Q1 2023 Costco Wholesale Corp Earnings Call
[music].
Okay.
Speaker 1: I mem.
Speaker 2: Please stand by. We're about to begin.
Speaker 3: Good afternoon, ladies and gentlemen, and welcome to the Costco Wholesale Corporation Fiscal Q1 2023 conference call. At this time, all participants are in a listen-only mode, and please be advised this call is being recorded. After the speaker's prepared remarks, there will be a question and answer session. If you would like to ask the question during this time, simply press star 1 on your telephone keypad. And if you would like to withdraw your question, simply press star 1 again. And now at this time, I'll turn the call over to Costco's CFO , Richard Galanti. Richard, please go ahead.
Speaker 4: Thank you, Bo. Good afternoon to everyone. I will start by stating that these discussions will include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements involve risks and uncertainties that may cause actual events, results, and or performance to differ materially.
Speaker 5: from those indicated by such statements. The risks and uncertainties include but are not limited to those outlined in today's call, as well as other risks identified from time to time in the company's public statements and reports filed with the SEC. Forward-looking statements speak only as of the date that they are made, and the company does not undertake to update these statements except as required by law.
Speaker 6: In today's press release we reported operating results for the first quarter of fiscal 23. The 12 weeks ended this past November 20th. Reported net income for the quarter was $1.364 billion or $3.07 per diluted share. That compared to $1.324 billion.
Speaker 7: $2.98 a share last year. This year's results included a charge of $93 million pre-tax, or $0.15 per share, primarily related to downsizing our chartering shipping activities, and a tax benefit of $53 million, or $0.12 per diluted share, related to stock-based compensation.
Speaker 8: Last year's results included an asset write-off of $118 million pre-tax, or $0.20 per diluted share, and a tax benefit of $91 million, or $0.21 a share related to stock-based compensation.
Speaker 9: Additionally, the strength of the US dollar resulted in our foreign company earnings translating into fewer US dollars.
Speaker 10: With 25 to 30 percent of our earnings generated outside of the United States, this negatively impacted earnings by about 12 cents per share.
Speaker 11: In terms of sales, net sales for the first quarter increased 8.1% or $53.44 billion versus $49.42 billion reported last year.
Speaker 12: On a comparable sales basis during the first quarter, reported U.S. sales increased over the 12 weeks 9.3% and excluding gas inflation and FX 6.5%.
Speaker 13: Canada 2.4% reported 8.3% increase gas inflation in FX. Other international reported minus 3.1%.
Speaker 14: excluding gas inflation FX plus 9.1. So you have all totaled 6.6 reported for the company and X gas inflation and FX of 7.1. E-commerce by the way was reported of a minus 3.7 and a minus 2 excluding FX.
Speaker 15: In terms of first quarter comp sales metrics, traffic or shopping frequency increased 3.9% worldwide and up 2.2% in the US. Our average transaction size was up 2.6 worldwide and 6.9% US during the first quarter.
Speaker 16: foreign currencies relative to US dollar negatively impacted sales by a little over 3% while gasoline price inflation positively impacted sales by approximately 2.5%. Moving down the income statement, membership fee income reported in the quarter, membership fee income came in right at a billion dollars.
Speaker 17: That $54 million number would have been increased by $32 million, and the membership on an adjusted basis would have been a little over 9% year over year on flat FX. In terms of renewal rates, at first quarter end, our U.S. and Canada renewal rates were 92.5% compared to 92.4% a quarter ago.
Speaker 18: Worldwide, the rate came in both at this quarter end and the previous quarter end, the same level at 90.4%.
Speaker 19: We ended first quarter with 66.9 million paid household members and 120.9 million cardholders, both of 7% versus last year and recognize we added about 22 units over the course of that last year. So that was about just under 3% of that increase.
Speaker 20: At Q1 end, paid executive memberships were right at 30 million, an increase of 904,000 during the 12 weeks or 75,000 a week.
Speaker 21: during the first quarter. Executive members now represent 45% of our paid membership and just under 73% of worldwide sales.
Speaker 22: Moving down the income statement to gross margin, I reported gross margin the first quarter was lower year over year by 45 basis points and lower by 21 basis points, excluding gas inflation.
Speaker 23: And as I'll explain in a minute, the 93% pre-tax charge, excluding that $93 million charge we took in the quarter, gross margin ex-gas inflation would have been only down three basis points.
Speaker 24: As I always ask you, jot down the following numbers, two columns and...
Speaker 25: Six line items. The first column is reported during the first quarter, a year-over-year delta change in basis points, and the second column excluding gas inflation. On a core merchandise basis, we reported in the first quarter minus 52 basis points and the next gas inflation minus 31 basis points.
Speaker 26: ancillary and other businesses plus 23 on a reported basis and plus 30.
Speaker 27: 2% reward minus 2 and minus 5.
Speaker 28: LIFO plus three and plus three.
Speaker 29: Other, that's the $93 million charge, minus 17 and minus 18. So all told again, a reported basis was 45, ex-cash inflation 21.
Speaker 30: So starting with the core, core merchandise's contribution gross margin on a reported basis was lower by 52 basis points year over year and lower by 31 basis points ex-gas inflation. In terms of the core margin on their own sales, in the first quarter our core on core gross margin if you will was also lower by 31 basis points.
Speaker 31: with food and sundries being up a little bit, offset by non-foods and fresh foods being down. Fresh foods was down, as you know, for the last couple of years. It's been particularly strong and it's come down a little bit. In addition, we are looking to hold prices on some of those price points despite inflated costs in some of the fresh food categories.
Speaker 32: Ancillary and other business growth margins were higher by 23 and higher by 30 basis points ex-gas inflation in the quarter, with gas, business centers and travel up year over year, all set in part by ECOM, food courts and optical.
Our 2% reward, minus 2 basis points reported, minus 5 excluding gas inflation, implying higher sales penetration coming from our executive members.
LIFO plus three basis points. We had a very small LIFO charge this year but but lapped a 14 million dollar charge in Q1 last year.
You recall last year during the four quarters we had LIFO charges in excess of $400 million pre-tax with a small amount, that $14 million in the first quarter, over $100 million in Q3 and over $200 million in Q4. So we'll see what inflation does this year. Hopefully it will continue to its current trends in the right direction.
Other than minus 17 and 18 basis points reported in ex-gas deflation, this is the 93 million in charge as mentioned in the earnings release, mostly related to downsizing our charter shipping activities.
Over a year after COVID began, you will recall that the supply chain challenges related to shortages of containers and shipping delays greatly intensified, with container freight and shipping rates skyrocketing.
It was in Q4 of 2021 on our earnings call that we mentioned our initial leasing of three ships and several thousand containers to help mitigate these challenges.
Later, we added four additional vessels and additional needed containers with commitments made for up to three years. Our objectives at the time were twofold. First, to increase the ability for more timely shipping and arrival of overseas merchandise. This allowed us to better stay in stock and drive sales. And second, to reduce some of the skyrocketing shipping and associated container costs.
We achieved those objectives for a period of time. Over the course of a year, year and a half, we controlled the shipping and delivery of nearly 50,000 containers, many that would have been greatly delayed and at an estimated savings as compared to the then current shipping container costs.
of somewhere between $1,000 and $2,000 per container. That, of course, fluctuated. Now with a dramatic improvement in shipping times and much lower shipping and container costs, it made sense to downsize our commitment and lower prices for our members.
Moving on to sGNA.
Our reported SGD in the first quarter was lower or better year over year by 35 basis points coming in at a 920 compared to a year ago 955. And that plus 35 basis point improvement would be plus 13 basis point improvement excluding gas inflation. Again writing down six line items and two columns.
First column being reported, second ex-gas inflation. During first quarter, our core operations was lower or better by eight basis points? Plus eight then?
without gas inflation minus nine, central zero and minus three.
Stock compensation plus three and plus one.
pre-opening 0 and 0, other plus 24 and plus 24, for a total first column reported year-over-year reported SG&A plus 35 or lower by 35 basis points and X gas inflation lower by 13.
Now going through those numbers, the core operations component of SGA was again lower by eight basis points reported, but higher by nine excluding impact of gas inflation. These results include three sets of wage increases that were done in the past year plus, as well as a little slower sales results in Q1 as compared to the prior quarter.
Still increases, but a little lower than the prior quarter.
Central was flatter zero and higher by three ex-gas inflation. Stock Comp, again, a little lower number than Stock Comp as a percent, so it came down, improved a little bit. Pre-opening, no impact. And the other, the 24 basis points you recall last year in Q1, this consisted of an asset right off totaling 118 million pre.
pre-tax which impacted the SG&A line last year.
Below the operating income line, interest expense was $34 million this year, down $5 million or down from $39 million last year.
interest income another for the quarter was higher by 11 year over year.
53 million versus 42 million a year ago. Interest income was higher year over year offset by unfavorable FX.
Overall, reported pre-tax income in the quarter was up 4%, coming in at $1.77 billion compared to $1.696 billion a year ago. And excluding the charges described earlier in both years, pre-tax income was up around 3%. The river slowed into a cooled below]- Strong,
In terms of income taxes, our tax rate in Q1 was 23.0% compared to 20.7% in Q1 last year, so a little higher this year. Both years' tax rates benefited from the tax treatment of stock-based compensation as mentioned earlier.
The fiscal 23 effective tax rate, excluding these discrete items, this discrete item, is currently projected to be between 26 and 27 percent.
A few other items of note in terms of warehouse expansion. We plan to open a net of 24 units this year, 27 openings including three relocations, so a net of 24. In the first quarter, the net of that 24 included seven.
We planned three more in Q2, four in Q3, and 10 in Q4.
In the first quarter we opened, as I mentioned, seven net new warehouses. Four were in the US and one each was in Korea, our first in New Zealand, and our first in Sweden. Additionally, last week we opened another building in the US and just yesterday we opened our 14th location in Australia, our second on the country's west coast in or near Perth.
In fiscal 23, again, 27 total new openings, including three locations for a net of 24. Of the net 24, it's made up of 15 in the U.S. and nine in other international, including our third and fourth locations in China.
Regarding CapEx, in the first quarter CapEx was approximately 1.06 billion and our estimate for the entire fiscal year is CapEx of somewhere in the 3.8 to 4.0 billion dollar range.
Moving to e-commerce. E-commerce, as we mentioned in the press release, on a reported basis was for the quarter, year-over-year sales were minus 3.7 and minus 2x FX.
What we don't include in this number is our sales through same-day delivery, refreshed with our partners like Instacart, which we don't include those, and they are fulfilled in our warehouse. Our e-comp comps, FX, would have been if we included it in the positive low single digits.
Stronger departments in terms of year-over-year percentage increases were tickets and gift cards, tires, candy, and health and beauty aids. The largest e-comm merchandise department majors, which includes consumer electronics and appliances, which represents close to 40% to 50% of our e-comm volume.
was down in the high single digits. Subsequent to quarter-end, we did have our two biggest e-comm selling days in our company history, both on Black Friday and Cyber Monday.
Now a few comments regarding inflation.
Recall, we've seen some minor improvements in a few areas. Hopefully continuing the comment I made last quarter's earnings call. A little light at the end of the tunnel, but it's still little. Recall, last quarter and fourth quarter, we estimated year-over-year price inflation was about 8%.
In the first quarter, we estimate the equivalent year-over-year inflation number in the range of 6 to 7 percent.
Food and sundries is still up more than non-foods, but overall a little better level than a quarter ago for the company. And commodity costs are mostly coming down, whether it's corn, flour, sugar and butter, or even some things like steel. A few things are up, but overall we're seeing a little bit of a trend.
keep you posted. Switching over to inventory levels, recall that our total inventory in both at the end of Q3 and at the end of Q4 on a year-over-year basis were up 26% year-over-year. I'm happy to report that good progress was made during the first quarter of this fiscal year.
Our increase as of Q1N dropped to a 10% year-over-year increase, largely driven by an estimated 6-7% inflation and about just under 2% year-over-year unit growth. So, our inventory is well. We still have some pockets of a little over inventory. Overall, we feel pretty good about it.
As a reminder, in terms of upcoming releases, we will announce our December sales results for the five weeks ending Sunday, January 1st on Thursday, January 5th after the market closes.
With that, I will open it up to Q&A and turn it back over to Bo. Thank you.
Thank you, Richard. Ladies and gentlemen, just a reminder, any questions, simply press star 1, and if you find that your question has already been addressed, you can remove yourself from the queue by pressing star 1 again. We'll take our first question this afternoon from Simeon Gutman at Morgan Stanley .
Hey, thanks, guys. Good afternoon. Richard, I want to start with the short-term question. November , the slowdown in the stacks, is there anything, you know, tip of the iceberg there, macro merchandising, is there something obvious? I mean, you were living in pretty rarefied air, but curious if there's anything notable.
No, I think the biggest thing is I've said a couple of times in a quaint way, it rains on all of us during these tougher times, particularly with bigger ticket discretionary items. We're comparing against some huge increases a year ago, frankly over the last two or three years as you know, and that's where we've seen some of the flow down as I mentioned, you know, ecom.
Consumer electronics and appliance, as I mentioned, was down in high singles. I think inline was also down some amount. So that's where a big chunk of it is. When we look at food and sundries, that actually tends to be relatively strong for us. So overall, I think it's impacting us a little bit with what's going on out there.
I think it is a combination of compared to very strong stuff a year ago as well as the fact that big ticket discretionary has a little bit of weakness.
Okay, and maybe just a two-part follow-up. One is just related to that answer. Does those two couple of days, I don't know if you can judge enough from it, does it bring you back to some type of trend line or it sounds like your tone is...
there's still some pressure. And then the real follow up is on gas gross profits, if you just think about the movement of the lap throughout this fiscal year, does it progressively get harder through the year in terms of the lap? And then can you highlight to us which quarter has the highest cents per gallon lap throughout the rest of the year?
Yeah, I have a couple people in the room smiling, of course I can't tell you all that, but at the end of the day, first of all, if you look at our November report in numbers, the fact that those two dates, those two high dates on ECOM were in the last week, keep in mind ECOM is still under 10% of our total company.
But that helped a little bit relative to e-comm in the last four weeks that we reported. But overall, we don't know what kind of trend it means. We feel pretty good about what we're doing in terms of driving sales. And as I mentioned, the food and sundries as we get past big tickets, dressory purchases for holidays, for Christmas and what have you.
you'll have a higher penetration of some other things as well. As it relates to gas, for several quarters now, even beyond a year ago, we talked about the gas profitability for us and we believe our competitors are the big chains of gas stations.
have made more in gas and certainly that's helped us use some of that to continue to hold prices where we can on some things. Who knows what the new normal is? What we know is that not only is gas more profitable than it has been in the past, and like I said the same thing a year ago, will that change at some point? Maybe. We don't know. Right now it's good and...
And by the way, as we've mentioned a couple of times, we've seen strong gallon sales, and we're still taking market share. When the US gallon sales are generally close to flat, we're up in the 10 to 15% range in gallons. So we're driving people into the parking lot. And the fact that...
gallons of gas are profitable, that is just a little bit more for us as well. So that's helped us. There's always things that are going to help us and there's always going to be puts and takes.
Okay, thanks to everyone. Happy holidays.
Same to you. Thank you. We go next now to Chuck Graham at Gordon Haskett.
Hey, how's it going, Richard? My question's on the LIFO charge. It looks like if it's a few basis points that they hit it, that would back into about $30 to $40 million. And I'm curious, I know you don't provide guidance, but I know what you know now and its completion.
holds at that say 6% level would that be a good proxy for the charge at least over the next couple of quarters?
Well, I think.
LIFO was a slight pickup just because the dollar amount was less than the $14 million last year in the quarter.
It's very slight. So if that continues, that would be good and that would vote well. And I'm guessing you'd have a lot lower charge than 423 million, recognizing the big pickup was in Q3. The big hit was in Q3 and 4 when we saw the beginning of inflation rising. If inflation didn't go down but it just stayed the same.
In theory, you'd have no big charge. You'd have no additional charge. If it starts to go down from its peaks, there'll be some LIFO income.
Now mind you some of that will be used for pricing as well. I mean well, you know us
Yeah, okay. So what would you do to have the absolute dollar amount for the LIFO charge in the quarter for us?
Yeah.
It was less than a million dollars.
Less than a million. Okay, great. And then on the ancillary line, you've had real good success there in the back-to-back quarters, and you outlined gas profitability, E-com, food court. Is there one that's been more outsized over the past couple of quarters that maybe we could think about over the next few quarters because it's been a nice...
improvement. Well, the gas is just the sheer size of our gasoline business. It's been the biggest piece of that line for a few years.
Yeah, we have a, it's a 30 plus billion dollar business. On our 220 whatever billion last year we did in sales, I think a little over 30 billion was gas. So that's the big kahuna among all that stuff.
Okay, great. Thanks very much.
Thank you. We go next now to Michael Lasser of UBS.
Good evening, thanks a lot for taking my question. Richard, between the 31 basis point core on core gross margin, the discussion, decrease in core on core gross margin, the discussion around giving up some shipping capacity to
have a better price for your member. Is the mindset of Costco right now, as the economy enters a more difficult economic period, Costco is going to be stepping up price investments in order to gain market share?
Thank you.
I think we continue just to remain competitive. You know, you've known us long enough when asked who's our toughest competitor we
we look in the mirror and we say it's us. So I think that as we drive market share, we believe that part of it at least is due to the fact that we've continued to be very competitive. And so I don't, there's a change in that. We, notwithstanding, you know, where our numbers come out, we're always trying to push more into lowering the prices or keeping the price increases.
In which you long talked about the Costco model is driven first and foremost by sales and the need to drive at least the mid-single digit comp in order for the other parts of the team to work. So the economy is entering a softer period where discussion...
that can be going through these factors.
Well, the good news is that's your job to model it. Look, at the end of the day, I think that, you know, the comment I made about big ticket discretionary while we sell big ticket discretionary includes furniture, which we sell, you know, lawn garden and patio too.
That's not it right now at the holiday season necessarily. But that being said, there is a higher proportion of big ticket discretionary right now. And we're blessed in the sense that a big chunk of our business is fresh foods and food and sundries, which people have to eat. And as I mentioned, that has been strong throughout this. So.
I think overall we'll probably.
still look at it in a positive, relatively aggressive standpoint. Ultimately, when you talk about top line sales and if they're a little lower, what do we need? I think this question historically has always been asked, what do we need to have SG&A not go up as a percent of sales?
And the view is, and this is pre-inflation, the view is always you need to something, our best guess view is somewhere in the 4-5% comp range. If it falls below that, that will make SGA a little bit of a challenge. That being said, we're pretty pragmatic and
we know how to use our margin as well. So I think overall, we'll continue to work entirely to drive top line sales and look at it for the long term. And we're not any big way cutting back orders at this juncture, where we see some...
challenges with big ticket discretionary. Does it come down a little? I think the key word there is a little. And are we feeling very good about some of our business now despite what's going on out there? We're blessed that we think, again, I think as evidenced by gas and even the food and sundries business, we're blessed by taking market share still.
I think that's evidenced in our memberships and
Your answer was a lot better than my question, so thank you very much for having me on.
better than my question. Thank you very much.
Thank you. We go next now to Rupesh Parikh at Oppenheimer.
Good afternoon and thanks for taking my question. So just on my core on core decline of 31 basis points, I was hoping you provide more color just in terms of what's driving that decline in non foods category and then just related to the pressure on fresh foods. I know you know I think you've now lapped some of the you know last year I think fresh foods was also a headwind so when do we lap some of the I guess some of the efficiencies that you gained.
during the pandemic because I know you've given it back in recent course. I'm trying to get a sense of when that pressure point could go away.
You know, I don't know exactly. I mean, if we're...
you know, three quarters of a year into it. I think if I recall over the last two or three quarters, we've talked about like fresh being that way and probably exacerbated a little right now with the fact that we're trying to hold prices on some things that we think that that's driving our sales. You know, beyond that, um,
I forgot the first part of the question now. Just on non-foods, any more color? Oh yeah, I think it's fundamentally, first of all, in terms of overall it's fundamentally fresh and then some non-foods. Some of that has to do with some of the big ticket things. If you've been online and saw some things we did during...
not just the week of Thanksgiving and Cyber Monday, but we did some, you know, anywhere from 100 to $500 off on, I think, $500 cash card if you bought 3000 or more dollars of these items. And so we're getting rid of some, you know, some of the reason that 26% year-over-year inventory freeze went to 10 was we got
rid of some of the stuff that we had some things that we had deep freeze and some things that we had delayed shipping during the supply chain challenge. So yeah we did take some more markdowns than normal as you'd expect to help get rid of that and hopefully that's not a pressure point going forward. Certainly I don't think it will be as much.
You know, again, there's so many moving parts to this equation. I wish it was as easy as each base point we could explain. We try to give you the rounded numbers, but overall, again, I get back to we feel good about how we're doing competitively, and we certainly understand that big ticket discretionary things have shown a little weakness.
in part because of our strength from a year ago and in part it's got to be part of the economy and and the good news is we have big chunks of our business that are fresh foods, food and sundries, health and beauty aids, gas, all those types of things and even other things like that small but travel has come back really strong.
from a really weak place a couple years ago. Great, and then maybe just one additional question. Just on the membership fee hike, if we are in a weaker economic backdrop next year, does that at all impact how you guys are thinking about the timing of a membership fee hike?
Well it certainly goes into the thought process. We're still not even to the average of the last three increases in terms of timing between the last one and the next one. What we've said again and I'll say again is that our view is all the parameters as it relates to member loyalty and value proposition that we've improved to our member.
we have no problem thinking about doing it and doing it ultimately. So it's a question of when, not if. But we feel that we're in a very strong competitive position right now. If we have to wait a few months or several months, that's fine. And I'll be
purposely coy on when that might be.
Thank you. Happy holidays.
Same to you.
Thank you. We go next now to Paul Leshaway at City.
Hey, it's Brandon Cheetah, Montfort Paul. First of all, I wanted to dig into the decision on holding the price on fresh. Are you seeing competitors do the same, and that's why you reacted there? Or are you kind of trying to lead the charge there and just…
I'm curious like why, you know, make that decision since it seems like, you know, the consumer's been happy to take increased price, especially in the first place.
The last thing you said there is exactly why we chose to do a little more there. We want to be the most competitive and we can drive a lot of volume. Again, we're in it for the long term. It's precious that one of those unique areas where prices on many items do change.
But we're also part of it is also consciously keeping the price on the chicken
At $4.99 and keeping and those types of things keeping the price on the hot dog All those things go into that equation as well, but we we know that that can be a driver of business fresh We got great stuff and people do notice the price in our view people notice those price differences
locations.
And just a quick follow-up, you have a large competitor that's been talking about increased members in the $100,000 plus income cohort. And obviously it's not impacting your membership numbers, but I'm just wondering, how many of you are dealing with this kind of ethereal system,you know?
Do you see any impact on ShareWallet or any thoughts there? Do you look at how many of your members might have additional memberships as well?
Well, we don't.
What's that?
Yeah, somebody in the room is telling me we were also up in terms of the average household incomes. So I think we're both seeing that. We know a lot of, particularly of our executive, our business members.
in many cases, probably have both cards. They've always had both cards. And so, no, we don't put our head in the sand as it relates to it, but we look at our numbers and how we're doing. And we've seen that our penetration of higher-income members has also benefited during this time.
Got it. Appreciate it. Thanks and good luck.
Thank you. We'll go next now to Oliver Chin at Cowan. Before Oliver answers one other – Oliver, before you ask a question, one other comment. One of the things that we have not done and don't plan to do is do a lot of promotional activities with our membership.
And so that certainly that will in the short term help drive membership, but we don't do a lot of that.
Go ahead Oliver. Richard, thanks. Thanks. Happy holidays. Regarding e-commerce and going forward, what are your thoughts? You're up against some tough compares, but as we model it on a longer term basis, how should the growth rates evolve? And then as we think about non-food, you talked about it a lot, but...
Do you expect the non-food percentage mix to change from the past or it will more normalize?
And lastly, on the higher income consumer end gains there, would love for you to elaborate on what's happening and if you're getting more luxury consumers in terms of higher income folks joining the club. Thanks a lot. Sure, um
I wrote down non-food in terms of what's the new normal. Look, we don't know what the new normal is. I do know that
We figure out how to drive total sales. I do know that over the last two and a half years through COVID, people buying things for their home, whether it was indoor furniture, outdoor furniture, exercise equipment, electronics and appliances. And it increased even greater because of our acquisition in April of 2020. As the Henry
the last mile big and bulky delivery and installation arm from Sears. All that stuff has helped us dramatically. Look, a little bit is, again, we don't know how much of it is just comparing against very strong numbers versus a little weakness. Our guess is a little of both.
We always want to drive everything, but we want to drive more non-food things because you don't need any extra space. If you're turning fresh foods at 50, 60 times a year or more, you're turning some non-food categories at 8 times a year. It's easy to go from 8 to 10 without any extra space.
in the building. So that's always been a goal of ours to drive both sides of the business and we think we're pretty good at doing it and we'll find out what the answer is a year from now.
What was the other question? I'm sorry. On ECOM and the ECOM, the long-term growth rate there, and then also the higher income.
Sure. Okay, on e-comm, again, that is even more dramatic if you look at what e-comm did. You know, we essentially doubled e-comm over a 12-month period from about, worldwide from about $8 to $16 billion in that probably, you know, three or four months into COVID, and then going fast forward a year. So the last half of fiscal
20 and the first half of fiscal 21. We had pretty good numbers of late over the last year. That, of course, dramatically impacted in a good way from our acquisition of Innovell. And doing, as I mentioned on the last earnings call, pre that acquisition in the US, we did about a little over 2 million drops.
that in this this this operation that we acquired so
We've had outsized growth on that, helped also not only by the acquisition but COVID itself. So we're comparing against that now. We'll see where that goes. We think that e-commerce is still long term. First of all, as you know, we still want you to get in there, get into the...
into the warehouse as well. So long term we still think right now
We want to grow the e-commerce.
I would say our goal still is to grow it a little more than inline right now because so much of it has been benefited by big ticket items which have shown some weakness that's impacting a little bit right now. But long term we want to still be, even 9 or 10% of it, 200 and …
$40 or $50 billion business year is a big chunk of business.
In terms of the last question, I'm sorry I didn't write it down. Yeah, I think of you know I think of Costco as a luxury company too, so what are your thoughts on getting the higher-income consumers and anything you're seeing with your existing consumers in terms of behavior because everybody's under a little bit of pressure as well?
Thank you. Well, again, someone in the room here showed me that I think the data that somebody had asked me about where Walmart had indicated, we're all looking at that same data. We too saw the metrics of a little bit higher percentage of higher income people coming in. And I would stand the fact that we start with a higher percentage.
to start with. We try to trade you up and you know the quality of our merchandise and we'd much rather sell you a bigger ticket item with all the bells and whistles.
So I think that it's the way we merchandise, and we're not looking to change that at this juncture.
Thank you. Best regards, Richard.
Yep.
Thank you. We go next now to Greg Melich of Abercor.
Hi, thanks. I'd just like to talk about how traffic seems to be growing closer to 2% now in the US.
Is there anything specific going on there? We just need to get used to it as recycling lower gas prices and tough out this lower traffic.
Perhaps. I mean, we still think anything that's even in the low single digits is great. And we've benefited clearly from, you know, over the course of the last year, we've benefited, as I've seen in our membership signups, more people coming in, and the gas business driving that a little bit as well.
And just during COVID, we had a higher than previously average tick up in new member signups. And so that's probably subsiding a little bit at this juncture. But again, we feel very good about where our renewal rates are and the loyalty that our members have.
And we're pretty good at trying to figure out ways to get them in. We're doing, you know, we do online emails that are in-line directed, you know, for hot items to come in only available in store. And so those are the things that we continue to do.
Could you update us on any private label extra gains that you are getting in this environment?
trade down perhaps between proteins or anything like that worth calling out.
Last quarter I mentioned a couple things on the fresh side and the protein side that we actually saw strength in canned chicken and tuna, which was the comment that the buyers made saying that we're seeing, to the extent that prices were skyrocketing in some fresh protein, we saw strength in canned protein.
We don't see currently a lot of trade down on fresh. Prices have started to come down on some of those items as the underlying commodity costs have come down a little bit.
Got it. KS penetration is up. Our curriculum senior is up. I don't have the exact number in front of me. I'm guessing it's about somewhere approaching a percentage point, which is big. I would say over the last several years it's probably been a half a percentage point. But so probably up a little more than normal, but you know, and again we had that somebody asked us the question recently.
you know, are you seeing some trade down to private label? And we of course corrected them and said it's a trade up.
You also mentioned it's a housekeeping item, but I want to make sure I got the charge right.
So you're basically, I ran a check to reduce the size of a contract that was at a higher price.
So, so, yeah, what's the payback period on that check? Do we see it over four quarters, two quarters, six quarters?
You know, it's a moving target, honestly.
It's based on rates, frankly, and rates right now have come down dramatically. So- It's based on rates, frankly, and rates right now have come down dramatically.
That would be a year. It could be a little longer than a year, a little less than a year, depending on what happens tomorrow. Okay, great. Good luck and thanks.
Yep.
Thank you. We go next now to Peter Benedict of Baird.
Hey Richard, just on new member signups, you kind of mentioned it a little bit there in response to Greg's question, but just maybe talk about new member signup trends, holistically what you're seeing, anything US versus maybe some of these international markets you've been entering.
Just interested in your latest thoughts there. Well, I think the biggest thing continues to be we're better when somebody does sign up, that they sign up in those countries where we offer executive membership, which is I'm guessing 85% of our company, more maybe 90% of our company.
It's just not in some of the smaller unit countries. And overall, starting with the US, but overall in Canada.
We do a better job of getting you to sign up as an executive member to start with. We also do a better job of getting you to sign up to auto renew with putting in your credit card. All those things help. Let's face it, all those things help too. We know that an executive member buys more and shops more frequently in a year than an old-star member.
And so I think that we've seen those trends go on over the last few years, frankly. And what's helped in the last year is the fact that, again, just our new member signups has been higher than they had been historically over the last few years versus the last year or two. And I think we believe that's more because of COVID and
we were a good place to shop. Not sure that makes sense. I guess our last question just interested and interest income and other obviously has a few components to it. I'm curious if you can help us understand what the interest income
Was in in the quarter. I think it was about 8 million last year. I'm not sure I'm sure that was up a lot this quarter Just curious to give us a sense of what that number was in the first quarter. Thank you
We normally
Is that in the queue? Okay. Yeah, I can give it to you. Hold on a second
I didn't realize it's in the queue, which is not out yet. What it is, is you've got a big increase in interest income and a big increase in FX downside.
which is not out yet. What it is is you've got a big increase in interest income and a big increase in FX downside. So of the 50...
I think it was 53 is
$54 million is interest income and a negative $1 million is other.
which is a chunk of that's FX. And then this year, the 42 million, I'm sorry, last year, it was 8 million of interest income and 34 million of other.
The biggest piece of other being FX. So that added up to the 42. This year, the 53 is 54 of interest income and minus 1 of other.
That's what I was looking for. Thank you very much. And we'll go next now to Kelly Vania of BMO.
Hi, thanks for taking our questions. Richard just had one on elasticity and then another follow-up on the big ticket. But in terms of elasticity, any changes, I'm not sure how you measure it or monitor it, but any changes in your members' response?
That answer comes from the fact that my comments about big ticket discretionary items. We put more money behind it and that successfully cleaned up our inventory where we were over in some areas like furniture to some extent. But at the end of the day, I think in a year or two ago, we would have even guessed that could have been a little stronger.
But then that gets back to the whole question is the economy, the concerns in the economy impacting big-ticket discretionary items. So yeah, I mean there's clearly still elasticity when we do temporary price discounts or you know, even our MBA mailers. We still get good impact from it.
Some things, the bigger the ticket, not as much as we used to get.
That's helpful. And then just to follow up again on the big ticket, what percent of your sales would you say are big ticket? Maybe it ebbs and flows with the seasons, but just in general, do you see that members are pretty broad based in pulling back, meaning across income levels, executive gold star, etc.?
Well, online it's a little over 40, but online is only 9% of our sales. In store, I don't have it in front of me. 10 would be a good guess.
I'm including that 10 furniture as well. And jewelry, big ticket discretionary.
Perfect. Appreciate it.
And we'll go next now to Chris Horvitz at JP Morgan.
Thanks, good evening. So following up a little bit there, on the TV side, how much of it is a units down issue versus deflation and is there any differentiation that you're seeing between larger and smaller screen size purchases?
Yes, units are actually up and there's normal deflation in TVs and electronics anyway, but there is perhaps a little bit of...
you know, smaller sizes are coming down a little bit.
You know, not everyone wants an 85 inch television, which is where we over-indexed the bigger ticket stuff to start with. But we are seeing actual unit sales up.
So units are up with strength, relative strength, and smaller sizes. Yes. Yes.
Got it. And then a couple of other bigger picture consumer questions. Are you seeing maybe some mid to low end, maybe not buying the 18 pack of bounty? Do you think you might be losing some category share as someone's trying to economize?
the ticket for your, you know, the lower half of your income perspective. And then can you also, um, can you also talk about regionality? Obviously there's some weakness in certain housing markets and, uh, certain cities and then there's
you have a big exposure to California, there's been more laugh news in the technology industry and there's some population migration. So what are you seeing from a regionality perspective where you're seeing more weakness versus strength?
Well, first of all, we're seeing strength in sundries as part of what we call food and sundries, which is everything. Food in food and sundries is everything from canned beverages to a
to crackers and cereal and sundries of course paper goods and cleaning supplies and the like. And we're seeing strength in those areas. Those are actually strong, offset by some of the weaknesses I talked about on the non-food side. As it relates to regional, we don't really see any big differences. I mean every
month you're going to see a region stronger or weaker. It has more to do in our view right now of late with weather than anything else.
I don't I think I can't give you anything definitive on you know, what's how is the region?
They're all pretty close.
effort to pull this. Bob's saying here they're within a couple of points of comp.
Got it. And then one cleanup question, just on the inventory, you talk about pockets. It sounds like you cleaned up furniture and electronics, it sounds like. Is there any, where are those pockets? How much is it, is maybe holiday decor or toys? Are there more at risk categories in the month of December ?
as our merchants are sitting here. Holiday decor is fine. One example actually would be we'd have a small amount of air conditioners and fans, which was, you know, it was a hot summer and we were very strong in it. There were delays. Some of the supply chain challenges, some of that stuff didn't come in until September . And needless to say, we're not gonna put it out there and mark it down when nobody really is looking for an industry.
standpoint of Christmas stuff, both the Trima stuff as well as toys, we're in pretty good shape for that. We feel pretty good about that.
That's great. Thanks so much. Have a great holiday season.
Have a great holiday season.
Thank you. We go next now to Scott Ciccarelli at Truist.
Good evening, guys. So I guess I have another gross margin question. And I guess it's, look, if consumables continue to outpace discretionary goods based on what we're seeing in the economy, should we expect gross margins to compress a bit just from mix? Or do you have enough levers given existing price gaps across most of your categories to manage the slattest gross margins? How should we think about that?
And we're blessed right now with in some categories like gas that there's a better margin. So all that stuff there again, there's a variety of puts and takes. We feel overall there's nothing unusual about this quarter. And frankly, I think we're on the great side of the ability to climb out of these blood,
If inflation is
not rising again, even if it doesn't go down, but it doesn't rise again from its current levels, we're in pretty good stead of greatly improving the component of margin that relates to a LIFO charging, particularly Q3 and 4 when we you know, we had a hundred plus million dollar number and a 200 plus million dollar number, but that's to be seen and we need to wait and see.
So just as a follow up on that, Richard, like, fair to say that we're going to see lower freight rates starting to flow through the P&L and let's call it lift markdown pressure because the inventories are cleaned up a bit more than the last few quarters.
That should help you a little bit, sure. But as you might expect, and one of the reasons we took this charge is we don't want to have the buyers worry about putting higher costs into their... If rates have come down and we contracted, we want to take some of that out. But that's still being worked through. We have to continue to do that.
Beyond that, as rates come down, you'll see our prices on items come down too.
But beyond that, as rates come down, you'll see our prices on items come down too. All right, thanks a lot. Good evening.
OK, why don't we take two more questions?
Certainly Richard. Thank you. We'll go next now to Karen Short at credit police.
Hi, thanks for taking my question. So it's hard to begin and I hope you all have happy holidays coming forward, going forward. But I did want to clarify on two things. So in the past when you have had
slightly weakening traffic trends that have generally been a point to consider to actually
push through a higher membership rate increase. So I'm wondering, I know this is a very unusual time, but has that philosophy changed at all? Because obviously your comps are changing, or in or slowing. And then I would ask the same thing as it relates to.
the special dividend, we all know what your cash is and available cash is on the balance sheet in terms of timing with respect to announcing something like that along the lines of the fact that I think your board meeting is mid-January.
We have one every quarter. Look, we talked about both of those. In terms of the fee increase, I think over the last many years we've probably done them at a time when things were particularly strong comp-wise. The good news is
During all times, renewal rates were strong and have gotten even stronger. We always look at ourselves in the mirror and feel that the value proposition has gotten better. That being said, we have done them. I remember one time we were asked, it may have been back in uh
09-10 and during the Great Recession because I guess we did one probably in
11 or 12, which continued the Great Recession, and we'd be asked given the Great Recession, would you hold off on it? And our view was, and comps were a little weaker back then too for at least a couple quarters, and I think the comment I made was something to the effect...
we'd probably do it anyway, but because we're going to use it to drive greater value in our, you know, in terms of pricing and everything in a big way. And so that really, I think we've probably done it in times of...
lower comps or higher comps or good economy or tougher economy. And I think with the headline in the last, what I probably mentioned in the last quarter, Paul, or even the quarter before that, with a headline being recession question mark and inflation exclamation point.
There's no rush and first of all even if we follow the pattern of the last three over the last 16 or so years They averaged five years and seven months And I know now that five years and seven months from June of 17 is January of 23 I know on the last call I said that doesn't mean it's going to be January 23 It'll be it's question of when not if but
At this juncture, we'll just have to wait and see. And I'm not trying to be cute about it, but there's not a whole lot more I can tell you. There's no analytical framework we use other than we feel very good about our member loyalty and our strength. And if we wanted to do it yesterday, we could. And if we want to do it six months from now, we can. So we'll wait and see. As it relates to the special dividend, as.
You know, we've said before, it's certainly an arrow in our quiver that has bode well for us, we believe we think it's done well. We've done four of them. The last one was a couple of years ago. And we certainly do have cash. Mind you, when you look at our cash, about half of its US and and not
cash equivalents. And so certainly we have the ability to do it at some point. I think we wanted to wait and see how things are continuing here. I think that too is probably a question of when not if but again you'll be the second to know.
after us.
after us. OK, thank you very much. Have a good holiday.
Same to you.
Thank you. Thank you.
It'll be a real quick one, Richard. Can you just remind us, you're back to 15 net stores in the US, but what has to happen to go back to the years where you would open a net 25 a year in the US and maybe relieve some of the pressure on the over-productive clubs in the US right now?
Yeah, I think it's been a few years. I mean, when we opened the net of 27 or 8, maybe low 20s or 22 or 3 were there.
maybe 16 or 17 out of 23-ish in the last few years. You know, if you ask Greg, who's not in the room, but if you asked him, you know, if we're opening a net of 24 this year, I think I said, what's the goal five and 10 years from now? Probably to get it closer to 30 net.
probably by five years from now it's 50-50 US elsewhere versus elsewhere. That's the same answer I by the way said five years ago in terms of the fifth of the split but we'd like to see add five to that 24 in the next few years to go up a little bit higher.
terrif, ically have a lot of vity. We have a lot of activity going on.
Terrific. We certainly have a lot of activity going on. Excellent. Thank you, sir.
OK, with that, everyone, I'll thank you. Have a good holiday, and we're around to answer questions. Thank you, Richard. Ladies and gentlemen, that will conclude Costco's fiscal Q1 2023 conference call. Thank you all so much for joining us. I wish you all a great evening. Goodbye.
Thank you.