Costco (Minutes): 35 new stores to open in fiscal year 26, price increases only if absolutely necessary

The following is the FY25Q4 earnings call minutes for $Costco Wholesale(COST.US) organized by Dolphin Research. For earnings interpretation, please refer to Middle Class is "Weakening", Is Costco Facing Headwinds?

I. Review of Core Financial Information

1. Same-store sales: Reported growth of 5.7%, with adjusted growth of 6.4% after excluding the impact of gasoline price deflation (-0.9%) and foreign exchange (+0.2%).

a. Traffic: Global growth of 3.7%, the main driver of sales growth.

b. Ticket: Global growth of 1.9% (2.6% after excluding oil price and exchange rate adjustments).

2. Membership and Renewal Rate Analysis

Membership fee income: $1.72 billion, up 14% year-on-year (adjusted 13.6%). Less than half came from last year's fee increase, with more than half from membership growth and executive member upgrades.

a. Total paid members: 81 million (+6.3%). Paid executive members: 38.7 million (+9.3%). Executive members account for 47.7% of total paid members, contributing 74.2% globally.

b. Renewal rate: U.S./Canada: 92.3%; Global: 89.8%. The decline in renewal rate is mainly due to new members entering the renewal period through online channels in recent years, whose average renewal rate is slightly lower.

Management believes that online acquisition is net positive as it brings in a younger demographic (nearly half of new registered members are under 40), expanding the overall membership base. The company plans to enhance renewal rates for this segment through auto-renewal and digital communication.

3. Capital Expenditure: Q4 was $1.97 billion, nearly $5.5 billion for the year. Supporting the accelerated store opening plan of 35 new stores in FY2026, speeding up old store renovations, purchasing land for distribution center expansion, and investing in hot dog and coffee production facilities.

4. Inflation and Tariffs:

a. Overall inflation remains in the low to mid-single digits. Non-food sectors experienced inflation for the second consecutive quarter, mainly driven by imported goods.

b. Tariff response strategies:

- Shift production locations: Collaborate with suppliers to move production to tariff-free regions.

- Global sourcing: Leverage global purchasing power to reduce costs.

- Adjust categories: Increase the proportion of domestically sourced goods (such as beauty products, tires, mattresses) and KS products.

5. Reporting Caliber Change: From September 2025, e-commerce sales metrics will change to "digitally enabled comparable sales," including all online businesses such as Instacart and Costco Travel. Under the new caliber, digitally enabled sales exceeded $27 billion in FY2025.

II. Detailed Content of the Earnings Call

2.1 Key Information from Executive Statements

1. Store Expansion Plan: The current total number of global warehouse stores has reached 914.

a. In FY2025, 27 new stores were opened (including 3 relocations), with a net increase of 24. Ten new stores were opened in the fourth quarter, including expansions in Korea (20th store), Sweden (2nd store), and the U.S.

b. In FY2026, 35 new stores are planned, and the company sees significant expansion potential in both domestic and international markets.

2. Enhancing Member Value and Experience:

a. Starting June 30, exclusive early shopping hours for executive members and extended Saturday evening hours for all members were introduced in U.S. stores. This initiative brought about a 1% increase in weekly sales in the U.S. market and was well-received.

b. Executive members spending over $150 on Instacart receive a $10 monthly credit, significantly driving upgrades from regular to executive membership.

c. Implemented "scan while queuing" technology in U.S. stores, allowing employees to pre-scan small and medium-sized items while members queue, significantly speeding up checkout as members only need to pay upon reaching the register.

3. Kirkland Signature (KS) celebrates its 30th anniversary, with sales penetration continuing to rise. It provides members with high-value products, effectively offsetting inflation from tariffs. More KS product sourcing is being shifted to the country/region of sale to reduce costs and transportation emissions.

4. Employee Compensation: Multiple wage increases were implemented in 2024 and 2025, with the current average hourly wage for U.S. employees exceeding $31. The operations team successfully absorbed the cost increases from wage hikes and extended hours through improved efficiency and productivity, with minimal impact on the SG&A rate.

2.2 Q&A Session

Q: How aware do you think members are of the extended hours? Was June 30 a trial, or has it been fully rolled out?

A: We believe we have communicated effectively, conveying the extended hours to members through in-store signage and emails to executive members. We initially judged the success of this initiative based on the significant increase in traffic. Analysis shows that the additional Saturday evening and morning hours have collectively brought about a 1% increase in sales compared to before. We believe members are aware of this benefit, and we will continue to promote it as part of the exclusive benefits for executive members.

Q: The extended hours have brought about a 1% sales increase. How do you view the potential for this number to grow further in the future?

A: Changes in member shopping behavior take time, and it's challenging to predict the precise impact. Based on our past experience, such adjustments typically take over a month to fully manifest. However, given that this is a nationwide rollout, we have gained more attention and social media exposure. While we are satisfied with the initial response, it will certainly take more time to observe and understand its full long-term effects.

Q: Given the higher churn rate of online new members, do you expect the global renewal rate to decline to the mid-high 80% range seen before the pandemic (2019)? If the renewal rate does drop to that level, what measures will the company take to stabilize or improve it? How will these changes in renewal rate impact the company's overall financial performance?

A: Before looking at the renewal rate, I want to take a more macro perspective. We are pleased with the overall membership metrics this quarter. Our new member registrations, member upgrades, and total member households are all growing (9% and 6% respectively), leading to total membership fee income exceeding the budget set at the beginning of the year.

That said, the renewal rate is certainly a core metric we pay close attention to. After careful analysis, we found that the slight decline in renewal rate is largely due to the surge in new members registered through online channels over the past few years. These online members naturally have a slightly lower renewal rate than traditional members, and this impact is gradually becoming apparent in our overall data.

We expect to see similar slight declines in the coming quarters. However, we are actively addressing this by investing in improving the auto-renewal rate for online members and enhancing digital communication to help them better experience the value of Costco, thereby increasing their loyalty. Overall, while there are some fluctuations in the renewal rate, considering the strong growth in membership base and total income, we are confident in the overall health of our membership.

Q: The core retail category's gross margin increased by 29 basis points year-on-year. How is this distributed across different product categories? What notable price increases have you implemented recently? What changes in unit sales have you observed in these categories where prices have increased?

A: Regarding gross margin, excluding the gasoline business, our overall gross margin increased by 3 basis points, which we are pleased with, as it indicates our purchasing team has successfully provided value to members while addressing the impact of tariffs.

The advantage mainly comes from the "core of the core" part, and this improvement is broadly distributed across all major categories such as fresh, grocery, and non-food. This is mainly due to several factors: firstly, improved supply chain efficiency and reduced transportation costs; secondly, the increased sales proportion of our private label Kirkland Signature brought a better product mix; finally, the fresh department has done an excellent job in reducing waste and improving labor efficiency. These positive factors successfully offset the negative impacts of declining gasoline prices and accounting cost increases due to inflation. We prefer to view the business from a long-term perspective rather than a single quarter.

Q: You mentioned that this year's holiday season product mix might differ from previous years. Can you elaborate on this? Specifically, what differences will there be in the non-food "General Merchandise" section?

A: When stocking for this holiday season, we indeed streamlined traditional non-essential seasonal items like toys and decorations. However, this freed up valuable floor space, allowing us to introduce some new categories that couldn't be sold at this time in previous years due to space constraints.

For example, we have now introduced backyard storage sheds, home saunas, and more furniture—these are high-value, seasonally relevant items, and their sales performance has been excellent. The purchasing team successfully made strategic adjustments, replacing some traditional holiday items with these high-potential new categories. Therefore, although the product mix has changed, I still believe this will be an exciting holiday season, full of new products and opportunities not seen in previous years.

Q: Excluding price increases and exchange rate impacts, membership fee income still achieved a 7% growth. How sustainable do you think this growth trend is? Especially in markets like the U.S. and Canada, where penetration is already quite high, you are expanding by opening "fill-in" new stores. Does this pose a risk of slowing membership fee income growth?

A: We remain very optimistic about the continued growth of membership numbers. We open new stores every year, which naturally covers more areas and brings in new members. At the same time, a very positive trend is that we are seeing more and more younger generations becoming our members, opening up broader potential for future growth than ever before. Even in some of our mature markets and newly opened international markets, membership numbers continue to grow steadily as the business matures. Additionally, we are constantly introducing new member benefits, such as extended hours, Instacart collaboration, and credit card gas cashback, which will continue to attract new members to join. While we do not provide specific forecasts, we are confident in future membership growth.

Q: This quarter's membership growth of 6%—can this be partially attributed to the "delayed effect" of your crackdown on membership card sharing? Can we expect to see accelerated membership growth as a result? Besides existing members, are your executive membership benefits attracting more new members to directly choose to become executive members, thereby optimizing the new member tier structure?

A: Regarding your question, our data does not show a direct correlation between recent membership growth and the crackdown on membership card sharing. The related entry check measures have been in place for some time, so we do not believe this is the main driver of current growth.

What truly encourages us is that members have responded enthusiastically to the new benefits we continue to introduce, such as extended hours and Instacart collaboration. Meanwhile, the number of executive members is also growing, which is exactly what we hope to see. Because executive members typically shop more frequently and have higher loyalty. Our goal is to continuously increase member value, encourage member upgrades, and allow them to benefit more. The positive trends we are currently seeing are precisely the effects we hoped to achieve when we initially introduced these new benefits.

Q: Amazon announced this quarter that it will enhance its fulfillment capabilities. Have you seen a significant increase in traffic through the Instacart platform following this? Given the growing demand for online fresh grocery, do you think Costco's current fulfillment capabilities are optimized to meet this demand?

A: We find it difficult to determine whether the recent growth in fresh e-commerce business is directly due to Amazon's actions. Our Instacart and Uber businesses have been performing well and continue to grow. Our newly introduced executive member benefits have undoubtedly boosted this part of the business. We are closely monitoring industry competition, but we believe the core driver is the strong demand from consumers for our unique products (especially fresh ones), and they are simply choosing different delivery methods. We are very satisfied with the growth of this business, especially seeing strong momentum in the second half of this year, although its exact source is difficult to attribute. Additionally, it should be noted that starting next month, we will integrate this part of sales into the total e-commerce sales data, no longer listing it separately.

Additionally, please be reminded that from the next monthly sales report, sales from third-party platforms like Instacart will no longer be listed separately but will be directly included in our total e-commerce and digital sales growth data.

Q: This year you plan to achieve a 30% unit growth (20% in the U.S.). How long do you think this growth rate can be maintained? In the coming years, what level of unit growth rate do you hope to achieve in international markets?

A: We are optimistic about future growth opportunities. We have increased investment in our property team to seek new store opening opportunities globally, whether increasing density in existing markets or entering entirely new markets. We do see the sustainability of opening about 30 new stores each year, but we will not make rash decisions to achieve a specific number, so the actual number may fluctuate. Especially in international markets, project cycles are longer and may take years to land, which differs from the speed in the North American market. Overall, we believe there is still a good growth runway ahead, and we have an excellent team to support expansion and effectively manage the business diversion caused by new stores to existing stores.

Q: Related to this, what is next year's capital expenditure (CapEx) plan?

A: Typically, our expenditure growth aligns with sales growth. However, in FY2025, our capital expenditure growth rate exceeded sales growth for the first time. This is mainly to support investments in several key areas: preparing for more new store openings in 2026, store renovations, expanding logistics distribution centers to support online and offline businesses, and investing in production manufacturing to enhance the value of our private label (Kirkland Signature).

Looking ahead to FY2026, we believe these areas remain important growth opportunities. In addition to continuing to open new stores, we will also heavily invest in store renovations, as many mature market stores are nearing an average age of 20 years and need renovation to enhance service and capacity. At the same time, we will continue to invest in production manufacturing and technology to support private label development and improve members' digital experience.

Therefore, we expect capital expenditure in 2026 to again exceed 2025, and the growth rate may again slightly exceed sales growth. We are confident in the returns on these investments and will provide specific numbers in the first quarter's financial report.

Q: You mentioned that the inflation rate has risen from the low single digits (about 2%) last quarter to the low to mid-single digits now. Is this inflation acceleration entirely driven by non-food items? Can you roughly describe the magnitude of this change?

A: The overall inflation rate we see is basically the same as last quarter, remaining in the low to mid-single digits range, with the real change occurring in the third quarter, and the fourth quarter continued this trend. Specifically, the inflation rate for food and fresh categories remained stable, but there were internal fluctuations: prices for commodities like beef and coffee are accelerating, while price increases for items like berries, avocados, and eggs are slowing. The real change comes from the non-food category, which ended a year-long deflationary state and turned to low single-digit inflation. It is the shift from deflation to inflation in non-food that changed the overall inflation structure, prompting us to update the LIFO accounting estimate accordingly. Overall, the inflation rate remains stable in the low to mid-single digits.

Q: Given that many credit card companies are increasing card benefits and raising annual fees, what trends have you observed in the usage rate of co-branded cards? Are you considering enhancing credit card member value to further improve overall member benefits?

A: Our co-branded credit card program has always been very successful, creating significant value for members through reward mechanisms and additional benefits. Recently, to further drive the growth of this program, we upgraded the card: not only updating the card design but also adding a 5% cashback reward for gas purchases. So far, members have responded very positively to these changes, and the growth momentum of the program is satisfactory.

Q: How do you view the potential impact of tariffs in the coming quarters? Given that some retailers seem prepared to raise prices to cope with tariffs, do you plan to do the same? What is your view on related price elasticity? From a competitive positioning perspective, do you plan to take an offensive approach (e.g., maintaining low prices to gain market share), or do you think this will bring additional pressure on gross margins in the coming quarters?

A: We have adopted a multi-pronged strategy to address tariff issues and are confident that we have effectively mitigated the known impacts. Our advantage lies in our experienced purchasing team, who successfully navigated the volatile environment by streamlining SKUs, collaborating with suppliers, improving internal efficiency, and absorbing some costs. As a global retailer, we utilize an international procurement network and localized production (e.g., producing laundry detergent in Asia reduced costs by 40%) to offset tariff impacts and flexibly adjust the product mix to ensure we always provide optimal value to members. Although we have developed effective response strategies, the future tariff environment remains uncertain, and we will remain agile to respond to any new changes.

We are taking a very proactive and aggressive strategy to address tariffs. We will do our utmost to absorb their impact, using price increases as a last resort. Even if we must raise prices, we will be the last in the market to do so and the first to lower prices when possible. We are handling any cost increases in goods with all available tools to avoid any price increases.

Q: The total number of member households is maintaining a 6%-7% year-on-year growth. Can we understand its composition as: low single-digit growth in the U.S. market and high single-digit growth in international markets? Currently, what is the penetration rate of Costco member households among all households in the U.S.? How high do you think this penetration rate can reach in the future?

A: We focus more on creating and delivering core value to members rather than being fixated on specific growth numbers. We believe that the fundamental driver of membership growth comes from our team's daily focus on enhancing member value, ensuring that membership is worth more than its cost. Our business growth is organic, primarily relying on word-of-mouth among members rather than advertising. Therefore, we believe there are still opportunities for continued growth in the membership base. Indeed, international markets often bring faster new member growth when new stores open due to lower awareness. However, opening new stores in the U.S. can also relieve shopping pressure on surrounding old stores, not only achieving rapid sales growth in new stores but also promoting the entire region's business, proving that there is also growth potential in the U.S. market.

Q: You mentioned that extending hours has brought good sales increases and executive member upgrades, and it seems to be progressing well. Looking ahead to this fiscal year, do you expect this initiative to ultimately achieve net gains? In other words, will the sales and membership benefits it brings exceed the costs of increased employee hours?

A: Overall, extending hours has had a positive impact on the overall sales of U.S. stores. Although it increased employee costs, our operations team has done an excellent job in cost control, successfully absorbing this pressure. Therefore, we expect this will not pose a significant obstacle to the company's sales, general, and administrative expenses (SG&A).

Q: Given that you mentioned successful media campaigns earlier this year, does the company have any new plans or initiatives to expand other revenue sources when looking forward to the new year?

A: We are still in the early stages of expanding other revenue sources, but its scope goes beyond media advertising. Our financial services and credit card business are ongoing strengths, and the newly launched "buy now, pay later" product is also performing well; additionally, our successful travel business is creating value for members while achieving strong growth.

Media advertising is another component, and we are advancing on two fronts: on one hand, building the capability to push personalized information to members on a large scale through data platform integration; on the other hand, actively demonstrating to suppliers the value of advertising on our platform. This is an ongoing process, and we hope to showcase its future potential while building capabilities, and we will continue to advance in the coming year.

Q: How do you view the future opportunities and scale of the B2B business? Whether through Business Centers or online channels, will we see an accelerated development of the Business Center model?

A: We believe it has great development potential in both the U.S. and Canada and plan to accelerate expansion. When we relocate existing stores, the old sites are ideal for conversion into Business Centers due to their size and facilities. We are also exploring opportunities in international markets.

Q: In markets where the process of obtaining real estate approvals is lengthy, is the company considering using its strong balance sheet to pre-purchase large plots of land and then develop them in phases to accelerate the store opening process?

A: We are open to pre-purchasing land. If it means entering an ideal market, we will consider acquiring plots and surrounding assets, which helps create opportunities for future expansion.

Q: You mentioned that new stores have caused "cannibalization" of existing store sales in recent months. Do you expect this impact to be a negative factor throughout FY2026?

A: Regarding "cannibalization," this is actually the inevitable result of our continued investment in new stores to relieve pressure on busy stores and enhance total market sales and profitability. This strategy has always been effective for us, so we expect to continue using it in the future.

Q: In the non-food category, based on your current observations, do you expect inflation to remain at current levels in the coming quarters? Are we now at the most pressured period, or is there a possibility that inflation could rise further?

A: What we are currently describing is our judgment at this time. We have been actively managing the impact of tariffs and other factors, and in our current plans, we do not see any signs indicating that inflation will undergo dramatic changes. Of course, future new tariffs, market competition, or unforeseen events are beyond our prediction.

Q: In terms of digital development, you have already launched many customer-centric innovations. Looking ahead, what are the "low-hanging fruits" that excite you the most and are easy to achieve?

A: Our team has spent a lot of time focusing on how to continuously invest to improve the digital experience, making shopping more convenient for members, and we have already made some good progress in these areas. I believe we still see opportunities to enhance the member experience through the App and website, especially by investing in features that can provide members with more precise and relevant personalized information push capabilities. This is definitely one of our top priorities at the moment. In the future, you will see more of these opportunities being explored, whether to attract customers to shop in-store, increase the items in their shopping baskets, or enhance members' online engagement to boost e-commerce sales.

Q: For the KS private label, what is the next strategy? Is it to make minor adjustments or maintain the current strategy? You mentioned "leaning towards" the KS brand—is this merely to respond to the current environment, or will you take some new measures different from the past to further amplify its advantages?

A: Regarding the Kirkland Signature brand, our core strategy has always been to provide members with superior quality, value, and innovation. We do not have specific sales proportion targets but focus on filling market gaps with Kirkland products to create value for members when we discover them. At the same time, the presence of the Kirkland brand also forms healthy competition with the national brands we collaborate with, ensuring that members get the best choices. In recent years, thanks to the excellent work of the team, Kirkland's penetration rate has continued to grow, and we will continue to innovate in areas where value can be created in the future.

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