Costco Wholesale Corporation

Good day, everyone, and welcome to the Costco Wholesale Corporation Fiscal First Quarter 2024 Earnings Call. Today's call is being recorded, and all lines have been placed on mute to prevent any background noise. After the speaker's 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. To withdraw your question, it is star 1 again. I would now like to turn the call over to Richard Galante, Chief Financial Officer. 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. Comparable sales and comparable sales excluding impacts from changes in gasoline prices and foreign exchange are intended as supplemental information and are not a substitute for net sales presented in accordance with GAAP. In today's release, we reported operating results for the first quarter of fiscal 24. The 12 weeks ended November 26th. Reported net income for the 12-week first quarter came in at $1.589 billion, or $3.58 per share. up from $1.364 billion, or $3.07 per share, in the 12-week first quarter last year. This year's results included a tax benefit of $44 million, or 10 cents a share, related to stock-based compensation. Last year's results included a tax benefit of $53 million, or 12 cents per share, related to stock-based compensation, and also included a charge of $93 million pre-tax, or 15 cents per share, primarily related to downsizing our charter shipping activities. Net sales for the first quarter were $56.72 billion, a 6.1% increase over last year's first quarter, $53.44 billion. Net sales were benefited by approximately one-half to 1% in the U.S. and worldwide from the shift of the fiscal calendar as a result of the 53rd week in fiscal 2023. The following comparable sales reflect comparable locations year-over-year and comparable retail weeks. In the U.S., reported 2% comp sales. Ex-gas deflation and FX, 2.6%. Canada reported 6.4%. Ex-gas and FX, 8.2%. Other international reported 11.2%. Ex-gas and FX, 7.1%. For total company, reported 3.8%. and a 3.9, excluding those two items. E-commerce, which was reported as a 6.3, came in at a 6.1, excluding FX. Overall, for the first fiscal quarter, fresh foods were relatively strong once again, with food and sundries right behind. Non-foods showed improvement over the September, October, November timeframe, as did e-com sales. In terms of Q1 comp sales metrics, traffic or shopping frequency increased 4.7% worldwide, and 3.6% in the United States. Our average transaction was down 9.7% worldwide and down 1.6% in the U.S. Foreign currencies relative to the U.S. dollar positively impacted sales by approximately 4.7%, while gasoline price deflation negatively impacted sales by approximately 6.7%. I've gotten more than a few calls in the past few weeks as to how many pies we sold at in the U.S. leading up to Thanksgiving holiday. In the U.S., in the three days leading up to Thanksgiving, we sold 2.9 million of our famous pumpkin pies, along with 1.3 million apple and pecan pies. So over 4 million pies in total during the three days. Back to the income statement here. Next on the income statement is membership fee income. In the quarter, we reported $1.082 billion, or 1.91%. That's an $82 million or 8.2% increase and a four basis point increase over the first quarter last year. In terms of renewal rates, at first quarter end, our U.S. and Canada renewal rates stood at 92.8%, while the worldwide rate came in at 90.5%. Both of these rates were up one-tenth of 1% from those numbers 12 weeks earlier at the end of the fourth quarter. Membership growth continues. We ended Q1 with 72.0 million paid household members, up 7.6% versus last year, and 129.5 million cardholders, up 7.1%, with consistent growth throughout the quarters. At Q1 end, we had 33.2 million paid executive members, an increase of 939,000 during the 12 weeks since Q4 end. Executive members now represent a little over 46% of our paid members and a little over 73% of worldwide sales. Moving down the income statement next is our gross margin. Our reported gross margin in the fourth quarter was higher year over year by 43 basis points, coming in at 11.04% up from Q1 of last year at 10.61. That 43 basis point reported number, gas deflation would be plus 36 basis points. As I normally do here, we write down two columns and six line items. The first column is reported in the first quarter. The second column is margins excluding gas deflation. It's the year-over-year change in the first quarter. On a core merchandise, plus three basis points reported, minus three basis points X deflation. Ancillary and other businesses, plus 24 reported and plus 22 X gas deflation. 2% reward, lower year over year, minus 4 basis points reported and minus 3 X gas deflation. LIFO, plus 3 and plus 3. And other, plus 17 and plus 17. For a total, again, reported year over year up 43 basis points and X gas deflation up 36 basis points. Starting with the core, again, it was a total company. It was plus 3 and minus 3 reported in X gas deflation. In terms of core margin on their own sales or core on core margins, we're up by five basis points year over year. Ancillary and other business gross margin, again, higher by 24 and higher by 22 X gas deflation. This increase was driven largely by gas and e-com. Our 2% reward, higher by 4 and higher by 3 X deflation. reflecting higher sales penetration coming from our executive members. LIFO plus three basis points. We had a $15 million LIFO credit in the first quarter of this year. This compared to a very small half million dollar LIFO charge in Q1 a year ago. And then the other light item, the 17 basis points to the positive, as was mentioned earlier, last year in Q1 there was a 17 basis point impact from a $93 million credit. pre-tax charge, primarily related, primarily for the downsizing of our charter shipping activities. Moving on to SG&A, we reported SG&A of 9.45%, higher by 25 basis points than last year's 9.20%. Again, in Q1, we'll write down the two columns, reported without gas deflation. Operations, minus 18 and minus 14 basis points, minus meaning it's higher year over year. Central, minus 2 and minus 1. Stock compensation, minus 3 and minus 2. Pre-opening expense, minus 2 and minus 2. Again, for a total reported margin higher at minus 25 year over year. I'm sorry, SG&A, not margin. 25 and without gas deflation, higher by 19 basis points. The core, again, was higher by 18 and higher by 14, excluding the impact from gas. This included 12 weeks of this past March's extra top of scale increase in our wages, which represents an estimated two basis point hit. And as of September 18th, we raised the starting wage in the U.S. and Canada. That estimated impact from those new wages to be roughly two basis points as well. Again, central, nothing much to say other than it's one basis higher, excluding gas deflation. Again, it was stock comps at the minus 2x gas deflation and pre-opening. We did have a couple of more openings this year in the quarter than we did last year, and that was higher by two basis points. Below the operating income line, interest expense was $38 million this year, $4 million higher than last year's $34 million figure. Interest income and other for the quarter was higher by $107 million. coming in at 160 million this year versus 53 million last year. This was driven largely by the increase in interest income, about 100 million of that 107, due to higher interest rates as well as higher cash balances. The small additional impact was a favorable FX year over year. In terms of income taxes, our tax rate in the first quarter was 24.5%. This compares to 23.0% a year ago or 1.5 percentage points higher this year than last year. The increase in our rate in Q1 is primarily attributable to lower benefit from the stock-based compensation from a year ago. Overall reported net income was up 16.5% year-over-year in the quarter. A few other items of note. In terms of warehouse expansion, in the first quarter, we opened 10 locations, including one reload, so a net of nine increases. Those nine included eight in the U.S. and one in Canada. For the full year of fiscal 24, we estimate opening, we're planning to open 33 locations, including two reloads. So for a net increase of 31 new warehouses, that would be up from 23 that we opened in fiscal 23. For Q2 fiscal 24, we planned four new locations, including our sixth building in China, early in the calendar year. Regarding capital expenditures, the first quarter capital expenditure spend was approximately $1.04 billion. We estimate that fiscal 24 CapEx will be in the $4.4 to $4.6 billion range. That's up from $4.3 billion we had in fiscal 23, reflecting a continued increase in the number of the expansion that we're doing. In terms of e-commerce business, e-commerce sales in Q1 XFX increased 6.1%. The first quarterly year-over-year increase in five fiscal quarters and trended well during the three reporting periods of September, October, and November. Ecom showed strength in several areas. In food, things like e-gift cards, pet items, snack items were up in the mid-teens. Appliances were up year over year in the mid-20s. TVs was actually in the high singles despite the challenges with other aspects of consumer electronics like computers. And tires were up in the low teens. So overall, a pretty good showing there. As well, Costco Logistics enjoyed record-breaking deliveries In the first quarter of fiscal 24, we completed over 800,000 deliveries, which were up 17% versus the comparable quarter last year. And some fun wow items in the quarter in e-commerce. You've probably read about the fact that we're selling one-ounce gold bars. We sold over $100 million of gold during the quarter. We sold a Babe Ruth autographed index card for $20,000. And in addition to e-gift cards on everything from restaurants to golf to airlines, we And we just in the last couple of weeks launched a Disney e-gift card valued at $250 for $224.99. And for you last-minute shoppers out there, there's a Mickey Mantle autographed 1951 rookie card in nearly perfect condition, and it's on sale online for $250,000. Next, good progress continues to be made with our e-comm mobile and digital efforts. No big enhancements and changes to the site leading up to the holidays, mostly holiday prep. We did have 100% site availability during cyber week. And sales for the five cyber days, Thanksgiving, Black Friday, Saturday, Sunday, and Cyber Monday, were up year over year in the mid-teens. Our app downloads during the quarter were two and three quarters million. So total app downloads are now stand at 30.5 million or a 10% increase during the quarter. And that's after being over 40% increase in all of fiscal 23 versus the prior year. Our site traffic approaching a half a billion and just under 10% increase in the average order value being up about 2.5%. So continue to make progress there. Next, a couple of comments regarding inflation. Most recently in the last fourth quarter discussion, we had estimated that year-over-year inflation was in the 1% to 2% range. Our estimate for the quarter just ended that inflation was in the 0% to 1% range. Bigger deflation in some big and bulky items like furniture sets due to lower freight costs year-over-year. as well as on things like domestics, bulky, lower-priced items, again, where the freight cost is significant. Some deflationary items were as much as 20% to 30%, and again, mostly freight-related. TVs, the average sale prices have been lower, while units have been higher. And talking to the buyers overall, our inventories and our SKU counts are in good shape across all channels, and so far, we've had a good seasonal sell-through during the quarter. Lastly, As you saw in this afternoon's press release, we declared a $15 per share special cash dividend. This is our fifth special dividend in 11 years. The total payout will be about just under $6.7 billion and will be funded using existing cash and not accompanied by any issuance of debt. The special cash dividend will be paid on January 12th to shareholders of record on December 28th. Finally, in terms of upcoming releases, We will announce our December sales results for the five weeks ending Sunday, December 31st, on Thursday, January 4th, after market close. With that, I will turn it back for Q&A to Lisa and be happy to answer any questions.

Thank you. As a reminder, everyone, that is star 1 on your telephone. We'll take our first questions from Michael Lasser with UBS.