Dive Brief:

• Costco Wholesale’s newly updated employee agreement — which among other changes raises the minimum wage paid by the company by 50 cents to $20 an hour — will create a “headwind” to SG&A that the company will look to offset with increased “labor productivity” and other improvements, the warehouse club retailer’s CFO Gary Millerchip said on the company’s earnings call Thursday.  
• Under the agreement, the Issaquah, Washington-based company’s CEO Ron Vachris noted that the “top of scale” wage for U.S. service clerks rose $1 to $31.90 an hour with the average wage for the company’s employees in the U.S. and Canada now standing at a little more than $31 an hour including hourly employee bonuses, according to a transcript of the call.   
• Asked by an analyst about opportunities to mitigate the increased labor costs, Millerchip said the company would continue to “to find ways to be more efficient, because we are committed to continuing to invest in our employees.” Part of the company’s code of ethics is “to make sure that we're delivering industry leading wage and benefits for our employees,” he said.

Dive Insight:

The new employment agreement comes as the company — which offers some of the best pay and benefits in the retail industry, according to CFO Dive sister publication Retail Dive — has faced union pressure this year. 

On Friday, Costco Teamsters voted to ratify a contract covering 18,000 of the retailer’s workers, in a deal they said secured higher wages and a 22% increase in pension contributions, according to a post on the Teamsters’ X account. The deal came after Costco Teamsters voted to authorize a strike in January, after negotiations on a National Master Agreement expired Jan. 31. 

Costco ‘s continued investment in wages is not surprising as they have historically sought to maintain favorable above-market pay and their reputation for doing so seems both warranted and sustainable, according to Noah Rohr, an equity research analyst with Morningstar.  

“Kroger has cited an average hourly wage of $25 including employee benefits. Walmart cites its average hourly wage at about $18. And considering Costco’s SG&A as a percent of sales is still very low relative to most other retailers, the wage rate seems durable,” Rohr wrote in an email response to questions, adding that only about 5% of Costco’s workforce is represented by unions.

Costco did not immediately respond to a request for comment on the newly updated employee agreement. 

But, this year’s wage increases appear to follow on the heels of similar hikes made during Costco’s 2024 fiscal year ended Sept. 1, 2024, according to a 10-K filing. In July, the company increased what it characterized as the “starting wage” to at least $19.50 in all entry level positions in the U.S. and Canada, and increased all other “steps of the wage scales” by $0.50 to bring the average hourly rate for hourly employees to about $31 an hour at the end of 2024. 

Currently, the federal minimum wage stands at $7.25 an hour. Even though President Donald Trump in December said he would consider pushing that amount up, it’s not clear whether that will occur, according to a recent report from law firm Venable, which states it’s also possible the president may take the more typical Republican approach of leaving the matter for states to decide.

Separately, Costco for its fiscal second quarter ended Feb. 16 reported net income rose to $1.78 billion from $1.743 billion in the year-earlier period, with net sales rising 9.1% to $62.53 billion in the year-earlier period. Despite its earnings per share of $4.02 missing consensus estimates of $4.10, JPMorgan analysts wrote Thursday that they remain “overweight and disciplined buyers,” citing a share price target of $1,070 and noting that the company is expanding its efforts in its retail media and digital offerings.

“The COST fundamental story challenges all of the best companies in our coverage (and in consumer), in our view,” JPMorgan analysts led by Christopher Horvers wrote. “No other major retailer has succeeded in every country it entered and the club model ranks near autoparts, the top of the best sector in retail, in our view. As such, it remains a core holding and we remain Overweight.”