Costco (COST.US) 2QF25 Conference Call: It is expected to open 28 new stores in the current fiscal year, and the impact of tariffs is difficult to predict.

Recently, Costco held a 2QF25 conference call. The company's net profit for the second quarter of the 2025 fiscal year was $17.88 billion, with diluted earnings per share of $4.02, higher than $17.43 billion and $3.92 per share for the same period last year. Last year's results included a $94 million tax benefit ($0.21 per share). Excluding this discrete tax item, net profit and diluted earnings per share both increased by 8.4%. Operating profit increased by 12.3% year-over-year, with international net profit decreasing by $57 million when converted to U.S. dollars due to exchange rate fluctuations ($0.13 per share). The company's net sales for the second quarter of the 2025 fiscal year were $62.53 billion, an increase of 9.1% compared to $57.33 billion for the same period last year. Total comparable sales increased by 6.8% (adjusted for 9.1%), while e-commerce comparable sales increased by 20.9% (adjusted for 22.2%). Exchange rates and gasoline prices led to a decrease of approximately 2.1% and 0.1% in sales respectively, with global shopping traffic increasing by 5.7% (5.6% in the U.S.) and global average ticket price increasing by 1% (2.6% in the U.S.). The company executives stated that only 1 new warehouse was opened in the second quarter of the 2025 fiscal year, but there are large plans for future openings. A new store will be opened on March 8 in Brentwood, California, and on March 9 in Highland, California, with 4 more new U.S. stores opening the following week. The store opening on March 12 in Shrewsbury, Massachusetts will be the 620th in the U.S. and the 900th globally for Costco. It is expected that 28 new stores will be opened in the 2025 fiscal year, including 3 relocations, resulting in a net increase of 25 new buildings. It is difficult to predict the impact of tariffs, but the team remains flexible and aims to minimize the impact of cost increases on members. Approximately one-third of U.S. sales are imported from other countries, with less than half of the imports coming from China, Mexico, and Canada. During uncertain times, members tend to prioritize value in providing high-quality goods at excellent prices. The team will continue to meet this challenge by leveraging global purchasing power, strong supplier relationships, and innovation. Q & A Q: When egg prices rise, does the willingness of consumers to buy non-essential or essential items decrease? The performance does not seem to reflect any impact. Is there a situation where sales are slowing due to factors such as a rebound in tariffs? A: In the past few quarters, there has been no significant change in members' spending behavior. Members still value quality, value, and new products, showing willingness to spend but being more cautious in their choices. With the impact of inflation and tariffs, this situation may continue or worsen. Additionally, consumer spending on food for meals at home has increased. In non-food categories, the overall trend remains strong, with slower growth in consumer electronics and apparel categories, although Costco performs well in these categories compared to the industry. Fresh produce overall is showing positive trends, with strong growth in premium meat products and faster growth in low-cost products like ground beef, poultry, and pork. Performance in Canadian sales in February reflects the year-to-date performance, with same-store sales being strongest among the three regions after adjusting for foreign exchange and gasoline factors. Although there has been some decline from the trends in the second quarter, the overall results are still strong. Q: The core and core profit margins slightly decreased this quarter. Does this mean that Costco's recent trend of profit margin expansion has ended or at least paused, especially in the face of worsening inflation and difficulties from tariffs? A: The results of the core profit margin for this quarter should not be over-interpreted. Overall, the gross margin increased by 4 basis points, showing slight improvement while continuing to invest more value for members. The core profit margin decreased by 8 basis points, with grocery and fresh food categories showing slight increases and non-food categories showing slight decreases, reflecting some category structural changes. One factor contributing to the increase in costs this quarter is the rise in supply chain costs as the company continues to purchase more inventory to cope with the unpredictability of supply chain times and potential risks of tariffs. Looking at the overall results for the quarter, the core profit margin is expected to continue to increase slightly, and the company has the capability to continue investing and taking care of its members. The company is satisfied with its overall profit margin and its ability to deliver performance while investing in members. Q: In February, core same-store sales growth exceeded 8%. Was there a negative impact on non-essential businesses due to adverse weather, or was it only offset by the egg business? Regarding fresh food tariffs from countries like Mexico, what is Costco's stance, and will any price increase be passed on to consumers? A: Extreme weather briefly impacted the Northeast and Midwest, but overall recovery was quick. In terms of tariffs, the purchasing team will work with suppliers to optimize the supply chain, reduce costs as much as possible, and avoid direct price increases. The vertical integration of Kirkland Signature, such as in the egg business, allows for better handling of cost pressures. Q: If tariffs are imposed on China, Mexico, and Canada, will Costco emphasize that its own products still offer the best value compared to others, or will it actively seek goods from countries less affected by tariffs? A: Costco will consider both options. With a flexible "treasure hunt" product display structure, alternative products can be found in many categories. With a streamlined SKU pattern, the company is able to adapt to various situations and has established good relationships with suppliers. While the final outcome cannot be predicted, the team is ready to respond flexibly and is prepared to handle any potential situations that may arise. Q: In the February sales results, the Other International business segment showed a deceleration compared to the previous month. Is this related to the Chinese New Year? How do you view the long-term growth prospects of the international business? A: In the short term, especially in the Asian markets, the Lunar New Year has some impact. Since it has not had a significant impact on the company's overall performance, it was not specifically mentioned in the financial report. It is necessary to consider the data from January and February together when analyzing it in the context of the overall company.Looking at the trend, in the long term, there is considerable growth potential in international business. The company plans to open 25-30 new stores each year, with slightly more than half possibly located in the United States in the long-term plan, and slightly less than half distributed in international markets, including Canada, Mexico, Asia, and Europe. These markets all have great development potential, are not yet fully saturated, and the sales profit margin in international markets is similar to that in the United States, or even better in some cases, making them an important part of the company's growth strategy.Q: How is the performance of consumer electronics category? What is the effect of multi-vendor mail promotions? A: In the consumer electronics sector, the company's market share is growing, but the overall growth is slow compared to the overall market downturn. The company is showing steady to slight growth compared to the overall market, waiting for the next wave of innovation to drive additional growth in this category. During holidays, big-screen TVs (98 and 100 inches) sell well. The company is excited about the international product opportunities. During monthly budget meetings, operators from different regions share case studies of popular products in each market, allowing the company to better introduce global procurement resources and offer more cost-effective products to members. This area has seen significant growth and will continue to be an important part of the company's ongoing growth. In terms of multi-vendor mail and promotions, the product mix is exciting, ensuring both daily low-priced goods for stability and introducing new products and promotions in collaboration with suppliers to drive sales. This activity can drive foot traffic and is a win-win for members, with keeping things fresh being key to its success. Q: How does Kirkland Signature (KS) compare to national brands in terms of new product introductions? In non-food categories where KS penetration is low, what opportunities are there for breakthroughs? Is the proportion of KS new products becoming fixed products in the product mix high? A: The biggest opportunity lies in non-food categories. While brand loyalty in non-food categories is very high, the company has made breakthroughs in some categories, such as Kirkland Signature motor oil becoming the top-selling motor oil in all warehouses and golf balls successfully entering a category with high brand loyalty. The procurement team evaluates products strategically, seeking opportunities to improve quality or brand quality and offer high value for money, rather than blindly developing a large number of KS products. Recent successes include the sandwich bags and storage bags introduced in the grocery department. The success rate of KS products is high, but there are also cases of failure. The company treats KS products and other branded products equally, and if sales are poor or members do not approve, they will be removed from the shelves like other branded products. The procurement team conducts due diligence, and the introduced KS products provide high value for members. Q: How does the increase in wage costs affect profit margins? How can efficiency improvements offset this pressure? A: This quarter, wage costs have increased by about 13 basis points (mainly due to new labor contracts), but through technological optimization (such as entrance scanning systems) and process improvements, SG&A expenses have still decreased by 9 basis points. The company will continue to invest in employee benefits while controlling costs through automation and productivity improvements. Q: Is the inflation situation slightly higher than 1% for groceries, with general merchandise experiencing deflation? A: Inflation is highest in the fresh category, especially for meat; food and groceries have very low single-digit inflation; non-food categories have been experiencing deflation recently, but as the supply chain deflation situation from a year ago eases, it is now stabilizing. There has been a slight upward trend in inflation this quarter, compared to zero inflation last quarter. Q: What is the company's strategy in media (such as advertising) and how do they view the situation where peer advertising accounts for 4% - 5% of digital revenue? A: The company currently has additional sources of profit, such as co-branded credit card projects, travel business, and e-commerce advertising revenue (reaching hundreds of millions of dollars). The company sees retail media as an important growth opportunity, but it is still in the early stages and requires the building of infrastructure and capabilities. This is not just about creating a retail media platform for CPG suppliers, but also providing personalized experiences for members. This may be a multi-year plan. The company has launched discount media channels for testing and learning, with 10 activities currently ongoing and more in preparation. The company does not see this as a new revenue stream with a specific profit margin, but rather considers how to reinvest the value created back into members to increase member loyalty and drive sales. Q: What initiatives does the company have in place to increase store throughput, how is entrance scanning data useful, can extending gas station operating hours be applied to stores, and will the company consider extending store operating hours? A: Currently, the company is primarily focused on improving checkout speed and utilizing technology. Entrance scanning data is very helpful for operations, allowing employees to understand foot traffic and adjust the opening and closing of cash registers, improving productivity. The company is also focused on improving self-checkout, with the goal of allowing members to pass through quickly and turn over parking spaces. While extending store hours is not currently being considered, the company will continue to monitor, but there are no plans at the moment. The company has 60 U.S. gas stations in various stages of expansion, benefiting commuters during peak hours. Q: How is the promotion range of the current multi-vendor mailer (MVM Member Value Mailer)? How many members have received the digital MVM? Will it replace the paper MVM? What achievements have been made so far in terms of elasticity or response rates? A: The preparation process for printed MVM is longer, with vendors needing to prepare two months in advance, but it is still effective. Digital MVM offers great flexibility, with adjustments possible even up to the day before release if suppliers want to participate in promotions to drive sales. Buyers will present some products, the promotion period for digital MVM is 10 days, while regular MVM is around 28 days. Digital MVM allows more vendors to participate in communication with members, can drive significant sales, and is a incremental supplement to printed MVM, highly effective. Approximately 40 million people will receive information about related activities in their emails. In addition, the content in emails about warehouse dynamics nearby has a high open rate, and is effective in attracting members when they see new products and special offers from suppliers. This is also the first attempt to use member data for more targeted communication, based on members' shopping frequency and purchases.Reorganize product information such as product types to better meet the needs of members. Early signs indicate that the level of involvement and behavioral changes of members are encouraging.Q: How are the membership fees in other international countries, is it time for an adjustment? Are there any plans to further promote the premium membership plans in other international countries? A: In terms of membership fees, Australia increased its membership fees in the 2023 fiscal year, Mexico also made adjustments in September last year, and recently announced an increase in membership fees in Japan and Korea. The adjustment of membership fees in various countries is not synchronous, but is based on their own plans, the introduction time of membership fees, and previous adjustment situations to decide. In the future, adjustments will continue to be evaluated and made at their own pace. Regarding premium membership plans, they are usually introduced when a single market reaches a certain scale. Currently, there are premium membership plans in multiple Asian markets, Australia, and the UK. In terms of maturity, the penetration rate of premium memberships in Canada and the US is the highest, with significant growth potential in Asian markets, expected to approach the conversion rate of the US and Canada, while Australia and the UK lag behind Asian markets. As more warehouses are opened in new and small markets, opportunities to introduce premium membership plans will continue to be evaluated. Q: How is the average ticket trend in the US for items other than gasoline? Please explain in detail the impact of product mix, quantity of products, and inflation. If the prices of sugar, butter, and flour are dropping, why are baking food prices still increasing? A: The increase in baking food prices is mainly due to the rising prices of eggs outweighing the impact of the dropping prices of sugar, butter, and flour. In terms of product mix, the past 12 months have been satisfactory. Over the past two to three years, the frequency of members shopping in-store has continued to increase. About a year ago, the overall basket size remained stable or slightly decreased, but over the past 12 months, due to the growth of non-food items and providing members with high-quality and cost-effective products, merchants and operating teams successfully reversed the situation, increasing the number of items in the shopping basket and overall basket size. Until this quarter, inflation has been relatively stable, and the increase in average ticket price is mainly due to the increase in the number of items in the shopping basket or members purchasing better and larger items, rather than inflation factors. However, this situation may change this year due to inflation and potential tariff policies. Q: What are the reasons for the decrease in gasoline sales volume in February? A: The description of the decrease in gasoline sales volume is only for February. Looking at the results from the beginning of the year until now, gasoline sales are growing, albeit not significantly. The overall market may be stable or slightly decreasing, but the company has been expanding market share from the beginning of the year until now. Monthly data may be affected by factors such as weather, so it is more important to focus on longer-term trends. Overall, gasoline sales have shown low single-digit growth, which is lower compared to the growth rates of other business segments. Q: How are the new store openings distributed in new markets, existing markets, the US, and international markets this year? A: This year, the company will open 15 stores in the US, 3 stores in Canada, and 7 stores in other international markets, which is a relatively standard scale of store openings for the warehouse business in 2025. Q: Has extending the operating hours of gas stations resulted in additional gasoline sales, and have customers taken advantage of the extended hours? A: The company is currently satisfied with the response from members, and overall usage of the gas stations has improved. However, this is still in the early stages, but so far, the feedback from members has been good. Q: How does the price gap of the company compare to other businesses, especially with inflation on the rise? A: The company considers itself its biggest competitor and holds budget meetings each cycle to review prices, aiming to find ways to reduce costs and prices for members. The company believes that its price gap situation is good, and price adjustments are usually proactive rather than reactive to other businesses. If areas requiring price adjustments are identified in the meetings, the market operations personnel will usually make price adjustments before the meeting. The company believes that focusing on providing the best value and quality for members, and continuously improving themselves, is the most important, which is also reflected in the overall value the company currently provides.