10-Q: Costco Reports Robust Q3 Earnings with Strong Sales and Membership Growth

Costco Wholesale Corporation announced impressive third-quarter fiscal 2025 results, showcasing significant increases in net income and diluted earnings per share, driven by strong net sales and a notable rise in membership fee revenue.

Summary

• Net sales for the third quarter of fiscal 2025 increased by 8% to $61,965 million, up from $57,392 million in the prior year.
• Membership fees grew by 10% to $1,240 million in Q3 2025, compared to $1,123 million in Q3 2024, primarily due to new member sign-ups and fee increases.
• Total revenue for the quarter reached $63,205 million, an 8% increase from $58,515 million in the same period last year.
• Operating income for Q3 2025 rose by 15% to $2,530 million, up from $2,197 million in Q3 2024.
• Net income for the third quarter was $1,903 million, a 13% increase from $1,681 million in the prior year.
• Diluted earnings per share (EPS) for Q3 2025 were $4.28, compared to $3.78 in Q3 2024, representing a 13% increase.
• For the first thirty-six weeks of fiscal 2025, net sales increased 8% to $185,480 million, and net income rose 9.5% to $5,489 million, with diluted EPS at $12.34.
• Comparable sales for the total company increased by 6% in Q3 2025, driven by a 5% increase in shopping frequency and a less than 1% increase in average ticket size.
• Excluding the impact of foreign currency fluctuations and gasoline price changes, comparable sales for the total company increased by 8% in Q3 2025.
• E-commerce sales saw a 15% increase in the third quarter of 2025.
• The company operated 905 warehouses worldwide as of May 11, 2025, including 29 net new warehouses opened since the end of Q3 2024.
• Worldwide membership renewal rates stood at 90.2%, with the U.S. and Canada renewal rate at 92.7%.
• Gross margin percentage increased by 41 basis points to 11.25% in Q3 2025, or 29 basis points excluding the impact of gasoline price deflation.
• A quarterly cash dividend of $1.30 per share was declared on April 16, 2025, and paid on May 16, 2025, representing a 12% increase.
• Net cash provided by operating activities totaled $9,468 million for the first thirty-six weeks of 2025, up from $8,381 million in the prior year period.

Sentiment

Score: 8

Explanation: The document presents very strong financial results with significant growth in sales, membership fees, and profitability. Operational metrics like comparable sales and e-commerce growth are robust. While there are minor headwinds from foreign exchange and some one-time expenses, and ongoing legal proceedings, the overall performance and outlook are highly positive, indicating a well-managed and growing business.

Positives

• Significant growth in net sales, membership fees, operating income, and net income for both the quarter and year-to-date periods.
• Strong comparable sales growth of 6% overall, and 8% when excluding the impacts of foreign currency and gasoline price changes, indicating robust underlying business performance.
• E-commerce sales demonstrated strong growth of 15% in the third quarter, highlighting effective digital strategy.
• Improved gross margin percentage, increasing by 41 basis points, or 29 basis points excluding gasoline price deflation, reflecting effective merchandising and pricing strategies.
• High membership renewal rates (92.7% in U.S. and Canada, 90.2% worldwide) underscore strong member loyalty and recurring revenue streams.
• Increased quarterly cash dividend by 12% to $1.30 per share, signaling confidence in financial health and commitment to shareholder returns.
• Healthy cash flow from operating activities, providing substantial liquidity for ongoing operations and investments.
• Continued expansion of the warehouse base with 29 net new warehouses opened since Q3 2024, contributing to sales growth.

Negatives

• Foreign currency exchange rates had a negative impact on net sales by approximately $699 million and on net income by $35 million in Q3 2025.
• Lower gasoline prices negatively impacted net sales by $642 million in Q3 2025, although this is a sales mix effect rather than a core operational issue.
• Interest income decreased in the first thirty-six weeks of 2025 due to lower interest rates, partially offset by higher cash balances.
• Membership renewal rates were negatively impacted by sign-ups from a digital promotion in fall 2023 and higher penetration of online sign-ups in recent years, which typically renew at a lower rate.
• Gross margin was negatively impacted by 23 basis points due to a LIFO charge for higher merchandise costs and two basis points for a one-time expense for increased employee vacation.
• SG&A expenses as a percentage of net sales increased by 20 basis points, or 11 basis points excluding gasoline price deflation, partly due to investment in employee wages and a one-time expense for increased employee vacation.

Risks

• Domestic and international economic conditions, including fluctuations in exchange rates, inflation, or deflation.
• Effects of vigorous and widespread competition from global, national, and regional wholesalers and retailers, including e-commerce operations.
• Uncertainties in the financial markets.
• Consumer and small business spending patterns and debt levels.
• Breaches of security or privacy of member or business information.
• Conditions affecting the acquisition, development, ownership, or use of real estate.
• Capital spending requirements.
• Actions of vendors.
• Rising costs associated with employees, including health-care costs and wages.
• Workforce interruptions.
• Fluctuations in energy and certain commodity costs.
• Geopolitical conditions, including tariffs, which can adversely impact results.
• Ability to maintain effective internal control over financial reporting.
• Regulatory and other impacts related to environmental and social matters.
• Public-health related factors.
• Ongoing legal proceedings, including class actions related to wage and labor laws, opioid litigation, privacy law violations (pixel trackers), and product claims (PFAS in baby wipes), as well as government investigations (False Claims Act, FIFRA).

Future Outlook

Costco plans to open ten additional new warehouses, including one relocation, in the remainder of fiscal 2025. The company intends to spend slightly over $5,000 million on capital expenditures during fiscal 2025, primarily for acquiring land, buildings, and equipment for new and remodeled warehouses, information systems, and manufacturing and distribution facilities. The rate of square footage growth is expected to be higher in many of its foreign markets due to a smaller existing base.

Management Comments

• "Our philosophy is to provide our members with quality goods and services at competitive prices. We do not focus in the short-term on maximizing prices charged, but instead seek to maintain what we believe is a perception among our members of our pricing authority – consistently providing the most competitive values."
• "Generating comparable sales growth is foremost a question of making available the right merchandise at the right prices, a skill that we believe we have repeatedly demonstrated over the long-term."
• "Our philosophy is not to seek to minimize their wages and benefits. Rather, we believe that achieving our longer-term objectives of reducing employee turnover, increasing productivity and enhancing employee satisfaction requires maintaining compensation levels that are better than the industry average for much of our workforce."

Industry Context

Costco operates within a highly competitive global retail landscape, contending with a wide array of national, regional, and international wholesalers and retailers, including those with significant e-commerce presences. The company's strategy involves adapting to market changes through dynamic pricing, optimizing its merchandise mix (including private-label offerings), and expanding its online presence. Its gasoline business, while impacting overall gross margin percentage due to its lower margin nature, is viewed as a key driver for increasing traffic to its warehouses. The membership-based model is central to Costco's business, fostering member loyalty and generating consistent fee revenue, which differentiates it from many traditional retailers.

Comparison to Industry Standards

• Costco operates profitably at significantly lower gross margins than most other retailers, a result of its unique business model focused on high sales volumes, rapid inventory turnover, volume purchasing, efficient distribution, and reduced handling of merchandise in no-frills warehouse facilities.
• The company maintains compensation levels for its workforce that are better than the industry average, a strategic choice aimed at reducing employee turnover, increasing productivity, and enhancing employee satisfaction, which contrasts with some competitors who may prioritize minimizing labor costs.
• Costco demonstrates consistent success in adapting its business to general economic health fluctuations and vigorous competition through adjustments to its pricing and merchandise mix, including increasing the penetration of its private-label items, and through online offerings, showcasing a resilient and adaptable business model.

Legal Proceedings

• Martin Reyes v. Costco Wholesale Corporation: Class action and Private Attorneys General Act (PAGA) representative action alleging California wage and labor law violations (failure to pay minimum wage, overtime, provide breaks, accurate wage statements, reimburse expenses, pay wages when due, sick pay, and suitable seating). Motion to stay PAGA action granted on December 18, 2024.
• Nader v. Costco: PAGA action alleging various California Labor Code violations. Company's motion to strike portions of the complaint granted on February 14, 2025, and again on May 13, 2025, for a further amended complaint.
• In re National Prescription Opiate Litigation (MDL No. 2804): Consolidated cases concerning opioid abuses filed against the Company by various entities (counties, cities, hospitals, tribes, third-party payors, class actions for infants and individuals seeking insurance cost recovery). Claims pending in federal and state courts, some dismissed.
• Birdwell v. Costco Wholesale Corp., Scott v. Costco Wholesale Corp., R.S. v. Costco Wholesale Corp., Groves, et ano., v. Costco Wholesale Corp., and Castillo v. Costco Wholesale Corp.: Five consolidated class action suits alleging privacy law violations stemming from pixel trackers on Costco.com, seeking damages, equitable relief, and attorneys' fees under various state and federal statutes. Company's motion to dismiss Castillo complaint denied in substantial part in November 2024. Related civil investigative demands from Washington Attorney General's Office and pre-litigation letter from Los Angeles Office of the County Counsel received.
• Bullard, et ano., v. Costco Wholesale Corp., et ano.: Class-action lawsuit alleging Kirkland Signature Fragrance Free Baby Wipes contain PFAS, violating consumer protection and false advertising laws. Initial motion to dismiss granted on February 14, 2025, but defendants' motion to dismiss an amended complaint was denied on May 14, 2025.
• U.S. Attorney's Office, Western District of Washington Civil Investigative Demand: False Claims Act investigation concerning whether the Company presented or caused to be presented false claims relating to prescription medications.
• U.S. Environmental Protection Agency (EPA) Notice of Intent to File Administrative Complaint: Alleging violations of the Federal Insecticide, Fungicide and Rodenticide Act (FIFRA) for importation, sale, and distribution of misbranded devices and unregistered products asserted to be pesticides. An agreement has been reached to settle for an immaterial amount.

Stakeholder Impact

• Shareholders: Benefited from increased net income and diluted EPS, a 12% increase in quarterly cash dividend, and ongoing share repurchase program, indicating strong returns and capital management.
• Employees: Positively impacted by the company's philosophy of maintaining compensation levels better than the industry average and an investment in employee wages, though a one-time expense for increased employee vacation negatively impacted SG&A.
• Customers/Members: Benefited from the company's philosophy of offering low prices and competitive values, but faced increased annual membership fees in the U.S. and Canada. Digital promotions and online sign-ups have negatively impacted renewal rates.
• Suppliers: The company works with suppliers to share in absorbing cost increases and engages in earlier-than-usual purchasing in greater volumes, impacting supplier relationships and logistics.
• Creditors: The company's strong cash flow from operations and healthy cash and investment position indicate robust ability to meet its financial obligations, including long-term debt and lease liabilities.

Next Steps

• Open ten additional new warehouses, including one relocation, in the remainder of fiscal 2025.
• Spend slightly over $5,000 million on capital expenditures during fiscal 2025.
• Continue evaluating new accounting standards (ASU 2023-07, ASU 2023-09, ASU 2024-03) for their impact on financial reporting.
• Continue share repurchases under the $4,000 million authorization, which expires in January 2027.

Key Dates

Recommendation

Keywords

Costco, Wholesale, Retail, Membership Warehouse, Q3 Earnings, Financial Results, Net Sales, Membership Fees, Diluted EPS, Comparable Sales, E-commerce, Gross Margin, Operating Income, Cash Flow, Dividends, Stock Repurchase, SEC Filing, 10-Q