Good afternoon and thank you for standing by. Welcome to the Q2 Earnings Call and February sales results. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a Q&A session. To ask a question during the session, you'll need to press star one on your telephone. If you require any further assistance, please press star zero. I would now like to hand the conference over to the speaker today, Richard Galanti, Chief Financial Officer. Please go ahead.
Thank you, Jerome, 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 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 Q2 of fiscal 2022, the 12 weeks ended this past February 13th, as well as February retail results, for the four weeks ended this past Sunday, February 27th. Net income for the quarter came in at $1.299 billion or $2.92 per diluted share. Last year's Q2 net income came in at $951 million or $2.14 per diluted share. That latter number included a $246 million pre-tax or $0.41 per share cost incurred primarily from COVID-19 premium wages.
Net income for the 24 weeks was $2.62 billion or $5.90 per share, compared to $2.12 billion or $4.76 per diluted share last year in the first half. Net sales for the quarter increased 16.1% to $50.94 billion, up from $43.89 billion last year in the Q2 . Comparable sales in the Q2 for fiscal 2022 on a reported basis, U.S. sales increase during the 12-week period was 15.8%, excluding gas inflation 11.3%. Canada 16% reported, 12.4% ex gas inflation and FX. Other International 6.2% and +9% ex-gas inflation and FX.
For the total company, reported number of 14.4% on a same-store comparable basis and up 11.1% excluding gas inflation and FX. E-commerce on a reported basis up 12.5% and ex FX at up 12.6%. In terms of our Q2 comp sales metrics, traffic or shopping frequency increased 9.3% worldwide and up 8.3% year- over- year in the quarter in the United States. Our average transaction or ticket was up 4.6% worldwide and up 6.9% in the U.S. during the Q2 . Foreign currencies relative to the US dollar negatively impacted sales by approximately 60 basis points, while gasoline price inflation positively impacted sales by approximately 390 basis points.
I will review our February sales results later in the call. Going down our Q2 , fiscal 2022 income statement. Membership fee income reported came in at $967 million, up $86 million or up 9.8% from a year earlier, $881 million. There was about a $6.5 million negative impact due to FX. On an FX basis, if you will, the $86 million increase would have been up $92 million or 10.4%. In terms of renewal rates, they continued to increase. At Q2 end, our U.S. and Canada renewal rate stood at 92.0%, up four-tenths of a percentage point from the 12-week earlier Q1 end.
Worldwide rate, it came in at 89.6%, up 0.6% from where it stood twelve weeks earlier at Q1 end. Our renewal rates are continuing to benefit from more members auto-renewing, as well as increased penetration of executive members who on average renew at a higher rate than non-executive members and higher first year renewal rates for our new members. In terms of the number of members at Q2 end, member households and total cardholders. Total households was 63.4 million, up 900,000 from the 62.5 million just 12 weeks earlier. Total cardholders at Q2 end, 114.8 million, up 1.7 million from the 113.1 million figure 12 weeks ago.
At Q2 end, paid executive memberships stood at 27.1 million, an increase of 644,000 during the 12-week period since Q1 end. Executive members, by the way, represent now 42.7% of our total membership base and 70.9% of our total sales. Moving down to the gross margin line. Our reported gross margin in the Q2 was lower year-over-year by 32 basis points, but up 5 basis points excluding gas inflation. As I always do, I'll ask you to jot down a few numbers, two columns. The first column is reported and the second column would be excluding gas inflation. First line item, merchandise, core merchandise on a reported basis was down 75 basis points year-over-year and ex-gas inflation down 43.
Ancillary and other businesses reported + 40 basis points and ex-gas inflation plus 49 basis points. 2% reward +3 and -1 basis points. LIFO, - 14 and - 14 basis points. Other, +1 4 and + 14 basis points. Totally on a reported basis, again, year-over-year, -3 2 basis points and excluding gas inflation, + 5 basis points. Now in terms of the core merchandise component, being lower by 75 basis points year-over-year reported and - 43 basis points ex gas inflation. Recall last year in Q2 that the core reported was + 71 basis points ex, and ex gas + 63. Still improved to where we were two years ago, pre-pandemic and ex gas. In terms of the core margin on its own sales, in Q2, our core on core margin, if you will, was lower by 28 basis points year-over-year.
Approximately two-thirds of this coming from fresh foods and a little from foods and sundries and non-foods as well. Fresh continues to lap exceptional labor productivity and low product spoilage that occurred from the outsized sales a year ago in the Q2 . Ancillary and other business gross margin was higher by 40 basis points and by 49 ex gas in the quarter. Gas, travel, business centers and pharmacy were all better year-over-year, offset by e-com and optical. LIFO, we had a 14 basis point hit year-over-year to LIFO or a $71 million LIFO charge during the quarter, both with and without gas inflation. Recall that our Q1 LIFO charge year-over-year was $14 million, or in the Q1 was $14 million or a 3 basis point delta versus the prior year.
It's been the last three fiscal quarters that we've actually pointed out LIFO, as we saw a little bit of inflation going back to the summer or Q4 of fiscal 2021, a little more in Q1 of this fiscal year. As with everything you read in the news, a little, quite a bit more in Q2. Our 2% reward was higher on a reported basis by +3% and -1%, excluding gas inflation, a reflection of increased penetration of the 2% reward executive members. Other was +14 basis points, year-over-year. This is related to the COVID-related costs from a year ago, about $60 million. That's the portion of COVID-related wages that go into cost of sales, that like related to manufacturing businesses as well as their meat and bakery departments.
Overall, pretty good showing on the gross margin given the ongoing and increasing inflationary pressures. Moving to expenses, to SG&A. Our reported SG&A in the Q2 was lower or better year-over-year by 94 basis points, and better by 63 basis points excluding gas inflation. Again, jotting down two columns of numbers reported and the second one, ex-gas inflation. Operations, + 36 basis points and +9 . Here, a plus is good. It means it's lower year-over-year. Central, +1 3 and +10 . Stock compensation, plus three and plus two. Other, + 42 and + 42 for a total of + 94 and + 63. Better or lower by 94 basis points reported and better or lower by 63 basis points ex-gas inflation.
Now, again, looking at that first line item operations, the core operations component better by 36, but as well better by nine or lower by 9 basis points, excluding the impact from gas inflation. Keep in mind that this improvement occurred despite both the permanent $1 an hour wage increase that began in March 2021, is now anniversarying, and the additional starting wage increases from our two basic hourly scale service assistant and service clerk by an additional $0.50 an hour that occurred in October 2021. On SG&A, better by 13 basis points or 10 ex gas inflation. It's pretty straightforward operating leverage on strong sales figures. Stock comp, + 2 and + 2 again, reflection of good sales. Other, this + 42 basis points.
This was the $2 COVID wages of $186 million that goes into SG&A in Q2 a year ago. Again, on a year-over-year basis, that was that improvement. In terms of pre-opening expenses in past conference calls, really since we went public, I think, we've covered net pre-opening expenses next on this discussion. Starting this fiscal year, and going forward, pre-opening is now included in SG&A. The year-over-year change in SG&A related to pre-opening was flat year-over-year, no basis point delta year-over-year in the Q2. All told, reported operating income in Q2 increased 35% on a reported basis, coming in at $1.812 billion this year, compared to $1.34 billion a year ago in the Q2 .
Below the operating income line, interest expense was $36 million this year versus $40 million last year. Interest income and other for the quarter was higher by $6 million year-over-year, $25 million this year versus $19 million last year, primarily due to favorable FX. Overall reported pre-tax income in the quarter was up 37%, coming in at $1.801 billion compared to $1.319 billion a year earlier. In terms of income taxes, our tax rate in Q2 was slightly higher than it was in Q2 a year ago. It came in at 26.7% compared to 26.4% a year ago in the Q2. Our effective tax rate is currently projected to be in the 26%-27% range for the fiscal year. A few other items of note. Warehouse expansion.
For the year, we now plan to have 32 units, including four relocations, replacing existing units to larger and better located facilities, net total of 28. I think a quarter ago, we actually said it was a net total of 27, one more than that. However, remember, several of these are slotted to open in Q4 or fiscal Q4, 15 of them, or 14 net new. There's always a potential for one or two of those to shift into the next fiscal year. The five openings in Q2 that we had, one in Mexico, our 40th in Mexico, our 2nd in France, our 2nd in China, our 4th in Spain, and one additional unit in Florida, where we now have 29 locations.
Regarding capital expenditures, our Q2 spend for CapEx was approximately $723 million, and our full year CapEx spend is still estimated to be approximately $4.0 billion. Moving on to e-commerce. E-commerce sales in Q2, FX, as I mentioned earlier, increased 12.6% year-over-year. That's of course, on top of a Q2 of fiscal 2021 increase of 75% last year benefiting, of course, from COVID. Stronger departments in e-commerce in terms of year-over-year percentage increases, jewelry, tires, special order kiosk items, patio and garden, and home furnishings. Our largest online merchandise department, majors, which consists of consumer electronics, appliances, TVs, et cetera, was up in the high single digits on very strong sales increases a year earlier.
In terms of an update on Costco Logistics, this continues to drive big and bulky sales. For the quarter, deliveries were up year over year, 22%, and now about 85% of our U.S. e-com, less than truckload shipments, from Costco Logistics, we're doing ourselves. During the quarter, we averaged more than 65,000 stops per week with Costco Logistics, which translates into a little over three million planned drops in Costco Logistics for the fiscal year. In terms of e-com and mobile apps, it continues to improve, much improved layout, the ability to view warehouse receipts online, the ability to reschedule e-com deliveries in the U.S. and Canada, as well as reschedule returns pickups.
Later this month, we'll have our warehouse inventory along with the Instacart inventory online, and be able to see all the detail of our in-store merchandise as well. In terms of our e-commerce platform, Costco Next, we added a few additional suppliers, so we now have 37 suppliers online and growing. Again, Costco Next has about 1,000 items on it, curated items at Costco values. Please check it out. From a supply chain perspective, similar issues that we outlined both 12 and 24 weeks ago on the past quarterly earnings calls. The factors pressuring supply chains and inflation include port delays, container shortages, COVID disruptions, shortages of various components and raw materials and ingredients and supplies, labor cost pressures, of course, as well as truck and driver shortages.
Overall, we've done a pretty good job of given these supply chains challenges. I think that's evidenced in our sales strength. They continue to be delayed container arrivals, so we continue to advance order in many cases as we are able to. Virtually all departments are impacted. Less product and packaging challenges, but still a few. Still some limitations on key items, but again, that's improving a little. Chip shortages are still one of the things that are impacting many items, some more than others. But again, we're managing to have our shelves full and driving sales. One of the things that we've done that I mentioned last quarter, we had chartered three small container vessels to help provide us with additional flexibility on shipping.
We have now chartered a total of seven ocean vessels, up from those three, for the next three years. These are to transport containers between Asia and the U.S. and Canada. We've also leased containers for use in these ships. With these additions, about a quarter of our annual trans-Pacific containers and shipment needs are being accommodated this way, which gives us additional supply chain flexibility. Despite all the supply chain issues, we're staying in stock and continue to work to mitigate cost and prices increases as best we can. You know, every day and every week, you're gonna see in different items, in different departments, certain things on allocation or short, but other things are filling its place. Again, some things we are seeming to get a little better. Moving to inflation.
Inflation, of course, continues as evidenced by our LIFO charge. The inflationary pressures that we and others continue to see include higher labor costs, higher freight costs, as well as higher transportation demand, along with the container shortages and port delays that I just mentioned. Increased demand is in certain product categories, various shortages of everything from computer chips to oils, to chemicals, to resins. You know, higher commodity prices from, food service oils to additives and motor oils, to plastics, to detergents, to paper products as well. On the fresh side, proteins and butter and eggs and things like that. Not very different than what you hear and read and see from others, but again, we think we've done a pretty good job of corralling it as best we can.
For Q1 , a quarter ago, I mentioned that we estimated at that time overall price inflation to have been in the 4.5% to 5% range. For the Q2 and talking with senior merchants, estimated overall price inflation was in the 6% range. All of this said, again, I wanna give another shout-out to the job that our merchants and our traffic department and our operators have all been able to do to keep in order to keep the products that we need, pivot when and where necessary, and keep our warehouses full while keeping prices as low as we can for our members and continuing to show great value versus our competitors. Now turning to our February sales results. The four weeks ended this past Sunday, February 27th, compared to the same four-week period a year ago.
As reported in our release, net sales for the month of February came in at $16.29 billion, an increase of 15.9% from $14.5 billion a year earlier. Recall from January sales results that Lunar New Year, Chinese New Year occurred on February 1st. That's 11 days earlier this past year than last. This shift negatively impacted February's Other International by about 4 percentage points and total company by about half a percentage point. Comparable sales for the four weeks on a reported basis, U.S. was 17.4, ex gas and FX, 12.9. Canada reported 11.7, ex-gas and FX 8.8. Other International minus 0.9 and ex-gas and FX, 1.3 to the positive. Total company 14.0 and 10.6.
E-com within that number is 10.2 reported and 10.4 ex-gas and FX. Our comp traffic and frequency for February was up 8% worldwide and 8.2% in the United States. Foreign currencies year-over-year relative to the dollar negatively impacted total and comp sales as follows: Canada by approximately 0.2%, other International by approximately 4.5%, and total company by approximately 0.7%. Gas price inflation positively impacted total reported comps by about 4%, and average worldwide selling price per gallon was up year-over-year by 37%. Worldwide, the average transaction for February was up 5.5%. Our U.S. regions with the strongest sales were Texas, the Southeast and the Northeast. Other international and local currencies saw the strongest results in Australia, Mexico and the U.K.
Moving to merchandise highlights for the month of February, food and sundries came in at positive high single digits, fresh foods in the mid-single digits, and non-foods in the positive high single digits. Ancillary businesses sales were up mid-forties, with gas being certainly a driver of that, as well as food court and hearing aids were the top performers. With that, I wanna mention just a couple of recent executive changes. A month ago, we reported that Ron Vachris became President of Costco. Ron started his career 39 years ago at Price Company, at Price Club at the young age of 17. Most of his career was in operations through 2015. Then he spent a little over a year in real estate, traveling the world and working on both worldwide and domestic expansion.
Since that time in 2016, he's been in merchandising with certainly, responsibility not only for inline merchandising but online merchandising as well as very involved with, logistics and transportation. As well, just, this week, internally, we reported that taking Ron's previous spot as head of merchandising, is Claudine Adamo. Claudine has been with us for 30 years. She began, in an hourly position in our Kirkland warehouse in 1992, 30 years ago, but a year later came into buying and has been in buying ever since. Again, she'll be taking over, looking over all of merchandising.
Finally, in terms of upcoming releases, we will announce our March sales results for the five weeks ending April 3rd, on a Sunday, April 3rd, on Wednesday, April 6th, after the markets close. With that, we'll open it up to Q&A and turn it back to Jerome. Thank you very much.
Thank you. At this time, I would like to remind everyone, in order to ask a question, please press star then the number one on your telephone keypad. Your first question comes from the line of Michael Lasser from UBS. Your line is now open.
Good afternoon, Richard. Thanks a lot for taking my question. First on the fee increase or the potential for a fee increase. If there is no fee increase this year, should the market interpret that as some reflection of how Costco sees either its pricing power, especially in light of companies like Amazon and Netflix raising their fees this year? Or should we interpret it as a sign that the interval by which Costco will raise its fees over time is gonna lengthen?
Well, certainly I don't think you should interpret anything related to why or when. You know, historically, we always look at things like, you know, can we look ourselves in the mirror and do we feel that we've continued to increase the value of the membership? Certainly we look at renewal rates. We look less at what others do, frankly, but certainly it's out there what others are doing. What I do note is that I looked at the last three increases over the last 15 years, and on average, they were done about every 5.5 years, about five years and seven months. Five years from the anniversary of the June of 2017 would be this June.
I think the question will continue to be asked until we do or don't do something. At the end of the day, we certainly feel very good about our member loyalty, our success in getting members to move to executive member, which are even the most loyal. You guys will know when we tell you and at some point it'll happen. Stay tuned.
Thank you. My follow-up question is on the core-on-core gross margin. Over the last couple of quarters, you've given back about
Third of the core on core gross margin gains that Costco experienced during the heart of the cycle, the heart of the last couple of years. Is this the right way to think about what's sustainable from here? You may give back a third of it and keep two-thirds. Alternatively, would you expect-
Look, recognizing I'd like to think it was that easy that we could plan it and get there. Sometimes we get there, but 10 different variables go in 10 different directions than we had planned. There's lots of moving parts to it. The fact of the matter is, you know, we certainly have confidence in our competitive position and our confidence to get some margin if, as we go forth. The fact of the matter is our margins, our gross margins are still even on core, higher than they were two years ago. We had outsized margins two years ago, most particularly in fresh. When you had 20% and 30% increases in fresh, you darn near eliminated spoilage and what are the two?
Your labor, you improve dramatically labor productivity in fresh, and you darn near eliminated all your spoilage. Some of that's not sustainable, but even with some of the give back, if you will, on a two-year stack, if you will, we're still showing higher year-over-year numbers on core. The other thing is, as we've said, and we don't sit around and just pound our chest on it. You know, despite these inflationary pressures, we've tried to hold where we can. Now, needless to say, you can't do that in its entirety. We've probably been a little later than others in terms of raising some things in our view. We've worked with our suppliers to eat a little of it, and we eat a little of it.
I think that these margins, particularly given the sales strength and the operating leverage, allow us to be ever more competitive and drive our business. When asked the question, as many of you know over the years, who's our toughest competitor, it's us. I don't really look at this as being a reflection of what's going on out there. We're ever competitive. We're always checking our competition, and we feel that our competitive position is as strong as ever.
Very helpful. Thank you.
You're welcome.
Thank you. Your next question comes from the line of Simeon Gutman from Morgan Stanley. Your line is now open.
Hey, everyone. Good afternoon. Richard, I'd like to follow up on the core on core question just asked differently. About, I could say a year ago, supply chain costs were rising, input costs were rising, and it felt like you were not ahead of it. In the last two quarters, it seems like you're now more ahead of it. You feel better. You called out the two-year trend in the core on core. Does it feel like we are past the worst, and that you're able to either move pricing or, you know, have some visibility on supply chain? Then related to the perishable piece, it sounds like you're gonna keep some efficiency. There is a reason to believe that some of this you will keep, you know, going forward.
I don't know if that's fair or not.
Yeah. Well, certainly on the fresh and the fact that we're at higher sales levels, that allows for higher labor productivity and hopefully a little lower D&D or spoilage. I don't disagree with what you say, but you know, you never know what's gonna happen tomorrow. I know that for 35 years, when things get better, we figure out how to give a little more of it back. Certainly right now with all the inflation, first and foremost, is getting merchandise on the shelves and then mitigating those various cost components as much as you can, which is not a lot. But hopefully being as if not a little more competitive than others.
Maybe a follow-up. I'd love your take on the price gaps out there. It feels like every company we cover in the mass space, supermarket space, they're all pleased with price gaps. Yet I don't know if that's right or wrong, and we're seeing gross margins actually start to go up in some places. It seems like companies, your competition, they're taking price. That would imply that the gaps actually should be widening, and making you more valuable. Curious, I know you guys have folks running around stores a lot. Curious, what's your take on it?
Well, we like when they feel more comfortable, frankly. Look, our most direct competitor is Sam's. We've and I'm sure they do too do comp shops every week at every darn near every location. We feel good about those gaps. It's not that they've widened or shrunk. That overall, they're a tough competitor and so are we. As it relates to other traditional, yes, you've seen, I think we've called out strength in gas business. I think overall and what I read externally about gross margins in retail gas by the supermarkets and others is up. There’s a little bit more that gives us breathing room as well. We wanna be ever more competitive.
Great. Thank you.
Your next question comes from the line of Chuck Grom from Gordon Haskett. Your line is now open.
Hey. Thanks a lot, Richard. You know, over the past few months, you guys have had success raising retails, and I'm wondering if that trend has continued or if you're starting to see some limits or demand destruction in any parts of the club?
No, we haven't. I think, you know, certainly we hit on the more inflation creates some demand pressure. I'd like to think some of that inflation people wanting to shop at Costco to save more, frankly. We haven't seen that. No.
Okay. Okay, great. Then just another near-term question. You know, historically, I'm wondering if with gas prices, you know, where they are and where they're likely to go, I heard today California is close to $5. Historically, has there really been a tipping point, you know, and how it impacts traffic for you guys? I understand how it impacts the margin structure of your business, but historically, is there a tipping point for you?
We haven't seen that. You know, the only time my recollection is a number of years ago when prices got to $4 or $5 a gallon. Like then and now, we see our gallons improve, relatively speaking, because we're still the cheapest game in town. You know, at some point, if it goes to $5 to $7, who knows? I mean, will people stop driving a little bit and participate? I'd like to think that the hybrid models of working from home has helped save a little bit there.
Okay, great. Thank you.
Your next question comes from the line of Paul Lejuez from Citi. Your line is now open.
Hi, everyone. This is Brandon Cheatham for Paul. Thanks for taking our question. I was wondering, are you seeing any change in consumer behavior such as trade down or maybe trade to private label brands? Anything of that nature?
You know, it's interesting. On the one hand, the only thing I can think of is in fresh, when there's been big fluctuations in prices or big increase in prices on beef relative to chicken or something, you'll see some trade down within the protein family. Other than that, a couple of anomalies that are perverse in the sense that it's almost just the opposite. We've seen strength in jewelry and in big-ticket furniture items and the like, and more conversions to executive membership which, again, there's more value long-term to that customer, but it's, you know, it's adding $60 to their fee.
Got it. Just a point of clarification on price inflation. Has that moderated the past couple months, as I think some of your monthly updates have indicated, or are you still seeing that accelerate?
It has not moderated. It continues to go up.
Got it. Thank you.
Now, it's going up perhaps at a little less slope. The bigger slope was probably four to two months ago, and it's gone up from there. I think if I recall, there was a little lull, talking to the buyers, a little lull in the last couple of months of the year, but many suppliers are already talking back two months prior to that, to come January, we'll be coming back and talking to you again.
Got it. Interesting. Appreciate it. Thank you.
Your next question comes from the line of Scot Ciccarelli from Truist Securities. Your line is now open.
Good afternoon, guys. Scot Ciccarelli. Richard, you guys are running with nearly double the cash balance that you historically would have run with, kind of pre-pandemic. Obviously, there's still a lot of uncertainty in the market. I guess the question is, because we've seen this pattern for, you know, probably 8+ quarters now, to continue to run with much higher cash levels than what you historically have or, you know, should we start thinking about the potential return of capital to shareholders like you've done periodically?
Well, at some point, we'll figure out what to do with it. Mind you, our Q2 end balance sheet is probably our, the highest point from a seasonal standpoint, because you've built a lot of sales and you still have some of the bills to pay from the Christmas time. Not a lot, but some. Frankly, you know, knock on wood, our operating cash flow has certainly exceeded what we'd expected two years ago. Yes, there is a little more. At some point, certainly one of the arrows in our quiver is a special dividend along with the regular dividend increase that we've done every year, as well as some stock buyback. You know, first and foremost is CapEx.
You know, CapEx this year of $4.4 billion is up from the $3 billion to $3.5 billion over the last couple of years and up from numbers lower than that the two to four years prior to that. That's first and foremost what we wanna spend money on. You know, we've done four specials and, as one of the board members said, as is, we are a little quirky and it seems to have worked for us. It's certainly an arrow in the quiver, but we haven't made any decision at this point.
Got it. Thank you.
Your next question comes from the line of Karen Short from Barclays. Your line is now open.
Hi. Thanks very much. I just wanted to ask the membership fee question a little differently. In the past, you've talked about raising the membership fee in the context that you obviously have an inflow of dollars to then reinvest in price. I guess the question is, maybe with the assumption that consumer is going to continue to feel a little more and more stretched as the year progresses, how does that factor into your thought process? Then also tying that in with the fact that there was obviously the increase in membership at Amazon.
That doesn't hurt. At the end, honestly, at the end of the day, first and foremost, the factors that doesn't give us any concerns is the fact that our sales are strong, our renewal rates and loyalty are at all-time highs. That's all positive. Yes, when we do it, we use it to be even more competitive. On the one hand, you might argue that because of inflation, would this allow us to mitigate some of that? We're already doing that, by the way, without a fee increase. You know, we've done it 7 x in 35 years and, you know, sometime between summer and six or nine months down the road, is it likely? It's possible, but we'll have to wait and see.
We don't really consider what Amazon. We're asked the question the other way with some of our direct warehouse club competitors that they have not changed theirs in a number of years, and that does not concern us either. We look at what we're doing, how it affects our members, and we look at ourselves in the mirror and say, "Have we improved the value of the membership?" We've always felt that we've done that in a more dramatic fashion than these increases. Then we take those increases and use it to become even more competitive. You know, I cannot give you an answer other than we feel good about if and when we wanna do it, we'll be able to.
Okay. My second question is just on the net income margin, or I guess you could talk about pre-tax margin. You know, obviously, that has come up quite a bit over the last several years, and I think the question on a lot of people's mind is just, is there more of a willingness to flow through margin on that, you know, on that line? I know, again, you don't run your business that way. You run it for, you know, for units and volume and leverage on strong comps. Just wondering how you would frame that.
Well, you know, first of all, certainly in this quarter as well, you know, the bottom line margin improvement was the sum of great expense improvement and some margin detriment from taking out all the anomalies of each. That's the way we wanna do it. The old saying is, we wanna lower prices and raise margins. The same thing is we wanna improve the bottom line while not raising prices. I'm not talking about necessarily specific inflation right now. I think I recall a few of you on the call might remember this when we had our maybe first and last all-hands analyst meeting out here with about 300 people.
At the time, we had a 2.8% pre-tax return on sales and our founder was up there saying that we're a great company, and great companies deserve to make good money. Over the next several years, we wanted to go from 2.8% to a number, I won't get everybody excited, but a bigger number. At the end of the day, it went up and down, but it has improved. I think that we've got a lot of great things going on. We're not embarrassed to make money for our shareholders as well, but we're gonna do it within the confines of being ever more competitive from a pricing and value standpoint to our members.
Okay. Thanks very much.
Your next question comes from the line of Christopher Horvers from JPMorgan. Your line is now open.
Thanks. Good evening. I guess my first question is, do you look at the U.S. sort of core comp on a two and three-year basis? You know, really since the summer, there's been a bit more volatility to the two and three-year trends even over the past, you know, few months. Do you read into that? How much do you think that was maybe just like a holiday shift, maybe some Omicron impact in January? Curious how you're thinking about that.
It would be the all-inclusive yes. It's all of the above. You know, I remember when we had particularly strong early in the Christmas holidays, Thanksgiving, Christmas holiday season, we had strength. Part of that was bringing in some things early. Part of it was this increased demand that COVID has created for, you know, goods for the home, and the shortages of those same goods. Once they hit the shelves, you sold quickly. It was still positive, but a little less than that trend at the end of the calendar year. Without doing a lot of work, it seemed like that was the reason. You've got, you know, storms that affect the things.
You've got shifts in things like Chinese and Lunar New Year. We really don't spend a lot of time doing that. We try to understand why overall something, you know, some level of sales either generally were reduced. If an increase, we don't worry about it as much. I don't think we spend a lot of time thinking about that. As we've been reminded from the day of our founding, we're a top-line company, and it's all about driving sales and value. It's gonna be as good as we can get it. We don't read a lot into what you asked.
Got it. It's a good segue. I guess, you know, your executive trends, the renewal rates, the comps, the traffic, you're one of the few, you know, big retailers with really strong traffic. But at the same time, is there a point where just the culture becomes uncomfortable with passing through price? I mean, the vendors have talked about more price increases that have come starting January first. It seems like there's more, you know, coming in September. I could, you know, think of Jim sort of being paranoid and, you know, worried about, do we just push too far and do we not wanna risk that and invest more in price before even seeing any deterioration in the sales trends?
You know, I would say we're more aggressive when things are good, and we're aggressive when things are good and bad. I remember somebody years ago asked the question, given that sales, for whatever reason, had been weak for a month or two, and that was more the reason to be even more strong on pricing. I think that actually had to do related to a pending membership fee increase based on this kind of five-plus-year anniversary. The view was, is, no, our members are loyal, and we're gonna use it to drive more sales. No, I don't. I think we're still born of that same DNA of trying to constantly drive more value and not worry about how strong or weak we are today, just keep driving more value. If we keep focusing on that, nobody can catch us.
Just one quick.
Well, it's harder to catch.
Sorry, say that again.
It's harder to catch us at least, so.
Yep. Just a quick question on LIFO. If price increases have continued into this year, does that LIFO number just stay at this level? You know, as we lap through it, do we actually get that back?
In theory, you don't get it back. If, as I said earlier, if inflation is continuing, you should see some additional LIFO charges, maybe not as big, but who knows? At some point, at the beginning, as you start a new fiscal year, you've had whatever LIFO charge you'll have for this past year, and that's kind of the new set point for costs for each item. To the extent if there's additional inflation relative to that starting point, you'll have some additional LIFO next year. If things came down a little bit, let's say things.
I'm making these numbers up in an extreme, but things were up in one year, 20%, and the next year, they were down 10%, you had a big LIFO charge this year, and you actually have some LIFO credit in the following year.
Got it. Thank you. Best of luck.
I gave you an extreme example. That's not the reality.
Thank you.
Your next question comes from the line of Mike Baker from D.A. Davidson. Your line is now open.
Okay, thanks. I guess I'll stay on the inflation question, but ask two different inflation questions. One, if prices do come down, eventually they will, historically, what do you see in terms of your ability to maintain the current prices? In other words, not to come down and then to gain some margin in that sense. A second inflation-related question. Historically, when you see outside of inflation, now it's been a long time since we've seen inflation like this, but you've been around for a long time. When you see inflation, do you get more customers coming in to Costco to save money? You alluded to that earlier. You said that's what you hope happens. I guess I'm sure you've looked at it historically. What have you seen? Thanks.
Yeah. On the latter question, past history has indicated yes, not in a big way, but the answer is yes, directionally. As it relates to if prices come down, if our costs come down, we wanna be the first to lower the price, period.
Okay. That makes sense. One last one, if I could. Similar to that, you know, do you get more customers when it's an inflationary environment? Do you see more customers wanting to sign up to take advantage of your value in a tougher economic situation? In other words, in 2022, no stimulus. It does appear as if, you know, the economy might not be or at least the consumer economy might not be as strong as last year. How does that impact your memberships or renewal rates? Thanks.
I think if you asked us two years ago how would the next two years be in terms of new member sign-ups, we would be positive, but we probably have achieved greater than our own expectations by a little. Arguably that it was not just the stimulus, but notwithstanding the stimulus, there wasn't a lot of positive feelings out there in terms of a consumer, and we did just fine. You know, one of the good things that we've been blessed with that we are the extreme value proposition, and it generally bodes well for us in good and bad economic times.
I think we don't pay a lot of attention to it other than you know really being focused on driving you know price and value of our products and services and taking care of the customer, and then the rest seems to work.
Yep, sure does. Thanks for the color.
Yes, sir.
Your next question comes on the line of Rupesh Parikh from Oppenheimer. Your line is now open.
Good afternoon. Thanks for taking my question. I had a question just on the labor front. I was just curious what you guys are seeing from a labor availability standpoint, and then, you know, what your comfort is with your wage levels in the marketplace, just given we continue to see others raise their wages.
Well, we continue to raise them as others have, and we will continue to do that. You know, the biggest single area of challenge is one, we're headquartered in Seattle, which has become an increasingly expensive market, and within that, IT, where you not only have two big tech behemoths, but the next three tech behemoths all have 10,000-20,000 employees in this town as well. We've had to raise wages there, and it didn't happen overnight in the last two weeks, but it's happened continually over the last couple of years. We also lose a few people because we're not 100% work from home.
We have a good, fair hybrid work model, but for some, a few, they want that. Overall, though, if you look at our, you know, our total compensation and benefits package, you know, 90% of our employees are hourly in the warehouse, and while maybe there's a city or two where we've got to occasionally start at, you know, one step above the entry level, we've continued to raise the wages, as I mentioned in the thing, and we'll do it again.
Okay, great. Maybe one additional question. Just on the ancillary front, if you could just remind us where you are with your recovery versus pre-pandemic and some of the more challenged categories, travel, food court, et cetera.
Yeah. Well, the biggest one is, you know, is gas, and that's gone nothing but up. And again, as I mentioned earlier, the retail competitive price pressure has probably lessened over the last couple of years. Travel, you mentioned, is one that has been extreme ups and downs. You know, there was a period during the mid-2020 year lockouts, COVID lockouts where we had lost money in the business and had negative revenues because you were getting more cancellations and no new orders. And that's fluctuated. It's come back. It fell a little bit with Delta. It came back after that. It fell a little bit with Omicron, although now we seem to be up on the upward trend, and it is profitable.
Not as profitable as it was two years ago, but continuing in that direction. Huge business in both vacation packages as well as auto renew, you know, rental cars, and the like. So that's a business that's coming back nicely. You know, it was businesses like where there's face-to-face touch, if you will, within our hearing aid and optical shops that was actually closed for a number of weeks into mid-2020, but just for 10 or 15 weeks, I think. That's come back as well. Food courts have come back because we have chairs and tables back out, and we expanded the menu. So overall, a few of those ancillary businesses, they're not back to where they were, but they're getting there.
Then, of course, the one business that dwarfs all the other is gas, just in its size and its increased profitability. Overall, ancillary is doing fine and some of the ones that were hurt the most are picking up.
Great. Thank you.
Your next question comes from the line of Kelly Bania from BMO Capital. Your line is now open.
Hi. Thanks for taking our questions. Just to follow up real quickly on the gas. Richard, you made the comment about gas margins going up kind of across the space. Can you help us understand a little bit about how Costco's gas margins are relative to 2019? Are they up, maybe just up a little less? Where are we with gallons versus 2019?
I don't have that detail in front of me. Margins are up, prices are up, and it's a, you know, it's a huge business. It's a little more than 10% of our sales. It's a $20+ billion business now. Recognizing there's been, as I mentioned earlier, 30+% increase in just the price per gallon. It's definitely been up the last couple of years, and it's less volatile than it was five and ten years ago, in terms of a big margin fluctuation. I don't have the detail related to two years ago.
Okay. I'll just ask another one just on white space then, just in the U.S. Just curious if you can just give us an update on how you're looking at that today over the next couple years. Do you have to at all change your, you know, target demographics or target population density in terms of where you'll plan on opening up new clubs in the U.S.?
Sure.
Just the eventual number that you see, just an update there.
Sure. I mean, if you'd asked me five years ago what would it look like? You know, five years ago, we were opening about 25 a year. Call it 26 to make the math easy for a second. Maybe 70/30 U.S. and Canada are most successful, mature, most mature markets. Then over the next five or 10 years, the 70/30 would probably go to 60/40 outside of the U.S. and Canada. Here we are, five years into that incorrect answer, and we're probably 65/35 U.S., Canada, for two reasons. Partly is our expectations of what we can do in the U.S. and Canada has increased, not just in the last five years, but in general over many years.
It's taken a little longer, the timelines internationally, although we've got more feet on the ground and more staff looking. If you ask me today, I look five years from now, we'll go from 65/35 or whatever X is today, probably down to 50/50. I think the good news with that answer from that perspective is that we feel we still have plenty of opportunities in the U.S. and Canada, and we've ramped up our activities to do more in these other countries where we've also been quite successful. You know, if you asked over the next 10 years, we're opening, I think this year, 16 of our 28 are in the U.S. I could be off by one or two.
You know, our view is there's no reason to think for the next 10 years we can't open 15 or so a year in the U.S. Now mind you, one or two of those growing to two or three will be the business centers. We now have 22 business centers in the U.S. and five in Canada. That's been a good adjunct to our business. But we're also infilling. I gave an example at an internal meeting yesterday, and I've given it before to you guys. In San Jose, about four or five years ago, we opened our fourth in the greater San Jose market. At the time, the three units were doing about 250 each. Now, the four units are averaging right at 300 each.
On fewer members per location because you got existing members driving less far. There's a combination of infill. Now we're in 46 states, so there's not a lot of additional states. We're less penetrated versus our direct competitors in certain locations, in the Midwest and, you know, Texas, South, and parts of the Southeast, and we're still opening there as well. It's really a combination of all those things. I think our view is the good news is that there's still, we're far from saturating our most saturated markets, and we've upped the ante in terms of feet on the ground, real estate feet on the ground, if you will, in terms of getting some more into the pipeline.
Thank you.
Your next question comes from the line of John Heinbockel from Guggenheim. Your line is open.
Hey, Richard, first thing, philosophically, how do you guys think about closing the gap on the two membership tiers, right? Maybe encouraging some further conversion to Executive. I don't know if you've done any kind of work with your current Executive members, what would they like in the membership that's not there today, right, that perhaps you know might just help you take the annual fee higher?
Yeah. Well, I don't know exactly what we would ask. I need to ask our membership marketing people. I think we've frankly been very pleased of our success of getting more new members more existing members to convert and frankly more new members to sign up initially as an executive. Mind you, eight or 10 years ago in the U.S. where it started, we've had it for 15 years now, probably, you came in, and we just signed you up. We asked you what you wanted. We didn't do a lot. And maybe 20 or 25 at most 25 of every 100 signed up as an executive member. Today, it's in the 50s, close to 60. That's with just trying a little bit and showing them the value of it.
I think we've done a better job of doing that. We do a better job when we go into a new country. We're now in, I think, six of our countries, which are the largest ones. You wanna have at least 15 or so locations before you're looking at it to put an executive membership in it. We've toyed with the idea of having, you know, something even higher than executive, but we always go back to the fact that what we have works very well, and so I don't think there's anything currently on our plate to change that. We've also asked the question, you know, at some point, right now it's 72% or 73% of our sales are with the executive member, what happens when it gets to 85% or 90%?
Do you eliminate the lower membership? At some point we might, but that's, again, not in the cards at any time in the near future. We kinda like doing what we're doing and it's working fine.
Secondly, where are you on the personalization journey, right? I know you hired somebody maybe two years ago to kind of spearhead that. Where are we in? Does that pick up steam in the next year or so?
I think it picks up steam in the next year or so. The first order of business when we brought in people on that data analytics side two years ago, a person, he has built a great team. We're seeing small deliverables first and foremost, not online, but with merchants and to a smaller extent, with some of the operators. There's been some real deliverables that have saved our buyers time, and those are in the process of being rolled out. On the personalization and targeting, I think we've got a little better at targeting and still have a journey on the personalization, but that'll be coming. I thank you for asking it when you said a year or two.
Okay. Thank you.
Thank-
We'll take two more questions.
Okay. Now that's done. Your next question comes from the line of Laura Champine from Loop Capital. Your line is now open.
Thanks for taking my question. I'll make it quick. It's a follow-on to the unit growth questions asked earlier. It sounds like you're positioning the business to launch more international stores. Does it make sense for me to interpret that as unit growth may accelerate next fiscal year and beyond from this looks like it's gonna be about 3.5% this year?
Well, look, our goal for the last several years, there was the unique year of COVID, where we went down to 13 openings because there were several that construction had stopped for several months in the middle of 2020. But the reality is if you go back five or six years, we were opening 25-ish, some years 21 or 22-ish, and the view even then was to get up to closer to 30, certainly 25 to 30. I think this year we're finally hitting that with the expectation of 28 in my call this morning and call it, you know, 26 to 30, whatever X is, it comes out to be. We would certainly be comfortable at 30.
You know, one of the things that is unique is we try to be relatively methodical about it, particularly in new international markets. Once you open the first one, if it's successful, you're taking some people from that one to help and succeed in opening the second one. You know, one of the things is it's you know, the biggest cost factor on the warehouse P&L is labor and efficiency. When you're running a high volume unit, it's helpful when you've got more people coming over from a nearby unit. We are pretty methodical about growing somewhat slowly in new markets. You know, we went from one to five, 20 years ago over a 5-year period in Japan.
We've sped up a little in China, thinking that we've opened two now in three years and with another several in process. Probably several is more than a couple more. You know, we've increased it a little bit and but we feel pretty good about that. I would still say our rounded pat answer right now is 25 to 30, and we'd like it to be more up to 30 than 25 right now. We're not necessarily looking at that percentage. As we get bigger, God willing, in year six through 10, we're gonna be talking about 30 to 35, but we'll have to wait and see.
Got it. Thank you.
Your last question comes from the line of Peter Benedict from Baird. Your line is now open. Peter Benedict, your line is now open.
Sorry, take me off mute there. Thank you, Richard. Like most of my question's been asked, but just thinking about the supply chain situation and just curious if it's caused you guys to rethink or accelerate any of your kind of sourcing initiatives. I mean, you talked about the vessels and the containers, and that clearly seems to be in reaction to what's going on. But I'm thinking more along the lines of categories, you know, these efforts you've been underway for a long time going vertical. Are there any that maybe have jumped to the front of the line because of what you've seen over the last year or two?
Well, I think a couple of things we've done, not in a big way, but a couple of things we've done is there's probably a little bit more diversification of suppliers, particularly on huge, you know, $300 million to $1 billion SKUs. You need a little bit more there. You know, we've brought in certain things nontraditional to its season, you know, during the winter, bringing in bikes because we could have access to them and we sold them. Yeah, new countries of origin. There's a few of those things, but not in a big way.
You know, part of our success is huge buying power per item and you know, having you know, less than 4,000 SKUs to do our $200 billion is quite a bit different than having even 100,000 SKUs doing $150 billion to $500 billion, depending on who the retailer is. We've made changes and we are more open-minded to bringing in some things, but hopefully this thing, the supply chain works out over the next couple of years in a big way and in a better way.
Sure. Just lastly, I just saw the executive membership, you know, 43% of the members and 71% of the sales. Where are those numbers in maybe your more established markets where you've had it and maybe how underpenetrated is it in some of the newer markets? Just trying to get a sense of what the pathway might be for some of these newer markets.
Well, it's like renewal rates. Renewal rates, irrespective of what it becomes 10 years hence in a location, in a market, it starts off at a lower number and builds up to the higher number. Same thing with that executive transition. We're doing better today and even in first-year new markets. I think in the last couple of years, where have we added executive? Japan and Korea. Yeah, I mean, that 42% number is hovering in the low 50s, 50% or a little higher in more mature markets and starts off lower in other markets. But higher than it started in the previous new market, you know, a few years ago. It grows over time.
Yep.
And, and
Fair enough.
Yeah. Well, thank you very much. Everyone have a good afternoon and evening, and appreciate you getting on the call.
This concludes today's conference call. You may now disconnect. Thank you.