Costco Wholesale Aktie

Hello. I'm Andrew Yoon, AVP of Finance and Investor Relations, and I'll review our sales results for the 5-week retail month of September, which started on Monday, August 31, and ended on Sunday, October 4. This period is compared to the 5 weeks that began last year on Monday, September 1, and ended on Sunday, October 5.

This recording 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 this recording in today's sales release 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 them, except as required by law. Comparable sales and comparable sales, excluding all gasoline sales and the impact of foreign exchange are intended as supplemental information and are not a substitute for net sales presented in accordance with U.S. GAAP.

As reported in our release, net sales for the month came in at $30.02 billion, an increase of 13% from $26.58 billion last year. Reported comparable sales for the month were as follows: U.S., 12.5%; Canada, 6.3%; Other International, 10.8%. Comparable sales for the month, excluding the impacts from changes in gasoline prices and foreign exchange were as follows: U.S., 8%; Canada, 4.9%; Other International, 7.7%. Digitally-enabled sales, which are sales initiated through a digital device, whether fulfilled through a warehouse, distribution center or Costco Travel, increased year-over-year as follows: Reported, 19%; excluding foreign exchange, 19.1%.

Labor Day in the U.S. and Canada occurred 1 week later this year. The shift positively impacted September total comparable sales by a little more than 50 basis points. Total company comparable sales for the month, excluding all gas sales and the impact of foreign exchange were approximately 7.5%. Our comp traffic or frequency for the month was up 4.7% worldwide and 4.3% in the U.S. Foreign currencies year-over-year relative to the U.S. dollar impacted total and comparable sales as follows: Canada negatively by approximately 1%, Other International positively by approximately 1.2%, and Total Company approximately flat. Gas price inflation positively impacted total reported comp sales by approximately 3.8%. The average worldwide selling price per gallon was up 32.8% versus last year. Worldwide, the average transaction was up 6.4%, which includes the impacts from gas inflation and FX. Excluding gas inflation and FX, average transaction was up 2.8%.

In terms of regional and merchandising categories, the general highlights were as follows: U.S. regions with the strongest comparable sales were the Midwest, Southeast, and San Diego. Other International, in local currencies, we saw the strongest results in Spain, Taiwan and China. The negative impact of cannibalization was approximately 60 basis points.

Moving to merchandising highlights. The following comparable sales results by category for the month exclude the impact of foreign exchange: Foods and sundries were positive mid-single digits. Better-performing departments included sundries, food, and frozen food. Fresh foods were up mid- to high single digits. Better-performing departments included bakery and meat.

Nonfoods were positive high single digits. Better-performing departments included gift cards, housewares, and sporting goods. Ancillary sales were up mid-30s. Gas, pharmacy, and food court were the top performers. Gas was up mid-40s, driven by price per gallon changes year-over-year and high single-digit comparable gallon growth.

Looking ahead, the October reporting period will include the 4 weeks beginning October 5 and ending November 1, 2026, compared to the 4 weeks beginning October 6 and ending November 2, 2025. If you have any Investor Relations questions, please call Josh Dahmen at (425) 313-8254, Bryan Starnes at (425) 427-7403 or me at (425) 313-6305. This recording will be available until 4:00 p.m. Pacific Time, Wednesday, October 14.

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 Fourth Quarter Fiscal Year 2026 Conference Call. [Operator Instructions]

And I would now like to turn the conference over to Mr. Gary Millerchip, Chief Financial Officer. You may begin.

Good afternoon, everyone, and thank you for joining us for Costco's Fourth 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.

Joining me for today's call is our CEO, Ron Vachris. Before we dive into our financial results, I'll hand over to Ron for some opening comments.

Thank you, Gary, and good afternoon, everyone. Thank you for joining us today. As we wrap up fiscal year 2026, I'll share a few highlights from the year before turning the call back over to Gary.

In the fourth quarter, we opened 12 warehouses, including a relocation in Taiwan, 10 new U.S. buildings and our 43rd warehouse in Mexico. For the fiscal year, we opened 28 new warehouses, including 3 relocations for a total of 25 net new buildings. This brings our warehouse count to 939 worldwide. Our current plan is to open another 33 warehouses in fiscal year 2027, of which 5 are relocations as we build towards our goal of opening 30 net new warehouses per year. We continue to see significant opportunities for new warehouses growth, including new U.S. markets, such as Buffalo, New York and [ Laurence, Kensas ], infills in our more mature U.S. markets as well as international markets in which we operate. We're confident in the return on investment in all the buildings that we opened with new markets bringing more new members and infills driving many fewer new sign-ups, but a much quicker maturity curve for sales and profitability.

For fiscal year '27, we are planning to open 4 buildings in Europe, 5 in Canada and 1 in Mexico and have a strong pipeline of new warehouses planned for Asia, Australia and other international markets in fiscal year '28. Our business performed exceptionally well across all operating channels this year including our warehouses, ancillary businesses and digital platforms. We delivered top line sales growth of over 10% and expanded our market share by deepening member loyalty and capturing a larger share of wallet. This success was anchored by our agile item-driven model. Our buyers stayed ahead of member trends, quickly adjusting our assortment to offer high-quality relevant products at the lowest prices. This strong performance was spread across a wide range of departments, including meat, bakery, major electronics and health and beauty [indiscernible].

Our ancillary businesses also performed very well across the board with gas, pharmacy and travel leading the way, all growing at a faster pace than our overall growth rate. Our gas business has had a record year driven by members seeking value in Costco's top-tier gasoline in the face of rising prices. In fiscal year '26, we saw the penetration of U.S. member households that purchase gas reach an all-time high. During the fiscal year, we estimate we saved our members over $3.2 billion versus the average price at the pump in markets where we operate. We also expanded 26 existing U.S. gas stations during this year at our highest volume locations to increase throughput and improve the overall member experience.

In pharmacy, sales grew nearly 20% as we continue to expanding our digital capabilities. We increased member value and convenience through our GLP-1 and fertility programs as well as digital options like [ Rx mobile pay-ahead ] and pickup lockers. Many U.S. buildings are now achieving [ Rx pay-ahead ] penetrations of more than 1/3 of prescriptions, saving both members and our employees' valuable time. These programs led to double-digit script growth for the year and that are more than offset the headwinds from lower prices as a result of Medicare maximum fare price changes. This quarter, we are excited to announce a new partnership with [ Scan Health Systems ] to develop Medicare Advantage benefits that will help members get more value for their health care.

Our Costco Travel business continues to add exciting new packages and worldwide destinations. Vacation packages, cruises and car rentals all grew double digits during the year, as our great values continue to resonate with our members. During fiscal year '26, Costco sent over 750,000 members on cruises, an increase of 16%. One of those members booked 154 night crews on Region 7 Seas at a cost of over $218,000. This member will receive an $8,800 shop card as they conclude their crews.

We continue to make progress on digital in fiscal year '26. Digitally enabled sales, which include third-party delivery exceeded $33 billion and was an increase of more than 20%. Over the last few weeks, we have further expanded the ways in which our members can engage with us online with the announcement that our Uber Eats partnership is growing from 17 states to the entire U.S. as well as expansion of DoorDash partnership to include the U.S. These partnerships will complement the successful long-term partnership that we've had with Instacart in the U.S. and Canada. Members using these new marketplaces are significantly younger than our overall member base. Average delivery times across all 3 platforms are under an hour, bringing increased convenience in addition to our great values. We've observed that these sales through these channels are mostly incremental with limited impact on our core warehouse grocery business.

Our membership continues to be the most important item we sell and the additional benefits we introduced for Executive Members last year continue to resonate well. Executive Member penetration reached an all-time high in fiscal year '26. Renewal rates showed improvements again this quarter with the increasing executive penetration likely to help improve those rates in the future. Growth in new member sign-ups through digital channels and younger members also continued.

Looking over a longer time horizon, our member base under 40 has grown nearly 60% since COVID, increasing our total penetration of members under 40 to more than 1/4 of our total base. While these younger members start out spending a little less with us, over time, they grow into higher-spending members.

Finally, I'll touch briefly on tariff refunds, and Gary will share more details later in the call. As shared in our earnings release, we received some initial tariff refunds in the fourth quarter, and we reinvested some of these dollars to give value back to our members. This was predominantly through price reductions on a number of items in the second half of the quarter, including everyday items in produce, meat and beverages and some nonfood items such as home furnishings and hardware.

Reflecting back on the year, I want to thank all of our employees worldwide and congratulate them on another great year. As a management team, we continue to be incredibly proud of our 355,000 employees worldwide and the culture that they help foster. Their dedication to following our code of ethics, doing what's right and taking care of our members are the driving force for the consistency of our financial results.

With that, I'll turn it back over to Gary to discuss the financial results for the quarter, and I'll jump back on for Q&A and field some questions.

Thanks, Ron. In today's press release, we reported operating results for the fourth quarter of fiscal year 2026 for 16 weeks ended August 30. As usual, we published a slide deck under Events and Presentations on our investor website with supplemental information to support today's press release.

Net income for the fourth quarter came in at $2.998 billion or $6.75 per diluted share. This year's results include a nonrecurring benefit of $0.15 per diluted share from IEEPA tariff refunds received in the quarter less partial reinvestment of those refunds and increased member values. Excluding this nonrecurring benefit, net income and EPS were up 12.3% and 12.4%, respectively, from $2.61 billion or $5.87 per diluted share last year.

On the topic of tariff refunds, we received $184 million in the fourth quarter, which was made up of $174 million in refunds and $10 million in interest. This amount represents a little more than 1/3 of the total refunds expected. In the first quarter of fiscal year 2027, we have already received a similar amount of refunds as we did in Q4, and we intend to continue reinvesting the majority of the dollars we receive and increase member values.

As tariff refunds and tariff refund reinvestments are nonrecurring items that will continue to impact our financial results in fiscal year 2027, we plan to provide a similar level of information about the net impact on future quarterly earnings calls.

Net sales for the fourth quarter were $93.87 billion, an increase of 11.2% from $84.43 billion in Q4 2025. Comparable sales were up 9.4% and 6.7% adjusted for gas price inflation and FX. Excluding gas sales entirely and adjusting for the impact of foreign exchange, comparable sales were also up 6.7%. Digitally enabled comparable sales were up 19.5% and 19.8% adjusted for FX. Our segment breakout of comparable sales is disclosed in both our earnings release and the supplemental slide deck.

In terms of Q4 comp sales metrics, FX negatively impacted sales by approximately 0.3% while gas price inflation positively impacted sales by approximately 3%. Traffic or shopping frequency increased 3.3% worldwide. Our average transaction or ticket was up 5.9% worldwide and 3.3%, excluding gas price inflation and changes in FX.

Moving down the income statement to membership fee income. We reported membership fee income of $1.849 billion, an increase of $125 million or 7.3% year-over-year. Adjusting for FX, the increase was 7.7%. The September 2024 U.S. and Canada membership fee increase accounted for less than 1% of fee growth. And as a reminder, Q4 marks the last quarter in which we will see a year-over-year benefit from the membership fee increase. Excluding the membership fee increase in FX, membership income grew 6.8% year-over-year. This was driven by higher executive membership penetration and base membership growth. At Q4 end, we had 42.3 million paid executive members, up 9.4% versus last year. We ended the quarter with 84.1 million total paid members, up 3.8% versus last year and 150.4 million cardholders, up 3.6% year-over-year.

In terms of renewal rates, at Q4 end, our U.S. and Canada renewal rate was 92.3%, up 10 basis points from last quarter, and the worldwide rate came in at 89.8%, also up 10 basis points. It was pleasing to see the improvement in overall renewal rates this quarter as we continue to make progress with our targeted digital communications and retention strategies. As Ron mentioned earlier, in the longer term, we would also expect higher Executive Membership penetration to lead to a further improvement in renewal rates as Executive Members generally renew at a higher rate than Gold Star members.

Turning now to gross margin. Our reported gross margin rate was lower year-over-year by 11 basis points, coming in at 11.02% compared to 11.13% last year. Excluding gas inflation, the gross margin rate was higher by 20 basis points. Core on core was lower by 32 basis points and lower by 9 basis points, excluding gas inflation. In terms of core margins on their own sales, our core on core margins were higher by 18 basis points, excluding the impact of tariff refunds and tariff refund reinvestments. The increase in core on core margins was broad-based with fresh, nonfood and food and sundries all higher year-over-year. Supply chain efficiencies drove margin improvement across all categories. Fresh also benefited from higher labor productivity in meat, bakery and deli. And nonfood benefited from strong sell-through rates and a shift in sales mix as higher-margin departments outperformed in the quarter. The 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 rate than core merchandise sales.

Ancillary and other businesses gross margin was higher by 23 basis points and 32 basis points, excluding gas inflation. This was driven by the higher sales penetration in e-commerce, pharmacy and gas that I referenced a moment ago.

LIFO negatively impacted the rate by 11 basis points and 12 basis points without gas inflation. We had a $152 million LIFO charge in Q4 this year compared to a $43 million charge in Q4 last year. Higher memory costs in consumer electronics and inflation on items directly affected by the ongoing conflict in the Middle East such as gas, motor oil and resins were the biggest drivers. As a reminder, LIFO is calculated by comparing the cost of inventory on hand at the beginning of the fiscal year to the cost of inventory on hand at the end of the year. The magnitude of the LIFO charge in the quarter was much larger than the inflation rate in the quarter as a result of the need to true-up LIFO for the full fiscal year in our fourth quarter.

Lastly, as the IEEPA tariff refunds and the partial reinvestment of those refunds is a nonrecurring item, we have shown the net impact separately within the other line of our gross margin metric. This net benefit was 9 basis points, both with and without gas inflation. As this was a nonrecurring item, this impact is excluded from the core gross margin results.

Moving on to SG&A. Our reported SG&A rate was lower or better year-over-year by 27 basis points, coming in at 8.94% compared to last year's 9.21%. Excluding gas inflation, SG&A was lower or better by 2 basis points. The operations component of SG&A was lower or better by 22 basis points and flat excluding the impact of gas inflation. Central was lower or better by 5 basis points and lower by 2 basis points, excluding the impact of gas inflation. Below the operating income line, interest expense was $44 million versus $45 million last year. Interest income was $209 million versus $169 million last year, driven by higher cash balances and $10 million of interest received related to tariff refunds. And FX and other was a $44 million benefit versus a $46 million benefit last year. In terms of income taxes, our tax rate in Q4 was 25.2% compared to 25.6% in Q4 last year.

Turning now to some key items of note in the quarter. Capital expenditure was $2.21 billion in Q4 and $6.4 billion for the full year. For fiscal year 2027, we are planning approximately $7.5 billion in capital expenditure. This increase is predominantly due to a growth in the pipeline of new warehouses as we target a run rate of 30 net new openings a year and the continuation of outsized spend on our supply chain, which will set us up to efficiently support future warehouse and e-commerce sales growth. Beyond fiscal year 2027, we would expect to see a slowing in the rate of capital expenditure growth following 3 years of outsized growth that began in fiscal year 2025.

Turning now to some merchandising highlights. Through a relentless focus on value, quality and newness, we delivered consistently strong comparable sales growth in Q4. Nonfoods comp sales were up mid- to high single digits. Top performing departments were gold and jewelry, home furnishings, housewares, small electrics and health and beauty. Our success in health and beauty is a great example of our buyers identifying global trends and sourcing new items that resonate strongly with our members. Some of the best performing items this quarter included K-Beauty products such as [ Kallagam face ] masks and lotions from a number of top Korean vendors.

Fresh comparable sales were up mid-single digits, led by bakery and meat. Growth in bakery reflects our success in adding new and indulgent items at great value for our members. An example of this is our in-house pastries, which grew by over 100% in the quarter. In meat, our commitment to great quality and value fueled continued growth in both lower-cost proteins such as poultry and ground beef as well as premium items such as USDA prime beef and [ wagyu ].

Now before moving on from the fresh departments, I did want to address the speculation that's been blowing up our social media feeds and confirm that the rumors are true. For a limited time, the [ food court shore ] will be returning to all our U.S. locations starting this month. Food and sundries comp sales grew low to mid-single digits led by packaged foods, sundries and frozen foods. We continue to see a shift in member shopping habits towards healthier packaged foods and protein items such as meat snacks, sardines, can tuna and chicken, as well as high fiber options, such as [ Edamame ] and granola snacks all experienced strong growth.

Kirkland Signature items play an important role in how we deliver greater value for our members offering savings of at least 15% to 20% compared to the national brand equivalent with equal or better quality. Q4 launches included our [ KS Japanese MatcheGreen T-powder ], [ KS 1 ounce silver bars ], [ KS Pretzel Sandwiches ] and [ KS ultrafiltered 2% milk ]. Our goal is to be the first to lower prices where we see opportunities to do so, and the following are examples of price reductions that we implemented during the quarter. KS Walnuts from $13.79 to $9.99, [ KS Colombian whole bean coffee ] from $21.99 to $19.99, [ KS Drive Facial Tower ] from $19.99 to $18.99, and [ KS caused Black Pepper ] from $6.99 to $5.99.

In Ancillary businesses, comp sales continue to be extremely strong, up high 20s during the quarter. As Ron shared earlier, gas, pharmacy and travel led the way and are all great examples of how we grow share of wallet and deliver increased value from a Costco membership. Gas cards were positive mid-30s driven by the price per gallon increase year-over-year and record gas volumes.

Turning to inflation. Overall inflation during Q4 remained in the low single digits. As I mentioned when discussing [indiscernible] earlier, we did see an increase in nonfood inflation during the quarter, predominantly due to memory costs in consumer electronics, gas and petroleum-based items. Inflation in food and sundries and fresh was largely consistent with prior quarters as inflation in meat was offset by deflation in eggs and dairy. In the supply chain, while our traffic teams are working through some minor shipping disruptions due to recent typhoons in Asia and Panama Canal delays due to El Nino product is flowing relatively smoothly, and our merchants feel good about our inventory position. We continue to watch freight costs closely due to higher fuel prices. So far, the impact has been manageable as incremental fuel surcharges have been largely offset by lower contracted shipping rates.

In digital, total size and app traffic was up 30%. Breaking down our digitally enabled sales results, pharmacy, home furnishings, small electrics, hardware, houses, domestics and health and beauty were all top performers. Some of you may have noticed that we recently made the decision to discontinue our extended marketplace offering, Costco Next. As our digital capabilities mature, we believe that integrating the most popular items and brands from Costco Next more seamlessly into the Costco app and website provides a better member experience and will increase sales. This change is not material to our results.

During the quarter, we continued to accelerate personalization including enhanced product placements and e-mail communications. Our approach is resonating well with members, leading to triple-digit growth in sales from personalized initiatives in Q4 and 10% of all costco.com orders now include a personalized item. While starting from a low base relative to other channels, AI continues to grow in its influence on how our members are searching for products. Traffic to our site from AI search grew triple digits for the second consecutive quarter and continues to show the highest conversion rate of all site traffic.

Similar to e-commerce sales overall, sales originated from AI search are led by appliances and consumer electronics. Interestingly, the Costco membership is also among the top items originated from AI searches indicating that there is a strong positive sentiment around the value of our membership coming from these sources.

In closing, we are incredibly proud of our team and the great results they delivered in fiscal year 2026. As in the past, during times of wider market uncertainty, we believe our commitment to taking care of our members and delivering highly relevant products and services at the lowest price present opportunities for Costco to continue to grow our top line sales and market share in fiscal year 2027.

That concludes our prepared remarks. In terms of upcoming releases, we will announce our September sales results for the 5 weeks ending Sunday, October 4, on Wednesday, October 7, after market close.

We'll now open the line up for questions.

[Operator Instructions] And our first question comes from the line of Michael Lasser with UBS.

So it sounds like given the tariff refund, you have invested about $100 million into price to reinforce Costco's value proposition yet we really haven't seen a meaningful change in the trajectory of the monthly sales as of yet. And if anything, it has moderated a touch. So how are you evaluating the return on those investments? And if price is not moving the needle as significantly as maybe it has in the past, should we calibrate our expectations that this year is just going to be a more return to historic levels of same-store sales growth for Costco?

I think there's a couple of different sort of questions in there. I guess I would break it out between. I think as we think about the member and how they're thinking about value I would say we're seeing very similar trends to what we've talked about in prior quarters. Our members continue to show resilience in their spending and they show a willingness to spend in discretionary areas where they're seeing exciting new items at great value.

As we talked about the quarter, while gas was definitely a major impact on top line sales as members resonated with the value that we offer through our gas stations as they saw prices higher overall at the pump. When we look at our sales, excluding gas, they remain very robust. We had comp adjusted sales when you take out gas and FX in that sort of 6% to 7% range as they've been pretty much consistently year now. But I would say what really stood out for us during the quarter was, as you heard me say in maybe some of the prepared comments is that nonfood sales was the highest performing category overall, that shows that we are seeing members respond to the quality and the value items that we're offering and the value they present.

We also saw, as Ron mentioned in his comments, strong growth in travel as well, which I think is a good indicator of where there's great value. Our members are really embracing that proposition that we're offering. So we believe that we continue to offer a very compelling proposition for our members, and we're seeing a continuation of the trends that we've seen really throughout the year.

On the pricing investments to your point, really, we view that as very much a giving value back to our members for the tariff refunds that we received. And we -- our goal was to make sure that we spread those as we could to items that would have the most impact for members. So as Ron mentioned, quite a few everyday items were impacted. We did also invest some dollars into a number of nonfood areas where tariffs would have had an impact on those items, in particular, when the IEEPA tariffs were originally introduced. So overall, we view that very much as giving value back to our members for the tariffs that we pay, but we still feel very good about the comparable sales trajectory that we see in our performance and how our members are showing up and spending.

And our next question comes from the line of Simeon Gutman with Morgan Stanley.

My question is on membership. So the spread between membership growth and the unit growth is now or not MFI, but membership growth. How do you look at that? How should we look at it? I'm sure it is a growth driver in some way. But can you make the case that as long as existing member spend continues to climb, then the narrowing spread is just noise?

Thanks, Simeon. Yes, the way we look at our membership growth, to your point is we look at all the drivers of membership growth. And overall, when we think about the components of that, we were pleased with the year where we saw new member sign-ups grew during fiscal year '26. And that was at a time when we were cycling a strong growth in new member science from fiscal year 2025. And it was also without having any major outsized new openings in Asia that would typically cause a spike in new member sign-ups. So solid underlying performance in membership, [indiscernible] healthy level of sign-ups. And as Ron also mentioned in some of the earlier comments, what we've also been pleased with in that membership growth is seeing a younger member and sort of seeing that penetration go through over a quarter now of all members being under 40, we think is a really positive signs to your point about continued growth in spend per member.

We also saw a record level of executive membership penetration, both in new sign-ups and within the base, which again, similar to the theme you were sharing earlier, generally, our executive members spend at a higher level than our Gold Star members. So another sort of lead indicator that we feel is a good measure of quality around our member loyalty and member spend overall.

And then I think the final point on the membership sort of underlying metrics with the renewal rate absolute level being a strong data point, but also ticked up slightly during the quarter. So overall, we feel good about the membership metrics. But I think to your point, which is a really important one is, one of the things I think we're most excited about is when we look at the insights around membership is how we think about the quality of our membership base. And what I mean by that is we exit fiscal year 2026 with a record high executive penetration, as I mentioned, record high gas engagement, record high digital engagement. And when you look at sort of the things that we think about that are the strongest indicators of loyalty and likelihood of members continuing to spend the biggest share of wallet and spend more top line sales with us, then we do believe that really bodes well. And when you combine that with the underlying growth in membership, we think the combination of the 2 is a good indicator of the opportunity to keep growing top line sales.

And our next question comes from the line of Chuck Grom with Gordon Haskett.

A year ago, the tariff backdrop forced you to remove a bunch of items from the store and add other SKUs. Can you remind us how long that lasted and impacted the business? And I guess, how are you feeling about the assortment today as we move into the holiday season?

Great question. It really was most impactful in the first, second quarter, died off a little bit in the third quarter that we got back to a little bit more normalcy. I feel very good about the holidays. We feel very good about the buying lineup that our folks have. And as Gary said, the strong nonfood sales we saw in this quarter was the precursor for us back in this business again, and we feel good about the quality goods we have coming and the members are responding very well. So primarily first, second quarter were the biggest impacts.

And our next question comes from the line of Scot Ciccarelli with Truist.

I do have a follow-up on the membership. And Gary, I know you just went through a lot of this, but I guess the question is with kind of 8 quarters in a row where the membership growth has slowed, what do you think it will take to reverse that declining trend? And would you care to speculate when we might be able to see that?

Yes. Thanks for the question, Scot. I think from our perspective, and we look at the -- you've heard me talk through the underlying metrics. We are seeing continued growth in new member sign-ups. We're seeing a normalization now I would say is the majority of those younger digitally engaged members are flowing through the membership renewal rate or the membership base. So we're seeing more of a normalization in that growth and the sort of overall renewal rate that we publish each quarter.

I think if you look at the outlook for this year, obviously, we don't give guidance as we think about particular metrics. But I think the sort of the growth rate that we've seen in recent quarters is probably more typical than what we'd expect to see based on where we are today with the growth in new members that we're seeing and the sort of normalization of the renewal rate. I think for us, as we look at sustained growth in top line sales, as I mentioned in response to Simeon's question, we look at it more of a balance between continued growth in the membership base as we're seeing today and a continued growth in spend of those members. I think over time, as you think about the longer-term benefit of executive membership penetration growing, that would certainly be a tailwind in renewal rate that could be an accelerated total membership growth.

And as Ron mentioned in some of his opening comments, as we enter some of the Asian markets with some outsized growth in new membership in the future, that could certainly be a catalyst for higher headline membership growth. But I think for us, when we look at the balance of the business, we feel good around where the membership growth rate is today, particularly with those quality metrics that I mentioned about the opportunity to see higher spend per member alongside that growth.

And our next question comes from the line of John Heinbockel with Guggenheim.

So guys, what visibility do you have on vendor price increases coming over the next several months, you probably get at least a 90-day or maybe a 90-day look. What's the visibility on that, the advantage of substitutability, so maybe talk about attacking it that way. And then your thought the role that KS will play, right, is maybe we get a step-up in those increases.

Yes. It is quite dynamic when you think about the different commodities we deal in, and some have a lot more foresight than others. And so we do -- we'll see up to 90 days on some items and other things could have some more urgency if they're more impacted by freight or resin prices or those kind of things. So it's anywhere from 30 days to 90 days plus. And I think all the things you talked about have a great asset in there, and we continue to see the Kirkland Signature brand broaden, and we continue to see some great Kirkland items that we're introducing out in the marketplace that are really very good tools for us to continue to fight back on lower pricing.

So we work collaboratively with our vendors and dealing with these commodity increases and try and keep prices down the best we can. And it's a continual focus for all of our buyers are looking at how to reduce pricing.

And our next question comes from the line of Rupesh Parikh with Oppenheimer.

So on the agentic commerce first, clearly an evolving backdrop, just overall, how do you feel Costco's position as the backdrop continues to evolve?

Yes. Thanks for the question, Rupesh. I think as we talked about a little bit earlier on the call, we are excited about the opportunity with AI, particularly -- I don't know if I would say it's agentic commerce at the moment. I think for us, what we see is more members definitely using AI as at all to help them search for items of they're looking and thinking about shopping for different products and services. And we think because of the compelling value, as you know, we hold very closely and dearly the pricing authority that we have with our members. So we're always going to make sure that we will show up in a way for the items that we're selling we have the best value for our members. And we know that because we have a curated assortment and our buyers are personally vetting every item that we sell that the quality of those items. And so the reviews that members are going to see around the quality of the products that they're searching for should also be very strong.

So we feel it's a great opportunity for us, particularly as today, we don't do a lot of digital or we don't do any paid digital advertising. We certainly appear in digital advertising more because of the sort of reputation that we have as our members talk about us on social media. But AI presents an opportunity in a sort of a neutral environment for us to be able to ensure that our value and our quality shows up transparently for our members.

So it's early days in our mind, the traffic is growing significantly, but it's still a very low base. When we look at the volume that we see, we're seeing triple-digit growth in terms of the sales that we're seeing originate from that search activity on the different large language models, the AI tools that are out there for members. I think of that being a Gemini, Anthropic and OpenAI. And we're seeing encouraging growth in those areas. I think you heard me say on the earlier part of the call, what's also encouraging to us is when consumers or in our case, members are searching, it's also highlighting the value of a Costco membership, and we're seeing strong flow-through of membership activity and engagement because of the way our value is showing up there, too.

So I think we believe it's an exciting opportunity. We still got a lot of work to do as we've been optimizing and modernizing our digital capabilities. There's a lot of work going on in the teams right now to work with those large language models to identify how we can continue to clean up and update our data and our product pages so that our value continues to show up transparently in that environment. But we feel it's a continued opportunity for us to continue to grow sales and to highlight the value that we offer for our members.

Our next question comes from the line of Corey Tarlowe with Jefferies.

I think it was Gary in your prepared remarks you talked about how a lot of your newer members are younger and maybe more digitally savvy. Given the robust digital growth that you've seen, combined with the stronger growth from newer, younger members, does this at all cause you to think differently about perhaps what the optimal orientation is for the club over the next, let's say, 3 to 5 years?

Yes. Thanks for the question. I think overall, what we're describing and what we're seeing is that, first of all, as younger members engage with Costco, of course, they're generally signing up through a digital phone or laptop or iPad because that's the way they generally start that engagement and journey. I think what we found over time is that how we communicate with those members, definitely requires continued growth in our digital capabilities through improving the member experience online and through the app as we've been doing over the last year or so, continuing to use the information that we know about our members to provide a better personalized experience for them as they're engaging through the membership.

But I think just as importantly, if not more importantly, as being to how we draw those members into the experience of the warehouse and to really help them see the value of the relationship. You may have seen actually there was a recent article that talked about for younger consumers, how they're really engaging and excited about experiences and the opportunity that Costco presents to be in a brick-and-mortar retail environment and to enjoy the treasure hunt experience and engage in whether it's the food court or other nonfood items that we offer.

So I think for us, we certainly see it as a different way for members to enter into the Costco experience, but the warehouse continues to be hugely important to the value that we offer for members to create a differentiated experience. So our amazing employees have the chance to engage with members and help build loyalty with them as well. So I don't know that we feel that it changes the way in which we'd expect the warehouse to look in the coming years but we do think having an experience that combines the value of everything we offer in the warehouse with enhancing the experience online is important to continue to grow member loyalty and we definitely see that where members engage with us through the warehouse and they're engaged to the digital app or engaging through digital channels. They're even more loyal and shopping more frequently, not just online but also in the warehouse as well.

And our next question comes from the line of Kelly Bania with BMO Capital Markets.

Gary, I wanted to go back to kind of the member the membership household growth. You made the point that, obviously, the Asia markets could be a catalyst for higher contribution to that membership growth over time. But are you willing to share some metrics on what member household -- new member households look like in international countries such as Asia and how that compares to the U.S. because it does look like with this acceleration to a net new 30 units, it does look like that's weighted a little bit more towards international. So can you just help us do some math around that.

Yes. Thanks, Kelly. Certainly, we do expect, as you mentioned, to continue to grow new warehouses, and we believe we've got a path for the next 5 to 10 years of targeting that 30 new warehouses a year, which is why we continue to increase the capital investment towards that goal.

From a membership point of view, I would say -- and Ron may want to add some more color on this, too. I think it's important to sort of calibrate some of these things that we get to a strong outcome, whether it's in the new warehouses that we open or when you look at the success of our model overall in slightly different ways in the different markets that we operate in.

So if you think about some of those warehouses and businesses that we have in, say, Asia, like China, Japan, Korea. In many cases, we're going to see a much higher number of members per warehouse but they often visit less frequently. So we like the model, it performs very well. But the challenge there is how do we increase the level of frequency of visit and how do we increase the engagement with those members that we have in those markets because while the dynamics work very well overall, we think there's an opportunity to improve the how frequently and how much they're spending at Costco.

In a U.S. market, we might see less members per warehouse, but they're spending significantly more per member. And so we get to a similar strong economic outcome, but it's a different engagement in the way that they're engaging overall with Costco.

So when we talk about membership growth, it kind of comes back to my answer to one of the earlier questions is, for us, it's also about quality and ensuring that at one level, we could open a new warehouse in Asia that might have a significantly outsized growth in the membership base. And for a quarter or 2, it might show higher membership growth. But in some cases, you've got some of those members that are [ rigs ] coming in for the first year to experience Costco, and it might not really be a long-term value driver for us around membership renewal and continued shopping in the warehouses. Net-net, those Asian warehouses performed very well because they have a high number of members, but they do look a little bit different.

So for us, our focus is really on are we growing membership? Are we growing the quality of engagement with members and loyalty of members? And do we get to a strong sales performance by growing our membership base and growing engagement with those members? And I think based on the current outlook that we have for the growth in new warehouses. We feel good about the shape of how that looks at the moment. But certainly, it can change over time if you were to have 2 or 3 openings in Asia in a particular year, you might see higher growth in that membership base. But that might also mean when you look at our total metrics, it might be less impressive from a sales growth per member because it brings down that overall average.

And our next question comes from the line of Greg Melich with Evercore ISI.

Ron if you could unpack the inflation commentary a little bit more. I think you said that food inflation was running similar to prior quarters, maybe around 1% and that nonfood was higher, but decelerating. And I guess as part of that and the inflation outlook, how much do you think bringing the [indiscernible] back will add to average ticket in the next quarter?

I love the question. Thanks, Greg. Yes, just to unpack inflation for you. So what we're seeing overall currently, if I add together the sort of the cumulative impact in all of our merchandising categories, we feel like inflation currently is running in the low single digits, and it's relatively stable overall from what we've seen in prior quarters. The area where we did see some increase in the current quarter was in non-foods. And that was really -- I wouldn't say it was isolated, but the vast majority of it was in memory costs on consumer electronics and the items that you would expect to be related to oil. So gas prices, which we include in our inflation number and petroleum-based items as well.

So those would be the areas where we would have seen the increase in nonfood. It would still be relatively low inflation overall, if you blend it out across all of nonfoods, but that would have had an impact overall on the inflation.

In fresh and food and sundry, yes, generally consistent with what we've seen in the prior couple of quarters. There's still inflation in certain areas. So I think of beef would be a good example where we still see inflation. We still see some inflation, I should say, in resins, as I mentioned, in steel, in flour, some individual commodities. But there are also deflationary items like eggs and dairy and butter and cheese in particular. So all those things generally blend out to largely offset each other.

I would say maybe just to comment on one thing to on unpack inflation, too. It might have seemed a bit contradictive for us to say inflation is relatively consistent, but we had a large LIFO charge during the quarter. Maybe just to clarify the way our LIFO calculation works. Because of the accounting around LIFO, if the inflation happens at the end of the year, so in the final quarter, we have to true up the inflation for the whole year. Normally, if it was fairly consistent throughout the year, you would spread the charge over each quarter. But because the inflation I mentioned in consumer electronics and in the gas and petroleum related items happened in the fourth quarter, we have to true up the whole sort of calculation on the inventory that we have on hand at the end of the year for the inflation rate.

So while we true up $150 million or so charge in the fourth quarter, if you look at the total charge for life over the year, it's slightly north of $200 million, which if you kind of divide that by the total inventory that we have on hand in the U.S., that would be about 1.5% inflation. So while it sounds like a big number in the quarter, it's still really only pointing to about 1.5% inflation as the impact of LIFO on the total inventory that we have at the end of the fiscal year, if that helps.

And our next question comes from the line of Oliver Chen with TD Cowen.

This is Gabriela gar on for Oliver. I wanted to zoom out a little bit and ask about the strength of the consumer. Since you've noted for a couple of quarters now, strength in both value-oriented categories, but then also [indiscernible] ones like [indiscernible] or travel. I'd love to hear how you characterize the strength of the consumer today across income cohorts versus last quarter or last year? And then any commentary you can provide around price elasticity as you've made some of these additional value investments?

Sure. Thanks for the question. I think we would say that when we think about the consumer or [indiscernible] member, of course, is that very similar to prior quarters. I think our members are very resilient, and they continue to show a willingness to spend on discretionary items where they see these exciting new items that are offering great value to them. And I think we do see both of the things you described, we see members being very thoughtful about where they're spending their dollars. They're looking for value in everyday items. But they're also, as I mentioned, willing to spend on items where they see it's a great value even if it is in some of those nondiscretionary categories.

So what I mean by that, maybe just taking as examples for you in the sort of 3 main categories that we focus on, which are nonfood, food and sundry and fresh. If you think about nonfoods, we see strength in everyday items where we offer great value on things like tires and housewares and even everyday furniture. But we also see strong growth in some of the health and beauty items like small appliances, when you look at self-care things like fragrances, skin and hair care, even members want to splurge on great value items where we're offering tremendous value on massage chairs and so on as those kind of items. We've seen over 50% growth in those items.

So in nonfood, they will be good examples where we're seeing both of those dynamics at play of looking for that great value on every day, but also willing to buy items that are maybe more discretionary where they see the value.

Similarly, [indiscernible] fresh, everyday items, it really shows up in ground beef and poultry, but then on premium items in USDA prime and wagyu beef, but also in bakery, we see tremendous strength in bakery, where we're offering really great quality indulgent items for members to buy. So I think it shows up in all the different categories. We see both elements of it. And the nice thing about being an item business is I think we're able to deliver on both of those expectations of our members, and we're seeing growth in both ends of that spectrum.

And our next question comes from the line of Kate McShane with Goldman Sachs.

It's been asked a couple of times just with regards to the younger customer. But our question with regards to that was, it sounds like they maybe start buying a little bit less when they come to you than the average member, and we just wondered what that maturity curve look like. And then just how much incremental lift do you expect from your new third-party fulfillment agreements?

Sure. Thanks, Kate. On the maturity, it's really a case of what we tend to find is that younger members, generally speaking, as you might imagine, are a smaller household. And generally, the income levels are a little bit lower than when they sort of for us would sort of reach their peak maturity and guessing having the most need for what we offer at Costco. So really, as they go through that sort of pre 40 through 40 to 55 or so is when we see our members hit that peak spending pattern because their income is generally at its peak and they're also sort of largest family size. So generally taking advantage of the broader elements of what Costco has to offer.

I'd probably call out more in the shorter term, some of the other metrics that I mentioned around the potential for higher spend per member. When we look at our executive member penetration and how that's grown, generally speaking, as members are investing at a higher level in the fee, they psychologically, if you like, looking to get the most value from their membership. And so we tend to see higher spend on executive members. And similarly, as members engage in more in gas, we tend to find they visit more frequently. We didn't necessarily see that in the very early days of the spike in gas prices in the market because I think members were generally filling up short term to fill in more frequently rather than visiting at the same time to the warehouse. But we do believe that as members see the value of gas that we're offering, and we've got more new members buying gas for the first time, but we think that's a great indicator of continued spend and growth with members as well. So I think it's a combination of all of those that we would expect to be positive for us in terms of driving that incremental spend per member.

And on the third-party side, our general experience is that there are different consumers or members for us that are engaging in the different platforms. So we do think there'll be incrementality by bringing more choice to our members. And generally speaking, we find where members engage in 1 of those 3 platforms or at least Instacart for us so far. It's generally incremental. So it tends to be an additional shopping trip versus it's pulling away from anything that we see as [indiscernible] overall loyalty as well.

And our next question comes from the line of Chris Horvers with JPMorgan.

I want to try to bring together sort of the pricing and inflation question a little bit. So we're getting to a point where I think the egg deflation should start to go to 0 and no longer be a headwind. And it also seems like we're getting past most retailers the time frame of reinvesting tariff rebates and the oil is persistent enough where prices probably do go up.

So I guess as you look ahead in the calendar year, do you think that grocery inflation number, the low single digit, has a bit of an inflection coming or on the other hand, do you think that the softer industry volumes around grocery, obviously not for Costco, but across the industry, it is weaker because of some of the pressures on the low end do you think we don't have that sort of ultimate rationality that the industry has always demonstrated. Obviously, you're the last raise and first to lower, but ultimately, you do act rational when there are these persistent cost pressure.

So I just want to get the overall view on like how you think grocery inflation proceeds over the next 3 to 6 months and whether the industry is sort of strong enough and rational enough for those prices to actually go up?

Yes. I think for us, it's -- as you might expect, we think it's difficult to predict what's going to happen with inflation, I think especially because of the uncertainty around the situation with the Middle East and how long that might impact and what you might see in terms of volatility in prices on oil and oil-related items. And then, of course, there's still uncertainty around potentially where exactly we land on the tariffs that exist today or could exist in the future.

So I think there are variables that make it really hard for us to predict with too much precision of what may happen. I think as you -- so the best reference for us, we can share, I think, is really what we've seen in recent quarters. I don't know that we call out outside of caveating everything I'd say with those 2 major factors could have a meaningful impact on what happens in the coming 6 to 12 months.

Generally speaking, we've seen prices be relatively stable. And I think you're right, we may see the world a little bit differently because our focus is always on how do we find ways to lower our costs, how are we finding efficiencies to offset where there might be commodity price inflation. I don't know that we'd characterize what we see today as being any different looking forward from that outside of the unknowns that I just described.

And so from our perspective, it's been a relatively stable environment for inflation. And we're -- our goal is to continue to find ways to find cost savings and efficiencies that would offset where we might see those pressures to keep prices and value there for our members and drive top line sales.

And our next question comes from the line of David Bellinger with Mizuho.

I want to go into the third-party delivery expansion a bit more. Should we think about this as the ultimate solution for delivering for Costco? Because you do have a higher mix of these younger customers coming in, they tend to mix towards a propensity for faster delivery speeds, a lot of convenience. So is this -- or could there be some type of precursor here for a new investment cycle for Costco, where you have to meet those needs of the consumer ever more than you did in the past?

I think we feel pretty good about where we are with the digital engagement and delivery times. Be it in big and bulky, we've made some significant improvements in the past 5 years, bringing our times of delivery of furnishings and appliances from 4 to 5 weeks down to 3 and 4 days. The same type of thing -- the same type of improvement has been experienced in this same-day delivery. And the majority of these deliveries are done within 45 minutes, that was what the customer wants.

Gary said earlier, we find a lot of this interaction to be incremental to our experiences with our members. They're still visiting the clubs regularly but they use these as fill-in shops and some may use them even more frequently than that. So we see it as a great addition to the offering and there is a subset of people that really take advantage of this, and that tends to be the younger customers that we have. that resonate more with the immediacy of delivery, and they want that then. But we do see it really serving a purpose, be it from prescription deliveries to grocery deliveries, it's broad-based, and it's very again, like we said, incremental to the relationship with our members out there.

And our final question comes from the line of Christopher Nardone with Bank of America.

So first, I was wondering if there's any specific cost buckets within SG&A where you're starting to see more pressure relative to the last few quarters. And if there's any reason you wouldn't be able to continue leveraging SG&A if you're comping in the 6% range in the foreseeable future. if I can sneak in a quick follow-up just separately on GLP-1s. Just curious if you're starting to see an impact to sales from some of these recent price changes? And if not, could we see a larger headwind next year in calendar '27 from the next round of pricing cuts?

Yes. Thanks for the questions. I think first of all, on SG&A, I think you characterized it pretty well. We did see a little bit of leverage during the quarter. I wouldn't say that there is anything that we'd call out today that would cause us to think there's some major sort of headwinds that would impact our ability if we're comping at the rate that you mentioned to be able to create some leverage in the model.

I think the one area that we have called out previously in other quarters would be general liability and health care as costs that have been growing at a faster rate. But Q4 would be a good example where we were able to continue to achieve a little bit of SG&A leverage even with continued cost increases in those areas. But certainly, if that trend would to deteriorate, that would be a factor that could influence our ability to do that.

But when we look at our employee agreements, I think those are factored in for a 3-year period and year 1 is always the most expensive of a 3-year agreement there. So we're into year 2 now with that. So from -- when we look at the sort of opportunities to continue to be more productive as we drive top line sales, I don't think there's anything particularly I would call out that would be something to watch out for beyond what you saw in our Q4 results.

From a GLP-1 perspective, I think you -- probably the best way to look at it is the example of what's happened as Ron shared in our earlier comments with the initial changes on GLP-1s. We certainly had some impact on our business, but with the significant value that we offer through the programs that we've invested in to date and continue to invest in. We feel like we found ways to both offset those impacts and also drive more value for our members and drive increased script count as well as top line sales. So while I do think there will continue to be those underlying headwinds that we have to manage, we feel good about the way in which we're delivering more value for members through our health care, creating more convenience for them, and we believe those will allow us to continue to see momentum in that part of our business.

At Costco, when we see lower prices, we see an opportunity, and we've really taken great advantage of that this year in the pharmacy with the lower GLP pricing, the lower drug prices that we've been out there, how we've been able to capitalize on more unit growth. The same type of thing with the tariff investments that we've made. We've made significant tariff investments. Unit growth has been fantastic, and that's what it's all about is how do we get that value back to the member and the units have responded excellent, and we continue to see that in the pharmacy and in the core business itself. So we look to the opportunities at lower prices and taking care of our members.

And ladies and gentlemen, this concludes today's call, and we thank you for your participation. You may now disconnect.

Hello. I'm Andrew Yoon, Director of Finance and Investor Relations, and I'll review our sales results for the 4-week retail month of August, which started on Monday, August 3, and ended on Sunday, August 30. This period is compared to the 4 weeks that began last year on Monday, August 4, and ended on Sunday, August 31.

This recording 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 this recording in today's sales release 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 them, except as required by law. Comparable sales and comparable sales, excluding all gasoline sales and the impact of foreign exchange are intended as supplemental information and are not a substitute for net sales presented in accordance with U.S. GAAP.

As reported in our release, net sales for the month came in at $23.70 billion, an increase of 9.9% from $21.56 billion last year. Reported comparable sales for the month were as follows: U.S., 9.0%; Canada, 4.0%; Other International, 9.5%; total company, 8.4%; digitally-enabled 17.9%. Comparable sales for the month, excluding the impacts from changes in gasoline prices and foreign exchange were as follows: U.S., 5.6%; Canada, 2.8%; Other International, 6.8%; total company, 5.4%; digitally-enabled, 17.9%.

Labor Day in the U.S. and Canada will occur 1 week later this year. The shift negatively impacted our August total and comparable sales by a little less than 75 basis points. Total company comparable sales for the month, excluding all gas sales and the impact of foreign exchange was approximately 5.3%. Our comp traffic or frequency for the month was up 2.5% worldwide and 2.3% in the U.S. Foreign currencies year-over-year relative to the U.S. dollar impacted total and comparable sales as follows: Canada negatively by approximately 0.8%, Other International positively by approximately 1.2% and the total company positively by approximately 0.1%.

Gas price inflation positively impacted total reported comp sales by approximately 2.9%. The average worldwide selling price per gallon was up 25.8% versus last year. Worldwide, the average transaction was up 5.7%, which includes the impacts from gas inflation and FX. Excluding gas inflation and FX, average transaction was up 2.8%.

In terms of regional and merchandising categories, the general highlights were as follows: U.S. regions with the strongest comparable sales were the Southeast, San Diego and Midwest. Other international and local currencies, we saw the strongest results in Spain, China and Korea. The negative impact of cannibalization was approximately 50 basis points.

Moving to merchandising highlights. The following comparable sales results by category for the month exclude the impact of foreign exchange. Foods and sundries were positive low single digits. Better-performing departments included food, frozen foods and sundries. Fresh foods was up mid-single digits. Better-performing departments included bakery and meat. Nonfoods were positive mid-single digits. Better-performing departments included home furnishing, sporting goods and jewelry. Ancillary business sales were up high 20s. Gas, pharmacy and hearing aids were the top performers. Gas was up low 30s driven by price per gallon changes year-over-year.

Looking ahead, the September reporting period will include the 5 weeks beginning August 31 and ending October 4, 2026, compared to the 5 weeks beginning September 1 and ending October 5, 2025. Prior to September sales, we'll be releasing our Q4 and full year fiscal 2026 earnings on September 24. Earnings will be announced after market close with a conference call to follow at 2:00 p.m. Pacific Time. The call can be streamed via our Investor Relations website. If you have any Investor Relations questions, please call Josh Dahmen at (425) 313-8254, Bryan Starnes at (425) 427-7403 or me at (425) 313-6305. This recording will be available until 4:00 p.m. Pacific Time, Wednesday, September 9.

Hello. I'm Andrew Yoon, Director of Finance and Investor Relations, and I'll review our sales results for the 4-week retail month of July, which started on Monday, July 6, and ended on Sunday, August 2. This period is compared to the 4 weeks that began last year on Monday, July 7, and ended on Sunday, August 3.

This recording 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 and sales release 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 them, except as required by law.

Comparable sales and comparable sales, excluding all gasoline sales and the impact of foreign exchange are intended as supplemental information and are not a substitute for net sales presented in accordance with U.S. GAAP.

As reported in our release, net sales for the month came in at $23.12 billion, an increase of 10.7% from $20.89 billion last year.

Reported comparable sales for the month were as follows: U.S., 10.3%; Canada, 4.2%; Other International, 6.0%; total company, 8.9%; digitally-enabled, 17.7%.

Comparable sales for the month, excluding the impacts from changes in gasoline prices and foreign exchange were as follows: U.S., 6.9%; Canada, 4.9%; Other International, 6.6%; total company, 6.6%; digitally-enabled 18.2%. Total company comparable sales for the month, excluding all gas sales and the impact of foreign exchange were approximately 6.7%.

Our comp traffic or frequency for the month was up 3.6% worldwide and 3.3% in the U.S. Foreign currencies year-over-year relative to the U.S. dollar negatively impacted total and comparable sales as follows: Canada by approximately 3.0%, Other International by approximately 1.5%, and total company by approximately 0.6%.

Gas price inflation positively impacted total reported comp sales by approximately 2.9%. The average worldwide selling price per gallon was up 25.2% versus last year. Worldwide, the average transaction was up 5.1%, which includes the impacts from gas inflation and FX. Excluding gas inflation and FX, average transaction was up 2.9%.

In terms of regional and merchandising categories, the general highlights were as follows. U.S. regions with the strongest comparable sales were the Midwest, Southeast and San Diego. Other International and local currencies, we saw the strongest results in Taiwan, Korea and China. The negative impact of cannibalization was approximately minus 60 basis points for the total company.

Moving to merchandising highlights. The following comparable sales results by category for the month exclude the impacts of foreign exchange. Foods and sundries were positive low to mid-single digits. Better-performing departments included food, frozen foods and sundries. Fresh foods were up mid-single digits. Better-performing departments included bakery and meat. Nonfoods were positive mid-single digits. Better-performing departments included jewelry, home furnishing and housewares. Ancillary business sales were up high 20s. Pharmacy, gas and food court were the top performers. Gas was up low 30s, driven by price per gallon changes year-over-year.

Looking ahead, the August reporting period will include the 4 weeks beginning August 3 and ending August 30, 2026, compared to the 4 weeks beginning August 4 and ending August 31, 2025.

If you have any Investor Relations questions, please call Josh Dahmen at (425) 313-8254, Bryan Starnes at (425) 427-7403, or me at (425) 313-6305. This recording will be available until 4:00 p.m. Pacific Time, Wednesday, August 12.

Hello. I'm Andrew Yoon, Director of Finance and Investor Relations, and I will review our sales results for the 5-week retail month of June, which started on Monday, June 1, and ended on Sunday, July 5. This period is compared to the 5 weeks that began last year on Monday, June 2, and ended on Sunday, July 6.

This call 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 and sales release 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 them, except as required by law. Comparable sales and comparable sales, excluding all gasoline sales and the impact of foreign exchange are intended as supplemental information and are not a substitute for net sales presented in accordance with U.S. GAAP.

As reported in our release, net sales for the month came in at $29.24 billion, an increase of 10.6% from $26.44 billion last year. Reported comparable sales for the month were as follows: U.S., 10.6%; Canada, 3.7%; Other International, 4.7%; total company, 8.8%; digitally enabled 20.9%. Comparable sales for the month, excluding the impacts of changes in gasoline prices and foreign exchange were as follows: U.S., 7.6%; Canada, 4.9%; Other International, 5.6%; total company, 7.0%; digitally enabled 21.5%.

Total company comparable sales for the month, excluding all gas sales and the impact of foreign exchange was approximately 7.0%. Our comp traffic or frequency for the month was up 3.2% worldwide and in the U.S. Foreign currencies year-over-year relative to the U.S. dollar impacted total and comparable sales as follows: Canada negatively by approximately 3.0% Other International negatively by approximately 1.9% and total company negatively by approximately 0.7%.

Gas price inflation positively impacted total reported comp sales by approximately 2.5%. The average worldwide selling price per gallon was up 22.4% versus last year. Worldwide, the average transaction was up 5.5%, which includes the impacts from gas inflation and FX. Excluding gas inflation and FX, average transaction was up 3.7%.

In terms of regional and merchandising categories, the general highlights were as follows: U.S. regions with the strongest comparable sales were the Midwest, Southeast and Northeast. Other International and local currencies, we saw the strongest results in Taiwan, the United Kingdom and Korea. The negative impact of cannibalization was approximately minus 50 basis points for the total company.

Moving to merchandising highlights. The following comparable sales results by category for the month exclude the impact of foreign exchange. Foods & Sundries was positive low to mid-single digits. Better-performing departments included food, candy and frozen foods. Fresh Foods were up mid-single digits. Better-performing departments included bakery and meat. Non-Foods were positive mid- to high single digits. Better performing departments included jewelry, home furnishings and majors. Ancillary business sales were up high 20s. Pharmacy, gas and hearing aids were the top performers. Gas was up low 30s, driven by price per gallon changes year-over-year.

Looking ahead, the July reporting period will include the 4 weeks beginning July 6 and ending August 2, 2026, compared to the 4 weeks beginning July 7 and ending August 3, 2025. If you have any Investor Relations questions, please call Josh Dahmen at (425) 313-8254, Bryan Starnes at (425) 427-7403, or me at (425) 313-6305. This recording will be available until 4:00 p.m. Pacific Time, Wednesday, July 15.

Hello. I'm Andrew Yoon, Director of Finance and Investor Relations, and I will review our sales results for the 4-week retail month of May, which started on Monday, May 4, and ended on Sunday, May 31. This period is compared to the 4 weeks that began last year on Monday, May 5, and ended on Sunday, June 1.

This call 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 and sales release 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 them, except as required by law. Comparable sales and comparable sales, excluding all gasoline sales and the impact of foreign exchange are intended as supplemental information and are not a substitute for net sales presented in accordance with U.S. GAAP.

As reported in our release, net sales for the month came in at $24.01 billion, an increase of 14.5% from $20.97 billion last year. Reported comparable sales for the month were as follows: U.S., 13.7%; Canada, 9.2%; Other International, 9.7%; Total Company, 12.5%; Digitally Enabled 21.1%.

Comparable sales for the month, excluding the impacts of changes in gasoline prices and foreign exchange were as follows: U.S., 8.7%; Canada, 5.3%; Other International, 6.9%; Total Company, 8.0%; Digitally Enabled, 20.9%. Total Company comparable sales for the month, excluding all gas sales and the impact of foreign exchange was approximately 7.9%. Our comp traffic or frequency for the month was up 3.9% worldwide and 3.7% in the U.S.

Foreign currencies year-over-year relative to the U.S. dollar impacted total and comparable sales as follows: Canada positively by approximately 1.2%, Other International positively by approximately 1.4% and Total Company positively by approximately 0.4%. Gas price inflation positively impacted total reported comp sales by approximately 4.1%. The average worldwide selling price per gallon was up 34.9% versus last year. Worldwide, the average transaction was up 8.3%, which includes the impacts from gas inflation and FX. Excluding gas inflation and FX, average transaction was up 4.0%.

In terms of regional and merchandising categories, the general highlights were as follows: U.S. regions with the strongest comparable sales were the Midwest, Southeast and Northeast. Other International and local currencies, we saw the strongest results in Taiwan, Japan and the United Kingdom. The negative impact of cannibalization was approximately minus 60 basis points for the total company.

Moving to merchandising highlights. The following comparable sales results by category for the month exclude the impact of foreign exchange. Foods and sundries were positive mid-single digits. Better-performing departments included food, sundries and candy. Fresh foods were up high single digits. Better performing departments included meat and bakery. Nonfoods were positive high single digits. Better-performing departments included jewelry, small appliances and home furnishings.

Ancillary business sales were up high 30s. Gas, pharmacy and hearing aid were the top performers. Gas was up high 40s, driven by price per gallon changes year-over-year as well as an acceleration in volume growth. Looking ahead, the June reporting period will include the 5 weeks beginning June 1 and ending July 5, 2026, compared to the 5 weeks beginning June 2 and ending July 6, 2025.

If you have any Investor Relations questions, please call Josh Dahmen at (425) 313-8254, Bryan Starnes at (425) 427-7403 or me at (425) 313-6305. This recording will be available until 4:00 p.m. Pacific Time, Wednesday, June 10.

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.

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 to 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.

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 that are using their significant experience and expertise to try to reduce the impacts 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 on the call where we lowered prices this quarter.

We're also able to bring greater value to our members through many exciting new 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 have 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 drives 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 pre-scan tool internationally. The Paystation 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.

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 and 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 a 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 willing 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 the national brand equivalent with equal or better quality. Q3 launches included our KS energy drink, KS ultrafiltered milk, KC 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 Almond 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 the 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 non-foods, 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%. The 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 at 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 the market close. We'll now open the line up for questions.

[Operator Instructions] And our first question comes from the line of Michael Lasser with UBS.

Thank you so much for taking my question, 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.

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 the 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 is 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 -- I'll 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 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 is 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.

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.

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 continued 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 I 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 membership spend and membership growth over the last year or so.

And our next question comes from the line of Simeon Gutman with Morgan Stanley.

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?

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 1 individual component of the gross margin.

With that being said, there were a lot of moving parts during the current quarter. First of all, 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 were dealing with higher gas prices to really invest in increasing value to 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, we have 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 opportunities to do that.

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.

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 or higher value. So we don't tend to pass out the individual elements, but it would be a combination of both.

And our next question comes from the line of Christopher Horvers with JPMorgan.

So I wanted to pick I wanted to pick up the pricing thread. You mentioned in prepared remarks, running prices lower ahead of expected cost declines 1 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?

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 1 individual quarter or 1 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're also able to widen our gap 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.

This is Ron. And 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 then lowering prices for our members.

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?

Yes. 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.

And our next question comes from the line of Oliver Chen with TD Cowen.

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 guards 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 NME against great multiyear performance. What are the 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?

Thanks, Oliver. On the retail media question, I think for us, it's fairly simple, and the member always comes first. So it's 1 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.

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 points 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.

And our next question comes from the line of Chuck Grom with Gordon Haskett.

So about $4 to $5 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?

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 were 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 to capacity and coffee roasting 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, is 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.

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?

It's really based on the existing facility, and we have some that are earlier price club locations in the Northeast that were smaller facilities with 500 parks 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 there's any 1 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.

And our next question comes from the line of Scot Ciccarelli with Truist.

It seems like 2 of your biggest betters worldwide, but certainly in the U.S., Walmart and Amazon continue to ratch it up to competitive bar, if you will, on 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? Do you think you can fully rely on third-party partners to compete in that kind of environment?

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 in 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 there will be -- continue to be reviewed if we need to get further vertically integrated in that business.

And our next question comes from the line of Zhihan Ma with Bernstein.

I have 1 on traffic, understanding there was a lot of calendar shift 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?

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 and 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 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 on an individual year basis as well.

To add to what Gary is saying, as he 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 process through much quicker, return parking space is 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.

Maybe just mentioned, 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 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.

And our next question comes from the line of Peter Benedict with Baird.

I know we're going to get the main 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 everybody 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?

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 we're generally really not seeing any major change in 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 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 gap 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 thing that our buyers are focused on every day, and we continue to see that combination of items that offer everyday 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 nonfood, food and so and fresh, I would say, in non-foods, the everyday shows up in tires, and majors in 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 to 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, 1 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, B sticks. We launched our own Kirkland Signature B stick that's doing tremendous volume and offering tremendous value to our members. So that's an example of an area where we really leaning into those items because of what we're seeing with our members and the value and quality they're looking for.

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'd tell you that they're making some nice pivots based on the needs of the GLP customer. And Gary mentioned proteins, we just launched a coking 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.

And our next question comes from the line of Rupesh Parikh with Oppenheimer.

So 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?

I think it's pretty broad spread, Rupesh. It's -- as we mentioned earlier, still very early days for us, but as we've started to work on updating our product pages to ensure that the reflecting and translating through those large language models to allow 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 changed behavior.

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 an all-in pricing that our prices include delivery, installation, Holloway, 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, Roadhouse is included nitrogen included. So we feel we're very bullish on this AI search and the strength that's going to bring to telling the whole Costco story about the true value of what we offer.

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 as maybe more of a permanent increase in your fuel volumes related to recent changes of behavior?

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, numbers 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 that 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.

And our next question comes from the line of Greg Melich with Evercore ISI.

I'd love to unpack a little bit more on disinflation and inflation. Is it still running roughly 1% across the box carry? Is that a fair estimate? Because you said there were some good guys and some bad guys in the quarter.

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, 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 nonfood 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.

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?

Our profit was a little bit higher year-over-year, but as a rate of sales, obviously, were significantly lower.

And our next question comes from the line of John Heinbockel with Guggenheim Partners.

Maybe Ron, 2 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?

Yes. 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 chartered 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 are the 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.

And our final question comes from the line of Chris Nardone with Bank of America.

So on the executive membership strength, relative to recent trends, are you seeing more customers trade up from gold into executive? Or is there a recent strength more driven by new customers choosing to 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?

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?

Sign-ups.

Sign-ups, 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 referred to. So we're encouraged by the growth that we're seeing there. I wouldn't necessarily say we would attribute to 21 individual factor but definitely seeing continued growth in new member sign-ups year-over-year.

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?

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 expected. I would say today, with China, where 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.

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.

Hello. I'm Andrew Yoon, Director of Finance and Investor Relations, and I'll review our sales results for the 4-week retail month of April, which started on Monday, April 6, and ended on Sunday, May 3. This period is compared to the 4 weeks that began last year on Monday, April 7 and ended on Sunday, May 4. This call 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 and sales release 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 them, except as required by law. Comparable sales and comparable sales, excluding all gasoline sales and the impact of foreign exchange are intended as supplemental information but are not a substitute for net sales presented in accordance with U.S. GAAP.

As reported in our release, net sales for the month came in at $23.92 billion, an increase of 13.0% from $21.18 billion last year. April had one additional shopping day versus last year due to the calendar shift of Easter. This positively impacted both total and comparable sales by approximately 1.5% to 2%. Reported comparable sales for the month were as follows: U.S. 11.7%; Canada 11.5%; Other International, 11.5%; Total Company, 11.6%; Digitally-Enabled 18.8%. Comparable sales for the month, excluding the impacts from changes in gasoline prices and foreign exchange were as follows: U.S., 8.0%; Canada 7.6%; Other International, 6.5%; Total Company, 7.8%; Digitally-Enabled 18.4%.

Total Company comparable sales for the month, excluding all gas sales and the impact of foreign exchange was approximately 7.4%. Our comp traffic or frequency for the month was up 4.2% worldwide and 3.8% in the U.S. Foreign currencies year-over-year relative to the U.S. dollar impacted total and comparable sales as follows: Canada positively by approximately 1.5%; Other International positively by approximately 3.5%; and Total Company positively by approximately 0.7%. Gas price inflation positively impacted total reported comp sales by approximately 3.2%.

The average worldwide selling price per gallon was up 26.7% versus last year. Worldwide, the average transaction was up 7.1%, which includes the impacts from gas inflation and FX, excluding gas inflation and FX, average transaction was up 3.4%. In terms of regional and merchandising categories, the general highlights were as follows: U.S. regions with the strongest comparable sales were the Midwest, Southeast and Northeast. Other International and local currencies, we saw the strongest results in Australia, Taiwan and the United Kingdom. The negative impact of cannibalization was approximately minus 40 basis points for the total company.

Moving to merchandising highlights. The following comparable sales results by category for the month exclude the impact of foreign exchange. Foods and sundries were positive mid-single digits. Better-performing departments included frozen foods, candy and food. Fresh foods were up high single digits. Better-performing departments included meat and deli. Nonfoods were positive mid- to high single digits. Better-performing departments included home furnishing, jewelry and tires. Ancillary business sales were up mid-30s. Gas, pharmacy and hearing aid were the top performers. Gas was up low 40s, driven by price per gallon changes year-over-year, as well as an acceleration in volume growth.

Looking ahead, the May reporting period will include the 4 weeks beginning May 4 and ending May 31, 2026, compared to the 4 weeks beginning May 5 and ending June 1, 2025. If you have any Investor Relations questions, please call Josh Dahmen at 425-313-8254, Bryan Starnes at 425-427-7403, or me at 425-313-6305. This recording will be available until 4:00 p.m. Pacific Time, Wednesday, May 13.

Hello. I'm Andrew Yoon, Director of Finance and Investor Relations, and I'll review our sales results for the 5-week retail month of March, which started on Monday, April 2 (sic) [ March 2 ] and ended on Sunday, April 5. This period is compared to the 5 weeks that began last year on Monday, March 3, and ended on Sunday, April 6. This call 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 and sales release 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 them, 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 U.S. GAAP.

As reported in our release, net sales for the month came in at $28.41 billion, an increase of 11.3% from $25.51 billion last year. March had one less shopping day versus last year due to the calendar shift of Easter. This negatively impacted both total and comparable sales by approximately 1% and 1.5%. Reported comparable sales for the month were as follows: U.S., 8.7%; Canada, 10.7%; Other International, 11.9%; total company, 9.4%; digitally enabled 23.3%. Comparable sales for the month, excluding the impacts from changes in gasoline prices and foreign exchange were as follows: U.S., 6.2%; Canada, 5.4%; Other International, 6.6%; total company, 6.2%; digitally enabled, 22.5%. Total company comparable sales for the month, excluding all gas sales, the impact of foreign exchange and the calendar shift of Easter was approximately 7.8%.

Our comp traffic or frequency for the month, including the negative impact from the Easter shift, was up 1.5% worldwide and 0.7% in the U.S. Foreign currencies year-over-year relative to the U.S. dollar impacted total and comparable sales as follows: Canada positively by approximately 4.5%; other international positively by approximately 4.4% and total company positively by approximately 1.2%. Gas price inflation positively impacted total reported comp sales by approximately 200 basis points. The average worldwide selling price per gallon was up 17.8% versus last year.

Worldwide, the average transaction was up 7.8%, which includes the impacts from gas inflation and FX. Excluding gas inflation and FX, average transaction was up 4.6%. In terms of regional and merchandising categories, the general highlights were as follows: U.S. regions with the strongest comparable sales were the Southeast, Midwest and Los Angeles. Other international and local currencies, we saw the strongest results in Australia, Japan and Taiwan. The negative impact of cannibalization was approximately minus 40 bps for the total company.

Moving to merchandising highlights. The following comparable sales results by category for the month exclude the impact of foreign exchange. Foods and sundries were positive low to mid-single digits. Better-performing departments included food, candy and sundries. Fresh foods was up mid- to high single digits. Better-performing departments included bakery and meat. Nonfoods were positive mid- to high single digits. Better-performing departments included jewelry, majors and hardware. Ancillary business sales were up mid-20s. Pharmacy, gas and food court were the top performers. Gas was up mid- to high 20s, driven by price per gallon changes year-over-year as well as an acceleration in volume growth.

Looking ahead, the April reporting period will include the 4 weeks beginning April 6 and ending May 3, 2026, compared to the 4 weeks beginning April 7 and ending May 4, 2025. April will benefit from the calendar shift of Easter. If you have any Investor Relations questions, please call Josh Dahmen at (425) 313-8254 or me at (425) 313-6305. This recording will be available until 4:00 p.m. Pacific Time, Wednesday, April 15.

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 Fiscal Second Quarter 2026 Conference Call. [Operator Instructions]

And I would now like to turn the conference over to Gary Millerchip, Chief Financial Officer. You may begin. .

Good afternoon, everyone, and thank you for joining us for Costco's Second Quarter 2026 Earnings Call. In addition to covering our second quarter financial results today, we will also review our February sales results.

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 our 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 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.

Thank you, Gary. Good afternoon, everyone, and thank you for joining us today. I'll make a few brief comments about some key business priorities before turning it back over to Gary.

Let me start by addressing tariffs, as I know this topic is of great interest to our members and our shareholders. The future impact of tariffs remains extremely fluid as the recently eliminated IEEPA tariffs have now been replaced with new global tariffs for at least the next 150 days. Our buyers continue to act with great agility and urgency, always with the goal of reducing the impact of tariff on prices for our members.

We believe our expertise in buying and our limited SKU count model puts us in a position to manage this as well as anyone. Our strategies include moving the country of production when that makes sense. Consolidating buying efforts globally to lower the cost of goods, leaning in on Kirkland Signature, where we have the most control of the supply chain and sourcing more items domestically.

Let's move to regarding IEEPA tariff refunds. It is not yet clear what the process will be, what refunds, if any, will be received and when this will happen. Throughout the past year, we've taken action to reduce the impact of tariffs. In many cases, we didn't pass the full cost on to our members. The complexity of the tariffs implemented over the past year including layering of different tariffs on top of each other and multiple changes in rates throughout the year also made it challenging to track the exact impact to an individual item sold.

As we've done in the past, when legal challenges have recovered charges passed on in some form to our members, our commitment will be to find the best way to return this value to our members through lower prices and better values. We'll be transparent in how we plan to do this if and when we receive any refunds.

At Costco, we always want to be the first to lower prices and the last to raise them. During the second quarter, we lowered prices on key items such as eggs, cheese, coffee and some paper products as we saw lower inflation in these commodities. We will continue to be a pricing authority and some tariffs have been reduced, we are lowering prices on affected items such as certain textiles bedding and cookware SKUs.

Turning to our growth priorities. As I shared last quarter, our real estate and operations teams are focused on increasing our pipeline of new warehouses, both domestically and internationally. Since our last call, we opened 4 warehouses, including 1 relocation in the U.S., 1 net new U.S. location and 2 additional Canadian business centers. This brings our total warehouse count to 924 warehouses worldwide. We currently expect to have 28 net new openings in fiscal year '26 and are targeting 30-plus new openings per year in the coming years.

In digital, we continue to make strides with our road map to deliver a more seamless experience for members in warehouse and online. In the warehouses, we're achieving meaningful improvements in the speed of checkout, employee productivity, both as a result of our mobile wallet enhancements, pharmacy pay ahead and the rollout of employee pre-scan technology. We're also piloting automated pay stations that will allow members to pay for their pre-scan orders seamlessly, and with an average transaction time of around 8 seconds. Early results show this is improving the flow of traffic, and we've received great member feedback.

On our digital sites, we continue to roll out new personalization capabilities, which are resonating well with our members and are starting to have measurable impact on e-commerce sales growth. As consumers embrace AI and their shopping habits, we believe our commitments to providing the best value on great quality items can make Costco a beneficiary of these shifts. We're working closely with the leading AI companies to ensure our values will be visible to existing and potential future Costco members as they engage with these tools.

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.

Thanks, Ron. In today's press release, we reported operating results for the second quarter of fiscal year 2026 for 12 weeks ending February 15. As usual, we published a slide deck under Events and Presentations on our investor website with supplemental information to support today's press release.

Net income for the second quarter came in at $2.035 billion or $4.58 per diluted share up nearly 14% from $1.788 billion or $4.02 per diluted share in the second quarter last year. Net sales for the second quarter were $68.24 billion, an increase of 9.1% and from $6.53 billion in Q2 2025.

Comparable sales were up 7.4% or 6.7% adjusted for gas price deflation and FX. Excluding gas sales entirely and adjusting for the impact of foreign exchange, comparable sales were up 7.4%. Digitally enabled comparable sales were up 22.6% or 21.7% adjusted for FX. Our segment breakout of comparable sales is disclosed in both our earnings release and the supplemental slide deck.

In terms of Q2 comp sales metrics, FX positively impacted sales by approximately 1.4% and while gas price deflation negatively impacted sales by approximately 0.7%. Traffic or shopping frequency increased 3.1% worldwide. Our average transaction or ticket was up 4.2% worldwide and 3.5% excluding gas price deflation and changes in FX.

Moving down the income statement to membership fee income. We reported membership fee income of $1.355 billion, an increase of $162 million or 13.6% year-over-year. Adjusting for FX, the increase was 12.2%. The September 2024 U.S. and Canada membership fee increase accounted for about 1/3 of our membership income growth. Excluding the membership fee increase and FX, membership income grew 7.5% year-over-year. This was driven by continued growth in our membership base and upgrades to executive memberships.

At Q2 end, we had 4.4 million paid executive memberships up 9.5% versus last year. We ended the quarter with 82.1 million total paid members, up 4.8% versus last year and 147.2 million cardholders, up 4.7% year-over-year.

In terms of renewal rates, at Q2 end, our U.S. and Canada renewal rate was 92.1%, down 10 basis points from last quarter, and the worldwide rate came in at 89.7%, unchanged from last quarter. The slight decline in the U.S. and Canada in rate was due to the factors we have discussed in prior quarters and reflects new online members growing as a percentage of our total base and renewing at a slightly lower rate than warehouse sign-ups.

We continue to focus on increasing the renewal rate of these new online members through targeted digital communications and retention strategies. And those efforts partially offset the negative effect of the increased penetration of online sign-ups.

Turning to gross margin. Our reported rate was higher year-over-year by 17 basis points and higher 11 basis points without gas deflation, coming in at 11.02% compared to 10.85% last year. Core was lower by 3 basis points and lower by 7 basis points, excluding gas deflation. In terms of core margins on their own sales, our core-on-core margins were higher by 22 basis points. The increase in core on core margins was broad-based with nonfood, food and sundries and fresh all higher year-over-year. The difference between reported core margins and core on core margins was driven by mix changes as well as higher 2% executive rewards and lower income from our co-brand credit card program compared to last year.

Ancillary and other businesses gross margin was higher by 19 basis points or 17 basis points excluding gas deflation. This was driven by higher gas profitability and strong growth in pharmacy. LIFO negatively impacted the gross margin rate by 4 basis points. We had a $12 million LIFO charge in Q2 this year compared to a $12 million credit in Q2 last year. This quarter's gross margin rate also included a nonrecurring legal settlement, which had a positive impact of 5 basis points.

Moving on to SG&A. Our reported SG&A rate was higher or worse year-over-year by 13 basis points and higher or worse by 8 basis points without gas deflation, coming in at 9.9% and compared to last year's 9.06%. The operations component of SG&A was higher or worse by 2 basis points, but better or lower by 2 basis points, excluding the impact of gas deflation. Our operators once again did a great job improving productivity and capturing efficiency benefits from the technology investments we've recently implemented. These productivity improvements fully offset last year's wage investments and any impact of extended operating hours.

Central was higher or worse by 4 basis points and higher by 3 basis points, excluding the impact of gas deflation. This quarter's SG&A also included an increase in general liability reserves to reflect higher expected future costs for prior year claims not yet settled. This negatively impacted the 6 basis points. Below the operating income line, interest expense was $33 million versus $36 million last year. Interest income was $140 million versus $109 million last year, driven by higher cash balances, and FX and other was an $8 million benefit this year versus a $33 million benefit last year, largely due to changes in FX. In terms of income taxes, our tax rate in Q2 was 25.2% and compared to 26.2% in Q2 last year.

Turning now to some key items of note in the quarter. Capital expenditure in Q2 was $1.29 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 operations and enhancing the member digital experience.

In terms of merchandising highlights, the Lunar New Year celebration this year showcased our merchants global buying expertise. We were able to introduce many exciting new items for our members that help drive growth across fresh, foods and sundries and nonfood categories in the U.S. and our international markets. Some of the best sellers included items ranging from duck and quail eggs, Year of the Horse inspired gold jewelry and volume and [ Shine Muskogee ].

We also had a very successful Valentine's Day. In fact, laid out stem to stem the roses we sold in the U.S. of Valentine's Day this year would have stretched all the way from Seattle to New York City and back again. Fresh comparable sales were up low double digits in the quarter, led by meat and bakery. In meat, we saw strong growth 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 like the chocolate paisan of mini venues and a variety of seasonal patients and cookies.

Nonfood comp sales were up high single digits in Q2. And top-performing departments were gold and jewelry, tires, majors, health and beauty and small electrics. Unique items continue to play an important role in creating excitement for our members in nonfoods. And our second quarter sales included a $150,000 Emerald Cup 5.8 carat diamond ring, a $20,000 Babe Ruth Autograph Baseball and nearly 200 luxury Whisper golf carts at an average price of approximately $9,000.

In food and sundries, comps grew mid-single digits, led by candy and packaged Foods. While egg price deflation is expected to continue to be a headwind to sales in food and sundries for the foreseeable future, we're seeing significant unit and market share growth in eggs because of our strong value proposition. Overall inflation decreased slightly in Q2 as we saw lower inflation in Foods and sundries and fresh led by deflation in produce, eggs and dairy. This was partially offset by slightly higher inflation in nonfoods.

The supply chain was also relatively stable in Q2, and our merchants feel good about our current inventory vision heading into the spring. That said, as we look at the rest of the fiscal year, the situation in the Middle East could impact fuel costs and shipping schedules if there is instability in the region for a sustained period of time. Kirkland Signature remains a top focus to deliver great value for our members with cash items typically offering 15% to 20% value compared to the national brand alternative with equal or better quality. In Q2, we launched approximately 30 new KS items, including Crispy wings, Black and Salmon and various apparel items.

As Ron mentioned earlier, 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 Butter from $13.89 at the end of Q1 to $8.49 at the end of Q2, 12 KS organic coconut water from $12.79 to $10.99, KS organic seaweeds from $10.99 to $9.99 and 2-liter KS Italian extra virgin olive oil from $29.99 to $24.99. Within ancillary businesses, pharmacy and food port experienced double-digit comparable sales growth, and optical and hearing had high single-digit growth. Gas comps were negative mid-single digits, driven by mid- to high single-digit price deflation, partially offset our gallon growth.

Turning to digital. Site traffic in the quarter was up 32% and app traffic up 45%. Sales of pharmacy, golden jewelry, toys, tires, small electrics special events and housewares, all grew double digits year-over-year. And our same-day delivery service offered through Instacart, Uber Eats and DoorDash continue to grow at a faster pace than our overall digital sales.

The enhancements we are making to deliver a more personalized digital experience for our members are starting to create measurable impacts. In Q2, our personalized product recommendation carousels drove over $470 million of e-commerce sales. and our newly modernized product display pages are driving incremental sales on our dot-com site as well as increased traffic to our same-day sites. We have a clear road map for future digital enhancements and believe these will allow us to continue to grow digitally enabled sales at a faster pace than overall sales.

Finally, a brief update on our February sales results for the 4 weeks ended this past Sunday, March 1. The Net sales for the month came in at $2.69 billion, an increase of 9.5% from $19.81 billion last year. Comparable sales were as follows: the U.S. was up 5.2% or 6% adjusted for gas deflation and FX. Canada was up 12.8% or 9.3% adjusted for gas deflation and FX and Other International was up 17.9% or 10.9% adjusted for gas deflation and FX. And this resulted in total company comp sales of plus 7.9% or plus 7% adjusted to gas deflation and FX.

Digitally enabled sales were up 21.8% or 20.8% adjusted for FX. Total company comparable sales for the month, excluding all gas sales and the impact of foreign exchange was 7.8%. As a reminder, Luna and Chinese New Year occurred on February 17, 19 days later this year. This shift positively impacted February other international and total company sales by approximately 4% and 0.5%, respectively.

Our comp traffic or frequency for February was up 3% worldwide and 1.5% in the U.S. Foreign currencies year-over-year relative to the U.S. dollar positively impacted total and comparable sales as follows: Canada by approximately 5%, other international by approximately 8% and total company by approximately 1.7%. Gas price deflation negatively impacted total reported comp sales by approximately 85 basis points. The average worldwide selling price per gallon was down 7.5% versus last year.

Worldwide, the average transaction was up 4.8%, which includes the impacts from gas deflation and FX. Excluding gas deflation and FX, average transaction was up 3.9%.

In terms of regional and merchandising categories, the general highlights were as follows: U.S. regions with the strongest comparable sales with the Midwest, Northwest and Southeast. Other International in local currencies, we saw the strongest results in China, Taiwan and Korea. The negative impact of cannibalization was approximately 60 basis points for the total company.

Moving to merchandise highlights. The following comparable sales results by category for the month exclude the positive impact of foreign exchange. Food and sundries were positive mid-single digits. Better-performing departments included candy, food and frozen foods. Fresh foods were positive low double digits. Better performing departments included meat and bakery. Nonfoods were positive mid-single digits. Better-performing departments included jewelry, majors and small appliances.

Ancillary business sales were up mid- to high single digits. Pharmacy, food port and optical were the top performers. Gas was down low to mid-single digits, driven by price per gallon changes year-over-year.

In terms of upcoming releases, we will announce our March sales results for the 5 weeks ending Sunday, April 5, on Wednesday, April 8, after market close.

That concludes our prepared remarks, and we'll now open the line up for questions.

[Operator Instructions] And our first question comes from the line of Chris Horvers with JPMorgan.

So a bit of a near-term question here. There's been a lot of noise in January and February on the weather, whether there was a net benefit to January 1 of your competitors talked about a headwind to February because of the weather. So could you reconcile how the weather dynamics affected the first 2 months of the year?

And then similarly, gold has been very spiked into the beginning of January has pulled back a little bit here in February. So how are you thinking about how that impacted the business in those 2 months? And how do you think about that, how that could play out for the rest of the year?

Chris, thanks for the questions. Maybe on the first part of the question, on the weather, I think our general view is that it certainly created some volatility during the first 2 months of the year, but we wouldn't really call anything out. I don't think they would say we think there's major sort of impact when you look at the total sales results that we posted in January and February.

I think the one thing that I probably would mention is that our traffic visits were a little bit lighter in the U.S. in February. The thing that we think may have caused that to look a little bit like it was because of the weather we had in the Northeast, in particular, we have 55 warehouses that were closed for a full day and then took a couple of days for the local communities to get back up to sort of speed.

So I don't know that we call out when you look at the actual total sales that there was anything there that we'd want to call out, but I do think there might have been some impact on visits when you look at the sort of year-over-year growth there in the February results. But beyond that, I don't think there's anything that we would say that you should -- we'd look at in our results and say it was a major impact that should be adjusted for.

And then I think more broadly, I'll maybe just answer it in general terms. You mentioned the question around gold. I think as we look at the overall state of the consumer and our members and how they're shopping. And I think it really is a generally big picture, a continuation of the trends that we've seen over the last few quarters where for sure, members are very focused on quality and value and newness and exciting new items are very important. But when you deliver on those things, we're seeing members are willing to and have the capacity to spend.

And I think the fact that our buyers continue to find new and exciting items have resulted in our overall sales results each month when you strip out the noise around calendar shifts and strip out the noise around sort of short-term blips when there's questions around port strikes and tariffs. Overall, our results have been very consistent in that 6% to 7%. So I really wouldn't say there's anything certainly changes in different items because as we've adjusted assortment to reflect whether it's tariffs or different member preferences, but overall, very consistent in terms of the results that we've seen.

And our next question comes from the line of Michael Lasser with UBS.

Ron, you highlighted several innovations that you are currently implementing or testing to improve the member experience as well as increasing the efficiency of the business. Did you size the potential savings from things like prepaying your card or line breaking from your associates? And then as part of that, to what degree will you take those savings, reinvest it back in areas like the store wages, store labor and/or price? And are you starting to see any diminishing returns on the investments that historically Costco has been making and have proven to be quite fruitful?

You're very welcome total enhancements we're making both online and in the warehouse have all been very beneficial for us. In the warehouse, as you use the example of the pharmacy, our pharmacy business is very strong. Traffic has been significantly up and the adoption of the new digital enhancements have really allowed us to maintain the staffing we have in place and then handle this new growth of volume we're seeing. It's improving the member experience and it's making the throughput much better, be it the pharmacy app that we've developed or the pay ahead that we have in our warehouses. So it is really -- it's very accretive to us handling this new volume and being efficient as we do that. So we do see some good tailwinds behind that as that moves forward.

As far as investing in the business, they're seeing the same values in that, no, we feel that we still get the same return from our members as we continue to invest in the business out there. And the members are responding very nicely to it both with traffic and with sales that we see as well. So we feel good that we will continue to reinvest.

That's what we do, both in employees and in pricing and in the business overall and expansion, as Gary mentioned, and I mentioned in the earlier talk that we just had. And we're not only expanding buildings, we're relocating and we're also upgrading the insides of a lot of our older warehouses too. So we continue to put the money back into the company to drive top line sales. and grow our business globally.

And our next question comes from the line of Chuck Grom with Gordon Haskett. .

Inventory levels continue to be very well managed. Curious as you look ahead to the spring and summer, are you making any notable changes to the assortment akin to some of the changes you made last fall? And then with rising gas prices in the near term, can you just remind us historically the crossover traffic that you typically see into the club on like-for-like hours?

Sure. As far as mix goes, going into the spring and summer, we feel we're going back a little more traditional than we've seen last year. The supply chain has balanced out a little bit more. We feel good about the sourcing moves that we've made. So we feel as far as timing goes, selection, SKU counts, we're back on track again with where we were at the year prior. So I feel good about the lineup that we have. We feel good about production. Shipments until the most recent undertakings have really been -- everything has been on time and moving through very well.

So we haven't seen any disruptions from the Middle East and our regular merchandise flow, but we're watching that very cautiously, and we're staying on top of that. So we feel good about the spring and summer. And then as we forecast out into the fall, we feel we're in a good place. As far as gas, I'll let Gary answer that.

Yes. Thanks, Ron. Chuck, on gas, generally speaking, we see about half of members that will shop at the gas station will also cross shop at the warehouse. And obviously, as Ron mentioned, early days to know what the impact longer term might be from events in the Middle East at the moment. But generally speaking, if gas prices start to increase, then we tend to see our value position resonates better with members just because, obviously, we want to be the pricing authority on gas.

And so when prices are higher, that will tend to cause members to maybe take the extra mile that it might be involved to get to the gas station because of the incremental value they see there. But obviously, we'll have to see what happens with gas prices over the coming months there.

And our next question comes from the line of Simeon Gutman with Morgan Stanley.

I have 2 unrelated questions. First, the competitive openings are stepping up this year. I imagine there's maybe some membership impact in nearby openings from competitors. Is there anything above and beyond? And then the second part is if a customer speaks to an LLM, how do you show up or how do you want to show up? And are you seeing any opportunities to convert members?

You're welcome. As far as the new openings coming up, it won't have a negative effect on our membership we won't see those big swells of new markets that we would see when you go into an existing building. So it balances that out. It really drives our sales with frequency and visits as we relieve a high-volume warehouse those tend to build back very quickly. And so we may not see the traditional number of new members, but frequency of members and those types of things are really ramping up in those markets as we see. So we don't see a negative effect, but we don't see the big tailwind we saw with new sign-ups as we would in the new market as well.

And for the LLM, and I'll take a shot at that. The biggest thing we feel with our quality and our value is we want to show up everywhere we can and everywhere we can. And we want to make sure that Costco is surfacing with all these partners that we feel very confident with our values and our prices. If we're coming up on all these searches, we're going to made very well with those. So I don't know if you want to add anything that, Gary.

Well, the only thing, Ron, maybe just to come back to your first answer, I didn't know assuming your question was when competitors are opening warehouses too. And I guess I would say that really, we don't see any meaningful impact on our on our membership base or membership growth when we feel we operate today very effectively across the U.S. competing against very different operators. And we tend to focus on being our own toughest competitor, finding ways of how can we lower prices and continue to deliver more value. And so generally speaking, there's nothing I would call out that we see an impact to our membership base when we're competing against different operators in each market.

And our next question comes from the line of John Heinbockel with Guggenheim.

Ron, 2 maybe international questions, but can you talk about -- so Canada AUVs is now approaching $300 million. Thoughts -- and you're still growing, right? So thoughts on shopability capacity in those clubs, and I know you're opening business centers. So thoughts on that. And then secondly, I think you're going to open 3 outside of international outside of Canada this year. What does the pipeline look like in '27 and '28. Because I think you do want to ramp that up much higher than it is today.

Okay. Yes. As far as Canada goes, we have 114 buildings now, and we have had some very good success with infilling and even opened up a couple of new markets in the recent 2 years. Our volume per location is quite high in that market. We have done several things. The technology that we've done in the U.S. we're using in Canada as well. We've recently expanded operating hours in all of our Canadian buildings to help offset some of the traffic increases. So we feel that we've got a very good path of expansion in Canada over the next 5 years, and we feel good that we'll be able to maintain a good, high average volume per location and continue to infill with some great incremental sales there as well.

Internationally, yes, they take a little bit longer, a little bit longer before we bring these to fruition as opposed to being in North America. But we feel very good about the future from 27 on in our international markets as we continue to see performance both in Asia and Europe to be very strong. And so we look forward to some good growth expansion. We feel a good balance as we've had in the past, with a good portion of our locations being outside North America and an equal amount being here domestically as well.

And our next question comes from the line of Kate McShane with Goldman Sachs. .

I wondered if I could tack on to the real estate question and just ask about the fact that you noted some new opportunities in real estate are allowing you to enter into markets that you didn't think you could enter into previously. How should we think about this longer term? And how it will influence maybe the number of units you open in a year domestically?

Okay. Well, we're not changing the model, but we are being a little more creative with the use of things like parking decks. I know it's been announced, what we're doing in Los Angeles with the residents above our locations. So we are getting a little more creative. If we want to get into some of these inner cities, you're not going to find 25 acres available for us to go into. So how can we infill in some of these very strong markets like Los Angeles, New York, different places with a unique model for Costco that is going to allow us to continue to expand.

We've done a lot of these things in the past. We've proven out the models in Asia and we've got some very unique business models and also in Europe as well that have served us very well. So it's not new to the company. It's a little newer to the U.S. But we feel very good about how we can be efficient. We can maintain the Costco experience in all of these warehouses. But being a little bit -- a little more creative than a standard 25-acre site with 800 parks and 1 level of parking decks out there as well. So that's where we're seeing a lot of the openness to the opportunities to partner with others and get into markets that could have been otherwise tough to get into.

And Kate, I think that's kind of allowing us to be able to have more confidence in that plan to achieve that 30 warehouse a year goal that we talked about in the last couple of earnings calls. And when we talk about 30 a year, we look at sort of generally a 5- to 10-year time horizon for warehouses. And we feel like that 30 sort of target year is there to be achieved for that sort of time horizon. And that's the goal that we're working towards as we look at the plan. And roughly just over half of those, we think, would be in the U.S. and just under half would be in the rest of the world, if you include Mexico, Canada, Asia, Europe, Australia and New Zealand in that broader Rest of the World category.

And our next question comes from the line of Edward Kelly with Wells Fargo.

I was hoping that you could expand on core on core margins in the quarter and then maybe how we should be thinking about the back half? The compare seems a little bit tougher there, but just thoughts on how we should be thinking about that would be great.

Yes. Thanks, Ed. I'll take a step back overall on gross margin. We were pleased with the quarter overall in gross margin. As you heard us say that the overall result was -- if you adjust for gas deflation, was up 11 basis points, but we had a again, for a nonrecurring legal settlement in there for 6 basis points. So overall, we look at it as being up by 5 basis points in the quarter and being able to achieve that growth when we were also lowering prices for members and managing the impact of tariffs. I think the team did a really good job of being able to stay the course in making sure we're delivering more value while also being able to deliver a good financial outcome for our shareholders.

On the core on core specifically side of it, as you heard us say, we were up 22 basis points. I wouldn't say there's one particular sort of driver of that. It's similar to the themes we shared the last couple of quarters. I think during Q2 in particular, partly would have had some benefit when you look at -- we've said I know in prior discussions that when we see prices coming down as we saw in some of the deflationary items, often that's a time that's helpful to us because we can lead the sort of the world down with lower prices for our members. But because we turn the inventory so quickly and we also tend to get some financial benefit in there. And then we're continuing to work on supply chain efficiencies and Kirkland Signature penetration continues to improve.

So there's a number of different sort of factors, I would say, that help with that. At the same time, as you heard us say, there were some offsets in core because we paid higher 2% rewards. We are lapping some higher income in the credit card program. There is some mix shift as well because our pharmacy business is growing as our e-commerce business are both growing at a faster pace than our core sales. So they kind of dilute some of the impact when you look at the total core margin growth.

And I share all that context because I think from our perspective, when you think about looking forward, the rate is going to fluctuate and the different elements are going to fluctuate quarter-to-quarter, and we tend to not get too fixated on one individual element of the margin. Our goal is to run the business holistically for the long term. And my comment earlier about some slight improvement in the gross margin rate while lowering prices and continuing to manage the business effectively is how we tend to think about delivering value for, first of all, our members, and in turn, that resulting in member shareholders.

So when you look at the trajectory, I think I would focus less on one individual metric. I think where I would come back to is if you look at the quarter overall, we were up about 6 basis points. If you look at the last 12 to 24 months, Generally, our gross margin has been stable and has grown slightly, and there's been puts and takes with core on core and the other elements that I mentioned, but our focus is really on running the business for the long term and making sure we're delivering value for members, but we do think through some of the efficiencies that we create, we can -- we are slightly expanding margin, but it's only slightly because as Ron mentioned, really where we see meaningful benefit. We're reinvesting in the member to make sure that we're driving top line sales.

And our next question comes from the line of Rupesh Parikh with Oppenheimer.

So just going back to membership growth. So what's up 5% this quarter. So if you could maybe walk through some of the dynamics at play. And then as you look at your same club membership growth rates, just how those are trending versus your expectations?

Yes. Thanks, Rupesh. Yes, maybe again, just taking a step back, big picture. We were pleased with the membership results for the quarter. We saw -- I think you heard us say in the prepared remarks, 7.5% growth in membership fee income if you adjust out the fee increase in FX, so underlying really strong member loyalty and member fee income growth during the quarter. The bigger sort of part of that was the 9% growth in upgrades, which I think shows that the impact of the Instacart credit that we're offering each month for online shopping and the extended hours and some of the other benefits that we've added are resonating with our members and increasing the level of upgrades.

You mentioned the overall paid membership was a driver of that, too, was up about 4.8% during the quarter. As you said, Rupesh, it's a little bit lower than it's been over the last year or so. The last couple of quarters have been around that 5% mark. I think there's really 3 things that I would call out there. One is that we have seen over the last year or so, less new warehouse openings in sort of genuinely new markets. And generally speaking, when we open in a Japan or China, there's a dramatic increase and spike in the number of new members. So they certainly help to inflate the overall membership growth. And we really haven't had a meaningful number of those in the last year or so. So that's having an impact on slowing down the rate of growth.

Secondly, I'd say we are cycling some strong new member sign-ups a year ago. So we're having some impact of the -- as we cycle those and still seeing strong member sign-ups, but certainly, we're sort of lapping some higher growth that we saw this time last year. And then I think I'd also probably say if you look at the long-term growth rate, as I mentioned, certainly, we've had growth at a higher rate when there have been times where we've had those large new warehouse openings with inflated new members, and we've had peaks at certain times where we've seen higher member sign-ups.

If you look at our long-term growth rate, it really is in more of that 5% growth range in terms of new members. So I think it's kind of maybe resting more closer to where the long-term growth rate has been. And we think there's still plenty of opportunities to keep growing the membership base, whether it's through adding new benefits as we did some of those this year, whether it's existing warehouses continuing to mature and growing their membership base, as I mentioned earlier, improving the renewal rates as we're making good progress in those as well. And then in our international markets, we tend to be -- while we have a large member base per warehouse, the executive membership base tends to be lower penetrated in those areas as well.

So we think there's lots of opportunity for continued growth, but I think those would be the 3 points that I would call out as being the main drivers of us at a slightly lower rate year-over-year than we've been in the quarters prior to the last 2.

And our next question comes from the line of David Bellinger with Mizuho.

On renewal rates, the U.S. down about 10 basis points worldwide flat. So is this the real bottom here, given the way you calculate renewal rates, do you have a certain time line or time frame in mind when you can see this data set start to improve and move back up again? And then separately, we've noticed some in warehouse activity maybe given out a free item when you sign your membership up for auto renew. Can you talk about the uptake for that program and how that's helping renewal rate as well?

Sure. Yes. As you mentioned, we called out a few quarters ago that we were seeing a slight decline in the overall membership renewal rate and you characterized it very, very well, which is as we've started to see a meaningful increase over recent years in the member of the number of digital members signing up, they do generally renew at a slightly lower rate. And so as they've been building as a percentage of the total base, it's been a real positive for us in terms of adding younger new members and helping with total revenue growth.

And some of the comments I made about the membership growth responded to Rupesh's question earlier, but it has had an impact when you blend those into the total mix of members, it does bring down slightly the overall renewal rate. When we called that out 2 or 3 quarters ago, we said we probably have a few more quarters that where we'd expect to see a continuation of a slight decline in the renewal rate because there is that sort of math where those numbers are feeding into the overall renewal calculation, it does bring down the average. I think we're pleased to see that the global rate actually was flat during this quarter and the U.S. rate was only down 10 basis points, as you mentioned.

So I think it shows that we're making some good progress with the impact that we thought would happen through the maturation of those online members coming into the overall number, but also with some of the initiatives that we've been driving around contacting and engaging with those new digital members through digital communications through retention strategies. And if we'd have just played out the impact we would have expected without any of that activity, it would have been a higher decline just with the math of the number of digital members that we're feeding into the overall renewal rate calculation. So we are seeing and showing some impact of the benefit of those programs.

The auto renewal is something we've been focused on for some time. We believe as more members have grown over time. There's a real benefit in helping the member from a convenience point of view, having auto renew. And of course, it helps us with membership renewal rates as well. So that's something we've been we've had as a program for a while now, and there are certain times where we'll raise the awareness of it in the warehouse for our employees to have a talking point with a promotion of some sort as well.

So overall, I think we feel that we're seeing what we expected with the change in the renewal rate. It has slowed down. As we called out before, we may show a few more quarters where it's kind of reaching that maturation point, but we are very focused on those retention programs and have been pleased with the way that's adjusted the trajectory and we'll be targeting for that to continue.

And our next question comes from the line of Greg Melich with Evercore ISI.

I wanted to follow up on inflation. You mentioned how I believe it was a little bit less this quarter than the prior quarter. And I'm just curious how much less, if we look at that ticket up 3.4% in the U.S., could we say that inflation was maybe 100 bps of it down from 150 or maybe just sort of frame it?

Sure. Yes. Thanks, Greg. On inflation, in general, you heard it exactly right that we did see -- we've been talking about low to mid-single-digit inflation. It was slower in the second quarter, trending towards sort of low single digits, I guess. Now I'll caveat that with that was Q2. Obviously, the world has changed a little bit since we gave that update. And so we'll have to see how things play out with the situation in the Middle East. But certainly, as we look at what happened during the second quarter for us, fresh and food and sundries really drove the lower inflation overall. Ron mentioned it, but we've seen deflation in produce eggs, butter, cheese, some of these commodities. And they have a meaningful impact, as you might imagine on food and sundries in particular.

We do still see some areas of the business that are inflationary, beef remains fairly inflationary. And candy is still seeing, I think, still seeing some of the flow-through that we've seen historically and some of the commodity impacts there as well. But net-net, fresh and food and sundry would have been lower in Q2 than they were in Q1. We saw a little bit of increased inflation in nonfoods, again, modest, I would say, and it wasn't a big impact as you heard us talk about the LIFO impact. So it's still low single-digit inflation in nonfoods and that would be a little bit of sort of flowing through of tariffs in a couple of areas and gold, of course, was inflationary during the quarter as well.

So overall, sort of tying it to your question about basket, I think it kind of depends on how you define the impact of inflation. We tend to look at it are there more items in the basket, which would be the units and they're certainly growing. And then we break down or we'd look at inflation as being 2 components. One would be the price part that I just mentioned. The other part will be mix changes. So have the item changed in the basket as the size of the item changed in the basket. And we really don't kind of necessarily pull those apart.

But directionally to your point, the inflation as in the actual price increases would only have been a fraction of the total and the mix changes and the increasing units would have been a meaningful part of the growth as well.

Got it. Gold bar is helping the mix. .

It's broader than gold bars, but I think certainly, go bars have been a great example for us actually is where -- it's 1 of those examples where it's certainly been a tailwind to the business, but the amount of interest it drives around the brand and the traffic it drives to our websites and some of the cross-selling it drives there. I think it's been a nice surprise of, yes, it's been a great way to deliver value for members, but it's actually, I think, helped elevate other parts of our business, too, by raising more awareness of the things we have to offer online, for example.

And our next question comes from the line of Oliver Chen with TD Cowen.

On the digital advertising front here, there's a lot of great opportunity ahead. I'd love your thoughts on what the road map looks like there as well as marketplaces. And then as you zoom out on AI, you're having a lot of great success so far. AI is a technology that involves a lot of different partners, but you've had so much internal excellence. Like what are your thoughts on balancing that development and innovation around AI. And as you look forward, do you have an idea will it impact pricing, supply chain, merchandising or membership engagement more or less or probably all of the above, but would love your earlier views on where it might be most impactful.

Yes. Thanks, Oliver. I'll just try and canter through those relatively quickly. On advertising, I think we've shared before is I think you know that we have a meaningful amount of dollars that we generate from sort of media revenue today, and that is growing double digits. We have over -- I think it's now 1,000 of our suppliers that participating in engaging with us through placement or sort of being able to provide promotional opportunities for them.

From a retail media perspective, we think of that as being somewhat of a new opportunity around how do we get into sort of connecting to more of those marketing dollars that our vendors and suppliers are spending. Our first priority is really to build the capabilities internally around delivering more personalized relevant communication to our members. And you heard me mention in the prepared remarks, we're starting to see a few nice examples now where as we build in more of that relevant communication for our members, we're seeing them really respond in a positive way in driving either visits or items in the basket. So really encouraged by that.

I'd say we're still in the early innings with retail media because while we've been doing that, we're definitely testing and doing some programs. with our suppliers on things like digital TV and targeted MVM amplifications, but they're really kind of the early learning stages. And I think as we continue to build that personalization capability, we will we think we'll see some additional benefit really throwing through in advertising. I will sort of caveat as always with our expectation of ourselves is that we'll reinvest the vast majority of that to really drive more value for the member and drive more top line sales as we deal with everything that we do.

On the marketplace, I think for us, it's really -- it's been a case of where are there places that we can find services and value that offers more value to our members. We've seen, I think, some really good progress on things like installation services and new values that we can offer around, whether it's garden furniture or garden fixtures and windows and some of these areas where we see opportunities to really bring unique value to our member with great partners who deliver great quality and value. So there's certainly focus there.

And then I would broaden it to some of the services that we offer, as you think about things like Costco travel and think about some of the additional services that we're offering to members that, again, are unique ways in which we can deliver value, and we've been finding a lot of success in really deepening loyalty with members there and growing those elements. That's kind of probably the biggest part of as we think about sort of the marketplace concept of where we think the value can resonate with our members.

On AI, I think for us, it's really we look at it through the lens of we think we have a clear view of how we can deliver value for our members and how we support our employees. And so our focus with AI in general is where can it make us better at who we are. We're not really trying to chase things that aren't core to Costco. We think that's been key to what allowed us to navigate previous technology and digital sort of evolutions in the marketplace. And we're really focused on where are the places that we think AI can make us better for our members, can deliver more value for our members, can help our employees be more productive so that we can pay them better and we can deliver more value for our members.

So really, that's our overall philosophical approach there. But still early days but encouraged by the work we've been doing.

Thanks for tackling those. Best regards.

And our next question comes from the line of Scot Ciccarelli with Truist Securities.

I know it's only been about 2 years or so, but the last time you had this much cash on the balance sheet, you did pay out a special dividend. So is that something we could see in the next few quarters? And I guess, on a related front, just given how quickly cash is now building for you, could we see payouts on a more frequent basis than maybe what we've seen in the past?

Thanks, Scot. Yes, I wouldn't say our financial strategy has really changed significantly as we think about cash. Our first priority, of course, is always to invest in the business. And as you've seen, we've been investing more capital in the last couple of years to support runs priorities that he shared earlier around ensuring we've got the strong pipeline of new warehouses, ensuring that we're investing in our existing warehouses to improve the member experience and support the tremendous growth that we've seen in those warehouses. We're investing in depots and expanding the network there, not only to support our warehouses but also support the e-commerce growth that we're seeing.

And we're investing in digital and we think there's plenty of opportunities to continue to invest, and we feel good about the returns we can generate from those investments. I think you're right. We are seeing strong cash flow buildup. The great thing about our model is it generates significant free cash flow. And even with the investments we're making, we're seeing continued growth in that cash. Our general priorities are subject to board approval, we want to continue to grow the regular dividend because we think that's a core sort of fundamental part of demonstrating our confidence in the future growth of the company.

And we continue to sort of buy back stock to avoid dilution from executive stock grants. But when we do all those things in the way we have in the past, typically, we still generate excess cash, and we're building a stronger cash balance on our balance sheet today. And we do think with our valuation, the special dividend is probably the most effective way to return excess cash because it keeps flexibility if we want to invest more in capital expenditure in the future as well.

What I'd say on special dividend is while our cash balances are back to the levels that they were for the last special dividend, I think it's important to remember that to achieve a similar yield to last time when our stock was at $60 the cash would need to be greater. And so we'll continue to review the question of special dividend with our Board, but there are no plans that we could share at this time around a plan for special dividend.

And our next question comes from the line of Kelly Bania with BMO Capital Markets.

I wanted to ask first, if you could just talk about the pharmacy category. A lot of moving pieces being called out by some of your competitors there with the maximum fair pricing. And just curious how and if that impacts you, it doesn't look like it, but maybe would just want to confirm how you see that going forward. And then just bigger picture, wanted to follow up on the media question and the advertising. And I was curious if you would maybe size up that more specifically. I think, Gary, you said a meaningful amount. But just curious how that looks today or even if not specific on how it is just maybe relative to where it could be over time? Any color there?

Sure. Thanks, Kelly. On the pharmacy side of things, yes, we've had tremendous success with our pharmacy business. I think you've heard us say on a couple of the previous earnings calls that the teams really focused on how do we make sure that we're delivering not just the great value that we always promise to our members, but improving the member experience too. So we've added some new AI tools to improve our in-stock positions on pharmacy. And we've also made some digital enhancements to make it easier for the member to check out at the pharmacy to speed up the experience there as well.

So we've seen strong growth in pharmacy. And you may have heard me say in the prepared remarks that the pharmacy business grew at a faster pace than our total sales, which was part of the sort of reason for the disconnect between the core and core margin improvement and the core margin overall. I would say we will have a small impact as a result of the change with Medicare and the pricing of the drugs involved there, but nothing that I would call out to think about as a material headwind for us in terms of our top line sales results as we see it today.

And I think on retail media, I think really, we do think it's a significant opportunity, Kelly. But the reason we don't really size it is that it really comes back to my final point that there's tremendous opportunity for us to capture more value, we think, and to help our suppliers actually improve the return on their ad spend. But our focus will be very much on how do we use those dollars to deliver more value back to the member and drive top line sales. So sizing it for us would be more how much value can we create for the member and drive greater investment in our members in the value that we offer. And you would see it more in our top line growth as we're able to achieve that growth versus it being sort of a major change in our margin profile, I would say.

And our final question comes from the line of Zhihan Ma with Bernstein.

I wanted to ask about the international expansion side, specifically China, where growth seems to have stalled a bit recently, where I'm sure we're facing some pretty strong local competition and sales competition as well. Curious how you think about your business model fitting in a market which is highly e-commerce driven and what learnings you can gain there that can be applied to the rest of the business as well?

Thank you. I wouldn't say it was all this more by design, the way we have opened up the first warehouse very customary to what we've done when we've gone in every other country. We get in, we open up some warehouses. We learn about the culture. We learn about doing business in that country. And then we're on a good, steady growth pattern from there. We see great opportunities in China as we did before we went into the country. We're very pleased with our business and how we're growing. We feel we can compete with anybody in the country as we do internationally.

So I see good things coming for us in China, but it will be customary to our normal growth as we have done that around the world as we've built out Japan and Korea and Europe the same customary way that Costco grows in these new countries. So we're happy with China. It's growing nicely, and there's more to come in the future for sure.

And ladies and gentlemen, this concludes our question-and-answer session as well as today's call. We thank you for your participation, and you may now disconnect.

Hello. I'm Andrew Yoon, Director of Finance and Investor Relations, and I'll review our sales results for the 4-week retail month of January, which started on Monday, January 5, and ended on Sunday, February 1.

This period is compared to the 4 weeks that began last year on Monday, January 6, and ended on Sunday, February 2. This call 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 and sales release 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 them, 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 U.S. GAAP.

As presented in our release, net sales for the month came in at $21.33 billion, an increase of 9.3% from $19.51 billion last year. Reported comparable sales for the month were as follows: U.S., 5.8%; Canada, 11.4%; Other International, 9.5%; total company, 7.1%; digitally enabled, 34.4%.

Comparable sales for the month, excluding impacts from changes in gasoline prices and foreign exchange were as follows: U.S., 6.8%; Canada, 8.2%; Other International, 2.7%; total company, 6.4%; digitally enabled, 33.1%. Total company comparable sales for the month, excluding all gas sales and the impact of foreign exchange, was 7.3%. Lunar and Chinese New Year's will occur on February 17, 19 days later this year.

This shift negatively impacted January Other International and total company sales by approximately 4% and 0.5%, respectively. Our comp traffic or frequency for the month was up 2.4% worldwide and 2.2% in the U.S. Foreign currencies year-over-year relative to the U.S. dollar impacted total and comparable sales as follows: Canada positively by approximately 4.8%; Other International positively by approximately 7.6% and total company positively by approximately 1.7%.

Gas price deflation negatively impacted total reported comp sales by approximately 100 bps. The average worldwide selling price per gallon was down 9.6% versus last year. Worldwide, the average transaction was up 4.6%, which includes the impacts from gas deflation and FX.

Excluding gas deflation and FX, average transaction was up 3.9%. In terms of regional and merchandising categories, the general highlights were as follows: U.S. regions with the strongest comparable sales were the Midwest, Southeast and Texas.

Other International and local currencies, we saw the strongest results in Australia, the United Kingdom and Mexico. The negative impact of cannibalization was approximately minus 60 bps for the total company.

Moving to merchandising highlights. The following comparable sales results by category for the month excluded the impact of foreign exchange. Foods and sundries were positive mid-single digits. Better-performing departments included food, candy and frozen foods. Fresh foods were up mid-single digits. Better-performing departments included bakery and meat. Nonfoods were positive low double digits. Better-performing departments included jewelry, tires and majors.

Ancillary business sales were up low to mid-single digits. Pharmacy, food court and hearing aids were the top performers. Gas was down mid to high single digits, driven by price per gallon changes year-over-year.

Looking ahead, the February reporting period will include the 4 weeks beginning February 2 and ending March 1, 2026, compared to the 4 weeks beginning February 3 and ending March 2, 2025.

If you have any Investor Relations questions, please call Josh Dahmen at (425) 313-8254.

Hello. I'm Andrew Yoon, Director of Finance and Investor Relations, and I will review our sales results for the 5-week retail month of December, which started on Monday, December 1, and ended on Sunday, January 4. This period is compared to the 5 weeks that began last year on Monday, December 2, and ended on Sunday, January 5.

This call 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 today's call and sales release 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 them, 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 U.S. GAAP.

As reported in our release, net sales for the month came in at $29.86 billion, an increase of 8.5% from $27.52 billion last year. Reported comparable sales for the month were as follows: U.S., 6.0%; Canada, 8.4%; Other International, 10.6%; total company, 7.0%; digitally-enabled 18.9%.

Comparable sales for the month, excluding the impacts from changes in gasoline prices and foreign exchange were as follows: U.S., 6.3%; Canada, 6.0%; Other International, 5.6%; total company, 6.2%; digitally-enabled 18.3%. Total company comparable sales for the month, excluding all gas sales and the impact of foreign exchange was 6.9%.

Our comp traffic or frequency for the month was up 2.7% worldwide and 2.4% in the U.S. Foreign currencies year-over-year relative to the U.S. dollar impacted total and comparable sales as follows: Canada positively by approximately 3.5%, Other International positively by approximately 5.4% and total company positively by approximately 1.2%. Gas price deflation negatively impacted total reported comp sales by approximately 40 bps. The average worldwide selling price per gallon was down 4.4% versus last year.

Worldwide, the average transaction was up 4.2%, which includes the impact from gas deflation and FX. Excluding gas deflation and FX, average transaction was up 3.4%. In terms of regional and merchandising categories, the general highlights were as follows: U.S. regions with the strongest comparable sales were the Midwest, Northwest and Southeast. Other International and local currencies, we saw the strongest results in Australia, Japan and Korea. The negative impact of cannibalization was approximately minus 50 bps for the total company.

Moving to merchandising highlights. The following comparable sales results by category for the month exclude the impact of foreign exchange. Food and sundries were positive mid-single digits. Better-performing departments included food, candy and sundries. Fresh foods were up high single digits. Better-performing departments included bakery and meat. Nonfoods were positive mid-single digits. Better-performing departments included jewelry, tires, small appliances and majors. Ancillary business sales were up mid-single digits. Pharmacy, food court and optical were the top performers. Gas was down low single digits, driven by price per gallon changes year-over-year.

Looking ahead, the January reporting period will include the 4 weeks beginning January 5 and ending February 1, 2026, compared to the 4 weeks beginning January 6 and ending February 2, 2025. If you have any Investor Relations questions, please call Josh Dahmen at (425) 313-8254 or me at (425) 313-6305. This recording will be available until 4:00 p.m. Pacific Time, Wednesday, January 14.

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 First Quarter 2026 Earnings Call.

[Operator Instructions]

Thank you. And I would now like to turn the conference over to Gary Millerchip, Chief Financial Officer. You may begin.

Good afternoon, everyone, and thank you for joining us for Costco's First 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.

Thank you, Gary, and good afternoon, everyone. Thank you for joining us today. I'll start with a few brief comments on some of our key growth initiatives before turning it back to Gary to discuss the results of the quarter. In Q1, we opened 8 new warehouses, including a relocation in Canada, our third warehouse in France, 4 net new U.S. locations and 2 additional Canadian business centers. This brings our total warehouse count to 921 worldwide. We continue to see significant opportunities for future warehouse growth, both domestically and across the international markets and where we operate. While delays with a couple of our buildings in Spain resulted in us revising our planned net new openings for fiscal year '26 down to 28, we continue to plan for 30-plus net openings per year in future years.

We've increased the size of our real estate team to support this goal and without compromising on quality, we're being creative with real estate projects to further increase the potential for future growth. Recent examples of this include our new warehouse in Malus, France, where we converted an old Hypermart into a Costco warehouse as well as 2 Canadian business centers that opened in the last month, both of which were refurbished home improvement warehouses. This approach broadens our options for market expansion and lowers the capital investment required.

In addition to opening net new buildings, we will continue to relocate select high-volume warehouses to larger locations with more parking and expanded gas stations. By doing this, we're able to provide a better experience for our members and significantly accelerate sales growth in those markets.

In fiscal year '26, we have 5 relocations planned, including 3 in the U.S. and 1 each in Canada and Taiwan. The success of our new warehouse expansion has allowed us to consistently drive top line revenue well in excess of our comparable sales and gained significant market share. We continue to see improvements in the performance of our new buildings and a reduction in their time to maturity. With fiscal year '25 openings generating an annualized $192 million per warehouse of sales in the year of opening, that is up from $150 million for new warehouses opened just 2 years earlier.

Turning to digital. Our digital vision at Costco is to deliver a seamless experience that builds trust and loyalty with our members, both in warehouse and online. We aim to make the shopping at Costco easier, faster and more personal no matter where or how our members choose to shop. This isn't about technology for technology's sake, it's about using technology to strengthen the fundamentals that makes Costco who we are, increasing member loyalty, driving top line sales and improving efficiency in our operations so that we can bring goods to market at the lowest possible price. Progress has already begun and is delivering tangible results. In the warehouse implementation of scanning memberships at entry, the Costco Digital Wallet and pre-scanning small- to medium-sized baskets is leading to better member experience and improve productivity.

The warehouses that are first to adopt this pre-scan technology have shown checkout speed improvements of up to 20%. And across our U.S. warehouses overall, we achieved record levels of checkout productivity in the final weeks of the quarter. Online, we continue to make enhancements to improve the member experience on our site and app. As an example, this quarter, we launched new personalization capabilities that provide members with more relevant product recommendations based on their past for search history. The sales lift from this enhancement has been very positive. AI is also being interwoven into our business where we believe it can strengthen our model. Again, we're approaching it in a very Costco way, practical, member-focused and grounded in tangible business value.

An early use case has involved integrating AI into our pharmacy inventory system. This system now compares prescription drug pricing across vendors and autonomously and predictively reorders inventory, improving our in-stocks to more than 98%. This change has played an important role in helping us achieve mid-teen growth in pharmacy scripts filled and has improved margins while lowering prices to our members. We're now in the process of deploying AI tools in our gas business, which we expect will improve inventory management and drive incremental sales by ensuring we are always delivering the best value to our members.

These are just a few of the use cases we're developing into our business as we speak. While digital and technology will play an important role in our future, our people are what makes Costco special. I'd like to recognize the outstanding work done by our more than 340,000 employees around the world. Their commitment to our company and the Costco experience for our members is what drives our success.

I'd like to thank our entire team for their outstanding work this year and especially now during our busiest season. I also wanted to mention that our annual update to Costco's sustainability commitments was made available online earlier this month. This report provides a comprehensive review of the progress we are making towards our sustainability objectives, and I would encourage you to take a look. 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 fill some questions.

Thanks, Ron. In today's press release, we reported operating results for the first quarter of fiscal year 2026 for 12 weeks ended November 23. As usual, we published a slide deck under Events and Presentations on our investor website with supplemental information to support today's press release. Net income for the first quarter came in at $2.001 billion or $4.50 per diluted share, up from $1.798 billion or $4.04 per diluted share in the first quarter last year. This year's results include a tax benefit of $72 million or $0.16 per diluted share relating to stock-based compensation and last year's results include a tax benefit of $100 million or $0.22 per diluted share, also related to stock-based compensation.

Excluding these discrete tax items, net income and earnings per diluted share, both grew 13.6%. Net sales for the first quarter were $65.98 billion, an increase of 8.2% from $60.99 million in the first quarter last year. Comparable sales were 6.4%, both before and after adjusting for gas price deflation and FX. Excluding gas sales entirely and adjusting for the impact of foreign exchange, comparable sales were 7.1%. Digitally enabled comparable sales were 20.5%, both with and without adjusting for FX. Our segment breakout of comparable sales is disclosed in both our earnings release and the supplemental slide deck.

In terms of Q1 comp sales metrics, FX positively impacted sales by approximately 0.1%, while gas price deflation negatively impacted sales by approximately 0.1%. Traffic or shopping frequency increased 3.1% worldwide and our average transaction or ticket was up 3.2% worldwide, both with and without the impacts of gas price deflation and FX.

Moving down the income statement and membership fee income. We reported membership fee income of $1.329 billion, an increase of $163 million or 14% year-over-year. Adjusting for FX, the increase was also 14%. Last September's U.S. and Canada membership fee increase accounted for a little less than half of membership income growth. Excluding the membership fee increase and FX, membership income grew 7.3% year-over-year. This was driven by continued growth in our membership base and increased upgrades from GoldStar to executive membership. At Q1 end, we had 39.7 million paid executive memberships, up 9.1% versus last year. We ended the quarter with 81.4 million total paid members, up 5.2% versus last year and 145.9 million cardholders, up 5.1% year-over-year.

In terms of renewal rates, at Q1 end, our U.S. and Canada renewal rate was 92.2%, and the worldwide rate came in at 89.7%, both down 10 basis points from last quarter. This slight decline was due to the factors we discussed last quarter and reflects new online members growing as a percentage of our total base and renewing at a slightly lower rate than warehouse sign-ups. The decline was less than anticipated due to some early success with targeted communications to expiring members. Our goal is to continue to improve renewal rates by improving engagement with members who signed up digitally.

Although for the reasons previously shared, we may still see a slight decline in the overall renewal rate over the next few quarters.

Turning to gross margin. Our reported rate was higher year-over-year by 4 basis points, both with and without gas inflation, coming in at 11.32% compared to 11.28% last year.

Core was flat. In terms of core margins on their own sales, our core on core margins were higher by 30 basis points. This increase was broad-based with non-foods, foods and sundries and fresh all higher year-over-year. Supply chain improvements and an increase in KS penetration benefited margins as did additional marketing revenue. The improvement in core on core was offset by changes in mix and lapping higher income in our co-brand credit card program a year ago. Ancillary and other businesses gross margin was higher by 7 basis points, primarily driven by pharmacy and hearing aids. LIFO negatively impacted the gross margin rate by 3 basis points. We had a $1.9 million LIFO credit in Q1 this year compared to a $19 million credit in Q1 last year.

Moving on to SG&A. Our reported SG&A rate was higher or worse year-over-year by 1 basis point, coming in at 9.6% compared to last year's 9.59%. The operations component of SG&A was higher or worse by 1 basis point. Our operators did a great job improving productivity and capturing efficiency benefits from the technology investments that Ron referenced earlier. These productivity improvements fully offset wage investments and the impact of extended operating hours and would have created positive leverage in the quarter had we not experienced higher health care costs. Central was lower or better by 3 basis points. This quarter's SG&A also included a charge relating to a tax assessment for prior years, which negatively impacted the rate by 4 basis points.

Below the operating income line, interest expense was $35 million versus $37 million last year. Interest income was $122 million versus $96 million last year, driven by higher cash balances and FX and other was a $33 million benefit versus a $51 million benefit last year due to lower FX gains. In terms of income taxes, our tax rate in Q1 was 22.5% compared to 22% in Q1 last year. As mentioned earlier, this year's rate benefited $72 million and last year's rate benefited $100 million from annual RSU vestings.

Turning now to some key items of note in the quarter. Capital expenditure in Q1 was approximately $1.53 billion. As shared last quarter, we are making additional investments to support a higher number of new warehouse openings increased warehouse remodels to drive continued growth in existing high-volume buildings, depot network expansion and digital. We estimate capital expenditure for the full year will be approximately $6.5 billion.

Before we take a closer look at core merchandising results for Q1, here are a few fun facts about the holiday selling season so far. Our U.S. food court set a daily record on Halloween, selling 358,000 whole pizzas, an increase of 31% versus last year. Black Friday was a record-breaking day for our U.S. e-commerce business, generating over $250 million in nonfood orders. Our U.S. bakeries also set a record in the 3 days leading up to Thanksgiving selling 4.5 million pies. That's over 7,000 pies per warehouse over a 3-day period.

Turning to Q1 merchandising highlights. Our relentless focus on quality, value and newness continued to deliver market share gains across virtually all departments. Fresh sales were up mid- to high single digits, led by double-digit growth in meat. We saw strong growth in higher cost cuts of beef and even greater unit growth in lower-cost proteins like ground beef and poultry. Bakery experienced high single-digit growth driven by the introduction of some great new items such as our [indiscernible] dessert bars and our Creme Brulee Bar Cake.

Nonfoods have [indiscernible] sales in the mid-single digits. Our buyers continue to do an excellent job finding new and exciting items at great values while also adjusting our assortment to minimize the impact of tariffs. Golden jewelry, special events, health and beauty were all up double digits and major tires and small appliances also continued to outperform with high single-digit comps. We added a number of new national brand partnerships across a range of nonfood categories in Q1, including GAAP and alter gift cards [indiscernible] [indiscernible] apparel and upper deck trading cards. Food and sundries comp also grew mid-single digits, with candy and food showing the strongest results.

Newness has been driving growth in this category as well with on-trend items such as Dubai Chocolate performing very well. Kirkland Signature continues to grow at a faster pace than overall sales with KS items typically offering 15% to 20% value compared to the national brand alternative with equal or better quality. In Q1, we launched approximately 45 new KS items, including dry facial daily clean towels, caramelized blueberry croissants and various apparel items in addition to our latest food court offering, the caramel Brownie [ sundae ]. As always, our goal is to be the first to lower prices where we see opportunities to do so.

A few examples of lower prices this quarter include KS Chicken Pot Pie from $4.29 to $3.99 per pound; KS Bacon from $18.99 to $16.99 per packet; KS Whipped cream 3-pack from $10.49 to $8.99 and KS Walnuts 3 pounds pack $14.49 to $12.99.

In digital, site traffic in the quarter was up 24%, and app traffic was up 48%. Sales in non-foods were led by pharmacy, golden jewelry, tires, small electrics, apparel and majors, all of which grew double digits year-over-year. Our same-day delivery service offered in partnership with Instacart in the U.S. and Uber Eats and DoorDash internationally, also performed extremely well, growing at a faster pace than our overall digital sales. Strong traffic and sales growth in digital were aided by continued web and app improvements as well as the introduction of more personalized member communications.

We continue to see many opportunities to enhance digital engagement with our members and look forward to sharing progress on future earnings calls. Within ancillary businesses, pharmacy, food court, hearing aids and optical departments all had strong quarters. Gas comps were low single digits. Gas prices remained slightly deflationary in the quarter, but this was offset by volume growth. Costco Travel is another way in which we deliver unique membership value, and these services continue to resonate well with our members. Our member-only rates for vacation packages, hotels, cruises and rental cars often lead to hundreds or even thousands of dollars in savings in addition to the great service provided by our fantastic Costco travel agents.

Costco Travel U.S. set an all-time daily sales record on Cyber Monday before beating that record a day later on December 2. In all, we achieved over $100 million in gross bookings in the U.S. through Costco Travel in the 5 days following Thanksgiving, up 12% from last year.

Turning to inflation. Overall, inflation remained relatively consistent with recent quarters. Fresh and Food and sundries saw higher inflation in commodities such as beef, seafood and coffee, but this was offset by lower inflation in eggs, cheese, butter and produce. In non-foods, we saw low single-digit inflation for the third consecutive quarter, primarily driven by gold and imported goods. Our buyers continue to do a great job reducing the impact of tariffs for our members. The strategy is being deployed to achieve this include changing the country of production for some items, sourcing more items produced in the U.S., consolidating buying efforts globally to lower the cost of goods across all our markets, and leaning into Kirkland Signature, where we have more control over the supply chain.

Additionally, we are changing our item assortment where appropriate. As discussed last quarter, while we have a robust and exciting holiday merchandise selection in our U.S. warehouses, this represents a lower number of SKUs than in prior years. In replacement of some tariff-impacted items, our buyers have sourced a number of alternative great value items, including seasonal food, health and beauty and live goods. In many cases, these items are produced in the U.S. and are largely unimpacted by tariffs. The supply chain has remained stable, and our merchants feel very good about our inventory position.

By optimizing our inventory flow and reducing some of the higher inventory levels we built up a year ago in the face of greater supply chain uncertainty at that time, we've been able to improve working capital and lower the labor required to manage inventory without impacting in stocks or sales. Finally, in terms of upcoming releases, we will announce our December sales results for the 5 weeks ending Sunday, January 4 and on Wednesday, January 7, after market close. That concludes our prepared remarks, and we'll now open the line up for questions.

[Operator Instructions]

And our first question comes from the line of Michael Lasser with UBS.

On one of the observations -- one of the observations that the market has is under your tenure, Costco's had a greater willingness to move with speed, embrace technology in a different modes of retail and came a bit more than in the past. Is that a fair conclusion? And given the benefits of these actions that you're taking which is greater productivity and efficiency, would you be willing to continue to let the financial benefits fall to the bottom line? Or do you see a greater need to reinvest back in the business in areas like to continue to drive the talk, right?

You're welcome, Michael. You know, technology and bringing the company along has been a focus for several years. We've had the spend -- a couple of years ago, we really focused on our fundamental base systems and our core systems behind the scenes that will allow us to build for the future. And so we're now coming to a fruition where we're starting to see the benefits of that hard work of all the backroom systems that we had to build that are now coming to light and coming to the front phase for our members. We feel that technology is going to be part of the peak part of our future. I think it's equally as important as all of our other initiatives that we have out there, but we will never succumb to not being the best price and driving prices down for our members. That's what Costco is known for, and that will always be our leading mantra.

And our next question comes from the line of Christopher Horvers with JPMorgan.

So quick follow-up on the latter and then the full work question and then a second question. So as you think about results recently, they're strong in absolute standards. I think the market holds you to very high standards. Is there any concern that you see on the traffic side where there's more of an impetus to invest in price. And then secondly, it looks like executive members per week grew at an accelerated pace from 4Q to 1Q. How are you looking at that in terms of the overall benefit of extending the hours both in terms of the lift that you're seeing in sales? And is this also driving accelerated sign-up.

Yes. Thanks for the questions, Chris. First of all, I guess, on your point around sales and overall sort of membership growth in the business, I think from our perspective, we look at it very much over the last really 6 to 12 months. And when we look at the sort of trends and step back from what we're seeing with the member, there's a lot of consistency, actually. Overall, I think we've shared in the last couple of quarters. When we talk about what members are looking for, they're looking for value and for quality and for newness. And I think we've done a great job our buyers and [indiscernible] done a great job of bringing that to our members.

And when you look at month by month, there's definitely been some lumpiness in the individual monthly sales results that we posted. But a lot of that has been to do with whether it was uncertainty around tariffs 1 month to another or port strike that we have to cycle. And if you sort of take a step back and look at the last 7 months that we've reported in the last 2 quarters, our average sales have been around that 6.5% growth. We had 6.4% comps adjusted for [indiscernible] and FX in Q4. We had 6.4% Q1 this quarter.

And actually, if you look at every individual month, there was only 2 months in that last 7 months that were outside of the range of 6% to 7%. So I think sometimes there's a bit of fixation on individual month or one particular point of data. But actually, when we look at what we're seeing with the overall sort of patterns of how members are shopping and how they're behaving, we've seen a very sort of consistent pattern and a consistency in the results. So our goal is to really continue to make sure we're delivering on that value, quality and newness and ensure that we continue to see that that growth in membership accounts in their frequency of visiting and in the items that they're putting in the basket.

And generally, when you look across whether it's nonfood, food and sundries and fresh we've seen consistency in performance and growing market share in those areas. So we'll continue to focus on making sure we're delivering on that value but feel good about the overall sort of consistency in the results that we've been seeing.

I think from a -- I think the second part of your question maybe was around executive membership. And yes, I think we've been very pleased with the membership response to the extended operating hours. And also, you may remember, we added $10 per month as an extra benefit for executive members who shop on Instacart. The extended opening hours that we did was certainly a major benefit for our executive members having an extra hour in the morning on most days to shop the warehouse. But we also added an extra hour on a Saturday evening for all of our members. And if you think about the earlier hours, it often extends the total shopping members in the [indiscernible]. So it spreads out the traffic, if you like, to make the experience better for all our members. So we felt very positive about the change that we've seen. It's certainly been well received by members. We've seen a really nice uptick in executive upgrades to your point. And it gets hard to track the spend uplift because of the further away from the change you go, it's more difficult to sort of parse the differences that are happening in the impact on sales. But we still think that sort of 1% lift was a reasonable kind of view of what we think the impact was.

And of course, as I mentioned earlier, you see sort of different puts and takes that I would sort of -- if I look at our overall sort of sales trends, I think I look at it as it's probably offset some of that cycling of gift cards and gold that we were expecting at this time of year. And we've been able to maintain that overall sales growth even with those impacts.

And our next question comes from the line of Simeon Gutman with Morgan Stanley.

My question is on warehouse openings in the U.S., I think we're going to get to the highest number, something like 20 years next year. So do you do anything different from a membership perspective? I know we're lapping some of the short-term promotions that you did on membership. Is there anything you do different as you approach next year?

No, I don't think so. Next year's openings will be a good mix of some infills in established markets, and we still have some opportunities in some new markets. And so several of the infill locations don't result in a whole lot of sign-ups, but really drive a lot of top line sales because it really addresses the frequency aspect of things. And then the new markets that we've done several of those this year, and we have a few more slated for next year of markets that we may have been a little reluctant to go into, we've got much greater confidence at this point and we'll garner a much better new sign-up approach in those markets as well. So a lot of -- continuing on what we've done before, but some different type of scenarios as we move forward in the U.S.

And our next question comes from the line of Oliver Chen with TD Cowen.

On the technology side, it's been really exciting. As we think about retail media, are plenty of companies that really want to work with you deeply on digital advertising. Would love your thoughts there. And also as you approach the marketplace in a customer-centric way, you love to have your thoughts on that development. And finally, AI and gas. AI has so many applications across the customer experience as well as employees and inventory management. What's on your road map for how that will innovate your business going forward?

Thanks for the question, Oliver. Yes, I'll take the retail media question first. Yes, we talked about retail media a few times now on the calls, and I definitely believe that it's a meaningful opportunity for us. I always like to start the conversation on retail media though to remind everybody that we have a pretty large alternative profit business that many other retailers would define that way today. And I called out a couple of them on the call today outside of financial services. We have a large travel business. We have a traditional sort of media revenue business that we generate meaningful dollars today. And both of those were actually travel and the sort of marketing and media revenue were tailwinds to our business in the quarter. So there's there's a number of strengths that we have today in that space that are part of our model that I think showed through in the ability to keep investing in the member and still expanding our operating margins during the quarter.

That being said, we think of retail media is a slightly different opportunity from those because it really is about tapping into that marketing spend that many of our suppliers are investing in other places to drive their marketing awareness and drive return on ad spend. We are in the early innings. I would still say of retail media. We've been building out, as Ron alluded to earlier, the sort of data and tech platform that allows us to execute personalization at scale.

And I think for us, the first priority with personalization is to deliver a better member experience is to deliver more targeted relevant messaging so we drive more items in the basket, more visits to the warehouse, more visits online. And as you do those things, it just creates an even more compelling value proposition for our media partners while we're building and executing on that capability, we've been introducing some media activity on third-party sites. So I think of that as being -- you may have seen, you have the Costco Auto program that will run on digital TV, and we've done some targeted MVM amplification campaigns with some of our partners that have been very successful as well. We also recently launched advertising on our gas pumps as a new channel for us as well around new media opportunities.

So I think the headlines would be, we're seeing some early success, but it's still very much an opportunity in the future on the road map for us. And a bit like Ron mentioned earlier, all of our focus is on how do we drive more value for the member. So as you might expect, the vast majority of the value [indiscernible] here will reinvest in the member to drive down prices and value and increase sales. And we actually think that's a real advantage with the national brand partners that we work with on media because they know that we're committed to really driving the flywheel and driving growth in their overall business.

And on the AI front, we're extremely excited about what the future holds for us. I mean we see many opportunities that are really business-driven and tangible -- have great tangible business value for us and you look at things like our procurement system as we are a global retailer and we buy from around the world as well as supply chain, what it can do there. And just the tools that we've seen that this has improved our employees' work abilities and their skill sets as well as they do their day-to-day work. So we see a lot of value. We're very excited about the journey.

We look at it in a 2-phase approach that concurrently, we're going to be focusing on member-facing, how do we improve the experience for the member through AI and then business in basics, how do we continue to focus on the business basics. Our mantra is to bring goods to market at the lowest possible price. And we think AI has a great asset to that, and it really can help us become a much better merchant out there.

And our next question comes from the line of Chuck Grom with Gordon Haskett.

In your annual report, your sales waterfall chart is impressive. The class of [ '25 ], $192 million in sales versus $150 million in 2023. Can you help us think about the opportunity to continue to expand on this front and the steps you're taking to continue to improve productivity within the store?

We see a good horizon on expansion. We continue to -- the creativity, I mentioned just a couple of examples of things that we're doing differently. We've got a project in Los Angeles, where we're working with some developers that there's some affordable housing going above Costco, just north of LAX. That project will open up in 2027. And that would be a market that we could -- it's Baldwin Hills where it's called. That would be a market we would never be able to go to and find 25 acres to build a Costco. It just wouldn't happen. So we're finding creative ways to get closer to our members and to relieve some pressure from some of our highest volume locations.

And again, like I said, we continue to see some opportunities in markets that we would have questioned in the past due to maybe some competition is there, but we feel much stronger going in and attacking these markets. So like I said in the early opening remarks, good runway for 30-plus locations as we look forward for the next few years, for sure, and a good combination of both type of openings. And international still presents some very good strengths for us. In our recent Sweden opening our second location in Sweden, our third in France, and we've got quite a few in Asia that are upcoming as well. So we feel really strong about our future expansion.

And Chuck, I think on the point on the growth per warehouse, I think Ron's final point there is a really important 1 around the balance that we're able to get. So we find with many of the U.S. and Canada warehouses where we're filling in, we can accelerate the sales very quickly because Costco is known, we're sort of filling capacity where maybe there's some very busy warehouses around. So it really helps the economic model we're getting returns from the quick acceleration in sales growth. And then in the international markets or places where we have less penetration of warehouses, it really drives a significant increase in new member [indiscernible]. So it's nice to have a balance between those 2. The returns look a little bit different in how you get there, but they both generate strong return on investment in different ways, and they create a nice balance in the business overall as we grow.

And our next question comes from the line of Kate McShane with Goldman Sachs.

The renewal -- the renewal rate softness sounded better than what you expected. Could you maybe talk to some of the things you did to try and offset the softness from the more digital numbers?

Sure. Yes, you're exactly right. When we talked about the membership renewal rate last quarter, we shared that as a result of this change in mix around us adding more new digitally engaged members or signing up digitally to become a Costco member. What we've always seen with that group is that they're generally a bit younger. And generally speaking, they renew at a slightly lower rate. That's always been true, but there's a bigger number of them now coming into the base. So as they flow into the math model, it was -- it's impacting the overall renewal rate. And so I think you may have heard us talk last quarter, we said we think of while that's sort of a mathematical fact, we think there are opportunities for us to be able to change that outcome by delivering more targeted and relevant communication to those members that are have signed up digitally and are reaching that point in maturity where they're considering whether to renew or not to renew their membership with us.

And so our membership team is really focused on delivering targeted relevant messaging to engage those members to ensure they continue to see the value of the membership and really helping them see why there's significant value for them to continue to be members. And what you saw in this quarter was really some of the early work the team has done to engage those members and improve the renewal rate. And obviously, it's early days.

So we want to make sure that we can continue to build that momentum. But it's been encouraging to see the impact of those changes. And we were expecting, based on purely flowing through the sort of the renewal rate that we've seen before to see a slightly higher decline in the quarter, and we were able to offset a part of that with the changes that we made in communicating with members.

And our next question comes from the line of Peter Benedict with Baird.

I want to ask about digital. Maybe if there's any metrics you guys can share with the success you're having, maybe the -- how many -- what percentage of the membership that's engaging with you digitally now versus before? I don't think I may have missed it, but any stats around Costco Logistics. How you're doing with delivery there.

Sure. Thanks for the question, Peter. Yes, we haven't typically talked about the percentage of members that are engaging with digitally. It does continue to grow, as you might imagine, as we're continuing to make enhancements to the website to the app and really as we're delivering more relevancy to members through those channels. And so we are continuing to see growth. We did share in the prepared remarks that traffic was up 24% during the quarter on the website, and it was up even higher than that in the 40% plus range on the app during the quarter. So we continue to be pleased with the momentum that we're seeing in digital engagement with our members. And our expectation would be that digital sales, as we define it, would continue to grow at a faster pace over the longer term than our average sales overall as more members engage digitally, and we're able to use some of those targeted personalized communication tools to really help members see the relevancy of all the offers that we have online, but also to use those channels to help drive higher engagement into the warehouse as well and really creating a seamless experience across the channels.

Very excited about what we have coming in the app. I mean more engagement, more locking in the brick-and-mortar business with the virtual digital business as well. And as we continue to roll out enhancements we've got pay ahead for the pharmacy coming. We've got ordering cakes and deli trays online coming. So many of the things that we've heard from our members that could be a little bit clunky are now moving to a digital state, and we're seeing great adoption right out of the chute. So we continue to -- we see some upside to the continued growth and the digital value of having the app and using the digital membership card, the Costco wallet. Those things have all got a very nice road map in the next 12 months and we see that number is going to hopefully continue to outpace the growth of the warehouse.

And our next question comes from the line of John Heinbockel with Guggenheim.

Two real estate questions. A lot of opportunity internationally. What does the pipeline look like, both in some of your European countries and Asia? I know it takes a while. And then secondly, you mentioned remodels, which I don't think you haven't talked about too much. What is the remodel philosophy in the U.S.? How many do you do? What's the extent of that. What's the lift. I don't know how impactful that is.

Do you want to -- I can start. Good runway internationally. We see some good growth in Europe, especially in Spain and the U.K. We have got a lot of good things going on there, and we see that those 2 countries will be ramping up. We continue to see very, very good strength in Asia and so that market, we see the next 5 years, and we think that those projects do -- like you mentioned, do take a little bit longer, but they're going to start coming to fruition. So we'll see a good balance. We've been about 50-50, half of the expansion in the U.S. and half outside of the U.S. And now we're seeing even more opportunities in Canada and North America and Mexico. So a good balance, about half of the 30 should be outside the U.S. we see in the next 5 years.

Expansions and relocations, we normally do about 5 to 6 relocations a year. The uplift is dramatic. When we do these, we normally are moving a building that is underserving the market and goes into a larger facility, better parking. If we have a gas station, expanded gas or we add gas to it and a wide variety of uptake to extreme 50%, 60% increases when you add a gas station and really add a lot of parking to a 20% uplift to a building that had everything just got into a better facility.

So we strategically look at that. And then we are continuously investing in our current warehouses too, to make sure that we're updating the fresh foods areas. We're bringing the new ancillary businesses in there. So it's a process we go through every year of planning ahead, and we look out several years and a good combination of all 3 new locations, relocations and taking care of the existing buildings that we're doing business in as well.

And our next question comes from the line of Rupesh Parikh with Oppenheimer.

I just want to go back to the comments on SG&A leverage. So it sounds like this quarter, higher health care costs prevented your team from leveraging costs. So just curious about the dynamics there. And then as you think about productivity, just how do you think about the runway there? It sounds like it could continue for a few more quarters.

Yes. Thanks for the question, Rupesh. Yes, you've summarized it pretty well, actually, from how we looked at the quarter. If I just take a step back, there were kind of 4 main sort of headwinds or investments, if you like, that we had during the quarter when you think about the impact on the warehouses. The first, of course, is the investments that we make through our employee agreement each year. So that was the March [ 25 ] agreement. And that on an incremental basis, we're sort of mid-single digits headwind that the team had to kind of overcome in improving productivity. The second was, of course, the extended operating hours that we implemented in June. And then you mentioned it that we had higher health care costs in the quarter. We've generally seen, of course, health care cost increasing. This was perhaps the first quarter where we've seen health care costs grow at a faster pace than our sales.

So we saw a little bit of a headwind overall from health care costs in the quarter. And then we also had the 4 basis point impact from the tax charge that relates back to multiple years ago that we took during the quarter as well. So overall, we were 1 basis point negative on productivity. If we have not had the sort of sales and use tax charge that we had during the quarter. And without the health care cost, we'd have been sort of mid-single digit also positive leverage during the quarter without those sort of factors.

Now I would say, as you look forward, we're still going to have, of course, the continued investment that we've already implemented around wages. So we have to continue to support those costs. We've implemented the extended opening hours. We think the operators done a great job of absorbing that, as you've seen in the last couple of quarters, the health care costs, that's something we're taking action to make sure that we're comfortable with the trends that we're seeing. But of course, there's possibilities those costs could continue to be higher in the future. We wouldn't expect to have the sort of the 4 basis point impact that we had from tax.

So when -- I think when you take all those things and look at it going forward, we've historically said that we need to get to about mid-single-digit sales to be able to leverage SG&A. And I think with the work the team has done to offset extended operating hours, the work the team has done to offset the employee agreement. I think we're in that kind of ballpark. And actually in the first quarter, have we not have had the adjustment for sales tax, I think we'd have actually seen some leverage during the quarter. So I think that's the way to sort of think about it overall.

And our next question comes from the line of Greg Melich with Evercore ISI.

Gary, I think you mentioned that inflation was running similar. I just wanted to make sure I got the numbers right. It was up low single digits in general merchandise. Was food inflationary or not in the quarter? And how do you see that trending?

Yes. Food and fresh -- food and sundries and fresh, Greg, would have been slightly inflation. So low single -- low to mid-single digits. No real change really from last quarter. The are quite a few puts and takes in there, as I mentioned in the prepared comments that you've got a few of the commodities that would be inflationary right now when you look at items like beef and seafood and coffee, but then you've got produce, which is deflationary currently, and there are other items like eggs and cheese, which are still inflationary year-over-year, but a lower inflation than they were earlier in the year. So you've got kind of puts and takes that are offsetting each other, which really essentially sort of leveled it all out at the same level as it was for the last couple of quarters.

It -- would it be fair to say that most of the ticket growth in comp was driven by inflation?

I think there'll be a combination of both in there. We have -- and I remember for us, there's -- inflation for us the way we measure it would be -- it could be the members buying a bigger pack size or it could be the members buying an upgraded item of new electronic or appliance. So I think you kind of have to look at it, there's sort of probably -- or there is a combination of some level of natural inflation on like-for-like items, some level of inflation of members buying bigger pack sizes and increasing -- moving to the newer model, if you like, and then some level of unit growth as well in there.

Our next question comes from the line of Edward Kelly with Wells Fargo.

I wanted to dig into total paid members. You've had remarkable growth over the last few years. Model's obviously resonated. And 5% this quarter is still very good. But it has slowed a little over the last few quarters. I was wondering if you could just maybe discuss what you're seeing there. Is that more so in the U.S. And then have you seen any stabilization in that? I think the math would kind of suggest that maybe exit rate lower than 5.2%. So just thoughts there.

Yes. Thanks, Ed. Yes, membership, as you mentioned, in general, we've been really pleased with the results that we've seen in the quarter with the new members and the younger population that we're recruiting, the acceleration in upgrades and overall growth that you mentioned just over 5% and exec [indiscernible] [ 9 ]. So we're pleased with the results that we've seen overall. I think your point is accurate that if you look at the year-over-year growth, it has slowed a little bit from where it's been over the last couple of years. And I think some of that sort of starting to cycle some strong growth in the last year or so. But we still feel really good about the health of the membership growth.

And we think there's a lot of continued opportunities to maintain that growth in the future. I know Ron mentioned a few of them in one of the questions we answered earlier, but with partly with the existing warehouses that we're -- I think we're in a good position where every year, we've been opening 20 to 30 warehouses and we can see the maturity curve of the increase in the number of members that sign up as warehouses mature.

We're obviously opening new warehouses each year. And in particular, to your point, in international, we tend to see a much higher number of new member sign-ups and as that mix continues to blend out to sort of closer to 50-50 between international and the U.S. We do think with the actions that we're taking, as I mentioned also earlier on the call around improving renewal rates, there's an opportunity to help that trend as well. And then we're committed to continuing to improve the value of the membership. We've made obviously some major changes recently with the extended opening hours and the Instacart benefits and 5% gas on the credit card, but we'll continue to look for ways to add greater membership value. So I think it's accurate to say that it's a little bit slower than it has been, but we feel good about the momentum and the opportunity to continue to grow.

And our next question comes from the line of Zhihan Ma with Bernstein.

So on the nonfood side of things, I think your comp is now in the mid-single-digit percentage range. Can you just update us on when you expect to [indiscernible] the tough comps from the gift card sales? And does that timing coincide with the tax refunds or the incremental ones that consumers are going to get especially middle to higher income consumers early next year, will you start to see some more outsized benefit in that category?

Yes. I think overall, obviously, we generally don't provide sort of comments on forward looking, what we would expect. I think what we would say around nonfoods is that the team's done a great job of continuing to deliver exciting items at great value and quality. And we see while we have -- I think your comment is accurate that the growth year-over-year has come down to low double digits into that mid-single-digit range. And I think you've heard us mention before and you referenced it, that some of that really is starting to cycle the impact of gold being sold in warehouse and online and also some of the gift card programs that we had last year. But overall, we still see good market share gains in really pretty much all of the nonfood categories.

And we saw -- you may have heard us mention in the prepared comments that gold and jewelry, special events, health and beauty were all double digits. We also saw high single-digit growth in majors, in tires and small appliances. And I didn't mention apparel during the call earlier, but that's also showing really strong improvement in in sales momentum and comp growth as well. So I think our perspective on nonfood is that we think our teams are doing a really good job in delivering great value for the member. And we think we have a clear path to continue to grow our market share in nonfood by continuing to deliver on that promise to our members. And that's really where our focus is.

And our next question comes from the line of Scot Ciccarelli with Truist Securities.

I guess another question on warehouse expansion. What are your latest thoughts around long-term warehouse potential, both in the U.S. and in total. And then second, I think all of the lower price examples you gave were Kirkland products. So are most of your heaviest price investments on your private brand products.

Yes. On the first part of the question, Scott, I think Ron briefly alluded to it earlier as well, we tend to look at 5 to 10 years out in terms of our real estate plans, and we would still see a really good road map for 30-plus warehouses a year is the goal that we have at least achieving 30 new warehouses a year is the goal that we set for ourselves. And when we look at that 5- to 10-year plan, we see opportunities for growth in all the markets and geographies that we're operating in today. So generally speaking, we're expecting around half, maybe slightly over half to be in the U.S. and then just around half just slightly under half to be in the rest of the markets that we operate in. So think of that being Canada, Mexico, Europe, Asia, Australia, across those different markets. And I wouldn't say it's 1 specific geography, it's really fairly well spread across those markets to continue to build our presence in each of those different geographies.

On the second part of your question around Kirkland Signature. I think it's more a reflection of we tend to have, obviously, a very strong understanding of the costs involved in those items, and we want to be always the first to lower prices for our members and the last to increase them. And so buyers in our category managers who look at those items, whenever we see an opportunity either to work with our partners or to find ways to buy more effectively. We want to be looking for those opportunities. So in most of those cases, that's really working very closely with our suppliers to look at what we're seeing in the cost base and working creatively to either increase buying globally so that we can improve our economies of scale or looking at ways to operate more efficiently without ever compromising on the quality of the item.

And those would be all great examples of where our teams really looked and found opportunities to bring down the price and increase the value for our members.

And our next question comes from the line of David Bellinger with Mizuho.

Regarding the personalization efforts, those seems to be working pretty well early on. How much further does that have to roll out? Is it hitting every member at this point and any specific examples you can share on the conversion or the bills uplift that some of these personalization changes are helping with today?

Yes, we have been pleased, as you heard Ron mentioned in the comments around the progress that we made on personalization, where we really are now starting to use our membership data look for ways, how can we really make the experience better for the member? How do we improve the convenience for them, how do we help them see the most relevant messages that help them get to the best value from Costco? I still think there's plenty of road map and opportunity for us to continue to improve. First of all, we're relatively early on the journey. So we're learning what do our members really like, where are the places we can fine-tune and improve those communications and the places in which they show up.

I still think there are a number of elements on our road map where we still see parts of the experience that our members have that we can make that personalization, more relevant, whether that's the items and the order in which they see on things like the MVM or whether it's the way in which we deliver e-mail communication to our members. So we still see a really strong runway to continue to improve.

We don't really talk about metrics. I think our focus is much more on how we're driving overall member experience and top line sales. So some of these things are intended to improve the way the members are able to engage in our warehouses or the way they're able to buy online. So we tend to look at it more. Is it driving an improvement in member engagement? And is that helping drive our digital sales, which we continue to expect to grow at a faster pace overall than our warehouse business. And is it driving more member engagement overall. And we've been really pleased with the results so far in that journey.

And our next question comes from the line of Kelly Bania with BMO.

I was hoping to go back to the topic of renewal rates a little bit. I know you don't prefer to guide or forecast, but I think you did say, Gary, we might see still a decline in the renewal rate in the next few quarters. So I was just wondering if that's a little bit of conservatism because it sounds like you are having some success on mitigating that dynamic. Just wondering if you could comment on that. But also if you were to pull out that cohort of the younger members would the membership rates be improving, excluding that? Or can you share any of a deeper dive on that renewal rate dynamic?

Sure. Yes, really the -- Kelly, the impact that we've been talking about really is attributable to this phenomena that I've mentioned on the call earlier around as we add in, and it sounds like you fully understand the sort of concept of what's happening with the membership base overall. But as we've brought more of these digitally sign up members who are generally younger that just they do renew a lower rate. So really, the impact that we've talked about the last few quarters on renewal rate is a function of those members moving into the renewal rate overall. So that really is what's driving the -- what has driven the slight decline that we've seen over recent quarters.

To your point, our goal obviously is to arrest that decline as quickly as possible. And certainly, we're encouraged by what we saw this last quarter with the improvements that we made through the more targeted and relevant communication to members who we know have signed up through that channel. So we're very encouraged by what we've seen so far. Our goal is to stop that decline and to reverse that decline as quickly as we possibly can as we're only 1 quarter into the change that we made. We wanted to flag that, of course, there's still work to be done there. And we are still at a lower renewal rate on digital sign-ups than we are on warehouse sign-ups. And so our expectation of ourselves is to close that gap as quickly as possible, but we want to be transparent in all that we share that there's still work for us to do. And there is a possibility the next couple of quarters could still show a slight decline because of the factors that I've mentioned in prior calls.

And our final question comes from the line of Spencer Hanus with Wolfe Research.

Just curious if you could talk about the cadence of comps you saw through November and then into December. And how that's informing how the consumer is holding up heading into the holiday from your vantage point? And then are you seeing any trade down or divergence in performance by customer cohort that is changing how you guys are buying.

Yes, I think -- thanks for the question. I think we don't obviously get into talking about specifically our current quarter because we report our sales on a monthly basis. But overall, I would say we're seeing relative consistency in how our members are shopping. I mentioned it earlier that we've -- we have seen month-to-month some, I call it, bumpiness, if you like, in the sales, but most of that's been attributable to whether it's cycling, port strikes or consumer uncertainty, 1 month with tariffs and then the sales come back the next month. And if we look at the last 6 months or so, outside of the 2 things that I mentioned around, we've seen continued strong growth in nonfoods and market share gains, but we have seen a deceleration in nonfood. And I think that that's really been offset when you look at the total comps by the benefit we've seen from extended operating hours. But net-net, really in that sort of 6.5% range when you look at the last 2 quarters over the last 7 months, really, outside of a couple of months being one slightly above and 1 slightly below that 6% to 7% growth range. And those months are right next to each other.

So when you average out the two, they came in at 6.5% as well. We've been really in that consistent range. So nothing that we'd call out that we're seeing is a change other than the 2 factors I just mentioned in terms of member behavior and the way in which we believe our value is resonating with them.

And ladies and gentlemen, that concludes our question-and-answer session and today's call. We thank you for your participation, and you may now disconnect.

Hello. I'm Andrew Yoon, Director of Finance and Investor Relations, and I will review our sales results for the 4-week retail month of November, which started on Monday, November 3, and ended on Sunday, November 30. This period is compared to the 4 weeks that began last year on Monday, November 4 and ended on Sunday, December 1.

This call 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 and sales release 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 them, 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 U.S. GAAP.

As reported in our release, net sales for the month came in at $23.64 billion, an increase of 8.1% from $21.87 billion last year. Reported comparable sales for the month were as follows: U.S., 6.0%; Canada, 6.9%; Other International, 11.4%; total company, 6.9%; digitally enabled, 16.6%.

Comparable sales for the month, excluding the impacts from changes in gasoline prices and foreign exchange were as follows: U.S., 5.8%; Canada, 8.3%; Other International, 8.0%; total company, 6.4%; digitally enabled, 16.3%.

Total company comparable sales for the month, excluding all gas sales and the impact of foreign exchange was 7.0%. Our comp traffic or frequency for the month was up 3.8% worldwide and 3.0% in the U.S. Foreign currencies year-over-year relative to the U.S. dollar impacted total and comparable sales as follows: Canada negatively by approximately minus 0.7%; Other International positively by approximately 3.6%; and total company positively by approximately 0.4%.

Gas price inflation positively impacted total reported comp sales by approximately 10 bps. The average worldwide selling price per gallon was up 0.6% versus last year.

Worldwide, the average transaction was up 3.0%, which includes impacts from gas inflation and FX. Excluding gas inflation and FX, average transaction would have been up 2.5%.

In terms of regional and merchandising categories, the general highlights were as follows: U.S. regions with the strongest comparable sales were the Northeast, Midwest and Southeast. Other international and local currencies, we saw the strongest results in Australia, Taiwan and the U.K. The negative impact of cannibalization was approximately minus 60 bps for the total company.

Moving to merchandising highlights. The following comparable sales results by category for the month exclude the impact of foreign exchange. Foods and sundries were positive mid- to high single digits. Better-performing departments included candy, food and sundries. Fresh foods were up mid- to high single digits. Better-performing departments included meat and bakery. Nonfoods were positive mid-single digits. Better-performing departments included jewelry, tires and health and beauty. Ancillary business sales were up high single digits. Pharmacy, food court and optical were the top performers. Gas was up low to mid-single digits, driven by an increase in gallons year-over-year.

Looking ahead, the December reporting period will include the 5 weeks beginning December 1 and ending January 4, 2026, compared to the 5 weeks beginning December 2 and ending January 5, 2025. If you have any Investor Relations questions, please call Josh Dahmen at (425) 313-8254 or me at (425) 313-6305. This recording will be available until 4:00 p.m. Pacific Time Wednesday, December 10.

Hello. I'm Andrew Yoon, Director of Finance and Investor Relations, and I'll review our sales results for the 4-week retail month of October, which started on Monday, October 6, and ended on Sunday, November 2. This period is compared to the 4 weeks that began last year on Monday, October 7, and ended on Sunday, November 3. This call 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 and sales release 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 them, 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 U.S. GAAP.

As reported in our release, net sales for the month came in at $21.75 billion, an increase of 8.6% from $20.03 billion last year. Reported comparable sales for the month were as follows: U.S., 6.6%; Canada, 6.3%; Other International, 7.2%; total company, 6.6%; digitally enabled 16.6%. Comparable sales for the month, excluding the impacts from changes in gasoline prices and foreign exchange were as follows: U.S., 6.7%; Canada, 8.8%; Other International, 5.1%; total company, 6.8%; digitally enabled 16.7%.

Last year's total and comparable sales were negatively affected by a little more than 1% in the U.S. and slightly less than 1% worldwide due to pull-forward activity associated with Hurricane Helene and the port strikes in September. Our comp traffic or frequency for the month was up 3.6% worldwide and 3.7% in the U.S. Foreign currencies year-over-year relative to the U.S. dollar impacted total and comparable sales as follows: Canada negatively by approximately 1.5%; Other International positively by approximately 2.2% and total company positively by approximately 0.1%.

Gas price deflation negatively impacted total reported comp sales by approximately 0.2%. The average worldwide selling price per gallon was down approximately 2% versus last year. Worldwide, the average transaction was up about 2.9%, which includes the impacts from gas deflation and FX. Excluding gas deflation and FX, average transaction was up about 3.1%. In terms of regional and merchandising categories, the general highlights were as follows: U.S. regions with the strongest comparable sales were the Midwest, Southeast and Northeast.

Other international and local currencies, we saw the strongest results in Australia, Taiwan and Japan. The negative impact of cannibalization was approximately 60 bps for the total company. Moving to merchandising highlights. The following comparable sales results by category for the month exclude the impact of foreign exchange. Foods and sundries were positive mid- to high single digits.

Better performing departments included candy, food and cooler. Fresh foods were up mid- to high single digits. Better-performing departments included meat and bakery. Nonfoods were positive mid-single digits. Better-performing departments included Jewelry, Health & Beauty and Mattress. Ancillary business sales were up mid- to high single digits. Pharmacy, food court and hearing aids were the top performers. Gas was down low single digits, driven by price per gallon changes year-over-year.

Looking ahead, the November reporting period will include the 4 weeks beginning November 3 and ending November 30 compared to the 4 weeks beginning November 4 and ending December 1, 2024.

If you have any Investor Relations questions, please call Josh Dahmen at (425) 313-8254 or me at (425) 313-6305. This recording will be available until 4:00 p.m. Pacific Time, Wednesday November.

Hello. I'm Andrew Yoon, Director of Finance and Investor Relations, and I'll review our sales results for the 5-week retail month of September, which started on Monday, September 1 and ended on Sunday, October 5. This period is compared to the 5 weeks that began last year on Monday, September 2 and ended on Sunday, October 6.

This call 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 and sales release 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 them, 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 U.S. GAAP.

As reported in our release, net sales for the month came in at $26.58 billion, an increase of 8% from $24.62 billion last year. Reported comparable sales for the month were as follows: U.S., 5.1%; Canada, 6.3%; Other International, 8.5%; total company, 5.7%; digitally-enabled, 26.1%. Starting with this sales release, we changed our e-commerce comparable sales metric to digitally-enabled comparable sales. This metric now includes all sales delivered to members that are initiated through a digital device, whether fulfilled through a warehouse or a distribution center and Costco-Travel.

Comparable sales for the month, excluding the impacts from changes in gasoline prices and foreign exchange were as follows: U.S., 5.0%; Canada, 9.3%; Other International, 7.5%; total company, 6.0%; digitally-enabled, 26.3%. Last year's total and comparable sales benefited by approximately 2% in the U.S. and 1.5% worldwide as a result of increased sales due to abnormal consumer activity associated with Hurricane Helen and port strikes.

Our comp traffic or frequency for the month was up 2.1% worldwide and 1.4% in the U.S. Foreign currencies year-over-year relative to the U.S. dollar impacted total and comparable sales as follows: Canada negatively by approximately minus 2.5%; Other International positively by approximately 1%; and total company negatively by approximately minus 0.2%.

Gas price deflation remained relatively flat and negatively impacted total reported comp sales by less than 10 bps. The average worldwide selling price per gallon was down less than $0.01. Worldwide, the average transaction was up about 3.5%, which includes impacts from gas deflation and FX. Excluding gas deflation and FX, average transaction was up about 3.8%.

In terms of regional and merchandising categories, the general highlights were as follows: U.S. regions with the strongest comparable sales were the Northwest, Midwest and Los Angeles. Other International and local currencies, we saw the strongest results in Korea, Australia, China and Taiwan. In Korea, Taiwan and China, we saw a lift in comparable sales due to the holiday shift of the Moon Festival and Chuseok helping drive the strong results in those markets this month. The negative impact of cannibalization was approximately minus 60 bps for the total company.

Moving to merchandising highlights. The following comparable sales results by category for the month exclude the impact of foreign exchange. Food and sundries were positive mid-single digits. Better-performing departments include candy, cooler and deli. Fresh foods were up mid- to high single digits. Better-performing departments included meat and bakery. Nonfoods were positive high single digits. Better-performing departments included jewelry, majors and health and beauty. Ancillary business sales were up mid-single digits. Pharmacy, hearing aid and optical were the top performers. Gas was up low single digits, driven by volume increases year-over-year.

Looking ahead, the October reporting period will include 4 weeks beginning October 6 and ending November 2 compared to the 4 weeks beginning October 7 and ending November 3, 2024. If you have any Investor Relations questions, please call Josh Dahmen at (425) 313-8254 or me at (425) 313-6305. This recording will be available until 4:00 p.m. Pacific Time, Wednesday, October 15.

Ladies and gentlemen, thank you for standing by. My name is Abby, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Costco Wholesale Corporation's Fourth Quarter Fiscal '25 Earnings Call. [Operator Instructions]

And thank you. I would now like to turn the conference over to Mr. Gary Millerchip, Chief Financial Officer. You may begin.

Good afternoon, everyone, and thank you for joining us for Costco's Fourth Quarter 2025 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.

Thank you, Gary. Good afternoon, everyone, and thank you for joining us today. As we wrap up fiscal year 2025, I'll make a few brief comments on some of the highlights. In the fourth quarter, we opened 10 new warehouses, including a relocation in Canada, our 20th warehouse in Korea, our second warehouse in Sweden and 5 net new locations in the U.S. For the fiscal year, we opened 27 new warehouses, including 3 relocations for a total of 24 net new buildings. This brings our total warehouse count to 914 worldwide. We plan to open another 35 warehouses in fiscal year '26, of which 5 are relocations. We continue to see significant opportunities for expansion both domestically and internationally across the markets where we currently operate.

Gary will go into details about the quarter results, but a few highlights for the fiscal year. Net sales came in just under $270 billion, an increase of over 8% versus last year, and e-commerce sales exceeded $19.6 billion, increasing over 15%. And we had a record year for gas volumes, which benefited from longer gas station hours, new gas stations and expansions of existing gas stations as well.

We also recently celebrated a few milestones, including the 40th anniversary of our $1.50 hotdog and soda combo. Fittingly, we have just completed the rollout of Coca-Cola, the original soda partner from the 1985 inception of the iconic combo to all food courts worldwide. Our private label Kirkland Signature reached its 30th year anniversary this year. Kirkland Signature sales penetration continued to increase, bringing an even more high-quality value to our members while offsetting potentially inflationary impacts from tariffs. As mentioned last quarter, we are continuing to look at opportunities to move more KS product sourcing into the countries and regions where the items are sold and this is helping to lower cost as well as reduce emissions from transporting goods around the world.

To increase value and convenience for our members, on June 30, we added executive member exclusive operating hours in the mornings and additional hour on Saturday evenings for all members in our U.S. warehouses. We estimate these incremental hours have added about 1% to weekly U.S. sales since implementation. This has been very well received by our members.

In addition to the early opening hours for executive members, we also introduced a $10 credit per month on Instacart purchases greater than $150. Since announcing these new executive benefits, we've seen the meaningful increase in upgrades from Gold Star members to executive membership.

Another way we are improving the member experience is through the rollout of enhanced checkout technology in all U.S. warehouses. This is speeding up the checkout process by allowing our employees to scan small- and medium-sized transactions while the member is still in line. So upon reaching the cashier, nothing has to be removed from the car only payment is needed.

We also continue to make progress with our technology road map for digital and e-commerce. Enhancements this quarter included using data augmentation to improve search effectiveness, adding password assign in to our mobile app and creating a waiting room for high-velocity items such as Pokemon cards. These waiting rooms reduce the traffic from bots, increase the opportunity for members to purchase high-demand items while improving the speed and the stability of the site during peak traffic periods.

Reflecting on fiscal year 2025 overall, our merchandising and operations team did a fantastic job delivering strong financial results while also investing in our employees and improving value and convenience for our members. Our merchants adjusted their plans to mitigate tariff impacts and source items that our members need while delivering the lowest price at the best value. Our operators quickly and efficiently adapted to pay raises in March of '24, July of '24 and again, March of '25 that brought our average hourly U.S. wage to over $31 per hour and most recently to the expansion of our operating hours. Their focus on efficiency and improving productivity allowed us to absorb these significant investments with minimal impact to our SG&A rate.

As we look ahead to fiscal year 2026, despite the current macroeconomic uncertainty, we remain confident in our ability to grow market share by continuing to deliver exciting, high-quality items at the best value for our members.

With that, I'll turn it back over to Gary to discuss the results for the quarter, and I'll jump back in during Q&A to feel some questions.

Thanks, Ron. In today's press release, we reported operating results for the fourth quarter of fiscal year '25, the 16 weeks ended August 31. 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 fourth quarter came in at $2.61 billion, or $5.87 per diluted share, up 11% from $2.35 billion or $5.29 per diluted share in the fourth quarter last year. Last year's results included a nonrecurring tax benefit of $63 million or $0.14 per diluted share. Excluding this tax item, net income and earnings per diluted share, both grew 14%. Net sales for the fourth quarter were $84.43 billion, an increase of 8% from $78.8 billion in the fourth quarter last year. Comparable sales were 5.7% and or 6.4% adjusted for gas deflation and FX. E-commerce comparable sales were 13.6% or 13.5% adjusted for FX. Our segment breakout of comparable sales is disclosed in both our earnings release and the supplemental slide deck.

In terms of Q4 comp sales metrics, FX positively impacted sales by approximately 0.2%. And while gas price deflation negatively impacted sales by approximately 0.9%. Traffic or shopping frequency increased 3.7% worldwide. Our average transaction or ticket was up 1.9% worldwide. This includes the impacts from gas deflation and FX. Adjusted for those items, ticket would have been up 2.6% worldwide.

Moving down the income statement to membership fee income. We reported membership fee income of $1.72 billion, an increase of $212 million or 14% year-over-year. Adjusting for FX, the increase was 13.6%. Last September's U.S. and Canada membership fee increase accounted for a little less than half of the membership fee income growth in the quarter. 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 increased upgrades from Gold Star to executive membership.

At Q4 end, we had 38.7 million paid executive memberships, up 9.3% versus last year. Executive members represented 47.7% of paid members and 74.2% of worldwide sales. As Ron mentioned earlier, we have recently seen a lift in upgrades in the U.S. after we announced our executive member exclusive ours and other benefits. New member sign-ups continue to be strong, and we ended the fiscal year with 81 million total paid members, up 6.3% versus last year and 145.2 million cardholders, up 6.1% year-over-year.

In terms of renewal rates at Q4 end, our U.S. and Canada renewal rate was 92.3% and the worldwide rates came in at 89.8%. The decline in renewal rates was largely attributable to a higher number of online sign-ups entering the renewal rate. And this quarter included a large Groupon campaign in December 2023, entering the calculation. Overall, we view the growth in online sign-ups as a net positive as they are helping to grow our overall membership base and membership revenue and are also introducing younger members to Costco. Almost half of our new member sign-ups are now under the age of 40.

As we previously shared, new online members renew at a slightly lower rate on average, and they have grown as a percentage of our sign-ups over recent years. We would, therefore, expect to continue to see a small decline in our renewal rate as this change in membership mix gets fully reflected in our renewal rate calculation. That being said, through a focus on auto renewal and targeted digital communications, our goal is to improve the renewal rate for this cohort of new members in the future.

Turning to gross margin. Our reported rate in the fourth quarter was higher year-over-year by 13 basis points coming in at 11.13% compared to 11% last year. Gross margin was up 3 basis points, excluding gas deflation. Core was higher by 30 basis points and higher by 22 basis points without gas deflation. In terms of core margins on their own sales, our core-on-core margins were higher by 29 basis points. This increase was broad-based with fresh Foods and sundries and nonfoods all up year-over-year.

Supply chain improvements and an increase in KS penetration benefited margins in all categories, while fresh further benefited from lower spoilage and labor efficiencies. Ancillary and other businesses gross margin was lower by 11 basis points and 13 basis points without gas deflation. Gas was the main driver of the decrease. LIFO negatively impacted the gross margin rate by 6 basis points. We had a $43 million LIFO charge in Q4 this year compared to an $8 million credit in Q4 last year. This charge was essentially in line with the estimate we provided last quarter as overall inflation remained consistent with Q3.

Moving on to SG&A. Our reported SG&A rate in the fourth quarter was higher or worse year-over-year by 17 basis points, coming in at 9.21% compared to last year's 9.4%. SG&A was higher or worse by 9 basis points adjusted for gas deflation. The operations component of SG&A was higher or worse by 15 basis points and 8 basis points without gas deflation. This increase was partly due to our investments in employee wages. As noted last quarter, the incremental year-over-year impact from this year's March employee agreement was mid-single-digit basis points. and the off-cycle wage increase in July 2024, which affected the year-over-year rate comparison for the first 10 weeks of Q4 was mid- to high single-digit basis points.

An increase in general liability charges and reserves also negatively impacted SG&A this quarter by approximately 5 basis points. To partially offset these headwinds, our operators continue to do a great job leveraging strong top line sales and improving labor productivity. Notably, following the change in warehouse hours on June 30, our operators were able to minimize any impact to the SG&A rate.

Below the operating income line, interest expense was $46 million versus $49 million last year, and interest income was $169 million versus $138 million last year. FX and other was a $46 million gain in Q4 this year versus an $18 million loss last year. In terms of income taxes, our Q4 tax rate was 25.6% compared to 24.4% last year. As a reminder, last year's tax rate included a nonrecurring benefit of $63 million related to a transfer pricing settlement and true-ups of tax reserves.

Turning now to some key items of note in the quarter. Capital expenditure in Q4 was approximately $1.97 billion and for the full year, it was a little under $5.5 billion. We made some additional investments in Q4 to support accelerated warehouse growth, including the 35 planned openings in fiscal year 2026 that Ron mentioned earlier. Additionally, we increased our pace of spend on remodels to ensure that we continue to offer our members a best-in-class experience across all of our warehouses. Land purchases for future depot expansions and investments in our manufacturing facilities for expanded hot dog production and the new coffee roasting facility also contributed to the increased spend.

A few fun sales facts as we wrap up our fiscal year. While our members love the treasure hunt items that they find in our warehouses and online, our everyday value items are also extremely important to them, especially in times of economic uncertainty. There are no better examples of this than our hotdog combo, rotisserie chicken and KS bath tissue. And in fiscal year 2025, we sold over 245 million hotdog combos, over 157 million rotisserie chickens and enough bath tissue to reach the moon and back over 200 times.

Now taking a look at core merchandising sales in the quarter. Fresh sales were up high single digits, led by double-digit growth in meat. We continue to see strong unit growth across the department due to the quality and value we offer on both premium and lower-cost proteins. Wagyu and Grated performed well in the quarter, and lower-cost proteins like poultry, pork and ground beef also saw very strong unit growth. Nonfood had comp sales in the high single digits. Our buyers continue to do an excellent job finding new and exciting items at great values which are resonating well with members even as they remain very choiceful in their spending on discretionary items.

In the quarter, gold and jewelry, gift cards, majors, toys and men's apparel, were all up double digits. While gold was less of a year-over-year tailwind than earlier in the year, as we have now started to lap sales from a year ago, it continues to perform well. Strength in gift cards was driven by Disney, Uber and DoorDash, and majors were up high teens with consumer electronics leading the way. We also added a number of new high-quality national brand partnerships across a broad range of nonfood categories, including Fabletics, True Classic, Aura and La-Z-Boy.

Food and sundries had mid- to high single-digit comps with cola and candy showing the strongest results. New curtail and signature offerings allow us to continue to deliver greater value to members and our high-quality alternatives to some tariff-impacted goods. KS items typically offer members 15% to 20% value compared to national brand alternative with equal or better quality. In Q4, we launched over 30 new KS items, including grass fed beef sticks, organic extra firm tofu and various apparel items in addition to our latest food court offering, the combo calzone. Within ancillary businesses, pharmacy, optical and hearing aids all had strong quarters. And while gas volumes were positive low single digits in the quarter, gas comps were negative mid- to high single digits due to a lower average price per gallon.

Turning to inflation. Overall, inflation remained in the low to mid-single-digit range. Fresh and Food and sundries were relatively similar to last quarter, with higher inflation in key commodities like beef, coffee, sugar and corn partially offset by lower inflation in produce, eggs, butter and cocoa. In nonfood, we saw inflation return for the second consecutive quarter, primarily driven by imported items. This inflation drove the $43 million LIFO charge for the quarter, which is calculated by comparing the net landing cost of inventory at the beginning of the fiscal year with a net landing cost of inventory on hand at the end of the fiscal year.

We continue to work closely with our suppliers to find ways to mitigate the impact of tariffs, including moving the country of production where it makes sense and consolidating our buying efforts globally to lower the cost of goods across all our markets. Additionally, we are changing item assortment where appropriate. This includes leaning into care items and increasing domestically sourced goods. Examples include an increased emphasis on items in health and beauty, live goods, tires and mattresses.

We believe our expertise in buying and the flexibility afforded by our limited SKU can give us greater agility to navigate the current environment and minimize the impact of tariffs. Our ultimate goal is to increase our member values compared to the market.

From a supply chain perspective, we haven't seen any major changes since last quarter. Overall, supply remains relatively stable with no notable issues.

Looking ahead to the holiday season, our merchants feel good about our inventory position. And while the product mix will look a little different from years past, we will have a strong assortment of high-quality items that bring meaningful value seasonal themes and exciting newness to our members.

Turning now to digital. E-commerce site traffic was up 27%, and sales were led by gold and jewelry, housewares, apparel, tires, sporting goods, majors, small electrics, lawn and garden and domestics, all of which grew double digits year-over-year. We continue to grow share in big and bulky items sold online, powered by our investments in Costco Logistics, the combination of great values and the delivery experience that includes installation and haul away of old items, is resonating extremely well with members and resulted in a 13% increase in items delivered in the quarter.

Q4 fiscal year '25 marked the 15th consecutive quarter of improved member experience scores on Costco Logistics deliveries. A key focus of our digital strategy is to deliver a seamless experience and more personalized and relevant communications to our members. This is a multiyear journey. And as we complete the foundation elements of our plan, we are able to launch new experiences for members. For example, during the fourth quarter, we launched more relevant messaging on the costco.com homepage highlighting different offers depending on the individual's membership type and co-brand credit card status.

Executive members are showing information about executive benefits, while Gold Star members are encouraged to upgrade their membership and nonmembers are showing information about becoming members. Co-brand cardholders will be showing offers associated with ongoing spend campaigns, while noncardholders will be showing acquisition offers. These digital capabilities are also a key enabler for retail media as they allow us to target specific ads that deliver greater value for both members and suppliers while always honoring the premise choices of our members.

As an example, we recently executed a series of targeted MVM amplification campaigns with Kimberly Clark on third-party websites. This resulted in a strong return on ad spend of 14:1 and drove a 22% increase in traffic to the product detail pages and a 45% increase in digital sales of the promoted items. As we continue to execute our digital and technology road map, we are excited about the opportunities this creates to further enhance the member experience and drive top line sales.

Finally, in terms of upcoming releases, we will announce our September sales results for the 5 weeks ending Sunday, October 5, on Wednesday, October 8, after market close. Based on feedback received from investors, starting with our September sales release, will be changing our e-commerce comparable sales metric to now report digitally enabled comparable sales. This measure will incorporate all sales that originated online, including our same-day delivery service fulfilled by Instacart, Uber Eats and DoorDash Costco Travel, Business Center delivery and a few other smaller direct to member businesses. We believe this change aligns our reporting more closely with how our retail peers disclose this metric. For fiscal year 2025, our digitally enabled sales totaled more than $27 billion.

That concludes our prepared remarks, and we'll now open the line for questions.

[Operator Instructions] And our first question comes from the line of Christopher Horvers with JPMorgan.

My question has to do with the extended member hours. To what extent do you think that your member is actually aware of these extended hours. Was the June 30 the soft launch and you've made a harder launch as you came into the fall? And how do you think about that 1% comp lift in terms of it becoming much larger?

Well, I think the -- this is Ron. I think the communication, we have done a good job informing our members, both with signing at the warehouse, along with e-mails to our executive members. So we saw -- we really based that success based on the traffic we saw when we initially began these additional hours. The 1% is after we've analyzed the business compared to the prior months and to see how much we picked up both on the additional Saturday night hour along with the early morning hours as well. So we feel that the word is out there. We feel that we continue to communicate the executive member benefits as we continue to add to that suite of services that they get and that is inclusive of the hour that they get as well.

Chris, I think as well, just to completely agree with Ron's comments, it's one of those things that, obviously, it's a little bit difficult to predict exactly how the change flows through in terms of impact of member shopping behavior. To Ron's point, we did a lot of communication. When we made changes before around -- so some of our warehouses had longer hours before, it probably took a little bit longer than the first month or so for the full impact to show through in terms of member shopping behavior.

But with that being said, I think because this was a national launch, we did get more visibility and more social media exposure to it as well. So I think we've been pleased with the response we've seen, but there's certainly probably more time to unfold to see exactly how it plays out.

And our next question comes from the line of Michael Lasser with UBS.

You mentioned that you would expect your renewal rate to continue to fall as some of the digital sign-ups attrit out of the base. How far do you expect to see the membership rate decline. If we walk back in the pre-COVID in 2019, Costco regularly had a renewal rate, a worldwide renewal rate in the mid- to high 80% range. Is it realistic for it to go back to that? And if it did, what actions would Costco take to stabilize or improve that how is this all going to impact the financial performance?

Yes. Thanks, Michael. I appreciate the question. I think we take a little bit of a broader step back on the membership metrics because to your point, we certainly look at the renewal rate, and it's an important measure for us, and I'll talk a little bit more about how we view the opportunity to improve that metric over time as well. But I do think when we look at our overall metrics in membership, we were pleased with how the quarter played out. I think you heard us say in the prepared remarks that we're seeing a continued increase in sign-ups and that's also reflecting a growing number of younger members flowing into the base as well.

We saw an acceleration in upgrades, particularly towards the end of the quarter after we announced the extended hours and the Instacart $10 benefit per month, if you spend $150 on the basket. We also saw overall household growth grow by greater than 6% and executive members up by over 9% because of the acceleration in upgrades. And then on our membership fee income, actually, our membership fee income was a little bit ahead of where we had budgeted at the start of the year. So looking at sort of the overall impact of the membership fee increase and the way that members were behaving overall we're actually ahead of where we are budgeted based on everything we knew at that point.

So I think it's important just to take that bigger picture step back because overall, we think the membership base, the renewal rate is very strong overall and the results that we're seeing in growth in our overall membership engagement is also very strong. Now with all that being said, as I mentioned a moment ago, we do view the membership renewal rate is an important measure, and we've analyzed it very closely, as you might imagine, because it's something that we take pride in the overall level of membership renewal that we see.

When we analyze it, it really is essentially the vast majority of it is attributable to this higher number of online sign-ups. And if you look at what's happened really since COVID, we've seen in the last 3 or 4 years a significant growth in the number of members and the proportion of members that are signing up online. And that's bringing in newer members. It's helping to grow everything I just mentioned around membership fee income and overall membership base. but they do renew at a slightly lower rate. And as you think about how our membership renewal rate works and how it lags the effect of some of those changes. We're really sort of flowing through the impact of that into a sort of changing mix, if you like, of the overall base.

So I mentioned in my prepared comments, we do think we'll see a few more quarters of a similar type of impact that we saw in this quarter with the 40 basis point decline. But that being said, as we learn more about how to engage with those newer digital members, we're really investing in the opportunities to improve the auto renewal with that member group, increase the amount of digital communication and more relevant communication for those members who joined Costco starting online rather than starting in the warehouse.

So we have to think about how we can help really get them to experience more of the great value that we offer in a broader relationship. So we think there's opportunities to improve that measure. But overall, we like where we are with the membership metrics in total because of the overall growth it's driving in our membership income.

And our next question comes from the line of Chuck Grom with Gordon Haskett.

Can we dive into your core-on-core margins a little bit up 29 basis points year-over-year, how that spans across categories? And then more broadly, curious any notable observations on price increases you've taken recently? And I guess what unit velocity you're observing in those product categories? And then just last question, just on the holiday. You called out how the product mix might be different than years past. Can we just double click on that comment? I guess, what might be different in terms of -- particularly in the general merchandise part of the business?

Yes, sure. Thanks for the question, Chuck. I'll cover the first couple of parts around margin and tariffs and then Ron can talk a little bit more about assortment for the holidays. On the gross margin rate, so yes, I talked a little bit about it in the prepared comments. But overall, I think our focus was on the gross margin rate overall grew by 3 basis points, excluding gas. And when we think about the job our buyers did a merged to navigate tariffs and make sure we're still delivering tremendous value for our members, then we feel that was a really good outcome, and we were pleased with the way in which the team was able to manage staying true to who we are as a company and delivering value while also being able to deliver an overall slight improvement in the gross margin rate.

The core-on-core margin was definitely the strength area. That was, as I mentioned earlier, a fairly widespread across all 3 of our main categories, so fresh food and sundry and nonfood saw a slight improvement in the core on core margin. But it was really in our merchants and operators focusing on how can we offset some of the impacts that we're seeing in the business through tariffs. So a lot of the improvement came from supply chain efficiency with improvements by the operators in our depots and also gas prices helping us there as well.

We also saw some mix benefits with Kirkland Signature penetration improving. And then similar to last quarter, in fresh, in particular, the team did a great job of reducing spoilage or shrink as some retailers call it and improving our labor efficiency in the fresh departments. So those were all, I think, tailwinds in the quarter that helped us offset some of the headwinds that we saw in gas margins in particular during the quarter and also the impact that we saw on the LIFO charge with the higher inflation in the back half of the year.

I think in terms of thinking about it for the future, I would say, really, we tend not to focus on individual quarters because our goal obviously is to manage the business for a long time -- long term, I should say, and manage the business holistically. And so I think it's probably more relevant to look at the performance over a number of years and how we've been able to continue to grow the business and seen a slight improvement in gross margin. And really, we look at the quarter, and as I mentioned earlier, how we're able to balance the impact of tariffs and supporting our members while also maintaining a steady gross margin rate as well.

I'll maybe let Ron talk a little bit about the assortment and what we're seeing there with some of the changes.

Thank you, Gary. And exactly, it's not going to be a marked change in what you'll see in a Costco. Our buyers, when we were booking for this holiday season, really had to evaluate all the discretionary items, the toys and the trim and the decorations and those kind of things. and made decisions based on the necessities and what they felt they needed to be in Christmas trees. But we skin that. We really send down that whole category and we then down a lot of the additional seasonal areas as well.

What that provided us was the opportunity to bring in categories that we don't traditionally carry during that time of year. And so we're seeing some of that already. And when we're bringing in backyard sheds in the fall, which are doing very, very well for us, but we never have the ability to do that due to space constraints. We're bringing in saunas for your garage or your home who are also performing very well, high-ticket goods that are very relevant to the time of year, but not reflective of the traditional Costco set, you'll see. You'll see some more furniture in the warehouses that we normally didn't do any furniture at that time of the year. but it says great opportunities for top line sales.

So I feel really good about the way the buyers have pivoted on the discretionary items and said, okay, how can we still be relevant in the time of year, but with some new categories that we had not done before due to space limitations. So I still see it as a very exciting holiday season with some new goods that we haven't carried in prior years.

And our next question comes from the line of Zhihan Ma with Bernstein.

I wanted to follow up on the membership fee side, where you -- I think Gary mentioned it's 7% growth, excluding the price increase and FX. How sustainable do you think that trend is going to be especially in the U.S. and Canada, where you're opening some of the fill-in stores in markets where the penetration may already be fairly high. So is there a risk of the membership fee income growth slowing down from here?

Yes. Thanks for the question. We still remain very about the opportunities for continued growth in the membership base. We're obviously opening new warehouses every year, and Ron talked about that earlier in terms of the opportunity that creates to create a broader coverage of the geographies that we're operating in and driving new membership engagement. The positive and opportunity side of the comments we made earlier about membership renewal rate with that younger generation of members now also experiencing Costco. We think creates continued opportunity to drive new member engagement in a broader range of the potential member base than we've historically seen prior to COVID.

If we look at the maturity of our warehouses and some of the warehouses that have been opened in recent years, particularly in some of our international markets, generally speaking, we see continued growth in the number of members in those locations as those businesses and those warehouses mature over time as well. And of course, we're adding new member benefits all the time with the extended opening hours that Ron mentioned in the earlier comments and the Instacart benefits and the 5% gas rewards on the credit card that we mentioned a couple of quarters ago. So we generally don't talk about sort of future projections, but I think we feel very positive about the opportunity to continue to grow the membership base.

And our next question comes from the line of Scott Ciccarelli with Truist.

This is [ Sherman ] on for Scott. Kind of a piggyback on the membership question. with growing 6% in the quarter, is it possible that we're seeing the delayed benefits of people affected by the membership sharing like crackdowns? And can we see an acceleration from here? And outside of the existing memberships, are you seeing the new executive membership benefits driving a more favorable mix for new incoming members?

Yes. I think to the first part of the question, there's nothing we would see in the data that would say there's anything sort of happening relative to the change you referred to. And again, that was something that we found certainly during COVID, there was some change in behavior. And as we introduced the communication around the entry to the warehouse that helped sort of make sure that our members were able to renew and update their memberships in an appropriate way, and that's been something that's really been flowing through now for some considerable time. So I wouldn't say there's anything that we'd point to in the volume of member sign-ups that we're seeing that we would believe is related to that particular activity that you mentioned.

I think we have been really encouraged and pleased with the member reaction to the continued value that we're adding to the membership, the extended opening hours and the Instacart benefits that we referenced earlier. And certainly, with the growth that we've seen in the executive membership profile. Typically, what we see over time is those members are more engaged and they shop more frequently. And our goal is always to demonstrate more value for the member and encourage them to keep upgrading and getting more value from the membership from the Costco membership.

So in that regard, I think we're encouraged by the -- what we're seeing, and it was part of the goal that we had when we introduced those benefits.

And our next question comes from the line of Simeon Gutman with Morgan Stanley.

Ron, Gary, my question is on e-commerce and specifically grocery. So there was this announcement from Amazon in the quarter around increased fulfillment capabilities. Can you talk about if you've seen a spike in your Instacart driven traffic since then? I know you've added some benefits, so maybe it's hard to parse it out. And then can I ask if Costco has what you think is an optimal capability to meet with what is increasing online grocery demand?

Yes. Simeon, like you said, it's very tough to tell. The Instacart and Uber business continues to really do a very good business for us. It continues to grow at a good rate. And so we have seen the additional executive membership benefit be accretive to that has definitely helped it out quite a bit. We're very aware of new competition into this space, and we continue to watch that very closely.

It comes down to the Costco items that are being delivered as well, too, which is a big driver from the consumer out there is that they want the goods that we have at their home. It may be a different way to deliver to them as opposed to coming into the warehouse but there still is a desire to the fresh foods, which is a big driver for us in the food and sundry business that we have out there. So very aware of it. We're very happy with the growth of the business there. And we are seeing some strong growth at the back half of the year, and it's hard to tell exactly where that's coming from.

And Simeon, you may have heard me mentioned at the end of the prepared remarks that we are going to include now those sales in our definition of e-commerce-enabled and digitally enabled sales. So going forward from next monthly sales, you'll see those -- you won't see those numbers called out, but those numbers will be included within our overall growth in e-commerce and digital.

And our next question comes from the line of Peter Benedict with Baird.

Kind of on the unit growth, the 30% for this year, 20% in the U.S., just curious the sustainability of that pace of growth? How long do you think you can kind of sustain that level of growth here? And where do you think you can get the international unit growth to over the next few years? And kind of related to that, maybe a sense for what the CapEx plan is for next year. I apologize if we missed that. But curious kind of what the spend plan is for next year in terms of total CapEx.

As far as the future growth, I'll touch on that part. Yes, we do see some runway. We've made an investment in our real estate group to make sure that we're looking at all the opportunities as our geographical footprint continues to broaden around the world. We want to make sure that we are indeed looking at these opportunities. And for a few reasons, we feel very good. The right opportunities have come both in existing markets to increase capacity and where we feel we can better serve those markets. And we continue to still find in North America and internationally, opportunities in new markets where we're doing very well.

So we do see some runway as far as this 30 warehouses opening a year. We don't strive for a number. I mean, we're not going to make any bad decisions on opening warehouses to get to any set number. so it could ebb and flow. And in some of the international countries, it takes a little bit longer. So you'll see some swings back and forth year-to-year when things come to fruition. Some projects could take us 3 years internationally, where we have things that can turn much quicker in North America.

So overall, I think we do some feel some good runway out in front of us as far as growth goes. We have people ready to expand the company and our operators have done a very good job dealing with the cannibalization we've dealt with in the existing markets we're in.

And then maybe to answer the question on capital expenditure. I'll just maybe take a step back on that as well and provide a bit more context on what we saw in fiscal year '25 and how we think about 26 as well for you. So I think generally, when you look back at capital adventure for us over the last few years, we've seen it grow when you look at the compounded growth rate over the years, it's generally growing in line with sales.

And we did see in 2025, when you look at the total capital expenditure for the year, we grew capital expenditure at a fast pace than sales for the first time, actually for a while for us. And that was really for the areas that we mentioned earlier in the prepared remarks around the number of warehouses that we're looking to open in 2026, the remodel work that we're doing the preparing the depots for the expansion in warehouse sales and also e-commerce and also some manufacturing opportunities to improve the value in Kirkland Signature.

And I would say, as we think about future growth in 2026, those areas we think are opportunities for us looking forward as well. We've already talked about the warehouse growth, but we do think with remodels, the opportunity to keep expanding our capacity in our warehouses, especially as the average warehouse now in the U.S. and some of our more mature markets is around 20 years old. There's an opportunity for us to refresh and to support continued best-in-class service in those warehouses. We think there's continued opportunities in manufacturing to support further growth in Kirkland Signature.

And we didn't really talk about it in prepared comments, but technology is also an opportunity for us to be able to deliver more better member experiences and if the growth in e-commerce and member engagement. So overall, we think those will continue to be good opportunities for growth. We feel confident the returns on the investments that we'll make will be very strong as well. So we'd expect 2026 to have capital expenditure that would grow over 2025 and probably a little bit higher than sales again for the same reasons in '26 or 25. We typically actually give the CapEx number, I think, in our Q1 release. So we'll give you a specific number in Q1 as we do every year. But -- but I would expect it to be a growth again for the reasons I just mentioned.

And our next question comes from the line of Greg Melich with Evercore.

A couple of questions. I do want to circle back on inflation. Gary, I think you mentioned it was low single digits, maybe 2-ish percent last quarter. and now it's low to mid-singles. Can you just describe is it nonfood driving all that acceleration and sort of frame it magnitude-wise?

Sure. Yes. Thanks for the question. Yes, I think last quarter, actually, we said overall low to mid-single digits, and we really kind of said the same. This quarter, the change was really in Q3. Q4 has generally been consistent with Q3. And as we look at it and break it down by category, Fresh and food and sundries are relatively consistent quarter-over-quarter in that sort of low to mid-single-digit range. There are lots of sort of puts and takes in there. When you look at individual departments, we certainly see meat and deli largely because of meat and candy will be more inflationary, whereas departments like produce and liquor would be either lower inflation or decelerating inflation or even deflation in certain items.

And then on the commodities front, we see acceleration in inflation currently in commodities like beef and coffee, sugar and corn. But then also, that's partially offset by we're seeing some deceleration in produce, in particular in barriers and avocados and the eggs and butter and cocoa are also slower inflation, too. So there's lots of puts and takes in those food and sundries and fresh departments. The change in Q3 really was in nonfoods. But again, I would say it's really low single-digit inflation overall within nonfoods, but real change there was it was been deflationary for 12 months or so.

So that's kind of what drive -- what drove I should say the change in Q3 and the reason that we updated our LIFO estimates because we saw -- we've seen continued inflation in Food and Fresh, but that was being offset by nonfood. And now with some inflation in nonfood, that's kind of changed the overall picture. But it's still in that low to mid-single digit overall, I would say.

Got it. And my follow-up is we've just seen a lot of the credit card companies, add perks and race fees on their cards. I'm just sort of curious what trends you're seeing there in terms of penetration and any thought of ways to maybe enhance the member value on that front.

Yes. Well, for our credit card, it's an incredibly successful program for us, and we deliver a lot of incremental value to our members through the credit card with the rewards that we offer and some of the additional benefits roundness well. We did recently make some ties to our credit card recognizing that we felt there was an opportunity to accelerate the value and also to continue to grow that program. And so we added an incremental benefit where the member can now receive 5% rewards on gas. We also updated and modernized the card itself as well. And we've been pleased so far with the reaction from members and the continued growth in that program.

Our next question comes from the line of Edward Kelly with Wells Fargo.

Hi, everyone. Good afternoon. I wanted to follow up on tariffs and the outlook for the gross margin around that. I'm curious as to how you're thinking about the impact of tariffs over the next few quarters as it seems like there are retailers that are going to be taking more price? Is that something that you think you're going to be doing as well? How you're thinking about the elasticity associated with that, and I'm curious in terms of your competitive positioning? Do you plan to be offensive around this? Is it something that could have some incremental margin pressure in the coming quarters? Just any color around that would be great.

Yes. Thanks for the question, Ed. I think overall, first thing to say, of course, is that the environment with tariffs does still remain fluid. There could still be changes that we have to address as the picture unfolds. But with the tariffs that we've seen and we're sort of managing, if you like, as things stand today, our teams, I think, have done a fantastic job in navigating what's been a very fluid and changing environment. And I think that the benefit of us of having buyers who have really been in the business for many years and understand the business well that are managing with a limited SKU count that will have a low number of items per buyer so they really understand the individual items that we're buying and the way those products are costed and constructed.

And we can also, as Rob mentioned earlier, we have the flexibility to change items where we believe if we don't see that the value would be there with the impact of tariffs that we can move our assortment to items that really will deliver that value that our members have come to expect. I think we've also have the benefit of being a global retailer, so with 30% of our business being international, it gives us the opportunity to work with our suppliers in offsetting some of these things by buying globally and also still supporting 30% of our sales through our warehouse that are international, still are less impacted by some of those issues that we're working through.

And we've taken really a multipronged approach to it. There isn't a single answer of how we've managed tariffs. Part of it is that we have absorb cost ourselves and charged ourselves to offset those costs to protect the member by improving efficiency and lowering waste and spoilage and those kind of things. We've also worked with suppliers defined offsets and efficiencies and that includes buying more globally. And there are examples there where we've been able to save 30% to 40% on the cost of items by consolidating to a smaller number of buyers and bringing a small number of suppliers and bringing the cost down because of the volume that we can consolidate there.

We've also looked at sourcing from different countries and local production. And you may recall last quarter, we talked about with KS laundry detergent. We were able to save 40% in Asia by moving production for the items that we're producing for those markets to be in the region. And we've rotated items, as Ron referred to earlier. So I think from what we know today, we feel like there wasn't like a cliff for us. The impact was managed gradually by our teams doing all the things that we've mentioned, and we largely feel like we've worked through the strategies that we needed to mitigate what we see in front of us today.

So we feel like we know the teams have done a very good job to position us to make sure we have the right assortment at the right value and deliver even greater value for our members. The sort of caveat of everything I just said, of course, is that there may be changes still to come that we have to manage, and that's something that we'll have to be agile, if that's the case.

What I would add to what Gary said and I agree with everything he said, we are taking a very offensive approach to this, where we're going to do everything we can to mitigate tariff impacts. And last effect would be we pass on price. And if we do that, we're going to be the last 1 to go up and always the first one to go down and any opportunities we have out there. So it is all hands are on deck and we addressed this like we would any commodity increase. and we use the different tools we have to try and mitigate any price increase for any reason.

And our next question comes from the line of Kelly Bania with BMO Capital Markets.

Just wanted to ask about membership growth and total membership households that continues to increase in that 6% to 7% range year-over-year. Just 2 questions about that. One, is the right way to think about the components of that more like a low single-digit figure in the U.S. and high single-digit internationally? And then as you think about the long-term U.S. potential for household membership. What do you think or estimate that Costco has today in terms of percentage of U.S. households that are members? And how high do you think you can take that for time?

Yes. Thanks, Kelly. I think it maybe comes back to a couple of the comments that I made earlier. We look at the growth that we've seen. And certainly, it's a good reflection, I think, of the focus of all of our team here to say, how do we start every day thinking of how can we deliver more value for our members and how do we show that the membership decision is the best decision that our members have made because of the value that they get from the membership with Costco.

And really, our focus tends to be, I think, a little bit less on the way you phrased the question and more on -- how do we make sure that's always at the center of everything we do and continues to create new opportunities to grow our membership base. And I think because of the focus there and some of the things that we talked about on the call about how the team is navigating tariffs to make sure we stay true to that delivering the best value for the member as we're adding more membership benefits like the extended hours as we continue to open new warehouses and start to reach new member geographies. But also as the maturity of those warehouses, as you know, we don't advertise as a company.

And so we believe that word of mouth and our existing members extolling the value they see from their membership is how we grow our base. So there's an organic growth to our business because we're really focusing on ensuring how we deliver that continued value. So we still think there's opportunity to continue to grow that base. It would certainly be true that there's an opportunity in international markets to -- and we typically when we open in international markets, we see a larger number of membership new in those markets because there's less awareness of Costco. And typically, there's less sort of surrounding warehouses that could be impacted.

But on the other side of that, what we tend to see with warehouse in the U.S. where we open and we're drilling end markets, we see tremendously quick growth in sales in those areas because it -- and not only in the new warehouses, but we replace the sales in the effective warehouses because we're freeing up the capacity for those members to shop more frequently in the warehouse as well.

And our next question comes from the line of Rupesh Parikh with Oppenheimer.

So maybe a housekeeping question to start. So just on the incremental hours P&L impact. It sounds like it's going well. Good sales lift and you're seeing good upgraded executive members. As you look towards this fiscal year, do you expect it to be a net benefit, the benefits versus some of the expenses with the increase in employee hours?

Yes, I think it's fair to say that, Rupesh. I mean just kind of resummarizing what we talked about earlier. As Ron mentioned, we've seen a positive impact in terms of overall sales in the U.S. warehouses from the extended hours and -- our operators have done a great job managing the impact from an SG&A perspective. So we have the typical sort of headwinds from the employee agreement that we need to manage and leverage our sales, but we wouldn't be calling out any sort of major headwind from the SG&A perspective based on what a great job our operators have done to manage the impact.

Great. And then maybe just my follow-up question. I know Gary and alternative revenue streams. You guys have talked about successful media campaigns earlier this year. So just curious on any new efforts on the alternative revenue stream as we look towards the upcoming year.

Yes. It's -- I mean, it's still very much in the early stages. When we talk about alternative revenue for us, I think it's broader than media for sure. The question earlier that was asked around financial services and credit card. We think that's continued strength in our business and an opportunity to continue to grow. We launched the buy now pay later product with the firm earlier in the year, which is doing well. We have a tremendously successful travel business that delivers significant value for members and have strong growth in our overall model in delivering value for member and top line growth in the company as well. And media then is another component of that.

And I think our journey with media is that we're sort of on a two-pronged journey, I would say. One is to build out the capabilities so that we can deliver more personalized relevant messaging to our members, and that includes a unified single data platform where we stitch all of our information and data together and then build out the tools that allow us to deliver more relevant messaging at scale to our members. And as we're doing that, which is also really important to media, we're really kind of proving out the concept with our suppliers at the value of media within Costco.

And that's why we shared the example as we sort of want to make sure that we're demonstrating how we can create future value as we build those capabilities, and that will be a continuation over the next 12 months or so, and we'll certainly share more updates as we continue to make progress on that journey.

Our next question comes from the line of John Heinbockel with Guggenheim.

Two strategic questions for either one of you. Maybe Ron, when you think about the B2B opportunity, how do you think about that, the size of that, whether it's through business centers or online? Because I know when you do reloads, some of those become business centers, we're likely to see an acceleration in business centers? And then secondly, when you think about markets where you -- it's just taken longer to get real estate. Is there an opportunity to use the balance sheet to acquire chunks of real estate, right, that you can then kind of develop over a period of time and maybe that speeds the process up a little bit?

On the first question about business centers, yes, we think that there's some tremendous capacity, especially, we have now 6 in Canada, and we're going to continuously really grow much quicker rate in Canada and the business centers. the U.S. that we see great opportunities both in new markets as well as when we relocate a building to a larger facility, the old warehouses serve a great purpose for us as far as becoming a business center because they have the right size and parking is not an issue at that level because we deliver about 60% of the goods from our trucks out there as well. So we see a good runway for us, both U.S. and Canada and potential in international markets for the business centers as well. So that is it.

As far as looking at the additional property that we need to, we did -- we will take that into account if we have got to get into the right market and then how we can create value for any outparcels or additional properties that are nearby as that could open up opportunities for us to expand in the right place. So we are open to those opportunities as well.

And our next question comes from the line of Steven Zaccone with Citi.

A couple of follow-ups. First follow-up is you've talked about cannibalization to comps for the last couple of months. Do you expect that to be a headwind throughout 2026. And then just on some of the questions around the inflation outlook. On the nonfood side, based on what you're seeing in the business, do you expect nonfoods inflation kind of stay in this range for the next couple of quarters, especially trying to understand are we at some of the peak pressure? Or could it get a little bit higher from here?

Sure. Yes. Thanks for the questions. On cannibalization, it's really a reflection of our continued investment in filling warehouses to really make sure that we're continuing to grow our overall sales in those markets and relieve some of the pressure in some of our busier warehouses. And so I wouldn't see any reason why that would change dramatically in the future because that's a strategy that's working for us well in terms of continuing to grow our overall sales and grow our overall profitability in the markets in which we operate.

And then from an inflation point of view, I think as I mentioned earlier, we think that from everything we see today, on tariffs, we've been proactive in managing that. And so from everything that we're dealing with today, I think what you're hearing from us on inflation is how we see it at the moment. But the dilemma as I mentioned earlier, is we can't really predict what might happen in the future around future tariffs or future pricing by other players in the market, if you like, and so -- or events. So that's -- it's obviously hard for us to predict. But I wouldn't say that we're seeing anything in our plans that would cause that to change significantly.

And our final question comes from the line of Oliver Chen with TD Cowen.

Gary and Ron, on the digital road map, there's been a lot of customer-centric innovation you've done. What's low-hanging fruit ahead that you're most excited about? And then on Kirkland Signature, which is iconic, what's next is it just tweaks or is it a similar strategy? Some of the language in this call leaning into KS, that's probably a product of the environment. But was anything different about you'll continue to amplify that and maintain how great it is?

Yes. Thanks, Oliver. On the first part of your question, we've -- you're right. We spent a lot of time as a team focusing on how can we continue to invest in improving the digital experience and making it more convenient for members to shop and we've had some good progress in those areas. I think we continue to see opportunities to improve the member experience through the app and through the website and particularly in investing in capabilities that deliver more targeted and relevant personal messaging for members. That's definitely one of the highest priorities that we're focused on.

And you've heard us give a couple of examples of things that we're starting to do there, but we should certainly expect to see more of those opportunities going forward to drive whether it's visits into the warehouse or items in the basket or more engagement online with our members for e-commerce sales.

And then Kirkland Signature, I think just briefly on that, overall, our view on Kirkland Signature is that -- it's all about delivering quality, value and innovation for members. And if we see examples where there are gaps for our members, where we think there's items that we can deliver that value and quality that doesn't exist today, then we're -- that's what we're doing and how we're innovating and delivering new products for our members. We don't have a specific target for Kirkland Signature. It really is about when does that value and that opportunity there with the member.

And of course, we -- we love working with national brands as well to develop and grow those partnerships. But Kirkland Signature also provides a sort of healthy tension there to make sure that, that value and quality is there for our members. And so we'll continue to innovate and grow those items where we think we can deliver that value for the member. And it's certainly over the last few years, has continued to grow in penetration because of the great work our teams have done in building out those items and delivering that value for the member.

Maybe you should go to 24 hours, by the way.

We'll take that into consideration.

And ladies and gentlemen, that concludes our question-and-answer session and today's call. We thank you for your participation, and you may now disconnect.