Q3 2023 Costco Wholesale Corporation Earnings Call

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After the Speakers' remarks, there will be a question and answer session. If you would like to ask a question. During this time. Please press star followed by the number one on your telephone keypad.

If you would like to withdraw your question again press Star one.

Richard Galanti CFO you may begin your conference.

Thank you Josh 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 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 filed with the SEC forward looking statements speak only as of the date there.

And the company does not undertake to update these statements except as required by law.

In today's press release, we reported operating results for the third quarter of fiscal 'twenty to 'twenty. Three the 12 weeks ended this past may 7th reported net income for the quarter was one point $300 billion or $202 93 per diluted share as compared to adult $135 billion or $3.04 per diluted share a year ago in the third quarter.

This year's results included a nonrecurring charge to merchandise costs of $298 million pretax or <unk> 50 per share primarily for the discontinuation of our charter shipping activities last years results included a nonrecurring $77 million pre tax charge of $13 13 per share for incremental employee.

As many of you know two years ago. We initially at least three ships and thousands of containers to help mitigate some of the significant overseas freight challenges that were we were experiencing.

Later, we added four additional vessels and several thousand additional containers with commitments made for up to three additional years procuring. These ships and containers was integral to us being able to stay in stock for our members during those challenging times. It also allowed us to do so initially at a lower cost than the market rates at that time.

Shipping and freight markets have improved dramatically since that time, which led us to reevaluate our position as you'll recall in fiscal two physical want.

The fiscal first quarter of this fiscal year.

We took a charge to downsize by two vessels our charter shipping activities. Since then shipping container rates have continued to fall and then the third quarter. The third quarter. We concluded that it would be appropriate to completely discontinue the remainder of our charter shipping activities. As a result of this decision we recorded an impairment charge for all remaining charter assets. This is.

Susan allows our merchandising teams to take full advantage of the current shipping marketing rate market rates as opposed to much higher contracted charter rates and turn this allows us to do what we do best and lower prices for our members in terms of sales net sales for the third quarter increased one 9% to $52 $6 billion versus $51 six 1 billion.

As reported last year in the third quarter comparable sales for the quarter were as follows in the U S. On a reported basis minus 0.1% and excluding gas deflation and FX plus one 8%, Canada reported minus 1.1% reported ex gas and FX.

Speaker 1: shipping activities. Since then shipping and container rates have continued to fall and in the third quarter, this third quarter, we concluded that would be appropriate to completely discontinue the remainder of our charter shipping activities. As a result of this decision we recorded an impairment charge for all remaining charter assets.

Plus seven 4% and other international reported plus four 1% and ex gas and FX plus eight 4%. So total company reported basis, 0.3% comp sales and ex gas deflation and FX plus three 5%.

Speaker 1: This decision allows our merchandising teams to take full advantage of the current shipping market rates as opposed to much higher contracted charter rates. In turn, this allows us to do what we do best and lower prices for our members. In terms of sales, net sales for the third quarter increased 1.9% to $52.6 billion.

E Commerce on a reported basis was minus 10.0 N minus 9.0, excluding FX.

In terms of third quarter comp sales metrics traffic or shopping frequency remains pretty good increasing four 8% worldwide and three 5% in the U S. During the quarter, our average daily transaction or ticket was down 4.2% worldwide and down three 5% in the U S impacted in large part from weakness in bigger.

Speaker 1: versus $51.61 billion reported last year in the third quarter. Comparable sales for the quarter were as follows in the U.S. on a reported basis minus 0.1% and excluding gas deflation and FX plus 1.8%. Canada reported minus 1.0%.

Ticket non foods discretionary items foreign currencies relative to the U S dollar negatively impacted sales by approximately one 5% and gas price gasoline price deflation negatively impacted sales by approximately one 7%.

Speaker 1: reported X gas and FX plus 7.4% and other international reported plus 4.1% and X gas and FX plus 8.4% so total company reported basis 0.3% comp sales

Next on the income statement as membership fee income.

For the quarter, we reported a $1 $44 million of membership fee income of $198, 1.98% of sales compared to $984 million or $1, 91% a year ago in the third quarter, So a $60 million or six 1% increase in membership fees, excluding the headwinds and FX the 60.

Speaker 1: X gas deflation and FX at plus three and a half percent. Now e-commerce on a reported basis was minus 10.0 and minus 9.0 excluding FX.

Speaker 1: In terms of third quarter comp sales metrics, traffic or shopping frequency remains pretty good, increasing 4.8% worldwide and 3.5% in the US during the quarter. Our average daily transaction or ticket was down 4.2% worldwide and down 3.5% in the US, impacted in large part from weakness in bigger ticket non-foods discretionary items.

Dollar increase would have been higher by $17 million or up year over year or 8% adjusted for FX in terms of renewal rates at third quarter end, our U S and Canada renewal rate was 92, 6% and our world right a worldwide rate came in at 95%. These figures are the same all time high renewal rates that were achieved.

In the second quarter just.

Just 12 weeks earlier.

Membership growth continues we ended Q3 with $69 one paid household members and $124 7 million cardholders, both up approximately 7% versus a year ago at third quarter end, we had $31 3 million paid executive members, an increase of 681000 or 57.

Speaker 1: million dollars of membership fee income or 1.98 percent of sales compared to 984 million or 1.91 percent a year ago in the third quarter so a 60 million dollar or 6.1 increase in membership fees. Excluding the headwinds in FX the 60 million dollar increase would have been higher by 17 million.

<unk> thousand per week during the 12 week fiscal third quarter executive members now represent a little over 45% of our paid members and approximately 73% of worldwide sales.

Speaker 1: or up year over year, 8% adjusted for FX. In terms of renewal rates, at third quarter end, our US and Canada renewal rate was 92.6% and our worldwide rate came in at 90.5%. These figures are the same all-time high renewal rates that were achieved in the second quarter.

Moving down the income statement next is our gross margin our reported gross margin.

Third quarter was higher year over year on a reported basis by 13 basis points coming in at 10.32 as compared to a 10.19% number a year earlier, the 13 basis point positive ex gas deflation.

<unk> was plus was minus 3% minus three basis points.

Speaker 1: just 12 weeks earlier.

Speaker 1: Membership growth continues. We ended Q3 with 69.1 paid household members and 124.7 million cardholders, both up approximately 7% versus a year ago. At third quarter end we had 31.3 million paid executive members.

These numbers of course includes the little more than 50 basis points impairment charge to margin mentioned in todays earnings release as I normally do I'll ask you to jot down a few numbers two columns reported column and then columns, excluding gas deflation and the first item would be for the third quarter 'twenty three core merchandise margin.

Speaker 1: increase of $681,000 or $57,000 per week during the 12-week fiscal third quarter. Executive members now represent a little over 45% of our paid members and approximately 73% of worldwide sales.

On a reported basis it was up year over year to 39 basis points in ex gas deflation up 24.

Ancillary and other plus 13 and plus nine.

2% reward minus 11 and minus nine life.

Speaker 1: Moving down the income statement, next is our gross margin. Our reported gross margin in the third quarter was higher year over year on a reported basis by 13 basis points, coming in at 10.32 as compared to a 10.19% number a year earlier. The 13 basis point positive

LIFO, plus 25 and plus 25.

And other minus 53, and minus 52, if you add up the two columns again, you get to the reported number of on a reported basis gross margin year over year in the quarter was up 13 basis points in ex gas deflation down three basis points. So starting with the core again core was up.

Speaker 1: X gas deflation was minus 3 basis points. Both of these numbers of course includes the little more than 50 basis point impairment charge to margin mentioned in today's earnings release. As I normally do, I'll ask you to jot down a few numbers. Two columns, a reported column and then the columns.

Courted basis, 39 basis points year over year, and 24 ex gas deflation in terms of core margins on their own core sales are core on core margins they were higher by 17 basis points.

With food and sundries, and non foods being up and fresh foods being down a little.

Speaker 1: excluding gas deflation. The first item would be for the third quarter of 23, core merchandise margin on a reported basis it was up year over year 39 basis points and ex gas inflation up 24 ancillary another plus 13 and plus 9

Ancillary and other businesses gross margin was higher by 13, and again higher by nine ex gas deflation it within the ancillary businesses gas lean business centers food Court and travel were better year over year offset in part by E com.

Speaker 1: 2% reward minus 11 and minus 9. LIFO plus 25 and plus 25 and other minus 53 and minus 52. If you add up the two columns again you get to the reported number of reported basis gross margin year over year in the quarter was up 13 basis points and X gas deflation down three basis points.

2% reward again higher by 11 basis points and higher by nine ex gas deflation.

Higher sales penetration coming from our executive members is certainly part of that LIFO, plus 25 basis points year over year, both with or without gas deflation as you recall a year ago in the third quarter, we had $130 million charge for LIFO in this fiscal year, we had no LIFO charge, so $130 billion.

Speaker 1: So starting with the core, again core was up on a reported basis 39 basis points year over year and 24x gas deflation. In terms of core margins on their own core sales or core and core margins they were higher by 17 basis points.

Year over year improvement on that line item.

Note also that in the fourth quarter, a year ago, we had a $223 million LIFO charge. So we'll see how that goes in the fourth quarter of this year.

Speaker 1: with food and sundries and non foods being up and fresh foods being down a little. Ancillary and other businesses gross margin was higher by 13 and again higher by 9 ex gas deflation. Within the ancillary businesses gas, lean, business centers, food court and travel were better year over year offset in part by ECOM.

Other was lower by 53 basis points reported at 52 ex gas deflation. This was net of items from both years. This year. There was a 57 basis point negative impact from the $298 million pre tax charge again, primarily related to terminating our charter shipping activities. This was partially offset by lapping last year's 70.

Speaker 1: 2% reward again higher by 11 basis points and higher by 9x gas deflation. Higher sales penetration coming from our executive members is certainly part of that.

$7 million charge for incremental employee benefits of which $20 million or four basis points related to gross margin. The remaining 57 million I'll talk about it in a minute under SG&A.

Speaker 1: LIFO, plus 25 basis points year over year, both with and without gas deflation. As you recall, a year ago in the third quarter we had a $130 million charge for LIFO. In this fiscal year we had no LIFO charge. So 130 billion year over year improvement on that line item.

Moving on to SG&A, our reported SG&A.

This year was $9 one 1%.

Compared to $8 six 2% a year ago. So on a reported basis higher by 49 basis points in ex gas deflation higher by 34.

Speaker 1: Note also that in the fourth quarter a year ago we had a $223 million LIFO charge. So we'll see how that goes in the fourth quarter this year.

As with gross margin I'll ask you to jot down two columns of numbers, both reported and one with excluding gas deflation.

First item operations minus 48 basis points or higher by 48 basis points and minus 35 basis points central minus 11, and minus nine stock compensation zero and both columns preopening minus one and minus one other plus 11 and plus 11, if you add all those up.

Speaker 1: Other was lower by 53 basis points reported and 52x gas deflation. This was net of items from both years. This year there was a 57 basis point negative impact from the $298 million pre-tax charge, again primarily related to terminating our charter shipping activities. This was partially offset by lapping last year's $77 million charge for incremental employee benefits.

Again on a rate basis, 49 basis points higher year over year and ex gas deflation of 34 out of core operations.

This negative included of course, the impact of slower sales growth as well as the impact of a few of the.

Wage increases that we did that are typically out of the normal cycle over the last year over a year.

And that included the impact of four weeks of wage and benefits increases implemented last March the additional top of scale increase that went into effect July 4th and eight weeks of this March is higher than normal top of scale increase despite again, despite the slowing sales growth. We've continued to invest in our employees over the past year and that's always been a priority for us.

Speaker 1: is higher by 49 basis points and x gas deflation higher by 34. As with gross margin, I'll ask you to jot down two columns of numbers, both reported and one with excluding gas deflation. First item is operations, minus 48 basis points or higher by 48 basis points and minus 35 basis points.

Speaker 1: Central, minus 11 and minus 9. Stock compensation, 0 in both columns. Pre-opening, minus 1 and minus 1. Other, plus 11 and plus 11. If you add all those up, again on a basis, 49 basis points higher year over year, index gas deflation, 34. Now the core operations

Central higher by 11% and a higher by nine ex gas deflation again sales growth.

Nothing no big single item was an outlier there but sales growth overall.

My view is the impact stock comp flat, both with and without gas deflation. So no impact there no preopening again higher by one basis points, we had five openings this year and in the quarter and three last year.

Speaker 1: This negative included of course the impact of slower sales growth as well as the impact of a few of the wage increases that we did that are typically out of the normal cycle over the last year. And that included the impact of four weeks of wage and benefits increases implemented last March.

But again up one basis point delta year over year and other than the 11 basis point positive both with and without gas deflation as a result of lapping that 50, <unk> that $77 million charge, but it would be within SG&A.

Wrapping 57 of that $77 million charge for the incremental employee benefits.

Speaker 1: the additional top of scale increase that went into effect July 4th, and eight weeks of this March's higher than normal top of scale increase. Despite the slowing sales growth, we've continued to invest in our employees over the past year, and that's always been a priority for us.

Getting discussed earlier it in the release.

Below the operating income line interest expense came in at $36 million million dollars over last year's $35 million number and interest income are either for the quarter was higher by $57 million year over year.

Speaker 1: Central, higher by 11 and higher by 9 as gas deflation. Again, sales growth, no big single item was an outlier there, but sales growth of all in my view was the impact. Stock comp flat both with and without gas deflation, so no impact there. Pre-opening again, higher by one basis point. We had five openings this year.

This was driven by an increase in interest income due to higher interest rates and cash balances and the interest increase in interest income was partially offset by less favorable FX versus last year.

In terms of income taxes, our tax rate in the third quarter came in at 26, 5% that compared to 24, 9% in Q3 last year the fiscal 'twenty three effective rate excluding discrete items is currently projected to be in the 26% to 27% range.

Overall reported net income was down year over year by four percentage points net of the two nonrecurring items in both years third quarter third.

Speaker 1: Lapping 57 of that $77 million charge for the incremental employee benefits. Again, I discussed earlier in the release.

Third quarter's net income would have been up 8%.

Even with it being reflective of that higher income tax rate.

Speaker 1: Below the operating income line, interest expense came in at $36 million, a million dollars over last year's $35 million number, and interest income rather for the quarter was higher by $57 million year over year. This was driven by an increase in interest income due to higher interest rates and cash balances.

In terms of warehouse expansion to date, we've opened 17 locations in the first three quarters and also reload, including three relocations. So net of that 14 net new locations. In Q4, we have nine new openings with no reload. So a net of nine that'll put us at 23 26 openings less the three <unk>.

Speaker 1: and increase in interest income was partially offset by less favorable FX versus last year.

Close to be at 23 net new for this year.

Speaker 1: In terms of income taxes, our tax rate in the third quarter came in at 26.5%, that compared to 24.9% in Crew 3 last year. The fiscal 23 effective rate, excluding discrete items, is currently projected to be in the 26 to 27% range. Overall, reported net income was down year over year by four...

In the quarter again, we opened five with one with four being net new in addition to the relocation in Canada. We had two new buildings in the U S open and one additional building opened in Japan, each of Japan and China.

We are at the end of the nine new buildings plan for our fiscal fourth quarter.

That includes our north Tulsa, Oklahoma opening that opened this morning, and our fourth and fifth buildings in China planned for June and August .

These four these Q4 planned openings will bring our full year two count to 26 less the three our debt of 23.

That is made up of 13 in the U S and 10 outside of the U S rig.

Speaker 1: we've opened 17 locations in the first three quarters and also including three relocations so net of that 14 net new locations. In Q4 we have nine new openings with no reload so a net of nine. That'll put us at 26 openings less the three reloads to be a 23 net new for this year.

Regarding capital expenditures in Q3 of the quarter of the fiscal year.

We spent approximately $819 million our estimate for all of fiscal 'twenty three capex is approximately $4 billion.

Moving on to e-commerce.

In the release that e-commerce was at minus 10% sales decline.

Speaker 1: In the quarter again we opened five with four being net new. In addition to the relocation in Canada we had two new buildings in the US open and one additional building opened in each of Japan and China.

The decline and that's on a comp basis and ex gas FX ex FX minus 9% E. Com sales are more of the same story in terms of the sales as I discussed on our second quarter call and in our monthly sales recordings in Q3, big ticket discretionary departments, notably majors home furnishings small.

Speaker 1: We have again of the nine new buildings planned for our fiscal fourth quarter. That includes our North Tulsa, Oklahoma opening that opened this morning, and our fourth and fifth buildings in China planned for June and August .

Electric's jewelry in hardware.

Speaker 1: These Q4 planned openings will bring our full year count to 26 less than 3 or a day out of 23. And that is made up of 13 in the US and 10 outside of the US.

We're down about 20% in E com and made up 55% of E. Com sales. The same departments were down about 17% in warehouse, but they only make up 8% of warehouse and warehouse sales.

Speaker 1: Regarding capital expenditures in Q3 of the fiscal year, we spent approximately $819 million. Our estimate for all of fiscal 23 CapEx is approximately $4 billion. Moving on to e-commerce, you saw in the release that e-commerce was at minus 10% sales decline.

A few comments on inflation inflation continues to abate somewhat but you go back a year ago to the fourth quarter of 'twenty two last summer we would estimate at the time that your year over year inflation at the time was up 8% by Q1 and Q2 it was down to six 7% and then five and 6% in this quarter, we're estimating that year over year.

Speaker 1: on a comp basis and X FX minus 9%. ECOM sales, more to the same story in terms of the sales as I discussed on our second quarter call and in our monthly sales recordings. In Q3, big ticket discretionary departments, notably majors, home furnishings, small electrics, jewelry, and hardware.

Relation in the 3% to 4% range, we continue to see improvements in many items, notably food items like nuts eggs and meat.

As well as items that include as part of their components commodities like steel and resins on the non food side switching.

Switching over to inventory levels inventories overall are in pretty good shape as of quarter end, our inventories year over year as of the end of the third quarter were down 7% recall that they had been up during some of the supply chain challenges of last year.

Speaker 1: were down about 20% in e-comm and made up 55% of e-comm sales. These same departments were down about 17% in warehouse, but they only make up 8% in warehouse sales.

Finally in terms of upcoming releases.

We will announce our may sales results for the four weeks ending Sunday Sunday May 28th next Thursday on June 1st after market close.

Speaker 1: A few comments on inflation. Inflation continues to abate somewhat. You go back a year ago to the fourth quarter of 22 last summer. We had estimated the time that year-over-year inflation at the time was up 8% and by Q1 and Q2 it was down to 6 and 7% and then 5 and 6% and this quarter we're estimating that year-over-year inflation in the 3 to 4% range.

And also remember that our fiscal fourth quarter has an extra week. This year. So our quarter ending September <unk> of 2023, we'll have 717 weeks versus 16 weeks in the fiscal fourth quarter with that I'll open it up for questions and answers and turn it back over to Josh. Thank you.

Speaker 1: We continue to see improvements in many items, notably food items like nuts, eggs, and meat, as well as items that include as part of their components like commodities like steel and resins on the non-food side.

And remind everyone. If you would like to ask a question at this time. Please press star followed by the number one on your telephone keypad. Your first question comes from the line of Michael Lasser with UBS. Your line is open.

Speaker 1: Switching over to inventory levels, inventories overall are in pretty good shape. As of quarter end our inventories year over year as of the end of the third quarter were down 7%. Recall that they had been up during some of the supply chain challenges of last year.

Good morning, good afternoon Richard.

How broadly and widely Costco willing to roll back right.

In order to drive traffic and retain them.

Comp growth how are you thinking about the prospect of equally.

Speaker 1: Finally, in terms of upcoming releases, we will announce our May sales results for the four weeks ending Sunday, May 28th, next Thursday on June 1st after market close. And also remember that our fiscal fourth quarter has an extra week this year, so our quarter ending September 3rd.

Across all your entire portfolio. Thank you.

Well.

That's something that our merchants work on literally every day at every week.

Remember when inflation was peaking at 8% to 9% and some out there would say and we're known for trying to hold the line and work with our suppliers how much will they either of that how much will lead of that at the end of the day if margins year over year were down 50, or 100 basis points back then.

Speaker 1: of 2023. We'll have 17 weeks versus 16 weeks in the fiscal fourth quarter. With that, I'll open it up for questions and answers and turn it back over to Josh. Thank you.

Speaker 2: A reminder, if you would like to ask a question at this time, please press star followed by the number one on your telephone keypad. Your first question comes from the line of Michael Lasser with UBS. Your line is open.

That implies that some portion of it maybe instead of an eight or 9% increase our members, we're seeing a six or seven or 8% increase whenever that was we felt that we were doing as good a job as anyone out there and term given the item nature of our business to lower prices for our members and hopefully drive sales certainly right now.

Speaker 3: Good morning. Good afternoon, Richard. How broadly and widely is Costco willing to roll back prices in order to drive traffic and sustain a mid-single digit comp growth? How are you thinking about the prospect of deflation across your entire portfolio? Thank you.

We've always been a little bit compared to others over index in bigger ticket discretionary items, that's getting hit arguably more than others. If you look at our our fresh foods and food and sundries.

Speaker 1: Well, look, that's something that our merchants work on literally every day and every week. I remember when inflation was peaking at 8 to 9 percent and some out there would say, and we're known for trying to hold the line, work with our suppliers, how much will they eat of that, how much will we eat of that. At the end of the day, if margins are over, you're down 50 or 100 basis points.

There.

In the mid to mid high singles.

Look at the non foods and some of the ancillary, notably gasoline, which is definitely a 11% year over year deflation in gas prices. That's in the mid single negative. So it all it all adds up to where it is weird. We every day, we look to drive sales.

Or will it take to get to whatever excess who the heck knows we just I just know that our merchants and Greg and runner and Claudine our head of merchandising.

Pushing the buyers each day to do that and figure out how can we take the monies that we get.

Any types of monies from the vendors that can usually.

Speaker 1: lower prices for our members and hopefully drive sales. Certainly right now we've always been a little bit compared to others over indexed and bigger ticket discretionary items. That's getting hit arguably more than others. If you look at our fresh foods and food and sundries, there, you know, in the in the

Used to drive business one of the reasons that it made sense for us to discontinue the the.

The containers in the shipping the vessels.

As to reduce the cost that our buyers are seeing relative to these higher much higher contract rates now yeah. We were smart for for a year and now looking back and it was good to get out of it and that'll allow us to be more competitive as well. So we're I feel we're doing a great job of being very competitive when we do comp shops against our direct.

Speaker 1: mid to mid high singles. You look at the non foods and some of the answer is notably gasoline, which is definitely 11% year-over-year deflation in gas prices. That's in the mid single negative. So it all adds up to where it is. We every day we look to drive sales. What will it take to get to whatever X is? Who the heck knows?

Warehouse club competitors as well as different components, whether it's retail food or general merchandise on the buildings home improvement side.

Feel very good about our competitive position.

And what we're doing to do that.

So are you not expecting broadly deflationary period and my follow up question is gonna be.

Given the amount of value you get your member wouldn't it make sense to raise your fees right now are they.

Speaker 1: usually used to drive business. One of the reasons that it made sense for us to discontinue the containers and the shipping the vessels is to reduce the cost that our buyers are seeing relative to these higher much higher contract rates now. We were smart for a year and now looking back it was good to get out of it.

Okay.

Because your renewal rates have been so high.

We are providing even more value with gold economic well.

Well first of all on the question of deflation, let's hope that there is and and.

It will be the you'll be the first to see it at Costco and my view as it relates to membership fees nice try.

Speaker 1: that allow us to be more competitive as well. So I feel we're doing a great job of being very competitive when we do comp shops against our direct warehouse club competitors, as well as different components whether it's retail food or general merchandise on the building's home improvement side. We feel very good about our competitive position and what we're doing to do that. We're doing a great job of being very competitive and we're doing a great job of being very competitive. We're doing a great job of being very competitive and

Michael but at the end of the day with a headline being inflation, we feel very good about if we wanted to do what can we do it without impacting.

Any meaningful way renewal rates or sign ups or anything and at some point, we will but our view right. Now is is that we've got enough levers out there to drive business and we feel that it's incumbent upon us to be that.

Speaker 3: So are you not expecting broad-based deflation, Richard? And my follow-up question is going to be,

Beacon of light to our members in terms of holding them for right now it'll be it's not a matter of a big time, but.

Speaker 3: Given the amount of value you give to your members, wouldn't it make sense to raise your fees right now so that you could because your renewal rates have been so high and you would be providing more value in the fiscal economic chart. Well, first of all on the question of deflation let's hope that there is and and you'll be the first to see it at Costco in my view.

We'll let you know as soon as we know.

Thank you.

Your next question comes from the line of Simeon Gutman with Morgan Stanley . Your line is open.

Hey, Richard My first question is on the comps and the stacks.

It's obviously been slowing and you probably took more than your fair share over the last three years curious when you sit around how youre diagnosing it macro I don't know if it's gas attachment merchandising whether any of those options how do you diagnose what's happening.

Speaker 1: As it relates to membership fees, nice try, Michael, but at the end of the day, with the headline being inflation, we feel very good about if we want to do it, can we do it without impacting in any meaningful way renewal rates or signups or anything. And at some point we will, but our view right now is that we've got enough levers out there to

Yeah.

Yeah.

Well first of all we look at it.

Traffic dropped we're getting people in the door and we know what they are buying they're buying.

Speaker 1: to drive business and we feel that it's incumbent upon us to be that, you know, that beacon of light to our members in terms of holding them for right now. It's not a matter of a big time, but you know we'll let you know as soon as we know.

Speaker 1: and we feel that it's incumbent upon us to be that beacon of light to our members in terms of holding them for right now. It's not a matter of a big time, but we'll let you know as soon as we know. Thank you.

Non discretionary items are buying fresh foods are buying food and sundries, they're buying apparel.

Big way Theyre buying patio furniture now that the weather has turned in a big way.

Your furniture not as much.

We all know what's going on with consumer electronics out there, while all of the numbers <unk>.

Speaker 2: Your next question comes from the line of Simeon Gutman with Morgan Stanley . Your line is open. Hey Richard, my first question is on the comps and the stacks. It's obviously been slowing and you probably took more than your fair share over the last three years.

Industry wide or down ours are down a little less but they're down.

Yeah overall, we.

We.

When we look at what else can we do to drive more.

Non food business, but at the same time can we bring in a few more items on the food and sundries side, because we know traffic is good there is simple impulse items that sell for 15 to 25 Bucks. So that's what we do every day and that's what Claudine and her staff and <unk> of <unk>.

Speaker 2: Curious when you sit around how you're diagnosing it, macro, I don't know if it's gas attachment, merchandising, whether any of those options, how do you diagnose what's happening?

Speaker 2: when you sit around how you're diagnosing it, macro, I don't know if it's gas attachment, merchandising, whether any of those options, how do you diagnose what's happening? Yeah, well first of all we look at...

Merchants are doing.

Speaker 1: traffic and trap we're getting people in the door and we know what they're buying they're buying you know

And then my follow up can you give us some information or color on gasoline gross profit year over year, how that profit pool is trending obviously inclusive.

Speaker 1: non discretionary items, they're buying fresh foods, they're buying food and sundries, they're buying apparel in a big way. They're buying patio furniture now that the weather's turned in a big way, indoor furniture not as much. We all know what's going on with consumer electronics out there while all the numbers industry-wide are down. Ours are down a little less but they're down.

Both gallons and the Penny profit.

Well, yes gallons or close to flat the average price per gallon during the quarter was down 11%. So that's a 12 I don't have the number at 12 or 13% of our sales, which was the average price point for for cell unit. If you will was down 11%.

Speaker 1: So, you know, overall we, you know, we, when we look at what else can we do to drive more

Year over year guess lean was profitable in both quarters nicely.

Speaker 1: non-food business, but at the same time, can we bring in a few more items on the food and sundry side because we know traffic is good there. Simple impulse items that sell for 15 to 25 bucks. So that's what we do every day. And that's what Claudine and her staff and her merchants are doing.

I've said I think I'm sure I said last year in Q3, and this year. It helped it didn't help a little helped a little bit year over year, but not a lot.

And last year in Q4, it was a strong number.

Got an extra week.

Speaker 2: And then my follow up, can you give us some information or color on gasoline gross profit year over year? How that profit pool is trending? Obviously, inclusive. Of both gallons and the penny profit.

And we'll see how it goes this year, but right now gasoline continues to be quite profitable for us.

Okay. Thanks Richard.

Okay.

Your next question comes from the line of Christopher <unk> with Jpmorgan. Your line is open.

Speaker 1: Well, yeah, gallons are close to flat. The average price per gallon during the quarter was down 11%. So that's a 12, I don't have the number, 12 or 13% of our sales, which was the average price point for a sell unit, if you will, was down 11%.

Thanks, very much and good morning, So I just wanted to jump back to that to the pricing question from a strategy perspective, you know typically if you see things that are disinflation or deflation on more the commodity side, you'll take price ahead of that I guess is that where youre doing.

Speaker 1: Year over year, yes, lean was profitable in both quarters nicely. As I said, I think I'm sure I said last year in Q3 and this year it helped a little. It didn't help a little, it helped a little year over year but not a lot. Last year in Q4 it was a strong number. There was about enough Pharaoh in gam suspensions at the end

Currently and we've heard a lot of talk in the market about the vendor funding more promotions. How are you thinking about the balance between the retailer funding the promotion or the price investment versus the vendors.

Speaker 1: and you've got an extra week, but right now gasoline continues to be quite profitable for us.

Well first look we work with our suppliers every day and it's got to be a partnership there.

Speaker 1: that an extra week, but we'll see how it goes this year. But you know right now gasoline continues to be quite profitable for us. Okay, thanks Richard.

I think it's easier for us in the one hand that we do a lot of volume on a fewer items and we're managing our buyers. We have buyers that literally are managing a couple of dozen items, not 200 items and I remember when certain commodity prices like resins, and steel were going up and our monthly budget meeting hearing from the merchant sale.

Speaker 2: Your next question comes from the line of Christopher Horvers with JP Morgan. Your line is open.

Speaker 4: Thanks very much, and good morning. I just want to jump back to the pricing question. From a strategy perspective, typically if you see things that are disinflating or deflating on more the commodity side, you'll take price ahead of that. I guess

While we are committing out five six months for seasonal items like patio furniture, and barbecue grills, so you're a couple of years ago.

You were on we want to know what the vendor was increasing the price on whatever it was whether it was a major consumer products company or some manufacturer of nonfood items like that.

Speaker 4: Is that what you're doing currently? And we've heard a lot of talk in the market about the vendors funding more promotions. How are you thinking about the balance between the retailer funding, the promotion, or the price investment versus the vendors?

Why exactly why how much of its labor how much of it's the commodity costs and how much is the transportation costs, and then as prices and wage pressure or whatever and as we saw commodities coming down I think I'd like to think that we were the first on the phone with our suppliers getting.

Speaker 1: Well, first look we work with our suppliers every day and it's got to be a partnership there. Again, I think it's easier for us in the one hand that we do a lot of volume on a fewer items. We're managing our buyer, we have buyers that literally are managing a couple of dozen items not 200 items. And I remember when certain commodity prices like resins

Wanting to know when the price is going to drop and understand that we in some cases the supplier had committed to a season of three or four months and so there was some delay and we worked with them and Theyre. In addition, as we said we're going to invest a little on price. How much are you willing to invest in price. So it's a partnership and I think we are better positioned to do that simply because if you take our 200 and <unk>.

Speaker 1: steel were going up in our monthly budget meeting hearing from the merchants how you know while we're committing out five six months for seasonal items like patio furniture and barbecue grills. This is a couple years ago. We were on we want to know when the vendor was increasing the price on whatever it was whether it was a major consumer products company or some manufacturer of non-food items like that.

30, or $40 billion in sales and divided by 3800 Skus. It's a lot more pricing power per SKU and a lot more focused on an item by item basis. So that's what we do and.

As there are promotional monies out there from suppliers. This.

This goes back to the beginning of time around here I remember with the old traditional co op advertising dollars and supplier wanted you to spend <unk>.

Speaker 1: Why exactly why you know how much of its labor how much of its the commodity cost and then how much is the transportation cost? And then as prices work and wage pressure whatever and as we saw commodities coming down I think I'd like to think that we were the first on the phone with those suppliers getting a wanting to know when the price is going to drop and understandably in some cases the supplier had committed

Of our own money and add it to <unk> to do 10 sensitive advertising their product and we said just give us the five sensible basically 95% across not a dollar cost and and that's what we still do and.

So I think.

We have to be smart about knowing what every bucket of money is out there whether it's promotional monies or add monies are.

Speaker 1: to a season of three or four months and so there was some delay and we worked with them in there. In addition, as we said we're going to invest a little in price. How much are you willing to invest in price? So it's a partnership and I think we are in a better position to do that simply because if you take our 230 or 40 billion in sales and divide it by 3,800 SKUs it's a lot more pricing power per SKU and a lot more focus on an item by item basis.

Add monies on line now and work with our suppliers to that and in our case also with what we do what we call. The MDM the multi vendor mailers that coupon because we send out a 11 times a year.

Not only that but hot buys in store and what we call temporary price discounts.

Speaker 1: That's what we do and as there are promotional monies out there for the suppliers, this goes back to the beginning of time around here. I remember with the dual traditional co-op advertising dollars, a supplier wanted you to spend five cents of our own money and add it to five cents of theirs to do 10 cents of advertising of their product.

And what could drive sales the other part of that is is when we get monies in some cases what.

How much elasticity is there in driving business by lowering their price in some categories, particularly some of the bigger ticket categories right now theres not an appetite by the consumer necessarily for that so how do we add value to the item or do more things to it to drive business.

Speaker 1: And we said, just give us the five cents and we'll base it on a 95 cent cost, not a dollar cost. And that's what we still do. And so I think...

It's it's it's all of the above.

And so you know as you look forward I know you said I think three or 4% inflation in the quarter and you'll get the Nielsen data that was sort of low double digit right I mean, Walmart and talked about that so two part question. One is is the difference just mix that you have more fresh commodity exposure and then.

Speaker 1: We have to be smart about knowing what every bucket of money is out there, whether it's promotional monies or ad monies or ad monies online now, and work with our suppliers to do that. In our case also, we do what we call the MVM, the multi-vendor mailer, the coupon book list that we send out 11 times a year.

You know if you project forward that you'll have sort of no inflation potentially.

Speaker 1: And not only that, but hot buys in store and what we call temporary price discounts. And what could drive sales? The other part of that is when we get monies, in some cases, how much elasticity is there in driving business by lowering their price? In some categories, particularly some of the bigger ticket categories right now.

Eight months out so how do you think about your ability to continue to comp overall.

Well you know when there was low inflation.

And not an overarching concern about a recession.

And when the world was seem to be Comping, 345, and six years ago at 2% to 4% we were five to seven.

Speaker 1: There's not an appetite by the consumer necessarily for that. So how do we add value to the item or do more things to it to drive business? It's all of the above.

Our view is it's because we got great members buying more.

With great loyalty and great the best prices.

Speaker 4: And so, you know, as you look forward, you know, you said, I think, three or four percent inflation in the quarter, you know, you'll get the Nielsen data that was sort of low double digit, right? I mean, Walmart talked about that. So two part question. One is, is the difference just mix that you have more fresh commodity exposure?

Major difference.

And quality and so.

We've succeeded under those I think right now.

More of it in my view more of it relates to the fact that.

We're not only dealing with big ticket discretionary items weakness, which again when we look at like MPD and everything we're doing better in most of those categories are negative is not as negative as it is others out. There. In addition, we're comparing against two years of outsized growth in some of those things is people who are buying things from their home we saw.

Speaker 4: And then, you know, if you project forward that you'll have sort of no inflation potentially six, eight months out. So how do you think about your ability to continue to comp overall? Well, you know, when there was low inflation and not an overarching concern about a recession.

Outsized sales and indoor and outdoor furniture and electronics in Tvs and exercise equipment.

Speaker 1: And when the world was seen to be comping three, four, five, and six years ago at two to four percent, we were five to seven. Our view is because we got great members buying more with great loyalty and the best prices made a major difference.

So we're not only.

Comping comparing against this quote unquote recession concerns about big ticket items, but comparing against Uber strength over the last two years prior to that so I think we will come out of this fine.

We're pretty good at figuring out new items, and new things to do and.

Speaker 1: and quality. And so we've succeeded under those. I think right now more of it, in my view, more of it relates to the fact that we're not only dealing with big ticket discretion items weakness, which again, when we look at like MBD and everything, we're doing better in most of those categories.

We're not just focused on how do we drive sales and the other one or 2%, but how can we drive sales were bringing in new and exciting stuff.

And we continue to do that.

And this is anecdotal, but over the last year year and a half.

We've always been very good at taking what I'll call Big American Costco products, including a lot of chaos and having huge success overseas. We're now on a conscious basis figure out what a unique exciting overseas items can we bring elsewhere.

Speaker 1: Our negative is not as negative as others out there. In addition, we're comparing against two years of outsized growth in some of those things as people were buying things from their home. We saw outsized sales in indoor and outdoor furniture and electronics and TVs, and exercise equipment. We're not only

World, including the U S and Canada, and we are having.

Good experience with some of those things. These are all small things, but theres lots of little small things around here that add up.

Speaker 1: Comping comparing against this quote unquote recession concerns about big ticket items, but comparing against Uber strength over the last 2 years prior to that. So, I think we'll come out of this. Fine. Uh, we're pretty good at figuring out new items and new things to do and, uh.

Got it thank you so much.

Your next question comes from the line of Scott <unk> with Trust. Your line is open.

Good afternoon, guys Scot ciccarelli.

I think you mentioned in fresh foods, where a bit on the softer side.

Speaker 1: We're not just focused on how do we drive sales another 1 or 2%, but how can we drive sales? We're bringing in new and exciting stuff. And we continue to do that. This is anecdotal, but over the last year, year and a half, we've always been very good at taking what I'll call big American Costco products, including a lot of KS, and having huge success overseas.

You kind of look at the data is that a function of your members moving to less expensive package goods or is that more just do that in the.

Totally driven comparisons like you were just talking about on the discretionary side.

Yeah by the way when I was talking earlier about down the margins were a little weaker on fresh sales have been fine in the quarter.

Again, when you look at our reported.

Speaker 1: We're now on a conscious basis figuring out what unique, exciting overseas items can we bring elsewhere in the world, including the US and Canada. And we're having good experience with some of those things. These are all small things, but there's lots of little small things around here that add up.

Total company sales number is 0.3% or $3 five ex ex gas and FX, but within that.

0.3 reported.

Fresh was mid singles food and Sundries is mid to high singles non foods was a little over mid single negative.

Speaker 2: Got it. Thank you so much. Your next question comes from the line of Scott Ciccarelli with Truist. Your line is open.

Yeah.

Got it alright, I'm not saying that.

So the second question related to that though is are you seeing any other.

Speaker 2: Good afternoon guys. Gotcha. Richard, I think you mentioned fresh foods were a bit on the softer side. When you kind of look at the data, is that a function of your members moving to less expensive package goods or is that. More just do the code driven comparisons like you were just talking about on the discretionary side.

They're kind of trade, let's call it trade down type activity, whether it's more private label sales et cetera that you've identified from your numbers yes.

Yes.

The way not just in this current quote unquote recessionary concerns of a recession.

Historically, we've always seen.

Speaker 1: Yeah, by the way, when I was talking earlier about down, the margins were a little weaker on fresh. Sales have been fine. In the quarter, again, when you look at a reported total company sales number of 0.3% or 3.5x gas and FX, but within that 0.3 reported.

Somewhat like within fresh protein, we've always seen when there's a recession, whether it was <unk> 99, or nine eight or 910, we would see some.

Mark sales penetration shift from from beef to poultry and pork.

We have seen some of that now I think anecdotally I heard a few months ago from our.

Speaker 3: you know fresh was mid singles, food and sundries is mid to high singles, non-foods was a little over mid single negative. Got it, all right I misunderstood that. So the second question related to that though is are you seeing any

Food and sundries buyer.

That we saw some switch even to some gan products.

Can chicken and can't do and things like that but on the <unk> side. We've also seen that I think last quarter I mentioned that on a year over year basis, where there was a 150 basis point increase in private label.

Speaker 1: other kind of trade, let's call it trade down type activity, whether it's more private label sales, etc. that you can identify from your numbers. Thanks. Yeah, you know, and by the way, not just in this current quote-unquote recession or concern for recession. Historically, we've always seen some like within fresh protein, we've always seen when there's a recession whether it was 99.00 or 09, you know, 08 or 0910.

Sales penetration.

And this year at the end of the quarter was 120 basis points so still.

Over.

Over a full percentage point Delta and sales penetration. If you go back over the last 10 years. My guess is that on a year over year basis, maybe we've gone from I'm guessing 22, or three to 25 or 6%. So call. It 300 basis points over 10 years or eight years, So 30 to 50 basis.

Speaker 1: We would see some sales penetration shift from beef to poultry to pork. We've seen some of that now. I think anecdotally I heard a few months ago from our head of food and sundries buyer that we saw some switch even to some canned products.

Points versus 120 to 150 in the last couple of quarters. So, yes that would again and at least anecdotally suggest that we've seen.

People looking for.

Better bargains, we tried to correct people when they said it was it was it.

Speaker 1: on canned chicken and canned tuna and things like that. But on the KS side, we've also seen that. I think last quarter I mentioned that a year over year basis was 150 basis point increase in private label sales penetration. And this year at the end of the quarter is 120 basis points. So still.

Downgrading, because our view is an upgrade when they went to correct with signature.

Got it thank you very much.

Your next question comes from the line of Karen short with Credit Suisse. Your line is open.

Yeah.

Hey, Thanks, very much good to talk to you.

Speaker 1: over a full percentage point delta in sales penetration. If you go back over the last 10 years, my guess is that on a year-over-year basis, maybe we've gone from, I'm guessing, 22 or 23 to 25 or 6 percent. So call it 300 basis points over 10 years or 8 years.

Two questions one is Europe .

Our pretax margin is one of the highest that I think I've seen in the model like I'm not even sure I could go back to when it was as high as it was so I'm curious if you could just make some <unk>.

Our commentary on that and then the second question I had was.

Speaker 1: So you know 30 to 50 basis points versus 120 and 150 in the last couple quarters. So yeah that would again and at least anecdotally suggest that we've seen people looking for better bargains. We try to correct people when they said it was a downgrading because our view is an upgrade when they went to curriculum signature.

Not that we're necessarily going into a deflationary environment in food, but if we were to go into a deflationary environment and food.

What would be the deleverage you would see on the EBIT line on that front.

Well.

And we will Miss device, even could think of a number off top my head here.

Speaker 2: Got it. Thank you very much. Your next question comes from the line of Karen Short with Credit Suisse. Your line is open.

In our view.

First of all deflation will be the first out there lowering prices with it and.

Speaker 5: Hey, thanks very much. Good to talk to you. Two questions. One is your pre-tax margin is one of the highest that I think I've seen in the model. Like, I'm not even sure I could go back to when it was as high as it was. So I'm curious if you could just make some color or commentary on that. And then the second question I had was...

I'd like to think that we could drive business with it.

The other thing as you look at even something like gasoline.

I think all retailers out there that have gasoline operations has in the last few years reflected higher profitability from gas in our view, we have higher profitability and we're still we have the most extreme savings versus everybody else. So we've been able to make a little more per gallon because others have decided to make more than a little more.

Speaker 5: not that we're necessarily going into a deflationary environment in food, but if we were to go into deflationary environment in food, what would be the deleverage you would see on the EBIT line on that front?

And I think the hope that same thing holds true elsewhere, when we looked at our competitive price shops against our direct club competitors against others on key items like fresh with supermarkets.

Speaker 1: Well, I'd read the rest of advice, even could think of a number off the top of my head here. You know, in our view, first of all, deflation will be the first out there, you know, lowering prices with it. And we I'd like to think that we could drive business with it. The other thing is, look at even something like gasoline.

Again those are those.

Price gaps between us and our competition have not changed they are still as strong as we feel they should be and.

No.

Again, it's hard to say what.

Your comment about some.

Some of the highest pre tax margins, let's face it I remember looking at it even like SG&A, which was up year over year of course.

Speaker 1: I think all retailers out there that have gasoline operations have in the last few years reflected higher profitability from gas. In our view, we have higher profitability and we're still, we have the most extreme savings versus everybody else. So we've been able to make a little more per gallon because others have decided to make more than a little more.

If you go back.

Pre COVID-19 I think our SG&A on a reported basis was had a tenant in front of it as like 10, one or 10, 8% and our viewers could even get it ever get it below 10, and with Covid and Crazy sales for two years, we benefit of course more than we were detrimental by Covid.

And many of our categories and and.

Speaker 1: And I think that same thing holds true elsewhere. When we look at our competitive price shops against our direct club competitors, and against others on key items like fresh with supermarkets, again, those price gaps between us and our competition..

We got down below nine and of course normalize it's still better than it was.

And margins are still better than they were so I think some of it is sustainable.

Wages are not going to go down. The question is will they continue to go up again, we're going to be ahead of that too in terms of wanting to make sure. We take care of our employees, but lets assume that a big chunk of that is.

Speaker 1: have not changed. They're still as strong as we feel that they should be. And so again it's hard to say what you know your comment about some of the highest pretext margins let's face it I remember looking at it even like SG&A which was up here over here of course if you go back

Overall inflation subsides, a little bit I think we'll see a little less wage pressure, but look as you know Karen with US. It's top line sales, mostly and the biggest thing can affect anything I think we've shown that even with some lesser topline sales we've been able to pull the lever is in a way that still allows us to drive.

Speaker 1: Pre-COVID, I think our SG&A on a reported basis had a 10 in front of it. It was like 10.1 or 10.0%, and our viewers could even get it below 10. And with COVID and crazy sales for two years, we benefit, of course, more than we were detrimented by COVID in many of our categories. And

Bottom line, and we will continue to be pragmatic about it but.

Have to wait and see.

Sorry, just to follow up on that so is there any way to frame what acts gas ex gas margins ex fuel prices like what delta and sales.

Speaker 1: we got down below nine and of course normalized it's still better than it was and margins are still better than they were. So I think some of it is sustainable. You know wages are not going to go down. The question is will they continue to go up? Again we're going to be ahead of that too in terms of wanting to make sure we take care of our employees.

Results in a delta and Ebert.

Is there any way it's hard to say.

Not really I mean, we used to.

Look at.

Almost like the old way equals an extra speed model.

Based on incremental sales, what's the variable rate of expenses in a warehouse.

Our collective view this goes back several years, but our collective view was as you need it somewhere around four and a half where there was four or five but of a comp number to have flat SG&A or flat expenses at the warehouse.

Speaker 1: lesser top line sales, we've been able to pull the levers in a way that still allows us to drive bottom line and we'll continue to be pragmatic about it but we'll have to wait and see.

Certainly taking the weakness right now in big ticket items that are and then taking the weakness of gas deflation those things impact that SG&A percentage more than anything.

Speaker 5: Sorry, just to follow up on that. So is there any way to frame what X gas, X gas margins, X?

When I look every month at our budget meetings when the operators report on on Labor productivity as an example in fresh we're still improving and the.

Speaker 5: fuel prices like what Delta in sales would result in a Delta and EBIT.

3% to 6% labor productivity and pounds of protein processing.

Speaker 1: Is there any way to say that? Well, it's hard to say. Not really. I mean, we used to...

Pork poultry and beef meat through the system.

Speaker 1: you look at almost like the old Y equals and X plus B model, based on incremental sales, what's the variable rate of expenses in a warehouse. And in our collective view, this goes back several years, but our collective view was is you needed somewhere around four and a half, whether it was four or five, but.

When we look at front end labor.

Warehouse labor not the ancillary businesses or the fresh foods or anything but labor hours, we've shown labor productivity now in the last year.

With slower.

Slowing of sales and with three unusual.

Speaker 1: of a comp number to have flat SG&A or flat expenses at the warehouse. You know, certainly taking the weakness right now in big ticket items, and then taking the weakness of gas deflation, those things impact that SG&A percentage more than anything. When I look every month at our budget meetings, when the operators report on

Additional wage increases.

That's going to still show a labor present number higher as a percent of sales, which is our single biggest SG&A item bigger than other things, but look at the end of the day, we go again.

We're still a top line company and our view that will meant all things, we'd like to see I'm sure we'd like to see something.

Pre inflation back in the 5% to seven or eight range, but let's get from where we are now to three and four and we'll go from there.

Speaker 1: labor productivity is an example and fresh. We're still improving in the three to six percent labor productivity in pounds of protein, you know, processing pork poultry and beef meat through the system. When we look at front-end labor or you know warehouse labor not the ancillary business.

Okay I understand now the good news also is if I look back the last.

This is the second quarter that we've seen that discussion of of <unk>.

Lower sales of big ticket discretionary items.

It started actually I think a little bit in the quarter prior to that not the entire quarter, just a little bit in there. So if you will there's if.

All things being equal we'd be comparing against easier compares.

Six months from now.

But hopefully we can do them on our own as well.

Speaker 1: number higher as a percent of sales which is our single biggest SG&A item bigger than other things. But look at the end of the day we're still a top-line company in our view that will mend all things. We'd like to see I'm sure we'd like to see something

No that makes sense. Thanks, so much.

Your next question comes from the line of John <unk> with Guggenheim Securities. Your line is open.

So Richard core on core food and sundries or non food were up right. So.

Speaker 1: pre-inflation back in the five to seven or eight range. But let's get from where we are now to three and four. And we'll go from there.

Kind of a two part on core and core one what drove that was that predominantly mix.

Speaker 1: Okay, understood. Now the good news also is, if I look back, the last, well, this is the second quarter that we've seen that discussion of lower sales of big ticket discretionary items, it started actually I think a little bit in the quarter prior to that not the entire quarter, just a little bit in there.

And then secondly, fresh food was down, whereas fresh food versus 19 and.

And are we kind of getting to the point, where those that that erosion is going to.

Stop Brian we're pretty close to 19.

Look fresh foods are still up year over year on margins.

Versus 19, right fresh foods margins are up versus <unk> 19.

Speaker 1: So if you will, if all things being equal, we'll be comparing against easier compares six months from now. But hopefully, we can do a little on our own as well. No, that makes sense. Thanks so much.

It went way up I mean, I think a lot of them and I had a little cheat sheet.

Yes, if I look back at just fresh foods.

If I go back to 'twenty, one we had a couple of quarters, where fresh foods margins were up two and 300 percentage two or 300 basis points year over year in the quarter by the end of 'twenty. One this is near the end of it.

Speaker 4: Your next question comes from the line of John Heimbuckel with Guggenheim Securities. Your line is open. So Richard, core on core, food and sundries and non-food were up, right? So it was kind of a two-part on core on core. What drove that? Was that predominantly mixed?

The Atlanta is lapping that craziness that crazy goodness, we were down 190 basis points and for all of 'twenty. Two we were down anywhere from 50 to 120 basis points on a year over year basis, some of that compared to those plus two and 300 basis point numbers. This year were down again versus last year versus last year and down but down versus.

Speaker 3: And then secondly, fresh food was down. You know, where is fresh food versus 19? And are we kind of getting to the point where those, that erosion is going to stop, right? Because we're pretty close to 19.

That giant increase in fiscal 'twenty, one when I look at where our food gross margin is today in Q3 versus pre Covid, we're still up.

Speaker 1: Yeah, look, fresh foods are still up. You're over here on margins? No, very.

Speaker 1: versus 19 right fresh-foods margins are up versus 19

Okay.

Speaker 1: It went way up. I mean, I think, hold on a minute, I have a little cheat sheet. Yeah. If I look back at Just Fresh Foods.

But the other the other categories that were up Ryan is that predominantly mix private brand unless a big ticket.

Yeah, I think it is mix some of the non food strength as I mentioned I think.

If I go back to 21, we had a couple of quarters where fresh foods margins were up two and three hundred basis points year over year in the quarter. By the end of 21, this is near the end of 21, this is near the end of 21.

Apparel was one of them apparel has a strong margin apparel has a strong margin relative to all of our departments anyway.

And major majors has a weak margin generally anyway, and then of course lowered penetration of that.

This is lapping that craziness, that crazy goodness. We were down 190 basis points. And for all of 22, we were down anywhere from 50 to 120 basis points on a year-over-year basis. Some of that compared to those plus two and 300 basis point numbers. This year, we're down again versus last year, but down versus that giant increase in fiscal 2021.

Alright on free trade is by the way freight has helped too, particularly on big ticket items furniture, the white goods.

Exercise equipment things like that.

And then secondly, where are we on the personal personalization journey right because I know you've done more data analytics in the last couple of years.

When I look at where our food gross margin is today in Q3 versus pre-COVID, we're still up. Okay, but the other categories that we're up, right, is that predominantly mixed, private brand and less big ticket.

You've got the loyalty program right. So when you think about wallet share in.

Targeting promotions and E mails, and so forth it looks like a huge opportunity.

Where are we on that.

Sure by the way one other question that we've gotten a couple of times of late because of some of the companies out there and reported much higher shrink our shrink is intact, we haven't seen any major change in shrinkage.

I think it's mixed. Some of the non-food strength, as I mentioned, I threw out apparel as one of them. Apparel has a strong margin relative to all of our departments anyway.

It fluctuated a couple three basis points up.

And majors has a weak margin generally anyway, and then of course lower penetration of that. All right. By the way, fray does help too, particularly on big ticket items that you know the furniture, the white goods, exercise equipment, things like that.

Before COVID-19 as we rolled out.

Check out and since then it's come back down a little bit and so it's been a very tight range and so we've been fortunate in that regard in terms of where we are and personalization for those of you on the call that have known me forever I, there's probably four years ago that we talked about sometime soon we'll do targeting and via after that do personalization well where.

And then secondly, where are we on the personalization journey? Because I know you've done more data analytics in the last couple of years. You've got the old loyalty program. So when you think about wallet share and

Still in the early innings.

But.

What I'd like to tell you and I think I mentioned this on the on the on the last quarter's call.

you know, targeting promotions and emails and so forth. It looks like a huge opportunity.

Yes.

Just under a year ago, we hired a new VP of digital digital transformation. If you will both in E com and mobile sites and applications.

You know, you know, where are we on that? Sure, by the way one other question that we've gotten a couple of times of late because of some of the Companies out there reported much higher shrink. Our shrink is intact. We haven't seen any major change in shrinkage You know it fluctuated a couple three basis points up.

That complemented three other outside Vps, we hired.

One of which was in the data analytics area and we've really over the last six to nine months began a two year roadmap to two.

really before COVID as we rolled out self-checkout. And since then it's come back down a little bit. And so it's been a very tight range. And so we've been fortunate in that regard. And in terms of where we are in personalization, for those of you on the call that have known me forever, I was probably four years ago that we talked about, sometime soon we'll do targeting and after that do personalization.

To improve the re platform our primary E Commerce web site and the same goes for our mobile apps and mobile site.

Working of course with again with data analytics people the architect people as well as the business users.

We're currently building and dramatically increasing the number of engineering capabilities that we have and we're on our way, but I'd say we are in the early innings.

Well, we're still in the early innings, but I guess what I'd like to tell you, and I think I mentioned this on the last quarter's call, just under a year ago we hired a new VP of digital transformation, if you will, both in e-comm and mobile sites and applications.

First order of business to have which.

Which we know we feel we've gotten to a much better clean data site.

We're still sending you too many emails a week that don't pertain specifically to what you do but I think youre going to see incremental changes and I'll be able to hopefully report more on that at the next quarterly call.

Just in the last three months as an example, we've had three small releases to our mobile app that are improvements of it and we are now on plans to have.

That complemented three other outside VPs we hired, one of which was in the data analytics area. And we've really over the last six to nine months began a two-year roadmap to improve our platform, our primary e-commerce website, and the same goes for our mobile apps and mobile site. Working, of course, again with data analytics people, the architect people, as well as the business users.

Small improvements in that App each month for the several months going forward and so you really.

You know you've heard me say for the past couple of years that we're in the early innings I'll repeat that we are but we actually got a I think a good game plan and you'll see more to that over the future a little longer than we had hoped to do some of this stuff, but I think we're on our way in that regard.

Okay. Thank you.

Your next.

Comes from the line of Oliver Chen with TD Cowen Your line is open.

Hi, Richard when you think about household income what kind of trends or anything in terms of your customers and people are trading in the U Costco at large and then the big ticket item question did the what's your what are your thoughts on how you are planning inventories there the compares ease.

don't pertain specifically to what you do. But I think you're going to see incremental changes. And I'll be able to hopefully report more on that at the next quarterly call. And just in the last three months, as an example, we've had three small releases to our mobile app that are improvements of it. And we're now on plans to have

Do you expect improvement in.

Within big ticket any any color in terms of how that May proceed sequentially sure. Thanks.

small improvements in that app each month for the several months going forward. And so you really, as you know, you've heard me say for the past couple years that we're in the early innings. I'll repeat that, we are but we actually got a I think a good game plan and you'll see more to that over the future. A little longer than we had hoped to do some of this stuff, but I think we're on our way in that regard. Yeah.

improvements in that app each month for the several months going forward. And so you know you really you know you've heard me say for the past couple years that we're in the early innings. I'll repeat that we are but we actually got I think a good game plan and you'll see more to that over the future. A little longer than we had hoped to do some of this stuff but I think we're on our way in that regard. Okay thank you.

Our annual household income has actually gone up a little but I think thats more to do with wage increases than anything we still over index to higher end people higher and income people and so that's still there as it relates to our inventories again, if you'd asked me six months ago.

In fact, it was I think it was Q3 and Q1 Q.

Q4, and Q1, where year over year inventories were up 26%.

Your next question comes from the line of Oliver Chen with TD Cowen. Your line is open. Hi, Richard. When you think about household income, what kind of trends are you seeing in terms of your customers and people trading in the EU, Costco at large? And then the big ticket item question, what are your thoughts on how you're planning inventories there? As the comparison ease, do you expect improvement within big ticket, any color in terms of how that may?

As was our competitors everybody else a lot of that has to do with one.

People, who had enough big ticket items, but also just the terrible supply chain challenges that we all had.

And since then like others, we've shown as a reduction in that dramatically.

And that's good we feel pretty good about where we stand right now.

Some of you have noted and called US back again 6543 months ago, we had a lot of promotional things going on if you bought three or more <unk> thousand dollars of these 10 items and they were all different patio items or different in store furniture items.

may proceed sequentially. Thanks. Our annual household income has actually gone up a little but I think that's more to do with wage increases than anything. We still over-index to higher-end people, higher-end income people and so that's still there. As it relates to our inventories, you know, again if you'd asked me six months ago when in fact it was I think it was Q3 and Q1.

Is it 3000, where you got a 500 dollar cash card an already great pricing and that was a lot of our promotional money markdown money to get our inventories back in line, particularly on things, where we were over inventory because of the supply chain delays.

Q4 and Q1 where year-over-year inventories were up 26%, as was our competitors and everybody else. A lot of that had to do with, one, some people had enough big ticket items, but also just the terrible supply chain challenges that we all had. And since then, like others, we've shown a reduction in that dramatically.

And then on some examples.

I think air conditioners might be an example, because of the supply change last summer, we did great in selling through fans and air conditioners, but these are not exact numbers, but let's say, we plan to sell $500 million of it.

2025% of it got here after the summer because of the supply chain challenges. There is no need to mark those down to try to get rid of them in September October we held them and we're selling through them now and thats not an issue at all so.

and that's good. We feel pretty good about where we stand right now. Some of you have noted and called us on back again six, five, four, three months ago we had a lot of promotional things going on if you bought three or more thousand dollars of these ten items and they were all like you know different patio items or different in-store furniture items. You know you if you did three thousand or more you got a $500 cash card on already great price.

And talking to flooding Domino, our head of merchandising and in her non food people.

We feel pretty good about where we are both on existing inventory levels of what we have in there and as well as what we've committed to going forward for upcoming seasons, notably.

Back to school and Christmas.

And things like that.

Okay, and Richard you've made a lot of great strides in Asia, and China and other regions.

I would love just some highlights in terms of what's ahead of them.

Back half there.

And the second question I'm not connected consumer experience between digital and physical are there.

air conditioners, but these are not exact numbers, but let's say we plan to sell 500 million of it. Easily 20-25% of it got here after the summer because of supply chain challenges. There's no need to mark those down to try to get rid of them in September or October . We held them and we're selling through them now and that's not an issue at all. So in the meantime, I'm looking to Claudine Adamo, our head of...

Evolved thoughts in terms of both us and curbside and what are your members want and delivering you know the ultimate convenience.

Sure well first of all in terms of expansion outside of the United States.

If you look at just even this year at a 23 I think it was what 13 13 intent, so 60 ish, 60% to 65%.

And 60 in the U S, Canada, which combined is one because it's it's a.

Well saturated, but we're still opening a bunch of units there and.

Our oldest areas.

I see that over the next five years going from 65%, 35% or 60 40 to at least 50 50, if not trending a little bit towards outside the U S and Canada now that again is the same answer I would've given you six or seven years ago for now and I think that's a function of one having more opportunities every day than we thought we had before in the USA.

Okay, and Richard, you've made a lot of great strides in Asia and China and other regions. I'd love to get some highlights in terms of what's ahead for the back half there. And a second question, and that connected consumer experience between digital and physical, are there involved thoughts in terms of BOPIS and curbside and...

And there's plenty of opportunities going forward elsewhere.

what your members want and delivering the ultimate convenience. Thanks. Sure, well first of all in terms of expansion outside the United States, if you look at just even this year at a 23 I think it was what 13 and 10 so 60 ish 60 65 percent.

But I think youre still going to see us open in Korea, Taiwan.

Unit this year on a base of somewhere in the mid to high teens in Japan more than a year to year on a base in the low thirties.

A unit a year in Australia, not exactly a year each year, maybe it was one year, none and then too but in Australia, where we've got 14 I believe.

in the US-Canada, which I combined as one because it's well saturated, but we're still opening a bunch of units there, and it's our oldest areas. I see that over the next five years going from 65-35 or 60-40 to at least 50-50 if not...

And.

In Europe .

Imminently most of our units are in the UK, where we've gotten the low thirties, we're still going to open one or two year, they're one year prior to the year and we've opened a few others that we opened our fourth in Spain, and we now have two in France, and <unk> in Iceland in Sweden, So little growth there, but certainly in China.

trending a little bit towards outside the US and Canada. Now that again is the same answer I would have given you six, seven years ago for now and I think that's a function of one having more opportunities every day than we thought we had before in the US and Canada and there's plenty of opportunities going forward elsewhere. You're gonna, but I think you're still gonna see us open in Korea, Taiwan a unit-ish a year on a base of somewhere in the mid to high teens.

Anna I mean, China, the Big story this year for us as one of the stories is that we opened our first unit in China 354 years ago, our second a year and a half ago.

Our third last December .

Four.

In Japan, more than a unit a year on a base in the low 30s. A unit a year in Australia, not exactly a year each year, maybe it's one year, none, and then two. But in Australia, we've got 14, I believe. In Europe , we're dominantly...

Three more this year.

We're going to be at 6% at the end of this year.

This calendar year I'm, sorry, this calendar year to more of this fiscal year and then one more in the fall. So there's certainly more growth there, but that's not a lot of growth relative to some companies that have tried to go in and open 20 somewhere or something but we feel good about how we do that but we think there's plenty on if you look at the bottom line is if we're opening 2000.

<unk> three.

3% to 25, a year, we'd like to be a little 25, plus a year for the next five years and somewhere closer to 30 year in year six through 10 that would make us feel quite good.

So a little growth there, but certainly in China. I mean China the big story this year for us as one of the stories is that you know we opened our first unit in China three and a half four years ago, our second a year and a half ago, our third last December and three more this year.

And we feel very comfortable that we can do that at this juncture.

In terms of curbside, we're not very.

Thrilled about or maybe a little stubborn about it.

We tried it in a few locations a year ago.

Successfully proved ourselves we don't like it.

We'll be at six at the end of this year.

And we want you to come in and now we do have lockers from some big ticket non food items.

this calendar year, I'm sorry, this calendar year. Two more this fiscal year and then one more in the fall. So there's certainly more growth there but you know that's not a lot of growth relative to some companies that try to go in and open 20 somewhere of something. But we feel good about how we do that but we think there's plenty on, you know, if you look at the bottom line is if we're opening 20.

Interestingly when people do that they come in and over half of them shop, while they're in the location so and.

One of our challenges, which is a good quality problem to have is an average volume per layer warehouses continue to grown way more than we had thought a few years ago and we have last year we had.

three to twenty-five a year. We'd like to be a little twenty-five plus a year for the next five years and somewhere close to thirty a year in year six through ten. That would make us feel quite good and we feel very comfortable that we can do that at this juncture.

Over 150 locations doing over $300 million I think over 2007 or eight doing over $400 million in 2006, and so we've had to open more units and so we continue to look at a lot of places even in the U S and we don't get a lot of asks for it honestly now we're not asking a lot about it either.

In terms of curbside, we're not very thrilled about it or maybe a little stubborn about it. You know, we tried it in a few locations a year ago and successfully proved to ourselves we don't like it. And we want you to come in. And now we do have lockers from big-ticket non-food items.

So we don't get a lot of ask for it so I don't see that being as a big thing one of the things that we will be doing though is even online.

When you go to look at it online product if were sold into warehouse near you based on where you've shopped.

In the next several months plus my fingers.

Interestingly, when people do that, they come in and over half of them shop while they're in the location. So, one of our challenges, which is a good quality problem to have, is our average volume per warehouse has continued to grow way more than we had thought a few years ago. And we have, last year we had...

You will be able to say you can go ahead and get it in store.

Kirkland Issaquah location, which also has it in stock right now and in some cases.

Yes same day grocery you know of course, we already have with delivery with mostly within described we partnered with a couple of other people as well, but they are the big kahuna there both in the U S and Canada, and we do second and we do two day dry.

over 150 locations doing over 300 million, I think over 27 or 8 doing over 400 million and and and and 26 and so we've had to open more units and so we continue to look at a lot of places even in the US and and we don't get a lot of ask for it honestly. Now we're not asking a lot about it either so we don't get a lot of ask for it so I don't see that being as a big thing. One of the things that we will be doing though is even online.

Yes by the way in that number which is continuing to erode as not reporting in our income numbers is that that's in that case their employee or a contract employee comes in shops brings it up and takes it to you. So that's what we consider a warehouse sale.

Got it very helpful. Thanks, Richard.

When you go to look at an online product, if we're selling in the warehouse near you, based on where you've shopped, in the next several months, cross my fingers, you will be able to say, you can go ahead and get it in store at the Kirkland, at the Issaquah location, which also has it in stock right now. In some cases, you can think of it as what holds some value in the cost gap that'sANE functioning. Through most we do have to say we look to our customers to see how they affect the requirements and that kind of thing.

Your next question comes from the line of Scott Musket with RBC capital. Your line is open.

Hey, Thanks, Richard Thanks for taking the question so I wanted to.

Talk about competition, a little bit, but first shorter term and then maybe I missed the answer to this or that.

Was asked promotional activities now are they someone.

Yeah, Oh same day grocery, you know, of course we already have with delivery with mostly with Instacart We we partner with a couple of other people as well But they're the big kahuna there both in the US and Canada and and we do second and we do two day dry

Do you expect you said, they really kind of ramped up is that what youre seeing as well.

Yes, it is higher than it was.

Now mind you it was a lot lower for a couple of years because of the supply chain challenges I mean every TV, we could sell every whatever we could not particularly on the non Jose we could sell every paper. Good we could sell we actually took some items out of like the MBA mailers on the.

Yeah, by the way, that number which is continuing to grow is not reporting in our income numbers. In that case, their employee or contract employee comes in, shops, rings it up, and takes it to you. That's what we consider a warehouse sale.

On the sundry side, because when there were shortages like paper goods and why why promoted when first of all we've got to limit <unk>.

Thanks, Richard. Your next question comes from the line of Scott Mushkin with R5 Capital. Your line is open.

Customer and so some of those comparisons is there more theres more versus.

Hey, thanks, Richard, for taking the question. So I wanted to talk about competition a little bit. But first, shorter term, and maybe I missed the answer to this, or it was asked, promotional activities now, are they, someone, one of your competitors said they really kind of ramped up. Is that what you're seeing as well?

A lot less for a couple of years as well, but yes, we are seeing more now and is that purely from the vendors or is that some activities you're seeing from retailers themselves.

Yeah.

Well you mean.

Well.

I can speak for us.

Yes.

Yes, it's higher than it was. Now mind you, it was a lot lower for a couple years because of supply chain challenges. I mean every TV we could sell, every whatever we could, particularly on the non-p we actually took some items out of like the nbn mailers on the

Well it certainly when we see something that.

The retailers are doing we want to make sure we ask our supplier they cant tell us, but we are putting the pressure on to know that we're seeing some unusual things out there.

Loan behold, sometimes we see better deals.

The following day to us so we just got to stay on top of that but in terms of.

the sundry side because one there were shortages like paper goods and you know why promote it when first of all we've got to limit one per customer and so some of those comparisons is there more versus a lot less for a couple of years as well. But yes we are seeing more now.

I think.

As I said, a little earlier I think we've got a lot of levers to pull certainly all retailers that of gas right. Now is continue to be help with that.

Unusual things like fresh has been relatively strong and so we feel good about that.

Things like even like apparel.

And is that purely from the vendors or is that some activities you're seeing from retailers themselves? Well, you mean, well, I can speak for us.

Which is close to an $8 billion business for us worldwide $7 plus billion dollar business worldwide. That's been strong. So that's not promotional that's just better margins in some cases.

Okay. So then I wanted to talk a little bit more long term about competition.

Yeah, I mean, certainly when we see something that other retailers are doing, we want to make sure, you know, we ask our supplier, maybe they can't tell us, but we're putting the pressure on to know that we're seeing some unusual things out there. And lo and behold, sometimes we see better deals the following day to us. So we just got to stay on top of that. In terms of.

Been a long time I think what we've seen.

Openings from non Costco people.

You are going to see that over the next year or two three.

The other competitors also they tout their omnichannel and their technology about just scanning it and growing it.

You know, I think, as I said a little earlier, I think we've got a lot of levers to pull. Certainly all retailers that have gas right now have continued to be helped with that. You know, unusual things like fresh has been relatively strong and so we feel good about that. You know, things like apparel, which is a...

Give us an overall.

Your your view of the competitive environment over the next one to three years and how Costco fits and whether you think that some of those technologies.

E Comm stuff are competitive advantages for people that are are competing against you.

Well I think we're fortunate in one way that first and foremost the biggest value attribute or customer attraction attribute is the best quality goods at the lowest price and we dwarf everybody in that regard I mean, our average markup on goods is in the low double digits, 12%, 13%.

close to an $8 billion business for us worldwide, seven plus billion dollar business worldwide. That's been strong. So that's not promotional, that's just better margins in some cases. Okay, so then I wanted to talk a little bit more long term about competition. It's been a long time, I think, that we've seen.

You know what they are at other traditional retailers anywhere from 25 to $35 to 100%. So we have that extreme benefit to start with.

as many openings from non-Costco people. You are going to see that over the next year, two, three. The other competitors also, you know, they tout their omni-channel and their technology about, you know, just scanning it and going it. Just give us an overall, you know, your view of the competitive environment over the next one to three years.

Arguably we have been somewhat simple.

Our own arrogant way over the years one of the things we've done as I mentioned earlier.

A question that <unk>.

John I think head on.

Forget about personalization, even target target marketing I view it now as some.

and how Costco fits and whether you think that some of those technologies and ecoms stuff are competitive advantages for people that are competing against you. Well I think we're fortunate one way that first and foremost the biggest value attribute or customer attraction attribute is the best quality goods at the lowest price.

Low hanging fruit that we're finally get around to do over the next couple of years, so that'll be a positive to us relative to others in terms of the benefit of buying online and picking up in store and things like that.

We frankly view that it is more costly than it is beneficial and.

And we dwarf everybody in that regard. I mean, our average markup on goods is in the low double digits, you know, 12, 13%. You know what they are at other traditional retailers, anywhere from 25 to 35 to 100%. So we have that extreme benefit to start with. Arguably we've been somewhat simple in our own arrogant way over the years.

Again, we haven't been asked a lot about it other than by analysts to who are responding and fairness to the the.

The different retailers that feel they have to do it many of them want to do it but there's a cost to doing that so we feel pretty good about driving business. We think we can do more we can certainly do more online.

Have some strategic goal to go from 8%, which is still a $20 billion business, but to go from 8% of sales to 16, but let's go from eight to nine nine to 10 10 to 11 over a certain period of time, and we think that with some of the things we're doing on that side we can.

One of the things we've done as I mentioned earlier on the question that John I think had and Even forget about personalization even target target marketing. I view it now is some Low hanging fruit that we're finally good around to do over the next couple of years So that'll be a positive to us relative to others

I think we've also done an incredible job.

Day in and day out on the merchandising side of bringing in more exciting items.

That's something that is focused on that I hear about it every budget meeting.

In terms of the benefit of buying online and picking up in store and things like that, we frankly view that as more costly than it is beneficial. And again, we haven't been asked a lot about it, other than by analysts who are responding in fairness to the different retailers that feel they have to do it. Many of them want to do it.

And every Monday morning meeting with.

Greg and run in a few other senior colleagues, including our merchandising head. So I think that's what's going to keep driving our business I think.

We are getting better on the technology side.

Playing from behind a little bit on that but I think we've finally got a game plan and some people that are helping build those areas up both from a marketing and advertising standpoint.

But there's a cost to doing that. So we feel pretty good about driving business. We think we can do more. We can certainly do more online We don't have some strategic goal to go from 8% which is still a 20 billion dollar business But to go from 8% of sales to 16 But let's go from 8 to 9, 9 to 10, 10 to 11 over a certain period of time

The advantage of the advertising dollars that are out there that we've done pretty well despite ourselves, but we know we can do a lot better and grabbing some of those dollars so and.

What will we use it for us to drive drive drive sales.

And we think that with some of the things we're doing on that side, we can. I think we've also done an incredible job day in and day out on the merchandising side of bringing in more exciting items. And that's something that is focused on that I hear about at every budget meeting. And every Monday morning meeting with Greg and Ron and a few other senior colleagues, including our merchandising head. So I think that's what's going to keep driving our business. I think we

And the club openings and I don't think you touched on that and then.

The big the Big Club opening thing is is we're on target I think if you asked over the last three years, there was a big down here because of the pressure of Covid, but fiscal 'twenty, one two and three I think we averaged around 23 net new units a year and 'twenty two 'twenty three.

I'd like to get above 25.

Each of the next five years and closer to 30 years six through 10, that's kind of the game plan and that really is a bottom up approach by each of the eight U S geographic regions. The two Canadian regions and other every other country region working with operations in our real estate Department.

We are getting better on the technology side, playing from behind a little bit on that, but I think we've finally got a game plan and some people that are helping build those areas up, both from a marketing and advertising standpoint, taking advantage of the advertising dollars that are out there that we've done pretty well despite ourselves, but we know we can do a lot better in grabbing some of those dollars. And what we'll use it for is to drive sales.

<unk>.

Which ones are likely and what is our priority and we feel pretty comfortable we've got a good.

Good.

The pipeline of pending openings for sure over the next three or four years and with.

In the club openings, I don't think you touched on that. And then thank you. The big club opening thing is we're on our target. I think if you last three years, there's a big down year because of the first year of COVID. But fiscal 21, 2, and 3, I think we average around 23 net new units a year. And 22, 23. We'd like to get above 25 over each of the next five years and closer to 30 year 6 through 10..

At equal level of comfort that we feel that we will continue to have plenty of opportunities to open units.

Thanks.

Your next question comes from the line of Paul <unk> with Citi. Your line is open.

Hey, Richard this Brandon Cheatham on for Paul I wanted to follow up on what you mentioned about the digital investments that you all are making.

It sounds like it's something a little eventually you might monetize partnering with your vendors how do you balance that with your view that you really want your members in your warehouse and how do you see that working kind of over the long term.

That's kind of the game plan. And that really is a bottom up approach by each of the eight US geographic regions, the two Canadian regions and every other country region, working with operations and our real estate department, kind of which ones are likely and what's our priority. And we feel pretty comfortable. We've got a good, you know, a good.

Well first of all as part of that monetizing a digital is in warehouse.

We've been very successful of moving the needle if you will on a holiday weekend with hot prices on <unk>.

pipeline of pending openings for sure over the next three or four years, and with an equal level of comfort that we feel that we'll continue to have plenty of opportunities to open units.

of pending openings for sure over the next three or four years, and with an equal level of comfort that we feel that we'll continue to have plenty of opportunities to open units. Thanks.

Strip steaks.

They are at the beginning of the season with the planting season with.

Green Green Green items.

And so I think.

Your next question comes from the line of Paul Legewes with Citi. Your line is open. Hey, Richard. This is Brian Giamon for Paul. I want to follow up on what you mentioned about the digital investments that you all are making.

It's just we're getting around to doing a better job of it and were bringing in people that.

They've done it before frankly, and that's even in membership marketing.

Ambulatory who heads up.

As you review membership marketing.

We're doing more things than we're doing she's doing more things today than we did even a year ago trying some things and again I think that our first order of business is to drive business in store, certainly driving online as well, but not to just replace what's in store and so I think again.

It sounds like it's something that eventually you might monetize, partnering with your vendors. How do you balance that with your view that you really want your members in your warehouse, and how do you see that working over the long term?

Well first of all, part of that monetizing of digital is in warehouse. We've been very successful of moving the needle, if you will, on a holiday weekend with hot prices on strip stakes or at the beginning of the season with the planting season with green items.

I tried to stay a little low key on this subject because we're not.

Yes, I hate to use the word this new strategic effort, but what we've learned over the last few years as everybody as a technology company today and Theres. Some things that we've been a little slow to doing and we know there's a lot of opportunity there to do some of the even basic things not have you get five emails a week that none of which relate specifically to you.

And so I think it's just we're getting around to doing a better job of it and we're bringing in people that have done it before frankly. And that's even in membership marketing. Sandy Torrey who heads up, senior VP of membership marketing, we're doing more things than we're doing. She's doing more things today than we did even a year ago.

If it was an email even just based on a couple of items you purchased in store that had a banner of items that you might be interested in you could literally double the click rate on them. So those are the kinds of things that bring in before.

trying some things. And again, I think that our first order of business is to drive business in store, certainly driving it online as well, but not to just replace what's in store. And so I think, you know, again...

We call catalyst VP hires in our it department over the last few years.

One is data analytics and one is digital and that's and it's not just to individuals'. It's the teams that they have built in short order. So we'll continue to do that and tell you more as we go along.

I try to stay a little low-key on this subject because we're not, I hate to use the word this new strategic effort, but what we've learned over the last few years is everybody is a technology company today, and there's some things that we have been a little slow to doing and we know there's a lot of opportunity there to do some of the even basic things.

Got it.

If I can follow up.

The membership side.

You mentioned membership marketing or are you seeing any difference in promotions from your competitors for their memberships.

How's that.

Not have you get five emails a week that none of which relate specifically to you If if it was an email even just based on a couple of items you purchased in store That had a banner of items that you might be interested in you could literally double the the click rate on them So we're those are the kind of things that bring in you know of the four

Informed what you all are doing and if there are any major change.

On promotions on membership.

Well, there's really no change I mean, we do a few promotional things each year, but the biggest thing we don't do is in any big way discount our membership now some of the promotional things that you may sign up for membership and you get a certain number of coupons related to stuff, but I don't want to go into that but you can look at our competitors and see what they do there is a lot more promotional activity.

What we call catalyst VP hires in our IT department over the last few years one is data analytics and one is digital and And and and that's it's not just two individuals. It's the teams that they have built in short order So we'll continue to do that and tell you more as we go along If I could follow up on the membership side

<unk> going on elsewhere.

And we're still getting as I mentioned on the call are year over year, 7% increase in new memberships with about a 3% and just under 3% increase in number of new warehouses. So we're still getting people who are indoor I think in fairness, that's been helped by Covid.

You mentioned membership marketing. Are you seeing any difference in promotions from your competitors for their memberships? How is that informed what you all are doing? Is there any major change on promotions on memberships from your competitors? Well, for us, there's really no change. I mean, we do a few promotional things each year.

We were one of the.

Warehouse clubs was a big cavernous place to come and get a lot of things.

And that certainly helped us I'd like to think we're pretty good at what we do and that's why more people are signing up and we're opening new units.

And driving more business that way, so, but really we have not done it.

If anything we've done a little less on the promotional side and membership we do a few promotional things each year, but not a lot.

But the biggest thing we don't do is in any big way discount our membership. Now some of the promotional things that you may sign up for membership and you get a certain number of coupons related to stuff, but I don't want to go into that, but you can look at our competitors and see what they do. There's a lot more promotional activity going on elsewhere. And we're still getting, as I mentioned on the call, a year over year 7% increase in new memberships.

Thank you.

I'm going to take I'm going to take.

Okay.

I'm going to take one more question.

Your next question comes from the line of <unk> Parikh with Oppenheimer <unk> co. Your line is open.

Good afternoon, and thanks for taking my question. So on China I was curious with the reopening of their how the how those locations are performing versus your expectations.

with about a 3%, just under a 3% increase in number of new warehouses. So we're still getting people in the door. I think in fairness, that's been helped by COVID. When we were one of the, we being warehouse clubs, was a big cavernous place to come and get a lot of things. And that certainly helped us. I'd like to think we're pretty good at what we do. And that's why more people are signing up and we're opening new units. And driving more business that way. But really, we have not done anything like that. And I think that's what we're doing. And I think that's what we're doing. And I think that's what we're doing.

They're doing great.

Sure.

And the story, we've been blessed by those those first openings that we have over there.

Needless to say we were impacted like.

Everybody over there during the during the shutdown and what have you.

We had some great video clips at our budget meetings here showing what we did to create care packages not only for our members, but for the neighborhoods around us and and.

We were told they were the best care packages of any of the big retailers. So that made us feel good.

Great and then maybe just one follow up question. So if you look at your bigger ticket categories consumer electronics et cetera, any sense at this point whether trends have bottomed or.

Just curious if youre trying to monitor whether we could see further softening some of these bigger ticket areas.

Line is opengood afternoon. Thanks for taking my question to n China. Was curious with the reopening and there how to how those locations are performing versus expectations.

I have one of my colleagues here on the merchandising side and she was.

To me softly, the negatives are getting better.

They do great. End of story. We've been blessed by those first openings that we have over there.

Thank you.

It's about seven seven or eight months ago, seven ish months ago. When we started to see the decline and so if nothing else, we'll be having an easier compare.

Needless to say, we were impacted like everybody over there during the shutdown and what have you. And we had some great video clips at our budget meetings here showing what we did to create care packages, not only for our members, but for the neighborhoods around us. And we were told they were the best care packages of any of the big retailers. So that made us feel good.

Five months, but certainly we've seen a little bit of improvement in the negatives.

Well, thank you everyone.

David Josh and I are around to answer questions. If you have any more which I'm sure you will have a good afternoon.

Great. And maybe just one follow-up question. As you look at your bigger ticket categories, consumer electronics, et cetera, any sense at this point whether trends have bottomed or – just curious if you think trends have bottomed or whether we could see further softening some of these bigger ticket areas?

This concludes today's conference call. Thank you for your participation you may now disconnect.

I have one of my colleagues here on the merchandising side and she was saying to me softly, the negatives are getting better. And again, it's about seven or eight months ago, seven-ish months ago when we started seeing the decline. So when she said, look I can do it, her voice just wasn't Ax existed, I was just listening

And so if nothing else, we'll be having an easier compare five months sense, but certainly we've seen a little bit of improvement in the negative.

Well, thank you everyone. David, Josh and I are around to answer questions if you have any more, which I'm sure you will. Have a good afternoon.

This concludes today's conference call. Thank you for your participation. You may now disconnect. Your questions if you have any more.