Costco's 2025 Q4 Earnings Call: Shifting Narratives on Membership Renewal Rates, Extended Hours Impact, and Inflationary Pressures

The above is the analysis of the conflicting points in this earnings call

Date of Call: September 25, 2025

Financials Results

• Revenue: $84.43B, up 8% YOY (vs $78.8B prior year)
• EPS: $5.87 per diluted share, up 11% YOY (up ~14% YOY excluding last year’s $0.14 tax benefit)
• Gross Margin: 11.13%, up 13 bps YOY (11.00% prior year); up 3 bps ex gas deflation

Guidance:

• Plan to open 35 warehouses in FY26 (5 relocations); continued domestic and international expansion.
• CapEx expected to increase in FY26 vs FY25 and likely outpace sales growth (warehouses, remodels, depots, manufacturing, tech).
• Renewal rate to see small declines for a few quarters due to higher online sign-ups; driving auto-renew and targeted digital engagement.
• Inflation expected low-to-mid single digits; nonfood now low-single-digit inflation; supply chain stable.
• Actively mitigating tariffs via sourcing shifts, global buying, and efficiencies; pricing is last resort.
• Holiday mix shifts toward new high-ticket categories; inventory position healthy.
• Cannibalization to persist as fill-ins continue but supports overall sales growth.
• Digitally enabled sales metric to include same-day delivery partners starting with September.

Business Commentary:

* Fiscal Year Performance and Growth: - Costco Wholesale Corporation reported net sales of $270 billion for the fiscal year 2025, an increase of over 8% versus last year, and e-commerce sales exceeded $19.6 billion, increasing over 15%. - The growth was driven by strong contributions from new warehouse openings, increased gas volumes, and the rising penetration of Kirkland Signature products.

• Membership and Renewal Rates:
• The company's membership fee income grew by 14% year-over-year, reaching $1.72 billion, and the paid executive memberships increased by 9.3% to 38.7 million.

• Despite a slight decline in world-wide renewal rates, the growth in membership was driven by new online sign-ups and increased upgrades to executive memberships, especially after announcing new benefits such as extended hours and Instacart credits.

• Gross Margin Improvement:

• Costco's reported gross margin rate was higher by 13 basis points year-over-year, reaching 11.13%, and core-on-core margins improved by 29 basis points.

• This improvement was due to supply chain efficiencies, reduced spoilage in fresh departments, and increased Kirkland Signature penetration, offsetting headwinds from gas margin declines and LIFO charges.

• Inflation Management and Tariff Mitigation:

• Inflation remained in the low to mid-single-digit range, with the LIFO charge of $43 million in Q4, compared to a credit of $8 million in Q4 2024.
• The company effectively managed inflation by moving product sourcing to lower-cost countries, consolidating buys, and leveraging its expertise in global sourcing and supply chain optimization.

Sentiment Analysis:

• Net sales up 8% and EPS up 11% YOY; comps +5.7% (+6.4% ex gas/FX). Membership fee income rose 14% YOY; executive members +9.3%. Gross margin improved 13 bps YOY (core-on-core +29 bps). Management plans 35 FY26 openings and expects higher FY26 CapEx to drive growth. Tariff impact being mitigated; supply chain stable. While renewal rate dipped 40 bps due to online mix, management expects modest declines near term with actions to improve.

Q&A:

• Question from Christopher Horvers (JPMorgan): How aware are members of extended hours and can the ~1% comp lift grow?
  Response: Extended hours are well-communicated and have driven ~1% U.S. sales lift; impact may build over time post national launch.

• Question from Michael Lasser (UBS): How far could renewal rates fall and what actions will stabilize them?
  Response: Decline is mix-driven from more online sign-ups; expect modest further declines for a few quarters while boosting auto-renew and targeted digital engagement; overall membership income remains strong.

• Question from Charles Grom (Gordon Haskett): Drivers of +29 bps core-on-core margin and holiday mix changes?
  Response: Margins improved across categories via supply chain gains, higher KS penetration, and fresh efficiencies; holiday set trims seasonal/discretionary to add high-ticket items like sheds, saunas, and more furniture.

• Question from Zhihan Ma (Bernstein): Sustainability of ~7% membership fee income growth ex price/FX?
  Response: Management sees ongoing growth via new warehouses, younger member acquisition, maturing international units, and added benefits; no explicit forecast provided.

• Question from Sherman for Scott Ciccarelli (Truist): Are membership gains from sharing crackdowns and are exec benefits improving mix?
  Response: No evidence gains are from sharing enforcement; new executive benefits are spurring upgrades and a more engaged member mix.

• Question from Simeon Gutman (Morgan Stanley): Have Instacart-driven grocery sales spiked amid new competition, and are capabilities sufficient?
  Response: Same-day channels (Instacart/Uber) are growing and aided by new exec benefits; Costco will report digitally enabled sales including these services.

• Question from Peter Benedict (Baird): How sustainable is unit growth and what is FY26 CapEx outlook?
  Response: Runway supports ongoing expansion (around 30 per year can ebb/flow); FY26 CapEx expected to increase vs FY25 and likely outpace sales; specifics in Q1.

• Question from Gregory Melich (Evercore ISI): What’s the inflation trend and any card enhancements?
  Response: Overall inflation remains low-to-mid single digits; nonfood shifted from deflation to low-single-digit inflation; card was enhanced with 5% gas rewards and modernization.

• Question from Edward Kelly (Wells Fargo): Tariff impact on margins/pricing and competitive stance?
  Response: Mitigating tariffs through sourcing shifts, global buying, supplier offsets, and efficiency; pricing is last resort—aim to be last to raise and first to reduce.

• Question from Kelly Bania (BMO): Components of membership growth and U.S. household penetration potential?
  Response: Growth driven by value, benefits, and expansion; international adds more new sign-ups while U.S. fill-ins free capacity; no penetration figures provided.

• Question from Rupesh Parikh (Oppenheimer): Are extended hours a net P&L benefit this year?
  Response: Yes—sales lift with SG&A impact minimized, making the change net positive.

• Question from Rupesh Parikh (Oppenheimer): Update on alternative revenue streams (media, financial services)?
  Response: Early but scaling: strengthening credit/Rx/travel, BNPL with Affirm, and building retail media via unified data and targeted messaging; pilot ROAS strong.

• Question from John Heinbockel (Guggenheim): B2B/business center strategy and real estate acquisition?
  Response: Expanding Business Centers (notably in Canada) including converting vacated sites; open to acquiring adjacent real estate to accelerate development.

• Question from Steven Zaccone (Citi): Will cannibalization persist in FY26 and what about nonfood inflation trajectory?
  Response: Cannibalization will continue with fill-ins but benefits overall sales; nonfood inflation likely around current low-single-digit levels absent new external shocks.

• Question from Oliver Chen (TD Cowen): Next priorities in digital and for Kirkland Signature?
  Response: Focus on personalized digital experiences to drive engagement and sales; continue selective KS expansion where it delivers superior value/quality alongside national brands.