Lesson 3 of 8
The cost structure
Costco's fiscal 2025 merchandising left 5,060 million after costs. Membership fees added 5,323 million, so the fee is more than half of operating income.
By Javier Sanz
Founder of ValueScreener. Built Ninety Nine, a securities services provider, and sold it to a tier-one global bank; ran operations and internationalization at Alpaca, the brokerage API.
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In one minute
- Model each cost against the revenue line that actually drives it, not against total revenue.
- Costco's merchandising produced 5,060 million dollars of operating income in fiscal 2025, and membership fees added 5,323 million with no cost line against them.
- The gap between gross margin at 11.12 percent of net sales and selling costs at 9.25 percent is 1.87 points, and a small move in either is large against it.
Splitting a cost base into fixed and variable is the standard instruction. The more useful split is by what each cost is driven by, and at a company with two revenue lines the two questions give different answers.
Costco fiscal 2025 operating income, built from four lines
- Net sales$269,912m
- Merchandise costs−$239,886m
- Selling, general and administrative−$24,966m
- Membership fees+$5,323m
- Operating income= $10,383m
The finding this makes visible
Merchandising, by itself, produced 5,060 million dollars of operating income in fiscal 2025 on net sales of 269,912 million. The membership fee added 5,323 million with no cost line standing against it in the income statement.
So the fee is 51.3 percent of operating income. In fiscal 2024 it was 52.0 percent and in fiscal 2023 it was 56.4 percent. A model that forecasts total revenue and applies an operating margin to it has averaged across two lines with entirely different economics and will be wrong in a direction it cannot detect.
The two ratios that matter, and how thin they are
Gross margin, meaning net sales less merchandise costs over net sales, was 11.12 percent in fiscal 2025, 10.92 percent in fiscal 2024 and 10.57 percent in fiscal 2023. Selling, general and administrative costs were 9.25, 9.14 and 9.08 percent of net sales across the same years.
The spread between them was 1.87 points in fiscal 2025, 1.78 in fiscal 2024 and 1.49 in fiscal 2023. Everything the merchandising business earns lives inside that gap, and a ten basis point error in either ratio is 270 million dollars.
Modelling each against its own driver
Merchandise costs belong against net sales, because they move with what is sold. Selling costs belong there too at this business, because warehouse staffing and operating costs scale with the estate that produces the sales.
The membership fee has no meaningful cost line in this statement, so the model carries it as revenue with no matching expense and lets the reader see that it does. That is not an approximation being hidden; it is the structure the income statement itself presents.
What the filing says about one distortion
The filing states that gasoline generally carries a lower gross margin percentage and lower selling costs relative to the rest of the business, so a higher penetration of gasoline sales lowers the reported gross margin percentage while also lowering selling costs as a share of net sales.
That matters for a model built on those two ratios. A change in either can come from the fuel price rather than from the business, which is why the filing also publishes comparable sales excluding the effects of currency and gasoline prices.
Check yourself
What share of Costco's fiscal 2025 operating income came from membership fees?
- About 12 percent
- 51.3 percent: 5,323 million dollars of 10,383 million
- About 90 percent
Show the answer
Answer: B.
Merchandising produced 5,060 million after merchandise costs and selling costs. The fee added 5,323 million with no cost line against it.Why is a single operating margin on total revenue the wrong model here?
- Because operating margin is not disclosed
- Because it averages two revenue lines with entirely different cost structures, and the mix between them moves
- Because membership fees are not revenue
Show the answer
Answer: B.
One line carries roughly 89 cents of cost per dollar and the other carries none in this statement. A blended margin hides both and the mix shift between them.A ten basis point error in gross margin is worth how much at fiscal 2025 net sales?
- About 27 million dollars
- About 270 million dollars, against operating income of 10,383 million
- About 2,700 million dollars
Show the answer
Answer: B.
Ten basis points of 269,912 million is 269.9 million, which is 2.6 percent of operating income. That is why the thin spread is the input to be careful with.Sources
- Costco Wholesale Corporation, Form 10-K for the fiscal year ended 31 August 2025, filed 2025-10-08, accession 0000909832-25-000101: the consolidated statements of income and the management discussion of gasoline's effect on gross margin and selling costs.
What this leaves out
- Gross margin here is net sales less merchandise costs over net sales, computed by this course. The filing discusses gross margin percentage in the same terms but the arithmetic is ours.
- Treating membership fees as carrying no cost reflects how the income statement presents them. Costs of servicing members exist and sit inside selling, general and administrative expenses without being separated.
- Nothing here is a view on Costco or on any security.