Costco Wholesale Corp (COST) — Q4 2024 Earnings Call Transcript

Good afternoon, everyone, and thank you for joining Costco's Fourth Quarter 2024 Earnings Call. I'd like to start by reminding you 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. Now before we dive into our financial results for the quarter, I'm delighted to say that Ron Vachris is joining us for the call today. I'll now hand over to Ron for some opening comments.

Thank you, Gary, and good afternoon, everyone. Thank you for joining us today. As we turn the page on fiscal year 2024, let me make a few comments on our progress during the year as a whole. Throughout the fiscal year 2024, we will continue to execute on our strategy of growing the top-line through delivering the highest quality goods at the lowest possible price to our members. As a management team, we continue to be incredibly proud of our 333,000 employees worldwide and the culture that they foster. The consistency of our financial results is a reflection of the commitment of our entire team to member service and the Costco experience. Most of these employees are led by our fantastic warehouse managers, who we view as executives in our company. Succession planning continues to be a key focal point for us, as we're continually working on identifying the future leaders of our company. In fiscal year 2024, we promoted 95 new warehouse managers. 85% of those promoted started at Costco as hourly employees. This promote-from-within culture and the long-term career it helps to build is core to who we are as a company, community member, and retailer. A few other highlights I'd like to mention. In fiscal 2024, we hit our target of 30 new warehouse openings. This included one relocation and resulted in 29 net new buildings. Highlights included our first-ever building in Maine, bringing us to 47 states, and our 600th US Building in Eau Claire, Wisconsin. We also continue to see significant opportunities worldwide, and our fiscal 2025 plan has 12 of our planned 29 openings coming outside of the US, including our fifth building in Spain, which opened in Zaragoza two weeks ago. With three of these warehouses being relocations, we expect to add 26 net new buildings in fiscal 2025. We continue to grow our e-commerce business, and Costco Logistics has had a remarkable year. Appliances and furniture in big and bulky has led the way, and Logistics delivered over 4.5 million items this last year, up 29% over the year prior. Improvements in our item assortment, delivery times, and scheduling functionality all enhance the member experience. We have great momentum with this business and expect big and bulky items will be a key part of our continued progress with e-commerce in the coming year. Turning to technology, we're starting to realize the benefits from the work that was done this past year. Members are very excited about being able to check warehouse inventory via the Costco app. And the membership card scanners installed at the front doors have delivered on the goal of speeding up the checkout process. This has been very well received by our members. More improvements are currently underway, which should further benefit our business both online and in our warehouses. With that, I'll turn it back over to Gary to discuss the results for the quarter, and I'll jump back on during Q&A to field some questions.

Thanks, Ron. In today's press release, we reported operating results for the fourth quarter of fiscal 2024, the 16 weeks ended September 1st. As we did last quarter, we published a slide deck on our investor site, under Events and Presentations, with supplemental information to support today's press release. You might find it helpful to have this presentation in front of you as I walk through our results. Throughout this discussion, when we're comparing to last year's fourth quarter, the best way to normalize for the extra week is to multiply last year's results by 16. Net income for the 16-week fourth quarter came in at $2.354 billion or $5.29 per diluted share, up from $2.16 billion and $4.86 per diluted share in the 17-week fourth quarter last year. This year's results included a non-recurring net tax benefit of $63 million or $0.14 per diluted share, related to a transfer pricing settlement and true-ups of various tax reserves. Reported net income was up 9% year-over-year. Excluding this year's non-recurring tax benefit and normalized for the extra week last year, net income and earnings per diluted share were up 12.7% and 12.6% respectively. Net sales for the fourth quarter were $78.2 billion, an increase of 1% from $77.4 billion in the fourth quarter last year. Adjusting for the extra week last year, net sales would have been up 7.3%. The following comparable sales reflect comparable locations year-over-year and 16 comparable retail weeks. US comp sales were up 5.3% or 6.3% excluding gas deflation. Canada comp sales were up 5.5% or 7.9% excluding gas deflation and FX. And other international comp sales were up 5.7% or 9.3% adjusted. This all led to total company comp sales of plus 5.4% or plus 6.9% adjusted for gas deflation and FX. Finally, e-commerce comp sales were up 18.9% or 19.5% adjusted for FX. In terms of Q4 comp sales metrics, foreign currencies relative to the US dollar negatively impacted sales by approximately 0.9%, while gasoline price deflation negatively impacted sales by approximately 0.6%. Traffic or shopping frequency increased 6.4% worldwide and 5.6% in the US. Our average transaction, or ticket was negative 0.9% worldwide and negative 0.3% in the US. This includes the headwinds from gas deflation and FX. Adjusted for those items, ticket would have been positive 0.5% worldwide and positive 0.6% in the US. Moving down the income statement to membership fee income, we reported membership fee income of $1.512 billion, an increase of $3 million, or 0.2%, on one less week year-over-year. FX negatively impacted membership fee income by 0.9%. Excluding the impacts from the extra week last year and FX, normalized membership fee income was up 7.4%. In terms of renewal rates, at Q4 end, our US and Canada renewal rate was 92.9%, down one-tenth of a percent from Q3 end. This slight decrease related to an online membership promotion that we ran for a short period in fiscal year 2023, which resulted in over 200,000 new sign-ups. As those members entered the renewal rate calculation during Q4 fiscal year 2024, the lower renewal rates for that cohort, which is typical for digital promotions, had a negative impact on the overall US renewal rate. Outside of those sign ups, there were no meaningful changes in the US renewal rate. The worldwide rate came in at 90.5%, the same as Q3, with improvement internationally offsetting the slight negative in the US. We ended Q4 with 76.2 million paid household members, up 7.3% versus last year, and 136.8 million cardholders up 7% year-over-year. About half of new member signups in fiscal year 2024 were under 40 years of age. This percentage has been growing since COVID and has lowered the average age of our member over the last few years. At Q4 end, we have 35.4 million paid executive memberships, up 9.6% versus last year. Executive members now represent 46.5% of paid members and 73.5% of worldwide sales. Turning to gross margin. Our reported rate in the fourth quarter was higher year-over-year by 40 basis points, coming in at 11% compared to 10.6% last year and up 33 basis points, excluding gas deflation. Core was lower by 5 basis points and lower by 11 basis points without gas deflation. In terms of core margins on their own sales, our core-on-core margins were higher by 9 basis points. Ancillary and other businesses' gross margin was higher 44 basis points and higher 42 basis points, excluding gas deflation. This increase year-over-year was driven by gas and e-commerce. E-commerce benefited from strong sales growth, item mix, and fulfillment productivity. And gas margins benefited from some moderate tailwinds and lapping a slightly weaker quarter last year, but nothing as significant as the benefit in Q1 2024, as a result of the volatility from world events in that quarter. 2% rewards was higher by 4 basis points or 3 basis points without gas deflation, reflecting higher sales penetration from our executive members. And LIFO was a benefit of 5 basis points. We had an $8 million LIFO credit in Q4 this year compared to a $30 million charge in Q4 last year. Moving to SG&A. Our reported SG&A rate in the fourth quarter was higher year-over-year by 8 basis points, coming in at 9.04% compared to last year's 8.96%. SG&A was higher by 2 basis points adjusted for gas deflation. The operations component of SG&A was higher 4 basis points, but was flat excluding gas deflation. Higher wages went into effect for the last six weeks of the quarter in the US and Canada, which was a headwind for the quarter of approximately 4 basis points. Investing in our employees remains a key part of our strategy, and we will continue to focus on driving top-line sales and improving productivity to mitigate the incremental costs. Central was higher by 3 basis points and 2 basis points without gas deflation. Stock compensation was flat year-over-year, and pre-opening was higher 1 basis point but flat without gas deflation. Below the operating income line, interest expense was $49 million versus $56 million last year, reflecting $1 billion of debt paydown in the second week of Q4 this year. Interest income for the quarter was $138 million versus $201 million last year, primarily due to the $6.7 billion special dividend paid in January 2024. Interest income will continue to be a headwind in the first half of this year due to lower year-over-year cash balances and lower interest rates. FX and other was an $18 million loss this year versus a $37 million gain last year. This was primarily due to foreign exchange. In terms of income taxes, our tax rate in Q4 was 24.4%, compared to 27.1% in Q4 last year. As mentioned earlier, this year's rate benefited from $63 million of net tax discrete items. Adjusted for this benefit, the tax rate for the quarter would have been 26.4%. Turning now to some key items of note in the quarter. We opened 14 new warehouses in the fourth quarter, 10 in the US, 2 in Japan, and 1 each in Korea and China. Capital expenditure in Q4 was approximately $1.58 billion, bringing the total year spent to $4.71 billion. Taking a deeper look into core merchandising sales, once again, non-foods led the way with the highest comparable sales in Q4. Our buyers have done a fantastic job finding new and exciting items at great values. Golden jewelry, gift cards, toys and seasonal, home furnishings, tires, and housewares all were up double digits in the quarter. Health and beauty aids also performed well, as we have expanded and elevated that category with new high-end SKUs, both online and in warehouse, including assorted luxury fragrances at a 30% to 70% value compared to retail prices. Across the fresh departments, we saw high single digit growth, as our continued focus on value is resonating with our members. An example of this in the meat department is our Kirkland Signature boneless chicken tenderloins, where we lowered the price 13% and saw a 21% lift in pounds sold. In food and sundries, the introduction of more international food products, such as paneer cheese, Punjabi cookies, and fried tofu kimbap are resonating extremely well with our members. We're also delivering greater value by adding some new Kirkland Signature items, such as our KS Organic Golden Maple Syrup and KS aerosol whipped cream. Kirkland Signature offers significant member value compared to the national brands and continues to grow at a faster pace than our business as a whole. Our goal is always to be the first to lower prices where we see the opportunities to do so. And just a few examples this quarter include KS Standard Foil, reduced from $31.99 to $29.99; KS Macadamia Nuts, reduced from $18.99 to $13.99; KS Spanish Olive Oil, 3 liters, reduced from $38.99 to $34.99; and KS Baguette 2-Packs reduced from $5.99 to $4.99. Our commitment to sustainability and achieving lower emissions is also presenting opportunities to lower our costs. A great example of this is our KS laundry packs, which we recently converted from a rigid plastic tub to a pouch. This allowed us to reduce the plastic packaging by 80% and pass these cost savings onto the member, lowering the price by $1 from $19.99 to $18.99. We've also found success working with suppliers to localize production of bulky items, such as water, paper, and laundry detergents. By manufacturing these goods closer to the countries in which they're sold, both costs and emissions associated with the shipment of these goods are greatly reduced. This quarter, we introduced our new Japan-produced Kirkland Signature paper towels. In addition to the emissions benefits from no longer shipping millions of units of paper towels from the US to Asia, the reduced freight allowed us to lower the price by approximately 30%, or $8 per unit in that market. As production ramps up, we are in the process of transitioning our other Asian markets to locally produce SKUs. Shifting the production country of this one product will result in annual member savings of $30 million. Within ancillary businesses, pharmacy had the strongest sales percentage increase, driven by double-digit growth in script counts. Our optical department also performed well, as more members have taken advantage of the exceptional values in brand-name frames and sunglasses. On a like-for-like 16-week basis, gas sales were negative low single digits in the quarter as a result of the average price per gallon being 5% lower. This was partially offset by gallon growth of 3%. Inflation was once again effectively flat in the quarter across all core merchandise. Food and sundries and fresh foods were slightly inflationary, and this was offset by deflation in non-foods. In the supply chain, we are seeing good flow of products through Panama and Baltimore. The Red Sea is a remaining pain point and is causing some relatively minor shipping delays. Product availability has generally been good with a few exceptions. Egg supplies are still being negatively impacted by avian influenza and prime beef and a handful of vegetable SKUs have been tight. As Ron shared earlier, we are pleased with the momentum in our digital business and continue to make good progress with our technology priorities. Our app was downloaded 3.5 million times in the quarter, bringing total downloads to approximately 39 million, and we recently upgraded the native search function on our US mobile app, leading to a doubling of the click-through rate on search results. E-commerce traffic, conversion rates, and average order value were all up year-over-year, helping to drive another strong quarter of comparable sales growth. While continued strength in bullion was a meaningful tailwind to e-commerce comps, appliances, health and beauty aids, tires, toys, gift cards, hardware, housewares, home furnishings, optical, and pharmacy all grew double digits year-over-year. The rollout of buy online and pick up in warehouse for TVs in the US market was also completed in Q4. This allows same-day pickup of a new TV for members who prefer not to wait for delivery. While buy online pickup in warehouse isn't cost-effective for us on lower-priced items, for high-value items with high shipping costs like TVs, the freight savings more than offset the additional labor required in warehouses to fulfill those orders. We're now testing a similar program on laptops. Costco Next, our curated marketplace, while still small, continued to grow nicely in the quarter. We added 11 new vendors, bringing the total to 86, and adjusting for the extra week, gross sales grew nearly 40% year-over-year. A brief comment on the membership fee increase that went into effect on September 1. Due to deferred accounting, this will have minimal impact early in the year. The vast majority of the benefit will come in the back half of fiscal year 2025 and into fiscal year 2026. With that being said, our commitment to invest in our employees and members is continuous as evidenced by the July wage increase and lower prices such as the example shared on today's call. In closing, we are encouraged by our momentum exiting fiscal year 2024 and are excited about the growth opportunities ahead as we continue to execute our strategy of delivering exciting new items and greater value for members, innovating with Kirkland Signature and growing our warehouse footprint and digital capabilities globally. In terms of upcoming releases, we will announce our September sales results for the five weeks ending Sunday, October the 6th on Wednesday, October 9th after market close. That concludes our prepared remarks. We'll now open the line up for Q&A.

Questions. On the previous earnings call, there was a discussion about the possibility of greater SG&A leverage in the future as a lot of foundational investments have already been made shortly after Costco announced a membership fee increase and reinvestment into employee wages as well. While wage investments are clearly the right thing for the business and instrumental for Costco's culture and success, how should we reconcile this potential posture of driving more leverage but also adopting the same prior approach of putting upside back into wages.

Hi, good afternoon. Thank you for the question. As we consider our overall model for the company, our priority is on achieving a balance across the business. Over the years, Costco has successfully focused on investing in our members, lowering prices and providing value, as well as investing in our employees. We believe this approach will continue to be essential for driving our top-line sales growth. You are correct that during the quarter, and on multiple occasions this year, we made various investments in our employees. Back in September 2023, we announced an increase in the starting wage, and in March of this year, we announced wage increases for several managerial roles in our warehouses. Recently, we also announced a further wage increase for all our hourly employees in the warehouses and distribution network. We view these initiatives as crucial for supporting our top-line growth. As noted in the quarter, when adjusting SG&A for gas deflation and focusing on the operational side of the business, we were able to offset cost increases through enhanced productivity and sales leverage, which we have consistently achieved over time. Our goal is to continue this trend. Therefore, rather than providing specific guidance on a particular metric, we are focused on the long-term ability to make these investments while also enhancing leverage within our model to ensure sustainable top-line growth and profitable advancement. Ron, would you like to add anything?

No, I have to agree with you, Gary.

Got it. That's really helpful. And just as a quick follow-up, can you speak to the impact of the card readers at the different stores you've rolled out so far? Should we be modeling potentially a lift in member counts or growth in addition to the MFI bump from the fee increase as well?

This is Ron. The purpose of the card readers at the front door, this is a system we've been using for over two years now in Europe and especially in the UK and we've piloted here in the US for about six months. Several different benefits for it. It gives our operators real-time traffic counts throughout the day. So we're able to adjust front-end lines that we need to open and close lines based on the fluctuations of business. We can monitor our fresh foods a little better because we know what the traffic counts look like and so forth. And it has also taken the friction of membership verification away from the front-end registers and moved that to the front door, where we're able to look at people's membership status. We let them know if their renewal is due before they get to the front-end. So we've realized some very nice, healthy front-end improvements in productivity, and it's allowed our operators to manage the business much better throughout the day.

Thank you. Good evening. I hope you can hear me. Can you discuss the risk related to the emerging port strike? What percentage of the products pass through the affected ports? Could you provide details on which categories are more vulnerable than others? Additionally, to what degree have you attempted to bring in products early for the holidays to mitigate this risk?

Yes, this is Ron again. I'll address that question. We have been closely monitoring the port strike for some time and were aware of its timing. Regarding the impact on our business, we primarily import nonfood items, along with some limited food and sundries, but nonfoods make up only about 25% of our total business, with just a portion of that being imported. There are also domestic goods included in nonfoods that are not imported. We have implemented several measures in response to this situation. We have contingency plans, cleared the ports, and pre-shipped goods. We have explored various options to bring in holiday merchandise ahead of schedule and considered alternate plans for moving goods through different ports across the country if necessary. The potential for disruption will depend on the duration and severity of the situation, which we cannot fully assess until we have more concrete information. Our team is actively monitoring the situation, and we have taken as many proactive steps as possible to prepare for this.

And then just as a quick follow-up. As you think about the risk around ocean freight rates, is your expectation that freight rates are maybe elevated right now because of all this and perhaps come down into next year as we think about contract renewal periods? Thanks.

I'm not good at predicting the future, but I can tell you that from what we're seeing, a big chunk of our freight comes in under contract. So we've been insulated from that. The spot market has peaked in the last quarter. We see that coming off now. If a port disruption could happen or something else could happen in the Red Sea, could that go up? Absolutely, it could go up. But from what we're seeing now, the spot market did increase and is coming off at this point. And again, our team did a great job by insulating us with good solid contracts for this year.

Thanks so much.

Thanks. Good afternoon, Gary and Ron, just to go back to the membership card scanners. Can you just speak to where you are on the rollout of that across the US? And any positive reactions you've seen so far? Our checks have shown that in some locations you guys are actually seeing a double-digit increase in new sign-ups.

Yes. We have about 350 US warehouses rolled out at this point and through the process, reaction has been very positive. Myself, all our operators, and we really rely on feedback of our warehouse managers and what's been done. And our head operator, Russ Miller, and I have met with great positive reactions both from the members and from the operators as well. We have seen some lift in member sign-ups from that. We have also seen a lift in renewals because before people get to the front end, now they're aware that my renewal is going to be due when I get to the registers, so members are very appreciative about that. They know that and they get up to the front, and they're not shocked by that process as well. So improved productivity, improved interaction. And as we know, as our volumes grow, we're looking for everything we can find to use technology to help get our members through the front ends in a good, smooth manner.

That's very helpful. And then my follow-up, just, Gary, on the other business line and within the margin build up 42 basis points ex-gas. Can you add a little bit of color on the sequential change? How much came from e-comm or how much came from the improvement in gas margins? Thank you.

Certainly. We highlighted those two factors because they were the most significant influences on our results. I regard them as fairly similar in their impact. E-commerce has shown a positive trend over the last few quarters, and we are very pleased with the momentum we've experienced in this area. The overall sales growth has been excellent, providing a great foundation. Additionally, the team has effectively enhanced fulfillment, efficiency, and product sell-through, along with better inventory management, which has also improved the mix. As I noted in the prepared remarks, we’ve observed strong growth and a balanced performance across e-commerce. This trend has been consistently positive over the past few quarters. Regarding gas, there wasn't anything particularly unusual this quarter. We experienced a slight tailwind in margin, and as I mentioned earlier, we are comparing it to a period of lower margins in the same quarter of 2023.

Hi, everyone. This is Brandon Cheatham on for Paul. Thank you Gary and Ron. I want to talk about new store growth. You mentioned 26 net in 2025, with I guess, an increasing focus on international. Anything you can share on why the US would step down from 24 levels? Should we think about international being a more important growth vertical for you? And then on the US side, how many of those are new markets versus infill where you're trying to alleviate traffic congestion from a nearby store?

On international and domestic new openings, the process relies on timing within the system. In larger markets, it may take us three years to develop a building, while in some markets, the process can be quicker. We don't have a specific plan; we prioritize buildings and agree that we will move forward. Then, it's a matter of following through with the necessary infrastructure and utilities. Regarding the outlook for international versus domestic growth, it is relatively balanced and largely influenced by timing. We anticipate 12 new openings outside the US next year, and in certain countries, it may take longer to open a building. The focus remains on the rhythm of these openings. We are optimistic about balanced growth and see many opportunities for infills across North America in the coming years. While we don't have anything confirmed for new regions next year, we are considering expanding into about 5 to 6 new markets.

Got it. Okay. Thanks. And just one follow-up on the membership fee increase. I know you all typically reinvest in the member experience and price. And I think we already talked about wages. How should we think about the timing of that? Because you realize the MFI fee increase over a longer period? Is there any near-term pressure that might flow through the P&L as you do focus on delivering that value to the member after you've increased that fee?

Sure. Yes, thanks for the question. We mentioned a couple of these things in the prepared comments too, but we certainly think about as we increase the membership fee, our goal is always to find ways to deliver more value for the member. And we think about that pretty holistically. It can be lowering prices. It can be launching new Kirkland Signature products. It's also investing in ways that we can improve member experience and some of the things that Ron mentioned earlier. And we believe a critical part of delivering a better experience for our members is also in employee wages. So we very much look at it holistically and how do we make sure we feel confident that we are delivering more value to our members over time. And some of those things that you heard in Q4, we've already started that journey with some of the wage increases and some of the ways in which we've been able to lower prices and deliver more value through new Kirkland Signature products in the quarter. To answer maybe the broader question that you mentioned, as you know, we generally don't provide guidance as part of our updates for the results of the company. That being said, I would say, overall we feel very good about our momentum ending fiscal year '24. And as we head into the new fiscal year, we feel very good about the opportunity ahead of us. As always, we've set ourselves high internal expectations for how we expect to grow the top-line and to do so profitably. And we'll be doing that by continuing to invest in member value and employees while driving efficiencies and leverage. And we still see many opportunities to find ways to improve gross margin and SG&A in terms of opportunities to fund those investments. We wouldn't normally comment on cadence for the year ahead either. But as I mentioned in my prepared remarks, there are a few unusual items this year with the deferred accounting for the membership fee increase, as you mentioned. And that will generally sort of really the most part of that will come in, in the second half of 2025 and the first half of 2026. And then there were also a couple of specific factors to Q1, namely the interest income, where we'll be cycling higher cash balances and higher interest rates from last year and gas profit, while it is really been pretty stable over the years, there was certainly some volatility due to world events in Q1 last year. So the one thing I think I would say is that as you think about our cadence of our earnings growth across '25, it's likely to be less linear than you would probably typically expect.

And Gary, I wanted to start by asking about the core-on-core increase of 9 basis points. Can you provide details on the performance by product category for fresh foods, sundries, and non-food?

Yes. Food and sundries were slightly negative. Fresh was slightly positive and non-food was the strongest of the three, which was really, again I think, from the mix perspective and the strong sell-through in the year, but that was sort of the breakout of it, John.

Could you elaborate on Kirkland Signature? You mentioned some price reductions that were all related to Kirkland Signature. Can you discuss those price decreases in comparison to brand-name products? What is the current penetration of Kirkland Signature? Is that business becoming significantly more profitable due to scale, or are you aiming to maintain a consistent margin on Kirkland Signature?

I will address that. We are observing an increase in penetration, currently in the high 20s, and it continues to rise as our overall penetration grows. We're not only making investments in pricing for Kirkland Signature, but with Claudine and her team, they are committed to setting an example for our suppliers, demonstrating the benefits of investing in pricing and driving unit volume. We are actively pursuing this while receiving strong support from our suppliers and partners worldwide, who are eager to increase their business and leverage Costco as their partner. We have exciting new items planned for Kirkland Signature this coming year, which will enhance our value proposition for members and strengthen member loyalty, as Kirkland Signature is a key draw to our store. We anticipate positive developments, continued growth in penetration, and gradual improvements in value and benefits for our members over time. Gary, if you would...

Yes, to add to your comment, John, regarding the margin opportunity, we remain very disciplined and have a cap on the margin we anticipate making on Kirkland Signature products. As that product mix grows, it creates an overall positive impact on our margins. I've mentioned a few examples in our prepared comments. We're also identifying excellent opportunities by working globally with our merchandising team to buy more efficiently and utilize in-country production. Combining all these efforts generates the potential for us to provide more value to our members while adhering to our margin commitments. This strategy not only enhances member investment but also supports our long-term growth.

Hi, guys. Scot Ciccarelli. Another question on the ID scanning. Any feel for how often nonmembers were shopping at Costco? And then secondly, just given some of the price reductions that you highlighted earlier, can you comment on your broader inflation and deflation expectations for fiscal '25? Thanks.

I can't provide a specific number regarding the scanning. We have been exclusive to members since the company started, and while customers do come in with shop cards and similar items, I can't specify what percentage of visitors are non-members. Regarding inflation, I think Gary would like to address that topic.

Yes, I'd be glad to provide some insights. While I can’t accurately predict the overall market, I can share what we’ve observed. For the quarter, inflation has been largely flat, with minimal inflation noted in fresh produce, which is the primary contributor. Overall, the inflation rate is very low, and we’re not witnessing significant inflationary pressure on prices or our business. Food showed slight inflation as well, but the differences among various categories are quite narrow, mostly fluctuating between a positive and negative 2%. On the commodity front, there’s a mixed picture: prices for corn, flour, and sugar are declining, leading to a deflationary trend in the bakery category. Conversely, we've seen rising prices for items like butter, cocoa, eggs, and cheese. Currently, there’s nothing suggesting that our situation will change drastically, and we remain focused on reducing our costs to keep prices stable for our members. Overall, we’re not experiencing anything dramatically different from what we've seen this past quarter, but we remain aware that market fluctuations can occur unexpectedly.

Helpful. Thanks a lot guys.

This is indiscernible on for Michael Lasser. Thanks very much for taking our questions. While it's early, what has been the customer response to the MFI increase? And do you expect to see a rise in customer attrition? Why or why not?

Yes. Thanks for the question. As you are familiar with the membership fee increase, we were very deliberate about the timing. In fact, we are really delayed by 2 years from when we've traditionally increased the fee every 5 years, and that was initially because of what we thought our members were experiencing with COVID and then we saw higher inflation. So we were very deliberate in delaying the increase until we felt that we started to see inflation dissipate and our members were spending more in non-food categories, seeing that they were coming through the inflationary period. From a member reaction perspective, I'd say, we haven't really heard a significant member reaction. Our membership renewal rates. There's no real change in trend, as I mentioned in some of my prepared remarks. I think the fact that we've been able to stave off inflation on things like the hot dog pricing at $1.50 and the rotisserie chicken at $4.99. And generally, demonstrating the way that we're lowering prices for members wherever we can. I think there's been a recognition that in the context of what's happened more broadly over the last seven years that we stayed true to our principles of really trying to help the member and deliver the value. And as we mentioned earlier on the call, we’ve been making investments, whether it be in wages for our employees in lowering costs to show our members that we want to make sure that the increase is delivering value to them.

Good evening. Thanks for taking my question. So just on the consumer front, just curious how you guys are feeling about the health of your consumer? And then any changes in consumer behavior of note during the quarter?

Sure. Thanks, Rupesh. I think we see the consumer or member through a course through our lens. And what I would say is that it is very clear that quality and value have never been more important. That's something that has very clearly coming through in our insights and how we're seeing our members shop. I think the encouraging thing for us is, as you know, as you look at our trends in the year-to-date, we have seen that as inflation has dissipated, our members have started to spend more on non-food items, which is really encouraging in our mind. And what we're really pleased about is the widespread nature of that across the different categories that we've seen in non-foods. I would say that on some categories like appliances and electronics, definitely, they've become more promotional over time. That would be a factor, I think, that members are looking for more deals. And for us, of course, we are always going to be there on price, but we also include within what we're offering to our members, the installation and the removal of the old product, if that's necessary in the delivery. So we kind of trend to try and differentiate there on the overall experience as well as being a great everyday low value. I think they're the kind of key trends in non-foods. On the food side of things, we've definitely seen some signals that would suggest that members and consumers in general are maybe shifting a little bit of spend from food away from home to food at home. Under the food and the sundry side of our business, alcohol would still be relatively soft. But as I mentioned in my prepared remarks, we're seeing really strong growth in our ethnic food categories and also in Kirkland Signature products, particularly in the new ones that we've been introducing. And then on the fresh side of things, really strong growth across meat, produce, and bakery. I would say we've certainly seen a continued acceleration in some of those lower-cost protein items like poultry, cheaper cuts of beef like ground beef, and pork. So there is definitely some signs that the consumer is being very choiceful in how they are spending their dollars. But thankfully, with the quality and value that we're offering is definitely resonating with our members.

Great. I have one follow-up question. There is a significant focus on alternative revenue streams, including media. I'm curious about the latest developments at Costco. Is there a more aggressive strategy in place for expanding that area?

Yes. I think we still see it as a significant opportunity. It’s definitely a journey for us. It’s the foundations of that journey are getting our technology infrastructure in a position where we feel really good about the capabilities that will allow us to deliver to the member in terms of the offers that we can give to them and the level of targeting and personalized capabilities that creates. We’ve already started to build out those plans and starting to identify how we can capture low-hanging fruit where there are opportunities. But we would see it as a significant opportunity over the long term to drive new revenue. We will approach this probably a little bit differently than many others – we’ll be reinvesting the vast majority of those dollars as we always do to drive top line growth. And we think that will be a competitive advantage with our CPG partners because it will show them that every dollar they’re spending is really intended to drive overall growth for the company. That being said, I do think it will help also with e-commerce business is typically less profitable, on this case, a way to offset some of those costs in delivery and fulfillment as well.

Great. Thank you.

Hi, good evening, Gary and Ron. Just wanted to ask about e-commerce, obviously, continuing strength there. Just can you just give us a broad update on the penetration, the profitability, and how that is impacting margins at this growth level? And just an update on what the penetration would be if you included Instacart, like others do in that penetration?

Yes, thank you, Kelly. We are very pleased with the momentum in our digital segment. We recently analyzed our data over the past decade and found that our e-commerce compounded annual growth rate exceeds 20%, indicating significant growth for us. Members are actively exploring more ways to access new deals and value. Generally, our e-commerce penetration is in the high single-digit range according to our current reporting. However, this figure does not account for digitally initiated sales transactions such as those from Instacart and Uber, which involve grocery and sundry purchases. Including those sales, along with gas in our overall sales total, would push our penetration into double digits when factoring in all these elements.

Okay. Can you share any insights on profitability and the impact of e-commerce on it?

Yes. I would still say it's marginally, it's lower than the traditional shopping in the warehouse, and that's obviously intuitively makes sense given that we're doing more of the picking and shopping for the member. As I mentioned in the prepared remarks that we have seen some good improvements as we've grown our sales numbers, that's created some leverage in the model. We’re improving the efficiency of our fulfillment costs. So it is continuing on an improving trend over time because of the sales growth and the leverage that’s creating, but also some of the improvements the team are making in the business to drive more efficiency as well.

Great. Thanks. Two questions. One, can you talk about competitive pricing, particularly in grocery. There's been a lot of talk about some grocery chains investing in price, et cetera. What are you seeing how your price gaps? And then I'll have a follow-up after that. Thanks.

Yes, thanks for the question. I think the key thing for us is we're our own biggest competitor. As you heard us mention earlier, we want to be the first to lower prices and the last to raise prices. And at every one of our regular budget meetings, we're talking about how can we find ways to do that. And the majority of our price investments are proactive, not that we're reacting. But of course, we're always watching and staying very close to competition. I would say that the promotional environment has been increasing. That would be with us, as Ron mentioned earlier, that our CPG partners are investing to find ways to drive units, and that would certainly be the case across some of the competition as well. I mentioned earlier, appliances and consumer electronics would be an area where we've seen more of that activity. But I think if you took it all on balance, we wouldn't say that we're seeing the activity sort of outside of normal in the food space. And we feel very good about our position relative to the market and continue to be proactive in finding ways to provide the best quality, best value for our members.

Excellent. That makes sense. Follow-up when gas prices fall; I think gas prices are down now 15% to 16% year-over-year, broadly speaking, at least in the latest data. Does that hurt your traffic at all? Because I think you mentioned that 50% of people come to get gas and then buy something. It seems that the growth in gallons did decelerate a little bit this quarter. Is that something you monitor or have any concerns about?

Yes. This is Ron. I don't see it as a concern. Gallons were up 3%, which was a little bit softer than the prior quarter. So when you do hit those peaks in prices, we will see a greater attraction to the Costco gas stations. But our balance of transactions, dual transactions that we have looks very positive. And so we're not seeing traffic dropping off at all in the warehouse based on the slightly softer gallon growth that we're seeing out in the gas stations.

Excellent. Thank you.

Hi, thanks a lot. And good to talk to you again. So my question is, when you look at your pre-tax margin, I know you don't manage to that in any way, shape, or form. But it obviously has been creeping up. So when you look at the actual delta on a 10 basis point increase in that margin, it's not immaterial to get to earnings and/or valuation, obviously. So wondering how you think about that.

Hi, Karen, I think the way we think about it is really back to some of the comments that we were referring to earlier is that our goal is always to drive top line. That's the top priority for the company, and we're focused on investing and delivering value for the member and delivering improved investments in our employees as well to make sure that we're an employer of choice. I appreciate the comment because I think, we have been successful over the years in doing that because there are ways for us to continue to lower our costs in our gross margin part of our business and drive more value for the member. Some of the things that we've been focused on, like global buying and the Kirkland Signature growth that we've seen, e-commerce growth, as we mentioned earlier. And there will be opportunities for things like Retail Media in the future. So I think there are a number of ways in gross margin and also a number of ways in SG&A where we can continue to be more efficient to drive that investment. Our focus is always to drive, as I mentioned, the top line, and if that, over time, allows us to continue to grow the margins, then obviously, that's something that we're pleased with, and it's a good outcome for our investors. But I wouldn't say, as you mentioned, it's a targeted outcome. It's really about making sure that we're driving that top line growth and the history, as you've mentioned, would suggest that when we've done that well as we continue to look for opportunities, it has allowed us to expand margin slightly as well.

I agree with Gary. I would add to that, there are several levers that our operators and our buyers have to improve margin. And our buyers speak often about the fact that we can lower prices while improving margin as well. And that comes with the efficiencies that we're seeing, comes with very good sell-throughs that we're realizing in the goods that we're buying, newness and bringing in new items to the market that could have a little bit better margins. And our operating shrinkage has been improving. And we saw a nice solid year this year and picked up some margin on improving shrink results in the business as well. So those are some different levers that will augment lowering prices and continue to improve margins.

But is it fair to think that 4%-ish maybe going up from there is realistic?

Yes, Karen, I believe we won’t discuss specific guidance regarding our future expectations. As Ron mentioned, we don’t view this as a zero-sum game. We see opportunities to keep investing in our members and employees, and we believe that managing the business effectively can lead to improved profitability over time. However, I prefer not to offer any specific guidance on that matter.

Great. Thank you.

Thanks, Karen.

Hi, thanks. I want to revisit the topics of profitability and gross margin, especially regarding gasoline and its positive impact. Are we currently at a profit of $0.20 per gallon, or what should we consider as a normalized range for the future?

I appreciate your question, Greg. Generally, we don't disclose specific details about our profitability across various business segments. However, regarding gas, I would consider it to be relatively stable overall. While there can be short-term fluctuations due to market volatility, this quarter's results seem to be part of a broader improvement in other business areas. I wouldn’t view it as a significant shift in the gas segment or a reason to provide more detailed insights, as we anticipate the gas side of our business to remain stable. This quarter was marked by some unusual volatility due to global events, but principally, I don't see gas undergoing major changes that would alter our outlook or approach. We do share information when significant unusual occurrences arise, but I don't see this as indicative of a new direction.

Got it. And given the recent wage increase, could you help level set us, so maybe on what your average wages are now in the US or globally? I think in the past, the number was something like $26 an hour?

No. Currently, the average wage is just north of $30 an hour.

Just north of 30%. Great. And that's for the US?

Yes. US and Canada equivalent.

So my last question was just given the nonfood, the success there. You called out the gold bullion Boeing again. I'm just curious, are there any plans to maybe bring Kirkland Signature into the gold bullion market?

No plans at this time.

All right. Thanks a lot and good luck guys.

Thank you.

Thank you, Krista. Thank you all for joining the call today, and we look forward to talking to you at the next quarterly earnings call. That will conclude our call. Thank you.