Costco FY 2Q17 Earnings Call Notes

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Richard Galanti

Still seeing deflation

“Regarding deflation, overall, primarily in the US, we have seen deflation in the 1%, 1.5% range in February. Departments such as foods, sundries, frozen foods, liquor meat, dairy showed the most deflation on the foods and sundries side. On the non-food side consumer electronics continue to be deflationary, primarily in the TV category. In terms of new openings, our opening activities, we planned, we opened a net of a 8 new locations during the first quarter, nine less were re-low.”

Working with instacart and Google Express

“Finally, a quick update on other home and office delivery sales channels. As you know, we partner with Google Express in five cities, operating out of 15 of our Costco US warehouses. In addition, we’re working with Google Express on a new service offering one to three day shipping of products throughout the Continental United States. We also continue to work with Instacart. Instacart currently operates in 26 US cities, in our case utilizing 132 of our US locations, and we are either testing or getting ready to test two other third-party delivery services within the next month or so.”

Gas prices up 29% y/y

“As Bob is reminding me, and getting back to the gasoline comment, a lot of it has to do with the contribution penetration of these areas. With gas inflation – I think gas prices are up 29% over the year, and gallon comps were up higher as well because of that.”

Private label philosophy

“Sure. I think yes, but we also, our success has been based first by selling branded goods at the best value out there. Two reasons, one such sharp savings relative to everybody else and two, our KS – if it’s as good as, if not better quality, which is our starting point and even a greater savings versus what we sell the brand for, that’s even better. And it keeps our members happy and it keeps us and our vendors honest. We’ll continue to drive it. Recognizing there aren’t a lot of $300 million and $500 million items out there, like the waters and the paper goods, and the K cups and whatever. But there’s lots of $20 million and $30 million and $50 million items – we get surprised every day. So yes, there will be a continued push for that, but there’s also a continued push to add brands that historically haven’t been prepared to sell us.”

We’re a bit of a tortoise

” One of the things we all know, we have the best prices on great quality items. And we’ve never been too good about worrying about how to get it to that end customer a day earlier. We’re doing – it’s the 80/20 with us. We’ve done just in the last six or eight months, a lot of improvement online in that customer experience, with the smallest amount of effort. The low hanging fruit. We’ve got good things working on, but we’re doing these things, honestly, from our offensive standpoint not a defensive standpoint. And I’m not trying to be cute. Clearly we want to do it for competitive reasons, too, but it’s not like we looked at this and we lost. We see our renewal rates, ex-some of that auto bill stuff that we believe. We see our traffic going up still, and we see online, we see our page views and the like going up as well. With some of the additional items and the types of items we put on and better communication to our members of what that is. I think again, sometimes we’re viewed as the tortoise, not the hare. Certainly, over time we’re viewed as being stubborn. I think in my view, we’re a lot less stubborn and – but we’re still a little bit of a tortoise sometimes and we got a lot of good things going on. We’ll see, but stay tuned.”

Inflationary in the months ahead

“The collective view is inflationary, or less deflationary, for the next few months and maybe a little inflationary, but it’s a crap shoot.”

Border adjusted tax is bad for consumers

“As it relates to the border adjustment tax, there’s clearly the people out there that want it and manufacturers that export a bunch of stuff and don’t import a lot of stuff and at the very other extreme retailers. Recognizing border adjustment tax is just one element of one version of the tax reform plan that’s been put forward out there. The probability of what’s going to happen and when it’s going to happen and how much of it’s going to happen, we don’t know. We don’t believe it’s good for consumers – it’s going to raise prices and ultimately, I read articles where some retailers, particularly apparel retailers, were 90%-plus of their merchandise is sourced overseas, well a 20% tax is a 20% tax. While retailers generally tend to historically be full corporate taxpayers, us in the mid-30s in the US probably a little higher than that, the total company effective rate. It’s going to hit it and so to go through, we personally don’t buy into the fact that it will be offset by a big rising dollar. We don’t know what’s going to happen with the retaliation out there by other countries, and we’ll see. But as a retailer, we definitely think that it’s bad, and we’re against it.”