Q2 2023 Costco Wholesale Corporation Earnings Call
Speaker 1: Good day. My name is Emma and I will be your conference operator today. At this time, I would like to welcome everyone to the Costco Wholesale second quarter fiscal year 2023 earnings conference call. All lines have been placed on mute to prevent any background noise.
Speaker 1: After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number 1 on your telephone keypad. If you would like to withdraw your question, again press the star 1. Thank you.
Speaker 2: Richard Galanti, CFO . You may begin your conference. Thank you, Emma, and 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 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.
Speaker 2: and 30 cents per share compared to 1.299 billion or 292 a share per diluted share last year, an increase of 13 percent.
Speaker 2: ago in the second quarter. Comparable sales for the second quarter were as follows. In the US, 5.7% for the 12-week period, excluding gas inflation, 5.8%. Canada, 3.5% reported, and 9.6% excluding gas inflation and FX. Other international, 3.8% reported, and a 9.5% excess inflation FX.
Speaker 2: For a total company of 5.2% reported and 6.8% excluding gas inflation in FX.
Speaker 2: E-commerce was a minus 9.6% for the 12 weeks reported and minus 8.7% excluding FX. In terms of second quarter comp sales metrics, traffic or shopping frequency increased 5% worldwide and 3.7% in the United States.
Speaker 2: Our average transaction or ticket was up two tenths of a percent worldwide and up 1.9 percent in the US during Q2. Foreign currencies relative to the dollar negatively impacted sales by approximately 1.8 percent and gasoline price inflation positively impacted sales very slightly by approximately two tenths of a percent.
Speaker 2: review our February sales results later in the call. Next on the income statement is membership fee income. I reported in the second quarter $1.027 billion of membership fee income or 1.89%. That's for this year's second quarter compared to $967 million earlier.
Speaker 2: So a $60 million increase in dollars are up 6.2%. Excluding the headwinds in FX, the $60 million increase would have been higher by $20 additional million. So on an FX-adjusted basis, membership income was up just over 8 percentage points. In terms of renewal rates, at second quarter end, our U.S. and Canada renewal rates was 92.6%, up a tenth of a percent from Q1 end.
Speaker 2: and worldwide rate came in at 90.5%, also up a tenth of a percent from our prior quarter. Both represent all-time highs. Membership growth has remained strong. We ended the second quarter with 68.1 million paid household members and 123.0 million cardholders, both up more than 7% versus a year earlier. In terms of Q2N, we had 30.6 million paid executives
Speaker 2: coming in at 10.72% as a percentage sales as compared to a year earlier, second quarter at 10.64%.
Speaker 2: Now, it'll be eight basis points up and then excluding gas inflation, it'll be up nine basis points. As I always ask you to draw a little chart, the two columns reported and excluding gas inflation and then we'll go down the line items. Core merchandise was minus six basis points reported and also minus six x inflation, gas inflation. Ancillary businesses were plus two and plus three basis points year over year.
Speaker 2: 2% reward, minus 2 and minus 2 basis points. LIFO, since we had a charge last year, nothing this fiscal quarter, it was plus 14 and plus 14. For a total, again, reported 8 basis points up year over year and ex-gas inflation up 9 basis points. Starting with the core, core merchandise grow margin again was lower by 6 basis points year over year. In terms of core margin on their own sales, or core on core margin if you will, it was lower year over year by 26 basis points. Most major departments in general were down with fresh foods being down a little more than others. We're continuing to hold or drop prices where we can due to dry traffic and improve our competitive advantage.
Speaker 2: Overall, core sales benefited from sales shifting from ancillary and other businesses to core. Ancillary and other business gross margins, again, were higher by two and three basis points ex-GAS in the quarter. GAS business centers and travel were better year over year, offset in part by e-comm and pharmacy.
Speaker 2: SuperState Reward, lower by two basis points. That's reflective of the higher sales penetration coming from our executive members. Lifel, as I mentioned, was a year-over-year variance of plus 14 basis points. We had no life or charge this fiscal quarter compared to a $71 million charge in Q2 last
Speaker 2: Moving on to expenses, SG&A. Our reported SG&A for the second quarter was higher year over year by 13 basis points. This year it was 9.11% compared to 8.98% in the second quarter of last fiscal year. Jotting down some numbers for the two columns, first column being reported and second ex-gas inflation. Operations was down higher, I said minus two basis points, higher by two basis points. So minus two and minus two.
Speaker 2: minus 9 and minus 9, so higher E over year and central by 9 basis points. Stock compensation minus 2 and minus 2. And then I'll told, that would be 13 basis points higher, both on a reported basis and S gas inflation. The core operations component of SGNA, again, higher by 2 basis points and also higher by 2 S inflation. This includes the wage and benefits increases implemented last March and last year's third fiscal quarter and last year's third fiscal quarter and an additional proper scale wage increase that went to affect the July 4th, which within our fourth quarter of last year. Central, as I mentioned, was higher by 9 basis points year over year.
Speaker 2: About half of this increase is a charge related to a tax audit covering several prior years. Stock comp pretty much as expected just a couple of basis points. Below the operating income line interest expense was $34 million this year, $2 million lower than the $36 million figure in Q2 of last year. Interesting come another for the quarter was higher by 89 million year over year. This was driven by an increase in interest income due to both higher interest rates being earned and on higher cash balances. The increase in interest income was slightly offset by unfavorable effects.
Speaker 2: in China.
Speaker 2: In fiscal 23, we expect to open a total of 27 warehouses, including three relocations, so a net increase of 24 new warehouses. These 24 plan new openings are made up of 14 in the US and 10 in other international. The 10 in other national includes the three in China, along with our first cost goes in each of New Zealand and Sweden, both of which were open during the fiscal first quarter.
Speaker 2: Regarding capital expenditures, our Q-2-quarter fiscal 23 capital spend was approximately $900 million. Our estimate for the year remains in a range of $3.8 to $4.2 billion based on timing. In terms of e-commerce, as I mentioned, e-commerce sales in Q-2-X-X decreased 8.7%. This weakness was driven mostly by our online mix of sales. Big ticket discretionary departments like majors, home furnishings, small electrics, jewelry, hardware, these were down 15% in the quarter and make up 58% of our e-commerce sales. These same departments, by the way, were down 11% in warehouse but only make up 8% of them.
Speaker 2: commodity prices are starting to fall, not to back to pre-COVID levels in some examples, but continue to provide summary relief, things like chicken, bacon, butter, steel, resin, nuts. Switching over to our inventory levels, again, both in Q3 and Q4 fiscal year ends of year in fiscal 22.
Speaker 2: Regarding the 2% drop, we were a bit over inventory last year as a result of supply chain challenges, causing inventory to be backed up at the ports. And talking to the buyers a year ago, their estimate of just timing of getting things across the ocean was 70 plus days. Today, it's back down to 30-ish days. And so we've seen supply chain improvement across the board and rates.
Speaker 2: January's sales results that the Lunar New Year Chinese New Year occurred on January 22nd this year, 10 days earlier than this year. The shift positively impacted February's other international by about 2% and total company by about a quarter of percent. Additionally, February's results for both the US and total company were negatively impacted by approximately 1% we estimate as a result of
Speaker 2: substantially worse weather this year over a year. I believe most of that was on the traffic side rather than the ticket side. Same store sales again in the release. The U.S. has reported 3.4 X gas 3.5. Canada reported 1.2 X gas and FX 7.3. Other international 6.5 reported X gas and FX plus 11.5. Total company the 3.5 reported which X gas and FX was 5.0. In terms of e-comm minus 11.2 reported and compared to a minus 10.3 without FX. That's actually an improvement from our January e-comm results. Our comp traffic or frequency in February was up 4.9 percent worldwide and 3.1 percent in the U.S. Foreign currency year over year relative dollar negatively impacted total incomparable sales as follows. Canada it impacted it by 5.5 percentage points.
Speaker 2: other international by approximately 5.7 and total company by approximately 1.5. A gasoline prices were essentially flat year over year ever so slightly inflationary but essentially flat. Worldwide the average transaction for February was down 1.3 percent, including the negative impact from FI so that I just mentioned. In terms of regional and merchandising categories, general highlights for February that we normally do on that monthly sales call. The US regions with the strongest comp sales were the Midwest, the Northeast and the Southeast. It turns weather in international local currencies. We saw the strongest results in Spain, UK and Mexico.
Speaker 2: Year over year inflation for food and sundries and fresh foods while still elevated or at their lowest levels in nearly a year with food and sundries and places dropping to the high single digits and fresh foods and to the low to mid single digits. Moving to merchandise highlights, the following comparable sales results by category for the month exclude the negative, which exclude the negative impact from far, far in exchange. Food and sundries were positive low double digits. Coover food and sundries were the strongest. Fresh foods were up mid single digits. Pedophory departments included bakery and meat. Non foods were negative mid single digits. Better forming departments included tires, health and beauty aids and apparel as well as majors, jewelry and house swears. I'm sorry, an apparel majors.
Speaker 2: which are electronics and big-ticket electronics items, jewelry, housewares, domestics, and small appliances and hardware, where the worst performers consistent with Q2 overall. And for a business of sales, we're up mid-signal digits, with food court hearing aid and pharmacy where the top performer is there. Finally, in terms of upcoming earnings and sales releases, we will announce our March sales results for the five weeks ending Sunday, April 2nd. On the following Wednesday, April 5th, after March, you close. And with that, I'm happy to turn it back over to Emma for questions and answers. Thank you. Thank you. As a reminder, if you would like to ask a question, press star, followed by the number one on your telephone keypad. Your first question today comes from the line of Simeon Gutman with Morgan Stanley . Your line is not open. Hey Richard, how you doing? Good. So, can we start? I guess sizing up the consumers in the summer. I want to see how you view February in, I guess, the continuum of months. And then part of it, I think you said the down mid-teens with some of those e-commerce categories, which thanks for that information. Is that stable? Is that worse?
Speaker 2: numbers. We're seeing, you know, there's just a couple of weeks in a couple of regions where we started a, you know, set out some seasonal things for spring and summer. So far so good, but it's literally small data points in small parts of the country where the weather has been a little better, which is not a lot of places.
Speaker 2: But anecdotal leads to comments were made on things like even some water sports items and camping equipment. But this is a small data set. So we'll cross our fingers and hope to see. But overall, you know, units are generally fine. I mean, there's some things still with like on the computer side. There's weakness overall. Not just with us.
Speaker 2: We're still seeing, I think I mentioned this in the first quarter call, we're seeing decent sales in units of televisions, all the average selling price points have come down. I think it's just in the next couple of weeks where the new TVs for the upcoming season are coming out. But other than that, what we look at, of course, is our average transactions, our shopping frequency is up. Our new signups are continuing to be strong up 7% in terms of new signups on less than 3% new openings. So those things vote well, but people certainly are...
Speaker 2: spending their dollars where they feel they should be spending them. And so we'll see where it goes from here. Okay. Follow up on EBIT growth. I know you don't guide, but this business is average, I think about high single or maybe around 10% over time. This year is a little below average because of some of the lapping. And you are lapping some great fuel for gross profits. Curious, the puts and the takes. So whatever number that you expect the EBIT dollars of this business to grow, are you confident in the levers that you have to get there?
Speaker 2: Well, look, we feel good about what we're doing in driving business in the right way and growing our business. We're, as you and others have heard forever, we're a cop line company. Well, I can't give guidance. Certainly, we've seen, we, and everybody who has cash have benefited from earning more money under interest, under cash right now. We saw in this quarter, there was a $70 million improvement year-over-year comparison of those margins simply because of LIFO to the extent that we can't predict what's going to happen, at least the trends yesterday were that we're starting to see some improvement and inflation. To the extent that continues, we're comparing to LIFO charges in excess of $100,200,000,000 in each of Q's, 3 and 4.
Speaker 2: So that's something that we look at as well. Gas is volatile, no pun intended, and it's been quite profitable in some quarters more than others. But we think that we've got the different lovers and puts in takes, if you will, to do that. But ultimately it's about driving sales.
Speaker 2: And certainly we know we're getting the customer in. We're getting more of them in and they're, again, renewing at the highest rate ever. So we'll go through this as good, if not better than others. Thanks, Richard. Your next question comes from the line of Michael Lasser with UBS. Your line is now open. Good evening, thanks for taking my question. So Richard, last time there was an economic downturn in the United States and globally, Costco performed pretty well, was able to.
Speaker 2: compositive during that time. It's this around it to much bigger business and it might exhibit more economic sensitivity. So, A, is that how you're thinking about it? And B, what actions would capital take to preserve its profitability in the event that it saw negative comps in the coming quarters? Well, we're gonna do things to drive market share. I mean, first and foremost, you know, we are certainly cognizant of the bottom line. And I think this is a good example that the score is a good example of that. But at the same token, we're gonna do what we need to do to drive sales because long term, when we get our customer in and they buy stuff, they're gonna come back and buy more stuff. And we've always done a good job of that. And even in the last decade, again, this one's a little different this economic downturn.
Speaker 2: in you. And follow up questions to your point. Your inflationary numbers that you cited are lower than what others are experiencing. So presumably your price gaps are widening, which makes sense and you're delivering more value for your your your your your your remember at a time when they arguably need it.
Speaker 2: And with that being said, how do the fact that you are delivering more value to your consumer and the M.A. somewhat pressured play into your mindset around whether or not you would raise your fee. I believe the spring would be the five year anniversary of the last time you raised your fees and you would typically do it around this time. Yeah, actually June would be our sixth anniversary. But as I mentioned, I think it's called Norris and I mentioned the previous calls.
Speaker 2: looking at the last I think three they average around five years and seven months which is about now or last month and You know what we said over the last few semesters of last few quarters always I have a college kid for the last few quarters is that it's question in our view it's question of if of when not if and So you know we'll let you know, but keep in mind that's one way that we
Speaker 2: become even more competitive, we take those monies and directly become even more competitive. I might add though, when we do our locations do weekly comp shops of 100 to 150 key items, all directly competitive items, and then a variety of other, grants are direct competitors and other limited comp shops against other forms of traditional retail where the gap of competitiveness is much greater. But the end of the day, our relative level of competitiveness in our view is as strong as it's ever been, and we do that weekly in locations and every four weeks at every four weeks monthly to the budget meeting, each of the regional operations senior execs get up and show those numbers. And you can rest assured we're going to continue to do that. Anderson, thank you very much and good luck and go trolling.
Speaker 2: There you go. Your next question comes from the line of Christopher Hovers with JP Morgan. Your line is now open. Thanks, good evening. Following up on the first question, I guess, relative to the last time that you spoke to us, do you think the consumers deteriorate at all? Anything that you're seeing on the, what they're buying, how price-sensitive, private label, income demographic? Were your observations around the rate of change for the consumer? Not terribly different than a quarter ago, or probably in David's January sales recording.
Speaker 2: And, you know, we look at that and we look at how it compared to a year ago and, and two years ago, we had so much strength there, not only with COVID and people buying big-take stuff and now the economy and the interest rate. So that's to be expected. You know, again, we kind of go few, our strength in food and sundries and fresh foods and healthy beauties and things like that. I'll help to counter some of that. One interesting comment that I think I haven't made in the past. We've been asked that during this concern about inflation and people trading down, have we seen any delta in the sales penetration of our own per-concidence items. And of course, my first comment is that's a trade up or a trade equal, not a trade down. But at the end of the day, you have seen actually in the last few months a bigger delta than normal. I'd say over the last 10 years, we see a half or a little less than a half a percent a year of increased penetration.
Speaker 2: In the last period, wasn't it? For this quarter year over year, we've seen about a one and a half percentage, one little over a one and a half percentage point increase in sales penetration on the food side. Food's being anything packaged or dry or wet, you name it. And so that we have seen a little bit of an increase in that. And I guess that's consistent with the session that looks people are looking to save money. And of course, if it's our brand, that's great. That creates loyalty. Yep. And then, you know, on the pricing slash LIFO point, you know, last quarter you talked about like, you know, we could have a LIFO benefit. And that could be a source of funds in terms of investing in price. So to our question, if prices stayed here today, would we essentially get back the LIFO headwinds that you had a year ago as we think about, you know, going forward.
Speaker 2: And then the second question is, you mentioned your price gaps are as good as they've ever been, but at the same time, there is some change in consumer, so should we think about that LIFO as a source of funds to further invest in price? I was looking at it more not as a source of funds, but more as it – look, to the extent that – and this is just using this as an example – if there was no LIFO charge, plus or minus in Q3 and 4, on a year-over-year comparison, you have on a pre-tax basis $130 million positive delta and a $223 million positive delta. Those are nice numbers to have as a positive delta. So from a standpoint of looking at the earlier question about are we cognizant of earnings growth, if you will, or reported earnings per share, part of that plays into that. That gives us a little bit of cushion there. As does gasoline from time to time, as does first and foremost stronger sales. So all those things play into that.
Speaker 2: But I think generally speaking, we're still going to do what's right in our view to drive sales. That's what we want to do first and foremost. And to the extent that that example occurred in Q3 and 4, that gives us a room to do that without even thinking about it. And then just from the accounting perspective, should we automatically get that back of price to stay at these levels?
Speaker 2: on the lap. If the lapping stays at zero, yes, there would be no new charge. So it would be comparing to a charge last year to the extent. Yeah, to the extent. Yeah, prices would go down relative to a year ago. You'd actually have a life of credit, which would be even a bigger year over your delta. Understood. Thanks very much. Your next question comes from the line of Chuck Graham with Gordon Haskett.
Speaker 2: profitable business. It's given us an additional competitive advantage of getting people in the door, if you will. I think it was this last summer in the early fall where I've given to numbers where our gallon sales increases in the US were up in the mid to high teens and compared to darn near flat for the US population as a whole.
Speaker 2: I had asked yesterday on that and I think that 15 plus percent delta of less versus the US population is still about 10 percentage points. And so we are still seeing taking markets here if you will be getting people in the parking lot.
Speaker 2: Okay, in terms of, thank you. In terms of value, when we look at a value compared to...
Speaker 2: average value across our locations where we do comp shops in some cases every day in many locations. This year the date I'm looking at a single digit number we feel that we're we save that member 37 cents that's an improvement over the last five years it's gone from the mid-20s to the mid-30s. Okay, top of context.
Speaker 2: And just on inflation, as prices have started to come down, I'm curious, and as you've invested in price too, curious what you've seen from a demand perspective and how you're measuring the success of some of those price actions that you appear to be taking. Well, it's an art, not a science. You know, we do some, we look at high velocity items where we can make a big difference fast on some items. On some things, this is just anecdotal because it was from our last budget meeting.
Speaker 2: with shipping costs coming dramatically down on a 25 and 50 pound bags of Jasmine Rice. We see the big uptick in sales because that's an item that really skyrocketed because it's a per pound based on the size of the bag. It was a heavy freight cost and so that comes down we see that going. I think we're doing more with our suppliers, you know, changing things around with the MVM, part of that based on allocation issues of what we have. But overall,
Speaker 2: No, we're for believer if you improve the value by lowering the price and you're going to drive more sales. Great, thank you. Your next question comes from the line of Scott Jarelli with tourist securities. Your line is now open. Good afternoon, guys. Hi, Richard. So you guys like many others have seen a shift away from a bunch of discretionary categories, probably stronger sales strength than the consumable category. But gross margins are actually pretty stable. So I guess the question is.
Speaker 2: Should we start to expect more gross margin pressure on go forward basis if we were to kind of see that mix shift, you know, continue leaning towards kind of food and consumables? And frankly the adult between those the dearest categories are not as extreme as they used to be and in fact and things like
Speaker 2: like fresh foods and food and sundries. Some of the weaker categories are not in that weaker, but lower margin categories are things like big ticket discretionary items. We make a smaller percentage, more dollars for unit, of course, but a smaller percentage on big ticket electronics.
Speaker 2: And so that impacts more the gross margin dollars than the percentages there. If anything, you know, if you go do a little homework on what the cost of processing and selling a check or just rechecking, our 499 price is what we would remain in is an investment in low prices to drive membership, to drive sales in a big way. So there's some things that we do notwithstanding huge inflation and even though some of the costs have come down a little bit.
Speaker 3: capital through future dividends.
Speaker 2: Well, it helps a little right now, so that's a good news. I don't think it changes our view that the special dividend which we've done for over the last 10 and a half years, I think. It's still an arrow in our quiver and at some point it's something you might see again. But I'm not trying to be cute. It's kind of like the membership question.
Speaker 2: You will let you know when we do it. God, thanks for having me. Your next question comes from the line of Karen Short with Credit Suisse. Your line is now open.
Speaker 4: Hey, thanks very much. Good to talk to you. So, Richard, I just had a question on you made a comment that you're particularly cognizant of the bottom line. I think was your exact...
Speaker 4: So I'm wondering if you can triangulate that with what you think net or pre-tax margin numbers should look like on a go-forward basis, but also triangulate that with the fact that you also commented that...
Speaker 2: you know, you're looking to invest in price to gain share in various categories. Sure, well, I think on the latter comment, we're looking to use price to gain share. We're continuing to do that. It's not like we're gonna go...
Speaker 2: do more or less, that's what we do for a living. We are, as I was trying to say in the comments that we're particularly concerned about online, we are a public for profit company and shareholders want to know what we're doing. We have, there have been times for those of you that have followed us for many years when we might...
Speaker 2: you know, take a bigger hit on some expense in a given quarter. I think, in fact, many years ago, it was the rotisserie chicken example that we frankly, I think, have more levers today to adjust things, which helps us, but we're not going to
Speaker 2: We're not going to get away from those two things driving the top line and being causing it that we're also a public company trying to earn money for our shareholders. But we're going to prioritize driving sales because that will benefit all the other things on that income statement. Okay, and then just on inventory, just obviously inventory down.
Speaker 2: everything else. It turns darn near daily. A lot of the improvement or reduction in inventory your year of year was all the stuff backed up.
Speaker 2: with the supply chain challenges and the port challenges a year ago. So we feel we're in good inventory shape, the flow is much better and yeah there's always going to be anecdotal examples of stuff that we have to a little too much or something or a little too less, but we feel pretty good right now about our inventory levels, even by category.
Speaker 2: There's a few categories a little over, a few categories under, but nothing like when we were 26% up and you had a lot of what I'll call in transit stuff literally on those pictures that you saw in the news of the ports and the ships. And so that's improved a lot.
Speaker 2: there's a few categories a little over a few categories under but nothing like when we were 26% up and you had a lot of What I'll call in transit stuff literally in On those pictures that you saw in the news of the ports and the ships and so that's improved a lot Okay, thanks so much
Speaker 2: Your next question comes from the line of Oliver Chen with TD Cowen. Your line is now open. Hi, Tom, on for Oliver. On digital, can you guys add some color as to how comps are expected to trend in the near term, just giving the evening compares in the back half of the year? And additionally, what opportunities lie ahead in terms of digital business from an engagement point of view? We don't project where we're going. I was glad at least that February was.
Speaker 2: while negative was a little bit of January , we've got additional marketing activities that we've got going on there. We did hire just five months ago, a new head of digital that is in the process of doing a lot of things. So building more to report over the next several quarters. But in my view, there's a lot of opportunities and low-hinge to do that. The biggest thing that the challenge that we've had just looking at our current numbers was that we've been so successful over the last two years, not only did COVID drive huge business on things for home, big ticket things for home, but furniture electronics.
Speaker 2: and televisions, you name it, computers. It also, the acquisition a couple of years ago or three years ago of what's now called cross-cold logistics. Those two things drove that business in such a big way. We recognize that's part of it, but we're not hanging out hand on that. We want to go to sales. Great, and then follow up on the executive memberships, with the higher penetration there. Could you just talk about how the
Speaker 2: at the current rates. And with that they get the 2% reward with some other benefits on certain consequential transactions. That definitely drives loyalty and drives frequency. So the executive member spends more and shops more.
Speaker 2: And then we get them also to get the co-branded city visa card. It's even better than that. So all those things work in our view in a positive direction. And so we like the fact that the executive membership penetration helped by its goal. We've said in the last couple of years, we brought it into a few other smaller countries. You need a core base of 15 or so locations to do it.
Speaker 2: And so we've got it in other locations as well, but we're still seeing increased penetration in the US of that. We do a better job, by the way, when somebody new comes in to sign up, of getting them to sign up. We do a better job of explaining the benefits of an executive membership than we did years ago as well. Great, thank you. Your next question comes from the line of Kelly Vania with DMO. Your line is now open.
Speaker 5: Hi, Richard. Thanks for taking our questions. I'm going to venture to ask a margin question here. The the core on core has been down for about eight quarters in a row, I believe. I just wondering if you could help us understand the thought process in managing the core margin in that way. And I guess particularly given your comment that some of the low margin categories like big ticket are under a little bit more pressure. So maybe even a little bit more.
Speaker 2: answer to that question is our fresh margins have been the biggest piece of that coming down and looking at it, our fresh margin in Q2 compared to Q2 three years ago pre-COVID, we're still up about 50, 60 basis points. Now we were up a lot more than that because of all the things that COVID did. It drove tremendous sales growth in those areas which created less.
Speaker 2: spoilage, which is a proponent of cost of sales and fresh foods, and labor productivity in places like the bakery and the meat department. And so, if you will, outsized improvement was still better than we were pre-COVID. And we maintained the sales. When we had outside sales, and these are not real numbers, I don't have them in front of me, but let's...
Speaker 2: make them up and say that fresh pre-COVID was going up 8% or 10% a year, 8% a year, whatever it was. And then we enjoyed a couple of years of 20 plus percent, I believe. And now we're still doing fine with sales growth, not up to 8% or 10%, but nonetheless, but it's still positive. And so we've kept all those outsized gains. But we've also, of late, not just the last month or two, but of the last several months, have invested in pricing. And certainly, fresh helps drive that.
Speaker 2: And I gave the example of the rotisserie chicken, but that goes through lots of areas of fresh foods where that's the key one of the key categories that people come into shop for. And are you thinking of managing that in a way to get back to kind of pre-COVID levels or would you let that run a little above for for some period of time.
Speaker 2: I don't think we're smart enough to know how to manage all these things. There's so many different components of what is the gross margin from the different core departments to the end-slaughty businesses, to gas, to life on out.
Speaker 2: It's really as fluid and managing it is a, we do manage it, but it's managing it in an organized chaotic way sometimes too, which is things change every day. I think we do a great job of doing it.
Speaker 5: Yeah. No, agreed, agreed. Just, I guess following up on the LIFO as it relates to the margin, you gave out some of the numbers in terms of the dollars in the last couple quarters. Would in order of magnitude, would those kind of offset some of the gas margin tailwinds? Is that the way to think about it or? Would the gas margin tailwind be bigger, smaller than the?
Speaker 2: your line is now open. I think a couple questions. One, I think to go back to the membership fee, but it just seems right. Does the $120 executive price point?
Speaker 2: Now that that's what 43% of members and 70 some percent of sales, does the fact that that's where the bulk of the sales are coming from change the thought process in terms of how you might do the timing of the membership.
Speaker 2: what 43% of members and 70% of sales. Does the fact that that's where the bulk of the sales are coming from, change the thought process in terms of how you might do the timing of the membership? No.
Speaker 2: Not at all. Great. And then second is items in basket, trying to figure out how it's comp slow. And I imagine you're still getting that wage inflation. SGNA doesn't deliver more. Is it why is that? If traffic's still growing and we have inflation, is it just because items per basket are down or how do we think about managing the SGNA dollar growth in this, not deflationary but disinflationary environment? Yeah, you're still up. And inflation frankly.
Speaker 2: price inflation offsets it a little bit, helps offset it a little bit. And I think the focus on trying to keep figuring out how to do things more efficiently. One of the things that we do religiously every four weeks at the budget meeting is the operators are talking about certain focus items, whether it's improving overtime hours or things we've done to automate something and physically improve.
Speaker 2: the flow of goods in a warehouse. We've done a pretty good job of that. And you know, we've done that now with standing to off-season wage increases this year. Three off-season wage increases. If you go back, I think, 15 months or the last 15 months. So, you know, our leverage there, or very slight deliverage is pretty impressive given that, you know, labor and benefits is our single biggest expense category by law. So productivity.
Speaker 2: And I think we've needed to do a good job with that. And just so I'm getting the math right on the comp, if the comp is running six and inflation is running six, then the traffic's up three, then items in basket would be down three. It's up, but it's up. It's up, it's up, it's up, it's up, it's up, it's up. It's up, it's up, it's up, it's up, it's up, it's up, it's up. I love me, it's next, yes.
Speaker 2: you done much work on price elasticity by category or item.
Speaker 2: And you think, you know, you think in the context of non-food is where there's softness, right? It's not consumables. Well, you know, what can you do mid course direction, mid course correction there, right? On non-food. You know, is there is there elasticity where you can drive some share early in season by making targeted investments in those categories? Well, I think there are and we do. We don't analyze, frankly, the price elasticity.
Speaker 2: on a historical basis other than we know what works in the past and we keep doing it more. It's pretty straightforward. But we're not doing AB tests or tests and let's take this price delta in this region, down X or up only Y in a different region, a different amount of C, which one works better. We're pretty senior focused on if we lower the price we'll do more sales. All right then to follow up on that right so again you think about not.
Speaker 2: sports in camping. We brought that a little earlier because we had some room and and he'll say this parts the country we there's no sense bringing in some of that stuff early at given the weather right now but at the end of the day I think we've always done a pretty good job of that as well. You know the big thing is is working with their suppliers.
Speaker 2: using electronics as an example, these are anecdotal stories, but during, while sales were very strong for two years during COVID and supply chain challenges were still there, there was virtually no promotional things. There's now more promotional. We have to, our buyers are out there making sure that we're getting
Speaker 2: every promotional penny that's out there and being on top of that with our suppliers. That's part of what we do, but that's been more of a focus. Yeah, we focus on the categories that are growing. Examples would be like hobbling apparel.
Speaker 2: any that's out there and being on top of that with our suppliers. That's part of what we do, but that's been more of a focus. Yeah, we focus on the categories that are growing. Examples would be like, Hobba and the Parallel, which are very strong for us right now.
Speaker 2: Okay, thank you. Okay, thank you guys. The part of our panel strength is getting more well-known stuff in. Okay, thank you. Your next question comes from the line of Paul Ledjuez with City. Your line is now open. Hey everyone, this is Brandon Cheetamon for Paul. Thanks for taking a question. Hey Richard, I want to go back to your comment. Thank you.
Speaker 2: on wider price gaps. It sounds like you're managing the business is kind of how you always have, but your price gaps are wider than they ever have been. So I'm just wondering, like, how has your competitors behavior changed?
Speaker 2: You know, there are certain categories that they're not responding to or are they responding slower than they have in the past? Well, I think I said they're as wide as they've ever been. I don't know if they've gotten wider. But you know, we feel very good about where they are. And this is against direct competitors or other large boxes on certain categories, recognizing when it's...
Speaker 2: a traditional retailer, there's a much bigger price gap to start with. And you know, now mind you also when we're looking at, despite the fact that
Speaker 2: there's a much bigger price gap to start with. And now, mind you also, when we're looking, despite the fact that we in another World's Club,
Speaker 2: essentially sell the same types of items. You know, we want to make sure that on exact like branded items, we're better price. So on those 150, that's where we've looked at that. They're the most competitive. And whether it's co-compepsie or ad-ville or tide, detergion or, you know.
Speaker 2: key items that everybody knows the price of is that same item. There are plenty of items that are differing in quantity, quality, size, color, you name it, where we feel that in some cases we have a better value. But that's up to the customer to behold that. And so we just keep doing what we're doing. We're focusing on those competitive items and constantly figuring out how to drive more value in any item we do.
Speaker 2: you know, how do we, especially private label, but how do we upsize the pack while improving the price per unit within the pack? Even when there was big inflation, how did we, how do we, you know, if there was a 10% increase in inflationary cost increase in something, how do we get the vendor to eat a little of it? We'll eat a little of it. You need a safe.
Speaker 2: there's still the majority of that increase is going to be in the price, but how do we also beyond that logistically, not logistically, but from a manufacturing standpoint, the packaging standpoint, how do we lower the price by a few extra percentage points by figuring out how to get x percent more cell units on a pallet by changing the configuration of the pack size. I think we have a
Speaker 2: We focus more on that than anybody, no, because we're taking our 230 or 40 billion in sales and dividing it by 3,800 items. So we have many items that are 50, 100, 300, 500 million dollar items, and when we can do that, we think that we do a good job of that.
Speaker 2: So that's to say, you think that you've got maybe a little bit of a cost advantage over your competitors, so they're not able to quite match you when you make moves like this.
Speaker 2: So that's to say, I mean, you think that you've got maybe a little bit of a cost advantage of your competitors, so they're not able to quite match you when you make moves like this. I'm sorry, what was that?
Speaker 2: Then you have a cost advantage, a little bit of a cost advantage compared to your competitor. So when you take prices down, they can't quite match you. And so that's why you're able to get your price gaps as well. Well, I think it's our model versus other models. Look, we have, we have, we respect and have very formidable competitors, whether it's under wear-offs clubs or big box disc counters or supermarkets. You have to be patient. Same to the price, but he couldn't match your competitor. Hello.
Speaker 2: And we're all doing what we can do to maximize our own respective model. So I think, no, we certainly when we make some price changes and things, we see our competitors act to them in some cases and not others. I think the fact that we have fewer items and we're out there every week, I know that our merchants when they see those comp shops, if there's...
Speaker 2: I'm making this up if there's a hundred items and we're the same on 50 and lower on 45 and higher on five Those five better be changed this week and we do it so I know we're on top of it I can't speak to our competitors by soon they are also
Speaker 2: But we have a model that allows us, the cost structure allows us to mark up our goods on average in the low teens compared to traditional retailers in the mid-20s to 100. So we have a little room there.
Speaker 2: Now, I think it's been about wanting to ask about SAMS Club recently announced that they have done change course and start opening doors. I'm wondering, does that impact you at all on your opening plans? Would you deal with those eight in the same place even if you knew they'd be opening a nearby or would that preclude you from the area?
Speaker 2: No, we're going to open what we want to open. Certainly look whether there's an existing open location or something that we're aware of based on what's going on in the real estate activity out there, which we all know what everybody's doing in advance in a way. So, does it impact us? It may impact us in some examples of whether it's SAMHSA or somebody else to push this one more soon. And look.
Speaker 2: I was going to say when he asked about them, I'm announcing they're going to open more doors. I think they said they're going to open about 30 over the next five or so years, five or six years. They apparently didn't get the memo that they should close them more, but I'm just kidding. We respect them as a competitor and we don't see that changing what we do. And there's plenty. I think it bodes well though that there's plenty of capacity still in this country, of course, in other countries even more so.
Speaker 6: Appreciate it. Good luck.
Speaker 1: Thanks. We'll take one more question. Your last question today comes from the line of Scott Mushkin with R5 Capital. Your line is now open.
Speaker 2: Hey guys, thanks for taking my question. I have tons, but I guess the first thing I wanted to ask a little bit, you gave the regional sales kind of which reasons were better. I mean obviously there have been a lot of layoffs in tech. Are you seeing any, and you have a huge business out in California, are you seeing that business underperform relative, you know, just over a couple month period?
Speaker 2: That's my first one. Not really. My guys here are looking at the numbers and they're saying not really. What was the guess? Yeah. No one that talks about this. Oh, one of the things that Josh Benson does. You know what we have 400 locations.
Speaker 2: 400 plus of our 550-ish location in the US have gas. That's even a bigger percentage in California and higher volume gas units. And with gas pricing, gas inflation coming down dramatically year over year, that's partly why they're not in the best performers.
Speaker 2: There's not a whole big difference out there. No, I'm not gonna come. And it just curious, and maybe this is a silly question, what happens with that gas business, especially in California, is with the push to EVs?
Speaker 2: different stuff there. No, I think I'm... And it just curious, and maybe this is a silly question, what happens with that gas business, especially in California, is with the push to EVs? Yeah.
Speaker 2: It's a long road ahead.
Speaker 7: long road ahead.
Speaker 2: At some point, you know, we only have 11 car washes. So we'll have plenty of room for car washes 30 years from now. But at the end of the day, we think it's a very long road. It's not happening in the next few years. And the fact that we're still taking such market share relative to US gas gallons in general is a positive. So it's a question, but not to... I think it's a question that we can defer for five or ten years, frankly. Thank you.
Speaker 2: you have told city California that my last question i know it's called long is just just wondering about a little bit long term you know the initiatives you had a big push in the fresh of you know several years ago it's obviously worked out really well we had the credit card we had the big push in the big ticket you know is there anything on the horizon like like that that you know we'll
Speaker 2: change the business a little bit and maybe grow a little faster? Well, international in general is plenty of opportunities. If you look at some of the foreign countries as a percent of sales, they are more profitable than the US.
Speaker 2: So those things, that creates more opportunity. I think on the, I don't see anything big right now coming on vertical integration. Might we do another poultry activity at some point? But that's still a few years down the road to even consider. We did a second meat plant outside of Chicago for the Midwest and East Coast just a couple of years ago.
Speaker 2: We're expanding our bakery commissary. So there's nothing at another couple hundred million dollar plus projects going on like that. I think another area that I think bodes well for us in terms of.
Speaker 2: competitiveness and getting our continued to work or getting prices down is working with suppliers certain things that we currently ship from the US elsewhere or air freight in the case of produce elsewhere. There's plenty of activity going on on what I'll call the hot house side. Could you grow more vegetables? But that...
Speaker 2: That's all good in concept, but it takes time to figure out and there's plenty of people trying to figure it out They're there and so we're waiting for that the other thing I think I gave an example a few years ago Something as simple as cashews Historically, they're all grown and washed
Speaker 2: good in concept but it takes time to figure out. And there's plenty of people trying to figure it out out there and so we're waiting for that. The other thing, I think I gave an example a few years ago, something as simple as cashews. Historically, they're all grown and washed and prepped.
Speaker 2: for roasting in Eastern Africa, shipped to America for roasting, quality roasting, packaging, and then shipped out to the 13 or 14 countries. Today, those that are ultimately sold in Korea, Taiwan, Japan, Australia, and China are now shipped to Vietnam to a quality roaster supplier of ours that grew over time with us. And we dramatically lowered the cost.
Speaker 2: on that portion of a huge amount of dollars. And then using that to do what we normally do, take 80 or 90% of that savings and lower the price even further in those countries. And we're talking, there's plenty of opportunities that I know we're now talking with big suppliers of these 100 and multi-hundred million dollar items that we buy.
Speaker 2: whether it's paper goods, plastic items, things like that, that which of these items could be produced overseas, particularly on the Asia side, and rather than having to produce some here and ship them there, there's a lower cost of production, and as long as we can maintain that quality. And so I think there's plenty of, there's gonna be lots of...
Speaker 2: little opportunities that become totally a good opportunity for us. Hey, that's great, caller. Appreciate it. Well, thank you everyone. We're around. I'm sure we'll be talking to a few of you today and tomorrow and early next week. Have a good afternoon or evening.
Speaker 1: This concludes today's call. Thank you for attending.