The paragraph is an introduction to Costco Wholesale Corporation's fiscal second quarter 2025 earnings conference call. Abby, the conference operator, welcomes participants and outlines the procedure for asking and withdrawing questions during the question and answer section. Gary Millerchip, the Chief Financial Officer, begins his remarks by mentioning that the call will cover the second quarter financial results and February sales, and will include forward-looking statements that involve risks and uncertainties. These forward-looking statements are bound by the Private Securities Litigation Reform Act of 1995. He also notes that comparable sales information is supplemental and not a GAAP substitute. Additionally, Ron Vachris will be joining him for the call.

In the second quarter of fiscal 2025, Costco plans significant expansion, with one new warehouse opened and several upcoming openings in California, including its landmark 900th global location. The company projects 28 new openings for the fiscal year, with 25 net new buildings after relocations. To improve service, gas station hours in North America have been extended. A new employee agreement has been implemented in the US and Canada, increasing top-of-scale wages by $1 immediately and additional increments in March 2026 and 2027. The US service clerks’ top wage is now $31.90 per hour, with a minimum wage raised to $20 per hour. The average wage for employees in the US and Canada exceeds $31 per hour.

The paragraph outlines several key updates and performance highlights from a company's recent report. It mentions that new employees now receive paid vacations in their first year, and US employees can gain a sixth week of vacation after 30 years of service. The operations and merchandising teams have shown strong performance, particularly in Canada and international segments, although foreign exchange fluctuations negatively impacted reported results outside the US. The company predicts continued foreign exchange and tariff challenges but aims to mitigate these through strategic buying, strong supplier relationships, and innovation. Approximately a third of US sales are imports, with less than half of those from China, Mexico, and Canada. The focus remains on providing high-quality items at competitive prices. Gary Millerchip, likely a company executive, introduces operating results for the second fiscal quarter of 2025 and references a slide deck available for further details.

In the second quarter, the company reported net income of $1.788 billion or $4.02 per diluted share, reflecting an 8.4% growth after excluding a tax benefit from the previous year. Operating income increased by 12.3%, despite a $70 million headwind from interest and other factors. Foreign exchange rates negatively impacted international net income by $57 million. Net sales for the quarter were $62.53 billion, up 9.1% from the prior year, with U.S. comparable sales increasing by 8.3% or 8.6% excluding gas deflation. Canadian and other international sales showed significant gains when adjusted for gas deflation and foreign exchange. E-commerce sales grew by 20.9% or 22.2% adjusted for FX. Traffic increased by 5.7% worldwide, with average transaction value up 1% globally. Foreign currency exchange and gas deflation presented challenges, impacting sales by 2.1% and 0.1%, respectively. Adjusted ticket value increased by 3.2% worldwide and 2.8% in the U.S.

In the article paragraph, Gary Millerchip discusses Costco's financial performance, particularly focusing on membership fee income, renewal rates, and gross margins. Membership fee income increased by 7.4% year over year to $1.193 billion, with a significant impact expected from a recent fee increase in future fiscal quarters. Renewal rates in the US and Canada were 93%, and worldwide were 90.5%, with potential volatility due to digital promotions and new openings in Asia. The company saw growth in paid memberships, including a 9.1% increase in paid executive memberships, now accounting for a significant portion of sales. Gross margin rates rose slightly, with adjustments made to the way the 2% reward is accounted for in business area metrics, while core margins were slightly down.

The article paragraph discusses the company's financial metrics, highlighting a decline attributed to supply chain investments and changes in non-food categories. Ancillary businesses experienced a marginal increase in gross margin, but e-commerce growth was counterbalanced by reduced gas profitability. LIFO credits were slightly lower compared to the previous year. SG&A expenses improved due to labor productivity and cost discipline, with a lower reported SG&A rate. The new employee agreement will create a future SG&A headwind, but its impact is expected to be moderate. Below operating income, interest expenses decreased while interest income also dropped due to reduced cash balances and lower interest rates, following a substantial special dividend payout.

The paragraph discusses financial and sales performance in Q2, highlighting that while interest rates remain a challenge, cash balances have stabilized following a special dividend. Foreign exchange gains dropped from $69 million the previous year to $33 million this year, and the tax rate increased to 26.2% from 22.1%, due to the previous year's benefit from a special dividend. Capital expenditures for Q2 were $1.14 billion, with a full-year forecast of $5 billion. Non-food merchandise sales grew in the mid-teens, notably in consumer electronics, jewelry, and home goods, while fresh food sales, particularly in meat, bakery, and produce, also saw strong growth. Food and sundries achieved low to mid-single-digit growth, with cooler and international foods performing best. The company seeks to enhance member value with national and private label brands.

The article discusses the company's strategy of being proactive in lowering prices and hesitant to raise them, highlighting price reductions on select products like olive oil, peanut butter, and tortilla strips. It emphasizes expanding local sourcing, such as introducing a Kirkland Signature (KS) water product in China, achieving significant savings. The company also improved the quality and value of KS diapers, and launched new KS products such as French fries, vodka and soda, and lager. Kirkland Signature is growing rapidly, outpacing the overall business. In ancillary areas, the pharmacy and food court performed well, with the introduction of a new smoothie and the return of a popular sandwich. Gas sales showed slight declines due to lower average per-gallon prices. The report ends by noting that while inflation varied by department, it remained low, with fresh products affected most, driven by meat and bakery items.

The paragraph discusses various aspects of Costco's operations. Food and sundries inflation remains manageable, with some items experiencing deflation, and the supply chain remains stable, though shipping is less predictable than pre-COVID. Costco's proactive inventory management has supported strong sales in non-food categories. In digital and e-commerce, Costco has enhanced its app with a warehouse tool and improved personalization by sending tailored digital messages. E-commerce has seen growth driven by bullion, home furnishings, and other departments, while Costco Logistics and Costco Next reported record holiday performances. Additionally, improvements were made to the co-branded credit card, offering members better cashback rates with no annual fee.

In February, Costco reported a robust performance with net sales reaching $19.81 billion, marking an 8.8% increase from the previous year. Executive members using the card benefited from enhanced rewards, with cash back on purchases in-store and online doubling to 4%, and gas rewards increasing to 5%. While US comparable sales rose by 8.6%, and Canadian sales saw a 3.2% increase (8.7% when adjusted for gas deflation and FX), other international sales were slightly down by 0.6% but up 6.5% when adjusted. E-commerce comparables saw a 19% increase, or 20.2% when adjusted for FX. Overall, the company's total comparable sales rose by 6.5% or 8.3% when adjusted. Traffic increased by 5% globally and by 5.8% in the US, though foreign currency fluctuations negatively impacted sales figures. The Midwest, Northeast, and Los Angeles were the strongest US regions, while Mexico, Taiwan, and Korea led internationally. Food and sundries saw mid-single digit growth, excluding FX impacts.

The paragraph discusses the performance of various retail departments, noting that cooler, frozen foods, and sundries were the strongest, while fresh foods, meat, and produce saw high single-digit growth. Non-food items increased by low teens, with jewelry, gift cards, and housewares performing well. Ancillary business sales grew slightly, with pharmacy and optical leading, though gas sales dropped slightly due to lower volumes. The company will release March sales results on April 9th. During the Q&A session, Simeon Gutman from Morgan Stanley asked about consumer spending behavior, particularly in relation to rising egg prices, and if there's any market slowdown, noting no observed impact in Canada. Gary Millerchip responded to these inquiries.

The paragraph discusses the current state of consumer behavior, noting that consumers remain focused on quality, value, and newness while being selective about their spending due to factors like inflation and tariffs. There is a trend of increased spending on food at home compared to eating out. In non-food categories, merchants have successfully emphasized quality and value, which has led to strong overall trends. However, consumer electronics and apparel have shown flatter growth compared to other categories, though the performance in these areas is still considered strong relative to the industry.

The paragraph discusses trends in meat sales, with premium items growing well and lower-cost cuts like ground beef, poultry, and pork experiencing faster unit growth. Overall sales trends remain consistent, with Canada showing strong performance in February, particularly in comparison to the US and other international segments. Despite a slight decline from a strong Q2, Canada's results are still robust. When questioned by Michael Lasser from UBS about the decline in core margins and its implications for Costco's margin expansion, Gary Millerchip advises not to read too much into the quarterly results regarding core margin trends.

The paragraph discusses the company's financial performance, highlighting a slight improvement in the gross margin rate by four basis points despite increased supply chain costs due to higher inventory purchases. These investments are intended to mitigate the unpredictability in supply chain timing and potential tariff risks. The breakdown reveals minor fluctuations: food and sundry sectors saw a slight increase, fresh was up slightly, while non-foods experienced a slight decrease. The company remains confident in its ability to invest in member value and maintain positive results. Toward the end, Christopher Horvers from JPMorgan inquires about weather impacts on the company's strong core comp growth in February.

In the paragraph, Ron Vachris addresses questions about the impact of weather and tariffs on Costco's business. He mentions that while weather conditions affected sales in some regions, especially the Northeast and Midwest, most impacts were recovered since they weren't tied to holidays or extended events. Regarding tariffs on grocery items, Ron explains that Costco's buyers handle these like any other cost increases. While margins can be tighter, the company works closely with suppliers to bring goods to market efficiently and mitigate cost increases. Tariffs are described as fluid, making it challenging to predict outcomes, but Costco is prepared to manage potential impacts and defer cost increases when possible.

The paragraph involves a discussion between Scott Ciccarelli and Ron Vachris about Costco's strategies for dealing with potential tariffs on imports from China, Mexico, and Canada. Ron Vachris explains that Costco's "Treasure Hunt" merchandising approach provides flexibility, allowing the company to adapt by finding replacements or alternative goods if tariffs impact certain items. He emphasizes the company's preparedness and strong supplier partnerships, maintaining a focus on value regardless of tariff conditions. The conversation then shifts to Jiang Ma from Bernstein, who inquires about international sales and any timing shifts affecting them, particularly regarding the slowdown in the international segment due to factors like the Chinese New Year. Gary Millerchip responds, indicating that such timing impacts are present, especially in Asian markets.

The paragraph discusses the company's international business and future growth plans. It explains that while certain factors like the Chinese New Year affected monthly results, overall international markets have shown strong performance, particularly in the second quarter. The company aims to open 25 to 30 new warehouses annually, with just over half in the US and the rest internationally—in regions like Canada, Mexico, Asia, and Europe—where there is still significant growth potential. Furthermore, international markets have comparable or better profitability than the US market. The paragraph concludes with a transition to a participant named Oliver Chen, who asks about general merchandise, electronics, and consumer health, praising the company's unit per transaction (UPT) strategies and product innovation.

The paragraph features a discussion between Gary Millerchip and Oliver Chen about the current state and strategy of multi-vendor mail, digital promotions, and consumer electronics. Millerchip explains that while they believe they are gaining market share in consumer electronics, overall growth in this area remains slow due to a lack of new innovations. There were, however, successful sales for large screen TVs during the holidays. He also highlights significant growth in international product offerings, achieved by sharing market insights and leveraging global buying power to offer better value. This approach has been beneficial and is expected to support future growth.

The paragraph discusses the success of introducing new products, particularly Kirkland Signature (KS) items, in comparison to national brands. The emphasis is on the potential for growth in non-food categories where KS has lower penetration but can make significant inroads. The paragraph highlights examples such as motor oil and golf balls, which were traditionally brand-loyal categories where KS has successfully become a top seller. The speaker attributes this success to the excitement of the product mix, the balance of everyday low prices, and partnerships with suppliers, all of which drive customer traffic and engagement.

The paragraph is an excerpt from a conversation where Ron Vachris discusses the strategic approach to developing Kirkland items. They focus on improving quality and adding value on an item-by-item basis rather than mass-producing new items. Vachris highlights the success and quality of products like sandwich and storage bags while acknowledging there are failures. Kirkland Signature products are held to the same standards as branded items, meaning non-performing items are quickly removed. He praises the buyers for their high success rate and diligence in offering great value to members. The conversation then shifts to Rupesh Parikh asking about wage-related financial impacts and productivity strategies to mitigate increased wage pressures. Gary Millerchip acknowledges the headwind and thanks Rupesh for his question.

The paragraph discusses a series of wage investments made over the past year, starting with one in March of the previous year, followed by increases in July, and more recent wage agreements. The wage changes from July and May will impact the current quarter as old investments are cycled out for new ones, leading to a mid-single-digit basis point increase in wage investments. Additionally, there will be a one-time adjustment in Q3 to account for vacation accrual changes. Despite these costs, the company achieved a nine basis point improvement in SG&A leverage in Q2 due to enhanced productivity and efficiency.

The discussion revolves around the company's strategy for maintaining efficiency while investing in employees with competitive wages and benefits. The conversation shifts to inflation, where Gary Millerchip notes that inflation was highest in the fresh category, especially meat, with food and sundries seeing low single-digit inflation, and non-foods experiencing deflation. Millerchip confirms inflation increased slightly over the quarter. Greg Melich inquires about the company's alternative media plans, referencing competitors who generate 4-5% of digital revenues from advertising.

Gary Millerchip discusses the company's current alternative profit streams, which include a co-branded credit card program, a travel business, and e-commerce ad revenue. He highlights the significant growth potential in the retail media sector, targeting marketing dollars from CPG companies. Although in the early stages, the company aims to develop a retail media platform and personalize member experiences. This involves creating targeted and timely messaging. It's a multi-year plan, but they've started with an offers media channel, with significant interest from CPG suppliers and ten campaigns currently live.

The paragraph discusses Costco's approach to enhancing member value and loyalty rather than focusing solely on new revenue streams. Greg Melich suggests this could lead to a larger executive rebate, to which Gary Millerchip agrees. The discussion then shifts to Edward Kelly from Wells Fargo, who asks about store throughput and initiatives to improve it, such as scanning at the entrance. Ron Vachris responds that enhancing checkout speed is a priority, and technology, such as door scanning and self-checkout, is being used to improve productivity. The conversation also touches on the possibility of extending store hours like those at gas stations to help manage customer flow.

The paragraph discusses the focus on improving technology in warehouses to expedite member processing and optimize parking space turnover. Ron Vachris addresses the possibility of extending store hours, suggesting it's under consideration but not currently planned. Edward Kelly and Ron Vachris also discuss gas station expansions to accommodate commuters. Chuck Grom inquires about the digital MVM initiative, questioning its scope, potential replacement of paper MVMs, and insights into consumer response. Ron Vachris explains that digital MVMs offer flexibility compared to the lengthy print process, allowing for last-minute adjustments and vendor participation to boost sales.

The paragraph discusses Costco's use of a digital marketing strategy to enhance customer engagement and drive sales. They have implemented a digital version of their MVM (Member Value Mail) that runs for ten days, instead of the traditional 28-day mailed version. This digital MVM reaches about 40 million people via email, highlighting new arrivals and special deals, which has resulted in high open rates and increased store traffic. Gary Millerchip explains that Costco is beginning to use membership data to tailor these communications, making them more targeted and relevant to individual shopping habits. The approach aims to personalize messages without altering the overall market strategy, and initial results suggest positive engagement and behavior changes. Chuck Grom asks when this initiative began, indicating ongoing interest in its progress.

The paragraph discusses changes in membership fees and executive programs for a business in various international markets. Gary Millerchip explains that membership fees have recently increased in Australia, Mexico, Japan, and Korea, though these changes do not follow the same schedule as the US and are based on individual market plans and histories. He also mentions that executive membership programs are introduced in markets that have reached a certain level of maturity and size, with such programs already existing in some Asian markets, Australia, and the UK.

The paragraph discusses the growth potential for executive membership in various global markets, noting that while Canada and the US have the highest levels of membership penetration, there is significant opportunity for growth in Asia, which is next on the maturity curve. Australia and the UK are further behind but still have potential. The discussion then shifts to analyzing average ticket trends excluding gasoline in the US, with an emphasis on the impact of product mix, quantity, and inflation. Despite some deflationary trends in items like sugar, butter, and flour, the bakery sector is facing inflation due primarily to the rising cost of eggs.

The paragraph discusses the company's positive performance over the past year, highlighting consistent growth in visit frequency and improvements in basket size, especially in non-food categories. The company attributes this success to delivering great assortments, quality, and value to its members. Despite flat inflation, the growth was driven by an increase in the number of items in the basket rather than inflation-induced increases. However, potential changes in inflation and tariffs could impact this growth. Additionally, Joe Feldman from Telsey Advisory Group inquires about declining gas volumes, expressing surprise and seeking clarification.

In the paragraph, Gary Millerchip discusses trends in gas sales, indicating a positive growth in gallons year-to-date despite a decline in February, attributing such fluctuations to factors like weather. He mentions low single-digit growth in gas compared to other business areas. Ron Vachris outlines the plan to open 15 new stores in the US, 3 in Canada, and 7 in other international locations, aligning with their typical annual expansion strategy. Mike Baker raises questions about the impact of extended gas station hours on sales volumes and inquiries about competitive price gaps amid rising inflation. Gary acknowledges the questions as the discussion continues.

The paragraph is an excerpt from a call where a company representative, Ron Vachris, discusses the positive response and increased usage of their gas stations following some changes. They emphasize that they view themselves as their own main competitor and focus on finding ways to reduce costs and prices for their members. They typically make proactive price changes rather than reacting to competitors. The commitment to providing the best value and quality is highlighted as central to their strategy. The call concludes with Vachris looking forward to meeting Mike Baker next week, and the operator ends the call.

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