Q2 2021 Costco Wholesale Corp Earnings And February Sales Call

March 4, 2021

[music].

Ladies and gentlemen, thank you for standing by and welcome to Q2 earnings call end February sales conference.

I would now like to hand, the call over to your speaker today, Mr. Richard Galanti, you may begin your conference.

Thank you Brenda and good afternoon to everyone I'll start by stating the these discussions will include forward looking statements within the meaning of the private Securities Litigation Reform Act of 1995 of these statements involve risks and uncertainties that may cause actual events results or performance to differ materially from those indicated by such statements the risks and uncertainties.

But are not limited to those outlined in today's call as well as other risks identified from time to time in the company's public statements and reports filed with the SEC.

Forward looking statements speak only as of the day to day are made and the company does not undertake to update these statements except as required by law.

In today's press release, we reported operating results for the second quarter of fiscal 2021. The 12 weeks ended February 14th as well as February retail sales results for the four weeks ended this past Sunday February 28th.

Reported net income for the quarter was $951 million or $2.14 per share compared to $931 million or $2.10 per diluted share last year.

The results included a $246 million pretax or at 41 cents per diluted share and costs incurred primarily from COVID-19 premium wages.

Net sales for the quarter increased 14, 7% to $43 eight $9 billion from $38 to $6 billion a year ago in the second quarter cash.

Comparable sales for the second quarter of fiscal 'twenty, one were as follows.

For the 12 week period of U S comps were reported at 11, 4% and excluding gas deflation and FX.

12, 6%, Canada reported at 13, 4% ex gas deflation in the FX 10, 6% other international reported at 21, 5% ex gas deflation and FX at 17, 7%. All told total company reported at 13, 8% and ex gas.

Deflation in FX 12, 9% <unk>.

E Commerce on a reported basis was 75, 8% and ex FX at 74, 8%.

In terms of the second quarter comp sales metrics or traffic or shopping frequency increased 1% worldwide end up two 7% in the us on a year over year basis during the quarter of.

Our average transaction or ticket was up 11, 9% total company and eight 5% in the us during the second quarter.

Foreign currencies relative to the US dollar positively impacted sales by approximately 110 basis points and gasoline price deflation negatively impacted sales by approximately 100 basis points.

I'll review our February retail sales.

The sales results a little bit later in the call joining us.

The income statement membership fee income.

Came in reported at $881 $5 million of two point of 1% compared to $816 $4 million of $2, one 3% in the quarter of year ago, So at $65 million or 8%.

Excluding the impact of ex FX, the $65 million increase would be $56 million, which would represent a six 9% increase excluding the impact of FX.

No openings occurred in fiscal in.

In the second fiscal quarter. Both this year end last year the fiscal quarter.

In terms of renewal rates at the U S and Canada renewal rate came in at as of Q2 at 91, 8% as of Q2 end. This was up 110th of a percent from the 99% at the end of the prior fiscal quarter worldwide. Our total company renewal rates were 88, 5% as of Q2 end also up 1%.

At the 1% from from the prior quarter's number of 88, 4%.

In terms of the number of members as of Q2 end, both member households, and cardholders.

In terms of households at Q2 end, we came in at 59 points of $59 7 million of.

Up from $59 1 million 12 weeks earlier and total card holders of $108 3 million up from $107 1 million at 12 weeks earlier as of Q2 end paid executive members were $23 8 million an increase of 506000 during the 12 weeks since Q1 end.

Moving down the income statement to the gross margin. This year's gross margin came in at 10, 96% two basis points lower than last year's second quarter on a reported basis of $10 nine 8% excluding debt, yes deflation it would've been 11 basis points lower.

As I always ask you do a little chart here shows some of the components of margin.

The two columns reported and the second column without gas deflation. The first line item would be core merchandise on a reported basis.

Our merchandize margin year over year was came in at plus 71 basis points ex gas deflation plus 63 basis points second line item of ancillary businesses minus 53 basis points, and then without gas minus 55 to.

The 2% reward minus six at minus five.

Other minus 14 in minus 14, so all told on a reported basis year over year and minus two basis points and again ex gas deflation minus 11 basis points.

So as you can see from this chart at the core merchandise component was higher by the ex gas deflation by 63 basis points similar to the last several fiscal quarters sales penetration of shifted to the core business, resulting in higher contribution of our total gross margin dollars coming from the core operations versus a year earlier.

Looking at the core merchandise categories at a relation of only two of their own sales core on core of fuel margins year over year or higher by 71 basis points.

The fresh foods was again the biggest driver here with strong sales in fresh we benefited from the efficiencies.

Efficiency gains in labor productivity and significantly lower spoilage.

That being said the other three major merchandise categories, food and sundries, <unk> soft lines and hard lines, all had higher margin percentages year over year in the quarter as well.

Ancillary and other business gross margin was lower by 53 basis points and by 55 ex gas deflation in the quarter with most of the negative impact coming from gas and to a lesser extent from the aggregate of travel hearing AIDS pharmacy, and food courts, offset a little bit by a positive impact from E com.

Cost of the logistics, which was our end of.

Our <unk> acquisition, a year ago impacted ancillary margins by six basis points to the negative.

2% reward you can see was impacted negatively the.

The by five basis points, implying that more of higher penetration of our sales are coming from at the executive membership group.

In other us the minus 14 basis points. All of this is attributable to the cost of COVID-19, or about $60 million of the $246 million. Previously mentioned these are the direct cost for incremental wages allocated to our manufacturing production and fulfillment operations.

Moving on to SG&A, our reported SG&A in the second quarter was higher or worse year over year by 11 basis points on a reported basis coming in at 989% versus $9 seven 8% of your earlier the minus 11 ex gas deflation at would've been at minus three.

Again doing a little short of the comparison with two columns, both reported and without gas deflation first line item would be operations.

Plus 31, so lower or better by 31 basis points of core operations was on a reported basis without gas deflation plus 38, so lower or better by 38 basis points central minus three basis points at minus two.

Stock compensation, plus three and plus three and other minus 42 and minus 42, yeah. Those columns up on a reported basis again SG&A was higher year over year by 11 basis points in ex gas deflation higher by three.

The core operations component when you look at that was better by 31 or 38, excluding the impact from deflation SG&A in the core excluding the COVID-19 related expenses, which I'll discuss in a moment with significantly leveraged with the strong core merchandise sales increases central again minus two ex gas deflation stock comp plus three both small year over.

The year basis points changes together pretty much awash and other was at minus 42 basis points hit to SG&A, which were incremental wage and benefit costs related to COVID-19 or $186 million of that $246 million total amount. So 60 of the million dollars of the $2 46 at hits the margin in 186 of the 236 hits SG&A.

I'd like to take a minute here and discuss our COVID-19 related expenses and how they are changing effect of this past Monday March 1st over the past 12 month period March 2020 through February 2021, companywide, we expanded approximately 1 billion of $60 million pre tax.

And COVID-19 related items of this amount approximately $825 million related specifically to the $2 an hour extra out of repay the remaining $200 million plus was made up of several other items, including the few months period, where employees 65 and older with paid to stay home. This was early on during the original lockdowns at cleaning.

The mass supplies paying wages to several weak for several weeks to our third party demo service employees.

Assisting employees with pay child care leave which continues.

With the $2 an hour of extra pay having been paid for full year that extra amount has been discontinued as of this past Sunday February 28th and effective March one a few days ago, we have implemented a permanent wage increase for hourly employees as well as most salaried warehouse employees.

In the U S and Canada, we are permanently increasing our starting wage and most wage steps above that by a dollar an hour and increasing our top of scale hourly wage by 45 cents an hour on top of the previously planned 55 cents an hour increase for top of scale.

With these changes our entry level hourly wages will increase from 15 at $15 50, an hour to 16 and $16 50, an hour similar type of increases are occurring in other countries, where we operate.

With this change along with the reduction <unk> elimination of several components of the $200 million plus expenses I just discussed.

Going forward basis, the $1 billion plus the expense over the past 12 months will be reduced by a little over one half of starting March one at which.

At the beginning of week three of the current fiscal third quarter.

Next on the income statement is preopening expense at pretty.

Pretty much the same year over year. This year came in at $9 million compared to last year's $7 million. So 2 million higher at both fiscal quarters. There were zero openings, although this relates to.

Upcoming openings as well.

All told reported operating income for the second quarter of 2021.

Including the $246 million mentioned earlier showed an increase of five 8% coming in at $1 340 million. This year compared to 1 billion $2 66 last year.

At the operating income line interest expense was $40 million this year versus $34 million last year.

Interest income and other for the quarter was lower by $26 million year over year interest income itself was lower by $19 million due to lower interest rates. Additionally, FX and other was lower by $7 million.

Overall reported pre tax income in the second quarter was up three 3% coming in at.

The 1 billion 319, this year compared to $1 277 of your earlier in terms of income taxes, our tax rate in the second quarter was 26, 4% of little higher than the 25, 9% recorded in Q2 of last year.

For all of 'twenty, one based on our current estimates which of course. These are always subject to change we anticipate at our effective normalized total company tax rate for the fiscal year to be in the 26% to 27% range.

A few other items of note in terms of warehouse expansion as I mentioned.

There were no openings in Q2, there were eight net new openings in Q1. So we're eight year to date in the second half of the fiscal year, both this quarter and the fourth fiscal quarter. We plan to open 13 more net new units five of those will be in the US three will be in Canada, and five will be in the overseas.

Regarding capex.

In the second quarter of fiscal 'twenty, one we spent approximately $573 million of.

Our full year Capex spend is still estimated in the three to $3 $2 billion range.

Moving on to E Commerce E Commerce sales overall for the quarter ex FX increased 75% year over year.

At the stronger departments over the counter pharmacy.

Garden, and patio, small electrics health and beauty and majors, including consumer electronics.

Total online grocery grew at a very strong rate in the second quarter. The comp numbers just mentioned follow our usual convention our usual convention.

Each excludes our third party same day grocery program, which was up 450% year over year in the quarter. If we include the third party same day in our E comm comps at the 76% reported comp number would have been 96%.

Costco logistics, formerly known as undeveloped continues to feel fill a greater percentage of our delivery.

And delivery.

Items and has steadily increased since its acquisition a year ago March.

In Q2, we made at our priority to enhance our white Glove service, which includes assembly of complex installation is now standard on many items and offered US an upgrade on many others.

Turning to COVID-19, and some of the issues of impact surrounding it we continue to interest to enjoy strong core merchandise sales I think our buying.

The teams have done a great job keeping our buildings of the stock despite outsized demand on some items and some supply chain challenges as well.

From a supply chain perspective overseas trade has continued to be an issue in regards to container shortage and port delays. This has caused the timing delays on certain categories, including furniture sporting goods lawn and garden, and even some food and sundries items like seafood of imported cheeses and oils we.

We expect these pressures to ease in the coming months.

But it's impacting everyone of course.

Regarding the pressures from high consumer demand. The examples of areas, where we have some supply issues on the non food side certain electronics due to the chip and component shortages like Tvs computers, and smart home related items ex.

The size of equipment bikes, and outdoor activity of items lawn and garden items and appliances on the food side can beverages have some shortages.

Due mostly to the aluminum mccann issue of shortages.

Bacon.

Is up 45% in pounds and so for whatever reason there is a lot of demand there. So there's a little bit of a challenge there at clubs surface cleaning wipes and standardizing sprays and some paper goods fresh foods overall is looking pretty good.

Our three warehouse curbside pickup test next.

The house Curbside pickup testing Albuquerque is ongoing we don't really have a lot to add at this time as the test is recent and continuing the pilot's going well of members have responded to it and basket size and of <unk>.

<unk> surpassed our expectations. Our focus of course is how can we be more efficient at doing at determined.

If this offering can be some scalable and make economic sense for us.

Turning to our February sales results. The four weeks ended this past Sunday February 28th.

Compared to the same period last year.

As reported in or at least net sales for the month of February came in at $14 5 billion an increase of $15.

The increase of 15, 2% from $12 2 billion last year.

Again going down the numbers that were in the release on the US on a reported basis were up on the <unk>.

Same store sale basis were up 10, 3%, that's both reported and without gas and FX cash.

Canada reported 21, 6% ex FX 15, 7%.

The other international 25 seven.

FX at 26 total company $13 eight reported ex gas and FX $12 three.

Within those numbers E Com 91, 1% reported and without gas and FX 89, 4% as with the quarter. These numbers with the.

He kind of numbers would be higher if we included the third party the.

Same day fresh.

When we discussed last year's February sales results, we pointed out that the fourth week last year had a big uptick in sales that's kind of was at the beginning of what we felt was a little bit of consumer pressure for consumers to buy end for fear of Lockdown again, primarily related to the consumers buying ahead of the anticipated COVID-19 lockdowns and closures.

That positively impacted last year's February sales by approximately three percentage points. Similarly sales in week four of this February of this week week four of this year February were lower as we anniversaried at unusually strong weak from a year ago. The estimated negative impact to the February month was approximately three five percentage points. So the ripple.

The numbers of 13, eight and ex gas and FX at 12, three would have been higher.

Excluding that impact.

Our comp traffic of our frequency from February was flat to last year worldwide and up seven tenths of a percent in the us.

Again, the sudden impact of that last week.

Worldwide. The average transaction was up 13, 8%, which included positive impacts of 140 basis points from FX and 10 basis points of the gas inflation.

Foreign currencies year over year relative to the dollar benefited February comps in Canada by 540 basis points other international by approximately 570 basis points and total company by 140 basis points.

Gas price inflation again positively impacted total reported comp sales by about 10 basis points, whereas the average selling price was about a percentage point higher year over year.

In terms of regional and merchandising categories of the general highlights U S regions with the strong results were southeast Midwest and Texas.

Internationally in local currencies, we saw the strongest results in Korea, U K and Japan.

Moving to merchandise highlights at the following comp sales results by category for the month of these exclude the positive impact of FX.

The sundries were in the positive high single digits departments with the strongest results were at liquor.

At the frozen foods and cooler.

<unk> lines were positive and the high Twenty's better performing departments of our toys and seasonal sporting goods hardware and majors, which would get us both white goods end consumer electronics for the most part soft lines were up and also up in the low twenties better performing departments included the housewares small appliances and home furnishings.

And finally fresh foods were up in the low twenties better for me departments included meat and Deli.

Ancillary business sales as mentioned earlier were down and they were down in terms of sales in the mid single digits in February primarily due to year over year lower year over year sales and food court hearing AIDS and gasoline.

Overall, a relatively good fiscal second quarter impacted of course by Covid expenses impacted both plus and minus by various aspects of our business due to Covid and certainly as I mentioned in the ancillary guests at the biggest of the ancillary hits.

Finally in terms of upcoming releases, we will announce our March sales results for the five weeks ending September Sunday April 4th on Wednesday April 7th after the market close with that I will open it up to Q&A and turn it back to winter.

Thank you, Sir and some of them.

Minder to ask the question you will need the press star one on your telephone.

Your first question is from Michael Lasser of UBS.

Line is open.

Good evening, Richard Thank you for taking my question.

First question is on the gross margin expansion the Costco at during the last quarter.

We knew that at.

Flow.

Kind of give back a lot of the growth margin could shrink kind of go up all of the.

Is that come along with double digit comp.

Go away or is there anything at Costco has learned that at now doing differently.

It will allow us the hold on the gross margin point.

Well first of all of it I don't think it would do anything dramatically, we're going to do anything dramatically different I mean, we're already pretty aggressive at a lot of things and of course well.

We're always trying to drive sales with aggressive value and pricing.

Probably the one area of which can be of challenges there will be of challenge at some point us fresh the particular strength in fresh foods for the <unk>.

Last several quarters on a year over year basis has been the strong fresh as led to.

Higher labor productivity, which is part of the cost component of that if you will manufacturing businesses as well as the lower spoilage or what we call damage and destroyed.

In many cases given the strength.

Youre not throwing away as much stuff at the end of the day of week and you're again being <unk>.

Much more productive from a labor efficiency standpoint at some point that will subside as is my guess.

Beyond that we feel pretty good about our ability to be very competitive in price.

Along that way.

Okay.

And the going on the the way going forward the billion dollar plus.

A little by store.

Mark.

Given the.

The permanent wage increase.

Okay.

Of the billion dollar the 500 million of.

The.

Costco of incurred over the last four quarters and that kind of go away.

Even though we do.

The wages will be increasing your SG&A dollars should go down.

Well the FCA and then as I mentioned earlier.

The COVID-19 related premium wages of the $2.

At 800 plus million.

The piece of that hit margin because of our manufacturing businesses. The labor involved in the manufacturing side of its part of the cost of sales.

So.

Again, if you looked at those proportion I think on the 246, we said 60 related to margin hit end.

At $241 86 related to SG&A hit.

A symbol of guests would be you could take that type of percentage of these numbers and apply quarterly at maybe a little bit more to SG&A.

Those percentages.

And so yes, if you look at if you looked at the $1 billion 60 that we talked about and we say of little over half. So the simple math would suggest at a little.

A little over half of that should should come back, although we'll stop talking about COVID-19 related expenses to us we've now anniversary that.

Understood. Thank you Dan Richard.

Your next question is from Simeon Gutman with Morgan Stanley. Your line is open.

Hey, Richard how are you. My first question is also on gross margin can you I just wanted to clarify because there was a big swing in the reported number of core on core looked pretty pretty healthy very similar to the prior quarter. You said I think plus 71, and so the big swing here was pretty much mostly gas are all gasoline and can you remind.

US when does the gasoline margin compare peak does it get worse before it gets better.

No.

A year ago in the third quarter, we pointed out that it helped us.

But.

It's Mike.

Mike It's at his guess at is volatile and the profitability of gas goes up and down dramatically, it's a meaningful business for us at.

And as prices go up we generally make less which has happened of late and that I think not just for us, but the supermarket change the other discount stores. The operate change of gas stations and so again directionally tried to point that out at each time.

But there's there's no rhyme or reason it could change on the dime.

Fair enough and I guess just to clarify but it is right. The core it looks like it was consistent with prior quarters at the Big swing in the reported was just then the remainder was mostly due to gas at this quarter right. Why it was down just yet right gets us more than half of all of those other things of those ancillary certainly travel is impacted as you might as you well know right now.

<unk>.

Probably one of the food courts, because we're still not open with seating.

Essentially.

Optical as well so all of those are impacting bagasse was the prime mover. There I was looking back at last year, what we call again, what we call warehouse in the other businesses, which again gets us meaning.

When there are big swings at tends to be yes is the biggest component of that.

A year ago in Q1 versus a year earlier that will be Q1, 'twenty versus 19 that number I don't have the detail in gas, but it was 19 basis points of the positive in Q2 year over year as two of the negative in Q3. It was 21 to the positive in Q4 dollars 70 ones of the negative. So you can see it fluctuate this year in the first quarter was 22 of the negative and now for us.

The five to the negative and again, there's a lot of components of that number not just gas the gas generally at tims tends to be the big mover there.

Okay. That's helpful. And then my follow up question Us on SG&A. If you look at SG&A year to date, So Q1 and Q2.

And you exclude all of the premium pay right, where you're excluding it from this year even from last year. It looks like SG&A is still taking a step up year over year, the tire than what looks normal like in prior years and I don't think that's incremental wage changes I don't know if there's anything else that's changed in the business. This year to date from an SG&A perspective.

You'll have easier comparisons because of the premium stuff starts coming up in the back half, but is there any reason why you structurally stepped up in the first half of this year.

Dollar.

Oh of dialogue.

Well I think it's the strong sales as a percentage of sales ex actually I think youll find the goes directionally better.

Okay Yeah.

Are you looking at.

Yes, I am looking at us.

Core operations for all of fiscal 'twenty versus all of the fiscal 19 net.

Gas deflation basis was lower or better by 25 basis points again, that's not we separate we separate out of that below the quarterly stuff or the unusual stuff.

Covid stuff, but the core business was lower at lower or better SG&A percent by 25 basis point for the entire year. This year in the first two quarters. It was plus 62 of them plus 38. So that's on average 50.

Fair enough okay.

Thank you Richard.

Yeah.

Your next question is from Chris Wetherbee.

J P. Morgan your line is open.

Thanks, Good evening, so I wanted to follow up on the February commentary. So the last February February of 2020, you did at a nine end that last quarter. You did at 12, then that last week at at 300 basis point so.

Of that would suggest you would get about 20 and that the last week of February.

And just running the math that would suggest that you were just slightly down.

It was 350 basis points of headwind down maybe.

Unlike our stack basis stack basis, maybe like one of 2% is that right.

No I think I agree with what you said about last year. This year in the first three weeks were a little over 17 in the last week brought that 17 down to 13 eight right.

Okay. So yes. So you were down maybe I explained at.

Differently each year, but yes the.

Basically the 30 day reported.

From the first three weeks was at.

2017.

In the fourth week caused it to be at 13 eight from the whole four weeks.

Right. So sorry, you cut of that right. So you come down high teens basically so that.

So as you as you look at it it's interesting because.

But at the same time as you look forward the comparisons remain tough, but you also meet our traffic in your stores quite aggressively I mean, I think peers are up.

Double digits.

It appears were up double digits.

In the month of March and April and Youre actually down April. So can you talk about to what degree do you think you actually left.

On the table as we think about just trying to model out against these comparisons going forward.

Well I can't speak for others.

We're frankly thrilled with our sales numbers that are in how we've done over the course of the last year.

As you look at both March and our fiscal third quarter March this giant step up in sales and traffic in courting. If you will by customers starting the week four of February and lasted through about $2 five weeks into March. So we'll talk about at specifically when we report March sales as it relates to the.

The fiscal quarter, which is essentially mid February to mid May I don't have the exact dates in front of me, but that 12 week period.

<unk> not only that tough comparison for those 335 weeks, which include <unk> for February and at least one two part of three at March but also when there was a lockdown and offsetting that and kind of late March into April and even early may we had some very tough compares and so that will make it.

All things being equal an easier comparison, so I think theres going to be at plus or minus debt probably add up to about even we will see.

The next challenge of course will be Q4, which is the mid may through the end of August.

That's when we enjoyed comps in the 12% to 15% range on an ongoing basis into September and October as well, but for Q4, where we saw a lot of strength not only on the food side, but on the non food side as people are buying things for the home as they weren't traveling going to sporting events and the like.

Okay and I just wanted to follow backup on the end of February math, sorry, the delay of this but.

It was where you actually at modestly positive end in that last week at just under Comped, the average and at <unk>.

Got it down Mark.

Mostly positive.

Yes got it.

Understood Thanks very much.

Yes.

Your next question is from Charles Grom with Gordon Haskett. Your line is open.

Hey, Thanks, a lot of Richard.

That's kind of what has been a drag on the top line.

But when you look at your business geographically and overlay that with markets that are maybe a bit farther along in the reopening process. Just I'm wondering if you've noticed any improvement in gas gallons.

Sure.

You are.

A little bit overall I mean at.

Gas gallons year over year I think in February of the quarter.

In the quarter were down 9%, 10%.

Which is an improvement relative improvement.

And within that some of the regions in the South, Texas, Florida, you've seen.

Better improvement.

Okay, great. Thank you and then just on the balance sheet inventory dollars are up <unk>.

2017, roughly 17% at was a little bit ahead of sales.

I guess, how are you feeling about the currency of inventory as we transition out of current insurance of some of the spring items.

Yeah, we.

Made a conscious effort.

A couple of months ago, I think even on the last quarterly call, we talked a little bit about some of the challenges with port delays both on the.

The the farm side of the.

At the merchandise is coming from as well as the ports along the West Coast of North America in particular and container shortages. So we were frontloading and not everything came in short. So we are frontloaded items that are not seasonal items of frontloaded.

Extra of inventory of basics, and so I'm not concerned about that at all.

Got it thank you.

Your next question is from Mike Baker of Dave.

Your line is open.

Hi, Thanks, I just wanted to ask about your view on inflation versus pricing in the.

And the market one of your big competitors talked about being satisfied with their price gaps, which maybe means there'll be a little bit of less pricing pressure out there. So how do you think about that and again, how do you think about inflation. Despite mid year at sort of moderating a little bit, but now as the commodity cost back up maybe it goes up again from here.

Well I'd say in the last several months, we've seen a little more inflation than we had in part because of some of the container shortages freight costs were a little higher there is some high demand items or product shortages due to the supply chain in general that have gone up.

When asked on a broad stroke basis on some of these items.

What type of inflation, we're seeing.

Sometimes as much as 2% to 4% sometimes less than that.

And.

Amit it's trended upward in the mid singles.

<unk>.

In the high singles, Yes, that's why Bacon I mentioned Bacon and.

And and but we feel good about our competitive ability.

Yes, we always want to be the last to raise in the <unk>.

<unk> raised in the first of lower end, but we feel again as you look at our margins we feel good about where our margins are coming in at our ability to be very competitive out there.

Okay that makes sense. So are we seeing a panic buying and bacon, yet or are we not at that point, yet probably tomorrow, because I mentioned at exactly.

There Tonight.

Thanks, Jeff.

Yes. Thank you.

Your next question is from Karen short with Barclays. Your line is now open.

Hi, Thanks.

I wanted to get back to the U S.

SG&A and or I guess, the gross margin question. So when I look at the EBIT growth. This.

This quarter versus sales growth and I back out COVID-19 costs.

Second quarter was by far.

Narrowest GAAP.

So three Q4 Q1 Q.

<unk> like you are a third of what you were at <unk>.

Like half of them more than half of the or less than half of what you were in four Q3 Q. So it clearly is a question of like the gross profit dollar growth versus the SG&A growth alright. So I guess I'm wondering can you just talk through that at a little bit Mark sure in.

In this quarter or just us.

Somewhat glaring.

Yeah, well I think again kind of gets back to gas.

The gas as a high sales dollar number and the impact to us.

Somebody put me on mute please.

Yes.

The impact of the gas is both dollars.

And average price to a lower gross margin as well.

And that is.

That's really the biggest the biggest piece of it.

Right, but I'm talking EBIT dollar growth, excluding COVID-19 costs versus the sales. So I guess, yeah, yeah, I mean, I guess sales I have to adjust for gas, but it still seems like a very widespread.

Well.

Again without without being without being specific to the dollar specific the biggest dollar impact year over year of profitability of what I mentioned at these various pluses and minuses with gas, okay and it's the combination.

It's a 10 of 10 ish percent piece of our business.

Which had a lower gross margin and lower dollar price per gallon Bob.

All of those things.

In terms of lower sales lower profits.

That's impacted.

Okay, and then just turning to the forward look on gross margin, obviously, appreciating the fact that strength and the fresh strength will hurt.

Margins as we get into the next couple of months, but ancillary said I guess help offset.

Some of that of appreciating gaffney.

You can't predict that but can you maybe talk through the dollar buckets of.

Gross profit dollars in the other categories within ancillary.

Well, yes.

True.

Travel should improve recognizing how much will of approval wait to see but it's starting to improve a little bit.

Food courts will improve at the same thing as we start to.

We put out seeding and expand the spend what we offer there.

Now when that occurs and how that occurs we're not sure of it probably the do it in certain regions first and go from there of gas is the big unknown in the day guesstimate of which direction. It goes each week.

But we will again try to point that out to you.

Hearing you here, we've seen the Peru, we have 18 of period improvement in hearing aid in optical.

Okay and then just last one from me is there any impact of the SG&A dollars from the enhanced white glove service the to call out.

This margin.

There is a better efficiencies, although keep in mind, we've really grown this fat the facet of taking out of some of our existing not only of the department has grown dramatically in the last year.

We were using third parties for a lot of it.

And we continue to push more on there and to improve the service to lower the price.

So I think you should see that should continue to improve but it was not without its cost to accomplish all of that in the last quarter.

Okay. Thank you.

Your next.

Question is from Paul of is Citigroup. Your line is open.

Everyone in the spring and shoot him on for Paul I was wondering if we could circle back on the inflation question and kind of go through some of the puts and takes of.

Inflation items that you'll be anniversarying.

Coming up in the coming quarters.

Okay.

Well I don't think we're anniversary any of them soon it's just starting to happen in the last month or two.

And again a lot of it has to do in our view you had.

You've had a little bit of of inflation over the last year with us.

Things like paper goods, because there's just the huge demand and the shortages, but in terms of some of the recent things with the container shortages and port issues.

Some supply issues on chips and components of big ticket items.

Cost of steel or us up.

50% to 100%.

The.

All of those things impact that I think it's more if this has happened in the last several months versus a year ago.

Got it can you quantify the impact of freight costs at some of the container of issues head on this most recent quarter.

I can't off the notes that I have in front of me.

Anecdotally if you look at what is the cost per container coming over at used to be.

It's up 10% to 15%.

Okay. That's helpful.

That's it from the thank you.

Yes.

Sure.

The next question is from Scott My skin of RFID capital. Your line is open.

Yeah.

Hey, guys. Thanks for taking my questions.

I kind of wanted us to think about the base of a more strategically Richard and the understand we went through a period, where you did the Citibank deal and then.

You guys can talk too much about it but you really expanded your fresh offerings, which I think help the clubs and drive store traffic.

I'm wondering if you think about the business over the next couple of years, and we think about kind of self help initiatives, where do you think.

There are some levers that you guys can pull.

Well I think the.

The first of all at some of them are ongoing at Kirkland signature continues to be something that will continue to increase.

The.

The offerings that we do.

The RNA giant 1 billion dollar ones items like theirs.

A handful of items like paper towels toilet paper of water that are huge.

The K cups, and those things that are in the one hundreds of millions of dollars, but theres lots of twenties hundreds out there and we continue to do that.

With all kinds of quality organic.

The packaged food items as well.

Sure.

I think one of the things that we've seen from some of our.

Some of our vertical integration is starting to pay off.

Got the chicken the facility at full capacity now we've got a great.

Bakery commissary.

We at two years ago, we opened a second meat plant.

We're seeing some improvement from that we're also starting to identify items that historically, we manufactured in one place generally of the United States and then shipped all over the world.

Whether it's roasting of nuts.

<unk> and cashews.

Yes.

And doing that at bringing all of that product from where it's grown to the us for roasting and packaging and then shipping out worldwide. We now have a supplier in Asia that is doing all of the needs for Asia, Australia and dramatically, we're able to dramatically reduce the price and drive.

Sales and drive bottom line dollars for us.

We're doing that with all kind of we're looking at all kinds of avenues to do that with.

From paper goods.

Things like that as well. So I think these are long term opportunities, but there should be there should be a lot of them over the over the.

Over the next several years of.

Also E com.

Notwithstanding our start back in the early two thousands.

We like everybody has become more important over the last year in particular.

Approaching 10% of our business and.

And continuing to grow nicely and we're driving we're getting better at doing it and.

And getting more clicks.

And the like in that regard.

So I think E Commerce, and then the big and bulky our acquisition of <unk> last March.

All of <unk> seen now we've pointed out I think for the last three fiscal quarters of six or seven basis point hit to gross margin as it relates to the manufacturing business of service business at goes and ultimately back into our cost of sales what that net cost.

Notwithstanding the fact that that has helped drive sales of big and bulky items in fact lowered the prices to our members on some of those items. So we think that thats.

At.

As expected it was going to be earnings dilutive at the.

At the operation standpoint for the first couple of years.

End defined there, but more as importantly, if not more importantly of growing big and bulky as part of our business. We're seeing big continued big increases from mattresses to white goods to exercise equipment, notwithstanding the fact that theres been some shortages in some of those items.

That's great. Thanks for all the color of that was perfect.

Yeah.

Your next question is from Scott <unk>.

At any of RBC capital markets. Your line is open.

Thanks, Good afternoon guys.

So as you guys get food inflation on meat pork et cetera are price increases there of direct pass through to the customer or do you guys tried to be sticky on some of your price is the way you have been with brief history of Chicken for example, yes.

What I don't think it will be as extreme as the old Chicken example, from 15 years ago or are we stuck with the continue to stay at 499 and figure out ways, how to do that but certainly we are.

We want to be the last we want to be as sticky as possible and hold off and wait until our cost of.

It has come through the system.

But overall, particularly on an on.

Fresh items those price is probably changed more often than not both at traditional supermarkets as well as the Costco some of the world.

Got it and then.

In fact at the other thing I want to mention is is we're a little unique in terms of our product mix. When you look at it we're selling.

Part of our our meat business as <unk>.

<unk>.

And those of the types of things, where we can get.

Our strong margin for us and show you the greater savings because the markups of traditionally on something like that special items are even higher at traditional retail outlets.

So we think overall, we're in good stead in that regard.

That's helpful of Richard and then you did mentioned Youre of chicken plant in us.

I think it's been for a bit fully up and running are you generating the efficiencies you guys are originally anticipated.

When you first went down that road.

We're pretty close I mean, we are at full production at which is similar there's been some.

Puts and takes the.

As we built it we decided to put in additional things that we think provide for a higher quality product.

Like are showing and things like that.

The COVID-19 expenses certainly of impacted us more than nobody at planned for it so that of course.

So that should improve over the next year.

Ah.

I think it's the.

Of the feed costs, we've been fortunate historically.

The first year, we were fortunate feed costs are coming up a little bit, but we're also finding that the chickens are growing a little better than we thought and so all of those things add up to we feel pretty good about it.

Great. Thank you very much.

2000.

Your next question is from Greg Melick.

Evercore ISI your line is now open.

Hi, Thanks.

I wanted to start just to clarify the inflation.

At the risk of being the fourth comment on it at.

You said that there are items that are that are higher right, but the 2% to 4% comment Richard was that the saying what you actually think it is now and your average ticket or is that sort of saying some items or in other words as well.

Would you estimate the whole back it's like one or 2% right now.

Yes, some categories in that two to four range and some are little I mentioned or like meat and pork are a little higher than that produce is flat but.

We don't do LIFO anymore, but I think if you look at our costs on average the view is probably.

The flat to up one five.

Somewhere in that range and Thats the gas Okay fair.

Fair enough thanks for that clarification.

Is.

What.

You went through the renewal rates I guess at.

As youre thinking about at now.

What do you think you can really get renewal rates too and maybe maybe tie it in with some of the other things you have to really drive loyalty like like the the credit card program.

Any update there in terms of what sort of engagement you have of at what percentage of customers our sales around the card to help us.

I understand where that the renewal rate could be trending.

Sure well look.

What we internally call. The Triple play is not only getting sort of become a member but to upgrade to the executive member and then to apply and get the.

The Citi visa card recognizing that not everybody that applies for our guests at based on credits.

Net credit decision is made by issuing bank not by us.

Yes.

And.

The.

I'm, sorry, I lost my train of thought right.

We will range in terms of the premium renewal rate.

As we do add people to the credit card and the executive membership both of those things tend to increase.

Provide for a more loyal or the customer or a high renewal rate also we're doing more things to get you to auto renew whether it's on the Citi visa card or working on from other areas right now as well to the extent we.

Get you the auto new by almost a factor of if theres going to be a higher renewal rate on those as well first and foremost.

Ultimately if the the things we do to make you want to.

The remain a member of Costco, we think debt.

Some of those things like upgrading to executive membership, which we've shown you continues to be part of our quarterly positive there.

As well as getting more people to auto renew.

Can you hear me.

Okay.

Not at any sorry, sorry.

Sorry, we heard that.

And then last is there any help on travel bookings of any sort of a glimpse of there or is that still depressed.

It is coming back but at the same thing I said back in the spring and the summer when there were some easing of Covid statistics and people were starting to book out for Christmas and even into the winter and spring of 2021, but they did at knowing that there was generally full cash.

Cancellation capabilities.

We're now seeing at and as you might expect many of those things were canceled.

Now we're seeing the same thing again, we've also.

Travel the appointment, we're doing pretty well relatively speaking on car rentals and as it relates to.

Travel and hotel bookings, we have added some additional domestic items in Mexico items for the domestic for the U S domestic market as well.

Yeah, Hawaii, Mexico are pretty strong.

Again within the relative framework there are some $4 five store things that we've gotten in the other parts of the world, which we can talk to us the few years ago, but so.

We're optimistic it's going to come back.

And the expected and we've certainly I think improved our offerings.

Excellent.

Putting in higher pressure monitors across from the Bacon.

Going forward there.

Hey, guys. Good luck.

There is of fast food.

Retailer out there that has the interesting name for that anyway, why don't we have two more questions.

Okay.

Your next question is from the British Canyon well your line is now open.

Hi, This is Spencer hanus on for Greg.

My first question is how should we think about how much of the.

Of the share gains that you had this year you will retain.

And then the low single digit comp in the last week of February how did that compare to your to your internal expectations.

Really the answer to the last question first I mean, we.

All we knew us as that week four of February compared to a year ago and weeks, one and two and part of the three of March we're going to be tough compares.

I think we actually did a little better than we thought but still at a low number given the strength of a year ago.

And I'm sorry, what was your first question.

The market share.

The TV market share look at the end of the day some of it is going to be sticky and some of it's not.

We all personally hope that restaurants will reopen and we'll all be able to go out in the.

Joining us socialized that will impact retail food sales at Costco in supermarkets, and the likes to some extent.

That being said there are other.

Retail formats, whether it was restaurants and food that of closed for good.

Apparel retailers of other general merchandise retailers. So in some ways some of the stickiness. Unfortunately relates to certain of certain aspects of retail that of closed for good and some of them will be that they've gotten more comfortable of buying some of these things from from.

From the likes of Costco.

Hope, we lose some of it to the.

The examples of restaurants, and the like and other stores that were impacted as the it can reopen and.

But I am sure debt, we will end up keeping a little bit of at as well.

Yeah.

That's helpful and then for the new members debt you've recruited during COVID-19.

Or are they different than previous cohorts and are you expecting to see renewal rates in line with the overall company average.

Whenever we sign of a member of if you look at our 90 point whatever percent renewal rate in the us and Canada that includes.

Some 10 year plus members that are 93 or four of 5% and includes some members of that.

In the last two years that might be mid seventy's to many of these so youll always from your zero to your one of the renewal it's going to be a lower rate in here when do you or two it's a combination of.

Two year members plus some new one year members picks at renewal rate up some of them.

I guess at some of these new ones again, theyre going to follow the format.

The other thing though is in some cases, we think we've gotten new members, sometimes in markets, where we don't even operate physical stores not a lot, but we can't help it can't hurt.

Got it thank you.

The last one.

Your next question is from.

Good day Sperry Oppenheimer. Your line is open.

Good afternoon, and thanks for taking my question. So Richard I just wanted to ask you just about E. Commerce fulfillment capacity. If you guys are obviously registered very strong growth. The last several months. So just curious where you guys are from the.

At the fulfillment perspective, and whether you would expect to see us top up of an investment going forward.

Well I think there has been a step up in the last couple of years US continue this year, we are building additional fulfillment as we speak fulfillment capability.

We're getting better at it but so is everybody thats.

<unk> seen this kind of wild growth.

In some ways, we think it may be easier for us because of the fewer items. We're doing the two day grocery still through our business centers, which works pretty smoothly.

So.

It is a larger percentage of the three ish billion, we spend every year than it used to be but certainly the biggest single percentage is still opening new warehouses.

Okay, Great and then maybe just one follow up question. So clearly you guys thought about I'm.

Sorry go ahead.

In addition to physical capital expenditures Theres also at capital expenditures, which is part of our Capex as well and there is a lot of investment in that around everything from e-commerce from mobile app to fulfillment and the like.

Okay, Great and then just given give at the announcement on the increase of minimum wages.

Do you see any of other levers going forward that can offset some of the some of the wage pressures that we've seen maybe on a multiyear basis in your business.

You know from the beginning of I used to think about that question of 30 years ago end.

We find US is that we're always able to because we've got a great employee base and that of hard working and loyal and no debt we care we as of.

Company.

Cared about.

I think that we feel that we've seen.

Over the years everything from inventory shrink to the labor productivity certainly we measure these things too, but yes labor productivity and a lot of it has to do with coming up with ideas many of which of these ideas come from our employees that are on the ground. If you will working in the meat department figured out how to be more efficient with.

Pounds per hour per labor hour. So we've always figured out ways not worried about let's figure out how to save at and then we can give us pass it onto them, let's pass it on and we will get there from an efficiency standpoint, and it seems to have worked for us.

Yes.

Things like where.

We're now have self checkout end.

60, or 70% of our 558 cost goes in the us it'll.

It'll be at virtually all of them and we're seeing it in other countries as well.

That's the savings that took us a while to the lead part of it in the figure it out I think we're on.

The third.

Format of at the version of it but it's working in our environment. The way we want at two and we see savings there. So we're constantly figuring of those things out.

Attribute a lot of that too.

Many of these good ideas don't come from the rooms here at the office they come from the people out on the floor.

Okay, great. Thank you.

Yeah.

The next question is from Edward Kelly with Wells Fargo. Your line is open.

Hi, Richard Thanks.

Yes.

I just wanted to go back first of all on the ancillary gross margin.

<unk> talked about gas being a bit more than half. So the remainder of pandemic related I guess 15 to 20 basis points.

That drag being consistent there since the pandemic began so if I look back over the the other quarters whatever sort of <unk>.

There will just be the gas moment.

Yes.

Yes, I think it was worse last year in Q3 end, but it's been similar it's improving a little right now, but still negative year over year. The big Delta as you had gas and quarters, where we talked about gas was a big positive at.

At offset more than offset some of these other negatives.

Alright, Okay. So we of that coming back from like normalized Dan when you look at the other.

<unk> of the gross margin.

How much of that is going to come back because the the 16.

The increase play a role there so should I assume only that comes back.

Well I think from simple math, we talked about the $2 46 for this quarter in total for Covid related end of that 60 impacted margin.

The <unk> 60 over 246, whatever that percentage is a little over a little under 25%.

And on an annual basis, we talked about the $1 billion 60 at a little over half so just take half of that.

That's kind of the net improvement of pretax improvement in margin from that.

I'm sure if theres other outliers will explain them to you as we go into each quarter.

Some of the things.

That's the easy one because it is big and we know what we're doing with at the end.

Loans are how quickly will travel comeback travel is a very high margin low SG&A business.

Food courts.

It will improve dramatically once we get tables out there everywhere and that's not going to happen tomorrow afternoon, but it's going to happen God willing over the next several months.

Okay, and just one last one for you so on the core.

Historically, the core margin really hasn't been up.

It's obviously doing very well right now.

Going forward I mean, you could still have maybe mix benefit from things like stimulus, but don't we eventually just sort of assumed at what we've seen over the last few quarters.

At a normalizes back to pre Covid level.

Take the margin down by by that amount.

Aye.

I feel a little stronger than that in terms of the positive I think that on the fresh side, yes at some point when you have your tougher year over year compares youre not going to get.

Those big basis point improvements from spoilage and labor productivity now some of it though at these new levels you have more productivity, we're not going to necessarily lose at all but if it's a tough compare you'll lose a little you'll lose some of it. So yes on some of the other categories, particularly as we increase growth of signature as we sell of certain things within fresh set of specialty items.

Where we can get a full margin showed even greater savings in some cases some of the vertical integration some of the things I mentioned like the nuts and cashews. These are all little things, but those tend to offset some of those things I'm not suggesting we're going to keep at all but I think that we're going to do better than people than the question is of concern about.

Great. Thank you.

Thank you.

Well, thank you for listening.

We're all here if you have any additional questions you know who we are at.

And have a good afternoon.

Thank you Brenda.

Youre welcome Sir ladies and gentlemen. This concludes today's conference call. Thank you for participating you may now disconnect.

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Ladies and gentlemen, thank you for standing by and welcome to the Q2 earnings call end February sales conference.

I would now like to hand, the call over to your speaker today, Mr. Richard Galanti, you may begin your conference.

Thank you Brenda and good afternoon to everyone I'll start by stating the these discussions will include forward looking statements within the meaning of the private Securities Litigation Reform Act of 1995 of these statements involve risks and uncertainties that may cause actual events results into our 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 at the company's public statements and reports filed with the SEC forward looking statements speak only as of the day. They are made and the company does not undertake to update these statements except as required by law.

Today's press release, we reported operating results for the second quarter of fiscal 2021 the <unk>.

In two weeks ended February 14th as well as February retail sales results for the four weeks ended this past Sunday February 28th.

Net income for the quarter was $951 million or $2 14 per share compared to $931 million or two.

$1 10 per diluted share last year. This year's results included a $246 million pre tax or at <unk> 41 per diluted share and costs incurred primarily from COVID-19 premium wages.

Net sales for the quarter increased 14, 7% to $43 eight 9 billion from $38 to $6 billion a year ago in the second quarter comp.

Comparable sales for the second quarter of fiscal 'twenty, one were as follows.

For the 12 week period of U S comps were reported at 11, 4% and excluding gas deflation and FX.

12, 6%, Canada reported at 13, 4% ex gas deflation and the FX 10, 6% other international reported at 21, 5% ex gas deflation and FX at 17, 7% of.

All told total company reported at 13 point of <unk> percent and ex gas deflation and FX 12, 9%.

E Commerce on a reported basis was 75, 8%.

And ex FX 74, 8%.

In terms of the second quarter comp sales metrics or traffic or shopping frequency increased 1% worldwide end up two 7% in the us on a year over year basis during the quarter.

Our average transaction or ticket was up 11, 9% total company at eight 5% in the us during the second quarter.

Foreign currencies relative to the US dollar positively impacted sales by approximately 110 basis points in cash.

Gasoline price deflation negatively impacted sales by approximately 100 basis points.

I'll review our February retail sales.

The sales results a little bit later in the call joining.

Moving down the income statement membership fee income.

The team in reported at $881 $5 million of two point of 1% compared to $816 $4 million of $2, one 3% of the quarter of year ago, So at $65 million of 8%.

Excluding the impact of ex FX, the $65 million increase would be $56 million, which would represent a six 9% increase excluding the impact of FX.

No openings occurred interest in.

In the second fiscal quarter. Both this year end last year the fiscal quarter.

In terms of renewal rates at the U S and Canada renewal rate came in at as of Q2 at 91% as of Q2 end. This was up 110th of a percent from the 99% at the end of the prior fiscal quarter worldwide. Our total company renewal rates were 88, 5% as of Q2 end also.

<unk> of 1% from from the prior quarter's number of 88, 4%.

In terms of the number of members as of Q2 end, both member households, and cardholders.

In terms of households at Q2 end, we came in at 59 points of $59 7 million up from $59 1 million 12 weeks earlier and total cardholders of $108 3 million up from $107 1 million at 12 weeks earlier.

As of Q2 end paid executive members were $23 8 million an increase of 506000 during the 12 weeks since Q1 end.

As I always ask you do a little chart here shows some of the components of margin.

The two columns reported and the second column without gas deflation first line item would be core merchandise on a reported basis.

Our merchandize margin year over year was came in at plus 71 basis points ex gas deflation plus 63 basis points second line item ancillary businesses minus 53 basis points, and then without gas minus 55 to.

The 2% reward minus 6% of minus five.

Other minus 14 in minus 14, so all told on a reported basis year over year minus two basis points and again ex gas deflation minus 11 basis points.

So as you can see from the chart. The core merchandise component was higher by the ex gas deflation by 63 basis points similar to the last several fiscal quarters sales penetration of shifted to the core business, resulting in higher contribution of our total gross margin dollars coming from the core operations versus a year earlier.

Looking at the core merchandise categories in relation of only two of their own sales core on core of fuel margins year over year or higher by 71 basis points.

The fresh foods was again the biggest driver here with strong sales in fresh we benefited from the efficiencies.

Patiency gains in labor productivity and significantly lower spoilage.

That being said the other three major merchandise categories, food and sundries, <unk> soft lines and hard lines, all had higher margin percentages year over year in the quarter as well.

Ancillary and other business gross margin was lower by 53 basis points and by 55 ex gas deflation in the quarter with most of the negative impacts coming from gas and to a lesser extent from the at.

Because of travel hearing AIDS pharmacy, and food courts, offset a little bit by a positive impact from E com.

Cost of logistics, which was our interest.

Our <unk> acquisition, a year ago impacted ancillary margins by six basis points to the negative.

2% reward you can see was impacted negatively the.

The by five basis points, implying that more of higher penetration of our sales are coming from at the executive membership group.

And other us the minus 14 basis points. All of this is attributable to the cost of COVID-19, or about $60 million of the $246 million. Previously mentioned these are the direct cost of incremental wages allocated to our manufacturing production and fulfillment operations.

Moving on to SG&A, our reported SG&A in the second quarter was higher or worse year over year by 11 basis points on a reported basis coming in at $9 eight 9% versus $9, 7% to 8% of your earlier the minus 11 ex gas deflation at would've been at minus three.

Again doing a little short of comparison with two columns, both reported and without gas deflation first line item would be operations.

Plus 31, so lower or better by 31 basis points of core operations was on a reported basis without gas deflation plus 38%, so lower or better by 38 basis points central minus three basis points at minus two.

Stock compensation, plus three and plus three and other minus 42% and minus 42, yeah. Those columns up on a reported basis again SG&A was higher year over year by 11 basis points ex gas deflation higher by three.

The core operations component when you look at that it was better by 31 or 38, excluding the impact from deflation.

And the core excluding the COVID-19 related expenses, which I'll discuss in a moment with significantly leveraged with the strong core merchandise sales increases central again minus two ex gas deflation stock comp plus three both small year over year basis points changes together pretty much awash and other was at minus 42 basis points hit to SG&A.

Which were incremental wage and benefit costs related to COVID-19 or $186 million of that $246 million total amount. So 60 of the million dollars of the $2 46 at CIT.

The margin in 186 of the 246 hits SG&A.

I'd like to take a minute here and discuss our COVID-19 related expenses and how they are changing effect of this past Monday March 1st over the past 12 months period March 2020 through February 2021, companywide, we expanded approximately 1 billion of $60 million pre tax.

And COVID-19 related items of this amount approximately $825 million related specifically to the $2 an hour extra out of repay the remaining $200 million plus was made up of several other items, including the few months period, where employee of 65 and older would pay to stay home. This was early on during the original Lockdowns at clean.

The MFS supplies paying wages to several weak for several weeks to our third party demo service employees.

Assisting employees with pay child care leave which continues.

With the $2 an hour of extra pay having been paid for full year that extra amount has been discontinued as of this past Sunday February 28th and effective March one of few days ago, we've implemented at a permanent wage increase for hourly employees as well as most salaried warehouse employees.

In the us and Canada, we are permanently increasing our starting wage and most wage steps above that by of dollar an hour and increasing our top of scale of hourly wage by 45 cents an hour on top of the previously planned 55 cents an hour increase for top of scale.

With these changes our entry level hourly wages will increase from 15 and $15 50, an hour to 16 and $16 50, an hour similar type of increases are occurring in other countries, where we operate.

With this change along with the reduction <unk> elimination of several components of the $200 million plus expenses I just discussed.

Going forward basis, the $1 billion plus expense over the past 12 months will be reduced by a little over one half of starting March one at which.

At the beginning of week three of the current fiscal third quarter.

Next on the income statement is preopening expense pretty.

Pretty much the same year over year. This year came in at $9 million compared to last year's 7 million. So 2 billion higher in both fiscal quarters. There were zero openings, although this relates to.

Coming openings as well.

All told reported operating income for the second quarter of 2021.

Including the $246 million mentioned earlier showed an increase of five 8% coming in at $1 340 million this year compared to $1 266 last year.

The operating income line interest expense was $40 million this year versus $34 million last year.

Overall reported pre tax income in the second quarter was up three 3% coming in at $1 319, this year compared to $1 277 of your earlier.

As of income taxes, our tax rate in the second quarter was 26, 4% of little higher than the 25, 9% recorded in Q2 of last year.

A few other items of note in terms of warehouse expansion as I mentioned.

There were no openings in Q2, there were eight net new openings in Q1. So we're eight year to date in the second half of the fiscal year, but at this quarter and the fourth fiscal quarter. We plan to open 13 more net new units five of those will be in the US three will be in Canada, and five will be in the overseas.

Regarding capex.

In the second quarter of fiscal 'twenty, one we spent approximately $573 million of.

Our full year Capex spend is still estimated in the three to $3 $2 billion range.

Moving on to E Commerce E Commerce sales overall for the quarter ex FX increased 75% year over year.

Few of the stronger departments over the counter pharmacy.

Garden, and patio, small electrics health and beauty and majors, including consumer electronics.

Total online grocery grew at a very strong rate in the second quarter. The comp numbers just mentioned follow our usual convention, our usual convention, which excludes our third party same day grocery program, which was up 450% year over year in the quarter. If we include the third party same day in our E comm comps at the 76% reported comp number would have been 96%.

Costco logistics, formerly known as <unk> continues to fill fill a greater percentage of our deliveries.

And delivery of.

Items and has steadily increased since its acquisition a year ago March.

In Q2, we made at our priority to enhance our white Glove service, which includes the assembly of complex installation is now standard on many items and offered US an upgrade on many others.

Turning to COVID-19, and some of the issues of impact surrounding it we continue to enjoy to enjoy strong core merchandise sales I think are buying the.

Teams have done a great job keeping our buildings of the stock despite outsized demand on some items and some supply chain challenges as well.

From a supply chain perspective overseas rate has continued to be an issue in regards to container shortage and port delays. This has caused the timing delays on certain categories, including furniture sporting goods lawn and garden, and even some food and sundries items like seafood of imported cheeses and oils.

We expect these pressures to ease in the coming months.

But at its impacting everyone of course regarding.

The size of equipment bikes, and outdoor activity of items lawn and garden items and appliances on the food side, Ken beverages have some shortages.

Due mostly to the aluminum mccann issue of shortages.

Bacon.

Is up 45% in pounds and so for whatever reason there is a lot of demand there. So there's a little bit of a challenge there of.

At clubs surface cleaning wipes and sanitizing sprays and some paper goods fresh foods overall is looking pretty good.

Our three warehouse curbside pickup to us next.

Warehouse curbside pick up testing Albuquerque is ongoing we don't really have a lot to add at this time.

The test us recent and continuing the pilot's going well of members have responded to it and that's the size of.

<unk> surpassed our expectations. Our focus of course is how can we be more efficient at doing at determined.

At this offering can be some scalable and make economic sense for us to us.

Turning from our February sales results before we extended this past Sunday February 28th.

Compared to the same period last year as reported or at least net sales for the month of February came in at $14 5 billion, an increase of 15 point, an increase of 15, 2% from $12 2 billion last year.

Again going down the numbers that were in the release on the US reported basis were up on the same store sale basis were up 10, 3%, that's both reported and without gas and FX, Canada reported 21, 6% ex FX.

Five 7%.

The international 25, 7%.

Ex FX of 26 total company 13, eight reported ex gas and FX $12 three.

Within those numbers E Com 91, 1% reported and without gas and FX 89, 4% as with the quarter. These numbers with the.

He kind of numbers would be higher if we included the third party.

Same day fresh.

When we discussed last year's February sales results, we pointed out that the fourth week last year had a big uptick in sales that's kind of was the beginning of what we felt was a little bit of consumer pressure for consumers to buy end for fear of Lockdown again, primarily related to the consumers buying ahead of the anticipated COVID-19 lockdowns and closures.

At that positively impacted last year's February sales by approximately three percentage points. Similarly sales in week four of February. This week week four of this year February were lower as we anniversaried at unusually strong weak from a year ago. The estimated negative impact to the February month was approximately three five percentage points. So the report.

The numbers of 13, eight and ex gas and FX at 12, three would have been higher.

Excluding that impact.

Our comp traffic or frequency for February was flat to last year worldwide and up seven tenths of a percent in the us.

Again with some impact of that last week.

Worldwide. The average transaction was up 13, 8%, which included positive impacts of 140 basis points from FX and 10 basis points of the gas inflation.

Gas price inflation again positively impacted total reported comp sales by about 10 basis points, whereas the average selling price was about one percentage point higher year over year.

In terms of regional and merchandising categories of the general highlights U S regions with the strong results were southeast Midwest and Texas.

Internationally in local currencies, we saw the strongest results in Korea, U K and Japan move.

Moving to merchandise highlights at the following comp sales results by category for the months of these exclude the positive impact of FX food and sundries were in the positive high single digits departments with the strongest results were at liquor.

The frozen foods and cooler hard lines were positive and the high Twenty's better performing departments were toys and seasonal sporting goods hardware and majors, which again as both white goods end consumer electronics for the most part.

Soft lines were up and also up in the low twenties.

Better performing departments included the housewares small appliances and home furnishings.

And finally fresh foods were up in the low twenties better for me departments included meat and Deli.

Ancillary business sales as mentioned earlier were down they were down in terms of sales in the mid single digits in February primarily due to euro lower year over year sales and food court hearing AIDS and gasoline.

Finally in terms of upcoming releases, we will announce our March sales results for the five weeks ending September Sunday April Force on Wednesday April 7th after the market close with that I will open it up to Q&A and turn it back to winter.

Thank you Sir. Thank you reminder, to ask the question you will need the press star one on your telephone.

Your first question is from Michael Lasser of UBS. Your line is open.

Good evening, Richard Thank you for taking my question. My first question is on the gross margin expansion at Costco.

The last quarter.

Okay.

Flow.

Kind of give back a lot of the gross margin gain could shrink is going to go all of the efficiencies that come along with double digit comp.

Go away or is there anything at Costco has learned that at.

Now doing differently at.

Will allow us to hold on the gross margin point.

Well first of all I don't think were doing anything dramatically, we're going to do anything dramatically different I mean, we're already pretty aggressive on a lot of things and of course well.

We're always trying to drive sales with aggressive value and pricing.

Probably the one area of which can be of challenges there will be of challenge at some point as fresh the.

The particular strength in fresh foods for the last several quarters on a year over year basis has been the strong fresh has led to higher labor productivity, which is part of the cost component of that if you will manufacturing businesses as well as lower spoilage or what we call damage and destroyed.

In many cases given the strength.

Youre not throwing away as much stuff at the end of the day of week and you're again being much more productive from a labor efficiency standpoint at some point that will subside as is my guess.

Beyond that we feel pretty good about our ability to be very competitive in price.

Along that way.

Okay.

And the going on the the way going forward the $1 billion.

We do a little by store.

At March for.

Given the.

The permanent wage increase so we can do.

Okay.

The 500 million of.

The extent talk to at incurred over the last four quarters and that is going to go away.

Even though.

The wages will be increasing.

The SG&A dollars should go down.

Well the SGA and then as I mentioned earlier the <unk>.

The wood related premium wages, the $2 that 800 plus million.

The piece of that hit margin because of our manufacturing businesses. The labor involved on the manufacturing side Thats part of the cost of sales.

And so.

Again, if you looked at those proportion I think of the $2 46, we said 60 related to margin hit.

To <unk> at 186 related to SG&A hit.

The simple guests would be you could take that type of percentage of these numbers and apply the quarterly maybe a little bit more to SG&A.

Those percentages.

And so yes, if you look at if you looked at the $1 billion 60 that we talked about and we say of little over half. So the simple math would suggest at a little.

A little over half of that should should come back, although we'll stop talking about COVID-19 related expenses to us we've now anniversary that.

Understood. Thank you Dan Richard.

Your next question is from Simeon Gutman of Morgan Stanley. Your line is open.

US when does the gasoline margin compare peak does it get worse before it gets better.

No.

A year ago in the third quarter, we pointed out that it helped us.

But.

It's Dan.

Mike It's at his guess at is volatile and the profitability of gas goes up and down dramatically, it's a meaningful business for us and as prices go up we generally make less which has happened of late and that I think not just for us, but the supermarket change the other discount stores the operate change of gas stations.

And so again Directionally I tried to point that out of the chime.

But there's there's no rhyme or reason it can change on a dime.

Fair enough and I guess just to clarify but it is right. The core it looks like it was consistent with prior quarters. The big swing in the reported was just then the remainder was mostly due to gas in this quarter right why it was Dan yes, yes.

I guess as more than half of all of those other things those ancillary certainly travel has impacted us as you well know right now.

Probably one of the food courts, because we're still not open with seating.

Essentially.

The optical as well so all of those are impacting bagasse was the prime mover. There I was looking back at last year, what we call again, what we call warehouse in the other businesses, which again gets us meaning when the big swings at tends to be yes is the biggest component of that at.

A year ago in Q1 versus a year earlier that'd be Q1, 'twenty versus 19 that number I don't have the detail in gas, but it was 19 basis points of the positive in Q2 year over year as two of the negative in Q3. It was 21 to the positive in Q4 dollars 70 ones of the negative. So you can see it fluctuate this year in the first quarter was 22 of the negative and now 55.

To the negative and again, there's a lot of components of that number not just gas the gas generally tends to be the big mover there.

Okay. That's helpful. And then my follow up question Us on SG&A. If you look at SG&A year to date, So Q1 and Q2.

And you exclude all of the premium pay right, where you're excluding it from this year even from last year. It looks like SG&A is still taking a step up year over year, the tire than what looks normal like in prior years and I don't think that's incremental wage changes I don't know if theres anything else that's changed in the business. This year to date from an SG&A perspective.

You will have easier comparisons because of the premium stuff starts coming up in the back half, but is there any reason why you structurally stepped up in the first half of this year.

All of them.

Dollar.

Dan.

Well I think it's the strong sales as a percentage of sales ex actually I think youll find it goes directionally better.

Okay. Yeah, I was just looking at yes.

Yes, I'm looking at.

Core operations for all of fiscal 'twenty versus all of us who might 19.

Ex gas deflation basis was lower or better by 25 basis points again, thats not we separate we separate out of that below the quarterly stuff or the unusual stuff.

The COVID-19 stuff, but the core business was lower at.

Lower or better SG&A percent by 25 basis point for the entire year. This year in the first two quarters. It was plus 62 of them plus 38. So that's on average 50.

Fair enough okay.

Thank you Richard.

Sure.

Your next question is from Chris Robertson of Jpmorgan. Your line is open.

Thanks, Good evening, so I wanted to follow up on the February commentary. So last February February of 2020, you did at nine and that last where you did the 12, then that last week at at 300 basis points. So that would suggest you did at about 20 and that the last week of February.

And just running the math that would suggest that you were just slightly down.

If it was 350 basis points of headwind down maybe.

Unlike our stack Davis stack basis, maybe like one of 2% is that right.

No I think I agree with what you said about last year. This year at the first three weeks were a little over 17 in the last week brought that 17 down to 13 eight right.

Okay. So yes, we were down.

Maybe I explained it.

Differently each year, but yes the.

Basically the 30 day reported.

Would it from the first three weeks was the low 17.

At the fourth week caused it to be at 13 eight for the whole four weeks.

Right. So you sort of your comp.

So you come down high teens basically so that.

So as you as you look at it it's interesting because.

But at the same time as you look forward the comparisons remain tough, but you also meet our traffic in your stores quite aggressively I mean, I think our peers are up.

Double digits.

It appears were up double digits.

In the month of March and April and Youre actually down April. So can you talk about to what degree of do you think you actually left.

Business on the table as we think about just trying to model out against these comparisons going forward.

Well I can't speak for others.

Frankly thrilled with our sales numbers in our end how we've done over the course of the last year.

Look at both March and our fiscal third quarter March this giant step up in sales and traffic in courting. If you will by customers starting in the fourth of February and lasted through about $2 five weeks into March. So we'll talk about at specifically when we report March sales as it relates to the <unk>.

Fiscal quarter, which is essentially mid February to mid May I don't have exact dates in front of me, but that 12 week period included not only that tough comparison for those 335 weeks, which include for February at weeks, one two and part of three of the March but also when there was a lockdown and offsetting that and kind of.

Late March into April and even early May we had some very tough compares and so that'll make it and our view of all things being equal an easier comparison, so I think theres going to be a plus or minus debt probably add up to about even the we'll see.

The next challenge of course will be Q4, which is the mid may through the end of August.

That's when we enjoyed comps in the 12% to 15% range on an ongoing basis into September and October as well, but for Q4.

Where we saw a lot of strength not only on the food side, but on the non food side as people were buying things for the home as they weren't traveling going to sporting events and the like.

Okay and I just wanted to follow backup on the end of February Matt sorry, the delay at us but.

Where do you actually modestly positive and that in that last week at just under Comped. The average end that brought it down modestly positive.

Yes got it.

Understood Thanks very much.

Yes.

Your next question is from Chuck Grom of Gordon Haskett. Your line is open.

Hey, Thanks, a lot of Richard.

The gas kind of what's been a drag on the top line.

But when you look at your business geographically and overlay that with markets that are maybe a bit farther along in the reopening process just I'm wondering if you've noticed any improvement.

Gas gallons.

Alright.

You are.

A little bit overall I mean at.

Gas gallons year over year I think in February of the quarter.

In the quarter were down 9%, 10%.

Which is an improvement relative improvement.

And within that at some of the regions in the South, Texas, Florida, you've seen.

Better improvement.

Okay, great. Thank you and then just on the balance sheet inventory dollars are up 17, roughly 17% at was a little bit of ahead of sales.

I guess, how are you feeling about the currency of inventory as you transition out of current insurance to some of the spring items.

Yes, we made a conscious effort.

A couple of months ago, I think even on the last quarterly call, we talked a little bit about some of the challenges with port delays.

Both on the.

The.

The foreign side of the.

Extra of inventory of basics, and so I'm not concerned about that at all.

Got it thank you.

Your next question is from Mike Baker of D. A Davidson your line is open.

Hi, Thanks, I just wanted to ask about your view on inflation versus pricing.

Moderating a little bit, but now with commodity cost back up maybe it goes up again from here.

Well I'd say in the last several months, we've seen a little more inflation than we had in part because of some of the container shortages from.

<unk> costs were a little higher there is some high demand items or product shortages due to supply chain in general that have gone up.

When asked on a broad stroke basis on some of these items.

What type of inflation, we're seeing.

Sometimes as much as 2% to 4% sometimes less than that.

Amit it's trended upward in the mid singles.

Pork in the high singles, Yes, that's why Bacon I mentioned Bacon and.

And the and but we feel good about our competitive ability.

Yes, we always want to be the last to raise in the <unk>.

<unk> raised in the first of lower end, but we feel again as you look at our margins we feel good about where our margins are coming in at our ability to be very competitive out there.

Okay that makes sense. So are we seeing panic buying and bacon, yet or are we not at that point, yet probably tomorrow, because I mentioned at exactly.

There Tonight.

Thanks, Yes.

Yes. Thank you.

Your next question is from Karen short with Barclays. Your line is now open.

Hi, Thanks.

I wanted to get back to the S. G.

<unk> I guess the gross margin question. So when I look at the EBIT growth in this quarter versus sales growth and I back out COVID-19 costs.

The second quarter was by far the narrowest GAAP.

So Q4 Q1 Q end.

The <unk> like you were a third of what you were at <unk>.

Yes.

Half of them more than half of the or less than half of what you were in four Q3 Q. So.

I clearly is the question of like the gross profit dollar growth versus the SG&A growth.

So I guess I'm wondering can you just talk us through that a little bit Mark sure in.

In this quarter just us.

Somewhat glaring.

Yeah, well I think again kind of gets back to gas.

Gas is a high sales dollar number and.

The impact to us.

Somebody put me on mute please.

The impact of the gas is both dollars.

And average price to a lower gross margin as well.

And that that's really the biggest the biggest piece of it.

Right, but I'm talking EBIT dollar growth, excluding COVID-19 costs versus the sales. So I guess, yeah, yeah, I mean, I guess sales I have to adjust for gas, but it does still seem like a very widespread.

Well.

Again without without being without being specific the dollar specifics the biggest dollar impact year over year profitability of <unk>.

I mentioned these various pluses and minuses with gas, Okay, and it's a combination it's at.

It's at 10 ish percent piece of our business.

Which had a lower gross margin and lower dollar price per gallon Bob.

Some of those things.

In terms of lower sales lower profits.

That's impacted us.

Okay and then just thank you let the.

Forward look on gross margin, obviously, appreciating the fact that strength and the fresh strength will hurt at times like gross margins as we get into the next couple of months, but.

Hillary said I guess help offset.

Some of that I appreciating Gaffney, you can't predict that but can you maybe talk through the dollar buckets.

Gross profit dollars in the other categories within ancillary.

Well.

Again travel should improve recognizing how much will improve we'll wait to see but it start starting to improve a little bit.

Food courts will improve at the same thing as we start to.

We put out seeding and expand the span of what we offer there.

Now when that occurs and how that occurs we're not going to probably of the do it in certain regions first and go from there gas is the big unknown in the day guesstimate of which direction. It goes each week.

But we will again try to point that out to you.

Okay I hear you here, we've seen the group we have seen the period improvement in hearing aid in optical.

Okay and then just last one from me is there any impact of the SG&A dollars from the enhanced White glove service thing to call out.

This margin.

Yes.

There is a better efficiencies, although keep in mind, we've really grown this fat the fashion of taking some of our existing not only of the department has grown dramatically in the last year.

We were using third parties for a lot of it.

And we continue to push more on there and to improve the service to lower the price and.

So I think you should see that should continue to improve.

It was not without its cost to accomplish all of that in the last quarter.

Okay. Thank you.

Your next question is from Paul of at Citi.

Your line is open.

Everyone in the spring shoot them on for Paul I was wondering if we could circle back on the inflation question and kind of go through some of the puts and takes of.

Cash and items that you'll be anniversarying.

The coming up in the coming quarters.

Well I don't think we're anniversarying any of them soon it's just starting to happen end of last month or two.

And again a lot of it has to do in our view you had.

<unk> had a little bit of of inflation over the last year with on things like paper goods, because theres, just the huge demand and the shortages, but in terms of some of the recent things with the container shortages and port issues.

Supply issues on chips and components of big ticket items.

Cost of steel or us up.

50% to 100%.

All of those things impact that.

I think it's more.

This has happened in the last several months versus a year ago.

Got it.

Can you quantify the impact of freight costs of some of the container issues head on this most recent quarter at.

I can't off the notes that I have in front of me.

I mean anecdotally if you look at what is the cost per container coming over.

He used to be.

It's up 10% to 15%.

Yeah.

Okay. That's helpful.

That's it from the.

Thank you.

Yes.

Sure.

The next question is from Scott Mark skin of RFID capital. Your line is open.

Yeah.

Hey, guys. Thanks for taking my questions.

So I kind of wanted us to think about the base of a little more strategically Richard and understand we went through a period, where you did the Citibank deal and then.

You guys have talked too much about it but you really expanded your fresh offerings, which I think help the clubs and drive store traffic I was wondering if you think about the business over the next couple of years, and we think about kind of self help initiatives, where do you think.

There are some levers that you guys can pull.

Well I think the.

The first of all at some of them are ongoing at Kirkland signature continues to be something that will continue to increase.

The.

The offerings that we do.

The RNA giant 1 billion dollar ones items like the.

A handful of items like paper towels toilet paper of water that are huge.

The K cups, and those things that are in the hundreds of millions of dollars, but theres lots of twenties hundreds out there and we continue to do that.

With all kinds of quality organic.

Packaged food items as well.

I think one of the things that we've seen from some of our.

Some of our vertical integration is starting to pay off.

We've got the chicken facility at full capacity now we've got a great.

E Commerce Sherry.

We at two years ago, we opened a second meat plant we're.

We're seeing some improvement from that we're also starting to identify items that historically, we manufactured in one place generally of the United States and then shipped all over the world.

Whether it's roasting of nuts and cashews.

And yes, and doing the at bringing all of that product from where it's grown to the us for roasting and packaging and shipping out worldwide. We now have a supplier in Asia that is doing all of the needs for Asia, Australia.

And dramatically.

Were dramatically reduced the price and drive sales and drive bottom line dollars for us.

We're doing that with all kind of we're looking at all kinds of avenues to do that with.

From paper goods.

Things like that as well. So I think these are long term opportunities, but there should be there should be a lot of them over the.

Over the next several years.

E Com.

Notwithstanding.

Our start back in the early two thousands.

We like everybody has become more important over the last year in particular.

<unk> approaching 10% of our business.

And continuing to grow nicely and we're driving we're getting better at doing it and.

Getting more clicks.

And the like in that regard.

So I think E Commerce, and then the big and bulky our acquisition of <unk> last March.

All of you see now we pointed out I think for the last three fiscal quarters of six or seven basis point hit to gross margin as it relates to the manufacturing business of service business at goes and ultimately back into our cost of sales would that net thing cost.

Notwithstanding the fact that that has helped drive sales of big and bulky items.

In fact lowered the prices to our members on some of those items. So we think that thats.

Net.

As expected it was going to be earnings dilutive at at the at the operation standpoint for the first couple of years.

That's great. Thanks for all of the color that was perfect.

Yeah.

Your next question is from Scott <unk>.

R&D of RBC capital markets. Your line is open.

Thanks, Good afternoon guys.

So as you guys get food inflation in meat pork et cetera are price increases there of direct pass through to the customer or do you guys tried to be sticky on some of the some of your price is the way you have been with brick history of chicken for example.

What I don't think we will be as extreme as the old Chicken example, from 15 years ago or are we stuck with the continued to stay at 499 and figure out ways, how to do that but certainly we are.

We want to be the last we want to be as sticky as possible and hold off and wait until our cost us.

Come through the system.

But overall, particularly on <unk>.

On fresh items, those price has probably changed more often than not both at traditional supermarkets as well as the Costco as of the world.

Got it and then.

In fact at the other thing I want to mention is we're a little unique in terms of of our product mix. When you look at it we're selling.

Part of our our meat business.

Rhyme.

And those of the types of things, where we can get.

Our strong margin for us and show you the greater savings because the market traditionally on something like that special items are even higher at traditional retail outlets.

So we think overall, we're in good stead net regard.

That's helpful. Richard and then you did mentioned Youre of chicken plant.

I think it's been for a bit fully up and running are you generating the efficiencies you guys are originally anticipated.

When you first went down that road.

We're pretty close I mean, we are at full production at which is similar there's been some sort.

Puts and takes the.

As we built it we decided to put in additional things that we think provide for higher quality product.

Like are showing and things like that.

The COVID-19 expenses certainly of impacted us more than nobody at planned for it so that of course.

Should should improve over the next year.

I think it's the.

Of the feed costs, we've been fortunate historically.

First year, we were fortunate to be trustee of coming up a little bit, but we're also finding that the chickens are growing a little better than we thought and so all of those things add up to we feel pretty good about it.

Great. Thank you very much.

Two of them.

Your next question is from Greg Melick.

Evercore ISI your line is now open.

Hi, Thanks.

I wanted to start just to clarify the inflation.

At the risk of being of course comment on it at.

You said that there are items that are that are higher right, but the 2% to 4% comment Richard was that saying what you actually think of it is now and your average ticket or is that sort of saying some items or in other words as well.

Would you estimate the whole back it's like one or 2% right now.

Yes, some categories in that two to four range and some are little I mentioned or like meat and pork are a little higher than that produces flat but.

We don't do LIFO anymore, but I think if you look at our costs on average the view is probably.

Flat to up one five but.

Somewhere in that range and Thats the gas Okay fair.

Fair enough thanks for that clarification.

Is.

What you.

You went through the renewal rates I guess as you're thinking about it now.

Sure.

What do you think you can really get renewal rates too and maybe maybe tie end with some of the other things you have to really drive loyalty like like the credit card program.

Any update there in terms of what sort of engagement you have with at what percentage of customers. Our sales around the card to help us understand where that the renewal rate could be trending.

Sure well look.

What we internally call. The Triple play is not only getting sort of become a member but the upgrade to the executive member and then to apply and get the.

At the Citi visa card recognizing that not everybody that applies for our guests at based on credits that credit decision is made by issuing banks not by us.

And.

The.

I'm, sorry, I lost my train of thought right.

Our renewal rate in terms of of improving renewal rate as we do add people to the credit card and the executive membership both of those things tend to increase.

Provide for more lawyer or the customer or a high renewal rate also we're doing more things to get you to.

Auto renew whether it's on the Citi visa card or working on from other areas right now as well to the extent, we get you the auto new by almost a factor of if theres going to be higher renewal rate on those as well first and foremost.

Ultimately if the the things we do to make you want to.

Remain a member of Costco, we think debt.

Some of those things, Mike upgrading to executive membership, which we've shown you continues to be part of our quarterly positive there.

As well as getting more people to auto renew.

Can you hear me.

Yes, that's about any sorry, sorry.

Sorry, we heard that.

And then last is there any help on travel bookings any sort of a glimpse of there or is that still depressed.

It is coming back but at the same thing I said back in the spring in the summer when there was some easing of Covid statistics and people were starting to book out for Christmas and even into the winter and spring of 2021, but they did at knowing that there was generally full.

The cancellation capabilities we're.

We're now seeing end as you might expect many of those things were canceled.

Now we're seeing the same thing again, we've also.

The travel Department, we're doing pretty well relatively speaking on car rentals and as it relates to.

Travel and hotel bookings, we have added some additional domestic items in Mexico items for the domestic for the U S domestic market as well.

The Hawaii, Mexico are pretty strong.

Again within the relative framework there are some $4 five store things that we've gotten in other parts of the world, which we can talk to us a few years ago, but so.

We're optimistic it's going to come back.

And the expected and we've certainly I think improved our offerings.

Excellent.

Putting in higher pressure monitors across from the Bacon.

Going forward.

Hey.

Hey, guys. Good luck.

Fast food.

Retailer out there that has us into.

<unk> named for that end.

The way why do we have two more questions.

Okay.

Yeah.

Your next question is from Goodbody Kenyon of Wolfe Your line is open.

Hi, This is Spencer hanus on for Greg.

My first question is how should we think about how much.

Of the share gains that you have this year youll retain.

And then the low single digit comp in the last week of February how did that compare to your to your internal expectations.

Really the answer to the last question first I mean, we.

All we knew us as that week four of February compared to a year ago and weeks, one and two and part of three of March we're going to be tough compares.

I think we actually did a little better than we thought but still at a low number given the strength of a year ago.

And I'm sorry, what was your first question.

Mark.

The TV market share look at the end of the day some of it is going to be sticky and some of us not.

We all personally hope the restaurants will reopen and we'll all be able to go out in the.

Julian socialize that will impact retail food sales at Costco in supermarkets, and the likes to some extent.

That being said there are other.

Retail formats, whether it was restaurants and food that of closed for good.

Apparel retailers of other general merchandise retailers. So in some ways some of the stickiness. Unfortunately relates to certain of certain aspects of retail that of closed for good and some of it will be the they've gotten more comfortable buying some of these things from from.

From the likes of Costco.

Hope, we lose some of it to the.

The examples of restaurants, and the like and other stores that were impacted as they can reopen and.

But I'm sure debt, we will end up keeping a little bit of at as well.

That's helpful and then for the new members debt you've recruited during COVID-19.

The different than previous cohorts and are you expecting the renewal rate in line with the overall company average.

Whenever we sign of a member of if you look at our 90 point whatever percent renewal rate in the us and Canada that includes.

Some 10 year plus members that are 93 or four of 5% and the includes some members that are at.

In the last two years that might be mid seventy's to many of these so youre always from your zero to your one of the renewal it's going to be a lower rate when do you or too it's the combination of <unk>.

Two year members plus some new one year members picks at renewal rate up some of my guess at some of these new ones again theyre going to follow the format.

The other thing though is in some cases, we think we've gotten new members, sometimes in markets, where we don't even operate physical stores not a lot but.

Can't help it can't hurt.

Got it thank you.

The last one.

Your next question is from the dashboard of.

Oppenheimer Your line is open.

From the fulfillment perspective, and whether you would expect to see a step up of an investment going forward.

Yes.

Well I think there has been a step up in the last couple of years US continue this year, we are building additional fulfillment as we speak fulfillment capability.

We're getting better at it but so is everybody thats.

And I've seen this kind of wild growth.

In some ways, we think at maybe easier for us because of the fewer items. We're doing the two day grocery still through our business centers, which works pretty smoothly.

So.

It is a larger percentage of the three ish billion dollars, we spend every year than it used to be but certainly the biggest single percentage of still opening new warehouses.

Okay, Great and then maybe just one follow up question. So clearly you guys thought about sorry.

Sorry go ahead.

In addition to physical capital expenditures Theres also at capital expenditures, which is part of our Capex as well and there's a lot of investment in that around everything from e-commerce from mobile app to fulfillment and the like.

Okay, Great and then just given given the announcement on the increase of minimum wages.

Do you see any of other levers going forward that can offset some of the some of the wage pressures that we've seen maybe on a multiyear basis in your business.

You know from at the beginning I used to think about that question 30 years ago.

We find US is that we're always able to because we've got a great employee base and that of hard working and loyal and no debt we care we as the.

The company.

The cared about.

I think that we feel that we've seen.

Over the years everything from inventory shrink to the labor productivity certainly we measure these things too, but the labor productivity and a lot of it has to do with coming up with ideas many of which of these.

Of these ideas come from our employees that are on the ground. If you will working in the meat department figured out how to be more efficient with pounds per hour per labor hour. So we've always figured out ways not worried about let's figure out how to save at and then we can give at pass it onto them, let's pass it on and we will get there from an efficiency standpoint at.

It seems to have worked for us.

Thanks, Jeff.

Yes, the things like <unk>.

We're now have self checkout in the.

The dollars are 70% of our 558 cost goes in the us it'll be virtually all of them and we're seeing it in other countries as well.

That's the savings that took us a while to the lead part of it and the figure out I think we're on.

The third.

Format of at the version of it but it's working in our environment. The way we want at two and we see savings there. So we're constantly figuring those things out and we.

Attribute a lot of that too.

Many of these good ideas don't come from the rooms here at the office they come from the people out on the floor.

Okay, great. Thank you.

The next question is from Edward Kelly at Wells Fargo. Your line is open.

Hi, Richard.

I just wanted to go back from.

First of all on the ancillary gross margin.

Can you talk about gas being a bit more than half. So the remainder of pandemic related I guess 15 to 20 basis points.

Of that drag been consistent there since the pandemic began so if I look back over the the other quarters whatever sort of our.

Remainder of that would just be the gas moment.

Yes.

Yes, I think it was worse last year in Q3.

But it's been similar it's improving a little right now, but still negative year over year the big.

Delta is as you had gas and quarters, where we talked about gas was a big positive.

At it offset more than offset some of these other negatives.

Right. Okay. So we of that coming back from like normalized and when you look at the other.

Segment of the gross margin.

How much of that is going to come back because the.

The 16 the.

The weighted increase play a role there so should I assume only half of that comes back.

Well I think from simple math, we talked about the $2 46 for this quarter in total for Covid related and of that 60 impacted margin. So 60 over 246, whatever that percentage is a little over a little under 25%.

And on an annual basis, we talked about a $1 60 of the little little over half so just take half of that.

That's the kind of the net improvement of pretax improvement in margin from that.

I am sure if theres other outliers will explain them to you as we go into each quarter.

Some of the things at.

That's the easy one because it's big and we know what we're doing with it.

Unknowns or how quickly will travel come back travel was at very high margin low SG&A business.

Of course.

It will improve dramatically once we get tables out there everywhere and that's not going to happen tomorrow afternoon, but it's going to happen God willing over the next several months.

Okay, and just one last one for you so on the core.

Historically, the core margin really hasnt been up.

It is obviously doing very well right now.

Going forward I mean, you could still have maybe mix benefit from things like stimulus but.

Don't we eventually just sort of assumed at what we've seen over the last few quarters sort of.

Normalizes back to pre Covid level can we take the margin down by by that amount.

Right.

I feel a little stronger than that in terms of the positive I think Dan on the fresh side, yes at some point when you have your of tougher year over year compares youre not going to get.

Those big basis point improvements from spoilage and labor productivity now some of it though at these new levels you have more productivity, we're not going to necessarily lose at all but if it's a tough compare you'll lose a little you'll lose some of it. So yes on some of the other categories, particularly as we increase Kirk of St mature as we sell of certain things within fresh debt our specialty items.

Where we can get a full margin showed even greater savings in some cases some of the vertical integration some of the things I mentioned like the nuts Cashews. These are all of little things, but those tend to offset some of those things I'm not suggesting we're going to keep at all but I think that we're going to do better than people than the question is of concern about.

Great. Thank you.

Thank you.

Well, thank you for listening.

We're all here if you have any additional questions you know who we are at.

And have a good afternoon.

Thank you Brenda.

Youre welcome, Sir and ladies and gentlemen. This concludes today's conference call. Thank you for participating you may now disconnect.

Q2 2021 Costco Wholesale Corp Earnings And February Sales Call

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