Q2 2022 Costco Wholesale Corp Earnings And February Corporate Sales Call
Good afternoon, and thank you for standing by welcome to.
The Q2 earnings call and February sales results at this time, all participants are in a listen only mode. After the speaker's presentation. There will be question and answer session. I'll ask a question. During the session you will need to press star one on your telephone.
Any further assistance. Please press star Zero I would now like to hand, the conference all participant today, Richard Galanti, Chief Financial Officer. Please go ahead.
Thank you Jerome 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 1095 lease.
These statements involve risks and uncertainties that may cause actual events results into our performance to differ materially from those indicated by such statements.
The risks and uncertainties include but are not limited to those outlined in today's call as well as other risks identified from time to time 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 second quarter of fiscal 'twenty two.
The 12 weeks ended this past February 13th as well as February retail results for the four weeks ended this.
This past Sunday February 27th.
Net income for the quarter came in at $1 billion and $299 million or $2 92 per diluted share last.
Last year's second quarter net income came in at.
$951 million or $2 14.
Per diluted share.
That latter number included a $246 million pre tax or <unk> 41 per share.
Costs incurred primarily from COVID-19 premium wages net.
Net income for the 24 weeks was 262 billion or $5 90 per share compared to $2 12 to two.
$2, one 2 billion.
For $4 76 per diluted share last year.
First half.
Net sales for the quarter increased 16, 1% to $50 $94 billion.
Up from $43 $8 $9 billion last year in the second quarter comparable.
Comparable sales in the second quarter.
Fiscal 'twenty two on a reported basis U S sales increased during the 12 week period was 15, 8%.
<unk> gas inflation 11 points.
11, 3% Canada.
16% reported 12, 4% ex gas inflation and FX.
Other international six, 2% and plus 9% ex gas inflation and FX for the total company reported number of 14, 4% on a same store comparable basis and up 11, 1%, excluding gas inflation and FX.
E Commerce on a reported basis of 12, 5% and.
FX up 12, 6%.
In terms of our second quarter comp sales metrics traffic or shopping frequency increased nine 3% worldwide and up eight 3% year.
The year over year in the quarter in the United States, Our average transaction or ticket was up four 6% worldwide and up six 9% in the U S. During the second quarter.
Foreign currencies relative to the U S dollar negatively impacted sales by approximately 60 basis points, while gasoline price inflation positively impacted sales by approximately 390 basis points.
I will review our February sales results later in the call.
Going down our second quarter.
<unk> 2022 income statement membership fee income reported came in at $967 million.
Up $86 million or up nine 8% from a year earlier $881 million, there was about a $6 $5 million impact negative impact due to FX. So on.
An ex FX basis, if you will the $86 million increase would have been up $92 million or 10, 4%.
In terms of renewal rates they continue to increase.
At second quarter end, our U S and Canada renewal rate stood at 92, 8% up four tenths of a percentage point from the 12 week earlier Q1 end and worldwide rate. It came in at 89, 6% up six tenths of a percent from where it stood at 12 weeks earlier Q1 end.
Our 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 nonexecutive members and higher first year renewal rates for our new members and.
In terms of the number of members at second quarter end member households, and total cardholders.
Total households.
With $63 4 million up 900000 from the $62 5 million just 12 weeks earlier.
Total cardholders at Q2, and $114 8 million up $1 7 million from the $113 1 million figure 12 weeks ago.
At second quarter end paid executive memberships stood at $27 1 million an increase of 644000.
During the 12 week period since Q1 and executive members by the way represent now 42, 7% of our total membership base.
And 79% of our total sales.
Moving down to the gross margin line, our reported gross margin second quarter was lower year over year by 32 basis points.
But up five basis points, excluding gas inflation as I always do I'll ask you to jot down a few numbers two columns. The first column is reported in the second column would be excluding gas inflation.
First line item merchandise core merchandise on a reported basis was down 75% 75 basis points year over year and ex gas inflation down 43%.
Ancillary and other businesses reported plus 40 basis points and ex gas inflation, plus 49 basis points.
2% reward plus three and minus one basis points.
LIFO minus 14 in minus 14 basis points.
Other plus 14, and plus 14 basis points, so totally on a reported basis again year over year minus 32 basis points, and excluding gas inflation plus five basis points.
Now in terms of the core merchandise component being lower by 75 year over year reported 43 minus 43 basis points ex gas inflation recall last year in Q2 that the core reported was plus 71 basis points and ex gas plus 63, so still improve to where we were two years ago preprint demick and ex gas.
In terms of the core margin on its own sales in Q2, our core on core margin. If you will was lower by 28 basis points year over year.
Approximately two thirds of this coming from fresh foods, and a little from foods, and sundries and non foods as well.
Fresh continues to lap exceptional labor productivity and low product spoilage that occurred from the outside sales a year ago in the second quarter.
Ancillary and other business gross margin was higher by 40 basis points and by 49 ex gas in the quarter gas travel business centers in pharmacy, you were all better year over year.
Offset by E common optical.
LIFO, we had a 14 basis point hit year over year to LIFO or $71 million LIFO charge during the quarter.
Both with and without gas inflation recall that our Q1 LIFO charge year over year.
It was $14 million or in the first quarter was $14 million or three basis point delta versus the prior year. It's been the last three fiscal quarters that we've actually pointed out LIFO as we saw a little bit of inflation going back to December or Q4 of fiscal 'twenty, one a little more in Q1 of this fiscal year.
Everything you read in the news a little.
Quite a bit more in Q2.
2% reward was higher on a reported basis by three and minus one excluding gas inflation.
Selection of increased penetration of the 2% reward executive members and other was plus 14 basis points.
Year over year. This is related to the COVID-19 related costs from a year ago about $60 million. That's the portion of Cobra related wages that go into cost of sales.
That like related to manufacturing businesses as well as their meat bakery departments overall pretty good showing on gross margin given the ongoing and increasing inflationary pressures movie.
Moving to expenses SG&A, our reported SG&A in the second quarter was lower or better year over year by 94 basis points.
And better by 63 basis points by 63 basis points, excluding gas inflation again, jotting down two columns of numbers reported and the second one ex gas inflation.
Operations, plus 36 basis points and plus nine here are pluses good it means it's lower year over year.
Central plus 13, and plus 10.
Stock compensation, plus three and plus two.
Other plus 42 and plus 42.
A total of plus 94 and plus 63.
Better or lower by 94 basis points reported and better or lower by 63 basis points ex gas inflation.
Now again looking at the first line item operations, the core operations component better again by 36.
As well better by 9% or lower by 90 basis points, excluding the impact of gas inflation.
Keep in mind this improvement occurred despite both the permanent dollar an hour wage increase that began in March of 2021.
Now anniversarying and the additional starting wage increases from our two two basic arity scale services systems and services.
Bye.
<unk> 50, an hour that occurred in October of 2021.
On a central better by 13 basis points or 10 ex gas inflation, it's pretty straightforward operating leverage on strong sales figures stock comp plus two and plus two again reflection of.
<unk>.
Good sales and other plus 42 basis points. This was the $2 COVID-19 wages of $186 million that goes into SG&A in Q2, a year ago. So again on a year over year basis that was that improvement.
In terms of Preopening expenses in past conference calls.
Since we went public I think we've covered that Preopening expenses next on this discussion starting this fiscal year and going forward. Preopening is now included in SG&A the year over year change in SG&A related to Preopening was flat year over year, no basis point Delta year over year in the second quarter.
All told reported operating income in Q2 increased 35% on a reported basis coming in at.
$1.812 billion, this year compared to $1 $340 million a year ago in the second quarter.
Below the operating income line interest expense was $36 million this year.
Versus $40 million last year.
Interest income and other for the quarter was higher by $6 million year over year $25 million this year versus $19 million last year, primarily due to favorable FX.
Overall reported pre tax income in the quarter was up 37% committed 1 billion 801 compared to $1 $3 19, a year earlier.
In terms of income taxes, our tax rate in Q2 was slightly higher than it was in Q2, a year ago was came in at 26, 7% compared to 26, 4% a year ago in the second quarter, our effective tax rate is currently.
He used to be projected to be in the <unk>.
6% to 27% range for the fiscal year.
Other items of note.
Warehouse expansion.
For the year, we now plan to have 32 new units.
And $2 32.
Units, including four relocations, so replacing existing units.
Larger and better located facilities. So net total of 28, I think a quarter ago. We actually said it was a net total of 27% so one more than that.
However, remember several of these are slated to open in Q4, our fiscal Q4.
15 of them are 14 net new.
There's always the potential for one or two is to shift into the next fiscal year.
Openings in Q2 that we had one each in Mexico or $40 in Mexico, Our second in France, our second in China.
Our fourth in Spain, and one additional unit in Florida, where we now have 29 locations.
Regarding capital expenditures.
Our Q2 spend for Capex was approximately $723 million and our.
Full year Capex spend is still estimated to be approximately $4 1 billion.
Moving on to E Commerce E Commerce sales in Q2 F X FX as I mentioned earlier increased 12, 6% year over year.
And Thats of course on top of a second quarter of fiscal 'twenty, one increase of 75% increase last year benefiting of course from Covid.
Stronger departments in ecommerce in terms of year over year percentage increases.
Jewelry tires, especially where kiosk items.
Patio and garden and home furnishings.
Our largest online merchandise department majors, which consists of consumer electronics appliances, Tvs et cetera.
Was up in the high single digits very strong sales increases a year earlier.
In terms of an update on Costco logistics.
Continues to drive big and bulky sales for the quarter deliveries were up year over year, 22% and now about 85% of our U S E com.
Less than truckload shipments.
From Costco logistics.
Ourselves.
Average during the quarter, we average more than 65000 stops per week with Costco logistics.
It translates into a little over $3 million planned.
Drops.
Costco logistics for the fiscal year.
In terms of E com and mobile apps continues to improve much improved layout.
Ability to view warehouse receipts online the ability to reschedule AECOM deliveries in the U S and Canada as well as reschedule returns pickups.
Later this month, we'll have our warehouse inventory along with the current inventory online.
And be able to see all the detail of our in line were in store merchandize as well.
In terms of our E Commerce platform Costco next we added a few additional suppliers. So we now have 37 suppliers online and growing again.
Costco next has about 1000 items on it curated items at Costco values.
Please give me the check it out.
From a supply chain perspective, similar issues that we outlined both 12 and 24 weeks ago on the past quarterly earnings calls.
The factors pressuring supply chains and inflation include port delays container shortages COVID-19 disruptions shortages of various components and raw materials and ingredients and supplies labor cost pressures of course, as well as truck and driver shortages overall, we've done a pretty good job of given the supply chain challenges.
I think thats.
It's evidenced in our sales strength.
They continue to be delayed into container arrivals. So we continue to advance order in many cases as we as we were able to <unk>.
Virtually all departments are impacted.
Less product and packaging challenges, but still a few.
Still some limitations on key items, but again thats improving a little chip shortage are still one of the things that are impacting many items some more than others, but again, we're managing temporary shelves full and driving sales.
One of the things that we've done that I mentioned last quarter last quarter I mentioned, we have chartered three small container vessels.
To help provide us with additional flexibility on shipping we have now charge a total of seven ocean vessels up from those three for the next three years and these are the transport containers between Asia and the U S and Canada.
We have also leased containers for use in these ships with these additions about a quarter of our annual Trans Pacific container and shipment needs are being accommodated this way, which gives us additional supply chain flexibility.
Despite all of the supply chain issues were staying in stock and continue to work to mitigate cost and price increases as best we can from every day and every week youre going to see in different items in different departments certain things on allocation or short, but other things are falling into place and again some things.
So you need to get a little better.
Need to inflation deflation of course continues as evidenced by our LIFO charge. The inflationary pressures that we continue to see include higher labor costs higher freight costs as well as higher transportation demand along with the container shortage and port delays that I just mentioned.
Increased demand in certain product categories.
Very shortages of everything from computer chips to oils into chemicals to residence.
Higher commodity prices from that.
Foodservice oils to additives and motor oils to plastics to detergents to paper products as well on the fresh side proteins in butter and eggs and things like that not very different than what you hear and read and see from others, but again, we think we've done a pretty good job of corralling. It as best we can.
For the first quarter, a year a quarter ago I mentioned that we estimated at that time overall price inflation to have been in the four 5% to 5% range for the second quarter and talking with senior merchants estimated overall price inflation was in the 6% range.
All of this said again I want to give another shout out to the job that our merchants and our traffic department and our operators all been able to do to keep in order to keep the products.
That we need pivot, when and where necessary to keep our warehouses full.
Keeping prices as low as we can for our members and continue to show great value versus our competitors.
Now turning to our February sales results. The four weeks ended this past Sunday February 27th compared with the same four week period a year ago.
As reported in our release net sales for the month of February came in at $16 $2 9 billion, an increase of 15, 9% from $14 5 billion a year earlier recall from January sales results that lunar new year lunar new year Chinese new year occurred on February 1st that's 11 days earlier this past this year.
And last this shift negatively impact February other international by about four percentage points and total company by about a half a percentage point.
Comparable sales for the four weeks on a reported basis U S was $17 four ex gas and FX 12, 9%, Canada reported 11, seven ex gas and FX eight eight other.
Other international minus nine.
Ex gas and FX, one three to the positive.
Total company 14 point out in 10 six and.
And E comm within that number is 10.2 reported in 10, four ex gas and FX.
Our comp traffic and frequency for February was up 8% worldwide and eight 2% in the United States.
Foreign currencies year over year relative to the dollar negatively impacted total and comp sales as follows Canada by approximately two tenths of a percent.
Other international by approximately four 5% and total company by approximately seven tenths of a percent.
Gas price inflation positively impacted total reported comps by about 4% and average worldwide selling price per gallon was up year over year by 37%.
Worldwide. The average transaction for February was up five 5%.
Our U S regions with the strongest sales, where Texas southeast and northeast other.
Other international and local currencies, the strongest results in Australia, Mexico, and the U K move.
Moving to merchandise highlights for the month of February .
Food and sundries was accumulated with positive high single digits.
Fresh foods in the mid single digits and non foods in the positive high single digits ancillary businesses sales were up mid forties with gas being certainly a driver of that as well as food court and hearing AIDS.
Were the top performers.
With that I want to mention just a couple of recent executive changes a month ago. We reported that run backwards became president of Costco. Ron started his career 39 years ago with price company at price club at the young age of 17. Most of his career was in operations through 2015, and he spent a little over a year and real.
State traveling the world and working on both worldwide and domestic expansion and since that time in 2016 has been in merchandising with certainly responsibly not only for inline merchandising, but online merchandising as well as very involved with that.
Logistics and transportation.
As well.
Just this week internally, we reported their takings ron's previous spud as head of merchandising.
As Claudina Domino Claudine has been with US for 30 years. She began in an hour reposition our Kirkland warehouse in 19, $92 30 years ago, but a year later came into buying and has been in buying ever since and most recently was senior VP of non foods sales.
Of non foods merchandising and.
Again, she will be taking over looking overall of merchandising.
Finally in terms of upcoming releases, we will announce our March sales results for the five weeks ending April 3rd on a Sunday April 3rd.
On Wednesday April six after the market close.
With that I will open it up to Q&A and turn it back to Jerome. Thank you very much.
Thank you at this time I would like to remind everyone in order to ask a question. Please press Star then the number one on your telephone keypad.
Your first question comes from the line Michael from.
From UBS. Your line is now open.
Good afternoon, Richard Thanks.
Alright. Thank you my question.
Got it.
The potential for it.
Yes.
Yes.
Year.
Perfect.
Some reflection.
Thank you.
Especially in light of.
Okay.
Yes.
Sure.
At this time.
Well.
It's possible.
Great.
Okay.
Well certainly I don't think.
You should interpret anything related to.
Wire when.
Historically, we always look at things like.
Do we feel we can we let ourselves in the mirror do we feel that we've continued to increase the value of the membership certainly we look at renewal rates.
It's less than what others do frankly, but certainly is out there what others are doing and what I do note is that I've looked at the last three increases over the last 15 years and on average they were done about every five little over every five and a half years about five years and seven months and.
Five years from the anniversary of the June of 2017 would be this June .
I think the question we will continue to be ask until we do or don't do something but at the end of the day, we certainly feel very good about our member loyalty.
Our success Didnt getting members to move to executive member, which are the most loyal and so.
You guys all know when when we tell you.
At some point it will happen, but stay tuned.
A question on that.
Core on core gross margin.
A couple of quarters.
About.
Yes.
One for Mark.
Okay.
Sure.
Sure.
The right way to think of.
About what.
Okay.
Sure.
Okay.
Sure.
Alright.
Yeah.
Yeah.
Yes.
Recognizing I'd like to think it was that easy that we can plan it and get there sometimes we get there, but 10 different variables go in 10 different directions than we had planned there's lots of moving parts to it. The fact of the matter is is we certainly have confidence in our <unk>.
Competitive position and our confidence to get some margin.
As we go forth. The fact of the matter is as our margins. Our gross margins are still even on core on core higher than they were two years ago. We had outsized margins two years ago, most particularly in fresh when you had 20% 30% increases in fresh.
Darn near eliminated spoilage and.
What are the two.
Labor.
Improved dramatically labor productivity and fresh and darn near eliminated all your spoilage.
Some of that is not sustainable so, but even with some of the give back if you will.
On a two year stack. If you will we've shown we're still showing higher year over year numbers on core on core. The other thing is as we've said and we don't sit around and just kind of your chest on it.
Yes.
Despite these inflationary pressures we've tried to hold where we can now needless to say you can't do that and that's near in its entirety.
But we've probably been a little later than others in terms of raising some things in our view, we've worked with our suppliers too.
All of it and we get a little of it and I think that these margins.
Particularly given the sales strength and the operating leverage allow us to be ever more competitive and drive our business. So.
When asked the question as many of you know over the years.
Who's our toughest competitor, it's us and I don't really look at this as being a reflection of what's going on out there. We're wherever competitive we're always checking our competition and we feel that that competitive.
Our competitive position is as strong as ever.
Hi, Bob.
Sure.
Thank you. Your next question comes on line of Simon Gutman from Morgan Stanley Your line's now open.
Hey, everyone. Good afternoon, Richard I would like to follow up on the core on core question just asked differently.
About a year ago supply chain costs were rising input costs are rising.
And it felt like you were not ahead of it in the last two quarters. It seems like Youre now more ahead of it you feel better you called out the two year trend and the core on core so does it feel like we are past the worse.
That you are able to either move pricing or have some visibility on supply chain and then related to the perishable piece it sounds like youre going to keep some efficiencies. So there is a reason to believe that some of this you will keep.
Going forward I don't know, if thats fair or not.
Yeah, well certainly on the on the fresh and the fact that we're at higher sales levels that allows for higher labor productivity and hopefully a little lower spoilage.
I don't disagree with what you say, but theres never know whats going to happen tomorrow.
No thats it for 35 years when things get.
Better we figure out how to give a little more of it back and certainly right now with all the inflation first and foremost is getting merchandise on the shelves and then mitigating those various cost components as much as you can which is not a lot and.
Again, but hopefully being.
As if not a little more competitive than others.
And maybe a follow up I'd love your take on the price gaps out there.
It feels like every company we cover in the mass space supermarket space. They are all pleased with price gaps.
And yet I'm not sure I don't know, if thats right or wrong, and we're seeing gross margins actually start to go up in some places. So it seems like companies your competition they are taking price.
That would imply that the gap is actually should be widening and making you more valuable curious I know you guys have folks running around stores a lot curious how what's your take on it.
Well, we like when they feel more comfortable frankly.
Our most direct competitor as Sam's we we.
And I'm sure they do to do comp shops every week and every darden every location.
We feel good about those gaps it's not that they've widened our shrunk that overall they are a tough competitor and so are we.
As it relates to other traditional yes, you've seen.
I think we've talked we've called out strength in gas business I think overall, what I read externally about gross margins in retail gas by the supermarkets and others is up and there is a little bit more that gives us breathing room as well, but we want to be ever more competitive.
Great. Thank you.
Your next question comes from the line of Chuck Grom from Gordon Haskett. Your line is now open.
Thanks, a lot Richard over the past few months you guys have had success raising retails and I'm wondering if that trend has continued or if youre starting to see some limits or demand destruction in any parts of the club.
No and we haven't.
Okay.
I think certainly we already got it.
The more inflation to create some.
<unk>.
Some demand pressure.
Like to think some of that inflation.
But wanted to shop at Costco in the save more frankly, but we haven't seen that yet.
Okay, Okay, Great and then just another near term question and historically.
Wondering if with gas prices, where they are and where they're likely to go I heard today, California is close to five bucks.
Stork lease has there really been a tipping point.
And how it impacts traffic for you guys I understand how it impacts the margin structure of your business, but historically is there a tipping point for you.
We haven't seen that yes, the only time it.
My recollection is a number of years ago when prices got to $45.
Alan and like then and now we see our gallons improve relatively speaking because we are still the cheapest game with them.
Yes at some point if it goes that evident.
People stopped driving a little bit it's hard to say.
I'd like to think that the.
The hybrid models of working here Thats helpful, Dave a little bit there.
Okay, great. Thank you.
Your next question comes from the line of Paul <unk> from Keybanc. Your line is open.
However on this Brandon Cheatham on for Paul Thanks for taking the question.
Was wondering are you seeing any change in consumer behavior, such as trade down on or maybe trade two private label brands and is there anything of that nature.
Right.
You know it's interesting on the one hand, and the only thing I can think of as in fresh when there's been big fluctuations in prices or big increase in prices on beef relative to check it or something youll see some trade down.
Within the protein family.
Other than that a couple of anomalies that are perverse in the sense that this almost just the opposite we've seen strength in jewelry and in big ticket furniture items and the like.
Okay.
And and and more conversions to executive membership, which again there is more value long term to that customer, but it's it's.
It's adding $60 to their feet.
Got it and just a point of clarification on price inflation has moderated.
Moderated the past couple of months is I think some of your monthly updates have indicated or are you still seeing that accelerate.
It has not moderated it continues to go up.
Got it now.
It's going to be up perhaps at a little less slipped the bigger slope was probably.
For the two months ago, and it's gone up from there.
I think if I recall, there was a little low talking to the buyers a little lull in the last couple of months of the year, but many suppliers are already talking back two months prior to that come January will be coming back and talking to you again.
Got it.
I appreciate it thank you.
Your next question comes from the line of Scot Ciccarelli from truly Securities. Your line is now.
Good afternoon, guys Scot Ciccarelli. So Richard you guys are running with nearly double the cash balance that you historically would have run with kind of pre pandemic, obviously theres still a lot of uncertainty in the market I guess the question is because we've seen this pattern for probably eight quarters now to continue to run with much higher cash level.
Then what you historically have or.
Should we start thinking about the potential return of capital to shareholders like you've done periodically.
Well.
At some point, we'll figure out what to do with it mind, you our Q2 balance sheet Q2 and balance sheet.
Probably.
The highest points from a seasonal standpoint.
Because of.
You've built a lot of sales and you still have some of the bills to pay from the Christmas time, not a lot, but some and and frankly.
Got it.
Our operating cash flow has certainly exceeded what we had expected two years ago. So yes, there is a little more at some point certainly one of the arrows in our quiver.
Special dividend along with the regular dividend increase that we've done every year.
As well as some stock buybacks, but first and foremost as Capex capex this year.
Boarish plus billion is is that from the three three and a half over the last couple of years and up from <unk>.
Number is lower than that two to four years prior to that so that's first and foremost.
That money on but.
Yes, we've done four specials and.
Sure.
As one of the Board member said is we are a little quirky and it seems to have worked for us. So it's certainly an arrow in our quiver, but we haven't made any decision at this point.
Got it thank you.
Your next question touch on the lineup Karen short from Barclays. Your line is open.
Hi, Thanks very much.
Just wanted to ask that membership fee question, a little differently. So in the past you've talked about raising the membership fee in the context that you obviously have.
While the dollar has been reinvesting right. So I guess the question is.
Maybe with the assumption that consumer is going to continue to fill a little more and more stretched as the year progresses, how does that factor into your thought process and then also tying that in.
The fact that there was obviously the increased membership.
Amazon.
I think we.
No.
That doesn't hurt but.
Honestly at the end of the day.
First and foremost the factors that.
Doesn't give us any concerns is the fact that our sales are strong our renewal rates and loyalty are at all time highs.
So that's all positive and yes, when we do it we use it to be even more competitive so on the one hand, you might argue that because of the inflation would this allow us to mitigate some of that we're already doing that by the way without a fee increase.
But.
Sure.
We've done it seven times in 35 years.
Some time between summer and.
Six or nine months down the road is it likely it's possible, but we'll have to wait and see.
We don't really consider what what Amazon or whether we were asked the question. The other way with some of our direct warehouse club competitors that there is they have not changed there is a number of years and that does not concern us either we looked at what we're doing how it affects our members and we look at ourselves in America is have we have we improved the value of the membership we've always felt.
We've done that in a more dramatic fashion that these increases and then we take those increases and use it to become even more competitive so.
I can't give you can I give you an answer other than we feel good about if and when we want to do it we'll be able to.
Okay and then my second question is just fine.
Net income margin or I guess, you could talk about pretax margin.
Obviously that has come up quite a bit over the last several years and I think the question on a lot of peoples mind is just is there more willingness to flow through margin on that.
And I know again, you don't run your business that way around that.
And volume and leverage.
Stock comps, but just wondering how you would frame that.
Well.
First of all certainly in this quarter as well.
Yes.
The bottom line margin improvement was.
The sum of.
Great expense improvement and some margin detriment and take it out all the anomalies of H and Thats. The way we wanted to do it the old saying is we want to lower prices and raise margins. The same thing as we want to improve the bottom line, while not raising prices.
And I'm not talking about necessarily specific inflation right now.
I think I.
A recall and a few on a.
A few of these on the review on the call might if I remember this when we had our first and last all hands the analyst meeting out here with about 300 people.
And at the time, we had a two 8% pre tax return on sales pretax and.
Our founder was out there, saying that we're a great company and great companies deserve to make good money in over the next several years. We wanted to go from two eight to a number I won't I won't get everybody excited but a bigger number and at the end of the day. It went up and down but it has improved I think that we've got a lot of great things going on.
We're not embarrassed to make money for.
For our shareholders as well, but we're going to do it within the confines of being ever more competitive from a pricing and value standpoint to our members.
Okay. Thank you very much.
And our next question comes from the line.
However from Jpmorgan your line's now open.
Thanks, Good evening.
I guess my first my first question is do.
Do you look at the U S sort of core comp.
Two and three year basis.
Really since the summer, there's been a bit more volatility to them.
And three year trends, even over the past few months.
Do you read into that how much do you think that was maybe just like a holiday shift maybe some omicron impact in January curious, how youre thinking about that.
It would be the all inclusive yes, it's all of the above.
I remember when we had particularly strong.
Early in the Christmas holidays, Thanksgiving Christmas holiday season, we had strength part of that was bringing in some things early.
Part of it was this increased demand that COVID-19 has created for goods for the home.
And the shortages are those same goods and so once they hit the shelves. So quickly and then of course it was a little it was still positive, but a little less than that trend.
At the end of the calendar year.
And without doing a lot of work it seemed like that was the reason.
Then you've got <unk>.
Storms that affect the things you've got shifts and things like that.
Chinese lunar new year.
We really don't spend a lot of time doing that.
Good to understand why overall.
Overall, something some leftover some level of sales either generally reduced for the increase were not worried about it as much and but I don't think we spend a lot of time thinking about that.
As we've been reminded from the day of our founding where top line company and it's all about driving sales and value in it.
It's going to be as good as we can get it.
So we don't read a lot into what you asked.
Okay. That's a good segue I guess.
Your executive trends the renewal rates the comps the traffic you're one of the few big retailers. So it's really strong traffic, but at the same time.
Is there a point, where just the culture becomes uncomfortable with with passing through price I mean, the vendors have talked about more price increases that have come starting January 1st it seems like theres more.
In September I could think of Jim sort of.
Being paranoid.
And worried about do we just pushed too far in do we not want to risk that and.
Invest more in price before even seen any deterioration in the sales trends.
I would say we are more aggressive when things are good.
We're aggressive when things are good and bad I remember somebody years ago asked the question.
Given that sales for whatever reason had been weak for a month or two.
That was more of a reason to be even more strong on pricing and I think that actually had to do related to a pending membership fee increase based on this kind of five plus year anniversary diversity and the view was is no. Our members are loyal and we're going to use it to drive more sales. So no I don't I think we're still.
Board of that same DNA of trying to constantly drive more value and not worry about how strong or weak. We are today, just keep driving more value and.
If we keep focusing on that nobody can catch us.
And then just one quick.
Sorry say it again, it's harder to catch us at least.
Yeah, and then just a quick question on LIFO if price increases have continued into this year does that LIFO number sort of stay at this level and as we lap through it do we actually get that back.
Well in theory, you don't get it back.
As I said earlier, if inflation is continuing you should see some additional LIFO charges.
Maybe not as big but who knows.
And at some point at the beginning you start a new fiscal year, you've had whatever LIFO charge youll have for this past year and that's kind of a loose set point for costs for each item and then to the extent if.
There is additional inflation relative to that starting point youll have some additional LIFO next year.
If things came down a little bit, let's say things I'm, making these numbers up and extreme because things were up and one year, 20% in the next year. They are downturn you had a big LIFO charge. This year and you actually have some LIFO credit in the following year.
Got it. Thank you best of luck I gave you an extreme example, that's not the reality.
Thank you.
Your next question comes from the line of Mike Baker from D. A Davidson your line is open.
Okay. Thanks, I guess I'll.
Stay on the inflation question, but I'll ask two.
Two different inflation questions. One if prices do come down eventually they will historically, what do you see in terms of your ability.
To maintain the current prices in other words not to come down and then to gain some margin.
Margin in that sense and then.
Inflation related question historically, when you see outsized inflation now it's been a long time since we've seen inflation like this but you've been around for a long time. When you see inflation do you get more customers coming into Costco to save money you alluded to that earlier, you said Thats, what you hope happens, but I guess I'm sure you've looked at it historically.
Have you seen.
On the latter question past history has indicated it's not in a big way, but the answer is yes directionally.
As it relates to if prices come down if our costs come down.
To be the first to lower the price period.
Okay.
That makes sense.
One last one if I could.
Similar to that as you get more customers wanted to inflationary environment do you see more customers wanting to sign up to take advantage of the value.
In tougher economic situation in other words in 2022, no stimulus. It does appear as if the economy might not be or with the consumer economy might not be as strong as last year, how does that impact. Your your memberships are renewal rates.
You asked US two years ago, how would the next two years be in terms of new member sign ups, we would be positive, but we probably have achieved greater than those expect that.
Our own expectations by a little.
So arguably that it was not just the stimulus, but notwithstanding that stimulus there wasn't a lot of positive feelings out there in terms of the consumer and we did just fine. So one of the good things that we've been blessed with that and we are the extreme value proposition and a generally bodes well for us in good and bad economic times and.
So I think we don't pay a lot of attention to it other than.
Yes.
Really being focused on driving.
Price and value of our products and services.
Taking care of the customer and then the rest seems to work.
Yeah sure Doug Thanks for the color.
Yes, Sir.
Your next question, perhaps on the line of <unk> Parikh from Oppenheimer. Your line is now open.
Good afternoon, and thanks for taking my question. So I had a question just on the Labor front I was just curious why you guys are seeing from a labor availability standpoint, and then what your comfort with their wage levels in the marketplace. If given we continue to see others raising wages.
Well, we continue to raise them as others have and we will continue to do that.
Yes.
The biggest single area of challenges one we're headquartered in Seattle, which is it.
And it is becoming increasingly expensive market and within that.
Were you not only have two big but he he.
But the next three.
Behemoths, all have 10% to 20000 employees and missed out as well. So we've had to raise wages there and it didnt happen overnight in the last two weeks it's been continuing.
Continually over the last couple of years.
And we will also lose a few people.
Because we're not 100% work from home we have a we think a good fair hybrid work model, but for some a few they want that overall, though.
If you look at.
Our total compensation and benefits package, 90% of our employees are hourly in the warehouse.
And.
Well, maybe there is a city or two where we've got a occasionally started one step above the entry level.
We've continued to raise that.
The wages as I mentioned, the thing and we will do it again.
Okay, Great and then maybe one additional question just on the ancillary or Brian If you could just remind us where you are with your recovery versus pre pandemic and some of the more challenged categories travel food court et cetera.
Yes.
The biggest one is.
As gas and Thats, nothing, but up and again as I mentioned earlier the retail.
<unk> price pressure is probably.
Lesson over the last couple of years.
Travel you mentioned is one that has been extreme.
Ups and downs there was a period during the mid mid 2020 year lockouts as Covid Lockouts, where we had negative we had lost money in the business and had negative revenues, because youre getting more cancellations and no new orders and Thats fluctuate has come back.
It fell a little bit with Delta it came back after that it fell a little bit with Amazon, Although now we seem to be upon the upward trend and it is profitable not as profitable as was two years ago, but continue in that direction huge business.
Both vacation packages as well as auto renewal.
Rental cars and the like so that's a business that's kind of nicely.
It was businesses like where there is face to face.
Touch if you will with our hearing aid.
Optical shops that was actually closed for a number of weeks in the mid 2020, but just for 10 or 15 weeks I think.
That's come back as well.
Food courts have come back in because we have chosen the tables back out and we expanded the menu.
So overall.
A few of those ancillary business, they're not back to where they were but theyre getting there and then of course, the one business that dwarfs. All the other is gas just in that size and its increased profitability. So overall ancillary.
It is doing fine and some of the ones that were hurt the most are picking up.
Great. Thank you.
Your next question comes from the line of Kelly Bania from BMO Capital. Your line is now open.
Hi, Thanks for taking our questions.
Follow up real quickly on the gas.
Richard you made the comment about gas margins going up kind of across the space.
Can you help us understand a little bit about how Costco gas margins are relative to 2019 are they up maybe just up a little less and where are we with gallons versus 2019.
I don't have that detail in front of me margins are up prices are up and.
It's a huge business.
A little more than 10% of our sales.
Plus $1 billion business now.
<unk> there has been as I mentioned earlier 30 plus percent increase in just the price per gallon.
But it's definitely been up the last couple of years.
It's less volatile than it was five and 10 years ago in terms of a big margin fluctuation, but.
I don't have the detail.
Two years ago.
Yeah.
Okay.
Just ask another one just on white space than just in the U S. Just curious if you can just give us an update on how youre looking at that today over the next couple of years do you have to you at all changed your.
Target demographics or target population density in terms of where you plan on opening up new clubs in the U S.
Does your eventual number that you see just an update there.
Sure.
If you had asked me five years ago.
How many five years, hence our know how many what would it look like five years ago. We were opening about 25, a year call. It 26 to make the math easy for a second and maybe 70 30 U S and Canada, our most successful mature most mature markets and.
And then over the next five or 10 years to 70, 30 would probably go to <unk>.
60, 40 outside of the U S.
In Canada and here, we are five years into this.
Correct answer and we're probably 65 35 U S Canada.
Two reasons, partly as is our expectations of what we can do in the U S and Canada has increased.
Not just in the last five years, but in general over many years and it's taken a little longer the timelines internationally, although we've got more feet on the ground and more stuff looking so if you ask me today I look five years from now.
We'll go from 65%, 35% or whatever excess today, probably down to 50 50, I think the good news with that answer from my perspective is that we feel we still have plenty of opportunities in the U S and Canada and we've ramped up our.
Our activities to do more in these other countries, where we have also been quite successful.
The.
If you say asked over the next 10 years, we're opening I think this year 16.
28 are in the U S that could be off by one or two.
Yeah. Our view is is there's no reason to think for the next 10 years, we can open 15, or so a year in the U S.
Now mind, you one or two of those.
Growing to two or three will be the business centers. We now have 22 business centers in the U S and five in Canada, and it's been a good adjunct to our business, but we're also and we are in filling.
I gave an example of an internal meeting yesterday and I haven't given it before to you guys.
And Jose about four or five years ago, we opened our fourth in the greater San Jose market at the time, the three units were doing.
About $2 50, each now the four units are averaging right at 300, each averaging and.
Fewer members per location, because you got existing members driving less far so there's a combination of infill now were in 46 states. So theres not a lot of additional states, we're less penetrated versus our direct competitors in certain locations in the Midwest and Texas and parts of the southeast.
And we're still opening there as well so it's really is a combination of all those things.
Our view is that the good news is that there is still.
We're far from saturating are most saturated markets and we've.
We've upped the ante in terms of feet on the ground in real estate feet on the ground. If you will in terms of getting some more more.
Turning to the pipeline.
Thank you.
Your next question comes from the line of John <unk> from.
From Guggenheim your lifestyle.
Hey, Richard first thing philosophically, how do you guys think about.
Closing the gap on the two membership tiers right, maybe encouraging some further converging to executive.
I don't know if you've done any kind of work.
Executive members, what would they like and the membership that's not there today.
Right that perhaps might just it might help you take the monthly the annual fee higher.
Yes.
I don't know exactly what we would ask I need to ask our membership marketing people I think we've frankly been very pleased of our our success of getting more exist more new members more existing members to convert and frankly more new members to sign up initially as an executive my view <unk>.
10 years ago in the U S where it started we've had it for 15 years now probably.
You came in and we just signed job we actually what you wanted we didn't do a lot in maybe 'twenty or 'twenty at most 25 of every hundred signed up as an executive member today, it's in the.
In the fifties closing close to 60.
And Thats, just trying a little bit and showing them the value of it. So I think we've done a better job of doing that.
We do a better job when we go into a new country. We are now in I think five of our six of our countries, which are the largest ones that you want to have at least 15 or so locations before youre looking at it to put it executive membership in it so.
We've toyed with the idea of having something even higher than executive, but we always go back to the fact that what we have works very well and so I don't think Theres anything currently on our plate.
Change that we're always asked we've also asked the question.
At some point.
Right now at 72% or 3% of our sales over the executive member.
When it gets to 85% or 90 to eliminate the lower membership at some point, we might but that's again not in the cards anytime in the near future.
We kind of like to what we're doing.
And it's working fine.
And secondly, where are you on the personalization journey.
But maybe two years ago to.
Spearhead that.
Where are we in does that pick.
Pick up steam in the next year or so.
It picks up steam in the next year or so the first order of business. When we brought in people on that data analytics side two years ago. A person. He has built a great team.
And.
We're seeing small deliverables first and foremost not online but.
With the merchants and to a smaller extent with some of the operators and there's some been some real deliberate.
Saved our buyers' time and those are in the process of being rolled out on the on the other.
Personalization and targeting I think we got a little better targeting and that and still have a journey on the personalization, but that'll be coming but I. Thank you for asking it when you said a year or two.
Okay. Thank you.
We will take two more questions.
Okay. Sir your next question comes from the line Thats, Laura Champine from loop capital. Your line is now open.
Thanks for taking my question I'll make a quick it's a follow on to the unit growth questions asked earlier, but it sounds like you're positioning the business to launch more international stores.
Is it is it does it makes sense for me to interpret that as unit growth may accelerate next fiscal year and beyond from this looks like it's going to be about three 5% this year.
Yes.
Our goal.
For the last several years.
Unique here of Covid, where we went down to 13 openings because there were several that construction that stopped for several months in the middle of 2020, but the reality is if you go back five or six years. We were opening 25 ish 70 years 'twenty, one or two ish and the view. Even then was is to get up to closer to 30 certainly 'twenty.
5% to 30.
This year is we're finally hitting that with the expectation of 28 and my call. This morning and call it 26% to 30, whatever access it comes out to be.
Sure.
We would certainly be comfortable at 38.
Yes.
One of the things that is unique as is.
We try to be relatively methodical about it particularly in new new international markets. Once you open. The first one if it's successful year youre, taking some people from that one to help them succeed in opening the second one.
One of the things as it is.
Yes.
The biggest cost factor on where else P&L was labor and efficiency and when youre running at.
Our high volume unit.
When <unk> got more people coming over from a nearby unit so.
Pretty methodical about growing somewhat slowly and new markets.
We went from one to $5 20 years ago over five year period in Japan.
We've sped up a little in China.
Thinking that we've opened two now and three years and with another several in process.
Private several is more than a couple of more so we've increased it a little bit and but we feel pretty good about that so I would still say our.
Our are rounded Pat answer right now is 25% to 30 and we'd like it to be more to 30% and 25 right now, but we're not necessarily looking at that percentage as we get bigger.
God willing in year six through 10, we're going to be talking about 30% to 35, but we'll have to wait and see.
Got it thank you.
Last question Ive got some line of Peter Benedict from Baird. Your line is now open.
Peter Benedict Your line is now open.
Alright take me off mute there.
Thank you Richard so.
My question has been asked but.
Just thinking about the supply chain situation.
Just curious.
If it's caused you guys to rethink or accelerate any of your youre kind of sourcing initiatives you talked about the vessels and the containers and that clearly seems to be in reaction to what's going on but I'm thinking more along the lines of categories.
Efforts have been underway for a long time going vertical are there any that.
Maybe you have jumped to the front of the line because of what you've seen over the last.
Last year or two.
Well I think couple of things we've done not in a big way, but a couple of things. We've done is there is probably a little bit more diversification of suppliers, particularly on huge $300 million to $1 billion Skus, you need a little bit more more there.
We.
We've brought in.
Certain things that are non traditional towards season.
The winter, bringing in bikes, because we get access to them and we sold them.
Yes, new car.
These are origin.
So theres a few of those things, but not in a big way.
None of our success is huge buying power per item and.
Having.
Less than 4000, Skus to do our 200 billion.
Quite a bit different than having even a 100000 skus doing $150 to 500 billion, depending on who the retailer is so.
We've made changes and we are more open minded to bringing in some things, but hopefully this thing the supply chain works out over the next couple of years in a big way and at a better way.
Sure and then just lastly, I'd start the executive membership, 43% of the members of 78% of sales.
Those numbers and maybe.
Your more established markets, where you've had it and maybe how underpenetrated as it and some of the newer markets just trying to get a sense of what the pathway might be for some of these newer markets.
Like renewal rates renewal rates irrespective of what it becomes 10 years hence.
Location in a market it starts off at a lower number and builds up to the higher number.
Same thing with that executive transition, we're doing better today than even in first year new markets I think in the last couple of years, where we added executive Japan and Korea.
And.
But.
Yes, I mean that 42% number is hovering in the low fifties 50, or a little higher in more mature markets.
<unk> starts off lower than other markets, but higher than it started in the previous new market a.
A few years ago so.
It grows overtime.
Yes.
Fair enough.
Well, thank you very much.
Everyone have a good afternoon evening and.
You're getting on the call.
This concludes today's conference call you may now disconnect. Thank you.
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