Costco Wholesale Corporation

Operator: Ladies and gentlemen, thank you for standing by. My name is Abby, and I will be your conference operator today. At this time, I would like to welcome everyone to the Costco Wholesale Corporation's Third Quarter 2026 Earnings Call. [Operator Instructions] And I would now like to turn the conference over to Gary Millerchip, Chief Financial Officer. You may begin. Gary Millerchip: Good afternoon, everyone, and thank you for joining us for Costco's Third Quarter 2026 Earnings Call. I'd like to start by reminding you that these discussions will include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements involve risks and uncertainties that may cause actual events, results and/or performance to differ materially from those indicated by such statements. The risks and uncertainties include, but are not limited to, those outlined in today's call as well as other risks identified from time to time in the company's public statements and reports filed with the SEC. Forward-looking statements speak only as of the date they are made, and the company does not undertake to update these statements, except as required by law. Comparable sales and comparable sales excluding impacts from changes in gasoline prices and foreign exchange are intended as supplemental information and are not a substitute for net sales presented in accordance with GAAP. Before we dive into our financial results, I'm delighted to say that Ron Vachris is, once again, joining me for today's call. I'll now hand over to Ron for some opening comments. Ron Vachris: Thank you, Gary. Good afternoon, everybody, and thank you for joining us today. I'll make a few comments on current events and provide a brief update on our strategic priorities before turning the call back over to Gary. Against the backdrop of ongoing macro uncertainty, our focus is providing quality goods and services at the lowest possible price continues to resonate strongly with our members. Nowhere has this been more apparent in the third quarter than our gas business. As events in the Middle East have had a significant impact on product supply and gas prices, our focus, as always, is to be there for our members by staying in stock and offering the best value. The result was record-breaking volumes. All 3 4-week fiscal periods of the quarter set successive all-time company volume sales records with the final 5 weeks of the quarter becoming our top 5 volume weeks ever. Our gas team performed exceptionally well to manage this unprecedented demand, which requires multiple daily gas deliveries to many locations. The high consumer price sensitivity, which fueled these record volumes, also drove many members to use our gas stations for the very first time in the third quarter. We believe this will drive even greater loyalty with these members in the future as members who use our gas stations typically spend more with us in the warehouse. We're closely monitoring the longer-term inflationary impacts of higher oil prices as well as the future impacts of tariffs. Our buyers continue to demonstrate their ability to adapt and are using their significant experience and expertise to try to reduce the impact on prices for our members. Our goal is to be the first to lower prices and the last to raise them, and Gary will share some examples later in the call where we lowered prices this quarter. We're also able to bring greater value to our members through many exciting new Kirkland Signature items in the third quarter. On the topic of tariffs, we started submitting our refund claims for the IEEPA tariffs. We are doing this through the process set up by the U.S. Customs and Border Protection. These submissions will go in over what may be the next few months. And based on what other claimants have experienced, we should start receiving refunds on approved claims on a rolling basis over the following 2 to 3 months. As we've mentioned before, our plan is to return to our members, in some form, the portion of tariffs that were passed on to them. How much we return and when depends on a variety of factors, including how much refund money we receive and when it arrives as well as developments in the lawsuit filed against the company regarding the return process. Turning to progress with growth priorities. Our real estate and operations team continue to focus on increasing our pipeline of new warehouses, both domestically and internationally as we target 30-plus net new openings per year in the coming years. In the quarter, we opened 4 net new warehouses, including 3 in the U.S. and 1 additional Canadian business center. Those openings brought our total warehouse count to 928 worldwide. We currently expect to have 26 net new openings in fiscal year '26, down 2 buildings from the prior call with those 2 buildings now set to open in fiscal year '27. So far this year, we've also completed 2 relocations with 1 more planned in Q4 as we continue to relocate select high-volume warehouses to larger locations with more parking and expanded gas stations to provide a better member experience and drive more volumes in these warehouses. In digital, we're making meaningful strides to deliver a more seamless and convenient experience for our members across the warehouse and online. As a result of our investments in technology and the commitment from our employees to use this technology to deliver a great member experience, we're seeing a significant improvement in the speed of checkout. The enhancements we have made include improvements to the mobile wallet, the introduction of digital membership card quick access on the Costco app and the rollout of our shopping cart prescan tool internationally. The pay station pilot I spoke about last quarter has also been successful, and we are now incorporating this technology into our new warehouse openings and high-volume buildings. We're also enhancing the e-commerce experience for members and recently rolled out same-day delivery services in Spain and France. Same-day delivery powered by our third-party partners has become a highly effective way to deliver more convenience to our members. Average same-day delivery time in the U.S. is now less than 45 minutes, and the average member satisfaction rating is 4.8 out of 5. This part of our business is growing at an even faster rate than our digital business overall and is a strong driver of loyalty as it is often our highest spending members who are using this service. Finally, as we learn more about how consumers are embracing AI in their shopping habits, we're working with the leading AI companies to improve the visibility of our values to current and potential future Costco members. We believe AI is changing how consumers research products and has the potential to be a significant opportunity for Costco given our pricing authority and our focus on quality. With that, I'll turn it back over to Gary to discuss the results for the quarter, and I'll jump back on during Q&A to field some questions. Gary Millerchip: Thanks, Ron. In today's press release, we reported operating results for the third quarter of fiscal year 2026, the 12 weeks ending May 10. As usual, we published a slide deck under Events & Presentations on our investor website with supplemental information to support today's press release. Net income for the third quarter came in at $2.192 billion or $4.93 per diluted share, up 15% from $1.903 billion or $4.28 per diluted share last year. Net sales for the third quarter were $69.15 billion, an increase of 11.6% from $61.96 billion in Q3 2025. Comparable sales were up 9.8% and 6.6% adjusted for gas price inflation and FX. Excluding gas sales entirely and adjusting for the impact of foreign exchange, comparable sales were also up 6.6%. Digitally enabled comparable sales were up 21.5% and 20.8% adjusting for FX. Our segment breakout of comparable sales is disclosed in both our earnings release and the supplemental slide deck. In terms of Q3 comp sales metrics, FX positively impacted sales by approximately 1%, while gas price inflation positively impacted sales by approximately 2.2%. Traffic or shopping frequency increased 2.4% worldwide. Our average transaction or ticket was up 7.3% worldwide and 4.2%, excluding gas price inflation and changes in FX. Moving down the income statement to membership fee income. We reported membership fee income of $1.373 billion, an increase of $133 million or 10.7% year-over-year. Adjusting for FX, the increase was 9.9%. The September 2024 U.S. and Canada membership fee increase accounted for a little more than 1/4 of membership income growth. Excluding the membership fee increase and FX, membership income grew 7% year-over-year. This was driven by continued growth in our membership base and upgrades to Executive Memberships. At Q3 end, we had 41.2 million paid Executive Memberships, up 9.6% versus last year. This quarter, we launched our Executive Member program in China and have seen strong early adoption in the market. We ended the quarter with 82.9 million total paid members, up 4.1% versus last year and 148.5 million cardholders, up 4% year-over-year. In terms of renewal rates, at Q3 end, our U.S. and Canada renewal rate was 92.2%, up 10 basis points from last quarter, and the worldwide rate came in at 89.7%, unchanged from last quarter. As previously shared, members who sign up online, on average, renew at a slightly lower rate than warehouse sign-ups. And as this population has grown as a percentage of our total base, this creates some downward pressure on the overall renewal rate. In Q3, it was pleasing to see that our focus on increasing the renewal rates of these members through targeted digital communications and retention strategies more than offset the negative impact from this mix change in our membership base. Turning to gross margin. Our reported rate was lower year-over-year by 21 basis points, coming in at 11.04% compared to 11.25% last year. Excluding gas inflation, the gross margin rate was higher by 1 basis point. Core was lower by 46 basis points and lower by 29 basis points, excluding gas inflation. In terms of core margins on their own sales, our core-on-core margins were lower by 9 basis points. This decrease was due to slightly lower margins in fresh and food and sundries, where we invested in lower prices for our members on several everyday items such as eggs and beef. Transportation costs were also a headwind in the quarter due to higher gas prices. The significant difference between reported core margins and core-on-core margins was primarily due to mix changes as we saw gas, e-commerce and pharmacy sales grow at a faster pace than core merchandising sales. Ancillary and other businesses gross margin was higher by 9 basis points and 14 basis points, excluding gas inflation. This was driven by higher sales penetration in e-commerce and pharmacy, partially offset by a lower gross margin rate in gas. LIFO positively impacted the rate by 14 basis points, both with and without gas inflation. We had a $44 million LIFO charge in Q3 this year compared to a $130 million charge in Q3 last year. This quarter's gross margin rate benefited 2 basis points from lapping the catch-up accrual in Q3 last year for the increased employee vacation days included in our March 2025 employee agreement. Moving on to SG&A. Our reported SG&A rate was lower or better year-over-year by 20 basis points, coming in at 8.96% compared to last year's 9.16%. Excluding gas inflation, SG&A was lower or better by 2 basis points year-over-year. The operations component of SG&A was lower or better by 12 basis points, but worse or higher by 3 basis points, excluding the impact of gas inflation as underlying improvements in productivity were offset by higher health care costs. Central was lower or better by 3 basis points and lower by 1 basis point, excluding the impact of gas inflation. Equity compensation was flat and higher or worse by 1 basis point, excluding gas. This quarter, SG&A also benefited 5 basis points from lapping the catch-up accrual in Q3 last year for higher vacation days in our 2025 employee agreement. Below the operating income line, interest expense was $32 million compared to $35 million last year. Interest income was $130 million versus $95 million last year, driven by higher cash balances, and FX and other was a $25 million benefit versus a $10 million loss last year, largely due to changes in FX. In terms of income taxes, our tax rate in Q3 was 25.4% compared to 26.2% in Q3 last year. Turning now to some key items of note in the quarter. Capital expenditure in Q3 was $1.41 billion. We estimate CapEx for the full year will be approximately $6.5 billion as we continue to invest in building a larger pipeline of new warehouses, remodeling our existing warehouses to drive continued growth in high-volume buildings, expanding our depot network to support operational efficiency and enhancing the member digital experience. In terms of merchandising highlights, as Ron mentioned in his opening comments, gas prices had a major impact on the quarter with our members allocating a greater proportion of their total spend to gas. At the same time, we saw very robust comp sales results, excluding gas, as our combination of merchandising quality, value and newness continue to resonate with members. Fresh comparable sales were up high single digits in the quarter, led by meat and bakery. In meat, we saw strength in both premium cuts of beef and lower-cost proteins such as ground beef and poultry. In bakery, we continue to see success with the launch of exciting new items, including a variety of seasonal pastries and cookies. Nonfoods comp sales were up high single digits in Q3. Top-performing departments were gold and jewelry, small electrics, tires, home furnishings, majors and health and beauty. Self-care and wellness items performed extremely well during the quarter, including fragrances and hair and skin products in the health and beauty and small appliances departments. We also saw members wanting to splurge on higher-value self-care items where the quality and value is compelling. For example, we experienced almost 50% sales growth in saunas and massage chairs during the quarter. In food and sundries, comp sales grew mid-single digits, led by packaged foods and candy. While egg price deflation was a headwind to sales, this was partially offset by significant growth in other items such as protein snacks and protein bars. Kirkland Signature is also driving growth in food and sundries. We continue to innovate with new KS items, offering savings of at least 15% to 20% to a national brand equivalent with equal or better quality. Q3 launches included our KS Energy Drink, KS Ultra Filtered Milk, KS Sea Salt Popcorn and KS Oven Roasted Chicken Dog Food. Our goal is to be the first to lower prices where we see opportunities to do so. And a few examples this quarter included KS Crispy Wings from $16.99 to $14.99, KS Milk Chocolate Almonds from $19.99 to $18.99, KS Golf Balls from $32.99 to $29.99 and KS King Size Sheets from $89.99 to $79.99. In ancillary businesses, comp sales were up mid-20s. Pharmacy led the way and saw significant market share gains in the quarter. In addition to our experienced pharmacists taking great care of our members, a number of factors are contributing to this growth. These include increased GLP-1 demand and inclusion of Wegovy and Ozempic in our member prescription program, great value on pet medications, acceptance of Medicare D over-the-counter flex cards and expansion of our mail order and specialty pharmacy offerings. Gas comps were positive high 20s, driven by a price-per-gallon increase year-over-year as well as an acceleration in volumes. Turning now to inflation. Overall, inflation increased slightly in Q3, largely because of higher gas prices. This was offset by lower inflation in food and sundries and fresh, primarily due to deflation in produce, eggs and dairy. Inflation increased slightly in nonfoods, and we are anticipating further inflation in a number of nonfood categories as higher resin costs start to flow into cost of goods. As always, our buyers are working hard to mitigate the impact of cost increases. The supply chain is generally stable, and our merchants feel good about our inventory position heading into the summer. We have relatively low inventory exposure to shipping issues stemming from the situation in the Middle East, but we continue to monitor the situation closely. In digital, we saw strong member engagement in Q3 with site and app traffic up 37%. Pharmacy, gold and jewelry, home furnishings, tires, special events, housewares and majors all grew double digits year-over-year. Delivering a more personalized experience for our members is a key focus, and we continue to make progress in this area. In Q3, our personalized product recommendation carousels delivered conversion rates 3x better than our typical conversion rates and contributed just under $0.5 billion of e-commerce sales. As Ron shared earlier on the call, with consumers increasingly using AI to research products and services, we believe this has the potential to be a significant sales opportunity for Costco. We're now leveraging AI to enhance our product pages online, which, in turn, is increasing our relevance with the large language models. While the volume of traffic generated from AI search is still low, we saw triple-digit growth in Q3, and this activity has the highest conversion rate of all traffic coming to our site. Finally, as we accelerate our digital capabilities, we are also broadening our reach in retail media. Q3 marked the launch of a new collaboration with Google Commerce Media and YouTube. Launching this partnership will make it easier for brands and agencies to collaborate with Costco retail media and is a significant milestone on our journey towards increasing our share of retail media revenue. That concludes our prepared remarks. In terms of upcoming releases, we will announce our May sales results for the 4 weeks ending Sunday, May 31, on Wednesday, June 3, after market close. We'll now open the line up for questions. Operator: [Operator Instructions] And our first question comes from the line of Michael Lasser with UBS. Michael Lasser: Recognizing and fully understanding you do not provide guidance, but given that new membership growth is a critical driver of your overall same-store sales growth as these new customers ramp their usage of the warehouses and this metric has slowed to 4.1%, which is the lowest level in some time, should we keep our expectations around your same-store sales growth outlook for at least the near term pretty modest, especially when you consider that you will be lapping some of the changes to the club hours in the coming weeks? Gary Millerchip: Michael, thanks for the question. I guess I'll cover that in a couple of different parts. I think first of all, maybe taking a step back on the main part of your question around membership and what we're seeing there in terms of growth. Overall, we were pleased with the results in the quarter. As I think you heard us say in the prepared remarks, we were -- when we look at membership growth, if you back out the fee increase and foreign exchange, we were up 7% overall. A big part of that was due to the continued engagement we see with Executive Members growing, and that was up over 9% during the quarter. And so maybe that's the first point to tie to your comment around sales. As you perhaps know, when we see members who are executive level, they generally spend more with us and visit more frequently. So that's a really positive dynamic in terms of impact and potential for future health and growth in terms of membership spending. And then as you mentioned, we saw paid membership growth of just over 4%. So those 2 together were what combined to create the 7% growth in the membership rate. We were also pleased to see that the renewal rate has sort of normalized, if you like, now as we started to now see the mix maturing of digital members coming into the membership renewal rate. And as we start to implement the benefits of -- or see the benefits, I should say, of more targeted marketing and retention strategies driving a leveling out, if you like, of that membership renewal rate. And our goal, of course, is to continue to improve that rate as we execute more of those communication and targeting marketing efforts with our members. As you mentioned, we have seen some slowing in the year-over-year membership growth in recent quarters. We attribute that to a number of factors. One would be that we've been opening or we haven't been opening new warehouses in major new markets. So if you think about some of the growth we've had in prior years in Asia, in particular, when we open new warehouses in Japan and in China, as an example, we tend to see an outsized growth in membership. But often, the renewal rate on those members is much lower because we have a big element of new consumers coming into the membership to really explore the experience and have a look at what we offer and often coming from a much longer distance and further away from the warehouse. So we haven't seen a major new opening in the new international market for a while, which definitely has an impact. And we are cycling some stronger growth from sign-ups from a year ago as well. So we think the sort of the 4% to 5% is a more normal rate of growth when you don't have the benefit of a large increase that's linked to some kind of special event like COVID or a new market entry. But overall, I'd say with the renewal rate leveling out and with the year-over-year growth that we're seeing in new member sign-ups, we feel good about the health of membership, and we think there's a lot of opportunity for continued growth in the future as well. Michael Lasser: And just as it relates to the same-store sales growth, given that that is a critical pipeline, especially as you lap some of the big outsized drivers over the last few years. Gary Millerchip: Yes. I mean, I think in general, I would say, as you mentioned, we don't give guidance on what we expect future trends to look like. We do expect to continue to grow our market share as we deliver great value for members and continue to provide great quality items. I would say, in broad terms, what we're seeing at the moment is just a continuation, I should say, of the trends that we've seen in really the last year or so, members being very willing and having the capacity to spend, but have very high expectations around quality, value and newness. And our value proposition seems to be resonating really well in that regard. As you know, we've been cycling some fairly major gift card programs and gold sales is now being cycled year-over-year. And yet as you look at the recent results that we've seen in our sales, we continue to comp, excluding gas, in that 6% to 7% range, and we haven't really seen any variation from that performance as you look at our membership spend and membership growth over the last year or so. Operator: And our next question comes from the line of Simeon Gutman with Morgan Stanley. Pedro Gil Garcia Alejo: This is Pedro Gil on for Simeon. I would like to ask you first about the core-on-core margin, which was down 9 basis points as you're lapping against some of the very strong gains that started 4 quarters ago, more or less. Should we recognize this as a sign that you're taking strategically a more aggressive value posture to gain share and capitalize on some of the trends in the consumer out there? And are you seeing something similar from the competition? Gary Millerchip: Yes. Thanks for the question. I would probably take a step back as we've shared before on gross margin when we talk about the rate year-over-year. We look at it overall and look at the quarter and the focus for us is really on the gross margin rate ex gas inflation or deflation. And during the quarter, we saw a 1 basis point improvement in the results. If you recall, you mentioned a moment ago, we're actually cycling 2 years' worth of, I think, the highest growth we've seen in gross margin rate in fiscal year 2025 and 2024 in Q3 in particular. But as we shared previously, we -- while we provide the detailed breakdown of our gross margin rate, we really do tend to focus on that measure of gross margin overall, excluding gas inflation or deflation because we tend to manage the business more holistically than looking at one individual component of the gross margin. With that being said, there were a lot of moving parts during the current quarter. First of all, we had higher top line growth overall, but that came with a significant shift in the composition of sales. So we had higher sales in gas, and added to e-commerce and pharmacy, that did create a fairly significant shift in the mix. So that has an impact on the core rate overall. In terms of core-on-core, we knew we were cycling in the quarter a fairly large LIFO charge from last year. So we saw it as an opportunity recognizing that our members are dealing with higher gas prices to really invest in increasing value for the member, partly through the widening of our value in gas in the market to drive volume growth and more gallons and traffic to our gas stations. But also in everyday prices, as I mentioned in prepared remarks, with eggs and meat, in particular, really keeping the value very strong for our members. So we saw the opportunity to do that because of the benefits that we were cycling from the prior year, and we felt that was the right thing to do to continue to drive top line growth in the business and deliver value for our members. I would say, in general, to the final part of your question, we tend to view ourselves as our toughest competitor. So really, the majority of the price investments that we're making are because we really want to ensure that we're delivering that great value for our members and where we have the opportunities to invest to drive top line growth while continuing to sustain our gross margins, then we look for the opportunity to do that. Pedro Gil Garcia Alejo: Okay. Great. That's helpful. And as a follow-up, if I could ask you about the composition of your comp between traffic and ticket, the ticket component is particularly meaningful. If you could parse out for us, how much of that is same SKU comparable pricing versus mix versus larger baskets, that would be very helpful. Gary Millerchip: Yes, it's really a combination of all of the above. We're seeing an increased number of items in the basket. We're seeing some inflation in the basket. But remember, for us, part of the inflation is moving items to higher -- bigger size items or better quality items at higher value. So we don't tend to parse out the individual elements, but it would be a combination of both. Operator: And our next question comes from the line of Christopher Horvers with JPMorgan. Christopher Horvers: So I wanted to pick up the pricing thread. You mentioned in the prepared remarks running prices lower ahead of expected cost declines. One of your peers talked about sort of eating some tariffs, maybe passing through the price earlier even though they had pre-tariff inventory. So my big question is, is there a change in the rationality of the overall market? Or is this simply just something opportunistic in a moment in time given the backdrop that we're sitting in? Gary Millerchip: Yes. I think, Chris, I'd answer the question in a couple of ways, and Ron may want to add some color commentary as well. I think maybe taking a step back and talking about the competitive landscape, we think of the market as being very rational currently. We tend to be our own biggest competitor with our goal being always to maintain that pricing authority and to be there for our members. And as I mentioned a moment ago, because of the impact of higher gas prices, we felt it was important to continue to deliver more value for our members. Really, maybe the broader comment I would make, too, is around as you think about the impact on gross margin for us, I think I've shared this in a couple of prior quarters when we were seeing higher core-on-core margin improvement. The rate for us will fluctuate quarter-to-quarter. We really would encourage you not to get too fixated on one individual quarter or one element of gross margin. We tend to manage it more holistically and look at how can we keep investing and driving value and driving top line for our members. This quarter, as I mentioned, we invested more in some everyday items like beef and eggs because we have the opportunity to do that with the LIFO charge that we're cycling, and we were also able to widen our gaps in gas. But overall, when we look at the trajectory of our gross margin rate over the last sort of 12 to 24 months, generally, it's been stable, and I'm talking about the gross margin rate ex gas inflation or deflation. It's generally been stable, a slight improvement sort of in the mid-single-digit range. And really, our Q3 result was very much in line with that trajectory, and we have the opportunity to be -- have that capacity to be able to invest more in value for our members as we were seeing the impact for them on gas prices. Ron Vachris: And this is Ron. To add to what Gary said, the moves that we've made on pricing were strategic, not reactionary. I mean these are things that you -- we will see. One of your examples was you saw some inventory that we had during higher tariffs. Now we're getting the lower-priced goods in. We may go down earlier in those to get into those lower-priced goods quicker. We're down quick on eggs when those -- that commodity started dropping. So we do -- we just use this as a lever. We've always talked long-standingly that we're the first to come down and the last to go up. And this period was a good example of that is getting into lower cost goods where we can and lowering prices for our members. Christopher Horvers: That makes sense. And then as a follow-up, historically, we've thought about a total comp of 4% to 5% to start to see core leverage on SG&A. You did something like a 9%, I think, because FX helps, but you actually delevered 3 basis points. So is there something changing there? You mentioned health care costs to what extent maybe freight impacted that flow-through? And any commentary about how we should think about the future? Gary Millerchip: Yes. And just briefly on SG&A, I wouldn't see anything has really changed in our view of that. If you look at the key components in operations, we were probably about mid-single-digit leverage in core operations, but with the health care cost increases and a couple of small onetime items, they more than offset that impact. And then in central, we also had a couple of legal settlements and reserves that would have impacted the central numbers as well. So of course, there's always the possibility that these items can occur unexpected each quarter. But outside of those, we would have seen a reasonable amount of leverage during the quarter and more consistent with that idea of mid-single-digit comps delivering some level of leverage. To your point, it would be excluding gas, of course. We typically don't see the same level of leverage on gas. But on the core operations, that's what we'd expect to see. Operator: And the next question comes from the line of Oliver Chen with TD Cowen. Oliver Chen: Gary, as we think about retail media, your business model is quite different with the SKU efficiency from other players. What are the parameters and/or guardrails you're thinking of in balancing the member satisfaction against the big opportunity? And it sounds like you're at a nice turning point with that opportunity. Also, Ron, as you continue to push for innovation and being your own best enemy against great multiyear performance, what -- are there trade-offs in terms of expenditures? Or not really? It's very capital light in terms of improving the checkout and automation as well as implementing AI to further make customers happier yet using technology and distribution and speed? Gary Millerchip: Thanks, Oliver. On the retail media question, I think for us, it's fairly simple, and the member always comes first. So it's one of the reasons why our focus with retail media, first and foremost, was to build more of the personalization capabilities to be able to deliver more relevant messaging to members that help improve the experience to save our members time and money. And as we're starting to implement those capabilities, we were also parallel introducing some media activity on third-party sites to really build the capability and to show our CPG partners what was possible with Costco and retail media. As we're now sort of scaling up those personalization capabilities, we'll continue to look at retail media through that lens. So how does retail media help us deliver more value, more relevant experiences for our members and how can our CPG partners participate in that to deliver a better investment, a better return on their marketing spend. So as we are introducing more of those capabilities, we would expect retail media to ramp up and increase the value we generate there, but it would definitely be through the lens of the member experience and member value. And of course, everything we do, 80% to 90% of that value is reinvested in the member to deliver more value for them and better pricing so we can drive top line sales. Ron Vachris: And again, on my question about the technology spend, I would consider it capital light from what we're seeing. We're seeing great returns on the investments. Gary spoke about the sales that we're leveraging on e-commerce. Yes, there's a cost of that AI, but it's being offset by greater sales and great leverage that we're seeing there as well. In the operations side of things, the technology we're using on the front end has been very accretive to higher productivity. I think his point on SG&A leverage is a good reflection of the benefits we're seeing with shorter lines, faster throughput for our members and, in turn, lowering our payrolls in these areas as well. So we see it not as any heavy lift for us in capital at this point. Operator: And our next question comes from the line of Chuck Grom with Gordon Haskett. Charles Grom: So about $45 in cash per share on the balance sheet. Can you zoom out, help us think about capital allocation, including plans for a special dividend and also how you may look to deploy future tariff refunds? Gary Millerchip: Sure. Thanks, Chuck. Yes, on the capital and sort of financial strategy, really very consistent in our mind. Our #1 priority, of course, is to keep investing in the business to drive growth. And you heard me share in the prepared remarks, we are really focused on accelerating new warehouses, remodeling warehouses where we have the opportunity to really expand capacity and support continued growth, particularly in those capital constrained -- sorry, those capacity-constrained locations, expanding the depot network. We're also doing some investments in manufacturing capabilities where they can support KS growth, things like expanding hot dog capacity and coffee roasting in some of these areas. And then, of course, digital member engagement and investing in technology capabilities there to enhance the member experience. As we make those investments, as that being the top priority, we're also growing the regular dividend over time, as you know, and we sort of continue to buy back stock at a level that avoids dilution from the executive stock grants that we issue each year. We are in a position, as you mentioned, where we continue to generate excess cash beyond those priorities. And we believe that at our current valuation, special dividend is typically the most effective way to return excess cash without giving up the flexibility to keep investing in growth where we see opportunities to do that. Our cash balances continue to grow, and we'll obviously evaluate what we think is the appropriate timing and approach to deal with that situation. It's important to remember the last time we did a special dividend, the stock price was materially lower than it is today. So to be at a similar yield, I should say, our cash would need to be at a higher level than it was at the last special dividend. But we'll continue to review those options with our Board, but no plan to share at the present time. But obviously, we'll keep investors posted as we continue to evaluate. Charles Grom: Okay. Great. Fair enough. And then just on real estate, you talked about, I think, relocating 3 stores this quarter or maybe this year. Can you just help us think about the opportunity set and just remind us what the threshold from a sales volume you typically do when you want to relocate a club? Ron Vachris: It's really based on the existing facility. And we have some that are -- our earlier Price Club locations in the Northeast that were smaller facilities with 500 parks that when they hit a threshold of the average volume of the warehouse, that we're seeing in the U.S., it is triggering time that we see opportunities to grow the sales in that market. So it's hard to say that there's any one dollar amount around the world that we use to trigger that. It truly is the size of the business and the size of the facility and how we're servicing our members in the gas stations, parking lots and the traffic inside the warehouse. So it is a moving target as we see. Operator: And our next question comes from the line of Scot Ciccarelli with Truist. Scot Ciccarelli: It seems like 2 of your biggest competitors worldwide, but certainly in the U.S., Walmart and Amazon, continue to ratchet up the competitive bar, if you will, in delivery speeds. Given that fact and the potential increase in agentic commerce, it seems like delivery capabilities and speed will become even more important over time. So do you think Costco will ultimately need to build out your own 1P delivery infrastructure? Or do you think you can fully rely on third-party partners to compete in that kind of environment? Ron Vachris: I think that we will continue to look at that. As you know, a few years back in 2020, we went ahead and made an acquisition to get into the big and bulky delivery because we felt that there was a significant opportunity in shortening the delivery times there. That has been very productive for the company, and we deliver a great example as far as that goes. Currently, now on our same-day delivery process, we have great -- have very good third-party partners that are, as I spoke to on the opening comments, are high satisfaction of our members, and we're averaging 45 minutes or less should a member require something to be delivered that quickly. So at the current time, we're happy with the partners that we have. We continue to evaluate that and look at how we can improve delivery times across the network and across the world. So that will be continue to be reviewed if we need to get further vertically integrated in that business. Operator: And our next question comes from the line of Zhihan Ma with Bernstein. Zhihan Ma: I have one on traffic. Understanding there was a lot of calendar shifts in Q3, but it looks like traffic was kind of below the historical trend, at least for the first part of Q3 and then started growing into April. Can you help us understand, one, how much of the April acceleration was benefiting from the gas inflation and driving more traffic into stores? And two, is there a structural way to further improve traffic, especially given a lot of your stores may already be at capacity so you may not physically be able to attract more traffic growth from here? Gary Millerchip: Sure. Yes. Thanks for the question. On traffic, I would say it's important to sort of think in our minds, take a step back and look at the last 12 months or so because we have seen a mix change over time. If you think back a year or so ago, we were sort of flat to slightly negative on basket size, and we've seen an increase in basket, and we were -- in traffic, we were probably up mid-single digits. And what we've seen is the continuation of the same overall comp trend that we were seeing then. But we've seen -- as we cycled some of those lower average basket size, we've seen basket sizes increase, and we've seen traffic continue to grow up a couple -- 2% roughly, I think, on average, if you look at recent monthly results compared to that 5%. So still growing healthily, but definitely a little bit lower than it was and sort of a normalization, if you like, over 2 years of those 2 numbers looking more close together. I think it's a little bit difficult to look at individual months and try and piece too much together from those. I do think there's a lot of work that we've done over recent quarters to create more opportunity for members to visit more frequently, whether it was the extended hours for our gas stations before the recent growth in gas that we've seen with higher prices, the extended operating hours in our warehouses that we launched just under a year ago as well. The work that Ron mentioned earlier around remodeling and expanding warehouses to create more capacity, whether it's the parking lots or the gas stations and more capacity there as well. So I think there's a lot of focus to make sure that we maintain that trajectory in traffic, but I do think there's going to be puts and takes in individual months just because of some of the different dynamics, as you mentioned, around members changing behavior. And I think of the period you were talking about as an example, we definitely had a period of time where members were stocking up on items as they were concerned about the impacts of what tariffs might mean on costs. And I think you see some of that showing up in the individual month-to-month data. But overall, we feel good about the traffic growth that we're seeing when we look at it on a 2-year basis and on an individual year basis as well. Ron Vachris: To add to what Gary is saying, as you spoke about in our capital expenditures, acquisitions of adjacent properties to our warehouses, expanding parking lots, the technology throughput is also a key driver of traffic. If we can get members processed through much quicker, we're turning parking spaces much faster, that is resulting in better traffic in those high-volume warehouses. And then we strategically look at infill locations. We've proven that when we open a building in an existing market, our build back in the existing buildings when we relieve the pressure comes very nicely. And so we see great build back of traffic in those warehouses that are relieved of the volume as we infill strategically around the world. Gary Millerchip: Maybe just mention too, you asked about gas. Just to confirm, you didn't say this, but I wanted to make sure I clarified. Gas traffic isn't included in our traffic number. I would say that, generally speaking, a little less than half of our members are visiting the warehouse when they visit the gas station. I wouldn't say we've seen a dramatic change when you look at our results in the third quarter around traffic overall as a result of that. We think that's partly because a lot of members are increasing their frequency of visiting the gas station to top up in between what would have normally been a gap between getting the tank to empty because of the concern about what might the gas price be tomorrow. But we do think, over time, it's a great way to build loyalty. When we look at our members that are engaged in gas with us, they are generally visiting more frequently overall. They're spending more with us overall, and they're also renewing at a higher rate. So we do think it's a good healthy barometer of long-term growth for the business as we continue to drive engagement in gas. Operator: And our next question comes from the line of Peter Benedict with Baird. Peter Benedict: I know we're going to get the May numbers next week, but just curious if you could comment on kind of any behavioral changes or changes in trend that maybe you've seen thus far. It's obviously a dynamic environment out there. So kind of attuned to that. And as related to that, maybe a bigger picture question around GLP-1s. You talked about it in the prepared remarks. I'm curious how it's influencing either any category performance that you've got or maybe how you're thinking about leaning into different categories as you think out over the next several months and years? Gary Millerchip: Yes. Thanks, Peter. As you mentioned, we will release sales next week, so I won't get into any sort of short-term trends. But I'll maybe just bridge back to a couple of comments I made earlier is we're generally really not seeing any major change in our members' behavior. I certainly -- well, I'll caveat that with gas, of course. Gas prices are very much on members' minds and they've had a major impact on our overall growth in gas and have also, for sure, become a bigger percentage of a member's total spend in the month because of the higher prices of gas that are in the market today. We've widened our gaps in terms of price to make sure we're there for our members, but we know that's something that's very high on our members' minds. But in terms of core merchandising, really very, very consistent. I think that quality, value and newness are extremely important, and that's the things that our buyers are focused on every day, and we continue to see that combination of items that offer every day great value are doing really well and items that are bringing newness and excitement are doing really well. A couple of examples of that in -- and it's across all 3 of our nonfoods, food and sundries and fresh, I would say. In nonfoods, the everyday shows up in tires and majors and health and beauty where we have great value for our members that they can take advantage of every day. And on the excitement side, finding new gold items for members to take advantage of special events. I mentioned some of the self-care items that we're selling in health and beauty and small appliances. They're really the areas where I see members taking advantage of some opportunities to treat themselves at great values. But similar things in fresh as well with premium meat still doing extremely well because of the value and quality that we offer, but unit growth extremely strong in ground beef and poultry as well with the everyday value that we're offering. I think in terms of GLP-1s, the biggest thing we're seeing, of course, is that the value that we're offering in our pharmacy is really helping members take advantage of those drugs in a very cost-effective way. I think I called out in our prepared remarks, one of the things that we're seeing in food and sundries where we're really leaning in is kind of anything protein right now is doing extremely well. So protein snacks, protein bars, beef sticks. We launched our own Kirkland Signature Beef Stick that's doing tremendous volume and offering tremendous value to our members. So that's an example of an area where we're really leaning into those items because of what we're seeing with our members and the value and quality they're looking for. Ron Vachris: And on the merchandising front, I've had an opportunity this last quarter to meet with several of the larger CPGs with Sarah, our Head Merchant. And I got to tell you that they're making some nice pivots based on the needs of the GLP customer. And as Gary mentioned, proteins, we just launched a Kirkland Signature Ultra Filtered Protein Milk in our dairy that has just taken off extremely, extremely strong, things with fiber, magnesium. So I think our buyers are right on top of the halo effect of GLPs and the needs of the members. And I'm quite impressed with what I'm seeing from the CPGs, the rather big ones, and how they're pivoting to the future potential opportunities there. So there is quite a potential opportunity, and I feel we're on the front side of that. Operator: And our next question comes from the line of Rupesh Parikh with Oppenheimer. Rupesh Parikh: Just going back to your commentary on AI search. I was just curious if you're seeing any benefits in any particular categories or services in terms of the traffic and conversion. Gary Millerchip: I think it's pretty broad-spread, Rupesh. It's -- as we mentioned earlier, it's still very early days for us. But as we've started to work on updating our product pages to ensure that they're reflecting and translating through those large language models so our value and our quality is showing up. As you can imagine, with the commitment we have to being great value for our members and with the commitment to quality, so member reviews and feedback generally on the products that we're selling is relatively positive compared to alternatives. Those generally resonate well with those large language models. And so I would say it's kind of when our members are searching for those items, we're showing up more consistently and have plans to ensure that we show up more consistently in the future. And we think it's an opportunity as we continue to evolve our strategy there to ensure that we're getting at least our fair share of that activity as members change behavior. Ron Vachris: Good example of categories would be like appliances. We've got a good value on appliances, a very good everyday value, but our real big value is in an all-in pricing that our prices include delivery, installation, haul away. Regular search didn't show all that value. Now with these large language models, they're able to look at the entire value such as tires that installations included, road hazards included, nitrogen included. So we feel we're very bullish on this AI search and the strength it's going to bring to telling the whole Costco story about the true value of what we offer. Rupesh Parikh: Great. And then my follow-up question, just on the fuel business. So you guys have seen a significant increase in volumes. How do you think about opportunities to increase throughput? And what may be, going forward, is maybe more of a permanent increase in your fuel volumes related to recent changes in behavior? Gary Millerchip: Yes. Thanks, Rupesh. Yes, it's a little bit difficult to predict, obviously, what's going to happen with gas prices. I think we believe that by widening our gaps and delivering more value for our members, I mentioned it a little bit earlier on the call, we see, over time, members that engage with us in gas are generally visiting more frequently, shopping more, buying more and also renewing at a higher rate. So we think the fact that we've got more members visiting our gas stations more consistently, and even as Ron mentioned in some of his prepared remarks, we're seeing some members that have been members for some time but are using the gas stations for the first time, we think that's also an encouraging sign for long-term loyalty. So I think on gas itself, it's a little bit more difficult to predict because often what we find is when gas prices are higher, members are willing to either travel a little bit further or recognize that it might take them a little bit longer to fill up because of how busy our gas pumps are. So we can see that change over time based on how prices change on gas, but we believe that members engaging with gas with us is a great reminder and reinforcement of the overall value that we offer and is likely to drive long-term loyalty based on what we've seen historically with members that buy gas from us versus those that don't. Operator: And our next question comes from the line of Greg Melich with Evercore ISI. Gregory Melich: I'd love to unpack a little bit more on disinflation and inflation. Is it still running roughly 1% across the box, Gary? Is that a fair estimate? Because you said there were some good guys and some bad guys in the quarter. Gary Millerchip: Yes, it was a little bit higher in the quarter, Greg. So sort of low to mid-single digits is what we've kind of shared in the past. But really most of the increase, if not all of the increase in the inflation rate, we include gas in that number, and gas was, for sure, as you might imagine, the largest part of the inflation. If I break it down a little bit more for you between some of the categories and items, I mentioned in prepared remarks, fresh and food and sundries were a bit lower during the quarter. That was largely on the back of produce, eggs and dairy all being deflationary. We are still seeing inflation in beef, deli and areas like candy. So there's definitely puts and takes in food and sundries, but the net impact was a slight reduction in fresh and food and sundries during the quarter. Nonfoods was a little bit higher during the quarter. Some of that was really as we're seeing higher cost of memory chips in computers having an impact on the sort of cost of items in majors. Now we took the opportunity to buy forward some items there to try and mitigate and minimize the impact for our members, but that's definitely something that we're seeing in the cost of the items. And then the secondary in nonfoods that we see, particularly if oil prices remain at elevated levels, is likely to see some increases in items that have sort of plastic components or polyester or cotton because of the impact of higher resin costs. Gregory Melich: Got it. And then maybe a follow-up on gas. You said you widened your price gaps in gasoline. Did the penny profit slip as part of that? Or is it basically just as everybody took prices up, you guys took it up less? Gary Millerchip: Our profit was a little bit higher year-over-year, but as a rate of sales, obviously, was significantly lower. Operator: And our next question comes from the line of John Heinbockel with Guggenheim Partners. John Heinbockel: Maybe Ron, two related questions. What does the club pipeline look -- and I know it's multiyear, club pipeline look like in Europe and Asia, let's say, over the next 3 years, right? And where is there the sort of the greatest backlog of clubs coming? And then secondly, when you think about capacity in Canada, right, where you've got some very high AUVs. I know you've been adding clubs. What does the capacity dynamic look like in that country? Ron Vachris: Okay. In Canada, yes, we have a lot of upside potential. We've got some clubs. We've got the next 3 to 5 years charted out. And so we see consistent strong growth in Canada for at least the next 5 years, and then we'll have to come back and evaluate where we're going. In Asia, great opportunities remain in China, in Korea and in Japan. Taiwan, we do see opportunity for a few more locations in that region, but we think primarily those other 3 big countries have the greatest potential for us as well. Europe, we're still very young in France, and we see that coming. Spain has got the shorter leeway that we see significant growth in Spain over the next 3 years as well. And the U.K. has been very strong for us the last 3 years. So I think we see some very good things coming in the U.K. as well. So we see very strong international expansion over the next 5 to 10 years, and those countries would probably be the leaders outside of North America. Operator: And our final question comes from the line of Chris Nardone with Bank of America. Christopher Nardone: So on the Executive Membership strength relative to recent trends, are you seeing more customers trade up from Gold into Executive? Or is the recent strength more driven by new customers choosing the higher tier membership? And then just as a related follow-up, with the spike in gas prices, are you seeing new membership acquisition improve as you move through the spring season? Gary Millerchip: Yes. Thanks for the questions, Chris. On the executive membership, it's a combination of both. So we're definitely seeing increase in membership upgrades from Gold membership, but we're also seeing a higher penetration of new members signing up for executive membership with the extra benefits that we offered, particularly the extended opening hours and the $10 per month on Instacart if you spend over a certain level. Sorry, what was the second part of the question? Yes, I don't know we could attribute to any individual factor, but we're certainly seeing year-over-year growth in new member sign-ups, as I mentioned earlier on the call. So we're pleased with that momentum. And obviously, we were cycling some higher growth last year as well, as I've referred to. So we're encouraged by the growth that we're seeing there. I wouldn't necessarily say we would attribute it to any one individual factor, but definitely seeing continued growth in new member sign-ups year-over-year. Christopher Nardone: Okay. And then just the China executive rollout, how is that going relative to your expectations? And if you could just remind us where you could still roll out this program in some of your other international markets over time? Gary Millerchip: Yes. Overall, we've been very pleased. I think it's ahead of our expectations in China. We obviously launched with high expectations, believing it would be a great value for our members, but we've seen a higher level of activity than we initially have expected. I would say today, with China, we have Executive Membership in most of our markets where we have a sort of a level of warehouses over the sort of the 7 number that we have in China. There are some individual countries where we wouldn't have Executive Membership today. And certainly, over time, if we grow that presence, that may make sense. But I think at the moment, we feel like we've got Executive Membership in the markets where it makes sense. Operator: And ladies and gentlemen, that concludes our question-and-answer session and today's conference call. We thank you for your participation, and you may now disconnect.