morning. My name is Kelly, and I will be your conference operator today. At this time, I would like to welcome everyone to the BJ's Wholesale Club Second Quarter Fiscal 2018 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session.
Session. I would now like to turn the call over to Bill Werner, Senior Vice President, Strategic Planning and Investor Relations. You may begin your conference.
Thank you, Kelly. Good morning, everyone. We appreciate you joining us for BJ's Wholesale Club's Q2 2018 earnings conference call and webcast. Chris Baldwin, our Chairman and CEO and Bob Eddy, our Chief Financial and Administrative Officer will provide you with an overview of our results followed by a Q and A session. Before we begin, please remember that during this call, we may make forward looking statements within the meaning of the federal securities laws.
These statements are based on our current expectations and involve risks and uncertainties that could cause actual results to differ materially from our expectations described on this call and today's press release. Please see the Risk Factors section of our prospectus filed with the SEC on June 28, 2018 for a description of those risks and uncertainties. Finally, please note that on today's call, we will refer to certain non GAAP financial measures that we believe will provide useful information for investors. The presentation of this information is not intended to be considered in isolation or as a substitute for the financial information presented in accordance with GAAP. Please refer to today's press release and the information posted on the Investors section of our website for a reconciliation of the non GAAP financial measures to the most comparable measures prepared in accordance with GAAP.
With that, I'll turn the call over to Chris.
Good morning. Thank you for joining us for our Q2 earnings call and our first since we've reentered the public markets. In addition to discussing our Q2 results, I'll talk about the company we are today, the key changes we've made over the last few years and our strategies to win going forward. Our Q2 performance shows that we continue to make progress in our transformation as we exceeded our internal expectations. Based on our performance, we have increased our internal expectations, which Bob will cover when he provides guidance.
I want to start by thanking our more than 25,000 team members who delivered these results by providing great value and outstanding service to our members. When I joined the team in 2015, we knew we had a great foundation, a strong value proposition, a real estate portfolio that was unmatched on the East Coast, a large and healthy membership base and a key differentiator in our fresh business. But as you all now know, our business at that time was stuck. We lacked the systems and capabilities to support growth and we had under invested in key areas of our business. Our transformation is built on our strong foundation.
We're taking a very disciplined approach to investing in these capabilities, systems and people necessary to unlock our true potential. As a result of this work, BJ's is quite a bit different today than we were even 2 years ago. Our Q2 results show that our transformation is continuing to make progress. This progress is accelerating, but we know we're still in the very early stages. We have much more to do and importantly much more opportunity ahead of us.
Today BJ's Wholesale Club has significant regional scale with 2 15 clubs in 16 states up and down the East Coast. We have more than 5,000,000 members. Providing outstanding value and service to these members is core to our strategy. Our success is driven by the outstanding value we deliver to our members, the unique product assortment and the subscription based membership model that creates dependable and resilient earnings streams for our company and shareholders over time. Our Fresh offering delivers outstanding member value and we've invested to improve our Fresh operations over the past 2 years.
As a result, we sell about 50% more fresh food per member per year than our club store competitors. As a private company, we have made very disciplined investments in systems and technology including fully installing SAP and improving our omni channel capabilities. We have also invested in people, marketing and membership to fuel our growth. Our work has been focused on building capabilities in 3 broad areas that are crucial for driving growth. Those areas are promotional effectiveness, assortment management and pricing capability.
First, I'll talk about promotions. Our investment in SAP and promotion management enabled us to deliver personalized promotions to our members and potential members. This is key to driving member engagement and attracting new members. We've been able to deliver digital coupons and personalized promotion based on shopping habits for the first time in our company's history, delivering tremendous value to our members and most importantly driving trips to our clubs. 2nd, assortment management.
Our investment in assortment capabilities has given our business more flexibility in delivering the treasure hunt that is crucial to building member engagement and providing value. We're able to turn our assortment and chase new opportunities faster and more efficiently than ever before. Our work in this area also creates the potential for us to enter a number of new categories moving forward. 3rd, our pricing capability. We are relentlessly focused on delivering value to our members.
Our members save about 25% versus grocery store prices and we continually compare our prices against competitors to ensure that we are delivering phenomenal value. Our investment in pricing capabilities is key to our success and we now have more timely accurate data to maintain this critical component of our strategy. We have also created a more robust procurement process, instilled SG and A discipline and eliminated unprofitable sales, while simultaneously investing for growth. These investments have set the stage for our growth as we reenter the public markets and have contributed to our recent improvement in comp sales, membership renewal rates, profitability and cash flows. I'm pleased to report that in the Q2 we saw net sales growth of 4.3% and merchandise comp sales of 2%, our 4th straight quarter of improving merchandise comps.
Adjusted EBITDA was $143,000,000 which is up 5.4% over last year and is an all time high for our company in the Q2. We're proud of our progress during the quarter, but more importantly, we see significant opportunities ahead of us. Let me take a moment to speak about our plan. 1st, acquiring and retaining members. Membership growth starts with providing outstanding value to retain current members and attract new ones.
The average BJ's member can save about 10 times their investment in membership fees each year. As we invest in acquiring new members, we work to highlight the value we offer to our members to our BJ's members. We're committed to using data to target potential members and consistently reach out to prospective members through both physical and digital channels. We've made significant progress in acquiring members through digital means. On a year to date basis, we've nearly tripled the percentage of members acquired through digital channels.
We see great opportunities in this area moving forward. We are aggressively testing and using social and digital media to reach younger audience and we are using mobile technology to target prospective members. We continue to invest in engaging and retaining our current membership base. We use our data to provide personalized promotions based on shopping habits, which improves member value. Programs such as our best in class credit card offering and our easy renewal program deliver better member value and convenience while driving retention and engagement for our company.
As a result, our membership renewal rates are at all time highs. This year, we successfully executed a membership fee increase which has met our very high expectations. We're pleased with our efforts to attract and retain new members and have a long, long runway ahead of us to continue to drive membership growth. 2nd, we intend to deliver value to get members shopping. Our fresh food business is key to delivering member value and driving visits to our club and we saw the results of our investments in Q2.
We saw growth in our dairy, seafood, floral and frozen offerings driven by new items and a relentless focus on value. We've also been successful in our grocery offerings seeing growth in salty snacks, water, active nutrition among many other categories. Our growing general merchandise business is key to creating the treasure hunt that drives trips and engages members. Our investment in assortment capabilities let us deliver exciting new products whether it's the latest fashion trend or the hottest electronics all out outstanding value. Apparel is one example of how our investments are helping us drive growth in general merchandise.
We continue to invest in assortment adding new brands and styles at outstanding value while improving our merchandising. This is an important category for our business and for our members. As a result of investments in systems and execution, we now change our apparel inventory 3 times more often than we did just 2 years ago, providing our members with the latest fashion trends in seasonal apparel. As a result, we saw significant sales growth in apparel in Q2. We have a strong pipeline of new items and look forward to launching exciting new brands at great prices in Q3.
Our investments in merchandising and assortments also drove our TV business growth during the quarter, making it easier for members to shop this very important category. Our seasonal business including air conditioners, grilling and garden supplies also grew in the quarter driven by new brands, exciting products and improvements in how we display our merchandise. Our private label brands are crucial to providing value to members. These brands, Wellesley Farms and Berkeley Jensen, continue to perform well and represented more than 20% of our sales in the quarter. Private label enables us to provide our members with high quality national brand equivalents and other unique product offerings at roughly 20% to 30% savings to the branded equivalent, while also providing higher margins to our company.
In Q2, our private label seasonal items performed particularly well with increases in both sales and profitability. Mother's Day was a good example of how we plan to use private label brands to aggressively engage our members. We created outstanding Wellesley Farms floral displays showcasing our high quality products at great prices. We have a strong pipeline of new private label items and merchandising plans including a much better assortment of Wellesley Farms and seafood scheduled for Q3. 3rd, we aim to make it more convenient to shop at BJ's.
We are investing in member value by providing by improving our omnichannel capabilities as we make the club experience easier and more convenient for our members. We rolled out a brand new online platform during the quarter, improving the entire portfolio of our technology infrastructure, payment options and online member experience. This is our largest digital upgrade in more than a decade. Our cloud based platform is scalable for growth and enables us to innovate and quickly launch new services. As a result of our upgrade, we were able to roll out buy online, pick up in club to all 2 15 clubs in the quarter.
Early results indicate that BOPIC is a strong offering. Members using the service tend to be younger and have significantly larger baskets than other shoppers. In addition, we're seeing that about half of BOPIC users make additional purchases once inside the club. We've also added same day delivery across the chain for this quarter. Same day delivery is now available to more than 70% of our members.
This service provides great value to members by offering grocery delivery at club prices for members who order on delivery.bjjs.com. Members love the convenience of these new offerings. We're still very early in the very early stages and we expect to see strong growth in Q3 and beyond. Our tire business is also a good example of how our investments in omni channel can drive member behavior in existing categories. We recently upgraded our tire website and improved our assortment to make it more convenient for members to take advantage of the outstanding value we provide in this very important category.
As a result, we've seen significant year to date growth in digital tire sales. Feel very good about this area of our business going forward. The most mature of our omnichannel investments is in our app, which is less than 1 year old. Our app recently reached 1,000,000 downloads, which is well ahead of our expectations. Our app receives higher ratings than many of our competitors and members love the convenience of downloading digital coupons to their phones.
Our omnichannel investments are off to a strong start. Members are responding to the added value and convenience and we'll update you on these programs as we continue to make progress in the months ahead. Finally, we plan to expand our strategic footprint. We've reinvented the BJ's Club opening model using a data driven approach that has yielded much better new club performance. We applied this approach as we planned our newest club and gas station in Roanoke, Virginia, which is on track to open this fall.
Membership continues to increase as excitement in the community grows. Looking ahead, we are planning to open 15 to 20 new clubs over the next 5 years, focusing on infill and markets adjacent to our existing locations. Above all else, the key to our transformation has been our team. We have focused on developing and recruiting outstanding team members at all levels of the company. Over the past 2 years, more than half our senior team are new to BJ's or in new roles.
We continued this trend in recent months, adding experienced retail executives to lead our real estate and human resources functions. We've also added a new executive to a senior role in our club operations team. These are crucial areas for us and I'm thrilled at the level of talent we've been able to attract. I'm proud of the team and what they've accomplished. I'll reiterate that we're in the very, very early innings of our transformation at BJ's, pleased by the progress we have made and excited about the opportunities that lie ahead.
We believe we have the right strategic focus and the initiatives in place to drive further improvement. And with that, I'll turn the call over to Bob who will review our results and outlook for the year in more detail. Thanks, Chris. Good morning, everyone. As Chris mentioned, we're excited to share BJ's story and our Q2 results with you.
In the Q2, we beat our internal expectations for top line, comp sales, margins, membership fees, profitability and cash flow. These gains were driven by our ability to continue the momentum we've built over the past few quarters. Our category profit improvement or CPI process and improving private label execution have yielded great margin gains allowing us to invest considerably in membership and merchandising initiatives that have fueled our top line growth. For the quarter, net sales increased by 4.3% to $3,200,000,000 compared with $3,100,000,000 last year. Comp sales increased by 5%, which included a 3% favorable impact from the sale of gasoline.
As a reminder, our comps are reported on a shifted basis in accordance with the NRF calendar. Merchandise comp sales, which exclude gasoline sales increased by 2%. We're proud to report that this is our 4th consecutive quarter of merchandise comp sales gains. Our general merchandise business led our merchandise comp sales gains with a 4% comp during the quarter. At this time last year, we were in the final stages of making significant moves within our general merchandise assortment including largely removing jewelry in favor of apparel.
Our Q2 GM comps reflect the positive impact of these changes. We revamped our summer seasonal and TV assortments as well and saw strong gains in those categories particularly later in the quarter. Comp sales of our edible and non edible grocery businesses respectively increased by 2% and 1% during the quarter. These gains were driven by more effective promotional tactics as we get smarter about promotional effectiveness and member engagement. Our perishable business saw a comp sales increase of 1% owing to our continued improvements in the execution of this part of our offering.
For those new to the BJ's story, we have been working hard to make sure that our members experience the best product considerable progress in the Q2. You should also know that there were certain unprofitable areas of our business that we strategically chose to exit while we were a private company. Our cafe business is one example that we have yet to fully cycle. The result has been an increase in profitability in our fresh business at the expense of some lost sales throughout this year in our fresh business. Membership fee income grew by approximately 10% versus last year driven by the increase in our membership fee, which went into effect in January of this year as well as the results of our continued focus on new member acquisition.
Member reaction to our recent fee increase has met our high expectations. We also continue to invest to drive members into our higher tier memberships as those offerings create a higher lifetime value for us and the best value for our members. Gross margin dollars increased by $35,000,000 to $589,000,000 and gross margin rate increased by 40 basis points to 18.2%. As you know, gasoline is sold at lower margins than much of our other merchandise. Excluding the impact of gas sales, our merchandise gross margin rate increased by approximately 80 basis points over last year driven by our procurement initiatives.
While driving these margin gains, we effectively managed our distribution costs and invested in member value to maintain our price advantage versus our competition. Since we began our CPI process 2 years ago, we have secured more than $300,000,000 in procurement cost savings. That is more than double our initial savings estimates and there is definitely more to go. We continue to work with our supplier partners to optimize our inventory assortment and our procurement costs. SG and A expenses were $549,000,000 compared to $477,000,000 last year.
When evaluating this number, you should consider some expenses incurred this year that relate to our IPO. Included within our $52,000,000 total stock compensation expense is a $49,000,000 charge related to certain equity awards that were issued in connection with the company's IPO. SG and A also included management fees to our private equity sponsors of $1,000,000 Our quarterly management fee arrangement was terminated in connection with the IPO and as a result you will not see this item going forward. We also incurred approximately $1,000,000 in other IPO related expenses. We have included adjustments for each of these expenses in arriving at adjusted net income.
Excluding these one time expenses related to our IPO, SG and A for the 2nd quarter was $498,000,000 compared to $473,000,000 in Q2 last year. The increase was driven by continued investments in membership acquisition and talent additions in key growth areas of the business. Operating income was $39,000,000 compared to $75,000,000 last year. Operating income increased by 14% to $90,000,000 from $79,000,000 in the same period last year, excluding the IPO related charges I referenced earlier. Interest expense increased to $60,000,000 from $44,000,000 in last year's Q2.
This year's this quarter's expense included a charge of $19,000,000 related to the extinguishment of our 2nd lien term loan. Assuming the IPO and related 2nd lien payoff took place at the beginning of the quarter and excluding that debt extinguishment charge, interest expense would have been $31,000,000 For the quarter, we had an income tax benefit of $15,000,000 compared to an income tax expense of $11,000,000 in the prior year. The benefit was driven by 2 things. First, the lower taxable income driven by stock compensation and other charges related to the IPO and second, by the $9,000,000 windfall tax benefit that occurred as a result of stock option exercises by former executives during the quarter. We expect to continue to experience windfall tax benefits as stock options are exercised in the future.
However, timing and amounts of any windfall benefits are difficult to estimate. For the quarter, we reported a net loss of $5,600,000 or $0.05 per diluted share compared to net income of $20,000,000 or $0.22 per diluted share in the Q2 of fiscal 2017. Adjusted net income was $43,000,000 an increase of 42% from the $31,000,000 in the prior year period. Adjusted net income excludes the after tax impact of the IPO equity awards, IPO costs, management fees, interest and charges related to the extinguishment of our 2nd lien term loan and the windfall tax benefit from option exercises. For the purposes of calculating adjusted net income, we have used a normalized tax rate of approximately 27 percent.
Our press release includes a table that reconciles GAAP net income to adjusted net income including on a per share basis. Adjusted EBITDA increased to $143,000,000 from 130 $6,000,000 in the comparable period last year. This is a record level for us in the Q2 and we're proud of the continued steady increase in profitability we have experienced over the last 10 quarters. For clarity on the adjustments used to arrive at these figures, please see the non GAAP tables included in our press release. Moving now to the balance sheet.
Total inventory was down 3% over last year's Q2. We continue to execute on plans to better manage our inventory levels and cash flows. Our AP to inventory ratio, a key measure of our working capital efficiency came in at 78% versus 73% last year. Total debt was $1,960,000,000 at the end of the second year end of this year's Q2 compared to $2,770,000,000 at the end of last year's Q2. The reduction in debt was due to the payoff of the 2nd lien term loan and a partial pay down of the ABL using IPO proceeds and operating cash flows.
Our net debt as of the end of the Q2 this year was $1,930,000,000 and our net debt to LTM adjusted EBITDA at the end of the second quarter was 3.4 times. Year to date free cash flow which we define as operating cash flow less CapEx came in very strong at $128,000,000 versus $8,000,000 in the prior year. The prior year included a one time cash outflow of approximately $73,000,000 for the compensatory payments related to options for our February 2017 recapitalization. Therefore, a more appropriate comparative prior year amount is $81,000,000 The strength in this year's cash flow is driven by our improved profitability and our strong working capital management. Before I turn to our outlook for the remainder of the year, I'd like to recap some of the key events and transactions that have taken place recently as we expect them to yield annual interest savings of approximately $75,000,000 On June 27, we completed our initial public offering.
This offering yielded net proceeds of approximately $691,000,000 which were used to fully extinguish our 2nd lien term loan and to partially pay down our ABL. Next, shortly after our IPO, we received ratings upgrades from both Moody's and Standard and Poor's. Our current corporate family ratings are now B1 at Moody's up from B3 and B at S and P up from B minus. On August 13 17 respectively, we closed re pricing transactions of our 1st lien term loan and our ABL facility. Our 1st lien term loan is now priced at L plus 300 and includes a step down to L plus 275 upon reaching 3 times leverage.
Our ABL is now priced at L plus 125 with the term loan portion of the facility priced at L +200. We also extended the maturity of our ABL for a new 5 year term. Further, we drew $350,000,000 on our ABL and paid down the 1st lien term loan to capture even greater interest savings. Note that the results of these repricing transactions have not been included in the Q2 adjustments I discussed earlier. Assuming LIBOR rates at the end of last fiscal year, the payoff of the 2nd lien will reduce our annual interest expense by $58,000,000 and the repricing of the remaining facilities will reduce our annual interest expense by an incremental $16,000,000 for a total annual interest expense reduction of approximately $75,000,000 We've grown the top line and profitability of our business along with free cash flow in both the second quarter and first half of this year.
Going forward, we believe the momentum of the first half will continue and our bottom line results will be aided by the deleveraging effects of transactions I just reviewed. Based upon our performance to date and the repricing transactions, we have increased our internal expectations for the year and offer you the following outlook. For the year, we expect net sales to be in a range of 12 point $6,000,000,000 to $12,700,000,000 with merchandise comparable store sales excluding gasoline of 1.8% to 2.1%. We expect interest expense for the full year including the anticipated benefit of the August 20 18 repricing transactions and excluding interest in the first half of fiscal twenty eighteen related to the 2nd lien term loan to be $115,000,000 to $118,000,000 In other words, we expect interest expense in the back half to be $54,000,000 to $57,000,000 We assume a tax rate of 27%. That rate will vary with any discrete items in each period.
And as I mentioned earlier, the tax rate will benefit to the extent that there are additional option exercises that generate windfall tax benefits. For the year, we expect net income to be in the range of $101,000,000 to $111,000,000 or $0.83 to $0.91 per share based on $121,900,000 diluted weighted average shares outstanding. We expect adjusted net income in the range of $163,000,000 to $173,000,000 or $1.17 to $1.24 per share based on $139,200,000 adjusted diluted weighted average shares outstanding. We expect adjusted EBITDA to be between $553,000,000 $563,000,000 for the year. And finally for the year, we expect capital expenditures to be in the range of $160,000,000 to $170,000,000 As I mentioned earlier, we expect to open our new club in Roanoke, Virginia in the Q3 and a club in Clearwater, Florida right around the end of our fiscal year.
We have also built a great pipeline for next year that we will discuss with you on future calls. As we look out beyond this fiscal year, our longer term financial goals include average annual revenue growth of 2% to 3.5% driven by new unit growth of 1% to 2% and merchandise comps which exclude gasoline of 1% to 2%. We target long term adjusted EBITDA growth of 5% to 7% and low double digit adjusted net income growth. And finally, our net leverage target is less than 3 times as we continue to pay down debt with a substantial free cash flow that this business generates. We anticipate being below 3 times net debt to adjusted EBITDA by the end of next year.
In closing, I'm proud that our continuing transformation has yielded Q2 performance that exceeded our internal expectations. I'm also happy to have reported to you an outlook for the remainder of the year that reflects our great performance in Q2 along with the meaningful impact of our debt repricing transactions. I look forward to delivering on our goals for the remainder of the year. And now I'll turn the call back over to Chris for closing comments before we begin the Q and A session. Thanks, Bob.
We're pleased with our Q2 results which exceeded our expectations. More importantly, we're still in the very early stages of our transformation. We see significant opportunities ahead of us as we work to attract and retain members, deliver value to them to get them shopping and make it more convenient to shop at BJ's Wholesale Club. Now let's go to questions.
Certainly. Your first question comes from the line of Robbie Ohmes from Bank of America Merrill Lynch. Please go ahead.
Hey, good morning guys. Thanks for taking my question. Actually, it's going to be a couple of quick questions. The first is, I was wondering if you could give us some color on the traffic versus ticket breakout in the comps And maybe within that, I know you gave the grocery comp, but maybe discuss the inflation part of your grocery business and also what the competitive environment looks like on the grocery and fresh side of your business? And then my second question is the sorry, the membership fee increase, I think you guys said something like met our high expectations on renewal rates.
Can you maybe, Chris, give us color on and maybe remind us what you're doing to keep those renewal rates so high post the membership fee increase? And if you can give us any numbers around that renewal rate, that would be terrific. Thanks.
Thanks Robbie. Thanks Robbie. On traffic and ticket, we saw a balanced contribution between both traffic and ticket in the quarter. We felt very good about both elements of the proposition. While we're not going to get into the specific numbers, we consider it an equal contribution from both.
I'm going to combine my answer on grocery and competition. Over the course of the quarter, Robbie, as you know, we're very disciplined in how we approach our pricing proposition as it's fundamental to the model of club stores. And across the quarter, we had no change in our pricing stance relative to our competition overall. Our pricing versus grocery is 25% or more better, And we have a 10% to 15% advantage versus mass. And we price equally every day to our club store competitors.
That we feel very good about our competitive position. There are certainly occasional regional dust ups in terms of certain key items that get football, but we feel very good about our overall pricing proposition to our members. On the renewal rate, overall, we've done a really good job of communicating value to our members and continuing to add value and we're encouraged by what we're seeing in terms of execution around the pricing changes. As you think about the flow through of the renewal price excuse me, the membership price change, about half of it comes from new members and about half of it is flow through the higher fee. And the biggest driver of our ability to keep our renewal rate high is the ability to execute on easy renewal, which we discussed at use for some length and continue to progress in improving our credit card offering, which saw a stronger performance.
Lastly, I think the last part of your question was about inflation. We saw inflation to be about flat on the company for the quarter. No real material change either up or down. Thank you very much for your questions. Hope I hit the question.
Thanks, Chris. Thank you, Ravi.
Your next question comes from the line of Christopher Horvers from JPMorgan. Please go ahead.
Thanks and good morning guys. Can you talk a little bit about how you think the weather perhaps impact 2nd quarter comps? I know there was some shift and I think you got some hot weather in there as well. Sam's talking about or Walmart's talking about good beverage sales and so forth. And any thoughts in terms of how you're capitalizing on and quantification of what you're seeing from a Sam's List perspective?
From a Sam's List perspective, it certainly helped our comps overall. But on weather overall, Chris, the early part of the quarter was really weak. It was a wet cold start to the 2nd quarter. But we feel like we made up for it in the back half with hot warm weather. And one of the reasons I made some comments on active nutrition and beverage that I did is reflective of that.
Our general merchandise proposition also responded very well with air conditioner and grilling sales and seasonal garden sales to be were very, very strong towards the back half of the quarter. So overall, I would characterize weather is about neutral with a bad start and a stronger finish. And I would characterize the impact of Sam's to be certainly a contributor, but we feel good about our business overall.
Understood. And then as it relates to the gross margin, 2 margin follow ups. As it relates to the CPI benefits, when you were out on the roadshow process, you talked about really not expecting much incremental benefit from new negotiations with the vendors. Can you talk about how those vendor negotiations have proceeded and whether or not we're including any incremental benefits in the gross margin outlook? And then lastly, on advertising, can you talk about sort of the amount of pressure that you saw on SG and A from a rate perspective relative to advertising?
That'd be great. Thanks very much.
Yes, I'm going to make a broader strategic point and then I'll ask Bob to follow-up. Overall, we feel very good about the procurement capabilities we built. And one of the things that we think a lot about as we run our business and speak to you about it is the discipline with which we approach the delivery of sales margin and cash flow performance. So with that discipline, we feel really good about where we are and we're really good about where we're going. So I'll let Bob take the specifics on CPI.
Yes. Hi, Chris. So when we were on the roadshow, I think we talked to everybody about the fact that we've completely reinvented our procurement processes and had tremendous success doing that. In my prepared remarks, I talked about the fact that we've yielded $300,000,000 in procurement savings program to date. So over a couple of years here, more than double what we thought we would do initially.
And that over performance is the result of the fact that we continue to get better at changing the story in our suppliers' minds in terms of how we can grow together. And it's important to note that that if you're comparing against the S-one, we had told you $260,000,000 in the S-one and we're now sitting over $300,000,000 So we clearly have been getting a little bit more successful at doing it, getting a little bit more sophisticated at this process and adding new wrinkles into it. So you'll see in the future an increasing press forward on private label as part of these discussions on the growth of your aspect of our assortment aspirations here. So we've had tremendous success to date and we do see continuing success going forward. As we talked about on the roadshow, I think we certainly hit the majority of our categories once but every single category we've hit a second time has yielded more results when we go through it again.
And so we certainly feel like there's a whole lot more to go get. It seems to take on a different life every quarter. I would tell you with that color 80 basis points of merchandise margin growth was a really strong quarter. And if I were to give you a detailed guidance going forward, I probably would not forecast 80 bps for Q3 as for instance, but we absolutely see more here out of our CPI program. And we'll use it as fuel for growth in the merchandising and marketing initiatives that Chris talked about.
And we'll obviously use it to make sure that we continue to provide the outstanding value we provide to our members going forward. That is our first commandment. We have to provide that value every single day.
And then on the advertising to leverage?
Yes. Thanks for reminding me. Advertising was about half of the remaining increase after you deduct all the IPO related stuff. So we've been investing disproportionately in both promotional advertising as well as even more so in membership acquisition. So if you think back to the story we told you on the roadshow, we have changed our entire membership approach from a periodic membership acquisition campaign that took place in the fall and the spring to an always on campaign.
Underlying that is a simple thought of the lifetime value of a member is on an average member is about 10 times the marginal acquisition cost of that average member. And so we should be disproportionately investing in this all day long. We have certainly done that throughout the first half of the year. We will continue to do that in the future. And that stopped up a meaningful part of that increase in SG and A.
Understood. Your
next question comes from the line of Mike Baker from Deutsche Bank. Please go ahead.
Thanks guys. Can you hear me okay?
Sure can Mike. Hey Mike.
Good. Thanks. Just wondering if you could provide you provided some color, I suppose, that we can back into on the monthly trends, but any quantification or additional color on how the comps trended by month? And I guess related to that, your implied back half comp guidance does suggest a pretty big acceleration on a 2 year basis. It suggests comps around 2% for the back half against much more difficult comparisons.
What gives you that confidence? Is it based on the trend that you're seeing throughout the
quarter? So absolutely, Mike. Thanks for those questions. We certainly did see as Chris mentioned earlier better
back part of
the quarter than the front part. May was pretty slow for us. June was about right on the average for the quarter and July was I think our best comp month of the year so far. So we felt like coming out of the quarter we were in great shape. Some of that as Chris talked about was the impact of weather, but the underlying businesses all performed very well.
You're right on that the guidance for the back half is a pick up from our internal expectations and that is really the feeling that we have coming out of the Q2 and the momentum provided by that plus what we view as the contribution from our membership programs going forward and the changes in assortment and other merchandising tactics that our merchants are putting together now for the back half. I would tell you that we expect Q4 to be stronger than Q3 from a comp perspective. So as you're tuning in your models, think about that. But overall, we're very comfortable with our momentum coming out of Q2 and foresee a good back half.
Okay. Well, so I had another follow-up, but something you just said will lead me to a different follow-up. Why would Q4 be better than Q3? What's behind that comment?
I think part of it is what's going on in the prior year and you pointed back to much tougher comparison. Q3, we had a pretty strong benefit last year from all of the after hurricane impacts. And so we've got a bump up against that in this fiscal year. So all things equal that's why I would tell you Q3 will be a little lower than Q4. If you want more color, I feel
a little bit better about
our contribution from omni channel in the back half and the items that our merchants are cooking up for a holiday season look like they're better than last year as well. So that's what I would tell you on that.
Okay, thanks. I'll turn it over to someone else now. Appreciate the color. Thanks,
Mike. Your next question comes from the line of Matt Fassler from Goldman Sachs. Please go ahead.
Thanks a lot. Good morning, guys. Hi, Matt. My primary question, I'll try to stick to the operator's rule, relates to membership tiers. And I know a big part of your story relates to signing people up at the higher tiers of membership, getting people on to the private label credit card, upgrading those who have already been members.
Any color as to the progress that you saw on that front during the quarter?
Sure. We continue to see progress. We continue to make changes to our world here and trying to invite progress. So one thing we're working on is co brand application at the register and that will hopefully roll out here in the next few weeks and allow us to really turbocharge that program. For Color, we do about $110,000,000 transactions, dollars 10,000,000 at membership desk and $100,000,000 at the register.
So currently we're only accepting apps at the membership desk and some tabling events and things. So if we can get people going through the register and not meaningfully add to the lines that we have in our registers and turbocharge the program that way we would consider that a home run. We continue to try and think of ways to tweak the program and build upon the program. The penetration of the car continues to increase both at the register and the gas pumps. Gas pumps is probably the most meaningful increase up to up over 20% of our transactions at the gas pumps are using the co brand card.
So that $0.10 off a gallon really matters to people. And as Chris mentioned, getting folks into easy renewal has been a nice tailwind here as well. We're up around 47% of our members in easy renewal at this point. That's up 7 or 8 percentage points from the end of last year and well towards our goal to get to where we want to be at the end of this year. That's providing a nice offset to the fee increase headwind that Chris talked about and will allow us to build from there.
And I think this follow-up follows naturally from your last answer I can slip it in. Gas gallon comps versus the merchandise comp average for you?
Yes. Guest count comps are about flat, Matt, quarter over quarter.
Great. Thank you so much.
No problem.
Your next question comes from the line of Chris Mandeville from Jefferies. Please go ahead.
Hey, thanks for taking my questions. Majority has already been asked. So I guess just focusing in on free cash flow, you obviously alluded to in your preamble that you've made some good gains on inventory management. Receivables were also down as well, payables were up low to mid single digits. So can you just speak to the opportunity that remains on improving working capital?
Do you have any type of target or goal set that you could share with us over the next 12 to 18 months?
Sure. So certainly we made some nice progress on inventory in particular. We look at that inventory to accounts payable ratio as an important one. Obviously, the club business is special and that it sells most of we sell most of our inventory before we have to pay for it. So we sold 78% of our goods before we had to pay for it this quarter.
That was pretty strong for us. I would tell you some of the inventory decrease was timing of receipt of goods as we play around with what comes in for the back half. The rest of it was real inventory sustainable inventory decreases. We continue to work on that. Our logistics team is pretty special from that perspective.
And we'll continue to do so. The reference to accounts receivable in there as well that tends to be timing of credit card receipts and rebate receipts more than anything. So I wouldn't pay too much attention to that. That's why we stick to AP to inventory ratio. And we'll continue to work on this.
The biggest the next big chunky opportunity for us is to take advantage of the new generation of logistics systems that are out there and we will do that in the coming years. It takes a while to put those things in and do it right without disrupting your business. We will do that in the coming years and that we think is worth call it another $50 or so 1,000,000 of inventory savings there. But that's the next leg out. All these working capital gains we've used to delever and we'll continue to do that.
So nice results, we're proud of them during the quarter. We see a little bit more runway here in the back half, but the next big leg is that systems update.
Okay. And then I know it's only been a few months, but how receptive has your customers been thus far with Instacart? Can you provide any insights on basket size or the categories that are being shopped versus in store today? And then can you just remind us of what other digital initiatives we should be looking forward to in the coming year? Thanks.
Sure. Thanks for your question, Chris. A couple overall, our intent at a strategic level is to make our club the most convenient club to our members. And over the course of the quarter, we re platformed our entire omni portfolio, as I mentioned in my prepared comments and the 2 big convenience initiatives that launched in the back half of the quarter are same day delivery and buy online pickup in club. Both have performed very, very well on buy online pickup in club.
We see the ring to be higher than our average as much of the what we're seeing flow through that system is general merchandise, as people reserve inventory, pay for it and then come up and about half of them are shopping the club after they pick up their reserved order. Secondly, on same day delivery, the value prop there is really important to us and we've been really encouraged by what we've seen. And the member there who is using that service is a bit younger than our average and we feel good about that. And the value prop is really simple. We're giving people same day delivery for club store prices plus a $15 fee.
And that value prop has been very clear, transparent and working as we bring those capabilities up in terms of the experience, we'll begin to market them in the Q3 and we're encouraged by what we see.
Your next question comes from the line of Simeon Gutman from Morgan Stanley. Please go ahead.
Thanks. Good morning. I wanted to ask a question about the Q2. The comps were very fine at 2%. I wanted to ask how you, Chris, can you parse out the environment, which was pretty good.
I know you talked about the months a little bit versus internal efforts and then anything around the Sam's Club closings of stores that are benefiting from those?
Yes, I think Simeon, thanks for your question. I think that the in the macro environment, it is very clear that the value retail works and when you add convenience on top of it, it works even better. And the environment I think overall on a macro basis is very, very good. But the thing we're pointing to is we're very early in our transformation and we feel very good about the discipline with which we have approached growing sales, earnings and cash flow. As a private company, we worked really hard to completely transform the disciplines and processes within the company in order to be ready to come out to the public markets.
And I think the balanced approach we've had is flowing through our P and Ls and the environment certainly is good. There is no question that a competitor closing some stores is good. But what I we point to most is our internal efforts to continue to deliver better value every single day to our more than 5,000,000 members.
If I can ask a quick follow-up, can you remind us why that the strategic consulting fee is not excluded from the P and L?
Simeon, it's excluded from the adjusted EBITDA definition, but not from adjusted net income. Okay. Thanks. Yes.
Your next question comes from the line of Kate Meehan from Citigroup. Please go ahead.
Hi, thanks for taking my questions. In the prepared comments, you mentioned more new categories moving forward. Would you be able to disclose what you're thinking and the timing of that? And with regards to private label, were there any specific changes made to private label in Q2 that yielded the better results?
Couple of things. Let me take the second one first, Kate, and thank you for your question. The private label business continues to be a terrific source of both sales and profit growth for us. So we feel very good about that. And the big thing that I tried to highlight in my prepared comments was a more integrated approach to how we merchandise and market.
An example was Mother's Day as we did private label floral and we felt very good about the in store presentation. Our clubs executed very, very well and the results were terrific. So as we thought as we think about it over time, we've gone from a series of items that we've added in order to compete more effectively in categories and create leverage with our suppliers to a much more integrated sales and marketing approach, which will drive our business going forward. So that while sounding simple has yielded better results. Secondly, on new categories, I'll go back to my comments that I made in response to my question that Simeon asked in that the company has worked really hard to create more and more discipline on how we approach things.
There's no better example than the approach we have to managing our categories. Apparel is the most recent addition where we've taken out jewelry and replace it with apparel to significant benefit. And as we go forward, things like outdoor categories and tools are places where we believe our core member will see great value and we expect one of the reasons why we're encouraged by our back half, particularly Q4 is our entry into some of those categories in a more meaningful way will create significant opportunity for us going forward. Those are 2 ones I would spotlight at this point. Sporting Goods is another one that we will do a much better job in.
Your next question comes from the line of Edward Kelly from Wells Fargo. Please go ahead. Edward Kelly from Wells Fargo. Please go ahead. Your line is open.
Your next question comes from the line of Peter Benedict from Baird. Please go ahead.
Hi, guys. Thanks for taking the questions. Just looking at the perishables and the non edible grocery comps in the quarter, they did slow a little bit from 1Q. So I'm not sure how to compare set up from a year ago. But can you just talk about those 2 categories?
Maybe what drove the slowdown and how you're thinking about them within your back half guidance?
Hey, Peter. So we think about those categories obviously against the compares that are out there. The Perishable business we think did okay during the quarter when you consider to compare. And the non oil business could do a little bit better, but generally has been as of right around the company's comp or at least around the company's traffic trend. And so we feel like that's in view of the entirety of that business unacceptable result as well.
We're playing around a lot in perishables as you know given our story. We're spending a lot of time and resources and effort to try and make sure that our members have the best experience whenever they visit us. And we made considerable progress on that in Q2. So that was an upside to perishables. The downside you've got to remember is the effect of discontinuing businesses there as well.
So in my prepared remarks I talked about CAFE. There are a couple of businesses throughout, but CAFE hits the Perishable business in particular that we've discontinued. So all told, we feel like we're doing fine in both of those businesses. And as we continue to work on the Perishable business, as we continue to get smarter about member engagement and promotional effectiveness, the non animal business will respond as well.
Okay. That's helpful, Bob. Thanks. And then just from a higher level perspective, Chris, how are you guys thinking about the CPI initiative, obviously, has given you guys a lot of profits to work with. Just your thoughts about booking those gains going forward versus reinvesting into price and to drive the top line, drive membership.
Where do you sit with that as we look out over the next couple of years?
Yes. As we think about, I'll make a macro point and then I'll ask Bob to make a specific comment if he chooses to. But Peter, our primary focus is reinvesting in those savings in our end member value. The most important takeaway is that our CPI work has allowed us to deliver pricing to the consumer that's equal to every one of our club store competitors better than grocers and better than mass merchants and expand our margins. We've also in that same bucket have invested substantially in the member experience, omni experience and in membership marketing overall.
And we feel very good about our ability to continue to do that going forward. It gets to my earlier answer on the balance and discipline we've tried to run the company with that is not only has been an important part of the most recent periods, but will be an important part of how we run the company going forward. Bob, do you
have anything to add to that?
No, Chris, you hit the highlights. Pricing is and member value is the most important thing we do and DPIs allow us to do that 1st and foremost and maintain the pricing gaps that we have as well as to invest in all the membership and assortment and other initiatives that we've been working on.
All right, great. Good to hear. Thanks guys. Best of luck.
Thank you, Peter. Thanks, Peter.
Your next question comes from the line of Simeon Siegel from Nomura Instinet. Please go ahead.
Thanks. Hey, guys. Good morning. Bob, to your earlier point, nice merch margin improvement and understanding you don't expect the same in Q3. What do you see as a long term gross margin potential?
And then, as you guys Chris, as you guys think about traffic opportunities, understanding the current, but also thinking about longer term, how do you think about new customer traffic versus greater frequency of existing shoppers? Thanks.
Hi, Simeon. So your margin question is a good one. While we were very impressed with 80 basis points improvement in merch margin, Q2 and we hope to replicate that. That's not how I would plan the business. And yet I think the thing you need to remember is we're approaching these assortment discussions with our suppliers in waves and so the results come in waves as well.
So Q1 and Q2 had pretty spectacular results in that view. Q3 and Q4 have a little less from what we know today. I sort of think if you're asking a longer term question, I think there's probably another as much as another point of merchandise margin to go get over the next couple of years and we're actively after that. At some point and the point is probably approaching pretty quickly, these discussions are going to stop being about just acquisition cost and becoming more about what products are actually on the shelves and what categories are on the shelves and how can we better balance the margin, the actual acquisition cost with the growth side of the business and get a little bit more focus on what's the right stuff to excite our members and provide that treasure hunt when they walk in the door. So we absolutely think that there's more to go get here.
We absolutely think that the P and L will benefit from that. But we would look to move this program towards the growth side over time. And Simeon to your question on traffic, the new member marketing work that our team has been working on is really focused on teaching people how to use the club. And as we continue to mature new members, we feel good about the future of our company. I will also point to some of my comments on using digital acquisition tools to access younger members, particularly newly forming families, which are a great target for the club store industry and we feel very good about our efforts there.
So our membership acquisition work has been fruitful and we continue to market to those members trying to focus on value and convenience and we feel pretty good about what we have done and the opportunities that lie ahead of us in both areas.
Your next question comes from the line of Ryan Domaczek from William Blair. Please go ahead.
Hi, good morning and thank you for taking my question. Just a follow-up on the digital side of things. Is the cost of acquiring those digital members less than the cost of acquiring a member through a direct mail channel? And then what percent of members today are acquired through digital channels and where do you hope to get that percentage to in the next 2 or 3 years? Thanks.
It's a great question, Ryan. So certainly digital acquisition is an evolving thing for us. We for the longest time have been almost fully denominated in direct mail acquisition efforts with some contribution of radio and in some years television, but the vast, vast majority has been in direct mail. We've seen our team has made tremendous progress in the last few quarters trying to figure out how to do this more effectively first. So Chris mentioned in his prepared remarks that we had about a threefold increase in number of members acquired digitally.
The cost per acquisition we're still working on. So the charge we gave to our team was go figure out how to do it first and then let's figure out how to scale it at an appropriate cost. So I would tell you that it's still more expensive to acquire a member digitally than it is in direct mail, But the trend is getting to where digital will become a much more palatable cost going forward. So we're making very good progress on it and we'll look for that to continue to scale going forward.
All right. Thank you. That makes sense and good luck in the back half.
Thank you.
And we have time for one more question. Your next question comes from the line of Edward Kelly from Wells Fargo. Please go ahead.
Yes. Hi, guys. Thanks for squeezing me in and sorry for the technical difficulties. My question to you is really related to fresh and what I'm trying to understand is the true underlying momentum of the business. So have you fully cycled the disruption that you saw last year in the business?
Is it possible to quantify what the exit of the cafe business means here? And then just as it relates to this category overall, can you give us an update on just the in store execution of the category and where you are today versus where you think you can be over time and the bigger picture upside here?
Sure. So good morning. You can certainly think about that. So we are, I would say, not fully cycled the disruption we continue to work to improve our execution in the field and we will continue to do so. We have distorted investment dollars that way.
We have begun a process to really fully rebuild the operations capability in the company starting from the top of the house all the way down. As Chris mentioned in his prepared remarks, we welcome this week new executive to our operations team that will run the northern part of our operations team. And so we're working on the team, we're working on the training of that team. Chris also mentioned a new executive running our human resources team. We have charged him with fully rebuilding the learning and development curriculum for the company throughout, but with a particular focus on the operations team.
There's a tremendous amount of work going on to make sure the labor model is right so that we take the considerable amount of money that we spend on our team members every year and make sure it's applied in the right places at the right times. So while we've made tremendous progress and the conditions that our members see are better than where they were a year ago, they're still not to our high standards. And we will continue to work diligently to make sure they're And we will continue to work diligently to make sure they're at that standard and they stay at that
standard going forward. You bring up
the cafe business that well, small, I would tell you it absolutely impacted the comps of that business. So think a few tenths worth of comp for the continuing exit of CAFE that will be fully exited by the end of the fiscal year. And so we feel like the underlying business approaches the comp for the whole company but it's not quite there yet and we will continue to work to get it there over time.
Thanks guys.
Thank you. Thanks.
And this concludes today's conference call. Thank you for joining. You may now disconnect.