Costco Wholesale Corp (COST)

Costco Wholesale Corporation operates membership warehouses and e-commerce sites in the United States and Puerto Rico, Canada, Mexico, Japan, the United Kingdom, Korea, Australia, Taiwan, China, Spain, France, Sweden, Iceland, and New Zealand, and operated 939 ¹, 914 ², and 890 ³ warehouses worldwide at August 30, 2026, August 31, 2025, and September 1, 2024. The Company operates e-commerce sites in the U.S., Canada, Mexico, the U.K., Korea, Taiwan, Japan, Australia, and China. The retail industry is highly competitive, based on factors such as price, merchandise quality and selection, location, convenience, distribution strategy, and customer service, and Costco competes on a worldwide basis with global, national, and regional wholesalers and retailers, including supermarkets, supercenters, online retailers, gasoline stations, hard discounters, department and specialty stores, and operators selling a single category or narrow range of merchandise. Walmart, Target, Kroger, and Amazon are among the significant general merchandise retail competitors in the U.S., and the Company also competes with other warehouse clubs, including Walmart's Sam's Club and BJ's Wholesale Club in the U.S. Many of the metropolitan areas in the U.S. and certain Other International locations have multiple competing clubs.

Costco's competitive positioning rests on a membership warehouse format that offers low prices on a limited selection of nationally-branded and private-label products in a wide range of categories, producing high sales volumes and rapid inventory turnover. When combined with operating efficiencies achieved by volume purchasing, efficient distribution, and reduced handling of merchandise in no-frills, self-service warehouse facilities, these volumes and turnover enable the Company to operate profitably at significantly lower gross margins than most other retailers. The Company carries less than 4,000 ⁴ active stock keeping units (SKUs) per warehouse in its core warehouse business, significantly less than other broadline retailers, and averages from 9,000 to 11,000 ⁵ SKUs online. Costco's private-label brand, Kirkland Signature, is described as high quality, offered at prices generally lower than national brands, and helping to lower costs, differentiate merchandise offerings, and generally earn higher margins, with an expectation to continue increasing sales penetration of private-label items. The Company's gasoline business represented 11% ⁶ of total net sales in 2026, and digitally-enabled sales, representing sales initiated through a digital device whether fulfilled through a warehouse or distribution center, as well as Costco Travel, represented 11% ⁷ of total net sales in 2026.

Costco generates revenue through net sales of merchandise across core merchandise categories, warehouse ancillary operations, and other businesses, supplemented by membership fee revenue. Net sales includes core merchandise categories (foods and sundries, non-foods, and fresh foods), warehouse ancillary (gasoline, pharmacy, food court, optical, hearing aids, and tire installation), and other businesses (e-commerce, business centers, travel, and other). Membership fees are recognized on a deferred basis, ratably over the one-year membership period, and the membership format is integral to the business and profitability, designed to reinforce member loyalty and provide continuing fee revenue. At the end of 2026, paid members totaled 84,100 thousand ⁸, household cards totaled 66,300 thousand ⁹, and total cardholders were 150,400 thousand ¹⁰. Executive members represented 42,300 thousand ¹¹ of total paid members in 2026, and the penetration of sales to Executive members represented approximately 75.2% ¹² of worldwide net sales in 2026. The member renewal rate was 92.3% ¹³ in the U.S. and Canada and 89.8% ¹⁴ worldwide at the end of 2026. The annual fee for memberships is $65 ¹⁵ in the U.S., varies in other countries, and includes a free household card.

Core merchandise categories comprise Foods and Sundries (including sundries, dry grocery, candy, cooler, freezer, liquor, and tobacco), Non-Foods (including consumer electronics, appliances, small electrics, health and beauty aids, hardware, lawn and garden, sporting goods, tires, toys and seasonal, automotive, stamps, tickets, apparel, furniture, domestics, housewares, special order kiosk, and jewelry), and Fresh Foods (including meat, produce, deli, and bakery). Sales increased $17,136 ¹⁶, or 8% ¹⁷, in core merchandise categories during 2026, increasing in all categories. Warehouse ancillary operations include gasoline, pharmacy, food court, optical, hearing aids, and tire installation, and operate primarily within, next to, or near warehouses, encouraging more frequent shopping. The Company operated 774 ¹⁸ gas stations at the end of 2026. Sales in warehouse ancillary and other businesses increased $10,199 ¹⁹, or 20% ²⁰, led by gasoline and pharmacy.

Other businesses include e-commerce, business centers, travel, and other. Business centers carry items tailored for food services, convenience stores, and offices, and offer walk-in shopping and deliveries, and are included in the total warehouse count. E-commerce operations give members convenience and a broader selection of goods and services, and Costco Travel offers vacation packages, car rentals, cruises, and other travel products exclusively for Costco members in varying degrees in the U.S., Canada, the U.K., and Australia. Digitally-enabled comparable sales increased 21% ²¹ during 2026, both as reported and excluding the impact of changes in foreign currencies.

During 2026, Costco opened 28 ²² new warehouses, including three relocations, for a total of 25 ²³ net new warehouses: 18 ²⁴ in the U.S., five ²⁵ in the Canadian segment, and two ²⁶ in the Other International segment, compared to 27 ²⁷ new warehouses, including three relocations, in 2025. In April 2026, the Board of Directors approved a 13% ²⁸ increase in the quarterly cash dividend, raising it from $1.30 ²⁹ to $1.47 ³⁰ per share. The Company paid the government approximately $500 ³¹ in IEEPA tariffs, and during 2026 began filing for refunds and received $184 ³², made up of $174 ³³ in refunds recorded as a reduction to merchandise costs and $10 ³⁴ recorded as interest income. Subsequent to 2026, the Company received $155 ³⁵ in additional refunds. Long-term debt proceeds in 2026 included three series of Guaranteed Senior Notes totaling approximately $500 ³⁶, at fixed interest rates ranging from 2.620% ³⁷ to 3.680% ³⁸, issued by the Japan subsidiary. During 2026 and 2025, the Company repurchased 891,000 ³⁹ and 943,000 ⁴⁰ shares of common stock, at an average price per share of $950.90 ⁴¹ and $957.66 ⁴², totaling $847 ⁴³ and $903 ⁴⁴.

Net sales increased 10% ⁴⁵ to $297,247 ⁴⁶ in 2026, driven by an increase in comparable sales and sales at new warehouses, with comparable sales increasing 8% ⁴⁷ and positively impacted by increases of 5% ⁴⁸ in average ticket and 3% ⁴⁹ in shopping frequency. Membership fee revenue increased 11% ⁵⁰ to $5,907 ⁵¹, driven by new member sign-ups, membership fee increases, and upgrades to Executive membership. Gross margin percentage decreased three basis points ⁵² to 11.09% ⁵³, and SG&A expenses as a percentage of net sales decreased 10 basis points ⁵⁴ to 9.15% ⁵⁵. Net income increased 14% ⁵⁶ to $9,226 ⁵⁷, or $20.76 ⁵⁸ per diluted share, compared to $8,099 ⁵⁹, or $18.21 ⁶⁰ per diluted share in 2025. The effective tax rate in 2026 was 24.7% ⁶¹, compared to 25.1% ⁶² in 2025. Net cash provided by operating activities totaled $15,817 ⁶³ in 2026, compared to $13,335 ⁶⁴ in 2025, and cash and cash equivalents and short-term investments were $21,301 ⁶⁵ and $15,284 ⁶⁶ at August 30, 2026, and August 31, 2025.

Costco plans to open up to 33 ⁶⁷ new warehouses, including five ⁶⁸ relocations, in 2027, and it is the Company's current intention to spend approximately $7,500 ⁶⁹ on capital expenditures during fiscal 2027, up from $6,435 ⁷⁰ spent in 2026. These expenditures are expected to be financed with cash from operations, cash and cash equivalents, and short-term investments. The Company's rate of square footage growth is generally higher in many international markets due to the smaller base in those markets, and it expects that to continue. The Company plans to continue expanding its international operations, having operated 292 ⁷¹ warehouses outside of the U.S. (31% ⁷² of all warehouse locations) at the end of 2026.

Growth in the membership base represents a core vector, with membership fee revenue increasing 11% ⁷³ to $5,907 ⁷⁴ in 2026, driven by new member sign-ups, membership fee increases, and upgrades to Executive membership. The fee income increase accounted for approximately 30% ⁷⁵ and 40% ⁷⁶ of membership income growth during 2026 and 2025. Executive members represented 42,300 thousand ⁷⁷ of total paid members in 2026, up from 38,700 thousand ⁷⁸ in 2025 and 35,400 thousand ⁷⁹ in 2024, and the Company seeks to increase the penetration of Executive memberships. The Company also seeks to continue increasing the sales penetration of its private-label Kirkland Signature items, which generally carry higher margins than national brand products and represent a growing portion of overall sales.

Digital and e-commerce expansion represents another growth vector, with digitally-enabled comparable sales increasing 21% ⁸⁰ during 2026, both as reported and excluding the impact of changes in foreign currencies. The Company is making substantial investments in technology and IT projects, including maintaining and enhancing digital resiliency, and is making investments in its websites and mobile applications. The Company must keep pace with changing member expectations and new developments by competitors, as members are increasingly using mobile phones, tablets, computers, and other devices to shop and otherwise interact with the Company. The Company also seeks to expand in existing markets to attain greater overall market share and intends to continue opening warehouses in new markets.

Gross margin percentage decreased three basis points ⁸¹ to 11.09% ⁸² in 2026, and excluding the impact of gasoline price inflation on net sales, gross margin percentage was 11.22% ⁸³, an increase of 10 basis points ⁸⁴. This increase was positively impacted by 19 basis points ⁸⁵ in warehouse ancillary and other businesses, primarily gasoline and pharmacy, offset by an 11 basis point ⁸⁶ decrease in core merchandise categories. The gross margin in core merchandise categories when expressed as a percentage of their own sales increased 15 basis points ⁸⁷, with the increase across all categories. Gross margin in warehouse ancillary and other businesses when expressed as a percentage of their own sales decreased 14 basis points ⁸⁸, primarily due to gasoline and pharmacy. SG&A expenses as a percentage of net sales decreased 10 basis points ⁸⁹ to 9.15% ⁹⁰, and excluding the impact of gasoline price inflation was 9.26% ⁹¹, an increase of one basis point ⁹². The Company's philosophy is not to seek to minimize employee wages and benefits, and it believes maintaining compensation levels better than the industry average for much of its workforce is required to achieve longer-term objectives of reducing employee turnover, increasing productivity, and enhancing employee satisfaction.

The Company's primary requirements for capital are acquiring land, buildings, and equipment for new and remodeled warehouses, information systems, and manufacturing and distribution facilities. At August 30, 2026, the Company had borrowing capacity under bank credit facilities of $2,118 ⁹³, compared to $1,220 ⁹⁴ at the end of 2025, with the increase primarily driven by the renewal and expansion of the U.S. revolving credit facility in August 2026, which increased total borrowing capacity from $400 ⁹⁵ to $1,000 ⁹⁶ and extended the maturity date to August 2027, as well as credit facility expansions in the Japan and Mexico subsidiaries. Canadian and Other International operations maintain $1,012 ⁹⁷ of this capacity under bank credit facilities, of which $333 ⁹⁸ is guaranteed by the Company. The Company has letter of credit facilities totaling $232 ⁹⁹, with outstanding commitments of $210 ¹⁰⁰ at the end of 2026. The Company believes its cash and investment positions and operating cash flow, with capacity under existing and available credit agreements, will be sufficient to meet its liquidity and capital requirements for the foreseeable future.

Cash dividends declared in 2026 totaled $2,458 ¹⁰¹, or $5.54 ¹⁰² per share, compared to $2,183 ¹⁰³, or $4.92 ¹⁰⁴ per share, in 2025. In April 2026, the Board of Directors increased the quarterly cash dividend from $1.30 ¹⁰⁵ to $1.47 ¹⁰⁶ per share, a 13% ¹⁰⁷ increase. Payment of dividends is subject to declaration by the Board of Directors, with factors considered including profitability and expected capital needs, and the Company presently expects to continue to pay dividends on a quarterly basis. The share repurchase program was authorized by the Board of Directors on January 19, 2023, in the amount of $4,000 ¹⁰⁸, and expires in January 2027. The remaining amount available to be purchased under the approved plan was $1,115 ¹⁰⁹ at the end of 2026.

Government actions in various countries relating to tariffs affect the costs of some of the Company's merchandise, and the degree of exposure is dependent on the type of goods, rates imposed, and timing of the tariffs. Higher tariffs are more likely to adversely impact rather than improve results. The Company paid approximately $500 ¹¹⁰ in IEEPA tariffs, and following the February 2026 U.S. Supreme Court ruling that the IEEPA tariffs were unlawful, the government launched a program to administer IEEPA refunds. During 2026, the Company received $184 ¹¹¹ in refunds, and subsequent to 2026 received $155 ¹¹² in additional refunds, with the intention to continue to invest the majority of the refunds in increased value for the member. For a small percentage of transactions where corrections are required, refunds may be delayed as the government continues to implement the IEEPA refund process.

The Company's financial and operational performance is highly dependent on U.S. and Canadian operations, which comprised 86% ¹¹³ and 83% ¹¹⁴ of net sales and operating income in 2026, and within the U.S., the Company is highly dependent on California operations, which comprised 26% ¹¹⁵ of U.S. net sales in 2026. The Company's international operations, including Canada, generated 27% ¹¹⁶ and 35% ¹¹⁷ of net sales and operating income during 2026. The Company faces strong competition from other retailers and warehouse club operators, and the emergence of AI tools may change consumer shopping habits and increase competition, with some competitors having greater technology capabilities, including faster adoption of AI technologies, and greater market penetration. The Company's growth is dependent in part on its ability to acquire property and build or lease new warehouses and depots, and it competes with other retailers and businesses for suitable locations, with local land use and other regulations potentially impacting its ability to find suitable locations and increasing the cost of sites.

Management's message to shareholders emphasizes that the most important driver of profitability is increasing net sales, particularly comparable sales, achieved through increasing shopping frequency from new and existing members and the amount they spend on each visit. The Company's philosophy is to provide members with quality goods and services at competitive prices, and it does not focus in the short-term on maximizing prices charged but instead seeks to maintain what it believes is a perception among members of its pricing authority by consistently providing the most competitive values. Management states that it believes the Company has been successful historically in adapting its business to changes in economic health and competition, such as through adjustments to pricing and merchandise mix, including increasing the penetration of private-label items, and through online offerings. The membership format is described as integral to the business and profitability, designed to reinforce member loyalty and provide continuing fee revenue, and the extent to which the Company achieves growth in its membership base, increases the penetration of Executive memberships, and sustains high renewal rates materially influences profitability. Management's stated forward-looking plans include opening up to 33 ¹²⁶ new warehouses, including five ¹²⁷ relocations, in 2027, and spending approximately $7,500 ¹²⁸ on capital expenditures during fiscal 2027. The Company presently expects to continue to pay dividends on a quarterly basis, and the share repurchase program authorized in January 2023 in the amount of $4,000 ¹²⁹ expires in January 2027. Management's strategic priorities center on driving comparable sales growth through merchandise availability at the right prices, expanding the warehouse base in existing and new markets including continued international growth, and investing in technology and digital capabilities to enhance the member experience while maintaining the Company's culture focused on value, integrity, and member service.

Total revenue for 2026 was $303,154 ¹³⁰, compared to $275,235 ¹³¹ in 2025, with net sales of $297,247 ¹³² versus $269,912 ¹³³ and membership fees of $5,907 ¹³⁴ versus $5,323 ¹³⁵. Net income was $9,226 ¹³⁶, compared to $8,099 ¹³⁷ in 2025, and diluted earnings per share was $20.76 ¹³⁸ versus $18.21 ¹³⁹, with basic earnings per share of $20.78 ¹⁴⁰ versus $18.24 ¹⁴¹. Operating income was $11,685 ¹⁴², compared to $10,383 ¹⁴³, and income before income taxes was $12,251 ¹⁴⁴ versus $10,818 ¹⁴⁵. Gross margin was $32,968 ¹⁴⁶ versus $30,026 ¹⁴⁷, with gross margin percentage of 11.09% ¹⁴⁸ versus 11.12% ¹⁴⁹, and SG&A expenses were $27,190 ¹⁵⁰ versus $24,966 ¹⁵¹, representing 9.15% ¹⁵² of net sales versus 9.25% ¹⁵³. The provision for income taxes was $3,025 ¹⁵⁴ versus $2,719 ¹⁵⁵, with an effective tax rate of 24.7% ¹⁵⁶ versus 25.1% ¹⁵⁷, favorably impacted by net discrete tax benefits of $83 ¹⁵⁸ and $72 ¹⁵⁹ related to research and development credits and stock compensation. Net cash provided by operating activities was $15,817 ¹⁶⁰ versus $13,335 ¹⁶¹, net cash used in investing activities was $6,378 ¹⁶² versus $5,311 ¹⁶³, and net cash used in financing activities was $3,355 ¹⁶⁴ versus $3,775 ¹⁶⁵. Cash and cash equivalents and short-term investments totaled $21,301 ¹⁶⁶ at August 30, 2026, versus $15,284 ¹⁶⁷ at August 31, 2025, of which unsettled credit and debit card receivables represented $2,842 ¹⁶⁸ and $2,670 ¹⁶⁹. Interest expense was $145 ¹⁷⁰ versus $154 ¹⁷¹, and interest income and other, net was $711 ¹⁷² versus $589 ¹⁷³. In the U.S. segment, total revenue was $219,823 ¹⁷⁴ and in the Canadian segment total revenue was $40,561 ¹⁷⁵ for the year ended August 30, 2026.

Costco's financial and operational performance is highly concentrated, with U.S. and Canadian operations comprising 86% ¹¹⁸ of net sales and 83% ¹¹⁹ of operating income in 2026, and within the U.S., California operations comprising 26% ¹²⁰ of U.S. net sales, meaning any substantial slowing or sustained decline in these operations could materially adversely affect results. International operations, including Canada, generated 27% ¹²¹ of net sales and 35% ¹²² of operating income during 2026, exposing the Company to foreign-exchange fluctuations that may adversely affect financial performance as international expansion continues. The Company paid approximately $500 ¹²³ in IEEPA tariffs, and although the U.S. Supreme Court ruled the tariffs unlawful in February 2026 and the Company received $184 ¹²⁴ in refunds during 2026 and $155 ¹²⁵ subsequent to year-end, higher tariffs are more likely to adversely impact rather than improve results, with exposure dependent on the type of goods, rates imposed, and timing of tariffs and policy changes. The Company is subject to significant self-insurance exposure, funding claims for employee health-care benefits, workers' compensation, general liability, property damage, directors' and officers' liability, vehicle liability, inventory loss, and other exposures predominantly through self-insurance, with costs that are highly unpredictable and can fluctuate as a result of inflation rates, regulatory or legal changes, and developments in claim frequency and amounts. The Company also faces strong competition from other retailers and warehouse club operators, and the emergence of AI tools may change consumer shopping habits and increase competition, with some competitors having greater technology capabilities, including faster adoption of AI technologies, and greater market penetration.