Costco Wholesale Q1 2024 Earnings Call Transcript

Quartr
Provided by Quartr
December 14, 2023

There are 17 speakers on the call.

Operator

Good day, everyone, and welcome to the Costco Wholesale Corporation Fiscal First Quarter 20 24 Earnings Call. Today's call is being recorded and all lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. I would now like to turn the call over to Richard Galanti, Chief Financial Officer. Please go ahead, sir.

Speaker 1

Any Thank you, Lisa, and good afternoon to everyone. I will start by stating that these discussions will include forward looking statements within the meaning of the Private Securities Litigation any further discussion. These statements involve risks and uncertainties that may cause actual events, results and or performance to differ materially any excuse me, 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 any further discussion, 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, any further discussion.

Speaker 1

The company does not undertake to update these statements except as required by law. Comparable sales and comparable sales any further questions. 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. Any further questions. In today's release, we reported operating results for the Q1 of fiscal 2024, the 12 weeks ended November 26.

Speaker 1

Any further questions. Reported net income for the 12 week Q1 came in at $1,589,000,000 or $3.58 per share, any additional information from the call. Up from $1,364,000,000 or $3.07 per share in the 12 week Q1 last year. This year's results included a tax benefit of $44,000,000 any impact or $0.10 a share related to stock based compensation. Last year's results included a tax benefit of $53,000,000 or $0.12 per share any impact related to stock based compensation and also included a charge of $93,000,000 pretax or $0.15 per share, any further delay in the quarter.

Speaker 1

Net sales for the Q1 were $56,720,000,000 any a 6.1% increase over last year's Q1 $53,440,000,000 any further questions. Net sales were benefited by approximately 1.5% to 1% in the U. S. And worldwide from the shift to the fiscal calendar as a result of any The 53rd week in fiscal 2023. The following comparable sales reflect comparable locations year over year and comparable retail weeks.

Speaker 1

Any In the U. S, reported 2% comp sales, ex gas deflation and FX, 2.6%. Any Canada reported 6.4 percent, ex gas and FX 8.2 percent. Other International reported 11.2 any Ex gas and FX 7.1 percent. For total company, a reported 3.8% and a 3.9% excluding those two items.

Speaker 1

Any e commerce, which was reported on us as a 6.3, came in as a 6.1 excluding FX. Any Overall for the 1st fiscal quarter, fresh foods were relatively strong once again with food and sundries right behind. Any further discussion. Non food showed improvement over the September, October, November timeframe as did e com sales. In terms of Q1 comp sales metrics, any Traffic or shopping frequency increased 4.7% worldwide and 3.6% in the United States.

Speaker 1

Any Our average transaction was down 0.9% worldwide and down 1.6% in the U. S. Any further questions. Foreign currencies relative to the U. S.

Speaker 1

Dollar positively impacted sales by approximately 0.4% of a percent, while gasoline price deflation negatively impacted sales by approximately any I've gotten more than a few calls in the past few weeks as to how many pies we sold in the U. S. Leading up to the Thanksgiving holiday. Any In the U. S, in the 3 days leading up to Thanksgiving, we sold 2,900,000 of our famous pumpkin pies along with 1,300,000 apple and pecan pies, So over 4,000,000 pies in total during the 3 days.

Speaker 1

Back to the income statement here. And next on the income statement is membership fee income. Any In the quarter, we reported $1,082,000,000 or 1.91 percent. Any That's an $82,000,000 or 8.2 percent increase and a 4 basis point increase over the Q1 last year. In terms of renewal rates, any At Q1 end, our U.

Speaker 1

S. And Canada rural rates stood at 92.8%, while the worldwide rate came in at 90.5%. Any changes. Both of these rates were up 1 10th of 1% from those numbers 12 weeks earlier at the end of the 4th quarter. Membership growth continues.

Speaker 1

We ended Q1 with 72,000,000 paid household members, up 7.6% any changes in the quarter versus last year and 129,500,000 cardholders up 7.1% with consistent growth throughout the quarters. Any At Q1 end, we had 33,200,000 paid executive members, an increase of 939,000 during the 12 weeks since Q4 end. Any further questions. Executive members now represent a little over 46% of our paid members and a little over 73% of worldwide sales. Moving down the income statement next is our gross margin.

Speaker 1

Our reported gross margin in the 4th quarter was higher year over year by 43 basis points, any Excuse me, coming in at 11.04 percent, up from Q1 of last year at 10.61%. That 43 basis point reported number ex any Gas deflation would be plus 36 basis points. As I normally do here, we write down 2 columns and any issues. 6 line items. The first column is reported in the Q1.

Speaker 1

The second column is margins excluding gas deflation. It's the year over year change in the Q1. Any Our core merchandise, plus 3 basis points reported, minus 3 basis points ex deflation any ancillary and other businesses, plus 24% reported and plus 22% ex deflation gas deflation, 2% reward any lower year over year minus 4 basis points reported and minus 3x gas deflation LIFO plus 3 and plus 3 any other plus 17% and plus 17%, for a total again reported year over year up 43 basis points and ex gas deflation up 36 basis points. Any Starting with the core, again, it was a total company, it was plus 3% and minus 3% reported in ex gas deflation. Any In terms of core margin on their own sales, our core on core margins were up by 5 basis points year over year.

Speaker 1

Any Ancillary and other business gross margin again higher by 24 and higher by 22x gas deflation. This increase was driven largely by gas and ecom. Any Our 2% reward, higher by 4 and higher by 3x deflation, reflecting higher sales penetration coming from our executive members. Any LIFO plus 3 basis points. We had a $15,000,000 LIFO credit in the Q1 of this year.

Speaker 1

This compared to a very small $500,000 LIFO any charge in Q1 a year ago. And then the other line item that 17 basis points to the positive, as was mentioned earlier, any Last year in Q1, there was a 70 basis point impact from a $93,000,000 pretax charge primarily related primarily for the downsizing of our charter shipping activities. Any Moving on to SG and A. We reported SG and A of 9.45%, higher by 25 basis points than last year's 9.20%. Again, in Q1, we'll write down the 2 columns reported any And without gas deflation, operations, minus 18 and minus 14 basis points, minus being meaning it's higher year over year.

Speaker 1

Any central minus 2 and minus 1 stock compensation minus 3 and minus 2 pre opening expense minus 2 and minus 2. Again, for a total reported margin higher at minus 25 year over year at I'm sorry, SG and A, not margin, 25 and without gas deflation, higher by 19 basis points. Any The quarter, again, was higher by 2018 and higher by 14 excluding the impact from gas. This included 12 weeks of this past March's extra top of scale increase in our wages, any which represents an estimated 2 basis point hit. And as of September 18, we raised the starting wage in the U.

Speaker 1

S. And Canada. Any that estimated impact from those new wages to be roughly 2 basis points as well. Again, Central, nothing much to say other than it's one basis higher any Including gas deflation, again with stock comps to minus 2x gas deflation and pre opening. We did have a couple of more openings this year in the quarter than we did last year any changes in the quarter.

Speaker 1

Below the operating income line, interest expense was $38,000,000 this year, any $4,000,000 higher than last year's $34,000,000 figure. Interest income and other for the quarter was higher by $107,000,000 any coming in at $160,000,000 this year versus $53,000,000 last year. This was driven largely by the increase in interest income about $100,000,000 of that 107 any impact due to higher interest rates as well as higher cash balances. The small additional impact was a favorable FX year over year. Any In terms of income taxes, our tax rate in the Q1 was 24.5%.

Speaker 1

This compares to any 23.0 percent a year ago or 1.5 percentage points higher this year than last year. Any The increase in our rate as of Q1 in Q1 is primarily attributable to lower benefit from the stock based compensation from a year ago. Any Overall reported net income was up 16.5% year over year in the quarter. A few other items of note. Any In terms of warehouse expansion in the Q1, we opened 10 locations, including 1 relo, so a net of 9 increases.

Speaker 1

Any those 9 included 8 in the U. S. And 1 in Canada. For the full year fiscal 'twenty four, we estimate opening any We're planning to open 33 locations including 2 relos. So for a net increase of 31 new warehouses any That would be up from 23 that we opened in fiscal 2023.

Speaker 1

For Q2 fiscal 2024, We planned 4 new locations, including our 6 building in China early in the calendar year. Regarding capital expenditures, any further questions. The first quarter capital expenditure spend was approximately $1,040,000,000 We estimate that fiscal 2024 CapEx will be in the $4,400,000,000 to $4,600,000,000 range. Any That's up from $4,300,000,000 we had in fiscal 2023, reflecting the continued increase in the number of the expansion that we're doing. Any In terms of e commerce business, e com sales in Q1 ex FX increased 6.1%.

Speaker 1

Any further questions. The first quarterly year over year increase in 5 fiscal quarters and trended well during the three reporting periods of September, October, November. Any Ecom showed strength in several areas. In food, things like e gift cards, pet items, snack items were up in the mid teens. Any Appliances were up year over year in the mid-20s.

Speaker 1

TVs was actually in the high singles any despite the challenges with other aspects of consumer electronics like computers and tires were up in the low teens. So overall, a pretty good showing there. Any As well, COSCO Logistics enjoyed record breaking deliveries. In the Q1 of fiscal 'twenty four, we completed over 800,000 deliveries, any which were up 17% versus the comparable quarter last year. And some fun wow items in the quarter in e commerce.

Speaker 1

Any You've probably read about the fact that we're selling 1 ounce gold bars. We sold over $100,000,000 of gold during the quarter. Any We sold a Babe Ruth Autographed Index Card for $20,000 And in addition to e gift cards on everything from restaurants to golf to airlines, any We just in the last couple of weeks launched a Disney e gift card valued at $2.50 for $224.99 any And for you last minute shoppers out there, there's a Mickey Mantle autographed 1951 rookie card in nearly perfect condition and it's on any Sale online for $250,000 Next, good progress continues to be made with our e com mobile and digital efforts. Any No big enhancements and changes to the site leading up to the holidays, mostly holiday prep. We did have 100% site availability during Cyber Week any issues.

Speaker 1

And sales for the 5 Cyber Days, Thanksgiving, Black Friday, Saturday, Sunday and Cyber Monday were up year over year in the mid teens. Any Our app downloads during the quarter were $2,750,000 so total app downloads are now stand at $30,500,000 or a 10% increase during the quarter any And that's after being over 40% increase in all of fiscal 2023 versus the prior year. Our site traffic approaching a 500,000,000 any And just under 10% increase and the average order value being up about 2.5%. So continue to make progress there. Any Next, a couple of comments regarding inflation.

Speaker 1

Most recently in the last Q4 discussion, any We had estimated that year over year inflation was in the 1% to 2% range. Our estimate for the quarter just ended that inflation was in the 0% to 1% range. Any Bigger deflation in some big and bulky items like furniture sets due to lower freight costs year over year as well as on things like domestics, bulky any lower priced items. Again, the freight cost is significant. Some deflationary items were as much as 20% to 30% any and again mostly freight related.

Speaker 1

TVs, the average sale prices have been lower, while units have been higher. And in talking to the buyers overall, any Our inventories and our SKU counts are in good shape across all channels. And so far, we've had a good seasonal sell through during the quarter. Any Lastly, as you saw in this afternoon's press release, we declared a $15 per share special cash dividend. This is our 5th special dividend in 11 years.

Speaker 1

The total payout will be about just under $6,700,000,000

Speaker 2

any and will

Speaker 1

be funded using existing cash and not accompanied by any issuance of debt. The special cash dividend will be paid on January 12 to shareholders of record on December 28. Finally, in terms of upcoming releases, we will announce our December sales results for the 5 weeks ending Sunday, any further discussion. With that, I will turn it back for Q and A to Lisa and be happy to answer any questions.

Operator

We'll take our first question from Michael Lasser with UBS.

Speaker 3

Any questions. Good evening. Thank you so much for taking my question. Richard, you had indicated over the last year and a half or so that any Costco had been raising prices faster than it had throughout its history. So now with prices coming down, any What is going to be the posture on passing along those savings?

Speaker 3

You already noted that inflation is flat to up 1%. Any Do you expect deflation, especially on the food side, as you get through the

Speaker 4

next couple of quarters?

Speaker 1

Any Well, you're talking to buyers, we've seen those even during the quarter, we saw the trend towards that 0 versus the one. Any But at the end of the day, we don't the buyers are looking out 3 to 6 months. They have on the fresh food side, commodities wise, they haven't seen a lot. There are a few things that are up and a few things are down, but no giant trend either way. Look, as you know us for a long time, we want to be the 1st to lower prices.

Speaker 1

We're out there pressing our vendors as we see different commodity components come down, certainly on the non food side as we saw shipping costs come down, things like that. And so any Probably a little more than less, but we'll have to wait and see. We don't know.

Speaker 3

And my follow-up is another any point that you've made for a long time is that Costco has been a drag off the profitability of the broader retail sector. Any If you compare Costco's operating margin, over the last 12 months versus where it was prior to pandemic, any It's 300 to 400 basis points higher. And yet across retail, there are signs that profitability is coming down. So now any What would stand in the way of Costco either maintaining this existing rate of operating profit margin any further growing it from here. Is it just simply going to be a function of your ability to drive further sales growth in the

Speaker 5

any Consistently

Speaker 3

mid single digit range or better?

Speaker 1

Sure. Well, happily, any I'm able to say that that's you get to figure that one out. At the end of the day, we're as you've known for a long time, we're a top line company. We want to drive sales. Any Certainly, as there's been deflation in certain products, we've seen units go up.

Speaker 1

I'm looking at one example here, just in the last month, any $100 plus 1,000,000 of KSNET items where sales were flat to down a couple percent, any While units were up in the mid teens. That takes a little more labor to do, but at the end of the day, that's what we want to do. We want to drive people and frequency. And I think as long as we see renewal rates continue to do what they do, as long as we see new sign ups continue to do what they do any And hopefully continue to get people to do convert to executive as well and constantly driving the best value out there, we'll be in good stead. And any So far, we've been able to do that and I think we'll continue to be able to do that.

Speaker 3

Thank you very much and have a good holiday.

Speaker 1

You too.

Operator

Any. We'll take our next question from Simeon Gutman with Morgan Stanley.

Speaker 6

Hi, there. This is Jackie Sussman on for Simeon. Thank you so much for taking our question. The core on core margin was up modestly this quarter and it seems like it moderated sequentially. Any Looking forward to the balance of the year, it seems like the comparison gets a bit tougher.

Speaker 6

I guess how should we think about your core on core margin? Could it stay expanding and positive for the rest of the year? Any color on that would be helpful. Thank you so much.

Speaker 1

There's so many different moving parts to it. Any As you've heard me say and I say in the last several years, we want to drive top line first. Any We're also pragmatic. We recognize we're a for profit company and we'll continue to work hard to do both. I wouldn't read much into any Any number going up a little or down a little frankly, it fluctuates and there's lots of different components to it.

Speaker 6

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

Speaker 1

They were a little better than we were expecting, but we were ready for

Speaker 6

it. Thanks so much.

Operator

Any We'll take our next question from Chuck Grom with Gordon Haskett.

Speaker 7

Hey, how's it going, Richard? Good afternoon. Any I wanted to just dive into the core margins a little bit more and see if you could flush out some of the category color. If you said it, I missed it, but food,

Speaker 1

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

Speaker 7

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

Speaker 1

Any I think, well, first of all, part of just ancillary in general is a sales penetration issue without going into it any The fact that it showed more sometimes when you look back over the quarters, they go any actions, the core on core and then the other businesses. And so given that you had higher sales penetration any In both in e comm that helped you. In e comm we had a lot of strength. We're doing a lot of big and bulky and we're driving that business.

Speaker 7

Any Okay, great. And then just bigger picture, I just have a question on the change at the CEO seat with Ron starting in a few weeks and any Replacing Craig, who replaced Jim, you've had the fortunate opportunity to work with all 3. And I guess I'm curious what change, if any, you think we could see any

Speaker 1

Yes. Well, I always joke I'm up for review, so I'm going to say nice things. But any No. At the end of the day, the reality is we're staying the course. I remember questions were asked 12 any plus years ago when Craig became President and 2 years later Jim retired and Craig became CEO and President.

Speaker 1

And what's going to who can replace Jim? And I think the same questions asked today, who can replace Greg and it really is a seamless transition. You have somebody retiring that's been here 40 ish years any And it's been in the business both on operations and merchandising for a successful number of years in both. And you've got any Ron who's coming in who started when he was 17 at a Price Club in Arizona and he already has his 40 year gold patch. Any And again, 30 ish years in operations, a year in real estate traveling the world and then 7 or 6 or 7 years in merchandising.

Speaker 1

Any So I think it is pretty seamless and to see them the 2 of them work together over the last 2 year almost 2 years since Ron became President. Any It's very similar to what I saw during those 2 years when Craig became President and 2 years later Jim any retired and Craig took on the CEO role as well. And so that's pretty much steady as she goes.

Speaker 7

Any Got you.

Speaker 1

Great.

Speaker 7

Happy holidays. Thanks.

Speaker 1

Thanks.

Operator

We'll take our next question from Scott Mushkin with R5 Capital.

Speaker 8

Any Hey, Richard. I guess I just wanted to think about the potential any clubs in the U. S. I know it comes up sometimes, but obviously you added 8. It just seems like there's maybe more runway even here in the issues.

Speaker 8

And I wonder if you had any thoughts on that and then I had a quick follow-up.

Speaker 1

Sure. Well, I mean, if we were to open the 31 this year, any That would be somewhere in the low 20s, 23, 24 in the U. S. And I recognize a few of those are business centers, which is any We continue to add as well as regular warehouse most of them are regular warehouses. And I would say that, yes, I I guess the story I'd share with you is 6 or 8 years ago when it was roughly sixty-forty or seventy-thirty U.

Speaker 1

S, Canada versus international other international. Any And we were asked what would it be by today, I'd say, well, by today, it will be fifty-fifty. Well, today, you're asking the same question. It's sixty-forty or seventythirty today, what will it be? Any And I think it will trend that way over time, but we are finding more opportunities in the U.

Speaker 1

S. Clearly, our average sales volume per location any It's higher today than we would have expected ourselves thankfully, 6, 7 years ago, what would it be by now? And we are finding those any changes. So I view that as good news. We still we've got a lot of things going on to drive international, any But international will be 6 or 7 units this year and then we'll continue to grow.

Speaker 1

Last year international any It's 9 or 10. And that's more of a timing issue.

Speaker 8

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

Speaker 1

Yes. Well, look, any I've always said I think the biggest attribute of value is the lowest price on a given quantity and quality of a good or service and then certainly add to that the trust that our members have. I think as it relates to specific things like I pointed out like appliances and even tires, it's value. We any And having acquired InterVel 3 or 4 years ago now called Costco Logistics, any We're doing a lot of business there. And I think we've gotten a better job of communicating what the value is, not just showing what the price of the exact item is at some of the other big retail competitors on some of these big items.

Speaker 1

But then you add in delivery, take away the old product used any The installation delivery, takeaway the old product for disposition, it's significant savings. Go do a price check of some of those things compared to our competition. That's where you'll see the strength.

Speaker 8

Perfect. Thanks.

Operator

We'll take our next question from John Heinbockel with Guggenheim.

Speaker 9

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

Speaker 1

Right. Well, we're if any First of all, our business was fixing the foundation. We're in the middle of replatforming our e commerce. It's not a big bang where we're going to put the switch one day. We're bringing things over any And that's in progress.

Speaker 1

It was I think I mentioned last probably last quarter, it's a 2 year roadmap on that and we're halfway through that. And so any I'd say very little so far. If we were in the 2nd inning, maybe we're in the 3rd inning now. But we a lot of the focus has been any 1st of all, making sure doing small improvements. We certainly got the on the 5 star rating, any We got up north of 4.5 on that and we're getting better at the site every time.

Speaker 1

But I think you would see personalization and any First of all, targeting and then personalization more over the next couple of years honestly. And we're fine with that. First of all, our business is getting the foundation right. Any And we've made a lot of progress. I didn't spend a lot of time on this call talking about the new things, the enhancements we've made to the mobile site and

Speaker 9

any And maybe as a follow-up, right, you talked about the international opportunity and it's still very well underdeveloped. Any So what the hindrance to getting to, because you're in a lot of countries now, 15 to 20 any Annual openings, maybe that's a big ask. But is it just quality of real estate? Because I would imagine any Operationally, it's not a human resource issue. Is it purely a real estate issue?

Speaker 1

I would say it's a combination of issues. Any In some countries, I mean, if you look at Korea, Taiwan, where we have whatever 15 or 16 locations in each country, any Very successful. It's a little harder to find the next location just from a real estate standpoint. If you look in Japan where we have any future opportunity. We've got 30 plus now and but again it's a little bit of real estate.

Speaker 1

If you look at places like China or Spain, any One of the challenges is, you want you like to be able to ideally bring over more than a handful of people from the existing location to the new one. Any It's a very hands on operation. I think one of the things that we felt we mentioned that we had success when we first opened our first unit in Shanghai is we had at least 60, 70 people move there from Taiwan any For promotions and for interactions, not just in the office and the buying offices, but even in the key supervisor and manager positions within the warehouse. Any And so it takes a little longer and but we're working hard at it, but it's a very hands on experience.

Speaker 10

Any Thank

Speaker 1

you.

Operator

We'll take our next question from Kelly Bania with BMO Capital Markets.

Speaker 8

Any Hi,

Speaker 11

Richard. Thanks for taking our questions. Just wanted to kind of follow-up on any questions. I think your average sale per club in the U. S.

Speaker 11

And Canada is around $300,000,000 at this point. And any. Just curious on the status of how many clubs are doing kind of well over that and are maybe in some need some relief in the form of self cannibalization and more clubs nearby. And follow-up as well on international, any Just as we think about the next maybe 3 to 5 years, are there any countries that might be disproportionately getting some more of the growth any

Speaker 1

hear. Okay. What was the first part of the question again? The average sales. Average sales.

Speaker 1

Average sales.

Speaker 12

Yes. The average.

Speaker 1

I I don't have the numbers in front of me, but I know in fiscal 2023, we had something like 25 or so locations that did over 400,000,000 any Another $160,000,000 or so that did $300,000,000 to $400,000,000 Those are huge numbers. And certainly as we get $350,000,000 plus any And one of them by the way that did over $400,000,000 did a few million over $600,000,000 So any Generally, when it starts getting when it starts having a 3 in front of it, certainly a 3.50, we want to start looking to see what we can do to cannibalize it frankly and to have more growth in that market. And so hopefully that's our one of our bigger problems and challenges that we have more of those each year. Any So I think that will continue. Again, if I look back 5, 8 years ago, even assuming whatever inflation any number you want to assume.

Speaker 1

I think we've done a little better than that in terms of the sales volumes. And so that's good news for us that we'll continue to do that. Internationally, any Again, I'm just looking at the map of where we are. Certainly, we only have 4 locations in Spain. Any We've actually have added a few on a base of 30 plus in the UK.

Speaker 1

We think we have more opportunity in Mexico. In Japan, any Where we have something in the low 30s, certainly it's done well there and there's many more markets and population there that we can go to. Any Australia is whatever 2 thirds, a little under 2 thirds the size of Canada where we have 105 or so locations. And in Australia, we have any 15. Yes, 15.

Speaker 1

I'm not suggesting we're going to have 2 thirds of 105 there anytime soon. Any It takes us 35 plus years to get there in Canada. And but we think that those are the opportunities. It's not like we're looking at a lot of other new countries at this juncture. We've done a few new countries, those single locations like in Sweden and Iceland and Auckland, any All being somewhat managed buying wise and somewhat operationally by a host country in the case of any Scandinavia by the U.

Speaker 1

K. And the case of Auckland by Australia.

Speaker 11

Any Thank you.

Operator

We'll take our next question from Scot Ciccarelli with Truist.

Speaker 13

Any Good afternoon, guys. So Richard, last quarter you talked a bit about Costco Next. And I guess my question is, any How big of an impact is that program having on your e comm sales at this point, number 1? Number 2, kind of related to that, any change in your vetting of what vendors operate on that program, just thinking about the quality control aspect? Thank you.

Speaker 1

Any First of all, it's still very small relative to our company. And the fact is, is that the cost of net sales currently are not in our sales. Any It's 3rd. We got a commission, so it's kind of like 3P, if you will, 3P sales. And at some juncture, some of there are rules any Accounting rules of where you can include in sales based on what risk and what ownership level you have in the items.

Speaker 1

But at this juncture, any Those sales it's more of an in the market value and just the commission in our number. In terms of how we vet, any We do it the same way we vet items. We want items that make sense, the right value and we have a team that is here that are vetting each and every one of those. I think we're up to about 70 about 65 current suppliers on there and we'll certainly have any Many more as we go forward.

Speaker 13

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

Speaker 1

Any Essentially, yes. Much like the travel business.

Speaker 13

Got it. Okay. Thank you.

Speaker 1

Mostly.

Operator

We'll take our next question from Greg Millett with Evercore ISI.

Speaker 14

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

Speaker 1

Any I think it's just us. Again, if I look at the if you ask the question, what are the any variables we would look at. We would want to look at strong renewal rates, strong new sign ups, strong loyalty any We have all that. So I think its question is we haven't needed to do it. We like providing extreme value.

Speaker 1

Certainly, while we've gone a little longer than the average increase, any We feel we certainly have driven more value to the membership. So I'll use my standby answer, my pat answer, it's any question of when not if, but at this juncture, we feel pretty good about what we're doing.

Speaker 14

And a follow-up on inflation. I just want to make sure I got that right. You said any 0 to 1 for the quarter. Did it trend towards 0? Did we exit near the bottom?

Speaker 14

And you mentioned some categories that were deflationary. Any Which ones are stubborn in terms of inflation where it's hardest to get it out?

Speaker 1

Which inflation which categories are stubborn and inflation? Any Yes. CPG brands, mostly. Any

Speaker 14

All the branded package stuff.

Speaker 1

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

Speaker 14

Any Okay. So it's not like we exited 0, we're still slightly positive.

Speaker 1

Right. But recognize the LIFO charge is an inventory cost any sales charge. Any Right. The 0 to 1 is from the beginning of the fiscal year. Oh, no, it's from the year.

Speaker 1

I'm sorry, the beginning of the 0 to 1 is versus a year ago.

Speaker 2

Any Year over year. Got

Speaker 1

it. Yes.

Speaker 14

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

Speaker 8

Any In

Speaker 1

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

Speaker 14

Perfect. Thanks. Have a great holiday, guys.

Speaker 1

Any You too.

Operator

We'll take our next question from rupesh Parikh with Oppenheimer.

Speaker 15

Good afternoon. Thanks for taking my question. So I just want to go to operating expense growth. So operating expense growth is still high. Any Would you expect the growth rates to moderate once you lap that March wage increase?

Speaker 15

And then anything unusual within that line item that's still driving a pretty high growth?

Speaker 1

There's not a lot unusual. I think it gets back to the question of low inflation, which creates a little bit more of a challenge, right? And again, that was a very extreme example any I gave you a nuts, but when you had a slight 0% to 2% decline in sales and a 14% increase in units, any You got more labor involved, more hours stocked to the shelf. I mean that's the 40,000 foot level and that's an extreme example. But I think overall any It is sales based.

Speaker 1

You should also remember, if you I remember going back to fiscal 2019 and the 1st part of fiscal 2020 any Before COVID, our SG and A percent was for all of 2019, it was a 10.04%. In the Q1 of 2020, it was a 10.34 any And for the whole year, it was a 1,004 for both of those 2 years. And we used to think to ourselves, will we ever be able to get it back below 10? Any And in 2022, which was the kind of month 7 through 2018, if you will, that 12 month period after that full fiscal year for us any We reported an $888 for that year. So even at the $945 that we just reported, we're still quite a bit lower than we had been historically, any A function of a lot of things, including higher sales productivity and all that.

Speaker 1

So I think we're doing pretty well. I think certainly that's the challenge. Any How do we reduce that and how do we manage that? And certainly the biggest way to manage it is driving more sales. Any Great.

Speaker 15

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

Speaker 1

Any Look, I think when we're asked that question, we're fortunate to answer it that we're first of all looking at the consumer through somewhat any Rose colored glasses here. We have enjoyed any Great value. And again, we're convinced it's value. We've gotten I think on the margin, there's a few extra things that we've done. We've improved the site or the website.

Speaker 1

Any We've gotten a little better communicating stuff, not completely. But I think overall it's and we've been good merchants. I think the merchants have done a great job of bringing in new stuff. Any And not being shy when we see an industry credit grade down a lot any That we can still if we're driving people in, we've got a better chance of getting them to buy something.

Speaker 15

Thank you. Happy holidays.

Speaker 8

Thanks.

Operator

We'll take our next question from Oliver Chen with TD Cowen.

Speaker 16

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

Speaker 1

Well, I would say any Allowing us to get better deals, which means lower prices. But look, I think Kirkland Signature relative to non gas sales any is in the high 20s. And I think it was probably a good year ago when inflation was in the 8% and 9% range, if you will, any If you remember, and we talked about that year over year, we saw probably the biggest increased penetration of KS at Costco. It was 1, 1.5 percentage points, any When historically it's been 25 to 50 basis points a year. I think we're back to that, but we've maintained that higher level and we're back to seeing any smaller increases in penetration every year, but nonetheless still driving that business.

Speaker 1

But we've got yes, I think that helps any With some of the deflationary stuff certainly with KS stuff we're closer to the supplier. We're not the only we're the only customer buying that item any And we can drive a little bit more business. So I think it just continues to work that way for us.

Speaker 16

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

Speaker 1

Any Some colleague in my room said they're buying gold. But no, that's actually online mostly. But no, I think any Again, I think the traffic thing is the thing that we're happily surprised about that we're continuing to drive people in on an increasing basis. Any We know we benefited during those call it those 2 years kind of March, April of 2020 to March, April of 2022, the any kind of the 2 years of COVID, we benefited in many ways from more members and more volumes and we've not only kept it, we're continuing now to add any to those levels. So we feel very fortunate in that regard.

Speaker 4

Thanks.

Speaker 1

Any One of my colleagues here just mentioned that discretionary merchandise trends are getting a little better. That's not only on big ticket, but in general non food science stuff. Any I think that corresponds with my comment earlier that we feel good about any The seasonal how we've done seasonally.

Operator

We'll take our next question from Mark Astrachan with Stifel.

Speaker 2

Yes, thanks and afternoon everyone. Any I guess I wanted to ask on the Kirkland products, specifically maybe on the CPG that you mentioned. How have any Pricing or how has prices trended on those versus the branded products? Have you seen any deviation there given you're closer? Are you able to lower prices?

Speaker 2

Any I suppose to the extent that that has happened, do you notice any more market share changes within those CPG categories?

Speaker 1

Any I think it's slightly it's deflationary it's a little more deflationary in the KS any which drives more value to KS frankly, but we're seeing some our ability to work with our CPG any suppliers as well. But just a little stronger ability to do that with KS.

Speaker 2

Got it.

Speaker 1

And then any I got a comment in the room here. We've had it's allowed us to do some new item introductions on the KS side as well.

Speaker 14

Any Great.

Speaker 3

And then just following up

Speaker 2

on the last question, anything you can call out amongst the newer memberships any cohorts in terms of renewal rates versus the average.

Speaker 1

Generally speaking, if you compare everybody was always concerned, any I remember 10 plus years ago, people would ask you, how are you going after millennials? And then is how are you going after the next gen or whatever, the Gen Zs or whatever. At the end of the day, any When we look at the different cohorts, if you just change the names, the curve seems to be about the same in terms of getting new younger members, they buy less, any They buy more as they get older into that 40 to 55 year old sweet spot. I don't know in terms of renewal rates. I think the rates are our overall rates are improving.

Speaker 1

So I think we're probably doing a better job there. Certainly things like frankly auto renewal helped that as well.

Speaker 8

Any Got

Speaker 2

it. Thank you. Happy holidays.

Speaker 1

Same to you.

Operator

We'll take our next question from Cory Tarlow with Jefferies.

Speaker 4

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

Speaker 1

Any Frankly, we look at the wages in a vacuum and we want to do as much as we can for our employees. And certainly, there were several increases starting with any Frontline worker premium during the initial year of COVID, we kept half of that in there, which any We kept one of those $2 an hour in there, which was like $400,000,000 a year. Again, we've also benefited from stronger sales and productivity. So we were able to afford that. We look at them independently and we'll continue to do that to look at it.

Speaker 1

To the extent inflationary pressures are down, any That means there's probably a little less inflationary pressure on wages, but we give over half of our any Employees are top of scale and they're getting increases irrespective of some of the extra things we've talked about every March. And then as you go from a new employee Over the first 9000 or 10000 hours, you're getting constant increases that are more significantly more.

Speaker 4

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

Speaker 1

I think it can hurt. Even with gas prices have come down a little bit, any That's top of mind every week when somebody fills up their tank. So those things help. I'm sure on a macro basis that's the case, but it's a guess on our part.

Speaker 4

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

Speaker 1

Thank you.

Operator

We'll take our next question from Dean Rosenbloom with Bernstein.

Speaker 10

Hey, Richard, guys, thanks for taking my questions. Any There's going to be 2 big debates the clients are asking us about. First one is on gross margins and in particular the potential for any gross margin impact from mix shift back toward things like appliances and TVs, which are any lower gross margin, at least in the marketplace versus fresh and food and sundries. As you see the sort of big ticket discretionary starting any impact on gross margins from that mix shift away from food and sundries to big ticket discussion?

Speaker 1

Any First of all, our margin range is so much more compacted than traditional retail any different categories of traditional retail. I mean, if you think about it, we have what a 12%, 13% gross margin, any 11, I'm thinking Mark's up. And in theory it ranges from 0 to 15. In reality it's any And there's very few things that are below 5 and a lot of things hover around the 8 to 12 range. Any And so I don't think it's as big of an impact to us in terms of those mix changes.

Speaker 1

And I got to say it's always any That old saying, it's always something. There's always something that hurts you and there's another thing that helps you. And it's a really it's a mixture.

Speaker 10

Any And then the other big debate that Connor is asking about is the relative profitability of new stores versus existing stores. Any There's sort of 2 themes there. 1 is new U. S. Versus existing U.

Speaker 10

S. And then the relative profitability of new stores internationally. I was wondering if

Speaker 1

you could speak to that a bit. Any Well, first of all, when you look at like an ROI, the eye on a the denominator on an older building is a lower eye. Any If 10 years ago, the typical building in the United States property equipment and building fixtures, any I'm shooting from the hip here was $30,000,000 to $35,000,000 and now it's $45,000,000 to $50,000,000 so you've got a different eye. But generally speaking, any When we look at the ROI of each of our 8 U. S.

Speaker 1

Regions or 2 Canadian regions, any new units come in start a little lower and get up there over time. You'll have some outliers because of some units that are 30 years and 40 years old any Even with the eye increase because we expanded the unit and upgraded it and remodeled it, the fact of the matter is, is those higher volumes really shine through there. Any On an international standpoint, we've always I think talked about the fact that there's a few different things that any The ROIs in some of these other countries tend to be a little higher. The return on sales tends to be even more even higher than that any changes in some of these countries because a combination very little related to gross margin, some related to membership fees, some related to wages and some related to benefits, health benefits. Any Yes.

Speaker 1

U. S. Healthcare costs dwarf every other country that we're in.

Speaker 10

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

Speaker 1

Any Thank you.

Operator

We'll take our next question from Joe Feldman with Telsey Advisory Group. Any

Speaker 5

Hey, guys. Thanks for taking the question. I wanted to first ask on executive member any penetration. It seems like it continues to inch higher. And I was just wondering how you guys think about that and like how high should that be?

Speaker 5

I mean, any Presumably you'd want everybody to be an executive member, but is there like kind of a natural level where you think it can still go from here beyond the 46%? Any

Speaker 1

I think well, there's always going to be another country or 2 we add. You need a certain number. In our view, we've always done it after there's 15 or so warehouses in the country. So that will add to a little bit. But no, I think some of the increase, any It's kind of like getting up to that asymptotic line when you one of these that drove it in the last few years, any We've done a better job in the last several years of selling it to you, as well as auto renewal.

Speaker 1

When people come in now or sign up online, They're signing up, do they want to put their credit or debit card in there and they can opt out, they can opt into doing it online any Do we have a renewal? So I think those things have pushed it along with us being any So wonderful. But I think you'll still see it come up a little bit, but probably that rate of increase will slow over time.

Speaker 5

Any Got it. Okay. And then maybe just a quick follow-up. Anything to talk about on shrink? Any Because I know that there was an issue with shrink even for you guys at one point and I know you guys have cracked down any Making sure members are showing their cards when they walk in the store and obviously that when you leave with your goods, they're checking your receipts.

Speaker 5

But any Anything we should think about with regard to shrink going forward and recent trends?

Speaker 1

Nothing. Thankfully nothing at all. Any It's really I think all we talked about was a combination of as we Went into some self checkout over the last several years and then perhaps more recent things that you read about in the paper, any We get less impacted by the latter as well. Maybe we saw a couple of basis point delta upward on a very any low number of basis points to start with. So we're fortunate in that regard.

Speaker 5

Got it. Thank you and happy holidays guys.

Speaker 1

Any Same to you. Thank you.

Speaker 4

Thank you.

Operator

We'll take our next question from Laura Champine with Loop Capital.

Speaker 12

Any Thanks for taking my question. I wanted to dig in a little bit more into some of those numbers on the column. The ancillary any Profit improvement, I think that's where you're I'm just wondering what drove that. And on the operations line, any It sounds like that pressure in SG and A didn't come mostly from wages and I'm wondering where it did come from.

Speaker 1

Any Yes. On the ancillary line, it's gas and e comm and it's a combination any increased sales penetration and increased margins within those businesses. The thing about gas is I think everybody out there that has gas stations, What we have found is we've been able to see improved profitability not just in the last quarter or 2, but over the last few years, last 3 to 5 years, any Improve profitability in gas because others are making more and we're allowed to make a little more. When we do our competitive price drops on gas, which we do weekly at every any gas station we operate with neighboring competitive gas stations. Our value proposition has actually increased any increased number of cents per gallon than we've ever seen.

Speaker 1

So that's been, if you will, a win win for us. On the e com side, I think driving more sales Has helped us in the margins there as well.

Speaker 6

Thanks. And then

Speaker 12

just on the operations.

Speaker 1

Any Yes. On the wages, while we pointed out I pointed out the call, I think there was like 4 or so basis points in total from those 2 distinct increases. We do other increases like any Over half of our employees are top of scale. They get an increase every March. That's significant as well, significant relative to basis points.

Speaker 1

Any When you have lower sales figures, everything is the rest of it is all the other line items like energy costs any And the like.

Speaker 12

Got it. So most of the pressure is probably coming from wages, not just those 2 discrete callouts you had?

Speaker 1

Any It's more than half. I don't have the exact figures with me.

Speaker 4

Got it. Thank you.

Operator

Thank you. And there are no further questions at this time. I'd like to turn the call back over to Richard Galanti for any additional or closing remarks.

Speaker 1

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

Operator

Thank you. And that does conclude the presentation. Thank you for your participation today and you may now disconnect.

Powered by Quartr
Earnings Conference Call
Costco Wholesale Q1 2024
00:00 / 00:00