Costco Wholesale Corp (COST) — Q4 2018 Earnings Call Transcript

Thank you, Britney, and good afternoon to everyone. I’ll start by stating that these discussions will include forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995. These statements involve risks and uncertainties that may cause actual events, results, and performance to differ materially from those indicated. 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 our operating results for the fourth quarter of fiscal 2018 and the 16 weeks ended September 2nd. Net income for the quarter came in at $1,043 million or $2.36 per share, a 13.5% increase compared to $909 million or $2.08 per share in the 17-week fourth quarter last year. If you normalize the number of weeks, it’s about a 20% increase. In terms of sales, net sales for the quarter were at $43.4 billion, a 5% increase over $41.4 billion last year, again 16 versus 17 weeks. On a comparable basis, comps were up 9.5% for the quarter. Sales for the 52-week fiscal year 2018 increased 9.7% to $138.4 billion from $126.2 billion last year in the 53-week year; on a comparable basis for the year, we reported a 9.5% comp. Now, comp sales for the fourth quarter were as follows: In the U.S. on a reported basis, it was 10.8%; excluding gas and foreign exchange, it would have been 7.8%. Canada reported 5.7% for the 16 weeks; excluding gas and foreign exchange was 4.6%. Other international was 6.7% reported and 6.9% excluding gas and inflation. Overall, the total Company reported a 9.5%, while excluding gas and foreign exchange it was 7.2%. E-commerce, which we began reporting on a monthly basis about a year ago, showed a 26.2% comp for the 16 weeks and 26.3% excluding gas and foreign exchange. In terms of fourth quarter sales metrics, shopping frequency was up 4.9% worldwide as well as in the U.S. We faced a negative impact of about 25 basis points on sales due to weakening foreign currencies relative to the U.S. dollar, while gas inflation benefited Q4 comps by about 260 basis points. Cannibalization negatively impacted the comp by about 55 basis points. Our average front-end transaction increased by 4.4% during Q4; excluding the impacts of inflation and foreign exchange, our average ticket rose just over 2%. Regarding membership income, we reported $997 million or 2.30% of membership fee income in Q4 of ‘18; in the 17-week quarter last year, it was $943 million, which was 2 basis points lower. This represents a $54 million increase or up 5.7%, with a little over 12% increase on a like-week basis. Of this normalized year-over-year increase in Q4, just over half is related to membership fee increases, mainly due to the $5 and $10 annual fee increases effective June 1st in the U.S. and Canada. Our membership renewal rates rose in Q4, with the U.S. and Canada rate at Q4-end standing at 90.4%, up from 90.1% at Q3-end. The worldwide rate improved to 87.9%, up from 87.5% at Q3-end. At Q4-end, we had 40.7 million Gold Star households, an increase from 40.0 million 16 weeks earlier; primary business was 7.6 million, up from 7.5 million; business add-ons stood at 3.3 million at both Q3-end and Q4-end. Overall, we increased from 50.9 million member households a quarter ago to 51.6 million at Q4-end. We ended the year with 94.3 million cardholders, up from 93.0 million at Q3-end. During the quarter, we had 13 net new openings. At Q4-end, paid executive memberships stood at 19.3 million, an increase of 229,000 executive members during the 16 weeks, averaging about 14,000 per week, which is the same average for the entire year. The year-over-year quarterly fee income benefit peaked this quarter, and while it will continue to contribute during the upcoming fourth quarters, it will moderate each quarter due to the nature of deferred accounting treatment of the fee increases. Moving on to gross margin, our reported gross margin in Q4 was lower year-over-year by 35 basis points, coming in at 10.92%, down from 11.27%. Excluding gas inflation, the decrease was 9 basis points. The core merchandise margin decreased by 44 basis points year-over-year, and ex-gas inflation it was down 22. Ancillary businesses reported a 14 increase and a 21 increase excluding gas inflation; rewards showed a plus 1 and minus 2 basis points. The other category decreased by 6 basis points year-over-year. If you total these columns, you will arrive at the reported 35 basis-point decline and the 9 basis-point decrease when excluding gas inflation. The core merchandise component saw a 44 basis-point decline reported and a 22 basis-point decline when excluding gas inflation, considering the sales penetration across various categories. Within food and sundries and hardlines, sales were slightly up, while softlines and fresh saw a slight decrease. Overall, it was a 2-point decline on core. Ancillary and other business gross margins were up due to strong margins, and while other reported a minus 6, it was consistent with the first three quarters of fiscal ‘18. We've incurred some additional costs mainly related to the rollout of centralized return facilities nationwide. This contributed a 4 basis-point detriment, which is an improvement from the previous three quarters. Furthermore, we were cycling one-time items from last year that benefited last year's quarter by two basis points, including a legal settlement offset by impacts from Hurricane Harvey. Regarding SG&A, our SG&A percentage improved by 15 basis points; excluding gas inflation and foreign exchange, it was worse by 8 basis points, finishing at 9.82% of sales. Reported, this is 15 basis points lower than the 9.97% last year. To illustrate, on a reported basis, Q4 ‘18 showed a lower figure by 16 basis points, while ex-gas inflation was worse by 4 basis points; central expenses were lower by 4 and worse by 7; stock compensation was neutral; and other improved by 3. Overall, the reported basis was lower by 15 basis points, and the ex-gas inflation aspect was worse by 8 basis points. The core operation component saw a negative impact of 6 basis points due to the U.S. wage increase effective June 11th affecting hourly employees, which will continue to affect SG&A comparisons for the next three quarters. Central expenses increased year-over-year by 4 basis points, and 7 when excluding gas inflation, primarily due to IT expenses and a variety of small changes. Other improved by 3 due to last year's SG&A expenses associated with Hurricane Harvey. For preopening expenses, this year was about the same as last year, with $31 million this time compared to $30 million last year. In Q4 last year, we opened 15 locations, 13 net, which included relocations. This year, we had 12 openings: 8 in the U.S. and Canada and 4 internationally. Overall, reported operating income for the 16-week Q4 of ‘18 was $1,446 million, compared to $1,450 million in last year's 17-week fourth quarter. Below the operating income line, reported interest expense was $5 million lower year-over-year, coming at $48 million in Q4 compared to $53 million last year. Interest income and other were higher year-over-year by $29 million, with interest income itself rising by $11 million, despite one less week year-over-year, due to higher interest rates and cash balances. Additionally, positive foreign exchange items totaled $14 million year-over-year. Overall, pretax income increased by 2% or $30 million in this year’s 16-week quarter, totaling $1,449 million this year compared to last year’s 17-week results of $1,419 million. In terms of income taxes, our tax rate in Q4 ’18 was 27.4%, compared to 28.4% for all of fiscal ’18 and 34.3% for Q4 last year. This quarter’s tax rate benefited from the income tax reform effective January 1st, along with favorable discrete tax adjustments. For fiscal ’19, our anticipated effective total Company tax rate is estimated at approximately 28%. A few additional notes: during fiscal ’18, we opened a net of 21 new units and 4 relocations, with 13 in the U.S. and 8 internationally. For ’19, we expect to open over 20 net new warehouses, with about three-quarters in the U.S. and the rest internationally. We plan to relocate 4 units to larger, better-located facilities, the same number as this year. Construction is underway for our first Costco in China, expected to open late next September. As of Q4's end, total warehouse square footage was approximately 110 million. Regarding stock buybacks, in Q4, we repurchased $89 million worth of Costco stock or 419,000 shares at an average price of $211.35. For all of 2018, we repurchased $322 million at an average price of $183.13 per share. Turning to e-commerce activities, overall e-commerce sales continued to grow strongly this quarter, at 26.2% and for the year, 32.2%. We are committed to providing great value for our members and slightly expanding our offerings, including some new and higher-end brands. Our online grocery services, encompassing two-day delivery and same-day fresh delivery through partners like Instacart and Shipt, are experiencing positive growth, though they still represent a small fraction of our total sales. We are generating online two-day grocery sales in all 50 states, even in the six states where no physical Costcos are located. Continuous improvements in our online merchandise and service offerings are positively affecting our business, enhancing both our online and warehouse sales, boosting member awareness of our digital presence, and increasing traffic in our warehouses. Now, let's discuss tariffs and their impact on our business. As you may know, this situation involves numerous factors and remains fluid, with developments from both the U.S. and Chinese governments. We are exploring various strategies to mitigate the effects, which include accelerating shipments before tariffs take effect, collaborating with suppliers to reduce or absorb costs, adjusting commitments on affected items, sourcing from alternative countries, and leveraging lower prices on some U.S. items impacted by tariffs. Ultimately, how customers and competitors respond to tariffs will influence the overall impact, which remains uncertain. Lastly, as noted in today’s press release, we plan to disclose a material weakness in internal control related to general IT controls in our Form 10-K. These controls pertain to internal user access and program change management related to our financial reporting processes. No misstatements have been identified in the financial statements due to these deficiencies, and we expect to file our Form 10-K on time. Remediation efforts have initiated, though the material weakness won't be considered resolved until the relevant controls operate effectively for a sufficient duration. We anticipate completing the remediation prior to the end of fiscal 2019. Regarding upcoming releases, we will announce our September sales results for the 5 weeks ending Sunday, October 7th, next week on October 10th. With that, I’ll pass the call back to Britney for Q&A. Thank you, Britney.

Good evening, Richard. Thanks a lot for taking my question. With the core gross margin down 2 basis points, the expectation was that you’d be taking some of the tax reform and investing it in the value proposition, particularly price. So, have those investments been made? And if they have, has it just been technical difficulty in areas? And where do you think your pricing now currently stands with others in the marketplace that have been investing in price?

We invest in price as it is part of our core identity. Over the past few years, we've discussed several factors that have contributed to this, starting with the transition to a new credit card system which provided us significant savings that we redirected towards pricing. Then, we had a fee increase in June of 2017, and the tax reform also played a role. These factors collectively have given us the flexibility to invest. It isn’t due to just one source; the funds are interchangeable. We're not just putting funds into pricing; we're also investing in infrastructure which we would have pursued regardless, especially with our initial successes in two-day and one-day delivery. There's a lot happening on that front. When it comes to our competitive position, during our regular budget meetings every four weeks across U.S. regions, we conduct price comparisons with our direct competitors, and we feel confident about our competitive stance. Traditional retailers, whether supermarkets or larger department stores, certainly feel the effects of these price investments more than we do. Our strong store traffic and robust comparable sales demonstrate that we are in a good position.

You’ve been accelerating your e-commerce growth and it’s growing at a very nice clip. So, would you consider further doubling down on some of your e-commerce investments in light of the fact that you’ve been able to show growth through both channels?

Well, doubling down, there’s going to be lots of definitions of doubling down. I think, we are; I mean, we certainly are putting a lot of focus on. Within IT, we’ve got a lot of efforts going into fulfillment and sourcing and you name it. But, I think part of our long-term natured DNA is that we’re going to do what we feel comfortable doing and grow it nicely. We’ve got a lot of activities in that area. We’ve added brands; we’ve added some categories. But for us, doubling or tripling 3,000 or 4,000 SKUs to 8,000 or 9,000 is a lot for us. There are plenty of opportunities that we’re seeing, not only on adding products but in the way we do it. We feel that the one and two-day delivery options that we now offer at frankly better prices and our items were being offered by other third parties before, dramatically better pricing, should help us, should help that process. We’re finding the ability to benefit not only with e-commerce but using online and emails to drive traffic into the warehouse, again with Hot Buys and in some cases some targeted buys, and online and e-commerce to be able to sell some items that were seasonally in nature that we might only have for 8, 10, 12 weeks. We are now in 52 weeks online with some real sales to be had there. Part of it’s on us to keep that awareness going and improving that awareness. I think we’re doing a better job of it, but we have more to do there.

Hi. This is Josh Kamboj on for Simeon Gutman. Thanks for taking our question. Your comps have been very strong for the last few quarters. If you look at the basket that consumers are buying, would you attribute the strength more to capturing a broader set of categories, or are customers trading up within your core consumable categories? And if the former, which new categories are you seeing the most success in?

It’s really pretty balanced for us and other non-food retailers like Walmart, Target, and certainly Best Buy. Electronics has been strong, and there are some higher price points there in general. Apparel has been helpful to us. We’ve had continued strong results for several years now in apparel, both brand and Kirkland Signature. We keep trying to put another can in that package. I think all those things help. But I’d say it’s more broad-based than specific.

Just as a quick follow-up, looking at consumer health through your lens now. Gas prices had leveled off for a while. They’re beginning to rise again. Are you seeing greater sensitivity in any of those categories?

We haven't seen it yet, but every day brings new opportunities. We noticed that when gas prices fell, some retailers reduced their prices as much as possible, which we appreciated. We could have lowered our prices a bit more, but we still managed to maintain a small profit. This has positively impacted our value proposition. Typically, when prices increase, we notice that consumers become more price-conscious. For example, in early 2008, when the economy was booming and gas prices exceeded $4, we experienced a significant rise in comparable gallon sales. This value proposition has contributed to that increase in sales. It's difficult to determine the precise effect on our overall numbers, but fortunately, our results are strong.

Richard, just first question is on the ancillary part of the gross profit margin composition that you provided. Just wondering why the ancillary line was up 14 basis points, so it’s a big reversal from the third quarter.

Well, the big thing is gas. Gas is now low double-digit percent of our total sales at a price point that’s 20-plus-percent higher per gallon than a year ago. And while it’s a low-margin business relative to us, its margins had improved year-over-year. So, that penetration helped us. E-commerce helped us a little as well.

E-commerce has been included in that line item. Regarding the second question, I know you've mentioned store targets in the low 30s, but now you're indicating low 20s. I'm curious about the reason behind the decline in the number of openings planned for 2019.

Well, we have a budget that’s between 20 and 25. So, I come in at the low 20s, just to be conservative. We’ve got more on plate. If you look at this year, this coming year, it’s like three quarters one quarter U.S. There’s more in the pipeline now internationally, but that pipeline takes longer to get through; it’s a longer pipeline. And so, I think you’ll see that change, best guess, in 2020 and 2021. If I was a betting person, over the next five years beyond ‘19, probably some number in the mid-20s is a likely number, but we’ll have to see; that’s subject to change.

Okay. And then, just a last question on e-commerce. What do you think about the impact from consumers buying online? Have you seen any change in how they are shopping in-store? In other words, are they coming less frequently to the store? If you could just kind of flush out the entire basket for total household when you blend in the store trips along with the online buying habits.

Well, the fact that traffic is actually as strong as it’s ever been, we enjoy like a 4.2 average compounded annual traffic increase for seven years from ‘09 to ‘15. I know everybody was concerned when it got down to the low 3s, and we’ve enjoyed it back in the 4s now and 4.95 the last couple of months I believe. It’s hard to say should have been higher than that if e-commerce. We think it’s been a net additive, but it’s hard to say at this point.

So, Rich, let me start with the difference between the minus 22 margin ex-deflation, and the minus 2 in their own category. So, obviously adverse mix; I think that’s maybe picked up a little bit in the last six months. What’s the primary driver of that? Is that mostly the strength in electronics or are there other factors at work?

Electronics margins are generally stable; there isn't a significant issue there. The concern lies with gas. Currently, gas accounts for about 12% of our total company sales, and it has a significantly different margin structure.

Yes. When you exclude gas deflation, margins were down 22, but only down 2 when examined in their respective categories. The difference between the two is not driven by mix.

It may be influenced by product mix to some extent, but it's important to remember that many factors contribute to margins. There are additional businesses with high margins, such as pharmacy and optical, which have a gross margin higher than the 40 to 50 percent discussed earlier, due to the inclusion of specialized optometrists and pharmacists. The overall pricing for customers must also be considered. Additionally, there are other categories or services that yield higher margins, all of which factor into the overall mix.

But you’re seeing penetration of Kirkland Signature continue to rise, and is it rising the same as it had been, faster or slower?

I think it’s been consistently rising, not faster or slower. Keep in mind, there are still new items out there. A lot of items that start out at 10 and 20, and 30 million. The big items, like toilet paper and water. We did see a big growth over the last couple of years in water as we brought the price down from $3.49 to $2.99. Looking down the list of late, the Kirkland Signature 40 cartridge razor blades with a handle, several organic cheeseburger in the food court, fragrances, the KS fragrances, all kinds of beverages.

Okay. And then, just a separate topic. You obviously were doing some stuff with BOPUS on a limited basis, and I think you wanted to keep it limited. Is it still just applying to those items, right, the notebooks and the bags or is there an idea of expanding that?

We have previously discussed some specific electronics items like tablets and small items, as well as high-end handbags. We have now included a few more electronics products. However, we still aim to proceed in our own way. We have been pleasantly surprised by the number of people purchasing these items, as they find it convenient and then come in to shop. It's worth noting that these are not solely new member purchases. Over half of those who come in are not just picking up their items; they tend to spend significantly more than the average shopper. Overall, things are progressing well, and we will continue to monitor the situation.

Hi, thanks. I just wanted to start with e-commerce for a second. Can you just give us an update on where e-commerce is as a percent of sales? And then, I wanted to see if you could give us a little color on how to think about the growth rate of e-commerce going forward?

I’m sorry. What’s the last part of the question?

How to think about the growth rate of e-commerce going forward?

The number is right around 5% of sales, I think a shade under 4%. We’re going to drive it as much as we can. A few months ago, we went from a string of monthly 30 pluses to 23 or something; people were disappointed a little bit out there. We feel very good about it. We think, we’ve shown the last couple of months, I can’t say anything about September, that will be next week, but we’ve seen the numbers that we feel. We have the benefit of not focused on e-commerce for many years and now taking advantage of that in a big way. An example is some big ticket seasonal items like home furnishings and furniture one part of the year and adding 40 extra weeks of offerings if you will, offering online now, as well as what we’ve done with white goods and the success there. In three years, we’ve grown from $50 million to $500 million in white good sales, helped of course by the brands willing to sell us good high-end stuff and our ability to sell it.

Okay. That’s helpful. And then, just in terms of the tariff commentary that you made. Any way to give some sense of what percent of product is imported from China today and where you can see that going in the next few years?

It’s really difficult to provide specific details. Some analysts have made estimates that fall within the range, but the situation is fluid. The truth is that things can't change overnight. Demand for a product can shift significantly if prices are expected to rise by 15% or 25%. We've seen similar situations in Mexico when U.S.-sourced goods have been affected by dramatic changes in the peso to dollar exchange rate, which has fluctuated from 3 to 8 to 10, then from 10 to 14, and more recently from 14 to 18 to 20. These changes will have a cooling effect on certain products until that effect diminishes. It’s too early to determine the full impact.

Okay. And just last question. Can you just give us inflation in 4Q, both cost and at retail, and then expectations, translation, given all the narrative from vendors' base, since calling out passing on cost increases?

I don't have that information on a cost basis readily available. This is mainly about LIFO indices and not sales, as some categories show higher penetration. It's a small amount and is slightly inflationary, which I emphasize with the word slightly.

What are your thoughts generally, because there has been a lot of narrative from the vendors regarding passing on price increases? Where do you guys stand or what are you seeing on that front?

Our approach is to be the last to raise prices and to collaborate with suppliers to avoid doing so. However, we recognize that some factors are beyond our control. Competitively, we aim to maintain our strategy of being the last to increase prices and the first to lower them. We have an advantage as a company because we are not required to sell every brand or size alternative for any given product. Our buying power is significant, with over $138 billion at our disposal, which stems from offering a limited selection of items. This allows us to leverage our knowledge of these products, particularly our private label offerings, giving us unique opportunities that simplify our operations.

Thanks.

First question is, you mentioned in the release that there have been no misstatements found related to the internal control weakness. Is there any risk that there could be a misstatement of the financials in the future or is that more about fixing the systems and getting the testing done?

We feel confident that our auditors share this sentiment. We clearly communicated our comfort level in the press release, emphasizing that there are no misstatements. The challenges we faced were related to internal user access, specifically involving IT personnel or contractors. There were instances where individuals retained access longer than they should have, and it took too much time to rectify that. Our controls were inadequate, and we acknowledge we should have managed this better. We made every effort to audit our systems comprehensively for the entire fiscal year, although some newer systems lacked historical data capabilities. After thorough reviews, both by us and external parties, we found no misstatements or breaches. We are unable to provide further assurance until we file the 10-K. While we recognize the importance of addressing these internal issues, it's crucial to note that they were not due to external factors.

Can you also talk about sort of the organic MFI growth number, sort of ex-FX and the 53rd week? It looks like all-in that number was running a little bit below 5% in the first half of the year, and then in the third quarter sort of picked up over 5%, and then in the fourth quarter nearly 6%. Is that sort of rough math that you’re seeing sort of like a MFI comp accelerating?

That is pretty good rough math. But keep in mind, one of the issues is the deferred accounting. The U.S. and Canada $5 and $10 fee increases that went into effect June 1st of ’17; in effect, I believe that was $245 million. In the next 12 months, using that number as the example, that’s how much more we have in our checking account. Based on deferred accounting, it takes 23 months to get that into the P&L. A part of the increase from Q3 relative to year-over-year Q3 to year-over-year Q4 peaks in a 12-month sense. If you think about it, somebody who got a $10 increase for the first time, their renewal happened to be in June, that $10 was effectively $0.80 a month for 12 months. Somebody who got it 11 months later in May, paid it for the first time, that will hit the $0.80 a month for months 12 through 23, rough numbers. A little of it probably has to do with that. I wouldn’t suggest that what used to be a 4% increase became a 5% and that there is no 6%, some of that increase is related to that. Some of it of course is related to how many openings we have and when the openings are.

Fighting through all the noise, how would you describe sort of like MFI comp trend over the past 12 months, has it improved?

I would say that if you exclude the benefit from the fee increase and account for the difference in weeks, my estimate remains fairly consistent. I believe we've gained a bit from some of the Sam’s closures; we opened a few fewer units than we did last year, and proportionately, there are also a few fewer international units, though I don’t have those exact figures with me. Overall, our renewal rates have seen improvement and continue to do so, which is encouraging after the effects of the credit card transitions in the U.S. and Canada.

Last question, could you give us how many Visa cardholders you have in the U.S. currently and how does that compare to when you entered in with from an AmEx cardholder perspective?

I don’t have that number right now. It continues to grow. In the U.S., our total Visa transactions, not just co-branded cards, are nearing 50%, sitting in the high 40s. It's approximately 55-45 for the Costco co-branded Visa. I don’t have that specific figure at the moment, but it continues to increase. We keep gaining new signups and can implement some promotional activities that we've carried out during holidays, which are very effective.

Rich, I wanted to ask you about complements. Can you reflect on your impressive performance? Not too long ago in the U.S., the comps had slowed to low single digits, which now seems like an anomaly. However, comps are now above historical norms. Can you discuss what you believe is driving this additional strength? How should we approach the idea of mean reversion in terms of timing and what the actual mean is? Is 2016 still a relevant reference point?

I’m not sure, I didn’t experience 2016 myself. We made some changes that negatively impacted us, particularly by altering the MVMs and significantly reducing the number of promotional days over a few months. Additionally, many customers who had auto-renewal on their credit cards lost that feature when we switched card networks. Members who used different AmEx cards at Costco, like the Delta or hotel cards, were also affected since those auto-renewals ended when we transitioned. Some of this relates back to 2016. We’ve also made improvements with Buyers’ Picks, Hot Buys, and by collecting email addresses, leading to a significant increase in our email list. All of these efforts have benefited us, and hopefully, this positive trend will last. However, each day brings new challenges.

I meant on the e-commerce growth. Obviously, you started the year strong. You mentioned something about people being a little bit disappointed when it slowed. Did that surprise you at all that it slowed the way that it did? And can you talk about how grocery is ramping relative to your expectations, two-day, same-day, and are there any metrics that you can share relative to the basket size, margins, etc.?

The e-commerce growth has slowed, moving from a low 30s growth rate to a low to mid 20s range. Looking at the two-year stack, we feel optimistic about it and believe we have many new initiatives to enhance that growth. We still have significant funds available to pursue strategies in this area. Additionally, there are brands that are open to selling to us now, which they weren’t previously. All of these factors are beneficial. The key point is that we’re concentrating on this area. We don’t need to acquire a company, as we are discovering numerous opportunities to implement our plans.

This is Paul Kearney on for Scott. Just a question on growth going forward and also business today. Where do you think you are in terms of wallet share of your current customers? What’s the biggest opportunity to grow wallet share with customers? If you had to divide going forward where most of your growth is coming from, is it coming from wallet share, is it coming from acquiring new members or continued unit growth in new markets?

Look, frequency is up; average sale is up. We know there is an example when we did fill that we don’t add a lot of new members; we have a lot of loyal members that are shopping a lot more frequently. When we’re asked what are the big two or three things that help our sales, we generally feel it’s our strength in fresh foods, gas stations, and the executive membership. We’re doing a better job of now emailing you. Great merchandise at low prices; some of these Buyers’ Picks and Hot Buys have helped as well.

Great. Thanks. And one quick follow-up, are you seeing any changes in membership trends for your clubs that are heavily using Instacart? Is Instacart delivery for non-members leading to any uptick in memberships for those clubs?

Instacart and other third parties like Shipt have been beneficial for us, with Instacart being the most significant. We maintain strong relationships with them, and while its growth is positive, it still represents a small portion of our overall business. We haven't noticed any significant changes in that area. We can identify a group of loyal Costco members, and within that group, there are customers who share similar shopping behaviors in terms of basket size and frequency. Some of these members are beginning to use Instacart, either as a primary option or as a supplement. Although we have observed a net increase in usage, it remains a small segment of our total customer base at this time.

Hi, Richard. Thanks for taking my question. This is Jonathan Livers on for Scot Ciccarelli. Just a question on e-commerce as it continues to be a focus and you’ve made sizable investments there and still putting up pretty impressive growth. Could you tell us what percentage of e-commerce is shipped, I guess, by stores versus shipped by vendors?

Very little is done at the warehouse; about 50% is us, but that's from our e-commerce fulfillment centers directly.

Hi, Richard. As e-commerce represents a larger portion of your overall business, what are the key factors affecting margin? How would you rank the main drivers for increasing e-commerce awareness and the initiatives you are implementing?

Again, we said before, first and foremost, we wanted to get into the facility. There is certainly in some categories, like white goods and big ticket items as well, e-commerce is the way to go in a big way, and we certainly benefitted from that. We don’t see e-commerce taking over our brick and mortar. We’ve also tried to figure out how to do some of the e-commerce or delivery related activities that some members want and we could provide savings too, but doing it our way.

From a modeling perspective for CapEx for next year, what are some of the major buckets and how should we think about how that will unfold?

First and foremost, it’s warehouses. To the extent there are a few more international, a couple more, IT is few hundred extra. It’s not extra from the year before, but general. We’ve got a chicken plant, which is north of $300 million, a big chunk of that spent in fiscal ‘19 and we really started spending money. The cheapest money was the acreage; the expensive money is the facility and all the equipment and everything. Some fulfillment activities we have on two-day delivery and e-commerce, small package e-com where that’ll be a savings to us. We’re just doing a lot of those things a lot more manual than we need to do.

Thank you. That’s helpful.

Hi, Richard. Thank you for taking the question and thank you for lasting this long on the call. Most of my questions have been answered, but just on e-commerce. Can you give us the e-commerce impact on comps? Do we have that number?

It’s somewhere in the 70 or 80 basis-point range. It’s north of 50 basis points and it’s below 100. So, I think it’s mid to high.

And can you talk a little bit about the demographics of the membership signups by age? What does it look like? Is your average age of members reducing, getting younger, and what about the signup, distribution?

We feel very good about the signups. By the way, whether they are called Gen Xers, Gen Zs, are whatever they were called before that, young people are signing these people up. I think we’re in the very high 30s or low 40s in terms of younger people signing up, which is consistent with what we’ve seen.

That was just the impact on the pace?

I need to find that out myself. I haven’t seen that since we told people that our average member in the U.S. went from 54 to 52. That was a number years ago.

Okay. And the last on e-commerce. Is there e-commerce activity outside of the U.S., and can you talk about the strength that you might see there?

We’re in U.S., Canada, Mexico, UK, Taiwan, and Korea. Over the next year and a half, we have two other countries planned. It’s growing nicely in other markets. The U.S. e-com business dwarfs the others. It probably had the biggest benefit other than starting off of a very small base because of where we had taken and combined in line and online buying together two years ago. We’ve seen a big benefit from that. We’ll do that elsewhere. It works.