U.S. Markets closed

Edited Transcript of COST earnings conference call or presentation 30-May-19 9:00pm GMT

Q3 2019 Costco Wholesale Corp Earnings Call

ISSAQUAH Jun 9, 2019 (Thomson StreetEvents) -- Edited Transcript of Costco Wholesale Corp earnings conference call or presentation Thursday, May 30, 2019 at 9:00:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Richard A. Galanti

Costco Wholesale Corporation - Executive VP, CFO & Director

================================================================================

Conference Call Participants

================================================================================

* Charles P. Grom

Gordon Haskett Research Advisors - MD & Senior Analyst of Retail

* Christopher Mandeville

Jefferies LLC, Research Division - Equity Analyst

* Edward Joseph Kelly

Wells Fargo Securities, LLC, Research Division - Senior Analyst

* Erica A Eiler

Oppenheimer & Co. Inc., Research Division - Equity Research Associate

* Gregory Scott Melich

Evercore ISI Institutional Equities, Research Division - Senior MD

* John Edward Heinbockel

Guggenheim Securities, LLC, Research Division - Analyst

* Joshua Kamboj

Morgan Stanley, Research Division - Research Associate

* Karen Fiona Short

Barclays Bank PLC, Research Division - Research Analyst

* Michael Lasser

UBS Investment Bank, Research Division - MD and Equity Research Analyst of Consumer Hardlines

* Scot Ciccarelli

RBC Capital Markets, LLC, Research Division - Analyst

* Scott Andrew Mushkin

Wolfe Research, LLC - MD and Senior Retail & Staples Analyst

* Stephen James McManus

Nomura Securities Co. Ltd., Research Division - Research Analyst

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Good afternoon. Ladies and gentlemen, my name is Jerome, and I will be your conference operator today. At this time, I would like to welcome everyone to the Costco Third Quarter Earnings Conference Call. (Operator Instructions) Thank you.

Now it's my pleasure to hand the call over to Mr. Richard Galanti, Chief Financial Officer. The floor is yours.

--------------------------------------------------------------------------------

Richard A. Galanti, Costco Wholesale Corporation - Executive VP, CFO & Director [2]

--------------------------------------------------------------------------------

Thank you, Jerome, and good afternoon to everyone. I will start by stating that these discussions will include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements involve risks and uncertainties that may cause actual events, results and/or performance to differ materially from those indicated by such statements. The risks and uncertainties include, but are not limited to, those outlined in today's call as well as other risks identified from time to time in the company's public statements and reports filed with the SEC. Forward-looking statements speak only as of the date they are made, and the company does not undertake to update these statements except as required by law.

In today's press release, we reported operating results from the third quarter of fiscal 2019 to 12 weeks ended May 12. Our reported net income for the quarter came in at $906 million or $2.05 per share. This compared to $750 million or $1.70 per share last year. As mentioned in the release, this year's third quarter benefited from a nonrecurring tax item of $73 million or $0.16 per share. Excluding this item, earnings for the fiscal third quarter were up 11% year-over-year.

Net sales for the quarter came in at $33.96 billion, a 7.4% increase over the $31.62 billion sales the year -- last year in the quarter. Comparable sales for the third quarter were as follows:

For the 12 weeks on a reported basis, U.S. was 7.0%. Excluding gas inflation, FX and rev rec, was 7 -- it would have been a 5.5%.

Canada reported at a 1.3%; ex those items, a 5.1% positive.

Other International reported 1.7%; ex those items, 6.9% to the positive.

So total company, we reported a 5.5% comp sales figure for the 12 weeks. Excluding those 3 items almost negated each other, coming in at 5.6% excluding those items.

E-commerce was 22% for the quarter on a reported basis and 19.5% ex those items.

In terms of Q3 comp sales, our third quarter traffic or shopping frequency increased by 3.7% worldwide and up 3.4% in the U.S. In terms of the impact of the items of gas, FX and rev rec, weakening foreign currencies relative to the U.S. dollar negatively impacted sales by about 130 basis points. Gasoline price inflation impacted sales by a small amount, plus 10 basis points; and rev rec benefited comp sales by about 110 basis points. So the net of the 3, about a minus 10 basis points.

Our average front-end transaction or ticket was up 1.8% during the third quarter. And excluding the impacts from gas, FX and rev rec, our average ticket was up approximately 1.9%.

Next on the income statement, membership fee income. We reported membership income in the third quarter of $776 million or 2.29% of sales. This is up $39 million or 5.3% from last year's $737 million. FX had a negative impact on that number that impacted that $39 million increase. It would have been about just under $10 million higher than that ex FX. Our reported membership fee revenue again was up to $39 million or 5.3%. In addition to FX impact and net to the negative, it does have the benefit of the fee increases we took almost 2 years ago, really the last fiscal quarter of that, those increases that we took in June of '17 in the U.S. and Canada.

We now have effectively completed that 23-month cycle it takes to recognize the incremental benefit from the fee increases. The benefit to our P&L in Q4 will be very small, less than $1 million.

In terms of renewal rates, at Q3 end, our membership rates -- renewal rates remained strong. In the U.S. and Canada, membership renewal rates came in at 90.7%, the same as it was a quarter ago. And worldwide, the rate was 88.3%, that figure also the same as of Q2 end.

In terms of number of members, at Q3 end, the number of member households we had was 53.1 million at Q3 end. That's up from 52.7 million 12 weeks earlier. In terms of total cardholders, we came in at 97.2 million, up from 96.3 million 12 weeks earlier at Q2 end.

During the quarter, we opened 3 new warehouses, 1 each in the United States, Korea and Australia.

At Q3 end, in terms of paid Executive Members, they stood at 20.4 million, which was an increase of 406,000 during the quarter or 34,000 per week. Korea was actually very small piece of that increase, so we've had a good continued increases in Executive Member penetration in other countries as well, most notably U.S. and Canada.

Going down the gross margin line. Our reported gross margin in the third quarter was lower year-over-year by 6 basis points coming in at 10.99% versus last year's 11.05%. Now excluding the items that I've excluded before, FX, rev rec and the like, the 6 basis point lower number would be actually plus 5 basis points excluding gas inflation and rev rec.

If I ask you to jot down a couple of numbers here, 2 columns, both reported and an ex gas inflation and revenue recognition for the third quarter of 2019 as compared to a year earlier. The first line item here would be core merchandise. On a reported basis year-over-year in the quarter, it was reported 1 basis point lower. Ex gas and rev rec, it was 9 basis points positive; ancillary businesses, minus 3 and minus 1 basis point; 2% Reward, minus 2 and minus 3. And summing all those up, you'd have the reported number, 6 basis points lower, and ex gas and rev rec, 5 basis points higher.

One thing you'll all note compared to last -- the second quarter, in the second quarter, we had a big increase in ancillary business margin as we pointed out last quarter's earnings release.

The core merchandise component here, again, lower by 1 basis point. If you look at the core merchandise categories in relation to their own sales core-on-core, if you will, margins year-over-year were higher in Q3 year-over-year by 21 basis points. The subcategories within the quarter, all 4 named subcategories, food and sundries, hardlines, softlines and fresh foods, were all up year-over-year in the third quarter on their own sales. And that's a trend that we've seen last quarter. It was up less than that amount in Q1, down a little bit year-over-year.

Ancillary and other businesses gross margin, again, lower by 1 basis point on the ex gas and rev rec. Nothing really to speak of, in terms of things there.

Moving to SG&A. Our SG&A percentage Q3-over-Q3 was lower or better by 6 basis points, coming in at 9.92% of sales this year. This compared to 9.98% reported last year. Ex gas inflation and rev rec, it was higher or slightly worse by 5 basis points. Again, to jot down a few numbers here in 2 columns, reported and the second column, without gas, inflation and rev rec -- gas inflation and rev rec, our core operations on a reported basis was better by 7 basis points, so plus 7; ex rev rec, minus 2; central, minus 1 and minus 2 basis points; stock compensation, 0 and minus 1. Summing up those 2 columns again on a reported basis, SG&A was lower or better by plus 6 basis points and ex those other items, worse by 5 basis points.

Now the key thing here is within the 7 basis points of improvement or -- rather, the minus 2 basis points ex gas and rev rec, that's notwithstanding the fact that we're still facing pretty big headwinds from the U.S. wage increases to our hourly employees that went into effect in June of 2018, as well as additional wage increases implemented in March of 2019. Both of these wage increases negatively impacted SG&A during the quarter, representing about 10 to 12 basis points of the year-over-year variance. In Q4, the estimated impact will be about minus 5 to 6 basis points, which is the residual impact from June of '18 plus the March 2019 increases. And then we'll tick down to 3 to 4 basis points, and that's what we estimate in Q1 of 2020.

Central, nothing to speak of there. It was higher by 2 basis points on an ex gas and rev rec basis.

Stock compensation, flat year-over-year and then again, minus 1.

Next on the income statement is preopening expense. Preopening expense came in at $14 million this year in Q3, up $6 million from a year ago. We had 1 additional opening, 3 openings this year versus 2 last year. There was also about $2 million of preopening expense in the number related to the chicken plant that we plan to start beginning of production in later this summer.

Additionally, some of this quarter's expense relates to our higher number of openings we have in Q4. In Qs 1 through 3 and the first 36 weeks of this year, we will open a total of 10 new locations. In Q4, we have 11 planned. So there were some remnants of beginning of some of the preopening there. All told, reported operating income in Q3 was up 5%, coming in at $1.122 billion this year compared to $1.067 billion last year.

Below the operating income line, reported interest expense was $2 million lower or better year-over-year, coming in at $35 million versus $37 million. That's just a slight difference in capitalized interest amounts. Interest income and other for the quarter was lower by $5 million year-over-year. Interest income itself was actually higher by $11 million year-over-year. However, various FX items in the amount of a minus $16 million negatively impacted the year-over-year comparison. Overall, pretax income in Q3 was also up 5%, coming in at $1.123 billion versus $1.071 billion last year.

In terms of income taxes, our reported tax rate in Q3 of fiscal '19 was 18.5% compared to 28.8% in Q3 last year. As was mentioned in today's release, this quarter's earnings and our tax rate benefited from a nonrecurring $73 million item. Excluding the $73 million item, our third quarter tax rate would have been 24.9%. And we estimate that our effective total company tax rate for fiscal -- for Q4 of fiscal '19 to be more in the 26.5% to 27% range.

A few other items of note. In terms of expansion, as I mentioned, we've opened through the third quarter to date a total of -- actually opened 12 units -- I'm sorry, opened 13 units, but that includes 3 relocations, so net of 10. In Q4, we'll open 13 locations, which includes 2 relos, so net of 11, which should put us, in terms of net new openings for the fiscal year at, 21, the same number that we had in fiscal '18. About 3/4 of the openings this year are in the U.S. and about 1/4 internationally. This also includes our anticipation of opening our first Costco in China, in Shanghai, tentatively scheduled to open on August 27, right before the fiscal year ends.

As of Q3 end, total warehouse square footage stood at 112 million square feet. In terms of CapEx, while our new warehouse openings remains in the low 20s, the CapEx then is in line with prior years. Excuse me, is in line with prior years. We've got a lot more money being spent on fulfillment, both e-commerce and grocery expansion and automation; the chicken plant, which is what we mentioned and as well as ongoing expansion in depot and infrastructure, as well as IT modernization.

In terms of stock buybacks in Q3, during the third quarter, we expended $44 million repurchasing 192,000 shares at an average price of $226.57. To date, we've expended $195 million or 903,000 shares at about a $216 per share price. As a reminder, at the last Board meeting, the board approved the reauthorization of a stock repurchase program, authorized a new $4 billion program that will remain in effect through April 2023.

In terms of e-commerce, overall, our e-commerce sales increased as we mentioned on a comp basis, 19.5%; reported, 22%; 19.5%, ex FX and gas. I might point out, by the way, that these numbers do not include the increases that we're seeing with Instacart. Instacart comes into our warehouses and purchases, and that goes into warehouse sales.

The top growth categories in the quarter were electronics, health and beauty aids, furniture, small appliances, automotive, and optical. New brands and items online during the quarter included high-end televisions from Sony and Samsung, as well as the latest generation Apple products or AirPods to iMacs and the like. Other things would include things like bareMinerals beauty cosmetics. Sales highlights for the quarter included some significant diamond ring purchases, 1 in the $400,000 range and big-ticket items like golf simulators that sold for $14,000 each, which we've sold during a 5-day period.

We also continue to improve our online and in-line cross-marketing initiatives, a lot of push notifications for start and end of warehouse promotions, e-mails featuring hot items and suggestions for Mother's Day and other holidays like Cinco de Mayo. During the quarter, we also completed the rollout of 6 regional grocery distribution centers located within our existing depots. You'll recall that previously, we had fulfilled, since late 2017 when we began the 2-day grocery, we did that through our business centers. As it expands, we pushed it into our depot operations, and we'll also have, in those cases, regional assortments.

An update on -- in terms of our buy online and pick up in store. In the quarter, we began rolling out additional pick-up lockers. Over the last several months, we've had 10 locations, but we're in the process of rolling that out to an additional 100 locations over the next 4 or 5 months, before the September through December holiday season.

Continued growth in Costco app use among our members, we continue to experience that with new features recently added like pharmacy orders and pick-up notifications, easier shopper -- easier shopping ability on member savings events, photo center and various push notifications. And expect several additional new features are planned for July and the upcoming months thereafter.

We continue to focus on getting merchandise to customers faster. Some of that has to do with where we locate the merchandise in these depot and other ancillary operations. As discussed last quarter, we will begin e-commerce operations in Japan later this summer and Australia, late summer, early fall.

Next thing I want to touch on for a minute is the whole question of tariffs. I'm sure we'll be getting some questions on that, so a few comments. As we indicated a couple of quarters ago in our earnings release, there continue to be a lot of moving parts, although some of the moving parts are getting bigger and -- but it is still pretty fluid. The actions that we took then and we continue to take, where we're able to, not in a big way, we're accelerating shipments before certain tariffs were put into effect or would be increased in the percentage of the tariff, although there's limited ability to do that. We've worked with suppliers. We've gone to potentially to every supplier on every item, as you might expect, to see what we can do to both reduce cost and figure out how to do that. In some cases, we've reduced order commitments on certain items. We've looked at alternative country sourcing where possible and feasible, although again, there's a limited amount of the ability to do that. And we've taken advantage of lower pricing on certain U.S. items that have been impacted the other way.

In summary, we'll continue to see our customers and competitors react to this. What's interesting is if you -- as you know, this List 3, which is the biggest of the 3 lists of potential tariff items, those were listed back in September of '18 at 10% tariffs. And were going to go to 25% at December -- as of December 31, 2018. That date has continued to move, although it's now moved and it's, in fact, at 25% for items that I believe are exported after May 10. So we're just starting to see some of those impacts.

As you might expect, it's all over the board in terms of every item and every vendor is different. In some cases, it's being passed on. In some cases, we're able to work to figure out how to move merchandise. And then the impact of when the price increase does go through, it has a different impact of how it affects sales. We think that we're in a good position in terms of our size and our ability and our relationships with our vendors, and we'll keep you posted on how it goes. This last piece, again, includes -- it's the biggest list of the 3 lists and includes things like furniture, luggage, bikes, vacuums, grills and more items like that.

That's pretty much it on our side. And lastly, in terms of upcoming releases, we will announce our May sales results for the 4 weeks ending this Sunday, June 2, next Wednesday, June 5, after the market close -- closes.

And with that, I will open it up for Q&A and turn it back to Jerome. Thank you.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) Now our first question comes from the line of Michael Lasser from UBS.

--------------------------------------------------------------------------------

Michael Lasser, UBS Investment Bank, Research Division - MD and Equity Research Analyst of Consumer Hardlines [2]

--------------------------------------------------------------------------------

Richard, how are you going to comp the $400,000 diamond ring? It's going to be tough next year.

--------------------------------------------------------------------------------

Richard A. Galanti, Costco Wholesale Corporation - Executive VP, CFO & Director [3]

--------------------------------------------------------------------------------

Well, do you have an anniversary coming up?

--------------------------------------------------------------------------------

Michael Lasser, UBS Investment Bank, Research Division - MD and Equity Research Analyst of Consumer Hardlines [4]

--------------------------------------------------------------------------------

Even if I did, I can't afford it. My question relates to the comp. The traffic's been moderating a bit. Should we think about this as just more reversion to the mean? Or do you think that there's something else going on?

--------------------------------------------------------------------------------

Richard A. Galanti, Costco Wholesale Corporation - Executive VP, CFO & Director [5]

--------------------------------------------------------------------------------

Well, look, every time, it reminds me of a few years ago when we saw slight moderation in traffic, and it was, oh my God, it's -- this has been the normal. And our answer then was we don't know what to do -- we don't know if it is or it isn't. What we know is we've got a lot of exciting things going on in buying. We certainly -- the different buckets of money we've talked about over the last few years, whether it's the fee income for membership fee increases, the credit card switch, the tax reform, all those things don't go away. They, in fact, grow each year a little bit. And so I think that we feel that we're in a good position to keep driving it. As it relates to where it goes from here, we'll have to see. We think, relatively speaking, our value proposition is as strong, if not, stronger than it's ever been out there, and we'll have to see where it goes.

Now what are some of the headwinds? Recent headwinds included the weather and other things that started back in February. Certainly, the -- this new word with a capital T called tariff, there's questions out there that we read about every day and we will see. Again, we feel whatever the impact is, we feel that in the earlier tariffs last year, recognizing many of them were in the 10% range, not the 25% range, we actually thought we'd pick up a little market share in some cases. We don't know what will happen tomorrow, but we feel we're in a good position from a buying power standpoint and certainly have the ability to drive sales the way we know how to do it with good value.

--------------------------------------------------------------------------------

Michael Lasser, UBS Investment Bank, Research Division - MD and Equity Research Analyst of Consumer Hardlines [6]

--------------------------------------------------------------------------------

My follow-up question is your core-on-core gross margin expanded rate, that accelerated quite a bit from the last couple of quarters. Is that because of what you are doing proactively? Or is it just that the market becoming a little less competitive and as a result, you're able to earn a little bit more on your sales?

--------------------------------------------------------------------------------

Richard A. Galanti, Costco Wholesale Corporation - Executive VP, CFO & Director [7]

--------------------------------------------------------------------------------

I think it is. It's a little of everything, and I think some of it's internal controls. We still manage the basics, managing spoilage and D&D and negotiating with vendors. It's a lot easier to do that. Our buying power or our strength per item is enormous, given our $150 million is over 4,000 given items at a given time. Certainly, I get back to some of those other buckets we've had available. We're able to use those, and we're able -- we've also been able to show that we drive even greater value. We -- the vendor sees a big increase in pick-up in the unit sales, and I think that's worked to our benefit.

--------------------------------------------------------------------------------

Operator [8]

--------------------------------------------------------------------------------

Your next question comes from the line of Edward Kelly from Wells Fargo.

--------------------------------------------------------------------------------

Edward Joseph Kelly, Wells Fargo Securities, LLC, Research Division - Senior Analyst [9]

--------------------------------------------------------------------------------

I wanted to ask about margins, just the performance on the core margin and then the core-on-core, which obviously was even better. Any additional color on the puts and takes there and then, how we should maybe be thinking about that for the remainder of the year, particularly as tariffs start to accelerate?

--------------------------------------------------------------------------------

Richard A. Galanti, Costco Wholesale Corporation - Executive VP, CFO & Director [10]

--------------------------------------------------------------------------------

Well, I mean, look, when -- we've always been asked when prices are going up. But when costs are going up, we want to be the last to raise them. And when prices are going down, we want to be the first to lower them. We're not afraid to use some of those monies to, again, drive business. I think a lot of things worked in our favor this quarter. Just when you get comfortable with us, we'll do something else, right? But there's -- again, we don't really give -- provide direction or guidance on where to go in the future. We feel pretty good right now about our competitive position, relative to both in line and online and the value proposition that we bring.

In fact, some of the weakness, whether it's tariff-related or whatever it's related, in some cases, we feel that it gives us a leg up as it relates to we can go in there and buy large quantities of something and at great value. And these are all anecdotal comments though. Overall, we feel again good about our competitive position and the things that we have in the pipeline as it relates to having good -- great merchandise and great prices.

--------------------------------------------------------------------------------

Edward Joseph Kelly, Wells Fargo Securities, LLC, Research Division - Senior Analyst [11]

--------------------------------------------------------------------------------

And just maybe a follow-up on the tariff side. As we think about List 3 and we think about 25%, your philosophy, I guess, generally, I mean you've always been a bit more of a customer-first organization. Is there margin risk associated with that? And then as we think about any potential for List 4, how strategically would you think about that?

--------------------------------------------------------------------------------

Richard A. Galanti, Costco Wholesale Corporation - Executive VP, CFO & Director [12]

--------------------------------------------------------------------------------

Well, there's always risk. At some point, you can't -- needless to say, no one [is able to eat up] all these tariffs. We work with vendors. Yes, there's been some switching, a small amount of switching to other countries of origin where we can, although we're not the only one in town trying to do that. At the end of the day, prices will go up on things.

What's interesting is, is it's hard to predict what the impact is. We've seen strengthened patio furniture even with certain tariff price increases, although part of that is because there was a little bit of slowdown in patio furniture because of the bad weather in January and February and we get into seasons early. So again, it's hard to analyze each one. I think what we're most cognizant of is a key price point. If you're something at $9.99, you hate to go to a new calculation that was at $10.49. But if it's 25% on $9.99, needless to say, you're not worried about $10.49. You've got to figure out where it is above that. And again, I think we've done everything we can, and we'll see where it goes from here. And then the real unknown is how long it's going to last.

And to the extent it gets into List 4, that's a whole new ballgame as well. That's the rest of everything, if you will, including electronics and apparel and the phones and televisions. And so -- and the more discretionary an item is -- we were, again, I think a little comparably surprised on the patio side, although we also have to recognize there was some buildup because the weather -- it took a little while for the weather to turn. And -- but if you start getting 25% tariffs on that List 4 -- but List 4 is not here yet. And we're hopeful that the ebbs and flows of the relations between our countries improves in that regard.

--------------------------------------------------------------------------------

Operator [13]

--------------------------------------------------------------------------------

Your next question comes from the line of Simeon Gutman from Morgan Stanley.

--------------------------------------------------------------------------------

Joshua Kamboj, Morgan Stanley, Research Division - Research Associate [14]

--------------------------------------------------------------------------------

This is Josh Kamboj on for Simeon. The expense levers that you saw in the quarter was encouraging especially against the wage headwinds that you're facing. Can you maybe go into a little bit more detail about what's driving those specifically? And then ignoring the benefit from lapping the wage increase next year, can you continue to drive expense leverage in the same areas for the foreseeable future to offset tariffs?

--------------------------------------------------------------------------------

Richard A. Galanti, Costco Wholesale Corporation - Executive VP, CFO & Director [15]

--------------------------------------------------------------------------------

Look, the biggest -- depending on the level of tariffs. If it's a lot, no. But as we've always said, we're -- the biggest thing is driving sales, if we can drive sales. We're not very good at leveraging expenses if sales are weakening relative to others perhaps. Those are things we're not going to do. We're not going to postpone a wage increase and things like that. And we work on expenses every day and every week and every month at our budget meetings literally, and I think we -- again, there'll be a little reduced headwind in each of the next few quarters with the big increase as we saw on hourly wages both in June of '17 and now in March -- sorry, in June of '18 and now in March of '19 as those -- that 10 to 12 negative goes to 6 or 7 goes to 4 or 5 or whatever I said earlier.

Beyond that, there's also -- I mean there's basis points here and there that go both ways. A lot of the things we're doing like in the new fulfillment centers, the automation, none of this stuff goes completely smoothly. And we don't point out each one of these things, but I'm sure there are some extra hits of 0.5 basis point here and 0.5 basis point there, and there's other things that improve. At the end of the day, sales is paramount.

The other thing is that as -- I think not over this next year but over the next several years, to the extent that we have a higher increase of openings outside the United States, that tends to help the overall percentages on things like healthcare. Healthcare is 30 to 70 basis points higher (sic) [lower] in every other country than the U.S., things like that. And so -- I'm sorry, lower, healthcare expense as a percent of sales is lower in every other country outside the United States. So there's -- we've been fortunate that our concept works in virtually every other country we've gone to. Takes -- sometimes, it takes a few years to get there when we first open in a country. But at the end of the day, that will help. And that's not going to help tomorrow. That's over the next 5 and 10 years.

--------------------------------------------------------------------------------

Joshua Kamboj, Morgan Stanley, Research Division - Research Associate [16]

--------------------------------------------------------------------------------

And just as a quick follow-up, following up with some of the other questions a little bit more directly. Do you think over the next few quarters your merch margin can continue to expand, that's the core-on-core one, as tariffs have a greater impact on your business?

--------------------------------------------------------------------------------

Richard A. Galanti, Costco Wholesale Corporation - Executive VP, CFO & Director [17]

--------------------------------------------------------------------------------

First of all, we don't guide. That's where I should say stop. But look, tariffs, to the extent that we want to be the last to raise prices, it doesn't mean we're going to wait and not do it at all. We've got to be pragmatic about it. But net-net those, that would be a drag, a little bit of a drag. Now hopefully, it's a drag for a plus 20, not a minus 5.

--------------------------------------------------------------------------------

Operator [18]

--------------------------------------------------------------------------------

Your next question comes from the line of Scot Ciccarelli from RBC Markets.

--------------------------------------------------------------------------------

Scot Ciccarelli, RBC Capital Markets, LLC, Research Division - Analyst [19]

--------------------------------------------------------------------------------

Scot Ciccarelli. I was curious if you guys have considered providing a click-and-collect kind of process for your grocery offering, given the success that Walmart's had with their grocery pickup.

--------------------------------------------------------------------------------

Richard A. Galanti, Costco Wholesale Corporation - Executive VP, CFO & Director [20]

--------------------------------------------------------------------------------

Not at this juncture. I mean the click and collect that we're doing is simply -- or is more for small sized, big-ticket items like electronics and jewelry and handbags. We continue to look at it. We continue to scratch our head about it. We recognize that they and some others are putting in a lot of financial commitment to doing this. I think what you're going to find is like everything else in life at Costco, over time, we figure out how to do it our way that makes sense for us that still works. One of the reasons that, whether it's Instacart or a smaller-scale Shipt, in the Southeast, which is the -- which is growing its geographic footprint as well as Google, all those things are ways to do that without us having to get into that business in a big way. And that's on 2 day. And recognizing, if somebody wants something in an hour, they're probably not going to get it from us. But what we see is, is we're -- the other thing is we still want to drive you into the warehouse and so far, what we see in small bite sizes here in some of the things we've done. The net of having that 1-day grocery with third parties or 2-day drag grocery through us, it has been slightly additive. So it's not cannibalizing -- well, it cannibalizes the number of visits to a warehouse a little but some of it still is an increase in sales. These are small data points in -- over a short period of time, so we have to see. But we'll figure out how to keep doing it our way and hopefully, that'll work.

--------------------------------------------------------------------------------

Scot Ciccarelli, RBC Capital Markets, LLC, Research Division - Analyst [21]

--------------------------------------------------------------------------------

Got it. So certainly nothing in the near future. Okay.

--------------------------------------------------------------------------------

Operator [22]

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Charles P. Grom, Gordon Haskett Research Advisors - MD & Senior Analyst of Retail [23]

--------------------------------------------------------------------------------

Richard, just in light of like the trade war rhetoric and market volatility and some of the [soft] concerns, I'm just wondering if you've seen any change in the consumer behavior, particularly in some of your more important markets such as California. PBH was out saying some things last night. Curious if you're seeing anything on your consumer.

--------------------------------------------------------------------------------

Richard A. Galanti, Costco Wholesale Corporation - Executive VP, CFO & Director [24]

--------------------------------------------------------------------------------

No, we really haven't.

--------------------------------------------------------------------------------

Charles P. Grom, Gordon Haskett Research Advisors - MD & Senior Analyst of Retail [25]

--------------------------------------------------------------------------------

No? Okay. Great. And then just thinking on and just to follow up on Ed's question about operating margins, they're much stronger than a decade ago, and frankly, not many in retail can say that. Just curious, when you look ahead and you think bigger picture about some of the puts and takes, what do you think about operating margin dollar growth in the future?

--------------------------------------------------------------------------------

Richard A. Galanti, Costco Wholesale Corporation - Executive VP, CFO & Director [26]

--------------------------------------------------------------------------------

Well, I guess, more, more. The slide that has been shown at our international managers' meeting every year for that 3- or 4-day event, from the beginning of time and through Craig Jelinek's tenure over the last 8 years, we're a top line company. And as long as we can keep driving sales, all those other things fall into place. The fact that we have been successful longer than I thought and are continuing to get more people to convert to Executive Membership, the benefit that we have with a great value on our credit card, all those things drive loyalty and will drive sales, and everything else will take care of itself. And we feel pretty comfortable right now with the -- recognizing value is not just price but value -- the price is still the biggest piece of value on what we do.

--------------------------------------------------------------------------------

Operator [27]

--------------------------------------------------------------------------------

Your next question comes from the line of Christopher Mandeville from Jefferies.

--------------------------------------------------------------------------------

Christopher Mandeville, Jefferies LLC, Research Division - Equity Analyst [28]

--------------------------------------------------------------------------------

Can I just ask in terms of competition on the consumable side? Are you seeing anything notable in terms of change on pricing, whether it be greater aggression or maybe a greater willingness to pass on overall cost inflation? And I guess I'm definitely curious about categories like eggs and pork where we've seen some significant deviations on pricing.

--------------------------------------------------------------------------------

Richard A. Galanti, Costco Wholesale Corporation - Executive VP, CFO & Director [29]

--------------------------------------------------------------------------------

Over -- yes, I mean pork has been all over the board as I understand. But overall, the answer to your overall question is not really. If anything, I mean using gasoline as an extreme example, I think the fact that our -- most gasoline retailers have been willing to make more on gas and it has enabled us to have a bigger value gap and make a little more. And so that suited us well. Again, I think we're fortunate that many of the price wars that are out there, the traditional retailers in any given category are impacted a lot more than we are on those things. So that's -- I think we've been fortunate.

And on basics, what I'll call the supermarket ads of yesteryear, we've been watching those every week since the beginning of time and continue to do so. And where we've helped ourselves is in areas of private label and areas of organic and specialty items. I mean you go into even something as basic as the cheeses. We're not just selling the basic cheeses anymore. We're selling premium cheeses. And I think in everything we do in packaged food items, we stepped up the quality and whether it's organic or antibiotic free or you name it. And those things, we're able to show great savings and still maintain decent margin.

--------------------------------------------------------------------------------

Christopher Mandeville, Jefferies LLC, Research Division - Equity Analyst [30]

--------------------------------------------------------------------------------

Okay. And because you brought up fuel, I guess I'm curious that the comments on being able to capture maybe a little bit more margin all while expanding your gap relative to competition, is that broad-based across the country? Or is it more so confined to areas like state of California? And then could you just speak to comp growth on gallons in the quarter?

--------------------------------------------------------------------------------

Richard A. Galanti, Costco Wholesale Corporation - Executive VP, CFO & Director [31]

--------------------------------------------------------------------------------

As I understand it, the only geographic region in the U.S. where that's not the case is parts of the Midwest, and it ebbs and flows there. Everywhere else, it's been pretty healthy for us and where -- I think the gaps -- the value gaps, when you look at some of these third-party websites that collect from millions of people across the country pricing, we continue to be shown as the best value out there.

--------------------------------------------------------------------------------

Christopher Mandeville, Jefferies LLC, Research Division - Equity Analyst [32]

--------------------------------------------------------------------------------

And anything on the comps for gallon growth?

--------------------------------------------------------------------------------

Richard A. Galanti, Costco Wholesale Corporation - Executive VP, CFO & Director [33]

--------------------------------------------------------------------------------

They continue to be in the -- I believe they're still in the high single digits in gallons. Yes, they continue in this quarter to be in the high single digits, whereas I think U.S. gallon consumption is in the low single digits. We're driving people into the parking lot.

--------------------------------------------------------------------------------

Operator [34]

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Karen Fiona Short, Barclays Bank PLC, Research Division - Research Analyst [35]

--------------------------------------------------------------------------------

I'm wondering -- our core growth margin, is there -- was there any benefit to core-on-core maybe from timing in terms of accelerating delivery of items that may be passing on some price increases because -- I mean it sounds like it could be a little more structural in nature, although I know you don't really want to commit to that. And then I had another question.

--------------------------------------------------------------------------------

Richard A. Galanti, Costco Wholesale Corporation - Executive VP, CFO & Director [36]

--------------------------------------------------------------------------------

Not really because in our mobility, we kept the cost down. Even as costs went up and we had it sooner, we held it off. We held off raising price until we were into a higher cost unit or product.

--------------------------------------------------------------------------------

Karen Fiona Short, Barclays Bank PLC, Research Division - Research Analyst [37]

--------------------------------------------------------------------------------

Okay. And then I guess then that would lead us to think that there may be something more structural in terms of what we just saw on core-on-core. Or are you reluctant to go down that path?

--------------------------------------------------------------------------------

Richard A. Galanti, Costco Wholesale Corporation - Executive VP, CFO & Director [38]

--------------------------------------------------------------------------------

Look. Again, I guess I choose to use the word that we try to be pragmatic about it. We didn't look back 2 quarters ago and say core-on-core was down 5 or 6 basis points year-over-year and then last quarter, it was up 7 or 8 or whatever we reported. Now it's up 20. We didn't strategically plan to do it like that. It's our buying power. I think in some of these weak times in certain categories, apparel is an example. We can go in and buy huge quantities of something where a manufacturer's volumes have been cut by other merchants and really drive great value and keep a little of it and give even a greater value to the customer. The private label is a little bit. Product mix is a little bit. Certainly, private label is a little of it.

--------------------------------------------------------------------------------

Karen Fiona Short, Barclays Bank PLC, Research Division - Research Analyst [39]

--------------------------------------------------------------------------------

Okay. And then if we get -- if List 4 does get implemented, what percent is actually imported from China in totality? Or what would be the increase on what's imported directly from China? Or do you just have no way of calculating that really?

--------------------------------------------------------------------------------

Richard A. Galanti, Costco Wholesale Corporation - Executive VP, CFO & Director [40]

--------------------------------------------------------------------------------

There's really not an easy way to calculate it. First of all, List 4 is somewhat titled everything else, but who knows what everything else is once it goes through that few month process of exceptions and people appealing the process. And look, it's more significant in the sense it's in categories that are arguably discretionary in nature, apparel to some extent, electronics certainly and more people put that off. Again, getting back to patio furniture, we didn't see it, although we believe part of that is related to just the season starting a little later this year.

--------------------------------------------------------------------------------

Karen Fiona Short, Barclays Bank PLC, Research Division - Research Analyst [41]

--------------------------------------------------------------------------------

Okay. And just last question for me. I think you're testing self-checkout in stores maybe. Can you just give an update on how many stores that's in? And then any color on what you're seeing with respect to traffic in those stores where that's been rolled out?

--------------------------------------------------------------------------------

Richard A. Galanti, Costco Wholesale Corporation - Executive VP, CFO & Director [42]

--------------------------------------------------------------------------------

Of the 540-ish locations in the U.S., it's in about 125, and we're going to move to 250 in rapid order over the next several months. It works -- by the way, for us, it works best in high-volume locations where it's gotten a lot easier particularly if you have a credit card now where the -- where you can just contactless. And it's very fast, and customers are using it. Our members are using it. And so it's saving some labor at the front end, as important. On the highest volume units, it's getting people through the front end faster, which we recognize when you get -- if our average unit is in the 180-190 range, you've got a lot of units in the 250 to 350 range, that helps.

--------------------------------------------------------------------------------

Operator [43]

--------------------------------------------------------------------------------

Your next question comes from the line of Gregory Melich from Evercore ISI.

--------------------------------------------------------------------------------

Gregory Scott Melich, Evercore ISI Institutional Equities, Research Division - Senior MD [44]

--------------------------------------------------------------------------------

Richard, can you give us a little more on the e-commerce front? Specifically, is it still more profitable from a margin standpoint than retail globally? And how could that change as you now roll out into Japan and Australia? How should we think about that?

--------------------------------------------------------------------------------

Richard A. Galanti, Costco Wholesale Corporation - Executive VP, CFO & Director [45]

--------------------------------------------------------------------------------

Well, keep in mind, the U.S. dwarfs everybody else. Canada dwarfs everybody else to some extent, proportionate to the size of our company. Overall, it's more profitable recognizing we don't charge back every item. There's a charge that the warehouse gets for accepting merchandise and things like that. At the end of the day, it's -- we think it is slightly more profitable at a lower gross margin. And there's certain categories like, I mean the most notable one is white goods. Four years ago in the U.S., we did maybe 50 million in limited amount of white good sale, meaning refrigerators, washers and dryers and the like. Now we display a few items in-store in 3 -- go out 3 fiscal years, which was last year's fiscal '18, we did 5-0 something, $500-plus million, a little over $500 million, and that should be -- we should be able to double that to go over $700 million this year so -- and double that in a few years. So that's a category that, by necessity, nobody was going to go pick it up -- buy it and pick it up in the warehouse anymore. And this has enabled us to have -- so there's those kinds of things that have helped as well, where we would have lost some of that business, I think, over time in the warehouse anyway. Patio furniture -- or patio furniture during the 12 to 16 weeks in the January through April period predominantly and regular furniture during the kind of after Memorial Day and before back to school during the 10 or so weeks in the middle of summer, that's when we sold that stuff. Now we sell some of that stuff year-round online, most notably patio furniture that we sell year-round in decent amount in geographies where the sun actually shines more often.

--------------------------------------------------------------------------------

Gregory Scott Melich, Evercore ISI Institutional Equities, Research Division - Senior MD [46]

--------------------------------------------------------------------------------

Got it. And so is it fair to say that still that e-commerce business is very general merchandise heavy? And can you update us on what vendor direct is as a percentage of that business or just -- and just how big it is as a percent of sales?

--------------------------------------------------------------------------------

Richard A. Galanti, Costco Wholesale Corporation - Executive VP, CFO & Director [47]

--------------------------------------------------------------------------------

Well, vendor direct, yes. When we first started years ago, it was mostly all vendor direct because it was big ticket -- it was solely big-ticket items being shipped, drop shipped. That's a lot smaller percentage today than it's ever been. First of all, in addition, over the last few years, where we have gone as to -- we wanted to improve the site greatly itself, whether it's search, returns, you name it. We've added categories to create more velocity and more reasons for you -- some of you to think about going to costco.com, whether it's health and beauty aids or food and sundries and things like that. And so -- and I think you'll see that continue, one of the reasons that we're doing some of these automation fulfillment for small packages, if you will. And that's the natural progression of how we do things. And I was reading an article just this morning about a -- the writer was suggesting a small percentage of our members shop online at Costco. That is -- it is small relative to others, but it's increased each year and is increasing at greater level now, and we're getting better at it. But again, we still want to use the Internet to get you into the store as well, and we think we've done a pretty good job on both of those.

--------------------------------------------------------------------------------

Gregory Scott Melich, Evercore ISI Institutional Equities, Research Division - Senior MD [48]

--------------------------------------------------------------------------------

Great. And just a clarification on the tariffs. It sounds like if, just pick a number, let's say 15% of your COGS came from China, List 3 would be less than half of that and List 4, theoretically, would be bigger if it went on everything. Is that fair?

--------------------------------------------------------------------------------

Richard A. Galanti, Costco Wholesale Corporation - Executive VP, CFO & Director [49]

--------------------------------------------------------------------------------

List 4 would be -- yes, absolutely.

--------------------------------------------------------------------------------

Operator [50]

--------------------------------------------------------------------------------

Your next question comes from the line of John Heinbockel from Guggenheim Securities.

--------------------------------------------------------------------------------

John Edward Heinbockel, Guggenheim Securities, LLC, Research Division - Analyst [51]

--------------------------------------------------------------------------------

So Richard, let me start with -- the sequential improvement in core-on-core, I'll beat that horse again. Is that fairly broad-based, right, the 8 to the 21?

And then secondly, I don't think -- you guys don't spend a lot of time thinking about item-by-item elasticity, or do you, and have a real good sense where the -- where some of that can be given back productively?

--------------------------------------------------------------------------------

Richard A. Galanti, Costco Wholesale Corporation - Executive VP, CFO & Director [52]

--------------------------------------------------------------------------------

Right. It is broad-based, and we certainly do not think a lot about price elasticity. Other -- well, we think about price elasticity in one direction. If we lower the price, will we sell more? And if you think back, John, a couple -- 2 or 3 years ago when we kind of restructured the MVM, which had worked well, improved sequentially over 15 years -- -plus years and it was a little stale. And so we've changed it out, fewer items and at greater values each. And what we found is, is on some cases, it worked and on some cases, it didn't. But I don't think we ever think about what if we raised the price and sell 2% less units.

--------------------------------------------------------------------------------

John Edward Heinbockel, Guggenheim Securities, LLC, Research Division - Analyst [53]

--------------------------------------------------------------------------------

Yes. I'm thinking more on the -- if we cut the price, if we reinvest some of our core-on-core benefit, can we get more share? Or are we just pushing on a string?

--------------------------------------------------------------------------------

Richard A. Galanti, Costco Wholesale Corporation - Executive VP, CFO & Director [54]

--------------------------------------------------------------------------------

We do that. And I think we tried the most extreme example of saying can we drive more value out of more volume. And if we can't, we don't stubbornly push on a string in every case.

--------------------------------------------------------------------------------

John Edward Heinbockel, Guggenheim Securities, LLC, Research Division - Analyst [55]

--------------------------------------------------------------------------------

All right. And then secondly, where do you think we stand gross and net openings for next year, right? So I know you probably want it to get up, both of those, right, gross openings probably in the high 20s and maybe get a bit higher than it's been. And obviously, you'll open Shanghai. But what's going on with China? Does that give you any pause for additional openings beyond Shanghai? Or no, you're still looking for real estate?

--------------------------------------------------------------------------------

Richard A. Galanti, Costco Wholesale Corporation - Executive VP, CFO & Director [56]

--------------------------------------------------------------------------------

Well, at this juncture, we -- by giving -- we have 2 locations, 1 that we're opening this late summer and 1 that we would, all things go well, about a year -- almost 2 years from now. So let's say 1.5 years-plus after the first 1 opens. That's different than what we've done in other countries. I think in Australia, we opened 3 over the first 4 years. I think in Japan, we opened 5 -- we opened actually, we went fast, we opened 6 over 5 years. In Spain, we opened 2 over 4 years. So that's not inconsistent. We'll continue -- when they're there, Craig and the real estate guys and Jim Murphy, the Head of International, and the local country managers, they're looking at other sites.

But right now we want to get to -- look, China's a little unique in many ways, aside from any issues right now with tariffs. That's not hopefully a long-term issue. Each item has to be registered separately. We're fortunate in the sense that we have a successful operation in Taiwan, which we were able to bring some key people. But we want to hire from within and like we do in other countries, start with a very small core group of people from -- that are expats but really grow it internally. And if it's also -- what we've said is if a new country is very successful, we're perfectly happy to have a couple of units over the first 2 or 3 years and 4 or 5 total units 4 or 5 years after we opened our first, and we'll go from there.

--------------------------------------------------------------------------------

John Edward Heinbockel, Guggenheim Securities, LLC, Research Division - Analyst [57]

--------------------------------------------------------------------------------

And your thoughts on openings this coming year?

--------------------------------------------------------------------------------

Richard A. Galanti, Costco Wholesale Corporation - Executive VP, CFO & Director [58]

--------------------------------------------------------------------------------

Excuse me?

--------------------------------------------------------------------------------

John Edward Heinbockel, Guggenheim Securities, LLC, Research Division - Analyst [59]

--------------------------------------------------------------------------------

This coming year, 2019 [over] August of '20, early thought on gross and net, where really that goes to?

--------------------------------------------------------------------------------

Richard A. Galanti, Costco Wholesale Corporation - Executive VP, CFO & Director [60]

--------------------------------------------------------------------------------

Yes, I think the next year will look about the same as this year.

--------------------------------------------------------------------------------

John Edward Heinbockel, Guggenheim Securities, LLC, Research Division - Analyst [61]

--------------------------------------------------------------------------------

All right. So like mid-20s gross and low 20s net.

--------------------------------------------------------------------------------

Richard A. Galanti, Costco Wholesale Corporation - Executive VP, CFO & Director [62]

--------------------------------------------------------------------------------

Yes.

--------------------------------------------------------------------------------

Operator [63]

--------------------------------------------------------------------------------

Your next question comes from the line of Scott Mushkin from Wolfe Research.

--------------------------------------------------------------------------------

Scott Andrew Mushkin, Wolfe Research, LLC - MD and Senior Retail & Staples Analyst [64]

--------------------------------------------------------------------------------

Got 2 questions. Richard, you talked about driving top line sales and that's the key to the company. Everything else takes care of itself. And if you kind of look back over the last, I guess, 5 years, you did a huge expansion, even blew out a number of centers to add to the fresh, so I think that helped a lot. The credit card helped a lot. When you look out over the next year or 2 or 3, what do you see that's already substantial? What do you see as kind of similar type of sales drivers potential?

--------------------------------------------------------------------------------

Richard A. Galanti, Costco Wholesale Corporation - Executive VP, CFO & Director [65]

--------------------------------------------------------------------------------

Well, I think we continue to see -- first of all, I think fresh foods is -- continues to evolve and grow, specialty items within both food and nonfood, organic, both fresh and shelf stable. One of the things that's -- again, the good news in my view is a lot of these -- there's lots of little things, not one giant thing. We continue to add gas stations in other countries besides U.S. and Canada. It works. E-commerce, as I mentioned, we'll add it to 2 more countries this year. All those things add on each other.

One of the things that we historically have not done a lot, and again, this is not a game changer overnight in terms of our performance, is we're very -- we've been very good at taking items in the U.S. and bringing them elsewhere and maybe to a small extent, some Canadian items because of the size that we are up there. We've been bringing and continuing to test items that we find in other countries that are high-end, specialty, unique items, and we're getting some success with that. It's a small thing right now, but we're very good at figuring out how to do that and taking it to the next step. So I think you're going to continue to -- we're merchants and we're the best price. And I think that's more than anything what you'll see with us.

I think we're doing a better job on the membership side in terms of converting people to Executive. We're still seeing good sign-ups with the credit card. And as those rewards get bigger, we believe that, that member becomes even more loyal. So I think we continue to see -- the good news is some of the concerns that many of you have had over the years that we haven't moved fast enough in certain areas, whether it's the Internet or e-commerce, there's a lot of low hanging fruit out there, and we're benefiting from some of that.

So I got to tell you, I come to every -- I go to every budget meeting, and you hear the merchants or the merchants from some of the other countries talk about some things that we're doing, and I think that's exciting. We're now the size, from a value proposition, there's certain bulk, high-volume Kirkland items and paper goods and the like, water where we're now of the size where we can produce them in another country at the same quality level and dramatically lower the freight cost. Now this is not across the board on everything, but there's lots of those types of opportunities that we continue to do. There's not a shortage of things to stay busy trying to drive our business around here that we feel pretty good about.

--------------------------------------------------------------------------------

Scott Andrew Mushkin, Wolfe Research, LLC - MD and Senior Retail & Staples Analyst [66]

--------------------------------------------------------------------------------

Perfect. And then my follow-up question really goes to the competitive climate. And we're seeing that maybe one of your competitors, biggest competitors, is kind of tacked a little bit differently. Maybe they were investing a lot in price a year ago and not so much now. Is that part of what's going on with the core-on-core gross margins, is that the competitive climate is just a little bit easier?

--------------------------------------------------------------------------------

Richard A. Galanti, Costco Wholesale Corporation - Executive VP, CFO & Director [67]

--------------------------------------------------------------------------------

It's really across the board with traditional retail as well. One of the things that I mentioned on the last few quarters' calls on the SAM side is, on the fresh side, they become and continue to be more competitive than they had been historically. That's the nature of the beast. But I think -- and again, we're not competing with just one direct competitor. We're competing with traditional merchandise retailers and supermarkets, and on an overall basis, we haven't seen any dramatic change.

--------------------------------------------------------------------------------

Scott Andrew Mushkin, Wolfe Research, LLC - MD and Senior Retail & Staples Analyst [68]

--------------------------------------------------------------------------------

So you see the competitive climate's stable, not worsening, not getting better.

--------------------------------------------------------------------------------

Richard A. Galanti, Costco Wholesale Corporation - Executive VP, CFO & Director [69]

--------------------------------------------------------------------------------

I think that's fair.

--------------------------------------------------------------------------------

Operator [70]

--------------------------------------------------------------------------------

Your next question comes from the line of Rupesh Parikh from Oppenheimer.

--------------------------------------------------------------------------------

Erica A Eiler, Oppenheimer & Co. Inc., Research Division - Equity Research Associate [71]

--------------------------------------------------------------------------------

This is actually Erica Eiler on for Rupesh. So I was actually hoping to dive a little bit deeper into your online grocery efforts. Can you maybe talk a little bit more about how the Instacart and dry grocery ramps are going so far and what you're seeing with these offerings? And then any metrics you can provide such as type of basket you're seeing and how you're viewing the incrementality of the purchase, et cetera, would be helpful.

--------------------------------------------------------------------------------

Richard A. Galanti, Costco Wholesale Corporation - Executive VP, CFO & Director [72]

--------------------------------------------------------------------------------

Yes. Look, 2-day -- first of all, with 2-day dry, which we do with UPS primarily, it's now the entire Continental United States. Much of it arrives in 1 day, but we guarantee 2 day. And it's expanding, and we're obviously getting a small number of sign-ups where that member is signing up just to receive online because they're too far away from driving. On Instacart, they too as you, I'm sure know, have dramatically increased their geographic footprint over the last 2 or 3 years. I think the thing that's most notable is that the value proposition to someone buying either directly from Instacart, going to their site or going to our same-day grocery site -- what did they say, 1 day? 1-day, sorry, 1-day grocery site, which is the Instacart engine for fresh, we've dramatically improved the value proposition over the last 2 years. And I think that's reflective of the fact that they've grown and have their own structure in place and if -- we believe we can be that anchor-type customer, anchor-type tenant in terms of driving value. And so we have sequentially I think now 4x brought down pricing over the last 2 years of what the ultimate markup on goods is above what you could walk into a Costco and buy it for. And so we're doing more business. It's growing at big numbers, high double-digit numbers, but it's on a small base.

--------------------------------------------------------------------------------

Operator [73]

--------------------------------------------------------------------------------

Your last question comes from the line of Simeon Siegel from Nomura.

--------------------------------------------------------------------------------

Stephen James McManus, Nomura Securities Co. Ltd., Research Division - Research Analyst [74]

--------------------------------------------------------------------------------

It's Steve McManus on for Simeon. So apparel's obviously been a huge call out for you guys, but it looks like the softline comps have been trending a little bit lower over the last couple of months kind of towards the mid-single-digit range. Can you just give us some color on what you're seeing within the category? Any notable call out there?

--------------------------------------------------------------------------------

Richard A. Galanti, Costco Wholesale Corporation - Executive VP, CFO & Director [75]

--------------------------------------------------------------------------------

Hold on. Within softlines, jewelry, that's been a little soft. Household furniture, although that -- some of that had to do with -- I don't know. It's been a little soft.

--------------------------------------------------------------------------------

Stephen James McManus, Nomura Securities Co. Ltd., Research Division - Research Analyst [76]

--------------------------------------------------------------------------------

All right. If I could squeeze one more in. On the MFI growth, did you guys call out what exactly was the [fee high] contribution for the quarter?

--------------------------------------------------------------------------------

Richard A. Galanti, Costco Wholesale Corporation - Executive VP, CFO & Director [77]

--------------------------------------------------------------------------------

$10 million.

--------------------------------------------------------------------------------

Stephen James McManus, Nomura Securities Co. Ltd., Research Division - Research Analyst [78]

--------------------------------------------------------------------------------

$10 million?

--------------------------------------------------------------------------------

Richard A. Galanti, Costco Wholesale Corporation - Executive VP, CFO & Director [79]

--------------------------------------------------------------------------------

Yes, that's -- thank you very much. Have a good afternoon, everyone.

--------------------------------------------------------------------------------

Operator [80]

--------------------------------------------------------------------------------

Thank you, and that concludes Costco's Third Quarter Earnings Conference Call. Thank you for joining. You may now disconnect.