Costco Wholesale Corp

NASDAQ:COST

Ladies and gentlemen, thank you for standing by. At this time, I'd like to welcome everyone to Costco Wholesale Corporation's Fiscal Second Quarter 2024 Earnings Call. [Operator Instructions]

I would now like to turn the conference over to Richard Galanti, CFO. Please go ahead.

Thank you, Demi, and good afternoon to everyone. I will start by stating that these discussions will include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements involve risks and uncertainties that may cause actual events, results and/or performance to differ materially from those indicated by such statements. The risks and uncertainties include, but are not limited to, those outlined in today's call as well as other risks identified from time to time in the company's public statements and reports filed with the SEC. Forward-looking statements speak only as of the date they are made, and the company does not undertake to update these statements, except as required by law. Comparable sales and comparable sales excluding impacts from changes in gasoline prices and foreign exchange are intended as supplemental information and are not a substitute for net sales presented in accordance with GAAP. In today's press release, we reported operating results for the second quarter of fiscal '24, the 12 weeks ended February 18 as well as February retail sales for the 4 weeks ended this past Sunday, March 3. Reported net income for the 12-week second quarter came in at $1.743 billion or $3.92 per diluted share, up from $1.466 billion or $3.30 per diluted share in the 12-week second quarter last year. This year's results included a tax benefit of $94 million or $0.21 per diluted share due to the deductibility of the $15 per share special dividend to the extent received by our employee 401(k) plan participants. Net sales for the second quarter were $57.33 billion, an increase of 5.7% from the $54.24 billion in the second quarter last year. Net sales were negatively impacted by approximately 1.5% in the U.S. and worldwide from the shift of the fiscal calendar as a result of the 53-week 2023 fiscal year. The following comparable sales reflect comparable locations year-over-year and comparable retail weeks. For the -- in the U.S., we reported a 4.3% comparable, excluding gas deflation and FX, the 4.3% would have been 4.8%. Canada reported comp for the quarter, 9.2%, 9.0% ex gas and FX. Other international, 8.6% and 8.2% ex gas and FX. Total company of 5.6% reported for the quarter and 5.8% excluding gas deflation and FX. E-commerce was an 18.4% reported and an 18.2% excluding FX. In terms of second quarter comp sales metrics, our traffic or shopping frequency increased by 5.3% worldwide and 4.3% in the U.S. Our average transaction or ticket was up 0.3% worldwide and up 0.1% in the U.S. And foreign currencies relative to the U.S. dollar positively impacted sales by approximately 0.2%, while gasoline price deflation negatively impacted sales by approximately 0.4% minus. Moving down the income statement to membership fee income. We reported membership fee income of $1,111,000,000, up $84 million or up 8.2% year-over-year in the quarter. In terms of renewal rates, at second quarter end, our U.S. and Canada renewal rate came in at 92.9%, which is up 0.1% from Q1 and 12 weeks earlier. And the worldwide rate came in at 90.5%, similar to the last quarter. Membership growth continues. We ended the second quarter with 73.4 million paid household members, up 7.8% versus last year, and 132.0 million cardholders, up 7.3%, with continuing growth throughout the quarters. At Q2 end, we had 33.9 million paid executive members, an increase of 646,000 during the 12-week second quarter. Executive members represent a little over 46% of paid members and a little over 73% of worldwide sales. Moving down the income statement line next to the gross margin. Our reported gross margin in the second quarter was higher year-over-year by 8 basis points, coming in at 10.80% compared to 10.72% last year in the quarter and up 4 basis points excluding gas deflation. Writing down the little matrix that we usually do with 2 columns, both reported and excluding gas deflation, first line item is core merchandise, plus 5% -- plus 5 basis points year-over-year on a reported basis and plus 2% ex deflation -- gas deflation; ancillary and other, plus 7% and plus 6%; 2% Reward, minus 7% and minus 7%; LIFO, plus 3% and plus 3%. And all told, total reported, again, gross margin year-over-year up 8 basis points and up 4, excluding gas deflation. In terms of the core margin on their own sales, again, while the number I just read you was a plus 5 basis points and plus 2 ex gas deflation, in terms of core margin on their own sales, our core-on-core margins were up 25 basis points year-over-year, with food and sundries and nonfoods being positive year-over-year and fresh being negative. Ancillary and other businesses gross margin were higher by 7 basis points and higher by 6 ex gas. The increase year-over-year was driven largely by e-com and partially offset by gas. 2% Reward, again, higher 7 basis points -- lower by 7 basis points, both with and without gas deflation, with higher sales penetration coming from our Executive Members. LIFO plus 3 basis points. We had a $14 million LIFO credit in the second quarter this year compared to no LIFO charge or credit in the second quarter of last year. Moving to SG&A. Our reported SG&A in the second quarter was higher year-over-year by 3 basis points, or minus 3 would be higher, coming in this year at 9.14% compared to last year's 9.11%. And the higher 0.3 would have been lower by 1 basis point, excluding gas deflation. In terms of Q2 year-over-year, the operations component of SG&A, doing the matrix, was 11 basis points higher or minus 11; ex gas deflation, minus 8, so 8 basis points higher. Central, plus 4 and plus 5 basis points. Stock compensation, plus 4 and plus 4. And total would be 3 basis points higher year-over-year and plus 1 basis point or 1 basis point lower year-over-year or better. With regard to the operations component being higher by 11 reported and 8 excluding deflation. As compared to a year ago, during the past year, we included 2 -- last March's extra top of scale increase in wages, which was about a 2 basis point hit to the SG&A line. As well in the first quarter of this year, we raised the starting wage in the U.S. and Canada. We estimate the impact of that new wage also was roughly 2 basis points, so about 4 basis points of that 8 -- or 4 basis points of that 11 were related to those wage increases more than normal. Below the operating income line, central, I mentioned, was better by 4 to 5 basis points, and the rest was pretty much straightforward. Below the operating income line, interest expense was $41 million this year versus $34 million last year. And interest income and other for the quarter was higher by $102 million year-over-year. This was driven by an increase in interest income due to higher interest rates and higher average cash balances as well as FX, which was favorable versus last year. We'll see less benefit from interest income going forward following the January payment of the $6.7 billion special dividend. In terms of income taxes, our tax rate in the second quarter came in at 22.1% compared to 26.1% in Q2 last year. As discussed earlier, this year's rate benefited from the tax deductibility of a special dividend paid to 401(k) participants. The fiscal '24 effective tax rate, including discrete items, is currently projected to be in the 26% to 27% range. And excluding the special dividend tax benefit in Q2, our Q2 tax rate instead of being -- coming in at 22.1% would have been 26.3%. Overall, reported net income was up 18.9% in the quarter on a reported basis. And again, excluding the special dividend-related income tax benefit, it would have been up 12.5% year-over-year. A few other items of note. In terms of openings in the second quarter, we opened 4 net new warehouses, including 3 new locations in the U.S. Actually, 2 of them were Costco Business Centers and 1 new Costco wholesale warehouse and 1 unit, and our sixth in China, in mid-January in Shenzhen. That's our sixth in China. There's been a lot of press about it. We have an estimated 10,000 people were at opening, and there are just under 200,000 members currently, including more than 20,000 members signed up from Hong Kong. And we've seen all kinds of things over there from tour agencies doing bus trips over to shop. For the full year '24, we estimate 30 total openings, including 2 relos, so for a net increase of 28 new units. And that puts the remainder of fiscal '24, for Q3 and 4, we plan on opening a total of 15 net new locations: 11 in the U.S., 2 in Japan and 1 each in Korea and China. Regarding CapEx, fiscal second quarter spend was approximately $1.03 billion. And for the year, it remains in the north of $4.4 billion to $4.6 billion, in that range. One additional comment on China. This past Monday, we launched, in our Pudong, China location, the ability for our members to order online about 400 items from our -- of our items to be delivered that day. And the delivery will be within about an 8-kilometer radius of the warehouse itself. It's getting a lot of social media attention over there, and we plan to launch it in the other 4 Shanghai area locations by month end, as well as in Shenzhen sometime the following month. In terms of e-commerce, e-commerce sales in Q2 ex FX increased 18.2%. E-comm showed strength in several areas, led by sales of gold and very recently, silver. As well, appliances were very, very strong, as was gift cards and e-tickets. As well, Costco Logistics enjoyed record-breaking deliveries. Much of that -- and many of those items are sold via e-commerce. In Q2 of '24, we completed over 1 million deliveries, up 28% versus Q2 a year ago. In terms of e-commerce sales over the past few months, we believe we've done a much better job explaining to our members the significant value propositions we offer compared to traditional competitors in several big-ticket categories. Under the "Why Buy at Costco?" banner and "The price you SEE is the price you PAY!" banner, we share with our members what's included in the price of appliances, tires, televisions, computers, and mattresses. You can see these online on our website of "Why Buy at Costco?" Just to give you one example, if you take a 4-set of high-end tires compared to a traditional retailer, we include, of course, installation, rotation, balancing, a 5-year road hazard warranty. Typically, that's a lot less road hazard warranty in other places or you'd have to pay for extra, ongoing flat repairs, nitrogen and disposal of the prior tires. Just one of the examples where the price of the tires itself might be very close to us. When you put in all the differences of those additional items, it's anywhere from a 15% to 25% savings on any of these items. Next on my list, I'll talk about costconext.com, a couple of comments on the seller platform. This allows -- costconext.com allows our members to exclusive access to direct-to-consumer sites for top quality brands at Costco value pricing. Currently, there are about -- there are 70 Costco Next brand sites, with 15 additional sites in development. We will likely end this calendar year with about 90 sites and continue to grow from there. Costco Next offers everything from home improvement to apparel, to pet, to home, to kitchen to electronics, to accessories as well as sports, bicycles and toys. You should check it out. It's a pretty good site. Progress continues to be made in our e-comm, mobile, and digital efforts. A couple of recent enhancements. In February, we rolled out our new native mobile application homepage on iOS. The native homepage now loads in less than 2 seconds compared to 8 seconds previously. Needless to say, that's important when about 60% of our e-comm business, both visitors and orders, are now done via our mobile app and browser. And last week, we rolled out Apple Pay to all members online, both web and mobile, on February 28. App downloads during the quarter were up 2.8 million and currently total around 33 million. On the product side, a couple of other new items to comment on. In our food courts, we recently replaced the churro with an awesome freshly baked 5.5-ounce chocolate chip cookie for $2.49. It is awesome. It's a great-tasting -- and a great-tasting turkey sandwich for $6.99, with the rollout of the latter being completed this week. In addition, we recently opened our first fully operated sushi offering in Issaquah, Washington across the street from our headquarters, with 2 more planned to open in the very near future. This operation is what we have successfully done for years -- for many years throughout our Asia Costcos in several countries over there. The sushi program has proven to be a category where we can be successful in both quality and price, and we're looking forward to seeing more of that in the future. A couple of comments about inflation. In the last quarter, in the first quarter, we estimated that year-over-year inflation was approximately 0 to 1%. We'll now say that in Q2, it was essentially flat. And notwithstanding essentially flat, we're taking price reductions where we can. Anecdotally, everything from simple items like reading glasses from $18.99 to $16.99, the 48-count of Kirkland signature batteries from $17.99 to $15.99, a 24-count of Pellegrino from $16.99 to $14.99 and even 4 pounds of frozen Three Berry fruit blend from $14.99 down to $10.99 with new crop pricing. So we continue to do that. We always want to be the first out there trying to lower prices. Many new items in sporting goods and lawn and garden are being set with lower prices year-over-year. And overall -- mostly due to reduced freight costs and lower commodity costs versus a year ago. And overall, our inventories and SKUs are in good shape across all channels. Overall, we have a good -- we've had good seasonal sell-through during the quarter. In terms of shipping and supply chain issues, we've been asked about that often, of late. There are some delays, generally just a couple or 3 weeks but mostly now planned for. First, there was an issue a while back about with the Panama Canal challenges, then, of course, the Red Sea challenges. A lot of that has to do with changing the way ships are being routed. No meaningful pricing issues because a lot of in-place contracts. Finally, turning to our February sales results, the 4 weeks ended this past Sunday, March 3, compared to the same retail calendar weeks last year. As reported in our release, net sales for the month came in at $18.21 billion, an increase of 6.9% versus $17.04 billion for the same 4 retail weeks last year. Again, just to -- announcement -- we did an announcement earlier today. The U.S. reported comp of 3.4% for February, ex gas and FX, 4.1%; Canada, 8.4% and 8.3%; other international, 10.8% and 11.3%; for a total company of 5.0% reported and 5.6% ex gas and FX, with e-comm coming in at a 16.2% reported and a 16.0% ex FX. Our comp traffic or frequency for February was up 6.2% worldwide and up 5.0% in the U.S. Foreign currencies year-over-year relative to the dollar negatively impacted total and comparable sales as follows: Canada by about 0.1% negative, other international by approximately 0.5% and total company by approximately 0.1%. Gasoline price deflation negatively impacted total reported comp sales by approximately 0.5%. And the average worldwide selling price per gallon of gas was down approximately 3.5% versus last year. Worldwide, the average transaction for February was down about 1.1%, which includes the negative impacts from FX and gas deflation. In terms of regional and merchandising categories, the general highlights are as follows: U.S. regions with the strongest comps were Midwest, Southeast, and Northeast. In terms of other international and local currencies, we saw strength in Mexico, Australia, and Korea. Moving to merchandise highlights. Food and sundries were positive in the mid-single digits. Fresh foods were up high single digits, and nonfoods were positive mid-single digits. And ancillary businesses were up in the low single digits. Food court, pharmacy, and optical were top performers, with gas down low single digits on a lower price per gallon. In terms of upcoming releases, we will announce our March sales results for the 5 weeks ending Sunday, April 7, on the following Wednesday, April 10, after market close. And lastly, before I turn it back to Demi for Q&A, I'd like to take a moment to say thank you to many of you who have turned in each quarter, some for many years, to allow me to share with you Costco's results, both our ups and our downs and thankfully, many more ups and downs and provide some fun and informative color on how we're doing along the way. Since going public in December of 1985, I have hosted all but one call. It has been an absolute privilege and honor to do so, so thank you all. As you know, in early February, it was announced that I will be ceding the role of CFO to Gary Millerchip effective March 15 after our second quarter 10-Q is filed, and retire, including from our Board, next January. It's a bit surreal of late but what a wonderful journey it has been with such a great company and great people, including many of you on the call today. I have certainly been very fortunate. The good news, Gary joined Costco last week and, along with David and Josh, will continue to provide to you all the transparency and straightforwardness that we are known for. It will be a positive and seamless transition. With that, I will be happy to turn it back to Demi to open it up for Q&A.

[Operator Instructions] Your first question comes from the line of Simeon Gutman with Morgan Stanley.

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

Sure. And by the way, it's when, not if, still. But really, we're -- joking aside, we're not that smart in terms of figuring out exactly why. I mean we know that all the factors that we believe would -- if we wanted to do it when we feel comfortable in terms of renewal rates, new member sign-ups, loyalty, all those things are continuing in the right direction. It really is a function -- and I don't think it would be done simply because, hey, things have slowed down a little bit, let's do it now. We like the fact that we're performing well. We like the fact that all -- most -- all metrics are going in the right direction in our business right now. We've got plenty of runway left. And given the economy and given everything else, it's us, it's Costco. So I think it is simply still not trying to be cute about it. It's not some big analytical formula. It's simply a measure of, we will, at some point, I'm sure, do it. And I've been joking with Gary, it will be on his watch, not mine.

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

Right. Well, whether it's -- I would say it's probably more likely to go up a little bit and down just because of whatever goes on in life, and the inflation that happened. But I got to look back at the last few years, we and others were helped through the crisis of COVID. And we haven't given a lot of that back. If I look at our SG&A, I remember when in fiscal '19, it came in at 10.04%, I'm looking at these numbers here. And even in '20, it was at 10.30% in the first quarter before COVID. And then in fiscal '21, it was 9.65% and then down to 8.88%, and now it's up -- fiscal '23, it was 9.08%. So notwithstanding, I remember when it was slightly above 10, we said, well, it's never going to get below 10 again. And a lot of factors continue to change. But just the sheer high productivity that we have is, frankly, higher than we thought. Some of that was gained through COVID because of everything else going on. But we haven't given it back. The good news, we haven't given it back and the good news continues to be that we're -- we seem to continue to be able to take market share. I think the fact that on big-ticket items, there's less SG&A. We continue to change the pack sizes of things for less freight, whatever it is, all the freight would be, that would be SG&A. But it is still a lot about sales at the end. And if you ask the rhetorical question, if comps went to 0, what would that mean? That would be tough on SG&A, but we'd figure other things out.

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

Richard, congrats on a great career that someone started basically day 1 at the company. My question is on culture. You've always said, it was customers first, employees second, shareholders third, and that philosophy has clearly played out. So looking at it, I'm curious how the new team is going to keep this culture intact and resist pressure from some of the non-founders of the company going forward.

Well, first of all, nothing has changed. It's not unlike the same question I think that was asked of Jim Sinegal after 28 years before he retired. And before we knew who his successor was going to exactly be, and I remember the Board asking, if you're 100 in terms of extreme value and extreme taking care of the customer and the employee and everybody else, whoever takes your place, what would they be in? He paused for a minute and said, "I have no doubt that will be at least in the mid-90s, if not higher." And frankly, after Craig was made that, in my view, whatever that number was, it increased towards 100 just because that's what we do. And that culture is so ingrained here. And when we talk about changing management, I always joke when people ask me as CFO how I'm important -- am I important to the strategic whatever of the company? The fact is we're run by merchants and operators, and we're there to serve and help them and certainly add our voice. But the fact of the matter is, and Craig for 12 years and now, and Ron, you have people that have been here for 35, 40 years and have -- were born and raised and have grown up in this culture. And it is so intact. Just last week when Gary joined us, he had to go through the required 2-hour Costco orientation, which includes obey the law, take care of your customer, take care of your employees, respect your supplier. And then if you do that, you can reward the shareholder. It is -- that's the one thing I can sleep very well at night.

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

Thanks.

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

Best of luck, Richard. You mentioned previously that most of the metrics are moving in the right direction. Can you highlight which metrics are not moving in the right direction? And especially from a membership per club standpoint, are there any signs that some of the more mature locations are either reaching a saturation or starting to see a peak in that metric?

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

Understood. My follow-up question is on the -- what seems like an inflection in the discretionary business. To what degree is Costco experiencing improvement in the gen merch categories as a result of aggressive changes, either like you had cited with the way you're communicating with the customer or the member or aggressive actions to take down prices? And if you are pulling those levers hard, is there an opportunity to move even more aggressively to drive the discretionary business? Because it does seem like Costco's experiencing a rebound in some of these areas more so than the rest of retail.

Yes. And absolutely, what is it? It's called -- it used to be NPD, it's Circana, which is that industry that shows you how you are on different product -- nonfood product categories versus the industry. When we look at something like appliances in the last several weeks or a couple of months, the industry is flat and we're up north of 20%. Same thing with tires, more than that percent. And so now that, you can't say let's do everything and everything will be up 20%, 30% because that's not going to happen. But at the end of the day, the focus of the buyers, as an example, is coming up with new ways to do things, to have great pricing and to constantly improve that pricing and figure out how to do that with our global buying power with -- every time there's a commodity price increase. Given an item of business, we have buyers that are in charge of 20 and 30 items, if not less, not 200, 300 items in a category. They know a lot more, in our view, about every cost component of that. And I think I feel very good that we do a very good job. I'm not suggesting others don't, but I know we do a very good job of getting on the phone immediately and working those issues. And as soon as we can get a savings, we're out there first pass to get on. And that's just our religion. Now we're able to do that partly because our sales have been relatively strong, and we've lapped some things from last year that have helped.

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

And my congratulations as well. Well done. It's been a pleasure. Wondering if you can maybe talk about Kirkland, the penetration, what's going on there. Any member shopping behavior around kind of private brand versus branded? And maybe what some of the branded packaged good companies are doing to maybe get some volumes up. Just curious about your view on that.

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

Got it. And then just on Costco Logistics, you gave some delivery numbers there. Just maybe step back a little bit, the penetration of Costco Logistics within the business. How meaningful is that at this point? What's left in terms of maybe growing that? Is that just going to go with the big ticket trends? Or are there, I don't know, internal initiatives to kind of drive further penetration of Costco Logistics?

What it's done strategically, I hate to overuse that word, it's allowed us to be much better on value and delivery times and quality and brought the delivery cost down on big-ticket items, particularly appliances and big screen televisions, mattresses and furniture, indoor and outdoor patio furniture and indoor furniture, some sporting goods. And in the -- before we bought Innovel, we're now called Costco Logistics in the spring of 2020. And the year before that, in the U.S., we did about 2.2 million drops. So the drop is anything from dropping off a sofa to delivering and installing a new refrigerator, freezer, or a washer-dryer and taking the old away for disposal. Both of those are dropped, recognizing the extreme difference there. But we did about 2.2 million drops in the U.S., none of which we did ourselves. With the acquisition of Innovel, I think for the -- probably over the last -- with this 1 million this quarter, a rough number of 4 million drops, which I believe about 70% of them -- over 4 million drops and about 70% of them is us. We've reduced the delivery times. We've just introduced in some categories like 2-hour windows where you can -- or 3-hour windows where you can choose, 2-hour windows where you can choose. So we're constantly getting better, and we've greatly improved the value. And when you look at something a category like appliances, we're still a very low percentage of the industry. And the fact it was up 20-plus percent last month -- or last quarter is a function of some of the things we're doing in terms of shouting out how good of a deal it is and doing a better job of that. But we think we have an opportunity to continue to grow those categories, recognizing they're all meaningful categories but they're all small percentages of our total. That's one of the nice things about us that we have lots of different categories.

Got it. Great. Well, thanks again, and best of luck, Richard.

Next question comes from the line of Rupesh Parikh with Oppenheimer.

Richard, I also want to offer my congratulations on your retirement. So just going back to the core-on-core margins. They're up, I think, 25 basis points this quarter. Just curious what drove that strong performance, if there's anything particular driving that?

Well, on the nonfood side, the biggest thing is -- well, not the -- a piece of it is comparing to last year where we had extra markdowns. I think -- we probably talked about it last time that nonfood was, a year ago, have been down year-over-year because of some of the supply chain challenges we had when such things were coming in late after the season in case some of the big-ticket items for overseas containers. So that was probably a chunk of it. On the fresh food side, I said it was down year-over-year a little. Fresh is competitive and we're being ever competitive on it as well. And -- but again, I don't view any of that as being terribly meaningful in terms of is that a big change that is coming. There's always something that's up a little bit and there's another thing that's down a little bit.

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

I can't think off the top of my head other than -- actually, someone across the table just said the word focus. At our budget meetings, which happen every 4 weeks with 150-plus people in town from all over the world, those are the kind of things we look at. And I think the operators are doing a better job of budgeting. And one of the things, I think, that came out at the last budget meeting in terms of budgeting, if you budget sales a little higher and they came in 1% lower, you got to control your labor costs. And so a lot of it has to do with focus and being meaningful to that. We certainly don't try to control expenses by not doing a wage increase when we think we need to. And we certainly have done that.

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

Richard, I feel like we should be like raising your jersey to the rafters like superstars retiring here. Never came without you, to tell you the truth. So congratulations.

Thank you.

So we'll have to see the CFO Hall of Fame. So a couple of things, some of your comments that you made. You're doing this delivery in 1 hour in China, I think you said going from 1 club to 3. Is that something you envision that can expand outside of China? And how should we think about that maybe even vis-à-vis the U.S.?

Well, in a way, we're doing same-day here with a few people, most notably Instacart and a little bit was shipped down in the Southeast. And I think we've got a test in Texas with Uber. But at the end of the day, we have that same-day delivery already as function. Over there, it is a third party that's doing it, like Instacart or these other ventures here. So it's just, it's new. It's not something that's new to the warehouse club industry in China. You could look elsewhere and find it too, but it's certainly something that makes sense. And again, in part because the social media, there's been a lot of publicity in just, I mean from the day it launched 3 days ago, it's gone nuts in terms of how many page hits it's getting and all that stuff. But it's just part of the business.

Got it. And then we talked about this over the years, and I think you said you're going to do 28 net new clubs this year. What's the capacity of the organization? Where do you see -- do you envision that going to 35 and 40? Like how should we think of it as we move out 3 to 5 years? Is it something that's going to trend up?

I think -- who knows? But I think generally, it probably trends up a little. There's a few years there, excluding the year that when COVID hit, that we only did like 13 because there were shutdowns in certain countries of construction and as well as the U.S. But if you look back, excluding that year over a 3- or 5-year period, plus or minus a couple of years there, it was about 23 a unit -- without looking at numbers, about 23 units a year. At the time, you said, what do you see over the next 10 years? What we saw collectively was somewhere in the -- hopefully targeting, let's say, 25 for the next 5 years per year and then going up to 25 to somewhere in the high 20s and if not, 30. I think that's generally the sense that we feel. Could we do more? Yes. Are we comfortable doing it this way? Yes. I think part of that is such a hands-on business. I get to say that from sitting here in headquarters most of the time, not traveling like my colleagues do in operations, but Ron is a great example. I mean he and several regional executives and operations, if there's an opening somewhere, or not an opening, they're out visiting usually at least 2, if not, 3 weeks a month around for 3 or 4 days, jumping around, visiting locations, not only existing locations but new sites. And so I think from a standpoint -- and the other thing is, particularly in newer countries, you want to get the first one opened, so you can train 50 or 80 people that want to move to the next location in that city that will help that one go. And we were very fortunate a few years back in the first Shanghai, in Minhang, in China, where we had a number of employees from Taiwan that wanted to move and be promoted into new locations, new jobs over there. So that helps us when we have 1 then 2 then 4 then whatever. So we take it slow. All I know is we're all very busy and particularly the operators and merchants as well. And so that's kind of the paradigm, I think, that we're going to continue to work at something in the 25 range and then heading up. Just a month -- just a quarter ago, I think our budget for this year was 32 and now -- or 31, now it's 28. And that's simply timing. There's 2 or 3 that pushed that for whatever construction delays or you found something, there's oil delays or whatever it might be, you might have moved from mid- to late summer to early fall, which is the new fiscal year. So I'm feeling pretty good that we're going to open 25-plus for the next couple of years and then probably 28-plus and go on from there.

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

Richard, you mentioned the word surreal, the feeling of retiring. I'd say it's almost as surreal, the $4.99 chicken. So thank you for all the help over the years. I would say -- I guess 2 things I want to touch on. One is ticket pressure. It looks like just in the most recent sales, with traffic growing more and more that you're seeing some AUR pressure. Is that 0% inflation turning to deflation as the merchants are seeing into March and April?

Well, I think that if the -- again, the inflation number is a calculation based on costs and mix. I think it's probably -- I would look too closely if the average ticket was up a couple -- a few tenths in the quarter, and then it was down 1% -- down in February by a tenth. And that's still relatively close. Some of it is a mix change, I'm sure. And some of it is some of the examples I gave you about lower pricing. Even if the underlying cost hasn't changed, some of it may be in terms of how we package and we take advantage of that. And that's on the sales side and not on -- not the exact costs from yesterday.

So looking ahead, that number, flat, looks pretty good from what the merchants are seeing today?

Yes. I think when I went to the last budget meeting 2 weeks ago, I think there's -- in the presentations, there's a lot of -- I used the phrase a few minutes ago, upscaling. I think that phrase buying with conviction. I mean I think the buyers are looking ahead right now in an offensive way and a positive way. Hopefully, we'll be right. But we feel, so far, we're being right.

I wanted to follow up with my second question on the Instacart side of e-commerce penetration. What would e-commerce penetration be now in the U.S. if you included the Instacart delivery and the other deliveries?

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

Well, thanks for everything, and enjoy retirement.

I hope to see you all.

Next question comes from the line of Kelly Bania with BMO Capital.

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

Well, without giving numbers out, we know there's an opportunity there more than we've done in the past. In the last 6 or 8 months, we brought on people that are seasoned in this business to help us. And it's a point of focus. We know that there's money out there. We've always been very successful in other forms of vendor buckets, whether it's end caps or advertising in our own Costco connection, and of course, over the last several years, some advertising online or banners or placement. But there's a lot more that can be done there. Rest assured, whatever it is, we're going to use it to -- just like when we always said, if we can save $1 on buying something, we're going to give $0.80 or $0.90 to the customer. I think that mantra will continue on this side as well. But there's certainly ability for more dollars out there. Some of our big retail competitors have talked about doubling in 5 or 6 years what they have. I think, again, it's a lower market share for us, so there's a little more opportunity for us to continue to grow that.

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

Yes. There's not -- on e-comm, there's not as many stored cards for our members. And as we're doing more with a digital wallet, that will help as well. So it's something that -- it should help.

Next question comes from the line of Oliver Chen with TD Cowen.

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

Well, we definitely have seen an impact from it. I mean, historically, the view was it has to be at least as good, if not better, quality than the leading national brand and at least a 20% savings as compared to what we sell the national brand for. And that -- those metrics continue in that regard. I think what we've seen when we look at some of the items that have risen greatly in price like paper products, on a percentage basis over the last several years because of freight costs, because of pulp prices, because of energy, all those things have dramatically increased. And what used to be -- I don't know the exact numbers, but for an 18-pack of -- a 24-pack of toilet tissue or a 15-pack or 18-pack of paper towels, you've got price points in the high 20s, if not low to mid-30s. And where we can show a dramatic savings on that, we've seen dramatic changes in unit market share towards Costco -- towards Kirkland Signature. But that's something that's been an iterative process over many years. Probably goes up and down a little bit. I'd say it's gone up a little bit in terms of a little more of a penetration in the last couple of years.

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

I don't think there's a big difference. In new markets, it's always a little slower. So like when we opened originally in Iceland or Sweden or Auckland or some of those are -- or France several years ago. You're always going to start -- or frankly, Japan 20 years ago, you tend to start out lower. In some cases, it's also a question -- some local vendors may not want to -- local country vendors may not want to sell you because they want to upset all the big traditional that have all the market share before we enter. And once we get 2 or 3 open, they talk to you a little more. And so I think all those things help us as we grow. Certainly, it's changed a little bit in the last few years. China being the most recent example, when we opened the first one in Minhang, in Shanghai, what, about 4 years ago, it made international news based on just the sheer number of members who signed up and everything. So we have a lot faster start, I think. Each year, we have a lot faster start than the year before. And so I don't see a big difference there. We certainly -- if you look in the U.S., I mean, I think one thing that's interesting is this fiscal year, we're going to open, whatever, 28 units. And I think of the 28, 20-plus are in the U.S., which is -- some people have asked, has it slowed down internationally? No, international takes a little longer to do. But what's interesting is we have a lot more runway than we ever thought possible. If you had asked us 5 years ago, by now, how many would we be putting in this year in the U.S., we would not have said 20-plus. It's got to slow down at some point. But the volumes that we're now doing in these locations, we've got to bleed some of that off. And so that's one good point. And then we still got plenty of going on overseas. And you'll see that continue to ramp up as well.

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

It seems like you guys have done some things to cut down on membership sharing, food court usage from nonmembers, et cetera. Richard, are you seeing something in the business that gives you concern that there's a growing issue from things like membership sharing?

No. I think part of it is -- first of all, I think the storyline sometimes is a little greater than the reality. During COVID, we did a little bit more -- there was a little bit more membership sharing. You had individuals where one family member, maybe not the one that had one of the 2 memberships, was coming into shop with mom or dad's credit card, and we allowed it. And then with the advent of self-checkout over the last several years, when you walk in the front door and you just flash your card and do they look at it or not, who knows? People would get in. And if you're going through self-checkout, you're not having to show your membership card to the cashier. And so there's probably an increasing but still small level of abuse of that privilege. And -- but we also had complaints from members saying, "I pay. Why shouldn't they?" So the view was we needed to just shore that up a little bit, and we did. We did it over a period of 6 months, I think about 6 months where we -- first, there was warnings and then ultimately changed. Are we getting some new sign-ups from it? Absolutely. But it's -- relative to the 60 million or 70 million members, it's not terribly meaningful, but it's more fair and the right thing to do.

Yes. I mean that was actually -- you started to answer it. So like you've seen some acceleration in membership. Should we kind of expect to see that in the future, like what we've seen with Netflix, for example, as they cut down member sharing?

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

Makes sense. Thanks again, and enjoy the next stage.

Thank you.

Next question comes from the line of John Heinbockel with Guggenheim Securities.

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

I think the biggest challenge with pain points, first of all, is flow of merchandise and pallets through the system, which we continue to work on and improve. Never -- if you announced this 10 years ago, will you ever have 150 of your 600 U.S. locations doing over $300 million and 40 of them doing over $400 million? The answer would be no, no way, even with inflation. The fact is we're doing a lot more volume than we've ever thought we would do. And so the biggest answer of not only making it a little more efficient but driving more sales is cannibalizing. We find existing members that sometimes will say, "I don't want to go there. It's too busy today." And by opening up that third or fourth unit in that city, we're seeing not an increase by 1/3 or 1/4 of the membership base but a significant increase in sales. And I can't think of anything specifically. We're always doing things with -- oh, David mentioned something here. One of the things we're -- we should be doing shortly is having warehouse inventory online. So when you go online to -- now I say that, a couple of people in the room are smiling and says, it may be a few months or a few -- more than a few months, but it will be soon. But at the end of the day, if you look at something to buy online and we have it in a location or 2 in the ZIP code where you typically shop -- in the location you would shop physically, we'll let you know you can buy there. And in many cases, it will be cheaper if you go pick it up yourself because the online costs might be higher -- is typically higher, particularly on the nonfood items. So I think that's something that will help that as well.

And secondly, is there any way to tell, you think about e-mail outreach. I mean it seems to be getting better and more call to action. I think about the 7 days of spring, which you're in the middle of now. Is there any way to tell the productivity of that outreach? And is that driving some of the e-comm pickup?

Absolutely. And yes, there is a way to tell. We are looking at it. Again, without going into a lot of detail, a couple of years ago, we brought in a new person in charge from IT in terms of all digital. He's built a team there working closely with merchants and operators but mostly with merchants in terms of doing these types of things. And we've seen, again, lots of improvements with our app, with our desktop. It's getting less clunky by the day and more ability to do some items to drive sales and some promotions like that.

Our next question comes from the line of Chris Horvers with JPMorgan.

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

I got to tell you, we -- in the last 12 months, we opened like 3% new locations, and we had a 7-plus percent increase in new members. So we're not trying -- we do have a few promotional things, but I would say we have not increased the types of things we do at all. And you're right. At other places, there's not a day that goes by you can't get a deep discount, much deeper than we've even ever done on an ongoing basis. And so no, we're not doing anything different. I mean are we pleasantly surprised by the rate of new sign-ups? Yes, it's nice to hear and have. And I think the fact that things like social media has helped us with the value proposition. And so no, we're not doing a lot of things in that regard.

And just from a technical question, one of your peers talks about 10-year renewal rate. The 93% that you quote, does that include like the year 1 renewal or in anyone that comes to the door on one of those digital coupons?

Yes, it does. And we've been doing the same way forever.

Next question comes from the line of Robby Ohmes with Bank of America.

Richard, my congrats as well. You will be missed very much. Listen, just a quick question. I love the credit card rewards program. It's amazing. It's like the best thing that's ever happened to me, the Citi card you guys do. Is there any issuer change with the late fees or anything going on that could change the rewards program or anything there?

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

Got it. And congrats on your retirement.

Thank you.

Next question comes from the line of Laura Champine with Loop Capital.

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

Well, that's exactly what it is. When -- first of all, if you just take the total number of members divided by total number of warehouses, I think we're about close to 70,000 households per location. When we opened a unit in not only China but other countries in Asia, we'll have anywhere from 80,000 to 150,000 members that sign up, many of whom are lookie-loos and a year later don't renew. We will start in some new countries with -- once the first batch renew for the first time, you might have a renewal rate in the 50s or at best, low 60s. And then it just, over the next 4 or 5 years, it continues to grow to something that's higher than that. Not -- that's more extreme than we saw 30 years ago in the U.S. and Canada. But nonetheless, that's exactly what you see. So when you -- just opening the 1 unit in Shenzhen or whatever we opened 1.5 years ago in China, that's going to affect the international renewal rate.

When we look at all other countries, when we look at the 13 -- the 11 other operations outside of U.S. and Canada, that renewal rate generally ticks up a little bit every year like the U.S. and Canada. In U.S. and Canada, by the way, it's been helped also with increased penetration of Executive Members. We have that in several countries but not all countries. The smallest countries, we don't have it in a number of units, and also with auto-renewal, which has helped us in the last several years. And that's, I don't believe, everywhere.

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

Well, the answer is it is and it does. So the answer is yes. I was at an opening -- I was at 2 months after opening in Osaka, Japan back in October. And on a Sunday, a random Sunday, I was not there on business, but a random Sunday, went over there, you couldn't move in the place. And it was great. It was a wonderful picture to see. So yes, I think that despite the fact that not everybody has cars and despite the fact that people have smaller housing arrangements, value plays well.

Our last question comes from the line of Corey Tarlowe with Jefferies.

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

Sure. Well, in terms of big-ticket discretionary, I think we completely believe that it's some of the things we're doing on our side to better explain the value. I mean it was almost like you did that and sales skyrocketed. 20% and 30% increases in some of those big-ticket categories just over the last couple of months, even if a piece of it is a year-over-year comparison, which I don't even know if it is or it isn't, at the end of the day, it was very evident to us. And then the other comment I mentioned, particularly like in appliances, we're still a very, very small percentage of the total industry. And so it's easier to take market share when you're such a small percent of something so I think that will continue. As regards to AI, we're just in the early innings of that. We've had third-party AI companies, large companies, including ones that are headquartered in Seattle, come out and talk to us. There's a whole list of things that we're doing with -- working with IT and our CEO and our heads of operations and merchandising to see where and how it might fit. But that will be a question for Gary in the future. Well, thank you, everyone. Again, it's been fun. The thing I'll miss most about the job is talking to everybody because I like talking, and it's been a great story to tell but it's been an absolute privilege. And I appreciate it. So have a good day, and I'm sure we'll be speaking to some of you shortly over the next few days with additional questions. Have a good day.

Ladies and gentlemen. This concludes today's conference call. You may now disconnect.