Gary Millerchip:

Good afternoon, everyone, and thank you for joining the call today. I'd like to start by saying how excited I am to be part of the Costco team, and it's a pleasure to be hosting my first Costco quarterly conference call. The whole Costco team has been incredibly welcoming. And as you might imagine, my first three months working alongside Richard have been a lot of fun. It's also been great visiting warehouses and facilities to immerse myself in the Costco culture and experience firsthand how this is positioning the company for continued growth. Over recent months, I've spent time and met with many analysts and investors, several of whom I know through my prior role. And it's clear you value and appreciate the company's current approach to investor communications. While I can't promise to be able to match the humor that Richard Galanti has become famous for, I can promise the same level of open dialogue and transparency you've come to expect. Oh, and to clear up some recent media speculation, I also want to confirm the $1.50 hot dog price is safe. Before I talk about our results, I wanted to mention that Ron Vachris is also join today's call. Many of you have expressed interest in hearing from Ron, and so we thought it would be a good idea to have Ron join the discussion and he can also take a few questions. Ron, would you like to add anything before we talk about the quarter?

Gary Millerchip:

Thanks, Ron. I'll 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 press release, we reported operating results for the third quarter of fiscal 2024, the 12 weeks ended May 12. Before I walk through all the numbers, new for this quarter, we are making available a slide presentation on our investor site under Events and Presentations. These slides summarize much of the information I will share today, including Richard's famous matrices. We intend to make this information available every quarter. Reported net income for the third quarter came in at $1.68 billion or $3.78 per diluted share, up from $1.3 billion and $2.93 per diluted share in the third quarter last year. Last year's results included a non-recurring charge to merchandise costs of $298 million pre-tax or $0.50 per diluted share, primarily for the discontinuation of our charter shipping activities. Net sales for the third quarter were $57.39 billion, an increase of 9.1% from $52.6 billion in the third quarter last year. The following comparable sales reflect comparable locations year-over-year and comparable retail weeks. U.S. comp sales were 6.2% or 6% adjusted for gas inflation and FX. Canada was 7.7% or 7.4% adjusted. Other international was 7.7% or 8.5% adjusted, and this led to total company comp sales of 6.6% or 6.5% adjusted for gas inflation and FX. Finally, e-commerce comp sales were 20.7%, both on a reported basis and adjusted for foreign exchange. In terms of Q3 comp sales metrics, traffic or shopping frequency increased 6.1% worldwide and 5.5% in the U.S. Our average transaction or ticket was up 0.5% worldwide and up 0.7% in the U.S. Foreign currencies relative to the U.S. dollar negatively impacted sales by approximately 20 basis points, while gasoline price inflation positively impacted sales by approximately 30 basis points. Moving down the income statement to membership fee income. We reported membership fee income of $1,123 million, an increase of $79 million or 7.6% year-over-year. Membership fee income growth was 8% excluding FX. In terms of renewal rates, at Q3 end, our U.S. and Canada renewal rate was 93%, up one tenth of a percent from Q2 end. The worldwide rate came in at 90.5%, the same as Q2 end. We ended Q3 with 74.5 million paid household members, up 7.8% versus last year, and 133.9 million card holders, up 7.4% year-over-year. At Q3 end, we had 34.5 million paid executive memberships, an increase of 661,000 since Q2 end. Executive members now represent over 46% of paid members and 73.1% of worldwide sales. Our reported gross margin rate in the third quarter was higher year-over-year by 52 basis points, coming in at 10.84% compared to 10.32% last year and up 54 basis points excluding gas inflation. Core was flat and higher by 2 basis points without gas inflation. In terms of core margin on their own sales, our core-on-core margins were higher by 10 basis points. Ancillary and other businesses gross margin was lower 6 basis points and lower 5 basis points excluding gas inflation. This decrease year-over-year was driven by gas, partially offset by e-commerce. 2% reward was lower by 1 basis point, both with and without gas inflation with higher sales penetration coming from our executive members. LIFO was a benefit of 2 basis points. We had an $11 million LIFO credit in Q3 this year compared to no LIFO charge or credit in Q3 last year. This is the third LIFO credit this year following a $15 million LIFO credit in Q1 and a $14 million credit in Q2. And finally, other was higher 57 basis points or 56 basis points excluding gas inflation. This was all related to lapping last year's negative impact from the $298 million pre-tax charge for charter shipping activities. Moving on to SG&A. Our reported SG&A rate in the third quarter was lower or better year-over-year by 15 basis points, coming in this year at 8.96% compared to last year's 9.11%. SG&A was lower year-over-year by 12 basis points adjusted for gas inflation. The operations components of SG&A was lower by 14 basis points and lower by 12 basis points, excluding the impact from gas inflation, despite an increase in warehouse wages this year. Higher labor productivity and great cost discipline by our operators drove the improved core SG&A results for the quarter. Central was better by 1 basis point and flat with our gas inflation. And stock compensation and pre-opening were both flat year-over-year. Below the operating income line, interest expense was $41 million this year versus $36 million last year and interest income and other for the quarter was flat year-over-year as lower interest income was offset by a foreign exchange gain in the quarter. In terms of income taxes, our tax rate in Q3 was 26.4% compared to 26.5% in Q3 last year. Overall, reported net income was up 29.1% year-over-year, and excluding last year's charge related to the discontinuation of charter shipping activities, it was up 10.3% year-over-year. A few other items of note. In terms of warehouse expansion, in the third quarter, we opened two new warehouses, both in the U.S. Additionally, since the end of Q3, we had two more openings. Last week, we opened in Loomis, California, and two days ago, we opened our seventh building in China in the Nanjing market. For the remainder of fiscal 2024, we plan to open another 12 new locations, nine in the U.S, two in Japan and one in Korea. This would bring the total for the full year to 30 openings, including one relocation for a net of 29 new warehouses. Regarding capital expenditures, Q3 spend was approximately $1.06 billion, and we estimate full year 2024 capital expenditure will be between $4.3 billion and $4.5 billion. Diving a bit deeper into some of the key themes we saw during the quarter. Non-foods have the highest comps of our core categories. This strength was aided by lapping some softness in sales a year ago, but was really driven by our merchandising teams doing a great job identifying high quality items with values that really resonated with our members and buying those items with conviction. As inflation has leveled off, our members are returning to purchasing more discretionary items. And growth in the category was led by toys, tires, lawn and garden and health and beauty aids. Bakery sales also showed great momentum in the quarter as our fresh foods team has reinvented that department with a number of new and exciting items, including the Kirkland Signature Lemon Blueberry loaf and Morning Buns. Within our ancillary businesses, the food court had the strongest quarterly sales with continued success of the chocolate chip cookie that was added to the food court this year. On the inflation front, it's more of the same from last quarter. Across all core merchandise, inflation was essentially flat in Q3, with fresh foods close to zero and slight inflation in food and sundries being offset by some deflation in non-foods. The deflation in non-foods was led by hardware, sporting goods and furniture, all still benefiting from lower freight costs year-over-year. Keep in mind that when we speak to inflation or in the case of non-food deflation, we're referring to our selling prices. We're intentionally creating incremental value for our members by delivering lower prices wherever possible. We believe our strategy of delivering value to drive unit volume and member satisfaction is the winning combination for us. In that vein, our buying teams are constantly aware of changing costs across all of their SKUs and are ensuring that we are capturing all cost decreases quickly so that we can pass on incremental value through price reductions. If we are unsuccessful in delivering ultimate value with branded goods, we evaluate the potential for new high quality Kirkland Signature items with a goal of providing at least 20% value versus what we would sell the national brand item at. This quarter, we released a new Kirkland Signature men's walking shoe and new Kirkland Signature facial wipes, both of which are doing very well. We also reduced prices on a number of existing items, including lowering Kirkland Signature pine nuts from $29.99 to $24.99 and reducing the price of our Kirkland Signature frozen shrimp SKUs by $1. These are just a couple of examples that came out of our recent monthly budget meetings where each country and region shares new and exciting items they have introduced to their warehouses and items where they've lowered prices. Turning now to digital. We continue to make enhancements to the app and website and are excited about the traction that these initiatives are getting with members. Total e-commerce sales growth in the quarter was led by Gold and Silver bullion, gift cards and appliances. In appliances, Costco logistics is playing a key role in providing both greater value and a better end-to-end experience for members. Deliveries through Costco logistics were up 28% in the quarter. Costco Next, our curated marketplace also continues to grow nicely and we added eight new vendors in Q3, bringing the total to 75. Our app downloads were up 32% versus a year ago with about 2.5 million new downloads in the quarter, bringing total downloads to more than 35 million. Site traffic was up 16% and average order value was up 8%. You may have also recently seen an announcement that we are expanding our relationship with Uber. Previously, Uber Eats delivered Costco orders in Texas and this new agreement allows consumers the ability to order from Costco through Uber Eats across all of Canada as well as 17 states in the U.S. We are also working to expand this partnership to several of our international countries in the coming months. In addition to the increased access to Uber Eats customers, the agreement will allow us to sell Uber gift cards globally and offer discounted Uber One annual membership to Costco members. Finally, in terms of our upcoming releases, we will announce our May sales results for the four weeks ending Sunday, June 2nd, on Wednesday, June 5th, after market close. Also, remember that our fiscal fourth quarter ending September 1, 2024, will have 16 weeks versus the 17 weeks in the fiscal fourth quarter last year. And with that, we will now open it up for Q&A.

Simeon Gutman:

Good afternoon. Hey, Gary, how are you doing?

Simeon Gutman:

We're going to take a stab at this membership question. The way that we've thought about it is it's an inflation offset to the model. And it was described as if you have enough levers in the middle of the P&L to deliver whatever stated EBIT growth you're trying to do, you didn't need to touch the membership fee. Is that still the way that you look at it? And is that visibility on enough levers still intact?

Simeon Gutman:

Right. Yeah. Yes.

Simeon Gutman:

Okay. Fair enough. Can I ask about your opinion on the U.S. expansion, it's been holding in a lot better. It's been more giving than we would have thought several years ago. Do you have any thoughts just your own perspective, you're probably looking at members per warehouse. Are you surprised at the runway you still have in the U.S.? You think it could be even more than what we're aware of today less? Just curious if there's anything surprising on that item.

Simeon Gutman:

Okay. Thanks, Gary. Appreciate it.

Operator:

Your next question comes from the line of Michael Lasser with UBS. Please go ahead.

Ron Vachris:

This is Ron Vachris. No, I think that this is part of our everyday DNA. I mean, we are competitive on a daily basis. Our buyers are on top of pricing daily, weekly and we all review them each month. And so we feel very good about where we are today and our runway to continue to be as competitive as we are moving forward.

Ron Vachris:

That's no -- and I think the answer to that is yes, on all those fronts. We are working on all those aspects. Right now, we're rolling out an expanded buy online pickup in warehouse that is always going to be limited in scope based on the volume in our warehouses that we have. We can't expand to all categories, but we're expanding as we currently speak in televisions and other electronic items that are there as -- and so yeah, we see that as a real opportunity for us. Technology is going to be one of our key priorities moving forward. How do we improve that member engagement and the relationship we have with them in our brick-and-mortar warehouses as well as online and through other aspects such as travel and so forth. So technology we see is a great opportunity to enhance the member relationship with Costco and also drive a lot more business for us as well as we move forward. So we're going to continually innovate. I mean, with the management changes, I wouldn't expect major changes as we have a proven strategy now. But as we've done for the past 41 years, we continue to innovate to the needs of our members. Oh, and the last on data, absolutely. We see a great opportunity for data. We have expanded our group there. We have a significant program now with retail media and we see some great upside potential. We've expanded that team and we see some good potential and some good runway for us in that as well, things like personalization and so forth.

Gary Millerchip:

Thanks, Michael.

Chuck Grom:

Hey, good afternoon and congrats again, Gary. And historically, Richard and team have been steadfast on the 14% to 15% margin ceiling, which has clearly paid dividends for the company over the years. I'm curious how you and Ron view this threshold you going to adhere to it? Do you think you can earn more? Just your thoughts on the margin front?

Gary Millerchip:

And Chuck, maybe just one thing to build on that too. I think as you think about some of the opportunities that Ron mentioned on the earlier call, I completely echo Ron's comment about we have a really clear growth strategy that's obviously delivering momentum in the company today and these opportunities through technology and media, I think are great opportunities for us to find new ways to unlock value. But again, I think we see those very much in the mindset of how do we give 90%-ish of that back to the member, so that we're continuing to drive member engagement, member loyalty and member value.

Ron Vachris:

Our biggest strength on digital e-com is, of course, the merchandise and the value that we have. I mean that's what works for us in our brick-and-mortar. You know, the technology, the systems that we have, the teams have got a great roadmap of where they're going. A lot of the work that's being done right now is very foundational. So better fulfillment, quicker delivery times, the reliability of the site, those type of things. So those are the things. And then following that will come iterative changes of forward facing improvements that you'll see in the sites and move forward. So I think we've got a very good roadmap to do that. But I think that does -- it's -- I think personalization is a big deal for members that we could do a much better job on and also a better correlation of the warehouse and the online business. We're working towards warehouse inventory online. So members could use that in the app. But app functionality is one of our greatest opportunities.

Gary Millerchip:

Thanks, Chuck.

Scott Ciccarelli:

Thanks, guys. Scott Ciccarelli. So given the strength of your discretionary sales following the well that we've seen with -- as the economy got a little funky, does that suggest your members are starting to feel better and more willing to spend on wants rather than needs?

Scott Ciccarelli:

Fascinating. And then today, we had a presentation. Obviously, Ron, you joined the call. Are there other changes we could potentially expect given some of the C-suite changes?

Gary Millerchip:

And Scott, maybe just to add from my perspective of being new to the role and new to the company, early observations to me, obviously, the incredibly impressed with the culture and the strategy is clearly working very well. So my first priority is to really being new to the company is to really acclimatize and to support and enable a smooth transition with the culture to make sure the momentum that we have continues going forward. And I think the other point, as we talked about a little bit earlier on the call is we're on a journey with technology and data. And so hopefully, there's things that I can bring to work with the team and help us continuing on that journey and accelerate that journey. And really that's the priorities in my mind being new into the CFO role.

Ron Vachris:

Thank you.

Kelly Bania:

Thanks for taking our questions. And Ron and Gary, pleasure to have you both on the call and love the slides. Thank you. I wanted to just maybe go back a little bit to retail media strategy and personalization. I think, Ron, you noted a hire or maybe some key hires in that department. And Gary, I think you bring a unique perspective to this area or both of these areas. So I guess just can you help size up the opportunity for us on these two fronts in retail media and personalization? Is it at all different than a typical retailer because of Costco's unique model and SKU count or anything along those lines? And I guess, would that -- would your plans in these areas include any increase in technology spend in coming years?

Ron Vachris:

I would have to mirror what Gary says. We are -- we do have a unique model. We have a relationship with all of our members. Our responsibility is use that data wisely and respectfully. As far as IT spend, yeah, there will be some IT spend. We don't see as we look in the future, we don't see that to be anything that will really change our trajectory of our cap investments. But there will be some IT requirements, but we feel that will be in the normal course of business.

Ron Vachris:

Thanks, Kelly.

John Heinbockel:

So guys, I want to go back to personalization again. Where do you think just conceptually the biggest opportunities are, right? When you think about wallet share, every one of your members is going to be a little different, but you can probably do cohorts. Why are they not buying from you and why personalized promotions, outreach on new items coming into the warehouse. I mean, where do you think the biggest opportunities are to build further wallet share?

John Heinbockel:

Okay. Maybe -- and then as a follow-up, Gary, you talked a little bit about the core-on-core. But maybe you step back a little bit if you -- and I know the idea is not necessarily to maximize margin, but maybe some thoughts core-on-core this quarter and I know I think there had been pressure on fresh, right, as you kind of normalize post-COVID back to a regular level. Are we now through that process of fresh getting back down to a certain level?

John Heinbockel:

Thank you.

Operator:

Your next question comes from the line of Peter Benedict with Baird. Please go ahead. Peter, if you're on mute.

Ron Vachris:

Okay. It's a very healthy environment from what we see from our members right now. And as you take a category such as our meat department, which is growing very nicely. A lot of volume being driven in ground beef and our new everyday lower price on boneless skinless chicken breasts, really driving a lot of volume units there, while Wagu Beef and prime are growing at a great clip for us as well. So we're seeing that benefit from both sides of the consumer that great value in both areas are doing very well. The non-foods, I tell you that non-foods is strictly driven by newness and excitement and we see big and bulky going very well. It's been a year of our $1,200 swing set that we have on the floor. We can't get enough. They're just blowing out. But it's again that continuous innovation of merchandise that is exciting our members and really driving some sales force there. Executive membership continues to -- yeah, and that drives our executive base and because people are engaging at a much higher level.

Ron Vachris:

Sure. We have -- we've gotten into vertical integration and sourcing as the need arises. And if you think back in the infamous story about the hot dog and coke at $1.50 and how are you going to figure out how to keep that price there, while we're going to open our own meat plants. And as we looked at the prices of optical lenses going up and then we opened up our optical grinding plants. So we did that to continue to look at those things. The chicken plant came because we saw an inflection point where supply was not going to meet demand. So we had to get involved and because we didn't have a partner that was willing to expand into that area as well. There is a focus that I have a group focused on too is that let's not try and be everything though. Let's -- we've got a business to run here and we're not going to get vertically integrated just because it's something we can do. It really is going to be driven by where the needs are and when do you need to step in. It's equally -- we have great partners out there that supply our goods for us and they're long-term suppliers. And so it's strategically using that relationship is going to be the key in the future. So there's nothing that I could announce at this time that we're going to expand into, but we continue to keep that in our back pocket should we need to.

Ron Vachris:

You're welcome.

Brandon Cheatham:

Hey, everyone. This is Brandon Cheatham on for Paul. Thanks for taking our question. Recently, you were selling Instacart gift cards at a discount online and in warehouse and thought that was pretty interesting because it's potentially a gift card that could be used at a competitor as well. So I'm just curious, is there any strategy behind that? Are you trying to drive member engagement online and if there are any learnings from that initiative?

Brandon Cheatham:

Got it. Thanks. And my follow-up, how do warehouses react when you open an infill warehouse? Does it open differently than other new markets? Does the current market feel an impact? And how many warehouses that you opened over the past year would you quantify as infill versus new markets? Thanks.

Brandon Cheatham:

Very helpful. Thank you.

Greg Melich:

Hi, thanks. Ron, I wanted to follow up on the gross margin cap still very much in place at 14%, 15%. Is there any reason that SG&A now that it's back under 9% of sales couldn't fall to 8% if you keep having the growth that you have?

Greg Melich:

That's great to hear it. And on maybe some insight on gas gallons in the quarter. I know it was volatile and there's certainly a [indiscernible] pressure for a lot of members and consumers. Did that help the traffic acceleration in the quarter -- gas gallon growth?

Greg Melich:

A great number. And I think a follow-up on gas. Is that still -- is the profitability in gas, Gary, kind of similar versus a year ago or last quarter or is that trending up or down?

Greg Melich:

That's fantastic. Well, welcome and I'll let somebody else ask about how much gold volume drove the comp. Take care, guys.

Gary Millerchip:

Thanks.

Rupesh Parikh:

Good afternoon. Thanks for taking my question. So just going back to unit growth. In recent years, it's been stuck in that, let's call that mid 20s, it looks like this year will be closer to 30. Just want to get a sense of the opportunities to potentially accelerate that unit growth, especially in the U.S. just given some of your competitors are planning to accelerate growth from here.

Rupesh Parikh:

Great. And maybe just one follow-up question. So in terms -- you guys added Uber to a number of locations. So as you guys think about the intermediate to longer-term, would you expect multiple providers at all Costco U.S. stores over time? So maybe just more the rationale in terms of adding Uber and their longer-term vision?

Rupesh Parikh:

Great. Thank you.

Christian Carlino:

Hi, good afternoon. It's Christian Carlino on for Chris. Could you speak to some of the innovation you're seeing in non-foods and anything else you think is driving some of the performance, particularly in discretionary categories. You called out toys, sporting goods and homes. So maybe any incremental color you can provide on those in particular? And while you're clearly gaining share, when you compare your own performance to some of the syndicated data out there, does the emerging newness suggest there's also somewhat of a rising tide in some of these categories that saw some pull-forward over the pandemic? Thanks.

Christian Carlino:

Got it. That's really helpful. And just broadly, are you seeing the competitive environment heat up in terms of peers investing in price, particularly in non-foods? You have some peers talking more and more about looking to drive units. Others are talking about a big step up in appliance promotions recently. So any color on what you're seeing competitively?

Gary Millerchip:

And I think maybe just one thing to mention on that, Ron too, you mentioned it earlier, but with on the appliances, obviously, making sure we're always very competitive on price. But I do think the acquisition of Innoval Costco Logistics now and the value that we offer members there through both including the delivery and the insulation and the removal of the old appliance is proving to be a real differentiator for us on the member experience as well.

Christian Carlino:

Got it. Thank you very much.

Scott Mushkin:

Hey, guys. Thanks for taking my questions. And Gary, welcome. It's nice to be talking to you at Costco. And Ron, thanks for [indiscernible].

Scott Mushkin:

I appreciate it. So my first question is kind of the opposite what everyone asks all the time around the fee. But given some of the stuff you've outlined around media and maybe driving the SG&A down, why do you need to increase the fee, right? Your sales are strong, your fee income growth is strong. So what -- just because you've always done it doesn't mean you should do it. So what would be the rationale behind driving a fee increase at this point?

Scott Mushkin:

Okay. And then my next question actually is kind of dovetails on the last one. But you guys talked about the consumer being a little bit better overall. And I guess what I was wondering is, is that really a Costco phenomenon? In other words, are you gaining share and that's what's really driving your improvements in some of these categories like electronics and appliances and big ticket rather than the consumer actually getting better. Is there any way to tease that out?

Gary Millerchip:

Scott, maybe one thing I would just add to is, I think we're all reading a lot about the consumer, of course and what they're going through right now. And I think what we see is that value and quality has never been more important. And so that plays to, as Ron described earlier, what we deliver, and we're making sure that the teams are laser focused on every day delivering that value and quality. And so I think we're drawing customers to what Costco has offer for many years and it's never more relevant than now based on what we're hearing from members and consumers.

Ron Vachris:

Thanks, Scott.

Edward Kelly:

Hi, good afternoon, everyone.

Ron Vachris:

It moves as time moves and you see pricing in categories and where we have the greatest opportunity to be more competitive for our members. And it may be in an area that if fresh foods is seeing some price inflation, we may invest more in the fresh foods departments for that period of time. The nice part about our model with 3,600 SKUs, 3,700 SKUs is we're still quite nimble as big as we are. So we can shift and based on the needs of our members and where we think the best investment in margin would take care of them. We're able to shift that thought process and then move it around. So I wouldn't say that there's any set, okay, if membership fee goes up, it's going to be spent in these areas. We work as a team and we continue to monitor it throughout the year and we act as needed.

Ron Vachris:

The part -- a good part of those is things like our e-commerce business and how we can -- how we can move out some of those goods out of the warehouse and move that business online. And as Gary spoke to, now that we have control over Costco logistics, we can bring great value to that experience as well. We continue to look at technology. We're testing some front door scanners that are going to -- they're speeding up our registers significantly when we get all the scanning and memberships are verified at the front door, it has shown a significant improvement in our register speed. And so that in turn turns over parking spaces much quicker. And so those kind of things along with strategic infills to help open up parking opportunities and gas expansions where those are needed as well. So there are several different levers that we'll continue to pull on how we can best serve the member in that building and where we need to make sure that we can look at throughput.

Ron Vachris:

You're welcome.

Oliver Chen:

Hi, Ron and Gary. You've done some really creative merchandising around UPTs and units per transaction with pickup items and innovation on that treasure hunt. What are your thoughts there? And also, big ticket and electronics, previously, previously, it was a bit of a drag. Just would love your thoughts on what you're seeing there. And third part is marketplace, the marketplace model and the concession model, and alternative inventory models. Just what are your views of opportunities there because they're really big ones and your member is so loyal to you as well. Thank you.

Oliver Chen:

I'm thinking strategically about adding units to people's baskets going forward and merchandising in that way as well if it's something you see in terms of an opportunity.

Gary Millerchip:

I think maybe just to add on that, Ron too. I mean, the nice thing about the opportunity there for us is with trips up by 5%, that's really why the average basket size has been more flat recently and that's because we've been growing member engagement in consumables, as Ron mentioned, with food and fresh. And so it does present a great opportunity. And I think it also speaks to the team doing a good job of driving more frequency of member visits. So it creates a great opportunity for us to drive more of that basket size as well.

Gary Millerchip:

I think the difference for us on that would be, of course, as we are with Costco Next is just being very curated for the member. So we're unlike a traditional marketplace that is about maybe just sheer volume for us, it's about making sure the member is getting something that truly is unique and valuable and being consistent to who we are, but it's tremendous upside opportunity there in that regard.

Gary Millerchip:

Yes, I think just briefly on electronics, so we believe -- I think Ron referenced earlier, we look at a lot of the market data and we believe that we're winning with the member there in terms of the value that we're delivering and when we look at our trends versus the market. So we feel good about our ability to continue to outpace the market there and we're seeing a good opportunity within digital in particular to really drive more connection with the member and take some of those big ticket items from the warehouse to online as well. And in Asia, I think it would be consistent with what we've talked about with warehouses in the past that we think all of the markets offer us a great opportunity for growth. Some of those markets in Asia are more mature, but there's still significant opportunities to open new warehouses and fill in those markets. And then obviously, we have markets like China where we're really just sort of starting that journey, but there's tremendous growth opportunity as we identify the right path forward in that market.

Oliver Chen:

Thank you. Best regards.

Gary Millerchip:

Thanks.

Joe Feldman:

Great. Hey, guys. Thanks for taking questions. A lot have been asked, but I do want to ask with Costco Logistics, what was driving that 28% increase, which is very strong? Was it new relationships with some of the other retailers or partnerships or just anything you could share on that would be helpful.

Gary Millerchip:

Joe, I'll give you the practical example as a new entrant to the Seattle market. I just had Costco Logistics deliver two mattresses, three TVs and a couple of chairs as well for me. So that's the kind of stuff I think that we're seeing really resonate with members.

Ron Vachris:

As Gary mentioned earlier, Costco Next is a bit unique, but is it a fully curated marketplace. As there's many other marketplaces out there that are just for somebody to go on and sell goods on this marketplace. These are relationships that our buyers have with our suppliers and we're creating new suppliers as well. This has not only been a new way to sell goods, we've also found that we can find some really neat items that are selling through Costco Next that we in turn then bring into our warehouse. So it is a great testing ground for newness -- new items, a way to expand categories of accessories for certain categories that you have swing sets that we sell online, but you have additional swings and slides and other activities that you sell that we normally wouldn't be able to fit into a warehouse. So it really complements the core warehouse business, but gives us an opportunity to expand member value to these other partners as well. So we see a lot of upside there.

Gary Millerchip:

Thank you.

Operator:

We have no further questions in our queue. And with that, this does conclude today's conference call. Thank you for your participation and you may now disconnect.

Richard Galanti:

Thank you, Debbie, 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 press release, we reported operating results for the second quarter of fiscal 2024, the 12 weeks ended February 18th, as well as February retail sales for the four weeks ended this past Sunday, March 3rd. Reported net income for the 12-week second quarter came in at $1.743 billion or $3.92 per diluted share, up from $1.466 billion or $3.30 per diluted share in the 12-week second quarter last year. This year's results included a tax benefit of $94 million or $0.21 per diluted share due to the deductibility of the $15 per share special dividend to the extent received by our employee 401(k) plan participants. Net sales for the second quarter was $57.33 billion, an increase of 5.7% from the $54.24 billion in the second quarter last year. Net sales were negatively impacted by approximately 1.5% in the US and worldwide from the shift of the fiscal calendar as a result of the 53-week 2023 fiscal year. The following comparable sales reflect comparable locations year-over-year and comparable retail weeks. For the -- in the US, we reported a 4.3% comparable. Excluding gas, deflation, and FX, the 4.3% would have been a 4.8%. Canada reported comp of -- for the quarter 9.2%, 9.0% ex-gas and FX. Other International 8.6%, and 8.2% ex-gas and FX. Total company 5.6% reported for the quarter, and a 5.8% excluding gas, deflation, and FX. E-commerce was an 18.4% reported, and an 18.2% excluding FX. In terms of second quarter comp sales metrics, our traffic or shopping frequency increased by 5.3% worldwide and 4.3% in the US. Foreign -- our average transaction or ticket was up three tenth of a percent worldwide and up one tenth of a percent in the US. And foreign currencies relative to the US dollar positively impact sales by approximately two tenth of a percent. While gasoline price deflation negatively impacted sales by approximately four tenth of a percent minus. Moving down the income statement to membership fee income. We reported membership fee income of $1.111 billion, up $84 million or up 8.2% year-over-year in the quarter. In terms of renewal rates, at second quarter end, our US and Canada renewal rate came in at 92.9%, which is up one tenth of a percent from Q1 and 12 weeks earlier. And the worldwide rate came in also at 90.5%, similar to the last quarter. Membership growth continues. We ended the second quarter with 73.4 million paid household members, up 7.8% versus last year, and 132.0 million cardholders, up 7.3%, with continuing growth throughout the quarters. At Q2 end, we had 33.9 million paid executive members, an increase of 646,000 during the 12-week second quarter. Executive members represent a little over 46% of paid members and a little over 73% of worldwide sales. Moving down the income statement line, next, to the gross margin. Our reported gross margin in the second quarter was higher year-over-year by 8 basis points, coming in at 10.80% compared to 10.72% last year in the quarter, and at 4 basis points excluding gas deflation. Writing down the little matrix that we usually do with two columns, both reported and excluding gas deflation. First line item is core merchandise, plus 5% -- plus 5 basis points year-over-year on a reported basis, and plus 2 basis points ex-deflation -- gas deflation. Ancillary and other, plus 7 basis points and plus 6 basis points. 2% reward, minus 7 basis points and minus 7 basis points. LIFO, plus 3 basis points and plus 3 basis points. And all told, total reported, again, gross margin year-over-year up 8 basis points and up 4 basis points excluding gas deflation. In terms of the core margin on their own sales, again, while the number I just read you was a plus 5% -- plus 5 basis points and plus 2 basis points ex-gas deflation. In terms of core margin on their own sales, our core-on-core margins were up 25 basis points year-over-year, with food and sundries and non-foods being positive year-over-year and fresh being negative. Ancillary and other businesses, gross margins were higher by 7 basis points and higher by 6 basis points ex-gas. The increase year-over-year was driven largely by e-comm and partially offset by gas. 2% reward, again higher 7 basis points -- lower by 7 basis points both with and without gas deflation, with higher sales penetration coming from our executive members. LIFO, plus 3 basis points. We had a $14 million LIFO credit in the second quarter of this year compared to no LIFO charge or credit in the second quarter of last year. Moving to SG&A. Our reported SG&A in the second quarter was higher year-over-year by 3 basis points or minus 3 basis points would be higher, coming in at -- this year at 9.14% compared to last year's 9.11%. And the higher 0.3% would have been lower by 1 basis point excluding gas deflation. In terms of Q2 year-over-year, the operations component of SG&A, doing the matrix, was 11 basis points higher, or minus 11 basis points. Ex-gas deflation, minus 8 basis points, so 8 basis points higher. Central, plus 4 basis points and plus 5 basis points. Stock compensation, plus 4 basis points and plus 4 basis points. And total would be 3 basis points higher year-over-year and plus 1 basis point or 1 basis point lower year-over-year or better. And with regard to the operations component being higher by 11 basis points reported and 8 basis points excluding deflation. As compared to a year ago, since -- during the past year, we included two last March's extra top-of-scale increase in wages, which was about a 2 basis point hit to the SG&A line. As well, in the first quarter of this year we raised the starting wage in the US and Canada. We estimate the impact of that new wage also was a roughly 2 basis point. So, about 4 basis points of that 8 basis points or 4 basis points of that 11 basis points were related to those two wage increases, more than normal. Below the operating income line, Central I mentioned was better by 4 basis points or 5 basis points, and the rest was pretty much straightforward. Below the operating income line, interest expense was $41 million this year versus $34 million last year and interest income and other for the quarter was higher by $102 million year-over-year. This was driven by an increase in interest income due to higher interest rates and higher average cash balances, as well as FX which was favorable versus last year. We'll see less benefit from interest income going forward following the January payment of the $6.7 billion special dividend. In terms of income taxes, our tax rate in the second quarter came in at 22.1% compared to 26.1% in Q2 last year. As discussed earlier, this year's rate benefited from the tax deductibility of a special dividend paid to 401(k) participants. The fiscal 2024 effective tax rate including discrete items is currently projected to be in the 26% to 27% range. And excluding the special dividend tax benefit in Q2, our Q2 tax rate instead of being -- coming in at 22.1% would have been 26.3%. Overall, reported net income was up 18.9% in the quarter on a reported basis. And again, excluding the special dividend-related income tax benefit, it would have been up 12.5% year-over-year. A few other items of note. In terms of openings in the second quarter, we opened four net new warehouses, including three new locations in the US. Actually, two of them were Costco business centers, and one new Costco Wholesale warehouse, and one unit in -- our sixth in China in mid-January in Shenzhen. That's our six in China. There's been a lot of press about it. We have an estimated 10,000 people who were at opening and there are just under 200,000 members currently, including more than 20,000 members who signed-up from Hong Kong. And we've seen all kinds of things over there from tour agencies doing bus trips over to shop. For the full year 2024, we estimate 30 total openings, including two relo's, so for a net increase of 28 new units. And that puts the remainder of fiscal 2024 for Q3 and Q4, we plan on opening a total of 15 net new locations, 11 in the US, two in Japan, and one each in Korea and in China. Regarding CapEx, fiscal second quarter spend was approximately $1.03 billion. And for the year, it remains in the north of $4.4 billion to $4.6 billion, in that range. One additional comment on China. This past Monday, we launched in our Pudong, China location, the ability for our members to order online about 400 items from our -- of our items to be delivered that day. This -- and the delivery will be within about an eight kilometer radius of the warehouse itself. That's getting a lot of social media attention over there and we plan to launch it in the other four Shanghai area locations by month-end, as well as in Shenzhen sometime the following month. In terms of e-commerce, e-commerce sales in Q2 ex-FX increased 18.2%. E-com showed strength in several areas, led by sales of gold and very recently silver. As well, appliances were very, very strong, as was gift cards and e-tickets. As well, Costco Logistics enjoyed record-breaking deliveries. Much of that -- many of those items are sold via e-commerce. In Q2 of 2024, we completed over 1 million deliveries, up 28% versus Q2 a year ago. In terms of e-commerce sales over the past few months, we believe we've done a much better job explaining to our members the significant value propositions we offer compared to traditional competitors in several big-ticket categories. Under the Why Buy At Costco banner and The Price You See Is The Price You Pay banner, we share with our members what's included in the price of appliances, tires, televisions, computers, and mattresses. You can see these online on our website of Why Buy At Costco. Just to give you one example. If you take a four-set of high-end tires compared to a traditional retailer, we include, of course, installation, rotation, balancing, a five-year road hazard warranty. Typically that's a lot less road hazard warranty than other places, or you'd have to pay for it extra, ongoing flat repairs, nitrogen, and disposal of the prior tires. So, just one of the examples where the price of the tires itself might be very close to us. When you put in all the differences of those additional items, it's anywhere from a 15% to 25% savings on any of these items. Next on my list, talk about costconext.com, a couple of comments on the seller platform. This allows -- costconext.com allows our members to exclusive asset -- access to direct-to-consumer sites for top-quality brands at Costco value pricing. Currently, there are about 70 -- there are 70 Costco Next brand sites, with 15 additional sites in development. We will likely end this calendar year with about 90 sites and continue to grow from there. Costco Next offers everything from home improvement to apparel to pet to home to kitchen to electronics to accessories, as well as sports, bicycles, and toys. You should check it out, it's a pretty good site. Progress continues to be made in our e-com, mobile, and digital efforts. A couple of recent enhancements. In February, we rolled out our new native mobile application homepage on iOS. The native homepage now loads in less than 2 seconds compared to 8 seconds previously. Needless to say, that's important when about 60% of our e-com business, both visitors and orders, are now done via our mobile app and browser. And last week, we rolled out Apple Pay to all members online, both web and mobile, on February 28th. App downloads during the quarter were up 2.8 million and currently total around 33 million. On the product side, a couple of other new items to comment on. In our food courts, we recently replaced the churro with an awesome freshly baked 5.5-ounce chocolate chip cookie for $2.49. It is awesome. It's a great-tasting -- and a great-tasting turkey sandwich for $6.99, with the rollout of the latter being completed this week. In addition, we recently opened our first fully operated sushi offering in Issaquah, Washington, across the street from our headquarters, with two more planned to open in the very near future. This operation is what we have successfully done for years -- for many years, and throughout our Asia Costcos and several countries over there. The sushi program has proven to be a category where we can be successful in both quality and price, and we're looking forward to seeing more of that in the future. A couple of comments about inflation. In the last quarter, in the first quarter, we estimated that year-over-year inflation was approximately zero to 1%. We'll now say that in Q2, it was essentially flat. And notwithstanding essentially flat, we're taking price reductions where we can. Anecdotally, everything from simple items like reading glasses from $18.99 to $16.99, the 48 count of Kirkland Signature batteries from $17.99 to $15.99, a 24 count of Pellegrino from $16.99 to $14.99, and even a four pounds of frozen three berry fruit blend from $14.99 down to $10.99 with new crop pricing. So, we continue to do that. We always want to be the first out there trying to lower prices. Many new items in sporting goods and lawn and garden are being set with lower prices year-over-year, and overall, mostly due to reduced freight costs and lower commodity costs versus a year ago. And overall, our inventories and SKUs are in good shape across all channels. Overall, we've had good seasonal sell-through during the quarter. In terms of shipping and supply chain issues, we've been asked about that often of late. There are some delays, generally just a couple to three weeks, but mostly now planned for. First, there was an issue a while back with the Panama Canal challenges. Then, of course, the Red Sea challenges. A lot of that has to do with changing the way ships are being routed. No meaningful pricing issues because a lot have been placed contracts. Finally, turning to our February sales results, the four weeks ended this past Sunday, March 3rd, compared to the same retail calendar weeks last year. As reported in our release, that sales for the month came in at $18.21 billion, an increase of 6.9%, versus $17.04 billion for the same four retail weeks last year. Again, just to announce what we did in the announcement earlier today, the US reported comp of 3.4% for February, ex-gas and FX, 4.1%. Canada, 8.4% and 8.3%. Other international, 10.8% and 11.3%. For our total Company, a 5.0% reported and a 5.6% ex-gas and FX, with e-com coming in at a 16.2% reported and a 16.0% ex-FX. Our comp traffic or frequency for February was up 6.2% worldwide and up 5.0% in the US. Foreign currencies year-over-year relative to the dollar negatively impacted total and comparable sales as follows

Simeon Gutman:

Hi, everyone. Hey, Richard, best wishes to you. Thank you for all your guidance. That's a metaphor since you don't give guidance. My first question is on the -- this is like a parting question on membership, and I want to make sure this framework sounds right. I know you said it's if, not when. And as part of the thought process is, there are enough levers in the business, product savings, cost savings, to be able to drive an appropriate level of profit growth from the business. And when that no longer presents itself, that's when the membership price increase can come through. And that can come through earlier than that, but that was one framework we were thinking in this, as we wait to hear when it happens.

Simeon Gutman:

And then maybe one more, Richard, is another question. You used to -- the business has comped very consistently over time and you used to say, I regret when it won't comp north of 4% to 5% because that's where it may be tougher to leverage our expenses. If you think about that framework, does it still apply? And then as you hand the baton to Gary and even Ron, do you spend more or are there ways where you -- the cost structure of the business can actually be altered to lower that leveraged threshold point?

Simeon Gutman:

Yes. Okay. Best wishes. Thanks, Richard.

Chuck Grom:

Hey, good afternoon. Richard, congrats on a great career, for someone who started on basically day one at the Company. My question is on culture. You've always said it was customers first, employees second, shareholders third, and that philosophy's clearly played out. So, looking at it, I'm curious how the new team is going to keep this culture intact and resist pressure from some of the non-founders of the Company going forward.

Chuck Grom:

That's great. Thanks, Richard. Enjoy your retirement.

Operator:

Next question comes from the line of Michael Lasser with UBS. Your line is open.

Richard Galanti:

No. First of all, when I said most, I was just trying to be human, that nobody is perfect. Everything is working in the right direction right now. And actually, I wasn't talking just about membership metrics, but in general, knock on wood, things are working pretty well. When I -- when we sit in at our monthly budget meeting, more times than not, we get pretty excited about what's going on from a new merchandising standpoint, newness, buying with conviction, and being aggressive and assertive out there. I mean, what we saw with just even that simple example I gave you with changes to big ticket items and why buy them at Costco, we saw great changes in numbers. So, we know that we've got a lot of levers to be able to pull to make this thing work. And so no, I just said, honestly, I said most because nobody is perfect. I didn't have any particular examples.

Richard Galanti:

Yes. And no, and absolutely. When -- what is it? It's called -- it used to be NPD, it's Circana, which is that industry that shows you how you are on different product -- non-food product categories versus the industry. When we look at something like appliances in the last several weeks or a couple of months, the industry is flat and we're up north of 20%. Same thing with tires, more than that percent. And so, now that you can't say, let's do everything and everything will be up 20% or 30% because that's not going to happen. But at the end of the day, the focus of the buyers, as an example, is coming up with new ways to do things, to have great pricing, and to constantly improve that pricing and figure out how to do that with our global buying power with -- every time there's a commodity price increase. Given an item business, we have buyers that are in charge of 20 and 30 items, if not less, not 200 and 300 items in a category. They know a lot more, in our view, about every cost component of that. And I think -- I feel very good that we do a very good job, and I'm not suggesting others don't, but I know we do a very good job of getting on the phone immediately and working those issues. And as soon as we can get a savings, we're out there first passing it on. And that's just our religion. Now, we're able to do that partly because our sales have been relatively strong, and we've lapped some things from last year that have helped.

Operator:

Next question comes from the line of Peter Benedict with Baird. Your line is open.

Richard Galanti:

There's not a lot of trade down, although when we -- we sometimes have more control over certain private labeled CPG items that we're able to drive more business, and so we're seeing an increased penetration of that versus some of the brands sometimes. But then that gets the brands to the table to work to provide more value on the branded as well. We want to be both. But we haven't really seen -- that was a question that happened as "the economy was" -- the question is, are we going into a recession, a couple of years ago, and inflation was peaking at 7%, 8%, and 9%, and are we seeing a difference? So, we did see a -- if you look back over the last 20 years, and without looking at the exact numbers, it seems like every year we'd grow a 0.25% to a 0.5% of increased Kirkland Signature penetration. And then there was one year when we were asked a couple of years ago, it seemed like there was 1% to -- 1.5% to 2% -- even 2% change in penetration. So, people were, in my view, switching a little bit out, but that's changed. We don't see that as much anymore.

Richard Galanti:

What is done strategically, I hate to overuse that word, it's allowed us to be much better in value and delivery times and quality, and brought the delivery costs down on big ticket items, particularly appliances and big screen televisions, mattresses, and furniture, indoor and outdoor patio and mattress and patio furniture and indoor furniture, some sporting goods. And before we bought Innovel, we're now called Costco Logistics in the spring of 2020. And the year before that, in the US, we did about 2.2 million drops. And a drop is anything from dropping off a sofa to delivering and installing a new refrigerator, freezer, or washer, dryer, and taking the old one away for disposal. Both of those are a drop, recognizing their extreme difference there. But we did about 2.2 million drops in the US, none of which we did ourselves. With the acquisition of Innovel, I think for the - probably over the last -- with this million this quarter, a rough number of 4 million drops, which I believe about 70% of them -- over 4 million drops, and about 70% of them is us. We've reduced the delivery times. We've just introduced in some categories like two-hour windows where you can -- or three-hour windows where you can choose, two-hour windows where you can choose. So, we're constantly getting better, and we've greatly improved the value. And when you look at something, a category like appliances, we're still a very low percentage of the industry. And, the fact that it was up, 20%-plus last month or last quarter, is a function of some of the things we're doing in terms of shouting out how good of a deal it is and doing a better job of that. But we think we have an opportunity to continue to grow those categories, recognizing they're all meaningful categories, but they're all small percentages of our total. That's one of the nice things about us that we have lots of different categories.

Richard Galanti:

Thank you.

Rupesh Parikh:

Good evening, and thanks for taking my question. And Richard, I also want to offer my congratulations on your retirement. So just going back to the core on core margins, they're up, I think, 25 basis points this quarter. Just curious what drove that strong performance, if there is anything in particular driving that?

Rupesh Parikh:

Great. And then maybe just one follow-up question. On the expense side, you guys did have better expense controls this quarter. So, just curious to what changed sequentially, because the growth rate did decelerate by a few percentage points.

Rupesh Parikh:

Thank you. Best of luck.

Operator:

Our next question comes from the line of Scott Mushkin with R5 Capital. Your line is open.

Richard Galanti:

Thank you.

Richard Galanti:

Well, in a way, we're doing the same thing here with a few people, most notably Instacart. And a little bit was shipped down in the Southeast. And I think we've got a test in Texas with Uber. But at the end of the day, we had that same-day delivery already as function. Over there, it is a third-party that's doing it, like Instacart or these other ventures here. So, it's just -- it's new. It's not something that's new to the warehouse club industry in China. You could look elsewhere and find it too. But it's certainly something that makes sense. And again, in part because of social media, there's been a lot of publicity and just, I mean, from the day it launched three days ago, it's gone nuts in terms of how many page hits it's getting and all that stuff. But it's just part of the business.

Richard Galanti:

I think, who knows, but I think generally it probably trends up a little. There was a few years there, excluding the year when COVID hit, that we only did like 13 because there were shutdowns in certain countries of construction and as well as the US. But if you look back, excluding that year over a three or five-year period, plus or minus a couple of years there, it was about 23 a unit. Without looking at numbers, about 23 units a year. At the time, you said, what do you see over the next 10 years? What we saw collectively was is somewhere in the, hopefully, targeting, let's say, 25 for the next five years per year, and then going up to 25 to somewhere in the high-20s, if not 30. I think that's generally the sense that we feel. Could we do more? Yes. Are we comfortable doing it this way? Yes. I think part of that is it's such a hands-on business. I get to say that from sitting here in headquarters most of the time, not traveling like my colleagues do in operations. But, Ron is a great example. I mean, he and several regional executives in operations, if there's an opening somewhere, or not an opening, they're out visiting, usually at least two, if not three weeks a month, or out for three or four days, jumping around, visiting locations, not only existing locations, but new sites. And so, I think from a standpoint -- and the other thing is, particularly in newer countries, you want to get the first one open so you can train 50 or 80 people that want to move to the next location in that city that'll help that one go. And we were very fortunate a few years back in the first Shanghai, in Minhang in China, where we had a number of employees from Taiwan that wanted to move and be promoted into new locations, new jobs over there. So, that helps us when we have one, then two, then four, then whatever. So we take it slow. All I know is, we're all very busy, and, particularly the operators and merchants as well. And so that's kind of the paradigm that I think that we're going to continue to work at. Something in the 25 range, and then heading up. Just a month -- just a quarter ago, I think our budget for this year was 32, and now -- or 31, now it's 28. And that's simply timing. There is two or three that are pushed, that for whatever, construction delays, or you found something in the soil delays, or whatever it might be, they might have moved from mid to late summer to early fall, which is the new fiscal year. So, I'm feeling pretty good that we're going to open 25-plus for the next couple of years, and then probably 28-plus, and go on from there.

Operator:

Next question comes from the line of Greg Melich with Evercore ISI. Your line is open.

Richard Galanti:

Well, I think that, again, the inflation number is a calculation based on costs and mix. I think it's probably -- I wouldn't look too closely if the average ticket was up a couple of -- a few tenths in the quarter, and then it was down a percent, down in February by a tenth. That's still relatively close. Some of it's a mix change, I'm sure, and some of it is -- some of the examples I gave you about lower pricing. Even if the underlying cost hasn't changed, some of it may be in terms of how we package, and we take advantage of that. So -- and that's on the sales side and not on -- not the exact cost from yesterday.

Richard Galanti:

Yes. I think when I go to the last budget meeting two weeks ago, I think there's -- in the presentations, there's a lot of -- I used the phrase a few minutes ago, upscaling. I didn't use that phrase, but then buying with conviction. I mean, I think the buyers are looking ahead right now in an offensive way and a positive way. Hopefully, we'll be right, but we feel so far we're being right.

Richard Galanti:

Yes. Instacart is 1.5% to 2% percent, something below 2%, but more to 1.5%, which is still on a $200 billion retailer, it's a lot. And we don't include that because that -- the Instacart person comes in, buys it, and checks out at the front end, so we don't include that. So, you'd add -- depending on rounding, you'd add 1% to 2% to the top-line number.

Richard Galanti:

I hope to see you all.

Kelly Bania:

Good evening. Thanks, Richard, and I have to add my congratulations to you. It's been a pleasure. Just wanted to ask where Costco stands with retail media and advertising dollars. I think the last update I had was in the range of a few hundred million. Just curious if you're willing to share with us where that stands today, what kind of growth that is experiencing, and just the Company's thought process on investing in that down the line.

Kelly Bania:

Thank you. And maybe just can I just follow up with the decision to roll out Apple Pay? Costco is pretty notorious for being strict on the payment method you can use. So just maybe the thought process on that, what you expect that to do for your e-commerce business, and any economics you can share.

Kelly Bania:

Fair enough. Thank you.

Katy Hallberg:

Hi there, this is Katy on for Oliver. And, of course, best wishes to you in your retirement. Just wanted to talk a little bit about the Kirkland price gap versus national brands. I know you touched on the Kirkland brand a little bit earlier on the call. But how has that price gap changed, especially year-over-year? And how has there -- has there been any impact to unit elasticity given that price discrepancy? Thank you.

Katy Hallberg:

Great. Thank you. And then just to follow up on the store discussion and unit growth, can you just provide a little bit of color on how the international store openings are performing just from a productivity angle? How is that versus the more tenured stores as well as the domestic stores?

Katy Hallberg:

Excellent. Thank you so much, and best wishes again.

Operator:

Next question comes from the line of Scot Ciccarelli with Truist. Your line is open.

Richard Galanti:

No, I think part of it is -- first of all, I think the storyline sometimes is a little greater than the reality. During COVID, we did a little bit more. There was a little bit more membership sharing. You had individuals where one family member, maybe not the one that had one of the two memberships, was coming into shop with mom or dad's credit card. And we allowed it. And then with the advent of self-checkout over the last several years, when you walk in the front door and you just flash your card and do they look at it or not, who knows, you would -- people would get in. And if you're going through self-checkout, you're not having to show your membership card to the cashier. And so there's probably an increasing but still small level of abuse of that privilege. And -- but we also had complaints from members saying, I pay, why shouldn't they? So, the view was -- is we needed to just shore that up a little bit. And we did. We did it over a period of six months, I think about six months, where we -- first there was warnings, and then ultimately changed. Are we getting some new signups from it? Absolutely. But it's relative to the 60 million or 70 million members, it's not terribly meaningful. But it's more fair and the right thing to do.

Richard Galanti:

Right. Well, it seems like Netflix had a much bigger issue or the ability to share was much easier because, first of all, it's electronic. In this sense, you still have to show a card when you walked in. And we're actually doing testing on that too, in terms of having your card be scanned and reviewed when you walk in. And we've done that in the UK, I believe, for a few years. And so it's all about -- just I would say it's as much hygiene as anything else. And it'll be slightly profitable to the extent that we make sure everybody -- I think we signed up more members than there were non-members then lost the small sales that that non-member did.

Richard Galanti:

Thank you.

John Heinbockel:

Congratulations, Richard. Enjoy your retirement. You'll be missed. So, when you think about -- you don't have many pain points in your in your clubs. But when you think about kind of throughput and things like, I know you tested BOPUS and cost really didn't make sense there. Things like that and/or scan and go, what -- do you think there are some unlocks here to do more volume and/or reduce any pain points?

John Heinbockel:

And secondly, is there any way to tell you think about email outreach. I mean, it seems to be getting better and more call to action. I try to think about the seven days of spring, which are in the middle of now. Is there a way to tell the productivity of that outreach? And is that driving some of the e-com pickup?

John Heinbockel:

Okay. Thank you.

Chris Horvers:

Good evening and we'll miss you, Richard, and welcome aboard, Gary. So, on the MFI, can -- did you mention how much the FX impacted total MFI growth year-over-year? And more broadly, it seems like it's becoming more competitive to acquire customers in the club channel. Couponing amongst your peers has really accelerated over the past year. Is that what you've observed? And do you think it's still escalating? And how are you responding?

Chris Horvers:

And just from a technical question, what are your peers talks about tenure renewal rate? The 93% that you quote, does that include like the year-one renewal or anyone that comes to the door on one of those digital coupons?

Chris Horvers:

Got it. Thank you very much and best of luck.

Operator:

Next question comes from the line Robby Holmes with Bank of America. Your line is open.

Richard Galanti:

Well, that's the new recent headline of that's happening and we'll have to wait and see. Look, at the end of the day, it may change the economics. There are other levers that we've talked to them in the past, our issuing bank about what we could do, but nothing is done at this point.

Richard Galanti:

Thank you.

Laura Champine:

Thanks for taking my question and wish you a long and happy retirement, Richard. It is -- I'm going to go out on a nitpick on the renewal rate. If renewal rate is flat overall, but 10 bps better US and Canada, that seems to imply it's not as good in international markets. Is that just some of the sampling that went on in China or what do you think might be driving that?

Laura Champine:

Got it. That's helpful. Once those clubs mature, the clubs in China, other clubs, new clubs in Asian markets, etc., do they tend to -- can you serve a higher number of households there? Meaning, would you expect them to be sustainably above that 70,000 or so households that you have in an average club?

Laura Champine:

Got it. Thank you.

Corey Tarlowe:

Hi. Good afternoon. Thanks for taking my question. And congrats Richard on your retirement. As it relates to big ticket discretionary items, it seems like that category has improved a little bit. Just wanted to get a little bit of understanding as to what you've seen that's underlying that improvement in trend. And then secondarily on AI, just curious with the recent technology enhancements that the business has made, how you see that impacting the business on a go-forward basis?

Corey Tarlowe:

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

Operator:

Ladies and gentlemen, this concludes this conference call. You may now disconnect.

Richard Galanti:

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 26. 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 $0.10 a share related to stock-based compensation. Last year's results included a tax benefit of $53 million or $0.12 per share related to stock-based compensation and also included a charge of $93 million pre-tax or $0.15 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 0.5% (ph) 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 at 3.9%, excluding those two items. E-commerce, which was reported as a 6.3% came in at 6.1% excluding FX. Overall, for the first fiscal quarter, fresh foods were relatively strong once again, with food and sundries right behind. Non-food showed improvement over the September October, November time frame 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 0.9% worldwide and down 1.6% in the U.S. Foreign currencies relative to the U.S. dollar positively impacted sales by approximately 0.4%, while gasoline price deflation negatively impacted sales by approximately 0.6%. I've gotten more than a few calls in the past few weeks as to how many pies we sold in the U.S. leading up to the 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 and next on the income statement's 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 4 basis point increase over the first quarter last year. In terms of renewal rates, at first quarter end, our U.S. and Canada renewal rate stood at 92.8%, while the worldwide rate came in at 90.5%. Both of these rates were up 0.1% 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 ex-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 3 basis points reported, minus 3 basis points ex-deflation. Ancillary and other businesses, plus 24% reported and plus 22% ex-gas deflation; 2% reward lower year-over-year, minus 4 basis points reported and minus 3 ex-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 ex-gas deflation up 36 basis points. Starting with the core. Again, it was total company, it was plus 3 and minus 3 reported and ex-gas deflation. In terms of core margin on their own sales, our core-on-core margins were up by 5 basis points year-over-year. Ancillary and other business gross margin, again, higher by 24 and higher by 22 ex-gas deflation. This increase was driven largely by gas and e-comm. Our 2% reward higher by 4 and higher by 3 ex-deflation, reflecting higher sales penetration coming from our Executive members. LIFO plus 3 basis points. We had a $15 million LIFO credit in the first quarter of this year. This compared to a very small $0.5 million LIFO charge in Q1 a year ago. And then, the other line 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 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're right down the two columns. Reported and without gas deflation, operations, minus 18 and minus 14 basis points, minus being -- 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 minus 25% year-over-year. I'm sorry, SG&A, not margin, 25 and without gas deflation, higher by 19 basis points. The quarter 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 2 basis point hit. And as of September 18, we raised the starting wage in the U.S. and Canada, that estimated impact from those new wages to be roughly 2 basis points as well. Again, central, nothing much to say other than its 1 basis point higher, excluding gas deflation. Again, it was stock comp's, 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 2 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 million due to higher interest rates as well as high 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 as of Q1 -- 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 relo (ph), so a net of nine increases. That -- those nine included eight in the U.S. and one in Canada. For the full year fiscal '24, we estimate opening -- we're planning to open 33 locations, including two relos, 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 plan four new locations, including our sixth building in China, are early in the calendar year. Regarding capital expenditures, first quarter capital expenditure spend was approximately $1.04 billion. We estimate that fiscal '24 CapEx will be in the $4.4 billion 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-com sales in Q1 ex-FX 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, November. E-comm 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 gold 1 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, 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 is 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-com mobile and digital efforts. No big enhancements and changes to the site leading up to the holiday, 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 2.75 million, so total app downloads are now stand at 30.5 million or a 10% increase during the quarter, and that's after up being over 40% increase in all of fiscal '23 versus the prior year. Our site traffic approaching 0.5 billion and just under 10% increase and the average order value being up about 2.5%. So we continue to make progress there. Next 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 unit's 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 31, 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.

Michael Lasser:

Good evening. Thank you so much for taking my question. You had indicated over the last 1.5 years 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 inflation is flat to up 1%. So do you expect deflation, especially on the food side as you get through the next couple of quarters?

Michael Lasser:

And my follow-up is 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 you compare Costco's operating margin over the last 12 months versus where it was prior to the pandemic, it's 300 to 400 basis points higher. And yet, across retail, there are signs that profitability is coming down. So now, what we've seen in the ways of Costco either maintaining this existing rate of operating profit margin or even further growing it from here, so it just simply going to be a function of your ability to drive further sales growth in the -- consistently mid-single digit range or better.

Michael Lasser:

Thank you very much and have a good holiday.

Operator:

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

Richard Galanti:

There are so many different moving parts to it. 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 want -- 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.

Richard Galanti:

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

Operator:

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

Richard Galanti:

Well, without giving you specific basis points, food and sundries was slightly down, very slightly down. Non-food was actually up. Some of that relates to the fact that we are 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.

Richard Galanti:

I think, well, first of all, part of just ancillary in general is a sales penetration issue. Without going into it that 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 and e-com, that helped you, and e-com, we had a lot of strength. We're doing a lot of big and bulky and we're driving that business.

Richard Galanti:

Yeah. Well, I always joke I'm up for review so I'm going to say nice things. But at the end of the day, the reality is, we're staying the course. 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. And what's -- who can replace Jim? And I think the same questions asked today, who could replace Greg? And it really is a seamless transition. You have somebody retiring that's been here 40-ish years and it's been in the business both on operations and merchandising for a successful number of years in both. And you've got Ron who's coming in, who started when he was 17 at a Price Club in Arizona. And he already has his 40-year gold patch. And again, 30-ish years in operations, a year in real estate traveling in the world and then six or seven years in merchandising. So I think it is pretty seamless. And to see them, the two of them work together over the last two years, 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. And so that's pretty much steady as she goes.

Richard Galanti:

Thanks.

Scott Mushkin:

Hey, Richard. I guess, I just wanted to think about the potential clubs in the U.S. I know it comes up sometimes, but obviously, you added eight. It just seems like there's maybe more runway you can hear in the U.S. And I wonder if you have any thoughts on that. And then I had a quick follow-up.

Scott Mushkin:

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 the environment.

Scott Mushkin:

Perfect. Thanks.

John Heinbockel:

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

John Heinbockel:

And maybe as a follow-up, you talked about the international opportunity and it's still very well underdeveloped. So what's 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 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?

John Heinbockel:

Thank you.

Kelly Bania:

Hello, Richard. Thanks for taking our questions. Just wanted to kind of follow up on Scot's question. I think your average sales per club in the U.S. 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 a 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 more of the growth here?

Unidentified Company Representative:

The average sales.

Kelly Bania:

Thank you.

Scot Ciccarelli:

Good afternoon, guys. So Richard, last quarter, you talked a bit about Costco Next. And 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 betting of what vendors operate on that program, just thinking about the quality control aspect? Thank you.

Scot Ciccarelli:

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?

Scot Ciccarelli:

Okay. Thank you.

Operator:

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

Richard Galanti:

I think it's just us. 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 it's a 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 I'll use my standby answer, my answer, it's a question of when, not if. But at this juncture, we feel pretty good about what we're doing.

Richard Galanti:

Which inflation -- which categories are stubborn in inflation?

Richard Galanti:

CPG, obviously.

Richard Galanti:

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

Richard Galanti:

Right. But recognize, the LIFO charge is an inventory cost of sales charge. [Multiple Speakers]

Richard Galanti:

Right. The 0% to 1% is from the beginning of the fiscal year. Now it's from -- I'm sorry, the beginning of -- the 0% to 1% is versus a year ago.

Richard Galanti:

Yeah.

Unidentified Company Representative:

Around 60%.

Gregory Melich:

Perfect. Thanks. Have a great holiday guys.

Operator:

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

Richard Galanti:

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? My extreme -- 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 stock of the shelf. I mean that's at the 40,000-foot level. And that's an extreme example. But I think overall, it is sales base. You should also remember, if you remember going back to fiscal '19 and the first part of fiscal '20, before COVID, our SG&A percent was -- for all of ‘19, it was at 10 04. In the first quarter of 2020, it was a 10 34, And for the whole year, it was a 10 04 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 8 88 for that year. So even at the 9 45 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 is driving more sales.

Richard Galanti:

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. The we have enjoyed great value. And again, we're convinced it's value. We've got -- I think on the margin, there's a few extra things that we've done. We've improved the site of the website. We've gotten a little better communicating stuff, not completely. But I think overall, it's -- 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.

Richard Galanti:

Thanks.

Thomas Nass:

Hi. This is Tom Nass on 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 callouts, any recent innovations? Just curious if this is essentially driving any efficiencies and supplier negotiations that can position Costco for stronger gross margin ahead.

Thomas Nass:

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

Thomas Nass:

Thanks.

Thomas Nass:

Great. Thank you.

Mark Astrachan:

Yes. Thanks and good afternoon, everyone. I guess I wanted to ask on the Kirkland products, specifically maybe on the CPG that you mentioned. How has pricing or how has 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?

Mark Astrachan:

Got it.

Mark Astrachan:

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?

Mark Astrachan:

Got it. Thank you. Happy holidays.

Operator:

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

Richard Galanti:

Frankly, we look at the wages in a vacuum, and 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 $1 of those $2 now 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 -- over half of our employees are top of scale and they're getting increases irrespective of some of the extra things we 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 more -- significantly more.

Richard Galanti:

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 think I'm sure on a macro basis, that's the case but it's a guess on our part.

Richard Galanti:

Thank you.

Dean Rosenblum:

Hey, Richard, guys. Thanks for taking my questions. There's really two big debates that clients are asking us about. First one is on gross margins, and in particular, the potential for a gross margin impact from mix 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 mix shift away from food and sundries to big ticket discretionary?

Dean Rosenblum:

True. And then the other big debate that's contrasting about is the relative profitability of new stores versus existing stores. There's sort of two themes there. One is new U.S. versus existing U.S. and then the relative profitability of new stores internationally. I was wondering if you could speak to that a bit.

Dean Rosenblum:

Got it. Thanks so much. Appreciate it. Good holidays and thanks for the pie.

Operator:

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

Richard Galanti:

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 will 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 when you -- 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 to they want to put their credit or debit card in there and they can opt in to doing it online -- doing other 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.

Richard Galanti:

Thankfully, nothing at all. It's really -- I think what we already talked about was a combination of, as we went into some self-check out 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.

Richard Galanti:

Same to you. Thank you.

Laura Champine:

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.

Laura Champine:

Thanks. And then just on the operations...

Laura Champine:

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

Q – Laura Champine:

Got it. Thank you.

Richard Galanti:

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.

Richard Galanti:

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 3. 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 0.2% comp. Excluding gas deflation and FX in the U.S., it would have been 3.1%. Canada, reported was 1.8%, and excluding gas deflation and FX, 7.4%. Other International reported 5.5%, and again excluding gas deflation and FX, 4.4%. Also total Company reported 1.1% comp and 3.8% ex-gas deflation and FX. In terms of e-commerce, that came in at minus 0.8% reported and 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 impacted sales by approximately 0.3%, 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 7%, ex that extra week. Excluding FX and 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 0.1% from the 92.6% figure as of the end of Q3. The worldwide rate came in at 90.4%, down 0.1%, reflecting the impact of increasing penetration of memberships from international, which renew at a lower rate, in large part because of new openings internationally. Our membership growth continues. We ended the fourth quarter with 71.0 million paid household members, up 7.9% versus a year ago, and 127.9 million cardholders, up 7.6%. That's on the new openings over the past year of - just under 3% increase in new locations. At the 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 membership and approximately - 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 - came in at 10.60%, up 42 basis points from 10.18% a year ago, and that 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 ex gas deflation up 28 basis points. Ancillary and other businesses, minus 32 basis points and minus 38 basis points. 2% reward, minus 4 basis points and minus 2 basis points. LIFO, plus 27 basis points and plus 28 basis points. And if you total that up, on a reported basis, gross margin was up 42 basis points year-over-year and ex gas deflation, up 16 basis points. Starting with the core, again, up 51 basis points year-over-year, and ex deflation, up 28 basis points. In terms of core margin on their own sales, our core-on-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 decrease was driven almost entirely by gas due to 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 in a couple of basis points plus or minus from a year earlier. 2% reward higher by 4 basis points and higher by 2 basis points, so a negative 2 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 continued - we've continue to see sequential improvement in year-over-year inflation. I'll talk about that a little later. We still had a small amount relative to the first day of the fiscal year, that's a small charge in Q4. A couple of final comments on margins. First, we are of - we're 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 1 basis point more. So no, thankfully, not a big issue for us. And second, the 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 onto 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 points, minus being higher by and without deflation, core would be minus 18 basis points. Central, minus 6 basis points and minus 3 basis points. And those are the really only two line items. The others were all zero; stock compensation, preopening 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 core operations being higher by 18 basis points ex gas deflation and on a reported basis higher by 37 basis points, 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 4 of '22, so midway through Q4 last year, and full 17 weeks of this past March's higher-than-normal top-of-scale increase. Central being higher by 3 basis points ex 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 at 27.1% compared to 25.4% in Q4 last year, so 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 quarter - this year in the 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. For the full 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, as well relocating one unit. All 10 locations net new are in - nine are in the U.S. and one is 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, totaled $4.32 billion. Turning to e-commerce, e-commerce sales in the fourth quarter ex FX, as I mentioned, decreased 0.6% year-over-year. While still negative, relatively speaking, our e-commerce showed good improvement. 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 of other items to 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 gold - 1-ounce gold bars. Yes, but when we load them on the site, they're typically gone within a few hours and we limit two 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're continuing 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-com 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, there are 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 to the extent there's gas station there, and so 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, 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 will announce our September sales results for the five weeks ending Sunday, October 1, on Wednesday, October 4, after the market closes. With that, I will open it up for Q&A and turn it back over to Lisa. Thank you.

Simeon Gutman:

Hi, Richard. How are you?

Simeon Gutman:

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

Simeon Gutman:

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

Simeon Gutman:

Hi, thanks, Richard. Good luck.

Michael Lasser:

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 is on pace to be 1% to 2% and you suggested it may be even lower than that. So should outside of the reverse be prepared for the prospect of deflation, either because that's what's happening with some underlying cost that Costco has 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?

Michael Lasser:

And so...

Simeon Gutman:

So just to clarify what you're saying is food and sundries prices are down on an average year-over-year, shelf-stable products are up year-over-year, gen merch is down. So in totality, it would seem like the store - the box 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?

Michael Lasser:

Okay. My follow-up question is, as low - as long as you see big-ticket under pressure, discretionary under pressure, which influences your total sales, because it's important for you to remember 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 late - labor and other SG&A is going to delever as long as the big tickets under pressure?

Michael Lasser:

Thank you very much and good luck.

Chuck Grom:

Hi, Richard. Just sticking on this - 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 can talk about?

Chuck Grom:

Okay, great. And I know you don't provide guidance, but I got...

Chuck Grom:

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

Chuck Grom:

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 LIFO lap will be it will be an obvious tailwind, but just curious, any other things that we should be thinking about from a modeling perspective?

Chuck Grom:

All right, great. Thank you.

Peter Benedict:

Hi, guys. Thanks for taking the question. Richard, just - first one, just on LIFO. I was just curious, I mean, $30 million charge is small, but I'm just curious, why they were even last one. Can you give us little more color, maybe what drove?

Peter Benedict:

That's fine. Yes, that's fine, just in the context of the broader disinflation it was interesting to see that. And then, just really turning to the international stuff you talked about the rural rates impact, can you remind us maybe on the international membership trends, when you open up a new core 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 opening 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.

Peter Benedict:

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

Peter Benedict:

Got it.

Peter Benedict:

Yes. Thanks so much, Richard.

Operator:

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

Richard Galanti:

Right, well, look, first of all, first and foremost, our traffic continues to do very well. Being up continually 4% to 5% on a year-over-year basis is great. And our renewal rates continue to be very strong. So that's the 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 MBD, that tells us where we are versus our competitors. Overall, not in every category, but overall we tend to do better. So even a negative number here is a lower negative number elsewhere. So - and again, what do we do, we brought in some smaller ticket items that are impulse snack items to get an extra partial item in everybody's basket. So, yes and newness, bringing those new items. And there's not been a whole lot in television. Our unit sales and 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.

Richard Galanti:

I'm sorry, what else did you ask?

Richard Galanti:

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 are talking about doubling these numbers in the next two or three years. In my view, there is some low-hanging fruit out there and we're actively working on it. We've hired a couple of people that are helping us with that as well and more to come.

Operator:

We'll take our next question from Paul Lejuez with Citigroup.

Richard Galanti:

Well. First of all, we've always prided ourselves in providing the best hourly wage package out there, wages, benefits, contributions to 401(k). 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 is in the high-$25s. That's on top of a very rich healthcare plan, where the employee only pays around 11% or 12% of it I believe. And on top, little less than that - and on-top of that, irrespective of what employee contributes to his or her 401(k), 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 401(k) plan with a very rich healthcare plan. So we stand apart in our view compared to anybody. Our pressure is that, it comes from ourselves. In the last few years, as there have been wage pressure, starting with the frontline workers during the beginning of COVID, we like many retailers added a 2% premium - $2 premium rather. We kept it longer to our knowledge than most anybody for a full year and 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 we feel that we're way ahead of our competition in that regard.

Richard Galanti:

I don't think we're prepared for Scan and Go, yet. We're just going to scan, but they can't go. So at the end of the day, the first order of business is getting the merchandise on there and haven't had numbers that where a member, he 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.

Operator:

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

Richard Galanti:

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 it was our strongest quarter, recognizing it's 16-week quarter. This 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 and the Costcos of the world. So it's still a profitable business. It's - our view has been, you used to be when prices - given that the return 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 is turning it every eight or nine days is paying a little less four days ago. And so we're making it the less, when sales went down - gallons - 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 on 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 to 30-set 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.

Richard Galanti:

Well, I think, look, at the end of 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 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 5%-ish on that money instead of a clear percent-ish on that money, does make it a little harder to do. But we're not selling the kind of earnings multiple, but we earn 5% on our assets. So, at some point, we'll do something and we'll have to wait and see.

Operator:

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

Richard Galanti:

I was joking you're going to say, first of all, they are very smart to be an executive member. Look, I think we are 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 and executive members start 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 - everybody used to be concerned 10 years ago, how we going to get millennials when we have an older average customer and all that and we did with things, with items, with things like organic. We're doing the same thing now. We're still getting whether it's Gen Z or Gen A or whatever the next is, we're getting our share of those new members when we look at the profile of our members.

Richard Galanti:

No, it's - I mean, the simple math would just say it's 16, 17 of our quarter is equal to a 16-week quarter. That's about as good as we can do.

Richard Galanti:

I think that particularly on net income it takes the 16% or whatever percent number down to 9% or something, and that's just simple math.

Operator:

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

Richard Galanti:

Sure. Inventories, as I mentioned, we feel - the merchants feel very good about our inventory levels right now. Are there a few departments are higher than they want, a few that need a little bit more sure. But overall, they're very good. Look at our fiscal year and inventories stood at just under $16.7 billion and payables stood at $17.5 billion. So I think this - running above 100% on that simple ratio is something new. We used to be - 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 will help your big-ticket sales, I said, well, at least in a few several more months we'll anniversary this weakness. So certainly that's going to help. I would like to think that not just that thing that's going to help, but - and the same would be commerce. I mean, we're - again one bright spot in this virtually all e-commerce, not nearly always - is nearly always 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 the item within our case includes delivery and warranty and things like that more so than some of our competitors. And showing great value there.

Richard Galanti:

Okay. Yes. I had the second and third, what was the first question? Oh, Instacart, I know they just went public. So we've gotten a lot of questions. At the end of the day, we were good partner with them, they were good partner for us. We used them throughout the U.S. and Canada. And as sales are growing, we've added over the last - 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 it has been for a while. Yes, 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 or 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 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. If there is a charge for it, it's going to be less 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 '24 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 so far, our openings there have treated us well overall.

Operator:

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

Richard Galanti:

Yes, Costco Next is drop-shipped. We curate the items with these suppliers. And for the most part pretty well-known brands. And so far we have not had an issue on that, recognizing it's - they tend to be items that are easily shipped to home. Yes, 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.com on costconext.com.

Richard Galanti:

Well, yes that's what our business is about, where we'll take a 10-pack and make it a 12-pack, I guess. But at the end of the day, if there's is inflation, it will impact all of us, but again. I think it should be favorable with us because we will show the best value - we'll still show the best value out there.

Richard Galanti:

Before you do it, another comment was made in the table here, that if there is deflation and disinflation, we've got a $450 million and $500 million LIFO reserve, that'll be - on a reported basis will be part of a tailwind of disinflation.

Operator:

We'll take our next question from Scott Mushkin with R5 Capital.

Richard Galanti:

I think, look we've 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 are tough competitors and so are we, and - but I think they continue to get to improve overtime, as have we. I don't - we don't really see a whole lot of other things. BJ's is why we expect their model and what they do. It's a slightly different model. So there's not as much - there is 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, our view is on the non-food side, we are 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 grew like that. Recognizing appliances of whatever a $30 billion business, we're still a small piece of it, but growing rapidly.

Richard Galanti:

I think. I think it matters. It does matter and I think it really mattered as we approached kind of the 5.5 years. Post June 17th, we were in the high - the headline every day was inflation and economy. And so, 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...

Operator:

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

Richard Galanti:

Yes, well, aside from LIFO, markdowns were lot less, quarter-on-quarter, so no markdowns. It was a big piece of it, particularly on the non-food side, that helped. Last year we had - 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 will come down and so that was probably the biggest single thing in those numbers. And the comment that was made at the table here, we're back on track on seasonal in and out dates. So we're not having - 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 as much, some we did store, but to move them out where we felt that was the best way to do it, we take extra markdowns. So that helped.

Richard Galanti:

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.

Richard Galanti:

No.

Richard Galanti:

Let's down was the answer yet.

Operator:

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

Richard Galanti:

Yes, 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, call it, but just in the U.S. So - and that number keeps changing. If you had asked me six or 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, outside of the - will be 50. And today, we're at 65, 70 in the U.S. 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 is still a lot of runway in that regard.

Richard Galanti:

That is still our view overall. In addition to the thing I mentioned a little bit with what we're doing with Instacart on 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 Pickup in Store.

Operator:

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

Richard Galanti:

Yes. Well the CPG, actually we did that last year as well, done it for a couple of years. We will say, we'll do it again. It's growing. So, 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 I'd say there's probably a little bit more increase on that type of promotional things. And then inventory is available for those things. We could really drive sales of those items in a short period of time.

Richard Galanti:

Yes, if it's earlier, it's a week or two earlier. And some things came in early, and yes, 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 to the members. But we want to be - we want to be out to. Typically this is nothing different here, even on things like toys will 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.

Richard Galanti:

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

Richard Galanti:

Thank you, Josh, 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 third quarter of fiscal 2023, the 12 weeks ended this past May 7. Reported net income for the quarter was $1.30 billion or $2.93 per diluted share. This compared to $1.35 billion or $3.04 per diluted share a year ago in the third quarter. This year's results included a nonrecurring charge to merchandise costs of $298 million pre-tax or $0.50 per share, primarily for the discontinuation of our charter shipping activities. Last year's results included a nonrecurring $77 million pre-tax charge or $0.13 per share for incremental employee benefits. As many of you know, two years ago, we initially leased three ships and thousands of containers to help mitigate some of the significant overseas freight challenges that we were experiencing. Later, we added four additional vessels and several thousand additional containers with commitments made for up to then three additional years. Procuring these ships and containers was integral to us being able to stay in stock for our members during those challenging times. It also allowed us to do so initially at a lower cost than the market rates at that time. Shipping and freight markets have improved dramatically since that time, which led us to reevaluate our position. As you recall, in the first quarter of this fiscal year, we took a charge to downsize by two vessels our charter shipping activities. Since then, shipping and container rates have continued to fall. And in the third quarter, this third quarter, we concluded that it would be appropriate to completely discontinue the remainder of our charter shipping activities. As a result of this decision, we recorded an impairment charge for all remaining charter assets. This decision allows our merchandising teams to take full advantage of the current shipping market rates as opposed to much higher contracted charter rates. In turn, this allows us to do what we do best and lower prices for our members. In terms of sales. Net sales for the third quarter increased 1.9% to $52.6 billion versus $51.61 billion reported last year in the third quarter. Comparable sales for the quarter were as follows

Michael Lasser:

Good afternoon, Richard. How broadly and widely is Costco willing to roll back prices in order to drive traffic and sustain a mid-single-digit comp growth? How are you thinking about the prospect of deflation across your entire portfolio?

Michael Lasser:

So are you not expecting broad-based deflation, Richard? And my follow-up question is going to be, given the amount of value you give to your members, wouldn't it make sense to raise your fees right now because your renewal rates have been so high and you would be providing even more value in this difficult economic environment.

Michael Lasser:

Thank you.

Simeon Gutman:

Hey, Richard. My first question is on the comps and the stacks. It's obviously been slowing, and you probably took more than your fair share over the last three years. Curious when you sit around how you're diagnosing it, macro, I don't know if it's gas attachment, merchandising, weather, any of those options, how do you diagnose what's happening?

Simeon Gutman:

And then, my follow-up, can you give us some information or color on gasoline gross profit year over year, how that profit pool is trending, obviously, inclusive of both gallons and the penny profit?

Simeon Gutman:

OK. Thanks, Richard.

Christopher Horvers:

Thanks very much and good morning. So I just want to jump back to the pricing question. From a strategy perspective, typically, if you see things that are dis-inflating or deflating on more of the commodity side, you'll take price ahead of that. I guess is that what you're doing currently? And we've heard a lot of talk in the market about the vendors funding more promotions, how are you thinking about the balance between the retailer funding the promotion or the price investment versus the vendors?

Christopher Horvers:

And so, as you look forward, you said, I think, 3% to 4% inflation in the quarter. If you look at the Nielsen data, that was sort of low double digit, right, I mean, Walmart talked about that. So a two-part question, one is, is the difference just mix that you have more fresh commodity exposure? And then, if you project forward that you'll have sort of no inflation potentially six, eight months out, so how do you think about your ability to continue to comp overall?

Christopher Horvers:

Got it. Thank you so much.

Scott Ciccarelli:

Good afternoon, guys. Richard, I think you mentioned fresh foods were a bit on the softer side. When you kind of look at the data, is that a function of your members moving to less expensive packaged goods? Or is that more just do the COVID-driven comparisons like you were just talking about on the discretionary side?

Scott Ciccarelli:

Got it. All right. I'm not sure I understood that. So the second question related to that, though, is are you seeing any other kind of trade, let's call it, trade-down type activity, whether it's more private label sales, etc., that you kind of identified from your members?

Scott Ciccarelli:

Got it. Thank you very much.

Karen Short:

Hey. Thanks very much. Good to talk to you. Two questions. One is your pre-tax margin is one of the highest that I think I've seen in the model, like I'm not even sure I could go back to when it was as high as it was. So I'm curious if you could just make some color or commentary on that. And then, the second question I had was not that we're necessarily going into a deflationary environment in food, but if we were to go into a deflationary environment in food, what would be the deleverage you would see on the EBIT line on that front?

Karen Short:

Sorry, just to follow up on that. So is there any way to frame what ex gas, ex gas margins, ex fuel prices -- like, what delta in sales would result in a delta in EBIT?

Karen Short:

Is there any way to calculate that?

Karen Short:

That makes sense. Thanks so much.

John Heinbockel:

So Richard, core-on-core, food and sundries and nonfood were up, right? So it's kind of a two-part on core-on-core. One, what drove that, right? Was that predominantly mix?  And then, secondly, fresh food was down. Where is fresh food versus '19? And are we kind of getting to the point where that erosion is going to stop, right, because we're pretty close to '19?

Unknown speaker:

No, versus '19.

John Heinbockel:

OK. But the other categories that were up, right, is that predominantly mix, private brand and less big ticket?

John Heinbockel:

And then, secondly, where are we on the personalization journey, right? Because I know you've done more data analytics in the last couple of years. You've got the old loyalty program, right? So when you think about wallet share and targeting promotions and emails and so forth, it looks like a huge opportunity. Where are we on that?

John Heinbockel:

OK. Thank you.

Oliver Chen:

Hi, Richard. When you think about household income, what kind of trends are you seeing in terms of your customers and people trading in and the new Costco at large? And then, the big-ticket item question, what are your thoughts on how you're planning inventory there? Do the compares ease? Do you expect improvement? And within big ticket, any color in terms of how that may proceed sequentially?

Oliver Chen:

OK. And Richard, you've made a lot of great strides in Asia and China and other regions. I'd love just some highlights in terms of what's ahead for the back half there. And a second question on that connected consumer experience between digital and physical, are there evolved thoughts in terms of BOPUS and curbside and what your members want and delivering the ultimate convenience?

Unknown speaker:

Calendar year.

Oliver Chen:

Got it. Very helpful. Thanks, Richard.

Scott Mushkin:

Hey. Thanks, Richard for taking the question. So I wanted to talk about competition a little bit. But first, shorter term, and maybe I missed the answer to this if it was asked, promotional activities now, are they -- one of your competitors said they kind of ramped up. Is that what you're seeing as well?

Scott Mushkin:

And is that purely from the vendors? Or is that some activities you're seeing from retailers themselves?

Scott Mushkin:

OK. So then I wanted to talk a little bit more long term about competition. It's been a long time, I think, what we've seen as many openings from non-Costco people. You are going to see that over the next year or two, three. The other competitors also, they tout their omnichannel and their technology about just scanning and going. Just give us an overall view of the competitive environment over the next one to three years and how Costco fits, and whether you think some of those technologies and e-com stuff are competitive advantages for people that are competing against you?

Scott Mushkin:

And the club openings, I don't think you touched on that.

Scott Mushkin:

Thanks.

Brandon Cheatham:

Hey, Richard, this Brandon Cheatham on for Paul. I want to follow up on what you mentioned about the digital investments that you all are making. It sounds like it's something that eventually you might monetize partnering with your vendors. How do you balance that with your view that you really want your members in your warehouse? And how do you see that working kind of over the long term?

Brandon Cheatham:

Got it. And if I could follow up on the membership side, you mentioned membership marketing. Are you seeing any difference in promotions from your competitors for their memberships? How has that informed what you all are doing? And is there any major change on promotions, on membership from your competitors?

Brandon Cheatham:

Got it. Thank you. Good luck.

Operator:

Your next question comes from the line of Rupesh Parikh with Oppenheimer & Co. Your line is open.

Richard Galanti:

They're doing great. End of story. We've been blessed by those first openings that we have over there. Needless to say, we were impacted, like everybody over there, during the shutdown and what have you. And we had some great video clips in our budget meetings here showing what we did to create care packages not only for our members but for the neighborhoods around us. And we were told they were the best care packages of any of the big retailers, so that made us feel good.

Richard Galanti:

I have one of my colleagues here on the merchandising side, and she was saying to me softly the negatives are getting better. And again, it's about seven or eight months ago, seven-ish months ago, when we started seeing the decline. And so, if nothing else, we'll be having an easier compare five months, hence. But certainly, we've seen a little bit of improvement in the negatives.

Richard Galanti:

Well, thank you, everyone. David, Josh and I are around to answer questions if you have any more, which I'm sure you will. Have a good afternoon.

Richard Galanti:

Thank you, Emma, 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 being 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 second quarter of fiscal '23, the 12 weeks ended this past February 12, as well as February retail sales for the 4 weeks ended this past Sunday, February 26. Reported net income for the quarter came in at $1.466 billion or $3.30 per share compared to $1.299 billion or $2.92 per diluted share last year, an increase of 13%. In terms of sales, net sales for the second quarter increased 6.5% to $54.24 billion compared to $50.94 billion reported a year ago in the second quarter. Our comparable sales for the second quarter were as follows

Simeon Gutman:

I guess, sizing up the consumer, I want to see how you view February in, I guess, the continuum of months. And then part of it, I think you said down mid-teens with some of those e-commerce categories. Thanks for that information. Is that stable? Is that worse? How do you kind of diagnose the whole consumer in the business?

Simeon Gutman:

Okay. A follow-up on EBIT growth, I know you don't guide, but this business has averaged, I think, about high single or maybe around 10% over time. This year, it's a little below average because of some of the lapping and you are lapping some great fuel gross profit. Curious of the puts and the takes. So whatever number that you expect the EBIT dollars of this business to grow, are you confident in the levers that you have to get there?

Operator:

Your next question comes from the line of Michael Lasser with UBS.

Richard Galanti:

Well, we're going to do things that drive market share, first and foremost. We are certainly cognizant of the bottom line. And I think this quarter is a good example of that. But at the same token, we're going to do what we need to do to drive sales because long term, when we get our customer in and they buy stuff, they're going to come back and buy more stuff. And we've always done a good job of that. Again, this one is a little different, this economic downturn, with the rising interest rates and the headlines of recession and high interest rates. But that being said, I think we're fortunate in the sense that we've got a multitude, various types of businesses within our business from big ticket discretionary items to food and sundries and health and beauty aids and fresh foods, which is really driving the cart right now more so than it has in the past. So we'll continue to do what we do. I remember years ago, someone asked about if sales were slowing down, what would we do. And we said we'd drive more sales by being even hotter on prices. But generally, that's worked for us, and I see that equation continuing.

Richard Galanti:

Yes. Actually, June would be our sixth anniversary. As I mentioned in the previous calls, looking at the last, I think, 3, they averaged around 5 years and 7 months, which is about now or last month. And what we said over the last few quarters is that, in our view, it's a question of when, not if. And so we'll let you know. But keep in mind, that's one way that we become even more competitive. We take those monies and directly become even more competitive. I might add though, our locations do weekly comp shops of 100 to 150 key items, all directly competitive items, and then a variety of other against our direct competitors and other limited comp shops against other forms of traditional retail where the gap of competitiveness is much greater. But at the end of the day, our relative level of competitiveness, in our view, is as strong as it's ever been. And we do that weekly in locations. And every 4-week, monthly 2-day budget meeting, each of the regional operations' senior executives get up and show those numbers. And you can rest assure we're going to continue to do that.

Christopher Horvers:

So following up on the first question, I guess, relative to the last time that you spoke to us, do you think the consumers deteriorated at all? Anything that you're seeing on what they're buying, how price sensitive, private label, income demographic? What are your observations around the rate of change for the consumer?

Christopher Horvers:

Yes. And then on the pricing/LIFO point, last quarter, you talked about like we could have a LIFO benefit and that could be a source of funds in terms of investing in price. So a two-part question, if prices stayed here today, would we essentially get back the LIFO headwinds that you had a year ago as we think about going forward? And then the second question is, you mentioned your price gaps are as good as they've ever been but, at the same time, there was some change in consumer. So should we think about that LIFO as a source of funds to further invest in price?

Christopher Horvers:

And then just from the accounting perspective, should we automatically get that back if prices stay at these levels on the lap?

Operator:

Your next question comes from the line of Chuck Grom with Gordon Haskett.

Richard Galanti:

Yes. Gas has been a relative blessing as well. It's a profitable business. It is volatilely profitable. Sometimes it's more. And sometimes, it's less. But overall, it's a profitable business. It's given us an additional competitive advantage of getting people in the door, if you will. I think it was this last summer into early fall where I've given some numbers where our gallon sales increases in the U.S. were up in the mid- to high teens compared to darn near flat for the U.S. population as a whole. I announced yesterday on that, and I think that 15-plus percent delta of us versus the U.S. population is still about 10 percentage points. And so we are still taking market share, if you will, and getting people in the parking lot. And in terms of value, we look at a value compared to average value across our locations where we do comp shops, in some cases, every day in many locations. This year, to date, I'm looking at single-digit number, we feel that we saved a member $0.37. That's an improvement. Over the last 5 years, it's gone from the mid-20s to the mid-30s.

Richard Galanti:

Well, it's an art, not a science. We'll look at high-velocity items where we can make a big difference, pass on some items. On some things, I mean this is just anecdotal because it was from our last budget meeting, with shipping costs coming dramatically down, on a 25- and 50-pound bags of jasmine rice, we've seen a big uptick in sales because that's an item that really skyrocketed because it's per pound, based on the size of the bag, it was a heavy freight cost. And so as that comes down, we see that going. I think we're doing more with our suppliers, changing things around with the MVM. Part of that's based on allocation issues of what we have. But overall, no, we're firm believer of if you improve the value by lowering the price, you're going to drive more sales.

Scot Ciccarelli:

So you guys, like many others, have seen a shift away from a bunch of discretionary categories, probably stronger sales strength in the consumable category. But gross margins are actually pretty stable. So I guess the question is, should we start to expect more gross margin pressure on a go-forward basis if we were to kind of see that mix shift continue to lean towards kind of food and consumables?

Scot Ciccarelli:

Got it. And then one follow-up here, you guys have obviously done a couple of onetime dividends over the years, but that was always in a really low interest rate environment. And as you guys just reported with your net interest income, you can actually generate some real returns on your cash now. So I guess the question is, does the higher risk-free interest rate environment actually discourage you from returning that capital through future dividends?

Operator:

Your next question comes from the line of Karen Short with Credit Suisse.

Richard Galanti:

Sure. Well, I think on the latter comment, we're looking to use price to gain share, we're continuing to do that. It's not like we're going to go do more or less. I mean that's what we do for a living. What I was trying to say in the comment, that being we're particularly cognizant to the bottom line, we are a public for-profit company, and our shareholders want to know what we're doing. There have been times, for those of you that have followed us for many years, when we might take a bigger hit on some expense in a given quarter. I think, in fact, many years ago, it was the rotisserie chicken example that we, frankly, I think, have more levers today to adjust things, which helps us. But we're not going to get away from those 2 things, driving the top line and being cognizant that we're also a public company trying to earn money for our shareholders. But we're going to prioritize driving sales because that will benefit all the other things on the income statement.

Richard Galanti:

Yes. By the way, gasoline inventory is very small relative to everything else. And it turns darn near daily. But a lot of the improvement or reduction in inventory year-over-year was all the stuff backed up with the supply chain challenges and the port challenges a year ago. So we feel we're in good inventory shape. The flow is much better. There's always going to be anecdotal examples of stuff, we have a little too much of something or a little too less, but we feel pretty good right now about our inventory levels even by category. There's a few categories, a little over a few categories under, but nothing like when we were 26% up and had a lot of, what I'll call, in-transit stuff literally on those pictures that you saw on the news, of the ports, on the ships. And so that's improved a lot.

Thomas Nass:

It's Tom on for Oliver. On digital, can you guys add some color as to how comps are expected to trend in the near term just given the easing compares in the back half of the year? And additionally, what opportunities lie ahead in terms of digital business from an engagement point of view?

Thomas Nass:

Great. And as a follow-up on the executive memberships, with the higher penetration there, could you just talk about how those members behave relatively, and additionally, the effects on the business from that higher penetration?

Operator:

Your next question comes from the line of Kelly Bania with BMO.

Richard Galanti:

Yes. I think the biggest component of the answer to that question is our fresh margins have been the biggest piece of that coming down. And looking at it, our fresh margin in Q2 compared to Q2 3 years ago, pre-COVID, we're still up about 50, 60 basis points. Now we were up a lot more than that because of all the things that COVID did. It drove tremendous sales growth in those areas, which created less spoilage, which is a proponent of cost of sales in fresh foods, and labor productivity in places like the bakery and the meat department. And so it was, if you will, outsized improvement. We're still better than we were pre-COVID. And we've maintained the sales. These are not real numbers, I don't have them in front of me, but let's make them up and say that fresh pre-COVID was going up 8% or 10% a year, 8% a year or whatever it was, and then we enjoyed a couple of years of 20-plus percent, I believe. And now we're still doing fine with sales growth, not up to 8% or 10%, but nonetheless, it's still a positive. And so we've kept all those outsized gains. But we've also, of late, not just the last month or 2 but over the last several months, have invested in pricing. And certainly, fresh helps drive that. And I gave the example of the rotisserie chicken, but that goes through lots of areas of fresh foods where that's one of the key categories that people come in to shop for.

Richard Galanti:

I don't think we're smart enough to know how to manage all these things. There's so many different components of what is the gross margin from the different core departments to the ancillary businesses, to gas, to LIFO now. So it really is fluid. And we do manage it, but it's managing it in an organized, chaotic way sometimes, too, as things change every day. I think we do a great job of doing it.

Richard Galanti:

Sometimes, in a given month even, it can be bigger or smaller, honestly. I mean gas fluctuates quite a bit. But good try on asking.

Gregory Melich:

A couple of questions. One, I hate to go back to the membership fee, but it just seems right. The $120 executive price point, now that that's, what, 43% of members and 70-some percent of sales, does the fact that that's where the bulk of the sales are coming from change the thought process in terms of how you might do the timing of the membership?

Gregory Melich:

Not at all. Great. And then second is on items in basket, trying to figure out how as comps slow, and I imagine you're still getting that wage inflation, SG&A doesn't delever more, why is that? If traffic's still growing and we have inflation, is it just because items per basket are down? Or how do we think about managing the SG&A dollar growth in this not deflationary but disinflationary environment?

Gregory Melich:

And just so I'm getting the math right on the comp, if the comp is running 6 and inflation is running 6, but traffic is up 3, then items in basket would be down 3?

Gregory Melich:

It's 100% ASP. Got it. All right. That great. Good luck.

John Heinbockel:

Richard, I want to start with I know you guys have begun doing a lot more data analytic work, and you talked about maybe investing in price. Have you done much work on price elasticity by category or item? And you think in the context of non-foods is where there is softness, right, it's not consumables. What can you do mid-course correction there, right, on nonfood? Is there elasticity where you can drive some share early in season by making targeted investments in those categories?

John Heinbockel:

All right. And then to follow up on that, right, so again, you think about nonfood, you said maybe nonfood is going to be a little weaker. And it's not all nonfood, right, it's certain categories. Have you dialed back inventory? Do you want to get product -- you get it in early anyway. I'm not sure you can get in any earlier. What do you do, if anything, I guess, inventory would be the biggest thing?

Operator:

Your next question comes from the line of Paul Lejuez with Citi.

Richard Galanti:

Well, I think I said that they're as wide as they've ever been. I don't know if they've gotten wider. But we feel very good about where they are. And this is against direct competitors or other large boxes on certain categories, recognizing when it's a traditional retailer, there's a much bigger price gap to start with. And I'll remind you also, despite the fact that we and another warehouse club essentially sell the same types of items, we want to make sure that on exact like-branded items, we're better priced. So on those $100 million, $150 million, that's where we look at that. They're the most competitive, whether it's Coke and Pepsi or Advil or Tide detergent or key items that everybody knows the price of or is that same item. There are plenty of items that are differing in quantity, quality, size, color, you name it, where we feel that, in some cases, we have a better value. But that's up to the customer to behold that. And so we just keep doing what we're doing. We're focusing on those competitive items and constantly figuring out how to drive more value in any item we do. How do we, especially private label, but how do we upsize the pack while improving the price per unit within the pack? Even when there was big inflation, if there was a 10% increase, inflationary cost increase in something, how do we get the vendor to eat a little of it, will eat a little of it? Needless to say that still the majority of that increase is going to be in the price, but how do we also, beyond that, from a manufacturing standpoint and a packaging standpoint, how do we lower the price by a few extra percentage points by figuring out how to get x percent more cell units on a pallet by changing the configuration of the pack size. We focus more on that than anybody I know because we're taking our $230 billion or $240 billion in sales and dividing it by 3,800 items. So we have many items that are $50 million, $100 million, $300 million, $500 million items. And when we can do that, we think that we do a good job of that.

Richard Galanti:

I'm sorry, what was that?