Q2 2025 Costco Wholesale Corp Earnings Call
Ladies and gentlemen, thank you for standing by my name is Abby and I'll be your conference operator today.
Speaker Change: At this time I would like to welcome everyone to the Costco Wholesale Corporation fiscal second quarter 2025 earnings Conference call.
Speaker Change: All lines have been placed on mute to prevent any background noise.
After the Speakers' remarks, there will be a question and answer session.
Speaker Change: We would like to ask a question during that time simply prestige Starkey followed by the number one on your telephone keypad. If you would like to withdraw your question Press Star one a second time.
Speaker Change: Thank you and I would now like to turn the conference over to Gary Miller Chip Chief Financial Officer, you may begin.
Gary Miller: Good afternoon, everyone and thank you for joining Cosco second quarter 2025 earnings call.
Gary Miller: In addition to covering our second quarter financial results today, We will also review our February sales results.
Gary Miller: I'd like to start by reminding you that these discussions will include forward looking statements within the meaning of the private Securities Litigation Reform Act of 1095.
Gary Miller: These statements involve risks and uncertainties that may cause actual events results <unk> performance to differ materially from those indicated by such statements.
Gary Miller: 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.
Gary Miller: Looking statements speak only as of the date. They are made and the company does not undertake to update these statements except as required by law.
Gary Miller: 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 GAAP.
Rob: Before we dive into the numbers I am delighted to say that <unk> is joining me for today's call I'll now hand over to Rob for some opening comments.
Rob: Thank you Gary and good afternoon, everyone. Thank you for joining us today as we wrap up the second quarter of fiscal 2025, I'd like to make a few brief comments on some of the highlights since we last spoke.
Speaker Change: Well, we only opened one new warehouse in the second quarter of fiscal 'twenty five we have big plans for the rest of the fiscal year Tomorrow, We will open up in Brentwood, California, followed by an opening in islands, California. The following day and for additional U S openings next week, including our Sharon, Massachusetts opening on March 12.
Speaker Change: Which will be our 620 U S warehouse and the 900 hospital locations worldwide.
Speaker Change: We're projecting 28, new openings during fiscal year, 'twenty five of which three will be relocations, where 25 net new buildings.
Speaker Change: In addition to adding warehouses to serve our members. We're also extended our gas station hours in North America during the quarter to make filling up with Costco more convenient for our members.
Speaker Change: Generally our stations are now staying open an hour later than they did previously with some opening earlier as well.
Speaker Change: Our updated employee agreement took effect this week in the U S and Canada. This agreement reflects our continued commitment to provide industry, leading pay and benefits for our employees.
Speaker Change: Highlights from the New agreement included an immediate $1 our top of scale increase followed by an additional dollar top of scale increase on March of 2026, and again in March of 2027.
Speaker Change: The top of scale wage for our U S service clerks is now $31.90 an hour.
Speaker Change: Additionally, on March 3rd our bottom of the scale wage increased by 50, an hour, taking our minimum wage to $20 an hour.
Speaker Change: The average weighted for the U S and Canada employees is now a little more than $31 an hour, including hourly employee bonuses with the majority of our employees at the top scale based on tenure.
Speaker Change: Paid vacation for new employees is now offered during the first year of employment and a six week of vacation is available to U S employees. After 30 years of service.
Speaker Change: Our operations and merchandising teams did a fantastic job on the quarter delivering strong operating results. Despite the uncertain macro environment.
Speaker Change: In particular, our Canada and other international business had an outstanding quarter delivering record results on a constant currency basis, although reported results outside the U S were negatively impacted by foreign exchange fluctuations year over year.
Speaker Change: As we look ahead to the remainder of this fiscal year headwinds from foreign exchange look likely to continue.
Speaker Change: Given the events over the last week it is difficult to predict the impact of tariffs, but our team remains agile and our goal will be to minimize the impact of related cost increases to our members.
Speaker Change: About a third of our sales in the U S are imported from other countries and less than half of those are items coming from China, Mexico and Canada.
Speaker Change: In uncertain times, our members have historically placed even greater importance on the value of high quality items at great prices and our teams will continue to rise to this challenge by leveraging our global buying power strong supplier relationships and innovation.
Speaker Change: With that said I'll turn it back over to Gary to discuss the results of the quarter when February sales ill jump back on during Q&A to field some questions.
Gary Miller: Thanks, Ron in today's press release, we reported operating results for the second quarter of fiscal 2025. The 12 weeks ended February 16.
Gary Miller: We have once again published a slide deck on our investor site under events and presentations with supplemental information to support today's press release.
Gary Miller: You might find it helpful to have this presentation in front of you as I walk through our results.
Gary Miller: Net income for the second quarter came in at one 788 billion or $4 <unk> per diluted share up from $1 74, 3 billion or $3 92 per diluted share in the second quarter last year.
Gary Miller: Last year's results included a tax benefit of $94 million or 21 cents per diluted share related to the tax deductibility of the special dividend paid to 401K participants <unk>.
Gary Miller: Excluding this discrete tax item net income and earnings per diluted share both grew eight 4%.
Gary Miller: A couple of additional data points that may be helpful relative to our reported net income.
Gary Miller: Operating income in the quarter increased 12, 3% compared to last year.
Gary Miller: This was partially offset by a $70 million year over year headwind in interest and other and I'll share more detail on these items a little later.
Gary Miller: And foreign exchange rate movements negatively impacted the translation of international net income to U S dollars by $57 million or <unk> 13 per diluted share.
Gary Miller: Net sales for the second quarter was $62 $5 3 billion, an increase of nine 1% from 50 733 billion in the second quarter last year.
Gary Miller: U S comparable sales were up eight 3% or eight 6% excluding gas deflation.
Canada comp sales were up four 6% or 10, 5% adjusted for gas deflation and FX.
Gary Miller: Other international comp sales were up one 7% or 10, 3% adjusted.
Gary Miller: This all led to total company comp sales of six 8% or nine 1% adjusted for gas deflation and FX.
Gary Miller: Finally e-commerce comp sales were up 29% or 22, 2% adjusted for FX.
Gary Miller: In terms of Q2 comp sales metrics foreign currencies relative to the U S. Dollar negatively impacted sales by approximately two 1% while gas price deflation negatively impacted sales by approximately 1%.
Gary Miller: Traffic or shopping frequency increased five 7% worldwide and five 6% in the U S.
Gary Miller: Our average transaction or ticket was up 1% worldwide and up two 6% in the U S.
Gary Miller: This includes the headwinds from gas deflation and FX adjusted for those items ticket would've been up three 2% worldwide and up two 8% in the U S.
Gary Miller: Moving down the income statement to membership fee income.
Gary Miller: We reported membership fee income of $1 193 billion, an increase of $82 million or seven 4% year over year.
Gary Miller: Membership fee income growth was nine 4% excluding FX.
Gary Miller: The recent membership fee increase contributed approximately 3% of fee income in the quarter due to the effects of deferred accounting the majority of the benefit from the membership fee increase will come over the next four fiscal quarters with the largest impact in Q4 fiscal year 2025, and Q1 fiscal year 2026.
Gary Miller: In terms of renewal rates at Q2 end, our U S and Canada renewal rate was 93%.
Gary Miller: Worldwide rate came in at 95%.
Gary Miller: As cohorts of new members move in and out of this calculation that could be one or two tenths of volatility in the reported number quarter to quarter.
Gary Miller: The biggest impacts come from digital promotions and Asia warehouse openings, both of which generate outsized membership sign ups, but also have lower renewal rates.
Gary Miller: We ended Q2 with $78 4 million paid household members up six 8% versus last year, and $140 6 million cardholders up six 6% year over year.
Gary Miller: At Q2 end, we had $36 9 million paid executive memberships up nine 1% versus last year.
Executive members now represent 47, 1% of paid members and 73, 8% of worldwide sales.
Gary Miller: Turning to gross margin our reported rate in the second quarter was higher year over year by five basis points coming in at 10, eight 5% compared to 10, 8% last year and up four basis points, excluding gas deflation.
Gary Miller: To simplify the gross margin metrics provided in our slide deck, starting this quarter, we have incorporated 2% reward as part of the business area, which generated the reward.
Gary Miller: This is split between core and ancillary and other businesses.
Coal was higher by five basis points and higher by four basis points without gas deflation.
Gary Miller: In terms of core margins on their own sales core on core margins were lower by eight basis points.
Gary Miller: This decline was due to investments in supply chain to support higher inventory and some mix changes in our non food categories.
Gary Miller: Ancillary and other businesses gross margin was higher by one basis point and flat without gas deflation.
Gary Miller: E Commerce again showed considerable strength year over year, but this was offset by lower gas profitability.
Gary Miller: LIFO was lower by one basis point and flat without gas deflation, we had a 12 million LIFO credit in Q2, this year compared to a $14 million credit in Q2 last year.
Gary Miller: Moving on to SG&A, our reported SG&A rate in the second quarter was lower or better year over year by eight basis points coming in at 9.06% compared to last year's 914%.
Gary Miller: SG&A was lower or better by nine basis points adjusted for gas deflation.
Gary Miller: The operations components of SG&A was lower or better by seven basis points and eight basis points without gas deflation.
Gary Miller: Higher labor productivity and great cost discipline by our operators drove this improvement.
Gary Miller: Central and stock compensation were flat, both with and without gas deflation and pre opening was lower or better by one basis point, both with and without gas deflation driven by fewer new warehouse openings in the quarter. This year.
Gary Miller: As Rob mentioned earlier, our new employee agreement went into effect earlier this week.
Gary Miller: While there was no impact in Q2, we estimate that this will create a headwind to SG&A of 13 basis points from March the third however.
Gary Miller: However, we will also lack a smaller increase from the same point in the prior year. So the net year over year basis point headwind from this wage investment is expected to be mid single digits.
Gary Miller: Below the operating income line interest expense was $36 million versus $41 million last year and interest income was $109 million.
Gary Miller: Versus $147 million last year.
Gary Miller: As indicated on last quarter's call interest income faced headwinds due to a lower cash balances subsequent to our $6 $7 billion special dividend in January 2024, and lower interest rates.
Gary Miller: While we expect interest rates will continue to be a year over year headwind for the remainder of the fiscal year. We have now lapsed the lower year over year cash balances following the special dividend.
Gary Miller: FX and other was a $33 million gain in Q2, this year versus a $69 million gain last year.
Gary Miller: In terms of income taxes, our tax rate in Q2 was 26, 2% compared to 22, 1% in Q2 last year.
Gary Miller: Recall last year's rate benefited from a $94 million discrete item related to the tax deductibility of the special dividend paid to 401K participants.
Adjusted for this benefit the tax rate for fiscal year 2020 for Q2 would have been 26, 3%.
Gary Miller: Yeah.
Gary Miller: Turning now to some key items of note in the quarter capital expenditure in Q2 was approximately 114 billion.
Gary Miller: And we estimate capex for the full year will be approximately $5 billion.
Gary Miller: Taking a deeper look into core merchandising sales and non foods categories led the way this quarter with comparable sales in the mid teens.
Gary Miller: Our buyers continue to bring a new and exciting items at great values.
Gary Miller: This included Big ticket consumer electronics products, such as 98 inch 100 inch Tvs.
Gary Miller: Pinball machines and gaming computers, all of which performed very well during the holiday season for.
Gary Miller: For the quarter overall, Golden jewelry gift cards, toys, and housewares appliances sporting goods home furnishings, and small electrics were all up double digits.
Gary Miller: Fresh in Q2 was up high single digits. This was led by double digit growth in meat, while we continued to see a shift towards lower cost proteins, such as ground beef and poultry.
Gary Miller: Bakery approaches also performed well this quarter.
Gary Miller: Food and sundries hard low to mid single digit comps with Cola and international foods, showing the strongest results.
Gary Miller: We continue to look for ways to increase the value for our members both with national brand items and our private label offerings. Our goal is always to be the first to lower prices, where we see opportunities to do so and the last to increase prices in the face of rising costs.
Gary Miller: A few examples of lower prices. This quarter include chaos refined olive oils single three liter from $29 99 to 2799.
Gary Miller: Chaos organic peanut butter from 11 49 to $9 99.
Gary Miller: Tortilla strips from $5 69 to $4 99.
Gary Miller: Another way, we have been able to lower prices is by continuing to expand the local sourcing of our bulky private label items across the globe.
Gary Miller: In Q2, we introduced a chaos purified water SKU for the China market that is produced in country.
By moving production into the region, we were able to bring members savings of greater than 20% versus the prior brand deepwater offering.
Gary Miller: Our merchants also continued to drive innovation with Kirkland signature most notably this quarter, we worked with a new supplier to rework our Kirkland signature diapers.
Gary Miller: Improvements versus the prior offering include a longer and thicker absorbing layer software or to cover and two times more stretching the waistband.
Gary Miller: As well as improving the quality of this item, we were able to increase the value by 11%.
Gary Miller: Although new Ks offerings. This quarter include <unk>, French fries Ks locked her in soda and new Ks Lager.
Gary Miller: Kirkland signature continues to grow at a faster pace than our business as a whole.
Gary Miller: Within ancillary businesses pharmacy, and Foucault departments led the way in the food Court, we have introduced our new Strawberry banana smoothie and are excited to announce the fan favorite Turkey Provolone Sandwich is making a return in Q3.
Gary Miller: Gas comps were negative low single digits during the quarter driven by the average price per gallon being down slightly.
Gary Miller: Now a few comments on inflation, while there was a fair bit of variability across departments overall inflation in the quarter was low single digits.
Gary Miller: Fresh was the most inflation rate of our categories driven by medium bakery.
Gary Miller: Food and sundries inflation remains relatively low as inflation and ex Coca coffee cheese in corn were partially offset by deflation in commodities, such as sugar and flour.
Gary Miller: The supply chain continues to be relatively stable, albeit shipping delivery dates are still less predictable than they were pre COVID-19.
Gary Miller: In non foods, our buying teams have been proactive in ordering higher levels of inventory over the past year, which has helped support our strong sales momentum and overall, we are pleased with sell through rates.
Gary Miller: Turning to digital and E Commerce, we continue to make progress with our technology roadmap.
The new warehouse told in our App, which allows members to view local warehouse item availability and prices had over 43 million visits.
Gary Miller: On personalization for the first time in Q2, we sent out multiple versions of our digital MVM differentiating the message for members based on their previous shopping behavior. We.
Gary Miller: We still have a lot of work to do in this area and are excited about the potential to improve the member experience through more relevant targeted messages and experiences.
Gary Miller: While strength in bullion was a meaningful tailwind to ecommerce sales home furnishings, small electrics hardware and sporting goods, where a few of the other departments that grew double digits year over year.
Gary Miller: Costco logistics had a record holiday season with over 500000 deliveries as we continue to grow share in big and bulky items.
Gary Miller: And Costco next accurate marketplace also had record holiday sales.
Gary Miller: We are now approaching 100 vendor sites and significantly grew average order value in the quarter.
Gary Miller: Shifting gears to alternative revenue streams, we've made some improvements to our co brand credit card this quarter.
Gary Miller: The card is a great way for members to increase the everyday value the refi receive when shopping at Costco offering attractive cashback rates with no annual fee <unk>.
Gary Miller: Executive members use the card can double their cashback on the majority of purchases in warehouse and Costco Dot com from 2% to 4% and last quarter, we increased the reward on gas purchases at Costco locations to 5%.
Gary Miller: On retail media following our first off site retail media campaign in Q1, we have entered into a number of additional similar campaigns with roughly 10 different partners live currently and many more in the pipeline.
Gary Miller: Turning now to our February sales results for the four weeks ended this past Sunday March 2nd compared to the same full of retail calendar weeks last year.
Gary Miller: Net sales for the month of February came in at $19 eight 1 billion, an increase of eight 8% from $18 to $1 billion last year.
Gary Miller: Comparable sales for the month were as follows.
Comparable sales were up eight 6%, both with and without gas deflation.
Gary Miller: Canada comp sales were up three 2% or eight 7% adjusted for gas deflation and FX.
Gary Miller: Other international comp sales were down 6% or up six 5% adjusted.
Gary Miller: This resulted in total company comp sales of six 5% or eight 3% adjusted for gas deflation and FX.
Gary Miller: Finally e-commerce comp sales were up 19% or 22% adjusted for FX.
Gary Miller: Our comp traffic or frequency for February was up 5% worldwide and five 8% in the U S.
Gary Miller: Foreign currencies year over year relative to the U S dollar negatively impacted total and comparable sales as follows Canada by approximately 6% other international by approximately 7% and total company by approximately one 8%.
Gary Miller: Gasoline prices were flat year over year in the month.
Gary Miller: Worldwide. The average transaction for February was up one 4%, including the negative impact from foreign exchange.
Gary Miller: In terms of regional highlights U S regions with the strongest comparable sales were the Midwest the northeast in Los Angeles.
Gary Miller: Other international and local currencies, we saw the strongest results in Mexico, Taiwan and Korea.
Gary Miller: Moving to merchandise highlights the following comparable sales results by category for the months exclude the negative impact of foreign exchange.
Gary Miller: Food and sundries were positive mid single digits Cola frozen foods, and sundries were the strongest departments.
Speaker Change: <unk> foods were up high single digits better performing departments included meat approaches.
Speaker Change: Non foods were positive low teens, better performing departments included jewelry gift cards and housewares.
Speaker Change: Ancillary business sales were up low single digits pharmacy, and optical with the top performers and gas was down low single digits on lower volumes.
Speaker Change: And finally in terms of upcoming releases, we will announce our March sales results for the five weeks ended Sunday April six on Wednesday April nine after market close.
Speaker Change: That concludes our prepared remarks, I will now open the lineup for questions.
Speaker Change: Thank you and we will now begin the question and answer session.
Speaker Change: If you have dialed in and we'd like to ask a question. Please press star one on your telephone keypad to raise your hand and join the queue.
Speaker Change: I would like to withdraw your question Press Star one a second time.
Speaker Change: If you are called upon to ask your question and our listening via speaker phone on your device. Please pickup your handset and ensure that your phone is not on mute when asking your question.
Speaker Change: To be able to take as many of your questions as possible. We ask that you. Please limit yourself to one question.
Speaker Change: Again, it is star one if you would like to join the queue.
And your first question comes from the line of Simon Gutman with Morgan Stanley. Your line is open.
Speaker Change: Yeah.
Speaker Change: Hey, Brian Hey, Gary Simeon Gutman I will ask one question.
Speaker Change: I want to talk about sales impact and the consumer broadly curious if consumers willingness to purchase either discretionary or non discretionary.
Speaker Change: Egg prices are blooming as.
Speaker Change: As a consumer coming back at all.
Speaker Change: And then it looks like your results don't show an impact, especially in Canada.
Speaker Change: Both in the quarter and in February but curious if there's any slowing in any places from tariffs backlash et cetera. Thank you.
Speaker Change: Yeah. Thanks Simeon.
Speaker Change: Yes, I'll take the first part of your question.
Speaker Change: The state of the consumer I guess more broadly I think youre right in the way you described it we're not really seeing any change in what we've seen around our members over the last really a few quarters. We believe that the member is probably as much focus now on quality value and newness as they have been for quite some time.
Speaker Change: But they are still showing that willingness to spend but they are being very choice for where they're spending their dollars and we think that's likely to continue and maybe even become more choice full as the impact of some return of inflation and the potential impact of tariffs could flow through as well.
Speaker Change: I'd say, we're also seeing a continued sign of what I mentioned last quarter, where there's some indication that members are spending a little bit more on food at home versus food away from home overall.
Speaker Change: That kind of I guess, the macro themes that we see when we talk about individual categories I would say our non foods again, I think you characterized it well for us our merchants have done a great job of really focusing on those three key themes that we hear from our members around bringing in great items at great quality and great value and while there's examples of that with newness around things like <unk>.
Speaker Change: And some of the large electronic and gaining items I mentioned, we're already seeing it as being fairly broad based across all the categories that I just did on the on the call earlier, so generally we're continuing to see.
Speaker Change: Strong trends overall in non foods. There are a couple of categories. Generally that are have been flatter I would say over recent quarters that consumer electronics and apparel. We believe we're performing relatively well on those compared to the industry, but they are at lowest trends on those on those items and that would be in some of the other category.
Speaker Change: With that I mentioned earlier, and we're seeing as I mentioned in some of the prepared remarks, we continue to see great trends on fresh.
Speaker Change: Products overall and it's rare.
Speaker Change: A bit of a bifurcation that we're still seeing really good growth on the more premium meat items, but we're seeing even faster unit growth I would say on some of the labor cost cut items like ground beef and poultry and pork.
Speaker Change: So overall I think the trends that we've seen we're not really calling out anything significantly different but of course, we're watching very closely and making sure. We're reacting to what we see from our members on catheter in particular as you mentioned really the the results that we reported in February are very much in line with the results that we've seen year to date, they actually had.
Speaker Change: The strongest overall comp sales when you adjust for FX and gas out of the three reporting segments that we talk about with international U S and Canada, but they had a phenomenal Q2, so they did come down a little bit from the trend that we saw in Q2, but still a very strong results overall.
Speaker Change: Thanks, guys. Good luck.
Speaker Change: Thank you.
Speaker Change: And our next question comes from the line of Michael Lasser with UBS. Your line is open.
Michael Lasser: Good evening. Thank you so much for taking my question with core on core margins being down modestly this quarter.
Speaker Change: Keep that as a sign that the recent screening of margin expansion that Costco has been able to achieve is coming to a conclusion or at least a pause.
Speaker Change: Especially in light of what seems like could it be a much more inflationary environment and a difficult dynamic with having to manage through the tariffs. Thank you very much.
Speaker Change: Yeah. Thanks, Michael Thanks for the question no I wouldn't really read too much into the individual results in the quarter on the core on core margin. Overall, we were pleased with the fact that the gross margin rate was up four basis points. So a slight improvement while we're still investing in more value for the member.
Speaker Change: And when we look at the breakdown of that core on core was down as you mentioned eight basis points to give you a bit more color on that food and sundries was actually up slightly fresh was up slightly non fees was down slightly so that was a sort of a mix change in that somewhat that impacted the numbers. While you may have heard me mentioned on the prepared remarks, but one.
Speaker Change: The things that with an increased cost during the quarter was higher supply chain costs as we have been continuing to buy more inventory, which we think will be helpful. As you think about some of the unpredictability that we've seen in supply chain timing and also with the potential risks around tariffs and really when we looked at the overall results for the quarter and installed at the core margin overall.
Speaker Change: It's going to be up slightly we have that ability to be able to invest and ensure that we're continuing to take care of the member side. We were we were quite deliberate on that this quarter, but again I wouldn't read too much into the individual puts and takes we feel good about the overall margin and our ability to keep investing in the member while at the same time.
Speaker Change: Continuing to deliver the results that we delivered.
Speaker Change: Thank you very much and good luck.
Speaker Change: Thanks.
And your next question comes from the line of Christopher <unk> with JP Morgan Your line is open.
Speaker Change: Thanks, Good evening. So one quick follow up and then an additional question.
Speaker Change: Other retailers are talking about whether having a negative impact on some of their more weather sensitive businesses. So I guess, turning turning the question upside down do you think about the 8% core comps that you saw in the month of February did you see any weather headwinds on.
Speaker Change: On your discretionary businesses or was it just simply offset on the AG side and then on the tariffs historically foods for things that come from Mexico that our fresh foods historically.
Speaker Change: Stuff gets passed through directly to the consumer how do you think about Costco stance on that.
Speaker Change: There is opportunities to meet with eggs, where you're vertically integrated and you can absorb some of the costs, but as you think about stuff like fresh food that's more commodity base would you just pass those price increases along thank you.
Ron: This is Ron as far as the weather we experienced the same whether everybody else did the last month and we tend to capture a lot of that back.
Ron: That's not an extended event and if it is not tied to a holiday.
Ron: Yes, we saw some hits here and there, but we recovered most of that in there probably was a little bit of the edge on sales taken off due to some extreme weather in the northeast and the Midwest. So we feel pretty good about.
Ron: How we handled through those those storms.
Ron: As far as the tariffs go on the grocery items are buyers deal what those like they would any other cost increase and.
Ron: There are sometimes the margins are much tighter in those categories, but they are prepared to work closely with the suppliers and see how efficient we can bring goods to market and is there anything we can mitigate in those categories. So it's the tariffs are very fluid right now so it's hard to really give any predictions on what we can do but we are preparing our people are very well equipped to.
Ron: Lower prices and defer any cost increase that come our way. So we're going to do all we can should that happen.
Ron: Great. Thanks very much.
Ron: Youre welcome.
Speaker Change: And your next question comes from the line of Scot Ciccarelli with tourists Securities. Your line is open.
Scot Ciccarelli: Hey, guys Scot Ciccarelli.
Scot Ciccarelli: With near Gulf Treasure Hunt Treasure Hunt structure, you guys have a lot of merchandising flexibility. So I guess, if we get tires rolling into China, and Mexico, Canada with the strategy being more focused on it is what it is Costco will still have the best value for those products relative to others.
Scot Ciccarelli: Or would there be a more aggressive effort to find goods from less tariff impacted countries.
Scot Ciccarelli: It would be a little bit of both.
Scot Ciccarelli: Youre exactly right with our flexibility of the treasure Hunt.
Scot Ciccarelli: There's not many items that we can't find something to replace or something else to bring in in that category, but it's going to be a little bit of both of those strategies that we can.
Scot Ciccarelli: As we say when it rains it rains on everyone in such as a tariff that we're all equal there and I feel like our people are very well equipped to deal with anything coming our way with our reduced SKU model and we can we have great partnerships with our suppliers and those items are very important to them as well. So I feel like we're well equipped to deal with whatever is coming our direction.
Scot Ciccarelli: And not knowing what that's going to be I can't really tell you what the outcome will be but.
Scot Ciccarelli: Our people are nimble and Theyre ready to go out and if they need to.
Scot Ciccarelli: Thank you.
Scot Ciccarelli: Yeah.
Speaker Change: And your next question comes from the line of <unk> with Bernstein. Your line is open.
Speaker Change: Thank you for taking my question so.
Speaker Change: This is a follow up on the international side.
Speaker Change: And first of all short term question in terms of the February sales results is there any timing shifts between January and February that led to.
Speaker Change: Sequential slowdown in the other international.
Speaker Change: And longer term.
Speaker Change: I don't know it seems perhaps understand how do we think about the long term international growth runway from here. Thank you.
Speaker Change: Sure Yes on the first part of the question there is some impact from particularly on the Asian markets. The Chinese new year, we generally because it didn't roll up to be a meaningful enough number at a total company level. We had we didn't call that out in our results we didn't call. It out in the in the January number specifically, either but yes, I would say you have to kind of look at the two months in.
Speaker Change: Combined the two really two.
Speaker Change: To understand the trend because of the impact that we would see from the Chinese new year impacting particularly.
Speaker Change: Korea, and Taiwan and China.
Speaker Change: And then in terms of the long term prospects for our international business Ron mentioned it in the prepared remarks, we had a tremendous second quarter. We were thrilled with the progress that we saw across those Theres international markets overall, and as we think about new store a new warehouses on the plan that as you may recall, we talked about 25 to 30 new warehouse.
Speaker Change: A year and as we look at our long term plan, we would things just over half of those would likely be in the U S. But just under half would be in our international markets, including Canada, Mexico, Asia, and Europe, and we look at all four of those as a strong market for us and opportunities to continue to expand our presence because we wouldn't see any of those as <unk>.
Speaker Change: Fully penetrated today and we're fortunate in that our international markets have similar or in some cases better profitability as a rate to sales than we have in our U S market as well so we still see plenty of opportunity and they remain an important part of our growth strategy.
Speaker Change: Thank you.
Speaker Change: And your next question comes from the line of Oliver Chen with TD Cowen Your line is open.
Oliver Chen: Hi, Thanks, Frank Gehry.
Oliver Chen: We had a question about general merchandise and electronics would love just thoughts on what you're seeing with respect to those.
Oliver Chen: Categories in the health of the consumer we want.
Oliver Chen: And you've done a great job with <unk> and are beginning with international products that would be great to hear.
Oliver Chen: Prospects, there and then a follow up.
Oliver Chen: On the more targeted and strategic multi vendor mailer as well as digital promotions and deals what's happening there. It seems like there's some nice traction and is it driving traffic or how are you approaching the nexgen and goodbye. Thank you very much.
Oliver Chen: Sure. Thanks, Oliver I'll just quickly you rattled through I think there were three different components that so im not consumer electronics and generally speaking, we believe and from what we see we're growing market share, but that's area would still be relatively slides that with flat to slight growth there, whereas the market overall, though still seems to be pretty sluggish and I think we're still look.
Oliver Chen: King for that next wave of new innovation to really spark extra growth in that in that category. We did see some really nice sales around the holidays on the larger TV screens and 98 inch 100 inch TV screens that created some new excitement and visually with very compelling in the warehouses and at all price did a great job in merchandising those and we saw some some nice lift at that.
Oliver Chen: Time of the year, but overall relatively flat as a category, especially compared to many of the other non food categories, where we see double digit growth currently.
Oliver Chen: On the international product I think was the second comment you made yes, we're really excited about that opportunity. We continue to see at our monthly budget meetings. When we have all of our operators come in that sharing examples of products that are resonating and in each of the markets that we operate I'm very quickly because of the ability to share those ideas across the teams, we're finding ways to bring those and bring our global.
Oliver Chen: Buying tobacco in finding even better ways to bring them to our markets, but also a better value for our members and we've seen some great growth in those opportunities and we think that'll be an important part of our continued growth in the future as well.
Speaker Change: Ron anything you want to add no.
Speaker Change: Gary is 100% right and then on the multi vendor mailer in the promotion.
Speaker Change: It really is excitement in that product mix and it's a good balance of everyday low prices that are buyers work towards on ensuring the quick key commodities are at an everyday price that our members can count on but also bringing in some newness and excitement and partnering with our suppliers when they want to drive some sales and we can deliver that through the multi vendor mailer.
Speaker Change: So I think the key to the success there. It is driving traffic continues to be a win for our members and I think the newness and keeping it fresh has been the key to that success.
Speaker Change: Yeah.
Speaker Change: Thank you best regards.
Speaker Change: Thank you.
Speaker Change: And your next question comes from the line of John <unk> with Guggenheim Securities. Your line is open.
Speaker Change: Hey, Ron I had a couple a whole list of questions with regard to Ks when you think about new item introductions.
Chaos versus national brands, how does that kind of compare.
Speaker Change: In most years when you think about categories, where chaos is under the lower penetration rate, which is a lot of non foods.
Speaker Change: Where can you kind of make breakthroughs there right and introduce Ks items that don't currently exist and then would you say.
Speaker Change: A very high percentage of the chaos introductions.
Speaker Change: And up in permanent fixtures in the in the assortment.
Speaker Change: Okay.
Speaker Change: The greatest opportunity, we have would be a non foods and it was something that was a category that we always felt brand loyalty was extremely strong which it is but the motor oil was a great example of it is now our top selling motor oil and all of our warehouses across scores of Kirkland signature where that was a very brand related item before.
Speaker Change: Sure.
Speaker Change: Golf balls was another example of when we entered into a extremely brand loyal category that we were able to breakthrough. So we see great success there.
Speaker Change: <unk> continue to look at where are those opportunities that we can improve quality from the brand or meet the quality of the brand and bring our substantial value to it. So we're not in a race to develop hundreds of Kirkland items, we look at it more of a strategic item by item basis that when there is an item that with an opportunity then that's when they will go after that the recent.
Speaker Change: <unk> bags and storage bags that we did in our sundries department are a tremendous value supreme quality and really doing very very well.
Speaker Change: And yes, you are right. We do have a very high success rate of Kirkland items, I mean, but there are failures out there there are things that we always say Claudia and myself, our head merchant, we can't fall in love with our own stuff and so we hold Kirkland signature to the same standards, we would at any branded item. If the sales were not performing our members are not resonating with that item.
Speaker Change: It is quick to go out as any branded item would be as well. So theres no annuities to FERC. One item has to meet the same standards, but I am very proud of the buyers that they do have a high success rate. They do their due diligence on those items when they really delivered great value to the member when we launch a kirklin item.
Speaker Change: Thank you.
Speaker Change: You're welcome.
Speaker Change: And your next question comes from the line of <unk> <unk> with Oppenheimer. Your line is open.
Good afternoon, and thanks for taking my question. So I guess, Gary just going back to a 13 basis point headwind on the wage front I think starting in March is that headwind larger given it's the first year of the agreement given some of the other changes and then just related to that given that it is a significant headwind do you guys see any new productivity opportunities to help offset some of the increased wage pressures. Thank you.
Speaker Change: Yes, thanks for your passion.
Speaker Change: Just to clarify that to answer your question as you May recall, we had a number of our wage investments that we made back in March last year.
Speaker Change: Our wage investments you've already made in March last year, and then we had another wage investment in July where we introduced a dollar increase at the bottom of the scale on the top of the scale and a 50% increase in the intervening points between those two.
Speaker Change: And then we just announced the wage increases that we've implemented this month with our new employee agreement.
So overall, what youre seeing is that the investment from this time last year will drop off.
Speaker Change: Drop off but we will have cycled it side, we've made that investment now and thats embedded in the numbers that where we're operating with so the headwind that we'll see in the current quarter will be the investment from July and the investment that we've made in May as you think about it quarter on quarter, it's about a mid single digit increase in.
Speaker Change: The basis points of investment.
Speaker Change: Because we're essentially cycling last march's and replacing it with this new increase so think of it as adding about a mid single digit basis point increase on an hour wage investments in the new quarter.
Speaker Change: And to answer or I should also say there'll probably be a.
Speaker Change: Is it a one time catch up in Q3 as well that'll be the accrual for vacation for the full year, because we are implementing that now, but we have to go back to the start with fiscal year with that change so there'll be an adjustment in the quarter for that as well.
Speaker Change: Outside of that to your point, we were very successful in the current quarter. Our operators in Q2 did a great job of continuing to drive productivity and continuing to improve efficiency. So that we actually still were able to achieve SG&A leverage as you heard me talk about earlier of nine basis points actually on the on the core and so.
Speaker Change: Our goal will be exactly the same is to continue to find ways to be more efficient because we are committed to continuing to invest in our employees as part of our code of ethics is to make sure that we're delivering industry, leading wage and benefits for our employees. So that'll be a continued part of the strategy, but it also includes being more highly productive and finding ways to fund those through.
Labor productivity and continuous improvement.
Speaker Change: The expectation we set for ourselves.
Speaker Change: Great. Thank you I'll pass it on.
Speaker Change: And your next question comes from the line of Greg <unk> with Evercore ISI. Your line is open.
Speaker Change: Thanks, everyone clarification, then my question. The clarification was on inflation I heard up low single digits is it fair to say that grocery was slightly above 1% and then maybe a general merchandise was deflationary.
And then I wanted to ask about alternative media.
Speaker Change: Yeah on the on the inflation side of things. So fresh was at was our highest of the three categories.
Speaker Change: Particularly in meat was the the highest there.
Speaker Change: Food and sundries would have been very low single digit inflation, but still inflationary or not and I would say important to know I guess that the trend was a little bit of an increase during the quarter. Because if you recall last quarter. We shared that inflation was flat. So we did see some increase in inflation as the quarter progressed and I would say meat was the largest of those food and sundries would've been.
Speaker Change: Next in non foods.
Speaker Change: Has been deflationary relative to recently that sort of even itself out now as we as we cycle some of the deflation from the supply chain about a year ago.
Speaker Change: Got it thanks, and then on the alternative media you talked about building that out could you help frame it a little bit Gary and.
Speaker Change: And the strategy behind it some of your peers have shown four or 5% of digital revenues can be.
Speaker Change: The advertising business, how do you how do you guys think about that.
Speaker Change: Sure I think overall I know I've mentioned this previously is while in discussions that we do have an alternative profit stream today, where we generate significant value through our large co branded credit card program. The travel business that we have and we have a revenue E. Commerce AD revenue stream that comes from many of this.
Speaker Change: Applies to participate on our on our website today and that's a few hundred million dollars. So there are a number of areas today, where we generate value in that space having.
Speaker Change: Having said all of that we do believe that the new sort of retail media theme, which is really going after the marketing dollars that the CPG spending is a significant growth opportunity for us.
Speaker Change: We are though in the very early stages of that we need to continue to build out the infrastructure and the capabilities and I would say, we're not only building those out to deliver on our retail media platform that we want to create for our CPG suppliers, but also to build out more of a sort of personalized capability for our own membership experience delivering more targeted.
Speaker Change: Relevant messaging and so think of it as the right offer the right communication through the right channel to the REIT member at the right time and this is really the capabilities that we're building for ourselves today and it will take some time to do that so it's likely to be a multiyear roadmap as we build those capabilities I would say, but we did at the same time launch this asset.
Speaker Change: It offers media channel. So that we can start to really test and learn and grow capability with our CPG suppliers and there's been a lot of interest and appetite to to really build that capability and we as we mentioned on the call. We now have 10 campaigns live and we see a lot more in the pipeline.
Speaker Change: From our perspective, though we've also mentioned this in the past is that I wouldn't think of it as Costco really coming out and declaring a new revenue stream with a new margin profile will think of it very much as being how do we generate a fair share of that value. So we can reinvest in our members and continue to drive our overall loyalty member engagement and drive top line sales are a little bit of a differ.
Speaker Change: Approach for US then you probably hear from some of our peers and others.
Speaker Change: One more reason for a bigger executive rebate.
Speaker Change: You got it exactly.
Speaker Change: Alright, Thanks, Gary and good luck guys.
Speaker Change: Thank you.
Edward Kelly: And your next question comes from the line of Edward Kelly with Wells Fargo. Your line is open.
Edward Kelly: Yes, hi, good afternoon guys.
Edward Kelly: Wanted to I wanted to ask you about throughput.
Edward Kelly: Doors.
Edward Kelly: Talk just a little bit about where you are.
Edward Kelly: From a standpoint of initiatives.
Edward Kelly: Our throughput I know you are scanning now and people are coming and I'm sure what you're doing with that.
Edward Kelly: And when you think about.
Edward Kelly: Chuck.
Edward Kelly: And obviously, it's a high class problem, but it's very busy.
Edward Kelly: And then you did mention extending hours on the gas stations.
Edward Kelly: Is that something that you maybe you can take from the stores, but with hot without problem. Thank you.
Edward Kelly: You know that.
Speaker Change: Good question.
Speaker Change: The speed of the checkout is one of our primary focuses right now and what uses of technology. We have scanning at the front door was very very helpful. For our operations really kept our people informed on what traffic looks like and they can adjust to opening up registers in closing registers and we saw some great improvements in productivity from that is.
Speaker Change: Well that was just a foray into the whole technology thing. So we see many things go on with self checkout, how we can improve that and so that is indeed, one of our biggest areas of focus for technology in our warehouses is how we can get members through quickly and turn parking spaces and do those type of things is there's a big push for us.
Speaker Change: Yeah.
Speaker Change: Okay.
Speaker Change: Yes, yes.
Speaker Change: A very big one for us Im sorry.
Speaker Change: I'm, sorry would you consider expanding store hours.
Speaker Change: Just quickly.
Speaker Change: <unk>.
Speaker Change: Just curious your thoughts there.
Speaker Change: That is something that does not off the table, we do look at that.
Speaker Change: Our gas expansions, we have 60 U S gas stations going through different they are at a different phase and expansions now we did see some demand from the commuters both at the early hours in the evening hours. So I think that that's going to be real benefit to those folks as well, but we will continue to look at the the warehouse hours no plan.
Speaker Change: That place at this time, though.
Speaker Change: Okay. Thank you.
Speaker Change: Welcome.
Speaker Change: And your next question comes from the line of Chuck Grom with Gordon Haskett. Your line is open.
Chuck Grom: Hey, Thanks, very much I wanted to just to go back to the digital MBM and was curious how fast that effort has been at this point in time I guess, maybe how many members received the digital MBM and are you, replacing that paper MBM and then I guess, we open our question. So I guess what have you learned so far in terms of elasticity or.
Speaker Change: Our response rate.
Speaker Change: It is it allows us to do different things that you can.
Speaker Change: The print processes quite extended so where our merchants are two months out when they are putting together the mailed MVM, which is still a very effective I mean, it's still very effective one is arrived in people's homes. The digital MVM is gives us quite a bit of nimbleness that up until the day before we put that out there we can the vendor wants to jump in and why.
This will drive some sales and it really gives us a lot of flexibility.
Speaker Change: Buyers have taken some items out there run the digital MVM for 10 days compared to the 28 or so that we had run the regular MVM and you may be able to let other other vendors now get into this type of communication to people and it really drives a lot of sales, but it has been incremental to the mailed MVM that we have out there. So we found it to be.
Speaker Change: Effective and it's.
Speaker Change: We're talking 40 million people are getting in.
Speaker Change: Just kind of a imprint in their email on what kind of activities. One of the biggest open rates. We have in our email is what's going on in their warehouse nearby and so when members get to see new items that are arriving in.
Speaker Change: Items that are on a special deal from the supplier, it's very effective for us in driving traffic.
Chuck Grom: Chuck maybe just to build on the part of your question that was tied to more of the targeted element of the communication.
Chuck Grom: Think of it as assets at a foray into how do we pay a little bit more targeted by using our membership data to make the message more specific to how you shop with Costco as a member so halfway.
Chuck Grom: How frequently you're visiting us what are the type of products that you are buying and then kind of re prioritizing.
Chuck Grom: Way in which the individual items of messaged on the communications to reflect more that's relevant for you and also the messaging that's really driving the communication to the member at the top of the email that sending out the message as well. So it's really that first step for us into saying rather than one size fits all how can we start to adjust that without changing the <unk>.
Chuck Grom: We go to market, but just making the communication part of that more relevant and the early signs we're encouraging around the level of engagement and the change in behavior that we saw as a result of that so certainly more to come on that front.
Speaker Change: Just a quick follow up here just I guess, one did you guys start that effort.
Chuck Grom: That was this last month.
Chuck Grom: On the digital I mean, it's been for years, but more Personalised was this month, yes, right right. Okay cool. Thank you.
Speaker Change: And your next question comes from the line of Kelly Bania with BMO capital markets. Your line is open.
Chuck Grom: Okay.
Kelly Bania: Hi, Thanks for taking my question Gary.
Kelly Bania: I wanted to just ask about membership fees, obviously, you've had the increase in U S and Canada, that's flowing through but.
Kelly Bania: Any update on where you are at with international other international countries.
Kelly Bania: Right time for any any changes there and maybe just also an update on the other international countries executive programs that says any plans for any additional rollouts there.
Speaker Change: Yes, Thanks, Kelly on the membership fee first of all yes, we increased the membership fee in Australia in 2023 fiscal year 2023, Mexico actually increased last year as well that was in September and actually we just announced in Japan and Korea, our membership fee increase as well. So we are we don't have them all on the same.
Speaker Change: Cadence they tend to be tied to their own individual plans and when the when the membership fee was introduced and when that previously had changes. So it doesn't always follow the same cadence as the U S. But we are changing membership fees in those countries will have already and other countries will continue to look and review on their own sort of cadence so continuation of previous.
Speaker Change: Our strategy that is very much the plan.
Speaker Change: And then on executive membership typically we look at it from the basis of when we reach of scale and in individual markets. We have executive membership in a number of the Asian markets, We have executive membership in Australia, and the UK as well because again they have reached a level of maturity and size.
Speaker Change: The exciting part there I'd say is that if you look at Canada and the U S that have the highest level of executive membership penetration as you go down that maturity curve Asia would be next but would still have a meaningful opportunity to continue to grab executive membership more towards the U S and Canada conversion rates and Australia, and the UK would be further behind Asia as well.
Speaker Change: So as they go through the maturity curve is one of those areas, where we see opportunity to continue to increase the executive membership penetration and as we grow some of our newer markets and smaller markets into larger number of warehouses will continue to evaluate the opportunity to introduce executive membership there as well.
Speaker Change: Yeah.
Speaker Change: And your next question comes from the line of Robbie <unk> with Bank of America. Your line is open.
Robbie: Oh, Hey, Ron and Gary Thanks for taking my question I was wondering.
Robbie: Excuse me if you could talk a little bit about the average ticket trends in the U S ex gas and give a little more color on mix versus number of items versus.
Robbie: Inflation impact and if anything is it.
Robbie: Changing there in terms of how youre getting to average ticket ex gas and maybe related to that I was just kind of curious if.
Robbie: Sugar and butter and flower are deflationary why use bakery inflating.
Robbie: Yeah, Yeah sure I'll take the second one first it's easy it's really AG, that's causing the major pain. There is kind of offsetting unfortunately, just the percentage growth that we're seeing in AG as far outweighed the deflationary situation on those on those other items.
Robbie: In terms of.
Robbie: So that mix in the basket and I'd say, we've been really pleased over the last 12 months, because if you'd looked at our results 12 months ago. We would have seen consistency in the visit growth, which has continued to be the case and thats been something that has been a trend for the last two or three years that we've been extremely.
Robbie: Pleased with and seeing that continued frequency of increase in visits but about a year ago, we would have been flat to negative on that.
Robbie: The overall, so the basket size and as you look at the change that we've seen over the last 12 months, partly I think because of the improvements that we've seen in non foods growth over that period of time.
Robbie: And as we've continued to deliver great assortments and great quality and great value for our members we have already seen our merchants and operators do a really good job of turning the corner and that in that situation and growing the number of items in the basket and the overall basket size up until this quarter as you know inflation has been relatively flat for us so any.
Robbie: The improvement that we were seeing at that point would have been largely driven by items in the basket versus the or Upselling in terms of.
Robbie: Is that better or bigger products by the member versus inflation driving that growth, but obviously that could change this year, depending on what we see with the with inflation and also with the potential introduction of some tariffs.
Robbie: Got it thank you.
Robbie: And your next question comes from the line of Joseph Feldman with Telsey Advisory Group. Your line is open.
Joseph Feldman: Yeah, Hi, guys. Thanks for taking my question.
Speaker Change: I had two kind of quick ones for you first on gas volumes I think I heard you guys say that volumes have been down and we heard that from another company you know pretty well Gary.
Speaker Change: And I was just wondering what is driving that.
Speaker Change: Little surprising to hear that the volumes were down the other question was about the stores.
Speaker Change: If you could just remind us.
Speaker Change: The new.
Speaker Change: New versus existing market balance of stores and also U S versus international for.
Speaker Change: For the year. Thanks.
Sure Yeah on the first part of the question. So the comment that we made about gallons being down was very specific to February. So if you look at our year to date results, we would be positive in gallons on gas.
Speaker Change: I would say that there isn't a huge amount of growth.
Speaker Change: I suspect the market generally may be flat to down, but we've been growing our market share as we look at the year to date is a little bit difficult to talk about one particular month, because there as Ron mentioned earlier, certainly weather can have an impact on those things. So wed look at probably the trend over a slightly longer period of time and say generally gallons.
Speaker Change: But it's it's low single digit growth in gallons versus <unk>.
Speaker Change: Compared to the growth that we see in other parts of the business today.
Speaker Change: Our new stores.
Speaker Change: I've got that this.
Speaker Change: This year, well open 15 locations in the U S.
Speaker Change: Three in Canada, and we will have seven and the other international countries that will open up and that's pretty typical for <unk>.
Speaker Change: Normal twenty-five warehouse here for us.
Speaker Change: Okay.
Speaker Change: Got it thanks, guys. Good luck with this quarter.
Speaker Change: Thanks.
Speaker Change: And your final question comes from the line of Mike Baker with D. A Davidson your line is open.
Speaker Change: Okay. Thanks.
Speaker Change: As a lifelong.
Speaker Change: Sharon, Massachusetts, I'll, just say that the entire town is really excited for your 900 store.
Speaker Change: The Buzz is high.
Speaker Change: My question also on gas.
Speaker Change: Just wondering.
Speaker Change: Pending the hours has that led to incremental gallons are you seeing customers take advantage of that and then a second question just.
Periodically we ask about your price gaps versus others, how do you see those right now, particularly with some inflation creeping back in thanks.
Speaker Change: Thanks, Yes on the first part of the question, Yes, we've been pleased so far with the member reaction and we are seeing.
Speaker Change: An improvement in overall usage of the gas station. So that's it's early days of course, but so far we've been pleased by the continuous by the member response.
And then the second part of question.
Speaker Change: Price gaps versus Kabbalah, yeah. So really this is something that we tend to look at it we really tend to view ourselves with our own biggest competitor. We have every every payer we have that budget meetings and we look at our prices and our goal at every meeting as defined where can we find ways to lower costs and lower prices for our members.
Speaker Change: I would say, we feel really good about our price gaps. We we generally the price changes that we're making a proactive versus reactive to others, but if we do find any area in those meetings, where we believe we need to adjust typically the operators in those markets have adjusted those prices before we've even got into the meeting. So overall, we believe that the folk.
Speaker Change: On delivering the best value and quality and pushing ourselves to always get better as is what's important and we think that certainly reflects the overall value that we're offering today.
Speaker Change: Yeah.
Speaker Change: And we hope to see you next week and sharing Mike I will be there.
Speaker Change: [laughter] I'll say Hello, alright, thanks, Mike.
Speaker Change: And ladies and gentlemen, this concludes today's call and we thank you for your participation you may now disconnect.
Speaker Change: Okay.
Speaker Change: Yeah.