Costco Wholesale (COST) Q3 2024 Earnings Call Transcript

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Costco Wholesale (COST 1.09%)
Q3 2024 Earnings Call
May 30, 2024, 5:00 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Thank you for standing by. My name is Krista, and I will be your conference operator today. At this time, I would like to welcome everyone to the Costco Wholesale Corporation third quarter 2024 earnings conference call. All lines have been placed on mute to prevent any background noise.

After the speakers’ remarks, there will be a question-and-answer session. [Operator instructions] I will now turn the conference over to Gary Millerchip, executive vice president and chief financial officer. Gary, you may begin your conference.

Gary Millerchip — Executive Vice President, Chief Financial Officer

Good afternoon, everyone, and thank you for joining the call today. I’d like to start by saying how excited I am to be part of the Costco team, and it’s a pleasure to be hosting my first Costco quarterly conference call. The whole Costco team has been incredibly welcoming. And as you might imagine, my first three months working alongside Richard have been a lot of fun.It’s also been great visiting warehouses and facilities to immerse myself in the Costco culture and experience firsthand how this is positioning the company for continued growth.

Over recent months, I’ve spent time and met with many analysts and investors, several of whom I know through my prior role. And it’s clear you value and appreciate the company’s current approach to investor communications. While I can’t promise to be able to match the humor that Richard Galanti has become famous for, I can promise the same level of open dialog and transparency you’ve come to expect. Oh, and to clear up some recent media speculation, I also want to confirm the $1.50 hotdog price is safe.

Before I talk about our results, I wanted to mention that Ron Vachris is also joining today’s call. Many of you have expressed interest in hearing from Ron. And so, we thought it would be a good idea to have Ron join the discussion, and he can also take a few questions. Ron, would you like to add anything before we talk about the quarter?

Ron Vachris — President and Chief Executive Officer

Thank you, Gary, and, again, welcome to Costco. I’m very happy to report that the transition from Richard to Gary has gone very well, and we’re very excited to have Gary on board as part of Costco. And I look forward to working together on the growth opportunities ahead for our company. Before we jump into the quarter, I wanted to make a couple of comments on the leadership transition.

As Richard has mentioned on previous calls, I’d worked closely with Craig Jelinek for many years, including side by side for the last two years as president. And so the CEO transition has been very seamless process. Since January, my time has been focused on working closely with the teams around the world to ensure we continue to deliver the best quality merchandise at our best value for our members. I’m incredibly proud of our employees, and I believe our consistency of results is a reflection of their commitment to our members and to each other.

Consistent with how Craig and Richard manage investor communications, I intend to have Gary host the quarterly conference calls, and I will join as business permits to answer a few questions. So, Gary, let’s go to the results, and I’m happy to jump back in for the Q&A portion to field some questions today.

Gary Millerchip — Executive Vice President, Chief Financial Officer

Thanks, Ron. 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 are made, and the company does not undertake to update these statements except as required by law. Comparable sales and comparable sales, excluding impacts from changes in gasoline prices and foreign exchange are intended as supplemental information and are not a substitute for net sales presented in accordance with GAAP. In today’s press release, we reported operating results for the third quarter of fiscal ’24, the 12 weeks ending May 12th. Before I walk through all the numbers, new for this quarter, we are making available a slide presentation in our investor site under events and presentations.

These slides summarize much of the information I will share today, including Richard’s famous matrices. We intend to make this information available every quarter. Reported net income for the third quarter came in at $1.68 billion or $3.78 per diluted share, up from $1.3 billion and $2.93 per diluted share in the third quarter last year. Last year’s results included a nonrecurring charge to merchandise costs of $298 million pre-tax or $0.50 per diluted share, primarily for the discontinuation of our charter shipping activities.

Net sales for the third quarter were $57.39 billion, an increase of 9.1% from $52.6 billion in the third quarter last year. The following comparable sales reflect comparable locations year over year and comparable retail weeks. U.S. comp sales were 6.2%, or 6% adjusted for gas inflation and FX.

Canada was 7.7% or 7.4% adjusted. Other international was 7.7% or 8.5% adjusted. And this led to total company comp sales of 6.6% or 6.5% adjusted for gas inflation and FX. Finally, e-commerce comp sales were 20.7% growth on a reported basis and adjusted for foreign exchange.

In terms of Q3 comp sales metrics, traffic or shopping frequency increased 6.1% worldwide and 5.5% in the U.S. Our average transaction or ticket was up 0.5% worldwide and up 0.7% in the U.S. Foreign currencies relative to the U.S. dollar negatively impacted sales by approximately 20 basis points, while gasoline price inflation positively impacted sales by approximately 30 basis points.

Moving down the income statement to membership fee income, we reported membership fee income of $1.123 billion, an increase of $79 million or 7.6% year over year. Membership fee income growth was 8% excluding FX. In terms of renewal rates, at Q3 end, our U.S. and Canada renewal rate was 93%, up one-tenth of a percent from Q2 end.

The worldwide rate came in at 90.5%, the same as Q2 end. We ended Q3 with 74.5 million paid household members, up 7.8% versus last year, and 133.9 million cardholders, up 7.4% year over year. At Q3 end, we had 34.5 million paid executive memberships, an increase of 661,000 since Q2 end. Executive members now represent over 46% of paid members and 73.1% of worldwide sales.

Our reported gross margin rate in the third quarter was higher year over year by 52 basis points, coming in at 10.84% compared to 10.32% last year and up 54 basis points excluding gas inflation. Core was flat and higher by 2 basis points without gas inflation. In terms of core margin on their own sales, our core-on-core margins were higher by 10 basis points. Ancillary and other businesses gross margin was lower 6 basis points and lower 5 basis points excluding gas inflation.

This decrease year over year was driven by gas, partially offset by e-commerce. Two-percent reward was lower by 1 basis point, both with and without gas inflation, with higher sales penetration coming from our executive members. LIFO was a benefit of 2 basis points. We had an $11 million LIFO credit in Q3 this year compared to no LIFO charge or credit in Q3 last year.

This is the third LIFO credit this year following a $15 million LIFO credit in Q1 and a $14 million credit in Q2. And finally, other was higher 57 basis points or 56 basis points excluding gas inflation. This was all related to lapping last year’s negative impact from the $298 million pre-tax charge for charter shipping activities. Moving on to SG&A, our reported SG&A rate in the third quarter was lower or better year over year by 15 basis points, coming in this year at 8.96% compared to last year’s 9.11%.

SG&A was lower year over year by 12 basis points adjusted for gas inflation. The operations component of SG&A was lower by 14 basis points and lower by 12 basis points, excluding the impact from gas inflation, despite an increase in warehouse wages this year. Higher labor productivity and great cost discipline by our operators drove the improved core results for the quarter. Central was better by 1 basis point and flat without gas inflation.

Call participants:

Gary Millerchip — Executive Vice President, Chief Financial Officer

Ron Vachris — President and Chief Executive Officer

Simeon Gutman — Morgan Stanley — Analyst

Michael Lasser — UBS — Analyst

Chuck Grom — Gordon Haskett Research Advisors — Analyst

Scot Ciccarelli — Truist Securities — Analyst

Kelly Bania — BMO Capital Markets — Analyst

John Heinbockel — Guggenheim Partners — Analyst

Peter Benedict — Robert W. Baird and Company — Analyst

Brandon Cheatham — Citi — Analyst

Greg Melich — Evercore ISI — Analyst

Rupesh Parikh — Oppenheimer and Company — Analyst

Christian Carlino — JPMorgan Chase and Company — Analyst

Scott Mushkin — R5 Capital — Analyst

Ed Kelly — Wells Fargo Securities — Analyst

Oliver Chen — TD Cowen — Analyst

Joe Feldman — Telsey Advisory Group — Analyst

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