Costco（Minutes）：Tariff Impact Expected Through Year-End, But Company Confident in Mitigation Capacity

Below is the earnings call summary for $Costco Wholesale(COST.US) FY25Q3. For earnings analysis, please refer to《Trump’s Tariff Frenzy, Costco “Steady as a Rock”》

I. Key Earnings Highlights

II. Detailed Earnings Call Content

2.1 Core Executive Statements

Store Network Expansion:​​ Opened 9 new warehouses in Q3, plan to open 10 in Q4. For the full fiscal year, expect to open a total of 27 new warehouses (including 3 relocations), resulting in a net increase of 24. The global warehouse count will reach 914.

​​Mitigating Tariff Impact:​​ Despite macro challenges, enhancing member value through limited SKU count and global scale benefits. Examples: Extending gas station hours (resulting in two record-breaking weeks for US gasoline sales volume last month, driven by extended hours, new stations, and lower prices); reducing prices on key items like eggs, butter, and olive oil.

​​Kirkland Signature Strategy:​​ Sales growth outpaced total company sales in Q3, with penetration increasing approximately 50 basis points year-on-year. Shifting more sourcing for goods to the country/region where they are sold to reduce costs and mitigate tariff impact.

​​Technology Innovation:​​ Launched a Buy Now, Pay Later (BNPL) service offering members exclusive deals on big-ticket items like appliances and furniture, with positive early sales results. Advancing pilot programs for new warehouse technologies aimed at improving member checkout efficiency and optimizing the in-store experience.

​​FX and Gas Price Impact:​​ On comparable sales metrics, foreign exchange rates negatively impacted sales by approximately 1.2%, while lower gasoline prices negatively impacted sales by approximately 1.1%.

​​Renewal Rate Decline:​​ The sequential decline in renewal rates from Q2 to Q3 is primarily attributed to a cohort of online members who signed up during the Fall 2023 promotion and entered the renewal calculation pool for the first time this quarter. The higher proportion of online sign-ups is a factor contributing to lower renewal rates.

​​Gross Margin:​​ Core merchandise gross margin increased by 36 basis points. A significant portion of this gain came from strong sales leverage in the Fresh Foods department. Additionally, declines in the cost of some key commodities and inputs like dairy, butter, eggs, and olive oil benefited Fresh Foods, Foods & Sundries.

• Non-Foods gross margin increased slightly globally but decreased slightly in the US.
• Margin improvements in Gasoline and E-commerce were key drivers of the overall growth.

​​Expense Ratio:​​ The operating component of SG&A increased by 13 basis points, driven by our investments in employee wages, partially offset by sales leverage and productivity gains.

​​Capital Expenditures:​​ Q3 CapEx was approximately 1.13billion.Weestimatefull−yearCapExwillbeslightlyover5 billion.

​​Category Performance:​​ Fresh Foods comparable sales increased by a high-single-digit percentage; Non-Foods comparable sales also increased by a high-single-digit percentage; Foods & Sundries comparable sales increased by a mid-to-high-single-digit percentage.

​​Tariff Impact:​​ Inflation in Fresh Foods, Foods & Sundries was broadly similar to last quarter. In Non-Foods, inflation was in the low-single digits for the first time in several quarters, primarily driven by imported goods. Approximately one-third of US sales are imports, with about two-thirds of those being Non-Foods. Goods imported from China represent approximately 8% of total US sales.

• The inflationary experience in Non-Foods was the primary driver of the approximately $130 million LIFO charge this quarter.
• If current inflation rates persist through the fiscal year-end, we anticipate an additional LIFO charge of 40millionto50 million in Q4.

​​Outlook:​​ Despite tariff impacts and economic uncertainty, confidence stems from the agility of our operations and buying teams, and our commitment to continuously deliver high-value merchandise and quality service. Our brand values (e.g., value, member experience) remain highly aligned with member needs.

2.2 Q&A

Q:​​ Costco continues to invest in pricing. Given the current environment, what guidance are you giving your buying teams? Are you pushing aggressively for price reductions or adjusting strategies? In which areas is the company maintaining price competitiveness? Have there been significant changes in sales volume and unit transactions?

​​A: Procurement Strategy:​​ We continuously respond to daily tariff changes, seize opportunities to reduce prices when key commodities decline, and immediately adjust prices. We are aggressively pursuing price reductions in feasible areas to mitigate the impact of tariffs on members and solidify our competitive advantage.

​​Q:​​ You mentioned an improvement in the competitive landscape later in the quarter. Was this due to competitors raising prices? How has the price gap evolved under current inflation? Non-food categories performed exceptionally well in March-April. To what extent can the demand pull-forward effect for some tariff-impacted goods around late March to early April be quantified?

​​A: Reasons for Improved Competitive Landscape:​​ The widening competitive gap stems from our proactive price reduction strategy (e.g., being the first to cut prices when key commodities decline), not competitor price increases. By tracking prices daily/hourly and collaborating with suppliers to rapidly reduce costs, we have built a price advantage.

​​Non-food Demand Pull-Forward Effect:​​ The buying team proactively sourced summer goods (e.g., patio furniture, sporting goods) early, securing shipments before tariff impacts hit. This kept prices stable or allowed only modest increases for these categories, boosting non-food performance. Categories with healthy inventory levels, like furniture and appliances, were less impacted by tariffs and also contributed to non-food growth. The effect was minor and difficult to quantify.

​​Q:​​ You mentioned the company will soon no longer be driven by growth in precious metals and gift card sales. To what extent should we recalibrate expectations for Costco? Can this impact be quantified? When might US market growth hit a ceiling? With stores becoming overly busy (parking difficulties, declining shopping experience), what percentage of US stores are currently at or near this saturation level?

​​A: Regarding Expectation Recalibration & Impact Quantification:​​ Non-food growth slowed from prior double-digits to high single-digits this quarter, primarily because high-base businesses like gift cards entered a period of tough year-over-year comparisons. Online transaction volume was also affected by cyclical factors. Demand pull-forward occurred in April for some categories (e.g., consumer electronics, paper goods) due to tariff concerns, potentially leading to further moderation in subsequent growth rates. The team is confident in maintaining non-food sales through value, quality, and novelty; growth opportunities remain.

​​Regarding US Growth Ceiling & Saturated Store Percentage:​​ There is no clear timeline for a US growth "ceiling." We are strategically relieving high-traffic stores (e.g., 80% of new stores opened in Q4 were for relief). Approximately 40 high-volume stores with annual sales exceeding $400 million are the current priority for optimization. Less mature stores still have growth potential, and most stores are expected to develop towards higher sales levels. Experience is being improved by extending gas station hours and using technology to optimize front-end processes (e.g., speeding up checkout to increase parking space turnover).

​​Q:​​ The company has achieved year-over-year EBIT margin improvement for 8-9 consecutive quarters (albeit modestly), even amidst macro volatility (e.g., recent tariff impacts). Will this trend change in the coming quarters? Is this the result of deliberate company decisions rather than happenstance?

​​A: Trend Sustainability:​​ We don't focus on single-quarter fluctuations, emphasizing long-term business management instead. Data may fluctuate in future quarters due to periodic investments (e.g., business expansion), but long-term improvement potential remains.

This quarter's gross margin benefited from improved fresh produce efficiency, reduced shrink, and lower commodity prices – results of active operational optimization.

​​Drivers:​​ The core philosophy is to continuously create value for members through global sourcing, local production, and growth of our private label (Kirkland Signature). We proactively pass on approximately 90% of the value to members to drive sales. Margin improvement is a natural outcome of this long-term strategy, not happenstance. New businesses (e.g., improving e-commerce profitability, retail media) also contribute to profit growth. However, the company does not provide single-quarter guidance and emphasizes strategic consistency.

​​Q:​​ The company estimates Q4 LIFO expense of $40-50 million. Do you expect LIFO impacts to moderate in Q4 and beyond? How does this compare to the full-year 2022 LIFO headwind? How does the current environment differ from 2022?

​​A: Regarding LIFO Impact Trend:​​ The Q4 LIFO expense estimate of 40−50millionassumesstablefull−yearinflation(slightinflationinnon−foods).Iffuturetariffsorcostsshownosignificantvolatility,thefull−yearLIFOexpenseisprojectedat145 million (primarily from US operations). This additional cost estimate essentially reflects the allocation and adjustment of the full-year incremental expense across quarters; it's not the actual inflation impact of a single quarter. Future moderation depends on inflation and tariff changes.

​​Comparison to 2022 & Current Environment Differences:​​ Post-pandemic inflation was higher in 2022, resulting in LIFO being a persistent headwind throughout the year. Current inflation levels are lower than 2022; non-foods experienced deflation in the first two quarters of this year and only slight inflation in Q3, resulting in overall more moderate pressure.

​​Inventory Levels:​​ Currently between 12billionand13 billion, so the 145millionLIFOimpactrepresentsonlyabout112-13 billion is US inventory. The LIFO method primarily applies to US operations; most international countries still use FIFO.

​​Q:​​ Grocery inflation was slightly positive last quarter, around 0.1%? Is this within the range we discussed?

​​A:​​ Inflation was slightly above 0.1%, in the low single-digit range, consistent with the trend from last quarter and year-to-date. Overall inflation levels haven't changed materially since the start of the year.

​​Category Performance Divergence:​​ Inflationary items include eggs (still high YoY) and pulp; deflationary items include butter, flour, and cheese among dairy products.

​​Q:​​ Given the mid-teens growth in digital business, can you specify what percentage of total business digital currently represents? Specifically, Costco Logistics grew 31% – what is its share within e-commerce?

​​A: Digital Business Share:​​ As defined by the company (excluding Instacart delivery, travel, etc.), it accounts for approximately 8% of total business. If measured by standard industry metrics (including some other services) or excluding gasoline sales, the share is about 12%.

​​Costco Logistics Share:​​ It handles 20%-25% of the company's total deliveries; for big & bulky items (e.g., furniture, appliances), its share reaches 80%-85%, making it the primary delivery channel for these goods.

​​Q:​​ Is there still a portion of members who have never used any of your digital services? Or is it currently only about half of members actively using them?

​​A: Current Situation:​​ Over half of members have downloaded the app, but some still underutilize digital services.

​​Growth Potential:​​ Digital penetration is expected to grow faster than the overall business. Optimizing app features (e.g., inventory visibility, search), enhancing member communication efficiency, and integrating digital wallet payments will further drive member engagement, indicating significant future growth potential.

​​Q:​​ Can you elaborate on the specific areas of front-end technology investment? Are you considering piloting extended store hours (like the gas station model) within stores?

​​A: Front-End Technology Investment Areas:​​ ① Promoting digital membership card adoption to improve member verification efficiency. ② Piloting the internally developed Scan and Go feature to speed up checkout via digital scanning; early tests show high member acceptance and positive results. ③ Focusing on end-to-end front-end process optimization, leveraging existing digital tools to improve member shopping flow and transaction experience.

​​Store Hours Adjustment:​​ Extending gas station hours has proven effective in boosting sales growth. We will continuously evaluate opportunities to optimize store hours from an operational efficiency perspective, but no specific pilot plans were mentioned.

​​Q:​​ With a new warehouse opening soon in Florida, can you discuss opportunities to further reduce costs on the supply chain side (distribution, transportation) beyond current levels?

​​A: Operational Efficiency:​​ Our warehouse network operates on a no-inventory-holding, direct-flow model and is already highly efficient. As we scale, we will enhance efficiency and generate financial leverage by optimizing the network layout in high-sales regions (e.g., the new Florida warehouse) and utilizing economies of scale.

​​Capital Allocation Focus:​​ Strategy remains stable – continuously investing to optimize the warehouse network in rational regions for further cost reduction and efficiency gains. E-commerce leverages the Costco Logistics network (strengthened post-Innovel acquisition, especially on the West Coast), driving sequential gross margin improvement through scaled operations.

​​Q:​​ Could tariff policies over the next 6 months impact demand planning? How are you adapting given increased inventory management complexity?

​​A: Demand Planning Response:​​ The buying team has developed short, medium, and long-term strategies. Based on current information (e.g., potential tariff changes), they lock in supply commitments with suppliers 6-8 months ahead. Decision factors include: whether goods can be sourced domestically, and whether pre-tariff-increase procurement is needed. Demand planning is dynamically adjusted through multi-dimensional analysis.

​​Inventory Management Strategy:​​ Building on the agility developed during the pandemic, we quickly find new sourcing channels (e.g., non-China sources) to ensure value and quality. Leveraging our global network (non-US markets), we can mitigate US inventory pressure by reallocating goods facing high tariffs in the US to other regions.

​​Q:​​ Will the positive factors driving margin improvement this quarter persist in the short term? Given some tariffs may be reduced, if this happens, will suppliers lower the price increases they implemented due to tariffs?

​​A: Margin Sustainability:​​ Some positive factors this quarter (e.g., deflation in inputs like butter, eggs, dairy) were specific to the quarter. The company focuses more on long-term value investments, balancing costs through efficiency gains in fresh foods (productivity, preservation tech) to support member value and sales growth. Short-term impacts need to be assessed alongside non-food inflation dynamics.

​​Impact of Tariff Reductions:​​ The tariff environment is dynamic and unpredictable; it's difficult to forecast if suppliers will lower prices. The company and suppliers maintain flexibility through limited SKUs, procurement expertise, and long-term relationships. We focus on creating member value through real-time price management and assortment optimization, rather than relying on tariff policy changes.

​​Q:​​ In the second half of the year, if cost pressures cannot be mitigated through other means, how much price increase is expected to be passed on to members? What impact would this have on non-essential category sales? How is inventory planning adapting? Does the current dynamic environment support increasing opportunistic buying?

​​A: Price Pass-Through & Category Impact:​​ We don't implement blanket price increases; we evaluate each item based on its nature (e.g., essential/non-essential):
① Essential categories (e.g., fresh produce): Prioritize absorbing costs internally through supply chain optimization (partnering with suppliers, improving efficiency) to maintain prices where possible (e.g., pineapples, bananas unchanged).
② Non-essential categories (e.g., flowers): Pass on some costs cautiously with modest price increases after assessing member price sensitivity; expected impact on volume is limited.

​​Inventory Planning Strategy:​​ Leverage the limited SKU model to flexibly adjust category mix, increasing US domestic sourcing (e.g., mattresses, outdoor furniture), reducing inventory share of tariff-sensitive goods, and optimizing inventory turnover.

​​Opportunistic Buying Feasibility:​​ The dynamic environment supports increasing opportunistic buying, focusing on high-growth, high-value categories (e.g., health & beauty, nutritional foods). We capture supply opportunities by responding quickly to market changes, while leveraging the global supply chain to balance regional inventories.

​​Q:​​ Costco offers members a more defined mix of payment options than typical retailers. Have you tested this? What do you expect to gain from partnerships with payment providers? Is this solely to support big-ticket purchases?

​​A: Testing Rationale:​​ We observed some members already using third-party buy-now-pay-later (e.g., Affirm) for Costco purchases, but these transactions weren't flowing through the Costco ecosystem, preventing members from accessing platform-exclusive pricing benefits. Integrating them addresses this.

​​Expected Outcomes:​​ Meet member installment payment needs, particularly for big-ticket items; enhance payment stickiness through in-platform exclusive pricing.

​​Q:​​ Several months after the membership fee increase, what notable changes have you observed in member feedback? As a US brand, is Costco impacted by its national identity in international markets?

​​A: Membership Fee Increase Feedback:​​ Trends are positive across renewal rates, new member sign-ups, and membership fee revenue growth. The increase came after 7 years (longer than the typical 5-year cycle), and iconic low-price items (e.g., hot dogs, rotisserie chicken) were maintained. Member expectations were well-managed, with no significant negative feedback observed; renewal rates show no material impact yet.

​​International Brand Impact:​​ There is member feedback expressing a "desire for more harmonious international relations," but sales data shows no significant impact from the US brand identity. Canada and all international markets achieved positive comparable sales growth this quarter, demonstrating strong momentum.

​​Q:​​ Renewal rates fluctuated due to historical sign-up patterns. How long is this expected to last? When will it stabilize? Why is digital membership renewal lower? Are there mitigation strategies? Is it due to member demographics or new member characteristics?

​​A: Renewal Rate Fluctuation Duration:​​ Expected to persist for some time (the foreseeable future). Key reasons include: cyclical lag from digital promotions driving new sign-ups (e.g., the 30 basis point decline this quarter relates to prior promotions); newly opened Asian warehouses have significantly more members per store (4-5x US levels), and many new members travel farther distances, also lowering the overall renewal rate.

​​Reasons for Lower Digital Membership Renewal:​​ Digital channel new members are younger on average, and younger members naturally have slightly lower renewal rates. Some members signing up via promotions are more focused on short-term deals and have weaker loyalty foundations.

​​Mitigation Strategies:​​ Effective digital engagement and strategies to guide members to physical stores.

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Disclosures: Dolphin Research Disclaimer