Good afternoon. My name is Frederica, and I will be your conference operator today. At this time, I would like to welcome everyone to the COS Q2 Earnings Call and February Sales Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session.
Thank you. Mr. Richard Galanti, CFO. Sir, you may begin your conference.
Thank you, Frederica, and good afternoon to everyone. I'll start by stating that these discussions will include forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements involve risks and uncertainties that may cause several actual events, results and or performances 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 we do not undertake to update these statements except as required by law.
In today's press release, we had three things to discuss. We reported our 2nd quarter and fiscal first half twenty seventeen operating results for the 12 week 24 week periods ended February 12. We also reported our monthly sales results for the 4 week reporting month of February, which ended this past Sunday, February 26. And we announced our plans for a membership fee increase in the U. S.
And Canada effective this coming June 1. For the 12 week fiscal 2nd quarter, earnings came in at $1.17 a share or $0.07 below last year's earnings results of $1.24 Some items of note. First, our co branded credit card and how it impacts our results. Similar to what we reported in our Q1 results, the Citi Visa co brand credit card program, which went live last June 20, positively impacted our margins by 16 basis points, our SG and A expenses by 24 basis points as compared to a year earlier and our overall bottom line in Q2 benefiting earnings by $0.16 a share. More detail on that later in the call.
2nd, gas profitability. Our profits from gasoline during the quarter as compared to last year's Q2 were lower by $42,000,000 pre tax or $0.06 a share. This is primarily a function of last year's very strong Q2 gas profit results and is consistent with the impact to gas profitability that rises in gas prices will cause on our earnings of gas. Number 3, IT expenses. Our IT activities impacted SG and A in Q2 on an incremental year over year basis by $26,000,000 pretax or 7 basis points to SG and A or $0.04 a share compared to last year.
This reflects both the direct expenses for the quarter as well as increasing levels of depreciation and amortization on major completed projects that are now in service. Number 4, stock compensation expense. This one is getting less of a negative impact each year. So it's a little smaller than spend. It was 10% higher year over year.
So $10,000,000 higher or about $0.015 impact to the P and L. FX, number 5. There are 2 FX items to point out. The first one, which I typically point out is the different how the impact is to changes in foreign currencies relative to U. S.
Dollar year over year. As compared to a year ago during the Q2, many of the foreign countries and locations where we operate began to strengthen during the quarter versus the U. S. Dollar, most notably in Canada, resulting in our foreign earnings in Q2 when converted into U. S.
Dollars being slightly higher by about $4,000,000 pre tax or about $0.01 a share, that if the exchange rates have been flat year over year. Number 2, as it relates to FX, is a much bigger impact to this quarter's P and L had to do with FX losses related to forward contracts and U. S. Dollar holdings by our international subsidiaries. These are used to pay U.
S. Dollar denominated merchandise payables in those countries. That those losses on those exceeded the gains on the related U. S. Dollar denominated payables.
This year in the Q2, it was roughly a $20,000,000 pre tax hit. Last year in Q2, the gains on those payables exceeded the net losses on forward contracts and U. S. Dollar holdings by $6,000,000 plus year over year swing or impact negative impact to the P and L by $0.04 a share. I might add that this year over year swing, it generally runs in the plus or -0 to $0.02 a share range.
With all the volatility out there, it was a little bigger this quarter. Number 6, LIFO. There was no LIFO charge or credit in this year's Q2 results, whereas in last year's Q2 results, it had a LIFO credit of $15,000,000 reflecting deflation on our LIFO indices and so positively impacted last year's Q2 by $0.02 a share. While we did have some deflation in the quarter as we did in Q1, with the switch over to a new accounting system platform in the beginning of the fiscal year, Basically, even though we've had deflation, we have no associated previous inflation or LIFO charges historically taken. And so if you will, there's a buildup of credit that will offset future LIFO charges to the extent that there's inflation in the future.
But again, year over year, that's a $0.02 hit to the quarter year over year swing. Number 7, income taxes. Last year in Q2, our effective income tax rate was right at 34%. Due to a discrete tax item this year in Q2 as well as small changes in the profitability mix by country. Our effective rate this year came in rather at set up to $0.34 came in at $35.6 effectively impacting our Q2 EPS by about $0.03 a share.
Turning to our 2nd quarter sales. Reported sales were up 6% and our 12 week reported comparable sales figure came in at up 3%. For the quarter, the 3% plus comparable sales figure was helped by gasoline price inflation to the tune of about 84 basis points. While the impact from FX was a very slight detriment, again, while currency strengthened during the quarter, the net over the quarter was still a slight detriment of about minus 9 basis points. So together about 0.75 percent hit.
Excluding gas price inflation, the reported plus 3 percent U. S. Comp remained at 3%. Our reported Canadian comp of +8 was actually a +2 excluding gas inflation and FX, remind you that the Canadian dollar strengthened quite a bit, and the reported minus 2 other international comp, excluding gas and FX, would have been a +3. All told, total comps reported for the quarter at 3.3% plus for the quarter, excluding gas and FX with the pluses and the minus still remained at plus 3% ex gas and FX.
For our 4 week month of February, which included the last 2 weeks of the fiscal Q2 the 1st 2 weeks of February did. Comps came in at a +4 on a reported basis. This consisted of a +5 reported in Canada, a plus 10 reported in sorry, a +5 reported in the U. S, a plus 10 reported in Canada and a minus 2 reported for other international. As I discussed last month or actually, as we discussed on our monthly sales call last month, the calendar shift of the Chinese Lunar New Year, that was 11 days earlier versus last year.
That positively benefited the January reporting period this year and negatively impacted February. We estimate that this shift was a detriment to February comps of about 3 quarters of a percent on the total company and 6.5 percentage points, so 6.50 basis points to the other international segment. Sales in February were positively impacted by both gasoline inflation to the tune of over a little over 200 basis points and by overall strengthening in foreign currencies relative to the dollar to the tune of about plus 60 basis points. Ex gas inflation in the U. S, the reported plus 5 would have been a plus 2%, ex gas inflation and FX in Canada, the reported plus 10% would have been also a plus 2% and the minus 2% reported for international would have been a minus 1% ex gas and FX and a plus 5% excluding the Lunar New Year shift.
Total company comps for the month reported at +4 would have been a +2 excluding gas deflation and FX. I'll also point out cannibalization. We do that every quarter and typically it's somewhere in the 0.5% range or a little less. Cannibalization has become a little bigger of a factor to our comp sales results in the last couple of months. The cannibalization impact on February was approximately 90 basis points negative for the total company, and it was actually minus 75 in January.
For February, it was minus 300 basis points in Canada. Mind you, this year, we're opening 7, I believe, 7 new warehouses on a base of 91 up there. So a lot of relative cannibalization for Canada and minus 180 basis points on the other international segment in February. I mentioned that the minus 70 the minus 90 basis points in February for the total company. By comparison for all of fiscal years 2015 2016, total company cannibalization averaged a little under 40 basis points to the negative.
So again, it's picked up late of late with some of the openings. We estimate weather had a negative impact on February comps as we had snow in the East and heavy rains in the West. The estimated impact in that was about 50 basis points in the U. S, about 75 in Canada and to the total company also about 50. Regarding deflation, overall, and primarily in the U.
S, we've seen deflation in the 1%, 1.5% range in February. Departments such as foods, sundries, frozen foods, liquor, meat, deli showed the most deflation on the foods and sundries side. On the non food side, consumer electronics continued to be deflationary primarily in the TV category. In terms of new openings, our opening activities we planned we opened a net of 8 new locations during the Q1, 9 less 1 relo. In Q2, we opened 4 new locations.
Those included our 13th unit in each of Korea and Taiwan, as well as 2 new locations in Florida in the Tampa, Florida area. For all of fiscal 2017, we have current plans of 29 net new locations, So 17 additional openings during the 3rd 4th quarters of fiscal 2017 are planned. Of the 29 for the year, 14 in the U. S, 8 in I'm sorry, 8 in Canada. I mentioned 7 earlier.
It's actually 8 on a base of 91 in Canada and 1 each in Japan, Korea, Taiwan, Mexico and Australia, as well as our first openings in France and Iceland, most likely in mid to late May. This afternoon, I'll also review with you membership trends and renewal rates, our membership fee plans in terms of increases in June, an update on the Citi Visa Anywhere card, an update on our multi vendor mailer promotional activities, additional discussion of course on margins and SG and A and a little bit about e commerce results and some initiatives there as well. In terms of 2nd quarter results, quickly on the sales. For the quarter, sales were up 6% to $29,130,000,000 On a reported comp basis, they were up 3% and again ex gas and FX, they still remained up 3%. For the quarter, the plus 3 reported comp was a combination of an average transaction increase of a little over 1% and an average shopping frequency increase of 2% for the quarter.
That's company wide, the frequency in the quarter for the U. S. Was a 3. In terms of geographic sales by geographic regions, the Midwest, Texas and Northwest regions were strongest with California not far behind. Internationally and local currencies, better performing countries were Mexico, U.
K. And Korea. In terms of merchandise category sales for the quarter, for the 2nd quarter within food and sundries, overall flattish year over year, Liquor or spirits and foods were the leaders. Tobacco continues to be a negative and actually in the high teens. As we mentioned, we look to cycle the majority of that tobacco sales losses those tobacco sales losses by the end of June.
For Hardlines, overall in the low to mid single digits, the strongest department results were tires, hardware and seasonal with consumer electronics down in the low singles. Softlines were also up in the lowtomidsingle digit range with apparel and home furnishings showing the strongest results. In fresh foods, comp sales were also in the lowtomidsingle digits. And lastly, in the Q2 overall, again, in terms of deflation, for the Q2 was in the 1.5% to 2% range. Similar departments on the foods and sundry side, non foods again saw a little deflation in consumer electronics, primarily TVs.
For February, traffic was up approximately 2% and 3% in the U. S, including 3% in the U. S, while average transaction was up a little under 2.5%, most of this was due to gas inflation and FX. In terms of geography, February, Midwest, Texas, San Diego region, which also in our case includes Arizona and Colorado and New Mexico, were the strongest as well as the Bay Area. Internationally in local currencies, U.
K, Mexico and Canada were at the top of the list. From a merchandise category standpoint, excluding FX, Food and Sundries and Hardlines, including the consumer electronics were up low single digits, Softlines up mid single and fresh foods slightly negative for the February reporting period. Again, a little deflation is impacting these numbers. Before moving to the income statement, a few comments about our multi vendor mailer, the coupon book list that we send out and have online, what we call the MVMs, these promotional activities and a few changes we've recently implemented. As most of you know, as most of you know from many, many years ago, the MVMs have grown and evolved over 22 years from 1 6 week summer coupon booklet back in 1995 to year end to generally year round promotional price pieces with great values on items being offered in each mailer.
Over the years, we've expanded the mailers and have continued to tweak them. More recently, we've revamped the NVM program, creating some newness, enhancing values, member values on some of the items, many of the items and creating a little more merchandising excitement. We've eliminated a few of the MVMs over the course of the year and also there'll be fewer days. We've reduced the number of items per mailer, but we've overall increased the offering in terms of total savings of those items. And we're also moving in some cases to everyday low pricing EDLP where we can drive higher over sales and show better everyday pricing and value.
In terms of Q2 2017, it was really the transition fiscal quarter for these NVM changes, if you will. The first revamped MVM ran in December, which is near the beginning of Q2. Overall, in the Q2, we had 17 fewer MVM promotional days. Mind you, the quarter itself is 7 weeks time 12 weeks times 7 is 84, couple of days closed for the holidays, but basically 17 out of those 84. 71 fewer items offered in those MVMs, but again, higher overall sales compared to last year in the MVMs.
Overall, so far, we like what we see. We continue to tweak it a little. But remember, we're still in the early stages of this. We know that 17 fewer MVMs days in our 84 day Q2 and 10 fewer NVM days in our 28 day month of February probably hurt traffic a little, but we shouldn't see that latter aspect in Q3 as there are the same number of NBM days year over year in the Q3. So again, Q2 is really the transition of that.
Now moving on to the line items in the income statement. In terms of membership fees, coming in at $636,000,000 up 5% or $33,000,000 versus last year, down a basis point. Minimal impact from FX because again, while they were increasing over the course of the year, they started off lower in the beginning of the Q2. In terms of membership, we continue to enjoy strong renewal rates coming in a little over percent in the U. S.
And Canada and 87.7% worldwide on a fully captured basis. And we continue to see increasing penetration of the executive membership program in the countries where we offer it. In terms of number of members at Q2 end, at Q2 end, primary Gold Star came in at $37,500,000 up from 12 weeks earlier at $37,100,000 dollars Primary Business 7.4000000 dollars up from 7.300000012 weeks earlier. Business add on 3,400,000 dollars down from 3,500,000 that has to do with some of those people converting into their own membership as they generally as they become executive members. So total cardholders, 48 point I'm sorry, total accounts, dollars 48,300,000 compared to 47.9 quarter fiscal quarter earlier.
Total cardholders $88,100,000 at second quarter end, up from $87,300,000 12 weeks earlier. As of Q2 end, our paid executive membership stood at $17,900,000 which is an increase of about $200,000 from 12 weeks earlier or about $17,000 additional per week. Executive members represented a little over a third of our member base and about 2 thirds of our sales. In terms of renewal rates, again, overall
in the U.
S. And Canada 90.2, percent down a 10% from 90.3 percent at the end of the quarter, which was also 90.3 percent at the end of the fiscal year back in late August. Business within that remained at 94.3 in both fiscal 1 and 2 quarters end and Gold Star, primary Gold Star at 89.5%. Again, it's probably a little roundy, just push it down instead of up that 0.10 percentage point. Worldwide actually picked up a little.
At Q2 end, it was 87.7%, up from 87.5% at Q2 end and 87.6% at fiscal year end. We feel these are pretty good numbers and don't really see a lot of impact. We believe a lot of it has to do with the conversions in credit cards. If you recall me talking probably a year, year and a half ago about some of the stuff we saw in Canada as we transitioned to Canadian credit card program a year and a half or so earlier than we did in last June here in the U. S.
And if I look back as an example, just a year ago in Q3, Canadian renewal rate was 90.6 percent for this quarter is 91.6 percent. So it's come back it started to come back as we would expect. Again, U. S, we're still seeing some of that auto bill impact that we believe is a big piece of it. Back in Q3 a year ago, we were 90.3 and actually 90.4 the prior quarter, down to 90.1 at the end of the year and we're 89.9% at Q2 2017 end.
So again, pretty much the kind of impact that we would have expected to see and not really terribly concerned about that at all. I want to spend a minute regarding our announcement on the increases of fees this morning, which will be effective June 1. First, the planned increases relate to our U. S. And Canadian operations.
Recall that fee increases membership fee increases took place in several other countries effective this past September 1, the beginning of the fiscal year. And both the U. S. And Canada, which by the way represents just under 90% of our company's fees, about 87% or 88%. The current annual fee for our individual Gold Star business and business add on memberships, what we refer to as our primary memberships, is currently $55 a year and has been at that level since November of 2011, about 5.5 years ago.
The annual fees for these memberships will go to $60 effective June 1. Also in the U. S. And Canada, our $110 per year executive membership fee, which has been at that level also since November of 2011, is being increased by $10 to $120 Also with regard to executive membership, the 2% reward associated with the executive membership will increase. Currently, the annual reward is capped at $7.50 that will be increased to $1,000 So while there is an increase in the annual fee, the reward goes up to $1,000 and that's based on eligible purchases.
That of course is in addition to the 2% reward that one gets if they use the Citi Visa Anywhere card at Costco or the 4% when they buy gas at Costco. In all, approximately 35,000,000 member households will be impacted by this increase, approximately half of whom are executive members and half of whom are primary Gold Star Business and Business Add On members. Note that the membership fees are accounted for on a deferred basis. So in terms of how it hits our P and L, our membership income line, approximately onetwelve, if you will, 1 month worth of the increase in fees from the June renewals, that will be the 1st group that gets this fee increase. Approximately onetwelve of the increase will be booked to the income statement in that 1st month of June, with an additional onetwelve being booked in each of the succeeding 11 months.
Next, increased fees from our July renewals, those will be booked starting in July 112 and following through to the following June and so on. So the full P and L impact of these increases will be over a 23 month timeline such that the last group of members to be billed at these new levels will be next May 2018 with a booking, if you will, of that those $5 $10 increases being recorded over that month and is exceeding 11 months, I. E. 23 months out. Before continuing down the income statement line items, a quick update and a few updated stats on the Citi Visa card offering.
Again, this began last June 20, early in our Q4 of 2016. Recall that we began last June 20 with approximately 11,400,000 co branded cards or about 7,400,000 accounts being transferred to Citi for conversion to the new Citi Visa Anywhere card. As of Q2 end, just under 90% of these accounts the accounts transferred have been activated, recognizing all accounts transferred to begin with were not activated. I think it was down in the low 80s at the time low to mid 80s. And in fact, that just under 90% activated as of Q2 end, that's up a few percentage points from Q1 end 12 weeks earlier.
Also, we now have about 1,200,000 new approved member accounts, representing about 1,600,000 new CVVisa cards out there since the June 20 conversion. Again, this is also up about 200,000 accounts over the past 12 weeks during fiscal Q2. Lastly, we are seeing the CityVisa co brand portfolio total spend higher year over year, both organically from the cards converted last June as well as from these new accounts. We'll see what the next few quarters bring. Overall, in terms of conversion, usage and new sign ups for the card, we feel it's going pretty well so far.
Going down to the gross margin line, our gross margin in the 2nd quarter was lower on a reported basis was lower year over year by 24 basis points coming in at 11.00 compared to last year's 11.24. Now as usual, there's a lot of moving parts here, gas inflation and the impact of the credit card, some of that benefit goes to the sales line, which therefore improves the reported margin. But I'll let you do I'll ask you to do my little matrix here. I will do it for 1st and second quarters, there'll be 4 columns. Reported Q1 2017 without gas deflation in Q1 'seventeen is the 2nd column.
3rd column is reported Q2 'seventeen and the last column would be without gas inflation in Q2 2017. The first line item would be core merchandise. In Q1, reported plus 19 basis points year over year without gas deflation, plus 16 basis points. For Q2, reported plus 1 basis point and without gas inflation, plus 9 basis points. Ancillary businesses, minus 5% and minus 6% in the 2 Q1 columns.
In Q2 'seventeen in the 2 columns, minus 20 basis points and minus 18 basis points, again reflecting lower margins in gas year over year, while increasing the penetration of gas sales. 2% reward, minus 2 basis points and minus 1 in columns 12 and in columns 34, 0 and minus 1. LIFO, minus 2 and minus 2 in Q1 and minus 5 and minus 5 in Q2, again recognizing that a year ago we had deflation and therefore LIFO credits. This year, while we had deflation, we can't take them since there's nothing to take them from prior offsetting LIFO charges. Other, last year, there was, I believe, a one time legal settlement that added 19 basis points to the first two columns here and 0 and 0 in columns 34.
You add all that up, last year in Q1, year over year margins were up 29 basis points on a reported and up 26 basis points ex gas deflation. I also mentioned last year that within those numbers, the City of Visa impact margins within that 29% and 26% was +13%. In the next two columns, reported Q2 'seventeen, again, margins on a reported basis came in 24 basis points lower year over year, and ex gas and FX came in 15 basis points lower than last year. Now mind you, both of those numbers still include do include the benefit from the Citi Visa program to the tune of about 16 basis points to the positive. So again, taking those out, the reported minus 24, adding to 16 in, that would be a minus 40 and adding 16 to the minus 15, it would be a minus 31 on an adjusted basis, if you will, using CityVisa.
Now the core merchandise component gross margin was higher by 1%, as you see in the chart, and plus 9%, excluding gas. Excluding the benefits of CityVisa, it was minus 15% and minus 7 excluding gas deflation. As I always mentioned, subcategories within the margin are core subcategories, food and sundries, hardlines, softlines and fresh foods. As a percent of their own sales were positive year over year by 7 basis points, but with the declining sales penetration of that given the inflation in gas, the contribution is a minus 7. Food and sundries and hardlines were both slightly higher year over year on their own sales.
Softlines was up about 60 basis points and fresh foods was lower year over year by about 10 basis points. Ancillary and other business gross margin, I mentioned, was down 20% in the quarter. Most of the year over year decrease was due to lower gas profits, as I mentioned earlier in the call. 2% reward, 1 basis point of negative impact to ex gas just implying a slightly higher sales penetration ex gas inflation on a year over year basis. And I already mentioned LIFO, that was about $0.02 a share as well.
Overall, our margins ex the Citi Visa credit card benefit were most negatively impacted by lower gas margins, somewhat negatively impacted by 5 basis points from LIFO year over year, with slightly lower year over year sales penetration of core also hurting it a little bit, even though core margins on the core sales were up 7 basis points. I might also mention that the plus 7 basis points core margin improvement year over year, This is notwithstanding some of the pricing initiatives that I mentioned earlier like EDLP that we've been taking these last couple of months. Moving to reported SG and A. Our SG and A percentage in Q2 year over year was lower or better by 5 basis points, but higher or worse by 4x gas inflation, coming in at a 10.23% this year compared to 10.28% last year on a reported basis. Again, excluding the benefits of the Citi Visa program, which clearly helped SG and A by lowering merchant charges, that was a 19 basis excluding benefits from that, year over year, SG and A was higher by 19 basis points and 28 basis points ex gas inflation.
In terms of performance year over year and SG and A, operations component, as I mentioned, was lower or better by 8 basis points year over year and plus 1% in the excluding the impact of gas. You see that in the chart we just drew. The plus 8 basis point improvement consisted again of much lower city Visa merchant fees and related fees, somewhat offset primarily by higher payroll and employee benefits costs. And again, that has to do with the underlying sales being a little lower and a few other things. Central expense was higher year over year in Q2 by 2 basis points, 3 without gas.
Again, IT was 7 or 8 without gas of that and offset by a couple of things that went our other way. Stock compensation expense, again, 1 to 2 basis points, not a big amount. Moving down to preopening expense. Preopening expense was higher by $5,000,000 coming in at $15,000,000 in Q2 of 2017 versus $10,000,000 a year earlier. Pre opening relates not only to your actual openings in that quarter, but also some of the ones leading up to it or getting ready to be open rather.
That was 4 openings in Q2 this year, only 1 opening last year. There's also higher year over year preopening expenses related to our entrance into 2 new countries, France and Iceland, as we already have people on the ground. Operating income in Q2, all told came in at 8 $44,000,000 1 percent lower or $12,000,000 lower from last year's 856,000,000 dollars Below operating income line reported interest expense came in at $31,000,000 in both this and last year's fiscal 2nd quarters. Interest expense began I might mention that interest expense beginning partway through Q3, I believe the middle of March, will improve quite a bit with a scheduled March 15, dollars 1,100,000,000 debt repayment. This is a 10 year fixed rate debt instrument, I believe at 5.5 percent about 5.5 percent fixed rate interest.
Net will save about $50,000,000 a year pretax, about $60,000,000 of reduced interest expense on that pretax offset by cutting a check for the $1,100,000,000 if you will and losing some interest income on that to the tune of roughly $10,000,000 and that's just a simple guesstimate. Interest income and other was lower year over year by $20,000,000 in the quarter. I was just informed that I skipped the SG and A chart. So why don't we go back and write that just so it's easy for those of you that put it down. Thank you.
Again, 4 columns for SG and A reported and without gas deflation Q1 2017 and Q1 2017 and reported without gas inflation Q2 2017 and Q2 2017. I think these numbers that I just read will make a little more sense. Operations, Q1 'seventeen reported minus 8 basis points or higher by 8 basis points and minus 6 without gas deflation, +8+1 in columns 34 Central, minus 9 and minus 9 and in Q3 and Q2, those columns 34 minuteus 2 and minus 3. Stock compensation minus 7% and minus 6% and then minus 1% and minus 2% in Q2. Mind you, it's always higher in Q1 because we do our big total company, total employee, those that get our issues grant in October.
Other +8 +8 plus 8 last year, again, that was a year over year unusual item, I believe, and 0 and 0 in columns 34. You add it all up on a reported basis in Q1 2017, it was higher year over year on a reported basis by 16 basis points and without gas deflation by 13. On a reported basis in Q2 2017, we were lower or better by 5 and higher or slightly worse by 4 basis points without gas inflation. As I mentioned, the Citi Visa impact to SG and A in Q1 was 25 basis points, that's in those numbers and 24 basis points in Q2. I won't go through the numbers I just mentioned.
My apology for doing that in reverse order. Below the operating income line, reported interest expense came in, I mentioned at $31,000,000 and I also mentioned that come March 15, we're going to save about $0.08 a share or $50,000,000 pretax net, dollars 60,000,000 reduced interest expense and roughly about $10,000,000 pretax reduced interest income. I was just getting ready to talk about the next line item on the income statement, the interest income and other. It was lower year over year by $20,000,000 in the quarter. This year in the quarter, it was a minus $4,000,000 number.
Needless to say, it's the other, not the interest income. Last year, it was plus $16,000,000 Actual interest income and other than the FX that I talked about earlier for the quarter were better year over year by 6,000,000 dollars Offsetting this, of course, was that $26,000,000 in charges related to various FX items that I discussed at the beginning of the call. Overall, pre tax income was lower by 4% or $32,000,000 in the quarter coming in at $809,000,000 versus $841,000,000 a year ago. I mentioned earlier in the call, income taxes, a little higher rate, coming in at 35.6% this fiscal quarter versus 34% last year. We think for the year, our current best guess for effective rate for the year is actually lower than that, a little lower than that 35.6 that we recorded in Q2, probably somewhere more likely in the 35.3 or 35.4.
That's our best guess. Overall reported net income came in at $515,000,000 compared to $546,000,000 net income last year in the same quarter. A quick rundown of other topics. The balance sheet is included in the morning's press in this afternoon's press release. A couple of balance sheet items that we try to give out.
Depreciation and amortization for Q2 totaled $312,000,000 for the quarter and $609,000,000 for the first half of this fiscal year. In terms of AP ratio, AP accounts payable as a percent of merchandise as a percent of inventories, 92% reported both this year and last year. If you take out non merchandise payables for construction and other things, This year, it came in at 82% AP ratio and last year was 83%. I'm just rounding down a little there. Average inventory per warehouse came in at $13,100,000 compared to $12,800,000 a year ago, we're up about 350,000 dollars Variances about a little over 100 of 1000 of its health and beauty aids and the like over the counter items.
Some of that has to do with the timing of our MVM build up in February. Others are mostly non foods, majors about 100,000 dollars small electrics about $75,000 and hardware about $50,000 to $60,000 So nothing terribly out of pocket there. In terms of CapEx, 1st quarter we spent $670,000,000 in the second I'm sorry, in the 2nd quarter, we spent $515,000,000 in the Q1, we spent $670,000,000 so total year to date $1,185,000,000 We estimate for the year CapEx will still be in the range of $2,700,000,000 to $2,800,000,000 So $1,500,000,000 to go, if you will, $1,500,000,000 plus to go. Next, Costco Online. We're in the U.
S, Canada, U. K, Mexico, Korea and Taiwan. Korea and Taiwan being the most recent additions about a year ago. For Q2, sales and profits were up, of course. Total online sales were up 12% and up 11% on a comp basis.
As I've spoken about a little bit, probably in Q4 last year and October and then in a fiscal quarter ago back in early December. We continue to improve our offerings, merchandise offerings and enhance our member experience online. In terms of improving merchandise, we continue to add new and exciting merchandise and we continue to improve in stocks on high velocity items. In terms of recent initiatives and recent online additions include Samsung appliances and a variety of added apparel brands, both direct and indirectly purchased, with additional offerings in various non food categories in the coming months. These would include Kohler Bath and Kitchen, Reebok Men's and Women's Activewear and Footwear, and Spyder Ski and Outerwear to name a few.
We've also continued to add various health and beauty aid, both regular ones and upscale ones and sundries items to our online offerings, increasing both online page viewing and member shopping frequency as well. One recent fun item to note, leading up to Valentine's Day, we offered online 50 long stem roses for $49.99 and that included delivery. We had sales in those 3 days of over $2,000,000 represented over 2 cargo planes and most important that $49.99 price point for 50 long stem roses is $30 less than we sold the same item for just a year ago. And if you're late to getting those roses, we are now offering at $39.99 including shipping. In terms of improving experience and functionality of the site, we've improved search, we've shortened the checkout process and we've improved our members' ability to track their orders and we'll continue to do some more of that.
Just recently, we automated much of our returns process, not only providing members much better quality of service, but also reducing by more than 20% in just the 1st couple of months our call center volume related to returns. There'll be more to come over this coming calendar year and several of these things, and we're finally getting around to doing some of this. Lastly, we continue to improve our distribution logistics. For example, in the U. S.
And Canada, we now fulfill online orders from 11 depot distribution points, which of course allows for closer and faster delivery of online orders. Overall, as I mentioned, we have plenty of online initiatives going on, both in terms of member experience and service, expanded products and services offerings and greater value to the member. Finally, a quick update on other home and office delivery sales channels. As you know, we partner with Google Express in 5 cities, operating out of 15 of our Costco U. S.
Warehouses. In addition, we're working with Google Express on a new service offering 1 to 3 day shipping of products throughout the continental United States. We also continue to work with Instacart. Instacart currently operates in 26 U. S.
Cities, in our case, utilizing 132 of our U. S. Locations. And we're either testing or getting ready to test 2 other third party delivery services within the next month or so. In terms of expansion, in fiscal 'sixteen, last year we opened 29 net units, about 4.5% square footage growth.
This year, it looks like it's going to be also 29 net new units, so about 4.25 percent square footage growth. The planned 17 locations, these 29 locations by country would be 14 in the U. S, 8 in Canada and 1 each in Taiwan, Korea, Japan, Australia, Mexico and then the new ones in France and Iceland. As of Q2 end, total warehouse square footage stood at 105,100,000 square feet. In terms next, in terms of stock buybacks, as you recall, in Q1, we repurchased 100 and $22,000,000 or 809,000 shares of Costco stock for an average price of right around $151 a share.
In Q2, we repurchased $66,000,000 or 411,000 shares at an average price of just under $160 or $159.86 I believe. In terms of dividends, our current quarterly dividend continues to stand at $0.45 a share. And on a quarterly basis, this $1.80 per share annualized represents a total cost of the company of right at $800,000,000 Lastly, I want to before I turn it back to Frederica, our fiscal 2017 Q3 scheduled earnings release date for the 12 week period ending Q3 ending May 7, We'll be we'll do that after the market close on Thursday, May 25, with the earnings call that afternoon at 2 p. M. Again.
With that, I'll be happy to open it up to Q and A. And Frederic, I'll turn it back over to you for that process.
And your first question comes from the line of Simeon Gutman with Morgan Stanley.
Hey, guys. It's Simeon. So Richard, I think the big question that I think will come up a lot, it looks like I'm not in front of all the numbers, but margins in this quarter sequentially versus Q1 seem like they got a little bit weaker. And I'm excluding, I think, some of the gasoline impact, which granted, I don't think was fully captured. Is there anything changing as far as investment back in the business, SG and A dollars, e commerce or just reinvesting back in a price sort of that we're not seeing?
Well, certainly the gas inflation does have an impact on and as well as does the increasing sales penetration of gas. That's probably as much of an impact. Certainly, as some of the more promotional stuff we did with every w low pricing had an impact, I didn't bother to try to quantify it because it's lots of different items and that's what we do. If anything, we did it a little more because we wanted There's been some other things going on, nothing major though. We really I look at the numbers, I don't see a big change other than things I mentioned and perhaps what I mentioned about that.
Yes. As Bob is reminding me and getting back to the GasLink comment, a lot of it has to do with the contribution penetration of these areas. With gas inflation, I think gas prices were up 29% over year and gallon comps were up higher as well because of that. We're higher because of what we do. We have good prices.
That had a probably a bigger impact. Yes, it's typically these are rough numbers, 800 basis points or 900 basis points lower than the rest of the merchandise that we sell. I mean, it could be 700 or 1000, 700 or 1000, but it's big and you have increasing penetration of that. So not only were gas margins down with rising gas prices within the gasoline business, but the impact that it has and again, if you get back to what I mentioned on the core margins on their own sales, which is roughly 80% of our sales, food and sundries, hard lines, soft lines and fresh foods. On core margins year over year in Q2, they were up 7 basis points, but the contribution, if you will, to the total here was minus 7.
Got it. Okay. That's helpful. And then I guess my follow-up, just thinking about reinvestment rates in the business, right? You have a membership fee increase coming down the pike at some point and now we know when.
And there's a lot of debate on how much flow through or not. I guess maybe the way to ask it is, is there a natural run rate of reinvestment that you as managers of this business try to put back in? And sort of where are we running relative to that? And yes, I'm trying to gauge when we get the membership fee increase, are we going to see that get pushed back into price as well or is that some of that's going to come through to the bottom line?
My view and I'm speaking historically here that roughly we've done increases about every 5 years and we're certainly not smart enough to figure out how to put it in over the 5 years. We know it hits the membership fee income line over about 2 years. We also know that it hits very little in the 1st month, onetwelve of onetwelve of the renewals, if you will. Historically, we've generally taken we've invested a lot of things, including continue to invest in price, which might even be a slight negative then. Arguably, we've chosen with some of the revamping of the MVM and some of the things we're doing with everyday low pricing to, if you will, do some of that now.
Not and that really is, in my view, not directly related to if, when and now when not if, a fee increase. But I would argue that we probably did a little more now, certainly the reduced number of MD days. Even in the MVM, what we've done is, is we've basically gone out to vendors and worked with them. The goal for us and them is to drive sales. Basically, it's a better value to the member, which means it's a little more expensive both for the vendor and us.
So I would say in some ways we started that process or we always do that process and you'll see when you see. But generally speaking, in my view, it historically goes in over a longer period of time, not just those 2 years, the net of everything.
Okay. Thanks, Richard. Good luck.
And your next question comes from the line of Michael Leyser with UBS.
Good evening. Thanks a lot for taking my question. Richard, presumably you're investing in price because you're seeing a more competitive environment. Can you quantify or at least qualitatively comment on how much more promotionally and competitively intense it is now than when you've seen it in the past, particularly around the time when you've raised your fees?
Well, you know what, I mean, we have a couple of senior merchants in the room with me shaking their head because and I concur, this is really not terribly related to that, to the fact that there's increased levels of competition. When we look at our direct competitors, notably direct warehouse clubs and certainly supermarkets on certain key fresh food and sundries items, a lot of what you read about were some of the big box discounters and their investment in price, which is formidable. Our view is that impacts and the competitors have to deal with that more directly or supermarkets in case of Walmart or Target or whatever else. We really haven't seen a big change there and certainly this was not motivated by that. I think more of it has to do with is over the last few years, you see some of the sales lift and some of the things that the MDM has been great for us for so many years changing.
And this it's an iterative process. If anything, just like we are ultimately we're going to do the right thing for the long term irrespective how it impacts now. We knew and we chose, but we don't give direction. We knew that this was going to have some impact, not a big impact, frankly, but with having less days by going to some EDLP and it's what it does to drive sales. I don't know where else you can get in the country, a 40 pack of half liter water bottles for $2.99 down from $3.49 and we're driving units, so we're driving a little traffic and that's what we do and it's not because somebody else went down to that price.
This is we look at some key items and how do we do this. And I think it has very little to do with either a different a change in the level of competition or the fact that we're getting ready to do a fee increase. We do that really those somewhat independently.
And just to quantify the impact of pricing, you got a 16 basis point benefit to your gross margin from the credit card transition. It sounds like you invested maybe all of that and more back in the everyday low price?
Again, I think the same comment, we didn't say, hey, we got this much back, let's use it all or let's use any of it. We really look at those independently. I think one of the comments I made on the Q1 call, which is the Q1 that there was really some transparency of how big of an impact the successful the new credit card has been both in terms of improving adding to our gross margin percentage and to our reducing our SG and A percentage in terms of lower fees. We really didn't say, wow, that's so big, let's use it. We do what we're going to do on pricing and this is where the chips fell on that.
I think one of the comments I made at the end of the first on the Q1 conference call is, we're clearly we were more lucky than smart that that helped offset some of the reductions in things and this is what we do.
Okay. And my follow-up question is, the assumption is because you tend to skew higher on the socioeconomic income demographic or your membership base does that you were not impacted by the delayed tax refunds in February. Do you think that's right? Or do you think there was some impact? And if so, could you quantify it?
Well, I can't quantify it certainly. Historically, when we've been asked similar questions about when there was issues with food stamp programs or things like that or this. We generally don't feel that we're impacted a lot at all. It certainly is not a positive, but my guess is it's not very much of a negative either. I would lean towards saying it not really a big impact at all.
Okay. Thank you.
And your next question comes from the line of Christopher Horvers with JPMorgan Chase. And your next question comes from the line of John Heinbockel.
So Richard, when you think about the executive increase in particular, how much discussion was there? What you should do with that in light of where your club competitors are, where Prime is? And then when you think about where that goes over time, what kinds of things can you add? And obviously the 2% is a big benefit. What can you add to the executive that might people might want that could allow that to continue to go up over time?
Again, first of all, what we do best is value to the member on products and services. And certainly that's going to be part of it. As it relates to enhancing both the primary membership and more importantly, the executive membership, I will say and they're not being cute, stay tuned. We've got other things that we're planning But But so we'll continue to do that and we'll continue to look at the value proposition on the credit card. As I mentioned, I'm sure a year ago when it was first transitioned to it, whatever we do and certainly the credit card profitability and success has been better than I think we and our partners have felt and originally planned.
We'll look to enhance that value over time, but that's not something you do until you're a couple of years out to see where things trend out. And we'll continue to be very good at driving value and getting you to say well.
Was there again, sort of when you think about what you could have done with executive, was there even any serious consideration, leave it alone, enhance the value proposition and push more people toward executive? You pretty much knew you wanted to do the $10 from the beginning.
Well, I think we always start with the premise that we pretty much knew that. We look at other things as well. And we'll see what happens in the future. Nothing is going to happen in the next year or so, I'm sure. But it's there are some other reasons in the State of California that it makes sense as it relates to sales taxability.
And it's we're pretty simple and it works for us. And we're pretty simple and we're pretty extreme in terms of value. And we always look at we always talk about what about another level of membership above that. Do you ever figure out how to just offer only an executive? We're not there yet.
And but rest assured there'll be more value oriented things coming to the executive for sure over time and more value to all members and general pricing and things.
All right. And then just one last thing. So when you look at KS assortment, right, over time here, right, so it's clearly, it's grown, looks like maybe up 50% over the past 5 years or so. That's imperfect, right, because there's stuff that cycles in and out. But when you think about where that ends up 3 years from now, 5 years from now, And obviously, your total assortment is staying somewhat the same.
Are we going to get a higher percentage of KS items just continuously almost forever?
Sure. I think, yes. I mean, but we also our success has been based first by selling branded goods at the best value out there. And it's for two reasons. 1, such sharp savings relative to everybody else.
And 2, our KS, if it's as good as if not better quality, which is our starting point and even a greater savings versus what we sell the brand for, that's even better. And it keeps everybody it keeps our members happy and it keeps us and our vendors honest and we'll continue to drive it. Recognizing there aren't a lot of $300,000,000 $500,000,000 items out there like the waters and the paper goods and the K Cups and whatever, but there's lots of $20,000,000 $30,000,000 $50,000,000 items that we get surprised every day. And so yes, there'll be a push for that, but there's also a continued push to add brands that historically haven't been prepared to sell us.
Okay. Thank you.
And your next question comes from the line of Matt Pfaffler with Goldman Sachs.
Hello, Richard, and good afternoon. A couple of questions.
First of all, just to make sure that we understand
the magnitude of the impact of the change in the MVM and the move to EDLP. When you talk about EDLP, are you solely talking about stepping in and displacing the MVM? And is there a way to estimate the impact that that might have on margin? And does that impact get grow or dissipate next quarter as the day disparity for the MVM comes down?
It really yes and no to each of those parts of those questions. There are so we've tried some items using the MVM as an adult, some we've chosen with vendors chosen to go to EDLP and get out of the item, get out of the MVM, others we've gone the other way. Sometimes it works one way and sometimes it works the other way and that's how you figure that out. Again, we not to be smug, but we really don't see it as yes, small basis points impact $25,000,000,000 $29,000,000,000 of quarterly sales figures by a lot. But we really it was probably we knew it was going to impact us this quarter.
We don't provide direction, so we really can't say anything. It should improve a little in the next quarter, but it's not that's not based on, oh my God, let's change it. It's just that's what happens.
And is the improvement based on the better sales that you're likely to get from the MVMs year over year or some other element related to the change you're making?
It's all of the above, including as we we've only done this for a couple of MVMs here. So a subset of all the vendors over the years that have participated in this with us, some that participate with us all the time for 22 years, some that are in and out and seasonal and some that are new. And as we see the things that work, we certainly don't keep that a secret and we go to our vendors and we have vendors and some examples that are wanting to do more for us, wanting to get those prices even lower because they see the lift impact on it. So it really is all of the above and I joke and use the word a little, it's a little strategic because we are merchants and we try a lot of different things and we're pretty good at figuring out what works and what doesn't and working with our vendors to do that.
And one quick follow-up, where are we right now in the credit card benefit cycle for you? Are there elements associated with CityVisa, whether it's sign ups, whether it's outside sales and the financial benefits they have to you that would lead to the financial benefit to you to ramp up? Or are we kind of leveling off what's likely to be sustainable?
Well, I think there was some benefit in Q4, but not big enough to actually separate out. The big Kahuna was in Q1 when we reported it and now it's Q2. So again, very simply, my guess is sometime you'll get some benefit incremental benefit in Q4 to get the other half of it, if you will, it's not exactly half of that. In addition though, there's probably a little more in Q4 because of some of the challenges of the conversion itself. And then beyond that, I think I've said occasionally that it should and hopefully will be the gift that keeps on giving a little as we drive more penetration both in Costco with a 2% component reward on that along with a 2% executive member reward.
And it will drive outside spend because the fact that the card is accepted at so many places. And if we can get you to use it everywhere or most everywhere, particularly those small merchants that generally pay higher fees to everyone. There's a component of that that we benefit from. So there's no way to predict what's going to happen. I think on a year over year comparison, the biggest bang for this buck is over the 1st 12, maybe 1st 15 months because of the first 8 or 10 weeks had the challenges of the conversion.
And beyond that, there should be incremental benefits, but probably certainly not as big as the 1st year. Thank you so much. By the way, at some point 2 or 3 years out, I'm guessing you're going to see when we get comfortable to see where it goes, you're going to see again enhanced improvement because that's what we do on even the reward proposition.
Thank you.
Both ours and our cards.
Thanks.
And your next question comes from the line of Paul Trussell with Deutsche Bank.
Hi. This is Tiffany Kanaga on for Paul. Thanks for taking our questions. I know you've gone through all the numbers in quite some detail, but can you help us understand a little better as we're lapping quite a significant deleverage in core SG and A excluding gas, so we didn't see the leverage this quarter that we'd hoped for. Can you walk us through what might have held back the core SG and A line ex gas this quarter and how to think about it going forward as we continue to lap even greater deleverage?
Well, I mean, at the end of the day, it's mostly, as it always is, payroll and benefits. Healthcare is inflationary. We still have bottom of scale increases that we've done and that was actually in March of last year, that's when that will anniversary, I think mid March. Yes, so that hit us a little bit. Yes, again, we look at the numbers.
I think we always look in the mirror at each monthly budget meeting and said, can we done a little bit can we have done a little better on controlling labor in the warehouses, controlling overtime hours? Sure. And there's probably a few basis points that are we could do better on. But for the most part, I think it's the underlying comp. And mind you, using that again silly example of the water when we go from $349,000,000 to $299,000,000 and sell a lot more units.
The margin dollars are plus or minus the same, but there's more labor involved, not a lot more, but again, all these things are incremental at a few basis points. So other than that, again, the big one of course is all the modernization related stuff. As we've had these big systems come on, it's like building a building. You build it and then you wait until you open it, if you will, or turn it on. And that's when you start to amortize it, in our case, so typically over 5 7 years, sometimes 3 on a few things.
And some of those big nuts, if you will, have occurred in the last year.
Thank you so much.
And your next question comes from the line of Brian Nialler with Oppenheimer.
Hi, good afternoon. I too wanted just to roll up further into this into the margin. So just to be clear, and I know you discussed this a lot of the way, Richard, but if I'm looking at my model, year on year gross margins were down, like spend was up by 24 basis points. So that's the first time in a while, at least in several quarters now, that it's been down. So did the shift to from the MDM to what EDLP is a significant portion of that?
I'm sorry, I asked the last part of the question, somebody is saying something
So I'm just the question I have, I mean, and I know this is a bit of a credit because others have asked some more questions. But when I look at so the gross margins ex membership fees here in the fiscal Q2 were down 24 basis points. And that's the first time, as I look back sequentially, in that same map, that they were down. And so how much of that if we look at that break in trend then, how much of that can be explained by this shift from the MDM to EDLP?
I would say if there were 5 factors, I'm making this up, it's probably the 3rd or 4th impact most impactful And the biggest single factor, which is well more than half of the factors in total is gasoline. Gasoline is in fact 2 ways. 1, you have substantially lower margin on gasoline profits on gasoline sales And 2, you have increasing penetration of gas because of a 29% higher price per gallon. And this is a business, I don't know the exact number in my head, but 10% of our total company sales. It's ranged from 9% to 12% or 13%.
So that alone, again, if I go back to Q2, if we look again on a reported basis, lower by 24 basis points, ex gas inflation minus 15%, but that minus 15% includes minus 18% most of ancillary, most of which is gas. And so that's where a lot of it is.
Okay. And then just on the shift in MGM to EDRP, is it fair to assume that if this is implemented, it could have more of a near term impact by margins and then maybe it takes a while for sales to catch up? And I'm thinking there is a because the MDM to a certain extent is a call to action to your concerns, correct? So if you shift to an EDLP, maybe you lose that call to action over time the consumer figures it out?
Well, a couple of things here. First of all, it's not like we've changed this thing from it's not binary. We've not gone from all this way to all another way. It is the transition quarter and we did a bunch of stuff in that transition quarter. But again, that's in my view, one of the smallest factors relating to this decline in margins year over year.
And the comment I made earlier to one of the questions on the call about what do we see going forward, I think Matt had asked it, is that it should not be an issue. I guess, we'll see. But we don't believe it will be an issue in Q3 like it was in Q2. So I really wouldn't lose a lot of sleep at this juncture over that and certainly not lose any sleep over the fact that we've made this major change. The major changes, we've changed it.
And we're seeing the things and components of it that work and seeing some of the things that we're tweaking. I think one of the reports out there that I saw a couple of days ago it talked about adding some days into the thing, no doubt, have some friends in the vendor business. The comment I made earlier about Q3, whereas in Q2 on an 84 day quarter, there were 17 less MDM days. In the 4 week month of February, 28 days, there were 11 10 or 11 less MVM days. In Q3, in that 84 day month less a day or 2 for holidays, there are no they're the same number of MB and M days year over year.
So again, I can't overemphasize that this is EDLP is not a word we use a lot historically. We're trying a lot of different things. And again, we think we feel pretty good about what we've got going forward here.
Got it. Thank you.
And your next question comes from the line of Oliver Shan with Cowen and Company.
Hi, Richard. Thanks for the details on the roses too.
I like
that. Regarding the mailer and the changes historically, what were you seeing with the consumer in terms of the consumer insights that kind of drove you to engage in TestStreet and reacting on changes to the MDM program? And what are you looking for as it gets tested? And then as we model the membership fee increases, how do you think that will interplay with store traffic? Do you feel like store traffic will continue in the nicely positive range?
Or will there be some volatility and risk we should think about going forward?
First of all, as it relates to how and when we decide to change some MVM stuff, not that we talk about this all the time, but for those of you who've known us, we've talked for the last few years about how we tweak it a little bit. There's some ultimately over time, there's items that don't get the same annual not only the same annual sales lift that they had historically gotten, but also the additional incremental new potential customers to that given item from the vendor's perspective. It's not just getting somebody to buy more of something and consume more of something, it's getting new members to do it. So over time, some of those things, not all of them, some of them get stale. And we've done some tweaking over the last few years, Probably 6 months ago, 3 months ago, the merchant sat down with the operators and senior people there and made a choice to do what we're doing now.
We knew and we know it would be most painful in the first in that transition quarter. But again, it's not in our view, again, not to be cavalier about it, it's not that big of a deal other than it did impact some things this way. And again, we continue to tweak it. And so we're unfortunately, because small basis points make changes on EPS numbers and we sell it at a nice multiple, I recognize the concern. But we feel we've got a lot of good things going on and we're pretty optimistic about what's going to go on here in the upcoming quarters as it relates to driving sales and improving earnings.
And again, I can't give you specifics about how and why, but we're pretty also good, as you know, laying out all the stuff here, good and bad, and so you can take a look at it. We don't look at this and see is that big of a deal and we have tweaked it a little bit. We have added a few less a few more days back to some things. We knew also that again Q3 was going to be a lot less of any those negative impacts as it relates specifically to MVM days.
And again,
I want to get
I want to get back to the EDLP question because again it's not an acronym in our vernacular even though that's what we do since the beginning of time. When we look at these items and we work with different vendors on different items, sometimes it's let's put a little more emphasis in the M and A M, change the pack size, do a greater value. Sometimes let's get out of the M and A M and do an EDLP and really come to the table with something that is a wow on an ongoing basis. And again, we've over not just the last couple of months, but over the last few years, we've seen as we've tried this occasionally, we've seen different things. And again, we feel good about what we feel that we're going to see going forward.
We feel good about the lifts that we've seen in many of the things, but we are by no means going to change everything to go to ETLP, which used to be MVM by any stretch. We think the MVM has a lot of continued potential for us. And by the way, there's some added benefits to it. Historically, in the last few years, our MVMs, I believe there was 3 days between the MVMs and the warehouse. When you're talking about lots not only what are the things that take up the most room and require the most operating issues in the warehouse?
It's big bulk items like detergents and paper goods and water and the like. And logistically, we pushed that pretty hard over the years to 3 days. 1, this gives them a little bit more efficiency in the warehouse. That's not the reason we did it, but that's an added benefit. 2, we've actually put some time in there to do a few other things in the warehouse, whether it's roadshows or some other things we've got going on with some merchandise presentations.
So and all of this relates only to what we do every day. We keep trying new stuff. It's not like, oh my god, something's changed.
Okay, Richard. Thank you. And what about your digital infrastructure in terms of is car pickup and pickup and buy online, reserve in store, as well as your mobile, and as well as thinking about the bricks and clicks supply chain, what factors will be important over the next few years in terms of making sure you're driving ease value convenience as well as being superior merchants?
Well, first of all, in terms of pick and click, no. Ask me next quarter, but I think the answer will be no for a while. You ought to go see it in some of the other places by the way. It ain't all that good and we don't have the room for it anyway. As it relates to we are doing some unique things with business delivery and we now have whatever 16 or 15 or 16 business delivery sites around the U.
S. Getting ready or just opening our first one in Canada. I think we just opened our first one in Canada. Probably the single biggest thing is what items we're offering online and how quickly we can get them to you. And I mentioned, maybe it was a little bit of a teaser, but I talked about online, You'll see some more things coming this calendar year, probably not until summer, that both what we're doing ourselves as well as what we're doing with a couple of third parties, not only in our markets, but outside of our markets in the Continental United States.
Look, one of the things we all one of the things that we all know, we had the best prices on great quality items and we've never been too good about worrying about how to get it to that end customer a day earlier. We're doing it's the 80 to 20 with us. We've done just in the last 6, 8 months, we've done a lot of improvement online in that customer experience with the smallest amount of effort, the low hanging fruit. We've got some good things working on, but we're doing these things honestly from an offensive standpoint, not a defensive standpoint. I'm not trying to be cute there.
I mean, clearly, we want to do it for competitive reasons too, but it's not like we've looked at this and we've lost. We see our renewal rates ex some of that auto bill stuff that we believe. We see our traffic going up still. And we see online, we see our page views and the like going up as well with some of the additional items and the types of items we put on and better communication to our members of what that is. So I think again, sometimes we're viewed as the tortoise, not the hare.
Certainly over time we're viewed as being stubborn. I think in my view, we're a lot less stubborn and but we're still a little bit of a tortoise sometimes and we got a lot of good things going on and we'll see. But okay, I'll stay tuned.
And our last the last question Richard is on stores. A big topic is just physical stores. You obviously have really superior traffic and a great assortment. So going what is your maximum store opportunity in the United States versus where you are currently? And are there any potential edits to the format?
Or is it status quo in terms of what we should think about over the longer term?
Well, I think first of all that every year it seems to occur that we think there's there becomes a few more locations that we thought were possible. Certainly in the last 3 fiscal years in 2015, I think we opened 21 in the U. S. As an example and 2016 or 2017 last year and I think 2017 I said this year. If you'd asked me 5, 7 years ago, I guess we'd be down to 10 to 12 a year.
Clearly, we've gone into several new markets, new for us, not new for the warehouse club industry, where we've done well. Some of them are smaller and take a little longer, but we're doing just fine there. I think we'll continue to add the line will keep getting a little get a little bit more towards that saturation, but a little slower than some might think. And I mean, we don't know in terms of our basic 155,000 square foot format Costco warehouse in the United States, I think it's a good guess to assume that it will be somewhere in the mid teens for the next 10 years per year. Don't know, 3 years from now, I might be wrong, but at this juncture, we're doing a little higher than that, which is a surprise to me.
Canada, this year is an anomaly, opening 8 on a base of 91. But I can remember 5, 8 years ago, I don't remember how many we had, maybe we had 70. We felt one day the market potential for all of Canada could be 90. Now it's probably in the 110, 120 range, but not 7 or 8 a year. This is unusual, but it's good for us.
The opportunities present itself. I don't see us necessarily anytime soon doing a unit half the size. We tried that a while back. Not to say we won't try something. We do now have, I think we began this year with 14 business centers all in the U.
S. I believe we plan to end this year with 18, one of which is our first one in Canada. Could you have 40 or 50 of those in the U. S. One day?
We'll see. We had 8 for the 1st 10 or 20 years for 10 or 15 years before we opened the 9th a few years back. And so I don't know if the 18 or the 17 in the U. S. By year fiscal year end will be 25 one day or 50 one day, but it's working and we'll see where it goes.
And then the second lastly leg is international.
Thank you very much, Richard.
And your next question comes from the line of Scott Mushkin from Wolfe Research.
Hi, this is Ben Shim in for Scott. Thanks for taking my question. Just a couple of questions. Can you give us an idea at this point what your expectations are for inflation or deflation across some of your consumables categories, such as food and personal care products?
I think the collective view is inflationary or less deflationary for the next few months and then maybe a little inflationary, but it's a crapshoot. Okay. I mean, it's based on asking our buyers in different departments. There's nothing widespread at this juncture.
Okay. Going to your historical experience with respect to membership fee increases, is 10% been the norm over the last several increases as far as attrition goes?
I'm sorry, 10% what was the 10% relates to? I think you mentioned something
like a 90% renewal rate over the last membership fee increase. And I'm just wondering
Yes. Our renewal rate over the last many years has tweaked up from the high 80s to the low 90s in the U. S. And Canada. Mean, there was a period of time there for probably 2 or 3 years that, let's say, 3 years over 12 quarters, it seemed like every quarter year over year was up another 10th for a lot of reasons.
Executive members, as we convert them, they renew at a higher rate. We will say on the co branded credit card, there's the benefit of auto billing for those that opt into that. You're going to get a little higher rate there. And hopefully, we keep doing things to make you want to renew more.
Okay. Relative to 5 years ago when you had your last fee increase, can you describe what the competitive environment was back then and if you remember and how it might be different now? Does that give you pause or concern?
Absolutely no concern.
Okay. All right. Thank you very much.
Sure.
And your next question comes from Robbie Ohmes from Bank of America Merrill Lynch.
Hey, Richard. I just quickly was curious on an update of your business in China, what you're seeing on Tmall and if you're any closer to maybe opening a store over there? Thanks. We continue to do team well. I think there was an issue with taxes that negatively impacted not only us, but anybody selling importing into China.
There's a 10% increase in taxes. Boy, maybe somebody else shouldn't do that. But there's a 10% increase in taxes and that impacted again negatively some of the imports into there. It is still relatively small. It's good, but it's relatively small.
In terms of us opening in a location over there, you should expect something in the next couple of years. Got it. Thanks.
And your next question comes from Karen Short from Barclays.
Hi. Thanks for taking my question. I just want to go to the fee increase. And I'm asking this because wondering if you could give a little color on where your average ticket is with your executive members now, say versus 2012? Because when I kind of when I obviously can calculate what the breakeven spending is off of this new fee.
And when I try to kind of back into how many trips per week your executive member needs to be making, you're almost up to once per week to break for that member to breakeven. I may be wrong in the math on the average ticket. So just wondering if you could give a little color on that.
We don't give out those numbers, but directionally, I think one of your assumptions is the average executive member spends a lot more per visit as well. Anything an executive and a business member and then more relatively speaking more of our business members are executive members as a percent of total business members versus Gold Star. I'm guessing I don't have the numbers in front of me. And so all those things play. I want to also add a comment, a question, a few questions ago about renewal rates, about how they've changed over time.
I have a simple summary sheet here that shows what our renewal rates were and this is I only have U. S. And Canada combined, which is again more than 80% of our company. At the end of 2005, it was 85.9 percent. At 2010, it was 87.7 percent.
And at 2015, it was 90.6 percent. And at the end of 2016, it was 90.3 percent. Again, that little delta downward has to do in our view with the conversion to the new Citi Visa card and some of the changes with automatic auto billing had to be redone. And so sequentially, it's continued to go in that direction. Recognizing, it can't go above 100 and jokes aside, it won't get that close.
But we think that it's been consistently improving at a level that is consistently good for us.
Okay. And then just on e commerce, I'm wondering if you could maybe give a little color on e commerce growth rate by categories. And obviously, your growth rate overall trails some of the mass competitors. So wondering, A, what did it come in kind of in line with where you expected for the holidays and or what you think you could continue to do to drive that strength?
I've shared I think a little bit of the kinds of things we're doing from member experience to faster delivery to expanding items and arguably letting our members know that we have it. Again, it started off years ago as limited big ticket items, hard to carry, hard to deliver, hard to install items. And we've added to that. We feel again fine with where we are. Yes, there are bigger increases out there, but I would bet that the investment per dollar of increase is dwarfed everywhere else.
I'm not trying to be cute about that because we are investing more in it, but doing it in an offensive rather than a defensive way. And we still want we're still a brick and mortar entity and we want to get in store because you're going to buy more in the warehouse. You're going to buy more when that happens. And we've got a lot of reasons for you to do that. We also recognize that we don't want to lose a sale somebody else because they only buy online.
And I think I feel you're going to see some good things continue over the next few years. It's a small online is a small percentage of our company, 4%, 4,500,000,000 or so. It's still a $4,500,000,000 business growing in the low well, at 11% or 12% this past fiscal quarter and the mid teens over the last few years in general. And I'm betting that will go up some from that level, but we have to see.
Great. Thanks.
And your next question comes from Sean Naldi from Piper Jaffray.
Hi, good afternoon. Just on the just wanted to go back to the merchandise margin. The core merchandise margin up 7 basis points in the quarter just on a rate basis. Just this has been going on, I think, for a couple of years now. And is it really driven by mix?
Or is it of the fewer promotions you were kind of describing or better deals from your vendors? Just trying to understand how this line item has just been a very consistent March hire and is that intentional by Costco?
It's first of all, it is intentional by us. My guess is that most of it's related to mix. I mean this quarter a little bit is related to the EDLP and the NVM shift or whatever. But generally speaking and certainly over the years, increasing penetration of gas. I mean, you've got a total company gross margin last year of what approaching 12%.
If roughly 10% of that's gas that He stock and core. Core and core. I think that's just the nature of the draw that quarter. Fresh foods tends to be a little higher margin and I think it was down a little bit this quarter. Some of that has to do with holding prices on some deflationary items.
A couple of months ago, I think it was there was a bad berry crop. I mean, literally, these are kind of things that will impact us when we're such a big player in this stuff. I don't see any big difference there.
Okay. I was going to say, it just seems to me just and I'd have to look at the model again. This has been a number that's been very, very consistently going up between 5 to 15 basis points almost every quarter for the last probably 10 quarters. Or maybe it's just mix related?
Well, no, core on core is not mix related, it's core on core.
I'm just saying like it was in the core, yes.
Yes. Okay. I'm sorry, I misunderstood part of the question. I think part of that is some of the aspects of the components of that. Some of the higher margin categories would be some of the non food categories like apparel.
For those of you who've known us for a while, I think the last 3 years, we've enjoyed probably annual compound growth rate in our apparel sales. Certainly the high singles may be 10%. So that's a category that's a higher margin to start with. I think we've done a little better job on some of the some other areas of non foods. But apparel is the one that stands out in my mind as a big example.
Fresh foods overall has a higher margin. And even though it fluctuates up and down core and core and its own core, if you will, it's a higher average margin department. And it's within penetration overall.
Yes. Okay, got it. And then just on new sign ups and renewal rates, I know millennials are becoming a bigger piece of the store. And I think Craig mentioned something like 44% of new sign ups are actually millennials now. Can you talk about how the millennials are doing in terms of their renewal rates, just overall?
And then I guess as an add on there, is any color on the renewal rates for some of the promos that you've experienced or experimented with over the last couple of years on like living social or in social media? How the renewal rates from those programs have gone?
Yes. I can't tell you how like the age group called millennials today and how they renew and spend versus 5 years ago, whatever they recall or 10 years ago, whatever they gen Y or Z or whatever it was back then. We didn't keep that we didn't look at that kind of data back then. We have for the last couple of years. So ask me in 3 years, I'll have some good information for you on that.
What we see though in terms of that age group that are now called millennials, it's not that different relative to the other age groups today
I guess, 2 good data
points on the 2 living
social things we did, I guess, 2 good data points on the 2 living social things we did about 2.5 years ago and about a little over a year ago. And we compared them to everybody else that signed up that month by just walking in or going online to sign up. What we found is through the LivingSocial and I could be off a few percentage points here that on LivingSocial, it was about in the mid-forty percent range of those that signed up on the Libby Social promotional effort that were millennials. And that compared to the walk ins that was in the mid-30s, maybe 9 or 10 percentage points difference. What we saw in terms of how much they spend over the course of the year, the living social or the millennials spent a little less each time and actually shopped a little more frequently, which is counterintuitive to me.
And in terms of renewal, they renewed about a percentage point or 2 higher than the walk ins in that 1st year that they had to renew. Again, a little counterintuitive to me, but maybe it's not statistically meaningful because again, this is its 1st year, it's 1 or 2 percentage points. But at least it gave me comfort personally that we're not losing them and they are coming in. And what we've also seen and what we believe when I look at kind of the curve of who spends the most at Costco, it's the they start spending more the peak is if I turn on 2, 4, 6, 8, if I separate people from 25 to 80 years old and 11 age groups, the peak is the 4th the 5th and 6th age groups, which are 45 to 49 and 50 to 54, and a nice increase going from 35% and 39% up to 40% and 44% before that. Well, it might be that makes sense.
Maybe they're getting married, maybe they're having kids, maybe they're getting married a little later, having 0.1 less kids, who knows. But once they do that, then they start making a little more money, they spend more. They have more mouths to feed and they are making more. So it's again, this is looking at a chart, not doing a lot of statistically significant analysis.
Okay. That's helpful. Last quick question for me. When should we expect the golf ball back in stock?
When we should expect the golf ball back in stock? Stay tuned. When we have it if and when we have it back, we'll let you know.
Thank you.
And your next question comes from the line of Chuck Saronosky from Northcoast Research.
Good afternoon, guys. I've got a question because what you said about the MVM is counterintuitive. You're very focused, Richard, always on growing frequency of visit. And it sounds like by reducing the days, there is the opposite. How do you communicate the other factors, you don't advertise to the member about roadshows and new excitement or lower prices in certain key items you're trying to feature?
Okay. Well, first of all, how we do it, the Costco connection, our magazine, e mail and in store size. But I got to tell you, we started this doing the hurt first, if you will. This goes back over a year ago when you start talking to vendors and our key partner merchandise partners and figuring out what we're going to do and how we're going to do it. It wasn't like we need to get every reduced day filled with something else.
Getting a little breathing room to the warehouses has been a big positive from our operator standpoint. And again, we'll see how that goes. So I don't think it was a big surprise. We knew we would get impacted a little bit on the traffic side, but and we know I think one of the comments I mentioned and one of the comments that some of you guys have mentioned or heard through others is that there have been a few extra days added to the starting point. Well, that's correct.
If we look back out in the next 3, 6, 9 months, the big extreme transition was this quarter and in particular February and you won't see that in Q3, it's the same number of days. We'll save more fluid in the next 2 to 3 quarters. And then it's just anniversarying stuff. All right. Thank you.
And your next question comes from the line of Kelly Bania with BMO Capital.
Hi, thanks for fitting me in. Wanted to ask about the decision to raise the dollar impact for the 2% reward. I was just curious if you tested that, that increased to $1,000 or if you have any thoughts on what kind of impact you think that could have on traffic or ticket from that executive member? And then also, I guess, associated with that, how we think about just the impact to gross margin as that flows through over the next several years? Thank you.
Well, first of all, there's a lot of executive members. In theory, even assuming the new fee structure of $60 120 that $60 means that you've got to spend, what, dollars 3,000 more a year to be breakeven on it on eligible purchases. That's not a big hurdle, but there's plenty of executive members that don't get near the $750,000,000 So there's some that won't be impacted at all. There's others that will be a nice impact. How we came to 7.5 to 1,000 is not unlike how we decide to do 5 10 each 5 years or 6 years or whatever and how we went from 500 to 7.50 next time.
I think again you'll see some other things that will add to the benefit. We continue to have added things to the executive benefit. Our family bought a Yukon Denali a couple of years ago. If you were a regular member on top of getting incredible pricing on the car, a regular primary, we got I think $200 or $300 cash card, an executive member got a $600 or $700 cash card. We will say that incentive people to become an executive member.
Once they are, they look at what are the rewards. There's plenty of things out there and we'll continue to add to that. How it impacts margin? The extra $250,000,000 it's relatively small, very small relative to the 35,000,000 people paying $5.10 each. Mind you, some of those are Canadian dollars, that's a little lower relative to U.
S. Dollar, but nonetheless, it's a very small piece.
Thanks.
And your next question comes from the line of Peter Benedict with Robert Baird.
Hey, Richard, quickly, when you pay down the debt later this month, your leverage ratios dropped pretty dramatically. Just what are your latest thoughts around leverage? And if you
care to comment on the circus in Washington and what's going on there? Is that impacting your decision on when you might do something around leverage? Thank you.
Well, clearly, as it relates to all the proposed tax things, one of which is the ability to not write off interest expense, That is not one of the ones we're worried about. We don't have a lot of interest expense. As it relates to our balance sheet and leverage, we like to think of ourselves as well capitalized, not over capitalized. We're cognizant of it. And again, that's why it'd be cute.
We look at all the components of it, regular dividend growth, special dividend stuff, stock buybacks, 1st and foremost, ramping up expansion. But we're cognizant of it. But again, we're not going to just do something because this is March 15 and we got to do something. I'm not sure again, stay tuned. We'll our Board meeting meets regularly every quarter and we just had a Board meeting a few weeks ago and didn't do anything different.
We're constantly asked questions about you going to increase the regular dividend, are you going to do another special? Stay tuned. We look at it every quarter and we decide what we want to do. But at this juncture, we basically use cash to pay off that debt and I'm happy it's the most expensive piece of debt that we have.
All right. Sounds good. Thanks, Richard.
And your next question comes from the line of Edward Kelly with Credit Suisse.
Hi guys. Thanks for taking my question. Richard, just looking at gross profit dollar growth, I know there's been a lot of talk about margins, but gross profit dollar growth this quarter slowed relative to where you were last quarter. Is that primarily fuel? And asking in another way, did you make less in profit per gallon in fuel this year than what or less in gross profit dollars in fuel this year than what you did last year?
I'm guessing we did because when prices go up, we make less per gallon period. And again, I don't have the exact numbers in front of me, but let's face it, 3, what was it, dollars 0.06 a share, dollars 42,000,000 pretax in the quarter year over year, that ain't all gallons. It's mostly profit per gallon. Yes. Vast majority of it is profit per gallon.
Okay. So as we think about, I mean, obviously the Street wasn't really modeling the quarter, the way that it came out, but and that's why I talk about the gross margin, but it really seems like it may be around this fuel side with a bit of price investment on top of that. I guess is that fair? And then my question for you beyond that is as we look out into to Q3, as long as fuel prices are stable, does this headwind go away a bit?
Bob, what did we do last year in Q3 on gas? Was it still big? I think it won't be all things being equal in terms of the comparison year over year, Q1 and Q2 profitability and gas a year ago was outsized big. We were profitable in Q1 and Q2 this year, but again, the comparison was a huge difference. Some of that outsized big became less outsized big in Q3.
It was less than Q3, but we don't know what Q3 this year brings. My guess it won't it certainly won't there's no certainty in anything in life. But my guess is it will be a little less negative, all things being equal. Thank you.
And your next question comes from the line of Greg Melich with Evercore ISI.
Hi, thanks. I had a quick follow-up to that one and then another question. If you're thinking about penny profit, Richard, are we back in gasoline to where we were a few years ago? Or could there still be room to go down there? And then, my other questions were on deflation.
I think you mentioned in February, it was about 50 bps less than in the Q2. I'd love to know what drove that. And then maybe a longer term question, if you just look at membership growth numbers, we have been running close to 7%. It's decelerated to about 5.5% the last few quarters. Could you help us understand why that is?
And if it's just timing of clubs or what's at work there? Thanks.
Okay. Greg, I hope you wrote down the numbers because a few people were whispering to me as you were talking. What was the first question?
First question was a follow-up on the gas profit. So basically, are we
Yes, yes. We've had about, I don't know if it's a year and a half or 2 years of outsized gas profits. Is it back to where it was before? 2 years of outsized gas profits. I believe so.
I don't know if it's a little worse or a little better than 2 years than 2.5 years ago, but certainly these last 2 years have been fun.
Got it. And then the other questions were deflation in February, it looked like it was not quite as bad. It was like 50 bps less deflation than in the second quarter?
Yes. I think that's year over year. So part of that is just when the relative timing of inflation was a year earlier in those respective quarters. And probably a little of it is some lower pricing on some stuff. I mean, again, I used the water example, that item is a $300,000,000 item and we did more sales, but It was Bob is mentioning in terms of deflation, it was a little better in the quarter in Q2 versus Q1, but February was actually a little more deflationary than the whole quarter relatively speaking than the whole quarter, quarter 2 overall.
It fluctuates down, But I think again, some of that has to do with pricing on our side. It's not just what the economists are telling us.
All right. And then lastly on the membership growth, I know it can move around sort of quarter to quarter. But if you look a few years ago, it seemed to run at sort of 7 ish, give or take. And now it's more like 5.5 last couple of quarters. Is that because we have more infills?
Or how should we think about less membership growth for the same sort of club openings?
Some of it's related to the cannibalization I mentioned earlier. When you open 8 units in Canada this year, there aren't a lot of new markets. It's we have opening we've had openings in the U. S. Where in a small new market, we could well, Tulsa was my extreme example, where through opening day, we had 22,000 sign up 20,000 plus sign ups.
I remember in Tennessee in a new market, we had 10 or 12, which is great. We could open a new unit in LA and have 3,000 sign ups. And it's an awesome location because it's existing members shopping a lot more frequently because it's a lot closer unit to them, but they've always been members. The other thing that will affect that is international openings, particularly in Asia where we can have during those 8 or 10 weeks up through opening day where we do tabling activities. We've had openings of 20,000 to 50000 to 40000 sign ups in those few weeks those several weeks.
So having a few of those change and again, I don't know if that helped, should help us or hurt us right now, just those are the things that generally impact. Overall, we feel that we're still adding members. Some of the new markets that we've gone into Tulsa again was an extreme one, but we again we tend to do well in those. Okay, great. Thanks.
And your next question comes from the line of Molly Smith with Bloomberg.
Hey, yes. Molly Smith here from Bloomberg News. Thanks for taking my question. Richard, I wanted to ask you about the prospect of the border adjustment tax and given that your cost of goods sold, about half of that comes from imports. So what have your thoughts been as these discussions continue?
Have you tried to lobby with any of these other retailers against the tax and as well in other changes potentially coming out of the new administration with health care, how that may impact your business as well, if at all?
Sure. Before I answer that, just one final comment response to Greg's question about the increased growth in new members or actually it's not members, but new revenue. A little of that probably was negatively impacted by the auto billing comp that I've made about the credit card transition. A little bit, I don't know how much, but I know that's probably a little bit of that offset too. As it relates to the border adjustment tax, there's clearly the people out there that want it, manufacturers that export a bunch of stuff and don't import a lot of stuff and the very other extreme retailers.
Recognizing border adjustment of tax is just one element of one version of the tax reform plan that's been put forward out there. The probability of what's going to happen and when it's going to happen and how much of it's going to happen, we don't know. We don't believe it's good for consumers. It's going to raise prices. And ultimately, I've read articles where some retailers, particularly apparel retailers, where 90 plus percent of their merchandise is sourced overseas.
Well, a 20% tax is 20% tax no matter how much, while retailers generally tend to historically be full corporate taxpayers, us in the mid-30s and in the U. S. Probably a little higher than that, that total company effective rate, it's going to hit it. And so if it were to go through, we personally don't buy into the fact that it will be offset by a big rising dollar. We don't know what's going to happen with the retaliation out there by other countries and we'll see.
But as a retailer, we definitely think it's bad and we're against it. We in terms of lobbying, we're not big on lobbying. We're doing a little bit in that area. Certainly, Rila Retail Industry Association is very involved in it. There's an offshoot organization formed, which Ryla is certainly a big part of and we've become part of the Americans for Affordable Products.
We've joined that along with many hundreds of retailers, including very some very large retailers. And through those lobbying efforts, we certainly support what they're saying. And hopefully, those out there that will make these decisions are listening. We've spent our whole lives driving down prices and recognizing also that so many items, it's not a question of let's buy them here instead of outside of the U. S, they don't exist here.
That's not going to happen overnight. So it will be a tax ultimately in our view and prices will ultimately have to rise.
Thanks so much. And anything on the Affordable Care Act either or no?
I'm sorry?
Anything else there on prospects have changed the ACA if that impacts your healthcare at all?
It really doesn't. We have a very good quality rich medical, dental, vision and other plan, where our employees only pay about 10% of the total cost. And it's one of the things that sometimes it impacts our P and L a little bit, but it's something that we're very proud of. And so we really don't have a lot to say about that.
Thanks so much.
And your next question comes from the line of Joe Feldman with Defaula.
Hi, guys. Joe Feldman from Telsey Advisory Group, as you know. Sorry to prolong the call, but just wanted to ask, could you share any thoughts on the service element of your offering? And I'm thinking about like travel and maybe I know like I don't know payroll tax or doing different things, auto sales and maybe how data mining could play into that?
Well, all those services, we try to not talk about them a lot because we've got a lot of good things going on. They're profitable. They're growing. So many of you have heard me talk to you about challenge you to go next time you rent a car, go to costco.com and no matter how smart you think you are, you'll see what a great value it is. We're doing better than that and getting that word out and you'll see additional services.
As it relates to data mining, we're starting to take some baby steps in that area. But again, our first and foremost is we're pretty good at getting on the phone and calling third party people that we think they can be a good partner to us and we'll continue to looking at other things. But those are all things that will continue I think to drive our business in a positive way. But I don't want to suggest we're hiring somebody to do big data mining at this point. We're doing more data analytics than we've ever done and there's plenty of low hanging fruit to start.
Thanks. And then one other question, just on IT expenses, I know it's been a drag much of this year and presumably it never goes away given where we're headed with technology in general. But is that the right way should it annualize at some point and level off or should we think about incremental expense going forward?
About 3.5 years ago, when we started when we embarked on this dark journey, recognizing we probably had the lowest cost IT out there and it was I always joke we were the greatest mass unit. It was always up and running, but it was band aided to death. And we've made a big investment. We also, during the process, found out what we don't know and what we need to do. And again, it's gone up.
I think the best guess 4 years ago was incrementally, it might cost in the low double digit basis points to SG and A. Mind you that every year the denominator of that calculation sales keeps going up. So it's rising. It's I think historically today that's probably in the mid to high teens and it's gotten a little more outsized this year because some of the big programs have now been installed. Notably, at the beginning of this 1st fiscal year, as an example, our major accounting platform, which is the crux of a lot of things that we'll do on it now, that was one $150,000,000 that will then be amortized over 7 years.
We'll keep it longer than that, but that's what we'll amortize it over. But so that's added to that thing. I think you'll still have incremental costs and the definition of modernization will evolve also. We keep adding new things to it, rewriting the pharmacy system. There's additional things that we'll do.
So I think it's going to be less painful going forward. This year is a double whammy because you also have some things that impact sales downward. And so that denominator hasn't grown as fast in that regard. But no, I think it's still going to be a drag for a few years, much less of a drag than it has been.
Got it. Thanks guys and good luck.
Why don't we take 2 more questions. I think this is our longest call ever and we're all David and Bob and I are here to Jeanine to answer them outside of this conference.
And there are no questions in queue.
Well, thank you very much. Have a good afternoon.