Good morning. My name is Brandy, and I will be your conference operator today. At this time, I would like to welcome everyone to the Q1 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. If you would like to ask a question during that time, simply press star, then the number 1 on your telephone keypad. If you would like to withdraw your question, press the pound key. Thank you. Mr. Richard Galanti, CFO, sir, you may begin your conference.
Thank you, Brandy. Good morning to everyone. This morning's press release reviews our first quarter of fiscal 2016 operating results for the 12 weeks ended November 22nd. 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 in the company's public statements and reports filed with the SEC. Forward-looking statements speak only as of the date they are made. We do not undertake to update these statements except as required by law. To begin with, our 12-week first quarter of fiscal 2016.
For the quarter, our reported earnings per share came in at $1.09, $0.03 below last year's reported figure of $1.12. There are several items of note, six to be exact, that impacted this year-over-year comparison of Q1 earnings. First, FX. In the first quarter, the foreign 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 million, or $0.10 a share, than those earnings would have been had FX exchange rates been flat year-over-year. The big weakness has started about a year ago. While I certainly don't know what's going to happen tomorrow, there's been continued weakness, certainly the biggest impacts look like the last four quarters.
One of the benefits, of course, is it's 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 million higher year-over-year in the first quarter, or $0.05 a share. We have over 4,600 people who receive 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 first quarter. While these grants typically vest over a five-year period, accelerated vesting occurs when a recipient reaches 25, 30, and 35 years of employment with the company. Factors driving this $36 million 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.
Two, 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 RSUs granted to each recipient. While there was a $36 million year-over-year increase in Q1, in the upcoming second, third, and fourth 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. One to two cents earnings year-over-year impact each quarter in the second, third, and fourth quarters versus the $0.05 a share impact in Q1. Third point I'd like to note, there are two SG&A items that together negatively impacted this year's Q1 earnings.
In the first quarter, we recorded a $22 million charge related to two non-recurring legal and regulatory matters. The $22 million figure represented an eight basis point hit to SG&A and impacted our first quarter earnings per share by $0.04. Point number four, 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&A expense percentages, especially as new systems are placed into service and depreciation begins. In the first quarter, on an incremental year-over-year basis, these costs impacted SG&A by an estimated $20 million pre-tax or six basis points without gas deflation, which was about a $0.03 hit to earnings in the quarter versus last year. Point number five.
Last year in the first quarter, we did call out that we had a $17 million benefit to gross margin related to a non-recurring legal settlement. That benefited last year's first quarter by $0.03 a share. Lastly, point number six, 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, have now ceased. The short-term negative impact relates to monies we earn for new co-brand sign-ups. Year-over-year in Q1, this represented a $15 million or $0.02 per share hit to our earnings.
This will continue to be a small negative impact to earnings in Q2 and three, 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. Six items of note. I added 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. I know some of them you don't. Turning to our first quarter sales. In terms of sales for the quarter, our 12-week reported comp sales figure for Q1 showed a -1% decrease, +two in the U.S., -nine in Canada, and -five in other international.
As we stated in our release, if you take out the two big impacts of gas price deflation year-over-year and the impact of negative FX, the +2% reported U.S. comp would have been a +6% for the first quarter. The -9% in Canada would have been a +9%, and the -5% other international would have been a +7%, such that the -1% reported comp would have been a +6%. As we reported last Wednesday in our November sales results for the four-week month ended November 29th, our comp sales increase, excluding the impact of FX and gas, was similar to the 12-week first fiscal quarter, with total company comp increase of 6%, and again, ex gas and FX, in the U.S., a +6%, in Canada, a +8%, in other international, a +7%.
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., three in Canada, two each in Japan and Australia, and one each in the U.K., Taiwan, and Spain. Later in the call, I will review with you our e-commerce activities, our membership trends, additional discussion about gross margin and SG&A in Q1, and recent stock purchase activities. Again, very briefly, sales for the quarter reported were up 1.3% to $26.6 billion, up from $26.3 billion a year ago. Again, on a comp basis, reported number was down 1%, but ex gas and FX was up 6%. For the quarter, our -1% reported comp sales results were a combination of an average transaction size down 4% for the quarter.
In terms of opening activities and plans, we opened 13 new locations in Q1, including two reloads for a net of 11 new warehouses during the quarter, which ended November 22nd. That included seven in the U.S., one in Canada, one in Australia, our eighth in that country, one in Japan, our 24th in Japan, and our second in Spain, just outside of Madrid in Getafe. That's our second unit in Spain. Two relocated locations were in Woodland Hills, California, and Teterboro, New Jersey. In the second quarter, we had two new business centers planned to open, one each in Westminster, California, and in Hackensack, New Jersey. 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.
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 three regions in California and the Midwest as well. Internationally, in local currencies, the better-performing countries were Australia, Taiwan, Mexico, and Canada. In terms of merchandise categories for the quarter, during the quarter, which we look at September, October, November, excluding FX and gas, within food 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 softline comps, our domestics, women's apparel, and home furnishings were standouts. 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 of the income statement, membership fees. In the first quarter, membership fees were up 2% and two basis points or up $11 million, coming in at $593 million versus $582 million a year ago. 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 in 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, 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 34.7 million, up from 34.0 million at year-end. Primary business, 7.2 million at quarter end versus 7.1 million a quarter ago. Business add-on remained at 3.5 million.
Total memberships, 45.4 million at quarter end, up from 44.6 million, and including extra cards, 82.7 million cards out there versus 81.3 million 12 weeks earlier. At Q1 end, paid Executive Memberships came in at 16.4 million, which was an increase of 307,000 or 26,000 new Executive Members increased each week in the 12-week fiscal first quarter. As you know, Executive Members are over a third of our member base and over two-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 are at 90.6%, rounded up to 90.6%. We rounded down to 90.5% at the end of Q1.
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 back to the U.S. perhaps based on what I said earlier. Total worldwide remained at 87.8% at quarter end and at fiscal year end. Going down the gross margin line, our reported gross margin in the quarter was up 26 basis points, coming in at 11.29%, up from 11.03%. As you know, gas deflation 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 4 columns. For all of fiscal 2015, columns 1 and 2 would be reported and then without gas deflation, and then 2 columns for Q1 2016, reported and without gas deflation.
Of course, these basis points figures are the year-over-year change from a year ago. Merchandise core was reported was +11 basis points for all of fiscal 2015, but without gas deflation was -12 year-over-year. For Q1, it was +24 and -3. Ancillary businesses for the year, +29 and +23. For the quarter, +11 and +4. 2% reward, -4 and -2, and for the quarter, -3 and -1. LIFO, for all of last year, was a five basis point pickup, both for the reported and without deflation. For the quarter, it was +1 and +1. Other, for the whole all of last year, +2 reported and +1 without gas deflation.
This year, that non-recurring legal settlement that benefited gross margin a year ago, such that it was -7 basis points reported and -7 without gas deflation. You add up those columns for all of fiscal 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, -6, with -7 of that -6 being the one-time benefit a year ago. Again, overall, those are the numbers.
In terms of core gross margins, which is the core business, food and sundries, hard lines, soft lines, and fresh foods, as a percent of their own sales, they were positive year-over-year in Q1 by 13 basis points. They were higher year-over-year across all four of these merchandise categories, with both hard lines and soft lines showing stronger year-over-year improvement than the year-over-year improvement in food sundries and fresh foods. Nonetheless, all four were positive year-over-year. Ancillary and other business gross margin was up 11 on a reported basis, up four without gas deflation for 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, overall, net 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 three basis points to the negative, one basis point to the negative ex-gas. LIFO. Last year at Q1, we had a $2 million credit representing slight deflation in the U.S. inventory pools, and a credit of $5 million 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 seven basis point hit in terms of the comparison, benefiting a non-recurring benefit last year versus nothing this year. Overall, gross margins excluding gas were down six basis points year-over-year, but up one basis point excluding that one-year charge-- That non-recurring benefit from last year. Moving on to SG&A.
Our SG&A percentages Q1 over Q1 were higher by 28 basis points, coming in at 10.54 this year versus 10.26 last year. Excluding gas deflation, we're lower or better by two basis points. I'll go into detail, and you'll see that the core expense components of that actually were pretty good. Again, four columns. Columns one and two would be fiscal 2015, the year reported and without gas deflation. Columns three and four would be Q1 2016, reported and without gas deflation. First line item, core operations, minus six reported and plus 16 without deflation for all of last year on a year-over-year basis. In Q1, zero and plus 26. Central, minus seven and minus five for the year, and minus eight and minus six for the quarter.
Stock compensation, minus five and minus four for the year, and minus 12 and minus 10 for the quarter. Quarterly adjustments, nothing last year in columns one and two. This year, minus eight and minus eight. That represents that $22 million item that I mentioned early on. Total, last year for the year-over-year, we reported SG&A up or minus 18 basis points, and without gas deflation, better or lower, plus seven basis points. This year, higher by 28, minus 28 basis points for the quarter reported, and without deflation, plus two. 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, better in the high single digits.
The combination of other expenses, a variety of them, were better by or lower by 10 basis points year-over-year. Again, the core controllable operating expenses were all in pretty good shape this quarter. Central expense was higher year-over-year by minus eight or minus six basis points without gas. As I mentioned earlier in the call, increased IT spending related to modernization showed higher year-over-year costs of seven basis points, six without gas deflation. I already mentioned earlier the stock compensation, which was 12 basis points or 10 basis points 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, if they had 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 three quarters year-over-year. 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 million non-recurring legal and regulatory items that I discussed. Overall, good expense control, but plenty of things, and hopefully, I've been able to elaborate to shed some light on the components of that. Moving down the income statement, pre-opening expense was higher by $11 million or four basis points higher. We had nine openings last year, including one relocation, 13 this year, including two. There's other pre-opening items in terms of countries and some other things, but overall, no big surprises there.
All told, reported operating income in Q1 was down $3 million from $770 million last year to $767 million this year. Below operating income, reported interest expense in Q1 came in at $33 million versus $26 million a year ago. Higher by seven-- interest income, I'm sorry, lower by $7 million. Interest income itself was lower year-over-year by about $4 million, and the other component was lower by $3 million 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. Reported pre-tax income was down 2% versus last year, coming in at $762 million, down from $779 million pre-tax a year ago. Several items impacted the year-over-year earnings comparison, which I discussed earlier in the call.
In terms of tax rates, our corporate income tax rate this quarter was up about a percentage point, coming in at 36.1% compared to last year's first quarter 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 operations, where tax rates are generally lower than our income tax rates for the United States. For a quick rundown of other topics. The balance sheet as in the recent past is included in today's press release. Point out a couple of items. Depreciation and amortization for Q1 came in at $271 million. Accounts payable as a percent of inventory on a reported basis was pretty much the same year-over-year. Last year 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 $14.9 million. Ex-FX, it would've been up about 6.5% up $960,000 assuming flat FX. About a quarter of a billion is electronics in what we call majors, and about $160,000 is apparel. Both built up inventory heading into the Thanksgiving week, Black Friday, and Cyber Monday. You could have extrapolated from our November reporting, where we reported the 4 weeks of November, the 12-week first quarter, and the 13-week retail reporting calendar of 454. The implication there, of course, was that the last week, which is really the first week of Q2, which is Thanksgiving week, was pretty strong.
The balance of the departments have been selling well, like hardware, housewares, and toys, 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 million, and our estimate for the year is most likely CapEx will be in the high 2s, say $2.8 billion to $3 billion. This compares to CapEx in last fiscal year of $2.4 billion. In terms of dividends, our quarterly dividend continues at $0.40 a share or $1.60 annualized. This represents a total annual cost to the company of around $700 million. In terms of stock buybacks in Q1, we bought back a total of 898,000 shares for $130 million, so an average price of $144.88. Next topic, Costco Online. We're now in five countries, having launched Korea November 10th.
We're in the U.S., Canada, U.K., Mexico, and Korea. For the first quarter, sales to profits were up over last year. Q1 e-commerce total sales were up 15%. On a comp basis, a total income basis, up 19% on a comp basis through the FX. 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, it was a few years ago that we platformed the sites. We've continued to improve our mobile apps, and there's room to go. They're a lot better than they used to be. Combined some of the e-commerce merchandise efforts with our inline efforts. We've added a few categories like apparel, Hava, and KS items.
We've greatly improved timing of shipments by shipping out of more than just one depot across the country. Again, we'll expect to see e-commerce in other international markets 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 six markets. Bay Area has recently been expanded. L.A., Manhattan, and more recently, Chicago, D.C., and Boston. We've increased our offerings and categories, and currently testing fresh foods available in a limited group in each of the San Francisco and L.A. markets. We're also providing merchandise to Instacart now in 16 markets throughout the United States, Boxed in three markets, and we're also doing some business with Jet.com in the three cities where they have their distribution centers.
Outside of here, Alibaba Tmall, we currently offer just over 200 SKUs on the Tmall site 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 Tmall, receiving over 300,000 orders. Next on the discussion list, expansion. Again, last year, we opened net new units of 23, so 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. I already mentioned where those would be. Also, as of Q1 end, some of you want to know what our square footage is. At Q1 end, it stood at 100,547,000 square feet.
Lastly, our second quarter fiscal 2016 scheduled earnings release, that'll be for the 12 weeks ended on February 14th, will be after the market closes on Wednesday, March 2nd, with earnings the following morning on Thursday, March 3rd. With that, I'll turn it back to Brandy and be happy to open it up for questions. Thank you.
Again, ladies and gentlemen, as a reminder, if you would like to ask a question, please press star one. Your first question is from Charles Grom with Sterne Agee.
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've budgeted back in August.
We beat them.
You beat them? Okay. Fair enough.
Yep.
Second question. When you look at new member sign-ups, how has the trend been by age group? I'm curious your ability to attract 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, et cetera?
We have. I don't have the most current month's detail, but from a month ago budget meeting, first of all, the average age of a Costco member has come down. I think a few years ago, we were about four years older than the average in the U.S. Now we're a little under two years older. About a third of our new sign-ups in recent months have been millennials. I'll make a point to provide a little more color on that each quarterly earnings release.
Okay. Last question from me, just on the gross margin. It's the first time in a long time that all four categories have been positive. Just curious 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. 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. I think there's been a little bit of deflation in some of those categories and some meat. 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. 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 organics is helping. Organics, as I've 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. Our view creates even a greater competitive moat given that that's where sometimes retailers will try to make more.
Your organic penetration stands at what at the current time?
Organic, well, it's $4-plus billion. It's still growing very strongly. I don't have the detail in front of me. Sorry.
That's all 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. That's generally a full margin business.
Your next question is from John Heinbockel with Guggenheim Securities.
Richard, a question on the fresh food deflation, 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 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 a price down and we'll always err to the low side. If we have a calculated margin that's, making the numbers up, but $8.15 a pound, it's going to be $7.99. You have all those things working towards that. That's what drives.
Yeah. You think the price elasticity on that is pretty high?
Well, when you have got a hot price on strip steaks or items like that, yes. When you can hit another $1 a pound, if you will, lower or a few dollars a pound on some items, that can drive business. Needless to say, you've been into Costco and talk about massing out big, good looking stuff. Fresh foods is where we shine.
You'd said, e-commerce growth was down a little bit. Is that purely mix?
Yeah. There's been nothing that was called out specifically of why that is, I assume it's mix.
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, because comp wasn't that different versus prior quarters. Is something you're doing internally to manage those items?
I wish we do more here, everything we do every day, I'm not trying to be cute here, certainly we continue to focus on things like basics, like overtime hours. Every four 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. I think that pays off. We have focus items, that they talk about each month. They talk about other things, working with buyers to create more seamless movement. All those things we really spend 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.
It was a little over a year ago that we made a few changes of plan in terms of primary caregivers within the plan. That changed a little behavior, not that big of an impact to the employee, a better management of that. I think we're still getting a little benefit of that there. It's at the core payroll as well, 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, Richard. Good morning. Curious if you can help diagnose the consumer. I know we saw some volatility in your monthly comps, there's been some unevenness in other parts of retail. You gave us some good color in November, what do you think is going on? Does spending appear back to normal? I don't know if it was just a temporary hiccup.
Well, I remember, I think it was October when we said one month does not make a trend. Then the first couple of weeks of November weren't terribly exciting, then it got more exciting. Middle of November and late November was quite a bit stronger than the first part of November. Again, I think we weren't really concerned when frequency was a three instead of a four, overall comps continue to be well. Our markdowns are in good shape, even though inventory's a little higher. I think we still feel cautiously optimistic, and certainly confident about what we're doing right now. I think if you'd asked me what surprises me in the last month versus the last couple of months, electronic has finally turned, 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. I think that reflects well on us. I can't speak to the consumer outside of that, though.
Right. 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. 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 out the FX issue. Softlines was low double digits. Fresh and outstanding, some deflation in the average sell and meat was good. Yeah. I hope it'll continue. Stay tuned.
Okay. Just to follow up on gross margin, because I guess the printed number is the highest number since our model goes back, 2003. You mentioned the four core categories were good, and I think you'd attributed somewhat to mix. Big picture, right? The mix of product, 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 haven't heard anybody talking about major changes in leverage. I think if you ask our suppliers, generally, we are typically front and center with them. When freight rates have come down, as you might expect, some suppliers are reluctant. They're waiting for us to call them, not to offer it up. Global sourcing, I think, is helping us competitively a little bit. Overall, I think we're still tough. There have been some suggestions out there that some retailers are 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. We're going to go back and make sure we get our share of that.
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 Lasser 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? 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 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. Citi and American Express are currently discussing what they need to be doing in terms of that transition. Again, contractually, there's not a lot we can say at this point, rest assured it's going to take several weeks, that transition. 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. It will be 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.
Should we factor into our models a potential disruption from the transition? 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. There are some possibilities of that. 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. It's what we do. You've got teams of people in operations that are working with our people in membership marketing, and that are working with the new outside provider, to make it as seamless as possible to have the communication out there, both in store, via email, via letter. I think it's going to go a lot better than one might think. It's just a lot of work to be done.
Understood. Coming back to the topic of traffic, three out of the last four months, traffic's been a little bit lower than the 4% you had been seeing consistently before that period. Are you just running into a point where there's now either limitations on how frequently 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. In my view, my own calculations, keep raising the amount of annual volume a warehouse can do. Certainly, there'll be somebody in line saying, "God, why did I come on Saturday afternoon?" At the end of the day, that's not an issue. Look, I remember in calendar 2009, the first year after the bad economy hit, we had a frequency number of around four. I was reminding people that if calendar 2010 was zero, that compounded number of plus two for those two years would have been better than our average over the prior 20 years. Now we've enjoyed seven years, calendar 2009 through calendar 2015, that have been slightly above four on average on a compounded basis. 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 four in the last couple of months, it's been a three and a half. We feel very good about where it is.
Okay. Thanks so much, have a good holiday.
You too.
Your next question is from Robert Ohmes with Bank of America Merrill Lynch.
Oh, thanks for taking my questions. Richard, I was wondering if you could talk a little bit more about partnering with Instacart and Google, maybe how that's going versus your expectations. Also, can you remind us how the membership is impacted by that if it were to roll out nationally? How does membership fee get accounted for in that? 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. 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 can get some things delivered to them. With respect to Instacart, I believe it's the Instacart memberships. Of course, they buy multiple memberships. That might be a slight decline.
Good morning. May I have your topic, please? If you're on speakerphone, would you please pick up your handset?
All trying to grow their businesses. 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 to all this brick and mortar. In our case, we see some changes. The net increase in some of these is that there's a slight improvement in total comp, recognizing you've got a few more visits that are delivered, but it's still a very small thing. There's not a lot of knowledge I can give you beyond that.
Thanks. Just the other question was on the success of fresh food and organic and everything, are you still seeing space allocation grow to that area? If so, where is it mostly been coming from, and is there a maximum allocation?
Good morning. May I have your topic? Okay. Thank you. I'll go ahead and put you back in the conference.
Linear feet of refrigerator and frozen, putting in more vertical stand-up coolers versus the coffin coolers in the deli and cheese areas. 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. The other thing is, that's an area where we could benefit by turning it faster as well. 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. I think we've done a great job in that area.
Just lastly, I think it's the CapEx, I think you're saying it's going to be up, say, like a half a billion or so versus last year. Can you remind us what that extra half a billion compared to last year is for?
Sure. Well, roughly eight or 10 more locations. Roughly a few more expensive locations internationally. There's all that other stuff I talked about where we're 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 cross-dock operations, where the average life of the majority of that inventory is less than a half a dozen hours. We've got a lot there. I believe, IT is Hold on, I've got that 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 million-$80 million. I don't have it in front of me. I'm sorry. That's a piece of it as well.
Got it. Thanks very much.
Your next question comes from Christopher Horvers with J.P. Morgan.
Thanks. Good morning, guys. Richard, I understand your comments on the MFI growth and the underlying trend being very strong. As you look at the MFI ex FX, it seemed to have slowed off a strong four-quarter trend that you saw through the third quarter of last year. 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 I know anecdotally, one thing we did was a LivingSocial thing a year ago, which was very good. We've not done that again at a corresponding time this year. 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, of international openings, again, we don't see any big trend there that concerns us. Trend change.
No trend change. Okay. Understood. Can you help us think about the gas? I know you get this question a lot, 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 second quarter a year-ago. Maybe anything on how much gas was a net benefit or a net detriment on a year-over-year basis, quantitative hopefully, any qualitative comments just to help as we think about this upcoming quarter.
We'll tell you each quarter, 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, relative to our history, versus very strong numbers Q1 a year-ago. We had pretty good numbers this time. I think year-over-year, it was within $0.01 of profitability. Flat to down less than $0.01 year-over-year. I think we also had a very strong Q2 profitability. That may be tough to match, we're early in the quarter, Q1 surprised me. Maybe I'll be surprised there, if it does come in a little bit, we'll certainly share with you if it's more than $0.01 or $0.02 of delta.
Right. 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. Again, when you say surprised to the upside, we were still down year-over-year a shade. 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 tripped down a little bit, that generally bodes well for us. Again, I'm not suggesting it can be as well as last year. We'll see.
Understood. Just one last question on the traffic side. I know you said you don't really see a change in the box, but 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 to come around Black Friday?
If I do, I'd be doing something else. We actually looked at it as a positive. We were starting to get a 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've 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 as strong was a surprise to us. No, 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. 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 of 4 categories up, once again, 13 basis points, similar to what we saw in the fourth quarter. You noted that if ex the cycling of the one-time benefit from last year, gross margins would have been up an additional seven basis points. Regarding the inventory levels, you stated that you feel pretty comfortable with those levels just given how strong the first week of the second quarter was. Is that a fair representation of your color on gross margins?
How should we think about that going forward?
Yes, mind you, the seven basis point of the one-time item, the 13 is the core business. It's not like it's 13 becomes 20.
Correct. On the core. Absolutely.
Right. Yeah. We feel pretty good about that.
Regarding just SG&A, again, just for my clarification, making sure my table's clear. Stock compensation, you mentioned, was up meaningfully year-over-year, $36 million, I believe you said. 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. More and more of the recipients, particularly the recipients like myself, who's been here 32 years almost, you've got more accelerated vesting. The entire hit is now not spread over 5 years. It's really, that's a timing issue. That's going to help you a little in the future. But the fact of the matter is because it's October, you've got a big hit in October of Q1. Just taking the math of if you think about it, the actual hit to P&L this year is a function of those grants that would have been made over the last 5 years that then vest ratably one-fifth a year. Adjusted when it vests faster than that accelerated based on tenure.
Not only do you have more people in the plan today than you had-- as a piece from 5 years ago gets fully extinguished and 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. You've got the vesting. The vesting, in my view, being one of the key ones. The way it hits, just simple math is that $36 million year-over-year change is more than half of our expected year-over-year increase in that line item. If it was half, in each of the next 3 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 10-13 range or 8-13 range each period.
Got it. The legal hit, is that fully contained into this particular quarter?
Yes.
Also on the IT modernization, how should we think about the cadence of those expenses going forward relative to what we saw in 1 Q?
In terms of the $22 million, 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 will 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. I'm hopeful that sometime next year we'll see that flatten out and come down. We got a lot going on there. Again, it's part of our operations. It will come down as a % of sales at some point in the future or come down certainly relative to the types of increases we've seen. It's necessary and we're starting to see some deliverables finally.
Thanks, Richard. I appreciate that clarification. Last from me is just on the international side. The Canada and international segments 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, maybe less competition, maybe a little bit less labor cost. 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's 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. 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. 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 cost as a % of sales. There's other things that help us up there, not just a little extra gross 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 the one-time items impacting in the quarter. A 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? A follow-on to that is, as the holiday season now has gone underway, what type of price promotions are you seeing throughout the sector on TVs?
I don't have the quarter in front of me, for the four weeks of November reporting, which would be through the Sunday after Thanksgiving, those four 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. 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. 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. 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.
To speak on the TVs.
I think the new technology, the 4K, is helping. 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, 4K, whatever, under $3,000 and under $2,000, depending on the size and some of the new technology. I think all those things are helping us a little bit on that category. I pointed it out also because it's one of those that we continue to get asked about as dot-com 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. One follow-up question, and I know you addressed this in your prepared comments, too, the inventory growth in the quarter. If you look at it on a year-on-year sequential basis, it did tick higher here in fiscal Q1. What explains that?
The two biggest components of that $900,000 ex-FX number year-over-year is electronics. This is about a quarter of a million, and that's planned and doing fine, as expressed in these sales numbers. Apparel, and again, we are out there en masse, and these are basics. We're not going to be left over with a lot of red and green Christmas dresses, because that's not what we sell. We're doing fine. We have no concerns about our inventories, our markdowns. Something I know we learned years ago, the cheapest markdown is the first markdown, and the quicker you get rid of stuff that have problems. Our markdowns overall have been nothing to be concerned about.
Thanks a lot.
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 give 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 quarters. As we think about where this shows up in the P&L, is there any discernible impact on the top line? If you could dimensionalize the impact on the member fees as well, just to understand where we would model for that to happen.
You say 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% that's going to go to sales. Everybody who has a co-brand card currently is still using it, so there's no impact there. What I try to do, recognizing that the dollar nine reported figure was going to raise some questions, we just looked at what are the things that we can really look at. Given that our sales continue to be strong, we're not really looking at that line to see how much sales do we estimate we're losing. Assume 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 don't have the co-brand card, they don't have that reward. 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 they're using debit or a very limited of an old house card from years ago. Or another Amex card. We don't see a big impact to that. Is it greater than zero, the negative impact? Of course. 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 we pointed that out.
Got it. A second question. You talked about the seasonality of stock op expense and the bulge you saw this quarter. Just to confirm what you talked about, I guess what you saw this past Q1 and what you 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 an accurate way to think about it?
Yes.
Okay, great.
By the way, it is part of our comp, and it is part of SG&A. We have always prided ourselves, for many years, we never changed the number of shares. As the stock compounded at 19% a year, that piece of 3,000 or 4,000 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%. Again, we just did it again at the grant that just happened. Notwithstanding, you're still seeing this big increase because of just how that works.
Great. Just another quick follow-up on the demographic piece. You gave us a couple of interesting numbers. A couple 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. Without knowing what the national average have done at our fingertips, hard to know. 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. Any sense of how you're faring with that cohort?
I haven't, and I haven't seen any figures presented to me that way. I've said a couple times in the last many months when people talk about millennials, I think the good news is we're getting more of them. 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 a smaller place, if they get married later, if they have fewer kids. It's going to rain on all of us. We certainly increasing the share that we get of those people will help. We're going to keep driving value given the flexibility of the types of things we can continue to sell, we'll see where it goes. 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 in 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? 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. It was, I think, contained pretty quickly, and the information was communicated pretty quickly. I believe that the last possible episode related to Costco of someone falling ill was November 1st, so we're trying to pass that. Thankfully, nobody was extremely hurt. There were a few that did go to the hospital, and I understand that they're all doing better now. 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 comes to top of mind. Organics. Organics continues. KS. At KS, we're doing a few more things, but that's steady as we go.
Okay, 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. Sounds like there's a lot of preparations involved, 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, maybe what you learned in that transition process.
Well, it just takes time. I think the big difference is, in Canada, the new issuer did not purchase the portfolio from American Express, therefore, it's what's referred to as a de novo program, where members have to sign up and reapply for credit. That's a little more disruptive. Now, it's a Mastercard up there are many people up there that have a Mastercard in his or her wallet already, so they still have something to use. 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.
The assumption here in the U.S. is that the transition will include the purchase of the portfolio, I think the language we've used in the past is that's what we anticipate, because there's always a chance that something can happen, we're working towards that end, as you would expect the issuers out there. Again, recognizing that Canada is 10% of our company and the U.S. is 70%, these are bigger numbers. I would guess that if you look at the $15 million I pointed out as related to just 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 in terms of the company as a whole. It's just going to take some time. I'm just trying to share with you what I can at this point.
Nothing big is going to happen. We'll get through it. We're very excited about the next many years under a great program.
That's helpful. Any color you can provide on what % of members do use the auto renewal? Anything else we should think about just modeling?
I don't have that at my fingertips. I probably wouldn't share that. As many as possible would be the answer. It makes it easier for the customer. Certainly, it gives them a reason to more likely renew.
Got it. Just another question. You mentioned, I think, two 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. Just what you think about that format going forward.
First and foremost, we're opening regular warehouse clubs. For a number of years, we had anywhere from, I think, six to eight business centers that were doing okay. Slightly profitable, but not setting the world on fire. There were a lot of changes that were made to it a couple of years ago. They are growing nicely. They are more profitable than they had been. It's another avenue. It's going to be a lot smaller footprint in terms of how many units we have than a regular Costco warehouse is, but we'll keep at it. 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. It's not like we've discovered something that we're going to go from 10 to 20 overnight in one year.
It's good, and it's a positive business for us. It certainly is a focus on the business member. We also will, from time to time, identify items in the business center that make sense to sell in all of our locations. We think it's a positive. Some of the 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 as we're relocating an old unit, we'll convert that other one in that city into a business center. That's been helpful to us as 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 Teterboro.
I mentioned that we opened a new one in Teterboro, that's a relo of Hackensack, which is now, over that several month period, is being converted into a business center. We think it's good. When asked what's driving our earnings growth or 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 us of the timing of the new credit card?
Well, our current relationship expires March 31st. There's a window of a few months there post that this could extend. It'll be sometime between April and the summer is my best guess at this point.
Great. 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? Technology is notoriously late. How is it going for you guys?
Smoothly would be an overstatement. I think at the beginning of time when we talked about this starting about three or four years ago, we said, "This is our best guess." I half jokingly said, "Whatever you think it's going to do, it's going to take twice as long and cost twice as much." Anybody that's gone through it, I think, generally experiences that. We're experiencing some level of that as well. That being said, 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. Again, overall, I think, 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. We got a lot going on, but we're getting through it, and I certainly wouldn't gloat about it because we know it's tough and it takes a long time. 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 to guess, what's the low end? 27 or 28. That just simply means that under 27 example, that means five in the latter half of the year, and the original budget would have been skewed out a little bit. Right now I'm looking, we've got seven new units coming in Q3 in this plan and 15 in Q4, with about half of those, a little over, probably eight of those, in August. I'm sure a few of those are going to slip.
I think a couple of those are going to slip.
Oh, okay. A couple of those will slip. That is because this number was 35. I'm guessing, so 28 to 32. Again, it's a fluid number. I don't think we've lost any. I know a couple of them we've already delayed. Might be a year delay for zoning issues. One example, again, we found some things underground that original core testings didn't find. 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've said it many times, we are our own toughest competitor, and I mean that. In our industry, notably Sam's and to a little 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. 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. I think the nature of our member. I don't think we've seen any big changes there other than we keep doing pretty good. As it relates to traditional competitors, 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, a high-end customer, particularly in the quality of fresh foods. Although our fresh foods numbers are pretty good. 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 million of sales on full margin items that didn't exist a few years ago. I think our global sourcing initiatives and things, that gives us, we believe, an edge on things like produce. You can't do it if you don't do the kinds of volumes we do. I think we've got some good advantages out there, and we are, I think, one of the best at not resting on our laurels. In terms of .com, again, we're pretty methodical about it.
Some of the things we're doing are helping, albeit in a lot of ways, and I think we're getting better at that, too.
All right. Thank you, Richard.
Oh, yeah, two more.
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, maybe you have the numbers even. What the penetration rate for e-commerce and services like rental cars and travel services and that type of insurance services, what the penetration rate is among your members, and has it been growing?
Yeah. Well, 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 had visited some shareholders recently on some proxy issues. 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 million rentals a year, and a lot of that is online. In two different meetings, individuals who prided themselves on knowing how to get the best deal on car rentals went online during the meeting and were able to save on the same car from the same third. Go try it, and we've got to do a better job of communicating that. Those businesses are growing.
They're all generally small percentages of the total. I think that creates more opportunity for us. I think I read recently where if we were a car dealer, we'd be the second-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. It's all good.
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?
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'll keep growing. I'm not trying to be cute, I just don't have that number in front of me.
No, that's fine. 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.
Correct. Okay.
It doesn't include gas, pharmacy, optical.
If you just shop the front end, no matter where else you shop.
Right. If you shop the front end, no matter where else you shop, it's just one transaction. If you shop just at the gas station, it's not a transaction in terms of our shopping frequency.
Correct.
The e-commerce is not ringing up as transactions either? Frequency. It's transactions, but not frequency.
e-commerce is like a warehouse, that is adding up. It's 3% of our business. Even if it's growing at three times at 20+% 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 two more questions? Hello?
Your next question comes from Bob Grob.
Hi, Richard. I just have two questions, two quick questions. On the credit card, the $0.02 hit this quarter, is that expected to be something similar over the next few quarters in terms of the impact? I guess the question then 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 don't know if around to $0.01 or to $0.03, but call it $0.02, I guess. It's a guess. At the time of transition, their money's baked into the deal, so I don't see any big impact to that in any of our numbers.
Got it. You mentioned the Alibaba Singles' Day. Can you just give us any insight in 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, about every two or three years, it used to be Jeff and Jim and our head of international, Jim Murphy. Now, of course, it's Craig and Jeff and our international, Jim Murphy, and a few others in real estate. 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 five years, but we got a lot going on.
For 20 years, we've never been terribly concerned about we got to get there now This gets our name known a little bit, but it's not like we've strategically sat down and said, "Hey, let's get our name known for a few years and then go." The Alibaba Tmall thing happened because they came to us, we didn't appreciate how many Kirkland Signature items were selling on their site before we sold them directly, and at a better value.
Thank you, Rich.
Your next question comes from Dan Binder 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.
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. In Canada, the marginal tax rate, federal tax rate, I believe, is 26% currently, 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. Generally speaking, I believe the U.S. versus in the nine countries we are, our effective U.S. tax rate on earnings in the U.S. is quite a bit higher than anywhere else. As the penetration of foreign earnings to total earnings, it's that simple.
Got you. We had an opportunity to visit your Top Club in Spain, and it was pretty impressive. I think one of the areas that surprised me was the amount of local sourcing you were doing, especially in areas like fresh, and we heard about 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 in whether it's the U.S. or Japan, et cetera. Seemed like it was growing.
I think first and foremost, the big thing is on multinational vendors, a lot of times, even with multinational vendors, you've got two or three or four geographic world regions. I remember when we went into Australia, and now we have eight units instead of one or two or three a few years ago. Still with only eight, 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. Again, since we have that meeting here every four weeks, the budget meeting, that's when that happens. I think a focus on that has helped us. As it relates to going into these markets, to the extent there are items in those countries, that helps us both ways.
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, 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 Kirkland 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 a 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. It's a win-win. 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.