The Value Equation

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09/07/2026

Costco’s returns have repeatedly trounced those of the S&P 500. What gets the credit for their success?

In 2025, Costco’s earnings per share grew nearly 10%, store sales climbed over 8%, and the membership model held strong....
09/05/2026

In 2025, Costco’s earnings per share grew nearly 10%, store sales climbed over 8%, and the membership model held strong. So how come Costco shareholders made less than the predicted returns?

Well, when you pay 53x cash flow for a business (nearly double the S&P 500 at the time, by the way), you’re buying the expectation that the multiple will either hold or expand. And there is almost no scenario where expansion is likely at that valuation.

The Value Equation flagged this before the year even began because we’re on the same page as Warren Buffet.

Buffett said to look at stocks as a business.

What he meant was: understand what the business actually earns, what it costs to run, and what you are paying to own it.

Those three things together tell you almost everything worth knowing.

And anyone who looked at those numbers would have been able to predict Costco’s first and only underperformance in its public existence.

09/03/2026

This is the single biggest risk to Costco’s declining margins.

Costco’s biggest long term risk has nothing to do with competition.They’ve got one of the most efficient business models...
09/01/2026

Costco’s biggest long term risk has nothing to do with competition.

They’ve got one of the most efficient business models ever studied. And yet the company faces a growth ceiling that no amount of operational excellence can fix.

It's called the denominator effect.

In 2023, Costco grew its store count by 2.7%.

In 2024, 3.4%. But that number flatters the reality because new stores don't open January 1st. If we adjust for a half-year convention, the contribution from new units drops to roughly 3%. With overall revenue growth of 5%, that leaves same-store sales doing just 2% of the work in an inflation environment of similar magnitude.

In real terms, existing locations are barely growing at all.

As Costco approaches 900 locations, every new warehouse represents a smaller percentage of the total. The new unit development engine that drove decades of outperformance is running into the weight of its own success.

Sales remain the single value equation lever that matters most for Costco's future.

The question is whether the machine can keep delivering as it gets bigger?

What are your thoughts?

(Check out the latest video on The Value Equation for mine.)

Many investors look at a great business and assume a great return.Value Equation investors look at the same business and...
08/29/2026

Many investors look at a great business and assume a great return.

Value Equation investors look at the same business and don't assume anything without considering multiple variables.

Why?

Because of this exact scenario:

At the end of 2024, Costco’s business model predicted a total return of 6.05% for the year ahead.

The actual 2025 fiscal year return came in at 4.94%.

What happened if store sales grew over 8%, earnings per share grew nearly 10%, and the membership model held?

Head to the latest Value Equation video for the full explanation on where the breakdown between prediction and reality happened.

08/27/2026

What’s at the heart of the world’s greatest business AND personal fortunes?

08/25/2026

Check out the math behind Costco’s wildly successful returns.

Most people know Costco as the place where you buy mayonnaise in unholy quantities and eat a $1.50 hot dog on the way ou...
08/22/2026

Most people know Costco as the place where you buy mayonnaise in unholy quantities and eat a $1.50 hot dog on the way out.

What most people don't know is that Costco's proprietary Kirkland brand alone generates $90 billion in annual revenue. (Which would make it one of the largest companies in the world if it stood on its own.)

Or that each of its approximately 900 locations averages nearly $280 million in annual revenue.

Or that its equity is worth 8.4x (!!!) what it cost to build.

The business model behind those numbers is one of the most instructive in modern retail and understanding it will change how you think about what a great business actually looks like.

Check out the latest video on The Value Equation for a full breakdown.

Costco's 5.2% operating profit margin looks unimpressive if you read that number and assume it's a low-margin business g...
08/18/2026

Costco's 5.2% operating profit margin looks unimpressive if you read that number and assume it's a low-margin business grinding out returns on sheer volume.

The Value Equation tells a completely different story:

Divide Costco's $254 billion in sales by its $60.4 billion in business investment and you get a sales-to-investment ratio of 4.2x.

Multiply that by the 5.2% operating profit margin and you get an unlevered equity creation yield of 21.9% (before maintenance capex and before accounting for the capital structure).

That changes the story to a highly efficient business model generating exceptional returns on the investment required to run it.

How is that possible?

It’s because the margin percentage was never the right number to look at.

Instead, you need to look at the relationship between what the business generates and what it costs to generate.

Which is exactly what the Value Equation is designed to reveal.

Make sure you’re following The Value Equation YouTube channel for the full story.

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85253

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