Costco Wholesale Corporation

Ladies and gentlemen, thank you for standing by. Welcome to the Q4 earnings call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during this session, you will need to press star 1 on your telephone. If you require any further assistance, please press star 0. Thank you. I would now like to hand the conference over to your respective hosts Mr. Richard Galanti, CFO. Sir, you may begin.

Thank you, and good afternoon to everyone. I'll start by stating that these discussions will include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements involve risks and uncertainties that may cause actual events, results, and or performance to differ materially from those indicated by such statements. The risks and uncertainties include but are not limited to those outlined in today's call, as well as other risks identified from time to time in the company's public statements and reports filed with the SEC. Forward-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. In today's press release, we reported operating results for the fourth quarter and fiscal year 2019. The 16 and 52 weeks ended September 1st. Reported net income for the quarter was $1.097 billion, or $2.47 a share. That compared to $1.043 billion a year ago, or $2.36 a share. This year's fourth quarter was negatively impacted by a $123 million pre-tax reserve to SG&A, or $96 million after-tax, or $0.22 per share, related to a product tax assessment. In terms of this $123 million pre-tax reserve, or charge to SG&A, Last week we received an assessment related to certain product taxes. It covered a seven and a half year period from January of 2009 through July 2016. While we'll be following a protest to this, a reserve for this assessment was recorded in the fourth quarter in accordance with U.S. GAAP. Excluding this reserve, Q419 net income would have been $1.19 billion or $2.69 a share, a 14% increase over last year's fourth quarter. Net sales for the quarter came in at $46.45 billion, a 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, a 7.9% increase over last year's $138.43 billion. In terms of comp sales, as was 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 rev rec, 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. E-commerce was a 19.8% reported comp and a 21.9% XFX and RevRec. In terms of the 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 REVREC benefited comp sales in the quarter by plus 110. So those three things together essentially zeroed out. Our average transaction or ticket during the fiscal quarter was up 1.4%, both with and without the impacts of GAF, FX, and REVREC. Next on the income statement, our membership fee income reported in the fourth quarter was $1,050,000,000, up 53 million or 5.3% over last year's fourth quarter. X the impact of FX, the $53 million increase would have been $58 million, or up 5.8%. During the fourth quarter, the 23-month cycle to recognize the incremental P&L benefit of the fee increases that began in June of 2017 was completed, and the impact in the Q4 results was almost zero, less than a million-dollar benefit to the quarter. In terms of renewal rates, At Q4 end, our U.S. and Canada membership renewal rate came in at a 90.9%, up 0.2% from 90.7% as of the end of the last quarter. And worldwide, the renewal rate was 88.4, up from 88.3% a quarter ago. Both of these figures, all-time highs. In terms of number of members at Q4 and fiscal year end, we had 53.9 million members. Member households, that's up from a quarter ago of 53.1 million. And total cardholders at the end of the year, 98.5 million, up from 97.2 million at the end of Q3. During the quarter, we had 10 net new openings, eight in the U.S., one in the U.K., and our first warehouse opening in China and Shanghai. At fourth quarter end, paid executive memberships totaled 20.8 million. which was an increase during the quarter of $362,000 or $23,000 a week. In terms of going down the gross margin line, our reported gross margin in the fourth quarter was higher year-over-year by a reported 14 basis points and X gas deflation and rev rec up by 20 basis points. As usual, I'll ask you to jot down a few items for explanation purposes. In the fourth quarter, you'll have two columns, both reported and then without gas deflation and RevRec. The line items would be, the first line item would be merchandise, core merchandise. On a reported basis, year over year, it was down eight basis points. X gas and RevRec, it was down three basis points. Ancillary businesses, up 29 basis points. And X those items, up 31 basis points year over year. 2% reward, minus three and minus four basis points. Other, minus 4 and minus 4. If you add those up, you get the plus 14 basis points as reported, and again, X gas and Rev Rec up 20. Now, in terms of the core merchandise component of gross margin, it was lower by 8 or might really lower by 3 X gas and Rev Rec. Looking at the core merchandise categories in relation to their own sales, or what we call core-on-core, margins year-over-year were higher by 4 basis points. Subcategories within that year-over-year in the 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 year-over-year. Ancillary and other business, as mentioned, was higher by 29 basis points and 31 higher ex-gas and rev rec. Most of that was attributable to strong gasoline margins. Other was minus 4 in both columns. Moving to SG&A, I'll ask you to jot down the following. Again, two columns reported in gas deflation and rev rec. Operations, plus three basis points and minus two. So minus two means higher by two. Central, minus five and minus five are higher by five. Stock compensation, plus two and plus two, so lower by two basis points year over year. And then other, minus 27 and minus 27. And with that, you would get to a reported SG&A percentage year-over-year being higher or worse by 27 basis points, coming in at 10.09% of sales, up from 9.82% of sales a year ago. Again, excluding the one-time item discussed earlier, the SG&A would have been flat year-over-year on a reported basis, and X gas and rev rec higher by five. Now, in terms of the components here, The core operations component, excluding the impacts of gas and REVRAC, again, was two basis points higher. This figure included the impact of the two wage increases that were taken in June of 2018 and March of 2019, which 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 anniversary is now during the quarter, we estimate that the impact in Q1 and Q2 until that one anniversary will be about a three to four basis point hit. Central was higher year-over-year by five basis points, both with and without gas and rev rack. IT was the biggest driver of that increase. In terms of stock comp, again, that helped the SG&A by two basis points. And again, lastly, as discussed earlier, the $123 million hit to SG&A decidedly counts for the 27 basis points. Next on the income statement, pre-opening expense. Pre-opening expense for the fourth quarter came in at $41 million, $10 million higher than the $31 million fourth quarter of last year. This year in the fourth quarter, we had 12 total openings, 10 net plus two reloads. A total pre-opening was up year-over-year primarily due to the pre-opening costs related to our chicken plant in Nebraska. It's now open for business, and we'll have an estimated 45-week ramp-up to full production from the September 10th go-live date. All told, reported operating income in Q4 increased 1%, coming in at $1.463 billion this year compared to $1.446 billion last year. And again, excluding the one-time item 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 a year earlier. And interest income and other for the quarter was higher or better by $23 million year over year. Actual interest income was better by $15 million, a combination of both higher invested cash balances and higher interest rates, with a balance of $8 million positive variance, primarily favorable FX-related items year over year. So overall, pre-tax income, again reported, including the one-time item, was up 3%, coming in at $1,492,000,000 this year, up from $1,449,000,000 last year. And again, excluding the one-time SG&A charge 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%. 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, as I mentioned, we opened 12 total locations, net of reloads to 10 net new locations. For the whole year, we opened 25 total locations, including five relocations, so a net increase of 20. About three-quarters of those were in the U.S. and a quarter of them international. At Q4N, our square footage stood at 114 million square feet. Regarding CapEx, fiscal 2019 total spend was right at $3.0 billion. We'd estimate the CapEx for the upcoming year will be that or slightly above that, not that different than the past fiscal year. In terms of stock buybacks in the fourth quarter, we repurchased 52 million shares, 194,000 shares at an average price. per share of a $268.08. That brought the total year to $247 million on 1.097 million shares at an average price of $225.16. Moving on to a couple other items of note, e-commerce, again, as mentioned, for the quarter on X gas and RevRec was up 21.9%. We saw particularly strong growth during the quarter in what we call majors, electronics and appliances and the like. Total Online Grocery continues to grow at a very healthy clip, recognizing it's still pretty small. That both includes the two-day as well as one-day fresh with the help of Instacart. Ecom, for the first time this past quarter, carried some new items like KitchenAid appliances and Weber grills and several high-quality beauty brands for the first time. In addition... We rolled out a few examples of if you've shopped in the warehouse, what we call merchandise roadshows, kind of a treasure hunt for the warehouses. Some of those things are now being put online. We sold another large diamond ring during the quarter for $220,000. And we have upcoming e-com sites planned for two new countries, Japan and Australia later this fiscal year, sometime mid-fiscal year. In terms of the Costco app, we've started to add a few things to it, including it can be used as your digital membership card. That was added in July. We now have over 2.5 million activations during the quarter. Currently, the app allows, in addition to digital membership, the register as well. View current gas prices. Executive members can view their growth in their annual 2% executive member reward. We have a few things related to the pharmacy in terms of refilling and managing pharmacy prescriptions, as well as being able to renew and upgrade, and the beginnings of some new shopping lists and current promotional offerings. There will be plenty of additional enhancements that are in the works, and we'll continue to roll those out and more tie-ins with Costco both in warehouse and online. I mentioned earlier that during the quarter we opened our first unit in China in the city of Minhang, part of Shanghai. Okay. That was on August 27th to great interest. Due to the overwhelming crowds, it was actually closed about four hours into the opening day. Subsequently to that, crowds have been well managed and sales have remained very strong over the past month. We've had record sign-ups there. I think it's been helped by the first one that we've opened there as well as the social media presence. We currently have over 200,000 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 open for 35 years, all told have approximately 68,000 member households per location. Our next opening is planned for early 2021 and also in Shanghai in the area of Pudong. In terms of tariffs, next item. And a quick update, there continues to be a lot of moving parts and changes and 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 steel shelving to furniture to luggage to shredders to things like that. Those are currently being tariffed at 25%. With the current plan, we understand to possibly go to 30% effective October 15th, but we'll just have to wait and see. List 4A, which is about $110 billion, includes things like kitchenware and cookware and domestics. It includes TVs, although I don't think we source from there on that. That started at 15% tariff on September 1st, and we'll see where that goes. And then List 4B, which is an additional $155 billion worth of goods, including electronics, laptops, tablets, toys, small appliances, some apparel and footwear as well. That's currently planned to go to 15% tariff effective December 15th. Again, 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 their impact. Where we can, we accelerate shipments before a tariff is being put into effect or is being planned for an increase in terms of the tariff percentage level. We are working with suppliers daily. We've gone to pretty much every supplier on every item to see what we can do to both reduce costs 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. We've looked at alternative country sourcing where possible and feasible, although again, there's a limited amount of that ability to do that. And we've taken advantage of lower pricing on a few U.S. items that have been picked the 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 a little different. In some cases, we're able to hold off on some, and some we need to push it forward to pass it on. And we'll continue to pursue that. Overall, we think we're in a good position relative to retail overall, given our size and scale and our ability and relationships with our vendors. The last thing on tariffs, just another area of potential tariffs. It relates to yesterday's WTO announcement that the U.S. can legally impose tariffs of up to $7.5 billion in EU-produced goods annually. Later yesterday, the USTR released a list of products it plans to target with duties planning to take effect October 18th. Some of the products included on the list include 25% duties, certain whiskeys and apparel items from the UK, various cheeses and olive oils from certain European countries, and certain pork products, butter and 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, we will announce our September sales results for the five weeks ending this coming Sunday, October 6th, on Wednesday, October 9th, after the market closes. With that, I'll open it up to questions and answers and turn it back to the operator. Thank you.

Thank you. And at this time, I would like to remind everyone, In order to ask a question, please press star, then the number one on your telephone keypad. Again, that's star, then the number one on your telephone keypad. We'll pause for just a moment to compile the Q&A roster. We have your first question coming from the line of Michael Lasser from UBS. Your line is now live.

Good afternoon. Thanks a lot for taking my question. So you recently run a few promotions to drive membership growth. You've done this in the past periodically. Should we interpret this as any different than that, particularly given that you're now anniversary all the benefits from the price increase? The skeptic could say, well, you want to increase membership growth, and so that's what's driving that decision. How should we think about that?

No, I think as it relates to the one I think we've got currently underway, it's very similar to the three or four we've done over the last three or four years, I think. And no real, you know, 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 I think the timing is just that, nothing beyond that. I don't anticipate doing another one for a while as we haven't in the past.

Okay, that's very helpful. And then on your growth in China, did it surpass your expectations, and does that influence how many and how quickly you can expand in that country?

Well, it 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 we open one or two units to start with over the first year or two, and and go from there. A lot of it has to do with the fact of building the people structure within a country. While we have help from neighboring countries and other areas to start the process, you really want to build, you know, your supervisor and your functional managers in the country. So, you know, if you had asked us before we even opened the first one and felt, you know, positive would be good, but who knew how good we'd do, how well we would do. He asked how many we'd have five years hence. The answer would probably be the same as it is today. We'll open a couple in the first year or two and then open a couple more perhaps and see where we go from there. We're certainly pleased and excited about what we've seen, but maybe it gets a little bigger, but certainly nothing that we're going to be pretty methodical about it as we have in other countries. Thank you very much, and good luck.

Thank you. We have your next question coming from the line of Simeon Goodman from Morgan Stanley. Your line is now live.

Hi, Richard. So on gross margin, it looked pretty solid. I want to make sure I heard properly. The core on core was up four, which I'd say 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. Can 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 and the Walmarts, generally the new normal over the last couple of years has been better, particularly for us, I think, as consumers. Prices historically have come down, and some retailers bring them down a little and some a little more. It's still given us the ability to, in our view, to have 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 were a couple of quarters, a few quarters back year over year that was also good. It does fluctuate, but I'd say the new normal overall is, on average, better than it had been.

And the core-on-core was pretty normal for you as well?

The core-on-core? Well, yeah. I don't think there was any big surprises there. We always tell you that when it's up a little year over year, maybe it'll come down a little. When it's down a little, maybe it'll come up a little bit. As it relates to the underlying factors of competition, we feel that the We haven't seen any giant changes in the competitive landscape out there. There's still a lot of competition, and there's a lot of headlines out there, but at the end of the day, we're still pretty darn competitive ourselves.

Okay, and my follow-up is on the EBIT dollar growth. It looked like it came in high single digit, like 9-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, Is there anything one way or the other that should impact that? I think the consensus is modeling a lower rate. I know you don't comment on that, but it's been several years of a little bit outsized growth. So I'm just curious if there's any big spending items, margin issues that we should think about as we model the next year.

There's lots of everything, Simeon. You know, we really don't, you know, talk about the future. I mean, we certainly feel good about what we're doing merchandising-wise, but You know, all retailers are impacted with tariffs right now. That's a little bit of an impact. But beyond that, we feel good about what we've got going on in terms of opening up another 20-ish units next year and driving membership. We certainly are pleased with seeing our renewal rates continue to go in the higher direction and getting new members. So overall, we feel good, but we'll see.

Great. Thank you. Thank you.

Thank you. We have your next question coming from the line of John Heinbuckle from Guggenheim. Your line is now live.

Hey Richard, two questions on gas. One, I don't think you, maybe I'm wrong, you guys think about an interaction between gas margin and core-on-core, right? Meaning if you're getting more margin at the pump in any given quarter, you can put that back a little bit into core-on-core. Do you think about it that way? And then on gas, gallon growth, you know, where is that now versus where it's been over the last year or two?

Yeah, well, look, we don't, in terms of the margin, if we're doing stronger in one, can we be a little more competitive elsewhere? While not completely, human nature dictates that, sure, when things are going well in one area, you see what else you can do in another area. But I wouldn't say they're, you know, We don't manage it that way necessarily. As it relates to gallons, I think our gallons were up in the high singles. Yeah, I'm hearing yes. So we continue to do, in terms of gallon comps, much stronger than the whole U.S. industry of gasoline.

And then secondly, where do you stand now with the opening schedule for the year? maybe by geography and cadence. Is it – I guess this past year was a little bit back and loaded, and I guess it's the same in 2020?

Yeah, probably so. You know, we generally try to get things open before the holidays. So, you know, when things are – you know, if you miss the holiday, whether it's 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 and New Year's. I think the year before was the same way. We opened a disproportionate number of the locations in Q4. Generally speaking, yes. I don't have a schedule in front of me exactly. Okay. Thank you.

Thank you. We have your next question coming from the line of Christopher Horvath from J.P. Morgan. Your line is now live.

Thanks. Good evening. So I wanted to ask you a question about average ticket growth, X, FX, and gas. If you take a look in August, you know, that slowed down pretty sharply relative to the prior trend. So I wanted to pick out that a bit. Is that a comparison issue? Is that a change in mix or perhaps, you know, lapping against some of the center aisle grocery price increases that the vendors started to put through last year? Is it investment in price? And so I just want to get your thoughts on what's driving that and any thoughts on the outlook there.

Well, I think the prior – if I'm not – if I'm correct, I think the last Q3, it was like 1.8 or 1.9, and this quarter it was a 1.4. I don't have a good answer, a specific answer for you on that. You know, it could be mixed. It probably is mixed, but I don't know off the top of my head.

Got it. And then on the tariffs, as you think about what's been passed through, how are peers acting? Are you seeing more, are your peers taking a portfolio approach in terms of trying to keep key price items at certain price points and then balancing out versus, say, less elastic items and how you're assessing the landscape on that side?

Yeah, I could say to start with that we don't see any major competitive issues. Certainly, I personally think it's easier to manage some subset of our 3,800 total items that we sell at a given time and location versus retailers that's selling 50 and 100, 150,000 items, and they're dealing with categories. You know, certainly on bigger ticket items, it's harder. I mean, it's hard – when it's a smaller ticket item, it might be easier to eat a little bit of it. When it's, you know, something like furniture or, you know, lawn and garden, things like that, that's a little harder. But overall, we haven't – we generally feel pretty good about it. And by the way, the other thing is we're 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 some of that tariff, in some cases, again, we would try to geographically move the 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 not to sell something and put something else in its place. I think that makes it a little easier for us relative to general merchandisers. But again, it impacts us all.

Got it. And then on the announcement last night, I mean, there's some items on there that stand out, olive oil and cheese. Can you talk about, particularly on the olive oil side, I imagine it might be the largest seller of olive oil in the United States. So can you talk about where you're sourcing there? Because I think Spain's covered, but Italy's not.

Yeah, we source from 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 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 the cash and the balance sheet that continues to build. So you can talk about what Can you talk about what your thought process is there? Has anything changed? Are you trying to keep dry powder for any particular reason? Thanks very much.

Sure. Well, I don't think there's any dry powder, M&A-related dry powder. We really haven't or currently plan to do anything. We do have a total of $1.7 billion coming due in December and February, $1.2 billion and then $500 million, I believe, coming. And so we'll pay that down. You know, we were always asked about questions about the special dividend. And, you know, our comments have been is that we've done three of them. They seem to have worked well and viewed positively. So it's still in our back pocket. But they are special. And so, you know, We'll have to wait and see what we decide to do in the future. But there's nothing specific that we have planned.

Understood. Thanks very much.

Thank you. We have your next question coming from the line of Karen Short from Barclays. Your line is now live.

Hey, thanks very much. Just on operating profit growth, I mean, it was to the 10%-ish growth, it was up $140 million. excluding the product tax assessment, but can you just give a little color on how much stronger year-over-year gas margins might have impacted that growth rate? Because I was kind of backing into about $150 million in incremental dollars from better gas margins.

Well, we don't disclose the specifics, but as I think I mentioned, I think it was Q2 year-over-year that we also had good gas margins. Certainly, that was a help to that.

Okay. But is that estimate like somewhere in the range or is it way too high?

We really don't go into that specific detail.

Okay. And then wondering if you could maybe give a little color in terms of elasticity and anything you could point to on elasticity response with categories where you did raise prices?

Sure. I mean, generally speaking, the bigger the ticket item where you also have a good portion of the tariff impacts the price, raises the price. I mean, this is an anecdotal example, but there 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 percent. And that included some price increases, so probably it was down 10% in units. But that's a subset of a subset of a category, and so I don't want to suggest it was everything. And I've been given examples from our buyers where there have been items where we've essentially most of the tariff is reflected in a price increase, and we've sold just as many units as we thought we were going to previous to that. There's been others where we've you know, the price increase tariff related, less than half of the tariff went into a price increase, if even 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, you know, when you take an item that retails for $999, $999, and have to get it up, forget even about $1249 using a 25% example, or be 25% of the cost, but nonetheless, you know, first thing you try to do is get it to $11.99 and then go from there or $10.99. But it's really over the board. Net, net, net, though, it's a slight negative impact.

Okay. And then I guess along those lines, can you just maybe give a little color on what inflation was at both, I guess, cost and at retail, and then if you could parse that out between consumables and non-consumables? Sure.

It was very little. We've seen very little. You still see taking tariffs away for a second on electronics and things. You'll see some deflation. Overall on 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. still higher than it had been a few years ago. But overall, you know, it's all in the soup here.

Okay, great. Thanks very much.

Thank you. We have your next question coming from the line of Chuck Grom from Gordon Haskett. Your line is now live.

Hey, thanks. Good afternoon, Richard. Just on the core-on-core between categories, a couple were up. Hard lines was down. Food and sundries, I think you said, was relatively consistent year over year. Just can you dive into the hard line compression and also the change from last quarter on the food and sundries segment? Thanks.

Yeah. Part of it's mixed change. You know, I mentioned earlier online but also in-store, electronics and majors, those tend to be a little – electronics tend to be a little lower margin business. But, you know, good growth still. Again, when asked the $64,000 question of is it competition, we're not seeing a lot of big changes out there. There's a lot of headlines with what's going on, particularly on the food side, but we haven't seen any big changes.

Okay, fair enough. And then can you just remind us how you guys are thinking about the company's long-term club growth potential, particularly here? in the U.S., and if you're seeing any signs of saturation in any of your key markets, both domestically and internationally.

Well, you know, by definition, like in the U.S. and Canada, the rate of growth will slow down, but I would have said that three years ago with what we've done in the U.S. and Canada. So we keep finding more opportunities, but over time it'll slow down. We're also, of course, adding the business centers. We have, I think, 18 in the U.S., and one in Canada with our second coming shortly in Canada. And so that'll add a little bit to it. You know, when, when asked recently, you know, what do you guesstimate? And it's, it's truly guesstimate over the next 10 years, you know, on a base of what five 40 ish in the U S you know, maybe another, you know, 12 to 12 plus a year, you know, right now it's been 15 a year. So by the time it'll come down a little bit in Canada, you know, you know, one plus a year, we thought we were saturated at 80 in Canada. Now we have 101 or two. And so, you know, that'll keep increasing. Certainly there'll be more. What I think the thing that we feel most comfortable saying is, is, you know, five years from now, the penetration of the percentage of the total openings will certainly by that likely by then, if nothing is certain be outside of the U S and 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 Costco Grocery or Instacart, I'm curious if the purchases have replaced an in-store trip. And I guess if you've analyzed how that could potentially impact your in-store traffic over the next, say, two to five years. Thanks.

Look, it's still early. It's the first full year, I guess. Generally speaking, you see more shops overall, recognizing it's a little less when they're shopping online. And the net of the two is still a slight net positive to what we had seen before. But, you know, what you have to be on the lookout is does it replace a shop? How many shops does it replace? And what we're seeing is you've got more somebody who's infilling, if you will, and maybe reducing their trips to the location a little bit. So I'd call it neutral to slightly good right now, but who knows what happens tomorrow. So far, we feel good about that, by the way, but we can't predict.

Right.

I think, by the way, I think part of it also is, as we've talked about, as what I've talked about in the past, is, you know, we use, to communicate to our members, aside from the traditional, you know, Costco connection and, you know, a lot of the e-mails, and the e-mails are not just for shopping online. The e-mails are talking about hot things that are happening in the warehouse and while supplies last in some cases. And we've seen good examples of that that can help drive frequency into the warehouse or create a trip. And that, along with gasoline, not every person that fills up with gas comes in. I think about half do, a little over half do. Even if one of them is incremental, that's a positive. We don't check to see what that is. We're not asking them. But we know it can't hurt. It's got to help. So we think that we're... I think those are the types of things that have helped us continue to drive traffic into the buildings, which we want to do. Makes sense. Thank you.

Thank you. We have your next question coming from the line of Scott Ciccarelli from RBC Capital Markets. Your line is now live.

Good afternoon, guys. Scott Ciccarelli. Just a quick follow-up on Chuck's kind of store opening question. Do you have a plan 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 in front of me. A little more than half. Okay, that's good.

And then, Richard, when you guys bring popular brand-name products where there's a lot of price transparency, you mentioned Weber Grills on the call under your website. How are you guys trying to target your pricing on those kinds of products where they can be found in lots of different spots? You guys have always been price competitive, of course, but can you provide any color on kind of how you're thinking about, you know, kind of price caps when you've got, you know, obviously the home improvement 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 it. In some instances, we bundle, so we create a value that includes perhaps accessories with the item or an extra whatever. But these are real value, I mean, real items that have a value to it and to show an even greater savings. And, you know, we've done that on all kinds of things, you know, whether it's computers or big appliances. And, by the way, I think that, you know, a lot of times, Competitive pricing tends to be on some of the entry level that what you see advertised, if you will. And then consumers generally trade themselves up with all the extra accessories and what have you. And that's where we continue to show good savings too. I mean, we look at some of those big ticket items and they're very strong savings to traditional.

Got it. Thank you.

Thank you. We have your next question coming from the line of Bobby Griffin from Raymond James. Your line is now live.

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 that 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 e-commerce sites in?

Yeah, Canada now. 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 FY20?

In FY20, yes. Starting with the two-day, which is easier, you know, two-day dry. But in Canada, we're doing one-day fresh as well. We'll be doing one-day fresh, but we're not doing it yet.

Okay.

We're doing two-day dry up there already.

Okay, I appreciate that. And I guess – Lastly, for me, I just wanted to touch on working capital continues to be, you know, impressive with payables, you know, ellipsing over 102% of inventory now. How much more room do you think you have in that as we model out forward? And is there any, you know, one-time items there that are driving some of the performance that we've got to keep in mind?

Well, there are seasonal issues. You know, our Q1 ends, you know, right around Thanksgiving time. The highest tables is the percent of inventories. I think generally the low point is Q2, mid-February, when sales are a little softer on a seasonal basis. Other than that, if anything, as we've built out e-comm and have more inventory in there, we're trying to grow it. actually probably impacts it a little negatively, notwithstanding the fact that it's currently a very strong number. We also have some programs where, you know, ideally sometimes you'll have vendors, usually smaller vendors, that even though we and they have negotiated extended terms in some cases, particularly on some seasonal items or stuff that's coming in a few months hence, sometimes if they need working capital, you know, it's a good rate of return for us to pay early, if you will. what'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. That's the best guess.

Yep. I appreciate the detail. Best of luck this fiscal year. Thank you.

Thank you. We have your next question coming from the line of Chris Mandeville from Jeffries. Your line is now live.

Hey, good evening, guys. This is Jeff on the line for Chris. Just a quick question. You touched on it just a little bit within 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?

I think, you know, I remember, you know, speak in the sense that we're still seeing good growth, certainly very good renewal rates, good results at openings. So we feel pretty good about it. Now, if you ask me how does that relate to the consumer, who the heck knows? I think if we all turned off the television and stopped listening to everything every day, we'd all be better. Thank you. I think we're also – everybody's a little desensitized to everything. Right. I understand. Thank you very much.

Thank you. We have your next question coming from the line of Oliver Chen from Callen & Company. Your line is now live.

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 products or improving checkout and search or your new DC, how would you prioritize the bigger drivers for traffic and growth at large?

Well, I think, first of all, as it relates to the app, just getting more people on it. I mentioned there was about 2.5 million since we improved it. There's still a lot of work to be done to add things to it. But that was like since July. I think we have over 10 million members on the app. One of the other things was just getting email addresses for everybody. You guys who have known us for a long time, we were a little later to the game than others in terms of even 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. Now, that sounds crazy. Simple, and why should we do that? I can only tell you we are, and that's helping. We're getting more people. We're getting more people to open the emails and to click on things. And I think one of the things I've talked about in the past, we still have these different buckets of money starting with the improvement from the credit card transition a couple years ago, the membership fee increase. tax reform, all these things have helped. And as you know, we take that and make it a better value for the member. And I think that's helped us, whether it's, you know, buyers, hot buys and wow items. And I think that's given us a little bit of a leg up over the last couple of years in terms of helping achieve the numbers that we have. So I think, you know, more connections to the members are going to help. Certainly there's no slowdown in renewal rates. That's been good to us. Beyond that, it's, you know, it's what we see every four weeks in our budget meeting from the buyers, you know, new and exciting stuff, constantly improving existing items. You know, there are a number of examples of whether KS items, what we continue to improve the item and, lower the price point while an improved item and therefore increase the value dramatically. There's 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 bring them to other parts of Costco. So I think when I think about from a merchandising standpoint, we're at the top of our game in a lot of things. On the efficiency side, We've got a lot of expenses going on. We talk about e-commerce in a moment. There's costs associated with that as we do that. There's IT in general with everything that we've got going on, whether it's e-commerce or fulfillment and depot infrastructure, the new poultry complex. So there's lots of things that are in our numbers in terms of expenses as well, and we've done pretty well. So 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.

You've done a good job managing those digital margins overall as you pursue the right kind of fulfillment options and supply chain and getting the smaller packages to customers with speed. What are your thoughts on those investments and how they align with what customers are looking for with speed of delivery?

Well, you know, we're not going to be – you know, you're not going to be able to order something and we'll drop it off an hour later anytime soon. You know, for us, the first order of improvement was – I can remember it wasn't that long ago where online, particularly on a big ticket item, a big physical item as well, it's an expected delivery time three to five weeks – And now it's three to five days, and certain items with certain vendors are now on. You can actually schedule delivery and installation. So, you know, tires is a great example as well. You know, it used to be with those online now, you can actually order them and schedule your appointment at the warehouse where you're shopping at. These are all basic things, but things that we hadn't done for a long time. So I think, you know, you'll see continued improvement in that. And none of it's easy, and it all costs more than you think, but those are in our numbers.

Finally, you've really had good momentum, including with diamonds at Costco and the big ticket sales of diamonds. What's your strategy with that business, and how has it been going? Any things we should think about?

Look, I mean, it starts with great quality and great value. You know, one of the things I think that has helped, the jewelry area is a good example with the 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. of some of those items and some other items like handbags and a limited number of electronics. But as it relates to jewelry overall, you know, I know we've got a lot of press because I mentioned a $400,000 diamond a couple of quarters ago. You know, we're selling close to 200,000 carats of diamonds a year. That's a lot of carats. And so the jewelry business is, you know, it's one of the things that hits you regularly. just past the electronics when you typically walk into a Costco, and it's all about value and trust.

Thank you. Best regards.

Thank you. Your next question comes from the line of Robbie Ohms from Bank of America. Your line is now live.

Hey, Richard, thanks for taking my questions. You know, 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, was it about 10 million of the pre-opening expenses quarter and how does it affect pre-opening 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 plant. I think it's the most state-of-the-art plant that I understand in the country. It's going to be very efficient, but it's going to take close to a year to get to full production. The first several weeks have gone as planned in terms of the first chicken went through and more each day, but you're going to get up to processing of 2 million birds a year. I'm sorry, 2 million birds a week in about 40 more weeks. The pre-opening stopped effectively when we opened it on September 10th. So a little bit in Q1, but not like that big amount. But, you know, it's a huge facility, and it's also air-chilled. About 95% of U.S. poultry plants are still water-chilled. So all the issues in terms – it's considered a very high-quality food item and 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 doesn't come without a cost. It was a big investment for us, and we'll know more in a year, but we're excited about it. Other things – a year ago, we added a second meat plant. We've had one in Tracy, California, for many years. We opened one in Morris, Illinois. We also, as you know, opened a bakery commissary in Canada that will also serve much of the United States in terms of things like cookie dough and croissants ready to bake off on premise. We're looking at a variety of greenhouse opportunities. There's a lot of technology and new things going on in the area of agriculture. Wouldn't it be nice to greatly lower the price of not having to airship 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 that are going on, we're going to hopefully benefit from that. But other than that, there's nothing else I don't think we've got planned in a big way. But I would say beyond the couple things I mentioned in the last year and a half and certainly this new chicken plant a few things on the greenhouse side, but not the type of capital investment required that was done in the poultry complex.

Got it. That's great. Thanks, Richard.

Thank you. We have your next question coming from the line of Michael Montani from Evercore ISI. Your line is now live.

Hi, Richard. Thanks for taking the question. Just wanted to ask for an update on executive program rollout, 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 it in U.S., Canada, Mexico, U.K., Korea, and Japan. And we just rolled it out this month in Japan. Korea we rolled out about a year, year and a half ago? A year ago.

Okay, great. One housekeeping one, if I could, is around 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.

I think it's on that summary sheet.

294 versus 305 a year ago.

And the last thing that I had was on city visa, 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?

You know, I don't have those numbers in front of us. I can tell you, we continue to add new members. We continue to the average reward per existing credit card holder on the city visa card continues to increase. The rewards are substantial. And it's really working well. It's probably better than we had originally had hoped, and it's done well for us and hopefully our partners.

Great. Thank you.

Thank you. We have your next question coming from the line of Kelly Pena from BMO Capital. Your line is now live.

Hi. Good evening. Thanks for fitting me in, Richard. Just wanted to go back to the store potential question, really in the U.S. I think it was a few years ago that you noted you were able to kind of go into some smaller communities than you maybe originally thought. And so just curious as you think about the next couple years, what kind of size and demographics of the communities are you looking looking at and been planning for new clubs and also when you when you go back to the saturation question and think about you know how do you analyze when you you know think you are at saturation what are some of the key metrics that you look at is it the pace of the ramp in terms of sales the cannibalization of members or just any help on how you how you guys think about analyzing that you know 30 years ago I think the view was is you needed about a half a million people in the trade area

plus certain number of businesses and all that kind of stuff. Today, that number can be as low as 200,000 sometimes. It depends. Some of the smaller or medium markets we've gone into in the last few years generally are markets where our competition, our direct competitors were, in many cases, for 20 or 30 years, and we had just never gone there. We've gotten probably a little more confident that when we go in that there's room for both of us, and we've done relatively well. I think the other thing is, if you look back over the last few years, and my guess is in the upcoming years, there'll be some infill opportunities. I've used the example on calls on the east side of Seattle and the Bellevue side of Seattle, where historically we had three locations, Esquire, Kirkland, and Woodinville. About two years ago, we opened in Redmond. And we only added... let's say in those three locations had about 190,000 members between them, households of 60, 65,000 each. Uh, we only added about 10,000 new members in the next year, but you had a lot of loyal members that started shopping more frequently because we were closer to them. Part of that comes when you have high volume, uh, in those, that example, I think as before we opened that fourth location on this side of Seattle, uh, we had, uh, uh, I think over 800 million aggregate sales, one in the low threes and the other two in the mid to high twos. And when you get to that level, that gives you a little more comfort that you can afford a little cannibalization. In that example, I think in the first year, data cannibalization, we did 120 plus million dollars of business, 120, 130 million of business. So it's pretty easy to Estimate and guesstimate what you think you could do, particularly when you have a loyal membership base. And then there are other markets, like if you look at the greater Los Angeles market, I'm talking the greater geographic market, I think we probably have 60-ish, roughly 60 units. The view is we can have another 15, but they're all very specific geographies, which are not quite impossible, but very difficult geographically. And we'd be thrilled to get 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, markets where our competition has been and we are just entering and then continued expansion in infills.

Okay, that's helpful. And maybe just another one on trade. on Click and Collect and how that's going and maybe what you're learning from a logistics and labor perspective as you do that for some of the big ticket items and then any changes or thoughts with respect to broadening that to some other categories like grocery, which I realize are more maybe complicated and labor intensive.

Yeah, I don't see us going too deep. I mean, we talked about tires and pharmacy and jewelry, handbags, computers, high-value small-size items for the time being.

Okay, thanks.

Thank you. We have your next question coming from the line of Laura Champagne from Loop Capital. Your line is now live.

Thanks for taking my question. It's just a quick one on inventory. Your inventory receipts looks like grew a little less rapidly than they have in prior quarters and also relative to sales growth. So just wanted to get a sense of why you might have cut your ordering and whether that reflects on your thoughts on our current quarter sales trends.

My guess is it's It's a little bit of an anomaly that I don't read a lot into it. It might be that we've really built up, as an example, increased year-over-year 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 cycled that for a year, I'm guessing. Other than that, there's nothing big to read into that.

Understood. Thank you.

Why don't we take two more questions?

Thank you. Your next question is coming from the line of Rupesh Parikh from Oppenheimer. Your line is now live.

Good afternoon. It's actually Erica Eiler on for Rupesh. So I just have one quick question, just flipping back to international. So when you look at a market like China, when do you typically see an inflection point in profitability in those clubs?

Well, at the club level... it could be the first year or a few years down the road. You've got a big central, uh, expense, you know, you, you've geared up whether you have one location or 10, there's not a big change, a huge change in the, uh, uh, and, and the cost of a central, you know, with, with, uh, you know, buyers and operations people and accounting department and the like, uh, I mean, it'll grow some, but you're not nearly from one to 10. And, uh, So it depends on the country. Usually it can be year four or five. I think in Japan, which is now 20-ish years old, our original budget was to open five in five years and to turn the corner of profitability towards the end of year five. I think we hit profitability near the end of year four, and we opened six. But that's probably a good guesstimate. It's probably going to be slower in a country like France, where it took us 10 years to get one open And while we're looking for additional sites, it still could be a couple years out. So you're not going to go from one to five in five years. But, you know, that's going to happen. We're going to have a mix of those.

Okay, great. That's super helpful.

Thank you. We have your next question coming from the line of Chuck, Sarah, and Koki from North Coast Research. Your line is now live.

Good evening, Richard. One housekeeping question. Can you talk about that tax reserve on the product? What drove that? Was that an excise tax kind of thing?

It was an assessment on a tax that some authority felt we should have been collecting. And we're, again, going to file a prose test and see how much. But I can't really talk to a lot about it yet. But, again, it relates to a seven-and-a-half-year period that ended in 2016 that we were just notified of the formal assessment. And, again, under GAAP accounting, we've reserved for it. Okay.

And then looking at the tariff situation, could that be an impetus to use private label sourcing on more products as a result to get the price down and And in general, what are you thinking about for new categories, new items for private label in the coming fiscal year?

Not really for tariffs. You know, first of all, some of our private label items are sourced out of China as well. So, you know, it's going to impact everybody. And then nothing changes quickly overnight. In terms of KS items, I think that you have seen late, and you'll continue to see a variety of items. I mean, you know, recent introductions are things like all kinds of specialty waters, essence waters, extra virgin olive oil that may 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. You know, more housewares. So I think you're going to continue to see that grow. and raise the quality further of existing items, that continuous improvement cycle. You're going to see that on some frozen food items, diapers. I'm just looking down my list here. Soaps, coffee pods. We've taken the KS coffee pod, which I think three or four years ago, We went to Fair Trade. Since then, it's now organic and recyclable, and we've lowered the price by over 10% to the customer while improving, if you will, the value and the quality, and it's driving more sales. So, again, there's lots of little things as regards to the types of items and what we're doing there.

All right. Thank you. Good luck for next year or this year.

Thank you. I think that's it. Well, thank you, everyone, and the group here will be around if there's any additional questions. Have a good day.

Thank you, everyone, for participating. This concludes today's conference. You may now disconnect. Have a lovely day.