Good day, and thank you for standing by. Welcome to the Quarter Three Earnings Call. At this time, all participants are in listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. I would like to hand the conference over to your speaker today, Mr. Richard Galanti. Sir, you may begin. Thank you, Sarah, and good afternoon to everyone. I want to begin by mentioning that these discussions will contain forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995. These statements carry risks and uncertainties that may lead to actual events, results, and performance differing significantly from what is indicated. The risks and uncertainties include, but are not limited to, those discussed in today's call as well as other risks identified in the company's public statements and SEC filings. Forward-looking statements are only valid as of the date they are made, and the company does not commit to updating these statements, except when legally required. In today's press release, we reported our operating results for the third quarter of fiscal 2021 for the 12 weeks ending May 9. Our reported net income for the quarter was $1.220 billion, or $2.75 per diluted share, compared to last year's third quarter net income of $838 million, or $1.89 per share. This year's third quarter included $57 million in COVID-19-related costs before tax, or $0.09 per share. In contrast, last year's third quarter included $283 million in COVID-19-related costs before tax, or $0.47 per share. Our net sales for the quarter rose 21.7% year-over-year, increasing from $36.45 billion a year ago to $44.38 billion this year. Comparable sales for the third quarter were as follows: in the U.S., reported sales increased by 18%, and when excluding gas inflation, they were up 15.2%; in Canada, reported sales rose by 32.3%, and when excluding gas and the strong Canadian dollar as well as foreign exchange, they increased by 16.7%; other international reported sales went up 22.9%, and when excluding gas and foreign exchange, they were up 13.1%. Overall, the company reported comparable sales of 20.6%, and again, excluding gas and foreign exchange, they were up 15.1%. E-commerce sales on a reported basis were up 41.2%, and when excluding foreign exchange, they increased by 38.2%. This follows a third quarter a year ago when e-commerce was up 66.1% compared to the prior year. Regarding Q3 comparable sales metrics, global traffic increased by 12.5%, and in the U.S., it was up 11.9%. Our average transaction value rose by 7.3% worldwide and by 5.7% in the U.S. during the third quarter, and these figures include the positive effects of gas inflation and foreign exchange. If adjusted for those factors, the increases would be approximately 1.8% and 2.7% in the U.S. Foreign currencies relative to the U.S. dollar positively impacted sales by about 290 basis points, while gasoline price inflation had a positive impact of around 260 basis points. Going down the income statement. Membership fee income reported for the third quarter, $901 million or 2.03% of sales. Again, we had strong FX, and so adjusting for that out, the $86 million reported increase would have been up $67 million, so FX up 8.2%, on a reported basis, up 10.6%. In terms of renewal rates, the U.S. and Canadian rate of renewal came in at 91.0%, the same as it was at Q2 end. Worldwide, our total company renewal rate was 88.4% at Q3 end or 0.1% lower during the prior quarter-end. China entered the renewal calculation for the first time this fiscal quarter. First-year renewal rates generally lag those of later years. And excluding China, the worldwide rate would have actually improved 0.1% versus the prior quarter. In terms of number of members at Q3 end, both member households and total cardholders. At the end of the third quarter, total paid households were 60.6 million, up from 59.7 million 12 weeks earlier. Total cardholders were 109.8 million, up from 108.3 million at the end of the second quarter 12 weeks ago. At the end of Q3, paid executive membership reached 24.6 million members, reflecting an increase of 817,000 during the 12 weeks since the end of Q2. Looking at the gross margin, our reported gross margin in the third quarter decreased year-over-year by 35 basis points, coming in at 11.18% compared to 11.53% a year ago. I encourage you to note down a few figures in two columns: the year-over-year change in gross margin and the change excluding gas inflation. For core merchandise, the reported figure declined by 52 basis points year-over-year and dropped 29 basis points when excluding gas inflation. Ancillary and other businesses showed an increase of 2 basis points and a rise of 7 basis points when excluding gas inflation. The 2% Reward program recorded a gain of 1 basis point but a decline of 2 basis points. Other categories saw an increase of 14 basis points in both columns. Therefore, the total reported gross margin year-over-year was down 35 basis points, and down 10 basis points when excluding gas inflation. The core merchandise component was down 52 basis points year-over-year and down 29 basis points when excluding gas inflation. This is primarily a function of sales shifting from core to ancillary versus last year as we begin to revert back to more historical sales penetrations. Recall, last year, we saw a significant shift of sales out of ancillary and other businesses and into the core. In terms of the core margin on their own sales, in third quarter, the core and core margin were better by plus 27 basis points, with nonfoods up significantly, rebounding from last year's lows. Food and sundries flat year-over-year and fresh foods down from last year, the latter still strong by historical standards. Fresh, as we've mentioned over the last few quarters, is lapping exceptional labor productivity and low product spoilage that occurred from the outsized sales that began a year ago in Q3 with the onset of COVID. Ancillary and other business gross margins, again, excluding gas inflation was up 7 basis points year-over-year in the quarter. We have a lot going on here as of last year we had closed the hearing aid and optical departments and had severely limited the service and selection at our food courts for most of Q3 last year. Gas had a particularly good quarter a year ago, which had helped to offset some of those closures a year ago. This year, we're showing margin improvement in optical, food court, e-com, and hearing aids, somewhat offset by gas. The 2% Reward was, again, on excluding gas inflation was lower by 2 basis points, indicating higher sales penetration to our executive members and the rewards associated with it. And other is plus 14 basis points. Nine of the 14 basis points is attributable to lower COVID-19 costs year-over-year. $44 million hit to margin in Q3 a year ago versus a $14 million hit to margin this year in the third quarter. Last year, we had 10 weeks of the additional $2 an hour premium wage, which was related to our fulfillment manufacturing businesses. This year, we experienced two weeks of the additional $2 an hour premium wage since the program ended at the start of the third week of Q3 after being in place for 52 weeks. The additional 5 basis points or $19.7 million resulted from setting aside a reserve last year in Q3 for certain third-party gift cards and ticket programs that were negatively affected by the onset of COVID. Additionally, as I mentioned during our March 4 Q2 earnings conference call, alongside the discontinuation of the $2 an hour premium pay, we implemented a permanent wage increase for our hourly employees and most salaried manager employees, effective in week three of this fiscal quarter. Since it's a permanent wage increase going forward, its impact is simply in our reported numbers and not separated out as COVID-related. Moving to SG&A. Our reported SG&A in the third quarter was lower or better year-over-year by 107 basis points. Again to jot down these following two columns and numbers, the first column is reported, and the second column, excluding gas inflation. In terms of operations, year-over-year, plus 37 basis points, meaning lower or better by 37 basis points, excluding gas inflation, plus 20 basis points. Central plus 4 basis points and plus 1 basis point; stock compensation, plus 5 and plus 4; other, plus 61 and plus 61. For a total, on a reported basis, again, SG&A year-over-year was lower or better by 107 basis points on a reported basis and excluding gas inflation, better by or lower by 86 basis points. Again, looking here, the core operation was better by 37 and better by 20, excluding the impact of gas inflation. A good result, particularly given that we implemented a permanent $1 an hour wage increase for the last 10 of the 12 weeks that comprise Q3. Central, nothing surprising there. Same with stock comp, and other, the plus 61 basis points excluding gas inflation, 56 of the 61 was attributable to the lower cost from COVID. $239 million hits SG&A in Q3 a year ago compared to $44 million in Q3 this year. The balance or plus 5 basis points, lower by 5 basis points, was $18.5 million were costs associated with the acquisition and integration of Innovel a year ago. Next on the income statement is preopening expense. Basically, this year, it came in at $10 million, $2 million higher than the $8 million in Q3 of fiscal '20. Reported operating income in Q3 '21 increased 41%, reaching $1.663 billion this year compared to $1.179 billion last year for the same quarter. Interest expense was $40 million this year, up from $37 million last year. Interest income and other for the quarter improved by $6 million. However, interest income decreased by $2 million year-over-year due to lower interest rates. Additionally, foreign exchange and other increased by $8 million year-over-year. Overall, reported pretax income in the third quarter rose by 42%, totaling $1.650 billion this year compared to $1.163 billion last year. In terms of e-commerce, our e-commerce sales, as I mentioned earlier. I'm sorry, before I go to e-commerce, our tax rate in the third quarter came in at 25.2% compared to 26.7% a year earlier. This quarter benefited from a one-time discrete tax item that benefited our number. For all of '21, based on our estimates, which, of course, are sadly subject to change, we anticipate that our effective normalized total company tax rate for the year to be in the 26% to 27% range. A few other items of note. In terms of warehouse expansion, in Q3, we opened 6 new warehouses, 1 in the U.S.; 3 in Canada; and 2 internationally. We also have plans in Q4 to open 7 additional ones, 5 in the U.S. and 2 others internationally. And that would put us in a total of 21 net new warehouses for the fiscal year, including 2 relocations, so 21 net. In addition to the 21 planned openings for fiscal '21, we aim to add about 25 new units in each of the next two fiscal years, which includes a second warehouse in China in fiscal '22, expected to be opened towards the end of calendar '21, and a third in late calendar '22, anticipated for early fiscal year '23. Concerning capital expenditures, our spending in the third quarter of fiscal '21 was approximately $1.03 billion. We now estimate our full-year capital expenditures to be in the range of $3.3 billion to $3.5 billion, which has been slightly increased from our estimate made 12 weeks ago to account for the recent $340 million purchase of a distribution facility on the West Coast to enhance our big and bulky delivery operations. Now turning to e-commerce. E-commerce sales in the third quarter, excluding foreign exchange, increased by 38.2% year-over-year. Stronger departments included jewelry, home furnishings, sporting goods, hardware, and major items, which include everything from appliances to consumer electronics. Regarding Costco Logistics, we marked the anniversary of the purchase of Innovel, now called Costco Logistics, this fiscal quarter. Costco Logistics continues to drive sales of big and bulky items, with U.S. e-commerce sales of these products up 53% during the quarter. Costco Logistics fulfilled about 70% of all U.S. big and bulky orders, and we are also continuing to add new big and bulky vendors. Overall, we've improved delivery times for many items from up to 2 weeks to now 5 to 7 days in several cases. Additionally, we have shifted several items from vendor-drop shipping to direct importing, which helps us speed up delivery and lower prices for our members. From a supply chain standpoint, we are still experiencing impacts from port delays. We are using additional carriers in some instances to help mitigate this issue. There are anecdotal reports of shortages in containers and pallets, with a 35% to 50% increase in incoming containers this year compared to last year. This increase is partly due to pent-up demand following last year's low levels. The time it takes for a container to arrive in the U.S., deliver its contents, and return to a U.S. port to head back overseas has increased from about 25 days to 50 days. There are multiple factors contributing to these delays. Chip shortages are affecting many items from an inflation perspective, with some items being impacted more than others. Additionally, transportation costs have risen in relation to containers and shipping. Despite these issues, we continue to work to address cost increases and supply chain delays in various ways as effectively as we can. The main strategy we've employed to manage supply chain delays is adjusting our ordering and front-loading orders for many items. We believe we have that situation fairly well under control. This challenge is expected to persist for the majority of this calendar year. We have received numerous inquiries about inflation over the last few months. There are several inflationary pressures that we and others are experiencing. These include increased labor costs, higher freight costs, a surge in transportation demand, along with the container shortages and port delays I mentioned earlier, increased demand across various product categories, and shortages of everything from chips to oils and chemical supplies due to facilities affected by the Gulf freeze and storms, along with rising commodity prices. Some inflationary sound bites, if you will. Price increases on items shipped across the ocean with suppliers paying up to double for containers and shipping. Price increases of pulp, paper goods, some things up 4% to 8%, plastic and resin increases from trash bags to plastic cups, plates, et cetera, and plastic wraps. Metals, aluminum foil, mid-single-digit cost increases also cans for sodas and other beverages. Higher import prices on cheeses, the combination of the product itself as well as some FX strength of some foreign currencies as well as freight, anywhere from 3% to 10% increases on certain apparel items, not all. In terms of fresh, higher protein prices, for example, meat overall year-over-year is up 7%. Beef in the last month has been up as much as 20%. Some of that is due to feed labor and transportation costs as well as restocking some of the additional increased demand coming now from institutional needs as restaurants start to reopen. And the list could go on and on. Now all this being said, I was asked during our second quarter call on March 4 about our estimation of overall inflation for our goods. I mentioned that we believed it was in the 1% to 1.5% range at that time. Currently, we estimate that overall price inflation at the selling level, excluding gasoline sales, is likely in the 2.5% to 3.5% range. Some items have increased more significantly, while others have not yet changed in price, and some have even seen slight decreases. We feel we've managed this situation fairly well, but inflation pressures are still present. In terms of sampling and demos in the warehouse, we eliminated our popular food sampling and demo activities in our warehouses last March at the onset of the pandemic. As various states opened and closed last summer and fall, we tried a few sampling events. These included single-serve items like cookies and crackers, take-out only, no-cook to prepared sample items, and a few enhanced talking demos with items for display only. I'm happy to report that over the next couple of weeks, we're beginning a phased return to full sampling. This will come in waves. The first wave of locations, around 170 out of our roughly 550 locations in the U.S., will be activated by the first week of June, with most of the remaining locations returning by the end of June. The first wave will influence the speed of our rollout and the timing of any lifted restrictions. There may also be a few states with unique restrictions. Increased safety protocols are in place, such as preparing all samples behind plexiglass, in smaller batches for better safety control, and distributing them to members one at a time. The same applies to our food courts. I'm happy to share that our food courts will be returning more prominently over the next few weeks. Last March, as the pandemic began, we significantly reduced the menu to just hotdogs, pizza, soda, and smoothies, and removed all seating, offering only takeout. We have recently started to add back tables and seating at a few outdoor food courts in several states. Over the past few months, we've also added back a few more food items, including bringing back a new and improved churros, which will be at all U.S. locations by the 4th of July, and adding a high-end soft ice cream to replace our frozen yogurt. And by June 7, we plan to have tables in seating back at most locations, but with more physical separation, tables of four instead of six and eight, and about half the seating capacity as we had before. Again, these are still subject to doing this in waves and see how it goes, and subject to any additional state rules or restrictions in a few cases. Finally, in terms of upcoming releases, we will announce our May sales results for the four weeks ending the Sunday, May 30, on next Thursday, June 4 after market closes. With that, I will open up to questions and answers, and I'll turn it back over to Sarah. Sarah?

Good afternoon. Richard, you outlined a variety of inflationary pressures that you're seeing in the business. How is this going to impact Costco's gross margin over the next couple of quarters? Costco tends to move more slowly with changing prices than others. Should we expect this to be a pressure point, especially as you lap a period of strong gross margin gain given the good sell-through last year?

Well, Michael, we'll have to wait and see. Our view is that while historically we aim to mitigate those increases by working with our vendors and striving for efficiency to ease some of the pressure points, some of it will be passed through, and some of it has already been passed through. From a competitive standpoint, we believe it hasn’t really affected our margins significantly. For instance, our $4.99 rotisserie chicken and our $2.99 40-pack of water have remained the same despite some pressure on certain cost components of these items. While these factors are already having a slight impact on our margins, we don't think it will significantly impact our margins compared to our competition.

Okay. My follow-up question is on the value of the Costco membership. Amazon is enhancing the value of its membership with more media content. Walmart continues to focus on the value of its membership offering. Do you think these factors are influencing the pricing power that Costco has to raise the fees associated with either the gold or executive membership? And do you feel like there has been a sharp increase in the value of a Costco membership over the last four years is that as you approach the normal cadence of when you would typically raise your fees, you could do it this time again?

Sure. We primarily concentrate on enhancing value. I believe that some of the advantages we've experienced in our strong business over the past year, particularly during COVID, stem from being classified as an essential business. Additionally, the demand for fresh and food items, as well as home products, has significantly contributed. We’ve also gained market share, which revolves around providing value. Our perspective is that our model remains strong, focused on offering the best prices for high-quality goods and services. Our purchasing power continues to improve in this area. We’ve expanded our methods of sourcing merchandise, whether in-store or through the notable increase in e-commerce, especially with the acquisition of Costco Logistics, which we believe enhances our sales strength and competitiveness. From a value proposition standpoint, the value we provide to our members is consistently increasing.

All right. Thank you so much and best of luck.

Hey, Richard, the core on core, I think, you said up 27. And I know you don't guide on this. I just want to ask maybe about the puts and the takes, if you talk about other categories that are higher margin that have yet to recover on the positive side. And then on the other side, the spoilage and some other things that helped you last year sort of come back. So just kind of think are there more good guys, the bad guy and just another way to think about the gross margin core on core going forward?

There are various factors to consider in this situation. One of the highlights from previous quarters has been the strong margins in fresh foods, driven by increased labor productivity and reduced product spoilage. While we are still above pre-COVID levels, there has been a slight decline from the peak last year in Q3, yet it remains better than historical figures. Additionally, the non-food sector has shown continued strength, particularly since last summer when consumers began purchasing items for their homes. Looking at ancillary businesses, excluding gas due to its fluctuating nature, I expect to see margin improvements, particularly in optical and hearing aids compared to last year, even in Q4. The travel sector is also rebounding significantly as COVID improves, likely fueled by pent-up demand, and this segment, while a smaller part of our sales, tends to be a high-margin business. Overall, we are identifying various pathways to enhance our performance, including Costco Logistics, which has faced a marginal impact over the past few quarters but is now expected to improve as we move forward. These small factors may contribute to better results in the future.

I apologize for the background noise, but I have a brief question regarding inflation. It seems that while some retailers are increasing their prices, your prices have also gone up without lagging behind. Are you observing strong demand, or is the overall environment remaining rational, allowing you to raise prices concurrently with rising input costs?

First of all, we focus on what we can control. Many consumer packaged goods companies, particularly in paper products and beverages, have announced price increases, and a lot of these are sticking because we and other retailers recognize the associated costs. I believe we are well-positioned to manage this effectively due to our purchasing power and the limited range of products we carry. The fact that our competitors are also raising prices, likely as quickly if not quicker than us, is a good sign. We have also implemented some price increases on items that have seen a rise in costs.

Okay. Thanks, Richard.

Hey, it's Tracy Kogan filling in for Paul. I have a question about the customers you gained over the past year during the pandemic. I was wondering if you could discuss the demographics of those customers, the trends in their repeat purchases, and how their spending habits might differ from your core customer group. Thanks.

What's most interesting is that we are attracting the next generation of customers, including Gen Z and millennials. During the COVID period, we experienced a significant increase in same-day fresh delivery, particularly through our partnership with Instacart. We also offered two-day delivery for dry groceries and other items. Anecdotally, we've managed to gain additional members in this way. While the two-day delivery is primarily handled by UPS, we have attracted some members from outside our traditional geographic areas, but the numbers aren't large. Overall, we continue to see growth in adding new members to our existing warehouses, and opening new locations has also contributed, especially with our online next-day delivery of fresh items.

Richard, inventory dollars were up about 27%, which is much higher than your current levels. I'm curious if there's any pull forward of items. How do you feel about the current position right now?

I think it's interesting that last year we experienced a decline because we were caught off guard. While we were rushing to bring in merchandise, we also began to reduce seasonal orders, realizing that this situation would persist longer than anticipated. This included cutting back on patio furniture for the summer and certain Halloween and Christmas items. Eventually, we discovered that we actually needed more inventory. So, some of the lower figures may be attributed to that. As I mentioned earlier in the call, we are pleased to have some extra inventory due to our strategy of buying early.

Okay. Great. That makes sense. And then just on the consumer. Curious what you're seeing over the past few weeks or maybe the past couple of months from a behavior perspective, both frequency in your clubs, basket sizes, particularly in states that are further along in the reopening process.

It’s challenging to make sense of everything because many events were occurring last year around April, May, and June. We noticed that states that reopened slightly earlier, like Texas and Florida, experienced a bit more shopping frequency sooner, but it wasn't significant enough to draw any strong conclusions. There was a trend, yes, but we weren't ready to say that would happen everywhere. Even in states that had remained more closed, the U.S. has opened significantly in the past month or month and a half, which is reflected in the new CDC guidelines. I also think that the arrival of spring weather and the pent-up demand to get out and do things played a role. I believe a lot of these factors are already influencing the situation.

Okay. Great. And then just last one for me. COVID costs were down meaningfully here in the third quarter. I'd imagine relative to the $281 million that you booked in the fourth quarter last year, you'd expect them to come down a lot. Is that a fair assumption for 4Q?

Yes, a significant part of that is the $2 an hour premium, which has been removed. Additionally, there will still be an element related to the $1 permanent wage increase that we implemented.

I'm following up on the previous question. When examining your sales growth in comparison to your SG&A growth, and considering that you had the $2 for part of the quarter, there seems to be a significant gap compared to what we've seen historically, even before COVID. I'm curious if you could provide insights on that specifically and how we should interpret this moving forward. Additionally, I have one other question.

Sure. First and foremost, it's about strong sales. We understand the benefits of operating leverage when we achieve a 7% comparable sales growth instead of 4% or 5%, and we are currently experiencing those positive comparisons, which is the main factor. In this quarter, healthcare costs were likely a bit higher because people did not attend their routine doctor visits a year ago in the third quarter, which impacted us somewhat. However, what mitigates those minor issues is our strong sales and stable labor costs.

Okay. And then...

Gas as well, taking gas inflation out of there would reduce that a little bit.

Right. Okay. And then just my second question or actually maybe 2 more, with respect to the membership fee, obviously, recognizing the value of membership fee to your members, how are you thinking about the timeline on the next possible increase just because I think we did anniversary what would be the 5-year mark?

No. Actually, the 5-year mark is next June.

Okay. How are you considering that from a philosophical standpoint?

Philosophically, I have had time to not think about it for several months. Jokes aside, we feel confident about our member loyalty. With our renewal rates, we are very pleased with our competitive position. However, we really haven’t put much thought into it yet.

Okay. And then just my last question. In terms of e-commerce, you provided a good percentage of sales and the growth that excludes third-party contributions. Can you give us a number and an update on where that stands when including third-party in food?

Yes. I think it's probably not as impactful now. The third party, especially the same-day fresh delivery, really peaked around last May or April. It was a huge increase, about ten times, but it has now probably halved, which is still significant compared to pre-pandemic levels. So, it’s not as impactful as it used to be. A couple of quarters ago, we reported an 86% increase in e-commerce. We mentioned that if we included items like same-day fresh, which third parties purchase and deliver, that 86% would have approached 100%. If I'm estimating, it might be around 5 to 8 percentage points, certainly not 15.

Richard, let me start, Costco Logistics, where are you guys now with capacity utilization? And where will you be when you add this new facility? And to the degree that costs are coming down, have you yet invested in price? Or are you investing more in delivery timetable, quickness of delivery?

We have been making significant improvements, although we do receive a few complaints each day from occasional mistakes. We took an aggressive approach to pricing right from the start. It's similar to how we enter new markets like France or Spain, where we price low in less efficient departments like fresh goods as if we were handling a larger volume. This strategy has initially posed some challenges as we adjust our pricing for items like mattresses or furniture deliveries before we can fully implement our plans. Fortunately, this is starting to balance out. Regarding capacity, we currently have a substantial amount of it, with about 70% of our large items being delivered through Costco Logistics. Some of the deliveries were handled by third parties, and while that was working out fine, we are now managing these deliveries ourselves. This segment is experiencing strong growth not just for us but across the entire industry, including furniture, home goods, exercise equipment, and televisions. We believe we have significant capacity available. The facility we acquired operated at less than 50% of its previous capacity a few years ago, but it's important to note that these numbers are not directly comparable. Our new facility encompasses a large space that enables us to handle more oversized items, especially since many of these products come from overseas and are bulky. Located on the West Coast in California, this facility will support our continued growth in this business segment.

And then just real quick, lastly, the cold and frozen delivery program, the 2-day program, how is that being fulfilled? And how do you think about that conceptually, right, in terms of consumer uptake versus the dry grocery that you did previously?

It's really too early to provide an update. We just started three weeks ago, and this was an initiative from our team. We believe it aligns well with the needs of our business customers, so we'll have to wait and see.

So Richard, I wanted to revisit the discussion about the big and bulky items we talked about earlier. I'm hoping you can provide some insight on the opportunity. Clearly, you are investing significantly in this area. Can you share what percentage of your sales currently comes from those items and where you anticipate it will go? How much do you think you can increase sales? I'm curious if you can provide any details to gauge its potential, as it's clearly a major focus for the company and involves substantial capital investment.

Yes, I don't have that detail in front of me. We're seeing 30% and 50% increases on items within some of those categories, everything from outdoor patio furniture or indoor furniture to mattresses to exercise equipment, the TVs along the way.

And is your expectation to bring in more vendors? And I don't know how many SKUs you're offering, but will you have more SKUs? And how are you thinking about advertising at your membership base?

Well, yes, I mean, first of all, I think that when we look at our 3- to 5-year plan, we think there will be outsized growth certainly for the next 3-plus years, we'll see. In terms of adding SKUs, yes, but we're not going crazy. Certainly, there's more SKUs online furniture sets, sofa and chair sets. We might have 1 or 2 on display, sometimes, in a warehouse, we'll have a dozen or so online. So we are adding both vendor names as well as additional selection, but still greatly limited relative to the traditional retail of those items.

Perfect. And then my second question is something we've talked about all the time, and I could go at it again. It's just on the openings. I know you said 25 this year over '22 and 25 in '23, I guess. I mean obviously, our research suggests you guys could do a lot more. And I know we've talked about the, I guess, the hard thing of getting the right locations and everything else. But what would it take to get that to 30 to 35, again on a more permanent basis? And is that something you guys would kind of strive to do? Because clearly the market opportunity is there.

I believe that some countries experience a slower pace and face challenges, but we have strengthened our efforts. This is one reason I indicated we would aim for 25 in each of the next two years. We feel fairly confident about all the projects we currently have underway in the U.S., Canada, and other regions. We have many initiatives in progress. However, moving from 25 to 35 is not something we are ready to commit to just yet. Could it happen? Yes. But in smaller countries, we prefer to proceed cautiously. We have accelerated our pace in China, with two locations either already under construction or soon to begin construction, expected to open in the next 18 months. This is a faster timeline than we typically follow. You can anticipate more announcements from us in China and other areas in the coming quarters.

This is actually Erica Eiler on for Rupesh. So first, I wanted to touch on your services business. As we look at travel and optical and food court, is there any way you can help us frame, at this point, how much of your service businesses have recovered versus 2019 levels?

There are several factors to consider. In the travel sector, last month we experienced around 10 of our top 15 days in history, which is notable even compared to the holiday season in 2019. This surge is largely due to pent-up demand, and we will have to see how it stabilizes. Currently, while car rentals have improved, cruises are still lagging behind but are starting to receive bookings again. We initiated significant efforts months ago to negotiate and present attractive deals on U.S., Mexico, and Hawaii vacation trips. Bookings are strong, although they have not yet translated into revenue. In the hearing aid sector, we faced similar challenges when fitting sessions were limited due to the need for direct contact. There has been considerable pent-up demand, which we are still observing, similar to what we're seeing in the optical sector. We expect this to normalize, but time will tell.

Okay. Great. And then your food categories have held up really well in spite of lapping the difficult comparisons last year. So maybe just an update on how you're thinking about food-at-home consumption from here.

Well, I mean, our 40,000-foot view of that is that what was gained because of food away from home stopping a year ago, and while it picked up some with takeout and delivery, it's now starting to improve a little bit, but some of that's going to be sticky. I don't know what the exact number is going to be, but our view is, is that it still certainly hasn't reverted back. I mean restaurants are just beginning to open in a bigger way. In many cases, still people are reluctant to go in. In many cases, the tables are further separated. So some of that's going to continue for the next 6-plus months, is my guess. Beyond that, when all is said and done, will some of it still be sticky? Our view is probably the fact that we, as a company, have done a pretty good job of staying in stock and certainly the quality of our fresh foods, I think that we've not only benefited from that. I'd like to think that we gain market share from other traditional food retailers in that regard, particularly on the fresh side.

Richard, first, just wanted to ask about executive membership, the penetration, I guess, up over $800,000 this quarter. This is high as I can see it in our model here. Just was curious if that's still happening in a meaningful way in the U.S.? Or if there's any other countries? And just any color you can provide on that point.

One factor that was a bit unusual is that over the past year, we expanded executive membership to Japan, where we now have 29 locations, including 2 new ones this quarter. Overall, we continue to improve at enrolling people as executive members, effectively communicating its benefits, and achieving a higher conversion rate among every 100 new members who sign up. Within the total of 817,000 new members, just under 200,000 were from Japan. Even without that, the remaining numbers were still very strong for the quarter. Okay. That's helpful. And then just any update on the pickup test that's happening? It's still a test. We're still just doing it in New Mexico in 3 locations. And the utilization of it, when we first did it, we marketed a little bit. The utilization has not set the world on fire in terms of where it's trending.

So Richard, you mentioned the negative impact on renewals from the Chinese store lapping. Are they renewing at about the same pace that you would normally expect first year renewals relative to prior store openings in new geographies?

One unique aspect over the past 15 years when we've opened in new countries is the significant number of new sign-ups, which sometimes just feels fortunate for us. Initially, this results in a lower-than-average renewal rate. Looking back at the 7 or 8 countries outside of the U.S. and Canada, we see that, unlike the U.S. or Canada where we might add between 5,000 to 20,000 members in the first year, in places like Korea, Taiwan, Japan, and mostly China, we experience 50,000 to 100,000 new member sign-ups upon opening. A year to 1.5 years later, as that initial group begins to renew, we aim for an 88-plus worldwide renewal rate, with the U.S. and Canada at 90.1. The renewals in the first year could range from the high 50s to the mid-60s. While I don’t have specific numbers for China, it follows a similar trend, and we have around 400,000 members at that single location. Keep in mind, this is a very large city, and Costco was already a well-known entity, despite it being our first store. All these factors have influenced the overall worldwide renewal rate.

Understood. Regarding the approximately 30 basis points decline in core margins excluding gas, you noted that this is partly due to the sales shift back to lower-margin ancillary business. Was this the quarter where we experienced the most significant move away from ancillary, or should we expect to see a similar impact as the year progresses?

I think Q3 was probably the most. It will still be impactful in Q4, probably not as much.

Two questions. First on e-commerce and multichannel. Do you have an update on the penetration now for e-commerce? Is it 10% or close? And what are you seeing in terms of the percentage of members that use multichannel and what their renewal rates look like, if they're any different?

First of all, I think it's about 7.5 or 8, and part of that is the huge shrink in gas.

Got it. What percentage of members actually use the multichannel offering, such as 2-day or Instacart? Is it a majority that have used it? Also, what are their renewal rates like after using multiple channels?

Approximately 45% of our members have engaged in e-commerce, and the renewal rate for these members is slightly improved. I am referring specifically to existing members who have utilized e-commerce, not new members who have just recently signed up.

Got it. That's great. I just want to confirm my understanding of the second question regarding gasoline. Do you have the growth number for gallons? And how did penny profit perform? I realize it impacts the mix, but can you provide insight on where we currently stand with gas inflation?

Gas profits decreased this quarter compared to last year. If you recall, in the third quarter of the previous year, there was a significant increase in demand for gas during the first few weeks, resembling a frenzy due to pre-COVID hoarding behaviors. While pricing became less competitive after that initial spike, we still had a robust profit and loss statement. This quarter's gas profit was decent, but last year's performance was notably stronger.

Got it. And so the pressure on any penny profit that you can get when gallons are recovering, I mean gallons are recovering now. Are we at that stage?

Yes, very much so.

I want to know, do you have any data you can share about the demographics or income levels of the new members that you've picked up in the past year? Is it trending any differently than your typical new member growth? Is it younger? I think Tracy kind of asked this question already, but I wonder if you had any specifics. And then lastly, I wanted to know, do you think you've got any benefit this quarter from consumers having just more money in their pocket from stimulus payments? Or is that not really characteristic of your membership?

I don't have the economic average income demographics available. When we compare new member sign-ups now to a year ago and even to two or three years ago, we are still attracting a fair number of younger individuals, possibly even younger than before, likely due to the influence of e-commerce. However, there has not been any significant change. Regarding any benefits from unusual stimulus in the past, we've observed that we haven't experienced as much of an advantage compared to other discounters or general merchandise retailers. While it likely has helped us to some extent, it hasn’t had as strong an impact as it has for others.

Richard, for my first question, considering the sourcing challenges posed by the pandemic, I’m interested in your updated views on your vertical sourcing initiatives. Are there any aspects being accelerated or delayed? What’s the latest information you have on this?

Yes. I think that having two meat plants, a chicken plant, a bakery commissary, and a couple of optical grinding labs has been beneficial for us. They are operating at full capacity. When feed costs increase, like in the chicken plant, we do experience some changes in those costs, but we don’t fully hedge against them. Overall, we have managed those costs quite well.

No. Yes, I was just wondering if you accelerated any initiatives that you maybe had in the pipeline, given what you've seen in COVID? Or if there's been any maybe new areas of the business that you maybe weren't considering vertical before, but maybe now you are?

Yes. I think the major aspect that has surprised us is the whole Costco Logistics side. For various reasons, including our ability to manage it ourselves and control delivery times. Additionally, there are several items that we've traditionally drop-shipped, where the supplier holds the inventory and handles shipping, which incurs costs. As we grow and increase our volume, and manage some of these processes directly, we can enhance delivery times and reduce prices, and we have observed that improvement. We are making progress in insulation and will continue to focus on that area. Currently, there are no plans for a major new chicken plant. However, we will be investing significantly in fulfillment, distribution, and logistics as mentioned regarding our capital expenditures. I also wanted to highlight one more point, but it has slipped my mind. Let's take two more questions.

No worries. Richard, just one follow-up on self-checkout, that effort you have. How penetrated is that across the chain right now? And what's been the member feedback? Are you guys pleased with the service you're giving there? Obviously, volumes are really high through the club, so I'm just curious on that.

Self-checkout is effective and is implemented in over 90 percent of our warehouses. I have observed locations that initially had six self-checkout units, arranged in two stacks of three, and now we have increased that number to nine and twelve in some locations. This indicates that it is functioning well. Customers appreciate it and it enhances both frontline operations and service quality. Additionally, it is cost-effective.

This is Jake Chinitz on for Scott. I know you've done a couple of things to stay more in touch with members, especially on the e-commerce side, for example, building a database of updated member e-mails. So can you just give us an update where that may be from a progression standpoint? And any results you've seen from that?

I think we're making progress, especially with improvements to our mobile site and enhancing our service and communication with our members. In the last year, we've increased the number of email addresses by 24%, which has led to higher conversion rates. We're also implementing more strategies in the warehouse to drive online traffic. I believe these efforts are effective, and we will continue to enhance our mobile experience. I'll make sure to address the phases of upgrades to our mobile site in the next earnings call, as I mentioned in the Q2 call, which will span from September and continue over the following months. I recognize these efforts are similar to what others have already implemented, and we're just now starting to make these improvements. Let's take one more question before we wrap up.

Just first one for you, Richard, on timing and next openings in China. Any more detail on when that next door is going to open? And then you talked about good news coming on pace of maybe opening beyond that. Thoughts on the potential to accelerate there now that you've had that first store open for a while?

Well, yes. Our initial plan was to open one store, and looking ahead five years, we thought we might have three. However, I believe we will aim for a slightly higher number now, possibly four or five. We have several projects in progress, but the two mentioned are already signed, sealed, and under construction. And the next opening, when is that scheduled for? I believe the fall, hold on a second. Late next summer. Yes, calendar '22, which would be Q1 of '23. Could you please remind us about your business customer mix? What are you observing in that customer segment as the situation begins to improve? Do you believe there is any lasting impact on that business, or do you anticipate it will rebound as things reopen? There are fewer businesses now. Over the 37 years we've been in business, in our early years, the ratio was likely 75-25 or 80-20 in favor of business to consumer. Consumers used to purchase many institutional items. Today, while we still operate as a wholesaler and value our business members, the ratio has flipped to about 75% consumer. One reason we've established our business center is to focus more on this shift. In fact, all three openings in Canada this past quarter were business centers, and our deliveries are beginning to improve. I don’t have the exact statistics, but among small restaurants, whether food trucks or takeout, there may have been a few closures, maybe 10 or 20 out of every 100, but many have started to reopen. So there may be some challenges, but we believe that some aspects of the business, including beyond food, will remain reliable for us. I would like to just say one last thing. At the end of the call before opening it to Q&A, I mentioned that our May sales release for the 4 weeks ending May 30 would be on Thursday, June 4. It's actually Thursday, June 3. So thanks for that correction. Thank you, everyone, and have a good day.

This concludes today's conference call. Thank you for participating. You may now disconnect.