Costco Wholesale Corporation

Thank you, Emma, and 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, and 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 second quarter of fiscal '23, the 12 weeks ended this past February 12, as well as February retail sales for the 4 weeks ended this past Sunday, February 26.

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 second quarter increased 6.5% to $54.24 billion compared to $50.94 billion reported a year ago in the second quarter.

Our comparable sales for the second quarter were as follows: in the U.S., 5.7% for the 12-week period, excluding gas inflation, 5.8%; Canada, 3.5% reported and 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 minus 9.6% for the 12 weeks reported and minus 8.7% excluding FX. In terms of second quarter 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%, and 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 second quarter, $1.027 billion of membership fee income or 1.89%.

That's for this year's second quarter compared to $967 million a year earlier, so a $60 million increase in dollars or up 6.2%. Excluding the headwinds in FX, the $60 million increase would have been higher by additional $20 million.

So on an FX-adjusted basis, membership fee income was up just over 8 percentage points. In terms of renewal rates, at second quarter end, our U.S.

and Canada renewal rate was 92.6%, up 0.01% from Q1 end, and worldwide rate came in at 90.5%, also up 0.01% from the prior quarter, both represent all-time highs. Membership growth has remained strong.

We ended the second quarter with 68.1 million paid household members and 123.0 million cardholders, both up more than 7% versus a year earlier. At Q2 end, we had 30.6 million paid executive memberships.

This is 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 8 basis points, coming in at 10.72% as a percent of sales as compared to a year earlier second quarter at 10.64%.

Now the 8 basis points up, and then excluding gas inflation, have been up 9 basis points. As I always ask you to draw a little chart with 2 columns, reported and excluding gas inflation, and then we'll go down the line items.

Core merchandise was minus 6 basis points reported and also minus 6 ex gas inflation. Ancillary businesses were plus 2 and plus 3 basis points year-over-year; 2% reward, minus 2 and minus 2 basis points.

LIFO, since we had a charge last year and nothing this fiscal quarter, it was plus 14 and plus 14. For total, again, reported, 8 basis points up year-over-year; and ex gas inflation, up 9 basis points.

Starting with the core. Our core merchandise gross margin again was lower by 6 basis points year-over-year.

In terms of core margin on their own sales, our 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 to drive traffic and improve our competitive advantage. Overall, core sales benefited from sales shifting from ancillary and other businesses to core.

Ancillary and other businesses gross margins again were higher by 2 and 3 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 2 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 plus 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 second quarter was higher year-over-year by 13 basis points. This year, it was 9.11% compared to 8.98% in the second quarter of last fiscal year.

Jotting down some numbers for the 2 columns, first column being reported; the second, ex gas inflation. Operations was down -- higher, I said, minus 2 basis points -- higher by 2 basis points, so minus 2 and minus 2; central, minus 9 and minus 9, so higher year-over-year in central by 9 basis points; stock compensation, minus 2 and minus 2; and then 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 2 basis points and also higher by 2 ex inflation. This includes the wage and benefits increases implemented last March and last year's third fiscal quarter and an additional top-of-scale wage increase that went into effect July 4, which was in our fourth quarter of last year.

Central, as I mentioned, was higher by 9 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 of basis points. Below the operating income line, interest expense was $34 million this year, $2 million lower than the $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 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 second quarter was 26.1%, down slightly from the 26.7% figure in Q2 last year.

The effective rate for the year, excluding discrete items, continues to be projected in the 26% to 27% range. Overall, net income was up about 13%.

In terms of a few other items of note, warehouse expansion. In the second quarter, we opened 3 net new warehouses, 2 in the U.S.

and 1 in Australia. Additionally, next week, we'll open our third warehouse in China, with our fourth and fifth China new openings scheduled to open in the fourth quarter of this fiscal year, so a total of 3 this fiscal year in China.

In fiscal '23, we expect to open a total of 27 warehouses, including 3 relocations, so 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 3 in China, along with our first Costcos in each of New Zealand and Sweden, both of which were opened during the fiscal first quarter.

Regarding capital expenditures, our second quarter fiscal '23 capital spend was approximately $900 million. Our estimate for the year remains in the range of $3.8 billion to $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 total warehouse in-line sales.

Now a few comments regarding inflation. It continues to seem to improve somewhat.

Recall, back in the fourth 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% to 7%.

In Q2, we estimate that the equivalent year-over-year inflation number has come down to 5% to 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 and some examples but continue to provide some relief with things like chicken, bacon, butter, steel, resin, nuts. Switching over to our inventory levels.

Again, both in Q3 and Q4 fiscal year-ends in fiscal '22, on a year-over-year basis, our inventories were up 26% year-over-year. And then in our first quarter of this year, they were up 10%, so good improvement there.

As of this quarter end, our inventory year-over-year 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.

And talking to the buyers 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.

And so supply chain improvement across the board and rates, of course, coming down. Now turning now to our February sales, the 4 weeks ended this past Sunday, February 26.

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 sales results that the Lunar New Year, Chinese New Year occurred on January 22 this year, 10 days earlier this year.

The shift positively impacted February's Other International by about 2% and Total Company by about 0.25%. Additionally, 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 over year. I believe most of that was on the traffic side rather than ticket side.

Same-store sales, again in the release, on 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, plus 11.5%; Total Company, 3.5% reported; ex-gas and FX was 5.0%; in terms of e-com, minus 11.2% reported compared to a minus 10.3% 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 currencies year-over-year relative to the dollar negatively impacted total and comparable sales as follows: Canada, been impacted by 5.5 percentage points, Other International by approximately 5.7% and Total Company by approximately 1.5%.

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 in this 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, in local currencies, we saw the strongest results in Spain, U.K.

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 excludes 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.

Majors, which were electronics and big-ticket electronics items, jewelry, housewares, domestics and small appliances and hardware were the worse performers, consistent with Q2 overall. Ancillary businesses sales were up mid-single digits.

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 5 weeks ending Sunday, April 2, on the following Wednesday, April 5, after market close.

And with that, I'm happy to turn it back over to Emma for questions and answers. Thank you.

I guess, sizing up the consumer, I want to see how you view February in, I guess, the continuum of months. And then part of it, I think you said down mid-teens with some of those e-commerce categories.

Thanks for that information. Is that stable?

Is that worse? How do you kind of diagnose the whole consumer in the business?

Well, I think as we talked about even the last 12 weeks ago, in the quarterly numbers, we've seen some weakness in what I'll call big-ticket discretionary items. 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 that we, of course, benefited in big ways with those big-ticket items.

So all those things, I think, reflect that in those numbers. There's just a couple of weeks in a couple of regions where we started to set out some seasonal things for spring and summer.

So far, so good, but 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. But anecdotally, some comments were made on things like even some water sports items and camping equipment.

But it's a small data set. So we'll cross our fingers and hope to see.

But overall, units are generally fine. I mean there's some things still with like, on the computer side, there's weakness overall, not just with us.

I think I mentioned this on the first quarter call, we're seeing decent sales in units of televisions while 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.

But other than that, what we look at, of course, our average transactions or shopping frequency is up. Our new sign-ups are continuing to be strong, up 7% in terms of new sign-ups on less than 3% new openings.

So those things bode well, but people certainly are spending their dollars where they feel they should be spending them. And so we'll see where it goes from here.

Okay. A follow-up on EBIT growth, I know you don't guide, but this business has averaged, I think, about high single or maybe around 10% over time.

This year, it's a little below average because of some of the lapping and you are lapping some great fuel gross profit. Curious of the puts and the takes.

So whatever number that you expect the EBIT dollars of this business to grow, are you confident in the levers that you have to get there?

Well, look, we feel good about what we're doing in driving business in the right way and growing our business. As you and others have heard forever, we're a top line company.

While I can't give guidance, certainly, we and everybody who has cash benefit from earning more money on their cash right now. As we saw in this quarter, there was a $70 million improvement in year-over-year comparison of gross margin simply because of LIFO.

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.

So that's something that we look at as well. Gas is volatile, no pun intended, and it's been quite profitable in some quarters more than others.

But we think that we've got the different levers and puts and takes, if you will, to do that. But ultimately, it's about driving sales.

And 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.

So we'll go through this as good, if not better, than others.

So 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 turnaround, it's a much bigger business, and it might exhibit more economic sensitivity.

So a, is that how you're thinking about it? And b, what actions would Costco take to preserve its profitability in the event that it saw negative comps in the coming quarters?

Well, we're going to do things that drive market share, first and foremost. We are certainly cognizant of the bottom line.

And I think this quarter is a good example of that. But at the same token, we're going to do what we need to do to drive sales because long term, when we get our customer in and they buy stuff, they're going to come back and buy more stuff.

And we've always done a good job of that. Again, this one is a little different, this economic downturn, with the rising interest rates and the headlines of recession and high interest rates.

But that being said, I think we're fortunate in the sense that we've got 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. So we'll continue to do what we do.

I remember years ago, someone asked about if sales were slowing down, what would we do. And we said we'd drive more sales by being even hotter on prices.

But generally, that's worked for us, and I see that equation continuing.

And a follow-up question is, to your point, the inflationary number that you cited are lower than what others are experiencing. So 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.

And with that being said, how does the fact that you are delivering more value to your consumer and then maybe somewhat pressured play into your mindset around whether or not you would raise your fess? I believe this spring would be the 5-year anniversary of the last time you raised your fees and you typically do it around this time.

Yes. Actually, June would be our sixth anniversary.

As I mentioned in the previous calls, looking at the last, I think, 3, they averaged around 5 years and 7 months, which is about now or last month. And what we said over the last few quarters is that, in our view, it's a question of when, not if.

And so we'll let you know. But keep in mind, that's one way that we become even more competitive.

We take those monies and directly become even more competitive. I might add though, 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.

But 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 4-week, monthly 2-day budget meeting, each of the regional operations' senior executives get up and show those numbers. And you can rest assure we're going to continue to do that.

So following up on the first question, I guess, relative to the last time that you spoke to us, do you think the consumers deteriorated at all? Anything that you're seeing on what they're buying, how price sensitive, private label, income demographic?

What are your observations around the rate of change for the consumer?

Not terribly different than a quarter ago or probably in David's January sales recording. So again, it all centers around big-ticket discretionary.

And we look at that and we look at how it compared to a year ago and then 2 years ago. We had so much strength there not only with COVID and people buying big-ticket stuff, now the economy and the interest rates, so that's to be expected.

Again, we kind of go phew, our strength in food and sundries and fresh foods and health and beauty aids and things like that 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.

And of course, my first comment is that's a trade up or a trade equal, not a trade down. But at the end of the day, we have seen actually, in the last few months, a bigger delta than normal.

I'd say over the last 10 years, we see 0.5% or a little less than 0.5% a year of increased penetration. For this quarter year-over-year, we're seen a little over 1.5 percentage point increase in sales penetration on the food side, foods being anything packaged or dry or wet, you name it.

And so we have seen a little bit of an increase in that. I guess that's consistent with the concession that most people are looking to save money.

And of course, if it's our brand, that's great. That creates loyalty.

Yes. And then on the pricing/LIFO point, last quarter, you talked about like we could have a LIFO benefit and that could be a source of funds in terms of investing in price.

So a 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 going forward? And then the second question is, you mentioned your price gaps are as good as they've ever been but, at the same time, there was some change in consumer.

So should we think about that LIFO as a source of funds to further invest in price?

I was looking at it more not as a source of funds but more as -- 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 have, on a pretax basis, $130 million positive delta and a $223 million positive delta. Those are nice numbers to have a positive delta.

So 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. So all those things play into that.

I think generally speaking, we're still going to do what's right, in our view, to drive sales. That's what we want to do, first and foremost.

And to the extent that, that example occur in Q3 and Q4, that gives us a little room to do that without even thinking about it.

And then just from the accounting perspective, should we automatically get that back if prices stay at these levels on the lap?

If the lapping stays at 0, yes, there would be no new charge, so it would be comparing to a charge last year. To the extent that, yes, 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.

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 balance have trended.

Yes. Gas has been a relative blessing as well.

It's a profitable business. It is volatilely profitable.

Sometimes it's more. And sometimes, it's less.

But overall, it's a profitable business. It's given us an additional competitive advantage of getting people in the door, if you will.

I think it was this last summer into early fall where I've 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 announced yesterday on that, and I think that 15-plus percent delta of us versus the U.S.

population is still about 10 percentage points. And so we are still taking market share, if you will, and getting people in the parking lot.

And in terms of value, 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 single-digit number, we feel that we saved a member $0.37.

That's an improvement. Over the last 5 years, it's gone from the mid-20s to the mid-30s.

Okay. That's helpful context.

And then just on the inflation, just as prices have started to come down 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?

Well, it's an art, not a science. We'll look at high-velocity items where we can make a big difference, pass 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 per pound, based on the size of the bag, it was a heavy freight cost. And so as that comes down, we see that going.

I think we're doing more with our suppliers, changing things around with the MVM. Part of that's based on allocation issues of what we have.

But overall, no, we're firm believer of if you improve the value by lowering the price, you're going to drive more sales.

So you guys, like many others, have seen a shift away from a bunch of discretionary categories, probably stronger sales strength in the consumable category. But gross margins are actually pretty stable.

So I guess the question is, should we start to expect more gross margin pressure on a go-forward basis if we were to kind of see that mix shift continue to lean towards kind of food and consumables?

Frankly, the delta between those various categories are not as extreme as they used to be. And in fact, in things like fresh foods and food and sundries, some of the weaker categories -- not weaker, but lower-margin categories -- are things like big-ticket discretionary items.

We make a smaller percentage, more dollars per unit, of course, but a smaller percentage on big-ticket electronics. And so that impacts more the gross margin dollars than the percentages there.

If anything, if you go do a little homework on what the cost of processing and selling a rotisserie chicken, our $4.99 price, which we maintain, is an investment in low prices to drive membership, to drive the sales in a big way. So there are some things that we do, notwithstanding huge inflation.

And even though some of the costs have come down a little bit, relatively speaking, we want those wow items in there as well.

Got it. And then one follow-up here, you guys have obviously done a couple of onetime dividends over the years, but that was always in a really low interest rate environment.

And as you guys just reported with your net interest income, you can actually generate some real returns on your cash now. So I guess the question is, does the higher risk-free interest rate environment actually discourage you from returning that capital through future dividends?

Well, it helps a little right now. So that's good news.

I don't think it changes our view that the special dividend, which we've done over the last 10.5 years, I think, it's still an arrow in our quiver. And at some point, it's something you might see again.

But I'm not trying to be cute, it's kind of like the membership question, we'll let you know when we do it.

So Richard, you made a comment that you're particularly cognizant of the bottom line. I think it was your exact commentary.

So I'm wondering if you can triangulate that with what you think net or pretax margin numbers should look like on a go-forward basis but also triangulate that with the fact that you also commented that you're looking to invest in price to gain share in various categories.

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 going to go do more or less. I mean that's what we do for a living.

What I was trying to say in the comment, that being we're particularly cognizant to the bottom line, we are a public for-profit company, and our shareholders want to know what we're doing. There have been times, for those of you that have followed us for many years, when we might 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, frankly, I think, have more levers today to adjust things, which helps us. But we're not going to get away from those 2 things, driving the top line and being cognizant that we're also a public company trying to earn money for our shareholders.

But we're going to prioritize driving sales because that will benefit all the other things on the income statement.

Okay. And then just on inventory, just obviously, inventory down meaningfully, but any thoughts on how to think about inventory going forward relative to sales given that it was down 2.5%?

And I'm not sure how much of that was gas or fuel related, so maybe if you can parse out that relative to ex fuel commentary.

Yes. By the way, gasoline inventory is very small relative to everything else.

And 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.

So we feel we're in good inventory shape. The flow is much better.

There's always going to be anecdotal examples of stuff, we have 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. There's a few categories, a little over a few categories under, but nothing like when we were 26% up and had a lot of, what I'll call, in-transit stuff literally on those pictures that you saw on the news, of the ports, on the ships.

And so that's improved a lot.

It's 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 given the easing compares in the back half of the year?

And additionally, what opportunities lie ahead in terms of digital business from an engagement point of view?

Well, we don't project where we're going. But I was glad at least that February, while negative, was a little better than January.

We've got additional marketing activities that we've got going on there. We did hire just 5 months ago a new Head of Digital that is in the process of doing a lot of things.

So there'll be more to report over the next several quarters. In my view, there's a lot of opportunities and low hanging fruit to do that.

The biggest thing, the challenge that we've had, just looking at our current numbers, was that we've been so successful over the last 2 years. Not only did COVID drive huge business on big-ticket things for home, be it furniture, electronics, televisions, you name it, computers, and also the acquisition a couple of years ago or 3 years ago of what's now called Costco Logistics, those 2 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 want to grow the sales.

Great. And as 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?

Well, they're more loyal, they spend more and they come more frequently. It's only good stuff.

So look, at the end of the day, if we can get somebody to, 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 drive frequency.

And so the executive member spends more and shops more. And then if we get them also to get the co-branded Citi Visa card, it's even better than that.

So all those things work, in our view, in a positive direction. And so we like the fact that the executive membership penetration helped.

We've said 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.

And so we've provided it in other locations as well. But we're still seeing increased penetration in the U.S.

of that. We do a better job, by the way, when somebody new comes in to sign up, 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.

I'm going to venture to ask a margin question here. The core-on-core has been down for about 8 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? And 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 gas windfall that we've had over the past several quarters?

Are you investing that back into the store? Maybe just help us understand the thought process in this core-on-core decline here.

Yes. I think the biggest component of the answer to that question is our fresh margins have been the biggest piece of that coming down.

And looking at it, our fresh margin in Q2 compared to Q2 3 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 proponent of cost of sales in fresh foods, and labor productivity in places like the bakery and the meat department. And so it was, if you will, outsized improvement.

We're still better than we were pre-COVID. And we've maintained the sales.

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 or whatever it was, and then we enjoyed a couple of years of 20-plus percent, I believe. And now we're still doing fine with sales growth, not up to 8% or 10%, but nonetheless, it's still a positive.

And so we've kept all those outsized gains. But we've also, of late, not just the last month or 2 but over the last several months, have invested in pricing.

And certainly, fresh helps drive that. And I gave the example of the rotisserie chicken, but that goes through lots of areas of fresh foods where that's one of the key categories that people come in to shop for.

And 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?

I don't think we're smart enough to know how to manage all these things. There's so many different components of what is the gross margin from the different core departments to the ancillary businesses, to gas, to LIFO now.

So it really is fluid. And we do manage it, but it's managing it in an organized, chaotic way sometimes, too, as things change every day.

I think we do a great job of doing it.

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 GAAP margin tailwind be bigger or smaller than those LIFO charges?

Sometimes, in a given month even, it can be bigger or smaller, honestly. I mean gas fluctuates quite a bit.

But good try on asking.

A couple of questions. One, I hate to go back to the membership fee, but it just seems right.

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 bulk of the sales are coming from change the thought process in terms of how you might do the timing of the membership?

No. Not at all.

Not at all. Great.

And then second is on items in basket, trying to figure out how as 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?

Yes, units are still up. And frankly, price inflation offsets it a little bit, it helps offset it a little bit, and 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 4 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, physically improve the flow of goods in a warehouse. We've done a pretty good job of that.

And we've done that notwithstanding to off-season wage increases this year, 3 off-season wage increases, if you go back, I think, over the last 15 months. So our leverage there and a very slight deleverage is pretty impressive given that labor benefits is our single biggest expense category.

So it's productivity. And I think we've continued to do a good job with that.

And just so I'm getting the math right on the comp, if the comp is running 6 and inflation is running 6, but traffic is up 3, then items in basket would be down 3?

It's mix. Yes, it's mix.

It's 100% ASP. Got it.

All right. That great.

Good luck.

Richard, I want to start with I know you guys have begun doing a lot more data analytic work, and you talked about maybe investing in price. Have you done much work on price elasticity by category or item?

And you think in the context of non-foods is where there is softness, right, it's not consumables. What can you do mid-course correction there, right, on nonfood?

Is there elasticity where you can drive some share early in season by making targeted investments in those categories?

Well, I think there are, and we do. We don't analyze, frankly, the price elasticity on a historical basis other than we know what works in the past and we keep doing it more.

It's pretty straightforward. But we're not doing A/B tests or test let's take this price delta in this region, down x or up only y; in a different region, see which one works better.

We're pretty singularly focused on if we lower the price, we'll do more sales.

All right. And then to follow up on that, right, so again, you think about nonfood, you said maybe nonfood is going to be a little weaker.

And it's not all nonfood, right, it's certain categories. Have you dialed back inventory?

Do you want to get product -- you get it in early anyway. I'm not sure you can get in any earlier.

What do you do, if anything, I guess, inventory would be the biggest thing?

Well, first and foremost, is being in stock, and to the extent that we bring in a few things early. I think the anecdotal comment I mentioned about water sports and camping, we brought that a little earlier because we had some room.

And there's parts of the country, there's no sense bringing in some of that stuff early given the weather right now. But at the end of the day, I think we've always done a pretty good job of that as well.

The big thing is working with the suppliers. Using electronics as an example, these are anecdotal stories, but while sales were very strong for 2 years during COVID and supply chain challenges were still there, there was virtually no promotional things.

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.

That's part of what we do. But that's been more of a focus.

Yes, we focus on the categories that are growing. Examples would be like HABA and apparel, which are very strong for us right now.

Part of apparel's strength is getting more well-known stuff in.

This is Brandon Cheatham on for Paul. I want to go back to your comments on wider price gaps.

It sounds like you're managing the business just kind of how you always have. But your price gaps are wider than they ever have been.

So I'm just wondering like how has your competitors' behavior changed? Are there certain categories that they're not responding to?

Or are they responding slower than they have in the past?

Well, I think I said that they're as wide as they've ever been. I don't know if they've gotten wider.

But we feel very good about where they are. And 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.

And I'll remind you also, despite the fact that we and another warehouse club essentially sell the same types of items, we want to make sure that on exact like-branded items, we're better priced. So on those $100 million, $150 million, that's where we look at that.

They're the most competitive, whether it's Coke and Pepsi or Advil or Tide detergent or key items that everybody knows the price of or is that 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.

But that's up to the customer to behold that. And so 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. 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, if there was a 10% increase, inflationary cost increase in something, how do we get the vendor to eat a little of it, will eat a little of it? Needless to say that still the majority of that increase is going to be in the price, but how do we also, beyond that, 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 of the pack size.

We focus more on that than anybody I know because we're taking our $230 billion or $240 billion in sales and dividing it by 3,800 items. So we have many items that are $50 million, $100 million, $300 million, $500 million items.

And when we can do that, we think that we do a good job of that.

So 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.

I'm sorry, what was 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.

And so that's why you're able to get your price gaps as wide as they have been?

Well, I think it's our model versus other models. We respect and have very formidable competitors, whether it's other warehouse clubs or big box discounters or supermarkets.

And we're all doing what we can do to maximize our own respective model. So I think 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, I'm making this up, that there's 100 items, and we're the same on 50 and lower on 45 and higher on 5, those 5 better be changed this week. And so I know we're on top of it.

I can't speak to our competitors, but I assume they are also. But we have a model, a cost structure, that allows us to mark up our goods, on average, in the low teens compared to traditional retailers in the mid-20s to 100.

So we have a little room there.

Got it. Sam's Club recently announced that they've changed course and start opening doors.

I'm wondering, does that impact you at all on your opening plans? Would you locate in the same place even if you knew they'd be opening nearby?

Or would that preclude you from the area?

No, we're going to open where we want to open certainly 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 is doing in advance in a way. And so does it impact us?

It may impact us in some examples, whether it's Sam's or somebody else, to push this one more soon. And look, I was going to say, when you asked about them announcing they're going to open more doors, I think they said they're going to open up about 30 over the next 5 or so years, 5 or 6 years.

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, other countries, even more so.

I have tons. But I guess the first thing I wanted to ask a little bit, you gave the regional sales kind of which regions were better.

I mean, obviously, there's been a lot of layoffs in tech, and you have a huge business out in California. Are you seeing that business underperform relative to just over a couple of month period?

That's my first one.

Not really. My guy is here looking at the numbers, and they're saying not really.

One of the things that Josh mentioned is, well, we have 400 locations. 400-plus of our 550-ish location in the U.S.

have gas, that's even a bigger percentage in California, and higher volume gas units. And with gas inflation coming down dramatically year-over-year, that's partly why they're not the best performers.

If you took that out, there's not a whole big difference out there.

And just curious, and maybe this is a silly question, what happens with that gas business, especially in California, with the push to EVs?

It's a long road ahead. We only have 11 carwashes.

So we have plenty of room for carwashes 30 years from now. But at the end of the day, we think it's a very long road.

It's not happening in the next few years. And the fact that we're still taking such market share relative to U.S.

gas gallons in general is a positive. So I think it's a question that we can defer for 5 or 10 years, frankly.

Yes, tell this to the California guy. My last question, I know this call has gone long, just wondering about a little bit long term the initiatives.

You had a big push into fresh several years ago. It's obviously worked out really well.

We had the credit card. We had the big push in the big ticket.

Is there anything on the horizon like that, that will change the business a little bit and maybe grow it a little faster?

Well, international, in general, there's 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.

So those things, that creates more opportunity. I don't see anything big right now coming on vertical integration.

Might we do another poultry activity at some point, but that's still a few years down the road to even consider. We did a second meat plant outside of Chicago for the Midwest and East Coast just a couple of years ago.

We're expanding our bakery commissary. So there's nothing, another 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 continuing 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 what I'll call the hot house side, could you grow more vegetables. But that's all good in concept, but it takes time to figure out.

And there's plenty of people trying to figure it out, and so we're waiting for that. The other thing I think I gave an example a few years ago, of 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.

They grew over time with us. And we dramatically lowered the cost on that portion of a huge amount of dollars, and 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. Now we're now talking with big suppliers of these hundred- and multi-hundred-million dollar 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, 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. And so I think there's going to be lots of little opportunities that become, in total, a good opportunity for us.

Well, thank you, everyone. We're around.

I'm sure we'll be talking to a few of you today and tomorrow and early next week. Have a good afternoon or evening.