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 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 one on your telephone keypad. If you would like to withdraw your question, press the pound key. Thank you. Mr. Richard Galanti, Chief Financial Officer, sir, you may begin your conference.
Thank you, Brandy. Good morning to everyone. This morning's release will review our second quarter and first half fiscal 2015 operating results for the 12 and 24-week periods ended February 15th, and our monthly, four-week sales results for the four-week period ending this past Sunday, March 1st. 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. We do not undertake to update these statements except as required by law. To begin with, our 12-week second quarter 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 million, 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 to company 401 plan participants. Partially offsetting this reduction to the income tax line was a $14 million, or $0.03 a share, income tax charge related to an ongoing overseas income tax matter.
The net impact of these two discrete tax items to our reported second quarter earnings, $1.35 earnings per share, was $43 million or $0.10 a share to the positive. Excluding these two items, EPS for the second quarter would have been $1.25 or up 19%. Other factors that impacted our second quarter when you are 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 will 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 currencies 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 million pre-tax, or $0.05 a share, than those earnings would have been had FX exchange rates been flat year-over-year. Again, another relative weakening of these foreign currencies relative to the U.S. dollar. Third, 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&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&A by an estimated $22 million or about $0.03 a share. Fourth, stock compensation expense. This was higher year-over-year in the quarter by $14 million or $0.02 a share.
While this charge was about a four-basis point hit to SG&A, it was a much smaller year-over-year impact to SG&A this quarter than it was in Q1 when the year-over-year delta was $38 million or $0.06 a share to the negative. Lastly, interest income and other. This number was lower year-over-year in Q2 by $10 million in pre-tax 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. 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, and this had about a 323-basis point impact on the number to the negative, and by weakening FX foreign currencies relative to the U.S. dollar. This was just under 250 basis points to the negative. Excluding gas, our reported 4% U.S. comp sales increase in Q2 would have been +8%. Our reported -2% international comp, assuming flat year-over-year FX rates, would have been +8% as well. Total comps again reported 2% for the quarter, +2%, excluding gas and FX were +8% for the quarter on a more normalized basis. For our four-week month of February, which includes the last two 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. Excluding gas, the +2% reported comp for February would have been a +7%. The reported flat international comp would have actually been a +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. Total company comps, the reported +1% for the month would have been a +8%, excluding gas deflation and FX. In terms of new openings, after opening nine new locations in Q1, including one reload, we opened no new locations in Q2.
All told, that puts our fiscal 2015 openings through the second quarter still as eight net new locations. We now operate 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. Eighteen planned for Q4. Of these 20 additional openings before our August 30th fiscal year end, 10 are in the U.S. and 10 will be international. Most likely end the fiscal year with 691 total locations. A few of those near the very end of the fiscal year could slip into Q1 of 2016. My guess is that additional 20 may be 17, 18, who knows.
Also this morning, I'll review our e-commerce activities, our membership trends and renewal rates, a little more discussion on margins and SG&A in the quarter. Our recent $5 a share special cash dividend and the related billion-dollar debt offering. Our recent announcement related to the planned changes for our U.S. co-branded credit card offering. For our second quarter results, sales for the quarter for the 12 weeks ended February 15th were $26.87 billion, up 4% from last year's $25.76 billion. Our reported comp basis, as I mentioned, Q2 comps were up 2%, but up 8% excluding gas and FX. For the quarter that reported plus 2 was a combination of an average transaction decrease of a little over -3%.
Again, taking gas and FX out of that number, the average normalized transaction increase would have been a little over 2%, so a positive. An average frequency increase of a little over 5.5%. 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 total base of only 20 over there. With Taiwan, Korea, and Mexico being strongest in local currency comps. In terms of merchandise categories for the quarter. For the second quarter, within food and sundries, overall in the mid-single digits.
Candy, meat, deli, beer, and wine were the relative standouts. Within hard lines, overall in the low single digits. Departments where the strongest were tires and electronics. Consumer electronics was up in the mid-single digits. Within mid-single digits softlines comps, domestics and apparel were standouts. 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 four-week month of February year over year, the average price of gasoline sold was down 31.5%. In terms of geography, Midwest, Southeast, and Bay Area regions were the strongest during February. Internationally, in local currencies, Taiwan and Korea 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 merchandise category standpoint, ex FX, food and sundries overall for the month was in the mid-single-digit range. Hard lines overall came into the mid to low single digits, which was consistent with what electronics did during February. Soft lines was up in the mid-single-digit range, and finally, fresh foods up nicely in the low teens overall, with meat being the strongest. Again, as I mentioned, seeing quite a bit of inflation in that area. Moving on the line items down the income statement. Membership fees were up four basis points and up 6% from $550 million a year ago in the quarter to $582 million or up $32 million.
Take out 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%. For the first time, our fully captured worldwide rate is rounding up to 88% instead of down to 87%. Continuing 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 32.7 million members, up from 32.0 million, up about a little under 700,000 from the end of the first quarter, 12 weeks earlier. Primary business inched up from 6.9 million to 7.0 million. Add-on remained at 3.5 million.
Total member households, 42.5 million at the end of Q1 and 43.2 million at the end of Q2, and representing total cardholders going from 77.5 million to 78.7 million over the 12-week fiscal quarter. At Q2 end on February 15th, paid Executive Memberships were a shade over 15.4 million, which is an increase of 188,000 during the quarter, or about 16,000 a week. That's both new member sign-ups as well as conversions. Executive Members, as I mentioned before, a little over two-thirds of our membership base and just about two-thirds of our sales. I'm sorry, about one-third of our membership base and about two-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%, inched up to 89.9%, and Total remained at 90.7%.
Worldwide, the 87.3% went to 87.9%. You'll see a little bit bigger increase there, because when you start at a lower base, that tends to improve a little bit faster in those first few years. I'll comment on this past Monday's press release regarding Costco entering into long-term co-brand credit card agreement with Citi and our acceptance and co-brand agreement with Visa. As the press release stated, we've entered into a new co-brand credit card agreement with Citi and an acceptance and 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 wouldn't be implemented until next April 1st, 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, needless to say, provide generous rewards to Costco members utilizing the new card. 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. It probably is not going to be till several months down the road, this calendar year. The new card, of course, will also serve as the members' Costco membership card. 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-brand credit card holders as well. Going down the gross margin line.
Gross margins were up 54 basis points on a reported basis from 1,053 to 1,107. As I always ask you to do, I'll ask you to jot down four columns and six line items. The columns, of course, would be Q1 2015, both reported and without gas deflation. The columns 3 and 4 would be Q2 2015, reported and without gas deflation. Going across those line items, the first one is core merchandise, reported in Q1 was -6 basis points year-over-year. Without gas deflation was -13. In Q2, reported was +10. Without gas deflation was -20. Ancillary, +22 and +20 in Q1, and +46 and +49 in Q2. 2% reward, -1 and -1, and then -5 and -2. LIFO, +1 and +1, and then in Q2, +3 and +3.
Other, +6 and +7 in Q1, and 0 and 0 in Q2. All told, in 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 +14. Reported for this quarter was +54, and on a gas neutral basis, excluding gas deflation, was a +20. As you can see, again, our overall gross margin was outsized at +54, and even at +20 without gas deflation. 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.
Again, excluding gas, you see in this chart it was -20. 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, 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+% of our total sales. On their own sales, they were down year-over-year by 3 basis points in the second quarter, with food and sundries and hard lines being up year-over-year a little, and soft lines and fresh foods being down a little. Frankly, margins are fine. We're driving sales, and certainly gas prices give us plenty of room to continue to be aggressive.
With gas prices going up the other way right now, 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. Our gas business accounted for nearly two-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 increasing Executive Membership was good. It hit margins by 5 basis points, or 2 basis points without gas deflation. That's that 2% reward feature. This just generally reflects continued increased sales penetration from the Executive Members, which, as I mentioned, buy more and are more loyal and shop more frequently.
LIFO in the second quarter, we recorded a $4 million credit pre-tax compared to a $5 million pre-tax charge last year, so about $0.01 a share or 3 basis points benefit year-over-year for $9 million to the gross margin. Moving on to SG&A. Our SG&A percentage Q2 over Q2 was higher or worse by 11 basis points, coming in at a 994 this year versus a 983 last year. 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. 5 line items. First one is core operations, or just operations. +8 basis points was reported in Q1. Plus here is a positive, mean lower year-over-year. +16 without gas deflation. In Q2, it was a +3 and a +29.
Central, -1 and -1. In Q2, -10 and -7, so higher year-over-year in that one. Stock compensation, -11 and -11, and then -4 and -3. There are no quarterly adjustments, so the last line item would be total. We reported a year-over-year SG&A higher by 4 basis points in Q1, both on a reported basis, +4 or lower by 4 basis points in Q1 without gas deflation. In Q2, higher or -11 basis points, and then better or lower by 19 basis points or +19 basis points without gas deflation. A little editorial on SG&A here. The operations component of SG&A was better by 3 in Q2 on a reported basis and better by 29 year-over-year excluding gas deflation.
Gasoline sales penetration and very low SG&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. 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. As I mentioned earlier, increased IT spending for our modernization. This was 7 basis points on a reported basis, 5 basis points without deflation and FX. Lastly, in both years, we had a few discrete items to the tune of about -5 basis points, but that is what it is.
Within SG&A, our stock compensation expense, as I mentioned, was higher or worse by four basis points on a reported basis, three without gas deflation. On the income statement line, pre-opening expense, $8 million last year, $9 million this year. Last year we had three openings. This year we had no openings, but we've got plenty of openings coming up, so you've got quite a bit of pre-opening 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 $877 million, 21% higher year-over-year, or higher by $153 million compared to last year's $724 million in the quarter. Below the operating income line, reported interest expense was essentially the same year-over-year, coming in at $26 million last year and $27 million this year.
As I mentioned earlier, interest income and other was lower by $10 million coming in last year in the quarter of $30 million to the positive. This year, only $20 million to positive. Actual interest income for the quarter was higher by three. The other swing was a -13. 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. Pre-tax income was higher by 20% or up $142 million from $728 million last year in the quarter to $870 million this year. In terms of income taxes, our company tax rate this quarter came in at a, needless say, on a reported basis at a very low 30.2% versus 35.0% last year.
The income tax line benefited primarily from a $57 million tax benefit in connection with a special cash dividend. Dividends paid on Costco shares held by our employees in our 401 plan, which total about 29 million shares, are deductible for U.S. income tax purposes. We recognized a one-time income tax benefit of approximately $57 million related to that. As I mentioned, there was an offset to that benefit of about $14 million 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 would have been up a tenth of a percent to 35.1%, just slightly higher compared to last year's 35.0% on a normal basis. Overall reported net income was $463 million last year compared to a reported $598 million in net income this year.
This year's net income on a reported basis was up 28%-29%, taking out those two 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 million in the quarter and $514 million year-to-date. Accounts payable ratio, accounts payable as a % of inventories on a reported basis, it showed improvement year-over-year from a 93% figure to a 97%. There's a lot of construction payables in that. It showed a comparable improvement from an 83% if you just do merchandise accounts payable as a % of merchandise inventories. Merchandise accounts payable as a % 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 $12.8 million this year on average per warehouse, up about $20,000 compared to a year ago. So pretty much flat. Ex FX year-over-year inventory levels would have been up about $350,000 or about 2.7% of sales on, again, an 8% sales increase. So I think good control of our inventories. And inventories are in good shape. Mid-year physicals came in just fine. Physical inventories. I will respond at this point to questions received in the past few months about the work slowdowns, as you know, on the West Coast ports. 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 four to eight weeks, if not a little longer, to get through the backup there.
We, like I am sure every other importer of containers, are trying to identify which ones have priority where we can. Really, so pretty much the impact of that is 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 million or $200 million. Nothing to really speak of in terms of sales. And it was probably a little worse for some others out there. In terms of CapEx. In Q1, we spent $555 million on CapEx. In Q2, we spent $619 million, so quarter-to-date, just under $1.2 billion. For the year, we would still expect to be somewhere in the $2.5 billion-$2.7 billion range, which is up from $2.0 billion last year. In terms of Costco online, we continue to operate it in the four countries, U.S., Canada, U.K., and Mexico.
We are also doing things, not really online, but through Alibaba, Tmall in Asia. But in terms of the four countries online, that is 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 is some impact there. But overall, continued good results and sales strength on our .com efforts. In terms of expansion, as I mentioned, we planned in Q3 to open three units, including one relocation, so net of two. And have current plans for 19, which includes one relo, so a net of 18 new in Q4.
Assuming we opened those, we would be at 28 net new units for the year or about 4.5% square footage growth. By country, assuming we get to 28, it would be 17 in the U.S., so a little under two-thirds there. One in Canada, one in the U.K., five in Asia, one in Korea, one in Taiwan, and three in Japan, as well as one in Australia and three new in Mexico. As of 2Q, total square footage stood at 96.4 million sq ft. In terms of stock buybacks. In Q1, as you know, we started the process and bought a little bit. We bought $18 million worth, or 139,000 shares at an average price of a little over $126 a share. In Q2, we expended $92 million to buy 642,000 shares at an average price of $143.21.
Now, a bunch of that was done before the dividend date, the $5 ex-dividend date. In terms of dividends, our current quarterly dividend stands at $0.355 a share or $1.42 per share annualized. That represents a total cost to the company of about $630 million. This regular dividend, of course, was in addition to the $5 per share dividend, which amounted to $2.2 billion that we paid out on February 27th. In fact, both dividends were paid to shareholders on February 27th. As I mentioned, to pay in part for the $2.2 billion special dividend, we did a $1 billion debt offering a few weeks back. That's $500 million of five-year fixed and $500 million of seven-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. March comp sales will be announced on Wednesday, April 8th after the market close around 6:00 P.M. Pacific Time and 9:00 P.M. Eastern Time. Hopefully, that'll help our East Coast friends. Similarly, our Q3 scheduled earnings release date will be Wednesday, May 27th for the 12-week third quarter ending May 10th. Again, the release will occur at 6:00 P.M. Pacific Time, 9:00 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&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. 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&A. Thank you. Hello.
At this time, if you would like to ask a question, simply press star one on your telephone keypad. Again, ladies and gentlemen, that is star one to ask a question. Your first question is from Charles Grom with Sterne Agee.
Thanks. Good morning, Richard, thanks a lot for doing past the 3:00 in the morning wake-up call. I guess my first question is, when you look at your gas business 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 three 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 it in the quarter. Again, it's not like we looked at it and said, "Well, that'll be an offset to FX," as an example, because we know that FX is still not-- Even if FX rates continue to stay where they are right now and don't get any relatively weaker, it's still on a relative basis in Q3 and Q4 going to be relatively weaker. We recognize that Q3 and Q4 will be a little more challenged in that regard, but certainly could margins have been up a few instead of down a few? Probably, but who knows.
Okay, fair enough. When you look to March of next year and the change in tenders, it's my understanding there's roughly 750 million U.S. Visa card holders today, and there's roughly 50 million Amex holders today in the U.S. How big an opportunity could this 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 business is for Citi to work with American Express and figure out the account portfolio. A lot hinges on that. We expect that to happen, but there's no guarantees. 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 that may want to use that instead. Just like there's cannibalization now, there's people who 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's not.
I think there's lots of opportunities. We got to get there first order of business is the transition itself. There'll be a lot more to say once we get there.
Okay. 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, just margins on e-commerce relative to the clubs? Thanks.
There's probably approaching 8,000 regular SKUs. I'm excluding from that we have a lot of tire SKUs, based on all the sizes. We've got a lot of office product SKUs through a third party, but the core SKUs on our side is 8,000, probably 1,500-plus more than a year ago. I'm guessing there, but that's probably a good number. 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-$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. SG&A is a lot lower. 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.
Richard, two-part question to get at 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 quality of experience in the club and maybe different parts of the club, like Fresh? 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?
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 two days schlepping around part of the country visiting warehouses, both us and competition and other things, and looking at new sites. 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. I got to tell you, when a member writes a little complaint, it doesn't have to be nasty, just a complaint, it gets heard. Recognizing we're always going to have some challenges.
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 emails that are sent in to senior management about positive experiences with a member with a particular employee who they were helped in the warehouse or somebody went above and beyond. 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 five years ago when we were opening about 20 units a year, probably, I don't have the numbers in front of me, but probably it was 70/30 U.S., and you say, "Richard, five years hence, where are you going to be?" I'd say, "Well, we're going to be about 30," and we actually got there, pretty close. If it's 70/30 U.S. back then, it's probably 50/50 heading to 30/70 over the next five years. Here we are, almost 60/40, 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 in that quality of experience, the units that are 250 and 300, 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. A lot of it also is, I think, surprising how many units we can put in some of the newer markets. That newer is a relative term. Newer markets and markets that we've been in for the last five or 10 years. I think it's a combination of all that. Again, last year, I think I have it here, hold on. Here it is. In fiscal 2013, I'm sorry, last year, of the 29 net openings we had, I think 16 were in the U.S. This year of the 28 or 16 or 17 were in the U.S., so a little over half. This year it's, what did I say? 17 out of 28, so almost two-thirds.
I think probably five 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. Yes, if you added even 30 a year for 10 years, you're essentially there. Yeah, I think so. That's certainly not out of the realm.
All right. 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 a 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. 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. Ultimately, 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 subtracted 20 or 30 that ultimately didn't work out. Well, now we bring back some a few years later that worked better. I remember years ago, we had an organic peanut butter Kirkland Signature that didn't set the world on fire. I think we're now testing again, and it's a pretty good item.
We'll see how long pretty good means. We recognize the strength of our concept is both KS and brand. I don't think, if you said, "Richard, you're in the mid-20s now in terms of KS. Do you ever see it going to 50?" That's a stretch. Even our own numbers internally, when 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. Certainly, there's not a lot of low-hanging fruit. There's lots of $20 million and $30 million and $50 million items over time, not a lot of $300 million and $400 million items like paper goods or water or things like that, or K-Cups.
Okay, thank you. 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, that's not just here, that's opening three units in Japan, and that affects three or five other Japanese units. Total cannibalization in fiscal 2013 was 65 basis points and 14, 58. For the first half of this year, it looks like it's about something in the low 40s. It's going to fluctuate between 35 and 75, depending on what we do and where we do it. My guess is something in the 40 to 50 range. 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 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? 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 what the excess margin may have been to EPS this quarter?
Look, just on that line item, it was two-thirds of the margin improvement of all answering businesses. It could be 200-plus basis points of extra margin. Our margins in gas on a daily basis over the years could be anywhere from a zero to a five or six. It's all over the board. Might even be a little higher sometimes, but it really ranges. 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, maybe when the bad economy hit, it went to the low negative single digits. We remained at four, five, six, seven. Right now, we're in the mid-teens.
We're getting a lot of people coming into Costco to buy gas, and that certainly drives them into the warehouse as well.
On the IT spend, you mentioned that, I think you said it was $0.02 this quarter. As you look at Q3 and four, what do you expect that impact to look like?
It's hard to guess completely. I know we've had 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 million, $60 million projects that the day they're put into service, they then over the next In our case, 65 four-week periods over the next five years, generally, you take a little under a $1 million a month hit. Some of those are starting to hit. My guess is it that much? Is it a little less? A little more? It's hard to say. Still over a several year period, incrementally, recognizing your denominator, sales keep getting bigger too. Even with that bigger sales, we had indicated something in the low to mid teens of basis points. I could be off by a couple of basis points, but it ain't cheap.
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?
Yeah. 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. Part of that's availability. We and everybody else could sell a lot more if there was more out there. I think we're doing a pretty good job of lining up our sourcing. I think I mentioned, last quarter, that for all of 2014, organic was approaching $3 billion, which was more than twice what it was 2 years earlier, or a year and a half earlier. It's growing fast. I don't know if it's 50% a year, but it's certainly growing at a low mid or mid double-digit number. 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. It'll keep growing.
Okay.
I'm sorry I can't be more specific.
Okay, thanks.
Your next question is from Christopher Horvers with JPMorgan.
Hi, it's Mark back on for Chris. Congrats on the fantastic quarter. How are you, Richard?
Good. Thank you.
Just to follow up on a couple of Chuck's questions, actually. It doesn't look like you're getting into too much specifics about the change in the credit card, Amex, et cetera. Just curious, what has been the response that you've seen from our friends up north? I know that sort of changed over in January, maybe what the reception has been there.
Well, it's been good so far. We're getting a lot of people to switch, recognizing it's people's membership card as well. If anything, our view of the U.S. 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, recognize, big positive to 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. 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 of %, that you guys are actually capturing a lot more share now than in sort of history, period. Is that something you would agree with?
Yeah, no, there's two places to that, just so everybody understands. When prices go up, we make less and save the customer. We still save them, save them less. When prices go down, we save them more and we make more. Certainly, prices going down, we save the customer more, that's positive, and we make a little more or a lot more. That's changed in the last few weeks, we've made a lot more in the last few quarters. 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, it is a lot because our gallonage 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. Yep. Pretty big acceleration there.
Yeah.
Just finally on geography-
By the way.
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 price. There's that third party, is it GasBuddy.com, that 40 whatever million people input their price of what they bought gas for. For two 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. That's not every station, every day, everywhere, but on average, with all those data points, we're it. I think that kind of publicity helps us as well.
That makes perfect sense. Just the last question on sort of geographical differences. It looks like you called out the Midwest, then the South area as the strongest. Obviously, a lot of moving pieces there with the Chinese New Year as a help. The port shutdowns, which on our math comes out to 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. If I look at the New York, the Northeast as an example, the four weeks that comprised February, the first two weeks were mid-positive single, and the last two weeks were mid-negative single-digit. That's a huge swing. Other areas did just fine. The Texas region got hammered the last week with weather. Overall 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 quick ones. On the credit card, I know you're not going to share a lot of details. Besides probably some savings just from some lower interchange fees or credit card fees, is there any escalators such that if there's certain volumes met, you could see 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, there's a handwritten note from many years ago when our securities counsel was sitting here, quickly as 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, 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, 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. We think that it's an exciting bucket, and we'll do a lot with it. 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, $0.90 back to the customer. Rest assured, there'll be whatever benefit X is, a little bit of it will accrue to our P&L, and a lot of it will accrue to the member in some way, shape, or form. 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., can you just speak directionally to whatever growth rate you're seeing in membership, whatever trend line has been occurring? Has it changed much? Is it the same in the U.S. versus international?
It's higher international because we're newer. I think I've shared in the past, if you take the total number of members divided by our total number of warehouses, you've got roughly 59,000, 60,000 member households per warehouse. In Japan, you've got a number that is a three-digit number. It's in the low hundreds. You also have a lower renewal rate in those first few years. It tends to balance out over time. We operate overall in other countries on a membership fee as a higher % of sales, particularly in Asia.
Whatever prevailing growth rate there has been in membership in the U.S. up until second quarter or up until the first, meaning has that run rate stayed the same in the U.S.?
Yeah. Again, a lot of it is dictated by new openings. Again, it's going to be dictated more, like when I said new member sign-ups in the quarter were up 9%, there have been times when it's been almost flat, part of that are down a little bit because a year earlier in that quarter, you opened three 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 eight 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 out front side. You could have anywhere from 25,000 to 40,000 members signed up.
40% of them aren't going to renew a year later, in terms of new members coming in and buying a membership, that really distorts that number. I don't know how much meaning-- That plus nine is a function of that as well, we always point that out.
Okay. Just very quickly, can you just remind us on the e-commerce business, are there member-only items, or is there items someone 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. The only person who's buying on your website is a member?
Correct. Yes.
Yes.
You have to be a member.
Okay. Thank you.
Is that it, James?
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 a membership should be?
Well, I think in a roundabout way you're asking about when do we see any possibility of a fee change. Historically, that's really we think about last. We drive prices and value every day in everything we do, and I mean it. You go to our budget meetings every four weeks, and you've got a day and a half, and half of that time, or a third of that time is merchants. We're figuring out how to improve the value and lower the price and raise the quality. Historically, using U.S. and Canada as 80% of our business, first of all, and probably 80-ish, a little different than that number, but pretty close in terms of % of members. 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.
During 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 into January of 2018. 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?
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. Just circling back to gas profitability, I know you've addressed this a few times on the call, given the spread between the Street's forecast and the actual for 2Q, I just wanted to touch back on your comments around the third quarter. You mentioned that gas prices have started to trickle back up. 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 gas helped us a little, hurt us a little, helped us a lot, hurt us a lot. It's pretty much in proportion with the trend of gas prices per gallon. As you know, the constant drive down has stopped, and it's actually been up a little bit. A lot of that party is now behind us for right now. 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? Anything you want to share on your decision to issue that one last week?
Well, we now have two data points instead of one. We did it, and you're right, the motivation or one of the motivations for doing it 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. 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. 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 billion 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. We tend to do both, and we tend to look at all things, first and foremost, CapEx, how can we ramp up CapEx? We've done that. Second 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 nine 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. There's no reason to think it'll be two 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 billion dollars of cash on the balance sheet, you have come to the debt markets, which I understand is opportunistic. Should we think about the cash balance that you have today is 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. Actually, we had cash and short-term investments at the end of the quarter of $7.4 billion, roughly.
I had a number that wasn't completely consolidated of, like, 7.2. 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. In addition, we announced last year that we brought back some of the cash in Canada. 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 billion, $1.5 billion, $1 billion plus, that is a cash equivalent, but it's not cash.
Got it. That's very helpful. Then just a very quick follow-up. We're seeing the LIFO benefit creep up. I know it's only a couple basis points, but it's a nice change from a year ago when, I guess you peaked out at around an eight basis point hit. Can you just talk about what the moving pieces are in driving that? 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'd be very helpful.
Yeah. 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, as of today, it's LIFO creditable. I don't think it's gonna be a big giant number either way, but it's a little bit of a crapshoot at this point.
Got it. Thank you so much.
Yeah. 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. Some of that is starting to finally flow through. 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. 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. Are they following that typical spending pattern of a new member in terms of spending and frequency?
I'm gonna punt because I don't know the answer to that. If you hold that question for next quarter, I promise we'll have some numbers. I know that we are tracking it, and 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. Just another one. You mentioned the Bay Area as, I think, a strong region, either in the quarter or for the month. I know that's an area where you have a 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, 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'll still take time for that to grow.
Great. Thank you.
Your next question is from Scott Mishkin with Wolfe Research.
Hey, guys. Thanks for letting the call go a little longer so I could 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. You mean total size of e-commerce?
Yeah.
It's about 3% of our total.
3% of your total sales. Cool.
On an annualized basis, I think last year it was, like, 2.9 something. Yeah. A little bit closer to 2.9. $3 billion and growing at 20%. Yeah.
$3 billion growing 20%-25%. From a gross margin perspective, how do we think about SG&A associated with that business? Is there much of it? I mean, is it, like, fractional? A couple percent? How do we think of SG&A when you look at it? I know a lot of the stuff just goes directly to the consumer. About 60% of it is there. Is there really a lot of SG&A associated?
No. Let me just look here. Margins are a shade lower, not a lot. SG&A is a lot lower.
Okay. From a philosophical perspective, everyone's always ragged on. Well, not ragged on. 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 are a little bit lower. SG&A is a lot lower. 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, we're retail, there's different parts of it. No, we're happy to make a little more there. First and foremost, are we as competitive as we can be relative to others? 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 does e-commerce, if you will, compensate for that? It's all part of the same thing. The fact that its margins overall are a little lower than the warehouses, I think is a function of that. 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 it or purchasing powers.
Pharmacies, of course, you've got pharmacists and pharmacy techs that make more than your average hourly employee. You've got a higher cost structure there, as well as all the regulatory and billing stuff going on in that business. We work on our higher margins to offset some of that, but we also work on a profitability number that's good. It's all part of the equation, if you will.
Sure, just one last one. 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, the fact that there isn't 2 million SKUs like there is on Walmart's site, I think is a great attribute. 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. Part of that was is trying to drive business, adding some categories 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 three kids at home, three 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 I'm going to get three other things in the non-food area that I had no plans to get, and I'm excited about that, but I knew going in I was going to get three or four items that I didn't plan on getting.
When I go to Costco, I don't know when do I go to Costco.com." Part of our challenge in the last year on Costco.com is not only driving sales of those bigger dollar ticket and physical ticket items that not everybody wants to schlep 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. Also, how do we get you there more regularly? Whether it's K-Cups and other items for your office or home or some apparel items. You know, the 5.5 million KS dress shirts that we sell every year, which is a great value. I always joked, if you're really tall with short arms, we can't serve you because we don't sell all the size and collar combinations. Online, we do.
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. If 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. Would you prioritize any major learnings from holiday in terms of where you might look to do things differently next year? On the core merchandising margins number, what should we look at as helpful drivers for that positively going forward? What kind of run rate might we expect there? Thank you.
Well, I'm sorry, 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, on the latter part, we don't provide specific direction on that area. I remember several years ago when our margins were just down year-over-year, every quarter for a couple of years, 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 response is still there. I think we continue to get excited by strong sales and strong loyalty and strong conversion to executive member, To a little margin improvement. If we want to get a little bit, we think we can, while still being very competitive.
In terms of what did we learn or not learn during the holiday, I think when we look back, we think we did a pretty good job of planning for the port slowdowns. Arguably, it's probably easier to do a better job when you're managing fewer items. 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 in bakery and food court and the like go up, that we're not going to change our prices. If it hurts our margin a little bit, it hurts it. We can get it elsewhere. I don't think Given our strength, 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. If anything
Okay
We will continue to be aggressive in terms of the types of products, the price points of products that our member wants great value or great items. We'll continue to drive the value proposition and upscale items.
Yeah, that sounds encouraging. 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 read too much into one quarter. For a number of years here, we've generally, again, taking FX gas out of it, but just the four walls of warehouse inventories on a non-FX diluted 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 of the draw a little bit, but still trending in a positive ratio there.
Okay. 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? Will that be a material driver of traffic? At some competitors, e-com contributes 100 basis points or more to comp.
Yeah. 23% growth on $3 billion is like $660 or whatever, or $500 million. That's a little under a half a 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 Center that we have that we both deliver and order for pickup. Some of the things we're testing with Google and Instacart 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." I don't know if our member appreciates it. I know there's a lot of effort out there doing it.
Our first order of business is we just are installing the membership module, which includes a lot of hooks to things, but I don't see us doing that for 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. Two, actually. One, have you seen any evidence that gas prices correlate either to customers' willingness to spend more on food, sundries, and hardline 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 du jour every night 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. 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. 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 disclose that. In the U.S., total credit card is about 40, debit's about 40, cash, check, and other is about 20.
Presumably, a big portion is private label.
Certainly more than half, 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 of it to this top of wallet card.
Got it. Thank you so much.
Your next question comes from the line of Meredith Adler with Barclays. Meredith, your line is open. There's 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. Good afternoon now 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&L, can you just help us understand a little better, like what we should expect both on MFI and on SG&A over the coming quarters as we look at the foreign exchange where we are today? 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. Again, I can't tell you all exactly what, when and where and how, 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. I mean, it's not like we're going to say, "Hey, let's take all this and go use it." 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 with a negative in front of it. Yeah, interesting coming others, a little bit of a crap shoot. It goes both ways. Gas we know is going to be less outsized profitable in the coming quarters. There's no reason, 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 of 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 two more calls.
Okay. Your next question comes from the line of Greg Melich with Evercore ISI.
Hi, thanks, Richard. I have two questions. One is, I 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 have to cycle, it comes back or is it something that's a new plan? My other question was on gross margin. I think I heard you say that in 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. Yeah, we're not going to give specifics on gas. It was very profitable. A little bit of it could be an offset to other margins. A lot of it is just outsized. We also had a few other things that went the other way. That outsized-ness was a little less outsized-ness. 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.
What drove that? Was there a mix issue or
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 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. I'm guessing at that one.
I guess just to explain it a little bit, where are we now with inflation for the whole store if you were to roll it together? With meat up and electronics down and all that kind of stuff.
Year to date, we're about 0.5% deflationary. That's a LIFO index for U.S. inventory. What would all like items cost us on day one of this fiscal year, and what do these same items cost us on day 180-ish or whatever this year. If on day one it was $100.00, at the end of 24 weeks, it was $0.995. 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. 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.
That's all.
Not a lot of deflation.
Okay, that's great. Thanks a lot.
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 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. 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 set out?
Well, in Asia and Australia, historically, we've 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 years ago, our original plan there was to open a unit a year for five years and just to achieve breakeven at the end of year five. I think we ended up opening six in five years, and we achieved breakeven at the end of year four, roughly. A lot of that has to do with you've got a $5+ million-a-year net on central expense, buyers, accounting department, small IT department, you name it. Then, of course, all the inefficiencies of starting up. Membership-wise, we're doing great in Spain. We have one unit, mind you. Sales-wise, we're a little under our plan, but it's starting to finally grow nicely.
I think now that we're there to stay, we've got two openings planned for the remaining part of this calendar year, both of them in the Madrid area. What dates are those?
One is in September.
One is in September, and one is later that year?
Yes, in the fall.
I think they're both in the fall. 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. 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 four or so years ago, the view was is that Spain would take three to five years, and France would take three to eight years, and it is. It's a long, drawn-out process of permitting and the whole appeals process over there by third parties.
Got it. Thanks, guys. A lot of the other questions we had were answered, thanks and good luck with this quarter.
Well, thank you. 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.