Good afternoon. My name is Britney, 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.
I would now like to turn the call over to our host, Mr. Richard Galanti.
Thank you, Britney, 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 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 Q4 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 $909,000,000 or $2.08 per share in the 17 week Q4 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 $43,400,000,000 a 5% increase over the $41,400,000,000 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 $138,400,000,000 from $126,200,000,000 last year in the 53 week year.
On a comp basis for the year as well, we reported at 9.5% comp. Now comp sales for the Q4 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 have been a 7.8%.
Canada reported was a 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 gas inflation and FX. All told, total company, as I mentioned, reported a 9.5%, ex gas and FX of 7.2 percent. 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 a 26 0.2% comp and ex gas and FX at 26.3%.
In terms of Q4 sales metrics, 4th 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 2 60 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 and excluding the impacts of inflation and FX, our average ticket was up a little over 2%. Next on the income statement line, membership income. We reported $997,000,000 or 2.30 percent of membership fee income in Q4 of 2018. Last year in the 17 week quarter, it was 9.43, 2 basis points lower.
So about 54 on a reported basis, dollars 54,000,000 increase or up 5.7%, again on a like weeks basis up a little over 12%. Of this normalized 12% number increased year over year in Q4, a little over half related to membership fee increases, the majority of which came from the $5.10 annual fee increases taken last June 1st in the U. S. And Canada. In terms of membership renewal rates, renewal rates rose in Q4.
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. And our worldwide rate improved from 87.9% 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 40,700,000 Gold Star households. That's up from 16 weeks earlier, dollars 40,000,000 primary business, dollars 7,600,000 up from 7,500,000 dollars Business add ons stood at $3,300,000 both at Q3 end and at Q4 end. So all told, we went from 50,900,000 member households quarter ago end to 51,600,000 at Q4 end. In terms of cardholders, we ended the year with 94,300,000 cardholders, up from 93 point 0,000,000 at Q3 end. During the quarter, we had 13 net new openings.
Also at Q4 end, paid executive memberships stood at 19 300,000, 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 Q4. It will continue to be additive to our numbers during the upcoming 4 quarters, very little in Q4 of 'nineteen, but during the 4 quarters, but will moderate each quarter. And 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 4th quarter was lower year over year by 35 basis points coming in at 10.92%, down from 11.27%.
Now that 35 basis point negative excluding gas inflation was minus 9 basis points. As I always ask you to do, we'll jot down 2 columns of numbers. 1 is Q4 2018 reported and then Q4 2018 ex gas inflation. The first line item will 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.
Ancillary businesses were plus 14 reported and plus 21 ex gas inflation. 2 percent reward plus 1 and minus 2 basis points. Other was minus 6 and minus 6 basis points year over year. And if you add those two columns up, you'll get the 35 basis point negative, which we reported and the minus 9 basis point, which I just mentioned on an ex gas inflation basis. Now the core merchandise component, again, on a reported basis was lower by 44% and lower by 22% 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. But 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 1st 3 quarters of fiscal 2018, I've mentioned to you that we're incurring some incremental costs primarily related to the rollout of a centralized return facilities throughout the country. And that was during the quarter, that was a 4 basis point detriment, which is relatively speaking an improvement for the 1st 3 quarters. In addition, we're cycling some one time items that last year in the quarter, which net net benefited last year's quarter by 2 basis points.
It was a positive legal settlement offset by some impact from last year's Hurricane Harvey. Moving to SG and A. Our SG and A percentage was lower or better by 15 basis points. And but on ex gas deflation in FX, it was worse by 8 basis points. Coming in at a 9.82% of sales this year, that would be the 15 basis points lower than the $9.97 on a reported basis.
Again, for ease of explanation, we'll jot down 2 columns of numbers, Q4 'eighteen as reported and then Q4 'eighteen ex gas inflation. Core operations is the first one, lower by 16, 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. Our stock compensation, 0 and 0. In other, it was a benefit of +3 and +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 say, the U. S. Wage increase that went into effect July June 11 to our hourly employees in the U. S, that negatively impacted SG and A by 6 basis points.
And as I mentioned probably last quarter, this will continue to impact the SGA comparison over the next three quarters, so June 11 through June 10th next year. Central expense was higher year over year in Q4 by 4 basis points, 7x 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, but net net, it added up to a minus 7x gas. And lastly, other was better by 3 that related to expenses occurred last year on the SG and A line as well from the Hurricane Harvey.
Next on the income statement, pre opening expense, about the same year over year. This year came in at $31,000,000 last year was $30,000,000 higher. Last year in the quarter, in Q4, we opened 15 openings, 13 net plus a couple of relos. 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 $1,446,000,000 This compares to $1,450,000,000 in the 17 weeks results of last year in Q4. Below the operating income line, reported interest expense was $5,000,000 lower year over year, coming in at $48,000,000 this year in Q4 compared to $53,000,000 last year. Interest income and other for the quarter was higher year over year by $29,000,000 dollars Interest income itself was higher by $11,000,000 despite 1 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 $14,000,000 Overall, pre tax income was higher by 2% or $30,000,000 in this year's 16 week quarter, coming in at $1,449,000,000 this year versus last year's 17 weeks results of $1,419,000,000 In terms of income taxes, our tax rate in Q4 'eighteen came in at 27.4 percent and 28.4 percent for all of fiscal 'eighteen.
This compared to 27.4 percent for Q4 compared to last year's Q4 of 34.3 percent. Now this quarter's tax rate benefited, of course, from the income tax reform that was effective January 1st, as well as some favorable discrete tax adjustments. For fiscal 'nineteen, 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 in all of fiscal 'eighteen, we opened a net of 21 new units plus additional 4 additional relos.
Of the 21 net, 13 were in the United States and 8 were international. For 2019, we expect to open 20 plus in the low 20s net new warehouses, about 3 quarters will be in the United States and about a quarter international. As well, we plan to relocate 4 units to better located in larger facilities, same number as we did this year. We're also under construction with our first Costco in China and Shanghai, with the opening expected late next September. As of Q4 end, total warehouse square footage stood right at 110,000,000 square feet.
Next subject, stock buybacks. In Q4, we repurchased $89,000,000 worth of Costco stock or 4 19,000 shares at an average price of $211.35 For all of 2018, we repurchased $322,000,000 at an average price of $183.13 per share. Moving to e commerce activities. Overall, e commerce sales increased increases continued strong levels for the quarter coming in at 26.2% and for the year at 32.2%. 1st and foremost, we continue to deliver great values to our members.
As well, 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 as well as 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 2 day grocery, which is the dry side, we're generating sales in all 50 states, including the 6 states where no physical cost goes 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 is 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 Working with suppliers to see what can be done to reduce and or absorb some of the costs. In some cases, reducing already commitments on certain impacted items. Alternative country sourcing, sure, but again, that's where possible and feasible.
It's limited ability and it takes time. 5, taking advantage of lower pricing on some U. S. See how customers and competitors react to tariffs and what impacts it will have remain to be seen. Our last topic, as was noted in this afternoon's press release, we plan to report in our Form 10 ks 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 ks. In terms of remediation, remediation efforts have begun, but 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 5 weeks ending this Sunday, October 7, next week on October 10.
With that, I'll turn the call back over to Britney for Q and A. Thank you,
Britney. And 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 2 basis points, the expectation was that you'd be taking some of the tax reform and investing it in the value proposition, particularly price. So have those investments been made? And if they have, has it just been in other areas?
And where do you think your pricing gap currently stands with others in the marketplace that have been investing in price?
Well, keep in mind, we invest in price as 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 a credit card transition that afforded us some great savings, some of which we used to invest in price, if you will. Next was the what's occurred generally every 5 or 6 years, a fee increase in June of 'seventeen. And then of course the tax reform. And all those things I think is of course of stability.
So I don't know if it's not like this one thing, but these monies are fungible and we're not only investing in price, we're investing in infrastructure that we would have done anyway, mind you, with the So there's a lot going on. And in terms of how we feel competitively, I can tell you every 4 weeks when we meet for our day and a half budget meeting and each of the in the U. S. As an example, each of the all regions including foreign regions, but in the U. S.
The 8 geographic regions, they do price swaps 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, but 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.
And speaking when you've been accelerating your e commerce growth and it's grown at a very nice clip. So 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 could be lots of definitions of doubling down. I think we are. I mean, 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. The but we're 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. But for us, doubling or tripling 3000 or 4000 skews to 8000 or 9000 is a lot for us. But there are plenty of opportunities that we're seeing, not only on adding products, but the way we do it.
We feel that the 1 to 2 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 and 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. The patio and lawn and garden, we generally were in and out of that stuff for 10, 12 weeks. Now we're in 52 weeks online and there's some real sales to be had there. So 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.
And your next question comes from the line of Simeon Gutman.
Hi, this is Josh Campbell joining for 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 consumer categories? And if the former, which new categories you're 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 continued strong results for several years now in apparel, both brand and Kirkland Signature. And we keep trying to put another can in that package.
So I think all those things help. But it's more I'd say it's more broad based than specific.
And then just as a quick follow-up, looking at the consumer health through your lens now, gas prices had leveled off for a while, they've been beginning to rise again. Are you seeing greater sensitivity in any of those big ticket categories?
Well, 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 is fine with us. We could have moved down a little more, but still we're able to make a little. So that's helped and enhance that value proposition. Generally, when prices go up, same thing, we generally can find where people are more conscious.
I know, I remember back in the first part of calendar 'eight when the economy was on fire and gas prices were north of $4 and some were saying it's going to $5 We saw a big increase in comp gallons. Same thing we're seeing in the last couple of years. We've seen that we've enjoyed a big increase in comp gallons
because of that value proposition. All right. Thank you.
Yes. And it's hard to say how that impacts our numbers. Our numbers have been fortunately pretty good.
That's helpful. Thank you.
And your next question comes from the line of Chuck Groom.
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. So it's a big reversal from the Q3.
Well, the big thing is gas. Gas is now low double digit percent of our total sales on a price point that's 20 plus percent higher per gallon than a year ago. So it's and while it's a low margin business relative to the rest of the company, its margins had improved year over year. So on that penetration, that helped us.
Okay. So
ecom helped us a little as well.
Okay. So e comm is sort of captured in that line item then? Okay. And then the second question is, I know you guys have talked about you've talked about sort of store targets in the low 30s, now you're talking in the low 20s. Just wondering why the deceleration in number of openings planned for 2019?
Yes. Well, look, we have a budget that's between $20,000,000 $25,000,000 And 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 3 quarters, 1 quarter U. S.
There's more in the pipeline now internationally, but that pipeline takes longer to get through. It's a longer pipeline. And so I think you'll see that change, best guess, in 2020 and 2021. If I was a betting person over the next 5 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. And then just last question on e commerce. When 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? And I don't think you're too concerned about it, but if you just kind of flush out maybe the entire basket for 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 enjoy like a 4.2 average compounded annual traffic increase for 7 years from 'nine to 'fifteen. And I know everybody was concerned you guys, everybody was concerned when it got down to the low 3s and we've been joined back into 4s now in 4.95% the last couple of months I believe. And so it's hard to say it should have 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.
And at this time, we have a question from John Heinbockel.
So Rich, let me start with the difference between the minus 22 margin ex deflation and the minus 2 in their own category. So that's obviously adverse mix. And I think that's maybe picked up a little bit in the last 6 months. What's the primary driver of that? Is that mostly the strength in electronics or are there other factors at work?
It's not mix, no. Electronics margins are generally where they've been. It's not there's not a big issue there. I guess gas, you've got a business that's what percentage of gas is our business now? 12%, 13% 12% of our total company sales is gas on a much different margin structure.
Yes, but I think when you pull out the right, so ex gas deflation, right, I think margins were down 22%, but they were down only 2%, right, 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. 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 professional optometrists and pharmacists. So it's kind of like what is the price that the customer is buying at all in at that. And you've got other categories that have ancillary categories or services that have higher margins.
So all those things go into the mix.
Okay. But you're seeing penetration of KS continue to rise and is it rising the same as it had been, faster, slower?
I think it's been consistently rising, and not faster or slower. I mean, keep in mind, there's still new items out there and but you've got a lot of items that start out at $10,000,000 $20,000,000 $30,000,000 dollars The big items like toilet paper and water, we saw a big growth over the last couple of years in water as when we brought the price down from $3.49 to 2.99 dollars I'm just looking down the list of late, the CureClone Signature 14 cartridge razor blades with a handle, several the organic cheeseburger in the food court, fragrances, the KS fragrances, all kinds of beverages.
Okay. And then just a separate topic, the you obviously were doing some stuff with BOPIS on a limited basis. I think you wanted to keep it limited. And is it still just applying to those items, right, notebooks and the bags or is there an idea of expanding that?
Well, we've talked to in the past, we talked we mentioned things like jewelry, some limited electronics items like tablets, and small size items as well as handbags, high end handbags and things. We have expanded it to some additional electronics items And but it's still we still want to do it our way. We think that these are areas where we've been surprised that 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. While they're in there, over half of them are not just picking up the item, they're going into the shop. Frankly shop at a higher much higher average than the average shop.
So far so good and we'll see.
All right. Thank you.
And 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 us an update on where e commerce is as a percent of sales? And 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?
Kind of how to think about the growth rate of e commerce going forward?
Well, I mean, the number is right around 5% of sales, I think, the shade under. I'm sorry, a little over 4%. And 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 pluses to 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 will be next week, but we've seen new numbers and we feel we could look, we have the benefit of having that focused on a lot for many years and now taking advantage of that in a big way. And I mean the example of some big ticket seasonal items like home furnishings and furniture one part of the year and adding 40 extra weeks of offerings if you will, offering online now as well as what we've done with white goods and the success there. In 3 years we've gone from $50,000,000 to $500,000,000 in white goods 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. And then just in terms of the tariff commentary they made, any way you could give some sense of what percent of product is imported from China today and where you kind of see that going in the next few years?
It's really hard to no, we don't want to give out specifics. There have been some of your some of the analysts out there that have done some estimates that are seem to be within the range, but it's fluid. But the real answer is things can't change overnight. What can change is demand for an item if the prices have to go up 15% or 25%. But we've experienced not dissimilar things.
I mean 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 $3 to $8 to $10 and then from $10 to $14 and more recently in the last couple of years from $14 to $8 to the $18 to $20 range, that will have a dampening effect on certain products. And so it has less of a dampening product impact. So it's really too early to tell.
Okay. And just last question, I guess, can you just give us inflation in 4Q both on cost and at retail and then expectations for inflation given all the narrative from vendors based calling out passing on cost increases?
I don't know. 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 capital S in the word slightly.
Okay. And then what are your thoughts 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? Well, I mean, again, our DNA is we want to be the last to raise the price and we want to work with any supplier to figure out how to not do that. But ultimately, you can't eat all these. But 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. And 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.
And there are times when I think our buying power is in effect the octane in that buying power is more than the $138,000,000,000 of purchasing power because it's to much number of limited items and not only brands competing, but also what we know about many of these items because of our private label nature. So it affords us, I think, some opportunities that perhaps make it a little easier for us.
And your next question comes from the line of Christopher Horvers.
Thanks. Good evening. So first question is, you mentioned in the release that there have been no misstatements found related to the internal control weakness. What's the is that the highness, is there any risk that there could be a misstatement of the financials in the future? Or is it more about sort of just fixing the systems and getting the testing done?
Well, keep in mind first of all that we feel comfortable and we feel that ultimately our auditors feel comfortable. We would have expressed a level of comfort we did in the press release about the time that there's no misstatements, there's the time limit that will be filed on time including the K. The issues had to do with internal user access. So people within IT or contractors and somebody who may have had access to something they should have and sometimes that they had once they should have had that access relieved, it took a little too long to do so. 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. So that's what we can tell you.
But we can't be more positive than that until we release the 10 ks. And so I don't want to belittle it, we should have it should have 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 sort of the like 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 and then in the Q3 sort of picked up over 5% and then in the 4th quarter nearly 6%. Is that sort of rough math that you're seeing sort of like a MFI comp accelerating?
Well, that's pretty good rough math. But keep in mind, one of the issues is on the deferred accounting. The U. S. And Canada, $5 $10 fee increases that went into effect June 1, 2017.
So in effect, I believe that in total was about $245,000,000 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 and L. And so part of the increase from Q3 relative year over year Q3 relative to year over year Q4 is you peak in $0.12 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, right, 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 will hit the $0.80 a month for months 12 through 23, rough numbers.
So if you will, month 12 is when you peak in terms of that getting what I'll call the full effect of 112 of the $275,000,000 is $245,000,000 is this example. So 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 now a 6%, some of that increase is related to that. But it's rational. Yes.
And 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 3 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 10000 over the next year. We reduced the average members, but we added net of cannibalization, dollars 120,000,000 $130,000,000 of extra sales in year 1 and we'll grow from there. So when you do that, that changes that growth metric a little bit.
Similarly, when we opened in Australia or Asia, we're afforded huge numbers of new sign ups in the 1st year with a lower renewal rate. But nonetheless, there have been openings where we've had 40,000, 50,000 new members with 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 warehouse of 60 plus 1,000 members. So international impacts it. A few of the living social things that we've done once every year or 2, all those things impact that number a little
Okay. So 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, you take out the difference of weeks, My guess is 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 of 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. So all those things would tweak it a little bit in 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 of credit cards in the U.
S. And Canada, makes us feel pretty good about it. Understood. And 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 just is approaching 50% in the high 40s. And it's probably 55%, 45%, the Costco co brand Visa.
I could be 60%, forty percent, I don't have that number in front me. But it continues to grow, we continue to get sign ups. And I think when somebody sees some of the things we've done with some of those monies, we talked earlier about investing in price, when you can buy something like a high end television that's already at great value at Costco And then when it's on NVM or coupon, it's another $200 off. And on top of that, if you use your Citi Visa card, not only is it you get a cash card, and that's not on every item, but in terms of promotional things that we've done over some of the holidays, it's really worked. And so those are the kinds of things that we've used that for.
Understood. Thanks very much.
And your next question comes from the line of Edward Kelly.
Yes. Hi, good morning sorry, good afternoon. So, Rich, I want to ask you about comp momentum and 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. But 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? And 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?
And is 2016 even relevant to think about?
Look, I don't know. I remember when now that 2016, 1, we did a little bit to hurt ourselves when we changed some of the changed up the MDMs and greatly reduced the number of promotional days of shopping, if you will. And we changed that over a quarter over a few months and we got back to where we were. There was 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.
The members opted in to just have auto renewal. Well, when we switched from one card one network to another, all those non cards weren't bought by the acquirer. All those auto renewals went off. So I think some of that is tied up into that 16 year. I also think that some of the things we've done with buyers 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 will look at it and say, why didn't you do this all along? We didn't. And we're now benefiting from that. So all those things I think have helped. And hopefully, that new norm will continue for a while, but every day is a new day.
And then just circling back on e commerce growth. Obviously, you started the year strong. 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? And then can you talk about how grocery is ramping relative to your expectations 2 days same day?
And are there any metrics that you can share on it relative to sort of basket size, margin, etcetera?
Well, in terms of when renewal rates or comp slowed a little bit, I remember when shopping frequency had slowed a little bit after this incredible run from 'nine to 'fifteen. I remember at the end of 'nine when we achieved I think a 3.8 or a 4.0 frequency up from a historical average of like 1.7. I was the first to say and remind people, if it's a lot lower than 10, it's still a good 2 year stack because this is not sustainable. And then for 4 years, we enjoyed it. But 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 a drop of, as one of my colleagues just said, great merchandise at low prices. I mean, 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, Rich, I see if I
wasn't clear. I went 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? And how has like 2 to 8 days they delivered your commercial?
The e commerce slowed well, when you say slowdown, it went from a low-30s number to a low-20s number. I'll throw it the 2 year stack back at you. I mean, 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. And the brands that are willing to sell us that historically hadn't. So all those things help. But I think again the biggest thing is we're focusing on it. But we're focusing in our way.
We don't need to go buy a company. And 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.
And your next question comes from the line of Scott Mushkin.
Hi, guys. Thanks for taking the question. This is Paul Carney on for Scott. Just on a question on growth going forward and also just business today. Where do you think you are in terms of wild share of your current customers?
And what's the biggest opportunity to grow wallet share of the customers? And also if you had to divide going forward where most of your growth is coming from, is it coming from WildShare? Is it coming from acquiring new members or continued unit growth in new markets? Thanks.
Yes. Look, frequency is 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 ask the question, what are the big 2 or 3 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 the executive membership. And we're doing a better job of now emailing you. So I think all those things have helped. But 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. And 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 like heavily using Instacart? So is Instacart delivery for non members leading to any uptick in memberships for those clubs? And thanks.
Instacart and our other third parties like Shipt and others, Instacart is the big one. We have good relationships with them. And it's growing nicely. But it's still a pretty small part of our 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 had like characteristics of average basket and shopper frequency and they're loyal.
And then you have them some of them will 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. And 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 from the line of Scott Ciccarelli.
Hi, yes, Richard. Thanks for taking my question. This is Jonathan Leivas on 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 percentage of e commerce is shipped by your stores versus shipped by vendors?
Very little if I mean 50% is us. But not through the warehouses, just us shipping directly from our e commerce fulfillment centers. Very little is done at the warehouse. Okay.
And by the way, it's only
the business center with our 2 day dry.
Got you. Okay. I appreciate that. Thanks so much.
And 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? And you have been speaking about this, but what are your main how would you prioritize the main drivers to drive the awareness growth of e comm and the kinds of initiatives that you're pursuing, as that seems like a big opportunity?
Well, again, as we've said before, 1st and foremost, we want to get you into the facility. And there's certainly in some categories like white goods and big ticket, 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 the savings to, but doing it our way. And so I think there's still plenty of low hanging fruit and we don't want you to get comfortable in just shopping at Costco online unless there's not a Costco within 100 miles.
Okay. And 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?
Yes. Well, 1st and foremost is warehouses. And to be said, there's a few more international, a couple more. IT is a few 100 extra. I mean, not extra from the year before, but in general.
We've got a chicken plant, which is north of $300,000,000 Big chunk of that is expended in fiscal 'nineteen. 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. And 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 2 day delivery and e commerce, small package e com, where that will be a savings frankly to us. But we're just we were doing a lot of those things a lot more manual than we even we need to do.
Thank
you. That's helpful.
Moving delivery date. So, yes, there's a few extra things. I think the number will still be in the very high 2s ish, low 3.
Okay. And lastly, the multi vendor mailer, are you pretty pleased with the state of 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 9 months ago, when we changed the number of frequent flyer, the number of NVM days in the warehouse, which hurt frequency in the warehouse, once we change that back, the fact that we've reduced the number of offerings in an MVM by 20 plus percent and increased the total value by more than that and by a net positive. And 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 NVM and do it in a different way with these hot buys and buyers picks. So I think we've in a way added to the arsenal a little bit and it's working, but it's still it will still evolve some more.
Yes. And do you believe that tariffs will contribute to risk factors with consumer confidence? Like what are your thoughts on how that may interplay because we have such 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? And 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 goes is exported to China.
Well, that's changed. And therefore, pork prices are way down. There's a great savings. That's created some opportunities. Same thing with nuts, same thing with soybeans, I believe.
I'm just giving you some anecdotal examples. So 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. And so it's probably a small net negative. Certainly whatever negative it is, we can weather it better than others.
Your next question comes from the line of Greg Melich.
Hi, thanks Richard. I have a couple couple
of questions. One was on gasoline, obviously growing a lot, but what was the gallon growth in the quarter? And did it 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 some new gas stations as well, but I think the comp has got to be in the high singles.
Got it. And how many new I mean 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 4, maybe 5 with gas. Mexico, we're adding some. Japan, we have a few.
U. S. And Canada certainly is more saturated with gas stations and people say we're not going to have 1 at 117th Street East River Drive. But 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 and then turned the Hackensack into a business center.
The Teeterboro is, I'm guessing here, 20,000 square feet larger with all the bells and whistles with a gas station and with a lot better parking. And so a few here and a few there that way.
Got it. And then a follow-up on the co branded card. If I did my math right, sort of upper 20s percent of the tender now would be on your card in the club. And if I remember correctly, the 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 same 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. That's great. And actually keep in mind part of that is the fact that it can be used in more places. So if we get whichever of those cards was your top of wallet, you have more potential to use it today than you did before.
That's great. Good luck. Thanks a lot.
Thank you.
And your next question comes from the line of Matt Sasseur.
Hello, Richard. Good afternoon. How are you? Good. My first question relates to SG and 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 and A higher by a bit less than a percentage point, so not an overwhelming increase. Just try 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. So as
we think about the apples to apples increase, because clearly the SG and A seems like it's going to might increase at a slightly accelerated rate with the wage increases. How was that an average week that 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 have said virtually nothing. So we 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. And so nothing there. What was the other part of the question?
There was a response for it.
No, I think you got that one.
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 $110,000,000 to $120,000,000 a year.
Yes. Understood. And so, I guess partial impact here in Q4 given the June implementation?
Right. June 11, so it was about 3 quarters it was 12 even though Q4 is normally a 16 week quarter, not a 12 week, it was about 12 of the 16 weeks business.
Understood. Secondly, your inventory increase was a bit higher. Now 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. A little of it some of it is volume, a little of it is what you just mentioned. And I think the last thing is, as we clearly have increased our inventory levels, particularly in e commerce and delivery related items.
Great. And then 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 Q3 of 2016.
So I guess the best in 9 quarters or so and even more so for the worldwide rate. Have we sort of shaken the cobwebs off now? And are we do you think there's more room to move higher here? Or do you think we're kind of back at the 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 impacted either a little up or a little down. That depends on rounding, if you round to the next 10th or not. When we do one of those I think we've done 4 of them now in the last 4 or 5 years of like the LivingSocial or the I think like that.
You'll get an extra 250,000 members in a 10 day period or 12 day period and would by definition have a lower renewal rate on them a year hence. So that hurts you a little bit. When that anniversaries a year later, it helps you a little bit. So there's lots of little things like that. But 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 70s, but it's relatively new. The average age of those locations is what 4 years ish maybe. And I look at the last 4 years, I only know this because I'm going there next week. And its renewal rate has consistently improved for the company in each of the last 4 years, which is consistent with what we've seen in other countries. So I think the bellwether is of course are U.
S. And Canada where we're mature. The average age of these locations are in the 20s. And so far so good. Got
you.
And your 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. So CapEx this year, high 2s, maybe low 3s 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 $200,000,000 to $300,000,000 above where we come out. I believe this year, we maybe were $100,000,000 above, right at $3,000,000 or $3,100,000,000 and that includes the beginnings of the chicken plant, some additional things we're doing with fulfillment. So I think overall something in the high 2s are I think we graduated from 2.5 to 2.8 range to 2.8 to 3.1 range.
Got it. Do you have the 4th quarter CapEx number?
Not yet. Okay. We'll be in the shape a couple of weeks.
Yes. Okay. On the international openings, I mean, you said well, 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'd say it's 3 years around the road. If you ask me today, it's probably 2 to 3 around the road and I could be wrong by a year further. We do definitely have more in the pipeline. And we've also been surprised by more opportunities in the U. S.
That we if you go back to 10 plus years ago, some of the cities we're in today, we would have said, no, we're not going to go there. There's always somebody else there already and it's not that big of a town, but we're finding success in those examples. And so I think we ultimately, international,
I don't know
what it is, whether it's 3 years or 4 years from now or 2 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? And then what was the private label penetration for 4Q and for the year?
Well, Jim, 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 fewer in between. Sporting Goods, any? Yes. Sporting Goods to some extent.
Okay, great. Thanks very much.
And your next question comes from the line of Kelly Bania.
Sorry, I forgot.
Hi, thanks for taking my questions, Richard. I wanted to just ask about with e commerce now about 4% of sales, just curious what percent of your members are really engaging online? And 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 had tried in the past. As it relates to, I'm guessing, I know that an executive member is more frequent, more loyal than a Gold Star member. An executive member with the Citi Visa card comes more often and spends more is more loyal than that. I would guess that somebody is using it online.
If they come from the warehouse and they're using online in addition to that, that's more loyal than their respective groups over those other things. But beyond that, when you've got somebody that's just using it online, I don't know off the top of my head.
Okay. And just a clarification on the CapEx. I think you mentioned some spend there going towards the 2 day delivery program. I guess, what exactly is that for?
Well, the 2 day delivery is with about 7 or e comm most of that's e comm fulfillment. There's some additional expenditures in some of the business centers, including building a couple of new business centers in geographies that will greatly reduce the, what I'll call the outsized UPS fees relative to the current mileage that has to be traveled to get those packages to their customers.
Okay, got it. And maybe just one last one on wages. You've obviously been making investments, but 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?
Well, first of all, we raised our entry level wages to $14,000,000 $14,500,000 in the United States in the past year related to tax reform. We give increases at top of scale every year. Even though our starting wage is 14 to 14.50, dollars 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. So at the end of the day, we feel very good about where we are. Employees starting today on a full time basis, it takes about 5 years to get to top of scale.
And I think our average U. S. Hourly wage is in the mid-22s, 22.5 roughly, which we believe dwarfs any other retail or retail type entity out there on a big scale. On a big scale.
And I believe that
you'll see more pressure on it. And by the way, there are some geographies around the country even before we raise it to 40, 50, we were already above that. We started at a tranche or 2 above that because of necessities. The Bay Area parts of the Bay Area would be an example.
Thank you.
One more question.
And your last question comes from the line of Budd Bugatch.
Hi, Richard. Thank you for taking the question and thank you for lasting this long on the call. Most of my questions have been answered. But just on e commerce, can you give us the e commerce impact on comps? Do we have that number?
I'm sorry, the comps?
Yes, e commerce impact on comps. How many basis points did it impact on comp?
It's somewhere in the 70 basis point or 80 basis point range. Okay. Thank you. And It's north of 50 basis points and it's not 1.
Say again?
It's north of 50 basis points and it's below 100 basis points. So I think it's in the mid to high. And can you talk a
little bit about the demographics of the membership sign ups by age? What does it look like? Are you is your average age of members reducing getting younger? And what about the sign up distribution?
Well, we feel very good about the sign ups. But by the way, when they were called Gen Xers or Gen Zs or whatever they were called before that, that's when you generally have 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?
That was the just the 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 customer our average member in the U. S. Went from 54 to 52.
Okay.
That was a number of years ago.
Okay. And last on e commerce, is there e commerce activity outside of the U. S? And can you talk about the strength that you might see there?
Well, we're in U. S, Canada, Mexico, UK, Taiwan and Korea. And over the next year and a half, I think we have 2 other countries planned. And look, it's growing nicely in other markets. I frankly, the U.
S. Ecom 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 in line and offline in line and online buying together a year 2 years ago. And I think that we've seen a big benefit from that. We'll do that elsewhere, but it works.
Thank you very much. Good luck on the next periods.
Thank you very much.