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One by one, over the past year, many major retailers caved under pressure from conservative groups to weaken their diversity, equity, and inclusion (DEI) programs. But one chain bucked that trend: Costco Wholesale.In December, conservative think tank National Center for Public Policy Research submitted a shareholder <a target="_blank" rel="noopener noreferrer" href="https://s201.q4cdn.com/287523651/files/doc_financials/2024/ar/FY24-Proxy-Statement.pdf">proposal</a> that would have required Costco to evaluate DEI initiatives which it claimed hold “litigation, reputational and financial risks.” Hogwash, Costco’s board responded: DEI is good business, its directors said.“As our membership diversifies, we believe that serving it with a diverse group of employees enhances satisfaction,” Costco wrote. Costco shareholders and customers seem to agree. In the shareholder proxy vote, 98% of votes cast opposed the proposal. In the first three quarters of this fiscal year, net sales were up 8%, outperforming most competitors; and surveys of customer satisfaction suggested that no Costco users were defecting.

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WMA 2024-Costco

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The retail giant, beloved for its bulk discounts and its $1.50 hot-dog-and-soda combo, continued to benefit from the return to in-person shopping. Revenue rose 16% in 2022 over the previous year, while profits rose 17%. 
<ul> 
 	<li>At the end of its fiscal second quarter in March 2023, the company claimed a 92.6% membership renewal rate.</li> 
 	<li>As of May 2023, Costco had 123 million member-cardholders, in 14 nations; 852 warehouses; and 304,000 full- and part-time employees worldwide.</li> 
</ul>

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WMAC 2022-11-Costco

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G500 2022-26-Costco Wholesale

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F500 2022 Costco

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CTW 2021-03-Costco

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G500-2020-033-Costco

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Costco Wholesale is known for its operation of membership warehouses globally, along with its e-commerce websites. The retailer offers branded and private-label products in a range of merchandise categories, including groceries, and is also responsible for gas sales, pharmaceutics, hearing-aid centers, and tire installation centers, as well as various online services. Costco was founded in 1976.

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Costco Wholesale (COST): Company Profile, Stock Price, News, Rankings

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Costco Wholesale

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Ladies and gentlemen, thank you for standing by. My name is Abby, and I will be your conference operator today. At this time, I would like to welcome everyone to the Costco Wholesale Corporation Fiscal Second Quarter 2026 Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during that time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, press star one a second time. Thank you, and I would now like to turn the conference over to Gary Millerchip, Chief Financial Officer. You may begin.

Good afternoon, everyone, thank you for joining us for Costco's Second Quarter 2026 Earnings Call. In addition to covering our second quarter financial results today, we will also review our February sales results. I'd like to start by reminding you that these discussions will include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements involve risks and uncertainties that may cause actual events, results, and/or performance to differ materially from those indicated by such statements. The risks and uncertainties include, but are not limited to, those outlined in today's call, as well as other risks identified from time to time in the company's public statements and reports filed with the SEC.

Forward-looking statements speak only as of the date they are made, and the company does not undertake to update these statements except as required by law. Comparable sales and comparable sales excluding impacts from changes in gasoline prices and foreign exchange are intended as supplemental information and are not a substitute for net sales presented in accordance with GAAP. Before we dive into our results, I'm delighted to say that Ron Vachris is once again joining me for today's call. I'll now hand over to Ron for some opening comments.

Thank you, Gary. Good afternoon, everyone, and thank you for joining us today. I'll make a few brief comments about some key business priorities before turning it back over to Gary. Let me start by addressing tariffs, as I know this topic is of great interest to our members and our shareholders. The future impact of tariffs remains extremely fluid, as the recently eliminated IEEPA tariffs have now been replaced with new global tariffs for at least the next 150 days. Our buyers continue to act with great agility and urgency, always with the goal of reducing the impact of tariff on prices for our members.

We believe our expertise in buying and our limited SKU count model puts us in a position to manage this as well as anyone. Our strategies include moving the country of production when that makes sense, consolidating buying efforts globally to lower the cost of goods, leaning in on Kirkland Signature, where we have the most control of the supply chain and sourcing more items domestically. Let's move to regarding IEEPA tariff refunds. It is not yet clear what the process will be, what refunds, if any, will be received, and when this will happen. Throughout the past year, we've taken action to reduce the impact of tariffs.

In many cases, we didn't pass the full cost on to our members. The complexity of the tariffs implemented over the past year, including layering of different tariffs on top of each other and multiple changes in rates throughout the year, also made it challenging to track the exact impact to an individual item sold. As we've done in the past when legal challenges have recovered, charges passed on in some form to our members, our commitment will be to find the best way to return this value to our members through lower prices and better values. We'll be transparent in how we plan to do this if and when we receive any refunds.

At Costco, we always want to be the first to lower prices and the last to raise them. During the second quarter, we lowered prices on key items such as eggs, cheese, coffee, and some paper products as we saw lower inflation in these commodities. We will continue to be the pricing authority, and as some tariffs have been reduced, we are lowering prices on affected items such as certain textiles, bedding, and cookware SKUs. Turning to our growth priorities, as I shared last quarter, our real estate and operations teams are focused on increasing our pipeline of new warehouses both domestically and internationally.

Since our last call, we opened four warehouses, including one relocation in the U.S., one net new U.S. location, and two additional Canadian business centers. This brings our total warehouse count to 924 warehouses worldwide. We currently expect to have 28 net new openings in fiscal year 2026 and are targeting 30+ new openings per year in the coming years. In digital, we continue to make strides with our roadmap to deliver a more seamless experience for members in warehouse and online. In the warehouses, we're achieving meaningful improvements in the speed of checkout, employee productivity, both as a result of our mobile wallet enhancements, pharmacy pay ahead, and the rollout of employee pre-scan technology.

We're also piloting automated pay stations that will allow members to pay for their pre-scanned orders seamlessly with an average transaction time of around eight seconds. Early results show this is improving the flow of traffic, and we've received great member feedback. On our digital sites, we continue to roll out new personalization capabilities, which are resonating well with our members and are starting to have measurable impact on e-commerce sales growth. As consumers embrace AI in their shopping habits, we believe our commitments to providing the best value on great quality items can make Costco a beneficiary of these shifts.

We're working closely with the leading AI companies to ensure our values will be visible to existing and potential future Costco members as they engage with these tools. I'll turn it back over to Gary to discuss the results for the quarter, and I'll jump back on during Q&A to field some questions.

Thanks, Ron. In today's press release, we reported operating results for the second quarter of fiscal year 2026, the 12 weeks ending February 15th. As usual, we published a slide deck under Events and Presentations on our investor website with supplemental information to support today's press release. Net income for the second quarter came in at $2.035 billion or $4.58 per diluted share, up nearly 14% from $1.788 billion or $4.02 per diluted share in the second quarter last year. Net sales for the second quarter were $68.24 billion, an increase of 9.1% from $62.53 billion in Q2 2025.

Comparable sales were up 7.4% or 6.7% adjusted for gas price deflation and FX. Excluding gas sales entirely and adjusting for the impact of foreign exchange, comparable sales were up 7.4%. Digitally enabled comparable sales were up 22.6% or 21.7% adjusted for FX. Our segment breakout of comparable sales is disclosed in both our earnings release and the supplemental slide deck. In terms of Q2 comp sales metrics, FX positively impacted sales by approximately 1.4%, while gas price deflation negatively impacted sales by approximately 0.7%. Traffic or shopping frequency increased 3.1% worldwide. Our average transaction or ticket was up 4.2% worldwide and 3.5% excluding gas price deflation and changes in FX. Moving down the income statement to membership fee income.

We reported membership fee income of $1.355 billion, an increase of $162 million or 13.6% year-over-year. Adjusting for FX, the increase was 12.2%. The September 2024 U.S. and Canada membership fee increase accounted for about 1/3 of our membership income growth. Excluding the membership fee increase and FX, membership income grew 7.5% year-over-year. This was driven by continued growth in our membership base and upgrades to executive memberships. At Q2 end, we had 40.4 million paid executive memberships, up 9.5% versus last year. We ended the quarter with 82.1 million total paid members, up 4.8% versus last year, and 147.2 million cardholders, up 4.7% year-over-year.

In terms of renewal rates, at Q2 end, our U.S. and Canada renewal rate was 92.1%, down 10 basis points from last quarter. The worldwide rate came in at 89.7% unchanged from last quarter. The slight decline in the U.S. and Canada renewal rate was due to the factors we have discussed in prior quarters and reflects new online members growing as a percentage of our total base and renewing at a slightly lower rate than warehouse signups. We continue to focus on increasing the renewal rate of these new online members through targeted digital communications and retention strategies. Those efforts partially offset the negative effect of the increased penetration of online signups.

Turning to gross margin, our reported rate was higher year-over-year by 17 basis points and higher 11 basis points without gas deflation, coming in at 11.02% compared to 10.85% last year. Core was lower by three basis points and lower by seven basis points excluding gas deflation. In terms of core margins on their own sales, our core-on-core margins were higher by 22 basis points. The increase in core-on-core margins was broad-based, with non-food, food and sundries, and fresh all higher year-over-year. The difference between reported core margins and core-on-core margins was driven by mix changes as well as higher 2% executive rewards and lower income from our co-brand credit card program compared to last year.

Ancillary and other businesses gross margin was higher by 19 basis points or 17 basis points excluding gas deflation. This was driven by higher gas profitability and strong growth in pharmacy. LIFO negatively impacted the gross margin rate by four basis points. We had a $12 million LIFO charge in Q2 this year compared to a $12 million credit in Q2 last year. This quarter's gross margin rate also included a non-recurring legal settlement, which had a positive impact of five basis points. Moving on to SG&A, our reported SG&A rate was higher or worse year-over-year by 13 basis points and higher or worse by eight basis points without gas deflation, coming in at 9.19% compared to last year's 9.06%.

The operations component of SG&A was higher or worse by two basis points, but better or lower by two basis points excluding the impact of gas deflation. Our operators once again did a great job improving productivity and capturing efficiency benefits from the technology investments we've recently implemented. These productivity improvements fully offset last year's wage investments and any impact of extended operating hours. Central was higher or worse by four basis points and higher by three basis points excluding the impact of gas deflation. This quarter's SG&A also included an increase in general liability reserves to reflect higher expected future costs for prior year claims not yet settled. This negatively impacted the rate by six basis points.

Below the operating income line, interest expense was $33 million versus $36 million last year. Interest income was $140 million versus $109 million last year, driven by higher cash balances. FX and other was an $8 million benefit this year versus a $33 million benefit last year, largely due to changes in FX. In terms of income taxes, our tax rate in Q2 was 25.2% compared to 26.2% in Q2 last year. Turning now to some key items of note in the quarter. Capital expenditure in Q2 was $1.29 billion.

We estimate CapEx for the full year will be approximately $6.5 billion as we continue to invest in building a larger pipeline of new warehouses, remodeling our existing warehouses to drive continued growth in high volume buildings, expanding our depot network to support operations and enhancing the member digital experience. In terms of merchandising highlights, the Lunar New Year celebration this year showcased our merchants' global buying expertise. We were able to introduce many exciting new items for our members that help drive growth across fresh, foods and sundries and non-food categories in the U.S. and our international markets.

Some of the best sellers included items ranging from duck and quail eggs, Year of the Horse inspired gold jewelry and bullion, and Shine Muscat grapes. We also had a very successful Valentine's Day. In fact, laid out stem to stem, the roses we sold in the U.S. for Valentine's Day this year would have stretched all the way from Seattle to New York City and back again. Fresh comparable sales were up low double digits in the quarter, led by meat and bakery. In meat, we saw strong growth in both premium cuts of beef and lower cost proteins such as ground beef and poultry.

In bakery, we continue to see success with the launch of exciting new items like the chocolate-hazelnut mini beignets and a variety of seasonal pastries and cookies. Non-food comp sales were up high single digits in Q2. Top performing departments were gold and jewelry, tires, majors, health and beauty, and small electrics. Unique items continue to play an important role in creating excitement for our members in non-foods, and our second quarter sales included a $150,000 emerald cut 5.8 carat diamond ring, a $20,000 Babe Ruth autographed baseball, and nearly 200 luxury Whisper golf carts at an average price of approximately $9,000.

In food and sundries, comps grew mid-single digits, led by candy and packaged foods. While egg price deflation is expected to continue to be a headwind to sales in food and sundries for the foreseeable future, we're seeing significant unit and market share growth in eggs because of our strong value proposition. Overall inflation decreased slightly in Q2 as we saw lower inflation in foods and sundries and fresh, led by deflation in produce, eggs and dairy. This was partially offset by slightly higher inflation in non-foods. The supply chain was also relatively stable in Q2, and our merchants feel good about our current inventory position heading into the spring.

That said, as we look at the rest of the fiscal year, the situation in the Middle East could impact fuel costs and shipping schedules if there is instability in the region for a sustained period of time. Kirkland Signature remains a top focus to deliver great value for our members, with KS items typically offering 15%-20% value compared to the national brand alternative with equal or better quality. In Q2, we launched approximately 30 new KS items, including crispy wings, blackened salmon and various apparel items. As Ron mentioned earlier, our goal is to be the first to lower prices where we see opportunities to do so.

A few examples this quarter included KS butter from $13.89 at the end of Q1 to $8.49 at the end of Q2. 12 count KS organic coconut water from $12.79 to $10.99. KS organic seaweed from $10.99 to $9.99. 2 L KS Italian extra virgin olive oil from $29.99 to $24.99. Within ancillary businesses, pharmacy and food court experienced double-digit comparable sales growth, and optical and hearing had high single-digit growth. Gas comps were negative mid-single digits, driven by mid to high single-digit price deflation, partially offset by gallon growth.

Turning to digital, site traffic in the quarter was up 32% and app traffic was up 45%. Sales of pharmacy, gold and jewelry, toys, tires, small electrics, special events and housewares all grew double digits year-over-year. Our same day delivery service offered through Instacart, Uber Eats and DoorDash continue to grow at a faster pace than our overall digital sales. The enhancements we are making to deliver a more personalized digital experience for our members are starting to create measurable impacts. In Q2, our personalized product recommendation carousels drove over $470 million of e-commerce sales, and our newly modernized product display pages are driving incremental sales on our dot-com site as well as increased traffic to our same day sites.

We have a clear roadmap for future digital enhancements and believe these will allow us to continue to grow digitally enabled sales at a faster pace than overall sales. Finally, a brief update on our February sales results for the four weeks ended this past Sunday, March 1st. Net sales for the month came in at $21.69 billion, an increase of 9.5% from $19.81 billion last year. Comparable sales were as follows. The U.S. is up 5.2% or 6% adjusted for gas deflation in FX. Canada was up 12.8% or 9.3% adjusted for gas deflation in FX. Other international was up 17.9% or 10.9% adjusted for gas deflation and FX.

This resulted in total company comp sales at +7.9% or +7% adjusted to gas deflation and FX. Digitally enabled sales were up 21.8% or 20.8% adjusted for FX. Total company comparable sales for the month, excluding all gas sales and the impact of foreign exchange, was 7.8%. As a reminder, Lunar and Chinese New Year occurred on February 17th, 19 days later this year. This shift positively impacted February other international and total company sales by approximately 4% and 0.5% respectively. Our comp traffic or frequency for February was up 3% worldwide and 1.5% in the U.S.

Foreign currencies year-over-year relative to the U.S. dollar positively impacted total and comparable sales as follows: Canada by approximately 5%, other international by approximately 8%, and total company by approximately 1.7%. Gas price deflation negatively impacted total reported comp sales by approximately 85 basis points. The average worldwide selling price per gallon was down 7.5% versus last year. Worldwide, the average transaction was up 4.8%, which includes the impacts from gas deflation and FX. Excluding gas deflation and FX, average transaction was up 3.9%. In terms of regional and merchandising categories, the general highlights were as follows: U.S. regions with the strongest comparable sales were the Midwest, Northwest, and Southeast.

Other international in local currencies, we saw the strongest results in China, Taiwan, and Korea. The negative impact of cannibalization was approximately 60 basis points for the total company. Moving to merchandise highlights, the following comparable sales results by category for the month excludes the positive impact of foreign exchange. Food and sundries were positive mid-single digits. Better performing departments included candy, food and frozen foods. Fresh foods were positive low double digits. Better performing departments included meat and bakery. Non-foods were positive mid-single digits. Better performing departments included jewelry, majors and small appliances. Ancillary business sales were up mid to high single digits. Pharmacy, food courts, and optical were the top performers.

Gas was down low to mid-single digits, driven by price per gallon changes year-over-year. In terms of upcoming releases, we will announce our March sales results for the five weeks ending Sunday, April the fifth, on Wednesday, April the eighth, after market close. That concludes our prepared remarks. We'll now open the line up for questions.

Thank you. We'll now begin the question and answer session. If you have dialed in and would like to ask a question, please press star one on your telephone keypad to raise your hand and join the queue. If you would like to withdraw your question, simply press star one a second time. If you're called upon to ask your question and are listening via speaker phone on your device, please pick up your handset and ensure that your phone is not on mute when asking your question. To be able to take as many questions as possible, we ask that you please limit yourself to one question. Again, it is star one to join the queue. Our first question comes from the line of Chris Horvers with JPMorgan. Your line is open.

Thanks. Good evening, guys. A bit of a near-term question here. There's been a lot of noise in January and February on the weather, whether there was a net benefit to January when your competitors talked about a headwind into February because of the weather. Could you reconcile how the weather dynamics affected the first two months of the year? Similarly, you know, gold has been very spiked into the beginning of January. It's pulled back a little bit here in February. How are you thinking about how that impacted the business in those two months and how do you think about that how that could play out for the rest of the year? Thanks so much.

Hi, Chris. Thanks for the questions. Maybe on the first part of the question on the weather, I think our general view is that it certainly created some volatility during the first two months of the year. We wouldn't really call anything out. I don't think that would say we think there's a major sort of impact when you look at the total sales results that we posted in January and February. I think the one thing that I probably would mention is that our traffic visits were a little bit lighter in the U.S. in February.

The thing that we think may have caused that to look a little bit lighter was because of the weather we had in the Northeast, in particular, we had 55 warehouses that were closed for a full day, and then took a couple of days for the local communities to get back up to sort of speed. I don't know that we call out when you look at the actual total sales, that there was anything there that we'd wanna call out. I do think there might have been some impact on visits when you look at the sort of year-over-year growth there in the February results.

Beyond that, I don't think there's anything that we would say that we'd look at in our results and say it was a major impact that should be adjusted for. I think more broadly, you know, I'll maybe just answer it in general terms. You mentioned the question around gold. I think, you know, as we look at the overall state of the consumer and our members and how they're shopping, and I think it really is a generally big picture, a continuation of the trends that we've seen over the last few quarters, where for sure members are very focused on quality and value and a newness and excitement, exciting new items are very important.

When you deliver on those things, we're seeing our members are willing to and have the capacity to spend. I think the fact that our buyers continue to find new and exciting items have resulted in our overall sales results each month when you strip out the noise around calendar shifts and strip out the noise around sort of short-term blitz when there's questions around port strikes and tariffs. Overall, our results have been very consistent in that 6%-7%. I really wouldn't say there's anything, certainly changes in different items because as we've adjusted assortment to reflect whether it's tariffs or different member preferences, but overall very consistent in terms of the results that we've seen.

Our next question comes from the line of Michael Lasser with UBS. Your line is open.

Good evening. Thank you so much for taking my question. Ron, you highlighted several innovations that you are currently implementing or testing to improve the member experience as well as increasing the efficiency of the business. Did you size the potential savings from things like prepaying your card or line breaking from your associates? As part of that, to what degree will you take those savings, reinvest it back in areas like the store wages, store labor and/or price? Are you starting to see any diminishing returns on the investments that historically Costco has been making and have proven to be quite fruitful? Thank you.

You're very welcome. You know, the digital enhancements we're making both online and in the warehouse have all been very beneficial for us. You know, in the warehouse, as you use the example of the pharmacy, our pharmacy business is very strong. Traffic has been significantly up, the adoption of the new digital enhancements have really allowed us to maintain the staffing we have in place and then handle this new growth of volume we're seeing. It's improving the member experience, it's making the throughput much better, be it the pharmacy app that we've developed or the pay ahead that we have in our warehouses.

It's very accretive to us handling this new volume and being efficient as we do that. We do see some good tailwinds behind that as that moves forward. As far as investing in the business, seeing the same values in that, no. We feel that we still get the same return from our members as we continue to invest in the business out there. The members are responding very nicely to it, both with traffic and with sales that we see as well. We feel good that we will continue to reinvest.

That's what we do, both in employees and in pricing and in the business overall and expansion, as Gary mentioned, and I mentioned in the earlier talk that we just had. We're not only expanding buildings, we're relocating, and we're also upgrading the insides of a lot of our older warehouses too. We continue to put the money back into the company to drive top line sales and grow our business globally.

Our next question comes from the line of Chuck Grom with Gordon Haskett. Your line is open.

The inventory levels continue to be very well managed. I'm curious, as you look ahead to the spring and summer, are you making any notable changes to the assortment akin to some of the changes you made last fall? With rising gas prices, in the near term, can you just remind us historically the crossover traffic that you typically see into the club on like for like hours?

Sure. As far as mix goes, going into the spring and summer, we feel we're going back to more little more traditional than we've seen last year. You know, the supply chain has balanced out a little bit more. We, you know, we feel good about the sourcing moves that we've made. We feel, as far as timing goes, selection, SKU counts, we're back on track again with where we were the year prior. I feel good about the lineup that we have. We feel good about production. Shipments until the most recent undertakings have really been everything's been on time and moving through very well.

We haven't seen any disruptions from the Middle East in our regular merchandise flow, but we're watching that very cautiously, and we're staying on top of that. We feel good about the spring and summer, and then as we forecast out into the fall, we feel, we're in a good place. As far as gas, I'll let Gary answer that.

Yeah. Thanks, Ron. Chuck, on gas, generally speaking, we see about half of members that will shop at the gas station will also cross shop at the warehouse. Obviously, it's, as Ron mentioned, early days to know what the impact longer term might be from events in the Middle East at the moment. Generally speaking, if gas prices start to increase, then we tend to see our value proposition resonates better with members just because obviously we want to be the pricing authority on gas.

When prices are higher, that will tend to cause members to, you know, maybe take the extra mile that it might be involved to get to the gas station because of the incremental value they see there. Obviously we'll have to see what happens with gas prices over the coming months there.

Our next question comes from the line of Simeon Gutman with Morgan Stanley. Your line is open.

Hey, guys. I have two unrelated questions. First, the competitive openings are stepping up this year. I imagine there's maybe some membership impact in nearby openings from competitors. Is there anything above and beyond? Then the second part is, if a customer speaks to an LLM, how do you show up or how do you wanna show up? Are you seeing any opportunities to convert members? Thank you.

You're welcome. As far as the new openings coming up, it won't have a negative effect on our membership. We won't see those big swells of new markets that we would see when you go into an existing building. It balances it out. It really drives our sales with frequency and visits. As we relieve a high volume warehouse, those tend to build back very quickly. We may not see the traditional number of new members, but frequency of members and those type of things start really ramping up in those markets as we see. We don't see a negative effect, but we don't see the big tailwind we saw with new signups as we would in a new market as well.

For the LLM, I'll take a shot at that. The biggest thing we feel with our quality and our value is we wanna show up everywhere we can and everywhere we can. We wanna make sure that Costco is surfacing with all these partners, that we feel very confident with our values and our prices. If we're coming up on all these searches, we're gonna vade very well with those. I don't know if you wanted to add anything to that, Gary.

Yeah. Well, the only thing, Ron, maybe just come back to your first answer. I didn't know assuming your question was when competitors are opening warehouses too. I guess I would say that really, we don't see any meaningful impact on our membership base or membership growth when we know we feel we operate today very effectively across the U.S., competing against very different operators. We tend to focus on being our own toughest competitor of finding ways of how can we lower prices and continue to deliver more value. Generally speaking, there's nothing I would call out that we see an impact to our membership base when we're competing against different operators in each market.

Our next question comes from the line of John Heinbockel with Guggenheim. Your line is open.

Hey, Ron. Two, two maybe international questions, but can you talk about—Canada AUVs is now approaching $300 million, you know, thoughts and you're still growing, right? Thoughts on, you know, shopability capacity in those clubs, and I know you're opening business centers. Thoughts on that. Secondly, I think you're gonna open three outside of international, outside of Canada this year. What does the pipeline look like in 2027 and 2028? I think you do wanna ramp that up, you know, much higher than it is today.

Okay. Yeah, as far as Canada goes, we have 114 buildings now, and we have had some very good success with infilling and even opened up a couple of new markets in the recent two years. Our volume per location is quite high in that market. We have done several things. The technology that we've done in the U.S. we're using in Canada as well. We've recently expanded operating hours in all of our Canadian buildings to help offset some of the traffic increases. We feel that we've got a very good path of expansion in Canada over the next five years, and we feel good that we'll be able to maintain a good high average volume per location and continue to infill with some great incremental sales there as well.

Internationally, yes, they, you know, they take a little bit longer before we bring these to fruition as opposed to being in North America. We feel very good about the future from 27 on in our international markets as we continue to see performance both in Asia and Europe to be very strong. We look forward to some good growth expansions. We feel a good balance as we've had in the past with a good portion of our locations being outside North America and an equal amount being here domestically as well.

Our next question comes from the line of Kate McShane with Goldman Sachs. Your line is open.

Thanks. Good afternoon. I wondered if I could tack on to the real estate question and just ask about the fact that you noted some new opportunities in real estate are allowing you to enter into markets that you didn't think you could enter into previously. How should we think about this longer term, and how it will influence maybe the number of units you open in a year domestically?

Well, you know, we're not changing the model, but we are being a little more creative with the use of things like parking decks. I know it's been announced what we're doing in Los Angeles with the residents above our locations. We are getting a little more creative. If we wanna get into some of these inner cities where you're not gonna find 25 acres available for us to go into. How can we infill in some of these very strong markets like Los Angeles, New York, different places, with a unique model for Costco that is going to allow us to continue to expand? We've done a lot of these things in the past.

We've proven out the models in Asia, and we've got some very unique business models, and also in Europe as well, that have served us very well. It's not new to the company. It's a little newer to the U.S., but we feel very good about how we can be efficient. We can maintain, you know, the Costco experience in all of these warehouses, but being a little bit, you know, a little more creative than a standard 25 acre site with 800 parks and one level parking decks out there as well. That's where we're seeing a lot of the openness to the opportunities to partner with others and get into markets that could have been otherwise tough to get into.

Kate, I think that's kind of allowing us to be able to have more confidence in that plan to achieve that 30 warehouse a year goal that we talked about in the last couple of earnings calls. When we talk about 30 a year, we look at sort of generally a five to 10-year time horizon for warehouses, and we feel like that 30 sort of target a year is there to be achieved for that sort of time horizon. That's the goal that we're working towards as we look at the plan.

Roughly just over half of those we think would be in the, in the U.S. and just under half would be in the rest of the world if you include Mexico, Canada, Asia, Europe, Australia, and New Zealand in that broader rest of the world category.

Our next question comes from the line of Edward Kelly with Wells Fargo. Your line is open.

Yeah. Hi. Good afternoon. Thank you for taking the question. I was hoping that you could expand on core-on-core margins in the quarter, and then maybe how we should be thinking about the back half. The compare seems a little bit tougher there, but, you know, just thoughts on how we should be thinking about that would be great.

Thanks, Edward Kelly. You know, I'll take a step back overall on gross margin. We were pleased with the quarter overall in gross margin. As you heard us say that the overall result was, if you adjust for gas deflation, was up 11 basis points, but we had a gain for a non-recurring legal settlement in there for six basis points. Overall, we look at it as being up by five basis points in the quarter and being able to achieve that growth when we were also lowering prices for members and managing the impact of tariffs.

I think the team did a really good job of being able to stay the course in making sure we were delivering more value while also being able to deliver a good financial outcome for our shareholders. On the core-on-core, specifically side of it, as you heard us say, we were up 22 basis points. I wouldn't say there's one particular sort of driver of that. It's similar to the themes we've shared the last couple of quarters.

I think during Q2, in particular, partly we'd have had some benefit when you look at, we've shared, I know in prior discussions, that when we see prices coming down, as we saw in some of the deflationary items, often that's a time that's helpful to us because we can lead the sort of the world down with lower prices for our members. Because we turn the inventory so quickly, we also tend to get some financial benefit in there. We're continuing to work on supply chain efficiencies and Kirkland Signature penetration continues to improve. There's a number of different sort of factors I would say that help with that.

At the same time, as you heard us say, you know, there were some offsets in core because we paid higher 2% rewards. We were lapping some higher income in the credit card program. There is some mix shift as well because our pharmacy business is growing and our e-commerce business are both growing at a faster pace than our core sales. They kinda dilute some of the impact when you look at the total core margin growth. I share all that context because I think from our perspective, when you think about looking forward, the rate is gonna fluctuate and the different elements are gonna fluctuate quarter-to-quarter.

We tend to not get too fixated on one individual element of the margin. Our goal is to run the business holistically for the long term. My comment earlier about some slight improvement in the gross margin rate while lowering prices and continuing to, you know, to manage the business effectively is how we tend to think about delivering value for first of all, our members and in turn, that resulting in members shareholders. When you look at the trajectory, I think I would focus less on one individual metric. I think where I would come back to is if you look at the quarter overall, we were up about six basis points.

If you look at the last 12–24 months, generally our gross margin has been stable and has grown slightly, and there's been puts and takes with core-on-core and the other elements that I mentioned. Our focus is really on running the business for the long term and making sure we're delivering value for members. We do think through some of the efficiencies that we create, we can. You know, we are slightly expanding margin, but it's only slightly because as Ron mentioned, really where we see meaningful benefit, we're reinvesting in the member to make sure that we're driving top line sales.

Our next question comes from the line of Rupesh Parikh with Oppenheimer. Your line is open.

Good afternoon. Thanks for taking my question. Just going back to membership growth, so what's up sub 5% this quarter? If you can maybe walk through some of the dynamics at play, and then as you look at your same club membership growth rates, just how those are trending versus your expectations? Thank you.

Thanks, Rupesh. Maybe again, just taking a step back, big picture, we were pleased with the membership results for the quarter. We saw, I think you heard us say in the prepared remarks, 7.5% growth in membership fee income. If you adjust out the fee increase in FX, so underlying really strong member loyalty and member fee income growth during the quarter. The bigger sort of part of that was the 9% growth in upgrades, which I think shows that the impact of the $10 Instacart credit that we're offering each month for online shopping and the extended hours and some of the other benefits that we've added are resonating with our members and increasing the level of upgrades.

You mentioned the overall paid membership was a driver of that too. It was up about 4.8% during the quarter. As you said, Rupesh, it is a little bit lower than it's been over the last year or so. The last couple of quarters have been around that 5% mark. I think there's really three things that I would call out there. One is that we have seen over the last year or so, less new warehouse openings in sort of genuinely new markets. Generally speaking, when we open in a Japan or a China, there's a dramatic increase and spike in the number of new members.

They certainly help to inflate the overall membership growth, and we really haven't had a meaningful number of those in the last year or so. That's having an impact on slowing down the rate of growth. Secondly, I'd say we are cycling some strong new member sign-ups a year ago, so we're having some impact as we cycle those and still seeing strong member sign-ups. But certainly we're sort of lapping some higher growth that we saw this time last year.

I think, you know, I'd also probably say if you look at the long term growth rate, you know, as I mentioned, certainly we've had growth at a higher rate when there have been times where we've had those large new warehouse openings with inflated new members, and we've had peaks at certain times where we've seen higher member sign-ups. If you look at our long term growth rate, it really is in more of that 5% growth range in terms of new members. I think it's kind of maybe resting more closer to where the long term growth rate has been.

We think there's still plenty of opportunities to keep growing the membership base, whether it's through adding new benefits as we did some of those this year, whether it's existing warehouses continuing to mature and growing their membership base, as I mentioned earlier, improving the renewal rates as we're making good progress in those as well. In our international markets, we, you know, tend to be—while we have a large member base per warehouse, the executive membership base—tends to be lower penetrated in those areas as well.

I think there's lots of opportunity for continued growth, but I think those would be the three points that I would call out as being the main drivers of us, at a slightly lower rate year-over-year than we've been, in the quarters prior to the last two.

Our next question comes from the line of David Bellinger with Mizuho. Your line is open.

Hey, everyone. Thanks for the question. I saw on renewal rates, the U.S. down about 10 basis points, worldwide flat. Is this the real bottom here? Given the way you calculate renewal rates, do you have a certain timeline or timeframe in mind when you can see this data set start to improve and move back up again? Separately, we've noticed some in-warehouse activity, maybe giving out a free item when you sign your membership up for auto renew. Can you talk about the uptake for that program and how that's helping renewal rate as well? Thank you.

Sure. Yeah. As you mentioned, we called out a few quarters ago that we were seeing a slight decline in the overall membership renewal rate, and you characterized it very, very well, which is, as we've started to see a meaningful increase over recent years in the number of digital members signing up, they do generally renew at a slightly lower rate. As they've been building as a percentage of the total base, it's been a real positive for us in terms of adding younger new members and helping with total revenue growth and some of the comments I made about membership growth, re-responding to Rupesh's question earlier.

It has had an impact when you blend those into the total mix of members, it does bring down slightly the overall renewal rate. You know, when we called that out two or three quarters ago, we said we probably have, you know, a few more quarters that where we'd expect to see a continuation of a slight decline in the renewal rate because there is that sort of math where those numbers are feeding into the overall renewal calculation. It does bring down the average. I think we're pleased to see that the global rate actually was flat during this quarter, and the U.S. rate was only down 10 basis points, as you mentioned.

I think it shows that we're making some good progress with, you know, the impact that we thought would happen through the maturation of those online members coming into the overall number, but also with some of the initiatives that we've been driving around contacting and engaging with those new digital members through digital communications, through retention strategies. We'd have just played out the impact we would have expected without any of that activity, it would have been a higher decline just with the math of the number of digital members that were feeding into the overall renewal rate calculation. We are seeing and showing some impact of the benefit of those programs.

The auto renewal is something we've been focused on for some time. We believe as more members, you know, have grown over time, there's a real benefit in helping the member from a convenience point of view, having auto renew. Of course, it helps us with membership renewal rates as well. That's something we've had as a program for a while now, and there are certain times where we'll raise the awareness of it in the warehouse for our employees to have a talking point with a promotion of some sort as well. Overall, I think we feel that we're seeing what we expected with the change in the renewal rate. It has slowed down.

Costco Wholesale (COST) Q2 2026 Earnings Call Transcript

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