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.

Good evening. Thank you so much for taking my question. Richard, you had indicated over the last year and a half or so that Costco had been raising prices faster than it had throughout its history. So now with prices coming down, what is going to be the posture on passing along those savings? You already noted that um inflation is flat to up one percent so do you expect inflation especially on the food side as you get through the next couple of quarters well you know talking to buyers we've seen those you know even during the quarter we saw the trend towards that zero versus the one

But at the end of the day, the buyers are looking out three to six months. On the fresh food side, commodities-wise, they haven't seen a lot. There are a few things that are up and a few things are down, but no giant trend either way. Look, as you know us for a long time, we want to be the first to lower prices. We're out there pressing our vendors as we see different commodity components come down, certainly on the non-food side as we saw shipping costs come down, things like that. And so probably a little more than less, but we'll have to wait and see. We don't know.

In my follow-up, it's another point that you've made for a long time, is that Costco's going to draft off the profitability of the broader retail sector. If we compare Costco's operating margin over the last 12 months versus where it was prior to the pandemic, it's 3 to 480 points higher. And yet across retail, there are signs that profitability is coming down. So now... What would stand in the way of Costco either maintaining this existing rate of operating profits margin or even further growing it from here? Is it just simply going to be a function of your ability to drive further sales growth in the consistently mid-to-single-digit range or better? Sure.

Well, happily, I'm able to say that you get to figure that one out. At the end of the day, as you've known for a long time, we're a top-line company. We want to drive sales. Certainly, as there's been deflation in certain products, we've seen units go up. I'm looking at one example here. Just in the last month, $100-plus million of KS nut items where sales were flat to down a couple percent while units were up in the mid-teens. that takes a little more labor to do. But at the end of the day, that's what we want to do. We want to drive people in frequency. And I think as long as we see renewal rates continue to do what they do, as long as we see new signups continue to do what they do, and hopefully continue to get people to convert to executive as well, and constantly driving the best value out there, we'll be in good stead. And so far, we've been able to do that, and I think we'll continue to be able to do that.

Thank you very much, and have a good holiday.

You too.

We'll take our next question from Simeon Gutman with Morgan Stanley.

Hi there. This is Jackie Sussman on for Simeon. Thank you so much for taking our question. The core and core margin was up modestly this quarter, and it seems like it moderated sequentially. Looking forward to the balance of the year, it seems like the comparison gets a bit tougher. I guess, how should we think about your core and core margin? Could it stay expanding and positive for the rest of the year or any color on that would be helpful? Thank you so much.

You know, there's so many different moving parts to it. You know, as you've heard me say and I say in the last several years, We want to drive top line first. We're also pragmatic. We recognize we're a for-profit company, and we'll continue to work hard to do both. I wouldn't read much into any number going up a little or down a little, frankly. It fluctuates, and there's lots of different components to it.

Gotcha. Thanks so much. And just a quick follow-up. Was the Black Friday and December Monday gains that you had better than what you were expecting internally? Thanks so much.

They were a little better than we were expecting, but we were ready for it.

Thanks so much.

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

Hey, how's it going, Richard? Good afternoon. I wanted to just dive into the core margins a little bit more and see if you could flush out some of the category color. If you said it, I missed it, but food, sundries, fresh, and on the hardline parts of the business.

Well, without giving you specific basis points, you know, food and sundries was slightly down, very slightly down. Non-food was actually up. Some of that relates to the fact that we were comparing against last year when we had higher freight costs and trying to drive business. And fresh was down a little bit. So nothing... earth-shattering in either of those directions.

Okay, and then on the ancillary of 22 basis points, I think we all get the gas component, but can you just talk about why the e-commerce margins were so much better in the quarter?

I think, well, first of all, part of just ancillary in general is a sales penetration issue. Without going into it, the fact that it showed more, sometimes when you look back over the quarters, They go in opposite directions, the core-on-core and then the other businesses. And so given that you had higher sales penetration in both in e-comm, that helped you. In e-comm, we had a lot of strength. We're doing a lot of big and bulky, and we're driving that business.

Okay, great. And just bigger picture, I just have a question on the change at the CEO seat with Ron. starting in a few weeks and replacing Craig, who replaced Jim. You know, you've had the fortunate opportunity to work with all three. And I guess I'm curious what change, if any, you think we could see from an operating standpoint moving forward?

Yeah. Well, I always joke I'm up for review, so I'm going to say nice things. But, no, at the end of the day, the reality is we're staying the course. You know, I remember questions were asked 12-plus years ago when Craig became president and two years later, Jim retired and Craig became CEO and president. Who can replace Jim? I think the same question is asked today, who can replace Craig? It really is a seamless transition. You have somebody retiring that's been here 40-ish years and has been in the business both on operations and merchandising for a successful number of years in both. You've got Ron who's coming in who started when he was 17 at a price club in Arizona. He already has his 40-year gold patch. And again, 30-ish years in operations, a year in real estate traveling the world, and then six or seven years in merchandising. So I think it is pretty seamless. And to see the two of them work together over the last almost two years since Ron became president, it's very similar to what I saw during those two years when Craig became president and then two years later Jim retired and Craig took on the CEO role as well.

um and uh so that's pretty much steady as she goes gotcha great happy holidays thanks thanks we'll take our next question from scott mushkin with r5 capital okay richard um i guess i just wanted to think about the potential clubs in the u.s i know this comes up uh sometimes but obviously you added eight It just seems like there's maybe more runway even here in the U.S., and I wonder if you have any thoughts on that, and then I had a quick follow-up.

Sure. Well, you know, I mean, if we were to open the 31 this year, that would be somewhere in the low 20s, the 23, 24 in the U.S. And I recognize a few of those are business centers, which is we continue to add as well as regular warehouses. You know, most of them are regular warehouses. And I would say that, you know, I guess the story I'd share with you is six or eight years ago when it was roughly 60-40 or 70-30 U.S. Canada versus other international, and we were asked, what would it be by today? I'd say, well, by today it will be 50-50. Well, today you're asking the same question. It's 60-40 or 70-30 today. What will it be? And I think it will trend that way over time, but we are finding more opportunities in the U.S. Clearly, our average sales volume per location is higher today than U.S., We would have expected ourselves, thankfully, you know, six, seven years ago, what would it be by now? And we are finding those opportunities. So I view that as good news. We still, you know, we've got a lot of things going on to drive international. But, you know, international will be, you know, six or seven units this year. And then I'll continue to go. Last year international was nine or ten. And that's more of a timing issue.

So then my follow-up is around traffic and also, like, the growth you had in appliances and TVs. You're just kind of going in a different direction than a lot of people. So what's driving the share gains in those categories? But also, are you guys doing anything specifically different to drive the traffic numbers you're seeing? Because, I mean, they're pretty amazing given, you know, the environments.

Yeah, well, look, I've always said I think the biggest attribute of value is the lowest price on giving quantity and quality of a good or service, and then certainly add to that the trust that our members have. I think as it relates to specific things, like I pointed out, like appliances and even tires, it's value. And having acquired Interval three or four years ago, now called Costco Logistics, and We're doing a lot of business there, and I think we've gotten a better job of communicating what the value is, not just showing what the price of the exact item is at some of the other big retail competitors on some of these big items, but then you add in delivery, take away the old product used, the installation, delivery, take away the old product for disposition. It's significant savings. Go do a price check of some of those things compared to our competition. That's where you'll see the strength.

Perfect, thanks.

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

So, Richard, I'm wondering if one of the things you may do differently, and we've talked about this before, is leaning into personalization more and where you are on that journey, particularly with Ron coming in.

Right. Well, if first-order business was fixing the foundation, we're in the middle of replatforming our e-commerce. It's not a big bang where we're going to put the switch one day. We're bringing things over, and that's in progress. I think I mentioned probably last quarter it's a two-year roadmap on that, and we're halfway through that. And so I'd say very little so far. If we were in the second inning, maybe we're in the third inning now. But a lot of the focus has been, on, first of all, making sure, doing small improvements. We certainly got the, you know, on the five-star rating, you know, got up north of four and a half on that. And we're getting better at the site every time. But I think you would see personalization and, first of all, targeting and then personalization more over the next couple of years, honestly. And we're fine with that. First-door business is getting the foundation right. And we've made a lot of progress. I didn't spend a lot of time on this call talking about the new things, the enhancements we've made to the mobile site and the e-com site, but we've done a lot.

And maybe as a follow-up, you talked about the international opportunity, and it's still very well underdeveloped. So the hindrance to getting to, because you're in a lot of countries now, 15 to 20 annual openings, maybe that's a big ask, but You know, is it just quality of real estate? Because I would imagine operationally it's not a human resource issue. Is it purely a real estate issue?

I would say it's a combination of issues. In some countries, I mean, if you look at Korea, Taiwan, where we have whatever, 15 or 16 locations in each country, very successful, it's a little harder to find the next location just from a real estate standpoint. If you look in Japan where we have plenty of future opportunity, we've got 30 plus now. But again, it's a little bit of real estate. If you look at places like China or Spain, one of the challenges is you like to be able to ideally bring over more than a handful of people from the existing location to the new one. It's a very hands-on operation. I think one of the things that we felt we mentioned that we had success when we first opened our first unit in Shanghai was is we had at least 60, 70 people move there from Taiwan for promotions and for interactions, not just in the office and the buying offices, but even in the key supervisor and manager positions within the warehouse. And so it takes a little longer, but we're working hard at it, but it's a very hands-on experience. Thank you.

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

Hi, Richard. Thanks for taking our questions. I just wanted to kind of follow up on Scott's question. I think your average sale per club in the US and Canada is around 300 million at this point. And just curious on the status of how many clubs are doing kind of well over that and are maybe in some need of relief in the form of self-cannibalization. and more clubs nearby. And follow-up as well on international, just as we think about the next maybe three to five years, are there any countries that might be disproportionately getting some more of the growth here?

Okay. What was the first part of the question again? Oh, average sales. I don't have the numbers in front of me, but I know in fiscal 23, we had something like 25 or so locations that did over 400 million, another 160 or so that did 300 to 400 million. Those are huge numbers. And certainly as we get 350 plus, and one of them, by the way, that did over 400 did a few million over 600 million. So generally when it starts having a three in front of it, certainly a 350, we want to start looking to see what we can do to cannibalize it, frankly, and to have more growth in that market. And so hopefully that's one of our bigger problems and challenges that we have more of those each year. So I think that'll continue. Again, if I look back five, eight years ago, even assuming whatever inflation number you want to assume, I think we've done a little better than that in terms of these sales volumes. And so that's good news for us that we'll continue to do that. Internationally, again, I'm just looking at the the map of where we are. Certainly, we only have four locations in Spain. We've actually added a few on a base of 30 plus in the UK. We think we have more opportunity in Mexico. In Japan, where we have something in the low 30s, certainly it's done well there and there's many more markets and population there that we can go to. Australia, you know, is whatever, two-thirds, a little under two-thirds the size of Canada, where we have 105 or so locations. And in Australia, we have 15. Yeah, 15. Now, I'm not suggesting we're going to have two-thirds of 105 there anytime soon. It takes us, you know, 35-plus years to get there in Canada. But we think that those are the opportunities. It's not like we're looking for a lot of other new countries at this juncture. We've done a few new countries, those single locations like in Sweden and Iceland and Auckland, all being somewhat managed buying-wise and somewhat operationally by a host country, in the case of Scandinavia, by the UK, in the case of Auckland, by Australia.

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

Good afternoon, guys. So Richard, last quarter you talked a bit about Costco Next. I guess my question is, how big of an impact is that program having on your e-com sales at this point, number one? Number two, kind of related to that, any change in your vetting of what vendors operate on that program? Just thinking about the quality control aspect. Thank you.

Well, first of all, it's, It's still a very small role to our company. And the fact is, is that the cost-connected sales currently are not in our sales. We get a commission, so it's kind of like 3P, if you will, 3P sales. And at some juncture, there are accounting rules of where you can include it in sales based on what risk and what ownership level you have in the items. But at this juncture, those sales, it's more of a market value and just a commission in our number. In terms of how we vet, we do it the same way we vet items. We want items that make sense, that provide value, and we have a team that is here that are vetting each and every one of those. I think we're up to about 70, about 65 current suppliers on there, and we'll certainly have many more as we go forward.

So presumably, if that program keeps growing, should that be a natural gross margin driver for you over time? I know it's small now, but if you're just collecting the commission, presumably that's kind of 100% margin, right?

Essentially, yes. Much like the travel business. Got it. Okay. Thank you.

Mostly.

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

Hi, thanks. Richard, I wanted to follow up on the membership fee hike because I think now we're in extra time. And I wonder how much does the growth and mix and executive membership driving that high single digit growth, is that what means that you don't have to increase it and you can keep waiting? Or is there something else?

I think it's just us. You know, again, if I look at the, if you ask the question, what are the variables we would look at, We would want to look at strong renewal rates, strong new sign-ups, strong loyalty, and we have all that. So I think the question is we haven't needed to do it. We like providing extreme value. Certainly, while we've gone a little longer than the average increase, we feel we certainly have driven more value to the membership. So, you know, I'll use my standby answer, my pat answer. It's a question of when, not if. But at this juncture, we feel pretty good about what we're doing.

And a follow-up on inflation, I just want to make sure I got that right. You said zero to one for the quarter. Did it trend towards zero? Did we exit near the bottom? And you mentioned some categories that were deflationary. Which ones are stubborn in terms of inflation, where it's hardest to get it out?

Which categories are stubborn in inflation? Yeah. CPG, Brents.

All the branded package stuff.

There wasn't a big trend. I think at the end it was a little lower than the beginning, but not a big trend.

Okay, so it's not like we exited at zero. We're still slightly positive.

Right, but recognize the LIFO charge is an inventory cost of sales charge.

The LIFO benefit. That's the zero to one zero per year. The LIFO is just...

Right. The zero to one is from the beginning of the fiscal year. Oh, no? I'm sorry. The zero to one is versus a year ago.

A year over year. Got it.

Yeah.

Great. And then this last, what is the auto renewal rate now?

In the U.S., it's around 60%.

Perfect. Thanks. Have a great holiday, guys.

You too.

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

Good afternoon. Thanks for taking my question. So I just want to go to operating expense growth. So operating expense growth is still high. Would you expect the growth rates to moderate once you've got that March wage increase and then anything unusual within that line item that's still driving a pretty high growth?

There's not a lot unusual. I think it gets back to the question of low inflation, which creates a little bit more of a challenge, right? And again, that was a very extreme example I gave you on nuts. But when you had a slight 0% to 2% decline in sales and a 14% increase in units, you got more labor involved, more hours stocked on the shelf. I mean, that's the 40,000-foot level. And that's an extreme example. But I think overall, it is sales-based. You should also remember, I remember going back to fiscal 19 and the first part of fiscal 20 before COVID, you know, our SG&A percent was, for all of 2019, it was a 1004. In the first quarter of 2020, it was a 1034. And for the whole year, it was a 1004 for both of those two years. And we used to think to ourselves, will we ever be able to get it back below 10? And in 2022, which was the kind of month seven through 18, if you will, that 12-month period after that full fiscal year for us of COVID, we reported an 888 for that year. So even at the 945 that we just reported, we're still quite a bit lower than we had been historically, a function of a lot of things, including higher sales productivity and all that. So I think we're doing pretty well. I think certainly that's the challenge. How do we reduce that? And how do we manage that? And certainly the biggest way to manage it is driving more sales.

Great. And maybe just one follow-up question. So just curious how you're feeling about the health of your consumer. So it was interesting to hear that TVs did well this past quarter.

Look, I think when we're asked that question, we're fortunate to answer it that we're first of all looking at the consumer through somewhat rose-colored glasses here. We have enjoyed great value. Again, we're convinced it's value. I think on the margin, there's a few extra things that we've done. We've improved the site, the website. We've gotten a little better communicating stuff. Not completely, but I think overall, and we've been good merchants. I think the merchants have done a great job of bringing in new stuff and not being shy when we see an industry category down a lot that we can still, if we're driving people in, we've got a better chance of getting them to buy something.

Thank you. Happy holidays.

Thanks.

We'll take our next question from Oliver Chen with TD Cowan.

Hi, this is Tom Nasson for Oliver. Just a quick question on the trend of Kirkland relative to last year. If you could just remind us how that's trending maybe across categories, and then if you have any notable call-outs, any recent innovations. Just curious if this is essentially driving any efficiencies in supplier negotiations that could position Costco for a stronger gross margin ahead.

Well, I would say allowing us to get better deals, which means lower prices. But, you know, look, I think – Kirkland Signature relative to non-gas sales is in the high 20s. And I think it was probably a good year ago when inflation was in the eight and nine range, if you will, if you remember. And we talked about that year over year, we saw probably the biggest increase penetration of KS at Costco. It was one, one and a half percentage points, when historically it had been 25 to 50 basis points a year. I think we're back to that, but we've maintained that higher level. And we're back to seeing smaller increases in penetration every year, but nonetheless still driving that business. But we've got, yeah, I think that helps with some of the deflationary stuff. Certainly with KS stuff, we're closer to the supplier. We're the only customer buying that item, and we can drive a little bit more business. So I think it just continues to work that way for us.

Great. And then just a quick follow up on any notable behavioral trends you've seen in consumer shopping this holiday season.

Some colleague in my room said they're buying gold, but no, that's actually online mostly. But no, I think again, I think the traffic thing is the thing that we're happily surprised about. that will continue to drive people in on an increasing basis. We know we benefited during those two years, March-April of 20 to March-April of 22, the two years of COVID. We benefited in many ways from more members and more volumes. We've not only kept it, we're continuing now to add to those levels. We feel very fortunate in that regard. Thanks. One of my colleagues here just mentioned that discretionary merchandise trends are getting a little better. And that's not only on big ticket, but in general, non-food sign stuff. I think that corresponds with my comment earlier that we feel good about the seasonal, how we've done seasonally.

We'll take our next question. Thank you. We'll take our next question from Mark Astrichan with Stifel.

Yeah, thanks, and afternoon, everyone. I guess I wanted to ask on the Kirkland products, specifically maybe on the CPG that you mentioned, how is pricing or how is prices trended on those versus the branded products? Have you seen any deviation there, given you're closer? Are you able to lower prices? I suppose to the extent that that has happened, Do you notice any more market share changes within those CPG categories?

I think it's slightly – it's deflationary. It's a little more deflationary in the KS than in the CPG, which drives more value to KS, frankly. But we're seeing our ability to work with our CPG suppliers as well, but just a little stronger ability to do that with KS. Okay. Got it. Again, a comment in the room here. It's allowed us to do some new item introductions on the KS side as well.

Great. And then just following up on the last question, anything you can call out amongst the newer memberships, cohorts, in terms of renewal rates versus the average?

Generally speaking, if you compare, everybody's always concerned. I remember 10 plus years ago, people would ask, how are you going after millennials? And then it's how are you going after the next gen or whatever, the Gen Zs or whatever. At the end of the day, when we look at the different cohorts, if you just change the names, the curve seems to be about the same in terms of getting new younger members. They buy less. They buy more as they get older into that 40 to 55-year-old sweet spot. I don't know in terms of renewal rates. I think our overall rates are improving, so I think we're probably doing a better job there. Certainly things like, frankly, auto renewal help that as well.

Got it. Thank you. Happy holidays. Same to you.

We'll take our next question from Corey Tarlow with Jefferies.

Hi. Good afternoon. Thank you for taking my question. Richard, you mentioned about the wage increases that you've taken recently. I'm curious to get your thoughts about the wage increases that you've taken within the context of now the lower inflation that you're seeing as well as what could be potential deflation further ahead. So I'm curious about the ability for Costco to maybe maintain a more nimble margin structure amid what could be some volatility on the pricing side?

Frankly, we look at the wages in a vacuum. We want to do as much as we can for our employees. And certainly, there were several increases, starting with the frontline worker premium during the initial year of COVID. We kept half of that in there, which we kept one of those $2 an hour in there, which was like $400 million a year. Again, we've also benefited from stronger sales and productivity, so we're able to afford that. But we look at them independently, and we'll continue to do that, to look at it. To the extent inflationary pressures are down, that means there's probably a little less inflationary pressure on wages. But we give, you know, over half of our employees are top of scale, and they're getting increases, irrespective of some of the extra things we've talked about every March. And then as you go from a new employee... over the first 9,000 or 10,000 hours, you're getting constant increases that are significantly more.

Understood. And then just piggybacking off of that, and I understand it may be difficult to attribute a cause and effect relationship to this, but do you think that perhaps the moderating inflation that we've seen in the need-based categories like fresh and food and sundries may have unlocked a little bit of extra wallet to spend in the non-food category and may have driven some of the momentum that you've seen in categories like TVs and others?

I think it can't hurt. Even with gas prices have come down a little bit, that's top of mind every week when somebody fills up their tank. So those things help. I'm sure on a macro basis that's the case, but it's a guess on our part.

Understood. Great. Thank you very much, and best of luck. Thank you.

We'll take our next question from Dean Rosenblum with Bernstein.

Hey, Richard, guys. Thanks for taking my questions. There's really two big debates that clients are asking us about. First one's on gross margins, and in particular, the potential for a gross margin impact from Nick's shift back toward things like appliances and TVs, which are notoriously lower gross margin, at least in the marketplace, versus fresh and food and sundries. As you see the sort of big ticket discretionary starting to come back a little bit, do you expect any overall impact on gross margins from that mixed shift away from food and sundries to big ticket discretionary?

You know, first of all, our margin range is so much more compacted than traditional retail, you know, different categories of traditional retail. I mean, if you think about it, we have, what, a 12%, 13% gross margin? 11, I'm thinking marked up. In theory, it ranges from 0 to 15. In reality, there's very few things that are below 5, and a lot of things hover around the 8 to 12 range. And so I don't think it's as big an impact to us in terms of those mixed changes. And I've got to say, it's always that old saying, it's always something. There's always something that hurts you and there's another thing that helps you. And it's, it's a really, it's a mixture.

Oh, true. And then the other, the other big debate that contracts and abouts is the relative profitability of new stores versus existing stores. And there's sort of two themes there. One is you knew us versus existing us and then the relative profitability of new stores internationally. I was wondering if you could speak to that a bit.

Well, first of all, we look at like at our ROI, the denominator on an older building has a lower I. If 10 years ago, the typical building in the United States, property equipment and building and fixtures, I'm shooting from the hip here, was 30 to 35 million, and now it's 45 to 50 million, so you've got a different I. But generally speaking, when we look at the ROI of each of our eight U.S. regions, our two Canadian regions, New units start a little lower and get up there over time. You'll have some outliers because of some units that are 30 and 40 years old, even with the eye increase because we expanded the unit and upgraded it and remodeled it. The fact of the matter is those higher volumes really shine through there. On an international standpoint, we've always, I think, talked about the fact that there's a few different things that the ROIs in some of these other countries tend to be a little higher. The return on sales tends to be even higher than that in some of these countries because a combination very little related to gross margin, some related to membership fees, some related to wages, and some related to benefits, health benefits. You know, U.S. health care costs dwarf every other country that we're in.

Got it. Thanks so much. I appreciate it. Good holidays, and thanks for the pie. Thank you.

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

Hey, guys. Thanks for taking the question. I wanted to first ask on executive member penetration. It seems like it continues to inch higher. And I was just wondering how you guys think about that and, like, how high should that be? I mean, presumably you'd want everybody to be an executive member, but is there, like, kind of a natural level where you think it can still go from here? beyond the 46%?

I think, well, there's always going to be another country or two we add. You need a certain number. In our view, we've always done it after there's 15 or so warehouses in the country. So that'll add to it a little bit. But no, I think some of the increase... It's kind of like getting up to that asymptotic line. One of the things that drove it in the last few years, one, we've done a better job in the last several years of selling it to you, as well as auto renewal. When people come in now or sign up online, they're signing up until they want to put their credit or debit card in there, and they can opt out. They can opt into doing it online. doing auto renewal. So I think those things have pushed it along with us being so wonderful. But I think you'll still see it come up a little bit, but probably that rate of increase will slow over time.

Got it. Okay. And then maybe just a quick follow-up. Anything to talk about on shrink? Because I know that there was an issue with shrink even for you guys at one point, and I know you guys have cracked down on you know, making sure members are showing their cards when they walk in the store. And obviously when you leave with your goods, they're checking your receipts. But anything we should think about with regard to shrink going forward and recent trends? Nothing.

Thankfully, nothing at all. It's really, you know, I think all we talked about was, you know, a combination of as we went into some self-checkout over the last several years, And then perhaps more recent things that you read about in the paper, we get less impacted by the latter as well. Maybe we saw a couple of basis point delta upward on a very low number of basis points to start with. So we're fortunate in that regard.

Thank you, and happy holidays, guys. Same to you. Thank you. Thank you.

We'll take our next question from Laura Champagne with Loop Capital.

Thanks for taking my question. I wanted to dig in a little bit more into some of those numbers on the column. The ancillary profit improvement, I think that's where you're – I'm just wondering what drove that. And on the operations line, it sounds like that pressure in SG&A didn't come mostly from wages, and I'm wondering where it did come from.

Yeah, on the ancillary line, it's gas and e-com, and it's a combination of increased sales penetration and increased margins within those businesses. You know, the thing about gas is I think everybody out there that has gas stations, what we have found is we've been able to see improved profitability, not just in the last quarter or two, but over the last few years, last three to five years. improved profitability in gas because others are making more, and we're allowed to make a little more. When we do our competitive price shops on gas, which we do weekly at every gas station we operate with neighboring competitive gas stations, our value proposition is actually increased number of cents per gallon than we've ever seen. So that's been, if you will, a win-win for us. On the e-com side, I think driving more sales has helped us in the margins there as well.

Thanks. And then just on the operations.

Yeah. On the wages. Well, we pointed out, I pointed out the call. I think there was like four or so basis points in total from those two distinct increases. We do other increases like, you know, over half of our employees are top of scale. They get an increase every March. That's, that's significant as well. It's significant relative to basis points when you have, you know, lower sales, lower sales figures, everything. And it's, it's, The rest of it is all the other line items, like energy costs and the like.

Got it. So most of the pressure is probably coming from wages, not just those two discrete call-outs you had.

It's more than half. I don't have the exact figures with me.

Got it. Thank you.

Thank you. And there are no further questions at this time. I'd like to turn the call back over to Richard Galante for any additional or closing remarks.

Well, thank you, Lisa, and thank you, everyone, on the call. We're around to answer questions, and have a happy holiday. And I think this is a record time of finishing this call, so enjoy the holidays. Thank you very much.

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