Costco (Cost) 16Q4 Earnings Call Notes

Richard Galanti – Executive Vice President and Chief Financial Officer


Rewards program is estimated to improve by 40-50% under Citi

“In terms of increased cash back rewards, the estimate is about a 40% to 50% improvement in the reward program, which is already previously a very good reward program to the members using the Citi Visa Anywhere card… In terms of improved cash back member rewards, our former card provided a 3% cash back on gas, 2% on restaurant and travel, and 1% everywhere else, including everywhere at Costco other than the gas. With the new CV’s Anywhere card 3% on gas now is 4%, 2% on restaurant and travel is now at 3% and probably the most significant rewards improvement in terms of the total bucket here is the previous 1% reward on all other Costco purchases doubled from the previous 1% cash back rewards now to 2%.”


80-90% of the Amex to Citi benefit will go back to the customers in the form of lower prices

“the best, simplest answer is that just like when we buy a physical product better lower we can buy whether it’s lower freight, greater purchasing power or greater production efficiencies or whatever we figure out with our supplier, we generally wanted 80% or 90% of that, the vast majority of it given back to the customer in terms of lower price because that’s what drives us and drives our business… That will drive value to that member and loyalty to us and also more business to us. And secondly, what’s left over and when we originally did it, we did it such that we are going to keep a small amount of it.”


Food and tobacco deflation and other deflation may continue at current levels for a few months. No guess on gas

“I would say probably best guess is five months or six months of continued deflation at these newer levels in some cases. Gas, who the heck knows… Late fall, so it’s a few months. That sounds like a definite maybe.”


Foreign stores may have started slow, but they have picked up

“And as we have said, the one market that has been – we start, we remind ourselves that there is a time when we were going to close Korea and Taiwan and they are our most and almost our most profitable productive countries and locations. And we have talked about our first unit in Syria [ph], got off to a slow start. It’s growing nicely now. Madrid got off to a much better start and it’s growing nicely.”


People come to Costco for the value. Not for American Express card

“Our view has been we don’t think that many people left Costco, because they can’t use their American Express card. American Express is a great brand and it was a great relationship for many years. But at the end of the day, they are coming to Costco because of our quality in our value.”


Online retailers are only taking “a little piece” from Costco

“The internet is taking from everybody. Our view is it takes a little less from us. And interestingly, when you look at the categories within our slightly lower sales over the last couple of few months, the categories that have buffed that trend have been discretionary nonfood categories like apparel and housewares and electronics. So, now when we look at food and sundries, we absolutely do not believe its delivery services. We do absolutely believe its deflation more than anything. But again, everybody takes a little piece of something.”


Costco will not compete with online retailers on their turf

“We are recognizing – we recognized that we are not going to be the provider. We may be the provider to somebody that wants to deliver like an Instacart or Google Express, but we are not going to be dropping off small items and our prices at your doorstep. That being said, we are, we have and we continue to add things… I think you are going to see big differences literally in the next several weeks of the types of hot items that you see on there on the non-food side in the treasure hunt. On the – I think that’s probably the biggest thing you will see… Our success has been based on pricing value, quality and quantity at the lowest possible price… we look at our core business of getting you in the store still is paramount to what we want to do.”


Furthermore, Costco acknowledges it is not Amazon or Internet proof, and reinforces that it will stick to its value proposition to bring people in-store

“I read the reports that some of you have written about that we and maybe one or two other retailers out there that are unique are Amazon proof or Internet proof. We don’t buy that for a minute. We do believe that we do rely and we do expect we are going to be impacted loss. We also don’t believe we have to go crazy on the other side, but we want both. But our value proposition is best served for us when it’s in-store getting members to come in and buying when they can see everything there that we have.”


Main purpose of gas is to get customers into the store

“When prices went down, our view is as retail gas, overall, they would lower their prices but not as much as they could have. And we lowered it more than that and we are still able to benefit a little from it. So that was a positive. I think yes, it’s the value proposition more than anything that gets people in our parking lot.”


Costco’s competitive position on price is stronger than it’s ever been

“But at the end of the day, if anything, our view is – the mode has continued to get bigger, in other words, our competitive position, pricing wise, is stronger than it’s ever been. But we are not resting on that. We are constantly trying to figure out how to widen it. That’s what we do.”


Organic food category growth trend continues strong and resonates well with millennials

“We expect organic to be up 20% this year. Now, some of that will be some cannibalizing of some traditional, conventional, but no, it’s the perfect items for us, because it’s our member. It helps us with millennials on top of that. We get that. It creates a bigger competitive pricing mode, because we have as good, if not better quality at much better pricing. In terms of supply, I think the supply is starting to catch up with the demand out there and I think that some of the – you have heard me talk in the past about many of our global sourcing initiatives, I think that’s going to continue to help us and make it more competitively advantageous to us.”


Millennials shop more often but buy less. In the aggregate they buy a little more

“What we were surprised at is that they actually shopped a little more frequently while a little less each time, but the aggregate of those two, they bought more over that year a little more, I mean, in the low single-digits, but there was more. It didn’t have a bracket around it. And they renewed at a slightly higher rate.”