Q4 2021 Costco Wholesale Corp Earnings Call

September 23, 2021

[music].

Good day and thank you for standing by welcome to the fourth quarter earnings call. At this time, all participants are in a listen only mode.

Be advised that today's.

Today's conference is being recorded.

After the speaker's presentation, there will be a question and answer session.

I ask a question during that time, you will need to press star one on your telephone.

If you require any further assistance please press star zero.

I would now like to hand, the conference over to your first speaker for today.

Yeah.

Oh. Thank you. Please go ahead.

Thank you Anne and good afternoon to everyone.

I'll start by stating that these discussions will include forward looking statements within the meaning of the private Securities Litigation Reform Act of 1995.

These statements involve risks and uncertainties that may cause actual events results <unk> perform.

Our formats 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 in the company's public statements and reports filed with the SEC forward looking statements speak only as of the date, they're 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 fourth quarter of fiscal 2021. The 16 weeks ended August 29th.

Reported net income for the quarter came in at $68.0 billion or $79.0 per share.

Last year's fourth quarter net income came in at one.

138, 9 billion or $16.0 per diluted share.

This year's fourth quarter included an $84 million pretax or <unk> 14 cents a share charge for the write off of certain assets and last year's fourth quarter included $281 million pre tax charge or <unk> 47, a share of COVID-19 related costs.

As well it included a $36 million or six cents a share pre tax charge related to the prepayment of one $5 billion of debt, partially offset by an $84 million or <unk> 15 per share benefit per share benefit for the partial reversal of a reserve related to a product, Texas tax assessment taken into fiscal year 2019.

<unk> net sales for the quarter increased 17, 5% to $105.0 billion up from $52.28 billion a year earlier in the fourth quarter.

Comparable sales for the fourth quarter.

Boarded.

An hour ago for the 16 weeks on a reported basis. The U S was 14 nine 9% excluding.

<unk> gas inflation and FX. The 49 would be 10, 3% positive Canada reported 19, 5% plus.

Ex gas inflation and FX six 7%.

Other international reported 15% without gas inflation and FX seven 3% total company.

<unk> 15, 5% reported nine 4% ex gas inflation and FX E Commerce by the way reported was 11, 2% positive X.

Ex gas inflation and FX.

FX eight 9% in.

In terms of Q4 comp sales metrics traffic or shopping frequency increased nine 2%.

<unk> worldwide and eight 8% in the U S. Our average transaction or basket was up five 8% worldwide and five 6% in the U S. During the fourth quarter that those numbers, including the positive impact from gas inflation and FX.

Foreign currencies relative to the U S dollar positively impact sales by approximately 230 basis.

Percent weights, and whereas gasoline price inflation positively impacted sales by approximately 385 basis points move.

Moving down the income statement to the membership line membership fee income for the fourth quarter came in at $127.0 billion in the fourth quarter of 2021, that's up $128 million.

It's more than the prior year's fourth quarter membership fee income of 1.1 dollars 6 billion to $128 million, representing 11, 7% increase year over year, excluding the benefit from positive excess.

Positive FX, the $128 million positive number would have been $107 million positive or nine seven.

From actively effective increase in terms of renewal rates at the fourth quarter and our U S. In Canada revenue renewal rate was 91, 3% up three tenths of a percentage point from 16th week earlier number at Q3 end and worldwide rate came in renewal rate came in at 88, 7% also.

Percent of tenths of a percentage point from Q3 end 16 weeks earlier.

Renewal rates are benefiting we believe for more members auto renewing as well as increased penetration of executive members, who on average renew at a higher rate than nonexecutive members.

Our first year renewal rates have also improved.

Well during this time.

In terms.

A number of members at Q4 end member households, and total cardholders.

At Q4, the fiscal year in a few weeks ago total paid households were $68.0 million, that's up $2.0 million from the $66 million figure we shared with you a 16 weeks earlier total card holders came in at 11.

11, $117.0 million or $9.0 million higher than the 198, we had as of Q3 and at.

At Q4 end paid executive members were came in at $31.0 million, an increase of a little over 1 million new executive members.

And that's during the 16 week period as.

Moving down to the gross margin line, our reported gross margin in the fourth quarter was lower year over year by 32 basis points and actually excluding gas deflation. It was higher by five basis points as I, usually do I'll ask you jot down two columns of numbers that little gross margin matrix. If you will.

The line items will be core merchandise.

As well as.

Ancillary second line item would be ancillary and other businesses third line item would be 2% reward for slight item.

Would be LIFO.

And last line item would be other and then finally the last line item would be total.

Two columns first one being reported year over year.

Nice quarter, and the second column, excluding gas inflation.

So core merchandise on a reported basis was lower year over year by 90 basis points ex gas inflation. It was lower at -57 basis points ancillary and other businesses plus 44 on a reported basis and plus 53 ex gas inflation.

And the four 2% reward plus one basis point and -3% year over year on an.

Ex gas inflation.

LIFO minus five and minus five basis points.

And other plus 18, and plus 17, if you added up to two columns you get the total for reported 32 basis points that I just mentioned.

And again ex gas inflation, plus five basis points now the core merchandise component you see here are lower by 90% year over year and lower by 57 ex gas inflation similar to last quarter. This is primarily a function of sales shifting from core to ancillary versus the last year as we begin to revert back to more historical sales penetrations we.

And last year, we saw a significant shift of sales out of ancillary and other businesses and into the core.

In terms of the core margin on their own sales in the fourth quarter. The core on core margins were lower by 40 basis points with non foods slightly up food and sundries is slightly lower year over year fresh foods was down and.

Call that fundamental driver of the core on core being lower in the quarter now fresh foods is lapping exceptional labor productivity and low product spoilage that occurred from the outside sales a year ago. In Q4, we retained some of that productivity gains from those productivity gains as volumes have remained high. However, we have also elected to hold delay and or mitigate some of the price increase.

And was it in this increasingly inflationary environment over the last few months.

Ancillary and other business gross margin as you see in the chart in the matrix was higher by 44 basis points higher by 53 ex gas inflation in the quarter gasoline had a good quarter as we are lapping year over year, a softer quarter due to the pandemic. We also showed improvement.

Increased court optical travel all of which were benefited by easy compares versus last year to also due to the impact of Covid on those businesses.

Now a LIFO just as the gross margin charge that we havent seen in this matrix for about seven years LIFO was lower by five basis points, both with and without gas inflation, we had a $30 million LIFO.

And food in the quarter, the first such charges since for such charge. Since 2014. This is a result of the continued inflationary cost pressures, which I'll discuss more in a few minutes.

2% reward higher by one basis point.

On a reported basis, but more importantly, lower by three basis points ex gas inflation again, implying slightly.

<unk> penetration of sales going to the executive member and the associated rewards with that come with it and.

And other is up 18 basis points.

Then up 17 ex gas inflation. This is primary related to COVID-19 related costs from a year ago.

Moving to SG&A, our reported SG&A in the fourth quarter was lower or better year over.

Slightly a 45 basis points and lower or better by 13 basis points, excluding gas inflation.

Second matrix of the day, the two columns reported and ex gas inflation and five line items operations second line item Central third line item stock compensation Fortunately.

<unk> line item other and then total on a reported basis core operations was lower or better by plus 19 basis points and ex gas inflation higher bi.

Eight basis points, so a minus eight basis points central plus 12, plus eight stock.

Stock compensation, plus two and plus two.

Our year by other plus 12% plus 11, adding up the columns again SG&A on a reported basis was better or lower by 45 basis points and lower ex gas inflation by 13.

As you can see in the matrix the core operations component again was better by 19 and lower than higher by now.

Lower by 19 and then.

Or higher by eight excluding the impact from gas inflation keep in mind. This results includes the permanent $1 an hour wage increase that we implemented in March of this year. This higher by by eight basis point year over year expense result.

It includes the 14 basis point cost of the dollar an hour wage increase.

Central.

Hi.

Proved by eight basis points ex gas inflation and stock compensation also with strong sales.

Helped by two basis points now the other a plus 12, plus 11 without gas inflation. So lower light that was the amount of basis points included in other last year was the COVID-19 expense of $217 million or <unk> 40.

It gives us points and the reversal of a product tax assessment reserve of $84 million or 16 basis points.

This year includes the write off of the <unk> assets totaling $84 million of 14 basis points. So you add all those up that's where you get the 11.

Next on the income statement is Preopening Preopening this year was <unk>.

Two $8 million last year $26 million or higher by nine and pre opening is up year over year.

In part due to the timing of openings.

And given different amount of preopening on a given location both within the quarter and in the following quarter.

All told reported operating income in the fourth quarter increased by 18%.

<unk> 35 coming in at $4.0 $75 billion this year compared to $100.0 billion a year earlier.

Below the operating income line interest expense was $52 million. This year essentially the same at 51 million a year ago.

Interest income and other for the quarter was higher by $77 million year over year roughly half of that is due.

Sent comparable FX and the other half is related to last year's fourth quarter charge for the make whole debt prepayment.

Overall reported pre tax earnings in the fourth quarter of 2021 came in up 23% coming in at 291 billion compared to last year's $87.0 9 billion now.

Our tax rate in the fourth.

With 26, 1% higher than last year's fourth quarter rate of 24 nine for fiscal 'twenty two based on our current estimates which of course can always change we anticipate that our effective normalized total company tax rate to be similar to fiscal 'twenty, one somewhere in the 26% to 27% range unless of course, there are changes to the U S corporate tax.

Quarter was we'll have to see wait and see.

A few other items of note warehouse expansion for.

For the fiscal 'twenty, one that just ended we opened a.

Net openings of 'twenty, and we actually had 22 openings, including two relocations, but total increase of 20 net units.

This year, we're looking.

Right, but at least 25 net new units, including second warehouses in each of China, and France, and our first location in New Zealand.

As well we plan to relocate five locations.

Regarding capital expenditures, our fourth quarter 2021 spend capital expenditure was approximately $10.0 billion, our full year capex.

Looking into <unk> $3, $14.0 billion as I mentioned in last quarter's call. This included a relatively recent $340 million purchase of a distribution forces distribution facility on the west coast to support our big and bulky delivery activities.

For ecommerce ecommerce sales in the fourth quarter ex FX.

<unk> increased by eight 9% year over year, that's on top of last year's Q4 ecommerce sales increase of 91%.

Stronger departments jewelry, we actually sold a couple of rigs and the $100000 range home furnishings with strong pharmacy was strong and sporting goods was strong a couple of other large departments like majors.

And electronics, while very good sales, we had really outsized sales a year ago in the fourth quarter during COVID-19.

Date on Costco logistics logistics continues to drive big and bulky sales for the quarter of Costco logistics sales within our delivery was up 130% and in.

The quarter represented 24% of all sales on our U S. E. Commerce site that compares to about 24% compares to 11% of E. Commerce sales last year mind, you much of that relates to moving teams from other third parties to our own internal logistics Department.

Approximately are currently approximately seven to 10000 daily deliveries.

Liberty's via Costco logistics are occurring and continuing to grow.

In terms of our E. Com App, we have over 10 million downloads is continually improving with additional features coming soon digital payment using the Costco credit card.

And pilot in several locations with full route with full rollout by the middle of next month.

The ability to view warehouse receipts online also next month more detail on online purchase as well and by October and we improved mobile site improved look and feel new landing page and expanded information both for dot com use and for enhanced warehouse information for.

Supply chain perspective, I want to go back to.

Two things supply chain and an inflation from a supply chain perspective, the factors pressuring supply chains and inflation include port delays container shortages COVID-19 disruptions shortages on various components raw materials and ingredients labor cost pressures and trucker and driver shortages trucks and driver shortages.

Domestically.

Anecdotally rather.

From a domestic side various major brands and requesting longer lead times.

Cases difficulty in finding drivers and trucks on short notice at lead times on ingredients and packaging had been extended in some cases, so planning is crucial which I feel people who've done a great job with that over.

The last several months.

Also we're putting some limitations on key items like Bath tissues roadhouse consume that your water high demand cleaning related skus are related to the uptick in delta related demand.

Furniture delays and some shortages of cross traditional rollout times to go from eight to 12 weeks.

From eight to 12 weeks up to 16 to 18 weeks in some ways. We think that's an advantage we're selling out the generally merchandise when it's once it's received within two weeks on most items and we've ordered more than earlier.

Same thing with toys and seasonal we're bringing in some of the items early chip.

Chip shortages impacting many of the items as I mentioned in the last call.

Examples of impacted items computers tablets videogames major appliances, feeling is from the buyers as this will likely extend into 2022 again, we're ordering as much as we can and getting in an earlier and.

As evidenced by the most recent sales results were doing okay with us.

Despite these issues Oh sorry.

In terms of transportation costs. They are increasing we're reading about it every day.

Painters trucks and drivers all are impacting the timing of deliveries and higher freight costs.

All of these issues, we continue to work to mitigate cost increases in a variety of different ways and hold down and or mitigate our price increases passed on to the members.

We've also charter.

The ocean vessels for the next year to transport containers between Asia, and the U S and Canada and we've leased several thousand containers for use on these ships every ship can carry.

800 to 1000 containers at a time and we will make approximately 10 deliveries during the course of the next year.

Moving to inflation again, there have been many there have been and are a variety of inflationary pressures that we and others are seeing and more of it.

As I discussed on last quarter's call inflationary factors are bound higher labor costs higher freight costs higher transportation demand, along with container shortages and port delays increased demand in certain.

Product categories, various shortages of everything from computer ships to oils and chemicals higher commodity prices, it's a lot of fun right now.

Some inflationary soundbites, if you will price increases on item shipped across the oceans, some suppliers or paying two to six times for containers and shipping price increases.

<unk>, a pulp and paper goods, some items up 4% to 8% again, we're trying to mitigate those where we can and we think we've done a decent job of mitigating some of it plastics resin increases on things like dress trash bags that flex skus pet products.

Resin oriented pet products plastic cups plates plastic.

I stick rep, many items up.

The 5% to 11% range metals again aluminum foil mid single digit cost increases as well as cans for sodas and other beverages.

And commodities earlier oil coffee nuts, they remain generally according to our buyers at five year highs and so on higher import prices on.

From Europe, like cheeses, but the combination of rate and FX.

3% to 10% increases on certain but not all apparel items and fresh inflation fresh foods inflation is up in the mid to high single digits with meat, leading the way up high single to low double digits due to feed labor and transportation costs.

Now I was asked.

Things March in our <unk>.

Second quarter earnings call at what level, we found inflation was running overall.

The sell price side.

They did that our best guess at the time was somewhere between one and one 5% I updated that 16 weeks earlier, the 16 weeks ago on our May 26, third quarter call and we estimate to be in the two five to three 5%.

Cent range as of today and talking with our senior merchants, we would estimate overall price inflation of the.

The products, we're selling to be in the three five to four 5% range as I discussed earlier. This inflation was the driver of the $30 million LIFO charge that we took in the quarter, but all of that said I feel I feel very good with the job that our merchants.

Back then traffic department and our operators have all been doing enable to in order to get the products that we need to pivot when and where necessary and keep our warehouses full while keeping prices as low as we can for our members and continuing to show incredible value versus our competitors. I think this is reflected in our strong reported sales and profits that we've achieved.

Spite challenges and our typical aggressive pricing.

Finally in terms of upcoming releases, we will announce our September sales results for the five weeks ending September Sunday October 3rd on Wednesday October 6th after the market close and with that I will open it up for questions within.

It does.

Thank you as a reminder to ask a question you will need to press Star then the number one on <unk>.

Sure thing that star one on your Italian failing to withdraw your question. Please press the pound key.

We have our first question from the line of Simeon Gutman.

Morgan Stanley Your line is now open.

Hey, Richard.

My first question is on next.

Next fiscal year I know you don't give a lot in terms of guidance, but wanted to ask.

If you think or how should we think about EBIT, whether it grows or not next year and if you don't answer that I was going.

If comps grow in fiscal 'twenty, two should EBIT grow.

Well on the first question of course, I can't say, we don't provide guidance.

But we've always talked about being a top line company and that helps a lot of things so depending on what level of sales, we will have to wait and see.

To ask if we do have the.

The dollar increase that started in March that all anniversary next February so at the end of Q2 next year.

But again, we've shown that even with what we view is holding the line as much as we can on pricing and being pretty aggressive there and taking that into account we've shown that with strong sales we can.

Certainly improve the bottom line as well so fingers crossed.

So my follow up maybe two parts and one of them is on sales and then you mentioned the wage increase so on the sales side.

Is there anything that youre looking at or approaching different.

No extreme value is one angle, but timing of mailers.

<unk>.

Inventory availability looking better as an ancillary that hasnt recovered what can you do on the top line given how how big of a lap and then you mentioned the wage increases and I know youll lap those in March, but you've seen I think Amazon and Walmart have moved up and so I'm. Just curious if you know how do you think about or should we expect.

They're not.

Another increase in terms of wages.

Sure well first of all as it relates to all the the anecdotal comments I made about <unk>.

Apply chain and inflation I think overall, we feel that we're doing a heck of a job and that stuff and I think some of the advantage. We have is is that we certainly have.

The natural ability to bring in things earlier to order early and to mitigate whatever delay may have occurred.

We certainly have the space to keep some of this stuff most particularly because of our Costco logistics acquisition, a year ago to additional storage space. If you will not that we are having an issue with that because it's turning pretty fast and.

The fifth and the fact that we're able to pivot we're bringing in new items, we're bringing in items off season for Christmas.

Pre COVID-19 it was not it was toys and trim, our home and electronics.

Today, it's all of those things plus things for the house from barbecue grills, even summer items, but anything you can get your hands on.

I think we've done a very good job of adding <unk>, adding suppliers, where we can.

And and also.

Making sure we're coming up with new items being.

Being creative and innovative on even on the food and sundries side.

I think from that standpoint.

Despite.

And again I'm looking at each other the merchants and the traffic people and everything you're saying boy. This when is this going to end. The fact is I think we're doing a very good job of that so from an inventory standpoint, I think for those of you who.

Several of you do go into visit our locations on a random basis. Therefore, they look good compared to some of the pictures, we see from others sometimes.

And so I feel from that standpoint, we have a good a good issue.

With inflation to the extent that there's permanent inflationary.

Items like freight costs or even somewhat permanent for the next year.

Can hold onto all of those some of that has to be passed on and it is being passed on.

Times where were.

Yes.

We're pragmatic about it but we recognize that since things have been so successful and our sales have been strong we can hold the line on some of those things and do a little better job hopefully do a better job than some of our competitors have and but even that more extreme than the value. So I think.

On things so far at least despite the challenges of worked in our favor a little bit.

Okay. Thanks Richard.

Yeah.

Thank you. Our next question comes from the line of Mike <unk> Mike.

Michael Lasser from UBS. Your line is now open.

Although that evening. Thanks, a lot for taking my question Richard in the past. What you said is that Costco's profitability tend to draft off the profitability of the overall retail sector in the last year and a half the profitability of the overall retail sector.

Moved nicely higher.

Also.

Our goal is profitability its margins have moved nicely higher do you view this.

Favorable.

Well first of all let me finish Simeon I had one other question on wages and let me just respond to that.

Look we're known for always being.

Have the best wage package and benefits package.

Take care of our employees package out there and big retail and big boxes, and all forms of big retail and even if we.

We raised our lowest our starting wage to that $82.0, a late mind you. Our average hourly wage is I think slightly in the U S is slightly north of 24.

And be healthy.

Benefit plan, we will do whatever it takes to continue that model.

Who knows when and where but we feel pretty good about where we are in.

<unk>.

As many of you on the call know irrespective of what's going on with our company in terms of strong sales are weak sales we're.

It is very right by our employees.

Sure.

And Michael I'm, sorry, and I'll go back to your question.

Yes. My question why we've seen an improvement in profitability across retail.

Tend to influence the profitability of the profit margin to Costco do you view the improvement to your profit margin is sustainable from here.

Are going to do it well.

I think the anomaly over the last year and a half has been that.

When a lot of big boxes or big retailers.

Enjoying comps pre COVID-19 in the I'll call it for 2% to 4% range of the 2% to 5% range and we are enjoying five sixes and sevens.

Okay, we have been enjoying mid teens or effectively low to mid teens over in and we've taken some market share from others, we think that some of that will stick.

We hope it will stick and we feel pretty good right now about what we've done and what we've accomplished.

Net to the extent that we can generate greater than industry average comps.

I think ended there they don't have to be in the low to mid teens. They could still be in the mid to high singles that we should continue to improve but again I get back to the comment that has been reinforced internally from the beginning of time.

Complex, we are a top line company and everything else will take care of itself.

Got it.

My second question is on your gross margin, there's a lot of moving pieces that there are a lot of moving pieces with everything that's happening with Costco right now, but specifically youre, giving back some of the core on core gross margin gains that you experienced some really strong.

Right sale last year, but on the other hand, your ancillary businesses, they're doing really well.

Is that <unk>.

Dynamic, where you're making up for the pressure on the fresh with strong ancillary is that sustainable and is part of that the perception is that costco tend to.

<unk> raised prices at a slower rate than others in the retail landscape, which hence depressed pressure its margin.

Inflation is heating up what would be different this time to make that not happen.

Well I think.

Your first part of your question I think tells part of the tail is.

Many moving parts if you look at gasoline which is a.

10, plus percent of our sales, it's a huge business, which can have huge.

<unk> of gross margin.

Knock on wood always profitable, but there's still quite a range of gross margin.

And Thats more.

So reflective of what's going on with competition in the retail gasoline market, we feel that sometimes other large retailers of gasoline.

Are looking to make a little more which gives us the ability to be quite.

Quite profitable, but still show an even bigger savings. So there's there's lots of puts and takes.

Certainly.

Last year, you had I mean, I think there was a 16 week roughly a 16 week period, where are our optical and our hearing aid centers were outright closed travel went literally having negative revenue because it was not having new business and it was refunding previously booked business.

Trough.

From lack of it.

And so there's those kind of anomalies again I get back to thinking that.

Due to the unfortunate thing called Covid.

Some businesses have benefited in the sense that we were essential in the sense that our cabinets places we feel that people.

<unk> coming in to the extent that we.

Our April merchandize why to have pivoted.

Maintain notwithstanding supply chain issues maintain.

Exciting full warehouses of merchandise.

So I think those are the things that help us.

Okay.

Felt country.

Yeah.

Thank you. Our next question comes from the line of Chuck Grom from Gordon Haskett. Your line is now open.

Hey, Thanks, Richard if inflation stays up in that two five to three five to four 5% range over the next couple of quarters would you expect.

LIFO charges to be about $30 million per quarter or should we can we adjusted per weaker.

Years ago, you have to add back the charge every quarter or sometimes a credit just wondering how we handle that from here.

Yes.

It's hard to say I wouldn't just say it's that much based on that it really depends.

In.

So when you had.

Again, we've enjoyed a number of years effectively.

Very little if any no LIFO.

Or eating into our previous LIFO credit five and six years ago.

So, but if theres consistent inflation going forward for the next 234 quarters.

You can also see.

Mind, you price increases to those customers.

Say, some there's been some already but.

Our view there is less than we could have done.

And that will continue and I think the more consistent inflation if inflation rates stayed at this level and we don't know that but if it did stay at this level.

Even with a LIFO charge in some.

So it'll be offset by price increases.

It also.

Okay.

Okay. Okay.

Great. Thanks, and then on just then I've got a follow up and then on the Labor front I am curious if you guys have observed an increase in applications and roughly 20 states.

Unemployment.

<unk> benefits.

On September 1st the number of companies have spoken to the big increase in job applications recently.

I don't know I, Havent asked and I don't know the answer to that.

It makes sense.

Okay, Alright, good luck. Thanks.

Yes.

Thanks.

Our next question comes from the line of Karen short from Barclays. Your line is now open.

Hi, Thanks, very much I just wanted to clarify one thing on that last line of questioning in terms of the law.

Oh charts.

What is this $30 million of catch up for the whole year or was that something that was.

The quarter itself because.

And it speaks to the run rate.

It's the quarter this was it.

Basically if you take your cost.

Silos of inventory and what was it at Q3 end and what is it now at Q4 it okay.

So.

I guess, obviously you listed all of these different pressure points on pricing I guess my bigger picture question is how do you think about it.

The membership fee structure in general all these pressures on I guess your business, but also on the consumer from an inflationary standpoint make you more likely less likely or.

So I could impact your membership fee increase.

Yes.

What we've said over the years is that.

Certainly we look at our gross profit as a combination of gross margin plus a membership fee, but we really don't look at it together in that way that hey, if we do something with.

The membership fee, we could be more aggressive on pricing I remember years ago somebody had asked when the.

Economy, it's often in our comps did weakened a little bit and we're.

Coming up on kind of that fifth anniversary ish of.

<unk>.

Pending increase and somebody said given the economy's weak are you.

And your sales have weakened a little bit still.

How does a positive number but weakened a little bit would you still do it and the response at the time was more likely we would do it because that's what we do it we can drive lower prices with it and drive more business.

So we really we look at the loyalty and certainly their loyalty and renewal rates have been up.

Yes.

If I honestly.

Still a ways away from Anniversarying the last.

Fifth year, or so fifth plus youre anniversarying of the last increase so we're a little ways from thinking about it.

Okay and then just.

We had a conference today with.

Large cap names that kind of indicated.

Sustainable cash balance could be.

You're still sitting on a pretty hefty.

Excess cash balance now.

I think.

That there is.

We've always been considered to have more cash and have a more conservative balance sheet.

The world is saying that they think that it should be going up more I don't think we've thought about it going up more in fact, when we did the capital raise in April of 'twenty. It related specifically to what if what was the worst case of Covid.

<unk>.

Six months later, we saw that we didn't need it we promptly gave it back to our shareholders and then a level.

So I think we're.

The other anomaly has been as we've been blessed with a very good fiscal year.

The last year and a half in terms of net income and operating cash flow relative to our.

<unk>.

Our regular dividend and the special let's say that kind of offset that capital that debt that we did.

So at the end of the day I don't see us changing our ammo in that at this point.

Great. Thanks very much.

Thank.

<unk> next question comes from the line of Chris <unk> from Jpmorgan. Your line is now open.

Thanks, I'll I'll stick by that the pricing Apple I guess, if im interpreting what youre, saying is that basically because these pressures seem more structural in nature.

And because.

The demand environment is so good you feel less compelled to be more aggressive on price and if the environment slows then that could change your calculus.

It's really all about the value proposition.

Yes.

If anything I think from the outside people.

Because look at us relative to other retailers and saying we've been more aggressive on holding prices than others at least that's how we feel.

But we have to be pragmatic as these things are permanent and consistent you've got to raise the price we can't be completely novel here, but we feel that if anything that moat is probable.

People really widened a little bit for us.

<unk>.

And that's great we like wider moats.

Third variable being the others are raising prices faster than near so the price gaps have widened.

That's our view that's our that's our buyers view, but we're looking at it really hit us given frankly, given how strong it's been.

Probably.

In our DNA, we hate raising prices, we want to be the last to raise it in the first to lower it.

In our DNA.

Putting on shades on the side and not even looking at others.

We're looking at how do we drive our own business and we know that being the most the best value out there.

And having great merchandise and all that other wondering if this stuff is how you do it and.

We've seen such strength in our numbers and then as we've encountered rising levels of inflation, where it can we hold the price on some things and we do it.

It's an art form more than a science, but it seems to work for us.

For sure.

So my second question is on the.

The membership fee MSI growth ex the FX.

<unk> seen that that number has accelerated the past two quarters. So is that <unk>.

Given that you know.

The accounting of this is over a 12.

Basis, you sort of you have a view you have some inkling on what that growth could be as you look forward.

Higher renewal rates, obviously, taking.

A ton of share should all else equal that level again MSI growth ex FX continues.

Mon to accelerate.

Well.

The Big answer is we hope so the fact that we're opening more units in 'twenty one than we did in 'twenty is a positive. The fact that there are several international units, which tend to have higher growth rates. The fact that auto renew.

<unk> kind of a freebie in the sense that more.

People getting signing up and putting a credit card on their application and their application are signing up for the most more importantly, signing up for the Citi Visa card.

That helps you a little bit.

Driving executive.

People today for every 100 people signing up today.

I think a little over half I don't have an exact number.

Remember six seven years ago eight years ago. It was half that percentage and these are rough numbers. So don't hold me to them, but at the end of the day executive members by its definition.

Higher renewal rates they shop more.

They buy more stuff so all of that stuff is there.

Yes, that's that those are all good factors for us.

And just one quick last one have you shared how many.

The percentage of your membership that have in the U S that have the <unk>.

The bank.

Private label card.

More frequently have.

Okay. Thanks best of luck.

By the way before the next question somebody check number we have seen a recent increase in applications.

And the last couple of weeks.

Thanks, Chuck asked that.

Yeah.

I don't think.

Yeah.

Okay.

Yes.

Yeah.

Thank you. Our next question comes from the line of Paul Lang Wang from Citi. Your line is now open.

Everyone in this Brandon Cheatham on for Paul.

Take a stab at the members.

Question as well.

You have some great membership statistics it sounds like you are offering great value in the call, but I was wondering.

Are you thinking about not investing.

As much and the number of promotions.

Anything that you can talk on there is that.

<unk> similar to last year has that increased.

No I think.

When you say member promotions, what do you mean.

Yeah, I think right now you're offering $40 Costco.

Costco cash card if you sign up.

Sure.

Oh marketing okay, yes.

We do have a variety of things.

Not a huge basis, but we tried some things in the last few years, we've done some things with.

Groupon in with one other one.

Livingsocial.

We've done some things like you've mentioned.

But those are not.

On a.

I'd say theyre on a regular irregular basis.

And we tried different things all the time, but I know I know.

That's really frankly independent of looking at the membership fee itself, it's really about how do we drive memberships and what is the incremental cost what is the true cost of acquiring a new member other than waiting for them to go online or walk into the warehouse to sign up themselves.

And so we're on it we're always trying some new things.

Got it.

You mentioned your own unchartered ships. So I was just wondering you know.

What percentage of your shipping would that represent next year.

Less than 20%.

That's been Florida.

Yes.

And less than 20%.

<unk> of our Asia shipping.

Yeah.

Got it okay.

And last one for me on the E. Comm side I was just wondering if you can.

Customer that shops there.

The store is frequently is.

Remember that doesn't show up online.

I don't know that off the top of my head.

And I don't have all the specific statistics in front of US all of the all the charts that we look at keep going in the right direction number of people that bought online percentage of members.

The hit rate when we do something on an E mail.

To get people to do something online.

So.

Online and in warehouse you typically shop maybe.

But your overall, okay. Bob has mentioned thank you Bob as debt.

When you if you take a regular loyal member and when they do start shopping online.

They may shop, a few times less in store, but the aggregate of the two was greater than the historical.

Which makes sense.

By the way the other thing there is is that online.

While we've constantly putting on what.

What I'll call.

Greater.

Frequently traffic building items or velocity items, like apparel health and beauty AIDS and things like that the fact that matter is as more and more big and bulky items are bought online years ago. If you wanted to buy a mattress or refrigerator you had to go buy it and pick it up.

At home, we didn't deliver we didn't install that's of course.

Change in the last many years.

We have an appliance business in the U S. That's well over $1 billion and growing fast continue to grow fast helped by by the Costco logistics, so that changes the metric a little bit too.

Great. Thanks for the additional color.

Our next question comes from the line of Mike Baker from Davidson Your line.

Line is now open.

Hi, Thanks, two questions from me.

One you did allude to the Delta variant and.

Having to limit some products.

Product in areas, where we've seen higher cases, so could you just sort of talk about overall different trends that you might be seeing in areas that are seeing bigger spikes.

And the new Covid variant versus others.

I don't know I don't have I don't have in front of me any detail by region in that regard what I knew now is it.

Like everything right now it's all over the board, we're talking I forget what cleaning supply it was whether it was clorox or lifestyle or some type of.

<unk>.

Anti bacterial wiper whatever it was but there had been a year ago. When there was a shortage of merchandize now they've got plenty of merchandise, but there is.

Two or three week delays on getting it delivered because there is a limited.

Short term changes to trucking and delivery needs.

Suppliers. So it really it really is all over the board.

And maybe as part of that anything anything in terms of the travel trends, which I know, we're coming back really strong as of last quarter.

As Delta.

Reverted that at all.

Yes, yes, if you look to the chart, which went down and so it's that.

Last summer or last spring it was negative more refunds than new things being booked.

It really got back to almost normal I'm talking about bookings.

Resort.

Vacations.

And like to Hawaii to Mexico, and things like that and just a month ago month, and a half two months ago at the.

Our monthly budget being charged for Xiaomi was almost back to where it was pre COVID-19 and then it felt like a rock not as bad as it was at its trough last spring, but it has certainly come down.

Cars not hit as bad.

Yes.

That will fluctuate based on again, what's going on out there.

Yes that all makes sense one more quick one those were that was one question in two parts.

Do you can you update us on the curbside pickup test that you were running in new Mexico, I think as of last time, we spoke.

Spoke it was it was in three stores right. We're currently not doing it.

We just continue for now we'll try some new things somewhere sometime but at this point, we've got a lot of good things going on and we were.

We really didn't see a lot of traction in it.

Interesting. Thanks, Thanks for that color I appreciate.

Tom Thank you.

Our next question comes from the line of Luke Best Buddy.

Your line is now open.

Good afternoon. Thanks for taking my questions. So I guess, just going back to the core margin. So it sounded like at least this past quarter on the price side, you guys delayed passing through some of the price increases. So if you look at non foods versus your food categories generally easier.

Pass through on that on the non food side versus the food side.

I wouldn't say that I think food fresh.

It turns so fast it turns more than 50 times, a year or 50 times, a year or whatever and where you.

<unk> got a hot price on strip steaks.

Or keeping the rotisserie chicken at 490.

89, that's going to impact you, a little fast and will change the pricing yes.

Yes.

The comment here is that we're not going to change the price of muffins every week.

We'll take it a little less margin on some items.

It's all over the board, but at the end of the day.

There is it's an art form not a science or not a straight across we are going to do.

This much on every item.

Okay, Great and then second question just as you look at your service business optical record et cetera, where are we versus where you were pre pandemic.

This business has fully recovered at this point.

Mostly yes, pharmacy and optical have food courts have come back.

Oh here.

It's not quite yet, but it's much better than it was.

At its trough.

And travel is.

Lots of fund based on what's going on with Covid.

Okay, Great and one final question.

I missed this in your prepared comments did you guys give a forecast for capex for the upcoming fiscal year.

Yes.

No it will have a three in front of it.

Okay. Okay. Thank you best of luck for the balance of year.

One more question.

Thank you. Our next question comes from the line of John Hind Buckles from Guggenheim.

Your line is now open.

So Richard you said, it's an art not a science I'm curious, where you guys sit on data data science and analytics around price elasticity, one and two personalization.

Bob.

The monthly Mailer or monthly emails where are we on that journey.

First.

Of all as it relates to pricing and elasticity I think if we were considered the best company in the world with data analytics, we would still not use it for price elasticity.

We're going to do what we do is merchants and look at competitive prices and see how low we can mark something up.

The old saying.

Saying from years ago, we want to improve margins by lowering price and lower prices at the same time by buying better and doing those things. So I don't see that happening at all as it relates to the other aspect of that that's coming we made a big investment in what I'll call data analytics for us because we went from darn near zero to something.

But brought on a VP of data analytics, a year ago March theres been a lot of progress a lot of focus to date has been on the merchandising side, providing better tools to buy and to project and things like that.

I think youll see more of that over the next year, but.

Again, we're getting there.

I always look at it.

One of the things that others are doing that will help.

It's low hanging fruit for us because we haven't done it yet but.

We'll keep going but that's where a lot of the data analytic function to date and this past year as we built a department around it has been just that.

And then secondly, one of the things you guys have been known for writers seasonally.

It is the thing in and out before everybody else. So.

Do you lean into that in an environment right where.

It is hard to chase product.

Get it in early people buy it and.

And they are done for the season as you lean into that more in terms of where you can more inventory.

The club or is there a limitation right because you've got a trim.

<unk> <unk> from one season to the next.

I think theres, a little bit of both there is a little bit of taking it where you can get it right now and certainly we're consciously bringing in I think I mentioned on even.

What was the furniture, where the cycle is gone from 12% and 14 weeks to 34 were bringing in an early.

Transient seasonal things, we'll do that on some items.

But it's a mixed bag just because.

We're pivoting and blocking them to accurately in 12 different directions like everybody.

Okay. Thank you we have time for one last question.

Thank.

And certainly our last question comes from the line of Kelly Bania from BMO Capital. Your line is now open.

Hi, Thanks for fitting me in Richard.

Just wanted to ask one more on the inflation you mentioned that the three and a half to four and a half range just wanted to clarify that is retail inflation.

Just curious.

What your cost inflation isn't just trying to get a sense of how much youre absorbing.

And maybe if you can just provide some examples of how Costco and the merchants are mitigating some of the pressures.

Yeah, it's both.

I'm.

I'm sorry, what.

Yes margins have generally stayed the same.

We gave you some examples on the fresh food side, where it's change in Y but generally speaking.

Yeah.

I think there's again a lot of moving parts and we continue to figure out how to balance it.

Any any examples you want to provide about how you're mitigating some of the pressures.

Well I mean I'm not on a specific product example, but the fact is is one we've got strong relationships and good buying power. There are vendors when we're eating a little bit into something we're asking in some cases for them to either a little bit into it.

During.

During these times, we're constantly figuring out how to be where there any cost savings to offset some of the cost increases, whether it's packaging or <unk> or whatever it might be and so I mean.

I think one of the things that helps us is that we are.

We're worrying about managing 3800 items, not 100000 items or 50000 items and.

And and that's helped us.

Yeah, and the intangible will be pivoting in and out of items for that reason also sorry to be vague, but it really is theres just so many different things out there.

Alright, thank you.

Thank you everyone will be around.

For any additional questions and have a good week and talk to you next time.

Yeah.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.

Okay.

Yes.

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Good day and thank you for standing by welcome to the fourth quarter earnings call. At this time, all participants are in a listen only mode.

Advice for today's.

This conference is being recorded.

After the speaker's presentation, there will be a question and answer session to ask a question during that time, you will need to press star one on your telephone.

You require any further assistance please press star zero.

I would now like to hand, the conference over to your first speaker for today.

Mr. Richard Galanti CFO. Thank you. Please go ahead.

You Ann and good afternoon to everyone.

Start by stating that these discussions will include forward looking statements within the meaning of the private Securities Litigation Reform Act of 1995, and these statements involve risks and uncertainties that may cause actual events results <unk> performance.

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 in the company's public statements and reports filed with the SEC forward looking statements speak only as of the date. They are made and the company does not undertake to update these statements except as required.

By law.

In today's press release, we reported operating results for the fourth quarter of fiscal 2021. The 16 weeks ended August 29th.

Reported net income for the quarter came in at $68.0 billion or $79.0 per share.

Last year's fourth quarter net income came in at one.

389 billion or $16.0 per diluted share this.

This year's fourth quarter included an $84 million pre tax or <unk> 14 cents a share charge for the write off of certain assets and last year's fourth quarter included $281 million pre tax charge or <unk> 47, a share of COVID-19 related costs.

As well it included a $36 million or six cents a share pre tax charge related to the prepayment of one $5 billion of debt, partially offset by an $84 million or <unk> 15 per share benefit per share benefit from the partial reversal of a reserve related to a product, Texas tax assessment taken into fiscal year 2019.

<unk> net sales for the quarter increased 17, 5% to $105.0 billion up from 52.2 dollars $8 billion a year earlier in the fourth quarter.

Comparable sales for the fourth quarter.

Boarded.

An hour ago for the 16 weeks on a reported basis U S was 49, 9% excluding.

<unk> gas inflation and FX. The 49 would be 10, 3% positive Canada reported 19, 5% plus.

Ex gas inflation and FX six 7%.

Other international reported 15% without gas inflation and FX seven 3% total company.

<unk> 15, 5% reported nine 4% ex gas inflation and FX E Commerce by the way reported was 11, 2% positive X.

Ex gas inflation and FX.

FX eight 9% in.

In terms of Q4 comp sales metrics traffic or shopping frequency increased nine 2%.

Percent worldwide and eight 8% in the U S. Our average transaction or basket was up five 8% worldwide and five 6% in the U S. During the fourth quarter that those numbers, including the positive impact from gas inflation and FX.

Foreign currencies relative to the U S dollar positively impact sales by approximately 230 basis.

Points, whereas gasoline price inflation positively impacted sales by approximately 385 basis points move.

Moving down the income statement to the membership line membership fee income for the fourth quarter came in at $127.0 billion in the fourth quarter of 2021, that's up $128 million.

From the prior year's fourth quarter membership fee income of $1 $7.0 billion to $128 million, representing an 11, 7% increase year over year, excluding the benefit from positive excess positive FX the $128 million positive number would have been $107 million positive or nine seven.

Percent effectively effective increase in terms of renewal rates at the fourth quarter and our U S and Canada renewal rate was 91, 3% up three tenths of a percentage point from 16th week earlier number at Q3 end and worldwide rate came in renewal rate came in at 88, 7% also.

We were up three tenths of a percentage point from Q3 end 16 weeks earlier.

The renewal rates are benefiting we believe for more members auto renewing as well as increased penetration of executive members, who on average renew at a higher rate than nonexecutive members.

Our first year renewal rates have also improved.

Well during this time.

In terms.

Were members at Q4 end member households, and total cardholders.

At Q4.

<unk> year in a few weeks ago.

Total paid households were $68.0 million, that's up $2.0 million from the $66 million figure. We shared with you 16 weeks earlier total cardholders came in at <unk> <unk>.

$117.0 million or $9.0 million higher than the $109 eight we had as of Q3 and at.

At Q4 end paid executive members were came in at $31.0 million, an increase of a little over 1 million new executive members.

And Thats during the 16 week period as.

The line items will be core merchandise.

As well <unk>.

Ancillary second line item would be ancillary and other businesses third line item would be 2% reward fourth line item.

Would be LIFO.

And last line item would be other and then finally the last line item would be total.

Two columns, the first one being reported year over year.

In the fourth quarter and the second column, excluding gas inflation.

2% reward plus one basis point and -3% year over year on an ex gas inflation.

LIFO minus five and minus five basis points.

And other plus 18, and plus 17, if you added up to two columns you get the total for reported 32 basis points that I just mentioned.

And again ex gas inflation, plus five basis points now the core merchandise component you see here lower by 90% year over year and lower by 57 ex gas inflation similar to last quarter. This is primarily a function of sales shifting from core to ancillary versus the last year as we begin to revert back to more historical sales penetrations we.

Last year, we saw a significant shift of sales out of ancillary and other businesses and into the core.

In terms of the core margin on their own sales in the fourth quarter. The core on core margins were lower by 40 basis points with non foods slightly up food and sundries was slightly lower year over year fresh foods was down and.

And was the fundamental driver of the core on core being lower in the quarter now fresh foods is lapping exceptional labor productivity and low product spoilage that occurred from the outside sales a year ago. In Q4, we retained some of that productivity gains from those productivity gains as volumes have remained high. However, we have also elected to hold delay and or mitigate some of the price increase.

Increases in in this increasingly inflationary environment over the last few months.

Ancillary and other business gross margin as you see in the chart in the matrix was higher by 44 basis points and higher by 53 ex gas inflation in the quarter gasoline had a good quarter as we are lapping year over year, a softer quarter due to the pandemic. We also showed improvement.

And food court optical travel all of which were benefited by easy compares versus last year to also due to the impact of Covid on those businesses.

Oh charge in the quarter the first such charge since first such charges. Since 2014. This is a result of the continued inflationary cost pressures, which I'll discuss more in a few minutes.

2% reward higher by one basis point on a reported basis, but more importantly, lower by three basis points ex gas inflation again, implying slightly.

Slightly higher penetration of sales going to the executive member and the associated rewards with that come with it and.

And other is up 18 basis points.

Then up 17 ex gas inflation. This is primary related to COVID-19 related costs from a year ago.

Moving to SG&A, our reported SG&A in the fourth quarter was lower or better year over.

Year by 45 basis points, and lower or better by 13 basis points, excluding gas inflation.

Second matrix of the day, the two columns reported and ex gas inflation and five line items operations second line item Central third line item stock compensation Fortunately.

<unk> line item other and then total on a reported basis core operations was lower or better by plus 19 basis points and ex gas inflation higher bi.

Eight basis points, so a minus eight basis points central plus 12, plus eight stock.

Stock compensation, plus two and plus two.

And other plus 12% plus 11, adding up the columns again SG&A on a reported basis was better or lower by 45 basis points and lower ex gas inflation by 13.

As you can see in the matrix the core operations component again was better by 19% lower and higher.

Lower by $19.

It includes the 14 basis point cost of the dollar an hour wage increase.

Central.

Again improved by eight basis points ex gas inflation and stock compensation also with strong sales and.

Helped by two basis points now the other a plus 12, plus 11 without gas inflation so lower.

That was amount of basis points included another last year was the COVID-19 expense of $217 million or <unk> 40.

Two basis points and the reversal of a product tax assessment reserve of $84 million or 16 basis points.

This year includes the write off of the I T assets totaling $84 million of 14 basis points. So you add all those up that's where you get the 11.

Next on the income statement is Preopening Preopening this year was <unk>.

$35 million last year $26 million or higher by nine pre opening is up year over year.

In part due to the timing of openings.

And given different amount of preopening on a given location both within the quarter and in the following quarter.

All told reported operating income in the fourth quarter increased by 18%.

Scent coming in at $77.0 billion this year compared to $93.0, 9 billion a year earlier.

Below the operating income line interest expense was $52 million. This year essentially the same at 51 million a year ago.

Interest income and other for the quarter was higher by $77 million year over year roughly half of that is due.

With favorable FX and the other half is related to last year's fourth quarter charge for the make whole debt prepayment.

Overall reported pre tax earnings in the fourth quarter of 2021 came in up 23% coming in at $93.0 billion compared to last year's 186.9 billion now.

Our tax rate in the fourth.

Quarter was 26, 1% higher than last year's fourth quarter rate of 24 nine for fiscal 'twenty two based on our current estimates which of course you can always change we anticipate that our effective normalized total company tax rate to be similar to fiscal 'twenty, one somewhere in the 26% to 27% range unless of course, there are changes to the U S corporate tax.

Rates will have to see wait and see.

A few other items of note warehouse expansion for.

For the fiscal 'twenty, one that just ended we opened a net openings of 'twenty and we actually had 22 openings, including two relocations, but total increase of 20 net units.

This year, we're looking.

Looking to open at least 25 net new units, including second warehouses in each of China, and France, and our first location in New Zealand.

As well we plan to relocate five locations.

Regarding capital expenditures, our fourth quarter 2021 spend capital expenditure was approximately $10.0 billion, our full year capex.

Spend was $3 $14.0 billion as I mentioned in last quarter's call. This included a relatively recent $340 million purchase of a distribution film distribution facility on the west coast to support our big and bulky delivery activities.

For ecommerce ecommerce sales in the fourth quarter ex FX.

<unk> increased by eight 9% year over year, that's on top of last year's Q4 ecommerce sales increase of <unk> 91 per cent.

Stronger departments jewelry, we actually sold a couple of rings in the $100000 range home furnishings with strong pharmacy was strong and sporting goods was strong a couple of other large departments like majors.

<unk> electronics, while very good sales, we had really outsized sales a year ago in the fourth quarter during COVID-19.

Date on Costco logistics logistics continues to drive big and bulky sales for the quarter, our Costco logistics sales within our delivery was up 130% and in.

Approximately are currently approximately seven to 10000 daily deliveries.

Liberty's via Costco logistics are occurring and continuing to grow.

In terms of our E. Com App, we have over 10 million downloads is continually improving with additional features coming soon digital payment using the Costco credit card.

In pilot in several locations with full route with full rollout by the middle of next month.

The ability to view warehouse receipts online also next month more detail on online purchase as well and by October and an improved mobile site improved look and feel new landing page and expanded information both for dot com use and for enhanced warehouse information for.

Supply chain perspective, I want to go back to.

Domestically.

Anecdotally rather.

From a domestic side various major brands are requesting longer lead times.

Cases difficulty in finding drivers and trucks on short notice lead times on ingredients and packaging have been extended in some cases, so planning is crucial which I feel people who've done a great job with that over.

The last several months.

Also we're putting some limitations on key items like Bath tissues roadhouse could consume that your water high demand cleaning related skus are related to the uptick in a delta related demand.

Furniture delays and some shortages of course traditional rollout times to go from eight to 12 weeks.

From eight to 12 weeks up to 16 to 18 weeks in some ways. We think that's an advantage we're selling out the generally merchandise when once it is received within two weeks on most items and we've ordered more than earlier.

Same thing with toys and seasonal we're bringing in some of the items early chips.

Chip shortages impacting many of the items as I mentioned in the last call.

I think as evidenced by the most recent sales results were doing okay with us.

Despite these issues Oh sorry.

Sorry in terms of transportation costs. They are increasing we're reading about it everyday containers trucks and drivers all are impacting the timing of deliveries and higher freight costs.

Despite all these issues, we continue to work to mitigate cost increases in a variety of different ways and hold down and or mitigate our price increases passed onto the members.

We've also.

So charter three ocean vessels for the next year to transport containers between Asia, and the U S and Canada and we've leased several thousand containers for use on these ships every shifting Kerry.

800 to 1000 containers at a time and we will make approximately 10 deliveries during the course of the next year.

Moving to inflation, but again there have been many that have been and are a variety of inflationary pressures that we and others are seeing and more of it.

Product categories, various shortages of everything from computer ships to oils and chemicals higher commodities prices. It is a lot of fun right now.

Inflationary soundbites, if you will price increases on items shipped across the oceans, some suppliers or us paying two to six times for containers and shipping price increases.

Creases of pulp and paper goods, some items up 48% again, we're trying to mitigate those where we can and we think we've done a decent job of mitigating some of it plastics resin increases on things like dress trash bags that flux skus pet products.

Resin oriented pet products plastic cups plates plastic.

I stick rep, many items up.

The 5% to 11% range.

<unk> again aluminum foil mid single digit cost increases as well as cans for sodas and other beverages I mentioned commodities earlier oil coffee nuts. They remain generally according to our buyers at five year highs and so on higher import prices on.

On things from Europe, like cheeses, but the combination of rate and FX.

3% to 10% increases on certain but not all apparel items.

Fresh inflation fresh foods inflation is up in the mid to high single digits with meat, leading the way up high single to low double digits due to feed labor and transportation costs.

Now I was asked.

Back in March at our second quarter earnings call at what level, we found inflation was running overall.

Sale price side.

<unk> done our best guess at the time was somewhere between one and one 5% I updated at 16 weeks earlier, the 16 weeks ago on our May 26, third quarter call and we update the estimate to be in the two and a half to three 5%.

Cent range as of today and talking with our senior merchants, we would estimate overall price inflation the.

The products were selling to be in the three five to four 5% range as I discussed earlier. This inflation was the driver of the $30 million LIFO charge that we took in the quarter, but all of that said I feel I feel very good with the job that our merchant.

Our traffic department and our operators have all been doing enable to in order to get the products that we need to pivot when and where necessary and keep our warehouses full while keeping prices as low as we can for our members and continue to show incredible value versus our competitors. I think this is reflected in our strong reported sales and profit that we've achieved.

Despite challenges and our typical aggressive pricing.

Thank you as a reminder to ask a question you will need to press Star then the number one on Italian side Thats Star one on Italian Sally can be drawing a question. Please press the pound key.

We have our first question from the line of Neon.

Manpower.

<unk> from Morgan Stanley. Your line is now open.

Hey, Richard.

My first question is on next.

Next fiscal year I know you don't give a lot in terms of guidance, but wanted to ask.

If you think or how should we think about EBIT, whether it grows or not next year and if you don't answer that I was going.

To ask if if comps grow in fiscal 'twenty, two should EBIT grow.

Well on the first question of course, I can't say, we don't provide guidance.

But we've always talked about being a top line company and that helps a lot of things so depending on what level of sales, we will have to wait and see.

We do have the.

The dollar increase that started in March that will anniversary next February so at the end of Q2 next year.

Certainly improve the bottom line as well so fingers crossed.

And my follow up maybe two parts and one of them is on sales and then you mentioned the wage increase so on the sales side.

Is there anything that youre looking at or approaching different Ah I know extreme value is one angle, but timing of mailers.

<unk>.

Inventory availability looking better as an ancillary that hasnt recovered what can you do on the top line given how how big of a lap and then you mentioned the wage increases and I know you'll lap those in March, but you've seen I think Amazon and Walmart have moved up and so I'm. Just curious if you you know how do you think about or should we expect.

Another.

Other increase in terms of wages.

Sure well first of all as it relates to all the anecdotal comments I made about <unk>.

Supply chain and inflation I think overall, we feel that we're doing a heck of a job on that stuff and I think some of the advantage. We have is is that we certainly haven't.

The financial ability to bring in things early or the order early and to mitigate whatever delay may have occurred.

And the fact that we're able to pivot we're bringing in new items, we're bringing in items off season for Christmas.

Pre COVID-19 it was not it was toys and trim, our home and electronics.

Today, it's all those things plus things for the house from barbecue grills, even summer items, but anything you can get your hands on.

And again I think we've done a very good job of adding earnings adding suppliers, where we can.

And.

And also.

Making sure we're coming up with new items, and then being creative and innovative on even on the food and sundries side.

I think from that standpoint.

Despite.

Sometimes looking at each other the merchants and the traffic people everything that you're saying boy. This when is this going to end. The fact is I think we're doing a very good job of that so from an inventory standpoint, I think for those of you who.

Several of you do go into visit our locations on a random basis. Therefore, they look good compared to some of the pictures, we see from others sometimes.

And so I feel from that standpoint, we have a good a good issue.

With inflation to the extent that there's permanent inflationary.

Items like freight costs or even somewhat permanent for the next year.

Can hold onto all of those some of that has to be passed on and it is being passed on.

Yes.

Although.

All of those things so far at least despite the challenges have worked in our favor a little bit.

Okay. Thanks Richard.

Yeah.

Thank you. Our next question comes from the line of Michael Michael Lasser from UBS. Your line is now open.

Good evening, Thanks for taking my question Richard in the past what you said is that Costco's profitability.

The draft off the profitability of the overall retail sector in the last year and a half the profitability of the overall retail sector.

Move nicely higher.

Also.

Costco's profitability its margins have moved nicely higher.

Thinking nimble.

Well first of all let me finish Simeon I had one other question on wages and let me just respond to that.

Look we're known for always being.

The best wage package and benefits package.

And you can take care of our employees package out there and big retail and big boxes, and all forms of big retail and even if and we raised our lowest our starting wage to that $60 to $110.0 on late mind you. Our average hourly wage is I think slightly in the U S is slightly north of 24.

With very healthy.

Employee benefit plan will do whatever it takes to continue that model.

Who knows when and where but we feel pretty good about where we are in.

<unk>.

As many of you on the call know irrespective of what's going on with our company in terms of strong sales are weak sales we're.

Are going to do what's right by our employees.

Uh huh.

And Michael I'm, sorry, and I'll go back to your question.

Yes. My question why we've seen an improvement in profitability across retail.

Tends to influence the profitability of the profit Martin with Costco do you view the improvement to your profit margin is sustainable from here.

Okay, well look.

I think the anomaly over the last year and a half has been that.

When a lot of big boxes, or big retailers, we're enjoying comps pre COVID-19 and then I'll.

Call it 2% to 4% range of the 2% to 5% range and we are enjoying five sixes and sevens.

Now, we've been enjoying mid teens or effectively low to mid teens.

And and.

We've taken some market share from others, we think that some of that will stick and we hope it will stick and we feel pretty good right now about what we've done and what we've accomplished.

Accomplished to the extent that we can generate greater than industry average comps.

We are a top line company and everything else will take care of itself.

Got it.

Sales last year, but on the other hand, your ancillary businesses, they're doing really well.

Is that dynamic.

Dynamic, where you're making up for the pressure on the fresh with strong ancillary is that sustainable and is part of that the perception is that costco tend to.

You raised prices at a slower rate than others in the retail landscape, which hence depressed pressure its margin and <unk>.

Inflation is heating up what would be different this time to make that not happen.

Well I think.

Your first part of your question I think tells part of the tail is.

There's so many moving parts if you will.

Gasoline, which is a.

Is 10 plus percent of our sales, it's a huge business, which can have huge.

<unk> of gross margin.

Knock on wood always profitable, but there's still quite a range of gross margin and and Thats more.

Reflective of what's going on with competition in the retail gasoline market, we feel that sometimes other large retailers of gasoline.

Are looking to make a little more which gives us the ability to be quite.

Quite profitable, but still show an even bigger savings. So there's there's lots of puts and takes.

Certainly.

From last year, you had I mean, I think there was a 16 week roughly a 16 week period, where are our optical and our hearing aid centers were outright closed travel went literally having negative revenue because it was not having new business and it was refunding previously booked business.

Trough.

<unk> of Covid.

And so there's those kinds of anomalies again, I get back to thinking that.

Due to the unfortunate thing called Covid.

Some businesses have benefited in the sense that we were essential in the sense that our cabinets places we feel that people.

We felt comfortable coming in.

The extent that we are.

Our April merchandize why to have pivoted.

Maintain notwithstanding supply chain issues maintained.

Citing full warehouses of merchandise.

I think those are the things that help us.

Yeah.

Okay. Thank.

Thanks, very much Richard.

Yeah.

Thank you. Our next question comes from the line of Chuck Grom from Gordon Haskett. Your line is now open.

Hey, Thanks, Richard if inflation stays up in that two five to <unk>.

I'm sorry, three five to four 5% range over the next couple of quarters would you expect.

The LIFO charge could be about $30 million per quarter or should we can we adjusted per weaker.

Years ago, you have to add back the charge every quarter or sometimes a credit just wondering how we handle that from here.

Yes.

It's hard to say I wouldn't just say it's that much based on that it really depends.

In.

Mind, you when you had again, we've enjoyed a number of years effectively.

Very little if any no LIFO.

Our eating into our previous LIFO credit five and six years ago.

So, but if theres consistent inflation going forward for the next 234 quarters.

Youre going to also see.

Some price increases to those customers.

Theres been some already but.

Our view there is less than we could have done.

And that will continue and I think the more consistent inflation if inflation rates stayed at this level and we don't know that but if it did stay at this level.

Even with a LIFO charge in some.

Ways, it'll be offset by price increases.

It also.

Okay.

Okay. Okay.

Great. Thanks, and then just then.

And I've got a follow up and then on the Labor front I'm curious if you guys have observed an increase in applications and roughly 20 states that have ended unemployment.

One that benefits on September 1st the number of companies have spoken to a big increase in job applications recently.

I don't know I, Havent asked and I don't know the answer to that.

It makes sense.

Okay, Alright, good luck. Thanks.

Okay.

Thanks.

Thank you. Our next question comes from the line of Karen short from Barclays. Your line is now open.

Hi, Thanks, very much I just wanted to clarify one thing on that last line of questioning in terms of the LIFO charge.

What is this $30 million of catch up for the whole year or was that something that was.

Reflective of the quarter itself because.

And it speaks to the run rate is.

It's the quarter this was it.

Basically if you take your cost.

Silos of inventory and what was it at Q3 end and what is it now in Q4 it.

Okay.

So.

So I guess, obviously you listed all of these different pressure points on pricing I guess my bigger picture question is how do you think about it.

The membership fee structure in general there's all these pressures on I guess your business, but also on the consumer from an inflationary standpoint make you more likely less likely or.

How does it impact your membership fee increase.

Yeah.

What we've said over the years is that.

Certainly we look at our gross profit as a combination of gross margin plus a membership fee, but we really don't look at it together in that way that hey, if we do something with.

The membership fee, we can be more aggressive on pricing I remember years ago somebody had asked when the economy. It's often in our comps have weakened a little bit and we're coming up on kind of that fifth anniversary ish of Av.

Pending increase and somebody said given the economies weaker U.

And your sales have weakened a little bit still.

Positive number but weakened a little bit would you still do it and the response at the time was more likely we would do it because that's what we do it we can drive lower prices with it and drive more business and so we really we look at the loyalty.

Certainly their loyalty and renewal rates have been up.

Yes.

If I honestly.

Still a ways away from Anniversarying the last.

Fifth year, or so fifth plus youre anniversarying in the last increase so we're a little ways from thinking about it.

Okay and then just.

We had a conference today with.

Large cap names that kind of indicated.

New view on what their actual cash balance should be going forward relative to pre pandemic had actually increased so wondering if you could just talk about your perspective on what you think the rate like sustainable cash balance could be because obviously, you're still sitting on a pretty hefty.

Excess cash balance now.

Thank you.

That there.

We've always been considered to have more cash and have a more conservative balance sheet.

<unk>.

Next months later, we saw that we didn't need it we promptly gave it back to our shareholders and then a level.

So I think we're.

The other anomaly has been as we've been blessed with a very good fiscal year.

The last year and a half in terms of net income and operating cash flow relative to our.

<unk>.

Our regular dividend and the special let's say that kind of offset that capital that debt that we did.

So at the end of the day I don't see us changing our ammo in that at this point.

Great. Thank you very much.

Thanks.

<unk> next question comes from the line of Chris Hovers from Jpmorgan. Your line is now open.

Thanks, I'll I'll stick by that the pricing Apple I guess, if I'm interpreting what you're saying is it basically use because these pressures seem more structural in nature.

And because.

The demand environment is so good you feel less compelled to be more aggressive on price and if the environment slows then that could change your calculus.

It's really all about the value proposition.

Yes.

If anything I think from the outside people.

Because look at us relative to other retailers and saying we've been more aggressive on holding prices than others at least that's how we feel.

But we have to be pragmatic as these things are permanent and consistent you've got to raise the price we can't be completely novel here, but we feel that if anything that moat is probable.

People will be widened a little bit for us.

<unk>.

And that's great we like wider moats.

So the third variable being that others are raising prices faster than nir. So the price gaps have widened.

That's our view that's our that's our buyers view, but we're looking at it really hit us given frankly, given how strong it's been.

Probably.

In our DNA, we hate raising prices, we want to be the last to raise it in the first to lower it.

In our DNA.

Putting on shades on our side and not even looking at others. We're looking at how do we drive our own business and we know that being the most the best value out there and.

And having great merchandise and all that other wonder if this stuff is how you do it and as we've seen such strength in our numbers and then as we've encountered rising levels of inflation, where can we hold the price on some things and we do it.

It's an art form more than a science, but it seems to work for us.

For sure.

So my second question is on.

The membership fee MSI growth ex FX.

Benefit that you've seen that that number has accelerated the past two quarters. So is that <unk>.

Given that the.

The accounting of this is over a 12.

Month basis, you sort of you have a view you have some inkling on what that growth could be as you look forward.

Higher renewal rates, obviously, taking.

A ton of share should all else equal that level again MSI growth ex FX continues.

Can you to accelerate.

Well.

<unk> kind of a freebie in the sense that more.

More people getting signing up.

Put your credit card on their application and their application are signing up for the most more importantly, signing up for the Citi Visa card.

That helps you a little bit.

Sure.

Driving executive member getting people more people today for every 100 people signing up today.

I think a little over half I don't have an exact number.

Remember six seven years ago eight years ago. It was half that percentage and these are rough numbers. So don't hold me to them, but at the end of the day the executive members by its definition.

Higher renewal rates they shop more.

More frequently they buy more stuff so all of that stuff.

Those are all good factors for us.

And just one quick last one have you shared how many.

The percentage of your membership that have in the U S that have the Citibank.

Private label card.

I don't think we have.

Okay. Thanks best of luck.

By the way before the next question somebody check number we have seen a recent increase in applications.

And the last couple of weeks.

Hey, Chuck asked that.

Yeah.

<unk>.

Yeah.

Okay.

Yes.

Yeah.

Thank you. Our next question comes from the line of Paul Lang, who was from Citi. Your line is now open.

Everyone was Brandon Cheatham on for Paul.

I'll take a stab at the members.

<unk> question as well.

You have some great membership statistics it sounds like you are offering great value in the call, but I was wondering if you know.

Are you thinking about not investing in it.

As much and the number of promotions.

Anything that you could talk on there is that.

Look similar to last year has that increased.

No I think.

When you say member promotions, what do you mean.

Yeah, I think youre right now you're offering $40 Costco cash card if you sign up.

Oh marketing okay.

We do a variety of things.

Not a huge basis, but we tried some things in the last few years, we've done some things with.

Groupon in with one other one.

Livingsocial.

We've done some things like you've mentioned.

But those are not on a on a.

I'd say theyre on a regular irregular basis.

And we tried different things all the time, but I know I know.

And so we're on it we're always trying some new things.

Got it.

You mentioned your own unchartered ships. So I was just wondering you know.

What percentage of your shipping would that represent next year.

Less than 20%.

One of them.

Yes.

And less than 20%.

Our Asia shipping.

Yeah.

Got it okay.

And last one for me on the E. Comm side I was just wondering if you can.

Customer that shops, there do they visit the store as frequently as.

A number but it doesn't show up online.

Yeah.

I don't know that off the top of my head, what and I don't have this.

The specific statistics in front of US all of the all the charts that we look at keep going in the right direction number of people.

Bought online percentage of members.

The hit rate when we do something on an E mail.

To get people to do something online.

So.

Online and in warehouse you typically shop maybe.

But your overall, okay. What Bob has mentioned thank you Bob is that when you if you take a regular loyal member.

And when they do start shopping online.

They may shop, a few times less in store, but the aggregate of the two was greater than the historical.

That makes sense.

Okay.

By the way the other thing there is is that online.

While we've constantly putting on.

What I'll call.

Yes.

Greater frequency traffic building items are for lot velocity items, like apparel health and beauty AIDS and things like that the fact of matter is as more and more big and bulky items are bought online years ago. If you wanted to buy a mattress or refrigerator you had to go buy it and pick it up.

Take it home we didn't deliver we didn't install that's of course.

<unk> changed in the last many years.

We have an appliance business in the U S. That's well over $1 billion and growing fast continue to grow fast helped by by the Costco logistics, so that changes the metric a little bit too.

Great. Thanks for the additional color.

Thank you. Our next question comes from the line of Mike Baker from Davidson. Your line is now open.

Hi.

Two questions from me one you did allude to the Delta variant and.

Having to limit.

Some product in areas, where we've seen higher cases, so could you just sort of talk about overall different trends that you might be seeing in areas that are seeing bigger spikes.

And the new Covid variant versus others.

No I don't have I don't have in front of me any detail by region in that regard what I knew now is.

Like everything right now it's all over the board, we're talking I forget what cleaning supplier was weather was clorox or lifestyle or some type of of.

Anti bacterial wiper whatever it was but there had been a year ago. There was a shortage of merchandize now they've got plenty of merchandise, but there.

There is two or three week delays on getting it delivered because theres a limit on short term changes to trucking and delivery needs.

The suppliers so it really it really is all over the board.

And maybe as part of that anything anything in terms of the travel trends, which I know, we're coming back really strong as of last quarter.

Delta.

River reverted that at all.

Yes, Yeah, if you look to the chart, which went down and so it's that.

Last summer or last spring it was negative more refunds than new things being booked it really got back to almost normal I'm talking about bookings of a risk.

<unk> vacations.

And like to Hawaii to Mexico, and things like that and just a month ago month, and a half two months ago.

At the monthly budget meeting the charge for Xiaomi was almost back to where it was pre COVID-19 and then it felt like a rock not as bad as it was at its trough last spring, but it has certainly come down.

<unk>.

Cars not hit as bad.

Yes.

That will fluctuate based on again, what's going on out there.

Yes that all makes sense one more quick one but those were that was one question in two parts.

You can you update us on the curbside pickup test that you were running in new Mexico, I think as of last.

Last time, we spoke it was it was in three stores right. We're currently not doing it.

And we just continue to for now we'll try some new things somewhere sometime but at this point, we've got a lot of good things going on.

Sure.

We really didn't see a lot of traction in it.

Interesting. Thanks, Thanks for that color I appreciate.

Appreciate the time.

Yeah.

Thank you. Our next question comes from the line of <unk> from Oppenheimer. Your line is now open.

Good afternoon, and thanks for taking my questions. So I guess, just going back to the core margin. So it sounded like at least this past quarter on the price side do you guys.

Delayed passing through some of the price increases. So if you look at non foods versus their food categories is it generally easier to pass through on that on the non food side versus the food side.

I wouldn't say that I think food fresh.

It turns so fast it turns more than 50 times, a year 50 times, a year or whatever and when you've.

Price on strip steaks.

Or keeping the rotisserie chicken at 499, that's going to impact you a little fast changing prices.

Yes.

The comment here is that we're not going to change the price of muffins every week.

So we will take a little less margin on some items.

It's all over the board, but you know at the end.

End of the day.

There's it's an art form not a science or not a straight across we're going to do this much.

Every item.

Okay, Great and then second question just as you look at your service business optical Covid corn et cetera, where are we versus where you were pre pandemic.

Business is fully recovered at this point.

Mostly yes, pharmacy and optical have food courts that come back.

Okay.

Hearing AIDS not quite yet, but it's much better than it was.

At its trough.

And travel is lots of fund based on what's going on with Covid.

Okay, Great and one final question.

I may have missed this in your prepared comments did you guys give a forecast for capex for the upcoming fiscal year.

No it will have a three in front of it.

Okay. Okay. Thank you best of luck for the balance of year.

And one more question.

Thank you our next.

Question comes from the line of John Hind buckles from Guggenheim.

Your line is now open.

So Richard you said, it's an art not a science I'm curious, where you guys sit on data data science and analytics around.

Price elasticity, one and two personalization.

<unk>.

Bob.

The monthly Mailer or monthly emails where are we on that journey.

First of all as it relates to pricing and elasticity I think if we were considered the best company in the world with data analytics, we would still not use it for price elasticity, we're going to do what we do is.

As merchants and murky competitive prices and see how low we can mark something up and the old saying from years ago, we want to improve margins by lowering and lower prices at the same time by buying better and doing those things. So I don't see that happening at all as it relates to the other aspect of that.

That's coming.

We made a big investment in what I'll call data analytics for us because we went from darn near zero to something but brought on a VP of data analytics a year ago March theres been a lot of progress a lot of focus to date has been on the merchandising side, providing better tools to buy and to project and things like.

That.

I think youll see more of that over the next year, but.

Again, we're getting there.

I always look at it is that some of the things that others are doing that will help.

It's low hanging fruit for us because we haven't done it yet, but we'll keep going but that's where a lot of the data analytic function to date and this past year as.

We built a department around it has been just that.

And then.

One of the things you guys have been known for REIT is seasonally getting in and out before everybody else.

Do you lean into that in an environment, where it's hard to chase product.

Get it in early people buy it and they are.

Done for the season.

And as you lean into that more in terms of where you can more inventory in the club or is there a limitation right because you've got a transition from one season to the next.

Yeah.

I think theres, a little bit of both there is a little bit of taking it where you can get it right now and certainly we're consciously bringing in I think I mentioned on.

Even.

What was the furniture, where the cycle is gone from 12% and 14 weeks to 16, and 18 were bringing in an early and certainly on seasonal things, we will do that on some items.

But it's a mixed bag just because.

We're pivoting and blocking and tackling in 12 different directions like everybody.

Okay. Thank you.

We have time for one last question.

Thank you. Our last question comes from the line of Kelly Bania from BMO Capital. Your line is now open.

Hi, Thanks for fitting me in Richard.

Just wanted to.

Ask one more on the inflation you mentioned that the three and a half to four and a half range just wanted to clarify that.

Rail inflation just curious.

What your cost inflation isn't just trying to get a sense of how much you are absorbing.

And maybe if you can just provide some examples of how costco and the merchants are mitigated.

Mitigating some of the pressures.

Yes, it's both.

I'm sorry, what.

Yes margins have generally stayed the same.

We gave you some examples on the fresh food side, where it has changed and why but generally speaking.

Yeah.

I think there's a lot of moving parts and we continue to figure out how to balance it.

Any any examples you want to provide about how you're mitigating some of the pressures well.

Well I mean I'm not a specific product example, but the fact is is one we've got strong relationships and.

And goodbye empowered our vendors when we're eating a little bit into something we're asking in some cases for them to either a little bit into it.

During these times, we're constantly figuring out how to be where there any cost savings to offset some of the cost increases whether it's packaging or.

Or whatever it might be and so I mean I think one.

The things that helps us is that we are worrying about managing 3800 items, not 100000 items or 50000 items and and that's helped us.

Yeah, and there are times, where we will be pivoting in and out of items for that reason also sorry to be vague, but it really is theres just so many different things.

Things out there.

Alright, thank you.

Thank you everyone will be around.

For any additional questions and have a good.

And talk to you next time.

Yeah.

Ladies and gentlemen, this concludes today's conference.

Thank you for participating you may now disconnect.

Q4 2021 Costco Wholesale Corp Earnings Call

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