Quick overview:

  • Costco Wholesale's newly revised employee agreement raises the company-paid minimum hourly wage by 50 cents to $20 and includes other adjustments. The company's CFO, Gary Millerchip, said during Thursday's earnings call that this move will create a "headwind" for selling, general, and administrative expenses (SG&A), and the company plans to offset the impact by improving "labor productivity" and other measures.
  • Under the agreement, CEO Ron Vachris of the Issaquah, Washington-based company noted that the "top rate" hourly wage for U.S. service clerks rises by $1 to $31.90, and the company's average hourly wage for employees in the U.S. and Canada (including hourly bonuses) is now slightly above $31, according to the call transcript.
  • When analysts asked how to mitigate rising labor costs, Millerchip said the company will continue to "find ways to be more efficient because we're committed to investing in our employees." He also mentioned that part of the company's code of ethics is "to ensure that we provide industry-leading pay and benefits for our employees."

Deeper dive:

The new employee agreement comes as the company—which, according to a report from CFO Dive's sister publication Retail Dive, leads the retail industry in pay and benefits—faces union pressure this year. Last Friday, Costco's Teamsters union members voted to ratify a contract covering 18,000 workers, which the union said secures higher wages and a 22% increase in pension contributions, as announced on the union's X account. Earlier, after the national master agreement expired on January 31, Costco's Teamsters union members voted in January to authorize a strike.

Costco's continued investment in wages is not surprising, as the company has historically sought to maintain pay levels above the market, and its reputation in this regard seems both reasonable and sustainable, said Morningstar equity research analyst Noah Rohr. In an email response, Rohr wrote: "Kroger has cited its average hourly wage at $25 (including benefits). Walmart has cited its average hourly wage at around $18. Given that Costco's SG&A as a percentage of sales remains very low relative to most other retailers, this wage level appears sustainable." He added that only about 5% of Costco employees are union-represented.

Costco did not immediately respond to a request for comment on the new employee agreement. But according to a 10-K filing, this year's wage increases appear to continue similar raises Costco made during its fiscal 2024, which ended September 1, 2024. In July 2024, the company raised the "starting pay" for all entry-level positions in the U.S. and Canada to at least $19.50 and increased all other "wage scale steps" by $0.50, bringing the average hourly wage for hourly workers to about $31 by the end of 2024.

Currently, the federal minimum wage is $7.25 per hour. Although President Donald Trump said in December he would consider raising that figure, whether the measure will be implemented remains unclear, according to a recent report from the law firm Venable; the report also noted that the president might take the more typical Republican approach of leaving the issue to individual states.

Separately, in its fiscal second quarter ended February 16, Costco's net income rose to $1.78 billion from $1.743 billion in the same period last year, and net sales increased 9.1% to $62.53 billion (versus $57.35 billion a year earlier). Although its earnings per share of $4.02 fell short of the consensus estimate of $4.10, JPMorgan analysts wrote on Thursday that they maintain an "Overweight" rating and a "disciplined buy," with a price target of $1,070, noting the company is expanding efforts in retail media and digital initiatives.

"We believe COST's fundamental story challenges all the best companies in our coverage (and in consumer products)," wrote the JPMorgan analyst team led by Christopher Horvers. "No other large retailer succeeds in every country it enters, and the membership model, in our view, is close to the auto parts industry, at the top of the best sectors in retail. Therefore, it remains a core holding, and we maintain our Overweight rating."