Ladies and gentlemen, thank you for standing by and welcome to the Q3 earnings call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions]. And please note that this conference is being recorded. [Operator Instructions]. And I would now like to hand the call over to Mr. Richard Galanti, CFO. Please go ahead, sir.

Thank you Joseph 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 2020, the 12 weeks ended May 10. Reported net income for the quarter came in at $838 million or $1.89 per diluted share. This compared to $906 million or $2.05 per diluted share last year in the third quarter. Now, this year's third quarter was negatively impacted by direct expenses of $283 million pretax or $0.47 per diluted share from incremental wage, safety and sanitation costs related to COVID-19 and last year's third quarter number of $2.05 included the benefit from a nonrecurring tax item of $73 million or $0.16 per diluted share. Net sales for the quarter increased 7.3% to $36.45 billion, up from $33.96 billion last year in the third quarter. On a same-store comparable sales basis for the third quarter, for the 12 weeks on a reported basis, the U.S. was at 5.9%. Excluding gas deflation and FX impact, the 5.9% would have been for the 12 weeks an 8.0%. Canada on a reported basis was minus 2.5%, ex gas deflation and FX plus 3.0%. Other international came in on a reported basis at 6.2% and again ex gas deflation and FX, plus 12.2%. All told, the total company came in with a reported 4.8% and again ex gas deflation and FX, the 4.8% would have been 7.8%. I might also note that e-commerce on a reported basis was 64.5% comp and ex gas deflation or ex FX, 66.1%. Now foreign currencies relative to the U.S. dollar negatively impacted sales by approximately 110 basis points and gasoline price deflation negatively impacted sales by approximately 190 basis points for the total company therefore to 300 basis points. Additionally, gasoline volumes or gallons were down about 20% year-over-year in the quarter as a result of less driving due to the pandemic. The impact of gasoline gallons is not in the adjusted figures that I just described above. In terms of traffic, our shopping frequency decreased in the quarter worldwide by 4.1% and in the U.S. by 2.0%. Our average transaction or ticket was up 9.3% during the third quarter and the 9.3% does include the negative impacts from gas deflation and FX. Now, our third quarter comp sales figures did reflect also that a few of our businesses, notably optical, hearing aids and photo were closed for much of Q3 and a good portion of our food court item offerings were eliminated also for much of Q3 as well we eliminated the food court seating during this time. Reopenings of these began, the ones that were closed, began on April 30, 10 days prior to the third quarter end with about 20% of the locations back to operating by Q3 end. In the past two to three weeks, nearly all will be back in operation by mid-June. In terms of the food courts which have been open but again a much more limited menu, we have added some but not all the items back as of now. In all, an estimated hit to the reported sales numbers that we gave you earlier in Q3 by one to two percentage points by those items being closed or restricted. Next on the income statement. Membership fee income reported came in at $815 million or 2.24%, up 5% or $39 million from $776 million or 2.9% last year in Q3. Ex FX weakness, the $39 million increase and 5% increase would have been up $47 million or 6%. During the quarter, we had two new openings and a total of four year-to-date. In terms of renewal rates, at Q3 end, our U.S. and Canada renewal rate came in at 91.0%, a tick up from where we were at Q2 end and the worldwide rate came in at 88.4%, the same as it was a fiscal quarter ago. Keep in mind that any impact on renewal rates from COVID, positive or negative, are reflected over the next several months. In terms the number of members at Q3 end, member households and cardholders. In terms of households, we ended the third quarter with 55.8 million households, up from 55.3 million 12 weeks earlier. And total cardholders came in at 101.8 million, up from 100.9 million 12 weeks earlier. At Q3 end, paid executive memberships came in at 21.8 million, an increase of 135,000 over the last 12 weeks. Going down to the gross margin line. Our reported gross margin was higher year-over-year by 54 basis points on a reported basis, coming in at 11.53%, up from 10.99%. Now, the 54, ex gas deflation would have been plus 33 basis points. As I usually do, I will ask you to write down a few numbers in two columns and then we will go through that explanation. In terms reported, in Q3 2020 year-over-year, the core merchandise was up 51 basis points on a reported basis and without gas deflation up 33. Ancillary businesses was on a reported basis plus 26 basis points, ex gas deflation plus 21. The 2% reward, minus six and minus four basis points. Other, minus 17 and minus 17. And you add up those two columns, total reported again up 54 basis points on a reported basis and up 33 basis points. And gross margin was up 33 basis points, ex-gas deflation. Now, the core merchandise component of gross margin again higher by 51 or 33 ex deflation. Keep in mind that in the quarter, we had a decent sales shift from ancillary and other businesses to core businesses which resulted in a higher contribution of our total gross margin dollars coming from the core. Looking at the core merchandise categories in relation to only their own sales or what we call core-on-core, margins year-over-year were lower by 17 basis points. Five basis points, by the way, which was losses related to our new poultry complex. This is something I have pointed out in the last two quarters and will probably do so next quarter as well. In total, pretty similar in fact to our year-over-year impact in Q2. So while higher penetration of our total sales came from the core this year, it was at a slightly lower gross margin percentage year-over-year. This is mostly attributed to sales mix, both between and within merchandise categories. Our fresh foods gross margin percentage was up, again despite any first-year headwinds from the ramp up process associated with poultry complex. The strength in fresh was a result of high sales, driving down our spoilage as well as labor costs as a percent of sales, being able to leverage those at a normal rate. Softlines, food and sundries and hardlines, all had lower margin percentage year-over-year in the quarter. One example, non-foods which is both hardlines and softlines. Non-foods was impacted by shift in sales towards lower margin departments, particularly things like majors and big-ticket electronics. Ancillary and other business gross margin in the two columns, higher by 26 basis points. And again, 21 higher basis points ex gas deflation. This result was primarily due to strength in gas and e-com gross margin dollars year-over-year, partially offset by lower penetration of ancillary sales due to lower gas prices and volumes and closures of some of those ancillary businesses that I talked about earlier. Several of those businesses have higher gross margins. 2% reward was higher or was a hit to gross margin by six basis points on a reported basis and four ex deflation, implying that slightly higher percentage of our sales were eligible for the executive member reward. The other line item, 17 basis points to the negative. 12 of the 17 basis points is attributable to the COVID costs and the 12 basis points, that's about $44 million of the $283 million number that was mentioned in the press release. These are the costs for incremental wages, safety and sanitation costs allocated to our cost departments and merchandise fulfillment operations. So it hits the margin. The other five basis points or $19.7 million came from accruing reserve for certain third-party gift cards and ticket programs. This latter $19.7 million was not included in the $283 million total amount that we called out as a direct incremental expenses from COVID. Moving to SG&A. Our reported SG&A percentage year-over-year was higher by 59 basis points, coming in at 10.51% of sales, up from 9.92%. Ex gas deflation, the minus 59 would have been minus 40 or higher by 40. If you would again please jot down the following SG&A components and then we will go through that. Core operations reported was plus nine or lower by nine, a benefit of nine. Ex gas deflation, plus 24 or a benefit of 24 basis points. Central was zero and plus two. Stock compensation, plus three and plus three. Other, minus 71 and minus 69. And you add up those two columns, you get to the reported SG&A increase of 59 basis points and ex gas and FX -- ex gas deflation, rather, minus 40 or by a higher by 40 basis points. Now again, the core operations component lower by nine and ex gas deflation lower by 24. SG&A in the core operations, that's excluding the COVID-related expenses that I will talk about in the minute, they were, needless to say, leveraged with strong core merchandise sales. Central was essentially flat and a slight improvement relative to the including the ex gas deflation. Stock comp, no surprises there. It was a slight benefit to SG&A by three basis points. And again the other component of 71 or 69 ex gas deflation, of the 71, 66 basis points of the 71 is attributable to the incremental costs of COVID-19 or $239 million of that $283 million total amount that was in the press release. Again these are the cost for incremental wages and safety and sanitation related to direct expenses. The balance of the 71 basis point figure was five basis points or $18.5 million, this came from the costs associated with the acquisition and integration-related expenses of our recent acquisition of Innovel, that last mile delivery and installation operation for big and bulky that we acquired a few months ago. Next on the income statement is pre-opening expense. Pre-opening expense was lower by $6 million, coming in at $8 million in the quarter versus $14 million a year ago. Again, we had two openings this year. Last year in the quarter, we had three. Although, chunks of each of these numbers relate to pending openings in Q4 as well. All told, reported operating income in the third quarter of 2020 increased by 5.1%, coming in at $1,179 million this year, compared to $1,122 million a year ago. Now this 5% increase is notwithstanding the incremental cost that I just talked about, the $283 million as well as the $19.7 million and the $18.5 million that I just mentioned as well. Those are all taken in the third quarter. Below the operating income line. Interest expense was higher year-over-year by $2 million coming in at $37 million this year in the quarter versus $35 million a year ago. Recall, that we completed a $4 billion debt offering on April 20 during the third quarter. Following the completion of the debt offering, we called the outstanding debt due May of 2021. That was a $1 billion tranche and an additional $5 million tranche that was due in February 2022. Both of these tranches, we have paid off this morning after a 30-day call notice. There will be a pretax expense of $36 million related to the earlier time and our make-whole of this debt which will hit our Q4 results on the interest income and other line in our P&L. Next on the income statement, interest income and other for the quarter. It was lower by $15 million year-over-year, mostly attributed to lower interest income and mostly attributed to lower interest rates within that. Overall, reported pretax income in Q3 of fiscal 2020 was up 3.6%, coming in at $1,163 million versus $1,123 million last year and again the $1,163 million is after taking the impacts of those charges that I previously mentioned. In terms of income taxes, our tax rate in Q3 this year was 26.7%. Last year, it was 18.5% tax rate. Again, last year, it included a benefit of a nonrecurring tax item of $73 million. A few other items of note in terms of warehouse expansion. As I mentioned, we opened two units in the third quarter. That puts us at five, actually five units total through the first three quarters. We expect in Q4 to open 10 including two relos, so net of eight. So it looks like our net total this year will be somewhere around 13. There's been a few that have been impacted by COVID-19 in terms of construction delays and have been pushed into the first part of fiscal 2021 which starts in early September. As of Q3 end, total warehouse square footage stood at 115 million square feet. In terms of capital expenditures, the third quarter of fiscal 2020 total spend was approximately $626 million and our estimated CapEx for all of fiscal 2020 is currently in the $2.7 billion to $2.9 billion range, a slight decline from what where we had guesstimated and estimated a quarter ago. And again, I think that has to do with some of the delays in construction since this COVID issue. In terms of e-commerce. As I mentioned earlier, overall our e-commerce sales on a reported basis increased 64.5% and 66.1% ex FX. I should note that within that 61%, like many retailers out there, we saw an increasingly level of strength in e-commerce sales over the last few months. If I look through the 12 week, the three four-week periods that comprise our 12 week third quarter, roughly that 64.5% reported number in the first four weeks was in the 25% range, in the next four weeks in the 50% increased range and the most recent in the last four weeks in the 90% range, but totaling that 64.5% on a reported basis. A few of the stronger departments, health and beauty aids, office, majors, housewares and small electrics. Total online grocery grew at an incredible rate during the third quarter, as I am sure did at many places. The comp numbers just mentioned again follow, that's the 64% number, they follow our historical convention where we exclude our third-party or same-day grocery program since that comes into the warehouse to be picked up by the third-party and delivered to our member. If we were to include that third-party in our e-commerce number, that mid 60% comp number would be slightly over 100%. So we have seen big strength in driving the business that way. Overall, our e-com sites have worked pretty smoothly during the quarter despite dramatic volume increases and as well we were able to improve on delivery times throughout the quarter as we adjusted to the ramped up order volumes. Now turning to Coronavirus and all the issues and impacts surrounding it. From a sales perspective, as discussed last quarter and indicated by our monthly sales results that we do, we started Q3 strong. I think it started actually in the fourth week of February and then into the first two-and-half weeks of March with very strong sales as people were stocking up prior to the implementation, the concern about availability of certain key products as well as the implementation of various stay at home orders. The middle of the quarter was weaker as many of geographies in which we operate had issued mandates limiting movement as well we had implemented our own restrictions during these times. Recently our sales have started to recover somewhat as states have begun to relax restrictions. Within the merchandise categories, foods, fresh and other essentials have been very strong despite out of stocks on some items throughout the quarter such as toilet paper, paper towels, cleaning supplies, et cetera, meats and proteins toward the end of the quarter, hand sanitizers and the like. Office and majors were also strong during the quarter driven by work from home initiatives while most other discretionary categories were a little weaker during the quarter such as jewelry, luggage, third-party gift cards, they were generally weak. Other weak categories which include things like sporting goods, lawn and garden, patio and apparel, while they were weak, they have rebounded somewhat towards the end of the quarter. From a supply chain perspective, I am going to give you 40,000 foot view of that. On the nonfood side, as it relates to imports from China, most the factories are now up and running. Other major country suppliers, India for textiles and domestics, Mexico primarily for things like TV assembly, a few weeks behind China in terms of getting back to normal but each week is showing improvement. On the food and sundry sides, paper goods still on allocation and item limits on certain items in certain regions. Sporadic limits on canned food items like tuna and chicken. The toughest areas, again, are still hand sanitizers, disinfecting wipes and Lysol sprays and the like. Items like milk and butter are generally okay. And also, we have eliminated like frozen, certain frozen proteins like chicken and beef items. In terms of fresh, on the protein side, the merchandise is there but challenging from a production and processing side. Currently, for us, pork is the least affected but somewhat affected by what we have done for the last couple of three weeks, I believe. On fresh beef, chicken and pork items, those protein items, we limit three fresh items in total. We also have limits of one per SKU on certain frozen items like 10 pounds of hamburger patties or chicken breast and the like. In terms of seafood and produce, that's all good. And again, talking to our buyers in these categories, they are generally, again probably with the exception of the hand sanitizer because it's not just people who are hoarding it, a great increase in use and demand of those items continued. But we expect continued improvement generally each week. And lastly, Costco travel, it was obviously significantly impacted during the quarter due to reduced demand as well as cancellations of previously booked trips. Members are now starting to actually book travel again, although generally further out than we have historically seen and of course we book those results when the trips or activities occur. Warehouses have overall remained open, although we did operate at reduced hours at most of our U.S. locations for several weeks during the quarter. Regular hours resume May 4 with an additional hour on weekday mornings for seniors and persons with disabilities. Warehouses are still following social distancing and sanitizing guidelines. Additionally, as discussed, some of our warehouse businesses like hearing aid, optical and photo and to a partial extent, the food courts, were closed or mitigated during the majority of the quarter. Also effective May 4, we now require all members and employees in the warehouses to wear masks. During the quarter, including again that big $283 million number, we spent about $32 million on masks, gloves and incremental cleaning supplies and things like plexiglass partitions, you name it, all related to COVID. But that's in that $283 million number. Some of the initiatives related to the $283 million in costs will extend into Q4. We would expect the incremental expenses related to COVID, these types of expenses related to COVID to exceed $100 million in Q4 but it would be quite a bit lower than the $283 million that we had in Q3. We will have to just wait and see, though. Finally, in terms of upcoming releases, we will announce our May sales results for the four weeks ending this Sunday, May 31 next Wednesday, June 3 after market close. With that, I will open it up for Q&A and turn it back to Joseph. Thank you.

[Operator Instructions]. We have our first question from Simeon Gutman from Morgan Stanley. Your line is open.

Hi Richard. I know we have to wait till we get the May result but I don't know how much you can preview us just given how dynamic the environment is in terms of the mix of products that's being sold, traffic to warehouse because the environment, now you are starting to see other states and stores open. Curious if there is anything you can call out as a preview for May?

I really can't call anything as a preview. Some of the comments I made in this document as it relates to towards the end of the quarter, we saw certain things pick up. The fact that we went back recently to full hours, we are all better both us, our employees and our members are better getting through the warehouse. So seasonally, I think some of the items that were online has picked up that we talked about. But we will wait and see next week.

Okay. And then my follow-up on memberships. I think you said that ex FX, they were up 6%, if I caught that. Can you parse out U.S. in the quarter relative to that 6%, if that is the right number? And then anything that surprised you with regard to the pace of new members growth, the actual amount or anything geographic?

Generally, no. But what we talked about way back when -- at the end of Q2 and the beginning of this quarter, we saw some pickup when there was a lot of you know, when we had these crazy strong numbers and people were coming in to buy all those essentials, short supply, high-demand and short supply items. We saw some additional sign-ups but not meaningful relative to our whole company in those weeks, towards the end of February and the first half of March. Other than that, I think the fact that the traffic is down a little bit but the average ticket is up, you have got some members that are coming in and bulking up a little more. And then you have some members that are not coming in as often. So that hits you a little bit but overall we think that we are in pretty good stead.

Okay. Can I just sneak in one more? I just want to --

Yes. One other comment is that we have also seen a switch from walk-in sign-ups to online sign-ups. And that's good. When you sign-up online, I know you are also required to have auto bill which is a positive for renewal rates long term.

Yes. And then the last one is on e-commerce, the assortment, the SKU assortment. Any like strategic thinking that we should have a bigger assortment than you do? I think you are always adding but is there a rethink as far the total number of SKUs?

I don't think necessarily. The only total increase is where we have gone to some additional suppliers in some very limited items. So we have expanded our supplier network in some limited cases. Beyond to that is more of a shift. It started with, if you will, some of the big and bulky items. And this started well before COVID, like white goods. And that's continuing and certainly the strength that we have had online, whether it's reported online through our two-day grocery or through e-commerce or certain third-party providers like Instacart and Shipt and others, all that stuff has driven some of the business from the warehouse to online. And again, I think, if I go back six, eight, 10 weeks ago, whatever the normal time to get something was, particularly like two-day grocery was well more than two days, we are back to two days. Same day, our third-party suppliers had challenges. They ramped up in the 200,000-plus new employees in a matter of weeks. That too has gotten a lot better in the last few weeks. So I hate to use the word strategic, we certainly know that big and bulky can be done very effectively online with a few displays in the warehouse as well but have that delivered and installed through online and that will continue. It probably has been expanded a little bit because of this people at home, things like exercise equipment and like big electronics and things.

Okay. Thanks Richard.

We have our next question from Chris Horvers from JPMorgan. Your line is open.

Thanks. Good evening. So a couple of question on the margin front. Can you talk about, break down the ancillary margins a little bit in terms of what you saw in terms of the benefit of gas versus the headwinds that you would see from mixing down in those other categories? And as you look ahead, given where you see gas prices are at this point, would you expect that benefit of gas, if prices held, to be higher in the current quarter?

Well, you know, there was a perfect good storm in the last quarter as it relates to margins and gas. And I think there's, not even our information, but there's public information on strength in retailers that sell gasoline in terms of gross margins. So we certainly benefited from that. A little offset to that was a reduced number of gallons. But nonetheless, it was particularly strong and I think that's evidenced in the matrix. You have higher margins on some of those other ancillary businesses like optical and hearing aid. While small in size, there's a higher margin because we have to account for the additional cost of optometrist and hearing aid technicians and the like. And so, those types of things, gas being the biggest piece of it towards the other stuff but it all ends up there was net net good for us in the quarter.

And so was there any, did you have any impact in terms of like the apparel category? Did you have to take any markdowns? And as you look at ahead, how are you thinking about the potential risk of that category impacting? Are you seeing some rebound in that category and don't expect that to be a headwind in the next quarter?

Fortunately, we haven't seen a lot of markdowns. Apparel, for us, is a pretty, there is a big part of it that's seasonal. And when this thing first started, we were able to talk to suppliers and work deals where in some cases certain things hadn't been made yet or they had the raw materials but they hadn't finished the product. So let's pay for part of the finished, for the raw materials but hold off until next season. We have held on. One of the reasons we went and borrowed money was looking at the worst case which, in our view, has not happened but what if we had a wholesome big volumes of seasonal stuff. We were going to, whatever commitments we had, we were going to respect. But I think, in combination of working with our vendors as well as sales have rebounded in those areas a little more than expected. It's not that people are coming in and going down every aisle. Some are just going getting their essentials and heading out of Dodge, but at the end of the day, I think as the weather has turned, we have been a little bit more, felt a little more good about things. Who knows what tomorrow brings, though.

Okay. And then just the last question also on gross margins. You mentioned that e-commerce was actually a benefit. Most retailers we have seen have a substantial headwind as e-commerce growth accelerated. But it didn't seem to occur here because -- so could you elaborate on that?

Well, first of all, it's like I think everybody, for us, it's certainly a lower margin business as we tried to build it over time. It's really the gross margin dollars are stronger because of the huge sales volume. We are spending more money on it. And so probably, I don't have it in front of me, but as a percent of profit, as a percent of sales I am sure it is down a little bit and that's expected. But the total gross margin dollars are up, simply because of the sheer strength of it.

Understood. Thank you.

We have our next question from Michael Lasser from UBS. Your line is open.

Good evening, Thank you for the opportunity for asking my question. Richard, are you reaching an upper bound of your membership potential in the U.S. with the view that if a pandemic is not going to motivate a regular consumer to sign up for a membership, that it maybe hard for them to sign up under any scenario?

Well, we certainly don't believe that. There is going to be two or three new normals over the next two or three years and probably not a real new normal and then with its own set of difficulties besides that. We are asked the question constantly. When I talk about this giant 10-plus fold increase in same-day grocery delivery, that's certainly because people, there is a group of people that don't want to go out. There's others that want to come in but they coming less frequently and buy more each time. There's going to be some new normals. Our guess is that whatever it's gotten to is not going to necessarily, maybe there is a back down a little bit at some point, but still be higher than it was the day before all this? Sure. But who knows? That's something that we talk about every day around here. And I think over time, there's been a lot of questions and we are happy with our renewal rates and we are all going to have get past this. One of things that we and some others, what I will call the big essential retailers, we have all been fortunate that we been open. And when you talk to people, anecdotally they feel frankly more comfortable coming into a Costco which is bigger, more wide open certainly the six feet apart that we are all doing, with the mask requirements. There are a few people that don't like it but there's most people do. So I think all the things that we are doing including the visible things that you see in-store. And then look, at the end of the day, it's a value proposition. Our average gross margin is in the very, very low double digits, 11% or 12%, implying of whatever 13% or so percent markup. Traditional retail grocers are in the mid to high 20s and other big boxes are above that and regular retails way above that. So also it's got to be a combination of all those things. We have got to figure out ways to get you in and I think we felt so far at least successfully, sometimes begrudgingly but successfully figuring out how to get you stuff online as well. And it will be a combination but we will have to see over time.

And my follow-up question is, speaking of online, given the success that you have enjoyed as of late, coupled with the acquisition you made a couple of months ago and the overall increase in online penetration that you have witnessed across retail in the last few months, is there an inclination within Costco to push harder to market your online channel more to expand your offerings to consumers? Or because of the desire to still push consumers into the store that you will maintain your posture?

Sure. Well, I think by necessity, we have responded and maybe for those of you, sometimes, I not suggesting to you Michael, that feel that we have been a little stubborn or are not winded to some of this stuff, we still want you to come in. You are going to buy more stuff when you come in, period. And we think we can do both. I mean, we recognize and I think white goods was the best example way before COVID. Four years ago, in the U.S. we did $50 million in white good sales. Three years later, we did $600 million, on our way to $1 billion, which is getting there faster simply because of COVID right now. Certainly, the acquisition of Innovel helps a lot of higher ticket big and bulky items, many of which people don't want to put in the back of their suburban or truck and take home. So I think we will have to see over time. We feel we have also been pretty good, again COVID has changed things a little bit right now, doing marketing and having email promotions that are in warehouse. And again, time will tell over time and we will figure it out together.

Understand. Thank you very much and good luck moving forward. I appreciate it.

We have our next question from Chuck Grom from Gordon Haskett. Your line is open.

Hi. Good afternoon Richard. It's actually John Parke, on for Chuck. Can you talk a little bit more about what you are seeing from a gas balance perspective towards the end of the quarter? A crossover to the business in the club? And then how some of those metrics have changed as certain areas have opened back up and are starting to normalize?

Yes. Look, just driving to work, you know, there's less gas gallons being bought. I think it has picked up a little, just hearing from the news and things. I know in the state of Washington, they have each day as a percentage of cars traveling on different interstates is improving a little bit. Part of it is some of the stay at home stuff and part of it is the weather's gotten nicer and people want to get out of Dodge. It has to impact a little. One of our frequency catalysts or the frequency catalysts that we have always talked about are fresh foods, executive member and gas. And so to the extent that gas has come down a little bit, that hurts a little bit. Offsetting that has been the fact that, one, the average ticket in the store was way up which helps offset the lower traffic. And again, who knows what tomorrow brings. We are encouraged of how we got through so far. We have seen some things pick up a little bit in the last several weeks in terms of categories as weather turned. Certainly, some of the openings, I think, should help us. But again, we will let you know. Hello?

Chuck Grom still on the line, sir? We have our next question from John Heinbockel from Guggenheim. Your line is open.

Hi. Richard, when you think about the Innovel, what's the biggest impact that's going to have from a customer perspective? And maybe it's just coincidence, it looks like, you look at some of the mailers, you have been pushing big and bulky a little more here. So that's not tied to Innovel ? That's just what you would have done anyway?

I think it's kind of what we would have done anyway. It certainly is because we now have the confidence that we can provide a better service at frankly a lower total price. Innovel was one of our suppliers that has always done a good job, as have some others. And as we build more volume on it and get more density, that too will allow us to lower the cost and lower the cost to our members. Certainly, with that and what we have seen again, I think if you had asked us four months ago, hey, we are going to have this big COVID thing and this is what's going to happen, we certainly didn't know that we would sell more big and bulky items. What were finding is, is because people are at home, notwithstanding some of the economic things of layoffs and furloughs, people are buying things for the house. We saw that again more recently with not related to big and bulky but lawn and garden. If you would have asked us two months ago, how is lawn and garden going to look, we would say it's going to not be very good because of all the economic issues. So I think at the end of the day, we are marketing additionally right now because we have the confidence that we can, we have seen the delivery times on certain big and bulky items improved dramatically on small groups of items as we onboard some of those items. It's a year-plus process.

And on the savings book, the thought process there, it looks like the assortment sort of getting back to normal, right, from a food and sundries standpoint. When is that fully back to normal? And do you go back to mailings or stay digital-only for now?

We would go back to mailings in June.

And the assortment normalizes in June as well?

Yes. For the most part, yes.

Okay. Thank you.

We have our next question from Karen Short from Barclays. Your line is open.

Hi. Thanks very much. A couple of questions on, I guess, e-com in general. Wondering first, within the membership growth, is any color you could provide on growth in online sign-ups versus walk-ins? And then I wanted just to ask a little bit more about e-com generally. I mean you have kind of obviously, you are blessed and cursed with very high velocity units and you have had to do the distancing, which has impacted traffic. But would that kind of cause you to rethink potentially a much more robust click and collect model? And then I just had one other follow-up.

Well, first of all, in terms of online sign-ups, a member that, again there are some members that aren't coming in or coming less frequently, to the extent they didn't come in the first part of this month and this is normally when they would come in and when they went to the checkout, it would notify them that they are up for renewal. They are now getting their email which they would have gotten, had they not renewed. And so that's pushing some of that way. Certainly, anecdotally, there have been plenty of people that have signed up to become members simply because of the one-day fresh or the two-day dry grocery. And so we are seeing a big push. I think it is too early to tell what happens in the future. I think more of it will go online just like everything else in life and we will do that. In terms of click and collect, we have very limited click and collect right now. It's in some of those high-value jewelry, small electronics. We did add pharmacy to it and that's not only click and collect, that's click and deliver through -- we are expanding. We are not everywhere yet with the benefit of Instacart. Tires, we are doing that where you could go online, order it and schedule it, schedule your tire installation. Photo. So we are doing more things. But if you are asking the question, to buy online and pickup in store in general, we are not looking at doing that on a regular product basis. We do delivery instead again through third parties in a big way as well as our own today.

Okay. And then I mean I know it kind of seems like a lifetime from now, but when we look towards the fall, as it relates to merchandising like back-to-school, Halloween, I guess the question is, two, well two. How much flexibility do you have to pivot to the extent that there really isn't much of a Halloween or back-to-school? And then the second question is just bigger picture. Everybody loves to go to Costco for the samplings. So I am just curious how you are thinking about that going forward? Is that something that we will not likely ever see again? Is there anything that you are discussing in terms of how you could reintroduce that safely? Anything there?

Karen, I missed the second part of the question. In terms of how do we feel our ability to pivot, look, if you go back two or three months ago, we were cutting orders, reducing orders recognizing there is going to be plenty of merchandise out there in these categories. Certainly for things like Christmas, I think we reduced the selection of a few things. And so a little more regular items than out there items. And now we are pivoting to try to get a few of those items, which are available. So frankly I think in some ways it's been easier for us because we have so many fewer SKUs and we are willing to try a few new things. And now, I didn't get the second part of your question.

The other part of it was just people love going to Costco for samplings. Food sampling, that's a bit part of the experience. So how are you thinking about that, just bigger picture? When we get to a new kind of abnormal?

We are going to start doing some things in mid-June on a slow rollout basis in sampling. I can't tell you anymore but it's needless to say, not going to be where you go and just pick up an open sample with your fingers. But the sampling and both food and nonfood items are popular. And road shows as well. I think you will see a little more excitement on the road show side. So things that we can do to get people excited about coming in.

Okay. Great. Thanks.

We have our next question from Greg Badishkanian from Wolfe Research. Your line is open.

Good afternoon. This is actually Spencer Hanus, on for Greg. Just turning to e-commerce again. Can you give us any color on the repeat rates that you are seeing from the new customers that it looks like you are adding to the platform? And then have you been able to take advantage of some of the lower online advertising costs that are in the marketplace today?

On the second question, the latter question, I don't know. I am not up to speed on that in terms of lower prices. I would assume, that's what I have read in the paper in general. So I would assume we have some of that ability, recognizing we don't spend a lot to start with. And the first question was what? Repeat business? Yes, you know what? That's another one that I don't know off the top of my head. Sorry.

Great. And then just if we could turn to small business customers. Can you talk about what you are seeing there? How did their sales go throughout the quarter for that segment of your customer base?

Well, look, I mean food service related small business is down everywhere. It's been helped a little bit by some, we are less about serving the big restaurant chains but the mom-and-pop restaurants. And so that the takeouts in your neighborhood, the Japanese, the Chinese, the Thai, those types of things, they are doing some business. Arguably, what business we are losing on some of those things, we are gaining because you are eating at home. So overall, I think just in looking at fresh foods and the food items of what we call food and sundries, it's been way up, particularly in fresh foods and somewhat in the rest. So I think overall, we have been blessed. Now, the question beyond that is, what happens when everything opens up? I think it's going to be, the new normal is still going to take some time. You see on the news that even in states where it's been open, there's not everybody running to sit down. And then there's restrictions on how many people can be in a certain place at a given time. So again, having fresh foods has been certainly something that's been very positive for us.

Great. Thank you.

We have our next question from Kelly Bania from BMO Capital. Your line is open.

Hi. Good evening. Thanks for taking my question. Richard, I think you mentioned executive penetration, if I heard it correctly, was up 135,000, which seem to be just a little bit of slowdown. I am wondering if it was impacted by the environment? And if you have to do anything to change your process in terms of convincing members to upgrade there?

Well, yes, it fluctuates all over the board. Certainly it shows improvement when we add a country like we have Japan and Korea in the last couple of years. It certainly is down from its peak a few years back. Probably the biggest things are that getting back to traffic, traffic is down a little bit. The other thing is, one of things we do in store a lot is something we internally call e-blocks or electronic blocks. So based on when your membership is scanned, based on your historical purchases, it makes all the sense in the world for you to upgrade to be an executive member. We have chosen for the last couple few months not to do e-block because it's one-on-one direct contact with the member while they are waiting in line at the register. And so we probably, my guess would be a little higher and then we haven't a lot of warehouses year-to-date. So we will get back to normal on these things. But it does not raise a concern for us at all on this point.

Okay. And just as a follow-up, in terms of renewal rates, I think you mentioned any impact from COVID there will be in the next few months. Maybe just can you give us any color on what we should expect to see? I was thinking maybe there could be a positive impact to renewal rates from this environment? But any color you can share would be helpful.

Well, we do what's called, we have always done it this way, a fully captured rate for renewal rate. So lets say you signed up originally in January. And so sometime in December, you get your renewal notice. And let's say, we ultimately get to that 90%, 91% renewal rate in the U.S. and Canada. By the end of January, you then draw the people that signed up in January, maybe by the end of January, I am making these numbers up here, at 75% and by the end of February you are at 82%, at the end of March you are at 85% and it takes, you might even get last 0.5% or 1% of that renewal rate six months out because if somebody that was a snowbird or somebody that just doesn't come in that often, there is always going to be that. In addition, whenever you have a group of new members, irrespective of whether it's online and in-store or in a new country, you have a lower renewal rate in that first respective year and then it builds each year over as year three becomes a combination of somebody renewing for the second time at a higher percentage than those that signed up originally in year two and were renewing for the first time in your three. So we don't know which direction. We know that we want to say that because we don't know where it's going to go. But the renewal rate right now is mostly related to stuff that happened four, five and six months ago and seven months ago.

Thank you.

We have our next question from Paul Lejuez from Citi. Your line is open.

Hi. Thanks. Richard, can you remind us of the economics of an online order in terms of basket size and what's in that basket? Then separately, curious if there are any categories within the box that you would say you are a bit high from an in-store perspective? Thanks.

Well, first of all, from online, there is regular online which includes rather big ticket items. So I don't have the number in front of me but if in-store during regular times the average frontend transaction was in the $160 range, $140 range, I am sorry $140 range, online which include a lot of big ticket items was probably $300 to $400 range. As we have added two-day grocery, that number has come down. Certainly, while we don't again include in e-com the same day grocery that the likes of Instacart and others come in and do, that's going to be lower as well. So all these things are in flux right now.

Got you. Then on the inventory side?

Again, I am happy to report that it is less than we braced for the worst case a few months ago or a couple months ago when we decided to raise some extra capital. Might we have to take things like seasonal apparel and seasonal lawn and garden and luggage, we do have some luggage to sell you, but it's a small category. But at the end of the day, all those things are less than we thought. So yes, there will be a small amount of items, probably in the few hundred to several hundred million dollars that will hold for a season or up to a year. But these are not things that are going out of style, even in items like apparel, which again I think we did, our buyers did a very good job of mitigating that impact initially with the suppliers. And also it's come back a little better than we thought. Not all the way back by any stretch but better than we thought. And in addition, we are not exactly high-fashion where things are going out of style. A lot of things that we have, whether it's some furniture items or apparel -- our senior merchant in the room is not pleased with that comment. But we are basic, we are fashion basic. We are not [indiscernible] about that.

Got you. And then just Richard, what percent of members shop the club in 3Q versus last year? And did this quarter mark a peak in that metric?

You know, I never looked at it. I mean it's a good question. We will have that for next time. Certainly, it's a lower percentage this quarter simply because of new members or people that cited, I mean I have friends that have chosen not to go physically anywhere and they are having things delivered and they love the same day fresh. So my guess, it's come down a little. Why don't we have two more questions?

Thanks. Good luck.

We have our next question from Greg Melich from Evercore. Your line is open.

Hi. Thank you. So Richard, it seems sound like e-commerce was probably 8% of the business in the quarter and if I am interpreting it correctly, should we think of it as that that would have grown to over 10% if you include the Instacart as part of e-commerce?

Yes.

Okay. And then second is on inflation. You talked about obviously deflation in gas and what that did to the topline. Has there been any inflation, especially given some of the shortages and proteins, et cetera that's worth noting as an offset?

Overall, ex gas, overall it's very small. I am actually guessing because it's a lot more sales volume than there is inventory level. But on certain limited items, we have seen extreme examples were like eggs for a period of time. Some of the protein items like meat. But I would guess that it's impacting us a little less than others in some of those categories because of some of our supply relationships and strength but it depends and it's coming back now, it's coming down. So overall, I would say very little difference than it would have been.

Got it. And then on Innovel, just a follow-up on that. How much of Innovel's business was distributing other people's things? And where does that revenue show up? And how you are thinking about either growing or reallocating that capacity?

Well, keep in mind, Innovel is a business built over decades to serve Sears, it's owner. And Sears of course has come down dramatically over the last few years. And while I can't disclose all the numbers I am aware of, the component that was actually still servicing their needs had come down. And then also they had gone through their own reorganization as a retail company. And with that, I think they lost the business along the way. So you know, there is an infrastructure and a capacity in place, infrastructure in place with great capacity. And so we view this as an ability to do great things with.

Could you describe that capacity a little bit? Like just number of employees or footage?

I think employees were 1,500. There is I think 11 large facilities, call it the roughly 800,000 to 1.2 million square foot facilities. And then about 105 smaller facilities which could be as small as 8,000 or 10,000 feet or as big as 50,000 or 60,000. And spread out generally serving I think 85% or 90% of the U.S. And again there's a lot of ability, it has a lot of capacity. And we were doing, we worked with them for five-plus years, I believe. But like anyone else working with them, we are doing a small piece of our business because we didn't know what was happening to the business as it's parent was going through it's on restructuring.

Got it. Thanks. Well, good luck.

Thank you. Last question.

We have our last question from Rupesh Parikh from Oppenheimer. Your line is open.

Good afternoon. This is actually Erica Eiler, on for Rupesh. Thanks for fitting us in and to hearing our question. So I wanted to touch on the store capacity restrictions that you put in place. You talked a little bit about the impact from some of the ancillary businesses being closed had on your sales. Are you able to quantify for us what you think the impact may have been to sales from the store capacity limitations and restrictions that you put in place? And as things start to open back up in certain markets, are there any changes in these restrictions you put in place? And can we expect to see these restrictions weigh up on sales for a bit longer?

Well, the only thing I would pointed out earlier was, those businesses like optical, hearing aid, a reduced food court, those things was somewhere in the middle between one and two percentage points impact in Q3. Aside from that, when we went from generally closing Monday through Friday and 8:30, we went to I think 6:00. But we also added an hour in the morning for elderly and expanded that from two days to three days now to all five weekdays. We have not tried to quantify that. I can tell you that when we have had some very busy locations historically and we said let's add an hour in the morning or an hour later at night, what we found is, we tended to just spread the business. So I think the same thing here. There is not a lot of big impact other than our qualitative view was that there's a lot more impact from shelter in place and stay at home and come and get what you need and leave than there is from anything else. And again as that, I was encouraged by some of the things I have seen with a couple of the other retail apparel stores that have just started to open and are showing good numbers, because people are coming back. So I think that net net is encouraging. But I don't think it was a big impact to us either way. By the way, yes, there was and you noticed in our numbers, Canada was weaker than the U.S. In Canada and Quebec there's actually current and outstanding limitations of Sunday closes which is new over the last few months. And there is also I think been a little bit more stricter generally over up there, either stricter or people listening better to stay at home issues. And so we have seen, in a country where we are the only game in town in terms of warehouse clubs, we have seen weaker traffic and therefore slightly weaker numbers than the U.S.

Okay. Well, I guess that's a good segue into my next question. So I was just curious on international side. If there is any more color you can provide on what you are seeing internationally with regards to Coronavirus impacting? Are there any notable differences in terms of behavior or any other callouts versus the U.S.?

Well, again, putting on my blinders for a minute. Taiwan and China are the most encouraging. China, we have one location, of course, that's been open for less than a year. So we don't have a year-over-year comparison. Taiwan is quite strong. Japan is quite strong, maybe a few weeks behind that. We see Australia coming back. So overall, that gives us encouraging news for the U.S. and Canada. But part of that answer is, so what until we see it.

Okay. Great. Thank you so much.

Okay. Well, thank you everyone. And me and my guys here are around to answer questions. Have a good day.