How COST (Costco Wholesale) Makes Money in 2025: A Deep-Dive With Income Statement

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Understanding how a warehouse club retailer like COST (Costco) makes money is essential for investors and anyone interested in the business of retail and membership-based wholesale. In this post, we break down COST's quarterly income statement (Q3 2025) using a Sankey chart to visualize the financial flows — what comes in, where it goes, and what's left as profit.

Quick COST Overview

Costco operates a global chain of membership-based warehouse clubs, offering bulk groceries, general merchandise, and ancillary services to individuals and businesses. Revenue comes primarily from product sales at its warehouse clubs and a significant, high-margin stream from annual membership fees. The business is segmented into Warehouse Club Revenue (core retail operations) and Membership Fee Revenue (recurring annual fees from members).

Revenue Breakdown

• Total Revenue (Q3 2025): $86.2B (+8.1% YoY)
  • Warehouse Club Revenue: $84.4B (98.0% of total)
  • Membership Fee Revenue: $1.724B (2.0% of total)
  • Growth is powered by increased club traffic, new warehouse openings, and strong membership renewal rates.

Gross Profit and Margins

• Gross Profit: $11.1B (12.9% gross margin)
  • Cost of Revenue: $75.0B (+7.8% YoY)
  • Costco maintains moderate margins due to its high-volume, low-markup business model, offset by the high-margin membership fees.
• Most costs come from product procurement, logistics, and warehouse operations.

Operating Income and Expenses

• Operating Income: $3.34B (+9.8% YoY, 3.9% margin)
• Operating Expenses: $7.78B (+10.1% YoY)
  • R&D: N/A (Costco does not report significant R&D expenses)
  • SG&A: $7.78B (+10.1% YoY, 9.0% of revenue) — includes payroll, warehouse operations, marketing, and administrative costs
  • Costco continues to invest in expanding its warehouse footprint and digital capabilities while maintaining operational efficiency.

Net Income

• Pre-Tax Income: $3.51B (+12.8% YoY, 4.1% margin)
• Income Tax: $900M (25.6% effective tax rate)
• Net Income: $2.61B (+10.9% YoY, 3.0% net margin)
• Costco converts a moderate portion of sales into profit due to its scale, efficient operations, and the recurring, high-margin membership fee stream.

What Drives Costco's Money Machine?

• Warehouse Club Sales: 98%+ of revenue comes from in-store and online product sales, driven by high member traffic and value pricing.
• Membership Fees: $1.724B in Q3 2025, with a 14% YoY growth, providing a stable, high-margin income stream.
• Strategic Investments: Expansion into new markets, e-commerce enhancements, and supply chain improvements.
• Future Growth Areas: International expansion and digital services, though not yet a major profit contributor.

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.

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

Key Takeaways

• Costco's money comes overwhelmingly from warehouse club sales, with membership fees providing a crucial, stable profit stream.
• High gross and net margins illustrate the power of Costco's membership-based, high-volume retail model.
• Heavy investment in warehouse expansion and digital transformation, balanced by efficiency in operating costs.
• Ongoing growth is driven by new club openings, strong membership renewals, and international 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 98% of its revenue from warehouse club sales (in-store and online product sales). The remaining revenue comes from membership fees, which are highly profitable and growing rapidly.

2. How profitable is Costco in Q3 2025?

Costco reported net income of $2.61B in Q3 2025, with a net margin of approximately 3.0%, reflecting moderate profitability driven by scale, operational efficiency, and recurring membership income.

3. What are the largest expense categories for Costco?

The biggest expenses on Costco's income statement are cost of revenue (mainly product procurement and logistics) and operating expenses, particularly SG&A, which reached $7.78B in Q3 2025 as Costco prioritizes warehouse operations, payroll, and administrative efficiency.

4. Why does international expansion operate at a loss?

International operations, despite generating significant revenue, posted an operating loss in Q3 2025. This is because Costco aggressively invests in new warehouse openings and market entry costs, believing these will drive long-term growth—even if the division is unprofitable today.

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

Costco's effective tax rate in Q3 2025 was 25.6%, consistent with previous years. This moderate rate is primarily due to the company's U.S.-centric earnings and limited international tax benefits.