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Costco is ‘the extreme value proposition’ compared to competitor markups: CFO

Costco CFO Richard Galanti sits down with Yahoo Finance’s Brian Sozzi to discuss the secret to the company's success, its plans for expansion, and whether or not it plans to raise its membership fees any time soon.

Video Transcript



DAVE BRIGGS: Costco is Yahoo Finance's 2022 company of the year. Joining us now is Yahoo Finance's Brian Sozzi, who got a chance to talk with the company's CFO about the keys to the company's success beyond even the incredible hot dog.

BRIAN SOZZI: Right, yeah, just an incredible hot dog, incredible bun. And it really, for me, it was just a highlight of the trip to have one of these hot dogs with the longtime CFO, Richard Galanti, who has been at Costco-- he's the longest serving CFO of an S&P 500 company. He actually helped raise the Series A funding for Costco in the early '80s before they went public. Absolutely mind blowing. I talked to Galanti about the company today and where it might be headed.

RICHARD GALANTI: Well, you know, the people that built it were the merchants and the operators. I got lucky along the way. I did work on Wall Street for a few years. And the last year I worked on was a Series A round for this little startup called Costco. In August of '83, we were engaged to do this. That was the month before they opened their first location. And I joined in March of '84 after they had four locations. So the day I arrived, I was replacing somebody who was here for a very short period of time. Everybody thought I knew what to do.

And but what was clear is, is unlike a lot of startups today, where you have a lot of people that are in their early to mid '20s, this was a startup where the key 10 or 12 merchants and operators, they were in their early to mid '40s. And we go by first names. We get on the phone and deal with stuff. Our founder years ago used to say, you got to deal with adversity head on. And when you screw something up, you say we screwed that up, and we're going to fix it.

BRIAN SOZZI: You're the longest serving CFO of a S&P 500 company?

RICHARD GALANTI: That's what I'm told. I don't know if that's--

BRIAN SOZZI: You're the only CFO--

RICHARD GALANTI: --embarrassing or a compliment?

BRIAN SOZZI: --I've ever known.

RICHARD GALANTI: Yeah, you know, they can't get rid of me. And I've been very fortunate. As my dad said many years ago, I was very lucky. I stepped in something and came out smelling like a rose. And I joined a company that was great, had great people running it that had experience. And hopefully I've done a good job helping with that process.

BRIAN SOZZI: Costco has won the Yahoo Finance Company of the Year, coveted award that we give out each year to some best in class operators. And we chose Costco, among many reasons, is that your sales this year have been off the charts in a year of rampant inflation-- eggs, butter, toothpaste, you name it. Why is that the case? Why have you won in this environment?

RICHARD GALANTI: I think a couple of things. If you go back, first of all, over the last two or three years, while COVID is horrible and it's impacted all of us from families-- our families, our people we work with, everything, supply chain, of course, in a perverse way, it's benefited Costco operationally. You know, when it first happened, the restaurants were closed. Who benefited? Supermarkets and Costco.

During the summer, when people weren't traveling and people weren't going to concerts and ballgames, where they do, they bought stuff for the house-- furniture, barbecue sets, electronics. So, in many ways, we benefited. While certain departments were hurt in a small way, others were helped in a big way.

If you think about it, Costco, on average, across everything, from tires to mayonnaise to diamonds, we mark up our goods around 12% or 13%. You know, supermarkets are in the mid to high 20s. Home improvement centers are in the low to mid 30s. Apparel stores are 100 plus in terms of markup. So we are ultimately the extreme value proposition.

BRIAN SOZZI: I was surprised to see the market reaction to your November sales. On the same store sales, a little slower month over month, but relatively speaking, almost a 6% comp in this environment is pretty good. Why do you think the market responded like that? Do you think that is a-- them being concerned about a possible recession? I mean, do you see that in your business?

RICHARD GALANTI: Look, over the last six or eight months, as there's been inflation and concerns of a recession, look, my answer is, is it rains on everyone. Maybe it drizzles on us, and not hard rain. And so we've done a little better than our peers. This was a slight downtick in those numbers. And as one of the analysts said, in some ways, we're priced to perfection. We sell at a very attractive multiple. We're doing well.

You know, I've been through this-- I've been through this rodeo many times over 38 years and 35, six years as a public company. We are just going to keep working to drive sales and drive value. And nothing goes on a straight line. And we feel good about what we're doing. And we think we've gotten through the supply chain challenges as good, if not better, than anybody out there. And we're going to still drive sales. So does it overreact both ways, up and down? Sure.

BRIAN SOZZI: Richard, it seems like there's a Costco on every block, in every state, every city, but that's not the case, right?

RICHARD GALANTI: It's not the case, but there are quite a few. We have about 570 plus in the US, 843, I think. This is our 843rd one worldwide. And we're in 46 states and Puerto Rico and 12 other countries. And we open around 25 a year right now. And about 2/3 of those are still in the US. People are always asking, isn't the US saturated between us and our competitors? And we keep finding more and more good opportunities.

And, you know, as our sales have grown, just, I think this location here, Lake Stevens is a great example. We have several locations within 15 or so miles, and three or-- two or three locations. But they've gotten so crowded, thank goodness, and so busy that we can put another one in. We're not going to add a lot of new members, but they're closer and they're going to shop more frequently here. And so we think that there's still plenty of opportunities. When asked how many locations are we going to have 10 years from now, you know, the general--

BRIAN SOZZI: That was my next question. Fire away.

RICHARD GALANTI: Generally, the view is, if we're opening around 25 now, probably 25 to 30. And maybe if it's 2/3, 1/3 US versus the rest of the world, maybe it's 50/50, or 60/40 the rest of the world 10 years from now, but we still think we have plenty of opportunities to grow in the US.

BRIAN SOZZI: The Kirkland brand is a beast. I was walking around the store, a lot of focus on Kirkland and rightfully so. How big is this brand each year? And how is it performing in this environment?

RICHARD GALANTI: Sure, it's doing very well. If you think about it, I think we-- for our fiscal year ended in August, we did a little over, I think, $223 billion in sales. And about a quarter of that was Kirkland Signature, so well over $50 billion in sales. And, you know, we've not-- and by the way, not every Kirkland product that we've done and offered lived to tell the tale. You know, we're-- if an item is not performing, it goes away.

But generally speaking, from the very beginning of time with Kirkland Signature, it had to be at least as good, if not better, than the leading national brand. We had to sell it ourselves at, at least a 20% lower price than we sold the leading national brand than what we sold it for, not what it sells at retail. So a greater savings on a quality that's as good, if not better, than the leading national brand.

BRIAN SOZZI: Something else that hasn't changed pricewise in a Costco store, besides the $1.50, the sacred hot dog, soda combo, is the cost of a membership. Is next year the year that you raise that membership? You constantly get asked this about earnings calls.

RICHARD GALANTI: You know, if you look back, a time beginning in 1983, the membership, the basic membership was 25. We didn't have an executive membership, which is 2x. I mean, now it's 60 and 120. But that 25 was increased $5 seven times, I think, so from 25 to 60 today. On average, we've done it around every 5, 5 and 1/2 years. So if you go back, the last time, it was June of '17. So starting in the spring of '22, we started getting asked the question.

And needless to say, you'll know when we announce it and say things. What I've tried to say and when we were constantly asked that question on earnings calls and directly, is, is that all the reasons why we would consider it-- we could do it, and it would work, in terms of member loyalty, the value proposition that we constantly improve on and bring to our member, we feel certainly comfortable we could do it. It's a question of when. You know, when the headline is concerned about a recession and concerned about inflation, we don't need to do it immediately.

Early on in 2022, I reminded people, the last one was June of '17. The last three were 5 and 1/2 to 5 and 3/4 years. So they say, does that mean January of '23? I said no. I said it's a question of when, not if. But we'll let you know.

BRIAN SOZZI: I was just walking around the store, and I was reminded by how long people stay at Costco. There have been workers in here and people in here that have been here for 20, 30 years, in some cases. Why is that the case? And do you think it's just surprising that you can go from a store manager in this environment to being in the C-suite?

RICHARD GALANTI: You know, I think it's fine because that's what we've done from the beginning of time. The original concept in terms of "take care of your employees" was to certainly take care of them financially and with good health benefits. I'm talking about 90% of our employees are hour-- of our 300+ employees are hourly. And nearly half of those are part-time.

They all get health benefits and very good health benefits. So take care of your employees. Let them think of it as a career, not just a job passing through, and provide those growth opportunities. And now it helps that we're growing. If we weren't growing, that wouldn't be. But you know, we're fortunate. We've never had to lay off people.

BRIAN SOZZI: Last one, quickly, before I let you go, we talked to Craig Jelinek, CEO of Costco. He hinted there might be some succession planning in the works. What's next for you? I mean, where do you see yourself in five years?

RICHARD GALANTI: You know, four or so years ago, friends and others would ask me, when are you going to retire? And I said two to three years. And that was four years ago. Today, when I'm asked, I say two years. I've been very lucky. I enjoy what I do. I get to work for a great company. But at some point, I will retire. I could see-- I've always enjoyed, as part of my job, teaching a few classes, not courses, but classes. I might do a little of that.

BRIAN SOZZI: I know Wall Street is a big fan of yours, and I'll say this, too. You're the only Costco CFO that I've known. I used to be an analyst that covered Costco. And it's always been a pleasure to follow your career, and you give great earnings calls. Richard Galanti, Costco CFO, congrats on winning the Yahoo Finance Company of the Year.


BRIAN SOZZI: Appreciate it.

RICHARD GALANTI: It's a pleasure, and thank you for the honor.

BRIAN SOZZI: Yeah, so there is Costco's longtime CFO Richard Galanti. And guys, key to our conversation was the discussion on the membership fee increase. Look, is it coming in January, February? Unclear, but the Street wants to see this. Now the costs in Costco's business, of course, have gone up. Look for this sometime in the first six months of next year, realistically. And when that happens, it is going to be a major profit boost to Costco's bottom line.

SEANA SMITH: And Sozzi, we're looking at a chart right now with shares off just about 14%. Your interview was very good, but I think a lot of people are wondering why exactly Costco was our company of the year, given the underperformance relative to some of those outperformers' prices-- I'm sure one of the big reasons. What are some of those other factors?

BRIAN SOZZI: Very simple. Me and Rick Newman want it to be, so we picked it. I mean, that's just a-- no, no, really, there's a whole, there's a [INAUDIBLE].

DAVE BRIGGS: There's the criteria.

BRIAN SOZZI: No, there's a Coke and [INAUDIBLE].

SEANA SMITH: No, but it's very good because it's also, it's prices, it's employee satisfaction.

BRIAN SOZZI: Yes, there's a whole [INAUDIBLE] yes, there's a whole-- and Rick goes into the homepage on how he picked this, but there's a whole committee of folks here at Yahoo Finance. We look at the stock price, but it's not the only thing. You heard Richard talk about how they take care of their employees. This is a company, for the most part, throughout the year, so double digit same store sales increases every single quarter, double digit profit growth. Not a lot of retailers were putting up those types of numbers over the past 12 months.

DAVE BRIGGS: Very revealing that the CFO wears a name tag like he's a cash register.

BRIAN SOZZI: It's a retail C-suite executive thing. If you talk to Doug McMillon over at Walmart, he does the same thing when he walks the store. It's just like a badge of honor.

DAVE BRIGGS: That is very telling. One last thing on the Kirkland brand, we showed staples-- paper towels, wipes. What's remarkable about Kirkland is golf balls.


DAVE BRIGGS: Tequila. I mean, we're talking about discretionary items, to say the very least. When their hoodies come out, people in their 20s jump online and overpay for them. How do you account for that?

BRIAN SOZZI: But I think Richard summed it up well. This Kirkland brand is not crap. I mean, usually, when you hear, like, private label products, you don't even want to go anywhere near it. The stuff, the food doesn't cook right. It doesn't last in the oven. It doesn't wash well. This is a high quality product, and he is correct. In many cases, this is better-- these products are better than the name brand stuff.

SEANA SMITH: And you can see it by the store behind you. It was so, so crowded.

BRIAN SOZZI: Crowded, and it is weird because this store was pretty much, I would say, open in the middle of nowhere. Dark, dark road. The crowd was there, maybe 150 people. Within two hours, the place was packed. You thought the store was there for about 15 years.