Costco Wholesale Corp (COST) — Q3 2024 Earnings Call Transcript

Good afternoon, everyone, and thank you for joining the call today. I'd like to start by saying how excited I am to be part of the Costco team, and it's a pleasure to be hosting my first Costco quarterly conference call. The whole Costco team has been incredibly welcoming. As you might imagine, my first three months working alongside Richard have been a lot of fun. It's also been great visiting warehouses and facilities to immerse myself in the Costco culture and experience firsthand how this is positioning the company for continued growth. Over recent months, I've spent time and met with many analysts and investors, several of whom I know through my prior role. It's clear you value and appreciate the company's current approach to investor communications. While I can't promise to be able to match the humor that Richard Galanti has become famous for, I can promise the same level of open dialogue and transparency you've come to expect. Oh, and to clear up some recent media speculation, I also want to confirm the $1.50 hot dog price is safe. Before I talk about our results, I wanted to mention that Ron Vachris is also joining today's call. Many of you have expressed interest in hearing from Ron, and so we thought it would be a good idea to have Ron join the discussion and he can also take a few questions. So, Ron, would you like to add anything before we talk about the quarter?

Thank you, Gary. And again, welcome to Costco. I'm very happy to report that the transition from Richard to Gary has gone very well and we're very excited to have Gary on board as part of Costco, and I look forward to working together on the growth opportunities ahead for our company. Before we jump into the quarter, I want to make a couple of comments on the leadership transition. As Richard has mentioned on previous calls, I've worked closely with Craig Jelinek for many years, including side-by-side for the last two years as President. The current CEO transition has been a seamless process. Since January, my time has been focused on working closely with the teams around the world to ensure we continue to deliver the best quality merchandise at the best value for our members. I'm incredibly proud of our employees and I believe our consistency of results is a reflection of their commitment to our members and to each other. Consistent with how Craig and Richard manage investor communications, I intend to have Gary host the quarterly conference calls and I will join as business permits to answer a few questions. So, Gary, let's go to the results and I'm happy to jump back in for the Q&A portion to field some questions today.

Thanks, Ron. I'll 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 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 press release, we reported operating results for the third quarter of fiscal 2024, the 12 weeks ended May 12. Before I walk through all the numbers, new for this quarter, we are making available a slide presentation on our investor site under Events and Presentations. These slides summarize much of the information I will share today, including Richard's famous matrices. We intend to make this information available every quarter. Reported net income for the third quarter came in at $1.68 billion or $3.78 per diluted share, up from $1.3 billion and $2.93 per diluted share in the third quarter last year. Last year's results included a non-recurring charge to merchandise costs of $298 million pre-tax or $0.50 per diluted share, primarily for the discontinuation of our charter shipping activities. Net sales for the third quarter were $57.39 billion, an increase of 9.1% from $52.6 billion in the third quarter last year. The following comparable sales reflect comparable locations year-over-year and comparable retail weeks: U.S. comp sales were 6.2% or 6% adjusted for gas inflation and FX. Canada was 7.7% or 7.4% adjusted. Other international was 7.7% or 8.5% adjusted, and this led to total company comp sales of 6.6% or 6.5% adjusted for gas inflation and FX. Finally, e-commerce comp sales were 20.7%, both on a reported basis and adjusted for foreign exchange. In terms of Q3 comp sales metrics, traffic or shopping frequency increased 6.1% worldwide and 5.5% in the U.S. Our average transaction or ticket was up 0.5% worldwide and up 0.7% in the U.S. Foreign currencies relative to the U.S. dollar negatively impacted sales by approximately 20 basis points, while gasoline price inflation positively impacted sales by approximately 30 basis points. Moving down the income statement to membership fee income, we reported membership fee income of $1,123 million, an increase of $79 million or 7.6% year-over-year. Membership fee income growth was 8% excluding FX. In terms of renewal rates, at Q3 end, our U.S. and Canada renewal rate was 93%, up one tenth of a percent from Q2 end. The worldwide rate came in at 90.5%, the same as Q2 end. We ended Q3 with 74.5 million paid household members, up 7.8% versus last year, and 133.9 million cardholders, up 7.4% year-over-year. At Q3 end, we had 34.5 million paid executive memberships, an increase of 661,000 since Q2 end. Executive members now represent over 46% of paid members and 73.1% of worldwide sales. Our reported gross margin rate in the third quarter was higher year-over-year by 52 basis points, coming in at 10.84% compared to 10.32% last year and up 54 basis points excluding gas inflation. Core was flat and higher by 2 basis points without gas inflation. In terms of core margin on their own sales, our core-on-core margins were higher by 10 basis points. Ancillary and other business gross margin was lower 6 basis points and lower 5 basis points excluding gas inflation. This decrease year-over-year was driven by gas, partially offset by e-commerce. The 2% reward was lower by 1 basis point, both with and without gas inflation with higher sales penetration coming from our executive members. LIFO was a benefit of 2 basis points. We had an $11 million LIFO credit in Q3 this year compared to no LIFO charge or credit in Q3 last year. This is the third LIFO credit this year following a $15 million LIFO credit in Q1 and a $14 million credit in Q2. And finally, other was higher by 57 basis points or 56 basis points excluding gas inflation. This was all related to lapping last year's negative impact from the $298 million pre-tax charge for charter shipping activities. Moving on to SG&A. Our reported SG&A rate in the third quarter was lower or better year-over-year by 15 basis points, coming in this year at 8.96% compared to last year's 9.11%. SG&A was lower year-over-year by 12 basis points adjusted for gas inflation. The operations component of SG&A was lower by 14 basis points and lower by 12 basis points, excluding the impact from gas inflation, despite an increase in warehouse wages this year. Higher labor productivity and great cost discipline by our operators drove the improved core SG&A results for the quarter. Central was better by 1 basis point and flat with our gas inflation. And stock compensation and pre-opening were both flat year-over-year. Below the operating income line, interest expense was $41 million this year versus $36 million last year and interest income and other for the quarter was flat year-over-year as lower interest income was offset by a foreign exchange gain in the quarter. In terms of income taxes, our tax rate in Q3 was 26.4% compared to 26.5% in Q3 last year. Overall, reported net income was up 29.1% year-over-year, and excluding last year's charge related to the discontinuation of charter shipping activities, it was up 10.3% year-over-year. A few other items of note. In terms of warehouse expansion, in the third quarter, we opened two new warehouses, both in the U.S. Additionally, since the end of Q3, we had two more openings. Last week, we opened in Loomis, California, and two days ago, we opened our seventh building in China in the Nanjing market. For the remainder of fiscal 2024, we plan to open another 12 new locations, nine in the U.S., two in Japan, and one in Korea. This would bring the total for the full year to 30 openings, including one relocation for a net of 29 new warehouses. Regarding capital expenditures, Q3 spend was approximately $1.06 billion, and we estimate full year 2024 capital expenditure will be between $4.3 billion and $4.5 billion. Diving a bit deeper into some of the key themes we saw during the quarter. Non-foods have the highest comps of our core categories. This strength was aided by lapping some softness in sales a year ago, but was really driven by our merchandising teams doing a great job identifying high-quality items with values that really resonated with our members and buying those items with conviction. As inflation has leveled off, our members are returning to purchasing more discretionary items. Growth in the category was led by toys, tires, lawn and garden, and health and beauty aids. Bakery sales also showed great momentum in the quarter as our fresh foods team has reinvented that department with a number of new and exciting items, including the Kirkland Signature Lemon Blueberry loaf and Morning Buns. Within our ancillary businesses, the food court had the strongest quarterly sales with continued success of the chocolate chip cookie that was added to the food court this year. On the inflation front, it's more of the same from last quarter. Across all core merchandise, inflation was essentially flat in Q3, with fresh foods close to zero and slight inflation in food and sundries being offset by some deflation in non-foods. The deflation in non-foods was led by hardware, sporting goods, and furniture, all still benefiting from lower freight costs year-over-year. Keep in mind that when we speak to inflation or in the case of non-food deflation, we're referring to our selling prices. We're intentionally creating incremental value for our members by delivering lower prices wherever possible. We believe our strategy of delivering value to drive unit volume and member satisfaction is the winning combination for us. In that vein, our buying teams are constantly aware of changing costs across all of their SKUs and are ensuring that we are capturing all cost decreases quickly so that we can pass on incremental value through price reductions. If we are unsuccessful in delivering ultimate value with branded goods, we evaluate the potential for new high-quality Kirkland Signature items with a goal of providing at least 20% value versus what we would sell the national brand item at. This quarter, we released a new Kirkland Signature men's walking shoe and new Kirkland Signature facial wipes, both of which are doing very well. We also reduced prices on a number of existing items, including lowering Kirkland Signature pine nuts from $29.99 to $24.99 and reducing the price of our Kirkland Signature frozen shrimp SKUs by $1. These are just a couple of examples that came out of our recent monthly budget meetings where each country and region shares new and exciting items they have introduced to their warehouses and items where they've lowered prices. Turning now to digital. We continue to make enhancements to the app and website and are excited about the traction that these initiatives are getting with members. Total e-commerce sales growth in the quarter was led by Gold and Silver bullion, gift cards, and appliances. In appliances, Costco logistics is playing a key role in providing both greater value and a better end-to-end experience for members. Deliveries through Costco logistics were up 28% in the quarter. Costco Next, our curated marketplace also continues to grow nicely and we added eight new vendors in Q3, bringing the total to 75. Our app downloads were up 32% versus a year ago with about 2.5 million new downloads in the quarter, bringing total downloads to more than 35 million. Site traffic was up 16% and average order value was up 8%. You may have also recently seen an announcement that we are expanding our relationship with Uber. Previously, Uber Eats delivered Costco orders in Texas and this new agreement allows consumers the ability to order from Costco through Uber Eats across all of Canada as well as 17 states in the U.S. We are also working to expand this partnership to several of our international countries in the coming months. In addition to the increased access to Uber Eats customers, the agreement will allow us to sell Uber gift cards globally and offer discounted Uber One annual membership to Costco members. Finally, in terms of our upcoming releases, we will announce our May sales results for the four weeks ending Sunday, June 2nd, on Wednesday, June 5th. Also, remember that our fiscal fourth quarter ending September 1, 2024, will have 16 weeks versus the 17 weeks in the fiscal fourth quarter last year. And with that, we will now open it up for Q&A.

Good afternoon. Hey, Gary, how are you doing?

Hi, Simeon.

We're going to take a stab at this membership question. The way that we've thought about it is it's an inflation offset to the model. And it was described as if you have enough levers in the middle of the P&L to deliver whatever stated EBIT growth you're trying to do, you didn't need to touch the membership fee. Is that still the way that you look at it? And is that visibility on enough levers still intact?

Yes. Thanks, Simeon. And you're talking about a membership fee increase now. Is that where your question is coming from?

Right. Yeah. Yes.

Yes. I would really kind of revert back to some of the comments that Richard shared previously. I don't think that we're thinking about it any differently than he's talked about in the last few calls. We've historically looked at increasing the membership fee every five years or so. And obviously, we're beyond that time period now in terms of what would be the typical cycle. There's nothing about anything that we see within how the business is performing that's changing our view on that. We feel really good about membership renewal rates. We feel really good about the test of are we delivering significantly more value to members than we were or have since we last increased the membership fee. But I think we are our own probably toughest competitor and that we look at what's happened in the marketplace over the last few years and when we were seeing high inflation and the risk and concern around recession. As I know before I joined the company, it was talked about extensively and it continues to be talked about as it's something that is still a case of when we increase the fee rather than if we increase the fee. But we are still evaluating those considerations to determine what the right timing is. And when we reach that point where we feel it is the right time, of course, we'll be very open and direct in communicating that.

Okay. Fair enough. Can I ask about your opinion on the U.S. expansion, it's been holding in a lot better. It's been more giving than we would have thought several years ago. Do you have any thoughts just your own perspective, you're probably looking at members per warehouse. Are you surprised at the runway you still have in the U.S.? You think it could be even more than what we're aware of today?

I think it's only surprising in as much as I know we've talked previously about we thought that we would potentially run out of runway for new warehouses in the U.S., and as you know, this year we're opening close to 29 net new warehouses and many of those will be continuing in the U.S. and we still see significant runway to continue to open more warehouses in the U.S. in the future. I think that sort of 25 to 30 new warehouse count is a reasonable proxy for what we think the runway is for the foreseeable future for new warehouses. I'd be surprised if at least half of those weren't in the continue to be in the U.S. because we still see significant growth when we open those new warehouses. And what it's doing for us in fill-in markets is it's creating capacity for our members that are shopping very busy warehouses today to be able to shop more frequently and drive more engagement with us and also it increases membership renewal rates over time as well. So I think we still see plenty of runway in the U.S. to continue to open more warehouses, but we also see a lot of growth opportunity, of course, in the international markets as well.

Okay. Thanks, Gary. Appreciate it.

Thanks, Simeon.

Good morning. Good afternoon. Thank you so much for taking my question. There's been a lot of announcements from consumable retailers in recent times about making price investments. Do you think you need to make a sizable price investment in the next couple of quarters in order to remain competitive?

This is Ron Vachris. No, I think that this is part of our everyday DNA. I mean, we are competitive on a daily basis. Our buyers are on top of pricing daily, weekly and we all review them each month. So we feel very good about where we are today and our runway to continue to be as competitive as we are moving forward.

My follow-up question is, given some of the changes in leadership over the last year or so, is there any thought to being more aggressive with some of the evolution on the model, things like buy online pickup in-store, deploying more technology in the store or capitalizing on the vast amounts of data that Costco has in the form of trying to monetize it through retail media. Thank you very much.

The answer to your question is yes, we are addressing all those areas. Currently, we are implementing an expanded buy online pickup in warehouse initiative, which will be limited by the capacity of our warehouses. While we cannot expand to every category, we are actively increasing our offerings in televisions and other electronic products. We view this as a significant opportunity. Technology will be a key focus for us as we look to enhance member engagement and strengthen our relationships both in our physical locations and online, as well as through additional services like travel. We see technology as a fantastic opportunity to improve member relations with Costco and drive more business in the future. We will continue to innovate, and despite the leadership changes, we do not anticipate major shifts in our proven strategy. As we have for over 41 years, we will keep adapting to the needs of our members. Regarding data, we see great potential there as well. We have broadened our team and have a robust program in retail media, which shows promising potential. We expect to see benefits from initiatives such as personalization among other opportunities.

Thank you very much.

Thanks, Michael.

Hey, good afternoon, and congrats again, Gary. Historically, Richard and team have been steadfast on the 14% to 15% margin ceiling, which has clearly paid dividends for the company over the years. I'm curious how you and Ron view this threshold. Are you going to adhere to it? Do you think you can earn more? Just your thoughts on the margin front.

No, that 14% to 15% has been part of our life for many years. Our objective, and our buyers' goals, is really about how aggressive they can get on pricing to deliver the best value. I don't see any plans to move that cap at all.

And Chuck, maybe just one thing to build on that too. I think as you think about some of the opportunities that Ron mentioned on the earlier call, I completely echo Ron's comment about we have a really clear growth strategy that's obviously delivering momentum in the company today and these opportunities through technology and media, I think are great opportunities for us to find new ways to unlock value. But again, I think we see those very much in the mindset of how do we give 90%-ish of that back to the member, so that we're continuing to drive member engagement, member loyalty and member value.

Great. And then just to kind of build off Michael's question, just wanted to get your high-level thoughts on digital e-commerce. What do you think Costco's strengths are? What do you think the weaknesses are today? And where do you think the biggest focus is going to be for the company in the coming years?

Our primary advantage in digital e-commerce lies in our merchandise and the value we offer, which also drives success in our physical stores. Our technology and systems are supported by teams with a clear roadmap ahead. Currently, much of the work is foundational, focusing on enhancing fulfillment, speeding up delivery times, and ensuring site reliability. Following these improvements, we will implement iterative changes that will enhance the user experience on our websites. I believe we have a solid plan for this, but there's considerable room for improvement in personalization for our members. Additionally, better aligning our warehouse and online operations is essential, and we're working on integrating warehouse inventory into our app for member use. The functionality of the app represents one of our most significant opportunities.

Great. Thank you.

Thanks, Chuck.

Thanks, Scott Ciccarelli. Given the strength of your discretionary sales and the recent changes in the economy, does that indicate that your members are becoming more optimistic and willing to spend on wants instead of just needs?

Yes. It does indeed look that way. I've got to tell you that the discretionary spend we're seeing, I mean, we're definitely winning in consumables as we see the food business and dining away from home has softened up a bit and people are eating and we're seeing that in our fresh foods. But I have to tell you that categories such as the home division and toys are categories that have lagged quite a bit post-COVID that with great excitement, I mean, our buyers have come out and delivered some great items, have phenomenal values, and have really rejuvenated those categories. And those are both leading categories for us in sporting goods, toys, furnishings, domestics, all those categories are really coming on very strong now and all of it discretionary in nature.

Fascinating. And then today, we had a presentation. Obviously, Ron, you joined the call. Are there other changes we could potentially expect given some of the C-suite changes?

I want to emphasize that there are no significant changes planned. The team that has been running the company has been performing well, and Gary has added great value to our efforts. Our model is effective globally, and the emphasis on high-quality merchandise resonates across all the regions where we operate. We will keep innovating and be attentive to our members' needs, but I cannot promise any major changes in the near future. Our focus is on continuing to execute effectively.

And Scott, maybe just to add from my perspective of being new to the role and new to the company, early observations to me, obviously, I'm incredibly impressed with the culture, and the strategy is clearly working very well. So my first priority is to really being new to the company is to really acclimatize and to support and enable a smooth transition with the culture to make sure the momentum that we have continues going forward. And I think the other point, as we talked about a little bit earlier on the call is we're on a journey with technology and data. And so hopefully, there's things that I can bring to work with the team and help us continuing on that journey and accelerate that journey. And really that's the priorities in my mind being new into the CFO role.

Very helpful. Thanks, guys.

Thank you.

Thank you for taking our questions. Ron and Gary, it's a pleasure to have you both on the call, and I appreciate the slides. I wanted to revisit the retail media strategy and personalization. Ron, you mentioned that there have been some key hires in that department. Gary, you have a unique viewpoint on these topics. Can you help us understand the opportunity in retail media and personalization? Is there anything different about Costco's approach due to its unique model and SKU count? Also, do your plans in these areas involve an increase in technology spending in the coming years?

Sure. Thanks, Kelly. I'll go first, and then Ron may want to add some comments as well. Many of your points relate to how we view the opportunity. As someone new to the company, I see that while many companies discuss alternative profit streams, Costco is already performing well in this regard. We are leveraging our strong membership relationship to run a significant co-brand payment program that benefits both members and the company. Our travel services business is quite unique in retail and represents a potential source of new revenue, extending our overall retail relationship. Additionally, we have media revenue in various areas of the business, showing that we are already generating income in this space. As Ron noted earlier, technology and data present a pathway for us to explore further growth opportunities, given the unique relationship we maintain with our members. We can enhance value for them by utilizing data and expanding through both our warehouse and digital channels. It’s a bit early to fully quantify this potential since there are specific aspects of our model that differentiate our opportunity. However, based on what we know and the team working on this, we believe there is significant potential for growth. As I mentioned, we intend to reinvest in our members to accelerate overall company growth.

I would have to mirror what Gary says. We do have a unique model. We have a relationship with all of our members. Our responsibility is to use that data wisely and respectfully. As far as IT spend, yeah, there will be some IT spend. We don't see as we look in the future, we don't see that to be anything that will really change our trajectory of our cap investments. But there will be some IT requirements, but we feel that will be in the normal course of business.

So guys, I want to go back to personalization again. Where do you think just conceptually the biggest opportunities are, right? When you think about wallet share, every one of your members is going to be a little different, but you can probably do cohorts. Why are they not buying from you and why personalized promotions, outreach on new items coming into the warehouse? I mean, where do you think the biggest opportunities are to build further wallet share?

John, I'll go ahead and start out. I think the biggest opportunity is, just like you said, the awareness of the warehouse and keeping our members in tune on what's active, what's going on in the warehouse near them and how we can continue to enhance and drive those sales. I think that that's probably our greatest opportunity with digital as we see moving forward. Personalization is good. We talk here a lot about a fair reasonable amount of personalization. We never want to compromise the treasure hunt of Costco. That's equally as important as people that go to costco.com. They never knew that they needed a 16-foot shed and they see a phenomenal value as they do in the warehouse. So we don't want to personalize to a detriment, that changes our DNA and who we are. But we do know that there are definitely some improvements we could have that would enhance the member experience. And that's everything that our team is focused on is that how does this move to the member and how does it improve their experience with us digitally.

Okay. As a follow-up, Gary, you mentioned the core-on-core concept. Could you take a moment to reflect on that? I understand the goal isn’t solely to maximize margin, but I’d appreciate your thoughts on core-on-core for this quarter. It seems there has been pressure on fresh as we transition back to a more normalized level post-COVID. Have we now completed that process of fresh returning to a certain level?

Yes. Thanks, John. Just maybe to give you a little bit more color on the core-on-core and how it kind of played out during the quarter. If you think about the three main categories in core between foods and sundries, fresh and non-foods, fresh would have continued to have been slightly lower year-over-year, and that's a very deliberate strategy for us to make sure we're delivering more value for the member, and we think that's a really important place for us to drive member engagement and support, especially as we're still seeing some commodities that are a little bit inflationary right now. So that would have been very much part of the plan from our perspective. But it was more than offset, as you mentioned, by the improvement in non-foods during the quarter, which was what led to the 10-basis point improvement on core-on-core. Food and sundries actually was pretty flat overall. So we feel good about the way that we're managing the balance while staying true to that principle of delivering the best value for the member. And we were pleased with how it played out during the quarter based on the work all the merchandising teams did.

Thank you.

Thanks, John.

Sorry about that. Yeah. Sorry about that, guys. Thanks for taking the question. Ron, maybe one for you. Just kind of back to the member behavior, maybe back to Scott's question a little bit. Can you just talk about maybe just your observations around maybe income cohorts, any other ways you bucket or slice your membership base, just how the behaviors have evolved here over the last several months. Is there any change that you think is interesting to call out? You talked about the better general non-food trends. Just curious if this environment reminds you of anything else historically? That's my first question.

Okay. It's a very healthy environment from what we see from our members right now. And as you take a category such as our meat department, which is growing very nicely. A lot of volume being driven in ground beef and our new everyday lower price on boneless skinless chicken breasts, really driving a lot of volume units there, while Wagyu Beef and prime are growing at a great clip for us as well. So we're seeing that benefit from both sides of the consumer that great value in both areas are doing very well. The non-foods, I tell you that non-foods is strictly driven by newness and excitement and we see big and bulky going very well. It's been a year of our $1,200 swing set that we have on the floor. We can't get enough. They're just blowing out. But it's again that continuous innovation of merchandise that is exciting our members and really driving some sales force there.

Sounds good across the board. But we're expecting a dryer to get delivered from Costco logistics in the next couple of days. So looking forward to that. And then the second question would be, yeah, Ron or Gary, either one of you, just your view on vertical sourcing. I mean, this has been something that has been evolving for several years going across different categories as you guys continue to grow your business, you need more, I guess, definable sources of supply. Just curious your view of vertical sourcing, where you are today, and what areas you might focus on over the next several years? Thank you.

Sure. We have entered vertical integration and sourcing as the need arises. If you recall the well-known story about the hot dog and coke priced at $1.50, we aim to maintain that price point, which is why we're opening our own meat plants. When we noticed the prices of optical lenses increasing, we decided to open our optical grinding plants. The chicken plant was established because we recognized a point where supply would not meet demand, and we had to step in since we didn't have a partner willing to expand in that area. A group I oversee is focused on ensuring that we don’t try to be everything; we have a business to run, and our move towards vertical integration will be driven by specific needs and timing. We also have excellent long-term partners who supply our goods, and strategically leveraging that relationship will be crucial moving forward. At this moment, I don’t have any specific expansion announcements to make, but we are keeping those options available should the need arise.

Terrific. Thanks so much.

You're welcome.

Hey, everyone. This is Brandon Cheatham on for Paul. Thanks for taking our question. Recently, you were selling Instacart gift cards at a discount online and in the warehouse and thought that was pretty interesting because it's potentially a gift card that could be used at a competitor as well. So I'm just curious, is there any strategy behind that? Are you trying to drive member engagement online, and if there are any learnings from that initiative?

The strategy was aimed at providing additional value to our members, particularly since there is an extra charge for grocery delivery to their homes. We collaborate closely with Instacart and will now work with Uber to minimize those costs, although they also have their own expenses to cover. The goal of this partnership is to enhance the service for our members and increase sales. While customers can use those services elsewhere, our responsibility is to save our members money, whether it's on airline tickets, Uber rides, or Instacart shopping. We explore all opportunities to add value for our members.

Got it. Thanks. And my follow-up, how do warehouses react when you open an infill warehouse? Does it open differently than other new markets? Does the current market feel an impact? And how many warehouses that you opened over the past year would you quantify as infill versus new markets? Thanks.

I guess it's about how they react. We usually have solid data before we open an infill building, allowing us to assess the potential cannibalization based on our member information. This capability helps us prepare and adjust labor, payroll, and purchasing in anticipation of the cannibalization we expect. Our team does an excellent job, typically within a percent or so of actual execution of our plans. We have become quite adept at planning these initiatives. In terms of strategy and the number of cannibalized locations, I would say we opened about eight this year that affected other buildings. Some of these may have impacted just one warehouse, while others were more complex; for instance, one in Toronto took sales from four surrounding buildings, but they managed to rebuild their sales in six months. These situations highlight, as Gary pointed out earlier, that frequency improves significantly because members can return to a high-volume club. It’s a strategic approach to cannibalization as we examine our locations globally.

Very helpful. Thank you.

Hi, thanks. Ron, I wanted to follow up on the gross margin cap still very much in place at 14%, 15%. Is there any reason that SG&A now that it's back under 9% of sales couldn't fall to 8% if you keep having the growth that you have?

That's a very good point. We continue to see a healthy SG&A number this quarter. Inventory was flowing well, and our warehouses did a fantastic job. SKU counts are in line. Everything aligned perfectly, and this is how we operate effectively. When we can achieve that level of top-line growth at our size, our operators do an excellent job utilizing that to improve SG&A. While I hesitate to suggest we could reach 8%, I believe there is potential to continue reducing that number.

It's great to hear that. Can you provide some insight on gas gallon sales for the quarter? I know it was volatile and there was definitely pressure on many members and consumers. Did that contribute to the increase in traffic during the quarter and the growth in gas gallons?

We experienced a 5% increase in gallons. Saving people on gas tends to drive more traffic as well. So, gallons were up 5% for the quarter.

That's a great number. Can you provide an update on gas profitability, Gary? Is it similar to what it was a year ago or last quarter, or is it trending up or down?

Yes, the gas profitability would have been down a little bit. I think you may have heard me mention in the prepared comments that when we looked at the overall gross margin rate for the quarter and the sort of headwind that we had was in the ancillary businesses, the other businesses, and it was essentially gas that created that headwind. So we did see a reduction in gas profitability during the quarter, but overall, the core-on-core margin improvement and e-commerce improvement essentially offset that to bring us pretty close to flat overall when you adjust for gas inflation in the results. So it was down. I would say generally, we've seen on gas profitability, it's been relatively consistent to slightly improving if you look over the last few years, but obviously, there are points in time when you think about volatility in fuel prices where you can have those ups or downs in any given quarter and this last quarter was one where we did see a headwind in year-over-year gas profitability.

That's fantastic. Well, welcome, and I'll let somebody else ask about how much gold volume drove the comp. Take care, guys.

Thank you.

Thanks.

Good afternoon. Thanks for taking my question. So just going back to unit growth. In recent years, it's been stuck in that, let's call that mid 20s, it looks like this year will be closer to 30. Just want to get a sense of the opportunities to potentially accelerate that unit growth, especially in the U.S. just given some of your competitors are planning to accelerate growth from here.

It's a good risk. When considering managed cannibalization, we see that adding 29 locations is a solid achievement for us. As we begin to implement these infills, some projects may take longer, and it’s a challenge since there isn’t much available land for us to open new warehouses. We need to be creative in finding ways to infill in a high-demand market. Our international expansion remains robust, although some regions we operate in tend to take more time to complete projects. As a result, you may notice fluctuations in our progress. The number of new locations between 25 and 29, or 25 to 30, works well for us. We are confident in our staffing, leadership, and the infrastructure needed to support these warehouses, enabling us to open with strong backing.

Great. And maybe just one follow-up question. So you added Uber to several locations. As you think about the intermediate to longer term, do you expect to see multiple providers at all Costco U.S. stores over time? Could you share more about the rationale for adding Uber and their longer-term vision?

We were conducting tests with Uber in Texas for some time and observed increased member engagement on their platform. This partnership also enables us to grow our international presence, as we plan to expand into Japan, Korea, Taiwan, and the UK, where we currently do not offer grocery delivery. The collaboration with Uber has brought significant advantages, complementing our long-standing relationship with Instacart, which has been beneficial for many years. We believe this opens up new opportunities for member engagement and will support our international expansion efforts.

Great. Thank you.

Hi, Ron and Gary. You've done some really creative merchandising around UPTs and units per transaction with pickup items and innovation on that treasure hunt. What are your thoughts there? And also, big ticket and electronics, previously, it was a bit of a drag. Just would love your thoughts on what you're seeing there. And third part is marketplace, the marketplace model and the concession model, and alternative inventory models. Just what are your views on opportunities there because they're really big ones and your member is so loyal to you as well. Thank you.

On your UPT, you were asking about the transaction impact? I'm thinking strategically about adding units to people's baskets going forward and merchandising in that way as well if it's something you see in terms of an opportunity. Absolutely. We recently had a session with our grocery divisions where we discussed the great success we've had with international foods being introduced in the U.S., as well as U.S. products being sent to other regions where we operate. It's essential to manage not just the consumables in grocery but also to highlight successful items from places like Taiwan, Korea, or the UK. When these products excite our members, it leads to impulsive purchases, as they trust our buyers and add these new items to their carts. This has been a significant success for us. Often, it aligns with the concept of a treasure hunt; customers might come in intending to spend $100 and end up spending $300. Our buyers and operators excel at making the warehouses appealing, so when members come in for their basic shopping, they also pick up additional items that catch their interest.

I think maybe just to add on that, Ron too. I mean, the nice thing about the opportunity there for us is with trips up by 5%, that's really why the average basket size has been more flat recently, and that's because we've been growing member engagement in consumables, as Ron mentioned, with food and fresh. It creates a great opportunity for us to drive more of that basket size as well.

And then your question on marketplace is a significant opportunity for us moving forward. I mean, we really do indeed see that. I think especially with our limited SKU count in the warehouse, how can we expand the offering to the members, bring value to their membership card beyond what's within our four walls or what's on costco.com and we see this as a great growth driver for us in the future and a way to bring expanded value to the members as we look forward. So I'm quite bullish on Costco Next and what that can become in the future.

I think the difference for us on that would be, of course, as we are with Costco Next is just being very curated for the member. So we're unlike a traditional marketplace that is about maybe just sheer volume for us, it's about making sure the member is getting something that truly is unique and valuable and being consistent to who we are, but it's tremendous upside opportunity there in that regard.

Okay. And finally, on that big ticket question, would love any green shoots on electronics or TVs? And the last question on Asia, you have same day in China and you've done a lot of great things in the Asian region. Just would love any update there in terms of progress you made and the big opportunity for more end sales as well. Thank you.

Yes, briefly on electronics, we believe, as Ron mentioned earlier, that we are winning with our members in terms of the value we provide. When we compare our trends to the market, we're confident in our ability to continue outperforming and see strong potential in digital to enhance connections with members and move more high-ticket items from the warehouse to online. In Asia, our view remains that all markets present significant growth opportunities. While some markets are more established, there is still a lot of potential for opening new warehouses. In China, we are just beginning our journey, but we see tremendous growth opportunities as we identify the right strategies for that market.

So the grocery delivery in China, we're up and going on six buildings. We just opened our seventh warehouse this week. It's been a big win for our members. Its delivery within two hours is what is able to be done. We're seeing some good incremental shops initially out of that program, and we look forward to good things in the future on that.

Thank you. Best regards.

Thank you.

Thanks.

Great. Hey, guys. Thanks for taking questions. A lot have been asked, but I do want to ask with Costco Logistics, what was driving that 28% increase, which is very strong? Was it new relationships with some of the other retailers or partnerships, or just anything you could share on that would be helpful.

Yes, we only deliver Costco members' orders through Costco Logistics. There are no partnerships contributing to the numbers you've seen. We do track a small amount of series numbers, but that does not factor into any of the growth figures we report. This is simply part of our historical relationship. The main drivers were appliances, furnishings, and outdoor products. Appliances alone saw nearly 30% growth during this period. As Gary mentioned, it's the member value of the all-inclusive pricing for delivery, installation, and haul-away that has truly resonated with our members and contributed significantly to our sales growth.

Joe, I'll give you the practical example as a new entrant to the Seattle market. I just had Costco Logistics deliver two mattresses, three TVs, and a couple of chairs as well for me. So that's the kind of stuff I think that we're seeing really resonate with members.

Got it. That's great. Thanks, guys. I have one other question. I know it's still relatively small, but how is Costco Next progressing? How do you see it continuing to grow in the future? How important do you think it will be as a driving factor? Is it part of the marketplace that Oliver mentioned?

As Gary mentioned earlier, Costco Next is quite unique as it serves as a fully curated marketplace. Unlike many other marketplaces that simply allow individuals to sell goods, our approach involves building strong relationships with our suppliers, and we're also onboarding new suppliers. This initiative has not only provided a new avenue for selling products but has also allowed us to discover some exceptional items that eventually get introduced to our warehouse. It serves as an excellent testing ground for innovative products and helps us expand our range of accessories, such as additional swings and slides for the swing sets we sell online, which typically wouldn't fit in our warehouse. This concept complements our core warehouse business while also enhancing member value with these additional partnerships. We see significant potential for growth in this area.

Got it. That's great. Thanks, guys. Good luck with the fourth quarter.

Thank you.

Thank you.