Costco Wholesale Corporation

Good day, everyone, and welcome to the Costco Wholesale Corporation fourth quarter and fiscal year 2023 operating results call. Today's call is being recorded. All lines have been placed on mute to prevent any background noise, and after the speaker's remarks, there will be a question and answer session. I would now like to turn the conference over to Richard Galante, CFO. Please go ahead, sir.

Thank you, Lisa, and 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 in the company's public statements and reports filed with the SEC. Forward-looking statements speak only as of the date they are made, and the company does not undertake to update these statements except as required by law. In today's press release, we reported operating results for the fourth quarter of fiscal 23. The 17 weeks ended September 3rd. These results and the figures presented today compare to last fiscal year's 16-week fourth quarter. Reported net income for the 17-week fourth quarter came in at $2.16 billion, or $4.86 per diluted share. compared to $1.868 billion or $4.20 per diluted share in the 16-week fourth quarter last year. In terms of sales, net sales for the 17-week fourth quarter were $77.43 billion, an increase of 9.4% from $70.76 billion in the 16-week fourth quarter last year. Comparable sales for the fourth quarter, and these figures are like-for-like number of weeks, In the U.S., reported was a 0.2% comp, excluding gas deflation and FX. In the U.S., it would have been a 3.1%. Canada reported was a 1.8%, and excluding gas deflation and FX, 7.4%. Other international reported 5.5%, and again, excluding gas deflation and FX, 4.4%. All told, total company reported 1.1% comp, and a 3.8% X gas deflation in FX. In terms of e-commerce, that came in at a minus 0.8% reported and a minus 0.6% excluding FX. Overall for the fiscal fourth quarter, food and sundries were relatively strong once again, with fresh foods right behind and with some offsets on some of the non-foods categories. In terms of Q4 comp sales metrics, Traffic or shopping frequency increased 5.2% worldwide and 5.0% in the United States. Our average transaction or ticket was down 3.9% worldwide and down 4.5% in the U.S., impacted in large part from weakness in bigger ticket non-foods discretionary items as well as the gas price deflation. Foreign currencies relative to the U.S. dollar negatively impact sales by approximately three-tenths of a percent. And gasoline price deflation negatively impacted sales by approximately 2.5%. Next on the income statement, membership fee income. Reported in the fourth quarter, $1.509 billion, or 1.95% of sales in the fourth quarter this fiscal year, compared to $1.327 billion, or 1.88% in Q4 of last year. So $182 million increase, or 13.7%. If you adjust for the extra week, the 13.7 would be roughly a 7% that extra week. Excluding FX in the extra week, the increase would have been around 7.5%. In terms of renewal rates at Q4 end, our U.S. and Canada renewal rates stood at 92.7%, which is up a tenth of a percent from the 92.6% figure as of the end of Q3. The worldwide rate came in at 90.4%. down a tenth of a percent, reflecting the impact of increasing penetration of memberships from international, which we knew at a lower rate in large part because of new openings internationally. Membership growth continues. We ended fourth quarter with 71.0 million paid household members, up 7.9% versus a year ago, and 127.9 million cardholders, up 7.6%. And that's on new openings over the past year of just under 3% increase in new locations. At fourth quarter end, we had 32.3 million paid executive memberships, an increase of 981,000 during the 17 weeks since Q3 end. The executive members now represent a little over 45% of our paid members and approximately 73% of worldwide sales. Moving down the income statement, next is our gross margin. Our reported gross margin in the fourth quarter came in higher. It came in at 10.60%, up 42 basis points from 10.18% a year ago. And the up 42 basis points is up 16 basis points, excluding gas deflation. As I always ask you to jot down a few numbers with two columns, both reported and excluding gas deflation. The first line item would be core merchandise on a reported basis, up 51 basis points year over year in the fourth quarter. And X gas deflation up 28 basis points. Ancillary and other businesses, a minus 32 and a minus 38. 2% reward, minus 4 and minus 2. LIFO, plus 27 and plus 28. And you total that up on a reported basis. Gross margin was up 42 basis points year over year. And X gas deflation up 16 basis points. Starting with a core, again, up 51 year-over-year and deflation up 28. In terms of core margin on their own sales, our core and core margins were higher by 35 basis points, with food and sundries and non-foods being up and fresh foods being down a little. Ancillary and other business gross margin was lower by 32 basis points and lower by 38 basis points ex-gas. This was driven almost entirely by gas. If you look at the other components of ancillary and other, which would include pharmacy, e-comm, food court, business centers, optical, all those things on a relative basis year over year were within a couple of basis points plus or minus from a year earlier. Two percent reward, higher by four and higher by two basis points. So a negative two basis points, including gas deflation. That represents higher sales penetration coming from our executive members. And LIFO, of course, if you recall last year in Q4, we had a $223 million pre-tax LIFO charge. While there was a small charge this year of $30 million on a year-over-year basis, of course, that showed the basis point improvement in margin. While we continue to see sequential improvement in year-over-year inflation, I'll talk about that a little later, we've still had a small amount relative to the first day of the fiscal year. That's the small charge in Q4. A couple of final comments on margins. First, we are off We are asked often recently about our inventory shrinkage results and whether it has dramatically increased in the past year versus historical shrink results. The answer is no. In the past several years, our inventory shrink has increased by a couple of basis points, in part, we believe, due to the rollout of self-checkout. Over the past year, it has increased by less than one basis point more. So no, thankfully, not a big issue for us. And second, year-over-year margin improvement has in part been due to fewer markdowns due to better inventory positions this year than last. Our inventories overall are in good shape. Moving on to SG&A, our reported SG&A in the fourth quarter, 8.96, up from 8.53% a year earlier, or up 43 basis points, and ex-gas deflation up 21 basis points. Again, jot down the two columns of numbers, both reported and excluding gas deflation. Operations, minus 37 basis point, minus being higher by and without deflation, core would be minus 18. Central, minus 6 and minus 3. And those are the really only two light items. The others were all zero, stock compensation, pre-opening, and other. So total reported margins were up 43 basis points year over year, and ex-gas deflation up 21 basis points. In terms of the... The core operations being higher by 18x gas deflation and on a reported basis higher by 37. This negative included the impact of lower sales growth as well as the impact of eight weeks of additional top of scale wage increases that went into effect July 4th of 22, so midway through Q4 last year. And a full 17 weeks of this past March is higher than normal top of scale increase. Central being higher by three basis points, x gas deflation. Again, not a lot of sales operating leverage there. And again, as I mentioned, the other line items that I typically read out were flat, both with and without gas deflation, so zero year-over-year change. Below the operating income line, interest expense came in at $56 million this year versus $48 million a year ago, one extra week, of course. Interest income and other for the quarter was higher by $171 million year-over-year, $238 million this year versus $67 million last year. This was driven in large part by an increase in interest income due to both higher interest rates and higher cash balances, as well as the extra week. In addition, FX was slightly favorable year over year. In terms of income tax rate, our tax rate this year in the fourth quarter came in 27.1% compared to 25.4% in Q4 last year, so a full 1.7 percentage points higher year over year. This increase in our rate as of Q4 is primarily attributable to an increased penetration of international earnings, which overall incurs a higher income tax rate than in the U.S. Overall reported net income was up 16% year-over-year in the quarter, or 9% if you adjust for the extra week this year in fourth quarter versus last. A few other items of note. In the fourth quarter, we opened nine net new warehouses, including five new buildings in the U.S., two in China, and one each in Japan and Australia. fiscal 23 year, we finished with 23 net new units as well as we did three relocations. And for the first quarter, the first 12 weeks of fiscal 24, we plan on opening 10 net new units and as well relocating one unit. All 10 locations net new, nine are in the U.S. and one are in Canada. Regarding capital expenditures, we've actually included the cash flow in the quarterly report, but CapEx spend in Q4 was approximately $1.56 billion, and for all of fiscal 23, it totaled $4.32 billion. Turning to e-commerce, e-commerce sales in the fourth quarter, XFX, as I mentioned, decreased 0.6% year-over-year. While still negative, relatively speaking, our e-commerce results showed good improvement this quarter versus our year-over-year results in Q2 and Q3. In the previous two fiscal quarters, big-ticket discretionary, majors, home furnishings, small electrics, jewelry, and hardware, were down 15% and 20% year-over-year, respectively, and down just 5% year-over-year in the fourth quarter, with those big-ticket departments making up over half of our e-commerce sales. A couple other items of note, within the sales of big-ticket discretionary, appliance were up over 30% in the quarter, Second, I've gotten a couple of calls that people have seen online that we've been selling one-ounce gold bars. Yes, but when we load them on the site, they're typically gone within a few hours, and we limit it to per member. And lastly, I'll point out Costco Next. We continue to grow that. We currently have 62 suppliers on CostcoNext.com, and we continue to onboard additional ones in many product areas, from home improvement to apparel, to pet, to home and kitchen, to electronics and accessories, to sports and bicycles and toys and the like. Now a few comments on e-comm mobile digital efforts, which we're always asked about. As I discussed during the last quarter earnings call, when I said that we were in the early innings of our digital mobile transformation efforts, progress is being made. In terms of recent additions and upgrades, we've recently redesigned the account page and the digital membership card. We also redesigned the header with larger search bar and expanded selling space. We've added an app box for messages and advertisements right in the app. We've recently, a few months ago, opened an optical digital store where you can virtually try on glasses and then order them for pickup, prescription glasses. And lastly, their ongoing improvement in our Costco app offering in-warehouse shopping tools for our customers such as a digital membership card, managing shopping lists, viewing warehouse savings, seeing the gas prices since there's a gas station there, and soon you'll be able to search warehouse inventory and scan barcodes from the app. With the improvements made thus far, over the past year our app store rating has gone from a dismal 2.3 stars to currently 4.7 stars. Unique visitors in the site are up 40% year-over-year, and the Costco app installs are up 46% year-over-year. So all in all, progress is being made. Lastly, a couple of comments regarding inflation. Most recently, in Q3-23, we had estimated that year-over-year inflation was in the 3% to 4% range. Our estimate for Q4 was inflation in the 1% to 2% range, and it's actually trended downward during the quarter. So hopefully these inflation trends will continue. We'll have to see. Finally, in terms of upcoming releases, we'll announce our September sales results for the five weeks ending Sunday, October 1st, on Wednesday, October 4th, after the market closes. With that, I will open it up for Q&A and turn it back over to Lisa. Thank you.

Thank you. If you would like to ask a question today, you can press star 1 on your telephone keypad, and to remove yourself from the queue, it is star 1 again. We'll take our first question from Simeon Gutman with Morgan Stanley.