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<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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G500 2022-26-Costco Wholesale

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F500 2022 Costco

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CTW 2021-03-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 will be your conference operator today. At this time, I would like to welcome everyone to the Costco Wholesale Corporation's third quarter 2026 earnings 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 again. Thank you. I would now like to turn the conference over to Gary Millerchip, Chief Financial Officer. You may begin.

Good afternoon, everyone, and thank you for joining us for Costco's third quarter 2026 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 a substitute for net sales presented in accordance with GAAP. Before we dive into our financial 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, everybody, and thank you for joining us today. I'll make a few comments on current events and provide a brief update on our strategic priorities before turning the call back over to Gary. Against the backdrop of ongoing macro uncertainty, our focus is providing quality goods and services at the lowest possible price continues to resonate strongly with our members. Nowhere has this been more apparent in the third quarter than our gas business. As events in the Middle East have had a significant impact on product supply and gas prices, our focus, as always, is to be there for our members by staying in stock and offering the best value. The result was record-breaking volumes.

All three four-week fiscal periods of the quarter set successive all-time company volume sales records, with the final five weeks of the quarter becoming our top five volume weeks ever. Our gas team performed exceptionally well to manage this unprecedented demand, which requires multiple daily gas deliveries to many locations. The high consumer price sensitivity, which fueled these record volumes, also drove many members to use our gas stations for the very first time in the third quarter. We believe this will drive even greater loyalty with these members in the future, as members who use our gas stations typically spend more with us in the warehouse. We're closely monitoring the longer-term inflationary impacts of higher oil prices, as well as the future impacts of tariffs.

Our buyers continue to demonstrate their ability to adapt and are using their significant experience and expertise to try to reduce the impacts on prices for our members. Our goal is to be the first to lower prices and the last to raise them, and Gary will share some examples later in the call where we lowered prices this quarter. We're also able to bring greater value to our members through many exciting new Kirkland Signature items in the third quarter. On the topic of tariffs, we've started submitting our refund claims for the IEEPA tariffs. We are doing this through the process set up by the U.S. Customs and Border Protection.

These submissions will go in over what may be the next few months. Based on what other claimants have experienced, we should start receiving refunds on approved claims on a rolling basis over the following two to three months. As we've mentioned before, our plan is to return to our members in some form the portion of tariffs that were passed on to them. How much we return and when depends on a variety of factors, including how much refund money we receive and when it arrives, as well as developments in the lawsuit filed against the company regarding the return process. Turning to progress with growth priorities, our real estate and operations team continue to focus on increasing our pipeline of new warehouses, both domestically and internationally, as we target 30+ net new openings per year in the coming years.

In the quarter, we opened four net new warehouses, including three in the U.S. and one additional Canadian Business Center. Those openings brought our total warehouse count to 928 worldwide. We currently expect to have 26 net new openings in fiscal year 2026, down two buildings from the prior call, with those two buildings now set to open in fiscal year 2027. Far this year, we've also completed two relocations with one more planned in Q4 as we continue to relocate select high-volume warehouses to larger locations with more parking and expanded gas stations to provide a better member experience and drive more volumes in these warehouses. In digital, we're making meaningful strides to deliver a more seamless and convenient experience for our members across the warehouse and online.

As a result of our investments in technology and the commitment from our employees to use this technology to deliver a great member experience, we're seeing a significant improvement in the speed of checkout. The enhancements we have made include improvements to the mobile wallet, the introduction of digital membership card quick access on the Costco app, and the rollout of our shopping cart pre-scan tool internationally. The pay station pilot I spoke about last quarter has also been successful, and we are now incorporating this technology into our new warehouse openings and high-volume buildings. We're also enhancing the e-commerce experience for members and recently rolled out same-day delivery services in Spain and France. Same-day delivery, powered by our third-party partners, has become a highly effective way to deliver more convenience to our members.

Average same-day delivery time in the U.S. is now less than 45 minutes, and the average member satisfaction rating is 4.8 out of five. This part of our business is growing at an even faster rate than our digital business overall and is a strong driver of loyalty as it is often our highest spending members who are using this service. Finally, as we learn more about how consumers are embracing AI in their shopping habits, we're working with the leading AI companies to improve the visibility of our values to current and potential future Costco members. We believe AI is changing how consumers research products and has the potential to be a significant opportunity for Costco, given our pricing authority and our focus on quality.

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&A to field some questions.

Thanks, Ron. In today's press release, we reported operating results for the third quarter of fiscal year 2026, the 12 weeks ending May 10th. 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 third quarter came in at $2.192 billion, or $4.93 per diluted share, up 15% from $1.903 billion or $4.28 per diluted share last year. Net sales for the third quarter were $69.15 billion, an increase of 11.6% from $61.96 billion in Q3 2025. Comparable sales were up 9.8% and 6.6% adjusted for gas price inflation and FX. Excluding gas sales entirely and adjusting for the impact of foreign exchange, comparable sales were also up 6.6%. Digitally enabled comparable sales were up 21.5% and 20.8% adjusting for FX.

Our segment breakout of comparable sales is disclosed in both our earnings release and the supplemental slide deck. In terms of Q3 comp sales metrics, FX positively impacted sales by approximately 1%, while gas price inflation positively impacted sales by approximately 2.2%. Traffic or shopping frequency increased 2.4% worldwide. Our average transaction or ticket was up 7.3% worldwide and 4.2% excluding gas price inflation and changes in FX. Moving down the income statement to membership fee income. We reported membership fee income of $1.373 billion, an increase of $133 million or 10.7% year-over-year. Adjusting for FX, the increase was 9.9%. The September 2024 U.S. and Canada membership fee increase accounted for a little more than one quarter of membership income growth. Excluding the membership fee increase and FX, membership income grew 7% year-over-year.

This was driven by continued growth in our membership base and upgrades to executive memberships. At Q3 end, we had 41.2 million paid executive memberships, up 9.6% versus last year. This quarter, we launched our executive member program in China and have seen strong early adoption in the market. We ended the quarter with 82.9 million total paid members, up 4.1% versus last year, and 148.5 million cardholders up 4% year-over-year. In terms of renewal rates at Q3 end, our U.S. and Canada renewal rate was 92.2%, up 10 basis points from last quarter, and the worldwide rate came in at 89.7%, unchanged from last quarter. As previously shared, members who sign up online on average renew at a slightly lower rate than warehouse sign-ups. As this population has grown as a percentage of our total base, this creates some downward pressure on the overall renewal rate.

In Q3, it was pleasing to see that our focus on increasing the renewal rates of these members through targeted digital communications and retention strategies more than offset the negative impact from this mix change in our membership base. Turning to gross margin, our reported rate was lower year-over-year by 21 basis points, coming in at 11.04% compared to 11.25% last year. Excluding gas inflation, the gross margin rate was higher by one basis point. Core was lower by 46 basis points and lower by 29 basis points excluding gas inflation. In terms of core margins on their own sales, our core-on-core margins were lower by nine basis points. This decrease was due to slightly lower margins in fresh and food and sundries, where we invested in lower prices for our members on several everyday items such as eggs and beef.

Transportation costs were also a headwind in the quarter due to higher gas prices. The significant difference between reported core margins and core-on-core margins was primarily due to mix changes as we saw gas, e-commerce, and pharmacy sales grow at a faster pace than core merchandising sales. Ancillary and other businesses gross margin was higher by nine basis points and 14 basis points excluding gas inflation. This was driven by higher sales penetration in e-commerce and pharmacy, partially offset by a lower gross margin rate in gas. LIFO positively impacted the rate by 14 basis points, both with and without gas inflation. We had a $44 million LIFO charge in Q3 this year compared to a $130 million charge in Q3 last year.

This quarter's gross margin rate benefited two basis points from lapping the catch-up accrual in Q3 last year for the increased employee vacation days included in our March 2025 employee agreement. Moving on to SG&A. Our reported SG&A rate was lower or better year-over-year by 20 basis points, coming in at 8.96% compared to last year's 9.16%. Excluding gas inflation, SG&A was lower or better by 2 basis points year-over-year. The operations component of SG&A was lower or better by 12 basis points, but worse or higher by 3 basis points, excluding the impact of gas inflation, as underlying improvements in productivity were offset by higher healthcare costs. Central was lower or better by 3 basis points and lower by 1 basis point, excluding the impact of gas inflation. Equity compensation was flat and higher or worse by 1 basis point, excluding gas.

This quarter, SG&A also benefited 5 basis points from lapping the catch-up accrual in Q3 last year for higher vacation days in our 2025 employee agreement. Below the operating income line, interest expense was $32 million compared to $35 million last year. Interest income was $130 million versus $95 million last year, driven by higher cash balances, and FX and other was a $25 million benefit versus a $10 million loss last year, largely due to changes in FX. In terms of income taxes, our tax rate in Q3 was 25.4% compared to 26.2% in Q3 last year. Turning now to some key items of note in the quarter. Capital expenditure in Q3 was $1.41 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 operational efficiency, and enhancing the member digital experience. In terms of merchandising highlights, as Ron mentioned in his opening comments, gas prices had a major impact on the quarter, with our members allocating a greater proportion of their total spend to gas. At the same time, we saw very robust comp sales results excluding gas as our combination of merchandising quality, value, and newness continued to resonate with members. Fresh comparable sales were up high single digits in the quarter, led by meat and bakery. In meat, we saw strength 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, including a variety of seasonal pastries and cookies. Non-foods comp sales were up high single digits in Q3. Top performing departments were gold and jewelry, small electrics, tires, home furnishings, majors, and health and beauty. Self-care and wellness items performed extremely well during the quarter, including fragrances and hair and skin products in the health and beauty and small appliances departments. We also saw members willing to splurge on higher value self-care items where the quality and value is compelling. For example, we experienced almost 50% sales growth in saunas and massage chairs during the quarter. In food and sundries, comp sales grew mid-single digits, led by packaged foods and candy.

While egg price deflation was a headwind to sales, this was partially offset by significant growth in other items such as protein snacks and protein bars. Kirkland Signature is also driving growth in food and sundries. We continue to innovate with new KS items, offering savings of at least 15%-20% to the national brand equivalent with equal or better quality. Q3 launches included our KS Energy Drink, KS Ultra Filtered Milk, KS Sea Salt Popcorn, and KS Oven Roasted Chicken Dog Food. Our goal is to be the first to lower prices where we see opportunities to do so, and a few examples this quarter included KS Crispy Wings from $16.99-$14.99, KS Milk Chocolate Almonds from $19.99-$18.99, KS Golf Balls from $32.99-$29.99, and KS King Size Sheets from $89.99-$79.99. In ancillary businesses, comp sales were up mid-20s.

Pharmacy led the way and saw significant market share gains in the quarter. In addition to our experienced pharmacists taking great care of our members, a number of factors are contributing to this growth. These include increased GLP-1 demand and inclusion of Wegovy and Ozempic in our member prescription program, great value on pet medications, acceptance of Medicare D over-the-counter flex cards, and expansion of our mail order and specialty pharmacy offerings. Gas comps were positive high 20s, driven by the price per gallon increase year-over-year, as well as an acceleration in volumes. Turning now to inflation. Overall, inflation increased slightly in Q3, largely because of higher gas prices. This was offset by lower inflation in food and sundries and fresh, primarily due to deflation in produce, eggs, and dairy.

Inflation increased slightly in non-foods, and we are anticipating further inflation in a number of non-food categories as higher resin costs start to flow into cost of goods. As always, our buyers are working hard to mitigate the impact of cost increases. The supply chain is generally stable, and our merchants feel good about our inventory position heading into the summer. We have relatively low inventory exposure to shipping issues stemming from the situation in the Middle East, but we continue to monitor the situation closely. In digital, we saw strong member engagement in Q3 with site and app traffic up 37%. Pharmacy, gold and jewelry, home furnishings, tires, special events, housewares, and majors all grew double digits year-over-year. Delivering a more personalized experience for our members is a key focus, and we continue to make progress in this area.

In Q3, our personalized product recommendation carousels delivered conversion rates three times better than our typical conversion rates and contributed just under half a billion dollars of e-commerce sales. As Ron shared earlier on the call, with consumers increasingly using AI to research products and services, we believe this has the potential to be a significant sales opportunity for Costco. We're now leveraging AI to enhance our product pages online, which in turn is increasing our relevance with the large language models. While the volume of traffic generated from AI search is still low, we saw triple-digit growth in Q3, and this activity had the highest conversion rate of all traffic coming to our site. Finally, as we accelerate our digital capabilities, we are also broadening our reach in retail media. Q3 marked the launch of a new collaboration with Google Commerce Media and YouTube.

Launching this partnership will make it easier for brands and agencies to collaborate with Costco Retail Media and is a significant milestone on our journey towards increasing our share of retail media revenue. That concludes our prepared remarks. In terms of upcoming releases, we will announce our May sales results for the four weeks ending Sunday, May 31st on Wednesday, June 3rd after market close. We'll now open the line up for questions.

Thank you. We will 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 again. 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. 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 Michael Lasser with UBS. Your line is open.

Good evening. Thank you so much for taking my question. Recognizing and fully understanding you do not provide guidance, given that new membership growth is a critical driver of your overall same-store sales growth as these new customers ramp their usage of the warehouses, and this metric has slowed to 4.1%, which is the lowest level in some time, should we keep our expectations around your same-store sales growth outlook for at least the near term pretty modest? Especially when you consider that you will be lapping some of the changes to the club hours in the coming weeks. Thank you so much.

Hi, Michael. Thanks for the question. I guess I will cover that in a couple of different parts. I think, first of all, maybe taking a step back on the main part of your question around membership and what we are seeing there in terms of growth. Overall, we were pleased with the results in the quarter. As I think you heard us say in the prepared remarks, when we look at membership growth, if you back out the fee increase and foreign exchange, we were up 7% overall. A big part of that was due to the continued engagement we see with executive members growing, and that was up over 9% during the quarter. Maybe that's the first point to tie to your comment around sales. As you perhaps know, when we see members who are executive level, they generally spend more with us and visit more frequently.

That's a really positive dynamic in terms of impact and potential for future health and growth in terms of membership spending. Then, as you mentioned, we saw paid membership growth up just over 4%. Those two together were what combined to create the 7% growth in the membership rate. We were also pleased to see that the renewal rate has sort of normalized, if you like, now as we've started to now see the mix maturing of digital members coming into the membership renewal rate and as we start to implement the benefits of Or see the benefits, I should say, of more targeted marketing and retention strategies driving a leveling out, if you like, of that membership renewal rate. Our goal, of course, is to continue to improve that rate as we execute more of those communication and targeting marketing efforts with our members.

As you mentioned, we have seen some slowing in the year-over-year membership growth in recent quarters. We attribute that to a number of factors. One would be that we haven't been opening new warehouses in major new markets. If you think about some of the growth we've had in prior years in Asia in particular, when we open new warehouses in Japan and in China, as an example, we tend to see an outsized growth in membership. Often the renewal rate on those members is much lower because we have a big element of new consumers coming into membership to really explore the experience and have a look at what we offer, and often coming from a much longer distance and further away from the warehouse.

We haven't seen a major new opening in a new international market for a while, which definitely has an impact, and we are cycling some stronger growth from signups from a year ago as well. We think the sort of the 4%-5% is a more normal rate of growth when you don't have the benefit of a large increase that's linked to some kind of special event like COVID or a new market entry. Overall, I'd say with the renewal rate leveling out and with the year-over-year growth that we're seeing in new member sign-ups, we feel good about the health of membership, and we think there's a lot of opportunity for continued growth in the future as well.

Just as it relates to the same-store sales growth, given that that is a critical pipeline, especially as you lap some of the big outsize drivers over the last few years. Thank you.

Yeah. I think in general, I would say, as you mentioned, we don't give guidance on what we expect future trends to look like. We do expect to continue to grow our market share as we deliver great value for members and continue to provide great quality items. I would say in broad terms, what we're seeing at the moment is just a continuation of the trends that we've seen in really the last year or so. Members being very willing and having the capacity to spend, but have very high expectations around quality, value, and newness. Our value proposition seems to be resonating really well in that regard. As you know, we've been cycling some fairly major gift card programs, and gold sales is now being cycled year-over-year.

Yet, as you look at the recent results that we've seen in our sales, we continue to comp, excluding gas, in that 6%-7% range, and we haven't really seen any variation from that performance as you look at our membership spend and membership growth over the last year or so.

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

Good afternoon. This is Pedro Gil on for Simeon. Thank you for taking our question. I would like to ask you first about the core on core margin, which was down nine basis points. As you're lapping against some of the very strong gains that started four quarters ago, more or less. Should we recognize this as a sign that you're taking, strategically, a more aggressive value posture to gain share and capitalize on some of the trends from the consumer out there? Are you seeing something similar from the competition?

Yeah. Thanks for the question. I would probably take a step back, as we've shared before on gross margin when we talk about the rate year-over-year. We look at it overall and look at the quarter, and the focus for us is really on the gross margin rate ex gas inflation or deflation. During the quarter, we saw a 1 basis point improvement in the result. If you recall, and you mentioned a moment ago, we're actually cycling two years' worth of, I think, the highest growth we'd seen in gross margin rate in fiscal year 2025 and 2024 in Q3 in particular.

As we shared previously, while we provide the detailed breakdown of our gross margin rate, we really do tend to focus on that measure of gross margin overall, excluding gas inflation or deflation, because we tend to manage the business more holistically than looking at one individual component of the gross margin. With that being said, there were a lot of moving parts during the current quarter. First of all, we had higher top-line growth overall, that came with a significant shift in the composition of sales. We had higher sales in gas and added to e-commerce and pharmacy. That did create a fairly significant shift in the mix. That has an impact on the core rate overall. In terms of core on core, we knew we were cycling in the quarter a fairly large LIFO charge from last year.

We saw it as an opportunity, recognizing that our members were dealing with higher gas prices, to really invest in increasing value to the member, partly through the widening of our value in gas in the market to drive volume growth and more gallons and traffic to our gas stations. Also in everyday prices, as I mentioned in prepared remarks, with eggs and meat in particular, really keeping the value very strong for our members. We saw the opportunity to do that because of the benefits that we were cycling from the prior year, and we felt that was the right thing to do to continue to drive top-line growth in the business and deliver value for our members. I would say in general to the final part of your question, we tend to view ourselves as our toughest competitor.

Really the majority of the price investments that we're making are because we really want to ensure that we're delivering that great value for our members and where we have the opportunities to invest to drive top-line growth while continuing to sustain our gross margins, then we look for the opportunities to do that.

Okay, great. That's helpful. As a follow-up, if I could ask you about the composition of your comp between traffic and ticket. The ticket component is particularly meaningful. If you could parse out for us how much of that is same SKU comparable pricing versus mix versus larger baskets, that would be very helpful.

Yeah. It's really a combination of all of the above, where we're seeing an increased number of items in the basket. We're seeing some inflation in the basket, but remember for us, part of the inflation is moving items to bigger sized items or better quality items at higher value. We don't tend to parse out the individual elements, but it would be a combination of both.

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

I wanted to pick up the pricing thread. You mentioned in prepared remarks running prices lower ahead of expected cost declines. One of your peers talked about sort of eating some tariffs, maybe passing through the price earlier even though they had pre-tariff inventory. My big question is there a change in the rationality of the overall market, or is this simply just something opportunistic in a moment in time given the backdrop that we're sitting in?

Yeah, I think, Chris, I'd answer the question a couple of ways, and Ron may want to add some color commentary as well. I think maybe taking a step back and talking about the competitive landscape, we think of the market as being very rational currently. We tend to be our own biggest competitor, with our goal being always to maintain that pricing authority and to be there for our members. As I mentioned a moment ago, because of the impact of higher gas prices, we felt it was important to continue to deliver more value for our members. Really, maybe the broader comment I would make, too, is around as you think about the impact on gross margin for us, I think I've shared this in a couple of prior quarters when we were seeing higher core on core margin improvements.

The rate for us will fluctuate quarter to quarter. We really would encourage you not to get too fixated on one individual quarter or one element of gross margin. We tend to manage it more holistically and look at how can we keep investing in driving value and driving top line for our members. This quarter, as I mentioned, we invested more in some everyday items like beef and eggs because we had the opportunity to do that with the LIFO charge that we're cycling, and we were also able to widen our gaps in gas. Overall, when we look at the trajectory of our gross margin rate over the last sort of 12-24 months, generally it's been stable, and I'm talking about the gross margin rate ex gas inflation or deflation. It's generally been stable, a slight improvement sort of in the mid-single digit range.

Really our Q3 result was very much in line with that trajectory, and we have the opportunity, have that capacity to be able to invest more in value for our members as we were seeing the impact for them on gas prices.

This is Ron. To add to what Gary said, the moves that we've made on pricing were strategic, not reactionary. These are things that we will see. One of your examples was you saw some inventory that we had during higher tariffs. Now we're getting the lower priced goods in. We may go down earlier in those to get into those lower priced goods quicker. We're down quick on eggs when that commodity started dropping. We've just used this as a lever. We've always talked long-standingly that we're the first to come down and the last to go up. This period was a good example of that, is getting into lower cost goods where we can and lowering prices for our members.

That makes sense. As a follow-up, historically, we've thought about a total comp of 4%-5% to start to see core leverage on SG&A. You did something like a nine, I think, because FX helps, but you actually delevered three basis points. Is there something changing there? You mentioned healthcare costs. To what extent maybe freight impacted that flow through? Any commentary about how we should think about the future? Thanks very much.

Just briefly on SG&A, I wouldn't say anything's really changed in our view of that. If you look at the key components in operations, we were probably about mid-single digit leverage in core operations, but with the healthcare cost increases and a couple of small one-time items, they more than offset that impact. In Central, we also had a couple of legal settlements and reserves that would have impacted the Central numbers as well. Of course, there's always the possibility that these items can occur unexpectedly each quarter. Outside of those, we would've seen a reasonable amount of leverage during the quarter and more consistent with that idea of mid-single digit comps delivering some level of leverage. To your point, it would be excluding gas, of course.

We typically don't see the same level of leverage on gas, but on the core operations, that's what we'd expect to see.

Our next question comes from the line of Oliver Chen with TD Cowen. Your line is open.

Hi, Ron and Gary. Gary, as we think about retail media, your business model is quite different with the SKU efficiency from other players. What are the parameters and/or guardrails you're thinking of in balancing the member satisfaction against the big opportunity? And it sounds like you're at a nice turning point with that opportunity. Ron, as you continue to push for innovation and being your own best enemy against great multi-year performance, are there trade-offs in terms of expenditures or not really? It's very capital light in terms of improving the checkout and automation, as well as implementing AI to further make customers happier, yet using technology and distribution and speed. Thank you.

Thanks, Oliver. On the Retail Media question, I think for us it's fairly simple in that the member always comes first. It's one of the reasons why our focus with Retail Media, first and foremost, was to build more of the personalization capabilities to be able to deliver more relevant messaging to members that help improve the experience to save our members time and money. As we're starting to implement those capabilities, we were also parallel introducing some media activity on third-party sites to really build the capability and to show our CPG partners what was possible with Costco and Retail Media. As we're now sort of scaling up those personalization capabilities, we'll continue to look at Retail Media through that lens.

How does Retail Media help us deliver more value, more relevant experiences for our members, and how can our CPG partners participate in that to deliver a better investment, a better return on their marketing spend? As we are introducing more of those capabilities, we would expect Retail Media to ramp up and increase the value we generate there. It would definitely be through the lens of the member experience and member value. Of course, everything we do, 80%-90% of that value is reinvested in the member to deliver more value for them and better pricing so we can drive top line sales.

Again, on my question about the technology spend, I would consider it capital light from what we're seeing. We're seeing great returns on the investments. Gary spoke about the sales that we're leveraging on E-commerce. There's a cost to that AI, but it's being offset by greater sales and great leverage that we're seeing there as well. In the operations side of things, the technology we're using on the front ends has been very accretive to higher productivity. I think his points on the SG&A leverage is a good reflection of the benefits we're seeing with shorter lines, faster throughput for our members, and in turn, lowering our payrolls in these areas as well. We see it not as any heavy lift for us in capital at this point.

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

Hey, Ron. Hey, Gary. About $45 in cash per share on the balance sheet. Can you zoom out, help us think about capital allocation, including plans for a special dividend, and also how you may look to deploy future tariff refunds?

Sure. Thanks, Chuck. Yeah, on the capital and sort of financial strategy, really very consistent in our mind. Our number one priority, of course, is to keep investing in the business to drive growth. You heard me share in the prepared remarks, we're really focused on accelerating new warehouses, remodeling warehouses where we have the opportunity to really expand capacity and support continued growth, particularly in those capacity-constrained locations. Expanding the depot network. We're also doing some investments in manufacturing capabilities where they can support KS growth, things like expanding hot dog capacity and coffee roasting, some of these areas. Then, of course, digital member engagement and investing in technology capabilities there to enhance the member experience.

As we make those investments, as that being the top priority, we're also growing the regular dividend over time, as you know, and we sort of continue to buy back stock at a level that avoids dilution from the executive stock grants that we issue each year. We are in a position, as you mentioned, where we continue to generate excess cash beyond those priorities, and we believe that at our current valuation, special dividend is typically the most effective way to return excess cash without giving up the flexibility to keep investing in growth where we see opportunities to do that. Our cash balances continue to grow, and we'll obviously evaluate what we think is the appropriate timing and approach to deal with that situation. It's important to remember the last time we did a special dividend, the stock price was materially lower than it is today.

To be at a similar yield, I should say, our cash would need to be at a higher level than it was at the last special dividend. We'll continue to review those options with our board. No plan to share at the present time, but obviously, we'll keep investors posted as we continue to evaluate.

Okay, great. Fair enough. Then just on real estate, you talked about, I think, relocating three stores this quarter or maybe this year. Can you just help us think about the opportunity set and just remind us what the threshold from a sales volume you typically do when you want to relocate a club?

It's really based on the existing facility, and we have some that are our earlier Price Club locations in the Northeast, that were smaller facilities with 500 parks. When they hit a threshold of the average volume of the warehouse that we're seeing in the U.S., it is triggering time that we see opportunities to grow the sales in that market. It's hard to say there's any one dollar amount around the world that we use to trigger that. It truly is the size of the business and the size of the facility and how we're servicing our members in the gas stations, parking lots, and the traffic inside the warehouse. It is a moving target as we see.

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

Hi, guys. Thanks for the time. It seems like two of your biggest competitors worldwide, but certainly in the U.S., Walmart and Amazon, continue to ratchet up the competitive bar, if you will, in delivery speeds. Given that fact and the potential increase in e-commerce, it seems like delivery capabilities and speed will become even more important over time. Do you think Costco will ultimately need to build out your own 1P delivery infrastructure, or do you think you can fully rely on third-party partners to compete in that kind of environment? Thanks.

I think that we will continue to look at that. As you know, a few years back in 2020, we went ahead and made an acquisition to get into the big and bulky delivery because we felt that there was a significant opportunity in shortening the delivery times there. That has been very productive for the company, and we deliver a great example as far as that goes. Currently now on our same-day delivery process, we have very good third-party partners that are, as I spoke to on the opening comments, are of high satisfaction of our members, and we're averaging 45 minutes or less should a member require something to be delivered that quickly. At the current time, we're happy with the partners that we have. We continue to evaluate that and look at how we can improve delivery times across the network and across the world.

That will be continued to be reviewed if we need to get further vertically integrated in that business.

Our next question comes from the line of Zhihan Ma with Bernstein. Your line is open.

Hi. Thank you for taking my question. I have one on traffic. Understanding there was a lot of calendar shift in Q3, but it looks like traffic was kind of below the historical trend, at least for the first part of Q3, and then started growing into April. Can you help us understand, one, how much of the April acceleration was benefiting from the gas inflation and driving more traffic into stores? Two, is there a structural way to further improve traffic, especially given a lot of your stores may already be at capacity, so you may not physically be able to attract more traffic growth from here? Thank you.

Sure. Yeah. Thanks for the question. On traffic, I would say it's important to, in our minds, take a step back and look at the last 12 months or so, because we have seen a mix change over time. If you think back a year or so ago, we were sort of flat to slightly negative on basket size, and we've seen an increase in basket and traffic, we were probably up mid-single digits. What we've seen is the continuation of the same overall comp trend that we were seeing then. We've seen, as we cycled some of those lower average basket size, we've seen basket sizes increase, and we've seen traffic continue to grow up a couple of 2% roughly, on average, if you look at recent monthly results compared to that 5%.

Still growing healthily, but definitely a little bit lower than it was and sort of a normalization, if you like, over two years of those two numbers looking more close together. I think it's a little bit difficult to look at individual month and try and piece two much together from those. I do think there's a lot of work that we've done over recent quarters to create more opportunity for members to visit more frequently, whether it was the extended hours for our gas stations before the recent growth in gas that we've seen with higher prices. The extended operating hours in our warehouses that we launched just under a year ago as well. The work that Ron mentioned earlier around remodeling and expanding warehouses to create more capacity, whether it's the parking lots or the gas stations and more capacity there as well.

I think there's a lot of focus to make sure that we maintain that trajectory in traffic. I do think there's going to be puts and takes in individual months just because of some of the different dynamics, as you mentioned, around members changing behavior. I think of the period you were talking about as an example, we definitely had a period of time where members were stocking up on items as they were concerned about the impacts of what tariffs might mean on costs. I think you see some of that showing up in the individual month-to-month data. Overall, we feel good about the traffic growth that we're seeing when we look at it on a two-year basis and on an individual year basis as well.

To add to what Gary is saying, as he spoke about in our capital expenditures, acquisitions of adjacent properties to our warehouses, expanding parking lots. The technology throughput is also a key driver of traffic. If we can get members processed through much quicker, we're turning parking spaces much faster, that is resulting in better traffic in those high volume warehouses. We strategically look at infill locations. We've proven that when we open a building in an existing market, our build back in the existing buildings, when we relieve the pressure, comes very nicely. We see great build back of traffic in those warehouses that are relieved of the volume as we infill strategically around the world.

Just mention, too, you asked about gas. Just to confirm, you didn't say this, wanted to make sure I clarified. Gas traffic isn't included in our traffic number. I would say that, generally speaking, a little less than half of our members are visiting the warehouse when they visit the gas station. I wouldn't say we've seen a dramatic change when you look at our results in the third quarter around traffic overall as a result of that. We think that's partly because a lot of members are increasing their frequency of visiting the gas station to top up in between what would've normally been a gap between getting the tank to empty because of the concern about what might the gas price be tomorrow. We do think over time, it's a great way to build loyalty.

When we look at our members that are engaged in gas with us, they are generally visiting more frequently overall. They're spending more with us overall, and they're also renewing at a higher rate. We do think it's a good, healthy barometer of long-term growth for the business as we continue to drive engagement in gas.

Our next question comes from the line of Peter Benedict with Baird. Your line is open.

Oh, hey, guys. Thanks for taking the question. I know we're going to get the main numbers next week, just curious if you'd comment on kind of any behavioral changes or changes in trend that maybe you've seen thus far? It's obviously a dynamic environment out there, so everybody's kind of attuned to that. As related to that, maybe a bigger picture question around GLP-1s. You talked about it in the prepared remarks. I'm curious how it's influencing either any category performance that you've got or maybe how you're thinking about leaning into different categories, as you think out over the next several months and years? Thanks so much.

Yeah. Thanks, Peter. As you mentioned, we will release sales next week, so I won't get into any sort of short-term trends, but I'll maybe just bridge back to a couple of comments I made earlier is we're generally really not seeing any major change in members' behavior. Well, I'll caveat that with gas, of course. Gas prices are very much on members' minds, and they've had a major impact on our overall growth in gas and have also, for sure, become a bigger percentage of a member's total spend in the month because of the higher prices of gas that are in the market today. We've widened our gaps in terms of price to make sure we're there for our members, but we know that's something that's very high on our members' minds. In terms of core merchandising, really very consistent.

I think that quality, value, and newness are extremely important, and that's the things that our buyers are focused on every day. We continue to see that combination of items that offer everyday great value are doing really well, and items that are bringing newness and excitement are doing really well. A couple of examples of that, and it's across all three of our non-foods, foods, and services and fresh, I would say. In non-foods, the everyday shows up in tires and majors in health and beauty, where we have great value for our members that they can take advantage of every day. On the excitement side, finding new gold items for members to take advantage of, special events. I mentioned some of the self-care items that we're selling in health and beauty and small appliances.

They're really the areas where I see members taking advantage of some opportunities to treat themselves at great values. Similar things in fresh as well, with premium meat still doing extremely well because of the value and quality that we offer. Unit growth extremely strong in ground beef and poultry as well with the everyday value that we're offering. I think in terms of GLP-1s, the biggest thing we're seeing, of course, is that the value that we're offering in our pharmacy is really helping members take advantage of those drugs at a very cost-effective way. I think I called out in our prepared remarks, one of the things that we're seeing in food and sundries, where we're really leaning in, is kind of anything protein right now is doing extremely well. Protein snacks, protein bars, beef sticks.

We launched our own Kirkland Signature Beef Sticks that's doing tremendous volume and offering tremendous value to our members. That's an example of an area where we're really leaning into those items because of what we're seeing with our members and the value and quality they're looking for.

On the merchandising front, I've had an opportunity this last quarter to meet with several of the larger CPGs with Sarah, our head merchant. I got to tell you that they're making some nice pivots based on the needs of the GLP customer. Gary mentioned proteins. We just launched a Kirkland Signature Ultra-filtered protein milk in our dairy that has just taken off extremely strong. Things with fiber, magnesium. I think our buyers are right on top of the halo effect of GLPs and the needs of the members, and I'm quite impressed with what I'm seeing from the CPGs, the rather big ones, and how they're pivoting to the future potential opportunities there. There is quite a potential opportunity, and I feel we're on the front side of that.

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

Costco Wholesale (COST) Q3 2026 Earnings Call Transcript

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