Zhihan Ma

Zhiyan Ma inquired about the sales trends and any improvements in big ticket discretionary projects, and sought clarification on the 10% year-over-year increase in inventory, specifically how much was driven by GMS acquisition versus cost increases or underlying buildup.

Answer

CEO Ted Decker stated that big ticket discretionary projects have not shown improvement and remain a key indicator for a market turn. CFO Richard McPhail explained that the inventory increase primarily reflects the addition of GMS's inventory, higher costs due to tariffs, and some year-over-year increase to support accelerated delivery speed. He affirmed that the company's in-stocks and inventory position are in excellent shape for 2026.

Zhihan Ma (Bernstein) sought clarification on the sales trends and any observed improvements in big ticket discretionary projects. Additionally, she asked for a breakdown of the approximately 10% year-over-year increase in inventory, specifically how much was attributable to the GMS acquisition, higher inventory costs (including tariffs), and any underlying increase in inventory buildup.

Answer

Ted Decker, Chair, President, and CEO, stated that the company has not yet seen an increase in big ticket discretionary projects, which remains the "telltale" sign for an upside turn in market demand. Richard McPhail, CFO, The Home Depot, explained that the year-over-year inventory increase primarily reflects the addition of GMS's inventory to the balance sheet, higher inventory costs (including tariffs), and some increase in inventory levels to support accelerated delivery speed. He affirmed that the company's in-stocks and inventory position are in great shape for 2026.

Zhihan Ma asked for a short-term follow-up on the $2 billion sales contribution from GMS, questioning if the implied high single-digit percentage decline year-over-year was due to macro weakness or underlying share dynamics, and requested additional color on the market.

Answer

Billy Bastek, Executive Vice President of Merchandising, explained that the $2 billion figure was an approximation, considering partial ownership and GMS entering its lowest quarter, alongside broader weather impacts. He affirmed that GMS continues to gain market share and expressed confidence in the business's future. Ted Decker, Chair, President, and CEO, addressed the long-term margin question by highlighting the structural differences between wholesale and retail margins, noting that while synergies and cross-selling would drive efficiencies and leverage incremental sales, the fundamental margin structures would not dramatically change.

Zhihan Ma asked about the $2 billion sales contribution from GMS for the year, noting an implied high single-digit decline year-over-year, and sought clarification on whether this was due to macro weakness or underlying share dynamics and market conditions. She also inquired about the long-term argument for structurally improving or recovering margins through further consolidation in the complex pro space, specifically regarding increased bargaining power with suppliers.

Answer

Richard McPhail, EVP and CFO, clarified that the $2 billion is an approximation for GMS's partial year ownership, including its lowest fiscal quarter, and noted weather impacts. He affirmed that GMS continues to take share and the business is viewed positively going forward. Ted Decker, Chair, President, and CEO, explained that while wholesale and retail have fundamental margin structure differences, synergies from cross-selling and operating efficiencies across a larger scale business would drive leverage and efficiencies, though fundamental margin structures would not dramatically change.

Zhihan Ma asked for a breakdown of the 15% increase in inventory, specifically how much was driven by the SRS acquisition and if there was any pull-forward. He also inquired about the accelerating comps during Q1, asking if there was an Easter timing shift and if the exit rate continued into May.

Answer

EVP and CFO Richard McPhail explained that the majority of the inventory increase was from adding SRS to the balance sheet, with additional investments made to support online sales momentum. EVP of Merchandising William Bastek confirmed there was no pull-forward and that inventory is well-positioned for the spring season. McPhail confirmed an Easter timing shift benefited March at the expense of April, and adjusting for it would have put April's U.S. comp closer to 2.5%.

Zhihan Ma asked for an explanation of the 15% year-over-year inventory increase and whether the accelerating comps during Q1 were impacted by the timing of Easter.

Answer

CFO Richard McPhail attributed the majority of the inventory increase to the inclusion of SRS's inventory, with additional strategic investments to support online sales momentum. EVP of Merchandising William Bastek confirmed inventory is well-positioned for the spring season. McPhail also confirmed an Easter timing shift impacted the quarter, noting that adjusting for it would have brought April's U.S. comp closer to 2.5%.

Zhihan Ma of Sanford C. Bernstein & Co. asked how the complex Pro initiatives, which involve extending more trade credit and holding more inventory, would impact the company's long-term ROIC expectations.

Answer

Chair, President and CEO Ted Decker stated that he does not expect a meaningful impact on ROIC from the Pro initiatives. He described the strategy as 'reasonably asset-light,' utilizing leased distribution centers and trucks, and a commission-based sales force. He added that even as trade credit scales, it will not be a material item on the company's large balance sheet.

Zhihan Ma inquired about non-food comparable sales, now in the mid-single digits, asking when the tough comparisons from gift card sales are expected to end and if this timing aligns with potential incremental tax refunds for middle to higher-income consumers, leading to outsized benefits in the category.

Answer

Gary Millerchip, Chief Financial Officer, stated that Costco does not provide forward-looking sales comments. He attributed the deceleration in non-food growth from low double digits to mid-single digits partly to cycling strong gold and gift card sales from the prior year. He emphasized the team's success in delivering value, leading to market share gains across most non-food categories, including double-digit growth in gold/jewelry, special events, health/beauty, and high single-digit growth in majors, tires, small appliances, and apparel.

Zhihan Ma asked for an update on when Costco expects to end the tough comparable sales from gift card sales on the non-food side, and if that timing coincides with potential incremental tax refunds for middle to higher-income consumers early next year, leading to outsized benefits in that category.

Answer

Gary Millerchip (CFO, Costco Wholesale Corporation) stated that Costco does not provide forward-looking comments but noted that the non-food team is delivering exciting items and value, leading to market share gains despite a deceleration in growth due to cycling gold and gift card programs. He highlighted strong performance in categories like gold and jewelry, special events, health and beauty, majors, tires, small appliances, and apparel.

Zhihan Ma questioned the sustainability of the 7% membership fee growth (excluding price increases and FX) and the potential risk of slowing growth, particularly in mature U.S. and Canada markets with high penetration.

Answer

CFO Gary Millerchip expressed excitement about continued membership growth, citing new warehouse openings, broader geographical coverage, and increased engagement from younger members. He noted that international markets and maturing warehouses continue to drive member growth, and new benefits like extended hours and Instacart further enhance member value, contributing to a positive outlook for the membership base.

Zhihan Ma asked about the sustainability of Costco's 7% membership fee growth (excluding price increases and FX), particularly in mature U.S. and Canada markets, and the risk of a slowdown.

Answer

EVP & CFO Gary Millerchip expressed continued excitement for membership base growth, citing new warehouse openings, broader geographical coverage, and new member benefits like extended hours and Instacart perks. He noted that international markets typically see larger new membership numbers, while U.S. fill-in stores quickly grow sales and free up capacity in existing warehouses.

Zhihan Ma questioned the sustainability of Costco's 7% membership fee growth (excluding price increases and FX), particularly in high-penetration U.S. and Canada markets, and whether there's a risk of this growth slowing down.

Answer

CFO Gary Millerchip expressed confidence in continued membership growth, citing new warehouse openings, engagement of younger members, and added member benefits. He noted that international markets typically see larger new membership numbers, while U.S. infill stores enhance capacity and drive sales in existing markets.

Zhihan Ma of Bernstein requested a detailed explanation of the LIFO charge calculation and the forecast for Q4, asking how the current inflationary environment compares to the period in 2022.

Answer

CFO Gary Millerchip provided a technical breakdown of the LIFO calculation, explaining that the $130 million Q3 charge was a year-to-date "true-up" resulting from the return of low single-digit inflation in non-food items. He projected an additional $40-50 million charge in Q4 if current inflation rates persist. He clarified that overall inflation within their inventory remains relatively low compared to the post-COVID period.

Zhihan Ma of Bernstein asked for a detailed explanation of the LIFO charge calculation, questioning the estimate for Q4 and how the current inflationary environment compares to the period in 2022.

Answer

Executive VP & CFO Gary Millerchip provided a technical breakdown, explaining that the $130 million Q3 LIFO charge was a year-to-date catch-up accrual based on an updated full-year estimate of ~$145 million, driven by a return to slight inflation in non-foods. He projected an additional $40-50 million charge in Q4 if current inflation rates hold. He clarified this level of inflation is still relatively low (1-1.5%) compared to the post-COVID period.

Zhihan Ma asked if a timing shift related to the Chinese New Year caused the sequential slowdown in Other International sales in February and requested an update on the long-term international growth outlook.

Answer

Executive Gary Millerchip confirmed the Chinese New Year impacted results in Asian markets and advised looking at January and February combined. For the long term, he reiterated plans for 25-30 new warehouses annually, with just under half being international, and emphasized that all international regions are seen as strong growth markets with attractive profitability.

Zhihan Ma of Bernstein asked for details on the difference in renewal rates between online and in-store member sign-ups and inquired about how the Costco Next marketplace might contribute to retail media growth.

Answer

Executive Gary Millerchip explained that digitally acquired members renew at a slightly lower rate, which is expected to have a continued modest impact on the overall reported renewal rate. He emphasized that underlying membership growth remains strong. Executive Ron Vachris clarified that Costco Next is a curated, member-exclusive marketplace that enhances member value. He added that any integration with retail media is in very early stages and yet to be determined.

Zhihan Ma inquired about the short-term dynamics and potential upside for remodel sales lifts, noting they are at the lower end of previous ranges. She also asked about the long-term view on real estate opportunities and growth rates given changes in the competitive landscape.

Answer

Todd Vasos, CEO, expressed satisfaction with the remodel program, noting Project Elevate's 3% sales lift and Project Renovate's 6% lift are strong returns, justifying continued investment in 2026. He affirmed confidence in 11,000 U.S. new store opportunities, with 450 planned for 2026, delivering approximately 17% returns, and highlighted the competitive advantage in rural America due to limited competitor store openings.

Zhihan Ma of Bernstein asked for a breakdown of the comp sales performance between macro-driven customer trade-in and company-specific operational improvements, and questioned what drivers would ensure sustainability.

Answer

CEO Todd Vasos attributed the balanced 2.8% comp to both factors, stating that operational improvements ('self-help') were crucial for retaining the new trade-in customers. For sustainability, he pointed to a strong value proposition, including a significant number of holiday items at $1, and a robust, digitized playbook for retaining new customers, which was successfully used after the Great Recession.

Zhihan Ma questioned the real estate strategy, asking if more store closures are anticipated beyond the recent announcements and how the returns compare between new stores, Project Elevate, and traditional remodels.

Answer

CEO Todd Vasos stated the recent portfolio review was the right decision, with closures concentrated in challenging urban locations and underperforming pOpshelf test stores. He affirmed a strong growth pipeline with 12,000 potential U.S. locations. CFO Kelly Dilts provided financial targets: new stores yield 17% IRRs, Project Elevate remodels target a 3-5% sales lift, and Project Renovate remodels aim for a 6-8% lift.

Zhihan Ma questioned the lower comp sales lift for remodels (6-8% vs. a historical 8-11%) and asked if the 2025 mix of remodels versus new stores represents a new medium-term model for the company.

Answer

CFO Kelly Dilts clarified that the comp lift is lower because the stores being remodeled already have more coolers than in the past, but the IRRs remain superior to new stores. CEO Todd Vasos added that the new 'Project Elevate' allows them to upgrade a larger portion of the store base more rapidly.

Zhihan Ma sought clarification on whether corporate expenses came in better than prior expectations and asked about the potential impact of incremental tax refunds next year on the shopping behaviors of middle to higher-income consumers.

Answer

CEO Mike Creedon confirmed that SG&A came in better than expected due to faster-than-anticipated savings. CFO Stewart Glendinning stated that Dollar Tree, as a value retailer, is well-positioned to benefit when consumers, including middle to higher-income households, have more disposable income from sources like tax refunds.

Zhihan Ma sought clarification on whether corporate expenses came in better than prior expectations and inquired about the potential impact of incremental tax refunds next year on the shopping behaviors of middle to higher-income consumers.

Answer

CEO Mike Creedon confirmed that SG&A came in better than expected due to faster-than-anticipated savings. CFO Stewart Glendinning added that Dollar Tree, offering the best value in retail, expects to benefit when consumers, including middle to higher-income households, have more money in their wallets from tax refunds.

Zhihan Ma questioned the performance of the multi-price rollout, noting the comp lift appeared to decelerate from mid-single-digits for earlier conversions to low-single-digits in the latest quarter.

Answer

Interim CEO Mike Creedon clarified that the lower aggregate lift was due to the mix of conversions. Q3 conversions were predominantly stores that already had Dollar Tree Plus (2.0 to 3.0), which yields a smaller incremental lift than converting a base store (1.0 to 3.0). He stressed that earlier cohorts continue to perform strongly and that performance improves the longer a store is in the multi-price format.

Zhihan Ma asked about the FBM-ADG integration strategy, specifically the extent of onboarding ADG onto the FBM-ERP system and the near-term integration process. She also inquired about Lowe's longer-term capital allocation plan, including the resumption of share buybacks after achieving the 2.75x deleveraging target by mid-2027, or if additional acquisitions are expected.

Answer

Marvin Ellison, Chairman and CEO, stated that it's early days for integration, with the primary rule being 'do no harm.' He noted that FBM's current IT platform is the same one ADG is transitioning to, and it's also used by Lowe's Pro Supply, which will accelerate IT integration. Brandon Sink, EVP and CFO, confirmed that Lowe's is pausing share repurchases to focus on integration and deleveraging to 2.75x by mid-2027. He added that FBM will continue organic growth and potential small, self-funded tuck-in M&A, but the focus for the next two years is integration.

Zhihan Ma asked about the FBM-ADG integration, specifically the extent of onboarding ADG onto the FBM-ERP system and the near-term integration process. She also inquired about the longer-term plan to delever to 2.75x by mid-2027, whether share buybacks would resume, or if additional acquisitions are expected.

Answer

Marvin Ellison (Chairman and CEO) stated that it's early days, with a 'do no harm' principle. He noted that FBM's current IT platform is the same one ADG is transitioning to and is also used by Lowe's Pro Supply, which will accelerate IT integration. Brandon Sink (EVP and CFO) confirmed the focus on integration for the next two years, pausing share repurchases, and expecting to reach the 2.75x leverage target by 2027. He added that FBM would pursue organic growth and Greenfield expansion, with small tuck-in M&A only if self-funded by additional cash flow.

Zhihan Ma of Sanford C. Bernstein & Co. asked for a follow-up on e-commerce profitability, seeking to understand the levers for further improvement, and questioned how the Target Circle 360 paid membership program differentiates itself in a competitive market.

Answer

COO Michael Fiddelke addressed profitability, stating the team is focused on making all fulfillment paths more efficient, such as optimizing Drive Up processes to reduce team member footsteps and improving package delivery. EVP Cara Sylvester explained the differentiation of Target Circle 360, highlighting its unique value proposition of offering same-day delivery from Target plus over 100 other retailers via Shipt, and a focus on adding exclusive benefits tailored to what Target guests value.

Zhihan Ma asked for the top three drivers of improving e-commerce profitability and the proportion of EBIT dollars coming from high-margin alternative revenue streams.

Answer

CFO John David Rainey revealed that advertising and membership alone contributed a little more than 25% of the company's total operating income in the quarter. He identified the top three drivers of e-commerce profitability as: 1) densification of the delivery network, 2) customers paying for express delivery, and 3) the growth of high-margin businesses like advertising and membership.