Ladies and gentlemen, thank you for standing by and welcome to the Q1 earnings call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. [Operator Instructions]. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Mr. Richard Galanti, CFO. Please go ahead, sir.

Thank you Laurie 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 first quarter of fiscal 2020, the 12 weeks ended November 24. Reported net income for the quarter came in at $844 million or $1.90 per share compared to $767 million or $1.73 a share last year in the first quarter. This year's first quarter results included a $77 million or $0.17 per share income tax benefit related to stock-based compensation. Last year's first quarter results included a $59 million or $0.13 per share income tax benefit related to stock-based compensation. Net sales for the quarter came in at $36.24 billion, a 5.6% increase over the $34.31 billion sold during the first quarter of last year. Comparable sales for the first quarter of fiscal 2020 in the U.S. on a reported basis was 4.7%, ex-gas deflation was 5.0%. Canada reported a 2.9%, ex-gas deflation and FX plus 5.1%. Other international reported 3.2%, ex-gas deflation and FX plus 4.5%. So total company was a 4.3% reported and ex gas deflation and FX of 5.0% E-commerce on a reported basis was a 5.5% and a 5.7% on a…

[Operator Instructions]. Your first question comes from the line of Christopher Horvers from JPMorgan. Please ask your question.

Thanks. Good evening. So, I just want to step back and get your thoughts in terms of how you plan the holiday season this year given that there are six fewer days. It seems like a lot of retailers are expecting a big surge at the end, bigger than normal into Christmas, given the shortened season. Is that something, I am not asking about December just how you planned it? Is it something you saw in 2013? Is it something you are planning for in 2019 and maybe any comment through what you have reported so far?

Well, I think we planned it and with some historical knowledge of what's happened in the past when you have got the shortest period of time between Thanksgiving and Christmas. And we plan, assuming that we are going to continue to have the types of levels of comps that we have in general, recognizing sometimes there's a switch between months as example being the switching -- Thanksgiving being in November versus -- Q1 rather versus Q2 for us in our example. But so yes, we do expect to ramp up on a per day basis. We will have to wait and see where it goes. But we went into the planning, I think, with the confidence that we have had, good shopping frequency increases and good renewal rates and pretty good comps.

Understood. And then on the pricing environment, it seems like Sam's has been taking some bigger hits to the gross margin line and it seems to be benefiting comps. So, are you seeing a step-up in terms of, in that core club channel? Are you seeing a step-up in price investment from your peers?

In a word, no.

Got it. That's fair enough. And then my last question is, in 2Q you are going to lap, I think, a pretty big benefit in the ancillary line last year. I think it was up 33 basis points, big part of that being gas, so you are going to have gas prices. Do we have to give that all back? I mean gas prices look like they will be up year-over-year at this point but are still going to be down a bit sequentially and I know there is an interplay between those two dynamics. So, any thoughts you could give us around lapping that 33 basis points given those dynamics would be super helpful?

Well, I think profitably for gas for us and as we have read from other retailers, big retailers that have gas stations as part of their retail concept, it's the new normal over the last few years. It has been a more profitable business. We, I think, benefit from the fact that we have seen our gallon increases on a comp basis in the very high single digits. So, we know we are taking market share. Despite increased profitability in that business, our savings in our view, when we can do price shops of competitors gas, it has never been as strong. So, we feel very good about where we are with that. Now sequentially, part of the increase, when you look at it on a year-over-year basis, last year's plus 30 or whatever, I don't have it in front of me, but whatever it was, had as much to do as what it was the year before. I think again when you read what others have said and what we have said in the last couple of quarters, it's been pretty good for all of us. So, it may be, you are not going to see that kind of delta on top of the big delta last year nor are you are going to see the big negative from that, negative from it coming back two years ago, but we will have to wait and see. We think what we have learned about gas profitability is, it could be very fleeting. Right now, it's been good as it was last quarter and as it was over the last couple of years in general, but you never know how to predict it from sometimes week to week.

Awesome, guys. Have a great holiday. Thanks so much.

Your next question comes from the line of Michael Lasser from UBS. Your line is now open.

Good evening. Thanks a lot for taking my question. Richard, you touched on this briefly. But how have tariffs impacted Costco's profitability and if some of the tariffs are rolled back, how is Costco is going to handle this? Should we be modeling margin benefit over the next couple of quarters from this dynamic?

Well, I think generally we have said on a qualitative basis, that overall I think companies of scale and certainly we are one of those and the fact that we feel that we have had a relatively good mitigation plan, if you will, easier on a 10% tariff than a 25%. I think one thing again on top of this, our scale in general, our ability to move in and out of items, if all of your items are 25% tariff because you are a furniture retailer or whatever retailer, that's different than a company that has a small percentage of our business in that area. Like others, we have moved a few things where we can and sourced it out of other countries. I think our total China imports into the U.S. is about just a few percentage points lower than a year ago. So, nobody can do a lot of that nor can we. But generally speaking, I don't think it's -- it's hard enough for us to budget it into our numbers. What we look at is, is the fact that in some cases where the price has gone up and we have passed on all or some of it, we haven't seen an impact to the unit sales. On others, we have and we never know until it happens, which ones are more elastic than others, if you will. But at the end of the day, we think that we have done as good as anybody in terms of being able to mitigate the impact. And so again, I think the fact that our margins, our core on core margins, generally speaking, even in the departments like hardlines and softlines, have been slightly up year-over-year. And certainly, we haven't done that without first and foremost being the most competitive out there. That makes us feel that now, we don't want it to continue and we don't want List 4B to come on or anything else to go higher. But I think we have done okay by it.

So in cases where you have taken price or reengineered a product to make it cheaper, how do you handle that?

Well, first of all, I don't think ever we have tried to reengineer a product. We are going to try to figure out how to get the price down a little bit with the help of our suppliers. Sometimes, our own money or whatever else we can or moving a few items to another country and sometimes eliminating an item and putting something else in its place here. So I remember I think one anecdotal story would be in late calendar 2008 when the economic downturn hit hard and what hit hard in our case was a as good as our values were on $1,000 and $1,500 patio furniture, we had a lot of markdowns to take care to get through that in January, February and March when that stuff hit the floors. I can remember vividly, come June, following that when we were still in a bad economic downturn and our head of merchandising and our CEO reminding everybody, it's a budget meeting, I don't want to see us bring down the quality and stuff to hit a price point. We have taken 20, 30 years to get our members comfortable with the types of values we can bring, particularly on bettering goods. And so might we buy a few less units of something? Yes. Might we augment a little bit with some offerings? Yes. But we try not to.

That's helpful. And my follow-up question is, given the well-publicized website outage over the holiday weekend, should we read that as Costco needs to make a more meaningful investment in its technology infrastructure to keep up with the growing size of that business?

Well, first of all, we live it every day here and certainly and we are. It was unfortunate. Despite all the efforts to have plenty of processing capacity, if you will, there was something that incurred. When we look at the five days between Thanksgiving and Cyber Monday, those five days on a year-over-year basis, I mean we still were up in the very high teens as a percentage on e-commerce, so consistent what we have showed you what we have currently been running. What it tells us, we could have done better than that. So we did leave something on the table there. And again, we were able to correct it. It took several hours that day, unfortunately. But rest assured, we are spending a lot of money on things like that.

Understood. Have a great holiday.

Your next question comes from the line of Chuck Grom from Gordon Haskett. Please ask your question.

Hi. Good afternoon, Richard. First question on MFI. Now we are past the fee increase and FX is normalizing, I am just wondering if you see any material reason why the 6% growth you reported in the quarter wouldn't be a good proxy in the coming quarters?

Well, who knows as certainly, one of the reasons why it's growing a little faster than the total sales line, a little of it's a couple of recent openings like the China opening. That's a little of it. I think more importantly, it's some of the things that we have done a much better job of getting new members to sign up as an executive remember. You saw in terms of the number of new member which is a combination of new membership signing up as executive member as well as conversions to these executive member, we are doing a better job of that as well. And of course that aside from improving membership fees, they are more loyal member that shop more frequently and renew more at a slightly higher rate. And so I think a lot of it is some of the things that we are doing, getting the growing number of members, I mean U.S. as a example here with the Citi Visa card, signing up for that and having auto-renewal as well as opting into auto-renewal on other Visa cards that somebody may choose to use at Costco. And so those are the things that help as well. I would like to think it's all related to just great value and that's more things that we offer the member, which is certainly part of it too.

Okay. Understood. And just to switch over to the balance sheet a little bit. Inventory levels were a little bit heavier. I presume that's just the timing of Thanksgiving. Any way to normalize for that, maybe inventory per club or some other metric, just to get a sense for what sort of apples-to-apples would look like?

Yes. Well, I think it's mostly the shift of holiday. Some of it is a buildup with e-commerce and those holidays as well with more in the system. We are doing more fulfillment on that side. Again, in the few days since then, it's come down as we have expected. So I don't think there is a whole lot to read into it.

Okay. Great. And then just last one on the core on core up 4%. Maybe quantify for us the drag that you are going to continue to see and then what you saw here in the current quarter from the chicken plant, just to get a sense for how much that was to the quarter?

Well, the thing about, if we open the chicken plant, the first chicken, if you will, went through on September 10. Hopefully 45 weeks later, there will be roughly 2.2 million chickens a week going through there. The first three months, if you will, which is Q1 here, September, October and part of most of November, you were at the lowest end of that. I don't want to straight line it completely, but it's close enough for this discussion, going from one chicken to 2.2 million chickens, if you will. There is a lot of operating cost in running the plant. And while we don't have both production lines running yet, there's just a lot of cost associated with that. It should be a diminishing drag in Q2 and then Q3 and then Q4 and then not be an issue.

Makes sense. Thanks a lot.

And we have Chris Mandeville from Jefferies. Please ask your question. Your line is now open.

Hi Richard. So just a quick question on Central SG&A, similar to Michael. I am just curious with respect to the IT investment, if we should be assuming that that pressure that was realized in the quarter actually progressively gets a little bit more prominent on a go-forward basis? I don't know if that's what you were trying to reference or allude to with respect to expanding your capabilities and activities? Or if we should be thinking about something similar on a go-forward basis?

If I look over the last several years with that word we have stopped using completely called modernization and now it's some modernization but other things as well. We talked about in the last, I talked about in the last several quarters things like e-comm fulfillment spending a lot of money on that. A lot of that hits SG&A in terms of all that technology. The chicken plant, to some extent. We have also over the last couple of years done a reset of certain departments within IT based on wage competition in this part of the woods up here in the Northwest. So I mean there's a lot of things that go into it. And we have got a lot going on, whether it's e-comm, continued increases in infrastructure and vertical integration as well as our depot operations and modernization. So I don't know. I think that when we first started talking about modernization years ago and it was just that, as best we could we estimated originally over a few years it would be incremental 10 basis points to the company. And then quickly, we felt it could be 13 and ultimately it was 18 or 19. And then, a couple of years went on a quarter-over-quarter basis, some quarters it was six and some quarters, it was two or zero. So I think a couple of quarters ago, maybe three quarters ago, it was flat year-over-year to that impact. And I reminded people that don't read anything into that like it is an inflection point. We have a lot going on both related to modernization stuff as well as expanding as well as vertical integration. So my guess is, it will still be a negative year-over-year. There's a negative, when those negatives anniversary a year hence, will we have incremental negative net? I can't say. At some point, it's supposed to slow down.

Okay. And then just my follow-up would be with respect to the Instacart pilot and delivering Rx to your members. I guess just what exactly you are attempting to accomplish there? And is the structure of delivering pharmacy any different in terms of how you are approaching things from a grocery perspective?

Yes. Well, no, look, it's convenience. Like anything in life out there, as you might expect, we are always asked when are you going to start to do order it online and pickup up in store, when are you going to do this, when you are going to have something else. And we kind of do things our own way. We look at all these things and this is one area that with the Instacart relationship where we have them already coming into our locations, let's give this a shot. We already have a good and growing mail-order business. We have 540-ish pharmacies around the country. But this is another opportunity. Our pharmacies are sometimes, somebody does, won't come out if they are not feeling well. And so it was an opportunity given and as density increases that should help. But you have already got these drivers delivering groceries to others, hopefully we can do this. And it is something to add to the competitive belt here.

Is there a notable impact to one's kind of Rx margin profile? I guess I am just curious about that the economics there?

No. First of all, it's brand new. And it's just a few locations, going to roll out to a few more shortly. So we will see where it goes.

All right. Thanks.

Your next question is from Simeon Gutman from Morgan Stanley. Please ask your question.

Hi there. This is Michael Kessler, on for Simeon. So a question on the competitive environment. We have seen Sam's Club undergoing an unexpected round of investments recently. And I guess is there anything notable that you would feel the need to respond to as far as what they are doing? Or anything that changes on your end from some of their investments?

Not really. I mean, look, our warehouse managers are in their locations every week. We hear about it and I hear about here every month by location or by region rather. And look, they are a good operator and a good competitor and we feel that we do a lot of things very well too. But there is nothing that I could point out. A year or so ago, we had pointed out that they have gotten a little more aggressive on fresh and some of these things ebb and flow. But at the end of the day, we feel very good about our competitive position.

Got it. Okay. Great. And just one follow-up on China. The new store that you opened there, a little further away from the opening. Is there anything notable that you have learned over the last couple of months? And any changes to your plans as far as the rollout, which I know is a little more on the slower side? But any updates on that front?

Well, first of all, on the rollout side that we have one other one planned which was planned previously. That's probably about a year-and-a-half away. And we will continue to look to see what we want to do next. But not a lot of change there. Overall, the location has exceeded our expectations. We have brought in additional help from neighboring places to help but the sales continue to grow, the sign ups continue to do very well there. And we will see. So we have had a great reception. We feel good about from a merchandising standpoint and maintaining a supply chain. Very good. And we are getting, I think, good reviews over there. We have also identified a few items, one in particular is again just anecdotal. we have done a very good job over there with sea cucumbers which I still have never tried. But we have found is that particularly on the West Coast in several cities where you have got customers that value that as a great item. We have done very well with it. So just like anything in life, we have found items that makes sense in other parts of our operation throughout the world. It's fun to see out there and it's a high value, high price item at a great value at Costco.

All right. Very interesting. Thank you.

And we have a question from the line of Greg Badishkanian from Citi. Your line is now open.

Hi. This is actually Spencer Hanus, on for Greg. You guys called out some sales headwinds related to the website issue. Do you think those sales have been lost? Or do you think they were just pushed out?

I think some was pushed out, some went the warehouse and some was lost. In the scope of things, given our whole company, recognizing that e-commerce while growing faster than the rest of in-line, is still little over 5% of our company. So I don't want to be cavalier about it. We didn't excite the members that were delayed. But we feel we have got, so we extended the values that hit the 30-plus million emails that we sent out it in the early hours of Thursday. We extended those deals for an extra two days. And so we think we got some of it back. And again for that five day period, we did just fine. Frankly, we feel we did lose something that we could have done better than we had anticipated.

And then any comment on big ticket sales trends that you are seeing? And then how does the consumer feel heading into the holiday season this year?

Yes. Big ticket items are strong, particularly electronics items. The fact that back in March or April this past year, we were able now to offer a full line of Apple products including the Macs and the watches and the like. And we have done very well with those. And online, we have done even better with those. And it's not just the Apple products. It's other big ticket high-end game computers and game consoles. Big screen TVs are huge, recognizing the price and value of those things for consumers keep coming down, which is great. Those are the things that have done very well for us.

Perfect. Thank you.

Your next question comes from the line of Karen Short from Barclays. Please ask your question.

Hi. Thanks very much. Just a couple of questions. I guess starting with the core on core. So you have obviously had pretty meaningful stability, I guess, on the core on core and you alluded to this a couple of quarters ago in terms of your scale and your buying power. But I am wondering if you could just frame a little bit on how we should think about core on core going forward because it does seem like we are kind of in a new norm of that being stable to up generally?

Well, I think the fact is that, you are right, all the things that we do to drive value or to get better pricing or based on our volume or Kirkland Signature or whatever, just when you think it's safe to go out, we are going to use it to drive business, which we have done. We talked in the past about the monies from increasing the membership fee, the monies from the change in credit cards, the income tax reform, recognizing about a little over a third of the income tax reform went to improve hourly wages. But at the end of the day, those have given us additional monies to continue to drive value. And there are times when we see something, a particular department or something, where the margin might be very strong year-over-year. That's the first thing we look at. Even if we are giving a greater savings to the customer, is it too much? And so again, we are a for-profit business. We want to grow our topline first and that will help the other things. But we don't manage it completely to the basis point. That we would like to see it year-over-year even go up a little bit, but we have avenues to do that.

Okay. And then on tariffs, just specifically to the tariffs for this Sunday if they were or not to go into effect. So can you just clarify, I mean the rest of the lists, like 1 through AA, I guess, obviously it's kind of already embedded. But is there anything to think about it in terms of 4B does not go into effect with respect to your positioning or the model or anything?

Anyway, we don't know. I mean to the extent that we bought in advance certain merchandise to the extent we could, anticipating that that was going to go into place and so let's get it in before the tariff, we did. But it wouldn't change it, so as you are saying, it wouldn't change things immediately there. So if I mean, if anything, we have had a little extra inventory in advance of it.

Okay. And then last few from me is just housekeeping on inflation and food and also in non-food and then thoughts on cash on the balance sheet as it continues to build? Thanks.

Inflation is almost a non-issue. It's not either inflation or deflation, generally speaking. I mean, yes, we mentioned they are slightly deflationary year-over-year. Tariffs is slightly inflationary of course on those limited items. Yes, proteins are up a little. My understanding, that has to do partly with China and with swine flu as well as more demand for beef. Other than that, not a lot to talk about there. What was the other part of the question?

It's cash on the balance sheet building?

Yes. Well, we have two debt repayments coming due this week or next Monday. Next week and in mid-February totaling $1.7 billion from prior debt offerings. Beyond that, of course, cash at the end of Q1 generally is the highest level because you have started to sell more, but you haven't paid for everything yet relative to seasonal stuff or Thanksgiving and Christmas. So like our AP ratio was always the strongest on a quarterly basis. Beyond that, stay tuned.

Okay. Great. Thanks. Have a great holiday.

Thank you.

And we have a question from John Heinbockel from Guggenheim Securities. Your line is now open.

So, Richard, where do you stand now with self-checkout? I know you have been expanding that. How many clubs is that in? What are your learnings, right, in terms of consumer, member satisfaction, speed of checkout? And then what do you think the rate of expansion of that is going to be?

Well, we currently have it in the U.S. and Canada in about 135 locations. It's going well. We have another 92 planned for early calendar 2020. So up above in the low 200s. And the senior operators continue to discuss it, additional rollouts with Craig, based on their performance. But overall, it's a positive. And so we will continue to do it, is my expectation.

I mean, roughly speaking, when you think about savings, right. I don't know how material that is but is there an idea that you reinvest that? Can it be enough to reinvest back into the business in something like expanded BOPUS? Or I know you have been sort of reticent about BOPUS because of the cost. Is that something you can now begin to get your arms around? Or no?

Well, first of all, I think thoughts on either of those are mutually exclusive of one another. When I look at the millions or billions of front-end seconds we save in labor, we know full well that some of it is, you don't get it all back, but even if you take a conservative amount, there is money to be saved there. More importantly, the members like it. The only thing the member doesn't like is when there is a member in front of them that is going through with their full basket and is taking longer. But generally speaking, even the high volume, the few high volume units that I have actually gone to of late, like the ones in Seattle and I use them when I am in and now they are fast, they work well and fast. So there is savings. But I think as well it improves that customer experience. As it relates to buy online and pickup in store, we continue to look at what others do and continue to scratch our head and recognizing the average Costco, even compared to our two direct competitors, is two and almost three times the volume per location, almost two times and almost three times the volume per location. So we will have to wait and see. We are still not at a point. We look at it, but we are not at a point that we are planning to do anything with that.

Okay. Thank you.

Your next question is from Kate McShane from Goldman Sachs. Your line is now open.

Hi. Good afternoon. Thanks for taking my question. We wanted to ask about apparel. I know that this is a category where you have been a little bit more focused. I wondered if you could give some color about the performance of apparel during the quarter? What you see the opportunity to be? And how Costco can kind of position itself to capture some share going into the next year?

Yes. I think it's part of the same story that we have talked about fortunately for the last few years. Apparel is a combination of both expanded Kirkland Signature as well as a few additional brands willing to sell us or expanding what they are selling us as well and great value. And it's a category in the several billions of dollars that continues to grow in roughly high single digits compared to retail apparel overall that's lot less than that. And I think I am always amazed at our monthly budget meetings when, in this case, buyers are bringing in and showing what's coming in for the new season whether it's outerwear, a few months ago outerwear for the fall or both men's, women's and children's stuff.

Thank you.

Your next question is from Scot Ciccarelli from RBC Capital Markets. Your line is now open.

Good evening guys. Richard, I had a follow-up question on the Shanghai location. Can you just provide a context on the sign-up activity of that location relative to a more traditional facility?

It's beyond good. I am sitting here with my colleagues on what I am allowed to say. The average Costco in the world has somewhere in the mid to high 60,000 of member households. We have had locations in other countries in Asia where we might be at a 100,000 to 120,000 after a few years, maybe even after one or two years. This one is more than twice that. So there's lot of press in a city that is populated with 25-plus million people.

Yes. I understand. So just given the fact that in the past you kind of talked about how long it takes locations to hit a breakeven point. I guess given the early sales and membership trajectory of that location, does that help change how you are kind of thinking about the breakeven point for that warehouse and hence the China opportunity? Or do you need more distribution scale to really get the profitability to where you want it?

Well getting to seven or eight or 10 locations in a country where a bunch of stuff is American supplied and barge shipped, not air flown, you become more efficient as you go from one to three, maybe using some third-party consolidation or storage to do high value bulk items because you don't want to run out of water or toilet paper as you may, the no-brainer items. And over time, by the time we get up to eight or 10, we want to have a bigger cross-dock with enough land to continue to expand it over time. Cross-docks in the U.S. and Canada serve 40 to 60 locations each and 40 to 60 relatively high volume locations. So we have one in Australia that serves 11 locations. That will continue to be a little bit as an economic improvement to that country as it serves 15 and 20 locations. We have opened two in Japan, essentially south to north for all of 26 or 27 locations. We plan to have a lot more there over time. So certainly, in addition, we have a lot of extra help there. We are doing big volume and we brought over additional people from Taiwan that speaks the local language and then understand our concept and we have been fortunate to have that additional history and expertise when we have gone there, but also with Costco more. So I think you have got, what is the normal once it's doing whatever volume it's doing and it's efficiently run at the warehouse, maybe you don't have all the efficiencies from cross-dock. That will take several years. But the most efficiencies are what's in the building and how many people you need to help that process and become more efficient. So I mean it takes a couple of years to do that. And that's one of the reasons why we generally go slow in new countries because we want to get it right from a customer experience on an operational side.

Got it. Very helpful. Thank you.

Your next question is from Oliver Chen from Cowen & Company. Your line is now open.

Hi. Thank you. Richard, on your digital innovation roadmap, what are your thoughts about fulfillment from in-store and micro fulfillment centers? And also thinking about the robotic capabilities across inventory management or supply chain from in-store? Would love your thoughts.

Well, just because of what we did currently a couple of years ago, we have our business centers that act as a focal point, as you know, for today. We have our depot operations. We have moved some of that fulfillment to annexes off of some of our depots as well where we put in to our biggest depot some automation fulfillment, which I have talked about over the last few quarters or last six months and we continue to roll some of that out. One of the things we have done is, is particularly things like how do we improve the time, particularly if items that might be presented in store but are only sold online like white goods, or what I will call big and bulky and those that require not only installation but sometimes take away the old one. While many third parties do that, we do a little of it. We have also figured out what are some of these items based on our volumes that can be staged efficiently and a dozen, I am making the number up, but a dozen geographic locations across Canada and United States to take the shipping times down dramatically. And we have done some of that stuff. And that's evolved over the last couple of years and we will do more. You have got a business of just white goods and that's certainly not the only big and bulky. There is furniture. There's patio stuff. There is exercise equipment. But just on white goods, we have gone from essentially sub $50 million a year four years ago, over $650 million and growing. And part of that is not just selling the stuff at great prices, it's getting it delivered to in fewer days.

Okay. And Richard on vertical integration opportunities ahead, what are you thinking could or should be possible? And what's your framework for evaluating what makes sense for you in terms of owning more parts of the supply chain across different categories?

Well, what started 25 years ago was a ground beef plant to save $0.04 to $0.06 a pound we thought a ground beef are now two major meat plants. One in Tracy, California where we started and one in Illinois, which is still growing into itself over the last year-and-a-half, two years since it opened. I think the one in California does well over four million pounds a week of just a handful of items that are ours. That gave us confidence to do the hot dog plant. We did almost partly by necessity a bakery commissary in Canada which we are finding can serve not only Canada but the U.S. on making more consistent and more efficiently crusted items like cookie dough and croissants. So we learn each time we do something. I think there has been some press out there about testing greenhouses for produce. We have got one up and running just in the last few months in California that I think some of the product is just starting to hit our shelves. But we think there is some great opportunities on the produce side for hothouses and greenhouses, if you will, particularly where transportation costs and time is a necessity on stuff that spoils quickly and easily. Right now, much of the produce that we ship to our Hawaii locations is air shipped. If you can do some more of that over there, that's a no-brainer. And given our volume and limited SKUs, we think that it's an efficient model to help. But that's not just us, others are trying that. Again, we think that the structure of our business allows us to take more advantage of that but it's new. I don't know if there's anything big. There is nothing as big as the chicken complex on the drawing boards. But I think we will continue to do things. But we are catching our breath a little bit right now. We have made some major investments for the second meat plant and the bakery commissary, just recently in the chicken complex and even more recently, the first of the few green hothouses. So we have got a lot going on. And the answer is, it works and so far and so good.

And my last question. Richard, Kirkland is a nice competitive advantage. What are your thoughts on how that percentage of mix may increase and categories that may be suitable for that you are not in yet? And also you cited new services that you have added to your product assortment. How will services evolve as a percentage of total? Just would love the magnitude of what may happen there over time?

Well, first, on the Kirkland Signature side, there aren't a lot of $0.5 billion and $1 billion items like water and various paper goods and things like that. And there are many, but not a lot of many new few hundred million dollar items. But yes there's lots of $20 million and $50 million items that can go to $50 million and $100 million and certainly I think on high-end packaged food items, on everything from not only organic but antibiotic-free. And I don't have all the adjectives in front of me, but there's lots of things that we can do that are high-end that our members want. And frankly has added benefits of seemingly gets in the millennials on some of those stuff. But I think we have expanded into some sporting goods. So there is lots of little things that will add to it. But if the number and I don't have it exactly in front of me, but ex-gas if the number is 24%, 25%, does it go to 30% over the next 10 or 15 years? May be. We think this is going to go up? Yes, likely a little bit because we found ourselves and our ability and our suppliers. Some of our private label suppliers are very good at what they do. But we also are still a branded retailer. We have very good savings, as you know, on branded items. On the service side, we don't talk about it a lot because they are small relative to the size of our company, but it's other things that make the membership sticky and are very profitable, whether it's the Costco auto program or our travel business which continues to grow. We now a year or so ago when we added the hotel only booking engine and more recently the airline reservation only, not just packaged items, package trips and everything. And so I think we will keep adding things. I can't tell you what yet, but we keep looking at things.

Great. Happy holidays. Thank you.

Your next question is from Greg Melich from Evercore ISI. Your line is now open.

Hi. Thanks Richard. I wanted to get an update on how the private label card, now that you have had a few years for it to properly season and scale, anything you could say on the penetration or how the sales are doing outside the club? And maybe link that to what the auto-renewal rates are now as part of the renewal rates?

Yes. I don't know what the auto-renewal rates are. They are increasing. The big issue is, when we converted, prior to conversion when it was the other provider, there was both the cobranded card plus other branded cards of that provider, like Delta SkyMiles or something. And all those non-cobrand ones, all those auto-renewals went away, went to zero. So that had to be picked up over time and we saw that impact our overall renewal rate a little bit. The other thing is, as we continue to add new increasing number of members that have the cobrand card and the value keeps getting better and bigger. And so we think that will continue to be additive. That's helped. I think overall, we have also done a better job even when somebody walks in to sign up not only to upgrade but when they like to auto-renew. And so all those things help. Certainly the Citi Visa is probably one of the biggest movers of that because of just the sheer size of it and in fact that we are still adding new cardholders to that list.

Is Citi Visa doing multiples of sales outside of the club that it's doing in the club at this point?

There's certainly more sales being done outside as there were over the 16 years of the previous relationship, that evolved over time. As we would have expected, this would be even greater than that outside versus inside spend and that's why we have revenue share which is good for us and them presumably. From the standpoint that the Visa card is offered at more smaller businesses which tend to have higher merchant fees in general anyway. So it's a whole new additional market potential of revenue share to those people using that card. If my card is top of wallet, there are certain places previously that I couldn't use it like the local dry cleaner and restaurant. Now I can.

Got it. And then you mentioned Japan and I think it was Australia coming for e-commerce if you look around the world. Any early learnings out of the launch in Japan?

Other than it what, well it's been two days. So I am happy to report I know nothing.

That's good to hear. Have a great holiday, Richard.

Thank you. Laurie, we will take two more questions.

Your next question is from Scott Mushkin from R5 Capital. Your line is now open.

Hi Richard. Thanks for taking my question. So I wanted to talk a little bit about maybe growth that's being left, I mean, obviously you left on the table. Obviously, your performance is incredible. But the number of club opening has come down a little bit. You might say through omnichannel. So just as you take a step back, we look at our research, we look like you are kind of almost underserving certain markets in the U.S. How do you think about growth? Is it time to speed things up a little bit? Get back up to the 30 clubs? Maybe put a little bit more money behind omnichannel? Kind of what's the company's thought process here?

I think I don't disagree with you. We want to open more than 20-ish this year. Part of that was, I think, some delays in how long it took overseas. We have got the pipeline filled a little bit better. And five years ago, well, I always said, our open plan is to do more than we were doing. Today, I would say the same thing. We do have, I think we will increase it a little bit, but I can't exactly say by how many and when. We are a very hands on company. And we have a lot of other things going on. And certainly there's a lot of emphasis on the e-commerce side, not only getting into few remaining countries but building it. Not because we are supposed to, but it's working. And we think that, in some cases, it's either sales that we would have lost anyway like big white goods you just don't sell those at store anymore. But we are getting people in the building still using this thing. So I think, don't expect some giant change from 20 to 30 in a couple of years. But our goal is to work harder to open a few more of those while we are doing all these other things as well.

All right. Thanks very much.

And your question is from Kelly Bania from BMO Capital. Your line is now open.

Hi Richard. Thanks for fitting me in here. Just wanted to ask about executive penetration. You called out Japan and the impact there a little bit. But just I am curious how much in the U.S. you are seeing executive penetration move higher? I know we have asked this over the years but just and where you think that could kind of level out at some point?

When I look by country, in the U.S. and Canada where it's been the longest and we have got the most units and the most services as part of the executive membership offering, it's in the mid-70s. In other countries where it's been, like Mexico, it's in the 50s and growing. But I think it starts off lower. I don't know if the marketing department has a plan for where it could go. It's more of what do we do to get people to convert and sign up originally. And so I think there is, if I was shooting from the hip totally, at some point there's going to be some members that don't want an executive membership, period. And even if it provides them some savings. And there's some people, they want it that sometimes it's not as much savings as they thought and they revert back. But at the end of the day, I would be thrilled to think that that could go to any one day, but I have no idea where and how long it will take to get there. We know that executive members are more loyal in terms of their renewal rates. They shop more frequently and they spend more each year.

Got it. And maybe just one more on gross margin. Obviously mix impacts some other retailers more than it really impacts you. But I guess over the years, we have talked about things like private label, organics or international or even e-commerce in terms of mix shift. And just curious as you kind of look at that core on core up 4% which is clearly very stable, just what kind of mix shift is kind of underlying that?

Well, I think it's more that mix shift. I mean certainly gas has the biggest impact. Gas is more than 10% of our business. It could be a gross margin line. First of all, -- and there is deflation. And so you could have the gross margin contribution, plus or minus, by a number of basis points. You have all the services while they are small work on higher gross margins than normal because they cover the pharmacy, the pharmacists and pharmacy tax. In optical, the optometrists, things like that. And those are all growing businesses, generally growing a little faster some of them than the company. Travel, as an example, would be. In travel, some of the things are gross sales and some of them are brokerage fees. So a very high margin. There is really very little cost of sales, it's commission. But getting back to the core merchandise, private label generally is a slight positive. Although, again the percentage of stuff that's private label versus branded while growing is growing at a slower rate than it has in the past. And then there's that magic word, competition. Our view is, as we look to how do we drive the top line, how can we be the most competitive. And we are fortunate that we have different buckets to do that with. So it's hard enough for us to know where the margins are going each month and each quarter other than we want it to be flat or up a little bit and we want to grow the topline which will solve a lot of things.

Understood. Thank you.

Okay. Well, thank you everyone. Thank you, Laurie.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.