Costco Wholesale (COST) Q1 2024 Earnings Call Transcript

Costco Wholesale (COST -1.75%)
Q1 2024 Earnings Call
Dec 14, 2023, 5:00 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

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 hinder any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator instructions] I would now admire to turn the call over to Richard Galanti, chief financial officer.

Please go ahead, sir.

Richard Galanti — Chief Financial Officer

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 — excuse me — 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 embark on 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 26th. 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% boost over last year’s first quarter $53.44 billion.

Net sales were benefited by approximately one-half 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 ponder 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 a 3.9 excluding those two items. E-commerce which was reported as a 6.3 came in at a 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, and November time frame as did e-comm 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 9/10 of a percent worldwide and down 1.6% in the U.S. Foreign currencies relative to the U.S.

dollar positively impacted sales by approximately 4/10 of a percent, while gasoline price deflation negatively impacted sales by approximately 6/10 of a percent. 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 statements.

Membership fee income in the quarter, we reported $1.082 billion, or 1.91%. That’s an 82 million or eight — 8.2% boost and a four-basis-point boost 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 one-tenth of 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 numbers, 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 boost 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 — excuse me — 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 the margins excluding gas deflation. It’s the year-over-year change in the first quarter. On our core — core merchandise, plus three basis points reported, minus three basis points ex-deflation; ancillary and other businesses plus 24 reported and plus-22 ex-deflation — gas deflation; 2% reward, lower year over year, minus four basis points reported and minus three ex-gas deflation; LIFO, plus three and plus-three; 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 a — total company, it was plus three and minus three reported an ex-gas deflation. In terms of core margin on their own sales, or core-on-core margins, were up by five basis points year over year. Ancillary and other business gross margin, again, higher by 24 and higher by 22 ex-deflation — gas deflation. This boost was driven largely by gas and e-comm. Our 2% reward, higher by four, and higher by three ex-deflation, reflecting higher sales penetration coming from our executive members.

LIFO, plus three basis points. We had a $15 million LIFO credit in the first quarter of this year. This compared to a very small half-million-dollar charge in Q1 a year ago. And then the other line item, that 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’ll write 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 two and minus one; stock compensation, minus three and minus two; pre-opening expense, minus two and minus two, again for a total reported margin, higher minus 25 year over year. And — I’m sorry, SG&A, not margin, 25; and without gas inflation by — higher by 19 basis points. The core, again, was higher by 18 and higher by 14 excluding the impact from gas. This included 12 weeks of this past March as extra top-of-scale boost in our wages, which we — which represents an estimated two-basis-point hit. And as of September 18th, we raised the starting wage in the U.S.

and Canada. That estimated impact from the — those new wages to be roughly two basis points as well. Again, central nothing much to say other than it’s one basis point higher excluding gas deflation; again with stock comps to minus two ex-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 two basis points. Below the operating income line, interest expense was 38 basis points — $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 boost in interest income, about 100 million of that 107 million, due to higher interest rates as well as higher cash balances. The — 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% a year ago, or 1.5 percentage points higher this year than last year. The boost 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, so a net of nine increases that those nine included eight in the U.S. and one in Canada. For the full year of fiscal ’24, we assess opening — we’re planning to open 33 locations, including two relos, so for a net boost of 31 new warehouses. That would be up from 23 that we opened in fiscal ’23.

For Q2 fiscal ’24, we scheme four new locations, including our sixth building in China early in the calendar year. Regarding capital expenditures, the first-quarter capital expenditure spend was approximately 1.04 billion. We assess 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 boost in the number of the expansion that we’re doing.

In terms of e-commerce business, e-comm sales in Q1 ex-FX increased 6.1%, the first quarterly year-over-year boost in five fiscal quarters and trended well during the three reporting periods of September, October, and November. E-comm showed strength in several areas. And food, things admire eGift cards, pet items, snack items, we’re up in the mid-teens. Appliances, we’re up year over year in the mid-20s.

TVs was actually in the high singles despite the challenges with other aspects of consumer electronics admire 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 one-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 eGift cards on everything from restaurants to golf to airlines, we just, in the last couple of weeks, launched a Disney eGift card valued at $250 for $224.99. And for you, last-minute shoppers out there, there’s a Mickey Mantle autographed 1951 rookie card in nearly perfect condition, and it’s on sale — sale online for $250,000.

Next, good progress continues to be made with our e-comm, mobile, and digital efforts. No big enhancements and changes to the site leading up to the holidays, 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% boost during the quarter.

And that’s after being over 40% boost in all of fiscal ’23 versus the prior year. Our site traffic, approaching a half a billion, and just under 10% boost in the average order value being up about 2.5%. So, 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 assess for the quarter just ended, that inflation was in the 0% to 1% range. A bigger deflation in some big and bulky items admire furniture sets due to lower freight costs year over year, as well as on things admire 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 units have been higher. And in 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 31st, 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.

Questions & Answers:

Operator

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

Michael Lasser — UBS — Analyst

Good evening. Thank you so much for taking my question. Richard, you had indicated over the last year and a half or so that Costco had been raising prices faster than it had throughout its history. So, now, with — 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 inflation, especially on the food side, as you get through the next couple of quarters?

Richard Galanti — Chief Financial Officer

Well, talking to the buyers, we’ve seen — you know, even during the quarter, we saw the trend toward that zero versus the one. But — but at the end of the day, we don’t — the buyers are looking at 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 see different commodity components come down and, certainly on the non-food side, as we saw shipping costs come down, things admire that. And so, you — probably a little more than less, but we’ll have to expect and see. We don’t know.

Michael Lasser — UBS — Analyst

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

Richard Galanti — Chief Financial Officer

Sure. Well, happily I’m able to say that that’s — you get to figure that one out. You know, 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. You know, I’m looking at one example here. Just in the last month, $100-plus million of KS nut 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.

And I think as long as we see, you know, renewal rates continue to do what they do, as long as we see new signups continue to what they do, and hopefully, continue to get people to do, you know, 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.

Michael Lasser — UBS — Analyst

Thank you very much and have a good holiday.

Richard Galanti — Chief Financial Officer

You too.

Operator

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

Jackie Sussman — Morgan Stanley — Analyst

Hi there. This is Jackie Sussman on for Simeon. Thank you so much for taking our question. The core-on-core margin was up modestly this quarter, and it seems admire it moderated sequentially.

Looking forward to the balance of the year, it seems admire the comparison gets a bit tougher. I guess how should we think about your core-on-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.

Richard Galanti — Chief Financial Officer

You know, there’s so many different moving parts to it. You know, 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 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.

Jackie Sussman — Morgan Stanley — Analyst

Gotcha. 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.

Richard Galanti — Chief Financial Officer

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

Operator

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

Chuck Grom — Gordon Haskett — Analyst

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

Richard Galanti — Chief Financial Officer

Well, without giving you specific basis points, you know, food and sundries was slightly down — very slightly down. Non-food was actually up. Some of that relates to the fact that we’re 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 — either of those directions.

Chuck Grom — Gordon Haskett — Analyst

OK, 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?

Richard Galanti — Chief Financial Officer

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

Chuck Grom — Gordon Haskett — Analyst

OK, great. And, you know, just bigger picture, you know, I just have a question on the change at the — at the COC with Ron starting in a few weeks and, you know, replacing Craig who replaced Jim. You know, 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 a — from an operating standpoint moving forward.

Richard Galanti — Chief Financial Officer

Yeah, well, I always joke I’m up for review, so I’m going to say nice things. But no, at the end of the day, the reality is we’re staying the course. You know, I recollect 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 going to — you know, who can exchange Jim, and I think the same questions asked today who can exchange Craig, and it really is a seamless transition. You have somebody retiring that’s been here 40-ish years and that’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 the world, and then seven — or 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, you know, I saw during those two years when — 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.

Chuck Grom — Gordon Haskett — Analyst

Gotcha. Great. Happy holidays. Thanks.

Richard Galanti — Chief Financial Officer

Thanks.

Operator

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

Scott Mushkin — R5 Capital — Analyst

Hey, Richard, I guess I just wanted to think about the potential clubs in the U.S. I know this comes up sometimes, but obviously, you added eight. And it just seems admire there’s maybe more runway even here in the U.S., and I wonder if you had any thoughts on that. And then, I had a quick follow-up.

Richard Galanti — Chief Financial Officer

Sure. Well, you know, if — if we were to open the 31 this year, that would be somewhere in the low 20s, 23, 24 in the U.S.. And now, recognize a few of those are business centers, which is we continue to add as well as regular warehouse — you know, most of them are regular warehouses. And I would say that — you know, I guess the story I’d share with you is, you know, six or eight years ago when it was roughly 60-40 or 70-30, U.S.

Canada versus the international — other international, and we were asked what would it be by today, I’d say, well, by today, it’ll 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’ll 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, you know, 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 — you know, we’ve got a lot of things going on to — to drive international. But, you know, international’ll be, you know, six or seven years — this year, and — and that opportunity to grow. Last year, international was nine — nine or 10, and it’s more of a timing issue.

Scott Mushkin — R5 Capital — Analyst

So, then my follow-up is around traffic and also, admire, 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 — pretty amazing given, you know, the environment.

Richard Galanti — Chief Financial Officer

Yeah, well, look, I always said I think the — the biggest credit of value is the lowest price on a given quantity and quality of a good or service and — and then certainly add to that the trust that our members have. I think as it relates to specific things, admire I pointed out, admire appliances and even tires, it’s value. We — and the combination — and, you know, having acquired, you know, Innovel 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 — 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 — use 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 see the strength.

Scott Mushkin — R5 Capital — Analyst

Perfect. Thanks.

Operator

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

John Heinbockel — Guggenheim Partners — Analyst

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 — on that journey, particularly with Ron coming in.

Richard Galanti — Chief Financial Officer

Right. Well, you know, first order of business was fixing the foundation. We’re in the middle of replatforming our e-commerce. It’s not a big thing where we’re going to split 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 roadmap on that, and we’re halfway through that. And so, I — I say very little so far. If we were — you know, if we were 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, you know, the — on the five-star rating, you know, 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 — 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 order of business is getting the foundation right.

And we’ve made a lot of progress as — I didn’t spend a lot of time on this call talking about the — the new things, the enhancements we’ve made to the mobile site and the e-comm site, but we’ve done a lot.

John Heinbockel — Guggenheim Partners — Analyst

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

Richard Galanti — Chief Financial Officer

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. You know, 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 admire China or Spain, one of the challenges is you want — you admire to be able to ideally bring over more than a handful of people from the existing location to 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 or 70 people moved there from Taiwan for promotions and for interactions, not just in the office and the buying offices, but even in the key, you know, supervisor and manager positions within the warehouse. And so, it takes a little longer, and — but we’re — we’re working hard at it. But it’s a very hands-on go through.

John Heinbockel — Guggenheim Partners — Analyst

Thank you.

Operator

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

Kelly Bania — BMO Capital Markets — Analyst

Hi, Richard. Thanks for taking our questions. Just wanted to kind of follow up on Scott’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 some of — relief in the form of self-cannibalization and more clubs nearby. And 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 some more of the growth here?

Richard Galanti — Chief Financial Officer

OK, what was the first part of the question again?

Unknown speaker

The average sale.

Kelly Bania — BMO Capital Markets — Analyst

Yeah average per club.

Richard Galanti — Chief Financial Officer

Average sales, yeah. The average, I don’t know, I don’t have the numbers in front of me, but I know, in fiscal ’23, we had something admire 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 to 350-plus — and one of them, by the way, they did over 400 — did a few million, over 600 million. So — and so, generally, when it starts getting — when it starts having a three in front of it, certainly a 350 million, we want to start looking to see what we can do to — to — to cannibalize it, frankly, and to have more growth in that market.

And so, you know, hopefully, that’s our — one of our bigger problems and challenges that we have more of those each year. So, I think that’ll 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 — we’ll continue to do that. Internationally, again, I’m just looking at the — the map of where we are. Certainly, you know, we only have four locations in Spain.

We actually have 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 in population there that we can go to. Australia, you know, is whatever, two-thirds — there’s a little under two-thirds the size of Canada where we have 105 or so locations.

And in Australia, we have 15. Yeah, 15. I’m not suggesting we’re going to have two-thirds of 105 there anytime soon. It takes us, you know, 35-plus years to get there in Canada, and — but we think that those are the opportunities.

It’s not admire we’re looking for a lot of other new countries at this juncture. We’ve done a few new countries, though, single locations admire in Sweden and Iceland and Auckland, all being somewhat managed buying-wise and somewhat operationally by a host country. In the case of Scandinavia, by the U.K.; in the case of Auckland, by Australia.

Kelly Bania — BMO Capital Markets — Analyst

Thank you.

Operator

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

Scot Ciccarelli — Truist Securities — Analyst

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-comm sales at this point, number one. Number two, kind of related to that, any change in your vetting of what vendors work on that program, just thinking about the quality control aspect. Thank you.

Richard Galanti — Chief Financial Officer

Well, first of all, it’s — 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 — it’s there, we get a commission. So, it’s kind of admire 3P, if you will, 3P sales.

And at some juncture, some of their rules — accounting rules of 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 a — the, you know, market value and just the commission in our number. You know, in terms of how we vet, we do it the same way we vet items. We want items that make sense to furnish value.

And we have a team that — that is here that are vetting — 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.

Scot Ciccarelli — Truist Securities — Analyst

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, you know, presumably, that’s kind of 100% margin, right?

Richard Galanti — Chief Financial Officer

Essentially, yes, much admire the travel business.

Scot Ciccarelli — Truist Securities — Analyst

Got it. OK. Thank you.

Unknown speaker

Mostly.

Operator

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

Greg Melich — Evercore ISI — Analyst

Hi, thanks. Richard, wanted 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 and mix and executive membership driving that high single-digit growth. Is that what means that you don’t have to boost it and you could keep waiting, or is there something else?

Richard Galanti — Chief Financial Officer

I think it’s just us. I mean, you know, again, if I look at the — if you — if you ask the question, what are the variables we would look at, we would want to look at strong renewal rates, strong new signups, strong loyalty, and we have all that. So, I think it’s — the question is we — we haven’t needed to do it. We admire providing extreme value. Certainly, while we’ve gone a little longer than the average boost, we feel we certainly have driven more value to the membership.

So, you know, I’ll use my standby answer, my pat answer, it’s a question of when, not if. But at this juncture, we feel pretty good about what we’re doing.

Greg Melich — Evercore ISI — Analyst

And a follow-up on inflation, I just want to make sure I got that right. You said zero to one for the quarter. Did it trend toward zero? Did we exit near the bottom? And — and you mentioned some categories that were deflationary. Which ones are stubborn in terms of inflation, where it’s hardest to get it out?

Richard Galanti — Chief Financial Officer

Which inflation — which — which categories are stubborn in inflation?

Greg Melich — Evercore ISI — Analyst

Yeah, yeah, where you get that.

Richard Galanti — Chief Financial Officer

CPG brands.

Greg Melich — Evercore ISI — Analyst

Mostly? All the branded packaged stuff?

Richard Galanti — Chief Financial Officer

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

Greg Melich — Evercore ISI — Analyst

OK. So, it’s not admire we exited zero; we’re still slightly positive.

Richard Galanti — Chief Financial Officer

Right. But recognize, the life of charge is an inventory cost-of-sales charge.

Unknown speaker

[Inaudible]

Richard Galanti — Chief Financial Officer

Right. The zero to one is from the beginning of the fiscal year — oh, now, it’s from — I’m sorry, the beginning — the zero to one is versus a year ago.

Greg Melich — Evercore ISI — Analyst

A year over year. Got it.

Richard Galanti — Chief Financial Officer

Yeah, yeah.

Greg Melich — Evercore ISI — Analyst

OK, great. And then, just last, what is the auto-renewal rate now?

Unknown speaker

[Inaudible]

Richard Galanti — Chief Financial Officer

In the U.S., it’s around 60%.

Greg Melich — Evercore ISI — Analyst

Perfect, thanks. Have a great holiday, guys.

Richard Galanti — Chief Financial Officer

You too.

Operator

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

Rupesh Parikh — Oppenheimer and Company — Analyst

Good afternoon and thanks for taking my question. So, I just wanted to go to operating expense growth. So, operating expense growth is still high. Would you expect the growth rates to moderate once you lap that March wage boost? And then, anything unusual within that line item that’s still driving a pretty high growth?

Richard Galanti — Chief Financial Officer

There’s not a lot unusual. I think it gets back to that question of low inflation, which creates a little bit more of a challenge, right? You know, my — and again, that was a very extreme example I gave you on nuts, but you know, when you had a zero — slight, you know, 0% to 2% refuse in sales and a 14% boost in units, you got more labor involved, more hours stock on the shelf. I mean that’s, you know, the 40,000-foot level, and that’s an extreme example, but I think, overall, it is sales base. You should also recollect — if you recollect, going back to fiscal ’19, in the first part of fiscal ’20 before COVID, you know, our SG&A percent was — for all of ’19, it was a 10 04. In the first quarter of 2020, it was a 10 34.

And for the whole year, it was 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 were — 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 — that’s the challenge: How do we — how do we — how do we reduce that and how do we — how do we handle that? And certainly, the biggest way to handle it is driving more sales.

Rupesh Parikh — Oppenheimer and Company — Analyst

Great, and then maybe just one follow-up question. So, just curious how you’re feeling about the health of your consumer. So, it was interesting to hear that TVs were — you know, did well this past quarter.

Richard Galanti — Chief Financial Officer

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, you know, rose-colored glasses here. The — you know, we have enjoyed great value. And again, we’re convinced it’s value. We’ve gotten, I think on — on the — on the margin, there’s a few extra things that 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 — and not being — 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.

Rupesh Parikh — Oppenheimer and Company — Analyst

Thank you. Happy holidays.

Richard Galanti — Chief Financial Officer

Thanks.

Operator

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

Tom Nass — TD Cowen Research — Analyst

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 in supplier negotiations, that could position Costco for stronger gross margin ahead.

Richard Galanti — Chief Financial Officer

Well, I would say allowing us to get better deals, which means lower prices. But, you know, look, I think we’re — Kirkland Signature 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 eight and nine range, if you will — if you recollect. And we talked about that, year over year, we saw probably the biggest boost penetration of KS at Costco. It was — it was one — 1.5 percentage points when, historically, it had been 25 to 50 basis points a year.

I think we’re back to that, but we’ve maintained that higher level. And — 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 stuff. Certainly, with KS stuff, we’re closer to the supplier. We’re not the only — we’re the only customer buying that item, and – and — and we can drive a little bit more business.

And so, I think it just continues to work that way for us.

Tom Nass — TD Cowen Research — Analyst

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

Richard Galanti — Chief Financial Officer

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, you know. We — we know we benefited during those — kind of those two years. Kind of, you know, 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.

Tom Nass — TD Cowen Research — Analyst

Thanks.

Richard Galanti — Chief Financial Officer

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 non-food kind of stuff. I think that — that corresponds with my comment earlier that we feel good about, you know, the seasonal — how we’ve done seasonally.

Tom Nass — TD Cowen Research — Analyst

OK, great. Thanks.

Operator

We’ll take our next question — thank you. We’ll take our next question from Mark Astrachan with Stifel.

Mark Astrachan — Stifel Financial Corp. — Analyst

Yeah, thanks. Good afternoon, everyone. I guess I wanted to ask on — on the Kirkland products, specifically maybe on the CPG that you mentioned, how have pricing — or how has prices trended on those versus the branded products? Have you seen any deviation there given your closure, or 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?

Richard Galanti — Chief Financial Officer

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

Mark Astrachan — Stifel Financial Corp. — Analyst

Got it.

Richard Galanti — Chief Financial Officer

And then — 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.

Mark Astrachan — Stifel Financial Corp. — Analyst

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

Richard Galanti — Chief Financial Officer

Generally speaking, you know, if you contrast — everybody’s always concerned, I recollect, 10-plus years ago, people would ask, “How are you going after millennials?” And then, it’s how we get after the next gen or whatever — the Gen Z’s 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, and they buy more as they get older into that 40- to 55-year-old sweet spot. And I don’t know in terms of — 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 admire — frankly, auto renewal help that as well.

Mark Astrachan — Stifel Financial Corp. — Analyst

Got it. Thank you. Happy holidays.

Richard Galanti — Chief Financial Officer

Same to you.

Operator

We’ll take our next question from Corey Tarlowe with Jeffries.

Corey Tarlowe — Jefferies — Analyst

Hi, good afternoon. Thank you for taking my 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 advocate ahead. So, I’m curious about the ability for Costco to maybe preserve a more nimble margin structure amid what could be some volatility on the pricing side.

Richard Galanti — Chief Financial Officer

You know, we — frankly, we look at the wages in a vacuum, and we want to do as much as we can for our employees. And — and certainly, you know, there were several increases starting with the — the — the front-line worker premium during the initial year of COVID. We kept half of that in there, which — you know, we kept one of those $2 an hour in there, which was admire $400 — 400 million a year. Again, we’ve also benefited from stronger sales and productivity, so we were able to afford that.

But we look at them independently, and we’ll continue to do that — to — to look at it. And to the extent inflationary pressures are down, that means there’s probably a little less inflationary pressure on wages. But we give — you know, over half of our employees are top of scale, and they’re getting increases, irrespective of some of the extra things we’ve 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.

Corey Tarlowe — Jefferies — Analyst

Understood. And then, just piggybacking off of that, and I comprehend it may be difficult to credit 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 admire fresh and food and sundries may have unlocked a little bit of extra wallet to spend in the non-food category and may have driven some of the momentum that you’ve seen In categories admire TVs and others?

Richard Galanti — Chief Financial Officer

I think it can’t hurt, you know, even with gas prices have come down a little bit. You know, 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.

Corey Tarlowe — Jefferies — Analyst

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

Richard Galanti — Chief Financial Officer

Thank you.

Operator

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

Dean Rosenblum — Bernstein Investment Research and Management — Analyst

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 admire appliances and TVs, which are notoriously lower gross margin, at least in the marketplace, versus fresh and food and sundries.

As you see the — 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?

Richard Galanti — Chief Financial Officer

You know, first of all, our — our margin range is so much more compacted than traditional retail — you know, different categories of traditional retail. I mean, if you think about it, we have, what, a 12%, 13% gross margin?

Unknown speaker

[Inaudible]

Richard Galanti — Chief Financial Officer

Eleven? I’m thinking marks up, you know. And — and in theory, it ranges from zero to 15. In reality, it’s — there’s a very few things that are below five, and a lot of things hover around the 8% to 12% range. And — and — and so, I don’t think it’s as big an impact to us in terms of those mix changes.

And, you know, and I got to say — I got to say it’s always — that old saying it’s always something — there’s always something that hurts you and there’s another thing that helps you. And it’s — it’s a really — it’s a mixture.

Dean Rosenblum — Bernstein Investment Research and Management — Analyst

So, true. And then, the other — the other big debate that clients are asking about is the relative profitability of new stores versus existing stores. And 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.

Richard Galanti — Chief Financial Officer

Well, first of all, you know, when you’re looking, admire, at an ROI, the I — the denominator on an older building is a lower I, you know. If — 10 years ago, the typical building in the United States land, you know, property, equipment, and building and fixtures, I’m shooting from the hip here, was — was 30 million to 35 million, and now it’s 45 million to 50 million. So, you’ve got a different I. But generally speaking, when we — when — when we look at the ROI of each of our eight U.S. regions, our two Canadian regions, new units come in and 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 the I boost because we expanded the unit and upgraded it and remodeled it. The fact of the matter is — is those higher volumes 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 — the ROI and 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 of — very little related to gross margin.

Some related to — to membership fees, some related to wages, and some related to benefits — health benefits. You know, U.S. healthcare costs dwarf every other country that we’re in.

Dean Rosenblum — Bernstein Investment Research and Management — Analyst

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

Richard Galanti — Chief Financial Officer

Thank you.

Operator

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

Joe Feldman — Telsey Advisory Group — Analyst

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

Richard Galanti — Chief Financial Officer

I think, well, there’s — 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’ll add to a little bit. But no, we — I think some of the boost, it’s kind of admire getting up to that asymptotic line when you — you know, one of the things that drove it in the last few years, one, we have done a better job in the last several years of — of — of selling it to you, as well as auto renewal. When people come in now or sign up online, they’re signing up, do they want to put their credit or debit card in there, and they can opt out, they can opt into — to doing it online, do — do a lot of renewal. So — so, I think those things have pushed it along with us, you know, being so wonderful, but I think you’ll still see come up a little bit, but probably, that rate of boost will slow over time.

Joe Feldman — Telsey Advisory Group — Analyst

Got it. OK. And then, maybe just a quick follow-up. Anything to talk about on shrink? Because I know that, you know, there was an issue with strength even for you guys at one point.

And I know you guys have cracked down on, you know, making sure members are showing their cards when they walk in the store, and obviously, that when you leave with your goods, they’re — they’re checking your receipts. But anything we should think about with regard to shrink going forward and recent trends?

Richard Galanti — Chief Financial Officer

Nothing — thankfully, nothing at all.

Joe Feldman — Telsey Advisory Group — Analyst

OK, good.

Richard Galanti — Chief Financial Officer

It’s really, you know — you know, I think all we talked about was, you know, a combination of as we went into some self-checkout 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.

Joe Feldman — Telsey Advisory Group — Analyst

Got it. Thank you and happy holidays, guys.

Richard Galanti — Chief Financial Officer

Same to you. Thank you. Thank you.

Operator

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

Laura Champine — Loop Capital — Analyst

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 admire that — that pressure in SG&A didn’t come mostly from wages, and I’m wondering where it did come from.

Unknown speaker

[Inaudible]

Richard Galanti — Chief Financial Officer

Yeah. Yeah, yeah, on the ancillary line, it’s gas and e-comm, and it’s a combination of increased sales penetration and increased margins within those businesses. You know, 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 station we work with our — with neighboring competitive gas stations, our value proposition is actually increased — increased number of cents per gallon than we’ve ever seen.

So, that’s been, if you will, a win-win for us. On the — on the e-comm side, I think driving more sales has helped us in the margins there as well.

Laura Champine — Loop Capital — Analyst

Thanks. And then, just on the operations and wages.

Richard Galanti — Chief Financial Officer

On the wages — yeah, on the wages, well, we pointed out — I pointed out on the call, I think there’s, admire, four or so basis points in total from those two distinct increases. We do other increases, admire, over half of our employees are top of scale. They get an boost every March. That’s — that’s significant as well — significant relative to basis points when you have, you know, lower sales — lower sales figures.

Everything — and it’s — the rest of it is all the other line items, admire energy costs and the admire.

Laura Champine — Loop Capital — Analyst

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

Richard Galanti — Chief Financial Officer

It’s more than half. I don’t have the exact figures with me.

Laura Champine — Loop Capital — Analyst

Got it. Thank you.

Operator

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

Richard Galanti — Chief Financial Officer

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, savor the holidays.

Thank you very much.

Operator

[Operator signoff]

Duration: 0 minutes

Call participants:

Richard Galanti — Chief Financial Officer

Michael Lasser — UBS — Analyst

Jackie Sussman — Morgan Stanley — Analyst

Chuck Grom — Gordon Haskett — Analyst

Scott Mushkin — R5 Capital — Analyst

John Heinbockel — Guggenheim Partners — Analyst

Kelly Bania — BMO Capital Markets — Analyst

Unknown speaker

Scot Ciccarelli — Truist Securities — Analyst

Greg Melich — Evercore ISI — Analyst

Rupesh Parikh — Oppenheimer and Company — Analyst

Tom Nass — TD Cowen Research — Analyst

Mark Astrachan — Stifel Financial Corp. — Analyst

Corey Tarlowe — Jefferies — Analyst

Dean Rosenblum — Bernstein Investment Research and Management — Analyst

Joe Feldman — Telsey Advisory Group — Analyst

Laura Champine — Loop Capital — Analyst

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