Costco Wholesale Corp (COST) — Q4 2019 Earnings Call Transcript

Thank you and good afternoon to everyone. I'll begin by noting that this discussion will include forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995. These statements contain risks and uncertainties that may lead to actual results differing significantly from those expressed. These risks include those detailed in today's call as well as others identified in the company's public reports and SEC filings. Forward-looking statements reflect the situation only as of their date, and the company does not intend to update these statements unless required by law. In today's press release, we reported our operating results for the fourth quarter and fiscal year ended 2019, covering the 16 weeks and 52 weeks ended September 1st. Net income for the quarter was $1.097 billion, or $2.47 per share, compared to $1.043 billion, or $2.36 per share, the previous year. This year's fourth quarter was negatively affected by a $123 million pretax reserve related to product taxes, which accounted for a $96 million after-tax charge, or $0.22 per share. We received this assessment last week regarding certain product taxes covering a 7.5-year period from January 2009 to July 2016. We plan to protest this assessment; however, we recorded a reserve for it in the fourth quarter in compliance with U.S. GAAP. Without this reserve, Q4 2019 net income would have been $1.19 billion or $2.69 per share, reflecting a 14% increase compared to last year’s fourth quarter. Net sales for the quarter reached $46.45 billion, marking a 7% increase from $43.41 billion last year. For the entire fiscal year, net sales amounted to $149.35 billion, an increase of 7.9% from $138.43 billion last year. Regarding comparable sales, for the 16-week fourth quarter, reported U.S. comp sales were 6.2%. When excluding gas deflation, FX effects, and revenue recognition, it stood at 5.2%. Canada reported 2.6%, and after adjustments, it was 4.7%. Other International showed 1.9% with adjustments resulting in 5.0%. Total company comp sales both with and without those adjustments were 5.1%. E-commerce experienced a reported comp of 19.8% and 21.9% when excluding FX and revenue recognition. For the fourth quarter, global traffic increased by 3.7% and by 3.6% in the U.S. Sales were negatively impacted by weakening foreign currencies by approximately 60 basis points, with gas price deflation contributing a negative 50 basis points, while revenue recognition positively affected comp sales by 110 basis points, essentially negating one another. The average transaction amount during the fiscal quarter rose by 1.4%, with or without the effects of gas, FX, and revenue recognition. Our membership fee income reported for the fourth quarter was $1.050 billion, representing a $53 million or 5.3% increase over last year. Excluding FX impacts, that increase would have been $58 million or up 5.8%. The fourth quarter completed the 23-month cycle for recognizing the incremental P&L benefit of fee increases that began in June 2017, which had a minimal impact, under $1 million, on this quarter's results. Our U.S. and Canada membership renewal rate at the end of Q4 was 90.9%, an increase from 90.7% last quarter. The worldwide renewal rate was 88.4%, up from 88.3% in the previous quarter. Both figures are at all-time highs. At the end of Q4 and the fiscal year, we had 53.9 million member households, a rise from 53.1 million last quarter, and total cardholders reached 98.5 million, up from 97.2 million at the end of Q3. During the quarter, we opened 10 net new locations; eight in the U.S., one in the U.K., and our first warehouse in China in Shanghai. By the end of the fourth quarter, paid Executive memberships totaled 20.8 million, reflecting an increase of 362,000 during the quarter or about 23,000 weekly. Regarding gross margin, our reported gross margin in the fourth quarter improved year-over-year by 14 basis points, and when excluding gas deflation and revenue recognition, it increased by 20 basis points. For further clarity, we detail two columns: reported and excluding gas deflation and revenue recognition. The first item is core merchandise where, on a reported basis, it was down 8 basis points; excluding gas and revenue recognition, it was down 3 basis points. Ancillary businesses improved by 29 basis points, or 31 basis points when excluding those items. The two percent reward was down 3 basis points, and the other category was down 4 basis points in both columns. These add up to the reported increase of 14 basis points, and again, it was up 20 basis points without gas and revenue recognition. The core merchandise component of the gross margin decreased by 8 basis points, potentially 3 basis points lower without gas and revenue recognition. When looking at core categories related to core-on-core sales, margins were higher by 4 basis points year-over-year, with improvements across fresh and softlines, slightly offset by declines in hardlines, while food and sundries remained relatively flat year-over-year. Ancillary and other businesses increased by 29 basis points and 31 basis points higher when excluding gas and revenue recognition, primarily due to strong gasoline margins. The other category was down 4 basis points in both columns. Moving on to SG&A, I want you to note the two columns once again—reported and excluding gas deflation and revenue recognition. Operations increased by 3 basis points, while excluding gas and revenue recognition, it decreased by 2 basis points, indicating higher by 2 basis points; central administration was down 5 basis points in both columns, meaning an increase of 5 basis points; stock compensation increased by 2 basis points in both columns, representing a reduction of 2 basis points year-over-year, while the other category decreased by 27 basis points in both columns. Overall, the reported SG&A percentage year-over-year was worse by 27 basis points, reaching 10.09% of sales, compared to 9.82% last year. Excluding the previously mentioned one-time items, SG&A would have been flat year-over-year on a reported basis and up 5 basis points excluding gas and revenue recognition. The operations component without gas and revenue recognition was 2 basis points higher, impacted by the wage increases from June 2018 and March 2019, which affected year-over-year comparisons by about 5 to 6 basis points this quarter. We estimate that once the first increase reaches its anniversary during this quarter, the impact in Q1 and Q2 will be about a 3 to 4 basis point effect. Central administration was higher year-over-year by 5 basis points in both columns, with IT being the main factor for this increase. Stock compensation contributed 2 basis points to help SG&A, while the $123 million impact on SG&A accounted for the 27 basis points difference. Regarding preopening expenses, the fourth quarter totaled $41 million, which is $10 million above the $31 million from the same period last year. This fourth quarter saw 12 openings, including 10 net new locations and two relocations. Increased preopening costs were mainly due to our new chicken plant in Nebraska, which is now operational and will undergo a 45-week ramp-up period from its September 10th opening. Overall, reported operating income for Q4 increased by 1%, totaling $1.463 billion this year compared to $1.446 billion last year. Excluding previously mentioned one-time items, operating income was up 9.7%. Below the operating income line, interest expenses were $3 million lower than last year, now at $45 million down from $48 million. Interest income and other income for the quarter was up by $23 million year-over-year. This included $15 million higher interest income due to increased invested cash balances and higher interest rates, along with an $8 million favorable variance primarily due to foreign exchange-related items. Consequently, pretax income including the one-time item rose by 3%, reaching $1.492 billion this year, compared to $1.449 billion in the previous year. Excluding the one-time SG&A charge, operating income would have increased by about 11.5%. For the fourth quarter, the effective tax rate was 25.7%, down from 27.4% a year ago, benefiting from several favorable discrete tax adjustments. Additionally, we opened a total of 12 net locations in the fourth quarter, resulting in a yearly total of 25 locations, including five relocations, leading to a net increase of 20 locations, primarily in the U.S., with approximately 25% internationally. By the end of Q4, our total square footage reached 114 million square feet. In terms of capital expenditures, we spent roughly $3.0 billion for fiscal 2019 and estimate similar spending in the upcoming year. During the fourth quarter, we repurchased 52 million shares, totaling 247 million shares for the year at an average price of $268.08, bringing the total for the year to 247 million shares at an average price of $225.16. Regarding e-commerce, we saw an increase of 21.9% excluding gas and revenue recognition, with particularly strong growth in electronics and appliances. Total online grocery sales continue to grow healthily despite still being a small segment, including both two-day and one-day fresh delivery options compared to Instacart. This past quarter, e-commerce introduced new items like KitchenAid appliances, Weber grills, and several high-quality beauty brands. We also launched merchandise roadshows, akin to a treasure hunt within the warehouses, with some items now available online. For example, we sold a large diamond ring for $220,000. Additionally, we plan to launch e-commerce sites in Japan and Australia later this fiscal year. For the Costco app, we introduced features including the digital membership card added in July, with over 2.5 million activations this quarter. The app allows users to access their digital membership, check current gas prices, view annual Executive Member Reward growth, and manage pharmacy prescriptions and shopping lists for promotional offerings. We are working on further enhancements to the app. Earlier, I mentioned our first unit opening in China in Minhang, a part of Shanghai, on August 27th. It attracted significant interest and had to close shortly after opening due to overwhelming crowds, but subsequent operations have been well managed with strong sales. We have seen record membership sign-ups there, helped by the opening and our social media efforts, with over 20,000 members registered. In comparison, mature international locations average around 68,000 member households. Our next Shanghai unit is set to open in early 2021. Regarding tariffs, numerous changes and adjustments continue, particularly concerning imports from China totaling about $250 billion, currently tariffed at 25%, with plans to increase to 30% by October 15th. List 4a involves approximately $110 billion in goods, starting with a 15% tariff from September 1st, including kitchenware and electronics. List 4b consists of another $155 billion worth of products with a planned 15% tariff set to begin on December 15th. Since tariffs were introduced over a year ago, we have actively managed and mitigated impacts where possible, including accelerating shipments ahead of tariff increases and negotiating with suppliers to reduce costs. We are exploring alternative sourcing where feasible and have utilized lower prices on unaffected U.S. items. The exchange rate has offered some assistance. Overall, our ability to adapt varies by item and vendor, and we continue to pursue opportunities in this area. Our size and vendor relationships position us well in retail in light of these challenges. Another potential tariff area arose from a recent WTO announcement allowing the U.S. to impose tariffs on up to $7.5 billion in EU goods, with targeted duties set to start on October 18th. Items on this list include specific whiskeys, apparel, cheeses, oils, and various pork products. Finally, we will announce our September sales results for the five weeks ending October 6th on October 9th after the market closes. With that, I will open the floor for questions and turn it back to the operator. Thank you.

Good afternoon and thanks a lot for taking my question. So, you’ve recently run a few promotions to drive membership growth. You've done this in the past periodically. Should we interpret this as any different than that particularly given that you now anniversary all of the benefits from the price increase? I guess you can say you want to increase membership growth, and that’s what's driving that decision. How should we think about that?

I believe that the current promotion we have in place is quite similar to the ones we've executed over the last few years. We aim to space these promotions out so that customers are not left waiting for the next one, but these initiatives do prove effective and beneficial. The timing is simply that—timing—and nothing more. I do not expect to launch another promotion in the near future as we have done previously.

Okay, that's very helpful. And then on your growth in China, did it surpass your expectations? And does that influence how many and how quickly you can expand in that country?

It clearly exceeded all of our high expectations. That said, we approach new markets methodically, typically starting with one or two units in the first year or two, and then we expand from there. A key factor is developing the people structure within a country; while we receive support from neighboring countries to kick off the process, it's crucial to establish our own supervisors and functional managers locally. If you had asked us before we opened our first unit, we felt optimistic about its potential, but we were uncertain about the specifics of execution and performance. Now, five years later, we anticipate following the same approach: starting with a couple of openings in the first year or two, then perhaps adding more as we assess the market. We're certainly pleased and excited about the progress we've made, and while it may grow a bit larger, we intend to remain methodical in our expansion, similar to our approach in other countries.

Thank you very much and good luck.

Hi Richard. So, on gross margin, it looked pretty solid. I want to make sure I heard properly, the core-on-core was up 4, which I'd say looks pretty normal for you, up a little, down a little, which means that the reported, it sounds like ancillary; the gas was a big piece of that. Can I ask you if the dynamics there, I think, over the past couple of years have improved in general? Are they still getting better or this was just pure market dynamics on the gas side?

I think the last few years, not only for us but other big gas retailers, supermarkets, and the Walmarts, generally, the new normal over the last couple of years has been better. Particularly for us, I think as prices historically have come down and some retailers bring them down a little, and some a little more, they still give us the ability to, in our view, to have improved margins and operations and probably showing a greater savings relative to what we had a few years ago. That being said, the quarter was good. A couple of quarters, a few quarters back year-over-year that was also good. It does fluctuate, but I'd say the new normal overall is on average better than it had been.

And the core-on-core was pretty normal for you as well?

The core-on-core, well, yes, I don't think there were any big surprises there. We always tell you that when it's up a little year-over-year, maybe it'll come down a little. When it's down a little, maybe it will be up a little bit. As it relates to the underlying factors of competition, we feel that we haven't seen any giant changes in the competitive landscape out there. There's still a lot of competition and there's a lot of headlines out there, but at the end of the day, we're still pretty darn competitive ourselves.

Okay. And my follow-up is on the EBIT dollar growth. It looked like it came in high single-digit like 9%-ish this year. And if you take the average over the last several years, it's coming around high single-digit that range. As you look out to your next fiscal year, is there anything one way or the other that should impact that? I think the consensus is modeling a lower rate. I know you don't comment on that, but it's been several years with a little bit outsized growth, and so just curious if there's any big spending items, margin issues that we should think about as we model the next year.

There's lots of everything, Simeon. We really don't talk about the future. I mean we certainly feel good about what we're doing merchandising-wise where all retailers are impacted by tariffs right now. That's having a little bit of an impact. But beyond that, we feel good about what we got going on in terms of opening up another 20-ish units next year and driving membership. We're certainly pleased with seeing our renewal rates continue to go in the higher direction and getting new members. So, overall, we feel good, but we'll see.

Hew Richard, I have two questions about gas. First, do you consider the relationship between gas margin and core-on-core? Specifically, if you're receiving a higher margin at the pump in a certain quarter, can that be partially reinvested into core-on-core? How do you view this interaction? Secondly, regarding gas gallon growth, how does that compare now to where it has been over the past year or two?

We don't fully manage margins that way. When one area performs well, it's natural to explore improvements in others, but we don't necessarily approach it in that manner. In terms of gallon growth, I believe our gallons are increasing in the high single digits.

Can you provide an update on your opening schedule for the year, including details by geography and cadence? Was the previous year somewhat back-end loaded, and is this expected to be the same in 2020?

Yes, that's likely the case. We generally aim to open locations before the holidays. Whether we miss a holiday in February, April, or May isn't as significant, but as we approach the back-to-school season, Labor Day, and continue through Christmas and New Year's, we do try to move things forward a bit. Last year was similar; we opened a larger number of locations in the fourth quarter. Generally speaking, I don't have an exact schedule in front of me.

Thanks. Good evening. So, wanted to ask you a question about average ticket growth ex FX and gas. If you take a look in August, that showed slow down pretty sharply relative to the prior trend. So, want to pick that at that. Is that a comparison? Is that a change in mix or perhaps lapping against some of the center aisle of grocery, price increases that the vendors are starting to put through last year? Is it investment in price then? And so just want to get your thoughts on what's driving that and any thoughts on the outlook there?

I believe that in the last quarter, the average was around one-eight or one-nine, and this quarter, it dropped to one-four. I don't have a clear answer for you at this moment. It might be due to a change in mix, but I can't confirm that right now.

Got it. Regarding the tariffs, how are your peers responding in terms of pricing strategies? Are they adopting a portfolio approach by maintaining certain price points for specific items while balancing against less elastic products? How are you evaluating the current market situation in this context?

We don't see any significant competitive challenges. I believe it's easier for us to manage a smaller selection of our 3,800 items compared to retailers that handle 50,000 to 150,000 items across various categories. While larger ticket items can be more complicated, it's often easier to adjust prices on smaller items. For items like furniture or garden supplies, it becomes trickier. Overall, we are generally confident about our position. As an item-focused business, we have strategies to mitigate the impact of tariffs, such as relocating production or sourcing from different suppliers when necessary, though there are limits to this approach. Ultimately, we can choose not to sell certain items and replace them with others, which gives us some flexibility compared to typical merchandisers, even though these challenges affect everyone in the industry.

Got it. And then on the announcement last night, I mean, there are some items on there that standout, olive oil and cheese. Can you talk about particularly in the olive oil side; I imagine this might be the largest seller of olive oil in the United States. So, can you talk about where you're sourcing that? I think Spain's covered, but Italy is not?

Yes, we source from several countries, including the ones that you just mentioned. There'll be some impact.

Got it. And then I guess the last question is that the money question here is another quarter down, and we haven't had any announcement as to what you're going to do with all the cash in the balance sheet that continues to build. So, can you talk about what your thought process is there? Has anything changed? Are you trying to keep dry powder for any particular reason? Thanks very much.

Sure. I don't believe we have any cash set aside for acquisitions at this time. We haven't made any plans to do so either. We do have $1.7 billion maturing in December and February, which consists of $1.2 billion and $500 million. We intend to pay that down. We often receive inquiries about a special dividend, and we have issued three in the past that were well received. It's still an option we might consider, but it will depend on future decisions. However, nothing specific is currently on the agenda.

Understood. Thanks very much.

Thank you very much. Regarding the growth in operating profit, it was approximately 10%, which translates to an increase of $140 million when excluding the product tax assessment. Could you provide some insight on how the stronger year-over-year gas margins may have influenced that growth rate? I estimated there might be around $150 million in additional dollars from improved gas margins.

Well, we don't disclose specifics. But as I think I mentioned, I think it was Q2 year-over-year that we also had a good gas margin; certainly, that was a help to that.

Okay. But is that estimate like somewhere in the range, or is it way too high?

We really don't go into that specific of a detail.

Okay. And then wondering if you could maybe give a little color in terms of elasticity and anything you can point to on elasticity response with categories where you did raise prices.

Sure. Generally speaking, for larger ticket items, where tariffs significantly impact pricing, we see an increase in prices. In one category that usually sees mid-single-digit growth year-over-year, we actually experienced flat or slightly declining prices, despite some price hikes. This particular subset accounted for a 10% decrease in units. However, I want to clarify that this does not apply to the entire category. Our buyers have reported instances where the majority of the tariff impact was included in the price increase, and we maintained the expected number of customers. In other cases, where the price hike was related to tariffs, it accounted for less than half of the increase, and we did notice a reduction in unit sales there as well. Overall, the situation varied significantly across the board. Typically, for high-priced items, like one that retails for $999, raising the price to around $1,240 reflects a significant increase due to a 25% cost increase. We often aim to set a target price of $1,199 or $1,099 first. However, the results have been mixed, leading to a slight overall negative impact.

Okay. And then, I guess along those lines, can you just maybe give a color on what inflation was at, I guess, both cost and at retail? And then if you can parse that out between consumables and non-consumables?

It was very little. We've seen very little. You still see taking tariffs away for a second on electronics and things you'd see some deflation. Overall in consumables, it's been pretty much steady as she goes. One question I was asked earlier this week was about what's going on with the freight components, and freight has actually improved a little bit year-over-year. It's higher than it was a few years ago, but overall; it's all in the soup here.

Hey thanks. Good afternoon Richard. Just on the core-on-core between categories, a couple were up, hardlines were down. Food and sundries, I think you said, was relatively consistent year-over-year. Just can you dive into the hardline compression and also the change from last quarter on the food and sundries segment?

Yes. There's been a change in the mix. I previously mentioned online sales, but also in-store electronics and major items, which generally have lower profit margins yet still show good growth. Regarding the key question about competition, we’re not observing significant changes in the market, despite numerous headlines about the food sector. Overall, we haven't noticed any major shifts.

Okay, fair enough. And then can you just remind us how you guys are thinking about the company's long-term club growth potential, particularly here in the U.S. and if you're seeing any signs of saturation in any of your key markets, both domestically and internationally?

By definition, the growth rate in the U.S. and Canada will slow down. I could have said that three years ago due to our efforts in those regions. However, we continue to discover new opportunities. Over time, though, growth will decelerate. We are also expanding our business centers, with 18 currently in the U.S. and one in Canada, with another on the way in Canada, which will contribute to growth. When asked for an estimate for the next ten years, we predict around five to forty openings in the U.S., possibly more than twelve per year. Currently, we are seeing about 15 openings a year, but that number will decrease slightly. In Canada, we're looking at more than one opening per year. Initially, we thought we had reached saturation at 80 locations, but we're now at 101 or 102, which will continue to rise. Overall, we feel confident that in three to five years, the percentage of new openings will still be favorable, even outside the U.S. and Canada.

Okay, great. And then just last question, online sales, I think, are about 5% of the total revenue. When you guys are analyzing shoppers that are using either CostcoGrocery, Instacart, I'm curious if the purchases have replaced the in-store trip. And I guess if you've analyzed how that could potentially impact your in-store traffic over the next two to five years? Thanks.

It's still early in the year. Generally, more shops are recognizing that shopping online might result in slightly fewer visits in-store. However, this trend appears to be a slight net positive compared to what we've previously observed. We need to monitor whether online shopping will replace in-store visits and to what extent. Currently, it seems that some customers are shopping online, which slightly reduces their trips to our locations. I would categorize this as neutral to slightly positive for now, but we cannot predict what may happen in the future. Overall, we feel positive about the situation, but it's unpredictable. Part of our communication strategy to our members, aside from the traditional connections and emails, involves not just promoting online shopping, but also highlighting appealing offers in the warehouse. This can encourage customers to visit more frequently. Additionally, while not every person who fills their gas tank visits the store, over half of those who do fill up often do shop in-store, and even if that represents an incremental gain, it's beneficial. We don’t track this directly, nor require anyone to, but we believe it helps drive traffic to our buildings, which is our goal.

Makes sense. Thank you.

Good afternoon guys. Scot Ciccarelli. Just a quick follow-up on Chuck's kind of store opening question. Do you have a plan for U.S. versus international store openings for the current fiscal year?

Yes, I think U.S. is still going to be a little more than half. I don't have the sheet in front of me.

A little more than half. Okay, that's good enough. Richard, when you guys bring popular branded products where there's a lot of price transparency, you mentioned Weber grills on the call in your website, how are you guys trying to target for pricing on those kinds of products when they can be found in lots of different spots? Can you guys price competitive, of course, but can you provide any color on kind of how you're thinking about kind of price caps when you've got obviously the Home Improvement guys out there, Amazon, Amazon Marketplace, et cetera?

Yes, we aim to have the lowest prices and will adjust them as low as feels appropriate. In some cases, we bundle products to create added value, including accessories and other items, which are genuine offerings that provide real value. We've applied this strategy across various categories, including computers and large appliances. Often, competitive pricing is seen at the entry level, as what is advertised tends to be basic. Generally, consumers tend to opt for upgrades with additional accessories, which is where we can offer significant savings. We've observed that for these big-ticket items, our discounts are quite substantial compared to traditional pricing.

Got it. Thank you.

Yes, good afternoon Richard and everybody else. Thank you for taking my questions. First, I just want to go back to the grocery delivery and some of the initiatives that have been rolled out here in the U.S. Have those been rolled into some of your other international markets that you're operating e-commerce sites in?

Yes, Canada now, we rolled it out in Canada with some help from others. We would like to do it in a few other countries, but we haven't said when and where. But in short order.

Okay. So is it safe to assume it will be sometime in fiscal year 2020?

FY 2020, yes. Starting with the two-day, which is easier, two-day dry. But in Canada, we're doing one-day fresh as well. We'll be doing one-day fresh, but we're not doing it yet. We're doing two-day dry up there already.

Okay. I appreciate that. And I guess lastly from me, I just want to touch on working capital continues to be impressive with payables, as you know, ellipsing over 102% of inventory now. How much more room do you think you have in that as we model out for one? And is there any one-time items there that are driving some of the performance that we're going to keep in mind?

Given the seasonal factors, our first quarter aligns closely with Thanksgiving, which tends to be when payables peak as a percentage of inventories. Usually, the second quarter, particularly February, is the low point since sales tend to soften seasonally. Additionally, as we expand our e-commerce capabilities and increase inventory, this might have slightly negatively impacted our current strong figures. We have some programs involving smaller vendors where we've negotiated extended terms, especially for seasonal items. Sometimes, if they need working capital, it makes sense for us to pay early, which we refer to as anticipation. Although these amounts are not significant, they have had a slight impact that should diminish over time. Overall, I recommend reviewing the percentages at the end of each quarter from previous years as they are likely to remain similar. That’s my best estimate.

Okay. I appreciate the detail. Best of luck this fiscal year.

Thank you.

Hey good evening. This is Jeff online for Chris. Just a quick question. You touched on this a little bit with the topic of tariffs. Just wanted to know your general temperature check on the consumer. It sounds like they are responding in some ways at big-ticket items like you said with price increases. But in general, what's your feeling on how consumers are acting just given both tariff politics and geopolitical concerns and stuff of that nature?

I think all I remember is we speak in a sense that we're still seeing good growth, certainly, very good renewal rates, good results and openings. So, we feel pretty good about it. Now, if you ask me how does that relate to the consumer, who the heck knows? I think we all turned off the television and stopped listening to everything every day. We'll all be better.

Thank you.

I think everyone has become somewhat desensitized to everything.

Hi thanks. Congrats on the progress in diamonds as well. Regarding the digital execution, the mobile app development has been really progressive. What are your thoughts on the biggest needle movers there? And as you think across digital, whether that be adding new product, improving check out and search, or your new D.C., how would you prioritize the bigger drivers for traffic and growth that large?

I believe that our primary focus with the app is to increase user adoption. Since we improved it, we have around 2.5 million users, but there’s still plenty of work ahead to enhance its features. Currently, we have over 10 million members using the app. Additionally, one of our priorities has been to collect email addresses from our members. We were a bit behind in this area compared to others, but we have made significant strides in the past couple of years to boost the number of members with valid email addresses. This simple step has positively impacted our engagement, as we’re seeing more people opening our emails and clicking on the links. In the past, we have maintained different financial strategies, such as improvements resulting from the credit card transition, membership fee increases, and tax reforms, all contributing to better value for our members. This approach has likely given us an advantage in achieving our goals over the last few years. More connections with our members will certainly help us continue this trend. We are also pleased to see no slowdown in renewal rates, which has been beneficial. In our budget meetings every four weeks, we consistently see exciting initiatives from our team that enhance existing products. For instance, on the KS side, we are working to improve items while lowering their price points, which significantly increases their value. We are exploring not only the exciting products we can ship from the U.S. to other countries but also interesting items from other regions to bring to our locations. From a merchandising perspective, we are performing exceptionally well. On the operational side, we are experiencing various expenses. We have discussed e-commerce before, and there are costs associated with that, as well as general IT expenses related to our ongoing projects, including e-commerce, fulfillment, depot infrastructure, and the new poultry complex. There’s a lot happening across the board.

And finally that you've really had good momentum, including with diamonds at Costco and the big-ticket sales of diamonds. What's your strategy with that business? And how has it been going? Any things we should think about?

It starts with great quality and great value. The jewelry area is a good example with the lockers we are now rolling out to several locations. Many customers with high-value small items can't have them shipped to their workplace and don't want to leave them at their front porch. We noticed an increase in some of those items as well as handbags and a few electronics. Regarding jewelry overall, we received a lot of attention after I mentioned a $400,000 diamond a couple of quarters ago. We're selling nearly 200,000 carats of diamonds each year. That's a substantial amount of carats. The jewelry business ranks just after electronics when you typically walk into a Costco, and it is all about value and trust.

Thank you. Best regards.

Hey Richard. Thanks for taking my questions. One question I'm getting is just a lot on the chicken plant. Can you just sort of let us know how that is going so far versus expectations? And also was it about $10 million of the preopening expense this quarter? And how does it affect preopening going forward? And maybe related to chicken plants, are there any other types of vertical integration, things that you might be looking out to do further?

This is a significant plant and I believe it is the most advanced facility of its kind in the country. It's designed for high efficiency, though it will require nearly a year to reach full production capacity. The initial weeks have proceeded according to plan, with the first chickens processed and more being handled each day. We anticipate processing 2 million birds per week in approximately 40 weeks. The preopening phase effectively concluded when we launched on September 10th, leading to some minor activity in the first quarter, but not substantial. This facility is large and utilizes air-chilling, while around 95% of U.S. poultry plants still use water chilling. This approach not only enhances the quality of the food we produce but also allows us to make environmentally friendly choices. However, this development did come with significant costs, marking a major investment for us, which we are enthusiastic about. Additionally, a year ago we opened a second meat plant; we have had one in Tracy, California for many years and recently launched another in Morris, Illinois. We also established a bakery commissary in Canada that will provide products like cookie dough and ready-to-bake croissants to many areas in the U.S. We are exploring various greenhouse opportunities given the technological advances in agriculture, which could help reduce shipping costs to Hawaii and minimize environmental impact. Overall, while we have a few notable projects in progress, there are no substantial plans beyond what I mentioned over the past year and a half, especially concerning the new chicken facility and initiatives in greenhouses, although these do not require the same level of capital investment as the poultry complex.

Hi Richard. Thanks for taking the question. Just wanted to ask for an update on Executive program rollout, if you can just remind us kind of which countries have it now and which ones might be slated to get it next?

We have it in the U.S., Canada, Mexico, U.K., Korea, and Japan. We just rolled it out this month in Japan, and we introduced it in Korea about a year to a year and a half ago.

Okay, great. One housekeeping one if I could is around gasoline. Can you give us a sense? I've been thinking that was around 10%, 11% of sales for the quarter. And also what was the ASP for gasoline this quarter?

Hold on. I think it's unclear. $2.94 compared to $3.05 a year ago.

Okay. And the last thing that I had was on Citi Visa, can you give us an update just on how many members have that now and what you're seeing in terms of third-party spend, just how it's progressing?

I don't have those numbers in front of me. I can tell you that we continue to add new members. The average reward for existing credit card holders on the Citi Visa card is continuing to increase. The rewards are substantial and it's really working well. It's likely performing better than we originally hoped, and it's been beneficial for us and hopefully for our partners.

Hi good evening. Thanks for fitting me in Richard. Just wanted to go back to the store potential question really in the U.S. I think it was a few years ago that, you know, you were able to kind of go into some smaller communities than you maybe originally thought. And so just curious, as you think about the next couple of years, what kind of size and demographics of the communities are you looking at and planning for new clubs? And also, when you go back to the saturation question and think about how do you analyze when you think you are at saturation, what are some of the key metrics that you look at? Is it the pace of the ramp in terms of sales, the cannibalization of members? Or just any help on how you guys think about analyzing that?

Thirty years ago, the perspective was that you needed around 500,000 people in an area along with a certain number of businesses to support trading. Nowadays, that number can sometimes drop to as low as 200,000. It varies. In some smaller or medium markets we've entered over the past few years, we've found that our direct competitors had often been there for 20 or 30 years, and we just hadn’t ventured into those areas before. We’ve gained more confidence that there's space for both us and our competitors, and we have performed fairly well in these markets. Looking back at the past few years, and anticipating similar trends in the future, we see opportunities for infill. For example, on the East side of Seattle, specifically Bellevue, we historically had three locations: Issaquah, Kirkland, and Woodinville. About two years ago, we opened a location in Redmond. Between the three previous locations, we had around 190,000 members in total—about 60,000 to 65,000 each. The first year after opening Redmond, we gained about 10,000 new members, but many loyal members began shopping more frequently because we were closer to them. This increase is part of the higher volume shopping trend. Before we opened that fourth location in Seattle, our total sales exceeded $800 million, with one location generating low $300 million and the other two in the mid to high $200 million range. At this scale, we felt comfortable with some cannibalization. In that first year after the new location opened, accounting for cannibalization, we conducted over $120 million in business. It's relatively straightforward to forecast potential revenue, especially with a loyal membership base. In other markets, like Greater Los Angeles, where we have about 60 locations, we believe we could add another 15, but they would be in very specific geographies that are challenging. We feel confident that in the next three to five years, the percentage of openings will continue to grow if nothing changes outside of the U.S. and Canada.

Okay, that's helpful. And maybe just another one on click and collect and how that's going and maybe what you're learning from a logistics and labor perspective as you do that for some of the big-ticket items. And then any changes or thoughts with respect to broadening that to some other categories like grocery, which I realize are more maybe complicated and labor-intensive?

Yes, I don't see us going too deep. I mean we're talking about tires and pharmacy and jewelry, handbags, computers, high-value small-sized items for the time being.

Okay. Thanks.

Thank you for addressing my question. I have a brief inquiry regarding inventory. It seems that your inventory receipts have increased at a slower pace than in previous quarters and relative to sales growth. I would like to understand why you may have reduced your ordering and whether this indicates your perspective on current quarter sales trends.

I think it's a bit of an odd situation that I wouldn't read too much into. It could be that we have built up our online inventories related to e-commerce year-over-year, but perhaps that didn't happen as much this quarter. We’ve been cycling through that for about a year, I assume. Other than that, there's nothing significant to infer from this.

Good afternoon. It's actually Erica Eiler on for Rupesh. So, I just had one quick question just flipping back to international. So, when you look at a market like China, when do you typically see an inflection point and profitability in those clubs?

At the club level, it could take a few years before reaching profitability. The central expenses remain relatively consistent regardless of whether you operate one location or ten. While costs will increase somewhat, the growth isn't proportional when scaling up. The timeline can vary by country; for example, in Japan, which has been operating for about 20 years, we initially planned to open five clubs in five years, and we approached profitability by the end of year four, having opened six clubs. In contrast, it took us 10 years to open the first club in France, and even as we seek additional sites there, it could still take a couple more years to see significant growth. It's unrealistic to expect to expand from one club to five within five years.

Good evening Richard. One housekeeping question. Can you talk about the tax reserve on the product? What drove that? Was it an excise tax kind of thing?

It was essentially on tax that some authority thought we should have been collecting and we're, again, going to file a protest and see how much. But I can't really talk to a lot about it yet. But again, it relates to, I'd say, a seven and a half year period that ended in 2016 that we were just notified before the formal assessment. Again, under GAAP accounting, we've reserved for it.

Looking at the tariff situation, could that possibly encourage increased private label sourcing for more products to lower prices? Additionally, what are your thoughts on new categories and items for private label in the upcoming fiscal year?

Yes, not really due to tariffs. Some of our private label items are sourced from China, which will affect everyone. Changes do not happen overnight. In terms of KS items, we will continue to see a variety of products, including recent introductions like specialty waters, essence waters, extra virgin olive oil that could be affected by tariffs, and chocolate chips. Additionally, there are several apparel items for men, women, and children, along with more housewares. I expect this segment to grow and for us to further enhance the quality of existing items through continuous improvement. You will also notice this development in some frozen food items, diapers, soaps, and coffee pods. For instance, we've updated the KS coffee pod, which transitioned to fair trade a few years ago, and it is now organic and recyclable. We've also reduced the price by over 10% for customers while enhancing the value and quality, which is driving more sales. These are the kinds of products and initiatives we are focusing on.

Thank you and good luck for this year.

Thank you. I think that's it. Well, thank you, everyone and the group here will be around if there's any additional questions. Have a good day.