Good morning. My name is Brandy, and I will be your conference operator today. At this time, I would like to welcome Thank you. Mr. Richard Galanti, CFO, sir, you may begin your conference.
Thank you, Brandy, and good morning to everyone. This morning's press release reviews our Q1 of fiscal 2016 operating results for the 12 weeks ended November 22. Before I begin, please note that these discussions will include forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements address risks and uncertainties that may cause actual events, results and or performance to differ materially from those indicated by such statements. These 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 with 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. To begin with, our 12 week Q1 of fiscal 2016. For the quarter, our reported earnings per share came in at 1.09 dollars 0.03 dollars below last year's reported figure of $1.12 There are several items of note, 6 to be exact, that impacted this year over year comparison of Q1 earnings. First, FX in Q1 deferred currencies where we operate were weaker year over year versus the U. S.
Dollar, primarily in Canada, Mexico and Korea, such that foreign earnings in Q1 when converted into U. S. Dollars for reporting purposes were lower by approximately $42,000,000 or $0.10 a share than those earnings would have been had FX exchange rates been flat year over year. The big weaknesses started about a year ago. While I certainly don't know what's going to happen tomorrow and there's been continued weakness, Certainly, the biggest impacts look like the last four quarters.
One of the benefits, of course, is made purchasing land and building units in some of these countries a little cheaper over the last year. Number 2, stock compensation expense was $36,000,000 higher year over year in the Q1 or $0.05 a share. We have over 4,600 people in our who received restricted stock units. For many of them, it is a significant part of their annual compensation. These grants are made annually each October in our fiscal Q1.
While these grants in our fiscal Q1. While these grants typically vest over a 5 year period, accelerated vesting occurs when a recipient reaches 25, 30 35 years of employment with the company. So factors driving this $36,000,000 increase included additional levels of accelerated vesting given the rising number of employees achieving long tenure with the company. This by the way is most impactful each Q1 given our October RSU grant cycle. 2, appreciation in our stock price and of course the larger number of employees in the plan.
I'd like to note that because of the significant price appreciation in our stock this past year, this year's annual RSU grant, which occurred in late October was reduced by an average of 12%. That is the number of RSU's granted to each recipient. So while there was a $36,000,000 year over year increase in Q1, in the upcoming second, 3rd and 4th quarters of this fiscal year, the anticipated year over year increases are estimated to be about a third of this dollar amount in each of the fiscal quarters. So $0.01 to $0.02 earnings year over year impact each quarter in second, 3rd and 4th quarters versus the $0.05 a share impact in Q1. 3rd point I'd like to note, there are 2 SG and A items SG and A items that together negatively impacted this year's Q1 earnings.
In the Q1, we recorded a $22,000,000 charge related to 2 non recurring legal and regulatory matters. The $22,000,000 figure represented an 8 basis point hit to SG and A and impacted our Q1 earnings per share by $0.04 Point number 4, IT modernization. As discussed in each of the past many quarters over a couple of years now, our major IT modernization efforts continue to impact our SG and A expense percentages, especially as new systems are placed into service and depreciation begins. In the Q1, on an incremental year over year basis, these costs impacted SG and A by an estimated $20,000,000 pretax or 7 basis points 6 basis points without gas deflation, which was about a $0.03 hit to earnings in the quarter versus last year. Point number 5, last year in the Q1, we did call out that we had a $17,000,000 benefit to gross margin related to a non recurring legal settlement.
So that benefited last year's Q1 by $0.03 a share. And lastly, point number 6, our co branded credit card transition in the U. S. As you know, we'll be transitioning to a new co branded credit card relationship in the U. S.
Next year. As we wind down our current relationship, new co brand sign ups have greatly slowed and in fact are now ceased. The short term negative impact relates to monies we earned for new co brand sign ups. Year over year in Q1, this represented a $15,000,000 or $0.02 per share hit to our earnings. This will continue to be a small negative impact to earnings in Q2 and 3 and possibly into Q4 based on timing, at which time I'll be able to better outline how the new relationship should directionally impact our future results and the future rewards to our members under the new co branded credit card program.
I look forward to sharing more information at that time. So, 6 items of note, I ended it up, it's about $0.27 of impact to our year over year earnings comparison. I know many of these things you may have in your numbers and I know some of them you don't. Turning to our Q1 sales. In terms of sales for the quarter, our 12 week reported comp sales figure for Q1 showed a -1% decrease, plus 2% in the U.
S, -9% in Canada and -5% in other international. As we stated in our release, if you take out the 2 big impacts of gas price deflation year over year and the impact of negative FX, the plus 2% reported U. S. Comp would have been a plus 6% for the Q1, the minus 9% in Canada would have been a plus 9% and the minus 5% other international would have been a plus 7%, such that the minus 1% reported comp would have been a plus 6%. And as we reported last Wednesday, in our November sales results for the 4 week month ended November 29, our comp sales increase excluding the impact of FX and gas was similar to the 12 week 1st fiscal quarter.
The total company comp increase of 6 and again ex gas and FX in the U. S. A +6 in Canada a +8, and other international a+7. In terms of opening activities and plans, we opened 13 new locations in Q1, including 2 relos for a net of 11 new warehouses during the quarter, which ended November 22. That included 7 in the U.
S, 1 in Canada, 1 in Australia, our 8th in that country, 1 in Japan, our 24th in Japan and our second in Spain, just outside Madrid and Getafe, that's our second unit in Spain. 2 relocated locations were in Woodland Hills, California and Tinaboro, New Jersey. In the Q2, we had 2 new business centers planned to open, one each in Westminster, California and in Hackensack, New Jersey. And for all of fiscal 2016, we have a current plan to open up 32 net new locations. That could come down a little bit based on timing as we get into the second half of the year.
A few maybe will be delayed, but that's our current plan. Of those assuming we were able to do all 32, 22 of them would be in the U. S, 3 in Canada, 2 each in Japan and Australia and 1 each in the UK, Taiwan and Spain. Later in the call, I will review with you our e commerce activities, our membership trends, additional discussion about gross margins and and and reported were up 1.3 percent to $26,600,000,000 up from $26,300,000,000 a year ago. Again, on a comp basis, reported number was down 1, but ex gas at FX was up 6.
For the quarter, our minus 1% reported comp sales results were a combination of an average transaction size down 4% for the quarter. Again, taking out gas and FX, it would be up 3%, excluding those items, and an average shopping frequency of about 3.5% for the quarter. In terms of sales comparisons by geography, geographically for Q1, the better operating performing regions in the U. S. Were all 3 regions in California and the Midwest as well.
Internationally, in local currencies, the better performing countries were Australia, Taiwan, Mexico and Canada. In excluding FX and gas, within food and sundries, which were up in the quarter, which we look at September, October November, Excluding FX and gas, within fruit and sundries, which were up in the mid single digits year over year, sundries, meat deli and spirits were the relative standouts. Our hardline sales were up in the mid to high single digits for the quarter. Majors or electronics came in positive for the quarter in the low double digit range. In addition to electronics, better performing departments included hardware and garden patio.
Within the mid single digit soft line comps, our domestics, women's apparel and home furnishings were standouts. And in Fresh Foods, where our comp sales were in the mid to high single digits, produce was at the top of the 4 subcategories. Moving down the line items on the income statement, membership fees. In the Q1, membership fees were up 2% and 2 basis points were up $11,000,000 coming in at 5 $93,000,000 versus $582,000,000 a year ago. Again, without FX, the dollars would have been up 6%.
I noticed in several of the preliminary notes from some of the sell side analysts out there, they had expressed some questions about the strength of membership. And I might point out a couple of things. In addition to being up 6% ex FX, on a cash basis, there was about another percentage point higher than these numbers. As well anecdotally, a year ago, we did a couple of things outside with social media, which we didn't do, small impact year over year, but something versus nothing. In terms of membership, we continue to benefit from good sign ups in existing and new locations, continued increasing penetration of our $110 a year executive membership and strong renewal rates at 91%, averaging up to 91% in the U.
S. And Canada and averaging up to 88% worldwide. Our new membership sign ups in Q1 year over year company wide were up 7%. In terms of members at Q1 end, Gold Star came in at the quarter end at $34,700,000 up from $34,000,000 at year end. Primary business $7,200,000 atquarterend versus $7,100,000 a quarter ago.
Business add on remained at $4,500,000 and including extra cards 82,700,000 cards out there versus 81,300,000 12 weeks earlier. At Q1 end, paid executive memberships came in at 16,400,000 which was an increase of 307 1,000 or 26,000 new executive members increased each week in the 12 week fiscal Q1. As you know, executive members are over a third of our member base and over 2 thirds of our sales in those countries where executive membership is available. In terms of renewal rates, in the U. S.
And Canada, at quarter end, we were at 90.6, rounded up to 90.6, rounded down to 90.5 at the end of Q1. That's the impact that I mentioned a quarter ago in Canada with having to re sign up the members with a new credit card program, a de novo program, that was a little small of an impact. I think there was a little bit in the U. S. Perhaps based on what I said earlier.
Total worldwide remained at 87.8% atquarterend at fiscal year end. Going down to gross margin line, our reported gross margin in the quarter was up 26 basis points coming in at 11 point $2.9 up from $11.03 As you know, gas inflation is a big impact to these figures. So I'll give you a couple of numbers. I'll ask you to write down the normal four columns. For all of fiscal 2015, columns 12 would be reported and then without gas deflation and then 2 columns for Q1 2016 reported and without gas deflation.
And of course, these basis points figures are the year over year change from a year ago. Merchandise core was reported was plus 11 basis points for all of fiscal 2015, but without gas deflation was minus 12 year over year. For Q1, it was plus 24 and minus 3. Ancillary businesses for the year, plus 29 and plus 23. For the quarter, plus 11 and plus 4.
2% reward minus 4 and minus 2 and for the quarter minus 3 and minus 1. LIFO for all of last year was a 5 basis point pickup both for reported and without deflation and for the quarter it was plus 1 and plus 1. Other last for the whole all of last year, plus 2 reported and plus 1 without gas deflation. And this year that non recurring legal settlement impacted gross margin that benefited gross margin a year ago, such that it was minus 7 basis points reported and minus 7 without gas 2015 reported gross margin was up 43 basis points, but up 15 ex gas deflation. This year Q1 reported up 26, but without gas deflation minus 6, with minus 7 of that minus 6 being the one time benefit a year ago.
So again, overall, those are the numbers. In terms of core gross margins, which is the core business, food and sundries, hardlines, softlines and fresh foods, As a percent of their own sales, they were positive year over year in Q1 by 13 basis points and they were higher year over year across all four of these merchandise categories. With both hardlines and softlines showing stronger year over year improvement than the year over year improvement in Food and Sundries and Fresh Foods. But nonetheless, all year over year. Ancillary and other business gross margin was up 11% on a reported basis, up 4% without gas deflation in the quarter.
Many of these businesses, gas, pharmacy, food court, hearing aids and Mini Labs all showed higher year over year gross margins as a percent of their own sales. Offsetting this a little was slightly lower e commerce gross margins, but overall that positive there. The 2% reward was higher year over year due to higher sales penetrations for executive members. This impacted gross margin in Q1 by 3 basis points to the negative, one basis point to the negative ex gas. LIFO, last year in Q1 we had a $2,000,000 credit representing slight deflation in the U.
S. Inventory pools and a credit of $5,000,000 this year, also relatively small, but a net pickup of a basis point year over year in terms of that recovery. Lastly, I mentioned the quarterly adjustment, a 7 basis point hit in terms of the comparison benefiting a non recurring benefit last year versus nothing this year. So overall gross margins excluding gas were down 6 basis points year over year, but up 1 basis point excluding that 1 year charge that nonrecurring benefit from last year. Moving on to SG and A.
Our SG and A percentages Q1 over Q1 were higher by 28 basis points, coming in at 10.54% this year versus 10.26% last year, but excluding gas deflation were lower or better by 2 basis points. I'll go into detail and you'll see that the core expense components of that actually were pretty good. So again, 4 columns. Columns 1 and 2 would be fiscal 2015 the year reported and without gas deflation. And then columns 34 would be Q1 2016 reported and without gas deflation.
1st line item, core operations, minus 6 reported and plus 16 without deflation for all of year on a year over year basis. In Q1, 0% and plus 26% central, minus 7% and minus 5% for the year and minus 8% and minus 6 for the quarter stock compensation, minus 5 and minus 4 for the year and minus 12 and minus 10 for the quarter Quarterly adjustments, nothing last year in columns 12. This year minus 8 and minus 8 that represents that $22,000,000 item that I mentioned early on. So total, last year for the year over year, we reported SG and A up or minus 18 basis points and without gas deflation better or lower, so plus 7 basis points. This year, higher by 28 basis points, so minus 28 basis points in the quarter reported and without deflation, plus 2.
Within operations, again, without deflation showed plus 26 or lower by 26. Within that, our core warehouse payroll was better year over year in the mid to high single digits. Benefits were lower or better in the high single digits. And the combination of other expenses, a variety of them were better by or lower by 10 basis points year over year. So again, kind of the core controllable operating expenses were all in pretty good shape this quarter.
Central expense was higher year over year by minus 8 or minus 6 basis points without increased IT spending related to modernization showed higher year over year costs of 7 basis points, 6 without gas deflation. I already mentioned earlier the stock compensation, which was 12 basis points or a 10 basis point without deflation. I also mentioned that again because of certainly the stock price increase, but also importantly, the fact that there's more and more employees hitting 25 and in some cases 30. And even in a few cases 35, they started back at Price Club. The total impact for the year, more than half of it based on our estimates is the impact in Q1 with about a third or less of that amount in each of the upcoming 3 quarters year over year.
So still going to be higher year over year, but not as high as that increase was in Q1. Finally, quarterly adjustments again related to the $22,000,000 non recurring legal and regulatory items that I discussed. So overall, good expense control, other but plenty of things and hopefully I've been able to elaborate and shed some light on the components of that. Moving down the income statement, preopening expense was higher by 11,000,000 higher. We had 9 openings last year, including 1 relocation, 13 this year, including 2.
There's other preopening items in terms of countries and some other things, but overall, no big surprises there. All total reporting operating income in Q1 reported operating income in Q1 was down $3,000,000 from $770,000,000 last year to $767,000,000 this year. Below operating income, reported interest expense in Q1 came in at $33,000,000 versus $26,000,000 a year ago. So higher by 7 interest income I'm sorry, lower by $7,000,000 Interest income itself was lower year over year by about $4,000,000 and the other component was lower by $3,000,000 year over year. That's primarily related to various FX related transactions.
Sometimes that's a positive, sometimes that's a negative, never that meaningful for the year in its entirety generally. Overall, reported pretax income was down 2% versus last year coming in at $762,000,000 down from $779,000,000 pretax a year ago. Again, several items impacted the year over year earnings comparison, which discussed earlier in the call. In terms of tax rates, our corporate in touch rate this quarter was up about a percentage point coming in at 36.1% compared to last year's Q1 rate of 35.2%. The higher tax rate year over year resulted from a few discrete items going to the increasing tax rate, not reducing it.
And to a little extent, lower earnings penetration from our foreign country where tax rates are generally lower than our income tax rates for the United States. Now for a quick rundown of other topics. The balance sheet has been the recent past is included in today's press release. Point out a couple of items. Depreciated and amortization for Q1 came in at $271,000,000 Accounts payable as a percent of inventory on a reported basis was pretty much the same year over year.
Last year it was 101%, this year 100%. Taking out non merchandise payables, last year, non merchandise payables as a percent of inventories was 92%. This year at quarter end, it was 90%. Average inventory per warehouse on a reported basis was up a little over 3% or $524,000 to $14,900,000 Again, ex FX, it would have been up about 6.5%, up $960,000 assuming flat FX. About $250,000 is electronics and what we call majors and about $160,000 is apparel, both built up inventory heading into the Thanksgiving week, Black Friday and Cyber Monday.
As you could extrapolate it from our November reporting, we reported the 4 weeks of November, the 12 week Q1 and the 13 week retail reporting calendar of 454. The implication there, of course, was that the last week, which is really the 1st week of Q2, which is Thanksgiving week, was pretty strong. The balance of the departments have been selling well, like hardware, housewares and toys. So really no issues of inventory levels going into the last few weeks before calendar year end. We're in pretty good shape.
In terms of CapEx, in Q1, we spent a little over $700,000,000 and our estimate for the year is to be into the most likely CapEx will be in the high 2s, say 2,800,000,000 to 3,000,000,000 compares to CapEx in last fiscal year of $2,400,000,000 In terms of dividends, our quarterly dividend continues at $0.40 a share or $1.60 annualized. This represents a total annual cost of the company of around $700,000,000 In terms of stock buybacks in Q1, we bought back a total of 898,000 shares for $130,000,000 so an average price of $144.88 Next topic, Costco Online. We're now in 5 countries having launched Korea November 10, where the U. S, Canada, UK, Mexico and Korea. For the Q1, sales and profits were up over last year.
Q1 e commerce total sales were up 15% on a comp basis, total and comp basis, up 19% on a comp basis excluding FX. And again, it represents a little over 3% of our sales. We've been asked a lot of how, again, the week of Thanksgiving, Black Friday, Cyber Monday, you name it. E commerce sales were quite strong, up 28% and up over 30% in local currencies. New initiatives, again, those few years ago that we re platformed the sites.
We've continued to improve our mobile apps and there's room to go, but they're a lot better than they used to be. Combined some of e commerce production efforts with our in line efforts. We've added a few categories like apparel, HAVA and KS items. We've greatly in the future. In terms of some of the others out there that are buying from us, we continue to provide merchandise for sale on the Google Shopping Express.
This is now being offered in 6 markets. Bay Area has recently been expanded, LA, Manhattan and more recently Chicago, DC and Boston. We've increased our offerings in categories and currently testing fresh foods available in a limited group in each of the San Francisco and LA markets. We're also providing merchandise to Instacart now in 16 markets through the United States, boxed in 3 markets, and we're also selling doing some business with jet.com into 3 cities where they have their with a heavy emphasis on Kirkland Signature items. It's going well, with a heavy emphasis on Kirkland Signature items.
It's going well and we're certainly building some recognition for the Costco and the Kirkland Signature names. We had a very successful Singles Day on Alibaba team all receiving over 300,000 orders. Next on discussion list expansion. Again, last year we opened net new units of 23, so it's about 3.5% square footage growth. This year, again, plans for up to 32 units.
If we achieve that, it'd be about 5% square footage growth. And I already mentioned where those would be. Also as a Q1 end, some of you want to know what our square footage is. At Q1 end, it stood at 100,000,000, 547,000 Square Feet. Lastly, our Q2 fiscal 2016 scheduled earnings release that will be for the 12 weeks ended on February 14, will be after the market closes on Wednesday, March 2, with earnings the following morning on Thursday, March 3.
With that, I'll turn it back to Brandy and be happy to open it up for questions. Thank you.
Your first question is from Charles Groan with Stern AG.
Hey, Richard. Thanks a lot. Just the first question, just a lot of moving parts with some of the one time items. And I know you guys don't give guidance anymore, but I'd be curious how the quarter overall performed relative to the expectations that you would have budgeted back in August?
We beat them.
You beat them? Okay.
Yes. And second question, when you look at
new member sign ups, how has the trend been by age group? I'm curious your ability to track younger customers given the success of Prime and other programs out there. Have you guys started to look at the sign ups by age group, etcetera?
We have and I don't have the most current month's detail, but from a monthly budget meeting. We're getting first of all, the average age of a Costco member has come down. I think a few years ago, we were about 4 years older than the average in the U. S. Now we're a little under 2 years older.
About a third of our new sign ups in recent months have been millennials. And I'll make a point to provide a little more color on that each quarterly earnings release.
Okay. And then last question for
me just on the gross margin. It's the first time in a long time that all 4 categories have been positive. Just curious if there's if you could provide a little color maybe by category, what's driving that?
Well, I think the one that's historically in the last many quarters that's always the one that's a little volatile and volatile is mostly defined as down year over year is fresh foods. And that has to do with the fact that as commodity prices have increased, we maintain prices, no doubt, things like rotisserie chickens and the like. And that's I think there's been a little bit of deflation in some of those categories and some meat, but also our volumes are particularly strong. When you've got a low double digit comp in produce as an example, that's going to help you, because if sales are strong, availability of products is good and spoilage is less. So those are the types of things that help you in fresh foods.
I think the strength in electronics has probably helped us. Those are the things that come to mind. I don't have a organics is helping. Organics, as I mentioned before, it's kind of a win win for us. We get for us a fuller margin, a more fair margin within the confines of what we limit ourselves to.
And in our view, it creates even a greater competitive moat given that that's where sometimes retailers will try to make more.
And your
organic penetration stands at what the current time?
Organic, well, it's $4,000,000,000 plus it's still growing very strongly, but I don't have the detail in front of me, sorry.
That's right. Okay, great. Thank you.
One other point on the soft lines, I know our apparel has been pretty strong too in terms of apparel basics. And so that's generally a full margin business.
And your next question is from John Heinbockel with Guggenheim Securities.
So Richard, a question on the fresh food deflation, right, as we and I guess maybe it behaves a little bit differently by category. But if you think about meat and dairy in particular, is that less of a benefit to you margin wise and more of a volume benefit in term just because you pass the declining prices through more quickly than most of your competitors by design. And so it's probably more
of a help
to volume than margin or no?
Yes. It's more of a help to volume. If anything, we'll bring the price down and we'll always air to the low side. So if we have a calculated margin that's making the numbers up, but $8.15 a pound, it's going to be $7.99 So you have all those things working towards that. But that's what drives business.
Yes. And you think it'd be the price elasticity on that is pretty high?
Well, when you had got a hot price on strip steaks or items like that, yes, when you can hit another dollar a pound, if you will, lower or a few dollars a pound on some items that can drive business. And needless to say, you've been at a Costco and talk about massing out big good looking stuff. That's fresh foods is where we shine.
You said e commerce gross was down a little bit. Is that purely mix?
Yes. There's been no comment no nothing that was called out specifically why that is. So I assume it's mixed.
All right. And then lastly, the leverage that you got in core operations was better than we've seen in a couple of quarters. It was pretty broad based. Is there anything you're doing differently, whether it's managing labor, benefit design, that would have because comp wasn't that different versus prior quarters. So is it something you're doing internally to manage those items?
I wish we knew more here, but I everything we do every day, I'm not trying to be cute here, but certainly we continue to focus on things like basics like overtime hours, Every 4 weeks when we have an all hands budget meeting here, each of the 16 or so senior VPs or country managers of operations get up and talk about things that they've done in their region to be more efficient. And I think that pays off. We have focus items that they talk about each month. They talk about other things, working with vendors working with buyers to create more seamless movement. All those things, we really spent a lot of time on.
One of the things that I think benefited us are our assumptions for healthcare costs, notably U. S, where it's most expensive and it's most inflationary. We've done a little better job of that. Was over a little over a year ago that we made a few changes to the plan in terms of primary caregivers within primary within the plan. And that changed a little behavior, not that big of an impact to the employee, but a better management of that.
So I think we're still getting a little benefit of that there. But it's in the core payroll as well. And I think that's a combination of lots of little things like I mentioned.
All right. Thank you.
Your next question is from Simeon Gutman with Morgan Stanley.
Thanks. Thanks, Richard. Good morning. Curious if you can help diagnose the consumer. I know we saw some volatility in your monthly comps and there's been some unevenness in other parts of retail.
And you gave us some good color in November, but what do you think is going on? Does spending appear back to normal? I don't know if it was just a temporary hiccup.
I remember, I think it was October when we said 1 month does not make a trend and that the 1st couple of weeks of November were terribly exciting and then it got more exciting. So and middle of November and late November was quite a bit stronger than the 1st part of November. So again, I think we weren't really concerned when it was when frequency was a 3 instead of a 4, but overall comps continue to be well. Our markdowns are in good shape even though inventory is a little higher. And so I think we still feel cautiously optimistic and certainly confident about what we're doing right now.
I think the kind of if you'd ask me what surprises me in the last month versus the last couple of months, electronic has finally turned and that's I think a function of people coming in, pricing keeps coming down. I think our fresh foods has been great. The fact that many times I'm explaining that fresh foods year over year margins are down a little, they were up a little, that's all good. So I think that reflects well on us. I can't speak to the consumer outside of that though.
Right. So other than electronics, the complexion of what consumers are spending on looks back to normal, back to the old cadence?
Yes, but that doesn't mean anything for tomorrow. But what's nice when I look at the November results, which I have in front of me, underlying in the U. S, which is the big piece here, so it does take a it eliminates the FX issue. Softlines was low double digits. Fresh notwithstanding some Yes, and so I hope it will continue.
Stay tuned.
Okay. And just to follow-up on gross margin, because I guess the printed number is the highest number our model goes back to 3. And you mentioned the 4 core categories were good. And I think you'd attribute it somewhat to mix. But big picture, right?
The mix of product is that that'll probably keep benefiting you. Can you give us a sense though on the leverage with suppliers? How much of that side of the coin is helping you as well?
I don't think that I haven't heard anybody talking about major changes in leverage. I mean, we are I think if you ask our suppliers, generally, we are typically front and center with them. We're looking when freight rates have come down, as you might expect, some suppliers are reluctant to they're waiting for us to call them not to offer it up. And global sourcing, I think is helping us competitively a little bit. So overall, I think we're still tough.
I mean, there have been some suggestions out there that some retailers going back to manufacturers to insist on extra monies. When we read that and hear that, we hear it from as you might expect, and we have to understand that there's some people out there that sell all of us and will share things each way. But you're going to find we're going to go back and make sure we get our share of that. So I think we continue to be tough. I don't think there's been any change in that.
Okay. Thank you.
Your next question is from Michael with UBS.
Good morning. Thanks a lot for taking my question. Can you describe what you're doing to prepare for the transition to Visa? And as you make that transition, how are you going to inform your existing members and new potential members of the switch?
Well, I'm glad it's
a lot of that's in the operations and membership marketing areas. There's a lot going on, needless to say, between our company and the new issuer Citi that's going to be coming out. There's going Citi and American Express are currently discussing what they need to be doing in terms of that transition. And again, contractually, there's not a lot we can say at this point, but rest assured it's going to take several weeks that transition. But the assumption is that existing members with the existing co branded card will be getting new cards in the mail on or about the time of the actual transition.
And it will be as hopefully as seamless as possible to them. Once we're allowed to communicate to our members about the new program, which again, contractually, we can't do that until that time. As you would expect, like anything we do, we're going to let everybody know and put it in big letters.
And should we factor into our models a potential disruption from the transition? Are you going will there be a period of when you take both Visa and American Express for a period of time?
There may be. Again, that's still in flux. I mean, there are some possibilities of that. But whether there's an exact transition, a binary transition or an overlap period of time, I don't really see a lot of disruption on that side. As you might expect, it's a royal pain to do this, but it's like it's what we do.
Got teams of people and operations that are working with our people in membership marketing and they're working with the outside the new outside provider to make it as seamless as possible to have the communication out there, both in store, via email, via letter. And so I think it's going to go a lot better than what might think. It's just a lot of work to be done.
Understood. And coming back to the topic of traffic, 3 out of the last 4 months, traffic has been a little bit slower than the 4% you had been seeing consistently before that period. Are you just running into a point where there is now either limitations on how frequently some of your members, some of your most loyal members can shop or limitations on the throughput that some of the stores are having based on the level of traffic that you're already seeing in those locations?
I think in terms of level of throughput, we keep doing a better job of that. We keep in my view, we keep in my own calculations, keep raising the number of annual volume the amount of annual volume that warehouse can do. I mean, certainly, there's there'll be somebody in line saying, God, why they come on Saturday afternoon. But at the end of the day, that's not an issue. Look, I remember in calendar 2009, for calendar 2009, the 1st year after the bad economy hit, we had a frequency number of around 4.
And I was reminding people that if calendar 10 was 0, that compounded number of plus 2 for those 2 years would have been better than our average over the prior 20 years. And now we've enjoyed 7 years of fiscal calendar 9 through calendar 2015 that have been slightly above 4 on average on a compounded basis. So at some point it has to come down a little bit. We feel very good about where it is. We can't look at any specific factor to say this is why it used to be a 4 in the last couple of months, it's been a 3.5.
We feel very good about where it is.
Okay. So thanks so much and have a good holiday.
You too.
Your next question is from Robbie Ohmes with Bank of America Merrill Lynch.
Thanks for taking my questions. Richard, I was wondering if you could talk a little bit more about partnering with Instacart and Google and Google and maybe how that's going versus your expectations? And also, could you remind us how the membership And And then I have a follow-up question. Thanks.
Sure. Well, each one's a little different. I believe with Google, you have to be a Costco member to go through the Google Shopping Express network. So it doesn't impact membership at all. Perhaps it gets a few members because there's some people that aren't going to come in, but now they could get some delivered to them.
With respect to Instacart, I believe it's the Instacart memberships and of course they buy multiple memberships. That might be a slight decline.
Good morning. May I have your topic? Good morning. May I have your topic, please?
All trying to grow their businesses. So I think starting from the point that many out there were concerned that everything's going to go this way and what's going to happen all this brick and mortar. In our case, we see some changes The net increase in some of these is that there's a slightly improvement in total comp, recognizing you've got a few more visits that are delivered, but it's still a very small thing. And so there's not a lot of knowledge I can give you beyond that.
Thanks. And just the other question was on the with the success of fresh food and organic and everything. Are you still seeing space allocation grow to that area? And if so, where is it mostly been coming from?
Good morning. May I have your topic? Thank you. I'll go ahead and put you back in the conference.
Lineal feet of refrigerator and frozen, putting in more vertical stand up coolers versus the coffin coolers and the deli and cheese areas. So we're getting more out of our space. We've added space. My guess is that there's less incremental space that we could do, but we're still doing it to some extent. And the other thing is that's an area where we can benefit by turning it faster as well.
So a lot of our expansion was to enable us to turn it fast, not only more square footage or more lineal footage of doors, but are more vertical cases, but have more merchandise out there, better presented and easier to grab. And I think we've done a great job in that area.
And then just lastly, the I think it's the CapEx, I think you're saying it's going to be up like $500,000,000 or so versus last year. Can you remind us what that extra $500,000,000 compared to last year is for?
Sure. Well, roughly 8 or 10 more locations, roughly a few more expensive locations internationally. There's all that other stuff I talked about where we're adding still adding a few gas stations, still adding a few hearing aid centers. Depots are infrastructure, which is we think a big competitive and profitable advantage to us. 84%, 85% of our goods now go through our crosstalk operations, where the average life of the majority of that inventory is less than a half a dozen hours.
So we've got a lot there. I believe IT is hold on, I've got a number here. How much? IT is I don't have it on here. I think that'll be year over year, it's going to be $60,000,000 to $80,000,000 I don't have it in front of me, I'm sorry.
But that's a piece of it as well.
Got it. Thanks very much.
Your next question comes from Christopher Horvers with JPMorgan.
Thanks. Good morning, guys.
So Richard,
I understand your comments on the MFI growth and the underlying trend being very strong. But as you look at the MFI ex FX, it seemed to have slowed off a strong 4 quarter trend that you saw through the Q3 of last year. So how much of this is social media offers? Are we lapping some big international openings as well? Basically trying to understand what the right underlying trend in MFI growth is?
I don't see a big concern there. Some of it's the social media where we I know anecdotally, one thing we did was a living social thing a year ago, which was very good. We've not done that again at a corresponding time this year. Yes, and I've not seen any comments from our membership marketing people when we reviewed the quarter with them of any concerns. There may be a little timing of openings, international openings.
But again, we don't see any big trend there that concerns us, trend change.
No trend change. Okay. Understood. And then can you help us think about the gas? I know you get this question a lot, but you had some nice gas benefits last year.
In the next quarter, you're going to lap, I think, what was an even stronger quarter, the Q2 a year ago. So maybe anything on how much gas was a net benefit or a net detriment on a year to year basis, quantitative hopefully, but any qualitative comments just to help as we think about this upcoming quarter?
We'll tell you each quarter, but in Q1, again, one would have thought, one includes you guys and me, that gas profitability would have fallen down a little bit, still very good historic relative to historic our history, but versus very strong numbers Q1 a year ago. We had pretty good numbers this time. I think year over year it was within a penny of profitability, flat to down less than a penny year over year. I think we also had a very strong Q2 profitability that may be tough to match, but we're early in the quarter and Q1 surprised me. Maybe I'll be surprised there, but if it does come in a little bit, we'll certainly share with you if it's more than a penny or 2 of delta.
Under all right, right, right,
right, right, right. So a tougher compare, but you were surprised to the upside on this case and taking that all into account, maybe it's not as bad as people fear out there?
Right. And again, when you say surprised to the upside, I mean, we're still down year over year a shade. But again, last year was pretty strong and Q2 was even stronger. We'll see how this quarter goes. The fact that gas prices and oil prices have crept down a little bit, that generally bodes well for us.
But again, I'm not suggesting it could be as well as last year, we'll see.
Understood. And just one last question on the traffic side. I know you said you don't really see a change in the box, but does in the consumer, does the fact that November was largely driven in the back half of the month concern you at all? Or is that just an indication of the consumer continuing to wait for the deals that come around Black Friday?
If I knew, I'd be doing something else. We actually looked at it as a positive. We were starting to get little concerned as it slowed down a little bit. And I think the fact that we don't put as much emphasis on Black Friday and Cyber Monday, it still did well. But we got a lot of people coming in earlier that week for crazy numbers of pumpkin pies and the like.
All those things I think help us. The fact that electronics was a strong was a surprise to us. So, I don't think we look at it that way at all.
Okay, understood. Thanks very much.
Your next question is from Paul Trussell with Deutsche Bank.
Hey, good morning, Richard. I apologize for any background noise. I'm in the airport. But I wanted to just go back first to your color that you provided on margins just to make sure that I captured some of the details that you listed out. When it comes to gross margins to start, I believe you spoke to the actual core 4 categories up once again 13 basis points, similar to what we saw in the 4th quarter.
You noted that ex the cycling of the one time benefit from last year, gross margins would have been up an additional 7 basis points. And regarding the inventory levels, you stated that you feel pretty comfortable with those levels just given how strong the 1st week of the second quarter was. Is that a fair representation of your color on gross margins? And how should we think about that? Yes.
But
mind you, the 7 basis point of a one time item, that's outside of that's not the 13 is the core business. It's not like it's 13 becomes 20.
Correct. On the core, absolutely.
Yes, right. Yes, yes, we feel pretty good about that.
And then regarding just SG and A, again, just for my clarification, making sure my table is clear. Stock compensation, you mentioned was up meaningfully year over year, dollars 36,000,000 I believe you said, so about a $0.05 hit or so on a go forward basis. That will only be about a third of the hit in the next few quarters?
What I was trying to convey is that because of timing, our annual grant to everybody is in late October because more and more of the recipients, particularly the recipients like myself who's been here 32 years almost. So you've got more accelerated vesting. So the entire hit is now not spread over 5 years. So it's really that's a tiny issue that's going to help you a little in the future. But the fact of the matter is, is because it's October, you've got a big hit in October or Q1.
So just taking the math of what we if you think about it, the actual hit to P and L this year is a function of those grants that were been made over the last 5 years that then invest ratably 1 5th a year. Adjusted when it vests faster than that accelerated based on tenure. So not only do you have more people to plan today than you had as a piece from 5 years ago gets fully extinguished, you're adding a new piece, A, this new piece has many more people from 5 years ago. It has a stock price per share a lot higher. And you've got the vesting, the vesting in my view being one of the key ones.
And so the way it hits just simple math is that $36,000,000 year over year change is more than half of our expected year over year increase of that line item. So if it was half, in each of the next three quarters, it'd be about a third of 50% in each of those quarters. It's not quite that, but instead of being 36%, it's going to be in the 10% to 13% range or 8% to 13% range each period.
Got it. And then the legal hit, is that fully contained into this particular quarter? And then also on the IT modernization, the what should we how should we think about the cadence of those expenses going forward relative to what we saw in 1Q?
In terms of the $22,000,000 again, it's a couple of items that we're still in the process of. That's our best guess of the impact. We don't think there'll be any big surprises there. If anything, you try to be reasonable and conservative. Outside of that, in terms of IT modernization, it's a little bit of a broken record here, but there is a light at the end of this tunnel incrementally.
And I'm hopeful that sometime next year, we'll see that flatten out and come down. But there's we've got a lot going on there. And again, it's part of our operations. It will come down as a percent sales at some point in the future or come down certainly relative to the types of increases we've seen. But it's necessary and we starting to see some deliverables finally.
Thanks, Richard. I appreciate that clarification. Last for me is just on the international side. The Canada and International segment have been able to have a reasonable spread versus the U. S.
In margins. I believe some of that's due to a little bit less labor costs. As you continue to grow the business and expand into new markets, how do you think about the margins in those segments going forward? Can it maintain a little bit of a reasonable spread versus the U. S?
I think all things being equal, Canada is going to continue to be more profitable than the U. S. And some of these other countries are going to continue to be even more profitable than that, not all of them, but some of them. We have no illusion that some of the ones that are really outsized profitable come down a little over time. But Canada is mature, still growing a little in terms of new units, still growing nicely in terms of local currency comps.
And it's nice that we're the only club in town. But that being said, we're still our own toughest competitor. We have a little extra margin there, not a lot. We have a lot lower healthcare costs as a percent of sales. So there's other things that help us up there, not just a little extra margin.
Thank you.
Your next question is from Brian Nagel with Oppenheimer.
Hi, good morning. Thank you for all the color at the beginning of the call on the kind of one time items impacting in the quarter. Question I have, Richard, you called out electronics as a point of strength. Could you comment specifically on the TV category? And to what extent some of the new innovations in TVs are helping drive better electronic sales?
And follow on to that is, is the holiday season now has gone under way, what type of price promotions you've seen throughout the sector on TVs?
I don't have the quarter in front of me, but for the 4 weeks of November reporting, which would be through the Sunday after Thanksgiving, those 4 weeks ended then. Within majors, which was up again ex FX in the mid teens for the month. I think I said it was in the low double digits for the quarter. TVs for the month were up both in dollars and sales in the mid-20s. So it's quite strong.
Now that may be because last year was a little weak. I don't know. I don't have that in front of me, but certainly it was strong. I think there is a little bit more promotions. Cell phones are strong, tablets are strong.
I'm sorry, tablets have come down a little bit, but phones are strong and those are the big things. Video games are strong. Again, all those other strongs or little weakers are dwarfed by television sales within electronics.
And to speak on TV
Technology, the 4 ks is helping, but the prices are coming down as well. I was there across the street yesterday and you've got smaller flat screens with great quality, less than $200 You've got bigger TVs less than $1,000 You've got as well the giant HD 4 ks whatever under 3,000 and under 2,000 depending on what the size and the item and some of the new technology. So I think all those things are helping us a little bit on that category. I pointed out also because it's one of those that I've been we continue to get asked about as dotcom continues to take market share of electronics and the impacts to other brick and mortars over the last few years. I think Best Buy has been a little better on TVs as well, but certainly this has been a standout for us of late.
Got it. It's helpful. And then one follow-up question. And I know you addressed this in your prepared comments here, but the inventory growth in the quarter. So if you look at it on a sequential year on year sequential basis, it did tick higher here in fiscal Q1.
What was what explains that?
Well, the 2 biggest components of that $900,000 ex FX number year over year is electronics, which is about a $250,000 and that's planned and doing fine as expressed in these sales numbers. And apparel, and again, we are out there en masse and these are basics. I mean, we're not going to be left over with a lot of red and green Christmas dresses because that's not what we sell. I mean, you're going to it's we're doing fine. We feel we have no concerns about our inventories, our markdowns.
Something I know we learned years ago that the cheapest markdown is the 1st markdown and the quicker you get rid of stuff that have problems and our markdowns overall have been nothing to be concerned about.
Thanks a lot.
And your next question is from Matthew Fassler with Goldman Sachs.
Thanks a lot. Good morning, Richard. Thanks for taking my question.
My first question just wants
to get a little more clarity around this transitional period as you have to cease sign ups for the card. You talked about it in terms of EPS impact on the quarter that you just reported and some residual impact over the next couple of quarters. As we think about where this shows up in the P and L, is there any discernible impact on the top line? And if you could kind of dimensionalize the impact on the member fees as well, just to understand where we would model for that to happen?
Well, you're you're saying we don't have any new co brand cards being signed up right now. So that's impactful a little bit to the membership line, not a lot. 99% of yes, it's going to that's going to go to sales. You've got everybody who has a co brand card currently is still using it. So there's no impact there.
Again, what I try to do recognizing that the $1.09 reported figure was going to raise some questions. We just looked at what are the things that we can really look at. We have not given that our sales continue to be strong, we're not really looking at that line to see is this how much sales do we estimate we're losing. I assume we're losing in theory, you're losing a sale for somebody that signed up as a member that can't sign up for the co brand card. They're still buying from us.
They just don't they don't have the co brand card. They don't have that reward. They've got they're probably using some other Amex reward card. Recognizing at its current strength, Amex is about 40% of our sales. There's still 60% of people that aren't using AmEx, whether you're using debit or a very limited of an old house card from we don't own it with from years ago.
So or another Amex card. So we don't see a big impact to that. Is it greater than 0, the negative impact? Of course. But again, given where our sales numbers have been, this is something that there's specific pieces that are monies earned for new sign ups in the equation.
And so we pointed that out.
Got it. Second question, you talked about the seasonality of stock comp expense and the bulge you saw this quarter. Just to confirm what you talked about, I guess, what you saw this past Q1 and we talked about for the rest of the year, seems to be seasonally a lot like what you had last year, even though it's a bit different from what you had over the prior few years. Is that accurate way to think about it? Yes.
Yes. Okay. Great. By the way, comp is it is part of our comp and it is part of SG and A. We have always prided ourselves for many years, we never changed the number of shares.
So as the stock compounded at 19% a year, that piece of 3000 or 4000 people's compensation improved dramatically. As you may recall, a couple of years ago, we reduced the number per recipient at whatever level that was by, I think, 15%. And again, we just did it again, as a grant that just happened, notwithstanding, you're still seeing this big increase because of just how that works.
Great. And then just another quick follow-up on the demographic piece. You gave us a couple of interesting numbers, a couple of different ways to come at that question, I guess. Is the average age of a new member changing for you? Has that been moving in one direction?
You talked about it relative to the national average and presumably that couldn't happen without the average age coming down, but without knowing what the national average have done at our fingertips, kind of hard to know. And then also, members in multifamily dwellings versus single family, if you think about millennials staying in that kind of environment and multifamily in general, gaining share from single family. I'm not sure if you're able to look at it that way, but any sense of how you're faring with that cohort?
Well, I have never I haven't and I haven't seen any figures presented to me that way. I've said a couple of times in the last many months when people talk about millennials. I think the good news is we're getting more of them and things like organic certainly help. Social media helps a little bit. Millennials is going to be an issue for the total pie in general, if people move home after college for a period of time, if they move into smaller place, if they get married later and if they have fewer kids, it's going to rain on all of us.
So we certainly having increasing the share that we get to those people will help. But we're going to keep driving value and given the flexibility of the types of things we can continue to sell and we'll see where it goes. But we have not looked at that. If we start looking at that, I'd be scared.
Thank you so much.
Your next question is from Oliver Chen with Cowen and Company.
Yes, good morning. This is Steven Zaccone on for Oliver Chen. Thanks for taking our questions. Just two quick questions. As you look to the remainder of 2016, are there any areas of the assortment that you have an opportunity for improvement in your view?
And then secondly, we just had a quick question regarding the E. Coli situation. Have you seen any traffic disruption from the headlines? It does appear that you have the situation contained, but just curious if you've seen any traffic disruptions? Thanks very much, Richard.
On the latter, no. That was, I think, contained pretty quickly and the information was communicated pretty quickly. And I believe that the last possible episode related to Costco of someone being fallen ill was November 1. So we're kind of past that. Thankfully, nobody was extremely hurt.
There were a couple there was a few that did go to the hospital, and I understand that they're all doing better now. So nothing new as it relates to that. I'm sorry, in terms of the other question in terms of what's new, again, it's more of the same. I can't give you anything specific that's at the top of mind. Organics continues.
KS. Yes, we're doing a few more things, but that's kind of steady as we go.
Great, thanks.
Your next question is from Kelly Bania with BMO Capital Markets.
Hi, thanks for taking my questions. Just wanted to ask another question on the transition to Citi. As we get closer to that transition in the spring, just curious how you feel about it. It sounds like there's a lot of preparations involved. And maybe you could just remind us what's different about this in the U.
S. Versus what you did in Canada a couple of years ago and maybe what you learned in that transition process?
Well, it just takes time. I think the big difference is, is in Canada, the new issuer was not able did not purchase the portfolio from American Express and therefore it's what's referred to as a de novo program where customers, members have to sign up and reapply for credit. And so that's a little more disruptive. It impacts now it's a Mastercard up there. And so there are many people up there that have a Mastercard in his or her wallet already.
So they still have something to use. And then in terms of auto renewals, part of our renewal rate is the fact that you have some members that do auto renewal, which as you might expect, statistically has a slightly higher renewal rate because it's auto. And the assumption here in the U. S. Is that the portfolio will be the transition will include the purchase of the portfolio.
And I think the language we've used in the past is that's what anticipate, because there's always a chance that something can happen, but we're working towards that end as you would expect the issuers out there. So again, it's recognizing that Canada is 10% of our company and the U. S. Is 70%. So these are bigger numbers.
I would guess that if you look at the $15,000,000 I pointed out as it related to just earnings revenues we get for signing up new co brand cards, even if the same percentages occurred up there, it wouldn't even be worth calling out Nothing big is going to happen. We'll get through it and we're very excited about the next many years under a great program.
That's helpful. Any color you can provide on what percent of members do use the auto renewal? And anything else we should think about just modeling?
I don't have that at my fingertips, but I would probably wouldn't we wouldn't share that. As many as possible would be the answer. It makes it easier for the customer and certainly it gives them a reason to more likely renew.
Got it. And then just another question. You mentioned, I think, 2 new business centers planned for this year. I was just curious if you could talk about how those are working, any relative profitability versus a typical club and just what you think about that format going forward?
Well, 1st and foremost, we're opening regular warehouse clubs. For a number of years, we had anywhere I think, 6 to 8 business centers that were doing okay, slightly profitable, not setting the world on fire. There are a lot of changes that were made to it a couple of years ago, and they are growing nicely. They are more profitable than they had been. And it's another avenue.
It's going to be a lot smaller footprint in terms of how many units we have than a regular warehouse, regular cost warehouses. But we'll keep at we're doing this just like we've done everything pretty methodically. On a base of 10 or so, we're going to open a couple. And so it's not like we've discovered something that's we're going to go from 10 to 20 overnight in 1 year. So it's good.
It's a positive business for us. It certainly is a focus on the business number. We also from time to time identify items in the business center that makes sense to sell in all of our locations. So we think it's a positive. Some examples also is where we've taken an old Costco, which is smaller footprint, perhaps not as well located for our general population member, where we'll as we're relocating an old unit, we will convert that other one in that city into a business center.
So that's been helpful to us well. We did that in South Atlanta. We did that in Chicago, I think in Bedford Park. I believe the New Jersey location is a relocation where Hackensack went to Teeterboro. So I mentioned that we opened a new one in Teeterboro, that's a relo Hackensack, which is now over that several month period is being converted into a business center.
So we think it's good. When asked what's driving our earnings growth and what's driving our whatever, I've always said it's a lot of little things and this would be one of them.
Great. Thank you.
Your next question is from Meredith Adler with Barclays.
Thanks. I have one quick question. Could you just remind me of the remind us of the timing of the new credit card?
Well, our current relationship expires March 31, And there's a window of a few months in there post that, that this could extend. So it'll be sometime between April and the summer is my best guess at this point.
Great. And then just you guys are still working very hard on your technology modernization. Can you talk about whether you've been pleased with the timing of everything and whether all the new systems have been rolled out smoothly. I mean technology is notoriously late, but how is it going for you guys?
Smoothly would be an overstatement. I mean, I think at the beginning of time when we talked about this starting about 3 or 4 years ago, we said, this is our best guess. And I have jokingly said, whatever you think it's going to do, it's going to take twice as long and cost twice as much. And anybody that's gone through it, I think generally experiences that. We are experiencing some level of that as well.
That being said, we've got everybody's supportive of it. The deliverables that we have had, sometimes they've taken longer, they've cost more. We've learned from what we didn't know. And as we find out, we do a better job on the next thing. And so again, overall, I think it's again, it's costing a little more than we thought.
It's taking a little longer, but we're getting some deliverables over the last year, like a new membership system, a new point of sale system, a big rollout of really the foundation of our accounting system will be at the beginning of the new fiscal year. So we got a lot going on, but we'll get through it. And I wouldn't I certainly wouldn't gloat about it because we know it's tough and it takes a long time, but we're getting there.
Great. Thank you very much.
Your next question is from Chuck Cerankosky with Northcoast Research.
Good morning, everyone. Richard, can you give us a little bit of color or some range on how many stores might be open this year? You said 32 on the top end. How low could that be? And where would
you expect some of the shortfalls to be? Look, 32 is my best guess. If I had a guess, what's the low end, 27% or 28%. That just simply means that under 27% example, that means 5% in the latter half of the year in the original budget would have been skewed out a little bit. Right now, I'm looking we've got 7 new units coming in Q3 in this plan and 15 in Q4 with about half of those, little over probably 8 of those in August.
So I'm sure a few of those are going to slip.
I think a couple of
those slipped that because this number was 35%. So I'm guessing, so 28% to 32%. Again, it's a fluid number. I don't think we've lost any, but we've I know a couple of them we've already delayed, might be a year delay for zoning issues. One example, there were again, we found some things underground that original core testings didn't find.
So you're always going to find some things out there like that.
Okay. Can you talk a little bit about competitive behavior that you're seeing out there, whether it's a reaction of more conventional stores to what you've been doing. There's not many retailers out there showing the comps that Costco is. Are you seeing any reaction in your channel and outside your channel and especially as you enter some new countries?
Overall, no. I mean, we are and I've said it many times, we are our own toughest competitor and I mean that. In our industry, notably Sam's and to extent BJ's, but certainly many locations where we compete head to head. We're in their locations literally every week, and I would assume they're in our locations every week. And we feel good about the competitive posture there.
I think it helps that our average volumes are dramatically higher, and that allows you to do a lot of things. And I think the nature of our member. So I don't think we've seen any big changes there other than where we keep doing pretty good. As it relates to traditional competitors, I mean, regionally, we look at all kinds of things. In the Northeast, we look at companies like Wegmans, which is a great supermarket retailer that are opening more units.
That's in our view, our customer, our high end customer, particularly in the quality of fresh foods, although our fresh food numbers are pretty good. So we're I think we're doing a pretty good job. We're helped by the fact that we can choose to do things like women's athletic wear, active wear, where we could literally create $100,000,000 of sales on full margin items that didn't exist a few years ago. So and I think our global sourcing initiatives and things that gives us, we believe an edge on things like produce. But you can't do it if you don't do the kinds of volumes we do.
So I think we've got some good advantages out there. And we are, I think, one of the best and not resting on our laurels. So in terms of dotcom, again, we're pretty methodical about it. Some of the things we're doing are helping, albeit from a
in a lot
of ways and I think we're getting better at that too.
All right. Thank you, Richard.
Your next question is from Scott Mushkin with Wolfe Research.
Hey guys, I'll be quick. I know the call is going long. I just wanted Richard to get your thoughts here and maybe have the numbers even what the penetration rate for e commerce and services like rental cars and travel services, not entirely of insurance services, what the penetration rate is among your members and do you have has it been growing?
Yes. They're growing nicely. We do not give out that information. They're all pretty good businesses. They've all grown slowly over time.
Travel is doing very well. Things like car rentals, I can tell you I visited some shareholders recently on some proxy issues. And during there, I was just giving you an example though of our rental car business, which has grown dramatically in the last year to well over 2,000,000 rentals a year. And a lot of that is online. And in 2 different meetings, individuals who prided themselves on knowing how to get the best deal on car rentals went online during the meeting, we're able to save on the same car from the same third party, go try it and we've got to do a better job of communicating that.
So those businesses are growing. They're all generally small percentage of the total. So I think that creates more opportunity for us. I think I read recently where if we were a car dealer, we'd be the 2nd largest car dealer in the country based on number of new cars purchased by our members through the Costco Auto program. All those are additional reasons to be a member.
They're all very profitable and growing. And if they're very profitable, it means we're going to keep getting even better values. So it's all good.
And your e commerce penetration rate, do you have that or is that something you don't want to talk about either?
Well, e commerce in terms of what do you mean penetration?
How many what percentage of the members are using your e commerce offer?
I don't have that in front of me. It's probably not as much as it should be and it will keep growing. And I'm not trying to be cute, I just don't have that number in front of me.
No, that's fine. And then when we're looking at these things and we're looking at frequency, I would guess that these are outside your frequency, they don't get counted. Is that true?
Correct. Our frequency is front end transactions at the warehouse. So it doesn't include gas, pharmacy, optical? Right. If you shop the front end, no matter where else you shop, it's just one transaction.
So if you shop just at the gas station, it's not a transaction in terms of our shopping frequency.
And the e commerce is not ringing up as transactions either frequency, it's transactions, but not frequent.
E commerce is like a warehouse, so that is adding up. But it's 3% of our business. So even if it's growing at 3 times at 20 plus percent versus 7%, it's de minimis to that number.
All right, perfect. That's it for me. Thanks guys.
Okay. Why don't we take 2 more questions?
Yes. Your next question comes from Bob Drabaugh.
Hi, Richard. I just had two questions, two quick questions. On the credit card, like the $0.02 hit this quarter, is that expected to be something similar over the next few quarters in terms of the impact. And I guess the question now is when you start to get to the new relationship, will there be additional marketing expense that you would also occur in addition to what's impacting the business today?
In terms of the first piece of that question, yes. I mean, I don't know if it's around to 0 point $1 to $0.03 but call it $0.02 is a guess and it's a guess. At the time of transition, there are monies baked into the deal. So I don't see any big impact to that, any of our numbers.
Got it.
And you mentioned the Alibaba Singles Day. Can you just give us any insight on like how you're looking at China and essentially what you're learning so far from that relationship?
We've been asked about China for 20 years and about every 2 or 3 years, it used to be Jim, Jeff and Jim and our Head of International, Jim Murphy. And now of course, it's Craig and Jeff and our International, Jim Murphy and a few others in real estate. And we keep looking. At some point, we'll probably open a couple of units, but we haven't pulled that trigger yet to actually go forth. I would say it's probable in the next 5 years, but we got a lot going on.
And for 20 years, we've never been terribly concerned about we got to get there now. So this gets our name known a little bit, but it's not like we've strategically sat down and says, hey, let's get our name known for a few years and then go. The Alibaba Tmall thing happened because they came to us and we didn't appreciate how much how many Kirkland Signature items were selling on their site before we sold them directly and at a better value.
Great. Thank you, Rich.
Your next question comes from Dan Bender with Jefferies.
I got the last one. I'll try and be quick. As you mentioned earlier in the call, there were some of these one time items that we were aware of, some that we were not. Just in terms of things like legal and regulatory, is there anything that we should anticipate in Q2 based on what you know today that we should be factoring in? No.
And then, you mentioned a lower contribution from international, which contributed to the tax rate difference. I was just curious, is that just related to startup costs in areas like Spain, just higher losses associated with that or is it something
No, not at all. What I was talking about is, if you have $100 in Canada earned and year over year in the quarter, the Canadian dollar relative to the U. S. Dollar is down 15%. We bring it down at $85 of income, not $100 of income.
So it's just and in Canada, the marginal tax rate federal tax rate, I believe is 26% currently versus I could be off a little bit versus 39% in the U. S. In some other countries, it's actually a little lower or higher. But generally speaking, I believe the U. S.
Versus in the 9 countries you are, our effective U. S. Tax rate on earnings in the U. S. Is quite a bit higher than anywhere else.
So as the penetration of foreign earnings to total earnings, it's that simple.
Got you. So we had an opportunity to visit your Hitape club in Spain. It was pretty impressive. I think one of the areas that surprised me was the amount of local sourcing you're doing, especially in areas like fresh and we heard about the some of the export activities with local vendors. I was just curious if you could expand a little bit on what that opportunity looks like when you not just for Spain, but other countries you're operating in, how much you're doing in terms of cross border type sourcing for other clubs and whether it's the U.
S. Or Japan, etcetera, seemed like it was growing.
I think 1st and foremost, the big thing is on multinational vendors getting the a lot of times even with multinational vendors, you've got 2 or 3 or 4 geographic world regions. And I remember when we went into Australia and now we have 8 units instead of 1 or 2 or 3 a few years ago, still with only 8, there's some divisions of even multinationals that aren't prepared quite to sell us, make available certain things and certainly sell us at global pricing. That can only change when they get us involved. And again, since we have that meeting here every 4 weeks, the budget meeting, that's when that happens. And so I think a focus on that has helped us.
It relates to going into these markets, so they send their items in those countries, that helps us both ways. And I think that's if you will, I think we do a good job of that. Those are all small little things that help long term. I'll give you an example back in Japan a few years ago. I forget the name of the there's a very well known what's considered a very premium tea, that's a Japanese branded product that they initially were reluctant to sell us when we entered Japan, even as we had 10 or so units.
Once we worked with them to provide a co branded curtain signature by that brand name, not only in Japan, but it sells very well in Eastern Canada and along the West Coast in California. All those things are net positive. It not only afforded us an ability to have a premium item with a decent margin and a new item in these other markets where we're strong. That market potential allowed us, I think, to procure items faster in some of those countries. So it's a win win.
But these are small, again, another small example.
Great. Thank you.
Okay. Well, thank you very much. We're around today if you have any further questions. Have a good day.