Costco Wholesale Corporation (COST) Earnings

Management highlights

### Membership Performance - Ended the quarter with 82.9 million total paid members (up 4.1% YoY) and 148.5 million total cardholders (up 4% YoY) - Paid executive memberships reached 41.2 million, up 9.6% YoY; the program launched in China during Q3 with strong early adoption - US and Canada renewal rate hit 92.2% (up 10 bps from last quarter), and global renewal rate held steady at 89.7%; targeted digital retention strategies offset downward pressure from lower average renewal rates of online-acquired members ### Value and Merchandising Strategy - Management maintained the long-standing strategy of being the first to lower prices and the last to raise prices, and invested in lower prices for multiple popular Kirkland Signature items this quarter to deliver member value - Continued Kirkland Signature innovation, launching multiple new items that offer 15-20% savings compared to equivalent national brands with equal or better quality - Buyers are actively mitigating inflationary impacts from higher oil prices, tariffs, and rising input costs (such as resin for non-food plastic goods) - Refunds for past IEWP tariffs are being claimed through US Customs and Border Protection, with plans to return a portion of received refunds to members; timing and amount of returns depend on approval speed, refund totals, and an ongoing lawsuit related to the refund process ### Real Estate and Warehouse Growth - The company maintains a long-term target of 30+ net new warehouse openings per year; 4 net new warehouses opened in Q3, bringing the global total to 928 - Full year FY2026 net new opening guidance is revised to 26 (down 2 from prior guidance, as two locations are now expected to open in FY2027) - Two warehouse relocations have been completed in FY2026 to date, with one more planned for Q4, moving high-volume locations to larger sites with expanded parking and gas stations to improve member experience and drive higher volumes ### Digital and Technology Initiatives - Multiple checkout enhancements (mobile wallet improvements, digital membership quick access, international pre-scan rollout, successful pay station pilot) have significantly improved checkout speed; pay station technology is now being added to new and high-volume warehouses - Same-day delivery, operated via third-party partners, now averages under 45 minutes in the US with a 4.8/5 member satisfaction rating; the service launched in Spain and France this quarter, grows faster than overall digital business, and is particularly popular with high-spending members, driving higher loyalty - AI optimization for online product pages has driven triple-digit YoY growth in AI-sourced traffic in Q3, with AI traffic delivering the highest conversion rate of all site traffic; appliances and tires are standout categories, as AI search highlights Costco's all-in value that is often missed in traditional search - A new retail media partnership with Google Commerce Media and YouTube launched this quarter, scaling the business while prioritizing member experience: all retail media efforts focus on relevant, personalized content that saves members time and money, with most generated value reinvested into member value and lower pricing ### Capital Allocation - Q3 capital expenditure totaled $1.41 billion, with full year FY2026 capex expected to be ~$6.5 billion, allocated to new warehouse construction, existing warehouse remodels, depot network expansion, and digital member experience enhancements - Top capital priorities are: 1) reinvestment in business growth, 2) growing the regular annual dividend, 3) buying back stock to offset dilution from executive equity grants; excess cash beyond these priorities is most likely to be returned via special dividend, with timing and size still under evaluation by the board

Guidance

- Full year FY2026 net new warehouse openings are revised downward to 26, from the prior target of 28; the two delayed openings are now scheduled for FY2027 - Full year FY2026 capital expenditure is guided to approximately $6.5 billion, in line with prior planning focused on growth and expansion initiatives - No formal same-store sales or earnings guidance is provided, but management noted that comparable sales excluding gas have consistently held in the 6% to 7% range over the past year, and the company expects to continue gaining market share through its value proposition

Segment performance

Overall Q3 FY2026 net sales hit $69.15 billion, up 11.6% year-over-year (YoY), with net income of $2.192 billion ($4.93 per diluted share), up 15% YoY. Comparable sales rose 9.8% overall, and 6.6% after adjusting for gas price inflation and foreign exchange (FX), matching the 6.6% adjusted comparable sales figure when excluding gas entirely. Digital comparable sales were up 21.5% (20.8% adjusted for FX). Membership fee income totaled $1.373 billion, up 10.7% YoY (9.9% adjusted for FX). Gross margin was 11.04%, down 21 basis points (bps) YoY, but up 1 bps after excluding gas inflation. Core-on-core gross margin was down 9 bps YoY, driven by investments in lower prices for fresh food items like eggs and beef, and higher transportation costs. SG&A came in at 8.96% of sales, down 20 bps YoY (down 2 bps excluding gas inflation), with higher healthcare costs partially offsetting underlying productivity gains. By merchandising category: 1) Fresh food: comparable sales up high single digits, with strength in premium and lower-cost beef, poultry, and seasonal bakery items; 2) Non-food: comparable sales up high single digits, led by gold/jewelry, small electrics, tires, home furnishings, and health/wellness, with nearly 50% sales growth in big-ticket self-care items like saunas and massage chairs; 3) Food and sundries: comparable sales up mid-single digits, led by packaged foods and candy, with Kirkland Signature innovation driving growth; 4) Ancillary businesses: comparable sales up mid-20s, with pharmacy leading on strong GLP-1 drug demand, market share gains, and expanded offerings; 5) Gas: comparable sales up high 20s, driven by higher prices and record volume from unprecedented consumer demand amid Middle East supply disruptions.

Risks & headwinds

- Ongoing macroeconomic uncertainty and inflationary pressure, particularly from elevated oil and gas prices that increase consumer cost burdens and transportation costs for the business - Uncertainty around the timing and total amount of IEPA tariff refunds, as well as legal risk from the pending lawsuit related to the member refund process - Potential future non-food inflation from rising resin costs driven by higher oil prices - Downward pressure on overall membership renewal rates from the growing share of members acquired online, who have historically had lower average renewal rates than members who sign up in warehouses - Supply chain exposure to potential disruptions stemming from ongoing geopolitical instability in the Middle East, though current inventory exposure to these risks is relatively low - Capacity constraints at some high-volume existing warehouses, which can limit traffic growth

Analyst Q&A

• Q: With paid membership growth slowing to 4.1% (the lowest in some time), should near-term same-store sales growth expectations be muted? /

  A: Management noted that 4.1% overall paid growth paired with 7% growth in membership income (excluding fee increases and FX) is healthy, driven by 9%+ YoY growth in higher-spending executive memberships. The slowdown in headline growth reflects a normalization after periods of outsized growth from large new market entry and COVID-era expansion; 4-5% paid growth is normal without these one-time drivers. Renewal rates have stabilized after targeted retention efforts for online-acquired members, and management expects consistent long-term growth, with recent comparable sales excluding gas holding steady in the 6-7% range.

• Q: The 9 bps core-on-core margin decline — is this a sign of a more aggressive strategic value posture to gain share, and how is competitive behavior trending? /

  A: Management explained that overall gross margin excluding gas inflation actually improved 1 bps YoY, and the core-on-core decline reflected intentional strategic investment. With a easier lapped LIFO charge from the prior year, the company chose to invest in lower everyday prices for items like beef and eggs, and widen gas price gaps to deliver value to members facing higher gas costs, driving volume and traffic growth. The market is broadly rational; Costco views itself as its own toughest competitor, and makes price investments to drive long-term top-line growth while keeping overall margins stable.

• Q: How does Costco balance retail media growth with protecting member satisfaction, and are there material trade-offs for technology/AI investments? /

  A: On retail media, member experience always comes first: retail media efforts focus on delivering relevant, personalized product recommendations that save members time, and 80-90% of retail media revenue is reinvested into lower prices and member value. On technology investments, management noted that checkout and AI investments are capital-light and deliver strong returns: faster checkout improves productivity, lowers payroll costs, and increases throughput to support higher traffic, while AI-driven sales growth offsets the cost of AI investments.

• Q: Do you need to build your own first-party delivery infrastructure to compete with Walmart and Amazon on speed, or can you continue relying on third-party partners? /

  A: Costco previously acquired a big-and-bulky delivery business to shorten delivery times for that category, which has been very successful. For same-day delivery, current third-party partners already deliver average under 45-minute delivery with 4.8/5 member satisfaction, so management is happy with the current model. The company will continue to evaluate the need for further vertical integration as delivery expectations evolve, but no changes are planned currently.