Costco Wholesale Q4 2021 Earnings Call Transcript

Quartr
Provided by Quartr
September 22, 2021

There are 12 speakers on the call.

Operator

Good day and thank you for standing by. Welcome to the 4th Quarter Earnings Call. At this time, all participants are in a listen only mode. Please be advised that today's conference is being recorded. After the speakers' presentation, there will be a question and answer session.

Speaker 1

I

Operator

would now like to hand the conference over to your first speaker for today, Mr. Richard Galanti, CFO. Thank you. Please go ahead.

Speaker 2

Thank you, Anne, and good afternoon to everyone. I'll start by stating that these discussions will include forward looking statements within the meaning of the Private Securities Litigation Act of 1995, these statements involve risks and uncertainties that may cause actual events, results and or performance to differ materially from those 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 2021 to 16 weeks ended August 29. Reported net income for the quarter came in at $1,670,000,000 or $3.76 per share.

Speaker 2

Last year's Q4 net income came in at $1,389,000,000 or $3.13 per diluted share. This year's Q4 included an $84,000,000 pre tax or $0.14 a share charge for the write off of certain IT assets. Last year's Q4 included $281,000,000 pre tax charge or $0.47 a share of COVID related costs, As well, it included a $36,000,000 or $0.06 a share pre tax charge related to the prepayment of $1,500,000,000 of debt, partially offset by an $84,000,000 or $0.15 per share benefit for the partial reversal of a reserve related to a product Tax assessment taken in the fiscal year 2019. Net sales for the quarter increased 17.5 percent to $61,440,000,000 up from $52,280,000,000 a year earlier in the Q4. Comparable sales for the Q4, as reported an hour ago, For the 16 weeks on a reported basis, the U.

Speaker 2

S. Was 14.9%. Excluding gas inflation and FX, the 14.9% would be 10.3% positive. Canada reported 19.5 percent plus, ex gas inflation and FX 6.7 percent. Other International reported 15%, without gas inflation and FX 7.3 percent total company 15.5% reported, 9.4 percent ex gas inflation and FX.

Speaker 2

E Commerce, by the way, reported was 11.2% positive, ex Gas inflation and FX 8.9%. In terms of Q4 comp sales metrics, Traffic or shopping frequency increased 9.2% worldwide and 8.8% in the U. S. Our average transaction or basket was up 5 8% worldwide and 5.6% in the U. S.

Speaker 2

During the Q4. Those numbers including the positive impacts from gas inflation and FX. Foreign currencies relative to the U. S. Dollar positively impact sales by approximately 2 30 basis points, whereas gasoline price inflation positively impacted sales by approximately 385 basis points.

Speaker 2

Moving down the income statement to the membership line. Membership fee income for the Q4 came in at 1 point $234,000,000,000 in the Q4 of 2021. That's up $128,000,000 from the prior year's 4th quarter membership fee income of 1 point $106,000,000,000 The $128,000,000 represents an 11.7% increase year over year. Excluding the benefit from Positive FX, the $128,000,000 positive number would have been $107,000,000 positive or a 9.7% effective increase. In terms of renewal rates, at the 4th quarter end, our U.

Speaker 2

S. And Canada renewal rate was 91.3%, Up 0.3 percentage point from 16 week earlier number at Q3 end. And worldwide rate came in renewal rate came in at 88.7%, also up 3 tenths of a percentage point from Q3 and 16 weeks earlier. Renewal rates are benefiting, we believe, from more members auto renewing as well as increased penetration of executive members who on average renew at a higher rate than non executive members. Our 1st year renewal rates have also improved As well during this time.

Speaker 2

In terms of number of members at Q4 end, member households and total cardholders, At Q4 fiscal year end a few weeks ago, total paid households were 61,700,000. That's up $1,100,000 from the $60,600,000 figure we shared with you 16 weeks earlier. Total cardholders came in at $111,600,000 or $1,800,000 higher than the $109,800,000 we had as of Q3 end. At Q4 end, paid executive members were came in at $25,600,000 an increase of a little over 1,000,000 new executive members, And that's during the 16 week period as well. Moving down to the gross margin line.

Speaker 2

Our reported gross margin in the 4th quarter was lower year over year by 32 basis points And actually excluding gas deflation, it was higher by 5 basis points. As I usually do, I should jot down 2 columns of numbers, a little gross margin matrix, If you will, the line items will be core merchandise, ancillary second line item would be ancillary and other businesses, 3rd line item would be 2% reward. 4th line item would be LIFO. And last line item would be other. And then finally, the last line item would be total.

Speaker 2

Two columns, the first one being reported year over year in the 4th quarter In the second column, excluding gas inflation. So core merchandise on a reported basis was lower year over year by 90 basis points. Ex gas inflation, it was lower at minus 57 basis points. Ancillary and other businesses, plus 44% on a reported basis And plus 53% ex gas inflation 2% reward plus 1 basis point and minus 3% Year over year on a report on a ex gas inflation, LIFO, minus 5 and minus 5 basis points And other plus 18 and plus 17. If you add up the 2 columns, you get the total for reported, the 32 basis points that I just mentioned, And again, ex gas inflation plus 5 basis points.

Speaker 2

Now the core merchandise component you see here lower by 90 year over year and lower by 57 ex gas inflation. Similar to last quarter, this is primarily a function of sales shifting from core to ancillary versus the last year as we begin to revert back to more historical sales penetrations. Recall last year, we saw a significant shift of sales out of ancillary and other businesses and into the core. In terms of the core margin on their own sales, In the Q4, the core on core margins were lower by 40 basis points with non foods slightly up, food and sundries slightly lower Year over year, Fresh Foods was down and was the fundamental driver of the core on core being lower in the quarter. Now Fresh Foods is lapping exceptional labor productivity and low product spoilage that occurred from the outsized sales a year ago in Q4.

Speaker 2

We retained some of that productivity gains some of those productivity gains as volumes have remained high. However, we've also elected to hold, delay and or mitigate some of the price in this increasingly inflationary environment over the last few months. Ancillary and other business gross margin, as you see in the chart in the matrix, Higher by 44 basis points and higher by 53 ex gas inflation in the quarter. Gasoline had a good quarter as we are lapping year over year A softer quarter due to the pandemic. We also showed improvement in food court, optical travel, all of which were benefited by easy compares versus last year also due to the impacts of COVID on those businesses.

Speaker 2

Now LIFO, this is a gross margin charge that we haven't seen in this matrix for about 7 years. LIFO was lower by 5 basis points both with and without gas inflation. We had a $30,000,000 LIFO charge in the quarter, the 1st such charge since 2014. This is a result of the continued inflationary cost pressures, which I'll discuss more in a few minutes. 2% reward higher by 1 basis point on a reported basis, but more importantly lower by 3 basis points ex gas inflation, Again, implying a slightly higher penetration of sales going to the executive member and the associated rewards that come with it.

Speaker 2

And other is up 18 basis points and then up 17 ex gas inflation. This is primarily related to COVID related costs from a year ago. Moving to SG and A, our reported SG and A in the Q4 was lower or better year over year by 45 basis points and lower or better by 13 basis 2nd matrix of the day, the 2 columns reported and ex gas inflation And 5 line items, operations second line item, central third line item, stock compensation 4th line item, other And in total, on a reported basis, core operations was lower or better by plus 19 basis points and ex gas inflation higher by 8 basis points or minus 8 basis points. Central, plus 12 and +8 stock compensation, plus 2 and +2 And other plus 12 and plus 11. Adding up the columns, again, SG and A on a reported basis was better or lower by 45 basis points And lower ex gas inflation by 13.

Speaker 2

As you can see in the matrix, the core operations component again was better by 'nineteen and Lower by 'nineteen and then or higher by 'eight excluding the impact from gas inflation. Keep in mind, results includes the permanent $1 an hour wage increase that we implemented in March of this year. This higher by 8 basis point year over year expense result It includes the 14 basis point cost of the dollar an hour wage increase. Central, again, improved by 8 basis points ex gas inflation. And stock compensation also with strong sales helped by 2 basis points.

Speaker 2

Now the other of plus 12 or plus 11 without gas inflation, so Lower those amount of basis points. Included in other last year was the COVID expense of $217,000,000 or 42 basis points And the reversal of a product tax assessment reserve of $84,000,000 or 16 basis points. This year includes the write off of the IT assets totaling $84,000,000 or 14 basis points. So you add all those up, that's where you get the 11. Next on the income statement Pre opening this year was $35,000,000 last year $26,000,000 so higher by $9,000,000 Pre opening is up year over year In part due to the timing of openings and given different amount of preopening on a given location, both within the quarter and in the following quarter.

Speaker 2

All told, reported operating income in the 4th quarter increased by 18% coming in at $2,275,000,000 This year compared to $1,920,000,000 a year earlier. Below the operating income line, interest expense was $52,000,000 this year, essentially the same in $51,000,000 a year ago. Interest income and other for the quarter was higher by $77,000,000 year over year. Roughly half of that is due to favorable FX And the other half is related to last year's Q4 charge for the make whole debt prepayment. Overall reported pretax earnings in the Q4 of 2021 Came in up 23 percent coming in at $2,291,000,000 compared to last year's 1,869,000,000 Now our tax rate in the Q4 was 26.1 percent, higher than last year's Q4 rate of 24.9%.

Speaker 2

For fiscal 2022, based on our current estimates, Which of course can always change. We anticipate that our effective normalized total company tax rate to be similar to fiscal 2021 Somewhere in the 26% to 27% range, unless of course there are changes to the U. S. Corporate tax rates, we'll have to see, wait and see. A few other items of note, warehouse expansion.

Speaker 2

For fiscal 2021, we just ended. We opened net openings of 20. We actually had 22 openings, including 2 relocations, but a total increase of 20 net units. This year, We're looking to open at least 25 net new units, including 2nd warehouses in each of China and France and our first location in New Zealand. As well, we plan to relocate 5 locations.

Speaker 2

Regarding capital expenditures, our Q4 2021 spend Capital expenditure was approximately $1,090,000,000 Our full year CapEx spend was $3,590,000,000 As I mentioned in the last quarter's call, this included a relatively recent $340,000,000 purchase of a Distribution facility on the West Coast to support our big and bulky delivery activities. For e commerce, E commerce sales in the Q4 ex FX increased by 8.9% year over year. That's on top of last year's Q4 e commerce sales increase of 91%. Stronger departments, jewelry, we actually sold a couple of rings in the $100,000 range. Home furnishings was strong, pharmacy was strong and sporting goods A couple of other large departments like majors and electronics, while very good sales, we had really outsized sales a year ago in the Q4 during COVID.

Speaker 2

Update on Costco Logistics. Logistics continues to drive big and bulky sales. For the quarter, Costco Logistics sales Within our delivery was up 130% and in the quarter represented 24% of all sales on our U. S. E commerce site.

Speaker 2

That compares to that 24% compares to 11% of e commerce sales last year. Mind you, much of that relates to moving things From other third parties to our own internal logistics department. Currently approximately 7000 to 10000 daily deliveries via Costco Logistics Are occurring and continuing to grow. In terms of our e com app, we have over 10,000,000 downloads. It's continually improving with additional features coming soon.

Speaker 2

Digital payment using the Costco credit card, it's in pilot in several locations with full rollout by the middle of next month. The ability to view warehouse receipts online also next month, more detail on online purchases as well. And by October end, we an improved mobile site, From a supply chain perspective, I want to go back to 2 things, supply chain and inflation. From a supply chain perspective, the factors pressuring Supply chains and inflation include port delays, container shortages, COVID disruptions, shortages on various components, Raw materials and ingredients, labor cost pressures and trucker and driver shortages trucks and driver shortages. Domestically anecdotally rather, from a even on a domestic side, various major brands are requesting longer lead times.

Speaker 2

Some cases difficulty in finding drivers and trucks on short notice. Lead times on ingredients and packaging have been extended in some cases. So planning is crucial, which I feel we've our people have done a great job with that over the last several months. Also, we're putting some limitations on key items, like bath tissues, roll towels, Crook and Signature Water, high demand cleaning related related to the uptick in Delta related demand. Furniture delays and some shortages have caused traditional rollout times to go from 8 to 12 weeks From 8 to 12 weeks up to 16 to 18 weeks.

Speaker 2

In some ways, we think that's an advantage. We're selling out generally merchandise once it's received within 2 weeks on most items, And we've ordered more and earlier. Same thing with Toys and Sezzle, we're bringing in some of the items early. Chip shortages Impacting many items, as I mentioned in the last call, examples of impacted items, computers, tablets, video games, major appliances. Feeling is from the buyers is this will likely extend into 2022.

Speaker 2

Again, we're ordering as much as we can and getting in earlier. And I think as evidenced by most recent sales results, we're doing okay with this. Despite these issues sorry, in terms of transportation costs, They're increasing. We're reading about it every day. Containers, trucks and drivers all are impacting the timing of deliveries and higher freight costs.

Speaker 2

Despite all these issues, we continue to work to mitigate cost increases in a variety of different ways and hold down and or mitigate our price increases passed on to the members. We've also chartered 3 ocean vessels for the next year to transport containers between Asia and the U. S. And Canada, and we've leased several 1,000 containers for use on these ships. Every ship can carry 800 to 1000 containers at a time and will make approximately 10 deliveries during the course of the next Moving to inflation.

Speaker 2

Again, there have been many there have been and are a variety of inflationary pressures that we and others are seeing and As I discussed on last quarter's call, inflationary factors abound, higher labor costs, higher freight costs, higher transportation demand, Along with container shortages and port delays, increased demand in certain product categories, various shortages of everything from computer chips to oils and chemicals, Higher commodities prices, it's a lot of fun right now. Some inflationary sound bites, if you will, price increases on items shipped across the oceans, Some suppliers or us paying 2 to 6 times for containers and shipping, price increases of pulp and paper goods, some items up 4% to 8%. Again, we're trying to mitigate those where we can and we think we've done a decent job of mitigating some of it. Plastics, resin increases on things like trash bags, ziplock pet products including resin oriented pet products, plastic cups, plates, plastic wrap, many items up in the 5% to 11% range. Metals, again, aluminum foil, mid single digit cost increases and as well as cans for sodas and other beverages.

Speaker 2

I mentioned commodities earlier, oil, coffee, nuts. They remain generally according to our buyers at 5 year highs and so on. Higher import prices on things from Europe like eases both the combination of freight and FX, 3% to 10% increases on certain, but not all apparel items And fresh fresh foods inflation is up in the mid to high single digits with meat leading the way up high single to low double digits due to feed, labor and transportation costs. Now I was asked back in March at our 2nd quarter earnings call at what level we felt inflation was running overall on the sell price side. I stated that our best guess at the time was somewhere between 1% and 1.5%.

Speaker 2

I updated that 16 weeks earlier 16 weeks ago on our May 26 3rd quarter call and we estimate to be in the 2.5% to 3.5% range. As of today and talking with our senior merchants, We would estimate overall price inflation of the products we're selling to be in the 3.5% to 4.5% range. As I discussed earlier, Disinflation was the driver of the $30,000,000 LIFO charge that we took in the quarter. But all of this said, I feel very good with the job that our merchants, our traffic department, Our operators have all been doing and able to in order to get the products that we need, pivot when and where necessary And keep our warehouses full, while keeping prices as low as we can for our members and continuing to show incredible value versus our competitors. I think this is reflected in our strong reported sales and profits that we've achieved despite challenges and our typical aggressive pricing.

Speaker 2

Finally, in terms of upcoming releases, we will announce our September sales results for the 5 weeks ending Sunday, October 3 on Wednesday, October 6 after the market close. And with that, I will open it up for questions with Ann. Ann, thank you.

Operator

Thank you. We have our first question from the line of Simeon Gutman from Morgan Stanley, your line is now open.

Speaker 3

Hey, Richard. My first question is on next fiscal year. I know you don't give a lot in terms of guidance, but wanted to ask if you think or how should we think about EBIT, whether it grows or not next year? And if you don't answer that, I was going to ask if comps grow in fiscal 2022 should EBIT grow?

Speaker 2

Well, on the first question, of course, can't say we don't provide guidance, but we've always talked about being a top line company and that Helps a lot of things. So depending on what level of sales, we'll have to wait and see. We do have The dollar increases started in March that will anniversary next February, so at the end of Q2 next year. But again, we've shown that with what we view as Holding the line as much as we can on pricing and being pretty aggressive there and taking that into account, we've shown that with strong sales, we can Certainly improved the bottom line as well. So fingers crossed.

Speaker 3

So my follow-up, maybe 2 parts, And one of them is on sales and then you mentioned the wage increase. So on the sales side, is there anything that you're looking at or approaching different? I know extreme value is one angle, but timing of mailers, inventory availability looking better, is it ancillary that hasn't recovered? What can

Speaker 1

you do on the top line

Speaker 3

given how big of a Larry, that hasn't recovered. What can you do on the top line given how big of a lap? And then you mentioned the wage increases, and I know you'll lap those in March, but you've seen, I think Amazon and Walmart have moved up. And so I'm just curious if how do you think about or should we expect another increase in terms of wages?

Speaker 2

Sure. Well, first of all, as it relates to all the anecdotal comments I made about supply chain and inflation, I think overall, we feel that we're doing a heck of a job in that stuff. And I think some of the advantage we have is that certainly have the financial ability to bring in things early or to order early and to mitigate whatever delay may have occurred. We certainly have the space to keep some of this stuff, Most particularly because of our Acosta Logistics acquisition a year ago, 2 additional storage space, if you will. Not that we're having an issue with that because it's Turning pretty fast.

Speaker 2

And the fact that we're able to pivot, we're bringing in new items. We're bringing in items off season. For Christmas, Not pre COVID, it was not it was toys and trim a home and electronics. Today, it's all those things plus Things for the house, for barbecue grills, even summer items, but anything you can get your hands on. And again, I think we've done a very good job of adding suppliers where we can.

Speaker 2

And also making sure we're coming up with new items and being creative and innovative Even on the food and sundry side. So I think from that standpoint, despite sometimes looking at each other, And the traffic people and everything is just saying, boy, this when is this going to end? The fact is, I think we're doing a very good job of that. So from an inventory standpoint, I think For those of you who and several of you do go in and visit our locations on a random basis, they're full. They look good compared to some of the pictures we see from others sometimes.

Speaker 2

And so I feel from that standpoint, we have a good issue. With inflation, to the extent that there's permanent inflationary Items like freight costs are even somewhat permanent for the next year. We can't hold on to all those. Some of that has to be passed on and it is being passed John, we're pragmatic about it, but we recognize that since things have been so successful And our sales have been strong. We can hold the line on some of those things and do a little better job or hopefully do a better job than some of our competitors have and Be even that more extreme in the value.

Speaker 2

So I think all those things so far at least despite the challenges have worked in our favor a little bit.

Speaker 3

Okay. Thanks, Richard.

Operator

Thank you. Our next question comes from the line of Michael Lasser from UBS, your line is now open.

Speaker 4

Good evening. Thanks a lot for taking my question, Richard. In the past, what you said is that Costco's profitability tends to draft up the profitability of the overall retail sector. In the last year and a half, the profitability of the overall retail sector has moved nicely higher. Also, Costco's profitability, its margins have moved nicely higher.

Speaker 4

Do you view this as sustainable?

Speaker 2

Well, first of all, let me finish. Simeon had one other question on wages and let me just respond to that. Look, we're known for always being want to have the best wage package and benefits package and take care of our employees package out there in big retail And big boxes and all forms of big retail. And even if the and we raised our lowest Our starting wage to that $16,000,000 $16,500,000 of late. Mind you, our average hourly wage is, I think, in the U.

Speaker 2

S. Is slightly north of 24 With very healthy employee benefit plan, we'll do whatever it takes to continue that model and who knows when and where, but We feel pretty good about where we are. And but as many of you on the call know, irrespective of what's going on with our company In terms of strong sales or weak sales, we're going to do what's right by our employees. And Michael, I'm sorry, now go back to your question.

Speaker 4

Yes. My question was, we've seen an improvement in profitability across retail that tends to influence the profitability or the profit margins of Costco. Do you view this improvement to your profit margin as sustainable from here?

Speaker 2

Okay. Well, look, I think the anomaly over the last year and a half Has been that when a lot of big boxes or big retailers were enjoying comps pre COVID in the, I'll call it the 2% to 4% range or the 2% to 5% range and we are enjoying 5%, 6% and 7%. Now we've been enjoying mid teens or effectively low to mid teens over And we've taken some market share from others. We think that some of that will stick and we hope It will stick. And we feel pretty good right now about what we've done and what we've accomplished.

Speaker 2

To the extent that we can generate greater than industry average comps, I think and that they're they don't have to be in the low to mid teens. They could still be in the mid to high singles that we should continue to improve. But Again, I get back to the comment that has been reinforced internally from the beginning of time, we are a top line company and everything else will take care of itself.

Speaker 4

Got it. My second question is on your gross margin. There's a lot of moving pieces as there are a lot of moving pieces with Everything that's happening with Costco right now, but specifically you're giving back some of the core on core gross margin gains that you experienced from really strong fresh sales last year. But on the other hand, your ancillary businesses are doing really well. So is that dynamic where you're making up for the pressure On the fresh with strong ancillary, is that sustainable?

Speaker 4

And as part of that, the perception is that Costco tends to raise prices at a slower rate than others in the retail landscape, which tends to pressure its margins as Inflation is heating up. What would be different this time to make that not happen? Thank you. Well, I

Speaker 2

think Your first part of your question, I think tells part of the tale is there's so many moving parts. If you look at gasoline, which is a It's 10 plus percent of our sales. It's a huge business, which can have huge variations of gross margin. Knock on wood, always profitable, but it's still quite a range of gross margin. And that's more Reflective of what's going on with competition in the retail gasoline market, we feel that sometimes other Large retailers of gasoline are looking to make a little more, which gives us the ability to be quite profitable, but still show an even bigger savings.

Speaker 2

So there's lots of puts and takes. Certainly from last year, you had I mean, I think there was a 16 week roughly a 16 week period Where our optical and our hearing aid centers were outright closed, travel went to literally having negative revenue because it was not Having new business and it was refunding previously booked business at the trough of COVID. And so there's those kind of anomalies. Again, I get back to thinking that Due to the unfortunate thing called COVID, some businesses have benefited in the sense that we were Central in the sense that our cavernous places, we feel that people felt comfortable coming in. To the extent that we Are able merchandise wise to have pivoted and maintain notwithstanding supply chain issues, maintain Exciting full warehouses of merchandise.

Speaker 2

So I think those are the things that help us.

Speaker 4

Okay. Thank you very much, Richard.

Operator

Thank you. Our next question comes From the line of Chuck Grom from Gordon Haskett, your line is now open.

Speaker 1

Hey, thanks. Richard, if inflation stays up in that 2.5% to I'm sorry, 3.5% to 4.5% range over the next couple of quarters. Would you expect that LIFO charge to be about $30,000,000 per quarter? Or should we Per week or years ago, you used to have that charge every quarter or sometimes a credit. Just wondering how we handle that from here?

Speaker 2

Yes. It's hard to say. I wouldn't just say it's that much based on that. It really depends. And mind you, when you Yes.

Speaker 2

Again, we've enjoyed a number of years of effectively very little if any or no LIFO or eating into a previous LIFO credit 5 6 years ago. So but if there's consistent inflation going forward for the next 2, 3, 4 quarters, You're going to also see some price increases to those customers. And I'm going to say some, there's been some already, but in our view, there's less than we could have And that will continue. And I think the more consistent inflation, if inflation raised stayed at this level, and we don't know that, but if it did stay at this level, Even with a LIFO charge, in some ways, it will be offset by price increases.

Speaker 1

Okay. Okay, great. Thanks. And then on I just don't know if you had a follow-up there. And then on the labor front, I'm curious if you guys have Observed an increase in applications in roughly 20 states that ended unemployment benefits on September 1.

Speaker 1

A number of companies have You've spoken to a big increase in job applications recently?

Speaker 2

I don't know the I haven't asked it. I don't know the answer to that. It makes sense.

Speaker 1

Okay. All right. Good luck. Thanks.

Speaker 2

Thanks.

Operator

Thank you. Next

Speaker 5

I just want to clarify one thing on that last line of questioning. In terms of the LIFO charge, was this 30,000,000 Catch up for the whole year or was that something that was reflective of the quarter itself because that then

Speaker 2

It's the quarter. It's basically if you take your cost Silos of inventory and what was it at Q3 end and what is it now at Q4 end?

Speaker 5

Okay. So I guess, obviously, as you listed all these different pressure points on pricing, I guess my bigger picture question is, how do you think about The membership fee structure in general, there's all these pressures on, I guess, your business, but also on the consumer from an inflationary standpoint make you More likely, less likely or how does it impact your membership fee increase decision process?

Speaker 6

Yes.

Speaker 2

What we've said over the years is that certainly we look at our gross profit as a combination of gross margin plus a membership fee. But we really don't look at it together in that way that, hey, if we do something with the membership fee, we could be more aggressive on pricing. I remember years ago, somebody had asked when The economy had softened and our comps had weakened a little bit and we're coming up on kind of that 5th anniversary ish of a pending increase. Somebody said, given the economy is weak, are you and your sales have weakened a little bit, still a positive number, but weakened a little bit, Would you still do it? And the response at the time was more likely we would do it because that's what we do.

Speaker 2

We could drive lower prices with it and drive more business. And so we really do we look at the loyalty and certainly the loyalty and renewal rates have been up. Yes. Well, and Karen, honestly, we're still a ways away from anniversarying the last the 5th year or so, 5th plus year anniversarying of the last increase. So we're a little ways from thinking about it.

Speaker 5

Okay. And then just, we had a conference today with Some large cap names that kind of indicated that their new view on what their actual cash balance should be going forward relative to pre pandemic It actually increased. So wondering if you could just talk about your perspective on what you think the right like sustainable cash balance could be because obviously you're still sitting on Pretty hefty excess cash balance now.

Speaker 2

I think if we've always been considered to have more cash and have a more conservative balance sheet. I think if the world is saying that they think that it should be going up more, I don't think we've thought about it going up more. In fact, when we did the Capital raise in April of 2020, it related specifically to what was the worst case of COVID. Once 6 months later, we saw that We didn't need it. We promptly gave it back to our shareholders and then a little.

Speaker 2

So I think we're the other anomaly has been is we've been Bless with a very good fiscal year, the last year and a half in terms of net income and operating cash flow Relative to our CapEx, our regular dividend and the special, let's say, that kind of offset that capital that debt we did. And So at the end of the day, I don't see us changing our MO in that at this point.

Speaker 5

Great. Thanks very much.

Operator

Thank you. Next question comes from the line of Chris Hovers from JPMorgan. Your line is now open.

Speaker 7

Thanks. I'll stick a bite at the price in apple. I guess, if I'm interpreting what you're saying, is it basically Because these pressures seem more structural in nature and because the demand environment is so good, you feel less compelled to be more aggressive on price and if the environment slows then that could change your calculus.

Speaker 2

It's really all about the value proposition. If anything, I think from the outside, People would look at us relative to other retailers and saying, we've been more aggressive on holding prices than others, at least that's how we feel. But we have to be pragmatic as these things are permanent and consistent, you've got to raise the price. We can't be completely noble here. But we feel that if anything That moat has probably widened a little bit for us and that's great.

Speaker 2

We like wider moats.

Speaker 7

So the 3rd variable being that others are raising prices faster than you, so the price gaps have widened?

Speaker 2

That's our view. That's our buyers' view. We're looking at it really at us. Given frankly, given how strong it's been and we in our DNA, we hate raising prices. We want to be the last to raise it and the first to lower it.

Speaker 2

In our DNA, not even putting on shades on the side and not even looking At others, we're looking at how do we drive our own business. And we know that being the most the best value out there in having great merchandise and all that other wonderful stuff is how you do it. And as we've seen such strength in our numbers And then as we've encountered rising levels of inflation, where can we hold the price on some things? And that's what we do. It's an art form more than a science, but it seems to work for us.

Speaker 7

For sure. So my second question is The membership fee, MFI growth, ex the FX benefit that you've seen, that number has accelerated The past 2 quarters, so is it given that the accounting of this is over a 12 month basis, You have a view, you have some inkling on what that growth could be as you look forward. Higher renewal rates, obviously taking a ton of share, should all else equal that Level, again, MFI growth ex FX continue to accelerate?

Speaker 2

Well, The big answer is we hope so. The fact that we're opening more units in 2021 than we did in 2020 is a positive. The fact that there are several international units, which tend to have higher growth rates, the fact that auto renew is kind of a freebie in the sense that More people getting signing up and putting a credit card on their application in their application or signing up for the most more importantly signing up for The Citi Visa card, that helps you a little bit. Driving executive more people Today, for every 100 people signing up today, I think a little over half, I don't have an exact number, sign up as an executive member. I remember 6, 7 years ago, 8 years ago, it was half that percentage.

Speaker 2

And these are rough numbers, so don't hold me to them. But at the end of the day, Executive members by its definition have higher renewal rates. They shop more frequently, they buy more stuff. So all that stuff is Those are all good factors for us.

Speaker 7

And just one quick last one. Have you shared how many the percentage of your membership that have In the U. S. That have the Citibank Private Label Card?

Speaker 2

I don't think we have.

Speaker 7

Okay. Thanks. Best of luck. Yes.

Speaker 2

By the way, before the next question, somebody checked, number of we have seen a recent increase in applications In the last couple of weeks. I think Chuck asked that. Okay.

Operator

Thank you. Our next question comes from the line of Paul Lejuez from Citi. Your line is now open.

Speaker 8

Everyone, this is Brandon Cheatham on for Paul. I'm going to take a stab at the membership question as well. You have some great membership statistics. Sounds like you're offering great value in the club. I was wondering, are you thinking about not investing As much in the new member promotions, anything that you could talk on there?

Speaker 8

Has that looked similar to last year? Has that increased?

Speaker 2

No. I think When you say member promotions, what do you mean?

Speaker 8

Yes. I think right now you're offering $40 on Costco Cash Card if you sign up.

Speaker 2

Marketing. Okay. Yes, we do a variety of things, not a huge basis, but we try some things. In the last Few years, we've done some things with Groupon and with LivingSocial. We've done some things like you've mentioned, But those are not on a I'd say they're on a regular, irregular basis.

Speaker 2

And we try different things all the time. But No. I think that's really frankly independent of looking at the membership fee itself. It's really about how do we drive memberships and what is the incremental cost, what What is the true cost of acquiring a new member other than waiting for them to go online or walk into the warehouse to sign up themselves? And so we're always trying some new things.

Speaker 8

Got it. And you mentioned your own chartered ships. I was just wondering what percentage of your shipping would that Represent next year.

Speaker 2

Less than 20%.

Speaker 8

Less than 20%.

Speaker 1

Got it.

Speaker 7

Yes. And

Speaker 2

that's the extent, 20% of our Asia

Speaker 1

shipping. Got

Speaker 4

it. Okay.

Speaker 8

And Last one for me. On the ecom side, I was just wondering, your customer that shops there, do they visit the Store as frequently as a member that doesn't shop online?

Speaker 2

I don't know that off the top of my head. And I don't have all the specific statistics in front of us. All the charts that we look at keep going in the right direction. Number of people that have bought online, percentage of members, The hit rate when we do something on an email to get people to do something online. I think what we do know

Speaker 8

is when we shop In online and in the warehouse, you typically shop maybe a few less times in warehouse, but you overall spend more Okay.

Speaker 2

What Bob has mentioned thank you, Bob, Is that, when you're if you take a regular loyal member and when they do start shopping online, They may shop a few times less in store, but the aggregate of the 2 is greater than their historical, which makes sense. By the way, the other thing there is that online, while we're constantly putting on what I'll call Greater frequently traffic building items or velocity items like apparel and health and beauty aids and things like that. The fact of the matter is, is more and more big and bulky items are bought online. Years ago, if you wanted to buy a mattress or a refrigerator, you had to go buy it and pick it up And take it home, we didn't deliver, we didn't install. That's of course changed in the last many years.

Speaker 2

And we have an appliance business in the U. S. That's well over $1,000,000,000 and growing Fast, continue to grow fast, helped by the Costco Logistics. So that changes the metric a little bit too.

Speaker 8

Great. Thanks for the additional color.

Operator

Thank you. Our next question comes from the line of Mike Baker from Davidson. Your line is now open.

Speaker 6

Hi, thanks. Two questions from me. 1, you did allude to the Delta variant and Having to limit some product in areas where we've seen higher cases. So could you just sort of talk about overall Different trends that you might be seeing in areas that are seeing bigger spikes in the new COVID variant versus others?

Speaker 2

I don't know. I don't have in front of me any detail by region in that regard. What I do know is just like everything right now, it's all over the board. We're talking I forget what cleaning supply it was, whether it was Clorox or Lysol or some type of Antibacterial wipe or whatever it was, but there had been a year ago, there was a shortage of merchandise. Now they've got plenty of merchandise, but there's 2 or 3 week delays on getting it delivered because there's a limit on short term changes to trucking and delivery needs The suppliers.

Speaker 2

So it really is all over the board.

Speaker 6

And maybe as part of that, seeing anything in terms of the travel trends, which I know we're coming back Really strong as of last quarter, but has Delta reverted that at all?

Speaker 2

Yes. If you look to the chart, Which went down and so it's the last summer or last spring it was negative, more refunds than new things being booked. It really got back to almost normal. I'm talking about bookings of resort vacations And like to Hawaii and to Mexico and things like that. And just a month ago, 1.5 months, 2 months ago, at the monthly budget meeting, the charge we're showing was almost back to where it was Pre COVID.

Speaker 2

And then it fell like a rock, not as bad as it was at its trough last spring, But it's certainly come down. Car is not hit as bad, but that will fluctuate based on again what's going on out there.

Speaker 6

Yes. That all makes sense. One more quick one. Those were that was one question in 2 parts. Can you update us on the curbside pickup Test that you were running in New Mexico, I think as of last time we spoke, it was in 3 stores?

Speaker 2

Right. We're currently not doing it. We discontinued it for now. We'll try some new things somewhere sometime. But at this point, we got a lot of good things going on and Yes, we were we really didn't see a lot of traction in it.

Speaker 6

Interesting. Thanks for the color. Appreciate the time.

Operator

Thank you. Our next question comes from the line of Rupesh Parikh from Oppenheimer. Your line is now open.

Speaker 9

Good afternoon. Thanks for taking my questions. So I guess just going back to the core margin. So it sounded like at least this past quarter on the You guys delayed passing through some of the price increases. So as you look at non foods versus your foods categories, is it generally easier to pass through on the non food side First to the food

Speaker 2

side. I wouldn't say that. I think food fresh turns so fast. It turns more than 50 times a year or 50 times a year or whatever. And when you've got a hot price on strip steaks or keeping the rotisserie chicken at 4.99 That's going to impact you a little faster.

Speaker 2

We're going

Speaker 8

to change the price of muffins every week.

Speaker 2

Yes. But the comment here is that we're not going to change the price of muffins every week. So we'll take a little less margin on some items. I think it's all over the board. But at the end of the day, There's it's an art form, not a science or not if straight across we're going to do this much on every item.

Speaker 9

Okay, great. And then second question, just as you look at your service business, optical, food core, etcetera, where are we versus where you were pre pandemic? Have those businesses fully recovered at this point?

Speaker 2

Mostly. Yes, pharmacy and optical have food courts have come back. Hearing aids not quite yet, but it's much better than it was at its trough. And travel is Lots of fun based on what's going on with COVID.

Speaker 9

Okay, great. And one final question. I may have missed this in your prepared comments. Did you guys give a forecast for CapEx for the upcoming fiscal year?

Speaker 2

No, it will have a 3 in front of it.

Speaker 9

Okay. Okay, thank you. Best of luck for the balance of the year.

Speaker 1

Okay. I

Speaker 8

have one more question.

Operator

Thank you. Our next question comes from the line of John Heinbockel from Guggenheim. Your line is now open.

Speaker 10

So Richard, you said it's an art, not a science. I'm curious where you guys sit on data science and analytics around Price elasticity, 1. And 2, personalization of the monthly mailer or monthly emails, Where are we on that journey?

Speaker 2

First of all, as it relates to pricing and elasticity, I think if we were considered the Best company in the world with data analytics, we would still not use it for price elasticity. We're going to do what we do as merchants and look at competitive prices And see how low we can mark something up. And the old saying from years ago, we want to improve margins by lowering and lower prices at the same time by buying better Doing those things. So I don't see that happening at all. As it relates to the other aspect of that, that's coming.

Speaker 2

We made a big investment in what I'll call data analytics for us because we went from darn near 0 to something, but brought on a VP of data analytics a year ago March. There's been a lot of progress, a lot of focus to date has been on the merchandising side, providing better tools to buy and to project and things like that. I think you'll see more of that over the next year. But again, we're getting there. I always look at it as some of the things that others are doing that will help.

Speaker 2

It's low hanging fruit for us because we haven't done it yet, but we'll keep going. But that's where a lot of the data analytics function to date In this past year, as we built a department around it, it has been just that.

Speaker 10

And then secondly, one of the things you guys have been known for, right, is seasonally getting in and out Before everybody else, so you lean into that in an environment, right, where it's hard to chase product, Get it in early, people buy it and they're done for the season. Do you lean into that more in terms of where you can more inventory, Get it in the club or is there a limitation right because you've got a transition from one season to the next?

Speaker 2

I think there's a little bit of both. There's a little bit of taking it where you can get it right now. And certainly, we're consciously bringing in, I think I mentioned on Even what was it furniture where the cycle has gone from 12 14 weeks to 16 18, we're bringing it in early. And certainly on seasonal things, we'll do that On some items, but it's a mixed bag just because we're pivoting and blocking and tackling in 12 different directions like everybody.

Speaker 6

Okay. Thank you.

Speaker 2

Yes. We have time for one last question.

Operator

Thank you. Our last question comes from the line of Kelly Bania from BMO Capital. Your line is now open.

Speaker 11

Hi. Thanks for fitting me in, Richard. Just wanted to ask one more on the inflation. You mentioned that the 3.5 To 4.5 range, just want to clarify that. Is retail inflation just curious, what your cost inflation is and just trying to get a sense of how much You're absorbing.

Speaker 11

And maybe if you can just provide some examples of how Costco and the merchants are mitigating some of the pressures?

Speaker 8

Yes,

Speaker 2

it's both. I'm sorry, what? Yes. Margins have generally stayed the same. I mean, we gave you some examples on the fresh food side where it's changed and why.

Speaker 2

But generally speaking, I think there's, again, a lot of moving parts and we continue to figure out how to balance it.

Speaker 11

Any examples you want to provide about how you're mitigating some of the pressures?

Speaker 2

Well, I mean, I'm not on a specific product example, but the fact is, One, we've got strong relationships and good buying power with our vendors. When we're eating a little bit into something, we're asking in some cases for them to eat a little bit into it. During these times, we're constantly figuring out how to be where are there any cost savings to offset some of the cost increases, whether it's packaging Or whatever it might be. And so I mean, I think one of the things that helps us is that we're worrying about managing 3,800 items not 100,000 Or 50,000 items and that's helped us. Yes.

Speaker 2

There are times where we'll be pivoting in and out of items for that reason also. Sorry to be vague, but it really is there's just so many different things out there.

Speaker 11

All right. Thank

Speaker 2

you. Well, thank you, everyone. We'll be around for any additional questions and have a good week and

Operator

may now disconnect.

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Earnings Conference Call
Costco Wholesale Q4 2021
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