Costco Q3: Fewer Warehouse Openings, Weaker Core Margins

Costco's fiscal 2026 third-quarter results, discussed on its May 28, 2026 earnings call, showed continued sales growth alongside weaker profit conversion and warehouse-opening progress than the earlier assessment anticipated.[1] The key questions had been whether membership revenue could keep growing, merchandise sales could generate stable profits, and warehouse openings and digital sales could support expansion. This disclosure showed broadly stable renewals and membership upgrades, softer core merchandise margins, and two delayed warehouse openings.[1] The growth foundation remains intact, but the near-term strength of profit improvement and physical expansion needs reassessment.

Costco sells merchandise through membership warehouses and collects recurring membership fees. Low merchandise markups attract member spending, while merchandise gross profit and membership fees together cover operating expenses. Expansion of its warehouse and digital channels requires capital investment.[2]

Change 1: Two fewer net openings, with capital spending unchanged

Costco reduced its net warehouse-opening plan for the fiscal year, delaying some additional sales capacity. The company cut its fiscal 2026 target from 28 to 26 net openings, moving two warehouses into fiscal 2027 without explaining the specific reasons.[1][3] It ended the third quarter with 928 warehouses and expected to finish the fiscal year with 940.[2]

The opening delays did not bring a reduction in planned full-year capital spending, leaving the cash investment burden in place. Third-quarter capital expenditure was $1.41 billion, and the full-year plan remained approximately $6.5 billion.[1] The earlier analysis identified a lag of several quarters between warehouse investment and mature sales and profit contributions. The revision therefore reduces confidence in near-term expansion delivery and makes subsequent opening progress and cash returns more important.

Growth in the existing business continues to support the company. Third-quarter net sales were $69.15 billion, up 11.6% year over year. Comparable sales rose 6.6% excluding gasoline-price and currency effects, while digitally enabled comparable sales grew 21.5%.[1] These figures show that current sales remain strong, but they do not establish that the delayed warehouses' future contribution has already been replaced.

Change 2: Core merchandise margins shift from improvement to pressure

Core merchandise profitability weakened relative to the earlier assessment. In the second quarter, core merchandise gross margin measured against core merchandise sales improved 22 basis points year over year. In the third quarter, it fell nine basis points year over year, a 0.31-percentage-point difference between the two year-over-year movements.[3][1] Management attributed the pressure to pricing investment in fresh foods and foods and sundries, together with higher transportation costs associated with rising gasoline prices.[1]

Offsets in overall margins and expenses mean these measures alone cannot establish the final change in operating income. The average gasoline selling price rose 20% year over year in the third quarter, lifting sales and changing the sales base used to calculate margins.[2] Excluding gasoline effects, overall gross margin improved one basis point and the selling, general and administrative expense ratio improved two basis points year over year.[1] Core merchandise pricing investment puts pressure on profit conversion, but the available material lacks complete third-quarter operating-income data and cannot establish that operating income declined.

Conclusion

This disclosure weakens the near-term assessment of profit improvement and warehouse-opening execution, while membership remains a stable source of support. Membership fee revenue grew 10.7% year over year, or 7% excluding the fee increase and currency effects. The US and Canada renewal rate was 92.2%, and paid Executive membership grew 9.6%.[1] Member growth and upgrades continue to support revenue and customer engagement, and the evidence still supports the company's underlying growth model.

The next assessment depends on whether margin pressure persists and the opening plan is delivered. The relationship between core merchandise margin, expenses and operating income in the next quarter will help establish how lasting this quarter's pressure is. Warehouse-opening progress relative to capital expenditure will indicate when investment converts into sales and cash returns. Continued core margin pressure, or further opening delays alongside sustained high investment, would weaken the current assessment further.

Sources

[1] COST_Q3_CALL · 2026-05-28 · Costco Q3 earnings call · https://investor.costco.com/events-and-presentations/

[2] COST_Q3_10Q · 2026-06-03 · Costco Q3 Form 10-Q · https://www.sec.gov/Archives/edgar/data/909832/000090983226000051/cost-20260510.htm

[3] COST_Q2_CALL · 2026-03-05 · Costco Q2 earnings call · https://investor.costco.com/events-and-presentations/