I will be your conference operator today. At this time, I would like to welcome everyone to the Costco Wholesale Corporation first quarter earnings call. 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'd like to ask a question during this time, simply press star one on your telephone keypad. If you'd like to withdraw your question, you can press the pound key. Thank you. I would now like to turn the conference over to CFO, Richard Galanti. You may begin.
Thank you, Christy, and good afternoon to everyone. I'll start by stating that these discussions will include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements involve risks and uncertainties that may cause actual events, results, and/or performance to differ materially from those indicated by statements and reports filed with the SEC. Forward-looking statements speak only as of the date they're made, and the company does not undertake to update these statements except as required by law. In today's press release, we reported operating results for the first quarter of fiscal 2018, the 12 weeks ended November 26th. Reported net income for the quarter came in at $640 million or $1.45 a share. That's a 17% increase compared to last year's first quarter results of $545 million or $1.24 a share.
In comparing the year-over-year results, there were two items noted in today's release. This $51 million figure represented a 19-basis point benefit to gross margin and a benefit to the first quarter 2017's earnings per share of $0.07 a share. Excluding those two items, the reported 17% increase in earnings would have been up 16%. A variety of other items impacted the year-over-year comparison. To the positive, gasoline profitability was higher year-over-year, as was, to a lesser extent, some incremental benefit from our co-branded credit card program metrics. Offsetting these year-over-year positives were costs related to Hurricanes Irma and Maria, as and a slightly higher year-over-year normalized income tax rate, about 70 basis points. Now turning to the income statement, I'll start with sales.
Net sales for the first quarter were $31.12 billion, a 13.3% increase from last year's $27.47 billion. While this year's 12-week quarter included one less sales day in the U.S. than the first quarter last year, due to the calendar shift of Thanksgiving, our pre-Thanksgiving and Black Friday holiday weekend sales fell into the first quarter this year, compared to having fallen into the second quarter last year. Combined, these two factors produced an estimated net benefit to this year's first quarter sales results by an estimated 1.5% in the U.S. and about 1.3% worldwide. As you saw in the release today, reported U.S. comparable sales increase was 10.3%, ex gas and FX, the 10.3% was at 8.7%. Canada was reported at 11.3%, ex gas and FX was a 4.3%. Other international, a plus 10.1% reported and ex gas and FX 8.2%.
All told, the total company was a 10.5 reported and a 7.9 after taking out the effects of gas inflation and FX. e-commerce, which we, several months ago, started reporting each month. For the 12 weeks, e-commerce comp sales were 43.5% up and ex gas, ex FX, it was 42.1%. This number includes the holiday north of 5% and perhaps up to 10% of benefit in that number. That 42 would come down a little bit if you normalized it. Still a very strong number. In terms of Q1 sales metrics, first quarter traffic was up 5.9% worldwide and 6.6% in the U.S. Gasoline inflation contributed another 142 basis points. Gas and FX together for the entire company was about two and a half percentage points, 250 basis points.
Cannibalization weighed in on comps to the tune of minus 105 basis points. For the last several quarters, we've had more impact from that as we've done several more reloads than we had done in the past. Average front-end transaction or ticket was up 4.3%. Again, a little over half of that, which was the gas and FX benefit. About 2 or a little over 2% normalized, transaction figure up. Next on the income statement, membership fees. Reported in Q1, $692 million. That's up $62 million or 9.8% year-over-year and 7 basis points. That $62 million increase in fees, benefit came from the fee increases we took in the U.S. and Canada effective June 1st of 2017.
The balance from the fee increases taken in September of 2016 or at the beginning of Q1 2017 in our other international operations. That goes back again to September of 2016. All told that plugged to be even more positive year-over-year delta in the upcoming 3 or so quarters. Our membership renewal rates came in at 90.0% in the U.S. and Canada and 87.2% worldwide. These are the same renewal rate percentage figures we had at the end of the previous fiscal quarter at Q4 2017. In terms of number of members at Q1 end, in terms of total households, at Q4 end, we had 49.4 million. We ended Q1 end 12 weeks later with 49.9 million, up a little over 1%, up right at 1%, during the 12 weeks.
Total cardholders at Q4 end, 12 weeks ago, we had 90.3 million cardholders, now 91.5 million. In terms of paid Executive members, they stand at 18.8 million, and that's an increase of about 246,000 over the past 12 weeks. We're still being able to convert and add new Executive members at the rate of about 21,000 a week in the quarter. I mentioned earlier in terms of the portion of the membership down to the gross margin line. Our reported gross margin the first quarter was lower year-over-year by 33 basis points. I'll ask you to just jot down 2 columns of numbers, not 4, just for the first quarter and basically what we reported for Q1 2018, and the second column would be without gas inflation, since that was impactful to understanding the numbers. The first line item is merchandise core.
Year-over-year on a reported basis, it was down 12 basis points. Ex gas inflation, it was flat or zero. Ancillary businesses, +6 on a reported basis and +9 ex gas inflation. 2% reward, -1 basis point and -2 basis points. Other, -26 and -26. All told, on total, on a reported basis, that was the -3 if you add up those numbers. Ex gas inflation, it was a -19. Overall, again, it was 33, excluding the 19 excluding the benefit from the non-recurring $51 million legal settlement last year, that was 19 basis points. Again, the total gross margin was lower year-over-year by 14 and was flat excluding gas inflation.
The core merchandise component of the margin was lower by 12, as you can see in the chart, but again, flat excluding gas price inflation in the quarter. Within the subcategories within core, food and sundries and soft lines, merchandise departments year-over-year in Q1 were up, and hard lines and fresh foods year-over-year were down. Ancillary and other business gross margins, again, in the chart I just shared with you, +6 basis points and +9 ex gas inflation. A higher year-over-year margin contribution came from gas and hearing aids mostly, offset by lower year-over-year margin contributions in pharmacy, e-commerce and food court. In terms of the 2% reward, the fact that that hits margin by a little bit indicates the fact that we're still getting increasing penetration of sales from members that have opted to become an Executive Member.
Lastly, in other, we had the positive non-recurring legal year-over-year settlement. That was a 19 basis point number. Most of the rest is some incremental costs this year, primarily related to new centralized return facilities. Going back two or three years ago, we tested this in one region, and in the last several months, we've rolled it out to the entire U.S. There'll be some small incremental costs related to that hits the margin in each of the next couple of quarters. Moving to reported SG&A. Our SG&A percentage in Q1 year-over-year was lower or better by 34 basis points. More importantly, I think ex gas inflation, it was still better or lower by 20 basis points. Again, on a reported basis, it came in at 10.36%. Doing the little chart again, the two columns, reported and without gas inflation.
Core operations, lower or better by 24 basis points. I put a plus sign in front of that. Ex gas inflation, +12. Central, +8 and ex gas, +7. Stock compensation, +2 and +1. Total reported lower or better, +34 basis points and ex gas +20 basis points or lower by 20 basis points. Looking again at the chart, the operations component was lower or better by 24 basis points and better by 12 ex gas inflation. This basically is a function of strong top-line sales. As you know, we've reported in each of the last several months and today in the quarter, very strong sales both in store and online. Central expense also lower by 8 basis points or 7 without gas. Again, when we look through all the detail, first and foremost, it's strong sales results. No real surprises here.
As we've been told, higher sales drives lower SG&A. Next on the income statement, pre-opening. $5 million lower this year in Q1, coming in at $17 million compared to $22 million. Really a function of opening schedule. This year in Q1, we opened seven openings, five net new openings plus two reloads, all in North America. Last year in Q1, we opened nine, eight of which were net new, but nine openings, again, all in North America. All told, reported operating income in Q1 came in at $951 million, up $102 million or 12% higher year-over-year. Excluding the legal settlement, basically would've been up $153 million from an adjusted $849 million last year. We're up 19% without that legal settlement. Below the higher year-over-year, basically because of the result of the debt offering we did this past May in conjunction with our special dividend.
Interest income and other was lower year-over-year by $4 million. Actual interest income in the quarter was better by $5 million. It was more than offset by about a $9 million negative impact from FX contracts, FX-related items, not just contracts. Those fluctuate plus or minus that amount, it seems, each quarter based on how we manage foreign currency payables in different countries around the world. Overall, pre-tax income was higher by 11% or $90 million in the quarter, coming in at $936 million, up $141 million or up 18%, excluding the $51 million one-time legal settlement benefit last year in Q1. In terms of income taxes, our tax rate in Q1 2018 came in at 30.4% for the quarter. Last year was 34.4%. On a normalized basis, again, taking out that unusual item that we mentioned in the press release today.
Last year, there was a small incremental difference. Last year, what I'll call normalized tax rate would have been a 34.1%, which would again been lower by about 70 basis points than this year's normalized tax rate of 34.8%, again, taking out that item that we mentioned in the press release. As I mentioned earlier in the call, again, we mentioned that a positive discrete tax item this year. Overall reported net income was higher by 17%, coming in at $640 million compared to last year's $545 million. Again, excluding the two items, since one of them was tax items and depreciation at $335 million. Warehouse expansion. I think we talked about somewhere we expect somewhere between 20 and 25 openings. Over half of them will be in the U.S. We expect three in Canada, two in Korea, and one each in Australia and Mexico.
As well, we plan to relocate six warehouses this year, four in the U.S. and two in Canada. That, again, compares to two to three a year in recent years. We opened quite a few extra in fiscal 2017 as well. As of Q1 end, total warehouse square footage stood at 108 million sq ft. In terms of stock buybacks, in all of fiscal 2017, we spent $473 million per quarter. Before I turn it back to Christy for Q&A, I'll give you a quick update on e-commerce and our credit card relationship with Citi Visa. Worldwide e-commerce sales in the first quarter of 2018 were $1.3 billion, up 40% year-over-year. Some Thanksgiving, Black Friday week, as well as Cyber Monday, which falls into Q2 this year and last year.
Our warehouses are supporting costco.com with signage and tablets used in search and purchase, and people can purchase .com items by our members from our warehouses, selected items. Online grocery, as you know, at the call a fiscal quarter ago, we talked about that week in the first week in October. We introduced two new delivery options on costco.com, a dry grocery two-day delivery and also same-day fresh delivery through Instacart. Both of those rolled out in early October. They've been positive to date while still in a soft opening/limited marketing mode. We rolled out in Q1 2018. We enhanced the value of the Executive Membership. In Q1 2018, now members who are Executive Members purchasing from Costco Travel will also receive a 2% reward on all their travel purchases.
Of course, with travel, and the like on the using their Citi Visa card, they get an additional 3%, so five between the two. We are also now offering a buy online pickup in-store on selected items, including jewelry and some laptop computers. We're seeing people coming in to pick them up, and many of them, over half of them, are shopping while they're there. Overall, all these efforts are having a positive impact on our business, both online and in-warehouse, and have resulted in greater sales momentum and increased awareness of our digital presence. We've done quite a few things online to increase traffic in our warehouses. I think I shared a few of those with you last time, whether it was [top buys on million] co-branded cards or 7.4 million accounts. Those were transferred over to Citi for the conversion.
As of Q1 end, we now have two complete. Our fiscal 2018 second quarter scheduled earnings release date for the 12-week second quarter ending February 18th. This weekend, we'll at the top of the next hour, do the call. With that, I'd like to open it up for questions with Christy. Back to you.
Okay. Thank you so much.
Thanks a lot for taking my question. Richard, is membership per club now at a growth level that can be sustained from here? Were there any unique promotions that contributed to the growth in that metric that you experienced during the quarter?
I think the biggest thing, if you go back a few quarters ago, where that average came down a little bit, it's a function of two primary things. Well, three. Number of openings, and certainly they fluctuate quarter to quarter and year-over-year. Those timings. When we add a new unit to an existing market, and I gave a couple examples of that last time, we might have 65,000 members per warehouse in three locations in the East Side of Seattle here or in the San Jose area. I think those were the two examples I gave you.
We open up a new unit, which adds $120 million-$130 million of incremental sales, but only adds literally a few thousand additional members because you now have members that are shopping more frequently because we're closer to them. That will continue to happen. The timing of openings, as I said, that'll move up and down. I think overall, the metric did come up both last quarter and this quarter, year-over-year, for the first time. Yeah, we're adding some new markets as well. That'll help us. My guess is the average, and to the extent it was a little less, we'll look at it and we'll say, well, usually the reason is there were less year-over-year openings in a few of these international markets. I think in 11 plus.
In a minute.
We feel very good about our renewal rates and so far so good on what we've felt the impact of the credit card switch and the auto bill. So far so good.
In the past, you've given a little bit more detail on renewal rates by Gold Star, primary business, membership cohort. Is there any reason why you've decided not to give that detail?
I think the biggest reason, over the years, some of you on this call know us for 20 or 25 years doing this. As we've gotten so granular, it almost has become a distraction. Rest assured, anything that is impactful, we're going to make sure that you know about. At the end of the day, what's important is total number of members and growth, existing member renewal rates, of course. Part of the other challenge is, early on in our career, wholesale member, you had to have a bona fide business license. It truly was a small business owner. Then that evolved into a business membership where you could have business add-ons, and many of those were not for business purposes, but a small business with 10 members, with 10 employees, and the employer bought the memberships for his or her employees.
After that, with the Executive Membership coming on, those people would get off of that primary membership and have their own membership. So we know more about our business member versus not based on what they're buying than anything else.
My follow-up question is on the potential for tax reform. Would you treat any savings that you might get from potential tax reform as any other windfall that you get and reinvest that back in the business in form of lower prices?
Well, first we have to wait and see what actually happens. I know in the first year of what we're reading about today, there's still some one-time offsets to that for earnings overseas, historical earnings overseas, to the extent that that cash hasn't come back. That will be a partial offset, I believe, to what we currently read today. Look, going forward, we're going to do what's long-term right for our stockholders' valuation. With us, that includes all the things you heard about historically. We'll have to wait and see and talk about it more when we get there.
Thank you so much, and good luck with the rest of the holiday.
Thank you.
Next question comes from the line of Chuck Grom from Gordon Haskett.
Hey, good afternoon, Richard. Just on the gross margins, I think you said the core on core was flat. I was wondering if you could shed some color on the Visa benefit and then also what the total core was as a percentage of their own sales, and if you could just amplify on any of the category color directionally that you gave earlier.
Yeah. Getting back to the previous person's questions about when I responded with the granularity. The big benefits were in the first year. There was some incremental benefit. Going forward, we're really not going to specify the detail. Needless to say, incrementally, it's a lot lower than going from nothing to the big benefit that we got in the first 12 months and will continue to get. The good news is it's growing as a % of sales. In terms of core on core, I think it was down a few basis points. I don't have that detail in front of me. Again, I know that was a big question last quarter, and compared to prior quarters. There's so many moving parts.
What I can tell you is we feel very good about our margins, that a lot of the stuff we have done and will continue to do is offensive, not defensive. We are probably the biggest surprise, it's worked as good, if not better than we thought it was going to work.
Okay. Great. Just on any early readings with Instacart, I know when you did Google Express that most of the purchases were fill-in trips and were therefore complimentary. I was just curious what your early takes are with that effort.
Yeah, look, all the numbers that are now on our website, one of the things I mentioned here, both we and Instacart have chosen for the first two or three months of this thing to basically have a soft opening, if you will, to make sure that we don't screw it up. When I say we don't screw it up, it's growing very nicely.
The acceleration in your digital sales in November, that was really just your core costco.com business?
Yes.
Okay, great. Good luck, Richard. Thanks.
Thank you.
Next question comes from the line of John Heinbockel from Guggenheim Securities.
Richard, on BOPUS, the thought of starting with jewelry and PCs, what sort of drove that? How far can you take that operationally, right? You think about other products like big bulky stuff, paper, beverage. Can you do that operationally, and then is that what your customers want? Are you hearing from members that they want more BOPUS items?
Well, first of all, we haven't heard from a lot of members. I'm not so sure that We haven't asked them either, by the way. We do see the strength in our numbers, particularly in store. The online's fantastic, but in store is 85% of our business. When we looked at doing it our way, we still scratch our head about do we want to even consider doing what some of the others are doing, not just other warehouse clubs, but other retailers. There's a lot of cost to that. So far, we haven't seen a reason to do that. In the case of these couple of categories, what we found is that there are a lot of people that won't buy it because they can't have it shipped to their office or their place of work, and they don't want it left at their doorstep.
Here's a way for them to buy it. We saw a nice piece of business being done that way. As you might expect, since they're not coming over to pick up the groceries that we've bought and sat and put their refrigerated stuff in the refrigerator and the frozen stuff in the freezer, they just go up to the cage and get this. Over half of them went in and shopped before they picked up their laptop or their jewelry. That's what we like.
Right. Are we more at the low end of that 20 to 25? Obviously, we sort of haven't done many in Asia of late. Is that just the way the real estate timing falls, and we're going to get a surge in overseas openings in the next-
Maybe a third. That's just a measure of timing. I think it's currently on the list for right after the fiscal year. A lot of it has to do with timing. In terms of the 20 to 25, history would suggest that it's at the lower end then versus the higher end. The real difference is not things that we don't have on the plate already. Do we get lucky with weather in the winter, and can we push a couple based on when different hurdles occur with permits or whatever.
All right. Just lastly, you talked about the gas benefit. Was that de minimis, or how big was that?
Well, there's no good time to become a little less granular. When you add them all up, it wasn't a big impact to the bottom line.
Okay.
At the end of the day, look, gas is good. There have been some quarters. If you looked at the last eight or 12 quarters, which I haven't looked at, it's probably more than $0.01, and there'd be quarters when it was five.
Yeah.
It could be anything within there or a little on either side of that. Didn't say they were good.
Okay. Thank you.
Ex gas.
Yeah.
Maybe the basket was up a couple of percentage points. We don't really look at LIFO anymore. We have it, but we don't look at it. I think if there was anything that was made ex gas, there was a tiny amount of inflation. That's on the cost side. Given investing in price and given the competition you see from other retailers out there, my guess is there was probably little, if any, inflation.
Okay. That's what I was wondering. There's been a lot of PPI has clearly been high, up and elevated, while CPI has been a lot more muted. I guess that's kind of why I'm wondering how much that impacted your margins, or how can we think about that in terms of-
I don't think that impacted a lot. I really don't think that impacted it, Karen. It's really us looking at what happens when we get hot on pricing, or hotter, and recognizing we have these benefits from credit card and from membership. That's what we do.
Okay. I guess, in terms of grocery delivery and Instacart, I guess you didn't give an update. Are you still at the 500 SKUs for grocery delivery and 1,700 on Instacart? Anything to indicate on that component of the business, whether or not this is drawing a customer who's kind of been dormant, and now you're seeing incremental trips? Anything you could point to? Because obviously the concern is that there will be cannibalization with this offering.
We really haven't. We'll wait six months and then take a look at it.
Okay. Lastly, how many units are on BOPUS right now?
I'm sorry, how many units?
Are on the buy online pick up in store for those small number of items.
Very limited.
Okay. Thank you.
Hold on. Hold on.
Jewelry and laptops are all warehouses.
All warehouses are doing jewelry and laptops.
US.
In U.S.
Okay. Our next question comes from the line of Simeon Gutman from Morgan Stanley.
Hey, guys. Richard, first on membership, can you talk about how successful the couple of promotions that you ran in the quarter and how it performed relative to other ones you've done in the past? Just generally, is the competitive environment for club membership any different than it's been in the past?
Well, first of all, I'm not sure what we did this quarter. During Q4, we did the Groupon/LivingSocial. That went fine, I'm not sure of anything we did this quarter.
Okay. What about the environment? Is it any different as far as competitors being promotional for new members? Is there anything to call out versus how it looked like in the past?
I don't think they're more promotional, our direct competitors have been very promotional, one more than the other, whether it's a monthly one or a certain amount of dollars off.
My follow-up is on the online sales. You gave a little bit of color. I don't know if you talked about categories that are outcomping. Curious if, just thinking about the products that are growing faster than the house online versus others, if that's doing anything for the gross margin.
Yes, keep in mind, with all this wonderful growth, it's less than 5% of our company. It doesn't have that big impact on the overall company. Electronics, it probably does, because we've been very successful online with electronics, and given the white glove service, hopefully members understanding that if they're an Executive Member and they have the co-brand card, they get an extra five off and they get a four-year warranty. That includes using the co-brand card. All those things we help drive the business, notwithstanding we haven't let everybody know. I think apparel has been good, but part of that is that we are doing more apparel online. I think we're also getting better, with a small B, on targeting certain types of emails to members that do some of these things.
Complementary items
Okay, thank you.
Yes.
Next question comes from the line of Dan Binder from Jefferies.
Thanks. The first question was on the Visa cardholder. I'm just curious, you're over a year in now, do you have any comparative data on how that cardholder is spending in the club versus the Amex cardholder previously?
The only thing I look at, I don't know that. In many cases, it was the same member. We believe that you have a higher spend because of better rewards, better promotions. The fact that Visa is accepted more places. If my old reward card, co-branded card, it was my top of wallet, and now the new Citi Visa is, there are many more places I can use my new one. That's driven more outside spend. The beauty of co-brand programs for big companies, whether it's airline, retail, hotel, travel, is that there's some revenue share there. Those are the metrics we've looked at. We also, of course, doubled the reward on all Costco purchases. Gas, four, but not a double, but everything else used to be one, and now it's two. All those things are helping us trend in the right direction there.
With regard to renewal rates, you highlighted that the renewal rate was the same as where we were at the end of fourth quarter. I know last quarter you were talking about the trajectory and how you think it'll follow your experience in Canada. Do you think that next quarter we could see the first tick up in renewal rates?
I think a quarter ago we said one to two quarters, we have one more quarter of-
Flat
of flat to- Again, when we're talking about tenths of a percentage point, a half a tenth is what will average it up or down. Yeah, we want to hedge our bets here a little bit, we believe that's the case, we've got one more quarter of a free pass here.
Lastly, do you have any-
We were pleased with what we saw in Q1 compared to Q4 end.
lastly, do you have any numbers around membership growth in comp stores?
No, we don't. Only because we did that last quarter because we knew there was a lot of concerns around it, we thought that was a data point.
From JPMorgan.
Thanks. Good evening. On the core margin being flat ex gas, usually when you go into these periods of into the teeth of the renewal, the membership fee increase, you tend to invest in gross margin, I think most have expected it to be down. Going back to a prior question, is mix helping you? The price environment is pretty promotional out there, just trying to understand why that came in flat versus through the historical experience of how you would invest into the fee increase period.
Look, our philosophy is we invest in this stuff. We're also pragmatic. There's a lot out there. I think we had the benefit also. Given our limited nature of our limited number of items, we can do some hot buys on a limited number of items that are truly wow and drive sales in an item an extra $10 or $20 million in a week or a few weeks. It seems to work for us. We feel good that we're looking at this stuff offensively, and we'll see how we use it.
In terms of, following up on the tax question, you talked about doing what's right for the shareholders, the valuation of the stock. I mean, historically, I think your motto is customer, employee, vendor, shareholder. Is that the way how we should think about that potential tax flow-through?
We'll drive you crazy a little bit. Sure. I mean, yes. We're going to keep doing what's right. Again, I'm not trying to be cute. First of all, we don't know what the tax plan's going to do, and we don't know what the impact in the first year of it based on some offsets. You could rest assured that we'll do the right thing, and we'll drive business the way we do it that helps all those stakeholders. [inaudible]
Lastly, just a couple quick follow-ups. Does the 53rd week shift end up being a point and a half headwind for this upcoming quarter? In the other line within gross margin, I think you said 26 basis points. When you say some of that's going to stick around for the next three quarters, is that 26 basis points or something a little more?
No. Within the 26, 19 of that 26 was that $51 million legal settlement benefit to gross margin in Q1 of 2017, a year ago. Year-over-year, it was minus 19 basis points. What we're talking about is the other seven.
Okay.
The other seven primarily has to do with a major switch we did in how we handle, return, and dispose of salvaged merchandise. We tested it for a couple of years in one or two regions, one region, then another. In just the last six or seven months, we've rolled it out throughout the United States to now all 12 depots that do this for us that can handle the entire United States. Needless say, we did it because it works and it's going to be positive. There's the startup costs, if you will, of getting it rolled out and done, and the efficiencies that will afford over time. That seven, hopefully, will be six, five, four, three. A year from now, it'll be zero, in theory, and then go the other way a little bit.
At the end of the day, we wanted to point it out because it is a little unusual, and we recognize that you guys are very sensitive to these basis points of margin.
The one and a half point sales shift?
That's for Q2.
Yeah.
for Q-
That's a headwind.
Yes. That'll be a headwind, yes. It'll be a bigger headwind for e-commerce because we don't know if it's 5% or 10%, probably in the high singles. That's a guess.
Understood. Thanks very much.
Next question comes from the line of Edward Kelly from Wells Fargo.
Hi, Richard. Good afternoon. Can I just ask about traffic? It wasn't that long ago, I guess, that traffic had slipped to 2% or so when we were all sort of thinking, maybe this is the new norm. Obviously, you have seen dramatically better traffic growth this year. I guess just thinking about things in hindsight, was there something unusual about that period to that level again, given the levers that you now have to pull in this business, whether it's the fee increase or tax or whatever it might be?
I think a little of it had to do with the credit card switch. Leading up to June of 2016, for about nine months from June 2016 backwards, we didn't sign up any new members, both we and American Express agreed there's no sense signing up somebody for a card that's going to go away in June of 2016. There's probably some negative impact and confusion. The confusion probably into the first few weeks of the new card, given it was an overall impact. I remember when those numbers were coming down, we were asked, and like you just said, we said, "Maybe it's the new normal. We don't know." We felt good about our business. One of the things we did is said, "How can we get it more exciting out there?" Part of that was pricing and the like.
We also had a little bit of a hiccup from a traffic standpoint with the multi-vendor mailers. If you recall, the good thing is fewer items with greater values and more sales in an MVM. However, the offset to that was we probably dug a little deeper than we should have in terms of fewer MVM days during the course of the year. We saw that impact basically December of 2016 to February or March of 2017, so pretty much Q2 of fiscal 2017. As we said on that Q2 call, which was a disappointing quarter, we said, "It's easy. We'll change back. We'll add some more days." We kept the lower, fewer items and the greater values. That's working nicely, but we have more days. Where we had tweaked a little bit too much and had fewer.
Just a follow-up on tax reform. I know it's a difficult question to ask, but maybe we think about it in bigger picture sense of investment and how you think about driving sales and when you think about where you'd like to spend money, particularly if you were to potentially get some windfall. Everyone sort of thinks about price, but are there other things that would really like to have but are expensive or an earnings headwind currently that makes the return calculation a little different, whether it's enhanced digital or fulfillment or something on labor? I'm just trying to figure out, are there other areas of the business besides just price that you should be thinking about that you would like to invest in if you had the opportunity?
Well, first of all, I would like to think that we would be doing those anyway. We have strong cash flow. As you know, we generate cash flow well in excess of our CapEx. Keep increasing the regular dividend, have done the specials a few times. Bought back stocks enough to at least cover, a little more than frankly, cover that with a bucket of money. What can we do that we weren't prepared to do yesterday? Now, as we said, I think you'll see us do what we do well. It's merchandising and driving business and taking care of our employees and ultimately taking care of our shareholders. I'm not trying to be cute. We don't know what we're going to do yet because first we got to figure out what's going to actually happen.
Great. Thank you.
Next question comes from the line of Matt Fassler from Goldman Sachs.
Thanks so much. Good afternoon, Richard. Half the sales, clearly, you're going to do a lot more sales per day and probably for employee hour. I'm not sure about the margin profile that you generate on that weekend.
I'm shooting from the hip on this one. Look, having extra strong sales in a warehouse on that day, they're more profitable as a percent of pre-tax because you've already budgeted your labor and it's busier. We kind of know it on the other end. Hopefully, we budget properly there, so maybe it's not a complete offset. We're talking about a few weeks here and there. I don't think it's a big deal either way.
Another question. You were asked on e-commerce about profitabilities related to category shift. If you think about the growth of the business, you think about some of the accommodations you're making and the incremental offers that you are providing, can you talk a bit about the gross margin profile of e-commerce in total? I think you addressed it briefly, I think as part of the gross margin discussion. Any senses to the direction of the-- I also know it's small, you made that point as well. Just as it gets bigger, is the direction you're taking it in moving the gross margin in that category one way or the other?
Look-
Through that channel, I guess I should say.
First of all, gross margin in e-commerce, even two years ago, was a little lower than the warehouse, the SG&A was a lot lower than the warehouse.
The bottom line was a lot higher than the warehouse, recognizing it wouldn't exist if it didn't have the warehouse. It's all one big happy family there. At the end of the day, what we have found and what everybody else found before us probably is, if we can figure out, and we have, we think, figured out how to communicate effectively with our members on some particularly hot buys, it really drives business, not just online. I think there's enough-- Our view is our margin, even whether it was a basis point lower or a basis point higher, it's because of what we wanted to do, not because we were impacted by losing something to someone else. I think we're fortunate in that regard.
Even within very competitive products, electronics is very competitive. We over-index to higher-end stuff. It's all competitive everywhere, but within the electronics area, it's probably a little better, a little less competitive, which makes us look better. In my view, there's so many buckets that we can pull from. I don't see that as a big thing to worry about analyzing at this juncture.
Great. Thank you so much.
Next question comes from the line of Paul Trussell from Deutsche Bank.
Good afternoon. Just to follow up on the e-commerce conversation. You've had a series of announcements on the last few calls, including partnerships and the buy online, pick up in store, Costco Grocery. I just wanted to take a step back real quick, Richard, if you can just talk about overall your mindset, and approach to e-commerce and omni-channel and what's led to, I think a lot of us view this as a bit of a turn in the narrative, in the way that you all have kind of approached the business historically.
I think we've still done things our way. Views out there, like several people on the call here. There's a range of views. I think what we've hopefully communicated is that in our own way, there's lots of little buckets out there and low-hanging fruit that we have, importantly, not only for e-commerce or omni-channel, but for in-store and driving business that way as well. We feel fortunate in that regard.
It was funny, I remember on the last earnings call 3 months ago, when we talked for the first time, and on the one hand, there were some out there that viewed this, "Yes, they figured it out." There was others saying, "They had to do this because something else is wrong." Our view is we're kind of doing pretty well, first and foremost, with driving our brick-and-mortar business, understanding that some of it already 10 years ago online, even with us, was white glove service on things you had to install or build, like a patio set or a swing set or a big screen television. One of the things I talked about last quarter was white goods. Over the last several months, we've improved our direct relationships with LG and Samsung.
Rather historically, when we were doing white goods not terribly well with just a limited couple of items, not with the highest end stuff that we could sell in store, all of a sudden, we have great value, incredible value, plus extra warranties and all that stuff if you use your Visa card. We think that we can take an item that was well under $100 million in sales, in a matter of a few years, be $1 billion. A billion is still just under 1% of sales, but it's $1 billion. There's lots of things that we are able to do in this tough new world. I've mentioned before apparel, where brick-and-mortar apparel is flatter down and total apparel, including online, is up a few percentage points.
We've got worldwide a close to a $7 billion apparel business that's compounded in the last three plus years at over 9%. Two reasons, growth in signature and weakness in brick and mortar, and some manufacturers willing to sell us for the first time, suppliers. Amazing pricing. We'll keep doing that.
That makes sense. You've spoken a bit about the investments in price and some of the product on the U.S. front. Is that the same story in what's happening in Canada and other places around the world? Or are there any other kind of unique factors that we would attribute some of the strength in those regions to?
It's everywhere. The fact that the Warehouse Club concept is newer in some of those countries, you had vendors, even international vendors, and certainly local vendors that were a little queasy. They knew how big we are, and if we come, it's going to be great, but they have a lot of customers that weren't thrilled. Once we get that second one opened, it helps the first one as well. We've seen the same thing happen in Australia over the first few years. Again, it gets back to we are a global sourcing and a global supplying company, and clearly, with eight or so locations in Australia, we bring the purchasing power of a $130 billion retailer to that market, and that helps us as well.
I think the fact that our Kirkland Signature items have become a high-end, incredibly low-priced brand, incredibly high-value brand, that's helped us as well.
Thank you. Lastly from me, quickly, I might have missed it, but from the Visa card, did you outline any particular benefit?
From the prior program to what this great new program has done for us, we did, and going forward, we aren't. We did say that incrementally it was a little benefit, percentage-wise.
Thanks and good luck.
Why don't we take two more questions?
Okay. Next question comes from the line of Kelly Bania from BMO.
Hi, good evening, Richard. Thanks for taking the question. Just curious on the SG&A line. You mentioned some incremental costs to think about over the next few quarters. Can you quantify that at all for us? In terms of the shift, was there any impact, the calendar shift to SG&A or membership or any other line items in the quarter?
There's a lot of little things. First of all, in terms of the shift help you, as Matt asked earlier about an extra percentage half, my guess is a small amount of basis points. The first part of the question you asked was about this thing that'll continue for the next few quarters. That's a margin item. That had to do with us changing the way to make it, frankly, more efficient and less costly for handling returns and doing it centrally, if you will, at each of 12 depots across the country. In the United States, talking about U.S. That was much of that extra, that line item that was 26 basis points, of which 19 was the one-time thing from last year. Those other seven basis points, much of that is that, but that's a margin hit.
That'll be a little bit of a margin hit in each of the upcoming, probably two or three quarters. I'm hoping it'll dwindle a little bit, but that'll be what it'll be.
Great. Just on online, with the acceleration online with grocery, just curious if you have any based on what you've seen so far, it's been very successful with just even a soft launch. You mentioned getting deeper into using some email and some targeted email. Just curious, what else can we expect to come from online? Do you have any plans for adding an auto-replenishment feature? Anything you can share with us on that would be great.
Well, first of all, with regard to delivery, we've done no marketing of it per se. It truly has been a soft opening, both on our part in the case of the same-day grocery on Instacart's part. Now, even with the comments I made about the laptops and the jewelry, that's the test. We looked at it, and of course, we've been asked 100 times, what about order online, pick up in store? We scratch our head and recognizing our places are a lot busier than others. We don't see how that makes sense. We don't hear a lot of members asking about it. We looked at it and said, where are some areas where it might make sense? We're trying it.
Tires, it makes sense. That's been very successful over the last year and a half, where you can order the tires online to go to the location that you want.
Any on the auto replenishment?
No comment at this point. We'll let you know if and when we decide. We're looking at that and some other things.
Thank you.
Next question comes from the line of David Schick from Consumer Edge.
Hi, good afternoon. Thanks for taking my question. We've talked a lot about digital and what you're trying digitally. My question is what you're seeing digitally in e-commerce, is that causing any merchandising decisions, pushing anything back to the clubs? Are you noticing anything in those trends that could change your merchandising? Thank you.
We've done emails to bring people in. Yeah. One thing that we've done is we've done a better job of emailing people to get them into the warehouse. I mentioned the New York strip steaks. We've also done some items that if you bought in store a baby seat, some of those are online and some of them are in store. The tire and [saw] I just mentioned.
Better deals.
Okay.
Right now, all we're doing is high-fiving each other. It's working to drive business in store and drive business online.
Any update on the wage outlook for you guys have stayed ahead of it and been very transparent with it. Just talking about the wage outlook now, 90 days since your last quarter.
No, we feel $16. Several markets, we start people at a little higher than that where we have to. Some parts of the Bay Area, some parts of New York. There are only a couple of cities, Seattle and San Francisco, where there's a minimum of $15. Rest assured, we'll stay ahead of the game on that.
Thanks.
Next question comes from the line.
Yeah. Cost of the hurricanes, that's another. I know you said there was a cost. I didn't hear what you said what the cost was.
We didn't. We're trying to be a little less granular because there were some offsetting things that we threw out there. The two of them together were a couple or three pennies in total, but not that big of a difference. I'm learning how to not tell you stuff. Not going to give it to you.
My last, my real question is in, you take a step back and we've talked about e-commerce forever, the Amazon impact, the concerns about it, and you've historically said, "We want people in our stores. We don't believe in a lot of this stuff, particularly, the buy online and the click and collect types of businesses." You want people in your stores or in your warehouses. I guess, just from a philosophical perspective, since your sales are so darn strong, why are you guys moving so aggressively with some of these e-commerce, either trials or even just rolling it out? It seems that if I look at it over time, it could be harmful to keeping people in your warehouses, and I just want to know philosophically what made you guys change your mind and why you're doing it.
First of all, I think, we want to be responsive, and we want to make sure that we're not being stubborn about things. If we have on average about 3,800 items in store, maybe we have twice that online. This is a rounding error for everybody else in terms of what they offer their customers in terms of items. We have to figure out how to do it and still have that value of what we do. We've also figured out how to do it without spending hundreds of millions of dollars. The two-day dry grocery, up to two-day dry grocery that we're doing through a handful of our depots, which covers essentially the entire continental U.S., we're able to do that pretty cheaply because we were already allowing business members to go to the business, not depots, but all consumable type items.
Our view is these are relatively inexpensive ways to try things, and they're working. Scott, of course, we have to measure how we do going forward. We'd love for grocery orders online to be fill and not stop you from coming. We recognize that you may come a few less times during the year. How do we change that? We also recognize there's people that live 30 to 60 minutes away from us. Sometimes that's 10 miles, sometimes that's 40 miles. That's been a big boon for us where we see this could help. Again, life has changed on big ticket, big size items, and items that you've got to install, in many cases, items that you want somebody else to take the old mattress or the old refrigerator away.
We've gotten, I think, some confidence in those areas that we can show the best value on the high-end stuff in those areas as well. I think it's all working probably a little better than we thought it would.
All right. I appreciate the answer, and I'd give a shout-out to that tire program. It's pretty good. Anyway, have a good holiday.
Well, thank you. We'll take one last question.
Next question comes from the line of Chuck Cerankosky from Northcoast Research.
Good afternoon, Richard. I just wanted to see if you could take sort of a 30,000-foot view and talk about how the mix is different and changing as this economy's improved, not only in the U.S., but maybe also comment on Canada and the rest of your operations.
Bigger ticket items are laptops and our pads, tablets, and televisions. Audio is everything from these boxes that you put outside, telephones, and jewelry. I think from a, is the economy getting better? Who knows? Certainly, there's money out there to be spent on this stuff, and we've seen some pickup in those areas. The internet's helped out a little bit.
By internet, you mean e-commerce?
Yes.
All right, great. Thank you.
Well, thank you everyone. We'll be around. Happy holidays.
Thank you. Thank you for your presentation. This concludes today's conference call. You all may now disconnect.