Costco (COST) Q4 2016 Earnings Call

Costco (COST) CFO Rich Galanti said certain departments in their business are experiencing deflation

“I had mentioned earlier we have recently seen a little pickup in the level of deflation overall. Some categories in the low to mid single-digits – in the low to mid single-digit range and several fresh food categories, notably meat and pork and things like that in the 5% to 10% range in some cases. Overall though, we are seeing net increasing deflation, but not in those levels and some non-food levels as well – non-foods as well.”

Despite a rough start, they believe they’ve successfully converted most members to the new Costco Visa credit card

“A few basic stats on the new card, approximately 11.4 million American Express co-branded cards, representing about just under 7.5 million accounts were transferred over to Citi during the conversion. Nearly 85% of those cards what we considered active, that is the card had been used for purchases over the previous 60 days. Currently, over 85% of the accounts transferred over have now been activated with Costco. And since June 20 and just the past many weeks, 1.1 million members have applied for the new card and over 730,000 new accounts have been activated or a little over 1 million additional Citi Visa cards in circulation. It’s still early. We launched only 14 weeks ago, but so far, we are beating our initial expectations in terms of conversion, usage and new sign-ups to the card.”

Their business model is about relentlessly trying to figure out ways to drive costs down so they can share the savings with customers

“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. And if we do it more next year, we will give 80% or 90% of that back. That will drive value to that member and loyalty to us and also more business to us.”

They believe Amazon is affecting their business yet are combating that by trying to get more people in their stores 

“The internet in general is going to take its percentage of different categories. It’s going to impact different categories and different retailers of such categories at different levels. 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.”