Costco (COST.US) FY26Q1 earnings call: Expect online digital sales to grow faster than overall average sales speed in the long term.

Recently, Costco (COST.US) held its FY26Q1 earnings call. The company stated that website traffic increased by 24% during the quarter, while app traffic grew by over 40%. They are satisfied with the momentum of digital interaction. They expect online digital sales to continue to grow at a faster pace than overall average sales, as more members engage digitally. Costco noted that retail media is an important opportunity, and they are building data and technology platforms to achieve mass personalization. Their primary goal is to enhance member experience and engagement. The company has been trying out media activities on third-party websites, digital TV, and gas station pumps, with early progress being smooth. Their focus remains on creating more value for members, so most of the revenue will be reinvested into lowering prices and enhancing member value. Senior management mentioned that there was slight inflation in food and grocery as well as fresh food during the quarter, at low to mid single-digit levels. Compared to the previous quarter, there was not much change, with various factors offsetting each other and keeping overall inflation levels similar to the past few quarters. During the quarter, the company opened 7 new stores, bringing the total number of stores worldwide to 923. There are still significant opportunities for expansion in domestic and international markets, and they are entering new markets through innovative ways. They have plans to open over 30 new stores annually in the coming years, ensuring balanced development in both domestic and international markets. Regarding members, the company is overall satisfied with the results, including new members, recruitment of young demographics, and the speed of executive member upgrades, with a total membership growth of over 5% year-over-year. Though the growth rate has slightly slowed compared to the past few years, the company is still satisfied with the healthy state of membership growth. The company sees many ongoing opportunities to sustain growth, such as opening 20-30 new stores annually, driving member registration growth as stores mature. Especially in international markets, they expect to see more new member registrations, with the ratio of international to U.S. markets nearing 50-50, providing stronger support for membership growth. In a Q&A session: Q: Market observers have noted that during your tenure, Costco is more willing to embrace technology with different retail models. Given the productivity and efficiency benefits brought by these actions, are you willing to allow financial benefits to reflect in profits? Or do you need more reinvestment back into the business to continue driving growth? A: The application of technology and the company's overall transformation have always been our core focus. Several years ago, we focused on building underlying foundational and core systems to lay a strong foundation for future development. Today, the early technology investments are starting to yield results, with the backend systems gradually being applied to member-facing applications. We believe that technology will be one of the core drivers of the company's future development, with its importance being equivalent to other growth initiatives. However, we will never stop providing the best prices for members and lowering costs. This is what Costco is known for and will always be our main focus. Q: From an absolute level, the company's recent performance has been strong, but the market's expectations for opening day customers are always high. Is the company worried about slowing customer traffic growth and the need to increase investment in price reductions? Additionally, this quarter saw an acceleration in the growth rate of executive members. How does the company view the boost in sales resulting from extended operating hours? Has this measure also driven the speed of executive member upgrades? A: Firstly, regarding sales and overall member growth, it is essential to take a long-term view over the past 6-12 months. Looking at member consumption trends, the overall performance is stable. Members seek value, quality, and novelty, and our procurement team is doing well in these aspects. Monthly sales results may fluctuate due to cyclical factors like tariff uncertainty or port strikes. Looking at sales figures over the past 6 months, the average sales growth has been around 6.5%. Comparable sales for Q4 were 6.4%, and for this quarter, Q1, it was also 6.4%. In fact, over the past 7 months, only 2 months had growth outside the 6% to 7% range. Our performance has shown strong stability in member shopping behavior and consumption patterns. Our core goal is to continue to provide high value and high-quality new products for members, driving growth in membership numbers, shopping frequency, and average spend per member. Currently, across non-food, grocery, and fresh categories, all segments have shown steady growth and are actively gaining market share. We will continue to focus on core member needs while maintaining confidence in the overall stability of performance. Regarding executive members, we are pleased with the response to extended operating hours. We have also added $10 extra benefits for executive members on Instacart. Extending operating hours has had positive effects on member experience and traffic flow. We see a noticeable positive impact of these initiatives on the upgrading of executive members. While it's challenging to precisely track the impact on sales uplift, we believe that the extended operating hours have boosted sales by around 1%. This boost is also expected to offset the anticipated cyclical impacts from gift card and Gold Star sales. We have been able to maintain overall sales growth under those influences. Q: In terms of the US store openings, next year is set to reach the highest number in about 20 years. Will the company adopt new strategies in member expansion? Considering the company is gradually digesting previous short-term member promotion activities, are there new plans for the membership business next year? A: There won't be any specific activities or initiatives. The new store openings next year will include filling stores in mature markets and opening stores in new markets. While most filling stores in mature markets may not bring a significant increase in new members, they can drive sales growth by improving shopping convenience. In new markets where we were cautious before, we now have stronger market expansion confidence and expect to achieve better new member growth. Overall, we will continue our expansion strategy while making flexible adjustments according to different market scenarios. Q: In terms of technology, many companies in retail media hope to collaborate deeply with you on digital advertising. What is your view on this? Additionally, the company is centering its e-commerce platform around the customer. How do you see the development prospects of this business? Lastly, with the application of artificial intelligence in the gasoline business - artificial intelligence has broad opportunities in customer experience, employee efficiency, and inventory management. What is the company's innovation roadmap in this regard for the future? A: Retail media is an important opportunity for us, but we are still in the early stages. We are building data and technology platforms to achieve mass personalization, with the primary goal of enhancing member experience and engagement. We have tried out media activities on third-party websites, digital TV, and gas station pumps, with early progress being smooth. Our focus remains on creating more value for members, so most of the revenue will be reinvested into lowering prices and enhancing member value. In terms of AI, we see many practical opportunities in areas such as global procurement and supply chain systems. We are taking a two-stage approach, focusing on both improving member experience and solidifying our business foundation. Our core goal is to push products to the market at the lowest possible prices, and AI is a crucial asset in achieving this goal. Q: By the FY25 fiscal year, new store sales are projected to reach $192 million per store, compared to $150 million in the FY23 fiscal year. Can you analyze the future growth space of this business? And what measures has the company taken to continuously improve store operational efficiency? A: We see good expansion prospects, with innovative methods of entering new markets (such as collaborating with developers to build affordable housing Costcos in Los Angeles). There are plans to open over 30 new stores annually in the next few years, ensuring balanced development both domestically and internationally. In international markets where penetration rates are low, new stores mainly drive new member growth, while in filling markets like the US and Canada, sales growth can be rapidly increased. Both models bring strong returns on investment in different ways, forming a positive balance for business growth. Q: Soft renewal rates sound better than expected. Could you talk about some of the things you have done to counteract the softness brought by more digital members? A: Yes, you are completely correct. Last quarter, we explained that the renewal rate impact is due to changes in the membership structure as we add more new digital members or have members register digitally through Costco, which changed the membership composition. We have seen that these members are generally younger and have slightly lower renewal rates, thus affecting the overall renewal rate. While this is an objective structural impact, we believe it can be improved through targeted communication - pushing more tailored information to online members close to expiration, reinforcing their awareness of the value of membership benefits. Our member team is focused on providing targeted relevant information to attract and engage these members, ensuring they continue to see the value of membership and truly understand the significant benefits of remaining a member. The better-than-expected performance this quarter is the early work of the team to attract these members and improve renewal rates. This is still in the early stages, and we hope to continue building momentum. It is encouraging to see the impact of these changes. If we purely base it on the renewal rate trends we have seen in the past, we would have expected a slightly larger decline this quarter, but through changes in communication methods with members, we successfully offset part of that decline. Q: Regarding the digital business, could you share some key metrics of success, such as the percentage of members interacting through digital channels? Additionally, how is Costco Logistics doing in terms of delivery? A: We generally do not discuss the percentage of members interacting through digital channels, but we can confirm that this number is steadily increasing. As we shared in the prepared remarks, website traffic grew by 24% and app traffic by over 40% this quarter. We are satisfied with the growth momentum of digital interaction. We expect that with more members engaging digitally, online digital sales will continue to exceed the growth rate of overall average sales in the long term. We are very excited about the upcoming features on our app. These upgrades will further bridge the gap between our offline physical business and online virtual business. In the next 12 months, our app roadmap is very clear, with features such as pre-payment at the pharmacy, online cake ordering, and deli platters. These features are optimized based on member feedback and have shown excellent adoption rates once launched. We believe that with continuous iterations of digital membership cards, the opening of the wallet, and other features, the growth rate of digital business is likely to continue outpacing offline stores. Q: Two questions regarding real estate. First, what is the expansion pipeline like in international markets, especially in Europe and Asia markets (I understand that project cycles are longer)? Second, store renovations - the company has mentioned less about this, can you introduce the store renovation strategy, number of renovations, scale of renovations, and the sales uplift they bring? A: There are good growth prospects internationally. We see strong growth in Europe, particularly in Spain and the UK, countries that will accelerate development. In Asia, we continue to see very strong performance, and we expect progress in that market over the next five years. Our expansion ratio is roughly half in the U.S. and half outside the U.S. Currently, we see more opportunities in Canada, North America, and Mexico, and expect that in the next five years, half of the approximately 30 new stores added annually will be outside the U.S. Regarding expansion and relocation, we typically relocate about 5 to 6 times a year. Sales uplift post-relocation is quite significant. We usually move stores that are unable to serve the market adequately to larger facilities with better parking. By expanding or adding new gas stations and significantly increasing parking capacity, the uplift can reach extreme levels of 50% to 60%. For stores that move to better buildings but already have all the necessary facilities, the uplift can be around 20%. We strategically consider these moves and continuously invest in existing stores to ensure fresh food areas are updated and new ancillary services are introduced. This is part of our pre-planned annual process where we look years ahead and consider a good mix of new locations, relocations, and maintenance of existing operating buildings. Q: About SG&A leverage, this quarter's increase in medical costs prevented the company from achieving cost leverage. Could you analyze the logic behind the change in this cost? In terms of productivity improvements, is there still room for continuous optimization in the coming quarters? A: This quarter, store-side cost impacts stem from four main factors: annual wage investments based on employee agreements, with a March 2025 agreement bringing mid single-digit cost pressure that needs to be offset by productivity improvements; extending operating hours implemented in June; unexpected growth in medical costs this quarter - previously, medical costs increased at a rate closely matching sales growth, but this quarter saw medical costs growing faster than sales growth for the first time; and tax expenditures of 4 basis points related to past years. Overall, this quarter saw a 1 basis point increase in SG&A ratio; if tax expenditures and medical cost impacts were excluded, the quarter could have achieved a mid single-digit bps cost reduction. Looking ahead, wage investments and extended operating hours' costs will persist, and efforts are being made to control medical costs, although high levels may continue. One-time impacts from tax expenditures will not recur. Historical experience shows that when sales achieve mid single-digit growth, the company is likely to achieve SG&A leverage. This quarter, the store team offset the costs of extended operating hours and wage investments through efficiency improvements, indicating that if not for tax expenditures, the quarter could have achieved cost leverage. Therefore, as long as sales maintain mid single-digit growth, achieving cost leverage is quite feasible. Q: You mentioned that inflation levels were similar compared to past quarters. Could you confirm specific data: is there inflation in food categories this quarter as well? How do you foresee the trend moving forward? A: Food and groceries, as well as fresh foods, experienced slight inflation, at low to mid single-digit levels. There hasn't been much change compared to the previous quarter. As mentioned earlier, there are many offsetting factors: beef, seafood, and coffee are currently experiencing inflation, while Shenzhen Agricultural Power Group is facing deflation. Other products like eggs and cheese are still experiencing inflation compared to the same period but at lower rates than earlier this year. These factors balance each other out, keeping inflation levels similar to the past few quarters. Q: Is the growth in comparable sales primarily driven by inflation? A: We believe it is a result of multiple factors working together. The inflation we calculate includes both price increases of the same products and an increase in average spend per member due to members choosing larger package sizes or upgrading to new electronic products/appliances. Therefore, the increase in average spend includes natural inflation of the same products, the "implicit inflation" from upgrading package sizes, and the contribution from upgrading products and sales growth. Q: Although the growth in paid members increased by 5% this quarter, it has slowed compared to the past few quarters. How do you view this? Is it more prevalent in the United States? Is it stabilizing? A: We are overall satisfied with the membership results this quarter, with new members, increased recruitment of young demographics, and an acceleration in the speed of executive member upgrades, resulting in a total membership growth of over 5% year-over-year. Your observation is accurate - while the growth rate has slightly slowed compared to the past few years, some of it can be attributed to the strong growth in the same period last year. However, we are still satisfied with the healthy state of membership growth. We see many ongoing opportunities to sustain growth: opening 20-30 new stores annually, increased member registrations as stores mature, and more new member registrations in international markets. As the ratio of international to U.S. markets nears 50-50, our membership growth will be better supported. We are taking measures to improve renewal rates and are committed to enhancing member value, such as extending operating hours, Instacart benefits, and the 5% cash back with credit card for gas purchases. While the growth rate has slightly slowed compared to previous years, we are satisfied with the growth momentum and opportunities for continued growth. Q: Regarding store expansion, what are your latest thoughts on the long-term potential in the U.S. and globally? Additionally, are your efforts on price reductions focused only on Kirkland products? A: Looking at the 5 to 10-year plan, we still see good growth opportunities, aiming for over 30 new store openings annually. We forecast growth opportunities in all current markets and regions over this 5 to 10-year plan period. Generally, we expect roughly half (possibly slightly more) of the new stores to be in the U.S., and the other half (slightly fewer) in Canada, Mexico, Europe, Asia, Australia, and other markets, balancing the distribution quite evenly. About the second part, the focus on Kirkland Signature products is because we have a deep understanding of the cost of these proprietary goods. We continually strive to lower costs for members and delay price increases as much as possible. Our procurement and category managers work closely with suppliers to review cost bases and capitalize on cost reduction opportunities through global procurement for economies of scale or more efficient operational methods (without compromising on quality). These are good examples of our team finding and seizing opportunities to lower prices and enhance member value. Q: Regarding personalization efforts, these measures seem to have shown promising early results. How much further do you need to expand? Are all members covered at present? Can you share specific examples of the conversion rates or average spend uplift brought about by these personalized changes? A: We are satisfied with the progress in personalization efforts. We are using member data to find ways to enhance member experience, increase convenience, and help them see the most relevant information. There is still a substantial roadmap and opportunities for continuous improvement as our journey is still relatively early. We are learning what members like and how we can fine-tune and improve these communications and their presentation. There are still many parts of our roadmap that can enhance the personalized relevance of member experience - whether they are viewing products on channels like MVM or receiving emails from us. Many aspects still have room for improvement. Our focus is more on how these efforts drive overall member experience and sales growth. They aim to improve how members interact in-store or online. We prefer to focus on whether it has driven an improvement in member engagement, whether it helps boost digital sales (we expect overall growth to be faster than in-store operations) and whether it has brought an overall increase in member engagement. We are very satisfied with the results achieved so far. Q: In terms of renewal rates, you mentioned that they may continue to decline over the next few quarters. Is this due to conservative estimates, as you have been successful in mitigating this trend? Additionally, if we exclude the younger member demographic, is there an improvement in renewal rates? Could you provide a deeper analysis of renewal rate dynamics? A: The impact on renewal rates is indeed attributed to the phenomenon we mentioned earlier: the addition of more typically younger digital registered members. They generally have lower renewal rates, affecting the overall renewal rate and leading to a slight decline in recent quarters. Our goal is to quickly stop and reverse this downward trend. We are pleased with the improvements made last quarter through more targeted and relevant communication with digitally registered members in this channel. Our goal is to quickly halt and reverse this decline trend, but our changes have been implemented for only a quarter. It needs explaining that the renewal rate for digitally registered members is still lower compared to in-store sign-ups, and we aim to bridge that gap quickly. We wish to transparently share that there is still work to do. As