Costco Wholesale Q3 Earnings Call Highlights
Key Points
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- Costco posted stronger Q3 results, with net income rising to $2.19 billion and net sales up 11.6% to $69.15 billion. Comparable sales increased 9.8%, helped by gasoline demand and a 21.5% jump in digitally enabled comparable sales.
- Membership remains a key growth engine, as membership fee income rose 10.7% and paid members reached 82.9 million. Executive memberships grew 9.6%, renewal rates stayed high, and management said membership health remains solid despite slower growth being more normal.
- Gasoline, pharmacy and digital initiatives drove traffic and loyalty, while Costco continued investing in value with price cuts on everyday items. The company also opened four net new warehouses in the quarter and expects to seek tariff refunds, with potential member reimbursements depending on the outcome.
Costco Wholesale (NASDAQ:COST) reported higher fiscal third-quarter earnings and sales as strong gasoline demand, continued membership growth and gains in digital sales supported results, executives said on the company’s earnings call.
Gary Millerchip, Costco’s executive vice president and chief financial officer, said net income for the 12 weeks ended May 10 rose to $2.192 billion, or $4.93 per diluted share, from $1.903 billion, or $4.28 per diluted share, a year earlier. Net sales increased 11.6% to $69.15 billion from $61.96 billion in the prior-year quarter.
Comparable sales rose 9.8%, or 6.6% excluding the impacts of gasoline price inflation and foreign exchange. Excluding gasoline sales entirely and adjusting for foreign exchange, comparable sales were also up 6.6%. Digitally enabled comparable sales increased 21.5%, or 20.8% adjusted for foreign exchange.
Gasoline Demand Sets Records
President and Chief Executive Officer Ron Vachris said Costco’s gas business was a standout in the quarter as events in the Middle East affected supply and prices. He said all three four-week fiscal periods in the quarter set successive all-time company volume sales records, and the final five weeks became Costco’s top five volume weeks ever.
Vachris said higher consumer price sensitivity led many members to use Costco gas stations for the first time. He added that members who use Costco gas stations typically spend more in the warehouse, which the company believes can support future loyalty.
Millerchip said gas price inflation positively affected sales by about 2.2% in the quarter, while foreign exchange added about 1%. Traffic, or shopping frequency, increased 2.4% worldwide. Average transaction size rose 7.3% worldwide and 4.2% excluding gas price inflation and foreign exchange.
During the question-and-answer session, Millerchip said gasoline visits are not included in Costco’s traffic metric. He said a little less than half of members visiting a gas station also visit the warehouse, and that gas customers tend to visit more frequently, spend more and renew at higher rates over time.
Membership Income Rises as Executive Tier Expands
Membership fee income increased 10.7% year over year to $1.373 billion. Millerchip said the September 2024 membership fee increase in the U.S. and Canada accounted for a little more than one-quarter of the membership income growth. Excluding the fee increase and foreign exchange, membership income rose 7%.
Costco ended the quarter with 82.9 million paid members, up 4.1% from a year earlier, and 148.5 million cardholders, up 4%. Paid executive memberships rose 9.6% to 41.2 million. Millerchip said Costco launched its executive member program in China during the quarter and has seen strong early adoption.
The U.S. and Canada renewal rate was 92.2%, up 10 basis points from the prior quarter, while the worldwide renewal rate was unchanged at 89.7%. Millerchip said Costco’s efforts to increase renewal rates among online sign-ups through targeted digital communications and retention strategies more than offset mix-related pressure from the growing share of online sign-ups.
In response to an analyst question about slowing membership growth, Millerchip said 4% to 5% paid membership growth is a more normal rate when Costco is not benefiting from factors such as a major new market entry or special events like COVID-era demand. He said the company remains positive on the health of membership.
Margins Reflect Price Investments and Sales Mix
Costco’s reported gross margin rate was 11.04%, down 21 basis points from 11.25% a year earlier. Excluding gas inflation, the gross margin rate was higher by one basis point. Millerchip said core margins were pressured by lower margins in fresh and food and sundries, where Costco invested in lower prices on everyday items such as eggs and beef. Higher transportation costs tied to gasoline prices also weighed on results.
Millerchip said the company benefited from a smaller LIFO charge in the quarter, with a $44 million charge compared with $130 million a year earlier. SG expenses as a percentage of sales improved to 8.96% from 9.16%, though excluding gas inflation SG improved by two basis points. He said productivity gains were offset in part by higher healthcare costs, along with certain legal settlements and reserves.
Executives emphasized that price cuts were part of Costco’s long-standing value strategy. Vachris said the company’s pricing moves were “strategic, not reactionary,” adding that Costco aims to be “the first to come down and the last to go up.” Millerchip said Costco invested in value as members dealt with higher gas prices and as the company lapped a larger LIFO charge from the prior year.
Merchandising, Pharmacy and Digital Growth Support Sales
Millerchip said fresh comparable sales rose high single digits, led by meat and bakery. In meat, Costco saw strength in premium beef cuts and lower-cost proteins such as ground beef and poultry. Non-foods comparable sales also increased high single digits, with top departments including 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. Millerchip said egg price deflation was a sales headwind, partly offset by growth in protein snacks and protein bars. Costco also launched several Kirkland Signature items during the quarter, including KS Energy Drink, KS Ultra Filtered Milk, KS Sea Salt Popcorn and KS Oven Roasted Chicken Dog Food.
Ancillary businesses posted comparable sales growth in the mid-20% range, led by pharmacy. Millerchip cited market share gains, increased GLP-1 demand, Wegovy and Ozempic inclusion in Costco’s member prescription program, pet medication value, Medicare Part D over-the-counter flex card acceptance, and mail order and specialty pharmacy expansion.
Digital engagement also increased, with site and app traffic up 37%. Millerchip said personalized product recommendation carousels generated conversion rates three times better than typical levels and contributed just under $500 million of e-commerce sales. Costco also launched a collaboration with Google commerce Media and YouTube as part of its retail media efforts.
Expansion Plans and Tariff Refunds
Vachris said Costco opened four net new warehouses during the quarter, including three in the U.S. and one Canadian business center, bringing the company’s worldwide total to 928 warehouses. Costco now expects 26 net new openings in fiscal 2026, down two from the prior call, with those two locations shifting to fiscal 2027.
The company continues to target more than 30 net new openings annually in coming years. Vachris said Costco also completed two relocations so far this year and plans one more in the fourth quarter, focusing on high-volume warehouses that can benefit from larger facilities, more parking and expanded gas stations.
Vachris said Costco has started submitting refund claims for IEEPA tariffs through the U.S. Customs and Border Protection process. He said submissions may take place over the next few months, with approved refunds potentially arriving on a rolling basis over the following two to three months. Costco plans to return to members in some form the portion of tariffs that were passed on to them, though Vachris said the amount and timing depend on refund receipts and developments in related litigation.
Millerchip said Costco expects full-year capital expenditures of about $6.5 billion as it invests in new warehouses, remodels, depot expansion and digital capabilities.
About Costco Wholesale (NASDAQ:COST)
Costco Wholesale Corporation operates a global chain of membership-only warehouse clubs that sell a wide array of merchandise in bulk at discounted prices. The company's product mix includes groceries, fresh and frozen food, household goods, electronics, apparel, and seasonal items, augmented by its prominent private-label brand, Kirkland Signature. Costco's business model centers on annual membership fees and high-volume, low-margin sales, designed to drive repeat purchasing and strong customer loyalty among both consumers and small-business buyers.
Beyond merchandise, Costco provides a range of ancillary services that complement its warehouses, including gasoline stations, pharmacy and optical services, hearing aid centers, photo services, and travel and insurance products.
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