Q1 2020 Earnings Call
And gentlemen, thank you for standing by and welcome to the Q1 earnings call. At this time all participants are in listen only mode. After the speakers presentation, there will be a.
And answer session to ask a question. During this session you want me to press Star one on your telephone. Please be advised that today's conference is being recorded I wouldn't like to Kinda conference over to your speaker today Mr. Richard Galanti CFO . Please go ahead Sir.
Thank you Laurie.
Good afternoon, everyone I'll start by stating that these discussions will include forward looking statements within the meaning of the private Securities Litigation Reform Dr. 1995. These statements involve involve risks and uncertainties that may cause actual events results underperformance to differ materially from those indicated by such statements the risks and uncertainties.
But are not limited to those outlined in today's call as well as other risks identified from time to time and the company's public statements reports filed with SEC.
Forward looking statements speak only as of the date there made from a does not undertake to update these statements except as required by law.
Today's press release, we reported GAAP results for the first quarter fiscal 2020.
The 12 weeks ended November 24.
Reported net income for the quarter came in at $844 million or dollar 90 for sure.
Appeared to $767 million or $1.73 a share last year in first quarter. This year's first quarter results included a 77 million dollar or 17 cents per share income tax benefit.
Related to stock based compensation last year's first quarter results included a $59 million or 13 cents per share going from tax benefit related to stock based compensation.
Sales for the quarter.
Came in at 36.24 billion a 5.6%.
Over the 34.31 billion.
The sold during the first quarter of last year.
Comparable sales for the first quarter fiscal two to 2020 in the U.S. on reported basis was 4.7%.
Gas deflation it was 5.0%, Kansas reported a 2.9 ex gas deflation and FX.
Plus five one other international reported three to ex gas deflation in FX plus 0.4 0.5. So total company was a 4.3 reported an ex gas deflation it affects a five point, though.
E Commerce on reported basis was a 5.5.
And Uh huh.
5.7, or other reported basis total copper so total in comparable probably sales for the quarter would never negatively impacted by the approximately by approximately one half percent.
Due to Thanksgiving occurring a week later this year ecommerce sales in the quarter were negatively impacted by an estimated 12 percentage points. So.
End of 5.5 in the 5.7, so were impacted to the negative by 12 percentage points in terms of Q1 comp sales metrics first quarter traffic were shopping frequency increased 3.4% worldwide and 3.1% in the U.S.
This again includes the impact of the for Thanksgiving holiday shift.
Weakening foreign currencies.
His role to the U.S. dollar negatively impacted sales by approximately 30 basis points and gasoline price deflation negatively impacted sales by approximately 40 basis points.
Our average transaction or ticket was up nine tenths of 1% during the quarter.
Really the negative impacts of gas deflation FX and the holiday shift.
Next on the income statement membership fee income reported membership fee income came in at $804 million up 6.1% or $46 million from last years 758 million.
The deflation afford and have a affects currencies would have been tied to that by a million to the negative so a bit about a million higher.
In terms of renewal rates that Q1, and our U.S. and Canada renewal rates was I came in at 90.9% and worldwide rate was 88.4%. Both of these figures remaining at the same renewal rate levels that were achieved 12 weeks ago fiscal yearend.
In terms of.
Remember that Q1 end <unk> member households in total hurdle buyers at Q4 in bashing supposed to come September 1st we had a 53.9 million member households that that Q1 and 12 weeks later was 54.7 million and total cardholders increased from fiscal year end of 98.5 million to 99.9.
In Q1 and.
During the quarter, we had three new openings on the U.S. business Center in Dallas, Texas into additional Transco warehouses in Connecticut in Minnesota. We also released cool relocated one of our units in Canada.
That that Q1 end paint executive memberships.
Our total.
Total debt at 21.4 million.
An increase of 579000 or 48000 per week since Q4 and this included the recent launch of offering executive memberships to our members in Japan for the first time as of the beginning of the fiscal year.
Even taking those out the average weekly increase would have been exceed the new gen.
Can you.
Okay Executive members would have been 41000 a week.
Way down the gross margin line.
To the gross margin line or reported gross margin fourth quarter was higher year over year by 30 basis points coming in at 11.05% as compared to year ago, 10.75%.
Yeah reported basis 30 ex gas deflation.
Relation would have been plus 26.
Doing a little short that we do each quarter.
Two columns reported ex gas deflation first line item would be core merchandise year over year in Q1 of 20 compare to your earlier quarter minus three basis points on a reported basis and minus six or that <unk> ex gas deflation basis.
Ancillary businesses, plus 20, and plus 19.
No no change to the 2% reward.
There was plus 13, and plus 13, so total of plus 30 basis points are important basis and plus 26.
Deflation now the core merchandise component gross margin again lower by three year over.
Your reported minus six ex gas deflation looking at the core merchandise categories in relation to their own sales quarter on quarter. If you will margins year over year were higher by four basis points subcategories within the core margins year over year in Q1 showed increases and Hardlines and Softlines and food and sundries and a decrease in fresh foods nearly all.
The decrease in fresh foods was the result of the initial operating losses from our new poultry complex.
That will be a small headwind throughout the year I recall that we commenced operations in Nebraska Chicken plan on September 10th.
Roughly a 45, we plan to get to full production and processing capacity. We're currently on track to do so.
Ancillary and other business gross margin higher by 20.
Reported an 18 if gas deflation.
The highlights being <unk> year over year being gas obstacle tire shop in hearing AIDS.
The other plus 13 compared to year ago. This relates to what we mentioned last year the quarter.
Two adjusting our estimate of breakage and rewards for.
The Citi Visa co branded card program last year.
And that was again, so comparison of that hit last year versus zero this year.
Moving to yesterday I reported yesterday percentage in Q1 over Q1 year over year was higher by 17 basis points coming in at 10.38% up from.
10.13% last year ex gas deflation as Jay was higher worse by 13 basis points again to little matrix that we do both reported and without gas deflation.
Operations minus nine basis points, meaning higher by nine basis points versus minus five basis points in Q X deflation central.
In this Ford minus four stock compensation minus four and minus four for a total again of minus 17 and minus 13.
The figure. These figures included in terms of the core being minus five on it ex gas deflation basis. This figure includes the impact from the wage increases that we've talked about in last couple of quarters that occurred.
This.
Packed relates the wage increases that occurred in March of 2019, which hit the year over year comparison by three to four basis points for the quarter as mentioned previously we would expect a similar.
Impact that will occur in Q2, before we anniversary that wage increase midway through Q3.
I was higher again by four basis points year over year I T was the biggest driver of the increase as we continued not only to maintain and upgrade but expands our capabilities activities and certainly we have a lot going on there and stock comp again minus four basis points to hit there.
That hit usually is in Q1 year over year.
Based on the fact that we grant.
Our issues in that quarter, and how we do things for employees 20, 530, and 35 years out.
On the income statement next on it is the Preopening expense.
It's lower by 8 million that came in at $14 million. This year in first quarter versus 22.
This year the key.
Where do we had four total openings three plus the relocation last year, we had eight total openings six plus two relocations.
All told operating income in Q1 increased by 11.8% coming in at a billion 61 million this year compared to 949 million last year.
Below the operating income line interest.
This was 2 million higher year over year 38, this year in Q1 compared to 36 million last year.
Interesting coming other for the quarter was higher better by 13 million.
Interest income was actually higher by 11, and others that plus 2 million variance was primarily favorable FX year over year.
Overall pretax income in the first quarter 2000.
When he was up 13% coming in that billion 58 compared to last year's 935.
In terms of income taxes are reported tax rate in Q1, 2020 was 19.1% compared to 16.9% in Q1 of last year. Both of these you first quarter tax rates this year in last year.
Benefited from the tax treatment of stock based compensation as mentioned earlier.
Last year's rate also benefited from an additional discreet items, which we mentioned in the quarter last year.
A few other items of note.
Terms of warehouse expansion, we expect open net new units of somewhere around 20, plus or minus.
With a lot of it plans to open new openings much of it back loaded towards the end of the fiscal year.
As of Q1, and we had total warehouse square footage of 114 million square feet.
Regarding capital expenditures in Q1, or total spend was approximately $700 million and our estimate of Capex for all of fiscal 20.
That's right around 3 billion dollar amount.
In terms of ecommerce.
Our overall ecommerce sales on a reported based in the quarter was a 5.5 as I mentioned earlier and again ex FX a five seven.
Again, those numbers you could add 12, roughly 12 percentage points to each of those to.
For our estimate of the impact of the holiday.
Shift.
A few of the stronger departments home furnishings, domestics tires and pharmacy.
Majors electronics were not among those departments as we feel that was that we believe is the most impacted by the holiday shift.
Total online grocery continues to grow at a faster rate than the core e-commerce ecommerce comps, although again, it's still a relatively small piece.
The business.
New online during the quarter expanded tickets offerings, including airline gift cards lifted New records and Super Bowl packages. We also during the quarter launched as a test in a few location same day prescription Rx delivery with Instacart and we launched in the quarter same day alcohol delivery also through Instacart.
In California, such that as of today, it's being offered in 12 states.
And lastly, this week earlier this week, we launched our Japan E Commerce site with our straw you cite planned to open in the first half of 2020 calendar 2020 in terms of terrorists tariffs that continues to be a lot.
Moving parts and changes up to including an hour ago.
Currently either again or.
Three and a half list if you will this 123 and four a.
Totaling about 360 billion dollars' worth of imports there were.
Possibilities that there would be for be list would go into place December 15th although the.
Current news out today is that China, U.S. very close to it that deal and.
On the fate finalizing a phase one part of the trade deal and so we'll have to wait and see.
In terms that you currently again there is some of the half billion dollars of U.S. imports that are subjected to occur 25% tariff, mostly food items like olive.
We will cheese wine whiskey butter cookies et cetera.
Again last week. This last Monday, the flight House announced that it proposed 100% increased 100% tariff on $24 billion in imports, which would include those among other items I will just have to wait and see where that is I believe comments or even.
Anticipated to be complete until.
Early to mid January .
That's pretty much it on our part lastly in terms of upcoming releases will we will announce our December sales results for the five weeks ending Sunday January 5th on Wednesday January Ace after market close and with that I'll open it up to Q.
Were they in turn it back to Laurie Thank you.
Ladies and gentlemen, Im sorry migrate to ask a question you will need to press star one on your telephone to withdraw your question press the pound key.
Your first question comes from the line of the Christopher Horvers from JP Morgan. Please ask your question.
Thanks, Good evening, so I, just want to step back and get.
Get your thoughts in terms of how you plan to holiday season. This year given that there are six fewer days seems like a lot of retailers are expecting that a big surge at the end bigger than normal into Christmas given a shortened season, that's something I'm not asking about December .
Just how you plan to is it something you saw in 2013, there's something you're you're planning for in 2019 and.
Any comment through you know what you've reported so far.
I think we planned and with some historical knowledge of what's happened over the past when you've got the shortest period of time.
Between say.
Giving and Christmas and.
We.
Plan, assuming that we're going to come to you have.
The types of levels of comps that we have in general recognizing sometimes there's a switch between months.
As example, being the switched Thanksgiving being in November versus.
Q1, rather versus Q2 that for us for example.
But so yes, we do expect to ramp up on a per day basis, we'll have to wait to see where it goes.
But we went into the planning.
I think with the confidence that we've had.
Good shopping frequency increases in good renewal rates and.
In pretty good comps.
Understood.
And then on the pricing environment seems like Sam has been taken some bigger hits.
To the gross margin line and it seems to be benefiting comp. So are you seeing a a step up in terms of in that core club channel, our you've seen a step up and.
And price investment from your peers.
In a word no.
Got it.
Fair enough and then my last question is on QQ, you're going to lap I think a pretty big benefit on any ancillary line last year I think of it was up 33 basis points big.
That being gas so you're gonna have.
Gas prices.
Do we have to give that all Bakken gas prices look like they they will be up you know year over year at this point, but you know if so let me down a bit sequentially and I know, there's an interplay between those two dynamics so.
Any thoughts then you could give us around lapping that 33 basis points, given those dynamics would be super helpful. Well I think profitably for gas for us and as we've read from other retailers big retailers that have gas stations as part of their retail concept.
It is the new normal over the last few years, it's been a more profitable business.
We I think benefit from the fact that we've seen our gallon increases on a comp basis in the very high single digits compare so we know we're taking market share.
Despite increased profitability in that business.
Yes, our savings in our view, where we can do price shops of competitors gas is never been a.
Strong so we feel very good about where we are with that.
Now sequentially part of the increase when you look at a year over year basis.
Last years, plus 30 or whatever have in front of me of but whatever was headed as much to do as what it was the year before.
I think when you again when you read what others are set in what we've said in the last couple of quarters.
It's been pretty good for all of US. So it may be you're not going see that kind of delta on top of the big Delta last year, but it's still.
Nor nor are you going to see the big negative from that negative from it coming back to it two years ago, but we'll have to wait and see what we've learned about gas.
Profitability is it could be very fleeting.
No. It's been good as it was last quarter and as it was over the last couple of years in general, but you never know how to predict from sometimes week to week.
Awesome guys have a great holiday. Thanks, so much.
Your next question comes from the line of Michael Lasser from you'd be asked your line is now open.
Good evening. Thanks, a lot for taking my question Richard you touched on this briefly but how have terrorists impacted cost goes profitability. If some of the tariffs are rolled back how is cosco going to handle this should we be modeling.
Margin benefit over the next couple of quarters from this dynamic.
I.
I think generally we've said on a qualitative basis that.
Overall, I think companies of scale and certainly we are one of those.
And the fact that we feel that we've had a relatively good mitigation plan if you will.
Easier on the 10% tariff than a 25.
One thing to get on top of our scale in general.
Our ability to move in and out of items.
You know if all of your items are 25% tariff because you are a furniture retailer or whatever retailer that's different than a company that has a small percentage of our business in that area.
Like others, we've moved a few things where we can source it have a.
Countries I think our total China imports into the us.
It's about it's just a few percentage points lower than a year ago. So nobody can do a lot of that nor can we but generally speaking I don't think it's it's hard enough for us to budget, it's hard numbers, but we look at is the fact that in some cases, where the prices going up.
We passed on all our some of it.
We haven't seen an impact to the unit sales and others, we have and.
We never know until it happens which ones.
Or more or lastly that others, if you will but at the end of the day, we think that we've done as good as anybody in terms of being able to mitigate the impact and so.
Got it I think the fact that our margins corker margins generally speaking, even and departments like Hardlines and Softlines had been slightly up year over year, and certainly we haven't done that without first and foremost being the most competitive out there that makes us feel that its.
No we don't want it to continue and we don't want.
You know list for B that to come on or anything else to go higher.
But but I think we've done okay bye.
So in cases, where you have taken price, we're re engineered product to make it cheaper how do you handle that.
First of all I don't think ever we try to reengineer product.
We're going to try to figure out.
How to get the priced out a little bit with help of our suppliers, sometimes our own money or whatever else weekend or moving a few items to another country.
And sometimes eliminating an item in putting somebody else in its place here. So.
I remember.
One anecdotal story would be in.
Late calendar late when the economic downturn hit hard and what hit hard at our case was a lot of as good as our values on 2000 1500 dollar patio furniture.
We had a lot of markdowns to take care to get through that in January February and March where that stuff at the.
The floors.
I can remember vividly come June following that when we are still in a bad economic downturn and or had a merchandising.
Our.
CEO reminding everybody at the budget meeting I don't want to see us bring down the quality and stuff to hit a price point.
Yeah, we've taken.
2030 years to get our members comfortable with the types of values, we can bring particularly on better end goods and so.
Might we buy a few less units of something yes might we.
Augment a little bit with some offerings, yes, but we try not to.
That's helpful. My follow up question is.
In the well publicized website allergy over the holiday weekend should we read that as cosco needs to make a more meaningful investment in its technology infrastructure to keep up with the growing size of that business.
Well first of all you know we live it every day here in certainly and we are.
It was unfortunately, despite all the efforts to have plenty of capacity processing capacity, if you will.
There was something that that incurred when we looked at the five days between.
Between Thanksgiving and Monday, Cyber Monday, those five days a year over year basis I mean.
We still were up and the very high teens as a percentage on ecommerce. So consisted of what we've showed you what weve currently been running.
What tells US we could have done better than that so we did leave something on the table there.
And again, we were able to corrected it took several hours that day Unfortunately, but.
Resi.
Assured we're spending a lot of money on things like that.
Understood have agreed holiday.
Your next question comes from the line of Chuck Grom from Gordon Haskett. Please ask your question.
Hey, good afternoon Richard.
Question on my side, you know now that we're we're past the fee.
Nuthrax is normalizing just wondering if you see any material reason why the 6% growth you reported in the quarter wouldn't be a good proxy in the coming quarters.
Well, yes, who knows.
As certainly what are the reasons why it's growing a little faster than the total sales line.
A little of its.
A couple of recent openings like the China opening Thats, a little of it I think more importantly, it's some of the things that we have done a much better job of getting new members to sign up as an executive member.
You saw the terms of the number of new member, which the combination of new membership sign you obviously.
As you remember as well as conversions to the executive member and we're doing a better job of that as well and of course that.
Aside from.
Improving membership fees it.
They are more loyal members that shop, more frequently and renewed at a high slightly higher rate and so I think a lot of is some of the things that we're doing getting.
Those that use the too.
The growing number of members in the U.M. using U.S. example, here with the Citi Visa card.
So I think for that and had heavy auto renewal as well as opting into auto renewal on on other visa cards that somebody may choose to use at Costco and so those are the things that help as.
Well.
I'd like to think it's all related to just great value and Thats more things that we offer the member which is certainly part of it too.
Okay understood.
Sorry, just at the switch over to the battle to little bit inventory levels were a little bit heavier I presume. That's just the timing of Thanksgiving anyway to normalize for that maybe inventory per club or.
Some other metrics just to get a sense for what.
Our apples to apples would look like.
Yes, I think it's mostly the this this the.
The shift of holiday some of it is a build up with e-commerce and those holidays as well with a more in the system.
Doing more fulfillment on that side.
Again in a few days since then it's come down as Weve expected. So I don't think theres, a whole lot to read into it.
Okay, Great and then just last one on on the core on core up for.
Maybe quantify for us the date that drag that you're going to continue to see the and then what you saw here in the current quarter from that from the chicken plant.
Just to get a sense for how much that was.
To the quarter well see about if we opened the chicken plan. The first chicken. If you went through on Gen on September 10th.
Hopefully 45 weeks later, there will be roughly 2.2 million chickens, a week going through there.
The first three months, if you will which is Q1 here September October and pardon mostly.
Robert.
You were at the lowest end of that I don't want to straight line it completely but it's close enough for this discussion going from one check into 2.2 million chickens.
If you will.
There's there's a lot of operating costs in running the plant and while we don't have.
Both production lines running yet.
No.
There's just a lot of cost associated with that it'll be a diminished demand it should be a diminishing drag in Q2, and then Q3 and then Q4 and then not be an issue.
Makes sense, thanks, a lot.
And do we have the Chris Mandeville from Jefferies. Please.
Ask your question. Your line is now open.
Hi, Richard So a quick question on central machinery.
So much Michael just curious with respect the ITC investment if we should be assuming that that.
Pressure that was realized in the quarter actually progressive we'd get a little bit more.
Dominant on a go forward basis I don't know if that's what you were try our reference are all due to with respect to expanding your capabilities and activity or if we should be thinking about something similar on a go forward.
If I look over the last several years would that word we stopped using completely called modernization and now it's some.
But other things as well we talked about in the last I talked about the last several quarters things like E com fulfillment.
Spending a lot of money on that a lot of that hits SGN a in terms of all that technology, the chicken plant to some extent.
There's.
We've also over the last couple of years done a.
Reset of certain departments within ICTI based on salary conference wage competition in this part of the woods appear in the northwest certainly Theres a lot of things that go into it and we've got a lot going on.
E Com.
You know continued increases in infrastructure.
And.
Local integration as well as our depot operations.
And modernization so I don't know I think there when we first started talking about modernization years ago, It's just that.
As best we could we estimated.
Originally over a few years it would be incremental 10 basis points to company and then quickly we felt it could be 13 and ultimately.
As 18 or 19, and then you are a couple of years one of them it quarter over quarter basis. Some quarters that was six in some quarters was zero to two or zero. So I think a couple of quarters ago, maybe three quarters, we like it was flat year over year that add to that impact.
I reminded people don't that don't read anything into that like which has an inflection point we have a lot.
Going on.
Both related to.
Modernization stuff as well as expanding as well as vertical integration so.
My guess is it'll still be a negative year over year does a negative.
With windows negatives anniversary year, hence when we have incremental negative I can't.
Say.
At some point, it's supposed to slowdown.
Okay, and then just my follow up would be with respect to the Instacart pilot and delivering Rx to your members I guess, just what exactly you're attempting to accomplish there and the structure of delivering pharmacy any different in terms of.
Hi here.
Broaching things from a grocery perspective.
Yes, well no I think you look its convenience.
Like anything in life out there as you might expect always asked one of your the start to do or online and pick up in store when you're going to do this when you're going to have something else.
And and we kind of do things our own.
The way we looked at we look at all these things and this is one area that with the Instacart relationship where we have.
Them already coming into our locations, let's give this a shot we already have.
Good and growing mail order business.
We have 500 and whatever 40.
So.
Pharmacies around the country.
But this is not another opportunity at pharmacies are sometimes but somebody just want to come out if they're not feeling well and so as an opportunity given.
And as density increases that should help but you've already got.
These drivers delivering groceries to others.
We can do this and and it is.
Somebody to add to the competitive belt here.
That nodal impact the ones cannot Rx margin profile I guess I'm, just curious about that the economic Theres no no and first of all it's brand new and it's just a few locations would roll out to a few more.
Shortly.
So it will see where it goes.
Hi, Thanks.
Your next question is from Simion, that's coming from Morgan Stanley . Please ask your question.
Hi, there if this is Michael Kessler on for semi and so question on the competitive environment we.
Seen Sam's club undergoing it kind of an unexpected round of investments recently I guess there anything notable that you would feel the need to respond to as far as what they're doing or anything that changes on your end from from some of their investments.
Not really I mean it look.
Our warehouse managers are in their locations.
Every week.
We hear about it I hear about here every month.
By location that everybody was hit by region, rather and and.
Look there, they're a good operator and good competitor and we.
We feel we do a lot of things very well to and and.
There's nothing that you point out if a year or so ago.
I had pointed out that they had gotten a little more aggressive on on fresh and.
Some of these things ebb and flow, but at the end of the day, we feel very good about our competitive position.
Got it okay, great and asked one follow up on China.
The new store that you open there a little further away from the opening is there anything notable that you've learned over the last couple of months and on any changes to your plans as far as the the rollout, which I know, it's a little more on on the slower side, but in any updates on that on that front.
On the rollout side that we have one one other one plan which was planned.
Previously.
That's probably about a year in the quarter year to halfway.
And.
And we'll continue to look see what we want to do next but not a lot of change there.
Overall, it's the location has exceeded our expectations.
Yeah, we brought in additional.
Help from.
From neighboring places.
To help but the sales continue to grow the sign ups can to you too.
We do very well there.
And we'll see so we've got a great reception, we feel good about.
From a merchandising standpoint and.
Maintaining a supply chain very good and we're getting the in reviews over there. We've also identified a few items.
One in particular that is again it just anecdotal.
We've done a very good job over there with CQ covers which I still have never tried but we have found is particularly on the.
West Coast in several cities, where you've got customers that.
Value that is a great item.
We have done very well so just like anything in life. We have found items that makes sense in other parts of our operation throughout the world.
It's fun to see out there and.
It's a high value high price.
Item at a great value at Costco.
Right. So I understand thank you.
I do we have a question from the line of Greg Badishkanian from Citi. Your line is now open.
Hi, This is actually spent their hand assigned for Greg you guys called out some sales headwinds related to website issue do you think.
I think those sales have been lost or do you think they were just pushed out.
I think some was pushed out some went to the warehouse in some was lost.
In the scope of things given our whole company, recognizing that ecommerce while growing faster than the rest.
Of inline as still five little over 5% of our company.
So.
It's not.
I don't want to be Cavalier about it we didnt excite the members that were delayed and but we feel we got so we extended the the values that hit the 30 plus million emails that we set out it in the early hours of Thursday.
We extended those deals for an extra.
Two days and so we think we got some of it back and again for that five day period. We did just fine frankly, we feel we did lose something though we could have done better than we had we had anticipated.
Yes.
Yes, and then any comment on big ticket sales trends that you're seeing and then how does that concern.
Or feel heading into holiday season this year.
Yes, big ticket items are strong, particularly like electronics items that affected it back in March or April this past year.
We were able now to offer a full line of Apple products, including the Max and the and the watches and alike.
And we've done very well those device and online we've done even better or those and it's not just the apple products its other big ticket.
Hi, and a gain computers and game consoles.
Yes, big screen Tvs are huge recognizing the price and value of those things for consumers keep coming down which is great.
Those are things that have done very well for us.
Perfect. Thank you.
Your next question comes from the line of cabin Schwartz from Barclays. Please ask your question.
Hey, thanks very much.
Just a couple of questions I guess, starting with the core encore.
So so you've obviously had pretty meaningful stability I guess mcclaren core and you alluded to this a couple of quarters ago in terms of your scale and you're buying power, but I'm wondering if you could just frame a little bit and how we should think about quad core going forward because it does seem like we're kind of in a new norm, but that being.
Both the up generally.
Well I.
I think the fact is is that you are right all the things that we do to drive value or to get better pricing or based on our volume or circumstance or whatever.
Yeah, just when you think it's safe to go out we're going to use it to drive business, which we've done.
We've talked.
In the past about the monies from.
From from increasing the membership fee the monies from changing credit cards.
The income tax reform, recognizing I've got a little over a third the income tax reform went to improve hourly wages, but at the end of the day.
As of giving us additional monies to.
To continue to drive value and.
There are times, when we see something particular department or something.
Where the margin might be.
Might be very strong year over year. That's the first thing we look at even if we're if we give me a greater savings to the customer.
You know is it too much and so.
Again, we are a for profit business, we want to grow our topline first and that'll help the other things.
But we don't manage it completely to the basis point.
That we'd like to see it year over year, even or go up a little bit but.
We.
Revenues to do that.
Okay, and then I'm tariff and just.
Perfectly to that tariffs first this Sunday, if they were not to go into effect.
Sorry can you just clarify am I mean.
The rest of the less like one through four I guess, obviously, it's kind of already embedded bed.
Is there anything to think about in terms of sport, which does not going to affect perspective, you are progressing or went out the model.
Hey, we're way, we don't know I need to the extent that we bought in advance certain merchandise to the extent we could.
Anticipating that that was going to go into a place and so let's get it did before the tariff we did.
But.
What's that.
It wouldn't change that right, so as you're saying it wouldn't change things immediately there so.
If any I mean, if anything we've had a little extra inventory in advance of it.
Okay and then last two for me is just housekeeping on.
Placement food and also in non food and thoughts on cash on the balance sheet as it continues to build.
Thanks.
Inflation is almost a non issue, it's not either inflation or deflation generally speaking I mean, yes, we mentioned, they're slightly deflationary year over year.
Tariffs to slightly inflationary of.
First on those limited items.
Yes proteins are up a little.
My understanding that has to do so partly with.
With China Edwards with swine flu as well as more demand for beef.
Other than that not a lot to talk about there.
What was the other part of question.
As cash on the balance sheet solving yes.
Yes, what we have to debt payments coming due.
This week with next Monday.
Next week and in February mid February totally a billion seven.
From prior debt offerings.
Beyond that of course cash at the end of Q1 generally is the highest level because youve.
You've started to sell more but you haven't paid for everything yet.
Relative to seasonal stuff for Thanksgiving and Christmas.
So the like RFP ratio is always the strongest then on a quarterly basis.
Beyond that so stay tuned.
Okay, great. Thanks have a great holiday.
Thank you.
Did you have a question from John Heinbockel from Guggenheim Securities. Your line is now open.
So Richard where where do you stand out with self checkout I know you've been expanding that.
How many clubs is that in.
What are your learnings right in terms of consumer a member satisfaction speeded checkout.
And then what do you think the rate of expansion of that is going to be.
Well, we currently have it in the U.S. in Canada in about 135 locations, it's going well.
We have another 90 to plan for raw early calendar 2020.
So you know up above and below two hundreds.
And.
Yeah. The see your operators continue to discuss it additional Ross with Craig based on the performance, but overall, it's a positive and so we'll continue to do it is my expectation.
I mean, roughly speaking when you think about.
Savings right I don't know how material that is but.
Is there an idea that you reinvest that cannot be enough to reinvest back into the business in something like expanded BOPUS or I know you've been sort of reticent about BOPUS because of the cost is.
Is that something you can now begin to get your arms around or no.
I will first of all I think.
Thats on either of those are mutually exclusive one another.
I looked at the millions or billions of front end seconds, we save and labor, we know full well that some of it is.
You know you don't get it all back, but even if you take a conservative.
Mount there is money to be saved their more importantly.
The members like it.
The only thing remember doesn't like is when there's a member in front of that it's going through with a full basket had and it's taking longer but generally speaking even in high volume. The few high volume units that I've actually gone to a of late like once in Seattle.
Yeah, I use them when I'm in and out of their fast.
They worked well and fast so there is a savings but I.
I think it as well it improves and improves that customer experience.
As it relates to buy online pickup in store.
We continue to look at with others do.
And continue to scratch our head.
You know and recognizing the average costco, even compared to our two direct competitors.
As to and almost three times the volume per location.
Almost two it almost three times the volume per location so.
Well have to wait and see we're still.
No.
Not at a point, we look at it but we're not at a point that were print plenty to do anything with that.
Okay. Thank you.
Your next question is from Kate Mcshane from Goldman Sachs. Your line.
Hi.
Hi, good afternoon, Thanks for taking my question.
We wanted to.
Ask about apparel I know that this is a category where you've been a little bit more focused I wondered if you could give some color about the performance of apparel during the quarter, what you see the opportunity to be and how cosco can kind of position itself to capture.
Some share going into the next year.
Yes, I think it's part of the same story that we talked about Fortunately for the last few years.
Apparel is a combination of both expanded kirkland signature as well as a few additional brands willing to sell us.
Spending with their selling us as well and and great value.
And.
And it's a it's a category.
Several billions of dollars that's continues to grow in the roughly high single digits compared to retail apparel overall that's.
A lot less than that so ed.
No I think.
I'm always amazed at our monthly budget.
Meetings when.
In this case buyers debris initially what's coming in for the new season or whether its outerwear few months ago outerwear for the fall.
Or.
Yes, both men's women's and children's stuff.
Thank you.
Your next.
The question is from Scott Ceccarelli from RBC capital markets. Your line is now open.
Good evening guys.
Richard I had a follow up question on the Shanghai location can you just providing context on the sign up activity at that location relative to a more traditional facility.
Yeah.
It's what.
No.
It's beyond good.
I'm sitting here with my colleagues will have no I'd say.
The average Costco in the World has somewhere in the mid to high 60, thousands of how member households.
We've had locations and other countries in Asia.
Where we might be at 100 120000 after a few years, maybe even after one or two years.
This one is more than twice that.
So.
Lot of press in a city that this populated with.
25 plus million people.
Yes, I understand so.
No just given the fact that in the past you kind of talked about how long. It takes locations that hit a breakeven point I guess given the early sales and membership trajectory that location does that help change. How you are kind of thinking about the breakeven point that warehouse and hence the China opportunity, where do you need more distribution scouts really get the profitability to where you want want.
Well the.
Gary to seven or eight or 10 locations and a country, where a bunch of stuff is American supplied or and barge shipped not not airfone.
You know you become more efficient as you go from one to three you maybe using it.
Third party consolidation or.
Average to do high value both items, because you don't want to run out of.
Order or toilet paper as you may.
No brainer items and over time that by time, we get up to eight or 10, we want to have a.
A bigger across stack that can.
Good enough land to continue to expand it overtime cross trucks in the USA and Canada serve 40.
60 locations, each and 40 60 relatively high volume locations. So.
We have wanted Australia that services 11 locations that'll continue be a little bit economic improvement to that country. As it serves 15 to 20 locations.
Weve opened two in Japan.
Actually south to north for all 20.
Six or 27 locations, we tried to have a lot more there overtime. So I certainly.
In addition.
We have a lot of extra help there we're doing we're doing big volume and we brought over additional people.
From Taiwan that that.
Speaks to local language.
And that understand our concept and it's been a it's been great. Its but we've been fortunate to have that additional.
History and his expertise when we've gone there, but also with cost similar so I think you've got to what is the normal once it's doing whatever volume, it's doing and and.
Yes, it's efficiently run.
On the warehouse, maybe you don't have all the efficiencies from cross dock that will take several years, but the most efficiencies or whats in the building.
And how many people do you need to help that process and you become more efficient. So let me take couple of years to do that.
And that's one of the reasons why we generally go slow in new countries.
Because we want to get it right from a customer experience in operational side.
Got it very helpful. Thank you.
Your next question is from Oliver Chen from Cowen and company. Your line is now open.
Hi, Thank you Richard on your digital innovation roadmap what are your thoughts about.
Fulfillment from in store and micro fulfillment centers and also thinking about.
The robotics capabilities across inventory management or.
Supply chain from in store would love your thoughts.
Well, we have you know just because of what we do current did currently a couple of years.
We have our business centers that act as a focal point as you know for today.
We have.
Our depot operations.
Yeah, we moved some of that fulfillment to two annexes off some of our depots as well.
Where we put in to our biggest depot.
So some automation fulfillment, which I talked about over the last.
The last few quarters last six months and we continue to roll so with that out.
Yes, one of the things we've done is particularly things like how do we improved the time, particularly of items that by eve be presented in store, but early sold online.
Like white goods or what I'll call big get bulky and those that require not only installation, but sometimes take away the old one.
While many third parties do that we do a little of it. We've also figured out what are some of these items based on our volumes that can be staged.
Officially.
Yes.
In.
It doesn't making the number up but it doesn't geographic locations across the United States to take the shipping times down dramatically.
We've done some of that stuff and that's evolved over the last couple of years. It will do more you've got to business just white goods and that's certainly not the only begun bulky, there's there's furniture theres patio stuff.
Theres exercise equipment, but just on white goods, we've gone from essentially sub 50 billion a year four years ago.
Over 650 and growing.
And that's part of that it's not just selling this perfectly prices, it's getting it delivered to you and fewer days.
Okay and Richard on the vertical integration opportunities ahead, what do you what are you thinking.
Could or should be possible and what's your framework for evaluating what makes sense for you in terms of owning more parts of the supply chain across different.
Well you know what started 20.
Five years ago is a ground beef plant to save for six cents a pound we thought on ground beef is now are now two major beat plants wanted Tracy, California, where we started and one in Illinois.
Which is still growing into itself over the last year to have two years since it opened.
I think the.
One in California.
It does well over 4 billion pounds a week.
Just a handful of items that we talked in ours.
That gave us comments to the hydrogen plant.
We did almost partly by necessity.
A bakery commissary in Canada, which we're fighting conserve.
Only candidate with us on making more consistent it more efficiently costed.
Items like that cookie dough.
Okay croissants so.
We learnt each time, we do something.
I think theres been suppress out there about testing a.
Greenhouses.
For for produce.
We've got one of the up and running just the last few months in California that all that I think some of the product is just starting to hit ourselves, but we think there's some great opportunities on the produce side for hot houses and greenhouses if you will.
Particularly.
And where transportation costs and time isn't necessity.
Stuff that you know spoils quickly and easily.
Right now.
Much of the produce that we shipped to our Hawaii locations as air shipped.
If you could do some more of that over there that's a no brainer.
Given our volume, but limited skews, we think that we it's an efficient modeled help but that's not just us others are try that again, we think that are the structure of our business allows us to take more advantage of that but it's due.
I don't know if there's.
Anything big there's nothing as big as the chicken.
Complex on on the drawing boards.
But I think we'll continue to do things, but we.
We're catch their breath, a little bit right now.
We've made some major investments in the second lead plant in the end the bakery commissary just recently, the tricky complex and even more recently the.
The first.
Just a few.
I agree that houses so we don't like vote on it.
The answer is it works so far so good.
And our last question Richard I'm Kirkland is a nice competitive advantage what do you thoughts on how that percentage of of mix may increase in.
Gory set it may be suitable for that you're not in yet and also you you cited in the new services that you've added tier to your product assortment.
How well services evolve as a percentage of total it's would love the magnitude of.
What may happen there over time.
Free.
The good news in your side.
There are a lot of half a billion a billion dollar items like water in various paper goods and things like that.
There are many but not a lot of many new.
Few hundred million dollar items, but the other day, there's lots of 20 and $50 million dollar items that could go to 50 to 100.
And certainly I think.
On on high end packaged food items.
Moving from not only.
Organic but antibiotic free and.
All I don't have all the adjectives differently, but theres lots of things that.
We can do that are high Ed and that that our members want and frankly has added benefits of.
Seemingly gets in the millennials and some of the stuff.
But I think we've expanded it to some sporting goods. So there's there's lots of little things that led to it.
But you know if the number and I don't have any exactly a friend to me, but ex gas.
Asked if the number is 20.
Four or 5%.
Does it go to 30 over the next 10 or 15 years maybe.
We think these are going to go up yes, likely a little bit because we found ourselves and our ability and and our suppliers. Some of our private label suppliers are very good at what they do but we also are.
Celebrated.
Retailer, we have very good savings as you know on branded items on the service side. You know, we don't talk about a lot because they're small relative to the size of our company.
But its other things that make the membership sticky and are very profitable, whether it's the auto Costco auto program.
Or our travel business, which continues to grow we now a year. So do we added the hotel only booking engine and.
More recently, the airline reservations only noxious package items.
It's trips and everything.
And.
And so I think we'll keep adding things I can't tell you what yet.
But we keep looking at things.
Great happy holidays. Thank you.
Your next question is from Greg Melich from Evercore ISI. Your line is now open.
Hi, Thanks Richard.
Again to update on how the private label current now that you've had a few years.
As for it to properly season scale.
Anything you could say on the penetration or how the sales are doing outside the club.
And maybe link that to what the auto renewal rates are now as part of the renewal rates yes.
I don't know associated with the auto rates on their increasing.
The big issue is when we convert.
Added.
Prior to conversion when it was the the other provider there was a both the co branded card plus other branded cards that provider like Delta skymiles or something.
And all those are all those non co brand ones. All those ought to renewals went away went to zero. So that had to be picked up overtime and we saw that impact.
Our overall renewal rate a little bit the other thing is as we continue to add new.
Increasing number of members that have this the co branded card ad.
The value of keeps getting better and bigger and so we think that we'll continue to be additive. That's helped I think overall, we've also done a better job.
Even with somebody walks in and to sign up not only to upgrade but would they like to auto renew.
And so all those things help certainly the Citi visa is probably one of the biggest movers of that because of just the sheer size of it and the fact that we're still adding new cardholders to that.
His Citi visa doing.
Multiples of sales outside of the club.
That is doing in the club at this point.
Theres more said, there's certainly more sales being done outside as there were over the 16 years and the previous relationship that evolved overtime. As we would have expected this would be the greater than that outside versus insights better thats, where we have.
Revenue share, which is good for us and then presumably.
From a standpoint that.
The visa card is offered more smaller businesses, which tend to have higher merchant fees and general anyway. So it's a whole do.
Additional market potential.
Thank you share to.
It to those to those people usually that card.
You know if my top if my card is top of wallet. There are certain places previously that I could use it.
Like the local Drycleaner a restaurant.
Now now I can't.
Got it.
Many of you mentioned, Japan, and I think it was Australia.
For E Commerce, if you look around the world any early learnings.
Out of the launch in Japan.
I think that at what well it's been two days. So I'm happy to report I have I know nothing [laughter] as good to hear ever great holiday Richard Thank you.
Well, we tend to work question.
Your next question is from Scott Mushkin from our five capital. Your line is now open.
Hey, rich or John Thanks, Thanks for taking my question. So I wanted to talk a little bit about maybe growth.
Thats being left I mean, obviously left on the table. Obviously your performance is incredible, but the number of club openings.
Out a little bit.
You might be.
The omni channel. So I was just as you take a step back we look at our research we looked like you're kind of almost underserved in certain markets in the U.S.
You think about gross is it time to speed things up a little bit get back up to the 30 clubs, maybe put a little bit more money be tied behind omnichannel kind of whats the companies.
Thought process here.
I think.
I don't disagree with you I believe we want to open more than 20 issued its a year.
Part of that was I think.
Some delays and how long it took overseas, we've got the pipeline filled little bit better and.
Five years ago out was that are open plan is to do more than we were doing today I'd say the same thing we do have.
I think will increase a little bit, but I can't you know exactly say, how but by how many land.
We are a very hands on company and we have a lot of other things going on.
Yes, certainly there's a lot of.
Offices.
On the E Commerce site, not only getting into the few remaining countries, but building it not because we're supposed to but it's working as we think that in some cases, it's either sales that we would have lost any way like big White goods, you just don't sell those in store anymore.
Ed Ed, but we're getting people in the building still.
Okay and using this thing so I think.
Don't expect sub giant changed from 20 to 30 in a couple of years, but our goal is to work harder to open a few more of those while we're doing all these other things as well.
All right thanks very much.
Good question, it's from Kelly Dania from BMO capital. Your line is now open.
Hi, Richard Thanks for fitting me in here.
Just wanted to ask about executive penetration, you called out Japan, and the impact there little bit but just.
I'm curious how.
Much in the U.S. here you are seeing executive penetration is higher I know we've asked this over the years, but just and where you think that could kind of level out at some point.
So going ahead some numbers here.
When I look.
By country.
Yes, it's in the USA, Canada, where it's been longer so we've got the most units and the most services as part of the executive membership offering it to the mid seventies.
Yes, and other countries.
Where it's been.
Mexico, It's if it's in the 50.
These growing but I think oh instructs us start off lower.
Yes, I don't I don't know if the marketing Department has a plan for where it could go it's more of what we do to get people, who could hurt and sign up it originally and so I think there's you know if I was shooting from the hit totally.
At some point, there's got to be some members that don't want an executive membership period, and even if it rises them some savings and there are some people that want it that sometimes it's it's not as Mercedes they thought but at the end and they convert back but the other today.
I'd be thrilled to think that that could go to 81 day, but I have no idea, where and how long it'll take.
To get there.
We know that executive members are loyal terms of their their renewal rates they shop more frequently they spent more each year.
Got it and maybe just one more on gross margin.
Obviously.
Mix impacts some other retailers more than more than it really impacts you, but I guess over the years, we've talked about things like private label organics or international or even E. Commerce in terms of mix shift and just curious as you kind of look at that core encore up for which clearly very stable just what what kind of.
Mix shift is kind of underlying that.
Well I think it's more that mix I mean, certainly gas has the biggest impact gas is more than 10% of our business. It could be a gross margin line first.
There are deflation.
So you could have the gross margin.
Contribution plus or minus.
By number of basis points up you have all the services, while there are small work on higher gross margins.
That normal because they cover the pharmacy, the pharmacists and pharmacy tax and optical the optometrist things like that and those are all growing businesses generally growing a little faster some of that.
Hopefully travel as an example would be travel southern things are gross sales of some of our brokerage fees. So a very high margin Theres. This is really very low cost of sales Commission.
But getting back to the core merchandise private label generally is a slight positive although again the the percentage of stuff that's private label versus branded.
While growing is growing at a slower rate that has the past.
So.
And then there is that that you weren't competition.
Our view is.
We look how do we drive the topline how do we how could we be the most competitive and we're fortunate that we have.
It's a different.
Buckets to do that with.
So if it's harder for us to know where the margins are going each month in each quarter other than we wanted to be flat or up a little bit.
We want to grow the topline, which all of which will solve a lot of things.
Understood. Thank you, okay, well, thank you everyone.
Thank you Laurie.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.