This is technically true, but sort of misses the mark. Costco does not price goods such that their Cost of Goods Sold + Operating Expenses = their Membership Fees + Non Alcohol Gross Revenue, Alcohol Gross Revenue to be their main source of profit. They do price goods such that their COGS + OPEX = Gross Revenue, leaving their membership fees to be the main source of profit.

In other words, you can say that any given vertical worth $Xbn of their revenue was their profit, if you are convinced that Costco actually models their pricing around that vertical section of their revenue. But in reality, everyone knows that the section they model around is membership fees - everything else is break even and the fees are profit.

You'll have to explain more slowly.

Are you saying that the way they account for memberships doesn't make much accounting sense?

(they break it out, page 37 http://investor.costco.com/static-files/05c62fe6-6c09-4e16-8... )

No, Costco is accounting for it normally by putting membership fees up there with gross revenue. I'm saying the gee-whiz description of memberships being 75% or more of profit is silly. The firm has gross margins on its sales. It also collects membership fees. Any one of its product lines could be a large portion of revenue that you could single out as being the driver of their profit. I just think it's silly to single it out like that. Gross margin pays for the stores to be open just as much as anything else, and with less margin the stores could be out of business despite collecting all those membership fees.