管理層發言
Ladies and gentlemen, thank you for standing by. My name is Abby, and I will be your conference operator today. At this time, I would like to welcome everyone to the Costco Wholesale Corporation's Third Quarter 26 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. If you would like to ask a question during that time, simply press star followed by 1 on your telephone keypad. If you would like to withdraw your question, press star 1 again. Thank you. I would now like to turn the conference over to Gary Millerchip, chief financial officer. You may begin.
Good afternoon, everyone. And thank you for joining us for Costco's third quarter 26 earnings call. I would like to start by reminding you that these discussions will include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements involve risks and uncertainties that may cause actual events, results, and/or performance to differ materially from those indicated by such statements. The risks and uncertainties include, but are not limited to, those outlined in today's call, as well as other risks identified from time to time in the company's public statements and reports filed with the SEC. Forward-looking statements speak only as of the date they are made, and the company does not undertake to update these statements except as required by law. Comparable sales and comparable sales excluding impacts from changes in gasoline prices and foreign exchange are intended as supplemental information and are not a substitute for net sales presented in accordance with GAAP. Before we dive into our financial results, I am delighted to say that Ron Vachris is once again joining me for today's call. I will now hand over to Ron for some opening comments. Thank you, Gary.
Good afternoon, everybody, and thank you for joining us today. I will make a few comments on current events and provide a brief update on our strategic priorities before turning the call back over to Gary. Against the backdrop of ongoing macro uncertainty, our focus on providing quality goods and services at the lowest possible price continues to resonate strongly with our members. Nowhere has this been more apparent in the third quarter than our gas business, as events in the Middle East have had a significant impact on product supply and gas prices. Our focus, as always, is to be there for our members by staying in stock and offering the best value. The result was record-breaking volumes. All three 4-week fiscal periods of the quarter set successive all-time company volume sales records, with the final five weeks of the quarter becoming our top five volume weeks ever. Our gas team performed exceptionally well to manage this unprecedented demand, which required multiple daily gas deliveries to many locations. The high consumer price sensitivity, which fueled these record volumes, also drove many members to use our gas stations for the very first time in the third quarter. We believe this will drive even greater loyalty with these members in the future as members who use our gas stations typically spend more with us in the warehouse. We are closely monitoring the longer-term inflationary impact of higher oil prices as well as the future impacts of tariffs. Our buyers continue to demonstrate their ability to adapt, and are using their significant experience and expertise to try to reduce the impacts on prices for our members. Our goal is to be the first to lower prices and last to raise them. Gary will share some examples later on the call where we lowered prices this quarter. We are also able to bring greater value to our members through many exciting new Signature items in the third quarter. On the topic of tariffs, we started submitting our refund claims for the Section 301 tariffs. We are doing this through the process set up by the U.S. Customs and Border Protection. These submissions will go in over the next few months and, based on what other claimants have experienced, should start receiving refunds on approved claims on a rolling basis over the following two to three months. As we have mentioned before, our plan is to return to our members in some form the portion of tariffs that were passed on to them. How much we return and when depends on a variety of factors, including how much refund money we receive and when it arrives, as well as developments in the lawsuit filed against the company regarding the return process. Turning to progress with growth priorities, our real estate operations team continues to focus on increasing our pipeline of new warehouses both domestically and internationally as we target 30-plus net new openings per year in the coming years. In the quarter, we opened four net new warehouses, including three in the U.S. and one additional Canadian business center. Those openings brought our total warehouse count to 928 worldwide. We currently expect to have 26 net new openings in fiscal year 26, down two buildings from the prior call, with those two buildings now set to open in fiscal year 27. So far this year, we have also completed two relocations with one more planned in Q4 as we continue to relocate select high-volume warehouses to larger locations with more parking and expanded gas stations to provide a better member experience and drive more volumes in these warehouses. In digital, we are making meaningful strides to deliver a more seamless and convenient experience for our members across the warehouse and online. As a result of our investments in technology and the commitment from our employees to use this technology to deliver a great member experience, we are seeing a significant improvement in the speed of checkout. The enhancements we have made include improvements to the mobile wallet, the introduction of a digital membership card with quick access on the Costco app, and the rollout of our shopping cart prescan tool internationally. The pay station pilot I spoke about last quarter has also been successful, and we are now incorporating this technology into our new warehouse openings and high-volume buildings. We are also enhancing the e-commerce experience for members and recently rolled out same-day delivery services in Spain and France. Same-day delivery powered by our third-party partners has become a highly effective way to deliver more convenience to our members. Average same-day delivery time in the U.S. is now less than 45 minutes, and the average member satisfaction rating is 4.8 out of 5. This part of our business is growing at an even faster rate than our digital business overall and is a strong driver of loyalty, as it is often our highest-spending members who are using the service. Finally, as we learn more about how consumers are embracing AI in their shopping habits, we are working with leading AI companies to improve the visibility of our values to current and potential future Costco members. We believe AI is changing how consumers research products, and it has the potential to be a significant opportunity for Costco given our pricing authority and our focus on quality. With that, I will turn it back over to Gary to discuss the results for the quarter, and I will jump back on during Q&A to field some questions.
Thanks, Ron. In today's press release, we reported operating results for the third quarter of fiscal year 26, the 12 weeks ending May 10. As usual, we published a slide deck under Events and Presentations on our investor website with supplemental information to support today's press release. Net income for the third quarter came in at $2.19 billion or $4.93 per diluted share, up 15% from $1.9 billion or $4.28 per diluted share last year. Net sales for the third quarter were $69.2 billion, an increase of 11.6% from $62 billion in Q3 25. Comparable sales were up 9.8%, and 6.6% adjusted for gas price inflation and FX. Excluding gas sales entirely, and adjusting for the impact of foreign exchange, comparable sales were also up 6.6%. Digitally enabled comparable sales were up 21.5%, 20.8% adjusting for FX. Our segment breakout of comparable sales is disclosed in both our earnings release and the supplemental slide deck. In terms of Q3 comp sales metrics, FX positively impacted sales by approximately 1% while gas price inflation positively impacted sales by approximately 2.2%. Traffic or shopping frequency increased 2.4% worldwide. Our average transaction or ticket was up 7.3% worldwide, and 4.2% excluding gas price inflation and changes in FX. Moving down the income statement to membership fee income. We reported membership fee income of $1.37 billion, an increase of $133 million or 10.7% year over year. Adjusting for FX, the increase was 9.9%. The September 2024 U.S. and Canada membership fee increase accounted for a little more than one-quarter of membership income growth. Excluding the membership fee increase and FX, membership income grew 7% year over year. This was driven by continued growth in our membership base and upgrades to executive memberships. At Q3 end, we had 41.2 million paid executive memberships, up 9.6% versus last year. This quarter, we launched our executive member program in China and have seen strong early adoption in the market. We ended the quarter with 82.9 million total paid members, up 4.1% versus last year, and 149 million cardholders, up 4% year over year. In terms of renewal rates, at Q3 end, our U.S. and Canada renewal rate was 92.2%, up 10 basis points from last quarter. And the worldwide rate came in at 89.7% unchanged from last quarter. As previously shared, members who sign up online on average renew at a slightly lower rate than warehouse sign-ups. As this population has grown as a percentage of our total base, this creates some downward pressure on the overall renewal rate. In Q3, it was pleasing to see that our focus on increasing the renewal rates of these members through targeted digital communications and retention strategies more than offset the negative impact from this mix change in our membership base. Turning to gross margin, our reported rate was lower year over year by 21 basis points, coming in at 11.04% compared to 11.25% last year. Excluding gas inflation, the gross margin rate was higher by 1 basis point. Core was lower by 46 basis points and lower by 29 basis points excluding gas inflation. In terms of core margins on their own sales, our core-on-core margins were lower by 9 basis points. This decrease was due to slightly lower margins in fresh and food and sundries, where we invested in lower prices for our members on several everyday items such as eggs and beef. Transportation costs were also a headwind in the quarter due to higher gas prices. The significant difference between reported core margins and core-on-core margins was primarily due to mix changes as we saw gas, e-commerce and pharmacy sales grow at a faster pace than core merchandising sales. Ancillary and other businesses gross margin was higher by 9 basis points and 14 basis points excluding gas inflation. This was driven by higher sales penetration in e-commerce and pharmacy, partially offset by a lower gross margin rate in gas. LIFO positively impacted the rate by 14 basis points both with and without gas inflation. We had a $44 million LIFO charge in Q3 this year, compared to a $130 million charge in Q3 last year. This quarter's gross margin rate benefited 2 basis points from lapping the catch-up accrual in Q3 last year for the increased employee vacation days included in our March 2025 employee agreement. Moving on to SG&A. Our reported SG&A rate was lower or better year over year by 20 basis points, coming in at 8.96% compared to last year's 9.16%. Excluding gas inflation, SG&A was lower or better by 2 basis points year over year. The operations component of SG&A was lower or better by 12 basis points, but worse or higher by 3 basis points excluding the impact of gas inflation as underlying improvements in productivity were offset by higher healthcare costs. Central was lower or better by 3 basis points and lower by 1 basis point excluding the impact of gas inflation. Equity compensation was flat and higher or worse by 1 basis point excluding gas. This quarter, SG&A also benefited 5 basis points from lapping the catch-up accrual in Q3 last year for higher vacation days in our 2025 employee agreement. Below the operating income line, interest expense was $32 million compared to $35 million last year, interest income was $130 million versus $95 million last year, driven by higher cash balances and FX and other was a $25 million benefit versus a $10 million loss last year largely due to changes in FX. In terms of income taxes, our tax rate in Q3 was 25.4% compared to 26.2% in Q3 last year. Turning now to some key items of note in the quarter. Capital expenditure in Q3 was $1.41 billion. We estimate CapEx for the full year will be approximately $6.5 billion as we continue to invest in building a larger pipeline of new warehouses, remodeling our existing warehouses to drive continued growth in high-volume buildings, expanding our depot network to support operational efficiency, and in enhancing the member digital experience. In terms of merchandising highlights, as Ron mentioned in his opening comments, gas prices had a major impact on the quarter, with our members allocating a greater proportion of their total spend to gas. At the same time, we saw very robust comp sales results excluding gas as our combination of merchandising, quality, value, and newness continues to resonate with members. Fresh comparable sales were up in the high single digits in the quarter, led by meat and bakery. In meat, we saw strength in both premium cuts of beef and lower-cost proteins such as ground beef and poultry. In bakery, we continue to see success with the launch of exciting new items including a variety of seasonal pastries and cookies. Non-foods comp sales were up in the high single digits in Q3. Top performing departments were gold and jewelry, small electrics, tires, home furnishings, majors, and health and beauty. Self-care and wellness items performed extremely well during the quarter, including fragrances and hair and skin products in the health and beauty and small appliances departments. We also saw members wanting to splurge on higher value self-care items where the quality and value is compelling. For example, we experienced almost 50% sales growth in saunas and massage chairs during the quarter. In food and sundries, comp sales grew in the mid-single digits led by packaged foods and candy. While egg price deflation was a headwind to sales, this was partially offset by significant growth in other items such as protein snacks and protein bars. Kirkland Signature is also driving growth in food and sundries. We continue to innovate with new KS items, offering savings of at least 15% to 20% to the national brand equivalent with equal or better quality. Q3 launches included our KS energy drink, KS ultra-filtered milk, KS sea salt popcorn, and KS oven-roasted chicken dog food. Our goal is to be the first to lower prices where we see opportunities to do so, and a few examples this quarter included KS Crispy Wings from $16.99 to $14.99, KS Milk Chocolate Almonds from $19.99 to $18.99, KS golf balls from $32.99 to $29.99, and KS king-size sheets from $89.99 to $79.99. In ancillary businesses, comp sales were up in the mid-20s. Pharmacy led the way and saw significant market share gains in the quarter. In addition to our experienced pharmacists taking great care of our members, a number of factors are contributing to this growth. These include increased GLP-1 demand and inclusion of Wegovy and Ozempic in our Member Prescription Program, great value on pet medications, acceptance of Medicare D over-the-counter flex cards, and expansion of our mail order and specialty pharmacy offerings. Gas comps were in the positive high twenties, driven by a price per gallon increase year over year as well as an acceleration in volumes. Turning now to inflation. Overall, inflation increased slightly in Q3, largely because of higher gas prices. This was offset by lower inflation in food and sundries and fresh, primarily due to deflation in produce, eggs, and dairy. Inflation increased slightly in nonfoods, and we are anticipating further inflation in a number of nonfood categories as higher resin costs start to flow into cost of goods. As always, our buyers are working hard to mitigate the impact of cost increases. The supply chain is generally stable, and our merchants feel good about our inventory position heading into the summer. We have relatively low inventory exposure to shipping issues stemming from the situation in the Middle East, but we continue to monitor the situation closely. In digital, we saw strong member engagement in Q3, with site and app traffic up 37%. Pharmacy, gold and jewelry, home furnishings, tires, special events, housewares, and majors all grew double digits year over year. Delivering a more personalized experience for our members is a key focus, and we continue to make progress in this area. In Q3, our personalized product recommendation carousels delivered conversion rates three times better than our typical conversion rates and contributed just under $5 billion of e-commerce sales. As Ron shared earlier on the call, with consumers increasingly using AI to research products and services, we believe this has the potential to be a significant sales opportunity for Costco. We are now leveraging AI to enhance our product pages online, which in turn is increasing our relevance with the large language models. While the volume of traffic generated from AI search is still low, we saw triple-digit growth in Q3, and this activity had the highest conversion rate of all traffic coming to our site. Finally, as we accelerate our digital capabilities, we are also broadening our reach in retail media. Q3 marked the launch of a new collaboration with Google Commerce and Media and YouTube. Launching this partnership will make it easier for brands and agencies to collaborate with Costco retail media and is a significant milestone on our journey towards increasing our share of retail media revenue. That concludes our prepared remarks. In terms of upcoming releases, we will announce our May sales results for the four weeks ending Sunday, May 31 on Wednesday, June 3 after market close. We will now open the line up for questions.
分析師問答
Thank you. We will now begin the question-and-answer session. If you have dialed in and would like to ask a question, please press star 1 on your telephone keypad to raise your hand and join the queue. If you are called upon to ask your question and are listening via speakerphone on your device, please pick up your handset and ensure that your phone is not on mute when asking your question. To be able to take as many questions as possible, we ask that you please limit yourself to one question. Again, it is star 1 to join the queue. And our first question comes from the line of Michael Lasser with UBS. Your line is open.
Good evening. Thank you so much for taking my question. Recognizing and fully understanding you do not provide guidance. But given that new membership growth is a critical driver of your overall same-store sales growth as these new customers ramp their usage of the warehouses and this metric has slowed to 4.1%, which is the lowest level in some time, should we keep our expectations around your same-store sales growth outlook for at least the near term pretty modest, especially when you consider that you will be lapping some of the changes to the club hours in the coming weeks? Thank you so much.
Hi, Michael. Thanks for the question. I guess I will cover that in a couple of different parts. I think, first of all, maybe taking a step back on the main part of your question around membership and what we are seeing there in terms of growth. You know, overall, we were pleased with the results in the quarter. As I think you heard us say in the prepared remarks, when we look at membership growth, if you back out the fee increase and foreign exchange, we were up 7% overall. A big part of that was due to the continued engagement we see with executive members growing, and that was up over 9% during the quarter. And so maybe that is the first point to tie to your comment around sales as you perhaps know when we see members who are at an executive level they generally spend more with us and visit more frequently. So that is a really positive dynamic in terms of impact and potential for future health and growth in terms of membership spending. And then as you mentioned, we saw paid membership growth up just over 4%. So those two together were what combined to create the 7% growth in the membership rate. We were also pleased to see that the renewal rate has sort of normalized if you like now as we started to now see the mix mature of digital members coming into the membership renewal rate and as we start to implement and see the benefits, I should say, of more targeted marketing and retention strategies driving a leveling out, if you like, of that membership renewal rate. And our goal, of course, is to continue to improve that rate as we execute more of those communication and targeting marketing efforts with our members. As you mentioned, we have seen some slowing in the year-over-year membership growth in recent quarters. We attribute that to a number of factors. One would be we have not been opening new warehouses in major new markets. So if you think about some of the growth we have had in prior years, in Asia in particular, when we opened new warehouses in Japan and in China as an example, we tend to see an outsized growth in membership. But often, the renewal rate on those members is much lower because we have a big element of new consumers coming into membership to really explore the experience and often coming from a much longer distance and further away from the warehouse. So we have not seen a major new opening in a new international market for a while, which definitely has an impact. And we are cycling some stronger growth from sign-ups from a year ago as well. So we think the 4% to 5% is a more normal rate of growth when you do not have the benefit of a large increase that is linked to some kind of special event like COVID or a new market entry. But overall, I would say with the renewal rate leveling out and with the year-over-year growth that we are seeing in new member sign-ups, we feel good about the health of membership, and we think there is a lot of opportunity for continued growth in the future as well.
And just as it relates to the same-store sales growth given that is a critical pipeline, especially as you lap some of the big outsized drivers over the last few years? Thank you.
Yeah. I mean, I think in general, I would say, as you mentioned, we do not give guidance on what we expect future trends to look like. We do expect to continue to grow our market share as we deliver great value for members and continue to provide great quality items. I would say in broad terms, what we are seeing at the moment is just a continuation of the trends that we have seen in really the last year or so. Members being very willing and having the capacity to spend, but have very high expectations around quality, value, and newness. And our value proposition seems to be resonating really well in that regard. As you know, we have been cycling some fairly major gift card programs and gold sales is now being cycled year over year. And yet, as you look at the recent results that we have seen in our sales, we continue to comp excluding gas in that 6% to 7% range, and we have not really seen any variation from that performance as you look at membership spend and membership growth over the last year or so.
Thank you very much, and good luck.
And our next question comes from the line Simeon Gutman with Morgan Stanley. Your line is open.
This is Pedro Gill here on for Simeon. Thank you for taking our question. I would like to ask you first about the core-on-core margin, which was down 9 basis points as you are lapping against some of the very strong gains that started four quarters ago, more or less. Should we recognize this as a sign that you are taking strategically a more aggressive value posture to gain share and on some of the trends in the consumer out there? And are you seeing something similar from the competition?
Yes. Thanks for the question. I would probably take a step back as we shared before on gross margin when we talk about the rate year over year. We look at it overall. I look at the quarter and focus for us is really on the gross margin rate ex gas inflation or deflation. And during the quarter, we saw a 1 basis point improvement in the results. If you recall, and you mentioned a moment ago, we are actually cycling two years where we saw some of the highest growth we have seen in gross margin rate in fiscal year 2025 and 2024 in Q3 in particular. But as we shared previously, while we provide detailed breakdown of our gross margin rate, we really do tend to focus on that measure of gross margin overall, ex-gas inflation or deflation because we tend to manage the business more holistically than looking at one individual component of the gross margin. With that being said, there were a lot of moving parts during the current quarter. First of all, we had higher top-line growth overall, but that came with a significant shift in the composition of sales. We had higher sales in gas and added to e-commerce and pharmacy, and that did create a fairly significant shift in the mix. So that has an impact on the core rate overall. In terms of core-on-core, we knew we were cycling in the quarter a fairly large LIFO charge from last year. We saw it as an opportunity recognizing that members were dealing with higher gas prices to really invest in increasing value to the member partly through the widening of our value in gas in the market to drive volume growth and more gallons and traffic to our gas stations, but also in everyday prices as I mentioned in prepared remarks, with eggs and meat in particular, really keeping the value very strong for our members. So we saw the option to do that because of the benefit that we were cycling from the prior year and we felt it was the right thing to do to continue to drive top-line growth in the business and deliver value for our members. I would say in general to the final part of your question, we tend to view ourselves as our toughest competitor. So really, the majority of the price investments that we are making are because we really want to ensure that we are delivering that great value for our members and when we have the opportunities to invest to drive top-line growth while continuing to sustain our gross margins, then we look for opportunities to do that.
And as a follow-up, if I could ask you about the components of your comp between traffic and ticket. The ticket component is particularly meaningful. If you could parse out for us how much of that is same SKU, comparable pricing versus mix, versus larger baskets, that would be very helpful.
Yeah. It is really a combination of all of the above. We are seeing an increased number of items in the basket. We are seeing some inflation in the basket. But remember, part of the inflation is moving items to higher bigger-sized items or better quality items or higher value. So we do not tend to parse out the individual elements, but it would be a combination of both.
And our next question comes from the line of Christopher Horvers with JPMorgan. Your line is open.
Thanks. Good evening, guys. So I wanted to pick up the pricing thread. You mentioned in prepared remarks running prices lower ahead of expected cost declines. One of your peers talked about sort of eating some tariffs maybe passing through the price earlier even though they had pre-tariff inventory. My big question is there a change in the rationality of the overall market or is this simply just something opportunistic in a moment in time given the backdrop that we are sitting in?
Yeah. I think, Christopher, I would answer the question a couple of ways and Ron may want to add some color as well. I think maybe taking a step back and talk about the competitive landscape, we think of the market as being very rational currently. We tend to be our own biggest competitor with our goal always to maintain that pricing authority and to be there for our members. As I mentioned a moment ago, because of the impact of higher gas prices, we felt it was important to continue to deliver more value for our members. Maybe the broader comment I would make is around the impact on gross margin for us. The rate will fluctuate quarter to quarter. We really would encourage you not to get too fixated on one individual quarter or one element of gross margin. We tend to manage it more holistically and look at how can we keep investing and driving value and driving top-line for our members. This quarter, as I mentioned, we invested more in some everyday items like beef and eggs because we had the opportunity to do that with the LIFO charge that we are cycling. And we are also able to widen our gaps in gas. But overall, when we look at the trajectory of our gross margin rate over the last 12 to 24 months, generally it has been stable, talking about the gross margin rate ex gas inflation or deflation. It has generally been stable with a slight improvement, and our Q3 result was very much in line with that trajectory, and we have the opportunity to have that capacity to be able to invest more in value for our members as we were seeing the impact for them on gas prices.
And to add to what Gary said, the moves that we have made on pricing were strategic, not reactionary. These are things that we will see more of in the future when warranted. One of your examples was you saw some inventory that we had during higher tariffs. Now we are getting the lower-priced goods in. We may go down earlier on those to get into those lower-priced goods quicker. We were quick on eggs when that commodity started dropping. We just use pricing as a lever. We have long said we are the first to come down and the last to go up. This period was a good example of getting into lower-cost goods where we can and lowering prices for our members.
That makes sense. And then historically, we have thought about a total comp of 4% to 5% to start to see core leverage on SG&A. You did something like a nine, I think, and because FX helps. But you actually delevered three basis points. Is there something changing there? You mentioned healthcare costs. To what extent maybe freight impacted that flow-through, and any commentary about how we think about the future? Thanks very much.
Just briefly on SG&A, I would not say anything has really changed in our view of that. If you look at the key components in operations, we were probably about mid-single-digit leverage in core operations, but with the healthcare cost increases and a couple of small one-time items, they more than offset that impact. And then in central, also had a couple of legal settlements and reserves that would have impacted the central numbers as well. So, of course, there is always the possibility that these items can occur unexpectedly each quarter, but outside of those, we would have seen a reasonable amount of leverage during the quarter and more consistent with that idea of mid-single-digit comps delivering that level of leverage. To your point, it would be excluding gas, of course. We typically do not see the same level of leverage on gas, but on the core operations, that is what we would expect to see.
Makes sense. Thanks very much.
Our next question comes from the line of Oliver Chen with TD Cowen. Your line is open.
Ron and Gary. Gary, as we think about retail media, your business model is quite different with the SKU efficiency from other players. What are the parameters and or guardrails you are thinking of in balancing member satisfaction against the big opportunity, and it sounds like you are at a nice turning point with that opportunity. Also, Ron, as you continue to push for innovation and being your own best enemy against great multiyear performance, what are the trade-offs in terms of expenditures or not really? Is it very capital light in terms of improving the checkout and automation, as well as implementing AI to further make customers happier, yet using technology and distribution and speed? Thank you.
Oliver, on the retail media question, I think for us it is fairly simple: the member always comes first. Our focus with retail media, first and foremost, was to build more of the personalization capabilities to be able to deliver more relevant messaging to members that help improve the experience and save our members time and money. As we are starting to implement those capabilities, we were also introducing some media activity on third-party sites to really build the capability and to show our CPG partners what was possible with Costco and retail media. As we are now scaling up those personalization capabilities we will continue to look at retail media through that lens: how does retail media help us deliver more value, more relevant experiences for our members, and how can our CPG partners participate to deliver a better return on their marketing spend. As we introduce more of those capabilities, we would expect retail media to ramp up and increase the value we generate there, but it would definitely be through the lens of the member experience and member value. And, of course, everything we do, a large portion of that value is reinvested in the member to deliver more value for them and better pricing so we can drive top-line sales.
And on the technology spend, I would consider it capital light from what we are seeing. We are seeing great returns on the investments. Gary spoke about the sales that we are leveraging on e-commerce. There is a cost to that AI, but it is being offset by greater sales and great leverage that we are seeing there as well. On the operations side of things, the technology we are using on the front ends has been very accretive to higher productivity. I think his points on the SG&A leverage is a good reflection of the benefits we are seeing with shorter lines, faster throughput for our members, and in turn lowering our payrolls in these areas as well. So we see it is not a heavy lift for us in capital at this point.
And our next question comes from the line of Chuck Grom with Gordon Haskett. Your line is open.
Hi, Ron. Hi, Gary. So about $45 in cash per share on the balance sheet. Can you zoom out and help us think about capital allocation, including plans for a special dividend and also how you may look to deploy future tariff refunds?
Sure. On the capital and financial strategy, really very consistent in our mind. Our number one priority is to keep investing in the business to drive growth. You heard me share in the prepared remarks—we are focused on accelerating new warehouses, remodeling warehouses where we have the opportunity to really expand capacity and support continued growth particularly in those capacity-constrained locations, expanding the depot network. We are also doing some investments in manufacturing capabilities where they can support KS growth, things like expanding hot dog capacity and coffee roasting in some of these areas. And then, of course, digital member engagement and investing in capabilities there to enhance the member experience. As we make those investments, that is the top priority. We are also growing the regular dividend over time, as you know, and we continue to buy back stock at a level that avoids dilution from the executive stock grants that we issue each year. We are in a position where we continue to generate excess cash beyond those priorities, and we believe that at our current valuation, a special dividend is typically the most effective way to return excess cash without giving up the flexibility to keep investing in growth where we see opportunities to do that. Our cash balances continue to grow, and we will evaluate what we think is the appropriate timing and approach to deal with that situation. It is important to remember the last time we did a special dividend, the stock price was materially lower than it is today. So to be at a similar yield, our cash would need to be at a higher level than it was at the last special dividend. But we will continue to review those options with our board. No plan to share at the present time, but we will keep investors posted as we continue to evaluate.
Okay. Great. Fair enough. And then just on real estate, you talked about relocating a few stores this quarter or maybe this year. Can you just help us think about the opportunities set and just remind us what the threshold from a sales volume you typically use when you want to relocate a club?
You know, it is really based on the existing facility. We have some earlier Price Club locations in the Northeast that were smaller facilities with limited parking. When they hit a threshold of the average volume of the warehouse that we are seeing in the U.S., it triggers the time that we see opportunities to grow the sales in that market. So it is hard to say there is any one dollar amount around the world that we use to trigger that. It truly is the size of the business, the size of the facility, and how we are servicing our members in the gas stations, parking lots, and the traffic inside the warehouse. So it is a moving target as we see opportunities.
Great. Thanks, guys.
And our next question comes from the line of Scot Ciccarelli with Truist. Your line is open.
Hi, guys. Thanks for the time. It seems like two of your biggest competitors worldwide, but certainly in the U.S., Walmart and Amazon, continue to ratchet up the competitive bar on delivery speeds. Given that fact and the potential increase in agent commerce, it seems like delivery capabilities and speed will become even more important over time. Do you think Costco will ultimately need to build out your own first-party delivery? Do you think you can fully rely on third-party partners to compete in that kind of environment? Thanks.
You know, I think that we will continue to look at that. A few years back, in 2020, we made an acquisition to get into the big and bulky delivery because we felt there was a significant opportunity in shortening the delivery times there. That has been very productive for the company and delivered a great example. Currently, on our same-day delivery process, we have very good third-party partners that, as I spoke to in the opening comments, have high satisfaction among our members and we are averaging 45 minutes or less when a member requires something to be delivered that quickly. So at the current time, we are happy with the partners that we have. We continue to evaluate how we can improve delivery times across the network and across the world. That will continue to be reviewed if we need to get further vertically integrated in that business.
Understood. Thank you.
And our next question comes from the line of Zihan Ma with Bernstein. Your line is open.
Hi. Thank you for taking my question. I have one on traffic. Understanding there was a lot of calendar shift in Q3, but it looks like traffic was kind of below the historical trend at least for the first part of Q3 and then started growing into April. Can you help us understand, one, how much of the April acceleration was benefiting from the gas inflation and driving more traffic into stores? And two, is there a structural way to further improve traffic especially given a lot of your stores may already be at capacity, so you may not physically be able to attract more traffic growth from here? Thank you.
Sure. On traffic, I would say it is important to think in our minds to take a step back and look at the last 12 months or so because we have seen a mix change over time. If you think back a year or so ago, we were sort of flat to slightly negative on basket size and we have seen an increase in basket and we were up mid-single digits on traffic. What we have seen is a continuation of the same overall comp trend that we were seeing then, but we have seen, as we cycled some of those lower average basket size months, basket sizes increase, and we have seen traffic continue to grow, roughly in the low single digits. So still growing healthily, but definitely a little bit lower than it was and a sort of normalization over two years. It is a little bit difficult to look at individual months and try and piece too much together from those. I do think there is a lot of work that we have done over recent quarters to create more opportunity for members to visit more frequently, whether it was the extended hours for our gas stations before the recent growth in gas that we have seen with higher prices, the extended operating hours in our warehouses that we launched just under a year ago, the work Ron mentioned earlier around remodeling and expanding warehouses to create more capacity with parking lots and gas stations. So I think there is a lot of focus to make sure that we maintain that trajectory in traffic, but I do think there are going to be puts and takes in individual months because of different dynamics around member behavior. At the period you were talking about, for example, we definitely had a period of time where members were stocking up on items as they were concerned about the impacts of what tariffs might mean on costs. I think you see some of that showing up in the individual month-to-month data. Overall, we feel good about the traffic growth that we are seeing when we look at it on a two-year basis and on an individual year basis as well.
To add to what Gary is saying, as he spoke about in our capital expenditures, acquisitions of adjacent properties to our warehouses expanding parking lots and the technology throughput are also key drivers of traffic. If we can get members processed through much quicker, we are turning parking spaces much faster. That is resulting in better traffic in those high-volume warehouses. Then we strategically look at infill locations. We have proven that when we open a building in an existing market, our build back in the existing buildings when we relieve the pressure comes very nicely. So we see great build back of traffic in those warehouses that are relieved of the volume as we infill strategically around the world.
Maybe just to mention too, you asked about gas. Gas traffic is not included in our traffic number. I would say that generally a little less than half of our members are visiting the warehouse when they visit the gas station. I would not say we have seen a dramatic change in our results in the third quarter around traffic overall as a result of that. We think partly because many members are increasing their frequency and visiting the gas station to top up in between. Over time, it is a great way to build loyalty. Our members that are engaged in gas with us are generally visiting more frequently overall, spending more with us overall, and renewing at a higher rate. So we do think it is a good barometer of long-term growth for the business as we continue to drive engagement in gas.
That is very helpful. Thank you.
And our next question comes from the line of Peter Benedict with Baird. Your line is open.
Hey, guys. Thanks for taking the question. I know we are going to get the main numbers in next week, but just curious if you would comment on any behavioral changes or changes in trend that maybe you have seen thus far. Obviously dynamic environment out there, so everybody's kind of attuned to that. And as related to that, maybe a bigger picture question around GLP-1s. You talked about it in the prepared remarks. I am curious how it is influencing either any category performance that you have got or maybe how you are thinking about leaning into different categories as you think out over the next several months and years. Thanks so much.
Thanks, Peter. As you mentioned, we will release sales next week, so I will not get into any short-term trends. But I will maybe bridge back to a couple of comments I made earlier: we are generally not seeing any major change in members' behavior, with the caveat of gas, which has had a major impact on overall member spend because of higher prices. We have widened our gaps in terms of price to make sure we are there for our members, but that is something that is very high on members' minds. In terms of core merchandising, very consistent: quality, value, and newness are extremely important and the things our buyers are focused on every day, and we continue to see that combination resonate. A couple of examples across nonfoods, foods, and fresh: in nonfoods, everyday shows up in tires, majors, and health and beauty where we have great value for our members they can take advantage of every day. On the excitement side, finding new gold items and special events bring members excitement—self-care items, small appliances are doing well. In fresh, premium meat still doing extremely well because of the value and quality we offer, but unit growth is extremely strong in ground beef and poultry as well with the everyday value we are offering. Regarding GLP-1s, the biggest thing we are seeing is our pharmacy value helping members take advantage of those drugs in a cost-effective way. In food and sundries, anything protein right now is doing extremely well—protein snacks, protein bars, beef sticks. We launched our own Kirkland Signature Beef Stick that is doing tremendous volume and offering tremendous value to our members. So that is an example of an area where we are leaning in because of what we are seeing with our members and the value and quality they are looking for.
On the merchandising front, I met with several large CPGs this last quarter with our head merchant, Sarah, and they are making nice pivots based on the needs of the GLP-1 customer. We just launched the Kirkland Signature Ultra-Filtered Protein Milk in our dairy and it has taken off extremely strong. Things with fiber and magnesium are also notable. I think our buyers are right on top of the halo effect of GLP-1s and the needs of members. I am quite impressed with what I am seeing from the big CPGs and how they are pivoting to future opportunities. There is quite a potential opportunity and I feel we are on the front side of that.
That is good to hear. Thanks so much.
And our next question comes from the line of Rupesh Parikh with Oppenheimer. Your line is open.
So just going back to your commentary on AI search, I was just curious if you are seeing any benefits in particular in any particular categories or services in terms of the traffic and conversion?
I think it is pretty broad-based, Rupesh. It is still very early days for us, but as we have started to work on updating product pages to ensure they are reflecting and translating through those large language models—allowing our value and quality to show up—when our member reviews and feedback are positive compared to alternatives, those generally resonate well with the models. We are showing up more consistently when members search for items, and we have plans to ensure we show up more consistently in the future. We think it is an opportunity as we continue to evolve our strategy there to get our fair share of that activity as members change behavior.
A good example categories-wise would be appliances. We have a good everyday value on appliances and our real big value is in all-in pricing. Our prices often include delivery, installation, and follow-up. Regular search did not show all that value. Now, with the large language models, they are able to look at the entire value such as tires where installation is included, road hazard included, nitrogen included. We are very bullish on AI search and the strength it will bring to telling the whole Costco story about true value.
Great. And then my follow-up question, just on the fuel business. You guys have seen a significant increase in volumes. How do you think about opportunities to increase throughput? What may be going forward as maybe more of a permanent increase in your fuel volumes related to recent changes in behavior?
It is a little bit difficult to predict what will happen with gas prices. We believe that by widening our gaps and delivering more value for our members, members who engage with us in gas are generally visiting more frequently, shopping more, buying more, and renewing at a higher rate. We think the fact that more members are visiting gas stations more consistently is encouraging for long-term loyalty. When gas prices are higher, members are often willing to travel a little bit further or accept a longer wait to fill up because of busy pumps. So that can change over time based on prices. But members engaging with gas is a strong reminder of overall value and likely to drive long-term loyalty based on what we have seen historically.
Great. Thank you.
And our next question comes from the line of Gregory Melich with Evercore ISI. Your line is open.
I would love to unpack a little bit more on disinflation and inflation.
Sure. Low to mid-single digits is what we have shared in the past as a general guide. Most of the increase in the inflation rate in the quarter, if not all, was driven by gas. Breaking it down, fresh and food and sundries were a bit lower during the quarter largely due to produce, eggs, and dairy being deflationary. We are still seeing inflation in beef, deli, and areas like candy. Non-foods was a little bit higher during the quarter. Some of that was really the impact of higher costs in components like memory chips in computers impacting majors. We took the opportunity to buy forward some items to mitigate the impact for our members, but it is something we are seeing. If oil prices remain elevated, we would likely see some increases in items that have plastic components or polyester or cotton because of higher resin costs. Our buyers are working hard to mitigate these increases.
Got it. And then maybe a follow-up on gas. You said you widened your price gaps in gasoline. Did the profit per gallon slip as part of that? Or was it basically you took prices up less than others when they raised prices?
Our profit was a little bit higher year over year, but the rate of sales was significantly higher which affected the mix.
Got it. Good luck. Thanks.
And our next question comes from the line of John Heinbockel with Guggenheim Partners. Your line is open.
Hey, guys. Maybe Ron, two related questions. What does the club pipeline look like in Europe and Asia over the next three years? And where is the greatest backlog of clubs coming? Secondly, when you think about capacity in Canada, where you have very high AUVs and you are adding clubs, what does the capacity dynamic look like in that country?
In Canada, we see a lot of upside potential. We have a plan charted out for the next three to five years and see consistent strong growth in Canada for at least the next five years, and then we will evaluate further. In Asia, great opportunities remain in China, Korea, and Japan. Taiwan also has opportunity. Those three countries have the greatest potential in that region. In Europe, we are still young in France and see growth there; Spain has shorter runway but significant growth over the next three years, and the U.K. has been very strong for us the last three years. So we see very strong international expansion over the next five to ten years and those countries would be leaders outside of North America.
Okay. Thank you.
And our final question comes from the line of Christopher Nardone with Bank of America. Your line is open.
Greg. Thank you, guys. On the executive membership strength relative to recent trends, are you seeing more customers trade up from gold into executive? Or is the recent strength more driven by new customers choosing the higher-tier membership? And then as a related follow-up with the spike in gas prices, are you seeing new membership acquisition improve as you move through the spring season?
Thanks for the questions, Christopher. On the executive membership, it is a combination of both. We are seeing increases in membership upgrades from gold to executive, and we are also seeing a higher penetration of new members signing up for executive membership with the extra benefits that we offer, particularly the extended opening hours and certain digital perks. I would not attribute it to one individual factor, but we are definitely seeing year-over-year growth in new member sign-ups as mentioned earlier. We are encouraged by that momentum. As to your second question about China and the executive rollout, overall we have been very pleased; it is ahead of our expectations in China. We launched with high expectations believing it would be a great value for members, but we have seen a higher level of activity than we initially expected. Today, we have executive membership in most of our markets where we have a sufficient number of warehouses. There are some individual countries where we do not have executive membership today and over time if we grow presence in those markets it may make sense. At the moment, we feel like we have the executive membership in the markets where it makes sense.
Thank you.
And ladies and gentlemen, that concludes our question-and-answer session and today's conference call. We thank you for your participation, and you may now disconnect.