Ladies and gentlemen, thank you for standing by, and welcome to the Q1 Earnings Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer session. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Mr.
Richard Valente, CFO. Please go ahead, sir.
Thank you, Laurie, and good afternoon to everyone. I'll 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 Q1 of fiscal 2020, the 12 weeks ended November 24. Reported net income for the quarter came in at $844,000,000 or $1.90 per share, compared to $767,000,000 or $1.73 a share last year in the Q1. This year's Q1 results included a $77,000,000 or $0.17 per share income tax benefit related to stock based compensation. Last year's Q1 results included a $59,000,000 or $0.13 per share income tax benefit related to stock based compensation. Net sales for the quarter came in at $36,240,000,000 a 5.6% increase over the 34,310,000,000 dollars sold during Q1 of last year.
Comparable sales for the Q1 of fiscal 2020 in the U. S. On a reported basis was 4.7 percent, ex gas deflation, it was 5.0 percent. Canada reported at 2.9xgasdeflation and FX plus 5.1. Other international reported 3.2 percent ex gas deflation and FX plus 4.5 percent.
So total company was a 4.3% reported and ex gas deflation and FX of 5.0 E commerce on a reported basis was a 5.5 and a 5.7 on a reported basis. Total and comparable company sales for the quarter were negatively impacted by approximately 1.5% due to Thanksgiving occurring a week later this year. E commerce sales in the quarter were negatively impacted by an estimated 12 percentage points. So again, the 5.5% and the 5.7% were impacted to the negative by 12 percentage points. In terms of Q1 comp sales metrics, 1st quarter traffic or shopping frequency increased 3.4% worldwide and 3.1% in the U.
S. This again includes the impact of the Thanksgiving holiday shift. Weakening foreign currencies relative to the U. S. Dollar negatively impacted sales by approximately 30 basis points and gasoline price deflation negatively impacted sales by approximately 40 basis points.
Our average transaction or ticket was up 9 10ths of 1% during the quarter, including the negative impacts of gas deflation, FX and the holiday shift. Next on the income statement, membership fee income. Reported membership fee income came in at $804,000,000 up 6.1 percent or $46,000,000 from last year's $758,000,000 Deflation foreign FX currencies would have impacted that by $1,000,000 to the negative, so it would
have been about $1,000,000 higher ex FX.
In terms of renewal rates, at Q1 end, our U. S. And Canada renewal rates was came in at 90.9% and worldwide rate was 88.4%. Both of these figures remaining at the same renewal rate levels that were achieved at 12 weeks ago at the fiscal year end. In terms of number of members at Q1 end, in terms of member households and total cardholders, at Q4 end back in, I think on September 1, we had 53,900,000 member households that Q1 12 weeks later was 54,700,000 and total cardholders increased from fiscal year end of 98,500,000 to 99,900,000 at Q1 end.
During the quarter, we had 3 new openings all in the U. S, a business center in Dallas, Texas and 2 additional Costco warehouses in Connecticut and Minnesota. We also relocated one of our units in Canada. At Q1 end, paid executive memberships were totaled at $21,400,000 an increase of $579,000 or $48,000 per week since Q4 end. This included the recent launch of offering executive memberships to the first time as of the beginning of the fiscal year.
Even taking those out, the average weekly increase would have been the new Japan executive members would have been 41,000 a week. Going down the gross margin line, to the gross margin line, our reported gross margin in the 4th quarter was higher year over year by 30 basis points coming in at 11.05 percent as compared to a year ago 10.75%. And again on a reported basis 30% ex gas deflation would have been plus 26. Doing the little chart that we do each quarter, 2 columns reported ex gas deflation. First line item would be core merchandise year over year in Q1 of 'twenty compared to a year earlier quarter, minus 3 basis points on a reported basis and minus 6 on an ex gas deflation basis ancillary businesses, plus 20% and plus 19%, no change to 2% reward and other was plus 13 and plus 13.
So a total of plus 30 basis points on reported basis and plus 26 x deflation. Now the core merchandise component gross margin again lower by 3 year over year reported minus 6x gas deflation. Looking at the core merchandise categories in relation to their own sales, core on core if you will, margins year over year were higher by 4 basis points. Sub categories within the core margins year over year in Q1 showed increases in hardlines, softlines and food and sundries and a decrease in fresh foods. Nearly all of that decrease in Fresh Foods was the result of the initial operating losses from our new poultry complex.
That will be a small headwind throughout the year. Recall that we commenced operations at the Nebraska Chicken Plant on September 10th with a roughly a 45 week plan to get to full production and processing capacity. We're currently on track to do so. Ancillary and other business gross margin higher by 20% reported in 2019 as gas deflation. The highlights being year over year being gas, optical, tire shop and hearing aids.
The other, the plus 13 compared to a year ago, this relates to what we mentioned last year in the quarter, to adjusting our estimate of breakage on rewards for the Citi Visa co branded card program last year. And that was again, so comparison of the hit last year versus 0 this year. Moving to SG and A, our reported SG and A percentage in Q1 over Q1 year over year was higher by 17 basis points, coming in at 10.30 percent, up from 10.13% last year. Ex gas deflation, SG and A was higher or worse by 13 basis points. Again, the little matrix that we do, both reported and without gas deflation.
Operations, minus 9 basis points, meaning higher by 9 basis points versus minus 5 basis points in Q ex deflation, central minus 4 and minus 4, stock compensation minus 4 and minus 4, for a total again of minus 17 and minus 13. The figure these figures include in terms of the core being minus 5 on a ex gas deflation basis, this figure includes the impact from the wage increases that we've talked about in the last couple of quarters that occurred this impact relates to wage increases that occurred in March of 20 19, which hit the year over year comparison by 3 to 4 basis points in the quarter. As mentioned previously, we would expect a similar impact that will occur in Q2 before we anniversary that wage increase midway through Q3. Central was higher again by 4 basis points year over year. IT was the biggest driver of the increase as we continue not only to maintain and upgrade, but expand our capabilities and activities.
And certainly, we have a lot going on there. And stock comp again minus 4 basis points to hit there. That hit usually is in Q1 year over year based on the fact that we grant our issues in that quarter and how we do things for employees 25, 30, and 35 years out. On the income statement, next on it is the preopening expense. It's lower by $8,000,000 It came in at $14,000,000 this year in the Q1 versus 22.
Dollars This year in the quarter, we had 4 total openings, 3 plus the relocation. Last year, we had 8 total openings, 6 plus 2 relocations. All told, operating income in Q1 increased by 11.8 percent coming in at $1,061,000,000 this year compared to $949,000,000 last year. Below the operating income line, interest expense was $2,000,000 higher year over year, dollars 38 this year in Q1 compared to $36,000,000 last year. Interest income and other for the quarter was higher or better by $13,000,000 Interest income was actually higher by $11,000,000 and other the plus $2,000,000 variance was primarily favorable FX year over year.
Overall pretax income in the Q1 of 2020 was up 13%, coming in at $1,58,000 compared to last year's $9.35 In terms of income taxes, our reported tax rate in Q1 2020 was 19.1% compared to 16.9% in Q1 of last year. Both of these Q1 tax rates this year and last year benefited from the tax treatment of stock based compensation as mentioned earlier. Last year's rate also benefited from an additional discrete items, which we mentioned in the quarter last year. A few other items of note, in terms of warehouse expansion, we expect to open net new units of somewhere around 20 plus or minus with a lot of it planned to open new openings, much of it backloaded towards the end of the fiscal year. As of Q1 end, we had total warehouse square footage of 114,000,000 square feet.
Regarding capital expenditures, in Q1, our total spend was approximately $700,000,000 and our estimate of Capitex for all of fiscal 'twenty remains right around the $3,000,000,000 amount. In terms of e commerce, our overall e commerce sales on a reported basis in the quarter was a 5.5 as I mentioned earlier, and again ex FX of 5.7. Again, those numbers, you could add roughly 12 percentage points to each of those to account for our estimate of the impact of the holiday shift. A few of the stronger departments are home furnishings, domestic, tires and pharmacy. Majors Electronics were not among those departments as we feel that was the we believe it was the one most impacted by the holiday shift.
Total online grocery continues to grow at a faster rate than the core e commerce comps, although again, it's still a relatively small piece of the business. New online during the quarter expanded tickets offerings, including airline gift cards, Lyft and Uber cards and Super Bowl packages. We also during the quarter launched as a test in a few locations same day prescription Rx delivery with Instacart and we launched in the quarter same day alcohol delivery also through Instacart in California such that as of today it's being offered in 12 states. And lastly, this week earlier this week, we launched our Japan e commerce site with our Australia site planned to open in the first half of twenty twenty, calendar twenty twenty. In terms of tariffs, there continues to be a lot of moving parts and changes up to and including an hour ago.
Currently, there again are 3.5 lists, if you will, lists 1, 2, 3 and 4A, totaling about $360,000,000,000 worth of imports. There were possibilities that there would be 4B list would go into place December 15, although the current news out today is that China and the U. S. Are close to a deal and on the phase on finalizing a Phase 1 part of the trade deal and so we'll have to wait and see. In terms of EU, currently, again, there's $7,500,000,000 of U.
S. Imports that are subject to a current 25% tariff, mostly food items like olive oil, cheese, wine, whiskey, butter, cookies, etcetera. Again, last week last Monday, the White House announced that it proposed 100 percent tariff increased to 100% tariff on $24,000,000,000 in imports, which would include those among other items. We'll just have to wait and see where that is. I believe comments aren't even anticipated to be complete until early to mid January.
That's pretty much it on our part. Lastly, in terms of upcoming releases, we will announce our December sales results for the 5 weeks ending Sunday, January 5th on Wednesday, January 8th after market close. And with that, I'll open it up to Q and A and turn it back to Lori. Thank you.
Your first question comes from the line of Christopher Harbors from JPMorgan. Please ask your question.
Thanks. Good evening. So I just want to step back and get your thoughts in terms of how you plan the holiday season this year, given that there are 6 fewer days. It seems like a lot of retailers are expecting a big surge at the end, bigger than normal into Christmas, given the shortened season. Is that something I'm not asking about December, just how you planned it?
Is it something you saw in 2013? Is it something you're planning for in 2019? And maybe any comment through what you've reported so far?
No, I think we've planned it and with some historical knowledge of what's happened in the past when you've got the shortest period of time between Thanksgiving and Christmas. And we plan assuming that we're going to continue to have the types of levels of comps that we have in general recognizing sometimes there's a switch between months as example being the switch in Thanksgiving being in November versus Q1 rather versus Q2 for us in our example. But so yes, we do expect to ramp up on a per day basis. We'll have to wait and see where it goes. But we went into the planning, I think, with the confidence that we've had good shopping frequency increases and good renewal rates and pretty good comps.
Understood. And then on the pricing environment, it seems like Sam's has been taking some bigger hits to the gross margin line and it seems to be benefiting comps. So are you seeing a step up in terms of in that core club channel? Are you seeing a step up in price investment from your peers?
In a word, no.
Got it. Fair enough. And then my last question is, in 2Q, you're going to lap, I think, a pretty big benefit on in the ancillary line last year. I think it was up 33 basis points, big part of that being gas. So you're going to have gas prices.
Do we have to give that all back? I mean gas prices look like they will be up year over year at this point, but it's still going to be down a bit sequentially. And I know there's an interplay between those two dynamics. So any thoughts and you could give us around lapping that 33 basis points given those dynamics would be super helpful.
Well, I think profitability for gas for us and as we've read from other retailers, big retailers that have gas stations as part of their retail concept, The new normal over the last few years is it's been a more profitable business. We, I think, benefit from the fact that we've seen our gallon increases on a comp basis in the very high single digits compare. So we know we're taking market share. Despite increased profitability in that business, our savings in our view when we can do price drops of competitors' gas has never been as strong. So we feel very good about where we are with that.
Now sequentially, part of the increase when you look at it on a year over year basis, last year's plus 30 or what, I don't have it in front of me, but whatever it was, had it as much to do as what it was the year before. I think when you again, when you read what others have said and what we've said in the last couple of quarters, it's been pretty good for all of us. So maybe you're not going to see that kind of delta on top of the big delta last year, but it's still nor are you going to see the big negative from that negative from it coming back to 2 years ago. But we'll have to wait and see. The thing we learned about gas profitability is it can be very fleeting.
Right now, it's been good as it was last quarter and as it was over the last couple of years in general, but you never know how to predict it from sometimes week to week.
Awesome, guys. Have a great holiday. Thanks so much.
Your next question comes from the line of Michael Lasser from UBS. Your line is now open.
Good evening. Thanks a lot for taking my question. Richard, you touched on this briefly, but how have tariffs impacted Costco's profitability? And if some of the tariffs are rolled back, how is Costco going to handle this? Should we be modeling margin benefit over the next couple of quarters from this dynamic?
I think generally we've said on a qualitative basis that overall I think companies of scale and certainly we are one of those. And the fact that we feel that we've had a relatively good mitigation plan if you will, easier on a 10% tariff than a 25%. I think one thing again on top of this our scale in general, our ability to move in and out of items. If all of your items are 25% tariff because you're a furniture retailer or whatever retailer, that's different than a company that has a small percentage of our business in that area. Like others, we've moved a few things where we can and source it over other countries.
I think our total China imports into the U. S. Is about just a few percentage points lower than a year ago. So nobody can do a lot of that nor can we. But generally speaking, I don't think it's hard enough for us to budget into our numbers.
What we look at is the fact that in some cases where the price has gone up and we've passed on all or some of it. We haven't seen an impact to the unit sales and others we have. And we never know until it happens which ones are more elastic than others if you will. But at the end of the day, we think that we've done as good as anybody in terms of being able to mitigate the impact. And so again, I think the fact that our margins our core on core margins generally speaking even in the departments like hardlines and softlines have been slightly up year over year.
And certainly, we haven't done that without 1st and foremost being the most competitive out there. It makes us feel that it's now we don't want it to continue and we don't want List 4 beta to come on or anything else to go higher, but I think we've done okay by it.
So in cases where you have taken price or reengineered a product to make it cheaper, how do you handle
that? Well, first of all, I don't think ever we try to reengineer a product. We're going to try to figure out how to get the price down a little bit with the help of our suppliers, sometimes our own money or whatever else we can do or moving a few items to another country. And sometimes eliminating an item and putting something else in its place here. So I remember I think one anecdotal story would be in late calendar 2008 when the economic downturn hit hard.
And what hit hard in our case was a lot of as good as our values are on $1,000 $1500 patio furniture, we
had a
lot of markdowns to take care to get through that in January, February March when that stuff hit the floors. I can remember vividly come June following that when we were still in a bad economic downturn and our Head of Merchandising and our CEO reminding everybody at the budget meeting, I don't want to see us bring down the quality and stuff to hit a price point. I don't want we've taken 20, 30 years to get our members comfortable with the types of values we can bring particularly on better end goods. And so might we buy a few less units of something? Yes.
Might we augment it a little bit with some offerings? Yes. But we try not to.
That's helpful. And my follow-up question is, given the well publicized website outage over the holiday weekend, should we read that as Costco need to make a more meaningful investment in its technology infrastructure to keep up with the growing size of that business?
Well, first of all, we live it every day here and certainly and we are. It was unfortunate despite all the efforts to have plenty of capacity, processing capacity, if you will, there was something that incurred. When we look at the 5 days between Thanksgiving and Monday, Cyber Monday, those 5 days on a year over year basis. I mean, we still were up in the very high teens as a percentage on e commerce. So consistent with what we've showed you, what we've currently been running, what tells us we could have done better than that.
So we did leave something on the table there. And again, we were able to correct it. It took several hours that day, unfortunately. But rest assured, we're spending a lot of money on things like that. Understood.
Have a great holiday.
Your next question comes from the line of Chuck Grom from Gordon Haskett. Please ask your question.
Hey, good afternoon, Richard. First question on MFI, now that we're past the fee increase and FX is normalizing, just wondering if you see any material reason why the 6% growth you reported in the quarter wouldn't be a good proxy in the faster than
the total sales line, a little faster than the total sales line. A little of it's a couple of recent openings like the China opening, that's a little of it. I think more importantly, it's some of the things that we have done a much better job of getting new members to sign up as an executive member. You saw the terms of the number of new member, which is a combination of new memberships signing up as an executive member as well as conversions to the executive member. We're doing a better job of that as well.
And of course that aside from improving membership fees, they are more loyal members that shop more frequently and renew at a slightly higher rate. And so I think a lot of it is some of the things that we're doing, getting those that use the growing number of members, I'm using U. S. Example here with the Citi Visa card, signing up for that and having auto renewal as well as opting into auto renewal on other Visa cards that somebody may choose to use at Costco. And so those are the things that help as well.
I'd like to think it's all related to just great value and that's more things that we offer the member, which is certainly part of it too.
Okay. That's great. And just to switch over to the balance sheet a little bit, inventory levels were a little bit heavier. I presume that's just the timing of Thanksgiving. Any way to normalize for that, maybe inventory per club or some other metric just to get a sense for what sort of apples to apples would look like?
Yes. Well, I think it's mostly the shift of holiday. Some of it is a buildup with e commerce and those holidays as well with more in the system doing more fulfillment on that side. Again, in the few days since then, it's come down as we've expected. So I don't think there's a whole lot to read into it.
Okay, great. And then just last one on the core on core up 4. Maybe quantify for us the drag that you're going to continue to see and then what you saw here in the current quarter from the chicken plant, just to get a sense for how much that was to the quarter?
Well, if you think about it, if we open the chicken plant, the first chicken, if you will, went through on September 10. Hopefully, 45 weeks later, there'll be roughly 2,200,000 chickens a week going through there. The 1st 3 months if you will which is Q1 here September, October and part of most of November you were at the lowest end of that. I don't want to straight line it completely, but it's close enough for this discussion going from 1 chicken to 2,200,000 chickens, if you will, there's a lot of operating costs in running the plant. And while we don't have both production lines running yet, we now there's just a lot of costs associated with that.
It will be a diminution it should be a diminishing drag in Q2 and then Q3 and then Q4 and then not be an issue.
Makes sense. Thanks a lot.
And we have Chris Mandeville from Jefferies. Please ask your question. Your line is now open.
Hi Richard. So a quick question on central SG and A, similar to Michael's. I'm just curious with respect to the IT investment, if we should be assuming that that pressure that was realized in the quarter actually progressively gets a little bit more prominent on a go forward basis. I don't know if that's what you were trying to reference or allude to with respect to expanding your capabilities and activities or if we should be thinking about something similar on a go forward basis?
If I look over the last several years with that word we've stopped using completely called modernization and now it's some modernization, but other things as well. We talked about in the last I talked about in the last several quarters things like e com fulfillment, spending a lot of money on that. A lot of that hits SG and A in terms of all that technology, the chicken plant to some extent. There's we've also over the last couple of years done a reset of certain departments within IT based on salary wage competition in this part of the woods up here in the Northwest. So I mean there's a lot of things that go into it and we've got a lot going on whether it's e comm, continued increases in infrastructure and vertical integration as well as our depot operations and modernization.
So I don't know. I think there when we first started talking about modernization years ago, it was just that as best we could, we estimated originally over a few years it would be incremental 10 basis points to the company and then quickly we felt it could be 13 and ultimately it was 18 or 19. And then there are a couple of years when on a quarter over quarter basis some quarters it was 6 and some quarters it was 2 or 0. So I think a couple of quarters ago, maybe 3 quarters ago, it was flat year over year that impact. And I reminded people, don't read anything into that like we've hit an inflection point.
We have a lot going on both related to modernization stuff as well as expanding as well as vertical integration. So my guess is it will still be a negative year over year. Does the negative when those negatives anniversary a year hence, will we have incremental negative net? I can't say. At some point, it's supposed to slow down.
Okay. And then just my follow-up would be with respect to the Instacart pilot and delivering RX to your members. I guess just what exactly you're attempting to accomplish there? And is the structure of delivering pharmacy any different in terms of how you're approaching things from a grocery perspective?
Yes. Well, no, I think look it's convenience. Like anything in life out there, as you might expect, we're always asked when are you going to start to do online and pick up in store? When are you going to do this? When are you going to have something else?
And we kind of do things our own way. We look at all these things and this is one area that with the Instacart relationship where we have them already coming into our locations, let's give this a shot. We already have a good and growing mail order business. We have 500 and whatever 40 ish pharmacies around the country, but this is not another opportunity. Pharmacies are sometimes somebody does want to come out if they're not feeling well.
And so it's an opportunity given and as density increases, that should help. But you've already got these drivers delivering groceries to others, hopefully, we can do this. And it is something to add to the competitive belt here.
Is that a notable impact to 1's kind of Rx margin profile? I guess I'm just curious about the economics there.
No. No. First of all, it's brand new. And it's in just a few locations, going to roll out to a few more shortly. So we'll see where it goes.
All right. Thanks.
Your next question is from Simeon Gut from Morgan Stanley. Please ask your question.
Hi, there. This is Michael Kessler on for Simeon. So question on the competitive environment. We've seen Sam's Club undergoing kind of an unexpected round of investments recently. And I guess, is there anything notable that you would feel the need to respond to as far as what they're doing or anything that changes on your end from some of their investments?
Not really. I mean look our warehouse managers are in their locations every week. We hear about it I hear about it here every month by location by region rather. And look, they're a good operator and a good competitor. And we feel that we do a lot of things very well too.
And but there's nothing that I can point out. A year or so ago, we had pointed out that they had gotten a little more aggressive on fresh and some of these things ebb and flow. But at the end of the day, we feel very good about our competitive position.
Got it. Okay, great. And just one follow-up on China, the new store that you opened there. You're a little further away from the opening. Is there anything notable that you've learned over the last couple of months?
And any changes to your plans as far as the rollout, which I know is a little more on the slower side, but any updates on that front?
First of all, on the rollout side, we have one other one planned, which was planned previously. That's probably about a year and a quarter, year and a half away. And we'll continue to look, see what we want to do next, but not a lot of change there. Overall, the location has exceeded our expectations. We brought in additional help from neighboring places to help, but the sales continue to grow.
The sign ups continue to do very well there and we'll see. So we've had a great reception. We feel good about from a merchandising standpoint and maintaining a supply chain very good and we're getting I think good reviews over there. We've also identified a few items, one in particular that is again just anecdotal. We've done a very good job over there with sea cucumbers, which I still have never tried.
But we have found is, particularly on the West Coast in several cities where you've got customers that value that as a great item, we have done very well with it. So just like anything in life, we have found items that make sense in other parts of our operation throughout the world. And it's fun to see out there, and it's a high value a high priced item at a great value at Costco.
And we have a question from the line of Greg Badishkanian from Citi. Your line is now open.
Hi. This is actually Spencer Hanus on for Greg. You guys called out some sales headwinds related to the website issue. Do you think those sales have been lost or do you think they were just pushed out?
I think some was pushed out, some went to the warehouse and some was lost. In the scope of things given our whole company recognizing that e commerce while growing faster than the rest of the of in line is still 5 a little over 5% of our company. So it's not I don't want to be cavalier about it. We didn't excite the members that were delayed. And but we feel we got some we extended the values that hit the 30 plus 1,000,000 emails that we sent out in the early hours of Thursday.
We extended those deals for an extra 2 days. And so we think we got some of it back. And again, for that 5 day period, we did just fine. Frankly, we feel we did lose something that we could have done better than we had anticipated.
And then any comment on big ticket sales trends that you're seeing and then how does the consumer feel heading into the holiday season this year?
Yes. Big ticket items are strong, particularly electronics items. The fact that back in March or April this past year, we were able now to offer a full line of Apple products including the Macs and the watches and the like. And we've done very well with those. And online we've done even better with those.
And it's not just the Apple products, it's other big ticket, high end game computers and game consoles. Big screen TVs are huge. Recognizing the price and value of those things for consumers keep coming down, which is great. Those are the things that have done very well for us.
Perfect. Thank you.
Your next question comes from the line of Karen Short from Barclays. Please ask your question.
Hey, thanks very much. Just a couple of questions. I guess starting with the core on core. So you obviously had pretty meaningful stability, I guess, in the core on core. And you alluded to this a couple of quarters ago in terms of your scale and your buying power.
But I'm wondering if you could just frame a little bit on how we should think about core on core going forward because it does seem like we're kind of in a new norm of that being stable to up generally.
Well, I think the fact is that you're right. All the things that we do to drive value or to get better pricing or based on our volume or Kirkland Signature or whatever. Just when you think it's safe to go out, we're going to use it to drive business, which we've done. We've talked in the past about the monies from increasing the membership fee, the monies from the changing credit cards, the income tax reform, recognizing about a little over a third of the income tax reform went to improve hourly wages. But at the end of the day, those have given us additional monies to continue to drive value.
And there are times when we see something a particular department or something where the margin might be very strong year over year. That's the first thing we look at. Even if we're giving a greater savings to the customer, is it too much? And so again, we are a for profit business. We want to grow our top line first and that will help the other things.
But we don't manage it completely to the basis point. Net net, we'd like to see it year over year even or go up a little bit, but we have avenues to do that. Okay.
And then on tariffs, just specifically to the tariffs for this Sunday, if they were or were not to go into effect. Sorry, I'm just can you just clarify, I mean, the rest of the list like 1 through 4a, I guess, obviously is already embedded, but is there anything to think about in terms of 4B that is not going to affect with respect to your positioning or the model or anything?
We don't know. I mean to the extent that we bought in advance certain merchandise to the extent we could anticipating that that was going to go into a place and so let's get it in before the tariff, we did. But what's that? It wouldn't change right. Somebody's here saying it wouldn't change things immediately there.
So if anything we've had a little extra inventory in advance of
it. Okay. And then last 2 for me is just housekeeping on inflation in food and also in non food and then thoughts on cash on the balance sheet as it continues to build? Thanks.
Inflation is almost a non issue. It's not either inflation or deflation generally speaking. I mean gas we mentioned there's slightly deflationary year over year. Tariffs is slightly inflationary of course on those limited items. Yes, proteins are up a little.
My understanding that has to do partly with China and with swine flu as well as more demand for beef. Other than that not a lot to talk about there. What was the other part of the question?
That was cash on the balance sheet building?
Yes. Well, we have 2 debt payments coming due this week or next Monday? Next week. Next week and in mid February totaling $1,700,000,000 from prior debt offerings. Beyond that, of course, cash at the end of Q1 generally is the highest level because you've started to sell more, but you haven't paid for everything yet relative to seasonal stuff for Thanksgiving and Christmas.
So like our AP ratio is always the strongest then on a quarterly basis. Beyond that, stay tuned.
Okay, great. Thanks. Have a great holiday.
Thank you. And we have
a question from John Heinbockel from Guggenheim Securities. Your line is now open.
So Richard, where do you stand now with self checkout? I know you've been expanding that.
How many clubs is that in?
What are your learnings, right, in terms of consumer member satisfaction, speed of checkout? And then what do you think the rate of expansion of that is going to be?
Well, we currently have it in the U. S. And Canada in about 135 locations. It's going well. We have another 92 planned for rollout in early calendar 2020, so up above the in the low 200s.
And the senior operations continue to discuss additional rollouts with Craig based on the performance. But overall, it's a positive. And so we'll continue to do it is my expectation. I mean, roughly speaking, when
you think about savings, right, I don't know how material that is, but is there an idea that you reinvest that can it be enough to reinvest back into the business in something like expanded BOPIS? Or I know you've been sort of reticent about BOPIS because of the cost. Is that something you can now begin to get your arms around or no?
Well, first of all, I think thoughts on either of those are mutually exclusive to one another. When I look at the 1,000,000 or 1,000,000,000 of front end seconds we save in labor, we know full well that some of it is you don't get it all back. But even if you take a conservative amount, there is money to be saved there. More importantly, the members like it. The only thing the member doesn't like is when there's a member in front of them that it's going through with their full basket and it's taking longer.
But generally speaking, even in the high volume the few high volume units that I've actually gone to of late, like the ones in Seattle, and I use them when I'm in and out of there fast, they work well and fast. So there is a savings, but I think as well it improves that customer experience. As it relates to buy online and pick up in store, we continue to look at what others do and continue to scratch our head. Recognizing the average cost go even compared to our 2 direct competitors is 2 and almost 3 times the volume per location, almost 2 and almost 3 times the volume per location. So we'll have to wait and see.
We're still not at a point we look at it, but we're not at a point that we're planning to do anything with that. Okay. Thank you.
Your next question is from Kate McShane from Goldman Sachs. Your line is now open.
Hi, good afternoon. Thanks for taking my question. We wanted to ask about apparel. I know that this is a category where you've been a little bit more focused. I wondered if you could give some color about the performance of apparel during the quarter, what you see the opportunity to be and how Costco can kind of position itself to capture some share going into the next year?
Yes. I think it's part of the same story that we talked about fortunately for the last few years. Apparel is a combination of both expanded Kirkland Signature as well as a few additional brands willing to sell us or expanding what they're selling us as well and great value. And it's a category in the several 1,000,000,000 of dollars that continues to grow in the roughly high single digits compared to retail apparel overall that's a lot less than that. So, and I think I'm always amazed at our monthly budget meetings when in this case buyers are bringing in and showing what's coming in for the new season, whether it's outerwear, a few months ago outerwear for the fall or both men's, women's and children's stuff.
Thank you. Your next question is from Scot Ciccarelli from RBC Capital Markets. Your line is now open.
Good evening, guys. Richard, I had a follow-up question on the Shanghai location. Can you just provide any context on the sign up activity of that location relative to a more traditional facility?
It's what? No, I know. It's beyond good. I'm sitting here with my colleagues with what I'm allowed to say. The average Costco in the world has somewhere in the mid to high 60 thousands of member households.
We've had locations in other countries in Asia where we might be at 100,000, 120,000 after a few years, maybe even after 1 or 2 years. This one is more than twice that. So I guess And I think it's got a lot of press in a city that is populated with 25 +1000000 people.
Yes, I understand. So just given the fact that in the past you kind of talked about how long it takes locations to hit a breakeven point. I guess given the early sales and membership trajectory of that location, does that help change how you're kind of thinking about the breakeven point for that warehouse and hence the China opportunity? Or do you need more distribution scale to really get the profitability to where you want it?
Well, getting to 7 or 8 or 10 locations in a country where a bunch of stuff is American supplied or in barge shipped, not air flown. You become more efficient as you go from 1 to 3. You may be using some third party consolidation or storage to do high volume bulk items because you don't want to run out of water or toilet paper as you may, the no brainer items. And over time, by the time we get up to 8 or 10, we want to have a bigger crosstalk that then can with enough land to continue to expand it over time. Our crosstalk in the U.
S. And Canada serve 40 to 60 locations each and 40 to 60 relatively high volume locations. So we have one in Australia that services 11 locations. That will continue to be a little bit of economic improvement to that country as it serves 15 20 locations. We've opened 2 in Japan, essentially south and north for all of 26 or 27 locations.
We plan to have a lot more there over time. So certainly, in addition, we have a lot of extra help there. We're doing big volume and we brought over additional people from Taiwan that speaks the local language and that understand our concept. And it's been great. We've been fortunate to have that additional history and expertise when we've gone there.
But also it's cost somewhere. So I think you've got to what is the normal once it's doing whatever volume it's doing and it's efficiently run at the warehouse, maybe you don't have all the efficiencies from cross stock that will take several years. But the most efficiencies are what's in the building and how many people do you need to help that process and you become more efficient. So think it takes a couple of years to do that. And that's one of the reasons why we generally go slow in new countries, because we want to get it right from a customer experience and an operational side.
Got it. Very helpful. Thank you.
Your next question is from Oliver Chen from Cowen and Company. Your line is now open.
Hi, thank you. Richard, on your digital innovation roadmap, what are your thoughts about fulfillment from in store and micro fulfillment centers? And also thinking about the robotics capabilities across inventory management or supply chain from in store? Would love your thoughts.
Well, we have just because of what we did currently a couple of years ago, We have our business centers that act as a focal point as you know for today. We have our depot operations. We've moved some of that fulfillment to annexes off some of our depots as well, where we put in to our biggest depot some automation fulfillment, which I talked about over the last few quarters, last 6 months, and we continue to roll some of that out. One of the things we've done is particularly things like how do we improve the time, particularly if items that might even be presented in store, but are only sold online like white goods or what I'll call big and bulky and those that require not only installation but sometimes take away the old one. While many third parties do that, we do a little of it.
We've also figured out what are some of these items based on our volumes that can be staged efficiently in a dozen I'm making the number up, but a dozen geographic locations across the continent of the United States to take the shipping times down dramatically. And we've done some of that stuff. And that's evolved over the last couple of years and we'll do more. You've got a business just white goods and that's certainly not the only big and bulky. There's furniture, there's patio stuff, there's exercise equipment.
But just on white goods, we've gone from essentially sub $50,000,000 a year 4 years ago to over $650,000,000 and growing. And that's part of that is not just selling this stuff at great prices, it's getting it delivered to you in fewer days.
Okay. And Richard, on the vertical integration opportunities ahead, what are you thinking could or should be possible? And what's your framework for evaluating what makes sense for you in terms of owning more parts of the supply chain across different categories?
Well, what started 25 years ago was a ground beef plant to save $0.04 or $0.06 a pound we thought on ground beef is now are now 2 major meat plants, 1 in Tracy, California, where we started and 1 in Illinois, which is still growing into itself over the last year and a half, 2 years since it opened. I think the one in California does well over £4,000,000 a week of just a handful of items that we that's aren't that ours. That gave us comments to the hot dog plant. We did almost partly by necessity a bakery commissary in Canada, which we're finding conserve not only Canada, but the U. S.
On making more consistent and more efficiently costed items like cookie dough and croissants. So we learn each time we do something. I think there's been some press out there about testing greenhouses for produce. We've got one up and running just the last few months in California that I think some of the product is just starting to hit our shelves. But we think there's some great opportunities on the produce side for hot houses and greenhouses, if you will, particularly where transportation costs and time is a necessity on stuff that spoils quickly and easily.
Right now, much of the produce that we ship to our Hawaii locations is air shipped. If you can do some more of that over there, that's a no brainer. And given our volume and limited SKUs, we think that we it's an efficient model to help. But that's not just us, others are trying that. Again, we think that the structure of our business allows us to take more advantage of that, but it's new.
I don't know if there's anything big. There's nothing as big as the chicken complex on the drawing boards. But I think we'll continue to do things, but we're catching our breath a little bit right now. We've made some major investments in the 2nd meat plant in the bakery commissary, just recently in the chicken complex and even more recently the first of a few green hot houses. So we got a lot going on.
And the answer is, it works. So far, so good.
And our last question, Richard, Kirkland is a nice competitive advantage. What are your thoughts on how that percentage of mix may increase in categories that it may be suitable for that you're not in yet? And also you cited new services that you've added to your product assortment. How will services evolve as a percentage of total? Just would love the magnitude of what may happen there over time.
Well, on the crude oil and silver side, there aren't a lot of $500,000,000 and $1,000,000,000 items like water and various paper goods and things like that. And there are many, but not a lot of many new few $100,000,000 items. But at the end of the day, there's lots of $20,000,000 $50,000,000 items that can go to $50,000,000 $100,000 And certainly I think on high end packaged food items, on everything from not only organic, but antibiotic free and I don't have all the adjectives in front of me, but there's lots of things that we can do that are high end and that our members want and frankly has added benefits of seemingly gets into millennials on some of this stuff. But I think we've expanded it to some sporting goods. So there's lots of little things that will add to it.
But if the number and I don't have it exactly in front of me, but ex gas, if the number is 24% or 5%, does it go to 30% over the next 10 or 15 years? Maybe. We think this is going to go up. Yes, likely a little bit because we found ourselves in our building and our suppliers. Some of our private label suppliers are very good at what they do.
But we also are still a branded retailer. We have very good savings as you know on branded items. On the service side, we don't talk about a lot because they're small relative to the size of our company, but it's other things that make the membership sticky and are very profitable, whether it's the auto Costco auto program or our travel business, which continues to grow. We now a year or so ago, we added the hotel only booking engine and most recently, the airline reservation only, not just packaged items, packaged trips and everything. And so I think we'll keep adding things.
I can't tell you what yet, but we keep looking at things.
Great. Happy holidays. Thank you.
Your next question is from Greg Millett from Evercore ISI. Your line is now open.
I wanted to get an update on how the private label card now that you've had a few years for it to properly season and scale, anything you could say on the penetration or how the sales are doing outside the club? And maybe link that to what the auto renewal rates are now as part of the renewal rates?
Yes. I don't know off the top of my head what the auto renewal rates are if they're increasing. The big issue is when we converted prior to conversion when it was the other provider, there was both the co branded card plus other branded cards of that provider like Delta SkyMiles or something. And all those non co brand ones, all those auto renewals went away, went to 0. So that had to be picked up over time and we saw that impact our overall renewal rate a little bit.
The other thing is, as we continue to add new increasing number of members that have this the co brand card. And the value keeps getting better and bigger. And so we think that will continue to be additive. That's helped. I think overall we've also done a better job even when somebody walks in to sign up, not only to upgrade, but when they like to auto renew.
And so all those things help. Certainly, the Citi Visa is probably one of the biggest movers of that because of just the sheer size of it and the fact that we're still adding new cardholders to that.
Is City Visa doing multiples of sales outside of the club that it's doing in the club at this point?
There's more there's certainly more sales being done outside. As there were over the 16 years of the previous relationship that evolved over time. As we would have expected, this would be even greater than that, outside versus inside spend, and that's where we have revenue share, which is good for us and them presumably. From the standpoint that the Visa card is offered at more smaller businesses, which tend to have higher merchant fees in general anyway. So it's a whole new additional market potential of revenue share to those people using that card.
If my top if my card is top of wallet, there are certain places previously that I couldn't use it, like the local dry cleaner or restaurant. Now I can.
Got it. And then you mentioned Japan and I think it was Australia coming for e commerce if you look around the world. Any early learnings out of the launch in Japan?
Other than it went well, it's been 2 days. So I'm happy to report I have I know nothing.
That's good to hear. Have a great holiday, Richard.
Thank you. Well, we take 2 more questions.
Your next question is from Scott Mushkin from R5 Capital. Your line is now open.
Hey, Richard. Thanks for taking my question. So I wanted to talk a little bit about maybe growth that's being left. I mean, obviously, left on the table, obviously, your performance is incredible, but the number of club openings have come down a little bit. You might think you're omni channel.
So just as you take a step back, we look at our research, we look like you're kind of almost underserving certain markets in the U. S. How do you think about growth? Is it time to speed things up a little bit, get back up to the 30 clubs, maybe put a little bit more money behind omni channel? Kind of what's the company's thought process here?
I think I don't disagree with you. We want to open more than 20 ish units a year. Part of that was, I think, some delays in how long it took overseas. We've got the pipeline filled a little bit better. And 5 years ago, I said our open plan is to do more than we were doing.
Today, I'd say the same thing. We do have I think we'll increase it a little bit, but I can't exactly say by how many and when. We are a very hands on company and we have a lot of other things going on. And certainly, there's a lot of emphasis on the e commerce side, not only getting into a few remaining countries, but building it, not because we're supposed to, but it's working. And we think that in some cases, it's either sales that we would have lost anyway like big white goods.
You just don't sell those in store anymore. But we're getting people in the building still and using these things. So I think don't expect some giant change from 20 to 30 in a couple of years. But our goal is to work harder to open a few more of those while we're doing all these other things as well.
All right. Thanks very much.
And your question is from Kelly Bania from BMO Capital. Your line is now open.
Hi, Richard. Thanks for fitting me in here. Just wanted to ask about executive penetration. You called out Japan and the impact there a little bit. But just curious how much in the U.
S. You're seeing executive penetration move higher. I know we've asked this over the years, and where you think that could kind of level out at some point?
Hold on a second. I had some numbers here. When I look by country, in the U. S. And Canada where it's been the longest and we've got the most units and the most services as part of the executive membership offering, it's in the mid-70s.
In other countries where it's been, like Mexico, it's in the 50s and growing. But I think it starts off lower. I don't know if the marketing department has a plan for where it could go. It's more of what can we do to get people to convert and sign up originally. And so I think there's if I was shooting from the hip totally, at some point there's going to be some members that don't want an executive membership, period.
And even if it's provided them some savings. And there are some people that want it that sometimes it's not as much savings as they thought, but at the end of the day, I'd be thrilled to think that that could go to 80 one day, but I have no idea where and how long it will take to get there. We know that executive members are more loyal in terms of their renewal rates. They shop more frequently and they spend more each year.
Got it. And maybe just one more on gross margin. Obviously, mix impacts some other retailers more than it really impacts you. But I guess over the years, we've talked about things like private label, organics or international or even e commerce in terms of mix shift. And just curious as you kind of look at that core on core, up 4%, which clearly very stable, just what kind of mix shift is kind of underlying that?
Well, I think it's more than mix shift. I mean, certainly gas has the biggest impact. Gas is more than 10% of our business. It can be a gross margin line. First of all, as you and there's deflation.
And so you could have the gross margin contribution plus or minus by a number of basis points. You have all these services, while they're small, work on higher gross margins than normal because they cover the pharmacy, the pharmacists and pharmacy techs and optical, the optometrists, things like that. And those are all growing businesses, generally growing a little faster, some of them than the company. Travel as an example would be. In travel, some of the things are gross sales and some of them are brokerage fees, so a very high margin.
There's really no very low cost of sales or commission. But getting back to the core merchandise, private label generally is a slight positive. Although, again, the percentage of stuff that's private label versus branded, while growing, is growing at a slower rate than it has in the past. And then there's that magic word competition. Our view is, is we look how do we drive the top line?
How do we how can we be the most competitive? And we're fortunate that we have different buckets to do that with. So it's hard enough for us to know where the margin is going each month and each quarter other than we want it to be flatter up a little bit and we want to grow the top line which will solve a lot of things.
Understood. Thank you.
Okay. Well, thank you, everyone. And thank you, Laurie.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.