Two retailers, two routes to a high return: Costco and Walmart

Sources: each company's consolidated statement of income and consolidated balance sheets (Item 8). Costco: 939 warehouses, 84.1 million paid members, renewal rates 92.3% (US and Canada) and 89.8% (worldwide), membership fees up 11% (Item 1 and MD&A). Walmart: 10,955 retail units (Item 2); "other gains and losses" mainly fair-value changes on equity investments (MD&A).

• Costco: (297,247 − 264,279) ÷ 297,247 = 11.09%, matching the 11.09% in its report. Walmart: (706,413 − 535,395) ÷ 706,413 = 24.21%.
• Costco: 27,190 ÷ 303,154 = 8.97%; 11,685 ÷ 303,154 = 3.85%. Walmart: 147,943 ÷ 713,163 = 20.74%; 29,825 ÷ 713,163 = 4.18%.
• Membership fees are 5,907 ÷ 11,685 ≈ 51% of Costco's operating income. Costco sells goods at close to cost plus its running costs, and much of its operating profit is the size of the fees members pay to shop there. Walmart earns a much wider gross margin and spends most of it on running far more, smaller stores. Its "membership and other income" (6,750) equals about 23% of its operating income, but that line also holds non-fee items, so it isn't a like-for-like comparison.

How it's built. Use the right base: gross margin on net sales (the figure the companies use), operating lines on total revenue. Say which you used. Common mistake: concluding Costco is "less profitable" from its 11% gross margin. Its model is to keep gross margin low on purpose; the fee does the rest.

• Costco: average assets (77,099 + 89,045) ÷ 2 = 83,072; average equity (29,164 + 35,803) ÷ 2 = 32,483.5. Net margin 9,226 ÷ 303,154 = 3.04%; ROA 9,226 ÷ 83,072 = 11.1%; ROE 9,226 ÷ 32,483.5 = 28.4%.
• Walmart: average assets 272,745.5; average equity 95,315. Net margin 21,893 ÷ 713,163 = 3.07%; ROA 21,893 ÷ 272,745.5 = 8.0%; ROE 21,893 ÷ 95,315 = 23.0%.

How it's built. Use net income attributable to the company with the company's own equity. Walmart has minority owners in some subsidiaries (its total equity including them is 105,887 at the year end); mixing the two would understate ROE. Walmart's total assets include the parts funded by those minority owners, so its ROA is very slightly understated; the effect is small.

• Costco: 303,154 ÷ 83,072 = 3.65; 83,072 ÷ 32,483.5 = 2.56. Walmart: 713,163 ÷ 272,745.5 = 2.61; 272,745.5 ÷ 95,315 = 2.86.
• On reported figures the net margins are almost identical (see the adjustment below). The gap in ROE comes from turnover: Costco sells about 3.65 of goods a year for each unit of assets against Walmart's 2.61. That more than offsets Walmart's higher leverage.
• So Costco earns the higher return with less leverage: its advantage comes from how hard it works its assets, not from borrowing.

How it's built. Show the three parts side by side and multiply them out to check they give the ROE you calculated directly (they do, to rounding). Then explain the biggest difference in words. Common mistake: stopping at "Costco has a higher ROE". The point of DuPont is why.

• Costco: inventory (18,116 + 19,324) ÷ 2 = 18,720 ÷ 264,279 × 365 = 25.9; receivables 3,581 ÷ 303,154 × 365 = 4.3; payables 21,187 ÷ 264,279 × 365 = 29.3.
• Walmart: inventory 57,643 ÷ 535,395 × 365 = 39.3; receivables 10,573.5 ÷ 713,163 × 365 = 5.4; payables 60,863.5 ÷ 535,395 × 365 = 41.5.
• Costco's stock sells in about 26 days, against Walmart's 39: a narrow range of fast-selling items in bulk. That is a large part of its higher asset turnover.
• Both cycles are close to zero. Average payables are larger than average inventory at both companies (Costco 21,187 against 18,720; Walmart 60,864 against 57,643), so suppliers fund all of their stock; the small positive cycles come from receivables.

How it's built. Inventory and payables over cost of sales; receivables over revenue. Note the limits: these are year-end balances averaged over two dates, and "receivables" here include more than customer debts (Costco's are mainly amounts due from suppliers as rebates, from pharmacy insurers and under its co-branded credit card deal; members pay at the till, so almost none is owed by shoppers, and its 4.3 days don't measure how fast customers pay). Common mistake: reading a near-zero cycle as a weakness; for a retailer it's a strength.

Walmart's profit includes a 2,075 million pre-tax gain, mainly from changes in the fair value of its equity investments: not part of running shops, and it can swing either way (the year before it was a loss of 794 million). Taking it out at Walmart's 24.4% effective tax rate removes about 2,075 × (1 − 0.244) ≈ 1,569 million, leaving about 20,324 million. On that basis Walmart's net margin is about 2.85% and its ROE about 21.3%. The ROE gap widens from about 5 points to about 7, and on this basis Costco's net margin (3.04%) is slightly above Walmart's (2.85%). Operating margin, which excludes the gain, is the cleaner comparison of the two businesses: 3.9% against 4.2%.

How it's built. Find non-operating items in the income statement and the MD&A, then show results with and without them. Say how you adjusted (here, at the effective tax rate, ignoring the minority owners' small share: a simplification you state). Common mistake: adjusting one company and not checking the other: Costco's "interest income and other" (711 million) is mostly interest on its cash and recurs, so we leave it in.

Costco and Walmart: two routes to a high return · Data: latest Forms 10-K (Costco year to 30 Aug 2026; Walmart year to 31 Jan 2026)

Summary. On reported figures both keep about 3 cents of every dollar of sales, but Costco earns the higher return on equity (28% against 23%) and does it with less leverage. The difference is speed: Costco turns its assets over about 3.6 times a year against Walmart's 2.6, mainly because its stock sells in about 26 days against 39. Costco's model is unusual: its gross margin is only 11% and membership fees equal about half its operating income, so its returns depend on members renewing (92% in the US and Canada). Walmart's 2026 profit includes a 2.1 billion investment gain; without it, its ROE is about 21%.

	Costco	Walmart
Net margin	3.0%	3.1%
× Asset turnover	3.65	2.61
× Equity multiplier	2.56	2.86
= ROE	28.4%	23.0%

What drives the difference. Similar margins, different turnover. Costco sells a narrow range in bulk from fewer, larger warehouses (939, averaging about 148,000 square feet), so its stock and its assets work harder. Walmart runs about 11,000 stores in many formats, with a wider range and wider gross margin, more spending per sale and more stock. Both are funded by their suppliers: cash conversion cycles of about 1 and 3 days.

What the ratios miss. Different year ends; leases (Walmart leases many of its stores; Costco leases the land or buildings of about a fifth of its warehouses; we come back to leases in the credit lessons); Walmart's minority owners; that turnover partly reflects strategy (Costco's high-volume, low-price items such as fuel raise sales without much profit); and the quality of the membership base, which no ratio shows.

What I'd check next. Costco's renewal rate and fee growth over five years; Walmart's operating margin by segment; both companies' return on invested capital including lease liabilities; and whether these ratios have been stable or moving.

Sources. Costco Wholesale Corporation, Form 10-K for the year ended 30 August 2026; Walmart Inc., Form 10-K for the year ended 31 January 2026: income statements, balance sheets, Item 1 and MD&A.

How it's built. Conclusion first, in plain words, with the numbers that prove it. One table: the DuPont split, because that's the analysis. Then the "why" in business terms, not ratio terms. Then the limits and next steps, which show the reader you know what you haven't covered. Common mistakes: listing every ratio you calculated; hiding the date mismatch; ending with a recommendation the analysis can't support.

A model reply. No: the two ROEs are built differently. Target earns 6.3% on its assets (3,705 ÷ 58,629.5) against Walmart's 8.0%, with a higher margin (3.5% against 3.1%) but much slower turnover (1.79 against 2.61), and it reaches a similar ROE only through more leverage (equity multiplier 3.80 against 2.86); both years also contain one-offs (Target's settlement gain, Walmart's investment gain), and without them Target's ROE is about 22.4% and Walmart's about 21.3%. What would change my mind: Target's turnover recovering, or Walmart's operating margin falling, so that their returns on assets converge.

How the expert gets there. Equal ROEs are a prompt to run DuPont, not a conclusion; they compare return on assets first, because it strips out financing, and they check both companies for one-offs.

What a reviewer would flag: comparing ROE alone; adjusting one company's one-off but not the other's; calling Target "riskier" without saying it's the higher leverage that makes it so.