COST 10-Q: Smart Summary

• Operations: At May 10, 2026, Costco operated 928 warehouses worldwide — 637 in the U.S. (47 states, Washington, D.C., and Puerto Rico), 115 in Canada, 42 in Mexico, 37 in Japan, 29 in the U.K., 20 in Korea, 15 in Australia, 14 in Taiwan, seven in China, five in Spain, three in France, two in Sweden, and one each in Iceland and New Zealand — plus e-commerce sites in the U.S., Canada, the U.K., Mexico, Korea, Taiwan, Japan, and Australia.
• Fiscal year: Fiscal 2026 is a 52-week year ending August 30, 2026; Q3 2026 refers to the 12-week quarter ended May 10, 2026, and the year-to-date period covers the 36 weeks ended May 10, 2026.
• Pending standards: ASU 2023-09 (income-tax rate reconciliation disaggregation, effective for annual periods beginning after December 15, 2024) and ASU 2024-03 (disaggregated cost and expense disclosures, effective for fiscal years beginning after December 15, 2026, and interim periods within fiscal years beginning after December 15, 2027) have not yet been adopted; both permit early adoption and prospective or retrospective application, and the Company is evaluating them.

• Portfolio composition: As of May 10, 2026, total short-term investments were $1.1B (recorded basis), consisting of available-for-sale government and agency securities with a recorded basis of $818M (cost $821M, net unrealized losses of ($3M)) and held-to-maturity certificates of deposit of $232M; this compares to $1.1B total at August 31, 2025 ($786M AFS, $337M HTM).
• Unrealized gains/losses: Gross unrealized holding gains and losses on available-for-sale securities were not material for either period ended May 10, 2026, or August 31, 2025, and there were no available-for-sale securities in a material continuous unrealized-loss position at either date.
• No sales activity: There were no sales of available-for-sale securities during the first thirty-six weeks of 2026 or 2025.
• Maturity profile (May 10, 2026): Of the $821M AFS cost basis, $133M matures in one year or less (fair value $134M), $441M in one-to-five years (fair value $440M), and $247M after five years (fair value $244M); all $232M of HTM certificates of deposit mature in one year or less.

• Fair value hierarchy: All financial assets and liabilities measured at fair value on a recurring basis are classified as Level 2; the Company held no Level 1 or Level 3 instruments as of May 10, 2026, or August 31, 2025, and there were no transfers between levels during the first thirty-six weeks of 2026 or 2025.
• Forward FX contracts: Forward foreign-exchange contracts were in a net liability position of ($9,000) as of May 10, 2026 (asset of $1,000, liability of ($10,000)), compared to a net liability of ($8,000) as of August 31, 2025 (asset of $6,000, liability of ($14,000)); both asset and liability positions are carried in other current assets and other current liabilities, respectively.
• Nonrecurring fair value: No fair value adjustments were recorded on assets or liabilities measured at fair value on a nonrecurring basis (including financial assets at amortized cost and long-lived nonfinancial assets) during the first thirty-six weeks of 2026 or 2025.

• Senior Notes outstanding: 4 tranches of Senior Notes totaling $5M at both May 10, 2026 and August 31, 2025: 3.000% due May 2027 ($1,000), 1.375% due June 2027 ($1,250), 1.600% due April 2030 ($1,750), and 1.750% due April 2032 ($1,000); fair value estimated using Level 2 inputs.
• Other long-term debt: Consists of Guaranteed Senior Notes issued by the Company's Japan subsidiary, valued using Level 3 inputs; carrying value declined from $805 to $684 following a March 2026 repayment of $69 by the Japan subsidiary.
• Fair value: The fair value of the Company's long-term debt, including the current portion, was approximately $5,259 at May 10, 2026 and $5,370 at August 31, 2025.

• Dividends: A quarterly cash dividend of $1.47 per share was declared on April 15, 2026, and paid on May 15, 2026, up from $1.30 per share in the third quarter of 2025.
• Repurchase authorization: The Board authorized a $4M stock repurchase program expiring January 2027; $1.4M remained available as of May 10, 2026.
• Repurchase activity: In the third quarter of 2026, the Company repurchased 184 thousand shares at an average price of $997.47 per share for a total cost of $183,000, compared to 215 thousand shares at $976.71 per share ($210,000 total) in the third quarter of 2025; for the first thirty-six weeks of 2026, 638 thousand shares were repurchased at an average of $945.46 ($603,000 total), versus 658 thousand shares at $946.64 ($623,000 total) in the comparable 2025 period.

• Plan authorization: The 2019 Incentive Plan authorizes issuance of up to 15,885,000 RSUs; at May 10, 2026, 5,252,000 shares remained available to grant, with 1,908,000 time-based RSUs and 127,000 performance-based RSUs outstanding (60,000 with performance targets already met, and 67,000 subject to 2026 targets deemed probable of achievement).
• RSU activity: During the first thirty-six weeks of 2026, 1,088,000 RSUs were granted at a weighted-average grant date fair value of $933.56, 1,296,000 vested and were delivered at $669.79, and 65,000 were forfeited at $694.61, leaving 2,035,000 units outstanding at May 10, 2026 at a weighted-average grant date fair value of $727.45.
• Unrecognized cost: Remaining unrecognized compensation cost related to unvested RSUs at May 10, 2026 was $1.1M, to be recognized over a weighted-average period of 1.6 years.

Dilution source: Diluted EPS is calculated using the treasury stock method, with RSUs as the only dilutive instrument; RSU dilutive share impact was 507 thousand for the 12 weeks ended May 10, 2026 vs. 804 thousand for the 12 weeks ended May 11, 2025, and 512 thousand vs. 870 thousand for the respective 36-week periods.

Legal Proceedings

• Martin Reyes v. Costco Wholesale Corporation (Nov 2023, PAGA stay granted Dec 18, 2024): California class action alleging wage-and-hour violations; second amended complaint pending motion to dismiss; related PAGA action stayed.
• Nader v. Costco (Aug 2024, stay granted Nov 13, 2025): PAGA action alleging California Labor Code violations; court twice granted motions to strike portions of complaint; action subsequently stayed.
• Madera v. Costco / Howell v. Costco (Jan–Mar 2026): Two Washington class actions alleging failure to provide meal/rest periods and accurate wage statements; Company has denied material allegations.
• In re National Prescription Opiate Litigation, MDL No. 2804 (from Dec 2017): Consolidated opioid MDL; third-party payor claim in Ohio and infant opioid-condition actions in 40 states remain pending; certain New York city/county and Pennsylvania DA claims pending in state court.
• Pixel-tracker privacy suits / Castillo consolidation (Sep–Oct 2023, motion to dismiss denied Nov 2024): Five class actions alleging privacy law violations from Costco.com pixel trackers; consolidated Castillo complaint surviving motion to dismiss; Washington AG and LA County Counsel investigations ongoing; Birdwell dismissed with prejudice Mar 2026.
• Salisbury v. Costco Wholesale Corp. (amended Mar 9, 2026): Class action alleging Kirkland Signature tequila labeled '100% de Agave' contains non-agave alcohol; Glazer action dismissed without prejudice and refiled as amended Salisbury plaintiff; Company's motion to dismiss filed Apr 2026.
• IEEPA tariff class actions (Mar 2026): Four class actions — Stockov, Gower, Ortiz, and Briggs — alleging Company passed IEEPA tariffs to members as higher prices in violation of state consumer protection laws; motions to dismiss filed in Stockov and Gower.

• Segment structure: The Company operates 3 reportable segments — United States, Canada, and Other International — organized based on geographic location. Other International includes membership warehouses in Mexico, Japan, the U.K., Korea, Australia, Taiwan, China, Spain, France, Sweden, Iceland, and New Zealand.
• CODM and metrics: The CODM is the Company's President and Chief Executive Officer, who uses total revenue, merchandise costs, SG&A, operating income, depreciation and amortization, additions to property and equipment, and total assets to evaluate performance and allocate resources.
• Intersegment eliminations: Inter-segment net sales and expenses, including royalties, have been eliminated in computing total revenue and operating income.
• Reconciliation to pretax income: The segment table reconciles to consolidated income before income taxes by adding 'Other income,' which consists of interest expense and interest income and other, net — $123M and $50M for the 12 weeks ended May 10, 2026 and May 11, 2025, respectively, and $358M and $266M for the 36 weeks ended May 10, 2026 and May 11, 2025, respectively.

• Business model: Costco operates membership warehouses and e-commerce sites offering a limited selection of nationally-branded and private-label products at low prices, relying on high sales volumes, rapid inventory turnover, and efficient distribution to operate profitably at significantly lower gross margins than most other retailers; the company often sells inventory before payment is required, even while taking advantage of early payment discounts.
• Key profitability drivers: Increasing net sales — particularly comparable sales — is described as the most important driver of profitability; comparable sales growth is achieved through higher shopping frequency and average ticket, and is tracked excluding foreign-exchange and gasoline price impacts as supplemental measures; starting this year, the e-commerce comparable sales metric was changed to "digitally-enabled comparable sales," capturing sales initiated through a digital device whether fulfilled through a warehouse or distribution center, as well as Costco Travel.
• Tariff and pricing exposure: Government tariff actions affect the costs of some merchandise; higher tariffs are described as more likely to adversely impact than improve results; pricing strategies in response to cost increases may include working with suppliers to share cost absorption, earlier or larger-volume purchasing, sourcing in countries where items are sold, or passing increases to members.
• Q3 2026 highlights (12 weeks ended May 10, 2026 vs. May 11, 2025): Net sales increased 12% to $69.2B driven by comparable sales growth and 23 net new warehouses; gasoline prices positively impacted net sales by $1.4B (221 basis points) and foreign currencies by approximately $643M (104 basis points); membership fee revenue increased 11% to $1.4B; net income increased to $2.2B ($4.93 per diluted share) from $1.9B ($4.28 per diluted share); effective tax rate was 25.4% vs. 26.2%; a quarterly cash dividend of $1.47 per share was declared April 15, 2026, and paid May 15, 2026; 4 new warehouses were opened (3 U.S., 1 Canada) vs. 9 in the prior-year period.

• Net sales growth: Net sales increased $7.2M or 12% in the third quarter and $17.9M or 10% in the first thirty-six weeks of 2026, with comparable sales contributing $6.1M or 10% and $14.6M or 8% of those increases respectively; comparable sales were lifted by approximately 7% and 5% growth in average ticket and 2% and 3% growth in shopping frequency in the respective periods, with the remainder driven by 23 net new warehouses opened since the end of the third quarter of 2025.
• Digitally-enabled sales: Digitally-enabled comparable sales increased 21% and 22% during the third quarter and first thirty-six weeks of 2026, and increased 21% for each period excluding the impact of changes in foreign currencies.
• Gasoline and ancillary businesses: Warehouse ancillary and other businesses sales increased $3,468 or 29% and $5,510 or 16% in the third quarter and first thirty-six weeks of 2026 led by gasoline and pharmacy; higher gasoline prices alone positively impacted net sales by $1,367 or 221 basis points and $936 or 50 basis points in the respective periods, with average price per gallon up 20% and 5%.
• FX and currency impact: Changes in foreign currencies positively impacted net sales by approximately $643 or 104 basis points and approximately $1,578 or 85 basis points during the third quarter and first thirty-six weeks of 2026; on an FX- and gasoline-price-adjusted basis, total company comparable sales grew 7% and 7% in those periods.

• Revenue growth: Membership fee revenue increased 11% to $1.4B in the 12 weeks ended May 10, 2026 and 13% to $4.1B in the 36 weeks ended May 10, 2026, driven by new member sign-ups, membership fee increases, and upgrades to Executive Membership.
• Member base: Total paid members stood at 82,900 thousand and total cardholders at 148,500 thousand at the end of the third quarter of 2026, versus 79,600 thousand and 142,800 thousand, respectively, in the prior-year period.
• Renewal rates: At the end of the third quarter of 2026, renewal rates were 92.2% in the U.S. and Canada and 89.7% worldwide; rates were negatively impacted by a higher number of memberships sold online, including through digital promotions, which renew at a slightly lower rate on average.
• Fee increase contribution: The September 1, 2024 U.S. and Canada annual membership fee increase (recognized on a deferred, ratable basis over the one-year membership period) accounted for approximately 25% and 35% of membership income growth during the third quarter and first thirty-six weeks of 2026, respectively.

• Gross margin overall: Gross margin as a percentage of net sales decreased by 21 basis points; excluding gasoline price inflation, gross margin percentage was 11.26%, an increase of one basis point.
• Positive drivers: Warehouse ancillary and other businesses (primarily pharmacy and e-commerce) contributed +14 basis points; a smaller LIFO charge versus the third quarter of 2025 contributed +14 basis points; the absence of a one-time employee vacation expense charge contributed +2 basis points; and changes in foreign currencies relative to the U.S. dollar positively impacted gross margin by approximately $69 compared to the third quarter of 2025, attributable to Other International and Canadian operations.
• Negative driver: Core merchandise categories negatively impacted gross margin by 29 basis points, primarily due to foods and sundries and fresh foods, partially offset by the co-branded credit card program and non-foods; when expressed as a percentage of core merchandise sales, the decrease was nine basis points, primarily from fresh foods and foods and sundries.
• Segment view: U.S. segment gross margin percentage decreased, driven by core merchandise categories partially offset by warehouse ancillary and other businesses, a smaller LIFO charge, and the absence of the vacation expense charge; Canadian segment gross margin percentage increased, led by warehouse ancillary and other businesses; Other International gross margin increased, primarily due to core merchandise categories.

• Gross margin (consolidated): Gross margin as a % of net sales increased by one basis point; excluding gasoline price inflation on net sales, gross margin % was 11.18%, an increase of six basis points, positively impacted by 13 basis points from warehouse ancillary and other businesses (primarily pharmacy and gasoline), three basis points from a smaller LIFO charge in the first thirty-six weeks of 2026 vs. 2025, and two basis points from a non-recurring legal settlement, partially offset by a 12-basis-point drag in core merchandise categories (primarily co-branded credit card program, foods and sundries, and 2% rewards, partially offset by non-foods increases).
• Currency impact: Changes in foreign currencies relative to the U.S. dollar positively impacted gross margin by approximately $170, attributable to Other International and Canadian operations, compared to the first thirty-six weeks of 2025.
• Core merchandise categories: When expressed as a % of core merchandise sales (rather than total net sales), gross margin in core merchandise categories increased 14 basis points, primarily due to non-foods and foods and sundries, partially offset by fresh foods.
• Segment performance: Gross margin % increased in all segments; the U.S. segment performed similarly to consolidated results; the Canadian segment's increase was driven by warehouse ancillary and other businesses, partially offset by core merchandise categories; the Other International segment's increase was driven by core merchandise categories and warehouse ancillary and other businesses.

• 12-week SG&A: SG&A expenses rose to $6.2M in the 12 weeks ended May 10, 2026 from $5.7M in the 12 weeks ended May 11, 2025, while as a % of net sales improved to 8.96% from 9.16%.
• 36-week SG&A: SG&A expenses rose to $18.8M in the 36 weeks ended May 10, 2026 from $17.2M in the 36 weeks ended May 11, 2025, while as a % of net sales improved to 9.24% from 9.27%.

• SG&A as % of net sales: SG&A expenses as a percentage of net sales decreased by three basis points; excluding the impact of gasoline price inflation, SG&A as a percentage of net sales was 9.29%, an increase of two basis points.
• Basis-point headwinds: Results were negatively impacted by two basis points from self-insured general liability claims expense, one basis point from a charge related to a tax assessment for prior years, and one basis point from warehouse operations and other businesses.
• Basis-point tailwind: The absence of a charge related to a one-time expense for increased employee vacation favorably impacted SG&A by two basis points.
• Currency impact: Changes in foreign currencies relative to the U.S. dollar increased SG&A expenses by approximately $113 compared to the first thirty-six weeks of 2025, attributable to Other International and Canadian operations; SG&A as a percentage of net sales was higher in U.S. and Canadian segments and lower in the Other International segment.

• Interest expense: Totaled $32M for the 12 weeks ended May 10, 2026 (vs. $35M in the prior-year period) and $100M for the 36 weeks ended May 10, 2026 (vs. $108M), primarily related to Senior Notes and financing leases.
• Interest income: Rose to $130M in the 12-week period (vs. $95M) and $392M in the 36-week period (vs. $300M), driven by higher cash balances partially offset by lower interest rates.
• Foreign-currency gains/losses: Swung to a $17M gain in the 12-week period (vs. a $17M loss) and contributed $38M in the 36-week period (vs. $49M), reflecting revaluation/settlement of monetary assets and liabilities by Canadian and Other International operations and mark-to-market adjustments on forward foreign-exchange contracts.
• Total interest income and other, net: Increased to $155M for the 12-week period (vs. $85M) and $458M for the 36-week period (vs. $374M).

• Provision for income taxes: Rose to $746M for the 12 weeks ended May 10, 2026 from $677M in the prior-year period, and to $2B for the 36 weeks ended May 10, 2026 from $1.8B in the prior-year period.
• Effective tax rate: Declined to 25.4% (12 weeks) and 24.4% (36 weeks) in 2026 from 26.2% and 24.9%, respectively, in the comparable 2025 periods; both year-to-date rates were favorably impacted by discrete tax benefits related to stock compensation of $72M in 2026 and $100M in 2025.

• Cash and investments: Cash and cash equivalents and short-term investments were $20B at May 10, 2026, up from $15.3B at August 31, 2025; unsettled credit and debit card receivables of approximately $3.1B at May 10, 2026 (vs. $2.7B at August 31, 2025) are included in those balances and generally settle within four days.
• Operating cash flow: Net cash provided by operating activities was $11.1B for the 36 weeks ended May 10, 2026, compared to $9.5B for the 36 weeks ended May 11, 2025; net cash used in investing activities was ($4.2B) vs. ($3.3B), and net cash used in financing activities was ($2.2B) vs. ($2.2B).
• Material obligations: Contractual obligations primarily consist of purchase obligations (merchandise, equipment, third-party services), long-term debt and related interest, leases, and construction and land-purchase obligations for new and relocated warehouses, with the majority of non-lease obligations due within the next 12 months.
• Liquidity adequacy: Management believes cash, investment positions, and operating cash flow, together with capacity under existing and available credit agreements, will be sufficient to meet liquidity and capital requirements for the foreseeable future, and that the U.S. asset position is sufficient to meet U.S. liquidity requirements.

• Operating cash inflows: Cash flow provided by operations is primarily from net sales and membership fees, while cash used in operations covers payments to suppliers, warehouse operating costs (wages, employee benefits, utilities, credit and debit card processing fees), operating leases, and income taxes.
• Year-to-date cash from operations: Net cash provided by operating activities totaled $11.1M in the first thirty-six weeks of 2026, compared to $9.5M in the first thirty-six weeks of 2025, with the increase primarily driven by higher cash flow from operating income and a reduced net investment in merchandise inventories.
• Merchandise inventory dynamics: The reduced net investment in merchandise inventories (the difference between merchandise inventories and accounts payable) resulted from faster inventory turns and improved payment terms with suppliers.

• Investing outflows: Net cash used in investing activities totaled $4.2M in the first thirty-six weeks of 2026, up from $3.3M in the first thirty-six weeks of 2025, primarily related to capital expenditures.
• Other investing activity: Net cash from investing activities also includes purchases and maturities of short-term investments.

• FY2026 capex plan: Costco spent $4.2M on capital expenditures in the first thirty-six weeks of 2026 and intends to spend approximately $6.5M for the full fiscal year 2026, directed toward new warehouse openings, remodels of existing locations, depot network expansion, and digitally-enabled business development.
• Funding sources: These expenditures are expected to be financed with cash from operations, cash and cash equivalents, and short-term investments.
• Warehouse openings: 16 new warehouses (including 2 relocations) were opened in the first thirty-six weeks of 2026, with 13 additional new warehouses (including 1 relocation) planned for the remainder of fiscal 2026.

• Uses of cash: Net cash used in financing activities totaled $2,175 in the first thirty-six weeks of 2026, compared to $2,182 in the first thirty-six weeks of 2025, with outflows primarily driven by payment of dividends, repurchases of common stock, repayments of short-term borrowings, withholding taxes on stock-based awards, and repayments of long-term debt.
• Inflows: Partially offsetting these uses were proceeds from short-term borrowings.

Debt repayments: Repayments of long-term debt in the first thirty-six weeks of 2026 totaled $69, compared to no repayments in the first thirty-six weeks of 2025.

• Quarterly dividend: A cash dividend of $1.47 per share was declared on April 15, 2026, and paid on May 15, 2026.

• Authorization: The Board of Directors authorized a share repurchase program of $4,000 on January 19, 2023, expiring January 2027, with $1,359 remaining available at the end of the third quarter.
• 2026 activity: During the first thirty-six weeks of 2026, 638,000 shares were repurchased at an average price of $945.46 per share, totaling approximately $603.
• 2025 activity: During the first thirty-six weeks of 2025, 658,000 shares were repurchased at an average price of $946.64 per share, totaling approximately $623.
• Mechanics: Purchases are made from time to time as conditions warrant via open market, block purchases, or plans under SEC Rule 10b5-1; repurchased shares are retired in accordance with the Washington Business Corporation Act.

• Borrowing capacity: As of May 10, 2026, total borrowing capacity under bank credit facilities was $1.5M, of which $1M is held by Canadian and Other International operations (with $338,000 guaranteed by the Company); short-term borrowings outstanding were $96,000 at the end of the third quarter of 2026 and immaterial at the end of 2025.
• Letter of credit facilities: Total letter of credit facilities (commercial and standby) amount to $242,000, with $205,000 in outstanding commitments at the end of the third quarter of 2026, most of which were standby letters of credit that do not expire or have expiration dates within one year.
• Facility terms: Bank credit facilities carry various expiration dates, most within one year, with general intent to renew; available borrowing capacity is reduced by the amount of standby and commercial letters of credit outstanding.