Margin Outlook and SG&A Leverage
Q: How will wage investments affect SG&A leverage?
A: Management emphasized balancing investments in employees and members while driving top-line sales. Despite recent wage increases, they aim to offset these costs by improving productivity and leveraging sales growth, maintaining SG&A efficiency. They have historically managed to invest in employees without sacrificing profitability. -

Membership Fee Increase Impact
Q: Any customer response to the membership fee increase?
A: Management noted no significant member reaction to the fee increase. Renewal rates showed no real change, and they believe their value proposition—including price investments and maintaining prices on key items like the hot dog and rotisserie chicken—continues to resonate with members. -

Kirkland Signature Margins and Growth
Q: Is Kirkland Signature becoming more profitable as it grows?
A: Kirkland Signature's penetration continues to grow, now in the high 20% range. Management is investing in price reductions for Kirkland Signature items, supported by suppliers, aiming to drive unit growth. While they cap margins on these products, the growing mix provides overall margin tailwinds. -

Inflation/Deflation Expectations
Q: Expectations for inflation or deflation in fiscal '25?
A: Management indicated that inflation was effectively flat in the quarter. Slight inflation was seen in fresh foods, mainly produce, while food and sundries were slightly inflationary. They are not seeing significant changes and continue focusing on lowering costs to hold prices down for members. -

E-commerce Growth and Profitability
Q: How is e-commerce growth impacting profitability?
A: E-commerce sales have grown over 20% compounded annually over the past ten years. Penetration is in the high single-digit range, reaching double digits when including services like Instacart. While e-commerce is less profitable than in-warehouse shopping, improvements in fulfillment efficiency and sales leverage are enhancing profitability. -

Consumer Health and Behavior
Q: Any changes in consumer behavior noted?
A: Management observed that quality and value are more important than ever to consumers. As inflation dissipated, members increased spending on nonfoods. There are signs of shifting spend from food away from home to food at home, with strong growth in fresh foods and ethnic categories. -

Alternative Revenue Streams
Q: Plans for alternative revenue streams like media?
A: Management sees retail media as a significant long-term opportunity. They are building foundational technology to deliver targeted and personalized offers. While still in early stages, they believe reinvesting revenue into driving top-line growth will benefit both Costco and their CPG partners. -

Store Growth and International Expansion
Q: Is international becoming a more important growth area?
A: The mix of international and U.S. store openings is based on timing and opportunities. They plan 29 new openings in fiscal '25, with 12 outside the U.S. They see significant opportunities for both infill in existing markets and expansion into new regions. -

Gasoline Margins Impact
Q: How are gasoline margins affecting profitability?
A: Gas margins were stable, with some moderate tailwinds in the quarter. Management considers gas margins to be relatively stable over time, despite short-term volatility. They do not expect any major underlying changes in gas profitability. -

Wage Increases and Cost Structure
Q: What is the impact of recent wage increases?
A: The average wage for U.S. and Canada hourly employees is now just north of $30 an hour. Management views investing in employees as crucial and aims to mitigate cost impacts through productivity improvements and sales growth. -

Card Readers and Membership Growth
Q: Are card readers increasing memberships?
A: The card readers have been rolled out to about 350 U.S. warehouses, receiving positive reactions. They have improved productivity and led to a lift in member sign-ups and renewals by notifying members of upcoming renewals before checkout. -

Competitive Pricing Environment
Q: Any changes in competitive pricing, especially in grocery?
A: Management stated they focus on being the first to lower prices and the last to raise them. While the promotional environment has increased, particularly in appliances and electronics, they remain proactive in price investments and believe their value proposition remains strong. -

Port Strike Risk and Ocean Freight
Q: How is the port strike risk affecting Costco?
A: Management is closely monitoring the potential port strike. Since only about 25% of their business is nonfoods, and only a subset is imported, the impact may be limited. They have taken preemptive measures like preshipping and planning alternate routes to mitigate disruptions. -

Traffic Impact from Gas Price Changes
Q: Do falling gas prices hurt warehouse traffic?
A: Gallon growth was up 3%, slightly softer than the prior quarter. While higher gas prices can attract more customers to the gas stations, they are not seeing a drop in warehouse traffic due to lower gas prices. -

Pre-tax Margin Expansion
Q: Thoughts on increasing pre-tax margins?
A: Management focuses on driving top-line growth and investing in members and employees rather than targeting specific margin expansion. They see opportunities to improve efficiency and margins over time but prioritize delivering value to members. -