Ladies and gentlemen, thank you for standing by, and welcome to the Q2 Earnings Call and February Sales Conference Call. At this time, all participants are in a listen only mode. After the speaker presentation, there will be a question and answer I I would now like to hand the conference over to your speaker today, Mr. Richard Galanti, CFO. Thank you.
Please go ahead.
Thank you, Rochelle, and good morning to everyone good afternoon to everyone. I'll start by stating that these discussions will include forward looking statements within the meaning of the 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 2020, the 12 weeks ended this past February 16, as well as February retail sales results for the 4 weeks ended this past Sunday, March 1. Reported net income for the quarter came in at $931,000,000 or $2.10 per share. This compared to last year's Q2 of 889,000,000 or $2.01 per share. Net sales for the quarter came in at $38,260,000,000 a 10 0.5% increase over the $34,630,000,000 realized last year in the quarter. Comparable sales for the 2nd quarter were as follows.
In the U. S. For the 12 weeks on a reported basis 9.1 percent excluding gas inflation and the impacts of FX 8.1 percent Canada on a reported basis 8.9 percent ex gas and FX 6.8 percent other international 7.9% reported and 7.1 percent ex gas and FX. For total company, a reported 8.9% same store sales increase and ex gas and FX of 7.9%. Both of those numbers were positively impacted as well by approximately 0.5% due to the Thanksgiving holidays occurring 1 week later this year than last year.
On e commerce, we reported a 28.4% comp for the 12 weeks, ex and a 28% FX. And again, there was a bigger impact of this Thanksgiving holiday shift there given the importance of that to e commerce. E commerce sales in the quarter were positively impacted by an estimated 11 percentage points and hence the 28% comp result. In terms of 2nd quarter comp sales metrics, 2nd quarter traffic or shopping frequency increased 5.9% worldwide and 6.1% in the U. S.
Strengthening foreign currencies relative to the U. S. Dollar positively impacted sales by about 25 basis points and gasoline price inflation positively impacted these numbers by about 80 basis points. Our average transaction or size or ticket was up 2.9% during the quarter, which includes the positive impacts of gas, inflation and FX. Later in the call, I will review our February sales results.
Moving down the income statement for the 2nd quarter. Membership fee income came in at $816,000,000 or 6.3% higher than the $768,000,000 recorded in Q2 of last year for a $48,000,000 increase. That percent increase is about the same as it was Q1 year over year. In Q1, we opened 3 we had 3 new openings. In Q2, we had no new openings.
In terms of renewal rates, at Q2 end, our U. S. And Canada renewal rates were came in at 90.9% and worldwide renewal rate at 88.4%. These are the same levels of renewal that we've achieved in each of the last two fiscal quarters. In terms of number of members at 2nd quarter end, in terms of member households and total cardholders, at the end of second quarter, we had 55,300,000 member households, up about 600,000 from the 54,700,000 12 weeks earlier.
And total cardholders totaled $100,900,000 up about $1,000,000 from the $99,900,000 we reported at the end of the first quarter. At Q2 end, paid executive memberships stood at 21,700,000 members, an increase of 321,000 during the 12 weeks or about 27,000 per week increase since Q1 end. Going down to the gross margin line, our reported gross margin in the 2nd quarter was lower year over year by 31 basis points coming in at 10.98% compared to 11 point 2 9 percent a year ago. That 31 basis point reduction lower number year over year excluding gas inflation, it would have been 22 basis points lower. If you'll please jot down the 5, 4 line items in 2 columns as we usually do.
First column is reported for the 2nd quarter and the second would be without gas inflation. The core merchandise margin was down on a reported basis 30 basis points year over year in the quarter, ex gas inflation was down 22, ancillary businesses a minus 5 and a minus 2 basis points, 2% reward, plus 4% and plus 2%. And then total, as I mentioned, 31 basis points lower year over year on a reported basis and ex gas inflation, 22 basis points lower. The majority of the lower year over year core margin was driven by higher sales penetration of 2 significant lower margin segments of our operations, which are growing at a faster rate than the core, notably gasoline and e comm, as well as the startup losses at our new poultry complex, which I had mentioned in the Q1 as well. Looking at the core merchandise categories in relation to only their own sales, core on core, if you will, margins year over year were lower on a reported basis by 15 basis points, of which 6 basis points related to the losses from the new poultry complex.
Within the core gross margin year over year in Q2, we showed a gross margin increase in softlines. Food and sundries was about even year over year and decreases in both hardlines and fresh foods. Hardlines was down in the quarter primarily due to holiday timing, which shifted more promotional activity into Q2 this year. Fresh was negatively impacted by our step up in price investments versus last year in Fresh and Fresh and by the margin impact from the new poultry complex as I just mentioned. We're now halfway through our 1st year of operations of the poultry facility, which opened on September 10, and we would expect the gross margin headwinds to decline, but continue, but to decline a little bit as we get to full production capacity and improve operations.
Ancillary and other business gross margins on a reported basis minus 5 basis points year over year and minus 2x gas deflation in the quarter. Basically, you had a few things that hurt you and a few things that helped you, but overall minus 2x gas inflation. 2% reward was better by 4% on a reported basis and by 2 basis points ex gas inflation. This relates primarily to a true up of our breakage estimate of the executive member rewards. Moving to SG and A, our reported SG and A percentage year over year was lower or better by 22 basis points coming in at 9.78 percent of sales, down from a 10.0 a year earlier.
Without gas inflation, SG and A was lower by 13 basis points. Again, if you jot down the following few numbers, 4 line items in the two columns. Core operations, year over year in Q2 on a reported basis showed an improvement, it was lower, so I'll say a plus 17 basis points and ex gas inflation plus 10%, central plus 1% and plus 0%, stock compensation was lower or plus 4 and plus 3 on ex gas inflation. And again, the total on a reported basis, SG and A was lower by 22 basis points, plus 22, and without gas inflation, a +13, so lower by 13. The core operations component, again, 17 reported, 10 excluding impact from gas.
This figure includes the impact of the wage increases that occurred last March of 2019. This hit our year over year comparison by an estimated 3 to 4 basis points. We anniversaried that increase just this past week, so the impact in Q3 will be minimal. SG and A also benefited during Q2 year over year from the shift of sales penetration to lower SG and A if you will lower SG and A segments of our operations which are growing at a faster rate than the core, again gas and ecom. Central was lower within SG and A.
Central was lower on a reported basis by 1 basis point or flat year over year ex gas inflation. We continue to invest and spend in IT to the tune of about 5 basis points higher year over year. That was offset by improvement in other expense items and of course helped by strong sales. And stock comp, as I mentioned, on a ex gas inflation improvement of 3 basis points. This varies quarter to quarter.
Looking at the last couple of years, generally, it's a small hit in Q1 and flat to a small benefit in the other quarters. Nothing really unusual to report there. Next on the income statement is preopening expense. Preopening expense was lower. It came in at $7,000,000 compared to $2,000,000 in Q2 a year ago.
As I mentioned earlier, this year we had no openings. Last year we had 2 openings, both in the U. S, 1 net new opening and 1 relo. This year's Q2 preopening expense in this quarter relates primarily to warehouse that will open during the 3rd 4th fiscal quarters, Coming up very soon, our opening in Perth, Australia and also our first in the state of Mississippi and Ridgeland, Mississippi that will be our 45th state of where we operate. Those will both open during the next couple of weeks.
All told, reported operating income in the second quarter of 2020 increased by 5.2 percent coming in at $1,266,000,000 this year compared to $1,203,000,000 a year ago. Below the operating income line, interest expense was the same year over year coming in both quarters at $34,000,000 and interest income and other for the quarter was lower by $1,000,000 so almost flat year over year. Overall, pre tax income was up 5.1% coming in at 1.277 dollars compared to last year's $1,215,000,000 In terms of income taxes, our rate was just slightly higher year over year. In the 2nd quarter, it came in at a 25.9% rate compared to 25.8% in Q2 last year. For all of fiscal 2020 based on our current estimates, which of course are subject to change, we anticipate that our effective normalized total company tax rate to be approximately 26% to 26.5%.
In terms of openings, as I mentioned, we had no openings in Q2. We plan 2 net new openings in Q3 and I'll give you a range for Q4, which is our 16 week fiscal quarter of 11 to 13. Part of that, again, most of the openings concentrated in our 4th fiscal quarter. And of course, there's probably a few subject to slipping into early part of next year based on weather. As of Q2 end, total warehouse square footage stood at 114,000,000 square feet.
In terms of capital expenditures, during the quarter, we spent approximately $545,000,000 and our estimated CapEx for all of fiscal 2020 remains right around $3,000,000,000 In terms of e commerce, as again, we reported a 28.4% comp sales increase and 28% without FX. Again, a lot of that had to do a lot of that increase had to do with the Thanksgiving shift. We estimated again that about 11 Overall, a few of the stronger departments, majors, special order kiosk items, seasonal and toys and housewares. These departments generally benefited from the holiday shift. In terms of total online grocery, that continues to grow at a faster rate than the store e com comp, both today and Instacart, the latter of which isn't included in our e commerce numbers as they come into the During the Q2, we successfully launched both our Japan e commerce site in December and our Australia e commerce site this past month in February.
And not to be outdone, we recently sold another high value large carat diamond for a little over $600,000 If anyone is interested, please give me a call. Turning to our February sales results. The 4 weeks ended this past Sunday, March 1st, compared to the same period last year. As reported in our release, net sales for the month of February came in at $12,200,000,000 a 13 0.8% increase from $10,720,000,000 a year ago. In terms of geography, U.
S. Reported comp for the 4 weeks 12.4%, ex gas at FX 11.6 percent, Canada reported at 10.2 percent, ex gas and FX at 10.4 percent, other international at 12.5 ex gas and FX at 13.5%. So total company at 12.1% reported and 11.7% ex gas and FX. Ecom for the 4 week period, 22.6% for the reported and 22.7x FX. Our February results benefited by last week's big uptick in sales, the 4th week of last month, mostly we believe related to concerns around the coronavirus.
This positively impacted the month's total and comparable sales numbers by approximately 3 percentage points. U. S. Regions with a strong sales results in February were the Northwest, Texas and the Midwest. International and local currencies, we saw strong results in Taiwan, Japan, Spain and Mexico.
For the month, currencies year over year relative to dollar hurt February comp sales in Canada by about 60 basis points. It impacted negatively other international by about 110 basis points and total company by about 20 basis points. Cannibalization was about a 10 basis point impact to the U. S. To minus, 140 basis point minus impact to other international and 30 basis points overall to the company.
Moving to merchandise highlights, the following comparable sales results by category. Food and sundries were positive in the low teens. Strongest departments included foods, frozen foods, sundries and candy. Hardlines were positive in the high singles. Better performing departments were lawn and garden, health and beauty aids and tires.
Softlines were up in the mid single digits. Better performing departments included housewares, domestics and jewelry. And finally, Fresh Foods were up in the low double digits, better performing departments included meat and produce. Within ancillary, pharmacy gas and hearing aids had some of the better comp sales increases in February. A gas price inflation, I think I mentioned this, positively impacted total reported comp sales by about 60 basis points.
Lastly, our comp traffic or frequency for February was up 9.2% worldwide and 8.9% in the U. S. Now given the fat impact in week 4 where we really saw the big uptick as I know many did out there related to the concerns over coronavirus, The 1st 3 weeks within that 9.2% worldwide for 4 weeks, the 1st 3 weeks stood at 7.6% and again within the 8.9% U. S. Frequency number for the 4 weeks, within that for the 3 weeks it was 6.9%.
So, still a good showing prior to that. For February, the average transaction was up 2.7%. Now, turning to the coronavirus and all the issues and impacts surrounding it. Like everyone, we are keeping a close eye on the developments around the coronavirus, including the impact on operations, the health and safety of our members and employees, and of course, our supply chain. As already discussed, we saw strength in our February traffic and comp sales related to the news and concerns about the virus, most particularly in the last week of the month, and that's continuing in the 1st few days of this week.
Our warehouses have overall remained open with only a few total days of closures at a couple of locations in Korea, as well our Shanghai location, there's been some limitations required on the number of people in the facility at a given time. Members are turning to us for a variety of items associated with preparing for and dealing with the virus, such as shelf stable dry grocery items, cleaning supplies, Clorox and bleach, water, paper goods, hand sanitizers, sanitizing wipes, disinfectants, health and beauty aids, and even items like water filtration and food storage items. And we're doing our best to stay in stock on these and other items. We're getting deliveries daily, but it's still not enough given the increased levels of demand on certain key items. It's been a little crazy this past week in terms of outside shopping frequency and sales levels and not only in the United States.
In terms of placing quantity limits on what a member can purchase, we are doing that in some instances. Tends to be at all locations, but may differ regionally based on supply levels. I do want to give 3 big shout outs. Our buying staffs, both here regionally and abroad are working in some cases around the clock to procure supplies from both existing suppliers and from other sources where possible. 2nd, a shout out to our warehouse employees.
These last 9 or so days has been beyond busy, even with the traffic jams in the parking lots and the long lines and check to check out, they've been absolutely awesome. And anecdotally, we're hearing that daily from members. We hear a few other things occasionally too. And lastly, our suppliers, both domestically and abroad, Overall, in terms of what the coronavirus related demand items in terms of that, it's looking better, but not perfect. We'll see what each day brings.
At our warehouses, in terms of cleanliness and sanitizing, we have enhanced sanitizing protocols and safety procedures have been implemented at all locations. Some examples, wiping down card handles with sanitizing wipes, placing of sanitizing wipes, stands at entrances, also along the fresh line wall of food courts, enhanced procedures at the food courts, patio tables, condiment tables, dispensers and pin pads, etcetera. The general things you might expect and that we see in all the recommendations. In terms of supply chain, closures of many manufacturing facilities extended well beyond the typical 1 week Chinese New Year holiday, which was the last week in January. In many cases, factories over there were closed for 1 to 2 additional weeks.
That's now improving each So initially, there were 2 to 3 weeks of factory closures, not 1. Then about 3 weeks ago, and just pulling some of the buyers that deal with the factories, they felt there was a rough number of 20% to 25% production levels, moving up to 40% and now as high as 60% to 80%. But again, it's improving and still has a little ways to go. In terms of transportation issues, with its Chinese New Year and then a couple of additional closure weeks, there were not only product issues, but also trucking and port issues. These are also abating with port capacity in China improving each day as well.
And I say port capacity, it's also the shipping lines that come to the various ports. Domestically, truck capacity is plentiful. However, exporting items, including KS items as well as other U. S. Manufactured items to our locations in Asia and Australia.
It's been a little bit of a challenge because of some container shortages here, but overall okay, it's just taking a little more work. We're finding other ways to handle any potential out of stocks by shifting SKUs to alternative items and categories, particularly in the areas of domestic goods, food and sundries and fresh. And as you might expect, our travel business is impacted due to reduced demand as well as higher than normal this point, it's hard to quantify what the financial impact will be for our future results to our future results. Again, the first week and half of this fiscal quarter, it's been the last week and half has been quite good with the sales, but we'll see what tomorrow brings. We'll continue to pass that information along and of course we do report monthly sales results.
Finally, in terms of upcoming releases, we will announce our March sales results for the 5 weeks ending Sunday, April 5 on Wednesday, April 8 after the market closes. With that, I will open it up to Q and A and turn it back over to Rochelle. Thank you.
All right. Thank you. Your first question comes from the line of Simeon Gutman from Morgan Stanley. Your line
is open.
Hey, Richard. Can you hear me okay?
Yes.
Okay, good. My first good, thank you. First question is on the gross margin. I think if we take the core on core down 15% and you get rid of the chicken production costs, you're down 9%. Did you say within that what the e commerce mix shift is and how that compares to prior quarters or to the prior run rate?
No, we weren't that specific, but a lot of it has to do with the fact that that one particularly that 1 week where it's so important to e commerce on promotional items for Black Friday, Cyber Monday, the weekend, the 3 days leading up to Thanksgiving. So you do have some lower margin you have some lower margin categories in there to start with as well as we do a lot more promotional stuff as most retailers do with that week of Thanksgiving.
Okay. So this was a little bit unusual given the timing and given just the Q4 or the holiday period was in that number?
Well, and I want to stand corrected if there's a couple of people here just corrected me. The e comm numbers are not in the core on core. So that would be outside of that.
Got it. Okay.
But it's still the strength in majors.
Right. Okay. Got it. And but broadly speaking, the greater mix of e com, Richard, is going to depress while you're saying it's not in that number, but it's unfavorable to gross margin broadly though. Is that fair?
And is that because of the mix of products that are being bought or because of the discounts or the markup that you're putting on those items?
It's both. I mean as we try to build new categories over the last year or so like apparel, we're giving some hot deals out there. If you buy 1 shirt, it's X. If you buy 2, it's a little less for delivery or whatever else. So we're driving that business.
And again, we've talked about
yes,
but the big thing is electronics. Electronics tends to be a low margin business, not only TVs, but all the computer and phone things.
Got it. Okay. My follow-up is on just overall reinvestment, right? Your business is growing at a really high level, high single digit comps. I'm not sure if you plan for that level.
And the core on core in general is doing relatively well. It's not down 20 or 30. And I guess the SG and A that you're spending seems somewhat in line, but I assume you're not flowing through all the leverage that's coming through this model. And so my question is, where are you finding places to reinvest? Again, it doesn't seem like the core on core is getting is going down enough to suggest you're putting it back in price.
Are you finding other places to spend in SG and A?
Well, I would argue that we are putting a lot of it back in price. Keep in mind of all the buckets we talk about historically from the membership fee income to the tax reform to the change in credit card. Those things keep growing and allows us to be competitive. And when we see strong I think it encourages us to do more of that. And the other thing is, is I'm not going to go through 10 different things, but there's lots of things.
We're very busy. It's not just the 5 basis points I mentioned in IT. We got a lot going on with ecom fulfillment, with the chicken complex, which I mentioned. There's a lot with the CCPA, these are small things, but each of these are various numbers of basis points. CCPA is the privacy California Privacy Act.
We don't point it out because I'm sure there's something that goes the other way sometimes. But at the end of the day, there's a lot of things going on and we feel pretty good about where our expenses are, although we're always going to try to improve them.
Okay. Thank you.
Your next question comes from the line of Gregory Melich from Evercore ISI. Your line is open.
Hi, thanks. Richard, two things I want to follow-up. One is on the membership fee income, could you give us what that is in constant currency? And also if you're seeing any membership sign ups inflect like the way sales and traffic have in the last couple of weeks?
It's $2,000,000 is it $2,000,000 It's $2,000,000 even with FX. Yes. We'll do negative.
Once we adjust for that, got it. And then on the sign ups, have you seen any change there in the rate of sign ups?
I honestly don't know. I know even a few people I mean the shopping frequency is off the charts the last few days and you see it on social media with people sending in pictures. So I've got to believe there's been a little bit of it, but not enough to move the needle.
Got it. And then secondly, it was just on gasoline.
What did
you have the average selling price this quarter? And if you had any sort of trends on the gallons, it would be great as well?
I don't have it in front of me. I know that there was gas was inflationary, correct? Yes.
I think.
Hold on a minute.
Gas price. In Q2, it was 7.9 percent inflationary.
Inflationary. And that's the average selling price per gallon versus a year ago?
Yes. $2.75 versus $2.55
Got it. And then last, I'll sneak in because I know it's coming. The balance sheet, very strong, more volatile markets. How should we think about buyback capital structure in the current rate environment and environment of the world?
Well, every banker calls us every day to let us know that rates are even lower today than tomorrow. But no, look, we continue to look at it. We talk about it every Board meeting and all I can tell you is to stay tuned.
All right. Thanks. Good luck, guys.
Thanks.
Your next question comes from the line of Chris Harbors from JPMorgan. Your line is open.
Thanks. Good evening. So a few follow ups. First on March, I mean, you are limiting some of those high volume items. It does look like you've got some pretty low in stocks out there.
Do you see the potential for comp risk later this month?
Well, we don't know. People have asked us what happens when people have been bulking up on certain items. And yes, there's out of stocks every day too. But overall, the numbers are incredible because there's so many people coming in and they're buying other stuff as well. So I don't know what tomorrow brings.
When asked the question, are people then go through this additional purchasing of water and shelf stable food items and everything. I guess it depends. Are some of them putting it in their basements for another day? Some of it related to the fact that people aren't eating out as much. I think it's a combination of those factors.
All we know is that last week starting Tuesday or Wednesday, which is when a lot of the news went even in the U. S. Went even further. We had a huge pickup in traffic, which continued over the weekend and increased and increased the 1st few days of this even further in the 1st few days of this month this week. And so we'll see what tomorrow brings.
And again on the supply side, there's clearly not just at Costco but other places, you really can't go in and generally find sanitizing items and what have you. And while we're getting shipments daily somewhere in the U. S, whatever limited amounts we get or allocated is gone pretty quickly. And I would assume that over the next few weeks or several weeks that will abate, but it depends what else happens with the virus itself.
Yes. I was at a store on Saturday. I've never right after the open, I've never seen a line that long, all the way back to dairy. The my follow-up question is, this might be hard to parse out, but I think the big question on investors' minds is how the consumer is going to behave. Obviously, you have the pantry load, but you also sell a lot of general merchandise.
You also sell a lot of big ticket. So we're able to sort of tease out if you're seeing any pullback relative to trend in the past week or so in some of the more discretionary and larger ticket categories?
What's interesting, I'm just looking at some handwritten notes from our that I spoke to our senior buyers yesterday. You would think things like patio furniture would be impacted because it's a big ticket discretionary items. The comment was we're selling it extremely well. Now part of that is we've got a bunch more people coming in. So maybe per customer the purchase per customer is down a little, but there's a lot more customers.
And so Lawn and Garden is doing well. The buyers knew that's more weather related in certain markets. There has been some impact. Excuse me?
Did you say TV? Are we going to say TV?
No, I said lawn and garden, weather related. And then in some electronics items, while some are strong, there's others like some laptops and some phones where there's been some supply chain issues. But I would say overall the initial thought my initial thought is that big ticket discretionary items might be negatively impacted right now. To the extent they are, it's been more than offset at least in these last several days by the influx of shopping frequency. I don't know what that means for tomorrow.
We'll have to see.
Understood. That's super helpful. And I'm sure all the media outlets are picking this all up. My other questions, 2 quick ones. One is, have you expanded the number of SKUs in the MVM?
It seems to have picked up over the past couple of months, but want to get your thoughts there. And then lastly, it looks like you have a new grocery delivery option in the app and on your website, sort of an extended delivery option, not the 2 day and not the same day. So sort of what's been the strategy there? And is that new or just a repackaging of something you already had?
Generally, there's been no change in MVM items. I mean, if it's up a little or down a little, I think that's random, not planned. And as it relates to shipping, at least the people in the room with me here are not aware of that. Was it? Okay.
It must be just repackaging something that you already have.
Yes. Okay.
Thanks very much. Best of luck. Sure.
Thank you.
Your next question comes from the line of Chad Rom from Gordon Haskett. Your line is open.
Hey, good afternoon. This is actually John Park on for Chuck. Can you guys provide a little bit of an update on the performance of same day and Costco 2 day and how that's impacting kind of total spend from these customers that are utilizing
it? It's still relatively new for us over the last year. Overall, and knowledge of this is a couple of months old, it's a slight improvement. The concern of course is they buy more having to deliver in one day and 2 day and then they come in less frequently, but how less frequently and they are coming in a little less frequently, but the sum of the 2 still is fine. Again, it's too early to tell in our view, does fine continue or does it change a little bit?
We're still but keep in mind also, we continue to do a lot of things consciously even through emails to get you come back in the location with certain promotional things that are in store only.
Got it. And then I guess just going back to the coronavirus, I mean is there any way to kind of indicate whether the margin on these sales are materially different than your traditional shop?
Food and sundries overall is yes, it's about in line, I would say, on the company averages.
All right. Perfect. Thank you.
Your next question comes from the line of Karen Short from Barclays. Your line is open.
Hi, thanks very much. A couple of questions. You Richard, you commented on the fresh gross margin decline. And I'm wondering if you could just give a little bit of color on that. And that's obviously excluding the poultry.
You kind of called it a step up in price investments.
Yes. We're just I mean, at the end of the day, our heart is we're merchants and we try to drive business. And fresh is an area that also is a frequency driver. So it's more my comment is more anecdotal than some new change in strategy.
But not necessarily also comment on the competitive landscape?
No. That is the increased level of competition that I've talked about, that goes back a year and a half plus ago. And that hasn't changed.
Okay. And then can you just maybe clarify a little bit on the, I guess, the true up of the breakage estimates?
Well, I mean at the end of the day it's a small amount of basis points. When we issue significant amount you can kind of back into the number yourself of what percentage of our sales are you get the 2% reward. And we send out those certificates and there's always going to be some slippage, notwithstanding the fact that we send out reminders to our members that you haven't cashed this. At the end of the day, we tend to be we do our best guess to accrue for slippage. And I'd like to think that we tend to be a little conservative and therefore when there's a review it picks up the other way.
But at the end of the day, accounting rules say you do your best guess of what it should be. And then when you re review it, you adjust that.
Okay. And then I just want to switch gears to the Shanghai store. And I think you said you'll be opening a second one soon. Maybe any thoughts on what you think that the actual annual volumes could and will settle out at for that store? And then any update on the number of members at that store since the last call?
And then I mean, I ask it in the context that to the extent that China is an opportunity, it's not so much about the units, it's actually about the volume per unit.
Right. Well, it's hard to say because this one is so off the charts. I mean, again, the last few weeks last several weeks with some limitations on number of members for some of that period of time, it's changed a little bit. But I mean, that's it was either our top or second largest location in our company for the several weeks leading up to that. And the number of members is again off the charts, nearly 5 times the company.
Okay. But would we take that same number and apply that to the total revenue for that box or how should
we say that?
No, no, no, because given the population of Shanghai and the fact that this thing went throughout social media and it was very popular over there. You have a somewhat higher renewal rate. We don't know yet because we opened it in August. But we know from other countries I'm sorry, lower renewal rate. And no, and you can't just simply multiply that out.
But the unit overall is again either number 1 or 2 up until the last few weeks with what's going on over there with coronavirus was one of our top two units.
Okay. And then just last question for me. I don't think I've asked this for a while, but do you have any are you willing to give an update on what you think or what the where the average ticket is in the U. S. Of an executive member today versus just the basic membership and how that's trended in the last several years?
Because it does seem like the momentum has really continued to increase in terms of your share gains.
Yes. Look, we don't disclose that, but more executive members and more penetration of executive members is good. More members who have the in the case of the United States, the co brand credit card is good. And if they have both in executive and that, it's even better. All those things I think help our sales growth.
Okay. Thanks.
Your next question comes from the line of John Heinbockel from Guggenheim. Your line is open.
Richard, the price investments you mentioned in fresh food, was that actually proactive price investments or more delays in passing through vendor increases? And then where those investments occurred, is that was that more protein as opposed to other categories?
It's definitely proactive on our part. And I think it's all of the above. It's protein, it's fresh I mean it's produce. Okay. And then if
you look at the fresh food comp, right, so I think you said low double digit and that included the final week, right? So that was the best fresh food comp you've had in a while. I don't know if you can parse out, maybe you can with looking at the final week, how much was some of that coronavirus related or was a lot of that step up related to the price investments?
Who knows? Clearly week 4 was different than weeks 1, 2 and 3 for everything, just the sheer number of people coming into the warehouse. I personally believe that given that restaurants probably have been impacted a little bit the last couple of weeks, they're buying more at supermarkets and more at Costco. So those things help a little bit as well.
And then lastly, when you think about it, I know you said the margin on some of that stuff is sort of in line with the average.
When you think about the
sort of the cost associated with restocking and dealing with that volume, and you think about, I don't know, an EBIT margin tied to that volume. Normally, the EBIT margin will be the incremental margin will be a lot higher. Is that less the case here because of the cost required to keep up with that volume?
Well, yes, I think there's a lot of additional things that cost you. I mean, there's not a lot of it, but I'm sure there's a little air freight going on. And I'm sure there's when you've got a high cube, high weight, low value item like water, 40.5 liters for $2.99 or something and you're going through it faster than you could put it on the floor, There's more labor and everything else. So, but it's still a net positive. In the scheme of things, I don't know if it helps or hurts the bottom a little bit.
Okay. Yes. And the other thing is, is they're not just coming and getting those 5 items and leaving. They're shopping a little bit. Again, I personally was surprised that patio furniture is strong.
And maybe per person, it's a little weaker, but there's a lot more persons. Okay. Thank
you. Your next question comes from the line of Mike Baker from Nomura. Your line is open.
Okay, thanks. A couple of questions. One, can you tell us how gas profits were this year versus last year? And then remind us, if you could, how much that helped 2Q 'nineteen versus 2Q 'eighteen?
I believe, I don't have it in front of me, but I believe last year we said gas helped us relative to the prior year. It was pretty it wasn't worth talking about plus or minus either way this year versus last.
Got it. Okay, shifting gears, a couple more if I could. So February, even if you take out the first of all, the 300 basis points, can we take that out pro rata across international and the U. S? Or is it did it impact one region more than the other?
And the real question is, when you strip that out, February was much stronger than you've been running even so. In other words, I presume the 1st 3 weeks were strong. So what do you think is behind that uptick even before you got to week 4?
It must be those investments in price. No, at the end of the day, it is generally around the world. I think Korea has been a little less than a little less of that it's on a little less of that benefit. But there's been there was an outbreak there that had a lot of publicity and I think there were more people perhaps staying home or not going out. But when I look at U.
S, Canada and several other countries, all of them had big upticks in that last the past 9 or so days. I'm sorry, what was the last part of the question?
Just why do you think weeks 1 so weeks 1, 2 and 3 were obviously strong as well because when you take out that 300 basis points, it's still your high single digits. So what do you think is behind that big uptick?
There's probably lots of little things. I'd like my mother would say we're good merchants and great stuff at low prices. There's nothing that stands out completely. Certainly, there was not a lot of press out there, issues around coronavirus even though it was in the news a little bit. Maybe on a macro basis, there's a little bit of that in there.
I think there may have been some weather issues a year ago that may have impacted a little. But overall, we were in those 3 weeks, forgetting about week 4, which was off the charts, it was we're feeling pretty good about it that some of the stuff we're doing is working from a merchandising standpoint and a pricing standpoint.
Okay, fair enough. Appreciate the time.
Your next question comes from the line of Rupesh Parikh from Oppenheimer. Your line is open.
Good afternoon. Thanks for taking my questions and thanks for all the comments on the coronavirus. So I guess, Richard, just going back to your commentary on the supply chain. So as you guys look forward, at this point, do you expect any impact on your supply chain related to coronavirus or is it too early to tell for later in the year?
Well, I think first of all, there has been an impact on it. It's now starting to get a little bit further to normal back to normal on regular stuff. On some of the virus related items that people are buying like water and sanitizing items and paper towels and things like that, That's going to take a little bit while longer. When I ask the buyers, they're working day to day with suppliers. You've got suppliers that are literally working around the clock to produce and to ship.
But again, people are coming in and buying stuff, if you will, for their basement.
And what about I guess I was asking more on some of the other categories like electronics and some of those categories that may come from Asia. Just curious if you expect an impact?
Well, I think I've mentioned there have been we have seen some little impact on some laptops and some cell phones. And I think that's related to some of the things that we all read about in the paper about some shortage some delays because of some of the component
parts.
I think one thing that helps us a little is we're able to pivot a little bit. So if there was a shortage or something with one area, we're able to put something else in its place since we sell pretty much everything. But we just don't know what's going to happen tomorrow. 1st order of business is to get the supply chains back open and running well. There are 2 kinds of supply chain issues.
There is a supply chain issue related to all these very high demand items related to fighting and protecting yourself, the waters, the sanitizing, the things like that. And then there's just stuff, I mean everything from furniture to apparel to electronics coming from China. And on the latter, it seems at least while the 1 week and keep in mind given the planned Chinese New Year week, there were stuff brought in early not only by us but I'm sure others. And so but then there was 2 more weeks of closure. So those kind of things over the last 3 weeks in terms of talking about buyers, the supply chain has and the manufacturers are now back open.
They went from 0, if you will, to 25% to 40% to 50% to 60%, 80%. And now it's getting to the ports and some of those things are also being abated, some of the issues there. So my guess is if everything got better tomorrow from a concern standpoint, you still have a few weeks here where it takes time to fill those supply chains.
Great. And one follow-up question, just on the holiday season, you guys had a really strong performance even with fewer selling days. So just curious if there's any surprises or what do you think contributed to the real strong outperformance?
Well, I think that's what we do. I mean, I think we've done a great job. We've been helped by strong big ticket categories like electronics, like patio furniture and lawn and garden right now and other hard lines and soft lines areas. Fresh continues to drive our business. As you know, when we're asked what are the 2 or 3 big factors that drive our business or categories, it's fresh, it's gas, it's executive membership.
And again utilizing those different bucket even when sales are good, we want to be aggressive in pricing. And when sales are bad, we want to be more aggressive in pricing. When sales are good, we want to be more aggressive in pricing. It drives the top line improvements drive the bottom line.
Great. Thank you.
Your next question comes from the line of Scot Ciccarelli from RBC Capital Markets. Your line is open.
Good afternoon, guys. Richard, you talked about expecting margin pressure to moderate a bit from the poultry plant ramp. And I know there was an incubation period there. So is that plant actually turning out product at this point? And related to that, can you give us an idea of what the incremental benefit you guys are expecting once you're in full production mode?
Well, I think it was mid September when the first chicken went through the plan, if you will. The plan was that 45 weeks later, there would be approximately 2,200,000 birds a week being processed. And so call it September to August. And so we're a little bit past the halfway mark on that. And I believe in terms of projection, we're a little bit past the halfway mark on that.
Call it 1,000,000 birds a week, I could be off a little bit on either side. And so a lot of this has to do with the fact that you've got this big facility that is running at well below capacity. The amount of impairment to margin related to that in Q2 was less than Q1. We would expect it to be less than in Q3 and further. So once we get to full capacity, I think and then I'm sure there's going to be some operational improvements over the 1st couple of years as well.
At the end of the day, it's a combination of sourcing and just simplest supply. And our view is we can improve, if you will, the ultimate cost per bird. But we don't know that yet. We spent a little more than we planned, but we also upgraded the facility to be air chilled instead of water chilled. It truly is a state of the art facility for the U.
S. And a very high volume facility. And I would say right now things are going as planned in terms of that 45 week cycle. And I would like to think that a year from now, 6 months from now or 2 more quarters from now, it's not going to be an issue that we really even talk about as it relates to how it impacted margin.
Got you. I appreciate that. I think you're wrong about
it a little bit. I don't think I'll be that wrong.
Got it. And then I know you obviously had the surge in that kind of 4th week as you pointed out because of coronavirus. Warehouses are obviously jammed, everyone kind of sees that. I'm curious if you happen to see an even larger increase from ecom in terms of like has there been some sort of shift in consumer behavior at all or is all the activity concentrated in warehouses?
No. I mean we saw an increase but not really. I mean mind you that we saw throughout February we saw some increase on e commerce. But again, if people are looking for those, the sense of urgency, I'm going out right now and get it and things like water and everything. And some of those key items like peanut butter and crackers and the like, we have online as well.
And those 2, in some regions, there might be in and out of stocks.
Got it. All right. Thanks, guys.
Your next question comes from the line of Judah Frommer from Credit Suisse. Your line is open.
Hi. Thanks for taking the question. I was hoping maybe you could help us with kind of how things trended in Korea over the last few weeks. You have exposure there, they're potentially weeks ahead of where the U. S.
Could be worst case scenario for the virus. So in terms of demand and kind of stock up and then potentially demand falling off as the virus spread there, any insights there?
Well, I think the only insight is from what I've read is not is the issue that more people are staying at home and not even going out. Whereas even near the well, the fluency that State of Washington and King County is getting with a few of the deaths, There are people out and about. There's a little less traffic on the highways and but notwithstanding that's it's on the highways coming to see us.
Got it. And then kind of changing gears, we've seen some stuff about potentially requiring membership in some food courts in the press. Anything behind the thought process there?
Well, first of all, it's gotten more press than it deserves. There are, I believe, 7 current locations on the West Coast where we and I believe they are all out door locations. And one of the challenges we've had is particularly on very busy locations where people that are non members just come and eat there every day, You've got member complaints saying why are you I have to pay to come to Costco. And so we took we're testing in 7 locations that we are limiting it to members only. Easy in locations where you have the food court inside, but on and many of the ones in areas where the weather is generally good like California, Arizona and things like that, you have a lot of them that are outside.
And so we'll see. But that's but again, 7 locations out of 540 we're testing it at and it's gotten a lot of press.
Okay, got it. And if
I could squeeze in one more. Anything on supply in pharmacy and any people stocking up there and potentially running out of inventory?
This is just a quote from the FDA yesterday. It said, while the FDA and other outlets are reporting disruptions in medical products are possible, at this time manufacturers are reporting that no specific drugs are experiencing shortage due to the impact of COVID-nineteen. And talking to our front head of pharmacy yesterday, he said the only thing that we've seen, there's been a little pickup there as well. Let's say somebody has a year long prescription, so a prescription plus 3 90 day refills for and they'll come in and they'll want all 4 of them filled now. And in some cases even when their particular insurance plan doesn't cover it, they're paying cash.
They're just hoarding up on their prescription to make sure we're not running out. But that's more again I think the same thing you're seeing with paper goods. But from a supply and availability standpoint, we haven't seen anything yet.
Okay. Thanks.
Why don't we take 2 more questions?
Okay. Next question comes from the line of Oliver Chen from Cowen. Your line is open.
Hi, Richard. Regarding the supply chain and what you're seeing, what are your thoughts regarding the price increases or potential price increases, whether that be from transportation cost or other and what your buyers think may happen there? And the second question is related to e commerce. You made a lot of progress on your mobile app. Just what's ahead for changes to the mobile app and also more broadly capital investments related to e comm and supply chain?
Thank you.
As it relates to costs, the general view of the buyers is that we have I get back to the comment I made earlier about strong relations. To the extent that there's some raw materials cost increases because of shortages, that's going to rain on everybody. In our view, it rains on us a little less. Given the limited number of items we buy and the amount of things the amount of a given item that we buy, our buyers we feel know a lot more about the cost structure. And so I haven't seen any commentary on that internally other than there was one small comment, I can't find it in my mess of papers here that there may be in some small cases some raw material increases on some particular item some particular raw material for some manufacturing process.
But overall, there's not been a big issue. Right now, the only increase in transportation is on some very limited items where there's been a little bit of air freight. What we're finding is that the ports are getting back at capacity and there's plenty of space. And so that's not been as big an issue. As it relates to an e comm and investment, there's not a lot I have on my plate to tell you today.
We're working on more things related to our app, to our membership digital app. And we certainly have some things going on, on the fulfillment side of e commerce. And we've been focused on getting 2 more countries open as I mentioned in the last quarter. And we think there are a few other things that we've got going on that I'll be happy to chat with the next time around.
Okay. And is buy online, pickup in store going as you like? And do you expect a lot of enhancements ahead to that as customers like it?
Well, customers like it, but we don't like it necessarily. We're doing buy online and pick up in store for some small items, small high value items, but we're not at the point where we're looking for members to buy online and come up and pick up their whole grocery basket. So we're trying to figure out our way. And certainly, again, the last 9 or so days notwithstanding, things seem to be working pretty well for us in that regard. We continue to work on the where we've had good sales and good strength over the last few years in e commerce is taking certain big and bulky things out of the warehouse, like white goods and things that are delivered and in some cases installed.
And so we continue to work on those kind of things as well.
And lastly, Richard, with the surge in demand and the traffic trends that you've seen, how have you managed the customer and guest satisfaction and also labor in your stores, those
kinds of
things we were curious about?
How do we measure?
How do you manage it and just and tried your best to make sure that customers are happy and also you have the appropriate labor levels relative to spikes and changes in demand?
Well, again, the last week and a half notwithstanding because it's been nuts. No, first of all, member comments and basic member renewal rates. I mean, we actually the operators and all the way to Craig see weekly information on comments. You can't imagine how many people call and email when they have something that they're concerned about. And we also measure the least expected, but the positive letters to that effect.
On the operation side, the key is still aside from merchandising, the art of merchandising out there and giving the warehouse manager, the managers and the merchandisers some leeway, not I mean certainly electronics is when you walk in and there's defensive promotional goods and fresh is in the back. But at the end of the day, there is a bit of merchandising that is pushed down to the regional and warehouse level and that's what I think drives our business there. In terms of the front end, managing the front end, I think we've got last count 120 of our 540 ish locations in the U. S. With self checkout and we plan another 100 in the next 3 months.
And so always trying to figure out and measuring the number of member transactions through the front end per hour.
Great. Thank you. Best regards. Great job.
Next question from the line of Peter Benedict from Baird. Your line is open.
Hey, Richard. Just two quick ones here to close out. So it looks like the business probably comping in the 20% range there in that last week. And certainly, the demand is probably even higher than that, just given that you guys are running out towards the end of the day. How do you think about the ability for the club to kind of keep up that pace with that pace of demand?
I mean, if this were to go on for 3, 4 more weeks, do you guys think you've got the supply chain able to keep up with that level of demand? Or are you hitting a point where you're not you're just not going to get another delivery tomorrow of pick your category?
Yes. No, well, I think it's all over the board. Yesterday, I think there was a couple of either Los Angeles or San Diego counties that announced a heightened level of concern. King County here in Seattle did that a couple of days ago. When that happens, that's another catalyst to push people to go out and get more stuff.
I would hope and look, we would all hope this thing peaks and starts to slow down. It depends what happens We'll be tired, but still working hard given that half of our employees roughly a little over half of our of the 90% of employees in our warehouses that are hourly, about a little over half of those 90 are full time and a little under half are part time. Certainly, they're employees that want to work more than part time, and so we've been able to accommodate some additional hours there. But everybody's a little tired, but that's what you do.
Okay. And then my last question is just on lawn and garden. You mentioned that a couple of times and you talked about seasonal. Maybe expand on that a little bit. Where in particular are you seeing the strong I guess it's an early start to spring, but maybe talk a little bit about what you're seeing on that front?
Well, the only thing I mentioned there was is that I and getting ready for today's call, had spoken to several of the senior merchants in the different categories. And one thing without even looking at the numbers, I thought is I assume some of the big ticket discretionary items might be a little weaker because people are not running in to get those items. They're running in to get other concerned items. And the fact was to my surprise that they said that certain items like patio furniture and lawn and garden was strong. They felt and again it was just their view that lawn and garden was more related to some of the areas of the country where the weather has turned already.
And but clearly because you got X percent more people coming in every day than normal.
Yes. That makes sense. Fair enough. Thanks so much.
Okay. Well, thank you everyone. Have a good afternoon and we're around to answer any questions. Have a good day.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.