Costco 10-Qquarter ended 2026-02-15

Executive Summary

Costco delivered broad-based Q2 FY2026 growth: higher shopping frequency, larger baskets and warehouse expansion lifted revenue 9.2%, while operating income rose 13%. Membership fees outpaced sales, supported by member growth and the earlier fee increase, reinforcing the economics of its low-price retail model. Earnings improvement was not entirely operational: a legal settlement supported merchandise margin, a lower tax rate helped net income, and favorable currency translation boosted sales. Cash generation supports accelerated investment without immediate funding pressure, but investors should distinguish durable traffic and membership gains from currency, working-capital and one-time benefits as lower-margin digital sales expand.

Key Financial Highlights

Q2 covers the 12 weeks ended 2/15/2026; H1 covers the first 24 weeks of FY2026. Balance-sheet changes are since 8/31/2025.

• Margin quality: Q2 merchandise margin rose 17 bp to 11.02%; excluding gasoline-price effects, the increase was 11 bp, including a 5 bp non-recurring legal-settlement benefit. Gasoline, pharmacy and core merchandise helped, while selling, general and administrative expenses rose 13 bp relative to sales, partly from higher self-insured liability claims.
• Cash conversion: H1 OCF exceeded net income by $3.65B. Accounts payable contributed $0.731B vs a $0.458B prior-year outflow, although inventory absorbed $0.783B; FCF deducts $2.82B of capital expenditures.
• Capital returns: H1 repurchases of $0.420B did not shrink the share count; shares outstanding increased a net 0.455M to 444M. Stock-based compensation was $0.652B, and cash dividends were $1.15B.
• Funding: Long-term debt carrying value excluding the current portion was broadly flat at $5.69B; senior notes include $2.25B due in 2027, comfortably below current liquid resources.

Business Developments

Comparable sales increased 7%, with average ticket up ≈4% and shopping frequency up ≈3%. Favorable currency translation added ≈$0.899B to Q2 sales, while lower gasoline prices partly offset volume growth. Digital-enabled comparable sales rose 23%, or 22% excluding currency effects, extending customer reach but carrying lower gross margins than warehouse operations.

International growth outpaced the United States: Q2 revenue increased 12% in Canada and 15% in Other International vs 7.6% domestically. Nevertheless, the United States generated 72% of revenue and remains the primary earnings engine.

Costco ended Q2 with 82.1M paid members. The fee increase effective 9/1/2024 accounted for ≈35% of Q2 membership-income growth, indicating growth also came from other membership drivers.

Management plans ≈$6.5B of FY2026 capital expenditures across warehouses, distribution, manufacturing, information systems and digital businesses. After 12 H1 warehouse openings, including two relocations, it plans another 21 openings, including three relocations; this expands capacity but adds preopening costs and initially less-profitable locations.

Risk Assessment

• Margin sensitivity: Costco’s low-margin model magnifies merchandise-cost, tariff, labor and insurance pressures; Q2 expense growth absorbed much of the merchandise-margin improvement.
• Membership retention: Renewal rates of 92.1% in the United States and Canada and 89.7% worldwide underpin recurring fees, but online promotions and newer international markets attract members with lower renewal rates.
• Expansion and channel mix: New warehouses can cannibalize existing locations, while rapid digital growth carries lower gross margins and may limit profit conversion.
• Currency and gasoline volatility: Translation and fuel-price movements can obscure underlying demand, with currency contributing ≈$0.899B to Q2 sales.
• Litigation: Employment, opioid, privacy, product-labeling and prescription-claim matters could create a material charge in an individual period, despite management’s assessment that pending matters are unlikely to materially affect overall finances.

This 10-Q lists no risk factors of its own and refers to the annual report. The risks above come from the rest of this filing. Full list: the company's 10-Ks on SEC.

Strategic Outlook and Investor Actionables

Management is investing for warehouse and digital growth while preserving value pricing. The investment thesis depends on membership durability and traffic translating into earnings despite a more expensive expansion program.

• Demand quality: Monitor comparable sales, shopping frequency and currency-adjusted digital growth; continued traffic gains would confirm growth beyond pricing and translation.
• Profit durability: Track merchandise margin excluding gasoline effects and settlement benefits alongside expense ratios and renewals; recurring margin gains would validate earnings quality.
• Investment conversion: Compare capital spending with the ≈$6.5B plan, warehouse openings and FCF; sustained cash generation without outsized payable benefits would support expansion funding.