Core margins improve and valuation falls, but member growth slows for a fifth quarter

Results vs. Consensus

Q4 FY2026 Scorecard (16 weeks ended August 30, 2026)

Consensus EPS was $6.54, with estimates from $6.52 to $6.55. Revenue estimates ranged from $94.85B to $94.97B. Costco gives no revenue or EPS guidance.

Year-Over-Year Comparison

Fiscal Year 2026 vs. Fiscal Year 2025 (52 weeks each)

Free cash flow equals operating cash flow less additions to property and equipment.

Quarter-Over-Quarter Comparison (rates only)

Costco's quarters contain 12/12/12/16 weeks. Direct dollar comparisons between FQ3 and FQ4 are therefore not meaningful. Rate comparisons help explain the quarter.

Why earnings exceeded consensus

• Revenue: Gasoline inflation added roughly 3% to comparable-sales growth, while foreign exchange reduced it by roughly 0.3%. These effects explain the difference between reported growth of 9.4% and adjusted growth of 6.7%. Growth was also 6.7% after excluding gas sales entirely and adjusting for foreign exchange. The result therefore holds under either gas adjustment. Non-foods was the strongest of the three merchandise categories.
• Margins: Changes in the sales mix caused the reported 11bps gross-margin decline. Core-on-core margin rose 18bps excluding tariff items, with gains in all three merchandise categories. Ancillary margin rose 23bps, LIFO reduced margin by 11bps, and the tariff item added 9bps in the other category. Gas, e-commerce and pharmacy grew faster than core merchandise, which reduced the reported margin. Excluding gas inflation, the reported rate rose 20bps.
• EPS: Operations drove most of the earnings growth, with some help from interest income and tax. Operating income grew 13.8%, faster than net sales growth of 11.2%. Interest income rose to $209M from $169M as cash increased $6.0B during the year. The tax rate fell 42bps to 25.2%. Together, higher interest income and the lower tax rate added a few cents to EPS.

Segment and Category Performance

Costco does not report profit by segment or merchandise category. It provides comparable sales by geography, comparable sales by merchandise category, and a breakdown of gross-margin changes. These disclosures help explain performance.

Comparable Sales by Geography

U.S. — the gas engine, and the quarter's dispersion

The U.S. led both reported and adjusted comparable-sales growth. Its 350bp difference between the two measures was the largest of the three regions, reflecting its gas business. Fuel volumes reached a record, as did the share of U.S. member households that bought gas. Adjusted growth was 7.2%, the highest regional result.

Assessment: U.S. adjusted growth of 7.2% exceeded the 6.6% full-year rate. This is the strongest demand signal in the release. It supports the improvement in traffic growth and suggests more than a rounding effect.

Canada — the laggard, and the one to watch

Canada's adjusted growth of 4.6% was below its 6.7% full-year rate and the company's 6.7% quarterly rate. Canada has 115 warehouses, with five more planned for FY27. The slowdown therefore matters. Management gave no explanation, and no analyst requested one.

Assessment: The quarterly rate was 210bps below the annual rate in Costco's second-largest market. This could reflect economic conditions or the start of a broader change. We retain it as an open question for FQ1.

Other International — reported strength, adjusted softness

Other International reported growth of 7.0%, or 6.2% after adjustments. The full-year difference was larger, at 9.8% reported and 6.5% adjusted. Foreign exchange increased the reported figures. Future expansion includes four European openings in FY27 and planned openings in Asia and Australia in FY28.

Assessment: International warehouse expansion remains possible and arguably becomes more promising. However, current comparable-sales growth trails the U.S. This opportunity extends over a decade, beyond the next four quarters.

Merchandise Categories and Ancillary

Assessment: The strongest categories changed from FQ3. Ancillary businesses and discretionary treats led FQ3, while core food remained steady. Non-foods led this quarter. Management attributed the improvement to restored product selections after tariff-related SKU removals earlier in the fiscal year. We interpret this as a real but modest recovery in demand as products returned.

Gross Margin Matrix — Q4 FY2026

Assessment: The margin breakdown changes our investment case. Core-on-core margin measures profit on core merchandise sales without distortion from faster growth in ancillary businesses with lower margins. Its year-over-year change improved from minus 9bps in FQ3 to plus 18bps in FQ4, with contributions from all three merchandise categories. Management cited supply-chain efficiency across all categories and higher labor productivity in meat, bakery and deli. These operating improvements support a more durable margin gain.

Membership Metrics

Executive members represented 50.3% of paid members, calculated as 42.3M divided by 84.1M. Management described the share as a record but did not give the percentage. FQ3 figures come from the FQ3 call. Dollar comparisons for membership fees are not meaningful because FQ3 contains 12 weeks and FQ4 contains 16.

Assessment: Member growth and member engagement moved in different directions. Member growth slowed, as did fee growth after excluding the September 2024 increase. Executive membership reached a record share above half of paid members, and both renewal rates improved. Members under 40 grew roughly 60% since COVID and now represent more than a quarter of members. Deferred fees grew 5.3%, below recognized fee-income growth of 7.3%. This suggests another slowdown in fee growth during FY27.

Key Topics & Management Commentary

Overall management tone: Management sounded more confident and relaxed than in FQ3, when it defended the margin decline. The call emphasized fiscal-year results and future capacity, with an unprompted joke about the Food Court churro's return. Membership growth drew more guarded answers. Three analysts questioned the slowdown. Each time, management emphasized engagement rather than member growth and offered neither a minimum growth rate nor a recovery timeline.

1. Core-on-core margin improves by 18bps across all categories

All three merchandise categories contributed to the margin recovery. Core margin as a share of total sales fell 32bps as reported, or 9bps excluding gas inflation. Both declines reflected changes in the sales mix. Core-on-core margin uses core sales as its denominator and better indicates changes in pricing and productivity.

"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, non-foods, 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." — Gary Millerchip, CFO

Management described the improvement more clearly than in FQ3. Last quarter, it avoided a commitment to future core-margin growth and emphasized the overall margin excluding gas inflation. We interpreted that response as lower expectations for core-margin growth. This quarter, management gave a specific result, confirmed gains across categories, and named two structural causes.

Assessment: The FQ4 result contradicts our FQ3 assessment. The 9bps decline reflected price reductions funded by the favorable LIFO comparison, as management stated. Underlying margin growth returned after that investment. We restore this part of our investment case. Management still gave no outlook for gross margin or repeated description of the prior 12 to 24 months. The change in our assessment rests on results rather than guidance.

2. The September 2024 fee increase no longer adds to growth after Q4

The September 2024 fee increase in the U.S. and Canada contributed less than 1% of fee growth this quarter. Its contribution was roughly half at the peak and a little more than a quarter in FQ3. Management confirmed that Q4 was the final quarter with a year-over-year benefit.

"The September 2024 U.S. and Canada membership fee increase accounted for less than 1% of fee growth. 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." — Gary Millerchip, CFO

Underlying fee income grew 6.8%, driven by member growth and a higher share of Executive members. The balance sheet suggests that even this rate may be optimistic for FY27. Deferred membership fees grew 5.3% to $3,006M. These fees are not yet recognized as income and will contribute to future income. Paid members grew 3.8%, while recognized fee income grew 7.3%.

Assessment: The largest reason for a higher valuation during the past two years ended on the schedule we described in FQ3. From FQ1 FY27, member growth and the Executive membership share determine fee growth. Deferred fees suggest growth closer to 5-6% than 7%. Another fee increase is the only identified action that changes this outlook. No participant raised that possibility on the call.

3. Member growth slows for a fifth consecutive quarter

Paid members grew 3.8% to 84.1M, after growth of 4.1% in FQ3 and 4.8% in FQ2. An analyst described eight consecutive quarters of slower growth, and management did not challenge that description. Reported figures show five consecutive declines after growth remained at 6.8% in both Q2 and Q3 FY25. Management changed how it described the expected rate rather than disputing the trend.

"I think the sort of the growth rate that we've seen in recent quarters is probably more typical of 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." — Gary Millerchip, CFO

Management named two possible causes of faster member growth: higher renewal rates as Executive membership expands, and large openings in new Asian markets. Management did not quantify an FY27 growth benefit from either factor. Named FY27 openings include four in Europe, five in Canada and one in Mexico. Management placed the Asia and Australia pipeline in FY28.

Assessment: Management described 4% to 5% as a more normal growth rate in FQ3. FQ4 growth fell below that range, and management now describes recent growth as typical. This offers no minimum future rate. Slower member growth remains the least convincingly answered concern. The margin recovery alone does not justify an upgrade.

4. Costco receives $184M of tariff refunds and returns much of the benefit through lower prices

Costco received $184M in IEEPA tariff refunds and related interest during Q4. This comprised $174M of refunds and $10M of interest. Management described the amount as a little more than one third of expected total receipts. That implies roughly $500M to $550M in total. By the call date, Costco received a similar amount in FQ1 FY27.

"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 in increased member values." — Gary Millerchip, CFO

The retained benefit added 9bps to gross margin, or roughly $85M on $93,873M of net sales. Interest added another $10M. Comparing the $85M with $174M of refunds implies roughly $90M of price reductions in the second half of the quarter. The reductions covered produce, meat, beverages, home furnishings and hardware.

Assessment: The use of refunds benefits members, and the disclosure helps investors assess earnings. Management committed to separate disclosure of the net impact each quarter while refunds continue. Roughly half of the receipts funded lower prices. We view this primarily as a program to improve member value, with an additional earnings benefit. The program ends after Costco collects the remaining two thirds.

5. The $152M LIFO charge reflects late-year cost increases

The $152M LIFO charge reduced gross margin by 11bps, compared with a $43M charge last year. The full-year charge was slightly above $200M. Management described overall inflation as relatively stable and in the low single digits. Analysts questioned the apparent conflict. Management explained that the large quarterly charge reflected an adjustment at fiscal year end.

"It might have seemed a bit contradictory for us to say inflation is relatively consistent, but we had a large LIFO charge during the quarter... 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... While we took a $150 million or so charge in the fourth quarter, if you look at the total charge for LIFO for the year, it is slightly north of $200 million. Which if you divide that by the total inventory that we have on hand in the U.S., that would be about 1.5% inflation." — Gary Millerchip, CFO

Management identified memory costs in consumer electronics and petroleum-related products as causes of inflation. These products included gas, motor oil and resins. Beef inflation continued, while egg, dairy, butter and cheese prices fell. Management also identified steel, flour and resin as commodities with higher prices.

Assessment: The arithmetic supports management's explanation. Comparing the charge with inventory gives a reasonable estimate of its scale, at 1.5%. The explanation does not remove the cost pressure. Memory and petroleum costs are especially difficult to forecast, and both rose near fiscal year end. This risk increased during Q4 and will affect FY27 gross margin if both costs continue to rise.

6. SG&A falls as a share of sales, but healthcare and liability costs remain concerns

The reported SG&A rate fell 27bps to 8.94%. Operations improved 22bps, and central costs improved 5bps. Excluding gas inflation, the total improved 2bps while operations remained flat. In FQ3, the operations rate rose 3bps excluding gas because of healthcare costs and non-recurring legal items. Q4 therefore reversed another FQ3 weakness.

"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 headwind 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 healthcare as costs that have been growing at a faster rate." — Gary Millerchip, CFO

Management added useful information about wage agreements. Each agreement covers three years, with the largest expense increase in year one. Costco is now in year two. The comparison with year one therefore becomes easier.

Assessment: Management stated that comparable-sales growth near 6% supports a lower SG&A rate, and Q4 demonstrated that result. The wage agreement supports an easier labor-cost comparison. Healthcare and general liability remain persistent cost pressures. Management stated that greater pressure from these costs could prevent further improvement in the SG&A rate.

7. FY27 capex rises to $7.5B, with 33 planned warehouse openings

FY26 capex was $6.4B. Management plans approximately $7.5B in FY27, an increase of 17%, for warehouse expansion and supply-chain investment. FY26 had 28 openings, including three relocations, for 25 net additions. This was below the FQ3 target of 26 net additions. FY27 plans include 33 openings and five relocations, for 28 net additions. The long-term target is 30 net additions annually.

"For FY 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... Beyond FY 2027, we would expect to see a slowing in the rate of capital expenditure growth following three years of outsized growth that began in FY 2025." — Gary Millerchip, CFO

Named FY27 openings include four in Europe, five in Canada and one in Mexico. New U.S. markets include Buffalo, New York, and Lawrence, Kansas. Management described the FY28 pipeline as Asia, Australia and other international markets.

Assessment: This was the strongest positive disclosure on the call, despite limited discussion. Planned openings approach the 30-net target after two years of delays. The capital plan supports that expansion, and management expects slower capex growth after FY27. At $7.5B on roughly $320B of net sales, capex would equal about 2.3% of sales. Expected slower capex growth provides management's first signal about future free cash flow.

8. National delivery services attract younger members

Uber Eats expanded from 17 states to the entire U.S. DoorDash also expanded to the U.S., alongside the existing Instacart service in the U.S. and Canada. Average delivery times across all three platforms are below one hour.

"Members using these new marketplaces are significantly younger than our overall member base... We've observed that these sales through these channels are mostly incremental, with limited impact on our core warehouse grocery business." — Ron Vachris, CEO

Members under 40 grew nearly 60% since COVID and now represent more than a quarter of all members. Management said these members initially spend less. Spending reaches its highest level at roughly ages 40 to 55, when household size and income reach their peaks.

Assessment: Management said delivery adds sales but gave no measure of the additional revenue. Whether delivery replaces existing sales remains the central question. Younger members initially spend less, which reduces average spending per member now while expanding the future customer base. We consider this a favorable trade at a 92.3% renewal rate in the U.S. and Canada. It also helps explain why member growth and spending growth per member both slowed.

9. AI search delivers a second quarter of triple-digit traffic growth

Traffic from AI search to costco.com grew at a triple-digit rate for a second consecutive quarter. This traffic had the highest purchase conversion rate of any source. Personalized initiatives also grew at a triple-digit rate. Personalized items now appear in 10% of costco.com orders. Total website and app traffic rose 30%.

"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... 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." — Gary Millerchip, CFO

Management named Gemini, Anthropic and OpenAI as sources of traffic. Costco buys no paid digital advertising. Management described AI search as a neutral environment where product selection and prices can attract customers on their merits. Separately, Costco discontinued the Costco Next marketplace because its contribution was immaterial.

Assessment: AI search offers potential future value but is not yet a driver of FY27 earnings. Management acknowledged the small starting base. Membership ranks among the main items purchased through AI search. This suggests AI search could attract new members as well as product sales. The possibility deserves attention because member growth slowed for five consecutive quarters.

10. Record gas volumes support visits and loyalty

Gas comparable sales grew in the positive mid-30s, reflecting higher prices per gallon and record volumes. The share of U.S. member households that bought gas reached a fiscal-year record. Costco estimates that members saved over $3.2B compared with average pump prices in its markets. It expanded 26 existing high-volume U.S. gas stations to serve more customers.

"But we do believe as members see the value of gas that we're offering and we've got more new members buying gas for the first time, that we think that's a great indicator of continued spend and growth with members as well." — Gary Millerchip, CFO

Assessment: Our FQ3 assessment remains valid. Gas mainly supports visits and loyalty. High pump prices helped gas volumes this year. That benefit could ease if prices fall. Costco expanded 26 stations this year, creating capacity that lasts beyond the current pricing benefit. The record share of households that buy gas offers more durable evidence of loyalty than comparable-sales growth in the mid-30s.

11. Pharmacy grows nearly 20% despite lower drug prices

Pharmacy sales grew nearly 20% for the fiscal year, supported by double-digit prescription growth. Management said higher prescription volumes more than offset Medicare maximum-fair-price changes. Digital services contributed to the growth. Mobile payments in advance now cover more than one third of prescriptions at many U.S. warehouses. Costco announced a partnership with SCAN Health Plan to develop Medicare Advantage benefits.

"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-1 pricing, the lower drug prices that we've been out there, how we've been able to capitalize on more unit growth." — Ron Vachris, CEO

Assessment: Pharmacy grew nearly 20% despite two consecutive rounds of government-driven price reductions. This strongly supports management's argument that lower prices increase prescription volumes. The SCAN partnership extends Costco's role from dispensing drugs into benefit design. It could help attract older members. Asked about further GLP-1 price reductions in calendar 2027, management said only that it expects the underlying pressure to continue.

Guidance & Outlook

Costco's policy excludes revenue and EPS guidance. Its outlook therefore consists of operating plans and commitments. This quarter's disclosures follow.

Implied trajectory: Our FY27 outlook assumes adjusted comparable-sales growth of roughly 6.0-6.5%. The 28 net warehouse additions increase the warehouse base by about 3%. Other assumptions include 6-7% fee-income growth without another fee increase, modest core-margin growth, and a lower SG&A rate. Interest income remains near current rates on a $20.2B cash balance. These assumptions support EPS growth in the low double digits. A repeat of FY26's 14.0% growth appears unsupported because FY26 included the final fee-increase benefit and a non-recurring tariff benefit.

Analyst expectations: Analysts reduced price targets after the results but retained their ratings. We interpret this as lower valuation multiples rather than lower earnings expectations. The next company update is September sales for the five weeks ending October 4. Costco will release it after market close on October 7.

Guidance style: Management gave few numerical forecasts. Its commitment to disclose the net tariff-refund benefit each quarter helps clarify the earnings outlook. However, management did not repeat its FQ3 description of gross margin excluding gas inflation. That description covered the prior 12 to 24 months and cited stability with improvement in the mid-single-digit basis points.

Analyst Q&A Highlights

Do price reductions increase sales?

The first analyst asked whether roughly $100M of price reductions increased sales. Monthly sales growth showed no meaningful improvement and, if anything, slowed slightly. The question also asked whether investors should expect a return to historical comparable-sales growth. Management discussed demand at length but did not quantify the return from lower prices. It described the reductions as a duty to members.

Q: "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. How are you evaluating the return on those investments? If price is not moving the needle as significantly as maybe it has in the past, should we calibrate our expectations that this year's just going to be a more return to historic levels of same-store sales growth for Costco?"
— Michael Lasser, UBS

A: "On the pricing reinvestments, 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 our goal was to make sure that we spread those as we could to items that would have the most impact for members... Overall, we view that very much as giving a 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."
— Gary Millerchip, CFO

Assessment: Management's answer matches its established approach to member value but leaves the question unanswered. Adjusted comparable-sales growth remained between 6% and 7% for a full year, with and without substantial price reductions. This could indicate stable demand or less additional volume from further price reductions. We favor the stable-demand interpretation. The question remains valid and unanswered.

Does slower member growth relative to warehouse growth matter?

Another analyst noted that paid-member growth approaches warehouse growth. This implies fewer additional members per new warehouse on average. The analyst asked whether higher spending by existing members makes this less important. Management emphasized member spending and engagement.

Q: "My question is on membership. The spread between membership growth and the unit growth is narrowing, not the MFI, but membership growth. How do you look at that? How should we look at it? I am sure it is a growth driver in some way, but can you make a case that as long as existing member spend continues to climb, then the narrowing spread is just noise?"
— Simeon Gutman, Morgan Stanley

A: "We exit fiscal year 2026 with a record high executive penetration, as I mentioned, record high gas engagement, record high digital engagement. When you look at 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."
— Gary Millerchip, CFO

Assessment: Three record measures of engagement provide a substantive answer. However, they support a different growth pattern from the historical investment case. Historically, both member growth and spending growth contributed. FY27 depends more on spending growth as member growth slows. That can produce the same revenue growth, but we consider it less durable because household spending has limits while new members expand the base.

What could restore faster member growth?

An analyst directly challenged the slowdown and requested both a mechanism and a timeline for recovery. Management named two possible causes of faster growth but gave no timeline. Management did not quantify the FY27 contribution from either cause.

Q: "I guess the question is with eight 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?"
— Scot Ciccarelli, Truist

A: "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 accelerator to total membership growth. 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."
— Gary Millerchip, CFO

Assessment: More Executive members could improve renewal rates gradually, from a U.S. and Canada base already at 92.3%. Asian expansion could also increase membership, but management placed that pipeline in FY28. Management gave no date for the gradual renewal benefit. We therefore assume no quantified FY27 acceleration from these factors. We interpret the answer as an expectation for member growth in the high threes during the coming year. Management prefers investors to judge engagement. That position is defensible but gives little support for a higher valuation from member growth.

How does a $152M LIFO charge fit relatively stable inflation?

An analyst questioned the apparent conflict between a LIFO charge that more than tripled and management's unchanged description of inflation. The exchange also included a joke about the Food Court churro. Management then explained the accounting adjustment clearly.

Q: "I wonder 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 non-foods was higher but decelerating. I guess as part of that and the inflation outlook, how much do you think bringing the churro back will add to average ticket in the next quarter?"
— Greg Melich, Evercore ISI

A: "It might have seemed a bit contradictory for us to say inflation is relatively consistent, but we had a large LIFO charge during the quarter... 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... While it sounds like a big number in the quarter, it is 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."
— Gary Millerchip, CFO

Assessment: Management gave a complete answer that can be checked. The 1.5% comparison with inventory appropriately indicates the scale of the charge. Timing remains important. Memory-chip and petroleum-related costs rose in Q4 and caused the adjustment. FY27 therefore starts with these costs already elevated.

How could Costco benefit from AI commerce?

Management distinguished AI-assisted search from transactions conducted by AI agents. It argued that neutral recommendations could favor a retailer with a selected product range and no paid digital advertising. This was the call's most detailed strategic answer.

Q: "On the agentic commerce front, clearly an evolving backdrop, just overall, just how do you feel Costco's positioned as the backdrop continues to evolve?"
— Rupesh Parikh, Oppenheimer

A: "We feel it's a great opportunity for us, particularly as today we don't do any paid digital advertising... But AI presents an opportunity in a sort of neutral environment for us to be able to ensure that our value and our quality shows up transparently for our members... 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."
— Gary Millerchip, CFO

Assessment: The argument fits Costco's business. Competitive prices and selected products could help a retailer that buys no search advertising when recommendations do not depend on advertising auctions. Whether that advantage persists as AI services seek revenue remains an unanswered question. Two quarters of triple-digit traffic growth and the highest purchase conversion rate currently support management's argument.

How do Asian and U.S. warehouses differ?

An analyst asked how many member households an Asian warehouse attracts compared with a U.S. warehouse. The question followed plans for more international openings. Management's detailed answer qualified its earlier argument that Asian expansion could accelerate member growth.

Q: "Are you willing to share some metrics on what 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?"
— Kelly Bania, BMO Capital Markets

A: "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... In a U.S. market, we might see less members per warehouse, but they're spending significantly more per member, and we get to a similar strong economic outcome... 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."
— Gary Millerchip, CFO

Assessment: Asian expansion could improve member growth while reducing average spending per member. Management also warned that some first-year members visit as tourists rather than become recurring customers. This was the most useful disclosure in the Q&A. FY28 openings could ease one concern while increasing another. They are not a complete solution to slower growth.

Will grocery inflation increase?

An analyst asked whether grocery inflation could rise from the low single digits. The question cited prior egg-price declines, the end of tariff-funded price reductions elsewhere, and persistent oil prices. Management declined to forecast inflation and identified two sources of uncertainty: oil and tariffs.

Q: "Just want to get the overall view on how you think grocery inflation proceeds over the next three to six months and whether the industry is sort of strong enough and rational enough for those prices to actually go up."
— Chris Horvers, JPMorgan

A: "I think for us, 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. 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."
— Gary Millerchip, CFO

Assessment: Management did not answer the forecast question but identified relevant uncertainties. It then emphasized cost savings to offset commodity inflation. We interpret this as a plan to absorb cost increases instead of increasing prices. That approach supports market share and member value, which helps renewals. It also limits gross-margin gains if oil prices remain elevated.

Could SG&A costs and further GLP-1 price cuts reduce growth?

The final question combined pressure on SG&A with the risk from further GLP-1 price cuts in calendar 2027. Management gave its clearest statement about possible SG&A improvement. It described lower drug prices as an opportunity to increase prescription volumes.

Q: "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 this 6% range in the foreseeable future... 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 2027 from the next round of pricing cuts?"
— Christopher Nardone, Bank of America

A: "I think the one area that we have called out previously in other quarters would be general liability and healthcare 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 were 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 three-year period, and year one is always the most expensive of a three-year agreement there. So we're into year two now with that."
— Gary Millerchip, CFO

Assessment: The wage agreement supports management's confidence about SG&A. The first year of a three-year agreement is the most expensive, and Costco is now in year two. That creates an easier wage comparison. Management's GLP-1 argument relied on prior results: lower prices increased prescription volumes enough to offset the price reductions. This is a reasonable base case, but it is not a numerical forecast.

Questions the call did not answer

1. The fiscal year-end call omitted capital allocation. Cash grew $6.0B during FY26 to $20,207M, or roughly $45.60 per share. Costco returned only $3.3B through dividends and buybacks, compared with $9.4B of free cash flow. FQ3 included a full exchange about a special dividend. This quarter, neither analysts nor management raised capital returns, although a year-end capital plan would be customary.
2. The call omitted the tariff-refund lawsuit discussed in FQ3. In May, management said the amount and timing of member returns depended partly on developments in that lawsuit. Four months later, Costco collected $184M and received a similar amount in FQ1. The absence of discussion does not establish that the litigation ended.
3. Management gave no outlook for gross margin. In FQ3, it described the margin excluding gas over the prior 12 to 24 months as stable, with slight improvement. FQ4 included a strong core-on-core result but no similar description of past trends or future expectations. The omission matters despite the better result.
4. No participant discussed the timing of another membership fee increase. Management confirmed that Q4 was the final quarter with a benefit from the September 2024 increase. Another increase is the largest available action to accelerate fee growth. Neither management nor analysts addressed it.
5. Management gave no minimum expectation for member growth. In FQ3, it described 4% to 5% as a more normal rate. FQ4 growth of 3.8% fell below that range. Management described recent growth as typical rather than defending the earlier range. No analyst challenged this change.
6. Management did not explain Canada's slowdown. Adjusted growth of 4.6% was 210bps below both Canada's full-year rate and the company total. Canada is the second-largest market, with five FY27 openings planned. The press release disclosed the result, but prepared remarks and analyst questions did not address it.
7. Management did not quantify the total earnings benefit from remaining tariff refunds. It committed to report the net impact each quarter, which improves disclosure. Management described receipts as a little more than one third of the expected total and planned to reinvest the majority. It gave no more precise aggregate estimate.

Market Reaction

• Before the results: COST closed at $896.48 on September 24. Year-to-date performance was +4.0%, compared with +12.5% for the S&P 500. The stock fell 6.6% over 30 days and 5.2% over twelve months. Its 52-week closing range was $850.00 to $1,094.32. The price was roughly 18% below the high and 5% above the low.
• After-hours trading: Shares rose around 0.3% after the release and were slightly lower in Friday premarket trading. The overnight reaction was limited.
• Next-day trading: COST opened at $887.00, down 1.1%, and fell to $883.10. It then recovered to close at $922.77, up 2.9%, or $26.29. The intraday range was $883.10 to $925.14, roughly 4.8% from low to high. The close was within $2.40 of the high.
• Volume: Trading reached 4.6M shares, compared with a 30-day average of 2.0M. Volume was 2.3 times normal.
• Relative performance: The S&P 500 rose 0.5% in the same session. COST outperformed by roughly 240bps.

The trading pattern helps explain the reaction. Shares opened lower, recovered during the session, and closed near the high on 2.3 times normal volume. We interpret this as investors moving from the reported 11bps gross-margin decline to the underlying 18bps core-on-core gain. The press release contained the reported decline. Investors needed the call for the core-on-core figure and its breadth across categories.

The call began at 5:00 PM ET on September 24, before the next trading session. Yet shares remained slightly lower before the market opened and then opened lower. During regular trading, the stock rose 4.5% from its low. We interpret this as a delayed valuation response to the margin recovery. Most of the EPS excess came from the non-recurring tariff item already identified in the release.

The earlier decline also matters. Before the results, shares fell 5.2% over twelve months and 6.6% over thirty days, while FY26 earnings grew 14.0%. Sentiment was weak enough for the margin recovery to support 240bps of relative outperformance. This response suggests that the excessive investor enthusiasm we identified in FQ3 substantially eased.

Street Perspective

Did the core-margin recovery validate management's FQ3 explanation?

Bull view: The 18bps improvement explicitly excludes tariff refunds and reinvestment. All three merchandise categories contributed. Supply-chain efficiency and labor productivity can provide recurring gains.

Bear view: One quarter does not restore the earlier sequence of gains. Management also gave no forward margin framework. Non-foods recovered from tariff-related SKU disruption. Part of the improvement therefore reflects recovery rather than a new recurring growth rate.

Our assessment: The positive argument is stronger. The exclusions, category breadth and causes of improvement are explicit. The missing outlook remains a valid concern. We restore this part of the investment case but retain the rating.

Can higher member spending offset slower member growth?

Bull view: Executive membership share, gas engagement and digital engagement reached records. Both renewal rates improved. Higher spending and engagement could sustain revenue growth despite slower member growth, with better economics. Members under 40 offer a decade-long opportunity for recurring income at today's acquisition costs.

Bear view: Five consecutive quarters of slower growth establish a trend. Management named two possible causes of faster growth but gave no quantified FY27 contribution. Household budgets limit spending gains, while additional members expand the customer base. Greater dependence on spending reduces the long-term growth rate. That matters at an earnings multiple above 40x.

Our assessment: The negative argument is stronger for future growth. Management's description of Asian warehouses reinforces it. Asian expansion could increase member growth but reduce average spending per member. This concern became more serious in Q4.

Does 44x trailing earnings offer an attractive entry price?

Bull view: Shares fell 5.2% over twelve months while earnings grew 14.0%, implying roughly 17% lower valuation without business deterioration. Free cash flow grew 19.8% to $9.4B, and cash reached $20.2B. Management expects slower capex growth after FY27. A similar combination of business quality and lower valuation supported our previous upgrade.

Bear view: At 44x trailing earnings and roughly 40x forward earnings, the price-to-earnings-to-growth ratio remains above 3.5x. Expected earnings growth is in the low double digits. The decline from 50x to 40x reduced the valuation premium but did not make the shares cheap. Fee growth will also slow after the fee-increase benefit ends.

Our assessment: Both arguments support Hold. The lower valuation is the strongest reason to consider an upgrade. However, expected earnings growth also slows. A lower multiple alone is insufficient.

Do delivery services add sales at an acceptable margin?

Bull view: Management says delivery sales are mostly additional, with limited effects on warehouse grocery sales. Delivery users are significantly younger. Members who use several channels also visit warehouses more frequently. These services could attract younger members and capture more of their spending.

Bear view: Third-party marketplaces have worse economics than warehouses. Management gave no measurement of additional sales. Younger members who begin with delivery may never become frequent warehouse shoppers. The Costco Next closure shows that some digital services do not succeed.

Our assessment: We provisionally accept that delivery adds sales, but its margin effect remains unquantified. Renewal rates among members under 40 are the relevant test as their share exceeds a quarter of the base. Management did not disclose renewal rates for that group. Disclosure of those renewal rates would help assess whether the additional sales persist.

Our estimates and valuation

Valuation: At $922.77, COST trades at 44.4x FY26 diluted EPS of $20.76 and 44.8x EPS of $20.61 excluding the tariff item. It trades at roughly 40x the midpoint of our new FY27 estimate. The free-cash-flow multiple is 43.6x on $9,390M, equivalent to a 2.3% yield. Market capitalization is roughly $409B, with $21.3B of cash and short-term investments and $6.2B of debt. Our new estimate balances better margins and a lower tax rate against slower fee growth. The price changed more than the earnings outlook, and roughly 40x earnings fairly values growth in the low double digits.

Over the next 12 months, we expect total return, including regular dividends, to be roughly in line with the S&P 500. We do not assume an unannounced special dividend. The downside is that slower member growth reduces earnings growth while investors pay a lower multiple. At roughly 40x expected earnings, both changes could reduce the share price despite continued earnings growth. Better margins reduce this risk but do not remove it.

We would return to Outperform if any two of these four conditions occur:

1. Core-on-core margin improves for a second and third consecutive quarter.
2. Paid-member growth stabilizes at or above 4%.
3. Costco announces another membership fee increase.
4. Shares trade in the lower half of their 52-week range without a corresponding decline in operating metrics.

The price condition is unmet. The $922.77 price is below the $972.16 midpoint, but member growth slowed for a fifth consecutive quarter.

Thesis Scorecard Post-Earnings

Overall: The investment case is modestly stronger than in FQ3, but we retain Hold. Core margins improved across categories, and the lower valuation reduced our concern about price. Those results weaken two reasons for our May downgrade. The third concern strengthened as the fee-increase benefit ended and member growth slowed for a fifth quarter, with no minimum rate promised. We restore one positive argument and retire another. One negative argument eased, while another became more serious.

Action: Hold. Existing holders should retain their shares without adding at this price. Costco offers earnings growth in the low double digits, leading renewal rates, more planned warehouses, and slower capex growth after FY27. At roughly 40x forward earnings, those qualities appear fairly priced. The price condition for an upgrade remains unmet while member growth slows. Another fee increase could provide the fastest route to an upgrade by restoring the fee-growth benefit that ended this quarter.