Good morning. My name is Felicia and I will be your conference operator today. At this time, I would like to welcome everyone to the 4th Quarter Fiscal Year 13 Operating Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session.
Thank you. Mr. Galanti, you may begin your conference.
Thank you, Felicia, and good morning to everyone. This morning, we're reporting our 16 week 4th quarter 52 week fiscal year 2013 operating results, which ended on September 1. These results are of course are compared to the 17 week and 53 week periods of the prior fiscal year. In addition, we're reporting this morning our September sales results for the 5 weeks ended this past Sunday, October 6. Let me start by stating that the discussions we are having will include forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and that 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. To begin with our Q4 operating results, for the 16 week quarter, reported earnings per share came in at 1 $0.40 up a penny from last year's 17 week 4th quarter earnings of $1.39 I will come back to this in a moment. In terms of sales for the quarter, total sales were up 1%, which was again was impacted by the extra week. Comp sales, which compares like 16 week periods were up 5% both on a reported basis and excluding gas and FX. For the quarter, gas prices year over year were effectively flat, so no impact on the 5% U.
S. Comp figure. However, foreign currencies weakened relative to the U. S. Dollar year over year in Q4, primarily in Canada and Japan, such that our reported 4% international comp figure assuming flat year over year FX rates would have been up 7%.
In terms of sales for the 5 week September period, total sales increased 6% year over year. Reported comparable sales increased 3% and that 3% was comprised of 4% in the U. S. And 0 internationally. And excluding gas and FX, comparable sales would have been up 5%.
The 4% U. S. Reported would have been a 5% excluding gas deflation and the 0 internationally would have been an up 6% assuming FX was flat year over year in local currencies. In terms of comparing our $1.40 reported earnings for the Q4 to last year's Q4 of $1.39 several items of note. First, there are a few items that I've discussed in each of the prior several earnings calls.
Last year's Q4 had an extra week simply dividing the 17 weeks into the $1.39 figure would have suggested that the benefit from an extra week was about $0.08 a share. Membership fee income of course included about $25,000,000 pre tax extra and that relates to the late 2011 early 2012 annual fee increase in the U. S. And Canada and how that works its way to our income statement based on deferred accounting over about a 23 month period. Interest expense of course was higher in the 4th quarter by about $13,000,000 pre tax or 0.02 dollars a share.
This related to last December's $3,500,000,000 debt offering that was done in conjunction with a $7 per share special dividend. There were also a few items that year to date through the 1st three quarters had represented positive year over year profit variances, but that swung the other way in Q4 year over year. For example, FX, whereas strengthening foreign currencies relative to the U. S. Dollar added to earnings per share year to date through the 1st 3 quarters and swung the other way in the Q4.
In Q4, foreign currencies the foreign currencies where we operate weakened versus the U. S. Dollar resulting in foreign earnings in Q4 when converted into U. S. Dollars being lower by about $10,000,000 pre tax or $0.015 a share than those earnings would have been had FX exchange rates been flat year over year.
A similar year over year profit swing occurred in the profitability of our gasoline operations. Year to date through the Q3, gas profitability was higher year over year through the Q3 year to date. In Q4, it too swung the other way coming in lower Q4 year over year. In addition to these factors, I'll point out in our discussion of SG and A a few other items that resulted in our expense percentages coming in higher year over year in Q4. In terms of new openings, for all of fiscal 2013, we opened 26 new locations, 12 in the U.
S, 3 each in Canada and the U. K, 5 in Japan and 1 each in Korea, Taiwan and Mexico, ending fiscal 2013 with 6 34 locations worldwide. For fiscal 2014, we've ramped up our expansion plans. On our docket are plans to open 36 new warehouses with half of these in the U. S.
And the remaining in international markets including our first two planned for Spain next spring in summer. Inevitably a few of these will probably get delayed, so I would estimate that a number in the low to mid-30s is more likely, still a pretty good increase above the 1626 new warehouses opened in each of the past two fiscal years. During the 1st 4 months of 2014 through calendar year end, we plan to open 15 of these locations, 10 in the U. S. Including 3 next week, 2 each in Canada and Australia and 1 in Mexico.
Also this morning, I'll review with you our membership trends, our e commerce activity and of course additional discussion about margins and SG and A. Quickly on the start of the call here in terms of 4th quarter results, more detail. Sales for the year's 4th quarter were $31,800,000,000 up 1% from last year's 17 week Q4 of $31,500,000,000 Again, if you normalize the 17 weeks by taking 16th, 17th of it if you will, it would have been up 7% on a normalized comparable week basis. On a reported comp basis, Q4 comps were up 5% for the quarter. For the quarter, our 5% reported comp was a combination of almost flat average transaction for the quarter.
That included the detriment of FX of about 80 basis points, so it would be up slightly without assuming flat FX and an average frequency increase in the quarter of 4.5 percent up. In terms of comparisons by geographic region, most U. S. Regions registered mid single digit comp increases for the quarter with Texas Midwest and Southeast being the strongest. Internationally in local currencies, Korea and Taiwan were on the weekend due in part to cannibalization on relatively small base of existing units with Canada and Mexico the strongest in terms of comp sales increases.
In terms of comp sales by merchandise category for the quarter, within food and sundries, which were mostly in the mid single digits, deli, wine and spirits, beer, frozen foods and candy were all relative standouts. Within hardlines, fairly flat numbers year over year. The departments with the strong results were office, health and beauty aids and hardware. Electronics sales, which is a relatively large sized sub department within hardlines that were weaker year over year in the Q4. For softlines, low double digits for the quarter.
Small electrics, housewares, domestics and apparel were standouts and the same old department media continuing being the relatively weak department pair. In Fresh Foods, comp sales in the mid single digits, deli and produce showing the best results. For September, the 5 week month sales were $9,900,000,000 up 6% from last year's September reporting period. On a comp basis, September comps were reported 5% I'm sorry, were up a reported 3% for the month. Debt 3% included a negative 1.3% average transaction.
This includes the detriment of FX of about 1.5 percentage points and deflationary gasoline, which deflated quite a bit about 1 percentage point. So those the 1.5% and the 1% those 2.5 percentage points negative is included in that minus 1.3% transaction. Average frequency up about 4%. Excluding FX and gas effects, comp sales for the month of September were plus 5%. In terms of sales by geography for the September, most U.
S. Regions were in the low to mid single digit comps with Southeastern Texas being on the strong end. Internationally, Korea and Japan were on the weak side of all the international countries with Canada and Mexico showing the strongest comp sales increases in local currency. In terms of category sales for September, food and sundries low to mid singles, hardlineslowsingles same similar to the quarter. Softlines in the lowtomidteens up a little bit from the quarter.
Fresh foods continues in the mid single digit range led again by produce and service deli. And lastly ancillary business comps were slightly negative on a reported basis basically due to the gasoline business, which experienced 8% deflation year over year in the average price per gallon during the 5 week monthly reporting period. Gallons in terms of gas were slightly positive. Moving on down the line items of the income statement. Membership fees were up 3% or about $22,000,000 increase of 4 basis points year over year to $716,000,000 Both membership fee numbers for this year's Q4 and last year's had some items to look at.
Within the $716,000,000 of course it was this year it included the $25,000,000 benefit that I talked about from the fee increase. And last year's $694,000,000 again was a 17 week quarter. So taking 1 17th out of that, it would reduce that number by 41,000,000 dollars So I think the 3% reported increase in dollars, again adjusting it for those 2 anomalies would have been up about 6%, but 3% is what we reported. In terms of membership, renewal rates remain strong both in the U. S.
And Canada and worldwide. Continued strength in our executive membership program. New member sign ups in the quarter company wide were very strong, up 9 percent year over year despite 1 less week in the quarter. That strong performance was mostly reflective of very strong sign up at our 3 Japan openings that opened in the Q4. As I've mentioned in the past, we've got very strong opening sign ups at locations in Asia and Australia.
In terms of number of members at 4th quarter end, Gold Star ended the quarter and the year at $28,900,000 up from $28,200,000 16 weeks earlier. Primary business remained at $6,600,000 Business add on remained at $3,500,000 Again, you get some of those add ons moving into other categories as they opt for executive. Total paid memberships went from $38,300,000 at year end to $39,000,000 I'm sorry $38,300,000 at Q3 end $39,000,000 at fiscal year end. And total cards went from 69.9 at 3rd quarter end to 71.2 at fiscal year end. Executive members continue to increase.
We're up over 13,500,000 at the end of the fiscal year, which is about 250,000 increase in terms of members since Q3 end or about 15,000 a week added during the quarter. As I've mentioned before, executive members are over half over a third of our member base and about 2 thirds of our sales as well. In terms of membership renewal rates, they too continue strong. Our business renewal rates went from a 93.9% at the end of the 3rd quarter to a 9 tweaked up to a 94.0%. Gold Star went from an 88.9% to an 89.1%.
So total business in Gold Star went from an 89.9% to a 90.0%. Now those numbers by the way are for the U. S. And Canada, which we've always showed in the aggregate. That's about a little over 82%, 83% of our business.
Worldwide, the number went from an 86.4% at the end of the Q3 to an 86.3%. And the reason there is with all these new international openings, you're always going to have much lower renewal rates in startup years of new locations, particularly in new markets. Going down the gross margin line, again, I'll ask you to jot down a few numbers. We'll have 4 columns. The columns would be reported and without gas and the second column without gas.
That would be Q3, 20 13 and Q3, 20 13. The 3rd and 4th columns will be reported for Q4, 2013 and without gas for Q4, 2013. As I mentioned in Q4, there were no there's no inflation. So the 3rd and 4th columns will be the same numbers. The line items, the first one would be core merchandising.
Going across to the 4 columns would be minus 5 basis points year over year, minus 11, minus 4 and minus 4. Ancillary and other businesses, plus 6, plus 5 and then plus 3% and plus 3% in the last two columns. 2% reward minus 2% across the board. LIFO plus 6% and plus 6% in the Q3 columns and plus 7% and plus 7% in the Q4 columns. And other, there was plus 7+7 in the Q3 columns and 0 and 0 in Q4 columns that related to a lawsuit recovery that we mentioned last quarter.
All told reported in Q3 year over year gross margins was up 12 basis points, But again taking out gas inflation it was up 5 basis points. This year both on reported and without gas it was up 4 basis points. Now to provide a little color on these numbers, core merchandise component of the gross margin was down 4 basis points year over year. 3 of the 4 core categories food and sundries, hardlines and softlines showed higher year over year gross margin percent on their own sales in the 10 to 25 basis points range each. While year over year in Q4 fresh food margins were lower by about 80 basis points.
As I mentioned on the last few earnings calls, our investment in pricing occurs throughout many merchandising departments, but has been most notable in fresh foods. Ancillary business gross margins were up 3 basis points year over year in Q4. Gas and Food Court margins coming in a little lower than Q4 last year, with others like pharmacy optical and hearing aids coming a little bit better. The impact from the increasing executive membership business represented a reduction in gross margin of 2 basis points reflecting the cost of higher penetration of sales going to the executive member reward program. LIFO in the 4th quarter, we recorded an $8,000,000 pre tax credit a year ago that compares to an $11,500,000 pre tax charge I'm sorry, an $8,000,000 pretax credit this year in Q4 compared to an $11,500,000 pretax charge last year in the quarter.
So that was a year over year 7 basis point swing to the favor in our favor. All in all, a pretty good margin result in the 4th quarter. Now moving to reported SG and A. Our SG and A percentages Q4 over Q4 were higher by 9 basis points coming in at 9.75% this year compared to a 9.66% last year. Again, we'll jot down a few numbers.
The same four columns reported and without gas and then again reported and without gas. And the first two columns would be for Q3 year over year and the 3rd and 4th columns would be Q4 year over year. Going across operations, plus 2 reported in Q3, 20 13, a plus 7 without gas. That means a plus sign means better or lower. In Q4, it was a minus 9 and a minus 9.
Central, plus 2 and plus 2 in columns 12, plus 3 and plus 3 in columns 34. RSUs or equity compensation, minus 1 and 0 and minus 3 and minus 3. All told, in Q3 year over year, we reported a +3 or SG and A better by 3 basis points. Without GADAS inflation, it was actually better by 9 basis points looking at it that way. And again in Q4 year over year, it was higher or minus 9 basis points.
The core operations component again was 9 basis points year over year. There are several moving parts to that. For example, benefits and workers' comp expenses were higher year over year in Q4 by 5 basis points, 4 on the benefits side and 1 on the workers' comp side, in part due to year end true ups of various expense accruals as well as some increases. So again some of that I would say would be more normal and some of it's just how we true up things at year end. Several additional basis points of our expense comparisons in Q4 year over year resulted from a variety of other year end expense accrual true ups that in the aggregate had helped us a little last year in the quarter intended to hurt us a little bit this year in the quarter.
These items notwithstanding, within core operations, our payroll as a percent of sales continue to improve year over year. Central expense, it was better or lower by 3 basis points as you saw on the chart. This benefited by bringing back a little bit of our bonus accrual for the year. That benefit was somewhat offset by ongoing IT modernization costs. I'm happy to mention also that I want to mention also that IT expenses as a percent of sales will continue to be negatively impact SG and A throughout the upcoming fiscal year as we continue these modernization efforts.
Lastly, our equity compensation, which is provided as part of a compensation package to more than 3 thousand people at Costco represented a 3 basis point hit to SG and A in the quarter. So all told, there are a few things that I think were anomalies in the few that were a little higher expense, all resulting of course in reported higher SG and A. In terms of the income statement preopening expense, dollars 15,000,000 last year, up $2,000,000 to $17,000,000 this year. No real surprises. Last year, we 6 openings 4 in the U.
S. And 2 international. This year, we had 7 openings in the quarter, 2 U. S. And 5 international.
All told, reported operating income in the 4th quarter increased slightly year over year coming in last year at 949 dollars versus $954,000,000 this year. Again, lots of reasons for this, the extra week and many of the items that I pointed out earlier in this discussion. Below the operating income line, reported interest expense was $14,000,000 higher year over year with Q4, 2013 coming in at $58,000,000 in last year's quarter. This difference relates to the additional interest expense again in the December 12 $3,500,000,000 debt offering, which equates to about $44,000,000 pre tax a year and about between $13,000,000 $14,000,000 for the 16 week quarter. Interest income and other was lower year over year by $2,000,000 coming in at $36,000,000 this year from $38,000,000 a year ago.
Actual interest income within this figure came in at $14,000,000 compared to $16,000,000 a year ago. The other component of interest income and other amounted to income of about $22,000,000 in each of the 4th quarters essentially the same over year over year. Overall pre tax income was down 11,000,000 dollars versus last year's Q4 coming in at $9.54 this year versus $965,000,000 last year. Again last year's Q4 included 1 more week of earnings results than this year's 16 week 4th quarter. In terms of income taxes, our company's tax rate this quarter came in at 34.8 percent versus 35.6 percent a year ago.
So a little less about 0.8 percent lower year over year tax rate. While many of the items I talked about in expenses tend to go against us in the Q4 this year versus last year, there are a few discrete items in taxes that tended to help us and reduce that rate a shade from a year ago. Overall, net income was up $8,000,000 versus last year's Q4 from $609,000,000 last year to 6 $1,000,000 this fiscal year in Q4. Now for a quick rundown of other topics. While the condensed balance sheet is included in this morning's press release, a couple of balance sheet informational items.
Depreciation and amortization for the quarter totaled 295,000,000 dollars and therefore $946,000,000 for the entire fiscal year. Merchandise accounts payable, again, and when you look at accounts payable on the balance sheet, it includes majority of it is merchandise related. The other component is typically construction related. And excuse me here I am sorry. So anyway on the balance sheet reported AP ratio was 100% this year down from 103%.
Just using merchandise accounts payable to inventory it was 89% down from 90%. Average inventory per warehouse last year was $11,700,000 per warehouse. This year was 12,500,000 dollars or about $800,000 per warehouse or about 7% up year over year. The $800,000 increase is really spread throughout many merchandise departments and overall our inventories are in good shape. Our fiscal inventories at fiscal year end came in as good as they've ever been.
In terms of CapEx, in the 1st 3 quarters of this year, we spent $488,000,000 $455,000,000 $435,000,000 respectively. So in Q4, we spent $705,000,000 not only is it more weeks in the fiscal quarter, but again it's in expected it's in product related to all the openings we've got coming on this fall. So for the total year, we spent $2,083,000,000 I'd estimate that our fiscal 2014 CapEx given the planned 36 openings will be approximately $2,300,000 to $2,500,000 Again, the lower end of that range take into account that probably there's a couple of things that will slip during the period. Costco online, currently costco.com, which is our U. S.
E commerce costco.caandcostco. Co, UK. For Q4 sales and profits were up over last year even with the extra week last year. Q4 e commerce sales were up 8%. Again, if you extrapolate that for the extra week, it would have been about 15% normalized.
E commerce is again a little over 2% of our sales. We replatformed dotcom sites our dotcom sites last fall as I've mentioned. We also launched the Android and Apple apps during the same time. Costco.uk was launched last fall and this fall we plan to begin e commerce operations in Mexico. In terms of expansion, for the year again this assumes that we opened the 36 that I mentioned that are in our plan.
It would be 14 in the Q1, 2 in the Q2 including 1 which is before calendar year end that's how we got to the 15 earlier, 9% in Q3 and 11% in Q4. So in fiscal 2013, the 26% we added represented about 4.5% square footage growth. Assuming 36% on a basis 6.34% this year that would be 5.5% square footage growth. If you assume that the low end perhaps 30% that would be about 4.7 square footage growth. So something in the 4.5% to 5% closer to 5% range should be our expectation this year.
The new locations by country assuming 36 figure, half would be in the U. S, 3 would be in Canada, 7 would be in Asia between 4 in Korea and 3 in Japan, 5 would be in Australia, 1 in Mexico and 2 would be in Spain. As I mentioned, we'd enter in the spring and the fall. As of 4th quarter end, some of you asked about square footage. We stood at square footage stood at 90,805,000 square feet, an increase year over year of 4.5%.
In terms of dividends, our current quarterly dividend stands at $0.31 a share or 1.24 dollars annualized. That was up 13% from the previous $0.275 per share quarterly dividend. This $1.24 annualized dividend represents the total cost of the company of about $541,000,000 And of course these quarterly dividends were in addition to the $7 per share special dividend, which totaled a little over $3,000,000,000 that we paid to shareholders back in December of 2012, our fiscal Q2 of 2013. The usual supplemental information will be posted on the Costco Investor Relations site later this morning. And lastly, our fiscal 14 Q1 scheduled earnings release date will be Wednesday, 11th December.
That will be for the 12 week Q4 ending on November 24. With that, I'll turn it over to Felicia.
Question comes from the line of John Heinbickel with Guggenheim Securities.
Hey, Richard. It's actually Steve Forbes on for John today. Hi. When you think about the, I guess, the holiday selling season coming up, does the shorter selling season between Thanksgiving and Christmas not matter? Or does something get done differently from a merchandising or operational standpoint?
It doesn't matter. I mean every pre holiday Christmas Day is better than a post holiday Christmas Day. But overall, we're approaching it the same from an inventory standpoint being fairly positive on our buying.
Okay. And then just on Canada, how are you progressing with the rollout of gas? And then I guess is there a target for the number of locations that offer gas as for the end of next year?
I'd have to we have 40 right now. North of 40 right now. My guess is
Every new building will have a gas station.
Every new building will have a gas station. So those 3, I guess another 3 to 5. So 6 to 8 is my guess on a oh, here I've got the numbers here. Gas in Canada, we have 43 currently at the end of as this past Sunday. And that's out of 85 total cost goes in Canada.
So on a base of 43, 6 to 8 would be a good year.
And then just lastly on cost pressure, actually the competitive environment, I guess, you mentioned fresh foods, the 80 basis points and so forth. Is there anything else you can give a little additional color on? And I guess are you is there any sense of the return that you're seeing on these investments?
Well, keep in mind the return I've used the example of the rotisserie chicken in the past. We get more positive press out there from keeping that incredible giant chicken that $4.99 And over the last year, 1.5 years, the underlying poultry prices have skyrocketed. So we've the underlying prices have skyrocketed such that there's very little margin on it right now, although it looks like there's some relief in terms of where pricing is going over the next few months based on poultry futures costs. It doesn't mean we're raising prices. It means that we'll at least make a little margin.
But yes, so that's us and that's what we do. In terms of the competitive environment out there, I mean from what I see at the every 4 week budget meetings from all the regions, it's not easy, but it's not there's always pockets of something, but there's nothing that's changed in the extreme either way.
Okay. Thank you.
Your next question comes from the line of Matthew Baxter with Goldman Sachs.
Thanks a lot and good morning. Can you comment on whether you bought back stock this quarter and what your general thought process is on the buyback at this stage of the
game? Sure. Well, we did not sorry I forgot to mention that. So for the year, we brought very little back about $34,000,000 I think at the very beginning of the fiscal year back in September. On a long term basis, we're still look to we're still positive about the outlook of our company long term and we'll continue to look at it.
We report once a quarter and we'll let you know next quarter what we've done or not done this quarter. We did of course do the $3,000,000,000 special dividend back in the fall at a time when the stock was showing a lot of strength. And so we feel good about the combination of the 2 over time. And I'm trying to be as coy as possible, because I can't give you any direction until we
let you know a quarter from now. Understood on that. And just a quick follow-up. On the Electronics business, can you give us a sense whether the weakness was volume or price driven and what you
think your market share did during the quarter?
Well, it was both. I honestly don't know what others have done. We've been very strong up until the Q4 like through May. It seemed like every month we had what we call majors which is electronics principally and TVs within that's the biggest category tended to be up in the 5 to 10 percentage point range. A little of that I think back then was higher average price point even though electronics tends to be deflationary.
We were selling bigger and bigger and more advanced television 60s 80s. For back in June, July as we saw some weakness and we shared that with everybody in our monthly sales call, The big effect tended to be the felt was it was the Olympics a year ago. And but that's what we've seen so far.
Thanks so much, Richard.
Appreciate it.
Hold on one other thing here. The menu the vendors are telling us there is a challenge that sales have come down a little bit everywhere. But I don't know what others have done.
Got it.
Thank you.
And your next question comes from the line of Chris Horvers with JPMorgan.
Thanks. Good morning, guys. Can you talk about
how you think about inflation in key categories going forward? And does that provide some an opportunity for some margin relief, such that maybe we can go back to flat core margins? Or and then related to that, how should we think about the LIFO impact related
to that? Okay. Well, first of all, again, as I've said several times in the last year or 2, when margins have showed a little year over year downturn, it's us in our view, it's us more than our competition. And we have been pretty extreme on certain categories. I think a year ago, it was the food court.
I mentioned the rotisserie chicken. When you're selling $60 plus 1,000,000 of those a year that adds up to more than a couple of basis points alone to the company. But that's overall what we do. In terms of LIFO in terms of what does inflation or deflation do, certainly inflation, we tend to ultimately you've got to take some of it subject to competition, but we tend to be a laggard historically. With deflation, we tend to be the 1st out of the box.
So certainly though when there's inflation, there's perhaps a little bit of an opportunity. But that gets to the LIFO question. What generally you see is when there's a LIFO credit meaning that there's been deflation you've also had some price reductions. So part of the reason I think the core year over year is down a little is that as well. When it goes the other way, they tend to go in opposite directions, not all the time, but that's the case.
So I think that we do better when we're reducing prices and driving business. And overall that's good for us better than others. We view that we tend to be more aggressive and take more advantage of that to show a difference between us and our competition.
So does that mean that are you seeing more deflation? And do you expect more deflation going forward? And would that result in?
Keep in mind, we're not seeing a lot of anything right now. I did mention gasoline in general. I mean, gasoline is quite deflationary. Year over year in the month, it was 8% lower. But it's kind of everything else is kind of neutral, certainly well under a percentage point.
Again, I mentioned poultry as an example that had more to do with the fact that poultry prices had risen dramatically over a couple of year period and we've maintained a 4.99 price on that, which again we find ourselves in the news about that, which is a positive. Now that there's some it seems like there's some downward pressure on both feed and poultry prices futures over the next few months as the commitments for the manufacturers go through the higher cost stuff, we would expect hopefully to see those prices come down, which adds to margin since we'll maintain that 4.99 dollars
But what about isn't there pricing on the grain side? Isn't that causing pressure? I mean, there's some Nielsen data out today suggesting that prices are coming down on the grain side. And if you look at corn and soy out there and where they're priced in the market today, that would suggest that prices will come down in the future. So are any of the merchants talking about on the dry grocery side or other areas in the box where they expect pricing to come down?
Or is the outlook basically neutral?
If our landed costs come down, generally we expect to see our prices come down. I think where we have the anomalies or the outliers are going to be something like an extreme item. And by the way, rotisserie chicken is just one form of chicken we sell. We sell frozen and fresh and everything else. But just that one item is $300 plus 1,000,000 So when we have been the leader in terms of keeping the price down despite very upward increases in underlying costs.
As those come down that gives us a little margin relief. But generally speaking across what I'll call the supermarket canned and box categories, we're going to try to lower prices.
Understood. And then any commentary in terms of how September played out from a cadence perspective week to week?
I don't have that detail in front of me. I mean a lot of it has to do with how Labor Day falls and what the weather is with back to school. There's probably a 3% or 4% range between the weeks, but I don't have that in front of me.
Okay. Fair enough. Thanks very much.
Your next question comes from the line of Dan Binder with Jefferies.
Hi, good morning. Just want to touch on a couple of things. First with regard to competitive pricing as you know one of your competitors has been out there with a new vendor book program that I think they've done now 3 or 4 times. Just curious in your more in your price sensitive organization, how are you dealing with that? Are you matching price when they do a vendor book?
Or do you just sort of do your own vendor book and disregard that as promotional pricing that's not every day?
We're going to do what we do. Look if they keep doing it, it must be working and we've been doing it for a long time ourselves. We're always out there trying to do new things as well. And I think that's fine. We take that into account when comments I mentioned earlier about levels of competition out there.
But I guess just day to day when they have a vendor book out there, do you feel compelled to lower the price on those items? Or do you just sort of treat it as a one off promotional event that you don't necessarily match?
Well, in a perfect world, absolutely, yes, every time. The reality is just like when on our NVM booklets when we're getting we've negotiated a specific deal with a specific vendor and it's essentially a lower cost to us because of that, but that's because of the deal we negotiated. We're not going to go way down to match something all the time. We'll look at it as promotional. At the end of the day, all of the big retailers from the biggest to the next 3 or 4 and the large supermarket chains as well, all the major manufacturers have various buckets and different silos of promotional monies, whether it's for the MVM or slotting allowances or seasonal back to school, whatever it is.
And different retailers are going to use it at different times in different ways. So ultimately, everyday blocking and tackling, we're going to match prices. We're not going to go crazy 20% below cost if somebody else had used that their silo of promotional monies in a way on a promotional basis. I wouldn't expect they would either.
And then with regard to Canada, I think you guys are a little bit more aggressive in front of Target's openings. They kind of came out of the gate maybe a little bit higher price than people thought. Just kind of curious how you've adjusted to that or if you have at all?
I would say it's been less of an issue than we had thought. We never thought it would be a huge issue other than the fact that having a formidable player and they certainly are formidable and respected coming into a market where that would impact promotional activities with Walmart and with Loblaws and others up there that there'd be a of marketing and excitement and promotional stuff. There has been some, but probably not as much as we had felt. Now we've also been helped by the fact that we've rolled out things like gas that drives business. And the economy overall in Canada has been very strong over the last few years.
They didn't they've not suffered the economy strains that we have here in the U. S. So maybe if you but we haven't seen a big deal.
So have you been able to take price back up since they weren't as aggressive? Or has it stayed pretty stable?
No. We tend not to do that.
Yes. Okay. Last item was just on this other income line. Mentioned $22,000,000 outside of interest income. Was that related to like FX gains?
I know you have that Mexico peso issue?
It's principally FX gains.
FX gains. Okay.
Yes.
Great. Thanks.
Your next question comes from the line of Greg
fee income. I did have a follow-up there. You said the 3% really sort of gets to 6% if you try and back out the extra week and fee increase. Does that also adjust for FX, which I presumably would have been a headwind to that year over year in the quarter?
That would affect it a little more. You're right.
So that might be another 100 bps? Should we just think of it as proportional to the business?
It's probably a little less than that, but I should have mentioned it. I always try to find reasons here.
Okay. All right. So that basically in local currency membership fee income might have been up 7% not 6%?
It could have been. I just don't have I need to calculate it out. But yes, it's something, but I don't know if it's relative to that. Well, the
and then second on SG and A, I just want to make sure I got the 9 bps of headwind that I got that right. The workers' comp sounded like most of it was a catch up for maybe under accrual earlier in the year. And then there were a few other things that you said were sort of a true up by year end. Could you summarize of the 9 bps, how much of it was true up versus how much of it is actual cost of running the business ongoing?
I don't want to get that granular not because the number is worse than I think. Somewhere in the middle is probably the right answer. They're literally 2 big ones of course are benefits and workers' comp, which I mentioned was 5 bps year over year. Know within workers' comp 1st of all, I understand what a true up is. You think about workers' comp, we have just the U.
S. Workers' comp well in excess of $100,000,000 of incurred expense every year. There's also what we reserve when somebody gets injured or whatever they are to say is on disability, we set a reserve based on what we think. Now to the extent it's a bad injury, it might be a reserve of tens of 1,000 if not a few $100,000 based on anticipation over a several year period. Every quarter end, we actuary our actuaries look at that to adjust the what's on the balance sheet if you will with expensed or reserved already.
So on top of that 100 a year of incurring items, you're also truing that up at the end of every quarter correctly under GAAP accounting. That I think the reserve on our balance sheet at any given time just on workers' comp is over $300,000,000 And so a swing of $5,000,000 or $10,000,000 one way on actuarial changes based on what happened in the last quarter of real expenses and adjusting those things, Sometimes it helps you by a few 1,000,000, sometimes it hurts you by a few 1,000,000. And there are several large expense accruals given our size that we try to be granular to help you understand the numbers. But again, if I had to look at last year in Q4, a few more of those moons lined up for us. This year, a few of those expenses lined up against us.
And probably somewhere in the middle of that 9% is the right number. I'd hate to go a little further than that because I don't know.
All right. Fair enough. And then lastly on the CapEx, understand that it's going up this year with more openings. But how should we think about that number? Is there is that number so I know you spend money on land and everything well before the opening.
So should we think about that number as proportional to a number that might be out there in 2015? Or in other words, as we model it out, if we're going to open 30 to 35 clubs a year, is this the run rate we use now? Or is this year elevated because you're going into Spain and there's like
I'd say more of it's the run rate than a one time elevation. So, yes, I mean I think something in the 2.3 to 2.5 is a best guess for right now.
Right. So that makes sense with this sort of opening level.
Right. And again, if it's 6 or 7 less and we got delayed on a couple of property purchases and we did a little less or more on depots all those things add into that. But probably something in the something between 2, 2.5 is the right guesstimate for the next few years.
Okay, great. Thanks a lot.
Your next question comes from the line of Jason Deras with UBS.
Hi, it's Jason Deras here. I just wanted to understand a bit more on the membership income in addition to what was shared before. I guess maybe just looking forward
though,
what kind of now that the accrual base is in there and you've taken the fee increase and renewal rates are high, I mean, what can be done to drive more members per store? Is executive membership going to be a bigger focus now that we've gone couple of years from that fee increase? And if you can share anything in terms of the international progress in terms of membership? Obviously, the renewal rates are lower than the U. S, but what can be done there?
Thanks.
Well, first of all, I mean, what I've always been surprised at is the continued increased penetration of executive membership even in countries like the U. S. Which has been around for 13 or 14 years and Canada which has been around for 10 years. We still we do a better job I think in store of converting people to executive membership, both when they new sign ups. I remember several years ago, 10 to 15 of every 100 signed up in the existing warehouse in the U.
S. And Canada signed up as an executive membership. Now it's in the 30s 40s. Part of that's us being a little bit better at just doing that. And hopefully, it's as we point that out there, they'll see that value.
In terms of driving membership, the fact that we're getting a lot more members in some of these countries like Asia and Australia certainly helps that as a higher percentage of our openings go to those markets. The low renewal rate is I remember the 1st few years even in the U. S. Back in the mid-80s in the Canada in the late-80s, if you signed up 100 people in the 1st year to get to that what was ultimately then a mature a mid-eighty rigor rate would have been great, of course, now it's 90. Percent.
In that 2nd year maybe 70 or 72 or 3 of those 100 signed up. But then a new 100 signed up also in year 3, a higher percentage of that 70% or 72% plus 70% or 72% of the 2nd year's 100%. So it kind of builds over time. I'd say those starting renewal rates in Asia start out a little lower than that 70% sometimes in the 50s or low 60s and then build from there. But mind you, it's been somewhat of phenomena where we get a lot of press, very densely populated cities and people coming in from a little further distance in a city in cities where it's a little harder to travel.
So I think all those things have tended to be the reasons why. We're going to keep doing what we do as it relates to driving membership. I think we've gotten better in our marketing activities in what we do. And so I think overall, we'll keep driving membership the old fashioned way in terms of opening new warehouses and certainly in less penetrated countries that is a bigger help giving them value. And historically, we've tended to raise fees about every 5, 5.5 years.
And I can't promise what it will be again, but that's what it's been for 30 years.
In terms of the age of the stores in the international market and the maturity process there, obviously, we're adding you're talking new stores and new countries even. Is there anything in the cadence of that that we should think about in terms of if we're modeling on a member per store basis on a year over year basis, if there's anything that you can share there for the coming year or so compared to prior years?
I mean it tends to be higher internationally. I think when we opened in Australia, we got off to an incredible start, our highest 1st year volumes ever in the country. Again, I think people around the world know what a membership club is and we get a lot more press when we go into a country. We've had outsized numbers. It helps when you've got 5 or 6 locations in a 20,000,000 population city and it's getting good press.
And so I think given our whole the size of our whole company and the fact that still 70% of our company is in the U. S. And another 10% or 12% is in Canada that yes, the international keeps moving the needle, but moves it a little upward.
And maybe just to wrap up my line of questioning on the member fees. So talking about 6% is the clean number maybe something closer to 7 really clean for FX for the way that it grew in the Q4. How would you consider that as a run rate? And with the new store openings, do you think it could be better than that? Or do you think that I guess let me let you answer how you think about that?
Yes. We're going to try. But I think that again something plus or minus a couple of percentage points from that is probably a best guess at this point. Mind you also there's deferred accounting. So when again I've shared examples when we open a new unit in the United States, membership sign ups as of opening day, which tends to be the 8 or 12 week period prior to opening day through opening day because you've got tabling activities there where people can come in and sign up once the parking lot you can get in and out of.
And in a very in the most in the best markets in the U. S, Greater Northern Cal, Southern Cal, Seattle, when we open a new unit, it's a no brainer success story, but you might only have 6 or 5,000 to 8000 sign ups or 4000 to 8000 sign ups because a lot of people are already members. They're going to come more frequently because we have we're closer to them. When you open in some of these countries, you might have 20000 to 40000 new sign ups through opening day. Now even if that's the case, it takes a year for that to get into the system based on deferred accounting because it's basically you book that annual fee 1.12 a month.
So I think again it will trend in there over time. But on a base of 6 35 or 40 locations, an extra few locations internationally, again it moves the needle in the right direction as it relates to this question, but it's not a giant mover.
Okay. Thank you very much.
Your next question comes from the line of Charles Grom with Stern AG.
Thanks. Good morning, Richard. As part of these modernization efforts that you talked about, when you look at your membership fee database, is there any thought internally to start data mining some of the consumer information that you have and begin more personalized couponing or targeted promotions versus the standard 3, 3.5 week MBMs that you're currently doing?
I would say we're closer than we've ever been, but it's still going to be a while. 1 of the modernization things that we're doing is rewriting the membership system. Let's start with some of the basics. The extreme example is last year when we re platformed dotcom a year ago, prior to that the search engines couldn't even crawl on the site. So we would never you'd never Google us and see costco.com.
Analogous to that is the membership and the data mining. I think that Craig has shown a little openness to our marketing people, but we're not going to go crazy quickly for us. But there's some opportunity there. But again, as we do some things, we'll let you know it like we did with dotcom.
Okay. Fair enough. And then just to follow back on Matt's question on the balance sheet and with $14 per share in cash and an adjusted debt to EBITDA ratio one of the lowest in retail. What's the Board waiting to see before you guys get more aggressive on the buyback? I get last year with the big dividend kind of holding back on the buyback, but what are you guys waiting to see to get more aggressive?
Well, we'll stay tuned to 12 weeks from now when we talk to you. We'll let you know. I mean, again, I think we view our runway, if you will, long term that we've got a lot of opportunity. We quarterly board meetings. But I really can't say a whole lot more than that at this point.
Okay. And then quarterly Board meetings. But I really can't say a whole lot more than that at this point.
Okay. And then I know you'll report this when the K comes out, but do you have the U. S, Canada and and international margins for the fiscal year of 2013 in the quarter?
I don't think Operating margin? I can give that to you unless it goes out publicly from an 8 ks standpoint. And that will be when will the K be Next Wednesday is our plan to send out the K.
Okay. Okay, great. And then on the 80 basis points in fresh foods and the 10 to 25 up in the other three areas, could you just give us a little bit of perspective of how that compared to the last quarter?
Why don't we go to the next question and then I'll answer it. I think I did talk about it in the last earnings call which I have in front of me. So we'll go to the next question and then I can answer that.
Okay. And then just to follow-up on question earlier with regards to that price investment. It appears that you guys it wasn't really necessarily offensive. It was more of a defense and the fact that your costs were going up. So you were keeping those rotisserie chicken prices at the $4.99 Is that fair to say that the large chunk of why you saw the margin pressure in Fresh Foods?
Well, that was the outsized component of it, but there were a few other items within Fresh foods as well.
Okay, great.
Back to your other question back I did find the what I said a quarter ago. The 4 core categories, this is in Q3 of 2013. The 4 core categories food and sundries, hard line, soft lines and fresh foods, each showed lower year over gross margin percents. So that compares to what I mentioned this quarter the food and sundries, hard lines and soft lines being up year over year. All 4 of those subcategories were lower year over year in Q3.
Okay, great. All right. Thanks a lot.
Your next question comes from the line of Mark Miller with William Blair.
Hi, Richard. I wanted to know whether Costco is giving consideration to having its employees enter healthcare exchanges going to kind of like defined contribution, if you will? And additionally, if you can give us some color on the rising health care cost and is it likely we'll see that continuing to run ahead of sales?
1st of all, we have no plans to change what we currently do. As it relates to continue to rise, a month of the answer is probably yes. We have made a few tweaks to our plan to try to make have our have the participants in the plan make more thoughtful decisions on a few things and made some very odd there's very small changes which maybe it brings down the rate a little bit. In each of the last 3 years, part of the Affordable Care Act as it's transitioning in was we estimated it was about 1 to 1.5 percentage points of increase each year. So even when we showed an 11, let's say, or 11.5 a couple of years ago year over year, 11.5 included a 1.5 from Affordable Care incrementally.
And I think this is the last year of a few of those transition items that have gone in. An example would be you have to have the same limit lifetime limit irrespective of the plan and we had a different lifetime limit for part time and full time plans. We upped it as you would expect us to do, we upped it to the higher limit for both. And so there's things like that. And if that's part of those 1% and 1.5% growth items on a sizable number to start with.
I would guess whatever it would have been, it'd be a little less because of 1, these grant these annual pieces that have gone into the Affordable Care Act that have transitioned in over 3 or 4 years now. I think this is the last year of that as it relates to what we know now. And but I've read some articles that where they've seen costs come down. And when I talk to a few others different industries, they don't see it a lot of low inflation yet either. So I don't know where those reports are coming from.
But I would guess is it a little lower than its run? Yes. Is it a lot lower? No. The other thing that I think helps us on a global basis is the numbers I'm talking about here are U.
S. We have a lot lower experience of these costs in all other countries, because in most cases it's a nationalized health care and controlled expense controlled quite a bit better as it relates to lower. And so as an increasing percentage comes from outside the U. S. That helps us.
And we get a little help from the fact that as we ramp up expansion for you to be covered in our health care, it takes 3 to 6 months based on full time and part time. The fact that we're opening more units now means that there'll be a few more people in. But again that's on a very large base. So that tweaks it down a little bit, but not a lot.
Well, on that dimension, I know in years past as your employee turnover came down that I think added to the rate of health care cost. What is the kind of employee retention year on year and is that a factor here too?
It's still very low. It did come down. A lot of that had to do I think when the economy hit hard and we will say the economy improved greatly. I think that probably our retention rates of employees has continued at a low good rate in our view, because we have we do have a good compensation and benefits package. And it's tough out there.
And so I think our renewal rate overall in the U. S. Is about 11%. Those numbers I'm most familiar with. And after a year, it's 6, I believe.
And that's pretty much about how low. I think the 11 might have been a 10 a year or 2 ago at an 8. I can be off by percentage point here, but that's pretty much where it's been.
Okay. And a separate question. Do your buyers see much ability to trade the consumer up? I mean, really the average ticket is kind of moving with inflation, it seems like at this point. But I mean are you as you're planning for the holiday, do you think you've got any ability to move it up usually with the upper income consumer showing some strength in consumer confidence at least up until recently you've been able to do that?
What's the outlook now?
Well, we keep trying and we keep I think we keep being successful. By the way, while the average ticket has moved as you suggested with inflation maybe a little more or less depending on the quarter, that's not withstanding the fact that we've had 4 plus percent shopper frequency for 5 years compounding now. So which compared to 1%, 1.5% compounding for the each of the 20 years before that. So I think that in part tends to put downward pressure on that number. So we're actually kind of pleased that it's held up where it is given that increase in frequency.
Also in new markets, it's a lower number to start with. And so that all goes into that weighted average as well. So I think overall our number is holding up pretty well. And look and mind you as merchants we are always trying to upgrade the product. We want to save a member money, but on the best item and the biggest quantity as you might expect that we do.
And so always trying to drive that and sometimes that's because we can drive more value that way particularly on very competitive
All right. Thanks, Richard.
Your next question comes from the line of Chuck Cerankosky with Northcoast Research.
Good morning, Richard.
Regarding the venture into Spain, anything you'd point out about those clubs that will be different from some of the others?
Nothing really. Yes, it will be it looks like warehouse. I think the one thing is, is they'll be on one floor as you know in several of the very densely populated cities in Asia and even in Sydney, we've got some double deck retail facilities with 2 or 3 decks of parking on top of that or below that. In Spain, our plan is to be on one level so far. But that we could have over time, but the first one will be on across.
And the size is in line with the corporate average? Yes.
It's in line with the corporate average of new locations. I think our average per warehouse is about 144, 143. We tend to build things in the 155 range.
Got you. And the real estate pipeline is ready for additional international expansion? Is that why we're seeing this nice step up here in
the openings?
Yes. I mean, I think the pipeline has been built over the last couple of years there. If you go back 4 or 5 years ago, there were a few if any real estate people on the ground in many of these countries. Now there are people on the ground in every country and that's been for the last couple of years. And so yes, the pipeline is full, but it's never any easier.
Sometimes when you look at the dates in these cities, it has planned opening 2016 if everything goes well and sometimes a lot sooner. But the fact is it's certainly harder than some of the smaller cities in the United States. What would
you how would you rate the prospects for additional new countries in Europe?
Well, I think we talked about going likely into 2 countries, 1 in 2014 and 1 in 2015. And beyond that, we'll see.
And finally, can you give us what the gasoline sales were in fiscal 2013?
I don't know if I have that in front of me. We'll go to the next question and I have somebody looking it up.
All right. Thanks.
And your next question comes from the line of Paul Trussell with Deutsche Bank.
Hey, guys. How are you doing? It's actually Matt for Paul. I was wondering if we could talk a little bit about SG and A. I know you kind of ran through healthcare as an issue and some of the other things you're facing with the technology investment.
But with your payroll, I think you said your payroll is getting better as a percentage of cost. How do we think about SG and A kind of for the remainder of the year? Thanks. Well, look we keep trying to bring it down, but we're not going to bring it down. We put we have our own constraints on certain aspects of it like we're going to still do top of scale increases for our 2 thirds of our hourly employees that are top of scale.
We're going to not cut back, which we could easily do on certain health care aspects. So we're going to do the things that we've always done. We're going to do it 1st and foremost by trying to drive sales. Gas by the way gas deflation does hurt you a little bit. When there's inflating gas, it's a very low gross margin business, but it's an even lower thankfully, SG and A low SG and A business.
So when you've got big gas inflation that seems to hurt your margin a little bit and help your SG and A, Conversely, the other way. So given that gas was 8% deflation in September, if that continued in the next couple of months, I'll be showing you that second column again for margin and SG and A. But that hurts it a little bit when it's deflationary. The thing that's going to help it is 1st and foremost is top line sales growth and secondly is lower ultimately lower structural SG and A in several of these other countries far that we're currently in like Asia, Mexico frankly, Australia. Okay, great.
Thanks. Appreciate it.
Your next question comes from the line of Budd Bugatch with Raymond James.
Good morning. Thanks for taking my question. Richard, just on Asia, I think you talked you said that there was cannibalization in Asia. I just wonder how you think about cannibalization in Asia going forward given the high productivity of those clubs?
We want to get more open faster even if it's a little hurtful to cannibalization. Mind you when you're open you're going from 5 to 6 locations in a 20,000,000 population city, you might have some cannibalization. But we've been blessed by having some units that are $250,000,000 to $300,000,000 plus in some cities in Taiwan, Korea and Japan where when you open a second you'll take 50 to 75 of that 300 away. And the only thing that goes into your comp is that negative 50 or 75 for that 1st year. But come second year, you've got 2 units that are growing nicely.
And so that's part of the business.
And typically in the second year or the 3rd year you usually start to see that 1st unit rebuild. Has that been your experience so far?
You would really see it the 53rd week out. I mean once that impact that cannibalizing impact anniversaries is when you'll see that rebound.
So almost immediately after you get to that 2nd year. Secondly and just lastly for me, I know in the States we're all thinking about the government shutdown And just interested to how management thinks about that impact on your business and if there's anything strategic you're doing because of it?
Other than scratching our head in this belief
We're all getting involved doing that.
I actually pulled our senior executives and operations. On the West Coast, there's really not seen any effect. Around D. C. Is the only place where we've seen some effect downward a little bit.
Okay. All right. Thank you very much.
Your next question comes from the line of Joe Feldman with Telsey Advisory Group.
Yes. Hi. Good morning, guys. I wanted to go back to the SG and A again. I've had a couple of questions just talking to some people this morning about with the 5% comp, why not get it?
Couldn't you get a little bit more leverage? I know there were some incremental expense it sounds like some true ups things like that. But should SG and A had a little more leverage? Or what how should we think about it going forward, I guess?
I think the 2 biggest things are the fact that, again given our size and given even on a $30,000,000,000 sales number for the quarter, dollars 3,000,000 which isn't what it used to be when you're doing $100,000,000,000 a year, dollars 3,000,000 of anything is a basis point swing. When you've got just a simple example of workers' comp, where you're adjusting every quarter as you should for GAAP accounting actuarially a $300 plus 1,000,000 tail of previous years of workers' comp issues. You've got a much bigger number adjusting in healthcare. You've got lots of other expenses. So I think it's a combination of several of those lining up in one direction instead of some of them offsetting.
There's always going to be a range. Usually you've got half one way and half the other. The let's see what else was there. The fact that we've 17 versus 16 weeks helped you hurt you a little bit. Again, my guess is at the end of the day, you we have some increased expansion efforts with opening in Spain and IT modernization.
That's a few basis points. So all those things add up. I think at the end of the day, what I was trying to convey when we look at all the numbers is 9 overstated kind of the underlying secular trend, but I don't want to suggest it was 0. It was probably somewhere north of 0 and south of 5, but I don't know what the number is. Got it.
Thanks for that. And then just another question. As far as holiday season goes, any changes to how you're approaching this year versus last year opening, closing, different times of events? Anything like that we should think about? Nothing.
Okay. And then the one last thing I wanted to ask you guys was just I know you gave us the monthly trends, so we kind of know where things are at. But I want to ask anyway, any changes in sort of purchasing habits from the core consumer in terms of surprises when you've maybe launched a new some of those special items that you have that things either sold better or worse than you may have expected and the way people are purchasing
anything to comment on? I think we I continue to be pleasantly surprised and happy that our frequency is where it is with a 4 in front of it. Recognizing some of that gas expansion in Canada, some of it's new markets where we open new units. But overall, no.
Okay. Thanks, guys. Good luck with this quarter.
Why don't we take 2 last questions?
Your next question comes from the line of Tiffany Kanaglia with Citi.
Hi. Thanks for taking my question. I wanted to ask how do you think small business owners are feeling right now? What's the sentiment that you're perceiving?
Well, I'm not an economist and we haven't seen a big change in our small business members in terms of their sales trends. So it's hard to say. I don't have a good answer to that one.
Okay. Thanks a lot.
And your next question comes from the line of Scott Mushkin with Wolfe Research.
Hey guys, thanks for slipping me in and I know a lot of questions have been asked. So I just wanted to talk about the magnitude of the price investments in fresh food next year. I guess it could vary to some degree on what happens competitively. But from what you can control, do you anticipate a continuation of the trend there?
Well, I can't really give you any direction going forward other than our we're going to be aggressive. It's in our blood. Again, good news is that to the extent that certain commodity prices are coming down, we kept our prices down when commodity those underlying raw material costs skyrocketed. Now that they're coming back, it hopefully will give us a fairer margin in some of those areas where we have really hit ourselves hard. And so hopefully if that under that scenario, that's positive to margin.
But we're going to keep doing what we're doing in terms of being aggressive. And I do want to say while we certainly aren't cavalier about our competition, we think our toughest competitor is ourselves and we're going to keep driving that. So just to clarify, if I heard you right that you're going
to be pretty aggressive, but and we've noted this in our research, there's a chance that the wholesale prices could come down faster than happens at retail. So you actually think it could be a potentially a net benefit given that dynamic. Is that a good read of what you were saying?
Potentially. And again, I'm using a data sample of one item here, the chicken. And certainly, there's a few other a lot of those in fresh foods are like that, because if you recall a few years ago, we were talking about Food Court margins got hammered because the cost of cheese skyrocketed. And needless to say, we sell a lot of pizza. And so but we gave that as an anecdotal example of where we're going to hold the price even though because it's such a value proposition.
And so there are a few of those. On general merchandise subject to competitive challenges out there, it rains on all of us all the competition out there. And when underlying costs are coming down a little bit, there's if there's pressure out there, we probably are more of it than others, but a little of it will retain. Okay. All right.
Listen, thank you
for taking my questions.
Appreciate it. Sure.
Okay. Before we hang up here, we're Bob and Jeff and I are in a budget meeting monthly budget meeting till about 1. So we'll take calls after that if you have any questions or shoot us an e mail. Thank you.
Thank you. This concludes today's conference call. You may now disconnect.