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 fourth quarter fiscal year 2013 operating results conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star, then the number 1 on your telephone keypad. To withdraw your question, press the pound key. Thank you, Mr. Galanti. You may begin your conference.
Thank you, Felicia, good morning to everyone. This morning, we're reporting our 16-week fourth quarter and 52-week fiscal year 2013 operating results, which ended on September 1st. These results are, of course, 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 five weeks ended this past Sunday, October 6th. 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. 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 fourth quarter operating results, for the 16-week quarter, reported earnings per share came in at $1.40, up $0.01 from last year's 17-week fourth 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 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 the fourth quarter, 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 five-week September period, total sales increased 6% year-over-year. Reported comparable sales increased 3%. That three was comprised of a four in the U.S. and zero internationally. Excluding gas and FX, comparable sales would have been up 5%. The four U.S. reported would've been a five, excluding gas deflation, and the zero internationally would've been an up six, assuming FX was flat year-over-year in local currencies. In terms of comparing our $1.40 reported earnings for the fourth quarter to last year's fourth quarter 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 fourth quarter had the extra week. Simply dividing the 17 weeks into the $1.39 figure would have suggested that the benefit from that extra week was about $0.08 a share. Membership fee income, of course, included about $25 million pre-tax extra. 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 a deferred accounting over about a 23-month period. Interest expense, of course, was higher in the fourth quarter by about $13 million pre-tax or $0.02 a share. This related to last December's $3.5 billion 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 first three quarters had represented positive year-over-year profit variances. 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 first three quarters, it swung the other way in the fourth quarter. In Q4, 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 million 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 third quarter, gas profitability was higher year-over-year through the third quarter, 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&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., three each in Canada and the U.K., five in Japan, and one each in Korea, Taiwan, and Mexico, ending fiscal 2013 with 634 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 and summer. Inevitably, a few of these will probably get delayed, I would estimate that a number in the low to mid-30s is more likely. Still a pretty good increase above the 16 and 26 new warehouses opened in each of the past two fiscal years. During the first four months of 2014 through calendar year-end, we plan to open 15 of these locations, 10 in the U.S., including three next week, two each in Canada and Australia, and one 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&A.
Quickly on the start to the call here in terms of fourth quarter results, more detail. Sales for the year's fourth quarter were $31.8 billion, up 1% from last year's 17-week fourth quarter of $31.5 billion. Again, if you normalize the 17 weeks by taking 16 seventeenths of it, if you will, it would've 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. It would've been up slightly assuming flat FX. An average frequency increase in the quarter of 4.5% 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 weak end, due in part to cannibalization on a 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 hard lines, fairly flat numbers year-over-year. The departments with the strong results were office, health and beauty aids, and hardware. Electronic sales, which is a relatively large sized sub-department within hard lines, were weaker year-over-year in the fourth quarter. Soft lines, low double digits for the quarter.
Small electrics, housewares, domestics and apparel were standouts. The same old department, media, continuing being the relatively weak department there. Fresh Foods , comp sales in the mid-single digits. Deli and produce showing the best results. For September, the five-week month, sales were $9.9 billion, up 6% from last year's September reporting period. On a comp basis, September comps were up a reported 3% for the month. That 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 one percentage point. The 1.5 and the one, 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 +5%.
In terms of sales by geography for September, most U.S. regions were in the low to mid-single digit comps, with Southeast and 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. Hard lines, low singles, similar to the quarter. Soft lines in the low to mid-teens, up a little bit from the quarter. Fresh Foods continues in the mid-single digit range, led again by produce and service deli. 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 five-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 million, an increase of 4 basis points year-over-year to $716 million. Both membership fee numbers for this year's fourth quarter and last year's had some items to look at. Within the $716 million, of course, this year, it included the $25 million benefit that I talked about from the fee increase. Last year's $694 million, again, was a 17-week quarter. Taking one seventeenth out of that, it would reduce that number by $41 million. I think the 3% reported increase in dollars, again, adjusting it for those two anomalies, would've been up about 6%. The 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 signups in the quarter company-wide were very strong, up 9% year-over-year, despite one less week in the quarter. That strong performance was mostly reflective of very strong signup at our three Japan openings that opened in the fourth quarter. As I've mentioned in the past, we've got very strong opening signups at locations in Asia and Australia. In terms of number of members at fourth quarter end, Gold Star ended the quarter and year at 28.9 million, up from 28.2 million 16 weeks earlier. Primary business remained at 6.6 million. Business add-on remained at 3.5 million. Again, you get some of those add-ons moving into other categories as they opt for executive. Total paid memberships went from 38.3 million at Q3 end and 39 million at fiscal year end.
Total cards went from 69.9 million at third quarter end to 71.2 million at fiscal year end. Executive members continue to increase. We're up over 13.5 million 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 a third of our member base and about two-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 third quarter, tweaked up to a 94.0%. Gold Star went from an 88.9% to an 89.1%. Total business in Gold Star went from an 89.9% to a 90.0%. 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 third quarter to an 86.3%. 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. Excuse me. Going down the gross margin line, again, I'll ask you to jot down a few numbers. We'll have four columns. The columns would be reported and without gas, in the second column without gas. That would be Q3 2013 and Q3 2013. The third and fourth columns would be reported for Q4 2013, and without gas for Q4 2013. As I mentioned, in Q4, there's no inflation, so the third and fourth columns will be the same numbers. The line items, the first one will be core merchandising.
Going across to the four 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. Other, there was plus 7 and plus 7 in Q3 columns and 0 and 0 in Q4 columns. That related to a loss of recovery that we mentioned last quarter. All told, reported in Q3 year-over-year, gross margins was up 12 basis points. Again, taking out gas inflation, it was up 5. This year, both on a 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, hard lines and soft lines, showed higher year-over-year gross margin percents on their own sales in the 10-25 basis points range each. While year-over-year in Q4, Fresh Foods margins were lower by about 80 basis points. As I mentioned in the last few earnings calls, our investment in pricing occurs throughout many of the 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 fourth quarter, we recorded an $8 million pre-tax credit a year ago. That compares to an $11.5 million pre-tax charge, an $8 million pre-tax credit this year in the fourth quarter, compared to an $11.5 million pre-tax charge last year in the quarter. That was a year-over-year 7 basis point swing in our favor. All in all, a pretty good margin result in the fourth quarter. Now moving to reported SG&A. Our SG&A percentages Q4-over-Q4 were higher by 9 basis points, coming in at 975 this year, compared to 966 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. The first two columns will be for Q3 year-over-year, and the third and fourth columns would be Q4 year-over-year. Going across, operations, plus 2 reported in Q3 2013, a plus 7 without gas. 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 1 and 2, plus 3 and plus 3 in columns 3 and 4. RSUs or equity compensation, minus 1 and 0, and minus 3 and minus 3. All told, in Q3 year-over-year, we reported a plus 3 or SG&A better by 3 basis points. Without gas inflation, it was actually better by 9 basis points looking at it that way.
In Q4 year over year, it was higher or -9 basis points. The core operations component, again, was 9 basis points year over year. There are several moving parts to that. For example, the benefits and workers' comp expenses were higher year over year in the fourth quarter by 5 basis points, four on the benefits side and one on the workers' comp side, in part due to year-end true-ups of various expense accruals, as well as some increases. 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 and tended to hurt us a little bit this year in the quarter. These items notwithstanding, within core operations, our payroll as a percent of sales continued to improve year over year. Central expense, it was better or lower by 3 basis points, as you saw in 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 want to mention also that IT expenses, a percent of sales, will continue to negatively impact SG&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 3,000 people at Costco, represented a 3 basis point hit to SG&A in the quarter. All told, there are a few things that I think were anomalies and a few that were a little higher expense. All resulting, of course, in reported higher SG&A. In terms of the income statement pre-opening expense, $15 million last year, up $2 million to $17 million this year. No real surprises. Last year we had 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 fourth quarter increased slightly year over year, coming in last year at $949 million versus $954 million this year.
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 million higher year over year, with Q4 2013 coming in at $36 million versus $22 million in last year's quarter. This difference relates to the additional interest expense again in the December 12th three and a half billion dollar debt offering, which equates to about $44 million pre-tax a year and between $13 million and $14 million for the 16-week quarter. Interest income and other was lower year over year by $2 million, coming in at $36 million this year from $38 million a year ago. Actual interest income within this figure came in at $14 million, compared to $16 million a year ago.
The other component of interest income and other amounted to income of about $22 million in each of the fourth quarters, essentially the same year-over-year. Overall pre-tax income was down $11 million versus last year's fourth quarter, coming in at $954 million this year versus $965 million last year. Again, last year's fourth quarter included one more week of earnings results than this year's 16-week fourth quarter. In terms of income taxes, our company's tax rate this quarter came in at 34.8% versus 35.6% a year ago. A little less, about 0.8% lower year-over-year tax rate.
While many of the items I talked about in expenses tended to go against us in the fourth quarter 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 million versus last year's fourth quarter from $609 million last year to $617 million this fiscal year in the fourth quarter. For a quick rundown of other topics. While the financed 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 million, and therefore $946 million for the entire fiscal year. Merchandise accounts payable, and when you look at accounts payable on the balance sheet, majority of it is merchandise related. The other component is typically construction related. Excuse me.
Here I am. Sorry. Anyway, on the balance sheet, our reported AP ratio was 100% this year, down from 103%. Just using merchandise accounts payable to inventories, it was 89%, down from 90%. Average inventory per warehouse last year was $11.7 million per warehouse. This year it was $12.5 million, 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 first three quarters of this year, we spent $488 million, $455 million, and $435 million respectively. In Q4, we spent $705 million. Not only is it more weeks in the fiscal quarter, but again, it's related to all the openings we've got coming on this fall.
For the total year, we spent $2,083 million. I'd estimate that our fiscal 2014 CapEx, given the planned 36 openings, will be approximately $2.3 billion-$2.5 billion . Again, the lower end of that range, taking into account that probably there's a couple of things that'll slip during the period. Costco online, currently costco.com, which is our U.S. e-commerce, costco.ca, and costco.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 extrapolated that for the extra week, it would have been about 15% normalized. E-commerce is again, a little over 2% of our sales. We re-platformed our .com sites last fall, as I've mentioned. We also launched the Android and Apple apps during the same time.
costco.co.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 open the 36 that I mentioned that are in our plan. It would be 14 in the first quarter, two in the second quarter, including one which is before calendar year-end, that's how I got to the 15 earlier. Nine in Q3 and 11 in Q4. In fiscal 2013, the 26 we added represented about 4.5% square footage growth. Assuming 36 on a base of 634 this year, that would be 5.5% square footage growth. If you assumed at the low end, perhaps 30, that would be about 4.7% square footage growth. 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., three would be in Canada, seven would be in Asia, between four in Korea and three in Japan, five would be in Australia, one in Mexico, and two would be in Spain, as I mentioned, we'd enter in the spring and the fall. As of fourth quarter end, some of you asked about square footage. Square footage stood at 90,805,000 sq ft, 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 annualized. That was up 13% from the previous $0.275 per share quarterly dividend. This $1.24 annualized dividend represents total cost to the company of about $541 million.
Of course, these quarterly dividends were in addition to the $7 per share special dividend, which totals a little over $3 billion that we paid to shareholders back in December of 2012, our fiscal second quarter of 2013. The usual supplemental information will be posted on the Costco Investor Relations site, later this morning. Lastly, our fiscal 2014 first quarter scheduled earnings release date will be Wednesday, the 11th of December. That will be for the 12-week fourth quarter ending on November 24th. With that, I'll turn it over to Felicia.
At this time, I'd like to remind everyone, in order to ask a question, press star one on your telephone keypad. We'll pause for just a moment to compile the Q&A roster. Your first question comes from the line of John Heinbockel with Guggenheim Securities.
Hey, Richard. It's actually Steven 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. Every pre-holiday Christmas day is better than a post-holiday Christmas day. Overall, we're approaching it the same from an inventory standpoint and being fairly positive on our buying.
Okay. Just on Canada, how are you progressing with the rollout of gas? 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 north of 40 right now. We have 40 right now. North of 40. North of 40 right now. My guess is every new building will have a gas station. Those three, I guess another three to five. Six to eight is my guess. Oh, here, I got the numbers here. Gas in Canada, we have 43 currently at the end of, as of this past Sunday. 41, yeah. That's out of 85 total Costcos in Canada. On a base of 43, six to eight would be a good guess.
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? I guess, is there any sense of the return that you're seeing on these investments?
Well, keep in mind, a 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. Over the last year and a half, the underlying poultry prices have skyrocketed. 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. Doesn't mean we're raising prices. It means that we'll at least make a little margin. Yeah, so that's us, and that's what we do.
In terms of the competitive environment out there, from what I see at the every four-week budget meetings from all the regions, it's not easy, but there's always pockets of something, but there's nothing that's changed in the extreme either way.
Okay, thank you.
The next question comes from the line of Matthew Fassler with Goldman Sachs.
Thanks a lot. 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. We did not. Sorry, I forgot to mention that. For the year, we bought very little back, about $34 million, I think, at the very beginning of the fiscal year back in September. On a long-term basis, we're still positive about the outlook of our company long term. 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 billion special dividend back in the fall, at a time when the stock was showing a lot of strength. We feel good about the combination of the two over time, 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. 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 fourth quarter, 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 five 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 televisions, 60s and 80s. Back in June, July, as we saw some weakness, we shared that with everybody on our monthly sales call, the big effect tended to be, the thought was it was the Olympics a year ago. That's what we've seen so far.
Thanks so much, Richard. Appreciate it.
Hold on, one other thing here.
All right.
The vendors are telling us there is a challenge that sales have come down a little bit everywhere.
Okay.
I don't know what others have done.
Got it. Thank you.
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 an opportunity for some margin relief, such that maybe we can go back to flat core margins? 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 two, when margins have showed a little year-over-year downturn, in our view, it's us more than our competition. 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 million of those a year, that adds up to more than a couple of basis points alone to the company. That's overall what we do. In terms of LIFO, in terms of what does inflation or deflation do? Certainly inflation, 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 first out of the box. Certainly, though, when there's inflation, there's perhaps a little bit of an opportunity.
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. 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. I think that we do better when we're reducing prices and driving business. Overall that's good for us better than others. We view that we tend to be more aggressive at taking more advantage of that to show a difference between us and our competition.
Does that mean that are you seeing more deflation and do you expect more deflation going forward? Would that result in-
Keep in mind, we're not seeing a lot of anything right now. I did mention gasoline in general. Gasoline is quite deflationary. Year over year in the month, it was 8% lower. 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-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 it seems like there's some downward pressure on both feed and poultry prices in futures over the next few months as the commitments for the producers go through the higher cost stuff, we expect hopefully to see those prices come down, which add to margin since we'll maintain that $4.99.
What about, isn't there pricing on the grain side? Isn't that causing pressure? Meaning there's some Nielsen data out today that's suggesting that prices are coming down on the grain side. 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. 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 expect to see our prices come down. I think to where we have the anomalies or the outliers are going to be something like an extreme item. 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 million. 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. Generally speaking, across what I'll call the supermarket canned and boxed categories, we're going to try to lower prices.
Understood. 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. 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 Dane 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 three or four times. Just curious, 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 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, I think that's fine. We take that into account when the comments I mentioned earlier about levels of competition out there.
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 on our MVM booklets, when we've negotiated a specific deal with a specific vendor, and it's essentially a lower cost to us because of that. That's because of the deal that 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 three or four, 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. Different retailers are going to use it at different times in different ways. Ultimately, every day blocking and tackling, we're going to match prices.
We're not going to go crazy 20% below cost if somebody else had used their silo of promotional monies in a way on a promotional basis. As I wouldn't expect they would either.
With regard to Canada, I think you guys were 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 lot 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've not suffered the economy strains that we have here in the U.S. Maybe it didn't ask them, but we haven't seen a big deal.
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.
Yep. Okay. Last item was just on this other income line. You mentioned $22 million outside of interest income. Was that related to FX gains? I know you have that Mexico peso issue-
Yeah
with the dollar.
It's principally FX gains.
FX gains. Okay.
Yeah.
Great. Thanks.
Your next question comes from the line of Gregory Melich with ISI Group.
Hi, thanks. Richard, thanks for the walkthrough on the membership 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 presumably would have been a headwind to that year-over-year in the quarter?
That would affect it a little more. You're right.
That might be another 100 basis points. 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. That basically in local currency, membership fee income might have been up 7%, not 6%.
It could have been. I need to calculate it out. Yeah, it's something, but I don't know if it really.
A little.
Yeah.
Second on SG&A, I just want to make sure I got the nine basis points 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. There were a few other things that you said were sort of a true-up by year-end. Could you summarize, of the nine basis points, 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's worse than I think. Somewhere in the middle is probably the right answer. The two big ones, of course, are benefits and workers' comp, which I mentioned was five basis points year-over-year. I know within workers' comp. First of all, understand what a true-up is. You think about workers' comp, we have just the U.S. workers' comp well in excess of $100 million of incurred expense every year. There's also what we reserve when somebody gets injured or whatever, or 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 thousands, if not a few hundred thousand dollars, based on anticipation over a several-year period.
Every quarter end, our actuaries look at that to adjust what's on the balance sheet, if you will, what we've expensed or reserved already. On top of that $100 million a year of incurring items, you're also truing that up at the end of every quarter, correctly, under GAAP accounting. I think the reserve on our balance sheet at any given time, just on workers' comp, is over $300 million. A swing of 5 or $10 million 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 million, sometimes it hurts you by a few million. There's several large expense accruals, given our size, that we try to be granular to help you understand the numbers.
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. Probably somewhere in the middle of that nine is the right number. I'd hate to go a little further than that because I don't know.
All right. Fair enough. Lastly, on the CapEx, understand that it's going up this year with more openings. How should we think about that number? Is that number because I know you spend money on land and everything well before the opening. Should we think about that number as proportional to a number that might be out there in 2015? 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. Yeah, I think something in the $2.3 billion-$2.5 billion is a best guess for right now.
That makes sense with this sort of opening level.
Again, if it's six or seven 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. Probably something between two and a half is the right guesstimate for the next few years.
Okay, great. Thanks a lot.
Your next question comes from the line of Jason DeRise with UBS.
Hi, Jason DeRise here. I just wanted to understand a bit more on the membership income, in addition to what was shared before. Looking forward, now that the accrual base is in there and you've taken the fee increase and renewal rates are high, what can be done to drive more members per store? Is Executive Membership going to be a bigger focus now that we've gone 2 years from that fee increase? 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., what can be done there? Thanks.
First of all, 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 do a better job, I think, in-store of converting people to Executive Membership, both when new signups. I remember several years ago, 10-15 of every 100 that signed up in an existing warehouse in the U.S. and Canada signed up as an Executive Membership. Now it's in the 30s and 40s. Part of that's us being a little bit better at just doing that, hopefully, as we point that out, 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. I remember the first few years, even in the U.S. back in the mid-1980s and in Canada in the late 1980s. If you signed up 100 people in the first year to get to that, what was ultimately then a mature, a mid-80 renewal rate would have been great. Of course, now it's a 90. In that second year, maybe 70 or 72 or 3 of those 100 signed up. A new 100 signed up also. In year 3, a higher percentage of that 70 or 72 plus 70 or 72 of the second year's 100. 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, then build from there. Mind you, it's been somewhat of a phenomenon where we get a lot of press, very densely populated cities, and people coming in from a little further distance in cities where it's a little harder to travel. 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. 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.
Historically, we tended to raise fees about every five and a half years. I can't promise when it'll 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 talking about adding 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.
It tends to be higher internationally. I think when we opened in Australia, we got off to an incredible start, our highest first-year volumes ever in a 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 five or six locations in a 20-million population city and it's getting good press. I think given 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 it moves it a little upward.
Maybe just to wrap up my line of questioning on the member fees. Talking about 6% is the clean number, maybe something closer to 7%, really clean for FX for the way that it grew in the fourth quarter. How would you consider that as a run rate? With the new store openings, do you think it could be better than that? I guess, let me let you answer how you think about that.
Yeah. 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. Again, I've shared examples. When we open a new unit in the U.S., membership sign-ups as of opening day, which tends to be the eight 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. In the best markets in the U.S., northern Cal, southern Cal, Seattle, when we open a new unit, it's a no-brainer success story, but you might only have 5,000-8,000 sign-ups or 4,000-8,000 sign-ups because a lot of people are already members.
They're going to come more frequently because we're closer to them. When you open in some of these countries, you might have 20,000-40,000 new sign-ups through opening day. 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 one twelfth a month. I think, again, it'll trend in there over time, but on a base of 635 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 Chuck Grom with Sterne Agee.
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 three-and-a-half week MVMs 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. One 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 .com a year ago. Prior to that, the search engines couldn't even crawl on the site. 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, we're not going to go crazy quickly for us. There's some opportunity there. Again, as we do some things, we'll let you know it like we did with .com.
Okay, fair enough. Just to follow back on Matt's question on the balance sheet and with $14 per share in cash and an adjusted debt-EBITDA ratio, one of the lowest in retail, I guess, what's the board waiting to see before you guys get more aggressive on a buyback? I get last year with the big dividend kind of holding back on the buyback, 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. Again, I think we view our runway, if you will, long term, that we've got a lot of opportunity. We certainly, I agree with you, even with the ramped up CapEx, we have a strong balance sheet, we'll continue to talk at quarterly board meetings, I really can't say a whole lot more than that at this point.
Okay. I know you'll report this when the K comes out, but do you have the U.S., Canada, and International margins for the fiscal year of 2013 in front of you?
I don't think I can give.
Operating margins.
I don't think I can give that to you unless it goes out publicly from an 8-K standpoint. That'll be out, when will the K be out?
Next Wednesday.
Next Wednesday is our plan to send out the K.
Okay, great. On the 80 basis points in Fresh Foods and the 10 to 25 up and in the other three areas, could you just give us a little bit of perspective how that compared to the last quarter? If you have it.
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. We'll.
Okay
go to the next question, then I can answer that.
Okay. Then just to follow up on Chris's question earlier with regards to that price investment, it appears that you guys 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, there were a few other items within Fresh Foods as well.
Okay, great. All right.
Back to your other question. I did find what I said a quarter ago. The four core categories, this is in Q3 of 2013. The four core categories, food and sundries, hardlines, softlines, and Fresh Foods, each showed lower year-over-year gross margin %. That compares to what I mentioned this quarter, the food and sundries, hardlines, and softlines being up year-over-year. All four of those subcategories were lower year-over-year in Q3.
Okay, great. All right. Thanks a lot.
Your next question calls from the line of Mark Miller with William Blair.
Hi, Richard. 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. Additionally, if you can give us some color on the rising healthcare costs, and is it likely we'll see that continuing to run ahead of sales?
First of all, we have no plans to change what we currently do. As it relates to continue to rise, the answer is probably yes. We have made a few tweaks to our plan to try to have the participants of the plan make more thoughtful decisions on a few things and made some very small changes, which maybe it brings down the rate a little bit. In each of the last three years, part of the Affordable Care Act, as it's transitioning in, we estimated was about 1 to 1.5 percentage points of increase each year. Even when we showed an 11, let's say, or 11.5 a couple of years ago, year-over-year, that 11.5 included a 1.5 from Affordable Care incrementally. I think this is the last year of a few of those transition items that are going in.
An example would be you have to have the same 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. There's things like that's part of those 1% and 1.5% growth items on a sizable number to start with. I would guess whatever it would've been, it'd be a little less because of, one, these annual pieces that have gone into the Affordable Care Act that have transitioned it over 3 or 4 years now. I think this is the last year of that as it relates to what we know now.
I've read some articles where they've seen costs come down, and when I talk to a few others in different industries, they don't see a lot of low inflation yet either. I don't know where those reports are coming from. I would guess, is it a little lower than it's 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 nationalized healthcare and expense controlled quite a bit better as it relates to lower. As an increasing percentage comes from outside the U.S., that helps us.
We get a little help from the fact that as we ramp up expansion, for you to be covered in our healthcare, 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. 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 healthcare 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 needless to say, the economy hasn't improved greatly. I think that probably our retention rates of employees has continued at a low good rate in our view, because we do have a good compensation and benefits package, and it's tough out there. So I think our renewal rate overall in the U.S. is about 11. Those are the numbers I'm most familiar with. After a year, it's six, I believe. That's pretty much about how low. I think the 11 might have been a 10 a year or two ago as [inaudible] . I could be off by a percentage point here, that's pretty much where it's been.
Okay, a separate question. Do your buyers see much ability to trade the consumer up? Really, the average ticket is kind of moving with inflation, it seems like, at this point. 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 I think we keep being successful. By the way, while the average ticket has moved, as you suggested, with inflation maybe a little more, a little less, depending on the quarter, that's notwithstanding the fact that we've had 4-plus% shopper frequency for 5 years compounding now, which compared to 1%, 1.5% compounding for each of the 20 years before that. I think that, in part, tends to put downward pressure on that number. 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, that all goes into that weighted average as well. I think overall, our number is holding up pretty well. 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. Always trying to drive that, and sometimes that's because we can drive more value that way, particularly on very competitive items.
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'll be different from some of the others?
Nothing really.
How about-
Yeah. It'll look like where else. I think the one thing 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 two and three decks of parking on top of that or below that. In Spain, our plan is to be on one level so far. We could have over time, the first one will be across.
The size is in line with the corporate average?
Yes. The size is 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. The real estate pipeline is ready for additional international expansion. Is that why we're seeing this nice step up here in the planned openings?
Yeah. I think the pipeline has been built over the last couple of years. If you go back four or five 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. Yes, the pipeline's full, but it's never any easier. Sometimes when you look out at dates in these cities, it has planned opening 2016, if everything goes well, and sometimes a lot sooner. The fact is, it's certainly harder than some of the smaller cities in the U.S.
How would you rate the prospects for additional new countries in Europe?
Well, I think we talked about going likely into two countries, one in 2014 and one in 2015. Beyond that, we'll see.
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.
Your next question comes from the line of Paul Trussell with Deutsche Bank.
Hey, guys. How you doing? It's actually Matt for Paul. I was wondering if we could talk a little bit about SG&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. With your payroll, I think you said your payroll is getting better as a percentage of cost. How do we think about SG&A 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 have our own constraints on certain aspects of it, like we're going to still do top-of-scale increases for two-thirds of our hourly employees that are top of scale. We're going to not cut back, which we could easily do on certain healthcare aspects. We're going to do the things that we've always done. We're going to do it first and foremost by trying to drive sales. 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, low SG&A business. When you've got big gas inflation, that seems to hurt your margin a little bit and help your SG&A. Conversely, the other way.
Given that gas was 8% inflation in September, if that continued in the next couple of months, I'll be showing you that second column again for margin and SG&A. That hurts it a little bit when it's deflationary. The thing that's going to help it is, first and foremost, is top-line sales growth, and secondly is ultimately lower structural SG&A in several of these other countries so 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 said that there was cannibalization in Asia, and 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 going from five to six locations in a 20-million population city, you might have some cannibalization. We've been blessed by having some units that are $250 million-$300 million-plus in some cities in Taiwan, Korea, and Japan, where when you open a second unit, you'll take $50 million-$75 million of that $300 million away, and the only thing that goes into your comp is that negative $50 million or $75 million for that first year. Come second year, you've got two units that are going nicely. That's part of the business.
Typically, in the second year or the third year, you usually start to see that first unit rebuild. Has that been your experience so far, or?
You really see it the 53rd week out. Once that cannibalizing impact anniversaries is when you'll see that rebound.
Almost immediately after you get to that second year. Secondly, just lastly from me, I know in the U.S., we're all thinking about the Government shutdown, 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 disbelief
We're all getting bald doing that.
I actually polled our senior executives in 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.
Yeah. Hi, good morning, guys. Wanted to go back to the SG&A again. I've had a couple questions just talking to some people this morning about, with the 5% comp, why couldn't you get a little bit more leverage? I know there was some incremental expense, it sounds like, some true-ups, things like that, should SG&A had a little more leverage? How should we think about it going forward, I guess?
I think the two biggest things are the fact that, again, given our size and given even on a $30 billion sales number for the quarter, $3 million, which isn't what it used to be when you're doing 100 billion a year, $3 million 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 million 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. 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. Let's see, what else was there?
The fact that we've 17 versus 16 weeks hurts you a little bit. Again, my guess is at the end of the day, we've had some increased expansion efforts with opening in Spain and IT modernization. That's a few basis points. 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 nine overstated kind of the underlying secular trend. I don't want to suggest it was zero. It was probably somewhere north of zero and south of five, I don't know what the number is.
Got it.
It's a lot of moving parts.
Thanks for that. Just another question. As far as holiday season goes, are 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. 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 want to ask anyway. Any changes in sort of purchasing habits from the core consumer in terms of surprises, when you've maybe launched 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, is there anything to comment on?
I think I continue to be pleasantly surprised and happy that our frequency is where it is with a four in front of it. Recognizing some of that's gas expansion in Canada, some of it's new markets where we open new units. Overall, no.
Okay. Thanks, guys. Good luck with this quarter.
Why don't we take two last questions?
Your next question comes from the line of Tiffany Kanaga 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. It's hard to say. I don't have a good answer for that one.
Okay. Thanks a lot.
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. I just wanted to talk about the magnitude of the price investments in Fresh Foods next year. I guess it could vary to some degree on what happens competitively. 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.
Be aggressive.
We're gonna 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 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. Under that scenario, that's positive to margin. We're gonna 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 gonna keep driving that.
Just to clarify if I heard you right, that you're gonna be pretty aggressive, and we've noted this in our research, there's a chance that the wholesale prices could come down faster than what happens at retail. You actually think it could be potentially a net benefit given that dynamic. Is that a good read of what you were saying?
Potentially, again, I'm using a data sample of one item here, the chicken. There certainly are just 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. Needless to say, we sell a lot of pizza. We gave that as an anecdotal example of where we're gonna hold the price, even though because it's such a value proposition. 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. When underlying costs are coming down a little bit, if there's pressure out there, we probably are more of it than others. A little of it we'll retain.
Okay. All right. Listen, thank you for taking my questions. Appreciate it.
Sure. Okay, before we hang up here, Bob and Jeff and I are in a monthly budget meeting till about 1:00, we'll take calls after that if you have any questions or shoot us an email. Thank you.
Thank you. This concludes today's conference call. You may now disconnect.