Costco Wholesale - Q2 2023
March 2, 2023
Transcript
Operator (participant)
Good day. My name is Emma, and I will be your conference operator today. At this time, I would like to welcome everyone to the Costco Wholesale Q2 fiscal year 2023 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, again, press star one. Thank you. Richard Galanti, CFO, you may begin your conference.
Richard Galanti (CFO)
Thank you, Emma, good afternoon to everyone. I will start by stating that these discussions will include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements involve risks and uncertainties that may cause actual events, results, and/or performance to differ materially from those indicated by such statements. The risks and uncertainties include, but are not limited to, those outlined in today's call, as well as other risks identified from time to time in the company's public statements and reports filed with the SEC. Forward-looking statements speak only as of the date they are being made, the company does not undertake to update these statements except as required by law.
In today's press release, we reported operating results for the Q2 of fiscal 2023, the 12 weeks ended this past February 12th, as well as February retail sales for the four weeks ended this past Sunday, February 26th. Reported net income for the quarter came in at $1.466 billion or $3.30 per share, compared to $1.299 billion or $2.92 per diluted share last year, an increase of 13%. In terms of sales, net sales for the Q2 increased 6.5% to $54.24 billion, compared to $50.94 billion reported a year ago in the Q2. Comparable sales for the Q2 were as follows.
In the U.S., 5.7% for the 12-week period, excluding gas inflation, 5.8%. Canada, 3.5% reported, 9.6% excluding gas inflation and FX. Other international, 3.8% reported and 9.5% ex gas inflation and FX. For total company, 5.2% reported and 6.8% excluding gas inflation and FX. E-commerce was -9.6% for the 12 weeks reported and -8.7% excluding FX. In terms of Q2 comp sales metrics, traffic or shopping frequency increased 5% worldwide and 3.7% in the United States.
Our average transaction or ticket was up 0.2% worldwide and up 1.9% in the U.S. during Q2. Foreign currencies relative to the dollar negatively impacted sales by approximately 1.8%. Gasoline price inflation positively impacted sales very slightly by approximately 0.2%. I'll review our February sales results later in the call. Next on the income statement is membership fee income. Reported in the Q2, $1.027 billion of membership fee income or 1.89%. That's for this year's Q2 compared to $967 million a year earlier, so a $60 million increase or in dollars or up 6.2%.
Excluding the headwinds in FX, the $60 million increase would have been higher by $20 million. On a FX-adjusted basis, membership fee income was up just over 8 percentage points. In terms of renewal rates at Q2 end, our U.S. and Canada renewal rate was 92.6%, up 0.1% from Q1 end, and worldwide rate came in at 90.5%, also up 0.1% from our prior quarter. Both represent all-time highs. Membership growth has remained strong. We ended the Q2 with 68.1 million paid household members and 123.0 million cardholders, both up more than 7% versus a year earlier.
In terms of at Q2 end, we had $30.6 million paid Executive memberships. This was an increase during the 12-week quarter of 630,000 members since Q1 end. Executive members now represent 45% of paid members and about 73% of worldwide sales. Moving down the income statement next is our gross margin. On a reported basis, gross margin was higher year-over-year by eight basis points, coming in at 10.72% as a percent of sales as compared to a year earlier Q2 at 10.64%. That would be eight basis points up, and then excluding gas inflation, it would have been up nine basis points.
As I always ask you to draw a little chart with two columns, reported and excluding gas inflation, then we'll go down the line items. Core merchandise was -6 basis points reported also -6 excluding gas inflation. Ancillary businesses were +2 and +3 basis points year-over-year. 2% reward, -2 and -2 basis points. LIFO, since we had a charge last year, nothing this fiscal quarter, was +14 and +14. For a total, again, reported eight basis points up year-over-year and excluding gas inflation up nine basis points. Starting with the core merchandise gross margin again was lower by six basis points year-over-year.
In terms of core margin on their own sales or core on core margin, if you will, it was lower year-over-year by 26 basis points. Most major departments, in general were down, with fresh foods being down a little more than others. We're continuing to hold or drop prices where we can due to drive traffic and improve our competitive advantage. Overall, core sales benefit from sales shifting from ancillary and other businesses, to core. Ancillary and other business gross margins again were higher by two and three basis points ex gas in the quarter. Gas business centers and travel were better year-over-year, offset in part by e-com and pharmacy. 2% reward lower by two basis points. That's reflective of the higher sales penetration coming from our executive members.
LIFO, as I mentioned, was a year-over-year variance of +14 basis points. We had no LIFO charge this fiscal quarter compared to a $71 million charge in Q2 last year. Moving on to expenses, SG&A. Our reported SG&A for the Q2 was higher year-over-year by 13 basis points. This year it was 9.11% compared to 8.98% in the Q2 of last fiscal year. Jotting down some numbers for the two columns, first column being reported and second ex gas inflation. Operations was down, higher, -2 basis points, higher by 2 basis points, so -2 and -2. Central, -9 and -9, so higher year-over-year in central by nine basis points.
Stock compensation -2 and -2. All told that would be 13 basis points higher, both on a reported basis and ex gas inflation. The core operations component of SG&A again higher by two basis points and also higher by two ex inflation. This includes the wage and benefits increases implemented last March and last year's third fiscal quarter and an additional profit scale wage increase that went into effect on July 4th, which was in our Q4 of last year. Central, as I mentioned, was higher by nine basis points year-over-year. About half of this increase is a charge related to a tax audit covering several prior years. Stock comp, pretty much as expected, just a couple basis points.
Below the operating income line, interest expense was $34 million this year, $2 million lower than the $30 million, $36 million figure in Q2 of last year. Interest income and other for the quarter was higher by $89 million year-over-year. This was driven by an increase in interest income due to both higher interest rates being earned on and on higher cash balances. The increase in interest income was slightly offset by unfavorable FX. In terms of income taxes, our tax rate in the Q2 was 26.1%, down slightly from the 26.7% figure in Q2 last year. The effective rate for the year, excluding discrete items, is currently, continues to be projected in the 26%-27% range. Overall, net income was up about 13%.
In terms of a few other items of note, warehouse expansion. In the Q2, we opened three net new warehouses, two in the U.S. and one in Australia. Additionally, next week we'll open our 3rd warehouse in China with our 4th and 5th China openings, new openings scheduled to open in the Q4 of this fiscal year. A total of three this fiscal year in China. In fiscal 2023, we expect to open a total of 27 warehouses, including three relocations, a net increase of 24 new warehouses. These 24 planned new openings are made up of 14 in the U.S. and 10 in other international. The 10 in other international includes the three in China, along with our first Costcos in each of New Zealand and Sweden, both of which were opened during the fiscal Q1.
Regarding capital expenditures, our Q2 fiscal 2023 capital spend was approximately $900 million. Our estimate for the year remains in a range of $3.8 billion-$4.2 billion based on timing. In terms of e-commerce, as I mentioned, e-commerce sales in Q2 ex FX decreased 8.7%. This weakness was driven mostly by our online mix of sales. Big ticket discretionary departments like majors, home furnishings, small electrics, jewelry, hardware. These were down 15% in the quarter and make up 58% of our e-com sales. These same departments, by the way, were down 11% in warehouse, but only make up 8% of our warehouse inline sales. Now a few comments regarding inflation. It continues to seem to improve somewhat.
Recall back in the 4th fiscal quarter, which ended last August, our estimated year-over-year price inflation was 8% for that prior fiscal year. During Q1, the estimate on a year-over-year basis came down to 6%-7%. In Q2, we estimate that the equivalent year-over-year inflation number has come down to 5%-6% range, and even a little lower than that towards the end of the quarter, according to the buyers. We continue to see some improvements in many items. Commodity prices are starting to fall, not back to pre-COVID levels in some examples, but continue to provide some relief. Things like chicken, bacon, butter, steel, resin, nuts.
Switching over to our inventory levels, again, in both in Q3 and Q4 fiscal year ends a year ago, in fiscal 2022. On a year-over-year basis, our inventories were up 26% year-over-year. In our Q1 this year they were up 10%, so a good improvement there. As of this quarter end, our inventory year-over-year at the as of the end of Q2 was down 2% year-over-year. Regarding the 2% drop, we were a bit over inventoried last year as a result of supply chain challenges causing inventory to be backed up at the ports. In talking to the buyers, you know, a year ago, their estimate of just timing of getting things across the ocean, was 70-plus days. Today, it's back down to 30-ish days. We've...
You know, supply chain improvement across the board and the rates, of course, coming down. Turning out to our February sales, the four weeks ended this past Sunday, February 26th. As reported in our release, net sales for the month were $17.06 billion, an increase of 4.7% from $16.29 billion a year earlier in the month of February. Recall from January's sales results that the Lunar New Year, Chinese New Year occurred on January 22nd this year, 10 days earlier than this year. The shift positively impacted February's other international by about 2% and total company by about a quarter of a percent.
February's results for both the U.S. and total company were negatively impacted by approximately 1%, we estimate, as a result of substantially worse weather this year year-over-year. I believe most of that was on the traffic side rather than the ticket side. Same-store sales again in the release, the U.S. as reported 3.4%, ex-gas 3.5%. Canada reported 1.2%, ex gas and FX 7.3%. Other international 6.5% reported, ex gas and FX +11.5%. Total company, the 3.5% reported, which ex gas and FX was 5.0%. In terms of e-com, -11.2% reported and compared to a -10.3%, without gas and without FX. That's actually an improvement from our January e-com results.
Our comp traffic or frequency in February was up 4.9% worldwide and 3.1% in the U.S. Foreign currency year-over-year, relative to the dollar, negatively impacted total and comparable sales as follows. Canada, it impacted it by 5.5 percentage points, other international by approximately 5, 7, and total company by approximately one and a half. Gasoline prices were essentially flat year-over-year, ever so slightly inflationary but essentially flat. Worldwide, the average transaction for February was down 1.3%, including the negative impact from FX that I just mentioned. In terms of regional and merchandising categories, general highlights for February that we normally do on the monthly sales call. The U.S. regions with the strongest comp sales were the Midwest, the Northeast, and the Southeast.
In terms of other international local currencies, we saw the strongest results in Spain, UK, and Mexico. Year-over-year inflation for food and sundries and fresh foods, while still elevated, were at their lowest levels in nearly a year, with food and sundries inflation dropping to the high single digits and fresh foods to the low to mid single digits. Moving to merchandise highlights, the following comparable sales results by category for the month which exclude the negative impact from foreign exchange. Food and sundries were positive low double digits. Cooler food and sundries were the strongest. Fresh foods were up mid-single digits. Better performing departments included bakery and meat. Non-foods were negative mid-single digits. Better performing departments included tires, health and beauty aids, and apparel as well as majors, jewelry, and housewares.
I'm sorry, and apparel. Majors, which were electronics and big ticket electronics items, jewelry, housewares, domestics, and small appliances and hardware were the worst performers, consistent with Q2 overall. Ancillary businesses sales were up mid-single digits, with food court, hearing aid, and pharmacy were the top performers there. Finally, in terms of upcoming earnings and sales releases, we will announce our March sales results for the five weeks ending Sunday, April 2nd, on the following Wednesday, April 5th, after market close. With that, I'm happy to turn it back over to Emma for questions and answers. Thank you.
Operator (participant)
Thank you. As a reminder, if you would like to ask a question, press star followed by the number one on your telephone keypad. Your first question today comes from the line of Simeon Gutman with Morgan Stanley. Your line is now open.
Simeon Gutman (Executive Director and Senior Equity Research Analyst)
Hey, Richard. How you doing?
Richard Galanti (CFO)
Good.
Simeon Gutman (Executive Director and Senior Equity Research Analyst)
Can we start, I guess sizing up the consumer, I wanna see how you view February in, I guess, the continuum of months? Part of it, I think you said the down mid-teens with some of those e-commerce categories, which thanks for that information. Is that stable? Is that worse? How, you know, How do you kinda diagnose the whole consumer in the business?
Richard Galanti (CFO)
Well, I think as we talked about even last, you know, 12 weeks ago in the quarterly numbers, we've seen some weakness in what I'll call big ticket discretionary items. I think it's, you know, I'm not an economist, but I think it's a combination of the economy and concerns out there, as well as particularly strong numbers that we enjoyed not only a year ago, but a year prior to that with COVID. We, of course, benefited in big ways with those big ticket items. All those things I think reflect that in those numbers. We're seeing, you know, there's just a couple of weeks in a couple of regions where we started to, you know, set out some seasonal things for spring and summer.
So far so good, it's literally small data points in small parts of the country where the weather has been a little better, which is not a lot of places. You know, anecdotally, some comments were made on things like even some water sports items and camping equipment. This is a small data set. We'll cross our fingers and hope to see. Overall, you know, units are generally fine. I mean, there's some, you know, things still with like on the computer side, there's weakness overall, not just with us. We're still seeing, I think I mentioned this on the Q1 call, we're seeing decent sales in units of televisions, all the average selling price points have come down.
I think it's just in the next couple of weeks where the new TVs for the upcoming season are coming out. Other than that, you know, what we look at, of course, is our average transactions. Our shopping frequency is up. Our new sign-ups are continuing to be strong, up 7% in terms of new signups, on, you know, less than 3% new openings. Those things bode well, but people certainly are spending their dollars where they feel they should be spending them. We'll see where it goes from here.
Simeon Gutman (Executive Director and Senior Equity Research Analyst)
Okay. Follow-up on EBIT growth. I know you don't guide, this business has averaged, I think, about high single or maybe around 10% over time. This year is a little below average because of some of the lapping. You are lapping some great fuel for gross profits. Curious, the puts and the takes to whatever, to whatever number that, you know, you expect the EBIT dollars of this business to grow, are you confident in the levers that you have to get there?
Richard Galanti (CFO)
Well, look, we feel good about what we're doing in driving business in the right way and growing our business. We're, as you and others have heard forever, we're a top-line company. While I can't give guidance, certainly we've seen we've, we and everybody who has cash have benefited from earning more money on their interest on their cash right now. As we saw in this quarter, there was a $70 million improvement year-over-year comparison of gross margin simply because of LIFO. To the extent that we can't predict what's going to happen, at least the trends yesterday were that we're starting to see some improvement in inflation. To the extent that continues, we're comparing to LIFO charges in excess of $100 million and $200 million in each of Q3 and Q4.
That's something that we look at as well. Gas, you know, is volatile, no pun intended, and it's been quite profitable in some quarters more than others. We think that we've got the different levers to, you know, and puts and takes, if you will, to do that. You know, ultimately, it's about driving sales. Certainly we know we're getting the customer in, we're getting more of them in, and they're again renewing at the highest rate ever. That, we'll go through this as good, if not better than others.
Simeon Gutman (Executive Director and Senior Equity Research Analyst)
Thanks, Richard.
Operator (participant)
Your next question comes from the line of Michael Lasser with UBS. Your line is now open.
Michael Lasser (Equity Research Analyst)
Good evening. Thanks for also taking my question. Richard, last time there was an economic downturn in the United States and globally, Costco performed pretty well, was able to comp positive during that time. This time around, it's a much bigger business and it might exhibit more economic sensitivity. A, is that how you're thinking about it? B, what actions would Costco take to preserve its profitability in the event that it saw negative comps in the coming quarters?
Richard Galanti (CFO)
Well, we're gonna do things to drive market share, I mean, first and foremost. You know, we are certainly cognizant of the bottom line, and I think this is a good example of that. This quarter is a good example of that. But at the same token, we're gonna do what we need to do to drive sales, because long term, when we get our customer in and they buy stuff, they're gonna come back and buy more stuff. We've always done a good job of that. Even in the last again, this one's a little different, this economic downturn with, you know, the rising interest rates and the headlines of recession and high interest rates.
That being said, I think we're fortunate in the sense that we've got, you know, a multitude, various types of businesses within our business, from big ticket discretionary items to food and sundries and health and beauty aids and fresh foods, which is really driving the cart right now, more so than it has in the past. We'll continue to do what we do. Yeah, I remember years ago, someone asked about if sales were slowing down, what would we do? We said we'd drive more sales by being even hotter on prices. Generally, that's worked for us, and I see that equation continuing.
Michael Lasser (Equity Research Analyst)
The follow-up question is, to your point, the inflationary numbers that you cited are lower than what others are experiencing. Presumably, your price gaps are widening, which makes sense, and you're delivering more value for your member at a time where they arguably need it. With that being said, how does the fact that you are delivering more value to your consumer and they may be somewhat pressured, play into your mindset around whether or not you would raise your fees? I believe this spring would be the five-year anniversary of the last time you raised your fees and you would typically do it around this time.
Richard Galanti (CFO)
Yeah. Actually, June would be our sixth anniversary.
Michael Lasser (Equity Research Analyst)
Yeah. Sorry.
Richard Galanti (CFO)
As I mentioned in the previous call. No worries. As I mentioned in the previous calls, looking at the last, I think three, they average around five years and seven months, which is about now or last month. What, you know, what we said over the last few semesters, the last few quarters was, I have a college kid. For the last few quarters is in our view, it's a question of when, not if. You know, we'll let you know. Keep in mind, that's 1 way that we become even more competitive. We take those monies and directly become even more competitive.
I might add, though, when we do, our locations do weekly comp shops of 100 to 150 key items, all directly competitive items, and then a variety of other against our direct competitors and other limited comp shops against other forms of traditional retail where the gap of competitiveness is much greater. At the end of the day, our relative level of competitiveness, in our view, is as strong as it's ever been, and we do that weekly in locations and every four weeks at our Every four-week monthly two-day budget meeting, each of the regional operations senior executives get up and show those numbers. You can rest assured we're gonna continue to do that.
Michael Lasser (Equity Research Analyst)
Understood. Thank you very much and good luck and go Trojans.
Richard Galanti (CFO)
There you go.
Operator (participant)
Your next question comes from the line of Christopher Horvers with JP Morgan. Your line is now open.
Christopher Horvers (Managing Director and Senior Equity Research Analyst)
Thanks. Good evening. Following up on the first question, I guess, you know, relative to the last time that you spoke to us, do you think the consumer has deteriorated at all? Anything that you're seeing on the, you know, what they're buying, how price sensitive, private label, income demographic? What are your observations around the rate of change for the consumer?
Richard Galanti (CFO)
Not terribly different than a, than a quarter ago or probably in David's January sales recording. You know, again, it all centers around big-ticket discretionary. You know, we look at that, and we look at how it compared to a year ago and two years ago. We had so much strength there, not only with COVID and people buying big-ticket stuff and now the economy and the interest rates. That's to be expected. You know, again, we kind of go, phew, our strength in food and sundries and fresh foods and health and beauties and things like that all help to counter some of that.
One interesting comment that I think I haven't made in the past, we've been asked that during this concern about inflation and people trading down, have we seen any delta in the sales penetration of our own Kirkland Signature items? Of course, my first comment is that's a trade up or a trade equal, not a trade down. At the end of the day, we have seen actually in the last few months, a bigger delta than normal. You know, I'd say over the last 10 years, we see a, you know, a half or a little less than a half a percent a year of increased penetration. In the last, what period was it?
Speaker 14
Just for this quarter, year-over-year.
Richard Galanti (CFO)
For this quarter, year over year, we've seen about a little over 1.5 percentage point increase in sales penetration on the food side. You know, foods being, you know, anything packaged or dry or wet, you name it. That we have seen a little bit of an increase in that, and I guess that's consistent with the concession that looks people are looking to save money. Of course, if it's our brand, that's great. That creates loyalty.
Christopher Horvers (Managing Director and Senior Equity Research Analyst)
Yep. you know, on the pricing/LIFO point. You know, last quarter you talked about like, you know, we could have a LIFO benefit, and that could be a source of funds in terms of investing in price. Two-part question. If prices stayed here today, would we essentially get back the LIFO headwinds that you had a year ago as we think about, you know, going forward? The second question is, you mentioned your price gaps are as good as they've ever been, but at the same time, there is some change in consumer. Should we think about that LIFO as a source of funds to further invest in price?
Richard Galanti (CFO)
I was looking at it more not as a source of funds, but more as a. Look, to the extent that, and this is just using this as an example. If there was no LIFO charge plus or minus in Q3 and Q4 on a year-over-year comparison, you'd have on a pre-tax basis, a $130 million positive delta and a $223 million positive delta. Those are nice numbers to have as a positive delta. From a standpoint of looking at the earlier question about are we cognizant of earnings growth, if you will, or reported earnings per share, part of that plays into that.
That gives us a little bit of cushion there, as does gasoline from time to time, as does, first and foremost, stronger sales. All those things play into that. You know, I think generally speaking, we're still gonna do what's right in our view to, to drive sales. That's what we wanna do first and foremost. To the extent that that example occurred in Q3 and Q4, that gives us a little room to do that without even thinking about it.
Christopher Horvers (Managing Director and Senior Equity Research Analyst)
Then just from the accounting perspective, should we automatically get that back if prices stay at these levels on the lap?
Speaker 14
The lap, it stays at zero.
Richard Galanti (CFO)
If the lapping stays at zero, yes, there would be no new charge, so it would be comparing to a charge last year. Yeah.
Speaker 14
Correct.
Richard Galanti (CFO)
Yeah. If prices were to go down relative to a year ago, you'd actually have a LIFO credit, which would be even a bigger year-over-year delta.
Christopher Horvers (Managing Director and Senior Equity Research Analyst)
Understood. Thanks very much.
Richard Galanti (CFO)
Sure.
Operator (participant)
Your next question comes from the line of Chuck Grom with Gordon Haskett. Your line is now open.
Chuck Grom (Managing Director)
Hey, how you doing, Richard? Just curious, if you could talk about the gas business from a competitive standpoint and how that's changed bigger picture over the years, and then more recently, how gas gallons have trended?
Richard Galanti (CFO)
Yeah. look, gas has been a relative blessing as well. It's a profitable business. It is volatilely profitable. Sometimes it's more than and sometimes it's less. Overall, it's a profitable business. It's given us an additional competitive advantage of getting people in the door, if you will. I, you know, I think it was this last summer into early fall where I'd been given some numbers where our gallon sales increases in the U.S. were up in the mid to high teens. Compared to darn near flat for the U.S. population as a whole. I'd asked yesterday on that, and I think that +15% delta of us versus the U.S. population is still about 10 percentage points. We are still seeing taking market share, if you will, of getting people in the parking lot.
Chuck Grom (Managing Director)
Okay, great.
Richard Galanti (CFO)
In terms of-
Chuck Grom (Managing Director)
Thank you for that.
Richard Galanti (CFO)
In terms of value, when we look at a value compared to average value across our locations where we do comp shops, in some cases every day in many locations. This year-to-date, I'm looking at a single-digit number, we feel that we save the member $0.37. That's an improvement. Over the last five years, it's gone from the mid-20s to the mid-30s.
Chuck Grom (Managing Director)
Okay. helpful context. Then just on the inflation, just so as prices have started to come down, curious, and as you've invested in price too, curious what you've seen from a demand perspective and how you're measuring the success of some of those price actions that you appear to be taking?
Richard Galanti (CFO)
Well, it's an art, not a science. you know, we look at high velocity items where we can make a big difference fast on some items. on some things, I mean, this is just anecdotal because it was from our last budget meeting with shipping costs coming dramatically down on a 25 and 50 pound bags of Jasmine rice. We've seen a big uptick in sales because that's an item that really skyrocketed because it's a per pound, based on the size of the bag, it was a heavy freight cost. As that comes down, we see that going. I think we're doing more with our suppliers work, you know, changing things around with the MVM. Part of that's based on allocation issues of what we have. Overall, no, we're a firm believer, if you improve the value by lowering the price, and you're gonna drive more sales.
Chuck Grom (Managing Director)
Great. Thank you.
Operator (participant)
Your next question comes from the line of Scot Ciccarelli with Truist Securities. Your line is now open.
Scot Ciccarelli (Managing Director and Senior Equity Research Analyst)
Good afternoon, guys. Hi, Richard. You guys, like many others, have seen a shift away from a bunch of discretionary categories, you know, probably stronger sales strength in the consumable category. Gross margins are actually, you know, pretty stable. I guess the question is, should we start to expect more gross margin pressure on a go-forward basis if we were to, you know, kind of see that mix shift, you know, continue to lean towards kind of food and consumables?
Richard Galanti (CFO)
Frankly, the delta between those, the various categories are not as extreme as they used to be. In fact, in things like fresh foods and food and sundries, you know, some of the weaker categories are not weaker, but lower margin categories are things like big ticket discretionary items. You know, we make a smaller percentage, more dollars per unit, of course, but a smaller percentage on big ticket electronics. So that impacts more the gross margin dollars than the, than the percentages there. If anything, you know, go.
If you go do a little homework on what the cost of processing and selling a rotisserie chicken, our $4.99 price is, which we maintain, is an investment in low prices to drive membership, to drive the sales in a big way. There's some things that we do, notwithstanding huge inflation over. Even though the some of the costs have come down a little bit, relatively speaking, we want those wow items in there as well.
Scot Ciccarelli (Managing Director and Senior Equity Research Analyst)
Got it. Thank you. One follow-up here. You guys have obviously done a couple one-time dividends over the years, but that was always in a really low interest rate environment. As you guys just reported with your net interest income, you can actually generate some real returns on your cash now. I guess the question is, does the higher risk-free interest rate environment actually discourage you from returning that capital through future dividends?
Richard Galanti (CFO)
Well, it helps a little right now, so that's the good news. I don't think it changes our view that this, the special dividend, which we've done for over the last 10 and a half years, I think, it's still an arrow in our quiver, and at some point, it's something you might see again. I'm not trying to be cute. You know, it's kind of like the membership question. We'll let you know when we do it.
Scot Ciccarelli (Managing Director and Senior Equity Research Analyst)
Got it. Thanks, guys. Have a good evening.
Operator (participant)
Your next question comes from the line of Karen Short with Credit Suisse. Your line is now open.
Karen Short (Managing Director)
Hey, thanks very much. Good to talk to you. Richard, I just had a question on, you made a comment that you're particularly cognizant of the bottom line, I think was your exact commentary. I'm wondering if you can triangulate that with what you think, you know, net or pretax margin numbers should look like on a go-forward basis, also triangulate that with the fact that you also commented that, you know, you're looking to invest in price to gain share in various categories.
Richard Galanti (CFO)
Sure. Well, I think on the latter comment, we're looking to use price to gain share. We're continuing to do that. It's not like we're gonna go do more or less. That's what we do for a living. What I was trying to say in the comment is that we're particularly cognizant of the bottom line. We are a public for-profit company, and our shareholders wanna know what we're doing. There have been times, for those of you, that have followed us for many years, when we might, You know, take a bigger hit on some expense in a given quarter. I think, in fact, many years ago, it was the rotisserie chicken example, that we've frankly, I think have more levers today to adjust things which helps us.
We're not gonna get away from that, uh, those two things, driving the top line and being cognizant that we're also a public company trying to earn money for our shareholders. We're gonna prioritize driving sales because that will benefit all the other things on that income statement.
Karen Short (Managing Director)
Okay. Just on inventory, just obviously, inventory down, you know, meaningfully, but any thoughts on how to think about inventory going forward relative to sales, given that it was down 2.5%? I'm not sure how much of that was gas or fuel related, so maybe if you could parse out that relative ex fuel.
Richard Galanti (CFO)
Yeah. By the way, gasoline inventory is very small relative to everything else.
Karen Short (Managing Director)
Right.
Richard Galanti (CFO)
It turns darn near daily. But a lot of the improvement or reduction in inventory year-over-year was all the stuff backed up with the supply chain challenges and the port challenges a year ago. We feel we're in good inventory shape. The flow is much better. You know, there's always gonna be anecdotal examples of stuff that's a little too much of something or a little too less, but we feel pretty good right now about our inventory levels, even by category.
You know, there's a few categories a little over, a few categories under, but nothing like when we were 26% up and you had a lot of, what I'll call, in transit, stuff, literally in, on those pictures that you saw on the news of the ports and the ships. That's improved a lot.
Karen Short (Managing Director)
Okay, thanks so much.
Operator (participant)
Your next question comes from the line of Oliver Chen with TD Cowen. Your line is now open.
Tom Fitzgerald (VP and Equity Research Analyst)
Hi, Tom on for Oliver. On digital, can you guys add some color as to how comps are expected to trend in the near term, just giving the easing compares in the back half of the year? Additionally, what opportunities lie ahead in terms of digital business from an engagement point of view?
Richard Galanti (CFO)
Well, we don't project where we're going. You know, I was glad at least that, you know, February was, while negative, was a little better than January. We've got additional, you know, marketing activities that we've got going on there. We did, you know, hire just five months ago, a new head of digital that is in the process of doing a lot of things. There'll be more to report over the next several quarters. You know, in my view, there's a lot of opportunities and low-hanging fruit to do that. You know, the biggest thing that the challenge that we've had just looking at our current numbers was that we've been so successful over the last two years.
Not only did COVID drive huge business on things for home, big ticket things for home, be it furniture, electronics, televisions, you name it, computers. It also, the acquisition two years ago or three years ago of what's now called Costco Logistics, those two things drove that business in such a big way. We recognize that's part of it, but we're not hanging our hat on that. We wanna grow the sales.
Tom Fitzgerald (VP and Equity Research Analyst)
Great. A follow-up on the executive memberships. With the higher penetration there, could you just talk about how those members behave relatively, and additionally, the effects on the business from that higher penetration?
Richard Galanti (CFO)
Well, they're more loyal, they spend more and they come more frequently. It's only good stuff. Look, at the end of the day, if we can get somebody to commit, in the U.S. as an example, spend $120, instead of $60 at the current rates, and with that, they get the 2% reward with some other benefits on certain consequential transactions, that definitely drives loyalty and drives frequency. The executive member, you know, spends more and shops more. If we get them also to get the co-branded Citi Visa card, it's even better than that. All those things work in our view in a positive direction.
We like the fact that the executive membership penetration, helped by its We've seen it in the last couple of years, we brought it into a few other smaller countries. You need a core base of 15 or so locations to do it. We've got it in other locations as well. We're still seeing increased penetration in the US of that. We do a better job, by the way, when somebody new comes in to sign up, of getting them to sign up. We do a better job of explaining the benefits of an executive membership than we did years ago as well.
Tom Fitzgerald (VP and Equity Research Analyst)
Great. Thank you.
Operator (participant)
Your next question comes from the line of Kelly Bania with BMO. Your line is now open.
Kelly Bania (Equity Research Analyst)
Hi, Richard. Thanks for taking our questions. I'm going to venture to ask a margin question here. The core on core has been down for about eight quarters in a row, I believe. I was just wondering if you could help us understand the thought process in managing the core margin in that way. I guess particularly given your comment that some of the low margin categories like big ticket are under a little bit more pressure, so maybe even a little bit more surprising. Is it just the way that other mix is shaking out? Is this intentionally? Are you reinvesting any of the maybe windfalls that we've had over the past several quarters, are you investing that back into the store? Maybe just help us understand this thought process and this core on core decline here.
Richard Galanti (CFO)
Yeah. I think the biggest component of that answer to that question is our fresh margins have been the biggest piece of that coming down. Looking at it, our fresh margin in Q2 compared to Q2, three years ago pre-COVID, we're still up about 50, 60 basis points. Now we were up a lot more than that because of all the things that COVID did. It drove tremendous sales growth in those areas, which created less spoilage, which is a component of cost of sales in fresh foods and labor productivity in places like the bakery and the meat department. That it was, if you will, outsized improvement, we're still better than we were pre-COVID. I think and we've maintained the sales.
When we had outside sales, and these are not real numbers, I don't have them in front of me, but let's make them up and say that fresh pre-COVID was going up 8% or 10% a year, 8% a year, whatever it was, and then we enjoyed a couple of years of +20%, I believe. Now we're still doing fine with sales growth, not up to eight or 10, but nonetheless, but it's still positive. So we've kept all those outsized gains, but we've also, of late, not just the last month or two, but over the last several months, have invested in pricing, and certainly fresh helps drive that.
I gave the example of the rotisserie chicken, but that goes through lots of areas of fresh foods where that's the key, one of the key categories that people come in to shop for.
Kelly Bania (Equity Research Analyst)
Are you thinking of managing that, in a way to get back to kind of pre-COVID levels? Or would you let that run a little above for some period of time?
Richard Galanti (CFO)
I don't think we're smart enough to know how to manage all these things. There's so many different, you know, components of what is the gross margin from the different core departments to the ancillary businesses, to gas, to LIFO now. It really is fluid. We managing it is, we do manage it, but it's managing it in an organized, chaotic way sometimes too, because things change every day.
Kelly Bania (Equity Research Analyst)
Okay. Great. Maybe.
Richard Galanti (CFO)
I think we do a great job of doing it, but yeah.
Kelly Bania (Equity Research Analyst)
No, agreed. Agreed. Just I guess following up on the LIFO as it relates to the margin, you gave out some of the numbers in terms of the dollars in the last couple of quarters. In order of magnitude, would those kind of offset some of the gas margin tailwinds? Is that the way to think about it? Or, would the gas margin tailwinds be, you know, bigger or smaller than those LIFO charges?
Richard Galanti (CFO)
Sometimes in a given month even is it can be bigger or smaller, honestly. I mean, it does fluctuate. Gas fluctuates quite a bit. Good try on asking.
Kelly Bania (Equity Research Analyst)
Thank you.
Operator (participant)
Your next question comes from the line of Greg Melich with Evercore. Your line is now open.
Greg Melich (Senior Managing Director)
Thanks. A couple of questions. One, hate to go back to the membership fee, but it just seems right. Does the $120 executive price point, now that that's what 43% of members and 70 some percent of sales, does the fact that that's where the, the bulk of the sales are coming from change the thought process in terms of how you might do the timing of the membership?
Richard Galanti (CFO)
No.
Greg Melich (Senior Managing Director)
Okay.
Richard Galanti (CFO)
Not at all.
Greg Melich (Senior Managing Director)
Not at all. Great. Then second is on items in basket. Trying to figure out how is comps slow, and I imagine you're still getting that wage inflation, SG&A doesn't delever more. Why is that? If traffic's still growing and we have inflation, is it just because items per basket are down? Or how do we think about managing the SG&A dollar growth in this, not deflationary, but disinflationary environment?
Richard Galanti (CFO)
Units are still up. Inflation, frankly, price inflation offsets it a little bit, helps offset it a little bit. I think the focus on trying to keep figuring out how to do things more efficiently. One of the things that, again, that we do religiously every four weeks at the budget meeting is the operators are talking about certain focus items, whether it's improving overtime hours or things we've done to automate something and physically improve the flow of goods in a warehouse. We've done a pretty good job of that. You know, we've done that notwithstanding two off-season wage increases this year, three off-season wage increases if you go back, I think 15 months, over the last 15 months.
You know, our leverage there, or very slight deleverage is pretty impressive given that, you know, labor and benefits is our single biggest expense category by a longshot. It's productivity, and I think we've continued to do a good job of that.
Greg Melich (Senior Managing Director)
Just so I'm getting the math right on the, on the comp, if the comp is running six and inflation is running six, if the traffic's up three, then items in basket would be down three?
Speaker 14
Items are up, but it's the mix.
Greg Melich (Senior Managing Director)
It's all mixed.
Richard Galanti (CFO)
My guys are helping me. It's mixed. Yeah, it's mixed.
Greg Melich (Senior Managing Director)
It's a 100% ASP. Got it. All right. That's great. Thanks, and good luck.
Operator (participant)
Your next question comes from the line of John Heinbockel with Guggenheim. Your line is now open.
John Heinbockel (Managing Director)
Hey, Richard, I wanna start with. I know you guys have begun doing a lot more data analytic work. You talked about maybe investing in price. Have you done much work on price elasticity by category or item? You think, you know, you think in the context of non-food is where there's softness, right? It's not consumables. You know, what can you do mid-course correction there, right on non-food? You know, is there elasticity where you can drive some share early in season by making targeted investments in those categories?
Richard Galanti (CFO)
Well, I think there are, and we do. We don't analyze, frankly, the price elasticity on a, you know, historical basis other than we know what works in the past.
John Heinbockel (Managing Director)
Yeah.
Richard Galanti (CFO)
We keep doing it more. It's pretty straightforward. We're not doing, you know, A&B tests or tests and, you know, let's take this price delta in this region, you know, down X or up only Y in a different region, in a different amount and see which one works better. We're pretty singular focused on if we lower the price, we'll do more sales.
John Heinbockel (Managing Director)
All right. Just to follow up on that, right. If, again, you think about non-food, you know, what are the buyers? You know, you sit there telling us maybe non-food is gonna be a little weaker, and it's not all non-food, right? It's, you know, it's certain categories. Have you dialed back inventory? Do you wanna get product? I mean, you get it in early anyway. I'm not sure you can get it in earlier. What do you do, if anything? I guess inventory would be the biggest thing.
Richard Galanti (CFO)
Well, first and foremost is being in stock.
John Heinbockel (Managing Director)
Yeah.
Richard Galanti (CFO)
To the extent that we bring in a few things early, I think that the anecdotal comment I mentioned about water sports and camping, we brought that in a little earlier because we had some room. Needless to say, there's parts of the country there's no sense bringing in some of that stuff early given the weather right now. At the end of the day, I think we've always done a pretty good job of that as well. You know, the big thing is working with their suppliers, using electronics as an example. These are anecdotal stories, but during sales were very strong for two years during COVID and supply chain challenges were still there was virtually no promotional things.
John Heinbockel (Managing Director)
Yeah.
Richard Galanti (CFO)
There's now more promotional. Our buyers are out there making sure that we're getting every promotional penny that's out there and being on top of that with our suppliers. I mean, that's part of what we do. That's been a more of a focus. Yeah, we focus on the categories that are growing. Examples would be like, home and apparel.
John Heinbockel (Managing Director)
Yeah.
Richard Galanti (CFO)
Which are very strong for us right now.
John Heinbockel (Managing Director)
Okay. Thank you, guys.
Richard Galanti (CFO)
Part of it-
John Heinbockel (Managing Director)
Yeah.
Richard Galanti (CFO)
Part of apparel strength is getting more well-known stuff in.
John Heinbockel (Managing Director)
Okay. Thank you.
Operator (participant)
Your next question comes from the line of Paul Lejuez with Citi. Your line is now open.
Brandon Cheatham (VP, Equity Research)
Hey, everyone. This is Brandon Cheatham on for Paul. Thanks for taking our question. Hey, Richard. I wanna go back to your comments on wider price gaps. You know, it sounds like you're managing the business just kinda how you always have, but your price gaps are wider than they ever have been. I'm just wondering, like, how has your competitors' behavior changed? You know, are there certain categories that they're not responding to, or are they responding slower than they have in the past?
Richard Galanti (CFO)
I think I said they're as wide as they've ever been. I don't know if they've gotten wider. You know, we feel very good about where they are. This is against direct competitors or other large boxes on certain categories, recognizing when it's a traditional retailer, there's a much bigger price gap to start with. You know, now mind you also, when we're looking at despite the fact that we and another warehouse club essentially sell the same types of items, you know, we wanna make sure that on exact like branded items, we're a better price. On those 100, 150, that's where we look at that, they're the most competitive.
You know, whether it's Coke and Pepsi or Advil or Tide detergent or, you know, key items that everybody knows the price of or it's the exact same item. There are plenty of items that are differing in quantity, quality, size, color, you name it, where we feel that in some cases we have a better value. That's up to the customer to behold that. We just keep doing what we're doing. We're focusing on those competitive items and constantly figuring out how to drive more value in any item we do. You know, how do we, especially private label, but how do we upsize the pack while improving the price per unit within the pack?
Even when there was big inflation, how do we, you know, if there was a 10% increase in inflationary cost increase in something, how do we get the vendor to eat a little of it? We'll eat a little of it. You needless say, there's still the majority of that increase is gonna be in the price. How do we also beyond that, logistically, not logistically, but, from a manufacturing standpoint and a packaging standpoint, how do we lower the price by a few extra percentage points by figuring out how to get X percent more cell units on a pallet by changing the configuration, the pack size?
I think we focus more on that than anybody I know because, you know, we're taking our $230 billion or $240 billion in sales and dividing it by 3,800 items. We have many items that are $50 million, $100 million, $300 million, $500 million dollar items. When we can do that, we can, we think that we do a good job of that.
Brandon Cheatham (VP, Equity Research)
Yeah. That's to say, I mean, you think that you've got maybe a little bit of a cost advantage over your competitors, so they're not able to quite match you when you make moves like this?
Richard Galanti (CFO)
I'm sorry, what was that?
Brandon Cheatham (VP, Equity Research)
That you have a cost advantage, a little bit of a cost advantage compared to your competitors. When you take prices down, they can't quite match you, that's why you're able to get your price gaps as wide as they have been.
Richard Galanti (CFO)
Well, I think it's our model versus other models. Look, we respect and have very formidable competitors, whether it's other warehouse clubs or big box discounters or supermarkets. we're all doing what we can do to maximize our own respective model. I think... No, certainly, when we make some price changes to things, we see our competitors act to them in some cases and not in others. I think the fact that we have fewer items and we're out there every week, I know that our merchants, when they see those comp shops, if there's, I'm making this up, if there's 100 items and we're the same on 50 and lower on 45 and higher on five, those five better be changed this week. we do...
I know we're on top of it. I can't speak to our competitors, but I assume they are also. We have a model that allows us, the cost structure allows us to mark up our goods on average in the low teens compared to traditional retailers in the mid-twenties to 100. There's we have a little room there.
Brandon Cheatham (VP, Equity Research)
Got it. I wanted to ask about Sam's Club recently announced that they'd change course and start opening doors. I'm wondering, does that impact you all at all on your opening plans? You know, would you.
Richard Galanti (CFO)
Yeah.
Brandon Cheatham (VP, Equity Research)
Sill locate in the same place, even if you knew they'd be opening nearby? You know, would that preclude you from the area?
Richard Galanti (CFO)
No, we're gonna open what we wanna open. Certainly, look, whether it's an existing open location or something that we're aware of based on what's going on in the real estate activity out there, which we all know what everybody's doing in advance in a, in a way. And, you know, does it impact us? It may impact us in some examples of whether it's Sam's or somebody else to push this one more soon. And, you know, look, I was, I was gonna say when you asked about them announcing they're gonna open more doors, I think they said they're gonna announce open about 30 over the next five or so years, five or six years. You know, they apparently didn't get the memo that they should close some more, I'm just kidding.
Look, we respect them as a competitor, and we don't see that changing what we do. I think it bodes well, though, that there's plenty of capacity still in this country, of course, in other countries, even more so.
Brandon Cheatham (VP, Equity Research)
Got it. Appreciate it, and good luck.
Richard Galanti (CFO)
Thanks. We're gonna take one more question.
Operator (participant)
Your last question today comes from the line of Scott Mushkin with R5 Capital. Your line is now open.
Scott Mushkin (Founder and CEO)
Hey, guys. Thanks for taking my question. I have tons. I guess the first thing I wanted to ask a little bit, you gave the regional sales, kinda which regions were better. I mean, obviously, there's been a lot of layoffs in tech. You have a huge business out in California. Are you seeing that business underperform relative, you know, just over a couple month period? That's my first one.
Richard Galanti (CFO)
Not really. My guys here are looking at the numbers, and they're saying not really. What was the gas?
Speaker 14
Yeah. California is hitting gas, and that's why they're no longer top performers for gas.
Richard Galanti (CFO)
One of the things that Josh mentioned is, you know, well, we have 400 locations, 400+ of our 550-ish locations in the US have gas. That's even a bigger percentage in California and higher volume gas units. With gas inflation coming down dramatically year-over-year, that's partly why they're not in the best performers. If you took that out, there's not a whole big difference out there.
Scott Mushkin (Founder and CEO)
No big difference. Just curious, and maybe this is a silly question, what happens with that gas business, especially in California, is with the push to EVs?
Richard Galanti (CFO)
You know, it's a, it's a long road ahead. You know, at some point, you know, we only have 11 car washes, so we'll have plenty of room for car washes 30 years from now. At the end of the day, we think it's a very long road. It's not happening in the next few years. The fact that we're still taking such market share relative to U.S. gas gallons in general is a positive.
Scott Mushkin (Founder and CEO)
All right.
Richard Galanti (CFO)
It's a question. I think it's a question that we can defer for five or 10 years, frankly.
Scott Mushkin (Founder and CEO)
Yeah. Tell the state of California that. Anyway, hey, my last question, I know this call's gone long, is just wondering about a little bit long-term, you know, the initiatives. You had a big push into fresh, you know, several years ago. It's obviously worked out really well. We had the credit card. We had the big push in the big ticket. You know, is there anything on the horizon like that, you know, will change the business a little bit and maybe grow it a little faster?
Richard Galanti (CFO)
Well, international, in general, is plenty of opportunities. If you look at some of the foreign countries as a percent of sales, they are more profitable than the U.S. Those things, that creates more opportunity. I think on the, I don't see anything big right now coming on vertical integration. Might we do another poultry activity at some point, that's still a few years down the road to even consider. We did a second meat plant in outside of Chicago for the Midwest and East Coast just a couple of years ago. We're expanding our bakery commissary. When there's nothing at another, you know, couple of hundred million dollar-plus projects going on like that.
I think another area that I think bodes well for us in terms of competitiveness and, you know, continue to work on getting prices down is working with suppliers. Certain things that we currently ship from the U.S. elsewhere or air freight in the case of produce elsewhere. There's plenty of activity going on the, what I'll call the hothouse side. Could you grow more vegetables? That's all good in concept, but it takes time to figure out. There's plenty of people trying to figure it out there. We're waiting for that. The other thing, I think I gave an example a few years ago, something as simple as cashews.
Historically, they're all grown and washed and prepped for roasting in Eastern Africa, shipped to America for roasting, quality roasting, packaging, and then shipped out to the 13 or 14 countries. Today, those that are ultimately sold in Korea, Taiwan, Japan, Australia and China are now shipped to Vietnam, to a quality roaster supplier of ours that grew over time with us. We dramatically lowered the cost on that portion of a huge amount of dollars. Then using that to do what we normally do, take 80% or 90% of that savings and lower the price even further in those countries.
There's plenty of opportunities that I know we're now talking with big suppliers of these $100 and multi-$100 million items that we buy, whether it's paper goods, plastic items, things like that which of these items could be produced overseas, particularly on the Asia side, and rather than having to produce them here and ship them there. There's a lower cost of production and, as long as we can maintain that quality. I think there's gonna be lots of little opportunities that become in total a good opportunity for us.
Scott Mushkin (Founder and CEO)
Hey, that's great, color, I appreciate it.
Richard Galanti (CFO)
Well, thank you everyone. We're around. I'm sure we'll be talking to a few of you today and tomorrow and into early next week. Have a good afternoon or evening.
Operator (participant)
This concludes today's call. Thank you for attending. You may now disconnect.