Good afternoon. My name is Brittany, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Q4 earnings call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. If you would like to ask a question during this time, simply press star, then the number one on the telephone keypad. If you would like to withdraw your question, press the pound key. I will now like to turn the call over to our host, Mr. Richard Galanti.
Thank you, Brittany, 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 fourth quarter of fiscal 2018, the 16 weeks ended September 2nd.
Net income for the quarter came in at $1,043,000,000, or $2.36 per share, a 13.5% increase compared to the $909 million, or $2.08 per share in the 17-week fourth quarter last year. If you normalize the number of weeks, it's about a 20% increase. In terms of sales, net sales for the quarter came in at $43.4 billion, a 5% increase over the $41.4 billion last year. Again, 16 versus 17 weeks. On a comp basis, which is on a like-week basis, comps were up 9.5% for the quarter. Sales for the 52-week fiscal year 2018, they increased 9.7% to $138.4 billion from $126.2 billion last year in the 53-week year. On a comp basis for the year as well, we reported a 9.5% comp. Now, comp sales for the fourth quarter were as follows, and again, it's in the press release.
In the U.S., on a reported basis, was 10.8%. Ex gas and FX, it would've been 7.8%. Canada reported was 5.7% for the 16 weeks. On a ex gas and FX, it was 4.6%. In other international, 6.7% reported, a 6.9% ex gas inflation and FX. All told, total company, as I mentioned, reported 9.5%, ex gas and FX is 7.2%. As well, e-commerce, which we've started reporting about a year ago on a monthly basis as well. E-commerce for the 16 weeks was 26.2% comp and ex gas and FX 26.3%. In terms of Q4 sales metrics, fourth quarter traffic or shopping frequency was up 4.9%, both on a worldwide basis as well as in the U.S. Weakening foreign currencies relative to the U.S. dollar negatively impacted sales by about 25 basis points, and gas inflation benefited Q4 comps by about 260 basis points.
Cannibalization, by the way, weighed on the comp by about 55 basis points to the negative. Our average front-end transaction was up 4.4% during Q4, excluding the impacts of inflation and FX, our average ticket was up a little over 2%. Membership income. We reported $997 million, or 2.30%, of membership fee income in Q4 of 2018. Last year in the 17-week quarter, it was $943 million, 2 basis points lower. On a reported basis, a $54 million increase or up 5.7%. On a like-weeks basis, up a little over 12%. Of this normalized 12% number increase year-over-year in Q4, a little over half related to membership fee increases, the majority of which came from the $5 and $10 annual fee increases taken last June 1st in the U.S. and Canada.
In terms of membership renewal rates, renewal rates rose in Q4. In our U.S. and Canada membership renewal rate at Q4 end stood at 90.4%. That's up from 90.1% at Q3 end, 16 weeks earlier. Our worldwide rate improved to 87.9%, up from 87.5% at Q3 end. In terms of number of members at Q4 end, at Q4 end, we had 40.7 million Gold Star households. That's up from 16 weeks over year, 40.0 million. Primary business, 7.6 million, up from 7.5 million. Business add-ons stood at 3.3 million, both at Q3 end and at Q4 end. All told, we went from 50.9 million member households a quarter ago end to 51.6 million at Q4 end. In terms of cardholders, we ended the year with 94.3 million cardholders, up from 93.0 million at Q3 end. During the quarter, we had 13 net new openings.
Also at Q4 end, paid Executive Memberships stood at 19.3 million. That's an increase of 229,000 exec members during the 16 weeks, or about 14,000 increase per week, which by the way, is the same average for the whole year. Related to the annual fee increases, the year-over-year quarterly fee income benefit peaked in this quarter, the fourth quarter. It will continue to be additive to our numbers during the upcoming four quarters. Very little in Q4 of 2019, during the four quarters. We'll moderate each quarter, this is due to the nature of deferred accounting treatment of the fee increases. Going down to the gross margin line. Our reported gross margin in the fourth quarter was lower year-over-year by 35 basis points, coming in at 10.92%, down from 11.27%. That 35 basis point negative, excluding gas inflation, was -9 basis points.
As I always ask you to do, we'll jot down two columns of numbers. One is Q4 2018 reported, Q4 2018 ex- gas inflation. The first line item would be core merchandise. On a year-over-year basis, on a reported basis, core merchandise gross margin was down 44 basis points year-over-year. Ex- gas inflation was down 22 basis points. Ancillary businesses were +14 basis points reported and +21 basis points ex gas inflation. 2% reward +1 basis point and -2 basis points. Other was -6 basis points and -6 basis points year-over-year. If you add those two columns up, you'll get the 35 basis point negative, which we reported, and the -9 basis point, which I just mentioned, on an ex-gas inflation basis. The core merchandise component, again, on a reported basis, was lower by 44 basis points and lower by 22 basis points ex-gas inflation.
That still takes into account the sales penetration of the different categories. If you look at the core merchandise categories in relation to their own sales, the core merchandise margin categories in terms of their own sales, core on core, if you will, margins year over year in Q4 were lower by 2 basis points. Within food and sundries and hard lines was up a little. Soft lines and fresh were down a little. All told, it was minus 2 on core on core. Ancillary and other business gross margins, as I mentioned, was up 14 reported and up 21 ex- gas inflation. That's because of the extra good margins as well as sales penetration. Other was minus 6.
As was the case in the first 3 quarters of fiscal 2018, I've mentioned to you that we're incurring some incremental costs primarily related to the rollout of the centralized return facilities throughout the country. During the quarter, that was a 4 basis point detriment, which is relatively speaking an improvement for the first 3 quarters. In addition, we're cycling some one-time items that last year in the quarter which net benefited last year's quarter by 2 basis points. It was some positive legal settlement offset by some impact from last year's Hurricane Harvey. Moving to SG&A. Our SG&A percentage was lower or better by 15 basis points. On ex -gas inflation and FX, it was worse by 8 basis points. Coming in at a 982 of sales this year, that would be the 15 basis points lower than the 997 on a reported basis.
Again, for ease of explanation, we'll jot down 2 columns of numbers. Q4 2018 as reported and then Q4 2018 ex- gas inflation. Core operations is the first one, lower by 16, or I'll say plus 16 basis points and minus 4 basis points or worse by 4 basis points on an ex-gas inflation basis. Central, minus 4 and minus 7. Stock compensation, 0 and 0. In other, it was a benefit, plus 3 and plus 3. Again, you add up the columns, you get on a reported basis, we were lower or better by 15 basis points and ex-gas inflation, higher or worse by 8 basis points. Now the core operation component. Let's see, the U.S. wage increase that went into effect June 11th to our hourly employees in the U.S., that negatively impacted SG&A by 6 basis points.
As I mentioned probably last quarter, this will continue to impact the SG&A comparison over the next 3 quarters of June 11th through June 10th of next year. Central expense was higher year-over-year in Q4 by 4 basis points, 7 ex- gas inflation. IT expenses were about 2 basis points of that and the balance coming from a lot of small changes in a variety of miscellaneous items, frankly. Net, it added up to a minus 7 ex gas. Lastly, other was better by 3. That related to expenses incurred last year on the SG&A line as well from the Hurricane Harvey. Next on the income statement, pre-opening expense. About the same year-over-year. This year it came in at $31 million. Last year was $30 million, so a million dollars higher.
Last year in the quarter, in Q4, we opened 15 openings, 13 net plus a couple of reloads. This year we had 12 openings, 8 in the U.S. and Canada and 4 international. All told, reported operating income for the 16-week Q4 of 2018 came in at $1.446 billion. This compares to $1.450 billion in the 17-week results of last year in the fourth quarter. Below the operating income line, reported interest expense was $5 million lower year-over-year, coming in at $48 million this year in Q4 compared to $53 million last year. Interest income and other for the quarter was higher year-over-year by $29 million. Interest income itself was higher by $11 million despite one less week year-over-year. A combination of higher interest rates earned on the cash proceeds, cash that we have, as well as higher invested cash balances.
Also benefiting the year-over-year comparison were positive year-over-year FX items that in total amounted to $14 million. Overall, pre-tax income was higher by 2% or $30 million in this year's 16-week quarter, coming in at $1.449 billion this year versus last year's 17-week results of $1.419 billion. In terms of income taxes, our tax rate in Q4 2018 came in at 27.4% and 28.4% for all of fiscal 2018. The 27.4% for Q4 compared to last year's Q4 of 34.3%. This quarter's tax rate benefited, of course, from the income tax reform that was effective January 1, as well as some favorable discrete tax adjustments. For fiscal 2018, based on our current estimates, which, of course, are subject to change, we anticipate our effective total company tax rate to be approximately 28%. A few other items of note.
During all of fiscal 2018, we opened a net of 21 new units, plus 4 additional reloads. Of the 21 net, 13 were in the U.S. and 8 were international. For 2019, we expect to open 20+, in the low 20s, net new warehouses. About three-quarters will be in the U.S. and about a quarter international. As well, we plan to relocate 4 units to better located and larger facilities, the same number as we did this year. We're also under construction with our first Costco in China, in Shanghai, with the opening expected late next September. As of Q4 end, total warehouse square footage stood right at 110 million square feet. Next subject, stock buybacks. In Q4, we repurchased $89 million worth of Costco stock, or 419,000 shares at an average price of $211.35.
For all of 2018, we repurchased $322 million at an average price of $183.13 per share. Moving to the e-commerce activities. Overall, e-commerce sales increases continued strong levels for the quarter, coming in at 26.2%, and for the year at 32.2%. First and foremost, we continue to deliver great value to our members. We continue improving and slightly expanding our offerings, including some new brands and higher-end brands. We continue to improve the member experience as well. This past fiscal year, our site traffic, conversion rates and orders all improved year-over-year. Online grocery, both our dry grocery 2-day delivery, as well as our same-day fresh delivery, the latter through Instacart and others like Shipt, are growing nicely, but still a very small part of our company's sales.
In terms of online two-day grocery, which is the dry side, we're generating sales in all 50 states, including the six states where no physical Costcos are present. Still relatively small to our company. We continue to improve the online merchandise and sales offerings and services offerings with hot buys and buyer picks and buy online and pick up in store, and we'll continue to do exciting merchandising activities. Overall, all these efforts, we feel, are positively impacting our business, both online and in-warehouse, and are helping our sales, increasing member awareness of our digital presence, as well as increased traffic that we've enjoyed in our warehouses. The next subject I'll touch on is tariffs and their impact on our business. As you know, there are many moving parts and it's extremely fluid, starting with the actions and reactions by both the U.S. and Chinese governments.
What actions are we exploring and taking in some short-term and some long-term? Accelerating shipments before tariffs go into effect, recognizing there's a limited ability to do so. Everybody's trying to. Working with suppliers to see what can be done to reduce and/or absorb some of the costs. In some cases, reducing order commitments on certain impacted items. Alternative country sourcing, sure, but again, that's where possible and feasible. It's a limited ability, and it takes time. Five, taking advantage of lower pricing on some U.S. items because of the reverse, if you will, such as pork, nuts, and soybeans. In summary, we'll have to see how customers and competitors react to tariffs and what impacts it'll have remain to be seen. Last topic.
As was noted in this afternoon's press release, we plan to report in our Form 10-K a material weakness in internal control related to general IT controls. These controls relate to internal user access and program change management over certain of our IT systems that relate to our financial reporting processes. I can tell you that there have been no misstatements identified in the financial statements as a result of the deficiencies, and we expect to timely file our Form 10-K. In terms of remediation efforts have begun, but the material weakness will not be considered remediated until the applicable controls operate for a sufficient period of time and we conclude through testing that the controls are operating effectively. We expect that the remediation of the material weakness will be completed prior to the end of fiscal 2019.
Lastly, in terms of upcoming releases, we will announce our September sales results for the five weeks ending this Sunday, October 7th, next week on October 10th. With that, I'll turn the call back over to Brittany for Q&A. Thank you. Brittany?
At this time, I would like to remind everyone, in order to ask a question, press star and the number 1 on your telephone keypad. Again, that's star and the number 1 for questions. At this time, we have a question from Michael Lasser.
Good evening, Richard. Thanks a lot for taking my question. With the core gross margin down two basis points, the expectation was that you'd be taking some of the tax reform and investing it in the value proposition, particularly price. Have those investments been made? If they have, has it just been in other areas? Where do you think your pricing gap currently stands with others in the marketplace that have been investing in price?
Keep in mind, we invest in price, it's in our DNA. Certainly, over the last few years, there's been several buckets, if you will, that we've talked about, starting with the credit card transition that afforded us some great savings, some of which we used to invest in price, if you will. Next was what's occurred generally every five or six years, a fee increase in June of 2017.
Then, of course, the tax reform. All those things, I think, is a force of stability. It's not like this one thing. These monies are fungible, and we're not only investing in price, we're investing in infrastructure that we would've done anyway, mind you, with the initial successes of two-day and one-day fresh. So there's a lot going on. In terms of how we feel competitively, I can tell you every four weeks when we meet for our day and a half budget meeting, in the U.S., as an example, all regions, including foreign regions, but in the U.S., the eight geographic regions, they do price shops compared to our direct competitors, and we feel very good about those where we stand competitively.
As it relates to monies that traditional retailers, whether supermarkets or the other big boxes, look, it works and it helps, we think it impacts other traditional retailers a lot more than it does us. I think that we've seen, as evidenced by our strong traffic numbers, and frankly, our strong comps in store, we feel pretty good about where we stand on that.
When you've been accelerating your e-commerce growth, and it's growing at a very nice clip. Would you consider further doubling down on some of your e-commerce investments in light of the fact that you've been able to show growth through both channels?
Well, doubling down is, I guess, there's going to be lots of definitions of doubling down. I think we are. We certainly are putting a lot of focus on it. I can tell you within IT, we've got a lot of efforts going into fulfillment and sourcing and you name it. I think part of our long-term nature DNA is that we're going to do what we feel comfortable doing and grow it nicely. We've got a lot of activities in that area. We've added brands, we've added some categories. For us, doubling or tripling 3,000 or 4,000 SKUs to 8,000 or 9,000 is a lot for us. There are plenty of opportunities that we're seeing, not only on adding products, but the way we do it.
We feel that the one- and two-day delivery options that we now offer at, frankly, better prices than our items were being offered by other third parties before, dramatically better pricing, should help us, should help that process. We're finding the ability to benefit not only with e-commerce, but using online and emails to drive traffic into the warehouse, again, with hot buys and perhaps in some cases, some targeted buys. Online and e-commerce to be able to sell some items that were seasonal in nature that we might only have for 8, 10, 12 weeks, notably patio furniture and lawn and garden, or furniture during the summer. Patio, lawn, and garden, we generally were in and out of that stuff for 10 to 12 weeks. Now we're in at 52 weeks online, and there's some real sales to be had there.
part of it's on us, though, to keep that awareness going and improving that awareness. I think we're doing a better job of it, but we have more to do there.
Okay. Good luck. Thank you very much.
Your next question comes from the line of Simeon Gutman.
Hi, this is Josh Campbell joining from Simeon Gutman. Thanks for taking our question. Your comps have been very strong for the last few quarters. If you look at the basket that consumers are buying, would you attribute the strength more to capturing a broader set of categories or are customers trading up within your core consumable categories? If the former, which new categories are you seeing the most success in?
It's really pretty balanced. I think not only for us, but other non-food retailers like Walmart and Target and certainly Best Buy. Electronics has been strong, and there's some higher price points there in general. Apparel has been helpful to us, so we've had some continued strong results for several years now in apparel, both brand and Kirkland Signature. We keep trying to put another can in that package. I think all those things help. I would say it's more broad-based than specific.
All right. Thank you. Just as a quick follow-up, looking at the consumer health through your lens now, gas prices had leveled off for a while, they're beginning to rise again. Are you seeing greater sensitivity in any of those particular categories?
We haven't yet, but again, every day is a new day. One thing, we've found that when gas prices were going down, some retailers weren't taking them down as much as they could have, in our view, which was fine with us. We could have gone down a little more, but still were able to make a little, so that's helped us and enhanced that value proposition. Generally, when prices go up, same thing, we generally can find where people are more conscious. I remember back in the first part of calendar 2008 when the economy was on fire and gas prices were north of $4 and some were saying it's going to go into 5. We saw a big increase in comp gallons. Same thing we're seeing in the last couple of years. We've enjoyed a big increase in comp gallons because of that value proposition.
All right. Thank you.
Yeah. It's hard to say how that impacts our numbers. Our numbers have been, fortunately, pretty good.
That's helpful. Thank you.
Your next question comes from the line of Chuck Grom.
Hey, thanks a lot, Richard. Just first question is on the ancillary part of the gross profit margin composition that you provided. Just wondering why the ancillary line was up 14 basis points. It's a big reversal from the third quarter.
The big thing is gas. Gas is now low double-digit % of our total sales on a price point that's 20+% higher per gallon than a year ago. While it's a low-margin business relative to the rest of the company, its margins had improved year-over-year, that penetration helped us.
Okay, so-
E-comm helped us a little as well.
Okay. E-comm is sort of captured in that line item then. Okay. Thanks. Okay. The second question is, I know you guys have talked about sort of store targets in the low 30s. Now you're talking the low 20s. Just wondering why the deceleration and number of openings planned for 2019.
Well, look, we have a budget that's between 20 and 25, so I come in at the low 20s just to be conservative. We've got more on our plate. If you look at this year, this coming year, it's like three quarters, one quarter U.S. There's more in the pipeline now internationally, but that pipeline takes longer to get through. It's a longer pipeline. I think you'll see that change, best guess, in 2020 and 2021. If I was a betting person, over the next five years beyond 2019, probably some number in the mid-20s is a likely number, but we'll have to see. That's subject to change.
Okay, just a last question on e-commerce. What do you think about the impact from consumers buying online? Have you seen any change in how they're shopping in-store? In other words, are they coming less frequently to the store? I don't think you're too concerned about it, but if you could just kind of flesh out maybe the entire basket and trends for a total household when you blend in the store trips along with the online buying habits.
Well, I mean, the fact that traffic is actually as strong as it's ever been. We enjoyed like a 4.2% average compounded annual traffic increase for seven years from 2009 to 2015. I know everybody was concerned, you guys, everybody was concerned when it got down to the low 3s, and we've enjoyed it back into 4s now, and 4.95% the last couple of months, I believe. It's hard to say. Would it should've been higher than that if e-commerce? We think it's been net additive, but it's hard to say at this point.
Okay, great. Thanks a lot.
Next we have a question from John Heinbockel.
Rich, let me start with the difference between the minus 22 margin x deflation and the minus two in their own category. That's obviously adverse mix, and I think that's maybe picked up a little bit in the last six months. What's the primary driver of that? Is that mostly the strength in electronics? Are there other factors at work?
It's not mix. No. Electronics margins are generally where they've been. There's not a big issue there. It's gas. You've got a business that's What % of gas is our business now? 12, 13%? 12% of our total company sales is gas on a much different margin structure.
Yeah, I think when you pull out the So ex gas deflation, I think margins were down 22, but they were down only two when looked at in their own categories. The difference between the two is not mix driven?
Well, it may be mix driven somewhat, but keep in mind, there's lots of other things that go into margin.
Okay.
There's the ancillary businesses that have higher margins. If you think about pharmacy and optical, their gross margin, which is sales minus cost of sales, is a higher gross margin than the 14 or 15 we talk about because it includes.
Right
the professional optometrists and pharmacists. It's kind of like, what is the price that the customer's buying it all in at that. You've got other ancillary categories or services that have higher margins. All those things go into the mix.
Okay. You're seeing penetration of KS continue to rise, and is it rising same as it had been, faster, slower?
I think it's been consistently rising, not faster or slower. Keep in mind, there's still new items out there-
Okay
You've got a lot of items that start out at $10 million and $20 million and $30 million. The big items like toilet paper and water, we saw a big growth over the last couple of years in water when we brought the price down from $3.49 to $2.99. I'm just looking down a list. Of late, the Kirkland Signature 14 cartridge razor blades with a handle, the organic cheeseburger in the food court, fragrances, the KS fragrances, all kinds of beverages.
Okay. Just separate topic, you obviously were doing some stuff with BOPIS on a limited basis, I think you wanted to keep it limited. Is it still just applying to those items, the notebooks and the bags? Is there an idea of expanding that?
Well, in the past, we mentioned things like jewelry-
Yeah
some limited electronics items like tablets.
Yep
small size items as well as handbags, high-end handbags and things. We have expanded it to some additional electronics items.
Okay.
We still want to do it our way. We think that these are areas where we've been surprised at many people are buying it because it's convenient, and then they're going to come by the shop. Not to suggest these are all incremental shops, by no means, but while they're in there, over half of them are not just picking up the item, they're going in the shop.
Right.
Frankly, shop at a much higher average than the average shop. So far so good. We'll see.
All right. Thank you.
Your next question comes from the line of Karen Short.
Hi, thanks. I just wanted to start with e-commerce for a second. Can you just give us an update on where e-commerce is as a % of sales? Then I wanted to see if you could give us a little color on how to think about the growth rate of e-commerce going forward.
I'm sorry, what was the last part of the question?
How to think about the growth rate of e-commerce going forward.
Well, the number's right around 5% of sales. I think a shade under. I'm sorry, a little over 4%. Look, we're going to drive it as much as we can. I think a few months ago when we went from a string of monthly 30+ to a 23 or something, people were disappointed a little bit out there. We feel very good about it. I think we've shown in the last couple of months, I can't say anything about September, that'll be next week, but we've seen good numbers and we feel we have the benefit of having not focused on it a lot for many years, and now taking advantage of that in a big way.
The example of some big-ticket seasonal items like home furnishings and furniture in one part of the year and adding 40 extra weeks of offerings, if you will, of offering it online now, as well as what we've done with white goods and the success there. In three years, we've gone from $50 to $500 million in white good sales, which has been helped, of course, by the brands willing to sell us good high-end stuff and our ability to sell it.
Okay, that's helpful. Then, just in terms of the tariff commentary they made, any way you could give some sense of what % of product is imported from China today and where you kind of see that going in the next few years?
No, we don't want to give out specifics. There have been some of the analysts out there that have done some estimates that seem to be within the range, but it's fluid. The real answer is things can't change overnight. What can change is demand for an item if the prices has to go up 15% or 25%. We've experienced not dissimilar things. In Mexico, when you've got a bunch of U.S.-sourced goods historically, and when the peso to the dollar has changed dramatically from three to eight to 10, and then from 10 to 14, and more recently, in the last couple of years, from 14 to the 18 to 20 range, that'll have a dampening effect on certain products until it has less of a dampening impact. It's really too early to tell.
Okay. Just last question, I guess, can you just give us inflation in 4Q both at cost and at retail and then expectations for inflation, given all the narratives from vendors calling out passing on cost increases?
I don't have that off the top of my head on a cost basis, and this is purely like looking at LIFO indices, and not on sales because some categories have a higher penetration. It's very small. It's slightly inflationary, but I'm talking about a capital S in the word slightly.
Okay. What are your thoughts just generally, because there has been a lot of narrative from the vendors in terms of passing on price increases. Where do you guys kind of stand, or what are you seeing on that front?
Again, our DNA is we want to be the last to raise the price, we want to work with any supplier to figure out how to not do that. Ultimately, you can't eat all these. We feel competitively, we'll keep doing what we do, that we're usually the last to raise the price and the first to lower it. I think we have, as a company, one advantage is that we don't have to sell every brand alternative, every size alternative, every SKU alternative of a given item. There are times when I think our buying power is in effect, the octane of that buying power is more than the $138 billion of purchasing power, because it's too many number of limited items, not only brands competing, but also what we know about many of these items because of our private label nature.
It affords us, I think, some opportunities that perhaps make it a little easier for us. Nothing's equal.
Yeah. Thanks.
Thank you.
Your next question comes from the line of Christopher Horvers.
Thanks. Good evening. First question is, you mentioned in the release that there have been no misstatements found related to the internal control weakness. Is that behind this? Is there any risk that there could be a misstatement of the financials in the future, or is it more about you sort of just fixing the systems and getting the testing done?
Keep in mind, first of all, that we feel comfortable and we feel that ultimately our auditors feel comfortable, or we wouldn't have expressed a level of comfort we did in the press release about the title, that there's no misstatements and there's the timing that everything we filed on time, including the K. The issues had to do with internal user access. People within IT or contractors, and somebody who may have had access to something they should have, and sometimes once they should have had that access relieved, it took a little too long to do so. The controls weren't in place. We should have done a better job. We went back as far as we could and looked back as far as we could in some systems for the entire fiscal year, which is what you want to do.
In some of the newer systems, there was no look-back ability for certain things. I can tell you all the look-backs that we have done and that our outside help has done, has found no issues whatsoever in terms of misstatements or breaches. That's what we can tell you. We can't be more positive of that until we release the 10-K. I don't want to belittle it. It should've been fixed, but it was internal to us, not external, and we'll go from there.
Understood. That's very helpful. Can you also talk about an organic MFI growth number, sort of ex FX in the 53rd week? It looks like all in, that number was running a little bit below 5% in the first half of the year. In the third quarter, sort of picked up over 5%, in the fourth quarter, nearly 6%. Is that sort of rough math that you're seeing sort of like a MFI comp accelerating ex FX?
Well, that's pretty good rough math. Keep in mind, one of the issues is on the deferred accounting. The U.S. and Canada $5 and $10 fee increases that went into effect June 1st of 2017. In effect, I believe that in total was about $245 million. Well, over the next 12 months, using that number as the example, that's how much more we have in our checking account. Based on deferred accounting, it takes 23 months to get that into the P&L.
Yeah.
Part of the increase from year-over-year Q3 relative to year-over-year Q4 is you peak in 12 months hence, if you think about it. Somebody who got a $10 increase for the first time, their renewal happened to be in June. That $10 was effectively $0.80 a month for 12 months, June to May. Somebody who got it 11 months later in May, they paid it for the first time 11 months after the first person did. That'll hit the $0.80 a month for months 12 through 23. Rough numbers. If you will, in month 12 is when you peak in terms of that getting what I'll call the full effect of one twelfth of the $245 million in this example. I think a little of it probably has to do with that.
I wouldn't suggest that what used to be a 4% increase became a 5% and is now a 6%. Some of that increase is related to that.
But directional-
Yeah. Some of it, of course, is related to how many openings we have and where the openings are. When we opened a very successful unit on the east side of Seattle in Redmond a year and a half ago, with three other units on the east side, including Kirkland and Issaquah, where we're headquartered here, and one other. We went from 195,000 members or 65 per building on average. Maybe we added another 8,000 or 10,000 over the next year. We reduced the average members, but we added net of cannibalization, $120 million-$130 million of extra sales in year one, and we'll grow from there. When you do that changes that growth metric a little bit. Similarly, when we open in Australia or Asia, we're afforded huge numbers of new signups in the first year with a lower renewal rate.
Nonetheless, there have been openings where we've had 40,000, 50,000 new members when the company average for all warehouses whose average age is probably in the high teens, if not low 20s, an average in the low 60s of warehouses of 60-plus thousand members. International impacts it. A few of the LivingSocial things that we've done once every year and a year or two, all those things impact that number a little bit.
Okay. I guess fighting through all the noise, how would you describe sort of like a sort of MFI comp trend over the past 12 months? Has it improved?
I would say, well, if you take out the benefit of the fee increase-
Yeah
you take out the difference of weeks, my guess it's been about the same. I'm guessing. We picked up a little from some of the Sam's closings, the 63 Sam's closings. We opened up a couple units less than we did a year ago, and I think proportionally a few less international units. I don't have that in front of me. All those things would tweak it a little bit one way or another. I think overall, the fact that our renewal rates have improved and continue to improve, finally after the impact of the transitions with credit cards in the U.S. and Canada makes us feel pretty good about it.
Understood. Then last question, could you give us how many Visa cardholders you have in the U.S. currently, and how does that compare to what you entered in with from an Amex cardholder perspective?
I don't have that number in front of me. It continues to grow. I believe that in the U.S., our Visa tenders, total Visa, not just the co-brand card, is approaching 50%, in the high 40s. It's probably 55/45, the Costco co-brand Visa. I could be 60/40. I don't have that number in front of me. It continues to grow. We continue to get signups. I think when somebody sees some of the things we've done with some of those monies, and you talked earlier about investing in price, when you could buy something like a high-end television that's already great value at Costco, and then when it's on MVM or coupon, it's another $200 off.
On top of that, if you use your Citi Visa card, not only you get a cash card, that's not on every item, in terms of promotional things that we've done over some of the holidays, it's really worked. Those are the kinds of things that we've used that for.
Understood. Thanks very much.
Your next question comes on the line of Edward Kelly.
Yeah, hi. Good morning. Sorry, good afternoon. Richard, I wanted to ask you about comp momentum, if you could just maybe reflect a little bit on the impressive run that you've had. It wasn't long ago in the U.S. that comps had kind of slowed to the low single digits, which now seems like a one-off. Comps now are above historical, what you would think, I guess, historical norms. Can you just talk about what you think is driving that incremental strength? Then how should we be thinking about, I don't know, I guess, what I would call mean reversion, and the timing around that, and what is the real mean? Is 2016 even relevant to think about?
I don't know. I remember when 2016, one, we did a little bit to hurt ourselves when we changed up the MVMs and greatly reduced the number of promotional days of shopping, if you will. We changed that over a few months, and we got back to where we were. There's also, add on that, the conversion of credit cards, where you had a lot of people that were auto-renewal on a credit card that lost that auto-renewal. Any member under the old Amex program that was using a different Amex card at Costco, whether it was the Delta card or a hotel card, Starwood card, all those things, some of those became auto-renewal, that our members opted in to just have auto-renewal. When we switched from one network to another, all those non-cards weren't bought by the acquirer. All those auto-renewals went off.
I think some of that is tied up into that 2016 year. I also think that some of the things we've done with buyer's picks and hot buys and collecting email addresses, again, we're proud of the fact that we've greatly increased the number of email addresses we have. Some would look at it and say, "Why didn't you do this all along?" We didn't, and we're now benefiting from that. All those things I think have helped, and hopefully that new norm will continue for a while, but every day is a new day.
Just circling back on e-commerce growth. Obviously, you started the year strong, and you had actually mentioned something, Richard, about people being a little bit disappointed when it slowed. Did that surprise you at all that it had slowed the way that it did? Can you talk about how grocery's ramping relative to your expectations, two-day, same day, and are there any metrics that you can share on it relative to sort of basket size, margin, et cetera?
Well, in terms of when renewal rates or comps slowed a little bit, I remember when our shopping frequency had slowed a little bit after this incredible run from 2009 to 2015. I remember at the end of 2009 when we achieved, I think, a 3.8 or a 4.0 of frequency up from a historical average of 1.7, I was the first to say and remind people, if it's a lot lower than 10, it's still a good two-year stack because this is not sustainable. For four years, we enjoyed it. I think you look at the things that we've done merchandising wise, the added brands we have, the better communications tools that we can communicate with our members, and really that low-hanging fruit that we are benefiting from on top of, as one of my colleagues just said, great merchandise at low prices.
There's a lot of good things that we've had going on for ourselves, and I think that should continue. We still have a lot of buckets here.
Sorry, Richard, if I wasn't clear, I meant on the e-commerce comp or e-commerce growth and what we've seen recently there relative to how you started the year. Has that small slowdown surprised you at all? How has, like, two-day and same day delivered versus-
No, the e-commerce slowed. Well, when you say slowed down, it went from a low 30s number to a low to mid-20s number. I'll throw the two-year stack back at you. We feel very good about it. We feel very good about what we're doing, we think we've got a lot of new things to come on and to expand it, we still have a lot of, if you will, funds in the bucket to drive business in that direction as well. The brands that are willing to sell us that historically hadn't, all those things help. I think, again, the biggest thing is we're focusing on it. We're focusing in our way. We don't need to go buy a company. We're finding out that there's a lot of opportunity for us doing some of the things that we want to do.
Great. Thank you.
Your next question comes from the line of Scott Mushkin.
Hi, guys. Thanks for taking the question. This is Paul Carney on for Scott. A question on growth going forward and also just the business today. Where do you think you are in terms of wallet share of your current customers, and what's the biggest opportunity to grow wallet share of the customers? Also, if you had to divide going forward where most of your growth is coming from, is it coming from wallet share? Is it coming from acquiring new members or continued unit growth in new markets? Thanks.
Yeah. Look, frequency's up, average sale is up. We know there's an example when we've infilled that we don't add a lot of new members. We have a lot of loyal members that are shopping a lot more frequently. We know that our success with both-- When we're asked the question, what are the big two or three things that impact that help our sales, I think generally speaking, we all generally feel it's our strength in fresh foods, which continues to grow and improve. It's our gas stations, which gets you in the parking lot, and Executive Membership. We're doing a better job of now emailing you. I think all those things have helped. As our head of merchandising would say, it's great merchandise at low prices and some of these buyer picks and hot buys have helped as well.
Great, thanks. One quick follow-up, and maybe it's too early to tell, but are you seeing any changes in membership trends for your clubs that are more heavily using Instacart? Is Instacart delivery for non-members leading to any uptick in memberships for those clubs? Thanks.
Instacart and our other third parties like Shipt and others, Instacart's the big one, and we have good relationships with them. It's growing nicely. It's still a pretty small part. We have not discerned any big difference there. When we've looked, and this is anecdotal, not statistically valid, but when we looked at it, you take a group of loyal Costco members and then a group within that group who have like characteristics of average basket to shopping frequency, and all of a sudden, and they're loyal, and then some of them start using Instacart. Some of them are using it to fill in some of it. They may reduce their annual shops by a few and increase this way several. The key for us, though, is making sure they still get into Costco occasionally.
So far, we've seen a net increase in that, but it's a very small population, and it's a very small size in its entirety at this point.
Great. Thank you.
Your next question comes on the line of Scot Ciccarelli.
Hi. Yes, Richard, thanks for taking my question. This is Jonathan Liverzon for Scot Ciccarelli. Just a question on e-commerce as well as it continues to be a focus, and you've made sizable investments there and still putting up pretty impressive growth. Could you tell us what % of e-commerce is shipped by your stores versus shipped by vendors?
Very little. 50%. 50% is us. Not through the warehouse. Not through the warehouses, just us shipping directly from our e-commerce fulfillment centers. Very little is done at the warehouse.
Okay.
By the way, it's only the business center with our two-day drive.
Got you. Okay, I appreciate that. Thanks so much.
Your next question comes from the line of Oliver Chen.
Hi, Richard. Regarding e-commerce, as it becomes a bigger percentage of your total business, what are the main dynamics in terms of the margin impact there? You have been speaking about this, but how would you prioritize the main drivers to drive the awareness growth of e-com and the kinds of initiatives that you're pursuing as that seems like a big opportunity?
Again, we've said before, first and foremost, we wanted to get you into the facility. There's certainly in some categories like white goods and big physical ticket items as well, e-commerce is the way to go in a big way, and we certainly benefited from that. We don't see e-commerce taking over our brick and mortar. We've also tried to figure out how to do some of the e-commerce or delivery-related activities that some members want and that we could provide a savings to, but doing it our way. I think there's still plenty of low-hanging fruit, and we don't want you to get comfortable just shopping at Costco online unless there's not a Costco within 100 miles.
Okay. Richard, from a modeling perspective for CapEx for next year, what are some of the major buckets, and how should we think about how that will unfold?
Well, first and foremost, it's warehouses. To the extent there's a few more international, a couple more. IT is a few hundred extra. Not extra from the year before, but in general. We've got a chicken plant, which is north of $300 million. A big chunk of that is expended in fiscal 2019, and we've already started spending money. The cheapest money was the acreage. The expensive money is the facility and all the equipment and everything. The whole fulfillment. I guess what's new would be some things like the chicken plant, would be some of the fulfillment activities we have on two-day delivery and small package e-com where that'll be a savings, frankly, to us, but we were doing a lot of those things a lot more manual than even we need to do.
Thank you. That's helpful.
Moving delivery dates. Yeah, there's a few extra things. I think the number will still be in the very high twos-ish, low threes.
Okay. Lastly, the Multi-Vendor Mailer. Are you pretty pleased with the state of it now? Is it in the right place? I know it's an important document, and you've been thinking about making sure that it's efficient with respect to breadth and depth.
Well, I think we're pleased. Other than a year and a half ago, a year and nine months ago, when we changed the number of frequent flyer, the number of MVM days in the warehouse, which hurt frequency in the warehouse. Once we changed that back, the fact that we've reduced the number of offerings in an MVM by 20-plus % increase the total value by more than that, and by net positive. It's definitely working, in terms of what we want to get out of it. Mind you also, we've taken some of those items. Not every item works the same way. Sometimes some items that have been regular get stale. Sometimes we got to shake it up a little bit or change the value proposition.
Sometimes we take it out of the MVM and do it in a different way with these hot buys and buyer's picks. I think we've, in a way, added to the arsenal a little bit, and it's working. It'll still evolve some more.
Yeah. Do you believe that tariffs will contribute to risk factors with consumer confidence? What are your thoughts on how that may interplay, because we're in such a great backdrop currently.
Look, on an item given basis, when you have an expensive discretionary item, take like a patio set, I'm just using that as an example. You're going to have a little less demand probably. Is it going to change. Mind you, there's a few items on the food side that are going the other way because in examples of pork, where something like a third of the U.S. pork is exported to China. Well, that's changed, and therefore pork prices are way down. There's great savings. That's creating some opportunities. Same thing with nuts. Same thing with soybeans, I believe. I'm just giving you some anecdotal examples. You're going to lose some and win some. How it impacts, I think everybody feels that tariffs. People smarter than me don't like them. It's probably a small net negative.
Certainly, whatever negative it is, we can weather it better than others.
Thank you, Richard. Thanks a lot. Have a great night.
Your next question comes from the line of Greg Melich.
Hi. Thanks, Richard. Had a couple questions. One was on gasoline. Obviously, growing a lot. What was the gallon growth on the quarter, and did penny profit actually improve? It sounds like it did, but I just want to see if that's the case.
The gallon increases were in the low double digits, 11, 12. 11% or 12%.
Got it.
Which is huge compared to the U.S. economy.
Right. Got it.
That's not all comp. That's some new gas stations as well. I think the comp has got to be in the high singles.
Got it. How many new stations are at most of the clubs that you can have them, right? Is there a penetration number you have?
Well, new openings are getting them, more so than not. In international, we're still adding where we can. I think in Australia with 10 locations, we've got four, maybe five, we guess. Mexico, we're adding some. Japan, we have a few. U.S. and Canada certainly is more saturated with gas stations. People say we're not going to have one at 117th Street, East River Drive. Where we can. Generally speaking, when we relocate, we do.
A good example in your neck of the woods is when we took the old land-occupied, or constrained, Hackensack Costco and moved it to Teterboro, then turned Hackensack into a business center. The Teterboro is, I'm guessing here, 20,000 sq ft larger with all the bells and whistles, with a gas station, and with a lot better parking. A few here and a few there that way.
Got it. Then a follow-up on the co-brand card. If I did my math right, upper 20s% of the tender now would be on your card in the club. If I remember correctly, part of the benefit of this is getting people top of wallet and getting them to use it everywhere. Do you have any sort of update on the usage of how much more it's being used outside of Costco, and therefore, how much more loyal that member is in terms of using the card and then coming back to the club?
I'll just say, yes, we do. We do have that information.
Okay. Is it back to where it was with Amex, I guess, is what I would say, or above?
I think it's quite a bit above.
Quite a bit above. That's great.
Yes, continuing to grow. Keep in mind, part of that is the fact that it can be used in more places. Whichever of those cards was your top of wallet, you have more potential to use it today than you did before.
That's great. Well, good luck. Thanks a lot.
Thank you.
Your next question comes from the line of Matthew Fessler.
Hello, Richard. Good afternoon. How are you?
Good.
My first question relates to SG&A. Trying to figure out a couple of the moving pieces. First of all, it looks like the wage increase that you discussed probably drove the SG&A higher by a bit less than a percentage point. Not an overwhelming increase. Just trying to benchmark the year-on-year increase when you exclude the factor of the extra week a year ago. I went back, and you weren't terribly granular, I think, on last year's call about the expense profile of that extra week. As we think about the apples-to-apples increase, because clearly the SG&A seems like it might increase at a slightly accelerated rate with the wage increases. Was that an average week you would have had for the extra week a year ago? Are there expenses that don't get carried in for the extra week?
There's little, if any, expenses, and some of our accounting people said virtually nothing. The week are fully allocated. It's not like if we took an annual expense and divided it by an extra week or had a free week at the end of the year. We don't. We do it by the number of days of the year. Nothing there. What was the other part of the question? There was, I had a response for it.
No, I think you got that one.
Oh, in terms of the wage increases related to the tax reform. At the time we did that, we announced it was going to be somewhere between $110 million-$120 million a year.
Yep. Understood. I guess partial impact here in Q4 given the June implementation.
Right. It was June 11th. Even though Q4 is normally a 16-week quarter, not a 12-week, it was about 12 of the 16 weeks was this.
Understood. Secondly, your inventory increase was a bit higher, and you did speak to front-loading some receipts in anticipation of tariffs. Was that a factor? Anything else moving the inventory in that direction?
When I looked at the list category-wise, electronics year-over-year is higher by choice.
Some of it's volume, a little of it is what you just mentioned. I think the last thing is we clearly have increased our inventory levels, particularly in e-commerce and delivery related items.
Great. Finally, on renewal rates, you seem to have shaken off some of the cobwebs that emerged, I guess, in the period after the credit card transition. Your U.S. and Canada renewal rate is back to where it was in the third quarter of 2016. I guess the best in nine quarters or so, and even more so for the worldwide rate. Have we sort of shaken the cobwebs off now? Do you think there's more room to move higher here, or do you think we're kind of back at a level where we're likely to plateau?
Who knows? I think we feel good about the loyalty and what we're doing to drive loyalty. There's some things that impact it either a little up or a little down, and that depends on rounding, do we round to the next tenth or not? When we do one of those, I think we've done four of them now in the last four or five years, like the LivingSocial or the thing like that. You'll get an extra 200,000 to 250,000 members in a 10-day period or 12-day period, and by definition, have a lower renewal rate on them a year hence. That hurts you a little bit. When that anniversary is a year later, it helps you a little bit. There's lots of little things like that.
When we look at the underlying rates, and I look at even taking a country like Australia, which is only 10 locations, its renewal rate is lower. It's still in the seventies, but it's relatively new. The average age of those locations is what? Four years-ish, maybe.
I look at the last four years. I only know this because I'm going there next week. Its renewal rate has consistently improved for the company in each of the last four years, which is consistent with what we've seen in other countries. I think, the bellwethers, of course, are U.S. and Canada, where we're mature. The average age of these locations are in the twenties. So far, so good.
Got you.
What is this?
The next question comes from the line of Peter Benedict.
Hey, Richard. A clarification just on the CapEx. I just want to make sure we heard you right. CapEx this year, high twos, maybe low threes with the incremental increase driven, I guess, a part of it by the chicken plant. Is that the way we should think about it?
Yes. Typically, our own internal budgets are $200 million to $300 million above where we come out. I believe this year maybe we're $100 million above, right at $3 billion or $3.1 billion. That includes the beginnings of the chicken plant, some additional things we're doing with fulfillment. Yeah. I think overall, something in the high twos. I think we graduated from $2.5 billion-$2.8 billion range, to $2.8 billion-$3.1 billion range.
Got it. Do you have the fourth quarter CapEx number?
Not yet.
Okay.
It'll be in the K in a couple of weeks.
Yep. Okay. On the international openings, you said 75% of the clubs this year are going to be in the U.S. You said you've got a bigger pipeline internationally. They take longer. Is there a timeframe where we should be thinking about when non-U.S. club openings will account for more than half of your openings? Is that a couple of years down the road?
If you'd asked me a couple of years ago, I would say it's three years around the road. If you ask me today, it's probably two to three around the road, and I could be wrong by a year further. We do definitely have more in the pipeline. We've also been surprised by more opportunities in the U.S. that if you go back to 10 plus years ago, some of the cities we're in today, we would've said, "No, we're not going to go there." There's somebody else there already, and it's not that big of a town, but we're finding success in those examples. So I think ultimately international, I don't know what it is, whether it's three years or four years from now or two years from now.
Right. Okay. Last question, just around brands, both yours and others. Which categories beyond white goods are you seeing kind of an incremental step up in your ability to get premium brands? What was the private label penetration for 4Q and for the year?
Well, I can't give you the latter number, but in terms of ability to get new brands, apparel continues. Cosmetics, some specialty food items, but those are fewer and further between. Sporting goods, Eddie?
Yep.
Sporting goods to some extent.
Okay, great. Thanks very much.
Yep.
Your next question comes from the line of Kelly Bania.
Sorry, I forgot.
Hi. Thanks for taking my questions, Richard. Wanted to just ask about, with e-commerce now about 4% of sales, just curious what percent of your members are really engaging online. I guess in connection with kind of the renewal rates question, as you look at those members that are engaging online, are they renewing at a similar rate or a higher rate? Just curious how that could influence the renewal rates over time.
We don't disclose how many of our members. It's increasing dramatically, but from a smaller base because we hadn't tried in the past. As it relates to, I'm guessing, I know that an Executive Member is more frequent and more loyal than a Gold Star Member. An Executive Member with a Citi Visa card comes more often and spends more and is more loyal than that. I would guess that somebody who's using it online, if they come from the warehouse and they're using online in addition to that's more loyal than their respective groups over those other things. Beyond that, when you've got somebody that's just using it online, I don't know, I'll have to stop my hazard.
Okay. Just clarification on the CapEx. I think you mentioned some spend there going towards the two-day delivery program. I guess, what exactly is that for?
Well, the two-day delivery is with Most of that's e-com fulfillment. There's some additional expenditures in some of the business centers, including building a couple of the business centers in geographies that will greatly reduce the, what I'll call the outsize UPS fees relative to the current mileage that has to be traveled to get those packages to their customers.
Okay, got it. Maybe just one last one on wages. You've obviously been making investments. With the announcement this week from Amazon going to $15, just curious if you see more pressure from that or broadly speaking and how you plan to over the next couple of years.
First of all, we raised our entry level wages to $14 and $14.50 in the U.S. in the past year related to tax reform. We give increases to top of scale every year. Even though our starting wage is $14 to $14.50, an employee who's been here over a number of years can get up into the equivalent of the low, the mid-40s to the mid-50s on an hourly basis over time, on top of great health benefits. At the end of the day, we feel very good about where we are. An employee starting today on a full-time basis, it takes about 5 years to get to top of scale. I think our average U.S. hourly wage is in the mid-$22s, $22.50, roughly, which we believe dwarfs any other retail or retail type entity out there on a big scale.
I believe that you'll see more pressure on it. By the way, there are some geographies around the country, even before we raised it to $14.50, we were already above that. We started at a tranche or 2 above that because of necessities. Parts of the Bay Area would be an example.
Thank you.
One more question.
Your last question comes from the line of Budd Bugatch.
Hi, Richard Galanti. Thank you for taking the question, thank you for lasting this long on the call. Most of my questions have been answered, just on e-commerce, can you give us the e-commerce impact on comps? Do we have that number?
I'm sorry, the comps?
Yeah. E-commerce impact on comps. How many basis points did it impact on comps?
It's somewhere in the 70 or 80 basis point range.
Okay. Thank you.
It's north of 50 and it's not one.
Say again?
It's north of 50 basis points and it's below 100, I think it's in the mid to high.
Can you talk a little bit about the demographics of the membership signups by age? What does it look like? Is your average age of members reducing, getting younger? What about the signup distribution?
Well, we feel very good about the signups, by the way, whether they were called Gen Xers or Gen Zs or whatever they were called before that's when you generally sign these people up. I think we're in the very high 30s or low 40s in terms of younger people signing up, which is consistent with what we've seen. What was the other part of the question?
Well, that was the, just the.
Oh, the age.
-impact on the base.
I haven't seen that. I need to find that out myself. I haven't seen that since we told people that our average member in the U.S. went from 54 to 52.
Okay.
That was a number of years ago.
Okay. Last on e-commerce, is there e-commerce activity outside of the U.S., can you talk about the strength that you might see there?
Well, we're in U.S., Canada, Mexico, U.K., Taiwan, and Korea. Over the next year and a half, I think we have two other countries planned. Look, it's growing nicely in other markets. Frankly, the U.S. e-com business dwarfs the others and has probably had the biggest benefit other than starting off from a very small base because of where we had taken and combined inline and online buying together a year or two years ago. I think that we've seen a big benefit from that, and we'll do that elsewhere. It works.
Okay. Thank you very much. Good luck on the next periods.
Thank you very much.