COST
#Well, first of all, it clearly is not capital; we have plenty of capital.
I would argue we have too much capital out there.
We like it that way.
It's people.
It is people.
Years ago, I didn't depreciate it as much as I do now, particularly in these countries.
If you think about in Japan, I think there was an 18-month period a few years ago where we went from 9 to 20 units in about a year and a half, two years.
It's not like we are sending a bunch of experienced warehouse managers to go open and operate and be warehouse managers in Japan from different countries.
So you do that a few at the beginning and you may do it occasionally on a onesie basis, but at the end of the day, you are growing from within and developing those local country people.
And first and foremost from an international standpoint, you've got that.
That can be a little bit of a challenge, and then you've got things take longer there.
There are some countries that I understand are very difficult just because of zoning and restrictions that are in place, not just on us, but any big-box, even local company big boxes in the hypermarket area and the like.
So it's going to take a little longer there.
The other thing ---+ do I think we can go above 30.
Look, we shoot for low 30s and then next year we will shoot for mid-30s and you've certainly heard me say that we want to be around 30 and five years from now we should be doing 35.
Maybe we will fall a little short of that, maybe we won't.
But we've got more feet on the ground real estate-wise in other countries, as well as the US, than we've ever had.
It does take a little longer, but we also ---+ could we physically open more.
Sure.
But we like what we do and the way we do it.
And probably we also have a comfort level that it's not like we are going to miss out.
We are, in our view, the preferred [flood] out there, and so when we go into a market, if we take a little longer to get there, people are waiting for us.
It might be a little harder, but the fact of the matter is is we feel comfortable how we are doing it.
First quarter was ---+ and if you haven't seen this slide before, it's reiterated and put out here internally every day of the year and at our managers meeting, Jim used to and Craig does now, we are a top-line company.
We want to drive sales.
The fact that margins year-over-year are up on those categories up 16 basis points, we are not smart enough to figure out how to get there all the time.
We are always going to drive margin a little bit where we can, but we do it the right way by giving most of any savings back to the customer.
If I look at our competitive stance, our pricing competitive stance, versus our direct competitors, the gap has never been wider.
We could make a little more of this, but we don't.
At the end of the day, we are always looking for ways to do that.
When we do membership fee changes, historically, we are always looking to give some of that back.
So all of those things go into it.
But at the end of the day, what helps margins.
Private label, fresh food strength, some of the ancillary businesses.
All of those things are helping as well, and again, we feel ---+ we don't necessarily ---+ I got to tell you, we don't look at it and say, hey, frequency came down a little bit, or the comp is a new normal or a little bit lower.
We want to do more.
Even when we were doing a 4% shopping [fee], how do we get it higher even though that was kind of tough.
So we are going to continue to do things in that direction and we don't necessarily worry about, well, that came down a little bit so we need an extra few basis points of margin.
That's never the case around here.
I don't know.
We keep adding ---+ well, we subtract and add KS items, so they live and die by the same metrics.
If it's not a great item, we stop it.
But there aren't any giant items like toilet paper and water, those types of things or disposable diapers, several years ago, but there are lots of little ones.
I think, again, we would see that continue, the increased penetration, but at a slower rate of growth in the future as well for the same reasons.
I don't think, getting back to your question, I don't think that's a big reason of why the basket size has changed.
If anything, many of those items, it's a lower price point.
If we are doing brand only and we brought in the (inaudible) next to it, in many instances, it may be the same because we go to a bigger pack size.
In many instances, you've got a lower price point on the same number of units.
Well, we really can't talk to anything about May yet.
There's no giant surprises in either direction.
But, at the end of the day ---+ and again, the comfort level ---+ I think I was ---+ earlier in the call, I was responding to many calls that I received from both institutional investors and analysts out there about the concern.
And again, when we look back at it, and we reported April sales and we said, okay, what are the reasons why it came down a bit, was a little weaker.
What again gave us comfort, one little data point of comfort, was the fact that some of those discretionary categories are actually doing a little better than one would have thought given the total number.
And so that's about as much as I would read into that.
We will tell you next Wednesday for May.
The price per gallon was down for the quarter 19.7%, basically $2.59 a year ago and $2.08 this year.
And what was the last part.
I think year-to-date we are up in the low single digits in terms of comp gallons.
Again, the big comparison was it was a year ago when it was really outsized comp gallons up 7%, 8%.
I know in April I think a year ago it was 8% in the US, and so that was part of that impact of why sales, in our view, sales were a little weaker particularly in California in April.
It was within a penny or two, really no change year-over-year.
I think it might have been a penny (inaudible).
Well, in the US ---+ first of all, every new unit we do where it's possible, we put in a gas station and we are even doing a few in countries like Japan and Australia, which we hadn't done historically.
We relocated a few units in the US.
We just moved Hackensack to Teterboro.
The Hackensack became I think our 11th, 10th or 12th business center and the new Teterboro one is a big new Costco with a gas station, with better parking and great.
So if we did three or four ---+ I don't have it in front of me ---+ but if we did 4 relos this year, my guess at least 3 of them have gas stations and those three [don't].
But we are starting to max that out.
In the US, we have ---+ at the end of the quarter, we had 420 gas stations out of 481 warehouses.
In Canada, 55 out of 90.
I'm guessing in Canada we still have a little bit more room to grow because we started there later.
Again, in the UK, we had none a couple years ago, now we have 4.
Japan we have 5.
Spain, 50% of them, 1 out of 2, and Australia, 5 out of 8 I believe.
And so again it's not like five years ago in terms of just adding a bunch of gas stations, but it still, I think, moves the needle a little bit.
Well, look, you talked about shopping frequency staying at 4% for 7 years.
People have stayed for 30, including me.
So you are having some turnover, of course.
Over the last few years, you've had people that are retiring in their early 70s that have worked together starting 55 years ago at FedMart in San Diego.
But I think from a merchandising and operations standpoint, that's been well thought out.
Let's face it, the first big concern was what's going to happen when Jim leaves.
I think while we were comfortable here internally, I think we've shown and certainly Craig has shown that the transition and the maintaining of the culture has continued without missing a beat.
In merchandising over the last few years, we've took certain [carriers] like we used to be with non-foods, which is a combination of hardlines and softlines and Dennis Knapp, who was a senior executive over that and has since retired, we promoted two people and have broken out hardlines and softlines.
In operations, we've made several promotions and changes of people again, typically low-tenured people like they've only been here 20 to 25 years that are going from VP to Senior VP levels on ---+ I think we've got about 16 Senior VPs of Operations in the US geographically.
Now in terms of Doug, Doug, as you know, has been head of US merchandising and certainly involved in a lot of merchandising beyond that as well.
Doug is great.
He's leaving for ---+ no negative issues both internally or with himself, and we are all kind of jealous.
He's more on the younger side of the senior management team.
Craig has a plan, but he's looking at a few things and over the next few months, we will be announcing how that changes.
But we've got good people in place and we don't think that there's an issue at all there.
In Asia, <UNK> Chang, who goes back to the Price Club days probably 25 plus years ago, ran operations for Taiwan, was promoted as Senior VP over Asia and we've brought some new people in there as well, new people meaning existing Costco people, of course, from the US.
And so I think we feel pretty good about the change.
It's sped up because it was at zero.
In the last couple of years, it's been a few, a couple and now it's a few and a few more.
But I think we are pretty well-positioned for that.
I don't see a big change in what we do and how we do it.
We pointed out California last month for April because it was ---+ while US overall again was a little weaker than it had been, it was really California.
California is about a third of our US company operations and it's probably a little bit more penetrated gas-wise.
And again, a year ago, we had gallon comps, which not only drives gasoline, but more importantly drives people in the parking lot and 52 or 53 of every 100 come into shop.
And so that was where we saw a bit of a distortion, California versus the rest of the US.
I believe there was a ---+ I don't have the number in front of me ---+ but to get to a 1, the other US was at a 2 and California was a minus 1, and I'm off by a little bit there, but it is that kind of direction.
And so that was a little unusual.
Again, I can't predict what that means for the future, but other than that, there are some markets where ---+ I think the positive that we see is we've been successful in some of these new medium-size markets.
We had the most new sign-ups I believe in many years in terms of a new market, new medium-size market in Tulsa just a few weeks ago.
Through opening day, we had more sign-ups than we've had.
Now I'm not talking about Asia; that's a whole different story in terms of sign-up levels.
So again, things look pretty good.
I don't know if there's a lot of geographic changes other than the thing we called out on California.
I personally believe a lot of that related to some of the gas issues.
Well, sure.
In the car business, I think last year just in the US, we did just under 0.5 million new cars.
We've always done ---+ when car manufacturers have come out with something new, we could do ---+ by putting one of those cars in front of our trucks in front of each of our locations and doing some type of extra amount of incentive, we can drive a ridiculously large percentage of those six weeks of sales in that car or truck.
In this case, we've toyed with the idea for several years and talked to all the manufacturers about doing a KS vehicle.
A great vehicle with all the bells and whistles and an even better value than you'd get as a Costco member or as a Costco executive member.
So I know we had started and stopped a couple times with a couple different manufacturers.
We are pleased with it.
We think the manufacture is.
The dealers are.
And sure there will probably be more in the future, but we will see.
We back those with auto products too.
We just keep bringing it to a different level.
Why don't we take two more questions.
Well, I don't know what's driving it.
We do a pretty good job of getting people in the door, opening in some of these new markets help.
It's just been overall strong.
If the US is 15% and the whole Company is 15%, where was it down.
It was up relative to the 15% of course in the end and places like Taiwan and Spain of course was huge, but it's huge on a base of one.
And then it was a little lower in Canada where we had very few new openings.
And Mexico same thing.
Mexico last year we had a huge opening on a base of about 34 or 35 units, a huge opening, which had outsized numbers, so we are comparing against that with no new openings this year.
Same thing in Canada.
We had a huge opening in a location there a year ago in the quarter versus none.
Well, if I look at my LIFO index ---+ we don't know exactly.
If I look at my LIFO index, which is 70% of our inventory, it's a US accounting principle, from the beginning of the year to now, that's about a percentage point, 0.9 of 1%.
If I look at the just the total through the US front-end registers, number of items in the basket was up year-over-year 1.4 percentage points, the average basket was up 0.4 percentage points, so a 1.0 percentage point delta there.
That again I think just affirms that roughly 1% deflationary number on average.
But it's educated art, not complete science here.
And the margins, the 16, is on its own sales, each of those categories, by each of those four categories' sales.
IT is the gift that keeps on giving.
We started at about 3.5, 4 years ago.
As we look at it today, what we thought might take four or so years to do the big chunks of this will take six.
As we thought it would cost X, it cost 1.5X to 2X, or whatever it is, which is typical.
Our guess is that it'll still be slightly detrimental in fiscal 2017 and actually technically it may be even flat to improved a little in 2017, but you've got a 53-week year, so there is a little cheat there.
But generally speaking, flat to up a little in 2017, maybe up a little in 2018 or flat, maybe down a little.
We don't know yet.
But we are starting to get to that inflection point and my guess is that inflection point will come sometime towards the end of 2017 or into 2018.
Keep in mind, these numbers don't assume anything ---+ this is necessity first and foremost.
We believe it will help us in different ways, in many ways, and there will be other things we'll add to it.
But the bulk of it, of course, is getting behind us and we will go from there.
I don't think there's anything big out there [that way].
We just did the bottom of the scale increase, which is a little unusual, not a big number, but it's $0.06 or so a year.
And there's no giant changes coming to healthcare.
We still give great health, medical, dental and vision benefits to everybody.
If we increased the sales penetration outside of the US, certain structural expenses help us.
Healthcare in the US is easily 20 to 60 basis points as a percent of sale higher than every other country in the world and so just by doing more elsewhere that'll help that number a little bit.
Same thing with labor costs.
We pay similarly great labor wages relative to whatever in-country norms are, but certainly the numbers in the US and Canada are higher than some of the countries.
And so those things will help us a little bit.
Now I don't think ---+ there's nothing huge going on out there that ---+ I don't think we have any big shocks to the system.
Thank you, guys.
We will be around.
Have a good day.
