Costco Wholesale Corp (COST) — Q2 2018 Earnings Call Transcript

Thank you, Christy. Good afternoon, everyone. I'll start by stating that these discussions will include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements involve risks and uncertainties that may cause actual events, results and/or performance to differ materially from those indicated by such statements. The 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 the Company does not undertake to update these statements except as required by law. In today's press release, we reported operating results for the second quarter of fiscal 2018, the 12 weeks ended February 18th, as well as February retail sales for the four weeks ended this past Sunday, March 4th. Reported net income for the quarter came in at $701 million or $1.59 a share, a 36% increase compared to last year's second quarter results of $515 million or $1.17 a share. This year's earnings per share included $0.17 due to a net income tax benefit of $74 million as a result of the tax legislation recently passed by Congress. Excluding this benefit, net income grew by 22% year-over-year. This afternoon, I'll start by reviewing our Q2 operating results. Beginning with sales, net sales for the quarter came in at $32.3 billion, a 10.8% increase over the $29.1 billion of sales during the second quarter of last fiscal year. This year's 12-week second quarter included one additional sales day in the United States versus last year due to the shift of Thanksgiving. However, while we gained the sales day in the quarter, our pre-Thanksgiving and Black Friday holiday weekend sales fell in the first quarter this year compared to the second quarter last year. Combined, these two factors negatively impacted second quarter sales results by an estimated 1.4% in the U.S. and slightly less worldwide, somewhere about 1% to 1.1%. The shift also negatively impacted e-commerce sales results by an estimated 7 to 8 percentage points in the second quarter. Recall that in Q1 we had an estimated 10% improvement relative to the shift in e-commerce. Looking at the 24-week fiscal year-to-date comparable sales results in our earnings release, it essentially eliminates the impact from the holiday shift altogether. Now for the second quarter's 12-week comparable sales results, in the U.S. we reported a 7.1% increase ex-gas and FX, 5.7%, and then we estimate these add to 1.4 back for the shift in the holiday. Canada reported 8.7% and 2.5% ex-gas and FX; other international reported 15.7% and 7.4% ex-gas and FX. So total company would be 8.4% reported and 5.4% ex-gas and FX, with a little over 1% impact—negative impact on that 5.4% from the Thanksgiving shift. E-commerce reported a 28.5% comp sales, 27.3% ex-gas and FX, and again we estimate that 27.3% was hit by about 7 to 8 percentage points related to the holiday shift, resulting in something a little over 30%. In terms of Q2 sales metrics, second quarter traffic or shopping frequency was up 3.7% worldwide and 3.4% in the U.S. Also, these numbers are negatively impacted by the Thanksgiving holiday shift as I just discussed. In terms of the impact on FX and gas for the company, with flat currency relative to the U.S. dollar over the last year, FX impacted sales, with the strengthening in foreign currencies contributing approximately 180 basis points, and gas inflation contributed another 125 basis points, resulting in about 3 percentage points combined. Cannibalization weighed on the comp to the tune of 55 basis points negative. Our average front-end transaction or ticket was up 4.6% in the quarter, excluding the net benefits from gas inflation and strong foreign currencies relative to the dollar, it was up a little over 1.5%. Our February sales results were also reported in the sales release, and I'll review these results at the end of the call. Moving down the income statement for the second quarter, membership income is the next line item. I reported in Q2 $716 million, up $80 million from the $636 million last year's second quarter, representing about a 12.6% increase in dollars. The FX benefit from strong foreign currencies contributed about $12 million. Of the $80 million increase in membership fees year-over-year, about $37 million resulted from membership fee increases. The majority of the $37 million came from fee increases taken last year in the U.S. and Canada, with smaller balances from fee increases taken in our other international operations starting back in September of 2016. So, all told, if you take out both of those, on a normalized basis, membership fees were up $31 million or about 5%. In terms of renewal rates, our renewal rates improved in Q2 to 90.1% in the U.S. and Canada, up from 90% a quarter earlier, and worldwide improved to 87.3% as of Q2 end, up 20% from the 87.2% at Q1 end. I think the most important thing here of course is the trends we’ve seen with the conversion of the credit card over the last year and a half in the U.S. and slightly overlapping that prior to that in Canada, and I'm happy to say that what we expected came through there and we’re seeing a slight improvement now. At Q2 end, we had 39.6 million Gold Star members, up from 39.3 million 12 weeks earlier. Primary business members were 7.5 million at both quarter ends. Business add-ons were 3.2 million at Q1 end and at Q2 end were 3.3 million. So total member households went from 49.9 million at Q1 end to 50.4 million at the end of Q2. Total cardholders stood at 92.2 million at the end of the quarter, up from 91.5 million 12 weeks earlier. During the quarter, we had only one opening. At Q2 end, paid executive members totaled 18.8 million, an increase of about 46,000 from the second quarter end or about 4,000 a week. A little softer than it had been in recent quarters. When we look at the quarter ago, it started off quite a bit weaker and I’m happy to say the last several weeks have been in the high teens to low 20s on average per week. Lastly, in terms of the portion of membership fee increases related to the recent fee increases, that year-over-year quarterly membership fee increase will continue to grow each fiscal quarter this year and into fiscal ’19, given the deferred accounting treatment regarding when it benefits our income statement. The year-over-year increase will peak in Q4 of this fiscal year. So the $37 million Q2 increase related to that will increase in Q3 and again in Q4 based on the P&L on deferred accounting. Moving on to gross margin, our reported gross margin came in at 10.98%, or 2 basis points lower year-over-year. On a reported basis that minus 2 basis points, it was actually plus 11 basis points excluding gas and FX. Within that I’ll have you just jab down the two columns with the four or five members in each column; first column would be as reported and the second column without gas inflation. The core merchandise on a reported basis was year-over-year down 20 basis points, down 8 basis points without gas inflation. Ancillary businesses were up 23 basis points in the quarter and up 25 excluding gas inflation. So, all told, if you add up column one, the reported year-over-year gross margin change was minus 2 basis points and ex-gas inflation was plus 11. If we look at the core merchandise categories in relation to their own sales, even though again on an ex-gas inflation basis, the core has contributed to the total company's minus 8. If you look at core categories on core sales, margins year-over-year in Q2 were higher by 14 basis points. Subcategories within core margins year-over-year in Q2 focused on sundries, hard lines, and fresh foods were up, while soft lines were down a little. Notwithstanding greater all of these improvements and greater values for our members, as we continue to do it. Ancillary and other businesses gross margin was up 23 basis points and 25 excluding gas inflation. Gas represented a little more than half of that improvement; it's the combination of higher sales penetration and improved margins within the business. With hearing aids, pharmacy, optical business centers, and our travel division all showing higher year-over-year gross margins and contributing to that number as well. Lastly, in other, as was the case with the first quarter, we were incurring incremental costs related to the rollout of our new centralized returns facilities. This will continue to impact us as I said last quarter and each in the next few quarters, likely a little less each quarter, and it was down a basis point this time from 7 to minus 6. Long term, we believe it's a big benefit to us. Moving to reported SG&A, our SG&A percentage in Q2 year-over-year was lower or better by 21 basis points and better by 9 basis points plus 9 basis points ex-gas inflation coming in at 10.02% of sales this year compared to 10.23% on a reported basis. The two columns here are reported and without gas inflation too. The first line item would be operations plus 19 basis points and plus 8 basis points excluding gas inflation, central minus 1 basis points and minus 2 basis points, stock compensation plus 3 basis points in each column. Total SG&A was lower by 21 basis points on a reported basis and better by 9 basis points ex-gas inflation. Not a whole lot of unusual items here; the core operations component was better by ex-gas inflation, and strong top-line sales led to the year-over-year improvement in payroll, benefits, and other traditional expenses like utilities and maintenance. Next, on the income statement's preopening expenses. They were better or lower by $3 million in Q2; this year they were $12 million, down from last year’s $15 million. Again this year we opened only one new unit. Last year, we opened four. However, we also have quite a bit of preopening related to two big manufacturing plants, one that we just opened and one that’s under construction. The new meat plant in the Midwest and our major new chicken plant in Nebraska is also under construction. Overall, reported operating income for Q2 came in at $1.16 billion, an increase of $172 million or 20% higher year-over-year from last year's $844 million figure. Below the operating income line, reported interest expense came in at an additional $6 million—or $6 million higher year-over-year than $37 million this year compared to $31 million last year, primarily a result of last year's debt offering. Interest income improved year-over-year by $11 million in the quarter. Actual interest income for the quarter was higher year-over-year by $5 million; also benefitting this line item is the year-over-year comparison with various FX items, mostly various FX items in the amount of positive $6 million. Overall, pretax earnings were higher by 22% or $177 million higher in Q2, coming in at $986 million this year compared to $809 million in last year's same quarter. Regarding income taxes, our tax rate in the second quarter came in at 27.7% for the quarter, compared to 35.6% last year. The lower tax rate for Q2 this year is a result of tax law changes. The primary benefit was the reduction in the U.S. federal corporate income tax rate from 35% to 21%. Given that our fiscal year doesn’t align with the calendar year, we have a blended U.S. federal rate of 35% for 119 days of the fiscal year and 21% for the remaining 245 days of the fiscal year, which results in an average of 25.58%. The impact of that lower rate on Q2 pretax income accounted for $52 million of the total $74 million tax benefit I mentioned. Going forward, we anticipate the effective company-wide rate for the remainder of '18 in Q3 and Q4 will be approximately 29.5% to 30% range, with fiscal '19 expected at around 28% plus or minus. Overall, reported net income was higher by 36%, coming in at $701 million in Q2 compared to $515 million last year, again up 22% excluding tax benefits. Before I leave the subject of tax law changes, I'd like to mention a few plans concerning the savings. Overall, one, we do not expect any major changes to our capital allocation plans. We’re generally a net positive cash flow operator, notwithstanding CapEx and dividends. Secondly, we will use some of these savings to benefit our employees; we’re working on that, so stay tuned.Thirdly, we’ll invest some of the savings to continue to drive greater value to our members. This will certainly include investing in price and other activities. Lastly, when asked if any of these tax savings will fall to the bottom line, the answer is yes. Most importantly, indirectly, by investing and driving value, we’ve seen what that does, and we know what that does. Much of that investing in value and price comes back in greater earnings. Directly, possibly a little less, but again stay tuned. A few other items of note include our warehouse expansion. We opened only one unit in Q2, compared to a total of five in Q1. Our plans for the current quarter, which ends in mid-May, include two more. As we progress to Q4, it is a robust quarter with 16-week duration, and we plan to open a net of 15 units with a total of 18 openings ensuring our closure on that point. In terms of stock buybacks, during fiscal 2017, we spent $473 million purchasing just under 3 million shares at an average price of just under $158. In the first quarter, we spent $190 million at an average price of about $162.5, and in this quarter just ended, we spent an additional $59 million at an average price of $187.7 per share. Moving on to an update on our e-commerce business; we operate e-commerce sites in the U.S., Canada, the UK, Mexico, Korea, and Taiwan. Total e-commerce sales for Q2 came in at $1.5 billion, a 29% year-over-year increase. Overall, our e-commerce sales continue at very strong levels; looking back at Q1, ex-FX, it was positive 42.1%. However, there was a chunk related to the benefit of the Thanksgiving holiday shift in Q2; as I mentioned earlier, it stands at 27.3% ex-FX. For the first half of the fiscal year, taking out the Thanksgiving shift, we saw all together a growth of 33.7%. February, as reported in the press release, came in at 37%. We continue to improve our offerings and enhance member experience with better search and checkout processes that I’ve previously shared. In the quarter, our site traffic, conversion rates, and orders were up significantly year-over-year. Our warehouses are effectively supporting costco.com with signage and tablets in the store. Currently, we have those in 195 U.S. buildings to help members search and purchase costco.com items. We are also capturing more email addresses. Our improved content is resulting in an increased open rate of emails, further driving in-store and online traffic. If you visit costco.com, you’ll see mentions of hot buys, some of which are in-store only while supplies last, creating excitement in terms of driving traffic both in-store and online. A great example of which you can see is the hot buys in the warehouse. As for online grocery, our dry grocery two-day delivery and same-day fresh delivery via Instacart have been quite positive year-to-date and continue to grow. We're currently in 441 of our U.S. warehouses and expect to cover most of the remaining U.S. warehouses by year-end. We are enhancing our online merchandise and services offerings not just generally but specifically with hot buys. We've improved our apparel offerings, focusing on adding items that complement our warehouse offerings. Exciting things are happening with some big-ticket seasonal items that might be limited in-store but Available in larger volumes online. Currently, we have over 100 high-end beauty items available online. In Q1 ’18, we added a 2% reward for all travel purchases through Costco Travel, a first of its kind for us, and for our executive members when using the Costco Visa card, you get an additional 3%, totaling a discounted rate of 5% off alongside great values; we have seen growth in Costco Travel. We are also offering a limited buy online and pick up in-store option for select small-sized big-ticket items where customers prefer to avoid leaving the item at their doorstep. This includes jewelry, tablets, laptops, and most recently, handbags. These initiatives are creating positive impacts on our business in both online and warehouse sales. We will continue to expand these activities, and we believe that leveraging some of the tax savings will help drive this growth as well. Now, let’s review the February results before transitioning to March 4th. As reported, net sales for the month came in at $10.21 billion, a 12.8% increase from last year's $9.05 billion. The Lunar New Year and Chinese New Year that occurred in February this year compared to January last year positively impacted our other international February sales by about 4.5 percentage points and the total company February sales by a little more than half a percentage point. For the first 26 weeks of fiscal 2018, we reported sales of $68.51 billion, a 12% increase from $61.18 billion in the same number of weeks last year. I won’t go through all the numbers that you can see in the press release, but the reported 9% U.S. ex-gas effects will be 7.5%. The 8.4% reported for Canada will be a 3.2%, and the 22.2% other international would still be a very strong 14.1%. The total company reported comp ex-gas effects stand at 10.5% reported and a positive 7.7%. As I mentioned, e-commerce ex-FX is up 37% compared to the reported 38.1%. In terms of regional merchandising categories for February, U.S. regions with strong results included the Southeast, Los Angeles, and the Midwest, while internationally, Taiwan, Japan, and Mexico ranked at the top. Foreign currencies year-over-year relative to the dollar benefited the total company by about 150 basis points, compared to 180 in the last quarter. Canada benefitted from around 425 basis points, while other internationals benefitted by around 800 basis points. The impact of cannibalization on the total company in February was about 60 basis points, while the U.S. experienced around 40. In Canada, with several openings this year, the impact was about 140 basis points, while internationally, the impact was small, about 30 basis points. In terms of merchandise highlights for February, food sundries comp sales were positive in the mid-to-high single digits. Better performing departments included tobacco, liquor, and candy; hardlines experienced low double-digit growth, with appliances, tires, and health and beauty aids contributing positively. Fresh foods were up in the high single digits, particularly in meat, bakery, and deli. Within ancillary businesses, gas positively impacted total reporting comps by about 135 basis points, an effect felt from the higher year-over-year gas prices. Our comp traffic in February increased by 5.2% worldwide and 4.8% in the U.S., showing an improvement over Q2’s frequency figures. For February, the average transaction increased by 5.1%, which includes the impacts of FX and gas as well as the shift related to the Lunar Chinese New Year. Lastly, I want to mention that when we reported our earnings, we noted that this quarter has created some confusion as we received feedback that 12 out of 27 analysts updated their numbers based on some estimate of tax reform benefits, impacting forecast adjustments. I mention this as a potentially clarifying point considering we reported earnings 45 minutes before the call. Our fiscal '18 third quarter scheduled earnings release date for the 12-week third quarter ending May 30 is scheduled for after market close on Thursday, May 31, with the earnings call that same afternoon at 2 o'clock Pacific Time. With that, I'll open it up for questions. Back to you, Christy.

First question, Richard, can you discuss what's happening with spend per member trend? It's clearly increasing ex-gas. But can you talk about whether members are spending in existing categories or new ones? And then I have a follow-up.

It's a little of both. I think you also have to consider that I don't have the numbers in front of me, but I'm willing to bet that our average price per item has decreased. We have created greater value just from the MVMs alone, resulting in significant savings. In some cases, a small amount from us but more from our suppliers, as it drives more sales. We’re achieving 20% to 30% fewer items, yet we have more total sales and more gross margin dollars. I would also mention that we have seen notable changes, particularly in categories like women's athletic wear, which is growing from nothing to 100 million in the past few years. Recently, we have also seen substantial improvement in white goods due to being supplied by all the major brands. While I don't have exact figures at my disposal, I would estimate that we have seen numbers from the prior first and second quarters on an annualized basis exceeding 250 to 300 million a year, and it's expected to continue growing. So there’s definitely a mix there.

Can you share what percentage of your members are spending online with you and is there any change in how frequently they’re visiting?

I don’t have the exact numbers; I’m sure it's still a low number. I don’t know frankly if somebody had it, if it’s 10%, 20%, or 25%. I know that when I had last week's budget meeting, we reviewed the open rate for emails, and it's gone up substantially. Part of that is what we’re sending them. We’re sending them some notable items that get their attention, including while supplies last in-store on some of these items, which drives their interest. I know we’re seeing a better connect rate and once again, I don’t want to give you numbers I don’t know exactly, but all those things are trending in the right direction. Given we have a lot of low-hanging fruit here, given that we haven't done much in the past.

My follow-up is just on the Visa Card. You’re cycling the benefit; I know we’re not talking about the buckets anymore. But can you just tell us how your profit pool is performing versus your expectations?

In the first four quarters, we shared the effective basis points of improved SG&A and margin relative to how this compares with the prior deal. Now we're in the first few quarters after that. For the year, it will still be an improvement, though relatively small. When we started at the anniversary, we gained some extra funds to drive things; those fall off after the first year. We’re still getting new sign-ups and accounts, and we’re seeing people spend more on it and even more outside, which contributes to the revenue share. Overall, we’re still quite pleased with it. My guess is it will continue to grow this year at a rate slightly less than our total sales growth and probably at a consistent rate in the future of this significant benefit we're already experiencing. By the way, I mentioned utilizing some of that, as I talked about in adding the executive membership. We've done several successful initiatives over the holidays where, if you buy a television at Costco using the Citi Visa Card, you automatically get a 90-day return policy and a two-year warranty. If purchased with the Citi Visa Card, you also get another 2% off. On top of everything else, we used many of those funds to drive even greater value, which has collectively driven customers into our stores. As I think I mentioned last time, we noticed the impact from these funds in many ways.

So Richard, if I look at the 2019 new tax rate, am I right that the tax benefit in aggregate is about $300 million? Is that fair?

Well, if we consider the pretax amount, we have been operating at around 35.5 and if we subtract approximately 7 percentage points, it might range between 6.5 and 7.5. The U.S. accounts for about 70% of our earnings, which is where the benefit arises. However, there will be some offsets as the advantages from deferred tax foreign tax credits and other credits will decrease, and this will also be taken into account. Overall, we anticipate that the effective rate will be close to 28%.

It sounded like you talked about the benefit to the bottom line being more indirect, so is it fair to say the vast majority of the savings plan will be reinvested? And you mentioned several buckets; are they all of equal size? And you didn’t mention an e-commerce bucket, although is that one included into the others?

When I spoke about buckets, I referred to the additional funds we have from the various sources we've benefited from over the last couple of years. Notably, credit card shifts and some of the non-recurring benefits of tax changes. All those optimally enable us to do more of what we're doing. I’m not being coy, but to answer your question, yes, some will fall into the bottom line. However, we also take care of our employees. We’re currently evaluating various measures, not onetime bonuses specifically, we are looking at everything strategically because we must continually care for good employees. We’ve seen many things we've been working on, value-wise, while lower gross margins or dollars per sale unit has actually increased gross margin dollars as we've sold a lot more units. I think the concerns raised regarding millennials and how much they come to our store—they're buying just as much as prior generations when they were their age. We will continue to evaluate opportunities while we look to maximize our investment channels and leverage all buckets as best we can. The key here is that we are happy with progress and positive about what we're achieving.

You've talked about pushing value. Is there anything new regarding product development or your pricing against national brands that plays into this?

One recent product I read about in the press was our new hazelnut spread, which is basically very similar to Nutella. It is literally flying off the shelves; it's a great value and quality. We have several product offerings that we are refining and getting ready to launch, whether it’s organic, shelf-stable food items or apparel products and cosmetics. We've got some fragrance items that we've tested, which we plan to continue launching. There are plenty of small-scale innovations going on.

Lastly, have you calculated the benefits you might see on U.S. comp from the Sam’s Club closings? I imagine you’ve started to see that already.

We've begun to see some impact from that; it was somewhat expected following the rush for sales items when 20% or 30% off their pricing occurred. However, we anticipate it to be minimal as expected. We each need to carry out our own estimates, but we feel we've captured a bit of the sales and some new member sign-ups resulting from it. My guess is if the average Sam's Club in the U.S. is in the low 90s, those that closed were likely running below that. When I spoke to Craig, the Head of Operations, our collective view was that we'll probably achieve around 10% to 20% market share from the closed units and not 50% or 70% as some may think. I originally found that estimate low, but we recognize not all of the clubs closed at the same time. Additionally, we might not appeal to the same customers and won't capture every sale immediately, and some we might not, but we are still able to see positive margins from the overall traffic mix.

I think a lot of investors are trying to figure out the strength in e-commerce. I know there's a lot happening with checkout, category extensions, etc. Could you rank benefits, such as where you see appliances heading compared to extending the internet offering and brands? How do these evolve with online grocery?

The rollout in online grocery is still a small piece for us; however, it’s been driving traffic. I think the most significant factors are awareness and cross-marketing, via in-store activities that make people aware of what’s offered online and a much improved email open rate. We’ve started things with a conscious yet cautious approach; the department heads are feeling optimistic that this will continue to drive results going forward. I don't want to throw out figures but the early data is positive and we have those comparative metrics in place.

And as for the uptake you're seeing in online grocery, could you compare the two-day delivery option versus Instacart? Many people ask if this will diminish trips to the warehouse and thus overall spend?

The only data we have that goes back more than three to six months is from our prior collaboration with Google's Shopping Express in the Bay area, and back at the time, the strong performance showed that existing members who tried it increased their total annual purchase volume with us beyond what others were spending. However, they did appear to visit the physical stores less frequently—a measurable difference we are interested in assessing as such trends continue. This is a dynamic space with a tentative view, and we might see a short-term drop in in-store visits as customers explore alternatives, but long-term, we’ll be monitoring these movements to better understand overall behaviors.

I wanted to ask about price investment, specifically regarding elasticity. How does that differ from your traditional competitors, especially since there are fewer SKUs?

It was just a year ago we faced slightly disappointing second quarter results, partly due to the change in MVM count on the shelves. During that period, we implemented certain strategies to improve sales. Over months and continuing today, we are doing further testing and other products with our vendors. For example, we reduced the price on our Kirkland Signature bottled water from $3.49 to $2.99 consistently. We saw a noticeable command of unit price in areas like that as suppliers adjusted their pricing in the market, knowing they needed to be competitive. We can take several of those limited SKU items to better drive volume, so it really gives us an edge over competitors and maximizes our customer value. We can achieve volume over what we already set up with price changes, and that allows for successful sales outcomes.

Lastly, what’s your strategy regarding labor investment based on rising wages? Are you planning to maintain historical wage differences?

We contribute ensuring employees see a beneficial pay arrangement overall and need to examine the total packages. It’s not simply about the base wage but healthcare and benefits. The average hourly wage for our employees has been in the $22.25 to $22.5 range historically, which is above market average. In addition, we have competitive medical and dental plans and cover a significant portion of premiums for employees and their dependents. Therefore, we have an above-average package overall and will invest further irrespective of tax law changes from our earnings to support our workforce.

With your auto-renewal membership program, how effective has the $20 gift card offer been? Could you comment on membership trends?

I don’t have specific data on that program. We've been analyzing our membership marketing efforts and have noticed a somewhat stronger second half of the quarter as trends shifted. However, in terms of renewals, my assumption is the more proactive engagement for the auto-renewal part collectively improves these trends, but we’ll keep monitoring those closely during the next few quarters. Historically, we’ve seen correlations—much like the situation in Canada where we have noticed after initial hesitations that it tends to turn favorable over time. As for preopening expenses, they are indeed lower this quarter due to fewer openings than last year. Our focus will be on continuing to optimize operations and our investment in necessary infrastructure for ongoing growth and value creation. Concerning freight expenses, we’ve seen some retailers discussing their impact. From our perspective, we view higher freight costs and overall container availability as an operational challenge. Ultimately, our inbound strategies, including our cross-dock operations, minimize the extent to which these challenges impact our business and transaction efficiencies.

Just trying to clarify the tax reform benefits and your investments in employees and pricing. Should we expect those changes fairly quickly, or is there lead time before implementation?

I’ll provide more clarity on that in the next call. We have already begun investing in pricing over the past year and will continue to do so. On the employee side, we’ve already initiated some of that, but anticipate some particular action in the next couple of months that will differ into Q3 and affect the overall amount alongside employee remuneration initiatives moving forward as well.

Could you provide information on inflation in the quarter at both cost and retail?

Regarding inflation, I think we’ve seen it up slightly on a cost basis, leading me to believe that we are flat or slightly down on a retail basis based on what we’re seeing. I'll provide you with further data to confirm that later on.

Just trying to understand the margins dynamics here; with no inflation and an investment in price, how were your core margins as a percentage of sales up despite increased pressures?

No doubt, the factors responsible for margin improvements vary widely. Our travel business has seen meaningful growth since it's a high-margin business; the broker commission and SG&A costs are very minimal in relation to this segment. Improvements in damage and spoilage reduction, along with better vendor agreements, have all contributed to advancing margins as well. We have been focused on optimizing efficiencies, price points, and product offerings to boost overall profitability.

Can you speak about better margins in February that you mentioned? What specifically led to the better performance?

There’s numerous contributors, but importantly, we’ve seen strong performance across appliances, hardlines, and other categories where e-commerce improved engagement, expanding revenue opportunities and traffic leading to better overall margins. The influx of promotional prices and delivery continue to support our positive momentum. The last points I want to make in closing are related to our top-selling items. Gas prices rising has had a positive influence on our accounting for total reporting comps in February. The overall atmosphere of the market and degree of traffic frequency appears to be shifting positively for us; we expect to continue recording positive metrics with our strategic pricing adjustments. Thank you for your participation today. It's always appreciated. I look forward to seeing you at our next earnings call.