Costco Wholesale Corporation

Ladies and gentlemen, thank you for standing by. My name is Abby and I'll be your conference operator today. At this time, I would like to welcome everyone to the Costco wholesale corporation's fourth quarter fiscal 25 earnings call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during that time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, press star one a second time. And thank you. I would now like to turn the conference over to Mr. Gary Millerchip, Chief Financial Officer. You may begin.

Good afternoon, everyone, and thank you for joining us for Costco's fourth quarter 2025 earnings call. I'd like to start by reminding you that these discussions will include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements involve risks and uncertainties that may cause actual events, results, and or performance to differ materially from those indicated by such statements. The risks and uncertainties include, but are not limited to, those outlined in today's call, as well as other risks identified from time to time in the company's public statements and reports filed with the SEC. Forward-looking statements speak only as of the date they are made, and the company does not undertake to update these statements except as required by law. Comparable sales and comparable sales excluding impacts from changes in gasoline prices and foreign exchange are intended as supplemental information and are not a substitute for net sales presented in accordance with GAAP. Before we dive into our financial results, I'm delighted to say that Ron Vakris is once again joining me for today's call. I'll now hand over to Ron for some opening comments.

Thank you, Gary. Good afternoon, everyone, and thank you for joining us today. As we wrap up fiscal year 2025, I'll make a few brief comments on some of the highlights. In the fourth quarter, we opened 10 new warehouses, including a relocation in Canada, our 20th warehouse in Korea, our second warehouse in Sweden, and five net new locations in the US. For the fiscal year, we opened 27 new warehouses, including three relocations for a total of 24 net new buildings. This brings our total warehouse count to 914 worldwide. We plan to open another 35 warehouses in fiscal year 26, of which five are relocations. We continue to see significant opportunities for expansion both domestically and internationally across the markets where we currently operate. Gary will go into details about the quarter results, but a few highlights for the fiscal year. Net sales came in just under $270 billion, an increase of over 8% versus last year, and e-commerce sales exceeded $19.6 billion, increasing over 15%. And we had a record year for gas volumes, which benefited from longer gas station hours, new gas stations, and expansions of existing gas stations as well. We also recently celebrated a few milestones, including the 40th anniversary of our $1.50 hot dog and soda combo. Fittingly, we've just completed the rollout of Coca-Cola, the original soda partner from the 1985 inception of the iconic combo. to all food courts worldwide. Our private label Kirkland Signature reached its 30th year anniversary this year. Kirkland Signature sales penetration continues to increase, bringing even more high quality value to our members while offsetting potentially inflationary impacts from tariffs. As mentioned last quarter, we are continuing to look at opportunities to move more KS product sourcing into the countries and regions where the items are sold And this is helping to lower costs as well as reduce emissions from transporting goods around the world. To increase value and convenience for our members, on June 30th, we added executive member exclusive operating hours in the mornings and additional hour on Saturday evenings for all members in our U.S. warehouses. We estimate these incremental hours have added about 1% to weekly U.S. sales since implementation. This has been very well received by our members. In addition to the early opening hours for executive members, we also introduced a $10 credit per month on Instacart purchases greater than $150. Since announcing these new executive benefits, we've seen the meaningful increase in upgrades from Gold Star members to executive membership. Another way we are improving the member experience is through the rollout of enhanced checkout technology in all U.S. warehouses. This is speeding up the checkout process by allowing our employees to scan small and medium sized transactions while the member is still in line. So upon reaching the cashier, nothing has to be removed from the cart, only payment is needed. We also continue to make progress with our technology roadmap for digital and e-commerce. Enhancements this quarter included using data augmentation to improve search effectiveness, adding passwordless sign-in to our mobile app, and creating a waiting room for high velocity items such as Pokemon cards. These waiting rooms reduce the traffic from bots, increase the opportunity for members to purchase high demand items while improving the speed and the stability of the site during peak traffic periods. Reflecting on fiscal year 2025 overall, our merchandising and operations team did a fantastic job delivering strong financial results while also investing in our employees and improving value and convenience for our members. Our merchants adjusted their plans to mitigate tariff impacts and source items that our members need while delivering the lowest price at the best value. Our operators quickly and efficiently adapted to pay raises in March of 24, July of 24, and again March of 25 that brought our average hourly U.S. wage to over $31 per hour, and most recently to the expansion of our operating hours. Their focus on efficiency and improving productivity allowed us to absorb these significant investments with minimal impact to our SG&A rate. As we look ahead to fiscal year 2026, despite the current macroeconomic uncertainty, we remain confident in our ability to grow market share by continuing to deliver exciting, high quality items at the best value for our members. With that, I'll turn it back over to Gary to discuss the results for the quarter. And I'll jump back in during Q&A to field some questions.

Thanks, Ron. In today's press release, we reported operating results for the fourth quarter of fiscal year 25. The 16 weeks ended August 31st. As usual, we've 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 fourth quarter came in at $2.61 billion. or $5.87 per diluted share, up 11% from $2.35 billion, or $5.29 per diluted share in the fourth quarter last year. Last year's results included a non-recurring tax benefit of $63 million, or $0.14 per diluted share. Excluding this tax item, net income and earnings per diluted share both grew 14%. Net sales for the fourth quarter were $84.43 billion, an increase of 8% from $78.18 billion in the fourth quarter last year. Comparable sales were 5.7% or 6.4% adjusted for gas deflation and FX. E-commerce comparable sales were 13.6% or 13.5% adjusted for FX. Our segment breakout of comparable sales is disclosed in both our earnings release and the supplemental slide deck. In terms of Q4 comp sales metrics, FX positively impacted sales by approximately 0.2%, while gas price deflation negatively impacted sales by approximately 0.9%. Traffic or shopping frequency increased 3.7% worldwide. Our average transaction or ticket was up 1.9% worldwide. This includes the impacts from gas deflation and FX. Adjusted for those items, ticket would have been up 2.6% worldwide. Moving down the income statement to membership fee income. We reported membership fee income of $1.72 billion, an increase of $212 million or 14% year over year. Adjusting for FX, the increase was 13.6%. Last September's US and Canada membership fee increase accounted for a little less than half of the membership fee income growth in the quarter. 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 increased upgrades from gold star to executive membership. At Q4 end, we had 38.7 million paid executive memberships, up 9.3% versus last year. Executive members represented 47.7% of paid members and 74.2% of worldwide sales. As Ron mentioned earlier, we have recently seen a lift in upgrades in the US after we announced our executive member exclusive hours and other benefits. New member signups continue to be strong, and we ended the fiscal year with 81 million total paid members, up 6.3% versus last year, and 145.2 million cardholders, up 6.1% year over year. In terms of renewal rates at Q4 end, our US and Canada renewal rate was 92.3%, and the worldwide rate came in at 89.8%. The decline in renewal rates was largely attributable to a higher number of online signups entering the renewal rate, and this quarter included a large Groupon campaign in December 2023 entering the calculation. Overall, we view the growth in online signups as a net positive, as they are helping to grow our overall membership base and membership revenue, and are also introducing younger members to Costco. Almost half of our new member signups are now under the age of 40. As we previously shared, new online members renew at a slightly lower rate on average, and they have grown as a percentage of our signups over recent years. We would therefore expect to continue to see a small decline in our renewal rate as this change in membership mix gets fully reflected in our renewal rate calculation. That being said, through a focus on auto renewal and targeted digital communications, Our goal is to improve the renewal rate for this cohort of new members in the future. Turning to gross margin, our reported rate in the fourth quarter was higher year over year by 13 basis points, coming in at 11.13% compared to 11% last year. Gross margin was up three basis points, excluding gas deflation. Core was higher by 30 basis points and higher by 22 basis points without gas deflation. In terms of core margins on their own sales, our core-on-core margins were higher by 29 basis points. This increase was broad-based, with fresh, foods and sundries, and non-foods all up year over year. Supply chain improvements and an increase in KS penetration benefited margins in all categories, while fresh further benefited from lower spoilage and labor efficiencies. Ancillary and other businesses' gross margin was lower by 11 basis points, and 13 basis points without gas deflation. Gas was the main driver of the decrease. LIFO negatively impacted the gross margin rate by six basis points. We had a $43 million LIFO charge in Q4 this year compared to an $8 million credit in Q4 last year. This charge was essentially in line with the estimate we provided last quarter as overall inflation remained consistent with Q3. Moving on to SG&A. Our reported SG&A rate in the fourth quarter was higher or worse year over year by 17 basis points, coming in at 9.21% compared to last year's 9.04%. SG&A was higher or worse by nine basis points adjusted for gas deflation. The operations component of SG&A was higher or worse by 15 basis points and eight basis points without gas deflation. This increase was partly due to our investment in employee wages. As noted last quarter, The incremental year-over-year impact from this year's March employee agreement was mid-single-digit basis points. And the off-cycle wage increase in July 2024, which affected the year-over-year rate comparison for the first 10 weeks of Q4, was mid-to-high single-digit basis points. An increase in general liability charges and reserves also negatively impacted SG&A this quarter by approximately five basis points. To partially offset these headwinds, our operators continue to do a great job leveraging strong top line sales and improving labor productivity. Notably, following the change in warehouse hours on June the 30th, our operators were able to minimize any impact to the SG&A rate. Below the operating income line, interest expense was $46 million versus $49 million last year, and interest income was $169 million versus $138 million last year. FX and other was a $46 million gain in Q4 this year versus an $18 million loss last year. In terms of income taxes, our Q4 tax rate was 25.6% compared to 24.4% last year. As a reminder, last year's tax rate included a non-recurring benefit of $63 million related to a transfer pricing settlement and true-ups of tax reserves. Turning now to some key items of note in the quarter. Capital expenditure in Q4 was approximately $1.97 billion, and for the fall year was a little under $5.5 billion. We made some additional investments in Q4 to support accelerated warehouse growth, including the 35 planned openings in fiscal year 2026 that Ron mentioned earlier. Additionally, we increased our pace of spend on remodels to ensure that we continue to offer our members a best-in-class experience across all of our warehouses. Land purchases for future depot expansions and investments in our manufacturing facilities for expanded hot dog production and a new coffee roasting facility also contributed to the increased spend. A few fun sales facts as we wrap up our fiscal year. While our members love the treasure hunt items that they find in our warehouses and online, Our everyday value items are also extremely important to them, especially in times of economic uncertainty. There are no better examples of this than our hot dog combo, rotisserie chicken, and KS bath tissue. And in fiscal year 2025, we sold over 245 million hot dog combos, over 157 million rotisserie chickens, and enough bath tissue to reach the moon and back over 200 times. Now taking a look at core merchandising sales in the quarter. Fresh sales were up high single digits, led by double-digit growth in meat. We continue to see strong unit growth across the department due to the quality and value we offer on both premium and lower-cost proteins. Wagyu and grass-fed beef performed well in the quarter, and lower-cost proteins like poultry, pork, and ground beef also saw very strong unit growth. Non-foods had comp sales in the high single digits. Our buyers continue to do an excellent job finding new and exciting items at great values, which are resonating well with members, even as they remain very choiceful in their spending on discretionary items. In the quarter, gold and jewelry, gift cards, majors, toys, and men's apparel were all up double digits. While gold was less of a year-over-year tailwind than earlier in the year, as we have now started to lapse sales from a year ago, it continues to perform well. Strength in gift cards was driven by Disney, Uber, and DoorDash, and majors were up high teams, with consumer electronics leading the way. We also added a number of new high-quality national brand partnerships across a broad range of non-food categories, including Fabletics, True Classic, Aura, and Lazy Boy. Food & Sundries had mid-to-high single-digit comps, with Cooler and Candy showing the strongest results. New Kirtland Signature offerings allow us to continue to deliver greater value to members and are high-quality alternatives to some tariff-impacted goods. KS items typically offer members 15% to 20% value compared to the national brand alternative with equal or better quality. In Q4, we launched over 30 new KS items, including grass-fed beef sticks, organic extra firm tofu, and various apparel items, in addition to our latest food court offering, the Combo Calzone. Within ancillary businesses, pharmacy, optical and hearing aids all had strong quarters. And while gas volumes were positive low single digits in the quarter, gas comps were negative mid to high single digits due to a lower average price per gallon. Turning to inflation. Overall, inflation remained in the low to mid single digit range. Fresh and food and sundries were relatively similar to last quarter, with higher inflation in key commodities like beef, coffee, sugar, and corn, partially offset by lower inflation in produce, eggs, butter, and cocoa. In non-foods, we saw inflation return for the second consecutive quarter, primarily driven by imported items. This inflation drove the $43 million LIFO charge for the quarter, which is calculated by comparing the net landed cost of inventory at the beginning of the fiscal year with the net landed cost of inventory on hand at the end of the fiscal year. We continue to work closely with our suppliers to find ways to mitigate the impact of tariffs, including moving the country of production where it makes sense and consolidating our buying efforts globally to lower the cost of goods across all our markets. Additionally, we are changing item assortment where appropriate. This includes leaning into KS items and increasing domestically sourced goods. Examples include an increased emphasis on items in health and beauty, live goods, tires, and mattresses. We believe our expertise in buying and the flexibility afforded by our limited SKU count give us greater agility to navigate the current environment and minimize the impact of tariffs. Our ultimate goal is to increase our member values compared to the market. From a supply chain perspective, we haven't seen any major changes since last quarter. Overall, supply remains relatively stable with no notable issues. Looking ahead to the holiday season, our merchants feel good about our inventory position. And while the product mix will look a little different from years past, we will have a strong assortment of high-quality items that bring meaningful value, seasonal themes, and exciting newness to our members. Turning now to digital. E-commerce site traffic was up 27%, and sales were led by gold and jewelry, housewares, apparel, tires, sporting goods, majors, small electrics, lawn and garden, and domestics, all of which grew double digits year over year. We continue to grow share in big and bulky items sold online, powered by our investments in Costco logistics. The combination of great values and the delivery experience that includes installation and haul away of old items is resonating extremely well with members and resulted in a 13% increase in items delivered in the quarter. Q4 fiscal year 25 marked the 15th consecutive quarter of improved member experience scores on Costco logistics deliveries. A key focus of our digital strategy is to deliver a seamless experience and more personalized and relevant communications to our members. This is a multi-year journey, and as we complete the foundation elements of our plan, we are able to launch new experiences for members. For example, during the fourth quarter, we launched more relevant messaging on the costco.com homepage, highlighting different offers depending on the individual's membership type and co-brand credit card status. Executive members are shown information about executive benefits, while Gold Star members are encouraged to upgrade their membership. And non-members are shown information about becoming members. Co-brand cardholders will be shown offers associated with ongoing spend campaigns, while non-cardholders will be shown acquisition offers. These digital capabilities are also a key enabler for retail media, as they allow us to target specific ads that deliver greater value for both members and suppliers. while always honoring the privacy choices of our members. As an example, we recently executed a series of targeted MVM amplification campaigns with Kimberly Clark on third-party websites. This resulted in a strong return on ad spend of 14 to 1, drove a 22% increase in traffic to the product details pages, and a 45% increase in digital sales of the promoted items. As we continue to execute our digital and technology roadmap, we are excited about the opportunities this creates to further enhance the member experience and drive top line sales. Finally, in terms of upcoming releases, we will announce our September sales results for the five weeks ending Sunday, October the 5th on Wednesday, October the 8th after market close. Based on feedback received from investors, starting with our September sales release, we'll be changing our e-commerce comparable sales metric to now report digitally enabled comparable sales. This measure will incorporate all sales that originated online, including our same-day delivery service fulfilled by Instacart, Uber Eats, and DoorDash, Costco Travel, Business Center Delivery, and a few other smaller direct-to-member businesses. We believe this change aligns our reporting more closely with how our retail peers disclose this metric. For fiscal year 2025, our digitally enabled sales totaled more than $27 billion. That concludes our prepared remarks, and we'll now open the line for questions.

Thank you. And if you have dialed in and would like to ask a question, please press star 1 on your telephone keypad to raise your hand and join the queue. If you would like to withdraw your question, simply press star 1 a second time. If you're called upon to ask your question and are listening via speakerphone on your device, please pick up your handset and ensure that your phone is not on mute when asking your question. To be able to take as many questions as possible, we ask that you please limit yourself to one question. Again, it is star one if you would like to join the queue. And our first question comes from the line of Christopher Horvers with JP Morgan. Your line is open.

James Meeker, Thanks good evening to my question has to do with the extended Member hours. James Meeker, To what extent, do you think that your members actually aware of these extended hours was was the June 30 at the soft launch and you and you've made a harder launch as you came into the fall. James Meeker, And how do you think about that 1% conflict in terms of it becoming much larger thanks very much.

Well, I think that this is Ron. I think the communication we have done a good job informing our members both with signing at the warehouse along with emails to our executive members. So we saw we really based that success based on the traffic we saw when we initially began these additional hours. The 1% is after we've analyzed the business compared to the prior months and to see how much we picked up both on the additional Saturday night hour along with the early morning hours as well. So we feel that the word is out there. We feel that we continue to communicate the executive member benefits as we continue to add to that suite of services that they get. And that is inclusive of the hour that they get as well.

Chris, I think as well, just to completely agree with Ron's comments, it's one of those things that obviously it's a little bit difficult to predict exactly how the change flows through in terms of impact of member shopping behavior. To Ron's point, we did a lot of communication. When we made changes before around, so some of our warehouses had longer hours before, it probably took a little bit longer than the first month or so for the full impact to show through in terms of member shopping behavior. But with that being said, I think because this was a national launch, we did get more visibility and more social media exposure to it as well. So I think we've been pleased with the response we've seen, but there's certainly probably more time to unfold to see exactly how it plays out. Thanks very much.

And our next question comes from the line of Michael Lasser with UBS. Your line is open.

Good evening. Thank you so much for taking my question. You mentioned that you would expect your renewal rate to continue to fall as some of the digital signups a trip out of the base. How far do you expect to see the membership rate decline if we look back In the pre-COVID in the 2019, Costco regularly had a renewal rate, worldwide renewal rate in the mid to high 80% range. Is it realistic for it to go back to that? And if it did, what actions would Costco take to stabilize or improve that? And how is this all going to impact the financial performance? Thank you very much.

Yeah, thanks, Michael. Appreciate the question. You know, I think we take a little bit of a broader step back on the membership metrics because to your point, we certainly look at the renewal rate and it's an important measure for us. And I'll talk a little bit more about how we view the opportunity to improve that metric over time as well. But I do think, you know, when we look at our overall metrics for membership, we were pleased with how the quarter played out. I think you heard us say in the prepared remarks that we're seeing a continued increase in signups and that's also reflecting a growing number of younger members flowing into the base as well. We saw an acceleration in upgrades, particularly towards the end of the quarter after we announced the extended hours and the Instacart $10 benefit per month if you spend $150 on the basket. And we also saw overall household growth grow by greater than 6% and executive members up by over 9% because of the acceleration in upgrades. And then on membership fee income, actually our membership fee income was a little bit ahead of where we'd have budgeted at the start of the year. So looking at sort of the overall impact of the membership fee increase, and the way that members were behaving overall, were actually ahead of where we'd have budgeted based on everything we knew at that point. So I think it's important just to take that bigger picture step back, because overall, we think the membership base, the renewal rate is very strong overall, and the results that we're seeing in growth in our overall membership engagement is also very strong. Now, with all that being said, as I mentioned a moment ago, we do view the membership renewal rate as an important measure, and we've analyzed it very closely, as you might imagine, because it's something that we We take pride in the overall level of membership renewal that we see. When we analyze it, it really is essentially the vast majority of it is attributable to this higher number of online signups. And if you look at what's happened really since COVID, we've seen in the last three or four years a significant growth in the number of members and the proportion of members that are signing up online. And that's bringing in newer members. It's helping to grow everything I just mentioned around membership fee income and an overall membership base. but they do renew at a slightly lower rate. And as you think about how our membership renewal rate works and how it lags the effect of some of those changes, we're really sort of flowing through the impact of that into a sort of changing mix, if you like, of the overall base. So as I mentioned in my prepared comments, we do think we'll see a few more quarters of a similar type of impact that we saw in this quarter with the 40 basis point decline. But that being said, as we learn more about how to engage with those newer digital members, we're really investing in the opportunities to improve the auto renewal with that member group, increase the amount of digital communication and more relevant communication for those members who are joining Costco starting online rather than starting in the warehouse. So we have to think about how we can help really get them to experience more of the great value that we offer in a broader relationship. So we think there's opportunities to improve that measure. But overall, we like where we are with the membership metrics in total because of the overall growth it's driving in our membership income.

And our next question comes from the line of Chuck Grom with Gordon Haskett. Your line is open.

Good afternoon. Can we dive into your core margins a little bit, up 29 basis points year-over-year, how that's spanned? across categories and then more broadly i'm curious any notable observations on price increases you've taken recently and i guess what unit velocity you're observing in those product categories and then just last question just on the holiday you called out how the product mix might be different than years past can we just just double click on that comment i guess what what might be different in terms of uh particularly in the general merchandise part of the business thanks

Yeah, sure. Thanks for the question, Chuck. I'll cover the first couple of parts around margin and tariffs, and then Ron will talk a little bit more about assortment for the holidays. On the gross margin rate, so yeah, I talked a little bit about it in the prepared comments, but overall, you know, I think our focus was on the gross margin rate overall grew by three basis points, excluding gas. And, you know, when we think about the job our buyers did and merchants did to navigate tariffs and make sure we were still delivering tremendous value for our members, then we feel that was a really good outcome and we were pleased with the way in which the team was able to manage staying true to who we are as a company in delivering value while also being able to deliver an overall slight improvement in the gross margin rate. The core-on-core margin was definitely the strength area. That was, as I mentioned earlier, fairly widespread across all three of our main categories, so fresh, food and sundry, and non-foods all saw a slight improvement in the core-on-core margin. But it was really in our merchants and operators focusing on how can we offset some of the impacts that we're seeing in the business through tariffs. So a lot of the improvement came from supply chain efficiency with improvements by the operators in our depots and also gas prices helping us there as well. We also saw some mixed benefits with Kirkland signature penetration improving. And then similar to last quarter, in fresh in particular, the teams did a great job of reducing spoilage or shrink, as some retailers call it, and improving our labor efficiency in the fresh departments. So those were all, I think, tailwinds in the quarter that helped us offset some of the headwinds that we saw in gas margins in particular during the quarter, and also the impact that we saw on the LIFO charge with the higher inflation in the back half of the year. I think, you know, in terms of thinking about it for the future, I would say really we tend not to focus on individual quarters because, you know, our goal obviously is to manage the business for the long term, I should say, and manage the business holistically. And so I think it's probably more relevant to look at the performance over a number of years and how we've been able to, you know, continue to grow the business and seen a slight improvement in gross margin. And really we look at the quarter, and as I mentioned earlier, of how we're able to balance the impact of tariffs and supporting our members while also maintaining a steady gross margin rate as well. I'll maybe let Ron talk a little bit about the assortment and what we're seeing there with some of the changes.

Thank you, Gary. Exactly. You know, it's not going to be a marked change in what you'll see in a Costco. Our buyers, when we were booking for this holiday season, really had to evaluate all the discretionary items, the toys and the trim and the decorations and those kind of things. And made decisions based on the necessities and what they felt they needed to be in Christmas trees, but we skinned that we really thin down that whole category. And we send down a lot of the additional seasonal areas as well, what that provided us was the opportunity to bring in categories that we don't traditionally carry during that time of year. And so we're seeing some of that already when we're bringing in you know backyard sheds in the fall, which are doing very, very well for us, but we never had the ability to do that, due to space restraints. we're bringing in saunas for your garage or your home, who are also performing very well. High ticket goods that are very relevant to the time of year, but not reflective of the traditional Costco set you'll see. You'll see some more furniture in the warehouses that we normally didn't do any furniture that time of year, but it says great opportunities for top line sales. So I feel really good about the way the buyers have pivoted on the discretionary items and said, okay, how can we still be relevant in the time of year, but with some new categories that we had not done before due to space limitations. So I still see it as a very exciting holiday season with some new goods that we haven't carried in prior years. Great, thank you.

And our next question comes from the line of Zihan Ma with Bernstein. Your line is open.

Great, thank you. I wanted to follow up on the membership fee side where you, I think Gary mentioned it 7% growth, excluding the price increase and FX. How sustainable do you think that trend is going to be, especially in the U.S. and Canada, where you're opening some of the fill-in stores in markets where the penetration may already be fairly high? So is there a risk of the membership fee income growth slowing down from here? Thank you.

Yeah, thanks for the question. You know, we still remain very excited about the opportunities for continued growth in the membership base. We're obviously opening new warehouses every year, and Ron talked about that earlier in terms of the opportunity that creates to create a broader coverage of the geographies that we're operating in and driving new membership engagement. You know, the positive and opportunity side of the comments you made earlier about membership renewal rate with that younger generation of members now also experiencing Costco, we think creates continued opportunity to drive new member engagement in a broader range of the potential member base than we've historically seen prior to COVID. If we look at the maturity of our warehouses and some of the warehouses that have been opened in recent years, and particularly in some of our international markets, generally speaking, we see continued growth in the number of members in those locations as those businesses and those warehouses mature over time as well. And, of course, we're adding new member benefits all the time with the extended opening hours that Ron mentioned in the earlier comments and the Instacart benefits and the 5% gas rewards on the credit card that we mentioned a couple of quarters ago. So, you know, we generally don't talk about sort of future projections, but I think we feel very positive about the opportunity to continue to grow the membership base.

Thank you very much.

And our next question comes from the line of Scott Siccarelli with Truist. Your line is open.

Hi, thank you. This is Shervin on for Scott. Kind of a piggyback on the memberships question. With it growing 6% in the quarter, is it possible that we're seeing the delayed benefits of people affected by the membership sharing like crackdowns? And can we see an acceleration from here? And outside of the existing memberships, are you seeing the new executive membership benefits driving a more favorable mix for new incoming members?

Yeah, I think, you know, To the first part of the question, there's nothing we would see in the data that would say there's anything sort of happening relative to the change you referred to. And again, that was something that we found. Certainly during COVID, there was some change in behavior. And as we introduced the communication around the entry to the warehouse, that helped sort of make sure that our members were able to renew and update their memberships in an appropriate way. And that's been something that's really been flowing through now for some considerable time. So I wouldn't say there's anything that we'd point to in the volume of member sign-ups that we're seeing that we would believe is related to that particular activity that you mentioned. You know, I think we have been really encouraged and pleased with the member reaction to the continued value that we're adding to the membership, the extended opening hours and the Instacart benefits that we referenced earlier, and certainly with the growth that we've seen in the executive membership profile, typically what we see over time is those members are more engaged and they shop more frequently, and our goal is always to demonstrate more value for the member and encourage them to keep upgrading and getting more value from the membership, from the Costco membership. So in that regard, I think we're encouraged by what we're seeing, and it was part of the goal that we had when we introduced those benefits.

All right. Thank you so much. That was very helpful.

And our next question comes from the line of Simeon Gutman with Morgan Stanley. Your line is open.

Hey, Ron. Hey, Gary. My question is on e-commerce and specifically grocery. So there was this announcement from Amazon in the quarter around increased fulfillment capabilities. Can you talk about if you've seen a spike in your Instacart-driven traffic since then? I know you've added some benefits, so maybe it's hard to parse it out. And then can I ask if Costco has what you think is an optimal capability to meet what is increasing online grocery demand. Thanks.

Yeah, I mean, like you said, it's very tough to tell. The Instacart and Uber businesses continues to really do a very good business for us. It continues to grow at a good rate. And so we have seen the additional executive membership benefit be accretive to that. It's definitely helped it out quite a bit. We're very aware of new competition into this space, and we continue to watch that very closely. You know, it comes down to the Costco items that are being delivered as well, too. A big driver from the consumer out there is that they want the goods that we have at their home. It may be a different way to deliver to them as opposed to coming into the warehouse, but there still is a desire to the fresh foods, which is a big driver for us in the food and sundry business that we have out there. So very aware of it. We're very happy with the growth of the business there. and we are seeing some strong growth at the back half of the year, and it's hard to tell exactly what that's coming from.

And, Simon, you may have heard me mention at the end of the prepared remarks that we are going to include now those sales in our definition of e-commerce enabled and digitally enabled sales. So going forward from next month's monthly sales, you won't see those numbers called out, but those numbers will be included within our overall growth in e-commerce and digital. Thank you.

And our next question comes from the line of Peter Benedict with Baird. Your line is open.

Oh, hey, guys. Thanks for taking the question. It kind of on the unit growth, the 30 for this year, 20 in the U.S. Just curious, the sustainability of that pace of growth. How long do you think you can kind of sustain that level of growth here? And where do you think you can get the international growth, unit growth to over the next few years? And kind of related to that, maybe a sense for what the CapEx plan is for next year. I apologize if we missed that, but curious kind of what the spend plan is for next year in terms of total CapEx. Thank you.

As far as the future growth, I'll touch on that part. Yes, we do see some runway. We've made an investment in our real estate group to make sure that we're looking at all the opportunities as our geographical footprint continues to broaden around the world. We want to make sure that we are indeed looking at these opportunities and You know, for a few reasons, we feel very good. The right opportunities have come both in existing markets to increase capacity and where we feel we can better serve those markets. And we continue to still find in North America and internationally opportunities in new markets where we're doing very well. So we do see some runway as far as this 30 warehouses opening a year. We don't strive for a number. I mean, we're not going to make any bad decisions on opening warehouses to get to any set number. So it could ebb and flow. And in some of the international countries, it takes a little bit longer. So you'll see some swings back and forth year to year when things come to fruition. Some projects could take us three years internationally where we have things that can turn much quicker in North America. So overall, I think we do feel some good runway is out in front of us as far as growth goes. We have people ready to expand the company, and our operators have done a very good job dealing with the cannibalization we've dealt with in the existing markets we're in.

And then maybe to answer the question on capital expenditure, I'll just maybe take a step back on that as well and provide a bit more context on what we saw in fiscal year 25 and how we think about 26 as well for you. So I think generally when you look back at capital expenditure for us over the last few years, we've seen it grow. When you look at the compounded growth rate over the years, it's generally grown in line with sales. And we did see in 2025 when you look at the total capital expenditure for the year, we grew significantly. capital expenditure at a faster pace than sales for the first time actually for a while for us. And that was really for the areas that we mentioned earlier in the prepared remarks around the number of warehouses that we're looking to open in 2026, the remodel work that we're doing, preparing the depots for the expansion in warehouse sales and also e-commerce and also some manufacturing opportunities to improve the value in Kirkland Signature. And I would say as we think about future growth in 2026, those areas we think are opportunities for us looking forward as well. We've already talked about the warehouse growth, but we do think with remodels, the opportunity to keep expanding our capacity in our warehouses, especially as the average warehouse now in the U.S. and some of our more mature markets is around 20 years old, there's an opportunity for us to refresh and to support continued best-in-class service in those warehouses. We think there's continued opportunities in manufacturing to support further growth in Kirkland Signature. And we didn't really talk about it in prepared comments, but technology is also an opportunity for us to be able to deliver better member experiences and deliver growth in e-commerce and member engagement. So overall, we think those will continue to be good opportunities for growth. We feel confident the returns on the investments that we'll make will be very strong as well. So we'd expect 2026 to have capital expenditure that would grow over 2025 and probably a little bit higher than sales again for the same reasons in 26 as 25. We typically actually give the CapEx number, I think, in our Q1 release. So we'll give you a specific number in Q1 as we do every year. But I would expect it to be a growth again for the reasons I just mentioned.

And our next question comes from the line of Greg Millick with Evercore. Your line is open.

Hi, thanks. A couple questions. I do want to circle back on inflation. Gary, I think you mentioned it was low single digits, maybe 2-ish percent last quarter, and now it's low to mid-singles. Can you just describe, is it non-food driving all that acceleration and sort of frame it magnitude-wise?

Sure, yeah. Thanks for the question. Yeah, I think last quarter, actually, we said overall low to mid-single digits, and we really kind of said the same. This quarter, the change was really in Q3. Q4 has generally been pretty consistent with Q3. And as we look at it and break it down by category, fresh and food and sundries are relatively consistent, quarter over quarter in that sort of low to mid-single digit range. There are lots of sort of puts and takes in there. When you look at individual departments, we certainly see meat and And deli, largely because of meat and candy, would be more inflationary, whereas departments like produce and liquor would be either lower inflation or decelerating inflation or even deflation in certain items. And then on the commodities front, we see acceleration in inflation currently in commodities like beef and coffee, sugar and corn. But then also that's partially offset by we're seeing some deceleration in produce, in particular in berries and avocados. And then eggs and butter and cocoa are also slower inflation too. So there's lots of puts and takes in those food and sundries and fresh departments. The change in Q3 really was in non-foods. But again, I would say it's really low single-digit inflation overall within non-foods. But the real change there was it had been deflationary for 12 months or so. So that's kind of what drove, I should say, the change in Q3 and the reason that we updated our LIFO estimates because we saw a little, we'd seen continued inflation in food and fresh, but that was being offset by non-foods. And now with some inflation in non-foods, that's kind of changed the overall picture, but it's still in that low to mid single digit overall, I would say.

Got it. And my follow-up is we've just seen a lot of the credit card companies add perks and raise fees on their cards. I'm just sort of curious what trends you're seeing there in terms of penetration and And any thought of ways to maybe enhance the member value on that front?

Yeah, well, for our credit card, you know, it's an incredibly successful program for us. And we deliver, you know, a lot of incremental value to our members through the credit card with the rewards that we offer and some of the additional benefits around travel as well. We did recently make some changes to our credit card, recognizing that we felt there was an opportunity to accelerate the value and also to continue to grow that program. And so we added an incremental benefit where the member can now receive 5% rewards on gas. We also updated and modernized the card itself as well. And we've been pleased so far with the reaction from members and the continued growth in that program. That's great. Thanks and good luck. Thank you.

And our next question comes from the line of Edward Kelly with Wells Fargo. Your line is open.

Hi, everyone. Good afternoon. I wanted to follow up on tariffs and the outlook for the gross margin around that. I'm curious as to how you're thinking about the impact of tariffs Over the next few quarters, it seems like there are retailers that are going to be taking more prices. That's something that you think you're going to be doing as well. How you're thinking about the elasticity associated with that. And I'm curious, in terms of your competitive positioning, do you plan to be offensive around this? Is it something that could have some incremental margin pressure in the coming quarters? Just any color around that would be great. Thank you.

Yeah, thanks for the question, Ed. I think overall, first thing to say, of course, is that the environment with tariffs does still remain fluid. There could still be changes that we have to address as the picture unfolds. But with the tariffs that we've seen and we're sort of managing, if you like, as things stand today, our teams, I think, have done a fantastic job in navigating what's been a very fluid and changing environment. And I think the benefit of us of having buyers who have really been in the business for many years and understand the business well, that are managing with a limited SKU count, that we have a low number of items per buyer, so they really understand the individual items that we're buying and the way those products are costed and constructed. And we can also, as Ron mentioned earlier, we have the flexibility to change items where we believe if we don't see that the value would be there with the impact of tariffs, that we can move our assortment to items that really will deliver that value that our members have come to expect. I think we've also... had the benefit of being a global retailer, so with 30% of our business being international, it gives us the opportunity to work with our suppliers in offsetting some of these things by buying globally and also still supporting 30% of our sales through our warehouses that are international still are less impacted by some of those issues that we're working through. And we've taken really a multi-pronged approach to it. There isn't a single answer of how we've managed tariffs. Part of it is that we have absorbed cost ourselves and challenged ourselves to offset those costs to protect the member by improving efficiency and lowering waste and spoilage and those kind of things. We've also worked with suppliers to find offsets and efficiencies, and that includes buying more globally. And there are examples there where we've been able to save 30% to 40% on the cost of items by consolidating to a small number of suppliers and bringing the cost down because of the volume that we can consolidate there. We've also looked at sourcing from different countries and local production. And you may recall last quarter, we talked about with KS laundry detergent, we were able to save 40% in Asia by moving production for the items that we're producing for those markets to be in the region. And we've rotated items as Ron referred to earlier. So I think from what we know today, we feel like, you know, there wasn't like a cliff for us. The impact was managed gradually by our teams doing all the things that we've mentioned. And we We largely feel like we've worked through the strategies that we needed to mitigate what we see in front of us today. So we feel like we know the teams have done a very good job to position us to make sure we have the right assortment at the right value and deliver even greater value for our members. The sort of caveat of everything I just said, of course, is that there may be changes still to come that we have to manage, and that's something that will have to be agile if that's the case.

But I would add to what Gary said, and I agree with everything he said. We're taking a very offensive approach to this. where we're going to do everything we can to mitigate tariff impacts. And last effect would be we pass on price. And if we do that, we're going to be the last one to go up and always the first one to go down on any opportunities we have out there. So it is all hands are on deck. And we address this like we would any commodity increase. And we use the different tools we have to try and mitigate any price increase for any reason.

Thank you.

And our next question comes from the line of Kelly Vania with BMO Capital Markets. Your line is open.

Hi, Ron and Gary. Thanks for taking our questions. Just wanted to ask about membership growth and total membership households that continues to increase in that 6% to 7% range year over year. Just two questions about that. One, is the right way to think about the components of that more like a low single-digit figure in the US and high single-digit internationally, and then Emily Coyle- As you think about the long term US potential for household membership, what do you think or estimate that costco has today in terms of percentage of US households that are members and how high, do you think you can take that over time.

Yeah, thanks, Kelly. You know, I think it maybe comes back to a couple of the comments that I made earlier. We look at the growth that we've seen, and certainly it's a good reflection, I think, of the focus of all of our team here to say, how do we start every day thinking of how can we deliver more value for our members, and how do we show that the membership decision is the best decision that our members have made because of the value that they get from the membership with Costco? And really, our focus tends to be, I think, a little bit less on the way you phrased the question and more on how do we make sure that's always at the center of everything we do and continues to create new opportunities to grow our membership base? And I think because of the focus there and some of the things that we talked about on the call about how the team is navigating tariffs to make sure we stay true to that, delivering the best value for the member, as we're adding more membership benefits like the extended hours, as we continue to open new warehouses and start to reach new member geographies, but also as the maturity of those warehouses. As you know, we don't advertise as a company, and so we believe that word of mouth and our existing members extolling the value they see from their membership is how we grow our base. So there's an organic growth to our business because we're really focusing on ensuring how we deliver that continued value. So we still think there's opportunity to continue to grow that base. It would certainly be true that there's an opportunity in our international markets to and we typically when we we open an international markets, we see a larger number of membership new in those markets because there's less awareness of Costco and typically there's less sort of surrounding warehouses that could be impacted. But on the other side of that, you know what we tend to see with warehouse in the US where we open and we're filling in markets. we see tremendously quick growth in sales in those areas because not only in the new warehouses, but we replace the sales in the effective warehouses because we're freeing up the capacity for those members to shop more frequently in the warehouse as well.

And our next question comes from the line of Rupesh Parikh with Oppenheimer. Your line is open.

Good afternoon. Thanks for taking my question. So maybe a housekeeping question to start. So just on the incremental hours P&L impact, it sounds like it's going well, you know, good sales lift and you're seeing good upgrades to executive members. As you look towards this fiscal year, do you expect it to be a net benefit, you know, the benefits versus some of the expenses with the increase in employee hours?

Yeah, I think it's fair to say that, Sripesh. I mean, just kind of resummarizing what we talked about earlier, as Ron mentioned, we've seen a positive impact in terms of overall sales in the U.S. warehouses from the extended hours, and our operators have done a great job managing the impact from an SG&A perspective. So we have the typical sort of headwinds from the employee agreement that we need to manage and leverage our sales, but we wouldn't be calling out any sort of major headwind from the SG&A perspective based on what a great job our operators have done to manage the impact.

Right. And then maybe just my follow-up question. I know, Gary, in alternative revenue streams, you guys have talked about successful media campaigns earlier this year. I'm just curious on any new efforts on the alternative revenue stream as we look towards this upcoming year.

Yeah. I mean, it's still very much in the early stages. When we talk about alternative revenue, for us, I think it's broader than media for sure. A question earlier that was asked around financial services and credit card, we think that's a continued strength in our business and an opportunity to continue to grow. We launched the buy now, pay later product with Affirm earlier in the year, which is doing well. We have a tremendously successful travel business that delivers significant value for members and has strong growth in our overall model and delivering value for member and top line growth in the company as well. And media then is another component of that. And I think our journey with media is that we're sort of on a two-pronged journey, I would say. One is to build out the capabilities so that we can deliver more personalized, relevant messaging to our members. And that includes a unified single data platform where we stitch all of our information and data together and then build out the tools that allow us to deliver more relevant messaging at scale to our members. And as we're doing that, which is also really important to media, we're really kind of proving out the concept with our suppliers of the value of media within Costco. And that's why we shared the example as we sort of want to make sure that we're demonstrating the how we can create future value as we build those capabilities. And that'll be a continuation over the next 12 months or so. And we'll certainly share more updates as we continue to make progress on that journey.

Great. Thank you. That's a lot.

Thanks. Pardon me. Our next question comes from the line of John Heinbockel with Guggenheim. Your line is open.

Hey, guys. Two strategic questions for either one of you. Maybe, Ron, when you think about the B2B opportunity, How do you think about that, the size of that, whether it's through business centers or online? Because I know when you do reloads, some of those become business centers. We're likely to see an acceleration in business centers. And then secondly, when you think about markets where it's just taken longer to get real estate, is there an opportunity to use the balance sheet to acquire chunks of real estate that you can then kind of develop over a period of time and Maybe that speeds the process up a little bit.

On the first question about business centers, yes, we think that there's some tremendous capacity, especially we have now six in Canada and we're going to continuously really grow much much quicker rate in Canada. The business centers in the US that we see great opportunities both in new markets as well as when we relocate a building to a larger facility. The old warehouses serve a great purpose for us as far as. becoming a business center because they have the right size and parking is not an issue at that level because we deliver about 60% of the goods from our trucks out there as well. So we see a good runway for us, both U.S. and Canada and potential in international markets for the business centers as well. So that is it. As far as looking at the additional property that we need to, we will take that into account if we have got to get into the right market, and then how we can create value for any out parcels or additional properties that are nearby us that could open up opportunities for us to expand in the right place. So we are open to those opportunities as well.

Thank you. And our next question comes from the line of Stephen Zacon with Citi. Your line is open.

Great. Good evening. Thanks very much for taking my question. A couple of follow-ups. First of all, you've talked about a cannibalization to comps for the last couple of months. Do you expect that to be a headwind throughout 2026? And then just on some of the questions around the inflation outlook, on the non-food side, based on what you're seeing in the business, do you expect non-foods inflation to kind of stay in this range for the next couple of quarters? Basically trying to understand, are we at some of the peak pressure or could it get a little bit higher from here? Thanks.

Sure. Yeah. Thanks for the questions. On cannibalization, you know, it's really a reflection of our continued investment in filling warehouses to really make sure that we're continuing to grow our overall sales in those markets and relieve some of the pressure in some of our busier warehouses. And so I wouldn't see any reason why that would change dramatically in the future, because that's a strategy that's working for us well in terms of continuing to grow our overall sales and grow our overall profitability in the markets in which we operate. And then from an inflation point of view, I think, as I mentioned earlier, we think that from everything we see today on tariffs, we've been proactive in managing that. And so from everything that we're dealing with today, I think what you're hearing from us on inflation is how we see it at the moment. But the dilemma, as I mentioned earlier, is we can't really predict what might happen in the by other players in the market, if you like, or events. So that's the bit that's obviously hard for us to predict. But I wouldn't say that we're seeing anything in our plans that would cause that to change significantly.

Okay, understood. Thanks very much.

And our final question comes from the line of Oliver Chen with TD Cowan. Your line is open.

Hi, Gary and Ron. On the digital roadmap, there's been a lot of customer-centric innovation you've done What's low-hanging fruit ahead that you're most excited about? And then on Kirkland Signature, which is iconic, what's next? Is it just tweaks or is it a similar strategy? Some of the language in this call, leaning into chaos, that's probably a product of the environment, but is there anything different about how you'll continue to amplify that and maintain how great it is? Thanks a lot.

Yeah, thanks, Oliver. On the first part of your question, we've You're right. We've spent a lot of time as a team focusing on how can we continue to invest in improving the digital experience and making it more convenient for members to shop, and we've had some good progress in those areas. I think we continue to see opportunities to improve the member experience through the app and through the website, and particularly in investing in capabilities that deliver more targeted and relevant personal messaging for members. That's definitely one of the highest priorities that we're focused on. And you've heard us give a couple of examples of things that we're starting to do there, but you should certainly expect to see more of those opportunities going forward to drive, whether it's visits into the warehouse or items in the basket or more engagement online with our members for e-commerce sales. And then Kirkland Signature, I think just briefly on that, you know, overall, our view on Kirkland Signature is that it's all about delivering quality, value, and innovation for members. And if we see examples where there are gaps for our members where we think there's items that we can deliver that value and quality that doesn't exist today, then that's what we're doing and how we're innovating and delivering new products for our members. We don't have a specific target for Kirkland Signature. It really is about when there's that value and that opportunity there with the member. And of course, we love working with national brands as well to develop and grow those partnerships. But Kirkland Signature also provides a a sort of healthy tension there to make sure that that value and quality is there for our members. And so we'll continue to innovate and grow those items where we think we can deliver that value for the member. And it's certainly over the last few years has continued to grow in penetration because of the great work our teams have done in building out those items and delivering that value for the member.

Thanks a lot. Best regards. Maybe you should go to 24 hours, by the way.

We'll take that into consideration.

And ladies and gentlemen, that concludes our question and answer session and today's call. We thank you for your participation and you may now disconnect.