Good afternoon. My name is Christie, and I will be your conference operator today. At this time, I would like to welcome everyone to the Quarter 2 Earnings Call in February sales. 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 will now turn the conference over to CFO, Mr. Richard Galanti. You may begin.
Thank you, Christie, 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 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 Q2 of fiscal 2018, the 12 weeks ended February 18, as well as February retail sales for the 4 weeks ended this past Sunday, March 4.
Reported net income for the quarter came in at $701,000,000 or $1.59 a share, a 36% increase compared to last year's Q2 results of 515,000,000 or $1.17 a share. This year's earnings per share included $7 due to a net income tax benefit of $74,000,000 as a result of the tax legislation recently passed by Congress. Excluding this benefit, 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 $32,300,000,000 a 10.8% increase over the $29,100,000,000 of sales during the second quarter of last fiscal year.
This year's 12 week Q2 included one additional sales day in the United States versus last year due to the shift of Thanksgiving. But while we gained the sales day in the quarter, our pre Thanksgiving and Black Friday holiday weekend sales fell in the Q1 this year compared to the Q2 last year. Combined, these two factors negatively impacted 2nd 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 minus 7 to minus 8 percentage points in the 2nd 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. Now for the Q2 12 week comparable sales results. In the U.
S, we reported a 7.1% increase, ex gas and FX, 5.7%. And then 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 percent, 7.4 percent ex gas and FX. So total company would be an 8.4 percent reported and a 5.4 percent ex gas and FX and a little over 1% of impact negative impact on that 5.4 percent from the Thanksgiving shift.
E Commerce reported was 28.5% comp sales, 27.3 percent ex gas and FX. And again, we estimate that 27.3 percent was hit by about 7 to 8 percentage points related to the holiday shift. So something in the low to mid-30s ex that. In terms of Q2 sales metrics, 2nd quarter traffic or shopping frequency was up 3.7% worldwide and 3.4% in the U. S.
Also 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, that impacted sales. The strengthening foreign currencies impacted sales by approximately 180 basis points to the positive.
And gas inflation contributed another 125 basis points, so together about 3 percentage points. Cannibalization weighed in on the comp by the tune of to the tune of 55 basis points to the 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 Q2, that is membership income is the next line item. I reported in Q2 $716,000,000 up $80,000,000 from the $636,000,000 last year's Q2 and up about 4 basis points or 12.6 percent in dollars. Now ex FX, the benefit of strong foreign currencies benefit the number by about $12,000,000 Of the $80,000,000 increase in membership fees increased over year over year, about $37,000,000 related to membership fee increases. The majority of the $37,000,000 came from fee taken last June 1 in the U. S.
And Canada, with a smaller balance from the fee increases taken in our other international operations starting back in September of 2016. So all told, if you take out both of those, we would on a normalized basis, membership fees were up $31,000,000 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 and worldwide improved to 87.3% as of Q2 end, up a 10th 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 and happy to see that that what we expected came true there and seeing a slight improvement. In terms of members at Q2 end, at Q2 end, we had 39,600,000 Gold Star members, up from 39,300,000 12 weeks earlier. Primary businesses were $7,500,000 at both quarter ends.
Business add ons, which was $3,200,000 at Q1 end at Q3 end was 3.3 percent. So total member households, dollars 49,900,000 at Q1 'eighteen end, up to $50,400,000 at Q 'eighteen end. Total cardholders at $92,200,000 at the end of the quarter, up from $91,500,000 12 weeks earlier. During the quarter, we only had one opening. At Q2 end, paid executive members were $18,800,000 an increase of about 46,000 from the 2nd quarter end or about 4,000 a week, a little softer than it had been in recent quarters.
When we look 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. So the $37,000,000 Q2 increase related to that will increase in Q3 and increase again in Q4 based on how it hits the P and L on deferred accounting and still have even smaller yet smaller increases in the next couple of 3 quarters after that into 2019. Going down the gross margin line, our reported gross margin came in at 10.98% or 2 basis points lower year over year.
On a reported basis, that minus 2 basis points, it was actually plus 11 basis points excluding gas and FX. Within that, I'll have you just jot down the 4 or 5 2 columns with the 4 or 5 numbers in each column. First column would be reported 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 8 basis points without gas inflation. Ancillary businesses up 23 basis points in the quarter and up 25x gas inflation 2% reward plus 1 and 0 in those two columns and other minus 6 and minus 6 basis points.
So all told, if you add up column 1, the reported year over year gross margin change was the minus 2 basis points and ex gas inflation was plus 11. If we look at 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 minus 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, hard lines and fresh foods were up. Softlines was down a little, notwithstanding greater 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 25x 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 centers and travel all showing higher year over year gross margins and that contributed to that number as well. 2% reward, again, essentially flat ex gas.
Lastly and other, as was in the case of the Q1, we were incurring incremental costs related to the rollout of our new centralized returns facilities. And 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 7% to minus 6%. Long term, we believe it's a big benefit to us. Moving to reported SG and A, our expenses, our SG and A percentage Q2 over Q2 was lower or better by 21 basis points and better by 9 basis points plus 9 basis points ex gas inflation coming in at 10.02 percent of sales this year compared to 10.23 percent on a reported basis. Again, the two columns reported and without gas inflation.
The first line item would be operations, plus 19 basis points and plus 8 basis points ex gas inflation central, minus 1 basis point and minus 2 basis points stock compensation, plus 3 basis points in each column and then total, plus 21 basis points or lower or better by 21 basis points on a reported basis and ex gas inflation better by 9 basis points. Not a whole lot of unusual items here. The core operations component again was better by 8x 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 3 basis points. Again, strong sales and usually that's the number that's most impacting Q1 when we do the big grant every year. Next on the income statement, preopening expenses, they were better or lower by $3,000,000 In Q2 this year, they were $12,000,000 last year, dollars 15. Now again, this year we only opened 1 new unit. Last year, we opened 4.
However, we also have quite a bit of preopening related to 2 big manufacturing plants that we 1 we've just opened and 1 we're 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 $1,016,000,000 up $172,000,000 or 20 percent higher year over year from last year's $844,000,000 number. Below the operating income line, reported interest expense came in at plus $6,000,000 at $6,000,000 higher year over year at $37,000,000 this year compared to $31,000,000 a year ago, primarily a result of last year's debt offering. Interest income and other was better year over year by $11,000,000 in the quarter. Actual interest income for the quarter was better year over year by $5,000,000 Also benefiting this line item is the year over year comparison was various FX items, mostly various FX items in the amount of a positive 6,000,000 dollars Overall, pre tax earnings were higher by 22 percent or $177,000,000 higher in Q2 coming in at $986,000,000 this year compared to $809,000,000 last year in the Q2.
In terms of income taxes, our tax rate in the Q2 came in at 27.7% for the quarter compared to 35.6% last year. But 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 our fiscal we don't have a calendar year, and so it doesn't align with the traditional calendar year. You take the number of days in each 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 2 45 days of the fiscal year, you get an average of 25.58%.
The impact of the lower that lower rate on Q2 pre income was $52,000,000 of the $72,000,000 I just mentioned of the $74,000,000 I just mentioned. The other $22,000,000 is basically two main things. One is a true up of Q2 of Q1 recognizing in Q1 we assumed we had no reason to assume this much lower federal income tax rate. So, turning up for the Q1 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.
Also, the net impact of these items in Q2 was an additional $22,000,000 tax benefit. So total tax benefit in Q2 is $74,000,000 the $52,000,000 what I'll call normalized to Q2, the $22,000,000 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% to 30% range. And in fiscal 2019, based on what we currently know, and of course, all that's subject to change, is approximately we assume it will be approximately 28%, plus or minus. As we know more, we'll share it with you.
Overall, the reported net income was higher by 36%, coming in at $701,000,000 in Q2 compared to the $515,000,000 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 visavis these savings. Overall, 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 2, 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 3, we'll invest some of the savings to drive to continue to drive greater value to our members. This will certainly include investing in price as well as other activities. And number 4, 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 and driving value, we've seen what that does and we know what that does and much of that investing in value and price comes back in greater earnings. And directly perhaps a little, but again stay tuned. A few others a few other items of note, warehouse expansion, as I mentioned, we opened only 1 unit in Q2. That's on top of 5 net new units in Q1. Our plans for the current quarter, which will end in mid May, is 2 more.
And then Q4 is the big quarter. It's a 16 week quarter, but we plan to open net 15 units, 18 openings, including 3 relos. Assuming we got there, we'd 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, but somewhere in those low 20s. For all of 2018, again, we expect to open something around 2022 or 2023 with 3 quarters of those in the next two quarters and most of it in the 4th quarter.
As of Q2 end, total warehouse square footage stood at 108,000,000 square feet. In terms of stock buybacks, in all of fiscal 2017, we expended $473,000,000 purchasing just under 3,000,000 shares at an average price of just under $158 In the Q1, we expanded, as mentioned, dollars 119,000,000 at an average price of about $162,500,000 In this quarter just ended, we expended an additional $59,000,000 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 quarter for the 2nd quarter came in at $1,500,000,000 up 29% year over year. Overall, our e commerce sales increases continue at very strong levels. If you look back in Q1, we FX, it was a positive 42.1 percent. Again, that 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 altogether was plus 33.7 percent. And in February, as you saw in the press release, and I'll talk about February overall in a minute, came in at 37%. So continued very strong sales growth and momentum in these numbers. We continue to improve our offerings.
We've been and we continue to be helped by the improved member experience with better search checkout 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 the 195 U. S.
Buildings, and that's used to help search and purchase costco.com items for our members from our warehouse. We continue to capture more e mail addresses. In addition, our improved content is resulting in increasing our open rate of e mails, again driving traffic both in store and online. If you go right now to costco.com, I think it talks about hot buys and you'll see that some of them are in warehouse only as supplies last and 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 yourself with these hot buys in the warehouse.
Online grocery, both our dry grocery 2 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 4.41 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, with 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. And then we're doing some other exciting things. Currently, there's over 100 high end beauty items online. In Q1 'eighteen, we added the 2% reward to all travel purchases through Costco Travel.
That's something we had not done in the past. That's if you that's to our executive members. As well, 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 sized big ticket items where many people aren't likely to want to leave them at their doorstep.
So 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. But again, this is limited. This is we'll continue to see how it works. All these efforts that I just mentioned are having a positive impact on our business both online and in warehouse and that we believe helps the sales momentum and increased awareness of our digital presence as well as the traffic that we've enjoyed recently in our warehouses.
In some, we're continuing to expand these activities. It's evolving and improving and it will drive our business both online and in store and certainly some of the tax savings will go towards driving that as well. Next, let me review the February sales results before we ended March 4. As reported in our release, net sales for the month came in at $10,210,000,000 a 12.8% increase from the $9,050,000,000 last year. Lunar New Year the Lunar New Year and 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 4.5 percentage points and the total company February sales by a little more than 0.5 percentage point. For the 1st 26 weeks of fiscal 2018, we reported sales of we have now reported sales of 68 $510,000,000 12.0 percent increase from $61,180,000,000 in the same number of weeks last year. I won't go through all the numbers that you see in the press release, but again on a 4 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 percent and total company 10.5% reported comp, ex gas and FX, 7.7% to the positive. And as I mentioned, e commerce ex gas I mean, I'm sorry, 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 strong results were Southeast Los Angeles 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 the dollar, total company benefited by about 150 basis points. Again, I think for the last quarter, it was 180.
Canada was helped by about 4.25 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, and the impact on the U. S. Was about 40. Canada, where we did quite a few openings this year, was about 140 basis points impact from that, a very small impact to 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. Hardlines were up low double digits. Better forming departments were majors, tires and health and beauty aids, HABA. Majors were up mid to high 20s led by appliances, computers and tablets.
So very strong showing there both in store and online. Softlines 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 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 column, 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 $0.05 or $0.04 or $0.05 But I'm just mentioning that because there's I assume there's confusion out there on everybody as we report given this is the quarter of transition. Lastly, our fiscal 2018 Q3 scheduled earnings release date for the 12 week Q3 ending May 13. We'll do the same thing. There'll be an aftermarket close on Thursday, May 31, with the earnings call that afternoon at 2 Pacific Time. With that, I'll open it up for questions.
Back
to you, Christy. First question comes from the line of Simon 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 new ones? And 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. I mean, 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. And we're getting with 20% to 30% fewer items, more total sales and more gross margin dollars.
So 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 $0,000,000 to $100,000,000 in the last few years. Certainly in the last year, year and a half, we've seen a big improvement in white goods with the advent of being supplied by all the majors. And I don't have exact numbers in front of me, but I'd be willing to guess while we had some of the prior first, second quarter on an annualized basis that's well over $250,000,000 $300,000,000 a year and growing. So there's going to be a few of those things as well.
And 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? And is there any change in how frequently they're visiting?
I don't have the exact numbers. It's still I'm sure it's still a low number. I don't know frankly, off top of my head if it's 10 or 20 or 25. I know that when I've 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 items that get their attention, including while supplies last in store on some of these items. And that gets their interest. We're seeing 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. And my follow-up is just on the 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 CityVisa?
Exactly, yes.
I'm smiling. The first four quarters we because it was so sizable, we shared with you the effective basis points of improved SG and A and margin related to how compared to the prior deal. We're now in the first couple of quarters, 3 quarters after that. For the year, it will still be an improvement, but a relatively small improvement. When we start when you at the beginning of the anniversary, the first anniversary, because when you started, you've got some extra money to drive things, Those fall off.
We're still getting new sign ups. 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. So I would say we're still very pleased with it.
My guess is it will 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.
Now by the way, we're using some of that as well. I mentioned the 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 2 year warranty. If you purchase it with a C Visa card, not only you'd get another 2% off on that on top of the 2% if you're an executive member, but get another 2 year on your warranty, so you get a 4 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 $1200,000 $1300 retail TV where we were already at great savings.
On top of that, if you use your Citi Visa card, you got $150 to $300 cash card depending on what TV and when it was. So 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. There's we believe that we can use this to drive sales in lots of ways that perhaps give us a little more octane than we would have thought.
Okay. Thanks.
Next question comes from the line of John Heinbockel.
So Richard, if I look at the 2019 new tax rate, am I right that the tax benefit in aggregate is about $300,000,000 Is that fair?
Well, take your pre tax and we don't know exactly, but if you look at we've been running about a 35 and half and subtract about and now we say it's 28, it's about 7 percentage points. I don't know if it's 6.5 or 7.5. It's you've got U. S. Which is this is a broad brush stroke 70% of our earnings.
So that's the side that gets the benefit. You have some offsets from that. Clearly, some of the benefits from deferred tax Internet, foreign tax credits and things that go away and things like that. So net net, all that included, we estimate that it's going to be around the 28 plus or minus level.
Now it sounded you talked about the benefit to the bottom line being more indirect. So 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? And you listed a bunch of buckets. Is there are they all sort of equal sizes?
And you didn't mention an e commerce bucket. Is that 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. 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. And so again, I'm not being cute, but will some of it fall bottom line? Yes.
We also take care of our employees. 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. And we're going to take care of things. And we're also what we have seen is, is many of the things we've done value wise have while maybe lower the gross margin dollars per cell unit, we've seen increased gross margin dollars because we sell a heck of a lot more units.
And if we and 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. And I think the biggest thing we want to communicate is we feel good about what we're doing and good about what's going on. And but there's never a dull moment out there.
And how does the 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, I mean, the one that I read about recently in the press was our new hazelnut spread, which is basically Nutella. I mean, it is literally flying off the shelves. It's a great value and it's a great quality. There are several at 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.
So it's lots of little things.
All right. And then just lastly, do you guys yet know or been able to calculate your the benefits you get to U. S. Comp from the Sam's closings? And have you started to see I imagine you've started to see that already, right?
We started to see it after the 1st week. The 1st week you had everybody rushing to 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, a little bit of member signs up from it and that's continuing. My guess is if the average Sam's Club the U.
S. As I understand it is in the low 90s, people say the 63 day close were less than that. And when I spoke to Craig immediately about it and the Head of Operations, their collective view was is that we 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 that we won't necessarily get it overnight and some we will.
But look, it's a with everything with all the other buckets, even a small bucket, it's 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 are 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. But could you perhaps sort of rank the benefits, whether it's where would you put appliances versus extending the aisle and 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 but 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. And that's come with the headline, if you will, which is something that's really hot in store. And there's also hot again, go to the if you go to if you haven't gone to the site lately, take a look.
And again, I think we're starting from a low base a low metric given on what we hadn't done in the past. And so you talk to our e commerce people and our Head of relative department heads of merchandising or head of merchandising, they feel pretty good that this will continue. I'm not suggesting 40 on 40 on 40 every year, but even when it hit 30 for the first time, Bob Nelson and I are asking, well, what happens a year from now? And the view is there's a lot of things they've got going on that should continue to drive it. But stay tuned, we'll see.
On top of that, we're getting off to a good start, albeit with a conscious slow soft opening of both delivery sites.
And that's really my follow-up. And so how was the sort of uptake are you getting in the online grocery? And could you compare the 2 day delivery option versus Instacart? And 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 noticed more than 3 months old or 6 months old is going back to the original data that we have from when we did 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, and again, that did not include Fresh though. And then we saw an existing member who was not making these numbers up, but it was 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 2 to 3 less 2 to 4 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 from on the Instacart side. And some of the end of the 2 day and we're actually adding some items. I think last time I mentioned, we started through our business about 10 business centers, which covers essentially the entire continental United States, virtually the entire continental United States. 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 100 over the next 6 months. And it's working so far, but it's new. And 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, is the results that we've seen from the ways we communicate with our member online. And 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. So as much as everybody is 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, it's still at a better price than the day before on Instacart because the prices are better today and even a better price through costco.com Costco and even better, of course, as you come in and we'll keep sending that message as well.
But I think we're honestly 2 plus years before we really know something of that, certainly 9 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.
Yes. Hi, Richard. So 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 MDMs were out there. And in explaining why we did it to start with was just because over time, whatever you do, it gets a little stale or not in every instance, but in some instances. So you try new things. Over those few months and continuing to today, we're continuing to try new things with our vendors as well. And I use water as an example.
We were a great value on 40.5 liters of Kirkland Signature and the price may be different a given state or something based on transportation. But I think we were at $3.49 which was the best price out there and doing heck of a lot of volume. And now we're at, I believe, dollars 2.99 every day. Well, you can imagine our various suppliers said, well, who's going to how can we do this? Well, you have huge increases in unit volumes.
And 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 and get back to that word I used about more octane in the dollar that we use. You take something like that TV example, we did $30,000,000 $40,000,000 on 1 SKU in 6 or 8 days. And how do you do that?
You do that because one, it's limited, 2, it's already a great price and 3, it's even a greater value because of what we do with our what we could do with partnering with our suppliers on it. And then on top of that, there's these other buckets. I gave the example of if you use your Citi Visa card. Well, we got some sign ups out of that, so applications on that. So I think that tends to be a little different.
I gave you example last quarter at the end of that for the 10 days leading up to and through Labor Day weekend, when everybody when traditional retail is out there selling USDA Choice strip steaks at making the number of $8.49 or $8.99 we're at 7.99 dollars we were at $699 And we locked up lots of New York strip steaks in the weeks preceding that and we saw a noticeable drive into the warehouse. So I think that having it's a lot easier to do when you've got 3,800 items out there versus 50,000 in the supermarket or 100 plus 1,000 in multi general stores, supercenter store.
Okay. And then 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. I mean, we heard from Target earlier this week about moving to $12 an hour. I mean, you are at the upper end of the pay scale for in terms of what you're paying your employees.
But does a rising tide just lift all boats here? Like how are you thinking about this philosophically? Are you looking to maintain the historical wage gaps that you've had? Just how should we be thinking about this for you?
Well, 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 use U.
S. Because every country is 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 were hourly, when they started yesterday or 20 years ago, is in the 22.25 percent to 22.5 percent, 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 over $10,000 little over $10,000 where we pay 90% of it roughly. So we have a great now by the way, that covers spouses and dependents as well. But on average, it's a little over 2 people per covered employee. But at the end of the day, even if the bottom of scale gets a little closer, the delta between the entire compensation 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. And then 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?
Well, as to the latter question, our membership market people are looking at it. I don't know exactly. My guess it has we had a strong Q1 where it averaged over 21,000 a week of new. Our sign ups during the quarter were fine. But my guess is it has to do with what did we do a year earlier or how are they calculating how are they collecting certain data.
I'm just relieved that the second half of the quarter it improved greatly. And my guess is not a big issue. Now the first question?
I would just saw through personal experience that you have 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. We did some it sounds silly, but 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. But we were below 50% with valid email addresses. And In two instances in the last few months, in about a week or 10 day period, we got over 1,000,000 members to get their email addresses by giving them something like $2 off on muffins or something.
So 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.
I mean, if I could just copy what happened over the several quarters after Canada. Canada is now above where it was before the conversion started 2.5 years ago. And Canada went down over 6 quarters from the conversion quarter to 6 quarters, 5 more quarters out by I believe 100 basis points, the renewal rate. And now it's 2% or 3% higher than it was before that. U.
S. Only went down around 60 basis about 6 tenths of a percent. So now it's back up a 10th from that minus 6. History should show that that will happen, but we'll have to wait and see.
And then just 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 had any thoughts on how it may impact you?
Well, look, the higher freight costs and availability of containers impacts all of us. It's not it's interesting, it's not talked a lot about. We're I think what it's made us do is we're doing a better job on back hauling, a more conscious effort. Historically, we always backhauled extra pallets and recycle like cardboard corrugated and you get basically could make more dollars doing that. But we really had done a lot on back hauling supplies merchandise for vendors.
And so I think that's mitigated a little bit of late. But I think it's still a net number. My guess would be it's not as impactful to us as it is to traditional retailer based on what I just said. 90% of our goods go through our cross Stock Depot operations. You've got literally 1,000 put into low single digit 1,000 several 1,000 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.
But we're able 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 employees, investing in price. Is that something that we should kind of expect fairly quickly? Or is that something that both of those 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 a 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 2 months. So it will impact Q3 less than a full Q3, whatever it is.
On both wage and price?
And then On employees, on price, we're already starting to do a little of that. But we've also had the benefit of various buckets. It's not all these buckets are fungible.
Okay. And then I don't think you gave inflation in the quarter.
Hold on a second. I don't have that in front of me. I think it's very 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 and then I'll get it for you
in a second.
And just on Instacart, I know you did say that ticket was larger on Instacart. So 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? And then obviously, Sam's announced the 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. I mean, 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 kind of 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 like Google Shopping Express, which didn't include Fresh. I believe it's still it's a double digit number, but in the higher double digits rather than the middle double digits.
Okay. And 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 about our accounting people. 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 3 or 4th last year.
And I would say overall, it's slightly inflationary because that is and looking at the turnover of the different categories. So my guess is it's and in the last 4 weeks, it was exactly 0. So I would say 0 to 2. This is cost, which would tend led me to believe that we're slightly we're definitely deflationary compared to that because we're lowering prices.
Great. Okay. Thanks very much.
Yes. Next question comes from the line of Chuck Grom.
Hey, good afternoon, Richard. Just trying to understand something here. So no inflation, you're investing more in price, yet your core on core margins as a percentage of sales were up, I think you said 14 basis points, which is the best performance since the 3rd quarter, with 3 of the 4 large categories up. So 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 4 core and core, there's so many other little things. An improvement in our travel business, which is a very high gross margin business, right? We don't it's not the value of that plane ticket and hotel. It's the broker commission with very little SG and A associated with it. So very little cost of sales.
All those things help a little bit. I think within the 80% of our business, which is core and core, fresh foods, hard lines, soft lines and food sundries, And talking to our Head of Merchandising 2 days ago, probably the 2 biggest things are what we call internally improved D and D. It's where damage is destroyed. We're having to mark things down less whatever we get from our vendors. There might be a spoilage allowance or returns allowance within something.
But generally speaking, we've showed an improvement there. And we've also shown 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 $1,000 item that we sell for $1100 just to make the numbers up. It's $100 gross margin on $1100 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.
So we've just improved our gross margin percent. You're talking about 1,000,000,000 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 3 or 4 years, we've seen what we call apparel in a couple of different apartments, men's, women's and kids, up 9 ish percent compounded for 3 or 4 years on a $7 or so,000,000,000 or so business worldwide. So those are that sends me higher margin. So my guess is, it's a lot of it's a little things. And part of it is getting our vendors to our suppliers working with them. We don't want just more money for them if we can't drive more sales to make up for it and get more dollars.
So all those things help.
Okay. That's helpful. And then just quickly on February, I think you said that hard lines were up low doubles and majors were the highest that we've been tracking, I think, some mid to high 20s. Can you just dissect that
for us? What led to
the improvement? And 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. So some of it has to do with I get back to the $150 to $300 off on a TV that's already incredibly low priced 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 will 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 is going to be. But 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. And then just one housekeeping. You guys said that the 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, I mean, 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. And when you miss your number a little bit in sales, it hurts you on the SG and 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 holidays, paid holidays.
When one of those falls in a that's more in our monthly budget meetings, our every 4 week budget meetings, when the operators will have to explain sometimes, payroll percent 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 4 week period that we have. And so 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? And 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 cost, look, we are spending more money. We're building some actual e commerce fulfillment centers. We 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 Burialuma, and annex, but it's a major multi double digit 1,000,000 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 2 day is us through our business delivery for roughly 10 of our business delivery centers with these 500 or so items. You'll say that's more inventory in the system right now while we do that. So all those things are costing us a little more in that regard. That's in the numbers as well. It will continue to be.
In terms of if you look at a CapEx company that's in the $2,500,000,000 range, There's always just when you think you're done with crosstalk operations, we're adding expanding some, adding a second one to Japan, even though we only have 20 7 or 8 units right now, but geographically, it makes sense now. Putting 1 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. So all those things have been additive to it. So I think as it relates to fulfillment, you'll still see some more, but it's in the $0,000,000 to 2 $100,000,000 a year, not we're going to go have to spend an extra $500,000,000 on our stuff.
And as we go from $200,000,000 even, what dropped out of the another bucket there? But 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.
But right now, we're 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. And you've 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? And 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 and 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 and A as well. What's your thought process on gas and its contribution to margin both on the based on the current gas price environment, which is relatively stable and also on the comparisons they evolved through last year?
Hello? Yes. I'm back.
Okay.
I don't know what happened there, guys. Sorry about that.
I think Oliver might have been in the midst of asking a question when I was called on to the line. So you can deal with that or go to my question first.
Well, 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. And then I answered the question he had about awareness. Did you hear that?
Some of
it. So it's really up to you.
Why don't we go on with your question? 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, and some of it related to gas as you discussed and some to non gas businesses. And taking a look back at a year ago, your ancillary margins were down sharply. Gas, I think, has something to do with it.
So what's your thought process on gas margins kind of intrinsically relative to trend, I guess, on a dollar basis or a penny 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's been pretty good. And a lot of it has to do with gallons. I think our gallons are up 9%, 9%, 10%, almost 10% compared to a U. S.
Industry that's up in the low like 2%. On the ancillaries, I think 2 things. 1, 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? Yes. No, 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, is nothing was called out last year or if it was a little disappointing, it was. And so 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.
And if I could just ask a second question, you 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 to do. When we look back at again the early days of in the Bay Area with Google Shopping Express, we saw it was a net increase in total spend every 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, you might have a little bit what we're finding is this is more anecdotal. There are plenty of people that are using it simply for fill in and still coming just as long, but we don't know yet.
We're also, by the way, finding members signing up members that we didn't have before. And 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 Costco. And we're just starting and we haven't even tried to market to those people yet.
And 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 come from Peter Benedict.
Hey, Richard. Hey, by the way, I've taken my arms off the table, so I don't touch the cord disconnecting it. My apologies.
Matt's had a heck of a time with Q and A the last couple of days. So but 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? And 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. 4 or 5 SKUs just for us. It's our meat plant. We have 2 optical grinding labs that grind 5,500,000 to 6,000,000 pair of prescription glasses that we sell every year. I guess you could say we have 2 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 will allow us to source ourselves about 100,000,000 chickens a year, which is less than a quarter of our needs, although another third to 40% of our needs are sourced in what the business was referred to as dedicated plants. We're not the only one that does it using 1 of the 3 or 4 large providers that we share in all the profitability and costs related to that plant. But needless to say, we think we do we can do that better than others because we have them make much 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 2 largest commissaries up there that serve some of our bakery needs were acquired by the 2 largest grocery retailers over the last few years. But in hindsight, it seems to be working. And 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. So I don't know what all that adds up to. My guess is 10% or less in total, maybe 5%. But 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.
And 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 then 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 only you can look at it there, but you can only have it received and ordered online. So it's we're doing it, but it's working so far. You expect to see it in more locations.
Okay. And then just with the bulk of the buy online, pickup in store, are those how are you staffing that from a labor perspective?
Just staff. I mean, they're going through trading. They're going through 3rd party trading in some cases. I mean, we're working with our vendors in some cases.
Okay. That's fair. And then last, just housekeeping. The D and A number, I don't know if you gave that for the Q2. Do you guys have that?
Which one? Depreciation. Depreciation?
It will be in the queue. My apologies, we don't.
No problem. All right. Thanks, guys.
Thank you. Why don't we have 2 more questions?
Okay. Next question comes from the line of Scott Monchaine.
Hey, guys. Thanks for taking my questions. So 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. And I was just wondering if you could talk about how you're thinking about as you just 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 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, you've got to 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 drawing lots of different things. We when you say going slowly, arguably, we do a lot of things slowly. We started with e commerce slowly 15 or 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 that we think works for us in our environment. And every time we so far when we do these things, it works. And it works our way. And it's not unlike when we first started in business and 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.
But on top of that, convenience and delivery for some is as well. But 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. And 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 whatever's did when they were that age. But what we're finding is items that pretend well for that and we'll see. And which of these are complementary.
So again, I don't know where we are 5 years from now. I know we have some fees 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. And we'll see where we go.
So my second question is with the tax and the reinvestment. Any thoughts like when we our surveys of consumers, I don't think it's just us, is that the 2 stress points for consumers in going to the store at this point, parking lots and checkout. Any thoughts on trying to ease? I mean, 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 2 friction points for consumers?
Well, what's interesting is we've got 4% traffic growth year on year on year on year and 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 to sit for an hour waiting for a shot and not shopping. But as it relates specifically to the front end, we continue to expand.
In the last probably 8 years, 9 years, we have reduced we have spent in terms of the average number of customers through an open register, an open staff to 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 in 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. And one of the things, we'll be rolling out so new things at the front end, testing it at 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. By the way, the other thing is, is we'll continue to open and infill and cannibalize units. We as one of the examples I've given in the last few calls on it for another question was last year we opened effectively our 4th unit on the east side of Seattle, the Woodville, Kirkland, Issaquah area and a 4th one in San Jose, California. In both instances, we went from roughly, I'll call it 60,000 members per location in the 3, so or 65,000, 180,000 to 195,000 members among 3 warehouses to maybe another 5,000 members in the market.
But we added net of cannibalization $110,000,000 to $125,000,000 of annual sales, which is great. And so that certainly is a relief point also. Now I can't speak specifically, one of our highest volume units in the United States is in Westbury, just notwithstanding the fact that we have bought, I forget what it was a retail big retail store next door at the supermarket maybe or a keyword, but adding lots of things to it. And it's hard to get another location you're buying. So 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 Binnock.
Kelly, Any others? One more.
Next question comes from the line of Chuck Cerankosky.
Hi, Chuck. Hello, Rick. Chuck Cerankoski. 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 and 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 preopening will start before because as you open them, let's say, the first several that open in the 1st several weeks of Q4, much of the preopening is incurred in the month leading up to it. Q4 is the thing. But in Q4 is also 16 weeks versus 12. So my guess it will be it will clearly be higher in Q4. And I don't know how 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. So that saves you a little bit, but we do that every year. All right. Thank you. Thank you, everyone.
Have a good day.