2026 05 28 Earnings Cost Q3 Fy2026

Summary

COST Q3 FY2026 (12 weeks ended May 10, 2026): net sales $69.2B (+11.6% YoY), net income $2.19B (+15%), EPS $4.93. The quarter's dominant theme was record-breaking gas volumes driven by Middle East supply disruption — all three four-week fiscal periods set successive all-time company volume records. Pharmacy led ancillary growth with "significant market share gains" driven by GLP-1 (Wegovy/Ozempic in member prescription program). Consumer behavior broadly resilient: basket up 7.3% worldwide, traffic +2.4%. Protein-adjacent food categories outperforming. Near-term cost headwinds: memory chip costs rising (affecting electronics), resin/polyester cost increases expected if oil prices stay elevated. Section 301 tariff refunds being submitted to CBP; plan to return refunds to members.

Transcript

Ron Vachris: Good afternoon, everybody, and thank you for joining us today. I will make a few comments on current events and provide a brief update on our strategic priorities before turning the call back over to Gary. Against the backdrop of ongoing macro uncertainty, our focus is providing quality goods and services at the lowest possible price continues to resonate strongly with our members. Nowhere has this been more apparent in the third quarter than our gas business, as events in The Middle East have had a significant impact on product supply and gas prices, our focus, as always, is to be there for our members by staying in stock and offering the best value. The result was record breaking volumes.

All 3 4-week fiscal periods of the quarter set successive all-time company volume sales records, with the final 5 weeks of the quarter becoming our top 5 volume weeks ever. Our gas team performed exceptionally well to manage this unprecedented demand, which requires multiple daily gas deliveries to many locations. The high consumer price sensitivity, which fueled these record volumes, also drove many members to use our gas stations for the very first time in the third quarter. We believe this will drive even greater loyalty with these members in the future as members who use our gas stations typically spend more with us in the warehouse.

We are closely monitoring the longer term inflationary impact of higher oil prices as well as the future impacts of tariffs. Our buyers continue to demonstrate their ability to adapt, and are using their significant experience and expertise to try to reduce the impacts on prices for our members. Our goal is to be the first to lower prices and last to raise them. And Gary will share some examples later on the call where we lowered prices this quarter. We are also able to bring greater value to our members through many exciting new Signature items in the third quarter. On the topic of tariffs, we started submitting our refund claims for the Section 301 tariffs.

We are doing this through the process set up by the US Customs and Border Protection. These submissions will go in over what may be the next few months and based on what other claimants have experienced, should start receiving refunds on approved claims on a rolling basis over the following 2 to 3 months. As we have mentioned before, our plan is to return to our members in some form the portion of tariffs that were passed on to them. How much we return and when depends on a variety of factors. Including how much refund money we receive, and when it arrives, as well as developments in the lawsuit filed against the company regarding the return process.

Turning to progress with growth priorities. Our real estate operations team continues to focus on increasing our pipeline of new warehouses both domestically and internationally. As we target 30+ net new openings per year in the coming years. In the quarter, we opened 4 net new warehouses, including 3 in the U.S., and 1 additional Canadian business center. Those openings brought our total warehouse count to 928 worldwide. We currently expect to have 26 net new openings in fiscal year 26, down 2 buildings from the prior call with those 2 buildings now set to open in fiscal year 27.

So far this year, we have also completed 2 relocations with 1 more planned in Q4 as we continue to relocate select high volume warehouses to larger locations with more parking and expanded gas stations to provide a better member experience and drive more volumes in these warehouses. In digital, we are making meaningful strides to deliver a more seamless and convenient experience for our members across the warehouse and online. As a result of our investments in technology, the commitment from our employees to use this technology to deliver a great member experience, we are seeing a significant improvement in the speed of checkout.

The enhancements we have made include improvements to the mobile wallet, the introduction of digital membership card with quick access on the Costco app, and the rollout of our shopping cart prescan tool internationally. The pay station pilot I spoke about last quarter has also been successful, and we are now incorporating this technology into our new warehouse openings and high volume buildings. We are also enhancing the e commerce experience for members and recently rolled out same day delivery services in Spain and France. Same day delivery powered by our third party partners has become a highly effective way to deliver more convenience to our members.

Average same day delivery time in The US is now less than 45 minutes, and the average member satisfaction rating is 4.8 out of 5. This part of our business is growing at an even faster rate than our digital business overall. And is a strong driver of loyalty, as it is often our highest spending members who are using the service. Finally, as we learn more about how consumers are embracing AI in their shopping habits, we are working with the leading AI companies to improve the visibility of our values to current and potential future Costco members.

We believe AI is changing how consumers research products, and has a potential to be a significant opportunity for Costco given our pricing authority, and our focus on quality. With that, I will turn it back over to Gary to discuss the results for the quarter and I will jump back on during Q&A to field some questions.

Gary Millerchip: Thanks, Ron. In today's press release, we reported operating results for the third quarter of fiscal year 26, the 12 weeks ending May 10. As usual, we published a slide deck under Events and Presentations on our investor website with supplemental information to support today's press release. Net income for the third quarter came in at $2.19 billion or $4.93 per diluted share, up 15% from $1.9 billion or $4.28 per diluted share last year. Net sales for the third quarter were $69.2 billion, an increase of 11.6% from $62 billion in Q3 25. Comparable sales were up 9.8%, and 6.6% adjusted for gas price inflation and FX.

Excluding gas sales entirely, and adjusting for the impact of foreign exchange, comparable sales were also up 6.6%. Digitally enabled comparable sales were up 21.5%, 20.8% adjusting for FX. Our segment breakout of comparable sales is disclosed in both our earnings release and the supplemental slide deck. In terms of Q3 comp sales metrics, FX positively impacted sales by approximately 1% while gas price inflation positively impacted sales by approximately 2.2%. Traffic or shopping frequency increased 2.4% worldwide. Our average transaction or ticket was up 7.3% worldwide, and 4.2% excluding gas price inflation and changes in FX. Moving down the income statement to membership fee income.

We reported membership fee income of $1.37 billion, an increase of $133 million or 10.7% year over year. Adjusting for FX, the increase was 9.9%. The September 2024 US and Canada membership fee increase accounted for a little more than 1/4 of membership income growth. Excluding the membership fee increase and FX, membership income grew 7% year over year. This was driven by continued growth in our membership base, and upgrades to executive memberships. At Q3 end, we had 41.2 million paid executive memberships, up 9.6% versus last year. This quarter, we launched our executive member program in China, and have seen strong early adoption in the market.

We ended the quarter with 82.9 million total paid members, up 4.1% versus last year, and a 149 million cardholders, up 4% year over year. In terms of renewal rates, at Q3 end, our US and Canada renewal rate was 92.2%. Up 10 basis points from last quarter. And the worldwide rate came in at 89.7% unchanged from last quarter. As previously shared, members who sign up online on average renew at a slightly lower rate than warehouse sign ups. And as this population has grown as a percentage of our total base, this creates some downward pressure on the overall renewal rate.

In Q3, it was pleasing to see that our focus on increasing the renewal rates of these members through targeted digital communications and retention strategies more than offset the negative impact from this mix change in our membership base. Turning to gross margin, Our reported rate was lower year over year by 21 basis points, coming in at 11.04% compared to 11.25% last year. Excluding gas inflation, the gross margin rate was higher by 1 basis point. Core was lower by 46 basis points and lower by 29 basis points excluding gas inflation. In terms of core margins on their own sales, our core-on-core margins were lower by 9 basis points.

This decrease was due to slightly lower margins in fresh and food and sundries. Where we invested in lower prices for our members on several everyday items. such as eggs and beef. Transportation costs were also a headwind in the quarter due to higher gas prices. The significant difference between reported core margins and core-on-core margins was primarily due to mix changes as we saw gas, e commerce and pharmacy sales grow at a faster pace than core merchandising sales. Ancillary and other businesses gross margin was higher by 9 basis points and 14 basis points excluding gas inflation. This was driven by higher sales penetration in e-commerce and pharmacy, partially offset by a lower gross margin rate in gas.

LIFO positively impacted the rate by 14 basis points both with and without gas inflation. We had a $44 million LIFO charge in Q3 this year, compared to $130 million charge in Q3 last year. This quarter's gross margin rate benefited 2 basis points from lapping the catch up accrual in Q3 last year for the increased employee vacation days included in our March 2025 employee agreement. Moving on to SG&A. Our reported SG&A rate was lower or better year over year by 20 basis points. Coming in at 8.96% compared to last year's 9.16%. Excluding gas inflation, SG&A was lower or better by 2 basis points year over year.

Capital expenditure in Q3 was $1.41 billion. We estimate CapEx for the full year will be approximately $6.5 billion as we continue to invest in building a larger pipeline of new warehouses, remodeling our existing warehouses to drive continued growth in high volume buildings, expanding our depot network to support operational efficiency, and in enhancing the member digital experience. In terms of merchandising highlights, as Ron mentioned in his opening comments, gas prices had a major impact on the quarter, with our members allocating a greater proportion of their total spend to gas. At the same time, we saw very robust comp sales results excluding gas. As our combination of merchandising quality, value and newness continues to resonate with members.

Fresh comparable sales were up in the high single digits in the quarter, led by meat and bakery. In meat, we saw strength in both premium cuts of beef and lower cost proteins such as ground beef and poultry. In bakery, we continue to see success with the launch of exciting new items including a variety of seasonal pastries and cookies. Non-foods comp sales were up in the high single digits in Q3. Top performing departments were gold and jewelry, small electrics, tires, home furnishings, majors, and health and beauty. Self care and wellness items performed extremely well during the quarter, including fragrances and hair and skin products in the health and beauty and small appliances departments.

We also saw members wanting to splurge on higher value self care items where the quality and value is compelling. For example, we experienced almost 50% sales growth in saunas and massage chairs during the quarter. In food and sundries, comp sales grew in the mid-single digits led by packaged foods and candy. While egg price deflation was a headwind to sales, this was partially offset by significant growth in other items such as protein snacks and protein bars. Kirkland Signature is also driving growth in food and sundries. We continue to innovate with new KS items, offering savings of at least 15% to 20% to the national brand equivalent with equal or better quality.

Q3 launches included our KS energy drink, KS ultra filtered milk, KS sea salt popcorn, and KS oven roasted chicken dog food. Our goal is to be the first to lower prices where we see opportunities to do so, and a few examples this quarter included KS Crispy Wings from $16.99 to $14.99, KS Milk Chocolate Almonds, from $19.99 to $18.99, KS golf balls from $32.99 to $29.99, and KS king-size sheets from $89.99 to $79.99. In ancillary businesses, comp sales were up in the mid-20s. Pharmacy led the way and saw significant market share gains in the quarter. In addition to our experienced pharmacists taking great care of our members, a number of factors are contributing to this growth.

These include increased GLP-1 demand, and inclusion of Wegovy and Ozempic in our Member Prescription Program, great value on pet medications, acceptance of Medicare D over-the-counter flex cards, and expansion of our mail order and specialty pharmacy offerings. Gas comps were in the positive high twenties, driven by a price per gallon increase year over year as well as an acceleration in volumes. Turning now to inflation. Overall, inflation increased slightly in Q3, largely because of higher gas prices. This was offset by lower inflation in food and sundries and fresh, primarily due to deflation in produce, eggs, and dairy.

Inflation increased slightly in nonfoods, and we are anticipating further inflation in a number of nonfood categories as higher resin costs start to flow into cost of goods. The supply chain is generally stable, and our merchants feel good about our inventory position heading into the summer. We have relatively low inventory exposure to shipping issues, stemming from the situation in The Middle East. But we continue to monitor the situation closely. In digital, we saw strong member engagement in Q3, with site and app traffic up 37%.

Pharmacy, gold and jewelry, home furnishings, tires, special events, housewares, and majors all grew double digits year over year. Delivering a more personalized experience for our members is a key focus, and we continue to make progress in this area. In Q3, our personalized product recommendation carousels delivered conversion rates 3x better than our typical conversion rates. And contributed just under $5 billion of e commerce sales. As Ron shared earlier on the call, with consumers increasingly using AI to research products and services, we believe this has the potential to be a significant sales opportunity for Costco. We are now leveraging AI to enhance our product pages online, which in turn is increasing our relevance with the large language models. While the volume of traffic generated from AI search is still low, we saw triple digit growth in Q3, and this activity had the highest conversion rate of all traffic coming to our site.

That concludes our prepared remarks.

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Q&A

Analyst (Michael Lasser - UBS): Given that new membership growth is a critical driver of your overall same store sales growth and this metric has slowed to 4.1%, which is the lowest level in some time, should we keep our expectations around your same store sales growth outlook for at least the near term pretty modest?

Gary Millerchip: Overall, we were pleased with the results in the quarter. When we look at membership growth, if you back out the fee increase and foreign exchange, we were up 7% overall. A big part of that was due to the continued engagement we see with executive members growing, and that was up over 9% during the quarter. We were also pleased to see that the renewal rate has sort of normalized. We think the sort of the 4% to 5% is a more normal rate of growth when you do not have the benefit of a large increase that is linked to some kind of special event like COVID or a new market entry.

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Analyst (Christopher Horvers - JPMorgan): Is there a change in the rationality of the overall market around pricing, or is this simply just something opportunistic in a moment in time given the backdrop?

Gary Millerchip: We think of the market as being very rational currently. We tend to be our own biggest competitor. Because of the impact of higher gas prices, we felt it was important to continue to deliver more value for our members. The moves that we made on pricing were strategic, not reactionary.

Ron Vachris: The moves that we have made on pricing were strategic, not reactionary. I mean, these are things that we will see. One of your examples was you saw some inventory that we had during higher tariffs. Now we are getting the lower priced goods in. We may go down earlier in those to get into those lower priced goods quicker. We are down quick on eggs when that commodity started dropping. So we just use this as a lever. We have always talked long-standingly that we are the first to come down and the last to go up.

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Analyst (Gregory Melich - Evercore ISI): Is inflation still running roughly 1% across the box?

Gary Millerchip: Sort of low to mid single digits is what we have kind of shared in the past. But really most of the increase, if not all the increase, in the inflation rate — we include gas in that number — and gas was for sure the largest part of the inflation. Fresh and food and sundries were a bit lower during the quarter. That was largely on the back of produce, eggs, and dairy all being deflationary. We are still seeing inflation in beef, deli, and areas like candy. Non-foods was a little bit higher during the quarter. Some of that was really as we are seeing higher cost of memory chips in computers having an impact on the sort of cost of items in majors. And then secondary nonfoods that we see, particularly if oil prices remain at elevated levels, is likely to see some increases in items that have sort of plastic components or polyester or cotton because of the impact of higher resin costs.

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Analyst (Peter Benedict - Baird): On GLP-1s — how is it influencing category performance or how you are thinking about leaning into different categories?

Gary Millerchip: The biggest thing we are seeing is that our value that we are offering in our pharmacy is really helping members take advantage of those drugs in a very cost effective way. In food and sundries where we are really leaning in is anything protein right now is doing extremely well. So protein snacks, protein bars, beef sticks. We launched our own Kirkland Signature Beef Stick that is doing tremendous volume and offering tremendous value to our members.

Ron Vachris: On the merchandising front, I have had an opportunity this last quarter to meet with several of the larger CPGs. And I gotta tell you that they are making some nice pivots based on the needs of the GLP customer. Gary mentioned proteins. We just launched the Kirkland Signature Ultra filtered protein milk in our dairy that has just taken off extremely, extremely strong. Things with fiber, magnesium. So I think our buyers are right on top of the halo effect of GLPs and the needs of the members. And I am quite impressed with what I am seeing from the CPGs, the rather big ones, and how they are pivoting to the future potential opportunities there.