Costco Wholesale Q4 2023 Earnings Results & Report

Costco Wholesale EPS Results

• Actual EPS: $4.86
• Consensus EPS: $4.79
• Beat/Miss: Beat by +$0.07
• One Year Ago EPS: $4.20
• EPS Beat Rate: 6 of last 8 quarters

Costco Wholesale Revenue Results

• Actual Revenue: $78.94 billion
• Expected Revenue: $77.72 billion
• Beat/Miss: Beat by +$1.22 billion
• YoY Revenue Growth: +9.50%

Costco Wholesale (NASDAQ:COST) operates membership-based warehouse clubs that offer a broad selection of merchandise at generally low prices. Its products include groceries, fresh foods, appliances, electronics, apparel, furniture, and household goods, as well as its Kirkland Signature private-label line.

The company also provides services such as gasoline stations, pharmacies, optical and hearing-aid centers, food courts, and travel offerings. Costco serves members through warehouses and online channels.

Founded in 1983 in Seattle, Costco has expanded across North America, Europe, Asia, and Australia. Ron Vachris became president and chief executive officer in January 2024.

Costco Wholesale Q4 2023 Earnings Call Transcript

Key Takeaways

• Costco delivered Q4 net income of $2.16 billion (EPS $4.86), up 16% year‐over‐year, on net sales of $77.43 billion, a 9.4% increase.
• Comparable sales rose 1.1% reported (3.8% ex‐gas deflation/FX), with e-commerce down 0.8% reported but improving versus prior quarters.
• Paid membership reached 71 million households (+7.9%) with executive members at 32.3 million, driving a 13.7% jump in membership fee income.
• Gross margin expanded 42 basis points to 10.60%, while SG&A was 8.96% of sales (+43 bps), reflecting wage investments, gas deflation and better inventory positions.
• Inflation eased to 1–2% in Q4 and remains on a downward trend; Costco opened 23 net new warehouses in FY23 and plans 10 more in Q1 FY24, investing $4.32 billion in CapEx.

Presentation

[Operator]

Good day, everyone, and welcome to the Costco Wholesale Corporation Q4 and fiscal year 2023 operating results call. Today's call is being recorded. All lines have been placed on mute to prevent any background noise, and after the speaker's remarks, there will be a question and answer session. I would now like to turn the conference over to Richard Galanti, CFO. Please go ahead, sir.

[Richard Galanti, CFO at Costco Wholesale Corporation]

Thank you, Lisa, and good afternoon to everyone. I will start by stating that these discussions will include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements involve risks and uncertainties that may cause actual events, results, and/or performance to differ materially from those indicated by such statements. The risks and uncertainties include, but are not limited to, those outlined in today's call, as well as other risks identified from time to time in the company's public statements, and reports filed with the SEC. Forward-looking statements speak only as of the date they are made, and the company does not undertake to update these statements except as required by law. In today's press release, we reported operating results for the Q4 of fiscal 2023, the 17 weeks ended September 3rd.

[Richard Galanti, CFO at Costco Wholesale Corporation]

These results and the figures presented today compared to last fiscal year's 16-week Q4. Reported net income for the 17-week Q4 came in at $2.16 billion, or $4.86 per diluted share, compared to $1.868 billion, or $4.20 per diluted share in the 16-week Q4 last year. In terms of sales, net sales for the 17-week Q4 were $77.43 billion, an increase of 9.4% from $70.76 billion in the 16-week Q4 last year. Comparable sales for the Q4, and these figures are like-for-like number of weeks. In the U.S., reported was a 0.2% comp. Excluding gas deflation and FX in the U.S., it would have been a 3.1.

[Richard Galanti, CFO at Costco Wholesale Corporation]

Canada reported 1.8%, and excluding gas, deflation, and FX, 7.4%. Other international reported 5.5, and again, excluding gas deflation and FX, 4.4. All told, total company reported 1.1% comp and a 3.8% ex gas deflation and FX. In terms of E-commerce, that came in at a -0.8% reported and a -0.6% excluding FX. Overall, for the fiscal Q4, food and sundries were relatively strong once again, with fresh foods right behind and with some offsets on some of the non-foods categories. In terms of Q4 comp sales metrics, traffic or shopper frequency increased 5.2% worldwide and 5.0% in the United States.

[Richard Galanti, CFO at Costco Wholesale Corporation]

Our average transaction or ticket was down 3.9% worldwide and down 4.5% in the US, impacted in large part from weakness in bigger ticket, non-foods, discretionary items, as well as the gas price deflation. Foreign currencies relative to the US dollar negatively impact sales by approximately 0.3%, and gasoline price deflation negatively impacted sales by approximately 2.5%. Next on the income statement, membership fee income reported in the Q4, $1.509 billion, or 1.95% of sales in the Q4 of this fiscal year, compared to $1.327 billion, or 1.88% in Q4 of last year. So a $182 million increase, or 13.7%.

[Richard Galanti, CFO at Costco Wholesale Corporation]

If you adjust for the extra week, the 13.7 would be roughly a 7% ex that extra week. Excluding FX and the extra week, the increase would have been around 7.5%. In terms of renewal rates at Q4 end, our U.S. and Canada renewal rates stood at 92.7%, which is up 0.1% from the 92.6% figure as of the end of Q3. The worldwide rate came in at 90.4%, down 0.1%, reflecting the impact of increasing penetration of memberships from international, which renew at a lower rate, in large part because of new openings internationally. Membership growth continues.

[Richard Galanti, CFO at Costco Wholesale Corporation]

We ended the Q4 with 71.0 million paid household members, up 7.9% versus a year ago, and 127.9 million cardholders, up 7.6%. And that's, on a, you know, new openings over the past year of 3, just under 3% increase in new locations. At Q4 end, we had 32.3 million paid Executive Memberships, an increase of 981,000 during the 17 weeks since Q3 end. The Executive Members now represent a little over 45% of our paid membership, and approximately paid members and approximately 73% of worldwide sales. Moving down the income statement, next is our gross margin.

[Richard Galanti, CFO at Costco Wholesale Corporation]

Our reported gross margin in the Q4 came in higher, it came in at 10.60%, up 42 basis points from 10.18% a year ago, and the up 42 basis points is up 16 basis points, excluding gas deflation. As I always ask you to jot down a few numbers with 2 columns, both reported and excluding gas deflation. The 1st line item would be core merchandise on a reported basis, up 51 basis points year-over-year in the Q4, and ex gas deflation up 28 basis points. Ancillary and other businesses, a minus 32 and a minus 38. 2% Reward, -4 and -2.

[Richard Galanti, CFO at Costco Wholesale Corporation]

LIFO, +27 and +28, and you total that up, on a reported basis, gross margin was up 42 basis points year-over-year, and ex gas deflation up 16 basis points. Starting with the core, again, up 51 year-over-year, and with ex deflation up 28. In terms of core margin on their own sales, our core on core margins were higher by 35 basis points, with food and sundries and non-foods being up and fresh foods being down a little. Ancillary and other business gross margin was lower by 32 basis points and lower by 38 basis points ex gas. This decrease was driven almost entirely by gas.

[Richard Galanti, CFO at Costco Wholesale Corporation]

If you look at the other components of ancillary and other, which would include pharmacy, e-com, food court, business centers, optical, all those things on a relative basis year-over-year were then a couple of basis points ± from a year earlier. 2% Reward, higher by 4 and higher by 2 basis points, so a -2 basis points excluding gas deflation. That represents higher sales penetration coming from our Executive Members. And LIFO, of course, if you recall last year in Q4, we had a $223 million pre-tax LIFO charge. While there was a small charge this year of $30 million on a year-over-year basis, of course, that showed the basis point improvement in margin.

[Richard Galanti, CFO at Costco Wholesale Corporation]

While we've continued to see sequential improvement in year-over-year inflation, I'll talk about that a little later, we've still had a small amount relative to the 1st day of the fiscal year. That's the small charge in Q4. A couple of final comments on margins. First, we are asked often recently about our inventory shrinkage results and whether it has dramatically increased in the past year versus historical shrink results. The answer is no. In the past several years, our inventory shrink has increased by a couple of basis points, in part, we believe, due to the rollout of self-checkout. Over the past year, it has increased by less than 1 basis point more. So no, thankfully not a big issue for us.

[Richard Galanti, CFO at Costco Wholesale Corporation]

Second, a year-over-year margin improvement has in part been due to fewer markdowns due to better, better inventory positions this year than last. Our inventories overall are in good shape. Moving on to SG&A. Our reported SG&A in the Q4, 8.96%, up from 8.53% a year earlier, or up 43 basis points, and ex gas deflation, up 21 basis points. Again, jot down the 2 columns of numbers, both reported and excluding gas deflation. Operations, minus 37 basis point, minus being higher by, and without deflation, core would be minus 18. Central, minus 6 and minus 3. And those are the really only 2 line items. The others were all 0, stock compensation, pre-opening and other.

[Richard Galanti, CFO at Costco Wholesale Corporation]

So total reported margins were up 43 basis points year-over-year, and ex gas deflation, up 21 basis points. In terms of the core operations being higher by 18, ex gas deflation, and on a reported basis, higher by 37, this negative included the impact of lower sales growth, as well as the impact of 8 weeks of additional top-of-scale wage increases that went into effect July 4, 2022, so midway through Q4 last year, and a full 17 weeks of this past March's higher than normal top-of-scale increase. Central being higher by 3 basis points, ex-gas deflation, again not a lot of sales operating leverage there. And again, as I mentioned, the other line items that I typically read out were flat, both with and without gas deflation, so 0 year-over-year change.

[Richard Galanti, CFO at Costco Wholesale Corporation]

Below the operating income line, interest expense came in at $56 million this year versus $48 million a year ago. 1 extra week, of course. Interest income and other for the quarter was higher by $171 million year-over-year, $238 this year versus $67 last year. This was driven in large part by an increase in interest income, due to both higher interest rates and higher cash balances, as well as the extra week. In addition, FX was slightly favorable year-over-year. In terms of income tax rate, our tax rate this year in the Q4 came in 27.1% compared to 25.4% in Q4 last year, so a full 1.7 percentage points higher year-over-year.

[Richard Galanti, CFO at Costco Wholesale Corporation]

This increase in our rate as of Q4 is primarily attributable to an increased penetration of international earnings, which overall incurs a higher income tax rate than in the U.S. Overall, reported net income was up 16% year-over-year in the quarter, or 9% if you adjust for the extra week this year in the Q4 versus last. A few other items of note. In the Q4, we opened 9 net new warehouses, including 5 new buildings in the U.S., 2 in China, and 1 each in Japan and Australia. That for the full fiscal 2023 year, we finished with 23 net new units, as well as we did 3 relocations.

[Richard Galanti, CFO at Costco Wholesale Corporation]

And for the Q1, the first 12 weeks of fiscal 2024, we plan on opening 10 net new units and as well, relocating 1 unit. All 10 locations net new are in, 9 are in the US and 1 are in Canada. Regarding capital expenditures, we've actually included the cash flow in the quarterly report, but CapEx spend in Q4 was approximately $1.56 billion, and for all of fiscal 2023, it totaled $4.32 billion. Turning to e-commerce. E-commerce sales in the Q4, ex FX, as I mentioned, decreased 0.6% year-over-year. While still negative, relatively speaking, our e-commerce showed good improvement. Results showed good improvement this quarter versus our year-over-year results in Q2 and Q3.

[Richard Galanti, CFO at Costco Wholesale Corporation]

In the previous 2 fiscal quarters, big-ticket discretionary majors, home furnishings, small electrics, jewelry, and hardware, were down 15% and 20%, 15% and 20% year-over-year, respectively, and down just 5% year-over-year in the Q4, with those big-ticket departments making up over half of our E-commerce sales. A couple other items of note. Within the sales of big-ticket discretionary, appliances were up over 30% in the quarter. Second, I've gotten a couple of calls that people have seen online that we've been selling gold, 1-ounce gold bars. Yes, but when we load them on the site, they're typically gone within a few hours, and we limit 2 per member. And lastly, I'll point out Costco Next. We continue to grow that.

[Richard Galanti, CFO at Costco Wholesale Corporation]

We currently have 62 suppliers on CostcoNext.com, and we're continuing to onboard additional ones in many product areas, from home improvement to apparel, to pet, to home and kitchen, to electronics and accessories, to sports, and bicycles and toys and the like. Excuse me. Now, a few comments on e-com mobile digital efforts, which we're always asked about. As I discussed during the last quarter earnings call, when I said that we were in the early innings of our digital mobile transformation efforts, progress is being made. In terms of recent additions and upgrades, we've recently redesigned the account page and the digital membership card. We also redesigned the header with larger search bar and expanded selling space. We've added an app box for messages and advertisements right in the app.

[Richard Galanti, CFO at Costco Wholesale Corporation]

We've recently, a few months ago, opened an Optical digital store where you can virtually try on glasses and then order them for pickup, prescription glasses. And lastly, lastly, there are ongoing improvement in our Costco app, offering in-warehouse shopping tools for our customers, such as a digital membership card, managing shopping lists, viewing warehouse savings, seeing the gas prices, to the extent there's a gas station there. And soon you'll be able to search warehouse inventory and scan barcodes from the app. With the improvements made thus far, over the past year, our App Store rating has gone from a dismal 2.3 stars to currently 4.7 stars. Unique visitors on the site are up 40% year-over-year, and the Costco app installs are up 46% year-over-year.

[Richard Galanti, CFO at Costco Wholesale Corporation]

So all in all, progress is being made. Lastly, a couple of comments regarding inflation. Most recently, in Q3 2023, we had estimated that year-over-year inflation was in the 3%-4% range. Our estimate for Q4 inflation is in the 1%-2% range, and it's actually trended downward during the quarter. So hopefully, these inflation trends will continue. We'll have to see. Finally, in terms of upcoming releases, we'll announce our September sales results for the 5 weeks ending Sunday, October 1st, on Wednesday, October 4th, after the market closes. With that, I will open it up for Q&A and turn it back over to Lisa. Thank you.

[Operator]

Thank you. If you would like to ask a question today, you can press * 1 on your telephone keypad, and to remove yourself from the queue, it is * 1 again. We'll take our first question from Simeon Gutman with Morgan Stanley.

[Simeon Gutman, Executive Director and Senior Equity Analyst at Morgan Stanley]

Hey, Richard, how are you?

[Richard Galanti, CFO at Costco Wholesale Corporation]

Good.

[Simeon Gutman, Executive Director and Senior Equity Analyst at Morgan Stanley]

I guess my first question, I don't mean it tongue-in-cheek, but, you know, I guess, is a membership price increase part of the fiscal plan? And then part of the question is: Is there a point at which, you know, you, you know, this membership increase is part of, I guess, a hedge against inflation, is there a point at which, you know, you, the model feels more weight without it? In other words, can you go another year without it?

[Richard Galanti, CFO at Costco Wholesale Corporation]

Well, you know, my, my pat answer, of course, is it's a question of when, not if. You know, it's a little longer this time around since June of 2017, so we're 6 years into it. But, you know, you'll see it happen at some point. We can't really tell you if, if it's in our, our plans or not. We'll, we'll let you know when we know. We feel good, needless say, about all the attributes of member loyalty and member growth. And, frankly, you know, in terms of looking at the values that we provide to our members, we continue to increase those. It's certainly a greater amount than even, even more than if and when an increase occurs. So, you know, stay tuned.

[Richard Galanti, CFO at Costco Wholesale Corporation]

We'll keep you posted, but there's not a whole lot I can tell you about that.

[Simeon Gutman, Executive Director and Senior Equity Analyst at Morgan Stanley]

Fair enough. And then ultra short term, as gas prices have moved up, have you seen any effect or impact on spending at the store?

[Richard Galanti, CFO at Costco Wholesale Corporation]

No, I mean, you know, you look at the numbers over the last few months that we report monthly and quarterly. There's not been a heck of a lot change. You know, big-ticket discretionary, while improved relatively, as I mentioned, online, those online items, we've seen the number of items in a basket tick up a little in the last few months, but I think that has more to do with the fact that we consciously added, I think I mentioned in the last call, we consciously added 40 or 50, what I'll call smaller ticket indulgent items, whether it's snack items and the like, to just, you know, impulse items. And so, you know, that's what we do as merchants.

[Richard Galanti, CFO at Costco Wholesale Corporation]

But overall, we haven't seen any big change, or been able to correlate any big change to what's happened with gas prices.

[Simeon Gutman, Executive Director and Senior Equity Analyst at Morgan Stanley]

Okay. Thanks, Richard. Good luck.

[Operator]

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

[Michael Lasser, Managing Director and Senior Equity Research Analyst at UBS]

Good morning. Good afternoon, I should say. Thank you so much for taking my question. Richard, you ended your prepared remarks saying that this quarter, or this month, inflation's on pace to be, 1%-2%, and you suggested it may be even lower than that. So should outside observers be prepared for the prospect of deflation, either because that's what's happening with some underlying costs that, that Costco's been experiencing, or Costco will look to invest in price as a way to continue to drive volumes, especially at a time when core on core margins are expanding so nicely?

[Richard Galanti, CFO at Costco Wholesale Corporation]

Well, first of all, the comment that, you know, was 1-2, but then as we looked at the 17 weeks, if you were the 4 months, roughly, we saw it-- you know, if we looked at it internally at each of the end of those 4 months, we saw the level... That 1-2 is from the beginning to the end of the year, or I'm sorry, the beginning to the end of the quarter. But during the quarter, we saw that trending downward, if you will, a little. And when I talked to the merchants, you know, on the fresh side, it's flat to down a little. Right now, on the food and sundry side, it's up a little.

[Richard Galanti, CFO at Costco Wholesale Corporation]

Primarily in some of the CPG stuff. And on big ticket, or not big ticket, but on non-foods, partly because of freight, which is down year-over-year in a nice way, and in some cases, some of the commodity costs on steel and the like, that's come down. So that being said, not a big change, but at least it's trending that way. Who knows what tomorrow brings? And as it relates to us-

[Michael Lasser, Managing Director and Senior Equity Research Analyst at UBS]

So just to-

[Richard Galanti, CFO at Costco Wholesale Corporation]

Well, I was gonna say, as it relates to us, we're always pushing prices as fast as we can. We wanna be the first to lower them when those things happen and drive sales.

[Michael Lasser, Managing Director and Senior Equity Research Analyst at UBS]

So-

[Richard Galanti, CFO at Costco Wholesale Corporation]

I think we've seen that with our traffic.

[Michael Lasser, Managing Director and Senior Equity Research Analyst at UBS]

So just to clarify, what, what you're saying is food and sundries, prices are down on average year-over-year, 'cause shelf-stable products are up year-over-year, gen merch is down. So in totality, it would seem like the store, the box is deflating. Does it get, does the rate at which you see deflation continue to increase from here? And, would you expect that to be just driven by the factors that you mentioned, or are you driving that as a way to drive this traffic?

[Richard Galanti, CFO at Costco Wholesale Corporation]

Well, first of all, I wanna correct one thing you, that I maybe misstated or you misunderstood. In terms of fresh, fresh is pretty much flat. Food and sundries, which is, you know, health, everything from sundries and packaged goods and CPG goods, that's tends to be up a little bit. And, and, you know, I'd like to think that we're pushing the envelope as much as we can with our suppliers, that as certain freight costs have come down, recognizing the headline today in the paper is, oil is approaching $100 a barrel. So who, who the heck knows what will happen tomorrow?

[Michael Lasser, Managing Director and Senior Equity Research Analyst at UBS]

Okay. My follow-up question is, as long as you see big ticket under pressure, or discretionary under pressure, which influences your total sales, because it's important for your member to come in and buy these big ticket items, does this gonna influence how you think about managing labor in the store? Should the market just anticipate that labor and other SG&A is gonna de-lever as long as the big ticket's under pressure?

[Richard Galanti, CFO at Costco Wholesale Corporation]

Well, you know, I think we've seen that over the last year, frankly. We had such operating leverage over a couple of years when we had outside sales during the 2 years of COVID, you call it the spring of 2020 to the spring of 2022. You know, it was before COVID, when our SG&A was over 10%, slightly over 10%, and we said, "Would it ever be able to get below that?" It's now still below 9%. So notwithstanding the fact, when I've looked at the last several quarters on a year-over-year basis, you know, again, particularly the last couple of quarters, we've seen some de-leverage of that. Look, we wanna drive sales, and, you know, we'll do that in the best ways we can.

[Richard Galanti, CFO at Costco Wholesale Corporation]

But we recognize when we used to get the question all the time, you know, "What comp number and do you need to have 0, you know, negative or positive leverage with SG&A?" Recognizing there was very little inflation back then. But we used to say somewhere, who knows, but somewhere in the 4.5-5 range. So we don't know exactly where it is, but we're certainly not gonna change the level of service that we have. And we're certainly gonna respect our employees in terms of what we've done with wage increases over time. And that's what we do.

[Michael Lasser, Managing Director and Senior Equity Research Analyst at UBS]

Thank you very much, and good luck.

[Operator]

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

[Chuck Grom, Managing Director at Gordon Haskett]

Hey, how's it going, Richard? Just sticking on this, on the inflation topic here, on unit elasticity, particularly in categories where you're seeing prices actually start to fall or compress. Curious what you're seeing on units, if you're seeing them improve at all to offset those price declines, and if there's any examples in either food or in GM that you could talk about.

[Richard Galanti, CFO at Costco Wholesale Corporation]

Well, yeah, I remember when we talked a few quarters ago about some of the slowness in big-ticket discretionary. When we got hotter on prices, it did a little bit, but not as much as we would have thought to start with. But again, that perhaps was the impact of what's going on with the concerns in the economy and everything else. We know that when we put hot buys and what we call TPDs, temporary price discounts on items, even medium-sized ticket items, we do see, you know, the units increase, but it's not as predictable, I would say, as it used to be.

[Chuck Grom, Managing Director at Gordon Haskett]

Okay, great. I know you don't provide guidance, but I... Go ahead.

[Richard Galanti, CFO at Costco Wholesale Corporation]

It's a little easier on the food side to see that sometimes when we're taking the price of a meat item down.

[Chuck Grom, Managing Director at Gordon Haskett]

Okay, so you are starting to see some units increase as prices drop in certain parts of the business then?

[Richard Galanti, CFO at Costco Wholesale Corporation]

Sure.

[Chuck Grom, Managing Director at Gordon Haskett]

Okay.

[Richard Galanti, CFO at Costco Wholesale Corporation]

Sure.

[Chuck Grom, Managing Director at Gordon Haskett]

Gotcha.

[Richard Galanti, CFO at Costco Wholesale Corporation]

By the way, even on big ticket, when we've seen $300 and $400 price declines because of freight and raw material cost on some big ticket non-food items, we'll see, we'll see some of the, some of the sales pick back up on that. But it's, you know, there's nothing guaranteed.

[Chuck Grom, Managing Director at Gordon Haskett]

Okay. All right. Thank you. I know you don't provide guidance, but I actually do remember when you did give some directional help back in the day. But are there any big puts and takes that we should be thinking about on the gross margin and SG&A line over the next 4 quarters that we should be thinking about? You know, clearly, the LIFO lap will be an obvious tailwind, but just curious, any other things that we should be thinking about from a modeling perspective?

[Richard Galanti, CFO at Costco Wholesale Corporation]

No, not really. I mean, LIFO is certainly one that was an impact over the last year and starting to start to slow down. You know, assuming that trend continues, there won't be, you know, much LIFO going forward for right now, but we'll see. Beyond that, no, we, you know, we're still opening, you know, we opened 23 net new units this past year. We're on board to do something in the mid- to high 20s this year. But that's not enough to move the needle in terms of a leverage standpoint or anything. No, I'd say it's steady as she goes, and if anything, I look at the margins overall, given everything that's going on, including competition, that we're doing pretty well there.

[Richard Galanti, CFO at Costco Wholesale Corporation]

With some of the wage hikes that we've continued to do, and sales being a little weaker than they had been a year ago, I think we're doing pretty well on that as well. We're optimistic about our future, but we'll see what happens.

[Simeon Gutman, Executive Director and Senior Equity Analyst at Morgan Stanley]

Right. Great. Thank you.

[Operator]

We'll take our next question from Peter Benedict with Baird.

[Peter Benedict, Senior Research Analyst at Baird]

Oh, hey, guys. Thanks for taking the question. Richard, just first one, just on LIFO. So I'm just curious, I mean, the $30 million charge is small, but just curious why there even was one. Can you give us a little more color as maybe what drove?

[Richard Galanti, CFO at Costco Wholesale Corporation]

Yeah. Well, I think it was on things like... Well, gas was one, and then in some of the fresh food items, there was—even though there was deflation in things like eggs and some dairy products, there was, there were some inflationary trends in beef. Beyond that, do you have that handy?

[Erica Eiler, Equity Research at Oppenheimer]

I mean,

[Richard Galanti, CFO at Costco Wholesale Corporation]

Yeah, it's really small, but on $16 billion of inventory, it's a lot. I mean, it's still a small number, $30 million. I'm not... But, on, on-

[Richard Galanti, CFO at Costco Wholesale Corporation]

Yeah. That's all. I don't have the details beyond that.

[Peter Benedict, Senior Research Analyst at Baird]

That's fine. Yeah, no, that, that's fine. Just in the, in the context of broader disinflation, all that stuff, it's just interesting to see that. And then, just really turning to the international stuff, you talked about the real rates impact. Can you remind us, maybe on the international membership trends, when you open up a new club outside the U.S., maybe give us some framework or some benchmarks around how many new members tend to sign up? How does that compare to what you would see, let's say, in the next year, you know, club you open in the U.S.?

[Richard Galanti, CFO at Costco Wholesale Corporation]

Yeah.

[Peter Benedict, Senior Research Analyst at Baird]

What kind of renewal rates you tend to see year 1, year 2, just so we have a frame of reference there? Thank you.

[Richard Galanti, CFO at Costco Wholesale Corporation]

I don't have the exact numbers in front of me, but generally speaking, in Asia, whether it's Korea, Taiwan, Japan, or China, we'll open a new unit, including the 10 or 12 weeks of signups prior to opening, with anywhere from 50 to 100 thousand new members. We had a couple of extremes, like when we first opened in Shanghai and Minhang, of well over 200. Now, some of that's looky-loos that don't renew, and we usually in that 1st year of renewal and those types of outsized numbers, we might be as low as the mid- to high 50s and it takes a few years to get even to the mid-70s. But we see those numbers overall continuing to increase every year.

[Richard Galanti, CFO at Costco Wholesale Corporation]

And I can't go—I should probably go back to what it was in the first 10 years of our 40-year history with even the U.S. My guess, it wasn't that extreme, but we didn't have as many... It wasn't national and local news events the day we opened. You had a lot of people coming in to some of these markets that are signing up that maybe live too far away or choose not to come back. So we're seeing that continuing to grow. So by, you know, even that simple, that slight, you know, 0.1% decline, it's a rounding error in the sense that if you open up a couple more units a year ago, that they're just renewing for the first time, that increases that number.

[Peter Benedict, Senior Research Analyst at Baird]

Yep. No, understood. Last question. I think I heard you say mid to high twenties in terms of unit opening plan for fiscal 2024. Can you give me a, give us a sense for how many of those are in the U.S., so then how many would be international? Thank you.

[Richard Galanti, CFO at Costco Wholesale Corporation]

70+% in the U.S. and Canada. Mostly U.S., of course.

[Peter Benedict, Senior Research Analyst at Baird]

Got it.

[Richard Galanti, CFO at Costco Wholesale Corporation]

Which in my view-

[Peter Benedict, Senior Research Analyst at Baird]

Thanks so much.

[Richard Galanti, CFO at Costco Wholesale Corporation]

... continues to work. We're finding more openings, more opportunities in the U.S. to infill, given our high volumes, and we've got plenty going on over the years, overseas.

[Peter Benedict, Senior Research Analyst at Baird]

Yep. Thanks so much, Richard.

[Richard Galanti, CFO at Costco Wholesale Corporation]

Thank you.

[Operator]

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

[Erica Eiler, Equity Research at Oppenheimer]

Good afternoon. This is actually Erica Eiler on for Rupesh. Thanks for taking our questions. So I guess first, I was hoping maybe you could give us a quick download, maybe on how you're feeling about the health of your consumer right now. I mean, obviously, some concerns out there on, you know, student loan impact starting to roll in here as those restart. So maybe, you know, any color you can provide on, you know, how you're thinking about discretionary from here, maybe some of those concerns out there, you know, anything on, you know, trade down or private label, you know, anything of note on that front in terms of consumer behavior as well.

[Richard Galanti, CFO at Costco Wholesale Corporation]

Right. Well, look, first of all, first and foremost, our traffic continues to do very well. You know, being up continually 4%-5% on a year-over-year basis is great. And our renewal rates continue to be very strong. So that's a starting point. It makes sense to us on big-ticket discretionary, that's where you'd see the biggest weakness. We see some of that in some compa- some areas going back. When we look at our numbers compared to NPD, you know, that tells us where we are versus our competitors. Overall, not in every category, but overall, we tend to do better. And so even a negative number here is a lower negative number than elsewhere. So, and again, what do we do?

[Richard Galanti, CFO at Costco Wholesale Corporation]

We brought in some smaller ticket items that are impulse snack items to get an extra partial item in everybody's basket. So... Yes, and newness is, you know, bringing those new items. And, you know, there's not been a whole lot in television. You know, our unit sales and TVs are pretty good, but the average price point has come down, as they do anyway. You know, there's always deflationary when you don't have new technology yet, and that's just, we haven't seen a whole lot of new stuff yet there.... Gaming is good right now, and, and Christmas is good. I mean, we're one of the, not the only one, but one of the few that are bringing in seasonal items early.

[Richard Galanti, CFO at Costco Wholesale Corporation]

Everything from decor to trees to toys, that's starting off well so far. But it's new. It's, you know, it's in the last few weeks.

[Erica Eiler, Equity Research at Oppenheimer]

Okay, that's really helpful.

[Richard Galanti, CFO at Costco Wholesale Corporation]

Oh-

[Erica Eiler, Equity Research at Oppenheimer]

Oh, no, go ahead.

[Richard Galanti, CFO at Costco Wholesale Corporation]

I'm sorry, what else did you ask?

[Erica Eiler, Equity Research at Oppenheimer]

Oh, yeah. And then just shifting gears, so I just wanted to touch on, you know, retail media. So obviously, a significant focus on, you know, driving retail media at some of your peers. So just curious if you could maybe talk a little bit about, you know, what Costco is doing in this area and the bigger opportunities that your team sees here.

[Richard Galanti, CFO at Costco Wholesale Corporation]

Well, part of that is some of the things we're doing with digital and mobile and the app. We're not giving out quantifiable numbers, but certainly some of our competitors are talking about doubling these numbers in the next 2 or 3 years. In my view, there's some low-hanging fruit out there, and we're actively working on it. We've hired a couple of people that are helping us with that as well, and more to come.

[Erica Eiler, Equity Research at Oppenheimer]

Okay, great. Thank you so much.

[Operator]

We'll take our next question from Paul Lejuez with Citigroup.

[Brandon Cheatham, VP in Equity Research at Citigroup]

Hey, everyone, this is Brandon Cheatham for Paul. I just wanted to, when you look at the retail landscape, I was wondering, you know, how do your wages compare to your competition? Are you seeing similar trends in, you know, inflation pressure on the wage front? And anything that you can help us with, you know, what your plans are over the next couple quarters?

[Richard Galanti, CFO at Costco Wholesale Corporation]

Well, first of all, we've always prided ourselves in providing the best hourly wage package out there: wages, benefits, contributions to 401(k). I'm using U.S. numbers here, but our average U.S.... 90% of our employees, like many big retailers, are hourly. And our average hourly wage is approaching $26. It's in the high $25s. That's on top of a very rich healthcare plan, where the employee only pays around 11 or 12% of it, I believe. And on top a little less than that. And on top of that, we, irrespective of what an employee contributes to his or her own 401(k), we contribute anywhere from 3%-9% based on years of service.

[Richard Galanti, CFO at Costco Wholesale Corporation]

So you've got a 20-year cashier making, you know, on a, on a full-time basis, in the mid-$60s, with another $4,000 or $5,000 being contributed to his or her 401(k) plan with a very rich healthcare plan. So we stand apart, in our view, compared to anybody. Our pressures are. It comes from ourselves. In the last few years, as there have been wage pressures, starting with, you know, the frontline workers during the beginnings of COVID, we, like many retailers, added a 2% premium, a $2 premium, rather. We kept it longer, to our knowledge, than most anybody for a full year. And at the end, we kept a $1 in there.

[Richard Galanti, CFO at Costco Wholesale Corporation]

And since then, we've had at least 3 or 4 increases on top of the normal top-of-scale increase that we do every, generally have done every year. We have done every year. So in our view, the pressure comes from us, and we feel that we're way ahead of our competition in that regard.

[Brandon Cheatham, VP in Equity Research at Citigroup]

Got it. That's helpful. Thanks. And I think you mentioned that the next iteration on the app, you're gonna be able to scan barcodes. Is the idea that eventually the customer is gonna be able to scan and go? And how could that, you know, help flow operations in your stores, if that is the case?

[Richard Galanti, CFO at Costco Wholesale Corporation]

I don't think we're prepared for scan and go yet. We're just gonna scan, but they can't go. So, you know, at the end, at the end of the day, the first order of business is getting the merchandise on there and have numbers that where a member even goes online to say, "Hey, you can also get this currently at your local location." So, knowing what's in store when somebody wants to come out, I think that's gonna be a big positive to start with. And part of the scan is to be able to get more product information on the item as well.

[Brandon Cheatham, VP in Equity Research at Citigroup]

Gotcha, that makes sense. Okay, I appreciate it. Good luck.

[Operator]

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

[Greg Melich, Senior Managing Director leading the Broadlines & Hardlines Team at Evercore]

Hi, thanks. I have 2 questions, Richard. First, I'd love an update, given the volatility in gas prices the last year and a half, as to where we are on penny profit. I know it had improved a lot, but I'm curious if it came back down in the last 12 months or if it sort of stabilized at that higher level.

[Richard Galanti, CFO at Costco Wholesale Corporation]

Well, we don't give specific numbers. You know, gas has been stronger for us and, we believe, all retailers in the last few years. In fact, it was Q4 last year, which I think was our strongest quarter, recognizing it's a 16-week quarter. This Q4, it was still strong, down from its strongest a year earlier on a weekly basis, but nonetheless, quite strong. And so it's part of the profit picture currently of all big retailers that sell gas, the supermarkets, the Walmarts, the Costcos of the world. So, you know, it's still a profitable business. It's...

[Richard Galanti, CFO at Costco Wholesale Corporation]

Our view has been, it used to be when prices, given that we turn it so fast, literally almost daily, when the price of gas is going up, the guy down the street who's turning it every 8 or 9 days is paying a little less 4 days ago, and so we make a little less, and when sales went down, gallons went. The price per gallon went down, we made a little more. I think that equation, while it's still true, is not the driver of the bottom line of gas. Everybody seems to be wanting to make more in gas, which allows us, in our view, to make a little more and still be even more profitable. We've seen our competitive spread...

[Richard Galanti, CFO at Costco Wholesale Corporation]

versus our direct competitors at every location, on average, improve over the last couple of years to now be in the, I wanna say, the 30-cent range per gallon.

[Greg Melich, Senior Managing Director leading the Broadlines & Hardlines Team at Evercore]

Mm-hmm.

[Richard Galanti, CFO at Costco Wholesale Corporation]

Mid-30s is the average, which is up. It's an average, and it can range from 10 to 45, but at the end of the day, we feel good about our competitive position. It's increased, and we're still quite profitable. Down a little bit from a year ago, but nonetheless, quite profitable.

[Greg Melich, Senior Managing Director leading the Broadlines & Hardlines Team at Evercore]

That's helpful. Thanks. And then, my follow-up is on cash. I think you finished it with $13.7 billion. I think the last time you got to 13 was when you had a special dividend in 2020. What are your thoughts on, you know, how much cash you need or want, and especially now that there is a positive interest rate on holding cash, does that make you more interested in keeping it, but then you pay more tax? Just how do you think about it?

[Richard Galanti, CFO at Costco Wholesale Corporation]

Well, I think it's, look, at the end of the day, we've done 4 special dividends in the past. It's part of our DNA. At some point, we may do that again. Again, it's somewhat like the answer to the other question about membership fees. It's probably a question of when, not if, but we'll let you know. Certainly, with earning, you know, 5%-ish on that money instead of 0.25%-ish on that money, does make it a little harder to do, but we're not selling at the kind of earnings multiple that we are to earn 5% on our assets. So, you know, at some point we'll do something, and, you know, we'll have to wait and see.

[Greg Melich, Senior Managing Director leading the Broadlines & Hardlines Team at Evercore]

Got it. Thanks, and good luck.

[Operator]

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

[Kelly Bania, Managing Director and Senior Equity Research Analyst at BMO Capital Markets]

Hi, thanks for taking our question, Richard. I just wanted to ask, I think I've asked this many, many times, but seems like another huge quarter for Executive Membership growth, almost 1 million more this quarter. And was just curious if you could talk about the profile of that member today that's either upgrading or starting out as Executive. What's the characteristics of that customer? And any changes in how that Executive member spends in their 1st year in that upgrade, compared to the prior years?

[Richard Galanti, CFO at Costco Wholesale Corporation]

Well, I was joking. I was gonna say, first of all, they're very smart to be an Executive Member. Look, I think we, over the time, we've done a better job of communicating the value of the Executive Member, so we clearly get more people to sign up that way in advance. And we see that over time, a regular member, over the first few years, will buy more every year. An Executive Member starts at a higher level and will buy more every year from that higher level. So, that, that's really the profile that we've seen. I don't have any specifics on how old the member is. I know that when we look at age characteristics of new members, we're still...

[Richard Galanti, CFO at Costco Wholesale Corporation]

You know, everybody used to be concerned 10 years ago, "How are we gonna get millennials when we have an older average customer?" and all that. And we did, with things with items, with things like organic. We're doing the same thing now. We're still getting our, whether it's Gen Z or Gen A or whatever the next gen is, we're we are getting our share of those new members when we look to the profile of our members.

[Kelly Bania, Managing Director and Senior Equity Research Analyst at BMO Capital Markets]

Thanks. And, Richard, I may have missed this, but did you quantify the extra week impact in terms of EBIT or EPS or anything for us?

[Richard Galanti, CFO at Costco Wholesale Corporation]

No, it's, I mean, the simple math would just say it's 16/17 of our quarter is equal to a 16-week quarter. That's about as good as we could do.

[Kelly Bania, Managing Director and Senior Equity Research Analyst at BMO Capital Markets]

Okay, thank you.

[Richard Galanti, CFO at Costco Wholesale Corporation]

But it takes that. I think, like, on net income, it takes the 16 or whatever percent number down to a 9 or something. And that's just simple math.

[Kelly Bania, Managing Director and Senior Equity Research Analyst at BMO Capital Markets]

Perfect.

[Operator]

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

[Oliver Chen, Managing Director and Senior Equity Research Analyst at TD Cowen]

Hi, Richard. Inventory seemed well-positioned. What are your thoughts about where they are now and versus and also how we will model them going forward relative to sales? And then as we look at overall ticket trending negative, that comp starts to ease, so does that imply that won't flex, you know, on, on partly the nature of the ticket comparisons overall? The same question for E-commerce. You know, as you anniversary some of the headwinds, can we expect the comparison to help as well? Thanks a lot, Richard.

[Richard Galanti, CFO at Costco Wholesale Corporation]

Sure. Inventory, as I mentioned, we feel, the merchants feel very good about our inventory levels right now. Are there a few departments a little higher than they want, a few that need a little more, sure? But overall, they're very good. In fact, you know, you look at our fiscal year-end, you know, inventory stood at just under $16.7 billion, and, payables stood at $17.5 billion. So I think this is the running above 100% on that simple ratio is something new. We used to enjoy running 90%-95%. It fluctuates, but, overall, we feel good about our inventories where they are now. And in terms of supply chain, things coming in on time, we feel good about that as well.

[Richard Galanti, CFO at Costco Wholesale Corporation]

Now, as it relates to, as we anniversary the inflection of when we saw some weakness, I think a couple of quarters ago, I mentioned that, "Well, what will help your big ticket sales?" I said, "Well, at least in a few, several more months, we'll anniversary this weakness." So certainly, that's gonna help. I would like to think that it's not just that thing that's gonna help, but... And the same with e-commerce. I mean, we're again one bright spot in this virtually all e-commerce, nearly all e-commerce, was the appliances that...

[Richard Galanti, CFO at Costco Wholesale Corporation]

I think we've done a better job also of showing the value of these items online, not just, you know, the price of the item, which in our case includes delivery and warranty and things like that, more so than some of our competitors, and showing great value there.

[Oliver Chen, Managing Director and Senior Equity Research Analyst at TD Cowen]

Okay, thanks, Richard. Just a couple of short ones. Would love any thoughts on Instacart. It seems like it's a really great partnership that you've had for a while. Also another question we had is, will EV charging, you know, play a role in how you're thinking about future services for customers? Finally, China. It's a smaller percentage of total, but it's an important market for the long term. Lots happening there. Has anything changed the value proposition or the geopolitics? Thanks.

[Richard Galanti, CFO at Costco Wholesale Corporation]

Okay, yeah, I had the second and third. What was the first question?

[Operator]

Instacart.

[Richard Galanti, CFO at Costco Wholesale Corporation]

Oh, Instacart. Look, I know they just went public, so we've gotten a lot of questions. At the end of the day, they're good. We're a good partner with them. They're a good partner for us. We use them throughout the U.S. and Canada, and sales are growing. We've added, you know, during COVID, we added some non-food items that still can be carried in the car, if you will. And we're doing, I think, prescriptions with them now. And so no, it's a good relationship and has been for a while.

[Simeon Gutman, Executive Director and Senior Equity Analyst at Morgan Stanley]

We didn't know that 6 months ago.

[Richard Galanti, CFO at Costco Wholesale Corporation]

Yeah. I might add, though, that with regard to those sales, we include that in our warehouse sales, not our e-commerce sales, because it's their employee coming into Costco to shop, purchase at the register, and then take it to the customer. So that's not in our mobile or e-commerce sales. As it relates to EV charging, we're testing it in a number of locations. Not a whole lot to be said. You know, if there's a charge for it, it's gonna be less at Costco, and we'll wait and see. And then as it relates to China, no, we've just opened a few weeks ago, our 5th location.

[Simeon Gutman, Executive Director and Senior Equity Analyst at Morgan Stanley]

2 more.

[Richard Galanti, CFO at Costco Wholesale Corporation]

We have 2 more planned this fiscal year, both in the, I think one in-

[Simeon Gutman, Executive Director and Senior Equity Analyst at Morgan Stanley]

Shenzhen.

[Richard Galanti, CFO at Costco Wholesale Corporation]

...Shenzhen and early calendar 2024, and one other one before the end of August. So we'll have 7 locations up from 2 a year and a half ago. And, you know, so far, our openings there have treated us well overall.

[Oliver Chen, Managing Director and Senior Equity Research Analyst at TD Cowen]

Thank you. Best regards.

[Operator]

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

[Scot Ciccarelli, Managing Director and Senior Equity Research Analyst at Truist]

Good evening, guys. Can you help us understand a bit better how the Costco Next process works? I mean, is it similar to how your E-commerce business used to work, where products were essentially drop shipped from their vendors? And if that's the case, Richard, how do you control the quality of the product and delivery process? Because I thought that became an issue for you guys, before you took over your own distribution for e-com.

[Richard Galanti, CFO at Costco Wholesale Corporation]

Yeah. Costco Next is drop shipped. But we curate the items with these suppliers, and they're, for the most part, pretty well-known brands. And so far, we have not had an issue on that, recognizing you know, it tends to be items that are easily shipped to a home. Yeah, and we're-

[Scot Ciccarelli, Managing Director and Senior Equity Research Analyst at Truist]

And how-

[Richard Galanti, CFO at Costco Wholesale Corporation]

... we're doing, we have all the tracking information as well. So all I can tell you is you're right about that. That's a good point. Years ago, when we did this, there was a difference, but so far it's worked quite well for us. We've had very few customer issues as it relates to items purchased on costco.com to on costconext.com.

[Scot Ciccarelli, Managing Director and Senior Equity Research Analyst at Truist]

Okay, understood. Thank you. And then, another inflation question. If we do wind up getting outright deflation, outside of improved traffic or unit velocity, are there ways to protect margins? Because, it seems to me like that could wind up being a deflator to the margin if we're in a deflationary environment there.

[Richard Galanti, CFO at Costco Wholesale Corporation]

Well, you know, look, that's what our business is about. We're, you know... We'll take a 10-pack and make it a 12-pack, I guess. But at the end of the day, if there's a little disinflation, it'll impact all of us. But again, I think it should be favorable with us because we'll show the best—we'll still show the best value out there.

[Scot Ciccarelli, Managing Director and Senior Equity Research Analyst at Truist]

Understood. Thank you.

[Operator]

We'll take our next question.

[Richard Galanti, CFO at Costco Wholesale Corporation]

Before you do, another comment was made at the table here, that if there is a deflation or disinflation, we've got a $450-$500 million LIFO reserve that'll be on a reported basis will be part of a tailwind of that disinflation.

[Scot Ciccarelli, Managing Director and Senior Equity Research Analyst at Truist]

Got it. Thank you.

[Operator]

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

[Scott Mushkin, Founder and Managing Partner at R5 Capital]

Hey, Richard. Thanks for taking my question. I don't think we've talked a lot about it, but, you know, what's competition like out there now that we're seeing inflation come down and volumes, particularly for some guys, are negative? Just wondering what it looks like out there.

[Richard Galanti, CFO at Costco Wholesale Corporation]

I think, look, we've said this for a few years now, our competition with Sam's is the most direct, and we've seen improvements in parts of what they do from our perspective. They're tough competitors, and so are we. But I think they've continued to get to improve over time, and as have we.

[Scott Mushkin, Founder and Managing Partner at R5 Capital]

Okay.

[Richard Galanti, CFO at Costco Wholesale Corporation]

I don't... You know, we don't really see a whole lot of other things. You know, BJ's, while we respect their model and what they do, it's a slightly different model, so there's not as much. There's certainly, when we are competing directly as a membership warehouse club, we're making sure we're sharp on pricing, particularly in fresh and things like that, you know, supermarket items. Beyond that... Yeah, our view is on the non-food side, we're gaining share, as evidenced by the numbers we see in some of these NPD results and the thing that I just called out on appliances and things like that. Recognizing appliances is, whatever, a $30 billion business, we're still a small piece of it, but growing, growing rapidly.

[Scott Mushkin, Founder and Managing Partner at R5 Capital]

Thanks. And then I know it came up earlier about raising membership rates, but I kind of philosophical, like, you know, this recession, not recession, you know, maybe there will be one. How does the company look at raising the membership fee if the economy is slowing fast? Does it matter? Does it factor in?

[Richard Galanti, CFO at Costco Wholesale Corporation]

I think it mattered. It does matter, and I think it really mattered as we approached kind of the 5 and a half years post June of 2017. We were in the high— You know, the headline every day was inflation and economy. So, you know, we're doing great. We've got great loyalty. If we wait a little longer, so be it. And that's kinda how we feel right now, so.

[Scott Mushkin, Founder and Managing Partner at R5 Capital]

Okay, great. Thanks. I'll yield.

[Operator]

We'll take our next question from Chris Horvers with J.P. Morgan.

[Chris Horvers, Managing Director and Senior Equity Research Analyst at JPMorgan]

Thanks. Good evening, Richard. So, your core-on-core margins were up a lot in this quarter. Can you talk about what, what drove that? I think you mentioned food and sundries. Is that successful vendor-funded promotions? Is there anything one-time in nature about that gain that we shouldn't extrapolate forward?

[Richard Galanti, CFO at Costco Wholesale Corporation]

Yeah, well, aside from LIFO, no—you know, markdowns were a lot less. I think-

[Richard Galanti, CFO at Costco Wholesale Corporation]

Core on core.

[Richard Galanti, CFO at Costco Wholesale Corporation]

Core on core. So no markdowns was a big piece of it, particularly on the non-food side. That helped. We, you know, last year we had. It was a year ago that all of us, including Costco, I think our inventories on a year-over-year basis were up 26%, 1, for 2 quarters in a row. And, of course, those have all come down. And so, that was probably the biggest single thing in those numbers. Yeah.

[Chris Horvers, Managing Director and Senior Equity Research Analyst at JPMorgan]

And the-

[Richard Galanti, CFO at Costco Wholesale Corporation]

A comment that was made at the table here, we're back on track on seasonal in and out dates, so we're not having... You know, it was a year and a half ago, when certain seasonal items came in late, and just to move them out, not to have to store them as much. Some we did store, but to move them out where we felt that was the best way to do it, we took extra markdowns, so that helped.

[Chris Horvers, Managing Director and Senior Equity Research Analyst at JPMorgan]

Then a follow-up question around the consumer. You know, you just came through the back-to-school season. There are some important electronics categories that are a big part of the basket during that time of year, that also become a big part of the basket around holiday. Are you seeing, you know, iPads and PCs and notebooks? Are you seeing positive unit trends, and how does it make you feel about the upcoming holiday season?

[Richard Galanti, CFO at Costco Wholesale Corporation]

Gaming is up. Some of the Apple products are up with-

[Brandon Cheatham, VP in Equity Research at Citigroup]

Apple is up.

[Richard Galanti, CFO at Costco Wholesale Corporation]

TV units are up, but again, the average price points have come down some. Tablets are up, and audio is up a little.

[Chris Horvers, Managing Director and Senior Equity Research Analyst at JPMorgan]

But not notebooks and computers?

[Richard Galanti, CFO at Costco Wholesale Corporation]

Um, no.

[Company Representative]

Less down.

[Chris Horvers, Managing Director and Senior Equity Research Analyst at JPMorgan]

Got it. Thanks.

[Richard Galanti, CFO at Costco Wholesale Corporation]

Less down was the answer I got.

[Chris Horvers, Managing Director and Senior Equity Research Analyst at JPMorgan]

Understood. Thanks so much.

[Operator]

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

[John Heinbockel, Managing Director at Guggenheim]

So, Richard, first thing, maybe, you know, just talk about how you look at cannibalization, versus, expanding the market in the U.S., right? And if you—you know, obviously, you, you can now put, it looks like locations closer together. When you kind of look at the U.S. in total, is, is there a number, right, that you guys have in mind that's, that's now possible, you know, given what you're doing with density?

[Richard Galanti, CFO at Costco Wholesale Corporation]

We could add another $150 million.

[Richard Galanti, CFO at Costco Wholesale Corporation]

Yeah. Yeah. Our view is over the next 10 years, that we could add easily another 150, and that's on top of however many business centers, you know, falling.

[Brandon Cheatham, VP in Equity Research at Citigroup]

Yes.

[Richard Galanti, CFO at Costco Wholesale Corporation]

But just in the U.S. So that number keeps changing. You know, if you had asked me 6, 8 years ago, where we'd be today, I would say if we were 70/30 U.S. back then, we'd be 50/50 by now. Outside the country, we'd be fifty... And today, we're 65, 70 in the U.S. still. So, we're finding more opportunities here, and it's evidenced by just the sheer volumes of the units that our units are doing today versus 3 or 4 years ago. It's much higher than we would have expected 3 or 4 years ago. So we think that there's still a lot of runway in that regard.

[John Heinbockel, Managing Director at Guggenheim]

Just quick follow-up, I know you guys haven't been particularly interested in BOPUS, right, for cost reasons, and I assume that's still the case. You know, there's a consumer argument for it, but I think it's hard to make the cost side of it work. Is that still your view?

[Richard Galanti, CFO at Costco Wholesale Corporation]

That is still our view overall. In addition to, you know, the thing I mentioned a little bit with, what we're doing with Instacart on some non-food items as well, we are testing in-store some big-ticket items like TVs, but on a limited basis to see what happens for buy online and pick up in store.

[John Heinbockel, Managing Director at Guggenheim]

Okay, thank you.

[Operator]

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

[Joe Feldman, Senior Managing Director and the Assistant Director of Research at Telsey Advisory Group]

Hey, guys. Thanks for taking the question. Wanted to ask about the CPG guys. Are they funding promotions a little more regularly with you guys? I know you did something, I think, with P&G that seemed like a clever promotion, you know, to get a gift card back from them, it seemed. And I'm just wondering what you're seeing across the other vendors?

[Richard Galanti, CFO at Costco Wholesale Corporation]

Yeah, well, the P&G thing, we actually, we did that last year as well. We've done it for a couple of years, and, needless to say, we did it again. It's growing, so yeah. And, and once we do that with one, we wanna share that excitement with others to see what, what other types of things we can drive that way. So yeah, I'd say there's probably a little bit more increase on that type of promotional things.

[Richard Galanti, CFO at Costco Wholesale Corporation]

And then talking.

[Joe Feldman, Senior Managing Director and the Assistant Director of Research at Telsey Advisory Group]

Yeah, and then, yeah, go ahead.

[Richard Galanti, CFO at Costco Wholesale Corporation]

Inventory available for those things, because we could really drive sales of those items in a short period of time.

[Joe Feldman, Senior Managing Director and the Assistant Director of Research at Telsey Advisory Group]

Right. That makes sense. Yeah, the volume that you guys do. And then are you guys approaching the holiday any different this year? I know you mentioned Christmas goods are off to a good start, but is that, you know, earlier than normal? I feel like you, you're about the same timing, but maybe you could share thoughts on the approach to the holiday season.

[Richard Galanti, CFO at Costco Wholesale Corporation]

If it's earlier, it's a week or 2 earlier. And some things came in early, and...

[Richard Galanti, CFO at Costco Wholesale Corporation]

Yeah. Yeah. It's a little early compared to some of the supply chain disruptions we had, which, you know, screwed up a lot of things. But if you go back to where we were before COVID, we're probably at or very slightly earlier. And in terms of how we're approaching it, we're approaching it aggressively in terms of, you know, having stuff to sell to the member. But we wanna be, you know, we wanna be out, too. Typically, this is nothing different here. You know, even on things like toys, we'll bring in a few things, you know, in the last couple of weeks before Christmas, that if they don't sell through, we're not at risk of having to mark them down dramatically because they're not unique just to Christmas.

[Joe Feldman, Senior Managing Director and the Assistant Director of Research at Telsey Advisory Group]

Understood. Understood. No, that's great. No, thanks, guys, and good luck this quarter, Richard.

[Richard Galanti, CFO at Costco Wholesale Corporation]

Well, thank you, everyone. We're around to answer questions, and have a good holiday, and we'll talk to you soon.

[Operator]

This does conclude today's presentation. Thank you for your participation, and you may now disconnect.

Participants

Executives

• Richard Galanti, CFO

Analysts

• Simeon Gutman, Executive Director and Senior Equity Analyst at Morgan Stanley
• Michael Lasser, Managing Director and Senior Equity Research Analyst at UBS
• Chuck Grom, Managing Director at Gordon Haskett
• Peter Benedict, Senior Research Analyst at Baird
• Erica Eiler, Equity Research at Oppenheimer
• Brandon Cheatham, VP in Equity Research at Citigroup
• Greg Melich, Senior Managing Director leading the Broadlines & Hardlines Team at Evercore
• Kelly Bania, Managing Director and Senior Equity Research Analyst at BMO Capital Markets
• Oliver Chen, Managing Director and Senior Equity Research Analyst at TD Cowen
• Scot Ciccarelli, Managing Director and Senior Equity Research Analyst at Truist
• Scott Mushkin, Founder and Managing Partner at R5 Capital
• Chris Horvers, Managing Director and Senior Equity Research Analyst at JPMorgan
• Company Representative
• John Heinbockel, Managing Director at Guggenheim
• Joe Feldman, Senior Managing Director and the Assistant Director of Research at Telsey Advisory Group