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.

Hey, Richard. How are you?

Good.

I guess my first question, I don't mean it tongue-in-cheek, but is a membership price increase part of the fiscal plan? And then part of the question is, is there a point at which this membership increase is part of, I guess, a hedge against inflation? Is there a point at which the model feels more weight without it? In other words, can you go another year without it?

Well, yeah. My pat answer, of course, is it's a question of when, not if. You know, it's a little longer this time around since June of 17, so we're six years into it. But, you know, you'll see it happen at some point. We can't really tell you if it's in our plans or not. We'll let you know when we know. We feel good, needless to say, about all the attributes of member loyalty and member growth. And frankly, you know, In terms of looking at the values that we provide to our members, we continue to increase those. It's certainly a greater amount than even more than if and when an increase occurs. So, you know, stay tuned. We'll keep you posted, but there's not a whole lot I can tell you about that.

Fair enough. And then ultra short term, as gas prices have moved up, have you seen any effect or impact on spending at the stores?

No, I mean, you look at the numbers over the last few months that we report monthly and quarterly, there's not been a heck of a lot changed. Big ticket discretionary, while improved relatively, as I mentioned, online, those online items, we've seen the number of items in a basket tick up a little in the last few months, but I think that has more to do with the fact that we consciously added, I think I mentioned in the last call, we consciously added 40 or 50 what I'll call smaller ticket indulgent items, whether it's snack items and the like, to just impulse items. And so that's what we do as merchants. But overall, we haven't seen any big change or been able to correlate any big change to what's happened with gas prices.

Okay. Thanks, Richard. Good luck.

We'll take our next question from Michael Lasser with UBS.

Good morning, good afternoon. I should say thank you so much for taking my question. Richard, you ended your prepared remarks saying that this quarter or this month, inflation's on pace to be 1% to 2%, and you suggested it may be even lower than that. So should outside observers be prepared for the prospect of deflation, either because that's what's happening with some underlying costs that Costco's been experiencing, or Costco will look to invest in price as a way to continue to drive volumes, especially at a time when core-on-core margins are expanding so nicely?

Well, first of all, the comment that, you know, was one to two, but then as we look at the 17 weeks, if you were over the four months roughly, we saw, you know, if we looked at it internally at each of the end of those four months, we saw the level, that one to two is from the beginning to the end, at the end of the quarter, but during the quarter, we saw that trending downward, if you will, a little. And when I talked to the merchants, on the fresh side, it's flat to down a little. Right now, on the food and sundry side, it's up a little, primarily in some of the CPG stuff. And on non-foods, partly because of freight, which is down year over year in a nice way. And in some cases, some of the commodity costs on steel and the like, that's come down. So that being said, not a big change, but at least it's trending that way. Who knows what tomorrow brings? And as it relates to us, we're always pushing prices as fast as we can. We want to be the first to lower them when those things happen and drive sales. I think we've seen that with our traffic.

So just to clarify, what you're saying is food and sundries prices are down on average year over year. Shell's table products are up year over year. Gen merch is down. So in totality, it would seem like the stock Is deflating, does it get, does the rate at which you see deflation continue to increase from here? And would you expect that to be just driven by the factors that you mentioned, or are you driving that as a way to drive this traffic?

Well, first of all, I want to correct one thing that maybe I misstated or you misunderstood. In terms of fresh, fresh is pretty much flat. Food and sundries, which is, you know, Everything from sundries and packaged goods and CPG goods, that tends to be up a little bit. And I'd like to think that we're pushing the envelope as much as we can with our suppliers, that as certain freight costs have come down, recognizing the headline today in the paper is oil is approaching $100 a barrel. So who the heck knows what will happen tomorrow?

Okay. My follow-up question is, As long as you see big ticket under pressure, discretionary under pressure, which influences your total sales, because it's important for your member to come in and buy these big ticket items, is this going to influence how you think about managing labor in the store? Should the market just anticipate that labor and other SG&A is going to deliver as long as the big ticket's under pressure?

Well, you know, I think we've seen that over the last year, frankly. We had such operating leverage over a couple of years when we had outside sales during the kind of the two years of COVID, called the spring of 20 to the spring of 2022. And, you know, it was before COVID when our SG&A was over 10%, slightly over 10%, and we said, would it ever be able to get below that? It's now still below 9%. So notwithstanding the fact, when I've looked at the last several quarters on a year-over-year basis, You know, again, particularly the last couple of quarters, we've seen some deleverage of that. And look, we want to drive sales. And, you know, we'll do that in the best ways we can. So, but we recognize when we used to get the question all the time, you know, what competent number do you need to have zero, you know, negative or positive leverage with SG&A, recognizing there was no, very little inflation back then. But we used to say somewhere, who knows, but somewhere in the four and a half to five range. So we don't know exactly where it is, but we're certainly not going to change the level of service that we have, and we're certainly going to respect our employees in terms of what we've done with wage increases over time, and that's what we do.

Thank you very much, and good luck.

We'll take our next question from Chuck Grom with Gordon Heskett.

Hey, how's it going, Richard? Just sticking on the inflation topic here, on unit elasticity, particularly in categories where you're seeing prices actually start to fall or compress, curious what you're seeing on units, if you're seeing them improve at all to offset those price declines, if there's any examples in either food or in GM that you could talk about.

Well, yeah, I remember when we talked a few quarters ago about some of the slowness in big-ticket discretionary, When we got hotter on prices, it did a little bit, but not as much as we would have thought to start with. But again, that perhaps was the impact of what's going on with the concerns in the economy and everything else. We know that when we put hot buys and what we call TBDs, temporary price discounts on items, even medium-sized ticket items, we do see the units increase, but it's not as predictable, I would say, as it used to be.

Okay, great. And I know you guys don't provide guidance, but go ahead.

It's a little easier on the food side to see that sometimes when we're taking the price of a meat item down.

Okay, so you are starting to see some units increase as prices drop in certain parts of the business?

Sure. And by the way, even on Big Ticket, when we've seen $300 and $400 price declines because of freight and raw material costs on some big-ticket non-food items, we'll see some of the sales pick back up on that. But there's nothing guaranteed. Okay.

All right. Thank you. And I know you don't provide guidance, but I actually do remember when you did give some directional help back in the day. But are there any big puts and takes that we should be thinking about on the gross margin and SG&A line over the next four quarters that we should be thinking about? Clearly, the life of a lap will be it. will be an obvious tail end. But just curious, any other things that we should be thinking about from a modeling perspective?

No, not really. I mean, LIFO is certainly one that was an impact over the last year and started to slow down. Assuming that trend continues, there won't be much LIFO going forward for right now, but we'll see. Beyond that, no, we're still opening. We opened 23 net new units this past year. We're on board to do something in the mid to high 20s this year. But that's not enough to move the needle in terms of the leverage standpoint or anything. No, I'd say it's steady as she goes. And if anything, I looked at the margins overall, given everything that's going on, including competition, that we're doing pretty well there. with some of the wage hikes that we've continued to do and sales being a little weaker than they had been a year ago, I think we're doing pretty well on that as well. We're optimistic about our future, but we'll see what happens.

Right. Great. Thank you.

We'll take our next question from Peter Benedict with Baird.

Oh, hey, guys. Thanks for taking the question. Richard, just the first one just on life. So I'm just curious. I mean, the 30 million dollar charge is small, but I'm just curious why there were even less. Can you give us a little more colors? Maybe what?

Yeah, well, I think it was on things like, well, gas was one. And then in some of the fresh food items, there was even though there was deflation and things like eggs and some dairy products, there was there was some inflationary trends in beef. Beyond that, do you have that handy? Yeah, it's really small, but on $16 billion of inventory, it's a lot. I mean, it's still a small number, $30 million. I don't have the details beyond that. That's fine.

Yeah, that's fine. Just in the context of broader disinflation and all this stuff, it's interesting to see that. And then just really turning to the international stuff, you talked about the real rates impact. Can you remind us maybe on the international membership trends? When you open up a new club outside the U.S., maybe give us some framework or some benchmarks around how many new members tend to sign up? How does that compare to what you would see, let's say, in the next club you'd open? open in the U.S., and then what kind of renewal rates you tend to see year one, year two, just so we have a frame of reference there. Thank you.

I don't have the exact numbers in front of me, but generally speaking in Asia, whether it's Korea, Taiwan, Japan, or China, we'll open a new unit, including the 10 or 12 weeks of signups prior to opening, with anywhere from 50 to 100,000 new members. We had a couple of extremes, like when we first opened in Shanghai and Minhang of well over 200 Now, some of that's looky-loos that don't renew, and usually in that first year of renewal and those types of outsized numbers, we might be as low as the mid-to-high 50s, and it takes a few years to get even to the mid-70s. But we see those numbers overall continue to increase every year. And I should probably go back to what it was in the first 10 years of our 40-year history with even the U.S. My guess, it wasn't that extreme, but we didn't have as many It wasn't national and local news events the day we opened. You had a lot of people coming in to some of these markets that are signing up that maybe live too far away or choose not to come back. So we're seeing that continuing to grow. So even that simple, that slight tenth of a percent decline, it's around the air in the sense that if you open up a couple more units a year ago that they're just renewing for the first time, that increases that number.

Yep. No, understood. Last question. I think I heard you say mid to high 20s in terms of unit opening plan for fiscal 24. Can you give me a sense of how many of those are in the U.S. and how many would be international? Thank you.

70 plus percent in the U.S. and Canada. Mostly U.S., of course. Which in my view, we're finding more openings, more opportunities in the U.S. to infill given our high volumes. And we've got plenty going on over the years overseas.

Yeah. Thanks so much, Richard. Thank you.

We'll take our next question from Rupesh Parikh with Oppenheimer.

Good afternoon. This is actually Erica Ilan for Rupesh. Thanks for taking our questions. So I guess first, I was hoping maybe you could give this a quick download, maybe on how you're feeling about the health of your consumer right now. I mean, obviously some concerns out there on, you know, student loan impacts starting to roll in here as those restart. So maybe, you know, any color you can provide on, you know, how you're thinking about discretionary from here, maybe some of those concerns out there, you know, anything on, you know, trade down or private label, you know, anything of note on that front in terms of consumer behavior as well.

Right. Well, first of all, first and foremost, our traffic continues to do very well, you know, being up continually four and 5%. on a year-over-year basis is great. And our renewal rates continue to be very strong. So that's a starting point. It makes sense to us on big-ticket discretionary. That's where you'd see the biggest weakness. We see some of that in some areas going back. When we look at our numbers compared to NBD, you know, that tells us where we are versus our competitors, overall, not in every category, but overall, we tend to do better. And so even a negative number here is a lower negative number than elsewhere. So, and again, what did we do? We brought in some smaller ticket items that are impulse snack items to get an extra partial item in everybody's basket. Yes, and newness, you know, bringing those new items. And, you know, there's not been a whole lot in television. You know, our unit sales in TVs are pretty good, but the average price point has come down. As they do anyway, there's always deflationary when you don't have new technology yet. And that's just, we haven't seen a whole lot of new stuff yet there. Gaming is good right now. And Christmas is good. I mean, we're one of the, not the only one, but one of the few that are bringing in seasonal items early. Everything from decor to trees to toys, that's starting off well so far. But it's new. It's in the last few weeks.

Okay, that's really helpful. And then just – oh, no, go ahead.

I'm sorry, what else did you ask?

Oh, yeah, and then just shifting gears. So I just wanted to touch on, you know, retail media. So obviously a significant focus on, you know, driving retail media at some of your peers. So just curious if you could maybe talk a little bit about, you know, what Costco is doing in this area and the bigger opportunities that your team sees here.

Well, part of that is some of the things we're doing with digital and mobile and the app. and we're not giving out quantifiable numbers, but certainly some of our competitors have, talking about doubling these numbers in the next two or three years. In my view, there's some low-hanging fruit out there, and we're actively working on it. We've hired a couple people that are helping us with that as well, and more to come.

Okay, great. Thank you so much. We'll take our next question from Paul Liguez with Citigroup.

Hey, everyone. This is Brandon Schiedemann for Paul. um i just wanted to um when you look at the retail landscape i was wondering you know how do your wages compare to your competition are you seeing similar trends and you know inflation pressure on the wage front and anything that you can help us with you know what your plans are over the next couple quarters well first of all we've always prided ourselves in in providing the best

hourly wage package out there, wages, benefits, contributions to 401K. I'm using U.S. numbers here, but our average U.S. 90% of our employees, like many big retailers, are hourly. And our average hourly wage is approaching 26. It's in the high 25s. That's on top of a very rich health care plan where the employee only pays around 11% or 12% of it, I believe. And on top, a little less than that, And on top of that, irrespective of what an employee contributes to his or her 401K, we contribute anywhere from 3% to 9% based on years of service. So you've got a 20-year cashier making on a full-time basis in the mid-60s with another $4,000 or $5,000 being contributed to his or her 401K plan with a very rich health care plan. So we stand apart in our view. compared to anybody. Our pressure comes from ourselves. In the last few years, as there has been wage pressure, starting with the frontline workers during the beginnings of COVID, we, like many retailers, added a $2 premium. We kept it longer, to our knowledge, than most anybody for a full year. At the end, we kept a dollar in there. And since then, we've had at least three or four increases on top of the normal top of scale increase that we do every generally have done every year we have done every year so we'll in our view the pressure comes from us and uh and uh we feel that we're way ahead of our competition in that regard got it that's helpful thanks and i think you mentioned that the next iteration of the app you're going to be able to scan barcodes is the idea that eventually the

customer is going to be able to scan and go, and how could that help slow operations in your stores, if that is the case?

I don't think we're prepared for scan and go yet. We're just going to scan, but they can't go. At the end of the day, the first order of business is getting the merchandise on there and have numbers where a member even goes online to say, hey, you can also get this currently at your local location. So knowing what's in store when somebody wants to come out, I think that's going to be a big positive to start with. And part of the scan is to be able to get more product information on the item as well.

Gotcha. That makes sense. Okay. I appreciate it. Good luck.

We'll take our next question from Greg Millick with Evercore.

Hi, thanks. I have two questions, Richard. First, I'd love an update given the volatility in gas prices the last year and a half as to where we are on penny profit. I know it has improved a lot, but I'm curious if it came back down in the last 12 months or if it sort of stabilized at that higher level.

Well, we don't give specific numbers. Gas has been stronger for us and we believe all retailers in the last few years. In fact, it was Q4 last year, which I think was our strongest quarter, recognizing it's a 16-week quarter. This quarter, Fourth quarter, it was still strong, down from its strongest a year earlier on a weekly basis, but nonetheless quite strong. And so it's part of the profit picture currently of all big retailers that sell gas, the supermarkets, the Walmarts, the Costcos of the world. So, you know, it's still a profitable business. Our view has been, you know, it used to be when prices, given that we turn it so fast, literally almost daily, when profits are going up, I'm sorry, when the price of gas is going up, the guy down the street who's turning it every eight or nine days is paying a little less four days ago. And so we make a little less, and when sales went down, the price per gallon went down, we made a little more. I think that equation, while it's still true, is not the driver of the bottom line of gas. Everybody seems to be wanting to make more in gas, which allows us, in our view, to make a little more and still be even more profitable. We've seen our competitive spread versus our direct competitors at every location on average improve over the last couple of years to now be in the, I want to say, the 30-cent range per gallon. Mid-30s is the average, which is up. It's an average, and it can range from 10 to 45. But at the end of the day, we feel good about our competitive position. It's increased, and we're still quite profitable. down a little bit from a year ago, but nonetheless quite profitable.

That's helpful. Thanks. And then my follow-up is on cash. I think you finished it with $13.7 billion. I think the last time you got to $13 billion was when you had a special dividend in 2020. What are your thoughts on how much cash you need or want, and especially now that there is a positive interest rate on holding cash? Does that make you more interested in keeping it, but then you pay more tax? How do you think about it?

Well, I think it's, look, at the end of the day, we've done four special dividends in the past. It's part of our DNA. At some point, we may do that again. Again, it's somewhat like the answer to the other question about membership fees. It's probably a question of when, not if. But we'll let you know. Certainly with earning, you know, 5%-ish on that money instead of a quarter percent-ish on that money, does make it a little harder to do, but we're not selling the kind of earnings multiple we are to earn 5% on our assets. So, yeah, at some point we'll do something and we'll have to wait and see.

Got it. Thanks and good luck.

We'll take our next question from Kelly Abania with BMO Capital Markets.

Hi, thanks for taking our question, Richard. I just wanted to ask, I think I've asked this many, many times, but it seems like another huge quarter for executive membership growth, almost a million more this quarter. And I was just curious if you could talk about the profile of that member today that's either upgrading or starting out as executive. What's the characteristics of that customer and any changes in how that executive member spend in their first year in that upgrade compared to the prior years?

I was joking to say, first of all, they're very smart to be an executive member. I think we, over the time, we've done a better job of communicating the value of the executive member. So we clearly get more people to sign up that way in advance. And we see that over time, A regular member over the first few years will buy more every year. An executive member starts at a higher level and will buy more every year from that higher level. So that's really the profile that we've seen. I don't have any specifics on how old the member is. I know that when we look at age characteristics of new members, we're still, you know, everybody used to be concerned 10 years ago, how are we going to get millennials when we have an older average customer and all that and we did uh with things with items with things like uh organic we're doing the same thing now we're still getting our whether it's gen z or gen a or whatever the next jet is we we're getting our share of those new members when we look at the profile of our members thanks and richard i may have missed this but did you quantify the

extra week impact in terms of EBIT or EPS or anything for us?

No, it's, I mean, the simple math would just say it's one seven, you know, it's 16, 17th of our quarter is equal to a 16 week quarter. That's about as good as we could do, but it takes that thing like on net income, it takes the 16 or whatever percent number down to a nine or something. And that's just simple math.

Perfect.

And we'll take our next question from Oliver Chen with TD Cowen.

Hi, Richard. Inventory seems well-positioned. What are your thoughts about where they are now and also how we will model them going forward relative to sales? And then as we look at overall ticket trends being negative, that compare starts to ease. So does that imply that we'll inflect on partly the nature of the ticket comparisons overall? The same question for e-commerce. You know, as your anniversary, some of the headwinds, can we expect the comparison to help as well? Thanks a lot, Richard. Sure.

Inventories, as I mentioned, we feel, the merchants feel very good about our inventory levels right now. Are there a few departments that are a little higher than they want, a few that need a little more? Sure. But overall, they're very good. In fact, you look at our fiscal year end, inventories stood at just under $16.7 billion yesterday. And payables stood at $17.5 billion. So I think running above 100% on that simple ratio is something new. We used to enjoy running 90% to 95%. It fluctuates, but overall, we feel good about our inventories where they are now. And in terms of supply chain, things coming in on time, we feel good about that as well. Now, as it relates to, as we... Excuse me, as we anniversary the inflection of when we saw some weakness, I think a couple of quarters ago I mentioned that, well, what will help your big ticket sales? I said, well, at least in several more months we'll anniversary this weakness. So certainly that's going to help. I would like to think that it's not just that thing that's going to help. And the same with e-commerce. I mean, we're, again, one bright spot in virtually all e-commerce, not nearly all e-commerce, was the appliances that, and I think we've done a better job also of showing the value of these items online, not just the price of the item, which in our case includes delivery and warranty and things like that, more so than some of our competitors, and showing great value there.

Okay, thanks, Richard. Just a couple of short ones. We'd love any thoughts on Instacart. It seems like it's a really great partnership that you've had for a while. Also, another question we had is, will EV charging play a role in how you're thinking about future services for customers? Finally, China. It's a smaller percentage of total, but it's an important market for the long term. Lots happening there. Has anything changed the value proposition or the geopolitics? Thanks.

Okay. Yeah, I had the second and third. What was the first question? Oh, Instacart. I know they just went public, so we got a lot of questions. At the end of the day, we're a good partner with them. They're a good partner for us. We use them throughout the U.S. and Canada. And sales are growing. We've added over the last, you know, during COVID, we added some non-food items that still can be carried in the car, if you will. And we're doing, I think, prescriptions with them now. And so, no, it's a good relationship and has been for a while. Yeah, I might add, though, that with regard to those sales, we include that in our warehouse sales, not our e-commerce sales, because it's their employee coming into Costco to shop, purchase at the register, and then take it to the customer. So that's not in our mobile or e-commerce sales. As it relates to EV charging, we're testing it in a number of locations. Not a whole lot to be said. You know, if there's a charge for it, it's going to be less at Costco, and we'll wait and see. And then as it relates to China, no, we just opened a few weeks ago our fifth location. We have two more planned this fiscal year, both in the, I think one in Shenzhen in early calendar 24th. and one other one before the end of August. So we'll have seven locations up from two a year and a half ago. And, you know, so far our openings there have treated us well overall.

Thank you. Best regards.

We'll take our next question from Scott Ciccarelli with Truist.

Good evening, guys. Can you help us understand a bit better how the Costco Next process works? I mean, is it similar to how your e-commerce business used to work, where products were essentially drop shipped from their vendors? And if that's the case, Richard, how do you control the quality of the product and delivery process? Because I thought that became an issue for you guys before you took over your own distribution for e-com.

Yeah, Costco Next is drop shipped. But we curate the items with these suppliers, and they're, for the most part, pretty well-known brands. And so far, we have not had an issue on that, recognizing there tend to be items that are easily shipped to a home. Yeah, and we're doing, we have all the tracking information as well. So all I can tell you is you're right about that. That's a good point. Years ago when we did this, there was a difference, but so far it's worked quite well for us. We've had very few customer issues as it relates to items purchased on Costco Next.com.

Okay, understood.

Thank you.

And then another inflation question. If we do wind up getting outright deflation, Outside of improved traffic or unit velocity, are there ways to protect margin? Because it seems to me like that could wind up being a deflator to the margin if we're in a deflationary environment.

Well, you know, look, that's what our business is about. We'll take a 10-pack and make it a 12-pack, I guess. But at the end of the day, if there's a little disinflation, it'll impact all of us. But again, I think it should be favorable with us because we'll still show the best value out there. Understood.

Thank you.

We'll take our next question. Before you do, another comment was made at the table here that if there is deflation or disinflation, we've got a $450, $500 million LIFO reserve. That'll be, on a reported basis, will be part of a tailwind of that disinflation.

Got it. Thank you.

And we'll take our next question from Scott Mushkin with RFI.

Hey, Richard. Thanks for taking my question. I don't think we've talked about it, but, you know, what's competition like out there now that we're seeing inflation come down in volumes, particularly for some guys or? or negative sort of view what it looks like out there.

I think look we said this for a few years now our competition with Sam's is the most direct and we've seen improvements in parts of what they do from our perspective. They're tough competitors and so are we. And but I think they've continued to get to improve over time. And as well as have we. I don't you know we don't really see a whole lot of other things. BJ's, while we respect their model and what they do, it's a slightly different model, so there's not as much. There's certainly, when we are competing directly as a membership warehouse club, we're making sure we're sharp on pricing, particularly in fresh and things like that, supermarket items. Beyond that, yeah, our view is on the non-food side, we're gaining share, as evidenced by the numbers we see in some of these NPD results. And the thing that I just called out on appliances and things like that, recognizing appliances, whatever, a $30 billion business, we're still a small piece of it, but growing rapidly.

Thanks. And then I know it came up earlier about raising membership rates, but I kind of feel philosophical. Like, you know, this recession, not recession, you know, maybe there will be one. How does the company look at raising the membership fee if the economy is slow and fast? Does it matter? Does it factor in?

I think, I think it mattered. It does matter. And I think it really mattered as we approached kind of the five and a half years post June of 17, we were in the high, you know, the headline every day was inflation and economy. And, and so, you know, we're doing great. We've got great loyalty. If we wait a little longer, so be it. And that's kind of how we feel right now. So.

Okay, great. Thanks. I'll yield.

We'll take our next question from Chris Horvers with JP Morgan.

Thanks. Good evening, Richard. So your core and core margins were up a lot in this quarter. Can you talk about what drove that? I think you mentioned food and sundries. Is that successful vendor-funded promotions? Is there anything one-time in nature about that? gain that we shouldn't extrapolate forward?

Yeah, well, aside from LIFO, markdowns were a lot less. So no markdowns was a big piece of it, particularly on the non-food side. That helped. Last year, it was a year ago that all of us, including Costco, I think our inventories on a year-over-year basis were up 26% for two quarters in a row. And of course, those have all come down. And And so that was probably the biggest single thing in those numbers. Yeah. A comment that was made at the table here. We're back on track on seasonal in and out dates. So we're not having, you know, a year, it was a year, year and a half ago, where certain seasonal items came in late. And just to move them out, not to have to store them as much. Some we did store, but to move them out where we felt that was the best way to do it, we took extra markdowns. So that helped.

And then a follow-up question around the consumer. You just came through the back-to-school season. There are some important electronics categories that are a big part of the basket during that time of year that also become a big part of the basket around holiday. Are you seeing iPads and PCs and notebooks? Are you seeing positive unit trends, and how does it make you feel about the upcoming holiday season?

This is a great question. Gaming is up. Some of the Apple products are up. TV units are up, but again, the average price points have come down some. Tablets are up, and audio is up a little.

But not notebooks and computers. No. Less down was the answer I got. Understood. Thanks so much.

We'll take our next question from John Heinbuckle with Guggenheim.

So, Richard, first thing, maybe just talk about how you look at cannibalization versus expanding the market in the U.S., right? And if you, you know, obviously you can now put, it looks like locations closer together. When you kind of look at the U.S. in total, is there a number, right, that you guys have in mind that's that's now possible, you know, given what you're doing with density?

Yeah, our view is over the next 10 years that we could add easily another 150, and that's on top of however many business centers, you know, but just in the U.S. So, and that number keeps changing. You know, if you had asked me six, eight years ago where we'd be today, I would say if we were 70-30 U.S. back then, we'd be 50-50 by now. And today we're 65-70 in the U.S. still. So we're finding more opportunities here, and it's evidenced by just the sheer volumes of the units that our units are doing today versus three or four years ago. It's much higher than we would have expected three or four years ago. So we think that there's still a lot of runway in that regard.

And then just a quick follow-up. And you guys haven't been particularly interested in BOPIS, right, for cost reasons. And I assume that's still the case. You know, there's a consumer argument for it, but I think it's hard to make the cost side of it work. Is that still your view?

That is still our view overall. In addition to the thing I mentioned a little bit with what we're doing with Instacart on some non-food items as well, We are testing in-store some big-ticket items like TVs, but on a limited basis to see what happens for buy online and pick up in-store. Okay, thank you.

We'll take our last question from Joe Feldman with Telsey Advisory Group.

Hey, guys. Thanks for taking the question. I wanted to ask about the CPG guys. Are they funding promotions a little more regularly with you guys? I know you did something, I think, with P&G that seemed like a clever promotion, you know, to get a gift card back from them, it seemed. And I'm just wondering what you're seeing across the other vendors.

Yeah, with the P&G thing, actually, we did that last year as well. We've done it for a couple of years, and Needle Save, we did it again. It's growing. So, yeah. And once we do that with one, we want to share that excitement with others to see what other types of things we can drive that way. So, yeah, I'd say there's probably a little bit more increase on that type of promotional things. And inventory available for those things. We can really drive sales of those items in a short period of time.

Right. That makes sense. They have the volume that you guys do. And then are you guys approaching the holiday any different this year? I know you mentioned Christmas goods are off to a good start, but is that, you know, earlier than, than normal? I feel like you're, you're about the same timing, but maybe you could share thoughts on the approach to the holiday season.

If it's earlier, it's a week or two earlier. And some things came in early and, and, and, Yeah, it's a little early compared to some of the supply chain disruptions we had, which screwed up a lot of things. But if you go back to where we were before COVID, we're probably at or very slightly earlier. And in terms of how we're approaching it, we're approaching it aggressively in terms of having stuff to sell the member. But we want to be out too. Typically, this is nothing different here. Even on things like toys, we'll bring in a few things in the last couple of weeks before Christmas that if they don't sell through, we're not at risk of having to mark them down dramatically because they're not unique just to Christmas.

Understood. Understood.

No, that's great. Thanks, guys, and good luck this quarter, Richard.

Well, thank you, everyone. We're around to answer questions, and Have a good holiday, and we'll talk to you soon.

And that does conclude today's presentation. Thank you for your participation, and you may now disconnect.