Thank you for standing by, and welcome to the Q1 Earnings Call. At this time, all participants are in listen only mode. After the speakers' presentation, there will be a question and answer session. Thank you. I would like to hand the conference over to your speaker today, Mr.
Richard Galanti. Please go ahead.
Thank you, Cindy, 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 and uncertainties include, but are not limited to, those outlined in today's call as well as other risks identified from time to time in the company's public statements and reports filed with the SEC. Forward looking statements speak only as of the date they are made, 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 Q1 of fiscal our fiscal year 2021, the 12 weeks November 22. Reported net income for the quarter came in at $1,166,000,000 or $2.62 per share, compared to $844,000,000 or $1.90 per diluted share last year. This year's Q1 included tax benefits of $145,000,000 or $0.33 per share, dollars 0.16 of which was due to the deductibility of the $10 per share special cash dividend to the extent received by the company's 4 0 ks plan participants and $0.17 related to stock based compensation. Last year's Q1 included a $77,000,000 or $0.17 per share tax benefit related to stock based compensation as well. This year's results also included the costs related to our COVID-nineteen premium wages of $212,000,000 pretax or $0.35 per diluted share.
Net sales for the quarter increased 16.9 percent to $42,350,000,000 up from 36 $240,000,000 last year in Q1. In terms of our Q1 comp sales metrics, on a reported basis for the U. S, we reported a 14.6% figure, excluding gas deflation and FX impacts, the 14.6% for the 12 weeks would have been 17.0% increase. Canada for the 12 weeks reported 16.2%, ex gas and FX 16.8%. Other international reported 18.7%, ex gas and FX 17.7%.
So all sold for the total company, we reported 15.4 percent comp sales increase and excluding gas deflation and FX, the 15.4% would be 17 0.1%. E Commerce on a reported basis for the 12 weeks was 86.4%, and excluding FX, 86.2%. In terms of Q1 comp sales metrics, traffic or shopping frequency increased 5.5% worldwide and plus 7.6% in the U. S. Our average transaction size was up for the company 9.4% in the quarter year over year and up 6.5% in the U.
S. These include the negative impacts from gas deflation and the positive impact from FX. Foreign currencies relative to the U. S. Dollar positively impacted sales by about 30 basis points, and gasoline price deflation negatively impacted sales by approximately 200 basis points.
Going down the income statement, membership fee income came in at $860,900,000 up $57,000,000 or 7.1 percent, ex FX, it would have been up fifty $4,000,000 or 6.7 percent. During the quarter, we opened 8 new units. In terms of renewal rates, our U. S. And Canada renewal rate as of the end of Q1 'twenty one was 90.9% that compares to a quarter to ago of 91.0 and worldwide was 88.4%, which was the same as it was a quarter ago.
Now the U. S. And Canada rate of 90 0.9% compared to the 91.0%. This 0.1% decline was primarily a result of what we believe to be deferred renewals in Canada due to the pandemic. For example, traffic or frequency in our Canada warehouses in Q1 came in at a minus 1.3% compared to a +7.6 percent figure in the United States.
By the way, the U. S. Renewal rate was the same at both quarters end. In terms of number of members at Q1 end, total paid households at Q1 end was 59,100,000, dollars up from 12 weeks earlier Q4 end of $58,100,000 and total cardholders at Q1 end was $107,100,000 compared to 12 weeks earlier at $105,500,000 Also at 1st quarter end, paid executive memberships totaled 23,300,000 dollars an increase of 642,000 during the fiscal Q1. Onto the gross margin line, our reported gross margin in the Q1 was higher year over year by 50 basis points coming in at 11.55 percent of sales compared to 11.05 percent a year ago.
Excluding gas deflation, the 50 basis point increase would be 30 basis points. If you jot down 2 columns of numbers here to shed a little light on the components of gross margin, On a reported basis in Q1 'twenty one, the core merchandise margin year over year was up on a reported basis 83 basis points, + 83. 2nd column, without gas deflation, would have been plus 66 basis points. Ancillary businesses, minus 15 basis points reported and minus 20 ex gas deflation 2 percent reward minus 6 basis points and minus 4. Other minus 12 and minus 12.
And if you add up the 2 columns, on a reported basis, again, gross margin is reported as a percent of sales year over year in the quarter, it was up 50 basis points on a reported basis and ex gas deflation up 30 basis points. Now the core merchandise component gross margin it shows was higher by 83 and up 66 ex gas deflation. Similar to last quarter, we had a sales shift from ancillary to core. This resulted in higher contribution of our total gross margin dollars coming from the core operations versus last year. Looking at core merchandise categories in relation only to their own sales, core on core, if you will, margins year over year in the quarter were higher by 65 basis points.
Fresh foods was again the biggest driver here. With strong sales in fresh, we benefited from efficiency gains in labor productivity and significantly lower product spoilage. Food and sundries, softlines and hardlines, the other 3 main core components, all had higher margins year over year in the quarter as well, but Fresh Foods was the driver. Ancillary and other businesses gross margins, as I showed you here, was lower on a reported basis by 15 basis points and minus 20x gas deflation, most of the impact coming from travel and to a lesser extent from gas, optical, hearing aids and food courts. Costco Logistics, which is our name for the acquisition of Innoval that we did several months ago, impacted ancillary margins by minus 6 basis points, a slight relative improvement from the prior quarter year over year.
2% reward, nothing surprising there. And the other, the minus 12 basis points, all of this was attributable to the cost of the COVID-nineteen of $53,000,000 of the $212,000,000 total amount previously mentioned. These are the direct costs for incremental wages allocated to our manufacturing production and fulfillment operations. All told, even with the $53,000,000 of COVID costs hitting the margin, Q4 year over year gross margin on a reported basis ex gas still up 30 basis points year over year. Moving to SG and A.
Our reported SG and A in the Q1 as a percent of sales was lower or better year over year by 15 basis points coming in at a 10.15 percent of sales compared to a year earlier Q1 of 10.30 percent and ex gas deflation, the 15 basis improvement would be 32 basis points of improvement. Again, jotting down 2 columns of numbers reported and without gas deflation. Core operations in Q1 on a reported basis was lower or better by 49 basis points, so a +49, ex gas deflation of +62central, +1 and +3basispoints stock compensation, +3 and plus 4 basis points other, minus 38 and minus 37 basis points summing those two columns up, total reported SG and A year over year was better or lower better or plus 15 basis points and ex gas deflation, plus 32 basis points. Now SG and A in the core, again, it shows ex deflation improvement of 62 basis points. This excludes the COVID costs, which I'll talk about in a minute.
There was significant just basic significant leverage was strong core merchandise sales increases. In terms of other than minus 38 or minus 37 basis point number ex deflation, gas deflation, these were our incremental costs from the COVID-nineteen or $159,000,000 of the $212,000,000 total number that we had mentioned earlier. The premium wages have been extended through January 3 at this time. Again, even including these $159,000,000 of COVID related premium pay expenses, SG and A year over year improved nicely. Next on the income statement is preopening expense, dollars 22,000,000 this year in the quarter compared to $14,000,000 a year earlier.
We had 10 openings, 8 net of 2 relocations during the quarter and 4 openings gross, 3 net of 1 relocation a year earlier. Last year's $14,000,000 number did include a couple of $1,000,000 related to pre opening on our new poultry on our poultry complex, which was opened and went into business right before the beginning of Q1. All told, reported operating income for Q1 'twenty one increased 35%, coming in at $1,430,000,000 this year compared to $1,061,000,000,000 last year. And even a higher percent increase, of course, it would have been higher had not we had those premium pay. Below the operating income line, interest expense was $39,000,000 this year versus $38,000,000 last year.
Interest income and other for the quarter was lower by $6,000,000 year over year. Interest income itself within interest income and other was lower by $22,000,000 year over year due in large part to lower interest rates, offset by FX and other, which was up higher or better by $16,000,000 year over year. So overall, reported pretax income in Q1 'twenty one was up 34 percent coming in at $1,420,000,000 this year compared to $1,058,000,000,000 a year earlier. In terms of income taxes, our tax rate in the Q1 of fiscal 2021 was 16.8% compared to 19.1% in Q1 last year. Both years' tax rates benefited from the tax treatment of stock based compensation as mentioned earlier.
This year's tax rate in the Q1 also benefited from the tax deductibility of the special dividend payable to company 401ks participants as discussed that portion payable to the 4 0 ks participants as discussed earlier in the call. This full year's fiscal year's effective tax rate excluding these discrete items is currently projected to be between 26% 26.5%. In terms of warehouse expansion, as I mentioned, in the Q1 of this fiscal year, we opened 8 net new units. Our plan for the year is somewhere in the 20% to 22% range, none in the second quarter, and 6 or so 5 or 6 in Q3 and 7 or 8 in Q4. As of Q1 end, total warehouse square footage stood at 117,000,000 square feet.
In terms of capital expenditures, in the Q1 of 2021, we spent approximately $893,000,000 Our full year CapEx spend for fiscal 'twenty one is still estimated to be in the $3,000,000,000 to $3,200,000,000 range. In terms of e commerce, our overall, our e commerce sales in Q1, FX increased at 86.2% year over year. A few of the stronger departments, food and sundries, housewares, pharmacy, OTC and health and beauty aids, small electrics and TVs and other electronics. Total online grocery grew at a very strong rate in Q1, nearly 300%. The comp numbers that I mentioned, the 86.2% figure, follow our usual convention, which excludes these 3rd party same day grocery program as they come in themselves and shop at our warehouses and then deliver to our members.
If we include the 3rd party same day in our e commerce comps, the 86.2% result would have been just over 100%. Intervale, now rebranded as Costco Logistics, continues to grow and we continue to push more big and bulky items to the site. We've added in the past quarter, we added an in cart scheduler this quarter, where members can select specific delivery dates for most big and bulky items and made improvements to our call center with specifically trained agents as well. That continues to grow nicely. And lastly, a couple fun sports items just loaded 2 days ago.
We have a Babe Ruth autographed baseball for $64,000 and a Ty Cobb autographed at Louisville Slugger bat for $160,000 We've also recently sold a number of memberships for Wheels Up, a private jet service operator. Now turning to COVID and some of the issues and impacts surrounding it. From a sales perspective, similar to our strong sales results this past summer in our fiscal Q4, we have continued to enjoy strong sales results during the Q1 of fiscal 2021. We continue to generate strong sales in Food and Sundries and Health and Beauty Aids and Fresh Foods and the like. And we've also benefited from improved sales and products and items for the home.
As people are spending less on air and travel and hotel and dining out, they seem to have redirected some of those dollars to categories like electronics, furniture and mattresses, exercise equipment, housewares, cookware, domestics, etcetera. And as mentioned earlier, sales in most of our ancillary businesses were lower year over year the quarter, travel, gas, hearing aids and food courts. From a supply chain perspective, a 40,000 foot view, if you will, most factories are up and running, our suppliers, and in many cases, production capacity has been increased. However, even higher increases in demand of some products are still creating some supply issues. There are instances of 50%, 100% or even more sales increases of an item, and if we could procure more, we'd have even higher sales.
Examples would include things like exercise equipment, certain major appliances, certain electronics items, as well as certain housewares and small electric items. On the transportation front, there have been some container shortages at Origin as well as some congestion at destination ports here in the States. The latter, typically 2 to 4 days, but a little longer in some cases. We're managing through it and expect relief not until March or so of 2021. As well, the past few weeks, there have been some challenges that you may have read about in industry in terms of delayed delivery times of econ item of items just given the number of items being shipped now through 3rd party carriers.
While this may reduce some sales of members are confident are not confident in timely holiday delivery, we, like others, I'm sure, have done a couple of things. We've adjusted or stated expected delivery times on our side and reminded people to shop early. And we took in our case, we took several 100 non food items non food online items that are also in line and are providing same day delivery through Instacart, including items like AirPods and Instapots and laptops and many over the counter and health and beauty items as well as some other home essentials. In terms of food and sundries, continued limits on some paper goods. Demand and sales went up as COVID began spiking again.
Toughest areas, Also, in some cases, some paper goods, overall dairy items are in good shape as well as proteins and produce on the fresh side. In terms of our holiday merchandise planning and results, Halloween, we went into it a little more conservative in terms of costumes and Halloween specific candy items. We came out of Halloween with pretty clean inventory levels. At Christmas, as I think I mentioned on the last earnings call responding to question, we went a little more basic in terms of needs and uses for the house. So very strong, we've gone into it with fundamental items from the home like housewares, TVs, electronics, even added items like barbecues and pressure washers and furniture items.
A little less, we had cut back a little bit on seasonal items like holiday decorations and gift wrap and some of the candy and food gift baskets. In some instances, we've already sold through those inventories. Our warehouses overall have remained open and are mostly back to regular hours with an additional hour of any mornings for seniors and persons with disabilities. Warehouses are still following social distancing and sanitation guidelines, and in some jurisdictions, we have to limit occupancy. Since May 4, as you may recall, we've required members and employees to the warehouses to wear masks.
And since November 16, we've required face shields for those to wear a mask. Some of these initiatives, of course, will extend well into Q2 of this fiscal year. Finally, in terms of upcoming press releases, we will announce our December sales results for the 5 weeks ending Sunday, January 3 on Wednesday, January 6 after market closes. With that, I will open it up to questions and answers, and I'll turn it back to Cindy. Cindy?
Thank And your first question comes from the line of Simeon Gutman from Morgan Stanley. Your line is now open.
Hey, everyone. Good afternoon. Richard, I wanted to ask following on, you talked about some of the merchandising plans around Halloween and Christmas. You're going to begin to lap some pretty massive surges in growth when you get into the thick of 2021. I know you don't guide, but you're probably planning inventory purchases.
So I wanted to ask how you sort of manage with a pretty wide range of outcomes. And I don't know if you have any guideposts to thinking about some of the gains you're making in fresh food as far as the spoilage and the markdowns that don't seem to be happening. So how do you think how do you plan for lapping some of those as well?
Well, I mean there's a few different things and time periods that will be in question. If you recall, there was a big surge in frequency and sales results the last week in February and the 1st 2 or 3 weeks of March when people were coming in and hoarding in our view. And of course, we were running out of everything, basics from water to paper goods to cleaning supplies and things like that. And in some cases, and then beyond that into April May, there were some issues as there were some COVID spiking at many fresh plants, protein plants, meat and poultry and the like. And so it's hard to project completely.
I think of late, we have tried to build a little extra inventory where we can in some of those key things that aren't going to go out of style like paper goods and cleaning supplies. Although then you get the next rush of spiking and whatever extra inventory you had, it goes away pretty quickly. Look, we'll continue to work around it. We work I think in some cases, it's a little easier in the sense that we have fewer suppliers to deal with, fewer items to deal with. Arguably, in other cases, given our huge volumes, that creates its own challenges sometimes.
I think the bigger challenge is going to be post May last year and this past year and June is when we saw kind of sales strength not just in those key essential categories like fresh foods and foods and sundries and paper goods and health and beauty aids, but also on the non food side, items for the home, if you will, and those types of basic items. And again, people spending some of those dollars. Look, some things will improve and some things may be degraded a little bit. Some things that are degraded may take a while and not everything is going to happen. A light bulb is not going to go off one day and everything is going to get better from a food standpoint in terms of restaurants being open.
So I think we're in it together and we feel pretty good that we've got a good format to serve our members well and we'll go from there.
And as far as, I don't know, events, I know roadshows, I don't know how prevalent they've been. Your mailers, are there things that you can change the cadence of either to get more aggressive? Grocery, you've taken a huge amount of share this year. Is that an area you're going to lean into stronger? Just curious how you're thinking about the merchandise the merchants are prepping for the upcoming year?
Well, as it relates to promotional forms that we do like the MVM mailers or even online type of mailers. Needless to say, some of those have been changed because some of the big ticket non food not big ticket, I'm sorry, some of the big size items that are always in there, light paper goods, light cleaning supplies, In some cases, we've had to eliminate some of those items from the mailer. We put other items in. In some cases, it's done fine. In some cases, it's a little bit less of a sales increase.
But that's not just going forward, that's been in the last few months as well that we've changed those things. I think we've been pretty good at pivoting and adding new items. I think the examples of for Christmas, while we may have maybe went a little too deep into cutting back, not that they were big cuts, but we're running out of some of those decorative things a week or 2 earlier than we would have liked to. We also though have found success in lots of essential basic fundamental items. I don't think this I think the 1st Christmas we probably brought in barbecue grills and pressure washers to market and they're doing well because people are buying gifts for the home.
And your next question comes from the line of Mr. Mike Binker of D. A. Davidson. Your line is now open.
Hi, thanks. I was a little bit curious on the holiday trends. Two questions really. 1, by trying to advertise and get customers to spread out their sales and come in a little bit early, do you think there was any pull forward of holiday sales into November from December? And then a second part of the holiday question, I think you said that you're out of stock more aggressive on the seasonal stuff?
How much you think your sales could have been up if you had done that?
Yes. Well, first of all, talking to the buyers, they definitely feel that some of the merchandise and sales were pulled forward into November, not only from December, but even the week of November. There's been articles out there about Thanksgiving and overall not at Costco specific, but just in general about what's going on online and what have you. And so certainly some of that kind of got pushed forward. In terms of some decorative things, I mean there are examples where instead of buying 10% more this year of a given item, we bought 10% or 20% less.
So we still bought a lot. It's not like we cut our order back by half. But in retrospect, we probably could have sold a little bit more. I don't have a dollar number. It's probably not that meaningful.
For every negative, there's another positive. Needless to say, our comps overall have been very strong.
Yes. That's fair. And if I could ask one more, I guess, unrelated question. The MFI, the 7.1% increase, that's better than it has been, a nice acceleration there. Any color as to where that acceleration came from, from what it has been in more in the 4% or 5% range in the last few quarters?
Well, I think in terms of shopping frequency?
No, membership
fee income.
No, the correct. I'm sorry. Okay. I didn't hear the first part of the question. Well, I think we opened a few more units than we did a year earlier.
Without looking that deeply, that's probably most of it.
And your next question comes from Chuck Groom of Gordon Haskett. Your line is now open.
Hey, thanks. Hey, good afternoon, Richard. When you look at your online offering, can you remind us where it stands in terms of total mix of business and also level of profitability relative to the store? And looking ahead, what categories you may start going into more?
Well, I think in terms of in store, of course, in warehouse, we've got about 3,800 active items. Online, we typically have somewhere in the high single digit thousands, I mean, call it 9,000 plus. I'm sorry. In terms of percent of sales, it's about 7% of sales. Now we don't include in that number as I mentioned like the 3rd party sales like the Instacart Same Day Fresh, because their employee or contracted employee is coming into Costco shopping just like any other customer coming to shop.
So you could add a little bit more to that. But in terms of what we call online is about 7%. I think it was 6% in fiscal 2020 for the entirety. And of course, it was halfway through the year when you saw e comm percentages increases jump dramatically with the advent of COVID.
And then just level of profitability?
Overall, e commerce is a little less profitable. You've got category wise, it's profitable. You've got category wise, you've got merchandise categories that don't include some of the highest gross margin components of our business like fresh, like apparel in a big way in terms of penetration. You've got electronics, which is a lower than average margin business, both in store and online and so much bigger percentage of penetration online. So those are examples.
Certainly, the profitability of e commerce has been helped with the types of comp sales increases we've had over the past year. But also over this past year, there's some of the cost inefficiencies of growing it so fast. In terms of fulfillment, as we are continually adding locations where it can be shipped out of and getting closer to the customer as this overall size of the business has grown a lot. Yes. And as I mentioned earlier in the investment in Intervale or what's now we're calling Costco Logistics, that was a, as we expected, a hit year over year to margin simply because it's being ramped up and upgrading it.
Got you. And then just to follow-up on Mike's question, and I pardon my near term orientation of it, but when you look at the comp in November and the fall off at the end of the month, albeit still strong, just when you look back, if there's any learnings on to why you think sales fell off? And I'm curious if the revenue trends have started to bounce back.
I think it's I mean, our best guess is, it's complete pull forward. I mean, the fact is, people who've been marketing bigger ticket items and some of those types of holiday items earlier in November.
Black Friday
with promotions for the whole month?
Yes. Bob here mentioned that on Black Friday promotions this year, more of those things we promoted earlier in the month. And not an assessment, everybody else out there too.
Got you. All right. Thanks a lot.
And your next question comes from Mr. Michael Lasser of UBS.
Good evening. Thanks a lot for taking my question. Richard, you outlined a nice holiday gift that some people on this call might be considering getting for loved ones this season. When you look at your sales compared to the rest of the consumable retail landscape, most others are seeing a deceleration in their comp, whereas Costco is seeing an acceleration in its comp. Why do you think that is?
Is it simply because customers members are coming in to buy the discretionary goods and loading up their baskets with the consumable item?
We definitely think that, look, be essential and recognizing the people clearly are coming in to buy food and key cleaning items and health and beauty aids and the like, that gets you in the door. And certainly, in our view, given that money is being spent on other things in normal years, perhaps is being spent more for things for the home, We have that as well and I think that has helped us in that regard.
Okay. So it really comes down to mix and the cost goes to the cost. So nothing else to really consider?
I'm biased. I'd like to think part of it is as people feel hopefully at least relatively safe coming into a big wide open box environment where we've done we think a pretty good job of social distancing and other safety protocols.
Okay. In the core on core gross margin increase, it seems like it's a function of just the strong sales, allowing Costco to be able to sell through better than it might otherwise have been able to. Is that right that we should is it I think most
of it is strong sales, which shows its brightest colors with fresh food where you've got 2 cost components that have improved dramatically, spoilage and labor productivity. So that has certainly helped. I had one other thought on it, but I can't seem to come to mind. Sorry. Oh, let's promote.
The other Michael is I think you've all read about this from an industry perspective. There's been less promotional activities out there while we're still giving great values on things. When you look at TVs in general, while prices have come down across the board just because they always do over time, and these keep getting seem to be getting better, bigger and less expensive, There's not the kind of promotional money being thrown at it by the manufacturers because they haven't had to. And so I think that too has had some impact.
That's helpful. I hope you have a great holiday. Thank you.
You as well.
And your next question comes from the line of Mr. Scott from RBC Capital Markets.
Scott Ciccarelli. So I believe some of the products you guys sell via your website or e commerce are for members only, but not all of them or it doesn't look like that from a labeling perspective. So assuming it's not just a labeling difference, how much of your e commerce sales are coming from members?
Virtually all. I believe part of the challenges is on some items as we work with our suppliers and ourselves as well, we want you to be able to have to sign in to see the prices.
I got it. Okay. And then, Richard, what's the update today regarding how much of your e commerce sales are being drop shipped from vendors versus kind of delivered through Costco?
About fifty-fifty. A little less. A little less than 50 is being drop shipped.
Got it. All right. Appreciate it. Happy holidays.
Same to you.
Next question from Karen Short of Barclays. Your line is now open.
Hi, thanks very much. A couple of questions I wanted to ask. So first, just on COVID and wages. So the $212,000,000 you called out, obviously, you gave us a breakout on the impact on cost of goods versus SG and A. But that was a little higher than the number, I think, the $14,000,000 per week that you'd guided.
So wondering if that's what the delta would have been because that would have gotten us to about $168,000,000 And then wondering if you can give a little color on what the like other cleaning component might be, would have been in this quarter and then how to think about it into next quarter because presumably just like I asked last quarter that January 3rd date is probably not the end date, I would assume?
Well, we'll find out. Needless to say, I can't comment on that. But a big chunk of the difference of 14 or may have rounded honestly down to 14 and now it's rounding up to whatever. But at the end of the day, there's more hours is the biggest delta, more cumulative hours. Okay.
And
then the cleaning component?
That's relatively small.
Okay. And then, I'm wondering if you could give a little color on the expansion of the Instacart relationship. You obviously listed a couple of SKUs that you've added on to that with respect to the 3rd party. Can you give a color on what the markup is on non food items versus food? And then give a breakdown on what that would be for members versus non members on the markup?
Well, I can't be that specific. We continue over the last 3 or 4 years, we've continued to work to lower the effective average markup across the board on items. There is some discretion on some to be a little lower than that and some to be a little higher, but there's an average, which includes both their markup plus whatever other fees that person is spending, whether it's a per delivery fee or per monthly fee to Instacart. As given some of the unique issues near the end of the year with the high demand for shipping and the capacity issues out there with the 3rd party shippers. We and given that Instacart is always coming in, we've added some items to the fray.
In some cases, there is a maximum markup on those that don't that is in many cases smaller than that quite a bit smaller than that other that mid to high teen number percentage wise.
Okay. And then just last question. In terms of the MFI, obviously, I think January of '21 would be the new timeline in terms of the tax deductibility in California. Is there any thoughts in terms of timeline, in terms of how you would think about an MFI or a membership fee increase? Because I think in the past, you've historically done that when you've actually seen counterintuitively traffic slowing.
And it seems like you may be looking at slower traffic just based on tough compares as we get into parts of next year. So philosophically color on that?
Well, I mean, historically, as you know, for 35 years, we've effectively raised the basic fee $5 every roughly 5 years and I say roughly it could be 5, 5.5 years. And the executive membership has been raised to originally started at 100, now it's 110, then 120. The last time we did the increase was I believe was in June ish of 2016. So 5 years it was June of 2016.
It'd be 4 years.
Are you sure? I will check on that. But if you it was June of 1 of the years either 2016 or 2017, but it will be 5 years from then that we might look. You mentioned that we've done it when things are sales have been stronger, when sales have been weaker, when the economies took a hit or whatever else. We look at it somewhat independently of that.
We look at it and we feel have we improved the value of the membership by more than that 5 or respective $5 or $10 And I'm not suggesting we might wait or not, but time will tell. Historically, we've always felt very good about when we've done it that certainly the value proposition has been enhanced much at a much greater multiple than the $5 or $10
Thanks. Have a great holiday.
Thanks. You too.
Your next question is from Oliver Chen of Cowen.
Hi, thank you very much. Hi, Richard. Regarding what's ahead with vaccinations, do you see a role that your pharmacy will play in that? And also in this dynamic environment, how are you thinking about managing inventory versus sales as we look forward to hopefully a pathway to vaccination, etcetera? Thank you.
I believe we in the country are currently in the first phase of the vaccination process. We are not participating in that, but I believe Phase 2, which will be just a short period down the road, our pharmacies will also be part of the many pharmacies throughout the country that are going to be providing the service of vaccinations for that. We are in Phase 1 in the state of Alaska only currently. But I think throughout our country we plan to be in Phase 2 which will be the big push after this first initial round. And in terms of managing inventories, while space is not infinite, certainly the cost of carrying a little extra inventory isn't very expensive right now given the very low interest rates.
But at the end of the day, as I mentioned a little earlier, we I think we plan positively in terms of how our sales have been. And to the extent that the example of those seasonal items, we came down a little bit, but not a lot. And I think we'll continue to do that kind of planning. A lot of times on items that are short, but there's certainly no risk of having the only risk of having some extra paper towels for a few weeks is the risk of having them. There's not any obsolescence or markdown risk on it.
We will always try in times when there's more of that available, we'll build up a few extra weeks of supply. But overall, I don't see a big change in our inventory turns or payables ratios.
Okay. And e commerce?
They're dictated more by comp sales than anything. When we were enjoying a pre COVID a 6% to 8% comp sales number, Inventories as a percent of payables as a percent of inventories was whatever the number was. When we saw the big increase in comps, you saw the payables as a percent of inventories going up.
Got it. That's very helpful. And on the topic of e commerce, as we think about longer term growth rates as well as new customer acquisition that you're seeing in engagement online. What are some of the major catalysts for innovation going forward that you'll implement or that you're looking to implement? And then how do you think growth rates may evolve as hopefully reopenings occur eventually?
Well, look, we as much as anybody want things to get back to normal from a business standpoint, but also most importantly from a personal standpoint. And over the next couple of years, God willing, starting with this process of vaccinations and vaccines and hopefully a big chunk of this progress through by the beginning or during the summer. People will get out more and will be going back to restaurants and the like. And will that have an impact on our food sales? Of course, it will.
Some of this positive will be sticky. Some of the new members will be sticky and we'll go from there. I think that there are lots of attributes to value and loyal customer loyalty. Certainly, the best prices on great quality merchandise that the member trusts in our view is the biggest attribute and that's where we start from. E commerce is certainly and the acquisition of Innovell in terms of big ticket items and having a great service at a great value for those items we think helps us.
But ultimately, we still want our members to come into the warehouse. When they come in, they see the items and they're more likely to buy some of those items. And certainly, driving them in with great value and great quality is what we're all about.
That's helpful. And last on that logistics, cost of logistics part, what should we know about as we model that going forward in terms of the margin headwinds and the dimensions around the size of that business relative to total? Thanks.
Well, the only two data points we've given you is in Q4. Year over year it was about I think an 8 basis point margin hit into Q1, which we just reported for this new fiscal year, it was a 6 basis point margin hit. As guessing games go, assume that there will be constant improvement in that over the next several quarters so that it won't be a negative. Now mind you, that doesn't include any we get from increased sales of those items and the margin associated with that. But when we bought this thing, we knew that it would be dilutive from an earnings standpoint for certainly the 1st year and perhaps into the 2nd year, hopefully on a decreasing basis.
And certainly, the first two quarters would indicate a little of But at the end of the day, we think it those companies that have had their own infrastructure to be able to do last mile delivery and installations, it's a positive. Certainly, the home improvement companies have done that, the retailers. And it worked out for us and we're excited about what we can do with it.
Thank you very much. Happy holidays. Best regards.
Same to you.
Your next question from Edward Kelly of Wells Fargo. Your line is now open.
Yes. Hi, Richard. Good afternoon. You mentioned freight. I was hoping you could provide just a little bit more color on the headwind.
And then you talked about an improvement maybe coming in March. Any more color behind that?
Not really. Before each call, I'll sit down with the Head of Merchandising and some of the other senior people in Merchandising, just get the color on their departments and what's going on. And it was a by the way comment that with things coming from Asia as an example, there's or in general, there's container shortages. And so it may take a few extra days to get things on to a ship or the ship may go sailing not full in some cases. The same thing is on some of the big ports in the United States like on the West Coast particularly, they mentioned 2 to 4 days of delay.
Again, 2 days to 4 days is not a lot, but when you're moving inventory fast, you want to have it. Once you've ordered it, you want it built and put on the ship and get here and onto our floor. So it's not a big deal. And the comment was I said, what will improve and said, probably not until February, March. So I just that's what I threw out.
Not any more impactful than that.
Okay. And then I just had a question on e com and just digital strategy generally. Any updated thoughts on buy online, pick up at store? I mean, it has essentially kind of become a standard offering across the industry and we've obviously accelerated a lot of digital adoption. Just curious as to whether you're rethinking that at all?
We're not rethinking it. We continue to look at it and scratch our heads a little bit. But at this juncture, we don't have any current plan to do so. Okay.
And then just lastly for you, fuel, I think gross profit per gallon this quarter was probably up quite a bit. I mean, I look at the OPUS data looks like maybe double. Is that about right? And then what did gallons sold do this quarter?
We don't gallons sold were down, not down as much as they had been in its trough a few months ago. And you're right on margins, not a double, I can't give you any quantitative number there. But in terms of margins were up year over year as a percent, gallons were down year over year.
Okay. Thank you.
And your next question from Chris Harbors of JPMorgan.
Thanks. Good evening. So I wanted to follow-up on the holiday pull forward question. I was curious what the merchants are thinking about how the season progresses, particularly as we get close to Christmas. Some retailers think that given the earlier cutoff time to get the gifts in time for Christmas that there could be a big brick and mortar surge.
I think other retailers are saying that now it just started like with Prime Day and it's just been a pull forward. So don't expect anything out of the anything unusual close to Christmas. So curious what your merchants are thinking?
Well, merchants are feeling pretty, I'd say, aggressive with a small a. They feel that again some of it was pulled forward, but they're still, again running out of some gift wrapping paper 2 weeks before you wanted to is not the end of the world, but every sale is a sale that we want. In the same token bringing in fundamental items that if you end up having a few extra SKUs or a few extra quantity of certain SKUs the day after Christmas, it's not going to kill you because it's not stuff that's seasonal that has to be marked down in a big way. So I think that we're going into it recognizing that our sales overall, particularly brick and mortar, have done well, that we're basing their assumptions of what we're going to do even over the next 2 weeks positive relative to this. Recognizing that there could be some pull forward and there could be some because of the dates got a little longer on shipping, but at the end of the day, we see that we agree with you that could help the in store experience and we'll see.
Got it. And then in terms of the you called out travel and gross margin as a big impact there. Is there something around the accounting of that? You hadn't called it out prior. Maybe it was just because it's a relative to other things in the ancillary business.
But is there an accounting thing? Is there seasonality to that? And would we expect that to sort of get worse for some reason?
Well, what the accounts make you do is just like in the 10 ks, you got to put the you got to rank them in order of dollars. So in the case of travel, first of all, it's a very high gross margin business. To the extent that we're simply acting as a broker like our car rentals, there's sales and no cost of sales equals gross margin or very little cost of sales. Only when we curate an item and take ownership of it, you will, like 100 cruise ship weeks or whatever, I'm making this example up, where you sell $100,000 of something and make a few $1,000 or $5,000 of margin that's a 5%. But you have big chunks of that business that are 80 plus percent margin.
So it's a business that started to show a little bit of life as the summer we entered summer, but with the spiking of COVID in the last several weeks that has dissipated quite a bit. And even some of the life that occurred in the summer were bookings out as for Christmas, some of those are being canceled as you would expect them to be. So it's just it's the rank order of them which one hit harder a little bit.
Got it. And then the last question is on price gaps relative to peers and club and grocery, how are you what do you what have they widened? Where do you see them now? I think if you go back to this 'nine timeframe where sort of lap peak food at home inflation and you lap some food at home wallet gains, you seem to get more aggressive on price. So just want to get your thoughts on where you see the price caps now and how you're thinking about that into 2021?
Well, I mean, when we look at our comp shops compared to other warehouse clubs as well as comp shops specifically on certain items and other traditional retail formats, we feel very good about our competitive moat, if you will. And we don't think that's an issue at all for us right now. But we're the ones that keep pushing pushing the limits further.
Got it. Have a great season guys. Thanks.
Thank you.
And next question from Robert Moskow of Credit Suisse.
Thanks for the question. Richard, you mentioned that manufacturers, I guess, packaged goods, they're not promoting as much, not giving as many discounts as usual because they don't have to. At any point, do you think that could flip the other way? And if so, what would drive it? Is it just availability of supply or maybe a more intense competitive environment?
Gosh, when I find out I'll let you know. I mean what's happened of course with everything, you mean the strength, both the strength in electronic items, TVs, AirPods and everything else in between and laptops and the demand for those things is enormous. And in some cases, some shortages of supplies in general, even if capacity has gone up, it could be a lot more. It's hard to say.
Okay. I was thinking more on the lines of packaged food. We've heard sub categories putting promotions back in. Do you have any insight into that?
Okay. I don't. I'm sorry.
Okay. All right. Thank you.
And next question from Evercore ISI.
Hi.
It's Greg Malek. I think that was me. So actually two questions. 1, was there any grocery inflation showing up? And we see CPI for grocery picking up and there's less promotion.
What are you guys seeing there?
Very, very, very little.
So there's something, but it's nothing like 4% or 5%, some of those other numbers we see out
there. It's not even 8%. It's very, very, very little. Three
varies. Triple varies.
On cash, so the special dividend, congratulations on keeping it special and getting it done.
You should be back a
little under $10,000,000,000 of cash. What's the right number that you want to run the business with either still during COVID or even on the other side of it?
Well, keep in mind, there's a chunk of it that is weekend debit and credit card receivables that could be $1,000,000 or 1.5 dollars There's upwards of just under $1,000,000,000 that is related to insurance captives and the like. There's a $2,000,000,000 to $3,000,000,000 that oversees in different countries, which for whatever reasons, it's the last money you want to bring back because of whatever withholding or other taxes related to it. So at the end of the day, someone asked the question after we announced the $10 dividend, we could have done more. The answer is we could have, but why rush? I mean, right now, we still don't know what's going to happen with COVID and what may happen next year in the economy.
And so we'll probably have a little more cash than normal than pre COVID, if you will, but that's okay too.
And then last, could you just where are average rage rates today to sort of level set where the and we know the COVID top up. Thanks for that, helping us there. But where are we now before all that?
You mean the average U. S. Hourly wage?
Yes.
I think we're in the well, ex the $2 We're at the we're either right above or just approaching $24 average in the U. S.
Approaching $24 in the U. S. And so the and the changes for the base rates going up, that was you did that, that was completed when?
In March, I believe, last year? March last March. Last March, beginning of March? March 2019. March of 2019.
March of 2019. I believe it was near the beginning of March, whatever that Monday start for that weekly pay period was or biweekly pay period. And that was $2 across the board.
Right. And the COVID stuff is on top of that.
Excuse me?
The COVID was on top of the actual wage rate.
Yes.
Right. Got
it. Great. Well, good luck. Have a great holiday.
Thanks. You too.
And next question from rupesh Tariq of Oppenheimer. Your line is now open.
Good evening. Thanks for taking my question. So I wanted to ask for just some of the countries where you have lower COVID infections, China, Australia seems to be normalizing now. Has purchasing behavior in those markets returned back where it was maybe pre pandemic? I'm guessing Australia is probably a better read than China.
They're both
stronger comps.
From a category perspective, have you seen the category shift to, I guess, maybe where they were pre pandemic, if you look at the mix?
I don't want to know. Well, I don't have that detail in front of me unfortunately. And when I look at comps by country in local currencies, in most countries we're back to normal, if not a little better.
Okay. Okay, great. And then just in the U. S, just given we've seen spikes and infections and California has had more research has recently put in place. Just curious if you can just comment on anything you're seeing more recently just in terms of changes in consumer behavior or traffic to your stores?
The only thing that I've noted is that when it first started a few weeks ago or when the California everybody was waiting for California in California, everybody was waiting to hear what the new restrictions was going to be in terms of lockdowns. There was a spike in shopping and people were coming in. So we had particular strength over a couple of week period when more spiking was occurring.
Okay, great. Thank you. Have a great holiday.
Thank you. You too. And
Your next question from Kelly Bania of BMO Capital.
Great. Thanks for fitting me in here. Richard, just wanted to go back to the buy online and pick up at store question. I know you've said for several quarters now you continue to scratch your head, but it does seem like a lever that maybe you could pull one day that's already been pulled by pretty much everybody else in retail. But I guess just given the massive growth that you've seen with Instacart and your 3rd party partners there, there just does clearly seem to be a segment of your membership base that's willing to pay a premium or that markup for that service.
So I'm just curious if you've thought about even a markup type structure for pickup or even like a higher price point membership for a pickup type service?
As it relates to general conversations about it, those are topics that are discussed. One of the challenges right now is a lot of the buy online and pick up in store traditional retail promotions are at the same prices which you can come in and buy it for. So somebody is paying for the picking it up and storing it and waiting for you to pick it up. I think that will shake out too over time as people as companies somebody has to pay for it either the company or the customer. I'm not trying to be cute.
We're just we're looking at all those things, but we haven't made any decisions to go forth with it.
Okay. And just maybe quick follow-up. You mentioned the 7% ecom penetration from a sales perspective. But just curious if you could share just the percent of your maybe membership households that are engaged with Costco from a digital e commerce perspective?
Yes. We don't give out that information yet.
Okay.
Thanks.
As you might expect, it's growing.
Of course.
And your last question from Steph Wissink of Jefferies.
Thanks. Good afternoon, everyone, and thanks for squeezing this in. I just want to follow-up on Rupesh's earlier question, but ask it a slightly different way, which is looking at your cohort of new members that have joined really some kind of the Q3 of last year, any performance distinctions or category mix distinctions that might give you encouragement that those members might be a bit more sticky going forward or might be a bit longer lifetime value customers for you into the future? Thank you.
We don't have a lot of that information yet. What we recognizing that some of them signed up because of COVID and because we can deliver through Instacart Fresh and or we can serve them online. But there's not a lot to
go on yet.
Okay. Thank you.
Well, thank you, everyone. Hopefully, you have a happy and healthy holiday season and on to a better 2021. Have a good day.