Costco Wholesale Corporation (COST) Q3 2026 Earnings Call Transcript
Access earnings results, analyst expectations, report, slides, earnings call, and transcript.
Overview
The earnings call presents a mixed sentiment. While there are positive elements such as strategic pricing investments and international expansion plans, the lack of guidance and unclear management responses on key issues like same-store sales growth and special dividends create uncertainty. The Q&A section highlights some positive strategic initiatives but also reveals potential concerns about cost pressures and operational challenges. With no market cap data to assess volatility, a neutral prediction is appropriate, reflecting balanced positive and negative factors.
Key Financial Performance
Net Income $2.192 billion or $4.93 per diluted share, up 15% from $1.903 billion or $4.28 per diluted share last year. The increase is attributed to strong sales performance and operational efficiencies.
Net Sales $69.15 billion, an increase of 11.6% from $61.96 billion in Q3 2025. Growth driven by higher comparable sales and increased gas price inflation.
Comparable Sales Up 9.8% overall and 6.6% adjusted for gas price inflation and FX. Excluding gas sales entirely and adjusting for FX, comparable sales were also up 6.6%. Digitally enabled comparable sales were up 21.5% and 20.8% adjusting for FX.
Membership Fee Income $1.373 billion, an increase of $133 million or 10.7% year-over-year. Growth driven by membership base expansion, upgrades to executive memberships, and the September 2024 U.S. and Canada membership fee increase.
Gross Margin 11.04%, lower by 21 basis points year-over-year. Excluding gas inflation, the gross margin rate was higher by 1 basis point. Core margins were impacted by lower margins in fresh and food and sundries due to price investments and higher transportation costs.
SG&A Rate 8.96%, lower by 20 basis points year-over-year. Improvements in productivity were offset by higher healthcare costs.
Interest Income $130 million, up from $95 million last year, driven by higher cash balances.
Capital Expenditure (CapEx) $1.41 billion in Q3. Estimated full-year CapEx is approximately $6.5 billion, focused on new warehouses, remodeling, depot network expansion, and digital enhancements.
Fresh Comparable Sales Up high single digits, led by meat and bakery. Strength in premium cuts of beef, ground beef, poultry, and seasonal bakery items.
Nonfoods Comparable Sales Up high single digits. Top-performing departments include gold and jewelry, small electrics, tires, home furnishings, majors, and health and beauty.
Food and Sundries Comparable Sales Grew mid-single digits, led by packaged foods and candy. Egg price deflation was a headwind, but growth in protein snacks and bars offset this.
Ancillary Businesses Comparable Sales Up mid-20s, led by pharmacy and gas. Pharmacy growth driven by increased GLP-1 demand, pet medications, and expanded offerings. Gas comps were positive high 20s due to price-per-gallon increases and volume acceleration.
Inflation Overall inflation increased slightly in Q3 due to higher gas prices. Food and sundries and fresh inflation decreased due to deflation in produce, eggs, and dairy.
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Operating Highlights
Kirkland Signature New Products: Introduced new items such as KS Energy Drink, KS Ultra Filtered Milk, KS Sea Salt Popcorn, and KS Oven Roasted Chicken Dog Food, offering savings of 15%-20% compared to national brands.
Self-Care and Wellness Products: Experienced almost 50% sales growth in saunas and massage chairs, reflecting strong demand for high-value self-care items.
Warehouse Expansion: Opened 4 new warehouses (3 in the U.S. and 1 in Canada), bringing the total to 928 worldwide. Targeting 30+ net new openings annually in the coming years.
Digital Expansion: Rolled out same-day delivery services in Spain and France. Average delivery time in the U.S. is under 45 minutes with a 4.8/5 satisfaction rating.
Membership Growth: Launched executive member program in China with strong early adoption. Total paid members increased to 82.9 million, up 4.1% year-over-year.
Gasoline Sales: Achieved record-breaking gas sales volumes due to high consumer price sensitivity and events in the Middle East. Gas comps were up high 20s.
E-commerce Growth: Digitally enabled comparable sales grew 21.5%. Personalized product recommendations contributed nearly $0.5 billion in e-commerce sales.
Operational Efficiency: Improved checkout speed through mobile wallet enhancements, digital membership card access, and international rollout of shopping cart prescan tool.
AI Integration: Leveraging AI to enhance product pages and improve visibility in AI-driven searches. Triple-digit growth in AI-generated traffic with the highest conversion rate among all traffic sources.
Retail Media Collaboration: Launched collaboration with Google Commerce Media and YouTube to enhance retail media revenue opportunities.
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Risk or Challenges
Macroeconomic Uncertainty: Ongoing macroeconomic uncertainty could impact consumer spending and overall business performance.
Middle East Events Impacting Gas Prices: Events in the Middle East have significantly impacted product supply and gas prices, leading to inflationary pressures.
Inflationary Pressures: Higher oil prices and tariffs are contributing to inflationary pressures, which could affect pricing and margins.
Tariff Refund Process: The process of submitting refund claims for IEEPA tariffs is complex and subject to delays, with potential legal challenges regarding the return process.
Real Estate Expansion Delays: Two planned warehouse openings have been delayed to fiscal year 2027, which could impact growth targets.
Transportation Costs: Higher transportation costs due to increased gas prices are a headwind to margins.
Health Care Costs: Higher healthcare costs are impacting operational expenses.
Inflation in Nonfood Categories: Anticipated inflation in nonfood categories, such as higher resin costs, could increase costs of goods.
Shipping Issues in the Middle East: Potential shipping disruptions in the Middle East are being monitored, though current exposure is low.
Membership Renewal Rates: Online sign-ups renew at a slightly lower rate than in-warehouse sign-ups, creating downward pressure on overall renewal rates.
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Guidance & Outlook
Pipeline of New Warehouses: The company plans to open 30-plus net new warehouses per year in the coming years. For fiscal year 2026, 26 net new openings are expected, with 2 buildings delayed to fiscal year 2027.
Digital Enhancements: Costco is enhancing its digital capabilities, including the rollout of same-day delivery services in Spain and France, and leveraging AI to improve product visibility and personalization. AI-driven traffic to the site has shown triple-digit growth, and retail media collaborations with Google Commerce Media and YouTube have been launched.
Capital Expenditures: Estimated capital expenditures for the full fiscal year 2026 are approximately $6.5 billion, focusing on new warehouses, remodeling existing ones, expanding depot networks, and enhancing digital experiences.
Inflation and Pricing Strategy: The company is closely monitoring inflation trends, particularly in nonfood categories, and aims to mitigate cost increases. Costco's strategy is to be the first to lower prices and the last to raise them.
Membership Growth: Membership fee income grew 10.7% year-over-year, with a focus on increasing executive memberships and renewal rates. The company launched its executive member program in China, seeing strong early adoption.
E-commerce Growth: E-commerce sales are growing significantly, with digitally enabled comparable sales up 21.5%. Same-day delivery services are expanding, and personalized product recommendations are driving higher conversion rates.
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Shareholder Return Plan
The selected topic was not discussed during the call.
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Key Q&A
Q:Given that new membership growth has slowed to 4.1%, should expectations around same-store sales growth outlook for the near term remain modest?
A:Gary Millerchip explained that while paid membership growth was just over 4%, overall membership growth was 7% when excluding fee increases and foreign exchange. Executive membership grew over 9%, which is positive as executive members spend more and visit more frequently. Slowing membership growth is attributed to factors like the lack of new warehouse openings in major markets and cycling stronger growth from a year ago. Despite this, the renewal rate has normalized, and management feels good about the health of membership and sees opportunities for continued growth.
Q:Is Costco taking a more aggressive value posture to gain market share, as seen in the core-on-core margin decline?
A:Gary Millerchip stated that the focus is on gross margin rate excluding gas inflation or deflation. During the quarter, there was a 1 basis point improvement in gross margin. The decline in core-on-core margin was due to cycling a large LIFO charge from last year, higher sales in gas, e-commerce, and pharmacy, and investments in member value, such as widening gas price gaps and lowering prices on items like eggs and meat. These investments were strategic to drive top-line growth and deliver value for members.
Q:Can you parse out the composition of comp between traffic and ticket, and how much is due to same SKU pricing versus mix versus larger baskets?
A:Gary Millerchip explained that the composition is a combination of increased items in the basket, inflation, and members moving to higher-value or better-quality items. However, Costco does not parse out the individual elements.
Q:Is there a change in the rationality of the overall market regarding pricing, or is Costco's pricing strategy opportunistic?
A:Gary Millerchip stated that the market remains rational, and Costco's pricing strategy is strategic, not reactionary. The company aims to maintain pricing authority and deliver value for members. Investments in pricing, such as lowering prices on eggs and other items, are made strategically to drive top-line growth and sustain gross margins.
Q:Why did Costco's SG&A deleverage despite a 9% comp growth?
A:Gary Millerchip explained that while core operations saw mid-single-digit leverage, health care cost increases and some onetime items offset this impact. Central operations were also affected by legal settlements and reserves. Excluding these items, Costco would have seen leverage consistent with mid-single-digit comps.
Q:What are the parameters for balancing member satisfaction against retail media opportunities?
A:Gary Millerchip emphasized that the member always comes first. Retail media is focused on delivering personalized and relevant messaging to improve member experience. Most of the value generated from retail media is reinvested in members to deliver better pricing and drive top-line sales.
Q:Are there trade-offs in expenditures for innovation and technology improvements?
A:Ron Vachris stated that technology investments are capital-light and yield great returns. Improvements in e-commerce, checkout automation, and AI have led to higher productivity, shorter lines, and lower payrolls, making these investments accretive.
Q:What are Costco's plans for capital allocation, including special dividends and tariff refunds?
A:Gary Millerchip stated that the priority is to invest in growth, including new warehouses, remodeling, and technology. Costco grows its regular dividend and buys back stock to avoid dilution. Excess cash is typically returned via special dividends, but no plans were shared at this time. The timing and approach will be evaluated with the Board.
Q:What triggers a decision to relocate a warehouse?
A:Ron Vachris explained that relocations are based on the size of the existing facility and its ability to service members. Smaller, older facilities with high volumes may trigger relocations to accommodate growth and improve member service.
Q:Will Costco need to build its own delivery infrastructure to compete with faster delivery speeds?
A:Ron Vachris stated that Costco is satisfied with its current third-party partners for same-day delivery, which averages 45 minutes or less. However, the company will continue to evaluate opportunities to improve delivery times and may consider vertical integration if needed.
Q:How can Costco further improve traffic, especially in capacity-constrained locations?
A:Gary Millerchip and Ron Vachris highlighted efforts like extending gas station and warehouse hours, remodeling warehouses, and strategically opening infill locations to relieve pressure on high-volume warehouses. Technology improvements also help process members faster, turning parking spaces more quickly.
Q:What is Costco's approach to international expansion, particularly in Europe and Asia?
A:Ron Vachris stated that there are significant opportunities in China, Korea, Japan, and Spain. The U.K. and France also show strong growth potential. Canada has a robust pipeline for the next 5 years, with plans for consistent growth.
Q:How is Costco's executive membership performing, and what is driving its growth?
A:Gary Millerchip stated that executive membership growth is driven by both upgrades from Gold members and new members choosing the higher tier. Additional benefits like extended hours and discounts on Instacart have contributed to this growth.
Q:How is Costco leveraging AI search to improve traffic and conversion?
A:Gary Millerchip and Ron Vachris explained that AI search helps highlight Costco's value and quality, particularly in categories like appliances and tires. By showcasing all-inclusive pricing and other benefits, AI search enhances the member experience and drives sales.
Q:What is Costco's strategy for increasing fuel throughput and managing long-term gas volume growth?
A:Gary Millerchip stated that widening gas price gaps builds loyalty, as members who use Costco gas visit more frequently, spend more, and renew at higher rates. While gas traffic isn't included in overall traffic numbers, it is seen as a driver of long-term loyalty.
Q:How is Costco addressing the impact of GLP-1 drugs on category performance?
A:Gary Millerchip and Ron Vachris noted that protein-related items like snacks and bars are performing well. Costco is leaning into these categories and collaborating with CPGs to meet the needs of members influenced by GLP-1 drugs.
Q:Review of Unclear Management Responses
A:Management avoided directly answering questions about future same-store sales growth and the timing of a special dividend. They emphasized not providing guidance and stated that decisions on special dividends would be evaluated with the Board, without providing specific timelines or plans.
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Earnings Word Cloud
The most frequently occurring keywords in this quarter's earning call
AI company
AI consumer
AI shopping
Border Protection
Customs
building
claim
comment
day delivery
experience member
focus quality
gas station
impact
improvement
location
loyalty
member day
member experience
member gas
month
price member
priority
process
product
record volume
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tariff
technology
value
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COST Transcript
Costco Wholesale Corporation (COST) Q3 2026 Earnings Call Transcript
Unknown5-29
The earnings call presents a mixed sentiment. While there are positive elements such as strategic pricing investments and international expansion plans, the lack of guidance and unclear management responses on key issues like same-store sales growth and special dividends create uncertainty. The Q&A section highlights some positive strategic initiatives but also reveals potential concerns about cost pressures and operational challenges. With no market cap data to assess volatility, a neutral prediction is appropriate, reflecting balanced positive and negative factors.
Costco Wholesale Corporation (COST) Q2 2026 Earnings Call Transcript
Unknown3-5
The earnings call reveals a mixed financial performance: revenue and net income grew, indicating positive sales and operational efficiency, but gross margin declined, signaling cost pressures. The absence of shareholder return plans, such as dividends or buybacks, is neutral. No significant strategic initiatives or risks were highlighted. The Q&A section provided no additional insights. Despite revenue growth, the lack of strong positive catalysts and margin concerns suggest a neutral outlook for the stock price in the short term.
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.
COST Slides
Costco Q2 2026 slides: digital sales surge 22.6%, stock falls 2.4%2026-03-05
Costco Q1 2026 slides: Digital sales surge 20.5% as membership income jumps 14%2025-12-11
Costco Q4 2025 slides: sales surge 8% as membership and digital growth accelerate2025-09-25
Costco Q3 FY2025 slides: Sales up 8%, e-commerce surges 14.8%2025-05-29
COST Report
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