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 speaker's presentation, there will be a question- and- answer session. To ask a question during the session, you will need to press star one on your telephone. 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 Galanti, CFO. Please go ahead, sir.
Thank you, Lori, 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 first quarter of fiscal 2020, the 12 weeks ended November 24th.
Reported net income for the quarter came in at $844 million, or $1.90 per share, compared to $767 million or $1.73 a share last year in the first quarter. This year's first quarter results included a $77 million, or $0.17 per share income tax benefit related to stock-based compensation. Last year's first quarter results included a $59 million, or $0.13 per share income tax benefit related to stock-based compensation. Net sales for the quarter came in at $36.24 billion, a 5.6% increase over the $34.31 billion sold during the first quarter of last year. Comparable sales for the first quarter of fiscal 2020 in the U.S. on a reported basis was 4.7%. Ex- gas deflation, it was 5.0%. Canada reported a 2.9%, ex-gas deflation and FX, + 5.1%. Other international reported 3.2%, ex-gas deflation and FX, + 4.5%.
Total company was a 4.3% reported, and ex- gas deflation and FX, a 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 0.5% due to Thanksgiving occurring a week later this year. E-commerce sales in the quarter were negatively impacted by an estimated 12 percentage points. Again, the 5.5% and the 5.7% were impacted to the negative by 12 percentage points. In terms of Q1 comp sales metrics, first 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 9/10 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 million, up 6.1% or $46 million from last year's $758 million. Deflation, foreign FX currencies would have impacted that by $1 million to the negative, it would've been about $1 million higher ex FX. In terms of renewal rates at Q1 end, our U.S. and Canada renewal rates 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 the 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 1st, we had 53.9 million member households. At Q1 end, 12 weeks later, it was 54.7 million. Total cardholders increased from fiscal year-end of 98.5 million to 99.9 million at Q1 end. During the quarter, we had three new openings, all in the U.S. A business center in Dallas, Texas, and two additional Costco warehouses in Connecticut and Minnesota. We also relocated one of our units in Canada. At Q1 end, paid Executive Memberships totaled at 21.4 million, 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, ex the new Japan Executive Members, would've been 41,000 a week. Going down to the gross margin line, our reported gross margin in the fourth quarter was higher year-over-year by 30 basis points, coming in at 11.05% as compared to a year ago, 10.75%. Again, on a reported basis, 30, ex- gas deflation, would've been +26. Doing the little chart that we do each quarter, two columns, reported and ex- gas deflation. First line item would be core merchandise year-over-year in Q1 of 2020 compared to a year earlier quarter, -3 basis points on a reported basis and -6 on ex gas deflation basis. Ancillary businesses, +20 and +19. No change to the 2% reward. Other was +13 and +13.
A total of + 30 basis points on a reported basis and +26 ex deflation. The core merchandise component of gross margin, again, lower by three year-over-year reported -6 ex- 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. Subcategories within the core margins year-over-year in Q1 showed increases in hard lines, soft lines, 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. I recall that we commenced operations at the Nebraska chicken plant on September 10th, with 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 19% ex- gas deflation. The highlights year-over-year being gas, optical, tire shop, and hearing aids. The other, the +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. That was again, sort of comparison of the hit last year versus zero this year. Moving to SG&A. Our reported SG&A percentage in Q1 over Q1 year-over-year was higher by 17 basis points, coming in at 10.30%, up from 10.13% last year. Ex- gas deflation, SG&A was higher or worse by 13 basis points. Again, the little matrix that we do, both reported and without gas deflation. Operations, -9 basis points, meaning higher by 9 basis points versus -5 basis points ex deflation.
Central, -4 and -4 . Stock compensation, -4 and -4 . For a total, again, of - 17 and -1 3. The figure, these figures include, in terms of the core being -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. This impact relates to the wage increases that occurred in March of 2019, 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 continued not only to maintain and upgrade but expand our capabilities and activities, and certainly we have a lot going on there.
Stock comp again, -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 pre-opening expense. It's lower by $8 million. It came in at $14 million this year in the first quarter versus $22 million. This year in the quarter, we had four total openings, three plus the relocation. Last year, we had eight total openings, six plus two relocations. All told, operating income in Q1 increased by 11.8%, coming in at $1.061 billion this year compared to $949 million last year. Below the operating income line, interest expense was $2 million higher year-over-year, $38 million this year in Q1 compared to $36 million last year.
Interest income and other for the quarter was higher or better by $13 million. Interest income was actually higher by $11 million, and other, the +$2 million variance, was primarily favorable FX year-over-year. Overall pre-tax income in the first quarter of 2020 was up 13%, coming in at $1.058 billion compared to last year's $935 million. 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 first quarter 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 item, 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± , with a lot of it planned 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 million sq ft . Regarding capital expenditures, in Q1, our total spend was approximately $700 million, and our estimate of CapEx for all of fiscal 2020 remains right around the $3 billion 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. Again, ex FX, a 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, domestics, tires, and pharmacy.
Majors electronics were not among those departments as 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. 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. Lastly, earlier this week, we launched our Japan e-commerce site with our Australia site planned to open in the first half of 2020, calendar 2020.
In terms of tariffs, there continues to be a lot of moving parts and changes up to and including an hour ago. Currently, there are 3.5 lists, if you will. Lists 1, 2, 3, and 4A, totaling about $360 billion worth of imports. There were possibilities that there would be 4B list would go into place December 15th, although the current news out today is that China and the U.S. are close to a deal on finalizing a phase one part of the trade deal. We'll have to wait and see. In terms of EU, currently, again, there's $7.5 billion of U.S. imports that are subject to a current 25% tariff, mostly food items like olive oil, cheese, wine, whiskey, butter, cookies, et cetera.
Again, last week, last Monday, The White House announced that it proposed an increase to 100% tariff on $24 billion 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 five weeks ending Sunday, January 5th, on Wednesday, January 8th after market close. IAnd with that, I'll open it up to Q&A and turn it back to Lori. Thank you.
Ladies and gentlemen, as a reminder, to ask a question, you will need to press star one on your telephone. To withdraw your question, press the pound key. Your first question comes from the line of Christopher Horvers from JPMorgan. Please ask your question.
Thanks. Good evening. 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 six fewer days. 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? Maybe any comment through what you've reported so far.
No, I think we 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. 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. Yes, we expect to ramp up on a per day basis. We'll have to wait and see where it goes. 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. In the pricing environment, seems like Sam's has been taking some bigger hits to the gross margin line, and it seems to be benefiting comps. 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 in the ancillary line last year. I think it was up 33 basis points. Big part of that being gas. You're going to have gas prices. Do we have to give that all back? Gas prices look like they will be up year-over-year at this point, but they're still going to be down a bit sequentially. I know there's an interplay between those two dynamics. 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. We know we're taking market share. Despite increased profitability in that business, our savings, in our view, when we do price shops of competitors' gas, has never been as strong. We feel very good about where we are with that.
Sequentially, part of the increase when you look at it on a year-over-year basis, last year's +30 or I don't have it in front of me, but whatever it was, had as much to do as what it was the year before. I think 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. Maybe you're not going to see that kind of delta on top of the big delta last year, nor are you going to see the big negative from it coming back to two years ago. We'll have to wait and see. The thing we've 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. 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? If some of the tariffs are rolled back, how is Costco going to handle this? Should we be modeling a 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 our scale in general, our ability to move in and out of items. If all of your items are 25% tariff because you are 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 sourced it up in other countries. I think our total China imports into the U.S. is about just a few percentage points lower than a year ago.
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. On others, we have, and we never know until it happens which ones are more elastic than others, if you will. 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. Again, I think the fact that our core margins, generally speaking, even in the departments like hard lines and soft lines, have been slightly up year-over-year.
Certainly we haven't done that without first and foremost being the most competitive out there. That makes us feel that. Now, we don't want it to continue, and we don't want List 4B to come on or anything else to go higher. But I think we've done okay by it.
In cases where you have taken price or re-engineered a product to make it cheaper, how do you handle that?
Well, first of all, I don't think ever we try to re-engineer a product. We're going to try to figure out how to get the price down a little bit with help of our suppliers, sometimes our own money, or whatever else we can do, or moving a few items to another country. Sometimes eliminating an item and putting something else in its place here. I remember, I think one anecdotal story would be in late calendar 2008 when the economic downturn hit hard. What hit hard in our case was a lot of, as good as our values are on $1,000 and $1,500 patio furniture, we had a lot of markdowns to take care to get through that in January, February, and 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." We've taken 20, 30 years to get our members comfortable with the types of values we can bring, particularly on better end goods. 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. My follow-up question is, given the well-publicized website outage over the holiday weekend, should we read that as Costco needs 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 five days between Thanksgiving and Monday, Cyber Monday, those five days on a year-over-year basis, I mean, we still were up in the very high teens as a percentage on e-commerce. Consistent with what we've showed you, what we've currently been running, what tells us we could have done better than that. We did leave something on the table there. Again, we were able to correct it. It took several hours that day, unfortunately. 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 coming quarters.
Well, who knows? Certainly, one of the reasons why it's growing 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. Of course, that aside from improving membership fees, they are a more loyal member that shop more frequently and renew at a slightly higher rate.
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 a 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. 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. Understood. 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?
Yeah. 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. I don't think there's a whole lot to read into it.
Okay, great. Just last one on the core on core up for, 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 10th. Hopefully 45 weeks later, there'll be roughly 2.2 million chickens a week going through there. The first three months, if you will, which is Q1 here, September, October, and 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 one chicken to 2.2 million chickens, if you will. There's a lot of operating costs in running the plant. While we don't have both production lines running yet, there's just a lot of costs associated with that. 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.
Hey, Richard. A quick question on central SG&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, now it's some modernization, but other things as well. We talked about 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&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 wage competition in this part of the woods up here in the Northwest. I mean, there's a lot of things that go into it, and we've got a lot going on, whether it's e-com, continuing increases in infrastructure and vertical integration as well as our depot operations, and modernization. I don't know.
I think 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 an incremental 10 basis points to the company. Quickly we felt it could be 13, and ultimately it was 18 or 19. There were a couple of years when on a quarter-over-quarter basis, some quarters it was six and some quarters it was two or zero. I think a couple of quarters ago, maybe three quarters ago, it was flat year-over-year, that impact. I reminded people that 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. My guess is it'll still be a negative year-over-year.
Those are negative, when those negatives anniversary a year hence, will we have incremental negative of that? I can't say. At some point, it's supposed to slow down.
Okay. And just my follow-up would be with respect to the Instacart pilot and delivering Rx to your members. I guess just what exactly are you attempting to accomplish there? Is the structure of delivering pharmacy any different in terms of how you're approaching things from a grocery perspective?
Yeah. 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 order online and pick up in store? When are you going to do this? When are you going to have something else? 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. This is another opportunity. Pharmacies are sometimes somebody doesn't want to come out if they're not feeling well. It was an opportunity given, and as density increases, that should help.
You've already got these drivers delivering groceries to others, so hopefully we can do this. It is something to add to the competitive belt here.
Is that a notable impact to one's kind of Rx margin profile? I guess I'm just curious about the economics there.
No. First of all, it's brand new, and it's in just a few locations. We're going to roll out to a few more shortly. We'll see where it goes.
All right. Thanks.
Your next question is from Simeon Gutman from Morgan Stanley. Please ask your question.
Hi there. This is Michael Kessler on for Simeon. Question on the competitive environment. We've seen Sam's Club undergoing a kind of an unexpected round of investments recently, 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. Our warehouse managers are in their locations every week. I hear about it here every month, by location or by region, rather. They're a good operator and a good competitor and we feel that we do a lot of things very well, too. 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. 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 would be great. Thanks.
First of all, on the rollout side, and we have one other one planned, which was planned previously, that's probably about a year and a half away. 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. We'll see. We've had a great reception. We feel good about from a merchandising standpoint and maintaining a supply chain, very good. 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.
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. Just like anything in life, we have found items that make sense in other parts of our operation throughout the world. It's fun to see out there and it's a high-value, high-priced item at a great value at Costco.
Alright. It's very interesting. Thank you.
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 inline, is still a little over 5% of our company. So, it's not, you know, I don't want to be cavalier about it. It didn't excite the members that were delayed, but we feel we got some. The values that hit the 30+ million emails that we sent out in the early hours of Thursday, we extended those deals for an extra two days, we think we got some of it back. Again, for that five-day period, we did just fine. Frankly, we feel we did lose something, though we could have done better than we had anticipated.
Makes sense.
Yeah, we realized-
And then, any comment on big ticket sales trends that you are seeing, and then how does the consumer feel heading into the holiday season this year?
Yeah. 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. We've done very well with those. Online, we've done even better with those. 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 questions. I guess starting with the core on core. You've obviously had pretty meaningful stability, I guess, in the core on core, and you alluded to this a couple quarters ago in terms of your scale and your buying power. 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.
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, 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 talked in the past about the monies from increasing the membership fee, the monies from 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. 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? Again, we are a for-profit business. We want to grow our top line first, and that'll help the other things. 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, can you just clarify? I mean, the rest of the list, like 1 through 4A, I guess, obviously, is kind of already embedded. Is there anything to think about in terms of 4B that is not going to effect with respect to your positioning or the model or anything?
In a way, we don't know. To the extent that we bought in advance certain merchandise to the extent we could, anticipating that that was going to go into place, and so let's get it in before the tariff, we did. What's that? It wouldn't change things immediately. Right. Somebody's here saying it wouldn't change things immediately there. If anything, we've had a little extra inventory in advance of it.
Okay. And then last two 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. Gas, we mentioned, is slightly deflationary year-over-year. Tariffs is slightly inflationary, of course, on those limited items. Yeah, 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?
It was cash on the balance sheet building.
Oh, yes. Yeah. Well, we have two debt payments coming due this week or next Monday. Next week and in mid-February, totaling $1.7 billion 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. 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.
We have a question from John Heinbockel from Guggenheim Securities. Your line is now open.
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 in terms of member satisfaction, speed of checkout? 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. Up above in the low 200s. The senior operators continue to discuss additional rollouts with Craig based on the performance. Overall, it's a positive, we'll continue to do it is my expectation.
Roughly speaking, when you think about savings, I don't know how material that is, but is there an idea that you can it be enough to reinvest back into the business in something like expanded BOPUS? I know you've been sort of reticent about BOPUS 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 of one another. When I look at the millions or billions of front-end seconds we save in labor, we know full well that some of it is you don't get it all back. 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 is going through with a full basket and it's taking longer. Generally speaking, even 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. 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 Costco, even compared to our two direct competitors, is two and almost three times the volume per location. Almost two and almost three times the volume per location. 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, Kate.
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 position itself to capture some share going into the next year.
Yeah. I think it's part of the same story that we've 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. It's a category in the several billions of dollars that continues to grow in the roughly high single digits compared to retail apparel overall that's a lot less than that. 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, what I'm allowed to say. The average Costco in the world has somewhere in the mid to high 60,000 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 one or two years. This one is more than twice that.
So I guess the-
Recognizing it got a lot of press in a city that is populated with 25+ million people.
Yep. I understand. Just given the fact that in the past, you've 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?
Getting to seven or eight or 10 locations in a country where a bunch of stuff is American supplied or embarked, shipped, not air-flown. You become more efficient as you go from one t o three. You're maybe 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. Over time, by the time we get up to eight or 10, we want to have a bigger cross-dock with enough land to continue to expand it over time. Cross-docks in the U.S. and Canada serve 40-60 locations each, and 40-60 relatively high-volume locations. We have one in Australia that services 11 locations. That'll continue be a little bit of economic improvement to that country as it serves 15 and 20 locations.
We've opened two in Japan essentially south and north for all of 26 or 27 locations. We plan to have a lot more there over time. And certainly, i n addition, we have a lot of extra help there. We're doing big volume and we brought over additional people from Taiwan that speak the local language and that understand our concept, and we've been fortunate to have that additional history and expertise when we've gone there. Also it costs some more. I think 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-dock that'll 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. I think it takes a couple of years to do that.
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 robotic capabilities across inventory management or supply chain from in-store? Would love your thoughts.
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 six 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 of 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 continental United States to take the shipping times down dramatically. 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. That's certainly not the only big and bulky. There's furniture, there's patio stuff, there's exercise equipment. Just on white goods, we've gone from essentially sub $50 million a year four years ago to over $650 million 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. 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 as a ground beef plant to save $0.04 or $0.06 a lbs, we thought, on ground beef are now two major meat plants, one in Tracy, California, where we started, and one in Illinois, which is still growing into itself over the last year and a half, two years since it opened. I think the one in California does well over 4 million lbs a week of just a handful of items that are ours. That gave us commissary to the hot dog plant. We did, almost partly by necessity, a bakery commissary in Canada, which we're finding can serve not only Canada but the U.S. on making more consistent and more efficiently costed items like cookie dough and croissants. 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. We think there's some great opportunities on the produce side for hothouses 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. Given our volume and limited SKUs, we think that it's an efficient model to help. 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. We're catching our breath a little bit right now. We've made some major investments in a second meat plant, in the bakery commissary, just recently in the chicken complex, and even more recently, the first of a few green hothouses. We got a lot going on. The answer is, it works. So far, so good.
Our last question, Richard. Kirkland is a nice competitive advantage. What are your thoughts on how that percentage of mix may increase and categories that it may be suitable for that you're not in yet? 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 happened there over time.
Well, on the Kirkland Signature side, there aren't a lot of $500 million and billion-dollar items like water and various paper goods and things like that. There are many, but not a lot of many new few hundred million dollar items. At the end of the day, there's lots of $20 and $50 million items that can go to $50 and $100. 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. There's lots of things that we can do that are high end that our members want, and frankly, has added benefits of seemingly gets in the millennials on some of this stuff. I think we've expanded into some sporting goods. There's lots of little things that'll add to it.
If the number, and I don't have it exactly in front of me, but ex- gas, if the number is 24% or 25%, does it go to 30% over the next 10 or 15 years? Maybe. We think it's going to go up. Yes, likely a little bit, because we found ourselves and our ability and our suppliers, some of our private label suppliers are very good at what they do. We also are still a branded retailer, and we have very good savings, as you know, on branded items. On the service side, we don't talk about it a lot because they're small relative to the size of our company. It's other things that make the membership sticky and are very profitable, whether it's the Costco Auto Program or our Travel business, which continues to grow.
A year or so ago, we added the hotel-only booking engine and more recently, the airline reservation only, not just packaged items, packaged trips and everything. 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 Melich from Evercore ISI. Your line is now open.
Hi. Thanks, Richard. 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?
Yeah. I don't know off the top of my head what the auto-renewal rates are. 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. All those non co-brand ones, all those auto renewals went away, went to zero. That had to be picked up over time, and we saw that impact our overall renew rate a little bit. The other thing is, we've continued to add new increasing number of members that have the co-brand card, and the value keeps getting better and bigger. I think that will continue to be additive. That helps.
I think overall, we've also done a better job, even when somebody walks in, to sign up, not only to upgrade, but would they like to auto renew. 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 Citi Visa doing multiples of sales outside of the club than it's doing in the club at this point?
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 membership fees in general anyway. It's a whole new additional market potential of revenue share to those people using that card. 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. 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 two days. I'm happy to report I know nothing.
That's good to hear. Have a great holiday, Richard.
Thank you.
Well, we've got two more questions.
Your next question is from Scott Mushkin from R5 Capital. Your line is now open.
Hey, Richard. Thanks for taking my question. I wanted to talk a little bit about maybe growth that's being, 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 through omnichannel. 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 omnichannel? 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. Five years ago, I would have 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. Certainly there's a lot of emphasis on the e-commerce side, not only getting into the few remaining countries, but building it, not because we're supposed to, but it's working. 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. We're getting people in the building still and using these things. 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.
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. Hold on. 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, like Mexico, it's in the 50s and growing. But I think, It'll start 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. I think 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, even if it provided them some savings. There's some people that want it, that sometimes it's not as much savings as they thought, and they convert back.
But at the end of the day, I'd be thrilled to think that that could go to 80 one day, I have no idea where and how long it'll take to get there. We know that Executive members are more loyal in terms of their renewal rates. They shop more frequently, 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. 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. Just curious, as you look at that core-on-core up four, which clearly very stable, just what kind of mix shift is underlying that?
Well, I think it's more than mix shift. Certainly gas has the biggest impact. Gas is more than 10% of our business. It can be a gross margin line. First of all, there's deflation. You could have the gross margin contribution plus or minus by a number of basis points. You have all the 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 optometrist, things like that. 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 very little cost of sale. It's a 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. Then there's that magic word, competition. Our view is we look how do we drive the top line? How can we be the most competitive? We're fortunate that we have some different buckets to do that with. It's hard enough for us to know where the margin's 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. Thank you, Lori.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.