Gregory Melich

Greg Melich sought clarification on inflation trends, specifically if general merchandise was up low single digits, whether food was inflationary and its trajectory, and if most of the ticket growth in comparable sales was driven by inflation.

Answer

Gary Millerchip, Chief Financial Officer, confirmed that food and sundries, and fresh, experienced slight inflation (low to mid-single digits), consistent with recent quarters, due to various commodity puts and takes. He clarified that ticket growth resulted from a combination of natural inflation on like-for-like items, members purchasing larger pack sizes or upgraded products, and unit growth.

Greg Melich sought clarification on inflation trends, specifically if food was inflationary in the quarter and how it's trending, and if most of the ticket growth in comparable sales was driven by inflation.

Answer

Gary Millerchip (CFO, Costco Wholesale Corporation) confirmed that food and fresh food/sundries were slightly inflationary (low to mid-single digits), with puts and takes across commodities. He clarified that ticket growth was a combination of natural inflation on like-for-like items, members buying bigger pack sizes or upgraded items, and unit growth.

Greg Melich sought clarification on the acceleration of inflation, specifically if non-food items were the primary driver, and the magnitude. He also inquired about trends in Costco's credit card program, including penetration and opportunities to enhance member value.

Answer

EVP & CFO Gary Millerchip clarified that overall inflation remained low to mid-single digits, consistent with Q3 2025. He noted fresh and food/sundries were consistent, with puts and takes in individual departments and commodities. The change in Q3 was non-foods moving from deflationary to low single-digit inflation. Millerchip highlighted the credit card program's success, delivering incremental value through rewards and travel benefits. He mentioned recent changes, including a 5% gas rewards benefit and card modernization, which have been well-received.

Greg Melich inquired about the acceleration of inflation, specifically if non-food items were driving the shift from low to mid-single digits, and trends in credit card perks and fees, including penetration and member value enhancement.

Answer

CFO Gary Millerchip stated that overall inflation remained consistent at low to mid-single digits from Q3 to Q4. He noted that while fresh and food & sundries were consistent, non-foods, which had been deflationary, saw a return to low single-digit inflation, contributing to the LIFO charge. Regarding credit cards, he highlighted the program's success, recent addition of 5% gas rewards, and modernized card design, expressing satisfaction with member reaction and continued growth.

Greg Melich inquired about the inflation outlook, specifically if non-food items were driving the acceleration to low to mid-single digits, its magnitude, and trends in credit card perks and fees.

Answer

CFO Gary Millerchip clarified that overall inflation remained consistent at low to mid-single digits between Q3 and Q4 2025. He noted that non-foods, which had been deflationary, saw low single-digit inflation, contributing to the LIFO charge. He highlighted the success of Costco's credit card program, mentioning the recent addition of 5% gas rewards and card modernization.

Greg Melich from Evercore ISI asked for clarification on the level of grocery inflation and requested a deeper dive into digital metrics, including its percentage of total sales and the role of Costco Logistics.

Answer

CFO Gary Millerchip confirmed grocery inflation was in the low single-digit range. He detailed that e-commerce represents about 8% of sales by their narrow definition, but is closer to 12% when adjusted for gas sales and including other online services. CEO Ron Vachris added that Costco Logistics handles 80-85% of big and bulky deliveries, a key driver of its growth.

Greg Melich from Evercore ISI sought clarification on the level of grocery inflation and requested a deeper dive into digital performance, asking for its percentage of total sales and the specific contribution of Costco Logistics to e-commerce.

Answer

Executive VP & CFO Gary Millerchip confirmed grocery inflation was in the low single-digit range, similar to the prior quarter. He stated that e-commerce, as defined by Costco, is about 8% of sales but closer to 12% if gas sales are excluded and other online services are included. President, CEO & Director Ron Vachris added that Costco Logistics handles 20-25% of total e-commerce deliveries but represents a significant 80-85% of big and bulky items like furniture and TVs.

Gregory Melich asked for a breakdown of inflation between grocery and general merchandise and requested more detail on the strategy and scale of Costco's alternative/retail media business.

Answer

Executive Gary Millerchip detailed that fresh foods were most inflationary, followed by low single-digit inflation in food & sundries, while non-foods were evening out. Regarding retail media, he described it as a significant long-term opportunity but stressed they are in the early stages. He framed Costco's approach as different from peers, aiming to use the value generated to reinvest in members rather than creating a distinct high-margin revenue stream.

Gregory Melich of Evercore ISI asked for an update on e-commerce penetration, including the contribution from third-party services like Instacart, and the current sales penetration of the Kirkland Signature private label brand.

Answer

Executive Gary Millerchip stated that e-commerce penetration is in the 7-8% range of total sales as defined by Costco, but would be north of 10% if adjusted to exclude gas sales and include third-party delivery services, similar to how peers report. Executive Ron Vachris reported that Kirkland Signature penetration has now reached almost 33% in the U.S., primarily in food and sundries, and continues to grow at a faster pace than the overall business.

Gregory Melich asked for the normalized penny profit per gallon for gasoline, the current average hourly wage after the recent increase, and whether there were plans for a Kirkland Signature gold bullion product.

Answer

Gary Millerchip, an executive, declined to share specific gas profitability metrics but characterized the business as generally stable, noting the current quarter was not a directional change. Ron Vachris, an executive, stated that the current average wage is just north of $30 an hour in the U.S. and Canada. He also confirmed there are no plans for a Kirkland Signature gold bullion product at this time.

Greg Melich inquired about the drivers and constraints of Walmart Plus membership growth, asking what is needed to accelerate its expansion.

Answer

John Furner (President and CEO, Walmart U.S.) highlighted the best quarter for net additions, attributing it to improved delivery speed (35% sub-three hours, fastest growth sub-one hour), high Net Promoter Scores (NPS) for delivery, the successful launch of the OnePay Credit Card offering 5% back, and the addition of streaming options. He emphasized the role of supply chain investments and digital agents in improving accuracy and assortment.

Greg Melich inquired about the drivers behind the accelerated growth of Walmart Plus membership and the existing constraints or necessary actions to further boost its expansion.

Answer

President and CEO, Walmart U.S., John Furner, attributed the momentum to improved delivery speed (35% sub-three-hour deliveries), high Net Promoter Score (NPS) levels for delivery, and strategic investments in supply chain and inventory accuracy. He also highlighted the successful launch of the OnePay credit card, offering 5% back on purchases, and the addition of streaming options as key contributors.

Gregory Melich asked about the expected time lag for current tariff rates to be reflected in on-shelf prices and the potential magnitude of the impact on overall pricing.

Answer

CEO Doug McMillon explained that the price impact is a gradual process that began in April and will play out through the year, rather than a single event. The timing is affected by when inventory is received, such as for seasonal buys like back-to-school. He emphasized the company's focus on mitigating food inflation but did not quantify a specific basis point impact for general merchandise.

Gregory Melich asked for details on membership growth drivers, the behavioral lift from Walmart+ members, and how the resulting data is used in Walmart's newer businesses.

Answer

Walmart U.S. CEO John Furner explained Walmart+ helps customers amortize delivery costs, with success hinging on execution to build trust. Walmart International CEO Kathryn McLay described a spectrum of membership programs driving loyalty and personalization. A final comment from Sam's Club leadership noted that executing on basics like value and experience leads to record memberships and renewal rates.

Greg Melich asked for a breakdown of traffic and ticket, specifically how much of the accelerating ticket expansion was due to tariffs or mix, and how the basket is evolving. He also sought clarification on the 50 basis points annualized effect of the two acquisitions on margins and confirmed that the Q4 margin guide, down around 60 basis points, was primarily driven by these acquisitions.

Answer

Brandon Sink (EVP and CFO) explained that ticket growth drivers in Q3 were consistent with prior quarters, including strength in pro business, appliances, and modest price increases, with like-for-like inflation in line with expectations. Transactions were pressured by lower DIY demand and storm-related impacts. He confirmed the 50 basis points annualized dilution from acquisitions (20 basis points in 2025, 30 basis points wrap in 2026) and that the Q4 operating margin decrease is primarily due to the dilution from FBM ($1.3 billion in sales) and ADG.

Greg Melich asked for a breakdown of Lowe's traffic and ticket performance, specifically how much of the accelerated ticket expansion in Q3 was due to early tariffs, mix, or changes in basket size and items. He also sought clarification on the full annualized margin effect of the two acquisitions and the primary drivers behind the expected Q4 margin decrease.

Answer

Brandon Sink, EVP and CFO, explained that Q3 ticket growth drivers were consistent with prior quarters, including strength in pro and appliances, modest price increases, and like-for-like inflation in line with expectations. He noted that transactions were pressured by lower DIY demand and the 100 basis points of storm-related headwind. Brandon Sink clarified that the annualized margin effect of acquisitions is 50 basis points for 2026, with 20 basis points in 2025 and a 30 basis point wrap into 2026. He confirmed that the bulk of the Q4 operating margin decrease is driven by the dilution from layering in FBM and ADG sales.

Gregory Melich asked about the level of inflation in Q4 and whether potential tariffs were contemplated in the 2025 guidance. He also sought to confirm the operating margin leverage framework of 10 basis points on the upside and 15 on the downside.

Answer

CFO Brandon Sink stated that like-for-like inflation was 'pretty muted' in Q4. He clarified that while recently enacted tariffs are not explicitly included in the guide, the company is prepared to manage any changes. Sink also confirmed that the operating margin leverage framework of 10 bps for upside and 15 bps for downside remains the correct model for the full year.

Greg Melich asked for an understanding of how much volume negatively impacted the gross margin rate this year or in the third quarter. He also inquired about the volume growth required to achieve 100 basis points of leverage out of margin and the company's variable margin.

Answer

Al Mistysyn, SVP of Finance and CFO, estimated that supply chain inefficiencies impacted gross margin by 'low, you know, 10, 20, 30 basis points.' He emphasized the focus on driving operating margin, noting that any volume growth, even low single-digit, would be 'accretive' and lead to operating margin expansion. He stated that the leverage on future incremental volume would be 'less today than it would have been two years ago,' indicating improved efficiency.

Greg Melich asked how much volume hurt the gross margin rate in Q3 2025 or for the full year, and what volume growth would be needed to achieve 100 basis points of leverage out of margin, inquiring about the variable margin.

Answer

SVP of Finance and CFO Al Mistysyn estimated the gross margin impact from supply chain inefficiencies due to lower production volumes to be in the low 10-30 basis points range. He emphasized the focus on driving operating margin, not just gross margin, noting that SG&A leverage in Q3 helped operating margin expansion. He stated that any low single-digit volume growth would be accretive, leading to operating margin expansion, and that the company would get better leverage on future incremental volume than prior to the current cycle.

Greg Melich of Evercore ISI asked to quantify the impact of weak architectural volumes on gross margin, questioning what the margin might have been if volumes were flat or positive.

Answer

SVP of Finance & CFO Al Mestyshin acknowledged that margins would have been higher but was hesitant to provide a specific figure. He explained that the 60 basis point year-over-year gross margin expansion was driven by effective pricing in the Paint Stores Group and favorable mix, which was partially offset by the drag from supply chain inefficiencies due to lower production volumes.

Greg Melich of Evercore ISI asked about the relationship between volume and gross margin, seeking to quantify the margin headwind from the decline in architectural paint volume during the quarter.

Answer

CFO Allen Mistysyn explained that while the company achieved its 12th consecutive quarter of year-over-year gross margin expansion, driven by pricing and mix, there was a significant drag from supply chain inefficiencies due to lower production volumes needed to manage inventory. He was hesitant to quantify the exact basis point impact from volume alone.

Gregory Melich asked about the gross margin outlook, questioning if the strong expansion in Q1 would be the peak for the year given rising raw material costs and diminishing price benefits.

Answer

Executive Allen Mistysyn explained that while Q1's year-over-year margin improvement was the largest, this was partly due to an easy comparison against a weak Q1 2024. He expects further benefits from simplification initiatives and new price increases in other segments to support margins through the year, anticipating a similar consolidated price benefit in Q2 as in Q1.

Gregory Melich inquired about the drivers behind the forecasted rise in raw material expenses for 2025, specifically asking about the influential commodities and the impact of tariffs.

Answer

EVP & COO James Jaye explained that low single-digit inflation is driven by industrial resins, TiO2, solvents, and packaging, alongside existing tariffs on Asian epoxy imports. SVP & CFO Allen Mistysyn added that potential new tariffs are not included in the guidance and would require additional, targeted price increases if implemented.

Gregory Melich followed up on the 5% price increase, asking if the realized price in the Paint Stores Group was closer to 3% and if the difference was due to unfavorable mix.

Answer

Executive Allen Mistysyn confirmed that while the price increase is effective, the overall price/mix result is diluted by the performance of different segments. He stated the net impact would not be quite 3% in the quarter and noted that improving New Residential sales, for example, would also create a mix headwind for the average selling price.

Greg Melich inquired about the future flow-through of the 4% same-skew inflation and historical price elasticity on the DIY side.

Answer

CFO Jeremy Fletcher clarified that a tailwind from same-skew inflation is expected through Q4 and Q1, with most cost impacts from current tariffs already flowed through. CEO Brad Beckham explained that historically, economic shocks lead to some deferral of larger DIY ticket jobs, but not smaller maintenance items, and noted current pressure is modest and not across all categories.

Greg Melich inquired about the future flow-through of the 4% same-skew inflation and historical price elasticity on the DIY side.

Answer

Jeremy Fletcher (CFO, O'Reilly Automotive) indicated a tailwind from same-skew inflation is expected in Q4 and Q1, with most tariff-related cost impacts already flowed through. Brad Beckham (CEO, O'Reilly Automotive) explained that historically, larger ticket DIY jobs can see deferral during economic shocks, noting current modest pressure in some DIY categories but continued strength in maintenance categories and no observed trade-down.

Gregory Melich inquired about the competitive landscape, particularly regarding competitor store closures and opportunities with independents, and asked for the expected gross margin cadence for the rest of the year to support EBIT margin expansion.

Answer

Executive Brad Beckham noted that it's still too early to see a material impact from competitor store closures but confirmed M&A remains an opportunity, likely in the form of smaller tuck-in acquisitions. CFO Jeremy Fletcher addressed margins, stating that Q1 gross margin was in line with expectations and that they anticipate a relatively consistent performance for the remainder of the year, with a cadence similar to the previous year.

Gregory Melich of Evercore ISI questioned the impact of product mix and complexity on Q4 results and followed up on whether the historical 2-3% comp contribution from inflation and mix held true in 2024.

Answer

CFO Jeremy Fletcher noted that Q4 gross margin was impacted by the inclusion of the Canadian business, customer and product mix, and some transitory distribution costs. President Brent Kirby added that he feels very good about the cost proposition moving into 2025. Fletcher confirmed that complexity provides a lift to average ticket above same-SKU inflation, but this was somewhat compressed in 2024 by a pressured consumer. He expects a similar dynamic in 2025.

Greg Melich inquired about the factors influencing gross margins in the fourth quarter, specifically asking if anything beyond the cycling of business acquisitions, such as tariff pass-through timing or vendor rebates, would account for a moderated increase. He also asked for a strategic perspective on the benefits of Genuine Parts Company's combined businesses and the rationale for keeping them together in the long-term, given the recent board evolution and strategic review.

Answer

Bert Nappier, Executive Vice President and Chief Financial Officer, clarified that there were no unique factors beyond continued strategic sourcing, pricing initiatives, and the lapping of acquisition benefits affecting Q4 gross margin expansion. Will Stengel, President and Chief Executive Officer, and Bert Nappier highlighted the significant benefits derived from the combined businesses over the past three to four years, including accelerated sales effectiveness, technology investments, and supply chain synergies, emphasizing a 'one GPC' approach. They noted that the ongoing strategic review is a rigorous, natural process to evaluate initiatives and capital allocation, with an update planned for 2026.

Greg Melich inquired about factors influencing fourth-quarter gross margins beyond acquisition cycling, such as tariff pass-through or vendor rebates, and also asked about the strategic benefits of Genuine Parts Company's combined business structure in light of the recent board evolution.

Answer

Executive Vice President and CFO Bert Nappier clarified that no unique factors beyond ongoing sourcing/pricing initiatives and lapping acquisition benefits would impact Q4 gross margins. President and CEO Will Stengel highlighted significant benefits over the past 3-4 years from the combined structure, including accelerated sales effectiveness, technology investments, and supply chain efficiencies, with an update on the strategic review expected next year. Bert Nappier further emphasized procurement leverage and technology investments like the Poland Tech Center benefiting the entire business.

Gregory Melich asked for an update on the North American auto strategy, specifically the progress of acquiring independent stores and initiatives to regain market share. He also inquired about potential upside scenarios related to tariffs.

Answer

CEO William Stengel confirmed continued momentum in acquiring independent stores but noted the pace would moderate in 2025 to focus on operational excellence. CFO Herbert Nappier addressed the tariff question, suggesting an upside case could materialize if the current disruption resolves quickly, allowing the expected robust second half to occur. Stengel added that the rational nature of the market historically allows for passing through price increases.

Gregory Melich sought confirmation that Q1 sales growth would be below the full-year guidance range of 2-4%. He also asked about the company's strategy for managing tariffs, specifically whether the focus is on protecting gross margin dollars or gross margin rate, and a clarifying question on pension income versus interest expense.

Answer

EVP and CFO Herbert Nappier confirmed that sales growth would start the year lower and be back-half weighted. President and CEO William Stengel explained that the tariff strategy is a balancing act dependent on the product category, though gross margin rate is an important consideration. Nappier also clarified that the pension income headwind is separate from interest expense guidance.

Gregory Melich asked if 2024 results should be considered a new base for the long-term growth algorithm, questioned if inflation would normalize, and inquired about the company's current market share position.

Answer

EVP and CFO Herbert Nappier advised against using 2024 as a proxy year due to market volatility and stated they are not yet moving off their long-term growth algorithms. He also noted that they expect inflation to normalize to a 0.5%-1% price benefit long-term. President and CEO William Stengel asserted that the company feels 'really good' about its market share, citing third-party data showing NAPA's position has 'never been stronger' and that the industrial business is performing at or better than the market.

Greg Melich inquired about the necessary comparable store sales growth to leverage SG&A over the next couple of years, given the company's growth plans. He also asked about price elasticity, specifically if AutoZone has observed no elasticity to unit demand despite the initial wave of inflation.

Answer

Jamere Jackson, CFO, stated that SG&A will be managed in line with sales growth, implying an acceleration in comparable store sales is expected to leverage the planned SG&A investments. Phil Daniele, CEO and President, explained that the majority of AutoZone's business (failure and maintenance categories) exhibits low price elasticity, as customers eventually must address necessary repairs, and the discretionary segment is relatively small.

Greg Melich questioned what comparable sales growth rate AutoZone anticipates will be necessary to leverage SG&A over the next couple of years, given their current growth plans. He also asked about price elasticity, noting that AutoZone appears to have seen no significant impact on unit demand despite recent inflation.

Answer

CFO Jamere Jackson stated that if SG&A grows in the mid-single-digit range, AutoZone would expect an acceleration in comparable sales to leverage it, expressing confidence in their growth plan across DIY, commercial, and Mexico. President and CEO Philip Daniele explained that the core 'failure' and 'maintenance' categories have low price elasticity, as consumers eventually must address repairs. He noted that incremental price increases are small in dollar terms, making them easier for consumers to absorb.

Greg Melich followed up on SG&A growth, asking what level of comparable store sales growth AutoZone expects to be necessary to leverage SG&A over the next couple of years, given its aggressive growth plans. He also inquired about price elasticity, specifically if the company has observed any elasticity to unit demand despite the initial wave of inflation.

Answer

Jamere Jackson, CFO, stated that AutoZone manages SG&A in line with sales growth, implying that if SG&A continues to grow in the mid-single-digit range, an acceleration in comparable store sales would be expected to achieve leverage. Phil Daniele, CEO and President, explained that the majority of AutoZone's business (failure and maintenance categories) exhibits low price elasticity, as customers eventually must address necessary repairs. He noted that the discretionary segment is relatively small and that the industry has historically passed on costs without significant unit demand variability.

Greg Melich from Evercore ISI asked about consumer behavior, specifically if customers are trading down or simply taking discretionary items out of their baskets, and inquired how the EBIT impact from foreign exchange is allocated across the P&L.

Answer

CEO Philip Daniele noted that he hasn't seen significant trade-down behavior, but the discretionary business, which is about 16% of DIY, has been under pressure and its volume is now more constant. CFO Jamere Jackson clarified that the negative FX impact flows through the top line to gross margin and is a net negative to EBIT, despite being a slight 'good guy' on the SG&A line.

Greg Melich from Evercore ISI inquired about consumer behavior regarding trade-down and discretionary spending, and also asked for clarification on how the international FX headwind flows through the P&L.

Answer

CEO Philip Daniele stated that there has not been significant consumer trade-down, but discretionary categories (about 16% of DIY sales) remain under pressure. CFO Jamere Jackson explained that the negative FX impact hits revenue, flows through to gross margin, provides a slight benefit to SG&A, but is ultimately a net negative for EBIT, thus increasing deleverage.

Gregory Melich of Evercore ISI asked why the commercial (DIFM) business experienced deflation while DIY saw inflation, and requested a breakdown of the company's cost of goods sold by geographic origin.

Answer

Executive Philip Daniele explained that the slight deflation in the commercial average ticket was driven by both mix and moderated pricing after several years of significant inflation, not irrational behavior. He declined to provide a specific geographic breakdown of COGS but reiterated that the company has spent a decade diversifying its global sourcing.

Greg Melich questioned the gross margin drivers, specifically the impact of shrink and e-commerce shipping costs, and asked for an update on the company's sourcing diversification and COGS exposure following tariff mitigation efforts.

Answer

CEO Steve Lawrence detailed that a 40 bps merchandise margin gain was offset by a 20 bps headwind from shrink and 10 bps from e-commerce shipping. He noted that sourcing is now highly diversified to mitigate tariff risks, with private label COGS exposure at 6-7%, and expects AURs to accelerate into the high-single digits in the back half of the year.

Greg Melich asked for clarification on the gross margin headwinds from shrink and e-commerce shipping in Q2 and their expected impact in the back half. He also inquired about the current percentage of COGS imported from various countries, considering tariff mitigation efforts. Mr. Melich followed up on inventory, asking if the reported 8% increase in average unit retail (AUR) for inventory should be considered a proxy for future ticket AUR in coming quarters.

Answer

CFO Carl Ford detailed that merchandise margin was a 40 basis point tailwind, offset by 20 basis points from shrink and 10 basis points from e-commerce shipping. He expects shrink to be a 5 basis point headwind for the full year and e-commerce deleverage to continue. CEO Steve Lawrence explained that China exposure for manufactured goods is under 10% (targeting mid-single digits), but the overall sourcing base is diversified due to fluid tariff rates across countries. Private label COGS exposure is 6%-7%. Mr. Lawrence clarified that AUR was up in the mid-single-digit range, not 8%, and expects it to accelerate to high single or double-digits in the back half of the year for Academy and the industry.

Greg Melich of Evercore ISI questioned the cadence of gross margin, asking how long the benefit from pulled-forward inventory would last, and sought to clarify if the SG&A pressure from the Jordan launch was a one-time event.

Answer

EVP & CFO Earl Carlton Ford IV stated the $85 million inventory pull-forward should last through the tariff expiration dates in July and August. CEO Steven Lawrence added the inventory is 'evergreen' with no obsolescence risk. Ford confirmed the $7.5 million in SG&A for the Jordan launch was a Q1-specific expense, with ongoing SG&A deleverage driven by strategic investments like new stores and technology.

Gregory Melich of Evercore ISI followed up on tariffs, asking about the ratio of direct China sourcing to private label sales. He also asked if the COVID-demand pull-forward has been fully cycled in categories like outdoor and fitness.

Answer

CEO Steven Lawrence confirmed that direct sourcing from China, now under 9%, represents about one-third of their private label business. He also stated a belief that the company has moved past the COVID pull-forward in key hardline categories like fitness and bikes, which saw stabilization or positive inflection in Q4.

Greg Melich of Evercore ISI followed up on the second-half comp progression, asking for clarification on the expected interplay between average ticket and transactions. He questioned if the flattish comp outlook implies that transaction declines would offset ticket growth driven by tariffs.

Answer

CFO Bryan Langley confirmed that the guidance assumes average ticket will be up low-to-mid single digits, while transactions are expected to be down low-to-mid single digits. He noted there might be some slight compression in basket size embedded within the ticket assumption. CEO Tom Taylor added that both ticket and transactions will face pressure in Q4 from lapping the prior year's hurricane impact.

Greg Melich of Evercore ISI questioned where the 3P marketplace and advertising initiatives appear in financial statements and followed up on the blended tariff rate's impact on price elasticity.

Answer

CFO Matt Bilunas clarified that ad revenue primarily flows through gross margin, while marketplace commissions will be recognized in both revenue and gross margin. CEO Corie Barry emphasized that due to mitigation efforts, the actual product cost increases are lower than the headline tariff rates, and elasticity models are based on these lower, post-mitigation costs.

Gregory Melich from Evercore ISI asked for an update on the membership program's performance and member behavior. He also questioned whether the second-half guidance assumes a change in the promotional environment and requested the amount of the SG&A legal settlement.

Answer

CEO Corie Barry reported that the membership program is performing well, with growth in new paid members, higher engagement and spend from members, and retention rates exceeding expectations. CFO Matt Bilunas stated that the guidance assumes the highly promotional environment seen in Q1 and Q2 will continue for the rest of the year. He also quantified the one-time legal settlement benefit in SG&A as approximately $10 million.

Gregory Melich, on behalf of Robert Ottenstein, asked about the rationale behind a recent acquisition in the PepsiCo Beverages North America (PBNA) business and for an update on the drivers and outlook for PBNA's margins.

Answer

Chairman and CEO Ramon Laguarta expressed confidence in the North American beverage business, highlighting the multiyear trend of margin improvement as a key pillar of the strategy. He noted strong performance from Pepsi, which is gaining share, and Gatorade. He mentioned a major relaunch for Mountain Dew is coming soon. Regarding the acquisition, he stated it was subject to regulatory approval and that he could not comment further until it was finalized.

Greg Melich asked about the composition of the average ticket growth, specifically the split between inflation and other factors like mix, and inquired about the company's current competitive price positioning.

Answer

CFO Ryan Grimsland stated that inflation contributed about 1% to ticket growth and that the company now feels its pricing is very competitive following its $100 million price investment. CEO Shane O'Kelly added that the company will continue to act rationally, monitoring the market and passing on costs like tariffs where appropriate.