Costco Wholesale Corp (COST) — Q1 2024 Earnings Call Transcript

Thank you, Lisa, and good afternoon to everyone. I will start by stating that these discussions will include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements involve risks and uncertainties that may cause actual events, results and/or performance to differ materially from those indicated by such statements. The risks and uncertainties include but are not limited to those outlined in today's call, as well as other risks identified from time-to-time in the company's public statements and reports filed with the SEC. Forward-looking statements speak only as of the date they are made, and the company does not undertake to update these statements, except as required by law. Comparable sales and comparable sales excluding impacts from changes in gasoline prices and foreign exchange are intended as supplemental information and are not a substitute for net sales presented in accordance with GAAP. In today's release, we reported operating results for the first quarter of fiscal '24, the 12 weeks ended November 26. Reported net income for the 12-week first quarter came in at $1.589 billion or $3.58 per share, up from $1.364 billion or $3.07 per share in the 12-week first quarter last year. This year's results included a tax benefit of $44 million or $0.10 a share related to stock-based compensation. Last year's results included a tax benefit of $53 million or $0.12 per share related to stock-based compensation and also included a charge of $93 million pre-tax or $0.15 per share primarily related to downsizing our charter shipping activities. Net sales for the first quarter were $56.72 billion, a 6.1% increase over last year's first quarter, $53.44 billion. Net sales were benefited by approximately 0.5% to 1% in the U.S. and worldwide from the shift of the fiscal calendar as a result of the 53rd week in fiscal 2023. The following comparable sales reflect comparable locations year-over-year and comparable retail weeks. In the U.S. reported 2% comp sales excluding gas deflation and FX 2.6%. Canada reported 6.4%, ex-gas and FX 8.2%. Other International reported 11.2%, ex-gas and FX 7.1%. For total company reported 3.8% and at 3.9%, excluding those two items. E-commerce, which was reported as a 6.3%, came in at 6.1% excluding FX. Overall, for the first fiscal quarter, fresh foods were relatively strong once again, with food and sundries right behind. Non-food showed improvement over the September, October, November time frame as did e-commerce sales. In terms of Q1 comp sales metrics, traffic or shopping frequency increased 4.7% worldwide and 3.6% in the United States. Our average transaction was down 0.9% worldwide and down 1.6% in the U.S. Foreign currencies relative to the U.S. dollar positively impacted sales by approximately 0.4%, while gasoline price deflation negatively impacted sales by approximately 0.6%. I've gotten more than a few calls in the past few weeks regarding how many pies we sold in the U.S. leading up to the Thanksgiving holiday. In the U.S., in the three days leading up to Thanksgiving, we sold 2.9 million of our famous Pumpkin Pies along with 1.3 million apple and pecan pies. Back to the income statement here and next on the income statement's membership fee income. In the quarter, we reported $1.082 billion or 1.91%, that's an $82 million or 8.2% increase and a 4 basis point increase over the first quarter last year. In terms of renewal rates, at first quarter end, our U.S. and Canada renewal rate stood at 92.8%, while the worldwide rate came in at 90.5%. Both of these rates were up 0.1% from those numbers 12 weeks earlier at the end of the fourth quarter. Membership growth continues. We ended Q1 with 72.0 million paid household members, up 7.6% versus last year and 129.5 million cardholders, up 7.1%, with consistent growth throughout the quarters. At Q1 end, we had 33.2 million paid Executive members, an increase of 939,000 during the 12 weeks since Q4 end. Executive members now represent a little over 46% of our paid members and a little over 73% of worldwide sales. Moving down the income statement next is our gross margin. Our reported gross margin in the fourth quarter was higher year-over-year by 43 basis points, coming in at 11.04%, up from Q1 of last year at 10.61%. That 43 basis point reported number excluding gas deflation would be plus 36 basis points. As I normally do here, we write down two columns and six line items. The first column is reported in the first quarter. The second column is margins, excluding gas deflation. It's the year-over-year change in the first quarter. On a core merchandise, plus 3 basis points reported, minus 3 basis points ex-deflation. Ancillary and other businesses, plus 24% reported and plus 22% ex-gas deflation; 2% reward lower year-over-year, minus 4 basis points reported and minus 3 ex-gas deflation; LIFO, plus 3 and plus 3 and other plus 17 and plus 17 for a total, again, reported year-over-year up 43 basis points and ex-gas deflation up 36 basis points. Starting with the core. Again, it was total company, it was plus 3 and minus 3 reported and ex-gas deflation. In terms of core margin on their own sales, our core-on-core margins were up by 5 basis points year-over-year. Ancillary and other business gross margin, again, higher by 24 and higher by 22 ex-gas deflation. This increase was driven largely by gas and e-commerce. Our 2% reward higher by 4 and higher by 3 ex-deflation, reflecting higher sales penetration coming from our Executive members. LIFO plus 3 basis points. We had a $15 million LIFO credit in the first quarter of this year compared to a very small $0.5 million LIFO charge in Q1 a year ago. And then, the other line item, the 17 basis points to the positive. As was mentioned earlier, last year in Q1, there was a 17 basis point impact from a $93 million pre-tax charge primarily related to the downsizing of our charter shipping activities. Moving on to SG&A. We reported SG&A of 9.45%, higher by 25 basis points than last year's 9.20%. Again, in Q1, we're right down the two columns. Reported and without gas deflation, operations, minus 18 and minus 14 basis points, minus being — meaning it's higher year-over-year. Central minus 2 and minus 1. Stock compensation minus 3 and minus 2. Pre-opening expense, minus 2 and minus 2, again, for a total reported margin higher minus 25% year-over-year. I'm sorry, SG&A, not margin, 25 and without gas deflation, higher by 19 basis points. The quarter again was higher by 18 and higher by 14, excluding the impact from gas. This included 12 weeks of this past March's extra top of scale increase in our wages, which represents an estimated 2 basis point hit. And as of September 18, we raised the starting wage in the U.S. and Canada, that estimated impact from those new wages to be roughly 2 basis points as well. Again, central, nothing much to say other than its 1 basis point higher, excluding gas deflation. Again, it was stock compensation's, the minus 2x gas deflation and pre-opening. We did have a couple of more openings this year in the quarter than we did last year and that was higher by 2 basis points. Below the operating income line, interest expense was $38 million this year, $4 million higher than last year's $34 million figure. Interest income and other for the quarter was higher by $107 million, coming in at $160 million this year versus $53 million last year. This was driven largely by the increase in interest income, about $100 million of that $107 million due to higher interest rates as well as high cash balances. The small additional impact was a favorable FX year-over-year. In terms of income taxes, our tax rate in the first quarter was 24.5%. This compares to 23.0% a year ago or 1.5 percentage points higher this year than last year. The increase in our rate in Q1 is primarily attributable to lower benefits from stock-based compensation from a year ago. Overall, reported net income was up 16.5% year-over-year in the quarter. A few other items of note. In terms of warehouse expansion in the first quarter, we opened 10 locations, including one relocation, so a net of nine increases. Those nine included eight in the U.S. and one in Canada. For the full year fiscal '24, we estimate opening 33 locations, including two relocations, so for a net increase of 31 new warehouses that would be up from 23 that we opened in fiscal '23. For Q2 fiscal '24, we plan four new locations, including our sixth building in China, early in the calendar year. Regarding capital expenditures, first quarter capital expenditure spend was approximately $1.04 billion. We estimate that fiscal '24 CapEx will be in the $4.4 billion to $4.6 billion range, that's up from $4.3 billion we had in fiscal '23, reflecting a continued increase in the number of the expansions that we're doing. In terms of e-commerce business, e-commerce sales in Q1 excluding FX increased 6.1%, the first quarterly year-over-year increase in five fiscal quarters and trended well during the three reporting periods of September, October, November. E-commerce showed strength in several areas. In food, things like e-gift cards, pet items, snack items were up in the mid-teens. Appliances were up year-over-year in the mid-20s. TVs were actually in the high singles despite the challenges with other aspects of consumer electronics like computers, and tires were up in the low teens. So overall, a pretty good showing there. As well, Costco Logistics enjoyed record-breaking deliveries. In the first quarter of fiscal '24, we completed over 800,000 deliveries, which were up 17% versus the comparable quarter last year. And some fun items in the quarter in e-commerce. You've probably read about the fact that we're selling gold 1-ounce gold bars. We sold over $100 million of gold during the quarter. We sold a Babe Ruth autographed index card for $20,000. And in addition to e-gift cards on everything from restaurants to golf to airlines, we just in the last couple of weeks, launched a Disney e-gift card valued at $250 for $224.99. And for you last-minute shoppers out there, there is a Mickey Mantle autographed 1951 Rookie Card in nearly perfect condition and it's on sale online for $250,000. Next, good progress continues to be made with our e-commerce mobile and digital efforts. No big enhancements and changes to the site leading up to the holiday, mostly holiday prep. We did have 100% site availability during Cyber week, and sales for the five Cyber Days, Thanksgiving, Black Friday, Saturday, Sunday, and Cyber Monday were up year-over-year in the mid-teens. Our app downloads during the quarter were 2.75 million, so total app downloads now stand at 30.5 million or a 10% increase during the quarter, and that's after being over a 40% increase in all of fiscal '23 versus the prior year. Our site traffic approached 0.5 billion and showed just under a 10% increase, with the average order value being up about 2.5%. So we continue to make progress there. Next couple of comments regarding inflation, most recently in the last fourth quarter discussion. We had estimated that year-over-year inflation was in the 1% to 2% range. Our estimate for the quarter just ended indicates that inflation was in the 0% to 1% range, with bigger deflation in some big and bulky items like furniture sets due to lower freight costs year-over-year, as well as on lower-priced items where the freight cost is significant. Some deflationary items were as much as 20% to 30% and again, mostly freight-related. TVs, the average sale prices have been lower while units have been higher. And talking to the buyers overall, our inventories and our SKU counts are in good shape across all channels. And so far, we've had a good seasonal sell-through during the quarter. Lastly, as you saw in this afternoon's press release, we declared a $15 per share special cash dividend. This is our fifth special dividend in 11 years. The total payout will be about just under $6.7 billion and will be funded using existing cash and not accompanied by any issuance of debt. The special cash dividend will be paid on January 12th to shareholders of record on December 28th. Finally, in terms of upcoming releases, we will announce our December sales results for the five weeks ending Sunday, December 31, on Thursday, January 4th, after market close. With that, I will turn it back for Q&A to Lisa and be happy to answer any questions.

Good evening. Thank you so much for taking my question. You indicated over the last 1.5 years or so that Costco had been raising prices faster than it had throughout its history. So now with prices coming down, what is going to be the posture on passing along those savings? You already noted that inflation is flat to up 1%. Do you expect deflation, especially on the food side as you get through the next couple of quarters?

In discussions with buyers during the quarter, we observed a trend towards 0% inflation compared to 1%. However, buyers are looking ahead three to six months and on the fresh food side, they haven't observed significant changes in commodities. Some items are up while others are down, but there's no major trend in either direction. As you are aware, we prefer to be the first to reduce prices. We are actively engaging with our vendors to lower costs as certain commodity prices decline, and we are also seeing decreases in non-food shipping costs. Overall, it's likely we will see reductions, but we need to wait and see how things unfold.

And my follow-up is another point that you've made for a long time is that Costco's going to draft off the profitability of the broader retail sector. If you compare Costco's operating margin over the last 12 months versus where it was prior to the pandemic, it's 300 to 400 basis points higher. And yet, across retail, there are signs that profitability is coming down. So now, what we've seen in the ways of Costco either maintaining this existing rate of operating profit margin or even further growing it from here, so it just simply going to be a function of your ability to drive further sales growth in the consistently mid-single digit range or better.

Sure. I'm happy to say that it's up to you to figure that out. At the end of the day, as you know, we are focused on increasing sales. We've seen an increase in units despite deflation in certain products. For instance, in the last month, we've had over $100 million in KS net items where sales were relatively flat or down a couple of percent, but units increased by the mid-teens, which requires a bit more labor. Ultimately, our goal is to drive customer engagement and frequency. As long as renewal rates remain steady and we see new sign-ups continue, and hopefully get more people to convert to Executive memberships while providing the best value, we are on the right track. So far, we've been successful in this regard and I believe we will keep it up.

Thank you very much and have a good holiday.

You too.

Hi, there. This is Jackie Sussman on for Simeon. Thank you so much for taking our question. The core and core margin were up modestly this quarter and it seems like it moderated sequentially. Looking forward to the balance of the year, it seems like the comparison gets a bit tougher. I guess how should we think about your core and core margin? Could it stay expanding and positive for the rest of the year or any color on that would be helpful. Thank you so much.

There are many different factors involved. As I've mentioned before, our priority is to drive revenue growth. We're also realistic about our responsibilities as a for-profit company and we will continue to strive to achieve both objectives. I wouldn't place too much significance on any small fluctuations in numbers. They change and there are numerous elements that contribute to that.

Got you. Thanks so much. And just a quick follow-up. Was the Black Friday and Cyber Monday gains that you had better than what you were expecting internally? Thanks so much.

They were a little better than we were expecting but we were ready for it.

Thanks so much.

Hey. How is it going Richard? Good afternoon. I wanted to dive into the core margins a little bit more and see if you could flesh out some of the category color. If you said it, I missed it, but food, sundries, fresh and on the hardlines parts of the business.

Well, without giving you specific basis points, food and sundries was slightly down, very slightly down. Non-food was actually up. Some of that relates to the fact that we are comparing against last year when we had higher freight costs and trying to drive business and fresh was down a little bit. So nothing Earth-shattering in either of those directions.

Okay. And then on the ancillary up 22 basis points, I think we all get the gas component. But can you just talk about why the e-commerce margins were so much better in the quarter?

I believe one aspect of the ancillary business is related to sales penetration challenges. When reviewing the quarters, sometimes the core segments and other businesses can move in different directions. The increase in sales penetration for both e-commerce and the core business contributed positively. Additionally, we experienced significant strength in e-commerce, particularly in the big and bulky categories, which is driving that segment's growth.

Okay. Great. And then just bigger picture, I just have a question on the change at the CEO seat with Ron starting in a few weeks and replacing Craig, who replaced Jim. You've had the fortunate opportunity to work with all three. And I guess I'm curious what change, if any, you think we could see from an operating standpoint moving forward?

I often joke that I'm up for review, so I will say nice things. Ultimately, we are maintaining our path. I recall questions raised over 12 years ago when Craig became President, and two years later, when Jim retired and Craig became both CEO and President. Then, people wondered who could replace Jim. Today, similar questions are being asked about who could replace Greg. The transition is very smooth. We have someone retiring who has been with us for around 40 years, excelling in operations and merchandising alike. Ron is stepping in, and he began his career at 17 at a Price Club in Arizona, earning his 40-year gold patch. He brings about 30 years in operations, a year in real estate, and around six or seven years in merchandising. Hence, the transition is quite seamless. Observing their collaboration over the past two years, since Ron became President, reminds me of what transpired in the two years after Craig became President and Jim retired when Craig took over as CEO. So, we are essentially continuing as we have been.

Got you. Great. Happy holidays. Thanks.

Thanks.

Hey, Richard. I guess, I just wanted to think about the potential clubs in the U.S. I know it comes up sometimes, but obviously, you added eight. It just seems like there's maybe more runway you can hear in the U.S. And I wonder if you have any thoughts on that. And then I had a quick follow-up.

If we were to open 31 locations this year, that would bring us to the low 20s, around 23 or 24 in the U.S. Some of those will be business centers, which we continue to add along with most regular warehouses. About six or eight years ago, when the distribution was roughly 60-40 or 70-30 between the U.S. and Canada versus other international markets, I forecasted that it would be 50-50 by now. Today, you’re asking again, and it’s currently 60-40 or 70-30. I believe it will trend that way over time, but we are discovering more opportunities in the U.S. Our average sales volume per location exceeds our expectations from six or seven years ago. This is encouraging news. We still have many initiatives underway to advance International, which will add 6 or 7 units this year. Looking back, international growth last year was 9 or 10 units, but that’s primarily a timing consideration.

So then my follow-up is around traffic and also like the growth you had in appliances and TVs. You're just kind of going in a different direction than a lot of people. So what's driving the share gains in those categories? But also, are you guys doing anything specifically different to drive the traffic numbers you're seeing? Because I mean, they're pretty amazing, given the environment.

I've always said that I believe the most important factor of value is the lowest price when considering the quantity and quality of a good or service, along with the trust our members have. Specifically concerning items like appliances and tires, we are focused on value. Since acquiring Interval, now known as Costco Logistics, a few years ago, we've been doing a lot of business in that area. I think we have improved in communicating the value we offer, not just by showing the price of items compared to some of our larger retail competitors, but also by including aspects like delivery, removal of old products, installation, and disposal. These services represent significant savings. If you compare prices of these services to our competitors, that’s where you’ll notice our strength.

Perfect. Thanks.

So Richard, I'm wondering if one of the things you may do differently here, we've talked about this before is leaning into personalization more and where you are on that journey, particularly with Ron coming in.

We're focused on strengthening the foundation of our business. Currently, we're in the process of re-platforming our e-commerce. This isn't simply a switch that we can flip overnight; we're gradually transitioning and that work is ongoing. As I mentioned last quarter, this is a two-year roadmap, and we're about halfway through. There's been minimal progress so far, maybe we're in the early stages, but much of our energy has been directed towards making smaller improvements. Our rating has improved significantly, exceeding 4.5 stars, and each update enhances the site further. Over the next couple of years, you can expect to see more emphasis on targeting and personalization, which we welcome. Getting the foundation right is our top priority, and we've made substantial strides in that area. While I didn't delve deeply into the enhancements we've implemented for both the mobile and e-commerce sites during this call, we've accomplished a lot.

You mentioned the international opportunity is still largely underdeveloped. What are the challenges to expanding, considering you're currently in many countries with 15 to 20 annual openings, which may seem like a lot? Is the issue primarily related to the quality of real estate, since it seems operationally it’s not about having enough human resources? Is it mainly a real estate challenge?

I would say it's a combination of factors. In some countries, like Korea and Taiwan, where we have about 15 or 16 locations each, we've seen success, but it has become challenging to find new locations from a real estate perspective. In Japan, where there’s significant future potential, we currently have over 30 locations. However, real estate remains a challenge. In places like China or Spain, one of the difficulties is that we prefer to transfer a substantial number of staff from existing locations to new ones. Our operations require hands-on involvement. For instance, when we opened our first unit in Shanghai, we were able to relocate around 60 to 70 individuals from Taiwan for promotions and to facilitate interactions across different roles, including key supervisory and management positions in the warehouse. This process takes more time, but we are diligently working on it since it requires a very hands-on approach.

Thank you.

Hello, Richard. Thanks for taking our questions. Just wanted to kind of follow up on Scot's question. I think your average sales per club in the U.S. and Canada is around $300 million at this point. And just curious on the status of how many clubs are doing kind of well over that and are maybe in some need of relief in the form of self-cannibalization and more clubs nearby. And a follow-up as well on International. Just as we think about the next maybe three to five years, are there any countries that might be disproportionately getting more of the growth here?

Okay. What was the first part of the question, again?

The average sales.

In fiscal '23, we had around 25 locations that exceeded $400 million in sales, and another roughly 160 locations that ranged from $300 million to $400 million. These figures are significant. As we grow beyond 350 locations, one of them even surpassed $600 million. When we see sales touching $350 million, we need to assess how we can further enhance growth in those markets and potentially manage competitive factors. Ideally, this will be one of our challenges moving forward, and I expect to see more locations reaching this threshold each year. Looking back five to eight years, considering any inflation expectations, we've performed better in terms of sales volumes, which is encouraging. Internationally, we currently operate four locations in Spain and have a strong base of over 30 in the U.K., indicating room for further expansion in Mexico. In Japan, we have around 30 locations, which have been performing well, with additional markets and populations to explore. Australia has about two-thirds the size of Canada’s market, where we have around 105 locations, while we only have 15 in Australia now. While it won’t happen quickly, we believe there are significant opportunities there. We’re not actively seeking to enter many new countries at this time, but we've opened a few single locations in places like Sweden, Iceland, and Auckland, which are being managed locally in conjunction with operations from the U.K. and Australia.

Thank you.

Good afternoon, guys. So Richard, last quarter, you talked a bit about Costco Next. And I guess my question is, how big of an impact is that program having on your e-com sales at this point, number one? Number two, kind of related to that, any change in your betting of what vendors operate on that program, just thinking about the quality control aspect? Thank you.

First of all, it's still relatively small compared to our company. Currently, Costco's net sales are not included in our sales figures. We receive a commission, so it's similar to third-party sales. At some point, based on accounting rules, we might include those sales depending on the risk and ownership level we have in the items. For now, those sales represent more of the market value and just the commission in our numbers. Regarding our vetting process, we approach it the same way as we do for all items. We seek items that add value, and we have a team dedicated to carefully reviewing each one. We currently have about 70 suppliers and expect to add many more moving forward.

So presumably, if that program keeps growing, should that be a natural gross margin driver for you over time? I know it's small now, but if you're just collecting the commission, presumably that's kind of 100% margin, right?

Essentially, yes. Much like the travel business.

Mostly.

Hi, thanks. Richard, I want to follow up on the membership fee hike as I think now we're in extra time. And I wonder how much does the growth in mix and Executive membership driving that high single-digit growth. Is that what it means that you don't have to increase it and you could keep waiting or is there something else?

I think it’s just us. If you consider the variables we would examine, we would focus on strong renewal rates, robust new sign-ups, and high loyalty, and we have all that. Therefore, it’s really a matter of timing; we haven't found it necessary yet. We appreciate providing significant value. While we've delayed the average increase a bit longer, we believe we’ve delivered even more value to our members. So my consistent response is that it’s a question of when, not if. At this point, we feel confident about what we’re doing.

And a follow-up on inflation. I just want to make sure I got that right. You said 0% to 1% for the quarter. Did it trend towards 0%? Did we exit near the bottom? And you mentioned some categories that were deflationary, which ones are stubborn in terms of inflation where it's hardest to get it out?

Which categories are resistant to inflation?

Yeah. Where you can’t get that?

CPG, obviously.

All the branded packaged stuff?

There wasn't a big trend. I think at the end, it was a little lower than the beginning, but not a big trend.

Okay. So it's not like we exited 0%. We're still slightly positive.

Right. But recognize, the LIFO charge is an inventory cost of sales charge.

Year-over-year number. LIFO.

The 0% to 1% reflects the comparison to the beginning of the fiscal year and is in relation to a year ago.

Year-over-year, got it.

Yeah.

Great. And then just last, what is the auto renewal rate now?

Around 60%.

In the U.S., it's around 60%.

Perfect. Thanks. Have a great holiday guys.

You too.

Good afternoon. Thanks for taking my question. So I just want to go to operating expense growth. So operating expense growth is still high. Would you expect the growth rate to moderate once you lap that March wage increase? And then anything unusual within that line item that's still driving pretty high growth?

There's not much out of the ordinary. It relates back to the issue of low inflation, which poses a bit more of a challenge. My example regarding nuts was quite extreme. But when there’s a slight decline in sales of 0% to 2% coupled with a 14% increase in units, it results in more labor being involved and more hours spent stocking the shelves. This is a high-level overview, and while it is an extreme case, it's a sales-based perspective. It's worth noting that in fiscal year 2019 and the early part of fiscal year 2020, prior to COVID, our SG&A percentage was 10.04% for the whole of 2019 and 10.34% in the first quarter of 2020. We often wondered if we could ever get it below 10%. However, in 2022, during the 12-month period following that full fiscal year of COVID, we reported an 8.88% for that year. Even with the 9.45% we just reported, we're still considerably lower than our historical figures, due in part to increased sales productivity. Overall, I believe we are performing well, and the challenge is figuring out how to reduce that and manage it effectively. Driving more sales is certainly the key way to manage this.

Great. And then maybe just one follow-up question. So just curious how you're feeling about the healthier consumer. So it was interesting to hear that TVs did well this past quarter.

I believe that when we're posed that question, we are in a fortunate position to answer it positively, as we are viewing the consumer situation with an optimistic perspective. We have experienced significant value, and we truly believe it is value. On the margin, we have implemented a few additional improvements. We have enhanced the website's usability and our communication efforts have improved, although there's still room for growth. Overall, we have demonstrated good merchandising capabilities, and I think our team has excelled in introducing new products. We are not hesitant to take action in categories that are experiencing significant downturns, as we recognize that if we can attract consumers effectively, we increase our chances of making sales.

Thank you. Happy holidays.

Thanks.

Hi, this is Tom Nass on for Oliver. Just a quick question on the trend of Kirkland relative to last year. If you could just remind us how that's trending maybe across categories. And then if you have any notable callouts, any recent innovations? Just curious if this is essentially driving any efficiencies and supplier negotiations that can position Costco for stronger gross margin ahead.

I would say that this allows us to secure better deals, which translates into lower prices. Currently, Kirkland signature sales relative to non-gas sales are in the high 20s. A year ago, when inflation was around 8 to 9, we noted a significant increase in Kirkland signature penetration at Costco, with a rise of about 1 to 1.5 percentage points, compared to the historical average of 25 to 50 basis points per year. We're currently back to that historical norm but have maintained the higher level of penetration, leading to smaller annual increases that still contribute positively to our business. Additionally, we're in a better position with suppliers, as we are not the only customer for these items, allowing us to drive more business. This ongoing dynamic continues to benefit us.

Great. And then just a quick follow-up on any notable behavioral trends you've seen in consumer shopping this holiday season?

A colleague mentioned they are buying gold, but it's actually mostly online. I think the traffic situation is pleasantly surprising, as we continue to attract more people at an increasing rate. We experienced benefits during the two years of COVID from March 2020 to March 2022, gaining more members and volumes. Not only have we maintained those levels, but we are also adding to them, which makes us feel fortunate.

Great. Thank you.

Yes. Thanks and good afternoon, everyone. I guess I wanted to ask on the Kirkland products, specifically maybe on the CPG that you mentioned. How has pricing or how has prices trended on those versus the branded products? Have you seen any deviation there, given you're closer? Are you able to lower prices? I suppose to the extent that, that has happened, do you notice any more market share changes within those CPG categories?

I believe it's somewhat deflationary. It's a bit more deflationary in Kirkland Signature compared to the CPG, which adds more value to Kirkland Signature. However, we're also seeing our capability to collaborate with our CPG suppliers, but we have a slightly stronger ability to do that with Kirkland Signature.

Got it.

We've had the opportunity to introduce some new items in the Kirkland Signature range as well.

Great. And then just following up on the last question. Anything you can call out amongst the newer memberships cohorts in terms of renewal rates versus the average?

Generally speaking, if you compare, everybody was always concerned. I remember 10-plus years ago, people would ask you, how are you going after millennials? And then it's how you go after the next gen or whatever, the Gen Zs or whatever? At the end of the day, when we look at the different cohorts, if you just change the names, the curve seems to be about the same in terms of getting new younger members. They buy less, they buy more as they get older into that 40- to 55-year-old sweet spot. I don’t know in terms of renewal rates. I think the rates are – our overall rates are improving so I think we’re probably doing a better job there. Certainly, things like, frankly, auto renewal helped that as well.

Got it. Thank you. Happy holidays.

Same to you.

Hi. Good afternoon. Thank you for taking the questions. Richard, you mentioned about the wage increases that you've taken recently. I'm curious to get your thoughts about the wage increases that you've taken within the context of now the lower inflation that you're seeing as well as what could be potential deflation further ahead. So curious about the ability for Costco to maybe maintain a more nimble margin structure amid what could be some volatility on the pricing side.

We examine wages in isolation and aim to do as much as we can for our employees. There were several wage increases, starting with the frontline worker premium during the early stages of COVID. We maintained half of that premium, keeping $1 of the original $2, which equated to about $400 million a year. Additionally, stronger sales and productivity have enabled us to support these increases. We evaluate wages independently and will continue to do so. If inflationary pressures lessen, it likely means reduced pressure on wages. More than half of our employees are already at the top of the pay scale and receive annual increases regardless of other factors in March. Meanwhile, new employees receive consistent raises over their first 9,000 to 10,000 hours, which are significantly higher.

Understood. And then just piggybacking off of that, and I understand it may be difficult to attribute a cause and effect relationship to this. But do you think that perhaps the moderating inflation that we've seen in the need-based categories like fresh and food and sundries may have unlocked a little bit of extra wallet to spend in the non-food category? And they have driven some of the momentum that you've seen in categories like TVs and others?

I think it can't hurt even with gas prices come down a little bit. That's top of mind every week when somebody fills up their tank. So those things help. I think I'm sure on a macro basis, that's the case but it's a guess on our part.

Understood. Great. Thank you very much and best of luck.

Thank you.

Hey, Richard, guys. Thanks for taking my questions. There's really two big debates that clients are asking us about. First one is on gross margins, and in particular, the potential for a gross margin impact from mix shift back toward things like appliances and TVs, which are notoriously lower gross margin, at least in the marketplace versus fresh and food and sundries. As you see the sort of big ticket discretionary starting to come back a little bit, do you expect any overall impact on gross margins from that mix shift away from food and sundries to big ticket discretionary?

Our margin range is significantly tighter compared to traditional retail categories. We typically have a gross margin of around 12% to 13%, sometimes down to 11%. In theory, this can range from 0% to 15%, but in practice, very few items fall below 5%, with many staying between 8% and 12%. Therefore, I don't believe these mix changes will have a substantial impact on us. There's always a challenge that affects performance and another factor that can provide support. It's really a blend of various influences.

True. And then the other big debate that's contrasting about is the relative profitability of new stores versus existing stores. There's sort of two themes there. One is new U.S. versus existing U.S. and then the relative profitability of new stores internationally. I was wondering if you could speak to that a bit.

When evaluating ROI, older buildings typically show a lower return. For example, ten years ago, the average cost for U.S. properties and fixtures was around $30 million to $35 million, whereas now it's between $45 million and $50 million. This results in a different return perspective. Overall, analyzing the ROI across our eight U.S. regions and two Canadian regions, new units start off with a lower return but improve over time. There will be exceptions, especially with units that are 30 to 40 years old, despite any increases. The significant volume really highlights this trend. On an international level, we've noted that the ROIs in several countries are generally higher. The return on sales can be even stronger in these regions due to various factors, including gross margin, membership fees, wages, and health benefits. The healthcare costs in the U.S. surpass those of any other country where we operate.

Got it. Thanks so much. Appreciate it. Good holidays and thanks for the pie.

Thank you.

Hey, guys. Thanks for taking the question. Wanted to first ask on Executive member penetration seems like it continues to inch higher. And I was just wondering how you guys think about that. And like how high should that be? I mean presumably, you want everybody to be an Executive member. But is there like kind of a natural level where you think it can still go from here beyond the 46%?

I believe we will continue to expand into a few more countries as we need a certain number to operate effectively. In our opinion, we've typically made these expansions after we've established about 15 warehouses in a country. This will contribute to our growth. However, some of the increase is related to reaching a stable point where growth tends to level off. Over the past few years, we have improved our ability to market effectively and facilitate auto-renewal options. Now, when customers sign up online, they are more inclined to enter their credit or debit card information and choose to opt into auto-renewal. These factors have driven growth, and while we will continue to see some increases, the rate of growth will likely slow down over time.

Got it. Okay. And then maybe just a quick follow-up. Anything to talk about on shrink because I know that there was an issue with shrink even for you guys at one point. And I know you guys have cracked down on making sure members are showing their cards when they walk in the store. And obviously, when you leave with your goods, you're checking your receipts. But anything we should think about with regard to shrink going forward and recent trends?

Thankfully, nothing at all. I believe what we discussed earlier was a combination of our transition to self-checkout over the past few years and some recent developments mentioned in the news, which have had less of an impact on us. We may have experienced a slight increase, but it was on a very low starting point. So we consider ourselves fortunate in that respect.

Got it. Thank you and happy holidays, guys.

Same to you. Thank you.

Well, thank you, Lisa, and thank you, everyone on the call. We’re around to answer questions and have a happy holiday. And I think this is a record time of finishing this call. So enjoy the holidays. Thank you very much.