How COST (Costco Wholesale) Makes Money in 2026: A Deep-Dive With Income Statement

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Understanding how a warehouse club retailer like Costco (formerly N/A) makes money is essential for investors and anyone interested in the business of retail. In this post, we break down Costco's quarterly income statement (Q4 2025) using a Sankey chart to visualize the financial flows — what comes in, where it goes, and what's left as profit.

Quick Costco Overview

Costco operates as a membership-based warehouse club retailer, offering a wide range of merchandise including groceries, electronics, apparel, and services like gas stations and pharmacies. Revenue comes primarily from merchandise sales reported under "Other Revenue by Product," with additional streams from membership fees and warehouse operations, though detailed segment breakdowns show consolidated net sales dominating at 100% of total revenue.

The company focuses on high-volume, low-margin sales through bulk purchasing and efficient supply chain management, supported by a growing international footprint.

Revenue Breakdown

• Total Revenue (Q4 2025): $67.3B (+8.3% YoY)
  • Other Revenue by Product: $67.3B (100% of total)
  • Membership Fee Revenue: $0.0B (0% of total)
  • Warehouse Club Revenue: $0.0B (0% of total)
  • Growth is powered by strong comparable sales, membership growth, and expansion into new markets.

Gross Profit and Margins

• Gross Profit: $8.8B (13.1% gross margin)
  • Cost of Revenue: $58.5B (+8.1% YoY)
  • Costco maintains robust margins due to its scalable membership model, low markup on merchandise, and operational efficiencies from high inventory turnover.
• Most costs come from merchandise procurement, distribution, and warehouse operations.

Operating Income and Expenses

• Operating Income: $2.5B (+12.2% YoY, 3.7% margin)
• Operating Expenses: $6.3B (+8.3% YoY)
  • R&D: N/A
  • SG&A: $6.3B (+8.3% YoY, 9.4% of revenue) — covers payroll, warehouse operations, marketing, and administrative costs essential for member services and store maintenance.
  • Costco continues to prioritize operational efficiency while expanding operations through new warehouse openings.

Net Income

• Pre-Tax Income: $2.6B (+12.0% YoY, 3.8% margin)
• Income Tax: $582.0M (22.5% effective tax rate)
• Net Income: $2.0B (+11.3% YoY, 3.0% net margin)
• Costco converts a significant portion of sales into profit due to pricing power from its membership model, high sales volume, and cost controls.

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What Drives Costco's Money Machine?

• Merchandise Sales (Other Revenue by Product): 100%+ of revenue, driven by everyday essentials, seasonal items, and private-label Kirkland Signature products.
• Membership Fees: Key metric for recurring revenue stability, though reported at $0.0B in this segment view; historically powers ~2% of total revenue with high retention rates over 90%.
• International Expansion: Investments in e-commerce and new warehouses abroad to tap into growing global demand.
• Future growth areas: Digital sales and services like travel/optical, though not yet profitable at scale.

Visualizing Costco's Financial Flows

The Sankey chart below visualizes how each dollar flows from gross revenue, through costs and expenses, down to net income. This helps investors spot where value is created, what areas weigh on profits, and how efficiently the company operates.[1][4]

• Most revenue flows into gross profit, with operating expenses (especially SG&A) taking the largest chunk.
• Even after significant costs, 3.0% of revenue drops to the bottom line.

Key Takeaways

• Costco's money comes overwhelmingly from merchandise sales
• High gross and net margins illustrate the power of Costco's membership-driven warehouse model
• Heavy investment in operations, balanced by efficiency in operating costs
• Ongoing growth is driven by membership retention and global expansion

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FAQ About Costco's Income Statement

1. What is the main source of Costco's revenue in 2025?

Costco generates over 100% of its revenue from Other Revenue by Product (merchandise sales). Additional revenue sources include membership fees, though listed at 0% in this quarterly segment breakdown.

2. How profitable is Costco in Q4 2025?

Costco reported net income of $2.0B in Q4 2025, with a net margin of approximately 3.0%, reflecting strong profitability driven by high-volume sales and cost discipline.

3. What are the largest expense categories for Costco?

The biggest expenses on Costco's income statement are operating expenses, particularly Research & Development (R&D) and Sales, General & Administrative (SG&A) costs. R&D investment reached N/A in Q4 2025, as Costco prioritizes warehouse operations and member services.

4. Why does [segment/division] operate at a loss?

N/A, as no specific loss-making segments are detailed in the provided data; overall operations remain profitable with focus on scale.

5. How does Costco's effective tax rate compare to previous years?

Costco's effective tax rate in Q4 2025 was 22.5%, consistent with previous years. This moderate rate is primarily due to standard corporate tax structures and international operations.