Costco Wholesale Corporation (COST) Q1 2024 Earnings Call Transcript

Costco Wholesale Corporation  (NASDAQ: COST) Q1 2024 Earnings Call dated Dec. 14, 2023

Corporate Participants:

Richard A. Galanti — Executive Vice President and Chief Financial Officer

Analysts:

Michael Lasser — UBS — Analyst

Unidentified Participant — — Analyst

Chuck Grom — Gordon Haskett — Analyst

Scott Mushkin — R5 Capital — Analyst

John Heinbockel — Guggenheim — Analyst

Kelly Bania — BMO Capital Markets — Analyst

Scott Ciccarelli — Truist — Analyst

Greg Melich — Evercore ISI — Analyst

Rupesh Parikh — Oppenheimer — Analyst

Mark Astrachan — Stifel — Analyst

Corey Tarlowe — Jefferies — Analyst

Dean Rosenblum — Bernstein — Analyst

Joseph Feldman — Telsey Advisory Group — Analyst

Laura Champine — Loop Capital Markets — Analyst

Presentation:

Operator

Good day, everyone, and welcome to the Costco Wholesale Corporation Fiscal First Quarter 2024 Earnings Call. Today’s call is being recorded, and all lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions].

I would now like to turn the call over to Richard Galanti, Chief Financial Officer. Please go ahead, sir.

Richard A. Galanti — Executive Vice President and Chief Financial Officer

Thank you, Lisa, 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. Our 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.

The 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.

In today’s release, we reported operating results for the first quarter of fiscal ’24 for the 12 weeks ended November 26th. Reported net income for the 12-week first quarter came in at $1.509 billion or $3.58 per share from a $1.364 billion or $3.7 per share in the 12-week first quarter last year. This year’s results included a tax benefit of $44 million or $0.10 a share related to stock-based compensation. Last year’s results included a tax benefit of $53 million or $0.12 per share. Related to stock-based compensation and also included a charge of $93 million pre-tax or $0.15 per share, primarily related to downsizing our charter shipping activities.

Net sales for the first quarter were $56.72 billion, a 6.1% increase over last year’s first quarter 53.44 billion. Net sales were benefited by approximately 1.5% to 1% in the US and worldwide from the shift to the fiscal calendar as a result of the 53rd week in fiscal 2023.

The following comparable sales reflect comparable locations year-over-year and comparable retail weeks. In the US, reported 2% comp sales ex-gas deflation and FX, 2.6%, Canada reported 6.4%, ex-gas, and FX, 8.2% other International reported 11.2% ex-gas and FX, 7.1%. For total company reported 3.8% and 3.9%, excluding those two items. E-commerce, which was reported on us as 6.3%, came in at 6.1% excluding FX.

Overall, for the first fiscal quarter. Fresh foods were relatively strong, once again with food and sundries right behind. Non-foods showed improvement over the September-October-November timeframe as did comp sales. In terms of Q1 comp sales metrics traffic or shopping frequency increased 4.7% worldwide and 3.6% in the United States. Our average transaction was down nine-tenths of a percent worldwide, and down 1.6% in the US. Foreign currencies relative to the US dollar positively impacted sales by approximately four-tenths of a percent while gasoline price deflation, negatively impacted sales by approximately six-tenths of a percent.

I’ve got more than a few calls in the past few weeks as to how many we sold up in the US, leading up to the Thanksgiving holiday. In the US in the three days leading up to Thanksgiving, we sold $2.9 million of our famous Pumpkin pies along with $1.3 million of Apple pies and corn pies. So over four million pies in total during the three days.

Back to the income statement here. Next on the income statement is membership fee income. In the quarter, we reported a 1.082 billion or 1.91%, that’s an $82 million or 8.2% increase, and a four basis-point increase over the first quarter last year. In terms of renewal rates at the first quarter end, our US and Canada renewal rate stood at 92.8%, while the worldwide rate came in at 90.5%, both of these rates were up one-tenth of 1% from those numbers by 12 weeks earlier at the end of the fourth quarter.

Membership growth continues, we ended Q1 with 72.0 million paid household members up 7.6% versus last year, and 129.5 million cardholders up 7.1% with consistent growth throughout the quarters. At Q1 end, we had 33.2 million paid executive members, an increase of 939,000 during the 12-week since Q4 end. Executive members now represent a little over 46% of our paid members, and a little over 73% of worldwide sales.

Moving down the income statement next is our gross margin. Our reported gross margin in the fourth quarter was higher year-over-year by 40 basis points coming in at 11.04%, up from Q1 of last year at 10.61%, that 43 basis points reported number ex-gas deflation would be plus 36 basis points. As I normally do here we write down two columns and six line items. The first column is reported in the first quarter. The second column is margins excluding gas deflation. It’s the year-over-year change. In the first quarter. On a core merchandise plus three basis-points reported minus three basis-points ex-deflation. Ancillary and other businesses plus 24% reported and plus 22% ex-deflation gas deflation, 2% reward lower year-over-year minus four basis points reported and minus three basis points ex-gas deflation. LIFO plus three basis points and plus three basis points and other plus 17 basis points, plus 17 basis points for a total again reported year-over-year, up 43 basis points and ex-gas deflation, up 36 basis points.

Starting with the core. Again, it was a total company, it was plus three basis points and minus three basis points reported in ex-gas deflation. In terms of core margin on their own sales or core on core margins were up by five basis points year-over-year. Ancillary and other business gross margin again, higher by 24 basis points and higher by 22 basis points, ex deflation, gas deflation. This increase was driven largely by gas and e-com. Our 2% reward higher by four basis points and higher by three basis points ex-gas deflation reflecting higher sales penetration coming from our executive members. LIFO plus three basis points. We had a $15 million LIFO credit in the first quarter of this year. This compared to a very small $0.5 million LIFO charge in Q1 a year ago.

And then the other line item, 17 basis points to the positive, as was mentioned earlier, last year in Q1, there was a 17 basis point impact from a 93 million pretax charge primarily related — primarily for the downsizing of our charter shipping activities.

Moving onto SG&A. We reported SG&A of 9.45%, higher by 25 basis points than last year’s 9.20%. Again in Q1, right down the two columns reported without gas deflation operations minus 18 basis points and minus 14 basis points minus being, meaning it’s higher year-over-year, central minus two basis points and minus one basis point; stock compensation minus three basis points and minus two basis points; preopening expense, minus two basis points and minus two basis points. Again, for a total reported margin higher minus 25 basis points year-over-year. Yes. I’m sorry SG&A net margin 25 basis points and without gas deflation higher by 19 basis points.

The core again was higher by 18 basis points and higher by 14 basis points excluding the impact from gas. This included a 12 weeks of this past March as extra top-of-scale increase in our wages, which represents an estimated two basis-point hit. And as of September 18th, we raised our starting wage in the US and Canada. That estimated impact from those new wages to be roughly two basis points as well. Again, central, nothing much to say other than it’s one basis point by higher excluding gas deflation. Again, it was stock comps at the minus two basis points ex-gas deflation at preopening. We did have a couple of more openings this year in the quarter than we did last year and that was higher by two basis points.

Below the operating income line, interest expense was 38 basis points — $38 million this year, $4 million higher than last year’s $34 million per year. Interest income and other for the quarter was higher by $107 million coming in at $160 million this year versus $53 million last year. This was driven largely by the increase in interest income, about $100 million of about $107 million due to higher interest rates as well as higher cash balances. The small additional impact was a favorable FX year-over-year.

In terms of income taxes, our tax rate in the first quarter was 24.5%. This compares to 23.0% a year ago or 1.5 percentage points higher this year than last year. The increase in our rate as of Q1 — in Q1 is primarily attributable to lower benefit from the stock-based compensation from a year ago. Overall, reported net income was up 16.5% year-over-year in the quarter.

A few other items of note. In terms of warehouse expansion in the first quarter, we opened 10 locations, including one relos. So net of nine increases. Those nine included eight in the US and one in Canada. For the full year of fiscal ’24, we estimate opening, we’re planning to open 33 locations, including two relos. So, for a net increase of 31 new warehouses that would be up from 23 that we opened in fiscal ’23. For Q2 fiscal ’24, we plan four new locations, including our six building in China early in the calendar year.

Regarding capital expenditures. First quarter capital expenditure spend was approximately 1.04 billion. We estimate that fiscal ’24 capex will be in the $4.4 billion to $4.6 billion range. That’s up from $4.3 billion we had in fiscal ’23, reflecting a continued increase in the number of the expansion that we’re doing. In terms of e-commerce business. E-com sales in Q1, ex-FX increased 6.1%. The first quarterly year-over-year increase in five fiscal quarters have trended well during the three reporting periods of September, October, November. E-com showed strength in several areas. In food, things like e-gift cards, pet items, snack items were up in the mid-teens. Appliances were up year-over-year in the mid-20s, TVs was actually in the high singles despite the challenges with other aspects of consumer electronics like computers and tires were up in the low teens. So overall, a pretty good showing there.

As well, Costco Logistics enjoyed record-breaking deliveries. In the first quarter of fiscal ’24, we completed over 800,000 deliveries, which were up 17% versus the comparable quarter last year. And some fun wild items in the quarter in e-commerce. You’ve probably read about the fact that we’re solving one-ounce gold buyers. We sold over $100 million of gold during the quarter, we sold a Baybrook autographed index for $20,000. And in addition to E-gift cards on everything from restaurants to golf to airlines, and we just in the last couple of weeks, we launched a Disney eGift Card valued at $250 for $224.99. And for you, last-minute shoppers out there, there is a Mickey Mantle autographed 1951 rookie card in nearly perfect condition and it’s on sale online for $250,000.

Next, good progress continues to be made with our e-com mobile and digital efforts. No big enhancements and changes to the site, leading up to the holidays, mostly holiday prep. We did have 100%, I would say availability during Cyber Week, and sales for the Five Cyber Days Thanksgiving, Black Friday, Saturday, Sunday, and Cyber Monday were up year-over-year in the mid-teens. Our app downloads during the quarter were 234 million. So total app downloads now stand at 30.5 million or a 10% increase during the quarter and that’s after a be over 40% increase in all of fiscal ’23 versus the prior year. Our site traffic approaching 0.5 billion and just under 10% increase in the average order value being up about 2.5%, so continue to make progress there.

Next, a couple of comments regarding inflation, most recently in the last fourth quarter discussion we had estimated that year-over-year inflation was in the 1% to 2% range. Our estimate for the quarter just ended, that inflation was in the zero to 1% range. Bigger deflation in some big and bulky items like furniture sets due to lower freight costs year-over-year, as well as on things like domestic bulky lower-priced items. Again, where the freight cost is significant, some deflationary items were as much as 20% to 30% and again mostly freight-related. TVs, the average sale prices have been lower, while units have been higher. And in talking to the buyers overall, our inventories are SKU counts are in good shape across all channels. And so far, we’ve had a good seasonal sell-through during the quarter.

Lastly, as you saw in this afternoon’s press release, we declared a $15 per share special cash dividend. This is our fifth special dividend in 11 years. The total payout will be about just under $6.7 billion and will be funded using existing cash and that’s accompanied by any issuance of debt. The special cash dividend would paid on January 12 to shareholders of record on December 28th.

Finally, in terms of upcoming releases. We will announce our December sales results for the five weeks ending Sunday, December 31st on Thursday, January 4th, after market close.

With that, I will turn it back for Q&A to Lisa, and be happy to answer any questions.

Questions and Answers:

Operator

Thank you. [Operator Instructions] We’ll take our first question from Michael Lasser with UBS.

Michael Lasser — UBS — Analyst

Good evening. Thank you so much for taking my question. You had indicated over the last year and a half or so that Costco had been raising prices faster than it had throughout its history and now with prices coming down, what is going to be the posture on passing along those savings, you already noted that inflation is flat-to-up 1%, do you expect like inflation, especially on the food side, as you get through the next couple of quarters?

Richard A. Galanti — Executive Vice President and Chief Financial Officer

Well, in talking to the buyers we’ve seen even during the quarter, we saw the trend towards that zero versus the one. But at the end of the day the buyers are looking out at three months to six months they have on the fresh food side, commodities-wise, they haven’t seen a lot. There are a few things that are up and a few things are down, but no giant trend either way.

Look, as you have known us for a long time, we want to be the first to lower prices, we are out there pressing our vendors as we see different commodity components come down certainly on the non-food side, as we saw shipping costs come down and things like that. And so, probably a little more than less, but we’ll have to wait and see, we don’t know.

Michael Lasser — UBS — Analyst

And my follow-up. Another point that you made for a long-time, is that Costco is going to draw on the profitability of the broader retail sector. If we compare Costco’s operating margin over the last 12 months versus where it was prior to the pandemic, it’s 300 basis points to 400 basis points higher, and yet across retail, there are signs that profitability is coming down. So now, what we’re seeing in the way of Costco of either maintaining its existing operating profit margin or even further growing from here. Is it just simply going to be a function of your ability to drive further sales growth in consistently meeting the mid-single-digit range for better?

Richard A. Galanti — Executive Vice President and Chief Financial Officer

Sure. Well, we haven’t I’m able to say that as you get a figure that went out. At the end of the day, we’re as you’ve known for a long time, we’re a top-line company who wants to drive sales. Certainly, as there has been deflation in certain products we’ve seen units go up. Yeah, I’m looking at one example here just in the last month, 100 plus million dollars of chaos net items were sales were flat-to-down a couple of percent, while units were up in the mid-teens. That takes a little more labor to do. By the end of the day, that’s what we want to do we want to drive people frequency and I think as long as we see renewal rates continue to do what they do as long as we see new sign-ups, continue to do what they do, and hopefully continue to get people to convert to executive as well, and constantly driving the best value out there we’ll be in good stead and so far we’ve been able to do that and I think we’ll continue to be able to do that.

Michael Lasser — UBS — Analyst

Thank you very much and have a good holiday.

Richard A. Galanti — Executive Vice President and Chief Financial Officer

You too.

Operator

We’ll take our next question from Simeon Gutman with Morgan Stanley.

Unidentified Participant — — Analyst

Hi, there this is Jackie filling in for Simeon, and thank you so much for taking our question. The core-on-core margin was up modestly this quarter and it seems like it moderated sequentially. Looking forward to the balance of the year it seems like the comparison gets a bit tougher. I guess how should we think about your core-on-core margin, could it stay expanding and positive for the rest of the year, or any color on that would be helpful? Thank you so much.

Richard A. Galanti — Executive Vice President and Chief Financial Officer

There are so many different moving parts to it. As you’ve heard me say, and I say. In the last several years, we wanted to drive topline, first, we’re also pragmatic, we recognize we are for a profit company and we’ll continue to work hard to do both. I wouldn’t read much into any number going up a little or down a little, frankly. It fluctuates and there’s lots of different components to it.

Unidentified Participant — — Analyst

Got you. Thanks so much. And just a quick follow-up. Once the Black Friday and Cyber Monday gains that you had better than what we were expecting internally. Thanks so much.

Richard A. Galanti — Executive Vice President and Chief Financial Officer

They were a little better than we were expecting but we were ready for it.

Unidentified Participant — — Analyst

Thanks so much.

Operator

We’ll take our next question from Chuck Grom with Gordon Haskett.

Chuck Grom — Gordon Haskett — Analyst

Hey, let’s go. Richard. Good afternoon. I wanted to just dive into the core margins a little bit more and see if you could flush out some of the category color if you said it, I missed it, but food, sundries, fresh, and on the hardlines parts of the business.

Richard A. Galanti — Executive Vice President and Chief Financial Officer

Well, without giving you specific basis points. Yeah, food and sundries was slightly down, very slightly down. Non-food was actually up. Some of that relates to the fact that we are comparing against last year when we had higher freight costs and trying to drive business and fresh was down a little bit. So nothing earth-shattering in either of those directions.

Chuck Grom — Gordon Haskett — Analyst

Okay. And then on the ancillary, up 22 basis points. I think we I’ll get the gas component, but can you just talk about why the e-commerce margins were so much better in the quarter?

Richard A. Galanti — Executive Vice President and Chief Financial Officer

I think well, first of all, part of just ancillary in general is a sales penetration issue without going into it that the fact that it showed more, sometimes we look back over the quarters. They go in opposite directions. The core-on-core and then the other businesses. And so, given that you had higher sales penetration in both in e-comm that helped you, e-comm, we have a lot of strength. We’re doing a lot of big and bulky, and we’re driving that business.

Chuck Grom — Gordon Haskett — Analyst

Okay, great. And then just bigger picture. I just have a question on the change at the CEO seat with Ron starting in a few weeks replacing Craig who replaced, Jim, you’ve had the fortunate opportunity to work with all three and I guess, I’m curious what changed, if any, you think we could see from a — from an operating standpoint moving forward.

Richard A. Galanti — Executive Vice President and Chief Financial Officer

Yeah, well I always joke, I’m up for review some of the nice things, but at the end of the day, the reality is, is we’re staying the course. I remember questions were asked 12-plus years ago when Craig became the President, and two years later, Jim retired and Craig became CEO and President, and what’s your — who replaced Jim and I think the same questions asked today who replaced, Craig, it really is a seamless transition. You have somebody retiring that’s been here 40-ish years and has been in the business both on operations and merchandising for a successful number of years in both. And you’ve got Ron who is coming in who started when he was 17 at the Enterprise Club in Arizona and he has 40 year-ago badge and again 30ish years in operations, a year in real estate traveling the world, and then seven years — six years or seven years in merchandising. So, I think it is pretty seamless. To see them, the two of them work together over the last year, almost two years since Ron became President. It’s very similar to what I saw during those two years when Craig became President and two years later, Jim retired and Craig took on the CEO role as well. And so it’s pretty much steady as he goes.

Chuck Grom — Gordon Haskett — Analyst

Got you. Great. Happy Holidays. Thanks.

Richard A. Galanti — Executive Vice President and Chief Financial Officer

Thanks.

Operator

We’ll take our next question from Scott Mushkin with R5 Capital.

Scott Mushkin — R5 Capital — Analyst

Hey, Richard. I guess, I just wanted to think about the potential clubs in the US and I know it comes up sometimes but absolutely added a. It just seems like there is maybe more runway even here in the US and I wonder if you had any thoughts on that and then. I had a quick follow-up.

Richard A. Galanti — Executive Vice President and Chief Financial Officer

Sure. Well, yeah, I mean, if we were to open one this year that would be somewhere in the low 20s to ’23, ’24 in the US, now recognize a few of those are business centers, which is we continue to add as well as regular — most of them are regular warehouses. And I would say that, yeah. I guess the story, I’d share with you is six years ago – eight years ago when it was roughly 60, 40, or 70, 30 US-Canada versus international, other international. And we were asked what would it be by the day, I’d say by the day, it will be 50, 50. Well, today, you’re asking the same question is 60, 40, or 70, 30 today, what will it be, and I think it will trend that way over time, but we are finding more opportunities in the US. Clearly, our average sales volume per location is higher today than we would have expected ourselves thankfully, six years ago, seven years ago what would it be by now and we are finding those opportunities. So I view that as good news. We saw a lot of things going on to drive international, but international six or seven units this year and that opportunity to grow last year. International was nine or 10 and that was more of a timing issue.

Scott Mushkin — R5 Capital — Analyst

So then my follow-up is around traffic and also the growth you had in appliances and TVs. You just kind of go in a different direction than a lot of people. So what’s driving the share gains in those categories, but also, are you guys doing anything specifically different to drive the traffic numbers you’re seeing because I mean, they’re pretty, pretty amazing given the environment.

Richard A. Galanti — Executive Vice President and Chief Financial Officer

Yeah, well, look, I’ve always said, I think the biggest attribute of value is the lowest price giving quantity and quality of the good or service and then certainly add to that the trust that our members have. I think as it relates specifically to things like I pointed out, like appliances and even tires. It’s value. And having acquired Innovel three years ago or four years ago now called Costco Logistics, we’re doing a lot of business there, and I think we’ve gotten a better job of communicating what the value is not just showing what the price of the exact item is at some of the other big retail competitors on some of these big items. But then you add in delivery, take-away the old used, the installation, delivery, take away the old product for disposition. It’s significant savings. Go to a price check of some of those things compared to our competition. That’s where you’ll see the strength.

Scott Mushkin — R5 Capital — Analyst

Perfect, thanks.

Operator

We’ll take our next question from John Heinbockel with Guggenheim.

John Heinbockel — Guggenheim — Analyst

So Richard, I’m wondering is one of the things you might do differently and we’ve talked about this before is leaning into personalization more. And where you are on that journey, particularly with Ron coming in.

Richard A. Galanti — Executive Vice President and Chief Financial Officer

Right, well, the first of order of our business was fixing the foundation, we’re in the middle of re-platforming our e-commerce, it is not a big-bang, where we’re going to put the switch one day we’re bringing things over and that’s in progress. It was, I think I mentioned last probably last quarter it’s a two-year roadmap on that and we’re halfway through that. And so I’d say very little so far if we were — if we were in the second anything maybe we’re in the third inning now but a lot of the focus has been on first of all, making sure doing small improvements. We certainly got the — on the five-star rating, we got up north of 4.5 on that and we’re getting better at the site every time, but I think you’d see personalization. First of all, targeting and personalization more over the next couple of years honestly, and we’re fine with that. The first order of business is getting the foundation right and we’ve made a lot of progress. I didn’t spend a lot of time on this call talking about the new things, the enhancements we’ve made to the mobile site and e-com site but we’ve done a lot. Maybe as a follow-up, right. You talked about the international opportunity and still very well under-developed. So the hindrance to getting to because you are in a lot of countries now 15 to 20 annual openings, maybe that’s a big ask, but is it just quality of real estate, because I would imagine operationally, it’s not a human resource issue. Is it purely a real estate issue? I would say it’s a combination of issues in some countries. I mean if you look at Korea, Taiwan, we have whatever. 15 locations or 16 locations in each country, very successful. It’s a little harder to find the next location, just from a real estate standpoint. If you look in Japan, where we’ve plenty of future opportunity, we’ve got 30 plus now and — but again, it’s a little bit of real estate. If you look at places like China or Spain, one of the challenges is you want — you’d like to be able to ideally bring over more than a handful of people from the existing locations in the new one. It’s a very hands-on operation. I think one of the things that we felt we mentioned that we had success when we first opened our first unit in Shanghai is we had at least 60, 70 people move there from Taiwan for promotions and for interactions, not just in the office and the buying of offices, but even in the key supervisory manager positions within the warehouse. And so it takes a little longer — and but we’re working hard at it but it’s a very hands-on experience.

John Heinbockel — Guggenheim — Analyst

Thank you.

Operator

We’ll take our next question from Kelly Bania with BMO Capital Markets.

Kelly Bania — BMO Capital Markets — Analyst

Hi, Richard, thanks for taking my questions. Just wanted to kind of follow up on Scott’s question. I think your average sale per club in the US and Canada is around $300 million at this point. And just curious on the status of how many clubs are doing kind of well over that and maybe in some need, some kind of relief in the form of self-cannibalization and more clubs to buy and a follow-up as well on international because as we think about the next maybe three years to five years, are there any countries that might be disproportionately getting more of the growth here.

Richard A. Galanti — Executive Vice President and Chief Financial Officer

Okay. What was the first part of the question, again?

Unidentified Speaker —

Average.

Richard A. Galanti — Executive Vice President and Chief Financial Officer

Our average sale. just yes. The average, I don’t. I don’t have the numbers in front of me, but I know in fiscal ’23, we had something like 25 or so locations that did over $400 million and other 160 or so that did $300 million to $400 million. Those are huge numbers. And certainly, as we get $350 million plus and one of them by the way they did over $400 million, did, a few million over $600 million, so. And so generally when it starts getting, when it starts having a three in front of it, certainly a $350 million we want to start looking to see what we can do to cannibalize it, frankly into have more growth in that market. And so hopefully that’s one of our bigger problems and challenges that we have more of those each year. So, I think that will continue.

Again, if I look back five years ago or eight years ago, even assuming whatever inflation number you want to assume. I think we’ve done a little better than that in terms of the sales volumes. And so that’s good news for us that we’ll continue to do that. Internationally, again, I’m just looking at the map of where we are. Certainly, we only have four locations in Spain. We’ve actually have added a few on a base of 30 plus in the UK. We think we have more opportunity in Mexico. In Japan, where we have something in the low 30s, certainly, it’s done well there and there’s many more markets and populations there that we can go to. Australia is whatever, two-thirds, a little under two-thirds the size of Canada where we have a 105 or so locations, and in Australia, we have 15, yeah, 15. I’m not suggesting we’re going to have two-thirds of 105 there anytime soon. It took us 35-plus years to get there in Canada, and — but we think that those are the opportunities. It’s not like we’re looking at a lot of other new countries at this juncture, we’ve done a few new countries, those single locations like in Sweden and Iceland, and often all being somewhat managed up buying-wise and somewhat operationally by the host country in the case of. Scandinavia, by the UK, in the case of Auckland by Australia.

Kelly Bania — BMO Capital Markets — Analyst

Thank you.

Operator

We’ll take our next question from Scott Ciccarelli with Truist.

Scott Ciccarelli — Truist — Analyst

Good afternoon, guys. So, Richard, last quarter you talked a bit about Costco NEXT. I guess my question is, how big of an impact is that program having on your e-com sales at this point, number one. Number two, kind of related to that, any change in your bidding of what vendors operate on that program. Just thinking about the quality-control aspect. Thank you.

Richard A. Galanti — Executive Vice President and Chief Financial Officer

Well, first of all, it’s still very small relative to our company and the fact is, is that the Costco NEXT sales currently are not in our sales. It’s we had a commission. So it’s kind of like 3P if you will 3P sales. And at some juncture some of their rules accounting rules, where you can include in sales based on what risk and what ownership level, you have the items but at this juncture those sales. It’s more of a net market value and just the commission in our number.

In terms of how we vet, we do it the same way we do items. We want items that make sense and create value and we have a team that is here that are vetting every — each and every one of those. I think we’re up to about 70, about 65, the current suppliers on there and we’ll certainly have many more as we go forward.

Scott Ciccarelli — Truist — Analyst

So presumably if that program keeps growing, should that be a natural gross margin driver for you over time, I know it’s small now, but if you’re just collecting the commission, presumably that’s kind of a 100% margin there.

Richard A. Galanti — Executive Vice President and Chief Financial Officer

Essentially, yes. Much like the travel business mostly.

Scott Ciccarelli — Truist — Analyst

Got it, okay. Thank you.

Operator

We’ll take our next question from Greg Melich with Evercore ISI.

Greg Melich — Evercore ISI — Analyst

All right, thanks. Richard, wanted to follow-up on the membership fee hike as I think now we’re an extra time and I wonder how much does the growth and mix in executive membership is driving that high-single-digit growth. Is that what means that you don’t have to increase it and you can keep waiting or is there something else?

Richard A. Galanti — Executive Vice President and Chief Financial Officer

I think it’s just us. I mean, again if I look at the, if you ask the question, what are the variables, we would look at? We want to look at strong renewal rates, strong new sign-ups, strong loyalty, and we have all that. So, I think that question is we haven’t needed to do it. We like providing extreme value. Certainly, while we’ve gone a little longer than the average increase, we feel we have certainly driven more value to the membership. So I’ll use my standby answer my pat answer, it’s a question of when, not if. But at this juncture, we feel pretty good about what we’re doing.

Greg Melich — Evercore ISI — Analyst

And a follow-up on inflation. I just want to make sure, I got that right. You said zero and one for the quarter. Did it trend towards zero? Did we exit near the bottom? And you mentioned some categories that were deflationary, which ones are stubborn in terms of inflation, where it’s hardest to get it out? Inflation, which categories are inflation. Yeah, where did you get that?

Richard A. Galanti — Executive Vice President and Chief Financial Officer

CPG.

Greg Melich — Evercore ISI — Analyst

Obviously, all the branded basket study stuff.

Richard A. Galanti — Executive Vice President and Chief Financial Officer

There wasn’t a big trend. I think at the end, it was a little lower than in the beginning, but not a big trend.

Greg Melich — Evercore ISI — Analyst

Okay, so it’s not like we exited zero. We’re still slightly positive.

Richard A. Galanti — Executive Vice President and Chief Financial Officer

Right, but recognize the LIFO charges and inventory cost of sales charge.

Greg Melich — Evercore ISI — Analyst

For the LIFO benefits year-over-year number during the ones, year-over-year LIFO.

Richard A. Galanti — Executive Vice President and Chief Financial Officer

Right. The zero to one is from the beginning of the fiscal year. I’m sorry, the beginning of the zero-to-one is versus a year ago.

Greg Melich — Evercore ISI — Analyst

A year-over-year. Got it.

Richard A. Galanti — Executive Vice President and Chief Financial Officer

Yeah, yeah.

Greg Melich — Evercore ISI — Analyst

And great. And then just last, what is the auto-renewal rate now?

Unidentified Speaker —

Around 50%.

Richard A. Galanti — Executive Vice President and Chief Financial Officer

In the US, it’s around 60%.

Greg Melich — Evercore ISI — Analyst

Perfect, thanks. Have a great holiday, guys.

Richard A. Galanti — Executive Vice President and Chief Financial Officer

You too.

Operator

We’ll take our next question from Rupesh Parikh with Oppenheimer.

Rupesh Parikh — Oppenheimer — Analyst

Good afternoon, and thanks for taking my question. So I just wanted to go to operating expense growth. So operating expense growth is still high, would you expect the growth rates to moderate once you bought that March wage increase? And then anything unusual within that line item that still driving pretty high growth?

Richard A. Galanti — Executive Vice President and Chief Financial Officer

There’s not a lot of unusual. I think it gets back to the question of low inflation, which creates a little bit more of a challenge, right? My extreme and again that was a very extreme example, I gave you of nuts. But when you had a zero, slightly zero to 2% decline in sales and a 14% increase in units, you got more labor involved, more hours to stock with the shelf. I mean that’s at the 40,000-foot level and that’s an extreme example but I think overall it is sales-based. You should also remember if I remember going back to fiscal ’19 and the first part of fiscal ’20 before COVID, our SG&A percent was for all of 2019, it was a 1,004 four, in the first quarter of 2020 was a 1,034 and for the whole year, it was 1,004 for both of those two years and we used to think to ourselves will we ever be able to get it back below 10 and 2022, which was the kind of month seven through 2018, if you will, that 12-month period after that full-fiscal year for us of COVID, we reported an 88 for that year. So even at the 945 we just reported, we’re still quite a bit lower than we had been historically, a function of a lot of things including higher sales productivity and all that. So, I think we’re doing pretty well. I think certainly that’s that’s the challenge. How do we reduce that and how do we manage that? And certainly, the biggest way to manage that is driving more sales.

Rupesh Parikh — Oppenheimer — Analyst

Great. And then maybe just one follow-up question. So just curious how you’re feeling about the health of the consumer. So it was interesting to hear that TVs were — did well this past quarter.

Richard A. Galanti — Executive Vice President and Chief Financial Officer

Look, I think when we’re asked that question, we’re fortunate to answer that. First of all, looking at the consumer through somewhat rose-colored glasses here. The — we have enjoyed great value. Yeah, we’re convinced it’s value we’ve done. I think on the margin, there’s a few extra things that we’ve done, we’ve improved the site of the website. We’ve gotten a little better at communicating stuff, not completely, but I think overall we’ve been good merchants. I think the merchants have done a great job of bringing in new stuff and not being — and not being shy when we see an industry credit very down a lot that we can still if we’re driving people in, we’ve got a better chance of getting them to buy something.

Rupesh Parikh — Oppenheimer — Analyst

Thank you. Happy Holidays.

Richard A. Galanti — Executive Vice President and Chief Financial Officer

Thanks.

Operator

We’ll take our next question from Oliver Chen with TD, Cowen.

Unidentified Participant — — Analyst

Hi, this is Tom on for Oliver. Just a quick question on the trend of Kirkland relative to last year. If you could just remind us how that’s trending maybe across categories. And then if you have any notable call-outs, any recent innovations. Just curious if this is essentially driving any efficiencies and supplier negotiations, the composition at Costco for stronger gross margin ahead.

Richard A. Galanti — Executive Vice President and Chief Financial Officer

Well, I would say allowing us to get better deals, which means lower prices but look, I think we’re. Yeah, Kirkland Signature relative to non-gas sales is in the high 20s and I think it was probably a good year ago when inflation was in the eight and nine range, if you will. If you remember, we talked about that year-over-year we saw probably the biggest increase penetration of chaos as fast it was one percentage, 1.5 percentage points, when historically it’s been 25 basis points to 50 basis points a year. I think we’re back to that, but we maintained that higher level and we’re back to seeing smaller increases in penetration over the year but nonetheless, still driving that business. But we’ve got. Yeah. I think that helps with some of the deflationary stuff, certainly with chaos stuff we’re closer to the supplier, we’re not the only — we are the only customer buying that item and we can drive a little bit more business and so I think it just continues to work that way for us.

Unidentified Participant — — Analyst

Great. And then just a quick follow-up on any notable behavioral trends you’ve seen in consumer shopping this holiday season.

Richard A. Galanti — Executive Vice President and Chief Financial Officer

Some colleagues in my room have been buying gold but no, and that’s actually online mostly, but no, I think, again, I think the traffic thing is the thing that we’re happily surprised about that we’re continuing to drive people in on an increasing basis. We know we benefited during those call it those two years kind of March-April of ’20 to March-April of ’22, the kind of the two years of COVID, we benefited in many ways from more members and more volumes and we not only kept it, we’re continuing now to add to those levels. So we feel very fortunate in that regard.

Unidentified Participant — — Analyst

Thanks.

Richard A. Galanti — Executive Vice President and Chief Financial Officer

One of my colleagues here just mentioned that discretionary merchandise trends are getting a little better. And that’s not only on big-ticket but in general, non-food chain stuff. I think that corresponds with my comment earlier that we feel good about the seasonal. How we’ve done seasonally.

Operator

We will take our next question.

Unidentified Participant — — Analyst

Thank you.

Unidentified Participant — — Analyst

Thank you. We’ll take our next question from Mark Astrachan with Stifel.

Mark Astrachan — Stifel — Analyst

Yeah, thanks, and good afternoon, everyone. I guess, I wanted to ask on the Kirkland products specifically maybe on the CPG that you mentioned. How pricing or how have prices trended on those versus the branded products? Have you seen any deviation there, given your closer? Are you able to lower prices, I suppose to the extent that has happened? Did you notice any more market-share changes within those CPG categories?

Richard A. Galanti — Executive Vice President and Chief Financial Officer

I think it’s slightly it’s deflationary, it’s a little more deflationary in the KS than in the CPG, which drives more value to chaos, frankly, but we’re seeing some — our ability to work with our CPG suppliers as well. But just a little stronger ability to do that with KS.

Mark Astrachan — Stifel — Analyst

Got it.

Richard A. Galanti — Executive Vice President and Chief Financial Officer

And then, again A comment in the room here. We’ve had, it’s allowed us to do some new item introductions on the KS side as well.

Mark Astrachan — Stifel — Analyst

Great. And then just following up on the last question. Anything you can call out amongst the newer membership cohorts in terms of renewal rates versus the average?

Richard A. Galanti — Executive Vice President and Chief Financial Officer

Generally speaking, if you compare the was always concerned. I remember 10-plus years ago, people would ask you, how are you going after millennials? And that is how are you going after the Next-Gen or whatever the Gen Zs or whatever. At the end of the day, when we look at the different cohorts. If you just change the names, the curves seem to be about the same in terms of getting new younger members, they buy less, they buy more as they get older into that 40-year-old to 55-year-old sweet spot. I don’t know in terms of renewal rates. I think the rates are — our overall rates are improving, so I think we’re probably doing a better job there. Certainly, things like frankly auto-renewal help that as well.

Mark Astrachan — Stifel — Analyst

Got it. Thank you. Happy Holidays.

Richard A. Galanti — Executive Vice President and Chief Financial Officer

Same to you.

Operator

We’ll take our next question from Corey Tarlowe with Jefferies.

Corey Tarlowe — Jefferies — Analyst

Hi, good afternoon. Thank you for taking my questions. Richard, you mentioned about the wage increases that you’ve taken recently. I’m curious to get your thoughts about the wage increases that you’ve taken within the context of the lower inflation that you’re seeing as well as what could be potential deflation further ahead. So, I’m curious about the ability of Costco to maybe you maintain a more nimble margin structure and then what could be some volatility on the pricing side.

Richard A. Galanti — Executive Vice President and Chief Financial Officer

Yeah. Frankly, we looked at the wages in a vacuum and we want to do as much as we can for our employees and certainly, there were several increases starting with the frontline worker premiums during the initial year of COVID. We kept half of that in there, which, we kept, one of those dollars now in there which was like 400 — $400 million a year. Again, we’ve also benefited from stronger sales and productivity. So we were able to afford that. But we look at them independently and we’ll continue to do that to look at it.

To the extent, that inflationary pressures are down. That means there’s probably a little less inflationary pressure on wages but we give over half of our employees are top of the scale and they are getting increases irrespective of some of the extra things we’ve talked about every March. And then as you go from a new employee over the first 9,000 or 10,000 hours, you’re getting constant increases that are more, significantly more.

Corey Tarlowe — Jefferies — Analyst

Understood. And then just piggybacking off of that. And I understand it may be difficult to attribute a cause-and-effect relationship to this, but do you think that perhaps the moderating inflation that we’ve seen in the need-based categories like fresh and food and sundries may have unlocked a little bit of extra wallet to spend in the non-food category and they have driven some of the momentum that you’ve seen in categories like TVs and others.

Richard A. Galanti — Executive Vice President and Chief Financial Officer

I think it can hurt. Either the gas prices have come down a little bit. That’s top-of-mind every week when somebody fills out their tank. So those things help. I’m sure on a macro basis, that’s the case, but it’s a guess on our part.

Corey Tarlowe — Jefferies — Analyst

Understood. Great, thank you very much, and best of luck.

Richard A. Galanti — Executive Vice President and Chief Financial Officer

Thank you.

Operator

We’ll take our next question from Dean Rosenblum with Bernstein.

Dean Rosenblum — Bernstein — Analyst

Hey, Richard. Guys, thanks for taking my questions. There’s really two big debates clients are asking us about. The first one is on gross margins, and in particular, the potential for a gross margin impact from a mix-shift back toward things like appliances and TVs, which are notoriously lower gross margin, at least in the marketplace versus fresh and food and sundries. As you see the sort of big-ticket discretionary starting to come back a little bit, do you expect any overall impact on gross margins from that mix-shift away from food and sundries to big-ticket discretionary?

Richard A. Galanti — Executive Vice President and Chief Financial Officer

First of all, our margin range is so much more compact than traditional retail, different categories of traditional retail. I mean if you think about it, we have 12%, 13% of gross margin, 11%, so I’m thinking markup. And in theory of ranges from zero to 15%, in reality, it’s. There’s a very few things that are below 5% and a lot of things hover around the 8% to 12% range. And so I don’t think it’s as big an impact to us in terms of those mix changes. And it’s not a set, as you say it’s always I’m saying it’s always something there’s always something that hurts you and there’s another thing that helps and it’s a really it’s a mixture.

Dean Rosenblum — Bernstein — Analyst

True. And then the other big debated contrasting about is the relative profitability of new stores versus existing stores and there’s sort of two teams there, one is the new US versus existing US, and then the relative profitability of new stores internationally. I was wondering if you could speak to that a bit.

Richard A. Galanti — Executive Vice President and Chief Financial Officer

Well, first of all, if we look like at our ROI. The I on the denominator on an older building has a lower. I. If 10 years ago, the typical building in the United States land, property, equipment, and building and fixtures. I’m shooting from the hip here but was $30 million to $35 million, now it’s $45 million to $50 million. So you’ve got a different I. But generally speaking, well, when we look at the ROI of each of our eight US regions or two Canadian regions, new units come in and start a little lower and get up there over-time, you’ll have some outliers because of some units that are 30 years old and 40 years old. Even with the I increase because as we expanded the unit and upgraded and remodeled it. The fact of the matter is, is those higher volumes really shine through there?

On an international standpoint, we’ve always, I think, talked about the fact that there is a few different things that the the ROAs in some of these other countries tend to be a little higher. The return on sales tends to be even more — even higher than that in some of these countries because a combination, very little related to gross margin, some related to membership fees, some related to wages, and some related to benefits health benefits. US healthcare across every other country that we’re in.

Dean Rosenblum — Bernstein — Analyst

Got it. Thanks so much. I appreciate it. Good holidays, and thanks for the time.

Richard A. Galanti — Executive Vice President and Chief Financial Officer

Thank you.

Operator

We’ll take our next question from Joe Feldman with Telsey Advisory Group.

Joseph Feldman — Telsey Advisory Group — Analyst

Hey guys, thanks for taking the question. I wanted to first just ask on executive member penetration, it seems like it continues to inch higher and I was just wondering how you guys think about that and how high, should that be, I mean, presumably you’d want everybody to be an executive number, but is there like kind of a natural level where you think you can still go from here beyond the 46%.

Richard A. Galanti — Executive Vice President and Chief Financial Officer

I think well, there’s always going to be another country, or two, we add, you need a certain number of in our view, we’ve always done it after 15 or so warehouses in the country. So that will add to a little bit. No. I think some of the increase. It’s kind of like getting up to that asymptotic line when you. One of the things that drove it in the last few years. One, we have done a better job in the last several years of selling it to you as well as auto-renewal. When people come in now or sign up online they are signing to they want to put their credit or debit card in there and they can opt-out, they can opt into doing it online, doing a lot of renewal. So, I think those things have pushed it along with us being so wonderful, but I think you’ll still see come up a little bit but probably that rate of increase will slow over time.

Joseph Feldman — Telsey Advisory Group — Analyst

Got it, okay. And then maybe just a quick follow-up. Anything to talk about on shrink because I know that there was an issue with shrink, even for you guys, at one point and I know you guys have a crackdown on making sure members are showing their cards when they walk in the store, and obviously that leads whether your goods, they’re checking your receipts. But anything we should think about with regard to shrink going forward and recent trends.

Richard A. Galanti — Executive Vice President and Chief Financial Officer

Thankfully, nothing at all. It’s really, I think we’ve already talked about was it a combination of, as we went into some self-checkout over the last several years. And then perhaps more recent things that you read about in the paper, we get less impacted by the latter as well, maybe we saw a couple of basis-point deltas upward on a very low number of basis points to start with. So, we’re fortunate in that regard.

Joseph Feldman — Telsey Advisory Group — Analyst

Got it. Thank you and happy holidays, guys.

Richard A. Galanti — Executive Vice President and Chief Financial Officer

Same to you. Thank you.

Joseph Feldman — Telsey Advisory Group — Analyst

Thank you.

Operator

We’ll take our next question from Laura Champine with Loop Capital.

Laura Champine — Loop Capital Markets — Analyst

Thanks for taking my question. I wanted to dig in a little bit more into some of those numbers on the column, the ancillary profit improvement, I think that’s where you’re, I’m just wondering what drove that. And on the operations line, it sounds like that that pressure in SG&A didn’t come mostly from wages. And I’m wondering where it did come from.

Richard A. Galanti — Executive Vice President and Chief Financial Officer

Yeah on the ancillary line, it’s gas and e-com and it’s a combination of increased sales penetration and increased margins within those businesses. The thing about gas is, I think everybody out there that has gas stations what we have found is that we’ve been able to see improved profitability, not just in the last quarter or two, but over the last few years, last three years to five years. Improved profitability of gas because others are making more and we’re allowed to make a little more. When we do our competitive price shops on guests, which we do weekly at every gas station, we operate with neighboring competitive gas stations, our value proposition has actually increased, increasing number of cents per gallon than we’ve ever seen. So that’s been, if you will, a win-win for us. On the e-comm side. I think, driving more sales has helped us in the margins there as well.

Laura Champine — Loop Capital Markets — Analyst

Thanks. And then just on the operations.

Richard A. Galanti — Executive Vice President and Chief Financial Officer

Yeah, on the wages. While we pointed out, I probably on the call. I think there is like four so basis points in total from those two distinct increases we do other increases like we have over half of our employees are top of scale. They get an increase every March. That’s significant as well, significant relative to basis points when you have lower sales figures. It is the, rest of it all the other line items like energy costs and the like.

Laura Champine — Loop Capital Markets — Analyst

Got it. So most of the pressure is probably coming from wage is not just as two discrete call outs you had.

Richard A. Galanti — Executive Vice President and Chief Financial Officer

It’s more than half. I don’t have the exact figures with me.

Laura Champine — Loop Capital Markets — Analyst

Got it, thank you.

Operator

Thank you. And there are no further questions at this time, I’d like to turn the call-back over to Richard Galanti, for any additional or closing remarks.

Richard A. Galanti — Executive Vice President and Chief Financial Officer

Well, thank you, Lisa, and thank you everyone on the call. We are around to answer your questions and have a happy holiday. And I think this is a record time of finishing this call. So, enjoy the holidays. Thank you very much.

Operator

[Operator Closing Remarks]