Why Costco Stock Keeps WINNING | Big Gains.

So, we know Lululemon is pissed about

Costco because Costco is essentially

undercutting their fancy $128 pants.

It's worth understanding a little bit

how Costco makes money or how little

money they make on actually selling

products and where they make their big

money. But apparently, these Colt

Lululemon pants sell for around 128

bucks. And Lululemon is now pissed that

Costco is basically selling a dupe for

about $20.

And the whole enterprise of Costco

is upsetting the apple cart of premium

businesses that like to have really

thick fancy margins. And so that's kind

of where it's worth looking at Costco's

financial strategy a little bit and

understanding how they actually make

money and then how do they advertise

around that or maybe don't advertise

around that. Uh I'll explain. Take a

look at this. So this is uh Costco's

last earnings report and what you'll

find is they've got about $62 billion of

sales in just a threemonth period which

is pretty impressive. If you exclude

their membership fees, which let's just

assume for a moment that the membership

fees are basically 100% profit, with the

exception of people sitting there

selling the membership fees and the

miscellaneous customer support for

adjusting your membership and how you're

going to pay and stuff, it's a pretty

high margin product. It's what is it,

five or six bucks a month or whatever.

Uh but their goal is to get as many

people as possible into this membership

almost like a Netflix subscription. We

want everybody to have it. And the

benefit of everybody having it is it is

a nearly pure margin product. And so how

of course does Costco make money? Well,

mostly this membership. Why? Well,

because without the membership fees, so

if I take this $2.5 billion of uh money

right here, that comes down to

essentially the bottom line. These are

the earnings before taxes right here. If

we take that number and we subtract this

1240 right here, we'll find out that

Costco is really only operating at a

2.1% net margin net of membership fees.

So, in other words, if it weren't for

the membership fees, they're only making

2.1 cents for every dollar of product

that they're selling. That is

ridiculously

low. Now, obviously, that's after their

SGNA, their sales, general

administration items. And and what keeps

Costco profitable or actually a

functional business is that this high

margin membership fee right here helps

boost their cash flows and margins

substantially.

And they know this. So, their goal is,

hey, what can we do to basically get

every American being a member of Costco?

Well, what a better way than to sell

products at a very low margin. And

that's basically what Costco's premise

is and their promise to their customers

is, hey, if you come shop at Costco,

we'll pass on as much of the savings as

we can to you. All we ask is that you

pay to be a member uh of uh our club, so

to speak, and that you know, you don't

sneak in because you say your mom and

daddy are inside and uh and that you

don't have a membership card and they

sneak in. although you can't check out

anyway if you did sneak in without

having a membership card. This is in

contrast to a company like Lululemon. So

Costco is trying to take this approach

of, hey, we're going to provide uh

quality products at the lowest margins

possible. And again, all we ask is that

you pay our high margin subscription

fee, which honestly is relatively low

anyway. Uh if you then compare to what

uh Lululemon does, you can see a little

bit of a difference here. So, Lulu here

shows about $10.5 billion of revenues in

uh the 12 months ending

February 2025.

Of those $10.5 billion

in uh sales, they net $6.2

billion. Well, that's their gross

profit. Uh, and if you go all the way to

the bottom line before their tax

expense, they're bringing about $2.5

billion in a year down to the bottom,

which mind you is exactly what Costco is

bringing down, except in a quarter. See,

Costco is bringing down $2.5 billion

before taxes in a quarter, which means

Costco is basically making about four

times as much money as Lulu. But the big

difference is Lulu has a margin here of

about 25%. Right? 2576

divided by 10

uh 588. That works out to about a 24.3%

margin. So let me make sure I did that

right. 2576 divided by 10588. Yeah,

there we go. 24.3% margin, which is

roughly 10 times the same margin that

Costco has. that same line. See,

Costco's only got a 2.1% margin on EBIT.

So, their EBIT margin, earnings before

uh interest in taxes. Actually, it's

actually after interest because we've

had interest rate here. So, their

earnings before taxes, it should just be

the EBT, whatever. It's too confusing.

Doesn't matter. The same line, earnings

before taxes, uh in both cases, uh or a

10x difference in terms of margin. So

for every dollar of product Costco sells

you, they've got about 2.1 cents. Every

dollar of products Lululemon sells you,

they've got about 24 cents coming to

that bottom line.

The social point of view here is that

Lulu is basically ripping people off,

uh, or they're selling a luxury brand or

whatever, and Costco is trying to do the

best good for the most amount of people

at the lowest margins possible. This is

one of the reasons why Costco doesn't

care about keeping the prices of their

hot dogs at $1.50, 50 cents even if they

end up losing money on those because

those hot dogs aren't the point. The hot

dogs are, hey, join our club and you'll

get $1.50 hot dogs. It's part of the

marketing. It's part of the branding.

We're trying to do a social good for

people. That's Costco's messaging. And

so now you see that Lulu is suing Costco

for selling cheap knockoffs of the

athleisure sort of quote unquote premium

pants. And what's actually happening is

more people are going to Costco to

figure out what's going on with these

pants. As the Wall Street Journal here

says, the Lululemon lawsuit might just

turn out to be free advertising for

Costco, which is obviously the company's

preferred form of advertising. After

all, the press coverage of the lawsuit

is how many shoppers who would never

spend $128 on pants find out that found

out that their favorite company was

selling a lookalike product at just $20.

And now people go to Costco to look for

their next great deal. And it makes

sense. So when you look at the Kirkland

brand, a lot of the Kirkland products

are really I mean Costco isn't

manufacturing these Kirkland products.

socks, shoes, glasses, underwear, for

example, right here that Kirkland now

brands or nuts or toothpaste or

whatever. These are all likely just the

same exact products that you get from

the branded companies like Planters Nuts

versus the Kirkland Nuts. They're

probably all put together and bottled in

the same factory. They're just they've

just got a different label slapped on

them. uh one you pay for the brand in

the bottle and the other you pay for the

Kirkland sort of discount cult which is

fantastic. So from a social good

Kirkland is doing a fantastic job at

giving people access to products at the

lowest margin possible.

They actually say that they sell their

grow their branded products at no more

than 14% above cost. They cost even more

than 14% more though because some of

that cost goes to the brand's profit.

Uh, and Kirkland products are sold for

about a markup of 15%. Which is really,

really low because this is your gross

markup. So, if you buy a Kirkland

product for 15% markup, compare that to

a Lululemon product. Well, a Lululemon

product on the gross side, the cost of

goods sold are 43 bucks for every 158

bucks, let's call it. So 43 divided or

sorry that'd be 1058. There we go. Uh so

if I do if I just divide these into each

other 4317

we're looking at about a 2.5x premium.

So for every $100 of product let's let's

map this out so we can have some nice

bottom lines here because it's easier to

see. Okay. For every $100 of product

you buy at uh or or for every $100 of

product at Lulu, they sell it for $245.

For every $100 of product at Costco,

they sell it

uh for

$114

if branded.

Uh, and then $115 if Kirkland.

So, you can see the difference there.

Costco has a margin before taxes of

2.1%.

Lulu

has a margin before taxes of 24.3%.

Right? So, you can see the difference

here. Uh, and

I would argue that one of the reasons

Costco is so popular, which is also why

they're selling gold bars, you know,

this sort of gold bar idea, uh, it's

it's not

it's not about making money on the gold.

It's about getting more members, right?

Uh, I would argue Costco is probably

your social good, right? This is great

for society.

Whereas, you know, branded products,

uh, like a Lulu are probably, you know,

more uh,

you know, how would you describe it?

Like, uh,

you know, luxury kind of, uh, uh,

you know, groupy product, maybe like a

Louis Vuitton or or a Tiffany or

whatever, something that's like, oh,

look, you know, I've got this expensive

branded product. Because there is going

to be probably I mean I would imagine

some aspect of people are like I don't

want to walk around wearing stuff that

says Kirkland on it but the reality is

does it really matter? No of course not

generally the things we value like

clothing you know aren't actually that

valuable

very fascinating business model though

from Costco should look at their cash

flow too. So let's see if we go to

their cash flow statement. Here's their

balance sheet

and cash flows should be here. Here we

go. Statement of cash flows.

So in the 30 so this is going to be

oh what is this? This is about three

quarters. So in a in n in a 9-month

period Costco produces about $9.4 4

billion of cash flow, which means they

produce about a billion dollars a month

of cash flow

and they invest about a third of that

into uh their facilities and their

warehouses and their properties.

Kind of uh I think probably explains why

Costco stock does so well as well. I

mean, clearly you've got some serious

pricing power.

Costco, you know, in the last 5 years is

up 200%. Although, I do wonder how that

compares to Lulu. You know, maybe Lulu's

I know during COVID their stock

exploded. So, their five-year chart

could actually be pretty good. Nope.

Wow. I was not expecting that. I mean,

that's Wow. So, this is society voting

over the last 5 years. Although, I guess

this does take you back to the middle of

CO now. Over the last five years,

Lululemon has lost 25% of their stock

value, whereas Costco's up 200%.

And then look at the lifetime. Costco up

12 13,000%.

Obviously, Costco's been around since '

85 as a public company and Lulu only

since 2007.

But, uh, I mean, you can see at every

metric here, year to date, Costco's up

6%, Lulu's down 38%.

No wonder Costco is outperforming.

They're, you know, they're they're

providing a great good for society. Good

for them. Good for Costco, honestly.

It's pretty impressive.

>> Why not advertise these things that you

told us here? I feel like nobody else

knows about this.

>> We'll we'll try a little advertising and

see how it goes.

>> Congratulations, man. You have done so

much. People love you. People look up to

you.

>> Kevin Pra there, financial analyst and

YouTuber. Meet Kevin. Always great to

get your take.