Costco(COST) - 2024 Q3 - Earnings Call Transcript

Financial Data and Key Metrics - Net income for Q3 2024 was $1.68 billion, up from$ 1.3 billion in Q3 2023, with diluted EPS increasing to $3.78 from$ 2.93 [11] - Net sales increased by 9.1% to $57.39 billion compared to$ 52.6 billion in the same quarter last year [11] - Comparable sales growth was 6.6% (6.5% adjusted for gas inflation and FX), with U.S. comps at 6.2%, Canada at 7.7%, and other international markets at 7.7% [12] - E-commerce comp sales grew by 20.7%, both reported and adjusted for FX [12] - Membership fee income increased by 7.6% to $1,123 million, with renewal rates at 93% in the U.S. and Canada and 90.5% worldwide [12] - Gross margin rate improved by 52 basis points to 10.84%, driven by core margin improvements and lower gas inflation impact [13] Business Line Performance - Non-foods category showed the highest comp growth, driven by strong performance in toys, tires, lawn and garden, and health and beauty aids [18] - Bakery sales gained momentum with new product introductions like the Kirkland Signature Lemon Blueberry loaf and Morning Buns [18] - Food court sales were strong, particularly due to the success of the new chocolate chip cookie [19] - E-commerce growth was led by gold and silver bullion, gift cards, and appliances, with Costco Logistics deliveries up 28% [22] Market Performance - U.S. comp sales grew by 6.2%, while Canada and other international markets grew by 7.7% and 7.7% respectively [12] - Traffic increased by 6.1% worldwide and 5.5% in the U.S., with average transaction size up 0.5% globally and 0.7% in the U.S. [12] - Gasoline price inflation positively impacted sales by approximately 30 basis points, while foreign exchange had a negative impact of 20 basis points [12] Company Strategy and Industry Competition - The company continues to focus on delivering value to members through price reductions and high-quality Kirkland Signature products [19][20] - Expansion plans include opening 30 new warehouses in fiscal 2024, with a focus on the U.S., Japan, and Korea [17] - The company is enhancing its digital capabilities, with app downloads up 32% and site traffic increasing by 16% [22] - A new partnership with Uber Eats has been expanded to Canada and 17 U.S. states, with plans for further international expansion [23] Management Commentary on Operating Environment and Future Outlook - Management highlighted the importance of delivering value to members, especially as inflation has leveled off and consumers are returning to discretionary spending [18][19] - The company remains confident in its ability to maintain competitive pricing and drive member engagement through its value-focused strategy [19][20] - Management expressed optimism about the growth opportunities in both domestic and international markets, particularly in e-commerce and digital initiatives [22][23] Other Important Information - The company ended Q3 with 74.5 million paid household members, up 7.8% year-over-year, and 133.9 million cardholders, up 7.4% [12] - Executive memberships now represent over 46% of paid members and 73.1% of worldwide sales [13] - Capital expenditures for Q3 were approximately$ 1.06 billion, with full-year 2024 estimates between $4.3 billion and$ 4.5 billion [18] Q&A Session Summary Question: Membership Fee Increase - Management reiterated that membership fee increases are typically considered every five years, and while the company is beyond that cycle, no immediate changes are planned [26][27] - The company is focused on delivering value to members and ensuring that any fee increase would be justified by the value provided [26][27] Question: U.S. Expansion and Warehouse Growth - The company sees significant runway for new warehouse openings in the U.S., with a target of 25-30 new warehouses annually, half of which are expected to be in the U.S. [29][30] - Infill warehouses are strategically placed to reduce cannibalization and improve member shopping frequency [30][69] Question: Price Investments and Competitive Environment - The company does not plan to make significant price investments, as its everyday low-price strategy is already highly competitive [32] - Management is confident in its ability to maintain market share and drive member loyalty through value and quality [89][90] Question: Digital and E-commerce Strategy - The company is focused on improving its digital capabilities, including app functionality, site reliability, and personalized member experiences [40][41] - Costco Logistics is playing a key role in enhancing the e-commerce experience, particularly for large-ticket items like appliances [22][90] Question: Gross Margin and SG&A - The company maintains a gross margin cap of 14-15%, with no plans to change this threshold [37] - SG&A improved by 15 basis points in Q3, driven by higher labor productivity and cost discipline [15][73] Question: Gas Profitability and Traffic - Gas profitability was slightly lower in Q3, but overall traffic increased by 6.1%, with gas gallons up 5% [75][77] - The company sees gas as a key driver of member traffic and engagement [75][77] Question: Vertical Sourcing and Supply Chain - The company continues to explore vertical sourcing opportunities, particularly in areas like meat and optical products, but will only pursue these when necessary to ensure supply and value [63][64] Question: Retail Media and Personalization - The company sees significant opportunities in retail media and personalization, leveraging its unique member data to drive engagement and value [48][49] - IT spending will increase to support these initiatives, but it will remain within the normal course of business [52] Question: Discretionary Spending and Member Behavior - The company is seeing a return to discretionary spending, particularly in categories like home goods, toys, and sporting goods [43][61] - Management believes the company is gaining market share in these categories, driven by its value proposition [96][97] Question: Costco Next and Marketplace Model - Costco Next is seen as a significant growth opportunity, allowing the company to expand its product offerings and provide additional value to members [110][111] - The marketplace is curated to ensure that products align with the company's value-focused strategy [111][122]