The story

Put Costco's 10-Q next to NVIDIA's and you'd think you're reading about two different planets. No AI supercycle. No 78% revenue growth. Just a warehouse retailer that sells $1.50 hot dogs and somehow keeps printing money with mechanical reliability.

The real story in this filing is membership fees. At $1.24B for the quarter — up 10% year over year — they grew faster than merchandise sales. That matters because membership revenue is essentially pure profit: Costco's entire retail operation runs at razor-thin margins by design, with the fee business funding everything. Deferred membership fees on the balance sheet hit $2.93B, up from $2.5B at fiscal year-end — a forward-looking indicator that renewal rates and new sign-ups remain strong well into next year.

Cash jumped from $9.9B to $13.8B since September. With only $5.7B in long-term debt and accounts payable of $19.8B — meaning Costco is essentially being funded by its suppliers — the balance sheet is a fortress. The company collects cash from members and customers before it pays for most of its inventory.

The number most investors miss

Accounts payable ($19.8B) is nearly equal to merchandise inventories ($18.6B). Costco is selling goods before it pays for them — a negative cash conversion cycle that funds operations for free. At a tech company this would be unremarkable. At a retailer, it's extraordinary, and almost impossible for a competitor to replicate without Costco's scale and supplier relationships.

This is the structural advantage that most earnings coverage misses. The hot dog isn't a loss leader for goodwill — it's a signal to members that Costco passes every efficiency gain back to them. That trust is what drives 93% renewal rates, which is what makes the membership fee a near-certain annuity, which is what the entire model is built on.

Bull vs. bear

Bulls see

  • Membership fees growing 10% YoY — faster than sales, accelerating the high-margin engine
  • $13.8B cash pile — another special dividend or buyback acceleration possible
  • Negative cash conversion cycle = structurally self-funding business that competitors can't replicate
  • International expansion (Iceland, New Zealand, Sweden) still early innings
  • September 2024 membership fee increase still flowing through deferred revenue

Bears see

  • Valuation: stock trades at 50x+ earnings for an 8% revenue growth retailer
  • SG&A up 10% YoY — cost creep slightly outpacing revenue growth
  • Interest income falling ($85M vs $128M YoY) as rates normalize
  • E-commerce still subscale vs. Amazon at similar price points
  • New CFO — first full quarter under Gary Millerchip; capital allocation philosophy unknown

Flags worth monitoring

  • Deferred membership fees up 17% since fiscal year-end: A leading indicator worth tracking every quarter. Acceleration here typically precedes stronger reported fee revenue by one to two quarters.
  • New CFO Gary Millerchip: Came from Kroger and just completed his first full quarter signing certifications. Longtime CFO Richard Galanti ran the finances for 30 years — any philosophical shifts in capital allocation will show up slowly, but the proxy and next annual report are worth reading carefully.
  • Foreign currency translation added $327M to comprehensive income: A meaningful tailwind in Q3 that could reverse if the dollar strengthens. International earnings are a growing portion of the business.
  • California labor litigation (Nader v. Costco): Court partially struck the complaint but the case continues. Not material yet, but worth a footnote in any bull thesis on Costco's labor cost structure.

Follow-up questions for deeper reporting

Deferred membership fees are up 17% in nine months — is this driven by new member growth, the September 2024 fee increase flowing through, or both? What does cohort renewal data say about retention at the new price point?
New CFO Gary Millerchip came from Kroger — has his first quarter shown any changes in capital allocation philosophy vs. Galanti's 30-year tenure? The $13.8B cash pile needs a decision.
With accounts payable exceeding inventories, Costco's supplier relationships are the hidden moat. How durable is this in an environment where large suppliers are increasingly building direct-to-consumer channels?

The filing

All analysis is based on Costco's 10-Q for the quarter ended May 11, 2025, filed June 5, 2025 with the SEC.

View original filing on SEC.gov ↗