The conference call for Costco's third quarter 2024 earnings has begun, with Krista as the operator. Gary Millerchip, the Executive Vice President and Chief Financial Officer, is hosting the call for the first time and is excited to be part of the team. He has been meeting with analysts and investors and promises the same level of transparency as his predecessor, Richard Galanti. Ron Vachris, who many have expressed interest in hearing from, will also be joining the call.

The writer welcomes Gary to Costco and mentions the smooth transition from Richard to Gary. They have been working closely with Craig Jelinek and the transition has been seamless. The writer is proud of their employees and their consistent results. Gary will be hosting the quarterly conference calls and will include forward-looking statements. These statements involve risks and uncertainties and the company does not undertake to update them except as required by law.

In the third quarter of fiscal 2024, the company reported a net income of $1.68 billion, an increase from the previous year due to a one-time charge. Net sales also increased by 9.1%, with comparable sales in the U.S., Canada, and other international locations also showing growth. E-commerce sales saw a significant increase of 20.7%. Overall, traffic and average transaction also increased, while foreign exchange and gasoline prices had a slight impact on sales. A slide presentation with more detailed information will be made available every quarter.

In the third quarter, the company reported a 7.6% increase in membership fee income, with a renewal rate of 93% in the US and Canada and 90.5% worldwide. The company also saw an increase in paid household members and card holders. The gross margin rate was higher year-over-year, driven by gas inflation and higher sales penetration from executive members. LIFO was a benefit of 2 basis points, and other expenses were higher due to lapping last year's negative impact from a pre-tax charge. SG&A will be discussed next.

The company's SG&A rate in the third quarter was lower year-over-year due to lower gas inflation and improved core SG&A results. Interest expense was higher this year, but offset by a foreign exchange gain. Net income was up 29.1%, and the company has opened two new warehouses in the U.S. and two in China since the end of Q3. They plan to open 12 more warehouses by the end of the fiscal year and estimate a capital expenditure of $4.3-4.5 billion for the full year.

During the quarter, non-food items had the highest sales growth, driven by the merchandising team's ability to identify and purchase high-quality items that resonated with members. Inflation has leveled off, allowing members to purchase more discretionary items such as toys, tires, and health and beauty products. The bakery department also saw strong sales, thanks to new and exciting items like the Kirkland Signature Lemon Blueberry loaf and Morning Buns. The food court had the strongest sales, with the addition of a popular chocolate chip cookie. Inflation remained flat, with slight deflation in non-food items due to lower freight costs. Costco's strategy of delivering value to drive unit volume and member satisfaction is reflected in their constant monitoring of costs and passing on savings to members through price reductions.

In this paragraph, the company discusses their efforts to provide value to customers through their branded goods and Kirkland Signature items. They also mention price reductions on certain items and their success in the digital realm, including increased e-commerce sales and growth in their curated marketplace and app downloads. The company also announces their expanded relationship with Uber, allowing for Costco orders to be delivered through Uber Eats in Canada and 17 states in the U.S.

The company is expanding its partnership with Uber Eats to international countries and will offer discounted Uber One annual membership to Costco members. They will announce their May sales results on June 5th and remind investors that the fiscal fourth quarter will have 16 weeks instead of 17. The company is considering a membership fee increase, but they have enough levers in the P&L to deliver their stated EBIT growth without touching the fee. They typically increase the fee every five years, but it has been longer than that now.

The speaker states that there are no changes in their view on the business performance and they feel good about membership renewal rates and delivering value to members. They are evaluating when to increase membership fees and will communicate openly when the time comes. They are surprised by the continued expansion in the U.S. and see significant potential for more warehouse openings in the future.

The speaker, Ron Vachris, states that Costco is always competitive and regularly reviews their pricing to ensure competitiveness. They do not anticipate needing to make any significant price investments in the near future.

Ron Vachris, the Chief Operating Officer of Costco, confirms that the company is actively working on evolving their model and implementing new strategies such as buy online pickup in-store, utilizing technology in stores, and leveraging their data through retail media. They see these initiatives as opportunities to enhance member engagement and drive business. Costco has a proven strategy but will continue to innovate to meet the needs of their members. They have also expanded their team to focus on data and see potential in personalization.

During a conference call, Chuck Grom from Gordon Haskett asked about Costco's historical margin ceiling and if there are any plans to change it. Ron Vachris and Gary Millerchip both stated that the company's goal is to provide the best value to customers and there are no plans to change the margin ceiling. They also discussed the company's strengths and weaknesses in digital e-commerce and their focus on providing high-quality merchandise and utilizing technology to improve the shopping experience.

The company is currently working on foundational improvements to their website, such as better fulfillment and faster delivery times. They also have plans for future improvements, including personalization for members and better integration between their warehouse and online business. The recent strength in discretionary sales suggests that members are feeling more confident and willing to spend on non-essential items. Categories such as home goods, toys, and sporting goods have seen a significant increase in sales.

During a recent presentation, Ron Vachris and Gary Millerchip discussed potential changes and priorities for the company, emphasizing the success of their current model and the importance of continuing to execute well. Millerchip, who is new to the company, also mentioned his focus on supporting a smooth transition and accelerating the company's journey with technology and data. A question was asked about the company's retail media strategy and personalization.

The speaker, Gary Millerchip, responds to a question about the opportunities in retail media and personalization at Costco. He notes that there have been recent key hires in this department and that Costco's unique model and SKU count may present a different opportunity compared to other retailers. He also mentions that Costco is already utilizing alternative profit streams through their co-brand payment program and travel services, and that they currently have media revenue in certain areas of the business.

The speaker asks a question about the biggest opportunities for personalization and mentions the concept of wallet share and how each member may have different needs, but can be grouped into cohorts.

Ron Vachris and John Heinbockel discuss the opportunities for Costco to increase wallet share and sales through personalized promotions and outreach on new items in the warehouse. Vachris emphasizes the importance of maintaining the treasure hunt aspect of Costco while also improving the member experience digitally. Gary Millerchip adds that the core-on-core performance for the quarter was affected by pressure on fresh sales as the company normalizes post-COVID.

The paragraph discusses the three main categories in core between foods and sundries, fresh and non-foods, and how fresh has been deliberately kept slightly lower year-over-year to provide more value for the member. Non-foods showed improvement during the quarter, offsetting the flat performance of food and sundries. The company is pleased with how they managed the balance while still delivering the best value for the member. In terms of member behavior, the company has observed a healthy environment with better trends in non-foods and no significant changes in income cohorts or other membership categories.

The meat department at Costco is doing well, with both ground beef and higher-end meats like Wagu Beef and prime selling well. Non-food items are also selling well due to new and exciting products, such as a $1,200 swing set. Executive membership is also driving sales. The company has been focusing on vertical sourcing as needed, such as opening their own meat and optical plants to keep prices low.

The company's decision to sell discounted Instacart gift cards online and in stores was driven by a desire to provide value to its members. This initiative also serves as another way to engage members and potentially increase online sales. The company is working to keep delivery costs low, but acknowledges the need to pay their delivery partners.

The partnership between the company and its members is focused on enhancing services and driving sales. The company carefully plans and adjusts for cannibalization when opening infill warehouses, with about eight being opened this year. The impact on current markets varies, with some warehouses experiencing a significant increase in frequency due to the availability of a high volume club.

During a conference call, Greg Melich from Evercore ISI asks Ron Vachris about the gross margin cap and if SG&A could potentially fall to 8% due to the company's healthy performance. Ron responds that the company had a strong quarter with fresh goods and well-managed warehouses, allowing for potential continued reduction in SG&A. Greg also asks about gas gallons and if it helped with traffic acceleration, to which Ron confirms 5% growth in gallons. Greg then asks about the profitability of gas, to which Gary Millerchip responds that it was slightly down.

The speaker discusses the company's overall gross margin rate for the quarter and the impact of gas profitability on the results. They mention that while there was a reduction in gas profitability, the core-on-core margin improvement and e-commerce improvement offset this. They also mention that unit growth has been stuck in the mid 20s in recent years, but this year it will be closer to 30. The speaker acknowledges the potential for accelerating unit growth, but notes that infill projects can take longer to complete.

The company is facing challenges in finding space for new warehouses in high-demand areas. They are using creative methods to expand internationally. The number of warehouses is expected to remain steady, and the company is confident in their staffing and leadership. They have added Uber as a delivery option in some locations, which has led to increased member engagement and will also aid in international expansion.

The speaker discusses the innovation and performance of non-food categories, such as toys, sporting goods, and home decor. They mention unique and popular items, as well as a rising tide in these categories due to the pandemic. They also mention the competitive environment and how some peers are investing in price and promotions in non-foods.

The speaker explains that there will be ups and downs in competition, but they are confident in staying ahead and providing value to members. They mention their acquisition of Innoval Costco Logistics as a differentiator in member experience. The questioner asks about the rationale for a fee increase, and the speaker responds that fee increases allow them to lower prices and provide greater value to members.

The speaker asks about the impact of Costco's membership fee increase on the company's performance and the consumer market. The company's representatives acknowledge that they are gaining market share and attribute this to their focus on value and quality. They also mention that the membership fee increase is reinvested into benefits for members. The speaker also asks about the specific areas of reinvestment, to which the representatives mention their focus on industry trends, sales performance, and delivering value and quality to customers.

Ron Vachris discusses how Costco determines where to invest in reinvestment, stating that they are able to be nimble and shift investments based on the needs of their members. He also mentions that they are constantly monitoring and adjusting their strategy throughout the year. In terms of improving club throughput, Vachris mentions utilizing their e-commerce business and leveraging technology, as well as the potential impact of their recent acquisition of Costco logistics.

The speaker discusses how they are testing front door scanners to speed up register transactions and improve parking turnover. They also mention using strategic infills and gas expansions to serve members better. The speaker then talks about their creative merchandising strategies to increase units per transaction and the potential opportunities in the marketplace and alternative inventory models.

The speaker discusses the importance of not only managing consumables in the grocery section, but also introducing successful items from other countries to excite members and trigger impulsive purchases. This has been successful in increasing trips to the store, but the average basket size has remained flat. The speaker also mentions the potential of the marketplace and Costco Next to expand offerings and bring added value to members in the future.

Gary Millerchip, from Costco Next, explains that their marketplace is curated for their members, focusing on unique and valuable items. They are seeing positive trends in electronics and are expanding their same-day delivery in China. There is great growth potential in all markets, including China where they recently opened their seventh warehouse.

The speaker discusses the success of Costco's delivery program, which has seen a 28% increase in logistics. This growth is largely driven by the delivery of appliances, furnishings, and outdoor items. The program, which offers all-inclusive pricing for delivery, installation, and haul-away, has been well-received by members and has contributed to strong sales. The speaker also mentions that there are no partnerships involved in these numbers, and gives a personal example of using Costco Logistics for their own purchases.

The speaker discusses the growth of Costco Next, a curated marketplace that allows Costco to sell goods from new suppliers and test new items. They explain how this complements their core warehouse business and expands member value. The speaker sees a lot of potential for growth in this area. The call ends with no further questions.

This summary was generated with AI and may contain some inaccuracies.