Costco Wholesale Corp (COST) — Q3 2023 Earnings Call Transcript

Thank you, Josh, and good afternoon to everyone. I want to start by mentioning that our discussions will include forward-looking statements that carry risks and uncertainties, which could lead actual results to differ from what's discussed. These risks include those mentioned in today's call and others found in our public statements and SEC filings. Forward-looking statements are only valid as of the date they are made, and we do not commit to updating them, unless legally required. In our press release today, we shared our operating results for the third quarter of fiscal 2023, which ended on May 7. Our reported net income for the quarter was $1.30 billion, or $2.93 per diluted share, compared to $1.35 billion, or $3.04 per diluted share, for the same quarter last year. This year’s results included a nonrecurring charge to merchandise costs of $298 million pre-tax, or $0.50 per share, mainly associated with ending our charter shipping activities. Last year’s results had a nonrecurring pre-tax charge of $77 million, or $0.13 per share, for additional employee benefits. As many of you know, two years ago we initially leased three ships and thousands of containers to tackle significant overseas freight challenges we faced. We later expanded this by adding four more vessels and several thousand additional containers, with contracts extended for up to three more years. These ships and containers were crucial for us to maintain stock for our members during those tough times, allowing us to initially do so at lower market costs. The shipping and freight markets have improved significantly since then, prompting us to reassess our strategy. As you recall, we reduced our charter shipping activities by two vessels in the first quarter of this fiscal year. Since then, shipping and container rates have continued to decline, and in the third quarter, we decided to completely eliminate our remaining charter shipping activities. Consequently, we recorded an impairment charge for all remaining charter assets. This decision enables our merchandising teams to leverage current shipping market rates instead of the previously contracted higher charter rates, allowing us to continue lowering prices for our members. Regarding sales, net sales for the third quarter grew by 1.9% to $52.6 billion, compared to $51.61 billion from last year’s third quarter. Comparable sales for this quarter were as follows: in the U.S., reported at minus 0.1%, and excluding gas deflation and FX, plus 1.8%; Canada, reported at minus 1%, and excluding gas and FX, plus 7.4%; Other International, reported at plus 4.1%, and excluding gas and FX, plus 8.4%. Overall, total company comparable sales were up 0.3% reported and up 3.5% excluding gas deflation and FX. Our e-commerce sales saw a reported decline of 10% and a 9% decline when excluding FX. In terms of traffic, we saw a 4.8% increase worldwide and a 3.5% increase in the U.S. during the quarter, while our average daily transaction was down 4.2% worldwide and down 3.5% in the U.S., largely due to weakness in higher-ticket nonfood discretionary items. Foreign currencies negatively impacted sales by about 1.5%, and gasoline price deflation had a negative impact of approximately 1.7%. Moving on to membership fee income, we reported $1.044 billion for the quarter, which is 1.98% of sales, up from $984 million or 1.91% a year ago, representing a $60 million or 6.1% increase. Adjusted for FX, this increase would have been higher by $17 million, marking an 8% year-over-year growth. Our U.S. and Canada renewal rate stood at 92.6%, with a worldwide rate of 90.5%, both remaining at all-time high levels achieved just last quarter. Membership growth remains strong, with 69.1 million paid household members and 124.7 million cardholders, both reflecting an approximate 7% increase compared to last year. At the end of the third quarter, there were 31.3 million paid executive members, an increase of 681,000 or 57,000 per week during this fiscal quarter. Executive members now make up over 45% of our paid memberships and approximately 73% of total sales. Regarding our gross margin, it was reported at 10.32%, an increase of 13 basis points year-over-year, compared to 10.19% a year earlier. The gross margin, excluding gas deflation, experienced a slight decline of 3 basis points. These figures factor in the over 50 basis point impairment charge mentioned in today’s earnings release. For the third quarter, the core merchandise margin, on a reported basis, was up 39 basis points year-over-year, while excluding gas deflation, it was up 24 basis points. The ancillary and other categories were up 13 and 9, respectively. The LIFO component saw an improvement of 25 basis points, reflecting no charge this year compared to a $130 million charge in the same quarter last year. Regarding SG&A, our reported SG&A for this year was 9.11%, compared to 8.62% last year, marking a 49 basis point increase reported and a 34 basis point increase when excluding gas deflation. This increase reflects the impact of slower sales growth and several wage increases that fell outside the typical cycle over the last year. Despite the slowdown in sales growth, we prioritized investing in our employees. Below operating income, interest expense totaled $36 million, slightly higher than last year’s $35 million. Meanwhile, we saw an increase in interest income due to higher interest rates and cash balances, although this was partially offset by less favorable FX compared to last year. Our tax rate for the third quarter was 26.5%, up from 24.9% last year. The effective tax rate for fiscal '23 is projected to be in the 26% to 27% range. Overall, reported net income declined year-over-year by 4 percentage points, but would have increased by 8% when accounting for higher tax rates. In warehouse expansion, we opened 17 locations in the first three quarters, including three relocations, yielding 14 net new locations. In the fourth quarter, we plan to open nine new locations without any relocations, bringing our total to 26 openings for the year, netting down to 23. In this quarter, we opened five locations, including four new ones and one relocation in Canada. Looking ahead to our fourth quarter, we have scheduled openings in North Tulsa, Oklahoma, and additional buildings planned in China. Regarding capital expenditures, we spent about $819 million in Q3 and estimate about $4 billion for all of fiscal '23. In e-commerce, we reported a 10% sales decline on a comparable basis and a 9% decline excluding FX. Discretionary big-ticket categories saw a notable drop in e-commerce sales, while inflation is beginning to ease, with year-over-year inflation estimated between 3% and 4% in this quarter. Lastly, our inventories as of the end of the third quarter were down 7% year-over-year, indicating strong inventory management after last year’s supply chain challenges. We will announce our May sales results next Thursday and note that our fiscal fourth quarter has an extra week this year, resulting in 17 weeks instead of the usual 16. I'll now open the floor to questions and turn it back to Josh. Thank you.

Good afternoon, Richard. How broadly and widely is Costco willing to roll back prices in order to drive traffic and sustain a mid-single-digit comp growth? How are you thinking about the prospect of deflation across your entire portfolio?

Well, that's something our merchants focus on every day of the week. I recall when inflation reached 8% and 9%, and there were discussions about how much of that burden we and our suppliers would absorb. Back then, if margins were down 50 or 100 basis points year over year, that suggested that instead of an 8% or 9% increase, our members might have seen a 6%, 7%, or 8% increase. Regardless, we believed we were doing a commendable job of lowering prices for our members and driving sales, given the nature of our items. Presently, we've traditionally been more invested in larger-ticket discretionary items, which have seen more impact than others. Our fresh foods and sundries are performing in the mid- to mid-high single digits, while non-foods and certain ancillary items, particularly gasoline, are experiencing an 11% year-over-year deflation and are in the mid-single negatives. Every day we aim to boost sales. We're constantly evaluating what it will take to achieve our goals. Our team, including Craig, Ron, and Claudine, our Head of Merchandising, are actively encouraging our buyers to explore how we can utilize funds from vendors to enhance our business. One key decision we made was to discontinue the containers and shipping vessels, which helped reduce costs for our buyers in light of significantly higher contract rates. In hindsight, that decision was advantageous and made us more competitive. Overall, I'm confident that we are performing well in terms of competitiveness. When we compare ourselves to our direct warehouse club competitors and evaluate various segments like retail food and general merchandise in home improvement, we feel very positive about our competitive position and efforts.

So are you not expecting broad-based deflation, Richard? And my follow-up question is going to be, given the amount of value you give to your members, wouldn't it make sense to raise your fees right now because your renewal rates have been so high and you would be providing even more value in this difficult economic environment?

Well, first of all, on the question of deflation, let's hope that there is. And you will be the first to see it at Costco, in my view. As it relates to membership fees, nice try, Michael. But at the end of the day, with the headline being inflation, we feel very good about if we want to do it, can we do it without impacting, in any meaningful way, renewal rates or sign-ups or anything. And at some point, we will. But our view right now is that we've got enough leverage out there to drive business, and we feel that it's incumbent upon us to be that beacon of light to our members in terms of holding them for right now. It's not a matter of a big time, but we'll let you know as soon as we know.

Thank you.

Hey, Richard. My first question is on the comps and the stacks. It's obviously been slowing, and you probably took more than your fair share over the last three years. Curious when you sit around how you're diagnosing it, macro, I don't know if it's gas attachment, merchandising, weather, any of those options, how do you diagnose what's happening?

Well, first of all, we look at traffic. We're getting people in the door, and we know what they're buying. They're buying nondiscretionary items. They're buying fresh foods. They're buying food and sundries. They're buying apparel in a big way. They're buying patio furniture now that the weather has turned in a big way; indoor furniture, not as much. We all know what's going on with consumer electronics out there. While all the numbers, industrywide, are down, ours are down a little less, but they're down. So overall, when we look at what else can we do to drive more nonfood business but, at the same time, can we bring in a few more items on the food and sundry side because we know traffic is good there. It's simple impulse items that sell for $15 to $25. So that's what we do every day, and that's what Claudine and her staff and merchants are doing.

And then, my follow-up, can you give us some information or color on gasoline gross profit year over year, how that profit pool is trending, obviously inclusive of both gallons and the penny profit?

Gallons are nearly flat. The average price per gallon in the quarter was down 11%. That's about 12% or 13% of our sales, with the average price point per cell unit also down 11%. Year over year, gasoline was profitable in both quarters. As I mentioned last year, in Q3 and this year, it provided some benefit year over year, but not significantly. Last year, Q4 had strong numbers. We received an extra week, and we’ll see how it performs this year. Currently, gasoline remains quite profitable for us.

OK. Thanks, Richard.

Thanks very much and good morning. So I just want to jump back to the pricing question. From a strategy perspective, typically, if you see things that are dis-inflating or deflating on more of the commodity side, you'll take price ahead of that. I guess is that what you're doing currently? And we've heard a lot of talk in the market about the vendors funding more promotions, how are you thinking about the balance between the retailer funding the promotion or the price investment versus the vendors?

Well, first, look, we work with our suppliers every day and it's going to be a partnership there. Again, I think it's easier for us, on the one hand, that we do a lot of volume on a fewer items. We have buyers that literally are managing a couple of dozen items, not 200 items. And I remember, when certain commodity prices like resins and steel were going up, in our monthly budget meeting hearing from the merchants how, while we're committing out five, six months for seasonal items, like patio furniture, barbecue grills, a couple of years ago, we want to know when the vendor was increasing the price on whatever it was, whether it was a major consumer products company or some manufacturer of nonfood items like that. Why? Exactly why? How much of it's labor? How much of it's the commodity cost? And how much is transportation cost and wage pressure? Whatever. And as we saw commodities coming down, I'd like to think that we were the first ones on the phone with our suppliers wanting to know when the price is going to drop. And understandably, in some cases, the supplier had committed to a season of three or four months. And so, there was some delay, and we worked with them there. In addition, as we said, we're going to invest a little on price. How much are you willing to invest in price? So it's a partnership. And I think we are in a better position to do that simply because, if you take our $230 billion or $240 billion in sales and divide it by 3,800 SKUs, it's a lot more pricing power per SKU and a lot more focus on an item-by-item basis. So that's what we do. And as there are promotional monies out there from the suppliers, this goes back to the beginning of time around here. I remember with the traditional co-op advertising dollars, a supplier wanted you to spend $0.05 of our own money and add it to $0.05 of theirs to do $0.10 of advertising of their product. And we said, just give us the $0.05 and we'll base it on a $0.95 cost, not a dollar cost. And that's what we still do. And so, I think we have to be smart about knowing what every bucket of money is out there, whether it's promotional monies or ad monies, or ad monies online now, and work with our suppliers to do that. And in our case, also, we do what we call the MVM, the multi-vendor mailers, the coupon books that we send out 11 times a year, and not only that but hot buys in-store and what we call temporary price discounts and what can drive sales. The other part of that is, when we get monies, in some cases, how much elasticity is there in driving business by lowering their price. In some categories, particularly some of the bigger-ticket categories right now, there's not an appetite by the consumer necessarily for that. So how do we add value to the item or do more things to it to drive business? It's all of the above.

And so, as you look forward, you said, I think, 3% to 4% inflation in the quarter. If you look at the Nielsen data, that was sort of low double digit, right, I mean, Walmart talked about that. So a two-part question, one is, is the difference just mix that you have more fresh commodity exposure? And then, if you project forward that you'll have sort of no inflation potentially six, eight months out, so how do you think about your ability to continue to comp overall?

Well, when there was low inflation and not an overarching concern about a recession, when the world was seen to be comping three, four, five, and six years ago at 2% to 4%, we were 5% to 7%. Our view is, because we got great members buying more with great loyalty and the best prices by a major difference and quality, and so we've succeeded under those. I think right now, in my view, more of it relates to the fact that we're not only dealing with big-ticket discretionary items weakness which, again, when we look at like MPD and everything, we're doing better in most of those categories. Our negative is not as negative as others out there. In addition, we're comparing against two years of outsized growth in some of those things as people were buying things from their home. We saw outsized sales in indoor and outdoor furniture and electronics and TVs and exercise equipment. And so, we're not only comparing against this 'recession' or concerns about big-ticket items but comparing against uber strength over the last two years prior to that. So I think we'll come out of this fine. We're pretty good at figuring out new items and new things to do. And we're not just focused on how do we drive sales another 1% or 2% but how can we drive sales when bringing in new and exciting stuff. And we continue to do that. And this is anecdotal, but over the last year, year and a half, we've always been very good at taking what I'll call big American cross-scale products, including a lot of KS, and having huge success overseas. We're now, on a conscious basis, figuring out what the unique, exciting overseas items can we bring elsewhere in the world, including the U.S. and Canada. And we're having good experience with some of those things. These are all small things, but there's lots of little small things around here that add up.

Got it. Thank you so much.

Good afternoon, guys. Richard, I think you mentioned fresh foods were a bit on the softer side. When you kind of look at the data, is that a function of your members moving to less expensive packaged goods? Or is that more just due to the COVID-driven comparisons like you were just talking about on the discretionary side?

Yes. By the way, when I was talking earlier about down, the margins were a little weaker on fresh. Sales have been fine. In the quarter, again, when you look at a reported total company sales number of 0.3%, or 3.5% ex gas and FX, but within that 0.3% reported, fresh was mid-singles, food and sundries is mid- to high singles, nonfoods was a little over mid-single negative.

Got it. All right. I'm not sure I understood that. So the second question related to that, though, is are you seeing any other kind of trade, let's call it, trade-down type activity, whether it's more private label sales, etc., that you kind of identified from your members?

Yes. And by the way, not just in this current 'recession' or concern for recession, historically, like within fresh protein, we've always seen when there's a recession, whether it was '99 or '00 or '08, '09, '10, we would see some sales penetration shift from beef to poultry and pork. We have seen some of that now. I think anecdotally, I heard a few months ago from our Head of Food and Sundries buyer, that we saw some switch even to some canned products, like canned chicken and canned tuna and things like that. But on the KS side, we've also seen that. I think last quarter, I mentioned that on a year-over-year basis, there's a 150 basis point increase in private label sales penetration. And this year, at the end of the quarter, it's 120 basis points. So still, over a full percentage point delta in sales penetration. If you go back over the last 10 years, my guess is that on a year-over-year basis, maybe we've gone from, I'm guessing, 22% or 23% to 25% or 26%. So call it, 300 basis points over 10 years or eight years. So 30 to 50 basis points versus 120 and 150 in the last couple of quarters. So yes, that would, again, at least anecdotally, suggest that we've seen people looking for better bargains. We try to correct people when they said was it a downgrading because, arguably, it was an upgrade when they went to Kirkland Signature.

Got it. Thank you very much.

Hey. Thanks very much. Good to talk to you. Two questions. One is your pre-tax margin is one of the highest that I think I've seen in the model, like I'm not even sure I could go back to when it was as high as it was. So I'm curious if you could just make some color or commentary on that. And then, the second question I had was not that we're necessarily going into a deflationary environment in food, but if we were to go into a deflationary environment in food, what would be the deleverage you would see on the EBIT line on that front?

I can't provide a specific number off the top of my head. We believe that if deflation occurs, we will be among the first to lower our prices. We think this could help drive our business. Additionally, if we consider gasoline, we see that retailers with gas operations have experienced increased profitability in recent years. We believe we enjoy higher profitability and better savings than our competitors, allowing us to earn more per gallon because others have opted to increase their prices more significantly. This trend applies to other areas as well. When comparing our prices with those of direct club competitors and supermarkets on essential items like fresh produce, the price gaps remain strong. It's difficult to comment precisely on pre-tax margins. Historical data shows that our SG&A costs were around 10% before COVID. With the exceptional sales during the pandemic, we've benefited more than faced setbacks in many categories, driving our SG&A down below 9%. Overall, our margins have improved and are sustainable, while wages are unlikely to decrease. The key question is whether they will continue to rise. We plan to prioritize employee welfare while considering that if inflation eases, wage pressure might decrease. Ultimately, top line sales remain the main focus for us, and we have demonstrated that even with reduced top line sales, we can manage costs effectively to maintain profitability. We will remain practical and will need to observe how things unfold.

Sorry, just to follow up on that. Is there a way to outline what excluding gas, gas margins, and fuel prices would look like, specifically what change in sales would lead to a change in EBIT?

Well, it's hard to say.

Is there any way to calculate that?

Not really. We used to consider an old model where we looked at incremental sales and the variable rate of expenses in a warehouse. Over the years, our perspective has been that you need about 4.5% of a comp number, whether it's 4% or 5%, to maintain flat SG&A or flat warehouse expenses. The current weakness in big-ticket items and gas price deflation has a significant impact on the SG&A percentage. In our monthly budget meetings, we see improvements in labor productivity, particularly in fresh items, where we are still achieving 3% to 6% productivity in processing protein and meat. However, with recent slowing in sales and several unusual wage increases, our labor percent as a part of sales is now higher, which is our most significant SG&A item. Ultimately, we're still focused on top-line growth, which we believe will address these issues. We would prefer to see numbers in the pre-inflation range of 5% to 8%, but for now, we want to progress from our current situation to around 3% and 4%. The good news is that we've observed a trend of lower sales in big-ticket discretionary items, which began in the previous quarter, although not throughout. As we move forward, we'll be comparing against easier benchmarks in six months, and we hope to achieve improvements independently.

That makes sense. Thanks so much.

So Richard, core-on-core, food and sundries and nonfood were up, right? So it's kind of a two-part on core-on-core. One, what drove that, right? Was that predominantly mix? And then, secondly, fresh food was down. Where is fresh food versus '19? And are we kind of getting to the point where that erosion is going to stop, right, because we're pretty close to '19?

Yes. Look, fresh foods are still up year over year on margins.

No, versus '19.

Fresh food margins have increased compared to 2019. If I look back at 2021, we experienced several quarters where fresh food margins were up by 200 to 300 basis points year over year. By the end of 2021, as we started to normalize, we were down 190 basis points. Throughout 2022, we saw declines ranging from 50 to 120 basis points year over year, which is a contrast to the previous high increases. This year, we are down again compared to last year, but it is still lower than the significant rise we had in fiscal 2021. Currently, when I assess our food gross margin in Q3 compared to pre-COVID levels, we are still up.

OK. But the other categories that were up, right, is that predominantly mix, private brand, and less big ticket?

Yes. I think it's mixed. Like, some of the nonfood strength, as I mentioned, I threw out apparel as one of them, apparel has a strong margin. Apparel has a strong margin relative to all of our departments anyway. And majors has a weak margin generally anyway and then, of course, lower penetration of that. By the way, freight has helped too, particularly on big-ticket items, the furniture, the white goods, exercise equipment, things like that.

And then, secondly, where are we on the personalization journey, right? Because I know you've done more data analytics in the last couple of years. You've got the old loyalty program, right? So when you think about wallet share and targeting promotions and emails and so forth, it looks like a huge opportunity. Where are we on that?

Sure. By the way, one other question that we've gotten a couple of times of late because of some of the companies out there that reported much higher shrink, our shrink is intact. We haven't seen any major change in shrinkage. It fluctuated a couple, 3 basis points up really before COVID as we rolled out self-checkout. And since then, it's come back down a little bit. And so, it's been a very tight range. And so, we've been fortunate in that regard. In terms of where we are in personalization, for those of you on the call that have known me forever, it was probably four years ago that we talked about that sometime soon, we'll do targeting and after that, do personalization. Well, we're still in the early innings. But I guess what I'd like to tell you, and I think I mentioned this on the last quarter's call, just under a year ago, we hired a new VP of Digital, Digital Transformation, if you will, both in e-com and mobile sites and applications, that complemented three other outside VPs we hired, one of which was in the data analytics area. And we've really, over the last six to nine months, began a two-year road map to improve and replatform our primary e-commerce website and the same goes for our mobile apps and mobile site. Working, of course, again, with the data analytics people, the architect people, as well as the business users, we're currently building and dramatically increasing the number of engineering capabilities that we have. And we're on our way. But I'd say we're in the early innings. First order of business, which we now feel we've gotten to a much better clean data site. We're still sending you too many emails a week that don't pertain specifically to what you do. But I think you're going to see incremental changes, and I'll be able to hopefully report more on that at the next quarterly call. And just in the last three months, as an example, we've had three small releases to our mobile app that are improvements of it. And we're now on plans to have small improvements in that app each month for several months going forward. As you know, you've heard me say for the past couple of years that we're in the early innings. I'll repeat that. We are, but we actually got, I think, a good game plan, and you'll see more of that over the future. A little longer than we had hoped to do some of this stuff, but I think we're on our way in that regard.

OK. Thank you.

Hi, Richard. When you think about household income, what kind of trends are you seeing in terms of your customers and people trading in and the new Costco at large? And then, the big-ticket item question, what are your thoughts on how you're planning inventory there? Do the compares ease? Do you expect improvement? And within big ticket, any color in terms of how that may proceed sequentially?

Our annual household income has increased slightly, primarily due to wage growth. We continue to cater to a higher-income demographic. Regarding our inventory, if you had asked me six months ago, we experienced a 26% year-over-year increase in inventory, similar to our competitors. This was largely due to customers having sufficient big-ticket items and the significant supply chain issues we faced. Since then, we've made notable reductions in inventory, which is encouraging. There were many promotions in the past months, where purchasing over three thousand dollars in selected patio or in-store furniture items would earn you a $500 cash card on top of already competitive pricing. This was part of our strategy to align our inventories, especially for items that were overstocked due to supply chain delays. For instance, last summer, we performed well in selling fans and air conditioners, but significant portions of our planned $500 million sales came late due to logistics challenges. We decided not to discount these items to clear out inventory in September and October; instead, we held them and are currently selling them effectively. Discussions with Claudine Adamo, our Head of Merchandising, and her team indicate that we’re in a strong position regarding our existing inventory levels and our commitments for upcoming seasons, including back-to-school and Christmas.

OK. And Richard, you've made a lot of great strides in Asia and China and other regions. I'd love just some highlights in terms of what's ahead for the back half there. And a second question on that connected consumer experience between digital and physical, are there evolved thoughts in terms of BOPUS and curbside and what your members want and delivering the ultimate convenience?

Sure. Well, first of all, in terms of expansion outside of the United States, if you look at just even this year, at '23, I think it was, what, 13 and 10. So 60-ish, 60%, 65%, 60% in the U.S., Canada, which I combine as one because it's well saturated, but we're still opening a bunch of units there, and it's our oldest areas. But I see that, over the next five years, going from 65-35 or 60-40 to at least 50-50, if not trending a little bit toward outside the U.S. and Canada. Now that, again, is the same answer I would have given you six, seven years ago for now. And I think that's a function of, one, having more opportunities every day than we thought we had before in the U.S. and Canada, and there's plenty of opportunities going forward elsewhere. But I think you're still going to see us open in Korea, Taiwan a unit each year on a base of somewhere in the mid- to high teens; in Japan, more than a unit a year on a base in the low 30s; a unit a year in Australia, not exactly each year, maybe there's one in one year, none and then two. But in Australia, we've got 14, I believe. And in Europe, most of our units are in the U.K., where we're in the low 30s. We're still going to open one or two a year there or one a year probably there. And we've opened a few others. We opened our fourth in Spain, and we now have two in France and one each in Iceland and Sweden. So a little growth there. But certainly, in China, I mean, China is a big story this year for us. One of the stories is that we opened our first unit in China three and a half, four years ago; our second, a year and a half ago; our third, last December; and three more this year. We're going to be at six at the end of this year.

Calendar year.

This calendar year, we plan to open two more locations and an additional one in the fall. While this indicates growth, it's modest compared to some companies that have opened as many as 20 locations. However, we are optimistic about our strategy. If we can maintain an opening rate of between 23 to 25 locations per year, we aim to exceed 25 per year for the next five years, and reach closer to 30 annually in years six through ten, which we believe is achievable. Regarding curbside services, we are not particularly enthusiastic about them, having tested them in a few places last year and concluded they are not for us. We prefer customers to visit our stores directly. We've introduced lockers for large non-food items, and interestingly, over half of those who pick up their items shop in-store as well. A positive challenge we face is that our average sales volume per warehouse has grown significantly more than we anticipated a few years ago. Last year, we recorded over 150 locations achieving over $300 million in sales, with 26 of those exceeding $400 million. As a result, we have to open more units and are actively exploring various locations in the U.S., where there hasn't been strong demand for curbside service. We also won't be aggressively pursuing it. However, we do plan to improve our online shopping experience. In the coming months, if an item is available at a nearby warehouse, customers will be able to opt for in-store pickup. We currently provide same-day grocery delivery primarily through Instacart, alongside some other partners. This service continues to grow, but it's not included in our reported income figures as it involves their employees handling shopping and checkout on behalf of customers, which we categorize as a warehouse sale.

Got it. Very helpful. Thanks, Richard.

Thank you, Richard, for addressing my question. I wanted to discuss competition briefly. However, to start with a shorter-term observation, have you noticed any changes in promotional activities? One of your competitors mentioned that they have increased theirs. Is that what you are experiencing as well?

Yes. It's higher than it was. Now, mind you, it was a lot lower for a couple of years because of the supply chain challenges. I mean, every TV we could sell, whatever, particularly on the nonfood, we could sell, every paper good we could sell, we actually took some items out of like the MVM mailers on the sundries side because, one, there were shortages like paper goods, why promote it when, first of all, we've got to limit one per customer. And so, some of those comparisons, there's more versus a lot less for a couple of years as well. But yes, we are seeing more now.

And is that purely from the vendors? Or is that some activities you're seeing from retailers themselves?

I can speak for our team. When we notice what other retailers are doing, we make sure to check with our supplier. They might not always have the answers, but we’re pressing them to understand the unusual trends we’re observing. Occasionally, we find better deals the next day, so we need to stay vigilant. As I mentioned earlier, we have many strategies we can implement. All retailers currently benefitting from gas prices are seeing positive results. There have been some unusual trends, like strong performance in fresh products, which gives us confidence. Apparel, which is a nearly $8 billion global business for us, has also been performing well, reaching over $7 billion worldwide. This isn't due to promotional activities; rather, we are benefiting from improved margins in some areas.

OK. So then I wanted to talk a little bit more long term about competition. It's been a long time, I think, what we've seen as many openings from non-Costco people. You are going to see that over the next year or two, three. The other competitors also, they tout their omnichannel and their technology about just scanning and going. Just give us an overall view of the competitive environment over the next one to three years and how Costco fits, and whether you think some of those technologies and e-com stuff are competitive advantages for people that are competing against you?

Well, I think we're fortunate in one way that, first and foremost, the biggest value attribute or customer attraction attribute is the best-quality goods at the lowest price, and we dwarf everybody in that regard. I mean, our average markup on goods is in the low double digits, 12%, 13%. You know what they are at other traditional retailers, anywhere from 25% to 35% to 100%. So we have that extreme benefit to start with. Arguably, we've been somewhat simple, in our own arrogant way, over the years. One of the things we've done, as I mentioned earlier, on the question that John, I think, had, forget about personalization, even target marketing, I view it now as some low-hanging fruit that we're finally going around to do over the next couple of years. So that will be a positive to us relative to others. In terms of the benefit of buying online and picking up in store and things like that, we, frankly, view that as more costly than it is beneficial. And again, we haven't been asked a lot about it other than by analysts who are responding, in fairness, to the different retailers that feel they have to do it. Many of them want to do it. But there's a cost of doing that. So we feel pretty good about driving the business. We think we can certainly do more online. We don't have some strategic goal to go from 8%, which is still a $20 billion business, but to go from 8% to 16%. But let's go from 8% to 9% to 10%, 10% to 11% over a certain period of time. And we think that, with some of the things we're doing on that side, we can. I think we've also done an incredible job, day in and day out, on the merchandising side of bringing in more exciting items. And that's something that is focused on that I hear about at every budget meeting and every Monday morning meeting with Greg and Ron and a few other senior colleagues, including our merchandising head. So I think that's what's going to keep driving our business. I think we are getting better on the technology side. Playing from behind a little bit on that, but I think we've finally got a game plan and some people that are helping build those areas up both from a marketing and advertising standpoint, taking advantage of the advertising dollars that are out there that we've done pretty well despite ourselves but we know we can do a lot better in grabbing some of those dollars. And what we will use it for is to drive sales.

And the club openings, I don't think you touched on that.

The big club opening thing is we're on our target. I think the last three years, there was a big down year because of the first year of COVID. But fiscal '21, '22, and '23, I think we averaged around 23 net new units a year, 22, 23. We'd like to get above 25 over each of the next five years and closer to 30 year six through 10. That's kind of the game plan. And that really is a bottom-up approach by each of the eight U.S. geographic regions, the two Canadian regions, and every other country region, working with operations in our real estate department kind of which ones are likely and what's our priority. And we feel pretty comfortable we've got a good pipeline of pending openings, for sure, over the next three or four years and with an equal level of comfort that we feel that we'll continue to have plenty of opportunities to open units.

Thanks.

Hey, Richard, this Brandon Cheatham on for Paul. I want to follow up on what you mentioned about the digital investments that you all are making. It sounds like it's something that eventually you might monetize partnering with your vendors. How do you balance that with your view that you really want your members in your warehouse? And how do you see that working kind of over the long term?

We've been quite successful in monetizing our digital initiatives in the warehouse. During holiday weekends, we've seen good results with competitive pricing on items like strip steaks, and at the start of the planting season, we've seen interest in fresh produce. We're improving our approach and have brought in experienced professionals to help us. In membership marketing, for example, Sandy Torrey, our Senior VP, is implementing more strategies now than she did a year ago. Our main focus is to drive traffic in our stores while also enhancing our online presence, but we don't want to simply shift in-store business to online. I prefer to be cautious in discussing our new strategic efforts. We have learned that every company is leveraging technology today, and we’ve been somewhat slow to adapt. There's a lot of potential to improve even basic processes. For instance, instead of sending five generic emails each week, personalized communication based on items a customer has purchased could significantly increase engagement. We're enhancing our IT department with key hires focused on data analytics and digital initiatives, and it's not just about individuals but also the teams they are building. We'll continue to develop these strategies and provide updates as we progress.

Got it. And if I could follow up on the membership side, you mentioned membership marketing. Are you seeing any difference in promotions from your competitors for their memberships? How has that informed what you all are doing? And is there any major change on promotions, on membership from your competitors?

For us, there hasn't been any significant change. We engage in a few promotional activities each year, but we do not heavily discount our membership. There are some promotional brochures that offer a certain number of coupons with membership sign-ups, but I won't elaborate on that. You can observe our competitors to see their promotional strategies, as they are quite active. Nonetheless, we continue to see a 7% increase in new memberships year over year, alongside a nearly 3% growth in the number of new warehouses. We're still attracting new members, which I believe has been positively influenced by COVID, as our warehouse club format provides a spacious environment for shopping. I like to think we excel at what we do, which is contributing to the increase in sign-ups and the opening of new locations to drive business. In fact, we've actually reduced our promotional efforts in membership somewhat; while we still engage in some promotions each year, it's not extensive.

Got it. Thank you. Good luck.

I'm going to take one more question.

Good afternoon. Thanks for taking my question. So in China, I was curious with the reopening there, how the locations are performing versus your expectations.

They're doing great. End of story. We've been blessed by those first openings that we have over there. Needless to say, we were impacted, like everybody over there, during the shutdown and what have you. And we had some great video clips in our budget meetings here showing what we did to create care packages not only for our members but for the neighborhoods around us. And we were told they were the best care packages of any of the big retailers, so that made us feel good.

Great. And then, maybe just one follow-up question. So as you look at your bigger-ticket categories, consumer electronics, etc., any sense at this point whether trends have bottomed? Just curious if you think trends have bottomed or whether we could see further softening in some of these bigger-ticket areas?

I have one of my colleagues here on the merchandising side, and she was saying to me softly the negatives are getting better. And again, it's about seven or eight months ago, seven-ish months ago, when we started seeing the decline. And so, if nothing else, we'll be having an easier compare five months hence. But certainly, we've seen a little bit of improvement in the negatives.

All right. Thank you.

Well, thank you, everyone. David, Josh, and I are around to answer questions if you have any more, which I'm sure you will. Have a good afternoon.