Costco Wholesale Corporation (COST) Q4 2021 Earnings Report, Transcript and Summary

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

Thank you, Anne, 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 2021, the 16 weeks ended August 29th. Reported net income for the quarter came in at $1.67 billion or $3.76 per share. Last year's fourth-quarter net income came in at 1.389 billion or $3.13 per diluted share. This year's fourth quarter included an $84 million pre-tax or $0.14 a share charge for the write-off of certain IT assets. Last year's fourth quarter included a $281 million pre-tax charge or $0.47 a share of COVID -related costs. As well, it included a $36 million or $0.06 a share pre-tax charge related to the prepayment of $1.5 billion of debt partially offset by an $84 million or $0.15 per share benefit -- per share benefit for the partial reversal of a reserve related to a product tax assessment taken in the fiscal year 2019. Net sales for the quarter increased 17.5% to $61.44 billion, up from $52.28 billion a year earlier in the fourth quarter. Comparable sales for the fourth quarter as reported an hour ago, for the 16 weeks on a reported basis, U.S. was 14.9%, excluding gas inflation and FX, the 14.9 would be 10.3% positive. Canada reported 19.5% plus, ex-gas inflation and FX 6.7%. Other international reported 15%, without gas inflation and FX 7.3%. Total Company 15.5% reported 9.4% ex-gas inflation and FX. E-commerce, by the way, reported was 11.2% positive, ex-gas inflation, and FX 8.9%. In terms of Q4 comp sales metrics, traffic or shopping frequency increased 9.2% worldwide and 8.8% in the US. Our average transaction or basket was up 5.8% worldwide and 5.6% in the U.S. during the fourth quarter, that -- those numbers, including the positive impact from gas inflation and FX. Foreign currencies relative to the U.S. dollar positively impact sales by approximately 230 basis points, whereas gasoline price inflation positively impacted sales by approximately 385 basis points. Moving down the income statement to the membership line, membership fee income for the fourth quarter came in at $1.234 billion in the fourth quarter of 2021. That's up $128 million from the prior year's fourth quarter membership fee income of 1.106 billion; the $128 million represents an 11.7% increase year-over-year, excluding the benefit from positive FX the $128 million positive number would've been a $107 million positive or a 9.7% effective increase. In terms of renewal rates at the fourth quarter end, our U.S. and Canada, renewal rate was 91.3% up 3/10 of a percentage point from 16 weeks earlier number in Q3 end. The worldwide renewal rate came in at 88.7%, also up 3/10 of a percentage point from Q3 and 16 weeks earlier. Renewal rates are benefiting, we believe, for more members auto-renewing, as well as increased penetration of executive members who, on average, renew at a higher rate than non-executive members. Our first-year renewal rates have also improved as well during this time. In terms of the number of members at Q4 end member households and total cardholders, at Q4 fiscal year-end a few weeks ago, total paid households were 61.7 million. That's up 1.1 million from the $60.6 million figure we shared with you 16 weeks earlier. Total cardholders came in at 111.6 million or 1.8 million higher than the 109.8 we had as of Q3 end. At Q4 end paid executive members were -- came in at 25.6 million, an increase of a little over a million new executive members. And that's during the 16-week period, as well. Moving down to the gross margin line, our reported gross margin in the fourth quarter was lower year-over-year by 32 basis points, and actually excluding gas deflation, it was higher by 5 basis points. As I usually do, I ask you to jot down two columns of numbers, a little gross margin matrix if you will. The line items will be core merchandise, ancillary -- second line item would be ancillary and other businesses, third line item would be 2% reward, fourth line item would be lifo, and last line item would be other, and then finally, the last line item would be total. Two columns, the first one being reported year-over-year in the fourth quarter, and the second column, excluding gas inflation. So, core merchandise on a reported basis was lower year-over-year by 90 basis points, ex-gas inflation was lower minus 57 basis points. Ancillary and other businesses plus 44 on a reported basis, and plus 53 ex-gas inflation. 2% reward plus 1 basis point and minus 3 year-over-year on a report -- on ex-gas inflation. Lifo minus 5 and minus 5 basis points, and other plus 18 and plus 17. If you add up the 2 columns, you get the total for reported, the 32 basis points as I just mentioned, and again, ex-gas inflation plus 5 basis points. Now the core merchandise component you see here are lower by 90 year-over-year and lower by 57 ex-gas inflation. Similar to last quarters is primarily a function of sales shifting from core to ancillary versus the last year as we begin to revert back to more historical sales penetrations. Recall last year we saw a significant shift of sales out of the ancillary and other businesses and into the quarter. In terms of the core margin on their own sales, in the fourth quarter, the core on core margins were lower by 40 basis points with non-foods slightly up, food and sundries are slightly lower year-over-year. Fresh foods was down and was the fundamental driver of the core on core being lower in the quarter. Now fresh foods are lapping exceptional labor productivity and low product spoilage that occurred from the outsized sales a year ago in Q4. We retained some of that productivity gains -- from those productivity gains as volumes have remained high. However, we've also elected to hold, delay and/or mitigate some of the price increases in this increasingly inflationary environment over the last few months. Ancillary and other business gross margin, as you've seen the chart -- in the matrix was higher by 44 basis points and higher by 53 ex-gas inflation in the quarter. Gasoline had a good quarter, as we are lapping year-over-year, a softer quarter due to the pandemic. We also showed improvement in a food court, optical, travel, all of which were benefited by easy compares versus last year, also due to the impacts of COVID on those businesses. Now LIFO, this is a gross margin charge that we haven't seen in this matrix for about 7 years, LIFO was lower by 5 basis points, both with and without gas inflation. We had a $30 million LIFO charge in the quarter, the first such charge since 2014. This is a result of the continued inflationary cost pressures, which I will discuss more in a few minutes. 2% reward, higher by 1 basis point on a reported basis, but more importantly, lower by 3 basis points ex-gas inflation. Again, implying the slightly higher penetration of sales going to the executive member and the associated rewards would become with it. And other is up 18 basis points and then up 17 ex-gas inflation. This is primarily related to COVID-related costs from a year ago. Moving to SG&A our reported SG&A in the fourth quarter was lower or better year-over-year by 45 basis points and lower or better by 13 basis points, excluding gas inflation. The second matrix of the day, the two columns reported an ex-gas inflation and five-line items -- operations, second line items central, third-line-item stock compensation, fourth line item other, and then total, on a reported basis, core operations was lower or better by plus 19 basis points and ex-gas inflation higher by 8 basis points or minus 8 basis points. Central plus 12 and plus 8. Stock compensation, plus 2 and plus 2. And other plus 12 and plus 11. Adding up the columns, again, SG&A on a reported basis was better or lower by 45 basis points and lower ex gas inflation by 13. As you can see in the matrix, the core operations component again was better by 19 and low -- and higher by -- lower by 19 and then -- or higher by 8 excluding the impact from gas inflation. Keep in mind these results include the permanent $1 an hour wage increase that we implemented in March of this year. This higher by bate -- by 8 basis point year-over-year expense result, it includes the 14-basis point cost of the dollar an hour wage increase. Central again, improved by 8 basis point ex-gas inflation and stock compensation also with strong sales and helped by 2 basis points. Now the other of plus 12, or plus 11 without gas inflation, so lower. That was the number of basis points, included in other last year was the COVID expense of $217 million or 42 basis points and the reversal of a product tax assessment reserve of $84 million or 16 basis points. This year includes the write-off of the IT assets, totaling $84 million or 14 basis points. So, you add all those up, that's where you get the 11. Next on the income statement is pre-opening. Pre-opening this year was $35 million. Last year, $26 million, so higher by 9. Pre-opening is up year-over-year, in part due to the timing of openings. And given different amounts of pre-opening on a given location, both within the quarter and the following quarter. All told reported operating income in the fourth quarter increased by 18% coming in at $2.275 billion this year compared to $1.929 billion a year earlier. Below the operating income line, interest expense was 52 million this year, essentially the same as 51 million a year ago. Interest income and others for the quarter were higher by $77 million year-over-year. Roughly half of that is due to favorable FX, and the other half is related to last year's fourth-quarter charge for the make-whole debt prepayment. Overall reported pre-tax earnings in the fourth quarter of 2021, came in up 23% coming in at 2.291 billion, compared to last year's 1.869 billion. Now, our tax rate in the fourth quarter was 26.1%, higher than last year's fourth-quarter rate of 24.9. For Fiscal '22, based on our current estimates, which of course can always change, we anticipate that our effective normalized total Company tax rate to be similar to Fiscal '21, somewhere in the 26% to 27% range. Unless of course there are changes to the U.S. corporate tax rates, we'll have to wait and see. A few other items of note, warehouse expansion for the Fiscal '21 which just ended, we opened a net opening of 20, and we actually had 22 openings including two relocations, but a total increase of 20 net units. This year, we're looking to open at least 25 net new units, including second warehouses in each of China and France, and our first location in New Zealand. As well, we plan to relocate five locations. R regarding capital expenditures, our fourth quarter 2021 spend capital expenditure was approximately 1.09 billion. Our full-year capital spend was 3.59 billion. As I mentioned in last quarter's call, this included a relatively recent $340 million purchase of a distribution filler -- a distribution facility on the West Coast to support our big and bulky delivery activities. For E-commerce, E-commerce sales in the fourth quarter, ex - Fx increased by 8.9% year-over-year, that's on top of last year's Q4 E-commerce sales increase of 91%. Stronger departments, Jewelry, we actually sold a couple of rings in the $100,000 range. Home Furnishings was strong, Pharmacy was strong, and Sporting Goods was strong. A couple of other large departments like Majors and Electronics, while very good sales, we had really outsized sales a year ago, in the fourth quarter, during COVID. Update on Costco Logistics. Logistics continues to drive big and bulky sales. For the quarter, Costco Logistics sales within our delivery were up 130%. And in the quarter represented 24% of all sales on our U.S. E-commerce site. That compares to -- that 24% compares to the 11% of e-commerce sales last year. Mind you, much of that relates to moving things from other third parties to our own internal logistics department. Approximately -- currently approximately seven to 10 thousand daily deliveries via Costco logistics are occurring and continuing to grow. In terms of our e-com app, we have over 10 million downloads. It's continually improving with additional features coming soon. Digital payment using the Costco credit card it's in pilot in several locations with the full route with full rollout by the middle of next month. The ability to view warehouse receipts online, also next month. More detail on online purchases as well. And by October end, we -- an improved mobile site, improved look and feel, a new landing page, and expanded information both for dot-com use and for enhanced warehouse information. From a supply chain perspective -- I want to go back to two things supply chain and inflation. From a supply chain perspective, the factors pressuring supply chains and inflation include port delays, container shortages, COVID disruptions, shortages on various components, raw materials, and ingredients; labor cost pressures, and trucker and driver shortages -- truck and driver services. Domestically, anecdotally rather from an -- even on a domestic side, various major brands are requesting longer lead times. In some cases, difficulty in finding drivers in trucks on short notice, lead times on ingredients and packaging have been extended in some cases. So planning is crucial, which I feel people have done a great job that over the last several months. Also, we're putting some limitations on key items like bath tissues, roll towels, signature water, high-demand cleaning-related skews related to the uptick in adults-related demand. Furniture delays in some shortages across traditional rollout times to go from 8 to 12 weeks up to 16 to 18 weeks. In some ways, we think that's an advantage. We're selling out the -- generally, merchandise wins once it's received within two weeks on most items and we've ordered more and earlier. The same thing with toys and Christmas, we're bringing in some of the items early. Chip shortage impacting many items, as I mentioned in the last call, examples of impacted items, computers, tablets, video games, major appliances. The feeling is from the buyers as this will likely extend into 2022. Again, we're ordering as much as we can and getting in earlier. And I think as evidenced by most recent sales results, we're doing okay with this. Despite these issues -- sorry. In terms of transportation costs, they're increasing were reading about it every day. Containers, trucks, and drivers all are impacting the timing of deliveries and higher freight costs. Despite all these issues, we continue to work to mitigate cost increases in a variety of different ways and hold down and/or mitigate our price increases passed onto the members. We've also chartered 3 ocean vessels for the next year to transport containers between Asia and the U.S. and Canada, and we've leased several thousand containers for use on these ships. Every ship can carry 800 to 1,000 containers at a time and we'll make approximately 10 deliveries during the course of the next year. Moving to inflation, again, there have been many -- there have been and are a variety of inflationary pressures that we and others are seeing and -- more of it. As I discussed on last quarter's call, inflationary factors abound, higher labor costs, higher freight cost, higher transportation demand, along with container shortages and port delays, increased demand in certain product categories. Various shortages of everything from computer chips to oils and chemicals, at higher commodities prices. That's a lot of fun right now. Some inflationary soundbites, if you will, price increases on items shipped across the oceans. Some suppliers are -- that's paying 2-6 times for containers and shipping. Price increases of pulp and paper goods, some items up 4% to 8%. Again, we're trying to mitigate those where we can and we think we've done a decent job of mitigating some of it. Plastics, resin increases on things like dressed trash bags, Ziplock skews, pet products include -- resin oriented pet products, plastic cups, plates, plastic wrap, many items up in the 5% to 11% range. Metals, again aluminum foil, mid-single-digit crossed increases as well as cans for sodas and other beverages. I mentioned commodities earlier, oil, coffee, nuts, they remain generally, according to our buyers at 5-year highs, and so on. Higher import prices on things from Europe, like cheeses, but the combination of freight and FX. 3% to 10% increases on certain but not all apparel items. And fresh foods inflation is up in the mid to high single-digits, with meat leading the way up high -- single to low double-digits due to the feed, labor, and transportation costs. Now, I was asked back in March at our Second Quarter Earnings Call at what level we felt inflation was running overall on the sale price side. I stated that our best guess at the time was somewhere between 1% and 1.5%. I updated that 16 weeks earlier -- 16 weeks ago on our May 26 Third Quarter Call and we opted for the estimate to be in the 2.5% to 3.5% range. As of today, in talking with our senior merchants, we would estimate the overall price inflation of the products we're selling to be in the 3.5% to 4.5% range. As I discussed earlier, this inflation was the driver of the $30 million LIFO charge that we took in the quarter. But all of this said, I feel -- I feel very good with the job that our merchants, our Traffic department and our operators have all been doing enable to -- in order to get the products that we need, pivot when and where necessary, and keep our warehouses full while keeping prices as low as we can for our members and continuing to show incredible value versus our competitors. I think this is reflected in our strong reported sales and profits that we've achieved, despite challenges and our typical aggressive pricing. Finally, in terms of upcoming releases, we will announce our September sales results for the 5 weeks ending September, Sunday, October 3rd, on Wednesday, October 6th, after the market close. And with that, I will open it up for questions with Anne. Anne? Thank you.

Thank you. [Operator Instructions]. We have our first question from the line of Simeon Gutman from Morgan Stanley. Your line is now open.

Hey, Richard. My first question is on the next fiscal year. I know you don't give a lot in terms of guidance, but wanted to ask if you think or how should we think about EBIT, whether it grows or not next year? And if you don't answer that, I was going to ask if comps grow in Fiscal '22 should EBIT grow?

Well on the first question, of course, I can't say we don't provide guidance, but we've always talked about being a top-line company and that helps a lot of things. So, depending on what level of sales, we'll have to wait and see. We do have the dollar increases started in March, that will anniversary next February. So, at the end of Q2, next year. But again, we've shown that even with what we view as holding the line as much as we can on pricing and being pretty aggressive there and taking that into account, we've shown that with strong sales, we can certainly improve the bottom line as well, so fingers crossed.

So, my follow-up may be two parts and one of them is on sales and then you mentioned the wage increase. So, on the sales side, is there anything that you're looking at or approaching differently? I know extreme value is one angle, but the timing of mailers, inventory availability looking better, is it ancillary than hasn't recovered. What can you do on the top line given how big of a lap? And then you mentioned the wage increases, and I know you'll lap those in March, but you've seen that Amazon and Walmart have moved up, and so I'm curious how do you think about, or should we expect another increase in terms of wages?

Sure. Well, first of all, as it relates to all the anecdotal comments I made about supply chain and inflation, I think overall we feel that we're doing a heck of a job in that stuff. And I think some of the advantages we have is that we certainly have the financial ability to bring in things early or to order early and to mitigate whatever delay may have occurred. We certainly have the space to keep some of this stuff, most particularly because of our Costco Logistics acquisition a year ago, two additional storage space if you will. Not that we're having an issue with that because it's turning pretty fast, and the fact that we're able to pivot, we are bringing in new items. We're bringing in items off-season for Christmas, not -- pre - COVID it was toys, and trim at home, and electronics. Today it's all those things, plus things for the house, from barbecue grills, even summer items. But anything you can get your hands on. And again, I think we've done a very good job of adding suppliers where we can, and also making sure we're coming up with new items and being creative and innovative, even on the food and sundries side. So, I think from that standpoint, despite sometimes looking at each other, the merchants and the traffic people never need to say, boy, when this is going to end? The fact is, I think we're doing a very good job with that. So, from an inventory standpoint, for those of you who several of you do go and visit our locations on a random basis, they're full, they look good compared to some of the pictures we see from others sometimes. And so, I feel from that standpoint, we have a good issue. With inflation, to the extent that there are permanent inflationary items, like freight costs, or even somewhat permanent for the next year, we can't hold on to all those, some of that has to be passed on and it is being passed on. We're pragmatic about it, but we recognize that since things have been so successful and our sales have been strong, we can hold the line on some of those things and do a little better job, hopefully, do a better job than some of our competitors have, and be even that more extreme in the value. So, I think, all those things, so far, at least despite the challenges have worked in our favor a little bit.

Okay. Thanks, Richard.

Our 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. In the past, what you’ve said is that Costco's profitability tends to draft up the profitability of the overall retail sector. In the last year-and-a-half, the profitability of the overall retail sector has moved nicely higher. Also, Costco's profitability, its margins have moved nicely higher. Do you view this as sustainable?

Well, first of all, let me finish, Simeon had one other question on wages, and let me just respond to that. Look, we're known for always being one of the best wage packages and benefits packages and take care of our employee’s package out there in big retail and big boxes, and all forms of big retail. And even if - we raised our lowest, our starting wage to that 16 and 16.50 of late, mind you, our average hourly wage in the U.S. is slightly north of 24, with a very healthy employee benefit plan. We will do whatever it takes to continue to that -- that model. Who knows when and where, but we feel pretty good about where we are. And but as many of you on the call know, irrespective of what's going on with our Company in terms of strong sales or weak sales, we will do what's right by our employees. And Michael, I'm sorry, can I go back to your question?

Yeah. The question was, we've seen an improvement in profitability across retail and that tends to influence the profitability or profit margins of Costco. Do you view this improvement to your profit margin as sustainable from here?

Okay. Well look, I think the anomaly over the last year-and-a-half has been that when a lot of big boxes or big retailers were enjoying comps pre-COVID in the -- I'll call it the two to 4% range of the two to 5% range, and we're enjoying 5, 6s, 7s, now we've been enjoying mid-teens or effectively low-to-mid teens over, and we've taken some market share from others. We think that some of that will stick, and we hope it will stick, and we feel pretty good right now about what we've done and what we've accomplished. To the extent that we can generate greater than industry average comps. I think - and there - they don't have to be in the low-to-mid teens, they could still be in the mid-to-high singles that we could -- should continue to improve. But I guess I get back to the comment that has been reinforced internally from the beginning of time, we are a top-line Company and everything else will take care of itself.

Got it. My second questions on your gross margin. There's a lot of moving pieces, as there are a lot of moving pieces with everything that's happening with Costco right now, but specifically, you're giving back some of the core-on-core gross margin gains that you experienced some really strong price sales last year. But on the other hand, your ancillary businesses are doing really well. So, is that dynamic where you're making up for the pressure on the fresh with strong ancillary, is that sustainable? And as part of that, the perception is that Costco tends to raise prices at a slower rate than others in the retail landscape, which tends to pressure its margins as inflation is heating up. What would be different this time to make that not happen? Thank you.

I think -- your first part of your question, I think tells part of the tale is there are so many moving parts. If you look at gasoline, which is an - it is 10%+ of our sales. It's a huge business that can have huge variations of gross margin. Knock-on-wood, always profitable, but it's still quite a range of gross margin. And that's more reflective of what's going on with competition in the retail gasoline market. We feel that sometimes other large retailers of gasoline, are looking to make a little more, which gives us the ability to be quite profitable but still show even bigger savings. So, there are lots of puts and takes. Certainly, from last year, you had roughly a 16-week period, where our Optical and our Hearing Aid Centers were outright closed. Travel went to literally having negative revenue because it was not having a new business and it was refunding previously booked business at the trough of COVID, and so there's that kind of anomalies. Again, I get back to thinking that due to the unfortunate thing called COVID, some businesses have benefited in the sense that we were essential, in the sense that our [cavernous] (ph) places like we feel that people felt comfortable coming in to the extent that we are able merchandise-wise to have pivoted and maintain notwithstanding supply chain issues, maintain exciting full warehouses of merchandise. So, I think those are the things that help us.

Thank you very much, Richard.

Thank you. Our next question comes from the line of Chuck Grom from Gordon Haskett. Your line is now open.

Hey, thanks. Richard, if inflation stays up in that 3.5% to 4.5% range over the next couple of quarters, would you expect that LIFO charge to be about 30 million per quarter or could we adjust it per weaker -- years ago you used to have that charge every quarter or sometimes the credit, just wondering how we handle that from here?

Yeah. It's hard to say. I wouldn't just say it's that much based on that. It really depends. And mind you, when you have -- again, we've enjoyed a number of years of effectively very little, if any, or no LIFO or eating into our previous LIFO credit 5 and 6 years ago. But what -- if there was consistent inflation going forward for the next 2, 3, 4 quarters, you're going to also see some price increases to those customers. And I might say some, there's been some already, but in our view, there is less than we could've done. And that will continue and I think the more consistent inflation -- if inflation raise stayed at this level, and we don't know that, but if it did stay at this level even with a LIFO charge, in some ways, it will be offset by price increases. [Indiscernible].

Okay. Okay. Great, thanks. And then on a -- just a follow-up, and then on the labor front, I'm curious if you guys have observed an increase in applications in roughly 20 states that ended unemployment benefits on September 1st. There's a number of companies have spoken to a big increase in job applications recently.

I don't know the -- I haven't asked and I don't know the answer to that. It makes sense.

Okay. All right. Good luck. Thanks.

Thanks.

The next question comes from the line of Karen Short from Barclays. Your line is now open.

Hi, thanks very much. I just want to clarify one thing on that last line of questioning, in terms of the LIFO charge, was this 30 million a catch-up for the whole year, or was that something that was reflective of the quarter itself? Because to get that, speaks to the run rate.

It's the quarter, it's basically if you take your cost -- silos of inventory and what was it at Q3 end and what is it now at Q4 end.

Okay. So, I guess obviously as you lifted all these different pressure points on pricing, I guess my bigger picture question is, how do you think about the membership fee structure in general? There are all these pressures on I guess your business, but also on the consumer from the inflationary standpoint, make you more likely, less likely, or how does it impact your membership fee increase decision process?

What we've said over the years is that certainly, we look at our gross profit as a combination of a gross margin plus a membership fee. But we really don't look at it together in that way you that, "Hey, if we do something with the membership fee, we could be more aggressive on pricing. " I remember years ago somebody had asked when the economy had softened and our comps did weaken a little bit and we were coming up on that fifth anniversary - ish of a pending increase and somebody said, given the economy's weaker you and your sales have weakened a little bit, still a positive number, but weakened a little bit. Would you still do it? And the response at the time was more likely we will do it because that's what we do. We could drive lower prices with it and drive more business. And so, we really do -- we look at the loyalty and certainly, the loyalty and renewal rates have been up. [Indiscernible] If obviously, we're still a way away from anniversarying the last 5th year or so, the 5th plus year anniversarying of the last increase. So, we're a little way from thinking about it.

Okay. And then just a -- we had a conference today with some large-cap names that indicated that their new view on what their actual cash balance should be going forward relative to pre-pandemic had actually increased. So, wondering if you could just talk about your perspective on what you think the rate the rate of sustainable cash balance could be because obviously, you are still sitting on a pretty hefty excess cash balance now.

I think if the -- we've always been considered to have more cash and have a more conservative balance sheet. I think as the world is saying that they think that it should be going up more. I don't think we've thought about it going up more. In fact, when we did the capital raise in April of '20 and related specifically to what if -- was the worst-case of COVID, once -- 6 months later, we saw that we didn't need it. We probably gave it back to our shareholders and then a little. So, I think the other anomaly has been is we've been blessed with a very good fiscal year. The last year and a half in terms of net income and operating cash flow relative to our CAPEX, our regular dividend, and the special, let's say that kind of offset the capital -- the debt we did. So, at the end of the day, I don't see us changing our MO in that at this point.

Great. Thanks very much.

Thank you. The next question comes from the line of Chris Horvers from JP Morgan. Your line is now open.

Thanks. How all stay good prior to the price [Indiscernible] I guess if I'm interpreting what you're saying is it basically, it's because these pressures seem more structural in nature and because the demand environment is so good, you feel less compelled to be more aggressive on price, and if the environment slows, then that could change your calculus?

It's really all about the value proposition. Are -- if anything, I think from the outside, people would look at us relative to other retailers and say we've been more aggressive on holding prices than others, at least that's how we feel. But we have to be pragmatic as these things are permanent consistent. You've got to raise the price; we can't be completely noble here. But we feel that if anything, that moat has probably widened a little bit for us and that's great, we like wider moats.

So, the third variable being those others are raising prices faster than you, so the price gaps have widened.

That's our view. That's our buyer's view. But we're looking at, frankly, given how strong it's been, and in our DNA, we hate raising prices. We want to be the last to raise it and the first to lower it. Is in our DNA not even -- putting on shades on the side and not even looking, at others. We're looking at how do we drive our own business and we know that being the most -- the best value out there and having great merchandise and all that other wonderful stuff is how you do it. And as we've seen such strength in our numbers, and then as we've encountered rising levels in inflation, where can we hold the price on some things? And that's what we do. It's an art form more than a science. But it seems to work for us.

For sure. So, my second question is on the membership fee MFI growth X to FX benefit that you've seen, that number is accelerated the past two quarters. So, is it -- given that the accounting of this is over a 12-month basis, you have a view -- you have some inkling on what that growth could be as you look forward? Higher renewal rates, obviously, taking a ton of share, should all else equal that level? Again, MFI growth Ex Fx continues to accelerate?

Well, the big answer is we hope so. The fact that we are opening more units in '21 than we did in '20 is a positive. The fact that there are several international units that tends to have higher growth rates. The fact that Auto Renew is kind of a freebie in the sense that more people getting -- signing up and putting your credit card on their application -- in their application or signing up for the -- more importantly, signing up for the Citi Visa card. That helps you a little bit driving the Executive Member, getting more people today -- if every 100 people signing up today, I think a little over half, I don't have an exact number, sign up as an executive member. I remember 6, 7 years ago, or 8 years ago, it was half that percentage. And these are rough numbers, so don't hold me to them. But at the end of the day, executive members, by its definition, have higher renewal rates. They shop more frequently; they buy more stuff. So, all of that stuff is -- that -- those are all good factors for us.

And just one quick last one I have you shared how many -- the percentage of your membership that has -- in the U.S. that have the Citi Bank private label card?

I don't think we have.

Okay. Thanks. Best of luck.

By the way, before the next question, somebody checked a number, but we have seen a recent increase in applications in the last couple of weeks. I think Chuck asked that. Okay?

Thank you. Our next question comes from the line of Paul Lejuez from Citi. Your line is now open.

Hey everyone, it's Brandon Cheatham on for Paul. Gonna take a stab at the membership question as well. You know you have some great memberships statistics; it sounds like you're offering great value in the club. I was wondering, are you thinking about not investing as much in the new member promotions? Anything that you could talk about there, has that looked similar to last year, or has that increased?

No, I think -- when you say member promotions what do you mean?

I think right now you're offering $40 on a Costco cash card if you sign up.

Oh, marketing. We did -- we do a variety of things. Not a huge basis, but we tried some things in the last few years. We've done some things with Groupon and with, one other one -- Living Social. We've done some things as you've mentioned, but those are not on -- there I'd say they're on a regular -- irregular basis and we try different things all the time, but I know -- I think that's really, frankly, independent of looking at the membership fee itself. It's really about how do we drive memberships and what is the incremental cost? What is the true cost of acquiring a new member other than waiting for them to go online or walk into the warehouse to sign up themselves? And so, we're always trying some new things.

Got it. And you mentioned your own chartered ships. I was just wondering what percentage of your shipping that would represent next year.

Less than 20%.

Less than 20. Got it.

Less than 20% of our Asia shipping.

Got it, okay. And the last one for me, on the e-com side, I was just wondering your customer that shops there, do they visit the store as frequently as a member that doesn't shop online?

I don't know that off the top of my head. What I -- and I don't have all the specific statistics in front of us. All the charts that we look at keep going in the right direction. The number of people that bought online, percentage of members, the hit rate when we do something on an e-mail to get people to do something online.

What we do know is when we shop online and, in the warehouse, you typically shop maybe a few less times in the warehouse, but you overall spend more.

What Bob has mentioned, thank you, Bob, is that when you are -- if you take a regular, loyal member and when they do start shopping online, they may shop a few times less in-store, but the aggregate of the two is greater than their historical. Which makes up? By the way, the other thing there is that the online, while we're constantly putting on what I'll call greater frequently traffic building items velocity items. And like apparel and health and beauty aids and things like that. The fact that matter is more and more big and bulky items are bought online. Years ago, if you wanted to buy a mattress or a refrigerator, you had to go buy it and pick it up and take it home. We didn't deliver. We didn't install it. That's of course changed in the last many years and we have an Appliance business in the U.S. that's well over a billion dollars and growing fast -- continue to grow fast, helped by Costco Logistics. So that changes the metric a little bit too.

Great. Thanks for the additional color.

Thank you. Our next question comes from the line of Mike Baker from Davidson. Your line is now open.

Hi. Thanks. Two questions for me. One, you did allude to the Delta variant and having to limit some products in areas where we've seen higher cases. So, could you just talk about overall different trends that you might be seeing in areas that are seeing bigger spikes in the new COVID variant versus others?

I don't know. I don't have in front of me any detail by region in that regard. What I do know is, like everything right now it's all over the board. We're talking -- I forget what cleaning supply it was, whether it was Clorox, or Lysol, or some type of antibacterial wipe or whatever it was. But there had been -- a year ago there was a shortage of merchandise, now they've got plenty of merchandise, but there's 2 to 3-week delays on getting it delivered because there's a limit on short-term changes to trucking and delivery needs of the supplier. So, it really is all over the board.

And maybe as part of that, any seeing anything in terms of the travel trends, which now we're coming back really strong as last quarter.

Yes.

But has Delta reverted that at all?

Yes. Yes. If you look to the chart, which went down, so it's that -- last summer or last spring it was negative, more refunds than new things being bought. It really got back to almost normal. I'm talking about, bookings of resort vacations and -- to Hawaii and to Mexico and things like that. And just a month ago -- month-and-a-half, two months ago, at the monthly budget being the charts were showing us it's almost back to where it was pre-COVID. And then it fell like a rock, not as bad as it was at its drought last spring, but it's certainly calmed down. Cars were not hit as bad, but that will fluctuate based on, again, what's going on out there.

That all makes sense. One more quick one that was one question in two parts. Can you update us on the curbside pickup test that you were running in New Mexico, I think as of last time we spoke it was in 3 stores?

Right. We're currently not doing it. We discontinued it, for now, we'll try some new things somewhere sometime, but at this point, we got a lot of good things going on and we really didn't see a lot of traction in it.

Interesting. Thanks for the call, I appreciate the time.

Thank you. Our next question comes from the line of Rupesh Betti from Oppenheimer. Your line is now open.

Good afternoon and thanks for taking my questions. So, I guess just going back to the core margin. So, it sounded like at least this past quarter on the pricey side, you guys delayed passing through some of the price increases. So, if you look at non-foods versus your foods categories, is it generally easier to pass through on the non-food side versus the food side?

I wouldn't say that. I think food -- fresh turns so fast, it turns more than 50 times a year or whatever. And we've got a hot price on strip steaks or keeping the rotisserie chicken and for $0.99, that's going to impact you a little faster.

[Indiscernible]

But the comment here is that we're not going to change the price of muffins every week. So, we'll take a little less margin on some items. I think it's all over the board. But at the end of the day, it's an art form, not a science, or not straight across, we're going to do this much on every item.

Okay, great. And then the second question, just as you look at your Service business, Optical, Food Court, et cetera, where are we versus where you were pre-pandemic? Have those businesses fully recovered at this point?

Mostly. Pharmacy and Optical have. Food courts have come back, Hearing Aids not quite yet, but much better than it was at its trough --

[Indiscernible]

And Travel is lots of fun based on what's going on with COVID.

Okay, great. And one final question. I mean, I may have missed this in your prepared comments. Did you guys give a forecast for CAPEX for the upcoming fiscal year?

No, it will have a three in front of it.

Okay. Okay. Thank you. Best of luck, the balance of the year.

One more question.

Thank you. Our next question comes from the line of John Heinbockel from Guggenheim. Your line is now open.

So, Richard, you said it's an art, not a science. I'm curious where you guys sit on data science and analytics around price elasticity, 1. And 2, personalization of the monthly mailer or monthly e-mails. Where are we on that journey?

First of all, as it relates to pricing and elasticity, I think if we were considered the best Company in the world with data analytics, we would still not use it for price elasticity. We're going to do what we do as merchants and look at competitive prices, and see how low we can mark something up. And the old saying from years ago, we want to improve margins and lower prices at the same time by buying better and doing those things. So, I don't see that happening at all. As it relates to the other aspect of that, that's coming. We made a big investment in what I'll call data analytics for us because we went from darn near 0 to something. But brought on a VP of data analytics a year ago in March. There's been a lot of progress, a lot of focus to date has been on the merchandising side, providing better tools to buy and to project, and things like that. I think you'll see more of that over the next year, but again, we're getting there. I always look at it as just some of the things that others are doing that will help. It's low-hanging fruit for us because we haven't done it yet, but we'll keep going. But that's where a lot of the data analytic function to date in this past year as we built a department around it, has been just that.

And then secondly, one of the things you guys have been known for is seasonally getting in and out before everybody else. So, you lean into that in an environment where it's hard to chase product, getting it early, people buy it, and they're done for the season. Do you lean into that more in terms of where you can more inventory, get it in the clobber, or is there a limitation because you've got a transition from one season to the next?

I think there's a little bit of both. There is a little bit of taking it where you can get it right now, and certainly, we're consciously bringing in. I think I mentioned even what was the furniture where the cycle has gone from 12 and 14 weeks to 16 and 18, we're bringing in early. And certainly, on seasonal things, we'll do that on some items. But it's a mixed bag just because we're pivoting and blocking and tackling in 12 different directions like everybody.

Okay. Thank you.

We have time for one last question.

Thank you. Our last question comes from the line of Kelly Bania from BMO Capital. Your line is now open.

Hi, thanks for fitting me in, Richard. Just wanted to ask one more on the inflation you mentioned that the 3.5 to 4.5 range, just want to clarify that is retail inflation? Just curious what your cost inflation is, and just trying to get a sense of how much you're absorbing. And maybe if you can just provide some examples of how Costco and the merchants are mitigating some of the pressures.

[Indiscernible]

It's both. I am sorry, what? Margins have generally stayed the same, I mean, we gave you some examples on the side of the fresh food, where it's changed and why, but generally speaking, I think there is, again, a lot of moving parts and we continue to figure out how to balance it.

Any examples you want to provide about how you're mitigating some of the pressures?

Well, I mean, I'm not on a specific product example, but the fact is, one we've got strong relationships and good buying power with our vendors. When we're eating a little bit into something, we're asking in some cases for them to eat a little bit into it. During these times, we're constantly figuring out how to be where they're any cost savings to offset some of the cost increases. Whether it's packaging or whatever it might be. And so, I mean, I think one of the things that help us is that we're worried about managing 3,800 items, not 100,000 items or 50,000 items, and that's helped us. Yeah, there are times where we'll be pivoting in and out of items for that reason also. Sorry to be vague but it really is, there are just so many different things out there.

Right. Thank you.

Well, thank you, everyone will be around for any additional questions, and have a good week and talk to you next time.

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