Costco Wholesale Q3 2023 Earnings Call Transcript

Participants

Corporate Executives

• Richard A. Galanti, Executive Vice President and Chief Financial Officer
• Unidentified Speaker

Analysts

• Michael Lasser, UBS Group AG
• Simeon Gutman, Morgan Stanley
• Christopher Horvers, JP Morgan Cazenove
• Scot Ciccarelli, Truist Financial Co.
• Karen Short, Credit Suisse Group AG
• John Heinbockel, Guggenheim Securities
• Oliver Chen, TD Cowen
• Scott Mushkin, R5 Capital
• Brandon Cheatham, Smith Barney Citigroup
• Rupesh Parikh, Oppenheimer & Co.

Presentation

[Operator]

Ladies and gentlemen, thank you for standing by, and welcome to Costco Wholesale Corporation's Fiscal Q3 2023 Conference Call. [Operator Instructions] After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] Thank you.

Richard Galanti, CFO, you may begin your conference.

[Richard A. Galanti, Executive Vice President and Chief Financial Officer at Costco Wholesale]

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

In today's press release, we reported operating results for the third quarter of fiscal 2023, the 12 weeks ended this past May 7th. Reported net income for the quarter was $1.30 billion or $2.93 per diluted share, this compared to $1.35 billion or $3.04 per diluted share a year-ago in the third quarter. This year's results included a non-recurring charge to merchandise costs of $298 million pretax or $0.50 per share primarily for the discontinuation of our charter shipping activities. Last year's results included a non-recurring $77 million pretax charge or $0.13 per share for incremental employee benefits.

As many of you know, two years ago, we initially leased three ships and thousands of containers to help mitigate some of the significant overseas freight challenges that we were experiencing. Later, we added four additional vessels in several 1,000 additional containers with commitments made for up to then three additional years. Procuring these ships and containers was integral to us being able to stay at the stock for our members during those challenging times. It also allowed us to do so, initially, at a lower cost in the market rates at that time.

Shipping and freight markets have improved dramatically since that time, which led us to reevaluate our position. As you recall, in fiscal first quarter of this fiscal year, we took a charge to downsize by two vessels our charter shipping activities. Since then, shipping and container rates have continued to fall, and in the third quarter, this third quarter, we concluded that it would be appropriate to completely discontinue the remainder of our charter shipping activities. As a result of this decision, we recorded an impairment charge for all remaining charter assets. This decision allows our merchandising teams to take full advantage of the current shipping market rates as opposed to much higher contracted charter rates. In turn, this allows us to do what we do best, lower prices for our members.

In terms of sales, net sales for the third quarter increased 1.9% to $52.6 billion versus $51.61 billion reported last year in the third quarter. Comparable sales for the quarter were as follows. In the US, on a reported basis, minus 0.1%, and excluding gas deflation and FX, plus 1.8%. Canada reported minus 1.0%, reported -- ex gas and FX, plus 7.4%. And other international reported plus 4.1%, and ex gas and FX, plus 8.4%. So total company, on a reported basis, 0.3% comp sales, and ex gas deflation and FX, plus 3.5%. And our e-commerce on a reported basis was minus 10.0% and minus 9.0% excluding FX.

In terms of third quarter comp sales metrics, traffic or shopping frequency remains pretty good, increasing 4.8% worldwide and 3.5% in the US during the quarter. Our average daily transaction or ticket was down 4.2% worldwide and down 3.5% in the US, impacted in large part from weakness in bigger ticket non-foods discretionary items. Foreign currencies, relative to the US dollar, negatively impacted sales by approximately 1.5% and gas price -- gasoline price deflation negatively impacted sales by approximately 1.7%.

Next, on the income statement is membership fee income. For the quarter, we reported $1.044 billion of membership fee income or 1.98% of sales compared to $984 million or 1.91% a year-ago in the third quarter. So a $60 million or 6.1% increase in membership fees. Excluding the headwinds in FX, the $60 million increase would have been higher by $17 million or up year-over-year 8% adjusted for FX.

In terms of renewal rates at third quarter end, our US and Canada renewal rate was 92.6% and our worldwide rate came in at 90.5%. These figures are the same all-time high renewal rates that were achieved in the second quarter just 12 weeks earlier. Membership growth continues. We ended Q3 with 69.1 million paid household members and 124.7 million cardholders, both up approximately 7% versus a year-ago. At third quarter end, we had 31.3 million paid executive members, an increase of 681,000 or 57,000 per week during the 12-week fiscal third quarter. Executive members now represent a little over 45% of our paid members, and approximately 73% of worldwide sales.

Moving down the income statement. Next is our gross margin. Our reported gross margin in the third quarter was higher year-over-year on a reported basis by 13 basis points, coming in at 10.32% as compared to a 10.19% number a year earlier. The 13 basis point positive, ex gas deflation, was plus -- was minus 3% -- minus three basis points, both of these numbers, of course, includes the little more than 50 basis point impairment charge to margin mentioned in today's earnings release.

As I normally do, I'll ask you to jot down a few numbers, two columns, a reported column and then the columns excluding gas deflation. The first item would be for the third quarter of '23, core merchandise margin. On a reported basis, it was up year-over-year 39 basis points, and ex gas deflation, up 24 basis points. Ancillary and other plus 13 basis points and plus nine basis points. 2% reward minus 11 basis points and minus nine basis points. LIFO plus 25 basis points and plus 25 basis points. And other minus 53 basis points and minus 52 basis points. If you add up the two columns, again, you get to the reported number of -- on a reported basis, gross margin year-over-year in the quarter was up 13 basis points and ex gas deflation down three basis points.

So starting with the core. Again, core was up, on a reported basis, 39 basis points year-over-year and 24 basis points ex deflation -- gas deflation. In terms of core margins on their own core sales or core on core margins, they were higher by 17 basis points with food and sundries and non-foods being up and fresh foods being down a little. Ancillary and other businesses, gross margin was higher by 13 basis points and again higher by nine basis points ex gas deflation. Within the ancillary businesses, gasoline business centers, food court and travel were better year-over-year, offset in part by e-comm.

2% reward, again, higher by 11 basis points and higher by nine ex gas deflation. Higher sales penetration coming from our executive members is certainly part of that. LIFO plus 25 basis points year-over-year, both with and without gas deflation. As you recall, a year ago in the third quarter, we had $130 million charge for LIFO. In this fiscal year, we had no LIFO charge. So $130 million year-over-year improvement on that line item. Note also that, in the fourth quarter a year ago, we had a $223 million LIFO charge. So we'll see how that goes in the fourth quarter this year.

Other was lower by 53 basis points reported and 52 ex gas deflation. This was net of items from both years. This year, there was a 57 basis point negative impact from the $298 million pretax charge. Again, primarily related to terminating our charter shipping activities. This was partially offset by lapping last year's $77 million charge for incremental employee benefits, of which $20 million or four basis points related to gross margin. The remaining $57 million, I'll talk about it in a minute, under SG&A.

Moving on to SG&A. Our reported SG&A this year was 9.11% compared to 8.62% a year ago. So on a reported basis, higher by 49 basis points and ex gas deflation higher by 34 basis points. As with gross margin, I'll ask you to jot down two columns of numbers both reported and one with excluding gas deflation. First item is operations minus 48 basis points or higher by 48 basis points and minus 35 basis points. Central, minus 11 basis points and minus nine basis points. Stock compensation zero in both columns. Preopening, minus one basis point and minus one basis point. Other, plus 11 basis points and plus 11 basis points. If you add all those up, again on a reported basis, 49 basis points higher year-over-year, and ex gas deflation 34 basis points.

Now, the core operations. This negative included, of course, the impact of slower sales growth as well as the impact of a few of the wage increases that we did, that are typically out of the normal cycle over the last year -- a little over year. That included the impact of four weeks of wage and benefits increases implemented last March. The additional top of scale increase that went into effect July 4th and eight weeks of this March is higher than normal top of scale increase.

Despite again -- despite a slowing sales growth, we've continue to invest in our employees over the past year and that's always been a priority for us. Central, higher by 11 basis points and higher by nine basis points ex gas deflation. Again, sales growth, no big single item was an outlier there. But sales growth overall, it might be was the impact. Stock comp flat both with and without gas deflation, so no impact there. Preopening again higher by one basis point. We had five openings this year in the quarter and three last year. But again, a one basis point delta year-over-year. And other, the 11 basis point positive, both with and without gas deflation. This result of lapping that $77 million charge, but within SG&A lapping $57 million of that $77 million charge for the incremental employee benefits. Again, discussed earlier in the release.

Below the operating income line, interest expense came in at $36 million, $1 million over last year's $35 million number, and interest income and other for the quarter was higher by $57 million year-over-year. This was driven by an increase in interest income due to higher interest rates and cash balances, and interest -- increase in interest income was partially offset by less favorable FX versus last year.

In terms of income taxes, our tax rate in the third quarter came in at 26.5%, that compared to 24.9% in Q3 last year. The fiscal '23 effective rate, excluding discrete items, is currently projected to be in the 26% to 27% range. Overall, reported net income was down year-over-year by four percentage points net of the two non-recurring items in both years' third quarters, net income would have been up 8% even with being reflective with that higher income tax rate.

In terms of warehouse expansion, to date, we've opened 17 locations in the first three quarters, and also relo -- including three relocations. So net of that 14 net new locations. In Q4, we have nine new openings with no relos, so net of nine. That'll put us at 26 openings less the three relos to be at 23 net new for this year. In the quarter, again, we opened five with one -- with four being net new. In addition to the relocation in Canada, we had two new buildings in the US opened and one additional building opened in Japan -- in each of Japan and China.

We have -- again, of the nine new buildings planned for our fiscal fourth quarter. That includes our North Tulsa, Oklahoma opening that opened this morning and our fourth and fifth buildings in China planned for June and August. These four -- these Q4 planned openings will bring our full year count to 26, less the three at the end of '23[phonetic] and that -- it's made up of 13 in the US and 10 outside of the US. Regarding capital expenditures, in Q3 of the quarter -- of the fiscal year, we spent approximately $819 million. Our estimates for all of fiscal '23 capex is approximately $4 billion.

Moving on to e-commerce. You saw in the release that e-commerce was at minus 10% sales decline and ex -- on a comp basis, and ex FX minus 9%. e-comm sales, more to the same story in terms of the sales as I discussed on our second quarter call and in our monthly sales recordings. In Q3, big-ticket discretionary departments, notably majors, home furnishings, small electrics, jewelry and hardware were down about 20% in e-comm and made up 55% of e-comm sales. These same departments were down about 17% in warehouse, but they only make up 8% of warehouse and warehouse sales.

A few comments on inflation. Inflation continues to abate somewhat. You go back a year ago to the fourth quarter of '22 last summer, we had estimated the time that year-over-year inflation at the time was up 8% by Q1, and Q2, it was down to 6% and 7% and then 5% and 6%. And this quarter, we're estimating that year-over-year inflation in the 3% to 4% range. We continue to see improvements in many items, notably food items like nuts, eggs and meat, as well as items that include as part of their components -- commodities like steel and resins on the non-food side. Switching over to inventory levels. Inventories overall are in pretty good shape. As of quarter end, our inventories year-over-year as of the end of the third quarter were down 7%. Recall that they have been up during some of the supply chain challenges of last year.

Finally, in terms of upcoming releases. We will announce our May sales results for the four weeks ending Sunday -- this Sunday May 28th, next Thursday on June 1st after market close. And also remember that our fiscal fourth quarter has an extra week this year, so our quarter ending September 3rd of 2023 will have 17 weeks versus 16 weeks in the fiscal fourth quarter.

With that, I will open it up for questions and answers and turn it back over to Josh. Thank you.

[Operator]

[Operator Instructions] Your first question comes from the line of Michael Lasser with UBS. Your line is open.

[Michael Lasser, Analyst at UBS Group]

Good morning, good afternoon, Richard. How broadly and why the Costco willing to roll-back prices in order to drive traffic and sustain a mid-single-digit comp growth? How are you thinking about the prospect of deflation across your entire portfolio? Thank you.

[Richard A. Galanti, Executive Vice President and Chief Financial Officer at Costco Wholesale]

Well, look, that's something that our merchants work on literally every day and every week. I remember when inflation was peaking at 8% and 9% and some out there would say -- and we are known for trying to hold the line, work with our suppliers, how much will they eat of that, how much we eat of that. At the end of the day, if margins year-over-year were down 50 or 100 basis points back then, that implies that some portion of it, maybe instead of an 8% or 9% increase, our members were seeing a 6% or 7% or 8% increase. Whatever that was, we felt that we were doing as good a job as anyone out there, given the item nature of our business to lower prices for our members and hopefully drive sales. Certainly, right now, we're -- we've always been a little bit compared to others' over-indexed and bigger ticket discretionary items, that's getting hit arguably more than others.

If you look at our fresh foods and food and sundries, they are in the mid to mid-high-singles. You look at the non-foods and some of the ancillaries, notably, gasoline, which is -- 11% year-over-year deflation in gas prices, that's in the mid-single negative. So it all adds up to where it is. Every day, we look to drive sales. What will it take to get to whatever axis, who the heck knows. We just -- I just know that our merchants and Greg and Ron or -- and Claudine, our Head of Merchandising, are pushing the buyers each day to do that and figuring out how can we take the monies that we get. Any types of monies from the vendors, they can usually used to drive business.

One of the reasons that it made sense for us to discontinue the containers and the shipping vessels is to reduce the cost that our buyers are seeing relative to these higher -- much higher contract rates now. We were smart for a year, and now looking back, it was good to get out of it. And that allow us to be more competitive as well. So we're -- I think we're doing a great job of being very competitive. When we do comp shops against our direct warehouse club competitors as well as different components, whether it's retail food or general merchandise on the buildings -- home improvement side, we feel very good about our competitive position and what we're doing to do that.

[Michael Lasser, Analyst at UBS Group]

So are you not expecting broad-based deflation, Richard? And my follow-up question is going to be, given the amount of value you give to your members, wouldn't it make sense to raise your fees right now for the -- you can -- because your renewal rates have been so high and you would be providing more value in this difficult economic environment?

[Richard A. Galanti, Executive Vice President and Chief Financial Officer at Costco Wholesale]

Well, first of all, on the question of deflation, let's hope there is, and you'll be the first to see it in Costco, in my view. As it relates to membership fees, nice try, Michael. But at the end of the day with the headline being inflation, we feel very good about if we want to do it, can we do it without impacting in any meaningful way renewal rates or sign-ups or anything. And at some point we will, but our view right now is, is that we've got enough levers out there to drive business and we feel that it's incumbent upon us to be that beacon of light to our members in terms of holding them for right now. It's not a matter of big time, but we'll let you know as soon as we know.

[Michael Lasser, Analyst at UBS Group]

Thank you.

Questions and Answers

[Operator]

Your next question comes from the line of Simeon Gutman with Morgan Stanley. Your line is open.

[Simeon Gutman, Analyst at Morgan Stanley]

Hey, Richard. My first question is on the comps and the stacks. I mean, it's obviously been slowing and you probably took more than your fair share over the last three years. Curious, when you sit around how you're diagnosing it, macro, I don't know if it's gas attachment merchandising, whether any of those options. How do you diagnose what's happening?

[Richard A. Galanti, Executive Vice President and Chief Financial Officer at Costco Wholesale]

Yeah, well, first of all, we look at traffic and we're getting people in the door. And we know what they're buying, they're buying non-discretionary items, they're buying fresh foods, they're buying food and sundries, they're buying apparel in a big way. They're buying patio furniture, now that the weather has turned in a big way, indoor furniture not as much. We all know what's going on with consumer electronics out there. While all the members industry-wide are down, ours are down a little less, but they're down. So overall, we -- when we look at what else can we do to drive more non-food business, but at the same time, can we bring in a few more items on the food and sundries side because we know traffic is good there. It's simple impulse items that suffer $15 to $25. So that's what we do every day and that's what Claudine and her staff and her merchants are doing.

[Simeon Gutman, Analyst at Morgan Stanley]

And then my follow-up, can you give us some information or color on gasoline, gross profit year-over-year, how that profit pool is trending, obviously inclusive of both gallons and the penny profit?

[Richard A. Galanti, Executive Vice President and Chief Financial Officer at Costco Wholesale]

Well, yeah, gallons are close to flat. The average price per gallon during the quarter was down 11%, so that's a 12% -- I don't have the number, 12% or 13% of our sales, which was the average price point per sell unit, if you will, was down 11%. Year-over-year, gasoline was profitable in both quarters nicely. As I've said -- I think I'm sure I said last year in Q3 and this year it helped a little -- it didn't help a little -- it helped a little year-over-year, but not a lot. Next -- Last year in Q4 was a strong number and we've got an extra week, but -- and we'll see how it goes this year. But right now, gasoline continues to be quite profitable for us.

[Simeon Gutman, Analyst at Morgan Stanley]

Okay, thanks, Richard.

[Operator]

Your next question comes from the line of Christopher Horvers with JP Morgan. Your line is open.

[Christopher Horvers, Analyst at JP Morgan Cazenove]

Thanks very much, and good morning. So I just wanted to jump back to the pricing question. From a strategy perspective, typically, if you see things that are disinflating or deflating on more of the commodity side, you'll take price ahead of that. I guess, is that where you're doing currently? And we've heard a lot of talk in the market about the vendors funding more promotions. How are you thinking about the balance between the retailer funding the promotion or the price investment versus the vendors?

[Richard A. Galanti, Executive Vice President and Chief Financial Officer at Costco Wholesale]

Well, first -- look, we work with our suppliers every day and it's going to be a partnership there. Again, I think it's easier for us in the one hand that we do a lot of volume on a fewer items. We're managing -- we have buyers that literally are managing a couple of dozen items, not 200 items. And I remember when certain commodity prices, like resins and steel, were going up in our monthly budget meeting hearing from the merchants how -- what we're committing out five, six months for seasonal items, like patio furniture, barbecue grills, this was a couple of years ago. We're on -- we want to know when the vendor was increasing the price on whatever it was, whether it was a major consumer products company or some manufacturer of non-food items like that. Why? Exactly why? How much of its labor? How much of its the commodity costs? And then how much is the transportation costs? And then as prices work -- and wage pressure or whatever. And as we saw commodity is coming down, I think -- I'd like to think that we were the first on the phone with our suppliers, getting -- wanting to know when the price is going to drop. And understandably, in some cases, the supplier had committed to a season of three or four months. And so there was some delay and we worked with them and there.

In addition, as we said, we're going to invest a little on price, how much are you willing to invest in price. So it's a partnership. And I think we are better-positioned to do that simply because, if you take our $230 billion or $240 billion in sales and divided by 3,800 SKUs, it's a lot more pricing power per SKU and a lot more focused on an item-by-item basis. So that's what we do. And as there are promotional monies out there for the suppliers, this goes back to the beginning of time around here. I remember with the traditional co-op advertising dollars as supplier wanted you to spend $0.05 of our own money and add it to $0.05 of theirs to do $0.10 of advertising of their product, and we said, just give us the $0.05 and we'll base it on our $0.95 cost, not a dollar cost. And that's what we still do. And so I think we have to be smart about knowing what every bucket of money is out there, whether it's promotional monies or ad monies or -- ad money is online now and work with our suppliers to do that. And in our case also, we do, what we call, the MVM, the multi-vendor mailers, the coupon booklets that we send out 11 times a year. And not only that, but hot buys in store and, what we call, temporary price discounts, and what could drive sales.

The other part of that is, is when we get monies, in some cases, what -- how much elasticity is there in driving business by lowering their price. In some categories, particularly some of the bigger ticket categories right now, there's not an appetite by the consumer necessarily for that. So how do we add value to the item or do more things to it to drive business. It's all of the above.

[Christopher Horvers, Analyst at JP Morgan Cazenove]

And so as you look forward, you said I think 3% or 4% inflation in the quarter. If you look at the Nielsen data, that was sort of low-double-digit, right? I mean, Walmart talked about that. So two-part question. One is, is the difference just mix that you have more fresh commodity exposure? And then if you project forward that you'll have sort of no inflation, potentially six, eight months out. So how do you think about your ability to continue to comp overall?

[Richard A. Galanti, Executive Vice President and Chief Financial Officer at Costco Wholesale]

Well, when there was low inflation and not an over-arching concerned about a recession, when the world was seem to be comping three, four, five and six years ago at 2% to 4%, we were 5% to 7%. Our view is, is because we got great members buying more, great loyalty and great -- the best prices by a major difference and quality. And so we've succeeded under those. I think right now, more of it -- in my view, more of it relates to the fact that we're not only dealing with big-ticket discretionary items weakness, which again, when we look at like NBD[phonetic] and everything, we're doing better in most of those categories. Our negative is not as negative as other out there. In addition, we're comparing against two years of outsized growth in some of those things as people are buying things from their home. We saw an outsized sales in indoor and outdoor furniture and electronics and TVs and exercise equipment. And so we're not only comping -- comparing against this "recession", our concerns about big-ticket items, but comparing against uber strength over the last two years prior to that. So I think we'll come out of this fine. We're pretty good at figuring out new items and new things to do and we're not just focused on how do we drive sales in other 1% or 2%, but how could we drive sales, we're bringing in new and exciting stuff and we continue to do that. This is anecdotal, but over the last year, year and a half, we've always been very good at taking, what I'll call, big American Costco products, including a lot of KS, and having huge success overseas. We're now on a conscious basis, figure out what unique exciting overseas items can we bring elsewhere in the world, including the US and Canada, and we're having good experience with some of those things. These are all small things, but there's lots of little small things around here that add up.

[Christopher Horvers, Analyst at JP Morgan Cazenove]

Got it. Thank you so much.

[Operator]

Your next question comes from the line of Scot Ciccarelli with Truist. Your line is open.

[Scot Ciccarelli, Analyst at Truist Financial]

Good afternoon, guys. Scot Ciccarelli. Richard, I think you mentioned fresh foods were a bit on the softer side. When you kind of look at the data, is that a function of your members moving to less expensive packaged goods or is that more just due to the COVID-driven comparisons like you were just talking about on the discretionary side?

[Richard A. Galanti, Executive Vice President and Chief Financial Officer at Costco Wholesale]

Yeah, by the way, when I was talking earlier about down, the margins were a little weaker on fresh, sales have been fine. And in the quarter, again, when you look at a reported total company sales number of 0.3% or 3.5% ex gas and FX. But within that 0.3% reported, fresh was mid-singles, food and sundries is mid- to high-singles, non-foods was a little over mid-single negative.

[Scot Ciccarelli, Analyst at Truist Financial]

Got it. All right. [Indecipherable] of that. So the second question related to that, though, is, are you seeing any other kind of trade, let's call it, trade-down type activity, whether it's more private label sales, etc., that you kind of identified from new members? Thanks.

[Richard A. Galanti, Executive Vice President and Chief Financial Officer at Costco Wholesale]

Yeah -- and by the way, not just in this current "recession" or concern for recession. Historically, we've always seen somewhat -- like within fresh protein, we've always seen when there's a recession where it was '99, '00, or '09 -- '08, '09, '10. We would see some sales penetration shift from beef to poultry to -- and pork. We have seen some of that now. I think anecdotally, I heard a few months ago from our head of food and sundries buyer that we saw some switch even to some canned products, like canned chicken and canned tuna, things like that. But on the KS side, we've also seen that. I think last quarter, I mentioned that, on a year-over-year basis where there's a 150 basis point increase in private label sales penetration, and this year, at the end of the quarter, it's 120 basis points, so still over a full percentage point delta in sales penetration. If you go back over the last 10 years, my guess is that, on a year-over-year basis, maybe we've gone from, I'm guessing, 22% or 23% to 25% or 26%, so call it, 300 basis points over 10 years or eight years. So you have 30 to 50 basis points versus 120 basis points and 150 basis points in the last couple of quarters. So, yeah, that would again, and at least anecdotally, suggests that we've seen people looking for better bargains. We try to correct people when they said it was a downgrading because argue was an upgrade, when they went to Kirkland Signature.

[Scot Ciccarelli, Analyst at Truist Financial]

Got it. Thank you very much.

[Operator]

Your next question comes from the line of Karen Short with Credit Suisse. Your line is open.

[Karen Short, Analyst at Credit Suisse Group]

Hey, thanks very much. Good to talk to you. Two questions. One is, your pretax margin is one of the highest that I think I've seen in the model, like I'm not even sure I could go back to when it was as high as it was. So I'm curious if you could just make some color or commentary on that. And then the second question I had was, not that we're necessarily going into a deflationary environment in food. But if we were to go into deflationary environment in food, what would be the deleverage you would see on the EBIT line on that front?

[Richard A. Galanti, Executive Vice President and Chief Financial Officer at Costco Wholesale]

Well, I'd be remiss if I even could think of a number off the top of my head here. In our view, first of all, deflation, we'll be the first out there lowering prices with it. And I'd like to think that we could drive business with it. The other thing is, look at even something like gasoline. I think all retailers out there that have gasoline operations have, in the last few years, reflected higher profitability from gas. In our view, we have higher profitability and we're still -- we have the most extreme savings versus everybody else. So we've been able to make a little more per gallon because others have decided to make more than a little more. And I think that hold -- that same thing holds true elsewhere. When we look at our competitive price shops against our direct club competitors and against others on key items, like fresh with supermarkets, again, those price gaps between us and our competition have not changed. They're still as strong as we feel that they should be.

And so again, it's hard to say what -- your comment about some of the highest pretax margins, let's face it, I remember looking at it even like SG&A, which was up year-over-year, of course. If you go back pre-COVID, I think our SG&A on a reported basis was -- had a 10% in front of it. It was like 10.1% or 10.0%. And our view is, could it even ever get below 10%. And with COVID and crazy sales for two years, we benefited, of course, more than we were detrimented by COVID in many of our categories. And we got down below 9%, and of course, normalized, it's still better than it was, and margins are still better than they were. So I think some of it is sustainable. Wage pressure -- wages are not going to go down. The question is, will they continue to go up? Again, we're going to be ahead of that, too, in terms of wanting to make sure we take care of our employees. But let's assume that a big chunk of that is -- if overall inflation subsides a little bit, I think we'll see a little less wage pressure.

But look, as you know, Karen, with us, it's top line sales mostly, and the biggest thing can affect anything. I think we've shown that even with some lesser top line sales, we've been able to pull the levers in a way that still allows us to drive bottom line. And we'll continue to be pragmatic about it, but we'll have to wait and see.

[Karen Short, Analyst at Credit Suisse Group]

Sorry, just to follow up on that. So is there any way to frame what ex gas, ex gas margins, ex fuel prices, like what delta in sales would result in a delta in EBIT? Is there any way [Speech Overlap] that?

[Richard A. Galanti, Executive Vice President and Chief Financial Officer at Costco Wholesale]

Well, it's hard to say -- not really. I mean, we used to look at almost like the old Y equals AX plus B model based on incremental sales, what's the variable rate of expenses in a warehouse. In our collective view, this goes back several years, but our collective view was as you needed somewhere around 4.5%, whether it was 4% or 5% of a comp number to have flat SG&A or flat expenses at the warehouse. Certainly, taking the weakness right now in big-ticket items, that's -- or -- and then taking the weakness of gas deflation, those things impact that SG&A percentage more than anything. When I look every month at our budget meetings when the operators report on labor productivity using sample in fresh, we're still improving in the 3% to 6% labor productivity in pounds of protein, processing pork, poultry and beef through -- meat through the system.

When we look at front-end labor or warehouse labor, not the ancillary business or the fresh foods or anything, but labor hours, we've shown labor productivity. Now, in the last year, with slower -- a little slower of sales and with three unusual additional wage increases, that's going to still show a labor percent number higher as a percent of sales, which is our single biggest SG&A item, bigger than other things. But look, at the end of the day, we're still a top line company. In our view, that will amend all things. We'd like to see -- I'm sure we'd like to see something pre-inflation back in the 5% to 7% or 8% range. But let's get from where we are now to 3% and 4%, and we'll go from there.

[Karen Short, Analyst at Credit Suisse Group]

Okay, understood.

[Richard A. Galanti, Executive Vice President and Chief Financial Officer at Costco Wholesale]

Now, the good news also is, if I look back the last -- well, this is the second quarter that we've seen that discussion of lower sales of big-ticket discretionary items, it started actually I think a little bit in the quarter prior to that, not the entire quarter, just a little bit in there. So if you will, there's -- if all things being equal, we'll be comparing against easier compares six months from now and -- but hopefully, we can do them on our own as well.

[Karen Short, Analyst at Credit Suisse Group]

No, that makes sense. Thanks so much.

[Operator]

Your next question comes from the line of John Heinbockel with Guggenheim Securities. Your line is open.

[John Heinbockel, Analyst at Guggenheim Securities]

So Richard, core on core, food and sundries, and non-food were up, right? So it's kind of a two-part on core on core. One, what drove that, right, was that predominantly mix? And then secondly, fresh food was down. Where is fresh food versus '19? And are we kind of getting to the point where those -- that erosion is going to stop, right, because we're pretty close to '19?

[Richard A. Galanti, Executive Vice President and Chief Financial Officer at Costco Wholesale]

Yeah. Look, fresh foods is still up year-over-year on margins [Speech Overlap]

[Unidentified Speaker, at Costco Wholesale]

No, versus '19.

[Richard A. Galanti, Executive Vice President and Chief Financial Officer at Costco Wholesale]

Versus '19, right. Fresh foods margins are up versus '19. It went way up. I mean, I think -- hold on a minute. I had a little cheat sheet. Yeah, if I look back at just fresh foods, if I go back to '21, we had a couple of quarters where fresh foods margins were up 200 and 300 percentage -- 200 or 300 basis points year-over-year in the quarter. By the end of '21, this was near the end of -- kind of the -- is lapping that craziness, that crazy goodness, we were down 190 basis points. And for all of '22, we were down anywhere from 50 to 120 basis points on a year-over-year basis, some of that compared to those plus 200 and 300 basis point numbers. This year, we're down, again, versus last year and down -- but down versus that giant increase in fiscal '21. When I look at where our food gross margin is today in Q3 versus pre-COVID, we're still up.

[John Heinbockel, Analyst at Guggenheim Securities]

Okay. But the other categories that were up, right? Is that predominantly mix, private brand, and less big-ticket?

[Richard A. Galanti, Executive Vice President and Chief Financial Officer at Costco Wholesale]

Yeah, I think it's mix. Like some of the non-food strength, as I mentioned throughout, apparel was one of them. Apparel has a strong margin. And apparel has a strong margin relative to all of our departments anyway, and majors has a weak margin generally anyway, and then, of course, lower penetration of that.

[John Heinbockel, Analyst at Guggenheim Securities]

All right.

[Richard A. Galanti, Executive Vice President and Chief Financial Officer at Costco Wholesale]

Well, freight has -- by the way, freight has helped too, particularly on big-ticket items, the furniture, the white goods, exercise equipment, things like that.

[John Heinbockel, Analyst at Guggenheim Securities]

And then secondly, where are we on the personalization journey, right? Because I know you've done more data analytics in the last couple of years. So [Technical Issues] loyalty program, right? So when you think about wallet share and targeting promotions and e-mails and so forth, it looks like a huge opportunity. Where are we on that?

[Richard A. Galanti, Executive Vice President and Chief Financial Officer at Costco Wholesale]

Sure. By the way, one other question that we've gotten a couple of times of late because of some of the companies out there reported much higher shrink. Our shrink is intact. We haven't seen any major change in shrinkage. It fluctuated a couple of three basis points up really before COVID as we rolled out self-checkout, and since then, it's come back down a little bit. And so it's been a very tight range and so we've been fortunate in that regard. And in terms of where we are in personalization. For those of you on the call that have known me forever, it was probably four years ago that we talked about, but sometime soon we'll do targeting and be after that do personalization. Well, we're still in the early innings. But I guess what I'd like to tell you, and I think I mentioned this on the last quarter's call, just under a year ago, we hired a new VP of Digital -- Digital Transformation, if you will, both in e-comm and mobile sites and applications. That complemented three other outside VPs we hired, one of which was in the data analytics area. And we've really, over the last six to nine months, began a two-year roadmap to improve and re-platform our primary e-commerce website, and the same goes for our mobile apps and mobile site.

Working, of course, with -- again, with data analytics people, the architect people as well as the business users, we're currently building and dramatically increasing the number of engineering capabilities that we have, and we're on our way. But I'd say, we're in the early innings. First order business to have, which we now we feel we've gotten to a much better clean data site. We're still sending you too many e-mails a week that don't pertain specifically to what you do. But I think you're going to see incremental changes, and I'll be able to hopefully report more on that at the next quarterly call. And just in the last three months as an example, we've had three small releases to our mobile app that are improvements of it, and we're now on plans to have small improvements in that app each month for the several months going forward. And so you really -- as you know, you've heard me say for the past couple of years, that we're in the early innings. I'll repeat that. We are, but we actually got I think a good game plan and you'll see more to that over the future. A little longer than we had hoped to do some of this stuff, but I think we're on our way in that regard.

[John Heinbockel, Analyst at Guggenheim Securities]

Okay, thank you.

[Operator]

Your next question comes from the line of Oliver Chen with TD Cowen. Your line is open.

[Oliver Chen, Analyst at TD Cowen]

Hi, Richard. When you think about household income, what kind of trends are you seeing in terms of your customers and people trading and you, Costco, at large? And then the big-ticket item question, do the -- what's your -- what are your thoughts on how you're planning inventory there? Do the compares ease? Do you expect improvement? And within big-ticket, any color in terms of how that may proceed sequentially?

[Richard A. Galanti, Executive Vice President and Chief Financial Officer at Costco Wholesale]

Sure.

[Oliver Chen, Analyst at TD Cowen]

Thanks.

[Richard A. Galanti, Executive Vice President and Chief Financial Officer at Costco Wholesale]

Yeah, our annual household income has actually gone up a little, but I think that's more to do with wage increases than anything. We still over-indexed to higher-end people -- higher-end income people, and so that's still there. As it relates to our inventories, again, if you had asked me six months ago, when -- in fact, it was -- I think it was Q3 and Q1 -- Q4 and Q1, where our year-over-year inventories were up 26%, as was our competitors, everybody else. A lot of that has to do with, one, some people had enough big-ticket items, but also just the terrible supply chain challenges that we all had. And since then, like others, we've shown a reduction in that dramatically and that's good. We feel pretty good about where we stand right now. If you -- some of you have noted and called us on back again, six, five, four, three months ago, we had a lot of promotional things going on. If you bought three-or-more-thousand-dollars of these 10 items, and they were all like different patio items or different in-store furniture items. If you did $3,000 or more, you got a $500 cash card on already great pricing. And that was a lot of our promotional money, markdown money to get our inventories back in line, particularly on things where we were over-inventory because of supply chain delays.

And then on some examples, I think air conditioners might be an example. Because of the supply chains last summer, we did great in selling through fans and air conditioners but -- and these are not exact numbers, but let's say, we plan to sell $500 million of it, easily 20%, 25% of it got here after the summer because of the supply chain challenges. There is no need to mark those down to try to get rid of them in September, October, we held them, and we're selling through them now, and that's not an issue at all. So in talking to Claudine Adamo, our Head of Merchandising and her non-food people, we feel pretty good about where we are both on existing inventory levels of what we have in there and as well as what we've committed to going forward for upcoming seasons, notably back-to-school and Christmas and things like that.

[Oliver Chen, Analyst at TD Cowen]

Okay. And Richard, you've made a lot of great strides in Asia and China and other regions. I'd love just some highlights in terms of what's ahead for the back half there. And a second question in that connected consumer experience between digital and physical. Are there evolved thoughts in terms of BOPUS and curbside and what your members want and delivering the ultimate convenience? Thanks.

[Richard A. Galanti, Executive Vice President and Chief Financial Officer at Costco Wholesale]

Sure. Well, first of all, in terms of expansion outside of the United States, if you look at just even this year, out of '23, I think it was, what, 13 and 10. So 60-ish, 60%, 65% in the -- 60% in the US, Canada, which I combine as one because it's well saturated, but we're still opening a bunch of units there, and it's our oldest areas. But I see that over the next five years, going from 65%, 35% or 60%, 40%, to at least 50%, 50%, if not trending a little bit towards outside the US and Canada. Now, that's, again, is the same answer I would have given you six, seven years ago for now, and I think that's a function of, one, having more opportunities every day than we thought we had before in the US and Canada, and there's plenty of opportunities going forward elsewhere.

You're going to -- but I think you're still going to see us open in Korea, Taiwan a unit-ish a year on a base of somewhere in the mid to high-teens. In Japan, more than a unit a year on a base in the low 30s. A unit a year in Australia, not exactly each year, maybe it's just one, one a year, none, and then two. But in Australia, where we've got 14, I believe. And in Europe, we're dominantly -- most of our units are in the UK, where we've got in the low 30s. We're still going to open one or two a year there or one a year probably. And we've opened a few others. We've got -- we opened our fourth in Spain, and we now have two in France and one each in Iceland and Sweden. So a little growth there. But certainly, in China, I mean, China is a big story this year for us as one of the stories is that we opened our first unit in China 3.5, 4 years ago, our second a year-and-a-half ago, our third last December, and four -- and three more this year. We're going to be at six at the end of this year.

[Unidentified Speaker, at Costco Wholesale]

Calendar.

[Richard A. Galanti, Executive Vice President and Chief Financial Officer at Costco Wholesale]

This calendar year -- yeah, I'm sorry, this calendar year. Two more this fiscal year and then one more in the fall. So there's certainly more growth there, but that's not a lot of growth relative to some companies that have tried to go in and open 20 somewhere or something. But we feel good about how we do that, but we think there's plenty on -- if you look at the bottom line, if we're opening 23 to 25 a year, we'd like to be a little 25-plus a year for the next five years and somewhere closer to 30 a year and year six through 10[phonetic], that would make us feel quite good. And we feel very comfortable that we can do that at this juncture.

In terms of curbside, we're not very thrilled about it or maybe a little stubborn about it. We tried it in a few locations a year ago and successfully proved to ourselves we don't like it, and we want you to come in. And now we do have lockers from big-ticket non-food items. Interestingly, when people do that, they come in and they -- over half of them shop while they're in the location. So one of our challenges, which is a good quality problem to have, is our average volume per warehouse has continued to grow way more than we had thought a few years ago. And we have -- last year, we had over 150 locations doing over $300 million. I think over 27 or 28 doing over $400 million and -- or 26. And so we've had to open more units, and so we're continuing to look at a lot of places even in the US and we don't get a lot of ask for it, honestly. Now, we're not asking a lot about it either, but we don't get a lot of ask for it. So I don't see that being as a big thing.

One of the things that we will be doing, though, is, even online, when you go look at an online product, if we're selling in the warehouse near you based on where you've shopped in the next several months, cross my fingers, you'll be able to say, you can go ahead and get it in store at the Kirkland at the [Indecipherable] location, which also has it in stock right now. And in some cases -- yeah, oh same-day grocery, of course, we already have with delivery with -- mostly within [Indecipherable], we partnered with a couple of other people as well, but they're the big [Indecipherable] there, both in the US and Canada. And we do second -- we do two-day dry -- yeah. And by the way, that number, which is continuing to grow, is not reporting in our income numbers. In that case, their employee or contract employee comes in, shops, brings it up and face it to you. So that we consider a warehouse sale.

[Oliver Chen, Analyst at TD Cowen]

Got it. Very helpful. Thanks, Richard.

[Operator]

Your next question comes from the line of Scott Mushkin with R5 Capital. Your line is open.

[Scott Mushkin, Analyst at R5 Capital]

Hey, thanks, Richard. Thank for taking the question. So I wanted to talk about competition a little bit. But first shorter-term, and maybe I missed the answer to this or if it was asked. Promotional activities now, are they someone -- one of your competitors said they kind of ramped up. Is that what you're seeing as well?

[Richard A. Galanti, Executive Vice President and Chief Financial Officer at Costco Wholesale]

Yes, it's higher than it was.

[Scott Mushkin, Analyst at R5 Capital]

Okay.

[Richard A. Galanti, Executive Vice President and Chief Financial Officer at Costco Wholesale]

Now, mind you, it was a lot lower for a couple of years because of the supply chain challenges. I mean, every TV we could sell, every -- whatever we could -- not particularly on the non-food, we could sell, every paper good we could sell, we actually took some items out of like the MVM mailers on the sundry side because, one, there were shortages, like paper goods, and why promote it when, first of all, we've got to limit one per customer. And so some of those comparisons is there more -- if there's more versus a lot less for a couple of years as well. But yes, we are seeing more now.

[Scott Mushkin, Analyst at R5 Capital]

And is that purely from the vendors or is that some activities you're seeing from retailers themselves?

[Richard A. Galanti, Executive Vice President and Chief Financial Officer at Costco Wholesale]

Well, you mean -- well, I can speak for us. Yeah, I mean, certainly, when we see something that other retailers are doing, we want to make sure we ask our supplier, maybe they can't tell us, but we're putting the pressure on to know that we're seeing some unusual things out there. And lo and behold sometimes, we see better deals the following day to us. So we just got to stay on top of that. But in terms of -- I think as I said a little earlier, I think we've got a lot of levers to pull. Certainly, all retailers that have gas right now has continued to be helped with that. Unusual things like fresh has been relatively strong, and so we feel good about that. Things like -- even for like apparel, which is close to an $8 billion business for us worldwide, seven-plus-billion-dollar business worldwide, that's been strong. So that's not promotional, that's just better margins in some cases.

[Scott Mushkin, Analyst at R5 Capital]

Okay. So then I wanted to talk a little bit more long-term about competition. It's been a long time I think where we've seeing as many openings from non-Costco people. You are going to see that over the next year or two, three. The other competitors also, they tout their omnichannel and their technology about just scanning it and going it. Just give us an overall your view of the competitive environment over the next one to three years and how Costco fits and whether you think that some of those technologies and e-comm stuff or competitive advantages for people that are competing against you?

[Richard A. Galanti, Executive Vice President and Chief Financial Officer at Costco Wholesale]

Well, I think we're fortunate in one way that, first and foremost, the biggest value attribute or customer attraction attribute is the best quality goods at the lowest price, and we dwarf everybody in that regard. I mean, our average mark-up on goods is in the low-double-digits, 12%, 13%. You know what they are at other traditional retailers, anywhere from 25% to 35% to 100%. So we have that extreme benefit to start with. Arguably, we've been somewhat simple in our own arrogant way over the years. One of the things we've done, as I mentioned earlier on the question that John, I think, had on -- and even forget about personalization, even target marketing. I view it now as some low-hanging fruit that we're finally get around to do over the next couple of years. So that will be a positive to us relative to others.

In terms of the benefit of buying online and picking up in store and things like that, we frankly view that as more costly than it is beneficial, and again, we haven't been asked a lot about it other than by analysts who are responding, in fairness, to the different retailers that feel they have to do it, many of them want to do it. But there's a cost of doing that. So we feel pretty good about driving the business. We think we can do more. We can certainly do more online. We don't have some strategic goal to go from 8%, which is still a $20 billion business. But to go from 8% of sales to 16%, but let's go from 8% to 9%, 9% to 10%, 10% to 11% over a certain period of time. And we think that with some of the things we're doing on that side, we can.

I think we've also done an incredible job day in and day out on the merchandising side of bringing in more exciting items, and that's something that is focused on that I hear about at every budget meeting and every Monday morning meeting with Greg and Ron and a few other senior colleagues, including our merchandising head. So I think that's what's going to keep driving our business. I think we are getting better on the technology side, playing from behind a little bit on that, but I think we've finally got a game plan and some people that are helping build those areas up both from a marketing and advertising standpoint, taking advantage of the advertising dollars that are out there that we've done pretty well despite ourselves, but we know we can do a lot better in grabbing some of those dollars. So -- and what we will use it for is to drive sales.

[Scott Mushkin, Analyst at R5 Capital]

And the club openings, I don't think you touched on that [Indecipherable].

[Richard A. Galanti, Executive Vice President and Chief Financial Officer at Costco Wholesale]

Yeah, the big club opening thing is, is we're on our target. I think if you -- the last three years, there was a big down year because of the year -- the first year of COVID. But fiscal '21, '22 and '23, I think we averaged around 23 net new units a year and -- 22, 23. We'd like to get above 25 over the next -- each of the next five years and closer to 30 year six through 10[phonetic], that's kind of the game plan. And that really is a bottom-up approach by each of the eight US geographic regions, the two Canadian regions and other -- every other country region working with operations in our real estate department kind of which ones are likely and what's our priority, and we feel pretty comfortable. We've got a good pipeline of pending openings for sure over the next three or four years and with an equal level of comfort that we feel that we'll continue to have plenty of opportunities to open units.

[Scott Mushkin, Analyst at R5 Capital]

Thanks.

[Operator]

Your next question comes from the line of Paul Lejuez with Citi. Your line is open.

[Brandon Cheatham, Analyst at Smith Barney Citigroup]

Hey, Richard. This is Brandon Cheatham on for Paul. I want to follow up on what you mentioned about the digital investments that you all are making. It sounds like it's something that eventually you might monetize partnering with your vendors. How do you balance that with your view that you really want your members in your warehouse and how do you see that working kind of over the long-term?

[Richard A. Galanti, Executive Vice President and Chief Financial Officer at Costco Wholesale]

Well, first of all, as part of that monetizing of digital is in warehouse. We've been very successful at moving the needle, if you will, on a holiday weekend with hot prices on strip steaks or at the beginning of a season with the planting season with green items. And so I think it's just we're getting around and doing a better job of it, and we're bringing in people that we -- that have done it before, frankly. And that's -- even in membership marketing, Sandy Torrey, who heads up -- Senior VP of Membership, Marketing, we're doing more things than we're doing -- she's doing more things today than we did even a year ago, trying some things. And again, I think that our first order of business is to drive business in store, certainly driving it online as well, but not to just replace what's in store.

And so I think -- again, I tried to stay a little low key on this subject because we're not -- I hate to use the word this new strategic effort, but what we've learned over the last few years is everybody is a technology company today, and there are some things that we have been a little slow to doing and we know there's a lot of opportunity there to do some of the even basic things. Not how do you get five e-mails a week that none of which relates specifically to you. If it was an e-mail, even just based on a couple of items you purchased in store that had a banner of items that you might be interested in, you could literally double the click rate on them. So we're -- those are the kind of things that bringing in -- of the four, what we call, catalyst VP hires in our IT department over the last few years. One is data analytics and one is digital. And that's -- and it's not just two individuals, it's the teams that they have built in short order. So we'll continue to do that and tell you more as we go along.

[Brandon Cheatham, Analyst at Smith Barney Citigroup]

Got it. And if I could follow up on the membership side, you mentioned membership marketing. Are you seeing any difference in promotions from your competitors for their memberships? How has that informed what you all are doing? And is there any major change on promotions on membership from your competitors?

[Richard A. Galanti, Executive Vice President and Chief Financial Officer at Costco Wholesale]

Well, for us, there's really no change. I mean, we do a few promotional things each year. But the biggest thing we don't do is, in any big way, discount our membership. Some of the promotional things that you may sign up for a membership and you get a certain number of coupons related to stuff, but I don't want to go into that, but you can look at our competitors and see what they do, there's a lot more promotional activity going on elsewhere. And we're still getting, as I mentioned on the call, year-over-year 7% increase in new memberships with about a 3% -- just under a 3% increase in number of new warehouses. So we're still getting people indoor. I think, in fairness, that's been helped by COVID. When we were one of the -- we being warehouse clubs was a big cavernous place to come and get a lot of things, and that certainly helped us. I'd like to think we're pretty good at what we do, and that's why more people are signing up and we're opening new units and driving more business that way. So -- but really, we have not done -- if anything, we've done a little less on the promotional side and membership. We do a few promotional things each year, but not a lot.

[Brandon Cheatham, Analyst at Smith Barney Citigroup]

Got it. Thank you. Good luck.

[Richard A. Galanti, Executive Vice President and Chief Financial Officer at Costco Wholesale]

I'm going to take one more question.

[Operator]

Your next question comes from the line of Rupesh Parikh with Oppenheimer & Co. Your line is open.

[Rupesh Parikh, Analyst at Oppenheimer & Co.]

Good afternoon. Thanks for taking my question. So on China, I was curious with the reopening there, how those locations are performing versus your expectations?

[Richard A. Galanti, Executive Vice President and Chief Financial Officer at Costco Wholesale]

They're doing great. End of story. We've been blessed by those first openings that we have over there. Needless to say, we were impacted, like everybody over there during the shutdown and what have you. And we had some great video clips of our budget meetings here showing what we did to create care packages, not only for our members, but for the neighborhoods around us. And we were told they were the best care packages of any of the big retailers. So that made us feel good.

[Rupesh Parikh, Analyst at Oppenheimer & Co.]

Great. And then maybe just one follow-up question. So as you look at your bigger ticket categories, consumer electronics, etc., any sense at this point whether trends have bottomed or just curious if you think trends have bottomed or whether we could see further softening in some of these bigger ticket areas?

[Richard A. Galanti, Executive Vice President and Chief Financial Officer at Costco Wholesale]

I have one of my colleagues here on the merchandising side and she was saying to me softly, the negatives are getting better. And again, as I mentioned earlier, it's about seven or eight months ago, seven-ish months ago when we started seeing the decline. And so if nothing else, we'll be having an easier compare five months hence. But certainly, we've seen a little bit of improvement in the negatives. Well, thank you, everyone. And David, Josh and I are around to answer questions if you have any more, which I'm sure you will. Have a good afternoon. [Operator Closing Remarks]