Good day, everyone, and welcome to the Costco Wholesale Corporation Fiscal First Quarter 2024 Earnings Call. Today's call is being recorded and all lines have been placed on mute to prevent any background noise. After the speaker’s remarks, there will be a question-and-answer session. [Operator Instructions] I would now like to turn the call over to Richard Galanti, Chief Financial Officer. Please go ahead, sir.

Thank you, Lisa, and good afternoon to everyone. I will start by stating that these discussions will include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements involve risks and uncertainties that may cause actual events, results and/or performance to differ materially from those indicated by such statements. The risks and uncertainties include but are not limited to those outlined in today's call, as well as other risks identified from time-to-time in the company's public statements and reports filed with the SEC. Forward-looking statements speak only as of the date they are made, and the company does not undertake to update these statements, except as required by law. Comparable sales and comparable sales excluding impacts from changes in gasoline prices and foreign exchange are intended as supplemental information and are not a substitute for net sales presented in accordance with GAAP. In today's release, we reported operating results for the first quarter of fiscal '24, the 12 weeks ended November 26. Reported net income for the 12-week first quarter came in at $1.589 billion or $3.58 per share, up from $1.364 billion or $3.07 per share in the 12-week first quarter last year. This year's results included a tax benefit of $44 million or $0.10 a share related to stock-based compensation. Last year's results included a tax benefit of $53 million or $0.12 per share related to stock-based compensation and also included a charge of $93 million pre-tax or $0.15 per share primarily related to downsizing our charter shipping activities. Net sales for the first quarter were $56.72 billion, a 6.1% increase over last year's first quarter, $53.44 billion. Net sales were benefited by approximately 0.5% (ph) to 1% in the U.S. and worldwide from the shift of the fiscal calendar as a result of the 53rd week in fiscal 2023. The following comparable sales reflect comparable locations year-over-year and comparable retail weeks. In the U.S. reported 2% comp sales ex-gas deflation and FX 2.6%. Canada reported 6.4%, ex-gas and FX 8.2%. Other International reported 11.2%, ex-gas and FX 7.1%. For total company reported 3.8% and at 3.9%, excluding those two items. E-commerce, which was reported as a 6.3% came in at 6.1% excluding FX. Overall, for the first fiscal quarter, fresh foods were relatively strong once again, with food and sundries right behind. Non-food showed improvement over the September October, November time frame as did e-com sales. In terms of Q1 comp sales metrics, traffic or shopping frequency increased 4.7% worldwide and 3.6% in the United States. Our average transaction was down 0.9% worldwide and down 1.6% in the U.S. Foreign currencies relative to the U.S. dollar positively impacted sales by approximately 0.4%, while gasoline price deflation negatively impacted sales by approximately 0.6%. I've gotten more than a few calls in the past few weeks as to how many pies we sold in the U.S. leading up to the Thanksgiving holiday. In the U.S., in the three days leading up to Thanksgiving, we sold 2.9 million of our famous Pumpkin Pies along with 1.3 million apple and pecan pies, so over 4 million pies in total during the three days. Back to the income statement here and next on the income statement's membership fee income. In the quarter, we reported $1.082 billion or 1.91%, that's an $82 million or 8.2% increase and a 4 basis point increase over the first quarter last year. In terms of renewal rates, at first quarter end, our U.S. and Canada renewal rate stood at 92.8%, while the worldwide rate came in at 90.5%. Both of these rates were up 0.1% from those numbers 12 weeks earlier at the end of the fourth quarter. Membership growth continues. We ended Q1 with 72.0 million paid household members, up 7.6% versus last year and 129.5 million cardholders, up 7.1%, with consistent growth throughout the quarters. At Q1 end, we had 33.2 million paid Executive members, an increase of 939,000 during the 12 weeks since Q4 end. Executive members now represent a little over 46% of our paid members and a little over 73% of worldwide sales. Moving down the income statement next is, our gross margin. Our reported gross margin in the fourth quarter was higher year-over-year by 43 basis points, coming in at 11.04%, up from Q1 of last year at 10.61%. That 43 basis point reported number ex-gas deflation would be plus 36 basis points. As I normally do here, we write down two columns and six line items. The first column is reported in the first quarter. The second column is margins, excluding gas deflation. It's the year-over-year change in the first quarter. On a core merchandise, plus 3 basis points reported, minus 3 basis points ex-deflation. Ancillary and other businesses, plus 24% reported and plus 22% ex-gas deflation; 2% reward lower year-over-year, minus 4 basis points reported and minus 3 ex-gas deflation; LIFO, plus 3 and plus 3 and other plus 17 and plus 17 for a total, again, reported year-over-year up 43 basis points and ex-gas deflation up 36 basis points. Starting with the core. Again, it was total company, it was plus 3 and minus 3 reported and ex-gas deflation. In terms of core margin on their own sales, our core-on-core margins were up by 5 basis points year-over-year. Ancillary and other business gross margin, again, higher by 24 and higher by 22 ex-gas deflation. This increase was driven largely by gas and e-comm. Our 2% reward higher by 4 and higher by 3 ex-deflation, reflecting higher sales penetration coming from our Executive members. LIFO plus 3 basis points. We had a $15 million LIFO credit in the first quarter of this year. This compared to a very small $0.5 million LIFO charge in Q1 a year ago. And then, the other line item, the 17 basis points to the positive. As was mentioned earlier, last year in Q1, there was a 17 basis point impact from a $93 million pre-tax charge, primarily related -- primarily for the downsizing of our charter shipping activities. Moving on to SG&A. We reported SG&A of 9.45%, higher by 25 basis points than last year's 9.20%. Again, in Q1, we're right down the two columns. Reported and without gas deflation, operations, minus 18 and minus 14 basis points, minus being -- meaning it's higher year-over-year. Central minus 2 and minus 1. Stock compensation minus 3 and minus 2. Pre-opening expense, minus 2 and minus 2, again, for a total reported margin higher minus 25% year-over-year. I'm sorry, SG&A, not margin, 25 and without gas deflation, higher by 19 basis points. The quarter again was higher by 18 and higher by 14, excluding the impact from gas. This included 12 weeks of this past March's extra top of scale increase in our wages, which represents an estimated 2 basis point hit. And as of September 18, we raised the starting wage in the U.S. and Canada, that estimated impact from those new wages to be roughly 2 basis points as well. Again, central, nothing much to say other than its 1 basis point higher, excluding gas deflation. Again, it was stock comp's, the minus 2x gas deflation and pre-opening. We did have a couple of more openings this year in the quarter than we did last year and that was higher by 2 basis points. Below the operating income line, interest expense was $38 million this year, $4 million higher than last year's $34 million figure. Interest income and other for the quarter was higher by $107 million, coming in at $160 million this year versus $53 million last year. This was driven largely by the increase in interest income, about $100 million of that $107 million due to higher interest rates as well as high cash balances. The small additional impact was a favorable FX year-over-year. In terms of income taxes, our tax rate in the first quarter was 24.5%. This compares to 23.0% a year ago or 1.5 percentage points higher this year than last year. The increase in our rate as of Q1 -- in Q1 is primarily attributable to lower benefit from the stock-based compensation from a year ago. Overall, reported net income was up 16.5% year-over-year in the quarter. A few other items of note. In terms of warehouse expansion in the first quarter, we opened 10 locations, including one relo (ph), so a net of nine increases. That -- those nine included eight in the U.S. and one in Canada. For the full year fiscal '24, we estimate opening -- we're planning to open 33 locations, including two relos, so for a net increase of 31 new warehouses that would be up from 23 that we opened in fiscal '23. For Q2 fiscal '24, we plan four new locations, including our sixth building in China, are early in the calendar year. Regarding capital expenditures, first quarter capital expenditure spend was approximately $1.04 billion. We estimate that fiscal '24 CapEx will be in the $4.4 billion to $4.6 billion range, that's up from $4.3 billion we had in fiscal '23, reflecting a continued increase in the number of the expansion that we're doing. In terms of e-commerce business, e-com sales in Q1 ex-FX increased 6.1%, the first quarterly year-over-year increase in five fiscal quarters and trended well during the three reporting periods of September, October, November. E-comm showed strength in several areas. In food, things like e-gift cards, pet items, snack items were up in the mid-teens. Appliances were up year-over-year in the mid-20s. TVs was actually in the high-singles despite the challenges with other aspects of consumer electronics like computers, and tires were up in the low-teens. So overall, a pretty good showing there. As well, Costco Logistics enjoyed record-breaking deliveries. In the first quarter of fiscal '24, we completed over 800,000 deliveries, which were up 17% versus the comparable quarter last year. And some fun wow items in the quarter in e-commerce. You've probably read about the fact that we're selling gold 1 ounce gold bars. We sold over $100 million of gold during the quarter. We sold a Babe Ruth autographed index card for $20,000. And in addition to e-gift cards on everything from restaurants to golf to airlines, and we just in the last couple of weeks, launched a Disney e-gift card valued at $250 for $224.99. And for you last-minute shoppers out there, there is a Mickey Mantle autographed 1951 Rookie Card in nearly perfect condition and it's on sale online for $250,000. Next, good progress continues to be made with our e-com mobile and digital efforts. No big enhancements and changes to the site leading up to the holiday, mostly holiday prep. We did have 100% site availability during Cyber week, and sales for the five Cyber Days, Thanksgiving, Black Friday, Saturday, Sunday, and Cyber Monday were up year-over-year in the mid-teens. Our app downloads during the quarter were 2.75 million, so total app downloads are now stand at 30.5 million or a 10% increase during the quarter, and that's after up being over 40% increase in all of fiscal '23 versus the prior year. Our site traffic approaching 0.5 billion and just under 10% increase and the average order value being up about 2.5%. So we continue to make progress there. Next couple of comments regarding inflation, most recently in the last fourth quarter discussion. We had estimated that year-over-year inflation was in the 1% to 2% range. Our estimate for the quarter just ended, that inflation was in the 0% to 1% range. Bigger deflation in some big and bulky items like furniture sets due to lower freight costs year-over-year as well as on things like domestics, bulky, lower priced items again, where the freight cost is significant. Some deflationary items were as much as 20% to 30% and again, mostly freight-related. TVs, the average sale prices have been lower while unit's been higher. And talking to the buyers overall, our inventories and our SKU counts are in good shape across all channels. And so far, we've had a good seasonal sell-through during the quarter. Lastly, as you saw in this afternoon's press release, we declared a $15 per share special cash dividend. This is our fifth special dividend in 11 years. The total payout will be about just under $6.7 billion and will be funded using existing cash and not accompanied by any issuance of debt. The special cash dividend will be paid on January 12th to shareholders of record on December 28th. Finally, in terms of upcoming releases, we will announce our December sales results for the five weeks ending Sunday, December 31, on Thursday, January 4th, after market close. With that, I will turn it back for Q&A to Lisa and be happy to answer any questions.

Thank you. [Operator Instructions] We'll take our first question from Michael Lasser with UBS.

Good evening. Thank you so much for taking my question. You had indicated over the last 1.5 years or so that Costco had been raising prices faster than it had throughout its history. So now with prices coming down, what is going to be the posture on passing along those savings? You already noted that inflation is flat to up 1%. So do you expect deflation, especially on the food side as you get through the next couple of quarters?

Well, talking to buyers, we've seen that even during the quarter, we saw a trend towards that 0% versus the 1%. But at the end of the day, we don't -- the buyers are looking out three to six months. They have -- on the fresh food side, commodities-wise, they haven't seen a lot. There are a few things that are up and a few things are down, but no giant trend either way. Look, as you know us for a long time, we want to be the first to lower prices. We're out there pressing our vendors as we seek different commodity components come down and certainly on the non-food side, as we saw shipping costs come down, things like that. And so probably a little more than less, but we'll have to wait and see. We don't know.

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

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

Thank you very much and have a good holiday.

You too.

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

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

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

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

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

Thanks so much.

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

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

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

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

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

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

Yeah. Well, I always joke I'm up for review so I'm going to say nice things. But at the end of the day, the reality is, we're staying the course. I remember questions were asked 12-plus years ago when Craig became President, and two years later, Jim retired and Craig became CEO and President. And what's -- who can replace Jim? And I think the same questions asked today, who could replace Greg? And it really is a seamless transition. You have somebody retiring that's been here 40-ish years and it's been in the business both on operations and merchandising for a successful number of years in both. And you've got Ron who's coming in, who started when he was 17 at a Price Club in Arizona. And he already has his 40-year gold patch. And again, 30-ish years in operations, a year in real estate traveling in the world and then six or seven years in merchandising. So I think it is pretty seamless. And to see them, the two of them work together over the last two years, almost two years since Ron became President, it's very similar to what I saw during those two years when Craig became President, and then two years later, Jim retired and Craig took on the CEO role as well. And so that's pretty much steady as she goes.

Got you. Great. Happy holidays. Thanks.

Thanks.

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

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

Sure. Well, if we were to open the 31 this year, that would be somewhere in the low 20s, the 23, 24 in the U.S. And I recognize a few of those are business centers, which is we continue to add as well as regular -- most of the regular warehouses. And I would say that, yes, I guess the story I'd share with you is six or eight years ago when it was roughly 60-40 or 70-30 U.S.-Canada versus the international -- other international. We were asked, what would it be by today? I'd say, well, by today, it will be 50-50. Well, today, you're asking the same question, it's 60-40 or 70-30 today, what will it be? And I think it will trend that way over time, but we are finding more opportunities in the U.S. Clearly, our average sales volume per location is higher today than we would have expected ourselves thankfully, six, seven years ago, what would it be by now. And we are finding those opportunities. So I view that as good news. We still -- we've got a lot of things going on to drive International, but International will be 6 or 7 units this year. And then opportunity to grow last year, international was -- is 9 or 10 and that's more of a timing issue.

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

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

Perfect. Thanks.

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

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

Right. Well, we're -- first to our business was fixing the foundation. We're in the middle of re-platforming our e-commerce. It's not a big bank where we're going to put the switch one day, we're bringing things over and that's in progress. It was, I think I mentioned last -- probably last quarter, it's a two-year road map on that, and we're halfway through that. And so I'd say very little so far. If we're in the second inning, maybe we're in the third inning now. But we -- a lot of the focus has been on, first of all, making sure doing small improvements. We certainly got the -- on the 5 star rating, it got up north of 4.5 on that, and we're getting better at the site every time. But I think you would see personalization and, first of all, targeting and then personalization more over the next couple of years, honestly. And we're fine with that. We're the first to our business getting the foundation right. And we've made a lot of progress. I didn't spend a lot of time on this call talking about the new things, the enhancements we've made to the mobile site and the e-com site, but we've done a lot.

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

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

Thank you.

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

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

Okay. What was the first part of the question, again?

The average sales.

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

Thank you.

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

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

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

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

Essentially, yes. Much like the travel business.

Okay. Thank you.

Mostly.

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

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

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

And a follow-up on inflation. I just want to make sure I got that right. You said 0% to 1% for the quarter. Did it trend towards 0%? Did we exit near the bottom? And you mentioned some categories that were deflationary, which ones are stubborn in terms of inflation where it's hardest to get it out?

Which inflation -- which categories are stubborn in inflation?

Yeah. Where you can’t get that?

CPG, obviously.

All the branded packaged stuff?

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

Okay. So it's not like we exited 0%. We're still slightly positive.

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

Year-over-year number. LIFO [Multiple Speakers]

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

Year-over-year, got it.

Yeah.

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

Around 60%.

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

Perfect. Thanks. Have a great holiday guys.

You too.

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

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

There's not a lot unusual. I think it gets back to the question of low inflation, which creates a little bit more of a challenge, right? My extreme -- and again, that was a very extreme example I gave you on nuts. But when you had a slight 0% to 2% decline in sales and a 14% increase in units, you got more labor involved, more hours stock of the shelf. I mean that's at the 40,000-foot level. And that's an extreme example. But I think overall, it is sales base. You should also remember, if you remember going back to fiscal '19 and the first part of fiscal '20, before COVID, our SG&A percent was -- for all of ‘19, it was at 10 04. In the first quarter of 2020, it was a 10 34, And for the whole year, it was a 10 04 for both of those two years. And we used to think to ourselves will we ever be able to get it back below 10%. And in 2022, which was the kind of month seven through 18, if you will, that 12-month period after that full fiscal year for us of COVID, we reported an 8 88 for that year. So even at the 9 45 that we just reported, we're still quite a bit lower than we had been historically, a function of a lot of things, including higher sales productivity and all that. So I think we're doing pretty well. I think certainly, that's the challenge. How do we reduce that and how do we manage that? And certainly, the biggest way to manage is driving more sales.

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

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

Thank you. Happy holidays.

Thanks.

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

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

Well, I would say, allowing us to get better deals, which means lower prices. But look, I think we -- Kirkland signature (ph) relative to non-gas sales is in the high-20s. And I think it was probably a good year ago when inflation was in the 8 and 9 range, if you will, if you remember. And we talked about that year-over-year, we saw probably the biggest increased penetration of KS at Costco. It was 1, 1.5 percentage points, when historically, it has been 25 basis points to 50 basis points a year. I think we're back to that, but we've maintained that higher level and we're back to seeing smaller increases in penetration every year, but nonetheless still driving that business. But we've got -- yeah. I think that helps with some of the deflationary certainly with KS stuff, we're closer to the supplier. We're not the only -- we're the only customer buying that item and we can drive a little bit more business. So I think it just continues to work that way for us.

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

Some colleague in my room said they're buying gold. But no, that's actually online mostly. But no, I think -- again, I think the traffic thing is the thing that we're happily surprised about that we're continuing to drive people in on an increasing basis. We know we benefited during those, call it those two years, kind of March, April of '20 to March, April of '22, the kind of the two years of COVID, we benefited in many ways from more members and more volumes. And we’ve not only kept it, we’re continuing now to add to those levels, so we feel very fortunate in that regard.

Thanks.

One of my colleagues here just mentioned that discretionary merchandise trends are getting a little better. And that’s not only on big ticket but in general, nonfood stuff. I think that corresponds with my comment earlier that we feel good about the seasonal -- how we’ve done seasonally.

Great. Thank you.

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

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

I think it's slightly -- it's deflationary. It's a little more deflationary in the KS than in the CPG, which drives more value to KS, frankly. But we're seeing some -- our ability to work with our CPG suppliers as well, but just a little stronger ability to do that with KS.

Got it.

And it is, again, a comment in the room here. We've had -- it's allowed us to do some new item introductions on the KS side as well.

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

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

Got it. Thank you. Happy holidays.

Same to you.

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

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

Frankly, we look at the wages in a vacuum, and we want to do as much as we can for our employees. And certainly, there were several increases starting with the frontline worker premium during the initial year of COVID. We kept half of that in there, which we kept $1 of those $2 now in there, which was like $400 million a year. Again, we've also benefited from stronger sales and productivity so we're able to afford that. But we look at them independently and we'll continue to do that to look at it. To the extent inflationary pressures are down, that means there's probably a little less inflationary pressure on wages. But we give -- over half of our employees are top of scale and they're getting increases irrespective of some of the extra things we talked about every March. And then as you go from a new employee over the first 9,000 or 10,000 hours, you're getting constant increases that are more -- significantly more.

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

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

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

Thank you.

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

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

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

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

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

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

Thank you.

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

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

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

Got it. Okay. And then maybe just a quick follow-up. Anything to talk about on shrink because I know that there was an issue with shrink even for you guys at one point. And I know you guys have cracked down on making sure members are showing their cards when they walk in the store. And obviously, when you leave with your goods, you're checking your receipts. But anything we should think about with regard to shrink going forward and recent trends?

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

Got it. Thank you and happy holidays, guys.

Same to you. Thank you.

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

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

Yes. On the ancillary line, it's gas and e-com and it's a combination of increased sales penetration and increased margins within those businesses. The thing about gas is I think everybody out there that has gas stations, what we have found is we've been able to see improved profitability not just in the last quarter or two, but over the last few years -- last three to five years, improved profitability in gas because others are making more, and we're allowed to make a little more. When we do our competitive price shops on gas, which we do weekly at every gas stations, we operate with our neighboring competitive gas stations. On the e-comm side, I think driving more sales has helped us in the margins there as well.

Thanks. And then just on the operations...

Yeah. On the wages, while we pointed out – I pointed out on the call, I think there was like four or so basis points in total from those two distinct increases, we do other increases like over half of our employees are top of scale. They get an increase every March that’s significant as well, significant relative to basis points. When you have lower sales figures. I mean, and – the rest of it is all the other lines like energy costs and the like.

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

It’s more than half. I don’t have the exact figures with me. Q – Laura Champine: Got it. Thank you.

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

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

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