Costco Earnings Conference Call Nuggets: Inflation and International Expansion

Costco Wholesale Corporation (NASDAQ:COST) reported its first quarter fiscal earnings report and discussed the following topics in their earnings conference call.

Inflation and Core Categories

Deborah Weinswig – Citigroup asked: Can you talk a little bit about inflation in the core categories that you’re seeing? What’s your outlook for the rest of the year?

Richard A. Galanti – EVP and CFO responded: It’s certainly fresh foods.

I hear anecdotal items all the time including last week’s budget meeting from our fresh foods people, and they gave examples of anywhere from 5 percent to 8 percent on many meat, pork and poultry items.

In produce, you see it all over the board because it’s not only the economy, it’s demand from overseas as well as crops and what happened with the weather.

Across non-food categories, we mentioned in the November call that electronics and TVs for the first time and as months as I could remember, we actually saw the average selling per TV go up a little bit versus down. A lot of that has do with the fact that TVs are getting better, crisper and cheaper, so people are upgrading and spending more per TV for getting a large television with more clarity or whatever it is these days.

But across many categories,  jewelries continue to be inflationary. I want to differentiate that we’re talking about inflation that’s year-over-year.

In the last three months, we again have seen less than 20 basis points delta in the LIFO index year-over-year. If I looked, again these are just some samples and these are inflationary items in just the last three months, again these are anecdotal. But if I look across things like blueberries, which are up 60 percent, then I assume the blueberry crop was very good this year.

Grapes and prawns increased 20 percent. Some other blueberry types only increased 12 percent.

I look at the deflationary items and see  peanut butter is up quite a bit. On the deflationary side, gas is actually slightly down in the month, although that in the month compared not calendar year ago compared to the beginning of this fiscal year.

Various electronics items might be down on an exact item, 10 percent to 25 percent, but the average selling price on some items have increased. However, butter is down 10 percent to 15 percent so it’s a mixed bag.

When I asked the buyers two or three months ago aside from a little bit of lessening of continued inflation as compared to the previous month, when do you see prices coming down a little bit? They answered from two or three months ago about looking forward six months was in three to six months.

If you ask them today or last week, it’s in three to six months. So, I don’t think we know completely with that regard but the feeling is that prices have perhaps flattened out a little bit more off late but still inflationary compared to a year ago.

International Expansion and Return on Invested Capital

Weinswig asked: As you open more clubs outside of the U.S., how does that change your return on invested capital outlook?

Galanti responded: If it goes like we hope it goes, it will be a positive, but tomorrow could be another day; we will see.

As we have shared with you, one of the reasons that we have increased the proportion of locations overseas is because we are doing well. We have had great returns so far in Asia and three of our best openings ever were in Australia. We we are excited about that.

But what moves the needle of course short-term is the existing results on the whatever 500 plus of our 600 units that are in the U.S. and Canada.

The simple answer is yes.