Costco Wholesale Corporation (COST) Q1 2026 Earnings Call Transcript
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Overview
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.
Key Financial Performance
Net Income $2.001 billion or $4.50 per diluted share, up from $1.798 billion or $4.04 per diluted share in the first quarter last year. Excluding discrete tax items, net income and earnings per diluted share both grew 13.6%.
Net Sales $65.98 billion, an increase of 8.2% from $60.99 billion in the first quarter last year.
Comparable Sales 6.4%, both before and after adjusting for gas price deflation and FX. Excluding gas sales entirely and adjusting for the impact of foreign exchange, comparable sales were 7.1%. Digitally enabled comparable sales were 20.5%, both with and without adjusting for FX.
Membership Fee Income $1.329 billion, an increase of $163 million or 14% year-over-year. Adjusting for FX, the increase was also 14%. Excluding the membership fee increase and FX, membership income grew 7.3% year-over-year.
Gross Margin 11.32%, higher year-over-year by 4 basis points compared to 11.28% last year. Core margins on their own sales were higher by 30 basis points.
SG&A Rate 9.6%, higher or worse year-over-year by 1 basis point compared to last year's 9.59%. This was impacted by higher health care costs and a tax assessment for prior years.
Capital Expenditure Approximately $1.53 billion in Q1. Estimated capital expenditure for the full year is approximately $6.5 billion.
Traffic or Shopping Frequency Increased 3.1% worldwide, and the average transaction or ticket was up 3.2% worldwide, both with and without the impacts of gas price deflation and FX.
Renewal Rates U.S. and Canada renewal rate was 92.2%, and the worldwide rate was 89.7%, both down 10 basis points from last quarter due to new online members renewing at a slightly lower rate than warehouse sign-ups.
Digital Sales Site traffic was up 24%, and app traffic was up 48%. Digitally enabled comparable sales grew 20.5% year-over-year.
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Operating Highlights
Digital Enhancements: Launched personalization capabilities for product recommendations, leading to positive sales lift. AI integrated into pharmacy inventory system, improving in-stocks to over 98% and driving mid-teen growth in pharmacy scripts.
New Products: Introduced 45 new Kirkland Signature items, including food and apparel. Added new national brand partnerships in non-food categories.
Warehouse Expansion: Opened 8 new warehouses in Q1, including locations in France, Canada, and the U.S. Plans for 30+ net openings annually in future years.
Market Adaptation: Converted old Hypermart in France and refurbished home improvement warehouses in Canada into Costco locations, reducing capital investment.
Operational Efficiencies: Implemented pre-scan technology in warehouses, improving checkout speed by up to 20%. Achieved record checkout productivity in U.S. warehouses.
Inventory Management: AI tools deployed in pharmacy and gas business, enhancing inventory management and sales.
Sustainability: Released annual sustainability commitments update, highlighting progress towards objectives.
Digital Strategy: Focused on enhancing member experience through technology, driving loyalty and operational efficiency.
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Risk or Challenges
Delays in warehouse openings: Delays with a couple of buildings in Spain resulted in revising planned net new openings for fiscal year '26 down to 28, which could impact growth targets.
Renewal rate decline: Slight decline in U.S. and Canada renewal rates due to new online members renewing at a lower rate than warehouse sign-ups, potentially impacting membership income.
Higher health care costs: Increased health care costs negatively impacted SG&A, offsetting productivity improvements and wage investments.
Tax assessment charge: A tax assessment for prior years negatively impacted SG&A by 4 basis points.
Inflation in commodities: Higher inflation in commodities such as beef, seafood, and coffee could impact margins in fresh and food and sundries categories.
Tariff impacts: Tariffs on imported goods have led to adjustments in item assortment and sourcing strategies, which could affect product availability and costs.
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Guidance & Outlook
Future Warehouse Expansion: Costco plans to open 30-plus net new warehouses per year in future years, despite revising fiscal year '26 openings down to 28 due to delays in Spain. The company has increased its real estate team to support this goal and is exploring creative real estate projects to broaden market expansion and lower capital investment.
Relocation of Warehouses: In fiscal year '26, Costco plans to relocate 5 high-volume warehouses to larger locations with more parking and expanded gas stations, aiming to enhance member experience and accelerate sales growth.
Digital and Technology Enhancements: Costco is implementing digital technologies such as pre-scanning technology, AI in pharmacy inventory systems, and AI tools in the gas business to improve efficiency, enhance member experience, and drive incremental sales. These initiatives are expected to strengthen member loyalty and operational efficiency.
Capital Expenditures: Costco estimates capital expenditures for fiscal year '26 to be approximately $6.5 billion, focusing on new warehouse openings, remodels, depot network expansion, and digital investments.
Membership Growth and Engagement: Costco aims to improve renewal rates by enhancing engagement with members who signed up digitally, despite a slight anticipated decline in renewal rates over the next few quarters.
Digital Sales Growth: Costco continues to enhance its digital platform, with site traffic up 24% and app traffic up 48% in Q1. The company is focusing on personalized member communications and expects further growth in digital engagement.
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Shareholder Return Plan
The selected topic was not discussed during the call.
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Key Q&A
Q:Under your tenure, Costco has shown a greater willingness to embrace technology and change. Is this a fair conclusion, and will the financial benefits be reinvested in the business or allowed to fall to the bottom line?
A:Ron Vachris emphasized that technology has been a focus for several years, with investments in core systems now yielding benefits. He stated that technology is crucial for Costco's future but reiterated that the company will always prioritize offering the best prices to its members.
Q:Is there any concern about traffic trends and the need to invest in price? How are extended hours impacting executive membership and sales?
A:Gary Millerchip noted consistent membership growth and sales trends over the past 6-12 months, with average sales growth of 6.5% over the last two quarters. He highlighted the positive reception of extended hours, which improved shopping experiences and led to a 1% sales lift. Executive membership upgrades have increased, but tracking the exact sales impact is challenging.
Q:With the highest number of U.S. warehouse openings in 20 years, is there a different approach to membership?
A:Ron Vachris stated that there is no significant change in approach. New markets will focus on sign-ups, while infill locations will drive top-line sales by improving shopping frequency.
Q:What are Costco's plans for retail media, digital advertising, and AI?
A:Gary Millerchip highlighted early success in retail media, including advertising on gas pumps and third-party sites. He emphasized that most value created will be reinvested in members. Ron Vachris expressed excitement about AI's potential to improve procurement, supply chain, and member experience, with a focus on business basics and member-facing innovations.
Q:What is the opportunity for continued sales expansion and productivity improvements?
A:Ron Vachris mentioned creative projects like a Los Angeles location with affordable housing above Costco. He sees a strong runway for 30+ new locations annually, with international markets like Sweden and France showing promise. Gary Millerchip noted that U.S. and Canada infill locations accelerate sales quickly, while international markets drive new memberships.
Q:What actions are being taken to address renewal rate softness, especially among younger, digitally engaged members?
A:Gary Millerchip explained that targeted and relevant communication is being used to engage younger, digitally signed-up members, who typically renew at lower rates. Early efforts have shown positive results, but work remains to reverse the slight decline in renewal rates.
Q:Can you share metrics on digital engagement and Costco Logistics?
A:Gary Millerchip reported a 24% increase in website traffic and over 40% growth in app traffic. Ron Vachris highlighted upcoming app features like pharmacy pay-ahead and online ordering for cakes and deli trays, which aim to enhance digital engagement and member convenience.
Q:What is the pipeline for international expansion and U.S. remodels?
A:Ron Vachris sees strong growth opportunities in Europe, Asia, and North America, with about half of new locations outside the U.S. Remodels and relocations, typically 5-6 annually, yield significant uplifts in sales, especially when adding features like gas stations.
Q:What are the dynamics of SG&A leverage and productivity improvements?
A:Gary Millerchip cited headwinds like higher healthcare costs and extended operating hours but noted that productivity improvements have offset some of these. He expects mid-single-digit sales growth to enable SG&A leverage going forward.
Q:What is the current state of food and nonfood inflation, and how does it impact ticket growth?
A:Gary Millerchip stated that food and fresh categories are slightly inflationary, with low to mid-single-digit growth. Nonfood categories have seen consistent market share gains, with some deceleration due to cycling gift card and gold sales.
Q:What is the outlook for total paid membership growth?
A:Gary Millerchip acknowledged a slight slowdown in year-over-year membership growth but remains optimistic due to new warehouse openings, international expansion, and efforts to improve renewal rates.
Q:When will tough comps from gift card sales be lapped, and how does this align with tax refunds?
A:Gary Millerchip did not provide specific forward-looking guidance but emphasized strong market share gains in nonfood categories and consistent performance across various segments.
Q:What is Costco's long-term warehouse expansion potential, and are price investments focused on private brands?
A:Gary Millerchip sees a strong roadmap for 30+ new warehouses annually, with a balanced mix of U.S. and international locations. Price investments are not limited to private brands but reflect efforts to deliver value across all categories.
Q:How are personalization efforts progressing, and what is their impact on sales?
A:Gary Millerchip reported early success in personalization, with a focus on improving member experience and driving digital and overall sales. The company continues to refine its approach to enhance relevancy and engagement.
Q:What is the outlook for renewal rates, especially among younger members?
A:Gary Millerchip acknowledged that renewal rates among younger, digitally signed-up members remain lower but highlighted ongoing efforts to close this gap through targeted communication. He cautioned that slight declines may persist in the near term.
Q:What are the current consumer trends and their impact on comps?
A:Gary Millerchip observed consistent member shopping behavior, with average sales growth of 6.5% over the last two quarters. He noted no significant changes in consumer trends, aside from deceleration in nonfood categories.
Q:Review of Unclear Management Responses
A:Management avoided providing specific forward-looking guidance on several topics, including the exact timing of lapping tough comps from gift card sales, the impact of tax refunds on nonfood categories, and detailed metrics on the success of personalization efforts. Additionally, while they acknowledged challenges with renewal rates among younger members, they did not offer precise data on how these rates compare to traditional sign-ups.
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Earnings Word Cloud
The most frequently occurring keywords in this quarter's earning call
AI model
AI pharmacy
AI tool
Canada Taiwan
Costco Digital
Costco experience
Costco sustainability
Costco way
Costco work
Digital Wallet
France Hypermart
France location
Hypermart Costco
Millerchip Chief
Mulhouse France
Progress result
Spain opening
Taiwan success
Vachris today
Wallet small
addition building
app example
approach option
building Spain
building reduction
center
commitment
enhancement
estate
experience member
improvement warehouse
loyalty
opening warehouse
relocation Canada
result warehouse
role
system
use case
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.
COST Slides
COST Report
Frequently Asked Questions
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