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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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G500-2023-Costco

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

Costco had a smashing 2021, closing the year in record-breaking style as the pandemic eased and shoppers returned to in-person shopping at their favorite retailers. Costco's $5 billion in net income was 25% higher than in the year prior. With inflation surging to a four-decade high, the wholesaler raised its prices but still saw a 91% membership renewal rate. Like many other employers in the U.S., Costco raised its minimum wage in the fight to retain talent, upping that rate to $17 in October 2021. The warehouse supermarket giant partnered with Uber to trial a delivery service in Texas, and it collaborated with public health authorities to help get America vaccinated against COVID. Seeing more foot traffic in its stores, Costco debuted touchless condiment dispensers in its food courts, and brought back customer favorites like churros and smoothies to its menu. Costco pleased investors as well as shoppers in 2021 by delivering a 52% shareholder return for the year.

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F500 2022 Costco

Costco had a smashing 2021, closing the year in record-breaking style as the pandemic eased and shoppers returned to in-person shopping at their favorite retailers. Costco's $5 billion in net income was 25% higher than in the year prior. With inflation surging to a four-decade high, the wholesaler raised its prices but still saw a 91% membership renewal rate. Like many other employers in the U.S., Costco raised its minimum wage in the fight to retain talent, upping that rate to $17 in October 2021. The warehouse supermarket giant partnered with Uber to trial a delivery service in Texas, and it collaborated with public-health authorities to help get America vaccinated against COVID. Seeing more foot traffic in its stores, Costco debuted touchless condiment dispensers in its food courts, and brought back customer favorites like churros and smoothies to its menu. Costco pleased its investors as well as shoppers in 2021 by delivering a 52% shareholder return for the year.

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In the war for retail talent during the pandemic, Costco Wholesale put its money where its mouth is. Already a leader in incentives like paid sick days, Costco in February raised the internal minimum wage for its 200,000-plus–person workforce to $16, keeping the pressure on competitors to pay their own workers more. Not long afterward, Amazon and Walmart each gave raises to hundreds of thousands of their workers. Costco’s reward for its efforts: double-digit percentage increases in sales—long after pandemic panic-buying eased—and customers as loyal as ever.

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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

legacy

Costco Wholesale

costco wholesale

Ladies and gentlemen, thank you for standing by. My name is Abby, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Costco Wholesale Corporation Third Quarter twenty twenty five Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session.

Thank you. And I would now like to turn the conference over to Gary Millarchip, Chief Financial Officer. You may begin.

Good afternoon, everyone, and thank you for joining Costco's third quarter twenty twenty five earnings call. 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 intended as substitutes for net sales presented in accordance with GAAP. Before we dive into our financial results, I'm delighted to say that Ron Bakris is joining us again 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. As we wrap up the third quarter of fiscal twenty twenty five, let me make a few brief comments on some of the highlights. Since our last earnings call, we've opened nine warehouses, including relocation in Melbourne, Australia, our thirty seventh warehouse in Japan and seven net new low U. S. Locations.

We plan to open another 10 warehouses during the fourth fiscal quarter, which will include our second warehouse in Sweden, our twentieth warehouse in Korea and our one hundred and tenth warehouse in Canada. For this fiscal year, we expect to open 27 new warehouses, including three relocations for a total of 24 net new buildings. This will bring our total warehouse count to nine fourteen worldwide. Our merchandising and operations team did a fantastic job in the quarter, delivering some strong financial results while also maintaining our competitive price position despite a challenging macroeconomic backdrop. Capitalizing on the focus and scale we are able to achieve through our limited SKU count and global footprint, we continue to increase the overall value of our membership, including extended gas station opening hours and lowering prices on some key items such as eggs, butter and olive oil.

The combination of expanded gas station hours, new gas station openings and lower prices at the pump have led us to having two of our all time highest gallon weeks in The U. S. During the last month. In times of the consumer uncertainty, our Kirkland Signature brand is uniquely positioned to provide our members with great quality and great values. And during the third quarter, sales of Kirkland Signature items again outpaced our overall sales growth with our KS sales penetration up approximately 50 basis points year over year.

We continue to move more Clerk's and Signature product sourcing into the countries or regions where the items are sold. And this is helping us to lower costs and mitigate some of the potential impacts of tariffs. We're remaining agile as the situation with tariffs evolves, while also supporting the commitments we've made with our long term suppliers. As an example of this, during the third quarter, we rerouted many goods sourced from countries with large tariff exposure to our non U. S.

Markets. In The U. S, we pulled forward some items that we had planned for the summer and sourced additional locally produced goods to reduce tariff impacts and ensure that we were in stock. Actions such as these are allowing us to continue to provide great values for our members while also delivering value to our shareholders. Digital and technology are important parts of our future growth and we're investing to improve the member experience.

A recent example in e commerce is the launch of buy now pay later offering through our partnership with Affirm. This new program allows our members greater access to the Costco values on big ticket items such as appliances, furniture, consumer electronics and much more at exclusive rates for the Costco members. While still early days, we've been pleased with the initial sales results. And in our warehouses, we continue to work on opportunities to further improve the member experience. Please be on the lookout for several new technology pilots we are focusing on to help our members check out through our front end at a faster pace.

As we look ahead to the remainder of the fiscal year, while the impacts of tariffs and the outlook for the economy in general remain unknown, we are confident in the ability of our operators and merchants to rise to the challenges and continue to offer great service and find consistent values for our members. Our results in recent quarters have reinforced for us that in uncertain times, our values resonate with members as strongly as ever. With that, I'll turn it back over to Gary to discuss the results for the quarter, and I'll jump back on during Q and A to field some questions.

Thanks, Ron. In today's press release, we reported operating results for the third quarter of fiscal twenty twenty five, the twelve weeks ended on May 11. We have once again published a slide deck on our investor site under Events and Presentations with supplemental information to support today's press release. You might find it helpful to have this presentation in front

of you as I walk through our results. Net income for the third quarter came in at $1,900,000,000 or $4.28 per diluted share, up more than 13% from $1,680,000,000 or $3.78 per diluted share in the third quarter last year.

These results were driven by strong sales and margin performance despite the headwind of a $130,000,000 LIFO charge in the quarter and operating income being negatively impacted by a catch up accrual of $40,000,000 for the increase in employee vacation days included in our March 2025 employee agreement. As in Q2, foreign exchange rates also negatively impacted the translation of international net income to U. S. Dollars. In Q3, the impact was $35,000,000 or $08 per diluted share.

Net sales for the third quarter were $61,960,000,000 an increase of 8% from $57,390,000,000 in the third quarter last year. U. S. Comparable sales were up 6.6% or 7.9% excluding gas deflation. Canada comp sales were up 2.9% or 7.8% adjusted for gas deflation and FX.

Other international comp sales were up 3.2% or 8.5 adjusted and this all led to total company comp sales of 5.7% or 8% adjusted. Finally, e commerce comp sales were up 14.8% or 15.7% adjusted for FX. In terms of Q3 comp sales metrics, foreign currencies relative to the U. Impacted sales by approximately 1.2%, while gas price deflation negatively impacted sales by approximately 1.1%. Traffic or shopping frequency increased 5.2% worldwide and 5.5% in The U.

S. Our average transaction or ticket was up 0.4% worldwide and up 1.1% in The U. S. This includes the headwinds from gas deflation and FX. Adjusted for those items, tickets would have been up 2.7% worldwide and 2.3% in The U.

S. Moving down the income statement to membership fee income. We reported membership fee income of $1,240,000,000 an increase of $117,000,000 or 10.4% year over year. Membership fee income growth was 11.4% excluding FX and the recent membership fee increase represented approximately 4.6% of fee income in the quarter. In terms of renewal rates at Q3 end, our U.

S. And Canada renewal rate was 92.7% and the worldwide rate came in at 90.2%. As cohorts of new members from digital acquisition campaigns and warehouse openings in Asia move in and out of the calculation, there will continue to be some volatility in this number quarter to quarter. The decreases in the renewal rates in Q3 versus Q2 were primarily attributable to sign ups from a Groupon promotion in the fall of twenty twenty three entering the renewal rate calculation for the first time this quarter. Higher penetration of online sign ups entering the renewal rate calculation also contributes to the lower renewal rate.

These new digital memberships are a net positive as they grow the overall membership base and are generally younger members, but they also renew at a slightly lower rate. We ended Q3 with 79,600,000 paid household members, up 6.8% versus last year and 142,800,000 cardholders, up 6.6 year over year. At Q3 end, we had 37,600,000 paid executive memberships, up 9% versus last year. Executive members represented 47.3% of paid members and 73.1% of worldwide sales. Turning now to gross margin.

Our reported rate in the third quarter was higher year over year by 41 basis points, coming in at 11.25% compared to 10.84% last year and up 29 basis points excluding gas deflation. Core was higher by 36 basis points and higher by 27 basis points without gas deflation. In terms of core margins on their own sales, our core on core margins were higher by 36 basis points. A significant part of the increase was driven by our fresh departments, where strong sales leverage benefited our payroll costs and spoilage results. Additionally, the decrease in some key commodity and ingredient costs such as dairy, butter, eggs and olive oil were a tailwind in fresh and food and sundries.

In general, we feel margin pressure during times of inflation on these types of ingredients as we keep prices low for our members. And the opposite is often true when prices fall as we feel the margin relief faster while also being able to lower prices more quickly than our competitors. An example of this during the quarter is our croissant program, where we held prices lower when butter costs were elevated and are now seeing margin relief as those costs have come down. Food and sundries margin also increased during the quarter. In this case, we were able to lower egg prices by approximately 10% and butter by $1 per cell unit or approximately 7%, while also returning margins to more normal levels.

Lastly, in core on core, non food margins were up slightly worldwide, but down slightly in The U. S. Ancillary and other businesses gross margin was higher by 30 basis points and 27 basis points without gas deflation. Improved margins in gas and e commerce were the main drivers of the increase. LIFO negatively impacted the gross margin rate by 23 basis points, both with and without gas deflation.

We had a $130,000,000 LIFO charge in Q3 this year compared to an $11,000,000 credit in Q3 last year. I'll share more color on LIFO and inflation a little later in the call. Other was lower by two basis points both with and without gas deflation. This relates to the catch up accrual for the increased employee vacation days included in our March 2025 employee agreement. This change impacts gross margin for the employees who work in our supply chain and or manufacturing departments.

Moving now to SG and A. Our reported SG and A rate in the third quarter was higher or worse year over year by 20 basis points, coming in at 9.16% compared to last year's 8.96%. SG and A was higher or worse by 11 basis points adjusted for gas deflation. The operations components of SG and A was higher or worse 13 basis points and five basis points without gas deflation. This increase was due to our investment in employee wages, partially offset by sales leverage and productivity improvements.

The incremental year over year impact from this year's March employee agreement was mid single digit basis points on top of the low double digit basis point impact from our July 2024 wage increase. We will lap the July increase ten weeks into the sixteen week fiscal fourth quarter. Central was higher or worse two basis points and one basis point without gas deflation. Stock compensation was lower or better by one basis point both with and without gas deflation. Preopening was higher or worse by one basis point both with and without gas deflation, driven by more new warehouse openings in the quarter this year.

Other was higher or worse by five basis points both with and without gas deflation, reflecting the catch up accrual for higher vacation days in our twenty twenty five employee agreement. Below the operating income line, net interest and other was $50,000,000 this year versus $87,000,000 last year. The difference year over year was largely attributable to foreign exchange. And in terms of our income taxes, our tax rate in Q3 was 26.2% compared to 26.4% in Q3 last year. Turning now to some key items of note in the quarter.

Capital expenditure in Q3 was approximately $1,130,000,000 and we estimate CapEx for the full year will be a little over $5,000,000,000 Taking a deeper look into core merchandising sales, fresh category comparable sales were up high single digits. This was led by double digit growth in meat, with produce also performing very well in the quarter. Non foods also had comp sales in the high single digits. Our buyers continue to do an excellent job finding new and exciting items at great values, which are resonating well with our members even as they remain very choiceful in their spending on discretionary items. In the quarter, gold and jewelry, majors, toys, housewares and home furnishings were all up double digits.

While we continue to grow share in those non food departments, we are seeing some deceleration in year over year growth as we start to lap tougher compares in bullion and gift card sales from a year ago. Food and sundries had mid to high single digit comps with cola and frozen food showing the strongest results. In addition to lowering prices on butter and eggs, a few other examples where we were able to lower prices in the quarter to provide greater value to our members included two liter Kirtland Signature organic extra virgin olive oil from $24.99 to $18.39 Kirtland Signature chocolate macadamia clusters from $17.99 to $14.69 and Kirtland Signature organic mixed nut butter from $8.69 to 7.59 As Ron mentioned earlier, we are continuing to move more items to locally sourced production, which is allowing us to lower prices in those markets. A notable example in the quarter was our Kirkland Signature Ultra Clean laundry products. These SKUs are now sourced in Asia for our APAC warehouses, allowing us to significantly lower transportation costs and reduce member prices in the region by approximately 40%.

In The U. S, we are sourcing more American made goods where available, including items such as mattresses, pillows and plastic resin goods. New KS offerings are another way we are delivering more value to members. These items typically offer members 15% to 20% value compared to the national brand alternative with equal or better quality. In Q3, we launched over 40 new KS items ranging from mini muffin bites to smoked pork ribs and various new apparel items.

Within ancillary businesses, pharmacy and optical departments led the way. We are able to bring significant value to our members in optical through the combination of our labs, which manufacture our own high quality lenses, coupled with great prices on a wide range of frames, including luxury brands. Gas comps were negative low double digits during the quarter, driven by a lower average price per gallon. I'll now share some additional color on inflation and tariffs. Fresh and food and sunroofs inflation remained relatively similar to last quarter.

In nonfoods, we saw low single digit inflation return for the first time in a number of quarters. This was driven primarily by imported items. As a reminder, about a third of our sales in The U. S. Are imported and about two thirds of those sales are in nonfoods.

Items imported from China represent about 8% of total U. S. Sales. The inflation experienced in nonfoods was the primary driver of the $130,000,000 LIFO charge for the quarter, which is calculated comparing the net landed cost of inventory at the beginning of the fiscal year with the net landed cost of inventory on hand at the end of the current quarter. Based on our LIFO accounting methodology, if the current rate of inflation is maintained until our fiscal year end, we would have an additional 40,000,000 to 50 million dollars LIFO charge in the fourth quarter.

Any change in the level of inflation in the fourth quarter could increase or decrease the size of that charge. As we navigate an evolving environment with tariffs, we are working closely with our suppliers to find ways to mitigate the impact on cost, including moving production and sourcing to other countries where it makes sense to do so. As Ron mentioned earlier, we are leveraging our scale and global operations to help inform this approach. At Costco, we remain committed to providing quality items at the lowest possible prices and raising prices is always seen as a last resort. The evolving landscape with tariffs is adding complexity and challenges for how we operate our business, but we believe our expertise in buying and limited SKU count model give us greater agility to navigate the environment and ultimately increase our member values compared to the market.

The global supply chain remains relatively stable, although as previously shared, shipping delivery dates are generally less predictable than they were pre COVID. While the spot rate for shipping containers has increased recently in response to a short term increase in demand during the window that reciprocal tariffs have been paused, our shipping is generally covered by contracts and so we have not seen any material impact. Turning now to digital and e commerce. We continue to make progress with technology. As shared on last quarter's call, one of our key focus areas is building capabilities to deliver more personal relevant experiences for our members, helping them save time and money.

In the third quarter, successes included a targeted Mother's Day campaign to members who had purchased traditional Mother's Day gifts last year and the launch of our personalized product recommendation hub for members, showcasing items based on previous browsing history, new items they might find relevant and best selling items in their geographical area. Gold and jewelry, toys, health and beauty, majors, housewares, small electrics and apparel all grew double digits year over year. We continue to grow share in big and bulky items sold online, powered by our investment in Costco logistics. The combination of great values and the delivery experience that includes installation and haul away of old items is resonating extremely well with our members and resulted in a 31% increase in items delivered in the quarter. Costco Next, our curated marketplace, also continues to show healthy year over year growth.

In Q3 fiscal year twenty twenty five, our sales on Costco Next equaled our total sales for all of fiscal year twenty twenty two, and we are excited about the pipeline of new vendors in development for future rollout. Finally, in terms of upcoming releases, we will announce our May sales results for the four weeks ended Sunday, June 1, on Wednesday, June 4, after market close. That concludes our prepared remarks and we'll now open the line up for questions.

Thank you. And we'll now begin the question and answer session. If you would like to withdraw your question, simply press 1 a second time. If you are called upon to ask your question and are listening via speakerphone on your device, please pick up your handset and ensure that your phone is not on mute when asking your question. And our first question comes from the line of Simeon Gutman with Morgan Stanley.

Hey, everyone. I wanted to ask Ron since he's in the room. So Costco has continually invested in price and the nice thing is that you don't really have to catch up over time. Curious what you're telling the merchants right now given this moment in time. Do you put the pedal to the metal and anything different about the posture?

And are you seeing in places where price you're holding relative to the market, are you seeing tonnage and unit volume actually change meaningfully? Thanks.

Very good question, Simeon. It is it's quite complicated as Gary said now as we're dealing with the moving tariff scenes as things continue to change each day. We have been very fortunate with some of the key commodities coming down and then our buyers are immediately the first ones down in those goods. So we take every advantage of every opportunity that we can lower prices. And we've seen our competitive landscape improve slightly at the latter part of the quarter, which is very good for us.

So it means that we're doing the right thing. But we're going to continue to invest in price. It's what we do. It's how we grow our business. And we're going to continue to try and mitigate as much of this impact on tariffs as we can for our members.

So it's as we've always done, it's full force ahead on lowering prices where we can.

And our next question comes from the line of Christopher Horvers with JPMorgan. Your line is open.

Thanks. Good evening, guys. So quick follow-up on that last question and then an add on. So you Ryan, when you mentioned that it improved in the latter half of the latter part of the quarter, is that because your peers are raising prices? So how are price gaps changing given the inflation that's going on out there?

And secondly, as you think about the March period, I was you did extremely well in the non foods category. Clearly, a lot of that is share. To what extent could you quantify pull forward in some of these tariff items that you saw in like the March beginning of April? Thanks very much.

You're welcome. I think that the delta improvement has really been a very hard focus on movement and trying to work with our suppliers and lowering price wherever we can. I truly believe that we are the first one down when wherever we have those opportunities, and that does create that improved delta for us. So we're watching pricing daily and if not hourly on every key commodity. And you have commodities like butter and eggs come down, there's quite a halo effect to many different items.

So our buyers are on top of that talking to all the suppliers that would benefit from those reductions in cost and trying to really move that those products into lower cost as soon as we can. So I can't speak for the others, but I can speak for us. It's about lowering the prices as soon as we can and take advantage of those opportunities. As far as non foods, yes, we did. As we saw things starting to build on this tariff front, our buyers were very proactive and they pulled a lot forward, a lot of our summer goods, most of our patio program, our sporting goods program got in early this year, got it in ahead of the tariff impacts.

And that allowed us to hold prices or come just slightly up on prices when we needed to be. So that has really helped. And then some key categories that we have had good healthy inventory on such as furniture, appliances are not so much impacted, which has been a big driver for us and non foods as well. So it has been strategic movement of goods. And like I spoke about things that were hit with a higher tariff, we partnered with our other regions around the world where non U.

And then anything in terms of how much demand maybe pulled forward?

I think that there was slight we saw a slight impact on it. To quantify it, it was very tough to do. It was very tough to quantify that we saw any certain percent of a pull forward of the fear of tariffs.

And 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. Gary, it seemed like you were sending a reminder that you will soon lap this outsized growth from precious metals and gift cards. To what extent should we recalibrate our expectations as Costco lapse some of those outside gains? If you quantify that, that would be super helpful.

And then as part of that, at what point does Costco just reach a limitation to its rate of growth in The United States? Company has got to be mindful of depleting the overall membership experience as these clubs get so busy and it's difficult to find parking, it's difficult to navigate through the store, It takes a little longer to get in and out. What percentage of your clubs in The United States would you say are currently at that level or approaching that level? Thank you very much.

Michael. Yes, thanks for the questions. So just to cover the first part, think Ron will jump in on the second part of the question. Yes, we were sharing on the call. You may recall we've been sharing on previous quarters that we were up double digits in non foods and we were high single digits this quarter.

So part of the commentary that I shared was to remind you that some of that would be a reflection of the fact that we are cycling bullion starting to flow through on a year over year basis, particularly online. And then also gift cards, we had a particularly strong program of gift cards last year. So as we cycle those, you saw still very strong non food sales and strong market share gains, but the number would decelerate it into that high single digit range. I think it's kind of difficult to predict obviously where the consumer behavior goes in the future because of some of the things that Ron mentioned around the uncertainty. And also when you look at our individual month to month data, we obviously are sharing very transparently every month what our sales results are.

And there are going to be periods where like we shared earlier in April, where there's probably if you look at individual item categories like consumer electronics and even in paper products, there were it looked like a higher level of sales in April because of that. So you probably see a little bit of relief in some of those areas flowing through in the next couple of months. But I wouldn't really say we have anything other than confidence in what our buyers are doing in finding great quality items at great value and newness in terms of new and exciting items for the member. Everything we're still seeing right now would be that sort of the state of the consumer is that they're very focused on those three things. But where you can meet those three things really well with value and quality and newness, our members are still spending and buying non foods items.

So we think that the teams are doing a great job and we continue to see opportunity to grow in that space.

And on the operations side, it is a strategic priority for all of us in the company right now is that continue to how we improve the member experience in our high volume warehouses. As we speak about the fourth quarter openings, about 80% of those warehouses we're opening are going to cannibalize high volume locations for us. That's going to take some relief off. So we strategically look at new markets for openings, but with the real importance on strategically cannibalizing those warehouses where we can make that improvement of member experience in there as well. The recent expansion of gasoline hours was a great indicator that the throughput for our members improved nicely and we saw that immediately in gallon increases.

And on the technology front, we've realized with some of these pilots as we are working through these different systems to speed up the front end experience and get that moving flowing quickly. The backside of that is it turns over parking spaces quicker. And when you turn over parking spaces quicker, it makes the whole experience better. So we are very mindful of the high volume warehouses we have and we're strategically working on many different fronts to how do we continue to grow the volume in those existing buildings and continue to infill and look for new markets in The U. S.

As we do in all the regions around the world.

I guess maybe just one thing to add to Ron's comment Michael as well. I think you see in our 10 ks each year, we show the year by year sort of vintage of our warehouses. And I think the ones that Ron's particularly talking about where we have that over $400,000,000 of sales, which is I think what 40 or so warehouses where we're in that sort of category. So they're the highest priority there. I think as we do that, there's still tremendous growth in the less mature warehouses and we see year over year continued growth.

So I think that gives us a lot of confidence that while we make those enhancements that Ron mentioned, we still have significant opportunity with the vast majority of our warehouses to continue to grow and to for them to look into mature like our higher sales warehouses today.

And our next question comes from the line of Scot Ciccarelli with Truist. Your line is open.

Good afternoon guys. Appreciate the time. I think you guys have increased your EBIT margin on a year over year basis now by eight or maybe nine quarters in a row, however, slight. Even though we've had a pretty funky macro environment, tariffs obviously being the latest piece of that. Is there any reason we would see that trend change over the next few quarters?

Because it does seem like it's a bit of a conscious decision, not just randomness. Thanks.

Hi, Scott. Yes, thanks for the question. I would say overall, I know I mentioned this last quarter as well when we talked about the gross margin rate that we really are probably less focused than you might think on the individual quarters. We're more really focused on how we manage the business for the long term. And so you are going to see, I think individual fluctuations quarter by quarter as we make decisions to invest in the business at certain times to grow the company.

And certainly at other times like we saw in this quarter, of course, with gross margin rate in particular, we saw some real benefits in fresh productivity and lower spoilage and also some of the benefits of deflation in certain commodities. I think it's fair to look at our model over the longer term. I wouldn't particularly pick a number of quarters, but I think over the longer term, looking at generally how we've been able to grow the business and grow profitability. And I think our philosophy overall is, as you I know you've heard probably my predecessor Richard say this many times is that our goal is to continue finding ways to drive value for our members, lowering our prices consistently and doing that through our global buying, doing that for in country production, Kirkland Signature growth, as Ron mentioned earlier, and even some of the newer opportunities like e commerce growth and getting more profitable in e commerce and building the Retail Media business. But in all cases, our philosophy is how do we take 90% of that value and give it back to the member to drive top line.

And we do think over time we can still be increasing our margin a little bit as part of that plan. But that's our overall philosophy. So we wouldn't particularly guide to we don't guide at all as you know, wouldn't guide to thinking about an individual quarterly cadence, but that's more philosophically how we think about growing the company.

And our next question comes from the line of Zihan Ma with Bernstein. Your line is open.

Great. Thank you for taking my question. Gary, I wanted to follow-up on your LIFO comment. Clearly, a lot of your peers use inventory accounting, which is likely going to drive margins maybe in the opposite direction in the next quarter or two. For your LIFO estimates about the other kind of $90,000,000 of LIFO charge in Q4, am I reading that correctly?

You're suggesting a moderation in the LIFO impact in Q4 and in the coming quarters. How should we compare that to in the 2022 period where you had more of a full twelve months impact of LIFO headwind? And how does today's environment differ from then? Thank you.

Sure. I'll maybe break the question into a couple of parts because I think it's probably helpful just to explain how I hate to get sort of too technical on the accounting side, but just at least give a brief explanation of how we follow rules in calculating our LIFO charge. So essentially and you may recall the first two quarters of this year, we were seeing slight deflation in non food. So we actually had a credit to our LIFO charge for the first two quarters largely because foods and sundries and fresh were generally sort of fairly stable and sort of low inflation, which continues to be true and non foods being deflationary. In the third quarter, we saw non foods start to become slightly inflationary.

And so because of the way our LIFO calculation works, we're essentially estimating for the full year what the LIFO charge will be. So we're saying what will our inventory net landing cost of an item times the number of items that we have in inventory at the end of the year, how will that cost compare to the cost at the start of the year? And what we do is we sort of calculate what we estimate that will be for the end of the year and then we take the proportionate amount for the number of quarters. So if you think about the third quarter, we saw higher inflation. And as we were calculating out, our point estimate for the end of the year based on that calculation is about $145,000,000 call it for the full year based on the current inflation rate that we're seeing.

So we have to take three quarters or not quite three quarters, ninethirteen. So nine periods out of 13 periods in the year to date catch up in the quarter alone. So the $130,000,000 charge isn't a charge for the quarter. It's really a true up for the whole of the year for our estimate of inflation. And because we'll have four thirteenths of that charge in the fourth quarter, if inflation stays the same, that's where the 40,000,000 to 50 million dollars incremental charge comes in the fourth quarter.

So really all of that's getting us to the same data that we're looking at today, which is saying we believe there is inflation in our system because of the higher cost in non foods. The inflation rate has turned slightly positive on non foods. We're estimating based on current inflation rates that we see, the charge for the year will be $145,000,000 We've had to catch that up in the first three quarters. So it's $130,000,000 charge in the first three quarters that we show in Q3 and then there'll be an incremental 40,000,000 to $50,000,000 charge in Q4. That 40,000,000 to $50,000,000 estimate is really just based on what our current inflation rate is.

So if that inflation rate stays the same, if the tariff situation doesn't really change materially, that's our best estimate of what that outcome would be for the year. If we were to see higher tariffs, which led to higher cost of goods or lower tariffs and lower cost of goods, that could move that number up or down. And we'd have to true it up for the whole year in the fourth quarter because it's an estimate of the inventory value at the end of the year. So I'm sorry if that was a bit long windy, but I was trying to make sure I'm giving you kind of how the math works because it could feel a bit misleading that we're saying there was $130,000,000 of inflation during the quarter, but it's really a true up for the first three quarters of the year. And then I would say in general, still means that inflation is below where it would have been back in the post COVID period.

Our inventory levels are anywhere between $12.13000000000 dollars And so if you think of a charge of $145,000,000 of LIFO charge, that's really only 1% to 1.5% of inflation overall within our LIFO calculation. So it's still relatively low overall inflation, but it certainly is a change in trajectory from what we were seeing in the first two quarters.

That's very helpful. Thank you. Just a quick follow-up. Does that some of that bleed into the first half of next year as well?

It really depends on what happens with inflation going forward. So it wouldn't we take the new level of inflation at the end of the fiscal year and then our LIFO forecast for 2026 would be based on whether we think inventory the amount of inventory and the net landing cost of the product will increase in that year. So it really depends on there wouldn't be a carryover from current inflation into 2026. But if inflation was to rise again, could create a higher LIFO charge in 2026 or a lower LIFO charge if tariffs were reduced.

So just to clarify the LIFO charge, the 12,000,000,000 to $13,000,000,000 is for U. S. Inventory because 're still on the retail method for our most of our international countries. So it's really based on our U. S.

And our next question comes from the line of Greg Melich with Evercore ISI. Your line is open.

Hi, thanks. Just one quick clarification and then follow-up on digital. On the inflation in grocery last quarter, you said it was slightly positive. Was that around 01%? Is that the sort of range we're talking about?

Yes. It would be in that range, maybe just slightly higher than that, Greg, but you're in the right ballpark, low single digits for sure. And again, very similar to last quarter in grocery, it's a bit like it's been for the year to date. There are some items that are inflationary within grocery. So while egg prices have come down, as we mentioned earlier on within the year, they're still inflationary compared to what we would have seen in eggs last year.

Things like pulp are still inflationary as well within grocery, but then you've got butter, flour and cheese and some of the dairy items that have turned deflationary. So there's quite a bit of moving parts in there, but it really hasn't changed that materially since the earlier part of the year overall.

And what I'd love to do is just go deeper on digital just given the double mid teens growth.

just level set us now on what percentage of the business is digital? And particularly that Costco logistics up 31%, what percentage of e commerce is now done through Costco logistics?

Costco Wholesale (COST) Q3 2025 Earnings Call Transcript

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