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    COST
    Earnings call· May 2025(Q3 FY25)

    COSTCO WHOLESALE CORP /NEW Q3 FY25 earnings call COST

    May 29, 2025 Source

    Executive summary

    Costco Q3 FY25 — Strong Sales and Membership Growth Amidst Tariff Headwinds

    Costco delivered strong Q3 FY25 results, driven by robust sales and membership growth, despite facing LIFO charges and FX headwinds. The company continues to prioritize price investment and member value, leveraging its scale and Kirkland Signature brand to mitigate tariff impacts and navigate a challenging macroeconomic environment. Strategic investments in technology and supply chain aim to enhance member experience and operational efficiency.

    Highlights

    5

    • Net income increased over 13% to $1.9 billion or $4.28 per diluted share in Q3 FY25.

    • Total company comparable sales were up 8% adjusted for gas deflation and foreign exchange.

    • Worldwide traffic grew by 5.2% year-over-year.

    • Membership fee income rose 10.4% to $1.24 billion.

    • Kirkland Signature sales outpaced overall sales growth, with penetration up 50 basis points year-over-year.

    Concerns

    4

    • A $130 million LIFO charge negatively impacted operating income in Q3 FY25.

    • Operating income was negatively impacted by a $40 million catch-up accrual for increased employee vacation days.

    • Foreign exchange rates negatively impacted international net income by $35 million or $0.08 per diluted share.

    • Renewal rates slightly decreased due to new digital acquisition campaigns and a Groupon promotion entering the calculation.

    Guidance & targets

    2
    CategoryTargetConfidence
    Full-year Capital Expenditure
    a little over $5 billion
    high materiality
    High
    Incremental Q4 LIFO charge
    $40 million to $50 million
    medium materiality
    Medium

    Segment performance

    4
    SegmentRevenueYoYQoQMargin
    U.S.
    Strong comparable sales growth, further enhanced when excluding the impact of gas deflation.
    Comparable sales excluding gas deflation: 7.9%
    		—6.6%——
    Canada
    Solid comparable sales growth, significantly higher when adjusted for gas deflation and foreign exchange impacts.
    Comparable sales adjusted for gas deflation and FX: 7.8%
    		—2.9%——
    Other International
    Strong comparable sales growth internationally, particularly when adjusted for various factors.
    Comparable sales adjusted: 8.5%
    		—3.2%——
    E-commerce
    Robust growth in e-commerce sales, even stronger when adjusted for foreign exchange impacts.
    Comparable sales adjusted for FX: 15.7%
    		—14.8%——

    Operational metrics

    61
    Net income
    $1.9 billionup more than 13% YoY
    Q3 FY25
    Diluted EPS
    $4.28up from $3.78 YoY
    Q3 FY25
    Net sales
    $61.96 billionup 8% YoY
    Q3 FY25
    Foreign exchange impact on sales
    -1.2%
    Q3 FY25

    Negative impact on sales due to foreign currency translation.

    Gas price deflation impact on sales
    -1.1%
    Q3 FY25

    Negative impact on sales due to lower gas prices.

    Worldwide traffic
    5.2%YoY
    Q3 FY25

    Increase in shopping frequency.

    U.S. traffic
    5.5%YoY
    Q3 FY25

    Increase in U.S. shopping frequency.

    Worldwide average transaction/ticket
    0.4%YoY
    Q3 FY25

    Includes headwinds from gas deflation and FX.

    U.S. average transaction/ticket
    1.1%YoY
    Q3 FY25

    Includes headwinds from gas deflation and FX.

    Worldwide average transaction/ticket (adjusted)
    2.7%YoY
    Q3 FY25

    Adjusted for gas deflation and FX.

    U.S. average transaction/ticket (adjusted)
    2.3%YoY
    Q3 FY25

    Adjusted for gas deflation and FX.

    Membership fee income
    $1.24 billionup $117 million (+10.4%) YoY
    Q3 FY25
    Membership fee income growth (ex-FX)
    11.4%YoY
    Q3 FY25

    Growth excluding foreign exchange impacts.

    Membership fee increase contribution to fee income
    4.6%
    Q3 FY25

    Contribution from the recent membership fee increase.

    U.S. and Canada renewal rate
    92.7%
    Q3 FY25 end
    Worldwide renewal rate
    90.2%
    Q3 FY25 end
    Paid household members
    79.6 millionup 6.8% YoY
    Q3 FY25 end
    Cardholders
    142.8 millionup 6.6% YoY
    Q3 FY25 end
    Paid executive memberships
    37.6 millionup 9% YoY
    Q3 FY25 end
    Executive members as % of paid members
    47.3%
    Q3 FY25 end
    Executive members as % of worldwide sales
    73.1%
    Q3 FY25 end
    Gross margin (reported)
    11.25%up 41 bps YoY
    Q3 FY25
    Kirkland Signature sales penetration
    50up YoY
    Q3 FY25

    Kirkland Signature sales outpaced overall sales growth.

    LIFO charge impact on gross margin rate
    -23
    Q3 FY25

    Impact both with and without gas deflation.

    LIFO charge
    $130 millioncompared to $11 million credit in Q3 last year
    Q3 FY25

    This charge represents a true-up for the first three quarters of FY25, based on an estimated full-year charge of $145 million.

    Employee vacation days accrual impact on operating income
    -$40 million
    Q3 FY25

    Catch-up accrual for the increase in employee vacation days included in March 2025 employee agreement.

    Other gross margin impact (vacation accrual)
    -2
    Q3 FY25

    Relates to the catch-up accrual for increased employee vacation days in supply chain and manufacturing departments.

    SG&A rate (reported)
    9.16%up 20 bps YoY
    Q3 FY25
    Incremental YOY impact from March employee agreement on SG&A
    mid-single-digit
    Q3 FY25

    On top of the July 2024 wage increase impact.

    Impact from July 2024 wage increase on SG&A
    low double-digit
    Q3 FY25
    Stock compensation impact on SG&A
    -1YoY
    Q3 FY25

    Lower or better impact.

    Preopening impact on SG&A
    1YoY
    Q3 FY25

    Driven by more new warehouse openings.

    Other SG&A impact (vacation accrual)
    5YoY
    Q3 FY25

    Reflecting the catch-up accrual for higher vacation days in 2025 employee agreement.

    Net interest and other
    $50 millionversus $87 million last year
    Q3 FY25

    Difference largely attributable to foreign exchange.

    Tax rate
    26.2%compared to 26.4% in Q3 last year
    Q3 FY25
    Fresh category comparable sales
    high single digits
    Q3 FY25

    Led by double-digit growth in meat.

    Meat category growth
    double-digit
    Q3 FY25
    Nonfoods comparable sales
    high single digits
    Q3 FY25

    Golden jewelry, majors, toys, housewares and home furnishings all up double digits.

    Golden jewelry, majors, toys, housewares, home furnishings growth
    double digits
    Q3 FY25
    Food and sundries comparable sales
    mid- to high single digits
    Q3 FY25

    Cooler and frozen food showing the strongest results.

    Cooler and frozen food performance
    strongest results
    Q3 FY25
    Egg price reduction
    approximately 10%
    Q3 FY25
    Butter price reduction
    $1 per cell unit
    Q3 FY25
    Kirkland Signature organic extra-virgin olive oil price
    $18.39down from $24.99
    Q3 FY25

    For 2-liter size.

    Kirkland Signature Chocolate Macadamia Clusters price
    $14.69down from $17.99
    Q3 FY25
    Kirkland Signature Organic Mixed Nut Butter price
    $7.59down from $8.69
    Q3 FY25
    Kirkland Signature Ultra Clean Laundry products price reduction
    approximately 40%
    Q3 FY25

    Due to sourcing in Asia, reducing transportation costs.

    New KS items launched
    over 40
    Q3 FY25

    Ranging from mini muffin bites to smoked pork ribs and various new apparel items.

    Gas comps
    negative low double digits
    Q3 FY25

    Driven by a lower average price per gallon.

    Fresh and food and sundries inflation
    relatively similar to last quarter
    Q3 FY25

    Low single digits, with moving parts (some inflationary, some deflationary).

    Nonfoods inflation
    low single-digit
    Q3 FY25

    Return of inflation for the first time in a number of quarters, driven primarily by imported items.

    U.S. sales from imports
    approximately 1/3
    Q3 FY25
    Nonfoods sales from imports
    approximately 2/3
    Q3 FY25
    Items imported from China as % of total U.S. sales
    approximately 8%
    Q3 FY25
    Costco Logistics items delivered
    31%increase YoY
    Q3 FY25

    Driven by big and bulky items and delivery experience including installation and haul away.

    Costco NEXT sales
    equaled total sales for all of fiscal year 2022
    Q3 FY25

    Curated marketplace showing healthy year-over-year growth.

    Costco Logistics penetration of total deliveries
    20% to 25%
    Q3 FY25
    Costco Logistics penetration of big and bulky items
    80% to 85%
    Q3 FY25

    Includes patio, furniture, television, safes, etc.

    Digital business as % of total business (Costco definition)
    approximately 8%
    Q3 FY25

    Excludes delivery solutions (Instacart) and travel business.

    Digital business as % of total business (incl. some others)
    slightly north of 10%
    Q3 FY25

    If including components others might include in e-commerce.

    Digital business as % of total sales (ex-gas)
    around 12%
    Q3 FY25

    Excluding gas sales from total sales.

    Industry KPIs

    9
    MetricValueDetails
    Sg a rate9.16%%
    Marketplace 3p GMVhealthy year-over-year growth
    Gross margin drivers11.25%%
    Fuel gas station economicsnegative low double digits%
    Warehouse store club count914units
    Comparable same store sales5.7%%
    E commerce digital sales growth14.8%%
    Private label own brand penetrationup approximately 50 basis pointsbps
    Category level comps and inflation deflationlow single-digit%

    Product announcements

    1
    ProductTypeDetails
    Buy Now, Pay Later offering through Affirmlaunch

    Deals & partnerships

    2
    AffirmBuy Now, Pay Later offering for members on big-ticket items.

    Partnership to offer financing options for members on e-commerce purchases, particularly for appliances, furniture, and consumer electronics.

    GrouponGroupon promotion for new memberships in Fall 2023.

    A promotion in Fall 2023 that attracted new members, but these members renewed at a slightly lower rate, impacting overall renewal metrics.

    Capital programs

    3
    New warehouse openings (FY25)underway
    Spent to date: 9 opened in Q3
    Start: FY25

    Benefit: 24 net new buildings, 914 total warehouses worldwide

    For this fiscal year, we expect to open 27 new warehouses, including 3 relocations for a total of 24 net new buildings. This will bring our total warehouse count to 914 worldwide.

    Warehouse expansion (Q3 FY25)completed
    Spent to date: 9 warehouses opened
    Start: Q3 FY25

    Benefit: 9 warehouses opened (including 1 relocation in Melbourne, Australia; 1 in Japan; 7 net new U.S. locations)

    Since our last earnings call, we've opened 9 warehouses, including relocation in Melbourne, Australia, our 37th warehouse in Japan and 7 net new U.S. locations.

    Warehouse expansion (Q4 FY25)planned
    Start: Q4 FY25

    Benefit: 10 warehouses planned (including 1 in Sweden, 1 in Korea, 1 in Canada)

    We plan to open another 10 warehouses during the fourth fiscal quarter, which will include our second warehouse in Sweden, our 20th warehouse in Korea and our 110th warehouse in Canada.

    Risks & headwinds

    6
    LIFO charge / Inflation in nonfoodsQ3 FY25, Q4 FY25

    $130 million LIFO charge in Q3 FY25; estimated additional $40 million to $50 million LIFO charge in Q4 FY25 if current inflation rate maintained. Nonfoods inflation returned to low single-digits.

    Mitigation: Working with suppliers to mitigate cost impacts, moving production/sourcing to other countries, leveraging limited SKU count for agility, rotating into different items/assortment.

    Foreign exchange ratesQ3 FY25

    Negatively impacted international net income by $35 million or $0.08 per diluted share.

    Mitigation: Not explicitly stated, but implied by global operations and sourcing strategies.

    Employee vacation days accrualQ3 FY25

    $40 million catch-up accrual negatively impacted operating income.

    Mitigation: Accrual is a one-time catch-up for a March 2025 employee agreement.

    Tariff impactsOngoing, particularly Q3 FY25 and Q4 FY25.

    Evolving environment with tariffs is adding complexity and challenges for how we operate our business.

    Mitigation: Moving production/sourcing, rerouting goods to non-U.S. markets, pulling forward summer items, sourcing locally produced goods, leveraging scale and global operations.

    Shipping delivery predictabilityOngoing

    Less predictable than they were pre-COVID. Spot rates increased recently but covered by contracts.

    Mitigation: Generally covered by contracts, no material impact seen.

    Lower renewal rates from digital acquisition campaignsQ3 FY25 and expected to continue for a while.

    Renewal rates decreased in Q3 FY25.

    Mitigation: Engaging digital members more effectively through personalized communication, encouraging warehouse visits.

    What to watch in Q4 FY25

    5

    LIFO charge

    Q4 FY25
    Current$130 million charge in Q3 FY25 (true-up for 3 quarters)
    Target$40 million to $50 million incremental charge in Q4 FY25

    Why it matters

    Indicates the ongoing impact of inflation, particularly in non-foods, and the effectiveness of tariff mitigation strategies on inventory costs.

    Based on our LIFO accounting methodology, if the current rate of inflation is maintained until our fiscal year-end, we would have an additional $40 million to $50 million LIFO charge in the fourth quarter.

    Q&A highlights

    6

    How is Costco adjusting its pricing strategy given the current environment, especially with tariffs, and is it seeing changes in tonnage/unit volume due to its price investment?

    Ron Vachris stated that Costco continues to "put the pedal to the metal" on price investment, leveraging commodity cost declines to lower prices. He noted an improvement in the competitive landscape in the latter part of the quarter and emphasized proactive mitigation of tariff impacts through sourcing and supplier partnerships.

    “We're going to continue to invest in price. It's what we do. It's how we grow our business, and we're going to continue to try and mitigate as much of this impact on tariffs as we can for our members.”

    asked by Simeon Gutman · answered by Ron Vachris

    2 min read6 chapters

    Detailed Narrative

    01

    Warehouse Expansion and Strategy

    Costco opened 9 warehouses in Q3 FY25, including 7 net new U.S. locations, and plans to open another 10 in Q4 FY25, bringing the total to 24 net new buildings for the fiscal year. The expansion strategy includes strategically cannibalizing high-volume locations, particularly those with over $400 million in sales, to alleviate congestion and improve member experience. This approach aims to enhance throughput and overall operational efficiency in mature markets.

    02

    Kirkland Signature Brand Performance

    Kirkland Signature items outpaced overall sales growth in Q3 FY25, with sales penetration increasing by approximately 50 basis points year-over-year. The company is actively increasing local sourcing for KS products to reduce costs and mitigate tariff impact🌐s. An example is the Kirkland Signature Ultra Clean Laundry products, now sourced in Asia for APAC warehouses, leading to a significant 40% price reduction for members in that region.

    03

    Digital and Technology Investments

    Costco is investing in digital capabilities to enhance the member experience, including the launch of a 'Buy Now, Pay Later' offering through Affirm for big-ticket items like appliances and furniture, providing exclusive rates for members. Additionally, technology pilots are underway to speed up front-end checkout processes in warehouses. These initiatives are expected to improve parking turnover and overall member flow, particularly in high-volume locations.

    04

    Pricing Strategy and Commodity Deflation

    The company maintains a strong focus on price investment, leveraging commodity cost decreases in areas such as dairy, butter, eggs, and olive oil to lower prices for members. This proactive pricing strategy has improved Costco's competitive positioning, allowing it to realize margin relief faster when input costs fall and pass those savings to members more quickly than competitors. This approach is central to driving top-line growth.

    05

    Tariff Mitigation Efforts

    Costco is actively mitigating the impact of evolving tariffs by rerouting goods from high-tariff countries to non-U.S. markets, pulling forward summer inventory, and sourcing additional locally produced goods in the U.S. The company's limited SKU count model and global operational scale provide agility in navigating the complex tariff landscape, aiming to minimize cost impacts and maintain value for members.

    06

    Membership Dynamics

    The U.S. and Canada renewal rate stood at 92.7%, with the worldwide rate at 90.2% at the end of Q3 FY25. A slight decrease in renewal rates was observed, primarily attributed to new digital acquisition campaigns and a Groupon promotion from Fall 2023 entering the renewal calculation. These new digital members, often younger, tend to renew at a slightly lower rate, a trend expected to continue for some time. Executive memberships grew 9% year-over-year to 37.6 million.

    AI-generated summary of the company’s earnings call. Not investment advice.