Good afternoon. My name is Christy, I will be your conference operator today. At this time, I would like to welcome everyone to the Q4 earnings call and September sales. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star one on your telephone keypad. If you would like to withdraw your question, press the pound key. Thank you. I will now turn the call over to CFO, Richard Galanti. You may begin, sir.
Thank you, Christy, good afternoon to everyone. I'll start by stating that these discussions will include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements involve risks and uncertainties that may cause actual events, results, and/or performance to differ materially from those indicated by such statements. The risks and uncertainties include, but are not limited to, those outlined in today's call, as well as other risks identified from time to time in the company's public statements and reports filed with the SEC. Forward-looking statements speak only as of the date they are made, and the company does not undertake to update these statements except as required by law.
In today's press release, we reported our fourth quarter and fiscal year end 2017 operating results for the 17-week and 53-week periods ended September 3rd, and our September sales results for the five-week retail month ended this past Sunday, October 1st. For the 17-week fiscal fourth quarter, reported earnings came in at $2.08 a share, up $0.31 over last year's fourth quarter earnings per share of $1.77. In comparing our year-over-year fourth quarter operating results, several items to note. First, of course, this year's fiscal fourth quarter was comprised of 17 weeks of operations. Last year's fourth quarter results covered 16 weeks. We just finished a year which had the extra week in it. Second, the improved results related to co-brand credit card.
As we reported in each of our first three quarters of fiscal 2017, the Citi Visa co-branded credit card program again positively impacted our year-over-year gross margins by 14 basis points and SG&A expenses by eight basis points, and our overall bottom line in Q4, benefiting earnings year-over-year by an aggregate of 22 basis points or $0.13 a share over the 17-week fourth quarter. More detail to follow later in the call on this. Gas profitability, the third item. Our profits from gas during the quarter as compared to last year's fourth quarter were higher by about $40 million pre-tax, or $0.05 a share. Number four, gross margin. This year's fourth quarter margin, the gross margin included $20 million of pre-tax benefits from non-recurring legal items, which were partially offset by about a $10 million reserve charge for inventory losses attributable to Hurricane Harvey.
Together, this net $10 million pre-tax benefit represented a benefit of two basis point improvement to gross margin, or about $0.015 share the benefit to earnings per share. Fifth item of note, SG&A. This year's fourth quarter SG&A expenses included an $11 million or about $0.015 negative hit related to Hurricane Harvey. This represented about a three basis point detriment to our reported SG&A percentage in the quarter. Number six, modernization related IT. As a percent of sales, only slightly higher by a basis point year-over-year. Next, FX. There's two FX items to point out. On an operating basis compared to a year ago, foreign currencies had a very slight negative impact to earnings, less than $1 million pre-tax.
In our interest income and other line, the year-over-year swing in gains and losses related to accounting for our FX exposures in the other countries where we operate. In Q4, the year-over-year swing was about a -$12 million pre-tax or $0.02 a share hit impact to EPS year-over-year. Last year in Q4, we had a gain of $11 million in terms of these items. This year, we had a loss of about $1 million recorded this year in the fourth quarter. Number eight, income taxes. We had favorable discrete tax items in both fourth quarters, both this year and last. In last year's fourth quarter, discrete tax items benefited last year's fourth quarter earnings by $0.05 a share. This year's fourth quarter discrete positive tax items benefited earnings per share by $0.03, so $0.02 less of benefit this year over last year.
Lastly, LIFO. There was no LIFO charge or credit in this year's fourth quarter results, whereas last year's fourth quarter results had a LIFO credit of $31 million, reflecting deflation in our LIFO indices a year ago, or a $0.04 per share benefit last year versus zero this year. Turning to fourth quarter sales. Reported sales were up 16% in the quarter, including the benefit from the extra week, and reported comparable sales figure, which compares a like-for-like number of weeks year-over-year, was up 6.1%. For the quarter, the +6.1% comp sales figure was helped by gasoline price inflation to the tune of about a half a percentage point and hurt slightly by a slight detriment from the FX impact.
In terms of new openings, in Q4, we opened 12 new locations, six in the U.S., two in Canada, and one each in Australia, Japan, Iceland, and France. The last two countries being new countries for us as well. As of our fiscal year end, we operated 741 locations worldwide, including 26 new buildings during the year. We opened 28, but two of them were relos. This afternoon, I'll also review with you membership trends and renewal rates, an update on our co-brand Citi Visa card. I'll discuss a little bit further about margins and expenses. I'll discuss e-commerce results and some recent initiatives. A couple of other new initiatives as well. Lastly, I'll give you a recap of our September sales results for the five-week period ended this past Sunday. On to the results.
Sales for this year's fourth quarter, the 17 weeks ended September 3rd, were $41.36 billion, up 16% over last year's $35.73 billion. On a reported comp basis, Q4 comp sales were up 6.1% for the quarter on a reported basis, up 5.7% after accounting for fluctuations in gas prices and FX. For the quarter, our reported 6.1% comp sales results were a combination of an average transaction increase of 2.1% for the quarter, an average shopping frequency increase for the company worldwide 3.9% up, and within that 3.9, it's up 4.4% for the U.S. In terms of sales comparisons by geography, for the fourth quarter, within the U.S., the Midwest, Southeast, and Texas regions were the strongest, with other U.S. regions not far behind. Internationally, in local currencies, better performing countries were Japan, Mexico, and the U.K.
In terms of merchandise categories for the quarter, within that 6% reported comp, food and sundries up about 4%. Strong categories include spirits, deli, and frozen. Hard lines up in the mid-single digits. Overall, strongest departments results were lawn and garden, tires, toys, and consumer electronics itself were up in the high singles. Soft lines were up in the high singles overall, with housewares, jewelry, and home furnishings showing the best results. In fresh foods, comp sales were in the mid-single digits, relatively consistent across various departments of meat, bakery, deli, and produce. Within ancillary, gasoline had strong comps in the quarter, aided by higher average sale price this year versus last, as well as very strong gallon growth. In addition, hearing aids were up in the mid-teens, followed by optical and food court. Moving to the line items of the income statement. I'll start with membership fees.
Membership fees were up 13.4%, or $111 million year-over-year. As a percent of sales, they were down five basis points. That is, we expect, in part due to simply the strong sales results. Of the $111 million increase in fees year-over-year, about $15 million related to the membership fee increases we took. A little over half of that $15 million from the fee increases taken in our international operations last September 2016, and the balance from the June 1st increases taken in the U.S. and Canada recently. In terms of membership, renewal rates are fine. There's still some slight negative renewal rate impact from the U.S. credit card conversion last year, and we expect that to continue for at least a quarter or two. We continue to see increased penetration of our Executive membership.
In terms of number of members at Q4 end, at year end. Well, at Q3 end, we started with Gold Star of 37.8 million, and at the end of the quarter, at the end of the year, we had 38.6 million. Business Primary was 7.4 million at each period. Business Add-on, 3.4 million. Total member households, 48.6 million at third quarter end, and 17 weeks later at fiscal year end, 49.4 million. All told, cardholders were 88.9 million a quarter ago. Fourth quarter at year-end was 90.3 million. At year end, paid Executive memberships totaled 18.5 million, an increase of 274,000 since third quarter end, which is about 15,000 per week increase in the quarter. Executive members are about 38% of our member base and about 2/3 of our sales. In terms of renewal rates, at year end, Business members renewed at 94%, Gold Star members at 89.3%.
These numbers are for the U.S. and Canada combined, which is over 80% of our company. Total, U.S. and Canada, 90.0%, and worldwide, 87.2%. A slight tick down of 0.1 or 0.2 from the last quarter. A lot of that, as I mentioned earlier, we believe relates to, in the U.S., the conversion last June to the new credit card program and with auto rebill. Again, we expect that to continue to downtrend a little bit in the next quarter or two. While I'm on the subject of membership, I'd like to spend a couple of minutes to respond to the many questions we get literally every day relating to the following concerns. One, that new member sign-ups might be slowing. Two, that the average number of member households per location seems to be coming down a little.
Three, that with the increasing overlap of people having both a Costco membership and an Amazon Prime account, and the fact that more and more people are having groceries delivered by everyone, is this the beginning of something that will impact Costco? As to new memberships sign up slowing, we believe it's virtually all related to timing, the timing of openings, and the timing of two online new membership initiatives we undertook, one each in the past two fiscal years. For example, in the first three fiscal quarters of fiscal 2017, in these 36 weeks, we opened 16 new warehouses, including two openings with outsized sign-ups, both in Asia. A new unit in each of Korea and Taiwan. Those were done last January. Each of these locations added almost 60,000 new members to our base.
In Q4, in these 17 weeks, we opened 12 new locations, three with large sign-ups in Japan, Iceland, and France. Again, these three locations, each opened for only 5-15 weeks in the fourth quarter, added a total of 180,000 members to our base. Again, an average of about 60,000 new members per building. Timing of those certainly impact the numbers in terms of averages. Conversely, when we look at openings that cannibalize existing nearby locations, you'll add maybe a few thousand at the most new members at that new location. The result will drive an expected $80 million-$100 million of new annual sales in that market, but lower the average number of members for each building in that market by 10,000 or more.
The other timing issue, in the last two fiscal years, we've done two online new membership drives, each which added an average of around 200,000 members, one a little less and one a little more. The fiscal 2016 event occurred in February of 2016, near the end of our second quarter. The fiscal 2017 event occurred in August, in the fourth quarter of this year. Again, timing played an issue with that. One last data point. If I take all of the U.S. and Canada locations and I exclude all the new openings and all locations that were being cannibalized, in many cases by these new openings, the average number of members at these remaining locations grew year-over-year from the end of fiscal 2016 to the end of fiscal 2017 by approximately 4% year-over-year.
Our view is that we're fine, hopefully that answers some of the many questions we've got on these questions. As to the other questions, as it relates to increased delivery options by everyone, is it impacting us and is it impacting our brick and mortar? A few comments. One, of course, our sales and our comps are strong and have even trended up. Two, our shopping frequency is strong and has also trended up. Three, our value proposition, we believe it's stronger than ever. Four, we're just getting started on some of the new delivery options of our own, and I'll talk about that in a minute. Five, we're using online and the Internet to drive businesses both to e-commerce as well as in-store. Stay tuned and we'll continue to discuss that in each quarter.
Before continuing down the income statement line items, a couple of updated stats on the Citi Visa card offering. Again, this began in Q4 of last year in June, about June 20th, I believe. When the conversion to Citi Visa occurred in June of 2016, there were 11.4 million co-branded cards, or about 7.4 million accounts being transferred over to Citi. As of Q4 end, just over a year since the conversion, we now have 1.8 million new approved member accounts, or about 2.4 million new cards, including about 270,000 new accounts during the past 17 weeks. Overall, we're seeing the Citi Visa co-branded portfolio total spend higher year-over-year, both organically and from these new accounts.
Despite the fact that we had a partial comparison to the conversion last year, since it was midway through Q4, it was still positive year-over-year to gross margin, SG&A and EPS. I mentioned that earlier. I should note, though, that we'd anticipate the year-over-year comparisons to moderate, of course, as it did actually in Q4 as well, to moderate starting with the first quarter. Lastly, we continue to enhance the value proposition not only of being a Costco member, but then being a Costco Executive member, and then even better, a Costco Executive member using the Citi Visa Anywhere card. I'll share a couple of new examples of that during the remainder of this call. Overall, in terms of conversion, usage, and sign-ups for the card, all good at this point.
Going down to the gross margin line, our reported gross margin in the fourth quarter was lower year-over-year by 15 basis points. As I do always, I'll ask you to jot down a few numbers. We'll do four columns. The 1st two columns are year-over-year basis point changes for the third quarter. 1st column would be as reported, and the 2nd column would be without gas inflation. Q4 reported and Q4 without gas inflation. Those would be the four columns. 1st line item would be core merchandising. In Q3, we reported an improvement year-over-year, plus seven basis points. Without gas inflation, plus 20. This year in Q4, minus eight and minus three. Ancillary in Q3 was plus 15 reported and plus 19 ex inflation in gas. In Q4, minus one and plus one.
2% reward from Executive Membership, minus 2 and minus 4. In the third and fourth columns, plus 1 and 0. LIFO, minus 5 and minus 5 in Q3, and minus 9 and minus 9 in Q4. Other, minus 7 and minus 7 in Q3, and the two columns for Q4, plus 2 and plus 2. All told, on a reported basis in Q3 2017 year-over-year, we were up 8 basis points. Without gas inflation, up 23. In Q4 on a reported basis, down 15, and without gas inflation, minus 9. Mind you, in these numbers, the Citi Visa impact, as I mentioned earlier, in Q4 was plus 14 on a reported basis and without gas inflation. If you look at it that way, the minus 15 would be minus 29 ex that, and the minus 9 would be minus 23 ex that.
Overall, as I mentioned, reported margins were 15 basis points down year-over-year and 9 ex gas. As I just mentioned, taking out the Citi Visa benefit, minus 29 and minus 23. Within that, the core merchandise component of gross margin was lower by 8 reported, but 3 excluding gas. As I've shared before, the subcategories within our core gross margin, which is almost 80% of our sales within the warehouse, food and sundries, hard lines, soft lines, and fresh foods. As a percent of their own sales, they were essentially flat year-over-year, notwithstanding the investing in price that we have done during the course of this. With food and sundries and soft lines being up a little bit year-over-year and hard lines and fresh being down a little bit. Again, investing in price.
Ancillary and other business gross margin was down 1 basis point, up 1 basis point ex gas inflation. In the quarter, higher year-over-year margin contribution in gasoline, hearing aids, business centers and travel was offset by lower year-over-year margin contribution in e-commerce, again, investing in price as well as pharmacy, lower margins year-over-year. LIFO, I already shared with you the fact that we had a LIFO credit last year to the tune of $31 million versus 0 this year. Year-over-year, that was the 9 basis point delta. Hurricane Harvey, well, that was the net of 2 items, so I won't go through that one. Overall, margins were down relative to last year, and we feel it's a function of our own initiatives to drive sales and enhance member loyalty and satisfaction. Moving to reported SG&A.
Our reported SG&A year-over-year in Q4 was better or lower by 37 basis points, and 31 without gas inflation, coming in at 9.97% for the year compared to 10.34% last year. Excluding the Citi Visa benefit, again, the Citi Visa benefit was 8 basis points benefit to SG&A year-over-year or lower. Again, I'll ask you to jot down those 4 columns, Q3 reported and Q3 without gas, and then Q4 reported and Q4 without gas. In terms of core operations in Q3, plus 21 basis points, plus means good or lower, and plus 9 without gas. In Q4, plus 32 and plus 27. Central, minus 1 and minus 3. In Q4, reported and adjusted for gas, plus 8 and plus 7. Stock compensation, minus 1 and minus 1, and then in Q4, 0 and 0.
Other, minus five and minus five, then in Q4, minus three and minus three. Reported Q3, lower or plus 14 basis points reported and flat without gas inflation. Reported plus 37 or lower by 37 basis points year-over-year and plus 31 or lower by 31 basis points ex gas. Again, each of those numbers, that 37 and 31, you could look at it from the standpoint that eight basis points came from the improvement year-over-year related to the Citi Visa Card. While that's been a great improvement each of the last four quarters as it was to margin, we'll start to see that benefit. We'll still expect to see some benefit, but it will be greatly reduced after the first full year. In terms of our SG&A performance in Q4, the operations component again was quite good.
Strong top-line sales frankly led to year-over-year improvement in payroll benefits and other items, particularly bank fees. Central expense was lower year-over-year by eight basis points and seven without gas. Again, we saw a nice improvement in payroll and benefit expense %. Again, offset very slightly by a basis point from IT modernization. Lastly, other was worse by three basis points. That impacted it negatively, and that was the $11 million I mentioned earlier related to Hurricane Harvey. Next on the income statement is pre-opening expense. Last year in Q4, we had $24 million. This year was $6 million higher at $30 million. Last year, we opened 11 new units, 10 net of relos. Two of those 11 were international. This year, while we opened up only one more at 12 total, six were in international. International tend to have higher pre-opening. Overall, higher year-over-year pre-opening costs.
Again, it's really a reflection of higher penetration from international. All told, operating income in Q4 came in at $1,450 million, up $259 million or 22% higher year-over-year than last year's results. Below the operating income line, reported net interest expense came in at $53 million as compared to $39 million last year, primarily a result of the incremental new debt offering we did this past May in conjunction with the special dividend, which was discussed in last quarter's earnings call. Plus, there's one extra week in Q4 this year than last year. Interest income and other was lower year-over-year by $7 million, coming in at $22 million this year compared to $29 million last year. Within that number, actual interest income for the quarter was better year-over-year by $5 million.
However, it was more than offset by that minus $12 million of FX related items I discussed at the beginning of the call. Overall, pre-tax income was higher by 20% or $238 million higher in Q4, coming in at $1,419 million this year. In terms of income taxes, our tax rate in Q4 of 2017 came in at 34.3% for the quarter compared to 33.6% last year. Again, as I mentioned earlier in the call, we benefited from a few positive discrete items, tax items in both fourth quarters, but more last year than this year. Our effective rate for the entire fiscal year that we just ended came in at 35.36%. Reported net income was higher by 18% or coming in at $919 million this year compared to $779 million in net income reported last year in Q4.
For a quick rundown of other topics. The balance sheet is included in today's press release. A couple of balance sheet info items. Depreciation and amortization in Q4 total $441 million. For the entire year, depreciation of $1,370 million. Our accounts payable ratio, if you recall last year, we were converting an A/R accounting system, so we paid an extra week of invoices early to make sure we weren't going to run into any snafus with that conversion on day one of the fiscal year that just ended. Adjusting for that, last year, our accounts payable as a percent of inventories was 104%. Reported it was 85%, 104% taking that adjustment out. It came down to 98% at the end of this fiscal year.
If you take construction payables out there and other types of payables that are not merchandise, last year's normalized number at year-end was 91%, a little down at 89%, roughly 90% in both year-ends of last year on a merchandise-only basis and normalized for that paying the bills out early. In terms of average inventory per warehouse, this year at fourth quarter end, it was about $12.28 million per location. Last year, $11.85 million, so up about $430,000 per location. That's at the warehouse level. We've broken out this time the increase in inventories elsewhere because we have quite a bit of expanded inventory with our expansion of e-commerce fulfillment locations and activities, as well as some of the vertical integration things we're doing in those businesses.
In terms of CapEx, in Q4 we expended $779 million, which for all of 2017 would put us right at $2.5 billion, which is about the same as fiscal 2016. We'd anticipate spending to be a little higher in fiscal 2018. Not only as that increase relates to the sum of everything we do, not only openings, but also some manufacturing businesses that we're expanding, as well as e-commerce and some other things. In terms of e-commerce, we're of course in the U.S., Canada, U.K., Mexico, Korea, and Taiwan. You should expect additional countries to be open over the next year and a half. Total e-commerce sales in fiscal 2017 came in at $4.6 billion, up 15% from right at $4 billion at the end of fiscal 2016. For Q4, profits were of course up. Total e-commerce sales were up 27% in the quarter.
Of course, that includes an extra week, 17 versus 16 weeks, and up 21% on a comp sales basis, with it trending positive during the roughly four months of the quarter. As discussed over the past few quarters, much of our efforts over the past year focused on improving the functionality of our site. We improved search, streamlined the checkout process, improved our members' ability to track their orders, and automated much of the returns process. We also improved our online merchandising efforts by adding high-end and well-known brand names. A few examples of late, Marmot, Spyder, ExOfficio, GE Appliances, and Jiffy Lube services. We've expanded our KS offerings. We're providing new hot buys, limited time offers with extra discounts. We started doing what we call Buyers' picks and unique offerings through our partnership. Buyers' picks.
Lastly, some unique offerings through partnerships with Citi Visa, where we're offering in the cases of we've done it with Samsung, we've done it with tires and a few other things, where you buy it at Costco and you use your Citi Visa card on top of all the other great savings. There's anywhere from a 10%-15% cash offer. We're leveraging our global and brick and mortar buying power to expand and improve our online value proposition by lowering prices even further. We continue to build awareness of our site with Costco members through warehouse signage, special offers, and targeted emails, and expect us to discuss some of those activities more in 2018. We feel that all these efforts, which are ongoing, have resulted in increased traffic and sales, both online and in store during the past couple of quarters in particular.
Looking forward, we'll continue to expand these types of activities to drive our businesses. You'll hear more from us in the coming quarters about driving online sales with ongoing site improvements, improved online marketing activities, and of course, along with great products and services at fantastic prices. That's what we do. In terms of what's new, three days ago, we rolled out two new online delivery-related offerings. The first, Costco Grocery, which consists of non-perishable food and sundries items. This offers two-day delivery on dry grocery. A second, an expanded Instacart White Label same-day grocery delivery offering through our partnership with Instacart. That includes both dry and fresh grocery. You can find both sites by going to costco.com and then clicking on the grocery tab. You'll then be taken to a page offering and explaining both of these new online delivery options. A few details about each option.
As it relates to Costco Grocery, just under 500 dry grocery SKUs. Again, no fresh. Free delivery with orders over $75. Two-day or less delivery throughout the continental U.S. The boxes are up to 40-pound shipment through UPS. Orders are fulfilled at several of our business delivery centers. These offer very competitive pricing and value proposition. Excuse me. In fact, significantly better pricing than even we had at costco.com on many of these items. We'd expect to expand these offerings over time. The second option I mentioned, Instacart White Label. This is currently offered at 376 of our U.S. locations are live with it, and there will be a number of additional U.S. locations planned added between now and the end of calendar 2018 as our partnership expands.
There are approximately 1,700 SKUs, both dry and fresh, that are offered and can be fulfilled through the Instacart White Label option. Again, I mentioned it's same-day delivery. It's also a very competitive pricing value proposition, better than before. Again, Costco members will now have access to our promotional pricing like on MDMs as well. Costco executive members will also receive the 2% reward, and members utilizing the co-branded Costco Visa card will now earn that 2% on these purchases similar to in-store purchases. Just starting this week and stay tuned. Next on the discussion list here, warehouse expansion. For fiscal 2017, we opened 26 net new units, about 3.5% square footage growth. For fiscal 2018, we'd expect to open about 25 net new warehouses. A little under two-thirds of them in the U.S. and about a third internationally.
We plan to relocate six warehouses to better located and larger facilities. That compares to two to three reloads in each of the last several years. As of Q4 end, total warehouse square footage stood at 107.3 million sq ft. In terms of stock buybacks, in the first three fiscal quarters of 2017, over these 36 weeks, we expended $233 million to buy just under 1.5 million shares at an average price of $156.51. In Q4, these 17 weeks, we expended a little more than that $233. We expended $240 million for about 1.5 million shares at an average price of $159.21 a share. For the year, $473 million on stock repurchases, 2.998 million shares repurchased at an average price of $157.87. In terms of dividends, our current dividend stands at $0.50 per share per quarter. That's up 11% from the previous quarterly amount.
This yearly $2 per share annualized dividend represents a total payout from the company of approximately $880 million. Finally, before I turn it back for Q&A, I'll discuss September sales results. For September, which is the five weeks ended this past Sunday, sales for the five-week month were $12.4 billion, up 12.1% from the comparable five-week period last year of $11.06 billion. They were up 12.1%. On a reported comp basis, September comp sales were up 8.9% and 6.2% after accounting for fluctuation in gas prices and FX. For September, our reported 8.9% comp was a combination of an average transaction increase of 4.1%, and again, that 4.1% of course includes the benefits from FX and gas, and an average shopping frequency of 4.7% worldwide, and within the 4.7%, a 5.4% in the U.S. Gasoline price inflation and FX both contributed positively in the month.
Gas added 160 basis points while FX was favorable in the month by 110 basis points. Cannibalization impacted Canada in September by 325 basis points. As you know, we opened, I believe, six or seven locations on a base of the low 90s this year, so a lot of cannibalization going on up there. While the U.S. was negatively impacted by 60 basis points and other international by 155 basis points. Total company, 110 basis points of impact in cannibalization. As I'm not sure if I mentioned early, e-commerce comp sales in the month were up 30%. In terms of sales by geographic region, Texas and Midwest, both low double digits were strongest with California and the Southeast regions being in the 7% range. Internationally, in local currencies, better performing countries were Japan, Mexico, and the U.K.
In terms of merchandise categories for September within food and sundries, tobacco, candy, and cooler were the leaders. Tobacco, of course, we've anniversaried back in June some of the big declines and we're seeing strength since that point. For hard lines, which was up low double digits, strongest department results were lawn and garden, automotive, tires, consumer electronics, and toys. Soft lines, which were up in the mid-single digits, housewares, small appliance, domestics, and apparel showed the strongest results. In fresh foods, comp sales, which were in the mid-single digits, again, consistent pretty much across all 4 main categories. Within ancillary, gasoline again had very strong comps in the month driven by both price inflation and the cost of a gallon of gas, as well as strong comp gallon growth. In addition, hearing aids were up in the teens and optical was not far behind.
Lastly, before I turn it back for Q&A, our fiscal 2018 first quarter scheduled earnings release date for the 12 weeks, first quarter ending on November 26th. These will be reported after market close on Thursday, December 14th, with the earnings call that afternoon at 2:00 P.M. Pacific Time. With that, I'll be happy to answer questions, and I'll turn it over back to Christy.
Okay. At this time, if you have any questions, press star one on your telephone keypad. We'll pause for a moment to compile the Q&A roster. First question comes from the line with Simeon Gutman from Morgan Stanley.
Hey, good afternoon, Richard, Simeon . How you doing?
Good.
First, on membership, the renewal rates have been moderating a little bit, and there's been some explanation behind it. I think there was some credit card friction. I'm just curious if that's still the case or what's going on there. As part of that, the membership growth, can you talk to the composition in the U.S. versus international?
Well, again, in terms of renewal rate, we believe the biggest issue is the auto bill. When we look back at Canada, which occurred a year and a half, two years prior to conversion up there, from its peak renewal rate, I think all the way back to early fiscal 2015, if I looked out six quarters, it came down about a full percentage point. It's now actually a tenth of a percent above where it was that year earlier at its peak. When I look at the, we're now four and a half quarters into it, not six, and it's down. Again, it was down a full percentage point in the U.S., and recognize it's a little bit different scenario with conversion. It's down about a seven-tenths of a percent. We believe that's what it is.
When we talk to the membership marketing people and we ask them about what are the reasons when somebody doesn't renew, we get
Consistent answers with what they've heard for the last several years. Our view at this point is that we're not concerned about it. We'll have to see what happens over the next couple of quarters if after that, it doesn't change. We assume it will at this point. I'm sorry.
The member Yeah. If you just look at the overall membership, trying to dissect what the U.S. run rate is or how are, I guess, same unit membership trends, I guess if you can try to take out cannibalization, just the direction and what the trend line's been in the U.S.
Well, in the U.S. and Canada, which again, is 80% of our company, 80+% of our company, it was four. We just did that because we're getting the question every day. We can look at it. We didn't do that. We actually were trying to respond to some of the many questions. I think internationally, particularly since you've got newer units internationally, particularly in Asia and Australia, which is where your impact, less so in Mexico and U.K., where it's older. My sense is you'll see the same thing. It'll be positive, but greatly affected by cannibalization.
When you've got, in a city in Taiwan where you've got two very high volume units with well over 60,000 members per warehouse, and you open up a new one, you're still gonna get a lot of new openings relative, not a lot of new members relative to what we see here. My guess it's still that's gonna cause it to come down. Again, it has more to do with timing than anything, cannibalization than anything. I just don't have.
Okay
Beyond that. Canada and the U.S. are pretty similar.
Okay. My follow-up was on gross margin. I don't expect you to give a clear answer because I don't think you give a lot on the outlook. Trying to think of price investment in particular, right? There's been a pretty favorable trend up until this quarter, and I think you said down three ex fuel. I guess, how do you think of the price investment? I know it's constant for the business, but you'll have some tough compares as you head into next year, both on a gross margin and an overall EBIT growth perspective. How do you think of that as the next several quarters play out?
In a couple of words, we're fine. I think what we saw this fiscal quarter in terms of sales growth cures a lot of things and driving it with value. We've had a good fortune of having better than expected economics from our new credit card, and we certainly are just starting the benefit, if you will, to the membership fee line item, which will start and continue over the next 20-ish months as the fee increase in the U.S. and Canada. That's a fee increase that's about $240 million, peaking 12 months after we started. It takes 23 months because of deferred accounting to get in there. There's plenty to go around, and our view is that we can do both. We feel quite good.
Thanks, Richard.
Let me add one last comment on that I forgot to mention. A big chunk of it also is penetration of gas. Gas, while gas was great year-over-year, profitability was great, it's a much lower margin business. It's nine plus percent of our total sales at 500 to 700 less basis points of margin. When you've got huge increasing sales price per gallon and 10 plus percent sales growth on 10% of your business, that ate into it as well. I'll take that lower margin percentage every day for 40 extra million of profits in the quarter.
Next question comes from the line of Michael Lasser from UBS.
Good evening. Thanks a lot for taking my question. Richard, on the metric you provided about 4% membership per club growth ex cannibalization in the U.S. and Canada, is it just a coincidence that that's kind of in line with where your traffic has been trending over the last couple of quarters? Or should we think about it as your traffic growth is highly correlated to that membership growth ex cannibalization?
I think they're separate. I mean, a lot of times, I'll give you a simple example. Here in the Seattle region, we have three locations on the east side of the lake, Issaquah, which is across the street from where I am, Kirkland, which is where we used to be, and Woodinville. All three kind of align north to south on the east side of this Puget Sound. Last November, we opened Redmond, which is where, of course, Microsoft is headquartered. Basically, I think we had as of opening, less than 1,000 new signups at the Redmond location because we have close to 80% market household penetration in the Puget Sound, which is extreme. This is where we're headquartered, and we've been forever. We've taken the average number of members per location, excuse me, down from the mid-60s to the low 50s by just adding a new unit.
We'll add, here, $80 million to $100 million in sales in the first year in this market. When you've got locations that are doing $250 million to $300 million-plus per unit, you've got to cannibalize them. That's an example of that. I don't think the two are correlated.
Okay. Just thinking about the comp frequency or the frequency component of your comp, it would seem some of your most longstanding members are probably going to Costco about as much as they can. Is it that the newer members are building Their frequency, and that's where the bulk of the frequency across your population is growing? Or are you seeing growth in frequency across your entire population of members?
I think it's over the entire population. First of all, new members, every new member is going to presumably be more frequent every year for several years. I believe that some of the things we're doing, I didn't give an example on the call here. We've done several email initiatives to members to drive them in store. We did it over the holidays with New York strip steaks at $6.99. We did it with Copper River salmon over just a very limited, I think, a 10 or so day period. These are little things and little anecdotal things, we think that we keep doing things to drive you in more frequently as well.
I would bet that most of it, since the bulk of our sales come from the members that are more than a year and more than two years or more than three years, we're getting them in as well. A little more frequently.
My follow-up question is on September's frequency growth of 5.4%, that there's obviously a lot of moving pieces within the landscape in September between the hurricanes. You also had Amazon close on its acquisition of Whole Foods, and there was a lot of noise around that. If you look at your clubs around Whole Foods, was there any impact? What do you think drove such strong frequency growth in September?
Mel Brooks once said it's merchandising. It's value and merchandising and some of the other little things we're doing here. As it relates to the tragic things of the hurricanes in Texas and Florida and Puerto Rico, frankly, whenever there's a pending tragedy that's on the news every day, this pending tragedy like a hurricane, you get a buildup in sales leading up to it. You're closed for a few days perhaps or more in a couple of locations. When we looked, as I think I mentioned, the comp sales in Texas in September were one of the stronger regions. Now, that's partly because the entire state wasn't impacted by it. We don't think that was a big impact at all. As it relates to the publicity and the news and the noise around Amazon Whole Foods, all we can do is perform.
When we look at the value proposition, our view is our value proposition has gotten better. You read about Whole Foods having a giant increase in member shops or customer shops that first week. I would hope they do, and I would expect them to. There's a lot of news out there, and there's a lot of things. When we've done our own and we've read about the price changes, the lowering of prices, it gives us more confidence that our value is even greater. We'll have to wait and see. Nobody can predict everything. All we know is that our brick and mortar is as strong as it's ever been and trending in the right direction, even a bit from there. We know we've done a lot of there's 100 different things you do every day. I gave you a couple of the sound bites, the examples.
Again, at this point, we feel pretty good about what we're doing. We feel good that we've got a few delivery options for our members that, frankly, are better than the ones they were doing the day before with us or with Instacart or with anybody else. We feel that to the extent that somebody wants to choose to use that route, they'll be able to, and we'll be able to generate the sales from it.
Thank you very much.
Next question comes from the line of John Heinbockel with Guggenheim Securities.
Richard, I just wanted to start on SGA leverage, right? Both operations and Central, this was about, I think, as good a quarter as you've had in a long time. Extra week play any role in that? Maybe a little more detail on particularly operations, because I think you were down 27. You think about wages, benefits, utilities.
The only benefit is it's one sixteenth more of an earnings number. I guess you could take the $208 and divide by 17 weeks, but there's not a week with no rent expense in it because we prorate that daily.
Yep. If you think about it, you think about a sea change here, right? Because you've typically been up in Central and now down, and again, you were down quite a bit more than the third quarter. What is different or what was different fourth quarter versus third? I'm just curious of what was different, how sustainable that is.
Well, it's sales.
Okay.
We hope it's sustainable. We've got a lot of good things going on, but we're only a little bit better predictor than you guys are at that. We feel good about the initiatives we got going on. We feel good about the monies we have to invest in price and to still drive the other line items of our income statement.
Okay.
Yeah.
All right. Just on the openings, it sounds like maybe eight or nine, seven or eight outside the U.S. Is that sort of two Canada and maybe six or seven other international, where in other international?
I'll tell you. Bear with me, Son.
Sure, chief.
Yeah. Basically, a couple in Canada, two or three, four or five between the three countries in Asia. Another one probably in Australia. That's generally where they are.
Okay. Then just one last thing. When you think about your delivery options here, what's your sense as to how customers will use those and alter their behavior, right? So you think about the non-perishable food and sundries on the two-day. Do you think they'll get those delivered at home and then come in to buy fresh and non-food, some of the treasure hunt items, and not have their carts loaded with some of those sundries? How do you sort of get comfort about the impact on traffic to what you're doing?
Well, needless to say, we have to continue to watch that. We've had some limited experience with our relationship with Google starting a few years ago and with Instacart over the last couple of years. What we found so far is, it's more fill-in than replacement of a shop. The key is, if you come down a couple or three shops a year, one way is you add several more shops as fill-in or alternatives occasionally.
Yep.
That's what we saw, we have very little time and data to feel comfortable about where it'll go. We want to do both, of course, we have to keep getting you in store because you're going to buy more and you're going to see more, even if we had everything online, but we don't, of course. One of the things I mentioned was, how do we get you in store? We are just literally scratching the surface of any type of targeted email marketing initiatives. We have, as you know, a very loyal, hopefully you're one of them, loyal member. We are just scratching the surface with figuring out how to get you in store as well more often. On the several examples that we tried, it's great, and we'll have to see how that goes.
Okay. Thank you.
The one question that none of us know is everybody going to sit home and order stuff, recognizing you got to pay for it? No matter who ultimately, and there'll be several of the lowest cost supplier and provider delivering to you at home, there are people that actually want to go out. There are people that actually want to go touch their fresh foods and decide, pick it themselves. It's going to change over time. There's going to be an increasing percentage of online and online delivery. The question is, in brick and mortar, we've been asked for years, "Well, how can you drive sales if you're not offering as many alternatives and whatever else?" We've done it with value. In our case, value, first and foremost, is quality and low price. Over time, the percentage of delivery of fresh will change.
How much so, we'll all have to wait and see.
Okay. Thank you.
Next question comes from the line of Chris Horvers from JPMorgan.
Thanks, and good morning. First question just on the SGA front. Can you talk about the IT headwind was smaller from a basis point perspective, but of course, the overall top line is accelerated. As you think about the IT modernization and that central expense line, the underlying dollars, is that dollar growth year-over-year decelerating at this point, or when do you think that dollar growth actually decelerates?
Basically, I think we're in the middle of that. I think it was a quarter or two ago where it was lower year-over-year by basis point. I said, "That's not an inflection point." Certainly, even this one or zero basis point this quarter was helped greatly by sales growth. It's going to still increase. I think part of it is we're right at or about to enter our fifth year of "modernization." That line will start getting fuzzier and fuzzier. We certainly added things to what we are modernizing, taking major systems and doing that we had not contemplated at first. My guess is in the next year, assuming regular decent sales, as a percent of sales, a lot of these systems, you spend $60 million or $100 million on one system. It's kind of like building a building.
You start depreciating the day you open or the day you turn it on. It was probably three to four years ago that we started turning a system on in that regard as we complete them. It'll be another year before we've got, if you will, the plate full with these bigger expenses that then amortize over generally five to seven years. As sales grows, the denominator in this calculation grows. That'll be an offset to it. I'm shooting from the hip here, and it's a guess, but all things being equal, sometime in the next year, there's maybe an inflection point, but it's going to be in the one or two basis points either way, hopefully. At some point here, we'll stop talking about it.
Okay. You said on the Visa benefits, the gross margin, SG&A, you used the term moderate but not go away. I think last quarter you talked about that sort of, we're going to start to lap that, guys, and that's going to go away. Is it just moderation or does it go away, and is that-
Well, it's moderation with a capital M. I think in the first three quarters of this fiscal year, the sum of the benefit of improvement to SG&A and margin was 37 or 38 basis points. The aggregate in Q4 was 22. Mind you, a year ago in Q4, you had a lot of things happening. You were getting off the old program, and there was some detriment to that in those last several weeks anyway, the first five weeks of Q4. You had it, but there was also some noise and friction around getting the conversion done for two or three weeks. My guess is, it should improve because we're seeing increased penetration of usage. We're seeing increased revenue share from people seeing the value of this card, and not only at Costco, but they're top of wallet.
I forgot if I mentioned it on my part of this call, but using travel as an example. We just added Costco Travel to the executive member, first of all, effective September 1st, you get 2% on travel, which you hadn't gotten before. On top of that, if you use your Costco co-branded Visa Anywhere Card, Citi Visa card, you get another 3% by using that on travel. There's a 5% off unbelievable prices.
Understood. The last thing is, you talked about the timing of the Groupon, January, or earlier and in August.
Right.
Can you talk about what the rationale was to do it in August? I think a lot of people look out there and say, "Hey," they see this growth in membership slowing, sort of a desperation pass to the end zone to buffer the numbers into the print. Maybe just talk about what the genesis of that was. Is it an expression that you're concerned about millennial retention or millennial customer acquisition? Just talk broadly about that.
No, I think, first of all, we did it because it works. We don't do it every month or every six months because we don't want to get people comfortable waiting for the next online offering with added value, with added give to them. We want them to sign up as a member and pay for it. It works. The timing difference is simply we have a lot going on. I believe, if I recall, if I look back, we did the fee increase effective June 1st, and we didn't want to do it over that month or two period of time, so we pushed it out a little bit.
Just from what you've seen in terms of the millennial customer from a renewal rate perspective on these deals, just going back in time.
Yeah. By the way, going back to your question, though, you asked did we do it because we're concerned about millennial, I don't think we're smart enough to understand that. The fact is, we do it just to drive membership. We recognize that it has a good millennial benefit. I don't have the one on the one that we just did, but the one we did a year and a half ago, and the one we did like two and a half, three ago, versus a walk-in, a higher percentage of people that sign up on these LivingSocial or Groupon offers are millennials. Not as much as you'd expect. I think walking in, if I recall correctly, it was like mid to 39%. 39% of those that walked in this last one were millennials.
I think I go back to the previous one, it was 36% were walk-ins were millennials. Whereas millennials under this program, it was like in the mid to high 40s, about 10 extra percentage points. Not a huge distortion or a difference between those two. It helps.
Understood. Thanks very much.
Next question comes from the line of Karen Short with Barclays.
Hi. Thanks. Actually, just since we're on the subject of millennials, I'm wondering, can you maybe just give us an update a little bit on the average age of your membership? I know you kind of give that periodically. It seems to have been trending down. Any color you can give on that?
I don't have it in front of me. I know that when we did it about a year ago, it was looking at U.S. members. It was 52 years versus 54 years across the U.S., not the entire population of U.S. adults. We were two years older instead of a few years earlier than that, we were four years older. I have not seen anything since that. If I have it, you can ask me. I'll find out, but I don't recall.
Okay. Then one of the questions I think you were asked, and I didn't catch the answer if you gave it, but do you have any color just specifically on the performance of your stores that are in close proximity to Whole Foods since the price reductions took place at Whole Foods?
Yeah.
You could share.
We essentially overlap everywhere.
Yeah.
I'm not trying to be cute, but other than reading about it on the news and the paper on Wall Street, and we recognize, I read yesterday that there's some specialties, brick and mortar retail stores that are impacted more than others. We don't believe we've seen an impact from it.
Your comps wouldn't say it all, I guess.
Yes.
I guess on the online grocery, I just want to clarify. You gave 1,700 SKUs, and I think what you said was that possibly the price points would possibly be cheaper than Costco. Did I catch that right?
No, it'll be lower. Currently, you could go to certain other parties, Google Express, Instacart, as it was before October 1st, costco.com, Costco Business Center, and limited delivery within 40 or 70-mile radius of those 50 locations, Shipt down in the Southeast, I believe Boxed. I'm sure there's some others out there that I'm missing. When we look at the pricing that anybody, both a member and a non-member, as the case may be, depending on each one and how they price their goods, of what their delivered price is, this is better, including on some of the items which you could buy at great value and better value than those areas on costco.com already
Got it. Okay. Just the last question, there seems to have been some rumblings that you are looking to expand into China. I don't know if you could comment on that a little bit.
It's the 20-year discussion is we're looking. As a rule, until we have building permits to do something, we don't announce whether it's in Alabama or China. We are looking, and at some point, we'll announce something.
Okay, great. Thanks.
Next question comes from the line of Matthew Fassler with Goldman Sachs.
Thanks so much. Good afternoon. Richard, my first question relates to the line item that talks about core margin categories on their own sales. I guess that line item, this is inclusive of gas, I might not have caught the number, ex gas, had been up for the
It's exclusive of gas.
Okay. Only in core categories. That number had been up, I think, each quarter of the year. In fact, I think it had been up something like 11 straight quarters. The last time it was down, I think, was in, probably, 10th straight quarter, second quarter of fiscal 2015. I know it was flat this quarter. The differences are not very big, but it was a bit of a break in the pattern. Was there any particular area where you invested in price, and was there a concerted effort to invest to a greater degree in price that would have led to the increases in that line item abating here?
Yes. Again, honestly, we don't sit down. We decide, like, here's a bucket of money, if you will, and how are we going to use it? We don't do a bunch of sensitivity analysis of it. We're merchants, and I'm not, but they are here. We look at what are the things that drive business in retail grocery or retail non-food, as the case may be. Certainly on key items, I think I used the example of New York strip steaks, where we were at $7 and $8.99, and we went down to $6.99. By the way, we did that and still made a decent margin because of how we bought in on, we're a giant buyer of this stuff. We've done it on several items, and it works.
Got it. I-
I think the comment you made, the point you made, though, is while it's not a lot directionally, it's different. That's fine. We're really not concerned about that.
Fair enough. Secondly, Instacart I know is a prominent delivery partner. I know that prior to Amazon acquiring Whole Foods, Whole Foods had made an equity investment in Instacart. Does that have any impact on that partnership, on the future of? Obviously, you're not the only partner Instacart has, and this is probably a question a lot of their business partners are having. Is that a relevant consideration at all as we think about the forward for Instacart?
No. In fact, what we initiated this week are discussions both before and after that. Both before and after June 15th or 16th.
Great. Finally, the e-commerce business I know has accelerated over the past few months, and you spoke for the past couple of quarters about some of the changes that you made, replatforming, et cetera, and the capacity you have. Are there any particular categories where you're seeing that acceleration to the extent that you've kind of more than doubled the pace of growth in e-commerce? I know you're not doing fresh yet, obviously, and you're expanding your e-commerce efforts with some of these brand-new initiatives. Anywhere in particular where the business is taking off?
Well, on the non-food side, I think we mentioned a quarter or two ago, appliances is a big area. Apparel on the non-foods area, smaller ticket items like apparel and sundries. We continue, I think, do a better job at adding things on the food and sundry side, on the dry food and sundry side, and some big-ticket items. I look at some of the examples. Again, it was only for, what, a one or two-week period, the Samsung deal with using the Citi Visa card. On top of great pricing on the TV to start with, and White Glove service if you want it, you got our great price, and if you're an Executive member, you got 2%. If you used a Citi Visa card, you not only got a 2%, oh, you got that 2% because you bought it at Costco.
On top of that, you got a 15% cash card.
Total sales in line and online.
That impacted sales both in line, in store, as well as online. These are sound bites, but there's lots of them.
Got you.
There's lots that we haven't done yet.
Thank you so much. Appreciate it.
Next question comes from the line of Paul Trussell with Deutsche Bank.
Hey, good afternoon, Richard. First on membership. I believe the last LivingSocial deal that you ran in 2016, you signed up approximately 200,000, 250,000 new members through that program or so. Could you discuss what the more recent program led to in terms of sign-up? Then also the number you gave earlier on the call in terms of the 4% growth in U.S. and Canada ex cannibalization.
Yes.
What would that number be all in? Even if we included the club that did see some cannibalization. Just kind of overall U.S. maybe versus international growth in membership per club.
Yeah. I don't have it. Again, I was trying to be helpful to the-- One thing I guess I want to warn, we're not going to start doing this new calculation every quarter. We try to be helpful here. We know based on our discussions every day, week, and at the budget meeting, that we felt that we're fine when the question has been asked about the average number of members who are else seems to be going down, the new total new member sign up, the rate of growth seems to have been slowed a little bit. Again, hopefully, the data points I gave you allay those concerns. I don't have the detail beyond that. What we did is let's take all the cannibalized units.
We know that's a big impact, and all the new units, that many of them are in small markets. We know that's an impact. That's going to impact it.
Understood. On the Living Social signups?
It was a little better than the one 18 months earlier.
Fair enough. Then, just on gross margins, you mentioned at the beginning of the call the benefit, the pre-tax benefit that I think netted out to about $10 million or so.
Yeah.
What line item within gross margins did that impact? Also just wanted to inquire what, if any, margin impact you are assuming from the new Costco Grocery rollout.
Yeah. On the first one, I think it was a separate line item called other. That was the two basis points.
Okay.
As it relates to the impact of the new thing, it's going to be so small to start with, we don't even know yet.
Got it. On that point, as we think about gross margins over the near term, is it fair that we should think that flat to slightly down would be kind of the near term run rate, just given the investments in price that you've made and the moderating contribution from Visa?
We don't guide. Visa will be moderating still has a plus sign in front of it, even if it's small. I look back, though, we still have a chunk of those monies. We have the new membership fee increase that started in June, with, again, ultimately, it's $240 million that increased just the U.S. and Canada that'll hit the P&L. The total benefit to the P&L line won't be for 23 months from June, so next May of 2019. There's plenty of money out there to do both, to be able to, when the margins go up or down a little bit, again, I get back to it. It is merchandising. We feel we've got plenty of capacity. I think the salient point is, any of this related to competitive issues out there? For the most part, no. It's us.
Fair enough. I appreciate the color. Thank you.
Next question comes from the line of Chuck Grom with Gordon Haskett.
Hey, thanks, Richard. Could you just remind us the profitability of your digital business, relative to the club segment and also the SKU overlap between both and what you think the long-term opportunity is for the SKU count on the digital side?
E-commerce profitability is a higher percentage of pre-tax earnings and percent of sales than the brick and mortar. There are a lot of things like that. Some of the ancillary businesses are that way. It has continued. If it's come down a little, it's simply because we've invested in price. I would say whatever investment in price is, that number of basis points is less than the reduction in the profitability of e-commerce because we've driven e-commerce profitability.
Okay. Is that mostly on the merch margin side, or is it on the SG&A side?
A little bit is SG&A and a little bit's margin.
Okay. Then just to follow up on Chris's question earlier about the millennials, could you speak to membership trends and renewal rates for that category or for that cohort of individuals?
I don't have any new data on that other than I think what I shared last quarter. Millennials, new members generally renew at a lower rate. Every year you're stuck around, you're going to renew at a better, higher rate until you're really old. Millennials generally renew at about the same rate. At least that's what we-
As all first year members.
As all first-year members. Yeah. In fact, I remember, I don't have the detail on the one we just did, but the one we did 18 months ago, versus walk-in, we saw those that signed up on LivingSocial renewed at a percentage point higher rate in that first year of renewal. Again, that's plus or minus a little.
Okay. Just my last question is, obviously, the compression in your renewal rates and the timing of the Amazon/Whole Foods deal has given a lot of people concern, and it's obviously a focal point on the call. I wanted to circle back to Simeon's question earlier and your answer to his question with regards to Canada, because I think it gives you a good proxy for the pathway for the renewal rates subsequent to the change in tender. Could you just remind us and just go over that again? You said the peak to trough was around 100 basis points from the time you rolled out that new credit card. What was the recovery time, and therefore, you think it's going to be another quarter or two before your renewal rates tick up?
Can you just discuss that, because I think it's pretty important.
Yes. Mind you, there's still some differences and nuance differences between Canada and the U.S. Notwithstanding those differences, Canada, I think we did the transition in early fiscal 2015.
September of 2014.
September of 2014, which was Q1 of 2015. We were in Canada. If I look out six months later, it continued to drop for one, two, three, four, five, six quarters. It dropped exactly. I'm rounding to the tenth of a percent, but it dropped 1.0 percentage points. The next couple of quarters, it picked up half of the delta. It took another couple of quarters to pick up all of the delta. Another quarter plus to pick up the rest of the delta. This year, we converted in Q4 of 2016, so we're now in the fourth quarter past that, whereas I saw the trough in Canada, albeit some differences in nuances, six quarters out. That would tell me it's probably a couple more quarters, but that's about as much analysis as we've done.
Okay, great. Thank you.
Next question comes from the line of Oliver Chen with Cowen and C ompany.
Hi. Thanks, Richard. Richard, as you do think about e-commerce and you become much more aggressive and considerate about what your strategies are, what are your thoughts about the framework for balancing e-commerce and the convenience factor against margins and cost control from a CapEx and an expense perspective? Just what's your framework for how you're thinking about evaluating where you should allocate ROIC for the long term? Our second question was just about the value proposition story, which continues to be very compelling. How are you triangulating the value proposition against core merchandise margin and also working through with vendors in terms of maximizing it for the whole system and sharing and passing on some savings to customers? That's also a little bit related to the multi-vendor mailer and where you are with that project. Thank you.
Well, it's all of the above. First of all, in terms of allocation, first of all, the base e-commerce, as we've gone to more fulfillment centers, frankly it's been a net positive because we've driven down transportation costs, freight costs. We've driven down time to get it to you. The costs of the improvements to the site are de minimis. It's just that perhaps we were a little stubborn for a long time, and we hadn't done it. It wasn't our focus. Improving search, improving the site itself, expanding distribution points, those are small pieces of a $2.5 billion CapEx budget. I don't really see that we've got more than enough money to do it. As it relates to driving business, some of these things are tests, clearly. Someone else earlier asked the question, what if this thing with grocery is really successful?
Well, really successful is two things. It's really successful as a business and how does it impact people walking into Costco, because we know they're going to buy really a lot more stuff when they walk in. We have to do that, and we think we can manage that by using email to drive people in store as well, and the couponing and things like that. Again, time will tell, and we'll have to see where it goes. As it relates to working with vendors, it's pretty simple. Based on the volume and the efficiencies that we bring to purchasing product from a vendor, we better get the best price. And we all hear, and sometimes we read, and sometimes somebody accidentally sends us something, but we all hear about all the special deals or one retailer, whether brick-and-mortar or someone else.
I think like all of us out there, we have to keep our options open. We feel pretty good about where we're getting money. Some of the successes we've had, whether it's the special deals, the examples of the special deals, working with vendors on hot items and the buyer's picks. What I spoke about last February or early March in the second quarter earnings call about, in some cases tweaking, sometimes significantly tweaking how we use the MVM and what items go in it, how we drive greater value and sometimes partnering with a vendor to do that. All those things are part of the equation. I think it's a lot easier for us to do it when we're trying to manage a few thousand items and the enormity of purchasing power we have within those items and the availability of sourcing those items from many people.
I think we feel pretty good about what we're doing and how we're getting the monies and how we're spending them. There's a lot going on. We'll have to wait and see. We're gratified that the things we're doing are driving brick-and-mortar traffic and comps, and we're gratified by some of the things that we were telling you over the last few quarters of earnings calls about improving the site and adding a few things, have started coming to fruition on e-commerce. We think some of these new things, we're excited about it, but there's a lot of unknowns yet. Oh, a comment somebody in the room here mentioned. I think appliances is a great example. It used to be we sold some appliances in store and other big-ticket items like furniture. If you, "No, we don't deliver," and go get your U-Haul or your friend's pickup truck.
Well, that's not happening today. By displaying some items in store, we're driving more business. We're doing very well online, with furniture, with patio furniture, with regular furniture, with lawn and garden type big-ticket items, with electronics, including white glove service, and now with appliances. We think appliances, part of it also is brands. Having partnerships with GE and LG and Samsung, among others, which are relatively new in the way we're doing it. We think, in literally three or so years, we could add $1 billion of sales, which we started doing about eight months ago.
Next question comes from the line of Peter Benedict from Robert W. Baird.
Hey, Richard, just a quick one. You mentioned the manufacturing facilities during your prepared remarks. Can you talk a little bit more just about what you've done there and what the strategy is and some of the benefits you see when you start to take some of that stuff in-house? Thank you.
Well, that's a continuation of some things we've done. Years ago, we opened our first ground beef plant, I think it was originally in Tracy, California. The intention was is to, one, assure supply, and two, by definition have great quality. Two, lower the price per pound of landed ground beef to our locations. We did that and more. We now have a plant in California that supplies us. It's our plant, four-plus million pounds a week of a half a dozen SKUs. We're building a second plant on the East Coast right now because this one has been beyond capacity for a few years, but we now can accommodate one on the East Coast, and by the way, reduce some freight costs along the way, so we'll get more efficiencies from that.
The $300 million we're spending on a chicken plant in Nebraska just broke ground a month or two ago. We need over 400 million birds in the U.S. every year. This will be less than, about 100 million, so just under a quarter of our need. More importantly, we've got two other plants run by other well-known suppliers, where we would call them dedicated facilities. We had them retrofit them, greatly reduce the number of SKUs they're supplying and manufacturing to supermarkets, restaurants, and us and other clubs. Driving, guess what?
If you greatly reduce the SKUs and you make the manufacturing more efficient, you can save, given the week and given what happens with all the byproduct and the markets themselves, we can guarantee sourcing and lower our costs by anywhere from $0.10-$0.35 a bird, depending on what month and what's going on out there in the markets. It has worked well for us. We're looking to do that in other things. The fact that we source produce from 44 countries, it is what makes us who we are, but we're sourcing 30 SKUs or so, not 150 SKUs. We're building in Canada, we built a commissary for both of these. We'll continue to do that, but I think the biggest single commitment we've made is this new chicken plant, but it's not like we've gone from 0 to $300 million in this example.
We've done a lot of things.
Okay, that's great. Thanks so much.
Next question comes from the line of Scott Mushkin with Wolfe Research.
Hey, thanks for taking my questions. I know we're late. I wanted to just attack the elephant in the room. We've had a lot of questions on memberships. I think the elephant in the room, basically, it's the old Peter Lynch of investing. Invest in what you know. I think a lot of people in the investment community have seen, if they're Costco members, maybe have seen that their shopping frequency to Costco drop as Amazon's come in with things like Subscribe & Save and other programs that they've done. Richard, clearly, your sales are just amazing. They speed up and they speed up and they speed up, and your frequency.
What are we missing in the investment community where, again, it's the old Peter Lynch thing, invest in what you know, where our experiences, I think collectively, and I hear this from a lot of investors, but I also have experienced myself in my own household, we're going to Costco less, and yet your sales are so darn strong. What are we missing? Why do you think we're missing it?
I wish it was an easy explanation. We don't see it. It's a good answer from a standpoint that we don't see it, that's good to the numbers. Clearly, you've done some sampling yourself, Scott. Others have as well. Some of that sampling shows what you just suggested, that it appears that, including your family. Others, it doesn't show that. I don't know why. What we know is that we feel good. Well, certainly, we feel good about comps and frequency and renewal rates, subject to some of the credit card stuff. We feel good about some of the things we're getting ready to offer. If this stuff is being sold out there at higher prices, now those prices are going to be even lowered further by us with one- and two-day delivery or with the first same-day delivery with fresh.
We have to figure out how to communicate that to everybody. That should continue to drive our business. We'll see. I don't have a good answer for that one.
All right. That was actually my only question. Sorry.
I think part of it is, if you take using the supermarket grocery industry, the roughly whatever it is, $900 billion or trillion industry, everybody out there on this call and elsewhere will have their estimate of what delivery and online will be as a % of the total. If whatever it is today, it'll be more tomorrow, it'll be more the next day. I think everybody, even the most extreme assumption, is it's not going to be 100% ever. The question is it going to go from, I'm making these numbers up, from 5 to 10 and then slow down? Is it going to go to 20 or 25? Is it going to go to 40? Who the hell knows? Whatever it's going to be, we should have a piece of it.
Clearly, whatever that brick-and-mortar or people actually drive somewhere and get it themselves, I think we're going to keep taking pieces of that. An extreme example is not even in groceries, on apparel. We have a $6-plus billion apparel business that's compounded for three and a half years at 9-plus %, while the brick-and-mortar apparel is down. I know why, and we've explained why. For every point, there seems to be a counterpoint. Within grocery itself, part of it is the unique items, whether it's Kirkland Signature items or some of the things that we do uniquely ourselves. All those things, hopefully, will get in.
If we can't get you to come in for it, we'll at least get you to come in occasionally by some of the things we do that drive you in, like the strip steaks or like the Copper River salmon or like organics. To the extent you want to pay a little more, that little more will be a lot less more than it was the day before, even through us. That's what we're going to do.
Yeah. I think, right now it seems like with the strength of the business that our experience maybe on the investment community is a little different than what's going on for a lot of people. Hey, I had just one last one on the $75 free delivery. I've been on the site during the call. If you sell items and you deliver for free for over $75 of the order size, are the profits equivalent there with going to the store? Thanks for letting the call go so long.
Repeat the question. Somebody was mentioning something.
Yeah. Basically, if it's $75, the delivery is free.
Yes.
Is the profit equivalent if I go over $75 and I buy on this Costco Grocery, is the profit equivalent there versus the store?
Yes.
Yes. All right. Again, thanks for taking my question. Thanks for letting the call go so long.
Yeah. No worries. Part of that, by the way, is what we do. It's this huge volume that we're doing. Like any deliverer out there, including some of the ones that deliver our stuff, and they're doing stuff third party with us, it's all about getting more things in the box. If we get you to maximize that shipment, that goes a big way. If we get the volume that we can bring to the table when third party shippers are also looking for more volume and to spread that volume, that's all good for us and our members.
Next question comes from the line of Dan Binder with Jefferies.
Thanks. It's Daniel Binder. On the topic of e-commerce, you talked about the higher profitability of an online sale. I'm just curious, if you were to take $1 of sales out of the club and transfer it to online, does the better profit online completely offset the deleverage of pulling that $1 out of the club?
It's going to be a long time till we figure that out. At the end of the day, if all we're doing is substituting and taking sales out of brick-and-mortar and doing it online, that's a loss. That's a money-losing proposition. The fact of the matter is, if we're going to lose it, A, we should lose it to ourselves. B, can we drive more business anyway, both in store and online? The fact that you can get under this Costco Grocery, dry items throughout the entire continental U.S. within one year, and 90% of it already, starting two days ago. That includes lots of geographies where there's not a Costco within 150-200 miles. We think that we're going to drive some business outside of our existing members. By the way, they're going to become a member to do this.
They're already doing it despite ourselves online with the limited amount of things we had at a higher price. We think that, will somebody stop becoming a Costco member? Sure, there's going to be somebody. Will somebody shop less in store because they're now in filling or fulfilling some of that with buying direct? Yes. Will there be new people that didn't do it before? Absolutely. Will we figure out how to get you in the store even if you don't want to drive to the store? Yes. We've been pleasantly surprised by some little things we've done to do that. People like deals, and we do deals better than anybody.
Second question was around renewal rates. You talked about the next couple of quarters possibly before you see that inflection. If I go back far enough, I can recall cycles where you had membership fee increases, where the renewal rate would come off a little bit, not a lot. I think the last cycle, you didn't see that. I'm just curious, because you just raised membership fees, is it possible that that renewal rate takes a little bit longer than just a couple of quarters until you lap that fee increase next year?
I think it's possible. I think what you're talking about originally, though, is when we do an increase, you'd see almost an immediate drop in renewal rate for about a year, then it catch back up, and it continue on.
Right.
I think it's been at least two, if not three cycles, so 10-15 years prior to that when we saw that. Recognizing there's other things that have made you want to renew your membership. Having gas stations, having fresh foods, becoming an Executive Member, all those things have helped that as well. It's hard to dissect it in that regard. Anecdotally, what we hear from membership, and from membership when they survey members that have dropped, that it has virtually nothing to do with raising the fee.
Okay. Just two other questions. On the promotional front, if I go back a couple of quarters ago, it looked like you were pulling back on the MVM, hit the sales a little bit. Over the years, you've gotten a little bit more business on promotion, maybe a little less on EDLP. It's been a little bit of a shift. Now I'm just listening to the call today, it sounds like you're going to be more active online. I guess, just in terms of how it fits into the message to the customer about Everyday Low Price and whether they should wait for that promotion, do you feel like you have the right balance today? Or do you think there'll be further tweaks as you do more online, take away some of the MVM in the club?
First of all, the letter E means every day. What we changed back in February-ish, we continued. I gave a couple of examples what we've done online of late. It's not substituting something else. Our collective view is that we have the ability to do all the above, and we are doing it.
My last question was just around traffic. Both, I think in September, the quarter, I think actually for quite a while, or at least a couple of quarters, the U.S. traffic has been better than international. I was just curious, with a younger international store base, why would that traffic be softer? Is it strictly cannibalization, or is it something more than that, as you compare it to the U.S. traffic growth?
I think it's two things. It's cannibalization and new members in any state or any country, in that first renewal is less than the second-year renewal, is less than the third years. Every time they renew, they're more likely to renew the next year at a higher rate than the previous year class, if you will. We've got newer market units, and we have cannibalization.
Great. Thank you.
Next question comes from the line of Kelly Bania from BMO Capital Markets.
Hi, Richard. Thanks for squeezing me in here at the end. Just a couple more questions on the two new online initiatives. I guess first, how will the prices compare for each of them to the stores in the club? I believe Instacart has two different models, one where the prices actually match the in-store prices, but I believe there's a margin impact for the retailer. Just any comments on how we should expect or what the message to members will be on how prices will be on the online versus in the club. Are there any plans in terms of testing some more auto-replenishment type programs along with this? Any plans to market or advertise this in a meaningful way?
Okay. On the latter part, I believe there's something already on the site in terms of auto-replenishment that's on there.
It doesn't replenish.
I'm sorry. It does replenish, but it comes up with a list based on what you bought before. Again, yes, that'll be tweaked, but that was first order of business to get out there. First of all, in terms of Instacart having two different models, the same price as in store or not, I think they only have one model with us currently, prior to this week.
Oh, okay.
Which included however they charge for delivery or they mark up our goods. This will be lower when you go onto Instacart and even lower when you go on to Costco Grocery or the fresh, Costco e-commerce. Did I answer that?
Next question comes from the line of Chuck Cerankosky with Northcoast Research.
Good evening, Richard. When you're looking at the various reasons people shop at the Costco clubs, are you able to look at just how much they enjoy that shopping experience? You've got great sales numbers, and there's a lot of reasons to be in the store, but is there just a factor that indicates people enjoy being in the club?
I'm biased, of course. We all enjoy being in the club. What was the first part of your question?
You've got various reasons like saving money, to go to a Costco club and high quality.
Is there just flat out simply an experiential reason to be in the clubs that is driving traffic numbers that are better than a lot of other brick and mortar retail?
I think it's several. Look, Chuck, again, I am biased. It's several things. The gas stations help. Fresh Foods is second to none. In our view, the motor around that has gotten bigger, not smaller since June. There's Kirkland Signature items, there's Treasure Hunt Fresh, there's organic. I think it's what we do. When I go to the budget meetings every four weeks and I look at even some of the things we've got coming in for the various holidays, whether it's outerwear apparel for the winter or some of the holidays like Thanksgiving and Christmas, I think our members should be as excited as ever about some of the exciting new things we have. They keep driving that value proposition home.
Okay.
All the things that I mentioned earlier in the call. The tweaking the MVM, using the emails to get you in to buy. When everybody out there was at $8.99 to $10.99 on choice New York strip steaks, and we went from $7.99 to $6.99, that not only drives business and takes it away from chicken and ground beef, it drives traffic. We know how to do that kind of stuff pretty well.
Going back to membership, our work has been showing that household formations are looking a little better than the census numbers, which are about a million new households per year right now. Are you seeing that in membership sign-ups in the U.S.?
New households? I don't know. If you want to email me the question, I can find out.
All right. Thank you.
Next question comes from the line of Scot Ciccarelli with RBC Capital Markets.
Hey, guys. Thanks for squeezing me in. David Bellinger on for Scot Ciccarelli. Just one housekeeping item. Organic sales, can you tell us how much that was for the year?
Organic?
It was up a little over 20% and about $5.5 billion.
Great. One follow-up, also food related here. Anything you're seeing changing in either inflation, deflation? Has the tone of the conversation changed with any of the suppliers you talk to?
Well, it's pretty stable. We're not hoping for inflation. Everybody's hoping for inflation. It doesn't hurt us, but it's been pretty stable. If I look at LIFO indices or any type of those metrics, we've gone from deflation to flat or literally low single-digit basis points up on a basket. Taking gas out of the equation, which is quite inflationary right now.
Great. Thanks for that, guys.
Next question comes from the line of Joseph Feldman with Telsey Advisory Group.
Hi, guys. Thanks for taking the question. Two quick ones. Pick up in store. I know we've talked about this before with you guys, but just curious if you've changed your thinking on it at all or if there's any potential to do a test like a buy online pick up in store situation?
Yeah. We looked at it, but at this point we're not prepared to do it.
Okay.
We do it with tires. You can order them online and schedule your appointment.
Got it. Is it a space issue or a labor issue, you think?
First of all, to tell you the truth, in our view, and maybe we're stubborn, it's a common sense issue. You order and then we have to separate it into dry, refrigerated, frozen, wait for you. It is clearly a space issue. We're doing literally twice the volume of some others out there, 2 to 3 times the volume versus our two direct competitors. I'm sure at some point we'll try it, but it's not on the agenda in the next couple of months.
Got it. The other topic, I think you said the store mix for this year in new stores was two-thirds U.S., one-third international. I feel like you were trying to push more towards 50/50 the past couple of years. Just anything to do that you can mention there?
We're still trying. It's just there's a longer pipeline and we've had a lot going on. We will get there. I look at it and I think the good news is, if you'd asked me five, six, seven years ago, I don't think we'd have as many opportunities in the U.S. as we still think we have. Saturation continues, but the time when saturation ultimately occurs for new locations keeps being pushed out a little bit further.
Got it. Thank you very much. Good luck, guys.
Thank you. Why don't we take two last questions?
Okay, we got two more questions left. The next question comes from line of Brian Nagel with Oppenheimer.
Hi, this is David Bellinger on for Brian. Thanks for squeezing us in here. My first question is on the price investments you detailed earlier. Just to be clear, did those step up in Q4 versus the trend over the first three quarters of the year? If so, was that in some way a reaction to the Amazon Whole Foods deal?
No, they didn't, other than there's more weeks. There's 17 weeks versus the first three quarters that had 12 weeks. It had absolutely nothing to do with that. We price Whole Foods twice a week in many, many markets around the country, and we're kind of scratching our head. We've done that before. We did that before the announcement of the acquisition, by the way. Have they come down in prices of some items? Sure. Overall, and some of you have done your own price baskets, while we read about up to 43%, it's a lot closer to zero than it is 43%. Even with something dramatic, others out there are going to be impacted a lot more than we are, other than people wanting to have stuff delivered. We're providing that option based on how we do stuff.
Got it. Then as my follow-up, can you just give us any comments around the recent trajectory of food price deflation and what your expectations are going into 2018?
It's pretty flat right now. Within fresh, you're going to see variations like meat has come down a little bit. It was way up for a year. That's going to be seasonal. Produce depends on crops. Recent events. Recent events. Oil, gasoline depends on recent events, the hurricanes. Other than that, taking some of those things out, it's pretty flat. Hello?
The last question comes from the line of Mark Astrachan with Stifel.
Yeah, thanks, and afternoon, everyone. I wanted to ask, can you give the % of sales that Kirkland Signature represents? Then just curious if you think about the margins relative to what else is in store, given increasing competition out there and obviously the favorability of the KS products, would you think about increasing the offerings there going forward to help sort of fund and offer uniqueness within the store?
Yeah. Well, percentage-wise, ex gasoline, even though it says Kirkland Signature Gasoline, is about 24, 25% of our total sales, our non-gas sales. We'll continue to add items as they make sense. Can you give us a number? We're not really working towards the number. We think the number will keep going up a little bit because we do like it. We remind ourselves, our head of merchandising reminds our buyers every day, don't fall in love with it because it has your name on it, and each year, which items, even Kirkland Signature, should we discontinue because the brand does better. Maybe ours is a better value in our minds, and maybe it is a better value, but we're still not successful with it. Got to keep at it with the brand.
Got it.
Yeah. By the way, part of the focus of our buyers, probably before that, is to find more brands. We want more brands.
Got it. Just lastly, you'd previously talked about e-commerce expansion being done organically. Curious if that's still the case, or would you potentially take a look at other things, whether it's an actual retailer, whether it's a logistics provider, something that could help sort of bridge what you're doing externally now with something internally. Related to that sort of views on competitive dynamics, meaning you buy something that isn't necessarily something you want, but something that somebody else may want that ultimately could negatively impact your business.
I think with the latter part of that, no. That's going to be the last thing. I always joke we're not smart enough to figure that one out. I think that we're more likely to, first of all, look for partnerships and ventures to jointly venture something rather than to buy something. As you might expect, we, along with other large regional retailers, get calls every day about everything, whether it's delivery services, food-related meal stuff, all kinds of stuff. We're fortunate in the sense that, one, we've got some good relationships like the recent expansion of what we're doing with Instacart. That help. I don't see us doing that. That being said, we'll be open-minded to anything. We'll have to wait and see on that one. We've got a lot going on right now with some of the things we're doing that we're excited about.
Every time when we tried something, I keep bringing up the steak idea or the steak example or the Copper River salmon answer, we figure out what else can we do. There's a lot of those what else's. We've got our plate pretty full of those kind of things. We've got to look, we just rolled this thing out. What we rolled out three days ago is a soft opening, if you will. There's no publicity out there for it. We have to see how it goes, what it does first.
Sure. Thank you.
Thank you, everyone. Have a good day.
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