AutoZone—originally named Auto Shack—was founded on July 4, 1979, in Forrest City, Arkansas, as a separate entity in the family-owned wholesale food distributor Malone & Hyde. AutoZone offers a wide selection of automotive aftermarket products to repair, maintain, or improve vehicles, serving both Do-It-Yourself customers and Do-It-For-Me professionals. It also provides additional services at no extra cost, such as diagnostic testing and access to specialized tools through its “Loan-A-Tool” program. These efforts aim to improve one of the most important factors in the industry: customer service.

Customer service has been in AutoZone’s DNA since its inception. It coined and trademarked the term “WITTDTJR” (What It Takes To Do The Job Right) and adopted a philosophy centered on delivering “WOW! Customer Service”. AutoZone has, in essence, created a culture where its employees, known as AutoZoners, are expected to consistently go above and beyond for customers.

And the results? Far from boring. Just four years after its founding, in 1983, AutoZone opened its 100^th location. Today, it’s the largest retailer in the automotive aftermarket, operating 7,516 stores: 6,537 in the United States, 838 in Mexico, and 141 in Brazil. Despite its scale, and the presence of other nationwide competitors, the industry is fragmented, but consolidating, with smaller, independent repair shops holding a dominant position.

The automotive aftermarket is projected to grow at a mid-single-digit rate, driven by multiple trends. One of the most fundamental drivers of demand is total miles driven, as it affects the wear and tear of vehicles. With stable and low vehicle scrappage rates, the total number of vehicles on the road—known as the car park—is increasing, contributing to more miles driven and stronger future demand.

Another tailwind is the aging car park. The average vehicle age in the United States now exceeds 12 years, and since maintenance costs rise as vehicles get older, the automotive aftermarket directly benefits. AutoZone primarily services out-of-warranty vehicles, and with manufacturer warranties typically lasting around seven years, car purchases today can be translated into future demand. This lag effect improves the size estimate of the out-of-warranty car park, making the automotive aftermarket highly predictable.

During economic downturns, consumers tend to repair rather than purchase new vehicles. This drives demand for affordable repair solutions and aftermarket products, benefiting AutoZone as it appeals to cost-conscious customers, making the business more recession resistant.

What alternatives is there for transportation? Not many. One option is public transportation, but unlike many European and Asian cities, the United States lacks a well-developed transit infrastructure. While a few metropolitan cities offer viable options, most American cities are built around car dependency—making personal vehicles not just a preference, but a necessity.

The importance of private vehicles has a desirable result for the largest auto parts retailers like AutoZone: when vehicles need repairs, the immediate availability of auto parts often outweighs small price differences. With its vast store network and efficient distribution, AutoZone can monitor and replenish inventory levels—an advantage that smaller companies cannot match. With the car park consisting of hundreds of models across various categories like sedans, SUVs, and trucks, each often requiring specialized parts, AutoZone’s ability to source components quickly becomes a strong competitive advantage.

In the automotive aftermarket, size is king, not just improving distribution efficiency, but also enabling better supplier terms. These advantages are directly reflected into AutoZone’s financials. As the largest firm on the market, AutoZone has improved its accounts payable turnover—a key metric that measures how long it takes to pay suppliers—from 64 days in 1999 to 144 days in 2024. In contrast, its inventory turnover was 118 days in 2024, meaning AutoZone, on average, sells its products before paying for them, creating an attractive dynamic.

Inventory and accounts payable make up nearly all of AutoZone’s net working capital—the capital tied up in day-to-day operations. In fact, AutoZone has optimized its accounts payables to a point where its current operating liabilities now exceed its current operating assets. The result? AutoZone is provided short-term capital, totaling $1.5 billion in 2024, that it does not have an ownership claim over, but can deploy for value-creating investments, just like an insurance company uses its float.

In addition to improving capital efficiency, AutoZone’s bargaining power with suppliers enables it to reduce merchandise costs and manage operating expenses, which contributes to margin expansion. The largest auto parts companies have, furthermore, largely refrained from value-destructive tactics, such as price wars, and instead competed on quality of service and parts availability.

Over time, the effect of these has been translated into improved profitability, with the after-tax operating profit margin rising from 7% in 1998 to 16% in 2024.

Margin expansion and capital efficiency improvements have driven significant increases in return on invested capital—the yardstick for operational profitability and value creation. AutoZone’s return on invested capital has increased from 13% in 1999 to 45% in 2024, an impressive 32 percentage-point improvement. Essentially, each dollar invested in its operations returns 45 cents annually, after tax. Truly impressive.

AutoZone’s operations are not without risks. The most existential risk? Increased adoption of electric vehicles (EVs). EVs are more difficult to repair outside of dealerships and have fewer moving parts, reducing the demand for traditional auto parts. While EV adoption is accelerating, their share of the U.S. car park remains insignificant, currently estimated in the low single digits.

Several barriers limit EV adoption. One is inadequate charging infrastructure—the U.S. has fewer than 200,000 public charging stations, compared to 900,000 in Europe and 3.2 million in China. EVs have also become politically polarized in the U.S., which impacts government support in terms of subsidies and infrastructure investments.

As a result, while EVs eventually will affect the automotive aftermarket, the impact on AutoZone’s business is likely in the distant future. This limits the near term risk on AutoZone’s cash flows and, by extension, the present value of its shares.

Another risk is e-commerce. While platforms like Amazon have disrupted many retailers, the threat to the automotive aftermarket is limited. DIY customers often need help selecting and assembling parts; a service AutoZone provides. Additionally, the immediate in-store product availability is a major advantage, and thanks to AutoZone’s distribution, most parts can be sourced within the same day from nearby stores. Some items, like car batteries, cannot be shipped to private addresses, requiring an in-person visit to a brick-and-mortar retailer.

How about AutoZone’s management? They’ve proven themselves to be excellent stewards of shareholder capital. While cash flows have funded its store expansion, achieving impressive returns on capital, excess cash has been returned back to shareholders through share buybacks.

Charlie Munger, the former Vice Chairman of Berkshire Hathaway and Warren Buffett’s long-time partner, once remarked: “Pay close attention to the cannibals—the businesses that are eating themselves by buying back their stock.” One such cannibal is AutoZone. Since 1998, it has executed one of the world’s most aggressive share repurchase programs, reducing its outstanding share count by 89%. As a result, an investor’s ownership stake in AutoZone, without buying a single additional share, has increased ninefold over the period.

Buybacks can create value when shares are purchased below intrinsic value. AutoZone is often overlooked by investors due to its “boring” business model and absence of disruptive innovation. Instead, AutoZone has quietly compounded value for decades. This has contributed to AutoZone’s modest valuation, trading at a price-to-earnings multiple in the mid-teens for an extended period of time since 1998, indicating significant value creation from its share repurchase program.

AutoZone is a high-quality company, with a predictable and simple business model, and a proven management team with strong capital allocation skills. AutoZone currently trade at a forward free cash flow yield of 3.1%, based on consensus estimates.

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In 2015, Colin Huang, a former Google engineer born to middle-class factory workers in Hangzhou, China, founded Pinhaohuo—an online platform connecting farmers directly with consumers. Pinhaohuo aggregated consumer demand, allowing farmers to sell in bulk, reducing their reliance on middlemen—and leaving them with higher margins and consumers with fresher, more affordable produce.

After early success, Huang founded another company, Pinduoduo (now PDD Holdings), in 2015. The company merged with Pinhaohuo in 2016 and expanded its direct-to-consumer model to manufacturers—providing everything from household essentials to electronics, fashion, and more. PDD has a unique approach to e-commerce, describing itself as a mix of Costco and Disneyland—offering both value-for-money and an entertaining shopping experience.

By aggregating its large online demand, manufacturers can sell in bulk at lower prices, eliminating middlemen. The platform’s consumer base of over 900 million users attracts merchants who then offer even more competitive prices, which in turn draws in more consumers—creating a self-reinforcing cycle and a strong network advantage. 

PDD has pioneered an innovative e-commerce experience with its ‘team purchase’ option, which encourages users to team up with friends, family, or other shoppers within a specified timeframe to unlock further discounts. This model drives organic growth through social proof, increases user engagement, and gamifies the shopping experience.

But how does an e-commerce platform resemble Disneyland? PDD has turned online shopping into a social and interactive experience—and gamification is central to the model. Through in-app games and rewards, users can earn discounts or receive products for free, incentivizing daily engagement. Unlike traditional search-based e-commerce platforms, PDD has a discovery-based model that recommends products to users—encouraging impulse purchases. Another advantage of this approach is that consumers are less time-sensitive about delivery speed, as purchases are often spontaneous rather than out of necessity.

PDD generates revenue through its take rate, which has expanded from .3% in 2018 to an estimated 2% of total transaction value today. Additionally, the majority of PDD’s revenue (62% in 2023) comes from marketing services, where merchants pay fees for better placement in search results and browsing recommendations.

But does the model actually work? Absolutely. PDD has achieved extraordinary revenue growth, with a compounded annual growth rate of 80% since 2018. Its revenue is projected to reach almost 400 billion RMB (about $55 billion) in 2024—an impressive achievement for a nine-year-old company. Moreover, PDD achieved a $100 billion market valuation just five years after its founding—faster than Alphabet (Google) and Meta Platforms (Facebook), which took seven and eight years, respectively, to reach the same milestone.

PDD’s ability to offer the lowest possible price has set it apart from other Chinese e-commerce platforms, especially among value-conscious consumers in lower-tier cities (less-economically developed cities). As a result, PDD has become China’s second-largest e-commerce platform, after Alibaba—and its market share is increasing. Given that lower-tier cities account for over 70% of China’s population, their consumption growth is likely to surpass that of higher-tier cities.

Similar to Pinhaohuo (the platform connecting farmers with consumers), PDD launched Duo Duo Grocery in 2020. Duo Duo Grocery leverages the scale of individual consumers to purchase fresh produce from farmers, with next-day deliveries to local pick-up points.

Unlike competitors such as Alibaba Grocery, which focuses on higher-tier cities and offers immediate deliveries from local stores, Duo Duo Grocery eliminates middlemen—enabling it to provide the same products at lower prices. As a result, Duo Duo Grocery has emerged as an industry leader. 

In September 2022, PDD launched its international business unit, Temu, which has since gained significant traction. Temu, with its slogan “shop like a billionaire”, mirrors PDD’s domestic business model and has flooded social media feeds. The platform has (by some estimates) even surpassed Amazon in global user count, although its scale is still smaller than the domestic business.

PDD’s financials are equally impressive. The company operates an asset-light business model, with no inventories, storage facilities, or logistics infrastructure—allowing it to earn a return with no capital invested. 

When merchants join the platform, a sizable cash deposit is paid to guard against fraud. If a customer files a complaint, the merchant is penalized ten times the transaction value, with the penalty deducted from the deposit. Due to the size of PDD, these deposits have accumulated to a substantial cash reserve, which functions as a float. PDD is then able to invest this float, and generate a return exceeding 10 billion RMB in 2023. Additionally, PDD benefits from a net working capital benefit of 73 billion RMB—equivalent to almost 30% of its sales.

PDD is truly an impressive business, with an innovative and proven business model, and with future growth prospects. However, surprisingly, its shares trade at a 16.7% free cash flow yield based on 2025 consensus estimates. How is this possible?

One major factor is PDD’s secretive nature. Unlike other publicly traded companies, PDD is reluctant to share detailed financial information. For example, the company stopped disclosing its Gross Merchandise Value (the total value of transactions on its platform) after 2020, and it does not provide segmented financial reporting of its business units, Duo Duo Grocery and Temu, which instead are obscured in the economics of its domestic e-commerce business. As a result, investors are relying on guesses to estimate their size—and the profitability of these is largely unknown.

Additionally, although listed in the United States, PDD is a Chinese company—entailing significant political risk. In fact, Chinese law prohibits foreign nationals from owning shares in sensitive sectors, such as internet companies. Owning shares in PDD does not equate to an ownership of the Chinese operating business, but in a Cayman Islands-based entity with no operations, which instead relies on contractual agreements with the Chinese operating business, securing them control of business decisions and rights to its profits. However, these agreements have not been tested in Chinese courts, which raises questions about their enforceability.

There’s no doubt that PDD is a phenomenal business. While the concerns are valid, its innovative business model, strong financials, and growth opportunities raise the question of whether its shares are too discounted by the market. The management has described PDD’s core value as “本分” (Ben Fen)—loosely translated to adhering to one’s own duties and principles. Among other things, it means never taking advantage of others, even when in a position to do so. Time will tell whether they stay true to this philosophy.

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Two years later, in 1925, another company, Novo Terapeutisk Laboratorium was founded, sparking a rivalry between the two firms, lasting decades, and leading to innovations in the production of insulin. However, in 1989, the two competitors merged to form Novo Nordisk.

Today, more than a century after the visit to Toronto, Novo Nordisk has become the largest pure-play pharmaceutical company in metabolic care, specializing in the care of diabetes, obesity, and other chronic diseases—staying true to its purpose: [of] driving change to defeat serious chronic diseases.

Since the discovery of insulin, the demand for effective diabetes treatment has surged—fueled by significant changes to lifestyle and dietary habits. In fact, 1 in 10 adults, or over 500 million people, currently have type-2 diabetes—and this number is projected to increase to 800 million by 2045. Type-2 diabetes is linked to a series of health implications, such as lower life expectancy and cardiovascular disease, amplifying the need for effective treatment. With a market share of one third in diabetes care, and 43% in insulins, Novo Nordisk is the undisputed market leader.

Diabetes treatment has evolved dramatically—from early insulin injections derived from cattle and pigs, often causing allergic reactions and requiring multiple daily, self-dosed injections—Novo Nordisk currently has long-lasting, once-weekly insulin injections. However, the advancements in diabetes care are far from over. Novo Nordisk’s breakthrough development of semaglutide, marketed as Rybelsus and Ozempic in diabetes care, has revolutionized diabetes treatment. Semaglutide mimics the natural hormone GLP-1, and signals to the pancreas to release insulin. Additionally, semaglutide slows down digestion, leading to the feeling of being full for longer, and reduces appetite, lowering food intake—ultimately contributing to weight loss.

This breakthrough in diabetes care has synergies in another therapeutic area; obesity. Obesity, often misunderstood and stigmatized, affected more than 800 million adults in 2020 and this number is expected to surpass 1.2 billion by 2030. Besides the societal costs, obesity is associated with metabolic, cardiovascular and mechanical health complications—and life expectancy is substantially reduced. 

Novo Nordisk has leveraged the innovations with semaglutide, initially developed for type-2 diabetes, to launch Wegovy, a weight-loss treatment that has demonstrated an average weight reduction of about 17%. Novo Nordisk currently has a GLP-1 market share of 65%, in both diabetes and obesity care, with Eli Lilly trailing behind. 

The company has achieved significant revenue growth over the past 20 years, compounding at an annual rate of almost 12%—accelerating to 22% in the past three years, driven exclusively by its GLP-1 product portfolio.

How about the rest of Novo Nordisk’s financials? Equally impressive. The company has a gross and operating margin of 85% and 44%, respectively. Combined with a high asset turnover, Novo Nordisk achieves a return on invested capital of nearly 90%—far surpassing its peers. Moreover, the company has no debt and a net working capital surplus to sales of 24%. 

Novo Nordisk is expanding its product portfolio with innovative pipeline candidates. CagriSema—currently in Phase 3 trials—has demonstrated significant weight-loss benefits equal to 22.7%, and will benefit both the diabetes and obesity segments. Additionally, GLP-1, originally developed for diabetes and obesity care, is showing indications in the treatment of other chronic diseases, such as Alzheimer’s and Parkinson’s, further broadening Novo Nordisk’s therapeutic offerings—and delivering on its purpose to drive change to defeat serious chronic diseases.

So, what’s protecting Novo Nordisk against competition? Novo Nordisk holds a series of patents, protecting its active ingredients (for example, semaglutide) against biosimilars (similar versions of biologic drugs, such as insulin or semaglutide)—and for Novo Nordisk’s semaglutide products, Ozempic, Wegovy, and Rybelsus, patents extends until at least 2031. Novo Nordisk, furthermore, holds patents on its delivery systems, which enhances convenience for its patients. Also, continued investments in research and development will improve future treatments, extend patents, and limit the threat of competition.

The creation of a biosimilar is complex and costly—and although cheaper, compared to branded biologics, the cost difference is not substantial to warrant a huge loss of patients. This is due to physician and patient trust in the branded biologics, because of their familiarity with the brand and delivery system.

Additionally, Novo Nordisk draws benefits from its scale. With huge investments in research and development, and its century-long focus on protein and peptide engineering, Novo Nordisk has a deep expertise, which is difficult for newer competing companies to replicate. Novo Nordisk has, also, benefited from synergies with indications that overlap into other therapeutic areas—for example the discovery of the weight loss benefits of semaglutide, and possible benefits in other areas.

Ozempic and Wegovy have become brand names—and Novo Nordisk’s semaglutide drugs have received a cult following for their weight-loss benefits, spearheaded by celebrities and mentions in pop culture. With strong brand recognition, consumers trust and prefer Novo Nordisk’s products.

Lars Fruergaard Jørgensen is the CEO of Novo Nordisk, and joined the company in 1991—not long after the merger. Jørgensen has a significant ownership in Novo Nordisk stock, equal to about 17 times base salary, aligning him with shareholders. The Novo Nordisk Foundation, the largest charitable foundation in the world, controls 77% of the company’s voting rights, making Novo Nordisk able to focus on its long-term strategic vision, and shielding it from the pressures of short-term shareholders.

After more than a century since its founding, Novo Nordisk has achieved strong competitive advantages, and delivers highly-attractive products in growing, vast, and untreated markets. Novo Nordisk is currently trading at a forward free cash flow yield of 4.5%, based on 2025 consensus estimates.

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Since those humble beginnings, Airbnb has grown tremendously. Today, Airbnb has 5 million hosts, and with 8 million active listings, over 2 billion guests have been welcomed. While hotels offer standardized travel experiences limited to crowded attractions and hotel districts, Airbnb provides travelers the opportunity to rent unique accommodation, and access neighborhoods and experiences, otherwise inaccessible to them. The traditional travel industry’s one-size-fits-all approach, offered to travelers, is in sharp contrast to Airbnb, where guests can have authentic experiences and live like locals. Beyond accommodation, Airbnb has ‘Experiences’, where locals can share their passions and talents through activities, such as cooking classes featuring regional cuisine, guided city tours on bike, and much more.

Demand has increased rapidly since inception, fueled by multiple value propositions: Hosts are able to access a large (and growing) global demand through Airbnb’s platform—50% of new listings are booked within four days of becoming available. Airbnb simplifies hosting with tools like Smart Pricing to suggest optimal rates, insurance, payment facilitation, and scheduling assistance, which makes it easy to list and manage a property through the platform. For guests, Airbnb offers a huge selection of accommodations spanning over 100,000 cities, ranging from major urban hubs to rural communities, often underserved by hotels. Compared to hotels, Airbnbs usually offer superior value in terms of space, amenities, and affordability. Besides this, Airbnb has services, such as fraud protection, refund policies, and an urgent safety line.

One thing is certain: A better selection of listings attracts more guests to the platform—and vice versa. Airbnb’s competitive advantage is, thus, its network effect—and the more growth it achieves, the stronger it becomes.

Airbnb’s stellar growth is reflected in its financials, compounding its Gross Booking Value (GBV)—the total dollar value of bookings on the platform—at an annual rate of 32%, since 2015. GBV growth has primarily been driven by the Number of Nights and Experiences Booked, contributing to the annual increase with nearly 27%, while the increase in Average Daily Rate has contributed with the rest. Despite a decrease in GBV by almost 40% in 2020, due to the pandemic, it has rebounded—tripling since. Revenue growth has outpaced GBV at almost 35%, due to an increase in Airbnb’s Take Rate (the fee for facilitating bookings) from just over 11% in 2015 to almost 14% in 2023.

Airbnb is, furthermore, more countercyclical, compared to the rest of the travel industry: In economic downturns, property owners are able to rent out their apartments to earn additional income—and since Airbnbs usually have higher affordability, compared to hotels, Airbnb is less impacted by a decrease in travel activity.

So, what has led to this success? A significant culture shift. What was previously unthinkable—renting out one’s apartment to strangers—has become normalized. And the reason for this culture shift is thanks to Airbnb’s ability to build systems of mutual trust, allowing a large number of strangers to trust each other. The platform has achieved this through mutual reviews, insurance against property damage, a messaging service, background checks, a secure payment system, and support to assist with potential issues.

The travel industry is huge, representing a massive opportunity, with a total addressable market estimated well above $3 trillion. Airbnb’s current GBV represents only a small fraction, leaving huge opportunities for future growth—and as home-sharing becomes more mainstream, Airbnb is well-positioned to capture larger market shares.

Airbnb does face threats, however, due to low switching costs—allowing, especially, professional hosts to cross-list their properties to their own platforms. While Airbnb’s system of trust decreases the incentive to transact outside of its platform, cross-listing allows for the bypassing of Airbnb’s fees, and reduces the host’s risk of vacancies. Furthermore, competing platforms, such as Booking.com and Expedia, are attempting to offer the same experience—which could lower Airbnb’s future Take Rate.

Airbnb has a globally recognized brand, and the word “Airbnb” is used both as a noun and a verb all over the world—and with a strong brand association of unique stays, Airbnb has a competitive edge.

Airbnb’s capital-efficient business model allows it to earn a return without having capital invested—as it does not own the properties listed on its platform. Because of this, it has practically no capital expenditure requirements. Having created a market niche, Airbnb has been able to set favorable industry standards: For example, hosts are paid at check-in, and not when a booking is made—and since travelers book their accommodation well in advance, Airbnb benefits from a $6 billion ‘float’, providing an opportunity to earn a return. Since the float is invested in money market funds and short-term, high-quality bonds, Airbnb benefits from today’s higher interest rate environment. Airbnb also has an impressive net working capital surplus of over $4 billion, or about 40%, compared to revenues.

Brian Chesky has been Airbnb’s CEO since its inception. With a $1 annual salary and a 10% ownership stake, Chesky is strongly aligned with creating long-term shareholder value. Chesky has an extremely down-to-earth attitude, and a designer-first approach, where creativity is used to come up with unconventional solutions—a cornerstone of Airbnb’s culture. Chesky described the pandemic as Airbnb’s “second founding”, and used the crisis to simplify operations to focus on what Airbnb does better than anyone—its core home rental business. The best businesses do, indeed, emerge stronger in the aftermath of crises.

After its first trading day, Airbnb closed at $145 per share, 113% above its IPO price of $68. Today, more than four years later, Airbnb has become profitable, free cash flow generative, and has increased its revenues many-fold—yet, despite this, the current share price is 10% lower at $130. Airbnb trades at a 5.4% free cash flow yield based on 2023 results (or 3.8% when adjusted for share-based compensation) and a forward yield of 6% (or 4.1% adjusted) based on 2024 consensus estimates.

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Although Costco began its operations in 1983 in Seattle, Washington, it can trace its origins back to FEDCO—a membership department store founded by 800 U.S. Post Office employees in 1948 in Los Angeles, who wanted to combine their negotiating power by purchasing goods directly from vendors, and eliminate the mark-up of retailers. Costco has held true to this belief, but operates on a much larger scale: With operations primarily in the United States and Canada, and a presence in 14 countries through 896 membership warehouses, Costco provides significant value to its 137 million members.

Costco sells everything from groceries to appliances, jewelry, and more—primarily in bulk. Products are constantly rotated around in its warehouses, and new products are frequently introduced, creating a “treasure hunt” experience, which encourages members to explore the warehouse. This creates a sense of urgency and a desire to return, and it incentivizes members to strike on deals immediately. Costco also draws its members back into its warehouses with gas stations, pharmacies, tire installation, and its famous $1.50 hot dog and soda combo, which price has remained unchanged since the introduction in 1984. Additionally, Costco’s private label brand, Kirkland Signature, has become synonymous with high-quality products at low prices—and it’s an open secret that a lot of products are sourced from major brands.

For an annual fee of $65 or $130 for the Gold Star or Executive membership, respectively, Costco’s members gain access to its no-frills warehouses, where no stone is left unturned in the pursuit to find cost savings—the floors are of concrete to be more durable and easier to maintain, the ceilings have skylights to save on electricity, and the merchandise is stacked directly on the pallets, which they were delivered on, to save on labor costs. And the best part: All these costs savings are passed on directly to members through lower prices.

Costco limits its inventory to about 4,000 SKUs (different products)—a small fraction compared to competing retailers—allowing Costco to consolidate its purchases into larger volumes, improving its negotiating power, and further receive better prices from suppliers.

Costco’s business model is, thus, extremely simple: The huge number of members increase its negotiating power against suppliers, lowering its merchandise costs, which then are passed on to members through lower prices. The lower prices attract more members—and the cycle accelerates. In essence, Costco is an accumulation of the negotiating power of all its individual members—making scale its competitive advantage. While Walmart is its largest competitor, Costco is the largest retailer in the membership warehouse-segment, with Sam’s Club (owned by Walmart) and BJ’s Wholesale Club trailing behind.

Since members scan their membership cards at checkout, Costco gains a unique advantage into its member’s preferences, which assists in predicting which items to stock the shelves with. This increases the efficiency of their inventory, and is a contributor to their impressive inventory turnover levels, where all their inventory is turned over 14 times per year—or in less than once a month. On the supplier side, vendors are paid under 14 times per year—meaning that Costco, on average, pays for its inventories once these are sold on to its members. While companies usually have short-term capital tied up in inventory, receivables, etc., in the process to generate revenues, which inevitably turn into cash, the size of this working capital burden reflects the bargaining power companies have. Some rare companies, however, have a net working capital surplus, meaning capital is held at the company as a benefit, where it can earn a return—Costco is one of these rare companies, with its net working capital surplus comprising of almost 5% of revenues. Besides this, Costco is conservatively run, with a net cash position of about $3 billion.

In the past 30 years, Costco has compounded its revenues with almost 10% per year—where about two-thirds have come from an increase in same-store sales. Since its founding, sales have decreased only once—in 2009, with a decline of 1.5%, compared to the 2008-level.

And what about margins? Costco has maintained extremely consistent margins over time, with gross margins of 12 to 13%—around half of Walmart’s. This is a result of Costco’s unconventional pricing strategy of having a lower mark-up on its merchandise. This level is, furthermore, ideal for breaking even with their merchandise sales—leaving the revenue from its membership fees comprise the bulk of its net profit. Costco’s business is, thus, akin to a subscription model, and with high customer loyalty, expressed as 90% membership renewal rates, Costco has a lot of recurring revenue.

Costco commitment to “Take Care of Our Employees” mirrors its dedication to its members. Its employees have better hourly salaries and benefits, compared to competing retailers, resulting in a high employee satisfaction—93% of U.S. and Canadian employees have been with Costco for over one year. The employee satisfaction, including the size of their bulk products, the strict control on entrances and exits, and their membership format, results in an industry-low level of shrinkage (inventory loss), where only .1% of sales value is lost, compared to the industry-level of about 1.5%. This makes a huge difference in Costco’s profitability, with its profit margin of almost 3%. Although the profit margin is razor-thin, Costco has a return on capital of almost 36%, driven by its high asset turnover.

Ron Vachris became the third CEO in Costco’s history at the start of 2024, after the previous CEO, Craig Jalinek, retired. Vachris started out as a forklift driver in 1984 in Price Club, which later merged with Costco. His long tenure at various positions reflects a strong cultural alignment with the company. Vachris also has a significant ownership of Costco shares, equal to about 38 times his annual base salary, further aligning him with shareholders.

Costco is, indeed, a high-quality business with a simple and predictable business model, a durable competitive advantage, and a shareholder-aligned management team. The quality is, however, reflected in its price—as it trades at a 1.6% free cash flow yield (based on 2024 results), or a forward yield of 1.8% (based on 2025 consensus estimates).

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