COST — Q3 FY2026 Financial Report Analysis

Gasoline inflation, not shopping habits, drove Costco's 12% quarter

Costco's fiscal third quarter (the 12 weeks ended May 10, 2026) looks like an acceleration on the surface: net sales rose 11.6% to $69,154 million and comparable sales — sales at warehouses and digital businesses open more than a year, the measure that strips out the effect of simply opening more stores — rose 10%, against 6% in the same quarter last year.

Strip out two things Costco says it does not control, and the picture inverts. Comparable sales excluding changes in fuel prices and currency exchange rates rose 7%, versus 8% a year ago. In other words, the part of the business that reflects how often members shop and what they buy slowed slightly, while the headline number nearly doubled on the back of a 20% increase in the average price per gallon of gasoline.

The filing quantifies both effects directly: higher gasoline prices added $1,367 million to net sales, or 221 basis points of the growth rate (a basis point is one hundredth of a percentage point), and currency moves in Canada and Other International added roughly $643 million, or 104 basis points. Together that is about 3.3 points of the 11.6% reported growth.

Profit grew faster than sales — net income rose 15.2% to $2,192 million and diluted earnings per share rose 15.2% to $4.93 — but almost none of that came from the operating business. Operating income grew 11.3%, essentially in line with revenue. The gap was interest income and a lower tax rate.

The quarter in numbers

Renewal rates at quarter-end were 92.2% in the U.S. and Canada and 89.7% worldwide. Costco does not give the prior-year figures in this filing, so those two are not directly comparable here; management attributes pressure on the rate to a higher share of memberships sold online, including through digital promotions, which "renew at a slightly lower rate on average."

Takeaway: The 12% headline is a fuel-price artifact. Underlying traffic-and-basket growth (comp sales excluding gas and currency) decelerated from 8% to 7%, gasoline's lower-margin sales pushed reported gross margin down 21 basis points, and roughly 4 of the 15 points of EPS growth came from interest income and a lower tax rate rather than from retail operations. The business is still compounding, but at the 7-8% underlying pace it was already running at — not the 12% the top line implies.

Where the sales growth actually came from

The category split makes the fuel effect visible. Warehouse ancillary and other businesses — gasoline, pharmacy, optical, food court, e-commerce, business centers, travel — grew 29.0% to $15,419 million, and now account for 22.3% of net sales versus 19.3% a year ago. Core merchandise (the three grocery and general-merchandise categories) grew 7.4%:

That 3-percentage-point shift in sales mix toward gasoline is the mechanical reason reported gross margin fell: gasoline carries a much lower gross margin percentage than merchandise, so the more of it Costco sells at high prices, the lower the blended margin percentage looks even if nothing about the retail business has changed.

Within comparable sales, average ticket — the amount spent per visit — rose about 7% and shopping frequency about 2%. Since fuel is bought by the tankful at a 20% higher price per gallon, most of that ticket increase is price, not more goods in the cart. Gasoline volume itself rose about 10%, adding a further $662 million (107 basis points) to net sales, so Costco genuinely sold more fuel as well as dearer fuel.

Digitally-enabled comparable sales — orders initiated on a digital device plus Costco Travel — rose 21%, and 21% excluding currency, making it the fastest-growing part of the business by a wide margin and one Costco notes carries a lower gross-margin percentage than the warehouses.

Costco opened four warehouses in the quarter (three U.S., one Canada) against nine a year ago, ending the quarter with 928 worldwide. Twenty-three net new warehouses opened over the past year contributed the portion of sales growth not explained by comparable sales.

Margins: the improvement is mostly non-recurring items

Costco's own preferred measure — gross margin excluding the distorting effect of gasoline price inflation — was 11.26%, up just 1 basis point. The components of that 1 basis point matter more than the total:

• +14 bps from warehouse ancillary and other businesses, mainly pharmacy and e-commerce
• +14 bps from a smaller LIFO charge than in Q3 2025 (LIFO is an inventory-costing method; the charge swings with cost inflation and is not an operating result)
• +2 bps from the absence of last year's one-time charge for increased employee vacation
• −29 bps from core merchandise categories, mainly foods and sundries and fresh foods, partly offset by the co-branded credit card program and non-foods

Two of the three positive items — the LIFO swing and the missing vacation charge, 16 basis points combined — are comparisons against last year rather than improvements in this year's operations. Excluding them, the ex-gasoline gross margin would have been down roughly 15 basis points, consistent with the 29-basis-point squeeze in core merchandise. Costco describes that squeeze as its own pricing choice: holding or cutting prices "to drive sales or meet competition" rather than passing cost increases to members.

The same pattern shows in operating costs. SG&A fell 20 basis points as a percentage of net sales, but that mostly reflects the inflated sales base; excluding gasoline price inflation SG&A was 9.14%, down only 2 basis points, and 5 of those basis points came from the absence of last year's vacation charge. Warehouse operations cost 3 basis points more and stock compensation 1 basis point more. Underlying cost leverage was therefore slightly negative, not positive.

Why EPS grew faster than operating income

Operating income rose 11.3%; pre-tax income rose 13.9%; net income and EPS rose 15.2%. The two steps between:

• Interest income and other, net was $155 million versus $85 million, which the filing attributes to higher cash balances partly offset by lower interest rates. Cash and short-term investments reached $19,996 million at quarter-end, up from $15,284 million at the August 31, 2025 fiscal year-end — Costco is earning meaningfully more on an increasingly large cash pile.
• The effective tax rate fell to 25.4% from 26.2%. Held at last year's rate, net income would have been about $2,168 million, or 13.9% growth — so roughly 1.3 points of the 15.2% EPS growth is tax.

Buybacks were not a factor: diluted share count was 444.4 million versus 444.8 million, and Costco repurchased just 638,000 shares year-to-date at an average $945.46, about $603 million, leaving $1,359 million of the $4,000 million authorization that expires in January 2027. The quarterly dividend was $1.47 per share, declared April 15 and paid May 15, 2026.

Membership: still about half of operating profit

Membership fee revenue of $1,373 million equals 48.8% of the quarter's $2,815 million operating income — a reminder that Costco's merchandise business runs at close to break-even by design, and the annual fee is the profit. Fee revenue grew 10.7% against paid-member growth of 4.1% (82.9 million paid members, 148.5 million cardholders). The difference is price and mix: the September 2024 U.S. and Canada fee increase still accounted for about 25% of membership income growth in the quarter, down from 35% year-to-date, as the increase laps. The rest is new sign-ups and upgrades to Executive membership, which costs more and pays a 2% reward that is netted out of sales.

That 25%-and-falling contribution matters for the next several quarters: absent another fee increase, membership income growth should converge toward member growth plus Executive mix, which is a mid-single-digit rate rather than a double-digit one.

Segments: international profit outgrew international demand

Other International was the only segment to expand its operating margin, on gross-margin gains in core merchandise. But its underlying demand was the weakest of the three: comparable sales excluding gas and currency rose 6% there, down from 9% a year ago, and Canada slowed to 6% from 8%, while the U.S. held up better at 7% versus 8%. Currency translation, which added roughly $643 million to sales and $69 million to gross margin across Canada and Other International, flatters both international lines and should be read as a translation effect, not a demand signal — if the dollar strengthens, it reverses.

Tariffs: a cost question and now a legal one

Costco states plainly that "higher tariffs are more likely to adversely impact rather than improve our results," with exposure depending on goods type, rates and timing. The filing does not quantify a tariff cost, and management's stated playbook — sharing increases with suppliers, buying earlier and in greater volume, sourcing in the region of sale, and selectively absorbing costs — is the same set of levers that produced the 29-basis-point core merchandise margin decline this quarter.

New this quarter: in March 2026 four class actions were filed against Costco seeking refunds of tariffs paid under the International Emergency Economic Powers Act that were passed on to members through higher prices, alleging violations of state consumer-protection laws. Costco has moved to dismiss in two of them. No amount is quantified and Costco does not believe any pending matter will have a material adverse effect on its financial position, but the suits establish that tariff pass-through is now a litigation exposure as well as a margin one.

Cash generation and spending

Year-to-date (36 weeks), operating cash flow was $11,133 million versus $9,468 million, which Costco attributes to higher operating income plus a smaller net investment in inventory from faster inventory turns and better supplier payment terms. Capital spending was $4,228 million year-to-date against a full-year fiscal 2026 plan of about $6,500 million. Sixteen warehouses opened year-to-date (including two relocations) with 13 more planned, including one relocation, before the fiscal year ends.

Outlook

Costco does not issue financial guidance, so there are no company revenue or EPS targets to check against. What management does commit to in this filing: roughly $6,500 million of fiscal 2026 capital spending, 13 more warehouse openings before year-end, and continued willingness to absorb cost increases rather than pass them to members.

Our read on trajectory:

• The headline growth rate should fall back. The 221-basis-point boost from gasoline price inflation only persists while fuel prices stay above the prior-year comparison. When that lapses, reported growth converges toward the 7% underlying comp plus roughly 2-3 points from new warehouses — call it high single digits — and reported gross margin percentage mechanically improves as the gasoline mix shrinks, without anything real changing.
• Core merchandise margin is the number to watch. The 29-basis-point decline in core categories is deliberate price investment, and this quarter it was masked by a LIFO comparison and a missing prior-year charge that will not repeat. If core margin keeps eroding at this rate against a tariff cost base, operating margin cannot stay flat.
• Membership income growth decelerates from here unless Costco raises fees again. The September 2024 increase contributed 25% of fee growth this quarter versus 35% year-to-date, and that contribution shrinks each quarter.
• The financial-income tailwind is real but finite. $19,996 million of cash and short-term investments earning more than last year added roughly 2.6 points to pre-tax growth; falling interest rates would erode it, and Costco has historically returned large cash balances to shareholders through special dividends, which would end it outright.

For a fiscal fourth quarter ending August 30, 2026 and the FY2026 10-K that follows it, the questions are whether the ex-gas, ex-currency comp holds at 7% or keeps sliding, and whether core merchandise gross margin stabilizes once the LIFO and one-off comparisons are out of the way.