Ladies and gentlemen, thank you for standing by and welcome to the Q1 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. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Mr. Richard Galanti, CFO. Please go ahead, sir.

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 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. In today's press release, we reported operating results for the first quarter of fiscal 2020, the 12 weeks ended November 24. Reported net income for the quarter came in at $844 million, or $1.90 per share, compared to $767 million, or $1.73 a share last year in the first quarter. This year's first quarter results included a $77 million, or $0.17 per share, income tax benefit related to stock-based compensation. Last year's first quarter results included a $59 million, or $0.13 per share, income tax benefit related to stock-based compensation. Net sales for the quarter came in at $36.24 billion, a 5.6% increase over the $34.31 billion sold during the first quarter of last year. Comparable sales for the first quarter of fiscal 2020 in the U.S. on a reported basis was 4.7%; ex-gas deflation was 5.0%. Canada reported a 2.9%; ex-gas deflation and FX plus 5.1%. Other international reported 3.2%; ex-gas deflation and FX plus 4.5%. Total company was a 4.3% reported and ex-gas deflation and FX of 5.0%. E-commerce on a reported basis was 5.5% and 5.7% on a reported basis. Total and comparable company sales for the quarter were negatively impacted by approximately 0.5% due to Thanksgiving occurring a week later this year. E-commerce sales in the quarter were negatively impacted by an estimated 12 percentage points. So again, the 5.5% and 5.7% were impacted negatively by 12 percentage points. In terms of the Q1 comp sales metrics, first quarter traffic or shopping frequency increased 3.4% worldwide and 3.1% in the U.S. This includes the impact of the Thanksgiving holiday shift. Weakening foreign currencies relative to the U.S. dollar negatively impacted sales by approximately 30 basis points, and gasoline price deflation negatively impacted sales by approximately 40 basis points. Our average transaction or ticket was up 0.9% during the quarter, including the negative impacts of gas deflation, FX, and the holiday shift. Next, on the income statement, membership fee income. Reported membership fee income came in at $804 million, up 6.1% or $46 million from last year's $758 million. Deflation from foreign currencies would have impacted that by $1 million to the negative. So, it would have been about $1 million higher, excluding FX. In terms of renewal rates at Q1-end, our U.S. and Canada renewal rates came in at 90.9%, and worldwide rate was 88.4%, both of these figures remaining at the same renewal rate levels that were achieved 12 weeks ago at the fiscal year-end. In terms of number of members at Q1-end, in terms of member households and total cardholders, at Q4-end back on September 1, we had 53.9 million member households at Q1 and 12 weeks later was 54.7 million, and total cardholders increased from fiscal year-end of 98.5 million to 99.9 million at Q1 end. During the quarter, we had three new openings, all in the U.S., a business center in Dallas, Texas; and two additional Costco warehouses in Connecticut and Minnesota. We also relocated one of our units in Canada. At Q1-end, paid executive memberships totaled 21.4 million, an increase of 579,000 or 48,000 per week since Q4-end. This included the recent launch of offering executive memberships to new members for the first time as of the beginning of the fiscal year. Even taking those out, the average weekly increase would have been excluding the new members, executive members would have been 41,000 a week. Going down to the gross margin line, our reported gross margin in the fourth quarter was higher year-over-year by 30 basis points coming in at 11.05% compared to a year ago at 10.75%, and again on a reported basis 30 excluding gas deflation would have been plus 26. Doing the little chart that we do each quarter, two columns reported, excluding gas deflation. First line item would be core merchandise year-over-year in Q1 of 2020 compared to a year earlier quarter, minus 3 basis points on a reported basis and minus 6 basis points on an ex-gas deflation basis. Ancillary businesses plus 20 and plus 19. No change to the 2% reward, and other was plus 13 and plus 13. So total of plus 30 basis points on a reported basis and plus 26 excluding deflation. Now, the core merchandise component of gross margin, again lower by 3 year-over-year reported, minus 6 excluding gas deflation. Looking at the core merchandise categories in relation to their own sales, core on core, if you will. Margins year-over-year were higher by 4 basis points. Subcategories within the core margins year-over-year in Q1 showed increases in hardlines, softlines, and food and sundries and a decrease in fresh foods. Nearly all of that decrease in fresh foods was the result of the initial operating losses from our new poultry complex. That will be a small headwind throughout the year. Recall that we commenced operations at the Nebraska chicken plant on September 10 with roughly a 45-week plan to get to full production and processing capacity, and we are currently on track to do so. Ancillary and other business gross margin, higher by 20 reported and 19 excluding gas deflation. The highlights in the year-over-year being gas, optical, tire shop, and hearing aids. The other, the plus 13 compared to the year ago, this relates to what we mentioned last year in the quarter to adjusting our estimate of breakage on rewards for the Citi Visa co-branded card program last year, and that was again in comparison to the hit last year versus zero this year. Moving to SG&A. Our reported SG&A percentage in Q1-over-Q1 year-over-year was higher by 17 basis points coming in at 10.30%, up from 10.13% last year. Ex-gas deflation SG&A was higher or worse by 13 basis points. Again, the little matrix that we do, both reported and without gas deflation, operations minus 9 basis points, meaning higher by 9 basis points versus minus 5 basis points excluding deflation. Central, minus 4 and minus 4. Stock compensation, minus 4 and minus 4. For a total, again, of minus 17 and minus 13. These figures include, in terms of the core being minus 5 on an ex-gas deflation basis, this figure includes the impact from the wage increases that we talked about in the last couple of quarters that occurred. This impact relates to wage increases that occurred in March 2019, which hit the year-over-year comparison by 3 basis points to 4 basis points in the quarter. As mentioned previously, we would expect a similar impact that will occur in Q2 before we anniversary that wage increase midway through Q3. Central was higher again by four basis points year-over-year. IT was the biggest driver of the increase as we continued not only to maintain and upgrade but expand our capabilities and activities. We have a lot going on there. And stock compensation again minus four basis points hit there. That hit usually is in Q1 year-over-year based on the fact that we grant RSUs in that quarter and how we do things for employees 25, 30, and 35 years out. On the income statement, next one is the pre-opening expense. It's lower by $8 million. It came in at $14 million this year in the first quarter versus $22 million. This year in the quarter, we had four total openings, three plus the relocation. Last year, we had eight total openings, six plus two relocations. All told, operating income in Q1 increased by 11.8%, coming in at $1.61 billion this year compared to $949 million last year. Below the operating income line, interest expense was $2 million higher year-over-year, $38 million this year in Q1 compared to $36 million last year. Interest income and other for the quarter was higher or better by $13 million. Interest income was actually higher by $11 million and others plus $2 million variance was primarily favorable FX year-over-year. Overall pre-tax income in the first quarter of 2020 was up 13%, coming in at $1.58 billion compared to last year's $935 million. In terms of income taxes, our reported tax rate in Q1 2020 was 19.1% compared to 16.9% in Q1 of last year. Both of these first quarter tax rates, this year and last year, benefited from the tax treatment of stock-based compensation, as mentioned earlier. Last year's rate also benefited from an additional discrete item, which we mentioned in the quarter last year. A few other items of note. In terms of warehouse expansion, we expect to open net new units of somewhere around 20, plus or minus, with a lot of it planned to be back-loaded toward the end of the fiscal year. As of Q1-end, we had total warehouse square footage of 114 million square feet. Regarding capital expenditures, in Q1, our total spend was approximately $700 million and our estimate of CapEx for all of fiscal 2020 remains right around the $3 billion amount. In terms of e-commerce, our overall e-commerce sales on a reported basis in the quarter was 5.5%, as I mentioned earlier and again ex-FX 5.7%. Again, those numbers, you could add roughly 12 percentage points to each of those to account for our estimate of the impact of the holiday shift. A few of the stronger departments include home furnishings, domestics, tires, and pharmacy. Major categories, electronics were not among those as we believe it was the one most impacted by the holiday shift. Total online grocery continues to grow at a faster rate than the core e-commerce comps, although again it's still a relatively small piece of the business. New online during the quarter expanded ticket offerings including airline gift cards, Lyft and Uber cards, and Super Bowl packages. We also launched as a test in a few locations same-day prescription Rx delivery with Instacart, and we launched in the quarter same-day alcohol delivery also through Instacart in California, such that as of today, it's being offered in 12 states. Lastly, earlier this week, we launched our Japan e-commerce site with our Australia site planned to open in the first half of calendar 2020. In terms of tariffs, there continue to be a lot of moving parts and changes up to and including an hour ago. Currently, there are three lists, if you will. Lists 1, 2, 3, and 4A, totaling about $360 billion worth of imports. There were possibilities that there would be a 4B list going into effect December 15. Although the current news today is that China and the U.S. are close to a deal and on finalizing a phase one part of the trade deal. We will have to wait and see. In terms of the EU, currently, again, there are $7.5 billion of U.S. imports that are subject to a current 20% tariff, mostly food items like olive oil, cheese, wine, whiskey, butter cookies, etc. Again, last week, just last Monday, the White House announced that it proposed an increase to a 100% tariff on $24 billion in imports, which would include those among other items. We'll just have to wait and see where that stands. I believe comments aren't even anticipated to be complete until early to mid-January. That's pretty much it on our part. Lastly, in terms of upcoming releases, we will announce our December sales results for the five weeks ending Sunday, January 5 on Wednesday, January 8 after market close. With that, I will open it up to Q&A and turn it back to Laurie. Thank you.

Your first question comes from the line of Christopher Horvers from JPMorgan. Please ask your question.

Thanks. Good evening. So, I just want to step back and get your thoughts in terms of how you planned the holiday season this year given that there are six fewer days. It seems like a lot of retailers are expecting a big surge at the end, bigger than normal into Christmas, given the shortened season. Is that something, I am not asking about December, just how you planned it? Is it something you saw in 2013? Is it something you are planning for in 2019 and maybe any comment through what you have reported so far?

We have planned for this holiday season with historical data in mind, specifically considering the short time frame between Thanksgiving and Christmas. We are anticipating that our comparable sales will remain strong, even with the month transitions, such as Thanksgiving falling in November rather than the first quarter. Therefore, we expect to increase our sales on a per-day basis, but we will have to observe how it unfolds. We entered the planning phase with confidence due to our improved shopping frequency, high renewal rates, and solid comparable sales performance.

Understood. And then on the pricing environment, it seems like Sam's has been taking some bigger hits to the gross margin line and it seems to be benefiting comps. So, are you seeing a step-up in terms of, in that core club channel? Are you seeing a step-up in price investment from your peers?

In a word, no.

Got it. That's fair enough. And then my last question is, in Q2, you are going to lap, I think, a pretty big benefit in the ancillary line last year. I think it was up 33 basis points, big part of that being gas, so you're going to have gas prices. Do we have to give that all back? I mean gas prices look like they will be up year-over-year at this point but are still going to be down a bit sequentially, and I know there is an interplay between those two dynamics. So, any thoughts you could give us around lapping that 33 basis points given those dynamics would be super helpful?

Well, I think profitably for gas for us, and as we have read from other retailers, big retailers that have gas stations as part of their retail concept, it's the new normal over the last few years. It has been a more profitable business. We, I think, benefit from the fact that we have seen our gallon increases on a comp basis in the very high single digits. So, we know we are taking market share. Despite increased profitability in that business, our savings in our view, when we can do price shops of competitors' gas, it has never been as strong. So, we feel very good about where we are with that. Now sequentially, part of the increase, when you look at it on a year-over-year basis, last year's plus 30 or whatever, I don't have it in front of me, but whatever it was, had as much to do as what it was the year before. I think again when you read what others have said and what we have said in the last couple of quarters, it's been pretty good for all of us. So, it may be, you're not going to see that kind of delta on top of the big delta last year nor are you going to see the big negative from it coming back two years ago, but we will have to wait and see. We think what we have learned about gas profitability is, it could be very fleeting. Right now, it's been good as it was last quarter and as it was over the last couple of years in general, but you never know how to predict it from sometimes week to week.

Awesome, guys. Have a great holiday. Thanks so much.

Your next question comes from the line of Michael Lasser from UBS. Your line is now open.

Good evening. Thanks a lot for taking my question. Richard, you touched on this briefly. But how have tariffs impacted Costco's profitability and if some of the tariffs are rolled back, how is Costco going to handle this? Should we be modeling margin benefit over the next couple of quarters from this dynamic?

Well, we've generally indicated that on a qualitative level, larger companies like ours have a better chance of managing tariffs, particularly when it’s easier to handle a 10% tariff compared to a 25% one. Our size allows us to adjust our sourcing strategies effectively. For instance, while some companies may face all items at a 25% tariff, we have a smaller portion of our business impacted by that, which gives us more flexibility. We've made some adjustments by sourcing from alternative countries, and our total imports from China are only a few percentage points lower than last year. While no one can completely avoid the impacts, we've managed to integrate these changes into our financial planning. In situations where we've increased prices, we haven't seen a drop in unit sales, although for some products, we have. The specifics can vary, and we can’t always predict which items will be more sensitive to price changes. Overall, we believe we've effectively mitigated the impact of tariffs. Our core margins, especially in hardlines and softlines, have actually shown slight year-over-year growth, which we attribute to maintaining our competitive edge. While we hope there won't be further increases in tariffs, we believe we've navigated this situation quite well.

So in cases where you have taken price or reengineered a product to make it cheaper, how do you handle that?

Well, first of all, I don't think ever we have tried to reengineer a product. We are going to try to figure out how to get the price down a little bit with the help of our suppliers. Sometimes, our own money or whatever else we can or moving a few items to another country and sometimes eliminating an item and putting something else in its place here. So I remember I think one anecdotal story would be in late calendar 2008 when the economic downturn hit hard and what hit hard in our case was as good as our values were on $1,000 and $1,500 patio furniture, we had a lot of markdowns to take care to get through that in January, February and March when that stuff hit the floors. I can remember vividly, come June, following that when we were still in a bad economic downturn and our head of merchandising and our CEO reminding everybody, in a budget meeting, I don't want to see us bring down the quality of stuff to hit a price point. We have taken 20, 30 years to get our members comfortable with the types of values we can bring, particularly on bettering goods. And so might we buy a few fewer units of something? Yes. Might we augment a little bit with some offerings? Yes. But we try not to.

That's helpful. And my follow-up question is, given the well-publicized website outage over the holiday weekend, should we read that as Costco needs to make a more meaningful investment in its technology infrastructure to keep up with the growing size of that business?

Well, first of all, we live it every day here, and certainly we are. It was unfortunate. Despite all the efforts to have plenty of processing capacity, if you will, there was something that incurred. When we look at the five days between Thanksgiving and Cyber Monday, those five days on a year-over-year basis, I mean we still were up in the very high teens as a percentage on e-commerce, so consistent with what we have currently been running. What it tells us, we could have done better than that. So we did leave something on the table there. And again, we were able to correct it. It took several hours that day, unfortunately. But rest assured, we are spending a lot of money on things like that.

Understood. Have a great holiday.

Your next question comes from the line of Chuck Grom from Gordon Haskett. Please ask your question.

Hi. Good afternoon, Richard. First question on MFI. Now that we are past the fee increase and FX is normalizing, I am just wondering if you see any material reason why the 6% growth you reported in the quarter wouldn't be a good proxy in the coming quarters?

Well, who knows. Certainly, one of the reasons why it's growing a little faster than the total sales line is a couple of recent openings like the China opening. That's a little of it. I think more importantly, it's some of the things that we have done a much better job of getting new members to sign up as executive members. You saw in terms of the number of new members, which is a combination of new membership signing up as executive members as well as conversions to these executive members, we are doing a better job of that as well. And of course that aside from improving membership fees, they are more loyal members that shop more frequently and renew more at a slightly higher rate. And so I think a lot of it is some of the things that we are doing, getting the growing number of members, I mean the U.S. as an example here with the Citi Visa card, signing up for that and having auto-renewal as well as opting into auto-renewal on other Visa cards that somebody may choose to use at Costco. Those are the things that help as well. I would like to think it's all related to just great value and that's more things that we offer the member, which is certainly part of it too.

Okay. Understood. And just to switch over to the balance sheet a little bit. Inventory levels were a little bit heavier. I presume that's just the timing of Thanksgiving. Any way to normalize for that, maybe inventory per club or some other metric, just to get a sense for what sort of apples-to-apples would look like?

Yes. Well, I think it's mostly the shift of the holiday. Some of it is a buildup with e-commerce and those holidays as well with more in the system. We are doing more fulfillment on that side. Again, in the few days since then, it's come down as we have expected. So I don't think there is a whole lot to read into it.

Okay. Great. And then just last one on the core on core up 4%. Maybe quantify for us the drag that you are going to continue to see and then what you saw here in the current quarter from the chicken plant, just to get a sense for how much that was to the quarter?

Well, the thing about, if we open the chicken plant, the first chicken, if you will, went through on September 10. Hopefully, 45 weeks later, there will be roughly 2.2 million chickens a week going through there. The first three months, if you will, which is Q1 here, September, October, and part of most of November, you were at the lowest end of that. I don't want to straight line it completely, but it's close enough for this discussion, going from one chicken to 2.2 million chickens, if you will. There is a lot of operating cost in running the plant. And while we don't have both production lines running yet, there's just a lot of cost associated with that. It should be a diminishing drag in Q2 and then Q3 and then Q4 and then not be an issue.

Makes sense. Thanks a lot.

And we have Chris Mandeville from Jefferies. Please ask your question. Your line is now open.

Hi Richard. So just a quick question on Central SG&A, similar to Michael. I am just curious with respect to the IT investment, if we should be assuming that that pressure that was realized in the quarter actually progressively gets a little bit more prominent on a go-forward basis? I don't know if that's what you were trying to reference or allude to with respect to expanding your capabilities and activities? Or if we should be thinking about something similar on a go-forward basis?

If I look over the last several years with that word we have stopped using completely called modernization and now it's some modernization but other things as well. We talked about in the last, I talked about in the last several quarters things like e-comm fulfillment, spending a lot of money on that. A lot of that hits SG&A in terms of all that technology. The chicken plant, to some extent. We have also over the last couple of years done a reset of certain departments within IT based on wage competition in this part of the woods up here in the Northwest. So I mean there's a lot of things that go into it. And we have a lot going on, whether it's e-comm, continued increases in infrastructure and vertical integration as well as our depot operations and modernization. So I don't know. I think that when we first started talking about modernization years ago and it was just that, as best we could, we estimated originally over a few years it would be incremental 10 basis points to the company. And then quickly, we felt it could be 13, and ultimately it was 18 or 19. And then, a couple of years went on a quarter-over-quarter basis, some quarters it was six and some quarters, it was two or zero. So I think a couple of quarters ago, maybe three quarters ago, it was flat year-over-year to that impact. And I reminded people that don't read anything into that like it is an inflection point. We have a lot going on both related to modernization stuff as well as expanding as well as vertical integration. So my guess is, it will still be a negative year-over-year. There's a negative, when those negatives anniversary a year hence, will we have incremental negative net? I can't say. At some point, it's supposed to slow down.

Okay. And then just my follow-up would be with respect to the Instacart pilot and delivering Rx to your members. I guess just what exactly you are attempting to accomplish there? And is the structure of delivering pharmacy any different in terms of how you are approaching things from a grocery perspective?

Yes. Well, no, look, it's convenience. Like anything in life out there, as you might expect, we are always asked when are you going to start to do order it online and pick it up in-store, when are you going to do this, when are you going to have something else. And we kind of do things our own way. We look at all these things, and this is one area that with the Instacart relationship, where we have them already coming into our locations, let's give this a shot. We already have a good and growing mail-order business. We have 540-ish pharmacies around the country. But this is another opportunity. Our pharmacies are sometimes, somebody does, won't come out if they are not feeling well. And so it was an opportunity given, and as density increases, that should help. But you have already got these drivers delivering groceries to others, hopefully we can do this. And it is something to add to the competitive belt here.

Is there a notable impact to one's kind of Rx margin profile? I guess I am just curious about that, the economics there?

No. First of all, it's brand new. And it's just a few locations, going to roll out to a few more shortly. So we will see where it goes.

Your next question is from Simeon Gutman from Morgan Stanley. Please ask your question.

Hi there. This is Michael Kessler, on for Simeon. So a question on the competitive environment. We have seen Sam's Club undergoing an unexpected round of investments recently. And I guess is there anything notable that you would feel the need to respond to as far as what they are doing? Or anything that changes on your end from some of their investments?

Not really. I mean, look, our warehouse managers are in their locations every week. We hear about it and I hear about here every month by location or by region rather. And look, they are a good operator and a good competitor and we feel that we do a lot of things very well too. But there is nothing that I could point out. A year or so ago, we had pointed out that they have gotten a little more aggressive on fresh and some of these things ebb and flow. But at the end of the day, we feel very good about our competitive position.

Got it. Okay. Great. And just one follow-up on China. The new store that you opened there, a little further away from the opening. Is there anything notable that you have learned over the last couple of months? And any changes to your plans as far as the rollout, which I know is a little more on the slower side? But any updates on that front?

Well, first of all, on the rollout side, we have one other one planned which was planned previously. That's probably about a year-and-a-half away. And we will continue to look to see what we want to do next. But not a lot of change there. Overall, the location has exceeded our expectations. We have brought in additional help from neighboring places to help but sales continue to grow, the sign-ups continue to do very well there. We will see. So we have had a great reception. We feel good from a merchandising standpoint and maintaining a supply chain. Very good. And we are getting, I think, good reviews over there. We have also identified a few items, one in particular is again just anecdotal. We have done a very good job over there with sea cucumbers, which I still have never tried. But we have found is that particularly on the West Coast in several cities where you have got customers that value that as a great item. We have done very well with it. So just like anything in life, we have found items that make sense in other parts of our operation throughout the world. It's fun to see out there and it's a high-value, high-price item at a great value at Costco.

All right. Very interesting. Thank you.

And we have a question from the line of Greg Badishkanian from Citi. Your line is now open.

Hi. This is actually Spencer Hanus, on for Greg. You guys called out some sales headwinds related to the website issue. Do you think those sales have been lost? Or do you think they were just pushed out?

I think some was pushed out, some went to the warehouse, and some was lost. In the scope of things, given our whole company, recognizing that e-commerce while growing faster than the rest of in-line, is still a little over 5% of our company. So I don't want to be cavalier about it. We didn't excite the members that were delayed. But we feel we have got, so we extended the values that hit the 30-plus million emails that we sent out in the early hours of Thursday. We extended those deals for an extra two days. And so we think we got some of it back. Again for that five-day period, we did just fine. Frankly, we feel we did lose something that we could have done better than we had anticipated.

And then any comment on big ticket sales trends that you are seeing? And then how does the consumer feel heading into the holiday season this year?

Yes. Big ticket items are strong, particularly electronics items. The fact that back in March or April this past year, we were able to offer a full line of Apple products including the Macs and the watches and the like. And we have done very well with those. And online, we have done even better with those. And it's not just the Apple products. It's other big ticket high-end game computers and game consoles. Big screen TVs are huge, recognizing the price and value of those things for consumers keep coming down, which is great. Those are the things that have done very well for us.

Perfect. Thank you.

Your next question comes from the line of Karen Short from Barclays. Please ask your question.

Hi. Thanks very much. Just a couple of questions. I guess starting with the core on core. So you have obviously had pretty meaningful stability, I guess, on the core on core and you alluded to this a couple of quarters ago in terms of your scale and your buying power. But I am wondering if you could just frame a little bit on how we should think about core on core going forward because it does seem like we are kind of in a new norm of that being stable to up generally?

Well, I think the fact is that, you are right, all the things that we do to drive value or to get better pricing or based on our volume or Kirkland Signature or whatever. Just when you think it's safe to go out, we are going to use it to drive business, which we have done. We talked in the past about the monies from increasing the membership fee, the monies from the change in credit cards, the income tax reform, recognizing about a little over a third of the income tax reform went to improve hourly wages. But at the end of the day, those have given us additional monies to continue to drive value. And there are times when we see something, a particular department or something, where the margin might be very strong year-over-year. That's the first thing we look at. Even if we are giving a greater savings to the customer, is it too much? And so again, we are a for-profit business. We want to grow our topline first, and that will help the other things. But we don't manage it completely to the basis point. That we would like to see it year-over-year even go up a little bit, but we have avenues to do that.

Okay. And then on tariffs, just specifically to the tariffs for this Sunday if they were or not to go into effect. So can you just clarify, I mean the rest of the lists, like 1 through AA, I guess, obviously it's kind of already embedded. But is there anything to think about it in terms of 4B does not go into effect with respect to your positioning or the model or anything?

Anyway, we don't know. I mean to the extent that we bought in advance certain merchandise to the extent we could, anticipating that that was going to go into place and so let's get it in before the tariff, we did. But it wouldn't change it, so as you are saying, it wouldn't change things immediately there. So if anything, we have had a little extra inventory in advance of it.

Okay. And then last few from me is just housekeeping on inflation and food and also in non-food and then thoughts on cash on the balance sheet as it continues to build? Thanks.

Inflation is almost a non-issue. It's not either inflation or deflation, generally speaking. I mean, yes, we mentioned they are slightly deflationary year-over-year. Tariffs is slightly inflationary, of course, on those limited items. Yes, proteins are up a little. My understanding, that has to do partly with China and with swine flu as well as more demand for beef. Other than that, not a lot to talk about there. What was the other part of the question?

It's cash on the balance sheet building?

Yes. Well, we have two debt repayments coming due this week or next Monday. Next week and in mid-February totaling $1.7 billion from prior debt offerings. Beyond that, of course, cash at the end of Q1 generally is the highest level because you have started to sell more, but you haven't paid for everything yet relative to seasonal stuff or Thanksgiving and Christmas. So like our AP ratio was always the strongest on a quarterly basis. Beyond that, stay tuned.

Okay. Great. Thanks. Have a great holiday.

Thank you.

And we have a question from John Heinbockel from Guggenheim Securities. Your line is now open.

So, Richard, where do you stand now with self-checkout? I know you have been expanding that. How many clubs is that in? What are your learnings, right, in terms of consumer, member satisfaction, speed of checkout? And then what do you think the rate of expansion of that is going to be?

Well, we currently have it in the U.S. and Canada in about 135 locations. It's going well. We have another 92 planned for early calendar 2020. So up above in the low 200s. And the senior operators continue to discuss additional rollouts with Craig, based on their performance. But overall, it's a positive, and so we will continue to do it, is my expectation.

I mean, roughly speaking, when you think about savings, right. I don't know how material that is but is there an idea that you reinvest that? Can it be enough to reinvest back into the business in something like expanded BOPUS? Or I know you have been sort of reticent about BOPUS because of the cost. Is that something you can now begin to get your arms around? Or no?

Well, first of all, I think thoughts on either of those are mutually exclusive of one another. When I look at the millions or billions of front-end seconds we save in labor, we know full well that some of it is, you don't get it all back, but even if you take a conservative amount, there is money to be saved there. More importantly, the members like it. The only thing the member doesn't like is when there is a member in front of them that is going through with their full basket and is taking longer. But generally speaking, even the high volume, the few high volume units that I have actually gone to of late, like the ones in Seattle, and I use them when I am in and now they are fast, they work well and fast. So there is savings. But I think as well it improves that customer experience. As it relates to buy online and pickup in-store, we continue to look at what others do and continue to scratch our head, recognizing the average Costco, even compared to our two direct competitors, is two and almost three times the volume per location, almost two times and almost three times the volume per location. So we will have to wait and see. We are still not at a point. We look at it, but we are not at a point that we are planning to do anything with that.

Okay. Thank you.

Your next question is from Kate McShane from Goldman Sachs. Your line is now open.

Hi. Good afternoon. Thanks for taking my question. We wanted to ask about apparel. I know that this is a category where you have been a little bit more focused. I wondered if you could give some color about the performance of apparel during the quarter? What you see the opportunity to be? And how Costco can kind of position itself to capture some share going into the next year?

Yes. I think it's part of the same story that we have talked about fortunately for the last few years. Apparel is a combination of both expanded Kirkland Signature as well as a few additional brands willing to sell us or expanding what they are selling us as well and great value. It's a category in the several billions of dollars that continues to grow in roughly high single digits compared to retail apparel overall that's a lot less than that. And I think I am always amazed at our monthly budget meetings when, in this case, buyers are bringing in and showing what's coming in for the new season, whether it's outerwear, a few months ago outerwear for the fall or both men's, women's, and children's stuff.

Your next question is from Scot Ciccarelli from RBC Capital Markets. Your line is now open.

Good evening, guys. Richard, I had a follow-up question on the Shanghai location. Can you just provide a context on the sign-up activity of that location relative to a more traditional facility?

It's beyond good. I am sitting here with my colleagues on what I am allowed to say. The average Costco in the world has somewhere in the mid to high 60,000 of member households. We have had locations in other countries in Asia where we might be at a 100,000 to 120,000 after a few years, maybe even after one or two years. This one is more than twice that. So there's a lot of press in a city that is populated with 25-plus million people.

Yes. I understand. So just given the fact that in the past, you kind of talked about how long it takes locations to hit a breakeven point. I guess given the early sales and membership trajectory of that location, does that help change how you are kind of thinking about the breakeven point for that warehouse and hence the China opportunity? Or do you need more distribution scale to really get the profitability to where you want it?

Well, getting to seven or eight or 10 locations in a country where a bunch of stuff is American supplied and barge shipped, not air flown, you become more efficient as you go from one to three, maybe using some third-party consolidation or storage to do high-value bulk items because you don't want to run out of water or toilet paper as you may; the no-brainer items. Over time, by the time we get up to eight or 10, we want to have a bigger cross-dock with enough land to continue to expand it over time. Cross-docks in the U.S. and Canada serve 40 to 60 locations each and 40 to 60 relatively high-volume locations. We have one in Australia that serves 11 locations. That will continue to be a little bit as an economic improvement to that country as it serves 15 and 20 locations. We have opened two in Japan, essentially south to north for all of 26 or 27 locations. We plan to have a lot more there over time. So certainly, in addition, we have a lot of extra help there. We are doing big volume and we brought over additional people from Taiwan that speak the local language and understand our concept, and we have been fortunate to have that additional history and expertise when we have gone there, but also with Costco more. So I think you have got what is the normal once it's doing whatever volume it's doing, and it's efficiently run at the warehouse, maybe you don't have all the efficiencies from cross-dock. That will take several years. But the most efficiencies are what's in the building and how many people you need to help that process and become more efficient. So I mean, it takes a couple of years to do that. And that's one of the reasons why we generally go slow in new countries because we want to get it right from a customer experience on an operational side.

Got it. Very helpful. Thank you.

Your next question is from Oliver Chen from Cowen & Company. Your line is now open.

Hi. Thank you. Richard, on your digital innovation roadmap, what are your thoughts about fulfillment from in-store and micro fulfillment centers? And also thinking about the robotic capabilities across inventory management or supply chain from in-store? Would love your thoughts.

Well, just because of what we did currently a couple of years ago, we have our business centers that act as a focal point, as you know, for today. We have our depot operations. We have moved some of that fulfillment to annexes off of some of our depots as well where we put in to our biggest depot some automation fulfillment, which I have talked about over the last few quarters or last six months, and we continue to roll some of that out. One of the things we have done is, particularly things like how do we improve the time, particularly if items that might be presented in store but are only sold online like white goods, or what I will call big and bulky, and those that require not only installation but sometimes take away the old one. While many third parties do that, we do a little of it. We have also figured out what are some of these items based on our volumes that can be staged efficiently and a dozen, I am making the number up, but a dozen geographic locations across Canada and the United States to take the shipping times down dramatically. And we have done some of that stuff. And that's evolved over the last couple of years and we will do more. You have got a business of just white goods, and that's certainly not the only big and bulky. There is furniture. There's patio stuff. There is exercise equipment. But just on white goods, we have gone from essentially sub $50 million a year four years ago to over $650 million and growing. Part of that is not just selling the stuff at great prices, it's getting it delivered to in fewer days.

Okay. And Richard, on vertical integration opportunities ahead, what are you thinking could or should be possible? And what's your framework for evaluating what makes sense for you in terms of owning more parts of the supply chain across different categories?

Well, what started 25 years ago was a ground beef plant to save $0.04 to $0.06 a pound we thought a ground beef is now two major meat plants. One in Tracy, California where we started and one in Illinois, which is still growing into itself over the last year-and-a-half to two years since it opened. I think the one in California does well over four million pounds a week of just a handful of items that are ours. That gave us confidence to do the hot dog plant. We did almost partly by necessity a bakery commissary in Canada which we are finding can serve not only Canada but the U.S. on making more consistent and more efficiently crusted items like cookie dough and croissants. So we learn each time we do something. I think there has been some press out there about testing greenhouses for produce. We have got one up and running just in the last few months in California that I think some of the product is just starting to hit our shelves. But we think there are some great opportunities on the produce side for hothouses and greenhouses, if you will, particularly where transportation costs and time is a necessity on stuff that spoils quickly and easily. Right now, much of the produce that we ship to our Hawaii locations is air shipped. If you can do some more of that over there, that's a no-brainer. And given our volume and limited SKUs, we think that it's an efficient model to help. But that's not just us, others are trying that. Again, we think that the structure of our business allows us to take more advantage of that but it's new. I don't know if there's anything big. There is nothing as big as the chicken complex on the drawing boards. But I think we will continue to do things. But we are catching our breath a little bit right now. We have made some major investments for the second meat plant and the bakery commissary, just recently in the chicken complex and even more recently, the first of the few greenhouses. So we have got a lot going on. And the answer is, it works and so far and so good.

And my last question. Richard, Kirkland is a nice competitive advantage. What are your thoughts on how that percentage of mix may increase and categories that may be suitable for that you are not in yet? And also you cited new services that you have added to your product assortment. How will services evolve as a percentage of total? Just would love the magnitude of what may happen there over time?

Well, first, on the Kirkland Signature side, there aren't a lot of $0.5 billion and $1 billion items like water and various paper goods and things like that. And there are many, but not a lot of many new few hundred million dollar items. But yes, there's lots of $20 million and $50 million items that can go to $50 million and $100 million and certainly I think on high-end packaged food items, on everything from not only organic but antibiotic-free. And I don't have all the adjectives in front of me, but there are lots of things that we can do that are high-end that our members want. And frankly, it has added benefits of seemingly gets in the millennials on some of that stuff. But I think we have expanded into some sporting goods. So there are lots of little things that will add to it. But if the number, and I don't have it exactly in front of me, but excluding gas if the number is 24%, 25%, does it go to 30% over the next 10 or 15 years? Maybe. We think this is going to go up? Yes, likely a little bit because we found ourselves and our ability and our suppliers. Some of our private label suppliers are very good at what they do. But we also are still a branded retailer. We have very good savings, as you know, on branded items. On the service side, we don't talk about it a lot because they are small relative to the size of our company, but it's other things that make the membership sticky and are very profitable, whether it's the Costco auto program or our travel business which continues to grow. We now a year or so ago when we added the hotel only booking engine and more recently the airline reservation only, not just packaged items, package trips and everything. And so I think we will keep adding things. I can't tell you what yet, but we keep looking at things.

Great. Happy holidays. Thank you.

Your next question comes from Greg Melich from Evercore ISI. Your line is now open.

Hi. Thanks Richard. I wanted to get an update on how the private label card, now that you have had a few years for it to properly season and scale, anything you could say on the penetration or how the sales are doing outside the club? And maybe link that to what the auto-renewal rates are now as part of the renewal rates?

Yes. I don't know what the auto-renewal rates are. They are increasing. The big issue is when we converted, prior to conversion when it was the other provider, there were both the co-branded card plus other branded cards of that provider, like Delta SkyMiles or something. And all those non-co-branded ones, all those auto-renewals went away, went to zero. So that had to be picked up over time and we saw that impact our overall renewal rate a little bit. The other thing is, as we continue to add a new increasing number of members that have the co-brand card and the value keeps getting better and bigger. And so we think that will continue to be additive. That's helped. I think overall, we have also done a better job even when somebody walks in to sign up not only to upgrade but when they like to auto-renew. And so all those things help. Certainly, the Citi Visa is probably one of the biggest movers of that because of just the sheer size of it and the fact that we are still adding new cardholders to that list.

Is Citi Visa doing multiples of sales outside of the club that it's doing in the club at this point?

There's certainly more sales being done outside as there were over the 16 years of the previous relationship, that evolved over time. As we would have expected, this would be even greater than that outside versus inside spend and that's why we have revenue share which is good for us and them presumably. From the standpoint that the Visa card is offered at more smaller businesses which tend to have higher merchant fees in general anyway. So it's a whole new additional market potential of revenue share to those people using that card. If my card is top of wallet, there are certain places previously that I couldn't use it like the local dry cleaner and restaurant. Now I can.

Got it. And then you mentioned Japan and I think it was Australia coming for e-commerce if you look around the world. Any early learnings out of the launch in Japan?

Other than it was, well, it's been two days. So I am happy to report I know nothing.

That's good to hear. Have a great holiday, Richard.

Thank you. Laurie, we will take two more questions.

Your next question is from Scott Mushkin from R5 Capital. Your line is now open.

Hi Richard. Thanks for taking my question. So I wanted to talk a little bit about maybe growth that's being left, I mean, obviously you left on the table. Obviously, your performance is incredible. But the number of club opening has come down a little bit. You might say through omnichannel. So just as you take a step back, we look at our research and we look like you are kind of almost underserving certain markets in the U.S. How do you think about growth? Is it time to speed things up a little bit? Get back up to the 30 clubs? Maybe put a little bit more money behind omnichannel? Kind of what's the company's thought process here?

I think I don't disagree with you. We want to open more than 20-ish this year. Part of that was, I think, some delays in how long it took overseas. We have got the pipeline filled a little bit better. And five years ago, well, I always said our open plan is to do more than we were doing. Today, I would say the same thing. We do have, I think we will increase it a little bit, but I can't exactly say by how many and when. We are a very hands-on company. And we have a lot of other things going on. And certainly, there's a lot of emphasis on the e-commerce side, not only getting into a few remaining countries but building it. Not because we are supposed to, but it's working. And we think that, in some cases, it's either sales that we would have lost anyway like big white goods; you just don't sell those at the store anymore. But we are getting people in the building still using this thing. So I think, don't expect some giant change from 20 to 30 in a couple of years. But our goal is to work harder to open a few more of those while we are doing all these other things as well.

All right. Thanks very much.

And your question is from Kelly Bania from BMO Capital. Your line is now open.

Hi Richard. Thanks for fitting me in here. Just wanted to ask about executive penetration. You called out Japan and the impact there a little bit. But just I am curious how much in the U.S. you are seeing executive penetration move higher? I know we have asked this over the years but just and where you think that could kind of level out at some point?

When I look by country, in the U.S. and Canada where it's been the longest and we have got the most units and the most services as part of the executive membership offering, it's in the mid-70s. In other countries where it's been, like Mexico, it's in the 50s and growing. But I think it starts off lower. I don't know if the marketing department has a plan for where it could go. It's more of what do we do to get people to convert and sign up originally. And so I think there is, if I was shooting from the hip totally, at some point there's going to be some members that don't want an executive membership, period. And even if it provides them some savings. And there are some people, they want it that sometimes it's not as much savings as they thought and they revert back. But at the end of the day, I would be thrilled to think that that could go to any one day, but I have no idea where and how long it will take to get there. We know that executive members are more loyal in terms of their renewal rates. They shop more frequently and they spend more each year.

Got it. And maybe just one more on gross margin. Obviously, mix impacts some other retailers more than it really impacts you. But I guess over the years, we have talked about things like private label, organics or international or even e-commerce in terms of mix shift. And just curious as you kind of look at that core on core up 4% which is clearly very stable, just what kind of mix shift is kind of underlying that?

I believe it's primarily about the mix shift. Gas has a significant impact; it represents over 10% of our business, affecting our gross margin. Additionally, there is deflation, which can influence gross margin contributions by a varying number of basis points. While our services are a smaller segment, they tend to yield higher gross margins since they cover pharmacy, pharmacists, and pharmacy taxes. The optical segment involving optometrists is also growing and generally outpaces our overall growth. For instance, in the travel sector, we have elements of gross sales and brokerage fees, leading to high margins since costs are primarily commission-based. As for our core merchandise, private label products show a slight positive trend, even though their growth rate compared to branded products is slowing. Competition also plays a role in our strategy for driving revenue growth. We are fortunate to have various avenues to enhance our competitiveness. Consequently, it can be challenging to predict margin changes each month and quarter; our focus is to keep margins stable or slightly increase them while ensuring top-line growth, which will address many concerns.

Understood. Thank you.

Okay. Well, thank you everyone. Thank you, Laurie.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.