This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.
Cindy
Conference Operator
Thank you for standing by and welcome to the Q1 earnings call. At this time, all participants are in listen only mode. After the speaker's presentation, there'll be a question and answer session. To ask a question during the session, you will need to press star one on your telephone keypad. If you require any further assistance, please press star zero. Thank you. I would like to hand the conference over to your speaker today, Mr. Richard Calanti. Please go ahead.
Richard Calanti
CEO
Thank you, Cindy, and good afternoon to everyone. I will start by stating that these discussions will include forward-looking statements within the meaning of the Private Security 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 year 2021. The 12 weeks ended November 22nd. Reported net income for the quarter came in at $1.166 billion, or $2.62 per share. compared to $844 million, or $1.90 per diluted share last year.
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Richard Calanti
CEO
included tax benefits of $145 million or $0.33 per share, $0.16 of which was due to the deductibility of the $10 per share special cash dividend to the extent received by the company's 401k plan participants, and $0.17 related to stock-based compensation. Last year's first quarter included a $77 million or $0.17 per share tax benefit related to stock-based compensation as well. This year's results also included the costs related to our COVID-19 premium wages of $212 million pre-tax, or $0.35 per diluted share. Net sales for the quarter increased 16.9% to $42.35 billion, up from $36.24 billion last year in Q1. In terms of our first quarter comp sales metrics... On a reported basis for the U.S., we reported a 14.6% figure. Excluding gas deflation and FX impacts, the 14.6% for the 12 weeks would have been 17.0% increase. Canada, for the 12 weeks reported, 16.2%. Ex-gas and FX, 16.8%. Other international reported at 18.7%. Ex-gas and FX, 17.7%. So all sold for the total company, we reported 15.4% comp sales increase, and excluding gas deflation and FX, the 15.4% would be 17.1%. E-commerce on a reported basis for the 12 weeks was 86.4%, and excluding FX, 86.2%. In terms of Q1 comp sales metrics, traffic or shopping frequency increased 5.5% worldwide, and plus 7.6% in the U.S. Our average transaction size was up for the company 9.4% in the quarter year-over-year and up 6.5% in the U.S. These include the negative impacts from gas deflation and the positive impact from FX. Foreign currencies relative to the U.S. dollar positively impacted sales by about 30 basis points, and gasoline price deflation negatively impacted sales by approximately 200 basis points. Going down the income statement, membership fee income came in at $860.9 million, up $57 million, or 7.1%. XFX would have been up $54 million, or 6.7%. During the quarter, we opened eight new units. In terms of renewal rates, Our U.S. and Canada renewal rate as of the end of Q1-21 was 90.9%. That compares to a quarter ago of 91.0. And worldwide, it was 88.4%, which was the same as it was a quarter ago. Now, the U.S. and Canada rate of 90.9 compared to the 91.0, this 0.1% decline was primarily a result of what we believe to be deferred renewals in Canada due to the pandemic. For example, traffic or frequency in our Canada warehouses in Q1 came in at a minus 1.3% compared to a plus 7.6% figure in the United States. By the way, the U.S. renewal rate was the same at both quarters end. In terms of number of members at Q1 end, total paid households at Q1 end was 59.1 million, up from 12 weeks earlier Q4 end of 58.1. And total cardholders at Q1 end was $107.1 million compared to 12 weeks earlier at $105.5 million. Also at first quarter end, paid executive memberships totaled $23.3 million, an increase of $642,000 during the fiscal first quarter. Onto the gross margin line, our reported gross margin in the first quarter was higher year-over-year by 50 basis points, coming in at 11.55% of sales compared to 11.05% a year ago. Excluding gas deflation, the 50 basis point increase would be 30 basis points. If you jot down two columns of numbers here to shed a little light on the components of gross margin, on a reported basis in Q1-21, the core merchandise margin year-over-year was up on a reported basis 83 basis points, plus 83. Second column, without gas deflation, would have been plus 66 basis points. Ancillary businesses, minus 15 basis points reported and minus 20, ex-gas deflation. 2% reward, minus 6 basis points and minus 4. Other, minus 12 and minus 12. And if you add up the two columns, on a reported basis, again, gross margin is reported as a percent of sales year over year in the quarter was up 50 basis points on a reported basis, and X gas deflation up 30 basis points. Now, the core merchandise component gross margin it shows was higher by 83 and up 66, ex-gas deflation. Similar to last quarter, we had a sales shift from ancillary to core. This resulted in a higher contribution of our total gross margin dollars coming from the core operations versus last year. Looking at core merchandise categories in relation only.
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Unknown
only to their own sales, core and core, if you will.
Richard Calanti
CEO
Margins year over year in the quarter were higher by 65 basis points. Fresh Foods was, again, the biggest driver here. With strong sales in fresh, we benefited from efficiency gains and labor productivity and significantly lower product spoilage. Food and sundries, soft lines and hard lines, the other three main core components, all had higher margins year over year in the quarter as well. But Fresh Foods was the driver. Ancillary and other businesses' gross margins, as I showed you here, was lower on reported basis by 15 basis points and minus 20x gas deflation, most of the impact coming from travel and, to a lesser extent, from gas, optical, hearing aids, and food courts. Costco Logistics, which is our name for the acquisition of Innovel that we did several months ago, impacted ancillary margins by minus 6 basis points, a slight relative improvement from the prior quarter year over. 2% reward, nothing surprising there. And the other, the minus 12 basis points, all of this was attributable to the cost of the COVID-19 of $53 million of the $212 million total amount previously mentioned. These are the direct costs for incremental wages allocated to our manufacturing, production, and fulfillment operations. All told, even with the $53 million of COVID costs hitting the margin, Q4 year-over-year gross margin on a reported basis, X gas still up 30 basis points year-over-year. Moving to SG&A, a reported SG&A in the first quarter as a percent of sales was lower or better year-over-year by 15 basis points, coming in at a 10.15% of sales compared to a year earlier, first quarter of 10.30. And X gas deflation, the 15 basis improvement would be 32 basis points of improvement. Again, jotting down two columns of numbers, reported and without gas deflation. Core operations in Q1 on a reported basis was lower or better by 49 basis points, so a plus 49. Ex-gas deflation, a plus 62. Central, plus 1 and plus 3 basis points. Stock compensation, plus 3 and plus 4 basis points. Other minus 38 and minus 37 basis points. And summing those two columns up, total reported SG&A year over year was better or plus 15 basis points. And ex-gas deflation, plus 32 basis points. Now, SG&A in the core, again, it shows inflation improvement of 62 basis points. This excludes the COVID costs, which I'll talk about in a minute. There was significant – just basic significant leverage was strong core merchandise sales increases. In terms of other than minus 38 or minus 37 basis point number X deflation, gas deflation, these were our incremental costs from the COVID-19 or $159 million of the $212 million total number that we had mentioned earlier. The premium wages have been extended through January 3rd at this time. Again, even including these $159 million of COVID-related premium pay expenses, SG&A year over year improved nicely. Next on the income statement is pre-opening expense, $22 million this year in the first quarter compared to $14 million a year earlier. We had 10 openings, 8 net of 2 relocations during the quarter, and 4 openings grossed 3 net of 1 relocation a year earlier. Last year's $14 million number did include a couple million dollars related to pre-opening on our poultry complex, which was opened and went into business earlier. right before the beginning of Q1. All told, reported operating income for Q1-21 increased 35%, coming in at $1.43 billion this year compared to $1.061 billion last year. And even a higher percent increase, of course, it would have been higher had we not had the premium pay. Below the operating income line, interest expense was $39 million this year versus $38 million last year. Interest income and other for the quarter was lower by $6 million year over year. Interest income itself within interest income and other was lower by $22 million year over year, due in large part to lower interest rates, offset by FX and other, which was higher or better by $16 million year over year. So overall, reported pre-tax income in Q1-21 was up 34%, coming in at $1.42 billion this year, compared to $1.058 billion a year earlier. In terms of income taxes, our tax rate in the first quarter of fiscal 21 was 16.8%, compared to 19.1% in Q1 last year. Both years' tax rates benefited from the tax treatment of stock-based compensation, as mentioned earlier. This year's tax rate in the first quarter also benefited from the tax deductibility of of the special dividend payable to Company 401 participants as discussed earlier in the call. This full fiscal year's effective tax rate, excluding these discrete items, is currently projected to be between 26 and 26.5%. In terms of warehouse expansion, as I mentioned, in the first quarter of this fiscal year, we opened eight net new units. Our plan for the year is somewhere in the 20 to 22 range. None in the second quarter.
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Richard Calanti
CEO
Six or so, five or six in Q3 and seven or eight in Q4. As of Q1N, total warehouse square footage stood at 117 million square feet. In terms of capital expenditures, in the first quarter of 21, we spent approximately $893 million. Our four-year capex spent... For fiscal 21, it's still estimated to be in the $3 to $3.2 billion range. In terms of e-commerce, our overall e-commerce sales in Q1FX increased at 86.2% year over year. A few of the stronger departments, food and sundries, housewares, pharmacy, OTC and health and beauty aids, small electrics, and TVs and other electronics. Total online grocery grew at a very strong rate in Q1, nearly 300%. The comp numbers that I mentioned, the 86.2% figure, follow our usual convention, which excludes these third-party same-day grocery program as they come in themselves and shop at our warehouses and then deliver to our members. If we include the third-party same-day in our e-commerce comps, the 86.2% result would have been just over 100%. Innovell, now rebranded as Costco Logistics, continues to grow and we continue to push more big and bulky items to the site. We've added, in the past quarter, we added an in-cart scheduler this quarter where members can select specific delivery dates for most big and bulky items and made improvements to our call center with specifically trained agents as well. That continues to grow nicely. And lastly, a couple of fun sports items just loaded two days ago. We have a Babe Ruth autographed baseball for $64,000 and a Ty Cobb autographed Louisville Slugger bat for $160,000. We've also recently sold a number of memberships for Wheels Up, a private jet service operator. Now turning to COVID and some of the issues and impacts surrounding it, from a sales perspective, similar to our strong sales results this past summer in our fiscal fourth quarter, we have continued to enjoy strong sales results during the first quarter of fiscal 2021. We continue to generate strong sales in food and sundries, and health and beauty aids and fresh foods and the like. And we've also benefited from improved sales and products and items for the home. As people are spending less on air and travel and hotel and dining out, they seem to have redirected at least some of those dollars to categories like electronics, furniture and mattresses, exercise equipment, housewares, cookware, domestics, et cetera. And as mentioned earlier, sales in most of our ancillary businesses were lower year over year in the quarter, travel, gas, hearing aids, and food. From a supply chain perspective, a 40,000-foot view, if you will, most factories are up and running, are suppliers, and in many cases, production capacity has been increased. However, even higher increases in demand of some products are still creating some supply issues. There are instances of 50, 100% or even more sales increases of an item, and if we could procure more, we'd have even higher sales. Examples would include things like exercise equipment, certain major appliances, certain electronics items, as well as certain housewares and small electric items. On the transportation front, there have been some container shortages at origin, as well as some congestion at destination ports here in the States. The latter typically two to four days, but a little longer in some cases. We're managing through it and expect relief not until March or so of 2021. As well, the past few weeks, there have been some challenges that you may have read about in industry. in terms of delayed delivery times of items just given the number of items being shipped now through third-party carriers. While this may reduce some sales if members are not confident in timely holiday delivery, we, like others, I'm sure, have done a couple of things. We've adjusted or stated expected delivery times on our side and reminded people to shop early. And in our case, we took several hundred non-food online items that are also in line and are providing same-day delivery through Instacart, including items like AirPods and Instapots and laptops and many over-the-counter and health and beauty aid items, as well as some other home essentials. In terms of food and sundries, continued limits on some paper goods. Demand and sales went up as COVID began spiking again. Toughest areas, nitrile gloves, surface cleaning wipes, and sanitizing sprays. Also, in some cases, some paper goods, overall dairy items are in good shape, as well as proteins and produce on the fresh side. In terms of our holiday merchandise planning and results, Halloween, you know, we went into it a little more conservative in terms of costumes and Halloween-specific candy items. We came out of Halloween with pretty clean inventory levels. Christmas, as I think I mentioned on the last earnings call or responding to a question, we went a little more basic in terms of needs and uses for the house. So very strong, we've gone into it with fundamental items from the home like housewares, TVs, electronics, even added items like barbecues and pressure washers and furniture items. A little less, we had cut back a little bit on seasonal items like holiday decorations and gift wrap and some of the candy and food gift baskets. In some instances, we've already sold through those inventories. Our warehouses overall have remained open and are mostly back to regular hours with an additional hour of any mornings for seniors and persons with disabilities. Warehouses are still following social distancing and sanitation guidelines, and in some jurisdictions we have to limit occupancy. Since May 4th, as you may recall, we've required members and employees to the warehouses to wear masks, and since November 16th, we've required face shields for those unable to wear a mask. Some of these initiatives, of course, will extend well into Q2 of the fiscal year. Finally, in terms of upcoming press releases, we will announce our December sales results for the five weeks ending Sunday, January 3rd, on Wednesday, January 6th, after market closes. With that, I will open it up to questions and answers, and I'll turn it back to Cindy. Cindy?
Cindy
Conference Operator
Thank you. At this time... If you would like to ask a question, you may press star 1 on your telephone keypad. And your first question comes from the line of from Morgan Stanley. Your line is now open.
spk12
Hey, everyone. Good afternoon. Richard, I wanted to ask, following on, you talked about some of the merchandising plans around Halloween and Christmas. you're going to begin to lap some pretty massive surges in growth when you get into the thick of 21. I know you don't guide, but you're probably planning inventory purchases. So I wanted to ask how you sort of manage with a pretty wide range of outcomes. And, you know, I don't know if you have any guideposts to thinking about some of the gains you're making in fresh food as far as, you know, the spoilage and the markdowns that don't seem to be happening. So how do you think, how do you plan for lapping some of those as well?
Richard Calanti
CEO
Well, I mean, there's a few different things and time periods that will be in question. If you recall, there was a big surge in frequency and sales results the last week in February and the first two or three weeks of March when people were coming in and hoarding, in our view. And, of course, we were running out of everything, basics from water to paper goods to cleaning supplies and things like that in some cases. And then beyond that into April and May, There were some issues as there were some COVID spiking at many fresh plants, you know, protein plants, you know, meat and poultry and the like. And so it's hard to project completely. I think historically of late, we have tried to build a little extra inventory where we can and some of those key things that aren't going to go out of style like paper goods and cleaning supplies. although then you get the next rush of spiking and whatever extra inventory you had, it goes away pretty quickly. We'll continue to work around it. I think in some cases it's a little easier in the sense that we have fewer suppliers to deal with, fewer items to deal with. Arguably in other cases, given our huge volumes, that creates its own challenges sometimes. I think the bigger challenge is going to be post-May last year, this past year, and June is when we saw kind of sales strength, not just in those key essential categories like fresh foods and foods and sundries and paper goods and health and beauty aids, but also on the non-food side, items for the home, if you will, and those types of basic items. And again, people spending some of those dollars look, some things will improve and some things may be degraded a little bit. Some things that are degraded may take a while and not everything's going to happen. You know, a light bulb is not going to go off one day and everything's going to get better from a food standpoint in terms of restaurants being open. So I think, you know, we're in it together and We feel pretty good that we've got a good format to serve our members well, and we'll go from there.
spk12
And as far as, I don't know, the events, I know roadshows, I don't know how prevalent they've been. Your mailers, are there things that you can change the cadence of either to get more aggressive? You know, grocery, you've taken a huge amount of share this year. Is that an area you're going to lean into stronger? Just curious how, you know, thinking about the merchants are prepping for the upcoming year.
Richard Calanti
CEO
Well, as it relates to promotional forms that we do, like the MVM mailers or even online type of mailers, You know, needless to say, some of those have been changed because some of the big-ticket non-food, not big-ticket, I'm sorry, some of the big-size items that are always in there, like paper goods, like cleaning supplies, in some cases we've had to eliminate some of those items from the mailer. We put other items in. In some cases it's done fine. In some cases it's a little bit less of a sales increase. But that's not just going forward. That's been in the last few months as well. that we've changed those things. I think we've been pretty good at pivoting and adding new items. I think the examples of for Christmas, you know, while we may have maybe went a little too deep into cutting back, not that they were big cuts, but, you know, we're running out of some of those decorative things a week or two earlier than we would have liked to. We also, though, have found success in lots of essential, basic, fundamental items, you know, I think the first Christmas we probably brought in barbecue grills and pressure washers to market, and they're doing well because people are buying gifts for the home.
spk12
Thank you.
Cindy
Conference Operator
And your next question comes from the line of Mr. Mike Baker of D.A. Davidson. Your line is now open.
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Hi, thanks. I was a little curious on the holiday trends. Two questions, really. One, by trying to advertise and get customers to spread out their sales and come in a little bit early, do you think there's any pull forward of holiday sales into November from December? And then a second part of the holiday question, I think you said that you're out of stock quickly in some of the seasonal items. Do you think you could have been a little bit more aggressive on the seasonal stuff? How much do you think your sales could have been up if you had done that?
Richard Calanti
CEO
Yeah. Well, first of all, talking to the buyers, they definitely feel that some of the merchandise and sales were pulled forward into November, not only from December but even the week of November. There's been articles out there about Thanksgiving and Thanksgiving overall, not at Costco specific, but just in general about what's going on online and what have you. And so certainly some of that kind of got pushed forward. In terms of some decorative things, I mean, there are examples where instead of buying 10% more this year, of a given item, we bought 10 or 20% less. So we still bought a lot. It's not like we cut our order back by half. But in retrospect, we probably could have sold a little bit more. I don't have a dollar number. It's probably not that meaningful. For every negative, there's another positive. Needless to say, our comps overall have been very strong.
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Yep. Oh, that's fair. And if I could ask one more, I guess, unrelated question. The MFI, the 7.1% increase, that's better than it has been. A nice acceleration there. Any color as to where that acceleration came from, from what had been more in the 4% or 5% range the last few quarters?
Richard Calanti
CEO
Well, I think in terms of shopping frequency?
Chris Harbers
JP Morgan
No, membership.
Richard Calanti
CEO
Oh, membership. Correct. Oh, I'm sorry. Okay, I didn't hear the first part of the question. Well, I think we opened a few more units than we did a year earlier. Without looking that deeply, that's probably most of it.
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Okay, fair enough. I appreciate the color. Thank you.
Cindy
Conference Operator
And your next question comes from Chuck Grimm of Gordon Haskett. Your line is now open.
Chuck Grimm
Gordon Haskett
Hey, thanks. Hey, good afternoon, Richard. You know, when you look at your online offering, can you remind us where it stands in terms of total mix of business and also level of profitability relative to the store? And looking ahead, you know, what categories you may start going into more?
Richard Calanti
CEO
Well, I think in terms of in-store, of course, in warehouse, we've got about 3,800 active items. Online, we typically have somewhere in the high single-digit thousands. I mean, call it 9,000-plus. I'm sorry. In terms of percent of sales, it's about 7% of sales. Now, we don't include in that number, as I mentioned, like the third-party sales, like the Instacart Same Day Fresh sales. because their employee or contracted employee is coming into Costco shopping just like any other customer would come into the shop. So you can add a little bit more to that. But in terms of what we call online is about 7%. I think it was 6% in fiscal 20 for the entirety. And, of course, it was halfway through the year when you saw e-com percentages increases jump dramatically with the advent of COVID.
Chuck Grimm
Gordon Haskett
And then just level of profitability?
Richard Calanti
CEO
Overall – E-commerce is a little less profitable. You've got category-wise, it's profitable. Category-wise, you've got merchandise categories that don't include some of the highest gross margin components of our business, like fresh, like apparel, in a big way in terms of penetration. You've got electronics, which is a lower-than-average-margin business, both in-store and online, and some much bigger percentage of penetration online. So those are examples. Certainly the profitability of e-commerce has been helped with the types of comp sales increases we've had over the past year. But also over this past year, there's some of the cost inefficiencies of growing it so fast. In terms of fulfillment, as we are continually adding locations where it can be shipped out of and getting closer to the customer as this overall size of the business has grown a lot.
spk00
Yeah.
Richard Calanti
CEO
Yeah. And as I mentioned earlier, the investment in Innovel, what we're calling Costco Logistics, that was, as we expected, a hit year-over-year to margin simply because it's being ramped up and upgrading.
Chuck Grimm
Gordon Haskett
Gotcha. And then just to follow up on Mike's question, and I pardon my near-term orientation of it, but when you look at the comp in November and the fall-off at the end of the month, albeit still strong, Just when you look back, if there's any learnings on to why you think sales fell off. And I'm curious if the revenue trends have started to bounce back.
Richard Calanti
CEO
I think it's, I mean, our best guess is it's complete pull forward. I mean, the fact is people have been marketing bigger ticket items and some of those types of holiday items earlier in November.
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Last Friday, it was promotions for the whole month.
Richard Calanti
CEO
Yeah, Bob here mentioned that Black Friday promotions this year, more of those things we promoted earlier in the month. And not an assessment, everybody else out there too.
Chuck Grimm
Gordon Haskett
Gotcha. All right, thanks a lot.
spk12
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Unknown
Hey, Tex, can someone else get a turn?
Cindy
Conference Operator
Your next question is, comes from Mr. Michael Lesser of PBS.
PBS Representative
PBS
Thank you for taking my question. Some people on this call might be considering getting for loved ones this season. When you look at your sales compared to the rest of the consumable retail landscape, most others are seeing a deceleration in their comp. whereas Costco is seeing an acceleration in its comp. Why do you think that is? Is it simply because members are coming in to buy the discretionary goods and loading up their baskets with the consumable items?
Richard Calanti
CEO
We definitely think that, look, being essential and recognizing that people clearly are coming in to buy food and key cleaning items and health and beauty aids and the like, that gets you in the door. And certainly, In our view, given that money is being spent on other things in normal years, perhaps is being spent more for things for the home, we have that as well. And I think that has helped us in that regard.
PBS Representative
PBS
Okay. So it really comes down to snakes and the cost goes super tall. There's nothing else to really compare.
Richard Calanti
CEO
I'm biased. I'd like to think part of it is people feel hopefully at least relatively safe coming into a big, wide-open box environment where we've done, we think, a pretty good job of social distancing and other safety protocols.
PBS Representative
PBS
Okay. And the core-on-core gross margin increase, it seems like it's a function of just the strong sales. allowing Costco to be able to sell through better than it might otherwise have been able to. Is that right?
Richard Calanti
CEO
Yeah, I think most, most, most of it is, most of it is strong sales, which shows its brightest colors with fresh food, where you've got, you know, two cost components that have improved dramatically, uh, spoilage and labor productivity. Uh, so that has certainly helped. Um, the, uh, I had one other thought on it, but I can't seem to come to mind. Sorry. Oh, yeah, less promotion. The other, Michael, is I think you've all read about this from an industry perspective. There's been less promotional activities out there. While we're still giving great values on things, when you look at TVs in general, while prices have come down across the board just because they always do over time, and these seem to be getting better, bigger, and less expensive, there's not the kind of promotional money being thrown at it by the manufacturers because they haven't had to. And so I think that, too, has had some impact.
PBS Representative
PBS
That's helpful. I hope you have a great holiday. Thank you.
Richard Calanti
CEO
You as well.
Cindy
Conference Operator
And your next question comes from the line of Mr. Scott. From RBC Capital Market.
Scott Ciccarelli
RBC Capital Markets
Not even an attempt there. Hi, guys. Scott Ciccarelli. So I believe some of the products you guys sell via your website or e-commerce are for members only, but not all of them, or it doesn't look like that from a labeling perspective. So assuming it's not just a labeling difference, how much of your e-commerce sales are coming from members?
Richard Calanti
CEO
Virtually all. I believe part of the challenge is on some items as we work with our suppliers and ourselves as well, we want you to be able to have to sign in to see the prices.
Scott Ciccarelli
RBC Capital Markets
I got it. Okay. And then, Richard, what's the update today regarding how much of your e-commerce sales are being drop shipped from vendors versus kind of delivered through Costco?
Unknown
About 50-50. A little less than 50 is being drop shipped. Got it.
Scott Ciccarelli
RBC Capital Markets
All right. I appreciate it. Happy holidays. Same to you.
Cindy
Conference Operator
Next question from Karin Short of Barclays. Your line is open. Hi.
Karin Short
Barclays
Thanks very much. A couple questions I wanted to ask. So first, just on COVID and wages, So the 212 you called out obviously gave us a breakout on the impact on cost of goods versus SG&A. But that was a little higher than the number, I think, the $14 million per week that you guided. So wondering if that's what the delta would have been, because that would have gotten us to about $168 million. And then wondering if you can give a little color on what the other cleaning component might be, would have been in this quarter, and then how to think about it. into next quarter, because presumably, just like I asked last quarter, that January 3rd date is probably not the end date, I would assume.
Richard Calanti
CEO
Well, we'll find out. But let's say I can't comment on that. But a big chunk of the difference of 14 or it may have rounded, honestly, down to 14. And now it's rounding up to whatever. But at the end of the day, there's more hours is the biggest delta. Okay.
Karin Short
Barclays
And then the cleaning component?
Richard Calanti
CEO
That's relatively small.
Karin Short
Barclays
Okay. And then I'm wondering if you could give a little color on the expansion of the Instacart relationship. You obviously listed a couple of SKUs that you've added on to that with respect to the third party. Can you give a color on what the markup is on non-food items versus food and then give a breakdown on what that would be for members versus non-members on the markup?
Richard Calanti
CEO
Well, I can't be that specific. We continue, over the last three or four years, we've continued to work to lower the effective average markup across the board on items. There's some discretion on some can be a little lower than that and some can be higher, but there's an average, which includes both their markup plus whatever other fees that that person is spending, whether it's a per delivery fee or per monthly fee, to Instacart. Given some of the unique issues near the end of the year with the high demand for shipping and the capacity issues out there with the third-party shippers, and given that Instacart has always come in, we've added some items to the fray. In some cases, there is a maximum markup on those that is – in many cases smaller than that, quite a bit smaller than that other, that mid to high T number percentage wise.
Karin Short
Barclays
Okay. And then just last question in terms of the MFI, you know, obviously the, I think January of 21 would be the new timeline in terms of the tax deductibility in California. Is there any thoughts in terms of timeline in terms of how you would think about an MFI or a membership fee increase? Because I think in the past you've historically done that when you've actually seen counter to counterintuitively traffic flowing. And it seems like you may be looking at slower traffic just based on tough compares as we get into parts of next year. So philosophically color on that.
Richard Calanti
CEO
Well, historically, as you know, for 35 years, we've effectively raised the basic fee $5 every roughly five years. And I say roughly, it could be five, five and a half years. And the executive membership has been raised, originally started at $100, now it's $110, then $120. The last time we did the increase was, I believe, was in June-ish of 16. So five years, it was June of 16.
Chuck Grimm
Gordon Haskett
Before years.
Richard Calanti
CEO
Are you sure? We'll check on that. But if you – it was June of one of the years, either 16 or 17, but it would be five years from then that we might look. You mentioned that we've done it when things are – sales have been stronger, when sales have been weaker, when the economy took a hit or whatever else. We look at it somewhat independently of that. We look at it and we feel have we improved the value of the membership by more than that five or – And I'm not suggesting we might wait or not, but, you know, time will tell.
Unknown
Okay, thanks.
Richard Calanti
CEO
Historically, we've always felt very good about when we've done it that certainly the value proposition has been enhanced at a much greater multiple than the $5 or $10.
Karin Short
Barclays
Thanks. Have a great holiday.
Richard Calanti
CEO
Thanks, you too.
Cindy
Conference Operator
Our next question from Oliver Chen of Collin.
Oliver Chen
Collin
Hi, thank you very much. Hi, Richard. Regarding what's ahead with vaccinations, do you see a role that your pharmacy will play in that? And also in this dynamic environment, how are you thinking about managing inventory versus sales as we look forward to hopefully a pathway to vaccination, etc.? Thank you.
Richard Calanti
CEO
I believe We, the country, are currently in the first phase of the vaccination process. We are not participating in that, but I believe phase two, which will be just a short period down the road, our pharmacies will also be part of the many pharmacies throughout the country that are going to be providing the service of vaccinations for that. We are in phase one in the state of Alaska only currently. But I think throughout the country, we plan to be in phase two, which will be the big push after this first initial round. Um, and in terms of managing inventories, well, while space is not infinite, certainly the cost of carrying a little extra inventory isn't very expensive right now, given the very low interest rates. But at the end of the day, uh, as I mentioned a little earlier, we, uh, I think we plan, uh, positively in terms of how our sales have been, uh, and, uh, and, uh, to the extent that in the example of those seasonal items, we came down a little bit, but not a lot. And I think we'll continue to do that kind of planning. A lot of times on items that are short, but there's certainly no risk of having, the only risk of having some extra paper towels for a few weeks is the risk of having them. There's not any obsolescence or markdown risk on it. We will always try in times when there's more of that available, we'll build up a few extra weeks of supply. But overall, I don't see a big change in our inventory turns or payables ratios.
Oliver Chen
Collin
Okay, and e-commerce?
Richard Calanti
CEO
They're dictated more by comp sales than anything. When we were enjoying pre-COVID a 6% to 8% comp sales number, payables as a percent of inventories was whatever the number was. When we saw the big increase in comps, you saw the payables as a percent of inventories going up.
Oliver Chen
Collin
Got it. That's very helpful. And on the topic of e-commerce, as we think about longer-term growth rates as well as new customer acquisition that you're seeing and engagement online, what are some of the major catalysts for innovation going forward that you'll implement or that you're looking to implement? And then how do you think growth rates may evolve as hopefully reopenings occur eventually?
Richard Calanti
CEO
Well, look, we as much as anybody want things to get back to normal from a business standpoint, but most importantly from a personal standpoint. And, you know, over the next couple of years, God willing, starting with this process of vaccinations and vaccines and hopefully a big chunk of this progress through, you know, by the beginning or during the summer, People will get out more. We'll be going back to restaurants and the like. And will that have an impact on our food sales? Of course it will. Some of this positive will be sticky. Some of the new members will be sticky. And we'll go from there. I think that there are lots of attributes to value and customer loyalty. Certainly the best prices on great quality merchandise that the member trusts, in our view, is the biggest attribute. And that's where we start from. E-commerce is certainly in the acquisition of Innovel in terms of big-ticket items and having a great service and a great value for those items we think helps us. But ultimately, we still want our members to come into the warehouse. When they come in, they see the items, and they're more likely to buy some of those items. And certainly... driving them in with great value and great quality is what we're all about.
Oliver Chen
Collin
That's helpful. And last on that logistics, Costco logistics part, what should we know about as we model that going forward in terms of the margin headwinds and the dimensions around the size of that business relative to total? Thanks.
Richard Calanti
CEO
Well, the only two data points we've given you is in Q4. year over year, it was about, I think, an eight basis point margin hit in Q1, which we just reported for this new fiscal year. It was a six basis point margin hit. As guessing games go, assume that there'll be constant improvement in that over the next several quarters so that it won't be a negative. Now, mind you, that doesn't include any benefit we get from increased sales of those items and the margin associated with that. But when we bought this thing, we knew that it would be – you know, dilutive from an earnings standpoint for the, certainly the first year and perhaps into the second year, hopefully on a decreasing basis. And certainly the first two quarters would indicate a little of that, but at the end of the day, we think it, uh, uh, those companies that have had their own infrastructure to be able to do last mile delivery and, and, and installations, uh, it's a positive, certainly the home improvement companies have done that, uh, the retailers, uh, uh, and, uh, It worked out for us, and we're excited about what we can do with it.
Oliver Chen
Collin
Thank you very much. Happy holidays. Best regards.
Richard Calanti
CEO
Same to you.
Greg Malek
Unknown
Only two things are forever, love and Liberty Mutual, customizing your car insurance so you only pay for what you need.
Cindy
Conference Operator
Your next question from Edward Kelly of Wells Fargo. Your line is now open.
Edward Kelly
Wells Fargo
Yeah, hi, Richard. Good afternoon. You mentioned freight. I was hoping you could provide just a little bit more color on the headwind, and then you talked about an improvement maybe coming in March. Any more color behind that?
Richard Calanti
CEO
Not really. Before each call, I'll sit down with the head of merchandising and some of the other senior people in merchandising and just get the color on their departments and what's going on. It was a by-the-way comment that with – With things coming from Asia, as an example, or in general, there's container shortages, and so it may take a few extra days to get things onto a ship, or the ship may go sailing not full in some cases. The same thing is on some of the big ports in the United States, like on the West Coast particularly, there were they mentioned two to four days of delay. Again, two to four days is not a lot, but when you're moving inventory fast, you want to have it. Once you've ordered it, you want it built and put on the ship and get here and onto our floor. So it's not a big deal. And the comment was, I said, what will improve? And it said, probably not until February, March. So that's what I threw out. Not any more impactful than that.
Edward Kelly
Wells Fargo
Okay. Okay. And then I just had a question on e-com and just digital strategy generally. Any updated thoughts on buy online, pick up at store? I mean, it has essentially kind of become a standard offering across the industry, and we've obviously accelerated a lot of digital adoption. Just curious as to whether, you know, you're rethinking that at all.
Richard Calanti
CEO
We're not rethinking it. We continue to look at it and scratch our heads a little bit. But at this juncture, we don't have any current plan to do so.
Edward Kelly
Wells Fargo
Okay. And then just lastly for you, fuel, I think gross profit per gallon this quarter was probably up quite a bit. I mean, I look at the Opus data, it looks like maybe double. Is that about right? And then what did gallons sold do this quarter?
Richard Calanti
CEO
Gallons sold were down, not down as much as they had been in its trough a few months ago. And you're right on margins, not a double, I can't give you any quantitative number there, but in terms of margins were up year over year as a percent, and gallons were down year over year.
Edward Kelly
Wells Fargo
Okay. Thank you.
Cindy
Conference Operator
Your next question from Chris Harbers of JP Morgan.
Chris Harbers
JP Morgan
Thanks. Good evening. I wanted to follow up on the holiday pull-forward question. I was curious what the merchants are thinking about how the season progresses, particularly as we get close to Christmas. Some retailers think that given the earlier cut-off time to get the gifts in time for Christmas, that there could be a big brick-and-mortar surge. I think other retailers are saying that, no, it just, you know, started like with Prime Day and, you know, it's just been a pull forward. So don't expect anything out of the unusual, anything unusual close to Christmas. So curious what your merchants are thinking.
Richard Calanti
CEO
Well, merchants are feeling pretty, I'd say aggressive with a small A. You know, they feel that, again, some of it was pulled forward, but they're still, again, running out of some gift wrapping paper two weeks before you wanted to is not the end of the world, but every sale is a sale that we want. In the same token, bringing in fundamental items that if you end up having a few extra SKUs or a few extra quantity of certain SKUs the day after Christmas, it's not going to kill you because it's not stuff that's seasonal that has to be marked down in a big way. So I think that we're going into it recognizing that our Sales overall, particularly brick and mortar, have done well. We're basing our assumptions of what we're going to do even over the next two weeks positive relative to this. Recognizing that there could be some pull forward, and there could be some because the dates got a little longer on shipping. But at the end of the day, we agree with you. That could help the in-store experience, and we'll see.
Chris Harbers
JP Morgan
Got it. And then in terms of you called out travel and gross margin as a big impact there. Is there something around the counting of that? You hadn't called it out prior. Maybe it was just because it's a relative to other things in the ancillary business. But is there an accounting thing? Is there seasonality to that? And would we expect that to sort of get worse for some reason?
Richard Calanti
CEO
Well, what the accounts make you do, just like in the 10K, you've got to rank them in order of dollars. So in the case of travel, first of all, it's a very high gross margin business. To the extent that we're simply acting as a broker like our car rentals, there's sales and no cost of sales equals gross margin or very little cost of sales. Only when we curate an item and take ownership of it, you will, like 100 cruise ship weeks or whatever. I'm making this example up. where you sell $100,000 of something and make a few thousand dollars or $5,000 of margin, that's a 5%, but you have big chunks of that business that are 80 plus percent margin. So it's a business that started to show a little bit of life as we entered summer, but with the spiking of COVID in the last several weeks, that has dissipated quite a bit. And even some of the life... that occurred in the summer were bookings out for Christmas, some of those are being canceled, as you would expect them to be. So it's the rank order of them, which one hit harder a little bit.
Chris Harbers
JP Morgan
Got it. And then the last question is, on price gaps relative to peers and club and grocery, have they widened? Where do you see them now? I think if you go back to this 2009 timeframe where you sort of peaked food-at-home inflation and you lapped some food-at-home wallet gains, you seem to get more aggressive on price. So I just want to get your thoughts on where you see the price gaps now and how you're thinking about that into 2021.
Richard Calanti
CEO
Well, I mean, when we look at our comp shops compared to other warehouse clubs as well as comp shops specifically on certain items and other traditional retail formats, we feel very good about our competitive moat, if you will. And we don't think that's an issue at all for us right now. But we're the ones that keep pushing the limits further.
Chris Harbers
JP Morgan
Got it. Have a great season, guys. Thanks. Thank you.
Cindy
Conference Operator
And next question from Robert Moscombe of Credit Suisse.
Robert Moscombe
Credit Suisse
Thanks for the question. Richard, you mentioned that manufacturers, I guess, for packaged goods, they're not promoting as much, not getting as many discounts as usual because they don't have to. At any point, do you think that could flip the other way? And if so, what would drive it? Is it the availability of supply or maybe a more intense competitive environment?
Richard Calanti
CEO
Gosh, when I find out, I'll let you know. You know, I mean, what's happened, of course, with everything, you mean the strength, both the strength in electronic items, TVs, AirPods, and everything else in between, and laptops, and the demand for those things is enormous. And in some cases, some shortages of supplies in general. Even if capacity is going up, it could go up a lot more. So it's hard to say.
Robert Moscombe
Credit Suisse
Okay. I was thinking more on the lines of packaged food. We've heard some categories putting promotions back in. Do you have any insight into that?
Richard Calanti
CEO
Okay. I don't. I'm sorry. Okay.
Robert Moscombe
Credit Suisse
All right.
Richard Calanti
CEO
Thank you.
Cindy
Conference Operator
And next.
Greg Malek
Unknown
Hi, it's Greg Malek. I think that was me. So actually two questions. One, was there any grocery inflation showing up? And we see CPI for grocery picking up and there's less promotion. What are you guys seeing there?
Unknown
Very, very, very little.
Greg Malek
Unknown
So there's something, but it's nothing like 4% or 5%, some of those other numbers we see out there.
Richard Calanti
CEO
Oh, it's not even a percent. It's very, very, very little. Three varies.
Greg Malek
Unknown
Triple varies. On cash, so the special dividend, congratulations on keeping it special and getting it done. You should be back a little under $10 billion of cash. What's the right number that you want to run the business with? you know, either still during COVID or even on the other side of it?
Richard Calanti
CEO
Well, keep in mind, you know, there's a chunk of it that is, you know, weekend debit and credit card receivables that could be a billion or a billion and a half. There's upwards of just under a billion that is related to insurance captives and the like. There's a two to three billion that oversees in different countries. which for whatever reasons, it's the last money you want to bring back because of whatever withholding or other taxes related to it. Uh, so, you know, at the end of the day, um, you know, someone asked the question, uh, after we announced the $10 dividend, we could have done more. The answer is we could have, but why rush? I mean, right now we still don't know what's going to happen with COVID and what may happen next year in the economy. And, uh, So we'll probably have a little more cash than normal, than pre-COVID, if you will, but that's okay too.
Greg Malek
Unknown
And then last, could you just, where are average rates today, this sort of level set where the, and we know the COVID top-up, thanks for that, helping us there, but where are we now before all that?
Richard Calanti
CEO
You mean the average U.S. hourly wage? Yes.
Greg Malek
Unknown
Yes.
Richard Calanti
CEO
I think we're in the, well, X to $2. We're either right above or just approaching $24 average in the U.S.
Greg Malek
Unknown
Approaching $24 in the U.S. And so the changes for the base range going up, that was, you did that, that was completed when?
Richard Calanti
CEO
In March, I believe, last year? Last March, beginning of March.
Rupesh Tariq
Oppenheimer
March of 2019.
Richard Calanti
CEO
March of 2019. I believe it was near the beginning of March, whenever that Monday start for that weekly pay period was, or biweekly pay period. And that was $2 across the board.
Greg Malek
Unknown
Right. And the COVID stuff's on top of that.
Unknown
Excuse me?
Greg Malek
Unknown
The COVID was on top of the actual wage rate. Yes. Right. Got it. Great. Well, good luck. Have a great holiday. Thanks. You too.
Cindy
Conference Operator
And next question from Rupesh Tariq of Oppenheimer. Your line is now open.
Rupesh Tariq
Oppenheimer
Good evening. Thanks for taking my question. So I want to ask for just some of the countries where you have lower COVID infections. China, Australia seems to be normalizing now. Has purchasing behavior in those markets returned back to where it was maybe pre-pandemic? I'm guessing Australia probably better read than China.
Richard Calanti
CEO
They're both stronger comps.
Rupesh Tariq
Oppenheimer
From a category perspective, have you seen the category shift to, I guess, maybe where they were pre-pandemic, if you look at the mix?
Richard Calanti
CEO
Well, I don't have that detail in front of me, unfortunately. When I look at comps by country in local currencies, in most countries we're back to normal, if not a little better.
Rupesh Tariq
Oppenheimer
Okay. Okay, great. And then just in the U.S., just given we've seen spikes in infections and California's had more researches recently put in place, just curious if you can just comment on anything you're seeing more recently just in terms of changes in consumer behavior traffic to your stores.
Richard Calanti
CEO
The only thing that I've noted is that, you know, when it first started a few weeks ago or when the California, you know, everybody was waiting for California. In California, everybody was waiting to hear what the new restrictions was going to be in terms of lockdowns. there was a spike in shopping, and people were coming in. So we had particular strength over a couple-week period when more spiking was occurring.
Rupesh Tariq
Oppenheimer
Okay, great. Thank you. Have a great holiday.
Richard Calanti
CEO
Thank you, too.
Cindy
Conference Operator
And your next question.
Richard Calanti
CEO
We'll take two more questions, Cindy.
Cindy
Conference Operator
Okay. Your next question from Kelly Banya of BMO Capital.
Kelly Banya
BMO Capital
Great. Thanks for fitting me in here. Richard, just wanted to go back to the buy online and pick up at store question. I know you've said for several quarters now you continue to scratch your head, but it does seem like a lever that maybe you could pull one day that's already been pulled by pretty much everybody else in retail. But I guess just given the massive growth that you've seen with Instacart and your third-party partners there, there just does clearly seem to be a segment of your membership base that's willing to pay a premium or that markup for that service. So I'm just curious if you've thought about even a markup type structure for pickup or even like a higher price point membership for a pickup type service.
Richard Calanti
CEO
As it relates to general conversations about it, those are topics that are discussed. One of the challenges right now is a lot of the buy online and pick up and store traditional retail promotions are the same price as what you can come in and buy it for. So somebody's paying for the picking it up and storing it and waiting for you to pick it up. You know, I think that'll shake out too over time as people, you know, as companies, you know, somebody has to pay for it, either the company or the customer. We're not trying to be cute. We're looking at all those things, but we haven't made any decisions to go forth with it.
Kelly Banya
BMO Capital
Okay, and just maybe quick follow-up. You mentioned the 7% e-com penetration from a sales perspective, but just curious if you could share just the percent of your maybe membership households that are engaged with Costco from a digital e-commerce perspective.
Richard Calanti
CEO
We don't give out that information yet.
Kelly Banya
BMO Capital
Okay, thanks.
Richard Calanti
CEO
As you might expect, it's growing. Of course.
Cindy
Conference Operator
And your last question from staff of Jeffrey.
Jeffrey
Unknown
Thanks. Good afternoon, everyone, and thanks for squeezing us in. I just wanted to follow up on Rupesh's earlier question, but ask it a slightly different way, which is looking at your cohort of new members that have joined really from kind of the third quarter of last year. Any performance distinctions or category mix distinctions that might give you encouragement that those members might be a bit more sticky going forward or might be a bit longer lifetime value customers for you into the future? Thank you.
Richard Calanti
CEO
We don't have a lot of that information yet. what we recognizing that some of them signed up because of COVID and because we can deliver, you know, through Instacart food fresh, uh, and, uh, or we can, we can serve them online. Uh, but, uh, there's not a lot to go on yet.
Cindy
Conference Operator
Okay. Thank you.
Richard Calanti
CEO
Well, thank you everyone. Uh, hopefully you have a happy and healthy holiday season and, uh, On to a better 2021. Have a good day.
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