Ladies and gentlemen, thank you for standing by, and welcome to Q2 Earnings Call and February Sales Conference. I would now like to hand the call over to your speaker today, Mr. Richard Galanti. You may begin your conference.
Thank you, Buena, and good afternoon to everyone. I will start by stating that these discussions will include forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements involve risks and uncertainties that may cause actual events, results and or performance to differ materially from those indicated by such statements. The risks Certain uncertainties include, but are not limited to, those outlined in today's call as well as other risks identified from time to time in the company's public statements and reports filed with the SEC. Forward looking statements speak only as of the date they are made and the company does not undertake to update these statements except as required by law.
In today's press release, we reported operating results for the Q2 of fiscal 2021, the 12 weeks ended February 14, as well as February retail sales results for 4 weeks ended this past Sunday, February 28. Reported net income for the quarter was $951,000,000 or $2.14 per share, compared to $931,000,000 or $2.10 per diluted share last year. This year's results included $246,000,000 pre tax or $0.41 per diluted share and costs incurred primarily from COVID-nineteen premium wages. Net sales for the quarter increased 14.7 percent to $43,800,000,000 from $38,260,000,000 a year ago in the Q2. Comparable sales for the Q2 of fiscal 1 were as follows.
For the 12 week period, U. S. Comps were reported at 11.4% and excluding gas deflation and FX, 12.6 percent. Canada reported at 13.4 percent, ex gas deflation and FX 10.6 percent. Other international reported at 21.5 percent, ex gas deflation and FX 17.7%.
All told total company reported at 13.0 percent and ex gas deflation and FX 12.9%. E commerce on a reported basis was 75.8% and FX 74.8%. In terms of the 2nd quarter comp sales metrics, our traffic or shopping frequency increased 1% worldwide and up 2.7% in the U. S. On a year over basis during the quarter.
Our average transaction or ticket was up 11.9% total company and 8.5% in the U. S. During the 2nd quarter. Foreign currencies relative to the U. S.
Dollar positively impacted sales by approximately 110 basis points and gasoline price deflation negatively impacted sales by approximately 100 I'll review our February sales results a little bit later in the call. Going down the income statement, membership fee income came in reported at $881,500,000 or 2.01 percent compared to $816,400,000 or 2.13% in So up $65,000,000 or 8%. Excluding the impact of FX, the $65,000,000 increase would be $56,000,000 which would represent a 6.9% increase excluding the impact of FX. No openings occurred in fiscal Those in the 2nd fiscal quarter, both this year and last year in the fiscal quarter. In terms of renewal rates, the U.
S. And Canadian renewal rate came in as of for Q2 2 at 91.0 percent as of Q2 end. This was up 0.1% from the 90.9% at the end of the prior fiscal quarter. Worldwide, our total company renewal rates were 88.5% as of Q2 end, also up 0.1% from the prior quarter's number of 88 4%. In terms of number of members as of Q2 end, both member households and cardholders, in terms of households At Q2 end, we came in at $59,700,000 up from $59,100,000 12 weeks earlier.
And total cardholders $108,300,000 up from $107,100,000 12 weeks earlier. As of Q2 end, Paid executive members were $23,800,000 an increase of $506,000 during the 12 weeks since Q1 end. Moving down the income statement to the gross margin. This year's gross margin came in at 10.96%, 2 basis points lower than last year's 2nd quarter on a reported basis of 10.98%. Excluding gas deflation, Basis of 10.98%.
Excluding gas deflation, it would have been 11 basis points lower. As I always ask you, we will do a little chart here to show some of the components of margin. 2 columns reported and the second column without gas Deflation, first line item would be core merchandise. On a reported basis, core merchandise margin year over year was came in at plus 71 basis points, Ex gas deflation plus 63 basis points. 2nd line item ancillary businesses minus 53 basis points and then without gas minus 55 2% reward minus 6% and minus 5%, other minus 14% and minus 14%.
So all told on reported basis year over year minus 2 basis points and again ex gas deflation minus 11 basis points. So as you can see from this chart, the core merchandise component was higher by ex gas deflation by 63 basis Similar to the last several fiscal quarters, sales penetration has shifted to the core business, resulting in higher contribution of our total gross margin dollars coming from the core Looking at the core merchandise categories in relation only to their own sales, core on core if you will, Margins year over year were higher by 71 basis points. Fresh Foods was again the biggest driver here. With strong sales in fresh, we benefited from the efficiencies Efficiency gains in labor productivity and significantly lower spoilage. That being said, the other 3 major merchandise categories, food and sundries, Other business gross margin was lower by 53 basis points and by 55 ex gas deflation in the quarter with most of the negative impact coming from gas And to a lesser extent from the aggregate of travel, hearing aids, pharmacy and food courts, offset a little bit by a positive From Ecom.
Crossrail Logistics, which was our InterVel acquisition a year ago, impacted ancillary margins by 6 basis points to the negative. 2% reward you can see was impacted negatively by 5 basis points implying that more higher penetration of our sales are coming from the executive membership group. And other is the minus 14 basis points. All this is attributable to the cost of COVID-nineteen or about $60,000,000 of the $246,000,000 previously mentioned. These are the direct costs for incremental wages allocated to our manufacturing and fulfillment operations.
Moving on to SG and A, our reported SG and A in the second quarter was higher or worse year over year by 11 basis points on a reported basis, Coming in at 9.89% versus 9.78% a year earlier. The minus 11x gas deflation that would have been a minus 3. Again, doing a little chart of comparison with 2 columns, both reported and then without gas deflation. First line item would be operations, Plus 31, so lower or better by 31 basis points core operations was on a reported basis without gas deflation plus 38, so lower or better by 30 Central, minus 3 basis points and minus 2, stock compensation, plus 3 and plus 3 And other minus 42 and minus 42. You add those columns up on a reported basis again, SG and A was higher year over year by 11 basis And ex gas deflation higher by 3.
The core operations component, when you look at that was better by 31 or 38 excluding the impact from deflation. SG and A in the core excluding the COVID related expenses, which I'll discuss in a moment, was significantly leveraged with a strong core merchandise sales Central again minus 2x gas deflation, stock comp plus 3, both small year over year basis points changes together pretty much a wash. And other was a minus 42 basis points hit to SG and A, which were incremental wage and benefit costs related to COVID or 186,000,000 $246,000,000 total amount. So $60,000,000 of the $246,000,000 of the $246,000,000 hits the margin and $186,000,000 of the 2 I'd like to take a minute here and discuss our COVID related expenses and how they are changing effective this past Monday, March 1. Over the past 12 month period, March 2020 through February 2021, company wide we expended approximately $1,060,000,000 pre on COVID related items.
Of this amount, approximately $825,000,000 related specifically to the $2 an hour extra hourly pay. The remaining $200,000,000 plus was made up of several other items, including the few month period where employees 65 and older were paid to stay home. This was early on during the original lockdowns, cleaning and mask supplies, paying wages to several for several weeks to our 3rd party demo service employees and assisting employees with paid childcare leave, which continues. With the $2 an hour extra pay having been paid in for full year, That extra amount has been discontinued as of this past Sunday, February 28. And effective March 1, a few days ago, we have implemented a permanent wage increase for hourly employees as well as most salaried warehouse employees.
In the U. S. And Canada, we are permanently increasing our starting wage and most wage steps above by $1 an hour and increasing our top of scale hourly wage by $0.45 an hour on top of the previously planned $0.55 an hour increase for top of scale. With these changes, our entry level hourly wages will increase from $15,000,000 $15,50,000 an hour to $16,000,000 $16,50,000 an hour. Several components of the $200,000,000 plus expenses I just discussed.
On a going forward basis, this $1,000,000,000 plus expense over the past 12 months will be reduced by a little over 1 half starting March 1, which is the beginning of week 3 in the current fiscal Q3. Next on the income statement is preopening expense, pretty much the same year over year this year came in at $9,000,000 compared to last $7,000,000 so $2,000,000 higher. In both fiscal quarters there were 0 openings, although this relates to upcoming openings as well. All told reported operating income for the Q2 of 2021 including the $246,000,000 Mentioned earlier, showed an increase of 5.8 percent coming in at $1,340,000,000 this year compared to $1,266,000,000 last year. Below the operating income line, interest expense was $40,000,000 this year versus $34,000,000 last year.
Interest income and other for the quarter was lower by 26,000,000 Year over year, interest income itself was lower by $19,000,000 due to lower interest rates. Additionally, FX and other was lower by 7,000,000 Overall reported pretax income in the 2nd quarter was up 3.3% coming in at $1,319,000,000 this year compared to $1,277,000,000 a year earlier. In terms of income taxes, our tax rate in the 2nd quarter was 26.4%, a Our effective normalized total company tax rate for the fiscal year to be in the 26% to 27% range. A few other items of In terms of warehouse expansion, as I mentioned, there were no openings in Q2. There were 8 net new openings in Q1, so we're 8 year to date the second half of the fiscal year, both this quarter and the 4th fiscal quarter, we plan to open 13 more net new units.
5 of those will be in the U. S, 3 will be in Canada and 5 will be in overseas. Regarding CapEx, In the Q2 of fiscal 2021, we spent approximately $573,000,000 Our full year CapEx spend is still estimated in the $3,000,000 to 3 $2,000,000,000 range. Moving on to e commerce, e commerce sales overall for the quarter ex FX increased 75% year over year. A few of the stronger departments, over the counter pharmacy, garden and patio, small electrics, health and beauty and majors, including consumer electronics.
Total online grocery grew at a very strong rate in the 2nd quarter. The comp numbers just mentioned follow our usual convention, which excludes our 3rd party same day grocery program, which was up 4 50% year over year in the quarter. If we include the 3rd party same day in our e com comps, 76% reported comp number would have been 96%. Costwell Logistics, formerly known as Innovell, continues to fulfill a greater percentage of our delivery and delivery items and has steadily increased since its acquisition a year ago March. In Q2, we made it a priority to enhance our white glove service, which includes assembly or complex installation.
It's now standard on many items and offered as an upgrade on many others. Turning to COVID-nineteen and some of the issues and impacts surrounding it, we continue to enjoy strong core merchandise sales. I think our buying Teams have done a great job keeping our buildings in stock despite outsized demand on some items and some supply chain challenges as well. From a supply chain perspective, Overseas rate has continued to be an issue in regards to container shortage and port delays. This has caused timing delays on certain categories, including Furniture, sporting goods, lawn and garden and even some food and sundries items like seafood imported cheeses and oils.
We expect these pressures to ease in the coming months, But it's impacting everyone of course. Regarding the pressures from high consumer demand, examples of areas where we have some supply issues On the non food side, certain electronics due to chip and component shortages like TVs, computers and smart home related items, exercise equipment, Bikes and outdoor activity items, lawn and garden items and appliances. On the food side, canned beverages have some Shortages due mostly to the aluminum can issue of shortages. Bacon Is up 45% in pounds and so for whatever reason there's a lot of demand there, so there's a little bit of challenge there. Gloves, surface cleaning wipes and sanitizing sprays and some paper goods.
Fresh Foods overall is looking pretty good. Our 3 warehouse curbside pickup tests next our 3 warehouse curbside pickup tests in Albuquerque is ongoing. We don't really have a lot to add at this time as the test is recent and continuing. The pilot is going well, our members have responded to it and Basket size have actually surpassed our expectations. Our focus of course is how can we be more efficient at doing it, determine Turning to our February sales results, the 4 weeks ended this past Sunday, February 28, compared to the same period last year.
As reported in our release, net sales for the month of February came in at $14,050,000,000 An increase of 15.2 percent from $12,200,000,000 last year. Again, going down the numbers that were in the release, on the U. S. Reported basis, we're up On a same store sale basis, we're up 10.3%. That's both reported and without gas and FX.
Canada reported 21.6%, Ex FX 15.7 percent, Other International 25.7 percent, ex FX at 20.6 percent, total company 13.8 percent reported ex gas and FX 12.3 Within those numbers, ecom, 91.1 percent reported and without gas and FX, 89.4 As with the quarter, these numbers would the e comm numbers would be higher if we included the 3rd party When we discussed last year's February sales results, we pointed out that the 4th week last year had a big uptick in sales. That's Kind of was the beginning of what we felt was a little bit of consumer pressure for consumers to buy in for fear of lockdown, Again, primarily related to consumers buying ahead of the anticipated COVID lockdowns and closures. That positively impacted last year's February sales by 3 percentage points. Similarly, sales in week 4 of this February this week week 4 of this year February were lower as we anniversary that unusually strong from a year ago. The estimated negative impact to the February month was approximately 3.5 percentage points.
So the reported numbers of 13.8% and ex gas and FX of 12.3% would have been higher excluding that impact. Our comp traffic or frequency for February was flat to last year And up 7 tenths of a percent in the U. S. Again, some impact of that last week. Worldwide, the average transaction was up 13 point percent, which included positive impacts of 140 basis points from FX and 10 basis points of gas inflation.
Foreign currencies year over year relative to the dollar benefited February comps in Canada by 5.40 basis points, other international by approximately 5 whereas the average selling price was about a percentage point higher year over year. In terms of regional and merchandising categories, the general highlights, U. S. Regions with the strong results Southeast, Midwest and Texas. Internationally and local currencies, we saw the strongest results in Korea, UK and Japan.
Moving to merchandise highlights, The following comp sales results by category for the month and these exclude the positive impact of FX. Food and sundries were in the positive high single digits. Hardware and Majors, which again is both white goods and consumer electronics for the most part. Softlines were up and also up in the low 20s, Better performing departments included housewares, small appliances and home furnishings. And finally, fresh foods were up in the low 20s, better performing Ancillary business sales, as mentioned earlier, were down and they were down in terms of sales in the mid single digits in February, primarily due to lower year over year sales in Food Court Hearing Aids and Gasoline.
Overall, a relatively good Fiscal second quarter impacted of course by COVID expenses, impacted both plus and minus by various aspects of our business due to COVID. And Certainly, as I mentioned in the ancillary, gas had the biggest of the ancillary hits. Finally, in terms of upcoming releases, we will announce our March sales results for the 5 weeks ending Sunday, April 4, on Wednesday, April 7 after the market close. With that, I will open it up to Q and A and turn it back to Buena.
Thank you, sir. Your first question is from Michael Lasser of UBS. Your line is open.
Good evening, Richard. Thank you for taking my question. My first question is on the gross margin expansion that Costco has experienced over the last few quarters. Can we assume As sales flow, that you're just going to give back a lot of these gross margin gains because shrink is going to go up And all the efficiencies that come along with double digit comp go away? Or is there anything that Costco has learned That is now doing differently that will allow it to hold on to the gross margin cadence.
Well, first of all, I don't think we're doing anything dramatically we're going to do anything dramatically Different. I mean we're already pretty aggressive on a lot of things and of course we're always trying to drive sales with aggressive value and pricing. Probably the one area which can be a challenge or will be a challenge at some point is fresh. The particular strength in fresh foods For the last several quarters on a year over year basis has been the strong fresh has led to higher labor productivity, which is part of the cost component of That, if you will, manufacturing businesses as well as lower spoilage or what we call damaged and destroyed. In many cases given the strength you're not throwing away as much stuff at the end of the day or week and you're again being much more productive from a Labor efficiency standpoint.
At some point that will subside is my guess. Beyond that, we feel pretty good about Our ability to be very competitive and price along that way.
Okay. And you said Going on the wage expense, going forward, this $1,000,000,000 plus expense will reduce a little by half starting March 1, Given the permanent wage increases. So we should just take $500,000,000 to $500,000,000 Of extent that Costco has incurred over the last 4 quarters and that's going to go away. So it will be even though your Your wages will be increasing, your SG and A dollars should go down.
Well, SG and A and then as I Mentioned earlier, the COVID related premium wages, the $2 that $800 plus 1,000,000 A piece of that hit margin because of our manufacturing business is the labor involved on the manufacturing side that's part of cost of sales. And so Again, if you looked at those proportion, I think on the $246,000,000 we said $60,000,000 related to margin hit and $246,000,000 related to SG and A hit. A simple guess would be you could take that type of percentage of these numbers and apply it quarterly maybe a little bit more to And so yes, if you look to the $1,060,000,000 that we talked about And we say a little over half. So simple math would suggest that a little over half of that should come back. Although we'll stop talking about COVID related expense
Your next question is from Simeon Gutman of Morgan Stanley. Your line is open.
Hey, Richard, how are you? My first question is also on Can you I just want to clarify because there was a big swing in the reported number. Core on core looked Pretty healthy, very similar to the prior quarter. You said I think plus 71%. And so the big swing here was pretty much mostly gas or all gasoline.
And can you remind us When does the gasoline margin compare peak? Does it get worse before it gets better?
You know, Years ago in the Q3, we've pointed out that it helped us. But it's Mike, it is gas. It is volatile. And the profitability in gas goes up and down dramatically. It's a meaningful business for us.
And as prices go up, we generally make less, Which has happened of late and I think not just for us but the supermarket chains, the other discount stores that operate chains and gas stations. And so we again directionally try to point that out each time. But there's no rhyme or reason. It can change on a dime.
Fair enough. And I guess just to clarify, but it is right, the core looks like it was consistent with prior quarters. The big swing in the reported was just then the remainder was mostly due to gas This quarter, right. Why it was down?
Right. Gas is more than half of all those other things, those answer. I mean, certainly Travel is impacted as you well know right now, probably the food courts because we're still not open with seating essentially, Optical as well. So all those are impacting, but gas was the prime mover there. I was looking back at last year, What we call again, what we call warehouse and other businesses, which again gas is a meaning when there are big swings, it tends to be gas is the biggest component of that.
Yes. A year ago in Q1 versus a year earlier, that will be Q1 2020 versus 2019. That number, I don't have the detail on gas, but it was 19 basis points to the positive. In Q2 year over year it was 2 to the negative. In Q3 it was 21 to the positive.
In Q4 it was 71 to the negative. So you can see it fluctuates. This year in the Q1 it was 20 to the negative and now 55 to the negative. And again, there's a lot of components to that number not just gas, but gas generally Tends to be the big louver there.
Okay. That's helpful. And then my follow-up question is on SG and A. If you look at SG and A Year to date, so Q1 and Q2, and you exclude all the premium pay, right, where you're excluding it from this year even from last year. It looks like SG and A is Still taking a step up year over year that's higher than what looks normal like in prior years.
And I don't think that's incremental wage changes. I don't know if there's anything else Change in the business this year to date from an SG and A perspective. You'll have easier comparisons because the premium stuff starts coming up in the back half. But is there any reason why you structurally stepped up in the first half of this year?
You're talking about dollars. Dollars.
Well, I think it's a strong sales. As a percentage of sales, actually, I think you'll find it goes directionally better.
Okay. Yes, I was looking on
Yes, I'm looking at core operations for all of fiscal 2020 versus all of fiscal 2019. On an ex gas inflation basis was lower or better by 25 basis points. Again, that's not we separate out of that below the quarterly stuff or the unusual stuff, The COVID stuff, but the core business was lower or had lower or better SG and A percent by 25 basis points for the entire year. This year in the first two quarters, it was plus 62 and plus 38. So that's on average 50.
Fair enough. Okay. Thank you, Richard.
Your next question is from Chris Horvers of JPMorgan. Your line is open.
Thanks. Good evening. So I wanted to follow-up on the February commentary. So last February 2020, you did 9% in that last or you did a 12% in that last week at 300 basis points. So that would suggest You did about a 20 in that the last week of February.
And just running the math that would suggest that you were just slightly If it was 350 basis point headwind, you would down maybe on like a Stack basis maybe like 1% or 2%. Is that right?
No. I think I agree with what you said about last year. This year the 1st 3 weeks were a little over 17 in the last week brought that 17 down to our 13.8.
Okay. So yes, so you were down
Yes. Maybe I explained it Differently each year, but yes, basically the 13.8% reported for the 1st 3 weeks was Low 17 and the 4th week caused it to be a 13.8 for the whole 4 weeks.
Right. Sorry, you've comped that right. So you've comped down high teens basically. So that so as you look ahead, it's interesting because But at the same time, as you look forward, the comparisons remain tough, but you also meter traffic in your stores Quite aggressively. I mean, I think peers were up double digits In the month of March April and you were actually down in April.
So can you talk about to what degree do you think you actually left Business on the table as we think about just trying to model out against these comparisons going forward?
Well, look, I can't speak for others. We're frankly thrilled with our sales numbers and how we've done over the course of last year. As you look at both March and our fiscal Q3, March, this giant step up in sales and traffic and hoarding, if you will, by customers started in week 4 February and lasted through about 2.5 weeks into March. So we'll talk about it specifically when we report March sales. As it relates to the fiscal quarter, which is essentially mid February to mid May, I don't have the exact dates in front of me, but that 12 week period, it included not only that tough comparison for those 3, 3.5 weeks, which include week 4 February and weeks 1, 2 and part of 3 in March.
But also when there was a lockdown and offset that And kind of late March into April and even early May, we had some very tough compares. And so that will make it in our view all things being Well, easier comparison. So I think there's going to be a plus and a minus that probably add up to about even. We'll see. The next challenge of course will be Q4, Which is mid May through the end of August.
That's when we enjoyed comps in the 12% to 15% range On an ongoing basis into September October as well, but for Q4 where we saw a lot of strength not only on the food side, but on the non food side as people were buying things for the home As they weren't traveling, going to sporting events and the like.
Okay. And I just want to follow back up on the February math. Sorry to delay this, but It was were you actually modestly positive in that last week? It just under comped the average and it brought it down?
Modestly positive. Yes.
Got it. Understood. Thanks very much.
Yes.
Your next question is from Chuck Grom of Gordon Haskett. Your line is open.
Hey, thanks a lot, Richard. I know gas gallons have been a drag on the top line. But when you look at your business geographically and overlay that with markets that are Maybe a bit farther along in the reopen process. Just wondering if you noticed any improvement in gas gallons?
You are, a little bit. Overall, I mean our gas gallons year over year I think in was February the quarter? In the quarter, we're down 9% or 10%, which is an improvement relative improvement. And within that in some of the regions like in the South Texas, Florida, you've seen a little better improvement.
Okay, great. Thank you. And then just on the balance sheet, inventory dollars are up 17%, roughly 17%, it was a little bit ahead of sales. I guess how are you feeling about the currency of inventory as you transition out of for insurance to some of the spring items?
Yes. We made a conscious effort a couple of months ago. I think even on the last quarterly call we talked a little bit about some of the challenges with port delays Both on the farm side of where the merchandise is coming from as well as the ports along the West Coast North America in particular and container shortages. So we were front loading and not everything came in short. So we have front loaded Items that are not seasonal items, front loaded extra inventory of basics.
And so I'm not concerned about that at all.
Got it. Thank you.
Your next question is from Mike Baker of D. A. Davidson. Your line is open.
Hi, thanks. I just wanted to ask about your view on inflation versus pricing in the market. 1 of your big Talked about being satisfied with their price gaps, which maybe means there'll be a little bit less pricing pressure out there. So So how do you think about that? And again, how do you think about inflation despite mid year sort of moderating a little bit, but now with commodity costs back up, maybe it goes up again from here?
Well, I'd say in the last several months we've seen a little more inflation than we had in part because of some of the container shortages. Freight costs are Higher. There's some high demand items or product shortages due to supply chain in general that have gone up. When asked on a broad Stroke basis on some of these items, what type of inflation we're seeing, sometimes as much as 2% to 4%, sometimes less than that. And Yes.
On meat, it's trended upward in the mid singles, pork in the high singles. I guess that's why bacon I mentioned bacon. And but we feel good about our competitive ability. We're we always want to be The last to raise and the first to lower. And but we feel again, as you look at our margins, we feel good about where our margins are coming in and our ability to be very competitive out there.
Okay. That makes sense. So are we seeing panic buying in
Bacon yet or we're not at that point yet?
Probably tomorrow because I mentioned it.
Exactly. I'm heading there tonight.
Thanks.
Yes. Thank you.
Your next question is from Karen Short of Barclays. Your line is open.
Hi, thanks. I wanted to get back to This SG and A and or I guess gross margin question. So when I look at the EBIT growth in this quarter versus sales growth and I back out COVID costs. The second quarter was by far the narrowest gap. So 3Q, 4Q, 1Q and 2Q, like you are a third of what you were in 1Q, Like half, more than half of or less than half of what you were in 4Q, 3Q.
So it clearly is a question of like the gross profit dollar growth versus the SG and A growth. So I guess I'm wondering, can you just talk through that a little bit more because the change in This quarter this is somewhat glaring?
Yes. Well, I think again Karen it gets back to gas. Gas is a High sales dollar number and the impact to somebody put me on mute please. The impact to gas is both dollars and average price, so lower gross margin as well. That's really the biggest piece of it.
Right. But I'm talking EBIT dollar growth excluding COVID costs versus the sales. So I guess, yes, I mean, I guess sales I have to adjust for gas, but it just still seems like a very
Well, I can just again without being specific dollar specific, The biggest dollar impact year over year in profitability of when I mentioned these various pluses and minuses was gas.
Okay.
And the combination it's a 10 ish percent piece of our business, which had a lower gross margin And lower dollar price per gallon, both of those things would so lower sales, Lower profits, and that's impacted.
Okay. And then just turning to the forward look on gross margin. Obviously, appreciating The fact that shrink and the fresh strength will hurt potentially gross margins as we get into the next couple of months. But ancillary should, I guess help offset some of that appreciating gas may is you can't predict that, but can you Maybe talk through the dollar buckets of gross profit dollars in the other categories within ancillary?
Well, again, travel should improve recognizing how much we'll improve we'll wait to see, but it's starting to improve a little bit. Food courts will improve the same thing as we start to put out seating and expand what we offer there. Now when that occurs and how that occurs, we're not going to we're probably going to do it in certain regions first and go from there. Gas is the big unknown and the big Guesstimate of which direction it goes each week, but we'll again try to point that out to you. We've seen a we haven't seen a period improvement in hearing aid and optical.
Okay. And then just last one for me. Is there any impact to the SG and A dollars from the
There's better efficiencies, although Keep in mind, we have really grown this thing fast of taking our some of our existing not only have these departments grown dramatically in the last year, We were using 3rd parties for a lot of it and we continue to push more on there and to improve the service to lower the price. And so I think you should see that should continue to improve, but it was not without
Your next question is from Paul Leves of Citigroup. Your line is open.
Hey, everyone. This is Brian Cheatham on for Paul. I was wondering if we could circle back on the inflation question and kind of go through some of the puts and takes of Inflation items that you'll be anniversarying coming up in the coming quarters?
Well, I don't think we're anniversarying any of them soon. It's just starting to happen in the last month or 2. And again, a lot of it has to do in our view, You've had a little bit of inflation over the last year with on things like paper goods because of just a huge demand and the shortages. But in terms of some of the recent things with container shortages and port issues, some supply issues on chips and components of big ticket items, Cost of steel was up 50% to 100%. All those things impact that.
I think it's more This has happened in the last several months versus a year ago.
Got it. Can you quantify the impact of freight costs, some
I can't off with the Notes that I have in front of me, I mean anecdotally, if you look at what is the cost per container coming over, it used to be It's up 10% to 15%.
Okay. That's helpful. That's it for me. Thank you. Yes.
Your next question is from Scott Mushkin of R5 Capital. Your line is open.
Hey, guys. Thanks for taking my questions. So I kind of wanted to think about the business a little more strategically, Richard, and understand, We went through a period where you did the Citibank deal and then you guys didn't talk too much about it, but you really expanded your fresh offerings, which I think helped the clubs and drive some traffic. I was wondering if you think about the business over the next couple of years and we think about kind of self help initiatives, where do you think there's some levers that you guys can pull?
Well, I think well, first of all, some of them are ongoing. Kirkland Signature continues to be something that will continue to increase The offerings that we do, there aren't any giant $1,000,000,000 ones, items like there's a handful of items Like paper towels and toilet paper water that are huge. There's the K Cups and those things that are in the 100 of 1,000,000 of dollars. But there's lots 20s to 100s out there and we continue to do that with all kinds of quality organic packaged food items As well. I think one of the things that we've seen from some of our vertical integration It's starting to pay off.
We've got the chicken facility at full capacity now. We've got a great bakery commissary. 2 years ago, we opened a second meat plant. We're seeing some improvement from that. We're also starting to identify items that Historically, we manufactured in one place, generally the United States, and then shipped all over the world, whether it's roasting Nuts and cashews and doing bringing all that product from where it's grown to the U.
S. For roasting and packaging and shipping out worldwide. We now have a supplier in Asia that is doing all the needs for Asia, Australia and dramatically we're able to dramatically reduce the price and Drive sales and drive bottom line dollars for us. We're doing that with all we're looking at all kinds of avenues to do that with From paper goods to things like that as well. So I think these are long term opportunities, but There should be a lot of them over the next several years.
Also, e comm notwithstanding our start back in the early 2000s, We like everybody has that's become more important over the last year in particular. It's approaching 10% of our business And continue to grow nicely and we're driving we're getting better at doing it and getting more clicks And the like in that regard. So I think e commerce and then the big and bulky, our acquisition of Innoval last March, All you see now and we pointed out I think for the last 3 fiscal quarters, a 6 or 7 basis point hit to gross margin as it relates to the It's like a manufacturing, but it's a service business that goes ultimately back into our cost of sales with that net thing cost. Notwithstanding the fact that that has helped drive sales Big and bulky items and in fact lowered the prices to our members on some of those items. So we think that that's As expected, it was going to be earnings dilutive at the operation standpoint for the 1st couple of years And be fine there, but more as importantly, if not more importantly, growing big and bulky as part of our business.
We're seeing big continued big increases From mattresses to white goods to exercise equipment, notwithstanding the fact that there's been some shortages in some of those items.
That's great.
Thanks for all the color. That was perfect.
Your next question is from Scott Ciccarelli of RBC Capital Markets, your line is open.
So as you guys get food inflation on meat, pork, etcetera, are price increases there a direct pass through to the customer? Or do you guys try to be sticky on some of your prices the way you have been with rotisserie chickens, for example?
Yes. I don't think we'll be as extreme as the old chicken example from 15 years ago where we stuck we'll continue to stay at $4.99 and figure out ways how to do But certainly we are we want to be the last we want to be as sticky as possible and hold off and we'll wait until our cost That has come through the system. But overall, particularly on fresh items, those prices probably change more often than not both at Traditional supermarkets as well as the Costcos of the world. Got it. And in fact, the other thing I want to mention is, we're a little unique in terms of our product mix, when you look at it, we're selling part of our meat business is prime.
And those are the types of things where we can get a strong margin for us and show you greater savings because the markups traditionally on something like that special item Or even higher at traditional retail outlets. So we think overall we're in a good stead in that regard.
That's helpful, Richard. And then You did mention your chicken plant is I think it's been for a bit fully up and running. Are you generating the efficiencies you guys originally anticipated when you first went down that road?
We're pretty close. I mean we're at full production, which is similar. There's been some puts and takes. As we built it, we decided to put in additional Things that we think provide for higher quality product like air chilling and things like that. The COVID expenses certainly have impacted us more than nobody had planned for it.
So that of course should improve over the next year. I think it's the feed costs we've been fortunate. Historically, the 1st year we were fortunate feed costs are coming up a little bit. We're also finding that the chickens are growing a little better than we thought. And so all those things add up to we feel pretty good about it.
Great. Thank you very much.
Your next question is from Greg Melitz of Evercore ISI. Your line is open.
Hi, thanks. I just I want to start just to clarify the inflation at the risk of being the 4th comment on it. You said that there are items that are higher, right? But the 2% to 4% comment, Richard, was that saying what you actually think it is now And your average ticket or is that just saying some items are in other words, would you estimate the whole balance is like 1% or 2% right now?
Yes. Some categories are in that 2 to 4 range and some are a little I mentioned are like meat and pork are a little higher than that. Produce is flat. But we don't do LIFO anymore, but I think if you look at our costs on average, the view is probably flat to up 1, 1.5, but somewhere in that range, that's a yes. Okay.
Fair enough.
Thanks for that clarification. 2nd is, What you went through the renewal rates. I guess, as you're thinking about it now, What do you think you could really get renewal rates to? And maybe tie it in with some of the other things you have to really drive loyalty Like the credit card program. Any update there in terms of what sort of engagement you have with it?
What percentage of Customers or sales are on the card to help us understand where that renewal rate could be trending.
Sure. Well, look, What we internally call the triple play is not only getting to become a member, but to upgrade to the executive member and then to apply and get The Citi Visa card, recognizing that not everybody that applies for it gets it based on credits. That credit decision is made by the issuing bank, Not by us. And the I'm sorry, I lost my train What? Renewal rate.
In terms of improving renewal rate, as we do add people to the credit card and to executive membership, both of those things tend to increase provide for more loyal customer or a higher renewal rate. Also, we're doing more things to get you to auto renew, whether it's on the Citi Visa card or working on some other areas right now as well. To the extent, get you to auto renew by almost de facto, there's going to be a higher renewal rate on those as well. 1st and foremost, ultimately, it's The things we do to make you want to remain a member of Costco. We think that some of those things like
Can you hear me?
Yes, I can,
if that's better. Sorry, we
heard that.
And then last, is there any hope on travel bookings, any sort of glimpses there or is that still depressed?
It is coming back, but it's the same thing I said back in the springs and the summer when there were some easing of COVID statistics And people were starting to book out for Christmas and even into the winter and spring of 2021, but they did it knowing that there was generally full Cancellation capabilities. We're now seeing and as you might expect, many of those things were canceled. Now we're seeing the same thing again. We've also our travel department, we're doing pretty well relatively speaking on car rentals. And as it relates to travel and hotel bookings, We have added some additional domestic items and Mexico items for the domestic for the U.
S. Domestic market as well. Yes, Hawaii and Mexico are pretty strong. Again, within the relative framework, there is some 4 and 5 star things that we've gotten in other parts of the world, Which wouldn't talk to us a few years ago. But so we're optimistic it's going to come back and expect it and we've certainly I think improved our offerings.
Excellent. I'd suggest putting heart pressure monitors across from the bacon going forward.
There you go.
Thanks, good luck.
There's a fast food retailer out there that has an interesting name for that. Anyway, why don't we have 2 more questions?
Your next question is from Greg Badishkanian of Wolfe. Your line is open.
Hi, this is Spencer Hanus on for Greg. My first question is, how should we think about how much of those of the share gains that you have this year you'll retain? And then the low single digit comp in the last week February, how did that compare to your internal expectations?
Let me answer the last question first. I mean, All we knew is that week 4 February compared to a year ago and weeks 12 and part of 3 of March were going to be tough compares. I I think we actually did a little better than we thought, but still it was a low number given the strength a year ago. And I'm sorry, what was your first question?
Market share.
Oh, TV market share. Look, at the end of the day, some of it's going to be sticky and some of it's not. We all personally hope that restaurants will reopen and we'll all be able to go out and enjoy and socialize. That will impact retail food sales at Costco and Supermarkets and the likes to some extent. That being said, there are other Retail formats whether it was restaurants and food that have closed for good, apparel retailers, other general merchandise retailers.
So in some ways Some of the stickiness unfortunately relates to certain aspects of retail that have closed for good and some of it will be that got more comfortable buying some of these things from the likes of Costco. I hope we lose some of it to the examples of restaurants and the like and other Stores that were impacted as they can reopen. And but I'm sure that we will end up keeping a little bit of it as well.
That's helpful. And then for the new members that you've recruited during COVID, how are they different than previous cohorts? And are you expecting to see renewal rates in line with The overall company average?
Whenever we sign up a member, if you look at our 90 point whatever percent renewal rate in the U. S. And Canada, That includes some 10 year plus members that are 93% or 4% or 5% and includes some members that In the last 2 years that might be mid-70s to mid-80s. So you're always from year 0 to year 1 of renewal, it's It's a combination of 2 year members plus some new 1 year members that picks that renewal rate up. So my guess is some of these new ones, again, they're going to follow that format.
The other thing though is in some cases, we think we've gotten new members Sometimes in markets where we don't even operate physical stores. Not a lot, but it can't help it can't hurt.
Got it. Thank you.
Your next question is from Rupesh Parikh of Oppenheimer, your line is open.
Good afternoon. Thanks for taking my question. So Richard, I just wanted to just about e commerce fulfillment capacity. So you guys have obviously registered very strong growth last several months. So just curious where you guys are from From fulfillment perspective and whether you would expect to see a step up in investment going forward?
Well, I think there has been a step up in the last couple of years and it's continued this year. We are building additional fulfillment as we speak, fulfillment capability. We're getting better at it, but so is everybody that's seen this kind of wild growth. In some ways, We think it may be easier for us because of the fewer items. We're doing the 2 day grocery still through our business centers, which works pretty smoothly.
So It is a larger percentage of the $3 ish billion we spend every year than it used to be. But certainly the biggest single percentage is still opening new warehouses.
Okay, great. And then maybe just one follow-up question. So clearly you guys have sorry go ahead.
In addition to physical Capital expenditures, there's also IT capital expenditures, which is part of our CapEx as well. And there's a lot of investment in that Around everything from e commerce, from mobile app to fulfillment and the like.
Okay, great. And then just given the announcement on the increase in minimum wages, do you see any other levers going forward that can offset some of the wage pressures we've seen maybe on a multiyear basis in your business?
From the beginning, I used to think about that question 30 years ago. And what we find is that we're always able to because we've got a great employee base And that are hardworking and loyal and know that we care we as a company are they're cared about. I think that we feel that we've seen Over the years everything from inventory shrink to labor productivity, certainly we measure these things too, but labor productivity and a lot of it has to do with coming up with ideas many of which are these ideas come from our employees that are on the ground if you will working in the meat department, figuring out how to be more efficient with pounds per hour, per labor hour. So we've always figured out ways, not worried about Let's figure out how to save it and then we can give it pass it on to them. Let's pass it on and we'll get there from an efficiency standpoint.
It seems to have worked for us. Yes. Other things like we now have self checkout in 60% or 70% of our 5.58 cost goes in the U. S. It will be in virtually all of them and we'll see it in other countries as well.
That's a savings that took us a while to believe part of it and to figure out I think we're on the 3rd Format of it, the version of it, but it's working in our environment the way we want it to and we see savings there. We're constantly figuring those things out and we attribute a lot of that to many of these good ideas don't come from The rooms here at the office, they come from the people out on the floor.
Okay, great. Thank you.
Your next question is from Edward Kelly of Wells Fargo. Your line is open.
Hi, Richard. Thanks. Mohan here. I just wanted to go back, first of all, on the Ancillary gross margin. You talked about gas being a bit more than half.
So the remainder is pandemic related, I guess, 15, 20 basis Has that drag been consistent there since the pandemic began? So if I look back over the other quarters, whatever So the remainder there would just be the gas movement?
Yes. I think it was worse last year in Q3 and But it's been similar. It's improving a little right now, but still negative year over year. The big delta is, as you had gas in quarters where we talked about gas was a big positive, It offset more than offset some of these other negatives. Right.
Okay. So we have that coming back when life normalizes. And when you look at the Other segment of the gross margin, how much of that's going to come back? Because the 16 the waste increase Play a role there, so should I assume only half of that comes back?
Well, I think from simple math, we talked about the $246,000,000 for this quarter In total for COVID related and of that 60 impacted margin. So 60 over 2.46 whatever that percentage is A little under 25%. And on an annual basis, we talked about $1,060,000,000 a little over half. So just take half of that. That's kind of the net improvement or pre tax improvement in margin from that.
But I'm sure if there's other outliers, we'll explain them to you as we go into each quarter. Some of the things that's the easy one because it's big and we know what we're doing with The unknowns are how quickly will travel come back. Travel is a very high margin, low SG and A business. Food courts, It will improve dramatically once we get tables out there everywhere. And that's not going to happen tomorrow afternoon, but it's going to happen, God willing, over the next Several months.
Okay. And just one last one for you. So on the core, historically, The core margin really hasn't been up. It's obviously doing very well right now. Going forward, I mean, you could still have maybe mix Benefit from things like stimulus, but don't we eventually just sort of assume that what we've seen over the last few quarters Sort of normalizes back to pre COVID level and we take the margin down by that amount?
I feel a little stronger than that in terms of the positive. I think that on the fresh side, yes, at some point When you have your tougher year over year compares, you're not going to get those big basis point improvements from spoilage and labor productivity. Now some of it though at these new levels you have more productivity. We're not going to necessarily lose it all. But if it's a tough compare you'll lose a little you'll lose some of it.
So yes, On some of the other categories, particularly as we increase Kirkland Signature, as we sell certain things within fresh that are specialty items, where we can get a full margin showing even greater savings in some cases. Some of the vertical integration, some of the things I mentioned like the nuts and cashews, These are all little things, but those tend to offset some of those things. I'm not suggesting we're going to keep it all, but I think that we're going to do better than people or than the question As a concern about.
Great. Thank you.
Thank you. Well, thank you for listening. We're all here. If you have any additional questions, you know who we are and have a good afternoon. Thank you, Blaine.
You're welcome, sir. And ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now