Barron’s recently interviewed Galanti, who will stay on in an advisory role until the end of January 2025.

He touched on many topics, including the company’s formula for success, the prospect for an increase in Costco’s $60-a-year basic membership, the outlook for the popular hot dog and soda combination still priced at $1.50, and the influence of longtime Costco director Charlie Munger, who died in November at 99.

Galanti was a key part of a veteran management team that took the company from a tiny group of warehouse clubs in the Seattle area to the third-largest retailer in the world with 874 stores, a market value of $325 billion and one of the industry’s highest price/earnings ratios at 45—a sign of the investor confidence in the company’s outlook.

Galanti noted that the company’s split-adjusted IPO price was $1.67, meaning the stock has increased more than 400-fold in the more than 38 years since then. The stock ended Tuesday at $731, unchanged in the session.

He landed at Costco in 1984 before its IPO after a stint as a junior investment banker at Donaldson Lufkin & Jenrette. “The founders interviewed three boutiques” for a pre-IPO financing round, he recalls. “Kidder Peabody, Dillon Read and DLJ. Fortunately they picked DLJ.” The lead banker at DLJ on his team at the time was Hamilton “Tony” James, who has been a Costco board member since 1988 and is the current chairman. James was a senior executive at Blackstone for almost 20 years before retiring in 2021.

Costco at the time needed a vice president for finance and Galanti was offered the job. His father, who had operated a grocery business in the Atlanta area, told him, “I’ll support you in anything that you do, but there is no way in hell they will make money at 10% gross margins.”

Costco has succeeded with some of the lowest gross margins in retail at about 13%, roughly half that of Walmart

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The low margins are the flip side to the value proposition for members at Costco since it is virtually impossible for rivals to undercut the company and make money. Costco generally limits markups to 14% on branded goods and 15% on its private label Kirkland products.

Costco’s success was hardly assured with its rock-bottom margins and about eight competitors when it went public, including Sam’s Club, a division of Walmart.

The company began charging a $25 annual membership fee, and the basic fee is $60 a year nearly four decades later. There has been ongoing speculation that Costco will boost that fee—probably to $65—since the last increase came in June 2017 and the company has historically lifted the annual fee every five to six years.

“When we get asked about it, we’ve said it’s a question of when and not if,” Galanti said. Some 73 million households are members.

Costco executives also regularly get asked whether it will maintain the price of its hot-dog and soda combination at $1.50, which it has been since the combo was introduced soon after the company went public. Galanti pointed to comments of co-founder and longtime CEO Jim Sinegal, who told his successor, Craig Jelinik, “If you raise the f—ing hot dog, I will kill you.”

To help meet demand, Costco opened its own hot-dog plant that makes 300 million franks a year, about half of which are sold in the combo and the rest in packages in Costco stores.

The hot dogs originally were kosher. “One of the challenges is that we were exceeding the capacity of the two largest kosher suppliers,” Galanti said. When it made the change, it boosted the size of the hot dogs by about 10% to 4.4 ounces and they remain a “high quality beef,” Galanti says.

Galanti also lauded the contributions of longtime board member Charlie Munger, who was best known for being the right-hand man and sounding board for CEO Warren Buffett at Berkshire Hathaway

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Munger helped with Costco’s real estate strategy. “We used to buy the cheapest land possible” for stores, Galanti said. ‘That was fine until you have a competitor in the same market. Location does matter. Charlie said ‘Why don’t you pay twice as much and get a better site.’ From a long-term ROIC perspective, it has worked very well.”

Costco owns most of its real estate and maintains a strong balance sheet with more cash than debt.

Munger also endorsed Costco’s unusual dividend policy of paying a small regular dividend, which is now just 0.5%, supplemented with periodic special dividend payments like the $15-a-share payment in late 2023.

“It was in 2012 and we had excess cash,” Galanti said, and the company was weighing whether to boost the regular dividend. Munger favored the specials. “He said, ‘Wall Street likes it and it’s quirky so let’s keep doing what we’ve been doing.’”

Munger also liked the membership model at Costco, saying one of the benefits was a reduction in shoplifting, which now plagues many retailers. Members, Munger figured, were less likely to steal. Galanti said shrink, the industry term for losses to shoplifting and employee theft, has remained in the 0.12% to 0.13% range of sales, probably the best showing in the industry.

“As the old saying goes, membership has its privileges,” Galanti says.

The shoplifting is low in part because Costco checks membership cards when customers enter the store and looks at receipts when they leave—plus bulk items that Costco is known for are hard to steal.

Costco has succeeded with a very modest e-commerce presence with 7% to 8% of projected sales of $250 billion this fiscal year coming online. “We’d rather you come in to shop. You’ll buy more,” he says.

Costco stores can rack up huge annual sales volume with more than two dozen doing over $400 million in sales and one store in Honolulu, Hawaii doing $600 million a year.

The company has about 600 stores in the U.S. and continues to see considerable room to expand the store count. Of the roughly 28 stores due to open globally this fiscal year, about 75% are in the U.S. In some markets with high-volume stores, some members don’t shop as often because the stores are too crowded. “When we open a third, fourth, or fifth store in a market, we don’t sign up as many new members but they shop more frequently” Galanti says.

“We’ve always prided ourselves from the beginning of taking care of employees. And while it sounds clichéd, we do a pretty good job of it, “ Galanti says. The average wage for hourly workers, which are the bulk of its employees, is $29 an hour, while rivals are around $20. The average employee has been with Costco about 10 years and veteran cashiers can make over $30 an hour plus get a 9% contribution from the company to their 401(k) plan.

Costco also has a generous healthcare plan for which employees pay close to 10% of the cost, half the industry average.

Costco’s top managers often are corporate lifers—or close to it. The new CEO, Ron Vachris, who assumed the role in January, started in high school working at a Price Club (which was bought by Costco in the 1990s) driving forklifts and pushing carts. “He probably didn’t have the intention of staying after college, but he rose through the ranks,” Galanti says.

While Costco has no mandatory retirement age for its top executives, Galanti felt it was time to step down. “As you get older, you can’t guarantee your health.”

Galanti says that people have advised him: “You don’t want to have your plate empty in retirement, but you don’t want it completely full.” He gives himself a C-minus for retirement planning.

He is on the board of a private company, Veterinary Emergency Group, which provides 24-hour service for pets through a chain of hospitals. Galanti plans to leave the Costco board in early 2025. He may do some teaching.

In his retirement announcement, CEO Vachris said: “Over his nearly 40-year tenure as chief financial officer at the company, Richard has made innumerable and invaluable contributions to its success.”

Looking back, Galanti is happy that Costco CEOs gave him the chance to run the conference calls during which he talked about unusual initiatives like the sale of popular one-ounce gold bars. He rarely lacked key information sought by analysts.

“I was fortunate to be able to tell the story for such a long time, and what a great story it was to tell.”

Corrections & Amplifications:

Costco started from a tiny group of warehouse clubs in the Seattle area. An earlier version of this article incorrectly said it started in Southern California.

Write to Andrew Bary at andrew.bary@barrons.com