Costco (COST) Q2 2016 Earnings Call Notes

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Costco (COST) CFO Richard Galanti said weaker international currencies continue to impact their earnings results 

“During the quarter the foreign currencies where we operate continue to weaken versus the U.S. dollar in all countries but primarily in Canada, Mexico and Korea, resulting in our foreign earnings in the second quarter when converted into U.S. dollars being lower by about $32 million or $0.07 a share and if exchange rates had been flat year-over-year.”

And lower gasoline prices hurt their overall revenue

“For the quarter, sales negatively impacted by gasoline price deflation to the tune of 80 basis points.”

They are seeing more deflation than inflation of across the goods they buy

“Final comment on deflation. Beyond gasoline price deflation that we’ve always pointed out each month, we have seen a little additional deflation across many merchandise categories such that sales have been impacted a bit by – a little bit more in the past couple of months.  in the U.S., we’re seeing deflation in the low-single digit range for foods, sundries and fresh foods, and now, again, a little bit more on the non-food side as well.”

Seeing strong membership renewal rates

“And in terms of membership, renewal rates remain strong; 91% in the U.S. and Canada and 88% rounded up in worldwide. Continuing increasing penetration in the Executive Member I think helps that. New membership sign ups in Q2 company-wide were up 4%.”

Costco (COST) CFO Richard Galanti said they are raising starting wages for the first time since 2007

“This year we’re also changing the starting level or entry level hourly wages. This is the first change to the entry level wages in nine years. Since 2007 our entry level wage in U.S. and Canada was $11.50 or $12 an hour. Effective this month in the U.S. and Canada, we’re increasing our starting wages from $11.50 and $12 to $13 and $13.50. So up a dollar and a half.”

Their E-Commerce business is growing at a substantial rate

“Next, Costco e-commerce, Costco online. We’re now in six countries, having recently opened in Korea and Taiwan. We’re also of course in the U.S., Canada, U.K. and Mexico. For Q2, sales and profits were up over last year. Our total sales were up 19% in the quarter, up 22% ex-FX and on a comp basis, up 18% reported and up 21% ex-FX. So continued good results in terms of growing our e-commerce efforts.”

Costco (COST) CFO Richard Galanti said they look at their stock price to time their stock buyback program

“During the first five weeks of the past quarter, very little stock was repurchased. In fact, of the total $80 million, $3 million of the $80 million was purchased in the first five weeks, and the remainder, the vast majority was in the last seven weeks. And that’s purely a function of how we do it. We look at kind of a matrix pricing. As it goes up a little, we buy a little less, when it comes down a little, we buy a little more. As long as we feel comfortable about our runway, I think we’ll continue do that.”

Continuing to change product mix to increase frequency of customer visits

“The fact that we keep adding some gas stations is driving frequency. I remember years ago, I’ve heard for 30 years, now that this thing is maxing out, fresh foods or gas stations, whatever it is, we keep figuring out new things. And I feel good about some of the things we’re doing in a lot of the non-foods categories. Fresh foods never ceases to amaze me, and we’ll keep going.”

They say E-Commerce doesn’t affect their business as much as it would other retailers

“I’m sure there’s somebody that made one less trip to Costco because they bought something online or somewhere else. But I think we’re still doing a pretty good job of getting them in the door particularly with fresh foods, with gas for the Executive Member with a quality co-brand offer in terms of rewards. So all those things help.  And some of those pieces, we’re not going take. We’re not going take the single unit items, some small-value food and sundry things that are going to be delivered to your door by 7 in the morning if you ordered six hours earlier. That’s not us. We can’t do that at 10% and 11% margins. We’re taking little pieces of other things.”

Costco (COST) CFO Richard Galanti highlighted which items are seeing price decreases

“So again, that would indicate to me again we’re seeing a little bit more deflation. I can give you crazy numbers on given items. On a year-over-year basis, when you look down, just candy. M&Ms down 10% year-over-year. American single slices of cheese down 15%. Bacon down 20%”

Organic food is now a large and still growing category

“Yeah, we’re about $4 billion, which was I think in the last two years, it was up 30%-ish. And we’re on task, I think our goal this year to have a double-digit number that has a two in front of it, and we feel good about it. We are I think doing as good a job as anybody in terms of sourcing. And part of the challenge is availability. And the industry is growing, needless to say. There are more farmers and more poultry producers and more beef producers that are committing more to this. And we’re certainly out there literally in the fields here and abroad getting these growers and processors to do more. So, I think it still has some good opportunities there.”