Q1 2021 Costco Wholesale Corp Earnings Call
[music].
At the book into the Q1 earnings call at this time, all participants are in listen only be valued at.
For the speaker's presentation, there will be a question and answer session to ask the question. During the session. You want me to press Star one on your telephone keypad, you pretty core any for do assistance lease Best Star Zero same keep out of like they had the company celebrate to your first speaker for today Mr. Richard got into.
Please go ahead.
Thank you Sandy good afternoon to everyone I will start by state either of these discussions will include forward of forward looking statements within the meaning of the private Securities Litigation Reform Act of 995. These statements involve risks and uncertainties that may cause actual events results or performance to differ materially from those at the kids.
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 of the company is public statements and reports filed with the FCC forward looking statements speak only as of the day, they're made at.
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 first quarter of for school or fiscal year 2021 of the 12 weeks of day ended November 22nd.
Reported net income for the quarter came in at $1.166 billion or $2.62 per share compared to $844 million or a day and $1.90 per diluted share last year.
This years first quarter included tax benefits of $145 million or 33 cents per share.
16 cents of which was due to the deductibility of the $10 per share of special cash dividend to the extent received by the company as for the K plan participants at 17 cents related to stock based compensation low.
Last year's first quarter included day $77 million or 17 cents per share tax benefit related to us stock based compensation as well [noise] at this.
Richard results also included of the cost related to our COVID-19 premium wages of $212 million pretax or 35 cents per diluted share.
Net sales for the quarter increased 16.9% to $42.35 billion up from $36.24 billion last year in Q1.
In terms of our first quarter of comp sales metrics.
It took for the on a reported basis for the U.S., we reported a 14.6% figure excluding gas deflation at FX impacts the 14.6 for the 12 weeks would of been 17.0% increase Canada for the 12 weeks reported 16.2% ex gas at FX.
16.8%.
Other international reported at 18.7 per cent ex gas at FX, 17.7%. So all told for the total company, we reported 15.4% comp sales increase at <unk>.
Excluding gas deflation and FX, the 15.4% would be 17.1%.
E Commerce for it on a reported basis for the 12 weeks was 86.4% and excluding FX at 86.2%.
In terms of Q1 comp sales metrics traffic or shopping frequency increased 5.5 per cent worldwide and plus 7.6% of the U.S. our average transaction size.
Size was up for the company, 9.4% for the quarter year over year.
At up 6.5% of the us.
These include the negative impacts from gas deflation and the positive impact from FX.
Foreign currencies relative to the U.S. dollar positively impacted sales by about 30 basis points at.
Yes, lean price deflation negatively impacted sales by approximately 200 basis points.
Going down the income statement membership fee income.
At came in at $860.9 million up $57 million or 7.1%.
Ex FX it would have been up $54 billion or 6.7%.
During the quarter, we opened eight new units at.
In terms of renewal rates are U.S. in Canada the run rate.
As of the end of Q1, 21 was 90.9% that compares to a quarter ago of 91.0 and worldwide was 88.4%, which was the same as it was at a quarter ago now to US again at a rate of 90.9 compared to the 91 point out at this 0.1% decline was primarily rich.
A lot of what we believed to be to for renewals of Canada due to the pandemic.
For example traffic of frequency at our Canada warehouses in Q1 came in at at minus <unk> 0.13, minus 1.3 per cent compared to a plus 7.6% figure at.
The United States.
By the way the us renewal rate that was the same at both quarters end.
In terms of number of members at Q1 end.
Total paid households at Q1 end was 59.1 million up from 12 weeks earlier Q for end of 58.1 and.
Total cardholders at at Q1 end was one of those $7.1 million compared to 12 weeks earlier, one of 5.5 million.
Also at first quarter end paid executive memberships totaled 23.3 million at.
An increase of 642, that's an increase of 642000.
During the fiscal first quarter.
Onto the gross margin line, our reported gross margin of the first quarter was higher year over year by 50 basis points coming in at 11.55 per cent of sales compared to 11.05% of year ago, excluding gas deflation at the point the 50 basis points of increase would be 30 basis point.
A few of jot down at two columns of numbers here to shed a little light on the components of gross margin.
On a reported basis in Q1 21 of the core merchandise margin year over year was up on a reported basis 83 basis points plus 83.
Second column without gas deflation would of been plus 66 basis points ancillary businesses minus 15 basis points reported at minus 20.
Ex gas deflation two per cent reward minus six basis points at minus for.
Other minus 12 at minus 12, and if you at up to two columns on a reported basis again gross margin is reported as a percent of sales year over year in the quarter. It was up 50 basis points of reported basis and ex gas deflation up 30 basis points.
Now the core of merchandise component gross margin shows was higher by 83 at up 66 ex gas deflation similar to last quarter, we had a.
Sales shift from ancillary.
Core this resulted in higher contribution of our total gross margin dollars coming for the core operations versus last year looking.
Looking at core merchandise categories of relation only to their own sales of core and core if you will margins year over year in the quarter were higher by 65 basis points Fresh foods was again the biggest driver here with strong sales of fresh we benefited from efficiency gains of labor productivity and significantly.
And significantly lower product spoilage food and sundries softlines at Hardlines. The of the three main core components, all had higher margins year over year for the quarter as well, but fresh foods was the driver.
Ancillary and other businesses gross margins as I showed you here was lower or reported basis by 15 basis points at minus 20 ex gas deflation most of the impact coming from travel end to a lesser extent from gas optical hearing AIDS and food courts.
Costco logistics, which is our.
For named for the acquisition of innovation that we did several months ago impacted ancillary margins by minus six basis points.
Slight relative improvement for the prior quarter year over year two per cent reward nothing surprising there and the other day minus 12 basis points. All of this was attributable to the cost of the COVID-19 of $53 million of the 212 billion total free the total amount previously mentioned these are the direct costs for incremental wages allocated to our menu.
Factoring production at fulfillment operations.
All told even with the 53 million dollar of co wood costs hitting the margin Q4 year over year for gross margin on.
On a reported basis ex gas still up 30 basis points year over year moving.
Moving to SGN day, our reported SG day in the first quarter as a percent of sales was lower or better year over year by 15 basis points coming in at at 10.15% of sales compared to a year earlier.
First quarter of 10.3 O and ex gas deflation. The 15 basis importantly, prove it would be 32 basis points of improvement again jotting down two columns of numbers reported at without gas deflation.
Core operations in Q1 on a reported basis was lower or better by 49 basis points. So at plus 49.
Ex gas deflation of Plex plus 62.
Central plus one of the plus three basis points stock compensation, plus three end plus four basis points.
Other minus 38 at minus 37 basis points and 70 of those two columns up total reported EPS gene a year over year was better or lower that are for plus 15 basis points at ex gas deflation plus 32 basis points.
No unless you need of the core again at shows ex deflation improvement of 62 basis points. This excludes the covert cost, which I will talk about the mill at it.
There was significant and they're just basic significant leverage was strong core merchandise sales increases.
In terms of other than minus 38, or minus 37 basis point number ex deflation gas deflation at.
These were our incremental cost because of a 19 or $159 million of the $212 million total number that we had mentioned earlier.
Free need wages have been extended through January 3rd at this time again, even including these these at $159 million of covert related premium pay expenses issued a year over year improved nicely.
Next on the income statement as Preopening expense too.
Many 2 billion this year in the first quarter compared to 14 billion a year earlier.
We had 10 openings eight net of two relocations during the quarter.
And for openings gross three net of one relocation of your earlier last year's $14 billion number did include a couple of million dollars related to preopening on our new poultry on our poultry complex, which was opened that went into of business.
Right before the beginning of Q1.
All told reported or operating income for Q1, 21 increased 35% company and at $1.43 billion. This year compared to 1.061 billion last year end.
And even at a higher percentage increase of course it.
It would have been higher had not we had those at the premium paid.
At below the operating income line interest expense was 39 million. This year versus 38 last year interest income of another for the quarter was lower by $6 million year over year interest income itself within interest income at other was lower by $22 million year over year due in large parts of lower interest rates offset by FX and other which was up with us.
It was at it.
Higher or better by $16 million year over year. So overall reported pretax income in Q1, 21 was up 34% coming in at $1.42 billion. This year compared to one point of five $8 billion a year earlier.
In terms of income taxes, our tax rate in the first quarter of fiscal 21 was 16.8 per cent compared to 19.1% in Q1 last year. Both years tax rate benefited from the tax treatment of stock based compensation as mentioned earlier this year's tax rate at the first quarter also benefited from the tax deductibility of the special dividend payable to us.
Company for old K participants as discussed that portion payable to the foreign K participants as discussed earlier in the call. This years for this full year's fiscal year's effective tax rate. Excluding these discrete items is currently projected to be between 26 and 26 of the half percent.
Terms of warehouse expansion as I mentioned at the first quarter of this fiscal year, we opened eight net new units.
Our plan for the year at somewhere in the 20 to 22 range.
Non into second quarter.
In six or so five or six in Q3 and seven or eight in Q4.
As of Q1 end total warehouse square footage stood at 117 million square feet in terms of capital expenditures in the first quarter of 21, we spent approximately $893 million our full year capex spend at for fiscal 21 of is still estimated to be at the $3 billion to $3.2 billion range.
In terms of ecommerce our overall our E commerce sales in Q1 ex FX increased at 86.2% year over year, a few of the stronger departments food and sundries, Housewares pharmacy, ODC and health and beauty AIDS small electrics and Tvs and other electronics.
Total online grocery grew at a very strong rate in Q1, nearly 300% the comp numbers that I mentioned, the 86.2% for your follow follow our usual convention, which excludes these third parties same day grocery program as they come in themselves and shop at our warehouses and then delivered to our members. If we include the third party same day and our ecommerce comps the.
The 6.2% result would of been just over 100%.
Innovation now rebranded as Costco logistics continues to grow and we continue to push more a big of bulky items to the site.
We've added in the past quarter, we added expense in card scheduled for this quarter, where members can select specific delivery dates for most big and bulky items and made improvements to our call Center was specifically trained agents as well that continues to grow nicely.
And lastly, a couple of fund sports items, just loaded two days ago.
We have a babe Ruth lot of great baseball for $64000 and at high caught a lot of great of Louisville Slugger that for $160000. We've also recently sold a number of membership for wheels up of private jet service operator.
Turning now turning to occur at the to.
Covered and some of the issues at Impax surrounding it for a sales perspective similar to our strong sales results of this past summer at our fiscal fourth quarter. We have continued to enjoy strong sales results during the first quarter of fiscal 2021.
We continue to be run rates, we continue to generate strong sales and in food and sundries.
And the health of beauty AIDS and fresh foods at the like and we've also benefited from improved sales of products and items for the home as people are spending less on air travel and hotel of dining out they seem to of redirect at least some of those dollars to categories like electronics furniture, and mattresses exercise equipment, housewares cookware domestics et cetera.
And as mentioned earlier sales at most of our ancillary businesses were lower year over year, the quarter travel gas hearing AIDS and food courts.
From a supply chain perspective of 40000 foot view, if you will most factories are up and running at.
Suppliers and in many cases production capacity has been increased however, even higher increases in demand of some products are still creating some supply issues. There are instances of 50 or 100% or even more sales increases of an item and if we can procure more we'd have even higher sales. Examples would include things like exercise equipment certain major appliances certain elektron.
Ex items as well as certain housewares and small electric items.
On the transportation front, there have been some container shortages at origin as well as some congestion at destination for us here of the states. The latter typically two to four days, but a little longer in some cases.
We're managing through it and expect relief non until yeah March.
March or so of 2021 at.
As well of the past few weeks there have been some challenges at you may of right about the industry in terms of delayed delivery times of econ item of of items, just given the number of items being shipped now through third party carriers.
While this may reduce some sales of members are confident or not confident at time, we holiday delivery at.
We like others I'm sure of done a couple of things we've adjusted our stated back to delivery times at our site of reminded people to shop early and we took in our case, we took several hundred non food items non food on line items that are also in line at are providing same day delivery through instacart at.
Including us items like air pods at its deposits laptops and many of over the counter and help us over the counter at health beauty at items as well some of their home essentials in terms of food and Sundries continue continued limits on some paper goods demand and sales went up as covert began spiking again at toughest areas.
Nitrile gloves surface cleaning wipes and sanitizing sprays also in some cases some paper goods at overall.
Overall dairy items are in good shape as well as proteins proteins and produce on the fresh side of it.
In terms of our holiday merchandise planning and and results.
Halloween Yeah, we went into it a little more conservative in terms of costumes and at Halloween specific candy items, we came out of Halloween with pretty clean inventory levels at Christmas.
As I think I mentioned on the last earnings call are responding to a question. We went a little more basic in terms of needs and uses for the house.
So very strongly weve gone into at one fundamental either for the home like Housewares Tvs electronics, even added items like barbecues end pressure washers and furniture items.
A little less we had cut back a little bit on seasonal items like holiday decorations and gift for active in some of the candy and food gift baskets in some instances we've already sold through those inventories.
Our warehouses overall have remained open at are mostly back to regular hours with an additional hour of any mornings for seniors and persons with disabilities.
Warehouses are still following social distancing end sanitation guidelines and at some jurisdictions, we have to limit occupancy since may 4th as you may recall weve required members and employees to the warehouses to wear masks and since November 16th we required face yields for those at able to wear a mask.
Some of these initiatives of course will extend well into Q2 of the fiscal year.
Finally in terms of upcoming press releases, we will announce our December sales results for the five weeks ending Sunday January Threerd on Wednesday January six after market close.
With that I will open it up to your questions and answers and I'll turn it back to send the city.
Thank you.
That's fine.
I feel Bob to ask the question you May press Star one of your telephone keypad.
And your first question comes from the line of some of that money from Morgan Stanley. Your line is now open.
Hey, everyone of good afternoon, Richard I wanted to ask US following on you talked about some of the merchandising plans around Halloween and Christmas you're going to begin to lap some pretty massive surges and end growth. One of you got into the thick of 21 I know you don't guide, but you're you know you're probably planning inventory purchases. So I wanted to ask how you sort of man.
And with a pretty wide range of outcomes and you know I don't know if you have any guidepost for thinking about some of the gains you're making in fresh food I as far as you know the spoilage and the Mark Downs that don't seem to be happening. So how do you think how do you plan for lapping some of those as well.
Well I mean, theres, a few different things and time periods debt will be in question.
If you recall, there was a big surge and and frequency and sales results for the last week in February and the first two or three weeks of March when people were coming in at an hoarding at our view and of course, we are running out of everything basics from water to paper goods to cleaning supplies and things like that and in some cases and.
Beyond that into April may there were some issues as there were some covert at spiking at.
Many of fresh class protein plants yep.
At the meat and poultry and the like and so I, it's hard to project completely I think historically of late we have tried to build a little extra inventory, where we can and and some of those key things that are going to go out of style like paper goods and cleaning supplies. Although no then you get the next rush.
Of of.
Of of spiking and whatever extra inventory you had it goes away pretty quickly.
Well, we'll continue to work around it.
The work when we were at age in some cases, it's a little easier in a sense that we at fewer suppliers to deal with fewer items to deal with arguably in other cases, given our huge volumes that creates its own challenge at sometimes.
Yeah, I think the bigger challenge is going to be you know.
Post may last year. It at this past year end June is when we saw kind of sales.
Strength not just in those key essential categories, like fresh foods, and food and sundries and paper goods and of the beauty ides dates but also.
On the non food side.
Just for the home if you all of those types of basic items and again people spending some of those dollars.
Look at.
Some things will improve and some things.
<unk>.
May be degraded a little bit some things that are degraded may take a while I'm not everything is going to happen.
Right, but it was not going to go off one day at everything is going to get better from a from of food standpoint in terms of restaurants being open. So I think you know where it together and we feel pretty good that we've got a good at.
Good format to serve our members well and we'll.
We'll go from there.
And as far as I Dunno events I know you you know road shows I don't know how prevalent they've been your mailers are there things that you can change the cadence of either to get more aggressive at.
Grocery you've taken a huge amount of share. This year is at an area you're going to lean lean into stronger at just curious how you're thinking about the merchandise at the merchants are prepping for for the upcoming year.
Well as it relates to promotional.
Forms that we do like like the at and we have mailers or even online type of mailer's Needless to say some of those have been changed because some of the big ticket non food and that big ticket I'm sorry, some of the the big size items that are always in their light paper goods like cleaning supplies and stuff.
Okay says, we've kind of eliminate some of those items for the Mailer, we put other items end inside.
In some cases.
It's done find in some cases, it's a little bit less of a sales increase but that's not just going forward. That's been at the last few months as well that we've changed those things I think we've been pretty good at pivoting and adding new items I think the examples of of.
For Christmas.
You know well we may of.
Maybe went a little too deep into of cutting back not that they were big cuts but.
We're running out of some of those declaration of things a week or two earlier than we would have liked to we also though of found success at lots of essential basic fundamental items.
No I don't think there's any of the first Christmas we probably brought in barbecue girls at pressure washers at to market and they're doing well because people are buying gifts for the home.
Right.
Yeah.
Thank you.
And your next question will come from the low net Mr., Mike Baker of the Davidson.
Hey, Dan is now open.
Hi, Thanks, a I was sort of curious on the holiday trends to two questions really one by I tried to advertising at customers of spread out their sales income at a little bit really do you think there was any poll for of holiday sales of into November from December and at a second part of the holiday question.
I think you said that you were out of stock quickly at some of the seasonal items or do you think it could have made a of <unk> been a little bit more aggressive on the seasonal stuff. How much you think your sales could have been up if you had done that.
Yeah, well for first of all of it in terms of talking to the buyers. They definitely feel that some of the merchandise sales were pulled forward into November at not only from December but even the week of of November and there's been articles out there about Thanksgiving and overall.
Overall, not not at Costco specific but just in general about whats going on online and what have you and so certainly some of that kind of.
They got pushed forward in terms of at some decorative things I mean, there are examples where instead of buying 10% more this year I will give us an item, we bought 10 or 20% less so we still bought a lot when it's not like we cut our order backed by half but.
But in retrospect, we probably could of sold a little bit more I don't have a dollar number it's probably not that meaningful of for every negative. There is another positive needless to say our crops over all of them very strong.
Yeah, Oh, that's fair and at a fact that well ask for more yes, I'm glad of question you have a five day subsequent lumps and increase of that's better than it has been a nice acceleration there a at a color as to where that acceleration can't promise of <unk>.
For now for 5% range last few quarters.
Well I think in terms of shopping frequency.
Oh no the end.
Correct.
Oh I'm sorry, Okay, I, just didnt hear the for as part of the question.
Well I think we open a few more units than we did a year earlier that day without looking that deeply that's probably most of it.
Okay fair enough I appreciate the color.
Thank you.
And your next question comes from Chuck Grom of Garden.
Gordon Haskett.
Hey, Dan is now open.
Hey, good afternoon, Richard Yeah. When you look at your online offering can you remind us where where it stands in terms of a total of mix of business and also level at level of profitability relative relative to the store and looking ahead, you know what categories you may start going into more.
Well I think in terms of in store of course in warehouse, we'd be at about 3800 active items online. We typically have somewhere at the high single digit thousands of mean call at 9000 plus.
Sorry.
And in terms of the percent of sales, it's about 7% of sales that we don't include in that number as I mentioned like the US its third party sales like the Instacart same day fresh bill.
Because their their employer of contracted employees coming into Costco shopping just like any other customers coming to shop. So you can add a little bit more of that but in terms of what we call. It online is about 7% I think it was 6% in fiscal 2000 for the entirety of course it was halfway through the year. When you saw E com percentages increases jumped dramatically.
With the advent of Covance.
And then any level of profitability.
Overall ecommerce is.
A little less profitable you've got the category wise, it's profitable you guys gave us a category wise, you've got a merchandise categories that don't include some of the highest gross margin components of our business like fresh like apparel in a big way in terms of the.
Penetration.
Yeah, you've got electronics, which has a lower than average margin business. Both in store end online and so much bigger percentage of of penetration online sales are examples certainly the profitability of ecommerce has been helped with the types of comp sales increases we've had over the past year, but also of this past year. There are some of the.
The cost inefficiencies of growing at so fast.
You know we end in terms of fulfillment as.
As we are continually adding.
Locations, where it can be shipped out of an end getting closer to the customer as as the overall size of the business has grown a lot.
Yes, and as I mentioned earlier and the investment at end of our credit what's now we call, we're calling Costco logistics.
That was as we expected a hit year over year to end margin simply because of where it's being ramped up and upgrading.
Got you and then just a follow up on Mike's question and that part of my near term orientation of it but when you. When you look at the end of the common number and the fall off at the end of the month, albeit still strong just when you look back at the day learnings onto onto why you think sales fell off and I'm curious.
At the revenue trends have started at the back.
I think it's I mean, our best guess is its complete pull forward I mean, the fact is is that.
People have been marketing bigger ticket items at some of those types of holiday items earlier at November right.
Oh, Yeah, Yeah, Bob you mentioned that you know a black Friday promotions this year more of those things we promoted earlier in the month end.
And not assessment everybody else out there too.
Got you all right. Thanks a lot.
And your next question comes from most of my kind of that's fair at you'd be ass.
[noise] at even bought for taking my question Rich you outlined like all day.
Some people on at all Mike entering a little for loved ones.
<unk> <unk> <unk> when looking at north fail.
Were you the rest of the.
Consumable well Liam.
Most other <unk>.
Celleration in their comps were at Costco <unk> acceleration Tom.
Why do you think that it <unk>.
Because of the <unk>.
Members of coming in to buy that it's definitely good moving up about that.
At the consumable item.
Oh, we definitely think that a lot of it.
Be essential and recognizing the people clearly are coming in to buy food and cleaning items end and health and beauty AIDS and the like.
That gets you at the door and certainly in our view given that money.
Money is being spent on other things in normal years, perhaps is being spent more for things for the home Oh, we have that as well and I think that has helped us in that regard.
Okay. So it really comes down so net net and things like.
Like the Costco with all the.
Nothing to look at retail.
I buy us I'd like to think part of it is is people feel hopefully at least relatively safe company into a big wide open box environment, where we've done we think at a pretty good job of social distancing and and at other safety protocols.
Okay.
In the core and core gross margin increase.
Like it a function of the dog failed.
Allowing costco that number itself you better at my.
Right.
You got it right we should.
Right.
Yes, I think most of those most of it is most of it as strong sales which shows its.
Right us colors with fresh food, where you've got you know to cost components that of improved dramatically spoilage at labor productivity.
So that has certainly helped us.
The.
Those at one of the plot on it but I cant seem at the mine.
Sorry [laughter].
Oh lets say, yeah less per boat <unk>.
The other Michael is us I think you will see I think you've all read about this at it from an industry perspective, there's been less promotional activities out there. While we were still getting great values on things when you look at Tvs in general while prices have come down across the board just because they always do overtime.
The east keep getting seem to be getting better bigger and at less expensive, there's not the kind of promotional money being thrown at it by the manufacturers because they haven't had to end.
And so I think.
That too as you know had some impact.
A couple of Oh, I hope you have a great holiday.
You as well.
[noise] ask your next question comes from the line that's not just caught.
From RBC capital markets.
Not in at Camp, There, Hi, guys Scot Ciccarelli.
So I I believe some of the products you guys sell the at your website or E. Commerce are for members only but.
Not all of them or it doesn't look like that from a labeling perspective, so I'm, assuming it's not just the labeling difference how much of your E. Commerce sales are coming from numbers.
[laughter], Oh, a virtually all [laughter].
Yeah.
I believe that part of the challenge is is on some items.
As we work with our suppliers.
And our sales as well we want you to be able us have decided to see the prices.
I got it Okay, and then Richard what's the update today regarding how much of your at your E. Commerce sales are being drop shipped from vendors burst kind of deliberate through popped up.
At about 50 50.
The middle of less than 50 as being.
Drop shipped.
Got it alright, I appreciate you all the.
Same to you.
Our next question from current sort of Barclays. Your line of Penn.
Hi, Thanks very much.
A couple of questions at one at all so first just on.
All of it in any way does some of that 10 or 12, you called out obviously, you gave us a breakout on the impact on cost of goods versus ft, and <unk>, but yes that was a little higher than the number I think the 14 million per week that you'd guided so wondering if that.
What the Delta at would of better because of that would've gotten us about a 168 million and then went or anything of a little color on what they like other cleaning component might be what have been in this quarter and then how to think about at into next quarter, because presumably that's like I asked last quarter that January 3rd day, that's probably not at the end date.
I would assume.
Well, we'll find out but [laughter] needless to say I can't comment on that but.
A a big chunk of the difference of for Teeter and they of rounding honestly down to 14 and now it's rounding up to whatever but at the end of the day, there's more hours as the biggest delta.
Delta.
More of human of an hour.
We haven't changed at all.
And then of cleaning component.
Okay.
That's relatively small.
Yeah, Okay, and then I'm wondering if you could give us a little color.
Expansion of the Instacart relationship you, obviously lets at a couple of skews that you've added on to that.
Just back to the third party <unk> can you give us color on what the market is on non sheet items versus food and then look at it that breakdown of like that would be for members versus non members on the mark up.
Well it is.
I can't be that specific we continue over the last three or four years. We've continued to work to lower the effective average mark up across the board on items. There are some of discretion on some can be a little lower than that of somebody we liar, but theres an average which includes both their mark up plus whatever other fees that person is spending at whether it's a per day per day.
Liberty fee or per monthly fee tends to cart.
As it give us.
Some of the unique issues at near the end of year with the high demand for shipping and end the capacity issues out there with a third party shippers we give it at its guard has always come in Weve added some items for the two of the Fray in some cases, there is a maximum mark up on those that don't read that that is it.
In many cases smaller than that quite a bit smaller than that other of that.
Mid to high teens number percentage wise.
Okay and then just last question in terms of Dan If I am you know obviously the I think.
January of 21 would be new timeline in terms of at the tax deductibility in California is there any thoughts in terms of timeline in terms of how you would think about and then I fire at membership fee increase because I think in the past youve historically done that when you've actually seen counter active counter intuitive.
Okay traffic flowing in it.
Seems like he may be looking at slower traffic tests based on tough compares as they get into parts of next year.
Philosophically color at that well.
Well I mean, historically as you know for 35 years, we've effectively.
You raised the basic fee $5 every roughly five years and I say roughly could be five five and a half years.
And the end and the executive membership has been raised originally started at 200 now it's 110 at under 20.
The last kind of we did the increase was I believe was in June ish of.
Of 16, so five years at.
As of June 16th.
<unk> for here.
Sure.
Well, Jeff on that but.
If you do it was June of one of the years, either 16 or 17, but it would be five years from that that we might look you you mentioned that we've done at when things are of the sales of been stronger when sales have been weaker when the economy is getting ahead or whatever else. We look at it is somewhat independently of that Oh, we look at end, we feel have we improve.
Of the value of the membership by more than that fiber respect of five or $10 and I'm, not suggesting <unk>, we might wait or not but at a time will tell us.
At least right.
Historically, we've always felt very good at about what we've done at that certainly the value proposition has been enhanced much at a much greater multiples of the fight for $10.
Thanks have a great holiday thanks.
Thank you Jeff.
Our next question San at from Oliver Chen of colony.
Hi, Thank you very much hi, Richard regarding what's ahead with vaccinations do you see a role that your pharmacy will play in that and also in this dynamic environment. How are you thinking about managing inventory versus sales.
So as we look forward to hopefully at.
A pathway to vaccination et cetera. Thank you.
I believe.
No no.
We end the country are currently in the first phase of the vaccination process, we're not participating in that but I believe phase two which will be just a short period down the road. Our pharmacies will also be part of the many pharmacies throughout the country that are going to be a providing a service of of vaccinations for that.
We are in phase one at all in the state of Alaska, only currently but I think throughout our company country, we plan to be at phase, two which will be the big push after this first initial round.
And in terms of managing inventories well.
While space is not at.
And for that certainly the cost of of carry a little extra inventory isn't very expensive right now given at very low interest rates, but at the end of the day, a as I mentioned at a little earlier, we are I think we plan.
[noise] positively in terms of how our sales of Ben.
And and.
To the extent of the example of low seasonal items, we came down a little bit but not a lot.
And I think we'll continue to do that kind of planning a lot of times at odds on items that are short, but there's certainly no risk of having the only risk of having some extra paper towels for a few weeks is the risk of having of there's not any obsolescence or markdown risk on it.
We will always tried it and times when there's more of that available we'll build up a few extra weeks of supply, but overall I don't see a big change at our inventory turns or payables ratios, okay and E commerce dictated more by comp sales than anything when we are enjoying a ah.
Yeah pretty cold in a 6% to 8% comp sales number you know inventories as a percent of payables as a percent of inventories was whatever the number was.
When we saw the big increase in comps you saw the payables as a percent of inventory is going up.
Got it that's very helpful.
And on the topic of E commerce, as we think about longer term growth rates as well as new new customer acquisition that you're seeing and engagement online what are some of the major catalyst for innovation going for that you'll you'll implement or or that you're looking to implement.
And then how do you how do you think growth rates may involve you know at.
As us hopefully reopenings occur eventually.
[noise] well look at it we as much they may want things to get back to normal for a business standpoint, but also the most importantly from a personal standpoint, and Oh you know over the next couple of years God willing is starting with this process of vaccinations in the vaccines at the hopefully.
A big chunk of this progress through you know by the beginning here during the summer.
People will get out more are we going back to restaurants, and the like and will that have an impact on our food sales of course at well.
You know so some of this positive will be sticky some of the new members will be sticky and we'll go from there I think that you know.
There are lots of attributes to value and and at loyal customer loyalty.
Certainly the best price is on great quality merchandise that the number trust at our view is the biggest attribute and a and that's where we start from a we.
<unk>.
Ecommerce is certainly a and at the acquisition of end avail.
Terms of of a big ticket items and having a great service at a great value for those items, we think helps us.
But ultimately we still want our members to come into the warehouse when they come and they see the items of they're more likely to buy some of those items and certainly.
Driving them end with great value in credit quality is what we're all about.
That's helpful and last on non logistics Costco logistics part what should we know about as we model that going forward in terms of the margin headwinds and end the dimensions around the size of that business relative to total thanks.
Well at the only.
Two data points, we've given you is in Q4.
Year over year. It was about I think at 8.8 basis point margin hit in Q1, which we just reported for this new fiscal year. It was at six basis point margin hit.
And you know as guessing games goal assume that there will be constant improvement of that over the next several quarters. So that it won't be a net and then now mind you that doesn't include any benefit we get for increased sales of those items.
And the margin associated with that but yeah. When we bought this thing we knew that there would be a of you know dilutive from an earnings standpoint for the for certainly the first year and perhaps end in the second year, hopefully all of decreasing basis of certainly the first two quarters would indicate a little of that but at the end of the day, we think it.
Those companies that of have their own infrastructure to be able to do.
Last mile delivery at <unk> and installations at.
It's a positive certainly that would prove it companies have done that retailers are and it worked out for us it at all but we're excited about what we can do with it.
Thank you very much happy holidays best regards same for you.
Your next question from at the vitality of for lots of Marco Your line is now open.
Yes, Hi, Richard good afternoon.
You at you know you much at freight I was hoping you could if I just look at more color on the headwind in Dan you talked about an improvement maybe coming in March any any more color behind that.
No not really you know before each call I'll sit down one of the head of merchandising and some of the other senior people in merchandising just get the color on their departments and what's going on and you know it was a by the way comment that you know with a oh things coming from Asia as an example, there or in general.
Container shortages and so it may take a few extra days to get things onto a two to a ship or should I go sailing not fall in some cases are at the same thing is on some of the big ports in the United States like ER on.
On the West coast, particularly at their words.
They they mentioned two to four days of delay it again today for US is a it's not a lot, but when you're moving of inventory fast you want to have at once as Youve ordered at you want at Dolton put on the shipment of yet here at onto our floor.
[laughter], so it's kind of big deal it and any kind of was I said, what will improve and said probably not until February March. So I just that's why throughout.
No not any more impactful for that.
Okay, and then I just had a question on 'em on E Com and just digital strategy generally any updated thoughts on buy online pickup at store I mean, it has essentially kind of become a standard offering crossing is free and we've obviously accelerated a lot of that don't digital adoption I'm just curious as to whether you know your everything.
Not at all.
We're not rethinking it we continue to look at it and scratch our heads a little bit.
But at this juncture, we we don't have any current plans to do so.
Okay, and just lastly for you at fuel I think gross profit per gallon. This quarter was probably up you know quite a bit I mean I look at the open state. It looks like maybe double is at about right and then what the gallons sold due this quarter.
Oh, we don't gallons sold were down not down as much as they had been at its trough for a few months ago, and ER and ER and you're right on margins, but not at double I can't give you any quantitative number there.
But in terms of margins were up year over year as a percent at.
At gallons were down year over year.
Okay. Thank you.
Sure.
And your next question from Chris Horvers of JP Morgan.
Thanks, Good evening, so one of the fall, but not at the holiday poll for question was curious for the merchants are thinking of.
About how the season progresses, particularly as we get close to Christmas. Some retailers think that you know given the debt earlier cut off time to to get the gifts at a time for Christmas that there could be at you know big brick and mortar surge I think other retailers are saying that now what you've seen us started like with per.
Prime day, and you know it.
It's just been of pull forward. So don't expect anything out of the end use out of anything unusual close to Christmas. So clear curious what your margins are thinking.
Well merchandise or feeling pretty I'd say aggressive with a small way.
They feel that again some of it was pulled forward, but there's still a good.
Running out of so of gift wrapping paper two weeks before you wanted to is not the end of the world, but every sales as a sale that we want.
At the same token bring in fundamental items that if you end up having a few extra skews or a few extra quality of certain skews. The day after Christmas it's not going to kill you because it's not stuff that seasonal that has to be mark down at a big way. So I I think that we're going into it.
Recognizing that our sales.
Sales overall, particularly brick and mortar have have done well that oh, we're basing our assumptions of what we're going to do that over the next two weeks or price.
Sales of relative to us.
Recognizing that said there could be some of that.
Pull forward and there could be some because of the day, it's got a little longer on shipping, but at the end of the day, we see that you're a we agree with you that could help the the at the in store experience and we'll see.
Got it and then in terms of.
The trial, but you called out of travel in gross margin as a as a big impact there or is there something around the county of that I.
Haven't called that out prior maybe it was just because it's a relative to other things and the ancillary business, but is there an accounting thing is there seasonality to that end and what do we expect that to you know sort of get worse for some reason.
Well what becomes make you do just like in the 10-K, you got to put the <unk> you've got a ranking of an order of dollar. So if they used to in the case of travel first of all at the very high gross margin of business to these debt that we're simply acting as a broker like our car rentals.
There's sales and no cost of sales equals gross margin or very little cost of sales.
Only would we curated item intake.
Ownership of it you will like 100 crew ship weeks or whatever of making US example, up where you know you. So you know $100000 or something and make a few thousand dollars or $5000 of margin at that's a 5%, but you have big chunks of that business that are 80 plus percent margin. So as you know is a business that you have started to show a little bit of low.
Life of as December we entered December, but with the spiky of cold weather for the last several weeks.
That has dissipated or quite a bit.
And some of the life, even some of the life that occurred at a sober were bookings out.
As a at for Christmas some of those are being canceled as you would expect them to be so it's that's just it's the rank order of them, which wouldn't hit harder a little bit.
Got it and then and then at the last question is you know on price gaps relative to peers in club and end and.
At grocery how how are you what do you what.
I have have they widened where do you see them now I think if you go back to you know this own nine time frame, where sort of lap peaked food at home inflation and you lap. Some you know food at home.
While at gains at you seem to get more aggressive on price. So just wanted to get your thoughts on where you see the price gaps now and you know how you're thinking about that end to 21.
Well I mean, we look when we look at our comp shops compared to other warehouse clubs as well as the comp shops at really on certain items and other traditional retail formats, we feel very very good about our competitive.
Moat, if you will.
And of we don't think Thats an issue at all for US right now, but we're the ones that he pushing it.
For pushing the limits further.
Got it have a great season guys. Thanks. Thank you.
And next question from Robert Moskow of Credit Suisse.
Thanks for the question Richard you mentioned that manufactures Ah I guess for packaged goods or they're not promoting as much at getting as many discount its usual because they don't have to us.
At any point do you think that can flip the other way and if so what do you what would drive it is it just the mail ability of supply or maybe a more intense competitive environment.
Gosh, when I find out I'll, let you know.
You know at <unk>, what's happened of course with everything you need a straight for both the strength of the electronic items Tvs.
Airplanes and everything else of between.
And laptops and the day the demand for those things is your Dormice end in some cases, some shortages of supplies of general even of capacity is going up at kind of go up a lot more so.
It's hard to say.
Okay I was thinking more on the lines of packaged food we've heard some categories putting promotions back end do you have any insight into that.
Okay, I I don't I'm sorry.
Okay all right. Thank you.
And next.
Oh, that's mark [laughter] core I us Arnie.
Record high at Hey, it's Greg Melich I think that was me [noise].
So really two questions. One was there any grocery inflation showing up at least CCP I know.
For gross per capita plus promotion what are you guys seeing there.
Very very very little.
Uh huh.
So the number but it's nothing like four.
For a 5% some of those other numbers, we see out there Oh, it's not even a percent.
Very very very little three.
Three of Aries.
I want people to a non cash so that the special dividend congratulations or.
It net special and getting it done at <unk>.
What you should be back a little under 10 billion of cash what's the right number that you want to run the business with.
Either still during cove at or even on the other side of it.
Well keep in mind, you know, there's a chunk of it that is you know, we can't debit and credit card receivables that could be a billions and billions of half there's.
There's the.
Upwards of just under a billion that is related to at church captives into like there's a two to 3 billion that overseas in different countries, which is.
For whatever reasons, it's the last one for you want to bring back because of whatever withholding your other taxes related to it.
So you know at the end of the day.
You know someone asked the question.
After we announced the kind of dollar revenue we could have done more the answer is we could of but why rush I mean right now we still don't know what's going to happen with covert at what May happen next year and the economy and so we'll probably have a little more cash than the normal then free covered if you will but that's okay too.
Okay, and then last could you just where average rage rates today, just sort of level set for that but we know the covert up of thanks for that helping us there but.
Where are we now before all of that.
You mean, the average U.S. hourly wage yeah.
Yes.
I think we're in the for it.
The end well X the $2 yeah, we're at the were either right above or just approaching $24.
Average at the us.
Mhm.
Or some 24 in the U.S. and so well see.
For me.
And of the changes for the base rates going up that was too you did that that was completed when.
And Mark I believe last year, Mark last Mark last March beginning of March I think well know for getting the parts of the market 20 net March of 2018 I believe it was near the beginning of March whatever that Monday start for net weekly pay period was or biweekly day varied and that was $2 across the board.
Right.
A couple of at stuff up at.
Excuse me.
The covered it was on top of the the actual wage rate.
Yes.
Right got it okay, great well good luck have a great holiday.
Thanks, you too.
And next call Sandy from Rep expiring, Jeff Oppenheimer.
It is now open.
Good evening. Thanks for taking my question. So I went I wanted to ask for US. There are just some of the countries, where you have lower covert infections I, China, Australia seems to be normalizing now on the Haas purchasing behavior in those markets returned back to where it was maybe free pandemic I'm guessing Australia at probably a better read than China.
They're both of their stronger comps.
From a category perspective have you seen the category shift or I guess, maybe where they were pre pandemic. If you look at the mix.
No.
Well I don't have that detailed at friendly Unfortunately, and when I look at comps by country in local currencies.
We're in most countries we're back to normal.
If not a little better.
Okay. Okay.
Okay, Great and then just on the you asked us given we've seen spikes in infections in California at time.
For research has recently put in place just curious if you can just comment on anything you're seeing more recently just in terms of changes in consumer behavior of Tropic tier of stores at the only thing that I that I noted is is that you know when it first started a few weeks ago or one of the California. You know everybody was waiting for the California and in California, everybody was waiting to.
For what the new restrictions for is going to be in terms of Lockdowns. There was a spike in shopping.
And people are coming in so we we had particular strength or a couple of week period.
When when more spiking was occurring.
Okay, great. Thank you have a great holiday.
Thank you too.
Well, we thank you for us and so well take two more questions Andy.
Yes, our next question from Kelly Bania F.B.M.L. capital.
Great. Thanks for fitting fitting me in here.
Richard just want to go back to the buy online and.
Pick up at store question I know you've said for several quarters now you continue to scratch your head, but it does seem like a lever that maybe you could pull one day, that's already been pulled by a pretty much everybody else and retail, but I guess just given the massive growth at you've seen with Instacart and your third party partners there.
They're just us clearly see seemed to be a segment of your get your membership base, that's willing to pay a premium or or that mark up for that service. So I'm just curious if you.
Got about even a mark up type structure for pick up or even like a higher price point membership for a pickup type service.
Oh, well as it relates to general conversations about it.
Those are types. Those are topics that are discussed one of the challenges right. Now is there's a lot of the buy online and pickup in store traditional retail promotions are at the same price is what you come in at buy at for so somebody is paying for the the picking it up and the <unk> and <unk>.
The story at waiting for you to pick it up.
You know I think that will shake out to over time as people you know as as companies you know somebody has to pay for it either of the company or the customer.
Well I'm not trying to be cute. We're just you know we're looking at all those things, but we haven't made any decisions to go forth with it.
Okay, and just maybe a quick follow up you mentioned the seven per cent E com.
Penetration from us sales perspective, but just curious if you could share just a per cent of your maybe membership households that are engaged with Costco you know from at digital ecommerce perspective, yes.
Yeah, we don't give out that information yet.
Okay. Thanks.
Thanks.
As you might expect growing thing for us.
For of course.
And your last question from staff, let's think of Jeffrey.
Hey, good afternoon, everyone and thanks for squeezing of then I just want to follow up on reported earlier question, but at a slightly different way when looking at your cohort of number of joint then they found at.
The third quarter of last year, any performing at things Dan or category next to think saying that might give you encouragement that that was not great Nike that mark picky going forward or might be a bit longer lifetime value of happened. That's for you as a teacher thinking we don't have a lot of that information yet what we you recognizing that some of.
Of them signed up because of covert end because we can deliver you know through instacart for fresh at.
And Oh are we can we can serve them online.
But there's not a lot to go on yet.
Okay. Thank you.
Well, thank you everyone.
Hopefully you have a happy and healthy holiday season at the onto a better 2021.
Good day.
[noise] [noise].
[music].
Oh.
[music].
[music].
[music].