Costco Wholesale Corp (COST) — Q4 2015 Earnings Call Transcript

Thank you, Kayla. Good morning to everyone. Last night we reported operating results for the 16-week fourth quarter and 52-week fiscal year that ended August 30. These results are compared to the similar 16 and 52-week periods of fiscal 2014, which ended last year on August 31. Please note that these discussions will include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements address risks and uncertainties that may cause actual events, results, and/or performance to differ materially from those indicated by such statements. These risks and uncertainties include, but are not limited to, those outlined in today’s call, as well as other risks identified from time-to-time in the company’s public statements and reports filed with the SEC. Forward-looking statements speak only as of the date they are made and we do not undertake to update these statements except as required by law. To begin with our fourth quarter fiscal 2015 operating results, net sales for the fourth quarter came in at $35 billion, up 1% overall from a year ago. Comp sales were down 1% on a reported basis, but were up 6% including the negative gas and FX impacts. Gas prices for the quarter were down 21% year-over-year, negatively impacting U.S. comp figures by little more than 3 percentage points, so a plus 6 U.S. comp, excluding gas price deflation. Foreign currencies overall were weaker relative to the dollar year-over-year in the fourth quarter, such that our reported international comps on a reported basis were minus 10% in Canada and minus 7% in other international locations. Assuming flat year-over-year FX rates and excluding gas price deflation would have led to plus 7% in Canada and plus 6% elsewhere internationally. For the quarter, earnings per share came in at $1.73, up $0.15, or 10% from last year’s $1.58 figure. Regarding the year-over-year EPS comparison, one of the biggest items of note is FX. In Q4 year-over-year, the foreign currencies where we operate were weaker versus the U.S. dollar, resulting in our reported foreign earnings this year in Q4 being lower by about $53 million after-tax, or $0.12 a share than these earnings would have been had FX exchange rates stayed flat year-over-year. Another significant factor was income taxes. Our income taxes this year in Q4 included several discrete items that, in the aggregate, decreased our income tax line by $23 million, or about $0.05 a share. The largest component of the $23 million figure was a $17 million, or almost $0.04 a share income tax benefit resulting from our decision to repatriate in the near future from Canada back to the U.S. $750 million Canadian, or about $560 million U.S. of cash balances. The third item of note is IT monetization. As discussed in the past several quarters, our major IT monetization efforts are ongoing and will continue to negatively impact our SG&A expense percentages through the next fiscal year and possibly beyond, especially as new major systems are placed into service and depreciation begins. In the fourth quarter on an incremental year-over-year basis, these costs have impacted SG&A by an estimated $22 million or 6 basis points — 4 basis points without deflation in FX or about $0.03 a share. Lastly, LIFO also played a role. Last year in the fourth quarter we recorded a pre-tax LIFO charge of $11 million pre-tax, or $0.02 a share. This year, we actually had a LIFO credit or a bring back of $14 million pre-tax, or $0.02 a share, which largely had to do with gas deflation. In terms of new openings, for all of fiscal 2015, we opened 25 new locations, which included two relocations, resulting in a net of 23. Twelve new in the U.S., three each in Mexico and Japan, and one each in Canada, UK, Taiwan, Korea, and Australia. This brings our total to 686 locations operating worldwide by the end of fiscal 2015. For fiscal 2016, our plans are to add up to 32 net new warehouses, including a few business centers in the U.S. Eighteen to 20 of the planned new locations will be in the United States, with the remaining in international markets, including our second opening in Spain and our first opening planned for France. In the first four months of 2016 through calendar year-end, we plan to open 13 of those up to 32 warehouses, including two relocations, leading to a net of 11, and nine in the U.S., with one each in Canada, Australia, Japan, and Spain. The two U.S. relocations are included in that 11 figure. This morning, I’ll review with you our membership trends, related activities, our e-commerce activities, and discuss margins, SG&A, and recent stock repurchase activities. Going back to fourth quarter results, sales again for the fourth quarter and the 16 weeks ended August 30 were $35 billion, up 1% from last year’s $34.8 billion. On a reported basis, again, comps were down 1%. The reported comp figure was a combination of an average transaction decrease of about 4.5% for the quarter, which included the detriment from FX of a little over 4%, and gasoline price deflation of a little over 2.5% impact. Excluding these negative factors, comps overall were up 6%, and the transactions, adjusted for gas and FX, would have been slightly positive, with an average frequency increase of just under 4%, at about 3.25%. In terms of sales by geographic region, most U.S. regions registered low single-digit comp increases. These numbers incorporate the impact of gas deflation of little over 3% in the U.S., with the Midwest, Texas, and California showing the strongest performance. Internationally, in local currencies, the best results were seen in Australia, Mexico, Taiwan, and Spain, with Spain having only one new unit at the time. Comp sales by merchandise categories for the quarter showed food and sundries comps were mostly flat, all figures include about a 4% detriment from FX. The better-performing departments were deli, sundries, and candy. Within Hardlines, in the low single-digit range, notable departments were sporting goods, hardware, and automotive. Consumer electronics were slightly negative year-over-year while remaining slightly positive ex-FX. For Softlines, comps were in the low single-digit range, with home furnishings and domestics performing better. Within Fresh Foods, comps were also in the low single-digit range with best results in deli, produce, and meat. Moving down to the income statement, membership fees came in at $785 million, or 2.24% of sales, an increase of $17 million, or 2% in dollar terms and up 3 basis points. Again, FX had a significant impact on these dollar figures. Assuming flat year-over-year FX, the 2% dollar increase would have been up 6%. We continue to enjoy strong renewal rates, with 91% in the U.S. and Canada, and 88% worldwide. We are also experiencing strong sign-ups both for new and existing warehouses, alongside continued strength in our executive member program. By the fiscal year end, we had 34 million gold star members, up from the previous quarter's 33.2 million, 7.1 million primary business members, up from 7 million, and business add-on members of 3.5 million. In total, member households numbered 44.6 million at fiscal year-end, an increase from 43.7 million 16 weeks prior. Including additional cards, total cardholders stood at 81.3 million at fiscal year-end, an increase from 79.6 million in the previous quarter. Executive memberships rose to 16.1 million, marking an increase of about 400,000 members since the end of Q3. As I mentioned earlier, membership renewal rates remain strong. They rounded up to 91% for the U.S. and Canada and to 88% worldwide. Now, returning to the income statement, our gross margin in the fourth quarter on a reported basis increased year-over-year by 44 basis points, coming in at 11.14% compared to the fourth quarter of the previous year, which stood at 10.70%. Without the impact of gas price deflation, that increase would be up 15 basis points. I ask you to jot down just two columns of numbers looking just at the fourth quarter here. The first column would be the reported basis and the second without gas deflation. The first line item is core merchandise. On a reported basis, year-over-year, it was up 17 basis points. Ex-gas deflation, it was down 8 basis points. For ancillary businesses, reported was plus 25 and without gas plus 18, with the 2% reward increasing sales penetration related to executive member sales at the 2% reward minus 5 reported and minus 2 ex-gas. LIFO was plus 7 and plus 7, total reported as I mentioned up 44 basis points ex-gas plus 15. Reviewing these figures again, the core merchandise component was up 17, but minus 8 without gas primarily due to improved year-over-year gross margins within our gasoline and several other ancillary and warehouse businesses. Core merchandise gross margin, defined as the main four departments, food and sundries, hardlines, softlines, and fresh foods as a percentage of their own sales was up 13 basis points year-over-year; food and sundries, hardlines, softlines were up year-over-year while fresh foods was slightly lower. Ancillary and other business gross margins were up as I mentioned, plus 25 basis points plus 80 without gas. We enjoyed broad-based strength across most of our ancillary businesses with year-over-year gross margin improvements in gas, optical, hearing aids, as well as positive operating results in e-commerce, business centers, travel, and executive member services. The LIFO impact in the fourth quarter was a 4 basis point benefit or $40 million, compared to a 3 basis point detriment a year ago of $11 million. Our year-end inventory shrink results were in line with our all-time best results, and our inventory positions were in great shape. All in all, gross margin and inventory is well-managed. Moving on to SG&A, our SG&A percentages year-over-year in the fourth quarter worsened by 27 basis points, coming in at 10.00% of sales this year compared to 9.73% last year. Excluding gas deflation, SG&A was essentially flat year-over-year, worse by just 1 basis point. Again, I ask you to note two columns for Q4 reported and Q4 ex-gas deflation in terms of operations; reported was minus 15 or higher by 15 basis points, without gas deflation was plus 8 basis points or lower by 8. Central expenses were higher or worse by 7 basis points year-over-year, by 5 without gas, with nearly all of that variance coming from IT monetization efforts. Stock compensation expense represented a drop of 5 and 4 without gas for personnel engaged in our plan. Next on the income statement is pre-opening expenses, higher by $12 million, coming in at $27 million this year versus $15 million a year ago. In the last fourth quarter, we had 10 openings; this year, we had 13. Of the $12 million incremental expense, about $0.02 a share, nearly half is due to new incremental units (13 versus 10), with the remainder about $7 million variance arising from increased pre-opening expenses associated with upcoming openings in the early months of our new fiscal year compared to the similar prior-year period. Overall, reported operating income in the quarter increased $65 million, or 6% year-over-year, to $1.156 billion this year. Below the operating income line, reported interest expense was higher year-over-year, coming in at $40 million this year compared to $35 million last year, primarily due to the interest expense on the billion-dollar debt offering completed earlier this year to fund a portion of the special dividend. Interest income and other was higher year-over-year by $10 million, coming in at $40 million this year in Q4 versus $30 the previous year. Actual interest income for the quarter was $12 million, compared to $17 million the year before, indicating a decline of 5 million. The other category of interest income was higher year-over-year by $15 million, primarily related to various FX-related items involving foreign countries' FX needs. Overall, pretax income was up 6%, or $70 million this year compared to last year. In terms of our tax rate, our company tax rate for the quarter came in lower than last year at 32.7% for this quarter compared to 35.1% last year. We again benefited from several discrete items in Q4, as discussed earlier. Overall net income was up 10%, or $70 million, coming in at $767 million this year in Q4 compared to last year’s fourth quarter net earnings of $697 million. For a quick rundown of other financial items, while the balance sheet is included in today’s press release, a couple of quick balance sheet info items: Depreciation and amortization for Q4 came in at $351 million, and for the year at $1.127 billion. Our accounts payable as a percent of inventories on a reported basis was effectively 100%, 101% for both last year and this year’s fiscal year-end. Excluding non-merchandise payables, primarily construction-related, that came in at 89%, both at last year’s fourth quarter and this year’s fourth. In terms of average inventory for warehouses, it rose by 200,000 units, or 2%, to $13 million in Q4 this year, up from $12.8 million. If we assumed FX was flat year-over-year, that would mean an increase of 535,000, or about 4.2%. This increase was fairly well spread across many departments, with no major surprises. Overall, our inventory is in good shape. Regarding CapEx, in Q4, we spent $805 million, and for all of 2015, capital expenditures totaled $2.4 billion. For fiscal 2016, we estimate CapEx will increase from that $2.4 billion level to somewhere in the high $2 billion range, specifically between $2.8 billion and $3 billion. This year-over-year increase in CapEx allows us to plan for more openings this year than last year and increased spending for remodeling, expanding ancillary business operations, planned expansions of our cross-dock and distribution operations, and investing related to ongoing IT spending for monetization efforts. On the e-commerce front, we’re currently operating Costco online in four countries: the U.S., Canada, UK, and Mexico. For the fiscal year, total e-commerce sales were just under $3.5 billion, up a little over 20% for the year. Comp sales in e-commerce were also up 20% for both Q4 and the fiscal year. Regarding expansion, as earlier mentioned with the goal of 32 new units, we expect approximately 11 in Q1, three in Q2, seven in Q3, and 11 in Q4, with Q4 being a longer fiscal period of 16 weeks versus 12 weeks for the others. In fiscal 2015, on a net basis, we added 23 units on a base of 653, representing about 3.5% square footage growth. If we assume 32 units on a base of 686, that would provide just under 5% square footage growth. By country, assuming that 32-unit figure, we expect about 18 in the U.S., three in Canada, two each in Japan and Australia, and one each in the UK, Taiwan, Korea, Mexico, Spain, and France. As of the end of Q4, total square footage was 98.7 million. For common stock buybacks, in Q4, we spent $260 million on 1.836 million shares at an average price of just under $142. On an annualized basis, that would run approximately $850 million during the quarter. For the year, we spent $484 million at an average price of $142.87. Regarding dividends, our third quarterly dividend stands at $0.40 a share, or $1.60 annualized, an increase of 12.5% from the prior quarterly rate paid in the first two quarters of fiscal 2015. The annual $1.60 per share dividend costs the company about $700 million. Additionally, back in February, we paid a special dividend of $5 per share, totaling $2.2 million distributed to shareholders. Before I turn it over to Kayla for Q&A, our fiscal 2016 first quarter earnings release date is scheduled for after market close on Tuesday, December 8, with the earnings call the following morning on December 9. With that, I’ll open up the call for questions and turn it back to Kayla.

Hey, good morning, Richard.

Hi.

Just on the core margin performance in the quarter, I think you said it was up 13 basis points. Could you delve into the performance by the four sub-categories? I know you said that food, hardlines and softlines were all up. Just curious, the why the pressure on the fresh food side?

Well, I think the pressure on the fresh food side is us. We – when you’ve got some inflation on some of the commodity items like eggs, you’ve got to consider that we’re not changing the price of a 16-pack of muffins or a slice of pizza or hotdog. So it has more to do with that, and nothing really surprising there. If you look at each of those four categories, again overall, the gross margin as a percent of their own sales year-over-year in the quarter was up 13. I think the range was in the low 20s on the high side and the mid-teens on the downside. So not much of a change there, slightly above last year, no real significant alterations.

Okay. Good. And then when you look to next year, just kind of switching gears a little bit when you switched to Visa from AmEx, can you shape out for us how the switch is going to work and be handled, and what you’re planning to do with the interchange savings that you’re going to generate? And also just looking back, how you handled it in Canada and any surprises on that front?

No. I mean, things in Canada, first of all, went — have gone fine; a little different in Canada because of certain Canadian issues. The portfolio was not purchased by the new issuer, so we had essentially people apply for it. That being said, they shop at Costco, they want that co-branded card, and it’s just fine. You see a little bit of change in renewal rate when that happens because of auto-renewals. You’ve got to re-sign people up and everything. But as for an improvement in terms of additional moneys be it for us in terms of lower merchant fees or for our members in terms of better rewards on the co-brand, that’s all that is planned. In the U.S., we’re working through everything right now. The plan is for, again, the current contract to end in March next year, that could be in and around a month or two from there. The two parties, AmEx and Citi, continue to work towards that end, and we will expect to tell you more when we can. In terms of how it’s going to be split between merchant fees and rewards, I think I’ve stated before that our philosophy is to give most of the savings back to the customer when we save money on product purchases. We’re looking at all kinds of opportunities to do that, so stay tuned.

Okay, fair enough. And just last question, August comps were obviously pretty good. Just wondering, with September almost closed here, any surprises on September sales for you guys?

If I could tell you, I would. We’ll wait until next week.

Thanks. Good morning, Richard. Quick question, I think you telegraphed this on the sales side. Labor Day, realizing it was in September both years. But this year, the quarter may not have caught the — I guess, the lead-up to it. I don’t know if that’s a big deal from a sales or earnings perspective, just quickly on that.

More of just a sales perspective, given you’re talking mid-single, low single-digit numbers reported normalized and reported. We feel a negative impact of about 1 percentage point in August, and there will be a corresponding improvement in September reported for the same reason, because of the four weeks versus five. So, yes, the August numbers were impacted negatively a little, and the September number will show a little positive, which we’ll point out in the release.

Okay. And then the second question, on membership fees and potential increases. Just a question on the thought process, and I think in the past largely you’ve done them to cover inflation. I’m sure there has been inflation over the past five years in many areas. So can you talk about considerations and how you think about it? Are you surveying? Are you probing customers ahead of time to understand what’s tolerable? And then taking into account that the landscape is evolving a little, you have some nontraditional online model, membership model. So how do you think about the right range to raise that?

I think we’ve done $6, $5 increases over roughly 30 years, generally about every five or so years. We don’t do a lot of polling. We look at it internally and ask ourselves, have we improved the value of that membership to our members? Regarding the tolerability to the member, I’d say our historical increases, like the $5 in the case of the executive member last time five years ago, represents a level that is significantly less than what we see in other types of fees out there, be it fees for television, phones, or other services. So, I don’t foresee it ever being an issue. We haven’t really talked about it a lot, but it’s something we’ll probably do at some point so stay tuned.

Okay. Thanks.

Good morning, Richard. Wanted to just discuss assortment and fulfillment online. Certainly across the industry, there has been a lot of competition and investments being made in fulfillment, whether it’s Amazon or Jet.com, or some of the newer initiatives from Sam’s Club. Could you just discuss some of your recent online sales trends and any updates that you could provide for us on upcoming enhancements around assortment or fulfillment online?

I don’t think there’s anything specific that I can disclose. There are a few things I mentioned over the last few quarters. We certainly expanded the SKU selection and added frequently purchased items, including food and sundries and a few office needs, such as sundry items, health and beauty aids, K-cups, and a few apparel items. We’ve expanded that selection. We shipped from more than one depot now. When we started our online efforts a few years ago in the U.S., everything was shipped out of one depot in Southern California, which meant longer delivery times and higher costs. Since then, we’ve improved that quite a bit. Sales for the last couple of years have shown a year-over-year comp basis around 20%. We're taking a methodical approach. We’re not looking to go totally crazy out there. Our mobile apps have improved and will continue to do so. We’re confident in the value proposition we have, and we recognize that we cannot cater to everyone, but we believe we deliver great value. It’s also worth noting that some of these other services are purchasing from us; some of our top customers are those guys. So if we can’t deliver a single unit of milk or cereal to a doorstep, someone else may be purchasing from us.

Got it. That’s helpful. And you spoke about the impact to margins from an IT monetization standpoint. Could you just give us a bit more detail about what some of the latest focus points have been in terms of system upgrades and what we should be looking forward to you all tackling over the fiscal 2016 period?

Going back three years ago, we embarked on a significant effort to upgrade and monetize all our systems. Many of our systems were legacy ones, written in-house and band-aided over the years. Some of the non-legacy systems from outside suppliers are also not going to be supported going forward. We probably started later than we should have a few years ago. As I indicated each quarter, we strive to show you what the expenses associated with those incremental efforts are. We installed a new membership system a little under a year ago and a new point-of-sale system, which are just a couple of the deliverables. There are many smaller deliverables that I won’t go into now. More are in the pipeline that will hit the expense side over the coming year to two years. I previously mentioned that we are currently seeing additional costs in the low to mid-teens, which are stemming from these initiatives. While I can’t provide a whole lot of details on specific benefits, I believe we will begin to see benefits when looking beyond 2016. It doesn’t mean that SG&A will not go up fewer basis points; we will have to see. Yet, there is a light at the end of the tunnel. We are beginning to see some deliverables from our investments, mainly in transportation and other ancillary businesses.

Much appreciated. Good luck.

Hi, thanks a lot. Good morning, Richard. Regarding a bigger picture question, I was curious about your thoughts on what really sets you apart from other internet pure plays in terms of your supply chain, vertical integration, and kind of this buying scale you have there? And then also international is a nice piece of the business. As we look at our models and talk about that part of the story, which countries do you have the most opportunity to increase share and store base versus maximum potential? Thank you.

Sure. In terms of e-commerce, first, we have a lot more items compared to others. We have about 8,000 to 10,000 items instead of 3,700 in store. What separates us is that we offer good quality merchandise at the best pricing overall. We maintain margins that are at/or slightly below our reported total company margins, but still in the high single-digit or very low double-digit range. This, of course, is competitive against others in the space. We know we’re not going to be selling single items for quick delivery. However, we believe we can still capture our share of the market through effective methods. As for opportunities outside of the U.S., we've noticed the market potential keeps improving. For instance, we initially wouldn't have thought we could have close to 60 locations in Canada. We’re currently at over 80 and will surpass the 100 mark in the next several years. While in the U.S., we are still finding opportunities.

Okay. And Richard, just a quick follow-up. There has been talk regarding competitors in relation to how they handle vendors. Can you update us on your thoughts regarding your vendor relationships, and any catalysts that might arise given your buying scale, leverage, and heritage?

I’d like to think that we share internally and communicate is that we are tough but fair. We are tough; we fight for our members every day. I believe we strive to give the vast majority of any improvements back to the members which, in our view, strengthens our competitive position. One challenge we face is the sheer volume of our needs across various commodities, and so there’s a lot of proactive efforts here which others may not necessarily pursue to that depth because they are handling vendors with many more items. We see that as both an opportunity and a challenge. But overall, I believe we maintain good relationships with our vendors that are transparent to them, and I'm confident they would generally agree with that. Of course, a few may not, but we will continue to work with them effectively.

Best regards. Thank you.

Hi. Good morning. It’s Dan Binder. My question relates to ancillary margins. Over the last five quarters, three of them have shown ancillary margins up about 15 basis points ex gas. Then there have been two quarters with significantly greater increases. That coincides with declining gas prices. I’m trying to understand how much of that gross margin improvement is sustainable versus just being a function of how gas is fluctuating during the quarter.

Well, gas for most of the previous five fiscal quarters on a year-over-year basis has certainly helped a lot. But other ancillary businesses continue to grow; whether it's optical, hearing aid, or other warehouse club businesses, all those areas collectively add up. I genuinely hope that much of it is sustainable, but we are aware that once gas prices increase, margins will likely normalize again relative to our historical trends.

Okay. The other item I wanted to discuss was other income. I realize this is a function of the FX contracts you talked about earlier in the call and can be challenging to model. I’m curious though: if FX rates remain stable, how do you think that line item will look in Q1?

I can't precisely predict that. I can tell you we manage it so that if we operate in a foreign country where inventory purchases might be paid for in dollars or euros, they will decide how much of that they would lock in once they are comfortable with the price point. If local currencies fluctuate favorably against the dollar, it's beneficial for us; conversely, if they strengthen relative to the dollar, we lock in less currency. The range we generally see over the years is probably plus or minus $15 million pretax, usually slightly less than the current period, where it’s up about $15 million. Ultimately, we just want to highlight this as it is an unpredictable item on the income statement.

And lastly, regarding repurchase behavior, it seems to have picked up a bit this quarter. How are you thinking about it for this coming year?

We’ll communicate on that each quarter as it is part of how we manage our cash. As long as we feel good about our future, we plan to buy regularly, not trying to time the market. We bought a little more this quarter as stock prices began to decline, but we are confident about our future prospects as a company. You shouldn't expect any significant abrupt shifts in how we’ve managed these activities in the past; rather, our trend is upward as we remain comfortable at current levels.

Great. Thanks.

So, Richard, if you look at the three categories, the three broad departments, we saw some margin improvement. Were there any common themes in terms of maybe COGS doing a better job on your cost or KS mix? What’s the underlying commonality there? Additionally, do you think we have reached a point where we could see an upward drift in growth because the KS mix continues to improve, and how you buy that will likely continue to improve? Is it merited to invest back into the market price-wise?

I’d like to think we are being that strategic. Overall, we aim to improve margins slightly by lowering prices, and I mean that sincerely. We try to give most back to our customer members. Although we are quite firm and strong when it comes to maintaining pricing on certain fresh food items in a rising commodity environment, we've encountered some negative impacts there. You’re right though: as we improve our KS penetration, that should help to enhance margins. We’ve also experienced relative strength in departments like Softlines and domestics.

And do you feel, at least I’ve noticed this particularly in softlines, the quality of KS seems to be improving at a faster pace than it has in the recent past. Is that fair?

We are working on that, particularly regarding softlines, whether it’s apparel or other categories. We typically take what can be a retail-branded item valued at $200 or $300 for a pair of slacks and sell it for $49.99 by controlling the supply chain and sourcing it directly from manufacturers, which helps improve quality and maintains lower price points.

Do you think the initiatives like data mining, which involves understanding your membership base better, lead to better customer knowledge, and will that drive sales through more frequent visits or encouraging larger cart sizes when members do visit?

We have learned from doing virtually nothing to being slightly more data-driven; I believe we have plenty of low-hanging fruits we’ve not tapped into yet. Our membership marketing team is focusing on the dot-com area. We haven't done a lot in that sphere but are considering testing new initiatives and various marketing approaches. First and foremost, our aim remains constant—to drive quality and value for our members. We’re realizing that we haven't yet hit the limit of those efforts.

Okay. Thank you.

Hi Richard, good morning. I just have a couple of questions. I think last quarter you quantified the impact on the gas profit; I believe you said it benefited by a penny. I was wondering if you could provide that same metric this quarter. The second question I have concerns the remodels. Could you discuss what categories you're focusing on with the remodels, and what the expectations are regarding returns on comp uplifts that we might see?

Regarding the first question, there wasn’t a significant impact this quarter; it's generally a wash year-over-year—just a few cents. We don’t comment much on the dollar amount other than directionally. Certainly, we saw four or five fiscal quarters on a positive year-over-year basis. For remodels, keep in mind our approach is different from traditional retail stores; we remodel but don’t overhaul the whole space. We focus mostly on expanding fresh food areas and adding more refrigeration given they drive traffic. While we also seek to identify existing locations where adding gas stations is feasible, we’re focusing cash on improvements to existing facilities and modernizing our inventory.

And can you talk about the trends in the photo business and expectations there?

We’re processing fewer photos than we used to, impacting our profitability, but our margins remain about flat year-over-year. However, we’re also looking to expand into additional offerings such as photo books, ink and cartridges, etc. While the profitability isn’t what it used to be, we continue to make efforts to improve and strategically enhance the offering.

Thank you, Richard.

Hey Richard, this is Meredith Adler. I was wondering if you could talk a little bit about what happened with the store openings this year, which I think missed your expectations. I know some slipped into next year. Was there any common theme to that? Lastly, when you look at the expected number of openings for next year, do you see any risks based on what we saw in fiscal 2015?

Sure, there are always certain risks involved. I think prior to fiscal 2015, for a few years before that, we generally tracked better than expected on getting closer to our shots at openings. Initially, we target a budget based on greenlighting internally with expected permits and zoning requirements. We think, barring any outside surprises, we typically can hit that budget. We generally did not encounter locations we decided not to pursue; it’s usually unexpected complications during the development process. I’m hopeful we’ll get closer than we did this past year.

Great, thank you.

Good morning, thanks for taking my question. Can you provide more detail on the trends in traffic not only this quarter but over the last few years? Are you seeing growth primarily coming from the middle of the membership base? Presumably, the most frequent members are reaching a point where they cannot grow the frequency of their visits.

Overall, as we grow our membership and operations, we’ve seen some positive trends in traffic patterns. Our member distribution may also be a factor, with older members showing increased shopping frequencies due to various factors like families and immediate needs. Overall, we anticipate that merchandising, frequency drivers (like fresh foods), and even occasional prescription needs help to drive visits. Various overall reasons come into play when new members sign on, and we track their performance consistently.

Okay, and as a follow-up, how do you notice your membership population has responded to different promotions? I’m speaking about pricing, membership rewards through your card, and new merchandise offers. What appears most impactful for driving member traffic and potentially increasing overall membership?

We won’t disclose specifics, but overall it’s a little bit of everything. We work daily to improve the value we provide members, upsizing transactions, and improving cart size where appropriate. Multi-vendor mailers with couponing have grown over the years and we consistently track what engages our members the most. We focus on improving the value ratio — if we can sell you a bigger pack size at a better value, we will. We want to reassure members that they will receive significant returns when they choose to increase purchase volume.

Sure, I’m thinking more about the co-brand card and its influence for customers on frequency or use relative to pricing or coupons. Would you say it has as much effect?

We fully understand the impact of executive members who shop more frequently. If you were comparing a group of 100,000 members with similar shopping patterns and tenures, there is a noticeable divergence in habits when you consider a segment has converted to an executive membership, which leads to increased purchase habits. We experience continued penetration of that segment, and loyalty programs and initiatives such as the co-branded card are drivers of that trend.

Sure. All right, good luck with the upcoming year. Thank you so much.

Thank you.

Hey Richard, thanks for taking my question. A couple here. First, could you talk about the new member signup trends in Q4? I didn’t hear if you mentioned that; I apologize. I know they were down slightly in Q3.

Actually, they increased in Q4 year-over-year due to decent member signups in existing warehouses and likely a few more international units on a comparable year-over-year basis in the quarter. We’re up a little over 2 million members in the quarter.

Great. And you mentioned that Texas was doing well. Can you elaborate if there are any changes in energy markets, particularly in locations like Houston or Alberta? Have you observed any moderation in traffic or ticket sizes there?

I don’t have that granularity of data at hand.

Okay. And regarding the repatriation of cash from Canada, what were the motivations here? And with $1.2 billion coming due in December, do you have any plans to refinance or pay that off?

We’ll likely pay it off as part of the repatriation. Canada has proven to be a very profitable market for us, thus we’ve accumulated cash balances. At some point, we’ll assess whether we view this as permanently invested or not. We did a similar operation about a year ago, bringing back over a billion dollars. In this case, it was somewhat favorable from a tax perspective. We’ll continue to make decisions on that as necessary.

Okay, fair enough. Last question regarding CapEx. You mentioned an estimate for fiscal 2016 at $2.8 billion to $3 billion—this is an increase from the $2.4 billion level. Should we anticipate this level for several years assuming the openings remain at a higher count, or will the IT and systems investments taper off a bit?

I hope IT expenditures will taper off a little, but that’s not the primary driver. The guidance of spending in the high $2s range seems valid, with forecasts around $2.8 to $3.0 for this year but perhaps lower levels in subsequent years. It is not expected to increase significantly beyond the range we have indicated.

Yeah, okay, that makes sense. Thank you.

Thank you.

Thanks for taking my question. I had follow-ups on some points others raised, but I want to seek clarification. I think Michael Lasser asked about the Visa cards; will that card actually stimulate membership growth, Richard?

We’ll inform you if we see evidence as it develops.

Understood. And regarding the technology improvements, do you believe you have enough clarity regarding ancillary service uptake among your executive members?

Yes, we maintain tracking metrics, but we won’t disclose specifics. Each ancillary business functions uniquely, and some of them take a decade to gain a solid footing.

Do you think there's an opportunity to drive additional ancillary business growth with your core members?

Absolutely.

Perfect. When contemplating technology improvements to enhance customer relationships, how do you see this aspect evolving?

I apologize; could you repeat that?

I was asking if you believe investments in data gathering, knowing your customers better, and more aggressive marketing will lead to stronger customer relationships?

Our focus is primarily on driving value, yet we realize there are many opportunities. We often receive inquiries about data and analytics, and we do plan to explore these aspects further. I believe our primary point should remain emphasizing quality and value in the products and services we deliver.

Thank you so much. Really enjoyed your answers. Thanks.

Hi, thanks for your patience. Could you provide the average gas price in the quarter versus last year, and provide your gallon comps?

The average gas price in Q4 was $3.65 last year and $2.88 this current fourth quarter, a decline of about 21.2%.

If this is the case, are we thinking about the impact of profitability relating to gas correctly, Richard?

Yes, while gas prices were up about $0.20 a gallon from the previous quarter, it seems we have found a new normal. We make more profit when prices are low relative to the competition. We’re generally viewed positively as being competitively priced.

Right. And could you clarify on membership fee income? You mentioned it grew by 6% while excluding FX adjustments. However, that appears to be below the typical trend over the last few years. Is that primarily due to fewer openings last year?

There is some factor attributed to the situation in Canada regarding auto-renewals, which impacted our overall performance in a slightly negative manner. Overall, we still feel satisfied with our position.

Thank you.

Thank you.