Good day and thank you for joining us for the Q1 Earnings Call. All participants are currently in listen-only mode. I would like to turn the conference over to your speaker today, Richard Galanti. Thank you. Please proceed.

Thank you, Anne, and good afternoon everyone. I want to begin by pointing out that our discussions will contain forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995. These statements carry risks and uncertainties that could lead to actual events, results, and performance differing significantly from what is indicated. These risks include those discussed in today's call as well as other risks acknowledged in the Company's public statements and SEC filings. Forward-looking statements are valid only as of the date they are made, and the Company does not commit to update them unless legally required. In today's press release, we shared our operating results for the first quarter of fiscal '22, covering the 12 weeks ending November 21st. Our net income for the quarter was $1.324 billion, or $2.98 per diluted share, compared to $1.166 billion, or $2.52 per diluted share last year. This year included a cash benefit of $91 million, or $0.21 per share related to stock-based compensation, and a write-off of certain IT assets of $118 million, pre-tax or $0.20 per share. Last year included tax benefits of $145 million, or $0.33 per diluted share. Of that, $0.16 was due to the deductibility of the $10 per share special cash dividend paid to the company's 401(k) plan participants, and an additional $0.17 was related to stock compensation, along with increased expenses for COVID-19 premium wages of $212 million, which affected last year's quarter by $0.35 per share. Net sales for the quarter rose by 16.7% to $49.42 billion, compared to $42.35 billion during the same period last year. Same-store sales for the first quarter were reported as follows: In the U.S., there was a 14.9% increase on a reported basis for the 12 weeks, and when factoring out gas inflation and FX impacts, an increase of 9.9%. In Canada, there was an increase of 17.2% ex gas and FX and an 8.3% increase on a reported basis. Other international sales showed a reported increase of 13.4% ex gas and inflation in FX, with a 10.9% increase on a reported basis. Overall, the company reported a 15% increase on a comparable basis and 9.8% increase excluding gas and FX. E-commerce sales reported a 14.3% increase ex FX and a 13.3% increase in total. For Q1 comp sales metrics, traffic worldwide increased by 6.8% and in the U.S. by 5.9%. Our average transaction value or ticket increased by 7.7% worldwide and 8.5% in the U.S. Excluding the positive impacts of gas inflation and FX, the average ticket increased by 2.5% worldwide and 3.5% in the U.S. Foreign currencies relative to the U.S. dollar positively affected sales by about 90 basis points, while gasoline price inflation affected sales positively by approximately 430 basis points. Now looking at the income statement, membership fee income for the quarter was reported at $946 million, an increase of $85 million or 9.9% from last year's figure of $861 million. Ex FX, the $85 million increase would have been $80 million, with a 9.9% increase equating to 9.3%. In terms of renewal rates, our U.S. and Canada rate was 91.6%, up three-tenths of a percent from the Q4 figure, and the worldwide rate was 89.0%, also up three-tenths of a percent from Q4. Renewal rates are benefiting from more members auto-renewing and higher penetration of executive members, who renew at a rate higher than non-executive members. As for membership numbers at the end of the first quarter, total paid households were 52.5 million, an increase of 800,000 from the previous quarter, and total cardholders reached 113.1 million, up 1.5 million from the prior 12 weeks. Paid executive members totaled 26.5 million at Q1 end, an increase of 836,000 over the 12 weeks since Q4. Executive members represent 42% of our membership and a little over 70% of our sales. On the gross margin line, our reported gross margin for the first quarter was down year over year by 49 basis points, and excluding gas inflation, it was down by 6 basis points. I encourage you to note a few numbers. There are two columns showing reported year-over-year figures for Q1 and then without gas inflation for the same period. The first line would be core merchandise, which was down 63 basis points on a reported basis and down 26 basis points without gas inflation. Ancillary and other business showed an increase of 2 basis points reported and a rise of 12 ex gas inflation. The total reported basis margins were down 49 basis points year-over-year; excluding gas inflation, they were down 6 basis points. For core merchandise, the gross margin was lower by 63 basis points year-over-year and 26 basis points excluding gas inflation. Last year in Q1, core merchandise was up 83 basis points on a reported basis and up 66 basis points without gas inflation. Thus, we retained a significant portion of the improvement from two years ago in the core. For the quarter, our core margins were lower by 18 basis points, with non-foods being slightly up and food sundries slightly lower. Fresh foods were a primary driver of the lower core margins this quarter, bouncing back from last year’s significant labor productivity and low product spoilage due to external sales. In terms of SG&A, our reported SG&A in the first quarter improved year-over-year by 66 basis points, and by 29 basis points excluding gas inflation. Operations showed improvement by 40 basis points reported and 11 basis points ex gas inflation. Central reporting was better by 10, and without inflation, by 6. Stock compensation improved by 2 and worsened by 1 across both columns, and other improved by 14 and 13 basis points respectively. This performance gave us a total SG&A reported improvement of 66 basis points and 29 basis points excluded gas inflation. The core saw improvements of 40 basis points and 11 excluding gas inflation. Note that these results include the permanent dollar and hour wage increase initiated in March 2021 and four weeks of proposed starting wage increases that began this past October, raising wages from $16 to $17 and $15 to $18 for our key hourly employees. The changes took effect on October 25 and four weeks of those changes were included in Q1. Next regarding preopening expenses, this year in the quarter, the figure was $28 million, up from $22 million last year, reflecting a $6 million increase. Overall, reported operating income for the first quarter grew by 18%, reaching $1.693 billion compared to $1.43 billion last year. Interest expense remained unchanged at $39 million each for the first quarters of fiscal '21 and '22. Additionally, interest income and other for the quarter increased by $13 million year-over-year, driven by favorable FX. Total reported pre-tax income for Q1 was $1.696 billion, up 19% from $1.42 billion in the same quarter last year. Our tax rate for the first quarter of '22 was 20.7%, compared to 16.8% in Q1 last year. Both years benefited from favorable tax treatment of stock-based compensation, which was $91 million this year and $75 million last year. Last year’s tax rate was also positively influenced by the deductibility of a special dividend to the company’s 401(k) plan participants. For fiscal '22, the effective tax rate excluding these discrete items is projected to be between 26% and 27%. Looking at warehouse expansion, we opened 22 units for fiscal '21, resulting in a net increase of 20 units. In the last quarter, we opened 9 units, including a relocation, so net openings were 8. For the remainder of the year, we plan to open 23 new units, including 4 relocations. Recently, we've opened our second Costco in France on December 4 and our second location in China yesterday, along with openings today in Florida and our fourth unit in Spain. Our capital expenditures for the first quarter of fiscal '22 totaled approximately $1.05 billion, and our full-year CapEx is projected to be about $4 billion, which is an increase of over $400 million from last year's total of $3.6 billion. Most of the increase comes from international spending on new warehouse expansion and enhanced investment in logistics and e-commerce fulfillment operations. E-commerce sales grew in the quarter by 13.3% year-over-year, building upon a prior year growth of over 86%. Strong sales performances were seen in jewelry, tires, and home furnishings. Our largest merchandise department in terms of sales, which includes consumer electronics, TVs, appliances, etc., experienced high single-digit growth after a particularly strong year earlier. On Costco logistics, deliveries increased over 50% and now represent about 70% of our U.S. e-commerce big and bulky shipments, averaging more than 50,000 stops per week. This year, we project more than 3 million stops, which includes services from delivery to installation and removal of old units. Our e-commerce mobile app continues to improve, with additional features and redesigns implemented. Members can now view warehouse receipts online, link their co-brand Citi Visa card to their digital membership card for payments, and reschedule e-commerce deliveries much more easily. We’re also introducing new e-commerce kiosks in warehouses, improving the labeling of fulfillment methods, and continuing to expand e-commerce lockers, with plans to more than double locations during the 2022 calendar year. We recently launched a program called Costco Next, functioning similarly to our in-person road shows but online, with 34 growing suppliers offering just under 1,000 curated items. From a supply chain perspective, we are still facing issues with delays and shortages affecting inventory, including delays in import containers, with 79% late by an average of 51 days. Although we have been able to maintain inventory levels to some extent, challenges persist with various components and materials. Chip shortages are still affecting several items, and while certain inventory delays may extend seasonal availability, we believe we have done well to mitigate costs and price increases as much as possible. On inflation, we continue to face various pressures, including labor and freight costs, container shortages, and product demand increases. Based on discussions with our merchants, we estimate price inflation for Q1 '22 to be in the 4.5% to 5% range, a slight increase from last quarter's estimate. Our success in mitigating some of these challenges reflects in our strong operating results. Holiday merchandise has performed well, although timing can impact sales. Product categories like pet supplies, alcohol, and consumer electronics continue to see strong demand. Apparel sales have shown much stronger growth compared to last year’s flat performance. Lastly, our sustainability commitment website has recently undergone significant updates, and I encourage everyone to check it out. We will announce our December sales results for the 5 weeks ending January 2 on January 5 after the market closes. Now, I’ll open the floor to questions and turn it back over to Sadie. Thank you.

For our first question, we have Michael Lasser from UBS. Michael, your line is open.

Good evening. I appreciate the opportunity to ask my question regarding the 4% to 5% inflationary increase across your product range. Typically, Costco has been slower to raise prices compared to others, and this seems consistent with the trends in the retail sector. Has your approach to passing along price increases changed? If so, why? Additionally, does Costco currently have more pricing power than ever before, considering the pricing differences between you and other competitors in the market?

Well, I think as it relates to passing on, we've always said we want to be the last to raise the price and the first to lower the price, recognizing there's a limit to what you can do based on these cost increases. First and foremost, I think because of our relative purchasing power and our relationships with our vendors, we with our suppliers work to mitigate those increases in any way, shape, or form we can. Ultimately that may include us taking a little less markup. There's no complete, consistent answer throughout as you might expect. But overall, I think we've done a relatively good job of that and there is inflation in those numbers. Those numbers are kind of a combination of our cost increases as well as our some price increases, and again, it fluctuates there. For every few examples of something going up, there may be an example of something flatter, going down a little bit for unrelated reasons. And so again, it's a best guess, it's fluid. We saw inflation starting several months ago in a bigger way, I think, in our fiscal Q4 this summer, and continuing into this fiscal year and as we all have read articles, general articles out there about certain different major consumer product manufacturers announcing increases and continuing to do so. So I think it's going to continue, hopefully, we're getting towards the top and it will start flattening out and subsiding. But we'll see.

My follow-up question is with the core merchandise margin ex fuel and core on core gross margin getting less bad or declining at a lesser rate, this quarter than last. Is this a sign that the margin here is stabilizing? And do you think Costco exits the pandemic with a structurally higher gross margin than it had in the past, or are all these dynamics simply a function of what you've often said, which is when overall retail margins go up, go to Costco for just a little less than others? Thank you.

I believe I'm the last to comment on that point you made. Ultimately, I think we have gained market share, and hopefully, a significant portion of that will stick. The primary factor affecting our margins is not just buying power, which I believe is unparalleled given our sales of about $200 billion across 4,000 items, compared to competitors handling hundreds of thousands. Additionally, achieving higher sales productivity, especially in fresh foods, contributes positively to our margins. We aim to retain some of that momentum to enhance our competitiveness and potentially expand our model. Some of these advantages seem to be structurally embedded. However, as a well-known TV actress once said, there will always be challenges to address. We're committed to navigating those. Overall, we feel optimistic about some recent structural benefits that may support us moving forward, but the future is uncertain, and we’ll have to wait and see.

Great. Thank you very much and have a good holiday. Thank you.

For our next question, we have Simeon Gutman from Morgan Stanley. Simeon, your line is open.

Hey, everyone. I'll be Simeon for this call. My first question is actually a follow-up to Michael's second question. Maybe I'll ask it a different way, Richard. The 2-year core on core looks like it's actually getting better. And you said it yourself, you thought you did a pretty good job on it, and it looks like you are. So if we're kind of getting it feels like you're managing through the worst of it. And the environment may be getting better at the margin. I don't want to go too far and say that, why shouldn't this be the worst for the core on core notwithstanding comparisons, but the minute they get harder, but then they start to get easier.

Yes, I think that's how the story unfolds. While there will always be challenges, we feel confident about the structural achievements we've made. This includes gaining market share with increased sales levels, and we have not halted our innovative efforts with suppliers to enhance value. There are numerous examples of this, but ultimately, we are continuing to create value in various ways, whether that's through changing packaging, leveraging our volume, or relocating some production globally to expand our advantages. I agree that the narrative you mentioned is currently developing well, and I hope it continues that way.

Fair enough. My second question is more on SG&A and the business's leverage point. We used to chat about, Costco, always doing mid-single digit comps and that's good enough to cover the SG&A dollar growth. I think this quarter, the business did about 6.5% dollar growth adjusted. And you're going to have some of these wage investments that don't annualize well, maybe not to the middle or to closer to the end of the year. So I'm trying to get at what a normal post-COVID SG&A rate may look like. And then, does that mean it's sort of that mid-single-digit comp rate that leverages those expenses, I think is related to the probably the best estimate and I say guesstimate not estimate on where do you start? Where's the inflection point of leveraging SG&A probably still is in that mid-single-digit range. Beyond that, who the heck knows. I mean, we've been able notwithstanding some of these increases. We've been particularly in wages, we've been able to in strong comps have helped help these numbers. But I think we feel pretty good about having the sales volumes that continue to be able to leverage those expenses. So as soon as we find out, we'll let you know. But again, we're feeling pretty good about things at this juncture. And at some point, I would assume comps have to come back to hopefully better than pure average, but something back to where they had been pre-COVID, but on a higher base, and even that helps you a little bit.

You too.

For the next question, we have Christopher Horvers from JP Morgan. Christopher, your line is open.

Thanks. Good evening, everybody. So, I wanted to ask a little bit about your thoughts on holiday pull forward. Obviously, you saw an acceleration in trend on a 2-year basis in October, and then November things obviously, still amazing comp and gaining share. But trends decelerated and it was sort of against what was a weaker, I think, end of the month last year. So, can you talk about, like, what do you think is driving that? How do you think about the rest of the holiday season? And as you think about a consumer that's going to lap a bunch of stimulus in the first half of next year, what are your initial thoughts on how that all could play out?

November's comparisons were slightly below expectations, but still strong, only a couple of percentage points off from the previous months. It's likely some of that was brought forward. The numbers varied week to week last month, but overall, we are pleased. While there was a slight reduction in expectations, the results were better than anticipated. I'm particularly confident about our inventory levels. Recently, our senior merchant noted that we are better stocked than anyone else. This is partly due to our limited selection; as an item-based business, we can easily adapt. For instance, I received a call from a reporter asking about our cream cheese supply due to ongoing shortages affecting bagel shops. I checked, and despite the challenges elsewhere, our buyer confirmed we have all the cream cheese we need. We're doing well with our merchandising efforts.

Got it. As you reflect on last year and the stimulus, do you think that as we approach Christmas and New Year's, the consumer will likely return, especially since more people may be entertaining, similar to what you mentioned regarding baking? However, when January and spring stimulus comes around, do you believe your business benefited from the stimulus last year?

It likely had a positive effect, but not significantly. Historically, we've seen some influence from stimulus measures, and while we haven't been as affected as others, we have felt some impact. If there's a decrease in stimulus next year, it’s hard to predict what will happen to the stock market and people’s financial sentiments. That could alter things slightly. However, we're feeling optimistic here because we've demonstrated resilience over the years, performing well in both good and bad times. During prosperous periods, people tend to spend more, while during tougher times, they generally save more. This cycle allows us to introduce new products and services that we may not have previously offered. In our unique way, we sometimes gain from both good and bad conditions, and currently, we have a positive outlook on the future.

Oh, by the way, regarding what Bob just mentioned, even if some challenges arise, such as a reduction or elimination of certain stimulus items, the supply chain will eventually improve. As capable as our members are, we could perform even better with a greater supply of certain items. Despite some non-food categories seeing increases of 20% and 30% or more, the buyers still notice that we're running out of products and could do better with more inventory. This situation isn't unique to us; it affects everyone. However, I believe that any improvements in the supply chain will help mitigate the impact of other negative factors.

Got it. Thanks very much and enjoy the run on cream cheese at the clubs this weekend. Take care.

Historic.

For our next question, we have Chuck Grom from Gordon Haskett. Chuck, your line is open.

Hey, Richard and Bob team. Hope you guys are doing well. Question on leverage. If we back up the one-time charges in the quarter, it looks like you enjoyed over 100 basis points of improvement year-over-year and 65 basis points last quarter. And fully realizing the comps on a stock basis were better, but wondering if some investments or other costs may have rolled off. Just some thoughts on that front.

I believe the main factor is simply the leverage from sales growth. Excluding the specific COVID-related costs we discussed, one element not mentioned in the press release is the dollar-an-hour increase we implemented in March, along with a new increase that had a minor effect in Q1 since it started six weeks ago. In that context, nothing particularly stands out to me. My estimate, looking at my team here, is that strong sales would be the primary factor.

Okay, fair enough. So far in 2022, 14 retail locations have opened. This means you are more than halfway to your goal, which is fantastic. I'm curious about the broader perspective. Have there been any discussions about adding stores in your existing markets, particularly in higher density areas where some stores may be reaching their limits in terms of productivity and volume?

I think the answer is yes. I expect there to be small, methodical increases in that area over the next several years. In the past, we discussed having around 400 warehouses with an average capacity I’m guessing was about 180. Now, several years later, I believe the average is in the high 200s in the U.S., at least. We have a number of units in the 300 to 400 range, not in the hundreds but in the tens. We are looking for more infill and have been executing on that. If we were doing 3 to 5 a year or 3 to 7 a year over the last five years, could it be 5 a year going forward? It's possible, but I don't have that specific detail available.

Okay, great. And then my last one is just a follow-up on Chris's on November. I believe you guys did call out that there was some moderation in retail inflation, maybe 150 basis points or so. I’m just wondering if you could provide any color on where that retail inflation came in. And I guess why that happened? Was it self-inflicted, just wanted to get some color there.

One thing that was a little lower was from the increases in food and sundries and some food sundries items in fresh. That had spiked even more, it's still up year-over-year, but it spiked a little, it came down a little bit from where it had been. And then we haven't quantified anything specific beyond that.

Okay. All right.

Their suppliers are indicating that we can expect more increases in January and February. However, this does not align with what I have read in various business publications.

Okay. So just a lot of timing differences. Okay.

Yes.

Great. Thanks. Thanks a lot.

For the next question, we have John Heinbockel from Guggenheim. John, your line is open.

So, Richard, how is KS performing and what happens or how do you think about it in an inflationary environment, in terms of how you take price versus like items on the national brand side? And does KS do better in an inflationary environment?

Many of our KS items are available in large volumes, similar to the large volumes we handle with branded CPG products. We are actively working on both fronts to mitigate cost increases. KS continues to grow at a slightly faster rate than others, but the difference isn’t significant. We are consistently discovering new items to offer under KS for various reasons, which helps to drive the brand. However, we don’t see any major changes in this regard.

Okay. Secondly, you're talking the 70% on Costco Logistics is 70% of your needs. You're at what capacity in logistics? Is it still 50%? Or has it crept above that?

It's around 50%, possibly a little higher since we acquired what is now Costco Logistics a year and a half ago. We have transferred a significant amount of volume and expanded our total needs. I believe we are slightly above the original 50% capacity we estimated at that time, and we have ample capacity for the coming years. We are investing in this area, having spent approximately $340 million within our capital expenditures on a large distribution facility in Southern California, which spans 1.6 million square feet for various requirements. This includes a significant portion related to the Innovel acquisition in early 2020, where we obtained over 10 million square feet of leased space nationwide. While much of this is suitable, not all locations are perfectly aligned geographically; notably, our larger sites are located where we have a stronger presence compared to areas where competitors, like Sears, historically had their business. We continue to invest in upgrades, and from a merchandising perspective, we are very optimistic about our progress. This expansion has significantly benefited our business, particularly given our relatively small market share in several categories, especially in plant-based products, which presents substantial growth opportunities for us.

Okay, thank you.

For our next question, we have Karen Short from Barclays. Karen, your line is open.

Hey, thanks very much. I wanted to just talk about ticket a little bit. So U.S ticket at 3.5%? Can you kind of parse that out on per transaction versus AUP, but also tie that into the inflation numbers that you called out for the quarter and/or your expectations on inflation?

Honestly, I can't. I don't have that detail in front of me. Generally speaking, you've got electronics that like TVs and what have you that are going down in price, maybe a little less this year, because there's less promotions because of shortages. I mean, in every budget meeting every 4 weeks were presented examples of items where we're taking down the price of high volume key items by changing the packaging, by moving some aspect of manufacturing to another part of the world. And so I don't have the detail here in front of me for that. Sorry.

Okay. I wanted to ask for an update on the average ticket for executive members compared to gold members. Additionally, I know you've provided the percentage of sales, but could you also share how the frequency of executive versus gold memberships has changed over the nearly two years of the pandemic?

Somebody is just running out of the room to get that sheet. I'll answer it as soon as they return if you would like to ask another question or move on to the next one. But I'll respond once they are back.

Well, my standard question would be just on your cash balance in terms of thoughts on special dividends?

Oh, well, as soon as we know you'll know or the day after. Look, our cash position is strong. One of the things I pointed out is our CapEx is also increasing in a conscious way, notwithstanding that our cash flow from operations is growing at a quite a stronger rate as well. It's something that we've done four times in eight years. We and the shareholders seem to like it when we do it, and so I'm not trying to be tricky, but we haven't made that decision at this point. It's probably a win not if, but when we do it.

Okay. And then maybe just while you're waiting for that numbers on the executive, can you just maybe give us some color on what percent of freight is actually spot versus contract? I don't know if you've ever given that number.

I don't have the exact number, but I'm willing to bet it's 80% plus. I could be wrong, a little bit, but it is contracted. Now recognizing with contracts, we might do 1, 2, and 3-year contracts. So we're still benefiting on 3-year stuff. And then if any little on 2-year stuff, and now gone beyond the benefit of the 1-year stuff, And so it's over two or three-year period, but our assumption is, is it'll take less than that time to start to normalize somewhat.

Great. Yes. I mean, if you got those numbers on executive and golden ticket and frequency, that'd be great.

What they have indicated is that I currently don't have the average ticket changes. However, the total spending by an executive member is nearly three times that of a Gold star member.

Okay. Thank you.

Call it 2.5. Thank you.

For our next question, we have Greg Melich from Evercore ISI. Greg, your line is open.

Hi, thanks. I have two questions, Richard. One is about the gross margins. You mentioned that gas and travel have had a positive impact, but e-commerce has offset that. Can you explain where the profit from gas was up, even at the mixer?

Margin percent was down but you got a 40%. 50% increase in price per gallon.

Got it.

So you still might have more pennies per gallon, but the margin itself was down.

Got it. And then that was offset by e-commerce.

Yes, I wouldn't read too much into that description. We're just trying to convey the general factors that help or hurt us. E-commerce has been affected by various activities and our investments in fulfillment and expansion, and we're doing our best to adapt over time. I don't see this as a major issue. The impact on margins, whether they're slightly up or down, is more about the product mix rather than competition, especially given all the ongoing rapid expansion and investment.

Got it. And then maybe that's a tie back your discussion on the logistics. Big and bulky, if we look at the e-commerce is roughly 8% of sales, its big and bulky a quarter of that. Is that the kind of scale we're talking about?

It's over a third. So we're third, great.

The renewal rates continue to improve, which is impressive. How is it that this hasn't decreased at some point, especially considering you have more first-year members?

Are we going to reach 100? Just joking. As I mentioned earlier, the main factor contributing to our current success is auto renew. With more individuals using credit cards, especially through our two major co-branded partnerships in the U.S. and Canada, we are effectively converting more people into executive members. For every 100 new sign-ups, a slightly larger number are enrolling as executive members, which increases their likelihood of renewing. Additionally, while new warehouses and markets around the world typically experience lower renewal rates in their first year or two, they are beginning to see higher rates for renewals than before. All these elements are contributing positively. I like to think it’s a combination of our excellent offerings and value, but undoubtedly, auto renew plays a significant role in this growth.

And finally, regarding the fee increase, we have not raised it in five years, and we are considering it for the latter half of next year. Given that members appear to be opting for the fee hike through the executive membership, does that influence your timing on the fee increase? We anticipate starting to receive inquiries about this soon. While it may still be some time away, we are confident in our strong renewal rates and loyalty, which support this decision-making process. We will keep it in mind as we move forward. Very well have a great holiday season, everyone.

Thank you.

For our next question, we have Rupesh Betti from Oppenheimer. Rupesh, your line is open.

Good evening, thanks for taking my question. So I wanted to touch on Canada and other international. So we saw a strong and accelerating 2-year contract for both Canada and other international. Is there any more color you can provide in terms of maybe what you're seeing in those geographies?

I'm receiving a bit of assistance here. The primary factor seems to be related to how COVID affected different countries at different times. I recall that about a year or a year and a half ago, some foreign countries were performing better while we were under lockdown, and subsequently, they experienced their own lockdowns. This is partly why I think everyone has focused on the 2-year stack concept. Ultimately, that's a significant reason behind it.

Okay, great. And then as you look at your ancillary businesses, is there a way you can find an update as to how they're trending now versus pre-pandemic?

I don't have that detail with me. But generally speaking, tires have picked up as an example of an ancillary business. But the Costco auto program is down because there's a shortage of cars out there. Travel is up not where it was pre it was almost back to where it was pre-COVID. And then delta variant hit. And then it was coming back again and then Omicron hit. So it fluctuates pretty quickly. Omicron though, and I'm trying to think of the other things. Food courts have come back. Not I don't think they're quite where they were, but they're almost there. Hearing aids have come back. But still, I think slightly below pre-pandemic. Articles doing great. Pharmacy is doing great, helped, frankly, by the shots. We like other retail pharmacies, providing plenty of vaccines.

Okay, great. Thank you for all the color.

Okay.

For our next question, we have Stephanie Wissink from Jefferies. Stephanie, your line is open.

Hi. Good afternoon. This is Blake on for Steph. First question is a broad one. You are strong advocates of the in-store shopping experience. It appears that store sales have been quite robust lately for retailers. So, I am curious about how your in-store shopping compares to e-commerce against your expectations recently. Additionally, could you share any e-commerce initiatives you may be working on? I know you mentioned a pickup test that you discontinued, but is there anything else in the pipeline that you can disclose?

Both in-store and online sales have increased. The use of services like Instacart for same-day fresh items surged during the lockdowns in mid to late summer of 2020 and has remained higher than pre-COVID levels. E-commerce now accounts for about 8% or 9% of our sales, totaling $192 billion for the year ending last August, which is significantly higher than two years ago. Over the last three or four quarters, we've seen sales grow over 100% compared to two years ago, partly due to the increase in big and bulky items, which typically weren't a focus in-store. While there were mixed feelings about our mask requirements when they were first implemented in May 2020, it seems customers felt more comfortable shopping in a spacious environment with taller ceilings and wider aisles. We were taken aback by the strength of non-food categories in the summer and fall of 2020, as people turned to home purchases instead of traveling or attending events. This trend has continued, with consumers buying a variety of home goods alongside food items. Regarding our tests, we conducted a small trial in New Mexico with buy online and pick up in store. As I mentioned, we plan to have over 200 U.S. warehouses equipped with lockers in the next year. However, for buy online and pick up in-store, we’re uncertain due to space constraints at our busy locations. We find that not many customers are requesting this service, and those that do often prefer to shop while they're in-store. Looking ahead, while we’ve been somewhat slow to adopt certain mobile and digital strategies compared to others, we believe these initiatives will enhance our offerings.

That's super helpful. I was also wondering on your inventory positioning. How much are you getting ahead of any seasonal items or any challenges you may foresee for Q2 and Q3 for the spring and summer?

I'm not exactly sure. I know that when buyers presented the budget and discussed those issues, we have been bringing in items earlier. Our distribution system in the U.S., which we refer to as our depot, was about 10 million square feet. With the Innovel acquisition, we have essentially more than doubled that, which gives us some extra storage if needed and helps with getting items in early. We are somewhat seasonal, but historically we have always brought in items early. We have the cash available to invest an extra billion dollars in inventory, even if it remains for a while. Overall, some of our items are still arriving a bit later than they did before COVID, but they are arriving earlier than they would have if we weren't effectively managing our forward buying.

Perfect. If I could sneak one last one in. I might have missed it, but I think you said for the net new openings this year, you said 19. I thought the last quarter you were aiming more towards 25. Is there anything to call out?

When I mentioned it was 19, I was referring to the last three quarters of the fiscal year, plus some additional context.

Perfect. Thank you very much.

For our next question, we have Paul Lejuez from Citi. Paul, your line is open.

Hey, everyone, this is Brandon Cheatham for Paul. I was wondering if we could discuss the increase in CapEx. I think the last time we spoke, we believed CapEx would be lower. Now it appears that it has a higher figure. I'm curious if there has been a change in strategy. Specifically regarding the e-commerce investments, do you feel like you're trying to catch up or are you laying the foundation for growth? Any insights you can share would be appreciated.

Sure. Previously, we projected a range of 3.8 to 4.2, but now we are indicating about four. These figures have increased from the mid-threes over the last couple of years. Last year’s figure of 3.6 included an asset purchase of approximately $340 million to $345 million that I mentioned earlier in Southern California. This involved a facility exceeding 1.5 million square feet, with ample land to support our fulfillment and import operations. The main factors contributing to the rise from the low threes to the low fours over a few years include more international expansions, which tend to be costlier, and an increase in our expansion efforts. In fiscal 2020, we recorded only 13 net new units due to delays caused by COVID. In 2021, we had 20 units, and we expect to add 27 net new units this fiscal year along with about six relocations planned, although we might slightly fall short of that target. Overall, there are more warehouses being established, particularly in fulfillment, starting with the $1 billion acquisition last year of what is now Costco Logistics, which we are expanding, alongside our international initiatives.

Got it. And it's how we should kind of think about it going forward long-term?

That's not solely capital expenditures; those are also expenses. Please continue, I apologize.

And the 4 billion range is what we should think about CapEx for the long-term.

I’m unsure about the long-term, but I believe four billion seems appropriate for the next year or two. If conditions continue to improve and expand, it might increase a bit beyond that. However, we're not planning to spend it unless we identify good opportunities, as our cash flow has been surpassing net income along with regular dividends and capital expenditures.

Got it. And you also mentioned that you're able to change our products, when you're faced with shortages. I was wondering if you could quantify that versus kind of a normal quarter. And if you are switching out more than usual, what impact does that have on consumer behavior there, anything on the logistic side as well?

I don't have the exact figure, but I would estimate it's a small low to mid single-digit percentage. Essentially, looking back to spring 2020, when people were hoarding goods, we sought additional suppliers to source what we needed. This not only created new relationships but also provided long-term opportunities beyond just a three-month period. We expanded our product range by necessity, especially leading into last summer and fall, as demand surged for home goods like patio furniture, barbecues, indoor furniture, and kitchen gadgets. We capitalized on this trend by adding more items. While the treasure hunt aspect is still minor, I’ve noticed in some retailers that shelves can appear half empty. However, I believe our buyers have done an excellent job of maintaining full warehouses.

Okay. Thanks, and good luck for holiday.

For our next question, we have Edward Kelly from Wells Fargo. Edward, your line is open.

Hi. Good afternoon, everyone. Happy holidays. Richard, I wanted to ask you about the gross margin. Are there any additional thoughts you can share regarding the current quarter that might explain some expected incremental changes that are somewhat similar?

You're breaking up entirely during that call. So I heard about every other word, if you want to repeat yourself.

Yes, sorry. So I wanted to ask you about the gross margin. As you said, pretty good all things considered, any additional thoughts you can share on the current quarter? Comparisons in the core looks similar I think. Just wondering if there's any reason we should expect any incremental pressure.

From a competitive standpoint, everyone is competitive. I believe our model allows us to navigate that effectively. We have discussed our ability to generate additional profits per gallon, which enables us to pursue various opportunities. We have numerous strategies we can implement, and we are confident in our ability to maintain pricing on key items. We don't view achieving a margin as a major challenge; we are adept at finding ways to reach our goals while remaining competitive. Therefore, we do not anticipate significant changes in the current landscape.

Okay.

Just there's a lot of changes every month, and some things go up and some things go down. But overall, we feel pretty good about it.

And for the last question, we have Laura Champine from Loop Capital. Laura, your line is open.

Thanks, Richard. It's a follow-up question. You mentioned that renewal rates are still increasing, likely due to auto-renew. What percentage of your membership is currently on auto-renew?

It's about 50 in the U.S and Canada, which would imply and that's where we have the co-brand cards. And U.S and Canada is about 80% of our company. So the 50 becomes a 40 if you, rough numbers.

Got it.

Oh, I’m sorry, you can do it on any card, not just co-brand. But in the U.S and Canada it's about 50.

Understood. Thank you so much.

And for our last question, we have Kelly Bania from BMO Capital, Kelly, your line is open.

Thank you for including me in this discussion. Richard, I wanted to ask about the current inflationary environment. You've mentioned in previous quarters that your price gaps have increased. Do you believe this level of inflation is beneficial for Costco's business? Have you experienced anything similar in the past that might lead to even greater customer traffic to your stores?

I believe that with rising costs, there might be a reduction in overall demand, but our strong value proposition could work to our advantage. I read this morning that inflation is at its highest in many years. It wasn't too long ago that inflation was around 2% or 3% annually. Yes, it may remain elevated for a bit longer, but ultimately, I think it benefits us because of the value we offer.

That makes sense. And a lot has been asked here, but just wanted to also just check on self-checkout and where you are with that. And if there's any color, you can help us understand on the savings or the impact on the cost structure when you put in some self-checkout and the potential for that initiative going forward.

We pretty much have it now in most locations. And I'm speaking of the U.S. and Canada. And I know even across the street in many locations, we've expanded it from originally, two lanes of three or six to three lanes of three or even four lanes of three. So in a four lane area, you could have 12 people checking out. And so my guess is still going to grow a little as we expand existing units to offer a little bit more of it. And it's been a positive.

Okay, thank you.

Well, thank you everyone and have a good holiday season and we're around to answer additional questions. Have a good day.

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