Costco Wholesale Corp (COST) — Q4 2021 Earnings Call Transcript

Thank you, Anne, and good afternoon to everyone. I want to kick things off by mentioning that our discussions today will involve forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995. These statements carry risks and uncertainties that could lead to actual outcomes differing significantly from what's suggested. The risks and uncertainties are outlined in today's call, alongside other risks mentioned in the Company's public communications and SEC filings. Forward-looking statements are only valid as of their date, and we won’t update them unless legally required. In our press release, we shared our operating results for the fourth quarter of fiscal 2021, which included the 16 weeks ending August 29th. Our reported net income for this quarter is $1.67 billion or $3.76 per share, compared to $1.389 billion or $3.13 per diluted share from the previous year's fourth quarter. This year’s fourth quarter included an $84 million pre-tax charge, or $0.14 per share, for the write-off of certain IT assets, while last year included a $281 million pre-tax charge or $0.47 per share for COVID-related costs, along with a $36 million or $0.06 per share pre-tax charge associated with a debt prepayment. Last year’s results were partially offset by an $84 million benefit or $0.15 per share from reversing a reserve related to a product tax assessment from fiscal year 2019. Net sales for the quarter rose 17.5% to $61.44 billion, up from $52.28 billion in the same quarter last year. Comparable sales in the U.S. reported a 14.9% increase for the fourth quarter, which would be a positive 10.3% when excluding gas inflation and foreign exchange effects. Canada reported a 19.5% increase, with 6.7% excluding those effects. Other international sales reported a 15% increase, with 7.3% excluding gas inflation and FX. The company overall had a reported increase of 15.5% and 9.4% excluding those factors. E-commerce sales grew by 11.2%, and 8.9% when excluding gas inflation and FX. In terms of comparable sales metrics for Q4, traffic worldwide rose by 9.2%, with 8.8% improvement in the U.S. Our average transaction size increased by 5.8% globally, and by 5.6% in the U.S. during the fourth quarter, considering the positive effects of gas inflation and foreign exchange. The fluctuation of foreign currencies compared to the U.S. dollar positively impacted sales by about 230 basis points, while gasoline price inflation contributed positively by about 385 basis points. Moving to the membership section, membership fee income for the fourth quarter came to $1.234 billion, up $128 million from last year's fourth quarter income of $1.106 billion. This figure represents an 11.7% year-over-year increase; excluding the effect of favorable FX, the increase would have been $107 million or a 9.7% rise. By the end of Q4, our U.S. and Canada renewal rate stood at 91.3%, an increase of three-tenths of a percentage point from the number at the end of Q3. The global renewal rate was at 88.7%, also up three-tenths from Q3. We believe that the improvement in renewal rates is due partially to an increase in auto-renewals and the growing number of executive members, who tend to renew at higher rates than non-executive members. First-year renewal rates have also seen improvement during this period. As for member counts at Q4's end, there were 61.7 million total paid households, an increase of 1.1 million from 60.6 million reported 16 weeks prior. Total cardholders reached 111.6 million, up 1.8 million from the previous figure of 109.8 million at Q3's end. As for paid executive members, we had 25.6 million, reflecting an increase of over a million new executive members during these 16 weeks. Shifting to the gross margin line, our reported gross margin for the fourth quarter was down 32 basis points year-over-year, but was actually up 5 basis points excluding gas inflation. I usually ask you to note two columns with a gross margin matrix involving core merchandise, ancillary, and other businesses; 2% reward; LIFO; and others, so that the first column shows reported figures year-over-year in the fourth quarter, and the second column reflects results excluding gas inflation. For core merchandise, the reported decrease was 90 basis points year-over-year, and 57 basis points when excluding gas inflation. Ancillary and other businesses showed a positive 44 on a reported basis, and 53 excluding gas inflation. The 2% reward aspect increased by 1 basis point reported and decreased by 3 on an excluding basis. LIFO was down by 5 basis points both reported and ex-gas inflation, while the ‘other’ category was up 18 and 17 respectively. Summing the two columns supports the earlier mentioned total decline of 32 basis points, or a gain of 5 basis points when excluding gas inflation. The lower core merchandise component reflects a shift from core to ancillary sales compared to last year. Sales in core categories were lower by 40 basis points, with non-foods slightly improving and food and sundries slightly declining. Fresh food sales, which were a major factor for lower core margins, are comparable to last year's exceptional labor productivity and low spoilage levels due to higher sales in Q4. We have retained some productivity gains from consistently high sales volumes, but we've also chosen to hold or mitigate some price increases in light of rising inflation. The gross margin for ancillary and other businesses rose by 44 basis points and 53 excluding gas inflation for the quarter. Gasoline sales performed well due to easier comparisons against declines from last year's pandemic. Areas such as food courts, optical services, and travel all showed improvements, aided by simpler comparisons influenced by COVID impacts last year. We also encountered a $30 million LIFO charge in the quarter, marking our first such charge in nearly seven years prompted by ongoing inflationary cost pressures. As for SG&A, our reported SG&A for the fourth quarter improved year-over-year by 45 basis points, and 13 basis points better when excluding gas inflation. The second SG&A matrix includes two columns reported and ex-gas inflation, with line items for operations, central, stock compensation, other, and total. Reported core operations improved by 19 basis points, and increased by 8 when excluding gas inflation. Central operations saw a 12 basis point gain both ways. Stock compensation also benefited from strong sales, contributing an additional 2 basis points. While the ‘other’ category produced a gain of 12 and 11 without gas inflation, this includes a substantial COVID expense last year and a reserve reversal, in contrast to this year's IT asset write-off of $84 million. Pre-opening expenses for this year reached $35 million, compared to $26 million last year. This increase is partly due to timing of openings and varies among locations. Overall, reported operating income in the fourth quarter grew by 18%, reaching $2.275 billion this year, up from $1.929 billion last year. Below the operating income line, interest expense was $52 million, remaining roughly consistent with $51 million last year. Interest income and other items for this quarter rose by $77 million year-over-year, driven by favorable FX and last year's fourth-quarter debt prepayment charge. Consequently, our reported pre-tax earnings in Q4 2021 rose by 23%, amounting to $2.291 billion compared to $1.869 billion from the previous year. Our tax rate for the fourth quarter was 26.1%, up from 24.9% in the prior year. For Fiscal '22, we estimate the effective normalized tax rate to be in the 26% to 27% range, barring any changes to U.S. corporate tax rates. A few additional highlights include a net increase of 20 warehouse openings for Fiscal '21, with expectations to open at least 25 new units this year, including additional warehouses in China and France and our first in New Zealand. Our fourth-quarter capital expenditure was around $1.09 billion, totaling $3.59 billion for the year. This includes a recent $340 million acquisition of a West Coast distribution facility for our large item delivery operations. E-commerce sales in the fourth quarter grew 8.9% year-over-year, building on last year’s Q4 sales surge of 91%. We have seen strength in departments such as jewelry, home furnishings, pharmacy, and sporting goods, although sales in some areas like electronics must be viewed in light of the exceptionally strong sales last year during COVID. Regarding logistics, Costco Logistics experienced a 130% sales increase, now making up 24% of all sales on our U.S. e-commerce platform, compared to 11% last year. Despite constraints, we are managing to conduct an average of 7,000 to 10,000 daily deliveries through Costco logistics, which is continuously expanding. Our e-commerce app has surpassed 10 million downloads, with more features on the horizon. Additionally, we’re piloting digital payments with the Costco credit card at various locations, with a full rollout anticipated by next month, and new online functionalities are expected soon. Addressing supply chain concerns, there have been several pressures affecting our supply chains and inflation, including port delays, container shortages, and pandemic-related interruptions. Many brands are requesting longer lead times and facing challenges with drivers and trucks—it’s essential to plan effectively. We've had to impose limitations on high-demand items due to rising adult-related demand, while furniture delays have extended rollout times. Despite these issues, our product management is proactive, and we continue to order early for seasonal products. The ongoing chip shortages affect items such as computers and appliances, and it appears that the difficulties will extend into 2022. In terms of transportation costs, we are observing increases that impact delivery timing and freight costs. However, we are constantly working to minimize these cost increases and avoid passing them on to our members. Additionally, we chartered three ocean vessels for the next year to transport containers from Asia to the U.S. and Canada, further bolstering our logistics efforts. Regarding inflation, we are seeing numerous inflationary pressures affecting us and our peers, including higher labor and freight costs, heightened transportation demands, and various shortages. Price increases from suppliers have emerged, resulting in significant cost hikes for some essential goods. We're striving to mitigate these increases wherever possible. We’ve noted substantial increases in prices for plastics, metals, and various commodities. When I shared previous estimates of inflationary impacts, we projected an increase between 1% and 1.5% previously, which we later revised to 2.5% to 3.5%. Currently, we estimate overall price inflation on the products we sell to be in the range of 3.5% to 4.5%. Our recent LIFO charge is a direct result of these inflationary conditions. Overall, our team is doing a commendable job managing inventory and ensuring we maintain product availability for our members while keeping prices competitive. Lastly, we will disclose our September sales results for the five weeks ending October 3rd, on October 6th, after the market closes. With that, I will now turn it over to Anne for questions. Thank you.

Hey, Richard. My first question is on the next fiscal year. I know you don't give a lot in terms of guidance, but wanted to ask if you think or how should we think about EBIT, whether it grows or not next year? And if you don't answer that, I was going to ask if comps grow in Fiscal '22 should EBIT grow?

Well on the first question, of course, I can't say we don't provide guidance, but we've always talked about being a top-line company and that helps a lot of things. So, depending on what level of sales, we'll have to wait and see. We do have the dollar increases started in March, that will anniversary next February. So, at the end of Q2, next year. But again, we've shown that even with what we view as holding the line as much as we can on pricing and being pretty aggressive there and taking that into account, we've shown that with strong sales, we can certainly improve the bottom line as well, so fingers crossed.

So, my follow-up may be two parts and one of them is on sales and then you mentioned the wage increase. So, on the sales side, is there anything that you're looking at or approaching differently? I know extreme value is one angle, but the timing of mailers, inventory availability looking better, is it ancillary that hasn't recovered? What can you do on the top line given how big of a lap? And then you mentioned the wage increases, and I know you'll lap those in March, but you've seen that Amazon and Walmart have moved up, and so I'm curious how do you think about, or should we expect another increase in terms of wages?

Sure. First of all, regarding the comments I made about supply chain and inflation, I believe we are managing these areas effectively. One of our key strengths is our financial capacity to place orders early and address any potential delays. Additionally, thanks to our Costco Logistics acquisition last year, we have increased storage space, which helps us maintain inventory efficiently. We are actively introducing new products and bringing in items out-of-season for Christmas, expanding beyond our typical offerings to include household items like barbecue grills and even summer products. We have done well in adding suppliers and continually innovating, particularly in food and sundries. Despite occasional uncertainties, I think we're handling the situation quite well. From an inventory perspective, for those who visit our locations, they are well-stocked and presentable compared to imagery from competitors. We have a solid position. Regarding inflation, while some costs like freight are more permanent, we are passing on only what is necessary. We are being realistic about it, yet given our strong sales, we can maintain competitive pricing and hopefully perform better than our competitors. Overall, despite the challenges, things have been working in our favor.

Okay. Thanks, Richard.

Good evening. Thanks a lot for taking my question, Richard. In the past, what you’ve said is that Costco's profitability tends to draft up the profitability of the overall retail sector. In the last year-and-a-half, the profitability of the overall retail sector has moved nicely higher. Also, Costco's profitability, its margins have moved nicely higher. Do you view this as sustainable?

First, let me address Simeon's question about wages. We are recognized for offering one of the best wage and benefits packages in large retail. Even though we've increased our starting wage to around 16 and 16.50 recently, our average hourly wage in the U.S. is slightly above 24, along with a robust employee benefit plan. We are committed to maintaining this model. Although the timing is uncertain, we are confident in our position. Regardless of the company's performance, whether strong or weak sales, we will always prioritize what is best for our employees. Michael, can I return to your question?

Yeah. The question was, we've seen an improvement in profitability across retail and that tends to influence the profitability or profit margins of Costco. Do you view this improvement to your profit margin as sustainable from here?

I believe the unusual situation over the past year and a half has been that while many large retailers were experiencing comparable sales growth of around two to five percent before COVID, we were seeing much higher numbers, in the range of five to seven percent. Recently, we’ve been achieving mid-teens growth and gaining market share from competitors. We think some of this growth will be sustainable and we are optimistic about our achievements. We aim to continue generating comps above the industry average. These do not necessarily need to be in the mid to low teens; even mid to high single-digit growth would be an improvement. However, I want to emphasize that we've always believed we are a top-line company, and if we focus on that, everything else will follow.

Got it. My second question is on your gross margin. There's a lot of moving pieces, as there are a lot of moving pieces with everything that's happening with Costco right now, but specifically, you're giving back some of the core-on-core gross margin gains that you experienced some really strong price sales last year. But on the other hand, your ancillary businesses are doing really well. So, is that dynamic where you're making up for the pressure on the fresh with strong ancillary, is that sustainable? And as part of that, the perception is that Costco tends to raise prices at a slower rate than others in the retail landscape, which tends to pressure its margins as inflation is heating up. What would be different this time to make that not happen? Thank you.

Your question highlights the complexity of our situation. Gasoline, which represents over 10% of our sales, is a significant part of our business that experiences large fluctuations in gross margin. Thankfully, it's consistently profitable, but the gross margin can vary widely. This variability is largely influenced by competition in the retail gasoline sector, where other major retailers might aim to increase their margins. This allows us to remain profitable while also providing more savings for our customers. There are many factors to consider. Last year, for about 16 weeks, our Optical and Hearing Aid Centers were completely closed. Travel-related revenue plummeted as we refunded previously booked business during the peak of COVID, resulting in some unusual situations. Despite these challenges, we believe that our status as an essential business, along with our spacious stores, has made customers feel safe shopping with us. We've worked hard to adapt our inventory and maintain well-stocked warehouses despite supply chain disruptions, which has contributed to our success.

Thank you very much, Richard.

Thank you, Richard. If inflation remains in the 3.5% to 4.5% range over the next few quarters, do you anticipate that the LIFO charge will be around 30 million each quarter, or can we adjust it if conditions weaken? Years ago, you had that charge every quarter or sometimes a credit, so I'm curious about how we will manage this going forward.

It's difficult to provide a definitive answer. I wouldn't say it's solely based on that. It really varies. We've had several years where we saw little to no LIFO impact or reductions from our previous LIFO credits from five to six years ago. However, if inflation remains consistent over the next two to four quarters, we could expect to implement some price increases for our customers. There have already been some increases, but in our opinion, there could have been more. This trend will likely continue. If inflation stabilizes at its current level, even with a LIFO charge, some of that impact could be mitigated by those price increases.

Okay, thank you. As a follow-up, I'm interested to know if you have noticed an increase in job applications in around 20 states that ended unemployment benefits on September 1st. Several companies have mentioned a significant rise in job applications recently.

I haven't asked about that, so I don't know the answer. It makes sense.

Okay. All right. Good luck. Thanks.

Thanks.

Hi, thanks very much. I just want to clarify one thing on that last line of questioning, in terms of the LIFO charge, was this 30 million a catch-up for the whole year, or was that something that was reflective of the quarter itself? Because to get that, speaks to the run rate.

It's the quarter, and if you look at your cost, the inventory levels at the end of Q3 compared to now at the end of Q4.

Okay. So, I guess obviously as you lifted all these different pressure points on pricing, I guess my bigger picture question is, how do you think about the membership fee structure in general? There are all these pressures on I guess your business, but also on the consumer from the inflationary standpoint, make you more likely, less likely, or how does it impact your membership fee increase decision process?

We have stated that we view our gross profit as a combination of gross margin and membership fees. However, we don't really consider them together in a way that suggests adjusting membership fees would allow us to be more aggressive with pricing. I recall someone asking years ago, during a period of economic downturn and slightly weaker sales, if we would still implement a pending price increase, and my response was that we were more likely to proceed with it because that's our approach. Lower prices could stimulate more business. We do focus on loyalty, and our loyalty and renewal rates have been strong. We're still some time away from reaching the anniversary of our last increase, so we're not actively thinking about it at this moment.

Okay. We had a conference today with some large-cap companies that indicated their new view on what their actual cash balance should be going forward, relative to pre-pandemic levels, has actually increased. I am wondering if you could share your perspective on what you think the rate of a sustainable cash balance could be, given that you are still sitting on a significant excess cash balance now.

I believe we have always been viewed as having more cash and a more conservative balance sheet. The general sentiment seems to be that this should be increasing, but we haven't considered that possibility. In fact, when we raised capital in April 2020 in response to the potential worst-case scenario of COVID, we later realized we didn't need that funding, and we probably returned it to our shareholders along with a bit more. Additionally, we have been fortunate to have a strong fiscal year over the last year and a half in terms of net income and operating cash flow, especially when compared to our capital expenditures, regular dividend, and special payments that offset our debt. Therefore, I don't anticipate any changes to our approach at this time.

Great. Thanks very much.

Thanks. If I understand correctly, you believe that the structural pressures combined with strong demand mean you don’t feel the need to aggressively adjust prices. However, if the market conditions change, that might lead you to reconsider your approach.

It's really all about the value proposition. If anything, I think from the outside, people would look at us relative to other retailers and say we've been more aggressive on holding prices than others, at least that's how we feel. But we have to be pragmatic as these things are permanent consistent. You've got to raise the price; we can't be completely noble here. But we feel that if anything, that moat has probably widened a little bit for us, and that's great, we like wider moats.

So, the third variable being those others are raising prices faster than you, so the price gaps have widened.

That's our perspective and our buyers' perspective. We are evaluating the situation, and given the strong performance, we really dislike increasing prices. Our goal is to be the last to raise prices and the first to lower them. We focus on driving our own business, and we believe that offering the best value and high-quality merchandise is key. With the strong results we've experienced and the rising inflation, we are assessing where we can maintain prices. It's a nuanced process, but it has proven effective for us.

My second question is about the membership fee MFI growth and the FX benefit you've experienced, which has accelerated over the past two quarters. Given that this is accounted for over a 12-month period, do you have any expectations for what that growth might look like moving forward? With higher renewal rates and taking significant market share, should we expect that trend to continue? Additionally, does MFI growth continue to accelerate, excluding FX?

We hope so. Opening more units in 2021 than we did in 2020 is a positive sign. Also, several international locations tend to experience higher growth rates. The auto-renew feature encourages more people to sign up and use their credit cards, particularly for the Citi Visa card. This contributes to increasing the number of Executive Members; out of every 100 new sign-ups, just over half become Executive Members, which is significantly higher than the percentage from 6 or 7 years ago. These figures are approximate, but Executive Members tend to have better renewal rates and shop more frequently, leading to positive overall factors for us.

I have one last question. Can you share the percentage of your members in the U.S. who have the Citi Bank private label card?

I don't think we have.

Okay. Thanks. Best of luck.

By the way, before the next question, somebody checked a number, but we have seen a recent increase in applications in the last couple of weeks. I think Chuck asked that. Okay?

Hey everyone, it's Brandon Cheatham on for Paul. Gonna take a stab at the membership question as well. You know you have some great memberships statistics; it sounds like you're offering great value in the club. I was wondering, are you thinking about not investing as much in the new member promotions? Anything that you could talk about there, has that looked similar to last year, or has that increased?

No, I think when you say member promotions, what do you mean?

I think right now you're offering $40 on a Costco cash card if you sign up.

Oh, marketing. We do a variety of things. It's not a huge focus, but we've tried different initiatives over the last few years. We've collaborated with Groupon and Living Social, among others. While these efforts are not regular, we continually experiment with new ideas. However, I believe that this is independent of the membership fee itself. The key focus is on how we can drive memberships and understand the incremental cost associated with acquiring new members, beyond just waiting for them to sign up online or in-person at the warehouse. We are always exploring new strategies.

Got it. And you mentioned your own chartered ships. I was just wondering what percentage of your shipping that would represent next year.

Less than 20%.

Less than 20. Got it.

Less than 20% of our Asia shipping.

Got it, okay. And the last one for me, on the e-com side, I was just wondering if your customer that shops there, do they visit the store as frequently as a member that doesn't shop online?

I don't have the specific statistics at hand, but all the indicators we monitor are trending positively. The number of individuals purchasing online, the percentage of our members, and the response rate when we initiate an email campaign to encourage online activity are all moving in the right direction.

What we do know is when we shop online and, in the warehouse, you typically shop maybe a few less times in the warehouse, but you overall spend more.

What Bob mentioned is that when a regular, loyal member starts shopping online, they may shop a few times less in-store, but overall their spending increases compared to their historical habits. Additionally, while we are consistently introducing high-traffic items such as apparel and health and beauty products, it's important to note that more big and bulky items are being purchased online. In the past, buying items like mattresses or refrigerators required going to the store to pick them up. Delivery and installation options were not available then, but that has changed significantly over the years. Our appliance business in the U.S. is now over a billion dollars and continues to grow rapidly, supported by Costco Logistics, which also influences these metrics.

Great. Thanks for the additional color.

Hi. Thanks. Two questions for me. One, you did allude to the Delta variant and having to limit some products in areas where we've seen higher cases. So, could you just talk about overall different trends that you might be seeing in areas that are seeing bigger spikes in the new COVID variant versus others?

I don't have specific details by region available at the moment. However, I do know that the situation is quite varied across the board. There was a time when certain cleaning supplies, whether it was Clorox, Lysol, or antibacterial wipes, were in short supply. Now, there is an abundance of these products, but there are delays of 2 to 3 weeks in delivery due to the limitations on short-term adjustments in trucking and supplier delivery needs. Overall, it really is quite inconsistent.

And maybe as part of that, are you seeing anything in terms of the travel trends, which now we're coming back really strong as last quarter.

Yes.

But has Delta reverted that at all?

Yes. If you look at the chart, things went down last summer or spring, with more refunds than new purchases. It has nearly returned to normal levels, particularly with bookings for resort vacations to Hawaii and Mexico. About a month to two months ago, the charts indicated that it was almost back to pre-COVID levels. Then it dropped significantly, although not as drastically as last spring, but it has certainly stabilized. Car rentals were not affected as severely, but that will fluctuate based on the current situation.

That all makes sense. One more quick one that was one question in two parts. Can you update us on the curbside pickup test that you were running in New Mexico, I think as of last time we spoke it was in 3 stores?

Right. We're currently not doing it. We discontinued it, for now, we'll try some new things somewhere sometime, but at this point, we got a lot of good things going on and we really didn't see a lot of traction in it.

Interesting. Thanks for the call, I appreciate the time.

Good afternoon and thanks for taking my questions. So, I guess just going back to the core margin. So, it sounded like at least this past quarter on the pricey side, you guys delayed passing through some of the price increases. So, if you look at non-foods versus your foods categories, is it generally easier to pass through on the non-food side versus the food side?

I wouldn't say that. Fresh food moves quickly, turning more than 50 times a year. We're offering a great price on strip steaks and keeping the rotisserie chicken at $0.99, which will have an impact sooner.

I wouldn't say that. I think food turns so fast, it turns more than 50 times a year or whatever. And we've got a hot price on strip steaks or keeping the rotisserie chicken for $0.99, that's going to impact you a little faster.

But the comment here is that we're not going to change the price of muffins every week. So, we'll take a little less margin on some items. I think it's all over the board. But at the end of the day, it's an art form, not a science, or not straight across; we're going to do this much on every item.

Okay, great. And then the second question, just as you look at your service business, Optical, Food Court, et cetera, where are we versus where you were pre-pandemic? Have those businesses fully recovered at this point?

Mostly, Pharmacy and Optical have recovered. Food courts have returned, and while Hearing Aids are not entirely back to normal yet, the situation is much improved from its lowest point.

Mostly. Pharmacy and Optical have recovered. Food courts have returned, but Hearing Aids are not quite there yet, although it's significantly better than during the lowest point.

And Travel is lots of fun based on what's going on with COVID.

Okay, great. And one final question. I mean, I may have missed this in your prepared comments. Did you guys give a forecast for CAPEX for the upcoming fiscal year?

No, it will have a three in front of it.

Okay. Okay. Thank you. Best of luck, the balance of the year.

One more question.

So, Richard, you said it's an art, not a science. I'm curious where you guys sit on data science and analytics around price elasticity, 1. And 2, personalization of the monthly mailer or monthly e-mails. Where are we on that journey?

First of all, as it relates to pricing and elasticity, I think if we were considered the best Company in the world with data analytics, we would still not use it for price elasticity. We're going to do what we do as merchants and look at competitive prices, and see how low we can mark something up. And the old saying from years ago, we want to improve margins and lower prices at the same time by buying better and doing those things. So, I don't see that happening at all. As it relates to the other aspect of that, that's coming. We made a big investment in what I'll call data analytics for us because we went from darn near 0 to something. But brought on a VP of data analytics a year ago in March. There's been a lot of progress, a lot of focus to date has been on the merchandising side, providing better tools to buy and to project, and things like that. I think you'll see more of that over the next year, but again, we're getting there. I always look at it as just some of the things that others are doing that will help. It's low-hanging fruit for us because we haven't done it yet, but we'll keep going. But that's where a lot of the data analytic function to date in this past year as we built a department around it, has been just that.

And then secondly, one of the things you guys have been known for is seasonally getting in and out before everybody else. So, you lean into that in an environment where it's hard to chase product, getting it early, people buy it, and they're done for the season. Do you lean into that more in terms of where you can more inventory, get it in the club, or is there a limitation because you've got a transition from one season to the next?

I think there's a little bit of both. There is a little bit of taking it where you can get it right now, and certainly, we're consciously bringing in. I think I mentioned even what was the furniture where the cycle has gone from 12 and 14 weeks to 16 and 18, we're bringing in early. And certainly, on seasonal things, we'll do that on some items. But it's a mixed bag just because we're pivoting and blocking and tackling in 12 different directions like everybody.

Okay. Thank you.

We have time for one last question.

Hi, thanks for fitting me in, Richard. Just wanted to ask one more on the inflation you mentioned that the 3.5 to 4.5 range, just want to clarify that is retail inflation? Just curious what your cost inflation is, and just trying to get a sense of how much you're absorbing. And maybe if you can just provide some examples of how Costco and the merchants are mitigating some of the pressures.

Thank you for including me, Richard. I wanted to clarify the 3.5 to 4.5 range you mentioned regarding inflation; is that related to retail inflation? I'm also interested in understanding your cost inflation and how much of that you're absorbing. Could you provide some examples of how Costco and the merchants are addressing these pressures?

It's both. I am sorry, what? Margins have generally stayed the same, I mean, we gave you some examples on the side of the fresh food, where it's changed and why, but generally speaking, I think there is, again, a lot of moving parts and we continue to figure out how to balance it.

Any examples you want to provide about how you're mitigating some of the pressures?

Well, I mean, I'm not on a specific product example, but the fact is, one we've got strong relationships and good buying power with our vendors. When we're eating a little bit into something, we're asking in some cases for them to eat a little bit into it. During these times, we're constantly figuring out how to be where there are any cost savings to offset some of the cost increases. Whether it's packaging or whatever it might be. And so, I mean, I think one of the things that help us is that we're worried about managing 3,800 items, not 100,000 items or 50,000 items, and that's helped us. Yeah, there are times where we'll be pivoting in and out of items for that reason also. Sorry to be vague, but it really is, there are just so many different things out there.

Right. Thank you.

Well, thank you, everyone will be around for any additional questions, and have a good week and talk to you next time.