Costco Wholesale Q1 2022 Earnings Call Transcript

Quartr
Provided by Quartr
December 8, 2021

There are 13 speakers on the call.

Operator

Good day, and thank you for standing by, and welcome to the Q1 Earnings Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer session. I would now like to hand the conference over to your speaker today, Richard Galanti. Thank you.

Operator

Please go ahead.

Speaker 1

Thank you, Sadie, 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 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 In today's press release, we reported operating results for the Q1 of fiscal 'twenty two, The 12 weeks ended November 21st.

Speaker 1

Net income for the quarter came in at $1,324,000,000 or $2.98 per diluted share Compared to $1,166,000,000 or $2.62 per diluted share last year. This year included a tax benefit $91,000,000 or $0.21 this year related to stock based compensation and a write off of certain IT assets of $118,000,000 pre tax or $0.20 per share. Last year included tax benefits of $145,000,000 or $0.33 per diluted share, $0.16 of which was due to the deductibility of the $10 per share special cash dividend received by the Company's 401 ks plan participants and $0.17 related to stock based compensation, as well as incremental expenses for COVID-nineteen premium wages of $212,000,000 pre tax, which was hit last year in the quarter of $0.35 per share. Net sales for the quarter increased 16.7 percent to $49,420,000,000 up from $42,350,000,000 a year earlier in the Q1. Same store sales for the Q1 were as follows.

Speaker 1

In the U. S, on a reported basis for the 12 weeks, up 14.9% and excluding gas inflation and the impacts of FX, up 9.9%. Canada reported 17.2%, ex gas and FX plus 8.3%. Other international reported 13.4 Ex gas and inflation and FX up 10.9%. All told, the company reported a 15% increase on a comp basis And 9.8% up ex gas and FX.

Speaker 1

And e commerce, which was reported at 14.3 FX was 13.3. In terms of Q1 comp sales metrics, traffic or shopping frequency increased 6.8 Worldwide and up 5.9% in the U. S. During the quarter. Our average transaction or ticket was up 7.7% worldwide And 8.5% in U.

Speaker 1

S. During the quarter. Excluding the positive impact from gas inflation effects, the average ticket was up ex that Plus 2.5 percent worldwide and plus 3.5 percent in the U. S. Foreign currencies relative to the U.

Speaker 1

S. Dollar positively impact sales by about 90 And gasoline price inflation positively impacted sales by approximately 4.30 basis points. Next on the income statement, membership fee income reported in the quarter $946,000,000 up $85,000,000 or 9.9 percent from last $861,000,000 figure. Ex FX, the $85,000,000 increase would have been $80,000,000 and 9.9% increase would be 9.3%. In terms of renewal rates at Q1 at first Quarter end, our U.

Speaker 1

S. And Canada rate came in at 91.6%, up 3 tenths of a percent from the 12 week earlier figure at Q4 end. As well, the worldwide rate came in at 89.0 percent, also up 3 tenths of a percent from 12 weeks ago at Q4 end. The renewal rates are continuing to benefit from more members auto renewing as well as increased penetration of executive members who on average renew at a higher rate than the non executive members And 1st year renewal rates, which have improved a little. In terms of number of members at end of Q1, in terms of member households as well as total cardholders, At Q1 end, total paid households was 62,500,000, up 800,000 from 61.7 a quarter ago And total cardholders $113,100,000 up $1,500,000 from the $111,600,000 12 weeks ago.

Speaker 1

At Q1 end, paid executive members totaled $26,500,000 an increase of $836,000 during the 12 weeks since Q4 Executive members represent 42% of our members and a little over 70% of our sales. Moving down to the gross margin line. Our reported gross margin for the Q1 was lower year over year by 40 As I normally do, I ask you to jot down a few numbers. There are 2 columns, both reported year over year in Q1 and then without gas inflation year over year in Q1. First line item would be core merchandise Minus 63 basis points year over year on a reported basis and minus 26 basis points without gas inflation.

Speaker 1

Ancillary and other businesses, plus 2% on a reported basis and plus 12% ex gas inflation 2% reward, plus 3 and minus 1 basis point LIFO, minus 3 in both columns other, plus 12 basis points in both columns. Total then on a reported basis, margins were down 49 basis points year over year and ex gas inflation down 6 basis points. In terms of the core merchandise component gross margin being lower by 63 year over year and 26 basis points ex gas inflation. Recall last year in Q1, the core reported was up 83 basis points and ex gas up 66 basis points. So we've retained a good portion of the improvement From 2 years ago in the quarter.

Speaker 1

In terms of the core margin on their own sales, in the first quarter, Our core on core margins were lower by 18 basis points with non foods slightly up and food and sundries slightly lower year over year. Also lower year over year Fresh Foods was the primary driver of the core on core being lower in the quarter. Fresh continues to lap Exceptional labor productivity and low product spoilage that occurred from the outside sales that happened a year ago in the quarter. Ancillary and other business gross margin was higher by 2 basis points on a reported basis and again plus 12 basis points ex Gas inflation. Gas and travel were better year over year as they anniversary a softer quarter a year ago, offset by e comm, which was particularly strong a year ago and also related LIFO, we had a 3 basis point or $14,000,000 LIFO charge in the quarter.

Speaker 1

2% reward, Higher by 3 on a reported basis and lower by 1 excluding gas inflation, a reflection of slightly higher sales penetration going to the increased number of executive And other was up 12 basis points. This is related to COVID related costs from a year ago. That portion of the COVID related wages that go into the Cost of sales like our manufacturing businesses and our meat and bakery departments. Given the inflationary pressures and our ongoing efforts to mitigate price increase Our members in the face of inflation as best we can. Our Q1 gross margins results, all in all, I think we're pretty good.

Speaker 1

Moving to SG and A, our reported SG and A in the Q1 was lower or better year over year by 66 basis points And 29 basis points excluding gas inflation. Again, jotting down 2 columns of numbers, 1st column being reported And the second column being ex gas inflation, operations was better or lower by 40 basis points And ex gas inflation better or lower by 11 basis points. Central reported better by 10 Without inflation yes, inflation better by 6, stock compensation better by 2 and worse by 1 in 2 columns and Other better by 14 and better by 13 year over year. Total then, again on a reported basis, our SG and A was better or lower by 66 basis points And ex gas inflation lower or better by 29 basis points. Keep in mind, In terms of the core, again, better by 40 or better by 11 ex gas inflation, keep in mind this result includes the permanent dollar an hour wage increase That began in March of 2021 and 4 weeks of additional starting wage increases that we just took this past October Going from $16 to $17 and from $16.50 to $18 for our 2 main categories of hourly employees.

Speaker 1

These latest changes in the starting wages went into effect October 25th, just 6 weeks ago and 4 weeks of those 6 weeks were included in Q1. Central, no surprises there. Again, on an ex gas inflation basis, better by 6. Stock comp, as I mentioned, a little better a little worse by 1 ex gas inflation and other, the 14 and the 13 basis points numbers. This consisted of the COVID expense of $159,000,000 last year and the $180,000,000 write off of The impact of IT assets that I mentioned earlier.

Speaker 1

Next on the income statement is preopening expense. This year in the quarter $28,000,000 last year in the quarter $22,000,000 or $6,000,000 higher. All told, reporting operating income in the Q1 increased 18%, Coming in at $1,693,000,000 this year in the quarter compared to $1,430,000,000 last year. Below the operating income line, interest expense was $39,000,000 each of the 1st quarters of fiscal 'twenty one and 'twenty two. Interest expense rather, interest income and other for the quarter was higher by $13,000,000 year over year, primarily due to favorable FX.

Speaker 1

Overall reported pretax income in the Q1 was up 19% coming in at $1,696,000,000 This year compared in the Q1 last year of $1,420,000,000 In terms of income taxes, our tax rate in the first Quarter of 'twenty two was 20.7 percent compared to 16.8% in Q1 last year. Again, both years' tax rates benefited from the tax treatment of stock Compensation, as mentioned earlier, dollars 91,000,000 this year $75,000,000 last year in the quarter. Additionally, last tax rate benefited from the tax deductibility of the special dividend that portion payable to the company's 401 ks plan participants. The fiscal 'twenty two effective tax rate excluding these discrete items is currently projected to be between 26% 27%. A few other items of note in terms of warehouse expansion.

Speaker 1

As you know for fiscal 'twenty one, we opened 22 units including 2 relos, so Net increase of 20 units during fiscal 'twenty one and this quarter that ended a couple of weeks ago, we opened 9 units including 1 relo, so net openings of 8. For the remainder of the year, we plan to open 23 new units and also plan to open 23 units, 4 of which would be relocation, so a net of 19 if all goes as planned. It's been a busy past 7 days. We opened our second Costco in France last Saturday on December 4th, followed by our second building in China, which opened yesterday, As well as 2 buildings opening this morning opening today, 1 in the U. S.

Speaker 1

In Florida and our 4th unit in Spain. Regarding CapEx, our Q1 fiscal 'twenty two spend was approximately $1,050,000,000 Our full year CapEx Spend is estimated to be just about $4,000,000,000 This would represent an increase of more than $400,000,000 over last year's entire CapEx figure of $3,600,000,000 The largest areas of increase coming from international spending for new warehouse expansion and increased investment in our logistics and e com fulfillment operations. In terms of e commerce, sales in the quarter ex FX increased 13.3% year over year. That's of course on top of an 86% Plus increased a year ago in the Q1. Stronger apartments in terms of year over percentages include jewelry, tires and home furnishings.

Speaker 1

Our largest merchandise department in terms of sales majors, which is everything from consumer electronics and TVs to appliances, etcetera, Was up in the high single digits also on a very strong sales increase a year earlier. In terms of an update on Costco Logistics, It continues to drive our big and bulky sales. For the quarter, CosgroLogistics deliveries were up over 50% And now represent about 70% of our U. S. Ecom big and bulky shipments.

Speaker 1

We've averaged during the quarter more than 50,000 stops And for the year, we project more than 3,000,000 stops, which would be anything from dropping something off to installing and taking away the old clients Our e com mobile app, we continue to improve The site with additional features thus far, as I've talked about in the last few quarters quarterly calls, we've redesigned the app header and footer. We've updated and improved the menu layout. Our members now have the ability to view warehouse receipts online via both the app and desktop. Our co brand Citi Visa card is now linked can now be linked to the digital membership card and can be used for payment. Our members are now able to much more easily Schedule e com deliveries in the U.

Speaker 1

S. And Canada, same goes for rescheduling returns pickups and delivering in the first half of the Coming new calendar year, labeling of fulfillment a better labeling of fulfillment methods, members We'll be able to easily see fulfillment options be it e com, same day and even nearby warehouse availability of a particular item at a particular item level. We're rolling out new e com kiosks in the warehouse with video signage and easy touchscreen ordering. As well, we're rolling out e commerce lockers currently in the U. S.

Speaker 1

We have a 112 locations with more and we plan to more than double that number during calendar year 2022. In terms of e commerce, there is a program that received some press just yesterday called Costco Next. In a way, it's like our warehouse roadshows but Currently, there are 34 suppliers and growing, but it's still quite small, offering just under 1,000 items, curated items with Costco values. So, Please check it out when you have a chance. From a supply chain perspective, similar issues that we outlined in the 12 weeks ago on the last quarterly call, Each issue ebbs and flows a little bit, but overall the factors pressuring supply chains and inflation include port delays, container challenges, COVID disruptions, Shortages of various components, raw materials, ingredients and even packaging supplies, labor cost pressures and truck and driver challenges.

Speaker 1

Overall, we feel we've dealt pretty well with the supply chain challenges in terms of delayed container arrivals on the Pacific Coast, about 79% of our import containers are late by an average of 51 days. A A few percentage of those are actually a few days early and many of them are a few days more than 51 late. Virtually all departments are impacted. We've ordered early in many cases, as I mentioned, I think earlier on earlier calls, given the longer lead times, less product and packaging challenges, but still quite a bit, still some limitations on key challenges but still quite a bit. Still some limitations on key items but improving.

Speaker 1

Again, it ebbs and flows. Chip shortage is Still impacting many items, some more than others. In some instances, delayed inventory simply extends the season. An example might be lawn and garden and patio. As soon as the product arrives, it sells pretty quickly, but it may extend into beyond the normal seasonal time.

Speaker 1

Toys in seasonal in fact same thing, some inventory in fact won't make it before Christmas, but we've mitigated that as best as possible and feel pretty good about it. And in terms of moving on to despite all the supply chain issues, again, we're pretty feel pretty good about staying in stock and Continuing to work to mitigate cost and price increases as best we can. Moving on to inflation, again, it's pretty much the Same story that we told during each of the last two quarters. There have been in our variety of inflationary pressures that we and others are seeing from labor costs to freight costs Higher demand, to container shortages, import delays, to increased demand on certain product categories, Much of what you see and read out there, various shortages on everything from chips to oils and chemicals full supplied by facilities Hit by the Gulf storm was a while back, higher commodities prices. For Q1 'twenty two and talking with our merchants, senior merchants, We estimate that overall year over year price inflation to be in the 4.5% to 5% range.

Speaker 1

That's a little bit higher of an The estimated inflation rate that I discussed a quarter ago, but I think pretty consistent with what you read out there. All this said, much kudos to the job that our merchants and our traffic department and our operators have all been able to do in order to get the products that we need, pivot when and where We'll keep our warehouses full, while keeping prices low for our members and continuing to show value versus our competitors. Look, I think overall this is best reflected in the operating results that we continue to achieve despite these many challenges. Anecdotally on merchandising, holiday stuff has been strong. Again, sometimes it depends on when the merchandise gets in.

Speaker 1

Baking items, more people seem to be getting together are strong. Gift cards are up dramatically from a year ago, but it was weak a year ago. Pet products, as you might expect, are Strong with the benefit of increasing pet population over the past couple of years. Alcohol and spirits are strong, including gift boxes of various items And of course, continued strength in consumer electronics appliances, furniture and mattresses and the like. Apparel actually has enjoyed much stronger sales growth this year, albeit compared to relatively flat apparel sales a year ago.

Speaker 1

One last comment, our sustainability commitment Web site received a major refresh this week. So please feel free to visit the site. It's linked directly from our homepage under The column about us and then click on sustainability commitment. Finally, in terms of upcoming releases, we will announce Our December sales results for the 5 weeks ending Sunday, January 2nd on Wednesday, January 5th after market close. With that, I will open it up to questions and turn it back over to Sadie.

Speaker 1

Thank you.

Operator

For our first question, we have Michael Lasser from UBS. Michael, your line is open.

Speaker 2

Good evening. Thanks a lot for taking my question. Richard, your point about 4% to 5% inflationary increase across the assortment, Typically, Costco has been slower to raise prices than everyone else. That seems to be a number That's in line with others across the retail sector. So has the posture changed with respect to passing along price increases?

Speaker 2

Why is that the case? And does Costco have more pricing power today than it ever has in the past, given The pricing gap between you and others in the market?

Speaker 1

Well I think as it relates to passing on We've always said we want to be the last to raise the price and the first to lower the price, Recognizing there is a limit to what you can do based on these cost increases. 1st and foremost, I think because of our relative purchasing power and our relationships with our vendors, We with our suppliers work to mitigate those increases in any way shape or form we can. Ultimately, that may include us taking a little less Markup and maybe them taking a little less markup. There is no complete consistent answer throughout as you might expect. But overall, I think we've done a relatively good job with that and there is inflation in those numbers.

Speaker 1

Those numbers are Kind of a combination of our cost increases as well as our some price increases. And again, it fluctuates. For every few examples of something going up, there may be an example of something flatter going down a little bit for unrelated reasons. And so again, it's a best guess, it's fluid. We saw inflation starting several months ago in a bigger way, I think, in our fiscal Q4 this summer and continuing into this fiscal year.

Speaker 1

And As we all have read articles, general articles out there about certain different major consumer product manufacturers announcing increases And continue to do so. So I think it's going to continue. Hopefully, we're getting towards the top and it'll start flattening out and subsiding, but we'll see.

Speaker 2

My follow-up question is with the core merchandise margin ex fuel and the core on core gross margin getting less bad or declining at a lesser rate This quarter then last. Is this a sign that the margin here is stabilizing? And do you think the Costco exits the pandemic With the structurally higher gross margin than it's had in the past, or are all these dynamics simply a function of what you've often said, which is When overall retail margins go up, so do Costco, but just a little less than others? Thank you.

Speaker 1

I think on the last comment, yes, In terms of that last comment you made, look, I think at the end of the day, I think we in many ways have benefited from market Hopefully, some or most of which will be sticky. The biggest thing that impacts margins many often is not only on the buying power side, And arguably, I can't think of any company that has the buying power per item that we do because we do our roughly $200,000,000,000 in sales with 4,000 ish items versus anybody else that's doing it with 100 of 1000 of items or 50,000 items. But I think that Having higher levels of sales productivity, particularly in things like fresh foods helps your margin. We'll keep some of that and we'll use some of To be even more competitive and hopefully build a bigger mode a little bit. But I think that some of it is probably structurally there, But, as some famous TV actress said once, it's always going to be something.

Speaker 1

And we'll keep Fighting that battle out there. But we feel pretty good about some of the structural things that have occurred that hopefully will help us in the future, but we'll have to wait and see.

Speaker 2

Thank you very much and have a good holiday.

Speaker 1

Thank you.

Operator

For our next question, we have Simon from Morgan Stanley. Simon, your line is open.

Speaker 3

Hey, everyone. I'll be Simeon for this call. My first question is actually a follow-up To Michael's second question, maybe I'll ask it a different way, Richard. The 2 year core on core looks like it's actually getting better. And you said it yourself, you thought you did a pretty good job on it and it looks like you are.

Speaker 3

So if we're kind of getting it feels like You're managing through the worst of it and the environment may be getting better at the margin. I don't want to go too far and say that why shouldn't this be the worst For the core on core notwithstanding comparisons, but they which they get harder, but then they start to get easier.

Speaker 1

Yes, look, I think that's Hopefully, how the storybook goes, it's always going to be something. But look, jokes aside, we feel pretty good about Structurally, what we've been able to accomplish and part of that's market share with higher sales levels. And we've not stopped What I'll call the buyer creativity of working with suppliers to figure out how to continue to drive greater value. I can think of 50 examples, but at the end of the day, we're continuing to drive value in lots of ways, whether it's changing packaging Or using our volume, moving certain production to different parts of the world and Again, to make that mode even a little bigger. So, I agree with you that so far the story that you suggested is playing out And hopefully, it will continue to play out.

Speaker 3

Fair enough. My second question is more on SG and A and the businesses leverage point. We used to chat about Costco always doing mid single digit comps and that's good enough to cover the SG and A dollar growth. I think this quarter, the business did about 6.5 percent dollar growth adjusted and you're going to have some of these wage investments that will annualize, well, maybe not to the middle or closer to the end of the year. So I'm trying to get at what a normal post COVID SG and A rate may look like.

Speaker 3

And then does that mean it's sort of that mid single digit comp rate that leverages those

Speaker 1

I think as it relates to the probably the best guesstimate, and I say guesstimate not estimate, on Where do you start? Where is the inflection point of leveraging SG and A? Probably still is in that mid single digit range. Beyond that, who the heck knows? I mean, we've been able notwithstanding some of these increases, We've been particularly in wages, we've been able again, strong comps have helped these numbers.

Speaker 1

But I think we feel pretty good about having the sales volumes They continue to be able to leverage those expenses. So as soon as we find out, we'll let you know. But again, we're feeling Good about things at this juncture. And at some point, I would assume comps have to come back to hopefully better than pure average, but You know, something back to where they had been pre COVID, but on a higher base. And even that helps you a little bit.

Speaker 3

Okay, great. Thanks. Happy holidays, everyone. You too.

Operator

For the next question, we have Christopher Hovers from JPMorgan. Christopher, your line is open.

Speaker 4

Thanks. Good evening, everybody. So I wanted to ask a little bit about Your thoughts on holiday pull forward. Obviously, you saw an acceleration in trend on a 2 year basis in October and then November. Things obviously still amazing comp and gaining share, but trends decelerated and it was sort of Against what was a weaker, I think, end of the month last year.

Speaker 4

So can you talk about like what do you think is driving that? How do you think about the rest of the holiday season? And as you think about a consumer that's going to lap a bunch of stimulus in the First half of next year, what are your initial thoughts on how that all could play out?

Speaker 1

Well, I think, again, as you just mentioned, November's comps were a shade under outside expectations, still very good, a couple of percentage points different than what we We've been enjoying a couple of months prior to that. Probably the view is a little bit of that was pulling forward, But even within last month's number, the weeks varied and overall were good. But Just when it comes is reduced a little, the next day, it's better than you expected. So I think the one thing that I feel good about is our in stocks. Our Senior Merchant the other day had indicated that his view is that his feeling is that we're better in stock than anybody out there.

Speaker 1

And I think part of that is the fact of limited selection. We are an item business. We could put something else in place or something, but we've done a pretty good job. I I mean, I had a with a little bit of a chuckle, I had a call just yesterday from a reporter asking about how are we doing on cream cheese. And so I checked and we're actually seeing a bit of a fin cheese shortage out there and the bagel shops are being challenged.

Speaker 1

We actually have got as the buyer said, it took a little extra work, but we've got all the cream cheese we need. So I think we've done a good job in merchandising.

Speaker 4

Got it. And so, I guess, as you think about last year and the stimulus, I mean, do you think that I mean, obviously, I think the 2 more as you get closer to Christmas and New Year's probably comes back if people are entertaining more like you said on the baking side. But as you get into January and stimulus and stimulus in the spring, do you think your business lifted off of stimulus last year?

Speaker 1

Look, it couldn't hurt. It probably helped a little bit. I know historically when there's been Some stimulus items out there, factors. Our view is that we have not been impacted as much as other, but directionally we've Look, if next year there is a reduction in stimulus, Lord knows what's going to happen with Mark, in general, how people feel about where they're how they feel financially, that may all change a little bit. But We feel pretty good around here that one of the things that we've shown over the years that both in good and bad times, we tend to do well In good times because people want to spend more and even in less good times, people want to save more.

Speaker 1

And so I think From a merchandising stand and in tougher times, there's additional products and services that might be willing to sell us for the first time. So, In our own perverse way, we sometimes benefit from good and bad. And right now, we're feeling pretty good about what the future looks like. By the way, the other thing that Bob just mentioned that even if certain things head south in some way, shape or form like reduction or lack Elimination of certain stimulus items. Supply chain at some point is going to get better.

Speaker 1

As good as our numbers are, We could do better if we had more supply of certain of those items. Even in some categories in non food that are up 20% and 30% plus The buyers view, we're still running out of stuff or that we could do better if we had more. And that's not just us. I mean, that's It remains on everybody. But I think some improvement in supply chain will be an offset to any other things that are detrimental to that thought.

Operator

For our next question, we have Chuck Broom from Gordon Hasek. Chuck, your line is open.

Speaker 5

Hey, Richard, Bob, team. You guys are doing well. Just a question on leverage. If we back out the one time charge this quarter, it looks like you enjoyed over 100 basis points of improvement Year over year, we hit 65 basis points last quarter. Now fully realizing the comps on a stack basis were better, but wondering Some investments or other costs may have rolled off, just some thoughts on that front.

Speaker 1

I think more of it is just the leverage of sales growth, frankly. Again, taking out the specific COVID related charges that we talked about and fact that what we didn't talk about in terms of separating in the press release Was that dollar an hour increase we did in March and the new one that had a small impact in Q1 because it started 6 weeks ago. But in that regard, there's nothing that stands out in my view, in my estimate. I'm looking at my guys here. No, it was strong sales.

Speaker 1

Strong sales would be the number one factor.

Speaker 5

Okay. Okay. Fair enough. And then just on the storefront, 14 opened thus far in 'twenty two. So you're more than halfway to the goal, which is great.

Speaker 5

I was wondering, bigger picture, has there been any more discussions To backfill some of your existing markets, your higher density areas where perhaps some stores just can't handle any more productivity, Any more throughput just because of the volumes?

Speaker 1

I think that's the answer is yes. And I think that'll be Small methodical increases in that thought over the next several years. I mean, it used to be that we talked about when we had 400 warehouses and the average, I'm making those numbers up. So, the average was 180. And now, I think we have an average Several years later in the high 200s, in the U.

Speaker 1

S. At least. What? And we have a number of units in the 300 to 400 range. I mean, not 100, but tens of.

Speaker 1

And so we are looking for more infill. We've been doing that. And if it was 3 to 5 a year or 3 to 7, 3 to 5 a year in the last 5 years, Is it going to be 5 to 8 a year? Could be. I don't have that kind of detail in front of me.

Speaker 5

Okay, great. And then my last one is just to follow-up on Chris' on November. I believe you guys did call out that there was some moderation in retail inflation, maybe 150 basis points or so. I was just wondering if you could provide any color on, I guess, on where that retail inflation came in and I guess why that happened? Was it self inflicted?

Speaker 5

Just if you could give some color there?

Speaker 1

One thing that was a little lower was from the increases in food and sundries and some food and sundries items in fresh. That had spiked even more. It's still up year over year, but it spiked a little it came down a little bit from where it had been. And Ben, we haven't quantified anything specific beyond that.

Speaker 5

Okay. All right.

Speaker 1

And by the way, as you might There are suppliers out there that are saying, hey, come January, February, you'll see some more increases. And again, this is not inconsistent with What I've read in general articles in the various business periodicals.

Speaker 5

Okay. So just a lot of timing differences. Okay.

Speaker 1

Great. Thanks.

Speaker 5

Thanks a lot.

Operator

For the next question, we have John Heibinbockel from Guggenheim. John, your line is open.

Speaker 6

So Richard, how is KS performing? And what happens or how do you think about it in the inflationary environment In terms of how you take price versus like items on the national brand side, and does KS do better in an inflationary environment?

Speaker 1

Look, many of our CAS items are of such large volumes. It's not unlike dealing with the comparable large volumes we do in a branded CPG item. And so we're out there Fighting with both of them to try to mitigate those cost increases. KS still grows at a little faster rate than others, but nothing discernible. I think we keep finding new items to do KS with and for a variety of different reasons.

Speaker 1

And so it continues to drive that brand. But No, I don't think there's a we don't see a big difference of how that's changing.

Speaker 7

Secondly,

Speaker 6

the 70 Percent on Costco Logistics is 70% of your needs. You're at what capacity in logistics? Is it still 50% or is

Speaker 1

it correct above that? It's in the 50% range. Maybe it's slightly higher than that based on our When we originally bought what's now Costco Logistics a year and a half ago, we moved over a bunch of We've grown it as well, grown our total base of need. And I think we're slightly above 50% that we felt we had capacity for at the time and certainly have plenty of capacity over the next few years. Mind you, we're spending money on it.

Speaker 1

Part of our fulfillment and logistics, as I think I mentioned on the last quarterly call, Within CapEx, we have spent $340 or so 1,000,000 on a multi acre 1,600,000 Square Foot distribution facility in Southern California. That's for a variety of needs. Some of the much of what we bought in the Innovell acquisition in March or April of 2020, more than 10,000,000 square feet of space around the country, much of its leased, Much of it is fine by the way, but we're not all of it was geographically, particularly the big sites, the 1,000,000 square We're in areas where we're stronger relative to where Sears is stronger or where they had most of their business at the time. So, we're still spending money on it and upgrading it. But again, from a merchandising standpoint, we're very excited about it and it's helped us grow that business in a big way.

Speaker 1

And Given our small market share of many of those items, particularly on the appliance side, we feel there is a lot of growth potential for us.

Speaker 7

Okay. Thank you.

Operator

For the next question, we have Karen Schwartz from Barclays. Karen, your line is open.

Speaker 8

Hey, thanks very much. I wanted to just talk about ticket a little bit. So U. S. Ticket at 3.5%.

Speaker 8

Can you kind of parse that out on units per transaction versus AUP, but also tie that into the inflation numbers that you called out For the quarter and or your expectations on inflation?

Speaker 1

Honestly, I can't. I don't have that detail or thought in front of me. Generally speaking, you've got electronics that like TVs and what have you that are going down in price, maybe a little less This year because there's less promotions because of shortages. I mean, every budget meeting, every 4 weeks, we're presented Examples of items where we're taking down the price of high volume key items by changing the packaging, By moving some aspect of manufacturing to another part of the world, And so I don't have the detail Karen in front of me for that, sorry.

Speaker 9

Okay. And then I wanted to I don't think this

Speaker 8

has been asked for a while, but Can you give an update maybe on what the average ticket is for executive members versus gold? And then, I know you gave the obviously, you've given the But frequency of executive versus gold, how maybe that's changed over the last almost 2 years of the pandemic?

Speaker 1

I will somebody is just running out of the room to see if they can grab that sheet and I'll answer it as soon as they get back. If you want to ask another question or move on to the next one, but I'll

Speaker 8

Well, my standard question would be just on your cash balance in terms of thoughts on special dividends.

Speaker 1

Well, as soon as we know, you'll know or the day after. Look, our cash position is strong. One of the things I pointed out is our CapEx is also increasing in a conscious way. Notwithstanding that, Our cash flow from operations is growing at quite a stronger rate as well. And it's something that we've done 4 times in 8 years.

Speaker 1

We and the shareholders seem to like it when we do it. And so, I'm not trying to be cute, but we haven't made that decision at this juncture. It's probably a when, not if, but when will be when we do it.

Speaker 8

Okay. And then maybe just while you're waiting for that Numbers on the executive. Can you just maybe give us some color on what percent of freight is actually spot versus contract? I don't know if you've ever given that number?

Speaker 1

I don't have the exact number, but I'm willing to bet it's 80 plus percent. I could be wrong a little But it's contracted. Now recognizing with contracts, we might do 1, 2 3 year contracts. So we're still benefiting on 3 year stuff and Benefiting a little on 2 year stuff and have now gone beyond the benefit of the 1 year stuff. And so It's over a 2 or 3 year period, but our assumption is it will take less than that time to start to normalize somewhat.

Speaker 1

Is it higher today than it was? Yes. But it's I think we again, we probably with other large Users of freight and containers have probably done a pretty good job of at least staggering that not having to do a lot of spot stuff so far.

Speaker 8

Great. Yes, I mean if you get those numbers on executive and gold on ticket and frequency that would

Operator

be great.

Speaker 1

Okay. What they came back with right now is we don't have I don't have quickly average ticket changes, but the total spend per executive member compared to Gold Star member is almost 3x.

Operator

For our next question, we have Greg Malek from Evercore ISI. Greg, your line is open.

Speaker 7

Hi, thanks. I have two questions, Richard. One is digging a little bit into the margins, the gross margins. You said gas and travel Had helped but then offset by e commerce. Can you sort of explain where so that the gas penny profit was up even if the mix hurt?

Speaker 7

Is that

Speaker 1

Margin percent was down, but you've got a 40%, 50% increase in price per gallon. Got it. So, you still might have more pennies per gallon, but the margin itself was down.

Speaker 7

Got it. And then that was offset by e commerce?

Speaker 1

Well, e commerce is yes. And again, I wouldn't read a lot into any of that We're just trying to share with everyone directionally what helps it and hurts it a little bit. E commerce, just given all the activity we've gotten expenditures on And do what we can over time when we're pulling tickets if we if something else happened, I don't view it as a big issue for me. It's not whether the margin is up a little or down a little, it's less about competition and more about What's the product mix that month or week and what else is going on with this rapid expansion and investment in it?

Speaker 7

Got it. And then maybe just to tie back your discussion on the logistics. Big and bulky, if we look at if e commerce is roughly 8% of sales, Is Big and Bulky a quarter of that? Is that the kind of scale we're talking about?

Speaker 1

It's over a third.

Speaker 7

It's over a third. Great. And then last but not least, the renewal rates continuing to tick up, I guess, Impressive. How do we shouldn't that come off at some point, Just given that you have more 1st year members?

Speaker 1

We only get to 100. No, just kidding. Look, I think as I mentioned earlier in this and when I was speaking, Probably the single biggest thing that's helping it right now is auto renew. As we get more people on a credit card, both In the 2 big co branded in the U. S.

Speaker 1

And Canada, that's a no brainer to help a little bit. As we convert people to executive member and as we For every 100 new people signing up, a slightly higher number of them sign up as executive members, they are more likely to renew. So those things help as well. The thing I mentioned about new warehouses in markets around the world tend to be while they have a very A much lower renewal rate in their 1st year of renewal or year 2, they now continue to grow as more people have renewed the prior year. Those are Starting at generally, those are starting at higher rates than they were.

Speaker 1

So all those things help a little bit. I'd like to think it's all the wonderful things we do and the value proposition. And but certainly auto renew is probably a good help there.

Speaker 7

Got it. And then last, because someone has to ask it, just fee increase, I guess Back half next year is when it will be 5 years since the last one. What are the thoughts on that just given The members seem to be self selecting the fee hike already through the executive membership. Does that change your thought process as to when you might hike the fee?

Speaker 1

No. And our only thought is, is we'll probably start getting questions about now. It's still a while away, but we certainly feel good. As I've said in the past, renewal rates, strong renewal rates and loyalty Help that process that thought process, and we'll see. But it's still a little bit of time to think about it.

Speaker 7

Well, have a great holiday season, everyone.

Speaker 1

Thank you.

Operator

For our next question, we have Rupesh Parikh from Oppenheimer. Rupesh, your line is open.

Speaker 7

Good evening. Thanks for taking my question. So I wanted to touch on Canada and other internationals. We saw a strong and 2 year contract for both Canada and other international. Is there any more color you can provide in terms of maybe what you're seeing in those geographies?

Speaker 1

I'm getting a little help here. It's more it's probably most I agree, it's probably most about How COVID impacted different countries differently timing wise? I remember a year ago and a year and a half ago, Some of the foreign countries did better while we were being And then a little later they got locked down. And so part of it is one of the reasons I think everybody has picked up on the 2 year stack And I think that's as much as anything that's the reason.

Speaker 7

Okay, great. And then as you look at your ancillary Businesses, is there a way you can provide an update in terms of how they're trending now versus pre pandemic?

Speaker 1

I don't have that detail with me. Generally speaking, tires have picked up as an example, it's not an ancillary business. But The Acosta Auto program is down because there's a shortage of cars out there. Travel is up not where it was pre it was almost back to where it was pre COVID and then delta variant hit. And then it was coming back again and then Omicron hit.

Speaker 1

So it fluctuates pretty quickly on the comp. And I'm trying to think of the other things. Food courts have come back. I don't think they're quite where they were, but they're almost there. Hearing aids have come back, But still I think slightly below pre pandemic.

Speaker 1

Pharmaceutical is doing great. Pharmacy is doing great, Helped frankly by the shots. We like other retail pharmacies are providing plenty of vaccines.

Speaker 7

Okay, great. Thank you for all the color.

Speaker 5

Okay.

Operator

For our next question, we have Stephanie Wintzick from Jefferies. Stephanie, your line is open.

Speaker 10

Hi, good afternoon. This is Blake on for Steph. First question will be higher level. You guys are a big proponent of the in store shopping experience. It seems like store sales have been fairly strong As of late for retailers, so wondering how have your how's your in store shopping compared versus ecom versus your expectations Recently and then maybe if you can share any e com pilots you might have that You've been working on it.

Speaker 10

I know you mentioned you did a pickup test, but you discontinued that. Anything maybe in the works that you can share?

Speaker 1

Well, both in store and online have picked up. The pickup From things like Instacart for Same Day Fresh skyrocketed during the lockdowns in mid to late summer 2020 came down from those peaks, but it's still way above where it was pre COVID. E commerce, As you know, because we talk about every quarter, 8% or 9% of our sales on a company that did $192,000,000,000 in sales for the year ended this last So that's a lot bigger than it was 2 years ago. I think the last 3 or 4 quarters, the 2 year stack is 100 plus percent. But notwithstanding that, and part of that is the 1,000,000,000 bulky that has helped that number, which we really weren't driving that The fact that I think that as we've heard occasionally that Notwithstanding some people don't like our mask requirements when we first put them in back in May of 2020.

Speaker 1

I think overall people felt if I've got to go out, I'm going to go out to one place and bulk up on stuff And with taller ceilings and wider aisles and all those things, I got to believe that psychologically that's helped a little bit. At the end of the day, We were all surprised by if I go back to March of 2020, we're surprised by the strength in non foods categories, Summer and fall of 2020, much less now much the same now, it was because people weren't traveling and they weren't Going to games and concerts, but they were buying things for their home. And we certainly had on top of all the food items, all the other things they could buy for their home. So That was a pleasant surprise to us and that's continued. In terms of other tests, Not a whole lot.

Speaker 1

I mean, we did have that small test in New Mexico with buy online and pick up in the store. We're, as I mentioned on the call, have over A year from now, we have over 200 of our U. S. Warehouses with lockers. In terms of buying online and pick up a store, we're not quite sure about that.

Speaker 1

We have very busy locations. There's not a lot of room for it and it doesn't seem to be a lot of people clamoring. In fact, half or over half the people that come in and Do that on a few things that we buy online and the lockers, they come in and shop while they're there. And so and that's what we want. So beyond that, I don't think I think some of the things we're doing that I mentioned briefly about mobile and digital, some Some of these things everybody else have.

Speaker 1

We are sometimes late to the game on some of these things, but those should be all net additive to what we do.

Speaker 10

That's super helpful. I was also wondering on your inventory positioning. How much are you getting ahead of any seasonal items or any challenges you may foresee for Q2 and Q3 for the spring and summer?

Speaker 1

I don't know exactly. I know that consciously the advisors when they presented the budget meetings are talking about those issues. We are bringing in things early. We certainly have you think about it, what we call our depot or our view of distribution system in the U. S.

Speaker 1

It was something like 10,000,000 square feet and we essentially slightly more than doubled that with the Intervale acquisition. Aside from other things that helps us with a little storage if we needed or bringing in things early. And recognizing, we start with we are Somewhat seasonal, but historically we've always brought things in early anyway. So whatever it may be, we certainly have the cash as somebody mentioned earlier To have some extra $1,000,000,000 invested in inventory even if it hangs around for a little bit. But I think overall, Some of our items are still a little later than they would be pre COVID, but better than they would be if we were not doing as good a job as I think we are doing

Speaker 10

Perfect. If I could sneak one last one in, I might have missed But I think you said for the net new openings this year, you said 'nineteen. I thought the last quarter you were aiming more towards 'twenty five. Is there anything to call out there?

Speaker 1

I said it was 19 more in the last three quarters of the year, fiscal year, plus the 80 Q1. Perfect.

Speaker 10

Thank you very much.

Operator

For our next question, we have Paul Lewis From Citi, Paul, your line is open.

Speaker 11

Hey, everyone. This is Brandon Petemont for Paul. I I was wondering if we could talk about the increase in CapEx. I think last we spoke, we thought CapEx would have a 3 in front of it. Now it sounds like It has a 4 in front of it.

Speaker 11

I'm just wondering, was there a change in the strategy there? And specifically on the e comm investments, do Do you feel like you're playing some catch up there or laying the groundwork for growth? Just anything that you can share with that.

Speaker 1

Sure. I think previously as it relates to this year we had talked about I think 38% to 42% and now we're saying about 4%. These numbers are up from the mid-three's over the last couple of years, low to mid-three's over the last couple of years. In fact, last year's 3.6 Included $340,000,000 or $345,000,000 asset purchase that I mentioned earlier in the Southwest in Southern California, Which is basically a 1,500,000 plus square foot facility with lots of acreage to help with our fulfillment as well as our import stuff. And so I think there's if you say, what are the big things taking you from the low threes to the low fours over a few years of period?

Speaker 1

It's more international expansions, which tends to be a little more expensive for location. More expansion, in fiscal 'twenty, We were down to 13 net new units because some delays with COVID. I think we were 2020 21 and we're going to be 27 net new units This fiscal year plus 5 relos, which is 6 relos planned, we might miss that a little bit. But at the end of the day, so there's more warehouses, Clearly more in the whole fulfillment concept, starting with the $1,000,000,000 acquisition a year ago of what's now Costco Logistics, Starting with adding additional square footage to that, As well as the international things. And even on the distribution side or what we call our cross stock depots, spending money overseas now in some of these countries to do some of that In a better way.

Speaker 1

Actually building a mini depot in Hawaii where we have 5 locations? Yes. 7, I'm sorry. Seven locations, but huge volume locations. And with so we've gotten to the volume and efficiency there that These are good investments.

Speaker 1

So it's a lot of those things. Mind you, we still spend all in close to $1,000,000,000 a year in IT.

Speaker 11

And that's how we should kind of think about it going forward long term?

Speaker 1

By the way, that's not all CapEx, that's expenses as well. Go ahead, I'm sorry?

Speaker 11

And the $4,000,000,000 range is what we should think about CapEx for the long term?

Speaker 1

I don't know for the long term. I think 4 sounds about right for the next year or 2. And if things continue to grow well go well and grow well, maybe it goes up from there a little bit. But We're not looking to spend it if we don't think we have good things to spend it on just because our cash flow has been Exceeding net income plus our cash flow has been exceeding regular dividend plus capital expenditures and the like.

Speaker 11

And you also mentioned that you're able to change our products when you're faced with shortages. I I was wondering if you could quantify that versus kind of a normal quarter. And if you are switching out more than usual, what Does that have on consumer behavior there and anything on the logistics side as well?

Speaker 1

I think it's I don't have the exact number, but my guess is it's a small low to mid single digit percentage. What it means though is when back going all the way back to spring of 2020 and there were people were hoarding goods, We were going out to additional suppliers to see what we can get, recognizing from their perspective, it creates new relationships, which we'll honor going forward, not just for the 3 months We hated it then. And so I think there are opportunities to just expand product brands by necessity to some things. And with, I think, going into last summer and fall with that advent of All the things for the home, both patio furniture and lawn and garden and barbecue grills and indoor furniture and electronics and gadgets for the kitchen, We took advantage of that and brought in additional items. And so it's more of that than anything.

Speaker 1

And the treasure hunt, Yes. So it's still a small piece, but I think it's when I sometimes when I go into some retailers, I'm not getting any names, but you'll see Shelf half empty or some spaces. First of all, why don't you put something there? And but at the end of the day, I think our buyers have done a very good job of keeping the warehouses

Operator

For our next question, we have Edward Kelly from Wells Fargo. Edward, your line is open.

Speaker 7

Hi. Good afternoon, guys. Happy holidays. Richard, I wanted to ask you about gross margin, you said pretty much all things considered. Any additional thoughts that you can share Current quarter is in the quarter.

Speaker 7

There is no reason we should expect some incremental You know somewhat similar.

Speaker 1

You were breaking up entirely during that call, so I heard about every other word, if you want to repeat yourself. Yes, sorry. So I

Speaker 7

wanted to ask you about the gross margin. As you said, pretty good, all things considered. Any additional thoughts You can share on the current quarter. Comparisons in the quarter look similar, I think. Just wondering if there's any reason we should expect Any incremental pressure?

Speaker 1

From a competitive standpoint, I mean there's lots of companies everybody's competitive. Again, I think structurally our model allows us to better from that. We talked about More pennies per gallon of profit that allows us to do some other things. I think we've got I think we have A lot of levers to pull here. And we feel pretty good that we are able To hold the prices on key items and to I don't really think that we consider The challenge of achieving a margin, we're pretty good at figuring out how to get there while still being the company we are in terms of competitiveness.

Speaker 1

So, no big changes of what we see out there. It's just there's a lot of changes every month and some things go up and some things go But overall, we feel pretty good about it.

Speaker 7

All right. And then just one for you a little bit more big picture just around customer data. I was hoping maybe you could just provide an update Things like personalization and then media is something that we hear a lot of people talk about. Maybe just any thoughts on What you're doing with that opportunity as well?

Speaker 1

I think there's still low hanging fruit on the tree here. We've talked about it a little bit. We've done A little bit more targeting than we have ever done, but very little. There is more to come. It was just a year and a half ago We hired somewhat at a relatively senior level in terms of data analytics, But that's not the only thing they're working on, the group that he's put together.

Speaker 1

But so I think those are things that will come over time in the next few years. That's pretty much what I can tell you about that.

Speaker 7

Okay. Thank you.

Speaker 1

Okay. I'm going to take 2 more questions, Sadie.

Operator

We'll do, sir. And for the next question, we have Laura Champagne from Loop Capital. Laura, your line is open.

Speaker 12

Thanks, Richard. Mine will be quick. It's a follow on. I mean, you'd mentioned that renewal rates are still headed higher in part because of, Likely because of the auto renew. What percentage of your membership is on auto renew at this point?

Speaker 1

It's about 50 in the US and Canada, Which would imply and that is really where we have it, where we have the co brand cards. And US and Canada is about 80% of our company so the 50 becomes 40 if you rough numbers.

Speaker 7

Got it. You can do it on any card.

Speaker 1

I'm sorry, you can do it on any card, not just Co Brand. But in the U. S. And Canada, it's about 50.

Operator

For our last question, we have Kelly Bania from BMO Capital. Kelly, your line is

Speaker 9

open. Thanks for squeezing me in here. Just wanted to talk, Richard, about the just the inflationary environment. And You've talked a little bit in the past couple of quarters about how your price gaps have widened. Do you think this kind of magnitude of inflation is just Good for Costco's business.

Speaker 9

I mean, have you seen anything like this in the past where it could possibly just drive even more volume into your doors?

Speaker 1

I mean, from an argument that things are more costly, on the one hand, maybe it reduces demand overall In the sense that we're the extreme value proposition that helps us. So, who the heck knows? Yes. I think what I was reading this morning in the paper was this is the highest inflation in so many years. It wasn't that long ago though, 10 plus years ago that regular inflation was 2% or 3% a year and of course it's going to be a little more for a year.

Speaker 1

But at the end of the day, I think it helps us a little because of the value proposition that we have.

Speaker 9

That makes sense. And a lot has been asked here, but just wanted to also just check on Self checkout and where you are with that, and if there's any color you can help us understand on The savings or the impact on the cost structure when you put in some self checkout and the potential for that initiative going forward?

Speaker 1

We pretty much have it now in most locations, and I'm speaking of the U. S. And Canada, and I know even across the street in many locations, we've expanded it from originally 2 lanes of 3 or 6 to 3 lanes of 3 or even 4 lanes of 3. So in a 4 lane area, you could have 12 people checking out. And so My guess is it's still going to grow a little as we expand existing units to offer a little bit more of it and it's been a positive.

Speaker 1

Well, thank you everyone and have a good holiday season and we are around to answer additional questions. Have a good day.

Operator

And ladies and gentlemen, this concludes today's conference call. Thank you all for participating. You may now disconnect.

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Earnings Conference Call
Costco Wholesale Q1 2022
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