Costco Wholesale Q1 2023 Earnings Call Transcript

Quartr
Provided by Quartr
December 8, 2022

Key Takeaways

  • Net sales growth: Sales rose 8.1% to $53.44 B, with U.S. comparable sales up 9.3% for Q1, driving net income of $1.364 B or $3.07 per share.
  • Membership momentum: Membership fee income hit $1 B (+5.7% yoy, +9% ex-FX) with renewal rates near record highs and paid households up 7% to 66.9 M.
  • Gross margin pressure: Reported gross margin fell 45 bps (down 21 bps ex-gas), partly from a $93 M pre-tax shipping charge, though core merchandise margins were nearly flat ex-charge.
  • E-commerce slowdown: Q1 e-commerce sales declined 3.7% yoy (down 2% ex-FX), despite record Black Friday and Cyber Monday traffic.
  • Warehouse expansion: The company plans to open a net 24 new warehouses in fiscal 2023—including its first units in New Zealand and Sweden—to support long-term growth.
AI Generated. May Contain Errors.
Earnings Conference Call
Costco Wholesale Q1 2023
00:00 / 00:00

There are 15 speakers on the call.

Operator

Good afternoon, ladies and gentlemen, and welcome to the Costco Wholesale Corporation Fiscal Q1 2023 Conference Call. At this time, all participants are in a listen only mode and please be advised this call is being recorded. After the speakers' prepared remarks, there will be a question and answer session. And now at this time, I'll turn the call over to Costco's CFO, Richard Galanti. Richard, please go ahead.

Speaker 1

Thank you, Beau, 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 and the company's public statements and reports filed with the SEC. Forward looking statements speak only as of the date that they are made, The company does not undertake to update these statements except as required by law.

Speaker 1

In today's press release, we reported operating results for the Q1 of fiscal 2023, the 12 weeks ended this past November 20. Reported net income for the quarter was $1,364,000,000 were $3.07 per diluted share. That compared to $1,324,000,000 or $2.98 a share last year. This year's results included a charge of $93,000,000 pre tax or $0.15 per share, primarily related to downsizing our chartering Shipping activities and a tax benefit of $53,000,000 or $0.12 per diluted share related to stock based compensation. Last year results included an asset write off of $118,000,000 pre tax or $0.20 per diluted share and a tax benefit of $91,000,000 or $0.21 a share related to stock based compensation.

Speaker 1

Additionally, the strength of the U. S. Dollar resulted in our foreign Company earnings translating into fewer U. S. Dollars with 25% to 30% of our earnings generated outside of the United States, This negatively impacted earnings by about $0.12 per share.

Speaker 1

In terms of sales, net sales for the Q1 increased 8 1 percent or $53,440,000,000 versus $49,420,000,000 reported last year. On a comparable sales basis during the Q1, Reported U. S. Sales increased over the 12 weeks 9.3 percent and excluding gas inflation and FX 6.5 percent. Canada 2.4% reported 8.3% increase ex gas inflation and FX.

Speaker 1

Other International reported minus 3.1, excluding gas inflation FX plus 9.1. So you have all told 6.6 reported for the company and ex gas inflation and FX of 7.1. E Commerce by the way was reported of a minus Traffic or shopping frequency increased 3.9% worldwide and up 2.2% in the U. S. Our average transaction size was up 2.6% worldwide and 6.9% U.

Speaker 1

S. During the Q1. And foreign currencies relative to the U. S. Dollar negatively impacted sales by a little over 3%, while gasoline price inflation positively impacted Sales by approximately 2.5%.

Speaker 1

Moving down the income statement, membership fee income. Reported in the quarter, membership fee income Came in right at $1,000,000,000 that's $54,000,000 or 5.7% higher than last year's reported number of 946,000,000 Again, the relative weakness in foreign currencies relative to the U. S. Dollar, excluding the impact of FX, we're assuming flat FX year over year, That $54,000,000 number would have been increased by $32,000,000 and the membership on an adjusted basis would have been up a little over 9 year over year on flat FX. In terms of renewal rates, at first quarter end, our U.

Speaker 1

S. And Canada renewal rates were 92.5% compared to 92.4 percent a quarter ago and worldwide rate came in both this at quarter end and the previous quarter end the same level at 90.4%. We ended 1st quarter with 66,900,000 paid household members and 120,900,000 cardholders, both up 7% versus last year and recognize we added about 22 units over the course of that last year. So that was about Just under 3% of that increase. At Q1 end, paid executive memberships were right at 30,000,000 increase of 904,000 during the 12 weeks or 75,000 a week during the Q1.

Speaker 1

Executive members now represent 45% of our paid membership and just under 73% of worldwide sales. Moving down the income statement to gross margin. Our reported gross margin in the Q1 was lower year over year by 45 basis points and lowered by 21 basis points excluding gas inflation. And as I'll explain in a minute, the 93% pre tax charge, Excluding that 93% $93,000,000 charge we took in the quarter, gross margin ex gas inflation would have been only down 3 basis points. As I always ask you, jot down the following numbers, 2 columns and 6 line items.

Speaker 1

The first column is reported during the Q1, a year over year delta change in basis points and the second column excluding gas inflation. On a core merchandise basis, we reported in the Q1 minus 52 basis points and ex gas inflation minus 31 basis points. Ancillary and other businesses, +23 on a reported basis and plus 30 2 percent reward minus 2% and minus 5 LIFO plus 3 and plus 3. Other, that's the $93,000,000 charge minus 17 and minus 18. So all told, again, a reported basis was 45 ex gas inflation 21.

Speaker 1

So starting with the core, core merchandise's contribution to gross margin on a Reported basis was lower by 52 basis points year over year and lower by 31 basis points ex gas inflation. In terms of the core margin on their own sales, In the Q1, our core on core gross margin, if you will, was also lower by 31 basis points with food and sundries being up a little bit, offset by non foods and fresh foods being down. Fresh foods was down, as you know, for the last couple of years. It's been particularly strong and it's come down a little bit. In addition, we are looking to hold prices on some of those price points despite inflated costs in some of the fresh food categories.

Speaker 1

Ancillary and other business gross margins were higher by 23 and higher by 30 basis points ex gas inflation in the quarter, with gas, business centers and travel up year over year, offset in part by ecom, food courts and optical. Our 2% reward, minus 2 basis points reported, minus 5%, excluding gas inflation, implying higher sales penetration coming from our executive members. LIFO plus 3 basis points. We had a very small LIFO charge this year, but lapped a $14,000,000 charge Q1 last year. You recall last year during the 4 quarters we had LIFO charges in excess of $400,000,000 pre tax With a small amount that $14,000,000 in the Q1, over $100,000,000 in Q3 and over $200,000,000 in Q4.

Speaker 1

So we'll see what inflation does this year. Hopefully, it will continue its current trends in the right direction. Other, the minus 17 18 basis points reported in ex gas deflation, This is the $93,000,000 charge as mentioned in the earnings release, mostly related to downsizing our charter shipping activities. Over a year after COVID began, you will recall that the supply chain challenges related to shortages of containers and shipping delays greatly intensified with container freight and shipping rates skyrocketing. It was in Q4 of 2021 on our earnings call that we mentioned our initial leasing of 3 ships and several 1,000 containers to help mitigate these challenges.

Speaker 1

Later, we added 4 additional vessels and additional needed containers with commitments made for up to 3 years. Our objectives at the time were twofold. 1st, to increase the ability for more timely shipping and arrival of overseas merchandise. This allowed us to better stay in stock and drive sales. And second, to reduce some of the skyrocketing shipping and associated container costs.

Speaker 1

We achieved those objectives for a period of time. Over the course of a year, year and a half, we controlled the shipping and delivery of nearly 50,000 containers, many that would have been greatly delayed and at an estimated savings as compared to the then current shipping container costs of somewhere between $1,000 $2,000 per container that of course fluctuated. Now with a dramatic improvement in shipping times and much lower shipping and container costs, it made sense to downsize our commitment and lower prices for our members. Moving on to SG and A, our reported SG and A in the Q1 was lower or better year over year by 35 basis points coming in at a 9.20 compared to a year ago 9.55 And that plus 35 basis point improvement would be plus 13 basis point improvement excluding gas inflation. Again, writing down Six line items in 2 columns, 1st column being reported, 2nd ex gas inflation.

Speaker 1

During the Q1, our core operations was Lower or better by 8 basis points, +8 then without gas inflation, minus 9%, central, 0 and minus 3%, Stock compensation plus 3+1, pre opening 0 and 0, other plus 24+24 For a total first column reported year over year reported SG and A plus 35 or lower by 35 basis points And ex gas inflation lower by 13. Now going through those numbers, the core operations component of SGA was again lower by 8 basis points reported, but higher by 9 excluding impact of gas inflation. These results include 3 sets of wage increases that were done in the past year plus, as well as a little slower sales results in Q1 as compared to the prior quarter, still increases but a little lower than the prior quarter. Central was flat or 0 and higher by 3x gas inflation. Stock comp, again, a little lower number in stock comp As a percent, so it came down, improved a little bit.

Speaker 1

Pre opening, no impact. And the other, the 24 basis points you recall last year in Q1, This consisted of an asset write off totaling $118,000,000 pre tax, which impacted the SG and A line last year. Below the operating income line, interest expense was $34,000,000 this year, down $5,000,000 or down from $39,000,000 last year. And interest income and other for the quarter was higher by $11,000,000 year over year, dollars 53,000,000 versus $42,000,000 a year ago. Interest income was higher year over year offset by unfavorable FX.

Speaker 1

Overall reported pretax income in the quarter was up 4% coming in at $1,770,000,000 compared to $1,696,000,000 a year ago. And excluding the charges described earlier in both years, Pretax income was up around 3%. In terms of income taxes, our tax rate in Q1 was 23.0% compared to 20.7% Q1 last year, so a little higher this year. Both years' tax rates benefited from the tax treatment of stock based compensation as mentioned earlier. The fiscal 2023 effective tax rate excluding these discrete items this discrete item is currently projected to be between 26% 27%.

Speaker 1

A few other items of note in terms of warehouse expansion, we plan to open a net of 24 units this year, 27 openings including 3 relocations, so a net of 24. In the Q1, the net of that 24 included 7. We planned 3 more in Q2, 4 in Q3 and 10 in Q4. In the Q1, we opened, as I mentioned, 7 net new warehouses, 4 were in the U. S.

Speaker 1

And 1 each was in Korea, our first in New Zealand and our first in Sweden. Additionally, last week we opened another building in the U. S. And just yesterday we opened our 14th location in Australia, our second on the country's West Coast and or near Perth. In fiscal 'twenty three, again, 27 total new openings, including 3 locations for a net of 24.

Speaker 1

Of the net 24, it's made up of 15 in the U. S. And 9 in other international, including our 3rd and 4th locations in China. Regarding CapEx, in the Q1, CapEx was approximately $1,060,000,000 and our estimate for the entire fiscal year is CapEx of somewhere in the 3 $4,000,000,000 range. Moving to e commerce.

Speaker 1

E commerce, as we mentioned in the press release, On a reported basis was for the quarter, year over year sales were minus 3.7 and minus 2x FX. Including sales what we don't include in this number is our sales through like same day delivery for fresh with our partners like Instacart, which we don't include those and they are fulfilled in our warehouse. Our e comp comps ex FX would have been if we included it in the positive low single digits. Stronger departments in terms of year over year percentage increases were tickets and gift cards, tires, candy and health and beauty aids. The largest ecommerchandise department majors, which includes consumer electronics and appliances, which represents Over 40 close to 40% to 50% of our over 40% of our e com volume was down in the high single digits.

Speaker 1

Subsequent to quarter end, we did have our 2 biggest e com selling days in our company history, both on Black Friday and Cyber Monday. Now a few comments regarding inflation. Recall, we've seen some minor improvements in a few areas, hopefully continuing the comment I made last quarter's earnings call, A little light at the end of the tunnel, but it's still little. Recall last quarter and Q4, we estimated that year over year price inflation was about 8%. In the Q1, we estimate the equivalent year over year inflation number in the range of 6% to 7%.

Speaker 1

Food and sundries is still up more than non foods, But overall, a little better level than a quarter ago for the company. And commodity costs are mostly coming down, whether it's cornflour, sugar and butter or even some things like steel. A few things are up, but overall we're seeing a little bit of a trend, but we'll Keep you posted. Switching over to inventory levels, recall that our total inventory in both at the end of Q3 and at the end of Q4 on a year over year basis We're up 26% year over year. I'm happy to report that good progress was made during the Q1 of this fiscal year.

Speaker 1

Our increase as of Q1 end dropped to a 10% year over year increase, largely driven by an estimated 6% to 7% inflation And about just under 2% year over year unit growth. So inventories while we still have some pockets of little over inventory, overall we feel pretty good about it. As a reminder, in terms of upcoming releases, we will announce our December sales results for the 5 weeks ending Sunday, January 1 on Thursday, January 5, after the market closes. With that, I will open it up to Q and A and turn it back over to Beau. Thank you.

Operator

Thank you, You can remove yourself from the queue by pressing star 1 again. We'll take our first question this afternoon from Simeon Gutman at Morgan Stanley.

Speaker 2

Hey, thanks guys. Good afternoon. Richard, I want to start with the short term question. November, the slowdown in the Saks, Is there anything tip of the iceberg there, macro merchandising? Is there something obvious?

Speaker 2

I mean, you were living in pretty rarefied air, but curious if there's anything notable?

Speaker 1

No, I think the biggest thing is I've said a couple of times in a quaint way, it rains on all of us During these tougher times, particularly with bigger ticket discretionary items, we're comparing against some huge increases a year ago, Frankly over the last 2 or 3 years as you know and that's where we've seen some of the slowdown as I mentioned, ecom, Consumer Electronics and Appliance as I mentioned was down in high singles. I think in line was also down some amount. So that's where a big chunk of it is. When we look at Food and Sundries, that's actually tends to be relatively strong for us. So Overall, I think it's impacting us a little bit with what's going on out there.

Speaker 1

I think it is a combination of compared to very strong stuff a year ago as well as the fact that Big ticket discretionary has a little bit of weakness.

Speaker 2

Okay. And maybe just a Two part follow-up. One is just related to that answer. Does those 2 couple of days, I don't know if you can judge enough from it, does it bring you back To some type of trend line or it sounds like your tone is there's still some pressure. And then the real follow-up is On gas gross profits, if you just think about the movement of the lap throughout this fiscal year, does it progressively get harder through the year in terms of the lap?

Speaker 1

Have a couple of people in the room smiling. Of course, I can't tell you all that. But at the end of the day, first of all, if you look at our November reported numbers, the fact that those Those two high dates on e comm were in the last week. Keep in mind e comm is still a little under 10% of our total company, But that helped a little bit relative to ecom in the last 4 weeks that we reported. But overall, look, we don't know What kind of trend it means?

Speaker 1

We feel pretty good about what we're doing in terms of driving sales. And as I mentioned, the food and sundries as we get past Big ticket discretionary purchases for the holidays for Christmas and what have you, you'll have a higher penetration of some other things as well. As it relates to gas, For several quarters now, even beyond a year ago, we've talked about the gas profitability for us and we believe our competitors, Other big chains of gas stations have made more in gas and certainly that's helped us use some of that to Continue to hold prices where we can on some things. Who knows what the new normal is? What we know is that not only is Yes, more profitable than it has been in the past.

Speaker 1

And like I said, the same thing a year ago. Will that change at some point? Maybe. We don't know. So right now, it's good.

Speaker 1

And by the way, as we've mentioned a couple of times, we've seen strong gallon sales and we're still taking market share. When the U. S. Gallon sales are generally close to flat, we're up in the 10% to 15% range in gallons. So We're driving people into the parking lot and the fact that gallons of gas are profitable that is just a little bit more for us as well.

Speaker 1

So that's helped us. There's always things that are going to help us and there's always going to be puts and takes.

Speaker 2

Okay. Thanks to everyone. Happy holidays.

Speaker 1

Same to you.

Operator

Thank you. We go next now to Chuck Grom at Gordon Haskett.

Speaker 3

Hey, how's it going Richard? My question is on the LIFO charge. It looks like if it's a few basis points of a hit, that would Back into about $30,000,000 to $40,000,000 And then I'm curious, I know you don't provide guidance, but knowing what you know now and if inflation holds at that, Say 6% level, would that be a good proxy for the charge at least over the next couple of quarters?

Speaker 1

Well, I think yes, LIFO was a slight pickup just because the dollar amount was less than the $14,000,000 last year in the quarter. It's very slight. So if that continues, that would be good and that would bode well and you'd have I'm guessing you'd have a lot lower charge than 423,000,000 Recognizing the big pickup was in Q3 the big hit was in Q3 and Q4 when we saw the beginning of inflation rising. If inflation didn't go down, but it just stayed the same, In theory, you'd have no big charge. You'd have no additional charge.

Speaker 1

If it starts to go down from its peaks, That will have there'll be some LIFO income. Now mind you, some of that will be used for pricing as well. I mean, we'll you know us.

Speaker 3

Yes. Okay. So what would you do? Do you have the absolute dollar amount for the LIFO charge in the quarter Of course.

Speaker 1

Yes. Less than $1,000,000 Less than $1,000,000

Speaker 3

Less than $1,000,000 Okay, great. And then on the ancillary line, You've had real good success there in back to back quarters and you outlined gas profitability, ecom, Food Court. Is there one that's been more outsized over the past couple of quarters and that maybe we could think about over the next few quarters because it's been a nice improvement?

Speaker 1

Well, look, gas is just the sheer size of our gasoline business. It's been the biggest piece of that line For a few years. Yes, we have a it's a $30 plus 1,000,000,000 on our $220,000,000,000 whatever last year we did in sales, I think a little over $30,000,000,000 was gas. So that's the big kahuna among all that stuff.

Speaker 3

Okay, great. Thanks very much.

Operator

Thank you. We go next now to Michael Lasser of UBS.

Speaker 4

Good evening. Thanks a lot for taking my question. Richard, between the 31 basis point Core on core gross margin, the discussion decreased decrease in core on core gross margin, the discussion around Giving up some shipping capacity to have a better price for your member, is the mindset of Costco right now As the economy enters a more disco economic period, Costco is going to be stepping up price investments In order to gain market share?

Speaker 1

I think we continue just to remain competitive. Yes. You've known us long enough when asked who's our toughest competitor, we look in the mirror, we say it's us. So I think that As we drive market share part of we believe that part of it at least is due to the fact that we've continued to be very competitive. And so I don't think there's any change in that.

Speaker 1

We notwithstanding where our numbers come out, we're always trying to push more into lowering the prices or keeping the price This is going not as high as they could have been. I think fresh foods is a good example of that of late Where again, we've held the price points on certain items despite inflated costs, mostly in the protein area and a little bit in the bakery area.

Speaker 4

And Richard, you've long talked about the Costco model is driven 1st and foremost by sales And the need to drive at least the mid single digit comp in order for the other parts of the P and L to work. So if The economy is entering a softer period where discretionary sales are going to be a little weaker and comps overall sales are going to be a little softer. Should we be modeling and prognosticating just a lower overall earnings growth For Costco during this time, as

Speaker 1

we go through these factors? Well, good news is that's your job to model it. Look, At the end of the day, I think that the comment I made about big ticket discretionary while we sell big ticket discretionary includes furniture, which we sell Lawn and garden patio too, that's not right now at the holiday season necessarily. But that being said, there is a higher proportion of big Discretionary right now. And we're blessed in the sense that a big chunk of our business is fresh foods and food and sundries, Which people have to eat.

Speaker 1

And as I mentioned, that has been strong throughout this. So I think overall, we'll probably Still look at it in a positive aggressive relatively aggressive standpoint. Ultimately, when you talk about Top line sales and if they're a little lower, what do we need? I think this question historically has always been asked, what do we need to have SG and A Not go up as a percent of sales. And the view is and this is pre inflation thoughts.

Speaker 1

The view is always you need to something our Best guess view was somewhere in the 4% to 5% comp range. If it falls below that, that will make SG and A a little bit of a challenge. That being said, we're pretty pragmatic and we know how to use our margin as well. So I think overall, we'll continue to Work entirely to drop to drive top line sales and look at it for the long term. And we're not Any big way cutting back orders at this juncture, where we see some challenges with big ticket discretionary, Does it come down a little?

Speaker 1

I think the key word there is a little. And we're feeling very good about some of our business now despite what's going on out there. We're blessed that we think again, I think as evidenced by gas and even the food and sundries business, we're blessed by taking market share still. I think that's evidenced in our memberships and

Speaker 4

Your answer was a lot better than my question. So thank you very much.

Operator

Thank you. We go next now to Rupesh Parikh at Oppenheimer.

Speaker 5

Good afternoon. Thanks for taking my question. So just on a core on core decline of 31 basis points, I was hoping you provide more color just in terms of what's driving that decline In non foods category. And then just related to the pressure on fresh foods, I know I think you've now lapped some of the last year, I think fresh foods was also a headwind. So when do we lap some of the I guess some of the efficiencies that you gained during the pandemic?

Speaker 5

Because I know you've given it back in recent quarters. I'm trying to get a sense of when that pressure point could go away.

Speaker 1

I don't know exactly. I mean, if we're 3 quarters of a year into it, I think if I recall over the last 2 or 3 quarters, we talked about like Fresh being that way and probably exacerbated a little right now with The fact that we're trying to hold prices on some things that we think that that's driving our sales. Beyond that, I forgot the first part of the question now.

Speaker 5

Just on non food, any more color

Speaker 1

or color? Yes. I think that, yes, it's fundamentally First of all, in terms of the overall, it's fundamentally fresh and then some non foods. Some of that has to do with some of the big ticket things. If you've been online and saw some things we did During not just the week of Thanksgiving and Cyber Monday, but we did some anywhere from $100 to $500 off on I think $500 cash card if you bought $3,000 or more of these items.

Speaker 1

And so we're getting rid of some of the reasons that that 26% year over year inventory increase went to 10% Was we got rid of some of the stuff that we had some things that we had deep freeze and some things that we had delayed shipping during the supply chain challenge. So, yes, we did take some more markdowns than normal as you would expect to help get rid of that. And hopefully, that's not a pressure point going forward. Certainly, I don't think it will be as much. And again, there's so many moving parts To this equation, I wish it was as easy as each basis point we could explain.

Speaker 1

We try to give you the rounded numbers. But Overall, again, I get back to we feel good about how we're doing competitively. And we certainly understand that big ticket discretionary things have shown a little weakness In part because of our strength from a year ago and in part it's got to be part of the economy. And the good news is We have big chunks of our business that are fresh foods, food and sundries, health and beauty aids, gas, all those types of things. And even other things like That's small, but travel has come back really strong from a really weak place a couple of years ago.

Speaker 5

Great. And then maybe just one additional question. Just on the membership VHike, if we are in a weaker economic backdrop next year, does that at all impact how you guys are thinking about the timing of the membership VHike?

Speaker 1

Well, it certainly goes into the thought process. We're still not even to the average of the last three increases in terms of timing between the last one and the next one. What we've said again and I'll say again is that our view is all the parameters as it relates to member loyalty and value proposition that we've And prove to our member, we have no problem thinking about doing it and doing it ultimately. So it's a question of when not if, But we feel that we're in a very strong competitive position right now. And if we have to wait a few months or several months, that's fine.

Speaker 1

And I'll be purposely coy on when that might be.

Speaker 5

Thank you. Happy holidays.

Speaker 1

Same to you.

Operator

Thank you. We go next now to Paul Lechwey at Citi.

Speaker 6

Hey, it's Brandon Cheatham on for Paul. First one, I wanted to dig into the decision on holding the price on fresh. Are you seeing Competitors do the same and that's why you reacted there or are you kind of trying to lead the charge there? And just Curious like why make that decision since it seems like the consumer has been happy to take increased price, especially in fresh?

Speaker 1

Yes. The last thing you said there is exactly I think why we chose to do a little more there. We want to be the most competitive And we can drive a lot of volume. And again, we're in it for the long term. And it's Fresh is one of those unique areas where prices on many items do change almost weekly on some of those items, if not sooner, if not more quickly.

Speaker 1

And so our buyers are always looking at the, if you will, the supermarket ads as well as the other warehouse club ads, not literally ads, but what the pricing is And we react to that. But we're also part of it is also consciously keeping the price on the chicken at 4.99 And those types of things, keeping the price on the hotdog, all those things go into that equation as well. But We know that that can be a driver of business fresh. We got great stuff and people do notice the price in our view, people notice those price differences.

Speaker 6

And just a quick follow-up, you have a large competitor that's been talking about Increased members in the $100,000 plus income cohort, obviously it's not impacting your membership numbers, but I'm just wondering No. Do you see any impact on Share Wallet or any thoughts there? Do you look at how many of your members might have Additional memberships as well?

Speaker 1

Well, we don't what's that? Yes. Somebody in the room is telling me we were also up in terms of the average Household incomes. So I think we're both seeing that. We know a lot of particularly of our executive or our business members In many cases, probably have both cards.

Speaker 1

They've always had both cards. And so, no, we don't put our head in the sand as it relates But we look at our numbers and how we're doing and we've seen that the our penetration of higher income members has also benefited during this

Speaker 7

Time. Got

Speaker 6

it. Appreciate it. Thanks and good luck.

Operator

Thank you. We'll go next now to Oliver Chen at Cowen.

Speaker 1

Before Oliver answers, one other Oliver, before you ask a question, one other comment. One of the things that we have not done and Don't plan to do is do a lot of promotional activities with our membership. And so that certainly that will in the short term help Drive membership, but we don't do a lot of that. Go ahead, Oliver.

Speaker 7

Richard, thanks. Happy holidays. Regarding e commerce And going forward, what are your thoughts? You're up against some tough compares, but as we model it on a longer term basis, how should the growth rates evolve? And then as we think about non food, you talked about it a lot, but do you expect the non food percentage mix to change from the past or will more normalize?

Speaker 7

And lastly, on the higher income consumer and gains there, Would love for you to elaborate on what's happening and if you're getting more luxury consumers in terms of higher income folks joining in the club.

Speaker 1

Sure. I wrote down non food in terms of what's the new normal. Look, we don't know what's new normal is. I do know that we figure out how to drive total sales. I do know that over the last two and a half years Through COVID, people buying things for their home, whether it was indoor furniture, outdoor furniture, exercise equipment, electronics and appliances and Increasing, even greater because of our acquisition in April of 2020 of the Last Mile big and bulky delivery and installation arm from Sears.

Speaker 1

All that stuff has helped us dramatically. Look, a little bit is again, we don't know how much of it is just comparing against very strong numbers versus a little weakness. Our guess is a little above. We want to drive we always want to drive Everything, but we want to drive more non food things because you've got you don't need any extra space. If you're turning fresh foods at 50, 60 times a year or more, you're turning some non food categories at 8 times a year.

Speaker 1

It's easy to go from 8 to 10 Without any extra space in the building. So that's always been a goal of ours to drive both sides of the business and we think we're pretty good at doing it and This will be we'll find out what the answer is a year from now. On what was the other question, I'm sorry?

Speaker 7

On ecom and the ecom long term growth rate there and then also the higher income versus

Speaker 1

Sure. Okay. On e comm, again, that is even more dramatic if you look at what e comm did. We essentially doubled e comm over a 12 month period from About worldwide from about $8,000,000,000 to $16,000,000,000 in that probably 3 or 4 months into COVID and then going fast forward a year. So the last Half of fiscal 2020 and the first half of fiscal 2021.

Speaker 1

We had pretty good numbers of late over the last year. That of course dramatically impacted in a good way from our acquisition of Innoval. And doing as I mentioned on the last earnings call, Pre that acquisition in the U. S, we did about a little over 2,000,000 drops and a drop is anything from dropping off a sofa To install dropping off and installing a washer, dryer or refrigerator freezer and taking the old one away. We've gone from a little over 2,000,000 drops.

Speaker 1

In fiscal 2022, we did a little over $4,000,000 drops, 70% of which was on this site in this operation that we acquired. So We've had outsized growth on that helped also not only by the acquisition, but COVID itself. So we're comparing against that now. We'll see where that goes. We think that E commerce still long term.

Speaker 1

First of all, as you know, we still want you to get in there, get Into the warehouse as well. That's what so long term, we still think right now we're going to grow we want to grow the e commerce. Yes. I think I would say our goal still is to grow it a little more than in line right now because so much of it has been benefited by big ticket items, which have shown some weakness That's impacting a little bit right now. So, but long term, we want to still be even 9% or 10% of a 2 $40,000,000,000 or $50,000,000,000 business here is a big chunk of business.

Speaker 1

Yes. In terms of the last question, I'm sorry, I didn't write it down.

Speaker 7

Yes, I think of Costco as a luxury company too. So what are your thoughts on getting the Higher income consumers and anything you're seeing with your existing consumers in terms of behavior because everybody is under a little bit of pressure as well? Thank you. Well,

Speaker 1

again, someone in the room here showed me that I think the data that somebody had asked me about where Walmart had indicated, We're all looking at that same data. We too saw the metrics of a little bit higher percentage of higher income people coming in. Notwithstanding the fact that we start with a higher percentage to start with, that's we try to trade you up. And you know the quality of our merchandise and we'd much rather sell you a bigger ticket item with all the bells and whistles. So I think that it's the way we merchandise and we're not looking to change that at this juncture.

Speaker 7

Thank you. Best regards, Richard.

Operator

Yes. Thank you. We go next now to Greg Melich of Evercore.

Speaker 8

Hi, thanks.

Speaker 9

I would just like to talk about how traffic seems to be growing closer to 2% now in the U. S. Is there anything specific going on there or we just need to get used to it as recycling lower gas prices and tough out this lower traffic?

Speaker 1

Perhaps. I mean, we still think anything that's even in the low single digits is great. And we benefited clearly from over the course of the last year, we benefited as I've seen in our membership sign ups, More people coming in and the gas business driving that a little bit as well. And just during COVID, we picked we had At higher than previously average tick up in new member sign ups. And so that's probably subsiding a little bit at this juncture.

Speaker 1

But Again, we feel good very good about where our renewal rates are and then the loyalty that our members have. And we're pretty good at Keep trying to figure out ways to get them in. We're doing we do online emails that are in line directed for hot items To come in only available in store. And so those are the things that we continue to do.

Speaker 9

Got it. Could you update us on any Private label, extra gains that you're getting in this environment or trade down perhaps between proteins or anything like that we're calling out?

Speaker 1

We haven't seen last quarter I mentioned a couple of things on the fresh side and the protein side that we actually saw strength in canned chicken and tuna, Which was the comment that the buyers made saying that we're seeing to the extent that prices were skyrocketing in some fresh protein, we saw strength in canned protein. We don't see currently a lot of trade down on fresh. Prices have started to come down on some of those items As the underlying commodity costs have come down a little bit.

Speaker 3

Got it.

Speaker 1

KS penetration is up. Our Kyrgyle senior is up. I don't have the exact number in front of me. I'm guessing it's about somewhere approaching a percentage point, but which is big. And when it's I would say over the last several years it's probably been a 0.5 percentage point, but so probably up a little more than normal, but and again we had Somebody asked us the question recently, are you seeing some trade down to private label and we of course corrected them and said it's a trade up.

Speaker 9

You also mentioned it's a housekeeping item, but I want to make sure I got the charge right. So you're basically writing a check to Reduce the size of a contract that was at a higher price. So what's the payback period on that check? Do we see it over 4 quarters, 2 quarters, 6 quarters?

Speaker 1

It's a moving target honestly. It's based on rates, frankly, and rates right now have come down dramatically. So that would be A year. It could be a little longer than a year or a little less than a year depending on what happens tomorrow.

Speaker 3

Okay, great.

Speaker 10

Good luck and thanks.

Speaker 11

Yes.

Operator

Thank you. We go next now to Peter Benedict of Baird.

Speaker 11

Hey, Richard. Just to add new member sign ups,

Speaker 8

you kind of mentioned it a

Speaker 11

little bit there in response to Greg's question, but just Maybe talk about new member sign up trends holistically what you're seeing, anything U. S. Versus maybe some of these international markets you've been entering? Just interested in your latest thoughts there.

Speaker 1

Well, I think the biggest thing continues to be we're better when somebody does sign up, That they signed up in those countries where we offer executive membership, which is I'm guessing 85% of our company, More, maybe 90% of our company. It's just not in some of the smaller unit countries. And Overall, starting with the U. S, but overall in Canada, we do a better job of getting you to sign up as an executive member to start with. We also do a better job of getting you to auto sign up to auto renew with putting in your credit card.

Speaker 1

All those things help let's face it, all those things help too. We know that an executive member buys more and shops more frequently in a year than a Gold Star member. We know that One of those members with a credit card, co brand credit card shops even more frequently and spends more and they do all 3. If they're an executive member rather with a card versus being a regular member, that's the big kahuna here. And so I think that we've seen those trends go on over the last few years, frankly.

Speaker 1

And what's helped in the last year Is the fact that again just our new member sign ups has been higher than they had been historically over the last few years versus the last year Last year or 2. And I think we believe that's more because of COVID and we were a good place to shop.

Speaker 11

Not sure. That makes sense. And as my last question, just interest income and other obviously has a few It's Stuart. I'm curious if you can help us understand what the interest income was in the quarter. I think it was about $8,000,000 last year.

Speaker 11

I'm not

Operator

sure I'm sure that was up

Speaker 11

a lot this quarter. Just curious, can you

Operator

give us a sense of what that number was in the Q1? Thank you.

Speaker 1

We normally Is that in the queue? Okay. Yes, I can give it to you. Hold on a second. I didn't realize it's in the queue, so which is not out yet.

Speaker 1

But what it is, is you've got a big increase in interest income and a big increase in FX downside. So of the $50,000,000 I think it was $53,000,000 is interest income and a negative $1,000,000 is Which is a chunk of that's FX. And then this year, the $42,000,000 I'm sorry, last year, it was $8,000,000 of interest income And $34,000,000 of other, the biggest piece of other being FX. So that's added up to the $42,000,000 This year, the $53,000,000 is $54,000,000 of interest income and minus 1 of other.

Operator

Yes. That's what I

Speaker 11

was looking for. Thank you very much.

Operator

And we'll go next now to Kelly Bania of BMO.

Speaker 12

Hi. Thanks for taking our questions. Richard, just had one on elasticity and then another follow-up on the big ticket. But in terms of elasticity, any changes, I'm not sure how you measure it or monitor it, but any changes in your members' response To your actions when you are taking some lower prices here?

Speaker 1

I think if you ask the buyers overall that There's a little less elasticity than there used to be on some of these. Again, now that answer comes from the fact that My comments about big ticket discretionary items. We've put more money behind it and that successfully cleaned up our inventory where we were over in some areas like furniture To some extent. But at the end of the day, I think in a year or 2 ago, we would have even guessed that could have been a little stronger. But then that gets back to the whole question is the economy the concerns in the economy impacting big ticket discretionary items.

Speaker 1

So, yes, I mean, there's clearly still elasticity. When we do temporary price discounts or even our NVM mailers, We still get good impact from it. Some things, the bigger the ticket, not as much as we used to get.

Speaker 12

That's helpful. And then just a follow-up, again on the big ticket. What percent of your sales would you say are big ticket? Maybe it ebbs and flows with the seasons, but just in general. And do you see that members are pretty broad based and pulling back Meaning across income levels, executive, Gold Star, etcetera?

Speaker 1

Well, online it's a little over 40, But online is only 9% of our sales. In store, I don't have it in front of me, 10% would be a good guess. I'm including that 10 Furniture as well. So big take and jewelry, big take at discretionary.

Speaker 12

Perfect. Appreciate it.

Operator

And we go next now to Chris Horvers at JPMorgan.

Speaker 8

Thanks. Good evening. So following up a little bit there, on the TV side, is it how much of it is a units down issue versus Deflation. And is there any differentiation that you're seeing between larger and smaller screen size purchases?

Speaker 1

Yes. Yes. Units are actually up and there's normal deflation in TVs electronics anyway. And but there is perhaps a little bit of smaller sizes are coming down a little bit. Not everyone wants an 85 inches television and but Which is where we over index to bigger ticket stuff to start with.

Speaker 1

But we are seeing actual unit sales up.

Speaker 8

So units are up with strength relative strength in smaller sizes?

Operator

Yes.

Speaker 8

Got it. And then a couple of sort of other bigger picture consumer questions. I guess is there Are you seeing maybe some mid to low end maybe not buying the 18 pack of Bounty? Like do you think you might be Losing some category share as someone's trying to economize the ticket for your the lower half of your income perspective. And then Can you also talk about regionality?

Speaker 8

Obviously, there's some weakness in certain housing markets in Certain cities and then there's you have a big exposure to California. There's been more laugh news in the technology industry and there's some population migration. So

Operator

Okay.

Speaker 8

What are you seeing from a regionality perspective, where you're seeing more weakness versus strength?

Speaker 1

Well, first of all, we're seeing strength in sundries as part of what we call food and sundries, which is everything. Food In Food and Sundries is everything from canned beverages to crackers and cereal And sundries, of course, paper goods and cleaning supplies and the like. And we're seeing strength in those areas. Those are actually strong offset by some of the weakness I talked about on the non food side. As it relates to regional, We don't really see any big differences.

Speaker 1

I mean every month you're going to see a region stronger or weaker. It has more to do in our view Right now, I'm late with weather than anything else. I can't give you anything definitive on What's happening is the region? It's pretty good. They're all pretty close.

Speaker 1

They're within a point and a half or two Bob is saying here they're within a couple of points of comp.

Speaker 8

Got it. And then one cleanup question, just on the inventory, you talked about pockets. It sounds like You cleaned up furniture and electronics, it sounds like. Is there any where are those pockets? How much is it?

Speaker 8

Is maybe holiday decor or toys? Are there more at risk categories in the month of December?

Speaker 1

Yes. Good news as our merchants are sitting here, holiday and decor is fine. One example actually would be we have a small amount of air conditioners and fans, which was a hot summer and we were very strong in it. There were delays some of the supply chain challenges, some of that stuff didn't come in until September. And needless to say, we're not going to put it out there and market down when nobody really is Looking for a year for this year in September.

Speaker 1

And so that's the example of a few things now. We still have some furniture. It's way down from where it had been. So it's very, Very manageable. I think beyond that there's nothing huge.

Speaker 1

And again, the big question right now would be The fact that from a standpoint of Christmas stuff both the Trima stuff as well as toys, We're in pretty good shape for that. We feel pretty good about that.

Speaker 8

That's great. Thanks so much. Have a great holiday season.

Operator

Peace. Thank you. We go next now to Scot Ciccarelli at Truist.

Speaker 10

Good evening, guys. So I guess I have another gross margin question.

Speaker 8

And I

Speaker 10

guess it's look, if consumables continue to outpace discretionary goods based on what we're seeing in the economy, Should we expect gross margins to compress a bit just from mix? Or do you have enough levers given existing price gaps across most of your categories to manage the flattish gross margins. Just how should we think about the mix impact?

Speaker 1

We'll let you know next quarter. I mean, we have a lot of levers as you've mentioned, as you suggested to pull and push. We're also aggressive on pricing when we want to be like in the fresh foods area that I just mentioned. And we're blessed right now with in some categories like gas that does a better margin. So all that stuff there again there's a variety of puts and takes.

Speaker 1

We feel overall, there's nothing unusual about this quarter. And frankly, If inflation is not rising again, even if it doesn't go down, but it doesn't rise again from its current levels, We're in pretty good stead of greatly improving the component of margin that relates to a LIFO charge, particularly in Q3 and Q4 when We had $100 plus 1,000,000 number and a $200 plus 1,000,000 number, but that's to be seen and we need to wait and see.

Speaker 10

So just as a follow-up on that, Richard, like, fair to say that we're going to see lower freight rates Starting to flow through the P and L and let's call it less markdown pressure because the inventories are cleaned up a bit more than the last few quarters?

Speaker 1

That should help you a little bit, sure. But as you might expect, and one of the reasons we took this charge is we don't want to have to The buyers worry about inputting higher costs into their if rates have come down and we contracted, we want to take some of that out. But that's still being worked through. That's not we have to continue to do that. Beyond that, as rates come down, you'll see our prices on items come down too.

Speaker 10

Got it. All right. Thanks a lot. Good evening.

Speaker 1

Okay. Why don't we take 2 more questions?

Operator

Certainly, Richard. Thank you. We'll go next now to Karen Short at Credit Suisse.

Speaker 13

Hi. Thanks for taking my question. So good to talk to you again And I hope you all have happy holidays going forward. But I did want to clarify on 2 things. So in the past when you have had slightly weakening traffic trends that has generally been A point to consider to actually push through a higher Memberships, rate increase.

Speaker 13

So I'm wondering, I know this is a very unusual time, but Has that philosophy changed at all? Because obviously your comps are changing or slowing. And then I would ask the Same thing as it relates to the special dividend. We all know what your cash is and available cash is on the balance sheet In terms of timing with respect to announcing something like that along the lines of the fact that I think your Board meeting is mid January?

Speaker 1

We have one every quarter. Look, we talked about both of those. In terms of the fee increase, I think over the last many years, we've probably done them at a time when things were particularly strong comp wise. The good news is During all times renewal rates were strong and have gotten even stronger. We always look at ourselves in the mirror and feel that the value proposition has gotten better.

Speaker 1

That being said, we have done them. I remember one time we were asked, it may have been back in 2009, 2010 and during the Great Recession, because I guess we did one probably in 2011 or 2012, Which continued the great recession and we'd be asked given the great recession, would you hold off on it? Our view was and comps were a little weaker back then too for at least a couple of quarters. And I think the comment I made was something to the effect, We'd probably do it anyway, but because we're going to use it to drive greater value in terms of pricing and everything in a big way. And so that really I think we've probably done it in times of lower comps or higher comps or good economy or tougher economy.

Speaker 1

And I think with the headline in the last what I probably mentioned in the last quarter call or even the quarter before that, with the headline being Recession question mark and inflation exclamation point. There's no rush. And first of all, even if we follow the pattern of the last three Over the last 16 or so years, they averaged 5 years 7 months. And I know now that 5 years 7 months from June of 'seventeen is January of 'twenty 3. I know on the last call I said that doesn't mean it's going to be January 23.

Speaker 1

It will be it's a question of when not if, but at this juncture we'll just have to wait and see. And I'm not trying to be cute about it, but There's not a whole lot more I can tell you. There's no analytical framework we use other than we feel very good about our member loyalty and our strength. And if we wanted to do it yesterday, we could. If we want to do it 6 months from now, we can.

Speaker 1

So we'll wait and see. As it relates to The special dividend, as you know, we've said before, it's certainly an arrow in our quiver that has bode well for us, we believe. We think that's done well. We've done 4 of them. The last one was a couple of years ago.

Speaker 1

And we certainly do have cash. Mind you, when you look at our cash, about half of it's U. S. And not cash equivalents. And so certainly we have the ability to do it at some point.

Speaker 1

I think we wanted to wait and see how things are continuing here. I think that too is probably a question of when not if, but again you'll be the second to know after us.

Speaker 13

Okay. Thank you very much. Have a good holiday.

Speaker 1

Same to you.

Operator

Thank you. And we'll take our final question this evening from Robbie Ohmes of Bank of America.

Speaker 14

It will be a real quick one, Richard. Can you just remind us, you're back to 15 net Stores in the U. S. But what has to happen to go back to kind of the years where you would open kind of a net 25 a year in the U. S.

Speaker 14

And maybe relieve some of the pressure On the over productive clubs in the U. S. Right now?

Speaker 1

Yes, I think it's been a few years. I mean, when we opened the net of 27 or 8, maybe Low 20s or 22 or 3 were there. But we've been at maybe 16 or 17 out of 23 ish In the last few years, if you ask Greg, who's not in the room, but if you asked him, if we're opening a net of 24 this year, I think I said, What's the goal 5 10 years from now? Probably to get it closer to 30 net and probably by 5 years from now, it's fifty-fifty U. S.

Speaker 1

Elsewhere versus elsewhere? That's the same answer I by the way said 5 years ago in terms of the split. But we'd like to see add 5 to that 24 in the next few years to go up a little bit higher.

Speaker 14

Terrific. We certainly have

Speaker 1

a lot of activity going on.

Speaker 14

Excellent. Thank you, sir.

Speaker 1

Okay. With that, everyone, I'll thank you. Have a good holiday and we're around to answer questions.

Operator

Thank you, Richard. Ladies and gentlemen, that will conclude Costco's fiscal Q1 2023 conference call. I would like to thank you all so much for joining us. Wish you all a great evening. Goodbye.

Speaker 1

Thank you.

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