Costco Wholesale - Q4 2024

Executive Summary

• Q4 FY2024 delivered solid normalized growth: net sales $78.2B (+1% reported; +7.3% normalized for prior year’s extra week), diluted EPS $5.29, gross margin 11.00% (+40 bps YoY), and e‑commerce comps +18.9%.
• Membership fee income was $1.512B; renewal rates remained strong (U.S./Canada 92.9%; worldwide 90.5%), with paid household members up 7.3% YoY to 76.2M; Executive memberships rose to 35.4M and 73.5% of sales.
• Management highlighted wage investments (~4 bps SG&A headwind in Q4) and modest gasoline margin tailwinds; interest income fell as the company lapped the $6.7B special dividend paid in Jan-2024.
• Catalysts ahead: deferred accounting means the September 1 membership fee increase will largely benefit 2H FY2025 and into FY2026, while e‑commerce momentum and international expansion underpin top-line and margin leverage.

What Went Well and What Went Wrong

What Went Well

• Nonfoods strength with double-digit growth across gold/jewelry, gift cards, toys/seasonal, home furnishings, tires, and housewares; fresh departments grew high single digits, supported by value-driven pricing (e.g., 13% price cut on KS boneless chicken tenders drove 21% volume lift).
• Digital momentum: e‑commerce comps +18.9% (+19.5% ex-FX), improved fulfillment productivity, and completed buy-online, pickup-in-warehouse for TVs; app downloads reached ~39M and search click-through doubled after upgrade.
• Membership health: paid households 76.2M (+7.3% YoY), Executive members 35.4M (+9.6% YoY), with renewal rates stable; “we very much look at [fee increase] holistically… lowering prices, new KS products, and investing in employees”.

What Went Wrong

• Average ticket declined (-0.9% worldwide; -0.3% U.S.), pressured by gas deflation and FX; adjusted ticket only slightly positive.
• SG&A rate ticked up 8 bps (9.04%), with ~4 bps headwind from late-Q4 wage increases; interest income declined YoY following the January special dividend, and FX swung to an $18M loss.
• Supply chain: Red Sea disruptions and emerging U.S. port strike risk prompted contingency actions; some commodities/inputs remained tight (eggs, prime beef, select vegetables), and categories like alcohol stayed relatively soft.

Transcript

Operator (participant)

Ladies and gentlemen, thank you for standing by. My name is Krista, and I will be your conference operator today. At this time, I would like to welcome everyone to the Costco Wholesale Corporation fourth quarter 2024 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, please press star one on your telephone keypad. And if you'd like to withdraw that question, again, press star one. Thank you. I will now turn the conference over to Gary Millerchip, Chief Financial Officer. Gary, the floor is yours.

Gary Millerchip (CFO)

Good afternoon, everyone, and thank you for joining Costco's fourth quarter 2024 earnings call. I'd like to start by reminding you that these discussions will include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements involve risks and uncertainties that may cause actual events, results, and/or performance to differ materially from those indicated by such statements. The risks and uncertainties include, but are not limited to, those outlined in today's call, as well as other risks identified from time to time in the company's public statements and reports filed with the SEC. Forward-looking statements speak only as of the date they are made, and the company does not undertake to update these statements except as required by law.

Comparable sales and comparable sales, excluding impacts from changes in gasoline prices and foreign exchange, are intended as supplemental information and are not a substitute for net sales presented in accordance with GAAP. Now, before we dive into our financial results for the quarter, I'm delighted to say that Ron Vachris is joining us for the call today. I'll now hand over to Ron for some opening comments.

Ron Vachris (CEO)

Thank you, Gary, and good afternoon, everyone. Thank you for joining us today. As we turn the page on fiscal year 2024, let me make a few comments on our progress during the year as a whole. Throughout the fiscal year 2024, we continued to execute on our strategy of growing the top line through delivering the highest quality goods at the lowest possible price to our members. As a management team, we continue to be incredibly proud of our 333 000 employees worldwide and the culture that they foster. The consistency of our financial results is a reflection of the commitment of our entire team to member service and the Costco experience. Most of these employees are led by our fantastic warehouse managers, who we view as executives in our company.

Succession planning continues to be a key focal point for us as we're continually working on identifying the future leaders of our company. In fiscal year 2024, we promoted 95 new warehouse managers. 85% of those promoted started at Costco as an hourly employee. This promote-from-within culture and the long-term career it helps to build is core to who we are as a company, community member, and retailer. A few other highlights I'd like to mention. In fiscal 2024, we hit our target of 30 new warehouse openings. This included one relocation and resulted in 29 net new buildings. Highlights included our first-ever building in Maine, bringing us to 47 states, and our 600th U.S. building in Eau Claire, Wisconsin.

We also continued to see significant opportunities worldwide, and our fiscal 2025 plan has 12 of our planned 29 openings coming outside of the U.S., including our fifth building in Spain, which opened in Zaragoza two weeks ago. With three of these warehouses being relocations, we expect to add 26 net new buildings in fiscal 2025. We continue to grow our E-commerce business, and Costco Logistics has had a remarkable year. Appliances and furniture and big and bulky has led the way, and logistics delivered over 4.5 million items this last year, up 29% over the year prior. Improvements in our item assortment, delivery times, and scheduling functionality all enhance the member experience. We have great momentum with this business and expect big and bulky items will be a key part of our continued progress with E-commerce in the coming year.

Turning to technology, we're starting to realize the benefits from the work that was done this past year. Members are very excited about being able to check warehouse inventory via the Costco App, and the membership card scanners installed at the front doors have delivered on the goal of speeding up the checkout process. This has been very well received by our members. More improvements are currently underway, which should further benefit our business, both online and in our warehouses. With that, I'll turn it back over to Gary to discuss the results for the quarter, and I'll jump back on during Q&A to field some questions.

Gary Millerchip (CFO)

Thanks, Ron. In today's press release, we reported operating results for the fourth quarter of fiscal 2024, the 16 weeks ended September 1. As we did last quarter, we published a slide deck on our investor site under Events and Presentations with supplemental information to support today's press release. You might find it helpful to have this presentation in front of you as I walk through our results. Throughout this discussion, when we're comparing to last year's fourth quarter, the best way to normalize for the extra week is to multiply last year's results by 16/17. Net income for the 16-week fourth quarter came in at $2.354 billion or $5.29 per diluted share, up from $2.16 billion and $4.86 per diluted share in the 17-week fourth quarter last year.

This year's results included a nonrecurring net tax benefit of $63 million, or 14 cents per diluted share, related to a transfer pricing settlement and true ups of various tax reserves. Reported net income was up 9% year-over-year. Excluding this year's nonrecurring tax benefit and normalized for the extra week, last year, net income and earnings per diluted share were up 12.7% and 12.6%, respectively. Net sales for the fourth quarter were $78.2 billion, an increase of 1% from $77.4 billion in the fourth quarter last year. Adjusting for the extra week last year, net sales would have been up 7.3%. The following comparable sales reflect comparable locations year-over-year and sixteen comparable retail weeks. U.S. comp sales were up 5.3% or 6.3%, excluding gas deflation.

Canada comp sales were up 5.5% or 7.9%, excluding gas deflation and FX. Other international comp sales were up 5.7% or 9.3% adjusted. This all led to total company comp sales of +5.4% or +6.9%, adjusted for gas deflation and FX. Finally, e-commerce comp sales were up 18.9% or 19.5%, adjusted for FX. In terms of Q4 comp sales metrics, foreign currencies relative to the U.S. dollar negatively impacted sales by approximately 0.9%, while gasoline price deflation negatively impacted sales by approximately 0.6%. Traffic or shopping frequency increased 6.4% worldwide and 5.6% in the US.

Our average transaction or ticket was negative 0.9% worldwide and negative 0.3% in the U.S. This includes the headwinds from gas deflation and FX. Adjusted for those items, ticket would have been positive 0.5% worldwide and positive 0.6% in the U.S. Moving down the income statement to membership fee income. We reported membership fee income of $1.512 billion, an increase of $3 million or 0.2% on one less week, year-over-year. FX negatively impacted membership fee income by 0.9%. Excluding the impacts from the extra week last year and FX, normalized membership fee income was up 7.4%. In terms of renewal rates, at Q4 end, our U.S. and Canada renewal rate was 92.9%, down [0.1%] from Q3 end.

This slight decrease related to an online membership promotion that we ran for a short period in fiscal year 2023, which resulted in over 200,000 new signups. As those members entered the renewal rate calculation during Q4 fiscal year 2024, the lower renewal rates for that cohort, which is typical for digital promotions, had a negative impact on the overall US renewal rate. Outside of those signups, there were no meaningful changes in the US renewal rate. The worldwide rate came in at 90.5%, the same as Q3, with improvement internationally offsetting the slight negative in the US. We ended Q4 with 76.2 million paid household members, up 7.3% versus last year, and 136.8 million cardholders, up 7% year-over-year.

About half of new member signups in fiscal year 2024 were under 40 years of age. This percentage has been growing since COVID and has lowered the average age of our member over the last few years. At Q4 end, we had 35.4 million paid Executive Memberships, up 9.6% versus last year. Executive members now represent 46.5% of paid members and 73.5% of worldwide sales. Turning to gross margin, our reported rate in the fourth quarter was higher year-over-year by 40 basis points, coming in at 11% compared to 10.6% last year, and up 33 basis points excluding gas deflation. Core was lower by 5 basis points and lower by 11 basis points without gas deflation.

In terms of core margins on their own sales, our core on core margins were higher by nine basis points. Ancillary and other businesses gross margin was higher forty-four basis points and higher forty-two basis points, excluding gas deflation. This increase year-over-year was driven by gas and E-commerce. E-commerce benefited from strong sales growth, item mix, and fulfillment productivity, and gas margins benefited from some moderate tailwinds and lapping a slightly weaker quarter last year, but nothing as significant as the benefit in Q1 2024 as a result of the volatility from world events in that quarter. 2% rewards was higher by four basis points or three basis points without gas deflation, reflecting higher sales penetration from our Executive members, and LIFO was a benefit of five basis points.

We had an $8 million LIFO credit in Q4 this year, compared to a $30 million charge in Q4 last year. Moving to SG&A. Our reported SG&A rate in the fourth quarter was higher year-over-year by eight basis points, coming in at 9.04% compared to last year's 8.96%. SG&A was higher by two basis points, adjusted for gas deflation. The operations component of SG&A was higher four basis points, but was flat excluding gas deflation. Higher wages went into effect for the last six weeks of the quarter in the U.S. and Canada, which was a headwind for the quarter of approximately four basis points. Investing in our employees remains a key part of our strategy, and we will continue to focus on driving top-line sales and improving productivity to mitigate the incremental costs.

Central was higher by three basis points and two basis points without gas deflation. Stock compensation was flat year-over-year, and pre-opening was higher one basis point, but flat without gas deflation. Below the operating income line, interest expense was $49 million versus $56 million last year, reflecting $1 billion of debt paydown in the second week of Q4 this year. Interest income for the quarter was $138 million versus $201 million last year, primarily due to the $6.7 billion special dividend paid in January 2024. Interest income will continue to be a headwind in the first half of this year, due to lower year-over-year cash balances and lower interest rates. FX and other was an $18 million loss this year, versus a $37 million gain last year. This was primarily due to foreign exchange.

In terms of income taxes, our tax rate in Q4 was 24.4%, compared to 27.1% in Q4 last year. As mentioned earlier, this year's rate benefited from $63 million of net tax discrete items. Adjusted for this benefit, the tax rate for the quarter would have been 26.4%. Turning now to some key items of note in the quarter. We opened 14 new warehouses in the fourth quarter, 10 in the US, 2 in Japan, and one each in Korea and China. Capital expenditure in Q4 was approximately $1.58 billion, bringing the total year spend to $4.71 billion. Taking a deeper look into core merchandising sales, once again, non-foods led the way with the highest comparable sales in Q4.

Our buyers have done a fantastic job finding new and exciting items at great values. Gold and jewelry, gift cards, toys and seasonal, home furnishings, tires, and housewares, all were up double digits in the quarter. Health and beauty aids also performed well, as we have expanded and elevated that category with new high-end SKUs, both online and in-warehouse, including assorted luxury fragrances at a 30%-70% value to retail. Across the fresh departments, we saw high single-digit growth, as our continued focus on value is resonating with our members. An example of this in the meat department is our Kirkland Signature Boneless Chicken Tenderloins, where we lowered the price 13% and saw a 21% lift in pounds sold.

In food and sundries, the introduction of more international food products, such as paneer cheese, Punjabi cookies, and fried tofu kimbap, are resonating extremely well with our members. We're also delivering greater value by adding some new Kirkland Signature items, such as our KS Organic Golden Maple Syrup and KS Aerosol Whipped Cream. Kirkland Signature offers significant member value compared to the national brands and continues to grow at a faster pace than our business as a whole. Our goal is always to be the first to lower prices where we see the opportunities to do so. And just a few examples this quarter include KS Standard Foil, reduced from $31.99 to $29.99, KS Macadamia Nuts, reduced from $18.99 to $13.99, KS Spanish Olive Oil 3-liter, reduced from $38.99 to $34.99, and KS Baguette two-pack, reduced from $5.99 to $4.99.

Our commitment to sustainability and achieving lower emissions is also presenting opportunities to lower our costs. A great example of this is our KS Laundry Packs, which we recently converted from a rigid plastic tub to a pouch. This allowed us to reduce the plastic packaging by 80% and pass these cost savings on to the member, lowering the price by $1 from $19.99 to $18.99. We've also found success working with suppliers to localize production of bulky items such as water, paper, and laundry detergents. By manufacturing these goods closer to the countries in which they're sold, both costs and emissions associated with the shipment of these goods are greatly reduced. This quarter, we introduced our new Japan-produced Kirkland Signature paper towels.

In addition to the emissions benefits from no longer shipping millions of units of paper towels from the U.S. to Asia, the reduced freight allowed us to lower the price by approximately 30% or $8 per unit in that market. As production ramps up, we are in the process of transitioning our other Asian markets to locally produced SKUs. Shifting the production country of this one product will result in annual member savings of $30 million. Within ancillary businesses, pharmacy had the strongest sales percentage increase, driven by double-digit growth in script counts. Our optical department also performed well, as more members have taken advantage of the exceptional values in brand name frames and sunglasses. On a like-for-like 16-week basis, gas sales were negative, low single digits in the quarter, as a result of the average price per gallon being 5% lower.

This was partially offset by gallon growth of 3%. Inflation was once again effectively flat in the quarter across all core merchandise. Food and sundries and fresh foods were slightly inflationary, and this was offset by deflation in non-foods. In the supply chain, we are seeing good flow of products through Panama and Baltimore. The Red Sea is a remaining pain point and is causing some relatively minor shipping delays. Product availability has generally been good, with a few exceptions. Egg supplies are still being negatively impacted by avian influenza, and prime beef and a handful of vegetable SKUs have been tight. As Ron shared earlier, we are pleased with the momentum in our digital business and continue to make good progress with our technology priorities.

Our app was downloaded 3.5 million times in the quarter, bringing total downloads to approximately 39 million, and we recently upgraded the native search function on our U.S. mobile app, leading to a doubling of the click-through rate on search results. E-commerce traffic, conversion rates, and average order value were all up year-over-year, helping to drive another strong quarter of comparable sales growth. While continued strength in bullion was a meaningful tailwind to e-commerce comps, appliances, health and beauty aids, tires, toys, gift cards, hardware, housewares, home furnishings, optical, and pharmacy all grew double digits year-over-year. The rollout of Buy Online, Pickup in Warehouse for TVs in the U.S. market was also completed in Q4. This allows same-day pickup of a new TV for members who prefer not to wait for delivery.

While Buy Online, Pickup in Warehouse isn't cost-effective for us on lower-priced items, for high-value items with high shipping costs like TVs, the freight savings more than offset the added labor required in warehouses to fulfill those orders. We're now testing a similar program on laptops. Costco Next, our curated marketplace, while still small, continued to grow nicely in the quarter. We added 11 new vendors, bringing the total to 86, and adjusting for the extra week, gross sales grew nearly 40% year-over-year. A brief comment on the membership fee increase that went into effect on September the first. Due to deferred accounting, this will have minimal impact early in the year. The vast majority of the benefit will come in the back half of fiscal year 2025 and into fiscal year 2026.

With that being said, our commitment to invest in our employees and members is continuous, as evidenced by the July wage increase and lower prices, such as the example shared on today's call. In closing, we are encouraged by our momentum exiting fiscal year 2024, and are excited about the growth opportunities ahead as we continue to execute our strategy of delivering exciting new items and greater value for members, innovating with Kirkland Signature, and growing our warehouse footprint and digital capabilities globally. In terms of upcoming releases, we will announce our September sales results for the five weeks ending Sunday, October the sixth, on Wednesday, October the ninth, after market close. That concludes our prepared remarks. We'll now open the line up for Q&A.

Operator (participant)

Thank you. We will now begin the question-and-answer session. If you would like to ask a question, please press star one on your telephone keypad to raise your hand and join the queue. And if you'd like to withdraw your question, again, press star one, and please limit yourself to one question. Your first question comes from Simeon Gutman with Morgan Stanley. Please go ahead. Simeon Gutman, please press star one.

Simeon Gutman (Executive Director and Senior Equity Analyst)

Our question. On the previous earnings call, there was a discussion about the possibility of greater SG&A leverage in the future, as a lot of foundational investments have already been made. Shortly after, Costco announced a membership fee increase and reinvestment into employee wages as well. While wage investments are clearly the right thing for the business and instrumental for Costco's culture and success, how should we reconcile this potential posture of driving more leverage, but also adopting the same prior approach of putting upside back into wages?

Gary Millerchip (CFO)

Hi. Yes, good afternoon. Thanks for the question. You know, as we think about our overall model for the company, our focus is on really achieving a balance across the business. And as you know, over the years, what we've done successfully at Costco is continue to invest in members, continue to invest in lowering prices and value for our members, and continuing to invest in our employees. And we believe that's gonna be a critical part of our overall strategy going forward to make sure we keep driving our top-line sales growth. You're absolutely right. During the quarter, and in fact, I think three times during the year, we shared we made various investments in our employees.

Back in September 2023, we announced an increase in the starting wage, and then in March this year, we announced that we were increasing wages for a number of our managerial roles in the warehouses. And as you mentioned, we recently announced a further increase for all of our hourly employees in the warehouses and across our distribution network. And so from our perspective, we think that's an important part of continuing to support the top-line growth in the company.

As you saw in the quarter, when you adjust SG&A for gas deflation and for looking particularly at the operational part of the business, the good news was we were able to effectively offset those cost increases by driving productivity and driving sales leverage, and I think we've done that pretty consistently over time, and our expectation of ourselves is that we'll continue to do that. So I think for us, it's less about giving specific guidance on, you know, a particular measure, but more looking at the long term of how we expect to be able to keep making those investments, but also driving leverage in our model to ensure we're sustainably driving top line and driving profitable growth. Ron, anything you'd like to add?

Ron Vachris (CEO)

No, I have to agree with you, Gary.

Simeon Gutman (Executive Director and Senior Equity Analyst)

Got it. That's really helpful. And just as a quick follow-up, can you speak to the impact of the card readers at the different stores you've rolled out so far? Should we be modeling potentially a lift in member counts or growth in addition to the MFI bump from the fee increase as well?

Ron Vachris (CEO)

Yeah, this is Ron. You know, the purpose of the card readers at the front door. This is a system we've been using for over two years now in Europe, and especially in the U.K., and we piloted it here in the U.S. for about six months. Several different benefits for it. It gives our operators real-time traffic counts throughout the day, so we're able to adjust front-end lines that we need to open and close lines based on the fluctuations of business. We can monitor our fresh foods a little better because we know what the traffic counts look like and so forth. And it has also taken the friction of membership verification away from the front-end registers and moved that to the front door, where we're able to look at people's membership status.

We let them know if their renewal is due before they get to the front end. So we've realized some very nice, healthy front-end improvements in productivity, and it's allowed our operators to manage the business much better throughout the day.

Operator (participant)

Your next question comes from Chris Horvers with JPMorgan. Please go ahead.

Chris Horvers (Senior Analyst)

Thank you. Good evening. I'm on a train-

Gary Millerchip (CFO)

Hi, Chris.

Chris Horvers (Senior Analyst)

So hopefully you can hear me.

Gary Millerchip (CFO)

We can, yes.

Chris Horvers (Senior Analyst)

My question is, can you talk about the risk around the port strike that's emerging here? You know, what percentage of the product do you come through those affected ports? Any description on maybe the categories that are more exposed versus the others? And to what extent have you tried to bring in product early for the holidays, to try to manage that risk?

Ron Vachris (CEO)

Yeah, this is Ron again. Yes, I'll take that question. You know, the port strike is something we've been watching very closely for some time. We knew about the timing of this as well. When you think about the impact to our business, we import primarily non-foods and some limited food and sundries come in, but non-foods is less than about 25% of our total business, and only a subset of that is imported. There's some domestic goods in there as well that are not imported in non-foods. We have done a little bit of everything that you spoke about. We've got contingency plans. We've cleared the ports, we've pre-shipped.

We've done several different things that we could to get holiday goods in ahead of this timeframe and looked at alternate plans that we could execute with moving goods to different ports and coming across the country if needed. It could be disruptive based on how impactful. I can't tell you until we know length and what could happen out there, but it is in our sights. Our buyers are all over it. They're watching it closely, and we've taken as many preemptive measures as we could to prepare for this.

Chris Horvers (Senior Analyst)

Then just as a quick follow-up, as you think about the risk around ocean freight rates, is your expectation that freight rates are maybe elevated right now because of all this, and perhaps come down into next year as we think about contract renewal periods? Thank you.

Ron Vachris (CEO)

You know, I'm not good at predicting the future, but I can tell you that from what we're seeing, a big chunk of our freight comes in under contract, so we've been insulated from that. The spot market has peaked in the last quarter, and we see that coming off now. If a port disruption could happen or something else could happen in the Red Sea, could that go up? Absolutely, it could go up. But from what we're seeing now, the spot market did increase, is coming off at this point, and again, our team did a great job by insulating us with good, solid contracts for this year.

Chris Horvers (Senior Analyst)

Thanks so much.

Operator (participant)

Your next question comes from the line of Chuck Grom with Gordon Haskett. Please go ahead.

Chuck Grom (Equity Analyst)

Thanks. Good afternoon, Gary, and Ron. Just to go back to the membership card scanners, can you just speak to where you are on the rollout of that across the U.S. and any positive reactions you've seen so far? Our checks have shown that in some locations, you guys are actually seeing a double-digit increase in new sign-ups.

Ron Vachris (CEO)

Yeah, we have about 350 U.S. warehouses rolled out at this point and through the process. You know, reaction has been very positive. Myself, all our operators, and we really rely on feedback of our warehouse managers on what's been done. And our head operator, Russ Miller, and myself have been met with great positive reactions, both from the members and from the operators as well. We have seen some lift in member sign-ups from that. We've also seen a lift in renewals because before people get to the front end, now they're aware that my renewal is gonna be due when I get to the registers. So members are very appreciative of that. They know that, and they get up to the front, and they're not shocked by that process as well.

Improved productivity, improved interaction, and as we know, as our volumes grow, we're looking for everything we can find to use technology to help get our members through the front ends in a good, smooth manner.

Chuck Grom (Equity Analyst)

That’s very helpful. And then my follow-up, just Gary, on the other business line within the margin build, up 42 basis points ex-gas. Can you add a little bit of color on the sequential change? How much came from e-commerce, how much came from the improvement in gas margins? Thank you.

Gary Millerchip (CFO)

Sure. Yeah, we called those two out because they were the two biggest factor in the results. So I think of them as being, you know, relatively similar in terms of the impact. E-commerce actually has been a nice trend that we’ve seen for the last couple of quarters. We’ve been really pleased with the momentum in e-commerce.

Of course, the headline sales growth has been very positive, which is a great starting point, but then the team's done a really nice job of improving fulfillment efficiency and driving better sell-through in terms of the product and the inventory management as well, and the mix has improved. As I mentioned on the prepared remarks, we've seen really good growth, really balanced across the board around e-commerce growth. So e-commerce has been a sort of a sustained trend that we've been pleased with the last couple of quarters. On the gas side of things, I wouldn't say there was anything unusual during the quarter.

It was really more a case of that we had a little bit of tailwind in margin, and as I mentioned earlier, we're cycling some lighter margin in the same quarter in 2023.

Chuck Grom (Equity Analyst)

Thank you.

Operator (participant)

Your next question comes from the line of Paul Lejuez with Citigroup. Please go ahead.

Brendan Chinman (Analyst)

Hey, everyone, this is Brendan Chinman for Paul. Hey, Gary and Ron. I wanna talk about new store growth. You know, you mentioned 26 net in 2025, with, I guess, an increasing on focus on international. Anything you can share on why the US would step down from 24 levels? Should we think about international as, you know, being a more important growth vertical for you? And then on the US side, you know, how many of those are new markets versus infill, where you're trying to alleviate traffic congestion from a nearby store?

Ron Vachris (CEO)

You know, on the international to domestic, on new openings, it really is based on timing through the system. I mean, you know, in larger markets, we may have a building that's taken us three years to get to fruition, where some markets move quite quickly. So, you know, there's no specific plan that we have. We put the buildings in queue, we agree that we're gonna go there, and then it's following the process all the way through to how utilities come along, the infrastructure, those type of things. As far as the outlook on international versus domestic growth, it's pretty balanced. Again, more of a timing thing than anything, you know? I think that we've got 12 next year that will be outside of the U.S., and we've got some...

As you could imagine, in some countries, it takes us a few more years to get a building opened up. So it really is about the cadence of them opening. But we continue to look forward that we feel pretty good balanced growth. We see infills as being very positive for us, both in US, Canada, and all of North America, that we have plenty of opportunities for infills in North America for the next several years ahead. And then a good market of, you know, new regions of the world. I don't think we have anything lined up for next year, but new markets. I'd say that we're probably looking at five to six new markets that we'll be expanding into next year.

Brendan Chinman (Analyst)

Got it. Okay, thanks. And just one follow-up on the MFI fee increase. I know you all typically reinvest in the member experience and price, and I think we already talked about wages. You know, how should we think about the timing of that? Because you realize, you know, the MFI fee increase over a longer period. Is there any near-term pressure that might flow through the P&L as you do kinda focus on delivering that value to the member after you've increased that fee? Thanks, guys.

Gary Millerchip (CFO)

Sure. Yeah, thanks for the question. It, you know, we mentioned a couple of these things in the prepared comments, too, but we certainly think about, as we increase the membership fee, our goal is always to find ways to deliver more value for the member, and we think about that pretty holistically. It can be, lowering prices, it can be launching new Kirkland Signature products. It, it's also investing in ways that we can improve the member experience and some of the things that Ron mentioned earlier. And we believe a critical part of delivering a better experience for our members is also in employee wages. So we very much look at it holistically and how do we make sure we feel confident that we're delivering more value to our members over time.

And some of those things, as you heard in Q4, we've already started that journey with some of the wage increases and some of the ways in which we've been able to lower prices and deliver more value through new Kirkland Signature products in the quarter. To answer maybe the broader question that you mentioned, as you know, we generally don't provide guidance, as part of our updates for the results of the company. You know, that being said, I would say overall, we feel very good about our momentum ending fiscal year 2024, and as we head into the new fiscal year, we feel very good about the opportunity ahead of us. As always, we've set ourselves high internal expectations for how we expect to grow the top line and to do so profitably.

And we'll be doing that by continuing to invest in member value and employees while driving efficiencies and leverage. And we still see many opportunities to find ways to improve gross margin and OG and SG&A in terms of opportunities to fund those investments. We wouldn't normally comment on cadence for the year ahead either, but as I mentioned in my prepared remarks, you know, there are a few unusual items this year with the deferred accounting for the membership fee increase, as you mentioned, and that will generally sort of really, the most part of that will come in the second half of 2025 and the first half of 2026.

There are also a couple of specific factors to Q1, namely the interest income, where we'll be cycling higher cash balances and higher interest rates from last year. And gas profit, while it's really been pretty stable over the years, there was certainly some volatility due to world events in Q1 last year. So the one thing I think I would say is that as you think about our cadence of our earnings growth across 2025, it's likely to be less linear than you would probably typically expect.

Operator (participant)

Your next question comes from the line of John Heinbockel with Guggenheim Securities. Please go ahead.

John Heinbockel (Managing Director)

Hey, Gary, I wanted to start with. I think you said, right, core on core was up nine basis points. What was the color by product category of, you know, fresh foods, sundries, and non-food?

Gary Millerchip (CFO)

Yeah. Food and sundries were slightly negative. Fresh was slightly positive, and non-foods was the strongest of the three, which was really, again, I think from the mix perspective and the strong sell-through in the year, but that was sort of the breakout of it, John.

John Heinbockel (Managing Director)

And then maybe secondly, for both of you guys, how do you, when you think about Kirkland Signature, right, you talked about, you gave some price decreases that you've taken, and all of those that you cited anyway were Kirkland Signature. You know, so maybe, you know, talk about that, those price decreases, but maybe versus brand name product, where Kirkland Signature penetration is now. And is that business because you're getting scale? Is that just becoming a lot more profitable than it used to be or you're trying to manage to a flatter margin or an unchanged margin on Kirkland Signature?

Ron Vachris (CEO)

You know, I guess I'll take that one. We, you know, we continue to see the penetration grow, and then it's in the high 20s now, as it continues to grow, as our penetration across the board goes. We are not only seeing investment in price in Kirkland Signature, but with Claudine and her team, they have a commitment that if we're gonna expect that of our suppliers, we're gonna start with setting that example and showing the benefits of investing in price and driving unit volume. So we are doing that, but we're also seeing great support from our suppliers and our partners around the world that are also interested in driving their business and using Costco as that partner to get that done.

So, you know, we continue. I think we've got some great items coming up this next year in Kirkland Signature that will continue to enhance that value proposition to our members, and continues to build the loyalty with our members because this is, this is a place you come to get Kirkland Signature. So, we see good things coming, we see the penetration continue to grow, and we continue to see the value and the benefits to the members improving over time. Gary, if you'd-

Gary Millerchip (CFO)

Yeah, maybe, Ron, just to add to the comment also, John, you were asking around the margin opportunity. Obviously, we stay very disciplined about we have a cap on the margin that we expect to make on a Kirkland Signature product, but as that mix continues to grow, it definitely creates some overall tailwind in our margin overall. And, you know, I mentioned a couple of examples in the prepared comments. We're also seeing some really great opportunities as we're thinking more globally across our merchandising teams, really working together and finding ways to buy more efficiently and in-country production that we mentioned.

So when you take all those combined, I think that's creating opportunity for us to win-win in the sense that we can create more value for the member, stick within our commitments around the margins that we work within. But I do think it creates tailwinds and ways to balance the investment in the member while continuing to grow long term.

John Heinbockel (Managing Director)

Thank you.

Operator (participant)

Your next question comes from the line of Scot Ciccarelli with Truist Securities. Please go ahead.

Scot Ciccarelli (Managing Director and Senior Equity Research Analyst)

Hey, guys. Scot Ciccarelli. Another question on the ID scanning. Any feel for how often non-members were shopping at Costco? And then secondly, just given some of the price reductions that you highlighted earlier, can you comment on your broader inflation and deflation expectations for fiscal 2025? Thanks.

Ron Vachris (CEO)

As far as the scanning, I really couldn't give you a number. I mean, we've been exclusive for since the inception of the company, that we're exclusive to members. You know, there are shop cards and those type of things that people come in with, but I really couldn't give you a set number of what % of people coming in are non-members. And as far as inflation, I think Gary's saying that he'd like to take that one.

Gary Millerchip (CFO)

Yeah, happy to. Probably similar to Ron's comment earlier, I don't know, we would be particularly good at telling you what we forecast for the market overall, but what I, what I can maybe give you some a little bit more color from what we're seeing, Scot, from our perspective, we, you know, we shared for the quarter overall, inflation was essentially flat. We saw a little bit of inflation in fresh. That was mainly driven by produce right now. That was sort of the, the key category there that drove. But again, very low inflation, nothing meaningful to talk about. We're still seeing it very, very quiet in terms of the inflationary impact on prices and, and on the business.

Food would have been slightly inflationary as well, but it's remarkable actually how the small range now between the different categories, really nothing between positive two and negative two, and sort of all coming back out to even just very slightly inflationary, but nothing much there either that we're seeing. We are seeing more of a mixed view on commodities. Things like corn and flour and sugar are all deflationary, which is causing the bakery category as a whole to be deflationary. But then on things like butter and cocoa and eggs, as I mentioned earlier on the call, and cheese, we're seeing more inflation. So I don't know that we're seeing anything today that's causing us to believe that, you know, where we are today is what the world looks like.

Our goal, of course, is always to find ways to lower our costs and therefore hold prices down for our members. I wouldn't say that we're seeing anything dramatically different from how our quarter looked for this quarter, but of course, we're, you know, we're like everybody, we're susceptible to shocks and changes that can happen in the market.

Scot Ciccarelli (Managing Director and Senior Equity Research Analyst)

Helpful. Thanks a lot, guys.

Operator (participant)

Your next question comes from the line of Michael Lasser with UBS. Please go ahead.

Hi, this is [Zane Barako] from Michael Lasser. Thanks very much for taking our question. While it's early, what has been the customer response to the MFI increase? And do you expect to see a rise in customer attrition? Why or why not? Thank you.

Gary Millerchip (CFO)

Yeah, thanks for the question. You know, as you are familiar with the membership fee increase, we were very deliberate about the timing. In fact, we really delayed by two years from when we've traditionally increased the fee every five years, and that was initially because of what we thought our members were experiencing with COVID, and then we saw higher inflation. So we were very deliberate in delaying the increase until we felt that we started to see inflation dissipate and our members were spending more in non-food categories, seeing that they were coming through the inflationary period. From a member reaction perspective, you know, I'd say we haven't really heard a significant member reaction. Our membership renewal rates, there's no real change in trend, as I mentioned in some of my prepared remarks.

You know, I think the fact that we've been able to stave off inflation on things like the hot dog pricing at $1.50, and the rotisserie chicken at $4.99, and generally demonstrating the way that we're lowering prices for members wherever we can. I think there's been a recognition that in the context of what's happened more broadly over the last seven years, that we've stayed true to our principles of really trying to help the member and deliver the value. As we mentioned earlier on the call, we've been making investments, whether it be in wages for our employees or in lowering costs, to show our members that we want to make sure that the increase is delivering value to them.

Operator (participant)

Your next question comes from the line of Rupesh Parikh with Oppenheimer. Please go ahead.

Rupesh Parikh (Managing Director and Senior Analyst)

Good evening, and thanks for taking my question. So just on the consumer front, just curious how you guys are feeling about the health of your consumer, and then any changes in consumer behavior of note during the quarter?

Gary Millerchip (CFO)

Sure. Thanks, Rupesh. You know, I think we see the consumer, our member, through, of course, through our lens, and what I would say is that it's very clear that quality and value have never been more important. That's something that is very clearly coming through in our insights and how we're seeing our members shop. I think the encouraging thing for us is, as you know, as you look at our trends in the year to date, we have seen that as inflation has dissipated, our members have started to spend more on non-food items, which is really encouraging in our mind. And what we're really pleased about is the widespread nature of that across the different categories that we've seen in non-foods.

I would say that on some categories like appliances and electronics, definitely they've become more promotional over time. That would be, you know, a factor, I think, that members are looking for more deals. And for us, of course, we're always gonna be there on price, but we also include within what we're offering to our members, the installation and the removal of the old product, if that's necessary, and the delivery. So we kinda tend to try and differentiate there on the overall experience, as well as being a great everyday low value. I think they're the kind of key trends in non-foods.

On the food side of things, we've definitely seen some signals that would suggest that members and consumers in general are maybe shifting a little bit of spend from food away from home to food at home. On the food and sundries side of our business, alcohol would still be relatively soft, but as I mentioned in my prepared remarks, we're seeing really strong growth in our ethnic food categories and also in the Kirkland Signature products, particularly in the new ones that we've been introducing, and then on the fresh side of things, really strong growth across meat, produce, and bakery. I would say we've certainly seen a continued acceleration in some of those lower cost protein items like poultry, cheaper cuts of beef, like ground beef and pork.

So, you know, there's definitely some signs that the consumer is being very choiceful in how they're spending their dollars, but thankfully, with the quality and value that we're offering, it's definitely resonating with our members.

Rupesh Parikh (Managing Director and Senior Analyst)

Great. And then maybe just one follow-up question. You know, big focus out there on alternative revenue streams, including media. Just curious on the latest on the efforts from Costco, and, you know, is there maybe a more aggressive push in, you know, growing that area?

Gary Millerchip (CFO)

Yeah, I think we still see it as a significant opportunity. It's definitely a journey for us. It's, you know, the foundations of that journey are getting our technology infrastructure in a position where we feel really good about the capabilities that will allow us to deliver to the member in terms of the offers that we can give to them and the level of targeting and personalized capabilities that creates. We've already started to build out those plans and starting to identify how we can capture the low-hanging fruit where there are opportunities. But we would see it as a significant opportunity over the long term to drive new revenue.

We will approach this probably a little bit differently than many others in that, you know, we'll be reinvesting the vast majority of those dollars, as we always do, to drive top line growth. And we think that'll be a competitive advantage with our CPG partners because it will show them that every dollar they're spending is really intended to drive overall growth of the company. That being said, I do think it will help also with, you know, E-commerce business is typically less profitable, in this case, a way to offset some of those costs in delivery and fulfillment as well.

Rupesh Parikh (Managing Director and Senior Analyst)

Great. Thank you.

Operator (participant)

Your next question comes from the line of Kelly Bania with BMO Capital Markets. Please go ahead.

Kelly Bania (Equity Research Analyst)

Hi, good evening, Gary and Ron. Just wanted to ask about e-commerce. Obviously, continued strength there. Just, can you just give us a broad update on the penetration, the profitability, and, and how that is impacting margins at this growth level? And just an update on what the penetration would be if you included Instacart, like others do in that penetration.

Gary Millerchip (CFO)

Yeah. Thanks, Kelly. As we look at the progress, we're really pleased with the momentum that we've seen in digital. Actually, we were looking at the data recently over a ten-year period, and we've grown our compounded annual growth rate in e-commerce has been over 20% for that ten-year period. So it's been a significant growth story for us, and members clearly are valuing the additional ways in which we're giving them opportunities to find new deals and value for the member. Overall, the penetration would be in the sort of high single digit range based on how we report e-commerce today.

If you kind of to your point earlier, we don't include some of those digitally started sales transactions, if I could say it that way, so, Instacart, Uber, the ways in which members might be buying groceries and food and sundries. If you added those in, and of course, we also include gas in our total sales, we'd be into the double-digit penetration when you include all those elements in the number.

Kelly Bania (Equity Research Analyst)

Okay. And any comments on profitability and how E-commerce is impacting profitability?

Gary Millerchip (CFO)

Yeah, I would still say it's, you know, it's marginally, it's lower than the traditional shopping in the warehouse, and that's obviously intuitively makes sense, given that we're doing more of the picking and shopping for the member. As I mentioned in the prepared remarks, that we have seen some good improvements as we've grown our sales numbers. That's created some leverage in the model. We're improving the efficiency of our fulfillment costs. So it is continuing on an improving trend over time because of the sales growth and leverage that's creating, but also some of the improvements the team are making in the business to drive more efficiency as well.

Operator (participant)

Your next question comes from the line of Michael Baker with D.A. Davidson. Please go ahead.

Michael Baker (Managing Director and Senior Research Analyst)

Great, thanks. Two questions. One, can you talk about competitive pricing, particularly in grocery? There's been a lot of talk about some grocery chains investing in price, et cetera. What are you seeing? How are your price gaps? And then I'll have a follow-up after that. Thanks.

Gary Millerchip (CFO)

Yeah. Yeah, thanks for the question. You know, I think that the key thing for us is we're our own biggest competitor. You know, we, as you heard us mention earlier, we want to be the first to lower prices and the last to raise prices, and at every one of our regular budget meetings, we're talking about how can we find ways to do that, and the majority of our price investments are proactive, not that we're reacting. But of course, we're always watching and staying very close to competition. I would say that the promotional environment has been increasing. That would be with us, as Ron mentioned earlier, that our CPG partners are investing to find ways to drive units, and that would certainly be the case, you know, across some of the competition as well.

I mentioned earlier, appliances and consumer electronics would be an area where we've seen more of that activity, but I think if you took it all on balance, we wouldn't say that we're seeing the activity is sort of outside of normal in the food space, and we feel very good about our position relative to the market and continue to be proactive in finding ways to, you know, provide the best quality, best value for our members.

Michael Baker (Managing Director and Senior Research Analyst)

Excellent. Thank you. That makes sense. Follow-up. When gas prices fall, I think gas prices are down now 15-16% year-over-year, broadly speaking, at least in the latest data. Does that hurt your traffic at all? Because I think you guys say 50% of people who come to get gas come into the club and buy something. I think the unit growth, the gallons growth did decelerate a little bit this quarter. You know, is that something that you guys look at or have any concern over?

Ron Vachris (CEO)

Yeah, this is Ron. I don't see it as a concern. You know, gallons were up 3%, which was a little bit softer than the prior quarter. So when you do hit those peaks in prices, we will see a greater attraction to the Costco gas stations. But, you know, our balance of transactions, dual transactions that we have, looks very positive, and, so we're not seeing traffic dropping off at all in the warehouse based on the slightly softer gallon growth that we're seeing out in the gas stations.

Michael Baker (Managing Director and Senior Research Analyst)

Excellent. Thank you.

Operator (participant)

Your next question comes from the line of Karen Short with Melius Research. Please go ahead.

Karen Short (Managing Director)

Hey, thanks a lot, and good to talk to you again. So thanks for taking my question. So my question is, when you look at your pretax margin, I know you don't manage to that in any way, shape, or form, but it obviously has been creeping up. So, you know, when you look at the actual delta on, you know, a ten basis point increase in that margin, it's not immaterial to, you know, to earnings and/or valuation, obviously. So wondering how you think about that?

Gary Millerchip (CFO)

Hi, Karen. Yeah, I think the way we think about it is really back to some of the comments that we were referring to earlier, is that, you know, our goal is always to drive top line. That's the top priority for the company, and we're focused on investing and delivering value for the member and delivering improved investments in our employees as well, to make sure that we're an employer of choice. I think you appreciate the comment, because I think we have been successful over the years in doing that, because there are ways for us to continue to lower our costs in our gross margin part of our business and drive more value for the member.

Some of the things that we've been focused on, like global buying and the Costco signature growth that we've seen, e-commerce growth, as we mentioned earlier, and there'll be opportunities to things like retail media in the future. So I think there are a number of ways in gross margin and also a number of ways in SG&A, where we can continue to be more efficient to drive that investment. Our focus is always to drive, as I mentioned, the top line, and if that, over time, allows us to continue to grow the margins, then obviously that's something that we're pleased with, and it's a good outcome for our investors. But I wouldn't say, as you mentioned, it's a targeted outcome. It's really about making sure that we're driving that top-line growth.

The history, as you've mentioned, would suggest that when we've done that well, as we continue to look for opportunities, it has allowed us to expand margins slightly as well.

Ron Vachris (CEO)

You know, I would add. I agree with Gary. I would add to that. There are several levers that our operators and our buyers have to improve margin. And our buyers speak often about the fact that we can lower prices while improving margin as well. And that comes with the efficiencies that we're seeing, comes with very good sell-throughs that we're realizing, and the goods that we're buying, you know, newness and bringing in new items to the market that could have a little bit better margins. And our operating shrinkage has been improving, and we saw a nice solid year this year and picked up some margin on improving shrink results in the business as well. So those are some different levers that will augment lowering prices and continue to improve margins.

Karen Short (Managing Director)

But is it fair to think that 4%-ish, maybe going up from there, is realistic?

Gary Millerchip (CFO)

Yeah, Karen, I think we wouldn't get into, as you know, into sort of guidance of what we're expecting in the future. I do think, as Ron shared, that we don't see it as a, if you like, a zero-sum game. I think we believe there's an opportunity to continue to find ways to invest in our members and our employees, and we do believe you can do that through the way that we manage the business to continue to improve profitability over time. But I wouldn't wanna really provide any specific guidance related to that.

Karen Short (Managing Director)

Great. Thank you.

Gary Millerchip (CFO)

Thanks, Karen.

Ron Vachris (CEO)

Krista, are you there?

Gary Millerchip (CFO)

Is that all the questions, Krista?

Ron Vachris (CEO)

Hello?

Operator (participant)

Laura Champine from Loop Capital, your line is open. Your next question comes from Greg Melich with Evercore ISI. Please go ahead.

Greg Melich (Senior Managing Director)

Hi, thanks. I wanted to go back to the profitability and gross margin, particularly gasoline, the tailwind. What are we now back at twenty cents of penny profit per gallon, or what should we think of that as sort of a normalized range going forward?

Gary Millerchip (CFO)

Yeah, I think, Greg, we generally aren't sharing specific breakdown of profitability, and that would be true, obviously, across a number of areas of the business. But on gas, as I mentioned earlier, I would think of gas as being sort of fairly stable in general for us. You know, there are peaks and troughs because of volatility in the market in the short term sometimes. I wouldn't think of this quarter while it showed up in, as part of the overall improvement in other businesses. I wouldn't call it out as being like anything that was particularly changing the trajectory of gas or that would cause us to be wanting to share any more sort of detailed color. Because generally, we're expecting the gas side of the business to be relatively stable.

As I mentioned, you know, next quarter. This quarter, I should say, there was an example of where there was some really very unusual volatility because of world events. But in the main, I would think of gas as not being, you know, a major sort of underlying change in trajectory or something to look at differently in our model. Obviously, we do provide color where there's something unusual that pops up, but I wouldn't think of that as being a directional change.

Greg Melich (Senior Managing Director)

Got it. And given the recent wage increase, could you help level set us on maybe on what your average wages are now in the U.S. or globally? I think in the past, the number was something like $26 an hour.

Ron Vachris (CEO)

No, currently, the average wage is just north of $30 an hour.

Greg Melich (Senior Managing Director)

Just north of thirty. Great. And that's for the US?

Ron Vachris (CEO)

Yes.

Greg Melich (Senior Managing Director)

Perfect.

Ron Vachris (CEO)

US and Canada.

Greg Melich (Senior Managing Director)

Uh-

Ron Vachris (CEO)

Equalized in Canada.

Greg Melich (Senior Managing Director)

Got it.

Ron Vachris (CEO)

Oh, no, I'm sorry.

Greg Melich (Senior Managing Director)

And then last but not-

Ron Vachris (CEO)

Go ahead.

Greg Melich (Senior Managing Director)

Go ahead. So my last question was just given the non-food, the success there, you called out the gold bullion again. I'm just curious, are there any plans to maybe bring Kirkland Signature into the gold bullion market?

Ron Vachris (CEO)

No plans at this time.

Greg Melich (Senior Managing Director)

All right. Thanks a lot, and good luck, guys.

Ron Vachris (CEO)

Thank you.

Gary Millerchip (CFO)

Thank you.

Operator (participant)

Ladies and gentlemen, that's all the time we have for questions.