Q4 2019 Earnings Call
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Thank you good afternoon, everyone.
I'll start by saying that these discussions will include forward looking statements within the meaning of the private Securities Litigation Reform Act or 1995.
These statements involve risks and uncertainties that may cause actual events, resulting underperformance to differ materially from those indicated by such statements.
The risks or uncertainties include but are not limited to those outlined in today's call as well as other risks identified from time to time into somebody's public statements reports filed with the FCC.
Forward looking statements speak only as of the daycare made every company does not undertake to update these statements except as required by law.
In today's press release, we reported operating results for the fourth quarter in fiscal year 2019, the 16 and 52 weeks ended September 1st.
Reported net income for the quarter was $1.97 billion or $2.47 a share.
Compared to 1 billion 0.1, 0.4 $3 billion a year ago were to 36 cents for sure.
This year's fourth quarter was negatively impacted by 123 million dollar pretax reserved as today or 96 million after tax or 22 cents per share related to a product tax assessment.
In terms of 123 million dollar pre tax reserve for charged as Julie last week, we received an assessment related to certain product taxes discovered a seven of the half year period from January of 2009 through July 2016, well, we'll be Fabio protest to this I reserve for this assessment was recorded in the fourth quarter.
The accordance with U.S. GAAP.
Excluding this reserve Q4, 19 net income would have been 1.19 billion or $2.69 a share a 14% increase over last years fourth quarter.
Net sales for the quarter came in at 46.4 or $5 billion say, 7% increase over the 43.41 billion last year.
And for the entire fiscal year net sales in fiscal 19 came in at 149.35 billion.
7.9% increase over last years 138.43 billion.
In terms of comp sales as reported in the release for the 16 week fourth quarter reported U.S. was 6.2.
Excluding gas deflation FX and revenue recognition it was 5.2.
Canada reported 2.6 ex deflation FX and <unk> 4.7.
Other international reported 1.9.
Ex those items 5.0.
So total company both for the 16 weeks with and without those items was a 5.1.
Ecommerce was a 19.8% reported comp and a 21.9% ex FX and Rev. Wright.
In terms of Q4 comp sales metrics fourth quarter traffic or shopping frequency increased 3.7% worldwide and 3.6% in the U.S.
Weakening foreign currencies relative to the U.S. dollar negatively impacted sales by about 60 basis points gas price deflation was a negative 50 basis points and Rev. Rec benefited comp sales in the quarter by a plus 110, so those three things together essentially zero down.
Our average transaction or tissue during the fiscal quarter was up 1.4%, both with and without the impacts of gas FX and <unk>.
Next on the income statement a membership fee income reported in the fourth quarter was a billion $50 million up 53 million or 5.3% over last years fourth quarter.
Next the impact of FX, the 53 million dollar increase would have been 58 million.
5.8%.
During the fourth quarter, the 23 month cycle to recognize the incremental p. they'll benefit of the fee increases that began in June of 17 was completed and the impact in the Q4 results was almost zero less than a million dollar benefits to the quarter.
In terms of renewal rates that Q4, and our U.S. and Canada membership renewal rate came in at a 990.9%.
Two tenths of a person from 90.7% as of the end of the last quarter.
Worldwide.
The renewal rate was 88.4 up from 88.3% Puerto Rico both of these figures all time size.
In terms of number of members at the Q4 in fiscal yearend. We had 53.9 million member households, that's up from a quarter ago, a 53.1 million in total cardholders, but at the end of year 98.5 million up from 97.2 million at the end of Q3.
During the quarter, we had 10 that new openings in the U.S. one in the UK.
First where else opening in China in Shanghai.
At fourth quarter end paid executive memberships totaled 20.8 million.
Which was an increase during the quarter of 362000 or 23000 a week.
In terms of going down to gross margin on a reported gross margin in the fourth quarter was higher year over year by reported 14 basis points.
Gas deflation in Rev Rec.
By 20 basis points.
As usual I should jump down in a few items for <unk> for Ics Xplore explanation purposes.
In the fourth quarter two columns, both reported and then without gas deflation in rough right.
The line items would be the first line item would be a merchandise core merchandise reported basis year over year was down eight basis points.
Ex gas right and Rev. Rec, it was down three basis points.
Ancillary businesses up 29 basis points and ex those items up 31 basis points year over year.
2% reward minus three and minus four basis points.
Other minus four and minus four.
If you had those up you get the plus 14 basis points as reported and again ex gas and Rev. Rec up 20.
Now in terms of the core merchandise component of gross margin was lower by eight or might really lower by three ex gas the <unk>.
Looking at the core merchandise categories in relation to their own sales or what we call core and core margins year over year were higher by four basis points subcategories within that year over year into for fourth quarter showed increases in fresh and soft lines, partially offset by a little down year over year in hard lines with food and sundries being relatively flat.
Last year over year.
Ancillary and other business has mentioned was higher by 29 basis points than 30, 31, higher ex gas and <unk>.
Mostly at most of that was attributable to strong gasoline margins.
Other was minus four both columns.
Moving to SGT, but unless you to jot down the following a again two columns reported X deflation, yes deflation in <unk>.
Operations, plus three basis points and minus two so minus two means higher by too.
Central minus five and minus five or higher by five.
Stock compensation, plus two and plus two so lower by two basis points year over year.
And then other minus 27 at minus 27, it would that you would get to the reported yesterday percentage year over year be higher worse by 27 basis points coming in at 10.9%.
Sales up from 9.82% of sales a year ago.
Again.
Excluding the onetime items discussed earlier the issue they would've been flat year over year on reported basis, an ex gas and Rev Rec higher by five.
Now in terms of the components here the the core operations component, excluding the impacts of gas in Rev. Rec again was two basis points higher. This figure included the impact of the two wage increases that were taken in June of 18 in March of 19.
Essentially hit the year over year comparison by an estimated five to six basis points in the quarter.
We estimate that once the first one anniversaries now during the quarter.
We estimate that the impact in Q1 in Q2 until that one anniversaries will be about a three to four basis point hit.
Central was higher year over year by five basis points, both with or without yes <unk>.
He was the biggest driver that increase.
In terms of stock comp again that that was helped.
That helped yesterday by two basis points that again lastly, as discussed earlier.
He hit $123 million hit test you they decided we counts for the 27 basis points.
No actually comes David Preopening expense Preopening expense for the fourth quarter came in at 41 million $10 million higher than the 31 million.
Last quarter last year.
This year in the fourth quarter, we opened 12, we had 12 total openings.
And that the plus two Relos I told Preopening was up year over year, primarily due to the preopening costs related to our chicken plant in Nebraska, It's now open for business.
We'll have the estimated 45 week ramp up to fill to full production from the September 10th go live date.
All told reported operating income in Q4 increased 1% coming in is that 1.463 million billion dollars.
This year compared to 1.446 billion last year and again, excluding the onetime items discussed earlier operating income was up 9.7%.
Below the operating income line interest expense was $3 million lower or better year over year coming in at 45 million down from 48 million the earlier.
Net interest income and other for the quarter was higher better by 23 million year over year actual interest income was better by $15 million a combination of both higher invested cash balances in higher interest rates.
With the balance of 8 million positive variance, primarily favorable FX related items year over year.
So overall pre tax income again reported excluding the onetime.
The one time item was up 3% come either 1.492 billion this year.
Billion for 49 billion last year and again, excluding the onetime Institute HR as discussed earlier.
Operating income would have been up about 11.5%.
In terms of income taxes, our tax rate in the fourth quarter came in at 25.7 per cent compared to 27.4% in the fourth quarter a year ago. This quarter tax rate benefited from a few favorable discrete tax adjustments.
A few other items of note again in the fourth quarter I as I mentioned, we opened a 12 total locations that have relos attend that new locations for the whole year. We opened 25 total locations, including five relocation. So a net increase of 20.
About three quarters those were the U.S. a quarter of them international.
Q4 in or square footage stood at 114 million square feet.
Regarding capex fiscal 18 total spend was right at $3.0 billion, we'd estimate the capex for the upcoming year will be.
That are slightly above that not that different than the past fiscal year.
In terms of stock buybacks in the fourth quarter, we repurchased 52 billion shares 194000 shares at an average price per share of a to 68 or wait for that brought the total year to 247 million shares $247 million on 1.097 million shares at an average price of 225 16.
Moving onto it a couple other items of note ecommerce again as mentioned for the quarter.
Ex gas and Rev Rec was up 21.9%.
Particularly strong growth during the quarter in what we called majors electronics into places like.
Total online grocery continues to grow to.
Very healthy clip, recognizing it's still pretty small.
Both as includes the today as well as.
One day fresh with the help of Instacart.
E Com for the first time this past quarter carried some new items like kitchenaid appliances, Weber girls and several high quality beauty brands for first time.
In addition.
We rolled out a few examples of what we if youve shop to the warehouse what we call wrote merchandise road shows kind of a treasure hunt for the warehouses. Some of those things are now be being put on line.
We sold another large diamond ring during the quarter for $220000.
And we have a upcoming e-commerce sites plan for two new countries, Japan, and Australia, excuse me, Japan, and Australia, Australia later this fiscal year sometime mid fiscal year.
In terms of the costs go up we've started at a few things do it including the do it can be uses the new did as your digital membership card that was added in July .
We now have over two and half million activations during the quarter.
Currently the App allows in addition to digital membership and the register as well.
You got view current gas prices executive members can view their growth for their annual 2% executive member reward.
A few things related to the pharmacy in terms of refill, you're managing for movies pharmacy prescriptions as well as being able to renew it upgrade and the beginnings of some new shopping list and for promotional offerings.
Probably a additionally, husbands or the works as we will continue to roll those out.
More tie ins with Costco, both in warehouse and.
Yes.
I mentioned earlier that during the quarter, we opened our first unit in China in Russia in this city have been Han part of Shanghai.
That was on August 27th to great interest.
Due to the overwhelming crowds it was actually close about four hours into the opening day subsequent that crowds have been well managed in the sales of remained very strong over the past month.
We've had record sign ups there I think it's been helped by.
First one that we've opened there as well as the social media presence.
We have over we currently have over 200000 members signed up.
Just to put that in perspective worldwide the average Costco.
Ones that have been open for months and ones that have been opened for 35 years. All told have approximately 68000 member households per location.
Our next openings planned for early 2021 and also in Shanghai in the area of Pudong.
In terms of tariffs next item.
A quick update there continues to be a lot of moving parts and changes in a few increases along the way a few comments.
As you're probably aware the first three lists which total about $250 billion of imports from China includes things from water pitchers and air purifiers to bicycles to steal shelving to furniture luggage to shredders to things like that.
That's correct. Those are currently being tariff to 25% would be CRE plan, we understand to possibly go to 30% effective October 15th, but we'll just have to wait and see.
Lists for a which is about 110 billion includes things like Kitchenware cookware Domestics includes Tvs, Although I don't think we source from there from that.
Started at 15% tariff.
September 1st.
And we'll see where that goes and then lists for B, which is an additional hundred 55 billion dollars' worth of goods equally electronics laptops tablets toys small appliances, so apparel and footwear as well.
Thats currently planned to go to 15% tariff effective December 15th So we'll get we'll wait and see since the beginning of these tariffs over a year ago.
We continue to be active in managing and where possible mitigating the impact.
Where we can we so we we accelerate shipments before tariff is being put into effect or or this being planned for an increase in terms of terror percentage level.
We are working with suppliers daily we've gone to pretty much every supplier with every item to see what we can do to both reduce cost and figure out how to do that.
In some cases, we've reduced our commitments on certain items and again based on the impact of what we expect that we've looked at alternative country sourcing where possible feasible. Although again, there's a limited amount of that ability to do that and we've taken advantage of low pricing of the certain with a few U.S. items that have not been.
It appears to be other way the exchange rate.
By the way between our two countries has helped a little bit.
So all those things as you might expect it's all over the board every item and every vendor is we'll defer some cases, where we're able to hold off on some and some that were able to.
I need to push it forward to pass it on.
There will continue to.
To pursue that.
Overall, we think we're at a good position relative to retail overall, given our scale size and scale of our ability or relationships with our vendors.
The last thing on tariffs just another area of potential tariffs that relates to yesterday's WT own element to the U.S. can.
Legally impose tariffs of up to $7.5 billion.
Do you produce goods annually.
Later yesterday.
The U.S.
We are released a list of products it plans to target the duties planning to take effect October 18th some of the products included or the list.
Include 25% duties.
Whiskeys and apparel items for the UK, various cheeses and all the wheels from certain European countries and certain pork products Buttering yogurt from various European countries to name a few.
So that's pretty much it in terms of what we have to say lastly in terms of upcoming releases will release, we will announce or September sales results for the five weeks ending this coming Sunday October six on Wednesday October 9th after the market close closes with that I'll open it up to questions answered turn it back to the operator. Thank you.
Thank you and at this time I would like to remind everyone I get to ask a question. Please press Star then the number one and your telephone keypad agenda dived into number one on your telephone keep mom <unk> Pops with just a moment compiled acute anymore.
Yeah.
We have your first question coming from the line of Michael Lasser from you want your line is no.
Good good afternoon, Thanks for taking my question.
Do you recently running a few promotions to drive membership growth you've done this in the past periodically she should we interpret this as any different than that particularly given that you're now anniversary all the benefit from the price increase Kathy could say well you want to have increased membership growth and so that's what's driving that.
Decision, how should we think about that.
No I think David as it relates to the one I think we've got currently underway.
Very similar to what the three or four we've done over the last three or four years, I think and no real yeah. We've we try to put some time between them, we don't want to get people waiting for a promotional item, but they do work and they help and.
The timing is just that nothing.
Nothing beyond that.
I don't anticipate it's doing another one for a while there is as we havent the best.
Okay. That's very helpful and then on your growth in China.
It did you get it surpassed your expectation and does that influence how many and how quickly you couldn't being in that country.
Well clearly.
Surpassed all of our very high expectations.
That being said, we're pretty methodical when we go into a new country.
Wherever it is and yeah, we opened a one or two units to start with over the first year too and they go from there.
Lot of it has to do with the fact of building the that people structure within the country, while we have.
Hope from neighboring countries and other areas.
To start the process.
You really want to build.
You know your supervisor and your Matt your functional managers of the country. So you know if you'd asked us before we even opened the first one and felt you know positive it would be good, but who know how that how do we do.
How are we really do.
Yes, how many we'd have five years heads.
The answer would probably be the same as is today.
Well, but a couple of the first year or two and then opened a couple of more perhaps and see where we go from there and we're certainly pleased.
Please the excited about what we've seen.
But you know maybe gets a little bigger, but certainly nothing that yeah, we're going to be pretty methodical about it as we have another countries.
Thank you very much and good luck.
Thank you.
Your next question coming from the line of someone get money from Morgan Stanley . Your line is aligned.
Hi, Richard So and gross margin it looked pretty solid I want to make sure I heard properly. The core encore was up four which I'd say it looks pretty normal for you up a little down a little which means that the reported it sounds like the ancillary the gas was a big piece of that.
I ask you if the dynamics there I think over the past couple of years have improved in general are they still getting better or this is just pure market dynamics on the gas side.
I think the last few years not only for us, but other big gas retailers the supermarkets in the walmarts generally the new normal over the last couple of years has been better I, particularly for US I think as prices historically have come down.
And some retailers.
Bring him down a little and some a little more is still giving us the ability to it in our view to have improved improved margins in operations and probably show even a greater savings relative to what we had a few years ago that being said.
The quarter was good there a couple of quarters, a few quarters back year over year. There was also good.
It does fluctuate, but I'd say the new dormer overall is on average.
Better than it had been.
Okay.
And the core on core was pretty normal for you as well.
The core and core well, yeah, I don't think there was any big surprises there.
We always tell you that whether it's up a little year over year, maybe it'll come down a little when it's down a little they would come up a little bit as it relates to the underlying factors of competition, we feel that the we have a city giant changes in the competitive landscape out there and there's still a lot of competition and ER and you know there's a lot of headlines out there but.
At the end of the day, we're still pretty darn competitor ourself.
Okay and my follow up is on the EBIT dollar growth. It looked like it came in high single digit like nine ish percent. This year and if you take the average over the last several years, it's come in around high single digit that range as you look out to your next fiscal year.
There anything one way or the other that should impact that I think the consensus is modeling a lower rates I know you don't comment on that but its been several years of a little bit outsize growth. So just curious if theres any big spending items margin issues that we should think about as we model the next year.
There's lots everything Simeon.
Well, we really don't you talked about the future, but we certainly feel good about what we're doing merchandising wise.
You know, we're all retailers are back to a terrorist right now that some a little bit of it impact but beyond that we feel good about what we're going on in terms of opening up another.
20 issue, that's next year and.
Driving membership were certainly we're pleased with exceed our renewal rates continue to go.
The higher direction.
And getting new members. So the overall, we feel good but we'll see.
Great. Thank you okay.
Okay.
Thank you.
Next question coming from the line of John Heinbockel from that the Brian Your line is now live.
It richer two questions on gas.
One I don't think you know maybe I'm wrong, you guys. So think about an interaction between gas margin and core on core ride, meaning if you're getting more margin at the pump in any given quarter you can put that back a little bit into core and core do you think about it that way and then on gas.
Gallon growth.
Whereas that now versus where it's been over the last year or two.
Yes.
We don't in terms of the the margin if we're doing stronger and what do we can we be a little more competitive elsewhere.
Well not completely human nature of dictates that sure when things are going well and one area you see what else you can do in another area, but I wouldn't say do.
We don't manage it that way necessarily.
As it relates to I guess floods or I think our gallons were up at the high singles.
Yes, you haven't here yes.
Okay. So we continue to dig into July to do in terms of gallon comps.
Stronger than the whole U.S. industry.
Absolutely.
And then secondly, what's your where do you stand now with the opening schedule for the year.
Maybe by geography, and cadence is is that I guess this past year was a little bit backend loaded I guess, it's the same in 2020.
Yeah, well, probably so yeah, we we generally try to get things open before the holidays. So.
When things are.
You know if you if you missed the holiday whether its February or April or May who cares as much.
But you try to push them forward a little bit as you approach.
Back to school Labor day, all the way through Christmas New years.
So I think the last of the year before was the same way we opened a disproportionate number of the locations in Q4.
So generally speaking, yes, I don't have the scheduled for me exactly but.
Okay. Thank you.
Thank you we have your next question coming from the line of Christopher Horvers, Sometimes you might Dunn. Your line is no life.
Thanks, Good evening. So one question asking a question about.
Average ticket growth ex FX and gas if you take a look in August you know that should slow down pretty sharply relative to the prior trends so.
Wanted to pick at that at that is that is that AD is that a comparison that a change in mix or perhaps lapping against some of that senator al grocery price increases that the vendors starting to put through last year is an investment in price and so just wanted get your thoughts on what's driving that any thoughts on.
The outlook there.
Well I think the prior.
If I'm not.
If I'm correct I think the less in Q3, it was like one eight or whatnot side is this quarter as a one for it.
I don't have.
Good answer is specific answer for you on that.
Yes, it could be mix.
It's probably is mix but.
Don't know a couple ahead.
Got it and then on that on the tariffs such as you think about what's been passed through how our peers acting are you seeing more or your peers, taking works portfolio approach in terms of Im just trying to keep the key priced items that certain price points and then balancing out.
First, let's say less Oh, oh, less elastic items and.
How you're assessing landscape on on that side.
Yeah, I could say the Starwood, we don't see any major competitive issues.
Yeah.
Certainly it I personally think it's easier to manage.
Some subset of our 3800 total items that we sell to given timing location versus retailers at selling 50, and 100 150000 items.
They're dealing with categories.
Certainly a bigger ticket items, it's harder I mean, you. It's hard it was a smaller ticket item it might be easier to eat a little bit of it was.
Something like furniture or.
ER.
Lawn and garden things like that that's a little harder, but overall we have it.
Yeah, we generally feel pretty good about where by the way. The other thing is where an item driven business I'm sure I don't have examples in front of me, but I'm sure. There have been examples of items, where if we weren't able to greatly mitigate or mitigate as best we can be.
Some of that tariff and some cases again, we would try to.
Geographically movie item or source from another supplier there are limits to what you can do on that.
But overall I think.
We're able to decide that to sell something in put something else in its place I think that makes it a little easier for us relative to general merchandisers, but again its impacts us all.
Got it and then on the on the announcement last night I mean, there's some some items on there that standout olive oil and she can you talk about particularly on the olive oil side of that.
So it was might be the largest seller olive oil in the United States. So can you talk about we're sourcing there we think.
Spain, hover, but at least not.
Yeah, we sourced from various several countries.
Including the ones that you just mentioned.
But there'll be some impact.
Got it and then I guess the last question is is that the money question. Here is you know another quarter down and we haven't had any announcement as to what you're going to do with Delta cash and the balance sheet that continues to build so you can talk about what you talk about what's your thought process is there has anything changed are you trying to.
Try powder for any particular reason, thanks, very much sure well I don't think theres any any drypowder M&A related dry powder, we really haven't door currently planned to do anything.
Yeah, we do have a total of a billion seven coming due in December in February a billion to and then 500 million I believe.
And so well right it will pay that down.
Yeah, we are always asked about questions about the special dividend and AD.
Comments event is that we've done three of them.
They seem to have worked well in the viewed positively so it's still in the a and the.
Yeah.
It's still in our are back pocket, but they are special and so you know well have to wait and see what we decide to do in the future, but theres nothing.
Specific that we have planned.
Understood Thanks very much.
Thank you you have your next question coming from the line of Karen short from Barclays. Your line is now live.
Hey, thanks very much.
Operating profit growth.
It was.
Percentage growth.
It was up 140 million.
Excluding the product tax assessment, but can you just get a little color on how much.
Stronger year over year gas margins might have impacted that growth rate.
I was kind of backing into about a 150 million an incremental dollars from better gas margins.
Well, we don't disclose specifics, we don't disclose the specifics, but as I think I mentioned I think it was Q2 year over year that we also had a good guys parts and certainly that was a helped to that.
Okay.
That estimate like somewhere in the range or am I.
Hi.
We really don't disk can we really don't go to that the specific detail.
And then wondering if you could maybe give a little color in terms of elasticities and anything you could point you want to see responsive categories, where you did raise prices.
Sure I mean do.
Generally speaking the bigger ticket item where are you also have a.
Good portion of the tariff is.
Next the price raise the price.
I mean, there was one of these are this is an anecdotal example, but it was one category of those types of items.
That typically is up.
Mid single digits year over year, and instead was flat to down a couple of percent.
And that is that included some price increases so probably it was down 10% in units.
But that's you know a subset of a subset of a category.
And so I don't want to suggest it was everything and then given examples from our buyers where there have been items where weve.
Essentially.
Most of the tariff is affected it up at a price increase and we still just as many uses we thought we were going to previous to that there's been others, where weve you know the test that the price increase tariff related.
Less than half of the tariff went into a price increase if he than that and we saw you saw some unit.
Reduction.
Results. So it really has been over the board, but generally speaking the bigger the item yeah. We've taken out of the retails for 99, $989 and have to get it up forget even about 12 40 now using a 25% example.
Or be 25% of the cost but nonetheless.
You know first thing you're trying to do is get into 11 99, and then you'll for there are 10 99, but weve, it's really over the more that though it's a slight negative impact.
Okay, and then I guess.
Can you just maybe give a little color on what inflation was that both I guess cost and at retail and then if you could parse that out between consumable going on.
It was very little.
And we see very little you still see.
Taking tariffs away for a second on electronics and things you'll see some some deflation overall and consumables, it's been pretty much steady as she goes one question I was asked earlier.
This week was about what's going on with the freight components and freight has actually improved a little bit.
Year over year.
So higher than it had been a few years ago, but but overall.
No.
No it's all of the superior.
Okay, great. Thanks.
Thank you we have your next question coming from the line of Chuck Grom from Gordon Haskett. Your line is now live.
Thanks, Good afternoon, Richard just on the core on core between categories. A couple were up Hardlines was down through in food and Sundries. I think you said it was relatively consistent year over year. Just can you can you dive into the hardline compression and also the changed from last quarter on the food and Sundries segment. Thanks.
Yes, a part of its mix change you know I mentioned earlier on line, but also in store electronics should majors those tend to be a little electronics tend to be a little lower margin business.
But you know good growth still.
No yeah again, when I asked the $64000 question.
Is it competition, we're not seeing a lot of big changes out there whether it is.
There is looking at those a lot of headlines with what's going on particularly on the on the food side.
But we haven't seen any big changes.
Okay Fair enough and then can you just remind us how are you guys just thinking about the companies you know long term club growth potential, particularly here in the U.S. and if you're seeing any signs of saturation in any of your your key markets, both domestically and internationally.
Well you know.
By definition like in the U.S. into Canada, and the rate of growth will slow down, but I would have said that three years ago and because what we've done to the U.S. Canada.
So we keep finding more opportunities, but overtime. It will slow down we're also of course, adding the business centers.
We have I think 18 in the U.S. and wanting to Canada with our second coming shortly in Canada, and so that'll add a little bit to it you know when when asked recently what he is a guesstimate and is truly guestimate over the next 10 years.
Most of what 540 ish in the U.S.
You know maybe another.
12, the 12, plus a year right now it's been 50 year, so by to infer down a little bit.
In Canada.
No.
One plus a year.
We thought we were saturated at 80, Canada, they only have 101 or two.
And so you know that to keep increasing certainly there'll be more.
What I think the thing that we feel most comfortable saying is.
Five years from now the penetration of.
The percentage of the total openings will certainly by that likely by then it's nothing certain.
The outside of the U.S. in Canada.
Okay, Great and then just last question online sales I think are about 5% of total revenue. When you guys are analyzing shoppers that are using either customer grocer instacart I'm curious if the purchases have replaced an in store trip and I guess it we've analyzed how that could potentially impact your in store traffic over the next you know Saint Jude.
Five years, Thanks look and it's still early it's the first full year I guess.
Generally speaking you see more.
More shops overall, recognizing it's a little less when they're shopping online.
And then that into two is still a slight net positive to what we have seen before but you know you have to be I'd look at is.
It does it replaces shop, how many shops is there any place in what we're seeing is you've got more.
Somebody who's Infilling, if you will it maybe reducing their trips to the location a little bit.
So.
[noise] I'd call it neutral to slightly good right now, but that doesn't who knows what happens tomorrow.
So far we feel good about that by the way it but we can't predict right.
By the way I think part of it also is isn't when we've talked about as what I talked about in the past is you know we use.
Communicate to our members aside from the traditional.
Cosco connection and.
A lot of emails and emails are not just for shopping online emails are talking about hot things that are happening in the warehouse while supplies last in some cases, it and we've seen good examples of that they can help drive frequency into the warehouse or create a trips and that along with gasoline.
No not every person that fills up and gas comes in I think about half do a little over half do even if one of them as incremental that's a positive we don't we don't checked to see what that is.
We were not asking but that but we know it's got a can't hurt that's got to help so we think that were.
I think those types things that have helped us continuing to drive traffic into the buildings, which we want to do.
Makes sense. Thank you.
Thank you we have your next question comes on the line of Scott pick a rally from RBC capital markets. Your line is though.
Good afternoon, guys Scot ciccarelli.
Just a quick follow up on checks kind of store opening question do you have the plane for U.S. versus international store openings for the current fiscal year.
Yes.
I think U.S. is still going to be a little more than half I don't have a sheet front of the.
Okay, that's going up and then Richard when you guys bring popular brand name privates, where there's a lot of price transparency you mentioned leopard girls on the call under your website.
How are you guys trying to target your pricing on those kinds of products. When they can be found and lots of different spots and you guys have always been price competitive course, but can you provide any color on kind of how you're thinking about you know kind of price gaps when you've got obviously, the unproven guys out there Amazon Amazon marketplace et cetera.
Yeah look I mean, we want to be the lowest priced and we're going to go as low as we can and feel good about I felt in some instances we bundle. So we created a value that includes perhaps accessories with the I'd handler that extra whatever add but these are the real value on the real real items that have a value to it add that to show up.
Even greater savings and yeah, we've done that on all kinds of things you know.
Whether its computers or.
Or.
Appliance big appliances.
And by the way you know a lot of times.
The competitive pricing tends to be on some of the entry level would you see advertised if you will.
<unk> consumers generally trade themselves up to the.
With all the extra accessories.
And what have you and that's where we continue to show good savings too I mean, we looked at some of those big ticket items and we.
They are pretty very strong savings to traditional.
Got it thank you.
Thank you Yeah. Your next question coming from the line of Bobby Griffin from Raymond James Your line is no line.
Good afternoon, Richard and everybody else. Thank you for taking my questions.
First I just wanted to go back to the grocery delivery and some of the initiatives have been rolled out here in the U.S. have those been rolled out to some of your other international markets that you're operating ecommerce sites in.
Yes, Canada now we've we've rolled it out in Canada with.
Some help from others and we would look to do it in a few other countries, but we haven't said when and where but in short order. Okay. So sometime in is it safe to assume sometime in F. Why 20.
It is fytwenty, yes, starting with the today, which is easier to day dry.
But in Canada, we're doing a one day fresh as well so we'll be doing one day fresh, but we're not doing it yet.
Okay, well doing today dried up there already okay. I appreciate that and I guess lastly from me I just wanted to touch on working capital continues to be.
Oppressive with payables lipsey over 102% of inventory now how much more room do you think you haven't that as we model out forward and is there any.
A onetime items there that are driving some of the performance that we got to keep in mind.
Well, there's seasonal issues you know our Q1 adds a.
But you know right around Thanksgiving time.
And that's generally when it's the highest payables as a percent of inventories.
The Oh I think generally the low point is Q2 in mid February when sales are a little softer.
On a seasonal basis or other than that if anything we you know as we built out E com and have more inventory in our and there.
And what makes you know where I mean, we're trying to grow at that.
Actually probably impacted a little negatively notwithstanding the fact is currently a very strong number.
We also have some programs where.
You know ideally a sometimes you'll have vendors usually smaller vendors that even though we have they have negotiated extended terms in some cases, particularly on some seasonal items or stuff that's coming in a few months since.
Sometimes if they need working capital.
You know, it's a good rate of return for us to pay early if you will.
It's called anticipation.
These are not big numbers, but those impacted a little bit that would reduce it. So overall I'd probably look at what those percentages were at each of quarter ends for the last few years and assume it's not that different.
Okay.
Yes, yes, I appreciate the detail best of luck this fiscal year.
Thank you.
Okay.
Thank you we have your next question coming from the line, it's Chris Mandeville from Jefferies. Your line is not a lot.
Hey, good evening I stress on line for Chris I'm, just a quick question you touched on it just little bit with the topic of tariffs.
Just wanted to know your general temperature check on the consumer it sounds like you know they are responding in some ways with big ticket items like you said with price increases, but in general what's your feeling on how the consumer is reacting just given both tariff politics, and geopolitical concerns and stuff of that nature.
Well I think you know I never is yes.
Speak in a sense that we're still seeing good growth certainly very good renewal rates.
Good results at opening so we feel pretty good about it now if you ask me how does that relate to the consumer who that knows I think we altered off the television.
GAAP listening to everything every day, we ought to be better.
[laughter].
Thank you.
[laughter].
I think we're also everybody's old desensitized everything.
Right now I understand thank you very much.
Thanks, Dan we have your next question coming from the line of all of it sounds from Cowen and company. Your line is on line.
Hi, Thanks, Congrats on the progress on diamonds as well regarding the digital execution. The mobile App development has been really progressive what are your thoughts on the biggest needle movers, there and as you think across digital whether that be adding new product or improving checkout and sir.
Sure your new D.C., how would you prioritize the bigger drivers for for traffic and growth at large.
Well I think first of all as it relates to the at just getting more people on it.
I mentioned, there was about two and half million since.
We improved it theres still lot of work to be done to add things to it.
Without a sexist July I think we have over 10 million.
Numbers are the App.
Other things was just getting email addresses for everybody you guys, who are doing this for a long time we were.
A little later to the game than others in terms of either collecting email addresses years ago, and we've had a big push in the last couple of years.
And we've dramatically increased the number of members, where we have good email addresses that sounds simple why should we do that.
The only tell you we are in its that's helping we're getting more people were getting more people to to open the emails to click on things and so you know and I think when things I talked about the past we still had these.
Different buckets of money.
Starting with the improved.
The improvement from the credit card transition a couple of years ago, the membership fee increase.
Tax reform all these things have helped and as you know we take that.
They get a better value for the member and I think Thats helped us.
Whether it's.
Buyers Hot buys Oh, Wow items into I think that's.
Given us a little bit a leg up over the last couple of years in terms of helping.
Achieved the numbers that we have I think.
More.
More a connection to the members going to help I certainly there's no slowdown in renewal rates. That's that's been.
Good to us.
That it's you know, it's what we see.
Every four weeks at our budget meeting for the buyers.
New and exciting stuff.
Constantly improving existing items.
You know, there's a number of examples or whether it ks items, what we continue to improve the item and lowered the price point, while it improved either therefore increased the value dramatically.
There is looking at exciting items not just for us in the U.S. to ship to these other countries, but also to take some exciting items from other countries and bringing them to other parts of Costco, So I I think Honda.
Well when I think about from a merchandising standpoint.
Where the capital gain a lot of thanks.
Our the efficiency side, we've got a lot of expenses going on.
We talked about he comes from building there's cost associated that as we do that.
There's a you know.
I T in general with everything that we've got going on whether its ecommerce or.
Fulfillment a depot infrastructure.
The new poultry complex. So there's lots of things that are in our numbers in terms of expenses as well and that we've done pretty well so well.
I think we keep.
Doing the kinds of things that we're doing as it relates to global sourcing and in some cases, some vertical integration, but ultimately just driving more value.
Thanks, Richard anything they've done a good job managing the digital margins overall as you.
Pursue the right kind of the fulfillment options and supply chain and getting the smaller packages to customers with speed.
What are your thoughts on those investments and how they aligned with what customers are looking for with the speed of delivery.
Well.
You know, we're not gonna be you know you're not to be able order something and will drop it off an hour later anytime soon.
You know for us first or improve it was I can remember it wasn't that long ago, where online particulate a big ticket items big physical item as well.
I'd say do expected delivery time three to five weeks.
And now it's three to five days said certain items with certain vendors are now and you can actually scheduled delivery and installation and so were you know tires is a great example, as well.
Used to be.
Those online now you can actually ordered them and have them and schedule. Your appointment at the warehouse where your shopping at these are all basic things, but things that we had done for long time. So I think you know you'll see continued improvement that.
Okay and yeah okay.
One of its easy and it all cost more than you think but those are numbers yeah.
You finally that you really had good momentum, including with Diamond that Costco and the big ticket sales of Diamond.
What's what's your strategy with that business and how has that been going any things we should think about.
Look I mean, it starts with great quality great value.
You know those what do you think I think that has helped and that's the jewelry area. As a good example, I went to lockers that we're now rolling out to a number of locations.
You know a lot of people on high value small size items.
They can't ship it to their place of work and they don't want to leave it at their front porch.
And so we saw an uptick.
Some of those items and some other items like handbags in a limited number of electronics, but as it relates to jewelry overall you know.
I know, we've got a lot of process because I had mentioned a 400100 diamond a couple of quarters ago. You know, we're selling close to 200000 carrots of diamonds, a year from other carrots and add a and so jewelry business is a you know it's one of the things that hits you discussed the electronics when do you typically walk into a cost go up.
It's all about valuing the trust.
Thank you best regards.
Thank you.
Question coming come from the line Robby Ohmes from Bank of America. Your line is on line.
Hey, Richard Thanks for taking my questions.
One question I'm getting is just a lot on the chicken plant can you just sort of let us know how that is.
Going so far versus expectations and also we said about 10 million of the Preopening expense this quarter and how does it affect preopening going forward and.
Maybe related to chicken plants are there any other types of vertical integration you know things that you might be looking out to do further.
Well look this is a big cliff I think its.
Its a.
It's the most daisy clip that I understand as a country.
It's going to be very efficient, but it's going to take close to a year to get to full production and the first several weeks have gone as planned in terms of you know the first chicken went through and more each day, and but you're going to get up to 2 billion.
Processing of 2 billion birds a year.
Sorry to go to the converged a week.
And about 40 more weeks or the Preopening stopped effectively when we opened in September to so.
A little bit in Q1, but not like that big amount.
But you know, it's a huge facility it.
It's also a air chilled about 95% of U.S. poultry plants are still water chilled. So all the issues. It serves its considered a.
Very high quality.
A food item.
Good.
Allows us to deliver that while doing a lot of things for the environment as well. So there's a lot of good things. It does it come without a cost if you know to it was a big investment for us It and we'll know more to a year, but where we're excited about it other things yeah. We had a year ago. We added a second meet plant we've had when it Tracy, California for many years.
We opened one at Morris, Illinois.
We also as you know opened a a bakery commissary in Canada that will also serve much of the United States in terms of things like Cookie dough, it croissants ready to bake off premise.
We're looking at a variety of greenhouse opportunities, there's a lot of technology and do things going on in the area of agriculture.
Would it be nice to greatly lowered the price of how to air ship things to Hawaii.
As well as being closer to the market and being better for the environment. So.
I think given our size and given some of the things are going on we're going to hopefully benefit from that but that's that's.
The that there's nothing else I don't think we've got planned in a big way.
I would say.
Beyond the couple of things I mentioned in the last year and half and certainly this new checking plant.
Two things on the the greenhouse side, but not that type of capital investment required that was done in the poultry complex.
Got it that's great. Thanks Richard.
Thank you you have your next question coming from the line up of Michael Montani, but other core our fine yeah why does that.
Hi, Richard Thanks for taking the question just wanted to ask for an update on executive program roll out. If you can just remind us kind of which countries have it now and which ones might be slated to get it next well we have the U.S., Canada, Mexico UK.
Korea and Japan.
And we we just started we just rolled it out this bunch of Japan Korea, we rolled out about a year year and a half ago.
Year ago.
Okay great.
One housekeeping one if I could is around a gasoline can you give us a sense you know I had been thinking that was around.
10, 11% of sales for the quarter and also what was the ASP for gasoline this quarter.
Hold on.
Submission.
Yeah.
To date before versus three or five a year ago.
[laughter] and the last thing that I had was on city. Lisa can you give us an update just on how many members have that now and what you're seeing in terms of third party spend you know just how it's progressing.
I don't have those numbers in front of us I can tell you we continue to add do levers.
We continue to the average reward preexisting.
I'd card holder or other Citi visa card continues to increase.
Of the rewards are substantial said, it's really working well.
Probably better than we had originally.
It had hoped the.
As I said well for us it hopefully our partners.
Great. Thank you.
Thank you.
Next question coming from the line of Cali Pena from BMO capital. Your line is now.
Hi, good evening, Thanks for fitting me in Richard.
Just wanted to go back to the store.
Potential question really in the U.S. like I think it was a few years ago that you noted you were able to kind of go into some smaller communities spend you maybe originally thought and so just curious as you think about the next couple of years, what kind of size and demographics of the communities are are you looking at it.
And then planning for new cloud.
And also when you when you go back to the saturation question.
Think about you know how do you analyze when you think you are at saturation what are some of the key metrics that you look out is it the the pace of the ramp in terms of fails. The cannibalization of members. There just any help on how you. How you guys think about analyzing that.
30 years ago, I think the view was as you needed about a half a million people the trade area plus certain number of businesses and all that kind of stuff.
Today that number is should be as low as 200000, sometimes it depends on some of the smaller BD marches, we got into the last few years, Joe your markets, where our competition a direct competitors where in many cases for 20 or 30 years and we had just never go there.
We've got probably a little more confident that when we go in that there's room for both of us add the and we've done relatively well.
I think the other thing is is if you look back over the last few years of my guess is the upcoming years there'll be some infill opportunities are now I've used. The example calls.
He side of Seattle, Bellevue side of Seattle, where historically, we had three locations Esquire Kirkland Woodville about two years ago, we opened in red but.
And and we only added.
Let's say in those three locations had about a 180000 members between the household so 60 65000 each.
We only added about 10000, new members of the next year, but you had a lot of loyal members that started shopping more frequently because we were closer to that part of that Cubs, whether you have high volume.
And those that example, I think as before we open that force location on this side of Seattle.
We had I.
I think over 800 million aggregate sales wanted the low threes.
The other two and the.
But the high twos and when you get to that level that gives you a little more comfort that you can afford a little cannibalization that exact that example, I think the first year data cannibalization. We did 120 plus billion dollars a business that are 20 or 30 million a business. So.
It's pretty easy to.
Estimate a guesstimate what do you think you could do particularly when you have a loyal membership base.
And and a you know and then there are other markets like if you look at the greater Los Angeles market trucking greater geographic market I think we probably have 60 ish roughly 60 units.
View is is we could have another 50, but they're all.
So it's very specific geographies, which are not quite as possible, but very difficult and we'd be thrilled to get you know one one of those 15 open every couple of years, but you don't know if that can happen. So I think it's all over the board in terms of smaller trade areas Marchex, where.
Our competition has been and we are just entering the then continued expansion in infills.
[noise], Okay. That's that's helpful and let me just another one on.
On click and collect and and how that's going and maybe what you're learning from a logistics and and labor perspective, as you do that for some of the big ticket items and then any changes our thoughts with respect to broadening to some other categories like like grocery, which I realize there are more maybe.
Complicated and labor intensive.
[noise].
Yeah, I don't see us going to deepen you were talking about tires and pharmacy a jewelry.
Handbags computers high value small small size items.
For the tide big.
Okay. Thanks.
Yes.
Thank you we have your next question coming bundle I never Laura Champine families loop capital. Your line is not a life.
Thanks for taking my question. It's just a quick one on on inventory your inventory receipts looks like we're at grew a little less rapidly than they have in prior quarters and and also relative to sales growth. So just wanted to get a sense of have why you might have cut your ordering and whether that has any.
The weather that reflects on on your thoughts on our current corner sales trends.
My guess is it's it's a little bit of an anomaly that I don't read a lot into it.
Might be that we've really built up as an example increased year over year.
Evan to online inventories related to our E com and things like that but that's happened maybe less of that happened in this quarter, we've kind of cycle that three year I'm guessing.
Other than that there's there's nothing big to read into that.
Understood. Thank you.
Why do we take two more questions.
Thank you Sir your next question coming from the line of past Tovey from Oppenheimer. Your line is not like.
Good afternoon, it's actually Erica Eiler, Ontario, Pat.
Just one quick question just flipping back to international though when you Buck in a market like trying out when do you typically see and an inflection point and profitability and cloud.
Well at the club level.
It could be the first year or a few years down the road, you've got a big central.
Expense you have geared up whether you have one location or Ted there's not a big change the huge change and the.
And this is the cost of a central for your with.
You know buyers and operations people in the accounting department and the like.
I mean, it will grow sub but you're not nearly from what the 10 and.
So it depends on the country, usually it could be year four or five.
I think in Japan, which is now 20 ish years old.
Our original budget was opened five in five years had.
Turning the corner profitability towards the end of year five I think we hit profitability near the end the year for and we opened six so.
But yes, that's probably a good guesstimate.
Yeah, it's probably you'll be a slower to countries like France, where it took US 10 years to get one open.
Well, we're just looking for additional sites, it's still to be a couple of years out so you're not to go from one to five in five years, but you know that's going to happen do well you'd have a mix of those.
Okay, Great that's super helpful.
Thank you we have your next question coming from the line of Chuck Cerankosky from Northcoast Research. Your line is not a light.
Good evening Richard.
One housekeeping question can you talk about that tax reserve on the on the product or what drove that was that an excise tax kind of thing.
It was it was an assessment on it to attacks that.
So with already felt we should have been collecting and were getting you to file a protest a and C.
How much but I can't really talked a lot about it yet.
Alright. Thank you had it relates to a seven I think seven half year period that ended in 2016 that we are just notified of before the affordable assessments and they get under GAAP accounting.
We leave reserved for it.
Okay, and then looking at the tariffs situation that you get an impetus to put a use private label sourcing on more products as a result to get the price down and in general what are you thinking about for new categories, New items for private label in the bank fiscal year, yes that really for tariffs.
Well first of all some of our our private label items are sourced out of the of out of China as well. So you know it's going to impact everybody and then nothing changes quickly overnight.
In terms of can sign ups I think that you have seen of late and you will continue to see a variety of items I mean.
Recent introductions are things like all kinds of specialty waters assets waters.
Extra Virgin olive oil that they have some impact on tariffs.
Chocolate chips I'm, just looking down the list here.
You know several apparel items for men women and children.
Yeah more housewares, so I think you're going to continue to see that grow.
And and Ed.
And even and raised the quality further of existing items continue your that continuous improvement cycle.
You're going to see that I'd, Oh, yes of frozen food items.
You know diapers.
I'm just looking at my list here.
Soaks coffee pods, we've taken the Ks coffee pod, which I think three or four years ago.
We went and what.
Yes.
Fair trade. Since then we this now or organic and recyclable and we lowered the price by over 10% to the customer while improving if you will the value of the quality and it's driving more sales. So you know we again, we there's lots of little things as regards to the types of items and what.
We are doing there.
Hi, Thank you good luck for next year this year.
Thank you.
I think that's it.
[laughter].
Well. Thank you everyone did.
The group here will be around if theres any additional questions have a good day.
Thank you everyone for participating. This concludes today's conference you may now disconnect that meet them.
[noise].