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.
spk05: Good afternoon, ladies and gentlemen, and welcome to the Costco Wholesale Corporation Fiscal Q1 2023 conference call. At this time, all participants are in a listen-only mode, and please be advised, this call is being recorded. After the speaker's prepared remarks, there will be a question-and-answer session. If you would like to ask a question during this time, simply press star 1 on your telephone keypad, and if you would like to withdraw your question, simply press star 1 again. And now, at this time, I'll turn the call over to Costco's CFO, Richard Cohen.
spk01: Please go ahead. Thank you, Bo. Good afternoon to everyone. I will 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 and the company's public statements and reports filed with the SEC. Forward-looking statements speak only of the date that 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 23. The 12 weeks ended this past November 20th. Reported net income for the quarter was $1.364 billion, or $3.07 per diluted share. That compared to $1.324 billion billion or 298 a share last year. This year's results included a charge of 93 million pre-tax or 15 cents per share primarily related to downsizing our charter shipping activities and a tax benefit of 53 million dollars or 12 cents per diluted share related to stock-based compensation. Last year's results included an asset write-off of 118 million pre-tax or 20 cents per diluted share. and a tax benefit of $91 million, or 21 cents a share, related to stock-based compensation. Additionally, the strength of the U.S. dollar resulted in our foreign company earnings translating into fewer U.S. dollars. With 25 to 30 percent of our earnings generated outside of the United States, this negatively impacted earnings by about 12 cents per share. In terms of sales, Net sales for the first quarter increased 8.1%, or $53.44 billion, versus $49.42 billion reported last year. On a comparable sales basis during the first quarter, reported U.S. sales increased over the 12 weeks 9.3%, and excluding gas inflation and FX, 6.5%. Canada, 2.4% reported, 8.3% increase ex-gas inflation and FX. Other international reported minus 3.1, excluding gas inflation FX plus 9.1. So you have all told 6.6 reported for the company and X gas inflation and FX a 7.1. E-commerce, by the way, was reported of a minus 3.7 and a minus 2, excluding FX. In terms of first quarter comp sales metrics, traffic or shopping frequency increased 3.9% worldwide. and up 2.2% in the US. Our average transaction size was up 2.6 worldwide and 6.9% in the US during the first quarter. And foreign currencies relative to the US dollar negatively impacted sales by a little over 3%, while gasoline price inflation positively impacted sales by approximately 2.5%. Moving down the income statement, membership fee income. reported in the quarter, a membership fee income came in right at a billion dollars. Uh, that's $54 million or 5.7% higher than last year's reported number of 946 million. Again, the relative weakness in foreign currencies relative to the U S dollar, excluding the impact of FX or assuming flat FX year over year, that $54 million number would have been increased by $32 million. And the membership on an adjusted basis would have been a little over 9% year over year on flat FX. In terms of renewal rates, at first quarter end, our U.S. and Canada renewal rates were 92.5% compared to 92.4% a quarter ago. And worldwide, the rate came in both at this quarter end and the previous quarter end, the same level, at 90.4%. We ended first quarter with 66.9 million paid household members. and 120.9 million cardholders, both of 7% versus last year. And recognize we added about 22 units over the course of that last year, so that was about just under 3% of that increase. At Q1 end, paid executive memberships were right at 30 million, an increase of 904,000 during the 12 weeks or 75,000 a week during the first quarter. Executive members now represent 45% of our paid membership, and just under 73% of worldwide sales. Moving down the income statement to gross margin, I reported gross margin the first quarter was lower year over year by 45 basis points and lower by 21 basis points, excluding gas inflation. And as I'll explain in a minute, the 93% pre-tax charge, excluding that $93 million charge we took in the quarter, gross margin X gas inflation would have been only down three basis points. As I always ask you, jot down the following numbers, two columns and six line items. The first column is reported during the first quarter, a year-over-year delta change in basis points, and the second column excluding gas inflation. On a core merchandise basis, we reported in the first quarter minus 52 basis points and ex-gas inflation minus 31 basis points. Ancillary and other businesses, plus 23 on a reported basis and plus 30 2% reward, minus 2 and minus 5. LIFO, plus 3 and plus 3. Other, that's the $93 million charge, minus 17 and minus 18. So all told, again, a reported basis was 45, X gas inflation, 21. So starting with the core, core merchandises contribution gross margin on a reported basis was lower by 52 basis points year over year and lower by 31 basis points, X gas inflation. In terms of the core margin on their own sales, In the first quarter, our core gross margin, if you will, was also lower by 31 basis points, with food and sundries being up a little bit, offset by nonfoods and fresh foods being down. Fresh foods was down, as you know, for the last couple of years. It's been particularly strong, and it's come down a little bit. In addition, we are looking to hold prices on some of those price points, despite inflated costs in some of the fresh food categories. Ancillary and other business gross margins were higher by 23. and higher by 30 basis points ex-gas inflation in the quarter, with gas, business centers, and travel up year over year, offset in part by e-comm, food courts, and optical. Our 2% reward, minus 2 basis points reported, minus 5 excluding gas inflation, implying higher sales penetration coming from our executive members. LIFO, plus 3 basis points. We had a very small LIFO charge this year, but lapped a $14 million charge in Q1 last year. You recall last year during the four quarters, we had LIFO charges in excess of $400 million pre-tax with a small amount, that $14 million in the first quarter, over $100 million in Q3 and over $200 million in Q4. So we'll see what inflation does this year. Hopefully it'll continue to its current trends in the right direction. Other than minus 17 and 18 basis points reported in ex-gas deflation, this is the 93 million charges mentioned in the earnings release, mostly related to downsizing our charter shipping activities. Over a year after COVID began, you will recall that the supply chain challenges related to shortages of containers and shipping delays greatly intensified, with container, freight, and shipping rates skyrocketing. It was in Q4 of 2021 on our earnings call that we mentioned our initial leasing of three ships, and several thousand containers to help mitigate these challenges. Later, we added four additional vessels and additional needed containers with commitments made for up to three years. Our objectives at the time were twofold. First, to increase the ability for more timely shipping and arrival of overseas merchandise. This allowed us to better stay in stock and drive sales. And second, to reduce some of the skyrocketing shipping and associated container costs. We achieved those objectives for a period of time. Over the course of a year, year and a half, We controlled the shipping and delivery of nearly 50,000 containers, many that would have been greatly delayed and at an estimated savings as compared to the then current shipping container costs of somewhere between $1,000 and $2,000 per container. That, of course, fluctuated. Now, with a dramatic improvement in shipping times and much lower shipping and container costs, it made sense to downsize our commitment and lower prices for our members. Moving on to SG&A. I reported SG&A in the first quarter was lower or better year over year by 35 basis points, coming in at a 920 compared to a year ago, 955. And that plus 35 basis point improvement would be plus 13 basis point improvement, excluding gas inflation. Again, writing down six line items in two columns, first column being reported, second, X gas inflation. During first quarter, our core operations was lower or better by eight basis points, plus eight then. without gas inflation minus nine, central zero and minus three, stock compensation plus three and plus one, pre-opening zero and zero, other plus 24 and plus 24, for a total first column reported SGA plus 35 or lower by 35 basis points, and ex-gas inflation lower by 13. Now going through those numbers, the core operations component of SGA was again lower by eight basis points, reported but higher by nine excluding impact of gas inflation these results include three sets of wage increases that were done in the past year plus as well as a little slower sales results in q1 as compared to the prior quarter still increases but a little lower than the prior quarter central is flat or zero and higher by three x gas inflation stock comp again a little lower number in stock comp as a percent so it came down improved a little bit pre-opening no impact And the other, the 24 basis points you recall last year in Q1, this consisted of an asset write-off totaling $118 million pre-tax, which impacted the SG&A line last year. Below the operating income line, interest expense was $34 million this year, down $5 million or down from $39 million last year. And interest income and other for the quarter was higher by 11 year over year, $53 million versus $42 million a year ago. Interest income was higher year-over-year offset by unfavorable effects. Overall reported pre-tax income in the quarter was up 4%, coming in at $1.77 billion compared to $1.696 billion a year ago. And excluding the charges described earlier in both years, pre-tax income was up around 3%. In terms of income taxes, our tax rate in Q1 was 23.0% compared to 20.7% if you've won last year, so a little higher this year. Both years tax rates benefited from the tax treatment of stock-based compensation as mentioned earlier. The fiscal 23 effective tax rate excluding these discrete items, this discrete item is currently projected to be between 26 and 27%. A few other items of note in terms of warehouse expansion, we plan to open a net of 24 units this year, 27 openings including three relocations, so a net of 24. In the first quarter, the net of that 24 included seven. We planned three more in Q2, four in Q3, and ten in Q4. In the first quarter, we opened, as I mentioned, seven net new warehouses. Four were in the U.S., and one each was in Korea, our first in New Zealand, and our first in Sweden. Additionally, last week we opened another building in the U.S., and just yesterday we opened our 14th location in Australia. our second on the country's west coast, and are near Perth. In fiscal 23, again, 27 total new openings, including three locations for a net of 24. Of the net 24, it's made up of 15 in the U.S. and nine and other international, including our third and fourth locations in China. Regarding CapEx, in the first quarter, CapEx was approximately $1.06 billion. And our estimate for the entire fiscal year is capex of somewhere in the $3.8 to $4.0 billion range. Moving to e-commerce. E-commerce, as we mentioned in the press release, on a reported basis for the quarter, year-over-year sales were minus 3.7 and minus 2xFX. What we don't include in this number is our sales through same-day delivery for fresh with our partners like Instacart. which we don't include those, and they are fulfilled in our warehouse. Our e-com comps FX would have been if we included it in the positive low single digits. Stronger departments in terms of year-over-year percentage increases were tickets and gift cards, tires, candy, and health and beauty aids. The largest e-com merchandise department majors, which includes consumer electronics and appliances, which represents close to 40% to 50% of our e-com volume. was down in the high single digits. Subsequent to quarter end, we did have our two biggest e-com selling days in our company history, both on Black Friday and Cyber Monday. Now, a few comments regarding inflation. Recall, we've seen some minor improvements in a few areas, hopefully continuing the comment I made last quarter's earnings call. A little light at the end of the tunnel, but it's still little. Recall last quarter and fourth quarter, we estimated that year-over-year price inflation was about 8%. In the first quarter, we estimate the equivalent year-over-year inflation number in the range of 6% to 7%. Food and sundries is still up more than non-foods, but overall a little better level than a quarter ago for the company. And commodity costs are mostly coming down, whether it's corn, flour, sugar, and butter, or even some things like steel. A few things are up, but overall we're seeing a little bit of a trend, but we'll keep you posted. Switching over to inventory levels, recall that our total inventory in both at the end of Q3 and at the end of Q4 on a year-over-year basis were up 26% year-over-year. I'm happy to report that good progress was made during the first quarter of this fiscal year. Our increase as of Q1 end dropped to a 10% year-over-year increase, largely driven by an estimated 67% inflation and about just under 2% year-over-year unit growth. So Inventory as well, we still have some pockets of a little over inventory. Overall, we feel pretty good about it. As a reminder, in terms of upcoming releases, we will announce our December sales results for the five weeks ending Sunday, January 1st on Thursday, January 5th after the market closes. With that, I will open it up to Q&A and turn it back over to Beau. Thank you.
spk05: Thank you, Richard. Ladies and gentlemen, just a reminder, any questions, simply press star 1. And if you find that your question has already been addressed, You can remove yourself from the queue by pressing star 1 again. We'll take our first question this afternoon from Simeon Gutman at Morgan Stanley.
spk12: Hey, thanks, guys. Good afternoon. Richard, I want to start with a short-term question. November, the slowdown in the SPACs. Is there anything, tip of the iceberg there, macro, merchandising? Is there something obvious? I mean, you were living in pretty rarefied air, but curious if there's anything notable.
spk01: I think the biggest thing, as I've said a couple of times in a quaint way, it rains on all of us during these tougher times, particularly with bigger ticket discretionary items. We're comparing against some huge increases a year ago, frankly, over the last two or three years, as you know, and that's where we've seen some of the slowdown. As I mentioned, e-com, consumer electronics and appliances, as I mentioned, was down in high singles. I think inline was also down. down some some some some amount so that's where a big chunk of it is when we look at food and sundries uh that's actually it tends to be relatively strong for us so overall i think it's it's impacting us a little bit with what's going on out there i think it is a combination of compared to very strong stuff a year ago as well as the fact that big ticket discretionaries has a little bit of weakness okay and maybe just a two-part two-part follow-up one is just related to that answer
spk12: Does those two couple of days, I don't know if you can judge enough from it, does it bring you back to some type of trend line or it sounds like your tone is, you know, there's still some pressure. And then the real follow-up is on gas gross profits. If you just think about the movement of the lap throughout this fiscal year, does it progressively get harder through the year in terms of the lap? And then can you highlight to us which quarter has the highest cents per gallon lap throughout the rest of the year?
spk01: Yes. I have a couple of people in the room smiling. Of course, I can't tell you all that. But at the end of the day, first of all, if you look at our November reported numbers, the fact that those two dates, those two high dates on e-comm were in the last week. Keep in mind, e-comm is still a little under 10% of our total company. But that helped a little bit relative to e-comm in the last four weeks that we reported. But overall, we don't know what kind of trend it means. We feel pretty good about what we're doing in terms of driving sales and As I mentioned, the food and sundries, as we get past big-ticket stressor purchases for the holidays, for Christmas and what have you, you'll have a higher penetration of some other things as well. As it relates to gas, for several quarters now, even beyond a year ago, we've talked about the gas profitability for us and we believe our competitors, other big chains of gas stations. have made more in gas. And certainly that's helped us use some of that to continue to hold prices where we can on some things. Uh, who knows what the new normal is? What we know is, is that not only is gas more profitable than it has been in the past. And like I said, the same thing a year ago, will that change at some point? Maybe, uh, we don't know right now it's good. And, uh, and by the way, as we've mentioned a couple of times, we've seen strong gallon sales and we're still taking market share. Uh, we, um, When the U.S. gallon sales are generally close to flat, we're up in the 10% to 15% range in gallons. So we're driving people into the parking lot, and the fact that gallons of gas are profitable, that is just a little bit more for us as well. So that's helped us. There's always things that are going to help us, and there's always going to be puts and takes.
spk12: Okay. Thanks to everyone. Happy holidays.
spk01: Same to you.
spk05: Thank you. We go next now to Chuck Grom at Gordon Haskett.
spk13: Hey, how's it going, Richard? My question's on the LIFO charge. It looks like if it's a few basis points of a hit, that would back into about $30 to $40 million. And I'm curious, I know you don't provide guidance, but knowing what you know now and if inflation holds at that, say, 6% level, would that be a good proxy for the charge at least over the next couple of quarters?
spk01: Well, I think Yeah, LIFO was a slight pickup just because the dollar amount was less than the $14 million last year in the quarter. It's very slight. So if that continues, that would be good and that would bode well. I'm guessing you'd have a lot lower charge than $423 million, recognizing the big hit was in Q3 and Q4 when we saw the beginning of inflation rising. If inflation didn't go down but it just stayed the same, in theory you'd have no big charge. You'd have no additional charge. If it starts to go down from its peaks, there'll be some LIFO income. Now, mind you, some of that will be used for pricing as well. I mean, you know us.
spk13: Yeah, okay. So what would you do to have the absolute dollar amount for the LIFO charge in a quarter, of course?
spk01: Yeah. It was less than a million dollars. Less than a million. Okay, great.
spk13: And then on the ancillary line, you've had real good success there in the back-to-back quarters, and you outlined gas profitability, e-com, food court. Is there one that's been more outsized over the past couple of quarters that maybe we could think about over the next few quarters? Because it's been a nice improvement.
spk01: Well, look, gas is just the sheer size of our gasoline business. It's been the biggest piece of that line for a few years. It's a 30 plus billion dollar business. On our 220 whatever billion last year we did in sales, I think a little over 30 billion was gas. So that's the big kahuna among all that stuff.
spk05: Okay, great. Thanks very much. Thank you. We go next now to Michael Lasser of UBS.
spk15: Good evening. Thanks a lot for taking my question. Richard, between the 31 basis point core on core gross margin discussion, a decrease in core on core gross margin, the discussion around giving up some shipping capacity to have a better price for your member, is the mindset of Costco right now as the economy enters a more difficult economic period, Costco is going to be stepping up price investments. in order to gain market share?
spk01: I think we continue just to remain competitive. Um, you know, you, you've known us long enough when asked who's our toughest competitor, we, we, we look in the mirror, we say it's us. Uh, so I, I think that as we drive market share part of, we believe that part of it at least is due to the fact that we've continued to be very competitive. And, uh, so I don't, there's any change in that. Um, we, we, um, notwithstanding, you know, where our numbers come out, we're always trying to push more into lowering the prices or keeping the price increases from going, you know, not as high as they could have been. I think fresh foods is a good example of that of late, where, you know, again, we've held the price points on certain items despite inflated costs, mostly in the protein area and a little bit in the bakery area.
spk15: And Richard, you've long talked about the Costco model is driven by first and foremost, by sales and the need to drive at least the mid-single-digit comp in order for the other parts of the P&L to work. So if the economy is entering a softer period where discretionary sales are going to be a little weaker and cost as overall sales are going to be a little softer, could we be modeling and prognosticating just a lower overall earnings growth for Costco during this time as we go through these factors?
spk01: Well, the good news is that's your job to model it. Look, at the end of the day, I think that the comment I made about big ticket discretionary while we sell big ticket discretionary includes furniture, which we sell lawn and garden and patio too. That's not right now at the holiday season necessarily. But that being said, there is a higher proportion of big ticket discretionary right now. And, you know, we're blessed in the sense that, you know, a big chunk of our business is fresh foods and food and sundries, which people have to eat. And as I mentioned, that has been strong throughout this. So I think overall we'll probably still look at it in a positive, relatively aggressive standpoint. Ultimately, you know, when you talk about, you know, top line sales and if they're a little lower, what do we need? I think the question historically has always been asked, what do we need to have SG&A not go up as a percent of sales? And the view is, and this is pre-inflation thoughts, the view is always you need to something, our best guess view is somewhere in the 4% to 5% comp range. If it falls below that, that'll make SG&A a little bit of a challenge. That being said, we're pretty pragmatic in we know how to use our margin as well. So I think overall we'll continue to work entirely to drive top line sales and look at it for the long term. And we're not any big way cutting back orders at this juncture. You know, where we see some challenges with big ticket discretionary, does it come down a little? I think the key word there is a little. And are we feeling very good about some of our business now, despite what's going on out there? We're blessed that we think, again, I think as evidenced by gas and even the food and sundries business, we're blessed by taking market share still. And I think that's evidenced in our memberships.
spk15: Your answer was a lot better than my question. So thank you very much for having me on.
spk05: Thank you. We go next now to Rupesh Parikh at Oppenheimer.
spk10: Good afternoon. Thanks for taking my question. So just on my core-on-core decline of 31 basis points, I was hoping you provide more color just in terms of what's driving that decline in non-foods category. And then just related to the pressure on fresh foods, I know, you know, I think you've now lapped some of the, you know, last year, I think fresh foods was also a headwind. So when do we lap some of the, I guess, some of the efficiencies that you gained during the pandemic, because I know you've given it back in recent course, I'm trying to get a sense of when that pressure point could go away.
spk01: You know, I don't know exactly. I mean, if we're, you know, three quarters of a year into it, I think if I recall over the last two or three quarters, we've talked about like fresh being that way and, and probably exacerbate a little right now with the fact that we're trying to hold prices on some things that we think that that's driving our sales. Um, you know, beyond that, um, I forgot the first part of the question now.
spk10: Just on non-foods, any more color?
spk01: Oh, yeah. I think, yeah, it's fundamentally, first of all, in terms of the overall, it's fundamentally fresh, and then some non-foods. Some of that has to do with some of the big ticket things. If you've been online and saw some things we did during not just the week of Thanksgiving and Cyber Monday, but we did some, you know, anywhere from $100 to $500 off on, I think, $500 cash card if you bought $3,000 or more of these items. And so we're, you know, getting rid of some, you know, some of the reason that that 26% year over year inventory crease went to 10 was we got rid of some of the stuff that we had, some things that we had deep freeze and some things that we had delayed shipping during the supply chain challenge. Um, so, you know, we did take some more markdowns than normal as you'd expect to help get rid of that. And, uh, hopefully that's not a pressure point going forward. Uh, certainly I don't think it will be as, as much. And, uh, uh, You know, again, there's so many moving parts to this equation. I wish it was as easy as each basic point we could explain. We try to give you the rounded numbers. But overall, again, I get back to we feel good about how we're doing competitively. And we certainly understand that big ticket discretionary things have shown a little weakness, in part because of our strength from a year ago, and in part, it's got to be part of the economy. And the good news is we have a big chunks of our business that are fresh foods, food and sundries, health and beauty aids, uh, gas, uh, all those types of things. And even other things like that small, but you know, travel has come back really strong from a really weak place a couple of years ago.
spk10: Great. And then maybe just one additional question, just, just on the membership fee hike, if we are in a weaker economic backdrop next year, does that at all impact how you guys are thinking about the timing of a membership fee hike?
spk01: Well, it certainly goes into the, into the thought process. Um, We're still not even to the average of the last three increases in terms of timing between the last one and the next one. Uh, what we've said again, and I'll say again is, is that is our view is, is all the parameters as it relates to member loyalty and value proposition that we've improved to our member. We have no problem thinking about doing it and doing it ultimately. So it's a question of, of when, not if, but we feel that we're at a very strong competitive position right now. And if we have to wait a few months or several months, that's fine. And, you know, I'll be purposely coy on when that might be. Thank you. Happy holidays. Same to you.
spk05: Thank you. We go next now to Paul Leshway at Citi.
spk14: Hey, it's Brandon Cheatham on for Paul. First of all, I wanted to dig into the decision on holding the price on fresh. You know, are you seeing... competitors do the same and that's why you reacted there or are you kind of trying to lead the charge there and just curious like why you know make that decision since it seems like you know the consumer has been happy to take increased price especially in fresh yeah the last thing you said there is exactly I think why we chose to do a little more there
spk01: We want to be the most competitive, and we can drive a lot of volume. And, again, we're in it for the long term. And, you know, Fresh is one of those unique areas where prices on many items do change almost weekly on some of those items, if not more quickly. And so our buyers are always looking at, if you will, the supermarket ads as well as the other warehouse club ads, not literally ads, but, you know, what the pricing is. And we react to that. But part of it is also consciously keeping the price on the chicken at $4.99 and those types of things, keeping the price on the hot dog. All those things go into that equation as well. But we know that that can be a driver of business fresh. We got great stuff. And people do notice the price. In our view, people notice those price differences.
spk14: And just a quick follow-up, you have a large competitor that's been talking about, you know, increased members in the $100,000 plus income cohort. I mean, obviously, it's not impacting your membership numbers, but I'm just wondering, you know, do you see any impact on ShareWallet or any thoughts there? You know, do you look at how many of your members, you know, might have additional memberships as well?
spk07: Well, we don't. What's that?
spk01: Oh, somebody in the room is telling me we were also up in terms of the average household incomes. So I think we're both seeing that. We know a lot of, particularly of our executive, our business members, in many cases, probably have both cards. They've always had both cards. And so, no, we don't put our head in the sand as it relates to it, but we look at our numbers and how we're doing and And we've seen that our penetration of higher income members has also benefited during this time.
spk14: Got it. Appreciate it.
spk05: Thanks and good luck. Thank you. We'll go next now to Oliver Chin at Collin.
spk01: Before Oliver answers, one other, Oliver, before you ask the question, one other comment. You know, one of the things that we have not done and don't plan to do is do a lot of promotional activities with our membership. And so that certainly that will in the short term help drive membership, but we don't do a lot of that.
spk16: Go ahead, Oliver. Richard, thanks. Thanks. Happy holidays. Regarding e-commerce and going forward, what are your thoughts? You're up against some tough compares, but as we model it on a longer term basis, how should the growth rates evolve? And then as we think about non-food, you talked about it a lot, but Do you expect a non-food percentage mix to change from the past or it will more normalize? And lastly, on the higher income consumer and gains there, I would love for you to elaborate on what's happening and if you're getting more luxury consumers in terms of higher income folks joining in the club. Thanks a lot.
spk01: Sure. I wrote down non-food Uh, in terms of what's the new normal, look, we don't know what the new normal is. I do know that, uh, we figure out how to drive total sales. I do know that over the last two and a half years through COVID people buying things for their home, whether it was indoor furniture, outdoor furniture, exercise equipment, electronics, and appliances, and, and it increased even greater because of our acquisition in April of 2020 of the last mile, big and bulky delivery and installation arm from Sears. All that stuff has helped us dramatically. Look, a little bit is, again, we don't know how much of it is just comparing against very strong numbers versus a little weakness. Our guess is a little of both. We always want to drive everything, but we want to drive more non-food things because you don't need any extra space. If you're turning fresh foods at 50, 60 times a year or more, you're turning some non-food categories at eight times a year. It's easy to go from eight to 10 without any extra space in the, in the building. So that's always been a goal of ours to drive both sides of the business. And we think we're pretty good at doing it. And, and this will be, we'll find out what the answer is a year from now. On what was the other question? I'm sorry.
spk16: On e-comm and the e-comm long-term growth rate there. And then also the higher income pursuits. Sure.
spk01: Okay, on e-com, again, that is even more dramatic if you look at what e-com did. We essentially doubled e-com over a 12-month period worldwide from about $8 to $16 billion in that probably three or four months into COVID and then going fast forward a year. So the last half of fiscal 20 and the first half of fiscal 21. We had pretty good numbers over the last year. That, of course, dramatically impacted in a good way from our acquisition of Innovel. As I mentioned on the last earnings call, pre-that acquisition in the U.S., we did a little over 2 million drops. A drop is anything from dropping off a sofa to dropping off and installing a washer-dryer or a refrigerator-freezer and taking the old one away. We've gone from a little over 2 million drops. In fiscal 22, we did a little over 4 million drops, 70% of which was on this site, this operation that we acquired. So we've had outsized growth on that, helped also not only by the acquisition but COVID itself. So we're comparing against that now. We'll see where that goes. We think that e-commerce is still long-term. First of all, as you know, we still want you to get in there, get into the warehouse as well. So long-term, we still think right now we want to grow the e-commerce. I would say our goal still is to grow it a little more than inline right now because so much of it has been benefited by big-ticket items, which have shown some weakness. That's impacting it a little bit right now. But long-term, we want to still be – even 9% or 10% of a $240 or $50 billion business year is a big chunk of business. In terms of the last question, I'm sorry, I didn't write it down.
spk16: Yeah, I think of Costco as a luxury company too. So what are your thoughts on getting the higher income consumers and anything you're seeing with your existing consumers in terms of behavior? Because everybody's under a little bit of pressure as well. Thank you.
spk01: Well, again, someone in the room here showed me, I think the data that somebody had asked me about where Walmart had indicated We're all looking at that same data. We, too, saw the metrics of a little bit higher percentage of higher income people coming in, notwithstanding the fact that we start with a higher percentage to start with. We try to trade you up. You know the quality of our merchandise, and we'd much rather sell you a bigger ticket item with all the bells and whistles. So I think that... It's the way we merchandise, and we're not looking to change that at this juncture.
spk07: Thank you. Best regards, Richard.
spk05: Yep. Thank you. We go next now to Greg Mellich of Evercore.
spk02: Hi, thanks. Richard, I'd just like to talk about how traffic seems to be growing closer to 2% now in the U.S., Is there anything specific going on there or we just need to get used to it as recycling lower gas prices and tough out this lower traffic?
spk01: Perhaps. I mean, we still think anything that's even in the low single digits is great. And we've benefited clearly from, you know, over the course of the last year, we've benefited, as I've seen in our membership signups, more people coming in and the gas business driving that a little bit as well. And just, you know, during COVID, we had a higher than previously average tick up in new member signups. And so that's probably subsiding a little bit at this juncture. But again, we feel very good about where our renewal rates are and the loyalty that our members have. And we're pretty good at trying to figure out ways to get them in. We're doing, you know, we do online emails that are inline directed, you know, for hot items. to come in only available in store. And so those are the things that we continue to do.
spk02: Could you update us on any, you know, private label, you know, extra gains that you're getting in this environment or trade down perhaps between proteins or anything like that worth calling out?
spk01: We haven't seen, you know, last quarter I mentioned a couple of things on the fresh side and the protein side that we actually saw strength in canned chicken and tuna. which was the comment that the buyers made saying that we're seeing, to the extent that prices were skyrocketing in some fresh protein, we saw strength in canned protein. We don't see currently a lot of trade down on fresh. Prices have started to come down on some of those items as the underlying commodity costs have come down a little bit. KS Penetration is up. Our critical signature is up. I don't have the exact number in front of me. I'm guessing it's about somewhere... approaching a percentage point but which is big when it's i would say over the last several years it's probably been a half a percentage point but so probably up a little more than normal but you know and again we had somebody asked us the question recently you know are you seeing some trade down to private label and we of course corrected them and said it's a trade up you you also mentioned it's a housekeeping item but i want to make sure i got the charge right so you're basically i ran a check to
spk02: reduce the size of a contract that was at a higher price. So what's the payback period on that check? Do we see it over four quarters, two quarters, six quarters?
spk01: You know, it's a moving target, honestly. It's based on rates, frankly, and rates right now have come down dramatically. So that would be a year. It could be a little longer than a year, a little less than a year, depending on what happens tomorrow.
spk07: Okay, great. Good luck and thanks.
spk01: Yeah.
spk07: Thank you. We go next now to Peter Benedict of Baird.
spk04: Oh, hey, Richard. Just on new member signups, you kind of mentioned it a little bit there in response to Greg's question, but just maybe talk about new member signup trends, holistically what you're seeing, anything U.S. versus maybe some of these international markets you've been entering. Just interested in your latest thoughts there.
spk01: Well, I think the biggest thing continues to be we're better when somebody does sign up, that they sign up in those countries where we offer executive membership, which is, I'm guessing, 85% of our company, more, maybe 90% of our company. It's just not in some of the smaller unit countries. And overall, starting with the U.S., but overall in Canada, we do a better job of getting you to sign up as an executive member to start with. We also do a better job of getting you to auto sign up to auto renew with putting in your credit card. All those things help. Let's face it. All those things help too. We know that an executive member buys more and shops more frequently than in a year than a gold star member. We know that one of those members with a credit card, a co-brand credit card shops even more frequently and spends more and they do all three. Uh, you know, these are an executive rather with a card versus being a regular member. Uh, that's the big kahuna here. And so, and so I think that we've seen those trends go on over the last few years, frankly, and what's helped in the last year is the fact that again, just our new member signups has been higher than they had been historically over the last few years versus the last year and last year or two. And I think we believe that's more because of COVID and we were a good place to shop.
spk04: Not sure that makes sense. And that's my last question, just interest income and other, obviously, has a few components to it. I'm curious if you can help us understand what the interest income was in the quarter. I think it was about $8 million last year. I'm sure that was up a lot this quarter. Just curious if you could give us a sense of what that number was in the first quarter. Thank you.
spk01: Is that in the queue? Okay, yeah, I can give it to you. Hold on a second. I didn't realize it's in the queue, which is not out yet. What it is is you've got a big increase in interest income and a big increase in FX downside. So of the 50, I think it was 53, 54 million is interest income and a negative 1 million is other, which is a chunk of that's FX. And then this year, the 42 million, I'm sorry, last year, it was 8 million of interest income and $34 million of other, the biggest piece of other being FX. So that added up to the 42. This year, the 53 is 54 of interest income and minus one of other.
spk04: Yep. That's what I was looking for. Thank you very much.
spk05: And we'll go next now to Kelly Vania of BMO.
spk11: Hi. Thanks for taking our questions. Richard, just had one on elasticity and then another follow-up on the big ticket. But in terms of elasticity, any changes? I'm not sure how you measure it or monitor it, but any changes in your members' response to your actions when you are taking some lower prices here?
spk01: I think if you ask the buyers overall that there's a little less elasticity than there used to be, on some of these, again, now that answer comes from the fact that my comments about big ticket discretionary items, we've put more money behind it and that successfully cleaned up our inventory where we were over in some areas like furniture to some extent, but at the end of the day, uh, I think in a year or two ago, we would have even guessed that could have been a little stronger, but then that gets back to the whole question is the economy, the concerns in the economy impacting big ticket discretionary items. So yeah, I mean, there's clearly still elasticity. When we do temporary price discounts or even our MVM mailers, we still get good impact from it. Some things, the bigger the ticket, not as much as we used to get.
spk11: That's helpful. And then just to follow up again on the big ticket, what percent of your sales would you say are big ticket? Maybe it ebbs and flows with the seasons, but just in general, and do you see that members are pretty broad-based in pulling back, meaning across income levels, executive, gold star, et cetera?
spk01: Well, online it's a little over 40, but online is only 9% of our sales. In-store, I don't have it in front of me, 10 would be a good guess. I'm including that 10 furniture as well. And jewelry, big ticket discretionary.
spk07: Perfect. Appreciate it.
spk05: And we'll go next now to Chris Horvitz at J.P. Morgan.
spk03: Thanks. Good evening. So following up a little bit there, on the TV side, how much of it is a units down issue versus... deflation and is there any differentiation that you're seeing between larger and smaller screen size purchases?
spk01: Units are actually up and there's normal deflation in TVs and electronics anyway but there is perhaps a little bit of smaller sizes are coming down a little bit. Not everyone wants an 85 inch television which is where we over index to bigger ticket stuff to start with But we are seeing actual unit sales up.
spk03: So units are up with strength, relative strength in smaller sizes.
spk01: Yes.
spk03: Got it. And then a couple of sort of other bigger picture consumer questions. I guess is there, you know, are you seeing maybe some mid to low end, maybe not buying the 18 pack of bounty? Like, do you think you might be losing some category share as someone's trying to economize the ticket? for your, you know, the lower half of your income perspective. And then can you also, um, can you also talk about regionality? Obviously there's some weakness in certain housing markets and, uh, certain cities. And then there's, you have a big exposure to California. There's been more laugh news in the technology industry, and there's some population migration. So what are you seeing from a regionality perspective, uh, where you're seeing more, more weakness versus strength?
spk01: Well, first of all, we're seeing strength in sundries as part of what we call food and sundries, which is everything. Food and food and sundries is everything from canned beverages to crackers and cereal and sundries, of course, paper goods and cleaning supplies and the like. And we're seeing strength in those areas. Those are actually strong, offset by some of the weakness I talked about on the non-food side. As it relates to regional, we don't really see any big differences. I mean, every month you're going to see a region stronger or weaker. It has more to do, in our view, of late with weather than anything else. I can't give you anything definitive on what's happening. They're all pretty close. They're within a point and a half or two. Bob's saying here they're within a couple of points of comp.
spk03: Got it. One cleanup question. Just on the inventory, you talk about pockets. It sounds like you cleaned up furniture and electronics, it sounds like. Where are those pockets? How much is maybe holiday decor or toys? Are there more at-risk categories in the month of December?
spk01: The good news is our merchants are sitting here. Holiday decor is fine. One example actually would be we have a small amount of air conditioners and fans, which was a hot summer, and we were very strong in it. There were delays. Some of the supply chain challenges, some of that stuff didn't come in until September. And needless to say, we're not going to put it out there and mark it down when nobody really is looking for an air conditioner unit in September. And so that's the example of a few things now. We still have some furniture. It's way down from where it had been, so it's very, very manageable. I think beyond that, there's nothing huge. And again, the big question right now would be the fact that from a standpoint of Christmas stuff, both the trim stuff as well as toys, we're in pretty good shape for that. We feel pretty good about that.
spk03: That's great. Thanks so much. Have a great holiday season.
spk05: Peace. Thank you. We go next now to Scott Ciccarelli at Truist.
spk06: Good evening, guys. So I guess I have another gross margin question. And I guess it's, look, if consumables continue to outpace discretionary goods based on what we're seeing in the economy, should we expect gross margins to compress a bit just from mix? Or do you have enough levers given existing price gaps across most of your categories to manage to flattish gross margins? Just how should we think about the mix impact?
spk01: We'll let you know next quarter. I mean, We have a lot of levers, as you've mentioned, as you suggested, to pull and push. We're also aggressive on pricing when we want to be like in the fresh foods area that I just mentioned. And we're blessed right now with some categories like gas that does a better margin. So all that stuff, again, there's a variety of puts and takes. We feel overall there's nothing unusual about this quarter. And frankly, if inflation is not rising again, even if it doesn't go down, but it doesn't rise again from its current levels, we're in pretty good stead of greatly improving the component of margin that relates to a LIFO charge, particularly in Q3 and Q4 when we had a $100-plus million number and a $200-plus million number. But that's to be seen, and we need to wait and see. So just as a follow-up on that, Richard, like
spk06: So fair to say that we're going to see lower freight rates starting to flow through the P&L and let's call it let's mark down pressure because the inventories are cleaned up a bit more than the last few quarters.
spk01: That should help you a little bit, sure. But as you might expect, and one of the reasons we took this charge is we don't want to have to have the buyers worry about inputting higher costs into their If rates have come down and we contracted, we want to take some of that out. But that's still being worked through. We have to continue to do that. Beyond that, as rates come down, you'll see our prices on items come down, too. Got it.
spk06: All right. Thanks a lot. Good evening.
spk01: Okay. Why don't we take two more questions?
spk05: Certainly, Richard. Thank you. We'll go next now to Karen Short at Credit Suisse.
spk09: Hi, thanks for taking my question. So I hope you all have happy holidays going forward. But I did want to clarify on two things. So in the past, when you have had slightly weakening traffic trends, that has generally been a point to consider to actually push through a higher membership. rate increase. So I'm wondering, I know this is a very unusual time, but has that philosophy changed at all? Because obviously your comps are changing or in or slowing. And then I would ask the same thing as it relates to the special dividend. We all know what your cash is and available cash is on the balance sheet. in terms of timing with respect to announcing something like that along the lines of the fact that I think your board meeting is mid-January?
spk01: We have one every quarter. Look, we talked about both of those. In terms of the fee increase, I think over the last many years, we've probably done them at a time when things were particularly strong comp-wise. The good news is, during all times, renewal rates were strong and have gotten even stronger. We always look at ourselves in the mirror and feel that the value proposition has gotten better. That being said, we have done them. I remember one time we were asked, it may have been back in 09, 10, during the Great Recession, because I guess we did one probably in 11 or 12, which continued the Great Recession. And we'd be asked, given the great recession, would you hold off on it? And our view was, and comps were a little weaker back then, too, for at least a couple quarters. And I think the comment I made was something to the effect, we'd probably do it anyway because we're going to use it to drive greater value in terms of pricing and everything in a big way. And so that really, I think we've probably done it in times of lower comps or higher comps or good economy or tougher economy. And I think with the headline in the last, what I probably mentioned in the last quarter call or even the quarter before that, with the headline being recession question mark and inflation exclamation point, there's no rush. And first of all, even if we follow the pattern of the last three over the last 16 or so years, they averaged five years and seven months. And I know now that five years and seven months from June of 17 is January of 23. I know on the last call I said that doesn't mean it's going to be January 23. It's a question of when, not if, but at this juncture, we'll just have to wait and see. And I'm not trying to be cute about it, but there's not a whole lot more I can tell you. There's no analytical framework we use other than we feel very good about our member loyalty and our strength. And if we wanted to do it yesterday, we could. And if we want to do it six months from now, we can. So we'll wait and see. As it relates to the special dividend, as you know, we've said before, It's certainly an arrow in our quiver that has bode well for us, we believe. We think that it's done well. We've done four of them. The last one was a couple years ago. And we certainly do have cash. Mind you, when you look at our cash, about half of it's U.S. and not cash equivalents. And so certainly we have the ability to do it at some point. I think we wanted to wait and see how things are continuing here. I think that, too, is probably a question of when, not if. But, again, you'll be the second to know. After us.
spk09: Okay. Thank you very much. Have a good holiday.
spk05: Same to you. Thank you. And we'll take our final question this evening from Robbie Ohms of Bank of America.
spk08: It'll be a real quick one, Richard. Can you just remind us, you know, you're back to 15 net stores in the U.S., but what has to happen to go back to kind of the years where you would open kind of a net 25 a year in the U.S. and maybe relieve some of the pressure on the overproductive clubs in the U.S. right now?
spk01: Yeah, I think it's been a few years. I mean, when we opened the net of 27 or 8, maybe low 20s or 22 or 3 were there. But we've been at maybe 16 or 17 out of 23-ish in the last few years. You know, if you ask Craig, who's not in the room, but if you asked him, you know, if we're opening a net of 24 this year, I think I said, what's the goal 5 and 10 years from now? Probably to get it closer to 30 net. And probably by five years from now, it's 50-50 U.S. elsewhere versus elsewhere. That's the same answer I, by the way, said five years ago in terms of the split. But we'd like to see, Ed, five to that 24 in the next few years to go up a little bit higher. Terrific. We certainly have a lot of activity going on. Excellent. Thank you, sir. Okay. With that, everyone, I'll thank you. Have a good holiday. We're around to answer questions.
spk05: Thank you, Richard. Ladies and gentlemen, that will conclude Costco's fiscal Q1 2023 conference call. Thank you all so much for joining us. I wish you all a great evening. Goodbye.
Disclaimer