Costco Leverages Gas Surge and Digital Upgrades to Power Record Sales Amid Slowing Membership Growth

Costco (COST) delivered a robust financial performance for the 12 weeks ended May 10, posting net sales of **$69.2 billion**, up 11.6% from $62 billion a year earlier, and net income of **$2.19 billion** or **$4.93 per diluted share**, a 15% increase. Comparable sales rose 9.8% overall, but the figure fell to 6.6% after stripping out gas‑price inflation and foreign‑exchange effects—still well above the low‑single‑digit growth that many peers have struggled to achieve.

The standout driver was gasoline. “All three 4‑week fiscal periods of the quarter set successive all‑time company volume sales records,” said Chief Financial Officer Gary Millerchip, noting that the final five weeks were among Costco’s top five volume weeks ever.

Gas volumes surged as Middle‑East tensions pushed fuel prices higher; the company leveraged its “price gap” strategy to capture market share while keeping pump prices below competitors. Gross margin on gas slipped modestly, but overall reported gross margin held at **11.04%**, only 21 basis points lower year‑over‑year. Excluding gas inflation, margins actually improved by a point, reflecting disciplined pricing in core merchandise.

Digital acceleration also paid dividends. Digitally enabled comparable sales jumped 21.5%, with e‑commerce and pharmacy contributing mid‑20s growth. Same‑day delivery now averages under 45 minutes in the U.S., earning a **4.8/5** member satisfaction rating, while AI‑enhanced product pages drove triple‑digit traffic growth and the highest conversion rates of any source. “Our personalized recommendation carousels delivered conversion rates three times higher than typical,” Ron Vachris highlighted, underscoring the strategic push toward technology that improves both member experience and top‑line revenue.

Membership dynamics painted a more nuanced picture. Total paid members rose 4.1% to **82.9 million**, with executive memberships climbing 9.6% to 41.2 million—driven by upgrades and strong uptake in China’s newly launched program.

However, the overall membership growth rate is now at its lowest level in recent history, prompting analyst Michael Lasser (UBS) to ask whether “same‑store sales growth outlook…should be modest.” Management responded that the 7% underlying membership income growth—after stripping out the September 2024 fee hike and FX—reflects a healthy base of new sign‑ups and upgrades, but acknowledged that without fresh warehouse openings in major markets, the growth ceiling may tighten.

Capital allocation remains firmly weighted toward expansion. Costco opened four net new warehouses this quarter—including three U.S. locations and one Canadian business center—bringing the global count to **928**. The firm targets **30+ net new openings per year**, with a full‑year CapEx outlook of **$6.5 billion** to fund warehouse build‑outs, depot network enhancements, and digital investments.

While CFO Millerchip dismissed any imminent special dividend, he noted the company’s cash pile sits at roughly **$45 per share**, giving it flexibility for future shareholder returns once growth opportunities are exhausted.

Analysts also pressed on margin pressure from core merchandise. Morgan Stanley’s Simeon Gutman queried whether a 9‑basis‑point dip in core‑on‑core margins signaled an aggressive “value posture.” Management answered that the decline stemmed largely from mix shifts—higher gas, e‑commerce and pharmacy sales—and deliberate pricing cuts on staples like eggs and beef to protect member value.

The firm’s “first to lower prices, last to raise them” mantra, reiterated by Vachris, suggests margin erosion will be temporary as price elasticity drives traffic and basket size growth.

Finally, the call highlighted emerging revenue streams. Retail media partnerships with Google Commerce & Media and YouTube aim to monetize Costco’s high‑intent shopper base without compromising member experience—an initiative that “80‑90% of the value is reinvested in the member,” Millerchip explained. Meanwhile, AI‑driven search enhancements are expected to boost visibility for high‑margin categories such as appliances and tires, where bundled services (installation, nitrogen) can be showcased more effectively.

Overall, Costco’s Q3 results reflect a business that can translate macro headwinds—fuel price spikes, lingering inflation, and slower membership growth—into incremental sales through strategic pricing, digital innovation, and continued warehouse expansion. The key question for investors will be whether the company can sustain same‑store sales momentum once the gas surge normalizes and new warehouse pipelines fill out.