Costco Wholesale Q1 2024 Earnings Report

Costco Wholesale EPS Results

• Actual EPS: $3.48
• Consensus EPS: $3.41
• Beat/Miss: Beat by +$0.07
• One Year Ago EPS: $3.10

Costco Wholesale Revenue Results

• Actual Revenue: $57.80 billion
• Expected Revenue: $57.79 billion
• Beat/Miss: Beat by +$13.60 million
• YoY Revenue Growth: +8.20%

Costco Wholesale Announcement Details

• Quarter: Q1 2024
• Date: 12/14/2023
• Time: After Market Closes
• Conference Call Date: Thursday, December 14, 2023
• Conference Call Time: 5:00PM ET

Costco Wholesale (NASDAQ:COST) operates a membership-based warehouse retail business under the Costco name. The company sells a broad selection of merchandise, including groceries, fresh foods, beverages, appliances, electronics, furniture, apparel, jewelry, hardware, and seasonal products. It also offers services such as gasoline, pharmacies, optical departments, hearing-aid centers, food courts, travel services, and business delivery in selected markets.

Costco markets many products under its private-label Kirkland Signature brand and sells merchandise through warehouse locations and e-commerce platforms. Its membership model is designed to generate recurring membership revenue while allowing the company to offer products at competitive prices. Product selections and ancillary services vary by location and market.

The company traces its history to the opening of the first Price Club warehouse in San Diego in 1976. Costco Wholesale was established in 1983, and Price Club and Costco merged in 1993. Costco serves customers primarily in the United States and Canada, as well as in international markets including Mexico, the United Kingdom, Japan, South Korea, Taiwan, Australia, Spain, France, Iceland, and China. Ron Vachris serves as president and chief executive officer.

Costco Wholesale Q1 2024 Earnings Call Transcript

Key Takeaways

• Net income of $1.589 B ($3.58/share) vs. $1.364 B ($3.07/share) a year ago on 6.1% revenue growth to $56.72 B in Q1 fiscal 2024.
• Comparable sales rose 3.8% (3.9% ex-gas/FX) and U.S. e-commerce grew 6.1% ex-FX, marking the first quarterly online sales increase in over a year.
• Membership income climbed 8.2% to $1.082 B, with renewal rates at 92.8% in the U.S. & Canada and executive members now accounting for 46% of paid members and over 73% of worldwide sales.
• Gross margin expanded by 43 basis points to 11.04% (36 bps ex-gas deflation), driven by improvements across core merchandise and ancillary businesses.
• SG&A expenses increased by 25 basis points to 9.45% of sales, reflecting wage increases and higher labor costs implemented in Q1.

Presentation

[Operator]

Good day, everyone, and welcome to the Costco Wholesale Corporation Fiscal First Quarter 2024 earnings call. Today's call is being recorded, and all lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. If you would like to ask a question during this time, simply press star one on your telephone keypad. To withdraw your question, it is star one again. I would now like to turn the call over to Richard Galanti, Chief Financial Officer. Please go ahead, sir.

[Richard Galanti, CFO at Costco Wholesale]

Thank you, Lisa, and good afternoon to everyone. I will start by stating that these discussions will include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements involve risks and uncertainties that may cause actual events, results, and/or performance to differ materially, excuse me, 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.

[Richard Galanti, CFO at Costco Wholesale]

Comparable sales and comparable sales, excluding impacts from changes in gasoline prices and foreign exchange, are intended as supplemental information and are not a substitute for net sales presented in accordance with GAAP. In today's release, we reported operating results for the first quarter of fiscal 2024, the 12 weeks ended November 26th. Reported net income for the 12-week first quarter came in at $1.589 billion or $3.58 per share, up from $1.364 billion or $3.07 per share in the 12-week first quarter last year. This year's results included a tax benefit of $44 million or $0.10 per share related to stock-based compensation.

[Richard Galanti, CFO at Costco Wholesale]

Last year's results included a tax benefit of $53 million or $0.12 per share related to stock-based compensation, and also included a charge of $93 million pre-tax or $0.15 per share, primarily related to downsizing our charter shipping activities. Net sales for the first quarter were $66.72 billion, a 6.1% increase over last year's first quarter, $53.44 billion. Net sales were benefited by approximately 0.5%-1% in the U.S. and worldwide from the shift to the fiscal calendar as a result of the 53rd week in fiscal 2023. The following comparable sales reflect comparable locations year-over-year and comparable retail weeks. In the U.S., reported 2% comp sales, ex-gas, deflation, and FX, 2.6%.

[Richard Galanti, CFO at Costco Wholesale]

Canada reported 6.4%, ex-gas and FX, 8.2%. Other international reported 11.2%, ex-gas and FX, 7.1%. For total company, a reported 3.8% and a 3.9%, excluding those two items. E-commerce, which was reported on as a 6.3%, came in at a 6.1%, excluding FX. Overall, for the first fiscal quarter, fresh foods were relatively strong once again, with food and sundries right behind. Non-food showed improvement over the September, October, November timeframe, as did e-com sales. In terms of Q1 comp sales metrics, traffic or shopping frequency increased 4.7% worldwide and 3.6% in the United States. Our average transaction was down nine tenths of a percent worldwide and down 1.6% in the U.S.

[Richard Galanti, CFO at Costco Wholesale]

Foreign currencies relative to the U.S. dollar positively impacted sales by approximately 0.4%, while gasoline price deflation negatively impacted sales by approximately 0.6%. I've gotten more than a few calls in the past few weeks as to how many pies we sold in the U.S., leading up to the Thanksgiving holiday. In the U.S., in the three days leading up to Thanksgiving, we sold 2.9 million of our famous pumpkin pies, along with 1.3 million apple and pecan pies. So over 4 million pies in total during the three days. Back to the income statement here. Next on the income statement is membership fee income. In the quarter, we reported $1.082 billion or 1.91%.

[Richard Galanti, CFO at Costco Wholesale]

That's an $82 million or 8.2% increase and a four basis point increase over the first quarter last year. In terms of renewal rates, at first quarter end, our U.S. and Canada renewal rate stood at 92.8%, while the worldwide rate came in at 90.5%. Both of these rates were up 1/10 of 1% from those numbers, 12 weeks earlier at the end of the fourth quarter. Membership growth continues. We ended Q1 with 72.0 million paid household members, up 7.6% versus last year, and 129.5 million cardholders, up 7.1%, with consistent growth throughout the quarters.

[Richard Galanti, CFO at Costco Wholesale]

At Q1 end, we had 33.2 million paid Executive members, an increase of 939,000 during the 12 weeks since Q4 end. Executive members now represent a little over 46% of our paid members and a little over 73% of worldwide sales. Moving down the income statement next is our gross margin. Our reported gross margin in the fourth quarter was higher year-over-year by 43 basis points, coming in at 11.04%, up from Q1 of last year at 10.61. That 43 basis point reported number, ex-gas deflation, would be +36 basis points. As I normally do here, we write down two columns and six line items. The first column is reported in the first quarter. The second column is margins excluding gas deflation.

[Richard Galanti, CFO at Costco Wholesale]

It's the year-over-year change in the first quarter. On a core merchandise, +3 basis points reported, -3 basis points, ex-deflation. Ancillary and other businesses, +24 reported and +22 ex-deflation, gas deflation. 2% reward, lower year-over-year, -4 basis points reported and -3 ex-gas deflation. LIFO, +3 and +3, and other +17 and +17, for a total, again, reported year-over-year up 43 basis points and ex gas deflation up 36 basis points. Starting with the core, again, it was a total company. It was +3 and -3 reported in ex-gas deflation. In terms of core margin on their own sales or core-on-core margins, were up by 5 basis points year-over-year. Ancillary and other business gross margin, again, higher by 24 and higher by 22 ex-deflation, gas deflation.

[Richard Galanti, CFO at Costco Wholesale]

This increase was driven largely by gas and e-com. Our 2% reward, higher by 4 and higher by 3 ex-deflation, reflecting higher sales penetration coming from our executive members. LIFO, +3 basis points. We had a $15 million LIFO credit in the first quarter of this year. This compared to a very small $500,000 LIFO charge in Q1 a year ago. And then the other line item, that 17 basis points to the positive, as was mentioned earlier, last year in Q1, there was a 17 basis point impact from a $93 million pre-tax charge, primarily for the downsizing of our charter shipping activities. Moving on to SG&A. We reported SG&A of 9.45%, higher by 25 basis points than last year's 9.20%.

[Richard Galanti, CFO at Costco Wholesale]

Again, in Q1, we'll write down the two columns. Reported and without gas deflation, operations -18 and -14 basis points, minus meaning it's higher year-over-year. Central, -2 and 11. Stock compensation, -3 and -2. Pre-opening expense, -2 and -2. Again, for a total reported SG&A, higher -25 year-over-year. And I'm sorry, SG&A, not margin. 25, and without gas deflation higher by 19 basis points. The core again was higher by 18 and higher by 14, excluding the impact from gas. This included 12 weeks of this past March's extra top-of-scale increase in our wages, which represents an estimated 2 basis point hit. And as of September 18, we raised the starting wage in the U.S. and Canada.

[Richard Galanti, CFO at Costco Wholesale]

That estimated impact from the new, those new wages to be roughly 2 basis points as well. Again, SG&A, nothing much to say other than it's 1 basis point higher, excluding gas deflation. Again, with strong comps to the -2 ex-gas deflation and pre-opening. We did have a couple of more openings this year in the quarter than we did last year, and that was higher by 2 basis points. Below the operating income line, interest expense was $38 million this year, $4 million higher than last year's $34 million dollar figure. Interest income and other for the quarter was higher by $107 million, coming in at $160 million this year versus $53 million last year.

[Richard Galanti, CFO at Costco Wholesale]

This was driven largely by the increase in interest income, about $100 million of that $107, due to higher interest rates as well as higher cash balances. The small additional impact was a favorable FX year-over-year. In terms of income taxes, our tax rate in the first quarter was 24.5%. This compares to 23.0% a year ago or 1.5 percentage points higher this year than last year. The increase in our rate as of Q1 in Q1 is primarily attributable to lower benefit from the stock-based compensation from a year ago. Overall, reported net income was up 16.5% year-over-year in the quarter. A few other items of note.

[Richard Galanti, CFO at Costco Wholesale]

In terms of warehouse expansion, in the first quarter, we opened 10 locations, including one relo, so a net of nine increases. Those nine included eight in the U.S. and one in Canada. For the full year, fiscal 2024, we estimate opening, we're planning to open 33 locations, including two relos. So for a net increase of 31 new warehouses, that would be up from 23 that we opened in fiscal 2023. For Q2, fiscal 2024, we plan four new locations, including our sixth building in China, early in the calendar year. Regarding capital expenditures, the first quarter capital expenditure spend was approximately $1.04 billion. We estimate that fiscal 2024 CapEx will be in the $4.4-$4.6 billion range.

[Richard Galanti, CFO at Costco Wholesale]

That's up from $4.3 billion we had in fiscal 2023, reflecting a continued increase in the number of expansions that we're doing. In terms of e-commerce business, e-com sales in Q1, ex-FX, increased 6.1%. The first quarterly year-over-year increase in five fiscal quarters and trended well during the three reporting periods of September, October, and November. E-com showed strength in several areas. In food, things like e-gift cards, pet items, snack items were up in the mid-teens. Appliances were up year-over-year in the mid-20s. TVs was actually in the high singles, despite the challenges with other aspects of consumer electronics, like computers. And tires were up in the low teens. So overall, a pretty good showing there. As well, Costco Logistics enjoyed record-breaking deliveries.

[Richard Galanti, CFO at Costco Wholesale]

In the first quarter of fiscal 2024, we completed over 800,000 deliveries, which were up 17% versus the comparable quarter last year. And some fun wow items in the quarter in e-commerce. You've probably read about the fact that we're selling one-ounce gold bars. We sold over $100 million of gold during the quarter. We sold a Babe Ruth autographed index card for $20,000. And in addition to e-gift cards on everything from restaurants to golf to airlines, and we just in the last couple of weeks, launched a Disney e-gift card, valued at $250 for $224.99. And for you last minute shoppers out there, there's a Mickey Mantle autographed 1951 rookie card in nearly perfect condition, and it's on sale online for $250,000.

[Richard Galanti, CFO at Costco Wholesale]

Next, good progress continues to be made with our e-com, mobile, and digital efforts. No big enhancements and changes to the site leading up to the holidays, mostly holiday prep. We did have 100% site availability during cyber week, and sales for the five cyber days, Thanksgiving, Black Friday, Saturday, Sunday, and Cyber Monday, were up year-over-year in the mid-teens. Our app downloads during the quarter were 2.75 million, so total app downloads are now standing at 30.5 million, or a 10% increase during the quarter. And that's after having been over 40% increase in all of fiscal 2023 versus the prior year. Our site traffic approaching 500 million and just under 10% increase, and the average order value being up about 2.5%.

[Richard Galanti, CFO at Costco Wholesale]

So continuing to make progress there. Next, a couple of comments regarding inflation. Most recently, in the last fourth quarter discussion, we had estimated that year-over-year inflation was in the 1%-2% range. Our estimate for the quarter just ended, that inflation was in the 0%-1% range. Bigger deflation in some big and bulky items like furniture sets, due to lower freight costs year over year, as well as on things like domestics, bulky, lower-priced items, again, where the freight cost is significant. Some deflationary items were as much as 20%-30%, and again, mostly freight-related. TVs, the average sale prices have been lower, while units have been higher.

[Richard Galanti, CFO at Costco Wholesale]

And in talking to the buyers overall, our inventories and our SKU counts are in good shape across all channels, and so far, we've had a good seasonal sell-through during the quarter. Lastly, as you saw in this, this afternoon's press release, we declared a $15 per share special cash dividend. This is our fifth special dividend in 11 years. The total payout will be about just under $6.7 billion and will be funded using existing cash and not accompanied by any issuance of debt. The special cash dividend will be paid on January 12th to shareholders of record on December 28th. Finally, in terms of upcoming releases, we will announce our December sales results for the five weeks ending Sunday, December 31st, on Thursday, January 4th, after market close.

[Richard Galanti, CFO at Costco Wholesale]

With that, I will turn it back for Q&A to Lisa and be happy to answer any questions.

[Operator]

Thank you. As a reminder, everyone, that is star one on your telephone. We'll take our first question from Michael Lasser with UBS.

[Michael Lasser, Equity Research Analyst at UBS]

Good evening. Thank you so much for taking my question. Richard, you had indicated over the last year and a half or so that Costco had been raising prices faster than it had throughout its history. So now with, with prices coming down, what is going to be the posture on passing along those savings? You already noted that, inflation is flat to up 1%. So do you expect deflation, especially on the food side, as you get through the next couple of quarters?

[Richard Galanti, CFO at Costco Wholesale]

Well, in talking to the buyers, we've seen the, you know, even during the quarter, we saw the trend towards that 0 versus the 1. But at the end of the day, we don't. The buyers are looking out three to six months. They have. On the fresh food side, commodities-wise, they haven't seen a lot. There are a few things that are up and a few things are down, but no giant trend either way. Look, as you know us for a long time, we want to be the first to lower prices. We're out there pressing our vendors as we see different commodity components come down, certainly on the non-food side, as we saw shipping costs come down, things like that. And so, yeah, probably a little more than less, but we'll have to wait and see. We don't know.

[Michael Lasser, Equity Research Analyst at UBS]

In my follow-up is another point that you've made for a long time, is that Costco's been a drag on the profitability of the broader retail sector. If you compare Costco's operating margin over the last 12 months versus where it was prior to the pandemic, it's 300-400 basis points higher, and yet across retail, there are signs that profitability is coming down. So now, what would stand in the way of Costco either maintaining this existing rate of operating profits margin or even further growing it from here? Is it just simply going to be a function of your ability to drive further sales growth in the consistently mid- to single-digit range or better?

[Richard Galanti, CFO at Costco Wholesale]

Sure. Well, happily, I'm, I'm able to say that, that's. You get to figure that one out. You know, at the end of the day, we're, as you've known for a long time, we're, we're a top-line company. We want to drive sales. Certainly, as there's been deflation in certain products, we've seen units go up. Yeah, I'm looking at one example here. Just in the last month, $100+ million of KS nut items where sales were flat to down a couple%, while units were up in the mid-teens. That takes a little more labor to do, but at the end of the day, that's what we wanna do. We wanna drive people and frequency.

[Richard Galanti, CFO at Costco Wholesale]

I think as long as we see, you know, renewal rates continuing to do what they do, as long as we see new signups continue to do what they do, and hopefully continue to get people to do, you know, convert to executive as well, and constantly driving the best value out there, we'll be in good stead. So far, we've been able to do that, and I think we'll continue to be able to do that.

[Michael Lasser, Equity Research Analyst at UBS]

Thank you very much, and have a good holiday.

[Richard Galanti, CFO at Costco Wholesale]

You too.

[Operator]

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

[Jackie Sussman, Equity Research Senior Associate at Morgan Stanley]

Hi there, this is Jackie Sussman on for Simeon. Thank you so much for taking our question. The core and core margin was up modestly this quarter, and it seems like it moderated sequentially. Looking forward to the balance of the year, it seems like the comparison gets a bit tougher. I guess, how should we think about your core and core margin? Could it stay expanding and positive for the rest of the year? Or any color on that would be helpful. Thank you so much.

[Richard Galanti, CFO at Costco Wholesale]

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

[Jackie Sussman, Equity Research Senior Associate at Morgan Stanley]

Gotcha. Thanks so much. Just as a quick follow-up, was the Black Friday and Cyber Monday gains that you had better than what you were expecting internally? Thanks so much.

[Richard Galanti, CFO at Costco Wholesale]

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

[Jackie Sussman, Equity Research Senior Associate at Morgan Stanley]

Thanks so much.

[Operator]

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

[Chuck Grom, Equity Analyst at Gordon Haskett]

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

[Richard Galanti, CFO at Costco Wholesale]

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

[Chuck Grom, Equity Analyst at Gordon Haskett]

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

[Richard Galanti, CFO at Costco Wholesale]

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

[Chuck Grom, Equity Analyst at Gordon Haskett]

Okay, great. And then, you know, just bigger picture, you know, I just have a question on the change at the CEO seat with Ron starting in a few weeks and, you know, replacing Craig, who replaced Jim. You know, you've had the fortunate opportunity to work with all three, and I, I guess I'm curious what change, if any, you think we could see from a, from an operating standpoint moving forward?

[Richard Galanti, CFO at Costco Wholesale]

Yeah. Well, I always joke, I'm up for review, so I'm gonna say nice things. But no, at the end of the day, the reality is, we're staying the course. You know, I remember questions were asked 12+ years ago when Craig became president, and two years later, Jim retired, and Craig became CEO and president, and what's gonna, you know, who could replace Jim? And I think the same question is asked today: Who could replace Craig? And it really is a seamless transition. You have somebody retiring that's been here 40-ish years, and that's been in the business both on operations and merchandising for a successful number of years in both. And you've got Ron, who's coming in, who started when he 17 at a Price Club in Arizona, and he already has his 40-year gold badge.

[Richard Galanti, CFO at Costco Wholesale]

Again, 30-ish years in operations, one year in real estate, traveling the world, and then seven or eight - six or seven years in merchandising. So, I think it is pretty seamless. And to see them, the two of them work together over the last two years - almost two years since Ron became president, it's very similar to what, you know, I saw during those two years when Craig became president, and then two years later, Jim retired and Craig took on the CEO role as well. So that's pretty much steady as she goes.

[Chuck Grom, Equity Analyst at Gordon Haskett]

Gotcha. Great. Happy holidays. Thanks.

[Richard Galanti, CFO at Costco Wholesale]

Thanks.

[Operator]

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

[Scott Mushkin, Founder and CEO at R5 Capital]

Hey, Richard. I guess I just wanted to think about the potential clubs in the U.S. I know it comes up sometimes, but obviously, you added eight, and it just seems like there's maybe more runway even here in the U.S., and I wonder if you had any thoughts on that, and then I had a quick follow-up.

[Richard Galanti, CFO at Costco Wholesale]

Sure. Well, you know, I mean, if we were to open the 31 this year, that would be somewhere in the low 20s, 2023, 2024 in the U.S. And I recognize a few of those are business centers, which is we continue to add as well as regular warehouse, you know, most of them are regular warehouses. And I would say that, yeah, I guess the story I'd share with you is, you know, six or eight years ago, when it was roughly 60/40 or 70/30, U.S., Canada versus other international, and we were asked, "What would it be by today?" I'd say, "Well, by today, it'll be 50/50." Well, today, you're asking the same question, it's 60/40 or 70/30 today, what will it be?

[Richard Galanti, CFO at Costco Wholesale]

I think it'll trend that way over time, but we are finding more opportunities in the U.S. Clearly, our average sales volume per location is higher today than we would have expected ourselves, thankfully, you know, six or seven years ago, what would it be by now? And, we are finding those opportunities. So I view that as good news. We still, you know, have got a lot of things going on to drive international, but, you know, international will be, you know, six or seven units this year. And, and that'll continue to grow. Last year, international was nine or 10, and, that is, that's more of a timing issue.

[Scott Mushkin, Founder and CEO at R5 Capital]

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

[Richard Galanti, CFO at Costco Wholesale]

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

[Richard Galanti, CFO at Costco Wholesale]

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

[Scott Mushkin, Founder and CEO at R5 Capital]

Perfect. Thanks.

[Operator]

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

[John Heinbockel, Managing Director and Senior Research Analyst at Guggenheim]

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

[Richard Galanti, CFO at Costco Wholesale]

Right. Well, our first order of business was fixing the foundation. We're in the middle of re-platforming our e-commerce. It's not a big bang where we're gonna flip the switch one day. We're bringing things over, and that's in progress. I think I mentioned last quarter, probably. It's a two-year roadmap on that, and we're halfway through that. So I'd say very little so far. You know, if we were in the second inning, maybe we're in the third inning now. But we. A lot of the focus has been on, first of all, making sure doing small improvements.

[Richard Galanti, CFO at Costco Wholesale]

We certainly got the 5-star rating, you know, got up north of 4.5 on that, and we're getting better at the site every time. But I think you would see personalization and first of all targeting and then personalization more over the next couple of years, honestly. And we're fine with that. Our first order of business is getting the foundation right. And we've made a lot of progress. As I didn't spend a lot of time on this call talking about the new things and the enhancements we've made to the mobile site and the e-com site, but we've done a lot.

[John Heinbockel, Managing Director and Senior Research Analyst at Guggenheim]

And maybe as a follow-up, right, you talked about the international opportunity, and it's still, you know, very underdeveloped. So what the hindrance to getting to, 'cause you're in a lot of countries now, 15-20 annual openings, maybe that's a big ask, but, you know, is it just quality of real estate? 'Cause I would imagine, operationally, it's not a human resource issue. Is it purely a real estate issue?

[Richard Galanti, CFO at Costco Wholesale]

I would say it's a combination of issues. In some countries, I mean, if you look at Korea, Taiwan, where we have, whatever, 15 or 16 locations in each country, very successful, it's a little harder to find the next location just from a real estate standpoint. You know, if you look in Japan, where we've plenty of future opportunity, we've got 30+ now, and, but again, it's a little bit of real estate. If you look at places like China or Spain, one of the challenges is, you like to be able to ideally bring over more than a handful of people from the existing location to the new one. It's a very hands-on operation.

[Richard Galanti, CFO at Costco Wholesale]

I think one of the things that we felt we mentioned that we had success when we first opened our first unit in Shanghai, is we had at least 60, 70 people move there from Taiwan for promotions and for interactions, not just in the office, in the buying offices, but even in the key, you know, supervisor and manager positions within the warehouse. And so it takes a little longer, and, but we're working hard at it, but it's a very hands-on experience.

[John Heinbockel, Managing Director and Senior Research Analyst at Guggenheim]

Thank you.

[Operator]

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

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

Hi, Richard. Thanks for taking our questions. Just wanted to kind of follow up on Scott's question. I think your average sales per club in the U.S. and Canada is around $300 million at this point. And just curious on the status of how many clubs are doing kind of well over that and are maybe in some need of relief in the form of self-cannibalization and more clubs nearby. And follow up as well on international. Just as we think about the next maybethree to five years, are there any countries that might be disproportionately getting some more of the growth here?

[Richard Galanti, CFO at Costco Wholesale]

Okay, what was the first part of the question again?

[Operator]

The average sales.

[Richard Galanti, CFO at Costco Wholesale]

Oh, average sales.

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

The average-

[Richard Galanti, CFO at Costco Wholesale]

Yeah, I don't, I don't have the numbers in front of me, but I know in fiscal 2023, we had something like 25 or so locations that did over $400 million, another 160 or so that did $300 million-$400 million. Those are huge numbers, and certainly as we get 350+. And one of them, by the way, that did over $400 million, did a few million over $600 million. So, and so generally, when it starts getting, when it starts having a three in front of it, certainly a 350, we wanna start looking to see what we can do to cannibalize it, frankly, and to have more growth in that market.

[Richard Galanti, CFO at Costco Wholesale]

And so, you know, hopefully that's one of our bigger problems and challenges, that we have more of those each year. So I think that'll continue. Again, if I look back five, eight years ago, even assuming whatever inflation number you want to assume, I think we've done a little better than that in terms of the sales volumes. So that's good news for us that we'll continue to do that. Internationally, again, I'm just looking at the map of where we are. Certainly, you know, we only have four locations in Spain. We've actually added a few on a base of thirty-plus in the U.K. We think we have more opportunity in Mexico.

[Richard Galanti, CFO at Costco Wholesale]

In Japan, where we have something in the low 30s, certainly, it's done well there, and there's many more markets and population there that we can go to. Australia, you know, is whatever, two-thirds a little under two-thirds the size of Canada, where we have 105 or so locations, and in Australia we have 15? Yeah, 15. I'm not suggesting we're gonna have two-thirds of 105 there anytime soon. It took us, you know, 35+ years to get there in Canada. But we think that there, those are the opportunities. It's not like we're looking at for a lot of other new countries at this juncture.

[Richard Galanti, CFO at Costco Wholesale]

We've done a few new countries, those single locations, like in Sweden and Iceland and Auckland, all being somewhat managed up, buying wise and somewhat operationally by a host country, in the case of, Scandinavia, by the U.K., in the case of Auckland, by Australia.

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

Thank you.

[Operator]

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

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

Good afternoon, guys. So Richard, last quarter, you talked a bit about Costco Next, and I guess my question is, how big of an impact is that program having on your e-com sales at this point, number one? Number two, kind of related to that, any change in your vetting of what vendors operate on that program? Just thinking about the quality control aspect. Thank you.

[Richard Galanti, CFO at Costco Wholesale]

Well, first of all, it's still very small relative to our company, and the fact is that the Costco Next sales currently are not in our sales. It's third-party. We get a commission, so it's kind of like 3P, if you will, 3P sales. And at some juncture, there are rules, accounting rules, of where you can include it in sales based on what risk and what ownership level you have in the items. But at this juncture, those sales, it's more of an e-commerce, the, you know, market value and just the commission in our number. You know, in terms of how we vet, we do it the same way we vet items.

[Richard Galanti, CFO at Costco Wholesale]

We want items that make sense, that provide value, and we have a team that is here that are vetting each and every one of those. I think we're up to about 65 current suppliers on there, and we'll certainly have many more as we go forward.

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

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

[Richard Galanti, CFO at Costco Wholesale]

Essentially, yes. Much like the travel business.

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

Got it. Okay, thank you.

[Richard Galanti, CFO at Costco Wholesale]

Mostly.

[Operator]

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

[Greg Melich, Senior Managing Director at Evercore ISI]

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

[Richard Galanti, CFO at Costco Wholesale]

I think it's just us. You know, again, if I looked at the. If you asked the question, what are the variables we would look at? We would want to look at strong renewal rates, strong new sign-ups, strong loyalty, and we have all that. So I think it's the question is, we haven't needed to do it. We like providing extreme value. Certainly, while we've gone a little longer than the average increase, we feel we certainly have driven more value to the membership. So, you know, I'll use my standby answer, my pat answer: It's a question of when, not if, but at this juncture, we feel pretty good about what we're doing.

[Greg Melich, Senior Managing Director at Evercore ISI]

A follow-up on inflation. I just want to make sure I got that right. You said 0%-1% for the quarter. Did it trend towards zero? Did we exit near the bottom? And you mentioned some categories that were deflationary. Which ones are stubborn in terms of inflation, where it's hardest to get it out?

[Richard Galanti, CFO at Costco Wholesale]

Which categories are stubborn in inflation?

[Greg Melich, Senior Managing Director at Evercore ISI]

Yeah, where you can't get the-

[Richard Galanti, CFO at Costco Wholesale]

CPG brands.

[Greg Melich, Senior Managing Director at Evercore ISI]

Mostly. All the branded packaged stuff.

[Richard Galanti, CFO at Costco Wholesale]

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

[Greg Melich, Senior Managing Director at Evercore ISI]

Okay, so it's not like we exited at 0%, we're still slightly positive.

[Richard Galanti, CFO at Costco Wholesale]

Right, but recognize the LIFO charge is an inventory cost of sales charge.

[Greg Melich, Senior Managing Director at Evercore ISI]

The LIFO year-over-year number, the 0%-1% year-over-year. The LIFO is just from the-

[Richard Galanti, CFO at Costco Wholesale]

Right. The 0% to 1% is from the beginning of the fiscal year.

[Greg Melich, Senior Managing Director at Evercore ISI]

No.

[Richard Galanti, CFO at Costco Wholesale]

Oh, no. It's from the, I'm sorry, the beginning of the 0% to 1% is versus a year ago.

[Greg Melich, Senior Managing Director at Evercore ISI]

Year-over-year. Got it.

[Richard Galanti, CFO at Costco Wholesale]

Yeah. Yeah.

[Greg Melich, Senior Managing Director at Evercore ISI]

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

[Richard Galanti, CFO at Costco Wholesale]

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

[Greg Melich, Senior Managing Director at Evercore ISI]

Perfect. Thanks. Have a great holiday, guys.

[Richard Galanti, CFO at Costco Wholesale]

You too.

[Operator]

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

[Rupesh Parikh, Managing Director and Senior Analyst at Oppenheimer]

Good afternoon, thanks for taking my question. I just wanted to go to operating expense growth. Operating expense growth is still high. Would you expect the growth rate to moderate once you lap that March wage increase? And then anything unusual within that line item that's still driving a pretty high growth?

[Richard Galanti, CFO at Costco Wholesale]

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

[Richard Galanti, CFO at Costco Wholesale]

You should also remember, I remember going back to fiscal 2019 and the first part of fiscal 2020 before COVID, you know, our SG&A % was for all of 2019, it was 10.4%. In the first quarter of 2020, it was 10.34%, and for the whole year it was 10.4% for both of those two years. And we used to think to ourselves: Will we ever be able to get it back below 10%? And in 2022, which was the kind of months seven through 18, if you will, that 12-month period after that full fiscal year for us of COVID, we reported 8.88% for that year.

[Richard Galanti, CFO at Costco Wholesale]

So even at the 9.45 that we just reported, we're still quite a bit lower than we had been historically. A function of a lot of things, including higher sales, productivity, and all that. So I think we're doing pretty well. I think certainly that's the challenge. How do we reduce that, and how do we manage that? And certainly the biggest way to manage it is driving more sales.

[Rupesh Parikh, Managing Director and Senior Analyst at Oppenheimer]

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

[Richard Galanti, CFO at Costco Wholesale]

Look, I think when we're asked that question, we're fortunate to answer it, that we're first of all looking at the consumer through somewhat rose-colored glasses here. You know, we have enjoyed great value. And again, we're convinced it's value. We've gotten, I think on the margin, there's a few extra things that we've done. We've improved the site, the website. We've gotten a little better at communicating stuff, not completely, but I think overall, it's, and we've been good merchants.

[Richard Galanti, CFO at Costco Wholesale]

I think the merchants have done a great job of bringing in new stuff and not being shy when we see an industry category down a lot, that we can still, if we're driving people in, we've got a better chance of getting them to buy something.

[Rupesh Parikh, Managing Director and Senior Analyst at Oppenheimer]

Thank you. Happy holidays.

[Richard Galanti, CFO at Costco Wholesale]

Thanks.

[Operator]

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

[Tom Nass, Equity Research Associate at TD Cowen]

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

[Richard Galanti, CFO at Costco Wholesale]

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

[Richard Galanti, CFO at Costco Wholesale]

Yeah, I think that helps with some of the deflationary stuff. Certainly with KS stuff, we're closer to the supplier. We're the only customer buying that item, and then we can drive a little bit more business. So I think it just continues to work that way for us.

[Tom Nass, Equity Research Associate at TD Cowen]

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

[Richard Galanti, CFO at Costco Wholesale]

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

[Tom Nass, Equity Research Associate at TD Cowen]

Thanks.

[Richard Galanti, CFO at Costco Wholesale]

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

[Tom Nass, Equity Research Associate at TD Cowen]

Great. Thank you.

[Operator]

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

[Mark Astrachan, Managing Director and Senior Equity Research Analyst at Stifel]

Yes, thanks, and afternoon, everyone. I guess I wanted to ask on the Kirkland products, specifically maybe on the CPG that you mentioned. How have prices trended on those versus the branded products? Have you seen any deviation there, given you're closer? Are you able to lower prices? I suppose, you know, to the extent that that has happened, do you notice any more market share changes within those CPG categories?

[Richard Galanti, CFO at Costco Wholesale]

I think, you know, I think it's slightly deflationary. It's a little more deflationary in the KS than in the CPG. But which drives more value to KS, frankly. But we're seeing some strength in our ability to work with our CPG customers and suppliers as well. But just a little stronger ability to do that with KS.

[Mark Astrachan, Managing Director and Senior Equity Research Analyst at Stifel]

Got it. And-

[Richard Galanti, CFO at Costco Wholesale]

And it is, again, a comment in the room here. We've had. It's allowed us to do some new item introductions on the KS side as well.

[Mark Astrachan, Managing Director and Senior Equity Research Analyst at Stifel]

Great. And then just following up on the last question, anything you can call out amongst the newer memberships cohorts in terms of renewal rates versus the average?

[Richard Galanti, CFO at Costco Wholesale]

Generally speaking, you know, if you compare—everybody was always concerned. I remember 10+ years ago, people would ask you, "How are you going after millennials?" And then it's, "How are you going after the next gen or whatever, the Gen Zs or whatever." At the end of the day, when we look at the different cohorts, if you just change the names, the curve seems to be about the same in terms of getting new, younger members. They buy less, they buy more as they get older into that 40- to 55-year-old sweet spot. I don't know in terms of, in terms of renewal rates. I think the rates are improving—our overall rates are improving, so I think we're probably doing a better job there. Certainly, things like, frankly, auto renewal help that as well.

[Mark Astrachan, Managing Director and Senior Equity Research Analyst at Stifel]

Got it. Thank you. Happy holidays.

[Richard Galanti, CFO at Costco Wholesale]

Same to you.

[Operator]

We'll take our next question from Corey Tarlo with Jefferies.

[Corey Tarlo, SVP and Equity Research Analyst at Jefferies]

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

[Richard Galanti, CFO at Costco Wholesale]

Yeah, frankly, we look at the wages in a vacuum, and we want to do as much as we can for our employees. And certainly, you know, there were several increases, starting with the frontline worker premium during the initial year of COVID. We kept half of that in there, which, you know, we kept one of those two dollars an hour in there, which was like $400 million a year. Again, we've also benefited from stronger sales and productivity, so we're able to afford that. But we look at them independently, and we'll continue to do that, to look at it. To the extent inflationary pressures are down, that means there's probably a little less inflationary pressure on wages. But we give...

[Richard Galanti, CFO at Costco Wholesale]

You know, over half of our employees are top of scale, and they're, they're getting increases, irrespective of some of the extra things we talked about every March. And then, as you go from a new employee over the first 9,000 or 10, 000 hours, you're getting constant increases that, that are significantly more.

[Corey Tarlo, SVP and Equity Research Analyst at Jefferies]

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

[Richard Galanti, CFO at Costco Wholesale]

I think it can't hurt. You know, even with gas prices have come down a little bit, you know, that's top of mind every week when somebody fills up their tank. So those things help. I think. I'm sure on a macro basis, that's the case, but it's a guess on our part.

[Corey Tarlo, SVP and Equity Research Analyst at Jefferies]

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

[Richard Galanti, CFO at Costco Wholesale]

Thank you.

[Operator]

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

[Dean Rosenblum, VP and Senior Equity Analyst of US Hardlines and Broadlines Retail at Bernstein]

Hey, Richard, guys, thanks for taking my questions. There's gonna be two big debates the clients are asking us about. The first one's on gross margins, and in particular, the potential for a gross margin impact from mix shift to back toward things like appliances and TVs, which are notoriously lower gross margin, at least in the marketplace, versus fresh and food and sundries. As you see the sort of big ticket discretionary starting to come back a little bit, do you expect any overall impact on gross margins from that mix shift away from food and sundries to big ticket discretionaries?

[Richard Galanti, CFO at Costco Wholesale]

You know, first of all, our margin range is so much more compacted than traditional retail, you know, different categories of traditional retail. I mean, if you think about it, we have, what, a 12%-13% gross margin?

[Dean Rosenblum, VP and Senior Equity Analyst of US Hardlines and Broadlines Retail at Bernstein]

11%.

[Richard Galanti, CFO at Costco Wholesale]

Eleven? I'm thinking markup. You know, and in theory, it ranges from 0%-15%. In reality, it's in there's a very few things that are below 5%, and a lot of things hover around the 8%-12% range. And so I don't think it's as big of an impact to us in terms of those mix changes.

[Dean Rosenblum, VP and Senior Equity Analyst of US Hardlines and Broadlines Retail at Bernstein]

Great.

[Richard Galanti, CFO at Costco Wholesale]

And, you know, and I, I gotta say, I gotta say, it's always that old saying, "It's always something." There's always something that hurts you, and there's another thing that helps you. And it's a really, it's a mixture.

[Dean Rosenblum, VP and Senior Equity Analyst of US Hardlines and Broadlines Retail at Bernstein]

So true. And then the other big debate that clients are asking about is the relative profitability of new stores versus existing stores. And there's sort of two themes there. One is new U.S. versus existing U.S., and then the relative profitability of new stores internationally. I was wondering if you could speak to that a bit.

[Richard Galanti, CFO at Costco Wholesale]

Well, first of all, when you're looking like at an ROI, the I on the denominator on an older building has a lower I. You know, if 10 years ago, the typical building in the United States land, you know, property, equipment, building, and fixtures, I'm shooting from the hip here, but was $30 million-$35 million, and now it's $45 million-$50 million, so you've got a different I. But generally speaking, when we look at the ROI of each of our eight U.S. regions, our two Canadian regions, new units come in, start a little lower and get up there over time. You'll have some outliers because of some units that are 30 and 40 years old, even with the I increase, because we expanded the unit and upgraded it and remodeled it.

[Richard Galanti, CFO at Costco Wholesale]

The fact of the matter is those higher volumes really shine through there. On an international standpoint, we've always, I think, talked about the fact that there's a few different things that the ROIs in some of these other countries tend to be a little higher. The return on sales tends to be even higher than that in some of these countries, because a combination, very little related to gross margin, some related to membership fees, some related to wages, and some related to benefits, health benefits. You know, U.S. healthcare costs dwarf every other country that we're in.

[Dean Rosenblum, VP and Senior Equity Analyst of US Hardlines and Broadlines Retail at Bernstein]

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

[Richard Galanti, CFO at Costco Wholesale]

Thank you.

[Operator]

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

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

Hey, guys. Thanks for taking the question. Wanted to first ask on executive member penetration. Seems like it continues to inch higher, and I was just wondering how you guys think about that, and, like, how high should that be? I mean, presumably you'd want everybody to be an executive member, but is, is there, like, kind of a natural level where you think it can still go from here beyond the 46%?

[Richard Galanti, CFO at Costco Wholesale]

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

[Richard Galanti, CFO at Costco Wholesale]

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

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

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

[Richard Galanti, CFO at Costco Wholesale]

Nothing. Thankfully, nothing at all.

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

Good.

[Richard Galanti, CFO at Costco Wholesale]

It's really, you know, I think what all we talked about was a, you know, a combination of as we went into some self-checkout over the last several years, and then perhaps more recent things that you read about in the paper. We get less impacted by the latter as well. Maybe we saw a couple of basis point delta upward on a very low number of basis points to start with, so we're fortunate in that regard.

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

Got it. Thank you, and happy holidays, guys.

[Richard Galanti, CFO at Costco Wholesale]

Same to you. Thank you.

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

Thank you.

[Operator]

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

[Laura Champine, Director of Research and Senior Consumer Analyst at Loop Capital]

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

[Richard Galanti, CFO at Costco Wholesale]

Yep. Yeah, on the ancillary line, it's gas and e-com, and it's a combination of increased sales penetration and increased margins within those businesses. You know, the thing about gas is, I think everybody out there that has gas stations, what we have found is, we've been able to see improved profitability, not just in the last quarter or two, but over the last few years, last three to five years, improved profitability in gas because others are making more, and we're allowed to make a little more.

[Richard Galanti, CFO at Costco Wholesale]

When we do our competitive price shops on gas, which we do weekly at every gas station we operate with our neighboring competitive gas stations, our value proposition is actually increased number of cents per gallon than we've ever seen. So that's been a, if you will, a win-win for us. On the e-com side, I think driving more sales has helped us in the margins there as well.

[Laura Champine, Director of Research and Senior Consumer Analyst at Loop Capital]

Thanks. Just on the operations front.

[Richard Galanti, CFO at Costco Wholesale]

On the wages, yeah, on the wages, well, we pointed out. I pointed out on the call, I think there was, like, four or so basis points in total from those two distinct increases. We do other increases, like, you know, over half of our employees are top of scale. They get an increase every March. That's significant as well. Significant relative to basis points. When you have, you know, lower sales, lower sales figures. Everything, it is, it's, the rest of it is all the other line items, like energy costs and the like.

[Laura Champine, Director of Research and Senior Consumer Analyst at Loop Capital]

Got it. So most of the pressure is probably coming from wages, not just those two discrete call-outs you had?

[Richard Galanti, CFO at Costco Wholesale]

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

[Laura Champine, Director of Research and Senior Consumer Analyst at Loop Capital]

Got it. Thank you.

[Operator]

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

[Richard Galanti, CFO at Costco Wholesale]

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

[Operator]

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

Participants

Executives

• Richard Galanti, CFO

Analysts

• Chuck Grom, Equity Analyst at Gordon Haskett
• Corey Tarlo, SVP and Equity Research Analyst at Jefferies
• Dean Rosenblum, VP and Senior Equity Analyst of US Hardlines and Broadlines Retail at Bernstein
• Greg Melich, Senior Managing Director at Evercore ISI
• Jackie Sussman, Equity Research Senior Associate at Morgan Stanley
• Joe Feldman, Senior Managing Director and Assistant Director of Research at Telsey Advisory Group
• John Heinbockel, Managing Director and Senior Research Analyst at Guggenheim
• Kelly Bania, Managing Director and Senior Equity Research Analyst at BMO Capital Markets
• Laura Champine, Director of Research and Senior Consumer Analyst at Loop Capital
• Mark Astrachan, Managing Director and Senior Equity Research Analyst at Stifel
• Michael Lasser, Equity Research Analyst at UBS
• Rupesh Parikh, Managing Director and Senior Analyst at Oppenheimer
• Scot Ciccarelli, Managing Director and Senior Equity Research Analyst at Truist
• Scott Mushkin, Founder and CEO at R5 Capital
• Tom Nass, Equity Research Associate at TD Cowen