When entering the warehouse the card isn't given much scrutiny, but at the point of sale the cashier retains your card with the picture facing the cashier the whole time. Depending on the warehouse, cashiers also check to make sure the names on the form of payment matches the membership name.

The scenario you described is certainly possible, but it's not scalable. In a lost/stolen wallet scenario the legitimate owner would probably go in and cancel all of the cards. Furthermore, the only credit card you can use at Costco is an AmEx, and almost all US AmEx cards now have an EMV option. (I'm sure some third party AmEx issuers are still mag stripe only.)

So again, while card present fraud is technically possible at Costco, there is no rush for them to go out and replace all of their terminals with EMV. I think it will happen eventually.

If card present fraud, you have to look at the low hanging fruit. In every case I can think of where the wallet wasn't lost/stolen, the skimming happened at a restaurant. In the case of a lost/stolen wallet, the purchase has usually been something easy like at a gas station. (This is why a lot of pay at the pump stations now ask for a zip code.) I doubt most people who fraudulently get a credit card think about going to Costco.