Costco Earnings Call Shows Profits, Digital Surge

Costco Wholesale Corp. ((COST)) has held its Q2 earnings call. Read on for the main highlights of the call.

Costco Wholesale Corp. delivered a broadly upbeat earnings call, underscoring solid momentum across sales, profits and digital engagement while acknowledging a few manageable headwinds. Management stressed healthy underlying demand, strong membership economics and disciplined capital deployment, framing the current quarter as another step in a steady, long-term growth story.

Strong Profitability

Net income climbed to $2.035 billion, an increase of almost 14% from a year ago, reflecting strong operating leverage and tight cost control. Diluted EPS rose to $4.58 from $4.02, giving investors further evidence that Costco can grow earnings faster than sales even in a mixed macro environment.

Revenue and Comparable Sales Growth

Net sales reached $68.24 billion, up 9.1% year over year, as shoppers continued to flock to Costco’s value proposition. Comparable sales advanced 7.4% overall and 6.7% when adjusting for gas price deflation and foreign exchange, with ex‑gas and FX comps also at a healthy 7.4%.

Robust Digital Performance

Digitally enabled comparable sales surged 22.6%, or 21.7% excluding FX, far outpacing store‑only growth and signaling deeper omni‑channel engagement. Site traffic jumped 32% and app traffic 45%, while personalized recommendation carousels alone generated more than $470 million in e‑commerce sales.

Membership Strength

Membership fee income rose to $1.355 billion, up $162 million or 13.6% from last year, and 12.2% after FX adjustments, underscoring the power of Costco’s recurring revenue base. Paid members reached 82.1 million, up 4.8%, with paid executive memberships growing 9.5% to 40.4 million and continuing to lift loyalty and spend.

Traffic and Ticket Growth

Worldwide shopping frequency increased 3.1%, showing that members are visiting more often even after several robust years. The average transaction grew 4.2% globally and 3.5% excluding gas deflation and FX, a sign of healthy basket sizes and mix despite price relief in some categories.

Gross Margin Improvement on Core Basis

Reported gross margin expanded by 17 basis points year over year, or 11 basis points when stripping out the effects of lower gas prices. On a core‑on‑core basis, margins improved 22 basis points, with broad‑based strength across nonfood, food and sundries, and fresh, demonstrating disciplined merchandising and buying.

Warehouse Expansion and Capital Investment

Costco opened four warehouses in the quarter, taking its global footprint to 924 locations as it invests to support longer‑term membership and sales growth. Management expects 28 net new openings in fiscal 2026 and is targeting more than 30 per year thereafter, supported by second‑quarter CapEx of $1.29 billion and an estimated $6.5 billion for the full year.

Merchandising and Fresh Strength

Fresh category comparable sales grew in the low double digits, led by strong performance in meat and bakery, helping to anchor Costco’s reputation for quality staples. Nonfood comps rose in the high single digits and food and sundries in the mid‑single digits, with seasonal and unique items driving additional traffic and mix benefits.

Gas Price Deflation Headwind

Gas price deflation reduced reported comparable sales by roughly 0.7 percentage points in the quarter and about 85 basis points in February alone, muting headline growth. Gasoline comps were down in the mid‑single digits as the average worldwide selling price per gallon fell about 7.5% year over year in February.

Renewal Rate Pressure

The U.S. and Canada renewal rate edged down to 92.1%, a 10‑basis‑point decline from the prior quarter, even as the worldwide rate held steady at 89.7%. Management linked the modest slippage mainly to a higher share of online sign‑ups, which historically renew at slightly lower rates than in‑warehouse sign‑ups.

SG&A Rate Increase and Reserve Build

The reported SG&A rate increased by 13 basis points to 9.19%, with an uplift in general liability reserves accounting for about 6 basis points of the change. While this weighs slightly on near‑term profitability, the company emphasized disciplined expense management and the one‑off nature of some reserve movements.

Inventory Accounting and Margin Offsets

LIFO accounting had a roughly 4‑basis‑point negative impact on margins, as this quarter saw a $12 million charge versus a $12 million credit in the prior‑year period. A nonrecurring legal settlement added about 5 basis points, but some category mix shifts and higher reward costs acted as partial offsets to otherwise strong core margin gains.

Tariff Uncertainty

Management pointed to ongoing tariff changes and replacement global tariffs as a source of near‑term uncertainty, especially over the next several months. The company also flagged that the scope and timing of possible tariff refunds remain unclear, which could influence pricing decisions and the pace of returning savings to members.

External Risk: Middle East and Fuel/Shipping

Executives highlighted potential risk from continued instability in the Middle East, which could push up fuel costs and disrupt shipping lanes if conditions worsen. Such pressures would raise transportation and product costs and could affect inventory availability, though no material impact was reported yet.

Membership Growth Moderation

Total paid membership grew 4.8%, just under the 5% mark and slower than some prior periods, signaling a normalization from exceptionally strong growth. The moderation reflects fewer new‑market openings, tough comparisons against last year’s sign‑up surge and an increasing share of online sign‑ups, which ramp more gradually.

Cannibalization and Regional Variability

Cannibalization from newer warehouses was estimated at about 60 basis points for the company overall, a manageable drag given the long‑term benefits of densifying key markets. Management also noted regional variability, including softer U.S. traffic in February tied in part to weather‑related closures at 55 warehouses, which temporarily weighed on visits.

Forward-Looking Guidance and Outlook

Looking ahead, Costco plans to keep leaning into growth, with 28 net new warehouses expected in fiscal 2026, more than 30 annually thereafter and full‑year CapEx around $6.5 billion to support stores and digital innovation. Management sees digitally enabled comps continuing to outpace total sales, while closely monitoring egg deflation, tariff outcomes and geopolitical risks to fuel and shipping, and reaffirming its commitment to reinvest efficiencies into price and member value.

Costco’s latest call reinforced a narrative of steady, disciplined expansion, anchored by resilient membership economics and accelerating digital engagement. While gas deflation, slightly softer renewal rates and external risks will bear watching, the company’s strong balance of sales growth, margin improvement and robust capital plan leaves investors with a constructive, long‑term growth story.