Costco Wholesale (COST) Q2 2023 Earnings Call Transcript

Costco Wholesale (COST 0.84%)
Q2 2023 Earnings Call
Mar 02, 2023, 5:00 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good day. My name is Emma, and I will be your conference operator today. At this time, I would like to welcome everyone to the Costco Wholesale second quarter fiscal year 2023 earnings conference call. [Operator instructions] Richard Galanti, CFO, you may begin your conference.

Richard Galanti -- Chief Financial Officer

Thank you, Emma, and good afternoon to everyone. I will start by stating that these discussions will include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements involve risks and uncertainties that may cause actual events, results, and/or performance to differ materially from those indicated by such statements. The risks and uncertainties include, but are not limited to, those outlined in today's call as well as other risks identified from time to time in the company's public statements and reports filed with the SEC.

Forward-looking statements speak only as of the date they are being made, and the company does not undertake to update these statements except as required by law. In today's press release, we reported operating results for the second quarter of fiscal '23, the 12 weeks ended this past February 12th, as well as February retail sales for the four weeks ended this past Sunday, February 26th. Reported net income for the quarter came in at $1.466 billion or $3.30 per share, compared to $1.299 billion or $2.92 a share -- per diluted share last year, an increase of 13%. In terms of sales, net sales for the second quarter increased 6.5% to $54.24 billion, compared to $50.94 billion reported a year ago in the second quarter.

Comparable sales for the second quarter were as follows: in the U.S., 5.7% for the 12-week period. Excluding gas inflation, 5.8%; Canada, 3.5% reported. A 9.6%, excluding gas inflation and FX; Other International, 3.8% and reported a 9.5% ex gas inflation and FX; for total company of 5.2% reported and 6.8%, excluding gas inflation and FX. E-commerce was a 9.6% -- minus 9.6% for the 12 weeks reported and minus 8.7% excluding FX.

In terms of second quarter comp sales metrics, traffic or shopping frequency increased 5% worldwide and 3.7% in the United States. Our average transaction or ticket was up 0.002% worldwide and up 1.9% in the U.S. during Q2. Foreign currencies relative to the dollar negatively impacted sales by approximately 1.8%, and gasoline price inflation positively impacted sales very slightly by approximately 0.2%.

I'll review our February sales results later in the call. Next on the income statement is membership fee income reported in the second quarter, $1.027 billion of membership fee income or 1.89%. That's for this year's second quarter, compared to $967 million a year earlier. So a $60 million increase in dollars or up 6.2%.

Excluding the headwinds in FX, the $60 million increase would have been higher by $20 million additional. So on an FX-adjusted basis, membership fee income was up just over eight percentage points. In terms of renewal rates, at second quarter end, our U.S. and Canada renewal rates -- our U.S.

and Canada renewal rate was 92.6%, up 0.01% from Q1 end and worldwide rate came in at 90.5%, also up 0.01% from the prior quarter, both represent all-time highs. Membership growth has remained strong. We ended the second quarter with 68.1 million paid household members and 123.0 million cardholders, both up more than 7% versus a year earlier. In terms of -- at Q2 end, we had 30.6 million paid executive memberships.

This is an increase during the 12-week quarter of 630,000 members since Q1 end. Executive members now represent 45% of paid members and about 73% of worldwide sales. Moving down the income statement next on our -- is our gross margin on a reported basis. Gross margin was higher year over year by eight basis points, coming in at 10.72% as a percent of sales as compared to a year earlier second quarter at 10.64%.

Now the eight basis points up, and then excluding gas inflation, it have been up nine basis points. As I always ask you to draw a little chart with two columns, reported and excluding gas inflation, and then we'll go down the line items. Core merchandise was minus six basis points reported and also minus six ex inflation -- gas inflation. Ancillary businesses were plus two and plus three basis points year over year, 2% reward, minus two and minus two basis points.

LIFO, since we had a charge last year and nothing this fiscal quarter, it was plus 14 and plus 14. For a total, again, reported eight basis points up year over year and ex gas inflation up nine basis points. Starting with the core. Our core merchandise grow margin again was lower by six basis points year over year.

In terms of core margin on their own sales, our core-on-core margin, if you will, it was lower year over year by 26 basis points. Most major departments in general were down, with fresh foods being down a little more than others. We're continuing to hold or drop prices where we can due to drive traffic and improve our competitive advantage. Overall, core sales benefited from sales shifting from ancillary and other businesses to core.

Ancillary and other businesses gross margins, again, were higher by two and three basis points ex gas in the quarter. Gas business centers and travel were better year over year, offset in part by e-com and pharmacy. 2% reward lower by two basis points, that's reflective of the higher sales penetration coming from our executive members. LIFO, as I mentioned, was a year-over-year variance of plus 14 basis points.

We had no LIFO charge this fiscal quarter compared to a $71 million charge in Q2 last year. Moving on to expenses, SG&A. Our reported SG&A for the second quarter was higher year over year by 13 basis points. This year, it was 9.11%, compared to 8.98% in the second quarter of last fiscal year.

Jotting down some numbers for the two columns. First column being reported, the second ex gas inflation. Operations was down -- higher -- I said, minus two basis points higher by two basis points, so minus two and minus two; central, minus nine and minus nine, so higher year over year in central by nine basis points; stock compensation, minus two and minus two; and then all told, that would be 13 basis points higher, both on a reported basis and ex gas inflation. The core operations component of SG&A, again, higher by two basis points and also higher by two ex inflation.

This includes the wage and benefits increases implemented last March and last year's third fiscal quarter and last year's third fiscal quarter and an additional top-of-scale wage increase that went into effect July 4th, which was in our fourth quarter of last year. Central, as I mentioned, was higher by nine basis points year over year. About half of this increase is a charge related to a tax audit covering several prior years. Stock comp pretty much as expected, just a couple of basis points.

Below the operating income line, interest expense was $34 million this year. $2 million lower than the $36 million figure in Q2 of last year. Interest income and other for the quarter was higher by $89 million year over year. This was driven by an increase in interest income due to both higher interest rates being earned and on higher cash balances.

The increase in interest income was slightly offset by unfavorable FX. In terms of income taxes, our tax rate in the second quarter was 26.1%, down slightly from the 26.7% figure in Q2 last year. The effective rate for the year, excluding discrete items, is currently -- continues to be projected in the 26% to 27% range. Overall, net income was up about 13%.

In terms of a few other items of note, warehouse expansion. In the second quarter, we opened three net new warehouses, two in the U.S. and one in Australia. Additionally, next week, we'll open our third warehouse in China, with our fourth and fifth China openings -- new openings scheduled to open in the fourth quarter of this fiscal year.

So a total of three this fiscal year in China. In fiscal '23, we expect to open a total of 27 warehouses, including three relocations, so a net increase of 24 new warehouses. These 24 plan new openings are made up of 14 in the U.S. and 10 in Other International.

The 10 in Other international includes the three in China, along with our first Costcos in each of New Zealand and Sweden, both of which were opened during the fiscal first quarter. Regarding capital expenditures, our second quarter fiscal '23 capital spend was approximately $900 million. Our estimate for the year remains in the range of $3.8 billion to $4.2 billion based on timing. In terms of e-commerce, as I mentioned, e-commerce sales in Q2, FX decreased 8.7%.

This weakness was driven mostly by our online mix of sales. Big-ticket discretionary departments like majors, home furnishings, small electrics, jewelry, hardware. These were down 15% in the quarter and make up 58% of our e-comm sales. These same departments, by the way, were down 11% in warehouse, but only make up 8% of warehouse -- total warehouse in-line sales.

Now a few comments regarding inflation. It continues to seem to improve somewhat. Recall back in the fourth fiscal quarter, which ended last August, our estimated year-over-year price inflation was 8% for that prior fiscal year. During Q1, the estimate on a year-over-year basis was about -- came down to 6% to 7%.

In Q2, we estimate that the equivalent year-over-year inflation number has come down to 5% to 6% range and even a little lower than that toward the end of the quarter according to the buyers. We continue to see some improvements in many items. Commodity prices are starting to fall not to back to pre-COVID levels and some examples, but continue to provide some relief, things like chicken, bacon, butter, steel, resin, nuts. Switching over to our inventory levels.

Again, both in Q3 and Q4 fiscal year ends a year -- in fiscal '22. On a year-over-year basis, our inventories were up 26% year over year. And then in our first quarter of this year, they were up 10%, so good improvement there. As of this quarter end, our inventory year over year at the -- as of the end of Q2 was down 2% year over year.

Regarding the 2% drop, we were a bit over inventoried last year as a result of supply chain challenges causing inventory to be backed up at the ports. And talking to the buyers a year ago, the estimate of just timing of getting things across the ocean was 70-plus days. Today, it's back down to 30-ish days. And so we -- supply chain improvement across the board and rates, of course, coming down.

Now turning out to our February sales, the four weeks ended this past Sunday, February 26th. As reported in our release, net sales for the month were $17.06 billion, an increase of 4.7% from $16.29 billion a year earlier in the month of February. Recall from January sales results that the Lunar New Year, Chinese New Year occurred on January 22nd of this year, 10 days earlier this year, the shift positively impacted February's Other International by about 2% and total company by about 0.25%. Additionally, February's results for both the U.S.

and total company were negatively impacted by approximately 1% we estimate as a result of substantially worse weather this year over year. I believe most of that was on the traffic side rather than ticket side. Same-store sales again in the release: the U.S. has reported 3.4%.

Ex gas, 3.5%; Canada reported 1.2%. Ex gas and FX, 7.3%; Other International 6.5% reported, 'ex gas and FX plus 11.5%; total company, the 3.5% reported, which ex-gas and FX was 5%. In terms of e-comm, minus 11.2% reported, compared to a minus 10.3% without FX. That's actually an improvement from our January e-comm results.

Our comp traffic or frequency in February was up 4.9% worldwide and 3.1% in the U.S. foreign currencies year over year relative to the dollar negatively impacted total and comparable sales as follows: Canada, impacted it by 5.5 percentage points; other international by approximately 5.7%; and total company by approximately 1.5%. Gasoline prices were essentially flat year over year, ever so slightly inflationary, but essentially flat. Worldwide, the average transaction for February was down 1.3%, including the negative impact from FX that I just mentioned.

In terms of regional and merchandising categories, general highlights for February that we normally do in the monthly sales call. The U.S. regions with the strongest comp sales were the Midwest, the Northeast, and the Southeast. In terms of whether in international and local currencies, we saw the strongest results in Spain, U.K., and Mexico.

Year-over-year inflation for food and sundries and fresh foods while still elevated or at their lowest levels in nearly a year, with food and sundries inflation dropping to the high single digits and fresh foods to the low to mid-single digits. Moving to merchandise highlights. The following comparable sales results by category for the month exclude the negative -- which excludes the negative impact from foreign exchange. Food and sundries were positive low double digits.

Cooler, food and sundries were the strongest. Fresh foods were up mid-single digits departments included bakery and meat. Nonfoods were negative mid-single digits, and better forming departments included tires, health and beauty aids, and apparel as well as majors jewelry and housewares -- I'm sorry, in apparel, majors, which electronics and big-ticket electronics items, jewelry, housewares, domestics, and small appliances and hardware were the worst performers, consistent with Q2 overall. Ancillary businesses sales were up mid-single digits.

But with food court, hearing aid, and pharmacy were the top performers there. Finally, in terms of upcoming earnings and sales releases, we will announce our March sales results for the five weeks ending Sunday, April 2nd, on the following Wednesday, April 5th, after market close. And with that, I'm happy to turn it back over to Emma for questions and answers. Thank you.

Questions & Answers:

Operator

Thank you. [Operator instructions] Your first question today comes from the line of Simeon Gutman with Morgan Stanley. Your line is now open.

Simeon Gutman -- Morgan Stanley -- Analyst

Hey, Richard. How are you doing?

Richard Galanti -- Chief Financial Officer

Good.

Simeon Gutman -- Morgan Stanley -- Analyst

Can we start, I guess, sizing up the consumer, I want to see how you view February in, I guess, the continuum of months. And then part of it, I think you said the down mid-teens with some of those e-commerce categories, thanks for that information. Is that stable? Is that worse? What's -- how do you kind of diagnose the whole consumer in the business?

Richard Galanti -- Chief Financial Officer

Well, I think as we talked about even the last 12 weeks ago in the quarterly numbers, we've seen some weakness in what I'll call big ticket discretionary items. I think it's -- I'm not an economist, but I think it's a combination of the economy and concerns out there as well as particularly strong numbers that we enjoyed not only a year ago, but a year prior to that, with COVID, we, of course, benefited in big ways with those big ticket items. So all those things, I think, reflect that in those numbers. We're seeing -- there's just a couple of weeks in a couple of regions where we started to set out some seasonal things for spring and summer.

So far, so good, but it's literally small data points in small parts of the country where the weather has been a little better, which is not a lot of places. But anecdotally, some comments were made on things like even some water sports items and camping equipment. But it's a small data set. So we'll cross our fingers and hope to see.

But overall, units are generally fine. I mean there's some things still with like -- on the computer side, there's weakness overall, not just with us. We're still seeing -- I think I mentioned this in the ---on the first quarter call, we're seeing decent sales in units of televisions, while the average selling price points have come down. I think it's just in the next couple of weeks where the new TVs for the upcoming season are coming out.

But other than that, what we look at, of course, is our average transactions or shopping frequency is up. Our new sign-ups are continuing to be strong, up 7% in terms of new sign-ups, less than 3% new openings. So those things bode well, but people certainly are spending their dollars where they feel they should be spending them. And so we'll see where it goes from here.

Simeon Gutman -- Morgan Stanley -- Analyst

OK. Follow-up on EBIT growth. I know you don't guide, but this business has averaged, I think, about high single or maybe around 10% over time. This year, it's a little below average because of some of the lapping, and you are lapping some great fuel gross profit.

Curious the puts and the takes. So whatever number that you expect the EBIT dollars of this business to grow, are you confident in the levers that you have to get there?

Richard Galanti -- Chief Financial Officer

Well, look, we feel good about what we're doing in driving business in the right way and growing our business. As you and others have heard forever, we're a top-line company. While I can't give guidance, certainly, we've seen -- we and everybody who has cash will benefit from earning more money on their interest -- on their cash right now. As we saw in this quarter, there was a $70 million improvement in year-over-year comparison of gross margin simply because of LIFO.

To the extent that we can't predict what's going to happen, at least the trends yesterday that we're starting to see some improvement in inflation. To the extent that continues, we're comparing to LIFO charges in excess of $100 million and $200 million in each of Q3 and Q4. So that's something that we look at as well. The gas is volatile, no pun intended, and it's been quite profitable in some quarters more than others.

But we think that we've got the different levers to -- and puts and takes, if you will, to do that. But ultimately, it's about driving sales. And certainly, we know we're getting the customer in. We're getting more of them in and they're, again, renewing at the highest rate ever.

So that -- we'll go through this as good, if not better than others.

Simeon Gutman -- Morgan Stanley -- Analyst

Thanks, Richard.

Operator

Your next question comes from the line of Michael Lasser with UBS. Your line is now open.

Michael Lasser -- UBS -- Analyst

Good evening. Thanks a lot for taking my question. So, Richard, last time, there was an economic downturn in the United States and globally, Costco performed pretty well, was able to come positive during that time. Is this turnaround, it's a much bigger business and it might exhibit more economic sensitivity So, a, is that how you're thinking about it? And b, what actions would Costco take to preserve its profitability in the event that it saw negative comps in the coming quarters?

Richard Galanti -- Chief Financial Officer

Well, we're going to do things to drive market share, first and foremost. We are certainly cognizant of the bottom line. And I think this is a good example of that -- this quarter is a good example of that. But at the same token, we're going to do what we need to do to drive sales because long term, when we get our customer in and they buy stuff, they're going to come back and buy more stuff.

And we've always done a good job of that. And even in the last -- again, this one is a little different in this economic downturn with the rising interest rates and the headlines of recession and high interest rates. But that being said, I think we're fortunate in the sense that we've got a multitude -- various types of businesses within our business from big ticket discretionary items to food and sundries and health and beauty aids and fresh foods, which is really driving the cart right now more so than it has in the past. So we'll continue to do what we do.

And I remember years ago, someone asked about, if sales were slowing down, what would we do? And we said we'd drive more sales by being even hotter on prices. But generally, that's worked for us, and I see that equation continuing.

Michael Lasser -- UBS -- Analyst

And follow-up question is, to your point, your -- the inflationary number that you cited are lower than what others are experiencing. So presumably, your price gaps are widening, which makes sense and you're delivering more value for your at a time where they arguably need it. And with that being said, how does the fact that you are delivering more value to your consumer and somewhat pressured play into your mindset around whether or not you would raise your fee? I believe this spring would be the 5-year anniversary of the last time you raised your fees and you typically do it around this time?

Richard Galanti -- Chief Financial Officer

Yeah. Actually, June would be our sixth anniversary. But -- and as I mentioned in the previous calls, looking at the last, I think, three, they averaged around five years and seven months, which is about now or last month. And what we said over the last few semesters -- over the last few quarters, it was -- I'm a college kid.

For the last few quarters is that it's question -- in our view, it's a question of when, not if. And so we'll let you know. But keep in mind, that's one way that we become even more competitive. We take those monies and directly become more -- even more competitive.

I might add though, when we do -- our locations do weekly comp shops of 100 to 150 key items, all directly competitive items and then a variety of other our direct competitors and other limited comp shops against other forms of traditional retail where the gap of competitiveness is much greater. But at the end of the day, our relative level of competitiveness in our view is as strong as it's ever been. And we do that weekly in locations. And every four weeks at our -- every four-week monthly two-day budget meeting, each of the regional operations senior executives get up and show those numbers.

And you can rest assured we're going to continue to do that.

Michael Lasser -- UBS -- Analyst

Understood. Thank you very much and good luck [Inaudible]

Richard Galanti -- Chief Financial Officer

There you go.

Operator

Your next question comes from the line of Christopher Horvers with J.P. Morgan. Your line is now open.

Christopher Horvers -- J.P. Morgan -- Analyst

Thanks. Good evening. So following up on the first question, I guess, relative to the last time that you spoke to us, do you think the consumers deteriorate at all? Anything that you're seeing on the what they're buying, how price-sensitive private label, income demographic? What are your observations around the rate of change for the consumer?

Richard Galanti -- Chief Financial Officer

Not terribly different than a quarter ago or probably in David's January sales recording. So again, all centers around big ticket discretionary. And we look at that and we look at how it compared to a year ago and two years ago. We had so much strength there, not only with COVID and people buying big ticket stuff and now the economy and the interest rates.

So that's to be expected. Again, we kind of go a few our strength in food and sundries and fresh foods and health and beauty aids and things like and help to counter some of that. One interesting comment that I think I haven't made in the past, we've been asked that during this concern about inflation and people trading down, have we seen any delta in the sales penetration of our own Kirkland Signature items? And of course, my first comment is that's a trade up. or trade equal, not a trade down.

But at the end of the day, we have seen actually in the last few months a bigger delta than normal. I'd say over the last 10 years, we see a half or a little less than 0.5% a year of increased penetration in the last -- what period was -- for this quarter year over year, we're selling about one and a half percentage -- a little over one and a half percentage point increase in sales penetration on the food side. Foods being anything packaged or dry or wet, you name it. And so that we have seen a little bit of an increase in that.

And I guess that's consistent with the session that people are looking to save money. And of course, if it's our brand, that's great. That creates loyalty.

Christopher Horvers -- J.P. Morgan -- Analyst

Yep. And then on the pricing/LIFO point. Last quarter, you talked about like we could have a LIFO benefit and that could be a source of funds in terms of investing in price. So a two-part question.

If prices stayed here today, would we essentially get back the LIFO headwinds that you had a year ago as we think about going forward? And then the second question is, you mentioned your price gaps are as good as they've ever been. But at the same time, there is some change in consumer. So should we think about that LIFO as a source of funds to further invest in price?

Richard Galanti -- Chief Financial Officer

I don't -- I was looking at more not as a source of funds, but more is it -- look, to the extent that this is just using this as an example, if there was no LIFO charge plus or minus in Q3 and Q4 on a year-over-year comparison, you have, on a pre-tax basis, $130 million positive delta and a $223 million positive delta. Those are nice numbers to have a positive delta. So from a standpoint of looking at the earlier question about, are we cognizant of earnings growth, if you will, or reported earnings per share? A part of that plays into that, that gives us a little bit of cushion there as does gasoline from time to time, as does, first and foremost, stronger sales. So all those things play into that.

But I think generally speaking, we're still going to do what's right in our view to drive sales. That's what we want to do first and foremost. And to the extent that, that example occur in Q3 and Q4, that gives us a little room to do that without even thinking about it.

Christopher Horvers -- J.P. Morgan -- Analyst

And then just from the accounting perspective, do we -- should we automatically get that back if prices stay at these levels on the lap?

Richard Galanti -- Chief Financial Officer

If the lapping stays at zero, yes, there would be no new charge, so it would be comparing to a charge last year. To the extent -- yes, to the extent -- yes, prices were to go down relative to a year ago, you'd actually have a LIFO credit, which would be even a bigger year-over-year delta.

Christopher Horvers -- J.P. Morgan -- Analyst

Understood. Thanks very much.

Richard Galanti -- Chief Financial Officer

Sure.

Operator

Your next question comes from the line of Chuck Grom with Gordon Haskett. Your line is now open.

Chuck Grom -- Gordon Haskett -- Analyst

Hey. How are you doing, Richard? Just curious if you could talk about the gas business from a competitive standpoint and how that's changed bigger picture over the years? And then more recently, how gas balance have trended?

Richard Galanti -- Chief Financial Officer

Yeah. Look, we -- gas has been a relative blessing as well. It's a profitable business. It is volatilely profitable.

Sometimes it's more than -- and sometimes, it's less. But overall, it's a profitable business. It's given us an additional competitive advantage of getting people in the door, if you will. I think it was this last summer into early fall where I've given some numbers where our gallon sales increases in the U.S.

were up in the mid- to high teens compared to darn near flat for the U.S. population as a whole. I announced yesterday on that, and I think that 15-plus percent delta of us versus the U.S. population is still about 10 percentage points.

And so we are still seeing -- taking market share, if you will, of getting people in the And in terms of value, when we look at a value compared to average value across our locations where we do comp shops in some cases every day in many locations. This year to date -- I'm looking at a single-digit number, we feel that we're -- we saved a member of $0.37. That's an improvement. Over the last five years, it's gone from the mid-20s to the mid-30s.

Chuck Grom -- Gordon Haskett -- Analyst

OK. That's helpful context. And then just on the inflation, just as prices have started to come down, curious -- and as you've invested in price, too, curious what you've seen from a demand perspective and how you're measuring success of some of those price actions that you appear to be taking?

Richard Galanti -- Chief Financial Officer

Well, it's an art, not a science. We do some -- we'll look at high-velocity items where we can make a big difference best on some items. On some things, this is just anecdotal because it was from our last budget meeting, with shipping costs coming dramatically down on a 25- and 50-pound bags of jasmine rice. We've seen a big uptick in sales because that's an item that really skyrocketed because it's a -- per pound based on the size of the bag, it was a heavy freight cost.

And so as that comes down, we see that going. We're -- I think we're doing more with our suppliers, changing things around with MVM. Part of that's based on allocation issues of what we have. But overall, no, we're a firm believer if you improve the value by lowering the price and you're going to drive more sales.

Chuck Grom -- Gordon Haskett -- Analyst

Great. Thank you.

Operator

Your next question comes from the line of Scot Ciccarelli with Truist Securities. Your line is now open.

Scot Ciccarelli -- Truist Securities -- Analyst

Good afternoon, guys. Hi, Richard. So you guys, like many others, have seen a shift away from a bunch of discretionary categories, probably stronger sales strength in the consumable category. But gross margins are actually pretty stable.

So I guess the question is, should we start to expect more gross margin pressure on a go-forward basis if we were to kind of see that mix shift continue to lean toward kind of food and consumables?

Richard Galanti -- Chief Financial Officer

Frankly, the delta between those various categories are not as extreme as they used to be. And in fact, in things like fresh foods and food and sundries, some of the weaker categories are -- not that weaker, but lower-margin categories or things like big-ticket discretionary items, we make a smaller percentage, more dollars per unit of course, but a smaller percentage on big-ticket electronics. And so that impacts more the gross margin dollars than the percentages there. If anything -- if you go do a little homework on what the cost of processing and selling a registry chicken, our $4.99 price is -- which we maintain is an investment in low prices to drive membership -- to drive the sales in a big way.

So there are some things that we do, notwithstanding huge inflation and even though some of the costs have come down a little bit, relatively speaking, we want those items in there as well.

Scot Ciccarelli -- Truist Securities -- Analyst

Got it. And then one follow-up here. You guys have obviously done a couple of onetime dividends over the years, but that was always in a really low interest rate environment. And as you guys just reported with your net interest income, you can actually generate some real returns on your cash now.

So does -- I guess the question is, does the higher risk-free interest rate environment actually discourage you from returning that capital through future dividends?

Richard Galanti -- Chief Financial Officer

Well, it helps a little right now. So that's a good news. I don't think it changes our view that the special dividend, which we've done for over the last 10 and a half years, I think, it's still an arrow in our quiver. And at some point, it's something you might see again.

But I'm not trying to be cute. It's kind of like the membership question. We'll let you know when we do it.

Scot Ciccarelli -- Truist Securities -- Analyst

Got it. Thanks, guys. Have a good evening.

Operator

Your next question comes from the line of Karen Short with Credit Suisse. Your line is now open.

Karen Short -- Credit Suisse -- Analyst

Hey. Thanks very much. Good to talk to you. So Richard, I just had a question on -- you made a comment that you're particularly cognizant of the bottom line, I think, was your exact commentary.

So I'm wondering if you can triangulate that with what you think net or pre-tax margin numbers should look like on a go-forward basis, but also triangulate that with the fact that you also commented that you're looking to invest in price to gain share in various categories.

Richard Galanti -- Chief Financial Officer

Sure. Well, I think on the latter comment, we're looking to use price to gain share. We're continuing to do that. It's not like we're going to go do more or less, that's what we do for a living.

We are -- what I was trying to say in the comments that we're particularly cognizant to the bottom line, we are a public for-profit company, and our shareholders want to know what we're doing. We have -- there have been times for those of you that have followed us for many years when we might take a bigger hit on some expense in a given quarter, I think, in fact, many years ago, it was a rotisserie chicken example that we, frankly, I think, have more levers today to adjust things, which helps us. But we're not going to get away from that those two things driving the top line and being cognizant that we're also a public company trying to earn money for our shareholders. But we're going to prioritize driving sales because that will benefit all the other things on the income statement.

Karen Short -- Credit Suisse -- Analyst

OK. And then just on inventory, just obviously, inventory down meaningfully, but any thoughts on how to think about inventory going forward relative to sales given that it was down 2.5%? And I'm not sure how much of that was gas or fuel related. So maybe if you can parse out that relative to ex fuel commentary.

Richard Galanti -- Chief Financial Officer

Yes. By the way, gasoline inventory is very small relative to everything else. And it turns darn near daily. So -- but a lot of the improvement or reduction in inventory year over year was all the stuff backed up with the supply chain challenges and the port challenges a year ago.

So we feel we're in good inventory shape. The flow is much better. And there's always going to be anecdotal examples of stuff that's -- we have a little too much of something or a little too less, but we feel pretty good right now about our inventory levels even by category. There's a few categories, a little over a few categories under, but nothing like when you were 26% up, and you had a lot of, what I'll call, in-transit stuff literally on those pictures that you saw on the news of the ports, on the ships.

And so that's improved a lot.

Karen Short -- Credit Suisse -- Analyst

OK. Thanks so much.

Operator

Your next question comes from the line of Oliver Chen with TD Cowen. Your line is now open.

Tom Boyes -- Cowen and Company -- Analyst

Hi. It's Tom on for Oliver. On digital, can you guys add some color as to how comps are expected to trend in the near term, just given the easing compares in the back half of the year? And additionally, what opportunities lie ahead in terms of digital business from an engagement point of view?

Richard Galanti -- Chief Financial Officer

Well, we don't project where we're going. I was glad at least that February was -- while negative, was a little better than January. We've got additional marketing activities that we've got going on there. We did hire, just five months ago, a new Head of Digital that is in the process of doing a lot of things.

So there'll be more to report over the next several quarters. But -- and there's -- in my view, there's a lot of opportunities in low hanging fruit to do that. The biggest thing that the challenge that we've had just looking at our current numbers was that we've been so successful over the last two years not only did COVID drive huge business on things for home, big-ticket things for home, be it furniture, electronics, televisions, you name it, computers and also the acquisition a couple of years ago or three years ago of what's now called Costco Logistics. Those two things drove that business in such a big way that we recognize that's part of it.

But we're not hanging our hand on that. We want to grow the sales.

Tom Boyes -- Cowen and Company -- Analyst

Great. And then a follow-up on the executive memberships. With the higher penetration there, could you just talk about how those members behave relatively and additionally, the effects on the business from that higher penetration?

Richard Galanti -- Chief Financial Officer

Well, they're more loyal. They spend more and they come more frequently. It's only good stuff. So look, at the end of the day, if we can get somebody to come in the U.S.

as an example, spend $120 instead of $60 at the current rates. And with that, they get the 2% reward with some other benefits on certain consequential transactions. That definitely drives loyalty and drive frequency. And so the executive member spends more and shops more.

And then if we get them also to get the co-branded Citi Visa card, it's even better than that. So all those things work in our view in a positive direction. And so we like the fact that the executive membership penetration helped by its -- we've said in the last couple of years, we brought into a few other smaller countries. You need a core base of 15 or so locations to do it.

And so we've provided in other locations as well. But we're still seeing increased penetration in the U.S. of that. We do a better job, by the way, when somebody new comes in to sign up -- of getting them to sign up.

We do a better job of explaining the benefits of an executive membership than we did years ago as well.

Tom Boyes -- Cowen and Company -- Analyst

Great. Thank you.

Operator

Your next question comes from the line of Kelly Bania with BMO. Your line is now open.

Kelly Bania -- BMO Capital Markets -- Analyst

Hi, Richard. Thanks for taking our questions. I'm going to venture to ask a margin question here. The core-on-core has been down for about eight quarters in a row, I believe.

I was just wondering if you could help us understand the thought process in managing the core margin in that way? And I guess, particularly given your comment that some of the low-margin categories like big ticket are under a little bit more pressure. So maybe even a little bit more surprising. Is it just the way that other mix is shaking out? Is this intentionally? Are you reinvesting any of the maybe gas windfall that we've had over the past several quarters? Are you investing that back into the store? Maybe just help us understand the thought process in this core on core decline here?

Richard Galanti -- Chief Financial Officer

Yeah. I think the biggest component of that answer to that question is our fresh margins have been the biggest piece of that coming down. And looking at it, our fresh margin in Q2 compared to Q2 three years ago, pre-COVID, we're still up about 50, 60 basis points. Now we were up a lot more than that because of all the things that COVID did.

It drove tremendous sales growth in those areas, which created less spoilage, which is a proponent of cost of sales in fresh foods. And labor productivity in places like the -- in the bakery and the meat department. And so it was, if you will, outsized improvement, we're still better than we were pre-COVID. And so I think -- and we've maintained the sales.

When we had outside sales -- and these are not real numbers, I don't have them in front of me, but let's make them up and say that fresh pre-COVID was going up 8% or 10% a year, 8% a year or whatever it was. And then we enjoyed a couple of years of 20-plus percent, I believe. And now we're still doing fine with sales growth, not up to 8% or 10%, but nonetheless. And -- but it's still a positive.

And so we've kept all those outsized gains. But we've also of late, not just the last month or two, but of the last several months have invested in pricing and certainly, fresh helps drive that. And I gave the example of the rotisserie chicken, but that goes through lots of areas of fresh foods where that's the key -- one of the key categories that people come in to shop for.

Kelly Bania -- BMO Capital Markets -- Analyst

And are you thinking of managing that in a way to get back to kind of pre-COVID levels? Or would you let that run a little above for some period of time?

Richard Galanti -- Chief Financial Officer

I don't think we're smart enough to know how to manage all these things. There's so many different components of what is the gross margin from the different core departments to the ancillary businesses, to gas, to LIFO now. So it's -- it really is fluid. And we managing it is -- we do manage it, but it's managing it in an organized chaotic way sometimes, too, as things change every day.

I think we do a great job of doing this -- yes.

Kelly Bania -- BMO Capital Markets -- Analyst

No, agreed, agreed. Just, I guess, following up on the LIFO as it relates to the margin. You gave out some of the numbers in terms of the dollars in the last couple of quarters. Would -- in order of magnitude, would those kind of offset some of the gas margin tailwinds? Is that the way to think about it? Or would the GAAP margin tailwind be bigger or smaller than those LIFO charges?

Richard Galanti -- Chief Financial Officer

Sometimes in a given month, even it can be bigger or smaller, honestly. I mean it does fluctuate -- gas fluctuates quite a bit. But good try on asking.

Kelly Bania -- BMO Capital Markets -- Analyst

Thank you.

Operator

Your next question comes from the line of Greg Melich with Evercore. Your line is now open.

Greg Melich -- Evercore ISI -- Analyst

I think a couple of questions. One, I hate to go back to the membership fee, but it just seems right. Does the $120 executive price point, now that that's what, 43% of members and 70-some percent of sales, does the fact that that's where the bulk of the sales are coming from change the thought process in terms of how you might do the timing of the membership?

Richard Galanti -- Chief Financial Officer

No. Not at all.

Greg Melich -- Evercore ISI -- Analyst

Not at all. Great. And then second is on items in basket, trying to figure out how this comps slow, and I imagine you're still getting that wage inflation. SG&A doesn't deliver more.

Is it -- why is that? If traffic still growing and we have inflation, is it just because items per basket are down? Or how do we think about managing the SG&A dollar growth in this -- not deflationary, but disinflationary environment?

Richard Galanti -- Chief Financial Officer

Yeah. Units are still up. And inflation, frankly, price inflation offsets it a little bit. It helps offset it a little bit.

And I think the focus on trying to keep figuring out how to do things more efficiently. One of the things that, again, that we do religiously every four weeks at the budget meeting is the operators are talking about certain focus items, whether it's improving overtime hours or things we've done to automate something physically improve the flow of goods in a warehouse. We've done a pretty good job of that. And we've done that notwithstanding to off-season wage increases this year.

three off-season wage increases, if you go back, I think, 15 months -- over the last 15 months. So our leverage there very slight deleverage is pretty impressive given that labor and benefits is our single biggest expense category. So it's productivity. And I think we've continued to do a good job with that.

Greg Melich -- Evercore ISI -- Analyst

And the -- and just so I'm getting the math right on the comp. If the comp is running 6 and inflation is running six, then -- but traffic is up three, then items in basket would be down three?

Richard Galanti -- Chief Financial Officer

It's mix. Yes. It's mix .

Greg Melich -- Evercore ISI -- Analyst

It's 100% ASP. Got it. All right, That's great. Thanks and good luck.

Operator

Your next question comes from the line of John Heinbockel with Guggenheim. Your line is now open.

John Heinbockel -- Guggenheim Partners -- Analyst

Hey. Richard, I want to start with -- I know you guys have begun doing a lot more data analytic work. When you -- and you talked about maybe investing in price. Have you done much work on price elasticity by category or item? And you think in the context of nonfoods is where there is softness, right? It's not consumables.

What can you do mid-course correction there, right, on nonfood? Is there elasticity where you can drive some share early in season by making targeted investments in those categories?

Richard Galanti -- Chief Financial Officer

Well, I think there are, and we do. We don't analyze, frankly, the price elasticity on a historical basis other than we know what works in the past and we keep doing it more. It's pretty straightforward. But we're not doing A/B tests or tests and let's take this price delta in this region, down x or up only y in a different region, a different which one works better.

We're pretty singular focused on if we lower the price, we'll do more sales.

John Heinbockel -- Guggenheim Partners -- Analyst

All right. And then just to follow up on that, right. So again, you think about nonfood, what are the buyers -- you maybe nonfoods going to be a little weaker. And it's not all nonfood, right? It's certain categories.

Have you dialed back inventory? Do you want to get product do you get it in early anyway? I'm not sure you can get in earlier. What do you do if anything, I guess, inventory would be the biggest thing?

Richard Galanti -- Chief Financial Officer

Well, first and foremost is being in stock. And to the extent that we bring in a few things early, I think the anecdotal comment I mentioned about water sports and camping, we brought that a little earlier because we had some room. And Neil say there's parts of the country, there's no sense bringing in some of that stuff early, given the weather right now. But at the end of the day, I think we've always done a pretty good job of that as well.

The big thing is, is working with the suppliers. Using electronics as an example, these are anecdotal stories. But during -- while sales were very strong for two years during COVID and supply chain challenges were still there, there was virtually no promotional things. There's now more promotional.

We have -- our buyers are out there making sure that we're getting every promotional penny that's out there and being on top of that with our suppliers. That's part of what we do, but that's been more of a focus. Yes, we focus on the categories that are growing. Examples would be like apparel, which are very strong for us right now.

And part of apparel strength is getting more well-known stuff in.

John Heinbockel -- Guggenheim Partners -- Analyst

OK. Thank you.

Operator

Your next question comes from the line of Paul Lejuez with Citi. Your line is now open.

Brandon Cheatham -- Citi -- Analyst

Hi. This is Brandon Cheatham on for Paul. Thanks for taking a question. I want to go back to your comments on wider price gaps.

It sounds like you're managing the business, it's kind of how you always have. But your price gaps are wider than they ever have been. So I'm just wondering like how has your competitors' behavior changed? There are certain categories that they're not responding to or are they responding slower than they have in the past.

Richard Galanti -- Chief Financial Officer

Well, I think I said that they're as wide as they've ever been. I don't know think they've gotten wider. But we feel very good about where they are. And this is against direct competitors or other large boxes on certain categories, recognizing when it's a traditional retailer, there's a much bigger price gap to start with.

And now remind you also, when we're looking at -- despite the fact that we and another warehouse club essentially sell the same types of items, we want to make sure that on exact like branded items, we're a better price. So on those 100, 150, that's where we look at that they're the most competitive. And whether it's Coke and Pepsi or Advil or Tide detergent or key items that everybody knows the price of or is that same item. There are plenty of items that are differing in quantity, quality, size, color, you name it, where we feel that, in some cases, we have a better value.

But that's up to the customer to behold that. And so we just keep doing what we're doing, we're focusing on those competitive items and constantly figuring out how to drive more value in any item we do. How do we -- especially private label. But how do we upsize the pack while improving the price per unit within the pack.

Even when there was big inflation, how do we -- if there was a 10% increase in inflationary cost increase in something, how do we get the vendor to eat a little of it, we'll eat a little of it. You need to say there's still the majority of that increase is going to be in the price. But how do we also be on that logistically -- not logistically, but from a manufacturing standpoint and a packaging standpoint, how do we lower the price by a few extra percentage points by figuring out how to get x percent more cell units on a pallet by changing the configuration of the pack size. I think we have -- we focus more on that than anybody because we're taking our $230 billion or $240 billion in sales and dividing it by 3,800 items.

So we have many items that are $50 million, $100 million, $300 million, $500 million items. And when we can do that, we can -- we think that we do a good job of that.

Brandon Cheatham -- Citi -- Analyst

Yeah. So that's to say, I mean, you think that you've got maybe a little bit of a cost advantage of your competitors. So they're not able to quite match you when you make moves like this.

Richard Galanti -- Chief Financial Officer

I'm sorry, what was that?

Brandon Cheatham -- Citi -- Analyst

You have a cost advantage -- a little bit of a cost advantage compared to your competitors. So they -- when you take prices down, they can't quite match you. And so that's why you're able to get your price gaps as they have been?

Richard Galanti -- Chief Financial Officer

Well, I think it's our model versus other models. Look, there's -- we have -- we respect and have very formidable competitors, whether it's other warehouse clubs or big box discounters or supermarkets. And we're all doing what we can do to maximize our own respective model. So I think -- no, we -- certainly, when we make some price changes to things, we see our competitors act to them in some cases and not in others.

I think the fact that we have fewer items and we're out there every week, I know that our merchants when they see those comp shops, if there's -- I'm making this up, that there's 100 items and we're the same on 50 and lower on 45 and higher on five, those five better would be changed this week. And we do -- so I know we're on top of it. I can't speak to our competitors, but I assume they are also. But we have a model that allows us -- the cost structure allows us to mark up our goods on average in the low teens compared to traditional retailers in the mid-20s to 100.

So there's -- we have a little room there.

Brandon Cheatham -- Citi -- Analyst

Got it. And I wanted to ask about Sam's Club recently announced that they've done change course and start opening doors. I'm wondering, does that impact you at all on your opening plans? Would you locate in the same place even if you knew they'd be opening nearby or would that preclude you from the area?

Richard Galanti -- Chief Financial Officer

No. We're going to open when we want to open. Certainly, look, whether it's an existing open location or something that we're aware of based on what's going on in the real estate activity out there, which we all know what everybody is doing in advance in a way. And so does it impact us? It may impact us in some examples, whether it's Sam's or somebody else to push this one more soon.

And look, I was going to say, when you asked about them announcing they're going to open more doors, I think they said they're going to announce -- opens up about 30 over the next five or so years -- five or six years. They apparently didn't get the memo that they should close them more. But I'm just kidding. Look, we respect them as a competitor and we don't see that changing what we do.

And there's plenty -- I think it bodes well though there's plenty of capacity still in this country is, of course, in other countries even more so.

Brandon Cheatham -- Citi -- Analyst

Got it. Appreciate it. Good luck.

Richard Galanti -- Chief Financial Officer

Thanks. We're going to take one more question.

Operator

Your last question today comes from the line of Scott Mushkin with R5 Capital. Your line is now open.

Scott Mushkin -- R5 Capital -- Analyst

Hey, guys. Thanks for taking my question. I have tons. But I guess the first thing I wanted to ask a little bit, you gave the regional sales kind of which regions were better.

I mean, obviously, there's been a lot of layoffs in tech. Are you seeing -- you have a huge business out in California. Are you seeing that business underperform relative to just over a couple of month period? That's my first one.

Richard Galanti -- Chief Financial Officer

Not really. My guys here are looking at the numbers and they're saying not really. And what was the gas?

Unknown speaker

[Technical difficulty]

Richard Galanti -- Chief Financial Officer

One of the things that Josh mentioned is, well, we have 400 locations, 400-plus of our 550-ish location U.S. had gas. That's even a bigger percentage in California and higher volume gas units. And with gas pricing -- gas inflation coming down dramatically year over year, that's partly why they're not in the best performers.

If you took that out, there's not a whole big difference out there.

Scott Mushkin -- R5 Capital -- Analyst

And just curious, and maybe this is a silly question. What happens with that gas business, especially in California with the push to EVs?

Richard Galanti -- Chief Financial Officer

Yeah. It's a long road ahead. At some point, we only have 11 carwashes. So we have plenty of room for carwashes 30 years from now.

But at the end of the day, we think it's a very long road. It's not happening in the next few years. And the fact that we're still taking such market share relative to U.S. gas gallons in general is a positive.

So it's a question, but not -- I think it's a question that we can defer for five or 10 years, frankly.

Scott Mushkin -- R5 Capital -- Analyst

Yeah. [Inaudible] California that. My last question, I know the call has gone long. It's -- just wondering about a little bit long term.

The initiatives, you had a big push into fresh several years ago. It's obviously worked out really well. We had the credit card. We had the big push in the big ticket.

Is there anything on the horizon like that, that will change the business a little bit and maybe grow it a little faster?

Richard Galanti -- Chief Financial Officer

Well, international, in general, is plenty of opportunities. If you look at some of the foreign countries as a percent of sales, they are more profitable than the U.S. So those things -- that creates more opportunity. I think -- I don't see anything big right now coming on vertical integration.

Might we do another poultry activity at some point, but that's still a few years down the road to even consider. We did a second meat plant in outside of Chicago for the Midwest and East Coast just a couple of years ago. We're expanding our bakery commissary. So there's nothing another couple of hundred million dollar plus projects going on like that.

I think another area that I think bodes well for us in terms of competitiveness and getting our -- continue to work on getting prices down is working with suppliers, certain things that we currently ship from the U.S. elsewhere or air freight in the case of produce elsewhere, there's plenty of activity going on what I'll call the hot house side, could you grow more vegetables. But that that's all good in concept, but it takes time to figure out. And there's plenty of people trying to figure it out they're there, and so we're waiting for that.

The other thing I think I gave an example a few years ago, something as simple as cash use. Historically, they're all grown and washed and prepped for roasting in Eastern Africa, shipped to America for roasting,- quality roasting, packaging and then shipped out to the 13 or 14 countries. Today, those that are ultimately sold in Korea, Taiwan, Japan, Australia, and China, are now shipped to Vietnam to a quality roaster supplier of ours that grew over time with us. And we dramatically lowered the cost on that portion of a huge amount of dollars.

And then using that to do what we normally do, take 80% or 90% of that savings and lower the price even further in those countries. And we're talking -- there's plenty of opportunities that I know we're now talking with big suppliers of these hundred and multi-hundred million dollar items that we buy, whether it's paper goods, plastic items, things like that, that which of these items could be produced overseas, particularly on the Asia side, and rather than having to produce some here and ship them there. There's a lower cost of production and as long as we can maintain that quality. And so I think there's plenty of -- there's going to be lots of little opportunities that become in total a good opportunity for us.

Scott Mushkin -- R5 Capital -- Analyst

OK. That's great color. I appreciate it.

Richard Galanti -- Chief Financial Officer

Well, thank you, everyone. We're around. I'm sure we'll be talking to a few of you today and tomorrow and early next week. Have a good afternoon or evening.

Operator

[Operator signoff]

Duration: 0 minutes

Call participants:

Richard Galanti -- Chief Financial Officer

Simeon Gutman -- Morgan Stanley -- Analyst

Michael Lasser -- UBS -- Analyst

Christopher Horvers -- J.P. Morgan -- Analyst

Chuck Grom -- Gordon Haskett -- Analyst

Scot Ciccarelli -- Truist Securities -- Analyst

Karen Short -- Credit Suisse -- Analyst

Tom Boyes -- Cowen and Company -- Analyst

Kelly Bania -- BMO Capital Markets -- Analyst

Greg Melich -- Evercore ISI -- Analyst

John Heinbockel -- Guggenheim Partners -- Analyst

Brandon Cheatham -- Citi -- Analyst

Scott Mushkin -- R5 Capital -- Analyst

Unknown speaker

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