During Costco's fiscal second-quarter 2026 earnings call, company executives stated that the future impact of tariffs remains highly uncertain. Previously canceled IEEPA tariffs have been replaced by new global tariffs, which will be effective for at least the next 150 days. Regarding refunds for the IEEPA tariffs, the refund procedure, whether refunds will be received, and the timing remain unclear. The company is committed to returning any future tariff refunds to members in the most appropriate way through lower prices and better value, maintaining full transparency. Costco always aims to be the first to lower prices and the last to raise them. Inflation decreased slightly in the second quarter, with deflation observed in produce, eggs, and dairy products. The supply chain is relatively stable, but concerns were raised about potential impacts on fuel costs and shipping schedules due to the situation in the Middle East.

Executives added that the company opened 4 new warehouses this quarter, bringing the global total to 924. For fiscal 2026, a net increase of 28 new openings is projected. The long-term target is to open over 30 new warehouses annually in the coming years. Second-quarter capital expenditures were $1.29 billion, with full-year expenditures expected to be approximately $6.5 billion, allocated towards new warehouse construction, existing warehouse remodels, distribution center network expansion, and digital experience enhancements.

**Q&A Session**

**Q:** What was the impact of January and February weather dynamics on business? How has gold price volatility affected business in those months and the future outlook? **A:** Regarding weather, it caused some volatility early in the year but did not significantly impact overall sales results. One possible note is that U.S. traffic was slightly lower in February, potentially related to weather in the Northeast, where 55 warehouses were closed for a full day, and local communities took several days to recover. Overall, sales results did not require adjustment for this. Concerning gold prices, consumer and member shopping trends remain consistent with recent quarters. Members are highly focused on quality, value, and new items; when we provide these, members are willing and able to spend. Buyers continually find exciting new products, driving sales performance. Excluding short-term noise like calendar shifts, port strikes, and tariffs, our overall sales results are very consistent, stable in the 6% to 7% range. We adjust category mixes based on tariffs or member preferences, but performance is very stable.

**Q:** Inventory levels are well-managed. Looking ahead to spring and summer, will you make significant category mix adjustments like last fall? Historically, if fuel prices rise recently, what is the cross-shopping pattern between gas station traffic and store visits? **A:** Regarding the spring/summer merchandise mix, we feel this year will be more traditional than last year. The supply chain is more balanced, and our adjustments to sourcing strategies feel positive. In terms of timing, merchandise selection, and SKU counts, we are back to levels seen two years ago. We are satisfied with the current product lineup, and production and shipping have been timely and smooth. So far, the Middle East situation has not disrupted our regular merchandise flow, but we are monitoring it cautiously and remain vigilant. We feel positive about spring and summer and are well-positioned for fall forecasts. Regarding gasoline, generally about half of the members who fuel up also shop in the warehouse. If gas prices rise, our value proposition on fuel resonates better with members because we are a price authority. When prices are higher, members may be willing to drive a bit further for fuel, seeing the extra value. However, the actual trajectory of gas prices in the coming months remains to be seen.

**Q:** First, with increased competitor store openings this year, is there any impact on member counts at nearby locations? Second, if consumers use Large Language Models (LLMs) for shopping advice, how do you, or hope to, appear in search results? Do you see an opportunity for member conversion? **A:** Regarding competitor openings, this does not negatively impact our member counts. We don't see a massive influx of new members as in entirely new markets, but by alleviating pressure on high-traffic warehouses, shopping frequency and visit rates for existing members increase. Overall, we haven't seen a meaningful impact on our member base. Our focus is on being our own strongest competitor, concentrating on how to lower prices and consistently deliver more value. Concerning LLMs, the key point is we want to appear everywhere possible. Given our merchandise quality and value, we are confident that if Costco appears in all searches, we will perform very well. We are working with relevant partners to ensure Costco surfaces effectively.

**Q:** Two questions on international operations. Average sales per store in Canada are nearing $300 million and still growing; how do you consider the shopping capacity of these stores? Besides Canada, three international store openings are planned this year; what does the pipeline look like for 2027 and 2028, and will it accelerate significantly? **A:** Regarding Canada, we currently have 114 stores and have had good success in recent years filling market gaps and entering new markets. Average sales per store in this market are very high. We have implemented several measures, including deploying technologies used in the U.S. to Canada and recently extending operating hours at all Canadian stores to handle traffic growth. We see a good expansion path in Canada over the next five years, maintaining high average sales per store and achieving incremental sales by filling market gaps. For international markets, the opening cycle is slightly longer than in North America. However, we are very optimistic about international prospects beyond 2027, with continued strong performance in Asia and Europe. We anticipate good growth expansion, maintaining the good balance of the past where stores outside North America represent a reasonable proportion relative to North American stores.

**Q:** You mentioned new opportunities in real estate allowing entry into previously inaccessible markets. How should this be viewed long-term? What impact could this have on the annual U.S. store opening count? **A:** We haven't changed our model but are becoming more creative, for example, using parking structures or building residential above stores. To enter downtown areas like Los Angeles or New York, finding 25-acre parcels is impossible. So, we are exploring unique models suitable for Costco to fill gaps in these strong markets. These approaches aren't new for the company; we have validated many unique business models in Asia and Europe. They are newer for the U.S. We believe we can maintain efficiency, uphold the Costco experience across all warehouses, and enter previously difficult markets with more creativity. This increases our confidence in achieving the long-term goal of 30+ new stores annually. Over a 5 to 10-year span, we feel the 30-store annual target is achievable. Roughly more than half of these will be in the U.S., with the remainder in other parts of the world, including Mexico, Canada, Asia, Europe, Australia, and New Zealand.

**Q:** Can you provide a detailed interpretation of core merchandise margin performance this quarter? The comparison base appears higher in the second half; how should this be viewed? **A:** We are satisfied with the overall merchandise margin performance this quarter. Adjusted for gasoline, the overall margin increased by 11 basis points, but 6 basis points came from a one-time legal settlement. Excluding that, the increase was approximately 5 basis points. The team did an excellent job achieving this while lowering prices for members and managing tariff impacts. The core merchandise margin increased by 22 basis points. There was no single driver, similar to recent quarters. The second quarter benefited from lower prices on some items—we were able to be first to lower prices for members, and due to fast inventory turnover, we also gained some financial benefit. Additionally, supply chain efficiency continues to improve, and Kirkland Signature penetration is increasing. There were also offsets: higher 2% reward payments, a higher comparison base for credit card program income, and category mix changes as pharmacy and e-commerce grew faster than core sales, which diluted the core margin increase. Looking ahead, margin components fluctuate quarterly; we don't over-focus on any single metric. Over the past 12-24 months, overall margins have remained stable with slight growth. Our goal is to run the business for the long term, achieving slight margin expansion through efficiencies, but it will only be slight as we reinvest meaningful gains into members to drive top-line sales growth.

**Q:** Regarding member growth, it increased by 5% this quarter. Can you analyze the dynamics behind this? How does the member growth rate at existing warehouses compare to expectations? **A:** We are pleased with member performance this quarter. Excluding membership fee increases and foreign exchange impacts, membership fee income grew 7.5%, demonstrating strong member loyalty. Executive member growth was 9%, indicating that new benefits like monthly Instacart online shopping credits and extended hours are resonating. Total paid member count grew about 4.8%, slightly below the past year's level. This is mainly due to three reasons: fewer warehouse openings in new markets this past year, as new stores in countries like Japan and China typically drive significant member growth; a higher base of new member sign-ups in the prior year period; and over the long term, member growth rates are typically around 5%, so the current rate is closer to the long-term trend. There are still ample growth opportunities: adding new member benefits, ongoing maturation of existing warehouses expanding the member base, continued improvement in renewal rates, and further potential for executive member penetration in international markets.

**Q:** Regarding renewal rates, the U.S. was down 10 basis points, and globally it was flat. Does this suggest a bottom? Given how renewal rates are calculated, when do you expect to see this metric begin to improve? Also, in-store promotions for auto-renewal with free gifts were noted; what is the acceptance of this program, and how is it helping renewal rates? **A:** Concerning renewal rates, a few quarters ago we mentioned that as digital membership increased significantly in recent years—and their renewal rates are typically slightly lower—the increasing proportion of these members in the total base would pressure the overall renewal rate. We expected this to continue for a few more quarters. This quarter, the global rate was flat, and the U.S. was down only 10 basis points, which is a positive signal. It indicates that, on one hand, the impact of online members maturing and being factored into the overall calculation is being digested; on the other hand, our proactive efforts to engage and retain these new digital members through digital communication and retention strategies are working. Without these interventions, the decline due solely to the calculation effect of increasing digital members would have been larger. Regarding auto-renewal, we've had it for some time; it helps with member convenience and our renewal rates. We promote it in clubs to raise employee awareness, giving them a topic to discuss with members. Overall, the change in renewal rates is in line with our expectations, and the rate of decline has slowed. There may be a few more quarters as members reach maturity points, but we will continue focusing on these retention programs and are satisfied with the current trajectory of moderation.

**Q:** On inflation, you mentioned it was slightly lower this quarter than last. Looking at the 3.4% increase in U.S. average transaction value, how much was contributed by inflation? Can you quantify it, for example, a drop from 1.5% to 1%? **A:** Regarding inflation, we've consistently stated it's in the low-to-mid single digits. It did slow in Q2, trending towards the low single digits. But this was Q2; the Middle East situation has changed since, and we'll need to observe further. The overall slowdown in Q2 inflation was primarily driven by fresh food and groceries. We saw deflation in produce, eggs, butter, and cheese, significantly impacting the food and grocery categories. However, some areas still experienced inflation: beef inflation remains high, and there's been historic pass-through inflation in candy. Non-food inflation increased slightly but modestly, mainly due to tariff pass-through in certain areas and rising gold prices. Gold bars are a good example; they not only boost business but, more importantly, generate brand attention, drive website traffic, and resulting cross-category sales. It's a positive surprise, offering great value to members and helping other parts of the business by increasing awareness of our online offerings. Regarding average transaction value, we prefer to look at several dimensions: the number of items in the basket is growing; and inflation consists of both price changes and product mix changes. The price inflation you asked about is actually a small part of the average transaction value growth; mix changes and unit growth are more significant components.

**Q:** What is the future roadmap for digital advertising? Any plans for a marketplace platform? With AI involving many partners, how do you balance internal development and external collaboration? Which area—pricing, supply chain, merchandise procurement, or member engagement—will AI impact the most in the future? **A:** Regarding advertising, we currently generate significant revenue from media, achieving double-digit growth. Over 1,000 suppliers use our platform for promotion opportunities. For retail media, we see it as a new opportunity to access supplier marketing budgets. The priority is building internal capabilities to provide members with more personalized, relevant communication. We've seen positive cases where personalized communication effectively drives store visits or increases basket size. Retail media is still in early stages; we are testing projects like digital TV and targeted MVM amplification. As personalized capabilities continue to build, the advertising business will yield more benefits. Per our practice, most gains will be reinvested into creating more value for members and driving top-line sales. Concerning marketplace platforms, we primarily look for service and product areas that offer more value to members. We've made good progress in installation services, garden furniture, windows, etc., partnering with quality providers to deliver unique value. Additionally, services like Costco Travel are important ways we create value for members, successfully deepening member loyalty. Regarding AI, our perspective is clear: how can it create value for members and support employees? We focus on how AI can make us better, not chasing things peripheral to Costco's core. This has been key to navigating previous technological and digital changes. We look at specific areas where AI can bring more value to members or help employees be more productive, allowing us to pay employees better and create more member value. Overall, this is our philosophical approach; it's still early, but we are encouraged by the work done so far.

**Q:** The last time cash balances reached current levels, a special dividend was issued. Is another special dividend possible in the coming quarters? Given the pace of cash accumulation, would you consider more frequent dividend payments? **A:** Our financial strategy hasn't changed significantly. The primary priority is investing in the business, including the new warehouse pipeline, existing warehouse remodels, distribution center network expansion, and digital investments. We like the returns on these investments. Our model generates substantial free cash flow; even with ongoing investment, cash continues to grow. With board approval, we will continue to increase the regular dividend, reflecting confidence in future growth. We also repurchase shares to offset dilution from equity compensation. After these actions, excess cash typically still remains. Given our valuation, a special dividend is likely the most efficient way to return excess cash, as it preserves flexibility for future capital allocation. It's important to note that while the cash balance has returned to the level of the last special dividend, the stock price was $60 then; to achieve a similar yield now requires a larger cash amount. We continue to evaluate the special dividend with the board but have no specific plans to share at this time.

**Q:** Regarding the pharmacy business, competitors mentioned impacts from Maximum Fair Pricing policies. Is this affecting you? How do you view the future? Also, on the advertising business, can you quantify the scale or at least contrast the current level with future potential? **A:** Regarding pharmacy, our business is very successful. The team focuses on improving the member experience while delivering exceptional value. We've added new AI tools to enhance pharmacy inventory levels and made digital enhancements to speed up the checkout experience. The pharmacy business is growing faster than overall sales, which is one reason for the difference between core merchandise margin and core operating margin improvement. Changes in Medicare policies and drug pricing adjustments will have a slight impact on us, but based on current views, they do not constitute a material headwind to top-line sales. Concerning retail media, we see it as a significant opportunity. The reason we don't quantify it specifically is that our focus is on how to use this revenue to create more value for members and drive top-line sales. For us, scale means how much value we can create for members and how we can increase investment in member value. This ultimately reflects in top-line growth, not a major change in margin profile.

**Q:** Regarding international expansion, specifically in China. Recent growth appears to have moderated, facing strong local e-commerce competition. How does your business model adapt to a highly e-commerce-oriented market? What lessons learned can be applied to other markets? **A:** This is actually a deliberate pacing. Our approach is consistent in every country: open the first set of warehouses, learn the local culture and business practices, then enter a good, steady growth mode. The opportunities we see in China align with pre-entry expectations. We are very satisfied with the current business and growth trajectory and believe we can compete with anyone in China, just as in other countries. The China business is developing well, and there will be more growth in the future.