Good morning. My name is Britney, and I will be your conference operator today. At this time, I would like to welcome everyone to the 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 Thank you.
Mr. Richard Galanti, CFO, you may begin your conference.
Thank you, Britney. Good morning to everyone. I'll start by stating that our discussions will include forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements involve risks and uncertainties that may cause actual events, results and or performance to differ materially from those indicated by such statements. The risks and uncertainties include, but are not limited to, those outlined in today's call as well as other risks identified from time to time in the company's public statements and reports filed with the SEC.
Forward looking statements be only as of the date they are made, and we do not undertake to update these statements except as required by law. So last night's press release reported our second quarter and first half fiscal twenty sixteen operating results for the 12 24 week periods ended February 14, as well as our monthly sales results for the 4 week reporting month February, which ended this past Sunday, February 28. For the quarter, reported earnings came in at $1.24 a share compared to last year's Q2 earnings per share of $1.35 Note that last year's earnings were positively impacted by 2 discrete income tax items that together benefited last year's Q2 earnings by $43,000,000 or $0.10 a share. And then excluding these two items, earnings for the Q2 last year would have been 1 point $5 a share. Among the factors that impacted our Q2 year over year earnings comparison, foreign exchange, FX as compared to a year ago.
During the quarter, the foreign currencies where we operate continue to weaken versus the U. S. Dollar in all countries, but primarily in Canada, Mexico and Korea, resulting in our foreign earnings in the Q2 when converted into U. S. Dollars being lower by about $32,000,000 or $0.07 a share and exchange rates have been flat year over year.
2nd item of comparison is our co branded credit card transition in the U. S. And relates to that. As you know, we're transitioning to a new co branded credit card relationship in the U. S.
This year. As we wind down our current relationship, new co branded credit cards sign ups stopped several months ago. The short term negative earnings impact to the lost co brand credit card sign ups was 18 $1,000,000 pre tax or $0.03 per share hit to the 2nd quarter. Recall that the earnings impact was $15,000,000 pre tax or $0.02 a share last fiscal quarter and will continue to impact earnings in Q3 and a little even into the 1st month of Q4. As of today, we expect to have the new co branded Visa cards in the hands of our members in May with a go live transition date in June.
While I can't give you any specifics regarding the new card, I can't do that yet. I do look forward to sharing more details with you at that time. 3rd item, IT modernization. Our major IT modernization efforts continue to impact SG and A expense percentages, especially as depreciation begins on the new systems that are now being placed into service. In the Q2 on an incremental year over year basis, these costs impacted SG and A by about $10,000,000 or an estimated 3 basis points, 2 basis points without gas deflation, which was about $0.01 a share.
There is a light at the end of this tunnel with the SG and A headwinds. Based on our current estimates, we'd expect the year over year basis point impact to SG and A is likely to be just a couple of additional basis points in fiscal year 2017 and then flatten out hopefully a little better than flattening out over the next couple of years after that. Stock compensation expense was higher year over year in the same quarter by $14,000,000 or 0 point Q2, we recorded a pre tax LIFO credit of $4,000,000 This year into the second quarter, with deflation being a little bit more impactful than in the past couple of months. We've had a LIFO we had a LIFO pretax credit of $15,000,000 resulting in a year over year delta of $11,000,000 or $0.02 a share. Now turning to our 2nd quarter sales.
Reported sales were up 3% and our 12 week reported comp sales figure was up 1%. For the quarter, sales negatively impacted by gasoline price deflation to the tune of 80 basis points and by weakening foreign currencies relative to the U. S. Dollar by minus 3.40 basis points. Such that excluding gas deflation, the reported plus 3% U.
S. Comp for the 2nd quarter would have been a +4. The reported Canadian comp of a minus 7% in the 2nd quarter would be a +10%, excluding both gas deflation and assuming flat FX rates year over year. And the reported minus 3% international comp figure for the quarter, excluding gas and FX, would have been a +6. Total comps again reported 1% for the quarter and excluding gas and FX would have been up 5%.
For the 4 week month of February, which again ended this past Sunday, reported comps came in at flat at 0% and that consisted of a plus 2% comp on a reported basis in the U. S, a minus 2 reported in Canada and a minus 8 other international. As we discussed last month, the calendar shift of Super Bowl moved sales out of January reporting period into February. We estimated that this shift benefited our U. S.
Sales for the month of February by about 3 quarters of a percent the total company by about 0.5%. Sales were negatively impacted by again gas deflation, which started to head down again during the month, about 180 basis point negative impact to the number and also by weakening FX currency foreign currencies relative to the U. S. Dollar to the tune of 2 50 basis points. Excluding gas deflation in the U.
S, the reported plus 2% U. S. Comp for February would have been a plus 4. Excluding gas deflation and FX in February minus 2% comp in Canada would have been a +10 and the reported minus 8 international comp would have been flat year over year ex gas and FX. Total company comps reported again 0 for the month would have been a plus 4 excluding gas and FX.
I might mention that the other international normalized number, in other words, ex gas and FX of 0, mostly relates to the timing of the Chinese Lunar New Year holidays. We don't think that'll be an issue after timing of that. Final comment on deflation, beyond gasoline price deflation that we've always pointed out each month, we have seen a little additional deflation across many merchandise categories such as sales have been impacted a bit by a little bit more in the past couple of months. In terms of new openings, our opening activities and plans, we opened 13 new units in Q1, including 2 relos, so ahead of 11 new locations in the Q1. In Q2, we opened 1 new business center in Westminster, California.
For all of fiscal 2016, we're still on a target to do 30 net new locations, 21 of which will be in the U. S, 3 in Canada, 2 in Japan and 1 each in the UK, Taiwan, Australia and Spain. Also this morning, I'll review with you our e commerce activities, membership trends and renewal information, additional discussion of course of margins and SG and A and a couple of other items of note. Okay. In terms of our second quarter results, sales for the quarter were $27,570,000,000 up 3% from last year.
On a reported comp basis, Q2 comps were up 1 for the quarter, up 5x gas and FX. For the quarter, our plus 1 reported comp was a combination of an average transaction decrease of minus 2.5 percent and an average shopping frequency increase of just over 3%. Now in terms of the minus 2.5 percent average transaction decrease, again taking FX and gas out of that number that minus 2.5 percent would have been a positive number that would be just under plus 2%. In terms of sales comparisons geographically, in the U. S, the Midwest, Texas and California regions were strongest.
Internationally, Q2 in local currencies, better performing countries were Mexico, Canada, Australia and Taiwan. In terms of merchandising categories for the quarter, for the Q2 within food sundries, overall flattish meat deli and sundries were the leaders. Tobacco negative in the low double digits as we continue to eliminate tobacco skews from various locations. For hardlines, overall in the mid single digit range, departments with the strongest results were consumer electronics, which was up in the low to mid teens, sporting goods, lawn and guard and tires. Within the low to mid single digit soft lines, domestics and apparel were the standouts.
And in fresh foods, comp sales were in the low single digit range with produce showing the best results among the 4 main fresh foods categories. Lastly, as we mentioned during the December and January sales calls, in the U. S, we're seeing deflation in the low single digit range for food and sundries and fresh foods. And now again, a little bit more on the non food side as well. In terms of February, traffic was up a little over 3.5%, while the average transaction was down a little under 4%, about 3.75%.
Again, Guess, as I mentioned earlier, fell again a little more dramatically. In February, the average sale price year over year in gas was down 21% for the month, which is a bigger decline year over year than we saw in the quarter overall. In terms of geographic regions, again, for February, Texas, Southeast and Midwest regions were strongest and internationally in local currencies, Mexico all categories food sundries, hardlines, soft lines, fresh foods were in the mid single digit range for February reporting period. Again, a little deflation impacting these. And it's a little deflation, but it's more than we had seen historically of recent history.
Moving down the line items of the income statement, membership fees, we came in for this fiscal year at $603,000,000 up 4% or $21,000,000 from $582,000,000 a year ago and up 2 basis points as a percent of sales. Again, that $21,000,000 increase and 4% dollar increase, If you assume flat FX, the $21,000,000 would have been a $40,000,000 increase and a 4% increase ex FX would have been a 7% increase. In terms of membership, renewal rates remain strong, 91% in the U. S. And Canada and 88% rounded up to worldwide.
Continuing increasing penetration as an executive member, I think helps that. New membership sign ups in Q2 companywide were up 4%. I will point out last month, the early part of February and into the 2nd week of February, for 12 days, we ran a new membership promotion on Libbey Social. Recall that we also ran a membership promotion with Libbey Social about 18 months ago. Like that one, it went well and we don't do it too often.
I don't want to get people used to it, but it was a good result. In terms of new members at Q2 end, Gold Star members at Q2 end was 35,400,000 up from $34,700,000 at Q1 12 weeks earlier. Business primary remained at $7,200,000 Business add ons remained at $3,500,000 So all total at Q2 end we were at $46,100,000 versus $45,400,000 at Q1 end. And total cardholders would be $84,000,000 up from $82,700,000 As of the end of the 2nd quarter, paid executive memberships totaled $16,600,000 of our members, an increase of 214,000 over the 12 week month or about 18,000 a week increase in the quarter. And as I've mentioned before, executive members are a little more than a third of our membership base and about 2 thirds of our sales results.
In terms of renewal rates, as I mentioned, they continue strong business in the U. S. And Canada was at 94.5%, same as it was a quarter ago. Gold Star was 89.7%, same as a quarter ago. The total U.
S. And Canada 90.5%, same as a quarter ago. Worldwide at 87.7 percent down a tick from 87.8% at Q1 end, a little bit of rounding. And then as you know, all new markets we generally have in the 1st year lower renewal rates in that second year, the 1st year of renewals. I mentioned, I think, the last couple of months that in Canada, when we did the credit card conversion, which is a little different than the one we're doing here, It was a what's referred to as a de novo thing where everybody had to sign up for a new credit card and apply and what have you.
And so your renewal rates related to auto renewals, which by definition are high, it comes down a little. That'll be anniversary after next quarter. So we saw a little tick down in Canada in this quarter year over year as we had in the last couple of quarters as well. I should be one more quarter of that. Again, not terribly meaningful, but we've been asked.
Going down the gross margin line. Our gross margin in the Q2 was higher year over year on a reported basis by 17 basis points. As always, we'll jot down 4 columns of numbers with 6 line items. The first two columns are Q1 2016 and Q1 2016. The columns would be reported column 1.
Column 2 would be without gas deflation. Then we'd have Q2 2016, 2 columns reported and without gas deflation. Reading across, core merchandising Q1 on a reported basis was up 24 basis points, ex gas deflation was down 3 basis points year over year. For Q2 2016 reported was +5 and without deflation minus 3. Ancillary plus 11% and plus 4% in the Q1 year over year, plus 9% and plus 7% of Q2, 2% reward minus 3% and minus 1, q2 minuteus 1 and 0, LIFO plus 1 and plus 1 and in Q2 plus 4 and plus 4.
Other was minus 7 and minus 7 a year ago and not an issue 0 and 0 in Q2. Such that total reported year over year in Q1, we were up 26 basis points in gross margin without gas deflation down 6 basis points. And in Q2, we were up 17 and up 8x gas deflation. As you can see, the core component of gross margin was higher by 5, 3 excluding gas deflation in the quarter. Core gross margins, food sundries, hardlines, softlines and fresh foods as a percentage of their own sales were positive year over year in Q1 by 11 basis points with Food, Sundries and Hardlines showing higher year over year gross margins as a percent of their own sales, while Softlines and Fresh Foods a little lower year over year as a percent of sales.
But again, the net of those 4 major categories as a percent of their own sales was up year over year in the quarter by 11 basis points. Ancillary and other business gross margins were up 9 basis points, 7 without gas, both in terms of ancillary various ancillary business is our gas business, our food courts, our hearing aid centers, our tire shops and our win our mini labs all showed higher gross margins year over year as a percentage of their own sales. Again, executive membership not an issue without deflation, a zero impact year over year. And again, LIFO was 4 basis point benefit to the gross margin year over year. Moving to reported SG and A, our SG and A percentage in Q2 was higher or worse year over year by 34 basis points on a reported basis, and higher or up by 27 basis points ex deflation.
Let me again give you these tabular numbers and then I'll give you some text around those. Again, the 4 columns would be report Q1, the first two columns would be Q1 2016 year over year reported without gas and deflation and Q2 reported without gas. Those would be the 4 columns. First line item operations would be 0 basis points in Q1 reported and plus 26 without gas deflation, a plus meaning lower or better. In Q2, minus 22 and minus 16, central minus 8 and minus 6 in Q1 and Q2 minuteus 8, minus 7, stock expense minus 12 and minus 10 in Q1 and Q2 minuteus 4 and minus 4 and quarterly adjustments are unusual items -8 in Q1 and no unusual items to point out 0 in Q2.
Such that in Q1 year over year on a reported basis, SG and A was a minus 28 basis points or higher by 28 basis points. In Q1 ex gas, it was better or lower by 2 basis points, so a +2. In Q2, it was minus 34 as I mentioned and -27 ex gas deflation, so higher by 27. Now core operations against component, -22, again, -16 ex gas actually impacts gas deflation. Of that -16, payroll was about -2, benefits and workers' comp were minus 8, with remaining minus 6 basis points being a variety of items, including bank fees, depreciation and various other items.
Again, I think a few of those things relate to a slight a very slight change in sales increases and a couple of things just going a basis point in the wrong direction. I also point out that within the benefits of workers' comp about one thing that stood out is just in January, we had what's referred to as high cost, a high cost claims for employee benefits, medical claims. Typically, it averages over the last 2 years, this U. S. About $6,000,000 or $7,000,000 A year ago, it was a little lower than that.
It was about $3,500,000 This year, it was about 13. So nothing unusual other than we thought we referred to as high cost claims, anything over $100,000 but it just spiked. That's a few basis points there. But again, that will come and go in both directions. In terms of central expense, higher year over year in Q2 by 8 basis points, 7 without gas.
As I mentioned earlier, IT was 3 basis points of that or 2 without gas deflation. In addition, we had several one time items, which a total represented about $9,000,000 Again, we always have a few one time things to go either way. We had 3 items that together totaled $9,000,000 but they are what they are and it did impact our SG and A. And lastly, the stock compensation expense was 4 basis points. But before I move on from SG and A, I do want to mention one additional expense headwind that is just starting.
In March, every 3 years, we review our pay scales and in fact our entire employee agreement. We always review top of scale and historically increase the top of scale every year in March for the roughly 60%, 65% of our employees that are at top of scale already. In addition, this year, we're also changing the starting level, our entry level hourly wages. This is the first change to the entry level wages in 9 years. Since 2007, our entry level wage in U.
S. And Canada was $11.50 or $12 an hour. Effective this month in the U. S. And Canada, we're increasing our starting wages from $11.50 $12 to $13 $13.50 so up 1.5 dollars We estimate that this will cost us about $0.01 a share in Q3 year over year and about $0.02 a share in each of the next 3 quarters.
Again, it's part of what we do. And as there are a few warehouses that we've already started people at a higher level, simply markets like Bay Area or some limited markets like that. But at the end of the day, it will be about the numbers that I mentioned in terms of the impact to our earnings. Next on the income statement is preopening expense. Pretty much the same year over year, dollars 9,000,000 last year and $10,000,000 this year.
Last year, we had no actual openings in the quarter, but a lot of that relates to openings that are just getting ready to occur or just occurred, as well as one opening this year. All told, operating income in Q2 came in at $856,000,000 down 2% from a year ago's $877,000,000 Below the operating income line, reported interest expense in Q2 came in at $31,000,000 that's up $4,000,000 from last year's $27,000,000 excuse me. The increase is primarily due to interest on the $1,000,000,000 debt offering that was completed in Q3 last year related to our special one time special dividend that we did back in February, a year ago. Interest income and other was lower year over year by $4,000,000 coming in at $20,000,000 last year and only $16,000,000 this year. Actual interest income for the quarter was lower year over year by about $8,000,000 primarily a factor of less cash on hand this year as compared to a year earlier.
This is a result again of our two things. We had a $1,200,000,000 debt payoff last December, as well as we used about $1,000,000,000 of our cash towards paying that $5 share special dividend last February 27, a year ago. Overall, pre tax income income was lower by 3% or $29,000,000 in Q2, going from $870,000,000 a year ago to $841,000,000 In terms of income taxes, we got a little help there. Our company income tax rate this quarter came in right at 34%, up from a little over 30% a year ago in the quarter. The income tax line on this year's Q2 benefited from a few positive discrete items resulting in the 34% rate.
Our normalized rate would have been a shade over 35%, while last year's income tax line benefited from, as I mentioned we mentioned earlier, a $43,000,000 benefit in the call primarily relating to our $5 special cash dividend. Overall reported net income of $598,000,000 last year in Q2 compares to $546,000,000 of net income this year Q2 on a reported basis. Rundown of a few other items. Our balance sheet is included in morning's press release. A couple of things I always point out on this call.
Depreciation and amortization for Q2 totaled $285,000,000 for the quarter $556,000,000 year to date. Our AP ratio at accounts payable as a percent of payables, last year in Q2 on a reported basis, it was 97% and this year 5 percentage points lower at 92%. That includes construction and other payables. So if you just looked at merchandise payables as a percent of inventories, it would be 87 percent a year ago and 4% lower or 83% this year. Last year being higher by 4% or 5% here is actually the anomaly.
Couple of factors, part of it was last year's West Coast port slowdowns. You had a lot less inventory a year ago on some big ticket low turn items like electronics. Just that one department was $120,000,000 plus of higher inventory and only a few $1,000,000 of higher accounts payable. And then gas payables again was $20,000,000 or $30,000,000 to the wrong side of this AP calculation. As we try to keep our tanks a little full, more full when prices decline.
So again, that's running the business and nothing per se exceptional there. In terms of average inventory per warehouse, pretty much flat year over year coming in just $6,000 higher this year and average inventory per warehouse of $12,761,000,000 up from $12,755,000,000 a year ago. Ex FX, year over year inventory levels per warehouse were up more than the 6,000, they were up $286,000 or up 2%. But that again on a normalized basis, I think is one of the smaller increases we've seen year over year in that. Overall, inventory is in good shape.
Not only are they in good shape, we just completed mid year fiscal inventories and it's our best shrink results ever by a basis point plus. So again, I think it's indicative of running a clean shop there. In terms of CapEx, in Q1, we spent $715,000,000 In Q2, we spent approximately $650,000,000 more. We're still on track this year for fiscal 2016 CapEx to be in the range of $2,800,000,000 maybe as high as $3,000,000,000 but $2,800,000,000 that compares to $2,400,000,000 CapEx in fiscal 2015. Next, Costco e commerce, Costco online.
We're now in 6 countries, having recently opened in Korea and Taiwan. We're also, of course, in the U. S, Canada, UK and Mexico. For Q2, sales and profits were up over last year. Total sales were up 19% in the quarter, up 22% ex FX and on a comp basis up 18% reported and up 21% ex FX.
So continued good results in terms of growing our e commerce efforts. In terms of expansion, fiscal 2016, again, we opened ahead of 11 units in Q1, 1 new unit in Q2, so 12 through midyear. We plan 7 net openings in Q3, 9 openings including 2 relos, so 7 net. And in Q4, we're on task to do 11. So that would give us the 30 total for the fiscal year.
If you go back a year ago on fiscal 2015, we added 23 net new units on a basis what was then beginning basis 663, so about 3.5% square footage growth. Now this year assuming we get to the 30, that would be about 4.5% square footage growth. Again, the new locations by country, if we do the 30, 21 in U. S, 3 in Canada, 1 in the UK and 3 into Asia, 1 in Taiwan and 1 in Japan 2 in Japan, 1 more in Australia and 1 more in Spain. At Q2 end, total square footage stood at 100 700,000 square feet.
Next, in terms of stock buybacks in Q1, as I mentioned a quarter ago, we spent about $130,000,000 buying 898,000 shares back, so an average price of just under $145 a share. In Q2, we spent $80,000,000 on 531,000 shares, so an average price at just over $150 a share. During the 1st 5 weeks of the past quarter, very little stock was repurchased. In fact, of the total $80,000,000 3 of the $80,000,000 was purchased
in the
1st 5 weeks. And the remainder, the vast majority was in the last 7 weeks. And that's purely a function of how we do it. We look at kind of a matrix pricing. As it goes up a little, we buy a little less.
If it comes down a little, we buy a little more. As long as we feel comfortable about our runway, I think we'll continue to do that. In terms of dividends, our current quarterly dividend stands at $0.40 a share, so $1.60 annualized, which on an annual basis is about a $700,000,000 number. That's the quick and dirty of how Q2 went. I'll turn it back to Britney now and be happy to answer any questions.
Britney?
Your first question comes from
the line of John Heinbockel with Guggenheim Securities.
Hey, Richard, I know you have this data. I don't know if you how deeply you dig into it. But if you look at traffic in the U. S. By your different customer segments and in particular your most loyal customers, right?
So are the most loyal customers generally fresh food customers? Is that a good part of the basket? And do you think is it possible that a little bit of the moderation in traffic is, are you maxing out with your truly best customers? It's just hard to grow frequency with that group?
Well, I don't I'd have to look into it. I don't know. My guess would be that our more frequent customers are bimodal. They're the ones that you mentioned that would shopping more frequency as families on a regular basis and certainly food is a meaningful part of that. That's what one of the in my view, one of the 2 or 3 main factors that get people in the door on a more frequent basis.
You also have small business members who are buying a lot of things, not necessarily fresh foods. Obviously, some restaurants and convenience stores will buy some of that. But in terms of maxing out, I've said it before, I continue to be surprised how many more executive members we're getting even among existing longer tenured members. And so we got to look, we got to keep doing what we're doing in terms of being good merchants and constantly improving the value. And there's always saturation in everything you do.
We're pretty good at figuring out ways to offset that. In the last year or 2, certainly organics has helped, not only bringing in arguably some newer perhaps younger members, but taking existing members who love Costco, but there are certain things they didn't buy at Costco because they're an organic family. So I think we'll keep coming up with stuff, but I don't I would bet that logically that makes a little sense, but I bet you it's not that big of a factor that concern. I mean,
do you think the are your best customers do you think they're shopping 3, 4 times a month or more frequently than that? I'm sorry, who? Your best customers, right, in terms of shopping frequency. Do you think they're up to 3, 4 times a month or even more?
Yes, I'd say 3 or 4 times a month. I think you look, you have some customers shopping twice a week. More of those are small business. I have a friend that shops 6 times a week. That's what he tells me and I run into him a lot and I scratch my head why.
So, but I know jokes aside, I mean, arguably when there's a family that's getting to shop 4 times a week, are they on that curve of incremental frequency increases that would be it's going to be harder and harder to do. But again, we're pretty good at figuring out a reason why they need to come back. And we're getting more we feel good about the fact that in the last couple of years, our average members' age, which half a dozen years ago was about a 4 year they were 4 years older than the U. S. Population that's now just under 2.
So it's going and that's going in the right direction for a lot of reasons. The fact that we keep adding some gas stations is driving frequency. I remember years ago, I've heard over 30 years, what's just now that this thing is maxing out, fresh foods or gas stations, whatever it is, we keep figuring out new things. And I feel good about some of the things we're doing in a lot of the non foods categories. Fresh foods never ceases to amaze me and we'll keep going.
All right. And then just lastly, right, so you talked about 2 of the categories were up in gross, 2 are down. So just maybe a little more color on the ones up versus down, how much mix of factor? I guess, I thought fresh food might just because of deflation and a little bit of delayed pass through. But I guess maybe you pass through that a little more quickly.
Well, we do that by the way, one thing that Bob reminded me of, another issue in terms of a year over year comparison or as some of you like to talk to the 2 year stack, It was a year ago when gas fell dramatically in a big way and we had a couple of months there. We had a 5.5% frequency for a couple of months. So look, I think some of it's the deflation that we're seeing now a little bit, but some of it's that year over year comparison when we had some pretty nice numbers there. Now I'm hopeful that we'll find out in the next couple of months once we now that we've anniversaried that. Okay.
Thank you.
Your next question comes from the
line of Simeon Gutman with Morgan Stanley.
Hi, this is Joshua Cyber on for Simeon. If gas prices stay low, do you expect you'd see traffic slow as that competitive advantage starts to diminish?
Again, in theory, it should be less of a factor of helping sales because we're not on the news every night. We love it every year when Guess Buddy comes out. Now 3 or 4 years in a row since they started it, they were the lowest price nationally on average. I think we still get positive feedback from that. So yes, I mean, at the end of the day, is it better than when we had gas was going down a buck year over year or over a couple of months and it's on the news every night?
Sure, that helps us a little more. But we still find people that are just signing up and can't believe our gas prices. So again, it's a net positive. It's less of a positive than it was in the 1st year, the 2nd year and 3rd year.
Okay. And a follow-up to John's question. I don't know if you have this in front of you, but would you be able to compare traffic and ticket growth across demographic groups?
I don't have I know that our membership marketing people look at that and I've seen it, but I don't know if we want to go that I don't have it in front of me, so I can't answer that question.
Okay. Last one for me then. If you could talk about the dynamics between the credit card transition and a potential membership price increase in terms of timing?
Well, there's no real dynamic. It looks like we're on task. As you know, just last week, I believe, American Express and Citi announced the agreement to purchase the portfolio, and which I believe we're on track to issue Citi is on track to issue cards to the existing millions of members that have the current co branded card in May with a transition date in likely in early June. But again, it could slip a week or 2, too. We'll see.
And in terms of transition, there's not a lot contractually we can do until then. And of course, when the cardholders are being sent those cards by Citi, they'll be getting information from Citi. And I think that will start that process of making our members aware of what the new card brings to them and then we'll go from there. Look, we're excited about getting it done. It is a big transition in the sense that there's millions of members that have the current card and they'll get the new card in the mail.
We're excited about the value proposition to our members and we think it will be a net positive long term. Like anything, when we could save that money, we want to give most of it to our members and this will be like that as well. We'll get a little benefit from it. As it relates to the fee increase, we really haven't made any decisions, which would be consistent with the 6 times we did it in the past. History has shown if you just put dotted out chronologically, it's about every 5.5 to 6 years 5 to 6 years.
The last time we did it was in January of 2012. So 5 years would be January of 2017 and 6 years would be a year later. I can only tell you that logic would dictate, we certainly wouldn't do anything during the transition. We've got enough going on this year, mid year when we were doing this credit card transition. And so all those aligned to a possible answer.
At the end of the day, I don't know when we'll do it. I can tell you that we feel as comfortable today as ever about the loyalty of our members and we feel as comfortable as ever today that we feel that we've improved the value on that membership way more than the likely increases that you've seen in the past. Okay. Thanks, Richard. Yes.
Your next question comes from the
line of Christopher Horvers with JPMorgan.
So I wanted to follow-up on the membership fee increase as well. Last time you raised the executive membership price in addition to Gold Star, But I believe, correct me if I'm wrong, that was the first time you had ever done it. So can you walk us through how you thought about that last time and maybe reflect on how was that could possibly mean for the next potential increase?
Well, I think the big issue is for about, I think it's 10 or 12 or so years, we had the executive membership out there. The executive membership from its inception was $100 And our view at the time was, let's build it. And in theory, every time if you think about when we originally did the exact, I think the gold star was $45 and so there was a $55 delta, if you will, and $55 assuming a 2% reward breakeven, if you will, between do I stay a regular member executive was $27 an incremental $2,750 of annual purchases. And as the 45 went to 50 and to 55 that delta became less. So in theory, another bucket of I think it was 2 +1000000 additional members that fell into that bucket of being above breakeven and below breakeven.
And so we wanted to grow it. As we decided to raise it 5 almost 5 years ago, 4 plus years ago from not only from 50 to 55, but the 100 to 110, I think felt that we've gotten a lot of that benefit. And certainly, there's a lot more benefit incrementally than $10 and so we feel comfortable doing that. That's how we got there and how we get to the next one. Stay tuned.
Understood. And then just reflecting back on the traffic, I think, ex the Super Bowl, still 3 plus traffic comps, do you think that much has changed in terms of the behavior of the consumer within the box in terms of maybe are you seeing it in different mix, buying less discretionary items, less sort of trade up within the category or any commentary there that you talk about the consumer and how they're behaving in the store?
Well, in terms of discretionary, some of our stronger categories are not foods. So that flies in the face of that concern. Did we see a little bit of a little less strong numbers in some of those higher ticket categories in parts of Texas or Canada or well Canada was strong notwithstanding that or I guess North Dakota where we have, I don't know about North Dakota. I know Texas, it was a little different even though Texas overall was fine. I know that when I talked to our Head of International because of the strong dollar, they saw a little bit of a little weakening of that strength in the bigger ticket discretionary items.
But overall, I mean, we've had our best percentage dollar increases in electronics and specifically in TVs in the last couple of months in a number of in a few years.
Thanks very much.
Your next question comes from
the line of Dan Binder with Jefferies.
Hi, good morning. Thank you. My question was around membership as well. You obviously have a good retention rate and then presumably in existing clubs you have members that sign up to help fill the gap. I was just curious if you can give us some metrics around comp membership growth, that looks in the U.
S. And then how that looks on international?
First of all, any new market, even when we went into New Orleans or where we had been in Louisiana before a couple of years ago, you're going to see a year hence when you have your first class of renewals, it's going to be a number quite a bit lower than our company average. I think in the U. S, we typically see numbers in that 1st full year in a new market and there aren't many markets anymore, but when we do something in the low 70s perhaps. Overseas, when we first opened in Korea, Taiwan and Japan, and as we've opened new units at new geographic markets in those countries, we might see in the 1st year renewal rates in the high 50s to low 60s, then it grows from there. So our renewal rates and that's why you see that we separate U.
S. And Canada, which is the most mature. That number is a little higher than the worldwide number for that very reason. We only see a higher renewal rate among executive members. They get it.
They're spending they're investing another $55 on top of the main $55 on that upgrade because they get it, they get the value of it. And we think that works, reward programs works, branded credit card rewards works, fresh food and gas works, so all those things help.
So looking in aggregate, mature clubs and new markets, is the company actually experiencing comp store membership growth?
Yes, I'm sorry. And most of our sign ups are comp sign ups. So the answer is yes. I mean, this is a rounded number here, but when asked, hey, if you have a 90% or 91%, but we use 90% for this example. If you have a 90% enrollment rate and you had 100 members, what do you have a year hence?
We have about 101 or 102. You lose 10 and you gain 11 or 12. And that's kind of how it's been. Been. And that's I'm shooting from the hip with this one, but that's pretty consistent with my assumption of if overall new member sign ups are in the 4% this past quarter.
And you mentioned the LivingSocial campaign was good. Can you give us a little color around how many and how many were millennials?
No. Millennials were it did well, in fact terms of the number. We were pleased with our results based on our expectations of it. But again, we don't want to get people comfortable waiting for that kind of value proposition to sign up. And so that's why we waited 18 months.
And as it relates to millennials, I know I don't have the chart in front of me, but I have the chart that our Head of Membership Marketing showed at the budget meeting. Yes, it over indexes the other way towards younger people relative to our existing base, which is what you'd expect.
And then last question for you on the LIFO credit. Based on what you know today about deflation storewide, are you expecting additional LIFO credits as we get into the back half of the year?
If it were today, I'd say yes, but you never know. Keep in mind, when we have a LIFO credit, your markup is probably impacted a little the other way. When you have a LIFO charge, is because there's inflation, you've raised your prices a little bit. Sometimes there's a little bit of a gap there. So it's part of margin.
But yes, I think again, all things we see today, it would be a LIFO credit, a little bit of that extra LIFO credit.
Great. Thank you.
Your next question comes from
the line of Michael Lasser with UBS.
Good morning. Thanks a lot for taking my question. On the wage increases, is the increase that you're giving this year consistent with what you've done in the past? And when you've done this in the past, have you noticed any change in your sales trajectory? So employee satisfaction goes up and that leads to a better membership experience or it coincides with broader wage inflation and so people have more money to spend and they spend at the warehouses?
Yes. Well, somebody once said, it's like chicken soup, it can't hurt. I think at the end of the day, at top of scale, we've done every year for as long as I can remember. When you've got somebody that's reached top of scale, they want to know what they're going to get a year hence. And we've always erred to the high side on that.
I think over the last 3 years, top of scale in the U. S. Is in the $23 range, dollars 22.50 or something and just top of scale. And so if you and I think it was a $0.50 or $0.60 increase, so let's say $55 on $23 would be about a little about 2.5 percent increase. I believe the current increases are similar to that kind of percentage.
What we haven't done every year is bottom of scale. We like to be not and by the way, I want to also say is that the amount of cumulative hours it takes for somebody to get from bottom of scale to top of scale on a full time basis, not the people who all started full time, they don't. But on a full time basis, it takes about 4.5 years, which is very, very short period of time. So our employees get it, but we think this will help. And it's important to do.
We want to be the premium at all levels. We're a huge premium at the top of scale. That's as others raise their rates at the bottom. And it's frankly in some markets, this is a physical challenging physically challenging job. You're on your feet, you're lifting cases, you're pushing carts, these entry level jobs.
And so we thought it was time to do it. So that is incremental and that's what I mentioned earlier in the call that the $0.01 a share in Q3, thank you, and the $0.02 a share in each of the next 3 quarters because they're 4 quarters. That's that incremental piece that I'm talking about. Now I would like to think that we're not going to have a less shrink or employee shrink because of it or they're going to be better service providers to our members. I think it reinforces what they already feel and that's what we're all about.
Okay. And then my second question is on the competitive landscape. Trafficers remain good on a multiyear basis, but a little bit more volatile just on a 1 year basis. Are you seeing any signs that you are having more interference from competition? It certainly doesn't look like it from some of your club peers, but maybe some of your online players are peeling off some members or peeling off some trips from your member base?
I don't
think so. I mean, again, on the margin, are there a few? I'm sure there's somebody that made one less trip to Costco because they bought something online or somewhere else. But I think we're still doing a pretty good job of getting them in the door, with particularly with fresh foods, with gas, with executive member, with a quality co brand offer in terms of rewards. So all those things help.
I think we got again look, online is taking a piece. If it's taking and some of those pieces we're not going to take. We're not going to take the single unit items, some small value food and sundry things that are going to be delivered to your door by 7 in the morning if you ordered 6 6 hours earlier. That's not us. We can't do that at 10% to 11% margins.
But we're taking little pieces of other things. And again, we still feel pretty good about what's going on.
Awesome. Thank you so much.
Your next question comes from the
line of Brian Nagel with Oppenheimer.
Hi, good morning. Thanks for taking my questions. I want to go back and this may be a follow-up to some of the earlier questions. But the U. S.
Comps ex gas in January February, so my numbers were you had a 1 and a 4. And you had mentioned before there was some shift between those 2 months just given weather and then more importantly the time of the Super Bowl. But I guess the question I have Richard, if you look at those months and then maybe take them in total, is that tracking or sales in the U. S. Tracking where you'd expect them to be?
And if not, is there something we can point to
explain why? Look, we're like a teenager, we always want more. I think when we look at the detail, deflation is probably the biggest factor and that gives us comfort that fundamentally there's not been a lot of change in our view. We still it bothers us that it tracked a little differently. But we've again, that just makes us look at everything, what else can we do?
And we've got a lot of good things going on out there. So I don't do we like it a little better? Sure.
On the deflation point, you probably gave these numbers already, but was deflation a more significant factor here in the 1st 2 months of 2016 than it had been, say, in the second half or latter part of 2015?
Again, there's different ways to measure deflation. The answer is yes, first of all. But there's different ways to measure inflation. If I look at the first just from a LIFO index, which is U. S.
Inventories, if everything started at a cost, everything that we had in our warehouse at a cost of 100.00, that was the baseline. At the end of Q1, so at late November, that LIFO index was 99.49, so 0.5% lower on average. That's that inventory LIFO calculation. In the last 8 weeks, the 99.5% has gone to 99.06%, so down 44 other more basis points. So yes, that's continued.
So that's where I got the it's a little lower. We're seeing a little bit more deflation, particularly we're seeing it in some of those non food categories. When I look at the 85 plus percent of our goods that go through our depot operations, again, this is just one parameter. The number of pounds being shipped through with the dollar value, that dollar value is down a little over 1% year over year. Now for year over year, not from the beginning of this fiscal year.
So again, that would indicate to me again, we're seeing a little bit more deflation. I can give you crazy numbers on a given items. On a year over year basis, when you look down, Just candy, M and M is down 10% year over year. American single slices of cheese down 15%. Okay.
The bacon down 20 So but there's also some inflationary items. But overall, I think the LIFO index in that depo calculation, although it's not a perfect calculation, would indicate that we're seeing a little bit more deflation than we had overall. And particularly on the non food side, you're seeing it. And I think I mentioned a quarter or 2 ago when asked about that with oil prices coming down, what about some non food items like plastic bags and things that require a lot of petroleum based products? And the answer I got back and I shared with everybody was, yes, you're seeing it, but you got to ask for it more frequently and more strongly.
And even then it takes it took a little longer because sometimes you've got vendors that have committed out several months, if not a year on raw material prices and we're going to work with them. We're not going to drive we're going to do what we can, but we're not going to create hurt. And so again, we're starting to see a little over that, but that's retail.
Got it. That's helpful. Then the second question I had, just with respect to the forthcoming shift in credit card. And I know it's early, but is there anything you're watching is some type of leading indicator as to how your members may or may not react to this shift?
Look, you've got 11 or so 1000000 members that have the co brand card. You've got however many high-twenty million of member households in the U. S. We've had our share of letters both ways. Good, I'm glad you're changing.
I never liked whoever. And then you've got those as how dare you change, I got it for this reason and I love my card, my existing card. So aside from that, we feel comfortable or we wouldn't have done it. We recognize that we're looking to spend afterwards. I think with the reward proposition, with any possible improvement in merchant feed us, with the fact that the new card will be accepted in more places, there's a lot of reasons why it should be a positive.
We have to get there and see. Got it.
Thank you very much. Appreciate it.
Your next question comes from the line
of Paul Trussell with Deutsche Bank.
Hey, good morning, Richard. You spoke about the incremental labor costs that are forthcoming with the penny hit in 3Q and $0.02 thereafter over the next 12 months. But can you just dig a little bit more into the expense deleverage from the 2nd quarter? Certainly, as you mentioned, there was a little bit lighter sales volume. So perhaps that had an impact.
But what's your how should we think about the results in 2Q and the outlook on payroll and benefits and operations, etcetera?
Well, I think first of all, sales drive leverage. And I remember years ago, when we were always at the ask the question, what sales comp sales number you need to get any leverage at all or to be consistent. And our guest commitment at the time, this is number of years ago, was something in the 5% 4% or 5% range, kind of an underlying comp. But my stronger and more confident response portion of response was whatever other companies do to be able to better leverage if sales showed a little weakness, we're not going to be as good because we're not going to do some things. We're going to still clean the bathrooms every hour and we're going to still make sure all the parts are inside and not sit out there.
We're not going to cut labor. In fact, we'll enhance labor. We've done that at times at the front end to drive more business. And so I think, yes, the bottom of scale increase that's easy, that's quantifiable. A few of the moves lined up on a few items.
I mentioned the high cost claims was 3 or 4 basis points. I mentioned there were 3 other items that usually 2 of them go one way and one go the other way. And so it's a couple of 1,000,000 or a quarter and a half a penny impact to the quarter. This time, it was all in one direction. And so you're always going to have that.
But I guess I too get a little more defensive when we miss the number. Some of it was as we could have done a little better job. And so directionally, we're going to try to do a better job. We're going to hope that the moods line up 2 to 1 to the positive, not 3 to 0 the other way. And we know that we're getting a little less hit from IT modernization, the year or 2 hits.
Other than that, that's what we do for a living. I think the other thing is to drive more business and we're pretty good at that.
Fair enough.
And by the way, then the credit card, you've heard it before, I've said it before, whatever this additional bucket of potential money is, we're going to get most of it to the customer in the form of the co brand offering. But we're going to keep a little of it and that helps merchant fees, but that's not going to start until the summer and we'll go from there. So that should help us a little. We are fingers crossed.
I appreciate that color. Certainly, we will take a look at the 10 Q when that's out to see some of the margin detail geographically. But could you maybe just give us a little bit of preview of any changes year over year from a U. S. Or Canada or international standpoint?
Maybe you can just speak to some of the performances ongoing in those particular markets?
No, I think we have to wait till the quarter is out. The only thing that you've seen in the past historically is, is gas continues to be strong, but on a year over year basis, there's not a big difference. Gas is a big thing to the U. S. I think you've seen a couple of quarters in the 10 Q in the last couple of 2 or 3 quarters where the biggest improvement year over year on that in the segment analysis of operating income as a percent of sales.
The most improved was the U. S. Column, which is one of the lower columns. And that we've mentioned this part of that's attributed to gas. But I know in Q2, there was not a big it was still good, but it was also still it was very good a year ago.
So other than that, I can't really talk to you about it until it comes out.
Thank you. And lastly from me and very quickly on e commerce. You continue to have very solid growth up, I think it was 19% this quarter, 22% ex FX. Can you just speak to some of the categories really driving that strength? Is there any expansion of assortment that we've seen online of late?
And just a quick update on the Google and Instacart partnerships.
Well, we have over the last couple of years expanded some of the categories, what we'll call velocity categories, some sundries items, some limited non perishable food items, some apparel items, socks and underwear to speak of, things like that. So health and beauty aids. So yes, that's a little of it, but those are small pieces relative to if you could drive sales into furniture and exercise equipment, electronics. So those things are helping us as well. I think it's a lot of the things we've done.
Some out there would argue it's about time. But we'll get to it and we're driving it and we're starting to do a few new things.
Your next question comes from the line of Peter Benedict with Robert Baird.
Hey, Richard. How's the growth in trips to the pump change as gas prices have dropped here at around $2 Has that been, have you seen a noticeable change there? And remind us what percentage of those fill up trips correspond with a visit inside the club?
Well, for every 100 people that pump gas, during the hours that we're open in the warehouse, because we opened a couple of hours earlier than the warehouse opens at a gas pump and close an hour later. It's in the low 50s and that's improved a little from 5049, but it's in the low 50s. What was the other part of the question? I'm sorry.
I mean, have you seen the growth in trips moderate as gas prices have fallen? I mean, I think whether you measure that by comp gallon growth or what have you?
Yes. What we see is when it really spiked a year and a quarter ago, we saw a spike there as well. We don't see well, in terms of gallonage comps, we don't it's still positive and it still beats the U. S. Averages out there, but it's more muted than when you have those big deltas.
Okay. That's fair. It makes sense. And then just on the organic Yes,
it might only have that needs where we're retaining it.
Yes. No, understood. And then just on the organics, can you remind us where your penetration is at this point? What the pace of growth has been and where you think you can take that? Do you have more room to continue to improve the penetration of organics?
Yes. We're about $4,000,000,000 which was I think the last 2 years it was up 30 ish percent. And we're on task I think our goal this year is on task to be to have a double digit number that has a 2 in front of it. And we feel good about it. We are, I think, doing as good a job as anybody in terms of sourcing.
And part of the challenge is availability. And the industry is growing. You will say there are more farmers and more poultry producers and more beef producers that are committing more to this. And we're certainly out there literally in the fields here and abroad getting these growers and processors to do more. So I think it still has some good opportunities there.
Okay.
And then last question just on D and A was up about 9.5% year over year in the quarter. Is that a pace that you're comfortable with kind of going forward? Is that going to accelerate at all as some of these investments come in? Or is I'm just trying to get a sense for
how we should be thinking about the growth in
D and A going forward?
Well, it's partly going up because of IP modernization. And because we're opening 30 units instead of 23. And although this 30, 21 or so are in the U. S, which is a little different than I would have guessed 2 years ago, what it would be by now. And so I would say that it will keep for a couple of years here, it has kicked up.
We got at least 1 more year will kick up because of IT modernization. And then this year and next. And then it probably kicks up a little bit because of just a little bit more expansion and a little bit more expensive expansion. So, did that take the number if D and A if sales are growing at x, does D and A grow at x plus 2 or 3? I'd have to look at it, but it's probably as good a guess as anybody.
And I'd look at what it's done historically and probably it grows a little faster than that in the next couple of years, couple of 3 years
percentage wise. Okay, makes sense. Thank you.
Your next question comes from
the line of Oliver Chen with Cowen and Company.
Thanks a lot, Richard. The average transaction increase was impressive at that plus 2% range. Do you expect that that will be a dynamic that will continue? And is that just within consumer electronics, what are the major pluses there given that it had such nice performance? And Richard, as we do model the next year, what's the magnitude of deflation in terms of the impacts to comps?
Is it in the 100 basis point range? And just I think you mentioned several different categories, but is there an overall take on which categories, it's applying to most?
Well, starting with the last question first. Again, I think the difference now is that we're seeing a little bit more deflation on some of the non food items, particularly like an example, plastic bags and garbage bags and things like that that require petroleum based products. I still think again, you get the sound bites of the things that are down 10% to 20%. But overall, if deflation as measured by our LIFO indexes are down have been down a quarter percent a year and then last year maybe it was more than that. This year it seems like it's a little more.
It's still in the it's less than 1%. Maybe it's 0.5% to 1% instead of 0.25 percent, but I'm guessing there. And then in terms of electronics, I think a couple of things. I think arguably if we have a higher end member that probably helps. We certainly over index on bigger TVs.
I know that during the 4 weeks between Thanksgiving and New Year's Thanksgiving and Christmas, we had outsized TV sales dollars and talking to every major supplier that we buy from relative to everybody else, online and offline. And I think part of that was is that over indexing to 16 inches to 80 inches TVs. But we're seeing strength in phones. TVs is the thing that drives it. Cameras are better, but the cameras are better because they were weaker in the last couple of years.
And Richard, just remind us as a percentage of total, what is consumer electronics? I don't
have it in front of me, but I think Department 24 is 4 or 5, 4 plus. Okay. Okay. With TV probably be 40 plus percent of that. Okay.
And as you think about Costco for the long term, just for the 5 year story of Costco, we know that you don't have the buy online, pick up in store, the BOPUS. But what are customers asking for as you really try to where you're focusing efforts on in terms of your human capital? Where you're focusing efforts on in terms of your human capital and strategic priorities as you look to bricks and clicks over the long term?
One of the challenges we have with picking up at the store is we've got an average location that's doing 170 $580,000,000 which means we've got a bunch of locations that are doing $200,000,000 to $300,000,000 and several that are doing more than that. We don't want somebody to come by necessarily pick it up. Maybe that would change if we were having minus 3% comps in our lives. So we want to do everything possible to get them in the store and not just come and pick something up. So I don't see that as the strategic focus of ours, at least in the near term.
We also part of the thing of trying to get people in the store with treasure hunt items, with fresh foods, with gas. So we're keep driving that. As we've done our relationship with like in 6 markets with Google Shopping and I think 16 markets with Instacart, there are people that want things delivered to them and we're selling it. We're still selling it, but we're doing it that way. And so I think that's what we'll continue to do.
We are getting better. And again, some out there would say we've gone from an F to a C or an F to a D. Some would say that we've gone to a B plus We'd like to think of ourselves, we still have some things to do, but we've improved our mobile ops. We've gotten a little smarter about of how we do it. We know that when you come in store, you're going to buy a lot more than when you shop online in general.
And recognizing our average online transaction is actually higher than our in store visit, but that's because we started with just big ticket items. It's just recently we put on some other smaller ticket items. But we know that compared to let's say, a Instacart or Google experience, the in store visit is 2.5 to 3 times, if not a little more than that. Now what we're finding is that that customer comes in a little less frequency, does the online several times and another 2 is an aggregate improvement in their comp. So that works.
But we're still taking it slowly in terms of I don't see us doing pickup at store at least in the near future in the next year or 2, because we've got enough traffic there and we're trying to figure out how to keep driving that.
Richard, you have been experiencing such robust traffic and healthy fundamentals. What is your take on the health of the consumer? Because there seems to be different factors going on at different income levels and there's and at the same time, there's definitely market stock market volatility. And a related question is, if you if there is something that keeps you up at night for the next year, what would you highlight as risk factors as you evaluate them and think about them internally?
Look, I think from all the things I read, 1st of all, 1st and foremost, when we do our competitive price shops, we feel as good if not better than ever. When we look at our renewal rates and our customer loyalty, we feel as good as ever. When we look at our employee loyalty and our turnover rates, we feel as good, if not better than ever. We certainly like to read those nice things that everybody says about us. And I think it reinforces and we're doing it because we do it and we then reap the benefit of it.
So I think from that perspective, now at the same token, my favorite negative word or negative phrase out there, we talked about the volatility and the choppiness. There's a lot of what somebody referred to, not me, but toxic anxiety out there. The world is a little different and the dollar strength doesn't help everything. And even the U. S.
Economy, while good, there's not a big engine driving it necessarily. So there's a lot going on out there. I think I'm comforted by our consistency, even if it's come down a little bit in the last couple of months. And again, I can explain some of that with the strength of frequency a year ago. But look, we'd still like an extra half a point or a point there.
In terms of what keeps me up at night, what do I get to what do we as a company and what does Craig, our CEO get and what do we what Bob and I and Jeff asked about. A lot of it centers around dotcom and what are you going to do. And we try to not avoid it or be arrogant about it, but also recognize we try not to freak out about it. So I think in my older age, I loosely for age related issues, not the company related issues. I really feel pretty good fundamentally about our company and what we've got going on, what we're doing in terms of global sourcing, what we do we're doing in terms of the strength of our current signature brands.
And things could change, but we're and we'll keep trying to do a few things on the Internet more, but we're going to take it steady.
Are you still selling tons of diamonds? Have your diamond luxury sales been really good?
Yes. I mean, I know in fiscal 2015, they were up percentage wise up to like 150 plus 1,000 carats, which is up 50 or so percent. Yes.
Thank you. Thank you. Best regards.
Your next question comes from
the line of Meredith Adler with Barclays. Meredith, your line is open. You may be on mute.
Your next question comes from
the line of Matthew Fassler with Goldman Sachs.
Thanks so much and good afternoon at this point. My first question relates to U. S. Versus international traffic and ticket mix. When the numbers were quite similar in terms of total sales, or comp growth and FX for U.
S. And international, I guess we're a bit less curious about how the traffic trends you're seeing that you report, which I believe are global, correct me if I'm wrong, were different. So any sense as to how different the traffic number is in the U. S, particularly over the past few months?
No. I mean, again, the biggest factor was a year ago with the gas our view was gas related, we had a couple of months of mid-5s, which was anomaly the other way. And so we're just finishing comparing to that. What surprised would be in Canada, The underlying comp there is surprisingly strong given that oil prices are down. When I looked at for Q2 in terms of kind of front end transaction growth, which is shopping frequency, that's how we measure it.
Overall, we are again in the low 3s, a little bit 3s. The U. S. Was in the VIB IIIs, although that's impacted again by more impacted than ever anybody by gas, by the gas a year ago the shopping frequency. And look nationally, it ranges from flat to 14% and no rhyme or reason to it.
A little of it well, a little of it is in the Asian countries, Q2 was a little flatter because of opening new units as well.
Got it. If I can also focus on sales for a second question. So I guess the difference really between January February in the U. S. If you knock out the weather in Super Bowl etcetera, it's actually less seems to be at least in the overall numbers, seems to be less about traffic and more about ticket.
Now I know that there's a component of ticket that's obviously deflation. Is the decel in ticket ex gas and FX in the past couple of months entirely about deflation or is there any change in basket size or units per basket,
Well, it's basket size related to deflation.
So deflation pure and simple rather than any kind of units per transaction?
A month ago, we don't do this all the time, but a month ago, we had Bob had everybody look at last 2 months. We looked at the basket size and the actual number of items in the basket was up less than 1% but quarterly 0.25% and the average basket dollar amount was a little down. So that would imply again a little deflation, but we ought to buy in slightly more things in the area slightly. Got
it. Understood. And then finally on SG and A and the forward guide on wages. Just to be clear, is what's different over the upcoming 4 quarters or so simply the change in the entry level hourly wage rather than the increases you'd give your experienced team members? Or does that increase also flow through at a greater than usual rate
to the The top
of scale flows through at the same rate. But again, if you have 60 plus percent of your employees who currently are making 22% or 23%, whatever that top of scale is. And every March, they got a $0.55 $0.60 an hour increase. We've experienced that through all times 30 years, percentage wise, it's pretty similar. The unique thing this time is the bottom of scale, which just taking what it would be without it and what would it be with it and affects not only the entry level, it affects the first couple of increases.
If we were at 11.50 and 12, was it?
Yes.
And if we were 11.50 and 12 currently prior to now, 3 months or however many cumulative hours later, somebody goes from 11.50 to 11.75 and 11.75 to 12 or 12.20 $5 Well, everybody below $13 is now going to $13 And so, but on that, but what's the incremental cost, all things being equal. The incremental cost is about $0.08 a share over the course of a year. It's a penny this quarter because it's a partial quarter and then it's more it's about $0.02 a quarter and then it will anniversary next year this time.
Got it. Thank you. Thanks for the transparency today.
Your next question comes from
the line of Bob Drbul with Nomura Securities.
Hi, Richard. I just got a couple of questions, I think. The first one is on the membership fee income growth. What would it have been without the impact of no American Express sign ups?
Higher. Yes, we don't measure it. On the margin, we think somebody is coming to sign up because of us first and the co brand card second, a distant second, whether it's AmEx or CityVisa or anybody. I mean, they come in to be a member of Costco. So I don't think they come to the desk and say, never mind and walk away.
So I think now because part of our relationship with our former partner and our upcoming new partner, current and soon to be former partner and our upcoming new partner is they do some marketing for us. They do some things to get people to come in also. So there's probably a little bit, but we don't try to measure it. We just know it's 0 right
now. Got it. Okay. And then, in your soft lines business, there's been some the private label component, I think, has increased. And I was just wondering if you could talk through a little bit on the impact that weather has played in that segment of your business, both from like a markdown perspective, but also in terms of what you're really seeing as buying opportunities throughout the last few months in current market?
Well, the only thing that was impactful is I believe there was a relatively warm and there's more men's outerwear markdowns this last few months than we had a year than we had historically, but it was just completely weather related. And I didn't even point it out on the call that's probably a little bit of a that was a little bit of soft lines impact. That was one of the reasons that the soft lines margins, I mentioned year over year was a little down. Beyond that, when I did at the last budget meeting, when we're looking at some of the apparel buyers came in and talked about some of the new seasonal things, We keep getting a few more brands. I can't think of any off the top of my head right now.
But I think it's like a consistent we've had we've enjoyed apparel business with comps in the 10% to 15% range compounded for a couple of years now. And we're still seeing some decent growth in those areas. So it's a good category for us. I can't think I know we're committing I think we're trying a couple of men's athletic items. We've been very successful with the 2 or 3 different the 3 pieces, the bottom, the top of the jacket.
Your next question comes from
the line of Kelly Bania with BMO Capital Markets.
Hi, thanks for taking my question. Richard, just wanted to go back to the credit card transition. You've talked in the past about kind of reinvesting some of the savings, but I think you just also mentioned maybe keeping a little bit of it. I'm just curious, is that a change? Are you considering letting some more of that flow through?
I mean, you've had a lot of expense on the IT front now with the wage increase, FX has been a headwind. So just curious if there's any change in how you're thinking about those, the savings there. And now that we're kind of very close to it, any comment on what those savings could be in terms of magnitude?
No comments until we get there. So it really is going to be probably not until early October we report our year end and Q4 numbers since early June would be the beginning of the first about 3 weeks into our Q4. So I can't really tell you anything about it. We've made no change in what piece of this bucket we're thinking of saving. If anything, as we went through the final negotiation several months ago of what the reward structure would be, Craig pushed it further towards the customer, towards the member who would give this card.
We want it to be a great card. And so if anything, we went the other way a little bit. I just mentioned it, perhaps I didn't mention it that when I talk to people, as people have talked to me, my standard line has been like anything we do when we save a buck on a piece of merchandise, we can buy better. We're going to give as a rule of thumb, majority of it, maybe 80% even 90% back to the customer. We're going to do the same thing here.
We're going to give most of it back to the member. That being said, again, in the throes of the final figuring out what exactly do we want the reward structure to be and because we want that card to be top of wallet as we do with our current co brand. Top of wallet and we use not only at Costco, but outside of Costco and to be used at Costco as much as possible. We Greg pushed the envelope with us and with the 3rd parties to make sure that that value proposition is geared more towards them. So I don't there's been no change in terms of that.
Got it. That's helpful. And then just on the transition, will you have any grace period for a member that say doesn't have the co branded card, but tends to use their Amex at the store and didn't get a new card in the mail, obviously, but gets up to the register and goes to pay and you're not taking that anymore? Or is there will they just have to find a debit card? Or have you thought about how to treat that situation?
Well, first of all, there's going to be a lot of communication several times by us to our members about timing and everything. Contractually, there's a lot of things we can't do until near the end. There'll be plenty of information provided. We're still going to upset a few members when they come in. We did it with gas pumps years ago when we stopped accepting certain things.
And but at the end of the day, there'll be plenty of opportunities. The fact is, there'll be some members that have an existing Visa card in their wallet, while we would prefer them to have ours. There'll be cannibalization that way. Frankly, there'll be some cannibalization there. Look, whether it's American Express or Citi or any other big credit card issuer, they're the bank that determines credit eligibility for somebody signing up.
Now that doesn't impact the portfolio people, all the people that have the current co brand, they're going to get a new card similar in terms of credit capacity and things from their existing co brand relationship. But somebody who has to sign up, there are millions of people that never got an ASK card because they couldn't. They have resorted to debit or cash or check. There are some of those people that have any will be thrilled. There are some debit card holders that will do this.
But when you add it all up, we think that it's a net and we know that it's a net positive, certainly in terms of what we've negotiated and we'll see where it goes from there.
Got it. That's helpful. And then if I could just ask one more on online, A lot of retailers are spending a lot of money investing in their online business. It's kind of pressured the margins for them there. I believe your e commerce business is higher margin.
Just curious how you think about spending there going forward? And is that higher margin structure sustainable?
I'm sorry, could you repeat that?
In terms of online, just a lot of retailers have been talking about how much they're investing in their online business and not pressuring their margins for that side of the business. I believe your I believe Costco's margins online are higher margin. And I'm just curious how you think about spending there and if that higher margin
Its operating margin is quite a bit higher because you have a substantially lower SG and A. Now the fact that we're not spending 100 of 1,000,000 of dollars online, perhaps as part of that, but at the end of the day, we certainly make more when that dollar results online than it is in store. Notwithstanding the fact that our gross margin, what we charge the member is lower online than it is in store.
I guess the question is, do you see that sustainable?
I do. Because the SG and A portion is so low and because we're so extreme.
Great. Thank you.
Your next question comes from
the line of Scott Mushkin with Wolfe Research.
Hey, guys. Thanks for letting it go so long. So I just wanted to kind of poke at the kind of the environment that almost everyone seems to be operating in right now. I mean, I think you talked about traffic and I assume February traffic is in that kind of 2 to 2.5 range too. Talked about the deflation outlook.
We talked about wages going up. I guess as you kind of move forward here and this is not just a Costco question, I guess this is from an analyst perspective that covers a lot of retail. It seems like everybody is facing a lot of the same challenges. I mean, do you see a light at the end of the tunnel? I mean, we had deflation now minus 1 maybe.
We have wage inflation. We have traffic that's kind of come down a little bit. Not a great environment. And so it seems again that maybe something has to give here. I mean, is the wage inflation going to finally pick up demand?
I mean, where does this, in your opinion, kind of end? I mean, even Costco, which is probably one of the best retailers in the world, domestically is feeling the pressure. And I'm just trying to understand what's the end game here generally? I don't know if you have any thoughts on that. That's my question.
I don't know if this will give you comfort or anxiety. We're going to keep doing what we do. In bad times, we probably are have the benefit of being more aggressive to drive stuff. And if anything, I think we're doing it from a stronger position now than we've ever been in. We're going out there driving prices down.
We see our competitive moats actually even relative to traditional brick and mortars, not only our direct competitors, but other forms of not just clubs, but other forms of category dominant retailers. That boat has widened a little bit of late, of late being the last year or 2. And the answer around here is, well, can we get a little more margin? And the answer is, of course, no. We could drive more business so we can make it tougher on everybody.
So I think that and then again, I think some of the things we're doing in terms of our strength with our vendors and our global sourcing, all that stuff that helps. We've got we're doing a lot of good things.
So I mean, do
you have concern though given the slow wind down that we're seeing, Richard, a little bit on the components side? I mentioned higher costs yet deflation and the traffic. I mean, is that and I think someone asked you where you stay up at night. I mean, I guess, I meant old too, it's hard to stay up because you're getting old. But generally, does that get you a little nervous as you look at the business?
And at the broader economy that something's just a little off?
Well, I think I used the word earlier for that quoted from some economists about toxic anxiety. The world is filled with it. Our economy is darn good compared to a lot of them out there. And the fact that wages are increasing unemployment has improved, all that's positive. And frankly, higher wages at the lowest wage levels is, in my view, is a positive.
I think we've just got our head down and doing a lot of good things. I think that what we're doing again on some of the global sourcing stuff is something that very few could touch and the strength of our KS brand name. And we're going to figure out how to create more value. So other than everybody in the world never wanting to leave their house and only typing stuff to order and get it to the front door. Other than that risk, I think that our the strength of our merchandising, the strength of our competitiveness, the fact that we're able to be successful in other countries.
I come to every 4 week budget meeting and listen to merchants and some of the things they're doing and I go out and feel better about what we've got going on. So I in terms of I think by the way, when it is tougher for everybody else, everybody else does it less extreme than us. They figure out ways to cut costs that aren't necessary long term the right way or as right of a way in our view. And maybe we're righteous and we're standing on our own pedestal here, but it seems to have worked through for us through good and bad economies.
Perfect. Thanks for taking my question.
Okay. We're going to take 2 more questions.
Okay. And your next one comes from the line of Greg Melish with Evercore ISI.
Thanks,
Two questions, Richard. What drove the acceleration in membership fee income growth besides the LivingSocial program?
Well, LivingSocial had virtually no impact because of deferred accounting. Even if we had a little bump in that 1st week of Q last week of Q2, when the Lilly Social thing was happening, virtually none of it is hits the income statement because for a new member that $55 or $110 goes into the P and L over the next 12 months. And my guess is, it's probably some strength a year earlier that we're not getting full benefit of that.
It might even be strong membership.
That's the best reason. So I guess the second question then is on the ancillary business, because I know these have been growing a lot and you gave us a few numbers I think last quarter. Is there any way to sort of pull those together and say how what percentage of your members are doing a car rental or a travel program or a car buying or one of these things that is it 5% of the transactions if you think of it that way?
Because it really I think some of those services, it's 1% or less. I think one number that we've seen and presented in some of our PowerPoint presentations, I think last year we had car rentals of about 2,500,000 car rentals. Let's assume 2,500,000 car rentals weren't to 2,500,000 mutually exclusive customers, but maybe it was 2,000,000 members. I don't know if it's 1,500,000 or 2,000,000, but if it was even 2,000,000 members that would be less than 10%, probably 7% or 8%. And that so my guess is less than that, it's maybe 5%.
So we've got not everybody needs a mortgage, not everybody is doing forms check printing, but on some of the items, like as a percentage of our total membership base is low, but there's a lot of room for it to grow.
So that basically that nice tailwind to gross margin, that could be there for a while if we continue to get the Yes,
I think it is. I haven't absolutely. It probably over time moves the needle a little. It definitely moves the needle a little positively.
Okay. Good luck.
Thank you.
And your final question comes from
the line of Sean Naughton with Piper Jaffray.
Hi, good morning. So quick just following up on the LivingSocial deal, understanding that the deferred accounting doesn't really impact it, but how did that impact the total membership numbers for the quarter? And then also just how was the retention rate really on the one that you had about 18 months ago?
I think in terms of excuse me, aggregate number of members, we signed up a few more than we did the last time. And I think the 4% increase would be lower. It'd be somewhere north of 0 and south of 4.
Okay. So but the mechanics of the program when somebody buys that deal, they automatically they get it done, they don't have to the warehouse to get activated?
No, no. They buy the coupon or whatever online, they print it out, they go to the warehouse where they sign up for a membership.
Okay. So you don't get those
right away? It's that latter date that when we represent when we recognize it as a member and when we start deferred accounting, which will be small in the 1st year because you have the offsets of the value proposition to that purchaser.
Okay. So there could be more people that are signing up in the current quarter than we're in now that purchased that deal?
There will be, yes.
Yes. Okay. And then I guess the second question would just be around, you didn't talk much about the other international business being flat in February. You did say something about the Chinese New Year. But just is there something going on in the Japan business?
You haven't called it out in the monthly for a long time as being a real positive contributor to comps. Just any comment you can elaborate on for February for other international and then also specifically in Japan?
Well, I think in Japan, we last couple of years, we've had probably a little more cannibalization and their economy is soft. I know of late, again, as it relates to the strong dollar, in all countries where the dollar is much stronger, there is a little weakness in some of the bigger ticket items.
Okay. And then Okay. Thank you, Richard.
Okay. Well, thank you, everyone. Have a good day.
Ladies and gentlemen, this does conclude today's conference call. You may now