Thank you for joining us. I would like to welcome everyone to Costco Wholesale Corporation's Fiscal Second Quarter 2024 Earnings Call. All lines have been muted to minimize background noise. Following the speakers' comments, we will have a question-and-answer session. I will now turn the call over to Richard Galanti, CFO. Please proceed.

Thank you, Debbie, and good afternoon to everyone. I want to begin by noting that our discussions will include forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995. These statements are subject to risks and uncertainties that may result in actual outcomes differing significantly from the projections made. The associated risks and uncertainties are detailed in today’s call and in our public filings with the SEC. Forward-looking statements are valid only as of the date made, and we do not commit to updating them except as legally required. Comparable sales and sales adjusted for gasoline price changes and foreign exchange rates are meant to provide additional information and should not replace net sales reported in line with GAAP. In our press release today, we presented our operating results for the second quarter of fiscal 2024, which spanned the 12-week period ending February 18th, along with February retail sales data for the four weeks concluding March 3rd. Our net income for the 12-week second quarter was $1.743 billion, or $3.92 per diluted share, compared to $1.466 billion, or $3.30 per diluted share, in the same quarter last year. This year’s figures included a tax benefit of $94 million, or $0.21 per diluted share, related to the deductibility of the $15 per share special dividend received by participants in our employee 401(k) plan. Net sales for the second quarter reached $57.33 billion, marking a 5.7% increase from $54.24 billion during the same period last year. However, net sales were negatively affected by approximately 1.5% in the US and globally due to calendar shifts from the 53-week fiscal year of 2023. The following comparable sales show year-over-year figures for similar locations and retail weeks. In the US, our comparable sales were reported at 4.3%. When excluding the effects of gasoline, deflation, and foreign exchange, this would have stood at 4.8%. Canada reported a 9.2% comparable, and 9.0% when excluding gas and foreign exchange. Other international sales showed an 8.6% increase, with 8.2% excluding gas and foreign exchange. The total company reported a 5.6% increase for the quarter, and 5.8% excluding gas, deflation, and foreign exchange. E-commerce sales were up 18.4%, and 18.2% when excluding foreign exchange impacts. Regarding the second quarter comparable sales metrics, our worldwide traffic increased by 5.3%, with the US up by 4.3%. Our average transaction amount increased by 0.3% globally, and by 0.1% in the US. Foreign currency fluctuations positively influenced sales by about 0.2%, while gasoline price deflation had a negative impact of approximately 0.4%. Shifting to membership fee income, we reported $1.111 billion, reflecting an increase of $84 million, or 8.2%, year-over-year. Our renewal rate for the US and Canada at the end of the second quarter was 92.9%, up from Q1 by 0.1%. The worldwide renewal rate also held steady at 90.5%. Membership growth is ongoing, with 73.4 million paid household members, a 7.8% year-over-year increase, and 132.0 million cardholders, up 7.3%. Additionally, our paid executive membership stood at 33.9 million, an increase of 646,000 in the second quarter. Executive members represent over 46% of paid memberships and more than 73% of total sales. Moving to gross margin, our reported second quarter margin showed an improvement of 8 basis points year-over-year, coming in at 10.80%, versus 10.72% last year. Excluding the effects of gas deflation, the margin increased by 4 basis points. Breaking down the core merchandise, it increased by 5 basis points reported, and 2 basis points when excluding gas deflation. The ancillary and other categories rose by 7 basis points and 6 basis points, while the 2% reward program decreased by 7 basis points for both figures. In total, our gross margin showed a positive trend, supported largely by improvements in e-commerce. In the realm of SG&A, our reported expenses in the second quarter grew by 3 basis points, showing higher efficiency at 9.14% compared to 9.11% last year. We expect that the impact of recent wage increases contributed significantly to this year's SG&A figures. In terms of interest expenses, these totaled $41 million this year, compared to $34 million the year before, while interest income rose by $102 million due to increased rates and cash balances. We anticipate a decrease in this benefit as we move past the January special dividend payment. For our income taxes, our second-quarter tax rate appeared at 22.1%, down from 26.1% of the previous year, benefitting from the special dividend deduction. Going forward, our effective tax rate is projected between 26% and 27%. When excluding the dividend benefit, our rate would have been 26.3%. On a broader note, we opened four new warehouses in the second quarter, with three located in the US and one in Shenzhen, China, which marked our sixth location there, attracting considerable attention and membership growth. For the full fiscal year, we anticipate 30 openings, including two relocations. Our capital expenditures for the second quarter were approximately $1.03 billion, aligned with our forecast of $4.4 to $4.6 billion for the year. In terms of our China operations, we recently started a same-day delivery service for select items from our Pudong location, generating excitement and media coverage. E-commerce sales, excluding foreign exchange, saw an 18.2% increase, driven by strong performance in various product categories. Our logistics services reached record delivery numbers, reflecting growth in e-commerce transactions. I also want to highlight our ongoing improvements in e-commerce and digital capabilities, including a significant reduction in mobile app loading times and the rollout of Apple Pay. Introducing new products to our food courts, we've replaced the churro with a freshly baked chocolate chip cookie and launched a turkey sandwich. We've also initiated our sushi offerings successfully across various locations. Inflation has been stable recently, and while we still manage pricing reductions strategically, we maintain a positive outlook for our inventory and distribution channels, despite some minor shipping delays. Finally, for our February sales results, we reported sales at $18.21 billion, reflecting a 6.9% increase year-over-year. As I conclude, I’d like to express my gratitude to those who join us for these quarterly updates. After hosting all but one of the calls since our public offering in December 1985, the experience has been a privilege. I will be transitioning the CFO role to Gary Millerchip on March 15th and retiring from the Board next January. It has been a wonderful journey with this great company and its people. Thank you all.

The floor is now open for your questions. We'll pause for just a moment to compile the Q&A roster. Your first question comes from Simeon Gutman with Morgan Stanley. Your line is open.

Hi, everyone. Richard, best wishes to you. Thank you for your guidance. My first question is about membership, and I want to ensure this framework is accurate. I know you mentioned it's about if, not when. As part of the thought process, there are enough levers in the business, including product savings and cost savings, to drive an appropriate level of profit growth. When those options are no longer available, that’s when we might expect a membership price increase. It could happen even sooner, but this is one framework we were considering as we wait to see when it occurs.

Sure. And by the way, it's when, not if, still. And but really, joking aside, we're not that smart in terms of figuring out exactly why. I mean we know that all the factors that we believe, if we wanted to do it, would we feel comfortable in terms of renewal rates, new member signups, loyalty, all those things are continuing in the right direction. It really is a function. And I don't think it would be done simply because, hey, things have slowed down a little bit, let's do it now. We like the fact that we're performing well. We like the fact that almost all metrics are going in the right direction in our business right now. We've got plenty of runway left. Given the economy and given everything else, it's us, it's Costco, so I think it is simply still not trying to be too coy about it, it's not some big analytical formula, it's simply a measure that we will at some point, I'm sure, do it. And I've been joking with Gary, it'll be on his watch, not mine.

Richard, I have another question. The business has consistently performed well, and you previously mentioned that you would regret it if our growth didn’t exceed 4% to 5% because that could make it harder to manage our expenses. Does that still hold true? As you transition responsibilities to Gary and Ron, will you be dedicating more resources, or are there ways to adjust the business's cost structure to lower that growth threshold?

It’s likely that expenses will increase slightly due to factors like inflation. Looking back over the past few years, our company, along with others, managed to navigate through the COVID crisis without significant losses. For instance, in fiscal 2019, our selling, general, and administrative expenses were $10.04 billion. They were $10.30 billion in the first quarter of 2020 before the pandemic hit. In fiscal 2021, they decreased to $9.65 billion, then further to $8.88 billion, and as of fiscal 2023, they are at $9.08 billion. Despite fluctuations, we had previously thought that expenses would never drop below $10 billion again. Various dynamics continue to evolve, but our productivity has actually exceeded our expectations. Some of the gains were realized during COVID, and fortunately, we have not lost them. The positive aspect is that we continue to capture market share. There's a decline in SG&A for high-priced items, and we are modifying packaging sizes to reduce shipping costs. Ultimately, even if sales stagnated, we would find ways to manage SG&A effectively.

Yes. Okay. Best wishes. Thanks, Richard.

Next question comes from the line of Chuck Grom with Gordon Haskett. Your line is open.

Hey, good afternoon. Richard, congrats on a great career, for someone who started on basically day one at the Company. My question is on culture. You've always said it was customers first, employees second, shareholders third, and that philosophy's clearly played out. So, looking at it, I'm curious how the new team is going to keep this culture intact and resist pressure from some of the non-founders of the Company going forward.

Well, first of all, nothing has changed. This question reminds me of something Jim Senegal was asked after his long tenure before we knew who would succeed him. The Board asked him, if you rate your commitment to extreme value and taking care of customers and employees at 100, where will your successor be? He paused and said he believed they would be in the mid-90s, if not higher. After Craig took over, I felt that number moved closer to 100 because that's just how we operate. Our culture is deeply embedded here. When people ask me as CFO about my importance to the company's strategy, I often joke that we are run by merchants and operators, and our role is to support them while adding our perspective. With Craig's 12 years and now Ron at the helm, we have people here who have been part of this culture for 35 or 40 years. It's strong. Just last week when Gary joined us, he had to complete the mandatory two-hour Costco orientation, which covers obeying the law, caring for customers, employees, and respecting suppliers. If you do that, you can reward shareholders. That's something I can trust completely.

That's great. Thanks, Richard. Enjoy your retirement.

Next question comes from the line of Michael Lasser with UBS. Your line is open.

Good evening. Thank you so much for taking my question and best of luck, Richard. You mentioned previously that most of the metrics are moving in the right direction. Could you highlight which metrics are not moving in the right direction, especially from a membership per club standpoint? Are there any signs that some of the more mature locations are either reaching saturation or starting to see a peak in that metric?

No. First of all, when I said most, I was just trying to be human – that nobody is perfect. Everything is working in the right direction right now. I wasn't just talking about membership metrics, but in general, knock on wood, things are working pretty well. When we sit in at our monthly budget meeting, more times than not, we get pretty excited about what's going on from a new merchandising standpoint, newness, buying with conviction and being aggressive and assertive out there. I mean, what we saw with just even that simple example I gave you with changes to big ticket items and why buy them at Costco, we saw great changes in numbers. We know that we've got a lot of levers to be able to pull to make this thing work. So, no, I just said, honestly, I said most because nobody is perfect. I didn't have any particular examples.

Understood. My follow-up question is on what seems like an inflection in the discretionary business. To what degree is Costco experiencing improvement in the GenMerch categories as a result of aggressive changes, either like you had cited with the way you're communicating with the customer or the member, or aggressive actions to take down prices? And if you are pulling those levers hard, is there an opportunity to move even more aggressively to drive the discretionary business? Because it does seem like Costco is experiencing a rebound in some of these areas more so than the rest of retail. Thank you.

Yes. When we look at industry data, particularly in the appliances sector over the past few weeks or months, we've observed that while the industry itself remains flat, we have seen growth exceeding 20%. The same trend is evident in the tire segment, where we're performing even better. However, it's important to note that we can't expect every product to grow by 20% or 30% across the board. Ultimately, our buyers are focused on finding innovative ways to enhance our offerings, maintaining competitive pricing, and continuously improving this pricing through our global purchasing power, especially in response to commodity price increases. Our buyers handle a limited number of items, generally around 20 or 30, allowing them to have a deeper understanding of each cost component. I believe we excel in addressing these challenges promptly and passing on any savings as soon as possible. This is integral to our approach. Our ability to do this is also supported by relatively strong sales and the lessons we've learned from last year.

Thank you very much.

Next question comes from the line of Peter Benedict with Baird. Your line is open.

Sure. Thanks for taking the question, and my congratulations as well. Well done. It's been a pleasure. Wondering if you can maybe talk about Kirkland, the penetration, what's going on there, any member shopping behavior around kind of private brand versus branded, and maybe what some of the branded packaged good companies are doing to maybe get some volumes up. Just curious about your view on that.

There's not much trade down occurring, although we sometimes have greater control over certain private label consumer products that help us generate more business. We're seeing an increased penetration of those compared to some of the brands. This situation encourages the brands to engage with us to enhance the value of their products too. We aim to balance both. However, we haven't observed significant changes; this question arose a couple of years ago during discussions about a potential recession when inflation peaked at 7%, 8%, and 9%. Historically, over the past 20 years, we've typically seen an annual growth of around 0.25% to 0.5% in Kirkland Signature penetration. A few years back, there was a noticeable jump of about 1% to 2% as people seemed to be switching a bit. But that trend has since changed, and we don't see it happening as much anymore.

Got it. And then just on Costco Logistics, you gave some delivery numbers there. Just maybe step back a little bit. The penetration of Costco Logistics within the business, how meaningful is that at this point? What's left in terms of maybe growing that? Is that just going to go with the big ticket trends, or are there, I don't know, internal initiatives to kind of drive further penetration of Costco Logistics?

What we have strategically implemented has significantly improved our value, delivery times, and quality, while also reducing delivery costs on large items like appliances, big-screen TVs, mattresses, outdoor patio furniture, and some sporting goods. Prior to acquiring Innovel, now known as Costco Logistics, in spring 2020, we were handling about 2.2 million drops in the US, which included everything from delivering a sofa to installing a new refrigerator and disposing of the old one. After the acquisition, we managed around 4 million drops, with about 70% now being handled by us. We have successfully decreased our delivery times and introduced options like two- or three-hour delivery windows. We continuously seek improvements, especially in value. When examining the appliance category, we still represent a small percentage of the industry, but the recent growth of over 20% last month can be attributed to our efforts to promote the great deals more effectively. We believe there is ample opportunity to expand in these categories, understanding their significance, even though they comprise only a small fraction of our total sales. One of our strengths is our diverse range of product categories.

Got it. Great. Well, thanks again, and best of luck, Richard.

Thank you.

Next question comes from the line of Rupesh Parikh with Oppenheimer. Your line is open.

Good evening, and thanks for taking my question. And Richard, I also want to offer my congratulations on your retirement. So just going back to the core on core margins, they're up, I think, 25 basis points this quarter. Just curious what drove that strong performance, if there is anything in particular driving that?

On the non-food side, the main factor to consider is the comparison to last year when we faced additional markdowns. As we mentioned previously, non-food was down year-over-year a year ago due to supply chain issues that resulted in late arrivals of items, particularly those large-ticket items from overseas. That was likely a significant factor. Regarding fresh food, I noted it was slightly down year-over-year. The fresh segment is competitive, and we are maintaining our competitive stance as well. However, I don't see this as being particularly significant in terms of indicating a major change. There are always some things that are up a bit and others that are down a bit.

Great. And then maybe just one follow-up question. On the expense side, you guys did have better expense controls this quarter. So, just curious to what changed sequentially, because the growth rate did decelerate by a few percentage points.

I can't think of anything specific at the moment, but someone just mentioned the word focus. During our budget meetings, which take place every four weeks with over 150 people from around the globe, we review those types of details. I believe the operators are improving in their budgeting efforts. One point that emerged from the last meeting regarding budgeting is that if you set your sales projections slightly higher and they end up coming in at a lower percentage, you have to adjust your labor costs accordingly. A lot of this depends on maintaining a clear focus and being intentional about it. We certainly do not aim to control expenses by refraining from wage increases when they're necessary, and we have indeed acted on that when needed.

Thank you. Best of luck.

Thanks.

Our next question comes from the line of Scott Mushkin with R5 Capital. Your line is open.

Hey, thanks. Hey, Richard, I feel like we should be, like, raising your jersey to the rafters like a superstar is retiring here. I never came without you, to tell you the truth. So, congratulations.

Thank you.

So, here you are. So, yes. So, we'll have to see that The CFO Hall of Fame. So, a couple of things, some of your comments that you made. You're doing this delivery in one hour in China. I think you started going from one club to three. Is that something you envision that can expand outside of China? And how should we think about that, maybe even vis-a-vis the US?

We are doing something similar here with a few partners, particularly Instacart, and we've also started some testing in the Southeast, including Texas with Uber. We already have a same-day delivery function in place, which is being handled by a third party like Instacart and other companies. While this approach is new for us, it's not unfamiliar to the warehouse club industry in China, as similar models can be found elsewhere as well. It definitely makes sense, especially with the attention it's received through social media. Since its launch three days ago, we've seen a significant increase in online engagement and interest.

Got it. And then we've talked about this over the years, and I think you said you're going to do 28 net new clubs this year. What's the capacity of the organization? Where do you go? Do you envision that going to 35 and 40? How should we think of it as we move out three to five years? Is it something that's going to trend up?

I believe that, generally speaking, the trend will likely be upward. There were a few years, excluding the COVID year, where we only had about 13 due to construction shutdowns in certain countries, including the US. However, looking back over a three to five-year period—excluding that year—we were averaging around 23 per year. When discussing the next decade, we collectively aimed for about 25 openings per year over the next five years, eventually reaching the high 20s, if not 30. We feel confident in that outlook. While we could potentially do more, we are comfortable sticking with this plan because it requires a hands-on approach. I can share this perspective from headquarters, whereas my colleagues in operations spend considerable time visiting locations. Ron, for instance, along with other regional executives, frequently visits sites, often spending two to three weeks each month travelling to existing locations and new ones. In newer markets, it's crucial to open the first site to train personnel who can then advance to other locations in that city. A few years ago, in Shanghai, we were fortunate to have employees from Taiwan who were eager to move into new roles there. This helps us expand gradually; we remain very busy, especially our operators and merchants. I foresee us continuing to aim for around 25 openings, moving upwards. Just a quarter ago, our budget targeted 32, which is now adjusted to 28 due to some construction delays. Despite that, I feel optimistic about opening 25 or more over the next couple of years, moving towards 28 or beyond as we proceed.

Perfect. Thanks, Richard.

Next question comes from the line of Gregory Melich with Evercore ISI. Your line is open.

Hi. Thanks, Richard. You mentioned the word surreal, the feeling of retiring. I'd say it's almost as surreal as a $4.99 chicken. So, thank you for all the help over the years. I would say, I guess two things I want to touch on. One is ticket pressure. It looks like just in the most recent sales, with traffic growing more and more, that you're seeing some average unit retail (AUR) pressure. Is that 0% inflation turning to deflation, as the merchants are seeing into March and April?

I believe that the inflation figure is derived from costs and mix. It's not necessarily concerning if the average ticket increased slightly during the quarter but then decreased by a small amount in February. That's still fairly similar. Some of the variation could be due to changes in mix, and some is related to examples I've provided about lower pricing. Even if the fundamental costs remain unchanged, there may be variations in how we package our offerings, which we leverage. This pertains to sales dynamics rather than the precise costs from the previous day.

So, looking ahead, that number of flat looks pretty good from what the merchants are seeing today.

Yes. I believe that during the last budget meeting two weeks ago, there was a lot of discussion in the presentations about upscaling or buying with conviction. The buyers are currently looking forward in a proactive and optimistic manner. We hope we are correct, but so far, we feel we have been.

I wanted to follow up with my second question on the Instacart side of e-commerce penetration. What would e-commerce penetration be now in the US if you included the Instacart delivery and the other deliveries?

Instacart accounts for about 1.5% to 2%, leaning towards 1.5%. This is significant given that it's based on a $200 billion retailer. We don't include this figure because the Instacart customer pays at the front end. You could estimate that this would add around 1% to 2% to the total revenue figure.

Got it. Well, thanks. Thanks for everything, and enjoy retirement.

I hope to see you all.

Next question comes from the line of Kelly Bania with BMO Capital. Your line is open.

Good evening. Thanks, Richard, and I have to add my congratulations to you. It's been a pleasure. Just wanted to ask where Costco stands with retail media and advertising dollars. I think the last update I had was in the range of a few hundred million. Just curious if you're willing to share with us where that stands today, what kind of growth that is experiencing, and just the Company's thought process on investing in that down the line.

We recognize there is a significant opportunity in this area beyond what we've achieved previously. Recently, we've hired experienced professionals to enhance our efforts, and it's a key focus for us. We're aware that there are funds available. In the past, we have successfully utilized various advertising methods, like end caps and our Costco connection magazine. Additionally, we've engaged in some online advertising, but we believe there's much more potential to explore. We are committed to maximizing these opportunities just as we always have when it comes to saving costs and passing that value onto our customers. We see the potential for increased revenue, especially since some of our major retail competitors have mentioned plans to double their efforts in the next five or six years. Given our current market share, we believe we have ample room to grow in this area.

Thank you. And maybe just can I just follow up with the decision to roll out Apple Pay? Costco is pretty notorious for being strict on the payment method you can use. So just maybe the thought process on that, what you expect that to do for your e-commerce business, and any economics you can share.

Yes, on e-commerce, there's not as many stored cards for our members. As we're doing more with a digital wallet, that'll help as well. So, it's something that should help.

Next question comes from the line of Oliver Chen with TD Cowen. Your line is open.

Hi there, this is Katy on for Oliver. And, of course, best wishes to you in your retirement. Just wanted to talk a little bit about the Kirkland price gap versus national brands. I know you touched on the Kirkland brand a bit earlier on the call. But how has that price gap changed, especially year-over-year? And has there been any impact on unit elasticity given that price discrepancy? Thank you.

We have definitely seen an impact from it. Historically, the understanding was that our products need to match or exceed the quality of the leading national brand and offer at least a 20% savings compared to the national brand. These criteria still apply. When we examine items that have significantly increased in price, such as paper products, due to factors like freight costs, pulp prices, and energy expenses, we see that these costs have risen sharply over the years. For example, the prices for an 18-pack or a 24-pack of toilet paper or a pack of paper towels are now in the high $20s or even low to mid $30s. When we can demonstrate substantial savings on these items, we've observed a considerable shift in market share towards Costco and our Kirkland Signature brand. This has been a gradual process over many years and tends to fluctuate slightly. However, over the last couple of years, the penetration has increased a bit.

Great. Thank you. And then just to follow up on the store discussion and unit growth, can you provide a little bit of color on how the international store openings are performing just from a productivity angle? How is that versus the more tenured stores as well as the domestic stores?

I believe there isn’t a significant difference. In new markets, things are usually a bit slower at first. For example, when we initially launched in places like Iceland, Sweden, Auckland, or France years ago, we typically started with lower performance. The same can be said for Japan two decades ago. There may also be instances where local vendors are hesitant to work with us because they want to protect the established competitors who dominate the market before we enter. Once we have two or three locations open, they become more willing to engage with us, which aids our growth. The landscape has shifted somewhat in recent years, with China being a notable case. When we opened our first location in Minhang, Shanghai about four years ago, it garnered international attention due to the high number of new members we signed up, leading to faster starts than the previous year. I don’t perceive a major difference in that regard. In the U.S., this fiscal year, we plan to open around 28 locations, with over 20 of them in the U.S. Some have inquired whether our international pace has slowed down. Although international expansion generally takes longer, it’s interesting to note that we have more growth potential than we had anticipated. Five years ago, we wouldn’t have predicted that we would be opening more than 20 locations in the U.S. this year. While we expect some slowdown eventually, the volumes we’re seeing in these areas require us to manage our growth effectively. Nonetheless, we continue to have significant activity happening overseas, and that is expected to increase as well.

Excellent. Thank you so much, and best wishes again.

Thanks.

Next question comes from the line of Scot Ciccarelli with Truist. Your line is open.

Thanks for the time, guys. It seems like you guys are doing some things to cut down on membership sharing, food court usage from nonmembers, etc. Richard, are you seeing something in the business that gives you concern that there's a growing issue from things like membership sharing?

No, I think part of it is that the storyline sometimes is a little greater than the reality. During COVID, we saw a bit more membership sharing, where one family member, who maybe didn’t have one of the two memberships, would come in using a parent’s credit card. We allowed this. With the rise of self-checkout in recent years, people would walk in, flash their card, and whether it was actually checked or not was uncertain. If you’re using self-checkout, you don’t need to show your membership card to the cashier. There was likely a small but increasing level of abuse of that privilege. Additionally, we received complaints from members stating that they pay, so why shouldn't others? It became clear that we needed to address this issue a bit. We implemented changes over about six months, starting with warnings before making final adjustments. Are we seeing new signups from this? Yes, but in comparison to our 60 to 70 million members, it's not very significant. Ultimately, it’s more fair and the right approach.

Yes, you started to answer it. So, you've noticed some acceleration in membership. Should we expect to see similar trends in the future, like what we've seen with Netflix when they reduced sharing?

It seems like Netflix faced a much bigger challenge, or the ability to share was much easier for them because it's electronic. In our case, you still need to show a card when you enter. We are testing a process where your card can be scanned and verified upon entry. I believe we have been doing this in the UK for a few years now. It's all about maintaining standards. It may become slightly profitable if we ensure that everyone participates. I think we signed up more members than we lost non-members, which affected our small sales from those non-members.

Makes sense. Thanks again. And enjoy the next stage.

Thank you.

Next question comes from the line of John Heinbockel with Guggenheim Securities. Your line is open.

Congratulations, Richard. Enjoy your retirement. You'll be missed. When you think about your clubs, there aren't many pain points. However, considering throughput and elements like BOPUS, which you tested but found the costs didn't make sense, do you believe there are opportunities to increase volume or alleviate any challenges?

I believe the main challenge we face with pain points is managing the flow of merchandise and pallets through our system, which we are continually working to improve. If you had asked us ten years ago whether we would have 150 of our 600 US locations generating over $300 million and 40 locations exceeding $400 million, we would have said no, not even with inflation. The reality is that we are achieving a much higher sales volume than we ever anticipated. A key factor in enhancing efficiency and boosting sales is cannibalization. We have noticed that some current members might avoid certain locations due to crowds, and by opening a third or fourth unit in those cities, we see not just an increase in membership, but a significant boost in overall sales. Although I can't pinpoint specific actions at this moment, we are constantly working on improvements. David mentioned that we will soon have warehouse inventory available online, allowing customers to check online for items at locations nearby. If we have items in a location that customers typically shop at, we will indicate that they can buy it there. Often, picking up in-store will be cheaper than purchasing online, especially for non-food items, and I think this will contribute positively as well.

And secondly, is there any way to tell you think about email outreach. I mean, it seems to be getting better and more call to action. I try to think about the seven days of spring, which are in the middle of now. Is there a way to tell the productivity of that outreach? And is that driving some of the e-com pickup?

Absolutely. Yes, there is a way to tell. We're looking at it. A couple of years ago, we brought in a new person in charge from IT in terms of all digital. They've built a team. They're working closely with merchants and operators, but mostly with merchants in terms of doing these types of things. We've seen, again, lots of improvements with our app, with our desktop. It's getting less clunky by the day, more ability to do some items drive sales and some promotions.

Okay. Thank you.

Our next question comes from the line of Chris Horvers with JP Morgan. Your line is open.

Good evening, Richard, we'll miss you, and welcome aboard, Gary. Regarding the MFI, can you clarify how much the foreign exchange affected total MFI growth year-over-year? More generally, it seems that acquiring customers in the club channel is becoming increasingly competitive. I've noticed that couponing among your competitors has significantly increased over the past year. Is this something you've seen as well? Do you think it's still on the rise? How are you adapting to this situation?

In the past year, we opened about 3% more locations and saw an increase of over 7% in new members. While we do have some promotional efforts, we haven't changed our approach significantly. It's true that there are many deep discounts available that are more substantial than we've offered in the past. We aren't doing anything different in that area. Are we pleased with the increase in new signups? Yes, we are. It's encouraging to see, and social media has played a role in enhancing our value proposition. Overall, we aren't making many changes in that aspect.

And just from a technical question, what are your peers talking about tenure renewal rate? The 93% that you quote, does that include like the year-one renewal or anyone that comes to the door on one of those digital coupons?

Yes. It does. We've been doing it the same way forever.

Got it. Thank you very much and best of luck.

Thank you.

Next question comes from the line Robby Holmes with Bank of America. Your line is open.

Oh, hey, Richard. My congrats as well. You will be missed very much. Listen, just a quick question. I love the credit card rewards program. It's amazing. It's like the best thing that's ever happened to me. The Citi Card you guys do. Is there any issue or change with the late fees or anything going on that could change the rewards program or anything there?

Well, that's the new recent headline of that's happening and we'll have to wait and see. Look, at the end of the day, it may change the economics. There are other levers that we've talked to them in the past, our issuing bank about what we could do, but nothing is done at this point.

Next question comes from the line of Laura Champine with Loop Capital. Your line is open.

Thank you for taking my question, and I wish you a long and happy retirement, Richard. I want to focus on the renewal rate. If the renewal rate is flat overall but slightly better in the US and Canada, it suggests that it might be weaker in international markets. Are these results affected by the sampling in China, or what do you believe could be causing this?

That is correct. If you look at the total number of members divided by the total number of warehouses, we have approximately 70,000 households per location. In countries like China and other Asian nations, we typically see between 80,000 to 150,000 members sign up initially, though many will not renew after a year. When we enter new markets, the first renewal rates might be around 50% or even low-60%, but over the next four to five years, these rates tend to increase significantly. This trend is more pronounced than what we observed 30 years ago in the US and Canada. In fact, when we analyze our operations in the 11 countries outside the US and Canada, we notice that their renewal rates generally improve slightly each year, similar to the US and Canada. It's worth noting that the US and Canada have benefited from a rise in executive member penetration, a feature we have in several, though not all, countries. In some of the smaller countries, we lack this capability in multiple units. Moreover, auto-renewal has played a significant role in our improvement over the past few years, although it’s not universally implemented.

Got it. That's helpful. Once the clubs in China and other new clubs in Asian markets mature, do they tend to serve a higher number of households? Would you expect them to be sustainably above the average of around 70,000 households per club?

The answer is yes. I visited an open location in Osaka, Japan, two months after it opened in October, and on a random Sunday. It was incredibly crowded, which was wonderful to see. I believe that even though not everyone has cars and many people live in smaller homes, there is still significant value in our offerings.

Got it. Thank you.

Our last question comes from the line of Corey Tarlowe with Jeffries. Your line is open.

Hi. Good afternoon. Thanks for taking my question. And congrats Richard on your retirement. As it relates to big ticket discretionary items, it seems like that category has improved a little bit. Just wanted to get a little bit of understanding as to what you've seen that's underlying that improvement in trend. Secondly, on AI, just curious, with the recent technology enhancements that the business has made, how you see that impacting the business on a go-forward basis?

Sure. In terms of big ticket discretionary items, we strongly believe that our efforts to better convey their value have significantly contributed to a recent surge in sales, with increases of 20% to 30% in some categories over the past few months. Regardless of whether this is influenced by year-over-year comparisons, it is clear to us that these actions are effective. Additionally, for appliances, we still represent a very small portion of the overall industry, making it easier to capture market share. I expect this trend to continue. Regarding AI, we are just at the beginning stages. We've engaged with several large third-party AI companies, including some based in Seattle, to explore various possibilities in collaboration with our IT team and leadership. This will be a topic to discuss with Gary in the future.

Great. Thank you very much, and best of luck.

Well, thank you, everyone. Again, it's been fun. The thing I miss most about the job is talking to everybody because I like talking. It's been a great story to tell, but it's been an absolute privilege and I appreciate it. So, have a good day and I'm sure we'll be speaking to some of you shortly over the next few days with additional questions. Have a good day.

Ladies and gentlemen, this concludes this conference call. You may now disconnect.