COST (Trans): Confident on inflation; plans to open 30 warehouses annually.

Below is Dolphin Research's$Costco Wholesale(COST.US) FY26 Q1 earnings call Trans. For the results recap, see U.S. Gov. shutdown 'victim'? Is Costco due one last dip.

I. Key financials at a glance

Performance overview. Key metrics follow.

Net income and EPS: net income of $2.001bn; diluted EPS of $4.50. Excluding the tax benefit tied to stock-based comp, net income and EPS rose 13.6% YoY.

Sales: net sales of $65.98bn (+8.2% YoY). Comps grew 6.4%, while digital comps were up 20.5% and drove overall comp growth.

Membership fees: $1.329bn, +14% YoY (FX-adj.). Excluding the fee increase and FX, membership revenue rose 7.3%, driven by member base expansion and Executive upgrades.

Member metrics: paid members reached 81.4mn (+5.2% YoY); Executive members 39.7mn (+9.1% YoY). NA renewal was 92.2% and global 89.7%, both down 10bps QoQ.

Margins: reported GPM was 11.32%, up 4bps YoY. Core merchandise GPM was flat, but on a core sales basis it expanded about 30bps. SG&A rate ticked up 1bp YoY to 9.6%.

Cash flow and capex: Q1 capex was approx. $1.53bn. FY capex is guided to ~ $6.5bn to support new openings, remodels, depot network expansion and digital.

II. Earnings call details

2.1 Management highlights

1) Warehouse expansion and real estate strategy

Expansion progress: seven new clubs opened in Q1, bringing the global total to 923. The runway remains large in both domestic and Intl markets.

Forward plan: due to delays on certain Spain projects, FY26 net new openings are trimmed to 28. Longer term, the plan remains to add 30+ net clubs per year. The real estate team has been expanded to support the target.

Relocations: high-traffic clubs will be moved to larger sites to improve experience (e.g., more parking, fuel). Five relocations are planned in FY26 (3 in the U.S., 1 in Canada, 1 in Taiwan) to accelerate sales.

New club performance: unit ramps continue to improve, shortening the maturity curve. FY25 openings are running at an annualized ~$192mn in the year of opening, well above ~$150mn two years ago.

2) Digital transformation and AI

Initiatives and results: scanning membership at entry, launching the Costco digital wallet, and pre-scan for small/medium baskets have improved experience and throughput. Early pre-scan clubs saw checkout speed gains of up to 20%, and U.S. checkout efficiency hit a record by quarter-end.

Pharmacy inventory: integrating AI to cross-vendor price prescriptions and enable predictive replenishment lifted in-stock to 98%+, driving double-digit Rx volume growth. It also improved margins while lowering member costs.

3) Merchandising and segment performance

Fresh: mid-to-high single-digit growth, with meat up double digits. Value proteins like ground beef and poultry saw notable unit gains.

Non-foods: mid-single-digit growth. Gold jewelry, celebration/party, and HBC delivered double-digit gains, while tires and small appliances grew high-single digits. Several categories added new national brands during the quarter.

Grocery: mid-single-digit growth, with candy and food performing well. Newness, such as Dubai chocolate, contributed to growth.

Kirkland Signature (private label): outpaced total sales again, typically offering a 15%-20% value gap. About 45 new items launched this quarter, plus new food court products. The company continues proactive price cuts (e.g., chicken pot pie, bacon).

Digital sales: website traffic rose 24%, and app traffic grew 48%. Non-food growth was led by multiple categories including pharmacy and gold jewelry, delivering double-digit YoY gains. Same-day delivery with Instacart in the U.S. and Uber Eats/DoorDash Intl outpaced overall digital.

Ancillary: pharmacy, food court, hearing aids, and optical were strong. Fuel comps grew low single digits as volume gains offset modest price deflation. Costco Travel saw strong demand, setting records on Cyber Mon. and the following day, with U.S. bookings over $100mn in the five days post-Thanksgiving (+12% YoY).

4) Inflation, sourcing, and supply chain

Inflation: overall inflation was similar to recent quarters. In fresh, beef, seafood, and coffee were inflationary, offset by eggs and cheese deflation; non-foods stayed at low single-digit inflation for the third straight quarter.

Tariff mitigation: teams are shifting country-of-origin, increasing U.S. sourcing, consolidating global buys to lower costs, and leaning into Kirkland where supply-chain control is tighter. The assortment is adjusted as needed, with tariff-affected items replaced by high-value alternatives, many U.S.-made.

Supply chain and inventory: supply chain is stable and inventories are healthy. Optimizing turns reduced the elevated buffers built for uncertainty, improving working capital and labor needs.

2.2 Q&A

Q: During your tenure, Costco seems quicker to embrace tech across formats. Is that fair? Given the productivity gains, will you allow more of the benefit to flow to margins, or reinvest to sustain growth?

A: Tech deployment and company-wide transformation are core priorities. We spent years building foundational and core systems to support the future. Those investments are now paying off, and back-end progress is increasingly visible to members.We see tech as a key growth driver alongside our other initiatives.

That said, we will never stop delivering the best prices and lowering prices for members. That is what Costco is known for, and it will remain our North Star.

Q: Results are strong in absolute terms, but expectations for Costco are always high. Are you concerned about traffic deceleration and needing to lean harder into price cuts?

Second, Executive member growth re-accelerated this quarter vs. last. How do you view the sales lift from extended hours, and has it sped up Executive upgrades?

A: On sales and member growth, we look over 6–12 months. Member spend patterns are very steady, driven by value, quality, and newness, and our merchants execute well. Monthly results do move around with cyclicals like tariff uncertainty or port strikes, but over the past seven reported months across Q4 and Q1, avg. sales growth was ~6.5%.Q4 comps (adj.) were 6.4%, and Q1 comps were also 6.4%. Only two of the seven months fell outside the 6%–7% range, underscoring stability in member behavior.

Our focus is to keep delivering high-value, high-quality new items to drive member count, frequency, and basket. Across non-foods, grocery, and fresh, we are growing steadily and taking share. We will stay centered on core member needs and remain confident in the stability of results.

On Executive members, we are pleased with the response to extended hours. We also added a $10 monthly Instacart benefit for Executives. Extending hours (an extra morning hour for Executives and an extra hour for all on Sat. nights) improved experience and spread traffic.

We see a clear positive impact on Executive upgrades. The sales lift is hard to isolate, but we think roughly a 1% boost from extended hours is a reasonable estimate. It likely offset seasonal softness we expected in gift cards and gold, helping sustain overall growth.

Q: U.S. new club openings next year will be the highest in ~20 years. Any new tactics to acquire members? As prior short-term signup promos roll off, any new plans for membership next year?

A: No special campaigns planned. New clubs will include both infill in mature markets and entries into new markets. Infill typically adds fewer net new members but lifts sales via convenience; for some newer markets where we had been cautious, we are now more confident, so we expect better new-member adds. We will keep the proven playbook and tailor to local situations.

Q: On tech and retail media, many want to partner with you on digital ads. Thoughts? And as you build a member-centric e-comm platform, how do you view its outlook?Lastly, AI and fuel — where do you see the roadmap in CX, labor efficiency, and inventory?

A: Retail media is a meaningful opportunity, though we are early. We are building data and tech to enable personalization at scale, with member experience and engagement as the first goal. We are testing media on third-party sites, CTV, and at the pump, with encouraging early reads.Our focus is member value, so most economics will be reinvested into lower prices and greater member value.

On AI, we see many practical use cases, including global sourcing and supply chain. Our two-track approach is to improve member-facing experiences while strengthening the commercial backbone. The core aim is to get goods to market at the lowest possible price, and AI is a key enabler.

Q: New-club annualized sales hit ~$192mn for FY25 openings vs. ~$150mn in FY23. How much runway remains, and what are you doing to keep improving unit efficiency?

A: The runway is strong, and we are entering new markets in innovative ways (e.g., partnering in Los Angeles on a Costco integrated with affordable housing). We plan to open 30+ clubs per year for the next few years, balanced between domestic and Intl.In Intl or low-penetration regions, new clubs drive member adds; in U.S./Canada infill markets, they lift sales quickly. Both models deliver strong returns and a healthy growth balance.

Q: Renewal softness seems better than feared. What are you doing to offset the drag from more digitally acquired members?

A: Correct — as we noted last quarter, more new members are joining digitally, and that cohort skews younger with slightly lower renewals, which weighs on the overall rate. While structural, we believe targeted outreach to near-expiry digital signups can help, by reinforcing the value proposition.

Our membership team is focusing on relevant, targeted messaging to keep these members engaged and aware of the benefits. This quarter’s better-than-expected result reflects early progress from that work. It is still early, but the momentum is encouraging, and it helped offset what otherwise would have been a larger decline.

Q: On digital, can you share success metrics — e.g., member engagement via digital? Also, how is Costco Logistics performing on delivery?

A: We don’t disclose the share of members engaging digitally, but it is rising. As noted in prepared remarks, website traffic rose 24%, and app traffic grew 40%+ this quarter. We are pleased with the engagement trend and expect digital sales to grow faster than the total over time.

We are excited about upcoming app features that further link physical and digital. Over the next 12 months, we have a clear roadmap including pharmacy prepay, online cake orders, and deli platter orders. These are member-driven upgrades with strong adoption post-launch, and features like the digital membership card and Costco Wallet should keep digital growth ahead of clubs.

Q: Two on real estate. What does the Intl pipeline look like, especially Europe and Asia? And on remodels — can you discuss the U.S. approach, volume and scope, and the sales lift?

A: Intl growth prospects are strong. Europe, especially Spain and the U.K., is set to accelerate, and Asia remains very robust with progress expected over the next five years. Roughly half of additions will be in the U.S. and half outside the U.S., with more opportunities in Canada, North America broadly, and Mexico.We expect about half of the ~30 annual openings over the next five years to be outside the U.S.

On expansions and relocations, we typically do ~5–6 relocations per year, and post-move sales lifts are meaningful. We often move undersized clubs to larger facilities with better parking, and where we add or expand fuel and materially grow parking, lifts can be an extreme 50%–60%.

For a club that already has all services but moves to a better building, the lift can be ~20%. We plan these strategically and continue to invest in existing clubs, refreshing fresh areas and adding ancillary services. This multi-year planning balances new sites, relocations, and upkeep of the current fleet.

Q: On SG&A leverage, higher medical costs prevented leverage this quarter. What drove the change, and is there room for productivity gains in coming quarters?

A: Four main drivers at the club level: annual wage investments per labor agreements — the Mar-2025 agreement brought mid-single-digit pressure that we aim to offset with productivity; the extended hours implemented in Jun.; and medical cost growth above sales growth for the first time in this quarter. Lastly, a 4bp tax item related to prior years.

Net-net, SG&A rate rose 1bp. Ex the tax item and medical costs, we would have achieved a mid-single-digit bps decline this quarter.

Looking ahead, wage and extended-hours costs persist. We are acting to manage medical costs, though they could remain elevated, while the tax item will not repeat. Historically, with mid-single-digit sales growth, we can achieve SG&A leverage, and absent the tax item, we would have leveraged this quarter — reinforcing leverage potential if sales hold mid-single digits.

Q: You said inflation was similar to prior quarters. To confirm, general merchandise is low single-digit inflation — was food inflationary this quarter, and what’s the outlook?

A: Food and sundries and fresh were modestly inflationary, low-to-mid single digits, with little change vs. last quarter. As noted, there were offsets: beef, seafood, and coffee were inflationary; produce was deflationary; eggs and cheese were still inflationary YoY but less so than earlier in the year. These factors netted to overall stability.

Q: Are comps primarily inflation-driven?

A: It is a mix of factors. Our inflation metric includes same-item price increases and mix-ups from members choosing larger pack sizes or upgrading to newer electronics/appliances, so ticket growth reflects item-level inflation, size/mix 'implicit inflation,' plus product upgrades and unit growth.

Q: Paid members grew 5% this quarter — still strong but slower than recent quarters. Thoughts? Is it more U.S.-driven, and is it stabilizing?

A: We are pleased overall — new members, younger cohorts, and Executive upgrades all improved, with total members up over 5% YoY. Growth is a bit slower than the past couple of years partly due to a tough comp, but we remain comfortable with membership health.

We see multiple ongoing drivers: 20–30 new clubs per year, with maturity adding registrations; especially Intl, where new signups are stronger as the mix approaches 50/50 U.S./Intl. We are working to improve renewals and continue to enhance value via extended hours, Instacart benefits, and 5% gas cash-back on the co-brand card. Momentum remains healthy.

Q: On expansion, what is your latest view of the long-term U.S. and global opportunity? Also, your price-cut examples were mostly Kirkland — are you leaning more into private label for reductions?

A: Over a 5–10 year view, we still see a solid roadmap to add 30+ clubs per year, with that as a minimum goal. Every current region offers growth, with roughly half (or a bit more) in the U.S. and the rest in Canada, Mexico, Europe, Asia, Australia, and elsewhere, fairly balanced.

On Kirkland Signature, that reflects our deep cost visibility and the desire to lead with price cuts and delay increases where unavoidable. Our buyers work closely with suppliers, leverage global scale, and seek efficiency without compromising quality to capture price-down opportunities — all to lower prices and raise member value.

Q: On personalization, early reads look good. How far along is coverage, and do you have examples of conversion or basket uplifts?

A: We are pleased with progress using member data to improve experience and convenience and surface the most relevant content. It is still early with a long roadmap, and we are learning what members prefer and how to fine-tune messaging and presentation.There is ample runway to raise relevance, from what members see and the ordering in channels like MVM, to how we communicate via email.

We do not share specific metrics. The focus is driving the overall member experience and sales — improving in-club interactions and online purchase journeys. We watch whether engagement rises, whether it accelerates digital sales (expected to outgrow clubs), and whether it boosts overall participation; so far, results are encouraging.

Q: On renewals, you suggested a few more quarters of pressure. Is that conservatism despite recent mitigation? Ex younger cohorts, is the rate improving, and can you unpack the dynamics?

A: The pressure stems from the mix shift we discussed: more digitally registered, generally younger members with lower renewal rates, which has nudged the overall rate down in recent quarters. Our goal is to halt the decline quickly, and we are encouraged by early gains from more relevant outreach to digital signups.

We aim to stop and then reverse the trend, but our changes have only been in place for one quarter. Digital renewal remains below in-club signups, and we want to narrow that gap, so we are being transparent that the headline rate could dip slightly in the next few quarters.

Q: Any color on the cadence of comps from Nov. into Dec. as we enter the holidays? Any trade-down or cohort differences changing your buys?

A: We do not discuss in-quarter trends beyond monthly sales releases. Broadly, member shopping is consistent; monthly fluctuations relate to port strikes, tariffs, and other uncertainties, but over the last six months, growth was ~6.5%, with only two months outside 6%–7%.Non-food growth decelerated somewhat over the past six months, but share gains continued and benefits from extended hours offset that. We have not seen other changes in member behavior or in how we deliver value.

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