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 Second Quarter Earnings and February Sales Conference All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. Thank you.
Mr. Richard Kalanti, Chief Financial Officer, sir, you may begin your conference.
Thank you, Brandy. Good morning to everyone. This morning's release will review our Q2 and first half fiscal twenty fifteen operating results for the 12 24 week periods ended February 15 and our monthly 4 week sales results for the 4 week period ending this past Sunday, March 1. The discussions we are having will include forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements involve risks and uncertainties that may cause actual events, results and or performance to differ materially from those indicated by such statements.
The risks and uncertainties include, but are not limited to, those outlined in today's call as well as other risks identified from time to time in the company's public statements or 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 Q2 fiscal 2015 operating results. As you saw this morning for the quarter reported earnings per share came in at $1.35 up 29% from last year's $1.05 As noted in this morning's release, this year's net income was positively impacted by a 57,000,000 dollars or $0.13 a share income tax benefit. This was in connection with a portion of the $5 per share special cash dividend paid by the company last month's company 401 plan participants.
Partially offsetting this reduction to the income tax line was a $14,000,000 or 0 point $3 a share income tax charge related to an ongoing overseas income tax matter. The net impact of these 2 discrete tax items to our reported quarter earnings $1.35 earnings per share was $43,000,000 or $0.10 a share to the positive. So excluding these two items, EPS for the Q2 would have been $1.25 or up 19%. Other factors that impacted our Q2 when you're comparing year over year results. Gasoline operations as was also the case in Q1 2015, we benefited from strong margins and profits in our gas business.
I'll speak to this a little more when I discuss our gross margin. FX as compared to a year ago in Q2 this year, the foreign currency lease where we operate weakened versus the U. S. Dollar in all countries, but primarily in Canada, Mexico and Japan. This resulted in our foreign earnings in Q2 when converted into U.
S. Dollars being lower by about $32,000,000 pretax or $0.05 a share than those earnings would have been had FX exchange rates been flat year over year. So again another relative weakening of these foreign currencies relative to the U. S. Dollar.
3rd, IT modernization costs. As discussed in each of the past 8 or 10 or so fiscal quarters, our major IT modernization efforts will continue to negatively impact our SG and A expenses through this year and into next year and possibly a little beyond, especially as new systems are placed into service and depreciation begins. In Q2, on an incremental year over year basis, these costs impacted SG and A by an estimated $22,000,000 or about $0.03 a share. 4th, stock compensation expense. This was higher year over year in the quarter by $14,000,000 or $0.02 a share.
While this change this charge was about a 4 basis point hit to SG and A, it was a much smaller year over year impact to SG and A this quarter than it was in Q1 when the year over year delta was $38,000,000 or $0.06 a share to the negative. Lastly, interest income and other. This number was lower year over year in Q2 by $10,000,000 in pretax or $0.02 a share. The decrease primarily related to the revaluation and settlement of U. S.
Dollar payables primarily in our Mexico operations. As you know this line item if you will goes back and forth. Sometimes it helps us a little. Sometimes it hurts us a little. Under GAAP these adjustments are recorded to the interest income and other line.
Now in terms of sales for the quarter, reported sales were up 4.3% and our 12 week reported comp sales figure was up 2%. For the quarter, sales were negatively impacted by significant year over year gas price deflation. This had about a 3 23 basis point impact to the number to the negative and by weakening FX foreign currencies relative to the U. S. Dollar.
This was just under 2 50 basis points to the negative. So excluding gas, I reported 4% U. S. Comp sales increase in Q2 would have been +8. Our reported minus 2 international comp assuming flat year over year FX rates would have been +8% as well as such that total comps again reported 2% for the quarter plus 2% excluding gas and FX were plus 8% for the quarter on a more normalized basis.
For our 4 week month of February, which included the last 2 weeks of the fiscal second quarter, reported comps came in at +1 consisting of a+2 comp in the U. S. Flat International. Sales again were negatively impacted by gas price deflation almost 400 basis points for the month to the negative and weakening FX just under 300 basis points to the negative. So excluding gas, the plus 2% reported comp for February would have been a plus 7%.
The reported flat international comp would have actually been a plus 12%. There's a little benefit in there from the switch in the Lunar New Year I believe that impacted a couple of the Asia countries for us. And such that total company comps reported plus 1 for the month would have been a +8 excluding gas, deflation and FX. In terms of new openings, after opening 9 new locations in Q1 And we now operate 6 70 locations 671 locations and we now operate 6 70 locations 671 locations around the world. Between now and the end of fiscal 2015, we expect to open an additional 20 new locations, just a couple in Q3, which will end in early to mid May and then 18 planned for Q4.
Of these 20 additional openings before our August 30 fiscal year end, 10 are in the U. S. And 10 will be international. So most likely end the fiscal year with 691 total locations. Now a few of those near the very end of the fiscal year could slip into Q1 of 2016.
So my guess is that additional 20 maybe 2017, 2018 who knows. Also this morning, I'll review with you our e commerce activities, our membership trends and renewal rates, a little more discussion on margins and SG and A in the quarter, our recent $5 a share special cash dividend and the related $1,000,000,000 debt offering and our recent announcement related to the planned changes for our U. S. Co branded credit card offering. For our 2nd quarter results, sales for the quarter for the 12 weeks ended February 15th were 26 point $87,000,000,000 up 4 percent from last year's $25,760,000,000 On a reported comp basis as I mentioned Q2 comps were up 2 but up 8 excluding gas and FX.
Now for the quarter that reported plus 2 was a combination of an average transaction decrease of a little over minus 3%. But again taking gas out of that number, the average transaction increase would have been plus taking gas and FX out of that number, the average normalized transaction increase would have been a little over 2%, so the positive. And average frequency increase of a little over 5.5%. So year to date shopping frequency is up a little over 5%. In terms of sales comparisons by geographic region, for the quarter in terms of geography Midwest, Southeast and Northeast regions were the strongest.
Internationally in local currencies, Japan was the weakest still impacted by cannibalization of 2 units we opened in the last 12 months on a base of a total base of only 20 over there and with Taiwan, Korea and Mexico being strongest in local currency comps. In terms of merchandise categories for the quarter, for the Q2 within food and sundries, overall in the mid single digits, candy, meat, deli, beer and wine were the relative standouts. Within hardlines overall in the low single digits. Departments were the strongest were tires and electronics. Consumer electronics was up in the mid single digits.
Within mid single digit soft lines comps, domestics and apparel were standouts and in Fresh Foods where comps were in the high singles. Meat showed the best results although impacted by inflation there. For February, traffic was up again 5%, while average transaction on a reported basis was down 3.5%, but again getting really impacted by FX and even weaker gas year over year. Gas prices during the month 4 week month of February year over year, the average price of gasoline we sold was down about 3.5% 31.5%. In terms of geography, Midwest, Southeast and Bay Area regions were the strongest during February.
And internationally, in local currencies, Taiwan and Korea were the strongest. As I mentioned previously, the shift in the New Year holiday from January to February negatively impact January comps and positively impact February comps. For the company, probably about 50 basis points each way. From a merchandising categories merchandise category standpoint ex FX, Food and Sundries overall for the month was in the mid single digit range. Hardlines overall came into the mid to low single digits, which was consistent with what electronics did during February.
Softlines was up in the mid single digit range. And finally Fresh Foods up nicely in the low teens overall with meat being the strongest. And again, as I mentioned, I see quite a bit of inflation in that area. Moving on the line items down the income statement. Membership fees were up 4 basis points and up 6% from 5 $50,000,000 a year ago in the quarter to $582,000,000 or up $32,000,000 At takeout FX, the up 6% in dollars would have been up 9%.
In terms of membership, we continue to enjoy strong renewal rates. Our U. S. And Canada renewal rate still is at 91%, I think just a shade under that averaging up to 91. And for the first time our fully captured worldwide rate is rounding up to 88 instead of down to 87.
Continued increase increasing penetration of executive member of course helps us as well as those members tend to be the most loyal. New membership sign ups in Q2 company wide were up 9%. In terms of members at Q2 end, in terms of Gold Star, we ended Q2 with 32,700,000 members, up from 32,000,000 up about a little under 700,000 the end of the Q1 12 weeks earlier. Primary business inched up from $6,900,000 to $7,000,000 Add on remained at $3,500,000 So total member households $42,500,000 at the end of Q1 and $43,200,000 at the end of Q2 and representing total cardholders going from $77,500,000 to $78,700,000 over the 12 week fiscal quarter. At Q2 end on February 15, paid executive memberships were a shade over $15,400,000 which is an increase of 188,000 during the quarter or about 16,000 a week and that's both new member sign ups as well as conversions.
Executive members as I mentioned before, a little over 2 thirds of our about 2 thirds of our membership base a little over 2 thirds of our membership base and just about 2 thirds of our sales I'm sorry about 1 third of our membership base and about 2 thirds of our sales. In terms of renewal rates, they continue strong Again from business member renewal rates at Q1 end was 94.5. It tweaked up to 94.6 at the end of Q2. Gold Star was 89.8 and stepped to 89.9 and total was remained at 90.7 percent and worldwide the 87.3% went to an 87.9%. You'll see a little bit bigger increase there because when you start at a lower base that long term co brand credit card agreement with Citi and our acceptance and co brand agreement with Visa.
Yes, the press release stated, we've entered into a new co brand credit card agreement with Citi and an acceptance of co brand incentive agreement with Visa. These agreements are subject to the purchase from American Express of the existing co brand credit card portfolio by Citi and would be implemented wouldn't be implemented until next April 1, 2016 at the end of our current co brand arrangement. While there's not a lot of specifics I can give you at this point, I can tell you the following. Once issued, the new co brand Costco Visa credit card will be accepted throughout the United States and Puerto Rico. The new rewards based card will be fee free.
The new card will need as they provide generous rewards to Costco members utilizing the new card. And again, I can't tell you a lot of specifics about that, but we certainly look forward to telling you and our members more about it. But not it probably is not going to be until 7 months down the road this calendar year. The new card of course will also serve as the members' Costco membership card. Again, there's not a lot of detail we can give you at this point.
Needless to say, what we do is ultimately for the long term benefit of our company and our members, in this case, the co branded credit cardholders as well. Going down the gross margin line. Gross margins were up 54 basis points on a reported basis from $10.53 to $11.07 As I always ask you to do, I'll ask you to jot down 4 columns and 6 line items. The columns of course will be Q1 2015 both reported and without gas deflation and then columns 3 and 4 would be Q2 2015 reported and without gas deflation. Going across those line items, the first one is core merchandise and reported in Q1 was minus 6 basis points year over year without gas deflation was minus 13.
In Q2 reported was plus 10. Without gas deflation was minus 20. Ancillary plus 22 and plus 20 in Q1 and plus 46 and plus 49 in Q2. 2% reward minus 1 and minus 1 and then minus 5 and minus 2. LIFO plus 1 and plus 1 and then in Q2 plus 3+3 and then other plus 6+7 in Q1 and 0 and 0 in Q2.
All told in Q1 last Q1 2015 year over year to Q1 2014 we had a reported gross margin improvement of 22%, which is the sum of those line items in column 1. On a gas neutral basis, it was plus 14%. Again reported for this quarter was plus 54% and on a gas neutral basis excluding gas deflation was a +20%. Now as you can see, again, our overall gross margin was outsized at plus 54% and even at plus 20 without gas deflation. Again a lot of this has to do with gas sales penetration which were way up as well even though the lower price per gallon.
Our core merchandise gross margin was up 10 basis points year over year. But again excluding grass, you see in this chart it was down 20%. Again, this is a function of both increased sales penetration and strong gross margins with our gas business. If you look at the core gross margins as a percent of the various departments of their own sales and then when I talk about core, I'm talking about food and sundries, hard lines, soft lines and fresh foods, which account for about 80 plus percent of our total sales. On their own sales, they were down year over year by 3 basis points in the 2nd quarter with food and sundries and hardlines being up year over year a little and softlines and fresh foods being down a little.
Frankly, margins are fine. We're driving sales and certainly give us plenty of room to be continue to be aggressive. Although with gas prices going up the other way right now, we're don't expect to see those kind of outsized gas profits in the next quarter. Ancillary and other business gross margin was up 46% on a reported basis, 39% without gas deflation. Again, our gas business accounted for nearly 2 thirds of this Q2 year over year increase, but we also showed higher year over year margins in optical hearing aids and pharmacy.
The impact of the increase in executive membership was good. It hit margins by 5 basis points or 2 basis points without gas deflation. And again that's that 2% reward feature. This just generally reflects continued increased sales penetration from the executive members, which again as I mentioned buy more and are more loyal and shop more frequently. LIFO in the 2nd quarter, we recorded a $4,000,000 credit pre tax compared to a $5,000,000 pre tax charge last year, so about a $0.01 a share or 3 basis points benefit year over year for $9,000,000 to the gross margin.
Moving on to SG and A. Our SG and A percentage Q2 over Q2 was higher or worse by 11 basis points coming in at a $9.94 this year versus a $9.83 last year. Again, we'll do the same 4 columns reported and without gas impact Q1 2015 and then columns 3 and 4 Q2 2015 both reported and without gas. Five line items. First one is core operations or just operations.
Plus 8 basis points was reported in Q1 that means and plus year is a positive lower year over year, plus 16 without gas deflation. In Q2 it was a plus 3 and a +29. Central minus 1 and minus 1. And in Q2 minus 10 and minus 7 so higher year over year in that room stock compensation minus 11 and minus 11 and then minus 4 and minus 3. There are no quarterly adjustments, so the last slide item will be total.
Again, we reported a minus higher minus 4 year over year SG and A higher by 4 basis points in Q1 both on a reported basis plus 4 or lower by 4 basis points in Q1 without gas deflation. Again in Q2 higher or minus 11 basis points and then better or lower by 19 basis points or plus 19 basis points without gas deflation. Now a little editorial on SG and A here. Again, the operations component of SG and A was better by 3% in Q2 on a reported basis and better by 29% year over year excluding gas deflation. Again gasoline sales penetration and very low SG and A in the gas business certainly helps that number.
Within operations excluding gas and other warehouse businesses, so taking all that out payroll and benefits represented an improvement of 16 basis points of this 29 basis point improvement. So again strong sales overall certainly helped us improve payroll and benefits as well and get some leverage there. Central expense was higher year over year by 10 or 7 without gas inflation. Earlier, increased IT spending for modernization. This was 7 basis points on a reported basis, 5 basis points without deflation in FX.
And lastly, in both years, we had a few discrete items to the tune of about minus 5 basis points, but that is what it is. Finally, with SG and A, our stock compensation expense as I mentioned was higher or worse by 4 basis points on a reported basis, 3 without gas deflation. Next on the income statement line, preopening expense, dollars 8,000,000 last year and $9,000,000 this year. Last year, we had 3 openings. This year, we had no openings, but we've got plenty of openings coming up.
So you've got quite a bit of preopening expense already started and there's lots of other little things that go into that number. No real surprises. All told, operating income for Q2 came in at 8 $877,000,000 21 percent higher year over year or higher by $153,000,000 compared to last year's $724,000,000 in the quarter. Below the operating income line, reported interest expense was essentially the same year over year coming in at $26,000,000 last year $27,000,000 this year. As I mentioned earlier, interest income and other was lower by $10,000,000 coming in last year in quarter of $30,000,000 to the positive.
This year only $20,000,000 to the positive. Actual interest income for the quarter was higher by 3. The other swing was a minus 13. Again, most of that relates to year over year swings and various FX things. In this case, I think the biggest piece was the revaluation settlement of dollar payables, U.
S. Dollar payables primarily in our Mexico operations. I think that was a small positive last quarter. Overall, pretax income was higher by 20% or up 100 and and $42,000,000 from $728,000,000 last year in the quarter to $870,000,000 this year. In terms of income taxes, our company tax rate this quarter came in at a needless to say on a reported basis at a very low 30.2% versus 35.0 last year.
Again, the income tax line benefited primarily from a $57,000,000 tax benefit in connection with a special cash dividend. Dividends paid on cost per share held by our employees in our 4 zero one plan, which totaled about 29,000,000 shares are deductible for U. S. Income tax purposes. And we also and we recognized a one time income tax benefit of approximately $57,000,000 related to that.
As I mentioned, there was an offset to that benefit of about $14,000,000 after tax charge to the income tax line related to an ongoing income tax matter. Excluding these two items, our Q2 tax rate this year was actually up would have been up a 10% to 35.1 percent just slightly higher compared to last year's 35.0 percent on a normal basis. Overall reported net income was 4.63% last year compared to a reported 5.98% of net income this year. Again, this year's net income on a reported basis was up 28%, 29% taking out those 2 tax items up about 19%. For a quick rundown of other topics, while the balance sheet is included in the morning's press release a couple of balance sheet information items.
Depreciation and amortization for Q2 totaled $260,000,000 in the quarter 5 $14,000,000 year to date. Accounts payable ratio. Accounts payable as a percent of inventories on a reported basis, it showed improvement year over year from a 90 3% figure to 97%. There's a lot of construction payables in that. It's showed a comparable improvement from an 83% if you just do merchandise accounts payable as a percent of merchandise inventories.
Merchandise accounts payable as a percent of merchandise inventories, 83% last year, up to 87% this year in the quarter. Average inventory per warehouse was darn near flat coming in at 12,800,000 dollars this year on average per warehouse about $20,000 compared to a year ago, so pretty much flat. Ex FX year over year inventory was levels were up would have been up about $350,000 or about 2.7 percent of sales on again an 8% sales increase. So I think there's control of our inventories. And inventory is in good shape.
Mid year physicals came in just fine, the physical inventories. I'll respond at this point to questions received in the past few months about the work slowdowns. As you know on the West Coast ports, There's a week and a half ago I guess there was a new agreement. So things are getting back to order although the view is it will take 4 to 8 weeks if not a little longer to get through the backup there. We like I'm sure every other importer of containers are trying to identify which ones have priority where we can.
And really pretty much the impact of that's over. When we talk to our heads of merchandising in the different areas, the view is in Q2 we might probably got hit by $100,000,000 $200,000,000 nothing to really speak of in terms of sales. And it's probably a little worse for some others out there. In terms of CapEx, in Q1, we spent $555,000,000 on CapEx. In Q2, we spent $619,000,000 so quarter to date just under $1,200,000,000 For the year, we'd still expect to be somewhere in the $2,500,000,000 to $2,700,000,000 range, which is up from $2,000,000,000 last year.
In terms of Costco online, we continue to operate it in the 4 countries U. S, Canada, U. K. And Mexico. We're also doing things not really on line, but through Alibaba, Tmall in Asia.
But in terms of the 4 countries online, there's costco.com, Sales and profits needless to say were up during the quarter. Sales were up 23% in the quarter. Comp sales in the U. S. Were similarly up right around 23%.
Foreign sales in the other three countries were up on a local currency basis 20% and more as well. But again with currencies being down there's some impact there. But overall continued good results and sales strength on our dotcom efforts. In terms of expansion, as I mentioned, we planned in Q3 to open 3 units including 1 relocation, so net of 2 and have current plans for 2019 which includes 1 relo so net of 18 new in Q4. Assuming we opened those we'd be at 28 net new units for the year or about 4.5 percent square footage growth.
And by country assuming we get to 28, it would be 17 in the U. S. So a little under 2 thirds there, 1 in Canada, 1 in the U. K, 5 in Asia, 1 in Korea, 1 in Taiwan and 3 in Japan as well as 1 in Australia and 3 new in Mexico. As of Q2 end total square footage stood at 96,400,000 square feet.
In terms of stock buybacks, in Q1, as you know, we started the process and bought a little bit. We bought $18,000,000 worth or 139,000 shares at an average price of 120 a little over $126 a share. In Q2, we expended $92,000,000 to buy 6 42,000 shares at an average price of $143.21 Now a bunch of that was done before the dividend date for the $5 ex dividend date. In terms of dividends, our quarterly dividend stands at $0.355 a share or $1.42 per share annualized. That represents a total cost of the company of about $630,000,000 This regular dividend of course was addition to the $5 per share dividend, which amounted to $2,200,000,000 that we paid out last on February 27.
And in fact both dividends were paid to shareholders on February 27. As I mentioned, we also completed a one to pay in part for the $2,200,000,000 special dividend. We did a $1,000,000,000 debt offering a few weeks back. That $500,000,000 of 5 year fixed and $500,000,000 of 7 year fixed at attractive market rates. Lastly, just a couple of other items of note.
The March comp sales reporting period for this year will include 34 selling days versus which is a day less than the 35 days last year reflecting the calendar shift of the Easter holiday. In addition beginning next month, we'll start reporting comp sales one day earlier than we have historically done. So March comp sales will be announced on Wednesday April 8 after the market close around 6 p. M. Pacific Time and 9 p.
M. Eastern Time. Hopefully that will help our East Coast friends. And similarly our Q3 scheduled earnings release date will be Wednesday May 27 for the 12 week Q3 ending May 10. Again, the release will occur at 6 p.
M. Pacific Time, 9 p. M. Eastern Time that Wednesday with the earnings conference call still occurring the following morning. Before I turn the call back to Brandy for Q and A, hopefully I've helped everyone understand some of the factors impacting the number.
Overall, I think we had certainly the outsized gas profits helped, but there were lots of other little things that went the other way. So overall still we felt pretty good quarter and certainly strong sales membership renewal rates and the like. With that, I'll turn it back to Brandy for any Q and A. Thank you.
Your first question is from Charles Grom with Cerna AG.
Thanks. Good morning, Richard. And thanks a lot for moving past the 3 o'clock in the morning wake up call. I guess my first question is when you look at your gas today, clearly, it's a bucket for you guys to pull from to invest back in pricing for you guys to kind of be like Costco, if you will. Is there a way to quantify that this quarter?
I mean, clearly, the core margins within the 80% of the business being down 3 basis points. Was there some impact from you guys being more aggressive on price? Or if you could maybe just speak to it thematically?
I think qualitatively it allowed us to be a little more aggressive. We didn't just say, hey take this extra money and put it all there. We didn't. We certainly benefited from in the quarter. And again, it's not like we looked at it as well that will be an offset to FX as an example because we know that FX has still got even if FX rates continue to stay where they are right now and don't get any relatively weaker, it still on a relative basis in Q3 and Q4 are going to be relatively weaker.
So we recognize that Q3 and Q4 will be a little more challenged in that regard. But certainly could margins have been up a few and set it down a few? Probably, but who knows?
Okay. Fair enough. And then when you look to March of next year and the change in tenders, it's my understanding it's roughly 750,000,000 Visa cardholders today and there's roughly 50,000,000 Amex holders today in the U. S. How big an opportunity this could be for you guys to expand your membership base when you move into next year?
Well, look, we'll see. I mean, there's a lot of unknowns. First order of businesses for Citi to work with American Express and figure out the account portfolio and a lot hinges on that. We expect that to happen, but there's no guarantees. And there'll be and again, there's a lot I'd like to tell you.
There's a lot we'll figure out now. We know the bucket of dollars, if you will, in our mind of what we can use to drive usage of that kind of card to recognizing there'll be some cannibalization somebody that has a Visa mileage card in their wallet then they want to use that instead. Just like this cannibalization now, there's people that use a non co branded Amex card. Similarly, there'll be other places where there's outside spend increase because your neighborhood dry cleaner one card is accepted and another card is not. So there's lots I think there's lots of opportunities.
We got to get there 1st. And first order business is the transition itself and we'll there'll be a lot more to say once we get there.
Okay. And then just last question on e commerce up 23% in the quarter. Can you just remind us number of SKUs online today relative to a year ago? And where you think that can go? How much is crossing through your depots versus not?
And then just margins on e commerce relative to the clubs? Thanks.
There's probably approaching 8,000 regular SKUs. And I'm excluding from that that we have a lot of tire SKUs based on all the sizes. We've got a lot of office product SKUs to a 3rd party. But core SKUs on our side is 8,000 probably 1500 plus more than a year ago. And I'm guessing there, but that's probably a good number.
And that where those increases are a lot of sundries items, some apparel items, things like that, trying to get you to come back on a more frequent basis and smaller ticket items. A lot of the items we've added are items like I've mentioned versus $300,000 to $2,000 televisions and furniture sets.
Okay. Any color on profitability? Excuse me? Just as margins in the e commerce business?
Margins overall are probably a shade lower are a shade lower. SG and A is a lot lower. So profitability wise, e commerce is a very profitable operation relative to the company as a whole.
Okay. Thank you.
Your next question is from John Heinbockel with Guggenheim Securities.
So, Rich, 2 part question to get kind of the same thing. You've got some very busy clubs and you keep increasing traffic mid single digit every year. Do you guys spend a lot of time looking at kind of quality of experience in the club and maybe different parts of the club like Fresh. And with that in mind, is there an opportunity to open more clubs in the U. S.
Than you might have thought before, maybe cannibalize yourselves, gain share, improve the experience if some of them are too crowded. Have you guys done much work on that? Well, yes, in a lot of different ways, but not in terms of let's sit down and do that today at one time. I mean, first of all, quality of experience, as you, I think know, I'm sure you know, our operators and our merchants are in the warehouses a lot. Craig and a random set of merchandising operating victims just spent 2 days schlepping around part of the country visiting warehouses both us and competition and other things and looking at new sites.
So I think certainly the member responses that we get every day, the types of throughput per hour at the front end register, all those things go into that. And I got to tell you when a member writes a little recognizing we have we're always going to have some challenges. So we're constantly looking for that experience. We're constantly looking for that to get you out of there faster and to make it a better experience. I got to tell you, we still get probably more positives than negatives in terms of e mails that are sent into senior management about positive experiences with a customer a member with a particular employee who was they were helped in the warehouse or somebody went above and beyond.
So we have no illusion that we do everything right, but we're pretty steadfast of looking at all those things. In terms of willing to open more units, absolutely. I mean, if you had asked me 5 years ago when we were opening about 20 units a year and probably I don't have numbers in front of me, but probably it was 70, 30 U. S. And you say Richard 5 years hence where are you going to be?
And I'd say well we're going to be about 30 and we actually got there pretty close. And if it's seventy-thirty U. S. Back then, it's probably fifty-fifty heading to thirty-seventy over the next 5 years. And here we are almost sixty-forty still in the U.
S. I think that's a reflection of we're finding probably more opportunities than we thought possible. Some of it's what you mentioned, opening up and busy that quality of experience, the units that are 250300 and even a few that are 300 plus trying to get those in. Trying to balance that because cannibalization does cause a little heartburn for a year. But a lot of it also is I think surprising how many units we can put in some of the newer markets and newer is a relative turn.
Newer markets over the last and markets that we've been in for the last 5 or 10 years. And so I think it's a combination of all that. Again, last year, I think of the 2020 in fact, I have it here, hold on. Here it is. Of the 20 in fiscal 2013 I'm sorry, last year of the 29 net openings we had, I think 16 were in the U.
S. And this year of the 28 or 2016 or 2017 were in the U. S. A little over half. And this year, it's what did I say 17 out of 28, so almost 2 thirds.
And so I think you'll probably 5 years from now as we go from let's say 30 to 35, probably still half are in the U. S. And we're finding more opportunities. Do you think you can get to 1,000 there ultimately or have you not gone out that far? Well, we haven't gone out that far.
If you add yes, if you add even 30 a year for 10 years, you're essentially there. So yes, I think so. That's certainly not out of the realm. All right. And then secondly, what's the thought at least it seems like anecdotally maybe in certain items or categories, there may be a Kirkland introduced, maybe the brand or brand is no longer carried.
I don't think there's a conscious effort to although the quality and value of Kirkland certainly outstrips a lot of the brands, A conscious effort to get more Kirkland items in the store, more space to them. Is there a conscious effort or that's just kind of it happens, you put it in, it's where the demand is and so maybe it squeezes out some brands along the way? Well, I think there's an ongoing conscious effort to there are people that are in charge of coming up with new Kirkland stuff in each merchandise category and their job is to try to find new things just like any buyer's job is to find good exciting branded items. And ultimately they an item it is our cousin, it has Kirkland name on it, but it has to live and die like any other item. I think if we've added 30 or 40 items in the past 12 or 18 months, I bet you we've subtracted 20 or 30 that ultimately didn't work out.
And then we bring back some a few years later that worked better. I remember years ago we had a organic peanut butter Curc and Signature that didn't set the world on fire. I think we're now testing again and it's a pretty good item. But we'll see how long pretty good means. So we're it has to we recognize the strength of our concept is both KS and brand.
And I don't think we if you said Richard you're in the mid-20s now in terms of KS, you ever see it going 50? And that's a stretch. I mean, even our own numbers internally, we say how can we get it from 25 to 30? There's no formal game plan how many years is that going to take. It's what items work and certainly there's not a lot of low hanging fruit.
There's lots of $20,000,000 $30,000,000 $50,000,000 items over time, not a lot of $300,000,000 $400,000,000 items like paper goods or water or things like that or K Cups. Okay. Thank you. And last question last comment before getting to the next question out there. In terms of cannibalization, even if that's ramped up a little bit, I was just looking over the last few years, if you go back to fiscal 2013, what we call cannibalization, just not just here that's opening 3 units in Japan and that affects 3 or 5 other Japanese units.
Total cannibalization in fiscal 2013 was 65 basis points and 14.58%. And for the first half of this year, it looks like it's about something in the low 40s. So it's going to fluctuate between $35,000,000 $75,000,000 depending on what we do and where we do it. But my guess is something in the 40 to 50 range is kind of we're not going to be able to move that number overall a lot. Okay.
Next question.
Your next question is from Dan Binder with Jefferies.
Hi. It's Dan Binder. My question my first question is related to the gas business. Can you just give us an update on where the comp gallons were in the quarter, where gas is as a percentage of the total sales? And then you mentioned that the gas margin would start to be a little bit less favorable given where prices what prices are doing.
Can you help us just to understand kind of what the excess margin may have been to EPS this quarter?
Yes. Look it was just on that line item it was 2 thirds of the margin improvement of all ancillary businesses. It could be 200 plus basis points of extra margin. I mean, our margins in gas on a daily basis over the years could be anywhere from a 0 to a 5 or 6. And it's all over the board, might even be a little higher sometimes.
But it really ranges. And frankly, when it's a little higher, we're saving the customer more money. In terms of gallonage comps, I remember for a couple of years when the U. S. Overall not Costco, but all U.
S. Vehicle gallonage comps consumption was in the low single digits and maybe when the bad economy hit it went to the low negative single digits. And we went from we remained at 4%, 5%, 6%, 7%. Right now we're in the mid teens. So we're getting a lot of people coming into Costco to buy gas and that certainly drives them into the warehouse as well.
And then on the IT spend, you mentioned that I think you said it was $0.02 this quarter. As you look at Q3 and Q4, what do you
know we've had a couple of some of the original modules and modules makes it sound like it's a small number. These are big numbers. But you have projects that are $50,000,000 $60,000,000 projects that the data put into service they then over the next in our case 65 4 week periods over the next 5 years generally, you take a little under $1,000,000 a month hit. And so some of those are starting to hit. So my guess is it that much?
Is it a little less or a little more? It's hard to say. But still over a several year period incrementally recognizing your denominator sales keep getting bigger too. But even with that bigger sales, we had indicated something in the low to mid teens of basis points. I can be off by a couple of basis points, but it ain't cheap.
And then my last question was related to organics. Can you just give us an update on how many SKUs there are in the club at this point? What the mix is of sales and how that performed in the quarter? Kind of what you're thinking about that business going forward?
Yes. It's still a small percentage of Costco. It's a rising but it's a fast growing area as it is with a lot of other retailers as well. You're going to see more and more of it. A part of that's availability.
There's we could sell we and everybody else could sell a lot more if there was more out there. I think we're doing a pretty good job lining up our sourcing. And I think I mentioned last quarter that for all of 14, organic was like approaching $3,000,000,000 which was more than twice what it was 2 years earlier or 1.5 years earlier. It's growing fast. I don't know if it's 50% a year, but it's certainly growing at a high at a mid a low mid or mid double digit number.
And it's great for us because we show even a better value on that stuff than some of the things that it replaces. When we can do organic ground beef where everybody footballs regular ground beef and everybody makes a lower than average margin. This is the item that everybody tries to make more on and so we can make a little more not a lot more and show a greater value to our member. So it will keep growing. I'm sorry I can't be more specific.
Okay. Thanks.
Your next question is from Christopher Horvers with JPMorgan.
Hi. It's Mark Becht on for Chris. Congrats on the fantastic quarter. How are you Richard?
Good. Thank you.
Just a follow-up on
a couple of Chuck's questions actually.
So it doesn't look like you're getting into too much specifics about the change in the credit card Amex etcetera. Just curious what has been the response that you've seen from our friends up north? I know that sort of changed in January maybe what the reception has been there?
Well, it's been good so far. I mean, we're getting a lot of people to switch recognizing its people's membership card as well. And if anything, our view of the U. S. Should be I guess I can't get into a lot of it right now.
We wouldn't have done this if we thought there was a lot of risk associated with it. We think it's a big positive over a long period of time. But recognize big positive of us means giving most of it back to the customer. In this case, most of it back to the co branded user of a credit card. And that's going to happen we're really not going to be able to tell you a lot about it for a number of months.
Okay. I guess I'll switch back to the gas prices then. Historically, the adage has been you guys benefit when prices go up. But it looks like just based on gallonages and mileage driven, which has only been up a couple percent, you guys are actually capturing a lot more share now than in sort of history period. Would you is that something you would agree with?
Yes. No, there's 2 prices to that just so everybody understands. When prices go up, we make less and save the customer. We still save them, but save them less. When prices go down, we save them more and we make more.
Certainly, prices going down, we save last few quarters. If you go the other thing the thing I think you're talking about is when it was in the press every day as prices went from $3 to $4 to $4 plus a gallon, it was on the news every night in every city. That helped us, I think. The offset to that would be as prices are less important. How can that help you?
I don't know other than it is and it is a lot because our gallons is quite a bit up.
Did you say what the volume in gallonage was? I think it was call it up 11% last quarter.
It was in the mid teens I think we mentioned.
Okay. Yes. So pretty big acceleration there. And then just finally on And I would Go ahead. Sorry.
Just getting back to that comment. I think people ask us why. I think it's because we do a good job of being the most competitive priced. And there's that 3rd party is it gasbuddy.com that 40 whatever 1000000 people and put their prices of what they bought gas for, for 2 years in a row since they started announcing best overall low price out there by $0.14 or $0.16 a gallon across the country. Now you're going to that's not every station every day everywhere, but on average with all those data points, we're in.
I think that kind of publicity helps us as well.
No, that makes perfect sense. And then just the last question on sort of geographical differences. Help, but then the port shutdowns which on our math comes out to 60 basis points, 60 basis points roughly. Maybe just sort of what you're seeing elaborate a little bit geography and then maybe the Northeast? I know we've seen some pretty severe weather here as of late.
Thanks.
Well, look, I think you summed up what we summed up on the port strike and the Lunar New Year switch. I think the big deal is weather has played a role although we didn't it did last year as well. But if I look at the New York, the Northeast as an example, the 4 weeks that comprised February, the 1st 2 weeks were mid positive single and the last 2 weeks were mid negative single digit. That's a huge swing, but other areas did just fine. The Texas region got hammered the last week with weather.
But overall, we're it's just done we've done okay.
Great. Best of luck.
Thank you.
Your next question is from Simeon Gutman with Morgan Stanley.
Thanks. Good morning. Thanks, Richard. A couple of quick ones. On the credit card, I know you're not going to share a lot of details.
Is there besides probably some savings just from some lower interchange fees or credit card fees, Is there any elevators such that if there's certain volumes met, you could see benefits further benefits down the road? Or is this the lower fees you'll see a benefit upfront and then from there just how much business you do?
As you're asking, I'm looking at my wall behind me and there's a handwritten note from many years ago when our securities counsel was sitting here. Quickly, somebody was asking a question he wrote, we have no comment beyond the release. The reality is that there's lots of buttons that you push on these agreements. There's all aspects of it. At the end of the day, whatever our current arrangement as we look at it, whatever our current arrangement is with our current provider, both what we pay, what we receive to offset some of that, what our member using that co brand cardholder is rewarded.
We start with a premise of how much is that to start with? Where do we think it can go to? At the end of the day, we can whatever that bucket of money is, it can go towards lowering merchant fees, raising rewards or using some other place in our company. We'll figure it out. There's we think that's a it's an exciting bucket and we'll do a lot with it.
But just like I've told people in the past, if we can save a dollar on buying a product better whether it's detergent or coffee or anything or due to packaging or raw materials costs or energy costs, we're going to give $0.80 back to the customer. And rest assured, there'll be whatever benefit X is, a little bit of accrued to our P and L and a lot of it will accrue to the member in some way shape or form. But none of that can really we can't really tell you until next year.
That's fine. That makes sense. On membership, I know you don't say a lot international versus U. S, but can you just speak directionally to whatever growth rate you're seeing in membership, whatever trend line has been occurring? How is that has it changed much?
Is it the same in the U. S. Versus international?
It's higher international because we're newer. And I think I've shared in the past, I mean, if you take the total number of members divided by our total number of warehouses, you've got roughly 5,9,000, 60000 member households per warehouse. In Japan, you've got a number that has a it's a 3 digit number. It's 100 in the low 100s. You also have a higher a lower renewal rate in those first few years.
So it tends to balance out over time, but we operate overall in other countries on a membership fee as a higher percent of sales particularly in Asia.
But whatever prevailing growth rate there has been in membership in the U. S. Up until Q2 or up until first meeting? Has that run rate stayed the same in the U. S?
Yes. Again, a lot of it is dictated by new openings. And again, it's going to be dictated more. Like when I said, new member sign ups in the quarter were up 9%, but part of the or down a little bit because a year earlier in that quarter you opened 3 units in Asia where you might have and again I talk about an average of roughly 60,000 member households per location. We've had locations that will have new member sign ups as of opening day and that as of opening day means during the 8 or 10 or 12 weeks prior to opening when the parking lot is kind of set and we have the flags and the tabling activities outside.
You could have anywhere from 25,000 to 40000 members signed up. Now 40% of our can renew a year later, but in terms of new members coming in and buying a membership and that really distorts that number. So I don't know how much meaning that plus 9% is a function of that as well, but we always point that out.
Okay. And then just very quickly, can you just remind us the e commerce business? Is there other member only items or meaning or is there items someone can just who's not a member can come on the website and purchase as well?
In this crazy world, there are some items that we have online where we've agreed not to show the price unless you're a member.
Okay. Not to show the price, but the only person who's buying on your website is a member? Yes. Okay. Thank you.
And your next question is from Paul Trussell with Deutsche Bank.
Good morning, fellows. I wanted to just touch on membership as well, certainly with consistent and strong traffic. And you certainly are saving people money at the pump. How are you thinking about the value proposition of your membership currently in the U. S.
And international? What may be the timeline in terms of you kind of reassessing what you think the value of the membership should be?
Well, I think in a roundabout way you're asking about when do we see this any possibility of a fee change. Historically, that's really we think about last. We drive prices and value every day and everything we do. And I mean it, you go to our budget meetings every 4 weeks and you've got a day and a half and half of that time or a third of that time is merchants. And we're figuring out how to improve the value and lower the price and raise the quality.
And historically using U. S. And Canada as 80% of our business first of all and probably 80 ish a little different in that number pretty close in terms of percent of members. You have we've done a fee increase about every 5 or 6 years. The last one we did was in very late 2011, very early 2012.
So during the most of the calendar year of 2012, those renewers for the first time in 5 or 6 years saw a fee increase from 50 to 55 and from 100 to 110 on the executive in the U. S. And Canada. If history repeats itself 5 to 6 years from January of 2012 would be January of 2017 until January of 2018. So that's again based on history doesn't mean we're going to do it or not going to do it.
We've chosen generally to hold membership fees at whatever their prices are in most of the other countries in part because it's so darn strong to start with and why not continue to drive the business. And so again, I think it's generally the last thing we look at, but something we've looked at regularly over 30 years. And I'm sure we'll look at it again when the time is right.
Sounds good. And then just circling back to gas profitability and I know you've addressed this a few times on the call, but given the spread between The Streets forecast the actual for 2Q. I just wanted to touch back on your comments around the Q3. You mentioned that gas prices have started to trickle back up. But frankly, can you help us just kind of think about our expectations for the back half of the year?
Should it be closer to a more normalized cadence around gasoline profitability? Or do you continue to see a little bit of tailwind given the favorable mix?
Well, if you look at history, when we each quarter for the last several years will share with people that guess helped us a little, hurt us a little, helped us a lot, hurt us a lot. It's all it's virtually all it's pretty much in proportion with the trend of gas prices per gallon. And so as you know, the constant drive down has stopped and it's actually been up a little bit. So a lot of that party is now behind us for right now. And but I can't really tell you what it's going to be other than historically that's what it's been.
Understood. Thank you.
Your next question is from Matthew Fassler with Goldman Sachs.
It's Matt Fassler. Good morning. First question relates to the special dividend. I guess this is our first conference call since you announced the last one. With the prior special dividend, it was around the time of tax policy change and many companies pursued that tack.
As you take a bigger picture look now at capital allocation understanding that you did accelerate the stock buyback a bit. How are you thinking about special dividends perhaps as a recurring element of capital allocation? And any other way you want to share on your decision to issue that one last week?
Well, I mean, we now have 2 data points instead of 1. We did it and you're right the motivation or one of the motivations for doing when we did it was reading about it in The Wall Street Journal every day and just before people expected dividend tax rates to go up dramatically. So it made sense to be not only shareholder friendly, but shareholder friendly in a way that might help people as well if tax rates were going to change and be proactive about that. I think we appreciate the fact that it was perceived as being shareholder friendly. As you might expect both management and the Board want to continue to do things in that regard.
And it's not like we sat down and did this giant study of exactly when, how much and what should we do. I think we liked it the first time and it seems like our shareholders liked it the second time. I'm not trying to be cute or coy about it. They're a little independent of each other. I think that when we did the first one, which was a little over $3,000,000,000 worth, it was quite sizable.
It was a time when I guess in retrospect we could have bought some more stock back. It would have been a smart thing to do given where it's at now. But we wanted we tend to do both and we tend to look at all things 1st and foremost CapEx, how we ramp up CapEx and we've done that. 2nd would be our regular dividend. What are we going to do with that every year?
Again, there's no guarantees. But in each of the last spring periods over the last 9 years, I think we've raised it on average around 13.5%. We looked as you know from your models and our models, we are generating more cash than we can use in CapEx. And so we'll continue to look at ways to be shareholder friendly. And but there's no reason to think it'll be 2 years hence we'll do another one, but there's no reason to think we won't.
We'll see.
It's interesting even though you're running with several $1,000,000,000 of cash on the balance sheet you have gone to the debt markets, which I understand is opportunistic. Should we think about the cash balance that you have today as something that you feel you need to be comfortable with? Or is that a number that you could whittle down over time?
Well, I think it's a number we can whittle down. Mind you, I'm looking at quarter end. This number might be a shade different than the balance sheet number, but I think we had cash and short term investments of what was in the press release number there? Hold on a
second.
Okay, we had cash
and short term investments at the end of the quarter of $7,400,000,000 roughly. And I had a number that wasn't completely consolidated like 7.2. But if you look at that roughly 7.4 number about 2.5 is real cash in the U. S. Another 2.5, 3 is real cash outside the U.
S. Where we're spending it frankly. And in addition, we announced last year that we brought back some of the cash in Canada. So I think we could whittle the number down, but some of it's cash equivalents. If you think about from the time banks close on Friday night to the time they open on Monday morning, all those debit and credit card receivables, which could be upwards of $1,000,000,000 $1,500,000,000 dollars plus that is a cash equivalent, but it's not cash.
Got it. That's very helpful. And then just a very quick follow-up. We're seeing the LIFO benefit creep up. I know it's only a couple of basis points, but it's a nice change from a year ago when I guess you peaked out at around an 8 basis point head.
Can you just talk about what the moving pieces are in driving that? And I know you feel like you're fully marked at the end of any given quarter, but if you had to place bets on which direction that would go for the rest of the year, it would be very helpful.
Yes, I don't know. Gas has come up a little bit, although it's still below where it was at the beginning of the year. So that's still probably LIFO as of today, it's LIFO creditable. I don't think it's going to be a big giant number either way, but it's a little bit a crapshoot at this point.
Got it. Thank you so
much. Yes. By the way, Matt, part of that is some proteins are inflationary right now for not all reasons related. And then some other things, we're just starting to see the beginnings of some deflationary pressure on items manufactured with oil, plastic bags and the like. So some of that is starting to finally flow through.
So there'll be some things that are inflationary and some that are deflationary.
Thanks for that color.
Your next question is from Kelly Bania with BMO Capital Markets.
Hi, good morning. Thanks for taking my question. I'm not sure if it's too early to ask this, but just curious about the members that you brought in via the LivingSocial promotion several months ago. Just curious if you're tracking them following are they following that typical spending pattern of a new member in terms of spending and frequency?
I'm going to punt because I don't know the answer to that. But if you hold that question for next quarter, I promise we'll have some numbers. I know that we are tracking it. I just don't have the detail on it. I know that on average they're a little younger.
I don't know spend habits.
Okay. Then just another one. You mentioned the Bay Area as I think a strong region either in the quarter or for the month. Just I know that's an area where you have more robust offering in organics. And I was just curious if that's part of it.
And maybe how plans are to kind of bring that more robust organic offering to some more clubs in the rest of the country?
Well, that's probably a little piece of it. I think weather overall has helped. The West Coast is as bad as it's been in Texas and the Midwest and the East Coast, it's been offsettingly good over on our side of the country. And I'm sure that's helped some. Clearly, I think some of the merchandising efforts we've done on organics have helped.
Part of that, we are doing it more in other parts of the country. Part of it is supply issues and it will still take time for that to grow.
Great. Thank you.
Your next question is from Scott Mushkin with Wolfe Research.
Hey, guys. Thanks for letting the call go a little longer, so I can sneak one in here. I want to get back to e commerce and then the ancillary services ex gas and just explore, I know I think you said that the margins are great. Did you give us a number on how big e commerce is?
No. It's you mean total size of e commerce?
Yes.
It's about 3% of our total.
3% of your total sales.
On an annualized basis, I think last year it was like $2,900,000,000 something. $3,000,000,000 and you're only at 20%.
$3,000,000,000 going 20%, 25%. And then from a gross margin perspective, I mean, how do we think about SG and A associated with that business? Is there much of it? I mean is it like fractional, a couple percent? I mean how do we think of SG and A when you look I know a lot
of stuff just goes directly to
the consumer about 60% of it is the is there really a lot of SG and A associated?
No. There's margins are a let me just look here. Margins are a shade lower, not a lot. And SGA is a lot lower.
Okay. Okay. So and then from a philosophical perspective, everyone's always ragged on or not ragged, that's a bad way to say it. Everyone's always some people have criticized Costco because they don't let enough flow through to shareholders. How do we think about that?
I think the gross margins are what you're saying a little bit lower SG and A is a lot lower. So net net we got much better operating profit in the e commerce business. Is that okay with the company or is that something that you would try to make look like the rest of the business?
No. Look, I don't I mean, we're at retail, there's different parts of it. No, we're happy to make a little more there. We're still making 1st of all and foremost, are we as competitive as we can be relative to others? And we feel that we are very competitive.
We're also recognizing that e commerce is supported by the buying strength of the warehouses. As we brought in line electronics and furniture and some of those bigger ticket categories that buying strength how do you compensate how does e commerce if you will compensate for that. So it's all part of the same thing. The fact that its margins overall are a little lower than the warehouses, I think is indicative is a function of that and we'll continue to do that. We work on strong profits in some of the other ancillary businesses, but they also have different either costs associated with their purchasing powers.
Pharmacies, of course, you've got pharmacists and pharmacy techs that make more than your average hourly employees. So you've got a higher cost structure there as well as all the regulatory and billing stuff going on in that business. So we work on a higher margin to offset some of that. And but we also work on a profitability number that's good. So it's all part of the equation, if you will.
So then just one last one. So I think you
said you're up to 8,000 SKUs. One of the things we think benefits Costco hugely on the e commerce is that you're basically letting me use your people to do the shopping for me. In other words, like the fact that there isn't 2,000,000 SKUs like there is on Walmart site, I think it's a great attribute. So what's your thought about where the SKU count goes kind of balancing, Costco being your personal shopper versus wanting more, maybe more SKUs? Where do you think it goes?
Well, I think it probably goes up a little bit, but not a lot. The fact that it went from 4,000 to 8,000 or something in the last few years is a lot. But part of that was just trying to drive business, adding some categories to get people for people to think of it as top of mind or near top of mind instead of not at all. If I had to think about a comment from a very loyal shareholder and somebody who loves Costco with 3 kids at home, 3 teenagers and said, look, I love Costco. And I know when I go into a warehouse, I know I'm going to get the 10 items I plan to get in the food and sundries area and the other 10 that I didn't plan to get, but I know I'm going to come out with 20 and I'm going to be sated.
And I know I'm going to have great food samples. I know we get 3 other things in the Monterey area that I had no plans to get and I'm excited about that. But I knew going in I was going to get 3 or 4 items that I didn't plan on getting. But when I go to Costco, I don't know why when do I go to Costco.com. So part of challenge in the last year on costco.com is not only driving sales of those bigger physical ticket bigger dollar ticket and physical ticket items that not everybody wants to shop home like furniture and big screen TVs and have a great price and a great in many cases white glove service delivery and we're driving that business.
But also how do we get you there more regularly and whether it's K Cups and other items for your office or home or some apparel items. As you know the 5,500,000 KS dress shirts that we sell every year, which is a great value, if you I always joked if you're really tall with short arms, we can't serve you because we don't sell all the sizes and size and sleeve and color combinations. Online we do. So trying to get different reasons to get you onto the site more often is part of the equation here. And I think we're doing a pretty good job of doing that.
But I don't see and you said Richard you think you're going to have 50,000 one day? Gosh, I don't see it in my near future.
Thanks for the answers. Really appreciate it.
Your next question comes from the line of Oliver Chen with Cowen and Company.
Hi. Congrats on such solid results. I just had a bigger picture question about holiday. Did you have would you prioritize any major learnings from holiday in terms of where you might look to do things differently next year? And then on the core merchandising margins number, what should we look at as helpful drivers for that positively going forward?
Or what kind of run rate might we expect there? Thank you.
What I'm sorry, what were you saying? What was the second part of that question?
The core merchandise margins, what are some of the positive drivers we should look for in terms of optimism on the core merchandise margins, whether it be inventory control or is the run rate at a slight negative kind of realistic for us to model?
Well, needless to say, we don't provide on the latter part, we don't provide specific direction in that area. I remember several years ago when our margins were just down year over year every quarter for a couple of years. And every quarter we'd say margins are fine. We can tweak them a little bit if we want to and when we want to. I think that sentence that response is still there.
I think we continue to get excited by strong sales and strong loyalty and strong conversion to executive member. And all those things will continue to take front seat to a little margin improvement. But if we want to get a little bit, we think we can, while still being very competitive. In terms of what do we learn or not learn during the holiday, I think when we look back, I think we did a pretty good job of planning for the port slowdowns. And arguably, it's probably easier to do a better job when you're managing fewer items.
And so while we felt we got hurt by a little bit, I think we probably mitigated that hurt. Beyond that, again, I think we are comfortable when raw materials prices and bakery and food court and the like go up that we're not going to change our prices. And if it hurts our margin a little bit, it hurts it. We can get it elsewhere. So I don't think there were this was not as given our strength, we didn't there weren't a lot of things to necessarily learn as it relates to did sales soften and we drive more sales by more markdowns or something.
I think we thought we came out of this season pretty good. And if anything continue to be aggressive in terms of the types of products, the price points of products that our member wants great value and great items and we'll continue to drive the value proposition in upscale items.
Yes. That sounds encouraging. And inventories were nicely growing versus sales like underpinning sales. Is that a trend we should also model going forward in terms of the spread being neutral?
Probably a little bit. Again, I wouldn't be too much into 1 quarter. For a number of years here, we've generally again taking FX and gas out of it, but just the 4 walls of warehouse inventories on a non FX dilutive or increased basis. Generally speaking, we've had sales greater than inventory per warehouse increases. Sales were up 8% or 9%, inventories were up 5% or 6%.
I think my guess is Q2 was a little better than we thought, but luck for the draw a little bit, but still trending in a positive ratio there.
Okay. And our last question, you gave a lot of great details on e commerce and the evolution there. What about flexible store fulfillment and reserve and pickup and ship from store. Is that on the horizon? Is it something your customer appreciates?
And will that be a material driver of traffic as some competitors e comm contributes 100 basis points or more to comp?
Yes. Well, 23% growth on $3,000,000,000 is like $60,000,000 or whatever $500,000,000 So that's like a little under 0.5 percent of comp to the company. First of all, we don't do it right now with the exception of the 8 or 9 Costco business centers that we had that we both deliver and order for pickup. Some of the things we're testing with like Google and the carte are something enhanced, but it's not like you can't call Costco or go online at Costco and say, I want to order this stuff and I'll come and pick it up. So I don't know if our member appreciates it.
I know there's a lot of effort out there doing it. Our first order businesses get we just are installing the membership module, which includes a lot of hooks to things. But I don't see us doing that for the certainly the next year.
Okay. Congratulations on all this momentum and excitement. Thanks a lot. Best regards.
Thank you.
Your next question comes from the line of Michael Lasser with UBS.
Hi. Thanks a lot for taking my question. 2 actually. 1, have you seen any evidence that gas prices correlate either to customers' willingness to spend more on food, sundries and hard life in your stores or your ability to sign up more members at your clubs when gas prices are either moving up or moving down?
Well, it used to be when prices were moving up and it was the topic de jure every night on the from the consumer product and the consumer activists on the local news stations when prices were skyrocketing is when we saw some real sign ups related to it in that market. Conversely, you see less of that right now. Certainly, we're seeing the answer is I don't know completely, but certainly we're seeing more traffic to the gas stations, more and continued strong shopping frequency in the four walls of the warehouse. And some of that's got to be related to that, but I couldn't tell you how much.
Okay. And my second question is on the credit card. Can you give us a sense of what the private label credit card penetration is in your clubs?
I don't think we disclosed that. Total credit card in the U. S. Total credit card is about $40,000,000 debit is about $40,000,000 cash check and other is about $20,000,000
And presumably a big portion is
private label? Probably certainly more than half, but there are people that choose even using our current thing, there are people that choose to get Starwood points or Delta points on a different Amex card than the Costco one. Our goal though is to certainly drive more of it and we have successfully historically and hopefully we can do that in the future to drive more it to this top of wallet card.
Got it. Thank you so much.
Your next question comes from the line of Meredith Hadler with Barclays. Meredith, your line is open. There is no response from that line. We'll move to the next question. Your next question comes from the line of Bob Drbul with Nomura.
Hi, Richard. Good morning or good afternoon over here. I guess I have two questions for you. The first one is, when you look at the impact of FX this quarter throughout the P and L, can you just help us understand a little better like what we should expect both on MFI and on SG and A over the coming quarters as we look at the foreign exchange where we are today? And then the second question is with gas prices rising a bit over the past few weeks, are you adjusting the merchandise pricing that quickly to reflect the movement in gas as you were opportunistic this quarter with gas prices going up?
Will you change things as we go into the next few weeks given the rising prices?
Well, the answer to the last one is no. And again, I can't tell you all exactly what, when and where and how. But did it give us a little bit of cover to be aggressive? Yes. Did it give us a lot?
No. It gave us a lot of cover, but we chose not to use it. So I mean it's not like we're going to say, hey, let's take all this and go use it. So yes, as gas profits come down, that was part of our improvement. It so happens this quarter, one of the reasons I pointed out all those other things, some of which will continue to hit.
You guys can figure out FX based on where the currencies of each country are. If it weakens a little bit relative to the dollar from a year ago, it's a little more impactful. If it weakens a little less, it's a little less impactful, but still hit with a negative in front of it. Yes, interest income and others, a little bit of a crapshoot. It goes both ways.
Gas we know is going to be less outsized profitable in the coming quarters. And there's no reason to hopefully that sales will continue to drive in the right direction. I think overall I look at Q2 and taking all the good of gas out and the negatives and some of those other things, some of that will go away in Q3. But if we can drive sales and frequency, we'll be fine.
Okay, great. Thanks, Richard.
I'm going to take 2 more calls.
Okay. Your next question comes from the line of Gregory Melich with Evercore ISI.
Hi, thanks, Richard. Two questions. One is, I don't realize there's a lot
of moving pieces, but if you
were to look at gas and how much that helps EPS this quarter, could you give a range or if it was $0.10 and then sort of think about it going forward if gas was steady, is that something you sort of you have to cycle it comes back? Or is it something that's a new plan? And then my other question was on gross margin. I think I heard you say that ancillary there was pharmacy and maybe something else where there was some margin expansion. Could you help explain that if I heard that right?
Thanks.
Sure. We're not going to give specifics on gas. It was very profitable. A little bit of it can be an offset to other margins. A lot of it is just outsized.
But then we also had a few other things that went the other way. So that outsizeness was a little less outsizeness. In terms of gross margin, optical and hearing aids. Again, just looking just like I say in the core, gas was the big one, but several other key ancillary businesses also had slightly improving margins year over year, pharmacy optical and hearing aid.
And that what drove that? Was there a mixed issue or
I think some of it I think it's driving sales. A big chunk of it is driving sales. I think in hearing aids and I'm guessing here because I don't know, our success of our Kirkland Signature, which is an incredible value and quality. I'm told that the penetration of that is huge. Generally, we make more margin and save the customer more money on our private label.
But I'm guessing at that one.
And I guess just because it's linked a little bit, where are we now with inflation for the whole store, if you were to roll it together? The beat up and electronics down and all that kind of stuff?
Year to date, we're about 0.5% deflationary. And that's a LIFO index for U. S. Inventory. So what were all like items cost us on day 1 of this fiscal year and one of these same items cost us on day 180 ish or whatever this year.
And if on day 1 it was 100.00 on the end of 24 weeks, it was 0.995, so literally 0.5%. You had a little bit of inflation in some sundries and apparel and domestics. You had deflation as you expect in majors. You have deflation in gas. And you had deflation in food and sundries a little bit in food a little bit.
Sundries were up a little, food was down a little. So not a lot of deflation.
Okay. That's great. Thanks a lot.
And your final question comes from the line of Joe Feldman with Telsey Advisory.
Hey, guys. Thanks for taking my question. Made it in. Wanted to just ask about international for a moment. I think we've been in you've been in Spain now for about a year.
Just was curious for a little update there, update on what you're thinking about new countries. I believe France was going to be next. And also just more generally just store productivity when you're opening
internationally, are you still kind of achieving
and exceeding the targets that you've
a achieved and exceeded recognizing whenever you go into a new country and I'll go back I'll use Japan as an example 15, 18 years ago, 15 ago. Our original plan there was to open a unit a year for 5 years and just to achieve breakeven at the end of year 5. I think we ended up opening 6 5 years and we achieved breakeven at the end of year 4 roughly. And a lot of that has to do with you've got a $5 plus 1,000,000 a year net on central expense, buyers, accounting department, small IT department, you name it. And then of course all the inefficiencies are starting up.
Membership wise, we're doing great in Spain. We have 1 unit mind you. Sales wise, we're a little under our plan, but it's growing it's starting to finally grow nicely. I think now that we're there to stay, we've got 2 openings planned for the remaining part of this calendar year. 1 both of them in the Madrid area.
And what dates are those? 2017. One's in September and one is later that year? I think they're both in the fall. And again, what we find even if it's in different cities, once we're there, you start getting more local vendors willing to sell you because we're going to be around and you get a little more play in the press.
So we'll see, but we feel good about going so far. France, we're still at least a year away from opening. I think when we first sat down 4 or so years ago, the view was is that Spain would take 3 to 5 years and France would take 3 to 8 years and it is. So it's just it's a long drawn out process of permitting and the whole appeals process over there by 3rd parties.
Got it. Thanks guys. A lot of the other questions we had were answered. So thanks and good luck with this quarter.
Well, thank you. And thank you for listening for an hour and a half and have a good day.
Thank you. This does conclude today's conference call. You may now disconnect.