Costco COST Q4 FY2020 Earnings Call Transcript

Laurie: (00:01) Ladies and gentlemen, thank you for standing by and welcome to the Costco Q4 Earnings call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press *1 on your telephone. If you require any further assistance, please press *0. I would now like to hand the conference over to Richard Galani. Please go ahead. Richard Galani: (00:31) Thank you Laurie 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 statement involve risks and uncertainties that may cause actual events, results and/or performance to differ materially from those indicated by such statements. The risks of 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 statement speak only as of the data they are made and the company does not undertake to update these statements, except as required by law. Richard Galani: (01:07) In today's press release, we reported operating results for the fourth quarter in fiscal year 2020. The 16 and 52 weeks ended August 30th. Reported net income for the fourth quarter came in at $1.389 billion or $3.13 per diluted share compared to 1.097 billion or 2.47 per diluted share last year in the fourth quarter. Richard Galani: (01:32) This year's fourth quarter was negatively impacted by incremental expense related to COVID-19 premium wages and sanitation costs, totalling 281 million pre-tax or 47 cents-a-share, as well as a $36 million pre-tax charge, or 6 cents-per-share related to early payment of $1.5 billion of debt. Richard Galani: (01:55) These items were partially offset by an $84 million pre-tax benefit or 15 cents-a-share for the partial reversal of a reserve of 123 million pre-tax, 22 cents per diluted share, related to a product tax assessment taken in the fourth quarter of last year. Richard Galani: (02:12) Net sales for the quarter increased 12.5% to $52.28 billion, up from $46.45 billion in the fourth quarter a year earlier. For the fiscal year in its entirety, fiscal 2020 came in at 163.22 billion, a 9.3% increase over the $149.35 billion in fiscal 2019. Richard Galani: (02:36) Comparable sales for the fourth quarter of fiscal 2020 were as follows. On a reported basis for the 16 weeks, US was 11%. Excluding gas deflation and FX, the US was 13.6%. Canada reported 9.1% up. Again, ex gas deflation and FX 12.6% up. Other international reported 16.1%, ex gas deflation and FX 18.8%, bringing the total company to a reported number of 11.4% comp and again, ex gas deflation and FX up 14.1%. For the company, e-commerce reported was 90.6% up and ex gas and FX 91.3% up. Richard Galani: (03:28) In terms of the fourth quarter comp sales metrics, foreign currencies relative to the US dollar negatively impact sales by about 50 basis points and gasoline price deflation negatively impacted sales by approximately 220 basis points. Richard Galani: (03:43) Traffic or shopping frequency on a worldwide basis was down 1.2% during the fourth quarter and showed an increase of 1.2% in the US. Our average transaction or our average basket size was up 12.7% during the fourth quarter, notwithstanding the negative impacts from gas deflation and FX, which were included in that number. Richard Galani: (04:06) We've kept you up-to-date in our monthly sales calls on the impacts from the pandemic as we have been able to identify those. Overall merchandise sales in the core, core being food and sundries, hard line, soft lines and fresh, as well as pharmacy have all been strong. All sales in our ancillary, other ancillary and travel businesses, though now open have been soft. Richard Galani: (04:28) Next, moving down the income statement, membership fee income. We reported a fourth quarter membership fee income of $1.106 billion, up $56 million dollars from $1.05 billion in the fourth quarter of '19. The $56 million increase ex FX would have been 60 million up. Richard Galani: (04:49) During the quarter, we opened eight net new units and 13 for the entire fiscal year. Richard Galani: (04:55) In terms of renewal rates, at fourth quarter end, our US and Canada renewal rate remained at 91.0% and worldwide rate also remained at its similar number from a quarter ago at 88.4%. Richard Galani: (05:08) In terms of the number of members at Q4 end, both member households and cardholders, total paid households at fourth quarter end came in a 58.1 million and cardholders 105.5 million. In the fourth quarter, we standardized the membership count methodology globally, which we had apparently done differently in different markets, North America versus others, and so that increase includes that slight adjustment. The change resulted in adding approximately 1.3 million paid members and 2.0 million cardholders to our member base. Richard Galani: (05:47) So as an example, from Q3-Q4 when we showed going from 55.8 million to 58.1, or up 2.3 million, that 2.3 million increase includes the 1.3 million adjustment upward. Similarly, the 3.7 million increase from the end of third quarter to fourth quarter, that 3.7 million increase includes 2.0 million of an adjustment. I'd like to note, however, that neither the membership fee income dollars nor the renewal rate calculations were affected by this adjustment. Richard Galani: (06:17) At fourth quarter end, paid executive memberships totaled 22.6 million, an increase of 765,000 during the 16 weeks since third quarter end. Richard Galani: (06:29) Going down to the gross margin line, our reported gross margin came in at 11.24%, up 18 basis points from last year's fourth quarter gross margin of 11.06%. That 18 basis point increase, excluding gas deflation, came in what would have been -4 basis points and excluding a portion of the direct COVID expenses, would have been up 8 and I'll show you that in the numbers that I ask you to jot down here. Richard Galani: (06:57) If you jot down the following numbers, two columns. The first column will be fourth quarters reported, second column will be fourth quarter ex gas deflation, the first line item would be core merchandise. Year-over-year on a reported basis, core merchandise was up 101 basis points, ex gas deflation up 82 basis points. So +101 and +82 in the first line item. Ancillary businesses being the second line item reported -66 basis points and without gas deflation, -71. 2% reward - 4 and -2 basis points. Other -13 and -13 basis points and that would give you totals on a reported basis of +18 basis points, which I mentioned and ex gas deflation the -4. Richard Galani: (07:46) The core merchandise component of gross margin, again, was higher by 101 basis points year-over-year and 82 basis points higher ex gas deflation. Similar to last quarter and even more dramatic of an impact during this quarter, we had a significant sales shift from ancillary and other businesses to the core. This resulted in a higher contribution of our total gross margin dollars coming from the core operations versus last year. Richard Galani: (08:10) Looking at the core merchandise categories in relation to only their own sales, so core-on-core if you will, margins year-over-year were up by 70 basis points. Fresh foods was the biggest driver here. With the strong sales in fresh, we benefited from efficiency gains in both labor productivity and significantly lower what we call D&D or damaged and destroyed or product spoilage. Richard Galani: (08:35) Food and sundries, soft lines, hard lines, as well as I mentioned fresh foods already, but in addition, food and sundries, soft lines and hard lines all had higher margins year-over-year in the quarter, as well. Richard Galani: (08:47) Ancillary and other businesses gross margin, again, was lower by 66 basis points and 71 basis points ex gas deflation. Most of our ancillary businesses were lower year-over-year with the most significant negative impact coming from gasoline and travel, which accounted for about three-quarters of the decline. Richard Galani: (09:05) Costco logistics, which was primarily our acquisition this past March of the big and bulkier last mile carrier called InterBel, that was our newly acquired business. That impacted ancillary margins by -8 basis points. Again, we acquired this, this past March and we anticipated losses in this business as it ramps up. Note that these losses are not taken into account in the added sales or expanded product offerings, lower delivery prices and improved member satisfaction. Richard Galani: (09:37) Next, 2% reward. Nothing really to say there. -2 basis points ex gas deflation. And other, the -13 basis points, nearly all of this is attributable to the costs from COVID, 64 million of the $281 dollars previously mentioned. These are direct costs for incremental wages and sanitation allocated to our costs departments and to our merchandise fulfillment operations, so it impacts costs and sales. Richard Galani: (10:03) Moving to SG&A, our reported SG&A percentage year-over-year was lower or better by 47 basis points, coming in at 9.62% of sales this year in the fourth quarter versus 10.09% last year in the fourth quarter. Ex gas deflation SG&A was lower or better by 66 basis points. Richard Galani: (10:24) Again, if you jot down the following two columns of numbers, the first column is reported year-over-year SG&A change and the second column would be ex gas deflation. Core operations as reported were better or lower by 42 basis points and ex gas deflation lower or better by 57 basis points, so +42 and +57. Central +1 and +3. Stock compensation +3 and +4. Other +1 and +2. And that gives you the total on a reported basis SG&A being better by 47 basis points and ex gas deflation being better by 66. Richard Galani: (11:07) SG&A in the core, excluding COVID-related expenses which I'll discuss in a moment was significantly leveraged, of course, with a strong core of merchandise sales increases. As I mentioned, central, stock compensation showing small improvements year-over-year as a percent of sales. Richard Galani: (11:26) And now the other +1 basis point reported and +2 ex gas deflation, as I discussed earlier in the call, the quarter was positively impacted by an $84 million reversal of last year's fourth quarter $123 million pre-tax reserve related to a product tax assessment taken a year ago in the fourth quarter. The net impact from this item was +43 basis points. That +43 basis points is in this +1 and +2 basis point number. Also included in other are the incremental COVID costs or 217 million of the 281 million total amount. That equates to 42 or 41 basis points without gas deflation offsetting it the other way. So that's why you have that very small number on that line. Again, these are the costs for incremental wages and safety and sanitation. Richard Galani: (12:15) Next on the income statement, pre-opening expense. Pre-opening expense last year in the fourth quarter was $41 million. This year in the fourth quarter it was $15 million less, coming in at 26 million. Last year in the fourth quarter, we had 12 gross openings, 10 net and 2 relos and that compares to 10 openings gross or 8 net in the fourth quarter this year. The big difference in these two numbers, this year's fourth quarter relates primarily to warehouses opened during the quarter, as well as warehouses scheduled to open in the first quarter. Last year's pre-opening included $12 million in pre-opening expenses related to our then new poultry complex. Richard Galani: (12:53) All told reported operating income in Q4 increased 32%, coming in at 1,929,000,000 this year compared to 1,463,000,000 last year and it would be a slightly higher increase if you excluded the items that I mentioned earlier. Richard Galani: (13:10) Below the operating income line, interest expense was higher year-over-year by six million, coming in at 51 million this year compared to 45 million last year. Interest income and other for the quarter was lower by 83 million year-over-year. Richard Galani: (13:25) As discussed earlier, following the completion of the debt offering, we prepaid $1.5 billion of debt during the quarter. There was a pre-tax expense or what's known as a [inaudible 00:13:35] payment of $36 million related to the early retirement of that debt. That's in this interest income and other line. Richard Galani: (13:41) Actual interest income was lower by $28 million year-over-year in the quarter dur principally to lower interest rates being realized and lastly, FX and other was lower by $19 million. Richard Galani: (13:56) Overall reported pre-tax income in the fourth quarter came in higher by 25%, coming in at 1.869 billion this year compared to 1.492 billion last year. Again, that's including those items I pointed out earlier. Richard Galani: (14:13) In terms of the income tax rate, our tax rate in Q4 of '20 was 24.9%, a little lower than a year ago when it was at 25.7% in the fourth quarter a year ago. So a little benefit there. Richard Galani: (14:27) A few other items of note, in terms of warehouse expansion, with COVID, we had some delays in some of the planned openings for the fiscal year that just ended this past August 30th and a few of those have been pushed into this year that we're in now. For the year, we opened 16 total units, including three relos, so last year, we opened a net increase of 13 locations. Our plans for this year is to open about 20 net, 23, including three relos. That's our best guess and plan at this point. As of Q4N, our total warehouse square footage stood at 116 million square feet. Richard Galani: (15:04) In terms of capital expenditures, for the 16-week fourth quarter, we spent approximately $852 million and the full year, we spent $2.8 billion. Our estimated CapEx for all of fiscal year '21 is in the $3-3.2 billion range. Richard Galani: (15:23) E-commerce. Overall, our e-commerce sales, as you've seen each month, have increased nicely. For the fourth quarter on a reported basis up 90.6% and ex FX 91.3% increase during the fourth quarter. A few of the stronger departments, there are several, health and beauty aids, food and sundries, appliances, TVs, computers and tablets, housewares and small electrics, total online grocery grew at a very strong rate in Q4, several hundred percent. This e-commerce comp if you will, the e-commerce numbers I just mentioned above follow our usual convention, which we exclude the third party same-day grocery program. If we included that third party same-day, our e-commerce comps result would have been approximately 120% up during the quarter. Richard Galani: (16:15) Overall, our e-com sites worked relatively smoothly during the quarter, despite the dramatic volume increases and we were able to improve our delivery times throughout the quarter as we adjusted to the ramped-up order volumes. Richard Galani: (16:28) Now quickly turning to COVID and the coronavirus and some of the issues and impacts surrounding it, from a sales perspective, as indicated by our past three monthly sales releases, we have enjoyed strong sales results during the June, July and August timeframe. Certainly the sales strengths starts with our being deemed essential, resulting in strong sales of fresh foods and foods and sundries and health and beauty aids and the like. We've also benefited from the much improved sales in products and items for the home outside of the food area. As people are spending less on travel, air, hotel and dining out, they seem to have redirected at least some of those dollars to categories like lawn and garden, furniture and mattresses, exercise equipment bicycles, housewares, cookware, domestics and the like. Richard Galani: (17:11) And lastly, a few of our ancillary businesses, notably our optical and hearing aid operations, were closed for 12-16 weeks and reopened during the midsummer. From a supply chain perspective, kind of a 40,000 foot view, in terms of China, at least judging by the shipments to us, most of the factories are up and running. There are still some production challenges due to certain components downstream in the supply chain in areas like electronics, computer and certain white goods. It is getting better and improving each week and like us, we feel that our suppliers factories have gotten a bit better over the last several months at instituting safety protocols. That's our best guess. Richard Galani: (17:51) In terms of getting back to normal, each week is showing improvement and catching up, still a little behind. Food and sundries, some limits on paper goods, but getting better. Toughest area overall is still sanitizing wipes, as well as Latex gloves. In terms of other PP&E, we're in pretty good shape, selling quite a bit of masks and the like. Milk and butter, things like that are generally okay. In terms of fresh foods, proteins are currently all pretty good. There had been some slowdowns over the past few months and some allocations and some limits that we had to put on some sales of those items, but that's gotten back to normal at this point. Seafood and produce all good, as it has generally been throughout. Richard Galani: (18:32) In terms of holiday merchandise planning, Halloween, a small reduction in the amount of costumes. Some more basic candy items, as well as for Christmas going a little more basic in some areas, as well as looking at needs and uses for the house. Viewing it, given our strength of late, relatively optimistically. Richard Galani: (18:55) And Costco travel has shown some very modest improvement, but still significantly impacted during the quarter due to reduced demand. We do see our members starting to book travel again, although generally further out than we have historically seen. Richard Galani: (19:08) Our warehouses overall have remained open and are back to regular hours, with an additional hour on certain weekday mornings in many markets for seniors and persons with disabilities. The warehouses are still, of course, following the social distancing and sanitization guidelines and since May 4th, as you know, we've required all members and employees in the warehouse to wear masks. Richard Galani: (19:32) Finally, in terms of upcoming releases, we will announce our September sales results which is for the five weeks, ending Sunday October 4th, on that following Wednesday, October 7th, after market close. Richard Galani: (19:44) With that, I will open it up to Q&A and give it back to Laurie. Thank you. Laurie: (19:50) Yes, ladies and gentlemen, as a reminder, to ask a question, please press *1 on your telephone keypad. Again, in order to ask a question, please press *1. Laurie: (20:01) -a question, please press star one. Your first question is from [inaudible 00:20:05] from Morgan Stanley. Your line is open. Speaker 1: (20:10) Hi, everyone. Hey, Richard. My first question is how should we think about or how are you planning COVID costs for Q1 of the next fiscal year? If I'm not mistaken, I thought that for this fourth quarter, there was a range. I don't know if there was a range, but we were expecting them to be lower sequentially. I think they were pretty similar. So you mentioned the basics, what it constituted, but can you talk about why? Richard Galani: (20:35) Sure. As you may recall, on our first quarter conference call, we indicated that such types of costs in the Q4 would be at least 100 million or over 100 million. Of course, 281 is over 100, quite a bit larger. But the reality is the biggest factor is we chose to continue, at least for the time being, to $2 an hour premium. That represents about $14 million a week. To date, we're doing that, and we've committed to doing that at least through I believe the first eight weeks of this fiscal quarter. Again, we'll take that time again. Our numbers have been very good. Our employees are on the front line. Richard Galani: (21:21) Mind you, the fourth quarter was a 16-week quarter, versus Q3, which is a 12-week quarter. So on a per week basis, this has come down. There's other things that won't be repeated in the first quarter at least. If you go back to the very beginning of time, for the first four to five weeks, when we stopped doing food samples, we employed those third-party employees ourselves or we paid our third party to have them help us in the warehouse. That was during those three to four weeks of craziness in late February through late March, when people were coming in and hoarding and what have you. That helped quite a bit. Richard Galani: (21:57) So there's some costs that I don't expect to be continued. The biggest component, of course, would be the $2 premium, and we'll see. At this juncture, we've committed to it to our employees for the first eight weeks of this quarter. Speaker 1: (22:13) Okay. Thanks for that. My followup is you mentioned the holiday, and I think you said you were looking at it optimistically or favorable for now. Can you talk about maybe a little more detail why? It seems like the results speak for themselves for now, but there could be a lot of change over the next couple of months. Has your customer diversified their basket with you? You think you'll be able to retain them across more categories and keep trips as more retail gets their traffic back? Thanks. Richard Galani: (22:45) Sure, sure. Well, look. I mean, the main data points that we look at is how strong things have been in the last three and a half, four months. June, July, and August sales results, which we've all shared with you guys, the trend in traffic has improved. So it's been positive the last couple of months instead of slightly or even more than slightly negative, going back to April and May, while the average basket size has continued to be relatively strong. Richard Galani: (23:18) If you asked what some of the biggest surprises that we had looking at the last three months of [inaudible 00:23:28] compared to what we had expected a few months before that, I mean, the big surprise is we expected fresh and food and sundries and paper goods and the like and health and beauty aids to be strong, particularly food because of the [inaudible 00:23:41] people dining out. But I think we were a little surprised by the strength in many of these discretionary non-food categories, things for the house and big ticket items, again, not only furniture for inside the house, but patio furniture. Live goods were particularly strong. Richard Galani: (24:03) In some instances, we had tried to cut back a few orders back in March and April for seasonal summer goods, like patio furniture. Very quickly, we were having to scramble for more of those, and so far, so good. We recognized that people were coming into Costco. We believe they feel safe, given the safety protocols, the mask requirements, the sheer size of the building itself, and the width of the aisles. So all those things have helped us in that regard. Richard Galani: (24:34) We're also back to, after a couple of months of not having our traditional multi-vendor mailer coupon type of offerings, because several key items were limited or on allocation, we've gotten back to that. So I think at least our most recent three-plus month history has given us some comfort at this point. Now, as soon as I say that, things may change, but at this juncture, we feel very good about what it looks like, going forward, recognizing, looking at some of these things with a more basic in terms of Halloween and Christmas and the like. Laurie: (25:26) Your next question is from Chris [inaudible 00:25:31] from JP Morgan. Your line is open. Chris: (25:32) Thanks. Good evening, guys. So my first question is what's driving that strong core on core margin outside of the fresh category, which clearly would benefit from a shrink perspective? Is it sell-through and low clearance? Is it mix within the categories, or is it something else? Richard Galani: (25:53) Well, on fresh, it's all of the above. I mean, it's strong sales on a relatively higher initial margin business within our small confines of margin range, but then two components of cost of sales and fresh is labor productivity and spoilage. We don't have spoilage. We sell out, not literally, but almost literally to the piece on these and things. So you're not throwing stuff away. It's a great business from a gross margin dollar perspective, given the sales strength in it. So that's clearly the biggest thing. But, again, if you look at the other three core areas, core food and sundries, hard lines, and soft lines, they're all up a nice amount, but nothing like fresh foods. So that's helped. Richard Galani: (26:44) Now, mind you, other things have offset that, and the sum of all of those things is still a positive. The things that have offset it would be things like the fact that certain ancillary businesses, which are higher margin businesses, were closed for a 12 to 16 week period. Our food court, of course, has been limited of what we do there. We took out all the tables. We've limited the product offerings. Travel, which, while a small business, is an extreme example of high margin, many items in travel is just a brokerage fee, almost sales minus no cost to sales equal gross margin, if you will. It's the markup or the commission on some of that stuff, a portion of that. Richard Galani: (27:25) So those things have calmed down, but the sum of all those negatives are outweighed by the overall strength in core merchandise sales and pharmacy. Pharmacy has been relatively strong, too. Within that, fresh has been the biggest driver of it. Chris: (27:45) Got it. So a followup question that you were surprised by the negative gas impact in anciliary. I mean, your peers [inaudible 00:27:54] the same quarter saw tailwinds for the periods that crossed over. So can you talk about how much of that 66 basis points is specifically gas versus the other businesses? As you look forward, considering that optical's open and food court's, at least with a smaller menu, open and starting to see some traction around travel and gas prices being stable, do you expect at this point that the ancillary headwind could abate? Richard Galani: (28:31) I think it'll be less negative, but I think it's going to be around for a while. I mean, if you look at gas, gas is more profitable per dollar per gallon of sales than it was a couple years ago, because I think the prices have come down. Traditional retail has not been as competitive, which allows us to be more competitive, but still making a little more. At our trough, at the lowest point, I'm guessing back in April or May, there was a week where our gallons were down close to half. Today, they're down closer to maybe down 10%, maybe 5 to 15, depending on the day or the week. Richard Galani: (29:13) But in normal times for the last few years pre-COVID, when the US gasoline industry had comps in the very low single digits, we'd be in the very, very high single digits or close to 10 or 11, even, sometimes. So things have changed there. It's still a profitable business. But when your price per gallon goes down 20, 30% and your gallons are down even some small amount and it's 10-plus percent of sales of our business, it has that effect on it. At the end of the day, the sum of all this has still been quite good for us. Chris: (29:54) Could you break out the 66? Is that specifically related to gas? Richard Galani: (30:00) No, well, we said three quarters of it was- Bob: (30:02) Gas and travel. Richard Galani: (30:03) ... gas and travel. That's as good as we've got here. I don't have the details in front of me, but my guess is gas is more of it than travel. But they're both impactful. Chris: (30:17) Your guess is better than mine. Thanks very much. Laurie: (30:22) Your next question is from [inaudible 00:30:24] from [inaudible 00:30:24]. Your line is open. Speaker 2: (30:28) Hey. Good afternoon. Curious, Richard, how you're thinking about the recovery of your gasoline business, particularly from a gallons perspective and I guess how this interplay is holding back foot traffic into your storage. Clearly, it's getting better, but it's being impacted a little bit by the gas business. Richard Galani: (30:45) Well, I don't know exactly. I haven't seen numbers in the last week or two, but I believe our call it 10% negative gallon comp is still way better than the US as a whole, the US gasoline industry as a whole. But we'd rather have plus 10 than minus 10. The fact is that people are coming in less, but they're buying more each time, and the sum of those two things, as we've shown, we used to enjoy 5 to 8% comps pre-COVID on a regular basis. The last three months, we've enjoyed 14, if you will, and so overall, we'll take that. But it's got to be a small impact still. Speaker 2: (31:34) Okay. Then it's been a while since [inaudible 00:31:36], but the crossover between customers that purchase gas and then shop in the store, on timed hours, do you have that number handy? Richard Galani: (31:46) I haven't seen it lately, but historically, it had been ... During the hours that the warehouse itself is open, because we see the gas station is a couple hours perhaps on either side of that, it's in the low fifties. Speaker 2: (31:59) Right. Low fifties. Okay, great. Then just switching gears a little bit, on capital allocation, you ended the year with over $3 per share in cash and cash equivalents. You obviously remained significantly under-levered. Curious how you and the board are approaching this [inaudible 00:32:13] problem. Richard Galani: (32:14) Well, we have our regular quarterly board meeting in a couple of weeks. We'll see. But at the end of the day, we talked about it at every board meeting, all the different alternatives. Certainly when we went out to borrow the 4 billion, which was really a net increase of 2.5 billion, because we used a billion and a half to pay off existing debt, the fact was is that we were planning for a worst case scenario, where there'd be a slew of seasonal summer merchandise that we might have to hold for a year, as well as there'd be a lower inventory turn, particularly on discretionary non-food categories. Up until June, when we've seen the numbers really go in the northern way, June, July, and August, much of that need has not occurred. So yes, we are in a good position right now. We'll continue to look at it, but you'll know after we know. Speaker 2: (33:08) Got it. Thanks a lot. Laurie: (33:13) Your next question is from Karen Short of Barclays. Your line is open. Karen: (33:19) Hi. Thanks very much. I guess just a question just on the $2 premium. I guess the real question is, I mean, I know you called out the eight weeks, but would it be more prudent as we kind of model this to just kind of think that that's more or less the new norm, meaning 14 million a week is kind of what we should add on on an ongoing basis? It just seems that it's hard to take something like that away once you've offered it, but just thoughts on that. Richard Galani: (33:51) I don't think it's completely hard to take away. We communicate, VRCO and our Head of HR, to our employees. We've done that, and we've continued to extend it, but saying this'll be it, and now we've added a little more. Well, I think we'll see. I think it may be hard, but not impossible, and we want to make sure we communicate to our employees of why we're doing it. We'll just have to wait and see, Karen. Karen: (34:28) Okay. Then I wanted to judge [crosstalk 00:14: 30]. Richard Galani: (34:30) I wouldn't necessarily budget it in for the full fiscal year, but we don't know at this point. Karen: (34:37) Okay. Then- Richard Galani: (34:39) We know it's at least 8 of the 12 weeks in Q1, and it may be more. Karen: (34:44) Okay. Then just back to traffic for a second, so within your reported traffic numbers is obviously e-comm, right? So I wanted to just ask a little about what your physical in-store traffic looks like, and then I think on the last call, you were asked on color on traffic with your more loyal executive members versus the lower level members. Do you have any color on both of those? Richard Galani: (35:11) I'm looking at real quick. I don't have color in terms of ... Generally, I mean, executive members do everything, spend more, come in more frequently, buy more each time, and renew at a higher rate. I'm looking real quick here. Hold on. Bob: (35:31) [inaudible 00:35:34]. Richard Galani: (35:31) I don't have traffic. Comps, within our comp number, e-commerce benefits it by a little over 3%. Bob: (35:46) of the comp. Richard Galani: (35:47) Of the comp. Bob: (35:47) Not the traffic. Richard Galani: (35:47) Yeah, not the traffic number. Karen: (35:48) Okay. Bob: (35:48) [inaudible 00:15:52]. Richard Galani: (35:53) The average ring has more than doubled. Bob: (35:57) The average ring on e-comm. Richard Galani: (35:59) Oh, I'm sorry. The average ring on e-comm versus the warehouse- Bob: (36:03) Is about double. Richard Galani: (36:04) ... is about twice. That's because even though we've expanded on food and sundries and apparel, you've still got big ticket items like electronics and furniture, exercise equipment, and the like. Bob: (36:17) [inaudible 00:36:17] the traffic is something like one to two. [inaudible 00:16:21]. Richard Galani: (36:22) Bob here is saying he's guessing that the traffic impact would be one to two, but we don't know how that's broken out. Laurie: (36:27) I have your next question. It's from Michael [inaudible 00:36:36] from UBS. Your line is open. Michael: (36:39) Thanks for taking my question. So Richard, now that we're six months into the pandemic, has Costco come out of the situation in a better position to experience incremental margin expansion over time, and is there any factor that you learned that would allow the company to generate more margin expansion than it would have otherwise? Richard Galani: (37:03) Well, the more margin we can generate, the more likely we're going to give some of it back. In this case, arguably, given our strength, we've certainly given it back. We've remained very competitive, but we also maintained that $2 premium to our employees, which we appreciate. The first part of your question, when you started asking you about how do we feel we're going to come out of the pandemic and as things change, I mean, look. There's factors. As people eat out more and go out more or travel more, there's less for the home. That's on a macro basis. We have to believe here and we do believe that we have picked up new members. We've picked up sales from existing members from categories that they're buying more at Costco now, relatively speaking, in part because certain other venues or traditional venues are either closed or not frequented as often. So, again, we've been blessed in that regard. Richard Galani: (38:08) I think the other thing that I've witnessed over the last several months is our merchants' ability to pivot and to add items for the house, house ware items, additional items. So I think net of all those things, I still think, on a macro basis, when people start eating out more and start flying more and attending, going on vacations, some of these monies that are now being used for purchasing things for the home is going to move that way. That being said, I think there's several areas where we're retaining more of their dollars, and some portion of that, we'll continue to retain when it gets back to normal. Michael: (38:51) Okay. On an unrelated note, when you look at e-commerce growth, what percentage of your membership is currently buying from you online? What's the profile of the member who is driving the growth? Presumably, a lot of the spend is incredmental, because the spend of those members is going up. So does that change how you are thinking about emphasizing or investing behind your e-commerce business? Richard Galani: (39:20) Yeah. I don't have all those specifics. What I know is what was happening even before COVID and has been exacerbated in a positive way since COVID is some members have signed up to utilize those services. More members are utilizing those services and spending more on it. If you think about the one-day fresh, it is up several hundred percent fold, recognizing it was a smaller base. Even as it's gone down from its peak a couple, three months ago, it's still a lot higher than it was before. My guess is even as people get used to wanting to go out, there's some people right now that aren't going to the supermarket or aren't going out to shop or to Costco to shop. They love this service. Richard Galani: (40:03) The supermarket or I'm going to Costco to shop. They love the service. There's going to be some group that is going to like that. Given our quality and value, we in a supermarket are not mutually exclusive of one another and we think we'll keep some of that. We are certainly doing more to market to members, not only in-store promotions, but online promotions as well. Richard Galani: (40:28) Yeah. I feel better about our offerings today certainly than a year ago or two years ago, recognizing there's a lot of low-hanging fruit because of some of the things we hadn't done historically. We know that on the, I hate to use the phrase again, but on the big and bulky side, a lot of those things, for four years, we had talked, which is pre COVID, we had talked about going from $50 million in white goods sales in-store, in the U.S. with a limited sales penetration, if you will, to fiscal 19 doing almost $700 million, I think just under $700 million. That business has increased at a more rapid pace in the last year for two reasons. COVID and people buying things for the home, as well as in our view, the original things we're seeing trends wise in terms of how to utilize, better utilize our big and bulky interval acquisition, what we now call Costco logistics, for big ticket furniture items, lawn and garden items, exercise equipment, and the like. Speaker 3: (41:39) Okay. Thank you very much. Good luck. Richard Galani: (41:42) Thanks. Laurie: (41:44) Again, to ask a question, please press star one on your telephone keypad. Your next question is from Paul Lee Wells of Citi. Your line is open. Paul Wells: (41:55) Hey guys, Paul Lee. Richard, can you maybe talk about what you're seeing in terms of spending by new customers relative to existing customers, but also relative to what you would typically see from a new customer? Then second, I guess I'm curious if you looked at the club usage by members at all, what percent of your members used the club this quarter versus last quarter? Anyway to frame that? Thanks. Richard Galani: (42:25) I don't know if I can answer all those specifically, but keep in mind, some of our new members signed up simply for same day fresh or two day dry. Same day fresh, you have to be within a market trade area where there's a Costco. Two day dry, you can be anywhere, I think almost anywhere in the United States and with Instacart, it's both the United States and part of Canada now. We have some members, if they weren't a member, but they're signing up just to get to day dry and they're not near a Costco, needless to say, they're just buying those types of basic dry grocery items and that's it. Richard Galani: (43:05) Generally speaking, what we've seen in any given member, whatever type of member, they buy more each year over the first few years of their membership. Then there's the age thing as well. The sweet spot for us is still 40 to 55 year olds as they've grown economically, grown family-wise and are not on the downside of that curve in terms of empty nesting and what have you. I don't have any specifics beyond that to give you. Paul Wells: (43:39) How about club usage? Richard Galani: (43:43) Club usage? Same thing. Again, I can tell you, I don't have anything specific the last few months, but club, other than traffic, has improved greatly from its trough five months ago. Not back to where it was pre COVID, but one of the things that we see is is that the typical member, over the first three to five years, is growing their total purchases, which is a combination of their basket and their frequency. Clearly, when we can convert somebody to an executive member, they are buying more and shopping more frequently than that. Paul Wells: (44:26) Got it. Thank you. Good luck. Laurie: (44:26) Your next question is from Oliver Chin of Calling. Your line is open. Oliver Chin: (44:36) Hi, thank you. Richard, on the eCommerce frontier, it's been really impressive what you've done. What is some of the lower hanging fruit that you see ahead there, and also if you could brief us on the penetration now and how you might see that step change and where that will head in the future? Richard Galani: (44:53) Well, I mean, the main lower penetration things are, if you go back three or four years ago, I don't think we had good email addresses for much more than a third of our member base. We didn't focus on that kind of stuff. Today. We have well over 60% and growing. We now require you when you sign up, and more members are signing up online than in store in general anyway, when you sign up, you sign up with an email address. We're doing a lot more to collect and gather those email addresses and then communicating with them more often. That's probably the single biggest, low hanging fruit. Richard Galani: (45:32) The other thing is, is we feel that we've been able to use emails, if you will, not only to drive eCommerce special promotions, but also in-store special promotions. As well, the COVID, we were pleasantly surprised by just the sheer increase in people using same day fresh. Anecdotally, I can't tell you how many people have mentioned to me how they love it. They may very well be shopping same day fresh or same day whatever from their local supermarket as well. But we've got a lot of great items on there and it's hitting a cord. Oliver Chin: (46:19) Richard, as we look to this holiday season, which is definitely like no other, what factors would you prioritize as how you're planning it as best as you can differently this year versus others and is the multi-vendor mailer in good shape and are you going to leverage that a lot for holiday as well? Would love thoughts around dynamics of supply chain and marketing for holiday? Richard Galani: (46:42) Well, the multi-vendor mailer is back and there may be a few items that we don't have because of certain supply limitations, but for the most part, it's completely back after I think, two or three of those of six or nine weeks of multi-vendor mailers, if you will, that we didn't do. I think the biggest difference is, again for the Christmas holidays, is getting back to basics, but you're still going to see some hot, exciting items at Costco. Again, as I mentioned, even on Halloween, we still have costumes. I think we brought in something like 80% of what we would have normally brought in, 80% or 90%, and we're actually selling them. We added some vendors over the last several months, given certain shortages. One of the challenges is right now, we've had great numbers in electronics and white goods, not withstanding the fact that the numbers wouldn't be better if there was greater supply. We all read about there certain supply issues on laptops and computers and things like that on some of the gaming things. On some of the white goods, there might be a downstream shortage, or at least some allocation of compressors. We're doing very well on that. We've added some different vendors in some cases. I think the fact that we did so well this summer relative to what we had anticipated has given us the confidence to be still pretty aggressive going into the fall. Oliver Chin: (48:28) Last question. On same-day fresh and the momentum there, what are the margins like? What are your thoughts about that margin and the take rate, and also taking some of those capabilities in-house versus using the white label? Richard Galani: (48:43) Well, at this juncture, we have a very good relationship with other competitors, I'm sure having a good relationship also with Instacart. There's a few other smaller ones that we're using. We're not necessarily looking to take that in house at this juncture, but we are always looking at various third parties and we have good existing relationships and we want to keep growing those as well. Oliver Chin: (49:08) Thank you. Best regards. Richard Galani: (49:10) Thanks. Laurie: (49:13) Your next question is from John Heinbockel of Guggenheim Partners. Your line is open. John Heinbockel: (49:17) Hey Richard. A couple of things on growth. Even if you take out fresh food, right, it looks like the other three were up quite a bit. Maybe dive into a little bit similarities driving those three big categories versus what might be unique to each and then how sustainable is that? This obviously is one of the better core and cores we've seen in a while. Richard Galani: (49:40) Sure. Well, look, first and foremost, I guess two things. There's a little bit less promotional activity going on. You think about TVs and electronics. Those have been such a strong category, not just for Costco, but in general. The manufacturers haven't been doing as many promotional things. The other thing is, is given just the sheer sales strength, when you're comping, if we comped at, whenever it was in August '14, I don't have it in front of me, whatever, but in some of these categories that we talked about, what was stronger, you're talking comps in the low to high twenties. When you got that kind of sales strength, on a much smaller scale, you have less markdowns. Whatever your regular margin is on those categories, a little bit less without a little bit of an offset from end of cycle and some of those cycles are 60, 90 days, by the way on some of those skews. That's helped you a little bit. John Heinbockel: (50:50) Then, on ancillary rights, you said 75% was gas and travel. Was gas the bulk of that and if so, was gas more the compare last year, versus any decision that you made, right, to take less margin? I imagine it's not bad to take less margin and try to drive traffic. This market's just not there, right? Richard Galani: (51:11) I think in terms of less margin, that's more of our DNA. When things are really good, we're going to drive sales even further and do that or when things are good, we feel a little more comfortable in doing the $2 an hour for another month, whatever it might be. At the end of the day, there's probably less price competition out there today than there was a year ago. We're able to maintain our fair margins. John Heinbockel: (51:42) All right. Then lastly, what's the current thought process on two things; expanded BOPUS right, which you haven't wanted to do for cost reasons and a third tier of membership? I don't know if it'd be a higher tier or a middle tier, but segmenting that a little more. Richard Galani: (52:02) Yeah. Well, on buy online and pickup in store, we continue to look at what others do. We continue to scratch our head a little bit. It's not that we'll never do it, but it's not on the agenda for this week. As it relates to an additional tier of membership, again, I don't think that's on the top of the priority plate at this juncture given everything else that's going on. John Heinbockel: (52:32) Okay. Thanks. Laurie: (52:35) Your next question is from Scott Mushkin of R5 Capital. Your line is open. Scott Mushkin: (52:42) Hey guys, thanks for taking my question. I guess I want to get back to Richard to the eCommerce, the traffic mix and comments that you've made prior about really wanting to get people into the club. If the pandemic shifts that where you're going to see permanently traffic being an issue there, how are we thinking about impulse purchases and just the Costco model once we exit the pandemic, if this sticks with omni-channel just being a much bigger piece of the pie overall? Richard Galani: (53:18) Well, first of all, keep in mind, if our online business was five-ish percent a year ago, and now it's eight ish percent, that's a big delta in one year and it'll continue. It will probably continue to increase as a percentage from there. That excludes the third party Instacart type business, the one day grocery. Richard Galani: (53:45) We've been pretty good at pivoting along the way, and we recognize there's lots of attributes to value. The first and foremost is the lowest price on the greatest quality or quantity of goods and services and the trust that we've endeared with our members. I think that we'll figure that out as we go along. We may be occasionally stubborn on something, but we're not completely intransigent if we see that we need to do something. We figured out how to do things in a little different way than others and we'll continue to do that. Scott Mushkin: (54:20) As far as the pickup, I know that I think you were quoted in a recent article on this. I mean, how are you thinking about pickup over time and is there a way to bring that arrow into what you guys are doing at better economics? I know you always been cautious about those economics. Richard Galani: (54:41) Well, keep in mind, when third parties do it, their costs for picking, we believe, we don't know exactly what they are, but we believe based on our wages and benefits is less. They've created a model that works with their density and everything else. They're not just buying and delivering from Costco. They're buying and delivering to others. There are some economics in that model that makes sense. Our view also is there some retailers that are doing it because they feel they have to. One of the things that, the article you're talking about is the article today. In my view, the thing I would disagree in the article is that we should be concerned because our sales have started slowing, which is the contrary. They're stronger than they've ever been in the last three months. We don't have our head in the sand on it. We look at it. We have people here that study it and maybe it will surprise you one day, but at this juncture, we're not prepared to do that. Scott Mushkin: (55:46) Hey, thanks for taking my questions. Appreciate it. Laurie: (55:50) Your next question is from Rupesh Parikh of Oppenheimer. Your line is open. Rupesh Parikh: (55:56) Good evening. Thanks for taking my question, I guess, just to related question on real estate, so as you look at your store growth for this year, what's the split between international and domestic, and also just given some of the challenges of brick and mortar, I'm also just curious if you're starting to see more opportunities on the real estate front? Richard Galani: (56:12) Yeah, I mean, I think our general view is that we still feel that we want to open, looking at this year and the next five years, open somewhere between 20 and 25 a year net new units. About half of those, a little more than half, will start by coming in the United States and that'll trend over the five years to maybe being slightly over 50/50 in the U.S. to slightly under 50/50 in the U.S. We still think we have plenty of opportunities in the U.S. It does take longer in certain other countries. Richard Galani: (56:45) I think we're just about ready to do a second unit in France. We had just opened our third unit in Spain after having opened our first unit in Spain, gosh, five years ago. We have one unit in China with two plans for fiscal 22. We're now in fiscal 21. Some of these countries do take longer, but we are also putting a little bit more emphasis on that and where we've been successful, or we think we can be successful. I think, again at the 40,000 foot level, if we did 20 to 25, a little more than half in the first couple of years is U.S. and by year four, five or six, it would probably be, instead of 60/40 or 55/45, U.S., it'll turn to be just the opposite. Rupesh Parikh: (57:39) Great. Thank you. Laurie: (57:42) Your next question is from Scot Ciccarelli of RBC Capital. Your line is open. Scot Ciccarelli: (57:49) Thank you. Hi guys. Actually, another store growth question. What is the limiting factor for you in terms of accelerating your store growth further? You've got a grand total of one in France and grand total of one in Spain and you've been there for five years. It just seems to me like there could be a lot more store expansion if you really wanted to push it. I guess what I'm wondering is, what keeps you from accelerating that further? Richard Galani: (58:14) I think there are a couple of things. First of all, I've always said that we're a very hands-on company. One of the things we've learned when we've gone a little too fast, not to suggest one in five years is too fast. It is not, but I remember in Japan, we got to 10 or 12 locations. Then in about an 18 month period, we opened eight or nine and we had a little bit of operating indigestion. Richard Galani: (58:37) As it relates to France, it took us close to 10 years to get our first open. The level of people and entities that can appeal that process and fight you to keep you out is unbelievable. Again, in Spain, we actually have three and a fourth this year. Generally speaking, if I had to look at various countries, we'd open five in the first five years. That would be relatively fast for us, but again, it gets back to, I think, to getting that hands-on and make sure that we feel comfortable how the market is doing. We're probably a little slower than we could be, but we feel good about it. It's worked for us and will, I think, continue to do that. Scot Ciccarelli: (59:25) Richard, that's on the international front and that makes sense. You got to get comfortable with the market and supply chain, of course. What about just in the U.S.? You're obviously comfortable with how to navigate the store openings and what kind of restrictions you might have. It just seems to me like if you've got a decent amount of white space. Richard Galani: (59:44) Fair enough. Well, I think some of the white space gets better each year. If I look at even the Seattle market, there was a multi-year period where we didn't open any additional units and then we opened, on the East side here, Redmond and a couple of others. Part of it is ... Richard Galani: (01:00:03) Redmond and a couple of others, and part of it is cannibalizing nearby units and we try to be relatively methodical and disciplined of the returns that a new unit can generate net of cannibalization, and could we open 20 instead of 12 or 13 in the US? Absolutely, but it's how fast the real estate people and the regional operations people get with our CEO to go through that process and finding the right properties. Yeah. Speaker 4: (01:00:41) Got it. Okay. Thanks a lot, guys. Laurie: (01:00:44) Your next question is from Mike Baker of Davidson. Your line is open. Mike : (01:00:51) Hi, thanks guys and it's getting late so I'll be quick, but I wanted to ask you about the membership fee income up about five and change, I think, this quarter, which has been pretty consistent throughout the year, but I guess how much of that do you think is from new members that you're picking up because of the pandemic? Some of your competitors are seeing big increases in new members from the pandemic. It's hard to tease that out from your numbers and when we compare this, we can compare it to past MFI members, but it's a little lumpy because of the fee increases. So any idea of what you're picking up in terms of new members because of the pandemic? Richard Galani: (01:01:34) We don't disclose that. It's still a smaller percentage of the total. It's not a majority of the total. Mike : (01:01:44) And does it surprise you that those membership numbers aren't accelerating more as you might see from some of your competitors? Richard Galani: (01:01:54) Our view when we've looked at some of our competitor's numbers is partly because they have a much lower number of members per location than we do, and that's our view, but the fact is when we look at how penetrated we are in so many of our markets, I mean, we are even in California where we have 120, 130 units. I forget how many units we have there. I believe we're North of 60, slightly N=north of 60% member household market share in states like Oregon and Washington. We're well in excess of that. So I think that's part of the issue in our view. We've got a lot of people already. Mike : (01:02:42) Right. Yeah. Yeah. It makes sense. If I could ask one follow up on gas gallons sold. You said you were at 10% today. That's not 10% for the quarter, down 10%, that is, I believe, right? That's sort of a point in time. Did you mention how your gas gallons sold were for, as we go through the whole quarter? Richard Galani: (01:03:06) We did not. That's a more recent number in the last month, let's say. I mentioned that it may have been even in the end of Q3, which ended May 10th or May whatever around then, where we were like a minus 50, but my guess is we're somewhere in the low to mid teens for the last month. Mike : (01:03:31) For the last quarter or for the last month? Richard Galani: (01:03:33) The last month, low teens. Mike : (01:03:34) Okay. And so the total quarter is somewhere in between those two numbers presumably? Richard Galani: (01:03:39) Yes. Yes. Mike : (01:03:41) Got it. Great. Got it. Understood. Thank you. Laurie: (01:03:42) Your next question is from Peter Benedict of Baird. Your line is open. Peter: (01:03:52) Yeah. Hey Richard, just a question on how the product shortages issues that you guys have seen around COVID might be influencing your view on where you might go next in terms of vertical sourcing. I mean, I don't assume there's anything electronics or white goods, but has the experience the last four or five months maybe bent the curve in terms of when certain issues might be pulled forward? Richard Galani: (01:04:18) Well, in terms of vertical initiatives, we've got the last two or three years have been quite a bit, not only a bakery commissary that serves US and Canada just across the Canadian border, not only a second meat plant in Illinois versus the one we've had for many years in California, not only the poultry complex and not only a couple of smaller produce initiatives we've got going on right now, and last that not even expected, but the acquisition of Innovel or what we now call Costco logistics. So we got our hands full with a lot of things right now. I don't necessarily see... I think one of the things that we've learned from COVID, we have great relationships with large companies, both consumer product name companies and private label name companies of doing literally multi hundreds of millions of dollars of one item. Richard Galani: (01:05:14) When there has been some shortage of supply, we've had to expand that vendor network a little bit. There are some instances where, given our sheer volume in Asia now, can we find a comparable manufacturer or an existing supplier that wants to do something over there. So I think there'll be some ways to continue to reduce costs on key items, but in terms of what's the next big vertical, I don't know if we know at this point. Peter: (01:05:45) Well, that's fair. And then just thoughts on the travel bookings. You had mentioned that you were starting to see a pickup there, but it's further out than normal. Can you frame maybe what's normal and what you're kind of seeing right now? I thought that was interesting. Richard Galani: (01:05:56) And this is my definition of what I have understood previously of normal is if you go back pre COVID, the majority of your bookings each day related to stuff for the next few months, and maybe a little further out for five months before Christmas or five months before the beginning of summer. Today, you've got people booking things out five and nine months in some cases. Now there's two reasons. One, there's some great deals out there, and two, in many instances, there's no cancellation charges and so we'll have to wait and see, and part of that will be dictated by we've actually sold and had some members go on some cruises of late. Still a very small number. The car rental business has picked up a little bit better than the other, but still down relative to what it had been pre COVID. Richard Galani: (01:06:51) Yeah. Overall, and mind you, if we booked something out nine months, we don't take it into revenue until the trip is taken. So even though business has improved in terms of what we show in our numbers, there's very little... It's just starting to... First of all, it's not negative right now and there were a few months there in April, May, June, or April, May certainly, where cancellation costs were greater than trips being taken. Peter: (01:07:18) Yeah, that makes sense. All right. Thanks Richard. Laurie: (01:07:23) Your next question is from Kelly [inaudible 01:07:26] of BMO capital. Your line is open. Kelly: (01:07:30) Hi Richard. Thanks for taking our question. Just wanted to ask maybe a two-part question here. More and more retailers are talking a little bit about advertising maybe as a way to offset their lower margin e-commerce business, and so I was curious, one, if you could talk about where our e-com margins, just with all the acceleration and maybe just also remind us what bucket that is in your table, but then also just philosophically, how do you think about that, maybe taking on any more ad revenue to your .com business? Thank you. Richard Galani: (01:08:13) We're taking on more ad revenue and we keep learning more about that as well as we drive that business, but overall, the margins, as lower gross margins, part of that is category specific electronics, which is by far the largest single component of e-commerce is a high single digit margin. We think about it. In the Costco warehouse, you've got fresh that's in the low double digits, sometimes a pre-teen or early teen, and you've got again, conversely electronics, which is mid to high. You also, as we try to drive the business in certain new categories like apparel, where you buy two items and get $5 off or whatever the marketing or promotional item is. Richard Galani: (01:09:09) There's a lower realized margin on a given category in some of those categories versus online versus in store. So overall, you also have less SGNA and I get back to what Costco has always been a top line company. We're looking to grow it top line. Certainly the profitability of e-commerce has improved dramatically in the last year were these strong sales, but it's part of the ecosystem. Where is it in the matrix? It's an ancillary. Kelly: (01:09:42) It is an ancillary? Okay. Thank you. Laurie: (01:09:50) Your next question is from Laura Champine of Loop Capital. Your line is open. Laura Champine : (01:09:55) Just a quick one, Richard. You've managed to improve inventory turns or grow inventory slower than sales since the onset of COVID. I know that some of this has been supply chain issues or issues with certain skew sourcing, but that seems to be clearing up. How long can you keep improving inventory turns at this pace? Richard Galani: (01:10:18) Well, if we keep doing 14% sales, for a while, but I say that tongue in cheek because if you go back to April and May and the inventory turn come down, one of the reasons we were planning for additional capital, working capital needs. Yeah, look. I think we've gotten to a point when we've enjoyed a turn based on how you calculate it in the 12 to 13 range. When you get up to that range, it's difficult to some extent as well. Gas helps it because we turn gas every day. Fresh foods helps it because we turn fresh foods every week or less. I think about every week, maybe a little better than that, and the fact that we didn't have a big denigration on non-food items, which we had thought would be an offset to that. So it's helped a little bit right now, but if you asked me if I could just keep where we are right now, I'd say sure. Laura Champine : (01:11:17) Got it. Thank you. Laurie: (01:11:20) Your next question is from Christopher Mandela of Jeffries. Your line is open. Blake: (01:11:26) Hi, this is Blake on for Chris. Thanks for squeezing us in here. I was wondering if you'd comment at all on the extent to how much have existing customers you had before the pandemic that historically didn't buy general merchandise that are now shopping at category. How much of that example have you seen? Richard Galani: (01:11:48) Yeah, I don't know off the top of my head that, sorry. Blake: (01:11:52) Okay. And just lastly, can you talk about renewal rates and your expectations on those? Should we expect them to maybe creep higher given all the comp strength you're seeing now? Richard Galani: (01:12:06) Yeah, sorry, you're 0 for 2. We don't guide, no, we don't guide. They're things that help the renewal rate, getting people to executive, getting people to do our credit card. Some of the things we do now, when you sign up online, auto bill, and so those are things that help push it upward a little bit, or [inaudible 01:12:29] but conversely, if we ramped up internationally, and you're not going to do that overnight, but if we ramped up internationally, you start in any new market or the first few warehouses in a new country, you work on a much lower renewal rate to start with, but a much higher number of initial sign ups because there's a lot of looky-loos, and so all those things weigh in. Richard Galani: (01:12:55) We feel so far that I know as soon as we show a minus 10th of a percent in the quarter, which knock on wood, we haven't of late, people will worry what's going on, but our view is, is that we're hanging on to our members. We're getting them to in most countries, even in new countries, we've seen the trend to more often improve than not and so I think we feel pretty good about that. Blake: (01:13:20) Got it. Thanks so much. Richard Galani: (01:13:24) Why don't we take two more questions? Laurie: (01:13:26) Yes. Your next question is from Greg Milick of Evercore ISI. Your line is open. Greg: (01:13:33) Thanks. Richard, just one clarification on one question. Did you say e-commerce was 8% and then over 10% including Instacart? Was that for the year or the quarter? Richard Galani: (01:13:46) Quarter, roughly. Quarter and roughly. Greg: (01:13:51) 8ish and 10ish. Got it. And then, [inaudible 00:14:01]. You talked a lot about, and it's nice to see the US traffic come back for the quarter. Could you help us understand why international traffic remains negative and if there's any outlier countries driving that, or is really the US the outlier with traffic and come back, and if you're concerned that could influence the renewal rates and those international markets? Thanks. Richard Galani: (01:14:26) Well, no, Canada is the outlier internationally. Mind you, if US is a little over 70% of our company's sales. Canada's around 10, maybe 15. I'm sorry, 15, and so you've got other international being less than. There've been more restrictions in Canada and Australia also. There've been more lockdowns of late, but Canada and we have no direct warehouse competition in Canada. We've seen their traffic more negative with a basket even bigger than the US so we still got a buy-in and we've seen that improve also. That negative has been reduced. So hopefully that will continue as well. Trend-wise, last four months have been on the up and up. Greg: (01:15:21) Got it. So the trend's the right direction. It's just taken longer for those countries specific reason. Richard Galani: (01:15:26) It went further down to start with too. I mean, I think even that I'm shooting from the hip here, but even though several months ago with the US was a minus five traffic. Canada was a minus double digit traffic. Right. Greg: (01:15:42) Got it. Great. Thanks a lot. Good luck. Laurie: (01:15:45) We have Robert Moscow of Credit Suite. Please ask you a question. Your line is open. Robert: (01:15:53) Thanks for having me on the call. I wanted to know if you're noticing any regional differences in terms of how consumers are behaving during the pandemic. Inception rates are rising in certain states. I don't know if it'll fully go to lock-downs or not, but do you see any differences in terms of how they're getting ready for Halloween or worried about trick or treating or anything like that, and how are you responding to that? Richard Galani: (01:16:21) I can't be specific about Halloween. If I look back over the last several months, the only thing that we saw was is when certain states unlocked more quickly, we saw a little pickup there faster, earlier because people were getting out faster, some of those states that did that. Other than that, we haven't seen anything dramatic. Hold on. Yeah. Bob makes a good point here, I think, and we're all guilty of it. As the pandemic has progressed, we're all hopefully... Hello? Dammit. Hello? Robert: (01:17:09) We hear you. Richard Galani: (01:17:10) Oh, you can hear me now? I thought I hung up on you. Sorry. I think as the pandemic has continued, people have gotten a little more comfortable, hopefully still maintaining the safety protocols, but going out more often and that's helped the numbers pick up a little bit as well, and overall again, anecdotally, we feel that people feel more comfortable coming into a place where masks are required, where the places, the physical spaces are larger with more cubic feet of open air, if you will. So I think those things have probably helped us, but the only real difference we saw was during those couple of months where some states opened up a little faster than others. Robert: (01:17:50) Okay. Does that mean that fast reopenings eventually improve, that it's a net positive for your business in 2021? Richard Galani: (01:17:59) Well, that it's a net positive, but we don't know. Does that also mean as people eat out more frequently, they're going to buy less food, fresh food or food items at supermarkets and Costcos? There's probably some different offsets there. Again, we believe that some of the things that we've picked up through this pandemic, in part because a lot of these non food discretionary categories and big ticket categories, some of that's going to be sticky, and once they've shopped and had a good experience at Costco at a great value, they'll hopefully continue that. Robert: (01:18:36) Okay. Thanks so much. Richard Galani: (01:18:38) Okay. Well, thank you everyone. Have a good day and we're around. Have a good day. Laurie: (01:18:52) Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.