Costco Wholesale Corporation (COST) Q4 2023 Earnings Call Transcript

Costco Wholesale Corporation  (NASDAQ: COST) Q4 2023 Earnings Conference Call dated Sep. 26, 2023

Corporate Participants:

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

Analysts:

Simeon Gutman — Morgan Stanley — Analyst

Michael Lasser — UBS — Analyst

Chuck Grom — Gordon Haskett — Analyst

Peter Benedict — Baird — Analyst

Erica Eiler — Oppenheimer — Analyst

Brandon Cheatham — Citigroup — Analyst

Greg Melich — Evercore — Analyst

Kelly Bania — BMO Capital Markets — Analyst

Oliver Chen — TD Cowen — Analyst

Scot Ciccarelli — Truist — Analyst

Scott Mushkin — R5 Capital — Analyst

Chris Horvers — J.P. Morgan — Analyst

John Heinbockel — Guggenheim — Analyst

Joe Feldman — Telsey Advisory Group — Analyst

Presentation:

Operator

Good day, everyone, and welcome to the Costco Wholesale Corporation Fourth Quarter and Fiscal Year 2023 Operating Results Call. [Operator Instructions]

I would now like to turn the conference over to Richard Galanti, CFO. 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. 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.

In today’s press release, we reported operating results for the fourth quarter of fiscal ’23, the 17 weeks ended September 3. These results and the figures presented today compare to last fiscal year’s 16-week fourth quarter. Reported net income for the 17-week fourth quarter came in at $2.16 billion or $4.86 per diluted share, compared to $1.868 billion or $4.20 per diluted share in the 16-week fourth quarter last year. In terms of sales, net sales for the 17-week fourth quarter were $77.43 billion, an increase of 9.4% from $70.76 billion in the 16-week fourth quarter last year.

Comparable sales for the fourth quarter, and these figures are like-for-like number of weeks. In the US, reported was 0.2% comp. Excluding gas deflation and FX in the US, it would have been 3.1%. Canada, reported was 1.8%, and excluding gas deflation and FX, 7.4%. Other International reported 5.5%, and again excluding gas deflation and FX, 4.4%. Also total Company reported 1.1% comp and 3.8% ex-gas deflation and FX. In terms of e-commerce, that came in at minus 0.8% reported and minus 0.6% excluding FX. Overall for the fiscal fourth quarter, food and sundries were relatively strong once again, with fresh foods right behind and with some offsets on some of the non-foods categories.

In terms of Q4 comp sales metrics, traffic or shopping frequency increased 5.2% worldwide and 5.0% in the United States. Our average transaction or ticket was down 3.9% worldwide and down 4.5% in the US, impacted in large part from weakness in bigger ticket non-foods discretionary items, as well as the gas price deflation. Foreign currencies relative to the US dollar negatively impacted sales by approximately 0.3%, and gasoline price deflation negatively impacted sales by approximately 2.5%.

Next on the income statement, membership fee income reported in the fourth quarter $1.509 billion or 1.95% of sales in the fourth quarter this fiscal year, compared to $1.327 billion or 1.88% in Q4 of last year, so $182 million increase or 13.7%. If you adjust for the extra week, the 13.7% would be roughly 7%, ex that extra week. Excluding FX and the extra week, the increase would have been around 7.5%. In terms of renewal rates at Q4 end, our US and Canada renewal rates stood at 92.7%, which is up 0.1% from the 92.6% figure as of the end of Q3. The worldwide rate came in at 90.4%, down 0.1%, reflecting the impact of increasing penetration of memberships from international, which renew at a lower rate, in large part because of new openings internationally.

Our membership growth continues. We ended the fourth quarter with 71.0 million paid household members, up 7.9% versus a year ago, and 127.9 million cardholders, up 7.6%. That’s on the new openings over the past year of 3 — just under 3% increase in new locations. At the fourth quarter end, we had 32.3 million paid executive memberships, an increase of 981,000 during the 17 weeks since Q3 end. The executive members now represent a little over 45% of our paid membership and approximately — paid members and approximately 73% of worldwide sales.

Moving down the income statement, next is our gross margin. Our reported gross margin in the fourth quarter came in higher — came in at 10.60%, up 42 basis points from 10.18% a year ago, and that 42 basis points is up 16 basis points excluding gas deflation. As I always ask you to jot down a few numbers with two columns, both reported and excluding gas deflation, the first line item would be core merchandise, on a reported basis, up 51 basis points year-over-year in the fourth quarter and ex gas deflation up 28 basis points. Ancillary and other businesses, minus 32 basis points and minus 38 basis points. 2% reward, minus 4 basis points and minus 2 basis points. LIFO, plus 27 basis points and plus 28 basis points. And if you total that up, on a reported basis, gross margin was up 42 basis points year-over-year and ex gas deflation, up 16 basis points.

Starting with the core, again, up 51 basis points year-over-year, and ex deflation, up 28 basis points. In terms of core margin on their own sales, our core-on-core margins were higher by 35 basis points, with food and sundries and non-foods being up and fresh foods being down a little. Ancillary and other business gross margin was lower by 32 basis points, and lower by 38 basis points ex gas. This decrease was driven almost entirely by gas. If you look at the other components of ancillary and other, which would include pharmacy, e-comm, food court, business centers, optical, all those things on a relative basis year-over-year were down [Phonetic] a couple of basis points plus or minus from a year earlier. 2% reward higher by 4 basis points and higher by 2 basis points, so a negative 2 basis points including gas deflation. That represents higher sales penetration coming from our executive members. And LIFO, of course, if you recall, last year in Q4, we had a $223 million pre-tax LIFO charge, while there was a small charge this year of $30 million on a year-over-year basis. Of course, that showed the basis point improvement in margin. While we continued — we’ve continue to see sequential improvement in year-over-year inflation. I’ll talk about that a little later. We still had a small amount relative to the first day of the fiscal year, just a small charge in Q4.

A couple of final comments on margins. First, we are of — we’re asked often recently about our inventory shrinkage results and whether it has dramatically increased in the past year versus historical shrink results. The answer is, no. In the past several years, our inventory shrink has increased by a couple of basis points, in part we believe due to the rollout of self-checkout. Over the past year, it has increased by less than 1 basis point more. So no, thankfully, not a big issue for us. And second, the year-over-year margin improvement has in part been due to fewer markdowns due to better inventory positions this year than last. Our inventories overall are in good shape.

Moving onto SG&A, our reported SG&A in the fourth quarter 8.96%, up from 8.53% a year earlier or up 43 basis points, and ex gas deflation up 21 basis points. Again jot down the two columns of numbers, both reported and excluding gas deflation. Operations, minus 37 basis points, minus being higher by. And without deflation, core would be minus 18 basis points. Central, minus 6 basis points and minus 3 basis points. And those are the really only two line items. The others were all zero; stock compensation, preopening and other. So, total reported margins were up 43 basis points year-over-year, and ex gas deflation, up 21 basis points.

In terms of the core operations being higher by 18 basis points ex gas deflation and on a reported basis higher by 37 basis points, this negative included the impact of lower sales growth as well as the impact of eight weeks of additional top-of-scale wage increases that went into effect July 4 of ’22, so midway through Q4 last year, and full 17 weeks of this past March’s [Phonetic] higher-than-normal top-of-scale increase. Central being higher by 3 basis points ex gas deflation, again not a lot of sales operating leverage there. And again, as I mentioned, the other line items that I typically read out were flat, both with and without gas deflation, so zero year-over-year change.

Below the operating income line, interest expense came in at $56 million this year versus $48 million a year ago, one extra week, of course. Interest income and other for the quarter was higher by $171 million year-over-year, $238 million this year versus $67 million last year. This was driven in large part by an increase in interest income due to both higher interest rates and higher cash balances, as well as the extra week. In addition, FX was slightly favorable year-over-year. In terms of income tax rate, our tax rate this year in the fourth quarter came in at 27.1% compared to 25.4% in Q4 last year, so full 1.7 percentage points higher year-over-year. This increase in our rate as of Q4 is primarily attributable to an increased penetration of international earnings, which overall incurs a higher income tax rate than in the US. Overall, reported net income was up 16% year-over-year in the quarter, or 9% if you adjust for the extra week this year quarter — this year in the fourth quarter versus last.

A few other items of note, in the fourth quarter, we opened nine net new warehouses, including five new buildings in the US, two in China, and one each in Japan and Australia. For the full fiscal ’23 year, we finished with 23 net new units, as well as we did three relocations. And for the first quarter, the first 12 weeks of fiscal ’24, we plan on opening 10 net new units, as well relocating one unit. All 10 locations net new are in — nine are in the US and one is in Canada. Regarding capital expenditures, we’ve actually included the cash flow in the quarterly report, but capex spend in Q4 was approximately $1.56 billion, and for all of fiscal ’23, a total $4.32 billion.

Turning to e-commerce, e-commerce sales in the fourth quarter ex FX, as I mentioned, decreased 0.6% year-over-year. While still negative, relatively speaking, our e-commerce showed good improvement. Results showed good improvement this quarter versus our year-over-year results in Q2 and Q3. In the previous two fiscal quarters, big ticket discretionary majors, home furnishings, small electrics, jewelry and hardware, were down 15% and 20% year-over-year, respectively, and down just 5% year-over-year in the fourth quarter, with those big ticket departments making up over half of our e-commerce sales.

A couple of other items to note, within the sales of big ticket discretionary, appliance were up over 30% in the quarter. Second, I’ve gotten a couple of calls that people have seen online that we’ve been selling gold — 1-ounce gold bars. Yes, but when we load them on the site, they’re typically gone within a few hours and we limit two per member. And lastly, I’ll point out Costco Next. We continue to grow that. We currently have 62 suppliers on costconext.com, and we’re continuing to onboard additional ones in many product areas, from home improvement to apparel, to pet, to home and kitchen, to electronics and accessories, to sports, and bicycles and toys and the like.

Now, a few comments on e-com mobile digital efforts, which we’re always asked about. As I discussed during the last quarter earnings call, when I said that we were in the early innings of our digital mobile transformation efforts, progress is being made. In terms of recent additions and upgrades, we’ve recently redesigned the account page and the digital membership card. We also redesigned the header with larger search bar and expanded selling space. We’ve added app box for messages and advertisements right in the app. We’ve recently, a few months ago, opened an optical digital store where you can virtually try on glasses and then order them for pickup, prescription glasses.

And lastly, there are ongoing improvement in our Costco app, offering in-warehouse shopping tools for our customers such as a digital membership card, managing shopping lists, viewing warehouse savings, seeing the gas prices if there is a gas station there, and so you’ll be able to search warehouse inventory and scan barcodes from the app. With the improvements made thus far over the past year, our app store rating has gone from a dismal 2.3 stars to currently 4.7 stars. Unique visitors in the site are up 40% year-over-year and the Costco app installs are up 46% year-over-year. So all in all, progress is being made.

Lastly, a couple of comments regarding inflation, most recently in Q3 ’23, we had estimated that year-over-year inflation was in the 3% to 4% range. Our estimate for Q4, inflation in the 1% to 2% range, and it’s actually trended downward during the quarter. So hopefully, these inflation trends will continue. We’ll have to see.

Finally, in terms of upcoming releases, we will announce our September sales results for the five weeks ending Sunday, October 1, on Wednesday, October 4, after the market closes.

With that, I will open it up for Q&A and turn it back over to Lisa. Thank you.

Questions and Answers:

Operator

[Operator Instructions] We’ll take our first question from Simeon Gutman with Morgan Stanley.

Simeon Gutman — Morgan Stanley — Analyst

Hi, Richard. How are you?

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

Good.

Simeon Gutman — Morgan Stanley — Analyst

I guess my first question, I don’t mean a tongue-in-cheek, but is — I guess, is the membership price increase part of the fiscal plan? And then part of the question is, is there a point at which this membership increase is part of, I guess, a hedge against inflation? Is there a point at which the model feels more weight without it? In other words, can you go another year without it?

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

Well. My part [Phonetic] answer, of course, is it’s a question of when, not if. It’s a little longer this time around, since June of ’17. So we’re six years into it and — but you’ll see it happen at some point. We can’t really tell you if it’s in our plans or not. We’ll let you know when we know. We feel good. [Indecipherable] about all the attributes of member loyalty and member growth. And frankly, in terms of looking at the values that we provide our members, we continue to increase those. It’s certainly a greater amount than — even more than if and when an increase occurs. So stay tuned. We’ll keep you posted, but there’s not a whole lot I can tell you about that.

Simeon Gutman — Morgan Stanley — Analyst

Fair enough. And then, an ultra-short term, as gas prices have moved up, have you seen any effect or impact on spending at the store?

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

No. You look at the numbers over the last few months that we report monthly and quarterly, there has not been a heck of a lot change. Big ticket discretionary, while improved relatively as I mentioned online — those online items, we have seen the number of items in the basket tick up a little in the last few months, but I think that has more to do with the fact that we consciously added — I had mentioned in the last call, we’ve consciously added 40 or 50, what I’ll call, smaller ticket indulgent items, whether it’s snack items and the like, to just — impulse items. And so that’s what we do as merchants, but overall, we haven’t seen any big change to — or been able to correlate any big change to what’s happened with gas prices.

Simeon Gutman — Morgan Stanley — Analyst

Thanks, Richard. Good luck.

Operator

We’ll take our next question from Michael Lasser with UBS.

Michael Lasser — UBS — Analyst

Good morning — good afternoon, I should say. Thank you so much for taking my question. Richard, you ended your prepared remarks saying that this quarter — or this month’s inflation is on pace to be 1% to 2%, and you suggested it may be even lower than that. So should outside observers be prepared for the prospect of deflation, either because that’s what’s happening with some underlying cost that Costco has been experiencing or Costco will look to invest in price as a way to continue to drive volumes, especially at a time when core-on-core margins are expanding so nicely?

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

Well, first of all, the comment that it was 1% to 2%, but then as we looked at the 17 weeks, if you — or the four months roughly, we saw — if we look at it internally, at each of the end of those four months, we saw the level — that 1% to 2% is from the beginning to the end of the year — I’m sorry, the beginning at the end of the quarter. But during this quarter, we saw that trending downward, if you will, a little. And when I talk to the merchants on the fresh side, it’s flat-to-down a little right now. On the food and sundries side, it’s up a little, primarily in some of the CPG stuff. And on big-ticket — or not big-ticket, but our non-foods, partly because of freight, which is down year-over-year in a nice way, and in some cases, some of the commodity costs on steel and the like, that has come down. So that being said, not a big change, but at least it’s trending that way. Who knows what tomorrow brings. And as it relates to — well, as I say, as it relates to us, we’re always pushing prices as fast as we can. We want to be the first to lower them when those things happen and drive sales.

Michael Lasser — UBS — Analyst

And so…

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

I think we’ve seen that with our traffic.

Michael Lasser — UBS — Analyst

So just to clarify what you’re saying is, food and sundries prices are down on an average year-over-year. Shelf-stable products are up year-over-year. Gen merch is down. So in totality, it would seem like the store — the box is deflating. Does it get — does the rate at which you see deflation continue to increase from here? And would you expect that to be just driven by the factors that you mentioned? Or are you driving that as a way to drive this traffic?

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

Well, first of all, I want to correct one thing that maybe I misstated or you misunderstood. In terms of fresh, fresh is pretty much flat. Food and sundries, which is everything from sundries and packaged goods and CPG goods, that tends to be up a little bit. And I’d like to think that we’re pushing the envelope as much as we can with our suppliers that as certain freight costs have come down, recognizing the headline today in the paper is, oil is approaching $100 a barrel. So, who the heck knows what will happen tomorrow.

Michael Lasser — UBS — Analyst

Okay. My follow-up question is, as long as you see big ticket under pressure, discretionary under pressure, which influences your total sales, because it’s important for your member to come in and buy these big-ticket items, is this going to influence how you think about managing labor in the store? Should the market just anticipate that labor and other SG&A is going to delever as long as the big ticket is under pressure?

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

Well, I think we’ve seen that over the last year, frankly. We had such operating leverage over a couple of years when we had outside sales during the kind of two years of COVID, call it the spring of ’20 to the spring of 2022. And, it was before COVID when our SG&A was over 10% — slightly over 10%, and we said, would it ever be able to get below that. It’s now still below 9%. So, notwithstanding the fact, when I looked at the last several quarters on a year-over-year basis, again, particularly over the last couple of quarters, we’ve seen some deleverage of that. Look, we want to drive sales, and we’ll do that in the best ways we can. So — but we recognize when — we used to get the question all the time, what comp number do you need to have zero, negative or positive leverage with SG&A, recognizing there was low — very little inflation back then. But we used to say somewhere — who knows, but somewhere in the 4.5% to 5% range. So we don’t know exactly where it is, but we’re certainly not going to change the level of service that we have, and we’re certainly going to respect our employees in terms of what we’ve done with wage increases overtime. That’s what we do.

Michael Lasser — UBS — Analyst

Thank you very much and good luck.

Operator

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

Chuck Grom — Gordon Haskett — Analyst

Hi, Richard. Just sticking on the inflation topic here on unit elasticity, particularly in categories where you’re seeing prices actually start to fall or compress, curious what you’re seeing on units, if you’re seeing them improve at all to offset those price declines, and if there’s any examples in either food or NGM [Phonetic] that you can talk about?

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

Well, yes, I remember when we talked a few quarters ago about some of the slowness in big-ticket discretionary, when we got harder on price, it did a little bit, but not as much as we would have thought, to start with. But again, that perhaps was the impact of what’s going on with the concerns of the economy and everything else. We know that when we put hot buys and what we call TPDs, temporary price discounts, on items, even medium-sized ticket items, we do see — we do leverage — see the units increase, but it’s not as predictable, I would say, as it used to be.

Chuck Grom — Gordon Haskett — Analyst

Okay, great. And I know you don’t provide guidance, but I got…

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

It’s a little easier on the food side to see that sometimes more when taking the price of a meat item down.

Chuck Grom — Gordon Haskett — Analyst

Okay. So you are starting to see some units increase as prices drop in certain parts of the business?

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

Sure. And by the way — even on big ticket, when we see $300 and $400 price declines because of freight and raw material cost on some big-ticket non-food items, we’ll see some of the sales pick back up on that, but there’s nothing guaranteed.

Chuck Grom — Gordon Haskett — Analyst

Okay. All right. Thank you. And I know you don’t provide guidance, but I actually do remember when you did give some directional help back in the day. But are there any big puts and takes that we should be thinking about on the gross margin and on SG&A line over the next four quarters that we should be thinking about? Clearly, the LIFO lap will be an obvious tailwind. But just curious, any other things that we should be thinking about from a modeling perspective?

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

No, not really. LIFO is certainly one that was impacted over the last year and started to slow down. Assuming that trend continues, there won’t be much LIFO going forward for right now, but we’ll see. Beyond that, no, we’re still opening — we opened 23 net new units this past year. We’re on board to do something in the mid-to-high 20s this year. But that’s not enough to move the needle in terms of the leverage standpoint or anything. No, I’d say it’s steady as she goes. And if anything, I look to be the margins overall, given everything that’s going on, including competition, that we’re doing pretty well there. We — with some of the wage hikes that we continue to do and sales being a little weaker than they had been a year ago, I think we’re doing pretty well on that as well. We’re optimistic about our future, but we’ll see what happens.

Chuck Grom — Gordon Haskett — Analyst

All right. Great. Thank you.

Operator

We’ll take our next question from Peter Benedict with Baird.

Peter Benedict — Baird — Analyst

Hi, guys. Thanks for taking the question. Richard, just — first one, just on LIFO. Just curious, the $30 million charge, it’s small, but just curious, why they were [Indecipherable]. Can you give us little more color maybe what drove…

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

Yes. Well, I think it was on things like — well, gas was one. And then, in some of the fresh food items, there was — even though there was deflation in things like eggs and some dairy products, there were some inflationary trends in beef. Beyond that — do you have that handy? Yes, it’s really small, but on $16 billion of inventory, it’s a lot. It’s still a small number, $30 million, and that — but — that’s all. I don’t have the details on that.

Peter Benedict — Baird — Analyst

That’s fine. Yes, that’s fine. Just in the context of the broader disinflation, it was interesting to see that. And then, just really turning to the international stuff, you talked about the rental [Phonetic] rates impact. Can you remind us maybe on the international membership trends, when you open up a new club [Phonetic] outside the US, maybe give us some framework or some benchmarks around how many new members tend to sign up? How does that compare to what you would see, let’s say, in the next [Indecipherable] opening in the US? And then, what kind of renewal rates you tend to see year-one, year-two, just so we have a frame of reference there? Thank you.

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

I don’t have the exact numbers in front of me, but generally speaking, in Asia, whether it’s Korea, Taiwan, Japan or China, we’ll open a new unit, including the 10 or 12 weeks of sign-ups prior to opening, with anywhere from 50,000 to 100,000 new members. We had a couple of extremes, like when we first opened in Shanghai and Minhang, of well over 200,000. Now, some of that [Indecipherable] that don’t renew and we — usually in that first year of renewal and those types of outsized numbers, we might be as low as the mid-to-high 50s, and it takes a few years to get even to the mid-70s. But we see those numbers overall continue to increase every year. And I don’t — I can’t — I don’t — I should probably go back to what it was in the first 10 years of our 40-year history with even the US. My guess, it wasn’t that extreme, but we didn’t have as many — it wasn’t national and local news events, the day we opened. We had a lot of people coming into some of these markets that are signing up that may be live too far away or choose not to come back. So we’re seeing that continuing to grow. So it might be even that simple — that’s like 10% decline, it’s round [Phonetic] the year in the sense that you opened up a couple of more units a year ago, they’re just renewing for the first time, that increases that number.

Peter Benedict — Baird — Analyst

Yes. No, understood. Last one, I think I heard you say, mid-to-high 20s in terms of unit opening plan for fiscal ’24. Can you give us a sense how many of those are in the US and then how many would be international? Thank you.

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

70-plus percent in the US and Canada, mostly US, of course.

Peter Benedict — Baird — Analyst

Got it.

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

Which in my view is, we’re finding more openings — more opportunities in the US to in fill, given our high volumes, and we got a plenty going on over the years overseas.

Peter Benedict — Baird — Analyst

Yes. Thanks so much, Richard. Thank you.

Operator

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

Erica Eiler — Oppenheimer — Analyst

Good afternoon. This is actually Erica Eiler on for Rupesh. Thanks for taking our questions. So I guess first, I was hoping maybe you could give us a quick download maybe on how you’re feeling about the health of your consumer right now. Obviously, some concerns out there on student loan impacts starting to roll in here as those restart. So maybe any color you can provide on how you’re thinking about discretionary from here, maybe some of those concerns out there? Anything on trade-down or private-label, anything of note on that front in terms of consumer behavior as well?

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

Right. Well, look, first of all — first and foremost, our traffic continues to do very well. Being up continually 4% to 5% on a year-over-year basis is great. And our renewal rates continue to be very strong. So that’s the starting point. It makes sense to us on big-ticket discretionary, that’s where you’d see the biggest weakness. We see some of that in some areas going back. When we look at our numbers compared to MPD [Phonetic], that tells us where we are versus our competitors. Overall — not in every category, but overall, we tend to do better. So, even a negative number here is a lower negative number than elsewhere. So — and again, what do we do? We brought in some smaller ticket items that are impulse snack items to get an extra partial item in everybody’s basket, so — and newness, bringing those new items. And there’s not been a whole lot in television. Our unit sales and TVs are pretty good, but the average price point has come down, as they do anyway. There’s always deflationary when you don’t have new technology yet, and that’s just — we haven’t seen a whole lot of new stuff yet there. Gaming is good right now and Christmas is good. We’re one of the — not the only one, but one of the few that are bringing in seasonal items early, everything from decor to trees, to toys. That’s starting off well so far. But it’s new. It’s in the last few weeks.

Erica Eiler — Oppenheimer — Analyst

Okay. That’s really helpful. And then, just — no, go ahead.

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

I’m sorry, what else did you ask?

Erica Eiler — Oppenheimer — Analyst

And then, just shifting gears, so, I just wanted to touch on retail media. So obviously a significant focus on driving retail media at some of your peers. So just curious if you could maybe talk a little bit about what Costco is doing in this area and the bigger opportunities that your team sees here?

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

Well, part of that is some of the things we’re doing with digital, mobile and the app. And we’re not giving out quantifiable numbers, but certainly, some of our competitors are talking about doubling these numbers in the next two or three years. In my view, there is some low-hanging fruit out there, and we’re actively working on it. We’ve hired a couple of people that are helping us with that as well, and more to come.

Erica Eiler — Oppenheimer — Analyst

Okay. Great. Thank you so much.

Operator

We’ll take our next question from Paul Lejuez with Citigroup.

Brandon Cheatham — Citigroup — Analyst

Hey, everyone. This Brandon Cheatham on for Paul. I just wanted to — when you look at the retail landscape, I was wondering, how do your wages compare to your competition? Are you seeing similar trends in inflation pressure on the wage front and anything that you can help us with what your plans are over the next couple of quarters?

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

Well. First of all, we’ve always prided ourselves in providing the best hourly wage package out there, wages, benefits, contributions to 401(k). I’m using US numbers here, but our average US — 90% of our employees like many big retailers are hourly. And our average hourly wage is approaching $26. It’s in the high-25s. That’s on top of a very rich health care plan, where the employee only pays around 11% or 12% of it I believe, and on top — little less than that. And on-top of that, irrespective of what an employee contributes to his or her 401(k), we contribute anywhere from 3% to 9% based on years of service. So you’ve got a 20-year cashier making, on a full-time basis, in the mid-60s with another $4,000 or $5,000 being contributed to his or her 401(k) plan with a very rich health care plan. So we stand apart in our view compared to anybody. Our pressure is — comes from ourselves. In the last few years, as there had been wage pressure, starting with the frontline workers during the beginning of COVID, we like many retailers added a 2% premium — $2 premium, rather. We kept it longer to our knowledge than most anybody for a full year. And at the end, we kept $1 in there. And since then, we’ve had at least three or four increases on top of the normal top-of-scale increase that we do every — generally have done every year — we have done every year. So we’ll — in our view, the pressure comes from us, and we feel that we’re way ahead of our competition in that regard.

Brandon Cheatham — Citigroup — Analyst

Got it. That’s helpful. Thanks. And I think you mentioned the next iteration of the app. You’re going to be able to scan barcodes. Is the idea that eventually, the customers are going to be able to scan and go? And how could that help flow operations in your stores, if that is the case?

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

I don’t think we’re prepared for scan and go, yet. We’re just going to scan, but they can’t go. So at the end of the day, the first order of business is getting the merchandise on there and have numbers that where a member even goes online to say, hey, you can also get this currently at your local location. So knowing what’s in store when somebody wants to come out, I think that’s going to be a big positive to start with. And part of the scan is to be able to get more product information on the item as well.

Brandon Cheatham — Citigroup — Analyst

Sure, that makes sense. Okay, I appreciate it. Good luck.

Operator

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

Greg Melich — Evercore — Analyst

Hi, thanks. I have two questions, Richard. First, I’d love an update, given the volatility in gas prices last 1.5 years, as to where we are on penny profit. I know it has improved a lot, but I’m curious if it came back down in the last 12 months or if it’s sort of stabilized at that higher level.

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

Well, we don’t give specific numbers. Gas has been stronger for us and we believe all retailers in the last few years. In fact, it was Q4 last year which I think was our strongest quarter, recognizing it’s 16-week quarter. This fourth quarter, it was still strong, down from its strongest a year earlier on a weekly basis, but nonetheless quite strong. And so it’s part of the profit picture currently of all big retailers that sell gas, the supermarkets, the Walmarts and the Costcos of the world. So it’s still a profitable business. It’s — our view has been, it used to be when prices — given that we return it so fast, literally almost daily, when profits are going up — I’m sorry, when the price of gas is going up, the guy down the street who is turning it every eight or nine days is paying a little less four days ago, and so we’re making less. When sales went down — gallons — the price per gallon went down, we made a little more. I think that equation, while it’s still true, is not the driver of the bottom line of gas. Everybody seems to be wanting to make more on gas, which allows us in our view to make a little more and still be even more profitable. We’ve seen our competitive spread versus our direct competitors at every location on average improve over the last couple of years to now be in the — I want to say to 30-set [Phonetic] range per gallon, mid-30s is the average, which is up. It’s an average, and it can range from 10 to 45 [Phonetic]. But at the end of the day, we feel good about our competitive position. It’s increased. And we’re still quite profitable, down a little bit from a year ago, but nonetheless quite profitable.

Greg Melich — Evercore — Analyst

That’s helpful. Thanks. And then, my follow-up is on cash. I think you finished with $13.7 billion. I think the last time you got to $13 million was when you had a special dividend in 2020. What are your thoughts on how much cash you need or want? And especially now that there is a positive interest rate on holding cash, does that make you more interested in keeping it but then you pay more tax? Just how do you think about?

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

Well, I think, look, at the end of day, we’ve done four special dividends in the past. It’s part of our DNA. At some point, we may do that again. Again, somewhat like the answer to the other question about membership fees, it’s probably a question of when, not if, but we’ll let you know. Certainly with earning 5%-ish on that money instead of 0.25%-ish on that money does make it a little harder to do. But we’re not selling the kind of earnings multiple, but we earn 5% on our assets. So, at some point, we’ll do something, and we’ll have to wait and see.

Greg Melich — Evercore — Analyst

Got it. Thanks and good luck.

Operator

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

Kelly Bania — BMO Capital Markets — Analyst

Hi, thanks for taking our question, Richard. Just wanted to ask, I think I’ve asked this many, many times, but it seems like another huge quarter for executive membership growth, almost 1 million more this quarter. And just curious if you could talk about the profile of that member today that’s either upgrading or starting out as executive? What’s the characteristics of that customer? And any changes in how that executive member spends in their first year in that upgrade compared to the prior years?

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

I was joking when I say, first of all, they are very smart to be an executive member. Look, I think we — over the time, we’ve done a better job of communicating the value of the executive member. So, we clearly get more people to sign up that way in advance. And we see that over time, a regular member over the first few years will buy more every year. An executive member starts at a higher level and will buy more every year from that higher level. So that’s really the profile that we’ve seen. I don’t have any specifics on how old the member is. I know that when we look at age characteristics of new members, we’re still — everybody used to be concerned 10 years ago, how we going to get millennials when we have an older average customer and all that, and we did with things, with items, with things like organic. We’re doing the same thing now. We’re still getting — whether it’s Gen Z or Gen A or whatever the next gen is, we’re getting our share of those new members when we look at the profile of our members.

Kelly Bania — BMO Capital Markets — Analyst

Thanks. And Richard, I may have missed this, but did you quantify the extra week impact in terms of EBIT or EPS or anything for us?

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

No, it’s — I mean, the simple math would just say it’s 16, 17s [Phonetic] of our quarter is equal to a 16-week quarter. That’s about as good as we can do. I think on net income, it takes the 16 or whatever percent number down to 9% or something, and that’s just simple math.

Kelly Bania — BMO Capital Markets — Analyst

Perfect.

Operator

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

Oliver Chen — TD Cowen — Analyst

Hi, Richard. Inventories being well positioned, what are your thoughts about where they are now and also how we will model them going forward relative to sales? And then, as we look at overall, particularly as trends being negative, that compare starts to ease. So does that imply that won’t flex [Phonetic] on partly the nature of the ticket comparisons overall? The same question for e-commerce, as you anniversary some of the headwinds, can we expect the comparison to help as well? Thanks a lot, Richard.

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

Inventories, as I mentioned, we feel — the merchants feel very good about our inventory levels right now. There are a few departments a little higher than they want, a few that need a little bit more sure. But overall, they’re very good. In fact, you look at our fiscal year end, inventories stood at just under $16.7 billion and payables stood at $17.5 billion. So I think this — running above 100% on that simple ratio is something new. We used to be — we used to enjoy running 90% to 95%. It fluctuates, but overall, we feel good about our inventories where they are now. And in terms of supply chain, things coming in on time, we feel good about that as well.

Now, as it relates to — as we — excuse me, as we anniversary the inflection of when we saw some weakness, I think a couple of quarters ago, I mentioned that — what will help your big-ticket sales? I said, well, at least in a few — several more months, we’ll anniversary this weakness. So certainly, that’s going to help. I would like to think that it’s not just that thing that’s going to help, but — and the same with commerce. We’re — again, one bright spot, and it is virtually all e-commerce — not — nearly all e-commerce was the appliances that — and I think we’ve done a better job also of showing the value of these items online, not just the price of the item within our case includes delivery and warranty and things like that more so than some of our competitors and showing great value there.

Oliver Chen — TD Cowen — Analyst

Okay. Thanks, Richard. Just a couple of short ones. Would love any thoughts on Instacart. It seems like it’s a great partnership that you’ve had for a while. Also another question we have is, EV charging play a role, and how you’re thinking about future services for customers? Finally, China, any — it’s a smaller percentage of total, but it’s an important market for the long term. Lots happening there. Has anything changed the value proposition or the geopolitics? Thanks.

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

Okay. Yes. I had the second and third. What was the first question? Oh, Instacart. I know they just went public. So we’ve gotten a lot of questions. At the end of the day, we were a good partner with them. They are good partner for us. We used them throughout the US and Canada. And as sales are growing, we’ve added over the last — during COVID, we added some non-food items that still can be carried in the cart, if you will. And we’re doing, I think, prescriptions with them now. And so, no, it’s a good relationship and it has been for a while. Yes, I might add, though that with regard to those sales, we include that in our warehouse sales, not our e-commerce sales because it’s their employee coming into Costco to shop, purchase at the register and then take it to the customer. So that’s not in our mobile or e-commerce sales.

As it relates to EV charging, we’re testing it in a number of locations. Not a whole lot to be said. If there is a charge for it, it’s going to be less to Costco, and we’ll wait and see. And then as it relates to China, no, we just opened a few weeks ago our fifth location. We have two more planned this fiscal year, both in the — I think one in Shenzhen in early calendar ’24 and one other one before the end of August. So we’ll have seven locations, up from two 1.5 years ago. And so far, our openings there have treated us well overall.

Oliver Chen — TD Cowen — Analyst

Thank you. Best regards.

Operator

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

Scot Ciccarelli — Truist — Analyst

Good evening, guys. Can you help us understand a bit better how the Costco Next process works? Is it similar to how your e-commerce business used to work, where products were essentially drop-shipped from their vendors? And if that’s the case, Richard, how do you control the quality of the product and delivery process because I thought that became an issue for you guys before you took over your own distribution for e-com?

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

Yes. Costco Next is drop-shipped. We curate the items with these suppliers, and for the most part, pretty well-known brands. And so far, we have not had an issue on that, recognizing it’s — they tend to be items that are easily shipped to a home. Yes, we’re doing — we have all the tracking information as well. So, all I can tell you is, you’re right about that, that’s a good point. Years ago, when we did this, there was a difference, but so far it’s worked quite well for us. We’ve had very few customer issues as it relates to items purchased on costco.com — on costconext.com.

Scot Ciccarelli — Truist — Analyst

Okay. Understood. Thank you. And then, another inflation question. If we do wind up getting outright deflation outside of improved traffic or unit velocity, are there ways to protect margin because it seems to me like that could wind up being a deflator to the margin, if we’re in a deflationary environment there?

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

Well, yes, that’s what our business is about, where we’ll take a 10-pack and make it a 12-pack, I guess. But at the end of the day, if there is inflation, it will impact all of us. But again, I think it should be favorable to us because we will show the best value — we’ll still show the best value out there.

Scot Ciccarelli — Truist — Analyst

Understood. Thank you.

Operator

We will take our next question…

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

Before you do it, another comment was made in the table here that if there is deflation or disinflation, we’ve got a $450 million and $500 million LIFO reserve, that’ll be — on a reported basis, will be part of a tailwind of that disinflation.

Scot Ciccarelli — Truist — Analyst

Got it. Thank you.

Operator

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

Scott Mushkin — R5 Capital — Analyst

Hi, Richard. Thanks for taking my question. I don’t think we’ve talked about it, but what’s competition like out there? Now that we’re seeing inflation come down and volumes, particularly for some guys, are negative, just wondering if you — what it looks like out there?

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

I think, look, we’ve said this for a few years now, our competition with Sam’s is the most direct, and we’ve seen improvements in parts of what they do from our perspective. They are tough competitors and so are we, and — but I think they continue to get to improve overtime, as have we. I don’t — we don’t really see a whole lot of other things. BJ’s, while we respect their model and what they do, it’s a slightly different model, so there’s not as much — there is certainly — when we are competing directly as a membership warehouse club, we’re making sure we’re sharp on pricing, particularly in fresh and things like that, supermarket items. Beyond that, yes, our view is that on the non-food side, we are gaining share as evidenced by the numbers we see in some of these MPD [Phonetic] results, and the thing that I just called out of appliances being like that. Recognizing appliances is, whatever, a $30 billion business, we’re still a small piece of it, but growing rapidly.

Scott Mushkin — R5 Capital — Analyst

Thanks. And then, I know it came up earlier about raising membership rates, but kind of philosophical like this recession, not recession, maybe there will be one, how does the company look at raising the membership fee, if the economy is slow and fast? Does it matter? Does it factor in?

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

I think it matters. It does matter and I think it really mattered as we approached kind of the 5.5 years post June of ’17. We were in the high — the headline every day was inflation and economy. And so, we’re doing great. We’ve got great loyalty. If we wait a little longer, so be it. And that’s kind of how we feel right now. So…

Scott Mushkin — R5 Capital — Analyst

Okay, great. Thanks. I’ll yield.

Operator

We’ll take our next question from Chris Horvers with J.P. Morgan.

Chris Horvers — J.P. Morgan — Analyst

Thanks. Good evening, Richard. So your core-on-core margins were up a lot in this quarter. Can you talk about what drove that? I think you mentioned food and sundries. Is that successful vendor-funded promotions? Is there anything onetime in nature about that gain that we shouldn’t extrapolate forward?

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

Yes. Well, aside from LIFO, markdowns were a lot less quarter-on-quarter. So no markdowns was a big piece of it. Particularly on the non-food side, that helped. Last year, we had — it was a year ago that all of us, including Costco, I think our inventories on a year-over-year basis were up 26% for two quarters in a row. And, of course, those have all come down. And so, that was probably the biggest single thing in those numbers. And a comment that was made at the table here, we’re back on track on seasonal in and out dates. So we’re not having — a year — it was a year, year and a half ago where certain seasonal items came in late, and just to move them out, not to have to store them as much, some we did store, but to move them out where we felt that was the best way to do it, we took extra markdowns. So that helped.

Chris Horvers — J.P. Morgan — Analyst

And then, a follow-up question around the consumer, you just came through the back-to-school season. There are some important electronics categories that are a big part of the basket during that time of year that also become a big part of the basket around holidays. Are you seeing iPads and PCs and notebooks? Are you seeing positive unit trends and how does that make you feel about the upcoming holiday season?

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

Gaming is up. Some of the Apple products are up. TV units are up. But again, the average price points have come down some. Tablets are up, and audio is up a little.

Chris Horvers — J.P. Morgan — Analyst

But not notebooks and computers?

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

No.

Chris Horvers — J.P. Morgan — Analyst

Got it. Thanks.

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

Less down was the answer, yes.

Chris Horvers — J.P. Morgan — Analyst

Understood. Thanks so much.

Operator

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

John Heinbockel — Guggenheim — Analyst

So Richard, first thing, maybe just talk about how you look at cannibalization versus expanding the market in the US, right? And if you — obviously, you can now put, it looks like, locations closer together. When you kind of look at the US in total, is there a number that you guys have in mind that’s now possible, given what you’re doing with density?

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

Yes. Our view is over the next 10 years that we could add easily another 150, and that’s on top of however many business centers — but just in the US. So — and that number keeps changing. If you had asked me six, eight years ago, where we’d be today, I would say, if we were 70/30 US back then, we’d be 50/50 by now, outside of the — and today, we’re at 65, 70 in the US. So, we’re finding more opportunities here, and it’s evidenced by just the sheer volume of the units — that our units are doing today versus three or four years ago. It’s much higher than we would have expected three or four years ago. So we think that there is still a lot of runway in that regard.

John Heinbockel — Guggenheim — Analyst

And then, just a quick follow-up. I know you guys haven’t been particularly interested in BOPUS for cost reasons, and I assume that’s still the case. There’s a consumer argument for it, but I think it’s hard to make the cost side of it work. Is that still your view?

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

That is still our view overall. In addition to the thing I mentioned a little bit with what we’re doing with Instacart on non-food items as well, we are testing in-store some big-ticket items like TVs, but on a limited basis to see what happens for buy online and pick up in store.

John Heinbockel — Guggenheim — Analyst

Okay, thank you.

Operator

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

Joe Feldman — Telsey Advisory Group — Analyst

Hi, guys. Thanks for taking the question. I wanted to ask about the CPG guys, are they funding promotions a little more regularly with you guys? I know you did something, I think, with P&G that seemed like a clever promotion to get a gift card back from them, it seemed. I’m just wondering what you’re seeing across the other vendors.

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

Yes. With P&G, actually we did that last year as well, done it for a couple of years. We will say, we’ll do it again. It’s growing. So, yes — and once we do that with one, we want to share that excitement with others to see what are the types of things we can drive that way. So I’d say there’s probably a little bit more increase on that type of promotional things. And the inventory is available for those things because we could really drive sales of those items in a short period of time.

Joe Feldman — Telsey Advisory Group — Analyst

Right, that makes sense. They have the volume and you guys do. And then are you guys approaching the holiday any different this year? I know you mentioned Christmas goods are off to a good start, but is that earlier than normal? I feel like you are about the same timing, but maybe you could share thoughts on the approach to the holiday season.

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

Yes. If it’s earlier, it’s a week or two earlier. And some things came in early. And yes, it’s a little early compared to some of the supply chain disruptions we had, which screwed up a lot of things. But if you go back to where we were before COVID, we’re probably at or very slightly earlier. And in terms of how we’re approaching it, we’re approaching it aggressively in terms of having stuff to sell to the member. But we want to be out to. Typically this is nothing different here. Even on things like toys, we’ll bring in a few things in the last couple of weeks before Christmas, that if they don’t sell through, we’re not at risk of having to mark them down dramatically because they’re not unique just to Christmas.

Joe Feldman — Telsey Advisory Group — Analyst

Understood. No, that’s great. Thanks, guys, and good luck this quarter, Richard.

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

Well, thank you, everyone. We are around to answer your questions, and have a good holiday, and we’ll talk to you soon.

Operator

[Operator Closing Remarks]