Costco 10-Qquarter ended 2026-05-10

Executive Summary

Costco delivered double-digit revenue and earnings growth in Q3 FY2026, but the acceleration in reported sales overstated the improvement in underlying demand: comparable sales excluding gasoline-price and currency effects grew 7%, versus 8% a year earlier. Membership growth, digital adoption and international expansion support the investment case, while higher gasoline prices inflated sales and diluted the reported merchandise margin. Net income outpaced operating income partly because of higher interest income, currency gains and a lower tax rate—not solely stronger retail profitability. Substantial cash generation supports accelerated investment and dividends, but investors should distinguish durable membership and traffic growth from price-driven sales gains and favorable expense comparisons.

Key Financial Highlights

Periods ended 5/10/2026; YTD represents the first 36 weeks. Changes are Y/Y unless stated otherwise.

• Membership fees: Q3 $1.37B, +11%; YTD $4.06B, +13%. The 9/2024 fee increase contributed ≈25% and ≈35% of respective growth, with sign-ups and Executive upgrades supplying the remainder.
• Margin quality: Q3 merchandise gross margin fell 21 bp to 11.04%, but increased 1 bp excluding gasoline-price inflation. Lower core-category margins were offset partly by ancillary businesses and a smaller inventory-cost accounting charge; the absence of last year’s vacation charge also helped comparisons.
• Earnings bridge: Q3 interest income and other, net increased to $155M from $85M, reflecting higher cash balances and currency-transaction gains; the effective tax rate fell to 25.4% from 26.2%.
• Cash conversion: YTD inventory movements consumed $1.24B, while accounts payable supplied $2.50B. Improved supplier terms and faster inventory turns supported cash generation; FCF deducts $4.23B of capital expenditures.
• Capital returns: YTD repurchases totaled $603M, yet shares outstanding increased by 0.277M to 444M, so buybacks did not reduce the share count net of issuance. Stock-based compensation was $771M; dividends declared totaled $1.81B, and the quarterly dividend increased to $1.47 from $1.30.
• Funding: Long-term debt excluding the current portion was broadly flat at $5.67B, leaving expansion supported primarily by internal cash generation.

Business Developments

• Growth mix: Warehouse ancillary and other-business sales increased 29% in Q3, led by gasoline and pharmacy, versus 7% for core merchandise categories. Gasoline-price increases alone added $1.37B to sales, making headline growth less indicative of merchandise demand.
• Digital expansion: Digitally enabled comparable sales rose 21% in Q3. This broader measure replaced e-commerce comparable sales and includes digitally initiated warehouse fulfillment and Costco Travel; digital growth expands reach but carries lower gross-margin percentages than warehouse sales.
• Warehouse investment: Costco operated 928 warehouses and opened 16 YTD, including two relocations. Management plans 13 further openings, including one relocation, and ≈$6.5B of FY2026 capital expenditures across warehouses, technology and infrastructure.
• International opportunity: Other International operating income grew 19% in Q3 and 22% YTD, the fastest geographic growth, supporting diversification beyond the dominant U.S. business.

Risk Assessment

• Thin-margin sensitivity: Pricing investments, labor costs and merchandise-cost changes can materially affect earnings; core-category pressure persisted despite favorable gasoline-adjusted headline margins.
• Membership retention: Renewals were 92.2% in the U.S. and Canada and 89.7% worldwide; online memberships and digital promotions modestly weigh on retention, potentially weakening recurring fee growth.
• Consumer and external exposure: Tariffs, inflation, currency movements and weaker spending can disrupt sourcing, purchasing patterns and reported growth.
• Expansion execution: New warehouses initially earn less and may cannibalize existing locations, while scarce sites and lower-margin digital sales can constrain investment returns.
• Litigation and cyber exposure: Labor, opioid, privacy, labeling and tariff disputes could materially affect an individual period; cybersecurity failures could damage member trust.

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 continues to prioritize value, loyalty and expansion over near-term price maximization. The key investment question is whether growing membership and digital reach translate into durable earnings as fee-increase benefits moderate.

• Demand: Monitor gasoline- and currency-adjusted comparable sales and shopping frequency; improvement from Q3’s 7% and 2% would confirm stronger underlying momentum.
• Membership: Track paid members, renewals and fee growth as the contribution from the fee increase fades.
• Investment returns: Monitor core margins and FCF after expansion spending; sustained cash generation without further margin erosion would support the growth thesis.