Q4 2022 Costco Wholesale Corp Earnings Call

September 22, 2022

Yeah.

Thank you for standing by and welcome to Costco's fourth quarter fiscal 2022 earnings conference call. At this time, all participants are in a listen only mode.

After the speaker presentation, there will be a question and answer session to ask a question. During the session you will need to press star one one on your telephone I would now like to hand, the call over to CFO Richard Galanti. Please go ahead.

Thank you Latif 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, and these statements involve risks and uncertainties that may cause actual events results or performance to differ materially from those identa 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 company does not undertake to update these statements except as required by law.

In today's press release, we reported operating results for the fourth quarter of fiscal 2022. The 16 weeks ended this past August 28, net income for the quarter was one $806 8 billion or $4 20 per diluted share compared to $1 67 billion or $3 76 per diluted share.

Last year's fourth quarter was negatively impacted by an asset write off of $84 million pre tax or <unk> 14 per diluted share net.

Net income for the fiscal year totaled $5, eight 4 billion or $13 14, a share compared to $5 and <unk>.

$5 1 billion.

Or $11 27 per diluted share the prior fiscal year.

Net sales for the fourth quarter increased 15, 2% to $77 6 billion.

As compared to 60 144 billion reported last year in the fourth quarter on.

On a comparable sales basis from the fourth quarter.

U S for the 16 week period on a reported basis had comp sales of 15, 8% when you exclude gas inflation and FX, we wouldn't be any FX gas inflation it would be nine 6%.

Canada 13, 4% to reported 13, 7% ex gas and FX other international two 9% reported and 11, 3% ex gas and FX. So all told total company was reported as 37% and excluding gas and FX plus 10 four.

Percent.

Separately ecommerce seven 1% reported and again, excluding FX eight 4%.

In terms of the Q4 comp sales metrics traffic or shopping frequency increased seven 2% worldwide and up five 2% in the U S. R.

Our average transaction or ticket was up 6% worldwide and up 10, 8% in the U S. During the fourth quarter.

Foreign currencies relative to U S dollar negatively impacted sales by a little over 2% and gasoline price inflation positively impacted sales by approximately five 5%.

The best performing in the quarter, the best performing core categories in the quarter were sandy frozen.

He asks tire lawn and garden jewelry toys bakery and deli.

In terms of ancillary businesses, the best performers were gas and food courts and in other businesses travel and business centers perform best relative to the prior fiscal fourth quarter results.

Going down the income statement to membership fee income on a reported basis membership fee income came in at $132 seven.

One 1 billion or $1, 88% that was up 90 $393 million or seven 5% on a reported basis again with weaker foreign currencies relative to U S. Dollar that number excluding the impact of FX would have been $29 $8 million higher than the seven 5%.

The reported increase would have been a 10% increase.

In terms of renewal rates, we again hit all time highs at Q4, and our U S and Canada renewal rate came in at 92, 6%, which is three tenths of a percentage point higher from 16 weeks earlier at Q3, and when we were at 92, 3% and worldwide.

Wide renewal rate came in at the end of the fiscal year at 94%.

Tenths of a percentage point from Q3 and when it was 98%.

In terms of the number of member households, and cardholders at Q4, and we ended the fourth quarter with $65 8 million paid household members and.

$118 9 million cardholders, both up six 5% from a year earlier and Thats, 65% increase in number of card members and card holders is about just under a 3% increase in the number of locations. During the year. We opened 23 locations on a base that began the year with 815 warehouses.

At Q4 end.

Our paid executive memberships totaled $29 1 million, an increase of $1 2 million or <unk> 74000 per week. During the 16 weeks since third quarter end executive members now represent over 44% of our members in just under 70% 72% of our worldwide sales.

In terms of membership fees.

Asset will increase there are no specific plans regarding a fee increase at this time.

We're pleased with our growth in both top line sales and membership households over the last several quarters and in member and an end.

Loyalty is reflected in increasing member renewal rates well, let you know when something is about to happen.

Moving onto gross group fourth quarter gross margins for the quarter gross margin on a reported basis came in at 10, 8%.

Compare down 74 basis points from last year's reported gross margin of 10, 92% now, 74% 74 basis points year over year reduction.

As on a reported basis, excluding gas inflation. It was minus 22 basis points and as we normally do we ask you jot down a few numbers and then ill elaborate a little bit more on margin. So the two columns would be reported year over year change and the second one would be ex gas inflation net year over year change. So the core merchandise margin on a report.

Basis, minus 67 basis points year over year ex gas inflation minus 23 basis points.

Ancillary and other businesses the second line item, plus 20, and plus 34.

Our 2% reward zero and minus five.

LIFO minus 27% minus 28.

All told total minus 74 reported as I mentioned and minus 22.

Excluding gas inflation basis, starting with the core core merchandise contribution to gross margin was lower by 67 basis points year over year and by 23 ex gas inflation.

Sales mix negatively impacted the core primarily from the lower sales penetration of total core sales relative to relative to our increasing an outsized gasoline sales in terms of the core margin on their own sales in Q4, our core on core margins were lower by 26 basis points, that's pretty much in line with each of the last three quarters when it ranged from us.

<unk> 39 basis points year over year in Q3 minus 28 in Q2 and minus 18 in Q1 on a year over year basis. So again for the quarter. It was minus 26 core on core Anson.

Ancillary and other businesses gross margin was higher by 20 basis points and higher by 34 basis points ex gas inflation in the quarter.

Yes of course, as well as business centers and travel were better year over year offset somewhat by AECOM pharmacy food court in optical but overall.

A positive year over year change are 2% reward as I mentioned on an ex gas inflation basis was higher.

Our downside lower or down five basis points, implying higher sales penetration coming from our executive members.

In terms of LIFO LIFO as you know with inflation has been increasing it was 27 basis points down year over year higher year over year.

The LIFO charge this year on an ex gas inflation basis, 28 basis points higher and that represented $223 million charge in the quarter.

Recall other our LIFO charges were relatively small in the first part of the year at $14 million.

Last quarter in the third quarter of 130, and then as I mentioned here $2 23 for the quarter.

Moving to SG&A, we showed good results reported SG&A came in at 853%.

To last year's 922, an improvement of 69 basis points, but again ex gas inflation of the improvement was still good at 26 basis points lower year over year.

Again charting down with a few numbers here shutting down the numbers on our core operations basis on a on it.

Ported basis that was plus 50 basis points or a positive reduction of 50% improvement.

Ex gas inflation, plus 12 basis points central plus two and minus three.

Stock compensation, plus two and plus one pre.

Preopening expense, plus one and plus two.

Other plus 14, and plus <unk> that gets you down to again on a reported basis year over year SG&A was improved by 69 basis points ex gas inflation by 26 basis points.

In terms of the quarter year over year core operations was again better by 12, excluding any impact of gas inflation keep in mind. These results include the starting wage increases we instituted in October of 2021. So in the first quarter of this fiscal year. This past fiscal year as well as new wage and benefits increases implemented during the third quarter in March.

Of this year as well as the impact of eight weeks in this quarter as we increased the top of scale increase that went into effect July 4th. So a few increases that we've done this year and so we feel pretty good SG&A approval, given our our sales strength.

Central was lower by two basis points.

And higher by three ex gas inflation, nothing big to talk about there again stock compensation I mentioned Preopening I've, just we've noted that since we know that.

Include Preopening on the income statement as part of SG&A instead of a separate line item in <unk>.

Other again to 14 basis points recall that that included that last year's write off in the quarter totaling $84 million.

All told reported operating income in the fourth quarter increased 10% coming in at $2 97 billion.

A little of that benefit was that.

Asset write offs last year below the operating income line interest expense was $48 million this year versus $52 million last year relatively similar interest income and other for the quarter was lower by $1 million year over year coming in at $67 million. This year versus 68 last year interest income was actually higher but that was offset by unfavorable.

The FX impact, which pretty much offset each other to be roughly flat year over year overall reported pre tax income was up 10% coming in at $2 $56 billion. This year.

From $2 $2 $91 billion a year earlier.

In terms of income taxes.

Tax rate for the fourth quarter was 25, 4% compared to 26, one in Q4 last year the fiscal 'twenty three effective tax rate. We estimate is currently projected to be approximately 26%.

Netting one thing I've mentioned the way you have mentioned in the past net income attributable to Costco that line item was up 12% recall that on June 30 of this past year, we acquired a 45% minority interest from our JV partner in Taiwan. So we now own all of Costco Taiwan.

As a result net income attributable to Noncontrolling interest was better by $14 million in the quarter.

The Noncontrolling interest line will be zero going forward essentially.

A small amount, but pretty much zero.

A few other items of note in terms of warehouse expansion in the fourth quarter. We opened nine net new warehouses. So for the full year, we opened 26 warehouses, but that included three relocations. So a net increase during the year.

23 locations.

In the fourth quarter.

Of the nine we opened five were in the U S. Two in Canada, and one each in Korea and Japan.

In fiscal 'twenty, three we expect to open 29, new warehouses, including four reloads. So for a net of 25, new warehouses. These 25 plan net new openings are made up of <unk> in the U S and 10 in other international including our first locations in each of the New Zealand in Sweden, and our third and fourth locations in China.

Regarding capital expenditures, our fourth quarter Q4, spending Capex was approximately $1 6 billion and for the full year Capex spend in <unk> was $3 $9 billion, our estimate for the upcoming year fiscal 'twenty three capex to be.

Approximately the same in the three $8 billion to $4 billion range.

In terms of E Commerce business E Commerce sales in the fourth quarter ex FX increased eight 4%.

Stronger departments in terms of year over year percentage increases were tires.

Patio and garden prescription pharmacy, and health and beauty AIDS the largest E comm merchandise department in dollars, what we call majors, which includes everything from computers to appliances Tvs to audio et cetera was up in the high single digits, and Costco grocery, including our third party delivery.

Two day dry fresh and frozen.

Continue to grow they were up 20% in the quarter.

An update on Costco logistics with Costco logistics, we continue to transition from vendor drop ship to direct ship from our own inventory from our own inventory, particularly in big and bulky items over this.

For all of this lowers the cost of the merchandise that improves delivery times and service levels to our members and I'll share with you some statistics of that in a minute.

Prior to this acquisition in the U S. We were completing a few years ago about $2 million big and bulky deliveries and installations per year.

In fiscal 'twenty, two we completed $4 3 million big and bulky deliveries and installation previously all of those 2 million deliveries installations were made by third parties.

In fiscal 'twenty, two about 70% or a little over $3 million of the $4 $3 million were done by us in the fourth quarter in fact that percentage of.

Deliveries and installations done by outperformed by Us was 81%.

Pre acquisition the estimated average days to deliver.

15 days and at <unk>.

We're working with over 100 delivery partners today, our average delivery time for big and bulky as just under five days.

We're continuing to work to improve that.

We were down to eight delivery primary delivery partners.

A few comments regarding inflation, we've seen minor improvement in a few areas, but all in pressure pressure from higher commodity prices higher wages and higher transportation cost and supply chain disruptions. There's still present, but we are seeing just a little light at the end of the tunnel.

If you recall in the third quarter, we indicated that price inflation overall was about 7% plus for us for the fourth quarter and talking with our merchants. The estimated price inflation overall was about eight a little higher on the food and sundries side, a little lower on fresh foods in both higher and lower on the non food side.

We're seeing commodities, some commodities prices coming down such as guests.

Steel beef relative to a year ago, even some small cost changes in plastics, we are seeing some relief on container pricing wages are still the higher thing when we talk to our suppliers as we all know wages still seem to be the one thing thats still relatively higher but overall some beginnings of some light at the end of that tunnel.

Of course that could change.

Each week.

Despite current inflation levels. We believe we continue to remain competitive versus our others unable to raise prices as cost increases hopefully of course, a little less than others with whom we compete.

Many of you have asked about private label with the recent inflationary environment and what's happening here people trading down and of course, our first responses of course is they are not trading down they're trading up or certainly trading at the same.

In terms of Kirkland signature merchandize penetration.

<unk> gas.

Other businesses.

Kerry to Kirkland name Kirt.

Circumstances. Your merchandise is up just under 1% in terms of penetration compared to a year ago.

J S merchandise penetration is about 28% for the year. This is similar to historical trends, where it's increasing slowly and steadily over time, so no big dramatic change from the past there.

In terms of supply chain generally supply chain has improved a little including on time deliveries, we started seeing container prices coming down.

<unk> of course is in the spot market and then youll start to see it hopefully in some other contracts as they continue no longer any big capacity issues or container shortages domestically port delays have improved.

And while the rail strike that was in the news a few weeks ago was thankfully averted and its pace in anticipation of strike there were some rail ramp closures and delays in restarting that but the view from our buyers is that this should be eliminated for the most part towards the end of this week.

Switching over and inventory levels are out total inventory in Q4 and was up year over year just.

It was up just under 26% year over year.

At the end of the third quarter. It was up just over 26% of the <unk>.

6% increase an estimated 10% to 11 percentage points of it is inflation, that's that 8% number and new warehouse growth, 3% number in terms of unit growth over the last year, but still up year over year. Additionally, we are lapping some low stocks in certain departments as a result of last year's high demand.

Typically a non food areas, where last year, we were we.

We were about 90% of our targeted inventory levels food and sundries and fresh are in good shape. We feel are weak supply as components are weak supply.

Ply is comparable year over year.

Terms of non food inventories up in certain categories. Again. This is in part a result of being light in certain departments last year as mentioned earlier.

The good news so far initial seasonal sales seem to be going well as evidenced in our monthly sales reports and all told we would expect the 26% year over year increase start to head down as it has in just the past few weeks a little bit.

Lastly, as a reminder, in terms of upcoming releases, we will announce our September sales results for the five weeks ending Sunday October 2nd.

Next week on Wednesday in two weeks.

On Wednesday October five after the market close causes with that I will open it up to questions and answers with Latif. Thanks.

As a reminder to ask a question you will need to press star one one on your telephone again Thats Star one one on your telephone please standby, while we compile the Q&A roster.

Our first question comes from the line of Simeon Gutman Morgan Stanley .

Your line is open. Please go ahead Simeon.

Got it.

Good afternoon, everyone.

Richard I want to ask a couple of questions about membership fee.

So first of all you said.

As you are comfortable with sales so I'm questioning if.

Your tentative you're worried about the sales rate if you raise it.

Then is.

Is it is it is it fair if you don't raise it. It means you are also comfortable with the rate of EBIT growth in the business because that's been a tool for the business over time and I know you don't guide, but obviously trying to get you to answer that.

Sure well nice nice try.

At the end of the day, we've always been told and what we told you guys that we are a top line company or they can always drive sales certainly as we've increased membership fees historically about every five five and a half years, we've turnaround and use it to drive more value and whenever we do it we will do that I think at the end of the day.

And I also want to point out of course, if you look at the last three increases on average they were five years and seven months apart.

If you look at June of 17, plus five years and seven months Youre talking roughly January of 'twenty, three now I'm not suggesting it's January 23, I'm, just saying, it's not there yet anyway.

Our view is as we are confident in our ability to do so and at some point, we will but if it's a <unk>.

<unk>.

A when not if.

Given the headline of inflation and concerns about recession.

Recession, we feel quite comfortable driving sales and earnings the way we are right now and we still have that arrow in our quiver as we go forth.

And then maybe the follow up same topic Phil.

The way.

Your new fiscal year, you've obviously you plan the year do you cut back or you curtail spending or investment in any way that run through the P&L, if youre not planning to do it or if you are planning to do it not.

Not at all it's steady as she goes in terms of Capex and what we want to do and what we want to do with pricing and competitive pricing.

And we're not the only company out there, but as we've seen some slight declines in reported gross margin not only this quarter, but in the last several quarters part of that was just the upsize improvement in margin during the first year of Covid, but we are not as you know we're not shy about doing what we have to do to drive the topline.

And we will continue to do that.

Thanks, guys. Good luck.

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

<unk> of Oppenheimer.

Your line is open go ahead. Please refresh spring. Thanks for taking my question. So Richard I guess, just going back to your expense commentary there was a sequential pickup in your expense growth.

Versus Q3, besides the wage increases so is there anything else that was unique to the quarter that you'd call out.

Okay.

Well other than it was six.

16 weeks versus 12 weeks, but you're talking about a year over year basis, yes year over year, Yes, I think it's all right.

Looking for it.

I think the outsized thing is just that.

Our utilities costs up sure, but the outsized thing would be the wage increases.

Im sure I raise up.

It is always up a little more.

Everybody is doing more technology wise.

Okay, Great and then just on the health of the consumer just given many concerns out there anything I know like any changes in consumer behavior.

And your major category.

Are you guys seeing any changes versus maybe your expectations there.

Well I think I mentioned.

Our we've mentioned when we talked to some of you over the various months yes.

It was there when be prices skyrocketed, and now they're coming down versus a year ago, but when they skyrocket do you see a change in irrespective.

Irrespective of the state of the economy, you see some changes from beef to poultry and those examples.

One of the buyers had made a comment a few months ago that they saw some increased penetration of <unk>.

Chicken and tuna for that reason.

But at the end of the day, we haven't seen any big changes in that part of it is hard to see because.

During these two years of Covid, we enjoyed such strength in big ticket items and consumer.

Consumer electronics, if it's up a little versus up a lot. The last two years incrementally we know in each of those cases, our numbers relative to industry comparisons are still we're still beating the rest of the industry in terms of sales growth as the sales grow slower than it was last year, yes. Its still has a positive plus and <unk>.

Part of it and it's still better than the industry as a whole.

Great. Thank you I'll pass it along.

Thank you. Our next question comes from Chuck Grom of Gordon Haskett. Your line is open. Please go ahead Chuck Robb.

Okay.

Your line is open.

Alright.

Hey, Thanks, sorry about that Richard.

Encore three year on a three year basis. It looks like you guys showed a nice improvement from the last quarter can you.

That for us a little bit across the four major categories.

Thank you.

Well I don't have all that detail shortly but.

Generally speaking the thing that was outsized in the biggest way in the first years. So if COVID-19 was fresh as you remember as you recall with fresh you had virtually no.

Spoilage and you had much higher labor productivity. So you had huge three digit improvements.

And margins there.

So that's the comparison, we've talked about that in the last several quarters on a year over year basis versus compared to those two years, it's come down as a percent, but still up from where it was pre COVID-19.

Other than that yes.

There's all kinds of things that impact other departments at.

At the extreme you have a <unk>.

Small business, but.

In terms of our income statement travel.

<unk>.

Is it almost a brokerage business, where it's all margin.

Its margin and that went way down and now it's improving from where it has gone way down so that helps you a little bit, but theres a lot of moving parts to that I think fresh was.

The biggest outlier then.

During supply chain things and everything else.

There were impacts in certain departments or allocations and things like that there was less.

Shooting from the hip here, there was less promotional activity and consumer electronics because of shortages.

Chips are electronics, and so there's a lot of puts and takes.

But overall I would say fresh was the one that was most meaningful in that regard.

Okay, great. Thank you very much and then on the on the LIFO charge 28 basis points. I think you said last quarter. It was 25, I guess I was surprised it wasn't higher given.

How much prices have moved up over the past three to four months can you just maybe just give us a refresh on the accounting for that and what happens in the coming quarters as we start to lap the big charges.

Sure sure well two things again, if you look sequentially in Q1, it was sub $20 million in Q2 is.

Sub 40 30, something that 100, something then 200 something part of that is the way we account for it is as at the end of the Q1 when we saw what the trend was you then estimate what you believe it's going to be for the year and pro rate.

Or that or 12 weeks of that to that quarter and that as it continues to increase you operation adjusted on a year to date basis, so that skews that a little bit that's the way we've done it historically and prior inflationary times and the other comment you asked about.

It seems it seemed like it would be.

Okay.

Higher in Q4. The fact is as we <unk> thought halfway through the quarter. It would be higher than this part of that was if I. If I bifurcated Q4 into the first eight weeks and second eight weeks. The first eight weeks showed a a level of increase that would have required a larger LIFO charge it seem to some.

<unk> flattened out a little bit during the last several weeks of the quarter, which meant that it came down from what our expectation was so again I think that is consistent with I mentioned about we are seeing a little light at the end of the tunnel and not just us.

I think some of the buyers about a couple of items going down in price.

You can rest assured that our peers are calling the suppliers you said the price went up because of <unk>.

Steel prices, while steel prices are down what gifts and so we'll continue to do that but it's a slow road.

But we are again seeing a little bit of improvement at least in the second half of the fourth quarter.

And we.

We will see where it goes from there.

Okay. Thanks very much.

Yes.

Thank you. Our next question comes from Paul Let's use a city.

Your line is open. Please go ahead Paul.

I'm on for Paul Thanks for taking our question.

I wanted to dig in on the inventory piece a little bit.

Up 20 about 26% how much of that is you categorize as general merch you have some pretty big competitors that have been trying to clear some of their general merch as I'm sure everyone knows so as you kind of reach holiday.

Can you give us a sense of where you are for general merch inventory any plans to kind of further discount there to try and get leaner. Thanks sure well first of all without being too specific there is a decent chunk in there that I would call deep freeze from last year.

My example, I've used when talking to people is the Christmas trees that retail for 150 to $400 and they came in after Christmas are essentially after Christmas and the good news is is that they do.

Don't really change in style.

And they are now if you go to Costco youre going to see.

Youre going to see them on the floor and.

And if you add in the cost of holding them and low cost of interest I think theres still a little cheaper than the ones. We added to the inventory. This year. So in a perverse way that one didn't hurt us that example, other than we don't like to have extra inventory and so there are some seasonal things that came in late.

Probably a bigger piece of the Delta is us building up inventory, particularly on big and bolting and fulfillment both E com fulfillment in big and bulky.

The last part is early holiday.

We did consciously bringing some stuff part of it was.

Not knowing what was happening with supply chain and how many weeks of delay each item was we bought stuff and consciously a little early and then as I mentioned supply chain has improved a little but thats helps you.

So again, there is things that have helped it or heard it increased it reduced it the other thing thats.

The increase a little bit even some things like seasonal things like air conditioning and fans, which was we had a very strong season, but there were some delays in getting that stuff.

That.

That will be a small impact from a seasonal standpoint going forward, but net net I think that while the 26% number was.

Relatively same at year over year, Q3, and Q3 year over year in Q4, and again in work and talking with Ron and flooding and the merchants and.

And again see what we've seen just in the last two or three weeks its going in the right direction.

Nobody likes and I think the one other differences that.

Just some of the other bigger retailers.

Our inventory is more specifics like if we get a lot of it if we have a bunch of air conditioners are a bunch of <unk>.

<unk> furniture.

We may have to hold onto it but it's it's not a whole variety of different things and.

And so.

While we have had some additional markdowns nothing huge no big outsized numbers relative to what we would normally expect a little bit increase but nothing material.

Got you and so youre, bringing holiday up a little earlier than you otherwise would and some of that more seasonal air conditioners and fans you mentioned you might hold those over to the spring time.

Yes, that's easy.

The good news again.

Okay.

Two and a half years ago, when we acquired <unk>.

<unk>, which is we call with Costco logistics, we added.

10, or 20 million square feet between.

<unk>.

$10 million of Big space, the 1 million square foot space to the roughly $10 million to $12 million of depot space. We have so we were that was fortuitous in that regard.

Understood.

Thank you.

Thank you. Our next question comes from Kelly Bania of BMO capital markets. Your question. Please Kelly Bania.

Hi, Thanks, Kelly Bania from BMO.

Richard just wanted to touch on executive penetration.

<unk> line item continues to impress I think it's the biggest quarterly jump in the model that I can see.

But I guess my question is as you look at that kind of cohort of goldstar customers. Today is there anything different about that customer profile demographics or otherwise that makes it makes you think you can't have the same success in converting those customers up to executive overtime.

Well I think we think we will I mean, what you used to be asked the question as it used to be asked you about <unk>.

<unk> or Gen X and then millennials and Gen Z, we tend to see the same type of trends that are age and arguably income dependent.

Also during these last several years, we've continued to get better at.

Talking you into signing up is selling you on that.

The value of that executive member upfront. So we've seen the increased penetration there too. The other thing of course that helps us when we add it to a new country and I think in the past two years, we added it to Japan.

In Korea.

So we haven't of course in the U S Mexico, Canada.

In the U K.

And so we've already gotten the big countries. If you will in terms of number of locations and I'm sure there'll be another country. Two we added two overtime.

Those countries grow so no I think we've done a better job in doing it.

Starting with it years ago, you came in and we ask you what you wanted it and if you said goldstar. That's what you got now we actually tried to.

Share with you what's the what's the value of it and we've done a better job of that.

Okay. Thanks.

So may be follow up on the container pricing I think you mentioned, maybe Tom or at least starting there.

I guess the question is have you learned anything about your business.

Over the past few years.

Kind of focusing on discretionary imports.

The strategy to charter ships.

You might keep longer term or do you expect to kind of go back to kind of everything you were doing pre pandemic from from that perspective.

I think the biggest thing we've learned is that it really from.

<unk>.

The source of origin of these items.

If you go back to even when.

<unk> replaced in whatever 16 or 17.

Or whenever that was.

On China.

And there were certain items that were moved from manufacturers in China. Those same manufacturers, who may have had facilities and other neighboring countries.

Where we could and where they could that was moved to to get around some of those tariffs.

And so you learned through that process, we certainly learned through the last couple of years.

The challenges with containers not to say that we can change some of it.

But yes.

I think we tried it.

Can you try to spread it out a little more.

Not depend on one port and.

Certainly we've learned all those things and we've learned that we can continue to make mistakes along the way too.

Thank you.

Thank you. Our next question comes from Oliver Chen of Cowen.

Please go ahead Oliver Chen.

Okay.

The industry thinks so much inventory in the wrong kind of inventory what are your thoughts on the promotions that youre seeing and how youre thinking about pricing.

Bob on the nature of your portfolio you all with offer such sharp prices.

On inflation at the end of the tunnel second Richard maybe you could elaborate on that that sounds fair.

Alright.

And lastly on data.

All right, let's do one question at a time, so I don't forget.

Yes, yes.

Fly becomes more plentiful theres more promotions I remember last year or the last couple of years again given shortages in electronics, we saw we in the industry saw a lot less promotional activity being afforded retailers from the manufacturers on Tvs.

There was no need to do that and we're starting to see some of those promotional activities come back.

Other than that also.

One of the things that we like is our multi vendor mailer.

Both the.

The existing one as well as other promotional things, we do like that online and direct and.

Those had to be changed in some ways because of shortages or allocations of inventory a lot of times in those those types of MMS you got a lot of Hydra items like promotional things like Tvs as well as huge.

High sales volume items like paper goods and things like that and Youre looking at the paper goods as well there were a shortage of those along the way so we've.

And how to change those in and maximize them in the ways and the best way, we can figure out how to use those monies.

Work with the vendors as well as suppliers to figure out how to use that money and the best way.

And we.

And that's again, an iterative and evolving process.

Second question.

Yes on the inflation just light at the end of the tunnel.

Green shoots there that youre seeing.

Yeah.

Well again, I again anecdotally when we talk to the buyers they are starting to see a few examples whether it's.

Something like.

Outdoor patio furniture, or barbecue grill, where steel prices are coming down.

We're reminded by Craig and run our buyers.

Buyers reminded at the budget meeting when prices were going up make sure you understand why theyre going up is it what piece of it is.

Raw material costs, what piece of this re class and when these things come down you better be on the phone with them, calling them to say Wow.

When are we going to get a reduction and so I think.

In part because of our limited selection limited number of Skus and the huge volume I think our buyers know pretty darn well a lot of the cost components of these things.

That I think.

Bodes well for us, but again at the end of the day, we are seeing I think it is a little light at the end of the tunnel certainly container rates have come down container.

Container shortages have improved the port delays have improved all of that thing go into it.

And as raw material prices come down.

Okay.

<unk> is.

Generally helps you hurts you.

When we report our foreign companies earnings in U S dollars and the <unk>.

Currency has gone down 10%, it's 10% less earnings that we report, but at the same token since.

Using U S dollars and a lot of things not just in the U S to buy different supplies and raw materials from other places that helps you a little bit.

Yes.

Yeah.

Could something happen tomorrow to changes for sure, but at least we're seeing things going starting to go in the right direction and hopefully that bodes better for not just us but everyone.

Okay, and lastly, now it's time to talk about generation a.

What about the data matured and I know you hired that team.

What kind of.

Yes.

Were there any highlights you want to give up.

He is on the horizon.

In my old age I forgot to get any detail on that but I'll do that on the next quarter, but generally speaking it's been a couple of years since we brought in a VP of data analytics and he has built a sizable team and a lot of things are working on is take have better visibility as simple as we are we still need visibility into things that.

We have done historically.

This is not on the sales group sales side, but on the operating our business side.

Greatly reducing the intent is to greatly reduce the buyers' time and doing their own spreadsheets, if you will selling assigned.

And so we're doing a lot of activities like that.

In terms of.

The data analytics to drive more business Thats still to come we think.

We are doing okay, right now, but the first effort.

Area is on improving the data that both our data our operators our buyers are a traffic people get.

Okay. Thanks, very much best regards.

Yeah.

Thank you. Our next question comes from Greg Melick of Evercore ISI. Your line is open Greg Melick.

Two questions first on gas and then on the credit.

Card on the gas I guess I'm curious it looks like it's well we know it's a negative mix shift.

Really helped ancillary that was the one thing where gas profit or penny profit was up.

Can you just remind us of that dynamic that is gasoline prices fall, how how high Penny profit can go during that period and also remind us the traffic driving.

Relationship to gasoline.

Yes.

The old story was as when prices given that we turn our inventory about every day on average and the average in the U S. Gas stations is like every eight or nine days. So on average we are buying.

The other guys buying it for days.

Yes.

Before four.

Four days earlier, so when prices are going up each day when spot prices are going up each day.

It's costing us a little more because we bought it today at the highest priced versus four days ago, I'm being very simple here and when it's going down just the.

It happens that we make more money when it goes down I think part of that story has been thrown away because it seems that as not only us but.

The supermarket retailers and other discount retailers that operate large numbers of gas stations.

They have been.

To use it to as prices went up.

Or even went down a little bit they didn't go down as fast as perhaps they could have been which gives us in our view an ability to make a little more and still be the most competitive impact the moat and our view has gotten a little wider so I think overall gasoline as a retail business has gotten more profitable in the last couple of three years.

And.

Profitability has been even exacerbated a little bit.

By what's going on with inflation in the headline news.

They are skyrocketing and even if when you see guests while gas prices have come down at the pump it seemed like that lags.

Crude oil coming down and wireless coming down faster and so we.

We still are very much in our view the most competitive out there and arguably we've been able to.

To use that to be continue to be more competitive elsewhere as well.

Is it still 50% roughly that you think go to the club when they get gas.

Historically, a little over 50 every people.

Yes, historically, a little over 50 of every 100 people that filled up with gas came into shop.

Actually right when gas peaked right after the Ukraine, Russia thing for a couple of weeks there. It went down to late 2025% because people are dropping off their tanks.

There's going to be a gasoline shortage.

If you are a result as you remember the mid seventies.

But remember utilization also went up.

What we're seeing now is that slightly over 50 or slightly under 50.

Got it back to normal.

But more and more members are using it.

Got it and then.

On the credit card.

Update us on on anything you can on the credit card penetration.

The behavior of the portfolio.

Sort of a lift or percentage of tender on the cards or the lift you get outside of the club with it.

Just given that seems to be a key part of the renewal rates I would imagine continuing to enhance share auto renewal and it's not just on the Citi visa.

Co brand card is on any visa card.

Here in our Mastercard.

Worked out a deal with bank and Mastercard in Canada.

So on co brand.

Not only the fact that we do an exclusive which arguably gives us purchasing power to lower the merchant fee and to drive the reward to the member.

Typical co brand cards, there's revenue share.

So every time that card is used outside <unk>.

We share in that revenue, while we pay for some of the rewards.

That's more than offset that's offset by the revenue sharing so it continues to be fiscal 'twenty two was a great year.

For the card in terms of increasing penetration and increasing rewards to our members and.

Very in our view, a very favorable effective merchant fee to us, which we don't disclose.

And the auto renewal is up to what percentage.

Auto renewal.

Yes.

In the U S and the U I have this a U S number mid to high Fifty's.

Got it signed that broader room.

Oh, great Thanks, and good luck.

Thank you.

Thank you. Our next question comes from Peter Benedict Baird. Your line is open. Please go ahead Peter Benedict.

Hey, Richard Thanks for taking the question you kind of ended your prepared remarks, you said kind of seasonal going well.

Maybe you can elaborate on that are you talking about.

Paul seasonally you're talking Halloween, just what did you.

What were you trying to express with that.

Well part of what I'm trying to express is that while inventories were up 26% year over year.

Starting to feel good that theyre, showing the right direction.

With the efforts that we put forth.

Part of that strength is is once we also indicated on as I mentioned the call or somebody did that seasonal we brought in some cases seasonal early just because.

The delivery dates and we wanted to make sure we added and what.

What we've seen so far is as Halloween is doing well and Christmas is doing well.

So we're encouraged by what we've seen in the last few weeks.

Okay, perfect and then just.

Kind of maybe a bigger picture maybe historical question just talk about how the how your business has kind of performed in past recessions and maybe what do you see from your members actually think back.

What are the early indications when we're going into a tougher environment is it the business remember that starts to flow.

Traffic is it certain categories I don't know just just curious kind of your perspective.

As we're in this unique time in the economy.

I don't remember all of them, but I remember the <unk> 91.

At the end of that year.

From a recession to the great recession lasted for 45 years and that's as we entered it.

And it was pretty quick when it happened.

We saw some slowdown in <unk> and seasonal things which were like.

Barbecue grills, and patio furniture, and things like that big ticket those kind of big ticket items slowed.

If I could go back to my notes I'm sure. We've talked about we had an extra X million dollars of markdowns just to get through that stuff and so we didn't have it lingering after the first of the calendar year.

Other than that.

Generally speaking.

One of the nice things about our model is as we've done well in good times and bad times and good times of course people, who have money to spend and in bad times people want to save and.

In a perverse way, while none of us ever wished drove it on anybody.

From a bottom line standpoint, while it impacted some businesses negatively impacted many more of our business is positively and we seem to keep some of that market share rest.

Our restaurants are reopening.

What I read that people are still eating more at home than they did pre COVID-19 and but even within that we felt that we built some additional market share during that so.

I think overall.

Sure.

We did fine and I think the good news is even in bad times, we don't view ourselves as having to be as conservative as perhaps others might be.

We don't take big.

Reductions in buying.

<unk> open to buys or anything in that regard.

I remember back in <unk> nine with the with the barbecue.

Barbecue grills and patio furniture.

Midway through the new year and it was clear there was going to continue to be recession.

Whether it was Craig or Jim prior to Craig or both.

Reminder, to the buyers was don't bring down price points.

We've driven value at greater value greater value a greater price points.

If we want to be a little conservative refine but don't.

I think thats not going to do go forward based on the assumption that we're providing the best value out there.

Right.

That's helpful. I think as I recall, maybe your renewal rates actually went up during the great recession as well so definitely I'm sorry last question.

Yes, they certainly have now although auto renewal was certainly a piece of that.

Yep Yep no exact last question just on traffic Richard.

5% or so on the quarter I think August maybe it was maybe a shade below three.

In the U S. Just how do you guys think about that and it is or is there a traffic level.

That you guys don't like to.

To see it go below obviously more traffic, but is less but just kind of curious how you're thinking about that yes.

Part of the challenge in the last couple of years is every time something happens some of it hits the fan and it was like the omicron surge or the delta surge and Youll see things change dramatically.

Short period of time.

Look at the end of the day whenever we see any possibility of something weak we figured out how to drive sales and you usually drive sales by greater values Hot items and that goes back to the comment I made earlier about the multi vendor mailers.

Yes.

That's the one thing I think we're good at is figure out how to drive people into the door with with hot items, and that's helped us as well.

Oh, sorry, David here just share with me one of the other interesting we see more Monday through Thursday shopping on the weekend and vice versa, We see vessel last Monday to Thursday, and more on the weekends.

Because people are going back to work.

But so during the week, we go with what's going on and then by the end of the week.

Okay. Good enough. Thanks, very much good luck.

Thank you. Our next question comes from John Heimbach of Guggenheim Partners. Please go ahead John .

John Heimbach.

You guys have.

Any sense of demographics by goldstar versus executive.

And the thought being when you think about the structure going forward could you leave goldstar, where it is.

<unk> executive up and maybe at an executive plus alright, but neither has more than 2% or some other features right. So youre catering to people through the income spectrum.

Yeah, I think we tried to.

As you know John I think we try to keep things simple.

We talked about all kinds of things, but we always come back home and say, let's do this.

Keep it simple.

One of the issue and what are the other issues about doing a higher level of memberships and then.

Executive is sales taxability in some states.

That is currently non sales taxable, but at a certain level states say, it's sales tax, but not just the increment, but the whole membership fee. So that's something we take into account also.

At this juncture I think we still lend towards simple.

Okay, and then secondly, when you think about.

Yes, I think somebody asked right about inflation going forward.

A lot of what we hear is that it'll be sticky right.

Here for longer.

<unk>.

As it comes down.

Think vendors right are likely to respond we're not we're not going to see list price decreases.

Are we going to see more trade money step up so when you think about your participation in that and.

No.

Your ability to take advantage of that how do you how do you how do you go.

Think about that.

Well again.

Again, I think again in terms of the stickiness wages are still the culprit.

I think again, we're in as good a position if not better than anybody given that our buying power per item is off the charts high compared to anybody else.

And our buyers focus on the detailed components of it so there will be stickiness.

You read articles every day.

On television.

Sure.

And the periodicals the journal about some CPG companies. It just raised their prices and they are sticky.

We'll try to unpack them, but I'm sure some of it will stick and some of it won't but I think again, we're in the best position. When you think about we've got lots of $50 million $100 million and $200 million, even higher items and even have a handful of $1 billion skus. So we we think we are pretty good at figuring that out with our suppliers not one.

Just to say hey, the price went down on this commodity or this.

Supply cost component, but also in figuring out how to make things more efficient.

One of the things somebody asked earlier about what have we learned.

On the freight and trade size, a container side port side, I think we've learned through manufacturing as good as we think we are there things that I hear at the budget meetings. All the time about how on 100 200 $500 million Skus, how theyre, taking costs, so which right now meant that the price increase was lower than it would have been but how they took.

Cross out by by changing the production line or eliminating.

Some of the insight.

Packaging and Thats part of ESG as well as figure out how to lower the cost.

I don't know if anybody does as well as we do given that we're focused on such bigger volumes of an item.

Okay. Thank you.

Thank you. Our next question comes from Robbie Holmes of Bank of America Securities. Please go ahead Robby homes.

Maybe a follow up on John .

John's question, so the the kind of signs of relief and inflation Youre seeing can you can you give an example is in the kind of food and sundries side of the business are you seeing.

Some relief on the food inflation side.

Yes.

Uh huh.

Sure.

Yes, I'm getting some help here.

Certain commodities like corn or coming down I mentioned beef.

<unk> is coming down a little bit.

So all these things are impacting a little bit but in some cases the supplier of committed at the higher priced we worked with our suppliers.

The more transparent as they are with us, which we feel they are very transparent we worked together on that in some cases even win.

Commodity prices gone down fast.

They've committed to the next three months at a higher price because they were we.

All were fearful as you won't even higher we worked with them on that.

I think again it's.

It's.

At this juncture anecdotal and I can't give you any specific examples.

And then just a quick follow up I think you mentioned optical.

It was down I apologize.

Optical Ben been weaker for a while or what.

Nothing changed there.

I think the big thing there was a promotion we did a year ago quarter.

Yeah.

Okay.

We did a big promotion a year ago.

And this year, we did do a big promotion on lots of things all the time, but we did a big promotion this year on.

It looks slightly later date.

So we are now seeing it.

Got it.

Yes.

It's more timing than anything on that example.

Got it thanks, so much.

Thank you. Our next question comes from Scott Ciccarelli of true Securities. Your line is open. Please go ahead Scott Ciccarelli.

Thanks.

Hi, guys.

Cosco tends to put a line in the sand on pricing with some items, obviously, the hotdog and soda.

Chicken offerings for example, despite today's inflationary pressures.

Margins are actually holding in pretty well I guess the question is are there other areas, where you're being even more aggressive than normal on the pricing side and then.

Side of that is what categories are you guys using to maybe harvest some extra margin to offset that presumed margin squeeze from holding the line and stand on pricing.

Lightning just struck me no. We don't we really don't look at it that way I think.

As I mentioned earlier about there are some businesses that are.

Are doing well with margin like gas business.

On a smaller way to gather in the travel business those things help us be more aggressive in other areas or as you mentioned hold the price on the hot dogs in the soda a little longer.

However.

But at the end of the day.

No I don't think we necessarily look to find places where we.

Can harvest margin.

But we are there are different areas again.

The fresh foods business.

The strength in sales for two year period, where over two years, you had 30% to 40% 20 plus percent increase each year.

Enormity of the improvement in.

And the bottom line, even known as we're giving some of that back now still net net were better than we were two years ago. So all those things help that process.

But on a go forward basis, if youre really not looking to take any extra margin. Some other categories should we presume that margins may actually start to drop on a year over year basis.

Well, we don't provide guidance, but we will look at the bottom the top line first and how does that impact the bottom line and historically.

Years ago was we want to raise raise margins by lowering prices, but keeping a little of it.

That was the old saying you are.

Inflationary environment that changes a little bit but at the end of the day, it's all about driving volume. If we can if we can incrementally get another percentage point of comp sales that does more than any kind of harvesting we would ever want to do which we don't do.

Okay. Thanks, guys.

Okay.

Okay I think that's it on our end.

Thank you very much everyone. We're all here to answer some additional questions.

Talk to you soon.

And this concludes today's conference call. Thank you for participating you may now disconnect.

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Yes.

Thank you for standing by and welcome to Costco's fourth quarter of fiscal 2022 earnings Conference call. At this time all participants are in a listen only mode. After the speaker presentation. There will be a question and answer session to ask a question. During the session you will need to press star one one on your telephone.

I would now like to hand, the call over to CFO Richard Galanti. Please go ahead. Thank.

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

In today's press release, we reported operating results for the fourth quarter of fiscal 2022. The 16 weeks ended this past August 28, net income for the quarter was $1 $86 8 billion or $4 20 per diluted share compared to $1 67 billion or $3 76 per diluted share.

Year ago last year's fourth quarter was negatively impacted by an asset write off of $84 million pre tax or <unk> 14 per diluted share net.

Net income for the fiscal year totaled $5, eight 4 billion or $13 14, a share compared to $5.01 a $5 $5 1 billion.

Or $11 27 per diluted share the prior fiscal year net.

Net sales for the fourth quarter increased 15, 2% to $77 6 billion.

As compared to 61 44 billion reported last year in the fourth quarter.

On a comparable sales basis from the fourth quarter.

<unk> for the 16 week period on a reported basis had comp sales of 15, 8% when you exclude gas inflation and FX, we wouldn't be any FX gas inflation it would be nine 6%.

Canada 13, 4% to reported 13, 7% ex gas and FX other international two 9% reported and 11, 3% ex gas and FX. So all told total company was reported as 37% and excluding gas and FX plus 10 four.

Percent.

Separately ecommerce seven 1% reported and again, excluding FX eight 4% and.

In terms of the Q4 comp sales metrics traffic or shopping frequency increased seven 2% worldwide and up five 2% in the U S. R.

Our average transaction or ticket was up six 4% worldwide and up 10, 8% in the U S. During the fourth quarter.

Foreign currencies relative to U S dollar negatively impacted sales by a little over 2% and gasoline price inflation positively impacted sales by approximately five 5%.

The best performing in the quarter, the best performing core categories in the quarter were candy frozen.

He asks tire lawn and garden jewelry toys bakery and deli.

In terms of ancillary businesses, the best performers were gas and food courts and in other businesses travel and business centers perform best relative to the prior fiscal fourth quarter results.

Going down the income statement to membership fee income on a reported basis membership fee income came in at 1327.

$1 billion or $1, 88% that was up 90 $393 million or seven 5% on a reported basis again with weaker foreign currencies relative to the U S. Dollar that number excluding the impact of FX would have been $29 $8 million higher than the seven 5%.

The reported increase would have been a 10% increase in.

Wide renewal rate came in at the end of the fiscal year at 94%.

Tenths of a percentage point from Q3 and when it was 98%.

In terms of the number of member households, and cardholders at Q4, and we ended the fourth quarter with $65 8 million paid household members and.

$118 9 million cardholders, both of six 5% from a year earlier.

And that six 5% increase in number of card members and card holders is about just under a 3% increase in the number of locations. During the year. We opened 23 locations on a base that began the year with 815 warehouses.

At Q4 end.

In terms of membership fees.

Hospital increase there are no specific plans regarding a fee increase at this time.

We're pleased with our growth in both top line sales and membership households over the last several quarters and in term member and member loyalty is reflected in increasing member renewal rates well, let you know when something is about to happen.

Moving onto gross group fourth quarter gross margins for the quarter gross margin on a reported basis came in at 10, 8%.

Compare down 74 basis points from last year's reported gross margin of 10, 92%.

74% to 74 basis points year over year reduction.

On a reported basis, excluding gas inflation. It was minus 22 basis points and as we normally do we ask you to jot down a few numbers and then we will elaborate a little bit more on margin.

The two columns would be reported year over year change and the second one would be ex gas inflation net year over year change. So the core merchandise margin on a reported basis minus 67 basis points year over year ex gas inflation minus 23 basis points.

Ancillary and other businesses the second line item, plus 20, and plus 34.

Our 2% reward zero and minus 5%.

LIFO minus 27% minus 28.

All told total minus 74 reported as I mentioned and minus 22.

Excluding gas inflation basis.

<unk> with the core core merchandise contribution to gross margin was lower by 67 basis points year over year and by 23 ex gas inflation.

Minus 39 basis points year over year in Q3 minus 28 in Q2 and minus 18 in Q1 on a year over year basis. So again for the quarter. It was minus 26 core on core <unk>.

Ancillary and other businesses gross margin was higher by 20 basis points and higher by 34 basis points ex gas inflation in the quarter.

Yes of course, as well as business centers and travel were better year over year offset somewhat by AECOM pharmacy food court in optical but overall.

The positive year over year change are 2% reward as I mentioned on an ex gas inflation basis was.

Higher or downside lower or down five basis points, implying higher sales penetration coming from our executive members.

In terms of LIFO LIFO as you know with inflation has been increasing.

It was 27 basis points down year over year or higher year over year.

The LIFO charge this year on an ex gas inflation basis, 28 basis points higher and that represented $223 million charge in the quarter recall are there our LIFO charges were relatively small in the first part of the year at $14 million last quarter and the third quarter 130, and then as I mentioned here to 23%.

For the quarter.

Moving to SG&A we.

Show Good results reported SG&A came in at 853% compared to last year's 922, an improvement of 69 basis points, but again ex gas inflation of the improvement was still good at 26 basis points lower year over year.

Again charging down a few numbers here shutting down the numbers on our core operations basis on a.

On a reported basis that was plus 50 basis points or a positive reduction of 50% improvement.

Ex gas inflation, plus 12 basis points.

Central plus two and minus three.

Stock compensation, plus two and plus one pre.

Preopening expense, plus one and plus two.

Other plus 14, and plus 14 that gets you down to again on a reported basis year over year SG&A was improved by 69 basis points in <unk>.

Gas inflation by 26 basis points.

In terms of the quarter year over year. The core operations was begun better by 12, excluding any impact of gas inflation keep in mind. These results include the starting wage increases we instituted in October of 2021. So in the first quarter of this fiscal year. This past fiscal year as well as new wage and benefits increases implemented during the third quarter in March.

Of this year as well as the impact of eight weeks in this quarter as we increase the top of scale increase that went into effect July 4th. So a few increases that we've done this year and so we feel pretty good SG&A approval, given our our sales strength.

Central was lower by two basis points.

And higher by three ex gas inflation, nothing big to talk about there again stock compensation I mentioned Preopening I've, just we've noted that since we know that.

Include Preopening on the income statement as part of SG&A instead of a separate line item in.

Either again, the 14 basis points recall that that included at last year's write off in the quarter totaling $84 million.

All told reported operating income in the fourth quarter increased 10% coming in at $2 97 billion.

A little of that benefit was that asset.

Asset write off last year below the operating income line interest expense was $48 million this year versus $52 million last year relatively similar interest income and other for the quarter was lower by $1 million year over year coming in at $67 million. This year versus 68 last year interest income was actually higher but that was offset by unfavorable <unk>.

The FX impact, which pretty much offset each other to be roughly flat year over year overall reported pre tax income was up 10% coming in at $2 $501 $6 billion. This year.

From $2 $2 $91 billion, a year earlier in terms of income taxes, our tax rate for the fourth quarter was 25, 4% compared to 26, one in Q4 last year.

The fiscal 'twenty three effective tax rate. We estimate is currently projected to be approximately 26%.

One thing I mentioned, where you had mentioned in the past net income attributable to Costco that line item was up 12% recall that on June 30 of this past year, we acquired a 45% minority interest from our JV partner in Taiwan. So we now own all of Costco, Taiwan as a result, net income attributable to Noncontrolling interest was better by 14.

In the quarter.

The Noncontrolling interest line will be zero going forward essentially.

A small amount, but pretty much zero.

<unk> of 23 locations.

In the fourth quarter.

Of the nine we opened five we are in the U S. Two in Canada, and one each in Korea and Japan.

In fiscal 'twenty, three we expect to open 29, new warehouses, including four reloads. So for a net of 25, new warehouses. These 25 net new openings are made up of 15 in the U S and 10% other international including our first locations in each of the New Zealand in Sweden, and our third and fourth locations in China.

Regarding capital expenditures, our fourth quarter Q4, spending Capex was approximately $1 6 billion and for the full year Capex expenditures was $3 $9 billion, our estimate for the upcoming year fiscal 'twenty three capex to be.

Approximately the same in the three $8 billion to $4 billion range.

In terms of E Commerce business E Commerce sales in the fourth quarter ex FX increased eight 4%.

Stronger departments in terms of year over year percentage increases were tires.

Patio and garden prescription pharmacy, and health and beauty AIDS the law.

Just E com merchandise department in dollars, what we call majors, which includes everything from computers to appliances Tvs to audio et cetera was up in the high single digits, and Costco grocery, including our third party delivery.

Two day dry fresh and frozen.

Continue to grow they were up 20% in the quarter.

For all of this lowers the cost of the merchandise and improved delivery times and service levels to our members and I'll share with you some statistics of that in a minute.

Prior to this acquisition in the U S. We were completing a few years ago about $2 million big and bulky deliveries and installations per year.

In fiscal 'twenty, two we completed $4 3 million big and bulky deliveries and installation previously all of those 2 million deliveries installations were made by third parties in fiscal 'twenty, two about 70% or a little over $3 million of the $4 3 million were done by us in the fourth quarter in fact that the percentage of.

Deliveries and installations done by outperformed by US was 81% pre.

Pre acquisition the estimated average days to deliver was about 15 days.

<unk>.

And we were working with over 100 delivery partners today, our average delivery time for big and bulky as just under five days and we're continuing to work to improve that.

And we were down to eight delivery primary delivery partners a.

A few comments regarding inflation, we've seen minor improvement in a few areas, but all in pressure pressures from higher commodity prices higher wages and higher transportation across the supply chain disruptions, there's still present, but we are seeing just a little light at the end of the tunnel.

We're seeing commodities, some commodities prices coming down such as guests.

Steel beef relative to a year ago, even some small cost changes in plastics, we're seeing some relief on container pricing wages are still the higher thing when we talk to our suppliers and as we all know.

Are you just still seem to be the one thing thats still relatively higher but overall some beginnings of some light at the end of that tunnel and of course that could change.

Each week.

Despite current inflation levels. We believe we continue to remain competitive versus our others unable to raise prices as cost increases hopefully of course, a little less than others.

Who we compete.

Many of you have asked about private label with the recent inflationary environment and what's happening here or people trading down and of course, our first responses of course is they are not trading down they're trading up or certainly trading at the same.

In terms of Kirkland signature merchandize penetration.

<unk> gas.

Their businesses.

Kerry to Kirkland name.

<unk> merchandise is up just under 1% in terms of penetration compared to a year ago.

J S merchandise penetration is about 28% for the year. This is similar to historical trends, where it's increasing slowly and steadily over time, so no big dramatic change from the past there.

In terms of supply chain.

Generally supply chain has improved a little including on time deliveries, we started seeing container prices coming down first place.

Place you see it of course is in the spot market and then youll start to see it hopefully in some other contracts as they continue no longer any big capacity issues or container shortages domestically port delays have improved and while the rail strike that was in the news a few weeks ago was thankfully averted and its patient and anticipate.

<unk> strike there were some rail ramp closures and delays in restarting that but the view from our buyers is that this should be eliminated for the most part.

Towards the end of this week.

Switching over to inventory levels our.

Total inventory at Q4 and was up year over year just.

It was up just under 26% year over year.

At the end of the third quarter it was up just over 26%.

26% increase in <unk>.

Estimated 10% to 11 percentage points of it is inflation, that's that 8% number and new warehouse growth. That's at 3% number in terms of unit growth over the last year, but still up year over year. Additionally, we are lapping some low stocks in certain departments as a result of last year's high demand specifically in non food areas, where last year. We were we were about 90.

Percent of our targeted inventory levels food and sundries and fresh are in good shape. We feel are weak suppliers are weak supply is comparable year over year in terms of non food inventories. It's up in certain categories. Again. This is in part a result of being light in certain departments last year as mentioned earlier the <unk>.

Good news so far initial seasonal sales seem to be going well as evidenced in our monthly sales reports and all told we would expect the 26% year over year increase to start to head down as it has in just the past few weeks a little bit.

Lastly, as a reminder, in terms of upcoming releases, we will announce our September sales results for the five weeks ending Sunday October 2nd.

This next week on Wednesday in two weeks.

On Wednesday October five after the market close causes with that I will open it up to questions and answers with Latif.

As a reminder to ask a question you will need to press star one one on your telephone again Thats Star one one on your telephone please standby, while we compile the Q&A roster.

Our first question comes from the line of Simeon Gutman Morgan Stanley .

Your line is open. Please go ahead Simeon Gutman.

Good afternoon, everyone.

Richard I want to ask a couple of questions about membership fee.

So first of all.

You said you were comfortable with sales so I'm questioning.

Are your tenants if you're worried about the sales rate if you raise it and then.

Sure well nice nice try.

Look at the end of the day, we've always been told and what we told you guys that we are a top line company order can always drive sales certainly as we've increased membership fees historically about every five to five and a half years, we've turnaround and use it to drive more value and whenever we do it we will do that I think at the end of the day.

I also want to point out of course, if you look at the last three increases on average they were five years and seven months apart.

If you look at June of 2017, plus five years of seven months Youre talking roughly January 23, now I'm not suggesting it's January 23, I'm, just saying, it's not there yet anyway.

Our view is as we are confident in our ability to do so and at some point, we will but it's.

It's a question of.

When not if and given the headline of inflation and concerns about refreshing.

Recession, and we feel quite comfortable driving sales and earnings the way we are right now and we still have that arrow in our quiver as we go forth.

And then maybe the follow up same topic Phil.

Your new fiscal year, you've obviously plan the year do you cut back or you curtail spending or investment in any way that run through the P&L, if youre not planning to do it or if you are planning to do it.

Not at all I mean, it's steady as she goes in terms of Capex and what we want to do and what we want to do with pricing and competitive pricing.

And we're not the only company out there, but as we've seen some slight declines in reported gross margin not only this quarter, but in the last several quarters part of that was just the upsized improvement in margin during the first year of Covid, but we are not as you know we're not shy about doing what we have to do to drive the topline.

And we will continue to do that.

Thanks, guys. Good luck.

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

<unk> Parikh of Oppenheimer.

Your line is open go ahead. Please refresh spring. Thanks for taking my question. So Richard I guess, just going back to your expense commentary there was a sequential pick up in your expense growth.

Versus Q3, besides the wage increases was there anything else that was unique to the quarter that you'd call out.

Okay.

Well other than it was 60.

With 16 weeks versus 12 weeks, but you're talking about a year over year basis, yes year over year, Yes, I think youre right.

Four.

I think the outsize thing is just that.

Our utilities costs up sure, but the outsized thing would be the wage increases.

Okay sure I raised it.

It is always up a little more.

Everybody is doing more technology wise.

Okay, Great and then just on the health of the consumer just given many concerns out there anything to note like any changes in consumer behavior.

And your major category.

Are you guys seeing any changes versus maybe your expectations there.

Well I think I mentioned.

We've mentioned when we talked to some of you over the various months yes.

When <unk> prices skyrocketed, and now they're coming down versus a year ago, but when they skyrocket do you see a change in.

Irrespective of the state of the economy, you see some changes from from beef to poultry and those examples.

One of the buyers had made a comment a few months ago that they saw some increased penetration of canned.

Chicken and tuna for that reason.

But at the end of the day, we haven't seen any big changes in that part of it is hard to see because during.

During these two years of Covid, we enjoyed such strength in big ticket items and consumer electronics.

It's up a little versus up a lot the last two years incrementally.

No in each of those cases, our numbers relative to industry comparisons are still we're still beating the rest of the industry in terms of sales growth as the sales grow slower than it was last year, yes. Its still has a positive plus in front of it and it's still better than the industry as a whole.

Great. Thank you I'll pass it along.

Thank you. Our next question comes from Chuck Grom of Gordon Haskett. Your line is open. Please go ahead Chuck Robb.

Yes.

Your line is open.

Yes.

Hey, Thanks, sorry about that Richard on the Corp, Encore three year on a three year basis. It looks like you guys showed a nice improvement from the last quarter can you unpack that for us a little bit across the four major categories.

Thank you.

Well I don't have all that detail shortly but.

Generally speaking the thing that was outsized in the biggest way in the first years. So if COVID-19 was fresh as you remember as you recall with fresh you had virtually no <unk>.

<unk> and you had much higher labor productivity. So you had huge three digit improvements in margins there.

So that's the comparison, we've talked about that in the last several quarters on a year over year basis versus compared to those two years, it's come down as a percent still up from where it was pre COVID-19.

Other than that Theres, all kinds of things that impact other departments at.

At the extreme you have a <unk>.

Small business, but in terms of our income statement travel travel is.

Is it almost a brokerage business, where it's all margin.

Lot of its margin and that went way down and now it's improving from where it has gone way down so that helps you a little bit, but theres a lot of moving parts to that I think fresh was.

The biggest outlier then during supply chain things and everything else.

There were impacts in certain departments or allocations things like that there was less I'm just shooting from the hip here there was less promotional activity and consumer electronics because of shortages.

Chips are electronics, and so there's a lot of puts and takes.

But overall I would say fresh was the one that was most meaningful in that regard.

Okay, great. Thank you very much and then on the LIFO charge 28 basis points. I think you said last quarter was 25, I guess I was surprised that it wasn't higher given.

Sure sure well two things again, if you look sequentially in Q1, it was sub $20 million in Q2 is.

Sub 40 30, something than a 100, something then 200 something part of that is the way we account for it is as at the end of the Q1 when we saw what the trend was you then estimate what you believe it's going to be for the year and pro rate of third quarter that are 12 weeks of that to that quarter and then as it continues to increase you operation adjusted.

On a year to date basis, so that skews that a little bit that's the way we've done it historically and prior inflationary times.

The other comment you asked about.

It seems it seemed like it would be even.

And higher in Q4. The fact is as we too thought halfway through the quarter. It would be higher than this part of that was if I. If I bifurcated Q4 into the first eight weeks and second eight weeks. The first eight weeks showed a a level of increase that would have required a larger LIFO charge it seem to.

In some cases flatten out a little bit during the last several weeks of the quarter, which meant that it came down from what our expectation was so again I think that is consistent with I mentioned about we are seeing a little light at the end of the tunnel and not just us.

There is literally.

Some of the buyers about a couple of items going down in price and you can rest assured that our peers are calling the suppliers you said the price went up because of steel.

Steel prices, while steel prices are down what gifts and so we'll continue to do that but it's a slow road.

But we are again seeing a little bit of improvement at least in the second half of the fourth quarter.

And we.

We will see where it goes from there.

Okay. Thanks very much.

Yes.

Thank you. Our next question comes from Paul Let's use a city.

Your line is open. Please go ahead Paul.

I'm on for Paul Thanks for taking our question.

I wanted to dig in on the inventory piece a little bit.

Up about 26% how much of that is you categorize as general merch you have some pretty big competitors that have been trying to clear some of their general merch as I'm sure everyone knows so.

You kind of reach holiday.

Can you give us a sense of where you are for general merch inventory any plans to kind of further discount there to try and get leaner sure well first of all without being too specific.

A decent chunk in there that I would call deep freeze from last year.

My example, I've used when talking to people is the Christmas trees that retail for 150 to $400 and they came in after Christmas.

Essentially after Christmas and the good news is is that they don't really change in style and.

And they are now if you go to Costco youre going to see.

Youre going to see them on the floor and.

<unk> and Volta and fulfillment both E com fulfillment in big and bulky.

The last part is as early holiday.

We did consciously bringing some stuff part of it was.

Not knowing what was happening with supply chain and how many weeks of delay at each item was <unk>.

We bought stuff and consciously a little early and then as I mentioned supply chain has improved a little but thats helps you.

So again, there's things that have helped or hurt it increased it reduced it the other thing thats.

Increase a little bit even some things like seasonal things like air conditioning fans, which was we had a very strong season, but there were some delays in getting that stuff.

That.

That will be a small impact from a seasonal standpoint going forward, but net net I think that while the 26% number was rare.

Relatively same at year over year, Q3, and Q3, and Q4 and again in work and talking with Ron and putting in the merchants and.

And again see what we've seen just in the last two or three weeks if going in the right direction.

Nobody likes and I think that one other differences that.

Compared to some of the other bigger retailers.

Our inventory is more specifics like if we get a lot of it if we have a bunch of air initiatives are a bunch of <unk>.

Furniture.

We may have to hold onto it but it's it's not a whole variety of different things and so while we have had some additional markdowns nothing huge no big outsized numbers relative to what we would normally expect so a little bit increase but nothing material.

Gotcha, and so youre, bringing holiday up a little earlier than you otherwise would and some of that more seasonal air conditioners and fans. You mentioned you might hold those over to spring time right.

We will yes, that's easy.

The good news again call it Lucky.

Two and a half years ago, when we acquired <unk>.

<unk>, which is we call with Costco logistics, we added.

10, or 20 million square feet between.

<unk>.

$10 million of big space the million square foot space to the roughly $10 million to $12 million of depot space. We have so we were that was fortuitous in that regard.

Understood.

Thank you.

Thank you. Our next question comes from Kelly Bania of BMO capital markets. Your question. Please Kelly Bania.

Hi, Thanks, Kelly Bania from BMO.

Richard just wanted to touch on executive penetration.

Line item continues to impress I think it's the biggest quarterly jump in the model that I can see.

Well I think we think we will I mean, what used to be asked the question as it used to be asked you about <unk>.

Millennials or Gen X and then millennials and Gen Z, we tend to see the same type of trends that are age and arguably income dependent.

Also during these last several years, we've continued to get better at.

Talking you into signing up as <unk>.

Selling you on that.

The value of that executive member upfront. So we've seen the increased penetration there too. The other thing of course that helps us when we added to a new country and I think in the past two years, we added it to Japan.

In Korea.

So we haven't of course in the U S Mexico, Canada.

In the U K.

And so.

Have you gotten the big countries. If you will in terms of number of locations and I'm sure there'll be another country. Two we added two overtime as those countries' growth. So I think we've done a better job of doing it.

Starting with it years ago, you came in and we ask you. What you wanted and then if you say goldstar, that's what you've got now we actually tried to.

Share with you what's the what's the value of it and we've done a better job of that.

Okay. Thanks.

Just to maybe follow up on the container pricing I think you mentioned, maybe some relief starting there.

I guess the question is have you learned anything about your business over.

Over the past few years really kind of focusing on discretionary imports.

And the strategy to charter ships.

You might keep the longer term or do you expect to kind of go back to kind of everything you were doing pre pandemic from from that perspective.

I think the biggest thing we've learned is that it really from.

Sorry.

The source of origin of these items.

If you go back to even when.

Tariffs replaced in whatever 16 or 17.

Or whenever that was.

China and there were certain items that were moved from manufacturers in China. Those same manufacturers, who may have had facilities and other neighboring countries.

Where we could and where they could that was moved to to get around some of those tariffs.

And so you learned through that process, we certainly learned through the last couple of years.

The challenges with containers not to say that we can change some of it.

But yes.

I think we tried it.

Can you try to spread it out a little more.

Not depend on one port and.

Certainly we've learned all those things and we learned that we can continue to make mistakes along the way too.

Thank you.

Thank you. Our next question comes from Oliver Chen of Cowen.

Please go ahead Oliver Chen.

Okay.

The industry thinks so much inventory in the wrong kind of inventory what are your thoughts on the promotions that you are seeing and how youre thinking about pricing and any thoughts on the nature of your portfolio you all offer such sharp prices.

On inflation at the end of the tunnel second Richard maybe you could elaborate on that.

Alright.

And lastly on data.

Let's do one question at a time, so I don't forget.

Yes, yes supply becomes more plentiful theres more promotions I remember last year or the last couple of years again given shortages in electronics, we saw we in the industry saw a lot less promotional activity being afforded retailers from the manufacturers on Tvs.

There was no need to do that and we're starting to see some of those promotional activities come back.

Other than that also one of the things that we like is our multi vendor mailer.

Both the.

The existing one as well as other promotional things, we do like that online and direct and those had to be changed in some ways because of shortages.

Allocations of inventory a lot of times in those those types of MMS you got a lot of Hydra items like promotional things like Tvs as well as huge.

High sales volume items like paper goods and things like that and Youre looking at the paper goods as well there was shortage of those along the way so we've.

We learned how to change those in and maximize them in the ways and the best ways, we can figure out how to use those monies.

<unk> worked with our vendors as well as suppliers to figure out how.

Had to use that money and the best way.

And with.

And that's again, an iterative and evolving process.

Second question.

And then inflation just light at the end of the tunnel.

Green shoots there that youre seeing.

Yes.

Well again.

Anecdotally when we talk to the buyers they are starting to see a few examples whether it's.

Something like.

Outdoor patio furniture, or barbecue grill, where steel prices are coming down.

We're reminded by Craig and Ron are the buyers.

<unk> reminded at the budget meeting when prices were going up make sure you understand why theyre going up is it what piece of it is.

Raw material costs, what piece of it is freight costs and when these things come down you better be on the phone with them, calling them, saying when are we going to get a reduction and so I think.

In part because of our limited selection limited number of Skus and the huge volume I think our buyers know pretty darn well a lot of the cost components of these things.

That I think.

Bodes well for us, but again at the end of the day, we are seeing I think it is a little light at the end of the tunnel certainly container rates have come down container.

Container shortages have improved the port delays have improved all of that thing going into it.

And as raw material prices come down.

Okay.

<unk> FX generally helps you hurts you.

When we report our foreign companies earnings in U S dollars.

Currency has gone down 10%, it's 10% less earnings that we report, but at the same token since.

We're using U S dollars and a lot of things not just in the U S to buy different supplies and raw materials from other places that helps you a little bit.

Yes.

Could something happen tomorrow to changes for sure, but at least we're seeing things going starting to go in the right direction and hopefully that bodes better for not just us but everyone.

Okay, and lastly, now it's time to talk about generation a mandela.

What about the data mature and I know you hired that team.

Kind of.

Yes.

Were there any highlights you want to give up.

He is on the horizon.

We have done historically.

This is not on the sales force sales side, but on the operating our business side.

Greatly reducing the intent is to greatly reduce the buyers' time and doing their own spreadsheets, if you will I'm simplifying.

And so we're doing a lot of activities like that.

In terms of.

The data analytics to drive more business, that's still to come.

We think we're doing okay right now, but the first effort of this area is on improving the data that both our data our operators our buyers are traffic people get.

Okay. Thanks, very much best regards.

Thank you. Our next question comes from Greg Melick of Evercore ISI. Your line is open Gregg Melnick.

Two questions first on gas and then on the credit.

Credit card on the gas I guess I'm curious it looks like it's well we know it's a negative mix shift.

Really helped ancillary that was the one thing where gas profit or penny profit was up.

Can you just remind us of that dynamic that is gasoline prices fall, how how high Penny profit can go during that period and also remind us the traffic driving.

Relationship to gasoline.

Well.

Yes.

The old story was as when prices given that we turn our inventory about every day on average and the average in the U S. Gas stations is like every eight or nine days. So on average we are buying the other guys buying it for days.

Yes.

Four days earlier, so when prices are going up each day when spot prices are going up each day.

It's costing us a little more because we bought it today at the highest priced versus four days ago Im being very simple here and when it's going down just happened.

Happens that we make more money when it goes down I think part of that story has been thrown away because it seems that.

Not only us but the.

Supermarket retailers and other discount retailers that operate large numbers of gas stations.

Been able to use it to as prices went up.

Or even went down a little bit they didn't go down as fast as perhaps they could have been which gives us in our view and the ability to make a little more and still be the most competitive impact.

And our view has gotten a little wider so I think overall gasoline as a retail business has gotten more profitable in the last couple of three years and.

Profitability has been even exacerbated a little bit.

What's going on with inflation in the headline news.

Prices are skyrocketing and even if when you see guests.

Gas prices have come down at the pump.

It seemed like that lagged.

Crude oil coming down and why is it coming down faster and so we.

We still are very much in our view the most competitive out there and arguably we've been able to.

To use that to be continue to be more competitive elsewhere as well.

Is it still 50% roughly that you think go to the club when they get gas well historically, a little over 50 every people.

But at the moment.

Yes, historically, a little over 50 of every 100 people that filled up with guests.

In the shop.

That actually right when gas peaked right after the Ukraine, Russia thing.

For a couple of weeks there it went down to like 2025% because people chopping off their tanks.

For fear that there was going to be a gasoline shortage.

The result is you remember the mid seventies.

But yes member utilization also went up.

What we're seeing now is that little slightly over 50 or slightly under 50 got it back to normal yet.

But more and more members are using it.

Got it and then.

The last one on the credit card.

Update us on anything you can on the credit card penetration.

The behavior of the portfolio.

Lift.

A tender on the cards or the lift you get outside of the club with it.

Just given it seems to be a key part of the renewal rates I would imagine continuing to enhance.

Sure auto renewal and it's not just on the Citi visa.

Co brand card, it's on any visa card.

Here in our Mastercard, we worked out a deal with bank and Mastercard in Canada.

So on co brand.

Not only the fact that we do an exclusive which arguably gives us purchasing power to lower the merchant fee and to drive the reward to the member.

Typically the co brand cards, there's revenue share.

So every time that card is used outside.

We share in that revenue, while we pay for some of the rewards that's more than offset that.

All set by the revenue sharing so it continues to be fiscal 'twenty. Two was a great year for the card in terms of increasing penetration and increasing rewards to our members and.

Very in our view, a very favorable effective merchant fee to us, which we don't disclose.

Auto renewal is up to what percentage.

I don't know.

Okay.

In the U S.

In the U S a.

The U S number mid to high Fifty's signed.

Signed up broader room.

Oh, great Thanks, and good luck.

Thank you.

Thank you. Our next question comes from Peter Benedict Baird. Your line is open. Please go ahead Peter Benedict.

Hey, Richard.

Thanks for taking the question you kind of ended your.

Paired remarks, you said kind of seasonal going well.

Maybe you can elaborate on that are you talking about.

Paul seasonally you're talking Halloween, just what did you.

What were you trying to express with that.

Well part of what I'm trying to express is that while inventories were up 26% year over year.

We're starting to feel good that theyre going in the right direction.

With the efforts that we put forth and par.

The strength is is once we also indicated I mentioned the call or somebody did.

That seasonal we brought in some cases seasonal early just because we weren't sure of the delivery dates and we wanted to make sure we added it.

What we've seen so far is Halloween is doing well and Christmas is doing well.

And so we're encouraged by what we've seen in the last few weeks.

Okay, perfect and then just.

Kind of maybe a bigger picture maybe historical question just.

It was about how the how your business has kind of performed in past recessions and maybe what do you see from your members as you think back.

What are the early indications.

When we're going into a tougher environment is it the business remember that starts to flow.

<unk> is it certain categories I don't know just just curious kind of your perspective.

During this unique time in the economy.

Remember all of them, but I remember the <unk> 91.

At the end of that year, which went from a recession to the great recession lasted for four or five years and that's as we entered it and it was pretty quick when it happened.

We saw some slowdown in CMS seasonal things which were like.

Barbecue grills, and patio furniture, and things like that big ticket those kind of big ticket items slowed.

Other than that.

Generally speaking.

One of the nice things about our model is as we've done well in good times and bad times and good times of course people have money to spend and in bad times people want to save and.

The perverse way, while none of us ever wished co.

Covid on anybody.

From a bottom line standpoint, while it impacted some businesses negatively impacted many more of our business is positively and we seem to keep some of that market share.

Strontia reopening our people is what I read that people are still eating more at home than they did pre COVID-19 and but even within that we felt that we built some additional market share during that so.

I think overall.

Okay.

We did fine and I think the good news is even in bad times.

Don't view ourselves as having to be as conservative as perhaps others might be.

We don't take big rig.

Reductions in buying.

And open to buys or anything in that regard.

I remember back in <unk>, 10, or <unk> with the.

With barbecue grills and patio furniture.

Midway through the new year and it was clear it was going to continue to be recession.

Whether it was Craig or Jim prior to Craig or both.

As a reminder to the buyers was don't bring down price points.

We've driven value at greater value and greater value a greater price points.

If we want to be a little conservative refine but don't.

Think thats not going to do go forward based on the assumption that we're providing the best value out there.

Yeah.

Right.

That's helpful. I think as I recall, maybe your renewal rates actually went up during the great recession as well so definitely I'm sorry last question.

Yes, they certainly have now although auto renewal is certainly a piece of that.

Yeah, Yeah, no exactly last question just on traffic, Richard I think 5% or so on the quarter I think August maybe it was maybe a shade below three.

In the U S. Just how do you guys think about that and it is or is there a traffic level.

That you guys don't like to.

To see it go below obviously more traffic that is less but just kind of curious how you're thinking about that.

Yes part of the challenge in the last couple of years is every time something happens some of the hits the fan and it was like the omicron surge of the Delta surge and Youll see things change dramatically.

Period of time.

Look at the end of the day whenever we see any possibility of something weak we figure out how to drive sales and usually drive sales by greater values Hot items and that goes back to the comment I made earlier about the multi vendor mailers.

Yes.

That's the one thing I think we're good at is figure out how to drive people into the door with with hot items and.

And that has helped us as well.

Oh, sorry, David here, just share with me one of the other interesting things, we see more Monday through Thursday shopping then on the weekends and vice versa. So we see less of the last Monday to Thursday, and more on the weekends.

Because people are going back to work.

But during the week, we go what's what's going on and then by the end of the week.

Sure.

Okay. Good enough. Thanks, very much good luck.

Thank you. Our next question comes from John Heimbach of Guggenheim Partners. Please go ahead John .

John Heimbach.

You guys have any sense of demographics by goldstar versus executive.

And the thought being when you think about the structure going forward could you leave goldstar, where it is.

<unk> executive up and maybe added executive plus alright, but either has more than 2% or some other features right. So you are catering to people through the income spectrum.

Yeah, I think we try to.

As you know John I think we try to keep things simple.

We talked about all kinds of things, but we always come back home and say, let's do this.

Keep it simple.

One of the issue one of the other issues about doing a higher level membership than then.

Executive is sales taxability in some states.

That is currently non sales taxable, but at a certain level state say, it's sales tax, but not just the increment, but the whole membership fee. So that's something we take into account also.

At this juncture I think we still lend towards simple.

Okay, and then secondly, when you think about.

Yes, I think somebody asked right about inflation going forward.

A lot of what we hear is that it'll be sticky right.

Here for longer.

As it comes down.

Vendors right are likely to respond we're not we're not going to see list price decreases.

Are we going to see more trade money step up so when you think about your participation in that and.

No.

Your ability to take advantage of that how do you how do you how do you guys think about that.

Well.

Again, I think again in terms of the stickiness wages are still the culprit.

I think again, we're in as good a position if not better than anybody given that our buying power per item is off the charts high compared to anybody else.

And our buyers focus on the detailed components of it so there will be stickiness.

You read articles every day.

On television.

Sure.

And the periodicals the journal about some CPG companies. They just raised their prices and they are sticky.

We will try to unstack them, but I'm sure some of it will stick and some of it won't but I think again, we're in the best position. When you think about we've got lots of $50 million $100 million and $200 million, even higher items and even have a handful of $1 billion skus. So we we think we are pretty good at figuring that out with our suppliers not one.

Just to say hey, the price went down on this commodity or this.

Supply cost component, but also on figuring out how to make things more efficient.

One of the things somebody asked earlier about what have we learned.

On the freight and trade size container side Port side, I think we've learned through manufacturing as good as we think we are there things that I hear at the budget meetings. All the time about how on 100 200 $500 million Skus, how theyre, taking costs, so which right now meant that the price increase was lower than it would have been but how they took.

Cross out by changing the production line or eliminating.

Some of the insight.

Packaging and Thats part of ESG as well as figuring out how to lower the cost and again I.

I don't know if anybody does as well as we do given that we're focused on such bigger volumes of <unk> and <unk>.

Item.

Okay. Thank you.

Thank you. Our next question comes from Robbie Holmes of Bank of America Securities. Please go ahead Robby arms.

Maybe a follow up on.

John's question so the.

Signs of relief and inflation Youre seeing can you can you give an example is in the kind of food and sundries side of the business are you seeing.

Some relief on the food inflation side.

Yes.

Okay.

Sure.

Yes, I'm getting some help here.

Certain of these like cornering coming down I mentioned beef.

And it's coming down a little bit. So all these things are impacting a little bit but yes in some cases the supplier of committed at the higher priced we worked with our suppliers.

The more transparent they are with us, which we feel they are very transparent we worked together on that in some cases even win.

<unk> price has gone down fast.

We've committed to the next three months at a higher price because they were we all were fearful as you won't even higher we worked with them on that.

I think again it's.

Thats.

At this juncture anecdotal and I can't give you any specific examples.

Got you and then just a quick follow up I think you mentioned optical.

It was down I apologize.

Optical Ben been weaker for a while or what or did something change there.

I think the big thing there was a promotion we did a year ago quarter.

Yes.

Okay.

We did a big promotion a year ago.

And this year, we did do a big promotion on lots of things all the time, but we did a big promotion this year on.

It looks slightly later date.

So we're now seeing it.

Got it.

Yes.

It's more timing than anything on that example.

Got it thanks, so much.

Thank you. Our next question comes from Scott Ciccarelli of true Securities. Your line is open. Please go ahead Scott Ciccarelli.

Thanks.

Hi, guys.

Cosco tend to put a line on pricing with some items, obviously, the hotdog and soda.

Chicken offerings for example, despite today's inflationary pressures.

Margins are actually holding in pretty well I guess the question is are there other areas, where you're being even more aggressive than normal on the pricing side and then.

Side of that is what categories are you guys using to maybe harvest some extra margin to offset that presumed margin squeeze from holding the line in sand on pricing.

Lightning just struck me no. We don't we really don't look at it that way I think I.

I mentioned earlier about there are some businesses that are.

Are doing well with margin like gas business.

On a smaller way to get the travel business those things help us be more aggressive in other areas or as you mentioned hold the price on the hotdog and soda a little longer.

Forever and but at the end of the day.

No I don't.

Think we necessarily look to find places where we can.

Can harvest margin.

But we are there are different areas again.

The fresh foods business.

The strength in sales for a two year period, where over two years, you had 30% to 40% 20 plus percent increase each year.

Enormity of the improvement in.

The bottom line, even as we're getting some of that back now still net net were better than we were two years ago. So all of those things help that process.

On a go forward basis, if you're really not looking to take any extra margin. Some other categories should we presume that margins may actually start to drop on a year over year basis.

Well, we don't provide guidance, but we will look at the bottom the top line first and how does that impact the bottom line and historically.

Years ago was we want to raise raise margins by lowering prices, but keeping a little of it.

That was the old saying you are an inflationary environment that changes a little bit but at the end of the day. It's all about driving volume. If we can if we can incrementally get another percentage point of comp sales that does more than any kind of harvesting we would ever want to do which we don't do.

Okay. Thanks, guys.

Yes.

Okay.

Okay I think that's it on our end.

Thank you very much everyone. We're all here to answer some additional questions.

Talk to you soon.

And this concludes today's conference call. Thank you for participating you may now disconnect.

Q4 2022 Costco Wholesale Corp Earnings Call

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