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 speakers' remarks, there will be a question and answer session. Thank you.
I would now like to turn the conference over to CFO, 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. 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 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 Q1 of fiscal 2018, the 12 weeks ended November 26.
Reported net income for the quarter came in at $640,000,000 or $1.45 a share. That's a 17% increase compared to last year's Q1 results of $545,000,000 or $1.24 a share. In comparing the year over year results, there were 2 items noted in today's release. This $51,000,000 figure represented a 19 basis point benefit to gross margin and a benefit to the Q1 20 seventeen 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 incremental 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, 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 Q1 were $31,120,000,000 a 13 0.3% increase from last year's $27,470,000,000 While this year's 12 week quarter included 1 less sales day in the United States than the Q1 last year due to the calendar shift to Thanksgiving, our pre Thanksgiving and Brack Friday holiday weekend sales fell into the Q1 this year compared to falling into the second having fallen into the Q2 last year.
Combined, these two factors produced an estimated net benefit to this year's 1st 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 10.3x. Ex gas and FX, the 10.3x was at 8.7 percent Canada was reported at 11.3 percent, ex gas and FX was at 4.3 percent. Other international, a +10.1 percent reported and ex gas and FX 8.2%. All told, the total company was a 10.5% reported and a 7.9% after taking into 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 inflation I'm sorry, ex FX, it was 42.1%. Now this number includes the holiday shift north of 5% and perhaps up to 10% of benefit in that number. So that 42% would come down a little bit if you normalize it, still a very strong number. In terms of Q1 sales metrics, 1st quarter traffic was up 5.9% worldwide and 6.6% in the U. S.
And gasoline inflation contributed another 142 basis points. So gas and FX together for the entire company was about 2.5 percentage points, 2 50 basis points. As well, 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 relos 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.
So about 2 or a little over 2% normalized transaction figure up. Next on the income statement, membership fees reported in Q1, dollars 692,000,000 that's up $62,000,000 or 9.8 percent year over year and 7 basis points. Now that $62,000,000 increase in fees benefit came from the fee increases we took in the U. S. And Canada effective June 1, 2017.
And the balance from the fee increases taken in September of 'sixteen or at the beginning of Q1 'seventeen in our other international operations, and that goes back again to September of 'sixteen. But all told, that to be even more positive year over year delta in the upcoming 3 or so quarters. Our membership renewal rates were 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 'seventeen. In terms of number of members at Q1 end, in terms of total households, at Q4 end, we had $49,400,000 We ended Q1 end 12 weeks later with $49,900,000 dollars up a little over 1% right at 1% during the 12 weeks. And total cardholders at Q1 Q4 end weeks ago, we had 90,300,000 cardholders, now 91,500,000. In terms of paid executive members, they stand at $18,800,000 and that's an increase of about $246,000 over the past 12 weeks or we're still being able to convert and add new executive members at the rate of about 21,000 a week in the quarter. In terms of again, I mentioned earlier in terms of the portion of membership down to the gross margin line.
Our reported gross margin in the Q1 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 Q1 and basically what we reported for Q1 'eighteen, 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 0.
Ancillary businesses, plus 6% on a reported basis and plus 9% ex gas inflation 2% reward minus 1 basis point and minus 2 basis points other, minus 26 and minus 26. So all told, on total, on a reported basis, that was the minus 3 if you add up those numbers and ex gas inflation, it was a minus 19. Now overall, again, it was 33, excluding the 19 excluding the benefit from the non recurring $51,000,000 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 deflation 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 softlinesmerchandising departments, year over year in Q1 were up and hardlines and fresh foods year over year were down. Ancillary and other business gross margins, again, in the chart I just shared with you, plus 6 basis points and plus 9 ex gas inflation. Higher year over year margin contribution came from gas, hearing aids 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 higher penetration of sales from members 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 2, 3 years ago, we tested this in one region. And in the last several months, we've rolled it out to the entire United States. And so there'll be some small incremental costs related to that, that hits the margin in each of the next couple of quarters. Moving to reported SG and A.
Our SG and 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. And again, on a reported basis, it came in at 10.36%. Doing the little chart again, the 2 columns reported and without gas inflation. Core operations, lower or better by 24 basis points.
I a plus sign in front of that, and ex gas inflation, plus 12 Central, plus 8 and ex gas, plus 7 stock compensation, +2+1total reported lower or better, plus 34 basis points and ex gas plus 20 basis points or lower by 20 basis points. Now looking again at the chart, the operations component was lower or better by 24 basis points and better by 12x 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 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, 1st and foremost, it's a strong sales results. No real surprises here. As we've been told, higher sales drives lower SG and A. Next on the income statement, preopening, dollars 5,000,000 lower this year in Q1, so coming in at $17,000,000 compared to $22,000,000 really a function of opening schedule. This year in Q1, we opened 7 openings, 5 net new openings plus 2 relos, all in North America.
And last year in Q1, we opened 9, 8 of which were net new, but 9 openings, again, all in North America. All told, reported operating income in Q1 came in at $951,000,000 up $102,000,000 or 12% higher year over year. And excluding the legal settlement, basically, would have been up $153,000,000 from an adjusted $849,000,000 last year, were up 19% without that legal settlement. Below the operating 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 $4,000,000 Actual interest income in the quarter was better by $5,000,000 dollars However, it was more than offset by about a $9,000,000 impact negative impact from FX contracts, FX related items, not just contracts.
Those fluctuate plus and minus that amount it seems each quarter based on how we manage foreign currency payables in different countries around the world. Overall, pretax income was higher by 11 or $90,000,000 in the quarter, coming in at $936,000,000 up $141,000,000 or up 18% excluding the 51,000,000 dollars one time legal settlement benefit last year in Q1. In terms of income taxes, our checks rate in Q1 2018 came in 30.4% for the quarter. Last year, it was 34.4%. On a normalized basis, again, taking out that unusual item that we mentioned in the press release today, last year's tax rate would have come in 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 $640,000,000 compared to last year's 5.45 dollars And again, excluding the 2 items, since one of them was tax items, and depreciation at $335,000,000 Warehouse expansion, so I think we talked about somewhere we expect somewhere between 2025 openings. Over half of them will be in the U. S.
We expect 3 in Canada, 2 in Korea and one each in Australia and Mexico. As well, we plan to relocate 6 warehouses this year, 4 in the U. S. And 2 in Canada. And that again compares to 2 or 3 a year in recent years.
We opened quite a few extra in fiscal 'sixteen as well fiscal 'seventeen as well. As of Q1 end, total warehouse square footage stood at $108,000,000 108,000,000 square feet. In terms of stock buybacks, in all of fiscal 'seventeen, we spent $473,000,000 a quarter. Now before I turn it back to Christy for Q and A, I'll give you a quick update on e commerce and our credit card relationship with CityVisa. Worldwide, e commerce sales in the Q1 of 'eighteen were $1,300,000,000 up 40% year over year.
Again, some work is giving Black Friday week as well as Cyber Monday, which falls into Q2 this year versus falls into Q2 this year and last year. Warehouses are supporting costco.com with signage and tablets used in search and purchase and people can purchase a dotcom items by our members from our warehouses, selected items. Online grocery, as you know, at the call, fiscal quarter ago, we talked about that week in the 1st week in October. We introduced 2 new delivery options on costco.com, a dry grocery 2 day delivery and our same day fresher the latter 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 openinglimited marketing mode. We rolled out in Q1 'eighteen. We added enhanced the value of the executive membership. In Q1 'eighteen, we now members who are executive members purchasing from Costco Travel will also receive a 2% reward on all their travel purchases. And of course, with travel and the like on the using their Citi Visa card, they get an additional 3%, so 5% between the 2%.
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. Look, 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, as well as we've done quite a few things online to increase traffic in our warehouses. I think I shared with some of shares a few of those with you last time, whether it's hot buys on 1,000,000 co branded cards or 7,400,000 accounts. Those were transferred over to Citi for the conversion.
As of Q1 end, we now have Tube Sleep. Our fiscal 'eighteen second quarter scheduled earnings release date for the 12 week Q2 ending February 18. This again will be at the top of the next hour due to 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, are you now at a is membership per club now at a growth level that can be sustained from here? And 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 it was the that average came down a little bit, It's a function of 2 primary things. Well, 3, number of openings and certainly they fluctuate quarter to quarter and year over year. 2, we have huge membership sign ups in the U. S. And Canada where we've been forever.
So those timings you might get and then when we add a new unit to an existing market, and I gave a couple of examples of that last time, that will tend we might have 65,000 members per warehouse in 3 locations in the greater in the East Side of Seattle here or in the San Jose area. I think those are two examples I gave you. We opened up a new unit, which adds $120,000,000 $130,000,000 of incremental sales, but only adds literally a few 1,000 additional members because you now have members that are shopping more frequently because we're closer to them. And so that will continue to happen. The timing of openings, as I said, that will move up and down.
I think overall, the number the metric did come up both last quarter and this quarter year over year for the first time. And yes, we're adding some new markets as well. That will 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 it will ebb and flow.
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. And so far so good.
In the past, you've given a little bit 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 this for 20 or 25 years doing this. And 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. But at the end of the day, what's important is total number of members in growth, existing member renewal rates, of course. And part of the other challenges is for years, we had to be early on in our career, wholesale member you had had a bona fide business license, it truly was a small business owner.
And then over that evolved into a business membership where you could have business add ons and many of those were not for business purposes, but small business with 10 members with 10 employees and the employer bought the memberships for his or her employees. And then after that with the executive membership coming on, those people would get off of that primary membership and have their own membership. And so we know more about our business member versus not based on what they're buying and then anything else.
And then 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 the form of price lower prices?
Well, first we have to wait and see what actually happens. I know in the 1st year of what we're reading about today, there's still some one time offsets to that for earnings overseas. Your 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. And with us, that includes all the things you've heard about historically.
But we'll have to wait and see and talk about it more when we get there.
Thank you so much and good luck for the rest of the holiday.
Thank you.
Next question comes from the line of Chuck Groom 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 total core was as a percentage of their own sales? If you could just amplify on any of the category color directionally that you gave earlier.
Yes. And getting back to the previous person's questions about the granular when I responded with the granularity, the big benefits were in the 1st year. There was some incremental benefit, but 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 1st 12 months and we'll continue to get. And the good news is it's growing as a percent 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. And again, I know that was a big question last I was about to say last semester, last quarter, and compared to prior quarters. There's so many moving parts. What I can tell you is, is we feel very good about our margins that a lot of the stuff we have done and we'll continue to do is offensive, not defensive.
And we are probably the biggest surprise, it's worked as good if not better than we thought it was going to work.
Okay, great. And then just on any early readings with Instacart? I know when you did Google Express that most of the were fill in trips and were therefore complementary. I was just curious, what your early takes are with that effort?
Yes, look, all the numbers that are now on our website, but one of the things I mentioned here, we both both we and Instacart have chosen for the 1st 2 or 3 months of this thing to basically have a soft opening, if you will, to make sure that we don't screw it up. And 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.combusiness?
Yes.
Okay, great. Good luck, Richard. Thanks.
Next question comes from the line of John Heinbunkel from Guggenheim Securities.
So Richard, on BOPIS, 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 BOPIS items?
Well, first of all, we haven't heard from a lot of members. I'm not so sure that we we haven't asked them either by the way. But we do see the strength in our numbers, particularly in store. I mean, the online is 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 don't want to leave they can't have it shipped to their office or their place of work and they don't want it left at their doorstep. And so here's a way for them to buy it. And we saw a nice piece of business being done that way.
And as you might expect, since they're not going to be over to pick up their 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. So that's what we like.
Right. So do you think are we more at the low end of that 20 to 25? And obviously, we haven't 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 timing. In terms of the 20% to 25% history is what suggested it's at the lower end versus the higher end. There are a couple where and the real difference is not things that we don't have on the plate already, it's can we push them can we move do we get lucky with weather in the winter and if we push a couple based on when different hurdles occur with permits or whatever.
All
right. And then just lastly, you also you talked about the gas benefit. Was that de minimis or how big was that?
Well, we're trying to there's no good time to jump a little less granular. But we add them all up, it wasn't a big impact to the bottom line. But at the end of the day, look, gas is good. There have been some quarters. If you look at the last 8 or 12 quarters, which I haven't looked at, it's probably more than a $0.01 There have been quarters when it was $0.05 And it could be anything within there or a little either side of that.
They were good.
Okay. Thank you.
Ex gas, the basket was up a couple percentage points. And when I we don't really look at LIFO anymore. We haven't, we don't look at it. Our guess, I mean, I think if there was anything that was made ex gas, there was a tiny amount of inflation, but that's in the cost side. Given investing in price and given the competition you see from other retailers out there, my guess is there is probably little if any inflation.
Okay. So that's what I was wondering. I mean, there's been a lot of I mean, PPI has clearly been high, I mean, up and elevated while CPI has been a lot more muted. So I guess that's kind of I'm wondering how much of 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 and that's what we do. Okay.
And then I guess in terms of grocery delivery and then Instacart, I guess you didn't give an update. Are you still at the 500 SKUs for grocery delivery 1700 on Instacart? And then anything to indicate on that component of the business, whether or not this is drawing a customer who's kind of been dormant? 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. I mean, it's still even though there are big increases in what we'll wait 6 months and then take a look at it.
Okay. And then lastly, how many units are on BOPIS right now?
I'm sorry, how many units?
Are on the buy online, pick up in store? Are those small number of items?
Very limited. Hold on, hold on. All warehouses are doing jewelry and laptops in U. S.
Okay. Our next question comes from the line of Simon 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? And just generally, is the environment, 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. We did during Q4, we did the GrouponLibysocial And that went fine, but I'm not sure of anything we did this quarter.
Okay. And 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, but our competitor our direct competitors have been very promotional, one more than the other. But whether it's a monthly one or certain amount of dollars off.
And 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?
Well, yes, but keep in mind, with all this wonderful growth, it's still a very small it's less than 5% of our company. So it doesn't have that big impact to 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 5 off and they get a 4 year warranty that includes using the co brand card. So all those things we help drive the business notwithstanding we haven't let everybody know. And I think apparel has been good, but part of that is that we are doing more apparel online.
And 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.
Okay. Thank you.
Yes.
Next question comes from the line of Dan Vander from Jefferies.
Thanks. So, 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 MX cardholder previously?
The only thing I look at, I don't know that. The only thing, but in many cases it was the same number. We believe that you have a higher spend because of a better rewards, better promotions. The fact that Visa has accepted more places, if it is your top of if my old reward card, co branded card, it was my top of wall and now the new Citi Visa is, there are many more places I can use my new one. And so that's driven more outside spend and the beauty of co brand programs for big companies, whether it's airline, retail, hotel, travel, is that there's some revenue share there.
And so those are the metrics we've looked at. We also, of course, doubled the reward on all Costco purchases, gas 4, but not a double, but everything else used to be 1 and now it's 2. So all those things are helping us trend in the right direction there.
And then with regard to renewal rates, you highlighted that the renewal rate was the same as where we were at the end of Q4. I know last quarter you're talking about the trajectory and how you think it will 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 1 to 2 quarters. And so we have 1 more quarter of flat to yes, again, could it when we're talking about 10ths of a percentage point, 0.5 a 10th is what we'll average it up or down. So we want to hedge our bets here a little bit, but we believe that's the case and but we have got one more quarter of free pass here. Matt, We were pleased with what we saw in Q1 compared to Q4 end.
And then, Lasse, do you have any numbers around membership growth in comp stores?
No, we don't. Only because we did that last quarter because we know there was a lot of concerns around it and we thought that was a data point.
And From JPMorgan.
Thanks. Good evening. So on the core margin being flat ex gas, usually when you go into these periods of into the teeth of the renewal, the member that fee increase, you tend to invest in gross margin and I think most have expected it to be down. So going back to a prior question, is mix helping you? The price environment is pretty promotional out there.
So just trying to understand why that came in flat versus sort of 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. But I think we have the benefit also. We can take a 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 $10,000,000 or $20,000,000 in a week or a few weeks.
And so it seems to work for us. We feel good that we've got we're looking at this stuff offensively and we'll see how we use it.
And then in terms of the 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. So is that the way how we should think about that potential tax flow through?
I'm sure we'll drive you crazy a little bit, sure. I mean, yes, we're going to keep doing what's right. And again, I'm not trying to be cute. First of all, we don't know what the tax plan is going to do and we don't know what the impact of the 1st year of it based on some offsets. But you can rest assured that we'll do the right thing and we'll drive business the way we do it that helps all those stakeholders.
And then lastly, just a couple of quick follow ups. Does the calendar does the 53rd week shift end up being a 0.5 headwind for this upcoming quarter? And 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 like that?
No, within the 26, is 19 of that 26 was that $51,000,000 legal settlement benefit to gross margin in Q1 of 2017 a year ago. So year over year was minus 19 basis points. So what we're talking about is the other 7. The other 7 primarily has to do with a major switch we did in how we handle returned and dispose of salvage merchandise. And we tested it for a couple of years in 1 or 2 regions, one region and then another.
And in just the last 6 or 7 months, we've rolled it out throughout the United States to sell in all 12 depots that do this for us that could handle the entire United States. And needless to 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 we that will afford over time. So that 7 hopefully will be 6, 5, 4, 3, but a year from now it will be 0 in theory and then go the other way a little bit. But 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.
And then the 1.5 point sales shift?
That's for Q2. Yes.
That's a headwind.
That will be a headwind, yes. And it will 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.
I kind of just
asked about traffic. It wasn't that long ago, I guess, that traffic slipped to kind of like 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, like just thinking about things in hindsight, was there something unusual about that period of 2 kind of 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 'sixteen, for about 9 months from June 'sixteen 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. And so there's probably some negative impact and confusion and the confusion probably into the 1st few weeks of the new card given it was overall impact. I think it's I remember when those numbers were coming down, we were asked and like you just said, we said maybe it's the normal. We don't know.
We felt good about our business. And one of the things we did is said how can we get it more exciting out there. And part of that was pricing and the like. So we also had a little bit of hiccup from a traffic standpoint with the multi vendor mailers. If you recall, the good thing is, 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 NVM days and during the course of the year. And we saw that impact Q basically December of 'sixteen to February or March of 'seventeen, so pretty much Q2 of fiscal 'seventeen. And then as we said on that Q2 call, which was a disappointing quarter, we said it's easy, we'll change back and we'll add some more days. We kept the lower fewer items and the greater values and that's working nicely, but we have more days and so we had less we had where we had tweaked a little bit too much and have had fewer.
And just a follow-up on tax reform. I know it's a difficult question to ask, but maybe we think about it in like bigger picture sense of investment and how you think about driving sales and there's when you think about sort of like 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 are sort of like 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 have thinking about that you would like to invest in if you had the opportunity?
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 and keep increasing the regular dividend. I've done the specials a few times and bought back stocks. You'd have 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? I know that now as we said, I think you'll see us do what we do well in merchandising and driving business and taking care of our employees and ultimately taking care of our shareholders. And I'm not trying to be cute. We don't know what we're going to do yet because first we've 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.
This is 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 is busier. We kind of know it on the other end, hopefully we budget properly there. So maybe we it's not a complete offset. But I don't we're talking about a few weeks here and there.
I don't think it's a big deal either way.
Okay. And then another question. You were asked on e commerce about profitability as 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. But any sense as to the direction of the and I also know it's small, you made that point as well. Just as it gets bigger, is the direction you're taking it and moving the gross margin in that category one way or the other? Through that channel, I guess, I should say?
1st of all, gross margin in e commerce even 2 years ago was a little lower than the warehouse, but the SGA was a lot lower than the warehouse.
So the
bottom line was a lot higher than the warehouse, recognizing it wouldn't exist if it didn't have the warehouse. So 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 could figure out and we have, we think, figure out how to communicate effectively with our members on some particularly hot buys. It really drives business and not just online. And so I think there's enough we have so much, in my view, flexibility and comfort in our margin and because we're not being our view is our margin that even when there was a basis point lower or basis point higher is because what we wanted to do not because we were impacted by losing something to someone else.
And I think we're fortunate in that regard. And 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. So there's so many we have 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, and if you can just talk about overall kind of your mindset and approach to e commerce and kind of omni channel and what's kind of led to I think a lot of us view this as a bit of a turn in the narrative and the way that you all have kind of approached the business historically?
I think we still done things our views out there like several people on the call here. And 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 omnichannel, but for in store and driving business that way as well. And 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's others saying they had to do this because somebody else is wrong. Our view is, is we're kind of doing pretty well, 1st and foremost, with driving our brick and mortar business, understanding that some of it was going to be 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 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 than trying to rather than that 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. And we think that we can take an item that was well under $100,000,000 in sales in a matter of few years be $1,000,000,000 Now $1,000,000,000 still just under 1% of sales, but it's $1,000,000,000 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 $7,000,000,000 close to $7,000,000,000 apparel business that's compounded in the last 3 plus years at over 9%. Two reasons, Kirkland Signature and weakness in brick and mortar.
And some manufacturers are willing to sell us for the first time, suppliers. So and amazing pricing. And so we'll keep doing that.
That makes sense. And you know, spoken a bit about kind of 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, but you had vendors, even international vendors and certainly local vendors that would not were a little queasy. They knew how big we are and if we come, it's going to be great. 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 saw the same thing. We've seen the same thing happen in Australia over the 1st few years. And again, it gets back to we are a global sourcing and a global supplying company. And we're clearly with 8 or so locations in Australia, we bring the purchasing power of $130,000,000,000 retailer to that market and that helps us as well. Then 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. And lastly for me quickly, I might have missed it, but on the 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 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 and A line. You mentioned some incremental costs to think about over the next few quarters. Can you quantify that at all for us?
And was there in terms of the shift, was there any impact, the calendar shift to SG and A or membership or any other line items in the quarter?
There's a lot of little things. I mean, first of all, in terms of the shift help you as Matt asked earlier about an extra percentage shift? My guess is small amount of basis points. The thing you first asked the first part of the question you asked was about the state that will continue for the next few quarters. That hit 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, and so there's about that was much of that extra that line item that was 26 basis points of which 2019 was the one time thing from last year. Those other 7 basis points much of that is that, but that's a margin hit. And so that will be a little bit of a margin hit in each of the upcoming probably 2 or 3 quarters.
I'm hoping it will dwindle a little bit, but that will be what it will be.
Great. And then just 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. So 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 like delivery, we've done no marketing of it per se. So 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 100 100 times what about order online, pickup in store. We scratch our head and recognizing our places are a lot busier than others.
We don't see how that makes sense and we don't hear a lot of members asking about it. But we looked at it and said where are some areas where it might make sense and so we're trying it. Tires, it makes sense and that's been very successful over the last year, year and a half, where you can order the tires online to go to the location that you want.
And 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, but
Thank you.
Next question comes from the line of David Sheik 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.
Yes. I mean 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 saw I just mentioned.
Okay.
But in terms of right now, all we're doing is high fiving each other. It's working to drive business in store and drive business online.
Just any update on the wage outlook for you guys have stayed ahead of it and been very transparent with it, but just talking about the wage outlook now 90 days since your last quarter?
No, we feel 16. And in 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. And there are only a couple of cities, Seattle and San Francisco, where there's a minimum of 15, but rest assured we'll stay ahead of the game on that.
Thanks.
Next question comes from the line.
Yes, then cost of hurricanes, that's another. I think 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 2 of them together were a couple of $0.03 in total, but not big of a difference. I'm learning how to not tell you stuff. That's
then my last my real question is, you take a step back and we've talked about e commerce forever, the Amazon impact, I think 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. So 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 the 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?
Well, first of all, I think, well, we want to be responsive and we want to make sure that we don't that we're not being stubborn about things. But we also want to do it if we have 3,800 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. And so we have to figure out how to do it and still have that value of what we do. And so I think and we've also figured out how to do it without spending 100 of 1,000,000 of dollars.
We are the 2 day dry grocery up to 2 day dry grocery that we're doing through a handful of our depots, which covers essentially the entire continent of the United States, we're able to do that pretty cheaply because we're already allowing business members to go to business and not depots, but all consumable type items. So our view is these are relatively inexpensive ways to try things and they're working. We do have to Scott, of course, we have to measure how we do going forward. If we'd love for orders on 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? And 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. And that's been a big boon for us where we see this could help. So there's again, and life has changed on big ticket, big size items and items that you've got to install and in many cases, items that you want somebody else to take the old mattress or the old refrigerator away.
So we can show 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. So 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 actually it's pretty good. So anyway, have a good holiday.
Well, thank you. We'll take one last question.
Next question comes from the line of Chuck Kerkinski 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 this economy has 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, but the whole audio side has and audio is everything from these boxes that you can put outside, telephones and jewelry. So 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. And the Internet has helped out a little bit.
By Internet, you mean e commerce?
Yes. Great. Thank you. Well, thank you, everyone, and we'll be around. Happy holidays.
Thank you for your presentation. This concludes today's conference call. You all may now disconnect.