Q1 2022 Costco Wholesale Corp Earnings Call
During the session you will need to press star one on your telephone.
I turn the conference over to your Speaker today, Richard Galanti. Thank you. Please go ahead.
Thank you Sandy 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. These statements involve risks and uncertainties that may cause actual events results or performance to differ materially from those indicated by such statements. The risks and uncertainties include but are not limited to those outlined in today's call as well.
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 first quarter of fiscal 'twenty two.
The 12 weeks ended November 21.
Net income for the quarter came in at $1.3 billion to $4 billion or $2.98 per diluted share compared to 1.1 dollars $66 billion or $2 62 per diluted share last year. This.
This year included a tax benefit of $91 million or 21 cents. This year related to stock based compensation and a write off of certain assets of 118 million pre tax or <unk> 20 per share.
Last year included tax benefits of $145 million or 33 cents per diluted share 16th sense of which was due to the deductibility of the $10 per share special cash dividend received by the company's four one K plan participants and 17 cents related to stock based compensation as well in incremental expenses for COVID-19 premium.
Ages of $212 million pre tax, which was a hit last year in the quarter of <unk> 35 per share.
Net sales for the quarter increased 16, 7% to $49 four $2 billion up from $42 $35 billion a year earlier in the first quarter same.
Same store sales for the first quarter were as follows in the U S. On a reported basis for the 12 weeks up 14, 9% and excluding gas inflation and the impacts of FX up nine 9%.
Canada reported 17.2 ex gas and FX, plus eight 3% other international reported $13 four.
Ex gas inflation and FX up 10.9, all told the company reported a 15% increase on a comp basis, and nine 8% up ex gas and FX and E Commerce, which was reported at a 14, 3% ex FX was $13 three.
In terms of Q1 comp sales metrics traffic or shopping frequency increased six 8% worldwide and up five 9% in the U S. During the quarter, our average transaction or ticket was up seven 7% worldwide and eight 5% in U S. During the quarter, excluding the positive impact from gas inflation and FX the average tick.
It was up ex that plus two 5% worldwide and plus three 5% in the U S.
Foreign currencies relative to the U S dollar positively impact sales by about 90 basis points and gasoline price inflation positively impacted sales by approximately 430 basis points.
Next on the income statement membership fee income reported in the quarter $946 million up $85 million or nine 9% from last year's $861 million figure.
Ex FX the at the $85 million increase would have been $80 million and a nine 9% increase would be nine 3%.
In terms of renewal rates at Q at first quarter end, our U S and Canada rate came in at 91, 6% up three tenths of a percent from the 12 week earlier figure at Q4 end.
As well the worldwide rate came in at 89.8% also up three tenths of a percent from 12 weeks ago at Q4 end.
At Q4 end.
The renewal rates are continuing to benefit from more members auto renewing as well as increased penetration of executive members, who on average renew at a higher rate than the nonexecutive members and first year renewal rates, which have improved a little.
In terms of number of members and the first quarter.
In terms of member households, as well as total cardholders at Q1 end total paid households was $62 5 million up 800000 from $61 seven a quarter ago, and total card holders of $113 1 million up a million and a half from the $111 6 million 12 weeks ago.
At Q1 end paid executive members totalled 20 to $26 5 million an increase of 836000 during the 12 weeks since Q4 and executive members represent 42% of our members and a little over 70% of our sales.
Moving down to the gross margin line, our reported gross margin for the first quarter was lower year over year by 49 basis points, and excluding gas inflation lower year over year by six basis points.
As I normally do I ask you to jot down a few numbers.
The two columns both reported year over year in Q1, and then without gas inflation year over year. In Q1 first line item would be core merchandise minus tricks that minus 63 basis points year over year on a reported basis and minus 26 basis points without gas inflation.
Ancillary and other businesses plus two on a reported basis and plus 12 ex gas.
Gas inflation too.
2% reward plus three and minus one basis point.
LIFO minus three in both columns.
Other plus 12 basis points in both columns total then on a reported basis margins were down 49 basis points year over year, and ex gas inflation down six basis points.
In terms of the core merchandise component of gross margin being lower by 63 year over year, and 26 basis points ex gas inflation recall last year in Q1, the core reported.
Was up 83 basis points in ex gas up 66 basis points. So it will retain a good portion of the improvement from two years ago in the quarter.
In terms of the core margin on their own sales in the first quarter. Our core on core margins were lower by 18 basis points with non foods slightly up and food and sundries slightly lower year over year also lower year over year Fresh foods was the primary driver of the core on core being lower in the quarter.
<unk> continues to lapse to lap exceptional labor productivity and low product spoilage that occurred from the outside sales that began a year that we're.
That happened a year ago in the quarter.
Ancillary and other business gross margin was higher by two basis points on a reported basis and again, plus 12 basis points ex gas inflation gas and travel were better year over year as they anniversary a softer quarter a year ago offset by E Comm, which was particularly strong a year ago and also related to the pandemic life.
LIFO, we had a three basis point of $14 million LIFO charge in the quarter.
2% reward higher by three on a reported basis and lower by one excluding gas inflation reflection of slightly higher sales penetration going to the.
Increased number of executive members.
And other was up 12 basis points. This is related to COVID-19 related costs from a year ago.
That portion of the Covid related wages that go into the cost of sales like many of our manufacturing businesses and our meat bakery departments.
Given the inflationary pressures and our ongoing efforts to mitigate price increases to our members in the face of inflation as best we can our Q1 gross margins results all in all I think were pretty good.
Moving to SG&A, our reported SG&A in the first quarter was lower or better.
Year over year by 66 basis points, and 29 basis points, excluding gas inflation again jotting down two columns of numbers first column being reported in the second column being ex gas inflation.
Operations was better.
Lower by 40 basis points.
And ex gas inflation, better or lower by 11 basis points Central Rip.
Reported better by 10.
Without inflation against inflation better by six stock compensation better.
Better by two and worse by one in the two columns and other better by 14 and better by 13 year over year. Total then again on a reported basis, our SG&A was better or lower by 66 basis points ex gas inflation, lower or better by 29 basis points.
Keep in mind in terms of the core again, better by 40 or better by 11 ex gas inflation keep in mind. This result includes the permanent dollar an hour wage increase that began in March of 2021.
And four weeks of additional starting wage increases that we just took this past October.
Going from 16 to $17 and from $16 $50 to $18 for our two main categories of hourly employees. These latest changes in starting wages went into effect October 25th just six weeks ago and four weeks of those six weeks included in Q1 and Q1.
Central.
No surprises there again on a ex gas inflation basis, better by six stock comp as I mentioned, a little better a little worse by one ex gas inflation and other the 14 and the 13 basis points numbers. This is consistent with the COVID-19 expense of $150 million $159 million last year, and the 118 million.
Right off of the impacted assets that I mentioned earlier.
And next on the income statement is preopening expense.
This year in the quarter $28 million last year in the quarter, 22% or 6 million higher.
All told reporting operating income in the first quarter increased 18% coming in coming in at $1 $693 billion. This year in the quarter compared to $1 $43 billion last year.
Below the operating income line interest expense was $39 million each of the first quarters of fiscal 'twenty, one and 'twenty two.
Interest income interest expense, rather interest income and other for the quarter was higher by $13 million year over year, primarily due to favorable FX.
Overall reported pre tax income in the first quarter was up 19% coming in at $1 696 billion.
This year compared in the first quarter last year of 142 billion.
In terms of income taxes, our tax rate in the first quarter of 'twenty, two was 27% compared to 16, 8% in Q1 last year again, both years tax rates benefited from the tax treatment of stock based compensation as mentioned earlier at $91 million this year and $75 million last year and the quarter. Additionally, last year's tax rate.
<unk> from the tax deductibility of the special dividend that portion payable to the company's 401k plan participants.
Fiscal 'twenty two effective tax rate. Excluding these discrete items is currently projected to be between 26% and 27%.
A few other items of note in terms of warehouse expansion as you know for fiscal 'twenty. One we opened 22 units, including two reload. So a net increase of 20 units during fiscal 'twenty. One in this quarter that ended a couple of weeks ago, We opened nine units, including one reload. So net openings of eight for the remainder of the year, we plan to open two.
<unk> three new units and also.
Our plan to open 23 units four of which would be relocations. So a net of 19, if all goes as planned.
It's been a busy past seven days, we opened our second Costco in France last Saturday on December 4th followed by our second building in China, which opened yesterday as well as two buildings opening this morning opening today, one in the U S and Florida, and our fourth unit in Spain.
Regarding capex.
Our first quarter fiscal 'twenty two spend was approximately one 5 billion our full year Capex spend is estimated to be just about $4 billion. This would represent an increase of more than $400 million over last year's entire capex figure of $3 6 billion.
The largest areas of increase coming from international spending for new warehouse expansion and increased investment in our logistics and E comm fulfillment operations.
In terms of e-commerce sales in the quarter ex FX increased 13% 13, 3% year over year. That's of course on top of an 86% plus increase a year ago in the first quarter.
Longer apartments in terms of Europe percentages include jewelry tires and home furnishings, our largest merchandise department in terms of sales majors, which is everything from consumer electronics and Tvs to appliances et cetera was up in the high single digits also on a very strong sales increase a year earlier.
In terms of an update on Costco logistics it continues to drive our big and bulky sales for.
For the quarter Costco logistics deliveries were up over 50% and now represent about 70% of our U S E com.
Big and bulky shipments.
Average <unk>.
Average during the quarter more than 50000 stops per week and for the year, We project more than 3 million stops, which would be everything from dropping something off to installing and taking away the old plan.
<unk> for logistics and the full year.
Our E Com mobile app.
We continue to improve.
The site with additional features thus far as I've talked about in the last few quarters.
He calls we've redesigned the app header and footer, we've updated and improved the menu layout. Our members now have the ability to view warehouse receipts online via both the App and desktop our co brand Citi Visa card is now linked can now be linked to the digital membership card and can be used for payment of members are now able to much more easily rescheduled E comm deliver.
<unk> in the U S and Canada.
Same goes for rescheduling returns returns pickups and.
And delivering in the first half with the new.
Upcoming new calendar year.
<unk> and fulfillment.
A better labeling of fulfillment methods members can it will be.
Can eat will be able to easily see fulfillment options be it E. Com say same day and even nearby warehouse availability of particular item at the particular item level.
We're rolling out a new E com kiosks in the warehouse with video signage and easy touch screen ordering as well, we're rolling out ecommerce lockers currently in the U S. We have a 112 locations with more and we plan to more than double that number during calendar year 2022.
In terms of E Commerce, there's a program to receive some press yesterday, just yesterday called Costco next.
In a way, it's like our warehouse Roadshows, but online currently there are 34 suppliers and growing but it's still quite small offering just under a thousand items curated items with Costco values. So please check it out when you have a chance.
From a supply chain perspective, similar issues that we outlined in the 12 weeks ago on the last quarterly call each issue ebbs and flows a little bit but overall the factors pressuring supply chains and inflation include port delays container challenges COVID-19 disruptions shortages are very components raw materials ingredients and even packaging supplier.
Labor cost pressures and trucking driver challenges overall, we feel we built pretty well with the supply chain challenges in terms of delayed container arrivals on the.
The Pacific Coast.
79% of our important containers or late by an average of 51 days.
A few percentage of those are actually a few days early and many of them or a few days more than 51 late.
Virtually all departments are impacted we've ordered early in many cases as I mentioned I think earlier in earlier calls given the longer lead times.
Less product packaging challenges, but still quite a bit still some limitations on key items, but improving again, it ebbs and flows chip shortage is still impacting many items some more than others and some instances delayed inventory simply extends the season, an example might be lawn and garden and patio.
As soon as the product arrives itself pretty quickly, but it may extend into.
Beyond the normal seasonal time.
Toys and seasonal in fact same thing some inventory in fact won't make it before Christmas, but we've mitigated that as best as possible and feel pretty good about it.
And in terms of moving onto despite all the supply chain issues again, we're pretty.
We feel pretty good about staying in stock and continuing to work to mitigate cost and price increases as best we can and.
Now moving on to inflation again, it's pretty much the same story that we told during each of the last two quarters they've been there had been in our variety of inflationary pressures that we and others are seeing from labor cost freight cost.
Higher demand.
Container shortages and port delays to increased demand on certain product categories are much of what you see and read out there are various shortages on everything from chips to oils and chemical spills supply bicycle facilities hit.
<unk> the Gulf storms, a while back.
Higher commodity prices.
For Q1, 'twenty, two and talking with our merchant senior merchants, we estimate that overall year over year price inflation to be in the four 5% to 5% range, that's a little bit higher of an estimated inflation rate that I discussed a quarter ago, but.
I think pretty consistent with what you read out there.
All of this said much kudos to the job that our merchants and our traffic department and our operators have all been able to do in order to get the products that we need.
When and where necessary and keep our warehouses full.
While keeping.
Prices low for our members and continuing to show value versus our competitors.
Look I think overall this is reflect this is best reflected in the operating results that we continue to achieve despite these many challenges.
Anecdotally on merchandising.
Holiday stuff has been strong again, sometimes it depends on when the merchandise gets in.
Aching items more people seem to be getting together a strong gift.
Gift cards are up.
<unk> from a year ago, but it was weak a year ago pet products as you might expect are strong with the benefit of increasing pet population over the past couple of years alcohol spirits are.
Strong, including gift boxes of various items and of course continued strength in consumer electronics appliances furniture, and mattresses and the like.
Apparel actually has enjoyed much stronger sales growth this year, albeit compared to relatively flat apparel sales a year ago.
One last comment.
Our sustainability commitment website received a major refresh this week.
So please feel free to visit the site, it's linked directly from our homepage under.
Column about us and then click on sustainability commitment.
Finally in terms of upcoming releases, we will announce our December sales results for the five weeks ending Sunday January 2nd on Wednesday January 5th.
After market close with that I'll open it up to questions and turn it back over to Sandy. Thank you.
And ladies and gentlemen, if you would like to ask a question. Please press star.
And the number one on your account.
Okay.
I have a first question we have Michael <unk> from UBS, Michael Your line is open.
Good evening. Thanks, a lot for taking my question with your point about 4% to 5%, Inc. Inflationary increase.
Across the assortment.
Typically costco has been slower to raise prices than everyone else seems to be a number at the in line with others across the retail sector.
The posture changed with respect to passing along price increases.
Why is that the case and if Costco have more pricing power date than it ever has in the past.
Even the pricing gap between you and others in the market.
Well I think as it relates to Paas.
We've always said, we want to be the last to raise the price.
And.
The first to lower the price recognizing theres a limit to what you can do based on these cost increases first and foremost I think because of our relative purchasing power in our relationships with our vendors, we with our suppliers work to mitigate those increases in any way shape or form we can.
Ultimately that may include us, taking a little more less markup and maybe that's taking a little less markup. There is no complete consistent answer throughout as you might expect but overall I think we've done a relatively good job of that and there is inflation in those numbers those numbers are at.
Kind of a combination of our cost increases as well as our some price increases and again it fluctuate there.
For every few examples of something going up there may be an example of something flat or down a little bit for unrelated reasons and so again, it's our best guess it's fluid.
We saw inflation, starting several months ago in a bigger way I think in our fiscal Q4, this summer and continuing into this fiscal year and as we all have read articles general articles out there about certain different major consumer product manufacturers announcing increases and continue to do so so I think it's going to continue.
Hopefully, we're getting towards the top end.
Art flattening out and subsiding, but we'll see.
My follow up question is with the core merchandise margin ex fuel in the core on core gross margin getting less bad or declining at a lesser rate this quarter than last.
Is this a sign that the margin here is stabilizing and do you think the Costco exit the pandemic with the structurally higher gross margin than it had in the past or all of these dynamics simply a function of what you've often said, which is when overall retail margins go up through Costco.
But just a little less than others. Thank you.
I think on the last comment yes.
The last comment you made look I think at the end of the day.
I think.
In many ways have benefited from market share games, hopefully, some or most of which will be sticky.
The biggest thing that impacts margins, many often theres not only on the buying power side and arguably I can't think of any company that has the buying power per item that we do because we do are roughly $200 million of sales with 4000 ish items.
Versus anybody else Thats doing it with hundreds of thousands of items are 50000 items, but I think that.
Having higher levels of sales productivity, particularly in things like fresh foods helps your margin will keep some of that and will you sell it to be even more competitive and hopefully build a bigger moat, a little bit, but I think that some of it is probably structurally there but.
As some famous television extra said once it's always there's always going to be something and.
We will keep fighting that battle out there, but we feel pretty good about some of the structural things that have occurred that hopefully will help us in the future, but who will have to wait and see.
Thank you very much and have a good holiday.
Thank you.
For our next question, we have Simon Gutman from Morgan Stanley.
Okay.
Hey, everyone I'll be Simeon for this call.
My first question is actually a follow up to Michael second question, maybe I'll ask it a different way Richard the two year core on core it looks like it's actually getting better and you said it yourself you thought you did a pretty good job on it and it looks like you are so if we're kind of getting it feels like you're managing through the <unk>.
Worst of it and the environment, maybe getting better at the margin I don't want to go too far and say that why shouldn't be this would be the worst for the core on core notwithstanding comparisons but Mitch.
They get harder, but then they start to get easier.
Look I think that's hopefully how the story but goes.
You're always going to be something but no luck.
Jokes aside we feel pretty good about structurally what we've been able to accomplish and part of that is market share with higher sales levels and.
We have not stopped the what I'll call the buyer creativity of working with suppliers to figure out head of to continue to drive greater value.
I kept thinking 50 examples but at the end of the day.
We're continuing to drive value in lots of ways, whether it's changing packaging or.
Using our volume moving certain production to different parts of the world.
And.
To take to make that that moat, even a little bigger so I agree with you that so far the story that your suggestion is playing out and hopefully it will continue to play out.
Fair enough. My second question is more on SG&A in the businesses leverage point, we used to chat about Costco always doing mid single digit comps and that's good enough to cover the.
SG&A dollar growth I think this quarter the business did about six 5% dollar growth adjusted and Youre going to have some of these wage investments that don't annualize well, maybe not to the middle or to closer to the end of the year. So I'm trying to get at what a normal post COVID-19 SG&A rate may look like.
And then does that mean, it's sort of that mid single digit comp rate that leverage those expenses.
I think as it relates to that.
Probably the best Guesstimate say guesstimate not estimate on.
Where do you start we're seeing an inflection point of leveraging SG&A, probably still is in that mid single digit range.
Beyond that who the heck knows I mean, we've been able.
Notwithstanding some of these increases.
And particularly in wages we've been in April.
The strong comps of help to help these numbers, but I think we feel pretty good about having the sales volumes that continue to be able to leverage those expenses. So.
As soon as we find out we'll let you know, but again, we're feeling pretty good about things at this juncture.
And at some point I would assume comps to have to come back to hopefully better than that better than peer average but.
Something back to where they had been pre COVID-19, but on a higher base and even if that helps you a little bit.
Okay, great. Thanks happy holidays, everyone.
You too.
Great next question, we have Christopher <unk> from Jpmorgan.
Christopher Your line is open.
Thanks, Good evening, everybody. So I wanted to ask a little bit about your thoughts on holiday. Paul forward. Obviously, you saw an acceleration in trend on a two year basis in October and then November it.
Things, obviously still amazing comp again, gaining share but trends decelerated in.
It was sort of against that what was the weaker I think end of the month last year. So.
Like what do you think is driving that how do you think about the rest of the holiday season, and then as you think about a consumer that's going to lap a bunch of stimulus in the first half of next year.
What are your initial thoughts on how that all could play out.
Well I think again as you just mentioned November comps were a shade under outside expectations still very good.
A couple of percentage points different than what we had been enjoying the triple.
Months prior to that.
The view is a little bit of that was pulling forward.
But EBIT within EBIT within last month's number the weeks varied and overall, we're good but.
Just when it comes.
Reduced a little over the next day.
Better than you expected. So I think the one thing that I feel good about is our in stocks.
Our senior merchant the other day it didnt vacated at his view is is that.
It's feeling is is that we're better in Stockton anybody out there and I think part of that is the fact of limited selection. We are an item business, we could put something else in place or something but we've done a pretty good job.
I mean I had.
With a little bit of a chuckle at a call just yesterday from a reporter asking about.
How are we doing on cream cheese.
And so I checked and.
<unk> shortage out there and the bagel shops or are being challenged and we actually got it.
The buyer said it took a little extra work, but we've got all the cream cheese, we need so I think we've done a good job in merchandising.
Got it and so I guess as you think.
Think about last year and the stimulus I mean do you think that I mean, obviously I think the consumer I should get closer to Christmas and new years, probably comes back if people are entertaining more of like you said on the baking side, but as you get into January and stimulus and stimulus in the spring.
Do you think your business lifted off of stimulus last year.
I'll look at it.
It couldn't hurt it probably helped a little bit I know historically when when when theres been.
Some stimulus items out there.
<unk> our view is that we have not been impacted as much as either but directionally, we've been impacted the same.
Look if next year there is a reduction in stimulus.
Lord knows what's going to happen with the stock market in general and how people feel about where there they feel financially.
That may have changed a little bit but.
I feel we feel pretty good around here that in one of the things that we've shown over the years that is both in good and bad times, we tend to do well.
In good times, because people want to spend more on and even in less good times people want to save more and so I think.
From a merchandising Stan and invest in tougher times, there's additional products and services that might be willing to sell us for the first time so.
And our own perverse way, we sometimes benefit from good and bad and right now we're feeling pretty good about what the future looks like.
Oh by the way the other thing.
Rob just mentioned that even if certain things head south in some way shape or form like reduction or elimination.
The elimination of certain stimulus items.
Supply chain at some point is going to get better.
As our numbers are.
We could do better if we had more supply of certain of those items, even in some categories and non foods that are up 20% and 30 30 plus percent.
The buyers view, we're still running out of stuff or could do better if we had more and that's not just us I mean thats.
That it rains on everybody, but I think some improvement and supply chain will be an offset to any other things that are detrimental to that thought.
Got it thanks, very much and enjoy the run on cream cheese at the clubs this weekend take care.
Historic.
Our next question, we have Chuck Broome from Gordon Haskett, Chuck Your line's open.
Mr. Bob team, because it's been well.
A question on leverage if we back out the onetime charges quarter. It looks like you enjoyed over 100 basis points.
The improvement.
Year over year at 65 basis points last quarter and are fully realizing the comps on a stack basis, we're better but wondering if some investments or other costs may have rolled off.
Just some thoughts on that front.
I think more of it.
It's just the leverage of sales growth frankly.
Again, taking out this specific COVID-19 related charges that we talked about and fact that we didn't talk about in terms of separating in the press release was that dollar an hour increase we did in March and the new one that had a small impact in Q1, because it started six weeks ago.
In that regard.
There's nothing that stands out in my view.
And my guess estimate.
I'm not sure my guys here.
Right.
Strong sales would be the number one factor.
Okay. Okay fair enough and then just on the on the storefront.
Opened thus far in 'twenty two.
So you're more than halfway to that goal which is great.
Just wondering bigger picture has there been any more discussions to backfill some of your existing markets Youre higher density areas, where perhaps some stores.
Just can't handle any more productivity more.
Any more throughput just because of the volumes.
The answer is yes, and I think that'll be.
Yes.
It's.
Small methodical increases in that thought over the next several years I mean, it used to be that we are talking about when we had 400 warehouses and the average I'm, making those numbers up but the average was.
180 and now.
I think we have an average.
Several years later in the high two hundreds.
In the U S at least.
But.
Yes.
And.
And we have a number of units in the 300 400 range.
No I mean, not hundreds but.
<unk>.
And so we are looking for more infill that we have.
Been doing that.
Three to five a year or $3 73 to five years than the last five years isn't going to be five to eight a year could be I don't want to have that kind of detail in front of me.
Okay, Great and then my last one is just the follow up questions on November I believe you guys did call out that there was some moderation in retail inflation, maybe 150 basis points or so I was just wondering if you could provide any color on I guess on where that retail inflation came in and I guess why that happened was it wasn't self inflicted stuff.
If I could get some color there.
One thing that was a little lower whereas from the increases in food and sundries, and some food and sundries items and fresh.
That had spiked even more it's still up year over year, but despite it came down a little bit from where it had been.
Okay.
And then we haven't quantified anything specific beyond that.
Okay Alright.
Okay.
And as you might expect there their suppliers out there that are saying Hey come January February Youll see some more increases and again. This is not inconsistent with what you what ive read in general articles in the various business periodicals.
Okay. So just a lot of timing differences okay great.
Alright. Thanks.
Thanks, a lot.
Okay.
The next question, we have John <unk> from Guggenheim John Your line is open.
So Richard how is <unk>, performing and what happens or how do you think about it in an inflationary environment.
In terms of how you take price versus like items on the national brand side.
This chaos do better in an inflationary.
Larry environment.
Okay.
Look.
Many of our Ks items are of such large volumes, it's not unlike dealing with the comparable large volumes, we do in our branded CPG item and so we are out there.
And with both of them.
To try to mitigate those cost increases.
Right.
Ks still grows at a little faster rate than others.
Nothing discernible.
We keep finding new items to <unk> and for a variety of different reasons and so continuing to drive that brand, but no I don't think there is we don't see a big difference of how that's changing.
Okay.
Secondly, you talked in the 70% on Costco logistics with 70% of your needs.
What capacity and logistics is it still 50% or is it crept above that.
It was in the 50 range.
Maybe it's slightly higher than that based on our when we originally bought.
What's now Costco logistics, a year and a half ago, we've moved over a bunch of volume we've grown it as well grown our total base of need and.
I think we are slightly above the 50% that we felt we had capacity for at the time and we certainly have plenty of capacity over the next few years mind, you were spending money on it part of our fulfillment and logistics.
I think I mentioned on the last quarterly call.
Within Capex, we expanded 340 or so million dollars on a multi acre million, one 6 million square foot.
Distribution facility in Southern California.
That's for a variety of needs.
Some of the much of what we bought.
And the <unk> acquisition in March or April of 2020.
More than 10 million square feet of space around the country are much of its least much of its fine by the way, but we are.
Not all of it was geographically, particularly the big sites to 1 billion square foot sites were in areas, where we're stronger relative to where Sears is stronger.
Or are they had most of their business at the time, So we're still spending money on it and upgrading it but.
But again from a merchandising standpoint, we're very excited about it and it's helped us grow that business in a big way and given our small market share.
Of many of those items, particularly on the appliance side, we feel theres a lot of growth potential for us.
Okay. Thank you.
The next question, we have Karen short from Barclays. Karen Your line is open.
Hey, thanks very much.
Wanted to just talk about ticket a little bit so U S ticket at three 5% can you kind of parse that out.
The transaction well versus AEP, but also tie that into the inflation numbers that you've called out for the quarter.
Expectations on inflation.
Honestly I can't I don't have that detail or thought in front of me.
Generally speaking you've got electronics like Tvs and what have you that are going down in price, maybe a little less this year, because theres less promotions because of shortages.
I mean every budget meeting every four weeks were presented.
Examples of items, where we're taking down the price.
<unk>.
High volume key items by changing the packaging.
By moving some.
Yes.
Some aspects of manufacturing to another.
Another part of the World.
And.
So I don't have the detail caren in front of me for that sorry, okay.
Okay, and then I wanted to.
This has been asked for a while but it.
Could you give an update maybe on what the average ticket is for executive members versus gold.
And then.
I know you gave us obviously, you've given a percent of sales, but frequency executive versus how maybe that's changed over the last.
Tears of the pandemic.
I will have somebody who is just running out of the room to see if they can grab that sheets and I'll answer it as soon as they get back if you wanted to ask another question or move on to the next one then.
Intervene when he gets back well.
Well My standard question would be just on your cash balance in terms of thoughts on a special dividend.
Oh well.
As soon as we know Youll know.
The day after.
Our cash position is strong.
One of the things I pointed out is our Capex is also increasing and a conscious way.
Notwithstanding that our cash flow from operations is growing at a.
Quite.
Stronger rate as well.
Thing that we've done four times in eight years.
We.
And the shareholders seem to like it when we do it and so I'm not trying to be cute, but we haven't made that decision at this juncture.
It's probably a when not if but.
When it will be when we do it.
Okay, and then maybe just while you're waiting for that.
<unk> on the executive.
Can you just maybe give us some color on what percent of freight is actually spot versus contract I don't know if you've ever given that number.
I don't have the exact number but I'm willing to bet.
It's 80 plus percent.
I could be wrong, a little bit but.
<unk> now recognizing with contracts, we might do one two and three year contracts. So we're still benefiting on three year stuff and benefiting a little on two year stuff and now gone beyond the benefit of the one year stuff.
And so it's.
It's over two or three year period, but our assumption is it will take less than that time to start to normalize somewhat.
Okay, Great is it harder today than it was yes.
But yes, but it's I think we again, we probably with other large users of freight and containers have probably done a pretty good job of at least staggering that not having to do a lot of spot stuff so far.
Great Yeah, I mean, if you've got those numbers on executive.
On ticketing frequency that'd be great.
Total.
What they came back with right now is we don't have I don't have I don't have quickly average ticket changes, but the total spend for executive member compared to a gold star member is almost three X.
Okay. Thank you.
Call it two and a half.
Thank you thanks, so much.
Yes.
Our next question, we have Greg <unk> from Evercore ISI, Greg Your line is open.
Hi, Thanks I had.
Two questions Richard one is.
Taking a little bit into the margins. The gross margins as you said gas and travel have helped but then offset by E. Commerce could you sort of explain where gas penny profit was up even if the mix or is that.
No.
Alright.
Margin percent was down, but <unk> got a 40% 50% increase in price per gallon got it. So you still have more pennies per gallon, but the margin itself was down.
Got it and then and then that was offset by.
E Commerce E Commerce.
Yeah, and again I wouldn't read a lot into any of that description. We're just trying to share with everyone Directionally what helps it hurts a little bit.
E Commerce.
Just given all the activity we've got in expenditures on fulfillment and expansion and doing what we can.
Over time, when we're pulling tickets, if we if something else happened.
I don't view it as a big issue for me is that whatever whether the margins up a little or down a little it's less about competition and more about what's the product mix that month or week and what else is going on with this rapid expansion and investment in it.
Got it and then maybe tie back to your discussion on the logistics Big and bulky. If we look at E. Commerce is roughly 8% of sales is big and bulky a quarter of that is that the kind of scale, we're talking about and.
It's over a third okay great.
Uh huh.
And then last but not least.
The renewal rates.
Continuing to tick up I guess.
It's impressive how do we.
It shouldn't that come off at some point.
Just just given that you have more first year members.
Well I guess the 100, no just kidding.
I think as I mentioned earlier in this and when I was speaking.
Yeah.
Probably the single biggest thing thats, helping it right now.
As auto renew as we get more people on the credit card.
And the two big co branded in the U S and Canada.
That's a no brainer to help a little bit as we convert people to executive member and as we for every 100, new people signing up a slightly higher number of them signed up as executive members. They are more likely to renew so those things help as well.
The thing I mentioned about new warehouses in markets around the world.
Tend to be.
While they have a very a much lower renewal rate.
In their first year of renewal or a year or two.
And that will continue to grow as more people have renewed the prior year.
Those are starting it generally those are starting at higher rates than they were so all of those things help a little bit.
I'd like to think it's all of the wonderful things, we do and the value proposition.
But certainly auto renew is probably a good help there.
Got it and then Alaska someone has to ask it just fee increase I guess back half of next year as one it will be five years since the last one.
What are the thoughts on that just given that the members seem to be self selecting the fee hike already through the executive membership does that change your thought process as to when you might take the fee.
No.
Our only thought is is we're probably started getting questions about now.
All right.
So.
It's still a while away and.
We certainly feel good and as I've said in the past renewal rates strong renewal rates and loyalty.
That process has been that thought process.
And we will see but it's still a little bit of time to think about it. Okay. We'll have a great holiday season, everyone.
Thank you.
For next question, we have purpose parikh from open Tamar Paas.
Your line is open good evening. Thanks for taking my question. So I wanted to touch on Canada and other international So we saw strong and accelerating two year comp trend for both Canada and other international is there any more color you can provide in terms of maybe what youre seeing in those in those geographies.
Yeah.
I'm getting a little help here, it's more it's probably most is right agree it's probably most about it.
How COVID-19 impacted different countries differently timing wise, I remember a year ago, and a year and a half ago.
Some of the foreign countries.
Did better while we were being locked down and then later they got locked down and so part of it is one of the reasons I think everybody has picked up on the two year stack concept, but I think that's as much as anything thats the reason.
Okay, Great and then if you look at your ancillary businesses is there a way you can provide an update in terms of how they are trending now versus pre pandemic.
I don't have that detail with me, but generally speaking.
Tires are picked up as an example on an ancillary business, but the Costco auto program is down because there is a shortage of cars out there.
Travel is not where it was pre it was almost back to where it was pre COVID-19 and then Delta Varian hit and then it was coming back again, and then I'm going to decline.
The decline hit so it fluctuates pretty quickly.
So.
And.
Im trying to think of the other things food courts have come back.
Don't think they are quite where they were but they're almost there.
Hearing AIDS have come back, but it's still I think slightly below pre pandemic.
Optical is doing great.
Pharmacy pharmacy is doing great helped frankly by the shots.
We like other retail pharmacies, providing plenty of vaccines.
Okay, great. Thank you for all the color.
Okay.
For our next question we have.
Is there any tick from Jeffrey Tiffany Your line is open.
Hi, Good afternoon. This is blake on for Steph.
Question will be higher level, you guys are a big proponent of the in store shopping experience at sea.
Seems like store sales have been fairly strong as of late for retailers. So I'm wondering how are your how's your in store shopping compared versus E com versus your expectations.
Recently, and then maybe if you can share any.
E Com pilots you might have.
<unk> been working on I know you mentioned you did pick up task, but you discontinue that anything maybe in the works that you can share.
Well, both in store and online have picked up.
<unk>.
The pickup from from things like against required for same day fresh skyrocketed during the Lockdowns in mid summer mid to late summer 2020 came down from those peaks, but are still way above where it was pre COVID-19.
E Commerce as you as you know because we talked about every quarter.
89% of our sales.
On a company that has a 192 billion in sales for the year ended this last August so that's a lot bigger than it was two years ago.
The last three or four quarters. The two year stack is 100 plus percent.
But notwithstanding that.
And part of that is the big and bulky that has helped that number which we really werent driving that kind of business and store anyway.
The fact that I think that.
As we've heard occasionally that notwithstanding some people don't like our mask requirements. When we first put them back in may of 2020.
I think overall people felt if I've got to go out I'm going to go out to one place and bulk up on stuff and with taller ceilings and wider aisles and all those things I got to believe that psychologically thats helped a little bit at the end of the day.
We were all surprised by.
If you go back to March of 2020.
Surprised by the strength in non foods categories.
We're in fall of 2020 much less now.
Much the same now.
Because people weren't traveling and they werent going to games in concert, but they were buying things for their home and we certainly had on top of all the food items all the other things they could buy for their homes. So that was a pleasant surprise to us and Thats continued.
And then in terms of other test not a whole lot I mean, we did have that small tests in new Mexico with buy online and pick up in store.
As I mentioned on the call.
We have over a year from now have over 200 of our U S warehouses were lockers.
In terms of buying online and pick up in store, we're not quite sure about that.
We have very busy locations, there's not a lot of room for it and it doesn't seem to be a lot of people clamoring for and in fact have half the people that come in and do that on a few things that we buy online and the lockers they come in and shop, while they're there.
So and Thats, what we want so.
Beyond that I don't think I think some of the things we're doing that I mentioned briefly about mobile and digital.
Some of these things everybody else have we are sometimes late to the game on some of these things.
Those should be all net additive to what we do.
Yeah.
That's super helpful. I was also wondering on your inventory positioning.
How much are you getting ahead of any seasonal items or any challenges you may foresee for Q2 and Q3 for the spring and summer.
I don't know exactly I know that consciously.
He has advised when they presented the budget means you are talking about those issues and we are bringing in things early we certainly have.
Do you think about it or what we call our depot.
Our view of distribution system in the U S was something like 10 million square feet and we essentially the slightly more than double that with the NFL acquisition aside from other things that helps us with a little storage, if we needed or bringing in things early.
And recognizing we start with we are somewhat seasonal but historically, you've always brought things in early anyway. So whenever it may be we certainly have the cash as somebody mentioned earlier.
To have.
Some extra billion dollars invested in inventory, even if it hangs around for a little bit, but I think overall.
Some of our items are still a little later than they would be pre COVID-19, but better than they would be if we were not doing as good a job as I think we are doing.
On forward buying.
Perfect if I could sneak one last one and I might've missed it but I think you said for the net new openings. This year, you said 19 I thought the last quarter you were aiming more towards 25 is there anything to call out there.
I said it was 19 more in.
The last three quarters of the year fiscal year plus.
Plus the Ada guidelines.
Perfect. Thank you very much.
Our next question, we have Paul Lewis from City Hall. Your line is open.
Hey, everyone this brand and beat them on for Paul.
I was wondering if we could talk about the increase in Capex I think last we spoke we thought.
Capex would have a three in front of it it sounds like it's it has a four in front of it I was just wondering.
Is there a change in the strategy there and specifically on the on the E com investments.
You feel like Youre, playing some catch up there or laying the groundwork for growth.
Anything that you can share with that.
Sure I think in previous as it relates to this year, we had talked about I think 3% to four to quote unquote and now we're saying about four.
These numbers are up from the 36.
From the mid threes over the last couple of years low to mid threes over the last couple of years in fact last year's three six included a 340 or $345 million asset purchase that I mentioned earlier.
In the southwest in Southern California, which is basically a million and a half plus square foot facility with lots of acreage.
To help with our fulfillment as well as our important stuff.
And so I think there's if you said what.
What are the big things, taking you from the low threes to the low fours over a few years a period.
It's.
More international expansions, which tends to be a little more expensive per location more expansion.
In fiscal 'twenty, we were down to 13 net new units because some delays with Covid I think we were at 20.
'twenty, one and we're going to be 27, net new units. This fiscal year, plus five reloads, which is cyclically low as planned.
We might missed that a little bit but at the end of the day, so theres more warehouses.
Clearly more than the whole fulfillment.
Onset starting with the $1 billion acquisition a year ago.
Let's now Costco logistics, starting with adding.
Additional.
Square footage.
To that.
As well as the international things and even even on the distribution side or what we call. Our cross dock depots spending money overseas now and some of these countries to do some of that in a better way actually building in many depot in Hawaii.
Where we have five locations.
Seven I'm, sorry, seven locations, but huge volume locations and with the.
So we've gotten to the volume and efficiency there.
These are good investments so it's a lot of those things mind, you, we still spend all in.
Close to $1 billion a year in it.
Got it and that's how we should kind of think about it going forward long term.
That's by the way that's not all Capex.
<unk> well go ahead I'm sorry.
And the $4 billion range is what we should think about capex for the long term.
<unk>.
And over the long term I think four sounds about right for the next year or two and if things continue to grow well go well and grow well.
Maybe it goes up from there a little bit but.
We're not looking to spend it if we don't think we have good things to spend it on just because our cash flow has been.
Exceeding net income plus our cash flow has been exceeding regular dividend plus capital expenditures.
And the like.
Got it.
And you also mentioned that.
You were able to change our products when you're faced with shortages.
Wondering if you could quantify that versus kind of a normal quarter.
If you're switching out more unusual what impact does that have on it.
Consumer behavior there.
On the logistics side as well.
<unk>.
I don't have the exact number but my guess is it's a small.
Low to mid single digit percentage, what it means though is as win back going back all the way back to spring of 2020.
And there were people were hoarding goods, we're going out to additional suppliers to see what we can get recognizing from their perspective, it creates a new relationships, which will honor.
Going forward not just for the three months that we hated. It then and so I think there are opportunities to just expand product brands by necessity.
To sum things and.
And with I think the only into last summer and fall with that advent of.
Of.
All of the things for the home, both patio furniture, and lawn and garden, and barbecue grills, and indoor furniture, and electronics and gadgets for the kitchen.
We took advantage of that and brought in additional items and.
So it's more of that than anything.
And the treasure Hunt.
So it's still a small piece, but I think it's when I, sometimes when I go into.
Some retailers I'm not seeing any names, but youll see.
Self half empty or some spaces.
First of all why don't you put it something there and but at the end of the day I think our buyers have done a very good job of keeping the warehouses are full.
Great.
Good luck for holiday.
For our next question, we have Edward Kelly from Wells Fargo Your line.
Okay.
Hi, good afternoon, guys happy holidays.
Richard I wanted to ask you.
Gross margin.
All things considered any.
Any additional thoughts you could share.
Linked quarter.
No.
Alright.
Any reason, we should expect some sort of incremental.
Yeah.
Somewhat similar.
Youre breaking up entirely during that call. So I heard about every other word if you want to repeat yourself.
Yeah, sorry, so I wanted to ask you about the gross margin.
As you said pretty good all things considered any additional thoughts you can share on the current quarter comparisons in the core look similar I think I'm just wondering if theres any reason, we should expect any incremental pressure.
From a competitive standpoint, I mean, there is lots of everybody's competitive.
Again, I think structurally our model allows us to better from them that we.
We talked about.
More pennies per gallon of profit that allows us to do some other things.
I think we've got.
I think we have a.
Lot of leavers to pull here and.
We feel pretty good that we are able to.
Two.
To hold the prices on key items.
Two.
I don't really think that we consider the challenge of achieving a margin we're pretty good at figuring out how to get there while still being.
The company, we are in terms of competitiveness so.
No big changes of what we see out there.
Hey, Jessica.
Just theres a lot of changes every month.
Some things go up and some things go down, but overall, we feel pretty good about it.
Alright, and then just for a little bit more big picture just around cluster.
Customer data I was hoping maybe you could just provide an update on things.
Things like personalization.
And then media is something that we hear a lot of people talk about.
Maybe just any thoughts on what youre doing with that opportunity as well.
I think there is still.
The low hanging fruit on the tree here.
We've talked about it a little bit we've done a little bit more targeting than we have ever done, but very little there is more to come.
It was just a year and a half ago.
We hired.
Somewhat relatively senior level in terms of data analytics.
That's not the only thing that we're working on it.
With that he has.
Put together, but yes. So I think those are things that will come over time in the next few years.
That's pretty much what I can tell you about that.
Okay. Thank you, okay, I'm going to take two more questions Sandy.
And for the next question, we have Laura <unk> from loop Hutzell Laura lines have been.
Thanks, Richard Monto be quick hits, a follow on I mean, you had mentioned that renewal rates are still headed higher in part because of.
Likely because of the auto renew what percentage of your membership is on auto renew at this point.
Sure.
Right.
Understood.
It's about 50 in the U S and Canada.
Which would imply and that's really where we have it where we have the co brand cards.
In the U S and Canada is about 80% of our company. So the 50 becomes a 40% rough numbers now.
Got it.
Okay.
I'm sorry, you could do it on any car not just co brand.
But in the U S and candidates about 50.
Understood. Thank you so much.
Yes.
For our last question, we have Kelly Bania from BMO capital Kelly Your line is open.
Oh, Thanks for squeezing me in here.
Just wanted to talk a Richard about the just the inflationary environment.
You've talked a little bit in the past couple of quarters about higher price gaps have widened.
Do you think this kind of magnitude of inflation is just good for Costco business. I mean have you seen anything like this in the past where it could possibly just drive even more volume into your doors.
I mean from an argument that things are more costly on one hand, maybe it reduces demand overall.
That were the extreme value proposition that helps us.
So who the heck knows.
Yes.
I mean, when I was reading this morning in the paper was.
Inflation in so many years.
It wasn't that long ago.
10, plus years ago that.
Regular inflation was 2% to 3% a year and of course, it's going to be a little more for a year, but at the end of the day.
I think it helps us a little bit.
Because of the value proposition that we have.
That makes sense and a lot have been asked here, but just wanted to also just check on.
Self checkout, and where you are with that and if theres any color you can help us understand on.
The savings or the impact on the cost structure when when you put in some self checkout and the potential for that initiative going forward.
We pretty much have it now in most locations.
And I'm speaking of the U S.
And Canada, and I know even across the street in many locations. We've expanded it from originally two lanes of three or six to three lanes of three or even four lanes of three.
So in.
Four lane area, you could have 12 people checking out.
And so.
My guess is it's still going to grow a little as we expand existing units offer a little bit more of it.
And it's been it's been a positive.
Okay.
Okay. Thank you.
Well, thank you everyone.
Have a good holiday season, and we're around to answer additional questions.
Have a good day.
And ladies and gentlemen. This concludes today's conference call. Thank you all for participating you may now disconnect.
Okay.
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