Good afternoon. My name is Kimberly, and I will be your conference operator today. At this time, I would like to welcome everyone to the Costco First Quarter 2017 Earnings 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, you may begin your conference.
Thank you, Kimberly. Good afternoon to everyone. Please note that these discussions will include forward looking statements within the meaning of the Private Securities Litigation Reform Act 1995 that these statements involve risks and uncertainties that may cause actual events, results and or performance to differ materially from those indicated by such statements. The risks and uncertainties include, but are not limited to, those outlined in today's call as well as other risks identified from time to time in the company's public statements and reports filed with the SEC. Forward looking statements speak only as of the date they are made, and we do not undertake to update these statements, except as required by law.
For the 12 week fiscal Q1 that ended 2 weeks ago this past Sunday, earnings came in at 1 point $2.4 share, up 14% or $0.15 a share over last year's earnings reported earnings per share of $1.09 A few items to point out, as was mentioned in today's release, this year's Q1 benefited from a non recurring $51,000,000 legal settlement. This $51,000,000 pretax figure represented a 19 basis point benefit to gross margin and a benefit to 1st quarter's earnings per share of $0.07 a share. Last year in the Q1, there were 2 nonrecurring items that we mentioned that together negatively impacted last year's earnings results. In that quarter, we recorded a $22,000,000 pre tax charge, which represented an 8 basis point impact to SG and A to the negative and a reduction in last year's quarter earnings of $0.04 a share. Stock compensation expense was 13% or $25,000,000 higher year over year, so $0.04 a share more.
There are about 4,800 people of our employees that receive restricted stock units as a significant part of their annual compensation. These grants are made annually each October in our fiscal Q1 and then typically vest over a 5 year period with accelerated vesting when the recipient reaches 25, 30 35 years of employment with the company. Factors driving this increase included additional levels of accelerated vesting, given a rising number of our employees achieving long tenure with the company, an increased stock price with a 5 year ago grant the coming off of the thing when the stock price was in the 80s to last year's grant when the stock price was in the 150s and of course having a larger number of employees to plan. Note that the $25,000,000 year over year increase in Q1 is larger is a larger year over year dollar increase than we'd expect to record in each of the second, 3rd and 4th fiscal quarters of this year, given the October RSU grant cycle. Next, gas profitability.
Our profits from gas during the quarter as compared to last year's Q1 were lower by about $20,000,000 pretax or $0.03 a share, primarily a function of last year's very strong profit results in the Q1 for gas. 5th, IT costs. These expenses negatively impacted SG and A in the Q1 on an incremental year over year basis by about $18,000,000 or 5 basis points to SG and A, which is about $0.025 a share. And lastly, when I get to the discussion on year over year gross margin and SG and A comparisons, I'll review with you the very positive impact that our new CityVisa deal has had on margins, SG and A and of course, our bottom line. Turning to the Q1 sales.
Total reported sales were up 3% and our 12 week reported comparable sales figure on a reported basis came in at 1% year over year. Comp sales were negatively impacted by weaker FX relative to U. S. Dollar and slightly impacted by gas price deflation for a combined negative impact to the reported net comp number of about 0.75% of sales. Excluding gas deflation, the reported 1% U.
S. Comp figure for Q1 remained at 1%. The reported Canadian comp figure of +4 would have been +5 ex gas deflation and FX, and the reported 0% other international comp figure, excluding Gas and AveX, would have been plus 3%. Total comps reported at 1% for the quarter, again, excluding Gas and AveX, would have been plus 2%. And of course, this plus 2% total company adjusted figure is also being impacted by increases in deflation in other merchandising categories overall, primarily in Food and Hardlines Foods and Hardlines.
In terms of new openings, in the Q1, we opened 9 new locations, which included 1 relo, so a net increase of 8. And later in the call, I'll discuss our upcoming expansion plans for the balance of the fiscal year. This afternoon, I'll also touch on membership trends and renewal rates, again discuss margins and SG and A in Q1, update on the Citi Visa, the new Citi Visa relationship and the card, which we began offering in the U. S. And Puerto Rico this past June 20 during the fiscal Q4 of 'sixteen, Talk about e commerce and then a couple of other items of note.
So going down the income statement, again sales for the Q1, the 12 weeks ended November 20 were $27,500,000,000 up 3% from last year's Q1 of 26.6%. And again on a comp basis reported 1% and ex gas and FX, up 2%. Again, that up 2% still being impacted by other aspects of deflation that we hadn't called out historically. For the quarter, the plus 1% reported comp results were a combination of an average transaction decrease of 1 point 3 percent on a reported basis and an average shopping frequency increase of 2.2% to the positive. Now the average transaction decrease of 1.3 percent, this includes again the combined headwinds of FX and gas that I mentioned, which is about 3 quarters of a percent, and I'm sure levels of deflation in other categories.
I'll give some examples of that later in the call. In terms of sales comparisons by geographic region, within the U. S, Northwest, Texas and Midwest showed the best results. Internationally and local currencies, better performing countries were Mexico, U. K.
And Korea. In terms of merchandise categories for the quarter, in terms of sales for those, within food and sundries, overall, flat year over year with spirits, sundries and deli coming in best. Tobacco, of course, as I mentioned in the last call, was down a little over 20% year over year as we continue to see lower sales in that category. These as I mentioned before, these big tobacco declines should anniversary this coming spring. For Hardlines, also flat year over year.
The departments with the strong results were hardware, tires health and beauty aids. I'll give you an example of deflation, which is impacting this department. In November, for example, our reported November sales, TV sales in dollars were up 2% and units were up 17%. So quite a bit of deflation on big ticket items as well as some of the fresh foods items that I mentioned earlier. Within softlines, up low single digit comps, with apparel, small electrics and special events being the standouts.
And within fresh fruits, produce and deli were the strongest departments. And in ancillary businesses, hearing aids and optical show the best results. Again, in recent months, we've seen additional deflation overall in the low to mid single digit range in many food and fresh meat categories and a little more in some of the other non food areas, as I mentioned, like electronics. Moving to the line items in the income statement. Membership fees, good results for the Q1, coming in up 6% and 6 basis points as a percent of sales, up $37,000,000 year over year.
In terms of membership fees, good renewal rates, 90% U. S. And Canada, actually 90.3% and 88% worldwide, rounding up to 88%. Continued increasing penetration of the executive membership and in terms of number of members at Q1 end, compared to fiscal year end 12 weeks earlier, Gold Star, which stood at 36 800,000 accounts, at Q1 end it was 37.1. Primary business was 7.3, both at fiscal year end and at Q1 end.
Business add ons, 3.5% and 3.5%. For total membership, household memberships, 47.6% at fiscal year end and up to $47,900,000 at 1st quarter end. And given that many of the people have 2 cards, many of the accounts have 2 cards, At fiscal year end, we stood at 86,700,000 cardholders and at 1st quarter end, 87,300,000 people with a membership card. At the November 20, 1st quarter end, executive members stood at 17,700,000 member households, an increase of 348,000 since the end of the previous quarter. That's about 29,000 additional executive members per week increase during the 12 week quarter.
And as I've said before, members executive members are a little over a third of our base and a little bit more than 2 thirds of our sales where our executive members are offered. In terms of renewal rates, our business renewal rate, which at fiscal year end stood at 94.4%, came in at 94.3% renewal rate as of Q1 end. Gold Star at 89.5 both at fiscal year end and 1st quarter end, for total 90.3% at fiscal year end and it remained at 90.3% at first quarter end. Worldwide, at year end, it was 87.6% and it ticked to 87.5% at 1st quarter end. As you know, it's been probably almost 2 years in Canada when we converted to the Mastercard.
And with that, we saw as we would have expected a decline in a slight decline in the rural rate. Has occurred in Q4 2016 this past summer, we saw that finally reverse and saw an uptick in renewal rates in Canada and that continued in Q1 of this fiscal year 2. And we're now seeing the same thing in the U. S, had ticked down a little bit over the last couple of quarters, and ticked down a little bit as well in Q1. We don't see any issues there at that point at this point.
Regarding membership fees, at the beginning of this past September, beginning of our fiscal year, we increased membership fees in our Asia operations, Taiwan, Korea and Japan, as well as in Mexico and the U. K. And again, that's because due to deferred accounting, it's about 15% of our membership fee income base. And due to deferred accounting and the fact that it will roll in over the next 12 months since September, that will be a little less than a $0.01 a share a quarter. Before continuing down the income statement line items, a quick update on the Citi Visa card offering.
This past June 20, midway through the Q4 of 'sixteen, we stopped accepting American Express at all U. S. And Puerto Rico Costco and atcosco.com and began accepting all Visa cards, including, of course, the new Citi Visa Anywhere card. The new card is great in terms of increased cash back rewards for our members and great for us as well in terms of driving member value and sales over the next years and of course, lowering our effective merchant fees related to the new program. In terms of new card, as I as was mentioned over the last couple of quarters on these calls, there were approximately 11,400,000 Amex American Express co branded cards or about 7,500,000 accounts that were transferred from American Express to Citi for conversion to the new Citi Visa Anywhere card.
Over 85% of the accounts transferred over have been activated. And since the June 20 cutover several months ago, we have 1,000,000 members that have signed up for and have been approved for the new Citi Visa card. Most of them have it in hand, but to extent, it was the last couple of weeks, they might have gotten the card yet. In terms of conversion, usage and new sign ups for the card, all good so far. Now turning to gross margin.
Our reported gross margin in the 4th in the Q1 was higher year over year by 29 basis points coming in at 11 $58,000,000 this year versus $11.29,000,000 last year. As usual, I'll have you jot down for the quarter a few numbers. We'll just make the two columns for the quarter, reported and without gas deflation. In terms of core merchandising, year over year in the Q1, core merchandising was up 19 basis points, up 16% without gas deflation ancillary businesses down 5% -5% year over year and the quarter minus 6% without deflation 2% reward minus 2% in the quarter on a reported basis minus 1% without gas deflation LIFO, minus 2 and minus 2 other, which is the big one time the big nonrecurring benefit we got from a litigation settlement, plus 19 basis points, both for the reported and without gas. All told, for the quarter, we reported again a 29 basis point improvement and ex gas deflation, 26 basis points.
So overall, again, 26 basis points up on a kind of ex gas basis. The core merchandise component was higher by 19 basis points year over year and again 16 without the gas deflation. The majority of core gross margin increase, and I'm already taking out, we've separated out already the one time legal settlement, about 13 basis points of that 16, if you will, was due to higher year over year revenue share and bounties associated with the new Citi Visa agreement. Some of those monies go to the revenue line as its revenue share. The gross margin of our notwithstanding that, the gross margin of our core merchandising categories, which are the food and sundries, hard lines, soft lines and fresh foods, those that gross margin as a percent of their own sales were higher year over year in the Q1 by 17 basis points.
With food and sundries, hardlines and fresh foods all showing higher year over year margins and Softlines being down a little bit year over year. I know one of the impacts was the warmth of the season in outerwear issues. Ancillary and other business gross margin was down 5 basis points, 6 basis points ex gas deflation in the quarter, all a function of lower year over year gas profits, as I discussed earlier in the call. Ex gasoline operations, all other ancillary and other business gross margins were up 6 basis points. 2% reward, again, ex gas, a negative impact of 1 basis point, that's to margin.
That's a sales penetration and the associated executive member rewards from our executive members continue to grow. LIFO in the Q1 this year, we did not book a LIFO credit or charge compared to a 2 basis point positive or $5,000,000 pretax credit last year in the quarter. And lastly, the onetime nonrecurring legal settlement, this benefited Q1 gross margin by 19 basis points, as we discussed at the beginning of the call. Moving on to SG and A. Our SG and A percentage in the Q1 year over year was higher by 16 basis points on a reported basis and by 13 basis points ex gas deflation.
Again, I'll have you just jot down a few line items. Core operations for the quarter was higher or negative 8 basis points and without gas, a negative 6% Central, higher by 9% and 9%, both reported without gas deflation stock compensation expense, minus 7% and minus 6% other, plus 8% and plus 8%, that's that rough $20,000,000 or $22,000,000 amount that I told you about earlier in the call that impacted SG and A to the positive last year versus nothing this year. And again reported SG and A was higher by 16 basis points in the quarter, higher by 13x gas deflation. The core operations component of SG and A, again in the chart shows 8% higher and I'm sorry, 8 basis points higher year over year reported and 6 ex gas. This minus 6 consisted of higher payroll and benefits of about 31 basis points year over year.
That's certainly impacted by the lower sales result and certainly that's impacted by the deflation. I'll give you a couple of examples of that later. This was primarily offset by lower year over year merchant fees as a result of the switch to Citi Visa. That had a benefit to the SG and A line of 25 basis plus 25 basis points impact to the positive. Central expense was higher year over year in Q1 by 9.
Increased IT spending, again, as I mentioned, was 5 of that. Stock compensation expense, higher by 5 or 6 without gas. And lastly, the other item I mentioned, the +8 was nonrecurring in nature. Next on the income statement line, preopening expense. It was $4,000,000,000 lower this year versus last year, coming in at $22,000,000 versus $26,000,000 a year ago, really a function of openings.
This year in Q1, we had 9 openings, last year 13, each of the 9 included 1 relow and the 13 last year and the Q1 included 2 relos, pretty much in line with that number of openings. All told, operating income in the Q1 came in up $82,000,000 or 11%, but up $9,000,000 or 1% year over year excluding the just the non recurring items that I previously mentioned. Below the operating income line, interest expense in the Q1 came in at $29,000,000 this year versus $33,000,000 in last year, lower due to retirement of some senior notes in December of last year. Interest income and other was lower by $2,000,000 in the quarter, coming in at $26,000,000 versus $28,000,000 a year ago. Actual interest income and other actual interest income for the quarter was better year over year.
This is offset by approximately $4,500,000 in charges related to the FX transactions that usually fluctuate pluses or minus in the $0,000,000 to $10,000,000 range, so no surprises there. Overall, reported pretax income on a reported basis was higher by 11%, again higher by 1% ex those nonrecurring items that I mentioned earlier in the call. Terms of income taxes, our tax rate in the Q1 came in at 34.4% for the quarter compared to 36.1% last year. We benefited from a couple of positive discrete items this year in Q1. Our effective anticipated effective rate for the year is expected to be approximately 35.2 percent as best we can tell at this point.
Overall reported net income, dollars 545,000,000 this year, from up $65,000,000 from $480,000,000 last year, so an increase of 14%, ex the non recurring items that I mentioned, up 3%. And next for a quick rundown of other topics, while the balance sheet is included in this morning's in this afternoon's press release, a couple of the balance sheet info items, depreciation and amortization from the cash flow statement, which is not here, for the quarter came in at $297,000,000 for the quarter. Accounts payable, if you look at it, one of the things we always look at is our accounts payable as a percent of inventories. It reported on a reported basis, it was up from 100% a year ago in the quarter and to 103%. If you take out non merchandise payables, more of accounts payable, merchandise versus inventories, it improved from a 90% to a 93% from last year's Q1 end to this year's Q1 end.
Average inventory per warehouse was actually lower by about $67,000 per warehouse coming in at right at $14,900,000 a year ago and $14,830,000 per location this year. FX was of that roughly $70,000 lower. FX was about $170,000 lower, just the impact of FX. So about $100,000 net if you would assume flat FX. That's about what majors was up electronics.
It was up 100 and 17,000. So really not a lot of pluses and minuses over sub departments, but pretty much in line and pretty much flat year over year. In terms of CapEx, we spent approximately $670,000,000 during the quarter, and our estimate for the whole year, as I mentioned, hasn't changed from last quarter end. Our expectation for fiscal 2017 is somewhere in the $2,600,000,000 to $2,800,000,000 range compared to $2,600,000,000 for all of fiscal 2016. Next, costs go online.
We're now in, of course, in the U. S, Canada, U. K, Mexico and more recently, Korea and Taiwan. For the Q1, sales and profits were up. Total online sales were up 8% in the quarter and 7% on a comp basis.
Pretty choppy. Essentially, the first several weeks and the last several weeks of the quarter were in the mid singles with the middle part of it in the low doubles, if you will. I want to point out that over the past 3 weeks, and that would include the last week of Q1, which is the Thanksgiving week, and the 1st 2 weeks of our 2nd fiscal quarter, e comm sales were up in the low to mid teens, including similar results for both Black Friday and Cyber Monday. And of course, that's notwithstanding significant amount of TV sales, which were essentially flat in dollars and up 15% in units. Lastly, as it relates to our online business, We're improving our offerings and enhancing our member experience.
I touched on this a little bit last quarter's call. Our current focus comes in 3 primary areas in terms of improving merchandise first. We're adding more exciting high end branded merchandise on an everyday basis. We're improving in stocks and high velocity items, and there's a few other things that we'll be doing coming the 1st couple of months of the new calendar year. 2nd, we're improving the experience and functionality of our site.
We're improving our search that we have and we're continuing to do that. We've shortened the checkout process from many clicks to 2, and so a big improvement recognizing this is new for us. We're simplifying and automating our returns process, a much better experience, particularly on big ticket items. And we've seen great improvement in that in the last several weeks. And we're improving our members' ability to track their orders.
Again, that's something that we weren't terribly good at historically. And thirdly, we're improving our distribution logistics. We've increased the number of depots from where we fill online orders, so closer and faster and less expensive delivery. And again, look for more improved and quicker distribution comments for less early calendar 2017. Next, in terms of expansion, I mentioned we had 8 net new units this year.
This fiscal Q1, We plan 2 for Q2, a net of 5 for Q3, so ex relocations, and a net of 16 in Q4 for anticipated number for the year of net new units of 31, 34 less than 3 relos, so 31 net new locations. Last year, recall, we opened 29, so about 4.5 percent square footage growth. If we get to the 31, that would be about the same, about 4 point 5 plus square footage growth. Assuming the 31 net new openings, the fiscal 2017 locations by country will be 16 in the U. S.
Mind you that last year it was 21 out of 29 in the U. S, 8 in Canada, which is quite a number for Canada, and 1 each in Taiwan, Korea, Japan, Australia, Mexico, as well as France, our first in France and also one in Iceland. Note that these include our first locations to open in France and Iceland, and again, those will be in late spring and early summer. Now as you can tell by the quarterly dispersion of these, about half of the 31 planned openings are scheduled in Q4. To the extent a couple of those could slip into the next fiscal year, so be it.
So somewhere in the high, very high 20s, if not 30 or 31 is what we would expect. As of Q1 end, our total square footage stood at 104,500,000 square feet. In terms of common stock repurchases, for the Q1, we repurchased 809,000 shares for a total of $122,000,000 or an average price of $151 a share. That compares to all of fiscal 2016 when we repurchased $477,000,000 3,200,000 shares at an average price of just under $150 a share. In terms of dividends, our currently quarterly dividend stands at $0.45 a share, and that was a 12.5% increase, and that was effective last spring, 12.5% increase from the prior $0.40 a share.
So $0.45 a share on a quarter, so that yearly $1.80 dividend represents an annual cost to the company of just under $800,000,000 Lastly, before I turn it back for Q and A, our fiscal 2017 Q2 scheduled earnings release date for the 12 week Q2 ending February 12 will be after market close on Thursday, March 2, with the earnings call that afternoon at 2 Pacific Time. I will now turn it back to Kimberlyn for and open it up for questions and answers. Thank
you.
And your first question comes from the line of John Heinbockel from Guggenheim Securities.
So Richard, the new Citi agreement, was that a something that was a total benefit in the quarter of 38 basis points, if I'm hearing you right. And I assume that was exactly what you thought it would
be? Probably a little higher than we thought it would be. There's lots of nuances to the program. In terms there's bounties that we receive for signing up new members and applications that incents the warehouses to do that. There's revenue share on outside spend.
I think that's a little more than we had anticipated. We knew and felt that over time it would go up because of the acceptance of Visa in terms of the penetration of Visa throughout all types of merchants. And that happened a little faster than we had anticipated. There's also some other aspects of it. Again, there's lots of little pieces, but those are 2 of the bigger ones.
On the merchant side on the fee side rather, I think some of it's related to the fact that we're making estimates of the different reward buckets, if you will, gas at 4, Costco at 2, those velocity categories at 3. Again, there's all kinds of equations there that as that changes, there's some sharing. And so it's all good at this point.
Well, as sort of a follow-up to that, is that recognizing there's some volatility, is roughly that level, is that what you would expect going forward? And right now, it's covering, right, soft sales and some investments in labor. Is the idea that when the soft sales changes that more of that drops to the bottom line or do you think you find other things to invest in?
Well, time will tell, won't it? I think it's still an early program. We're in the 1st full fiscal quarter of it. Over the next couple of quarters, as I had said last quarter, this will be the first time we'll give you we'll try to provide a little bit more insight and I'm sure we'll be able to do a little bit more each time. As you know, we're going to invest in loyalty and growth and while it's raining on everybody as it relates to higher levels of deflation, we're known for deflating the sell price sooner and faster.
And certainly, one other sound bite example would be meat sales. Just in the month of November, meat sales were up 6% in dollars 16% in pounds. That's the kind of stuff that this deflation is impacting all retailers, of course, and it's probably impacting a lower margin quicker to pass it on up or down and certainly down faster. So all those things go into play. So time will tell.
And then just lastly, do you have you found or when you think about this conceptually, is it better to make more impactful to make price investments when we start the reflationary cycle, right? So not raising while others do as opposed to cutting more now, investing more in a deflationary cycle?
Well, we're always going to do more extreme probably than others. Another example would be, as I've said in the past, as it relates to some different types of competition out there, the competitive pricing mode has gotten wider, which is good. We haven't used that to improve our margins consciously in that regard. We the wider, the better. And so we're constantly figuring out that.
We're constantly going back to every supplier with our purchasing power, with our buying power as it relates to competition itself with private label to figure out how can we bring the quantity up, the quality up and the price down. And we know we'll sell more and each of us and our suppliers will make a little more times, a little less more times. And so that's what we do, that's what we're always doing. We see that at every monthly budget meeting. And so I think that we'll continue to do what we do.
We're certainly not going to benefit from every extra dollar of income. We're going to figure out how to use it to drive that competitive spirit and to drive our sales. And that's been a little tougher in this tough deflationary environment. Okay. Thank you.
Your next question comes from the line of Simeon Gutman with Morgan Stanley.
Thanks. Hey, guys. So my question relates to core profitability and expectations to the extent we could talk about it. So the EBIT growth this quarter was, I think, about 4% adjusted. The trend line has been a little lower, and I'm not taking a lot of currency into this.
But if you think about the core profitability going forward, Richard, should we expect it to increase? Granted this quarter had a tough top line compare. We talked about maybe credit card getting in better. I'm not thinking about membership price increase, but that's something that could come. But is this I suggest thinking about the overall business, how it's performing, do you expect it to do better than where it is or it's performing about where it should be?
Well, again, I'm not allowed to tell you what I think completely. We're encouraged by the last few weeks, including the 1st 2 weeks of Q2. But we've got we feel good about our merchandising offerings. We feel good about some things we're doing operationally. We certainly feel good about the strength of KS, Kirkland Signature.
And traffic has improved a little bit. I remember one of the analyst reports a few months ago was we can exhale. We're hopefully beyond that right now. We feel that again the traffic has seemed to have hit a trough and have come back a little. Not that we expect it to get back to 4 necessarily, but certainly it seems like it's back on the mend a little and we'll see.
I think I feel we're doing a lot of good things. We've got a lot of things up our sleeve in terms of merchandising. We're clearly merchandising and selling from a position of competitive strength and fresh foods drives the business. The fact that renewal rates, actually a little bit of impact from auto bill on the conversion are perfectly fine. So there's a lot of good things out there and I guess I'll stop there.
But overall, we'll see.
Okay. And then my follow-up, part of it relates to what John asked, where the credit card benefit that could ramp. There also could be, a membership price increase down the horizon. Thinking about what you reinvest versus what you drop down, I mean, are you is the investment rate being inhibited right now because you haven't had that membership price increase in a long time? So or are you going to let some of these things flow to the bottom line when we get there?
Well, first, let me go back for a minute to the monies that we've benefited from as it relates to the Citi Visa, the new agreement. In theory, you'd say, okay, if you made a little more than your plus, did you put it back into pricing? We're doing a lot in pricing anyway. And also, you don't change the reward structure every day. It's a new program.
I would assume over time and this is who knows, it's hypothetical. But over the next couple of years, if the performance of the program continues to go in the which we would expect to do in the right direction and our piece of that action, if you will, versus the rewards that our members are getting, you'd expect us to see this change that over time. But we're way too early to even think about that. Historically, as it relates to membership fee increases, we usually invest that back in the business, a lot of that in terms of competitiveness and pricing. And it kind of eases in over the next several years and to more fully into the bottom line.
Notwithstanding the fact that membership fee increases take about 8 fiscal quarters to get into the income statement on the membership line because of deferred accounting. So I don't think first of all, we certainly haven't done anything different as we've seen in some examples where we do comp shops versus certain others where that mode has gotten bigger, if you will, that gap has gotten wider, we haven't said, hey, let's use this to get a few extra basis points of margin. We've held the course and we continue to go in that direction.
Okay, thanks.
Your next question comes from the line of Paul Trussell with Deutsche Bank.
Hey, good afternoon, Richard. Just wanted to touch back on margins with if we think about the core GPM, ex the benefit from the Visa card, it was still up, but maybe a little bit less than the past few quarters. If you can maybe just touch on that. And then also on the SG and A, you mentioned the higher payroll and benefits. But if I recall, I think the Q2 last year is when you raised some wages.
Is that correct? And should we start to cycle some of that headwind? Well, on
the last point, the wages in I believe the U. S. And Canada, which is 80% plus or 80% to 83% of our company, we took the bottom of scale up a $1.50 basically from $11.50 $12 up to $13.13.50 I believe on an annual basis that's about a $40,000,000 incremental increase in our pre tax costs or about $3,000,000 a little over a little low $3,000,000 per month number. That started in March. So that's kind of halfway through early to halfway through Q3 of our fiscal Q2 of our fiscal year.
That's when that will anniversary. That's kind of small. I'm sorry, the first part of the question, I didn't write it down.
Just around core merchandise margins.
Yes. Keep in mind, as I try to point out on each of these calls, we mentioned what was the core the roughly 80 plus percent of our business that is food and sundries, hard line, soft lines and fresh foods. What is that margin on its own sales? And again, as I mentioned earlier in the call, that was up 17 basis points. When I look at the weighted average of how what impact it had on our company margin year over year, it's a lot less than 2017 because there's increased penetration of another category with a lower margin or reduced penetration of another category with a higher margin.
And so that tends to that's why we point that out. We don't see just because that 80% was 17 basis points up on that, that had a much smaller effect on the year over year for all companies.
Got it. Got it. And then just when it comes to top line, Richard, obviously, November was kind of a tale of 2 periods with the first half of the month and the second half being much better. And from the comments you made around e commerce, it sounds like there's been some strength maybe that's sustained into early part of December. Just kind of what's your view right now of kind of the spending levels of your core customer?
And as we turn the corner into 'seventeen, what's your thoughts around kind of what our core comp expectation should be, particularly in the U. S?
Well, again, we don't know. We'll have to wait and see ourselves. We're thrilled that the 1st few weeks have been good. And again, November, the 4 weeks of November was choppy, frankly, particularly the week of the election. I think it was worse than a snowstorm in terms of nobody wanting to go out and buy stuff.
So that's what I read about other retailers as well. So and again, over the last few months, it's been, A, a little choppy, a little more in November and a little weaker. And so at least what we can tell you at this point is the 1st couple of weeks have been okay. And again, traffic has seemed to have stabilized until something changes there, who knows. But again, we feel good about our merchandising, what's going on.
And one of the reasons we continue to provide monthly sales results is for that reason to keep you guys informed and that's pretty much what I can tell you at this point.
Fair enough. Thanks Richard.
Your next question comes from the line of Michael Lasser with UBS.
Good evening. Thanks a lot for taking my question. Richard, you mentioned that you signed up a 1,000,000 new members under the new Visa credit card arrangement. Is that above and beyond what you would normally sign up? Or is that typical with your run rate?
And how does that compare to your expectations?
No. First of all, we signed a million of our members signed up for it. Many of them could very well be existing members that historically did not have an Amex card or historically used not a co branded Amex card. And they have now signed up for this because they want to sign up because they're great rewards hopefully or they historically, again, were using debit or non cobranded MS Card and are now switching to this. So it's not we did not generate 1,000,000 new members from that.
Certainly, when a new member either online or walks in and to sign up as a new member, we, of course, are telling them the virtues of both executive membership and this great new co brand card.
And how are you seeing the spending patterns of those who signed up for the card or got the card versus how their spending patterns were under the Amex card?
Well, it's hard to know this quickly. Members generally speaking, irrespective of what credit card it is, whether it's a co brand or somebody or a rewards card for an airline or hotel, people generally, we find that people on credit cards spend more than by cash or check or debit. We also find that people with executive member spend more than non executive member. So the trifecta, if you will, is when they are not only a member, but they're an executive member and they use the Go Brand card. Lots of incentives to for loyalty and for spend and for capacity to spend.
And so that's what we try to do, try to do it in a not too hard of a sell as you might expect. And we've gotten a lot better at doing the basics. When we know a member is an existing member and if buys a lot historically, it's based on their prior 12 months. And it's a no brainer to be an executive member. We make sure they know, and we've done a better job of converting or getting people to sign up as an executive member to start with.
The credit fee, of course, is not completely in our hands, whether it was the 16 year a 14 year relationship 14 year, 16 year relationship with AmeriXpress or the new relationship here. It's up to the credit card issuer, in this case, Citi, to accept or reject an application. Now the ones that converted over, they were all at the same deal. But anybody knew they're signing up for a new card and there's going to be some people that get it and some people that don't. But what we knew though is a million of the people that did sign up for it have gotten it or approved it.
Okay. And my follow-up question is on the prospects for import tariffs. What percentage of your goods do you import from overseas? And if you could break that down between the Kirkland's brand and all other, it would be very helpful.
We were just asking that or being asked that question recently and we're putting some numbers together. Our best guess is somewhere north of 20,030 and I'm giving you a purposely large number because even you talk to some buyers in different departments, you find out it might be imported, but it's all based on it's a U. S. Dollar sale. And so we're getting my guess would be somewhere in the mid-20s.
Mid-20s as a percentage of total sales?
Yes.
Okay. Thank you so much and have a good day.
In the U. S, in the U. S. Now I'm assuming that includes I'm including that like electronics. Most electronics are purchased in U.
S. Dollars by U. S. Trading companies that are arms of the overseas manufacturer. And so again, it's a little tenuous to come up with an exact number, particularly since we just started looking at it.
Okay. Thank you very much.
Your next question comes from the line of Kelly Bania with BMO Capital.
Hi, good evening. Thanks for taking my question. I wanted to ask just a different question about gross margin. It's still if you look at the core gross margin, I think you set up 17 basis points, still very strong relative, I think it's been in the 10 to 15 basis point range. I know you've talked about online, organics, some of the higher margin categories and the mix shift there.
I was just curious if those are really still some of the same drivers or if there's anything else going on there, particularly as online seem to slow a little bit this quarter?
I think part of it is as prices have deflated, there are instances where we can make a little more, but not a lot more where others have not deflated them as much. Even though we're going to be the 1st to take it down in more, there's still a little bit on the table. Private label helps. I think those are the kinds of things. And we've also in terms of driving business, working with our vendors to lower the price and drive more business.
And we'll participate in it, but we'll still make a little more. So there is lots of little reasons. There is and again, I'd be remiss to say, I mean, year over year, we had just under a national basis point in shrink recovery. In other words, better shrink number or inventory shrinkage numbers. We don't talk about it because I mean, good news is it continues to improve a little for 30 years essentially, meaning we're doing a better job of operating our businesses and controlling our inventories.
But it's lots of little things.
That's helpful. And then just another big picture question, lots of questions on the savings and how you would think about possibly maybe reinvesting some of that over the years. But as I hear you on online and improving that experience, the checkout experience, the search, Do you look at ways to just make things more convenient for your members? Is there anything else you think about on the convenience front versus just the price front?
I got to tell you and a little tongue in cheek here, but we arguably were a little had been many years ago reluctant to even do e commerce, did it a little begrudgingly. It took a while to do some more things. I think the things that we're doing offensively, not defensively, but we were also probably a little stubborn along the way to suggest there are some extreme examples of when a member orders a big ticket item, electronics or white goods or whatever. And the delivery window is much larger than anyone else's. I mean, when they want to know what they'd like to know what pops up the calendar, here it goes.
When they want to return it, that process was not very good. And some of these are quick fixes. Search was not very good. That's been a quick fix to get a significant improvement and we'll get some more improvement. So I think that we're doing some things to that we've notwithstanding decent sales.
We're investing in better convenience. Yes, we're investing in better convenience. But by the way, that's not at the expense of we won't take our prices down a little bit. Those are truly independent, whether it's IT modernization efforts, some of which was a necessity, or what are we going to do with regard we need another $10,000,000 or $50,000,000 or whatever to enhance the site. That is totally independent of what we're doing there.
We know we as Jim Sinegal said for 25 plus years and Craig Jones has said for now 5 plus years, we are clearly a top line company and we're best when we drive sales. We probably aren't as good at leveraging expenses when sales come down than others because we're not going to do some things. But we're clearly taking the offensive. And again, there's some things that perhaps we should have done earlier, but we're already seeing some improvement in that. We think we know that will help.
Thank you.
Your next question comes from the line of Karen Short with Barclays.
Hi, Richard. This is Sean Cross on for Karen. Thanks for taking our questions. Can you talk about your outlook for deflation and any signs of leveling off or maybe even an upswing?
I'm sorry, I couldn't hear the question.
Sure. Sorry about that. Can you talk about your outlook for deflation and any signs for potentially leveling off or potentially an upswing?
When we talk to different category buyers, probably the ones that have more specific insight are on the fresh food side because they're dealing with commodities and negotiating. They're actually looking at the futures contracts and more of the cost is the actual item, the orange or the poultry or the pork or whatever, whereas sometimes that's not the case. I think usually when we ask, there's another 3 to 6 months of whatever. And when it gets to the anniversarying of it, there's been some huge swings, some huge examples of swings on some nuts, which last year doubled and they're now down 35%. There's eggs, of course, are down well over 60% year over year.
So and we're not if eggs were down even 50%, it doesn't mean that people are going to eat twice as many eggs to have flat sales. They're going to eat some more eggs, but not that many. So by the way, a few of those things may help in the bakery, the margins of the bakery. We're also not going to change the package, the cost of 16 muffins or 15 muffins. So overall, I think the feeling is given that the last few months have been a little more deflationary.
The view is that it's another few months of that, but they all believe that it's going to come back the other way. This is a lot of estimated semi educated guesses among different departments.
And so I noticed there's also an LIFO reserve. Apparently, there's no charge or credit in the quarter. Is that right?
Right. That's correct.
Okay. Thanks for that.
By the way, there won't be MCC, right? There won't be. Yes, we as effective at the beginning of this fiscal year, for 30 years, we've been on a retail cost system, a retail inventory system. Most companies historically have been on a cost based system where you can get down more granularly to item level. With the modernization that was part of this process too.
With the cost system, the way you value your inventories will not have LIFO charges and credits in the future? We will.
We will. We will let when
we restate it at the value of our inventory and the first year of fiscal year part of that cumulative difference.
Sorry, my I'm learning here as we go along. At the beginning of the year, you'll notice on our year end balance sheet, we revalued the inventory at cost in a different way and it was about a $60 plus 1,000,000 reduction in inventory at the beginning of the year, but not a P and L impact.
Got it. Okay.
But yes, you expect to to set there's inflation in the future, we will have a LIFO charge. I'm giving myself a thumb up. And once you have some LIFO charges, you can have credits. To the extent that there was LIFO is deflation right out of the box, you won't take that credit because you have no charge against to which you can take it.
Got it. All right. That explains it. Thanks for that. And just my follow-up is just, an extra week this year.
Can you give a sense of the impact? I think my math was about $0.10 to $0.11 but curious if you think that's sort of the right vicinity?
Well, whatever your it sounds like that's 2% of X. I don't have a calculator in front of me, 1.50 third of the year. For the most part, most expenses, even though, let's say, on a rental facility, you pay 12 monthly rents, we take it over the 53 weeks, not I mean, you don't get a 1 53rd credit for that. We amortize it over the course of the 10 years or 20 years. And so there's not a lot of it generally should be if it's 2% more weeks, it's 2% more earnings.
Your next question comes from the line of Matt Fassler with Goldman Sachs.
Thanks a lot. Good afternoon, Richard. My first question relates to the Citibank Visa deal. Can you tell what impact the enhanced cash back features have led to it? Has it been, in your view, more sign ups?
Has Citi seen more traction with some of the categories where you increased the incentives for consumers?
Well, again, I can't speak for Citi. To you, I can't speak to them. But they we certainly have discussion with them, but they've had they've made their own comments that I think are generally positive about how the program is working so far for them. What I can tell you from our perspective is, some of the things I already mentioned in terms of look, it's a significant improvement in the value proposition of the reward to the members assuming they spend like they did. Hopefully, they'll spend more because of the 2% at Costco instead of 1% on top of executive rewards, the 4% on gas instead of 3% and the 3% on velocity categories instead of 2%.
So all that stuff is
good. And are there any
There's more utilization. There's more places to use the card. Typically, these are smaller merchants that only perhaps accept certain brands over others. They pay higher fees, but we'll have to see.
And are there any surveys you've conducted that would suggest customers have really digested that extra penny they're going to get back at the end of the year?
No. What I can tell you from talking to our Head of Membership Marketing is, it stands out in good print on everybody's monthly statements. They see it and it's pretty big, pretty fast. And so I think those are the types of things that people look at. We know affinity programs work.
And again, based on Citi's comments publicly, it seems like it's working in the right direction for everyone, which means more spend on it.
Great. And then my follow-up is on deflation in gross margin. We've looked through your transcripts going back quite a while and this is a period I think of remarkable deflation particularly in the context of a decent U. S. Economy.
In your experience, how does gross margin progress through a deflationary cycle? You've talked about your expectations for when if and when deflation turns and a number of months going forward, etcetera. But in the past, as you've seen food prices in particular recover, how do your gross margins tend to behave?
It really is all over the board. Yes, I mean, with inflation, the dollars go up, the percent probably changes a little downward. So that would imply for us a little bit of improvement in dollars. But it can be all over the board. Gas is an extreme example.
It is a low margin competitive business. As prices tumble dramatically across general competition, prices were lowered, but not nearly proportional to the amount of savings to that retailer. We were able to improve our margins a little and widen the gap. That's a win win. Another silly example is organics.
Organics, because there's perhaps a little bit of less price sensitive elasticity to organic prices, we're able to make a little more margin, not a lot and have a wider value proposition versus others. So those are good things for us. Generally speaking, when there was cost inflation on milk and cheese and things like that, we would point out, as you know, historically, some of those quarters where we kept the chicken at $4.99 and margins went down essentially from something to nothing to the tune of $40,000,000 a year on one item. That was 4 or 5 years ago, 4 years ago. Conversely, when cheese prices fell, food court margins went up nicely because we've always we've never really changed the price of a slice of pizza.
So there's lots of little things that aren't don't fit in a square box or a round hole here. I would say generally, a little inflation is good. It helps sales. And we can be more competitive both up and down. And when prices are going up, it probably is a little bit more margin beneficial.
Thank you so much. I appreciate it. Thanks, Richard.
Your next question comes from the line of Oliver Chen with Cowen and Company.
Hi, Richard. Thanks. What are your thoughts regarding bricks plus clicks and whether that be buy online, pickup in store, reserve in store, car pickup from store, because we're just seeing a lot of innovation as retailers and pure plays go into physical retail that are previously digital. So I want to know what you think about that and if it's meaningful for you and if we should be concerned about your long term store traffic trends with the rise of Amazon. I just wanted and then mobile is about 2 thirds of online traffic for many retailers.
What should we expect for your mobile app on the 5 year plan for what you want to do there to make it really exciting and fun and great?
Well, first, we're fixing some of the basics and improving some of the basics. And I'm pretty excited about some of those things. You mentioned the number of mobile versus non mobile e commerce sales. Our numbers are lower than that mobile, but they're improving quickly. And again, we recognize there's things that we can and can't do.
We think that we could and should do a lot more online, but we also, as you pointed out, want to get people into the warehouses. We think that some of the things that we do in store will keep them coming. So far, it's not been an issue. And even one of the things while we try to point out these things each quarter in terms of traffic, in terms of even when traffic was impacted a little bit, we're asked that $64,000 question, is it all these other things? We see some of the categories that one would think would have been impacted negatively by it aren't being impacted negatively.
In terms of click and pickup, we've looked at it and we are not prepared to do that at this point. When we see it at other places, not just the other warehouse club, there's you need space for it or you need a lot less volume in the location for it, neither of which we have. And we're not getting a lot of demand for it. We do that at the business centers. You can lawn and iron get delivered.
And so that's more for the business member, not the individual. And we recognize that we're not the retailer, they're to sell you a smaller pack size or something at even a little bit better margin higher margin. That's not what we do. Now time will tell over time. We're not there's a lot of things that are going on out there.
We're looking at them. We've all seen the video from earlier this week about you just walk in. There's a lot of other brick and mortars that my guess would be far more impacted than us on that, but we'll have to wait and see. Again, we're going to if renewal rates trends changed by the way, we would see in the markets where we've done things with Google and where we work with Instacart as well, Google Express and Instacart. Probably the most extreme example would be the Bay Area where we started with Google and that was their first market and certainly that's where they're headquartered.
And it's doing fine. What we found is an existing loyal member is coming in a few less times a year, is shopping several more times, most certainly several more because it was 0, but shopping more, but the sum of the 2 is more. They buy a lot less when they're doing it online than when they come in. And part of that is the experience of walking in and seeing it all there. Even if not everything is offered, but it's not something with us.
So the good news is
You're live, Mr. DeLante.
Thank you. Hi, Oliver? Hello? Hello? Hi, Oliver.
Yes.
Thanks for the answering that. I just wanted to briefly ask you, did the Scan and Go make sense for you? Or is that something that's not conducive to your experience? And then as you do your own research on Amazon, which categories or what would you say like draw out your best competitive advantages? And what are your opportunities just to make sure you remain very competitive against Amazon?
And how are you feeling about millennials and Generation Z? It sounded like you still had a lot of good momentum with younger demographics.
Well, look, in terms of Scan and Go, honestly, we did a version of Scan and Go literally 20 years ago with a customer, a member would walk in and get an RF gun, radio frequency device, walk around, scan their own items, come up to the front, hand that thing to the cashier and the scanner and they print out a receipt. Needless to say, there's a lot more efficient things today. We continue to look at scan and go type things. We are not testing it currently, but we are looking at it. And I'm not suggesting we're going to do it.
We have done self checkout for a while. We've chosen to not do self checkout in higher volume units because we get people through without it. And as it relates, you would ask in terms of millennials and Generation Z, all those numbers are doing better for us. And part of it is things like not that we sat down and strategic thought how do we get them. We have a great value proposition.
Certainly, some of the things that we sell like organics is in my view is a big impact to that. Certainly, some of the things we do with we've done a couple of tests with Libbey Social over the last couple of years. All those things we think help. As it relates you asked a question about Amazon and Amazon is also the word for everything out there that's delivered or dotcom and everything else. And certainly they're doing a lot of things.
We want to make sure we understand what all of these people are doing. We do and not just from a competitive price shop and whether it's them or someone else, we recognize convenience is a value, but there's all sorts of things that we can and can't do. So I think that we're looking at these things offensively, not defensively at this point. I don't think that I think we're encouraged when we see the level of millennials, if you will, that are signing up, when we see the average age of our membership coming down. Now it was just a couple of years ago when the average U.
S. Costco adult member was 4 plus years older than the population as a whole. Now it's a little under 2. And that's without a lot of planning, but it's part of what we do. And I think part of that is the merchandise selection and our ability to change merchandise pretty quickly.
And certainly things like, again, organic stand out in a big way. I think the fact of what we're doing even on some things that aren't directly, they're all related to the business, but ESG and sustainability, we take care of our employees, the culture. Those are things that again, we didn't say we have to do better at that. We do best at that. We do a lot of good things like that.
When it comes down to merchandising, we believe that organics, the KS, what we're very good at is driving value and we're probably not going to be the person that's the best at delivering smaller sized goods to your house. There are some things we're going to do between that and nothing. And again, stay tuned for calendar 2017.
Thanks. Happy holidays. Best regards.
Thank you.
And your next question comes from Dan Binder with Jefferies.
Yes, hi. Good afternoon. My question was around some of the things you've already covered, including pricing and the moat that you said has opened up. And in light of that, there's been a lot of debate around the traffic just north of 2% or just under 3% depending on the month and a lot of questions around convenience. And I just wonder, as you review this online strategy, do you think there needs to be a major shift towards a broader SKU assortment?
Obviously, Amazon's got marketplace, Walmart's building marketplace, Target's chosen not to. Do you think as part of that convenience factor, Costco just needs to materially up their SKU count online?
Well, keep in mind, we have materially upped it over the last couple of years, recognizing it's still a fraction of anything else out there. If we were again at 3,700 active items in a physical location and that roughly that many online excluding like office products, which is through a third party and there's several thousand of those items. But in terms of what we do ourselves, and we've now taken it up to 8 ish, 8,000 maybe a little more. Is it likely to go to 40,000 or 50,000? Absolutely not, unless it does one day, but I don't think so.
And is it likely to go up a little bit more? Sure. And are there is it likely for us to do a few more things that provide convenience? Yes. But we still want you in the door.
And again, to Amazon and others credit, they're trying a lot of things. Some will work and some won't. And we're pretty good at understanding what works and figuring out how to augment it to do what we know how to do and what we want to do. And we recognize that we can't be selling you a smaller size of something at our margins nor are we prepared to double or triple the margin to do so.
Got you. My other question was around the membership fee or potential membership fee increase next year that's been talked about quite a bit. I'm just curious if there's a sensitivity and what that threshold is, at which point you would not do it. In other words, if the comp store sales were to continue being at the level that they were at in the Q1, would you be less likely to put an increase through and maybe an easier way to talk about it is what kind of comp level would you like to be at when you do it?
Directionally, I responded in the past by saying if comps were a little weaker, it would be more likely to want to do it or no impact on that decision. It's all in our view about what additional values that we brought to the table. Whatever amount of an increase might be contemplated, have we improved the value proposition significantly greater than that amount, which in my view has always been a no brainer for us. Our renewal rates, okay. And if sales are a little weak, it would be the time to do it, not to do it.
I'm not trying to suggest that it's tomorrow afternoon. I'm just saying that generally speaking, a little bit weaker, going to use that to drive business.
Okay. I guess my question or response to that is if you had this widening mode in price and you are priced right, this idea that you would reinvest membership fee dollars into price, do you think that would drive an incremental gain to get comps at a higher level?
On some items, yes. Is that the idea? On some items, yes. On some of the things that we do, if you keep in mind, 30 years ago in the original business, 33 years ago in the original business plan, it talked about it doesn't matter where you locate, you could be on the other side of the railroad tracks in a downtrodden area, people come to you, it's a destination. And that was fine until you add into that sentence until somebody is between you and your customer.
And over time, while we're certainly not at the mall, we recognize that we have to do some things. So what we're doing online right now with some of the member experience and distribution timing and costs and capabilities, Those are the types of things that we are investing in. Vertical integration in some aspects, whether it's a chicken plant or a bakery commissary up in Canada. There's a lot of things that we're doing to drive value, not just lower the price. But I don't yes, I don't see it that being a reason to do it or not to do it.
We look at it as a value proposition and we may become a little price is primary and I think it will continue to be primary, but we look at a few other things as
well. Great. Thank you.
Your next question comes from Robbie Ohmes with Bank of America.
Thanks. Hey, Richard. You mentioned going into Iceland and France and I know you guys are doing Kirkland on Tmall in China. Can you just maybe catch us up on when you might ponder opening a brick and mortar up in Mainland China? Thanks.
Sure. Well, on Tmall, it's I think about 300 items about a little over half of which are Kirkland Signature. So it's certainly the KS name is getting known and that's a positive. We've continued to look at it for a number of years. Is it in the next couple of 3 years?
Probably more likely to say yes to that than 2 years ago or 5 years ago, but it's there's nothing definite at this point.
Got you. And just a quick follow-up on the credit card. Is there any the new people sign the new sign ups on for the card, anything on the demographic side of who's signing up that's different than what you were seeing with the Amex card?
No, not at all. I mean it's they're called millennials instead of something else now, but that's no.
Got it. All right. Thanks very much.
Your next question comes from Peter Benedict with Baird.
Hey, Richard. Thanks. A couple of quick ones. First, just on the Google Express. Can you just talk about are there any plans to expand that test?
I know you mentioned the Bay Area, but where else is that being done? And are any thoughts to moving that out into more market?
Well, it started in the Bay Area, but then went to LA area. And in the last couple of years has expanded to as well Chicago, Boston, New York and D. C. I believe they're expanding and we're expanding in a few other markets as well. I believe I don't have that list in front of me, but I know it includes a few more.
And so let's say it's going from 6 ish to 12 plus ish. And now recognizing we're working with them in different markets, testing different things, We haven't really I think we've done a couple of small tests with some fresh foods, but it's a limited selection of items. And so far each of these are a little different. Sure. No, understood.
On tobacco, is that is
the weakness in tobacco or the sell down in tobacco, does that have any kind of a material effect on core gross margin? I understand that's a very low margin product. Well,
it's a low margin business, so it would help improve the margin a little bit.
Right. I mean, is that a material benefit to your core margins right now or is it No. Okay.
Gas would be an offset to that in a bigger way in my
view. Okay. And then last just on capital allocation, remind us kind of what are your thoughts there in terms of priorities and your latest views on leverage as I think some of your leverage ratios get down starting next year? So what's the latest thoughts there? Thank you.
Well, 1st and foremost, CapEx is expansion and expansion is not is first and foremost new units or improvements in existing units a little bit. But probably an equal priority is all the things associated with it, ancillary businesses, whether it's gas stations or as well as some of the manufacturing things we're doing. We're opening up a second meat. We have had it for a number of years at a meat plant in Tracy, California that does, I think, around £200,000,000 a year £4 +1000000 £1,000,000 a week of 4 or 5 items that are our items. We're opening a B plan on the East Coast shortly.
In Canada, we're building I think we've broken ground on a commissary for bakery. We are investing $50,000,000 plus closer to $300,000,000 on a big chicken plant, processing plant in Nebraska that is not broken ground yet, but is in the process of getting permits and stuff. And so there's things like that as well. We're still spending money in IT. But priority wise, none of this stuff impacts what we're doing for expansion.
We're expanding as much as we want. We try to be we look at our dividend every year. Historically, it's been about a 13% plus increase year over year for the last 9 or 10 years since its inception in 'five. We buy back a little stock. In terms of leverage, arguably some would say that we are I would say we're well capitalized, some would say we're under levered.
We've got a $1,100,000,000 10 year fixed rate debt instrument that comes due in March of 2017. The good news is that it's got the low, low fixed rate of about, I don't have that in front of me, but 5.5%, 5.6%, 5.5%. The what we do in terms of whether writing a check for it or refinancing part of it, we'll see. So no big changes of what we do. We've done a couple of special dividends, 1 in late 'twelve and 1 in early 'fifteen.
And I'm not indicating if we are, we aren't in the future. That was something that we chose to do at that time.
Okay, fair enough. Thank you.
Your next question comes from Greg Milich with Evercore ISI.
Three pretty quick ones. Of the 15% of people that haven't activated the card, What are those people using? Are they just using other Visa in their wallet? What can you tell us about their behavior? Are they coming less frequently or using cash?
Or what are they doing?
Well, a bunch of them it's between $11,000,000 $15,000,000 but a bunch of them is are people that was not active as a co brand Amex card. We had about 15% that had not that upon conversion, about 15% of the 11 or whatever 1000000 people in the 7,500,000 or so accounts, about just under 15% of them had not been used in the prior 2 months, I believe, the prior 60 days. And not to suggest that maybe some of them just hadn't used it and some of them they will use it or they've been out of town or whatever else. It's every answer to the sun. I think the vast majority of it would be that though.
They're using something else in their wallet. And to the extent that the membership card was on the back, they still have it in their wallet and they still have the new one in their wallet. And hopefully, they see those giant signs and they're reminded of the cash register by the cashier that have you heard about the 4321 or the new exciting warranty program on electronic on TVs, where you get a 4 year free warranty if you use it at Costco.
All right. Any other ads you want to put out there on it or we'll leave it at that?
Well, I thought I would do that since I didn't have it in my script.
Anyway, that's great. So then the second question is on international. So that's an area that as traffic has been running below the U. S. Now for a while, which has been kind of unusual if you look over the last few years.
Could you give us some insight as to why that is and how that's behaving maybe in the markets where you raised the fee? Is it linked to that? Or are renewal rates doing okay in those markets where the fee went up?
It's mostly cannibalization. We've got a $200,000,000 $300,000,000 business. You opened the second one in that city. The new one does $100,000,000 to $100,000,000 or $100,000 $150,000,000 of it's bled. What's in your traffic number is the old unit that's being cannibalized.
So on a base of 10 or 12 units, that's the biggest single reason.
And on the markets where the fee went up
By the way, there's probably a little bit of softness in Japan beyond that. And I can't say I can't tell you why and other than the economy has been tough there, but it rains on everybody.
And in terms of the markets where the fee went up, what have renewal rates done in those markets?
I'm sorry?
What have renewal rates done in the markets where the fee was increased?
Well, it just happened 3 months ago. We don't have any numbers yet. But it's de minimis of anything. And that's why I'd actually asked our marketing people earlier today and Bob is saying, yes. We won't know because it
takes 6 months to get
Yes. Bob has made a good point. It takes about 6 months to know because you've got people, not every member comes in every 2 weeks. So but trend wise, we don't see any big issue there at all.
Fair enough. Good luck.
Thank you, Kate. Why don't we take 2 more questions?
Your next question comes from Chuck Cerankosky with Northcoast Research.
Hello, Richard. Just a quick question about what you're seeing in Visa usage from people who are using who never were AmEx card Costco AmEx cardholders and how their spending behavior is changed or somehow affected by Costco accepting Visa's payment now?
It's up. Particularly somebody to the extent somebody is choosing to use another Visa card in his or her wallet, maybe it's an airline program or a hotel program, they may not be spending more because nothing has changed in their wallet. To the extent that they were using cash or debit, that's you see an increase, so we have seen that as we would have expected.
Are you seeing any related impact on membership? Are you able to see if new members are being generated by the Visa acceptance.
Well, we know that's the case to a small extent though. City, for example, has done marketing activities in their branches. That's but it's more existing members that are converted and you'll get a few and a few could be in the tens of 1,000, but out of 1,000,000, a couple of 3 or 4,000,000 or 10, 20,000, 30,000, 40,000 is not a big piece of that. All right. Thank you.
And your next question comes from Mike Montani with Evercore ISI.
We'll take one more. I think that was ISI just asked a question. Okay. Well, thank you, everyone. Have a good afternoon.