好市多 (COST) 2018 Q1 法說會逐字稿

Good afternoon, everyone.

My name is Christy, and I will be your conference operator today.

At this time, I would like to welcome everyone to the Costco Wholesale Corporation First Quarter Earnings Call.

(Operator Instructions) Thank you.

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

You may begin.

Thank you, Christy, and good afternoon to everyone.

I'll start by stating that these discussions will include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

These statements involve risks and uncertainties that may cause actual events, results and/or performance to differ materially from those indicated by such statements.

The risks and uncertainties include, but are not limited to, those outlined in today's call as well as other risks identified from time to time in the company's public statements and reports filed with the SEC.

Forward-looking statements speak only as of the date they're made, and the company does not undertake to update these statements except as required by law.

In today's press release, we reported operating results for the first quarter of fiscal '18, the 12 weeks ended November 26.

Reported net income for the quarter came in at $640 million or $1.45 a share.

That's a 17% increase compared to last year's first quarter results of $545 million or $1.24 a share.

In comparing the year-over-year results, there were 2 items noted in today's release.

First one, this year's first quarter had benefited from a $41 million or $0.09 a share income tax benefit related to a change in accounting rules for stock-based compensation.

And secondly, last year's first quarter results benefited from a nonrecurring $51 million legal settlement.

This $51 million figure represented a 19 basis point benefit to gross margin and a benefit to the first quarter 2017's earnings per share of $0.07 a share.

So excluding those 2 items, the reported 17% increase in earnings would have been up 16%.

A variety of other items impacted the year-over-year comparison.

To the positive, gasoline profitability was higher year-over-year as was, to a lesser extent, incremental -- some incremental benefit from our co-branded credit card program metrics.

Offsetting these year-over-year positives were costs related to Hurricanes Irma and Maria as -- and a slightly higher year-over-year normalized income tax rate, about 70 basis points.

Now turning to the income statement, I'll start with sales.

Net sales for the first quarter were $31.12 billion, a 13.3% increase from last year's $27.47 billion, while this year's 12-week quarter included 1 less sales day in the United States than the first quarter of last year due to the calendar shift for Thanksgiving.

Our pre-Thanksgiving and Black Friday holiday weekend sales fell into the first quarter this year compared to having fallen into the second quarter last year.

Combined, these 2 factors produced an estimated net benefit to this year's first quarter sales results by an estimated 1.5% in the U.S. and about 1.3% worldwide.

As you saw on the release today, reported U.S. comparable sales increase was 10.3.

Ex gas and FX, the 10.3 was at 8.7.

Canada was reported at 11.3, ex gas and FX, was a 4.3; Other International, a plus 10.1 reported, and ex gas and FX, 8.2.

All told, the total company was at 10.5 reported and a 7.9 after taking into -- after taking out the effects of gas inflation and FX.

E-commerce, which we, several months ago, started reporting each month.

For the 12 weeks, e-commerce comp sales were 43.5% up.

And ex gas inflation -- I'm sorry, ex FX, it was 42.1%.

Now this number includes the holiday shift of Thanksgiving, but it's a little different than in-store because of Cyber Monday, and we estimate that's somewhere north of 5% and perhaps up to 10% of benefit in that number.

So that 42% would come down a little bit if you'd normalize it, still a very strong number.

In terms of Q1 sales metrics.

First quarter traffic was up 5.9% worldwide and 6.6% in the U.S. Again, these 2 figures positively impacted by the Thanksgiving holiday shift as just discussed.

FX impacted total sales by about 110 basis points, and gasoline inflation contributed another 142 basis points.

So gas and FX together for the entire company was about 200 -- 2.5 percentage points, 250 basis points.

As well, cannibalization weighed in on comps to the tune of minus 105 basis points.

For the last several quarters, we've had more impact from that as we've done several more relos than we had done in the past.

Average front-end transaction or ticket was up 4.3% and, again, a little over half of that which was the gas and FX benefit.

So about 2 -- or a little over 2% normalized transaction figure.

Next on the income statement, membership fees.

Reported in Q1, $692 million.

That's up $62 million or 9.8% year-over-year and 7 basis points.

Now that $62 million increase in fees, about $24 million of the $62 million increase related to membership fee increases.

About 3/4 of that $24 million membership fee increase benefit came from the fee increases we took in the U.S. and Canada effective June 1, 2017 and the balance from the fee increases taken in September of '16 or the beginning of Q1 '17.

And our other international operations, that goes back again to September of '16.

But all told, that plus-$24 million is in that plus-$62 million.

So ex that $24 million, we were still a little bit up 6% and up in the low to mid-5% range if you take out the FX benefit.

We would expect, by the way, to see the impact of the fee increase based on how it impacts the income statement over time, with deferred accounting to continue to be even more positive year-over-year delta in the upcoming 3 or so quarters.

Our membership renewal rates were -- came in at 90.0% in the U.S. and Canada and 87.2% worldwide.

These are the same renewal rate percentage figures we had at the end of the previous fiscal quarter, Q4 '17.

In terms of number of members at Q1-end -- in terms of total households, at Q4-end, we had 49.4 million.

We ended Q1-end 12 weeks later with 49.9 million, up a little over 1 -- up right at 1% during the 12 weeks.

And total cardholders at Q1 -- Q4-end 12 weeks ago, we had 90.3 million cardholders, now 91.5 million.

In terms of paid Executive Members, they stand at 18.8 million, and that's an increase also of about 246,000 over the past 12 weeks, where we're still being able to convert and add new Executive Members at the rate of about 21,000 a week in the quarter.

In terms of -- again I mentioned earlier, in terms of the portion of membership increase related to the recent annual increase, that year-over-year number will continue to increase, and we'll share that with you each quarter going forward.

Going down to the gross margin line.

Our reported gross margin first quarter was lower year-over-year by 33 basis points.

I'll ask you to just jot down 2 columns of numbers, not 4, just for first quarter and basically what we reported for Q1 '18, and the second column would be without gas inflation so if that was impactful to understanding the numbers.

The first line item is merchandise core.

Year-over-year, on a reported basis, it was down 12 basis points.

Ex gas inflation, it was flat or 0. Ancillary businesses, plus-600 on a reported basis and plus-9, ex gas inflation; 2% Reward, minus 1 basis point and minus 2 basis points; Other, minus 26 and minus 26.

So all told, in total, on a reported basis, that was a minus 3 if you add up those numbers.

And ex gas inflation, it was a minus 19.

Now overall, again, it was 33 excluding the 19 -- excluding the benefit from the nonrecurring $51 million legal settlement last year, that was 19 basis points.

Again, the total gross margin was lower year-over-year by 14 and was flat excluding gas deflation -- gas inflation.

The core merchandise component margin was lower by 12, as you can see on the chart but, again, flat excluding gas price inflation in the quarter.

But within the subcategories within core, food and sundries and softlines merchandise departments, year-over-year in Q1 were up, and hardlines and fresh foods year-over-year were down.

Ancillary and other business gross margins, again on the chart I just shared with you, plus-6 basis points and plus-9 ex gas inflation.

Higher year-over-year margin contribution came from gas, hearing aids -- hearing aids mostly, offset by lower year-over-year margin contributions in pharmacy, e-commerce and food court.

In terms of the 2% Reward, the fact that, that hits margin by a little bit indicates the fact that we're still getting higher penetration of sales from members -- an increasing penetration of sales from members that opted to become an Executive Member.

Lastly, in Other, we had the positive nonrecurring legal year-over-year settlement that was a 19 basis point number.

Most of the rest is some incremental costs this year primarily related to our new centralized return facilities.

Going back 2 or 3 years ago, we tested this in one region.

And in the last several months, we rolled out to the entire United States.

And so there'll be some small incremental costs related to that, that hits the margin in each of the next couple of quarters.

Moving to reported SG&A.

Our SG&A percentage in Q1 year-over-year was lower or better by 34 basis points.

More importantly, I think ex gas inflation, it was still better or lower by 20 basis points.

Again, on a reported basis, it came in at 10.3 -- 10.36%.

Doing the little chart again, the 2 columns, reported and without gas inflation, core operations, lower or better by 24 basis points.

Put a plus sign in front of that.

And ex gas inflation, plus 12; Central, plus 8, and ex gas, plus 7; stock compensation, plus 2 and plus 1; total reported, lower or better, plus 34 basis points, and ex gas, plus 20 basis points or lower by 20 basis points.

Now looking again at the chart, the operations component was lower or better by 24 basis points and better by 12, ex gas inflation.

This basically is a function of strong top line sales.

As you know, we've reported in each of the last several months and today in the quarter very strong sales, both in-store and online.

Central expense also, lower by 8 basis points or 7 without gas.

Again, when we look at all the detail, first and foremost, it's strong sales results.

No real surprises here.

As we've been told, higher sales drives lower SG&A.

Next to the income statement, preopening.

$5 million lower this year in Q1, coming in at $17 million compared to $22 million, really a function of opening schedule.

This year in Q1, we opened 7 openings, 5 net new openings plus 2 relos, all in North America.

And last year in Q1, we opened 9, 8 of which were net new, but 9 openings, again, all in North America.

All told, reported operating income in Q1 came in at $951 million, up $102 million or 12% higher year-over-year.

Excluding the legal settlement, basically, it was up -- would have been up $153 million from an adjusted $849 million last year.

We're up 19% without that legal settlement.

Below the operating income line, reported interest expense was up $8 million year-over-year at $37 million this year in Q1 compared to $29 million a year earlier.

Higher year-over-year basically because of the result of the debt offering we did this past May in conjunction with our special dividend.

Interest income and other was lower year-over-year by $4 million.

Actual interest income in the quarter was better by $5 million.

However, it was more than offset by about a $9 million impact, a negative impact from FX contracts -- FX-related items, not just contracts.

Those fluctuate plus or minus that amount it seems each quarter based on how we manage foreign currency payables in different countries around the world.

Overall, pretax income was higher by 11% or $90 million in the quarter, coming in at $936 million, up $141 million or up 18% excluding the $51 million one-time legal settlement benefit last year in Q1.

In terms of income taxes, our tax rate in Q1 '18 came in at 30.4% for the quarter, last year was 34.4%.

On a normalized basis, again taking out that unusual item that we mentioned in the press release today, last year's tax rate would have come in -- last year, there was a small incremental difference.

Last year, what I'd call normalized tax rate would have been a 34.1%, which would again have been lower by about 70 basis points than this year's normalized tax rate of 34.8%, again taking out that item that we mentioned in the press release.

As I mentioned earlier in the call, again, we mentioned that's a positive discrete tax item this year.

Overall, reported net income was higher by 17%, coming in at $640 million compared to last year's $545 million.

And again, excluding the 2 items, since one of them was a tax item, excluding the 2 items in our press release, net income would have been higher by 16 percentage points.

A few other items of note before we turn it over to Q&A.

Capital expenditures were $820 million, and we would expect for the year for it to still be in the mid- to high 2s and depreciation at $335 million.

Warehouse expansion.

So I think we talked about somewhere -- we expect somewhere between 20 and 25 openings.

Over half of them will be in the U.S. We expect 3 in Canada, 2 in Korea and 1 each in Australia and Mexico.

As well, we plan to relocate 6 warehouses this year, 4 in the U.S. and 2 in Canada.

And that, again, compares to 2 or 3 a year in recent years.

We opened quite a few extra in fiscal '16 as well -- fiscal '17 as well.

As of Q1-end, total warehouse square footage stood at $108 million -- 108 million square feet.

In terms of stock buybacks, in all of fiscal '17, we spent $473 million for just under 3 million shares at an average price of $157.87.

In the first quarter, we repurchased 734,000 shares for $119 million or an average price of $162.51.

And needless to say, we've repurchased more stock early in the fiscal quarter.

Before I turn it back to Christy for Q&A, I'll give you a quick update on e-commerce and our credit card relationship with Citi Visa.

Worldwide, e-commerce sales in the first quarter of '18 were $1.3 billion, up 40% year-over-year.

Again, somewhere between 5% and 10% of benefit that was the holiday shift.

We continue to improve our offerings, and we continue to improve our member experience with better search, checkout and returns processes.

In the quarter, our site traffic conversion rates and orders were up nicely year-over-year, and we enjoyed basically stronger metrics for both the Thanksgiving, Black Friday week as well as Cyber Monday, which falls into Q2 this year versus -- falls into Q2 this year and last year.

Warehouses are supporting costco.com with signage in tablets used in search and purchase, and people can purchase the dot-com items via members from our warehouses, selected items.

Online grocery, as you know, at the call a fiscal quarter ago, we talked about that week, in the first week in October, we introduced 2 new delivery options on costco.com: a dry grocery 2-day delivery and our same-day fresh -- the latter -- and also same-day fresh delivery through Instacart.

Both of those rolled out early October.

They've been positive to-date while still in the soft openings/limited marketing mode.

We rolled out in Q1 '18.

We added -- enhanced the value of the Executive Membership.

Q1 '18, we have now members who are Executive Members purchasing from Costco Travel will also receive a 2% Reward on all their travel purchases.

And of course, with travel and the like on the -- using their Citi Visa card, they get an additional 3%, so 5% between the 2.

We are also now offering a buy online, pick up in store on selected items, including jewelry and some laptop computers.

We're seeing people coming in to pick them up, and many of them -- over half of them are shopping while they're there.

Look, overall, all these efforts are having a positive impact on our business, both online and in warehouse, and results in a greater sales momentum and increased awareness of our digital presence.

As well is we've done quite a few things online to increase traffic in our warehouses.

I think I shared with some of the -- shared a few of those with you last time, whether it's hot buys on USDA choice prime steaks leading into the back-to-school Labor Day weekend.

And so we think that we can use the Internet and online and e-mails to drive traffic both ways.

In terms of Citi Visa Anywhere card.

When the conversion to Citi Visa occurred back in June of '16, there were 11.4 million co-branded cards or 7.4 million accounts.

Those were transferred over to Citi for the conversion.

As of Q1-end, we now have 2.1 million new approved member accounts or 2.8 million new cards out there.

And that includes about 263,000 new accounts opened during the 12-week first quarter.

And we continue to be pleased with the adoption and utilization of the card to-date, it's been overall very good for us and our partners.

Lastly, our fiscal '18 second quarter scheduled earnings release date for the 12-week second quarter ending February 18, this again will be after the market close on Wednesday, March 7, and with the earnings call that afternoon at 2 p.m.

So we'll release the earnings shortly after the market closes and, at the top of the next hour, do the call.

With that, I'd like to open it up for questions with Christy, back to you.

(Operator Instructions) The first question comes from Michael Lasser from UBS.

Richard, are you now at a -- is membership per club now at a growth level that can be sustained from here?

And where there any unit promotions that contributed to the growth in that metric that you experienced during the quarter?

I think the biggest thing, if you go back a few quarters ago where it was -- yes, that average came down a little bit, it's a function of 2 primary things -- well, 3: number of openings and, certainly, they fluctuate quarter-to-quarter and year-over-year; two, we have huge membership sign-ups in certain new markets, particularly Australia, Asia, Iceland was off the charts, great, and so those compared to in the U.S. and Canada where we've been forever.

So those timings, you might get -- and then when we relo -- when we add a new unit to an existing market, and I gave a couple of examples of that last time, that will tend -- and we might have 65,000 members per warehouse in 3 locations in the greater -- in the east side of Seattle here or in the San Jose area, I think those are the 2 examples I gave you.

We opened up a new unit, which adds $120 million, $130 million of incremental sales but only adds a few -- literally, a few thousand additional members because you now have members that are shopping more frequently because we're closer to them.

And so that will continue to happen.

The timing of openings, as I said, that will move up and down.

I think overall, the number -- the metric did come up both last quarter and this quarter year-over-year for the first time, and yes, we're adding some new markets as well.

That will help us.

My guess is the average, if you take the total number of warehouses at quarter-end and divide it by the total number of locations, I mean, it's in the low 60s.

It will probably remain, plus or minus that a little bit.

To the extent it was a little less, we'll look at it and say, well, usually the reason is there were less year-over-year openings in a few of these international markets.

We feel very good about our renewal rates, and so far so good on what we've felt on the impact of the credit card switch and the auto bill, and so, so far so good.

In the past, you've given a little bit more detail on renewal rates by Gold Star primary business membership cohorts.

Is there any reason why you've decided not to give that detail?

I think the biggest reason, over the years, some of you on this call have known us for 20 or 25 years doing this, and as we've gotten so granular, it almost has become a distraction.

Rest assured, anything that is impactful, we're going to make sure that you know about.

But at the end of the day, what's important is total number of members and growth, existing renewal rates, of course.

And part of the other challenges is, for years, we had -- to be, early on in our career, a wholesale member, you had to have a bona fide business license, truly was a small business owner.

And then over -- that evolved into a business membership where you would have business add-ons.

And many of those were not for business purposes but small business with 10 members -- with 10 employees, and the employer bought the memberships for his or her employees.

And then after that, with the Executive Membership coming on, those people would get off of that primary membership and have their own membership.

So we know more about our business member versus not based on what they're buying than anything else.

And then my follow-up question is on the potential for tax reform.

Would you treat any savings that you might get from potential tax reform as any other windfall that you get and reinvest that back in the business in the form of price, lower prices?

Well, first, we have to wait and see what actually happens.

I know in the first year, what we're reading about today, there's still some one-time offsets to that for earnings overseas.

Historically, our earnings overseas, to the extent that, that cash hasn't come back, that will be a partial offset, I believe, to what we currently read today.

Look, going forward, we're going to do what's long term right for our stockholders' valuation.

And with us, that includes all the things you heard about historically.

But we'll have to wait and see and talk about it more when we get there.

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

Just on the gross margins, I think you said the core-on-core was flat.

I was wondering if you could shed some color there on the Visa benefit and then also what the total core was as a percentage of their own sales.

And if you could just amplify on any of the category color directionally that you gave earlier.

Yes.

Getting back to the previous person's questions about the granular -- why we respond to it with granularity, the big benefits were in the first year.

There was some incremental benefit.

But going forward, we're really not going to specify the detail.

Needless to say, incrementally, it's a lot lower than going from nothing to the big benefit that we got in the first 12 months, and we'll continue to get.

And the good news is it's growing as a percent of sales.

The -- in terms of core-on-core, I think it was down a few basis points.

I don't have that detail in front of me.

And again, I know that was a big question last -- I was about to say last semester -- last quarter and compared to prior quarters.

With -- there's so many moving parts.

What I can tell you is that we feel very good about our margins, that a lot of the stuff we have done and we'll continue to do is offensive, not defensive, and not -- and we are -- probably the biggest surprise is it's worked as good, if not better, than we thought it was going to work.

Okay, great.

And then just on any early readings with Instacart?

I know when you did Google Express that most of the purchases were fill-in trips and were, therefore, complementary.

I was just curious what your early takes are with that effort.

Yes, look, all the numbers are great partly because they expanded themselves in terms of the number of locations over the last 12 months.

Two, it's front and center now on our website.

But one of the things I mentioned here, we both -- both we and Instacart chose -- have chosen for the first 2 or 3 months of this thing to basically have a soft opening, if you will, to make sure that we don't screw it up.

And when I say we don't screw it up, it's growing very nicely and -- but clearly, when we market it, we think it will take off even more.

But so far, so good.

Okay.

So then when you look at the acceleration in your digital sales in November, that was really just your core costco.com business?

Yes.

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

So Richard, on BOPUS, the thought of starting with jewelry and PCs, what sort of drove that?

How far can you take that operationally, right?

You think about other products like big bulky stuff, paper, beverage, can you do that operationally?

And then is that what your customers want?

Are you hearing from members that they want more BOPUS items?

Well, first of all, we haven't heard from a lot of members.

I'm not so sure that we -- we haven't asked them either, by the way.

But we do see the strength in our numbers particularly in-store.

I mean, the online is fantastic, but in-store is 95% of our business.

When we looked at doing it our way, we still scratch our head about doing one -- even consider doing what some of the others are doing, not just other warehouse clubs but other retailers.

There's a lot of cost to that.

So far, we haven't seen a reason to do that.

In the case of these couple of items -- these couple of categories, what we found is that there are a lot of people that won't buy it because they don't want -- they can't have it shipped to their office or their place of work, and they don't want it left at their doorstep.

And so here's a way for them to buy it.

And we saw a nice piece of business being done that way.

And as you might expect, since they're not coming over to pick up their groceries that we've bought and set and put the refrigerated stuff in the refrigerator and the frozen stuff in the freezer, they just go up to the cage and get this.

Over half of them went in and shopped before they pick up their laptop or their jewelry.

So that's what we like, and we'll keep evolving it.

And we'll see, it's just a start.

And then the -- when you think about the tenor of openings here, right, so do you think -- are we more at the low end of that 20 to 25?

And obviously, we haven't -- we sort of haven't done many in Asia of late.

Is that just the way the real estate timing folds and we're going to get a surge in overseas openings in the next 18 months?

And then I think you're doing just 1 business center this year, is that right?

Only 1 business center this year?

We've already opened up in San Francisco.

So we have 1 in Minnesota, and maybe...

We'll have at least 2 this year, having opened 1 already, and maybe a third.

That's just a matter of timing.

I think it's currently on the list for -- right after the fiscal year.

A lot of that has to do with timing.

In terms of the 20 to 25, history would suggest that it's at the lower end versus the higher end.

There are a couple -- and the real difference is now things that we don't have on the plate already, it's can we push them -- can we move -- do we get lucky with weather in the winter as we push a couple based on when different hurdles occur with permits or whatever.

All right.

And then just lastly, are you also -- you talked about the gas benefit.

Was that de minimis?

Or how big was that?

Well, we're trying to -- there's no good time to have a little less granular, but when you add them all up, it will have a big impact to the bottom line.

But at the end of the day, gas is good, there have been some quarters -- if you look at the last 8 or 12 quarters, which I haven't looked at, it's probably more than $0.01, and there have been quarters when it was $0.05.

And it could be anything within there, a little on either side of that.

They were good.

Next question comes from the line of Karen Short from Barclays.

First, just a housekeeping question.

What was inflation in the quarter?

Did you give that?

No, we didn't.

Overall, ex gas -- so maybe the basket was up a couple of percentage points.

We don't really look at LIFO anymore.

We have it, but we don't look at it.

Our guess -- I mean, I think, if there was anything, it was maybe ex gas, there was a tiny amount of inflation.

But that's at the cost side.

Given investing in price and given the competition you see from other retailers out there, my guess is there is probably little, if any, inflation.

Okay, so that was a law of timing.

There's been lot of -- I mean, PPI has clearly been high -- I mean up and elevated whilst CPI has been a lot more muted.

So I guess, that's kind of -- I'm wondering how much of that impacted your margins?

Or how can we think about that in terms of...

I don't think that impacted -- I really don't think that impacted it, Karen.

It's really us looking at what happens when we get hot on pricing, or hotter, and recognizing we have these benefits from credit card and from membership.

And that's what we do.

Okay.

And then I guess, in terms of grocery delivery and then Instacart, I guess, you didn't give an update.

Are you still at the 500 SKUs for grocery delivery and 1,700 on Instacart?

And then anything to indicate on that component of the business, whether or not this is drawing a customer who's kind of been dormant and now you're seeing incremental trips?

Anything you could point to because, obviously, the concern is that there will be cannibalization with this offering.

Yes.

We really haven't.

I mean, it's still -- even though there are big increases in what they were doing the day before or the day after with us, going back to in early October, it's been -- it was a soft -- and it's miniscule relative to our company size.

We'll look -- we'll wait 6 months and then take a look at it.

Okay.

And then lastly, how many units on BOPUS right now?

I'm sorry, how many units...

Are on the buy online, pick up in store for those small number of items?

Very limited.

Hold on, hold on.

All warehouses are doing jewelry and laptops in U.S.

Our next question comes from the line of Simeon Gutman from Morgan Stanley.

Richard, first on membership, can you talk about how successful the couple of promotions that you ran in the quarter and how it performed relative to other ones you've done in the past?

And just generally, is the environment, the competitive environment, for club membership any different than it's been in the past?

Well, first of all, I'm not sure what we did this first quarter.

We did -- during Q4, we did the Groupon/LivingSocial, and that went fine.

But I'm not sure of anything we did this quarter.

Okay.

And what about the environment?

Is it any different as far as competitors being promotional for new members?

Is there anything to call out versus how it looked like in the past?

I don't think they're more promotional, but our competitor -- our direct competitors have been very promotional one more than the other.

But -- whether it's a monthly one or ex -- a certain amount of dollars off to try it out.

And so we -- no, we haven't really seen any dramatic difference in that, and it's been that way for a while.

Okay.

My follow-up on the online sales, you gave a little bit of color.

I don't know if you talked about categories that are out-comping the house average.

And are there -- is there any gross margin implication of the categories?

I realize you're in a -- there's still a range even within a pretty tight band, but curious if -- just thinking about the products that are growing faster than the house, online versus others, if that's doing anything for the gross margin.

Well, yes.

But keep in mind, with all this wonderful growth, it's still a very small -- it's 5% of our -- less than 5% of our company.

So it doesn't have that big impact to the overall company.

Where we're -- electronics, it probably does because we've been very successful online with electronics.

And given the white glove service, hopefully, members understanding that if they're an executive member and they have the co-brand card, they get an extra 5 off and they get a 4-year warranty.

That includes using the co-brand card.

So all those things we help drive the business, notwithstanding we haven't let everybody know.

And I think apparel has been good.

But part of that is that we are doing more apparel online.

And I think we're also getting better, with a small B, on targeting certain types of e-mails to members that do some of these things.

Next question comes from the line of Dan Binder from Jefferies.

So first question was on the Visa cardholder.

I'm just curious, you're over a year in now, do you have any comparative data on how that cardholder's spending in the club versus the Amex cardholder previously?

The only thing I look at -- I don't know that.

The only thing -- but in many cases, it's the same member.

We believe you have a higher spend because of better rewards, better promotions.

The fact that Visa is accepted in more places, if it is your top of wallet -- if my old reward card, co-branded card, it was my top of wallet and now the new Citi Visa is, there are many more places I can use my new one.

And so that's driven more outside spend.

And the beauty of co-brand programs for big companies, whether it's airline, retail, hotel, travel, is that there's some revenue share there.

And so those are the metrics we've looked at.

We also, of course, doubled the reward on all Costco purchases, gas 4, but not a double, but everything else used to be 1, and now it's 2. So all those things are helping us trend in the right direction there.

And then with regard to renewal rates, you highlighted that the renewal rate was the same as where we were at the end of fourth quarter.

I know last quarter, you're talking about the trajectory and how you think it will follow your experience in Canada.

Do think that next quarter, we could see the first tick-up in renewal rates?

I think a quarter ago, we said 1 to 2 quarters.

And so we have one more quarter of flat to -- could it -- we're talking about tenths of a percentage point, 0.05 is what we'll average it up or down.

So we want to hedge our bets here a little bit.

But we believe that's the case, but we've got one more quarter of free pass here.

We were pleased with what we saw in Q1 compared to Q4-end.

Then lastly, do you have any numbers around membership growth in comp stores?

No, we don't, only because -- we did that last quarter because we knew there was a lot of concerns around it, and we thought that was a data point.

And I'm sorry, we just don't have that.

Next question comes from the line of Chris Horvers from JPMorgan.

So on the core margin being flat ex gas, usually when you're going to these periods of -- into the teeth of the renewal, the membership fee increase.

You tend to invest in gross margin, and I think most expected it to be down.

So going back to a prior question, is mix helping you?

The price environment is pretty promotional out there, so just trying to understand why that came in flat versus sort of the historical experience of how you would invest into the fee increase period.

Look, our philosophy is we invest in this stuff.

We're also pragmatic.

There's a lot out there, but -- I think we have a benefit also, we can take it -- give it our limited nature of our -- limited nature, a limited number of items.

We could do some hot buys on a limited number of items that are truly wow and drive sales and item, an extra $10 million or $20 million in a week or a few weeks.

And so it seems to work for us.

We feel good that we've got -- we're looking at this stuff offensively, and we'll see how we use it.

And then in terms of the -- following up on the tax question, you talked about doing what's right for the shareholders, the valuation of the stock.

I mean historically, I think the -- your motto is customer, employee, vendor, shareholder.

So is that the way how we should think about that potential tax flow through?

I'm -- we'll drive you crazy a little bit, sure.

I mean, yes, we're going to keep doing what's right.

And again, I'm not trying to be cute.

First of all, we don't know what the tax plan is going to do and we don't know what the impact to the first year of it based on some offsets.

But you can rest assured that we'll do the right thing, and we'll drive business the way we do it that helps all those stakeholders.

And then lastly, just a couple of quick follow-ups.

Does the calendar -- does the 53rd-week shift end up being a point of headwind for this upcoming quarter?

And the other line within gross margin, I think you said 26 basis points.

When you say some of that is going to stick around for the next 3 quarters, is that 26 basis points or something like...

No, no, no.

Within the 26 is 19 of that 26 was that $51 million legal settlement benefit to gross margin in Q1 of '17 a year ago, so year-over-year was minus 19 basis points.

So what we're talking about is the other 7. And the other 7 primarily has to do with a major switch we did and how we handle return and disposed of salvage merchandise.

And we tested it for a couple of years in 1 or 2 regions, 1 region then another.

And then just the last 6 or 7 months, we've rolled it out throughout the United States to sell in all 12 depots that do this for us that could handle the entire United States.

And needless to say, we did because it works, tends to be positive.

There's the start-up cost, if you will, of getting it rolled out and done and the efficiencies that we afford over time.

So that 7 hopefully will be 6, 5, 4, 3. But a year from now, it will be 0 in theory and then go the other way a little bit.

But at the end of the day, we wanted to point it out because it is a little unusual, and we recognize that you guys are very sensitive to these basis points of margin.

And then the 1.5 points sale shift?

That's for Q2.

That's a headwind?

Yes, that will be a headwind, yes.

And it will be a bigger headwind for e-commerce because -- we don't know if it's 5% or 10% probably in the high singles, it's a guess.

Next question comes from the line of Edward Kelly from Wells Fargo.

Can I just ask about traffic?

It wasn't that long ago, I guess, that traffic had slipped to kind of like 2% or so, and we were also sort of thinking maybe this is the new norm.

Obviously, you have seen dramatically better traffic growth this year.

I guess like just thinking about things in hindsight, was there something unusual about that period of 2016?

And then as we think about things going forward, is there anything really that would cause things to slip to that kind of level again given the levers that you now have to pull in this business, whether it's the fee increase or tax or whatever it might be?

I think a little of it had to do with credit cards switch leading up to June of '16.

For about 9 months prior -- from June 16 backwards, we didn't sign up any new members but we had American Express -- agree, there's no sense signing up somebody for a card that's going to go away in June of 2016.

And so there's probably some negative impact and confusion, and the confusion probably into the first few weeks of the new card given it was overnight transition, which was a pain in the behind.

And so I think that probably had a -- it certainly wasn't a positive impact.

My guess, it was a little bit of a small impact.

I think it's -- I remember when those numbers were coming down, we were asked, and like you just said, we said maybe it's the new normal, we don't know, we felt good about our business.

And one of the things we did is said how can we get it more exciting out there.

And part of that was pricing and the like.

So I -- we also had a little bit of hiccup from a traffic standpoint with the multi-vendor mailers.

If you recall -- the good thing is there's fewer items with greater values and more sales than an MVM.

However, the offset to that was we probably dug a little bit deeper than we should have in terms of fewer MVM days and during the course of the year.

And we saw that impact Q -- basically December of '16 to February or March of '17, so pretty much Q2 of fiscal '17.

And then as we said on that Q2 call, which was a disappointing quarter, we said it's easy, we'll change it back, we'll add some more days.

We kept the lower -- fewer items and the greater values, and that's working nicely, but we have more days.

And so we had less -- where we had tweaked a little bit too much and have -- had fewer MVM days or higher traffic-helping days.

We were back to pretty much normal in that, maybe a few less but nothing that really impacts us.

And just a follow-up on tax format.

I know it's a difficult question to ask, but maybe if we think about it in like a bigger picture sense of investment and how you think about driving sales.

And as -- when you think about sort of like where you'd like to spend money, particularly if you were to potentially get some windfall, everyone sort of thinks about price, but are there other things that sort of like would really like to have but are expensive or an earnings headwind currently that makes the return calculation a little different, whether it's the enhanced digital or fulfillment or something on labor?

I'm just trying to figure out, are there other areas of the business besides just price that you sort of thinking about that you would like to invest in if you had the opportunity?

Well, first of all, I would like to think that we would be doing those anyway.

We have strong cash flow.

As you know, we generate cash flow well in excess of our CapEx and keep increasing the regular dividend, have done the specials a few times and bought back stock that have to at least cover -- a little more than, frankly, cover that, which over 5,000 employees get as part of the compensation.

And so I'd like to think that -- I don't think we're going to sit around the table and say we've got this big bucket of money, what can we do that we weren't prepared to do yesterday?

I know -- now as we said, I think you'll see us do what we do well.

It's merchandising and driving businesses and taking care of our employees and also we're taking care of our shareholders.

I'm not trying to be cute.

We don't know what we're going to do yet because we -- first, we got to figure out what's going to actually happen.

Next question comes from the line of Matt Fassler from Goldman Sachs.

A couple of follow-ups.

One on the calendar shift, can you talk about whether it was a particularly profitable 1.5 of sales?

Clearly, you were going to do a lot more sales per day and probably per employee hour.

I'm not sure about the margin profile that you generate on that week.

And so any impact on operating margin rate from that shift and presumably, whatever that was, would reverse in the following quarter.

This is -- I'm shooting from the hip on this one.

Look, having extra strong sales in a warehouse on that day, they're more profitable as a percent of pretax because you've already budgeted your labor and is busier.

We kind of know it.

On the other end, hopefully we budget properly there, so maybe we -- it doesn't -- it's not a complete offset.

But I don't -- we're talking about a few weeks here and there, I don't think it's a big deal either way.

Okay.

And then another question, you were asked on e-commerce about profitabilities related to category shift.

If you think about the growth of the business, you think about some of the accommodations you're making and the incremental offers that you are providing, can you talk a bit about the gross margin profile of e-commerce in total?

I think you addressed it briefly, I think, as part of the gross margin discussion.

But any sense as to the direction?

And I also know it's small, you made that point as well.

But just as it gets bigger, is the direction you're taking in, in moving to gross margin in that category one way or the other or through that channel, I guess, I should say?

First of all, gross margins in e-commerce even 2 years ago was a little lower than the warehouse but the SG&A was a lot lower than the warehouse.

So bottom line, it was a lot higher than the warehouse, recognizing it wouldn't exist if it didn't have the warehouse.

So it's all one big happy family there.

At the end of the day, what we have found and what everybody else found before us probably is if we can figure out -- and we have, we think -- figure out how to communicate effectively with our members on some particularly hot buys, it really drives business and not just online.

And so I think there's enough -- we have so much, in my view, flexibility and comfort in our margin.

And because we're not being -- our view is our margin, whether it's a basis point lower or a basis point higher, is because of what we wanted to do, not because we were impacted by losing something to someone else.

And I think we're fortunate in that regard.

And even within very competitive products, electronics is very competitive, we over-index to higher-end stuff.

It's all competitive everywhere, but within the electronics here, it's probably a little better, a little less competitive, which makes us look better.

So there's so many -- we have -- in my view, there's so many buckets we can pull from.

I don't see that as a big thing to worry about analyzing at this juncture.

Next question comes from the line of Paul Trussell from Deutsche Bank.

Just to follow up on the e-commerce conversation.

You've had a series of announcements on the last few calls, including partnerships and the buy online, pick up in store Costco grocery.

I just wanted to take a step back real quick, Richard, and if you could just talk overall kind of your mindset and approach to e-commerce and kind of omnichannel and what's kind of led to -- I think a lot of us view this as a bit of a turn in the narrative in the way that you all have kind of approached the business historically.

I think we've still done things our way, and we continue to evolve.

Needless to say, there's a lot of views out there, like several people on the call here, and that -- and there's a range of views.

I think what we've hopefully communicated is that in our own way, there's lots of little buckets out there and low-hanging fruit that we haven't touched.

Perhaps we should have touched some of them earlier, who knows?

But we seem to be running on many cylinders here, and the things we're doing are working, importantly, not only for e-commerce or omnichannel but for in-store, and driving business that way as well.

And we feel fortunate in that regard.

It's funny, I remember on the last earnings call 3 months ago when we talked for the first time about the 2 new delivery options on grocery on costco.com site, these 2 links.

And on the one hand, there are some out there that view this, yes, they figured it out.

There's others saying they had to do this because something else is wrong.

Our view is we're kind of doing pretty well, first and foremost, with driving our brick-and-mortar business, understanding that some of it was going to evolve irrespective of this.

We believe we're very successful with big-ticket items, furniture, big-ticket electronics.

What was evolving already 10 years ago online even with us was white glove service on things you had to install or build like a patio set or a swing set or a big screen television.

One of the things I talked about last quarter was white goods.

Over the last several months, we've improved our direct relationships with LG and Samsung rather than trying to -- rather than that -- rather historically when we were doing white goods not terribly well with just a limited couple of items, not with the highest-end stuff that we could sell in-store.

All of a sudden, we have great value, incredible value plus extra warranties and all that stuff if you use your Visa card.

And we think that we can take an item that was well under $100 million in sales and, in a matter of few years, be $1 billion.

That $1 billion is still just under a percent of sales, but it's $1 billion.

There's lots of things that we are able to do in this tough new world.

I'd mentioned before apparel, where brick-and-mortar apparel is flat or down.

And total apparel, including online, is up a few percentage points.

We've got, worldwide, a $7 billion -- close to a $7 billion apparel business that's compounded the last 3-plus years in over 9%.

Two reasons, growth in signature and weakness in brick-and-mortar, then some manufacturers willing to sell to us for the first time so -- suppliers, and amazing pricing.

And so we'll keep doing that.

That makes sense.

And also in looking at your strong top line over the last few months, it's occurred globally.

You've spoken a bit about kind of the investments in price and some of the product on the U.S. front.

Is that the same story and what's happening in Canada and other places around the world?

Or are there any other kind of unique factors that we would attribute some of the shift in those regions, too?

It's everywhere.

The fact that the warehouse club concept is newer in some of those countries, the fact that we're opening more units -- when we opened 1 unit in Sevilla, in Seville, Spain, a smaller market than Madrid, but you had vendors, even international vendors, and certainly local vendors, that would not -- were a little queasy.

They knew how big we are, and if we come, and so it would be great.

They have a lot of customers that weren't thrilled.

Once we get that second one opened, it helps the first one as well.

We saw the same thing -- we've seen the same thing happen in Australia over the first few years.

And again, it gets back to what we are, a global sourcing and a global supplying company.

And we're -- clearly, with 8 or so locations in Australia, we bring the purchasing power of $130 billion retailer to that market, and that helps us as well.

Then I think the fact that our fruits and signature items have become a high end, incredibly low-priced brand, incredibly a high-value brand, that's helped us as well.

And lastly from me quickly, I might have missed it, but on the -- from the Visa card, did you outline any particular benefit to gross margins or SG&A in this quarter?

Well, for the first 4 quarters, since it was so large going from the prior program to what this great new program has done for us, we did.

And going forward, we aren't.

We did say that incrementally, it was a little benefit percentage-wise.

Next questions comes from the line of Kelly Bania of BMO.

Just curious on the SG&A line, you mentioned some incremental costs to think about over the next few quarters.

Can you quantify that at all for us?

And were there -- in terms of the shift, was there any impact, the calendar shift, to SG&A or membership or any other line items this -- in the quarter?

There's a lot of little things.

I mean, first of all, in terms of the shift help, as Matt asked early about an extra percentage of help, it helps a little bit, but it's hard to quantify.

There's a little bit of shift with some holiday pay issues, but you're talking about, my guess, is small amount of basis points.

The thing you first asked, the first part of the question you asked was about this thing, it will continue for the next few quarters?

That had -- that's a margin item.

That had to do with us changing the way to make it, frankly, more efficient and less costly for handling returns.

And doing it centrally, if you will, at each of 12 depots across the country in the United States.

Talking about U.S., we started -- we tested this for the first time probably 3 years ago.

And we -- over the last 6 months, we went from 2 to 12 depots, so added 10 of them.

And so there's about -- that was -- much of that extra -- that line item that was 26 basis points, of which 19 was the one-time thing from last year, those other 7 basis points, much of that is that, but that's a margin hit.

And so that will be a little bit of a margin hit in each of the upcoming, probably, 2 or 3 quarters.

And I'm hoping it will dwindle a little bit, but that will be what it will be.

Great.

And then just on online, with the acceleration online of grocery, just curious if you have any -- based on what you've seen so far, it's been very successful with just even a soft launch.

So you mentioned getting deeper into using some e-mail and some targeted e-mail.

Just curious, what else can we expect to come from online?

Do you have any plans for adding an auto replenishment feature?

Anything you can share with us on that would be great.

First of all, with regard to like delivery, we've done no marketing of it per se.

So it truly has been a soft opening, both on our part, in the case of same-day grocery, on Instacart's part.

We want to get it right.

Percentage-wise, it's going crazy but it's a very small, small amount of business relative to our company.

Well, even with the comments we made -- I made about the laptops and the jewelry, that's a test.

We looked at it and, of course, we've been asked a hundred times, what about order online, pick up in store, we scratch our head and recognizing our place is a lot busier than others, we don't see how that makes sense, and we don't hear a lot of members asking about it.

But we looked at it and said where are some areas where it might makes sense, and so we trying.

Tires make sense, and that's been very successful over the last year, 1.5 years, where you can order the tires online to go to the location that you want them installed at, your traditional warehouse that you shop at, and that's driven -- in our view, that's driven volume to the tire business for us.

And any from the auto replenishment?

No comment at this point.

We'll let you know if and when we decide.

We're looking at that and some other things, but...

Next question comes from the line of David Schick from Consumer Edge.

We've talked a lot about digital and what you're trying digitally.

My question is what you're seeing digitally in e-commerce, is that causing any merchandising decisions pushing anything back to the club?

Are you noticing anything in those trends that could change your merchandising?

Yes, I mean, one thing that we've done is we've done a better job of e-mailing people to get them into the warehouse.

I mentioned the New York strip steaks.

We've also done some items that if you bought in-store a baby seat -- a car seat, the banner that's at the top of your e-mail includes some hot items.

Or if you bought tires, the banner includes some automotive or garage items.

Some of those are online and some of them are in-store.

The tires, I just mentioned.

Right now, what we're doing is high-fiving each other.

It's working to drive business in-store and drive business online.

Just any update on the wage outlook for -- you guys have stayed ahead of it and been very transparent with it.

But just talking about the wage outlook, now 90 days since your last quarter.

No.

We feel good about that.

We've taken up -- well, of course, we took up wages throughout -- using the U.S. as the base here, we took about 1.5 years ago, March of '16.

And in several markets, we start people at a little higher than that where we have to, some parts of the Bay Area, some parts of New York.

And there are only a couple of cities, Seattle and San Francisco, where there's a minimum of $15, but rest assured we'll stay ahead of the game on that.

Next question comes from the line of Scott Mushkin from Wolfe Research.

So a couple housekeeping items and then a question.

I don't think we've talked about -- much about inflation.

Or if we did, I missed it.

And I wanted you to -- what did the inflation look like in the quarter, what's your outlook.

Yes, we did talk briefly about it.

Look, it's -- we think it's up a little, but it's muted by the fact that -- driving better value, and so really not a big issue either way.

Next question?

Yes, then the cost of hurricanes, that's the other -- if there was a cost, I didn't hear what you said what the cost was.

We did -- we're trying to be a little less granular because there are some offsetting things that we threw out there.

The 2 of them together were a couple of $0.03 in total, but not that big of a difference.

I'm learning how to not tell you stuff...

Then my last, my real question is, when you take a step back, and we've talked about e-commerce forever, the Amazon impact and concerns about it, you've historically said, "We want people in our stores.

We don't believe in a lot of this stuff," particularly the buy online and the click-and-collect types of businesses, the -- you want people in your stores or your warehouses.

So I guess, just from a philosophical perspective, since your sales are so darn strong, why are you guys moving so aggressively with some of the e-commerce, either trials or even just rolling it out?

It seems that if I look at it over time, it could be harmful to keeping people in your warehouses.

And I just want to know philosophically what made you guys change your mind and why you're doing it?

Well, first of all, I think, well, we want to be responsive and we want to make sure that we don't -- we're not being stubborn about things.

But we also want to do it our way.

I think we've gotten comfortable there are some things that we can do that we think can drive our total company sales and profitability without impacting it and also recognize if we have 3,800 -- on average, about 3,800 items in-store, maybe we have twice that online.

This is a rounding error for everybody else in terms of what they offer their customers in terms of items.

And so we have to figure out how to do it and still have that value of what we do.

And so I think -- and we've also figured out how to do it without spending hundreds of millions of dollars.

We are -- the 2-day dry grocery, up to 2-day dry grocery that we're doing to a handful of our depots which covers essentially the entire continental United States, we're able to do that pretty cheaply because we're already allowing business members to go to the business -- not depots, but the business centers, because you can already buy it online and have it delivered.

But we brought in about just under 500 items that were more retail consumable type items.

So our view is that these are relatively inexpensive ways to try things, and they're working.

We do have to -- Scott, of course, we have to measure how we do going forward if -- we'd love for orders on the grocery orders online to be fill-in, not stop you from coming.

We recognize that you may come a few less times during the year.

How do we change that?

And we also recognize there are some people that live 30 to 60 minutes away from us, sometimes 10 miles, sometimes that's 40 miles.

And that's been a big boon for us that would -- where we see this could help.

So there's again -- and life has changed on big-ticket, big-sized items and items that you've got to install and, in many cases, items that you want somebody else to take the old mattress or the old refrigerator away.

So we can show -- we've got, I think, some confidence in those areas that we can show the best value on the high-end stuff, in those areas as well.

So I think it's all working probably a little better than we thought it would.

Next question comes from the line of Chuck Cerankosky from Northcoast Research.

I just wanted to see if you could take sort of a 30,000-foot view and talk about how the mix is different and changing as these economies improve, not only in the U.S. but maybe also comment on Canada and the rest of your operations.

Bigger-ticket items, jewelry, I think, has improved.

Electronics, expanded electronics, not just computers or laptops or iPads, tablets and televisions but the whole audio side.

Audio is everything from these boxes that you put outside, telephones and jewelry.

So I think from a -- is the company getting any better?

Who knows?

Certainly, there's money out there to be spent on this stuff, and we've seen some pickup in those areas.

And the Internet helped that a little bit.

By Internet, you mean e-commerce?

Yes.

Well, thank you, everyone, and we'll be around.

Happy holidays.

Thank you for your participation.

This concludes today's conference call.

You all may now disconnect.