Costco Wholesale Corp (COST) — Q2 2026 Earnings Call Transcript

Good afternoon, everyone, and thank you for joining us for Costco's Second Quarter 2026 Earnings Call. In addition to covering our second quarter financial results today, we will also review our February sales results. I'd 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 our 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 results, I'm delighted to say that Ron Vachris is once again joining me for today's call. I'll now hand over to Ron for some opening comments.

Thank you, Gary. Good afternoon, everyone, and thank you for joining us today. I'll make a few brief comments about some key business priorities before turning it back over to Gary. Let me start by addressing tariffs, as I know this topic is of great interest to our members and our shareholders. The future impact of tariffs remains extremely fluid as the recently eliminated IEEPA tariffs have now been replaced with new global tariffs for at least the next 150 days. Our buyers continue to act with great agility and urgency, always with the goal of reducing the impact of tariffs on prices for our members. We believe our expertise in buying and our limited SKU count model puts us in a position to manage this as well as anyone. Our strategies include moving the country of production when that makes sense, consolidating buying efforts globally to lower the cost of goods, leaning in on Kirkland Signature, where we have the most control of the supply chain and sourcing more items domestically. Let's move to regarding IEEPA tariff refunds. It is not yet clear what the process will be, what refunds, if any, will be received and when this will happen. Throughout the past year, we've taken action to reduce the impact of tariffs. In many cases, we didn't pass the full cost on to our members. The complexity of the tariffs implemented over the past year, including layering of different tariffs on top of each other and multiple changes in rates throughout the year, also made it challenging to track the exact impact to an individual item sold. As we've done in the past, when legal challenges have recovered charges passed on in some form to our members, our commitment will be to find the best way to return this value to our members through lower prices and better values. We'll be transparent in how we plan to do this, if and when we receive any refunds. At Costco, we always want to be the first to lower prices and the last to raise them. During the second quarter, we lowered prices on key items such as eggs, cheese, coffee and some paper products as we saw lower inflation in these commodities. We will continue to be a pricing authority and as some tariffs have been reduced, we are lowering prices on affected items such as certain textiles, bedding and cookware SKUs. Turning to our growth priorities. As I shared last quarter, our real estate and operations teams are focused on increasing our pipeline of new warehouses, both domestically and internationally. Since our last call, we opened 4 warehouses, including 1 relocation in the U.S., 1 net new U.S. location and 2 additional Canadian business centers. This brings our total warehouse count to 924 warehouses worldwide. We currently expect to have 28 net new openings in fiscal year '26 and are targeting 30-plus new openings per year in the coming years. In digital, we continue to make strides with our road map to deliver a more seamless experience for members in warehouse and online. In the warehouses, we're achieving meaningful improvements in the speed of checkout, employee productivity, both as a result of our mobile wallet enhancements, pharmacy pay ahead and the rollout of employee pre-scan technology. We're also piloting automated pay stations that will allow members to pay for their pre-scanned orders seamlessly with an average transaction time of around 8 seconds. Early results show this is improving the flow of traffic, and we've received great member feedback. On our digital sites, we continue to roll out new personalization capabilities, which are resonating well with our members and are starting to have measurable impact on e-commerce sales growth. As consumers embrace AI and their shopping habits, we believe our commitments to providing the best value on great quality items can make Costco a beneficiary of these shifts. We're working closely with the leading AI companies to ensure our values will be visible to existing and potential future Costco members as they engage with these tools. With that, I'll turn it back over to Gary to discuss the results for the quarter, and I'll jump back on during Q&A to field some questions.

Thanks, Ron. In today's press release, we reported operating results for the second quarter of fiscal year 2026 for 12 weeks ending February 15. 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 second quarter came in at $2.035 billion or $4.58 per diluted share, up nearly 14% from $1.788 billion or $4.02 per diluted share in the second quarter last year. Net sales for the second quarter were $68.24 billion, an increase of 9.1% from $62.53 billion in Q2 2025. Comparable sales were up 7.4% or 6.7% adjusted for gas price deflation and FX. Excluding gas sales entirely and adjusting for the impact of foreign exchange, comparable sales were up 7.4%. Digitally-enabled comparable sales were up 22.6% or 21.7% adjusted for FX. Our segment breakout of comparable sales is disclosed in both our earnings release and the supplemental slide deck. In terms of Q2 comp sales metrics, FX positively impacted sales by approximately 1.4%, while gas price deflation negatively impacted sales by approximately 0.7%. Traffic or shopping frequency increased 3.1% worldwide. Our average transaction or ticket was up 4.2% worldwide and 3.5% excluding gas price deflation and changes in FX. Moving down the income statement to membership fee income. We reported membership fee income of $1.355 billion, an increase of $162 million or 13.6% year-over-year. Adjusting for FX, the increase was 12.2%. The September 2024 U.S. and Canada membership fee increase accounted for about 1/3 of our membership income growth. Excluding the membership fee increase and FX, membership income grew 7.5% year-over-year. This was driven by continued growth in our membership base and upgrades to executive memberships. At Q2 end, we had 40.4 million paid executive memberships, up 9.5% versus last year. We ended the quarter with 82.1 million total paid members, up 4.8% versus last year and 147.2 million cardholders, up 4.7% year-over-year. In terms of renewal rates, at Q2 end, our U.S. and Canada renewal rate was 92.1%, down 10 basis points from last quarter; and the worldwide rate came in at 89.7%, unchanged from last quarter. The slight decline in the U.S. and Canada renewal rate was due to the factors we have discussed in prior quarters and reflects new online members growing as a percentage of our total base and renewing at a slightly lower rate than warehouse sign-ups. We continue to focus on increasing the renewal rate of these new online members through targeted digital communications and retention strategies. And those efforts partially offset the negative effect of the increased penetration of online sign-ups. Turning to gross margin. Our reported rate was higher year-over-year by 17 basis points and higher 11 basis points without gas deflation, coming in at 11.02% compared to 10.85% last year. Core was lower by 3 basis points and lower by 7 basis points excluding gas deflation. In terms of core margins on their own sales, our core-on-core margins were higher by 22 basis points. The increase in core-on-core margins was broad-based with nonfood, food and sundries and fresh all higher year-over-year. The difference between reported core margins and core-on-core margins was driven by mix changes as well as higher 2% executive rewards and lower income from our co-brand credit card program compared to last year. Ancillary and other businesses' gross margin was higher by 19 basis points or 17 basis points excluding gas deflation. This was driven by higher gas profitability and strong growth in pharmacy. LIFO negatively impacted the gross margin rate by 4 basis points. We had a $12 million LIFO charge in Q2 this year compared to a $12 million credit in Q2 last year. This quarter's gross margin rate also included a nonrecurring legal settlement, which had a positive impact of 5 basis points. Moving on to SG&A. Our reported SG&A rate was higher or worse year-over-year by 13 basis points and higher or worse by 8 basis points without gas deflation, coming in at 9.19% compared to last year's 9.06%. The operations component of SG&A was higher or worse by 2 basis points, but better or lower by 2 basis points excluding the impact of gas deflation. Our operators once again did a great job improving productivity and capturing efficiency benefits from the technology investments we've recently implemented. These productivity improvements fully offset last year's wage investments and any impact of extended operating hours. Central was higher or worse by 4 basis points and higher by 3 basis points excluding the impact of gas deflation. This quarter's SG&A also included an increase in general liability reserves to reflect higher expected future costs for prior year claims not yet settled. This negatively impacted the rate by 6 basis points. Below the operating income line, interest expense was $33 million versus $36 million last year. Interest income was $140 million versus $109 million last year, driven by higher cash balances; and FX and other was an $8 million benefit this year versus a $33 million benefit last year, largely due to changes in FX. In terms of income taxes, our tax rate in Q2 was 25.2% compared to 26.2% in Q2 last year. Turning now to some key items of note in the quarter. Capital expenditure in Q2 was $1.29 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 operations and enhancing the member digital experience. In terms of merchandising highlights, the Lunar New Year celebration this year showcased our merchants' global buying expertise. We were able to introduce many exciting new items for our members that help drive growth across fresh, foods and sundries and nonfood categories in the U.S. and our international markets. Some of the best sellers included items ranging from duck and quail eggs, Year of the Horse-inspired gold jewelry and bullion, and Shine Muscat grapes. We also had a very successful Valentine's Day. In fact, laid out stem-to-stem, the roses we sold in the U.S. for Valentine's Day this year would have stretched all the way from Seattle to New York City and back again. Fresh comparable sales were up low double digits in the quarter, led by meat and bakery. In meat, we saw strong growth 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 like the chocolate hazelnut mini beignets and a variety of seasonal pastries and cookies. Nonfood comp sales were up high single digits in Q2. Top-performing departments were gold and jewelry, tires, majors, health and beauty, and small electrics. Unique items continue to play an important role in creating excitement for our members in nonfoods. And our second quarter sales included a $150,000 emerald-cut 5.8 carat diamond ring, a $20,000 Babe Ruth autograph baseball, and nearly 200 luxury Whisper golf carts at an average price of approximately $9,000. In food and sundries, comps grew mid-single digits, led by candy and packaged foods. While egg price deflation is expected to continue to be a headwind to sales in food and sundries for the foreseeable future, we're seeing significant unit and market share growth in eggs because of our strong value proposition. Overall inflation decreased slightly in Q2 as we saw lower inflation in foods and sundries and fresh, led by deflation in produce, eggs, and dairy. This was partially offset by slightly higher inflation in nonfoods. The supply chain was also relatively stable in Q2, and our merchants feel good about our current inventory position heading into the spring. That said, as we look at the rest of the fiscal year, the situation in the Middle East could impact fuel costs and shipping schedules if there is instability in the region for a sustained period of time. Kirkland Signature remains a top focus to deliver great value for our members with KS items typically offering 15% to 20% value compared to the national brand alternative with equal or better quality. In Q2, we launched approximately 30 new KS items, including crispy wings, blackened salmon, and various apparel items. As Ron mentioned earlier, 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 Butter from $13.89 at the end of Q1 to $8.49 at the end of Q2, 12-count KS Organic Coconut Water from $12.79 to $10.99, KS Organic Seaweed from $10.99 to $9.99, and 2-liter KS Italian extra virgin olive oil from $29.99 to $24.99. Within ancillary businesses, pharmacy and food court experienced double-digit comparable sales growth, and optical and hearing had high single-digit growth. Gas comps were negative mid-single digits, driven by mid- to high single-digit price deflation, partially offset by gallon growth. Turning to digital, site traffic in the quarter was up 32% and app traffic was up 45%. Sales of pharmacy, gold and jewelry, toys, tires, small electrics, special events, and housewares, all grew double digits year-over-year. And our same-day delivery service offered through Instacart, Uber Eats and DoorDash continue to grow at a faster pace than our overall digital sales. The enhancements we are making to deliver a more personalized digital experience for our members are starting to create measurable impacts. In Q2, our personalized product recommendation carousels drove over $470 million of e-commerce sales, and our newly modernized product display pages are driving incremental sales on our dot-com site as well as increased traffic to our same-day sites. We have a clear roadmap for future digital enhancements and believe these will allow us to continue to grow digitally-enabled sales at a faster pace than overall sales. Finally, a brief update on our February sales results for the 4 weeks ended this past Sunday, March 1. Net sales for the month came in at $21.69 billion, an increase of 9.5% from $19.81 billion last year. Comparable sales were as follows: the U.S. was up 5.2% or 6% adjusted for gas deflation and FX; Canada was up 12.8% or 9.3% adjusted for gas deflation and FX; Other International was up 17.9% or 10.9% adjusted for gas deflation and FX. And this resulted in total company comp sales of plus 7.9% or plus 7% adjusted for gas deflation and FX. Digitally-enabled sales were up 21.8% or 20.8% adjusted for FX. Total company comparable sales for the month, excluding all gas sales and the impact of foreign exchange, was 7.8%. As a reminder, Lunar and Chinese New Year occurred on February 17, 19 days later this year. This shift positively impacted February Other International and total company sales by approximately 4% and 0.5%, respectively. Our comp traffic or frequency for February was up 3% worldwide and 1.5% in the U.S. Foreign currencies year-over-year relative to the U.S. dollar positively impacted total and comparable sales as follows: Canada by approximately 5%, Other International by approximately 8% and total company by approximately 1.7%. Gas price deflation negatively impacted total reported comp sales by approximately 85 basis points. The average worldwide selling price per gallon was down 7.5% versus last year. Worldwide, the average transaction was up 4.8%, which includes the impacts from gas deflation and FX. Excluding gas deflation and FX, average transaction was up 3.9%. In terms of regional and merchandising categories, the general highlights were as follows: U.S. regions with the strongest comparable sales were the Midwest, Northwest and Southeast. Other International in local currencies, we saw the strongest results in China, Taiwan, and Korea. The negative impact of cannibalization was approximately 60 basis points for the total company. Moving to merchandise highlights. The following comparable sales results by category for the month excludes the positive impact of foreign exchange. Food and sundries were positive mid-single digits. Better performing departments included candy, food, and frozen foods. Fresh foods were positive low double digits. Better performing departments included meat and bakery. Nonfoods were positive mid-single digits. Better performing departments included jewelry, majors, and small appliances. Ancillary business sales were up mid-to-high single digits. Pharmacy, food court, and optical were the top performers. Gas was down low to mid-single digits, driven by price per gallon changes year-over-year. In terms of upcoming releases, we will announce our March sales results for the 5 weeks ending Sunday, April 5; on Wednesday, April 8, after market close. That concludes our prepared remarks, and we'll now open the line up for questions.

So a bit of a near-term question here. There's been a lot of noise in January and February on the weather, whether there was a net benefit to January. One of your competitors talked about a headwind into February because of the weather. Could you reconcile how the weather dynamics affected the first 2 months of the year? And then similarly, gold has been very spiked into the beginning of January, has pulled back a little bit here in February. So how are you thinking about how that impacted the business in those 2 months? And how do you think about that, how that could play out for the rest of the year?

Thanks for the questions, Chris. Regarding the weather during the first two months of the year, we observed some volatility, but we don't believe it had a significant impact on our total sales results in January and February. One thing to note is that our traffic visits were slightly lower in the U.S. in February, which we think was influenced by weather conditions in the Northeast where 55 warehouses were closed for a day, and it took time for the local communities to return to normal. While there might have been some effect on visits as seen in the year-over-year growth for February, we don't believe it warrants a major adjustment in our overall sales results. Generally speaking, as for the consumer state and their shopping behavior, we're continuing to see consistent trends from the past few quarters. Members are focused on quality, value, and new, exciting items. When we meet these expectations, members seem willing and able to spend. Our buyers continue to identify new and engaging products, which has led to consistent sales performance each month despite fluctuations caused by calendar shifts or temporary market challenges. Overall, our results have been stable within the 6% to 7% range, and we don't see major changes in different items impacting this trend.

Ron, you highlighted several innovations that you are currently implementing or testing to improve the member experience as well as increasing the efficiency of the business. Did you size the potential savings from things like prepaying your card or line breaking from your associates? And then as part of that, to what degree will you take those savings, reinvest it back in areas like the store wages, store labor and/or price? And are you starting to see any diminishing returns on the investments that historically Costco has been making and have proven to be quite fruitful?

You're very welcome. The digital improvements we're implementing both online and in the warehouse have been very advantageous for us. In the warehouse, specifically regarding our pharmacy, our business is performing strongly. We've seen a significant increase in traffic, and the implementation of our new digital enhancements has helped us maintain our staffing levels while accommodating this rising volume. This is enhancing the member experience and improving efficiency, whether through the pharmacy app we've created or our pay-ahead system in the warehouses. Overall, we are effectively managing the increased volume and doing so efficiently. We anticipate favorable conditions as we move forward. Regarding our investments, we believe we continue to receive the same returns from our members as we invest in the business. The response from our members has been positive, evident in both traffic and sales. We are confident in our ability to reinvest, as we regularly do, whether it's in our employees, pricing strategies, or overall business expansion. As previously mentioned, we are not just expanding our facilities but also relocating and updating many of our older warehouses. We remain committed to reinvesting in the company to drive sales growth and expand our business on a global scale.

Inventory levels continue to be very well managed. Curious as you look ahead to the spring and summer, are you making any notable changes to the assortment akin to some of the changes you made last fall? And then with rising gas prices in the near term, can you just remind us historically the crossover traffic that you typically see into the club on like-for-like hours?

Sure. As we approach spring and summer, we believe we are returning to a more traditional approach compared to last year. The supply chain has improved, and we are confident in the sourcing decisions we've made. We feel that in terms of timing, selection, and SKU counts, we’re back on track with where we were the previous year. I am pleased with our lineup and production. Shipments before our recent challenges have been timely and efficient. We haven't experienced any disruptions in our regular merchandise flow from the Middle East, but we are monitoring the situation closely. Overall, we feel optimistic about spring and summer. Looking ahead to the fall, we believe we are well-positioned. Regarding gas prices, I’ll let Gary address that.

Yes. Thanks, Ron. Chuck, on gas, generally speaking, we see about half of members that will shop at the gas station will also cross shop at the warehouse. And obviously, as Ron mentioned, early days to know what the impact longer term might be from events in the Middle East at the moment. But generally speaking, if gas prices start to increase, then we tend to see our value position resonates better with members just because, obviously, we want to be the pricing authority on gas. And so when prices are higher, that will tend to cause members to maybe take the extra mile that it might be involved to get to the gas station because of the incremental value they see there. But obviously, we'll have to see what happens with gas prices over the coming months there.

I have 2 unrelated questions. First, the competitive openings are stepping up this year. I imagine there's maybe some membership impact in nearby openings from competitors. Is there anything above and beyond? And then the second part is if a customer speaks to an LLM, how do you show up or how do you want to show up? And are you seeing any opportunities to convert members?

You're welcome. As far as the new openings coming up, it won't have a negative effect on our membership. We won't see those big swells of new markets that we would see when you go into an existing building. So it balances that out. It really drives our sales with frequency and visits. As we relieve a high-volume warehouse, those tend to build back very quickly. And so we may not see the traditional number of new members, but frequency of members and those type of things start really ramping up in those markets as we see. So we don't see a negative effect, but we don't see the big tailwind we saw with new sign-ups as we would in the new market as well. And for the LLM, I'll take a shot at that. The biggest thing we feel with our quality and our value is we want to show up everywhere we can and everywhere we can. And we want to make sure that Costco is surfacing with all these partners that we feel very confident with our values and our prices. If we're coming up on all these searches, we're going to fare very well with those. So I don't know if you want to add anything to that, Gary.

Well, the only thing, Ron, maybe just to come back to your first answer, I didn't know if, Simeon, your question was when competitors are opening warehouses too. And I guess I would say that really, we don't see any meaningful impact on our membership base or membership growth when we feel we operate today very effectively across the U.S., competing against very different operators. And we tend to focus on being our own toughest competitor, finding ways of how can we lower prices and continue to deliver more value. And so generally speaking, there's nothing I would call out that we see an impact to our membership base when we're competing against different operators in each market.

Ron, could you discuss Canada AUVs, which are now nearing $300 million? You're still experiencing growth, correct? What are your thoughts on shopability capacity in those clubs, especially with the opening of business centers? Additionally, I believe you plan to open three locations outside of Canada this year. What does your pipeline look like for 2027 and 2028, as I assume you want to significantly increase that number?

Okay. Yes. As far as Canada goes, we have 114 buildings now, and we have had some very good success with infilling, and even opened up a couple of new markets in the recent 2 years. Our volume per location is quite high in that market. We have done several things. The technology that we've done in the U.S., we're using in Canada as well. We've recently expanded operating hours in all of our Canadian buildings to help offset some of the traffic increases. So we feel that we've got a very good path of expansion in Canada over the next 5 years, and we feel good that we'll be able to maintain a good, high average volume per location and continue to infill with some great incremental sales there as well. Internationally, yes, they take a little bit longer, a little bit longer before we bring these to fruition as opposed to being in North America. But we feel very good about the future from '27 on in our international markets as we continue to see performance both in Asia and Europe to be very strong. And so we look forward to some good growth expansion. We feel a good balance as we've had in the past, with a good portion of our locations being outside North America and an equal amount being here domestically as well.

I wondered if I could tack on to the real estate question and just ask about the fact that you noted some new opportunities in real estate are allowing you to enter into markets that you didn't think you could enter into previously. How should we think about this longer term? And how it will influence maybe the number of units you open in a year domestically?

We are not changing our model, but we are exploring more creative approaches, such as utilizing parking structures. We've announced our plans in Los Angeles regarding residents above our locations, which reflects this creativity. As we look to enter inner-city areas, finding 25 acres of land is often not feasible. Instead, we're seeking ways to integrate our unique Costco model into strong markets like Los Angeles and New York. We have successfully tried similar strategies in Asia and Europe, and while this may be relatively new for us in the U.S., we are confident in our ability to remain efficient and uphold the Costco experience in our warehouses. We're focusing on innovative solutions rather than traditional large sites, which has opened up many opportunities for partnerships and entry into challenging markets.

And Kate, I think that's kind of allowing us to be able to have more confidence in that plan to achieve that 30 warehouse a year goal that we talked about in the last couple of earnings calls. And when we talk about 30 a year, we look at sort of generally a 5- to 10-year time horizon for warehouses. And we feel like that, that 30 sort of target a year is there to be achieved for that sort of time horizon. And that's the goal that we're working towards as we look at the plan. And roughly just over half of those, we think, would be in the U.S. and just under half would be in the rest of the world, if you include Mexico, Canada, Asia, Europe, Australia and New Zealand in that broader Rest of the World category.

I was hoping that you could expand on core-on-core margins in the quarter and then maybe how we should be thinking about the back half? The compare seems a little bit tougher there, but just thoughts on how we should be thinking about that would be great.

Thank you, Ed. I'll take a moment to discuss gross margin. Overall, we were satisfied with the gross margin performance this quarter. If we adjust for gas deflation, we saw an increase of 11 basis points, although a legal settlement contributed 6 basis points to that figure. Thus, we consider the gross margin to have increased by 5 basis points this quarter, which is commendable given that we were also reducing prices for our members while managing tariff impacts. The team did an excellent job of ensuring we delivered more value while achieving favorable financial results for our shareholders. In terms of core-on-core margins, we experienced a 22 basis point increase. There isn't a single driver for this; rather, it's consistent with the trends we've discussed in recent quarters. In particular, during Q2, we benefited when deflationary trends helped us lower prices for our members. Our quick inventory turnover also generates some financial advantages. We're continuously enhancing supply chain efficiencies, and our Kirkland Signature brand continues to gain traction. However, there were some challenges in our core margins due to higher 2% rewards, and we’re also comparing against stronger earnings from our credit card program. Additionally, since our pharmacy and e-commerce businesses are expanding at a faster rate, they slightly dilute the overall core margin growth. I mention these factors because, looking ahead, we expect fluctuations in margin elements from quarter to quarter. We prefer not to focus excessively on any single aspect of the margin. Our long-term aim is to manage the business holistically. My earlier comment about slight gross margin improvement while lowering prices reflects our commitment to providing value to our members, which ultimately benefits both our members and shareholders. Overall, the quarter was up about 6 basis points. Over the last 12 to 24 months, our gross margin has been relatively stable and has seen slight growth, with various influences affecting the core-on-core margins. We prioritize managing the business for the long run and ensuring members receive value. We believe the efficiencies we’re creating allow for slight margin expansion, but it's modest, as our primary focus is on reinvesting in our members to drive sales growth.

So just going back to membership growth, so it's sub-5% this quarter. So if you could maybe walk through some of the dynamics at play. And then as you look at your same club membership growth rates, just how those are trending versus your expectations?

Thank you, Rupesh. Looking at the bigger picture, we were happy with the membership results for the quarter. We observed a 7.5% increase in membership fee income when excluding the fee increase and foreign exchange impact, reflecting strong member loyalty and fee income growth. A significant factor was the 9% growth in upgrades, indicating that our $10 Instacart credit for online shopping and the extended hours, along with other benefits we've introduced, are appealing to members and driving upgrades. The overall paid membership also contributed, rising about 4.8% during the quarter. However, as you pointed out, this is slightly lower than recent quarters, which have been around the 5% mark. There are three key points to consider: first, we've seen fewer new warehouse openings in truly new markets over the past year, which typically leads to a surge in new members when we expand to places like Japan or China. Secondly, we're also comparing to a year ago when we had strong new member sign-ups, so while we still have solid sign-ups now, we're up against a previous period of higher growth. Finally, in the long term, we've generally seen growth rates of around 5% for new members, reflecting a more stable rate. We believe there are still plenty of opportunities to grow our membership base, whether by adding new benefits like we've done this year, through existing warehouses maturing and increasing their membership, or by improving renewal rates. Additionally, in our international markets, while we have a considerable member base per warehouse, the executive membership is less penetrated, presenting further growth potential. Overall, these are the three main factors contributing to the slightly lower year-over-year growth than we experienced in the previous quarters.

Thanks for the questions. It's on renewal rates. The U.S. down about 10 basis points, worldwide flat. So is this the real bottom here? Given the way you calculate renewal rates, do you have a certain timeline or time frame in mind when you can see this data set start to improve and move back up again? And then separately, we've noticed some in-warehouse activity, maybe given out a free item when you sign your membership up for auto renew. Can you talk about the uptake for that program and how that's helping renewal rate as well?

Sure. As you pointed out, we previously mentioned a slight decline in the overall membership renewal rate. This is largely due to an increase in the number of digital members who sign up but tend to renew at a lower rate. While this growth in digital membership has positively impacted our ability to attract younger members and contributed to total revenue growth, it has also slightly lowered the overall renewal rate. We anticipated that this trend would continue for several more quarters, given how these new memberships affect our renewal calculations. However, it's encouraging that the global renewal rate remained flat this quarter, and the U.S. rate only fell by 10 basis points. This indicates that we are making progress as our online members mature and through the initiatives we’ve implemented to engage these new digital members. If we had not taken these steps, we would likely have seen a greater decline in renewal rates. We have been focusing on auto-renewal as it offers convenience for members, which in turn aids our renewal rates. We’ve promoted this program in our warehouses to enhance awareness among employees. Overall, we are observing the changes we anticipated in renewal rates. While we may experience additional slowdowns in the coming quarters until we reach a maturation point, we are committed to our retention programs and are pleased with the improvements in trajectory, aiming for this trend to continue.

I wanted to follow up on inflation. You mentioned how, I believe, it was a little bit less this quarter than the prior quarter. And I'm just curious how much less. If we look at that ticket up 3.4% in the U.S., could we say that inflation was maybe 100 bps of it down from 150 or maybe just sort of frame it?

Sure. Thanks, Greg. Regarding inflation, you've got it right that we’ve been discussing low to mid-single-digit inflation. It softened in the second quarter, approaching low single digits. However, that was the situation in Q2, and given the recent changes in the world, particularly in the Middle East, we will need to monitor how events unfold. In the second quarter, fresh food and sundries contributed significantly to the overall lower inflation. As Ron pointed out, there has been deflation in certain items like produce, eggs, butter, and cheese, which has had a notable effect on food and sundries. Although we continue to see inflation in some sectors, beef remains quite inflationary, and candy is still experiencing some historical flow-through and commodity influences as well. Overall, fresh food and sundries experienced lower inflation in Q2 compared to Q1. There was a slight increase in non-food inflation, though it was modest and not substantial, as we discussed regarding the LIFO impact. The non-food inflation remains in the low single digits, partially driven by tariffs in certain areas, and gold also contributed to inflation this quarter. Connecting this to your question about baskets, it depends on how we define inflation's impact. We consider the number of items in the basket, which is indeed growing. We analyze inflation in two ways: the price increases and changes in mix, referring to alterations in item types or sizes within the basket. We typically do not separate these two aspects. Overall, while actual price increases constitute a small portion of the overall change, the mix changes and the increase in units significantly contributed to our growth as well.

On the digital advertising frontier, there's a lot of great opportunity ahead. I'd love your thoughts on what the roadmap looks like there as well as marketplaces. And then as you zoom out on AI, you're having a lot of great success so far. AI is a technology that involves a lot of different partners, but you've had so much internal excellence. Like what are your thoughts on balancing that development and innovation around AI? And as you look forward, do you have an idea, will it impact pricing, supply chain, merchandising or membership engagement more or less or probably all of the above? But would love your earlier views on where it might be most impactful.

Thanks, Oliver. I'll go through those points quickly. Regarding advertising, we've mentioned before that we generate a significant amount of revenue from media, which is growing in double digits. Currently, over 1,000 of our suppliers are engaged with us through promotional opportunities. From a retail media standpoint, we see it as a new opportunity to connect with the marketing dollars spent by our vendors and suppliers. Our primary focus is on building our internal capabilities to deliver more personalized communication to our members. As I've said in earlier remarks, we've started seeing positive responses from members when we enhance our communication, leading to increased visits or more items in their baskets. We're still in the early stages of retail media, testing various programs with suppliers like digital TV and targeted MVM amplifications, and we believe that as we grow our personalization capabilities, we'll gain more benefits in advertising. However, we plan to reinvest most of that revenue to enhance member value and drive top-line sales. Regarding the marketplace, we're looking for services and value that can benefit our members. We've made progress in areas like installation services and unique offers around garden furniture and fixtures. We're also expanding services like Costco Travel, which helps deepen member loyalty. This focus on unique value is essential for resonating with our members. When it comes to AI, our approach is clear: we want to identify how it can enhance our value for members and support our employees. We're focused on using AI to improve our operations without chasing after non-core initiatives. This has helped us navigate technological advancements in the past. We aim to find where AI can boost productivity, allowing us to provide better compensation for employees and greater value for our members. While it's still early, we're encouraged by the progress we've made.

I know it's only been about 2 years or so, but the last time you had this much cash on the balance sheet, you did pay out a special dividend. So is that something we could see in the next few quarters? And I guess, on a related front, just given how quickly cash is now building for you, could we see payouts on a more frequent basis than maybe what we've seen in the past?

Thanks, Scot. Yes, I wouldn't say our financial strategy has really changed significantly as we think about cash. Our first priority, of course, is always to invest in the business. And as you've seen, we've been investing more capital in the last couple of years to support Ron's priorities that he shared earlier around ensuring we've got the strong pipeline of new warehouses, ensuring that we're investing in our existing warehouses to improve the member experience and support the tremendous growth that we've seen in those warehouses. We're investing in depots and expanding the network there, not only to support our warehouses, but also support the e-commerce growth that we're seeing. And we're investing in digital. And we think there's plenty of opportunities to continue to invest, and we feel good about the returns we can generate from those investments. I think you're right, we are seeing strong cash flow build up. The great thing about our model is it generates significant free cash flow. And even with the investments we're making, we're seeing continued growth in that cash. Our general priorities are, subject to Board approval, we want to continue to grow the regular dividend because we think that's a core sort of fundamental part of demonstrating our confidence in the future growth of the company. And we continue to sort of buy back stock to avoid dilution from executive stock grants. But when we do all those things in the way we have in the past, typically, we still generate excess cash and we're building a stronger cash balance on our balance sheet today. And we do think, with our valuation, the special dividend is probably the most effective way to return excess cash because it keeps flexibility if we want to invest more in capital expenditure in the future as well. What I'd say on special dividend is while our cash balances are back to the levels that they were pre the last special dividend, I think it's important to remember that to achieve a similar yield to last time when our stock was at $660, the cash would need to be greater. And so we'll continue to review the question of special dividend with our Board, but there are no plans that we could share at this time around a plan for special dividend.

I wanted to ask first, if you could just talk about the pharmacy category. A lot of moving pieces being called out by some of your competitors there with the maximum fair pricing. And just curious how and if that impacts you, it doesn't look like it, but maybe would just want to confirm how you see that going forward. And then just bigger picture, wanted to follow up on the media question and the advertising. And I was curious if you would maybe size up that more specifically. I think, Gary, you said a meaningful amount. But just curious how that looks today or even if not specific on how it is, just maybe relative to where it could be over time. Any color there?

On the pharmacy side, we have seen great success with our pharmacy business. We have mentioned in previous earnings calls that our team is dedicated to not only providing the excellent value we promise to our members but also enhancing the member experience. We have implemented new AI tools to improve our inventory in the pharmacy and made digital enhancements to streamline the checkout process for members, speeding up the experience. This has resulted in strong growth for our pharmacy segment, which has outpaced our overall sales growth. This disparity partially explains the difference between core-on-core margin improvement and the overall core margin. We expect some minor impact from changes with Medicare and drug pricing, but it is not expected to significantly hinder our top line sales results. Regarding retail media, we believe there is a significant opportunity. However, we do not quantify it because our focus is on using those funds to deliver more value back to our members and drive top line sales. Measuring it for us will center on the value we create for the member and the increased investment in the value we offer them, which will reflect more in our top line growth rather than a substantial shift in our margin profile.

I wanted to ask about the international expansion side, specifically China, where growth seems to have stalled a bit recently, where I'm sure you're facing some pretty strong local competition and Sam's competition as well. Curious how you think about your business model fitting in a market which is highly e-commerce driven, and what learnings you can gain there that can be applied to the rest of the business as well?

Thank you. I wouldn't say it was stalled. It was more by design. The way we have opened up the first warehouse is very customary to what we've done when we've gone into every other country. We get in, we open up some warehouses, we learn about the culture, we learn about doing business in that country. And then we're on a good, steady growth pattern from there. We see great opportunities in China as we did before we went into the country. We're very pleased with our business and how we're growing. We feel we can compete with anybody in the country as we do internationally. So I see good things coming for us in China, but it will be customary to our normal growth as we have done that around the world, as we've built out Japan and Korea and Europe the same customary way that Costco grows in these new countries. So we're happy with China, it's growing nicely, and there's more to come in the future for sure.