Costco Wholesale Corporation

Ladies and gentlemen, thank you for standing by and welcome to the Q1 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 the session, you will need to press star 1 on your telephone. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today. Mr. Richard Galante, CFO. Please go ahead, sir.

Thank you, Lori, 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 first quarter of fiscal 2020. The 12 weeks ended November 24th. Reported net income for the quarter came in at $844 million, or $1.90 per share. compared to $767 million or $1.73 a share last year in the first quarter. This year's first quarter results included a $77 million or $0.17 per share income tax benefit related to stock-based compensation. Last year's first quarter results included a $59 million or $0.13 per share income tax benefit related to stock-based compensation. Net sales for the quarter came in at $36.24 billion, a 5.6% increase over the $34.31 billion sold during the first quarter of last year. Comparable sales for the first quarter of fiscal 2020 in the U.S. on a reported basis was 4.7%. Ex-gas deflation was 5.0%. Canada reported at 2.9%, ex-gas deflation and FX deflation. plus 5.1. Other international reported 3.2, X gas deflation and FX plus 4.5. So total company was a 4.3 reported and X gas deflation and FX a 5.0. E-commerce on a reported basis was a 5.5 and a 5.7 on a reported basis. Total and comparable company sales for the quarter were negatively impacted by approximately 1.5% due to Thanksgiving occurring a week later this year. E-commerce sales in the quarter were negatively impacted by an estimated 12 percentage points. So, again, the 5.5 and the 5.7 were impacted to the negative by 12 percentage points. In terms of Q1 comp sales metrics, first quarter traffic or shopping frequency increased 3.4% worldwide. and 3.1% in the U.S. This, again, includes the impact of the Thanksgiving holiday shift. Weakening foreign currencies relative to the U.S. dollar negatively impacted sales by approximately 30 basis points, and gasoline price deflation negatively impacted sales by approximately 40 basis points. Our average transaction or ticket was up 9 tenths of 1% during the quarter, including the negative impacts of gas deflation, FX, and the holiday shift. Next on the income statement, membership fee income. Reported membership fee income came in at $804 million, up 6.1%, or $46 million from last year's $758 million. Foreign FX currencies would have impacted that by a million to the negative, so it would have been about a million higher, FX. In terms of renewal rates, at Q1N, our U.S. and Canada renewal rates came in at 90.9%, and worldwide rate was 88.4%. Both of these figures remaining at the same renewal rate levels that were achieved at the 12 weeks ago at the fiscal year end. In terms of number of members at Q1 end, in terms of member households and total cardholders, at Q4 end back in, I think on September 1st, we had 53.9 million member households. That at Q1 end 12 weeks later was 54.7 million. And total cardholders increased from fiscal year end of 98.5 million. to 99.9 million at Q1 end. During the quarter, we had three new openings all in the U.S., a business center in Dallas, Texas, and two additional Costco warehouses in Connecticut and Minnesota. We also relocated one of our units in Canada. At Q1 end, paid executive memberships were totaled at 21.4 million, an increase of 579,000 or 48,000 per week since Q4 end. This included the recent launch of offering executive memberships to the first time as of the beginning of the fiscal year. Even taking those out, the average weekly increase would have been, the new Japan executive members would have been $41,000 a week. Going down to the gross margin line, our reported gross margin in the fourth quarter was higher year-over-year by 30 basis points, coming in at 11.05% as compared to a year ago, 10.75%. And again, on a reported basis, 30x gas deflation would have been plus 26. Doing the little chart that we do each quarter, two columns, reported and x gas deflation. First line item would be core merchandise year over year in Q1 of 20 compared to a year earlier quarter. Minus three basis points on a reported basis and minus six on an x gas deflation basis. Ancillary businesses, plus 20 and plus 19. No change to the 2% reward. And other was plus 13 and plus 13. So a total of plus 30 basis points on reported basis and plus 26x deflation. Now, the core merchandise component of gross margin, again, lower by three year over year reported minus 6x gas deflation. Looking at the core merchandise categories in relation to their own sales, core on core, if you will, margins year over year were higher by four basis points. Subcategories within the core margins year over year in Q1 showed increases in hard lines, soft lines, and food and sundries, and a decrease in fresh foods. Nearly all of that decrease in fresh foods was the result of the initial operating losses from our new poultry complex. That will be a small headwind throughout the year. Recall that we commenced operations at the Nebraska Chicken Plant on September 10th with roughly a 45-week plan to get to full production and processing capacity. We're currently on track to do so. Ancillary and other business gross margin, higher by 20 reported in 19x gas deflation. The highlights year-over-year being gas, obstacle, tire shop, and hearing aids. The other, the plus 13 compared to a year ago. This relates to what we mentioned last year in the quarter, to adjusting our estimate of breakage on rewards for the City Visa co-branded card program last year. And that was, again, a comparison of the hit last year versus zero this year. Moving to SG&A, I reported SG&A percentage in Q1 year-over-year was higher by 17 basis points, coming in at 10.30%, up from 10.13% last year. Ex-gas deflation, SG&A was higher or worse by 13 basis points. Again, the little matrix that we do, both reported and without gas deflation. Operations, minus 9 basis points, meaning higher by 9 basis points versus minus 5 basis points in ex-deflation. Central, minus 4 and minus 4. Stock compensation, minus 4 and minus 4. For a total, again, of minus 17 and minus 13. In terms of the core being minus 5 on an ex-gas deflation basis, this figure includes the impact from the wage increases that we've talked about in the last couple of quarters. This impact relates to the wage increases that occurred in March of 2019, which hit the year-over-year comparison by 3 to 4 basis points in the quarter. As mentioned previously, we would expect a similar impact that will occur in Q2 before we anniversary that wage increase midway through Q3. Central was higher again by four basis points year over year. IT was the biggest driver of the increase as we continued not only to maintain and upgrade but expand our capabilities and activities, and certainly we have a lot going on there. And stock comp, again, minus four basis points to hit there. That hit usually is in Q1 year over year based on the fact that we grant our issues in that quarter and how we do things for employees 25, 30, and 35 years out. On the income statement, next on it is the pre-opening expense. It's lower by $8 million. It came in at $14 million this year in the first quarter versus $22 million. This year in the quarter, we had four total openings, three plus the relocation. Last year, we had eight total openings, six plus two relocations. All told, operating income in Q1 increased by 11.8%, coming in at $1.61 billion this year compared to $9.49 million last year. Below the operating income line, interest expense was $2 million higher year over year, $38 million this year in Q1 compared to $36 million last year. Interest income in other for the quarter was higher or better by $13 million this Interest income was actually higher by 11, and other, the plus 2 million variance, was primarily favorable FX year over year. Overall pre-tax income in the first quarter of 2020 was up 13%, coming in at $1.58 billion compared to last year's $9.35. In terms of income taxes, our reported tax rate in Q1 2020 was 19.1% compared to 16.9% in Q1 of last year. Both of these first quarter tax rates, this year and last year, benefited from the tax treatment of stock-based compensation, as mentioned earlier. Last year's rate also benefited from additional discrete items, which we mentioned in the quarter last year. A few other items of note, in terms of warehouse expansion, we expect to open net new units of somewhere around 20, plus or minus, with a lot of it planned new openings, much of it back-loaded towards the end of the fiscal year. As of Q1 end, we had total warehouse square footage of 114 million square feet. Regarding capital expenditures, in Q1, our total spend was approximately $700 million, and our estimate of cap tax for all of fiscal 20 remains right around the $3 billion amount. In terms of e-commerce, our overall e-commerce sales on a reported base of the quarter was a 5.5, as I mentioned earlier, and again, XFX, a 5.7. Again, those numbers, you could add roughly 12 percentage points to each of those to account for our estimate of the impact of the holiday shift. A few of the stronger departments are home furnishings, domestics, tires, and pharmacy. Majors electronics were not among those departments, as we believe it was the one most impacted by the holiday shift. Total online grocery continues to grow at a faster rate than the core e-commerce comps, although, again, it's still a relatively small piece of the business. New online during the quarter, expanded tickets offerings, including airline gift cards, Lyft and Uber cards, and Super Bowl packages. We also during the quarter launched as a test in a few locations, same-day prescription RX delivery with Instacart. And we launched in the quarter same-day alcohol delivery also through Instacart in California, such that as of today it's being offered in 12 states. And lastly, earlier this week we launched our Japan e-commerce site. with our Australia site planned to open in the first half of 2020, calendar 2020. In terms of tariffs, there continues to be a lot of moving parts and changes up to and including an hour ago. Currently, there are, again, there are three and a half lists, if you will, lists one, two, three, and four A, totaling about $360 billion worth of imports. There were Possibilities that there would be four B list would go into place December 15th, although the current news out today is that China and the U.S. are close to a deal on finalizing a phase one part of the trade deal, and so we'll have to wait and see. In terms of EU, currently, again, there's $7.5 billion of U.S. imports that are subject to a current 25% tariff, mostly food items like olive oil, cheese, wine, whiskey, butter, cookies. et cetera. Again, last Monday, the White House announced that it proposed an increase to 100% tariff on $24 billion in imports, which would include those and my other items. We'll just have to wait and see where that is. I believe comments aren't even anticipated to be complete until early to mid-January. That's pretty much it on our part. Lastly, in terms of upcoming releases, we will announce our December sales results for the five weeks ending Sunday, January 5th, on Wednesday, January 8th, after market close. And with that, I'll open it up to Q&A and turn it back to Lori. Thank you.

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