Q2 2020 Earnings Call
[music].
Ladies and gentlemen, thank you free standing by.
They keep your earnings call in February sales contracts.
Hi, all partnership I know leasing Aleem, it would actually get speak your presentation.
Question and that's your session and ask the question do we get session you only depressed hardening number one on your telephone if you require at afraid interesting when you scratch sorry zero I'd now like behind the conference over to your speaker today Mr. Richard Galanti. She Oh. Thank you. Please go ahead.
Thank you Michelle and good morning, everyone. Good afternoon, everyone.
Started by stating that these discussions will include forward looking statements within the meaning of the private Securities litigation reform after 1995.
These statements involve risks and uncertainties that may cause actual that's resulting underperforming could differ materially from those indicated by such statements. The risks uncertainties include but are not limited to those outlined in today's call as well as other risks identified from time to time at the company's public statements reports filed with the FCC.
Forward looking statements speak only as of the date. They are made and the company does not undertake to update these statements except as required by law.
In today's press release, we reported operating results for the second quarter fiscal 2020. The 12 weeks ended this past September.
Worry 16th.
Well its February retail sales results for the four weeks ended this past Sunday March 1st.
Reported net income per quarter came in at $931 million or $2.10 per share this compared to last years second quarter of 889 million or to $2 and once and for sure.
Net sales for the quarter came in at $38.26 billion. They tend to have percent increase over the $34.63 billion I realized last year in the quarter.
Comparable sales for the second quarter were as follows in the U.S. for the 12 weeks on reported basis, 9.1%.
Excluding gas inflation and the impact of FX, 8.1%.
Canada on reported basis, 8.9% ex gas and FX, 6.8%.
Other international 7.9% reported and 7.1% Excast benefits for total company reported 8.9% same store sales increased an ex gas it affects a 7.9.
Both of those numbers weren't were positively impacted as well by approximately half a percent due to the Thanksgiving.
Holidays occurring one week later this year than last year.
Oh ecommerce, we reported a 28.4% comp for the 12 weeks X.
And 28%.
FX.
And again, there was a bigger impact of this Thanksgiving holiday shifts there given the importance of that E. Commerce ecommerce sales in the quarter were positively impacted by the estimated 11 percentage points and hence the 28% from result.
In terms of second quarter comp sales metrics second quarter traffic, where shopping frequency increased 5.9% worldwide and 6.1% in the U.S.
Strictly foreign currencies relative to the dollar U.S. dollar positively impacted sales by about a quarter of a percent Oh I'm, sorry about by about 25 basis points.
Gasoline price inflation, possibly impacted these numbers by about 80 basis points.
Our average transaction size or ticket was up 2.9% during the quarter, which includes the positive impacts of gas inflation enough that [laughter] later in the fall I'll review, our separate February sales results [noise].
Moving down the income statement for the second quarter membership fee income came in at $816 million or 6.3% higher than to $768 million recorded in Q2 of last year for 48 million dollar increase that percent increases about the same as it was Q1 year over year in Q1, we opened three hope that we had.
Three new openings in Q2, we had no new openings.
In terms of renewal rates at Q2 and are you actually Canada renewal rates.
<unk> came in at 90.9% and worldwide renewal rate at 88.4%. These are the same levels of renewal that we've achieved in each of the last two fiscal quarters.
In terms of a number of members at second quarter end in terms of member households in total cardholders.
At the end of second quarter, we had 55.3 million member households.
Up about 600000 from the 54.7 12 weeks earlier.
Total cardholders totaled a 100 point ninemillion up about a million from the 99.9 million we reported at the ended the first quarter.
Q2, and paid executive memberships stood at 21.7 million members an increase of 321000 during the 12 weeks or about 27000 per week increased since Q1 and.
[laughter] going down due to the gross margin line I reported gross margin in the second quarter was lower year over year by 31 basis points coming in at 10.98%.
Compared to 11.29% a year ago that 30 weight that 31 basis point reduction <unk> lower number year over year, excluding gas deflation it would've been 22 basis points lower.
If you'll please jot down to five.
For line items and two columns as we were usually do a first column as reported for the second quarter and a sexual would be without gas deflation I do core merchandise margin was down on a reported basis 30 basis points year over year in the quarter ex gas inflation. It was down 22.
Ancillary businesses, a minus five an a minus two basis points.
2% reward plus four and plus too.
And then total was I mentioned, a 31 basis points lower year over year on reported basis, and ex gas inflation 22 basis points lower.
The majority of the lower year over year core margin was driven by higher sales penetration of two significant lower margin segments of our operations.
Which are growing at a faster rate than the core, notably gasoline and E com as well as the startup losses at our new poultry complex, which I'd mentioned in the first quarter as well.
Looking at the core merchandise categories in relation to all the only their own to their own sales a core inquiry fuel margins year over year were lower on a reported basis by 15 basis points.
Of which six basis points related to the losses from a new poultry complex.
Within the core gross margin year over year in Q2, we showed a gross margin increase in softlines.
Food and sundries was about even over year over year and decreases in both Hardlines and fresh foods Hardlines was down in the quarter, primarily due to holiday timing, which shifted more promotional activity into Q2 this year.
Fresh was negatively impacted by our step up in price investments.
Versus last year in fresh and fresh and by the margin impact from the new poultry complexes I just mentioned.
We're now halfway through our first year of operations of the poultry facility, which opened on September 10th and we would expect the gross margin headwinds to decline, but continue but declined a little bit as we get to full production capacity and improve operations.
Hi, ancillary and other business gross margins on reported basis minus five basis points year over year and minus two ex gas deflation in the quarter basically you had a few things that hurt you in a few things that helped you, but overall minus two excast inflation.
A 2% reward was better by four on a reported basis and by two basis points ex gas inflation. This relates primarily to a true up of our breakage estimate of the executive member Awards.
Moving gas you name I reported yesterday percentage year over year was lower better by 22 basis points coming in at 9.78% of sales down from a 10.0 or your earlier.
Without gas inflation SG Nay was lower by 13 basis points again, if you judge on the following a few numbers for line items into two columns.
Operations where operations.
Year over year in Q2 on reported basis showed improvement Oh, It was lower so I'll say, a plus 17 basis points and ex gas deflation plus 10, central plus one and plus zero.
Compensation was lower or plus four and plus three young Sps inflation and again the total on a reported basis. That's you know it was lower by 22 basis points, plus 22, and without gas inflation plus 13, so lower by 13.
The core operations component again, 17 reported 10, excluding impact guess this figure includes the impact of the wage increases that occurred last March 19. This hit our year over year comparison by an estimated three to four basis points. We anniversaried that increase just this past week. So the impact in Q3 will be minimal.
As she May also benefited during Q2 year over year from the shift of sales penetration to lower SGN Ace <unk>. If you were lower as GE. They statements of operations, which are growing at a faster rate than the court again gas and anytime.
Central was lowered it would NSG they central was lower on a reported basis by one basis point or flat year over year ex gas inflation, we continue invest and spend in <unk> to the tune of about five basis points higher year over year.
That was offset by improvement another expense items and of course helped by strong sales.
And stock comp as I mentioned on an ex gas deflation improvement of three basis points. This varies quarter to quarter looking at the last couple of years generally it's a small hit in Q1 in flat to a small benefit in other quarters, nothing really unusual support to report their.
Next on the income statement is Preopening expense <unk> expense was lower human at 7 million compared to 2 million in Q2, a year ago.
I mentioned earlier this year, we had no openings last year, we had.
Two openings.
Both in the U.S., one that new opening in one relo.
This years Q2 Preopening expense in this quarter relates primarily to warehouse that will open during the third and fourth fiscal quarters.
<unk>.
We have very soon or opening in personal Australia and also our first in the state of Mississippi enrichment, Mississippi that'll be our 45th state of up with where we operate those will both open during the next couple of weeks.
All told reported operating income in the second quarter of 2020 increased by 5.2% coming in at 1.266 billion. This year compared to 1.203 billion a year ago.
Below the operating income line interest expense was the same year over year for me in both quarters at $34 million and interest income and other for the quarter was lower by a million dollars, so almost flat year over year.
Overall pretax income was up 5.1% coming at a 1 billion to 77 compared to last years 1.215 billion.
In terms of income taxes, a rate was just slightly higher year over year in the second quarter. It was it came in at a 25.9% rate compared to 25.8 percentage due to last year.
For all the for all of fiscal two toward 2020 based on our current estimates which of course are subject to change we anticipate that our effective normalize total company tax rate to be approximately 26% to 26.5%.
In terms of openings as I mentioned, we had no openings in Q in Q2, we plan.
Two net new openings in Q3, and a Uni arranged for Q4, which is our 16 week fiscal quarter.
Of 11 to 13.
Part of that again, mostly albany's concentrated in our fourth fiscal quarter of course, there's probably a few subject to slipping into early part of next year.
Based on weather as of Q2, and total warehouse square footage stood at 114 million square feet.
In terms of capital expenditures during the quarter, we spent approximately $545 million and our estimated capex for all of fiscal 20 remains right around $3 billion.
Terms E commerce as again, we reported a 28.4%.
Comp sales increase.
And a 28 without FX.
Again, a lot of that had to do a lot of that increase had to do with the Thanksgiving shift we estimated again that about 11 percentage points that related to Thanksgiving. Following a week later this year.
And helping this number.
Overall.
A few of the stronger departments majors special order kiosk items seasonal and toys and housewares. These departments generally benefited from the holiday shift.
In terms of total online grocery that continues to grow at a faster rate than historical comp both today and instacart.
The latter which isn't included in our ecommerce numbers as they come into the warehouse to buy.
No. The sales penetration is still very small the sales are quite large and the high double digit rates year over year.
During the second quarter, we successfully launched both our Japan ecommerce site in December and our Australia ecommerce site.
This past month in February.
And not to be are done we recently sold another high value large carat diamond for a little over $600000. If anyone's interest at least give me your call.
Turning to our February sales results. The four weeks ended this past Sunday March 1st compared to the same period last year.
As reported in our release net sales for the month of February came in at $12.2 billion, a 13.8% increased from 10.72 billion a year ago.
In terms of geography, U.S. reported comp for the four weeks, 12.4% ex gas it affects Elevensix, Canada reported a tend to ex gas and FX. It 10 for other international Twelvefive ex gas and FX. The Thirteenfive. So total company a 12, one reported in a 11.
1.7, ex gas and FX.
E com for the for the four week period, 22.6% for the reported and 22.7 ex.
FX.
If every results benefited.
By last week's big uptick in sales the fourth week of last month, mostly we believe related the concerns around the Corona virus. This positively impacted the months total in comparable sales numbers by approximately three percentage points.
You asked regions with a strong sales results into very <unk> in February where the north West, Texas in the Midwest International Lee in local currencies, we saw strong results in Taiwan, Japan, Spain in Mexico.
For for the month foreign currencies year over year old <unk> dollar hurt said comps February comps.
Sales in Canada by about 60 basis points.
It impacted negatively other international by about 110 basis points and total company by about 20 basis points.
Cannibalization was about a 10 basis point impact to the U.S. minus 140 basis point minus impact other international and 30 basis points overall to the company.
Moving to merchandise highlights the following comparable sales results by category food and sundries were positive in the low teens strongest departments included foods frozen food sundries and candy our lines were positive in high singles that are performing departments were lawn and garden health and beauty AIDS and tires.
Off lines were up in the mid single digits better for you departments included housewares, domestics and jewelry and finally fresh foods were up in the low double digits better forming departments included meat and produce.
Within ancillary pharmacy, yes, the hearing AIDS had some of the better comp sales increases in February.
Hey gas price inflation, I think I mentioned this possibly impacted total reported comp sales by about 60 basis points.
Lastly, our comp traffic or frequency for February was up 9.2% worldwide and 8.9% in the U.S. now given the fact impact in weak for where we really saw the big uptick as I know many did out there.
Related to the concerns over Corona virus. The first three weeks within that 9.2 worldwide for four weeks. The first three weeks stood at 7.6% and again within the 8.9% U.S. frequency number for the four weeks within that for the three weeks. It was 6.9% so still a good showing prior to that.
For February the average transaction was up 2.7%.
Now turning to the Corona virus and all the issues that impact surrounding it.
Like everyone, we're keeping a close eye on the developments around the corner Corona virus, including the impact on operations, the health and safety of our members and employees and of course, our supply chain.
As already discussed we saw strengthen our February traffic and comp sales related to the news and concerns about the virus most particularly in the last week in the month and that's continuing in the first few days of this week.
Our warehouses have overall remained open with only a few total days of closures at a couple of locations in Korea as well, our Shanghai location Theres been some limitations required on the number of people into facility at this at a given time.
Members are turning to us for a variety of items associated with preparing for in dealing with the virus such a shelf stable dry grocery items cleaning supplies clorox bleach water paper goods hand, Sanitizers sanitizing, wipes, disinfectants health and beauty AIDS and even items like water filtration and food storage items.
And we're doing our best to stay in stock on these and other items were getting deliveries daily, but still not enough given the increased levels of demand uncertainty items, it's been a little crazy. This past week in terms of outside shopping frequency in sales levels and not only in the United States.
In terms of placing quantity limits on what and members can purchase we are doing that in some instances it tends to be at all locations, but may differ regionally based on supply levels I do want to.
Give three big shout outs are buying staffs, both year regionally in a broader working in some cases around the clock to procure supplies from both existing suppliers and from other sources where possible.
I can a shout out to our warehouse employees. These last nine or so days has been beyond busy even with the traffic jams and the parking lots in the long lines and check to show you how they've been absolutely awesome and anecdotally were hearing that daily for members.
Here are few other things occasionally too.
And lastly, our suppliers both domestically and abroad, we feel our strong long term relationships have helped to this crisis and we've been there for them and they are certainly there for us now.
Overall in terms of what the Corona virus related demand items.
In terms of that it's looking better, but not perfect well see what each day brings and our warehouses in terms of cleanliness in sanitizing, we have enhanced sanitizing protocols and safety procedures have been implemented all locations.
Some as some examples wiping downcourt handles with sanitizing wipes, placing of sanitizing wipes stands at entrances also along the fresh line wallet food courts enhance procedures that the food courts patio tables condiment tables dispensers in bed cetera. The general things you might expect in that we see in all the recommendations and serves the supply chain closures.
Any manufacturing facilities extended well beyond the typical one week Chinese new year holiday, which was the last week in January and many face cases factories over there were closed for one to two additional weeks that's now improving each week initially two to three weeks of factory. So so initially there are two to three weeks of factory closures not one Dan.
About three weeks ago, and just pulling some of the buyers that deal with the factories.
They felt there was a.
Rough number of 20% to 25% production levels moving up to 40 and now its highest 60 to 80, but again, it's a it's improving and so has little ways to go.
In terms of transportation issues with its Chinese new year, and then a couple of additional closure weeks. They were not only product issues, but also trucking in port issues. These are also abating with port capacity in China, improving each day as well I say port capacity. It's also the shipping lines to come to various sports domestically truck capacity is plentiful.
However, exporting items.
Including Ks items as well as other U.S. manufactured items to our locations.
In Asia, and Australia, it's been a little bit of a challenge because of some container shortages here.
But overall, okay, just take a little more work.
We're finding other ways to handle any any potential out of stocks by shifting skews to alternative items and categories, particularly in areas of domestic goods food and sundries and fresh.
And as you might expect our travel business is impacted due to reduced demand as well as higher than normal cancellations of previously booked trips, particularly as it relates to cruises and international travel I don't think there's really surprised with that.
At this point, it's hard to quantify what the financial impact will be for a future results to our future results again. The first we can half of this fiscal quarter it's been.
There's less the last we can have it's been quite good with the sales but.
We'll see what tomorrow brings.
We'll continue to pass that information along and of course, we do report monthly sales results.
Finally in terms of upcoming releases, we will announce or March sales results for the five weeks ending Sunday April 5th on Wednesday April 8th after the market closes.
With that I'll open it up to Q, and a and turn it back over to Michelle. Thank you.
Hi, Thank you.
Good to ask a question you will need your question number one I make telephone you may do on your question.
Please standby, while we've compiled acuity roster.
Your first question comes from delay Nevsun Young men from Morgan Stanley. Your line is open.
Hi, Richard.
Okay.
Yes.
Yes, good I first.
First question is on the gross margin.
If we take the core encore down 15, and you get rid of the chicken production costs.
No.
Did you say with in that what the E commerce mix shift.
That compares to prior quarters prior run right.
I wouldn't we that we weren't that specific but a lot of it has to do it affected that wasn't particularly that one week, where he is so important to E. Commerce on promotional items for Black Friday cyber Monday, the weekend, the three days, leading up to Thanksgiving. So you do have some lower margin.
You had some low margin categories in there just start with as well as we do a lot more promotional stuff as most retailers do with the with the with that week of Thanksgiving.
Okay. So this was a little bit unusual given the timing and given just the fourth quarter or the the holiday period within that number.
Well I want to stand corrected if there's a couple of people here just corrected me E. Com numbers are not in the core encore.
So that would be outside of that.
Got it okay, but it's still still does it feel to strengthen majors.
Right.
Got it and but broad broadly speaking the greater mix of E Com Richard is going to depressed.
Not in that number but it on favorable to gross margin broadly, though is that fair and.
Because of the mix of products that are being bought or because of the discounts or the mark up that you're putting on <unk>.
It's both you know I mean, as we try to build new categories over the last year. So like apparel were given some hot deals out there. If you buy one shirt. It's actually if you buy too it's a little less bird for delivery or whatever else. So yes, we are driving that business and again, we've talked about.
Yes, but the big the big things like Tronics electronics tends to be a low margin business not only Tvs, but you know all the oh, the computer and some things.
Got it Okay. My follow up is on just overall reinvestment right. Your business is growing at a really high level high single digit comps.
Sure plan for that level and the core encore general doing relatively well not down 20 or 30.
And I guess the S DNA that you're spending.
In line, but I assume you're not falling through all the leverage that's coming through this model and so my question is where are you finding places to reinvest again it doesn't seem like the core encore is getting.
It's going down enough to suggests you're putting it back in price.
Other places spending.
Well I would argue that we are putting a lot of it back and price keep in mind of all the buckets, we talked about historically from the membership fee income to the tax reform to the changing credit card those things keep growing and allows us to be competitive and when we see strong sales I think encouraged us to do more of that.
And the other thing is is I'm not going to go through 10 different things. There's lots of things were very busy is not just the the five basis points I mentioned in IP, we got a lot going on.
Yeah with E commerce fulfillment.
With the chicken complex with it which I mentioned.
There's a lot with us EPA. These are small things, but each of these are various bait numbers a basis points.
CCP is the privacy, California Privacy Act.
We don't pointed out because I'm sure there's something that goes the other way, sometimes but the ended today, there's a lot of things going on and.
We feel pretty good about where we're expenses are though the words are going to try to improve them.
Okay. Thank you.
Your next question comes from the willingness Gregory Marins from Evercore ISI. Your line is open.
Hi, Thanks, Ritu. Thanks wanted to follow up one is on the membership fee income could you give us what that isn't and constant currency and also.
If you're seeing any membership sign ups inflect like the way sales and traffic have in the last a couple of weeks.
It's too.
Two movies doing is 2 million even with FX.
Yes.
Once we just for that got it and then on the sign ups. If you see any change there in the in the rate of sign ups.
I honestly don't know I know.
Even in a few people I mean, the shopping frequency is off the charts. The last few days and and you see it on social media with people you know sending in pictures as I've got to be there's been a little bit of it but not enough to move the needle.
Got it and then secondly, it was just on gasoline what did you have the average selling price this quarter and if any sort of trends on the gallons would be great as well.
I don't have it in front of me I know that there was with gas was inflationary correct.
Yeah.
I think.
Oh.
Oh no [laughter].
Yes price.
Yes.
In Q2 was 7.9% inflationary.
Inflationary.
And that's the average selling price per gallon versus a year ago.
Yes.
75 versus 255.
Got it and then last I was thinking things I know, it's common or the balance sheet.
Very strong.
More volatile markets.
How should we think about buyback capital structure in the current rate environment and environment of the world.
Well every banker calls us every day to let us know that rates are even lower today and tomorrow.
But no we continue to look at it we talked about at every board meeting and.
Oh I can tell you is to stay tuned.
Alright, Thanks, Good luck guys.
Right.
Your next question comes from the line as Chris Horvers from Jpmorgan. Your line is open.
Thanks, Good evening sets of a few follow ups first on.
On March I mean, you are limiting some of those high volume items. It does look like you've got some pretty low end stocks.
Hi out there do you see the potential for.
Compress later this month.
Well, we don't know.
You know its people. This is what happens when people have been bulky up on certain items and yes. There is out of stocks everyday to but overall the numbers are incredible because there's so many people coming in.
And they're buying other stuff as well so.
Yes, I don't know what tomorrow brings.
When asked the question.
Yes.
He will then go through this this additional purchasing of water and.
Shelf stable food items, everything I guess, it depends where they are selling them putting it in their basements for another day.
Some of it related to the fact that people aren't eating out as much I think it's a combination of those factors. While we know is is that last week, starting Tuesday or Wednesday.
[music].
Which is when a lot of the news.
What event.
What.
In the U.S. went even further.
We had a huge picked up in traffic, which continued over the weekend in increased and increased at the first few days. This even further in the first few days of this month this week and so we'll see what tomorrow rings.
And then on the fly side, there is clearly not just cosco, but other places.
You really can't go in and generally find sanitizing items and what have you and while we're getting shipments daily somewhere in the U.S.
Whatever limited amounts we yet are allocated is gone pretty quickly.
I would assume that over the next few weeks or several weeks that will abate, but it depends what else happens with the virus itself.
Yeah I was at a store on Saturday I've never right. After the open I've never seen a line that long all the way back to dairy. The my My final question is is this might be hard to parse out I think the big question on investors' minds is how the consumer is going to behave obviously you know the pantry load, but you also sell a lot of.
General merchandise <unk> sell a lot of big ticket. So we're able to sort of Dodd tease out if you're seeing any pull back relative to trend in the past Cup at past week, or so and some of them more discretionary in larger ticket categories.
Yeah, what's interesting.
I'm just looking at some handwritten notes from our that I spoke to our senior buyers yesterday.
You would think things like patio furniture would be impacted because it's a big ticket discretionary items.
The comment was we're selling an extremely well now part of that is we've got a bunch more people coming in so maybe it per customer the purchase for customers down a little but theres a lot more customers and so and what else lawn and garden is doing well.
That buyers really thats more weather related in certain markets there has been impacted.
Excuse me.
You say TV or you're going to say TV, no I said lawn and garden.
Weather related.
And then in some electronics items was summer strong theres, others like some laptops in some phones, where there's been some supply chain issues, but I would say overall that.
The initial thought that my initial thought as is that big ticket discretionary items might be negatively impacted right now to the extent. They are it's been more than offset at least in these last several days by by the influx of shopping frequency.
I don't know what that means for tomorrow, we'll have to see.
Understood and Super helpful. On I'm sure all the media outlets are picking this all of my my other questions. Two quick ones. One is have you expanded the number of skews and the M.B.M. It seems to have picked up a over the past couple of months, but want to get your thoughts there and then lastly, it looks like you have in new grocery delivery.
Option in the App and on your website sort of an extended delivery option not the today and not the same day. So it sort of what's what's been the strategy there and it is that new were just you know a repackaging of something you already had.
Generally has been no change and MDM items I mean, if it's up a little are down a little that's random not planned.
And as it relates to shipping a at least the people in the room with me here are not aware of that.
Okay must be just repackaging of something that you already have yet okay. Thanks, very much best of luck, Jeff. Thank you.
Your next question comes from the line outside wrong from Gordon Haskett. Your line is open.
Hey, good afternoon actually John Park on for Chuck.
Can you guys provide a little bit of an update on.
Same day, and Casco today, and how that's impacting kind of total spend from these customers utilizing.
Yeah, it's still relatively new for us over the last year.
Overall.
Mike My knowledge of this is a couple of months old.
As a slight improvement.
Concern of course is is they buy more having to delivered and one day and today and then they come in less frequently but how less frequently and they are coming in a little less frequently but the some of the two still is fine.
Again, it's too early to tell that are viewed just fine continue or does it change a little bit.
We're still but keep in mind also where we continue to do a lot of things consciously even through emails to get you come back in the location with a certain promotional things that are in store only.
Got it and then I guess just going back to the current of Iris I mean is anyway to kind of indicate where margin on these sales are materially different than your traditional shop.
Okay.
Yeah food Sundries overall is yes.
Okay.
Yes, it's about in line I'd say on on the company averages.
[music].
Perfect. Thank you.
Uh huh.
Your next question comes from the line is carrying storage from Barclays. Your line is open.
Hi, Thanks, very much a couple of questions.
Richard you commented on the fresh gross margin decline and I am wondering if you could just give a little bit of color on that and that's not really leading the poultry he kind of call that a step up price investments.
Yeah, We're just yeah I mean at the end of the day, our hard isn't where merchants and where.
We try to drive business and and fresh is an area that also is a frequency driver. So it's more my comment is more anecdotal then some new change in strategy.
But not necessarily.
Comment on the competitive.
No that is the increased level of competition that I've talked about that goes back a year and a half plus ago.
And that that hasn't changed.
Okay, and then can you just maybe clarify little bit.
I guess that true up at the breakage estimates.
Well, yes.
Well I mean the ended the day, it's a small it's a small amount a basis point when.
We issue.
[noise] significant amount yet.
If you kind of back into the number yourself of what percentage of our sales or get the 2% reward and we send out those certificates and there's always going to be some slippage notwithstanding the fact that we send out reminders to our members that.
That you are you haven't.
Cash this at the end of the day, we tend to be we do our best guess to accrue for slippage and I'd like to think that we tend to be a little conservative and therefore, when there's a review it picks up the other way, but the ended the day, we yeah accounting rules say you do your best guest of what it should be and then when you read review.
You adjust that.
And then I just want to switch gears too.
Thank you said you event, you'll be opening a second one Sam but many maybe any thoughts on what you think that axle annual volumes could and will settle out at for that store and then any update on the number of member it.
That's stores since the last call.
I mean, I am getting the contacts that to the extent that China as an opportunity. It's not so much about the units, it's actually about the volume per unit.
Right.
Well, it's hard to say because this one is so off the charts.
I mean again the last few weeks with last several weeks with some limitations on number members for some of that period of time, it's changed a little bit, but and that was either topper second or second largest location in our company.
Turning to several weeks, leading up to that and the number of members is again off the charts.
Yes.
Nearly five times the company.
Okay.
But when we take that same number and apply that to the total revenue for that box or how should no no no no because you you know yeah.
Given that population of Shanghai and.
The fact that this thing went.
You know throughout social media and it's very popular over there you you have a.
You will you have a somewhat higher renewal rate, we don't know yet so we opened in August, but we know from other countries.
Lower run lower for the right and.
No in the you can't just simply multiply that out.
But.
But our but the unit overall as you know as you know again, either number one or two and up until the last few weeks with what's going on over there with throne of ours.
Yes.
One of our top two units.
And then just last question for me I don't think about.
Are you willing to give an update and what you think or what they were the average ticket as in the U.S. seven Evan executive member today versus.
Just the basic membership and how that's trended in the last several years because it does seem like they had momentum is really continue to.
Yeah sure games.
Yeah look we don't disclose that but more executive members and more penetration of executive members is good.
More members who have the.
In the case, the United States. The co brand credit card is good and if they have both in executive and that it's even better.
All those things I think or help help our sales growth.
Okay.
Your next question comes from the line of John Heinbockel from Gordon.
Okay.
Richard the price investments you mentioned in fresh foods that.
Actually proactive price investments were more.
Delays and passing through.
Vendor increases and then.
Where those investments occurred is that was that more protein as opposed to other categories.
It's it's definitely proactive on our part and Ah I think it's all the above its protein is fresh I mean, it's it's voters.
Okay, and then and then if you I mean, if you look at the fresh food comp right. So I think you said low double digit and that included the final weak right. So.
That was the best.
Fresh food comp you've had in a while we I don't know if you can parse out maybe you can with what we're looking at the final week, how much was some of that.
Corona virus related what was a lot of that step up related to the price investments.
Who knows clearly we for was different than weeks, one two and three for everything just that just a share number of people coming into the warehouse I personally believe that given that restaurants, probably had been impacted a little bit the last couple of weeks or they're buying more it supermarkets and more costco.
So those things up a little bit as well.
And then and then lastly, when you think about I know you said the margin on some of that stuff is sort of inline with the average when you think about the the sort of the cost associated with restocking and dealing with that volume and you think about I don't know in EBIT margin.
Tied to that volume normally the EBIT margin will be all the incremental margin me a lot higher is that less the case here because of the cost required to keep.
Keep up with that volume.
Well I think theres lot of additional things that cost issue I mean, there's there's not a lot of it but I'm sure. There's a little airfreight going on them and then and I'm sure there.
When you got a a.
Hi, Cube, hi, weight low value item like water.
40 half leaders for today that are something that you're going through it faster than you put it on the floor, you know theres more labor and everything else, so, but it's still a net positive I in the scheme of things I don't know if it helps or hurts the bottom a little bit.
Okay. Yeah. The other thing is is there not just coming in getting those five items, including.
They're shopping a little but again I personally was surprised that the patio furniture is strong.
And maybe per person, it's a little weaker but there's a lot more persons.
Okay. Thank you.
Your next question comes from the line, it's Mike Baker from number.
Okay. Thanks, a couple of questions. One can you tell us how gas profits were this year versus last year in and then remind us if you could how much.
That helped to Q 19 versus Twoq you 18.
Yes, I believe I don't have in front of me, but I believe last year, we said gas helped us relative to the prior year.
It was pretty it was it was wasn't we're talking about plus or minus either way.
This year patches.
Got it okay.
Okay shifting gears a couple more if I could so February even if you take out the first of all the 300 basis points can we take that out pro rata across you know international and the U.S. or is it that impact one region more than the other and the real question. When you strip it out February was.
Much stronger than than you've been running even so in other words I presume. The first three weeks were strong. So what do you think is behind that uptick even before you got the weak for.
Must be that must be those investments in price.
At the end of the day is generally around the World I think Korea has been a little less than a little less of that felt a little less of that benefit but there's been there's an that there was an outbreak there that had a lot of publicity and I think they're more people, perhaps staying home or you're not going out.
The but when I look at U.S. candidate in several other countries all of them had big upticks.
And that last you know the past nine or so days.
I'm sorry, what was the last probably question, which is why do you think we want the weeks one two and three were obviously strong as well because when you take out that 20 basis points. It's it's still you know your high single digit. So what do you think it's behind not big uptick.
And there's probably lots of little things I'd like you know my mother would say were good merchants and great stuff at low prices.
There's nothing that stands out completely I'm certainly there was not a lot of press out there.
Issues around Corona by Us, even though is in the news a little bit so maybe on a macro basis, there is a little bit of that in there.
I think there there may have been some weather issues a year ago that may have impacted a little.
But overall, we were in those three weeks forgetting about week, four which was off the charts.
It was a we're feeling pretty good about it at some of the stuff we're doing is working.
Merchandising standpoint, and the pricing standpoint.
Okay fair enough appreciate the time.
Your next question comes from the line that's your past.
Okay.
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Good afternoon. Thanks for taking my questions. Thanks for all the comment on the Corona virus. So I guess, Richard just going back to your commentary on the supply chain. So do you guys look for it at this point do you expect any impact on your supply chain relate to current of ours or is it is it too early to tell it for later in the here.
Well I think first of all there has been impact on it it's now starting to get a little bit further normal.
It's normal on regular stuff on some of the.
Virus related items that people are buying like water and sanitizing items and paper towels things like that that's going to take a little that's going to take a little bit while longer when I asked the buyers. They they're they're working day to day with suppliers, you've got suppliers that are literally working around the clock to to produce and to ship.
But again people are coming in and buying stuff. If you will further basement.
But what about I guess, I'm, asking where some of the other tigers like electronics and some of those categories I might may come from Asia, just curious if you're expecting impact.
Well I think there had been we've seen some a little impact on some laptops and and some cell phones I think thats related to southern things that we've written that we all read about in the paper or about some shortage has some delays because of some of the component parts.
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Great I, Yeah, I think one thing that.
That helps us a little as we're able to pivot a little bit. So if there was a shortage or something with one area, we're able to put somebody else in its place since we so pretty much everything.
But we just don't know what's going to happen tomorrow.
Our first order businesses to get to supply chains back open in running well.
Yeah. There's two kind is there are two kinds of supply chain issues. There is if I did issue related to all these very high demand items related to fighting and protecting yourself you know the waters. The sanitizing things like that and then there's just stuff I mean, you know everything from furniture to apparel to electronics coming from China and.
And on the ladder.
It seems at least while the why do we.
Keep in mind, given the planned Chinese new year week, there were stuff brought in early not only by us, but I'm sure others and so but then there was two more weeks to closure. So those kind of things over the last three weeks in terms of China buyers have the supply chain has in the manufacturers are now back open they went from <unk>.
Zero, if you will that 25 to 40 to 50 to 60, 80%.
And now it's getting to the ports and ER and some of those things are also being debated somebody issues. There. So my guess is.
If everything got better tomorrow pretty much concern standpoint, you still have a few weeks here, where it takes time to fill those supply chains.
Great and one follow up question just just on the holiday season, you guys had a really strong performance, even even with fewer selling days.
So just curious if there's any surprises or where do you think attributed to that real strong outperformance.
Well I think.
I think weve, that's what we do I mean, I think we've done a great job we've been helped by strong.
The strong big ticket categories like electronics, like patio furniture lawn and garden right now.
And other Hardlines and Softlines areas, a fresh continues to drive our business well when you know as you know when were asked what are the two or three big factors that drive our business our categories. It's fresh its gas, it's executive membership and again utilizing those different.
Bucket you had even when sales are good we want to be aggressive in pricing and.
When sales are bad we want to be address more aggressive in pricing themselves are good we want to be more aggressive pricing it drives the but at the top line improvement strive to bottom line.
Great. Thank you.
Your next question comes from the line of taxi clearly from RBC capital markets. Your line is open.
A good afternoon, guys I'm, Richard you talked about a second margin pressure to moderate a bit from the poultry plant ramp and I know, there's an incubation period. There. So is that plant actually turning out product at this point and relate that can you give us an idea of what the incremental benefit are you guys are expecting.
Once you're a in full production mode.
Well.
I think it was mid September when we when the first chicken went through the plan if you will.
The plan was that 45 weeks later, there would be approximately 2.2 million birds a week being processed.
And so call it September to August and so we're a little bit.
Yes, the halfway mark and that I believe in terms of.
Production were little bit past, the halfway mark on that.
Call It a million versus a week I should be off a little bit on either side and so a lot. In this has to do with the fact that you've got this big facility that is running well below capacity or the the amount of impairment to margin related to that in Q2 was less than Q1.
We would expect it to be less than in Q3 and further.
So once we get to full capacity I think.
And then as I'm sure there's going be some operational improvements are the first couple of years as well.
We ended the day, it's a combination of sourcing and just simply supply and our view is is we can improve if you will have the ultimate cost per bird, but we don't know that yet when we spend a little more than we planned but we also upgrading the facility to.
To be a air showed instead of water chilled.
It truly is a stay on facility and for the U.S. and at a very high volume facility and I.
I would say right now things are going as planned in terms of that 45 weeks cycle and I would like to think that a year from that six months from now two more quarters now it's not going to be an issue that we really even talk about as it relates to how it impacted margin.
Gotcha I appreciate that little bit.
Yeah.
Got it and then I know you obviously had the surge in that kind of fourth weekend as you pointed out because the corona virus warehouses are obviously jammed everyone kind of see that I'm curious if you happen to see an even larger increase from E. Com in terms of like <unk> there've been some sort of shift in consumer behavior at all or is all the activity concentrate.
Warehouses.
No I want to we saw an increase but not really I mean.
My view that yeah.
Yeah. We we saw throughout February we saw some increase on E commerce, but.
Again, if people are looking for those the sense of urgency I'm going out right now and get it and you know.
Things like water and everything.
Some of those key items like peanut butter, and crackers and and the like we have online as well and those two in some regions.
There might be in and out of stocks.
Got it alright, thanks, guys.
Your next question comes from the right Oh Gee death.
Got it seems your line.
Hi, Thanks for taking my question I was hoping maybe you could help us with kind of how how things trended in Korea over the last few weeks you have exposure. There. There you know potentially weeks ahead of where the U.S. could be worse case scenario for the virus. So in terms of demand and kind of stock up and then potential.
Early demand falling off as the virus spread there any insights there.
Well I think the only insight is from what I've read.
It is not is the issue that.
More people were staying at home and that Im going out.
Whereas.
Even near the.
Well the publicity that state of Washington, and and King County is getting.
With a few of the deaths.
Yeah. There are people out about there's there's a little less traffic on the highways and but notwithstanding that it's on the highway is coming to see yes.
Got it and then kind of changing gears, we've seen some something about potentially requiring a membership in some food courts in the press a anything minus all process there.
Well first of all it's it's gotten more press that it deserves.
There are I believe seven current locations.
On the West Coast, where we had I believe they are all outdoor locations and one of the challenges. We've had is particularly on very busy locations where.
People that are non members just come a need their everyday a you've got member complained saying why are you you know I have to pay the come to Cosco and so we took we're testing and seven locations that we are limiting it to members only.
Easy in locations, where you have the food court inside but on and many other ones and and in areas, where the weather is generally good like California, Arizona things like that you have a lot of other outside and so we'll see but that's.
But again seven locations at a 540, we're testing of that and and it's gotten a lot of press.
Okay got it if I could squeeze in one more at anything on on supply in pharmacy and any any.
People stocking up there and potentially running out of inventory.
Oh. This is just a quote from the FDA yesterday, it said, while the FDA and other outlets are reporting disruptions of medical products are possible. At this time manufacturers are reporting that no specific drugs are experienced a shortage due to the impact of coded making and talking to our far ahead of pharmacy yesterday. He said the only thing that we've seen there's been a little pick up there as well, let's say somebody has.
As a a.
A year long prescription so for nine.
Prescription plus 390 day refills for.
And they'll come in and they'll want all four of them feel now and in some cases, even when the their particular insurance plan doesn't cover it they're paying cash they just toward their whole 40 up on their prescription make sure we're not running out.
But that's more again I think quite the same thing you're seeing with paper goods.
But from a from a supply availability standpoint, but we haven't seen anything yet.
Okay. Thanks.
Well, we take two more questions.
Okay. Next question comes from the minus Oliver Chen from calling your line is open.
[laughter] Hi, Richard regarding the supply chain and what you're seeing what are your thoughts regarding the price increases or potential price increases rather that'd be from transportation cost or other and what what your buyers I think may happen. There and then second question is related to the E. Commerce, you made a lot of park.
Yes on your mobile App, just what's ahead for a changes to the mobile App and also more broadly capital investments.
Related to E com and supply chain. Thank you.
As it relates to costs.
General view of the buyers is is that.
We Oh I get back to the kind of made earlier about strong relations.
Two they said that there's some.
Some raw materials cost increases because of shortages, that's going to rein on everybody in our view it rains on us a little less but you know I think we've given the limited number of items, we buy in the amount of things with the amount of they give it item that we buy.
Our buyers, we feel know a lot more about the cost structure and and so I haven't seen any commentary on that internally.
Other than there was one small comment I can't find it in my message papers here that there may be in some small cases, some raw material increases on some particular item. Some some particular raw material for some manufacturing process, but overall, there's not been a big issue right now.
Yes, the only increase in transportation is on some very limited items, where there's been a little bit of airfreight.
What we're finding is is that the ports again getting back at capacity in and and there's plenty of space.
And so that's not been as being an issue.
As it relates to a and econ investment.
There's not a lot I have a might play to tell you today, we're working on more things related to our app.
You know to our membership digital App and Oh, we certainly have some things going on on the fulfillment side of ecommerce.
And you know we've been focused on getting to more countries open as I mentioned in the last quarter.
And no we think.
There are few other things that we've got going on that I'll be happy to chat when the next time around.
Okay, and as buying online pick up in store going as you like and do you expect a lot of enhancements I had to that as customers like it.
Well customers like it but we.
We don't like it necessarily.
We're doing buy online pickup in store for some small items small high value items, but we're not at the point, where we're looking for members to buy online that come up and pick up their whole grocery basket.
Yeah, So what we're trying to figure out our way and.
Certainly a again the last nine or so days notwithstanding a seems see things seem to be working pretty well for us in that regard yeah. We continue to work on the you know where we've had.
Good sales and good strength over the last few years in E. Commerce is taking certain begun bulky things out of the warehouse.
Like white goods and and things that are delivered in some cases installed and so were we continue to work on those kind of things as well.
And lastly, Richard with the with the surge in demand on the traffic trends that you've seen how have you manage this customer and guest satisfaction and also labor in your stores those kinds of things we were curious about.
How do we measure.
I'll be managed it and just and tried to your best to make sure that that customers are happy and also you have the appropriate labor levels, you know relative to to spikes and changes in demand.
Well again last week and a half notwithstanding because it's been nuts.
Well first of all.
Member comments and basic member renewal rates I mean, we actually the operators and although we have to Craig C. weekly.
Information on comments.
You can imagine how many people call an email.
When they have somebody that they're concerned about and we also measure and then let me read the least expected, but the positive letters to that effect.
On the.
On the operation side, Yeah. The key is still well aside from merchandising in the order merchandising out there and giving the.
The warehouse management isn't managers in the as the Merchandisers Ross Merchandisers, some leeway not yeah. I mean, certainly electronics is when you walk in and Theres defensive a promotional goods and fresh is in the back but the end of the day, there is a bit of merchandising or [noise].
That is pushed down to the regional and warehouse level and that's what I think drives our business there.
In terms of the front end managing the front end.
I think we've got last count.
120 of our 540 ish locations in the U.S.
With a fully self checkout and we plan another hundred in the next three months.
And so always trying to figure out and measuring the number of friends that number of.
Have a member transactions.
The front end per hour.
Great. Thank you best regards great job.
Next question from the line as Peter.
Yes.
Hi, Richard I'll, just two quick ones here to Closeouts. So.
It looks like the business, probably comping in the 20% range there in that last weekend and certainly the demand is probably even higher than that just given that you guys are running out towards the end of the day away [laughter]. How do you think about the ability for the club to kind of keep up that pace with that pace of demand I mean, if this if this were to go on.
On for three four more weeks.
Do you guys think you've got the supply chain able to keep up with that level of demand or you're hitting a point, where you know you're not you just not going to get another delivery tomorrow of picture category.
Yeah, no well I think it's it's it's all over the board you know yesterday I think there was a couple of either Los Angeles or San Diego, San Diego counties that announced a oh, hi heightened level of concern.
King County here in Seattle did that a couple of days ago when that happens that's another catalyst to push people to go out and get more stuff.
Uh huh.
I would hope.
Look we would all hope this thing peaks in starts to slow down it depends what happens tomorrow.
Well, yeah, we'll be tired, but still working hard given that half of our.
Employees, roughly a little over half our.
Of the 90% of employees in our warehouses that are.
Hourly about little over half of those 90, our full time and a little under half our part time.
Certainly their employees that want to work more than part time, and so we've been able to accommodate some additional hours there, but everybody's little tired, but that's what you do.
Okay and then my last question just on on Lawn and Garden. You can you mentioned that a couple of times and you talked about seasonal.
Maybe expand on that a little bit where where in particular are you seeing the strong I guess, it's an early start to spring, but maybe talk little bit about what what you're seeing on that front.
Well if he I mentioned there was is that I went and getting ready for today's call I'd.
Spoken to several of the senior merchants in the different categories and one thing I without even looking at the numbers I thought as I assume some of the big ticket discretionary items might be a little weaker because people are not running into get those items they are running into get.
Concerned items and the fact was to my surprise that they said that that certain items like Oh, patio furniture, and launching lawn and garden was strong they felt and again. It was just their view that Patty lawn and garden was more related to.
Some of the areas of the country, where the weather's turned already.
And but clearly because you got X percent more people coming in every day than normal.
No no I make sense fair enough. Thanks, so much.
Well, thank you everyone.
I have a good afternoon, and we're around to answer any questions.
Good day.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
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