Q3 2020 Earnings Call
First then going and welcome to the Q3 earnings calls.
So all participants are in listen only mode.
After the speakers for some patients there'll be a question answer session and thoughts. Good question during that time. Please press star one on a telephone keypad.
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And I would now like time buckle up with the Mr., Richard Dawkins fearful we feel like.
Thank you Joseph and good afternoon, everyone I'll start by stay at these discussions will include forward looking statements within the meaning of the private Securities Litigation Reform Act of 1995. These statements involve risks and uncertainties that may cause actual events results indoor performance to differ materially from those indicated by such statements. The risks and uncertainties include but are not limited.
To those outlined in today's call as well as other risks identified from time to time and the company's public statements and reports filed with the FCC.
Forward looking statements speak only as of that they are made and the company does not undertake to update these statements except as required by law.
In today's press release, we reported operating results for the third quarter fiscal 2020 of the 12 weeks ended may 10th reported net income for the quarter came in at $838 million or $1.89 per diluted share this compared to $906 million or $2.05 per diluted share last year in third quarter. Now this years third quarter was negative.
Really impacted by direct expenses of 283 million pretax or 47 cents per diluted share from weight incremental wage safety and sanitation cost related to covert 19.
And last year's third quarter, a number of $2.05.
The benefit from a nonrecurring tax item of $73 million or 16 cents per diluted share.
Net sales for the quarter increased 7.3% to 36.4 or $5 billion up from $33.96 billion last year in the third quarter.
On a same store a comparable sales basis for the third quarter.
For the 12 weeks on a reported basis, a the U.S. was a 5.9%.
Excluding gas deflation in FX impact the 5.9 would've been for 12 weeks of 8.0.
Canada on a reported basis was minus 2.5% ex gas deflation and FX plus 3.0.
Other international came in on a reported basis at 6.2% and again ex gas deflation in FX plus 12.2, all told the total company came in with reported 4.8% and again ex gas deflation and FX. The 4.8 would've been 7.8.
I might also note that ecommerce on a reported basis was 64.5% comp and X.
Yes, deflation or ex FX FX, 66.1%.
No foreign currencies relative to the U.S. dollar negatively impacted sales by approximately 110 basis points and gasoline price deflation negatively impacted sales by approximately 190 basis points.
For the total company to afford to 300 basis points. Additionally, gasoline volumes are gallons were down about 20% year over year in the quarter as a result of less driving due to the pandemic [laughter].
These adjusted figures are they getting impacts gasoline gallons is not in the adjusted figures that I just described above.
In terms of traffic, our shopping frequency or shopping frequency decreased in the quarter worldwide by 4.1% and in the U.S. by 2.0%.
Our average transaction Oh ticket was up 9.3% during the third quarter at a 9.3% does include the negative impact from gas deflation FX.
Now our third quarter comp sales figures did reflect also that a few of our businesses, notably optical hearing AIDS and photo were closed for much of Q3 and a good portion portion of our food court item offerings were eliminated also for much of Q3 as well we eliminated the food courts eating a during this time reopening of these began.
And these new ones were closed began on April Thirtyth 10 days prior to the third quarter end with about 20% of the locations back operating by Q3 and.
In the past two to three weeks.
Nearly always back in operation by mid June.
In terms of the food courts, which had been opened a bit but again, but a much more limited menu. We've added some but not all the items back as of now.
No an estimated hit to the reported sales numbers that we gave you earlier in Q3 by one to two percentage points by those items being closed or restricted.
Next on the income statement membership fee income reported came in at $815 million or 2.24% up 5% I was $39 million from 776 million or 2.9% last year in Q3.
Ex FX a weakness.
39 million increase and try percent increase would have been up 47 million or 6% during the quarter. We had two new openings a total of four year to date.
In terms of renewal rates at Q3 end, our U.S. in Canada renewal rate came in at 91.0%.
Tick up from where we were at Q2 and and world right and the worldwide rate.
Came in at 88.4% the same as it was a fiscal quarter ago.
Keep in mind that any impact on renewal rates from covert positive or negative or a reflected over the next several months.
In terms of the number of members a Q3 and a member households, and cardholders in terms of households, we ended the third quarter with 55.8 million households up from 55.3 million 12 weeks earlier and total cardholders came in at 101.8 million up from 100.9 billion 12 weeks earlier.
Sure.
At Q3 and paid executive memberships came in at 21.8 million an increase of 135000 over the last 12 weeks.
The only down to the gross margin line I reported gross margin was higher year over year by 54 basis points on a reported basis.
Coming in at 11.53% up from 10.9 954 ex gas deflation.
Would have been plus 33 basis points as I, usually do all that should drive to write down a few numbers in two columns and then we'll go through the that explanation.
In terms of reported in Q3 20 year over year. The core merchandise was up 51 basis points on a reported basis and without gas deflation up 33.
Ancillary businesses.
Was on a reported basis, plus 26 basis points ex gas deflation plus 21.
The 2% reward minus six and minus four basis points.
Other minus 17 and minus 17.
And you add up those two columns total reported again up 54 basis points on reported basis and up 33 basis points gross margin was up 33 basis points ex gas deflation not a core merchandise component gross margin again.
Higher by 51, or 33 X deflation keep in mind that into quarter, we had a decent sales shift.
From ancillary and other businesses to core businesses, which resulted in a higher contribution of our total gross margin dollars coming from the core.
Looking at the core merchandise categories in relation to only their own sales or what we call core and core margins year over year were lower by 17 basis points.
Five basis points by the way of which was losses related to our new poultry complex or something I've pointed out in the last two quarters, we'll probably do so next quarter as well.
In total pretty similar in fact, a year over year impact in Q2.
So while higher penetration of our total sales came from the core this year. It was at a slightly lower gross margin percentage year over year. This is mostly attributed to sales mix both between and within merchandise categories.
Our fresh foods gross margin percentage was up the again, despite any for sure headwinds from the from the ramp up costs associated with the poultry complex. The strengthened fresh was result of high sales driving down our spoilage as well as labor costs as percent of sales being able to leverage the those at a greater than normal rate.
Softlines food and Sundries Hardlines, all had lower margin percentage your year over year into quarter. One example, non foods, which is both hardlines and Softlines non foods was impacted by shifting sales towards lower margin departments, particularly things like majors and left big Big ticket electronics.
Ancillary and other business gross margin in the and the two columns higher by 26 basis points again, 21 higher basis points ex gas deflation.
This result was primarily due to strength in gas and E. Com gross margin dollars year over year, partially offset by a lower penetration of ancillary sales due to lower gas prices and volumes and the closures of some of those ancillary businesses that I talked about earlier.
Several those businesses have higher gross margins, 2% reward was higher Super Center Award was higher or was it hit to gross margin by six basis points on reported basis and for.
X deflation, implying that a slightly higher percentage of our sales.
We are eligible for the executive member reward.
The other line item 17 basis points to the negative 12 of the 17 basis points is attributable to the covert costs and the 12 basis points would that's about 44 million of the $283 million number that was mentioned in the press release. These are the costs for incremental wages safety and sanitation.
Was allocated to our cost apartments in merchandise fulfillment operations, so to say it hits to margin. The other five basis points or 19.7 million came from occurring reserve for certain third party gift cards and ticket programs. This latter 19.7 million was not included in the 283 total amount that we called out as a direct incremental expenses from Cowen.
Moving to SGN, a our reported yesterday percentage year over year was higher by 59 basis points coming in at a 10.51% of sales up from 9.92% ex gas deflation or the minus 59 would have been minus 40 or higher by 40.
He began please shut down to file the following as she may components and then we'll go through that core operations reported was plus nine or lower by nine the benefit of nine.
Ex gas deflation, plus 24 or benefit of 24 basis points central zero and plus too.
Stock compensation, plus three and plus three.
Other minus 71 and minus 69.
And you end up those two columns you get to the reported SG Nate increase of 59 basis points and ex gas in effect ex gas deflation, rather minus 40 be higher by 40 basis points.
Now that the Uinta core operations component lower by nine and ex ex gas deflation lower by 24.
As she nay in the core operations, excluding that's excluding to covert related expenses that I'll talk about in a minute. They were needless to say leverage with strong core merchandise sales central was essentially flat and a slight improvement relative to the with including deflate, yet ex gas deflation stock comp no surprises there a slight improve a slight benefit.
Yesterday, but three basis points and again the other component to 71.
69 ex gas deflation.
The 70 166 basis points of the 71 is attributable to the incremental costs of cobot 19, or 239 million of that $283 million total amount that was in the press release again. These are the cost for incremental wages and safety and sanitation related direct expenses the balance of the 71 basis point figure was five basis points or 18.
And a half million dollars. This came from the costs associated with the acquisition and integration related expenses of our recent acquisition of interval that last mile delivery and installation operation for billion bulky that we acquired a few months attack.
Next on the income statement is Preopening expense Preopening expense was lower by 6 million coming in at $8 million in the quarter versus 14, a year ago again, we had two openings. This year last year in the quarter. We had three although chunks of that these of each of these numbers relate to a pending openings in Q4 as well.
All told reported operating income in the third quarter of 2020 increased by 5.1% coming in at 1 billion won 1.179 billion. This year compared to 1 billion won 22 year ago. Now. This 5% increase is you know notwithstanding the incremental cost that we talked about it I just talked about that.
$283 million as wells to 19.7 in the 18.5, just mentioned as well.
Those are all taken in the third quarter.
Below the operating income line interest expense was higher year over year by 2 million coming in at 37 million. This year in the quarter versus 35 million a year ago recall that we completed a 4 billion dollar debt offering on April 20-F.
During the first during the third quarter.
Following the completion of the debt offering we call. The outstanding debt. Due may 20 may of 2021 that was a 1 billion dollar tranche and an additional $5 million tranche that was is it was due in February of 22. Both of these truncheons. We've paid off this morning. After a 30 day call notice there will be a pre tax expense of 30.
Sixmillion.
$36 million related to the earlier time in or make whole. These though this debt, which will hit our Q4 results on the interest income and other line in our PNM.
Next on the income statement interest income and other for the quarter. It was lower by 15 million year over year, mostly attributable to lower interest income and mostly attributed to lower interest rates within that.
Overall reported pretax income from Q3.
Fiscal 20 was up 3.6% coming in at a billion won 63 versus a billion won 23 last year and again.
The 1 billion won 60 threes after taking the impacts of those charges that I previously mentioned.
In terms of income taxes, our tax rate in Q3 was this year was 26.7% last year was 18.5% tax rate again last year included a benefit of a nonrecurring tax item of $73 million.
A few other items of note in terms of warehouse expansion, we as I mentioned, we opened two units in the third quarter that puts us at five actually five units.
Total through the first three quarters, we expect in Q4 to open.
10, including two Relo, so net of eight so it looks like our net total this year will be somewhere around 13, there's been a few that had been impacted by cobot 19 in terms of construction delays and had been pushed into the first part of fiscal 21, which starts in early September.
As of Q3 end total warehouse square footage stood at 115 million square feet.
In terms of capital expenditures.
Third quarter total third quarter fiscal 2020 total spend was approximately $626 million.
Our estimated capex for all of fiscal 20.
Is currently in the $2.7 billion to $2.9 billion range.
A slight decline from when we had guesstimated an estimated.
Quarter ago, and again I think that has to do with some of the delays in construction.
Since the scope with issue.
In terms of ecommerce as I mentioned earlier overall, our ecommerce sales on reported basis increased 64.5% and 66.1% ex FX.
I might mention I should note that within that 61 like many retailers out there we saw an increasingly level of strength in E. Commerce sales over the last few months, if I look through the 12 week. The three four week periods that comprise our 12 week third quarter, roughly that 66.1 or that's it.
Before and a half percent reported number.
And the first four weeks was in the 25% range and the next four weeks in the 50% increase range and the most recent and the last four weeks and the 90% range, but totaling that 64.5 on a reported basis a few of the stronger departments health and beauty AIDS office majors housewares and small electrics.
Total online grocery grew an incredible rate.
Within the third during the third quarter as I'm sure did it many places the the comp numbers just mentioned again follow the that's the 64% number.
They follow our historical convention that where we exclude our third party or same day grocery program since that those that comes into the warehouse to picked up by the third party and delivered two I remember if we were to exclude that third party in our E. Commerce number that mid 60% comp number would be slightly over 100%. So we've seen big straight.
And driving the business that way.
Overall, our E com sites have worked pretty smoothly during the quarter, despite dramatic volume increases and as well, we're able to improve on delivery times throughout the quarter as we adjusted to the ramped up order volumes.
Now turning to the.
Corona virus and all the issues an impact surrounding it.
From a sales perspective as discussed.
Last quarter in indicated by our monthly sales results that we do.
We started Q3 strong I think it started actually in the fourth week of February it into the first two and half weeks in March with very strong sales as people were stocking up prior to the inflammation the concerned about availability of certain key products as well as the implementation of various stay at home waters.
The middle of the quarter was.
It was a.
Weaker as many of the geographies in which we operate had issued mandates limiting movement as well we have implemented around restrictions during this these times.
Recently, our sales have started to recover somewhat as states have begun to relax restrictions.
Within the merchandise categories foods fresh and other essentially had been very strong despite out of stocks on some items throughout the quarters, such as toilet paper paper towels cleaning supplies et cetera, meats and proteins towards the end of the quarter hand sanitizers alike.
Office and majors were also strong during the quarter driven by work from home initiatives, while most other discretionary categories were a little weaker during the quarter such as jewelry luggage third party gift cards. They were generally weak other we checked categories, which include things like sporting goods lawn and garden patio and apparel, while they were weak Dave rebounded somewhat towards the end of.
The quarter.
From a supply chain perspective give you a 40000 for view of that.
On the non food side as it relates to imports from China. Most the factories are now up and running.
Sure.
Major countries suppliers, India for textiles, Domestics, Mexico, primarily for things like TV Assembly.
Two weeks behind China in terms of getting back to normal, but each week showing improvement on the food sundries sides paper goods still on allocation and idled limits on certain items in certain regions.
Sporadic sporadic limited limits on canned food items like tune in chicken tapas areas again are still state hand, Sanitizers, disinfecting, wipes and myself sprays and alike.
Items like Milken butter are generally okay, and we've also we have eliminated like frozen certain or host frozen proteins like chicken and beef items in terms of fresh find the protein side.
The merchandise has there been challenging from a production and processing side.
Currently for US pork is the lease affected but somewhat affected but what we've done for the last couple three weeks I believe.
On fresh beef chicken and pork items of those protein items, we limit three fresh items. In total we also have limits on of one per SKU uncertain frozen items like 10 pounds of Hamburger patties or chicken breast or the like.
In terms of seafood and produce that's all good and again talking to our buyers. These categories. There generally the again, probably with the exception to the hand sanitizer because of just it's not just people or hoarding. It there.
Great increasing use in demand of those items continued but we expect continued improvement generally each week.
And lastly, Costco travel it was the will say significantly impacted during the quarter due to reduced demand as well as cancellations of previous book trips members are now starting to actually book travel again, although generally further out than we have historically seen and of course, we booked those results when the trips or activities for the occur.
Yeah.
Our warehouses of overall remained open although we did operated at reduced hours at most of our U.S. locations for several weeks during the quarter regular hours resumed may 4th with an additional hour on weekday mornings for seniors and persons with disabilities.
Warehouses are still following social dispensing and sanitizing guidelines. Additionally, as discussed some of our warehouse businesses like hearing aid up to one photo and.
Personal extent the food courts were closed or mitigated during the majority of the quarter.
Also effective May force, we now require all members and employees in the warehouses to wear masks.
During the quarter included in that again that big $283 million number we spend about $32 million en masse clubs and incremental cleaning and cleaning supplies and things like plexiglas petitions and you name it all related to coven.
But that's in that 283 million dollar.
Some of the initiatives some of the initiatives related to 83 in costs will extend into Q4.
We would expect the incremental expenses related to co for these types of expenses related to covert to exceed 100 million in Q4, but be quite a bit lower than the 283 million 283 million that we had in Q3 will have to just wait and see though.
Finally in terms of upcoming releases, we will announce our may sales results for the four weeks ending the Sunday May 30, Onest next Wednesday June 3rd after market close.
With that I will open it up for acuity and turn it back to Joseph Thank you.
Thank you Sir at this time for that purpose. It must ask a question. Please press star one on your telephone keypad.
Again that start one on the telephone keypad.
Well, let's forget the moment tickle barbecue any Austin.
First we have our first a question from hitting in Gutman from Morgan Stanley. Your line is open.
Hey, Richard.
I know we have to wait till we get the me results, but I don't know how much you can pretty view us just given how dynamic the environment. The in terms of the mix of product that's being sold traffic to warehouse the environment now you're starting to see other states in stores open curious if theres anything you can call out as a preview for me.
I really can't Connolly thing is a preview some of the comments I made this document as it relates to towards the end of the quarter, we saw certain things pick up the fact that we.
Went back recently to full hours.
We're all better both us our employees in our members of better it's getting through the warehouse so.
You know seasonally I think the some of the items that were online has picked up that we talked about and but we'll wait and see next week.
Okay.
And then my follow up on memberships I think you said ex FX. They were up six if I caught that can can you parse out U.S. in the quarter.
Relative to that six if that is the right number and then.
Anything that surprised you with regard to the pace of new members growth the actual amount or anything geographic.
Generally no but.
What we talked about way back when the end of Q2 in the beginning of this quarter. We saw some pickup when there was a lot of.
When we have these crazy strong numbers and people were coming into by all those essential in short supply high demand in short supply items, we saw some additional sign ups, but not meaningful relative to our whole company in those weeks towards the end of February in the first half of March other than that you know I think the fact that the traffic is down.
A little bit, but the average ticket is up you've got some members that are coming in and bulking up a little more but.
Yes. Some members that are not coming in is often so that gets you a little bit but overall, we think that we're in pretty good stead.
Okay can I just sneak in one more I just want to out on what you are one other quick comment as that we have also seen the switch from walk in sign ups.
To online sign ups and.
That's good when you sign up online I know you're also required to have a.
Auto Bill, which is positive for renewal rates.
In terms.
Yes, and then the last one is on E commerce, the assortment the SKU assortment any any like strategic thinking that we should have a bigger assortment than you do I think you were always adding but is there a rethink as far as the total number of skews.
I don't think necessarily the toward the only total increases where we've gone to some additional flyers in some very limited items. So we've expanded.
Our supplier network in some limited cases beyond that it's more of a shift it started with with if you will some of the big in both the items and this started well before covert like white goods and Thats, continuing and certainly the strength that we've had on line, whether it's reported online.
Through our two day grocery or through.
Ecommerce or or certain third party providers like instacart and shipped and others.
All that stuff is driven some of the business from the warehouse online and and again I think weaved if I go back six 810 weeks ago.
Whatever the normal time to get something was particularly to the grocery was well more than two days, we're back to two days.
Same day, you know our third party suppliers had challenges of.
They ramped up in the 200, plus thousand new employees in a matter of weeks.
Two has gotten a lot better in the last few weeks so.
Hey to hesitate use dishes used the word strategic we certainly know that big and bulky can be done very effectively.
Online with a few displays in the warehouse as well, but you'll have that delivered and installed through online and that'll continue it probably has been expanded a little bit because of this people at home things like exercise equipment.
Let me, a big electronics and things.
Okay. Thanks Richard.
We have our next question from Chris Horvers from JP Morgan Your line is open.
Thanks, Good evening, so a couple of questions on a on the margin front can you talk about.
Break down the ancillary margin a little bit in terms of what you saw in terms of the benefit of gas versus the headwinds that you would see from mixing down in those other categories and.
As you look ahead, given where you see gas prices are at this point would you expect that benefit of gas to if prices held to.
The higher in the current quarter.
Well, yes, there was a perfect good storm in the last quarter as it relates to margins and gas and I think youd that theres not even our information, but theres public information on on strengthening retailers that sell gasoline in the terms of gross margins, we certainly benefited from that.
We'll offset to that was reduced number of gallons, but nonetheless, it was particularly strong I think that's evidenced in the matrix.
You have higher margins on some of those other ancillary businesses.
Like optical and hearing aid while small in size, there's a higher margin because we have to account for the additional costs about Tom interested in hearing it technicians and alike.
And so those types of things.
Yes, being the biggest piece of it.
Dwarfs, the other stuff but.
But it all adds up there was not good for us in the quarter.
And so I was there any or do you have any impact in terms of likely apparel categories. You have to take any any mark Downs and you know as as you look ahead. How are you thinking about that the potential risk of that category impacting or are you seeing some some rebound in that category in.
And don't expect that to be a headwind in the next quarter. Fortunately, we havent seen a lot of Mark Downs I mean, it's apparent for US is a pretty sees you know there's a big component of it that seasonal.
And you know when this thing first started we were able to talk to suppliers and work deals where in some cases.
Certainties had been made yet or they had to raw materials, but they had and finished the product so let's.
Pay for part of the finish for the for the raw materials, but hold off until next season.
We've held on will have we've you know when the reasons, we went and borrowed money was looking at the worst case, which in our view has not happened, but what if we had to hold some big volumes of seasonal stuff, we were going to whatever commitments. We had we were going to we were going to respect, but I think a combination of working with our vendors as well as sales.
I have rebounded in those areas little more than expected, it's not that people are coming in and going down every aisle. Some are just going getting their central's and had another dodge but at the end of the day I think is weather is turned we've been a little bit more felt a little more good about things who knows what tomorrow brings though.
Okay and then just the last question also on gross margins you mentioned that ecommerce was actually a benefit most retailers we've seen a have a substantial headwind as in ecommerce growth accelerated but it didn't seem to occur here, because so well to elaborate on that well first of all.
It's like I think everybody for us, it's certainly a lower margin business as we try to build it overtime.
Where do Rosemont, it's really the gross margin dollars are stronger because of the huge sales volume, we're spending more money in it and so probably I don't have been trying to me, but as a percent of properties as a percent of sales I'm sure is down a little bit.
And that's expected but.
But the total gross margin dollars are up.
Simply because of this this year strength of it.
Understood. Thanks.
Yes.
We have our next question from Michael Lasser from you'd be willing.
Your line is open any.
Good evening Big blocks. The my question, which is weakening in upper bound of your membership potential when you off with the that with a pandemic is not going to motivate and now.
Your consumer to sign up for a membership and then maybe hard for them to sign up under any scenario.
Well, we certainly don't believe that.
There is going to be two or three new normalize over the next two or three years and probably not a real new normal and then with its own set of difficulties. We size that we were asked the question constantly when I talked about this giant 10, plus fold increase in and same day grocery delivery. That's certainly because people. There's a good people don't want to go out there's others that want to come in.
But they come in less frequently and buy more each time, there's going to be some new normals. Our guess is is that whatever it's gotten too is not going to necessarily.
It may does it back down a little bit at some point still be higher than it was the day before all this sure, but who knows that certainty that we talked about everyday around here and I think over time theres been a lot of questions and.
We're happy with our renewal rates.
And we're all going have to get passed this one of the things.
We and some others of what I'll call the big essential retailers, we've all been fortunate that we've been open.
And when you talk to people anecdotally.
They feel frankly more comfortable come into Costco, which is bigger more wide open with the with certainly the six feet. Apart there were all doing with the mask requirements. There are few people don't like it but there is most people do.
So I think all the things that we're doing including the visible things that you see an in store.
And then look at the end as a it's a value proposition.
Average gross margin is in the very load very very low double digits 11 or 12%.
Apply whatever has 13 or so percent markup.
You know traditional retail grocers are in that mid to high Twentys and other big boxes are above that.
Regular retails way above that so it also has got to be combination of all those things we've got to figure out ways to get yen and I think weve so far at lease.
Successfully sometimes we're gradually been successfully for your figuring out how to get your stuff online as well and it'll be a combination, but we'll have to see overtime.
My follow up question.
Of online even.
Yes that you've enjoyed arguably.
Coupled with the acquisition, we need a couple of months ago and the overall increase in online penetration.
We witnessed across retail in the last few months.
They're inclination within Costco.
Order.
To the market your online channel more to.
I mean, you're offering to consumers or.
The desirable Neil which consumers into the store appear that you will maintain your passport.
Well I think by necessity. We have responded and maybe you know is for those of you sometimes I'm not suggesting you Michael bids that feel that we've been a little stubborn or are not wanting to do some of this stuff. We still want you to come in you're going to buy more stuff. When you come in period, and we think we can do both I mean, we recognize that.
White goods was the Best example away before cobot four years ago in the U.S., We did 50 million in white good sales.
If there are three years later, yeah, we did 600 on our way to a billion, which is getting there faster simply because the covered right now.
Certainly the acquisition of interval helps a lot of higher ticket bigger both items, many of which people don't want to put in there batch of their suburban or truck indicate take home. So I think we'll have to see overtime.
We feel we've also been pretty good again cobot has changed things a little bit right now.
Doing.
Marketing and having email promotions that are in warehouse and again time will tell overtime and we'll figure it out together.
Understood. Thank you very much in good luck moving forward our conservative.
We have our next question from Chuck Grom from Gordon Haskett. Your line is open.
Hey, good afternoon niches Stasi, John Paul accomplished Chuck.
Can you talk a little bit more than what you're seeing from a gas downs perspective towards ended the quarter.
Crossover to those visible in the cloud demand has some of those metrics have changed as certain areas have backup and starting to normalize.
Yes look.
Just driving to work you know theres less gas gallons being bought I think.
Is it has picked up a little as just hearing from the news and can thing I know in the state of Washington, They have each day the percentage of.
Cars traveling on different interstates is improving a little bit part of it is in some of the stay at home stuff is part of it is the weather's gotten nicer and people want to get out of damage.
It does it have to impact a little one of our frequency.
Catalysts.
The frequency catalyst that we've always talked about our fresh foods executive member and gaffe and so the extent to gas has come down a little bit that hurt a little bit.
Offsetting that has been the fact that one.
[music].
The average ticket in the store was way up.
Which helps offset the lower traffic and again, who knows what tomorrow brings were.
We are encouraged of how we got through so far.
We've seen some things pick up a little bit in the last several weeks in terms of categories are as weather churns.
Certainly some of the.
Openings I think should help us.
But again.
Well, let you know.
Okay.
Hello.
Yes.
Gum Standalone Sir.
We have our next question from.
John Heinbockel from Guggenheim.
It's up.
Richard when you when you when you think about the innovate what's what's the biggest impact that's going to have from a customer perspective.
You know and maybe it's just coincidence it looks like.
You look at some of the mailers even pushing.
A big Big in bulk you a little more here.
That's I mean, some thats on tight end of L. that's just.
What you would have done anyway.
I think it's kind of what we would generate away. It certainly is because we now have the confidence that we can provide a better service frankly, a lower total price.
You know.
Though was one of our suppliers.
As always done a good job as have some others.
We and as we build more volume on it and get more density that tool allow us to lower the cost and lower the cost to remembers certainly with that and what we've seen again I think if you'd asked us four months ago, Hey, we're going to have this big covert thing and this is what's going to happen. We certainly weren't didnt know that we would sell more big and bulky.
Items, what we're finding is because people are at home.
Notwithstanding some of the economic things of layoffs and furloughs people are buying things for the house. We saw that again more recently was not really good billion bulky, but lawn and garden.
If you'd asked US two months ago, How's lawn and garden election, we'd say, it's going to not be very good because of all the economic issues. So I think at the end of the day.
We are marketing. Additionally, right now because we have the confidence that we can we've seen the delivery times on certain begun bulky items improved dramatically on small.
Groups of items.
As we onboard some of those items, it's a year plus process.
Well it on the on the savings book for process there it looks like.
The assortment sort of getting back to normal.
Right from a food and sundries standpoint, we what does that fully back to normal Indeed do go back.
Two mailings or stay digital only for now.
We will go back to mailings in June.
And the assortment normalizes engine as well.
Yes for the most part yes.
Okay. Thank you.
We are in next question from carrying shrunk from Barclays. Your line is open.
Hey, thanks very much.
A couple of questions on I guess economy in general.
During first redundant membership growth as any color you could provide on growth and online finance versus walk in.
And then I wanted just ask a little bit more about econ generally I mean, I know you've kind of obviously your last encouraged with very high velocity units thing you've had to do the discussing which has impacted traffic, but with that kind of cause you to rethink potentially him.
I'm much more robust click and collect.
Model.
Just had one other follow on.
Well first of all in terms of online sign ups, yeah, I remembered that again there are some members that are coming I mean less frequently.
He said they didn't come in.
The first part of this month and this is normally and when they would come in and when they went to the checkout. It would notify them that they are up for renewal there now getting their email, which they would have gotten had they not renewed and so that's pushing some of it that way.
Certainly that they're certainly anecdotally been plenty of people that have signed up become members simply because of the one day fresh or the two day dry grocery and we're seeing so we're seeing a big push.
I think it's too early to tell what happens in the future I think more but we'll go online just like everything else in life and we'll do that in terms of click and collect yeah. We have very limited click and collect right now I Miss in some of those high value jewelry small electronics, we did add pharmacy to it and that's not only click and collect that's clicking.
Deliver through through were 10 were expanding we're not everywhere yet with the benefit of Instacart tires were doing that where you could go online order it and schedule it schedule your tire installation.
Well photo so we're doing more things, but if you're asking the question to buy online and pick up in store in general we're not looking at doing that on a regular.
Regular product basis.
We do delivery instead again through third parties in a big way as well as around today.
Okay, and then I mean, I know what kind of seems like a lifetime from now, but when we look towards the fall.
As it relates to merchandising link back to school Halloween I guess the question is.
Well to how much flexibility do you have to pivot to the extent that.
There really isn't much of the Halloween or back to school and then the second question is just bigger picture you know everybody loves to go to cost go for the sampling. So I'm just curious how you.
Think about not going forward is that something that will not likely ever see again is there anything that you're discussing in terms of how you get to reduce that safely anything there.
Karen I missed the second part of the question in terms of how do we feel that our ability to a pivoted and you look and see if you go back two or three months three months ago, we were cutting order reboot, reducing orders recognizing there's going be plenty of merchandise out there in these categories certainly for things like Christmas you know, we I think we reduce.
The selection of a few things and so.
So a little more regular items then.
They're items, but.
And now we're pivoting to try to get a few of those items, which are available. So I think frankly I think in some ways, it's been easier for us because we have so many fewer skews whirling to try if you knew things.
And now I didn't get the second part of your get a part of it was just people love going to Cosco for sampling food sampling that's a big part of the experience. So how are you thinking that that just bigger picture when we get a new kind of abnormal.
Okay.
We're going to start doing some things in mid June on a slow rollout basis and sampling I can't tell you anymore, but its needless to say not going to be where you go in just picking that picked up an open sample with your with your fingers.
But you know sampling and.
Food and food items are.
Our popular.
Okay and road shows as well I think you'll see a little bit more excitement on the road show side. So things that we can do to get people excited about coming in.
Great. Thanks.
We have our next question from Greg Badishkanian from Wolfe Research Your line is seven.
Good afternoon. This is actually Spencer handsets on for Greg is it just turning to E. Commerce again can you give us any color on their repeat rate, you're seeing from new customers and it looks like you're adding to the platform and then have you been able to take advantage of some of the lower online advertising costs that are in the marketplace today.
On the second question Larry question, I don't know I'm about to speed on that in terms of lower prices I would assume that's what I've read the paper in general So I'd assume we have some of that ability recognizing we don't spend a lot to start with.
On the first question was what.
I'll repeat business what does it.
Yeah, you know what that's another one that I don't know off the top of my head.
Sorry.
Great and then just if we can turn to small business customers can you talk about what you're seeing there how did that sales go throughout the quarter for that that segment of your customer base.
Well look I mean, yes.
Foodservice related small business is down everywhere.
It's been helped a little bit by some of you know we're less about serving the big restaurant change, but the mom and pop restaurants, and so to the Takeouts and your neighborhood, the Japanese and Chinese the tie those types of things they're doing some business.
Arguably what business, we're losing on some of those things were gaining because you're eating at home. So overall I think you just in looking at fresh foods and the food items of what we call food and sundries.
It's it's been well, particularly in fresh foods and somewhat and the rest. So I think overall weve been plus now that.
The question beyond that is what happens when everything is opens up I think it's going to be along the new normal still going to take some time and we do you see on the news that even in states, where it's been open theres not everybody running to sit down and then there's restrictions on how many people can be in a certain places us given time so.
Again, having fresh foods has been certainly something has been very positive for us.
Great. Thank you.
We have our next question from Count Kelly venue from BMO capital. Your line is open.
Hi, good evening, Thanks for taking my question.
Richard I think you mentioned executive penetration if I heard it correctly was up 135.
Thousand which.
Seem to be just a little bit of a slow down I'm wondering if it was impacted by the environment and if you have to do anything to change their process in terms of.
Convincing members to to upgrade their.
Yes, it fluctuates all over the board.
Certainly and it shows improvement when we add a country like we've done Japan Korea in the last couple of years.
It certainly is down from its peak a few years back probably the biggest things are.
Getting back to.
Traffic traffic is down a little bit the other thing is one of things we do in store a lock is something we we internally called E blocks or electronic walk so based on when you. Your membership Iscan based on your historical purchases. It makes all the sense of the world for you to upgrades and executive member.
We've chosen for the last couple few months not to do we block because it's one on one direct contact with the member while they're waiting in line that the register and so Weve, probably my guess would be a little higher.
And then we haven't opened a lot of warehouses year to date.
So we'll get back to normal and these things, but I. We don't we don't it does not raise a concern for us at all at this point.
Okay, and just as a follow up in terms of renewal rates I think you mentioned.
Any impact from covered there will be in the next few months, maybe just can you give us any color on what we should expect to see it with thinking maybe there could be a positive impacted renewal rate from from this environment, but any any color you can share would be helpful.
Well, we do what's called a who we've always done it this way a fully captured rate for renewal rate. So let's say you you signed up originally in January and so and sometime in December you get you renewed all noticed and let's say, we ultimately get to that 90.
91% renewal rate in the USA and Canada you.
By the end of January you and draw the people that signed up in January maybe by the end January I'm, making these numbers of your at 75 and by the end of February you're at 82, and the end of March you're at 85, and it takes you might even get the last half a percent or 1% of that rule rate six months out because it's somebody there was a snowbird or somebody that just does.
And come in that often there's always going to be that in addition.
Whenever you have a group of new members irrespective of whether its online and in store or in a new country you have at lower renewal rate in that first perspective here and then it builds each year over as your three becomes the combination of somebody renewing for the second time at a higher percentage than those that signed up originally in year, two insight and we're really for the first time in year three so.
I I.
Just one yeah, we don't know which direction we know that.
We wanted to say that because we don't know where it's going to go get the renewal rate right now.
It's mostly related to stuff that happened four or five and six months ago and seven months ago.
Thank you.
We have our next question from Paul address from Sidoti Your line is open.
Hey, Thanks, Richard can you remind us of the economics of of an online order on in terms of basket size and what's in that basket then separately curious if there any categories within the box that you would say your bit high from an inventory perspective. Thanks.
Well first of all from online there's regular online which includes a lot of the big ticket items. So I don't have the number of pride to me, but if our if in store the during regular times. The average front end transaction was in the one.
60 range.
140 range I'm, sorry, when 40 range online which include a lot of big ticket items was probably three to 400 range.
As we've added.
Yeah, as we added two day grocery that numbers come down certainly while we don't again include Ecom. The he is the same day grocery that you know that likes of Instacart, others come in and do that's going to be lower as well. So all these things are and flux right now.
Gotcha, and then on the inventory.
There Yeah again I'm happy report, that's less than what we brace for the worst case, a few months ago. When a couple of months ago and when we decide to raise some extra capital.
We have to take things like seasonal apparel and seasonal lawn and garden luggage.
We do have somebody has to say you.
But it's a small category, but at the end of the day all those things are less than we thought.
So yes, there will be a small amount of of items.
I mean, probably in the few hundred to several hundred million dollars that will hold for a season or up to a year.
But these are not things that are going out of style, even and items like apparel, which again I think we did to our buyers that are very good job of mitigating that impact initially with suppliers.
And and also it's come back a little better than we thought not all the way back by any stretch, but better than we thought.
In addition, we're not exactly high fashion, where things are going out of style.
A lot of things that we've we had whether it's some.
Some furniture items or or apparel.
Our senior emerged in the room is not pleased with that comment, but now we're basically or fashion basics.
Jeremy.
Gotcha Gotcha, and then just switching what percent of members shop, the club and three Q.
Versus last year ended this quarter market peak in that and that metric.
I you know I have never looked at it.
It's a good question, we'll have that for next time.
I certainly it's a low percentage this quarter simply because of new members or people that have cited I have friends that have not chosen not to go physically anywhere and they're having things deliver and they loved the same day fresh.
So my guess is just come down.
Well, we have two more questions.
Thanks, Good luck.
We have our next question from Greg manage from Evercore.
Your line itself.
Thank you.
Richard.
Sounds great E commerce, probably 8%.
Of the business in the quarter and if I'm.
Interpreting it correctly should we think of it is that that would have grown so over a 10%. If you include the instacart.
Yes, it's part.
Yes, okay.
And then.
Second as in one place than.
You talked about obviously deflation on gap adapted to the.
I have has there been any inflation, especially given some of the shortage errors and proteins et cetera, that's worth noting is an off that.
Overall ex gas overall, it's very small.
And actually gas because it's a it's a lot more sales volume than there is there's a inventory level, but.
Yes.
Unlimited items, we've seen.
Extreme examples where like eggs for a period of time some of the protein items.
Like meat.
But I would guess that it's impacting us a little less than others and some of those categories.
Because of similar supplier assistance right, but.
And it's coming back now it's coming down so overall, it's it's Jeff I would say very little difference.
Got it and then and then on NFL, just a follow up on that.
How much of Nfls business was distributing other people's things and where does that revenue show up and how you're thinking about either growing or reallocating that capacity.
Well keep in mind for Otis Indigo is a business built over decades to serve Sears its owner and fears of course has come down dramatically over the last few years into my can't disclose all the numbers I'm aware of.
That component that was actually still servicing their needs had come down and then also they had gone through their own reorganization as as account as a retail company and with that I think they lost business on the way. So you know, there's there's an infrastructure and capacity in place infrastructure placed with great capacity and so.
We view this as an ability to do great things with.
Could you describe that capacity, a little bit less number of employees or foot Israeli.
Thank you. Please 15, just 15 50 1500.
There are about 100, there's about theres anything 11 large facilities call. It the roughly 800000 million two square foot facilities.
And then about 105 smaller facilities, which can be as small as eight or 10000 feet or his biggest 50 or 60 and the spread route generally serving I think 85 or 90% of the U.S.
And.
And you know again Theres a lot of ability to there is it has a lot of capacity and we were doing we've worked with them for five plus years, I believe and but like anyone else working with them. We're doing a small piece of our business because we didn't know what was happening to the business.
As as apparel was going to its on restructuring.
Got it thanks, well good luck.
Thank you last question.
We have our last question from fresh Parry from Oppenheimer. Your line is open.
Good afternoon. This is actually at Tyler on for past, thanks for putting aside and take your question.
Well I wanted to touch on the you know the star capacity restrictions that you put in place.
You talked a little bit about you know the impact from some of the ancillary businesses being close tabs on having or south are you able to quantify for us on what you think the impact may have been Dallas from you know that that's still our capacity limitations. The restrictions that you put in place.
And the things start to open back up on in certain markets.
Are there any changes and the in these restrictions you put in place and can we expect to see these restriction in a way upon sales for a bit longer.
Well the only thing that we point and I point out earlier was is that those businesses like optical.
Hearing aid.
A reduced food court those things was somewhere in the middle between one two percentage points impact in Q3.
Aside from that when we went from generally closing Monday through Friday at 830, we went I think six.
But we also added an hour in the morning for elderly and expanded that from two days to three days to notify all five we days.
Yes.
We have that try to quantify that I can tell you that when when we've had some very busy locations historically instead, let's add an hour in the morning or an hour later Tonight, what we found as we tend to just spread the business. So I think the same thing here theres not a lot of big impact other than our.
Our view of our qualitative view was that there's a lot more impact from.
Shelter in place and stay at home and come and get what you need leave then there is from anything else and again is that.
I was encouraged by some of the things I've seen with couple of the other retail apparel stores that have just started opening showing good numbers.
Because people are coming back. So I think that is is encouraging but I don't think it's a big it was a big impact to us either way.
Great.
Yes, it was up there.
There was you noticed our numbers, Canada was weaker than the U.S. and Canada in Quebec, There's actually limited there's Curt current outstanding limitations of Sunday closes, which is new over the last few months.
And there is also I think been a little bit more stricter generally over the up there either stricter or people listening better to stay at home issues and so we've seen a in a country where were the only game in town in terms of warehouse clubs, we've seen a you know.
Weaker traffic and therefore.
We we can numbers in the U.S., we were okay, well I guess I guess a good segue into my next question Theres just curious on international by if there's any more color you can provide on what you're seeing internationally with regards to corner virus impacting our are there any.
Notable difference said in terms of behaviour or any other call outside versus the U.S.
Well I think.
Again, putting on my binders for a minute I mean, Taiwan and China and the most occurs you China. We have one location of course, that's been opened for less than a year. So we don't have a year over year comparison, Taiwan is quite strong.
Japan is quite strong maybe a few weeks behind that.
We see Australia coming back so overall that gives us encouraging news for the U.S. in Canada, but.
Part of that answers so what until we see it.
Okay, great. Thank you so much.
Well, thank you everyone.
Me in my guys here around to answer questions have a good day.
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