COST (Trans): comps steady at 6.7%, membership growth slowed

Dolphin Research compiled notes from $Costco Wholesale(COST.US) FY26 Q4 (16 weeks ended Aug 30) earnings call

I. Key takeaways

1. IEEPA tariff refunds: net contribution of $0.15 per share in Q4, with ongoing separate disclosure

a. Q4 net income was $2.998 bn with diluted EPS of $6.75, including a one-time net benefit of $0.15 per share from tariff refunds. Ex-refund, net income and EPS grew 12.3% and 12.4% YoY, respectively.

b. Q4 refunds totaled $184 mn ($174 mn principal + $10 mn interest), slightly over one-third of the expected total. A similar amount was received in FY27 Q1, and most of it will be reinvested into member pricing.

c. Refunds and reinvestment are presented as non-recurring items under 'Other' in the GPM bridge, with a net contribution of 9 bps (same with/without fuel). They are excluded from core GPM, and net effects will continue to be disclosed separately each quarter in FY27.

2. FY27 guide: capex of Approx. $7.5 bn, plan to open 33 clubs (net +28)

a. FY26 capex was $6.4 bn (Q4 alone $2.21 bn). FY27 is planned at Approx. $7.5 bn, driven by new club pipeline build-out and external supply chain investments.

b. FY26 saw 28 openings (incl. 3 relocations) and net +25, bringing the global count to 939. The planned 33 in FY27 include 5 relocations, with 4 in Europe, 5 in Canada, and 1 in Mexico, while Asia and Australia are primarily slated for FY28.

c. Capex has grown at a high pace since FY25 for three straight years. Growth is expected to moderate after FY27.

3. Membership fee: this quarter is the last YoY benefit from the U.S./Canada price hike

a. Membership fee revenue was $1.849 bn, up $125 mn or 7.3% YoY (+7.7% FX-adj.). The Sep 2024 U.S./Canada fee hike contribution is now under 1 ppt, and the base effect fully rolls off after Q4.

b. Ex-fee hike and FX, growth was 6.8%, driven by higher Executive penetration and base member growth.

c. Paid Executive members ended at 42.3 mn (+9.4%), total paid members at 84.1 mn (+3.8%), and cardholders at 150 mn (+3.6%). Renewal rates were 92.3% in the U.S./Canada and 89.8% globally, both up 10 bps QoQ.

4. GPM structure and one-offs

a. Reported GPM was 11.02%, down 11 bps YoY, but up 20 bps ex-fuel and inflation. Core-on-core GPM rose 18 bps ex tariff refunds and reinvestment, with broad-based gains across three major buckets, and supply chain efficiency as a common driver.

b. The gap between reported core GPM of -32 bps and core-on-core is mostly mix-driven, as fuel, e-comm and pharmacy outgrew core merchandise.

c. Q4 LIFO expense was $152 mn (vs. $43 mn last year), a headwind of 11 bps to GPM. SG&A rate was 8.94%, improving 27 bps YoY (+2 bps ex-fuel and inflation), and the tax rate was 25.2% (vs. 25.6%).

II. Detailed call notes

2.1 Management commentary

1. Club network

a. Q4 openings totaled 12: 10 new U.S. clubs, Mexico’s 43rd, and one relocation in Taiwan.

b. New markets such as Buffalo, NY and Lawrence, KS are bringing more new members. In densifying mature markets, new sign-ups are fewer, but sales and profitability mature more quickly.

2. Ancillary (fuel, pharmacy, travel)

a. Record year for fuel: U.S. member household penetration in fuel reached an all-time high, saving members over $3.2 bn vs. Avg. market fuel prices. This year, 26 high-traffic U.S. fuel stations were expanded.

b. Q4 fuel comps were Approx. +35%, driven by higher YoY fuel prices and record volumes. Ancillary overall comps were near +30%.

c. Pharmacy sales grew nearly 20% for the year, with GLP-1 and fertility programs and RxMobile prepay/lockers driving double-digit Rx volume growth. These more than offset headwinds from Medicare Maximum Fair Price cuts.

d. In many U.S. clubs, prescription prepay penetration is above one-third. This quarter, Costco announced a partnership with SCAN Health to develop Medicare Advantage benefits.

e. Travel saw double-digit growth in vacation packages, cruises, and car rentals for the year. In FY26, Costco sent over 750k members on cruises, up 16% YoY.

3. Digital and 3P delivery

a. FY26 digital sales (incl. 3P delivery) exceeded $33 bn, rising over 20%. Q4 site and app traffic grew 30%, and digital comps were +19.5% (+19.8% FX-adj.).

b. The Uber Eats partnership expanded from 17 states to nationwide, DoorDash coverage expanded across the U.S., and the long-term Instacart relationships in the U.S. and Canada are complementary. Avg. delivery time across all three platforms is under 1 hour, and new-platform users skew younger.

c. Personalized initiatives delivered triple-digit sales growth in Q4, and 10% of costco.com orders included personalized items. AI search traffic rose triple digits for two consecutive quarters, with the highest sitewide conversion, and sales were led by appliances and consumer electronics.

d. Costco shut down the extended-market Costco Next program, integrating top items and brands directly into the app and website. Management said the impact was not material.

4. Membership mix

a. Executive penetration hit a record high in FY26, and renewals improved again this quarter. Executive renewals are higher than for base members.

b. Members under 40 have grown nearly 60% since COVID and now account for over one-quarter of total members.

5. Merchandise and pricing

a. Q4 non-food comps were mid-to-high single-digit, led by gold jewelry, home, housewares, small appliances, and beauty/personal care. Korean beauty collagen masks and skincare stood out.

b. Fresh was up low single digits, led by bakery and meat, with in-house pastries up over 100%. Food and sundries were low-to-mid single digits, with strong growth in better-for-you packaged foods, protein, and high-fiber products.

c. Kirkland Signature is positioned at least 15%–20% below national brands at equal or better quality.

d. Examples of Q4 price cuts: KS walnuts $13.79→$9.99, Colombian coffee beans $21.99→$19.99, and coarse black pepper $6.99→$5.99.

e. Tariff refund reinvestment skewed to the back half of the quarter, covering everyday items like produce, meat, and beverages, and non-food categories more affected by IEEPA tariffs such as home and hardware. The food court churro is returning chainwide for a limited time starting this month.

6. Supply chain

a. Typhoon-related schedule disruptions in Asia and El Niño-driven Panamanian canal delays are still being managed. Overall flows remain smooth, and inventory is healthy.

b. Higher fuel prices are lifting freight rates, but the impact is manageable. Incremental fuel surcharges are broadly offset by lower contracted ocean rates.

2.2 Q&A

Q: About $100 mn of tariff refunds went into pricing, yet monthly sales did not accelerate and even softened slightly. How do you evaluate the return on this spend, and will comps normalize to historical levels this year?

A: Positioned as 'giving tariff refunds back to members', not measured by sales; ex-fuel comps remain 6%–7%.

Management noted member behavior is highly similar to recent quarters, with willingness to spend on discretionary items that offer clear value. Fuel was a major revenue driver this quarter, but ex-fuel and FX, comparable sales stayed in the 6%–7% range, which has held for about a year.

The standout was non-food as the best-performing major category, with travel also strong. Management views this as validation of the value proposition.

Reinvestment prioritizes items with the biggest member impact, spanning everyday goods and several non-food categories most affected by IEEPA tariffs. Management is not tying this spend to sales growth, and gave no full-year comps range.

Q: The gap between member growth and club growth is narrowing. How should we read this, and is it just noise as long as spend per member keeps rising?

A: Focus shifted away from total growth to three records: Executive penetration, fuel engagement, and digital engagement.

New member sign-ups increased in FY26 on top of a high FY25 base, achieved without large Asia openings to create a sign-up spike. This indicates sustained health in acquisition.

Members under 40 now exceed one-quarter of the base, Executive penetration hit records in both new and existing cohorts, and Executive members spend more than base. Renewal rates remain high and ticked up this quarter.

Management concluded that record Executive penetration, fuel engagement, and digital engagement signal strong loyalty and wallet share. Combined with member base growth, these underpin continued revenue growth.

Q: A year ago, tariffs forced some items off-shelf and SKUs were swapped. How long did this impact last, and how is the holiday assortment now?

A: Impacts were concentrated in Q1–Q2, normalization by Q3, and confidence in the holiday lineup.

Management said the assortment impact was greatest in Q1 and Q2, with normalization from Q3. This quarter’s strong non-food comps are seen as a sign of normalization, and holiday buys and in-stock quality are in good shape with positive member feedback.

Q: Member growth has decelerated for eight straight quarters. What would it take to reverse this, and when might we see it?

A: No timetable; current pace is 'appropriate for now', with catalysts in renewals and Asia openings.

Management acknowledged renewal 'normalization' as younger, more digital members enter renewal cycles, and reiterated that no guidance will be given on member metrics. The current run-rate reflects recent sign-up pace and renewal trends.

Two variables could change the slope: rising Executive penetration should lift renewals and total member growth over time, and certain Asia entries can create outsized new-member spikes that lift aggregate growth.

Internally, the framework balances 'member base growth + spend per member'. Given current quality metrics, management is comfortable with the pace.

Q: What is the visibility on supplier price increases over the next few months, and can substitutability and Kirkland Signature offset them?

A: Visibility ranges from 30 days to 90+ days depending on category, and KS is the primary offset.

Visibility varies by item, with some categories visible 90 days ahead, while items driven by freight or resin costs are more acute. Overall, the range is 30 to 90+ days, and buyers remain vigilant.

KS continues to broaden and is an effective lever to push prices lower. Management is also working with suppliers to navigate commodity cost inflation and did not quantify expected price increases.

Q: Where does Costco stand amid the rapid evolution of agentic commerce and AI e-comm?

A: Members mainly use AI as a search tool; AI-sourced sales are growing triple digits off a small base.

Management does not yet see agentic commerce at scale but observes increased AI-assisted search for goods and services. Costco’s strengths are price authority and curated selection, with buyers vetting each item and higher-quality reviews, helping value and quality to surface in neutral AI environments.

Costco runs no paid digital ads, with presence driven by word of mouth and social. AI search from models like Gemini, Anthropic, and OpenAI is driving triple-digit sales growth, albeit from a low base.

Membership is also a popular AI search entry point, with healthy conversion to activity and engagement. The current focus is collaborating with model providers to clean and update product data and pages.

Q: With younger, more digital-first members and rapid digital growth, will the optimal club format change over the next 3–5 years?

A: No change in club format expectations; digital for acquisition and communication, clubs remain the core of value delivery.

Young members typically enroll via mobile or desktop, so Costco is improving online and app experiences and using member data for personalization. However, getting members into clubs remains essential.

Younger consumers enjoy treasure-hunt shopping, the food court, and non-food categories. Management does not expect format changes in the next few years, but believes combining online and club experiences is key to loyalty, with omnichannel members showing higher frequency both online and in-club.

Q: With net openings of 30 skewing Intl, can you share member-household metrics for Asia vs. the U.S.?

A: No specific Intl metrics: Asia has more members per club but lower visit frequency, the U.S. is the reverse.

Management sees a pipeline to support 30 openings per year over the next 5–10 years, which supports ongoing capex. In Asia (China, Japan, Korea), clubs often have much larger member counts but lower frequency.

The model works, with the challenge being frequency and engagement. The U.S. has fewer members per club but higher spend per member, yielding similar unit economics.

One note on definitions: Asia openings can create outsized member growth for a quarter or two, some of which are 'first-year trial' members with lower long-term renewal and spend. In years with two to three Asia openings, member growth looks higher, but Avg. spend per member can appear lower.

Q: Can you further break down inflation, and how big is churro’s impact on next quarter’s basket?

A: Inflation remains low single digit and stable; FY LIFO slightly over $200 mn, implying Approx. 1.5%.

Non-food inflation is concentrated in storage costs for consumer electronics, fuel, and petroleum-based items, with non-food overall still low. Fresh and food/sundries are similar to the past two quarters, with inflation in beef, resin, steel, and flour, and deflation in eggs and dairy, especially butter and cheese.

Management addressed the optics of 'stable inflation but large LIFO expense' by noting FY inflation concentrated in Q4, requiring a catch-up LIFO charge in Q4. If inflation had been uniform, the expense would have been spread quarterly.

Q4 LIFO was Approx. $150 mn, taking FY LIFO slightly above $200 mn. Against U.S. ending inventory, this implies Approx. 1.5% inflation, and while the single-quarter number looks large, the implied rate is modest. No comment was made on churro’s basket contribution.

Q: Across income cohorts, how does current consumer strength compare with prior quarters and last year, and what about price elasticity?

A: Similar to prior quarters: value-seeking in staples coexists with willingness to spend on premium; no elasticity quantification.

Members are cautious and seek value in everyday items, but will spend on discretionary items with clear value. In non-food, tires, housewares, and everyday furniture are strong, alongside health/beauty, small appliances, fragrances, and skincare/haircare.

High-ticket 'treat' items like massage chairs and saunas grew over 50%. In fresh, everyday demand shows in ground beef and poultry, while premium shows in USDA Prime and Wagyu, and bakery is driven by high-quality indulgent items.

Management attributes growth at both ends to Costco’s item-driven model. No quantitative response on price elasticity was provided.

Q: Younger members start with lower spend; what does their maturity curve look like?

A: Spend peaks at ages 40–55; younger members start lower due to smaller households and lower income.

Younger members typically have smaller households and lower income relative to peak years. Spending peaks in the 40–55 bracket, when income peaks and households are largest, driving the broadest demand for Costco categories.

Near term, two variables matter more for spend per member: rising Executive penetration, as higher-fee members maximize value and spend more, and increasing fuel engagement, which lifts visit frequency. Initially, high fuel prices may lead to small, frequent fill-ups without in-club trips, but first-time fuel users are seen as a leading indicator for later spend growth.

Q: How much incremental lift can the new 3P fulfillment partnerships bring?

A: No quantification; platforms attract different cohorts and, per Instacart history, are largely incremental.

Each platform attracts different member segments, so expanding choice adds incrementality. With Instacart, members typically add an extra shopping trip rather than cannibalize existing spend, and overall loyalty improves.

Management did not quantify incremental sales.

Q: With egg deflation bottoming, tariff reinvestment ending, and sustained high fuel prices, will grocery inflation inflect in the next 3–6 months, and is the industry rational enough to raise prices?

A: No inflation forecasts; two variables are Middle East dynamics and tariff outcomes, while recent pricing has been stable.

Middle East developments could affect oil and petroleum-derived goods for an uncertain duration, and both current and potential tariffs remain uncertain in terms of final impact. Both could materially affect the next 6–12 months, limiting precise forecasts.

Beyond that, recent quarters show a relatively stable pricing environment, and management sees nothing markedly different ahead. Costco’s lens differs from the industry: the focus is on lowering internal costs and using efficiency to offset commodity inflation, sustaining price and member value to drive revenue.

No direct comment was made on industry pricing rationality.

Q: Is expanding 3P delivery Costco’s end-state for delivery, or a prelude to a new investment cycle?

A: No new investment cycle flagged; delivery SLAs have improved sharply, and 3P platforms are incremental.

Large-item delivery (furniture, appliances) has improved from 4–5 weeks to 3–4 days over five years, with same-day also seeing similar gains. Most deliveries can be completed in 45 minutes when members want that speed.

These interactions are incremental to member relationships, with members still visiting clubs regularly and using platforms for replenishment. Younger members, more sensitive to immediacy, are heavy users of this channel.

Coverage spans Rx to fresh delivery, and overall serves as an additive complement. No position was taken on new in-house delivery investments.

Q: Any new SG&A pressure points, and can you keep leveraging SG&A if comps hold around 6%?

A: Leverage should be achievable at 6% comps; the main pressures cited are general liability and healthcare costs.

Q4 achieved some leverage, and there are no major identifiable headwinds that would prevent further leverage at this comp level. General liability and healthcare costs have been rising faster than the Avg., as previously noted.

Even with these pressures, Q4 still delivered SG&A leverage. If the trend worsens, it could affect leverage capacity, and the current wage agreement is a three-year structure with year one being the costliest; Costco is now in year two.

Q: Have recent GLP-1 price cuts affected sales, and will the 2027 calendar-year cuts pose a larger headwind?

A: Price declines are a persistent headwind, but program investments have offset them; no quantification for 2027.

Referencing the first GLP-1 price reset, management said it had an impact, but ongoing investments in health programs offset the shock while enhancing member value and lifting Rx volume and revenue. The headwind will persist and requires management, but momentum remains solid.

Lower prices are seen as an opportunity: pharmacy volumes rose on GLP-1 and other price cuts, and tariff reinvestment also delivered strong unit growth. The key is to return value to members.

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