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Ahead of Costco Wholesale’s earnings report on Thursday, it’s worth noting that one of the secrets to the warehouse club’s financial success has been to keep shoplifting to a bare minimum.

The company’s shrinkage, or shrink—the catchall industry term for merchandise lost to shoplifting and employee theft, as well as damage or cashier errors—is just 0.11% to 0.12% of sales, according to Costco Chief Financial Officer Richard Galanti. The retail industry average is in the 1%-2% range.

Costco (ticker: COST) may have the lowest shrinkage of any major retailer, although few provide specific figures. Costco’s performance is important because the company has rock-bottom profit margins—a critical element in the value proposition for its 53 million members.

Shrinkage comes up periodically as an issue for retailers as it did on last week’s J.C. Penney (JCP) earnings conference call. The struggling department-store retailer said it’s making progress on combating the problem.

“We have taken immediate action to improve shrink and are beginning to see improved results on recent technology investments and staffing adjustments,” said J.C. Penney CFO Bill Wafford. He added that “security tag implementations” have led to a “20% reduction in shrink dollars in their respective areas.”

Other retailers that have combated shrinkage issues in recent years include industry leader Walmart (WMT).

There likely are several reasons for Costco’s minimal shrinkage rate, CFO Galanti tells Barron’s. There typically is only one entrance and exit at Costco stores, in contrast with mall-based retailers that often have multiple entrances. Another deterrent is that Costco staff check customer receipts at the door. When retailers look to boost margins by cutting staff, it can lead to higher levels of shoplifting because there are fewer eyes to watch exits.

Galanti says he likes to think that Costco’s members, now numbering 53 million, feel invested in the stores. They’re also relatively affluent. The basic Costco membership runs $60 annually.

Employees are well paid by retailing standards—Costco now has a $15 minimum wage—and that has led to below-industry turnover. Target’s (TGT) minimum wage is $13 an hour, and Walmart’s is $11. Amazon.com (AMZN) lifted its minimum wage to $15 an hour last year.

“We like to think we take good care of employees,” Galanti said. He noted that Costco’s shrinkage rate is down from around 0.35% 35 years ago.

Another deterrent to shoplifting is that Costco sells many items in bulk sizes. It’s tough to walk out of the store hiding a pack of 18 boxes of Kleenex tissue.

Read more:Costco Stock Could Be Headed for a Fall. Here’s How to Prepare.

Costco has been one of retail’s biggest winners thanks to the continued appeal of its formula, which includes low prices, no frills, attractive price-label offerings, and a treasure-hunt aspect that keeps members coming back to its stores. Costco’s share price, at around $248, recently hit a record and has more than doubled in the past five years, valuing the company at $109 billion.

Costco has succeeded without much of an internet presence, with online revenues running at about 6% of sales, which totaled $138 billion in its fiscal year that ended on Sept. 2, 2018.

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Costco’s low markups are apparent in a gross profit margin of 10% of sales and an operating profit margin of just 1%, both excluding membership fees, which account for the bulk of its earnings. Given its minimal margins, Costco’s prices are almost impossible to beat unless rivals want to sell at a loss.

If Costco experienced anything like industry-standard shoplifting, it would have no operating profit margin excluding membership fees and probably would have to lift prices.

Costco is highly regarded on Wall Street. Its shares trade for 31 times projected earnings of $8 a share in its fiscal year ending in August—one of the highest price/earnings multiple for any major retailer. Walmart is valued at about 21 times forward earnings, and many retailers change hands at 10 times earnings or less.

Costco has 773 warehouse stores globally, including 536 in the U.S. and Puerto Rico.

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