Q3 2025 Earnings Call Transcript

Ladies and gentlemen, thank you for standing by. My name is Abby, and I will be your conference operator today. At this time, I would like to welcome everyone to the Costco Wholesale Corporation Third Quarter 2025 Conference Call. All lines have been placed on mute to prevent any background noise.

After the speakers' 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 1 a second time. Thank you.

I would now like to turn the conference over to Gary Millerchip, Chief Financial Officer. You may begin.

Good afternoon, everyone, and thank you for joining Costco Wholesale Corporation's third quarter 2025 earnings call. I would 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 intended as substitutes for net sales presented in accordance with GAAP. Before we dive into our financial results, I am delighted to say that Ron Vachris is joining us again for today's call. I will now hand over to Ron for some opening comments.

Thank you, Gary, and good afternoon, everyone. And thank you for joining us today. As we wrap up the third quarter of fiscal 2025, let me make a few brief comments on some of the highlights. Since our last earnings call, we have opened nine warehouses including relocation in Melbourne, Australia, our thirty-seventh warehouse in Japan, and seven net new locations in the U.S.

We plan to open another 10 warehouses during the fourth fiscal quarter which will include our second warehouse in Sweden, our twentieth warehouse in Korea, and our hundred and tenth warehouse in Canada. For this fiscal year, we expect to open 27 new warehouses, including three relocations, for a total of 24 net new buildings. This will bring our total warehouse count to 914 worldwide. Our merchandising and operations team did a fantastic job in the quarter, delivering some strong financial results while also maintaining our competitive price position despite a challenging macroeconomic backdrop.

Capitalizing on the focus and scale we are able to achieve through our limited SKU count and global footprint, we continue to increase the overall value of our membership, including extended gas station opening hours and lowering prices on some key items such as eggs, butter, and olive oil. The combination of expanded gas station hours, new gas station openings, and lower prices at the pump have led us to having two of our all-time highest gallon weeks in the U.S. during the last month. In times of consumer uncertainty, our Kirkland Signature brand is uniquely positioned to provide our members with great quality and great values.

And during the third quarter, sales of Kirkland Signature items again outpaced our overall sales growth, with our KS sales penetration up approximately 50 basis points year over year. We continue to move more Kirkland Signature product sourcing into the countries or regions the items are sold, and this is helping us to lower costs and mitigate some of the potential impacts of tariffs. We are remaining agile as the situation with tariffs evolves, while also supporting the commitments we have made with our long-term suppliers. As an example of this, during the third quarter, we rerouted many goods sourced from countries with large tariff exposure to our non-U.S. markets.

In the U.S., we pulled forward some items that we had planned for the summer and sourced additional locally produced goods to reduce tariff impacts and ensure that we were in stock. Actions such as these are allowing us to continue to provide great values for our members while also delivering value to our shareholders. Digital and technology are important parts of our future growth, and we are investing to improve the member experience. A recent example in e-commerce is the launch of a buy now, pay later offering through our partnership with Affirm.

This new program allows our members greater access to the Costco Wholesale Corporation values on big-ticket items such as appliances, furniture, consumer electronics, and much more at exclusive rates for the Costco Wholesale Corporation members. While still early days, we have been pleased with the initial sales results. And in our warehouses, we continue to work on opportunities to further improve the member experience. Please be on the lookout for several new technology pilots we are focusing on to help our members check out through our front end at a faster pace.

As we look ahead to the remainder of the fiscal year, while the impacts of tariffs and the outlook for the economy in general remain unknown, we are confident in the ability of our operators and merchants to rise to the challenges and continue to offer great service and find consistent values for our members. Our results in recent quarters have reinforced for us that in uncertain times, our values resonate with members as strongly as ever. 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.

Thanks, Ron. In today's press release, we reported operating results for the third quarter of fiscal 2025. The twelve weeks ended on May. We have once again published a slide deck on our investor site under Events and Presentations with supplemental information to support today's press release. You might find it helpful to have this presentation in front of you as I walk through our results.

Net income for the third quarter came in at $1.9 billion, or $4.28 per diluted share, up more than 13% from $1.68 billion or $3.78 per diluted share in the third quarter last year. These results were driven by strong sales and margin performance, despite the headwind of a $130 million LIFO charge in the quarter and operating income being negatively impacted by a catch-up accrual of $40 million for the increase in employee vacation days included in our March 2025 employee agreement. As in Q2, foreign exchange rates also negatively impacted the translation of international net income to U.S. dollars.

In Q3, the impact was $35 million or $0.08 per diluted share. Net sales for the third quarter were $61.96 billion, an increase of 8% from $57.39 billion in the third quarter last year. U.S. comparable sales were up 6.6% or 7.9% excluding gas deflation. Canada comp sales were up 2.9% or 7.8% adjusted for gas deflation and FX.

Other international comp sales were up 3.2%, or 8.5% adjusted, and this all led to total company comp sales of 5.7% or 8% adjusted. Finally, e-commerce comp sales were up 14.8% or 15.7% adjusted for FX. In terms of Q3 comp sales metrics, foreign currencies relative to the U.S. dollar negatively impacted sales by approximately 1.2%, while gas price deflation negatively impacted sales by approximately 1.1%. Traffic or shopping frequency increased 5.2% worldwide and 5.5% in the U.S.

Our average transaction or ticket was up 0.4% worldwide and up 1.1% in the U.S. This includes the headwinds from gas deflation and FX. Adjusted for those items, tickets would have been up 2.7% worldwide, and 2.3% in the U.S. Moving down the income statement to membership fee income.

We reported membership fee income of $1.24 billion, an increase of $117 million or 10.4% year over year. Membership fee income growth was 11.4% excluding FX. And the recent membership fee increase represented approximately 4.6% of fee income in the quarter. In terms of renewal rates at Q3 end, our U.S. and Canada renewal rate was 92.7%.

And the worldwide rate came in at 90.2%. As cohorts of new members from digital acquisition campaigns and warehouse openings in Asia move in and out of the calculation, there will continue to be some volatility in this number quarter to quarter. The decreases in the renewal rates in Q3 versus Q2 were primarily attributable to sign-ups from a Groupon promotion in the fall of 2023 entering the renewal rate calculation for the first time this quarter. Higher penetration of online sign-ups entering the renewal rate calculation also contributes to the lower renewal rate.

These new digital memberships are a net positive, as they grow the overall membership base and are generally younger members, but they also renew at a slightly lower rate. We ended Q3 with 79.6 million paid household members, up 6.8% versus last year, and 42.8 million cardholders, up 6.6% year over year. At Q3 end, we had 37.6 million paid executive memberships, up 9% versus last year. Executive members represented 47.3% of paid members and 73.1% of worldwide sales.

Turning now to gross margin. Our reported rate in the third quarter was higher year over year by 41 basis points, coming in at 11.25% compared to 10.84% last year. And up 29 basis points excluding gas deflation. Core was higher by 36 basis points, and higher by 27 basis points without gas deflation.

In terms of core margins on their own sales, our core on core margins were higher by 36 basis points. A significant part of the increase was driven by our fresh departments, where strong sales leverage benefited our payroll costs and spoilage results. Additionally, the decrease in some key commodity and ingredient costs such as dairy, butter, eggs, and olive oil were a tailwind in fresh and food and sundries. In general, we feel margin pressure during times of inflation on these types of ingredients as we keep prices low for our members.

And the opposite is often true when prices fall, we feel the margin relief faster while also being able to lower prices more quickly than our competitors. An example of this during the quarter is our croissant program, where we held prices lower when butter costs were elevated and are now seeing margin relief as those costs have come down. Food and sundries margin also increased during the quarter. In this case, we were able to lower egg prices by approximately 10% and butter by $1 per cell unit or approximately 7% while also returning margins to more normal levels.

Lastly, in core on core, non-food margins were up slightly worldwide, but down slightly in the U.S. Ancillary and other businesses gross margin was higher by 30 basis points and 27 basis points without gas deflation. Improved margins in gas and e-commerce were the main drivers of the increase. LIFO negatively impacted the growth margin rate by 23 basis points, both with and without gas deflation.

We had a $130 million LIFO charge in Q3 this year, compared to an $11 million credit in Q3 last year. I will share more color on LIFO and inflation a little later in the call. Other was lower by two basis points both with and without gas deflation. This relates to the catch-up accrual for the increased employee vacation days included in our March 2025 employee agreement.

This change impacts gross margin for the employees who work in our supply chain or manufacturing departments. Moving now to SG&A. Our reported SG&A rate in the third quarter was higher or worse year over year by 20 basis points, coming in at 9.16% compared to last year's 8.96%. SG&A was higher or worse by 11 basis points adjusted for gas deflation.

The operations component of SG&A was higher or worse 13 basis points and five basis points without gas deflation. This increase was due to our investment in employee wages, partially offset by sales leverage and productivity improvements. The incremental year over year impact from this year's March employee agreement was mid-single-digit basis points, on top of the low double-digit basis point impact from our July 2024 wage increase. We will lap the July increase ten weeks into the sixteen-week fiscal fourth quarter.

Central was higher or worse two basis points, and one basis point without gas deflation, Stock compensation was lower or better by one basis point both with and without gas deflation, Preopening was higher or worse by one basis point both with and without gas deflation, driven by more new warehouse openings in the quarter this year, Other was higher or worse by five basis points both with and without gas deflation, reflecting the catch-up accrual for higher vacation days in our 2025 employee agreement. Below the operating income line, net interest and other was $50 million this year, versus $87 million last year.

The difference year over year was largely attributable to foreign exchange. And in terms of our income taxes, our tax rate in Q3 was 26.2% compared to 26.4% in Q3 last year. Turning now to some key items of note in the quarter. Capital expenditure in Q3 was approximately $1.13 billion and we estimate CapEx for the full year will be a little over $5 billion.

Taking a deeper look into core merchandising sales, fresh category comparable sales were up high single digits. This was led by double-digit growth in meat, with produce also performing very well in the quarter. Non-foods also 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 our members even as they remain very choiceful in their spending on discretionary items.

In the quarter, gold and jewelry, majors, toys, housewares, and home furnishings were all up double digits. While we continue to grow share in most non-food departments, we are seeing some deceleration in year-over-year growth as we start to lap tougher compares in bullion and gift card sales from a year ago. Food and sundries had mid to high single-digit comps, cooler and frozen food showing the strongest results. In addition to lowering prices on butter and eggs, a few other examples where we were able to lower prices in the quarter to provide greater value to our members included two-liter Kirkland Signature organic extra virgin olive oil, from $24.99 to $18.39, Kirkland Signature chocolate macadamia clusters from $17.99 to $14.69, and Kirkland Signature organic mixed nut butter from $8.69 to $7.59. As Ron mentioned earlier, we are continuing to move more items to locally sourced production, which is allowing us to lower prices in those markets.

A notable example in the quarter was our Kirkland Signature Ultra Clean laundry products. These SKUs are now sourced in Asia for our APAC warehouses, allowing us to significantly lower transportation costs and reduce member prices in the region by approximately 40%. In the U.S., we are sourcing more American-made goods where available, including items such as mattresses, pillows, and plastic resin goods. New 15 to 20% value compared to the national brand alternative with equal or better quality.

In Q3, we launched over 40 new KS items, ranging from mini muffin bites to smoked pork ribs and various new apparel items. Within ancillary businesses, pharmacy and optical departments led the way. We are able to bring significant value to our members in optical through the combination of our labs, which manufacture our own high-quality lenses, coupled with great prices on a wide range of frames, including luxury brands. Gas comps were negative low double digits during the quarter, driven by a lower average price per gallon.

I will now share some additional color on inflation and tariffs. Fresh and food and sundries inflation remained relatively similar to last quarter. In non-foods, we saw low single-digit inflation return for the first time in a number of quarters. This was driven primarily by imported items.

As a reminder, about a third of our sales in the U.S. are imported, and about two-thirds of those sales are in non-foods. Items imported from China represent about 8% of total U.S. sales. The inflation experience in non-foods was the primary driver of the $130 million LIFO charge for the quarter. Which is calculated 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 current quarter.

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 to $50 million LIFO charge in the fourth quarter. Any change in the level of inflation in the fourth quarter could increase or decrease the size of that charge. As we navigate an evolving environment with tariffs, we are working closely with our suppliers to find ways to mitigate the impact on cost. Including moving production and sourcing to other countries where it makes sense to do so.

As Ron mentioned earlier, we are leveraging our scale, and global operations to help inform this approach. At Costco Wholesale Corporation, we remain committed to providing quality items at the lowest possible prices, and raising prices is always seen as a last resort. The evolving landscape with tariffs is adding complexity and challenges for how we operate our business, but we believe our expertise in buying and limited SKU count model give us greater agility to navigate the environment and ultimately increase our member values compared to the market. The global supply chain remains relatively stable, although as previously shared, shipping delivery dates are generally less predictable than they were pre-COVID.

While the spot rate for shipping containers has increased recently, in response to a short-term increase in demand, during the window that reciprocal tariffs have been paused our shipping is generally covered by contracts, so we have not seen any material impact. Turning now to digital and e-commerce. We continue to make progress with technology. As shared on last quarter's call, one of our key focus areas is building capabilities to deliver more personal relevant experiences for our members helping them save time and money.

In the third quarter, successes included a targeted Mother's Day campaign to members who had purchased traditional Mother's Day gifts last year and the launch of their personalized product recommendation hub for members showcasing items based on previous browsing history, new items they might find relevant, and best-selling items in their geographical area. Golden jewelry, toys, health and beauty, majors, housewares, small electrics, and apparel all grew double digits year over year. We continue to grow share in big and bulky items sold online, powered by our investment in Costco Wholesale Corporation logistics.

The combination of great values and the delivery experience that includes installation, and haul away of old items is resonating extremely well with our members. And resulted in a 31% increase in items delivered in the quarter. Costco Wholesale Corporation Next, our curated market also continues to show healthy year over year growth. In Q3 fiscal year 2025, our sales on Costco Wholesale Corporation Next equaled our total sales for all of fiscal year 2022. And we are excited about the pipeline of new vendors in development for future rollout.

Finally, in terms of upcoming releases, we will announce our May sales results for the four weeks ended Sunday, June, on Wednesday, June after market closed. That concludes our prepared remarks, and we will now open the line up for questions.

Thank you. And we will now begin the question and answer session. If you have dialed in and would like to ask a question, please press 1 on your telephone keypad to raise your hand and join the queue. If you are 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 to join the queue. And our first question comes from the line of Simeon Gutman with Morgan Stanley. Your line is open.

Hey, everyone. I wanted to ask Ron since he is in the room. So Costco Wholesale Corporation has continually invested in price. And the nice thing is that you do not really have to catch up over time.

Curious what you are telling the merchants right now given this moment in time. Do you put, you know, do you put the pedal to the metal in anything different about the posture? And are you seeing in places where price you are holding relative to the market, are you seeing tonnage and unit volume actually change meaningfully? Thanks.

Yeah. Very good questions. I mean, you know, it is quite complicated, as Gary said, now as we are dealing with the moving tariff scenes. As things continue to change each day.

We have been very fortunate with some of the key commodities coming down, and then our buyers are immediately the first ones down in those goods. So we take every advantage of every opportunity that we can lower prices. And we have seen our competitive landscape improve slightly at the latter part of the quarter, which is very good for us. So it means that we are doing the right thing.

But we are going to continue to invest in price. It is what we do. It is how we grow our business, and we are going to continue to try and mitigate as much of this impact on tariffs as we can for our members. So it is as we have always done, it is full force ahead on lowering prices where we can.

Okay. Thank you so much.

And our next question comes from the line of Christopher Horvers with JPMorgan. Your line is open.

Thanks. Good evening, guys. So quick follow-up, and on that last question and then an add-on. So when Ron, when you mentioned that it improved in the latter half of the latter part of the quarter, is that because your peers are raising prices?

So, you know, how are price gaps changing given the inflation that is going on out there? And secondly, as you think about, you know, the March, April period, I was you did extremely well in the non-foods category. Clearly, there a lot of that is share. To what extent you quantify, you know, pull forward in some of these, tariff items that you saw in the in, like, the March, April?

Thanks very much.

You are welcome. You know, I think that the delta improvement has really been a very hard focus on movement and trying to work with our suppliers and lowering price wherever we can. I truly believe that we are the first one down when wherever we have those opportunities. And that does create that improved delta for us.

So we are watching pricing daily and if not hourly, on every key commodity. And you have commodities like butter and eggs come down. There is quite a halo effect to many different items. So our buyers are on top of that, you know, talking to all the suppliers that would benefit from those reductions in cost and trying to really move that those products into lower cost as soon as we can.

I cannot speak for the others, but I can speak for us. It is about lowering the prices as soon as we can and take advantage of those opportunities. As far as non-foods, yeah, we did. We you know, as we saw things starting to build on this tariff front, our buyers were very proactive, and they pulled a lot forward.

A lot of our summer goods, most of our patio program, our sporting goods program got in early this year, got it in ahead of the pro the tariff impacts. And that allowed us to hold prices or come just slightly up on prices when we needed to be. So that that has really helped. And then some key categories that we have had good healthy inventory on such furniture, appliances are not so much impacted, which has been a big driver for us in non-foods as well.

So it was been strategic movement of goods, and, like I spoke about, things that were hit with a higher tariff we partnered with our other regions around the world where the non-U.S. tariff impacts.

And then anything in terms of how much demand may be pulled forward?

You know, I think that there was slight we saw a slight impact on it. To quantify it, it was very tough to do. It was very tough to quantify that we saw any certain percent of a pull forward of a fear of tariffs.

Got it. Thanks very much.

You are welcome.

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.

Gary, it seemed like you were sending a reminder that you will soon lap this outsized growth from precious metals and gift cards. To what extent should we recalibrate our expectations as Costco Wholesale Corporation laps some of those outside games? If you quantify that, that would be super helpful. And then as part of that, at what point does Costco Wholesale Corporation just reach a limitation to its rate of growth in the United States?

The company's got to be mindful of depleting the overall membership experience as these clubs get so busy and it is difficult to find parking. It is difficult to navigate through the store. It takes a little longer to get in and out. Percentage of your clubs in the United States would you say are currently at that level or approaching that level?

Thank you very much.

Hi, Michael. Yeah. Thanks for the questions. So just to cover the first part, I think Ron will jump in on the second part of the question.

Yeah. We were we were sharing on the call. You may recall we have been sharing on previous quarters that we were up double digits in non-foods and we were high single digits this quarter. So part of the commentary that I shared was to remind you that some of that would be a of of the fact that we are cycling volume starting to flow through on a year over year basis, particularly online, and then also gift cards.

We had a particularly strong program of gift cards last year. So as we cycle those you saw still very strong non-food sales and strong share gains, but number would would decelerate it into that high single digit range. I think it is kinda difficult to to predict, obviously, where the consumer behavior goes in the future because of some of the things that that Ron mentioned around the uncertainty. And, also, when you look at our individual month to month data, you know, we obviously are sharing very transparently every month what our sales results are, and there are gonna be periods where like we shared earlier in in April, where there is probably if you look at individual item, categories like consumer electronics and even in paper, paper products that were it looked like a higher level of sales in in April because of that.

So you probably see a little bit of relief in some of those areas flowing through in the next couple of months. But I but I would not really say you know, we we have anything other than confidence in what our buyers are doing in finding great quality items and great value and newness in terms of new and exciting items for the member. Everything we are still seeing right now would be the sort of the the state of the consumer is that they are very focused on those three things, but where you can meet those three things really well with value and quality and newness, our members are still spending and and buying non-foods items.

So think that the teams are doing a great job, and we continue to see opportunity to to grow in that space.

And on the operations side, you know, it is it is a strategic priority for all of us in the company right now is that continue to how we improve the member experience in our high volume warehouses. As we speak about the fourth quarter openings, about 80% of those warehouses were opening are gonna cannibalize some high volume locations for us. That is gonna take some relief off. So we strategically look at new markets for openings, but with the real importance on strategically cannibalizing those warehouses where we can make that improvement of of member experience in there as well.

The recent expansion of gasoline hours was a great indicator that the throughput for our members improved nicely, and we saw that immediately in gallon increases. And on the technology front, we we have realized with some of these pilots as we are working through these different systems to to speed up the front end experience and and get that moving flowing quickly. The backside of that is it turns over parking spaces. Quicker.

And when you turn over parking spaces quicker, it makes the whole experience better. So we are very mindful of the high volume warehouses we have. And we are strategically working on many different fronts to how do we continue to grow the the volume in those existing buildings and continue to infill and look for new markets in the U.S. as we do in all the regions around the world.

Guess maybe just one thing to add to to Ron's comment, Michael, as well. I think you see in our 10-K each we show year by year sort of vintage of our warehouses. And I think the ones that Ron's particularly talking about where we have that over $400 million of sales, which is, I think, what, 40 or so warehouses where we are in that that sort of category. So they are the highest priority there.

I think as we do that, there is still tremendous growth in the less mature warehouses and we see year over year continued growth. So I think that gives us a lot of confidence that we make those enhancements that Ron mentioned, we still have significant opportunity the vast majority of our warehouses to continue to grow and to for them to look and to mature like higher our higher sales warehouses today.

Thank you very much, and good luck.

Thank you.

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

Good afternoon, guys. Appreciate the time. I think you guys have increased your EBIT margin on a year over year basis. Now by eight or maybe nine quarters in a row, however slight.

Even though we have had a pretty funky macro environment, tariffs obviously being the the latest piece of that. Is there any reason we would see that trend change over the next few quarters? Because it does seem like it is bit of conscious decision, not just randomness. Thanks.

Hi, Scott. Yeah. Thanks for the question. I would say overall, I know I mentioned this last quarter as well when we talked about the gross margin rate that we really are probably less focused than you might think on the individual quarters.

We are I think, individual more really focused on how we manage the business for the long term, and so you are gonna see fluctuations quarter by quarter as we make decisions to invest in the business at certain times to grow the company and and certainly at other times like we saw in this quarter, of course, with gross margin rate in particular. We we saw some real benefits in fresh productivity and lower spoilage and and also some of the benefits of deflation in in certain commodities. I think it is fair to look at our model over the longer term I would not particularly pick a number of quarters, but I think over the longer term, looking at generally how we have been able to grow the business and and grow profitability, And I think our philosophy overall is, as you I know you have heard probably my predecessor, Richard, say this many times is that our goal is to continue finding ways to drive value for our members, lowering our prices consistently, and doing that through our global buying, doing that for in-country production.

Kirkland Signature growth, as Ron mentioned earlier, even some of the newer opportunities like e-commerce growth and getting more profitable in e-commerce and building the retail media business, But in all cases, our our philosophy is how do we take nice percent of that value and give it back to the member to drive top line? And we do think over time, we can still be increasing our margin a little bit as part of that plan. But that is our overall philosophy, so we would not particularly guide to we do not guide at all, as you know, would not guide to thinking about an individual quarterly cadence, but that is more philosophically how we think about growing the company.

Understood. Thanks for the time.

Our next question comes from the line of Jiang Ma with Bernstein. Great. Thank you for taking my question. Gary, I wanted to follow-up on your LIFO comment.

Clearly, a lot of your peers use remit inventory accounting, which is likely gonna drive margins maybe in the opposite direction in the next quarter, which you For for your LIFO estimates about the other kind of 40, $50 million of LIFO charge in Q4 Am I reading that correctly? You are suggesting a moderation in the LIFO impact in Q4 and in the coming quarters. How should we compare that to in the 2022 period where you had more of a full twelve-month impact of LIFO headwind? And how does today's environment differ from then?

Thank you.

Sure. I will maybe break the question into a couple of parts because I think it is probably helpful just to explain how hate to get sort of too technical on the account side, but just at least give a brief explanation of how we follow rules in calculating our our LIFO charge. So, essentially and you may recall the first two quarters of this year we were seeing slight deflation in non-food. So we actually had a credit to LIFO charge for the first February largely because food foods and sundries and fresh were generally sort of fairly stable and and of low inflation, which continues to be true, and non-foods being deflationary.

In the third quarter, we saw non-foods start to become slightly inflationary And so because of the way our LIFO calculation works, we are essentially estimating for the full year what the what the what the LIFO charge will be. So we are saying what will our inventory net landing cost of an item times the number of items that we have in inventory at the end of the year how will that cost compare to the cost at the start of the year? What we do is we we sort of calculate what what we estimate that will be for the end of the year and then we take the proportionate amount for the number of quarters.

So if you think about the third quarter, we saw higher inflation as we were calculating out, our estimate our point estimate for the end of the year based on that calculation is about a hundred and $5 million, call it, for the full year based on the current inflation rate that we are seeing. So we have to take three quarters or not quite three quarters, nine thirteen. So nine periods out of 13 periods, in the year to date catch up in in the quarter alone. So $130 million charge is not a charge for the quarter.

It is really a true-up for the whole of the year for our estimates of inflation. And because we will have four thirteenth of that charge in the fourth quarter, if inflation stays the same, that is where the 40 to $50 million incremental charge comes in the fourth quarter. So really, all of that is getting us to the same data that we are looking at today, which is saying we believe there is inflation in our system because of the higher cost in non-foods. The inflation rate has turned slightly positive on on non-foods, We are estimating based on current inflation rates that we see, the charge for the year will be a hundred and 45,000,000. We have had to catch that up in the first three quarters, so it is a hundred and $30 million charge.

In the in the first three quarters that we show in Q3, and then there will be an 40 to $50 million charge in Q4. That 40 to $50 million estimate is really just based on what our current inflation rate is. So if that inflation rate stays the same, if if the tariff situation does not really change materially, that is our best estimate of what that outcome would be for the year. If we were to see higher tariffs, which led to higher cost of goods, or lower tariffs and lower cost of goods that could move that number up or down, and we would have to true it up for the whole year in the fourth quarter because we are it is an estimate of the inventory value at the end of the year.

So I am sorry if that was a bit long windy, but I was trying to make sure I am giving you kinda how the the math works because it it could feel a bit misleading that we are saying there was a and $30 million of inflation during the quarter, but it is really a true-up for the first three quarters of the year. And then I would say, in general, that that still means that inflation is is below where it would have been back in the post-COVID period. Know, our inventory levels are anywhere between $1,213,000,000,000 dollars. And so if you think of a charge of a hundred and $45 million of of in of LIFO charge, that is really only one to one and a half percent of inflation overall within our within our LIFO calculation.

So it is still relatively low overall inflation, but it certainly is a change in trajectory from what we were seeing in the first two quarters.

That is very helpful. Thank you. Just a quick follow-up. Does that some of that bleed into the first half of next year as well?

It it it really depends on what happens with with inflation going forward. So it would not we know if we we take the new level of inflation at the end of the fiscal year and then our LIFO forecast for 2026, be based on whether we think whether we think inventory the amount of inventory and the the the net landing cost of the product will increase in that year. So it really depend on there would not be a carryover from current inflation into 2026. But if inflation was to rise again, that could create a higher life LIFO charge in '26 or a lower LIFO charge if if tariffs reduced.

So just to clarify, the, the LIFO charge, the 12 to 13,000,000,000 is for U.S. inventory because we still on the retail method for our most of our international countries. So it is really based on our U.S. business that the LIFO charges incur.

Right. Thank you.

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

Hi, thanks. Just one quick clarification. And then follow-up on digital. On the inflation in grocery last quarter, said it was slightly positive. Was that around 01%? Is that the the sort of range we are talking about?

Yeah. It would be in that range, maybe slight just slightly higher than that, Greg, but you are in the right ballpark. Low single digits for sure. And again, very similar to last quarter.

In grocery, it is it is a bit like it has been for the year to date. There are some items that are inflationary within grocery. So while egg prices have come down, as we mentioned earlier on it, in within the year, there is still inflationary compared to what we would have seen in ex last year. Things like pulp are still inflationary as well within grocery, but then you have got butterfly and cheap flour and cheese and some of the dairy items that have turned deflationary.

So there is quite a bit of moving parts in there, but it really has not changed that materially. Since the earlier part of the year. Overall.

And what I would love to do is just go deeper on digital just given, you know, the the double you know, mid-teens growth. Can you just level set us now on what percentage of the business is digital? And particularly that Costco Wholesale Corporation logistics up 31%. What percentage of e-commerce is now done through Costco Wholesale Corporation logistics?

Yeah. On the first part of the question, it is it depends on the definition you use. So if you just do the sort of math on our business and how we define digital, which as a reminder does not include the delivery solutions that we offer through Instacart. It does not include our travel business where most of it would be online.

So there is a number of elements that I think others might include in there. Sort of e-commerce business that we would not. So on on the straight map on on how we define it, it would be about 8% of our business. If we included some of the components that others would include, it probably takes it to slightly north of 10%.

And then if you would take gas out of our total sales, which I I know, obviously, there is not an e-commerce element to gas, it is it is around the 12% of of total sales that we generate today, Greg. And then in terms of yeah.

For Costco Wholesale Corporation Logistics? Costco Wholesale Corporation Logistics, it it this is Ron. It is about 20 to 25% of our total deliveries for Costco Wholesale Corporation Logistics it is about 80 to 85% of our big and bulky. We do not run know, we make our buyers make decisions of what to put through that network and what not to put through it.

And so they look for the the best cost delivery source. And so we we know that big and bulky patio furniture television safes, those kind of things, All all but the super specialty stuff, run through Costco Wholesale Corporation Logistics. So a big chunk of that business is going through the network. Big and bulky.

Is there any any members that have not used your digital yet? In some way, shape, or form? Or is it still only half the people that really use it?

Yeah. It is over half of the downloaded the app. For sure, but there is still plenty of opportunity for growth in our mind. We still see it as an area where we would expect to outpace our overall growth.

And as we continue to improve the member experience, with enhancements every quarter, Greg, around whether it is the inventory available on the app or improving the search functionality, improving the, you know, the the way in which we communicate with members as I talked about earlier on the call. We believe all of those things are gonna drive more digital engagement think tied to even some of the comments that Ron was making about speed of checkout where members use the digital wallet and have their their payment card integrated within the wallet is significant. Increases the speed of checkout through the check lane in the warehouse as well.

So we still think there is plenty of opportunity to keep driving higher penetration of digital engagement with our members. And and we think it has got a runway to continue to grow in the future.

Great quarter, and thanks for the details.

Sure. Thank you.

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

Ron, you called out some technology efforts at the front end as as an we double click on that a little bit? And then with regards to the extended hours of operation at the gas, stations themselves, have you thought about testing that within the clubs? Thanks.

Sure. The first question, yeah, as Gary said, we we found that digital really enhances the speed of checkout and so we are really working hard on the digital membership card usage as well. We have also engaged in some scan and go done by Costco Wholesale Corporation kind of, test that we are doing out there that had been extremely successful of of moving people through the lines and and expediting the transactions. We have seen some very, very early results have been very positive and great adoption from our members seeing that as well.

So we are just looking at the whole overall Our operations team is really focused on the front ends, and we know there is many benefits to that part of the Costco Wholesale Corporation experience of of moving people through much better. So it really is using the digital enhancements that we have available today and we think we will see some good things going through there. And, yeah, we know we continue to look at the the hours of the operation as well. Gas has been very accretive to to to gallon growth in in our sales in the gas business.

So we continue to look at the operation side of things as well. The warehouse hours.

Great. Thank you.

And our next question comes from the line of John Heinbockel with Guggenheim Securities. Your line is open.

Hey. Quick one for Gary, one for Ron. For Gary, I know you got a depot opening in Florida soon. Can you remind us on the supply chain side, distribution, transportation, what is the opportunity there to continue to lower cost, from from where we are now?

And then and then, Ron, have you, have you made any changes with regard to tariffs on how you think about receipts you know, demand planning over the next, I do not know, six months, and how you flow that in, how it is maybe for you to chase inventory, but how do you attack that if if if all?

Thanks, John. On the the depots, you know, I think that it is certainly interesting being new relatively new to the company to see really how efficiently we operate our our depot network as I think you may be familiar with. We generally are not really holding inventory in any of the depots. We are moving products straight through.

So I think it ties a little bit to your point of as we grow in scale, how do we make sure we optimize the network to to be even more efficient just because of the scale of operations that we have now. And we know that when we look at our most productive warehouses and highest volume areas, we see incremental leverage that is created in our overall financial model. So I do not think there would be anything we call out as being a change in strategy, but certainly, continuing to invest capital in places where it makes sense to optimize the network for depots, we think can can help continue to improve our efficiency.

And then I think the second part of it would probably be more in e-commerce as we as we are growing that business, we have built out the Costco Wholesale Corporation logistics network and and invested in especially on the West Side of the country, would say, when we when we acquired Innovel, there was a strong presence in the East, less presence in the West, and so we built out that network. And I think it is part of how we keep showing improvement quarter over quarter in the other gross margin line where e-commerce continues to improve. Part of that is really leveraging those investments to drive more scale and more efficiency in our e-commerce operations.

That is probably the the bigger area where you see it now now results quarter to quarter.

And the question on strategic planning of future buying, yes, we our buyers are extensively going through short term midterm, and long term strategies as far as buying goes. As you know, the the continuous changing environment out there has presented a lot of opportunities for that group to to stay on top of this. And we are having to make some decisions based on the current information that we know today. As you can imagine, with our volume and the size of our company, our commitments are six to eight months out for supply.

With a lot of our suppliers. And in doing that, you know, we are empowering our buyers to make decisions now. Based on the the importance of the item. And is it something that we can replace with something domestically here?

Or is it something that we need to go ahead and and move on quickly and bring in prior to any future tariff increases? So they are they have a strategic plan out there. They are looking at different areas. We we went through a lot of this exercise during the COVID days when you could not get goods out of China for a different reason.

That is a shipping back that we have there. And I think our buy and I know our buying team executed great results during those periods of being very nimble. And going out and finding new places that bring value and quality to our members. So we are gonna remain nimble.

We are gonna make good decisions, and nice part is we do have some non-U.S. business that we can work closely with if if we do get caught with something at a higher tariff rate that we do not feel, would be something good for our members here in the U.S. We can work with the other regions to move goods out there as well.

Thank you.

You are welcome.

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

Good afternoon. Thanks for taking my questions. So two quick ones for me. So just going back to core on core margin improvement.

Gary, do you expect some of the positive drivers you saw during the quarter to continue near term? Then second, just on tariffs, just given maybe there is some hopes out there that some these tariffs will be rolled back. If we do see that, would you expect your vendors to reduce some of the tariff-induced price increases?

Yes. Thanks, Rupesh. On the core gross margin, I would say, some of those were fairly unique to the quarter in the sense that the adjustment that we saw around some of the deflation in some of the ingredients that I talked around around butter and eggs and dairy. And I think as you you know, we continue to look for ways to invest in the member to drive top line growth in our sales.

So I think, again, versus sort of maybe talking about what might happen in the next few quarters, I think of really sort of reflecting what I shared earlier in the call where how how can we continue to invest those dollars to drive more value for the member, drive top line, growth in the company. I do think that, you know, we have been able to be somewhat nimble in that if if there are continued impacts on inflation in non-foods, obviously, we could see some impact there that where we are giving back to the member essentially to try and hold on some of the increases there and and the benefit that we have had on things like Fresh in particular, where you look at the productivity improvements and spoilage improvements.

Obviously, those are the things that can potentially fund our investments in other areas to ensure that we are delivering for value more value for the member. So I think we would at it more on the longer term versus the short term benefits, but we will continue to look for ways to invest to drive top line growth in the business. And then I think from a tariff rollback, it is kind of really difficult to predict. Obviously, we are we are operating in really a dynamic environment, and we are we are staying agile.

I think all of our suppliers are staying agile, and, really, the focus is on how do we react to the the moment and make sure that we are there for our members in in managing price of the products and continuing to find the most relevant items for the member. So it is a little bit difficult to predict my what might happen around the corner. But I think as Ron mentioned earlier, we believe we are because of our limited SKU count and the expertise of our buyers and that long-term commitment to our suppliers that we have, we believe there is for us to continue to widen our value versus the market as we adapt to the changing environment.

Great. Thank you.

And our next question comes from the line of Kelly Bania with BMO Capital Markets.

Hi. Good evening. Thanks for taking our questions. Just wanted to try and see if we could understand your your stance on inventory planning here.

You made the comment that raising prices is is a last resort, which is clearly consistent with Costco Wholesale Corporation's pricing philosophy. But as we look out into the back half of this year, can you give us a sense of how much price that might not be able to mitigate that might end having to be passed on and how that could impact your unit, particularly on the discretionary side of the business, how you might be planning those And then, I guess, also with respect to inventory, are you seeing an environment that is supporting an elevated level of opportunistic buys in this in this dynamic environment.

Sure. Thanks, Kelly. You know, I I think as I mentioned a moment, ago, it is just such a dynamic environment right now that, really, the the focus that we have we have had in our buying teams is really staying agile to manage the situation. Our think I mentioned on the prepared comments, a lot of the focus the team has right now is as we look at the impact of tariffs where are the places we can work with our suppliers to find ways to be offsetting some of the impact of those where our places where we could potentially be sourcing with them from different countries if that is practical to to minimize the impact.

And in some cases, we are also looking at, I think, a benefit of being a limited SKU count model is we can look at rotating into different items and and and finding different assortment that makes more sense for the member. So I think to answer your question, it is probably you know, it is difficult to say in general terms because it really depends on the individual items and looking at how do we make sure we are delivering the best value for the member and delivering the right items that will really resonate with them and drive the volume that we allow allow us to keep those prices very low. And and really kind of doing it item by item.

I will give you a couple of examples that that might be helpful as we as we looked at what happened with Fresh, for example, during the last quarter, we saw inflation as a result of tariffs because we import certain fresh items from Central And South America. So on pineapples and bananas, for example, because they are key staple items for the member, and we felt it was important to to really, eliminate the impact there for the member by working with our suppliers and by us finding efficiencies and and accepting that there may be a margin impact, we we essentially held the price on those to make sure that we are protecting the member.

When we looked at we also sourced flowers from Central And South America. We looked at that item and decided that while we were able to offset some of the tariffs through similar activity that we did increase some price there because we felt that that was something that the the member would be able to absorb, and it was more of a discretionary item there. If I look at the non-food examples, you know, we are starting to look now because of the the potential impact of of tariffs is where are there places where are items that are produced in the U.S. where we might have opportunities to lean in more to some of those items as they have a great value.

It might be live goods, mattresses and pillows I mentioned, I think, the prepared comments on the call. Even U.S. outdoor furniture. Some of these areas where think there could be opportunities to really deliver value for the member when there are maybe some places where that value might not be there because of the impact of tariffs. Health and beauty would be another good example, I think, in nutritional items that have grown really strongly for us, and we see strong continued appetite for those items from members.

So looking to to really see where there are opportunities to to buy great items at great quality and value for our members there as well.

Thank you. That was was curious if I could just follow-up with a question on the Affirm partnership. And and the thought process there. Clearly, Costco Wholesale Corporation has maybe a more defined set of payment options for members than than typical retailers.

So just curious if you tested this and and and how what you expect to get out of this. Is it just more support for kind of the big and bulky purchases? Just any thoughts there?

Yeah. It is very much as you described. Kelly. We we saw that actually, we saw partly because with Affirm, has a white label product, if you like, where it is offering service members that there were some Costco Wholesale Corporation members that were already using Affirm as a solution for part of purchasing certain products at Costco Wholesale Corporation while not coming through our ecosystem and not getting the full value from Costco Wholesale Corporation with the the exclusive pricing that we can offer.

To members on the Affirm product when it is through our through our our website and through our digital solutions. And as we looked at the growth that we are seeing, which has been very strong in many of those big and bulky and large purchase items, we recognize there are some members that want to be able to structure those payments over a period of time, and we believe it is an opportunity for to be able to deliver more value for the member by having exclusive pricing there while also giving them more options in the way in which they can they can buy the product. Thank you.

And our next question comes from the line of Kate McShane with Goldman Sachs. Your line is open.

Hi, good afternoon. Thanks for taking our question. The numbers really do speak for themselves when it comes to membership growth. But we wondered if there was anything to note just given that it has been several months since the price increase.

In terms of any kind of member response, and international internationally, have you seen any kind of impact from Costco Wholesale Corporation being a U.S. Brand?

Yeah. Thanks, Kate. Overall, our membership I would say we are very pleased with the metrics. We we tend to look at it across renewal rates, continued sign-up activity overall, and then is the membership counts and the income growing.

And when we look at those three metrics, we are pleased with the the overall direction that we are seeing in all of those metrics. It is a little bit early in the renewal calculation still, have a really good feel for any impact from the membership fee increase. So we just be starting to see some of that into the number now, but nothing that we would flag as material in the in the numbers that we are seeing in renewal rate. I think as we shared before, we really have not heard a lot of member feedback.

I think the fact we waited seven years to increase the fee when we when we typically would do it in five, and so there was a level of understanding it may be coming and then also holding on many prices around the the the hot dog and the rotisserie chicken at times when inflation was higher as well. So nothing in general I would call out there and and and overall then in terms of, the international business to your question, you know, I would say that our members are very vocal in sharing feedback, and I think there is we certainly hear some feedback from members that they they they wish the relationship was was better today.

Between the the the countries. But but in terms of sales growth, as you saw in our published numbers, we continue to have really strong sales growth in Canada and international. In fact, was just looking this morning, all of our international countries had positive comp growth during the quarter as well. So there is really nothing that we call out other than think, there is definitely a recognition that that there is a is this, you know, tension at the moment between the relationships.

Thank you.

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

Hi, guys. Thanks for thanks for sneaking me in. I guess, I would had a question on the renewal rates and and know you flagged that they would be, coming in a little bit because of the nature of of the past sign up. Wait.

How long do you think this persists? You know, when do you think it may stabilize? And then any theories as to why these digital members renew at a lower rate? Do you have any strategies to address that?

Is it just the nature of the of of of the member or the the the new customers that are signing up? Just curious your thoughts on that. Thank you.

Yeah. Thanks, Peter. I would say overall, we expect it is likely to continue for a while. You may recall last quarter, it bumped up by 20 basis points.

This quarter, bumped down by 30 basis points. And so you you kinda have this lag of periods of time where we have got these digital promotion that we are doing that are coming into the into the the calculation and there are some members that are taking advantage of a unique promotion there, and they are also a younger an average younger age of member in that group as well. So we tend to see they renew at a slightly lower rate overall within digital. So I think this is something that we would expect to see for a period of time to come because of those factors.

And then you add to that that there was not really any impact from this in this quarter, but we do have Asian warehouses that open that have a large number of members per warehouse, you know, can be four four to five times average that we see in the U.S. per warehouse, and some of that is really in the first year just traveling long distances to come and see the warehouse for the first time and then we do see a lower renewal rate on those warehouses and the and the denominator is big. So it does have an impact there as well. So I do think you should expect that to continue for for the foreseeable future.

I think to the second part of your question that we do see as an opportunity, especially with the the digital members that are as we see more members start to sign up digitally, getting them into the warehouse, engaging with them more through more relevant and personalized communication, there is an opportunity to move those members up the loyalty curve and and renewal rates more more significantly. Part of that in in truth is also just over maturity in general. When we look at our younger members, they they generally renew at a slightly lower rate. And so it it is it is not a surprise to us that that is the case, but we think there is an opportunity for us to improve that renewal rate by continuing to engage with them more effectively digitally and making sure we we bring them into the warehouse.

That is helpful color. Thanks, Gary. Good luck.

Thanks.

And ladies and gentlemen, this will conclude our question and answer session and today's call. Thank you for your participation. And you may now disconnect.