Q4 2024 Costco Wholesale Corp Earnings Call

Krista: Ladies and gentlemen, thank you for standing by my name is Krista and I will be your conference operator today. At this time, I would like to welcome everyone to the Costco wholesale corporation for its quarter 2020 for conference call.

Krista: All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session.

Krista: If you would like to ask a question, please press star 1 on your telephone keypad. And if you'd like to withdraw that question, again, press star 1. Thank you. I will now turn the conference over to Gary Millerchip Chief Financial Officer. Gary, the floor is yours.

Gary Millerchip: Good afternoon everyone, and thank you for joining Costco's fourth quarter of 2021 earnings call.

Speaker Change: I'd like to start by reminding you that these discussions will include forward-looking statements within the meaning of the private security investigation reform act of 1995.

Speaker Change: These statements involve risks and uncertainties that may cause actual events, results and or performance to differ materially from those indicated by such statements.

Speaker Change: 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 far with the SEC.

Speaker Change: Forward-looking statements speak only as other day they are made, and the company does not undertake to update these statements except as required by law.

Speaker Change: Comparable sales and comparable sales excluding impacts from changes in gasoline prices and foreign exchange are intended as supplemental information and are not a substitute for net sales presented in accordance with gap.

Speaker Change: Now, before we dive into our financial results for the quarter, I'm delighted to say that Ron Vachris is joining us for the call today. I'll now hand over to Ron for some opening comments.

Ron Vachris: Thank you, Gary, and good afternoon everyone. Thank you for joining us today. As we turn the page on fiscal year 2024, let me make a few comments on our progress during the year as a whole.

Ron Vachris: Throughout the fiscal year 2024, we continued to execute on our strategy of growing the top line through delivering the highest quality goods at the lowest possible price to our members.

Ron Vachris: As a management team, we continue to be incredibly proud of our 333,000 employees worldwide and the culture that they foster.

Ron Vachris: The consistency of our financial results is a reflection of the commitment of our entire team to member service and the cost for experience.

Ron Vachris: Most of these employees are led by our fantastic warehouse managers, who we view as executives in our company. Succession planning continues to be a key focal point for us, as we're continually working on identifying the future leaders of our company.

Ron Vachris: In fiscal year 24, we promoted 95 new warehouse managers, 85% of those promoted started at Costco as an hourly employee.

Ron Vachris: This promote from within culture and the long-term career it helps to build is core to who we are as a company, community member and retailer.

Ron Vachris: A few other highlights I'd like to mention, in fiscal 2024, we hit our target of 30 new warehouse openings.

Ron Vachris: This included one relocation and resulted in 29 net new buildings.

Ron Vachris: highlights included our first ever building in Maine, bringing us to 47 states, and our 600 US building in the clear of Wisconsin.

Ron Vachris: We also continue to see significant opportunities worldwide, and our fiscal 2025 plan has 12 of our plan 29 openings coming outside of the U.S. including our fifth building in Spain, which we've opened in there, there goes the two weeks ago.

Ron Vachris: With three of these warehouses being relocations, we expect to add 26 net new buildings in fiscal 25.

Ron Vachris: We continue to grow our e-commerce business in Costco logistics that's had a remarkable year.

Ron Vachris: Appliance is in furniture and big and bulky has led the way, and logistics delivered over 4.5 million items a shot of year, up 29% over the year prior.

Ron Vachris: The improvements in our item's shortment, delivery times, and scheduling functionality all enhance the member experience.

Ron Vachris: We have great momentum with this business and expect big and bulky items will be a key part of our continued progress with e-commerce in the coming year.

Ron Vachris: Turning to technology, we're starting to realize the benefits from the work that was done this past year. Members are very excited about being able to check warehouse inventory via the Costco app.

Ron Vachris: In the membership card scanners installed with the front doors have delivered on the goal of speeding up the checkout process. This has been very well received by our members.

Ron Vachris: More improvements are currently underway, which should further benefit our business both online and in our warehouses.

Ron Vachris: With that, I'll turn it back over to Gary to discuss the results for the quarter and I'll jump back on during Q&A to fields and questions.

Gary Millerchip: Thanks, Ron. In today's press release we reported operating results for the fourth quarter of fiscal 2024, the 16 weeks ended September 1st.

Gary Millerchip: As we did last quarter, we published a slide deck on our investor site under events and presentations with supplemental information to support today's press release.

Gary Millerchip: You might find it helpful to have this presentation in front of you as I walk through our results.

Gary Millerchip: Throughout this discussion, when we're comparing to last year's fourth quarter, the best way to normalize for the extra week is to multiply last year's results by 1617.

Gary Millerchip: Net income for the 16 weeks for quarter, came in at $2.354 billion, or $5.29 per diluted share, up from $2.16 billion, and $4.86 per diluted share in the 17 weeks for quarter last year.

Gary Millerchip: This year's results included a non-recurring net tax benefit of $63 million, or $14 per diluted share, related to a transfer pricing settlement and true ups of various tax reserves.

Speaker Change: reported net income was up 9% year over year, excluding this year's non-recurring tax benefit and normalised for the extra week, last year net income and earnings per diluted share were up 12.7% and 12.6% respectively.

Speaker Change: Net sales for the fourth quarter was $78.2 billion, an increase of 1% from $77.4 billion in the fourth quarter last year.

Speaker Change: A justing for the extra week last year, net sales would have been up 7.3%.

Speaker Change: The following comparable sales reflect comparable locations year over year and 16 comparable retail weeks.

Speaker Change: U.S. compounds were up 5.3% or 6.3% excluding gas deflation.

Speaker Change: Canada comp sales were up 5.5% or 7.9% excluding gas deflation and effects.

Speaker Change: And other international compounds were up 5.7% or 9.3% adjusted.

Speaker Change: This all led to total company come sales of plus 5.4% or plus 6.9% adjusted for gas deflation and effects.

Speaker Change: Finally, he commos comp sales are up 18.9% or 19.5% adjusted for FX

Speaker Change: In terms of Q4 comes sales metrics, foreign currencies relative to the U.S. dollar negatively impacted sales by approximately 0.9%. While gasoline price deflation negatively impacted sales by approximately 0.6%.

Speaker Change: traffic or shopping frequency increased 6.4% worldwide and 5.6% in the US.

Speaker Change: Our average transaction or ticket with negative 0.9% worldwide and negative 0.3% in the US.

Speaker Change: This includes the headwinds from gas deflation and effects. Adjusting for those items, ticket would have been positive 0.5% worldwide and positive 0.6% in the US.

Speaker Change: Moving down the income statement to membership fee income. We reported membership fee income of $1.512 billion and increase of $3 million or 0.2% on one less week year over year.

Speaker Change: FX, negatively impacted membership fee income by 0.9%. Excluding the impacts from the extra week last year, and FX, normalised membership fee income was up to 7.4%.

Speaker Change: In terms of renewal rates, a Q4 end, a U.S. and Canada renewal rate was 92.9%. Down one, 10% to the percent from Q3 end.

Speaker Change: This light decrease related to an online membership promotion that we ran for a short period in fiscal year 2023, which resulted in over 200,000 new sign-ups.

Speaker Change: As those members entered the renewal rate calculation during Q4 fiscal year 24, the lower renewal rates for that cohort, which is typical for digital promotions, have a negative impact on the overall U.S. renewal rate.

Speaker Change: Outside of those sign-ups, there were no meaningful changes in the US renewal rate.

Speaker Change: The worldwide rate came in at 90.5% of the same as Q3, with improvement internationally offsetting the flight negative in the U.S.

Speaker Change: We ended Q4 with 76.2 million paid household members of 7.3% versus last year and 136.8 million car holders of 7% year over year.

Speaker Change: About half of New Member Signups in fiscal year 2024 were under 40 years of age. This percentage has been growing since COVID and has lowered the average age of our member over the last few years.

Speaker Change: At Q4N, we have 35.4 million paid executive memberships of 9.6% versus last year.

Speaker Change: Executive members now represent 46.5% of paid members and 73.5% of worldwide sales.

Speaker Change: Turning to Gross Margin, our reported rate in the fourth quarter was higher year over year by 40 basis points.

Speaker Change: Coming in at 11% compared to 10.6% last year, and up 33 basis points excluding gas deflation.

Speaker Change: Call was lower by 5 basis points and lower by 11 basis points without gas deflation.

Speaker Change: In terms of core margins on their own sales, our core on core margins were higher by 9 basis points.

Speaker Change: and Celeri and other businesses grows margin with higher 44 basis points and higher 42 basis points excluding gas deflation.

Speaker Change: The thing creature over year was driven by gas and e-commerce.

Speaker Change: Ecommerce benefited from strong sales growth, item mix and fulfillment productivity.

Speaker Change: and gas margins benefited from some moderate tailwinds and laughing a slightly weaker quarter last year. But nothing as significant as the benefiting Q-1224 as a result of the volatility from world events in that quarter.

Speaker Change: 2% rewards were hired by 4 basis points or 3 basis points without gas deflation, reflecting higher sales penetration from our executive members.

Speaker Change: And lifeboat was a benefit of five basis points. We had an $8 million lifeboat credit in Q4 this year compared to a $30 million charge in Q4 last year.

Speaker Change: Moving to SGNA.

Speaker Change: Our reported SGNA rate in the fourth quarter was higher year over year by 8 basis points, coming in at 9.04%, compared to last year's 8.96%.

Speaker Change: SGNA was hired by two basis points adjusted for gas deflation.

Speaker Change: The operations component of SGNA was higher 4 basis points, but was flat excluding gas deflation.

Speaker Change: Hi, Iwagius went into effect for the last six weeks of the quarter in the U.S. and Canada, which was a headwind for the quarter of approximately four basis points.

Speaker Change: Investing in our employees remains a key part of our strategy and we will continue to focus on driving topline sales and improving productivity to mitigate the incremental costs.

Speaker Change: Central was hired by three basis points and two basis points of their gas deflation. Stock compensation was flat year over year and pre-opening was I01 basis points but flat with our gas deflation.

Speaker Change: Below the operating income line, interest expense was $49 million versus $56 million last year, reflecting $1 billion of debt paid down in the second week of Q4 this year.

Speaker Change: Interest income for the quarter was $138 million versus $21 million last year. Primarily due to the 6.7 billion special dividend paid in January 2024.

Speaker Change: Interest income will continue to be a headwind in the first half of this year due to lower year over year cash balances and lower interest rates.

Speaker Change: FX and other was an $18 million loss this year versus a $37 million gain last year. This was primarily due to foreign exchange.

Speaker Change: In terms of income taxes, tax rating Q4 was 24.4 per cent compared to 27.1 per cent in Q4 last year.

Speaker Change: As mentioned earlier, this year's rate benefited from $63 million of net tax-discreet items.

Speaker Change: I just did for this benefit, the tax rate for the quarter would have been 26.4%.

Speaker Change: Turning now to some key items of note in the quarter.

Speaker Change: We opened 14 new warehouses in the fourth quarter, 10 in the US, 2 in Japan and 1 each in Korea and China

Speaker Change: Capital expenditure in Q4 was approximately $1.58 billion, bringing the total year spend to $4.71 billion.

Speaker Change: Taking a deeper look into core merchandising sales, once again, non-fused led the way with the highest comparable sales in Q4.

Speaker Change: Our buyers have done a fantastic job finding new and exciting items at great values. Gold and jewelry, gift cards, toys and seasonal, home furnishings, tyres and housewares, all were up double digits in the quarter.

Speaker Change: Health and beauty aids also performed well, as we have expanded and elevated that category with new high-end skews both online and in warehouse, including a sorted luxury fragrances at a 30 to 70% value to retail.

Speaker Change: A cross-the-fresh department, we saw high single digit growth, as our continued focus on value is resonating with our members.

Speaker Change: An example of this in the meat department is our Kirkland signature bone-must chicken tenderloins, where we lowered the price 13% and saw a 21% lift in pound sold.

Speaker Change: In food and sundries, the introduction of more international food products, such as paneer cheese, Punjabi cookies and fried tofu kimbap are resonating extremely well with our members.

Speaker Change: We're also delivering great value by adding some new Kirkland signature items, such as our KS Organic Golden Maple syrup and KS Erisol whip cream.

Speaker Change: Curve on the signature of a significant member value compared to the national brands, and continues to grow at a faster pace than our business as a whole.

Speaker Change: Our goal is always to be the first to lower prices where we see the opportunities to do so. And just a few examples this quarter include KS Standard foil, reduced from 3199 to 2999.

Speaker Change: KS McAdamianuts, reduced from 1899 to 1399 KS Spanish Olive Oil 3L, reduced from 3899 to 3499

Speaker Change: and KF back at 2-pack produced from 599 to 499.

Speaker Change: Our commitment to sustainability and achieving lower emissions is also presenting opportunities to lower our costs.

Speaker Change: A great example of this is our KS laundry park, which we recently converted from a rigid plastic tub to a pouch.

Speaker Change: This allowed us to reduce the plastic packaging by 80% and pass these cost savings onto the member, lowering the price by $1 from 1999 to 1999.

Speaker Change: We've also found success working with suppliers to localise production of bulky items such as water, paper and laundry detergents.

Speaker Change: By manufacturing these goods closer to the countries in which they're sold, both costs and emissions associated with the shipment of these goods are greatly reduced.

Speaker Change: This quarter we introduced our new Japan produced Kirkland signature paper towels.

Speaker Change: In addition to the emissions benefits from no longer shipping millions of units of paper towels from the U.S. to Asia, the reduced rate allowed us to lower the price by approximately 30%. Or $8 per unit in that market.

Speaker Change: As production ramps up, we are in the process of transitioning our other Asian markets to locally produce SKUs.

Speaker Change: Shifting the production country at this one product will result in annual member savings of $30 million.

Speaker Change: Within ancillary business is, pharmacy had the strongest sales percentage increase driven by double-digit growth in the script counts.

Speaker Change: Our optical department also performed well as more members have taken advantage of the exceptional values in brand name frames and sunglasses.

Speaker Change: On a like-for-like 16-week basis, gas sales were negative, low-single digits in the quarter, as a result of the average price per gallon being 5% lower.

Galan Groath: This was partially offset by Galan Groath at 3%.

Galan Groath: Inflation was once again effectively flat in the quarter across all core merchandise.

Galan Groath: Food and sundries and fresh foods were slightly inflationary, and this was offset by deflation in non-foods.

Speaker Change: In the supply chain, we are seeing good flow of products through Panama and Baltimore.

Speaker Change: The Red Sea is a remaining pain point and is causing some relatively minor shipping delays.

Speaker Change: Prompt of a ability has generally been good with a few exceptions.

Speaker Change: Ex-supplies are still being negatively impacted by A-Vin influenza, and prime B- and a handful of vegetable skews have been tight.

Speaker Change: As Ron shared earlier, we are pleased with the momentum in our digital business and continue to make good progress with our technology priorities.

Speaker Change: Our app was downloaded 3.5 million times in the quarter, bringing total downloads to approximately 39 million. And we recently upgraded the native search function on our U.S. mobile app, leading to a doubling of the click through rate on search results.

Speaker Change: Ecommerce traffic, conversion rates and average order value were all up year over year, helping to drive another strong quarter of comparable sales growth.

Speaker Change: While continued strength in Bolion was a meaningful tale when two e-commerce camps, appliances, health and beauty aids, tires, toys, gift cards, hardware, houseware, phone furnishings, optical and pharmacy, all-group double digit year over year.

Speaker Change: The rollout of buy-on-line pick-up in warehouse for TV's in the US market was also completed in Q4. This allows same-day pick-up of a new TV to members who prefer not to wait for delivery.

Speaker Change: While by online pick-up in warehouse isn't cost effective for us on lower price items for high value items with high shipping cost like TVs, the freight savings more than I set the added labour required in warehouse is to fulfill those orders. We're now testing a similar program on laptops.

Speaker Change: Cosco Next, Accurated Marketplace, while still small continued to grow nicely in the quarter.

Speaker Change: We added 11 new vendors bringing the total to 86 and adjusting for the extra week, gross sales grew nearly 40% year over year.

Speaker Change: A brief comment on the membership fee increase that went into effect on September 1st.

Speaker Change: Due to deferred accounting, this will have minimal impact early in the year. The vast majority of the benefit will come in the back half of fiscal year 2025 and in the fiscal year 2026.

Speaker Change: With that being said, our commitment to invest in our employees and members is continuous, as evidenced by the July wage increase and lower prices, such as the example shared on today's call.

Speaker Change: In closing, we are encouraged by our momentum exiting fiscal year 2024.

Speaker Change: And are excited about the growth opportunities ahead as we continue to execute our strategy of delivering exciting new items and great value for members, innovating with curtain signature and growing our warehouse footprint and digital capabilities globally.

Speaker Change: In terms of upcoming releases, we will announce our September sales results for the five weeks ending Sunday October 6th on Wednesday October 9th after market close.

Speaker Change: That concludes our preparatory marks. We'll now open the line up for Q&A.

Speaker Change: Thank you. We will now begin the question and answer session. If you'd like to ask a question, please press star 1 on your telephone keypad to raise your hand and join the queue. And if you'd like to withdraw your question, I can press star 1. And please limit yourself to one question.

Speaker Change: Your first question comes from Damian Gootman with Morgan Stanley, please go ahead.

Speaker Change: Simeon Gootman, please press star 1

Simeon Gootman: Her question.

Speaker Change: On the previous earnings call, there was a discussion about possibility of.

Speaker Change: Greer SGNA leverage in the future as a lot of foundational investments have already been made.

Speaker Change: Shortly after Costco announced a membership to be increased and reinvestment into

Speaker Change: Employee wages as well.

Speaker Change: While wage investments are clearly the right thing for the business and instrumental for Costco's culture and success, how should we reconcile this potential posture of driving more leverage, but also adopting the same prior approach of putting upside back into wages.

Speaker Change: Hi, it's good afternoon. Thanks for the question. You know as we think about our overall

Speaker Change: The model for the company our focus is on really achieving a balance across the business and as you know over the years what we've done successfully at Costco is

Speaker Change: Continuing to invest in members.

Speaker Change: continue to invest in lowering prices and value for our members and continue to invest in our employees. And we believe that's going to be a critical part of our overall strategy going forward to make sure we keep driving our top line sales growth.

Speaker Change: You're absolutely right during the quarter, in fact, I think three times during the year which shared we made various investments in our employees.

Speaker Change: Back in September 2023 we announced that increase in the starting wage.

Speaker Change: and then in March this year we announced that we were increasing wages for a number of managerial roles in the warehouses.

Speaker Change: And as you mentioned, we recently announced further increase for all of our hourly employees in the warehouse, isn't across our distribution network.

Speaker Change: and so from our perspective, we think that's an important part of continuing to support the top line growth in the company. As you saw in the quarter, when you were just SGA for gas deflation and for looking particularly at the operational part of the business, the good news was we were able to effectively offset that cost, those cost increases by driving productivity and driving sales leverage and I think we've done that pretty consistently over time and our expectation of our goals is that we'll continue to do that. So I think for us it's less about giving specific guidance on a particular measure but more look at looking over the long term of how we expect to be able to keep making those investments but also driving leverage in our model to ensure we're sustainably driving top line and driving.

Speaker Change: driving practical growth. Ron anything you like to ask? No, I have to agree with you, Gary.

Speaker Change: Got it, that's really helpful. And just as a quick follow up, can you speak to the impact of the card readers at the different stores you?

Speaker Change: rolled out so far. Should we be modeling potentially a lift in member counts or growth in addition to the MFI bump from the fee increase as well.

Speaker Change: This is Ron, you know, the purpose of the card readers at the front door, this is a system we've been using for over two years now in Europe, especially in the UK. And we piloted here in the US for about six months.

Speaker Change: Several different benefits for it. It gives our operators real-time traffic counts throughout the day.

Speaker Change: So we're able to adjust front-end lines that we need to open and close lines based on the fluctuations of business. We can monitor our fresh foods a little better because we know what the traffic counts look like and so forth. And it has also taken the friction of membership verification away from the front-end registers and moved that to the front door where we're able to look at people's membership status. We let them know if there are new laws due before they get to the front end.

Speaker Change: So we've realized some very nice, healthy, front-end improvements in productivity and it's a lot of our operators to manage a business much better throughout the day.

Speaker Change: Here next question comes from Chris Horvers with JP Morgan, please go ahead.

Chris Horvers: Thank you. Good evening. I'm going to train so clearly you can hear me.

Chris Horvers: We've got a question, is can you talk about the risk around the poor strike that emerging here, you know, 1% of the product you.

Speaker Change: comes through those affected ports, any description, maybe the categories that are more exposed versus the others, and to what extent have you tried to bring in product early for the holidays to try to manage the at risk?

Speaker Change: Yes, this is Ron again. Yes, I'll take that question. You know, the porch track is something we've been watching very closely for some time. We knew about the timing of this as well. When you think about the impact to our business, we import.

Speaker Change: and primarily non-foods and some limited food and sundries come in, but non-foods is less. It's about 25% of our total business and only a subset of that is imported. There's some domestic goods in there as well that are not imported and non-foods.

Speaker Change: We have done a little bit of everything that you spoke about. We've got contingency plans.

Speaker Change: We've cleared the ports, we've pre-shiped, done several different things that we could to get holiday goods in ahead of this timeframe and looked at alternate plans that we could execute with moving goods to different ports and coming across the country have needed.

Speaker Change: It could be disruptive based on how impactful I can't tell you until we know length and what could happen out there, but it is in our sights, our buyers are all over it, they're watching it closely and we've taken as many preemptive measures as we could to prepare for this.

Speaker Change: and then just as a quick follow up, as you think about the risk around ocean freight rates, or it gives your expectation that freight rates are maybe elevated right now because of all this and perhaps come down into next year as we think about contract renewal periods. Thank you.

Speaker Change: I'm not good at predicting the future, but I can tell you that from what we're seeing a big chunk of our freight comes in at a contract so we've been insulated from that.

Speaker Change: The spot market has peaked in the last quarter and we see that coming off now if a port disruption could happen or something else could happen the Red Sea could that go up absolutely it could go up But from what we're seeing now the spot market did increase is coming off at this point

Speaker Change: and again our team did a great job by insulating us with good solid contracts for this year.

Speaker Change: Thanks so much.

Speaker Change: Your next question comes from the line of Chuck Grom with Gordon Haskett. Please go ahead.

Chuck Grom: Thanks, Good afternoon, Gary, and Ron, just to go back to the membership card scanner. Can you just speak to where you are on the rollout of that across the U.S. And any positive reactions you've seen so far? Our checks have shown that in some locations you guys are actually seeing a double digit increase in new signups.

Speaker Change: We have about 350 U.S. warehouses rolled out at this point and through the process.

Speaker Change: You know, reaction has been very positive, myself, all our operators and we really rely on feedback of our warehouse managers and what's been done.

Speaker Change: and our head operator, Russ Miller and myself have been met with great positive reactions, full from the members and from the operators as well. We have seen some, some lift in, in members sign up from that.

Speaker Change: We've also seen a lift in renewals because before people get to the front end, now they're aware that my renewals are going to be due when I get to the registers So members are very appreciative of that. They know that and they get up to the front and they're not shocked by that process as well.

Speaker Change: So improved productivity, improved interaction, and as we know as our volumes grow, we're looking for everything we can find to use technology to help get our members through the front ends, then a good smooth manner.

Speaker Change: That's very helpful. My thoughts are just Gary on the other business line and within the margin builds up 42 basis points of the task. Can you add a little bit of color on the sequential change? How much came from e-commerce? How much came from the improvement in gas margins? Thank you.

Speaker Change: Sure, yeah, we call those two apps because they were the two biggest factors in the results. I think of them as being relatively similar in terms of the impact.

Speaker Change: He comes, actually, has been a nice trend that we've seen for the last couple of quarters. We've been really pleased with the momentum in e-commerce, of course, the headline sales growth has been very positive, which is a great starting point, but then the teams that are really nice job of improving fulfilment efficiency and driving.

Speaker Change: and better sell through in terms of the product and the inventory management as well. And the mix is improved, as I mentioned on the prepared remarks, we've seen really good growth, really balance across the board around e-commerce growth.

Speaker Change: So, Ecommerce has been a sort of a sustained trend that we've been pleased with the last couple of quarters. On the gas side of things, it was really, I wouldn't say there was anything unusual during the quarter. It was really more a case that we had a little bit of a tailwind in margin. And as I mentioned earlier, it was cycling some lighter margin in the same quarter in 2023.

Speaker Change: Cheers!

Speaker Change: Here next question comes from the line of Paul Ligeros with City Group. Please go ahead.

Speaker Change: Hey everyone, this is Brent and Cheetamon for Paul and Gary and Ron. I want to talk about new store growth, you know, you mentioned 26 net and 20.25.

Speaker Change: with, I guess, an increasing on focus on international. Anything you can share on why the U.S. would step down from only four levels, to be picked up on international, you know, in a more important group for the call for you.

Speaker Change: and then on the US side, you know, how many of those are new markets versus in fill where you're trying to leave the traffic congestion from a nearby store.

Speaker Change: For how often non members were shopping at Costco and then secondly, just given some of the price reductions that you highlighted earlier can you comment on your broader embracing and inflation expectations for fiscal 'twenty.

As far as the scanning I really couldnt give you a number I mean, we've been exclusive for since the inception of the company that were exclusive to members.

Gary Millerchip: There are sharp cards, and those type of things that people come in with but I really couldnt give you a set number of what percent of people coming in a non members and as far as inflation I think Gary as Gary assigning that he'd like to take that one yes happy too probably similar to Robin's comments earlier, we would be particularly good at telling you what we forecast for the.

A market overall, but what I can maybe give you some a little bit more color from what we're seeing Scott from our perspective, we shed for the quarter overall inflation was essentially flat we saw a little bit of inflation in <unk> that was mainly driven by prior to use right now that was sort of the key category that drove but again very low inflation nothing meaningful to talk about we're still seeing it.

Speaker Change: Very quiet in terms of the inflationary impact on prices and on the business food would have been slightly inflationary as well, but it's it's a remarkable actually how the small range now between the different categories really nothing between positive to a negative two and sort of all coming back out to even just very slightly inflationary, but nothing much there.

Either that we're seeing.

Speaker Change: We are seeing more of a mixed view on commodities things like corn flour, and sugar or deflationary, which is causing the bakery category as a whole to be deflationary, but then on things like <unk> and Coco in X as I mentioned earlier on the call and cheese were seeing more inflation. So I don't know that were seeing anything today, that's causing us to believe that.

Speaker Change: While we are today is what the world looks like in our goal of course is always to find ways to lower our costs and therefore, a whole prices down for our members. So I wouldn't say that we're seeing anything dramatically different from how a quarter look for this quarter, but of course were like.

Like everybody, we're susceptible to shocks and changes that can happen in the market.

Speaker Change: It's helpful. Thanks, a lot guys.

Speaker Change: Yeah.

Speaker Change: Your next question comes from the line of Michael Lasser with UBS. Please go ahead.

Speaker Change: Hi, Zane Barack on for Michael Lasser, Thanks, very much for taking my question.

Speaker Change: While it's early what has been the customer response to the MLP increase.

Speaker Change: You expect to see a rise in customer Christian why or why not.

Speaker Change: <unk>.

Speaker Change: Yes, thanks for the question.

Speaker Change: As you are familiar with the membership fee increase we.

Speaker Change: We're very deliberate about the timing we in fact, we we really delayed by two years from when we've traditionally increase the Fei every five years and that was initially because of what we thought our members we're experiencing with Covid and then we saw a higher inflation. So we were very deliberate in delaying the increase until we felt that we started to see inflation dissipate in Memphis.

Speaker Change: We're spending more in non food category is seeing that they were coming through the inflationary period.

Speaker Change: From a member reaction perspective, I'd say, we haven't really.

A significant member reaction of our membership renewal rates, there's no real change in trend as I mentioned in some of my prepared remarks.

Speaker Change: I think the fact that we've been able to stave off inflation on things like the hotdog price staying at $1 50 in the rotisserie chicken at $4 99, and generally demonstrating the way that we're lowering prices remembers wherever we can I think theres been a recognition that in the context of what's happening more broadly over the last seven years that we stay true to our.

Speaker Change: Principles of really trying to help the member and deliver the value and as we mentioned earlier on the call we've been making investments whether it be in wages for our employees.

Speaker Change: Lowering cost to show our members that we want to make sure that the increase is delivering value to them.

Okay.

Speaker Change: Okay.

Your next question comes from the line of <unk> <unk> with Oppenheimer. Please go ahead.

<unk> <unk>: Good evening and thanks for taking my question. So just on the consumer front just curious how you guys are feeling about the health of your consumer and then any changes in consumer behavior of note during the quarter.

Sure. Thanks for your passion.

Speaker Change: I think we see that the consumer I remember through three of course through our lens and what I would say is that it's very clear the quality and value I have never been more important that's something that is very clearly coming through in our insights in how we're seeing our members shop I think the encouraging thing for US is as you as you know as you look at our trends and the year to date, we have seen that is.

Speaker Change: Inflation has dissipated members have started to spend more on non food items, which is really encouraging in our mind and what we're really pleased about is the the widespread nature of that across the different categories that we've seen in non foods I would say that on some categories like appliances and electronics definitely they've become more.

Speaker Change: Promotional over time that would be.

Speaker Change: I think that members are looking for more deals and for US of course, we're always going to be there on price, but we also.

Speaker Change: Included within what we're offering to our members the installation and the removal of the <unk> product, if that's necessary and the delivery. So we kind of trend to try and differentiate there on the overall experience as well as being a great everyday low value.

Speaker Change: I think that the kind of key trends in non foods on the food side of things.

Speaker Change: We've definitely seen some signals that would suggest that members and consumers in general that may be shifting a little bit of spend from food away from home to food on the food and sundries side of our business.

Alcohol would still be relatively soft.

But as I mentioned in my prepared remarks, we're seeing really strong growth in our ethnic food categories and also in the Kirkland signature products, particularly in the new ones that we've been introducing and then on the fresh side of things really strong growth across meat produce and bakery I would say, we certainly seen a continued acceleration in <unk>.

Speaker Change: Are those lower cost protein items like poultry cheaper cuts of beef like ground beef and pork.

Speaker Change: So there's definitely some signs that the consumer is being very choice falling how they're spending their dollars, but thankfully with the quality and value that we're offering is definitely resonating with our members.

Speaker Change: Great and then maybe just one follow up question you know a big focus out there on an alternative revenue streams, including media just curious on the latest on the uppers from Costco or is there more is there maybe a more aggressive question growing that area.

Speaker Change: Yes, I think we still see it as a significant opportunity it's definitely a journey for us. It's the foundations of that journey are getting our technology infrastructure in a position, where we feel really good about the capabilities that will allow us to deliver to the member in terms of the offers that we can give to them and the level of targeting and personalized capabilities that curve.

<unk>.

We've already started to build out those plans and starting to identify how we can capture the low hanging fruit, where there are opportunities, but we would see it as a significant opportunity over the long term.

Drive new revenue, we will approach this is probably a little bit different than many others and that we will be reinvesting the vast majority of those dollars as we always do to drive top line growth and we think that'll be a competitive advantage with our CPG partners because it will show them that every dollar of that spending is really intended to drive overall growth of the company.

Speaker Change: That being said I do think it will help also with.

Speaker Change: E Commerce business is typically less profitable in this case, a way to offset some of those costs in delivery and fulfillment as well.

Brian: Great. Thank you Brian.

Your next question comes from the line of Kelly Bania with BMO capital markets. Please go.

Speaker Change: Go ahead.

Kelly Bania: Hi, Good evening, Gary and Ryan.

Just wanted to ask about e-commerce.

Obviously continued strength there just can you just give us a broad update on the penetration of profitability and how that is impacting margins at this growth level and just an update on what the penetration would be if you included in CCAR.

Speaker Change: Like others do in that penetration.

Speaker Change: Yes, Thanks, Kelly as we look at the progress we're really pleased with the momentum that we've seen in digital actually we were looking at the data recently over a 10 year period and we've grown.

Speaker Change: Compounded annual growth rate in E. Commerce has been over 20% for that 10 year period. So it's been a significant growth story for us and members clearly are valuing the additional ways in which we're giving them opportunities to find new deals and value for the member.

Overall, it would be at the penetration will be in the sort of high single digit range based on how we report e-commerce today.

If you kind of to your point earlier, we don't include some of those.

Speaker Change: Digitally starting sales transactions, if I could say it that way so <unk> had the ways in which members might be buying groceries and food and sundries.

Zane Barack: Zane and of course, we also include gassing.

Total sales we'd be into the double digit penetration. When you include all those elements in the number.

Speaker Change: Okay, and any comments on profitability.

Zane Barack: Boston.

Speaker Change: E Commerce is impacting profitability.

Speaker Change: Yes, I would still say, it's it's marginally lower than the traditional shopping in the warehouse and that's obviously intuitively makes sense given that we're doing more of the picking and shopping for the member as I mentioned in the prepared remarks that we have seen some good improvements as we've grown our sales numbers thats created some leverage in the model where <unk>.

Speaker Change: Improving the efficiency of our fulfillment cost. So it is it is continuing on an improving trend over time because of the sales growth and the leverage that's creating but also some of the improvements the team in making the business to drive more efficiency as well.

Speaker Change: Okay.

Speaker Change: Got you.

Speaker Change: Our next question comes from the line of Michael Baker with D. A Davidson. Please go ahead.

Michael Baker: Great. Thanks, two questions. One can you talk about competitive pricing, particularly in grocery there's been a lot of talk about some grocery chains investing in price et cetera. What are you seeing how are your price gaps and then I'll have a follow up after that thanks.

Yeah.

Speaker Change: Yes, yes, thanks for the question.

Speaker Change: I think that the key thing for us is where our biggest competitor.

Speaker Change: As I mentioned earlier, we want to be the first to lower prices in the last to raise prices.

Speaker Change: Every one of our regular budget meetings were talking about how can we find ways to do that in the majority of our price investments are proactive not that we're reacting but of course, we're always watching and staying very close to competition I would say that the promotional environment has been increasing that would be with us as Ron mentioned earlier that our CPG partners are investing to find ways to drive.

Units and that would certainly be the case across some of the competition as well I mentioned earlier appliances and <unk>.

Speaker Change: Consumer electronics would be an area, where we've seen more of that activity, but I think if you took it all on balance we wouldn't say that we're seeing the activity is sort of outside of abnormal in the food space.

Speaker Change: We feel very good about our position relative to the market and continue to be proactive in finding ways to.

Speaker Change: Provide the best quality best value for our members.

Speaker Change: Excellent. Thank you that makes sense.

Speaker Change: I'll follow up.

When gas prices fall I think gas prices are down about 15%, 16% year over year.

Speaker Change: Broadly speaking at least in the latest data does that hurt your traffic at all because I think when you guys say, 50% of people who come to get gas come into the club and buy something.

Speaker Change: I think the unit growth the gallons growth did decelerate a little bit this quarter.

Speaker Change: Is that something that you guys look out or have any concern over.

Speaker Change: Yes. This is Ron I don't see it as a concern gal.

Ron Vachris: Gallons were up 3%, which was a little bit softer than the prior quarter. So when you do hit those peaks in prices, we will see a greater attraction to the Costco gas stations, but our balance of transactions dual transactions that we have looks very positive and so we're not seeing traffic dropping off at all.

Ron Vachris: And the warehouse based on the slightly softer gallon growth that we're seeing out in the gas stations.

Speaker Change: Excellent. Thank you.

Speaker Change: Your next.

Speaker Change: Next question comes from the line of Karen short with Melius Research. Please go ahead.

Karen short: Hey, Thanks, a lot and good to talk to you again.

Karen short: So thanks for taking my question.

Karen short: So my question was.

Speaker Change: When you look at your pretax margin.

Speaker Change: I know you don't manage to that.

Speaker Change: In any way shape or form.

Speaker Change #100: Obviously, it's been creeping up.

Speaker Change: So.

Speaker Change #101: When you look at the actual dollar.

Speaker Change #101: On.

Speaker Change #101: The 10 basis point increase in that in March.

Speaker Change #101: Hum.

Speaker Change #101: It's not material to.

Speaker Change #101: Now to earnings and our valuation obviously.

Speaker Change #102: Wondering how you think about that.

Speaker Change #103: Hi, Karen yet I think the way we think about it is really back to some of the comments that we were referring to earlier is that I can.

Speaker Change #103: All of these all way to drive top line, that's the top priority for the company and we're focused on investing and delivering value for the member and delivering.

Speaker Change #103: Improved investments in our employees as well to make sure that we're an employer of choice I think.

Speaker Change #103: Right the comment because I think we have been successful over the years in doing that because there are ways for us to continue to lower our costs and our gross margin part of our business and drive more value for the member some of the things that we've been focused on like global buying and the Coke signature growth that we've seen e-commerce growth as you mentioned earlier and there will be opportunity.

Speaker Change #103: Things like retail media in the future. So I think there are a number of ways in gross margin and also a number of ways in SG&A, where we can continue to be more efficient.

To drive that investment our focus is always to drive as I mentioned, the top line and if not over time allows us to continue to grow the margins. Then obviously, that's something that we're quite pleased with and it's a it's a good outcome for our investors, but I wouldn't say as you mentioned, it's a it's a targeted outcome is really about making sure that we're driving that top line.

Speaker Change #103: Growth in the history as you've mentioned would suggest that when we've done that well as we continue to look for opportunities. It has allowed us to expand margins slightly as well.

Speaker Change #104: I would add I agree with Gary I wouldn't I would add to that there are several several levers that our operators and our buyers have to improve margin and in our buyer speak often about the fact that we can lower prices, while improving margin as well and that comes with the efficiencies that we're seeing comes with very good sell throughs that we're realizing in the goods that we are.

Speaker Change #103: Or buying.

Speaker Change #103: Newness in bringing on new items to the market that that could have a little bit better margins and our operating shrinkage has been improving and we saw a nice solid year. This year and picked up some margin on improving shrink results and the <unk>.

Speaker Change #103: Business as well so those are some different levers that will augment lowering prices and continuing to improve margins.

Speaker Change #103: But is it fair to think that 4%.

Speaker Change #103: Maybe Kuwait.

Speaker Change #103: Up from there.

Speaker Change #103: Realism.

Speaker Change #103: Okay.

Speaker Change #103: Yes, I think we wouldn't get into as you know into sort of guidance of what we're expecting in the future I do think as Ron Chad that we we don't see it as a zero sum game I think we believe there's an opportunity to continue to find ways to invest in our members and our employees and we do believe you can do that through.

Ron Chad: The way that we manage the business to continue to improve profitability over time, but I wouldn't want to really provide any specific guidance related to that.

Ron Chad: Okay.

Speaker Change #106: Great. Thank you.

Scott: Thanks Scott.

Scott: Right.

Scott: Yeah.

Scott: Chris are you there is that all that questions Krista.

Scott: Hello.

Scott: Laura Champine from loop capital your line is open.

Scott: Sure.

Scott: Great.

Speaker Change #108: Your next question comes from Greg <unk> with Evercore ISI. Please go ahead.

Hi, Thanks.

Speaker Change #108: I wanted to go back to the.

Speaker Change #109: The profitability and gross margin, particularly gasoline the tailwind.

Greg: Are we now back at 20 cents of Penny profit per gallon or what should we think of that as sort of a normalized range.

Speaker Change #111: Going forward.

Speaker Change #112: Yes, I think Greg we generally aren't sharing specific breakdown of profitability and that would be true obviously across a number of areas of the business, but on gas as I mentioned earlier I would think of gas as being sort of fairly stable in general for us and there are peaks and troughs because of the volatility in the market in the short term, sometimes I wouldn't think of this quarter.

Speaker Change #112: While it showed up in as part of the overall improvement in other businesses I wouldn't call it out as being like anything that was particularly changing the trajectory of gas or.

Speaker Change #112: All of that would cause us to be wanting to share any more sort of detailed color because generally were expecting the gas side of the business to be relatively stable as I mentioned next quarter this quarter I should say.

Speaker Change #112: That was an example of where there was some really.

Speaker Change #112: Very unusual volatility because of world events, but in the main I would think of gas is not being.

Speaker Change #112: A major sort of underlying change in trajectory or something to look at differently in our model. Obviously, we do provide color, where there's something unusual that pops up but I wouldn't I wouldn't think of that as being a directional change.

Speaker Change #113: Got it and given the recent wage increase could.

Speaker Change #114: Could you help level set us on maybe on what's your average wages are now in the U S or globally I think in the past the number was something like $26 an hour.

Speaker Change #114: Currently the average wage is.

Speaker Change #116: Just north of $30 an hour.

Speaker Change #117: Just north of 30, great and Thats for the U S. Yes.

Yes.

Speaker Change #117: U S and Canada.

Speaker Change #117: Globalize in Canada.

Speaker Change #118: Got it.

Speaker Change #118: Go ahead go ahead.

Speaker Change #119: My last question was just given the the non food the success there.

Speaker Change #120: You called out the gold bowling again I'm just curious are there any plans to maybe bring kirkland signature into the gold bullion market.

Speaker Change #119: Yes.

Speaker Change #121: No plans at this time.

Speaker Change #122: Alright, Thanks, a lot and good luck guys.

Speaker Change #122: Thank you.

Speaker Change #122: And ladies and gentlemen, that's all the time, we have for questions. Today I will now turn the conference back over to Gary for closing comments.

Speaker Change #122: Okay.

Thank you Kristen. Thank you all for joining the call today, and we look forward to talking to you at the next quarterly earnings call that will conclude our call. Thank you.

Speaker Change #124: Ladies and gentlemen, this does conclude today's conference call. Thank you for your participation and you may now disconnect.

Yeah.

Speaker Change #124: Yeah.

Speaker Change #124: Yeah.