COSTCO WHOLESALE CORP /NEW Q3 FY26 earnings call COST

Middle East events sharply raised gas prices, and Costco leaned in by widening its price gaps to stay in stock and deliver value. All three 4-week fiscal periods set successive all-time company volume records, and the final 5 weeks were Costco's top-5 volume weeks ever, requiring multiple daily deliveries to many locations. High price sensitivity drove many members to use Costco gas stations for the first time. Gas comps were positive high-20s, driven by both year-over-year price-per-gallon increases and accelerating volumes. Gas price inflation added ~2.2% to comp sales and was the largest contributor to overall inflation in the quarter. Penny profit was slightly higher YoY in absolute terms but significantly lower as a rate of sales, reflecting the deliberate value investment.

Total paid members reached 82.9M (+4.1%) and cardholders 148.5M (+4%), with executive members at 41.2M (+9.6%). Excluding the September 2024 fee increase (a little more than 1/4 of MFI growth) and FX, membership income grew 7%. Management attributed the slower ~4% paid growth to the absence of major new international market openings (Japan/China entries historically drive outsized but lower-renewal sign-ups) and to cycling stronger prior-year sign-ups, framing 4-5% as a normal rate absent a special catalyst. The US/Canada renewal rate rose 10 bps to 92.2% as targeted digital retention efforts more than offset downward pressure from a growing lower-renewing online-signup cohort. Costco launched executive membership in China this quarter with adoption ahead of expectations.

Reported gross margin was 11.04%, down 21 bps YoY, but up 1 bp excluding gas inflation. Core margin fell 46 bps (29 bps ex-gas); core-on-core margin was down 9 bps due to lower fresh and food-and-sundries margins where Costco invested in lower prices on eggs and beef, plus gas-driven transportation cost headwinds. LIFO added 14 bps to the rate ($44M charge vs. $130M last year). The large gap between reported core and core-on-core reflected mix, as gas, e-commerce, and pharmacy grew faster than core merchandise. Management stressed it manages gross margin holistically ex-gas and saw the LIFO lapping benefit as an opportunity to reinvest in member value.

Digitally enabled comparable sales rose 21.5% (20.8% ex-FX) and site/app traffic climbed 37%, with pharmacy, gold and jewelry, home furnishings, tires, special events, housewares, and majors all up double digits. Personalized product recommendation carousels delivered 3x-better-than-typical conversion and contributed just under $0.5B of e-commerce sales. AI-driven search traffic, while still low volume, grew triple digits and carries the highest conversion rate of all site traffic, as Costco enhances product pages to surface its all-in value (delivery, installation, haul-away) to large language models. Q3 marked a new retail media collaboration with Google Commerce Media and YouTube. Same-day delivery, powered by third-party partners, averages under 45 minutes in the US with a 4.8/5 satisfaction rating and was rolled out in Spain and France.

Fresh comps were up high single digits led by meat (both premium beef cuts and lower-cost ground beef and poultry) and bakery. Nonfoods comps were up high single digits, led by gold and jewelry, small electrics, tires, home furnishings, majors, and health and beauty; self-care items were especially strong, with saunas and massage chairs up almost 50%. Food and sundries grew mid-single digits led by packaged foods and candy, with egg deflation a headwind partly offset by strong protein snacks and bars. Kirkland Signature continued to drive growth with new launches (KS Energy Drink, KS Ultra Filtered Milk, KS Sea Salt Popcorn, KS Oven Roasted Chicken Dog Food, plus a KS Beef Stick and KS Ultra Filtered Protein Milk), each offering 15-20% savings vs. national-brand equivalents. Costco proactively lowered prices on several KS items.

With roughly $45 in cash per share on the balance sheet, management reiterated priority one is reinvesting in the business — accelerating new and remodeled warehouses, expanding the depot network, adding manufacturing capacity (hot dog and coffee roasting for KS growth), and digital/technology. Costco grows the regular dividend over time^⏳ and buys back stock to offset executive-grant dilution. A special dividend remains the preferred vehicle for excess cash but management noted that, with the stock materially higher than at the last special dividend, cash would need to reach a higher level to deliver a similar yield; no plan was announced. Tariff refund proceeds and their eventual return to members remain contingent on refund timing and a pending lawsuit.