Good afternoon. My name is Christy and I will be your conference operator today. At this time, I'd like to welcome everyone to the Quarter Two Earnings Call and February Sales. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star one on your telephone keypad. If you'd like to withdraw your question, press the pound key. I will now turn the conference over to the CFO, Mr. Richard Galanti. You may begin.
Thank you, Christy. 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. That 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 second quarter of fiscal 2018, the 12 weeks ended February 18th, as well as February retail sales for the 4 weeks ended this past Sunday, March 4th. Reported net income for the quarter came in at $701 million, or $1.59 a share, a 36% increase compared to last year's second quarter results of $515 million, or $1.17 a share. This year's earnings per share included $0.17 due to a net income tax benefit of $74 million as a result of the tax legislation recently passed by Congress. Excluding this benefit, the net income grew by 22% year-over-year. This afternoon, I'll start by reviewing our Q2 operating results, beginning with sales. Net sales for the quarter came in at $32.3 billion, a 10.8% increase over the $29.1 billion of sales during the second quarter of last fiscal year.
This year's 12-week second quarter included one additional sales day in the U.S. versus last year due to the shift of Thanksgiving. While we gained a sales day in the quarter, our pre-Thanksgiving and Black Friday holiday weekend sales fell in the first quarter this year compared to the second quarter last year. Combined, these two factors negatively impacted second quarter sales results by an estimated 1.4% in the U.S. and slightly less worldwide, somewhat at or about 1.1%. The shift also negatively impacted e-commerce sales results by an estimated -7 to -8 percentage points in the second quarter. Recall that in Q1, we had an estimated 10% improvement relative to the shift in e-commerce, 5 to 10.
I think if you look at the 24-week fiscal year to date comparable sales results in our earnings release, it essentially eliminates the impact from the holiday shift altogether. For the second quarter 12-week comparable sales results. In the U.S., we reported a 7.1% increase, ex-gas and FX, 5.7%. We'd estimate that you'd add the 1.4 back for the switch in the holiday. Canada, 8.7% reported and 2.5% ex-gas and FX. Other international reported 15.7%, 7.4% ex-gas and FX. Total company would be an 8.4% reported and a 5.4% ex-gas and FX and a little over 1% negative impact on that 5.4% from the Thanksgiving shift. E-commerce reported was 28.5% comp sales, 27.3% ex-gas and FX. Again, we estimate that 27.3% was hit by about seven to eight percentage points related to the holiday shift.
Something in the low-to-mid 30s ex-that. In terms of Q2 sales metrics, second quarter traffic or shopping frequency was up 3.7% worldwide and 3.4% in the U.S. These numbers are negatively impacted by the Thanksgiving holiday shift, as I just discussed. In terms of the impact on FX and gas for the company, FX, assuming flat currency relative to the U.S. dollar over the last year, the strengthening foreign currencies impacted sales by approximately 180 basis points positive, and gas inflation contributed another 125 basis points. Together, about three percentage points. Cannibalization weighed in on the comp to the tune of 55 basis points negative. Our average front-end transaction or ticket was up 4.6% in the quarter. Excluding the net benefits from gas inflations and strong foreign currencies relative to the dollar, it was up a little over 1.5%.
Our February sales results were also reported in today's release. I'll review these results at the end of the call. Moving down the income statement for the second quarter, membership income is the next line item. I reported in Q2 $716 million, up $80 million from the $636 million last year's second quarter, and up about four basis points or 12.6% in dollars. FX, the benefit of strong foreign currencies, benefited the number by about $12 million. Of the $80 million increase in membership fees, increased year-over-year, about $37 million related to membership fee increases. The majority of the $37 million came from fee increases taken last June 1st in the U.S. and Canada, with a smaller balance from the fee increases taken in our other international operations starting back in September 2016.
All told, if you take out both of those, on a normalized basis, membership fees were up $31 million or about 5%. In terms of renewal rates, our renewal rates improved in Q2 to 90.1% in the U.S. and Canada, up from 90% a quarter earlier. Worldwide improved to 87.3% as of Q2 end, up a tenth of a percent from the 87.2% at Q1 end. I think the most important thing here, of course, is the trends we've seen with the conversion of the credit card over the last year and a half in the U.S. and slightly overlapping that, prior to that in Canada. Happy to see that what we expected came true there and we're seeing a slight improvement now. In terms of members at Q2 end. At Q2 end, we had 39.6 million Gold Star members, up from 39.3 million 12 weeks earlier.
Primary businesses were $7.5 million at both quarter ends. Business add-ons, which was $3.2 million at Q1 end, at Q3 end was $3.3 million. Total member households, $49.9 million at Q1 2018 end, up to $50.4 million at Q2 2018 end. Total cardholders at $92.2 million at the end of the quarter, up from $91.5 million 12 weeks earlier. During the quarter, we only had one opening. At Q2 end, paid executive members were $18.8 million, an increase of about 46,000 from the second quarter end, or about 4,000 a week. A little softer than it had been in recent quarters. When we looked at the quarter though, it started off quite a bit weaker, and I'm happy to say that the last several weeks have been in the high teens, low 20s on average per week.
Lastly, in terms of the portion of membership fee increases related to the recent fee increases, that year-over-year quarterly membership fee income increase will continue to grow each fiscal quarter this year and into fiscal 2019, given the deferred accounting treatment as to when it benefits our income statement. The year-over-year increase will peak in Q4 of this fiscal year. The $37 million Q2 increase related to that will increase in Q3 and increase again in Q4 based on how it hits the P&L on deferred accounting, and still have even yet smaller increases, but in the next couple of three quarters after that into 2019. Going down the gross margin line, our reported gross margin came in at 10.98%, or two basis points lower year-over-year. On a reported basis, that -2 basis points, it was actually +11 basis points excluding gas and FX.
Within that, I'll have you just jot down the two columns with the four or five numbers in each column. First column would be as reported, and second column would be without gas inflation. The core merchandise on a reported basis was year-over-year down 20 basis points, down eight basis points without gas inflation. Ancillary businesses, up 23 basis points in the quarter and up 25 ex gas inflation. 2% reward, +1 and 0 in those two columns, and other -6 and -6 basis points. All told, if you add up column one, the reported year-over-year gross margin change was the -2 basis points, and ex gas inflation was +11.
As I've done in the past, if you look at the core merchandise categories in relation to their own sales, even though again, on a ex gas inflation basis, the core as it contributed to the total company was -8. If you look at core categories on core sales, margins year-over-year in Q2 were higher by 14 basis points. Subcategories within core margins year-over-year in Q2, food and sundries, hardlines, and fresh foods were up. Softlines was down a little. All these improvements are notwithstanding greater values to our members as we've continued to do. Ancillary and other businesses gross margin up 23 basis points and 25 ex gas inflation. Gas represented a little more than half of that improvement. It's both a combination of the higher sales penetration and improved margins within the business.
With hearing aids, pharmacy, optical, business centers, and travel all showing higher year-over-year growth margins, that contributed to that number as well. 2% reward, again, essentially flat ex gas. Lastly, in other, as was in the case with the first quarter, we're incurring incremental costs related to the rollout of our new centralized returns facilities. This will continue to impact us, as I said last quarter, in each of the next few quarters, likely a little less each quarter, and it was down a basis point this time from seven to -6. Long-term, we believe it's a big benefit to us. Moving to reported SG&A.
Our expenses, our SG&A percentage Q2-over-Q2 was lower or better by 21 basis points, and better by nine basis points, +9 basis points ex gas inflation, coming in at a 10.02% of sales this year compared to 10.23% on a reported basis. Again, the two columns, reported and without gas inflation. The first line item would be operations, +19 basis points and +8 basis points ex gas inflation. Central, -1 basis point and -2 basis points. Stock compensation, +3 basis points in each column. Total, +21 basis points or lower, better by 21 basis points on a reported basis, and ex gas inflation, better by nine basis points. Not a whole lot of unusual items here. The core operations component again was better by eight ex gas inflation.
Strong top-line sales we believe led to year-over-year improvement in payroll, benefits, and other traditional expenses like utilities and maintenance. Central expense, higher by a couple of basis points ex gas. We got a lot going on. Stock compensation, better year-over-year by three basis points. Again, strong sales and usually that's a number that's most impacting Q1 when we do the big grant every year. Next on the income statement is pre-opening expenses. They were better or lower by $3 million. In Q2 this year, they were $12 million, last year, $15 million. This year we only opened one new unit. Last year we opened four. However, we also have quite a bit of pre-opening related to two big manufacturing plants. One we've just opened and one under construction. A new meat plant in the Midwest, as well as our major new chicken plant in Nebraska that's under construction.
All told, reporting operating income for Q2 came in at $1,016 million, up $172 million or 20% higher year-over-year from last year's $844 million number. Below the operating income line, reported interest expense came in at $6 million higher year-over-year at $37 million this year compared to $31 million a year ago, primarily a result of last year's debt offering. Interest income and other was better year-over-year by $11 million in the quarter. Actual interest income for the quarter was better year-over-year by $5 million. Also benefiting this line item is the year-over-year comparison was mostly various FX items in the amount of a positive $6 million. Overall, pre-tax earnings were higher by 22% or $177 million higher in Q2, coming in at $986 million this year compared to $809 million last year in the same quarter.
In terms of income taxes, our tax rate in the second quarter came in at 27.7% for the quarter, compared to 35.6% last year. Of course, the lower tax rate for Q2 this year, it's a result of tax law changes. The primary benefit was the result of the lowering of the U.S. federal corporate income tax rate from 35% to 21%. Given that we don't have a calendar year, it doesn't align with the traditional calendar year, you take the number of days in our fiscal year, which fall before or after December 31st. In our case, it's a blended U.S. federal rate, 35% for 119 days of a fiscal year and 21% at the remaining 245 days of the fiscal year. You get an average of 25.58%.
The impact of that lower rate on Q2 pre-tax income was $52 million of the $74 million I just mentioned. The other $22 million is basically two main things. One is a true up of Q1. Recognizing in Q1, we had no reason to assume this much lower federal income tax rate. Truing up for the first quarter so that we're in tune for the whole year. The other piece is some positives and some offsets to that relating to various things that have come with the new tax legislation. All told, the net impact of these items in Q2 was an additional $22 million tax benefit. Total tax benefit in Q2, $74 million. The $52 million, what I'll call normalized to Q2, the $22 million related to truing up Q1 and other offsets that go along with the original change in tax laws.
Going forward, we anticipate that the effective company-wide rate for the balance of 2018 in Q3 and Q4 will be probably in the 29.5%-30% range. In fiscal 2019, based on what we currently know, and of course, all that's subject to change, we assume it'll be approximately 28% ±. As we know more, we'll share it with you. Overall, the reported net income was higher by 36%, coming in at $701 million in Q2 compared to the $515 million last year. Again, up 22% ex the tax benefits I just spoke about. Before I leave the subject of tax law changes, a few comments as to what our plans are vis-a-vis these savings. Overall, one, we do not expect any major changes to our capital allocations plans. We're generally a net positive cash flow operator, notwithstanding CapEx and dividends and what have you.
Number two, as many others have done, we will use some of these savings to benefit our employees. We're working on that, and stay tuned. Number three, we'll invest some of the savings to continue to drive greater value to our members. This will certainly include investing in price as well as other activities. Number four, when asked, and we have been, if any of these tax savings will fall to the bottom line, the answer is yes. Most importantly, indirectly, by investing in driving value, we've seen what that does, and we know what that does. Much of that investing in value and price comes back in greater earnings. Directly, perhaps a little, but again, stay tuned. A few other items of note. Warehouse expansion, as I mentioned, we opened only one unit in Q2. That's on top of five net new units in Q1.
Our plans for the current quarter, which will end in mid-May, is two more. Q4 is the big quarter. It is a 16-week quarter, we plan to open net 15 units, 18 openings, including three reloads. Assuming we got there, we would have 23 net openings for the year. My guess it'll be 22 or 23. A little better than I think I mentioned a quarter ago, somewhere in those low twenties. For all of 2018, again, we expect to open something around 22 or 23 with three-quarters of those in the next two quarters and most of it in the fourth quarter. As of Q2 end, total warehouse square footage stood at 108 million sq ft. In terms of stock buybacks, in all of fiscal 2017, we expended $473 million, purchasing just under three million shares at an average price of just under $158.
In the first quarter, we expended, as mentioned, $119 million at an average price of about $162.50. This quarter just ended, we expended an additional $59 million at an average price of $187.70 per share. Now for an update on our e-commerce business. We currently operate e-commerce sites in the U.S., Canada, U.K., Mexico, Korea, and Taiwan. Total e-commerce sales for the second quarter came in at $1.5 billion, up 29% year-over-year. Overall, our e-commerce sales increases continue at very strong levels. If you look back in Q1, ex FX, it was a positive 42.1%. Again, there was a chunk in there that related to the benefit of the Thanksgiving holiday shift. In Q2, 27.3%, as I just mentioned, ex FX. Adding the first half together, again, taking out the Thanksgiving shift there, the first half all together was +33.7%.
In February, as you saw in the press release, I'll talk about February overall in a minute, came in at 37%. Continued very strong sales growth and momentum in these numbers. We continue to prove our offerings. We continue to be helped by the improved member experience with better search, checkout, and returns processes that I've shared some of that with you in the past. In the quarter, our site traffic and conversion rates and orders were up nicely year-over-year. Our warehouses are supporting costco.com with signage and tablets in the store. We now have that in 195 U.S. buildings. That's used to help search and purchase costco.com items for our members from our warehouses. We continue to capture more email addresses. In addition, our improved content is resulting in increase in our open rate of emails, again, driving traffic both in store and online.
If you go right now to costco.com, I think it talks about Hot Buys, you'll see that some of them are in warehouse only as supplies last. We think that we've got some excitement going here in terms of driving traffic, both specifically in store using the internet and emails, as well as driving traffic online. A great example of that is, again, you can look for it yourself for these Hot Buys in warehouse. Online grocery, both our dry grocery two-day delivery and our same-day fresh delivery through Instacart, as I mentioned last quarter, rolled out in early October. It's been quite positive year-to-date and growing. We're just starting to do some limited marketing. Instacart now is in 441 of our U.S. warehouses and should be in most of the remainder of our U.S. warehouses by calendar year-end.
We continue to improve the online merchandise and services offerings, again, not only in general but with Hot Buys. We've improved our apparel offerings. We're doing a better job of focusing and adding items that are complementary to our warehouse offerings. We're doing some great things with some big-ticket seasonal items where we might be out of them at a given date or start them at a certain date in store, but online, we can afford greater availability of those. We're doing some other exciting things. Currently, there's over 100 high-end beauty items online. In Q1 2018, we added the 2% reward to all travel purchases through Costco Travel. That's something we had not done in the past. That's to our executive members.
If you use your Costco Visa card, co-branded card, you get 3% that way, so it'd be 5% off of what's already great values and seeing great growth in Costco Travel. As I think I mentioned last time on the call, we're offering a very limited buy online, pickup in store. These are really basically selected small size, big-ticket items where many people aren't likely to want to leave them at their doorstep. Some jewelry, tablets and laptops, and most recently, handbags. All these things are driving shops in store. Over half the people that are doing this are shopping in store when they're there. Again, this is limited. We'll continue to see how it works.
All these efforts that I've just mentioned are having a positive impact on our business, both online and in warehouse. That we believe helps in the sales momentum and increased awareness of our digital presence, as well as the traffic that we've enjoyed recently in our warehouses. In sum, we're continuing to expand these activities. It's evolving and improving. It'll drive our business both online and in store. Certainly some of the tax savings will go towards driving that as well. Next, let me review the February sales results before we end in March 4th. As reported in our release, net sales for the month came in at $10.21 billion, a 12.8% increase from the $9.05 billion last year. The Lunar New Year and the Chinese New Year, that occurred in February this year as compared to January last year.
We estimate that this positively impacted the other international February sales by about four and a half percentage points and the total company February sales by a little more than a half a percentage point. For the first 26 weeks of fiscal 2018, we have now reported sales of $68.51 billion, 12.0% increase from $61.18 billion the same number of weeks last year. I won't go through all the numbers that you see in the press release. Again, on a four-week basis, the reported 9% U.S. ex gas and FX would be 7.5%. The 8.4% reported for Canada would be a 3.2%. The 22.2% international would still be a very strong 14.1%. Total company, 10.5% reported comp, ex gas and FX, 7.7% to the positive. As I mentioned, e-commerce, ex FX, is 37% compared to the reported 38.1%.
In terms of regional merchandising categories for February, general highlights for the month, U.S. regions with the strongest results were Southeast, L.A., and Midwest. Internationally, in local currencies, Taiwan, Japan, and Mexico were at the top of the list this month. Foreign currencies year-over-year relative to dollar, total company benefited by about 150 basis points. Again, I think for the last quarter, it was 180 basis points. Canada was helped by about 425 basis points, while other international was helped by about 800 basis points. The impact of cannibalization on the total company in February was about 60 basis points. The impact on the U.S. was about 40 basis points. Canada, where we did quite a few openings this year, was about 140 basis points impact from that. A very small impact, other international, to the tune of 30 basis points.
In terms of merchandise highlights, food and sundries comp sales for the month were positive mid to high single digits. Departments with the strongest results were tobacco, liquor and candy. Hard lines were up low double digits. Better performing departments were Majors, tires and health and beauty aids, HBA. Majors were up mid to high 20s, led by appliances, computers and tablets. Very strong showing there, both in store and online. Soft lines were up mid to high single digits. Better performing departments included domestics, jewelry and apparel. Fresh foods was up in the high single digits. Better performing departments were meat, bakery and deli. Within ancillary businesses, gas also still helped by cannibalization, but gas, food court and optical had the best comp sales results in February.
As I mentioned, gas prices were higher year-over-year and had a positive impact on our total reported comps of about 135 basis points. Our comp traffic or frequency for February was up 5.2% worldwide and 4.8% in the U.S. So an improvement over Q2's frequency figures as well. For February, the average transaction was up 5.1% for the month, which includes the impacts both of FX and gas, as well as the shift in the Lunar Chinese New Year. I did want to make one other comment. As you know, we reported our earnings 45 minutes before the call, and the first thing that comes out is some of the news releases very quickly and where we beat the number or we miss the number.
When we look at First Call and the 27 or so analysts that put numbers in there, it appears to us there are about 12 of the 27 that over the last month or so have adjusted their numbers, their estimates for some estimate of tax reform benefit. If you adjust based on what they were before that, it looks like the First Call number of $1.46, I believe, comes down $0.04 or $0.05. But I'm just mentioning that because I assume there's confusion out there on everybody as we report, given this is the quarter of transition. Lastly, our fiscal 2018 third quarter scheduled earnings release date for the 12-week third quarter ending May 13th. We'll do the same thing. It'll be an after-market close on Thursday, May 31st, with the earnings call that afternoon at 2:00 P.M. Pacific Time. With that, I'll open it up for questions.
Back to you, Christy.
Okay. At this time, if you have any questions or comments, go ahead and press star one on your telephone keypad. We'll pause for just a moment to look at our Q&A roster. First question comes from the line of Simeon Gutman from Morgan Stanley.
Hey, guys, it's Simeon. Hope all is good. First question, Richard, can you discuss what's happening with spend per member trends? It's clearly increasing ex gas, but can you talk about if members are spending in existing categories or in new ones? Then I have a follow-up to that.
Well, it's a little of both. I think you also have to add in there that, I don't have the numbers in front of me, but I'm willing to bet that I know our average price per item has come down. We've done a lot of driving greater value. Just on the MVMs alone, you're seeing significant savings. In some cases, a small amount from us, but more from our suppliers because it drives more sales. We're getting with 20%-30% fewer items, more total sales and more gross margin dollars. I would guess that now, to the extent that we're doing things like, I've given you examples over time, like certain apparel items like women's athletic wear that's gone from zero to $100 million in the last few years.
Certainly in the last year and a half, we've seen a big improvement in white goods with the advent of being supplied by all the majors. I don't have exact numbers in front of me, but I'd be willing to guess while we'd had some the prior first, second quarter on an annualized basis, that's well over $250 million-$300 million a year and growing. There's going to be a few of those things as well.
Can you share what percentage-
It's mostly frequency, frankly, when you look at it.
Okay. Can you share what percentage of your members are spending online with you? Is there any change in how frequently they're visiting?
I don't have the exact numbers. I'm sure it's still a low number. I don't know, frankly, off the top of my head if it's 10 or 20 or 25. I know that from last week's budget meeting, when we look at in terms of the number of the open rate of emails, it has gone up substantially. Part of that is what we're sending them. We're sending them some really Hot Buys that get their attention, including while supplies last in store on some of these items. That gets their interest.
I know we're seeing a better connect rate, and again, I don't want to give you numbers that I don't know exactly, but all those things are going in the right direction as they should given, as I said before, there's a lot of low-hanging fruit there because there's a lot of things we hadn't done in the past.
Okay. My follow-up is just on the Costco Visa card. You're cycling the benefits. I know we're not talking about the buckets anymore, but can you just tell us how your profit pool is performing versus your own expectations?
As it relates to Citi Visa?
Exactly, yeah.
I'm smiling. The first four quarters, because it was so sizable, we shared with you the effective basis points of improved SG&A and margin related to how compared to the prior deal. We're now in the three quarters after that, for the year, it'll still be an improvement, but a relatively small improvement. At the beginning of the anniversary, the first anniversary, because when you started, you got some extra money to drive things, those fall off. We're still getting new signups. We're still getting new accounts. We're seeing people spend more on it. We're seeing people spend more outside on it, which again, is part of the revenue share. I would say we're still very pleased with it.
My guess is it'll continue to grow this year less than our sales growth, total company, and then probably consistent with that in the future a little from this big benefit that we started with.
Okay. Thanks, Richard.
By the way, we're using some of that as well. I mentioned adding the Executive Membership. We did several things that were successful over the holidays where if on top of the fact already that if you have the Citi Visa card, if you buy a television, for example, at Costco, you automatically get a 90-day return policy and a two-year warranty. If you purchase it with a Citi Visa card, not only you'd get another 2% off on that, on top of the 2% if you're an Executive Member, but you get another two years on your warranty, so you get a four-year warranty. On top of all that, we use some of the monies, some of the bucket, if you will, to drive even greater values, which drove people in.
Where there were examples, I don't have them in front of me, but literally on a $1,200, $1,300 retail TV where we were already at great savings, on top of that, if you use your Citi Visa card, you got a $150-$300 cash card, depending on what TV and when it was. We're figuring out, I think I mentioned last time, what we see with these dollars, wherever they're coming from, whether it's from that bucket, from the membership fee income bucket, from tax reform bucket, you name it, there's a lot of buckets right now. We believe that we could use this to drive sales in lots of ways that perhaps give us a little more octane than we would have thought.
Thanks.
Next question comes from the line of John Heinbockel.
Richard, if I look at the 2019 new tax rate, am I right that the tax benefit in aggregate's about $300 million? Is that fair?
Well, take your pre-tax. Well, we don't know exactly, but if you look at, we've been running about a 35.5. Now we say it's 28. It's around seven percentage points. I don't know if it's six and a half or seven and a half. You've got U.S., which is, this is a broad brush stroke, 70% of our earnings. That's the side that gets the benefit. You have some offsets from that. Clearly, some of the benefits from deferred tax, foreign tax credits and things that go away and things like that. Net-net, all the included, we estimate that it's going to be around a 28 ±.
Now, it sounded, you talked about the benefit to the bottom line being more indirect. Whatever that is, it sounds like the vast majority of whatever the savings is, that the plan is to reinvest that in some form. Is that fair? You listed a bunch of buckets. Are they all sort of equal sizes? You didn't mention an e-commerce bucket. Is there one of those, or is that blended into the other ones you talked about?
Well, when I talk about buckets, I really talk about what are additional monies that we've gotten through things we've done in the last couple of years or benefited from during the last couple of years.
Yeah.
Notably, credit card switch, membership fee increase, and of late tax legislative changes. All those things allow us to do more of what we do. Again, I'm not being cute, but will some of it fall to the bottom line? Yes. We also take care of our employees.
Yep.
We're looking at a lot of different things now. Whatever we do, it's going to be something that's permanent, not a one-time bonus necessarily. We're going to take care of things. We're also, what we have seen is many of the things we've done value-wise, have while maybe lower the gross margin or dollars per sell unit.
Yeah
We've seen increased gross margin dollars because we sell a heck of a lot more units. Some of the things we're seeing now with the benefit of doing a better job of getting you to even open your email. Now, I don't know if we've gone from a D to a C or a C to a B or a B to an A, but my guess is there's still some room for benefit there. I think the biggest thing we want to communicate is we feel good about what we're doing and we're good about what's going on. There's never a dull moment out there.
You talked about sort of pushing value. How does anything new with regard to KS in terms of product development or your pricing versus national brands, how does that play into this?
Well, the one that I read about recently in the press was our new hazelnut spread-
Yep
which is basically Nutella. It is literally flying off the shelves. It's a great value, and it's a great quality. In every budget meeting and every board meeting, we see a whole litany of new items that we're getting ready to try and roll out whether it's organic, shelf-stable food items or apparel, KS items and others. Cosmetics. We've got a couple of fragrance items out there under our name that we've tested and we're going to continue to drive. It's lots of little things.
All right, just lastly, do you guys yet know or been able to calculate the benefit you get to U.S. Comp from the Sam's closings? I imagine you've started to see that already, right?
We started to see it after the first week. The first week you had everybody rushing to go get sale items on 20% or 30% off. It's small, as we expected. We each have to do our own estimate, but we think we've gotten a little bit of sales out of it and a little bit of member signs up from it, and that's continuing. My guess is, if the average Sam's Club in the U.S., as I understand it, is in the low 90s, people say the 63 they closed were less than that.
Right.
When I spoke to Craig immediately about it, and the heads of operations, their collective view was, is that we'll probably get 10% or 20% of it, not 50% or 70% of it. I originally thought that was low, but when you recognize not all of them are immediately close, many of them are, but some of them aren't. Some of it's not the same customer, and we won't necessarily get it overnight, and some we will. With all the other buckets, even a small bucket is a nice thing to have here.
All right. Thank you.
Next question comes from the line of Chris Horvers.
Thanks. Good evening. I think a lot of investors trying to figure out the strength in e-commerce, and I know there's a lot going on in terms of what you're doing on checkout and category extensions and so forth. Could you perhaps sort of rank the benefits, whether it's where would you put appliances versus extending the aisle versus some of the brands and versus the rollout of online grocery?
The rollout of online grocery is a very small piece of it. That's just started. Excuse me. It is driving traffic. I think the biggest things are awareness and cross-marketing, doing more activities in store to let people know about what's online, and a better job of getting people to open their emails. That's come with the headline, if you will, which is something that's really hot in store. There's also a lot. Again, if you haven't gone to the site lately, take a look. Again, I think we're starting from a low base and a low metric, given on what we hadn't done in the past. You talk to our e-commerce people and our head of relative department heads of merchandising, our head of merchandising, they feel pretty good that this will continue.
I'm not suggesting 40 on 40 on 40 every year. Even when it hit 30 for the first time, Bob Nelson and I are asking, "Well, what happens a year from now?" The view is, there's a lot of things they got going on that should continue to drive it. Stay tuned. We'll see. On top of that, we're getting off to a good start, albeit with a conscious soft opening of both delivery sites.
That's really my follow-up. What sort of uptake are you getting in the online grocery, and could you compare the two-day delivery option versus Instacart? I think a lot of people ask us, "Is this going to diminish the trip to the warehouse, and thus sort of the overall spend that I have goes down, and then the margin rate of me as a customer also goes down?" Any thoughts on that as well?
Sure. Well, look, the only data that we know that's more than three months old or six months old is going back to the original data that we have from when we're doing Google Shopping Express, the longest period of time in the Bay Area, where it was the strongest. What we typically saw back then, again, that did not include fresh, though. That we saw an existing member who was, and I'm making these numbers up, they were growing their total purchases with us by 3% a year. They grew it by more than 3%, but they came in a couple of two to four less times and shopped online more times, several more times than that. Because when they shopped online, it was a lower average ticket than when they came in store. Mind you, it's a little different.
We're seeing a bigger average spend on the Instacart site and on the two-day. We're actually adding some items. I think last time I mentioned, we started through about 10 business centers, which covers essentially the entire continental U.S., virtually the entire continental U.S. We started with about 470 or 480 SKUs out of the regular warehouse being serviced out of the business centers. We've actually added some items to that, and I think the goal is to add a couple of hundred over the next six months. It's working so far, but it's new, we can't promise anything. We recognize with fresh, how much of it is going to be fill-ins versus I'll go a few times less to Costco.
What gives us a little comfort at this point, but that's all it is the results that we've seen from the ways we communicate with our member online. If you go on right now, you'll see there's several very exciting items that are just in store and while supplies last. That drives traffic and that gets you in the store. Everybody's going to know somebody that's going to shop a lot less in store because they're getting all their groceries at Costco or more stuff fresh delivered. Mind you, at a better price than the day before on Instacart because the prices are better today and even a better price through costco.com. At Costco. Even better, of course, as you come in. We'll keep sending that message as well. I think we're honestly at two-plus years before we really know something on that.
Certainly, nine to 12 months before we have any inkling of what it means.
Understood. Thanks very much.
Next question comes from the line of Edward Kelly.
Yeah. Hi, Richard. I just wanted to ask about price investment and not so much about the quantity, but I was hoping that you could just maybe talk about the elasticity on price investment in your business and how maybe it differs from some of your traditional competitors. Whether having less SKUs, less that you need to focus on, less SKU overlap, how that actually impacts what you're seeing from an elasticity standpoint when you actually do make those investments.
Well, it was just a year ago when we had a slightly disappointing second quarter result, partly because of the change in the number of days the MVMs were out there. In explaining why we did it to start with was, is because over time, whatever you do, it gets a little stale, or not in every instance, but in some instances. You try new things. Over those few months and continuing to today, we're continuing to try new things with our vendors as well. I use water as an example. We were a great value on 40 half liters of Kirkland Signature, and the price may be different in a given state or something based on transportation. I think we were at $3.49, which was the best price out there, doing a heck of a lot of volume.
Now we're, I believe, $2.99 every day. Well, you can imagine our various suppliers said, "Well, how can we do this?" Well, you have huge increases in unit volumes. Guess what happened on the way to the forum? The brands need to come down in price too, because they're losing market share. I think that's something that's unique about us, that limited selection. We could take, I get back to that word I use about more octane in the dollar that we use. You take something like that TV example. We did $30 million, $40 million on one SKU in six or eight days. How do you do that? You do that because, one, it's limited, two, it's already a great price, and three, it's even a greater value because of what we could do with partnering with our suppliers on it.
On top of that, there are these other buckets. I gave the example of if you use your Citi Visa card. We got some sign-ups out of that. Some applications on that. I think that tends to be a little different. I gave the example last quarter at the end of that for the 10 days leading up to and through Labor Day weekend, when traditional retail's out there selling USDA choice strip steaks at, I'm making the number up, $8.49 or $8.99, we're at $7.99. We were at $6.99. We locked up lots of New York strip steaks in the weeks preceding that, and we saw a noticeable drive into the warehouse. I think that it's a lot easier to do when you've got 3,800 items out there versus 50,000 in a supermarket or 100-plus thousand in multi-general stores, supercenters.
Okay. I just wanted to ask you about labor generally and tax reinvestment. There's been a lot of talk in the marketplace about investing in labor. We heard from Target earlier this week about moving to $12 an hour. You are at the upper end of the pay scale in terms of what you're paying your employees. Does a rising tide just lift all boats here? How are you thinking about this philosophically? Are you looking to maintain historical wage gaps that you've had? Just how should we be thinking about this for you?
I think we always want to maintain a significant premium overall. We have to look at all the pieces of it. It's not just the headline starting wage. It's not just a one-time bonus. It's also healthcare. If you look at the average, I'll use U.S. because every country's different, but relative to what's in that country, it's the same types of premiums. The average U.S. wage of our 90% of our employees who are hourly, whether they started yesterday or 20 years ago, is in the 22 and a quarter to 22 and a half, I believe. On top of that, whether you're part-time or full-time, you've got a great medical, dental, and vision plan that on average costs the company a little over $10,000, where we pay 90% of it, roughly. Now, by the way, that covers spouses and dependents as well.
On average, it's a little over two people per covered employee. At the end of the day, even if the bottom of scale gets a little closer, the delta between the entire compensation is significantly greater. Notwithstanding that, we do what we're going to do even before tax law changes. We're going to do a little more because we can.
Great. Thank you.
Next question comes from the line of Dan Binder.
Hi, Dan Binder. I saw you had a program out there on the auto renewals where you get a $20 gift card if you sign up. I was just curious how effective that program has been. Also on membership, you had mentioned that there was a slow start to Executive conversions in the quarter. I was just curious what you think that was related to and then how you were able to shift the pace on that.
To the latter question, our membership marketing people are looking at it. I don't know exactly. My guess, we had a strong first quarter where it averaged over 21,000 a week of new. Our signups during the quarter were fine, but my guess is it has to do with what did we do a year earlier? How are they collecting certain data? I'm just relieved that the second half of the quarter, it improved greatly. My guess is it's not a big issue. The first question?
I just saw through personal experience that you had a $20 gift card offer for signing up on auto-renewal for members that haven't done it yet related to the new card. I was just curious how effective that program has been.
I don't know specifically on that program. I know we do a lot of things as it relates to that. It sounds silly, we did some programs to sign up, get members' email addresses, which we do a better job when they sign up now as a new member. We were below 50% with valid email addresses. In two instances in the last few months, in about a week or 10-day period, we got over 1 million members to get their email addresses by giving them something like $2 off on muffins or something.
With the improvement in the renewal rates this quarter, the trends obviously reversed. Would you anticipate small improvements over the next several quarters based on that experience that you talked about on prior calls with what you saw in Canada?
I would hope so. If I could just copy what happened over the several quarters after Canada. Canada is now above where it was before the conversion started two and a half years ago. Canada went down over six quarters from the conversion quarter to six quarters, five more quarters out by, I believe, 100 basis points, the renewal rate. Now it's two or three tenths of a percent higher than it was before that. U.S. only went down around six tenths of a percent. Now it's back up a tenth from that minus six. History should show that that'll happen, but we'll have to wait and see.
Last item on freight. Just curious, there's been a number of retailers talking about that pressure, and in some cases, it's been material impact to the earnings outlook. I didn't really hear much on that today. I was curious if you have any thoughts and how it may impact you.
Well, look, the higher freight costs and availability of containers impacts all of us. It's interesting, it's not talked a lot about where I think what it's made us do is we're doing a better job on backhauling, a more conscious effort. Historically, we always backhauled extra pallets and recycle like cardboard corrugated and you basically could make more dollars doing that. We really hadn't done a lot on backhauling supplies, merchandise from vendors. I think that's mitigated it a little bit of late. I think it's still a net number. My guess would be it's not as impactful to us as it is to a traditional retailer based on what I just said. 90% of our goods go through our cross-dock depot operations.
You've got literally thousands, but in the low single-digit thousands, several thousand trucks that are going out, trailers that are now, not every one of them, but picking up things, whether it's produce from Central Washington or Central California, or working with suppliers, because we don't do long haul. It's a lot easier to even do these kind of things when you've got limited items.
Great. Thank you.
Next question comes from the line of Karen Short.
Hello, can you hear me?
Yes.
Hi. Sorry, I just wanted to clarify in terms of tax reform benefit. In terms of the kind of puts and takes as we think through the rest of the year and into the fiscal 2019, obviously, you commented on investing in employees, investing in price. Is that something that we should kind of expect fairly quickly, or is that something that both of those that would have a little bit of lead time and you're kind of still to be determined? Just to clarify.
I'll be able to give you better clarity on that at the next call. We've continued to invest in price over the last year, and we're going to continue to do that. I think we've already started a little of that on the employee side. Something will be forthcoming, my guess is in the next two months.
Okay.
It'll impact Q3 less than a full Q3, whatever it is.
On both wage and price.
On employees. On price, we're already starting to do a little of that. We've also had the benefit of various buckets. All these buckets are fungible.
Okay. I don't think you gave inflation in the quarter. Wondering if you could give that both at cost and at retail.
Inflation? Hold on a second. I don't have that in front of me. I think it's ever so slightly up on a cost basis, which would lead me to believe it's flat or slightly down on a retail sales basis given what we're doing.
Okay.
We'll go to the next question, then I'll get it for you in a second.
Okay. Just on Instacart, I know you did say that ticket was larger on Instacart. I guess two questions on Instacart. One is, can you maybe give a little more color on how much larger the average spend is, or average ticket is on Instacart? Then obviously Sam's announced a rollout of Instacart as well. Does anything change with your pricing strategy on your Instacart offering as a function of that announcement?
Well, to the latter, no. Our strategy is always to be very competitive, and if we have to be more competitive, we will. We feel we're very competitive on the things that we're doing. What was the first part of the question?
Just some quantification on how much bigger the average ticket is.
Well, when I say it's a little higher average ticket, it's a little higher average ticket than what we experienced with Google Shopping Express, which didn't include fresh. I believe it's a double-digit number, in the higher double digits rather than the middle double digits.
Okay. I don't know if you-
As it relates to inflation, when I look at our LIFO index that we don't use for anything anymore, right? I'm asking our accounting people here. At some point we will. If I look at our composite year to date, fiscal 2018, among the various categories, it's deflationary by 14 basis points. That's from our fiscal year-end, September 3rd or 4th last year. I would say overall, it's slightly inflationary because that is in looking at the turnover of the different categories. My guess is, in the last four weeks, it was exactly zero. I would say zero to-
Cost or revenue?
This is cost.
Okay.
Which would lead me to believe that we're definitely deflationary compared to that because we're lower in prices.
Great. Okay. Thanks very much.
Yep.
Next question comes from the line of Chuck Grom.
Hey, good afternoon, Richard. Just trying to understand something here. No inflation, you're investing more in price, yet your core on core margins as a percentage of own sales were up, I think you said 14 basis points, which is the best performance since the third quarter with three of the four large categories up. Can you just help us understand the improvement in the margins this quarter and looking ahead, any sustainability of that trend?
Recognizing it's not just the four core on core. There's so many other little things. An improvement in our travel business, which is a very high gross margin business, right? It's not the value of that plane ticket and hotel, it's the broker commission with very little SG&A associated with it, very little cost of sales. All those things help a little bit. I think within the 80% of our business, which is core on core, fresh foods, hardlines, softlines, and food sundries. In talking to our head of merchandising two days ago, probably the two biggest things are what we call internally improved D&D. It's where damage is destroyed, when we're having to mark things down less whatever we get from our vendors. There might be a spoilage allowance or a returns allowance within something. Generally speaking, we've showed an improvement there.
We've also showed a little bit of an improvement with-- I can't quantify whether that's a basis point or a few, but it's an example. Another one is you take the example of a $1,000 item that we sell for $1,100 just to make the numbers up. It's $100 gross margin on $1,100, it's whatever, 9% or whatever it is. If we get an extra $150 off through an MVM, we're now selling it for $950, still making $100 gross margin. We've just improved our gross margin percent. You're talking about billions of dollars a year in the aggregate, low double digits, but still real money. Fresh foods penetration increases, generally speaking, even though fresh foods, I believe it was slightly up, but fresh foods is a higher margin department. Apparel is a higher margin department. We've had good growth.
I think in the last three or four years, we've seen what we call apparel in a couple of different departments, men's, women's, and kids', up nine-ish% compounded for three or four years on a seven or so billion dollar business worldwide. That tends to be a higher margin. My guess is it's the little things, and part of it is getting our suppliers, working with them. We don't want just more money from them if we can't drive more sales to make up for it and get more dollars. All those things help.
Okay, that's helpful. Then just quickly on February, I think you said that hardlines were up low doubles and majors were the highest that we've been tracking. I think you said mid-to-high 20s. Can you just dissect that for us? What led to the improvement? I presume maybe appliances were very strong around President's Day. Did that help out?
Computers being not only desktops, but importantly laptops and tablets as well, and appliances. Those are all very strong. Online has helped us as well in those categories in the aggregate. Some of it has to do with, I get back to the $150-$300 off on a TV that's already at incredibly low price if you use your Costco Visa card. All those things have helped drive the business. I want to get back to the previous question also on, what I can tell you about core on core gross margin. Years ago, we started highlighting that because that's the core business, and there's lots of other things like traffic, like gasoline, that could go up or down 300 basis points in gross margin within that department, and it's 10% of your total company.
Whatever it is, it'll be a little better or a little worse each quarter. I think it's more important to understand where. I'm not suggesting, I don't know what the next quarter's going to be. Murphy's Law always tell you, we continue to feel good about what we're doing, and there's lots of little pieces that affect that gross margin.
Okay. Just one housekeeping. You guys said that there was obviously a sales impact on the quarterly results. I think you said 140 basis points. Just wondering if there was any bottom-line impact in 2Q.
Well, the bottom line impact other than the sales themselves, hopefully we're doing a pretty good job of scheduling hourly employees in the warehouse. When you do a little better than your plan, you beat the heck out of the numbers because you had fewer employees doing the same work. When you miss your number a little bit in sales, it hurts you on the SG&A line. I don't think that's that big of an issue. Probably a bigger issue, which I can't tell you the answer, I can just tell you what the issue is, would be paid holidays.
That's more in our monthly budget meetings or every four-week budget meetings, when the operators will have to explain sometimes, payroll % was up 10 or more basis points, but there was an extra, particularly around Thanksgiving and Christmas and New Year's, or Easter even. Sometimes these things will fall in a different month, a different four-week period that we have. That impacts it.
Okay, thank you.
Next question comes from the line of Oliver Chen.
Hi, Richard. Regarding the e-commerce details, what's ahead with fulfillment in terms of how you're thinking about fulfillment speed and inventory management and how that may flow through on a longer-term basis in terms of CapEx needs and as you think about certain fixed costs associated with the march towards different fulfillment options for the consumer. The second e-com question is just about engagement. It really sounds like awareness and marketing is a factor in driving traffic to e-com at large. What do you think are the next steps just to improve that engagement over time? Thank you.
Well, as it relates to fulfillment and the costs, look, we are spending more money. We're building some actual e-commerce fulfillment centers in part because we're running out of room in some of the depots where we did it at. I think we're doing one in Tracy, California or Mira Loma. An annex, but it's a major multi double-digit millions of dollars. We have a little more inventory in the system on e-commerce because we're fulfilling from closer places as we do more business. We have a greater commitment with this delivery, whereas our two-day is us through roughly 10 of our business delivery centers with these 500 or so items. Needless say, that's more inventory in the system right now while we do that. All those things are costing us a little more in that regard. That's in the numbers as well, and it'll continue to be.
In terms of if you look at a CapEx company that's in the $2.5 billion range, there's always just when you think you're done with cross-dock operations, we're expanding some, adding a second one to Japan, even though we only have 27 or 8 units right now, but geographically it makes sense now. Putting one into, I believe, Australia soon. Building a bakery commissary in Canada and a chicken plant in Nebraska and a second meat plant for us in the Midwest. All those things have been additive to it. I think as it relates to fulfillment, you'll still see some more, but it's the $0-$200 million a year, not we're going to go have to spend an extra $500 million in our stuff. As we go from 0 to 100 even, what dropped out of another bucket there.
Needless to say, we have cash flow to do it. We've never sat down and said, "Which can we do first?" Because we have to limit what we do based on not going over X amount of dollars. As it relates to awareness and engagement, short term, there's some of the blocking and tackling. I know e-commerce operations, they've engaged some outside parties to help with some of the, what I'll call targeted marketing engagement 101, and to see what more we can do. Right now there's still a lot to be done with just getting more email addresses, refining, getting that open rate to continue to go up in the right direction, which it is.
Okay, Richard, that's very helpful. You made a lot of progress with buy online, pickup in store. What are you thinking about for what you're monitoring about what may make sense there? Will you think about refrigeration? Will that be an option and a good option, or what kind of items are best suited for that program? Thank you.
Next question comes from the line of Matt Fassler.
Thanks so much, good afternoon. Richard, my first question relates to the ancillary business. You had a fairly subdued comparison a year ago on gas profitability, presumably, and obviously this year ancillary was a big contributor. You indicated that gas was a piece of that, and also some of the other businesses that you've discussed in Q&A as well. What's your thought process on gas and its contribution to margin, both based on the current gas price environment, which is relatively stable, and also on the comparisons they evolved through last year? Hello?
Yes.
Hi. I'm back.
Okay.
I don't know what happened there, guys. Sorry about that.
I think Oliver might've been in the midst of asking a question when I was called onto the line. You can deal with that or go to my question first.
I'm not sure. Did you hear the answer? I answered the question related to CapEx and expansion of physical activities or inventory needs related to driving fulfillment. I answered the question that he had about awareness. Did you hear that?
Some of it. It's really up to you.
Why don't we go on with your question.
Sure.
Oliver, if you're there, feel free to get back on the line.
Did you hear my question on ancillary, Richard?
No, I did not.
Okay. I'll repeat it then. The question related to the benefit that you received from ancillary this quarter, which was substantial. Some of it related to gas, as you discussed, and some to non-gas businesses. Taking a look back at a year ago, your ancillary margins were down sharply. Gas, I think, has something to do with it. What's your thought process on gas margins intrinsically relative to trend, I guess, on a dollar basis or $0.01 per gallon basis in the current environment with relatively stable gas prices, particularly as you come up against, I guess, some more normalized comparisons in the second half of the year?
Well, a lot of the gas, whilst the price per gallon is up, profitability has been okay. It has been pretty good. A lot of it has to do with gallons. I think our gallons are up 9%, 10%, almost 10%, compared to a U.S. industry that's up in the low 2%. On the ancillaries, I think two things. One, if I look back at last year, there was Bob, wasn't there one thing last year that hit us that was a catch-up or something in ancillary? Yeah. I think that my guess, I don't have the exact stuff in front of me. My guess is I know we've had strong ancillary performance. My guess is nothing was called out last year, or if it was a little disappointing, it was, there's probably a little offset there as well.
I know that many of the ancillaries are growing nicely and improving margin, bottom line margin.
If I could just ask a second question. You were asked about Instacart already. If you think about the customer who's turning to Instacart as the program grows with you, do you have a sense as to what the impact is or what the contribution is of legacy Costco customers who are now moving to Instacart and how their behavior changes, if at all, as they shop Instacart in the store?
We don't know yet. It's too small to know yet and too new. When we look back at, again, the early days in the Bay Area with Google Shopping Express, we saw it was a net increase in total spend per year with a few trip reductions in store and several deliveries to more than offset it. My guess is with fresh being more dominant, of course, with Instacart, what we're finding is, and this is more anecdotal, there are plenty of people that are using it simply for filling and still coming just as along, but we don't know yet. We're also, by the way, signing up members that we didn't have before.
Both with the Instacart white label as well as Costco's 2-day grocery, where we can deliver to places that are 150 miles from a Costco.
We're just starting, and we haven't even tried to market to those people yet.
Based on your comment on size, it sounds like even though you're in over 400 clubs, it sounds like it's not material to the traffic acceleration.
Hold on just one second, Matt.
Hello?
Okay. You are back into the main conference. We have our next question, coming from Peter Benedict.
Hey, Richard.
Hey, by the way, I've taken my arms off the table, so I don't touch the cord and disconnecting it. My apologies.
Matt's had a heck of a time with Q&A the last couple of days. Anyway, we'll move on. Can you give us a sense, maybe what percentage of the business today is vertical, with you guys owning product from production all the way to sale? If you're not going to speak to any numbers, maybe just which categories is that most present in, and where can you take that over the next few years?
Well, I don't have a percentage calculated, but where it is, we have a hotdog plant that makes all of the Kirkland Signature hotdogs for the United States. Almost all of them. We're at capacity. We have a meat plant in California that is over 4 million pounds a week of four or five SKUs just for us. It's our meat plant. We have two optical grinding labs that grind 5.5-6 million pair of prescription glasses that we sell every year. I guess you could say we have two central fill facilities, both for filling prescriptions for our own pharmacies as well as mail order for ours and a few others, third parties. We're building a major chicken plant in Nebraska that'll allow us to source ourselves about 100 million chickens a year, which is less than a quarter of our needs.
Another third to 40% of our needs are sourced in what the business once referred to as dedicated plants. We're not the only one that does it, using one of the three or four large providers that we share in all the profitability and costs related to that plant. Needless to say, we think we can do that better than others because we have them do many fewer SKUs than a traditional retail in that area. We do some packaging of candies and nuts, so it's semi-vertical. We have a bakery commissary that we just started production in Canada. That was done out of necessity. The two largest commissaries up there that serve some of our bakery needs were acquired by the two largest grocery retailers over the last few years. But in hindsight, it seems to be working. Trying to think what else.
We do lots of packaging of gift baskets and clamshell type stuff that we do ourselves, so that's somewhat vertical, not completely. I don't know what all that adds up to, but I guess it's 10% or less in total, maybe five. At the end of the day, where is it going to go in the future? I think you'll see more things related to sourcing of foods and commodities and proteins. Whether it's hothouse produce or doing things with chickens and cows, I don't know.
Good. No, that's fair enough. Thanks for that overview. On e-commerce, any plans to roll out the signage and the tablets beyond those, I think you said 195 clubs that are in today. Just how is the labor in the club used to facilitate the buy online pickup store? Is that a new role or are you just taking existing folks and repurposing them?
No, we are rolling it out. First of all, we have employees that actually have a tablet with them, and particularly in areas like electronics and perhaps home furnishings with seasonal items. Big ticket items that in likelihood they're there looking at it, but may still choose to buy it online. In some cases, like white goods, you can look at it there, but you can only have it received and ordered online. We're doing it, but it's working so far. You expect to see it in more locations.
Okay, just with the bump of the buy online pickup in store, how are you staffing that from a labor perspective?
Just staff. They're going through training. They're going through third party training in some cases. We're working with our vendors in some cases.
Last, just housekeeping, the D&A number, I don't know if you gave that for the second quarter. Do you guys have that?
Which one?
Depreciation.
Depreciation? It'll be in the Q. My apologies, we don't.
No problem. All right. Thanks, guys.
Thank you. We have two more questions.
Okay. Next question comes from the line of Scott Mushkin.
Hey, guys. Thanks for taking my questions. I wanted to give another shot at the e-commerce question on margin. Richard, we've talked about it over the last couple of years and the challenges of bringing omni-channel to a retailer. I was just wondering if you could talk about how you're thinking about it as you kind of slowly go down that omni-channel road and what we should think about as margin. It seems like you're almost pricing differently in the different channels, but I was wondering if you could kind of frame it for us as that grows as a part of your business. Clearly not hurting yet.
Well, first of all, with delivery, somebody's got to pay for it. In some cases, we're testing to see how do we include it in the price? Do we charge for it? Do we subsidize it? Whatever. We're trying lots of different things. When you say going slowly, arguably, we do a lot of things slowly. We started with e-commerce slowly, 15 to 18 years ago. I look at it as if there's some out there that says, "Here are the 50 things we should be doing," let us look at the menu of 50 things, and we're going to choose the 10 or 15 or however many it may be that we think works for us in our environment. Every time, so far, when we do these things, it works, and it works our way.
It's not unlike when we first started in business, said you can't sell only 3,800 items or whatever it is and have limited categories. We recognize that value is more than just great, the lowest price on the relative quality and quantity of something where we are second to none. On top of that, convenience and delivery for some is as well. We can't be everything to everybody. So far, that's working very well for us, even as we move, in some cases, slowly in some of these new areas. I think we're fortunate that we're able to find those niches. Being an item business, the same concerns that people have about, are we getting our share of millennials? We are. Are they buying as much? Well, they're buying as much as the old Gen whatevers did when they were that age.
What we're finding is items that portend well for that, and we'll see.
Okay.
Which of these are complementary? Again, I don't know where we are 5 years from now. I know we have some things that we've done on the table. We all do now. I know there's some things that we're going to be doing over the next year or so to continue to grow it. We'll see where we go.
My second question is, with the tax and the reinvestment, any thoughts like our surveys of consumers, I know it's just us, is that the two stress points for consumers in going to the store at this point, parking lots and checkout. Any thoughts on trying to ease it's a good problem to have, but man, the checkout process at Costco can back way up and, of course, the parking lots can. Any thoughts of using some of the money to try to ease those two friction points for consumers?
Well, what's interesting is, we've got 4% traffic growth year on year on year on year. We've put a lot of time and effort in front end to speed you out. One of the things we're concerned about with order online and pick up in store is we don't want you there if you're not going to come through. People talk about having urgent care or doc in a box things. We don't want you there sitting for an hour waiting for a shot and not shopping. As it relates specifically to the front end, we continue to expand. In the last probably eight years, nine years, we have sped in terms of the average number of customers through an open, staffed register, has gone from the low 40s to the low 50s per hour.
Now, it may not seem like that, but it's like being at a red light. It seems like longer than it is. That being said, I just was at an off-site meeting last week for a day and a half, one of the things we'll be rolling out, some new things at the front end, testing it in about 50 locations that should continue to work on that. In terms of the parking lots, where we can, we expand the parking lots. Beyond that, I can't tell you a whole lot. Oh, by the way, the other thing is, we'll continue to open and infill and cannibalize units.
One of the examples I've given in the last few calls on it for another question was, last year, we opened effectively our fourth unit on the east side of Seattle in the Woodinville, Kirkland, Issaquah area, and a fourth one in San Jose, California. In both instances, we went from roughly, I'll call it 60,000 members per location in the three, so our 65,000, 180,000 to 195,000 members among three warehouses, to maybe another 5,000 members in the market. We added net of cannibalization, $110 million-$125 million of annual sales, which is great. That certainly is a relief point also. Now, I can't speak specifically. One of our highest volume units in the continental U.S. is in Westbury, notwithstanding the fact that we have bought, I forget, it was a big retail store next door, a supermarket maybe, or a Kmart.
Adding lots of things to it, and it's hard to get another location nearby. We'll always have items like that, but we'll keep working on it.
Perfect. Thanks for taking the questions.
Last question comes from the line of Kelly Bania.
Kelly, is that you? Any others? One more?
Next question comes on the line of Chuck Cerankosky.
Hi, Chuck.
Chuck Cerankosky. I just want to explore a little bit the 15 stores, well, actually 18, the final quarter of the current fiscal year, which we think about in terms of pre-opening expense in that period and any SG&A burden, and then how having those clubs open sets you up for the new year, for fiscal 2019, especially going into the holiday season.
Well, some of the pre-opening will start before, because as you open them, let's say the first several that opened in the first several weeks of Q4, much of the pre-opening is incurred in the months leading up to it.
Q4 is big.
Q4 is also 16 weeks versus 12. My guess, it'll clearly be higher in Q4. I don't know necessarily how it sets us up. There may have been a few we pushed to get into this year just to try to get them open. That saves you a little bit, but we do that every year.
All right. Thank you.
Okay. Thank you everyone. Have a good day.
This concludes today's conference call. You all may now disconnect.