Earnings call transcript: Costco Q3 2025 sees profit rise, stock dips
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Overview
The earnings call summary highlights strong financial performance with increased sales, membership fee income, and gross margin. Despite higher SG&A rates due to wage investments, productivity improvements offset these costs. The Q&A section revealed management's focus on price competitiveness and strategic growth, although some responses lacked clarity. The partnership with Affirm and strong international sales add positive sentiment. Overall, the company's solid financial metrics, strategic initiatives, and optimistic outlook suggest a positive stock price movement in the near term.
Key Financial Performance
Net Income $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. Driven by strong sales and margin performance despite a $130,000,000 LIFO charge and a $40,000,000 catch-up accrual for increased employee vacation days.
Net Sales $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.
Membership Fee Income $1,240,000,000, an increase of $117,000,000 or 10.4% year over year. Growth was 11.4% excluding FX, with the recent membership fee increase representing approximately 4.6% of fee income in the quarter.
Gross Margin 11.25%, higher year over year by 41 basis points compared to 10.84% last year. The increase was driven by strong sales leverage in fresh departments and lower costs of key commodities.
SG&A Rate 9.16%, higher year over year by 20 basis points compared to last year’s 8.96%. The increase was due to investments in employee wages, partially offset by sales leverage and productivity improvements.
Capital Expenditure Approximately $1,130,000,000 for Q3, with an estimate of a little over $5,000,000,000 for the full year.
Paid Household Members 79,600,000, up 6.8% versus last year.
Paid Executive Memberships 37,600,000, up 9% versus last year.
Tax Rate 26.2%, compared to 26.4% in Q3 last year.
LIFO Charge $130,000,000 in Q3 this year compared to an $11,000,000 credit in Q3 last year, driven by inflation in non-food items.
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Operating Highlights
New Product Launches: In Q3, Costco launched over 40 new Kirkland Signature items, including mini muffin bites and smoked pork ribs.
Kirkland Signature Sales Growth: Sales of Kirkland Signature items outpaced overall sales growth, with KS sales penetration up approximately 50 basis points year over year.
Warehouse Openings: Costco opened nine warehouses in Q3, including locations in Australia, Japan, and the U.S., with plans for 10 more in Q4.
International Expansion: Plans to open a second warehouse in Sweden, a twentieth in Korea, and a hundred and tenth in Canada.
Operational Efficiency: Costco improved operational efficiencies by sourcing more products locally, which helped lower costs and mitigate tariff impacts.
Digital Investment: Investments in digital technology include a new buy now pay later program through Affirm, enhancing member access to big-ticket items.
Strategic Shift in Sourcing: Costco is moving more product sourcing to regions where items are sold to lower costs and reduce tariff impacts.
Agility in Supply Chain: Costco is adapting its supply chain strategy to mitigate tariff impacts by rerouting goods and sourcing locally.
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Risk or Challenges
Tariff Impacts: Costco is facing challenges due to evolving tariffs, which add complexity to operations. The company is actively working with suppliers to mitigate costs and has rerouted goods from high-tariff countries to non-U.S. markets.
Supply Chain Challenges: The global supply chain remains stable, but shipping delivery dates are less predictable than pre-COVID. While spot rates for shipping containers have increased, Costco's contracts have shielded them from material impacts.
Inflation and LIFO Charges: Costco reported a $130 million LIFO charge due to inflation, with expectations of an additional $40-50 million charge in Q4 if inflation remains steady. This reflects the impact of rising costs on inventory.
Competitive Pressures: Costco is maintaining competitive pricing despite inflationary pressures. The company is focused on lowering prices where possible to enhance member value, which is crucial in a competitive retail environment.
Economic Uncertainty: The overall economic outlook remains uncertain, impacting consumer behavior and spending patterns. Costco is adapting its strategies to navigate these challenges while continuing to provide value to members.
Digital Engagement: While digital membership is growing, there is a noted lower renewal rate among digital members compared to traditional members. Strategies are being developed to enhance engagement and improve renewal rates.
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Guidance & Outlook
Warehouse Openings: Costco plans to open 10 additional warehouses in the fourth fiscal quarter, including locations in Sweden, Korea, and Canada, bringing the total for the fiscal year to 27 new warehouses.
Kirkland Signature Sales: Sales of Kirkland Signature items outpaced overall sales growth, with KS sales penetration up approximately 50 basis points year over year.
Digital Initiatives: Costco launched a buy now pay later program through a partnership with Affirm, aimed at enhancing member access to big-ticket items.
Technology Pilots: Costco is focusing on technology pilots to improve checkout speed and member experience in warehouses.
Sourcing Strategy: Costco is moving more product sourcing to regions where items are sold to lower costs and mitigate tariff impacts.
Future Revenue Expectations: While the impacts of tariffs and economic outlook remain uncertain, Costco is confident in its operators and merchants to continue providing value to members.
CapEx Projections: Capital expenditure for the full year is estimated to be a little over $5 billion.
LIFO Charge Expectations: An additional LIFO charge of $40 million to $50 million is expected in Q4, depending on inflation rates.
Membership Growth: Costco ended Q3 with 79.6 million paid household members, up 6.8% year over year.
Gross Margin Outlook: The company expects to continue finding ways to drive value for members while managing gross margins.
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Shareholder Return Plan
Shareholder Return Plan: Costco has not explicitly mentioned a shareholder return plan involving dividends or share buybacks in this call. However, they have indicated a commitment to providing value to shareholders through operational efficiencies and maintaining competitive pricing.
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Key Q&A
Q:What are you telling the merchants right now given this moment in time? Do you put the pedal to the metal and anything different about the posture?
A:We have been very fortunate with some of the key commodities coming down and our buyers are immediately the first ones down in those goods. We take every advantage of every opportunity that we can lower prices. We’re going to continue to invest in price. It’s what we do. It’s how we grow our business.
Q:Is the improvement in pricing due to your peers raising prices? How are price gaps changing given the inflation?
A: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 can’t speak for the others, but I can speak for us. It’s about lowering the prices as soon as we can.
Q:To what extent could you quantify pull forward in some of these tariff items?
A:I think that there was slight we saw a slight impact on it. To quantify it, it was very tough to do.
Q:To what extent should we recalibrate our expectations as Costco laps some of those outside gains?
A: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.
Q:What percentage of your clubs in The United States would you say are currently at that level or approaching that level?
A: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.
Q:Is there any reason we would see that trend change over the next few quarters?
A:We’re more really focused on how we manage the business for the long term.
Q:How should we compare that to the 2022 period where you had more of a full twelve months impact of LIFO headwind?
A: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.
Q:How do you think about receipts, demand planning over the next six months?
A:Our buyers are extensively going through short term, mid term and long term strategies as far as buying goes.
Q:Can you give us a sense of how much price that might not be able to mitigate that might end up having to be passed on?
A:It’s difficult to say in general terms because it really depends on the individual items.
Q:What are your thoughts on the Affirm partnership?
A:We believe it’s an opportunity for us to be able to deliver more value for the member by having exclusive pricing there.
Q:Have you seen any kind of impact from Costco being a U.S. brand?
A:We continue to have really strong sales growth in Canada and international.
Q:How long do you think the lower renewal rates will persist?
A:I’d expect it’s likely to continue for a while.
Q:What strategies do you have to address the lower renewal rates of digital members?
A:We think there’s an opportunity for us to improve that renewal rate by continuing to engage with them more effectively digitally.
Q:Review of Unclear Management Responses
A:Management avoided giving a direct answer or lacked clarity on the following questions: 1. To quantify the pull forward in some of these tariff items was described as tough to do, lacking specific data. 2. The extent to which price increases might need to be passed on was described as difficult to say in general terms, indicating a lack of clarity. 3. The impact of the Affirm partnership was discussed in general terms without specific metrics or expected outcomes.
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Earnings Word Cloud
The most frequently occurring keywords in this quarter's earning call
Affirm
Costco Hi
Costco line
Costco logistics
LIFO charge
Officer Costco
SG
SKU count
butter egg
buy
calculation
charge quarter
combination
commerce
dairy
day employee
decision
depot
driver
employee agreement
environment Chief
estimate
furniture
inflation rate
item member
line Chief
math
member rate
moment
network
non
number quarter
operation
opportunity member
opportunity value
philosophy
price butter
pricing
relief
reminder
scale
sense
solution
tariff
vacation day
COST Transcript
Costco Wholesale Corporation (COST) Q1 2026 Earnings Call Transcript
Positive12-11
The earnings call highlights strong market share growth, successful digital engagement, and promising international expansion, despite some challenges with renewal rates among younger members. The company's strategic focus on warehouse expansion and digital enhancements, along with optimistic guidance for membership growth, supports a positive outlook. However, management's avoidance of specific forward-looking guidance introduces some uncertainty, tempering the overall sentiment. Given these factors, the stock price is likely to experience a positive movement in the short term.
Costco Wholesale Corporation (COST) Q4 2025 Earnings Call Transcript
Positive9-25
The earnings call summary and Q&A section reveal a generally positive sentiment. The company is expanding with new warehouses, showing strong membership growth, and enhancing digital initiatives. While management avoided some specifics, they conveyed confidence in mitigating tariffs and sustaining growth. The focus on value delivery and investment in technology and real estate supports a favorable outlook. Despite some uncertainties, the overall sentiment suggests a positive stock price movement, likely in the 2% to 8% range.
Earnings call transcript: Costco Q3 2025 sees profit rise, stock dips
Positive5-29
The earnings call summary highlights strong financial performance with increased sales, membership fee income, and gross margin. Despite higher SG&A rates due to wage investments, productivity improvements offset these costs. The Q&A section revealed management's focus on price competitiveness and strategic growth, although some responses lacked clarity. The partnership with Affirm and strong international sales add positive sentiment. Overall, the company's solid financial metrics, strategic initiatives, and optimistic outlook suggest a positive stock price movement in the near term.
Costco Wholesale Corporation (COST) Q3 2025 Earnings Call Transcript
Unknown5-29
The earnings call presents a mixed picture: strong financial performance with increased net income and EPS, alongside challenges like inflation and competitive pressures. The Q&A reveals management's focus on long-term growth and cost optimization, but lacks clarity on tariff impacts and price adjustments. No share repurchase program was announced, and economic uncertainty persists. Despite strong sales, the absence of clear guidance and lack of new partnership announcements suggest a neutral stock price movement over the next two weeks.
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COST Report
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