Please stand by. We're about to begin. Good afternoon, ladies and gentlemen, welcome to the Costco Wholesale Corporation Fiscal Q1 2023 conference call. At this time, all participants are in a listen-only mode, please be advised this call is being recorded. After the speakers' prepared remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star one on your telephone keypad, if you would like to withdraw your question, simply press star one again. Now, at this time, I'll turn the call over to Costco's CFO, Richard Galanti. Richard, please go ahead.
Thank you, Bo, and good afternoon to everyone. I will start by stating that these discussions will include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements involve risks and uncertainties that may cause actual events, results, and/or performance to differ materially from those indicated by such statements. The risks and uncertainties include but are not limited to those outlined in today's call, as well as other risks identified from time to time in the company's public statements and reports filed with the SEC. Forward-looking statements speak only as of the date that they are made. The company does not undertake to update these statements except as required by law. In today's press release, we reported operating results for the first quarter of fiscal 2023, the 12 weeks ended this past November 20th.
Reported net income for the quarter was $1.364 billion or $3.07 per diluted share. Compared to $1.324 billion or $2.98 a share last year. This year's results included a charge of $93 million pre-tax or $0.15 per share, primarily related to downsizing our charter shipping activities and a tax benefit of $53 million or $0.12 per diluted share related to stock-based compensation. Last year's results included an asset write-off of $118 million pre-tax or $0.20 per diluted share and a tax benefit of $91 million or $0.21 a share related to stock-based compensation. Additionally, the strength of the US dollar resulted in our foreign company earnings translating into fewer US dollars.
With 25%-30% of our earnings generally generated outside of the United States, this negatively impacted earnings by about $0.12 per share. In terms of sales, net sales for the first quarter increased 8.1% or $53.44 billion versus $49.42 billion reported last year. On a comparable sales basis during the first quarter, reported U.S. sales increased over the 12 weeks 9.3% and excluding gas inflation and FX, 6.5%. Canada, 2.4% reported, 8.3% increase ex gas inflation and FX. Other international reported -3.1%. Excluding gas inflation FX, +9.1%. You have all told 6.6% reported for the company and ex gas inflation and FX is 7.1%.
E-commerce, by the way, was reported of a -3.7% and a -2% excluding FX. In terms of first quarter comp sales metrics, traffic or shopping frequency increased 3.9% worldwide and up 2.2% in the U.S. Our average transaction size was up 2.6% worldwide and 6.9% U.S. during the first quarter. Foreign currencies relative to the US dollar negatively impacted sales by a little over 3%, while gasoline price inflation positively impacted sales by approximately 2.5%. Moving down the income statement, membership fee income. Reported in the quarter, our membership fee income came in right at $1 billion. That's $54 million or 5.7% higher than last year's reported number of $946 million.
Again, the relative weakness in foreign currencies relative to the US dollar, excluding the impact of FX or assuming flat FX year-over-year, that $54 million number would have been increased by $32 million and the membership on an adjusted basis would have been up a little over 9% year-over-year on flat FX. In terms of renewal rates, at first quarter end, our U.S. and Canada renewal rates were 92.5% compared to 92.4% a quarter ago. Worldwide rate came in both at this quarter end and the previous quarter end, the same level at 90.4%. We ended first quarter with 66.9 million paid household members and 120.9 million cardholders, both up 7% versus last year.
Recognize we added about 22 units over the course of that last year, so that was about just under 3% of that increase. At Q1 end, paid Executive Memberships were right at $30 million, an increase of 904,000 during the 12 weeks or 75,000 a week during the first quarter. Executive members now represent 45% of our paid membership and just under 73% of worldwide sales. Moving down the income statement to gross margin. Our reported gross margin in the first quarter was lower year-over-year by 45 basis points and lower by 21 basis points excluding gas inflation.
As I'll explain in a minute, the 93% pre-tax charge, excluding that $93 million charge we took in the quarter, gross margin ex gas inflation would have been only down 3 basis points. As I always ask you, jot down the following numbers, two columns and six line items. The first column is reported during the first quarter, a year-over-year delta change in basis points, and the second column excluding gas inflation. On a core merchandise basis, we reported in the first quarter -52 basis points and ex gas inflation -31 basis points. Ancillary and other businesses, +23 on a reported basis and +30. 2% reward -2 and -5. LIFO +3 and +3. Other, that's the $93 million charge, -17 and -18.
All told, again, a reported basis was 45%, ex gas inflation 21%. Starting with the core merchandise's contribution gross margin on a reported basis was lower by 52 basis points year-over-year, and lower by 31 basis points ex gas inflation. In terms of the core margin on their own sales, in the first quarter, our core on core gross margin, if you will, was also lower by 31 basis points, with food and sundries being up a little bit, offset by non-foods and fresh foods being down. Fresh foods was down, as you know, for the last couple of years, it's been particularly strong, and it's come down a little bit. In addition, we are, you know, looking to hold prices on some of those price points despite inflated costs in some of the fresh food categories.
Ancillary and other business gross margins were higher by 23 and higher by 30 basis points ex gas inflation in the quarter, with gas, business centers, and travel up year-over-year, offset in part by e-com, food courts, and optical. Our 2% reward - 2 basis points reported - 5 excluding gas inflation, implying higher sales penetration coming from our Executive Members. LIFO + 3 basis points. We had a very small LIFO charge this year, but lapped a $14 million charge in Q1 last year. You recall last year during the four quarters, we had LIFO charges in excess of $400 million pre-tax with a small amount, that $14 million in the 1st quarter, over $100 million in Q3 and over $200 million in Q4. We'll see what inflation does this year.
Hopefully, it'll continue to its current trends in the right direction. Other, the - 17 and -18 basis points reported in ex gas inflation. This is the $93 million charge as mentioned in the earnings release, mostly related to downsizing our charter shipping activities. Over a year after COVID began, you will recall that the supply chain challenges related to shortages of containers and shipping delays greatly intensified with container, freight, and shipping rates skyrocketing. It was in Q4 of 2021 on our earnings call that we mentioned our initial leasing of three ships and several thousand containers to help mitigate these challenges. Later, we added four additional vessels and additional needed containers with commitments made for up to three years. Our objectives at the time were twofold. First, to increase the ability for more timely shipping and arrival of overseas merchandise.
This allowed us to better stay in stock and drive sales. Second, to reduce some of the skyrocketing shipping and associated container costs. We achieved those objectives for a period of time. Over the course of a year and a half, we controlled the shipping and delivery of nearly 50,000 containers, many that would have been greatly delayed and at an estimated savings as compared to the then current shipping container costs of somewhere between $1,000 and $2,000 per container. That, of course, fluctuated. Now, with a dramatic improvement in shipping times and much lower shipping and container costs, it made sense to downsize our commitment and lower prices for our members. Moving on to SG&A.
Our reported SG&A in the first quarter was lower or better year-over-year by 35 basis points, coming in at 9.20% compared to a year ago, 9.55%. That +35 basis point improvement would be +13 basis point improvement excluding gas inflation. Again, writing down six line items in two columns. First column being reported, second ex gas inflation. During first quarter, our core operations was lower or better by 8 basis points, +8 then. Without gas inflation, -9. Central, zero and -3. Stock compensation, +3 and +1. Pre-opening, zero and zero. Other, +24 and +24. For a total first column reported SG&A, +35 or lower by 35 basis points and ex gas inflation lower by 13.
Going through those numbers, the core operations component of SG&A was again lower by 8 basis points reported, but higher by nine excluding impact of gas inflation. These re-results include three sets of wage increases that were done in the past year plus, as well as a little slower sales results in Q1 as compared to the prior quarter. Increases, but a little lower than the prior quarter. Central was flat or zero and higher by three ex gas inflation. Stock comp, again, a little lower number in stock comp as a percent, so it came down improved a little bit. Pre-opening, no impact. The other, the 24 basis points you recall last year in Q1, this consisted of an asset write-off totaling $118 million pre-tax, which impacted the SG&A line last year.
Below the operating income line, interest expense was $34 million this year, down $5 million or down from $39 million last year. Interest income and other for the quarter was higher by 11 year- over- year, $53 million versus $42 million a year ago. Interest income was higher year- over- year, offset by unfavorable FX. Overall, reported pre-tax income in the quarter was up 4%, coming in at $1.77 billion compared to $1.696 billion a year ago. Excluding the charges described earlier in both years, pre-tax income was up a little around 3%. In terms of income taxes, our tax rate in Q1 was 23.0% compared to 20.7% Q1 last year, so a little higher this year.
Both years' tax rates benefited from the tax treatment of stock-based compensation as mentioned earlier. The fiscal 2023 effective tax rate, excluding this discrete item, is currently projected to be between 26% and 27%. A few other items of note. In terms of warehouse expansion, we plan to open a net of 24 units this year, 27 openings, including three relocations, so a net of 24. In the first quarter, the net of that 24 included seven. We planned three more in Q2, four in Q3, and 10 in Q4. In the first quarter, we opened, as I mentioned, seven net new warehouses. Four were in the U.S. and one each was in Korea, our first in New Zealand, and our first in Sweden.
Last week, we opened another building in the U.S., and just yesterday we opened our 14th location in Australia, our second on the country's west coast, in or near Perth. In fiscal 2023, again, 27 total new openings, including three locations for a net of 24. Of the net 24, it's made up of 15 in the U.S. and nine in other international, including our third and fourth locations in China. Regarding CapEx, in the first quarter, CapEx was approximately $1.06 billion, and our estimate for the entire fiscal year is CapEx of somewhere in the $3.8 billion-$4.0 billion range. Moving to e-commerce. E-commerce, as we mentioned in the press release on a reported basis, for the quarter, year-over-year sales were -3.7% and -2% ex FX.
What we don't include in this number is our sales through, like, same-day delivery for fresh with our partners like Instacart, which we don't include those, and they are fulfilled in our warehouse. Our e-com comps ex FX would have been, if we included it, in the positive low single digits. Stronger departments in terms of year-over-year percentage increases were tickets and gift cards, tires, candy, and health and beauty aids. The largest e-com merchandise department majors, which includes consumer electronics and appliances, which represents close to 40% to 50% of our over 40% of our e-com volume was down in the high single digits. Subsequent to quarter end, we did have our two biggest e-com selling days in our company history, both on Black Friday and Cyber Monday.
Now, a few comments regarding inflation. Recall, we've seen some minor improvements in a few areas, hopefully continuing the comment I made last quarter's earnings call. A little light at the end of the tunnel, but it's still little. Recall last quarter, in fourth quarter, we estimated year-over-year price inflation was about 8%. In the first quarter, we estimate the equivalent year-over-year inflation number in the range of 6%-7%. Food and sundries is still up more than non-foods, but overall a little better level than a quarter ago for the company. You know, commodity costs are mostly coming down, whether it's corn flour, sugar and butter, or even some things like steel. A few things are up, but overall, we're seeing a little bit of a trend, but we'll keep you posted.
Switching over to inventory levels. Recall that our total inventory in both at the end of Q3 and at the end of Q4 on a year-over-year basis, we're up 26% year-over-year. I'm happy to report that good progress was made during the first quarter of this fiscal year. Our increase as of Q1 end dropped to a 10% year-over-year increase, largely driven by an estimated 6%-7% inflation and about just under 2% year-over-year unit growth. Inventory as well, we still have some pockets of a little over inventory. Overall, we feel pretty good about it. As a reminder, in terms of upcoming releases, we will announce our December sales results for the five weeks ending Sunday, January 1st, on Thursday, January 5th, after the market closes.
With that, I will open it up to Q&A and turn it back over to Bo. Thank you.
Thank you, Richard. Ladies and gentlemen, just a reminder, any questions, simply press star one, and if you find that your question has already been addressed, you can remove yourself from the queue by pressing star one again. We'll take our first question this afternoon from Simeon Gutman at Morgan Stanley.
Hey, thanks, guys. Good afternoon. Richard, I wanna start with the short-term question. November, the slowdown in the stacks. Is there anything, you know, tip of the iceberg there, macro, merchandising? Is there something obvious? I mean, you are living in pretty rarefied air, but curious if there's anything notable.
You know, I think the biggest thing, as I've said a couple of times in a quaint way, it rains on all of us during these tougher times, particularly with bigger ticket discretionary items. We're comparing against some huge increases a year ago, frankly, over the last two or three years, as you know. That's where we've seen some of the slowdown. As I mentioned, you know, e-com, consumer electronics and appliances, as I mentioned, was down in the high singles. I think in line was also down some amount. That's where a big chunk of it is. When we look at food and sundries, that's actually tends to be relatively strong for us. Overall, I think it's impacting us a little bit with what's going on out there.
I think it is a combination of compared to very strong stuff a year ago, as well as the fact that big ticket discretionary has a little bit of weakness.
Okay. Maybe just a two-part follow-up. One is just related to that answer. Does those two couple of days, I don't know if you can judge enough from it, does it bring you back to some type of trend line? It sounds like your tone is, you know, there's still some pressure. The real follow-up is on gas gross profits. If you just think about the movement of the lap throughout this fiscal year, does it progressively get harder through the year in terms of the lap? Can you highlight to us which quarter has the highest cents per gallon lap throughout the rest of the year?
Yeah. I have a couple of people in the room smiling. Of course, I can't tell you all that. At the end of the day, first of all, if you look at our November reported numbers, the fact that those two dates, those two high dates on e-com were in the last week. Keep in mind, e-com is still a little under 10% of our total company, that helped a little bit relative to e-com in the last four weeks that we reported. Overall, look, we don't know what kind of trend it means. We feel pretty good about what we're doing in terms of driving sales.
As I mentioned, you know, the food and sundries as we get past big-ticket discretionary purchases for the holidays, for, you know, Christmas and what have you'll have a higher penetration of some other things as well. As it relates to gas, you know, we've for several quarters now, even beyond a year ago, we've talked about the gas profitability for us, and we believe our competitors, the other big chains of gas stations have made more in gas, and certainly that's helped us use some of that to continue to hold prices where we can on some things. Who knows what the new normal is? What we know is that not only is gas more profitable than it has been in the past, and I could have said the same thing a year ago. Will that change at some point? Maybe.
We don't know. Right now it's good. By the way, as we've mentioned a couple of times, we've seen strong gallon sales and we're still taking market share. When the U.S. gallon sales are generally close to flat, we're up in the 10%-15% range in gallons. We're driving people into the parking lot. The fact that gallons of gas are profitable, that is just a little bit more for us as well. That's helped us. There's always things that are gonna help us, and there's always going to be puts and takes.
Okay. Thanks to everyone. Happy holidays.
Same to you.
Thank you. We go next now to Chuck Grom at Gordon Haskett.
Hey, how's it going, Richard? My question's on the LIFO charge. It looks like if it's a few basis points of a hit, that would back into about $30 million-$40 million. I'm curious, I know you don't provide guidance, but knowing what you know now and if inflation holds at that, you know, say, 6% level, would that be a good proxy for the charge, at least over the next couple of quarters?
Well, I think y eah, LIFO was a slight pickup just 'cause the dollar amount was less than the $14 million last year in the quarter. It's very slight. If that continues, that would be good and that would bode well, and I'm guessing you'd have a lot lower charge than $423 million, recognizing the big pickup was in Q3. The big hit was in Q3 and Q4 when we saw the beginning of inflation rising. If inflation didn't go down, but it just stayed the same, in theory you'd have no big charge. You'd have no additional charge. If it starts to go down from its peaks, there'll be some LIFO income. Now, mind you, some of that'll be used for pricing as well. I mean, we'll, you know us.
Yeah. Okay. What would you do to have the absolute dollar amount for the LIFO charge in the quarter for us?
Yeah. Less than $1 million.
Less than $1 million. Okay, great. On the ancillary line, you've had real good success there on a, you know, back-to-back quarters, and you outlined, you know, gas profitability, e-com, food court. Is there one that's been more outsized over the past couple of quarters and that maybe we could think about over the next few quarters? 'Cause it's been a nice improvement.
Well, well, look, gas is just the sheer size of our gasoline business. It's been the biggest piece of that line for a few years. Yeah. It's a $30 billion+ biz. On our $220 whatever billion last year we did in sales, I think a little over $30 billion was gas. That's the big kahuna among all that stuff.
Okay, great. Thanks very much.
Thank you. We go next now to Michael Lasser of UBS.
Good evening. Thanks a lot for taking my question. Richard, between the 31 basis point core-on-core gross margin decrease in core-on-core gross margin, the discussion around giving up some shipping capacity to have a better price for your member. Is the mindset of Costco right now as the economy enters a more difficult economic period, Costco is gonna be stepping up price investments in order to gain market share?
I think we continue just to remain competitive. You know, You've known us long enough, when asked who's our toughest competitor, we look in the mirror and we say, "It's us." I think that as we drive market share, we believe that part of it, at least, is due to the fact that we've continued to be very competitive. I don't think there's any change in that. We, notwithstanding, you know, where our numbers come out, we're always trying to push more into lowering the prices or keeping the price increases from going, you know, not as high as they could have been. I think fresh foods is a good example of that of late, where, you know, again, we've held the price points on certain items despite inflated costs, mostly in the protein area and a little bit in the bakery area.
Richard, you've long talked about the Costco model is driven first and foremost by sales and the need to drive at least a mid-single-digit comp in order for the other parts of the P&L to work. If the economy is entering a softer period where discretionary sales are gonna be a little weaker and Costco's overall sales are gonna be a little softer, should we be modeling and prognosticating just a lower overall earnings growth for Costco during this time as a result of these factors?
The good news is that's your job to model it. Look, at the end of the day, I think that, you know, the comment I made about big ticket discretionary while we sell Big ticket discretionary includes furniture, which we sell, you know, lawn and garden and patio, too. That's, that's not it right now at the holiday season, necessarily. That being said, there is a higher proportion of big ticket discretionary right now. You know, we're blessed in the sense that, you know, a big chunk of our business is fresh foods and food and sundries, which people have to eat. As I mentioned, that has been strong throughout this. I think overall, we'll probably still look at it in a positive relatively aggressive standpoint.
Ultimately, you know, when you talk about, you know, top line sales and if they're a little lower, what do we need? You know, I think the question historically has always been asked, what do we need to, you know, have SG&A not go up as a % of sales? The view is, and this is pre-inflation thoughts. The view is always you need to something our best guess view as somewhere in the 4%-5% comp range. If it falls below that'll make SG&A a little bit of a challenge. That being said, we're pretty pragmatic and we know how to use our margin as well. I think overall we'll continue to work entirely to drive top line sales and look at it for the long term.
We're not any big way cutting back orders at this juncture. You know, where we see some challenges with big ticket discretionary, does it come down a little? I think the keyword there is a little. Are we feeling very good about some of our business now, despite what's going on out there? We're blessed that we think, again, I think as evidenced by gas and even the food and sundries business, we're blessed by taking market share still. I think that's evidenced in our memberships.
Your answer was a lot better than my question. Thank you very much, and have a good holiday.
Thank you. We go next now to Rupesh Parikh at Oppenheimer.
Good afternoon, and thanks for taking my question. Just on core decline of 31 basis points, I was hoping you'd provide more color just in terms of what's driving that decline in non-foods category. Then just related to the pressure on fresh foods, I know, you know, I think you've now lapped some of the, you know, last year, I think fresh foods was also a headwind. When do we lap some of the, I guess, some of the efficiencies that you gained during the pandemic? Because I know you've given it back in recent quarters. I'm trying to get a sense of when that pressure point could go away.
You know, I don't know exactly. I mean, if we're, you know, three quarters of a year into it, I think if I recall over the last two or three quarters, we've talked about like fresh being that way and probably exacerbated a little right now with the fact that we're trying to hold prices on some things that we think that that's driving our sales. You know, beyond that, I forgot the first part of the question now.
Just on non-foods, any more color?
Oh, yeah. Yeah. I think that, yeah, it's fundamentally, first of all, it's in terms of the overall, it's fundamentally fresh and then some non-foods. Some of that has to do with some of the big ticket things. If you've been online and saw some things we did during not just the week of Thanksgiving and Cyber Monday, but we did some, you know, anywhere from $100-$500 off on, I think, $500 cash card if you bought $3,000 or more of these items.
We're, you know, getting rid of some, you know, some of the reason that that 26% year-over-year inventory crease went to 10 was we got rid of some things that we had to deep freeze and some things that we had delayed shipping during the supply chain challenge. Yeah, we did take some more markdowns than normal, as you'd expect, to help get rid of that. Hopefully that's not a pressure point going forward. Certainly, I don't think it will be as much. You know, again, there's so many moving parts to this equation. I wish it was as easy as each basis point we could explain. We try to give you the rounded numbers.
Overall, again, I get back to we feel good about how we're doing competitively. We certainly understand that big ticket discretionary things have shown a little weakness, in part because of our strength from a year ago, and in part it's got to be part of the economy. The good news is we have big chunks of our business that are fresh foods, food and sundries, health and beauty aids, gas, all those types of things. Even other things like that's small, but, you know, travel has come back really strong from a really weak place a couple of years ago.
Great. Then maybe just one additional question. Just on the membership fee hike. If we are in a weaker, you know, economic backdrop next year, does that at all impact how you guys are thinking about the timing of a membership fee hike?
Well, it certainly goes into the thought process. We're still not even to the average of the last three increases in terms of timing between the last one and the next one. What we've said again, and I'll say again, is that, our view is all the parameters as it relates to member loyalty and value proposition that we've improved to our member, we have no problem thinking about doing it and doing it ultimately. It's a question of when, not if. We feel that we're in a very strong competitive position right now. If we have to wait a few months or several months, that's fine. You know, I'll be purposely coy on when that might be.
Thank you. Happy holidays.
Same to you.
Thank you. We go next now to Paul Lejuez at Citi.
Hey, it's Brandon Cheatham on for Paul. First one, I wanted to dig into the decision on holding the price on fresh. You know, are you seeing competitors do the same and that's why you reacted there? Or are you kind of trying to lead the charge there and just c urious, like why, you know, make that decision since it seems like, you know, the consumer's been happy to take increased price, especially in fresh?
The last thing you said there is exactly, I think, why we chose to do a little more there. We, we want to be the most competitive, and we drive a lot of volume and, again, we're in it for the long term. It's, you know, fresh is one of those unique areas where prices on many items do change almost weekly on some of those items, if not sooner, if not more quickly. Our, our buyers are always looking at the, if you will, the supermarket ads as well as the other warehouse club ads. Not literally ads, but you know what the pricing is, and we react to that.
Part of it is also consciously keeping the price on the chicken at $4.99 and keeping t hose types of things. Keeping the price on the hot dog. All those things go into that equation as well. We know that that can be a driver of business, fresh. We got great stuff, and people do notice the price. In our view, people notice those price differences.
Yeah. Just a quick follow-up. You have a large competitor that's been talking about, you know, increased members in the $100,000+ income cohort. I mean, obviously it's not impacting your membership numbers, but I'm just wondering, you know, do you see any impact on share of wallet or any thoughts there? You know, do you look at how many of your members, you know, might have additional memberships as well?
Well, we don't... What's that? Oh. Yeah. Oh, somebody in the room is telling me we were also up in terms of the average household incomes. I think we're both seeing that. We know a lot of, particularly of our Executive or our business members, in many cases probably have both cards. They've always had both cards. No, we don't put our head in the sand as it relates to it, but we look at our numbers and how we're doing, and we've seen that the our penetration of higher income members has also benefited during this time.
Got it. Appreciate it. Thanks and good luck.
Thank you. We'll go next now to Oliver Chen at Cowen.
Before Oliver answers. Oliver, before you ask a question, one other comment. You know, one of the things that we have not done and don't plan to do, is do a lot of promotional activities with our membership. That certainly will, in the short term, help drive membership, but we don't do a lot of that. Go ahead, Oliver.
Richard, thanks. Thanks. Happy holidays. Regarding e-commerce and going forward, what are your thoughts? You're up against some tough compares, but as we model it on a longer term basis, how should the growth rates evolve? As we think about non-food, you talked about it a lot, but do you expect the non-food percentage mix to change from the past or it will more normalize? Lastly, on the higher income consumer and gains there, would love for you to elaborate on what's happening and if you're getting, you know, more luxury consumers in terms of higher income folks joining in the club. Thanks a lot.
Sure. I wrote down non-food in terms of what's the new normal. Look, we don't know what the new normal is. I do know that we figured out how to drive total sales. I do know that over the last 2.5 years through COVID, people buying things for their home, whether it was indoor furniture, outdoor furniture, exercise equipment, electronics and appliances, and increased even greater because of our acquisition in April of 2020 of the last mile, big and bulky delivery and installation arm from Sears. All that stuff has helped us dramatically. Look, a little bit is, again, we don't know how much of it is just comparing against very strong numbers versus versus a little weakness. Our guess is it's a little of both.
We always wanna drive everything, but we wanna drive more non-food things because you don't need any extra space. If you're turning fresh foods at 50, 60 times a year or more, you're turning some non-food categories at eight times a year. It's easy to go from eight to 10 without any extra space in the building. That's always been a goal of ours, to drive both sides of the business. We think we're pretty good at doing it. Well, we'll find out what the answer is a year from now. On. What was the other question? I'm sorry.
On e-com and the e-com long-term growth rate there, and then also the higher income consumers too.
Sure. Okay. On e-com, again, that is even more dramatic if you look at what e-com did. You know, we essentially doubled e-com over a 12-month period worldwide from about $8 billion to $16 billion in that probably, you know, three or four months into COVID and then going fast forward a year. The last half of fiscal 2020 and the first half of fiscal 2021. We had pretty good numbers, of late, you know, over the last year. That, of course, dramatically impacted in a good way from our acquisition of Innovel. You know, doing, as I mentioned on the last earnings call, you know, pre that acquisition in the U.S., we did about a little over 2 million drops.
A drop is anything from dropping off a sofa to dropping off and installing a washer, dryer or a refrigerator, freezer and taking the old one away. We've gone from a little over 2 million drops. In fiscal 2022, we did a little over 4 million drops, 70% of which was on this site that in this operation that we acquired. We've had outsized growth on that, helped also not only by the acquisition, but COVID itself. We're comparing against that now. We'll see where that goes. We think that e-commerce is still long-term. First of all, we, as you know, we still want you to get in there, get into the warehouse as well.
That's what, so long-term, we still think right now we wanna grow the e-commerce. you know, I think I would say our goal still is to grow it a little more than in line right now, because so much of it has been benefited by big ticket items, which have shown some weakness that's impacting a little bit right now. but long-term, we wanna still be, you know, even 9% or 10% of a $240 billion or $250 billion business a year is a big chunk of business.
Yeah.
In terms of, the last question, I'm sorry, I didn't write it down.
Yeah. I think of, you know, I think of Costco as a luxury company, too. What are your thoughts on getting the higher income consumers and anything you're seeing with your existing consumers in terms of behavior? 'Cause everybody's under a little bit of pressure as well. Thank you.
Well, again, when someone in the room here showed me the I think the data that somebody had asked me about where Walmart had indicated, we're all looking at that same data. We, too, saw the metrics of a little bit higher percentage of higher income people coming in. Notwithstanding the fact that we start with a higher percentage to start with. We try to trade you up. You know the quality of our merchandise and, we'd much rather sell you a, you know, a bigger ticket item with all the bells and whistles. I think that it's the way we merchandise, and, we're not looking to change that at this juncture.
Thank you. Best regards, Richard.
Yep.
Thank you. We go next now to Greg Melich of Evercore.
Hi, thanks. Richard, I'd just like to talk about how, you know, traffic seems to be growing closer to 2% now in the U.S. Is there anything specific going on there or we just need to get used to it as we're cycling lower gas prices and tough out this lower traffic?
Perhaps. I mean, we still think anything that's even in the low single digits is great. We benefited clearly from, you know, over the course of the last year, we benefited, as seen in our membership sign-ups, more people coming in, and the gas business driving that a little bit as well. You know, during COVID, we had a higher than previously average tick up in new member sign-ups. That's probably subsiding a little bit at this juncture. We feel good, very good about where our renewal rates are and the loyalty that our members have. We're pretty good at keep trying to figure out ways to get them in. We're doing, y ou know, we do online e-mails that are in line directed, you know, for hot items to come in only available in store. Those are the things that we continue to do.
Got it. Could you update us on any, you know, private label, you know, extra gains that you're getting in this environment or trade down perhaps between proteins or anything like that worth calling out?
You know, last quarter, I mentioned a couple of things on the fresh side and the protein side that we actually saw strength in canned chicken and tuna, which was the comment that the buyers made saying that we're seeing to the extent that prices were skyrocketing in some fresh protein, we saw strength in canned protein. We don't see currently a lot of trade down on fresh. Prices have started to come down on some of those items as the underlying commodity costs have come down a little bit.
Got it.
KS penetration is up. Our KS penetration is up. I don't have the exact number in front of me. I'm guessing it's about somewhere approaching a percentage point, but which is big. I would say over the last several years, it's probably been a half a percentage point, probably up a little more than normal. You know, again, Somebody had asked us the question recently, you know, are you seeing some trade down to private label? We, of course, corrected them and said it's a trade up.
You also mentioned it's a housekeeping item, but I wanna make sure I got the charge rate. You're basically writing a check to reduce the size of a contract that was at a higher price.
Yes.
What's the payback period on that check? Do we see it over four quarters, two quarters, six quarters?
You know, it's a moving target, honestly. It's based on rates, frankly, and rates right now have come down dramatically. That would be a year. It could be a little longer than a year, a little less than a year, depending on what happens tomorrow.
Okay, great. Good luck, and thanks.
Yeah.
Thank you. We go next now to Peter Benedict of Baird.
Oh, hey, Richard. Just on new member signups, you kinda mentioned it a little bit there in response to Greg's question. Just maybe talk about new member signup trends holistically, what you're seeing, anything U.S. versus maybe some of these international markets you've been entering? Just interested in your latest thoughts there.
I think the biggest thing continues to be we're better when somebody does sign up, that they sign up as an executive member in those countries where we offer Executive Membership, which is, I'm guessing 85% of our company. More, maybe 90% of our company. It's just not in some of the smaller u-unit countries. Overall, starting with the U.S., but overall in Canada, we do a better job of getting you to sign up as an executive member to start with. We also do a better job of getting you to sign up to auto-renew with putting in your credit card. All those things help. Let's face it, all those things help too. We know that an executive member buys more and shops more frequently in a year than a Gold Star member.
We know that one of those members with a credit card, co-brand credit card shops even more frequently and spends more. They do all three, you know, if they're an Executive Member rather with a card versus being a regular member, that's the big kahuna here. I think that we've seen those trends go on over the last few years, frankly. What's helped in the last year is the fact that, again, just our new member sign-ups has been higher than they had been historically, over the last few years versus the last year, last year or two. I think we believe that's more because of COVID, and we were a good place to shop.
I'm not sure. That makes sense. As my last question, just interested and interest income and other obviously has a few components to it. I'm curious if you can help us understand what the interest income was in the quarter. I think it was about $8 million last year. I'm not sure. I'm sure that was up a lot this quarter. Just curious if you could give us a sense of what that number was in the first quarter. Thank you.
Do we normally do that? Is that in the queue? Okay. Yeah, I can give it to you. Hold on a second. I didn't realize it's in the queue, so which is not out yet. What it is you've got a big increase in interest income and a big increase in FX downside. Of the 50, I think it was 53, is $54 million is interest income, and a -$1 million is other, which is a chunk of that's FX. This year, the $42 million... I'm sorry, last year, it was $8 million of interest income and $34 million of other, the biggest piece of other being FX. That added up to the $42. This year, the $53 is $54 of interest income and -$1 of other.
Yep. No, that's what I was looking for. Thank you very much.
We'll go next now to Kelly Bania of BMO.
Hi. Thanks for taking our questions. Richard, just had one on elasticity and then another follow-up on the big ticket. In terms of elasticity, I'm not sure how you measure it or monitor it, but any changes in your members' response to your actions when you are taking some lower prices here?
I think if you ask the buyers overall that there's a little less elasticity than there used to be on some of the things. Again, now that answer comes from the fact that my comments about big ticket discretionary items. We've put more money behind it, and that successfully cleaned up our inventory where we were over in some areas like furniture to some extent. At the end of the day, I think in a year or two ago, we would have even guessed that could have been a little stronger. That gets back to the whole question, is the economy, the concerns in the economy impacting big ticket discretionary items? Yeah, I mean, there's clearly still elasticity. When we do, temporary price discounts, or, you know, even our MVM mailers, we still get good impact from it.
Some things, the bigger the ticket, not as much as we used to get.
That's helpful. Just to follow up, again, on the big ticket, what % of your sales, would you say are big ticket? Maybe it ebbs and flows with the seasons, but just in general. Do you see that members are pretty broad-based in pulling back, meaning across income levels, Executive, Gold Star, etcetera?
Well, online, it's a little over 40%, but online is only, you know, 9% of our sales. In store, I don't have it in front of me. 10% would be a good guess.
Thank you.
I'm including that 10 furniture as well. Jewelry, big ticket discretionary.
Perfect. Appreciate it.
We'll go next now to Christopher Horvers at J.P. Morgan.
Thanks. Good evening. Following up a little bit there, on the TV side, how much of it is a units down issue versus deflation? Is there any differentiation that you're seeing between larger and smaller screen size purchases?
Yes. Yeah. Units are actually up, and there's normal deflation in TVs and, you know, electronics anyway. But there is perhaps a little bit of, you know, smaller sizes are coming down a little bit. You know, not everybody wants an 85 inch television, but which is where we over-index to bigger ticket stuff to start with. We are seeing actual unit sales up.
Units are up with strength, relative strength in smaller sizes.
Yeah. Yes.
Got it. A couple of sort of other bigger picture consumer questions. I guess, you know, are you seeing maybe some mid to low end maybe not buying the 18-pack of Bounty? Like, do you think you might be losing some category share as someone's trying to economize the ticket for your, you know, the lower half of your income perspective? Can you also talk about regionality? There's some weakness in certain housing markets, in certain cities, you have a big exposure to California. There's been more layoff news in the technology industry, and there's some population migration. What are you seeing from a regionality perspective, where you're seeing more weakness versus strength?
First of all, the we're seeing strength in sundries as part of what we call food and sundries, which is everything, you know, food and sundries is everything from, you know, canned beverages, you know, to crackers and cereal, and sundries, of course, paper goods and cleaning supplies, and the like. We're seeing strength in those areas. Those are actually strong, offset by some of the weakness I talked about on the non-food side. As it relates to regional, we don't really see any big differences. I mean, every month you're gonna see a region stronger or weaker. It has more to do in our view of late with weather than anything else.
Got it. Then what?
I can't give you anything definitive on, you know, is the region t hey're all pretty close. You know, Bob's saying here they're within a couple of points of comp.
Got it. One cleanup question? Just on the inventory, you talk about pockets. It sounds like you cleaned up furniture and electronics, it sounds like. Is there where are those pockets? You know, how much is maybe holiday decor or toys, other more at-risk categories in, you know, the month of December?
Yeah. The good news is, as our merchants are sitting here, holiday decor is fine. One example actually would be we have a small amount of air conditioners and fans. Which was, you know, it was a hot summer, and we were very strong in it. There were delays. Now, some of the supply chain challenges, some of that stuff didn't come in until September. Needless to say, we're not gonna put it out there and mark it down when nobody really is looking for an air conditioner unit in September. So, that's the example of a few things now. We still have some furniture. It's way down from where it had been, so it's very, very manageable. I think beyond that, there's nothing huge.
Again, the big question right now would be, the fact that, from a standpoint of Christmas stuff, both, the trim-a-home stuff as well as toys, we're in pretty good shape for that. We feel pretty good about that.
That's great. Thanks so much. Have a great holiday season.
Peace.
Thank you. We'll go next now to Scot Ciccarelli at Truist.
Good evening, guys. I guess I have another gross margin question, and I guess it's, look, if consumables continue to outpace discretionary goods based on what we're seeing in the economy, should we expect gross margins to compress a bit just from mix? Do you have enough levers given existing price gaps across most of your categories to manage to flattish gross margins? How should we think about the mix impact?
We'll let you know next quarter. I mean, we have a lot of levers, as you've mentioned, as you suggested, to pull and push. We're also aggressive on pricing when we wanna be, like in the fresh foods area that I just mentioned. We're blessed right now with, in some categories like gas, that there's a better margin. All that stuff there, again, there's a variety of puts and takes. We feel overall, there's nothing unusual about this quarter.
And frankly, if inflation is not rising again, even if it doesn't go down, but it doesn't rise again from its current levels, we're in pretty good stead of greatly improving the component of margin that relates to a LIFO charge, and particularly in Q3 and 4 when we, you know, we had a $100+ million number and a $200+ million number. That's to be seen, and we need to wait and see.
Just as a follow-up on that, Richard, like, fair to say that, you know, we're gonna see lower freight rates starting to flow through the P&L and let's call it less markdown pressure because the inventories are cleaned up a bit more than the last few quarters?
That should help you a little bit, sure. As you might expect, and one of the reasons we took this charge is we don't wanna have to have the buyers worry about inputting higher costs into their... If rates have come down and we contracted, we wanna take some of that out. That's still being worked through. That's not, you know, we have to continue to do that. Beyond that, as rates come down, you'll see our prices on items come down too.
Got it. All right. Thanks a lot. Good evening.
Okay. Why don't we take two more questions?
Certainly, Richard. Thank you. We'll go next now to Karen Short at Credit Suisse.
Hi. Thanks for taking my question. It's hard to begin, and hope you all have happy holidays coming forward, going forward. I did wanna clarify on two things. In the past when you have had slightly weakening traffic trends, that has generally been a point to consider to actually push through a higher membership rate increase. I'm wondering, I know this is a very unusual time, but has that philosophy changed at all? Because obviously your comps are changing or, and, or slowing. And then I would ask the same thing as it relates to the special dividend.
We all know what your cash is and available cash is on the balance sheet in terms of timing with respect to announcing something like that along the lines of the fact that I think your board meeting is mid-January.
We have one every quarter. Look, when we talk about both of those, in terms of the fee increase, I think over the last many years, we've probably done them at a time when things were particularly strong comp-wise. The good news is during all times, renewal rates were strong and have gotten even stronger. We always could look ourselves in the mirror and feel that the value proposition has gotten better. That being said, we have done them. I remember one time we were asked, it may have been back in 2009, 2010 during the Great Recession, because I guess we did one probably in 2011 or 2012, which continued the Great Recession. We'd be asked, given the Great Recession, would you hold off on it?
Our view was And comps were a little weaker back then, too, for at least a couple of quarters. I think the comment I made was something to the effect, we'd probably do it anyway, but because we're going to use it to drive greater value in our, you know, in terms of pricing and everything in a big way. That really I think we've probably done it in times of lower comps or higher comps or good economy or tougher economy. I think with the headline in what I probably mentioned in the last quarter call or even the quarter before that, with the headline being recession, question mark, and inflation, exclamation point, there's no rush.
First of all, even if we follow the pattern of the last three over the last 16 or so years, they average five years and seven months. I know now that five years and seven months from June of 2017 is January of 2023. I know on the last call I said, "That doesn't mean it's gonna be January of 2023." It's a question of when, not if. At this juncture, we'll just have to wait and see. I'm not trying to be cute about it, but there's not a whole lot more I can tell you. There's no analytical framework we use other than we feel very good about our member loyalty and our strength. If we wanted to do it yesterday, we could. If we wanna do it six months from now, we can. We'll wait and see.
As it relates to the special dividend, as you know, we've said before, it's certainly an arrow in our quiver that has bode well for us, we believe. We think that it's done well. We've done four of them. The last one was a couple years ago. We certainly do have cash. Mind you, when you look at our cash, about half of it's U.S., and not cash equivalents. Certainly we have the ability to do it at some point. I think we wanted to wait and see how things are continuing here. I think that, too, is probably a question of when, not if. Again, you'll be the second to know after us.
Okay. Thank you very much. Have a good holiday.
Same to you.
Thank you. We'll take our final question this evening from Robert Ohmes of Bank of America.
It'll be a real quick one, Richard. Hey, can you just remind us, you know, you're back to 15 net stores in the U.S., but what has to happen to go back to kind of the years where you would open kind of a net 25 a year in the U.S. and maybe relieve some of the pressure on the overproductive clubs in the U.S. right now?
Yeah, I think it's been a few years. I mean, when we opened the net of 27 or eight, maybe low 20s or 22 or 23 were there. We've been at maybe 16 or 17 out of 23-ish in the last few years. You know, if you ask Greg, who's not in the room, but if you asked him, you know, if we're opening a net of 24 this year, I think I said, what's the goal five and 10 years from now? Probably to get it closer to 30 net, and probably by five years from now, it's 50/50 U.S. elsewhere versus elsewhere. That's the same answer I, by the way, said five years ago in terms of the split. We'd like to see, add five to that 24 in the next few years to go up a little bit higher.
Terrific. Thank you.
We certainly have a lot of activity. We have a lot of activity going on.
Excellent. Thank you, sir.
Okay. With that, everyone, I'll thank you. Have a good holiday. We're around to answer questions.
Thank you, Richard. Ladies and gentlemen, that will conclude Costco's Fiscal Q1 2023 conference call. Thank you all so much for joining us. I wish you all a great evening. Goodbye.
Thank you.