Good day, and thank you for standing by, and welcome to the Q1 earnings call. At this time, all participants are in the listen only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star one on your telephone. I will now hand the conference over to our speaker today, Richard Galanti. Thank you. Please go ahead.
Thank you, Sadie, and good afternoon to everyone. I'll 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 first quarter of fiscal 2022, the 12 weeks ended November 21.
Net income for the quarter came in at $1.324 billion or $2.98 per diluted share, compared to $1.166 billion or $2.62 per diluted share last year. This year included a tax benefit of $91 million or $0.21 this year related to stock-based compensation and a write-off of certain IT assets of $118 million pre-tax or $0.20 per share. Last year included tax benefits of $145 million or $0.33 per diluted share, 16 cents of which was due to the deductibility of the $10 per share special cash dividend received by the company's 401(k) plan participants and 17 cents related to stock-based compensation.
As well, an incremental expenses for COVID-19 premium wages of $212 million pre-tax, which was hit last year in the quarter of $0.35 per share. Net sales for the quarter increased 16.7% to $49.42 billion, up from $42.35 billion a year earlier in the first quarter. Same store sales for the first quarter were as follows. In the U.S., on a reported basis for the 12 weeks, up 14.9% and excluding gas inflation and the impacts of FX, up 9.9%. Canada reported 17.2%, ex gas and FX plus 8.3%. Other international reported 13.4%, ex gas and inflation and FX up 10.9%.
All told, the company reported a 15% increase on a comp basis and 9.8% up, ex gas and FX. In e-commerce, which was reported at 14.3, ex FX was 13.3. In terms of Q1 comp sales metrics, traffic or shopping frequency increased 6.8% worldwide and up 5.9% in the U.S. during the quarter. Our average transaction or ticket was up 7.7% worldwide and 8.5% U.S. during the quarter. Excluding the positive impact from gas inflation and FX, the average ticket was up, ex that, at +2.5% worldwide and +3.5% in the U.S.
Foreign currencies relative to the U.S. dollar positively impact sales by about 90 basis points, and gasoline price inflation positively impacted sales by approximately 430 basis points. Next on the income statement, membership fee income reported in the quarter $946 million, up $85 million or 9.9% from last year's $861 million figure. Ex FX, the $85 million increase would have been $80 million, and the 9.9% increase would be 9.3%. In terms of renewal rates at first quarter end, our U.S. and Canada renewal rate came in at 91.6%, up 0.3% from the 12-week earlier figure at Q4 end.
As well, the worldwide rate came in at 89.0%, also up 0.3% from 12 weeks ago at Q4 end. The renewal rates are continuing to benefit from more members auto-renewing, as well as increased penetration of executive members who on average renew at a higher rate than the non-executive members and first year renewal rates which have improved a little. In terms of number of members at end of first quarter, in terms of member households as well as total cardholders at Q1 end, total paid households was 62.5 million, up 800,000 from 61.7 a quarter ago. Total cardholders, 113.1 million, up 1.5 million from their 111.6 million 12 weeks ago.
At Q1 end, paid executive members totaled 26.5 million, an increase of 836,000 during the 12 weeks since Q4 end. Executive members represent 42% of our members and a little over 70% of our sales. Moving down to the gross margin line, our reported gross margin for the first quarter was lower year-over-year by 49 basis points and excluding gas inflation lower year-over-year by 6 basis points. As I normally do, I ask you to jot down a few numbers. There are two columns, both reported year-over-year in Q1 and then without gas inflation year-over-year in Q1. First line item would be core merchandise minus 63 basis points year-over-year on a reported basis and minus 26 basis points without gas inflation.
Ancillary and other businesses, +2 on a reported basis and +12 ex gas inflation. 2% reward, +3 and -1 basis point. LIFO, -3 in both columns. Other, +12 basis points in both columns. Total then on a reported basis, margins were down 49 basis points year-over-year, and ex gas inflation down 6 basis points. In terms of the core merchandise component gross margin being lower by 63 year-over-year and 26 basis points ex gas inflation. Recall last year in Q1, the core reported was up 83 basis points and ex gas up 66 basis points. we retained a good portion of the improvement from two years ago in the core.
In terms of the core margin on their own sales in the first quarter, our core on core margins were lower by 18 basis points, with non-foods slightly up and food and sundries slightly lower year-over-year. Also, lower year-over-year fresh foods was the primary driver of the core on core being lower in the quarter. Fresh continues to lap exceptional labor productivity and low product spoilage that occurred from the outside sales that happened a year ago in the quarter. Ancillary and other business gross margin was higher by 2 basis points on a reported basis, and again plus 12 basis points ex gas inflation. Gas and travel were better year-over-year as they anniversary a softer quarter a year ago, offset by e-com, which was particularly strong a year ago and also related to the pandemic.
LIFO, we had a 3 basis point or $14 million LIFO charge in the quarter. Our 2% reward, higher by 3 on a reported basis and lower by 1 excluding gas inflation, a reflection of slightly higher sales penetration going to the increased number of executive members. Other was up 12 basis points. This is related to COVID-related costs from a year ago. That portion of the COVID-related wages that go into the cost of sales like our manufacturing businesses and our meat and bakery departments. Given the inflationary pressures and our ongoing efforts to mitigate price increases to our members in the face of inflation as best we can, our Q1 gross margins results all in all, I think were pretty good. Moving to SG&A.
Our reported SG&A in the first quarter was lower or better, year-over-year by 66 basis points and 29 basis points excluding gas inflation. Again, jotting down two columns of numbers, first column being reported and the second column being ex gas inflation. Operations was better or lower by 40 basis points, and ex gas inflation better or lower by 11 basis points. Central, reported better by 10. Without gas inflation, better by 6. Stock compensation, better by 2 and worse by 1 in the two columns. Other, better by 14 and better by 13 year-over-year. Total, again on a reported basis, our SG&A was better or lower by 66 basis points, and ex gas inflation lower or better by 29 basis points.
Keep in mind, in terms of the core, again, better by 40 or better by 11 ex-gas inflation. Keep in mind this result includes the permanent dollar an hour wage increase that began in March of 2021, and four weeks of additional starting wage increases that we just took this past October, going from $16 to $17 and from $16.50 to $18 for our two main categories of hourly employees. These latest changes in the starting wages went into effect October 25, just six weeks ago, and four weeks of those six weeks were included in Q1. SG&A and no surprises there. Again, on an ex-gas inflation basis, better by 6. Stock comp, as I mentioned, a little better, a little worse by 1, ex-gas inflation.
Other, the 14 and the 13 basis points numbers. This consisted of a COVID expense of $159 million last year, and the $118 million write-off of the impacted IT assets that I mentioned earlier. Next on the income statement is pre-opening expense. This year in the quarter, $28 million. Last year in the quarter, $22 million or $6 million higher. All told, reporting operating income in the first quarter increased 18%, coming in at $1.693 billion this year in the quarter compared to $1.43 billion last year. Below the operating income line, interest expense was $39 million each of the first quarters of fiscal 2021 and 2022. Interest expense rather.
Interest income and other for the quarter was higher by $13 million year-over-year, primarily due to favorable FX. Overall reported pre-tax income in the first quarter was up 19%, coming in at $1.696 billion this year compared to the first quarter last year of $1.42 billion. In terms of income taxes, our tax rate in the first quarter of 2022 was 20.7%, compared to 16.8% in Q1 last year. Again, both years' tax rates benefited from the tax treatment of stock-based compensation as mentioned earlier, $91 million this year and $75 million last year in the quarter. Additionally, last year's tax rate benefited from the tax deductibility of the special dividend, that portion payable to the company's 401(k) plan participants.
The fiscal 2022 effective tax rate, excluding these discrete items, is currently projected to be between 26%-27%. A few other items of note in terms of warehouse expansion. As you know, for fiscal 2021, we opened 22 units, including two relos, so a net increase of 20 units during fiscal 2021. This quarter that ended a couple weeks ago, we opened nine units, including one relo, so a net openings of eight. For the remainder of the year, we plan to open 23 new units, four of which would be relocations, so a net of 19 if all goes as planned. It's been a busy past seven days.
We opened our second Costco in France last Saturday on December 4, followed by our second building in China, which opened yesterday, as well as two buildings opening today, one in the U.S. in Florida and our fourth unit in Spain. Regarding CapEx, our first quarter fiscal 2022 spend was approximately $1.05 billion. Our full year CapEx spend is estimated to be just about $4 billion. This would represent an increase of more than $400 million over last year's entire CapEx figure of $3.6 billion. The largest areas of increase coming from international spending for new warehouse expansion and increased investment in our logistics and e-commerce fulfillment operations. In terms of e-commerce, sales in the quarter, FX increased 13.3% year over year.
That's of course, on top of an 86% plus increase a year ago in the first quarter. Stronger departments in terms of year-over-year percentages include jewelry, tires, and home furnishings. Our largest merchandise department in terms of sales majors, which is everything from consumer electronics and TVs to appliances, et cetera, was up in the high single digits, also on a very strong sales increase a year earlier. In terms of an update on Costco Logistics, they continue to drive our big and bulky sales. For the quarter, Costco Logistics deliveries were up over 50% and now represent about 70% of our U.S. e-com big and bulky shipments. We've averaged during the quarter more than 50,000 stops per week.
For the year, we project more than 3 million stops, which would be everything from dropping something off to installing and taking away the old appliance for logistics in the full year. Our e-com mobile app, we continue to improve the site with additional features. Thus far, as I've talked about in the last few quarterly calls, we've redesigned the app header and footer. We've updated and improved the menu layout. Our members now have the ability to view warehouse receipts online via both the app and desktop. Our co-brand Citi Visa card can now be linked to the digital membership card and can be used for payment. Our members are now able to much more easily reschedule e-com deliveries in the U.S. and Canada. Same goes for rescheduling returns pickups.
Delivering in the first half of the new upcoming calendar year, labeling of fulfillment, a better labeling of fulfillment methods. Members will be able to easily see fulfillment options, be it e-com, same day, and even nearby warehouse availability of a particular item at a particular item level. We're rolling out new e-com kiosks in the warehouse with video signage and easy touchscreen ordering. As well, we're rolling out e-commerce lockers. Currently in the U.S., we have 112 locations, with more, and we plan to more than double that number during calendar year 2022. In terms of e-commerce, there's a program that received some press yesterday, just yesterday, called Costco Next. In a way, it's like our warehouse roadshows, but online.
Currently, there are 34 suppliers and growing, but it's still quite small, offering just under 1,000 items, curated items with Costco values. Please check it out when you have a chance. From a supply chain perspective, similar issues that we outlined in 12 weeks ago on the last quarterly call. Each issue ebbs and flows a little bit, but overall, the factors pressuring supply chains and inflation include port delays, container challenges, COVID disruptions, shortages of varied components, raw materials, ingredients, and even packaging supplies, labor cost pressures, and truck and driver challenges. Overall, we feel we've dealt pretty well with the supply chain challenges in terms of delayed container arrivals on the Pacific Coast. About 79% of our import containers are late by an average of 51 days.
A few percent of those are actually a few days early, and many of them are a few days more than 51 late. Virtually all departments are impacted. We've ordered early in many cases, as I mentioned, I think earlier on earlier calls, given the longer lead times. Less product and packaging challenges, but still quite a bit. Still some limitations on key items, but improving. Again, it ebbs and flows. Chip shortage is still impacting many items, some more than others. In some instances, delayed inventory simply extends the season. An example might be lawn and garden and patio. As soon as the product arrives, it sells pretty quickly, but it may extend into beyond the normal seasonal time. Toys and seasonal, in fact, same thing.
Some inventory, in fact, won't make it before Christmas, but we've mitigated that as best as possible and feel pretty good about it. Despite all the supply chain issues, again, we feel pretty good about staying in stock and continuing to work to mitigate cost and price increases as best we can. Moving on to inflation, again, it's pretty much the same story that we told during each of the last two quarters. There have been and are a variety of inflationary pressures that we and others are seeing, from labor costs to freight costs to higher demand, to container shortages and port delays, to increased demand on certain product categories. Much of what you see and read out there.
Various shortages on everything from chips to oils and chemicals still supplied by facilities hit by the Gulf storms a while back. Higher commodities prices. For Q1 2022, in talking with our merchants, senior merchants, we estimate that overall year-over-year price inflation to be in the 4.5%-5% range. That's a little bit higher of an estimated inflation rate that I discussed a quarter ago, but I think pretty consistent with what you read out there.
All this said, much kudos to the job that our merchants and our traffic department and our operators have all been able to do in order to get the products that we need, you know, pivot when and where necessary and keep our warehouses full, while keeping, you know, prices low for our members and continuing to show value versus our competitors. Like, look, I think overall this is best reflected in the operating results that we continue to achieve despite these many challenges. Anecdotally on merchandising, you know, holiday stuff has been strong. Again, sometimes it depends on when the merchandise gets in. Baking items, more people seem to be getting together are strong. Gift cards are up dramatically from a year ago, but it was weak a year ago.
Pet products, as you might expect, are strong with the benefit of increasing pet population over the past couple of years. Alcohol and spirits are strong, including gift boxes of various items. Of course, continued strength in consumer electronics, appliances, furniture, mattresses and the like. Apparel actually has enjoyed much stronger sales growth this year, albeit compared to relatively flat apparel sales a year ago. One last comment. Our sustainability commitment website received a major refresh this week, so please feel free to visit the site. It's linked directly from our homepage under the column About Us, and then click on Sustainability Commitment. Finally, in terms of upcoming releases, we will announce our December sales results for the five weeks ending Sunday, January second, on Wednesday, January fifth, after market close.
With that, I will open it up to questions and turn it back over to Sadie. Thank you.
For our first question, we have Michael Lasser from UBS. Michael, your line is open.
Good evening. Thanks a lot for taking my question. Richard, your point about 4%-5% inflationary increase across the assortment. Typically, Costco's been slower to raise prices than everyone else. That seems to be a number that's in line with others across the retail sector. Has the posture changed with respect to passing along price increases? Why is that the case? Does Costco have more pricing power today than it ever has in the past, given the pricing gaps between you and others in the market?
Well, I think as it relates to passing on, we've always said we wanna be the, you know, the last to raise the price and the first to lower the price. Recognizing there's a limit to what you can do based on these cost increases. First and foremost, I think because of our relative purchasing power and our relationships with our vendors and suppliers, we work to mitigate those increases in any way, shape, or form we can. Ultimately, that may include us taking a little more or less markup and maybe them taking a little less markup. There's no completely consistent answer throughout, as you might expect. Overall, I think we've done a relatively good job of that. There is inflation in those numbers.
Those numbers are kind of a combination of our cost increases as well as some price increases. Again, it fluctuates. You know, for every few examples of something going up, there may be an example of something flatter going down a little bit for unrelated reasons. Again, it's a best guess, it's fluid. You know, we saw inflation starting several months ago in a bigger way, I think in our fiscal Q4 this summer and continuing into this fiscal year. As we all have read articles, general articles out there about certain different major consumer product manufacturers announcing increases and continuing to do so. I think it's gonna continue. Hopefully, we're getting towards the top and it'll start flattening out and subsiding, but we'll see.
My follow question is, with the core merchandise margin ex-fuel and the core on core gross margin getting less bad or declining at a lesser rate this quarter than last, is this a sign that the margin here is stabilizing? Do you think the Costco exits the pandemic with a structurally higher gross margin than it's had in the past? Are all these dynamics simply a function of what you've often said, which is when overall retail margins go up, so do Costco's, but just a little less than others? Thank you.
I think on the last comment, yes, in terms of that last comment you made. Look, I think at the end of the day, I think we in many ways have benefited from market share gains, hopefully some or most of which will be sticky. The biggest thing that impacts margins many often is not only on the buying power side, and arguably, I can't think of any company that has the buying power per item that we do, because we do our roughly $200 billion in sales with, you know, 4,000-ish items, versus anybody else that's doing it with hundreds of thousands of items or 50,000 items. But I think that, having higher levels of sales productivity, particularly in things like fresh foods, helps your margin.
We'll keep some of that, and we'll use some of it to be even more competitive and hopefully build a bigger moat a little bit. I think that some of it is probably structurally there, but you know, as some famous TV actress said once, "It's always gonna be something," and you know, we'll keep fighting that battle out there. We feel pretty good about some of the structural things that have occurred that hopefully will help us in the future, but we'll have to wait and see.
Thank you very much, and have a good holiday.
Thank you.
For our next question, we have Simeon Gutman from Morgan Stanley. Simon, your line's open.
Hey, everyone. I'll be Simeon for this call. My first question is actually a follow-up to Michael's second question. Maybe I'll ask it a different way, Richard. The two-year core on core looks like it's actually getting better, and you said it yourself, you thought you did a pretty good job on it, and it looks like you are. It feels like you're managing through the worst of it. The environment may be getting better at the margin. I don't wanna go too far and say that. Why shouldn't this be the worst for the core on core, notwithstanding, you know, comparisons, but they which get harder, but then they start to get easier.
Yeah. Look, I think that's hopefully how the storybook goes. It's always gonna be something. No, look, jokes aside, we feel pretty good about structurally what we've been able to accomplish, and part of that's market share with higher sales levels. You know, we've not stopped what I'll call the buyer creativity of working with suppliers to figure out how to continue to drive greater value. I can think of 50 examples, but at the end of the day, you know, we're continuing to drive value in lots of ways, and whether it's changing packaging or you know, using our volume, moving certain production to different parts of the world, and to make that moat even a little bigger.
I agree with you that so far, the story that you suggested is playing out and hopefully it'll continue to play out.
Fair enough. My second question is more on SG&A and the business's leverage point. We used to chat about, you know, Costco always doing mid-single digit comps, and that's good enough to cover the SG&A dollar growth. I think this quarter the business did about 6.5% dollar growth adjusted, and you're gonna have some of these wage investments that it'll annualize, well, maybe not till the middle or to closer to the end of the year. I'm trying to get at what a normal post-COVID SG&A rate may look like. Then, you know, does that mean it's sort of that mid-single digit comp rate that levers those expenses?
I think as it relates to the probably the best guesstimate, and I say guesstimate, not estimate, on where do you start, where's the inflection point of leveraging SG&A, probably still is in that mid-single-digit range. Beyond that, who the heck knows? I mean, we've been able, you know, notwithstanding some of these increases, particularly in wages, again, strong comps have helped these numbers. I think we feel pretty good about having the sales volumes that continue to be able to leverage those expenses. As soon as we find out, we'll let you know. Again, we're feeling pretty good about things at this juncture.
You know, at some point, I would assume comps have to come back to a, hopefully better than a, better than peer average, but you know, something back to where they had been pre-COVID but on a higher base, and even that helps you a little bit.
Okay, great. Thanks. Happy holidays, everyone.
You too.
For the next question we have Christopher Horvers from J.P. Morgan. Christopher, your line's open.
Thanks. Good evening, everybody. I wanted to ask a little bit about your thoughts on holiday pull forward. Obviously, you saw an acceleration in trend on a two-year basis in October and then, you know, November, you know, things obviously still amazing comp and gaining share, but you know, trends decelerated and, you know, it was sort of against what was a weaker, I think, end of the month last year. Can you talk about like, what do you think is driving that? How do you think about the rest of the holiday season? As you think about a consumer that's gonna, you know, lap a bunch of stimulus in the first half of next year, what are your initial thoughts on how that all could play out?
Well, I think, you know, again, as you just mentioned, November's comps were a shade under outside expectations. Still very good. You know, a couple percentage points different than what we had been enjoying a couple of months prior to that. Probably the view is a little bit of that was pulling forward. But even within last month's number, the weeks varied and overall were good. But you know, just when it's reduced a little, the next day it's better than you expected. I mean, I think the one thing that I feel good about is our in-stocks. You know, our senior merchant the other day had indicated his view is that, his feeling is that we're better in stock than anybody out there.
I I think part of that is the fact of limited selection. We are an item business. We could put something else in place for something, but we've done a pretty good job. I mean, I had a, you know, with a little bit of a chuckle, I had a call just yesterday from a reporter asking about how are we doing on cream cheese. I checked, and we're actually, there's a cream cheese shortage out there and the bagel shops are being challenged. We actually got, as the buyer said, it took a little extra work, but we've got all the cream cheese we need. I think we've done a good job in merchandising.
Got it. I guess as you know, as you think about last year and the stimulus, I mean, do you think that I mean, obviously, I think the consumer, as you get closer to Christmas and New Year's, probably comes back if people are entertaining more, like you said, on the baking side. But as you get into, you know, January and stimulus in the spring, do you think your business lifted off of stimulus last year?
Look, it couldn't hurt. It probably helped a little bit. I know historically when there's been some stimulus items out there, factors. Our view is that we have not been impacted as much as others, but directionally, we've been impacted the same. Look, if next year there's a reduction in stimulus, Lord knows what's gonna happen with the stock market in general, and how people feel about where they're how they feel financially. That may all change a little bit, but we feel pretty good around here that in. You know, one of the things that we've shown over the years that in both good and bad times, we tend to do well. In good times because people wanna spend more, and then even in less good times, people wanna save more.
I think from a merchandising standpoint in tougher times, there's additional products and services that might be willing to sell us for the first time. In our own perverse way, we sometimes benefit from good and bad, and right now we're feeling pretty good about what the future looks like. By the way, the other thing you know that Bob just mentioned, that even if certain things head south in some way, shape, or form, like reduction or lack or elimination of certain stimulus items, supply chain at some point is gonna get better. As good as our numbers are, we could do better if we had more supply of certain of those items.
Even in some categories in non-food that are up 20 and 30+% , the buyer's view, we're still running out of stuff or that we could do better if we had more. That's not just us. I mean, that's it rains on everybody. I think some improvement in supply chain will be an offset to any other things that are detrimental to that thought.
Got it. Thanks very much, and enjoy the run on cream cheese at the clubs this weekend. Take care.
Thanks, George.
For our next question, we have Chuck Grom from Gordon Haskett. Chuck, your line's open.
Hey, Richard, Bob, team. Hope you guys are doing well. Just a question around leverage. You know, if we back out the one-time charges quarter, it looks like you enjoyed over 100 basis points of improvement year-over-year and 65 basis points last quarter. Not fully realizing the comps on a stack basis were better, but wondering if some investments or other costs may have rolled off. Just some thoughts on that front.
I think more of it is just the leverage of sales growth, frankly. Again, taking out the specific COVID-related charges that we talked about. The fact that what we didn't talk about in terms of separating in the press release was that $1 an hour increase we did in March, and the new one that had a small impact in Q1 because it started six weeks ago. In that regard, there's nothing that stands out in my view, in my guesstimate. I'm looking at my guys here. Do you...
No.
No, no.
Strong sales.
It was strong. Strong sales would be the number one factor.
Fair enough. Just on the storefront, you know, 14 opened thus far in 2022. You're more than halfway to the goal, which is great. I'm just wondering, you know, bigger picture, is there been any more discussions to backfill some of your existing markets, you know, your higher density areas where perhaps some stores, you know, just can't handle any more productivity, you know, any more throughput just because of the volumes?
I think that's the answer is yes, and I think that'll be you know, small methodical increases in that thought over the next several years. I mean, it used to be that we talked about when we had 400 warehouses and the average, I'm making these numbers up, so the average was you know, 180. Now the you know, I think we have an average several years later in the high 200s in the U.S. at least. We have a number of units in the 300-400 range. Not hundreds, but you know, tens of. We're looking for more infill.
We've been doing that and, you know, if it was 3-5 a year or three to seven, eight. 3-5 a year in the last five years. Is it gonna be 5-8 a year? Could be. I don't have that kind of detail in front of me.
Okay, great. Then my last one is just to follow up on Chris' on November. I believe you guys did call out that there was some moderation in retail inflation, you know, maybe 150 basis points or so. I'm just wondering if you could provide any color on, I guess, on where that retail inflation came in and I guess why that happened. Was it self-inflicted? Just, if you want to give some color there.
One thing that was a little lower was from the increases in food and sundries and some food and sundries items and fresh. That had spiked even more. It's still up year-over-year, but it spiked a little. It came down a little bit from where it had been. We haven't quantified anything specific beyond that.
Okay. All right.
By the way, as you might expect, there are suppliers out there that are saying, "Hey, you know, come January, February, you'll see some more increases." Again, this is not inconsistent with what I've read in general articles in the various business periodicals.
Okay. Just a lot of timing differences. Okay.
Yeah.
Great. Thanks a lot.
For the next question, we have John Heinbockel from Guggenheim. John, your line's open.
Richard, how is KS performing and what happens or how do you think about it in an inflationary environment in terms of how you take price versus like items on the national brand side? Does KS do better in an inflationary environment?
Look, many of our KS items are at such large volumes. It's not unlike dealing with the comparable large volumes we do in a branded CPG item. We're out there, you know, fighting with both of them, you know, to try to mitigate those cost increases. KS still grows at a little faster rate than others, but nothing discernible. I think we keep finding new items to do KS with and for a variety of different reasons, and so it continues to drive that brand. No, we don't see a big difference in how that's changing.
OOkay. Secondly, you know, the 70% on Costco Logistics is 70% of your needs. You're at what capacity in logistics? Is it still 50% or has it crept above that?
It's in the 50 range. Maybe it's slightly higher than that based on our when we originally you know bought what's now Costco Logistics a year and a half ago. We've moved over a bunch of volume. We've grown it as well, you know, grown our total base of need. I think we're slightly above the 50% that we felt we had capacity for at the time. We certainly have plenty of capacity over the next few years. Mind you, we're spending money on it. Part of our fulfillment and logistics is I think I mentioned on the last quarterly call in within CapEx we had spent $340 million or so on a multi-acre 1.6 million square-foot distribution facility in Southern California.
That's for a variety of needs. Much of what we bought in the Innovel acquisition in March or April of 2020, more than 10 million square feet of space around the country, much of it's leased. Much of it's fine, by the way, but not all of it was geographically. Particularly the big sites, the 1 million square-foot sites, were in areas where we're stronger relative to where Sears is stronger or they had most of their business at the time. We're still spending money on it and upgrading it, but you know, again, from a merchandising standpoint, we're very excited about it and it's helped us grow that business in a big way.
Given our small market share of many of those items, particularly on the appliance side, we feel there's a lot of growth potential for us.
Okay, thank you.
For the next question, we have Karen Short from Barclays. Karen, your line's open.
Hey, thanks very much. I wanted to just talk about ticket a little bit. U.S. ticket at 3.5%, can you kinda parse that out on units per transaction, well, versus AUP, but also tie that into the inflation numbers that you called out for the quarter and/or your expectations on inflation?
Honestly, I can't. I don't have that detail right in front of me. You know, generally speaking, you've got electronics that, like TVs and what have you, that are going down in price, maybe a little less this year because there's less promotions because of shortages. I mean, at every budget meeting, every four weeks, we're presented examples of items where we're taking down the price of high volume key items by changing the packaging, by moving some aspect of manufacturing to another part of the world. I don't have the detail, Karen, in front of me for that. Sorry.
Okay. I wanted to. I don't think this has been asked for a while, but can you give an update maybe on what the average ticket is for executive members versus Gold? You know, I know obviously you've given the % of sales, but frequency of executive versus Gold, how maybe that's changed over the last, you know, almost two years of the pandemic.
I will, somebody's just running out of the room to see if they can grab that sheet, and I'll answer it as soon as they get back. If you wanna ask another question or move on to the next one, but I'll intervene when it gets back.
Well, my standard question would be just on your cash balance in terms of thoughts on special dividends.
Oh. Well, as soon as we know, you'll know, or the day after. Look, our cash position is strong. One of the things I pointed out is our CapEx is also increasing in a conscious way. Notwithstanding that, our cash flow from operations is growing at quite a stronger rate as well. It's something that we've done four times in eight years. You know, we and the shareholders seem to like it when we do it. I'm not trying to be cute, but we haven't made that decision at this juncture. It's probably a when, not if, but, you know, when will be when we do it.
OkOkay. Maybe just while you're waiting for that in numbers on the executive, can you just maybe give us some color on what % of freight is actually spot versus contract? I don't know if you've ever given that number.
I don't have the exact number, but I'm willing to bet it's 80%+. I could be wrong a little bit, but it contracted. Now, recognizing with contracts, we might do one-, two-, and three-year contracts. We're still benefiting on three-year stuff and benefiting a little on two-year stuff, and have now gone beyond the benefit of the one-year stuff. It's over a two- or three-year period, but our assumption is it'll take less than that time to start to normalize somewhat.
Okay. Great.
Is it higher today than it was? Yes. Yeah, but it's. I think we again probably with other large users of freight and containers have probably done a pretty good job of at least staggering that, not having to do a lot of spot stuff so far.
Great. Yeah. I mean, if you get those numbers on Executive and Gold on ticket and frequency, that'd be great.
Okay. What they came back with right now is I don't have quickly average ticket changes, but the total spend per executive member compared to a Gold Star member is almost 3x.
Okay. Thank you.
Call it 2.5. Thank you.
Okay. Thanks so much. Bye.
For our next question, we have Greg Melich from Evercore ISI. Greg, your line's open.
Hi, thanks. I had two questions, Richard. One is digging a little bit into the margins, the gross margins. You said gas and travel had helped, but then offset by e-commerce. Can you sort of explain, you know, so the gas penny profit was up, even if the mix hurt, is that...
Margin percent was down, but you've got a 40%-50% increase in price per gallon.
Got it.
You still might have more pennies per gallon, but the margin itself was down.
Got it. That was offset by e-commerce.
Well, e-commerce is. Again, I wouldn't read a lot into any of that description. We're just trying to share with everyone directionally what helps it and hurts it a little bit. E-commerce, just given all the activity we've gotten in expenditures on fulfillment and expansion and doing what we can, you know, over time when we're pulling tickets, if something else happened, I don't view as a big issue from a. It's not, whatever, whether the margin's up a little or down a little, it's less about competition and more about what's the product mix that month or week, and what else is going on with this rapid expansion and investment in it.
Got it. Then maybe to tie back your discussion on the logistics. Big and bulky, if e-commerce is roughly 8% of sales, is big and bulky a quarter of that? Is that the kind of scale we're talking about?
It's over a third.
It's over a third. Great. Last but not least, the renewal rates, you know, continuing to tick up is impressive. Shouldn't that come off at some point, just given that you have more first-year members?
When it gets to 100. No, just kidding. Look, I think as I mentioned earlier in this, when I was speaking, probably the single biggest thing that's helping it right now is auto-renew. As we get more people on a credit card, both in the two big co-branded in the U.S. and Canada, that's a no-brainer to help a little bit. As we convert people to Executive Member, and as we see for every 100 new people signing up, a slightly higher number of them sign up as Executive Members, they are more likely to renew. Those things help as well.
The thing I mentioned about new warehouses in markets around the world tend to be, while they have a much lower renewal rate in their first year of renewal or year two, they now continue to grow as more people have renewed the prior year. Those are generally starting at higher rates than they were. All those things help a little bit. I'd like to think it's all the wonderful things we do and the value proposition, but certainly auto-renew is probably a good help there.
Got it. Last, because someone has to ask it, does fee increase, I guess back half next year is when it'll be five years since the last one. What are the thoughts on that, just given that members seem to be self-selecting a fee hike already through the Executive membership? Does that change your thought process as to when you might hike the fee?
No. Our only thought is we'll probably start getting questions about now.
Fair enough.
It's still a while away, but we certainly feel good. As I said in the past, you know, renewal rates, strong renewal rates and loyalty help that process, that thought process. We'll see. You know, it's still a little bit of time to think about it.
Okay. Well, have a great holiday season, everyone.
Thank you.
For our next question, we have Rupesh Parikh from Oppenheimer. Rupesh, your line's open.
Good evening. Thanks for taking my question. I wanted to touch on Canada and Other International. We saw a strong and accelerating two-year comp trend for both Canada and Other International. Is there any more color you can provide in terms of maybe what you're seeing in those geographies?
I'm getting a little help here. It's probably most about how COVID impacted different countries differently, timing-wise. I remember a year ago, a year and a half ago, you know, some of the foreign countries did better while we were being locked down, and then a little later they got locked down. Part of it is, you know, one of the reasons I think everybody's picked up on the two-year stack concept, but I think that's, as much as anything, the reason.
Okay, great. As you look at your ancillary businesses, is there a way you can provide an update in terms of how they're trending now versus pre-pandemic?
I don't have that detail with me, but generally speaking, you know, tires have picked up as an example. It's not an ancillary business. You know, the Costco Auto Program is down because there's a shortage of cars out there. Travel is up, not where it was pre-COVID. It was almost back to where it was pre-COVID and then the Delta variant hit, and then it was coming back again and then Omicron hit. It fluctuates pretty quickly.
Yeah.
I'm trying to think of the other things. Food courts have come back. I don't think they're quite where they were, but they're almost there.
Hearing aids.
Hearing aids have come back, but still, I think slightly below pre-pandemic.
Optical.
Optical is doing great.
Pharmacy is doing great.
Pharmacy is doing great. Helped, frankly, by the shots. We, like other retail pharmacies, are providing plenty of vaccines.
Okay, great. Thank you for all the color.
Okay.
For our next question, we have Stephanie Wissink from Jefferies. Stephanie, your line's open.
Hi, good afternoon. This is Blake on for Steph. First question will be higher level. You know, you guys are a big proponent of the in-store shopping experience, and it seems like store sales have been fairly strong as of late for retailers. Wondering, you know, how's your in-store shopping compared versus e-com versus your expectations recently? Then maybe if you can share any e-com pilots you might have that you've been working on. I know you mentioned you did a pickup test, but you discontinued that. Anything maybe in the works that you can share?
Well, you know, both in-store and online have picked up. You know, the pickup by things like Instacart for same-day fresh skyrocketed during the lockdowns in mid- to late summer 2020. Came down from those peaks, but is still way above where it was pre-COVID. E-commerce, as you know, because we talk about it every quarter is, you know, 8% or 9% of our sales on a company that is $192 billion in sales for the year ended this last August. So that's, you know, a lot bigger than it was, you know, two years ago. It's the last, I think the last three or four quarters, the two-year stack is 100%+.
Not with standing that, part of that is the big and bulky that has helped that number, which we really weren't driving that kind of business in store anyway. The fact that I think that, as we've heard occasionally, that notwithstanding some people don't like our mask requirements when we first put them in back in May of 2020, I think overall people felt, if I've gotta go out, I'm gonna go out to one place and bulk up on stuff. With taller ceilings and wider aisles and all those things, I gotta believe that psychologically that's helped a little bit.
At the end of the day, we were all surprised by, if you go back to, you know, March of 2020, we're surprised by the strength in non-foods categories, summer and fall of 2020, much less now. Much the same now. It was because people weren't traveling and they weren't going to games and concerts, but they were buying things for their home. We certainly had, on top of all the food items, all the other things they could buy for their home. That was a pleasant surprise to us, and that's continued. In terms of other tests, not a whole lot. I mean, we did have that small test in New Mexico with buy online and pick up in store.
As I mentioned on the call, we have over a year from now over 200 of our U.S. warehouses with lockers. In terms of buying online and pick up in store, we're not quite sure about that. We have very busy locations. There's not a lot of room for it, and it doesn't seem to be a lot of people clamoring for that. In fact, half or over half the people that come in and do that on a few things that we buy online in the lockers, they come in and shop while they're there. That's what we want. Beyond that, I don't think.
I think some of the things we're doing that I mentioned briefly about mobile and digital, some of these things everybody else have, we are sometimes late to the game on some of these things. Those should be all net additive to what we do.
That's super helpful. I was also wondering on your inventory positioning, how much are you getting ahead of, you know, any seasonal items or any challenges you may foresee for Q2 and Q3 for the spring and summer?
I don't know exactly. I know that consciously they, the advisors when they presented the budget meetings are talking about those issues. We are bringing in things early. We certainly have, you know, you think about it, our what we call our depot or our view of distribution system in the U.S., was something like 10 million sq ft, and we'd essentially slightly more than double that with the Innovel acquisition. Aside from other things, that helps us with a little storage if we need it or bringing in things early. Recognizing we start with, you know, we are somewhat seasonal, but historically we've always brought things in early anyway.
We've, whatever it may be, we certainly have the cash, as somebody mentioned earlier, to have a, you know, some extra $1 billion invested in inventory, even if it hangs around for a little bit. I think overall, some of our items are still a little later than they would be pre-COVID, but better than they would be if we were not doing as good a job as I think we are doing on forward buying.
Perfect. If I could sneak one last one in. I might have missed it, but I think you said for the net new openings this year, you said 19. I thought the last quarter you were aiming more towards 25. Is there anything to call out there?
Oh, no. What I said, it was 19 more in the last three quarters of the year, fiscal year.
Plus the 18.
Plus the 18 Q1.
Perfect. Thank you very much.
For our next question, we have Paul Lejuez from Citi. Paul, your line is open.
Hey, everyone. This is Brandon Cheatham for Paul. I was wondering if we could talk about the increase in CapEx. I think last we spoke, you know, CapEx would have a three in front of it. Now it sounds like it's. It has a four in front of it. I was just wondering, you know, was there a change in the strategy there? Specifically on the e-com investments, you know, do you feel like you're playing some catch-up there or, you know, laying the groundwork for growth? Just anything that you can share with that?
Sure. I think previous as it relates to this year, we had talked about, I think, $3.8 billion-$4.2 billion, quote-unquote. Now we're saying about $4 billion. These numbers are up from the mid-3s over the last couple of years. Low- to mid-3s over the last couple of years. In fact, last year's $3.6 billion included a $340 million or $345 million asset purchase that I mentioned earlier in the Southwest in Southern California, which is basically a 1.5 million-plus sq ft facility with lots of acreage to help with our fulfillment as well as our import stuff. I think there's
If you said what are, you know, what are the big things taking you from the low 3s to the low 4s over a few years of period? It's more international expansions, which tends to be a little more expensive per location. More expansion. You know, we in fiscal 2020, we were down to 13 net new units because of some delays with COVID. I think we were at 20 in 2021, and we're gonna be 27 net new units this fiscal year, plus five reloads, which is six reloads planned. We might miss that a little bit, but at the end of the day, there's more warehouses. Clearly more in the whole fulfillment concept, starting with the billion-dollar acquisition a year ago of what's now Costco Logistics.
Starting with adding additional square footage to that as well as the international things. Even on the distribution side or what we call our cross-dock depots, spending money overseas now in some of these countries to do some of that in a better way. Actually building a mini depot in Hawaii, where we have five locations?
Yeah. Seven.
Seven, I'm sorry. Seven locations, but huge volume locations. We've gotten to the volume and efficiency there that these are good investments, so it's a lot of those things. Mind you, we still spend all in, you know, close to $1 billion a year in IT.
Got it. That's how we should kinda think about it going forward long term?
That's, by the way, that's not all CapEx. That's expenses as well. Go ahead, I'm sorry?
Yeah, the kinda $4 billion range is what we should think about CapEx for the long term?
I don't know for the long term. I think four sounds about right for the next year or two. If things continue to go well and grow well, maybe it goes up from there a little bit. You know, we're not looking to spend it if we don't think we have good things to spend it on, just because our cash flow has been exceeding net income plus regular dividend plus capital expenditures, and the like.
Got it. You also mentioned that, you know, you're able to change out products when you're, you know, faced with shortages. Yeah, I was wondering if you could quantify that versus, you know, kind of a normal quarter. Then, you know, if you are switching out, you know, more than usual, you know, what impact does that have on, you know, consumer behavior there and anything on the logistics side as well?
I think it's. I don't have the exact number, but my guess is it's a small, you know, low- to mid-single-digit percentage. What it means, though, is going back all the way back to spring of 2020, and there were people hoarding goods. We were going out to additional suppliers to see what we can get, recognizing from their perspective, it creates some new relationships which we'll honor going forward, not just for the three months that we needed it then. I think there were opportunities to just expand product brands by necessity to some things. With I think the
In going into last summer and fall, with that advent of all the things for the home, both, you know, patio furniture and lawn and garden and barbecue grills and indoor furniture and electronics and gadgets for the kitchen, we took advantage of that and brought in additional items. It's more that than anything. The treasure hunt. It's still a small piece. Sometimes when I go into some retailers, I'm not gonna name names, but you'll see a shelf half empty or some spaces. First of all, why don't you put something there? But at the end of the day, I think our buyers have done a very good job of keeping the warehouses full.
Great. Thanks, and good luck for holiday.
For our next question, we have Edward Kelly from Wells Fargo. Edward, your line is open.
Hi. Good afternoon, guys. Happy holidays. Richard, I wanted to ask you, gross margin, you know, stayed pretty all things considered. Any additional thoughts that you can share on the current quarter or any reason we should expect some incremental pressure, you know, somewhat similar?
You were breaking up entirely during that call, so I heard about every other word. If you wanna repeat yourself.
Yeah, sorry. I wanted to ask you about the gross margin. You know, as you said, pretty good, all things considered. Any additional thoughts you can share on the current quarter? You know, comparisons in the core look similar, I think. Just wondering if there's any reason we should expect any incremental pressure.
From a competitive standpoint, I mean, there's lots of competition. Everybody's competitive. Again, I think structurally our model allows us to benefit from that. We talked about, you know, more pennies per gallon of profit that allows us to do some other things. I think we've got a lot of levers to pull here, and we feel pretty good that we are able to hold the prices on key items. I don't really think that we consider the challenge of achieving a margin. We're pretty good at figuring out how to get there while still being, you know, the company we are in terms of competitiveness. No big changes of what we see out there.
Okay.
It's just there's a lot of changes every month. You know, some things go up and some things go down, but overall we feel pretty good about it.
All right. Just one for a little bit more big picture just around, you know, customer data. I was hoping maybe you could just provide an update on, you know, things like personalization. Media is something that, you know, we hear a lot of people talk about. You know, maybe just any thoughts on, you know, what you're doing with that opportunity as well.
I think there's still, you know, low-hanging fruit on the tree here. We've talked about it a little bit. We've done a little bit more targeting than we have ever done, but very little. There is more to come. You know, it was just a year and a half ago that we hired someone at a relatively senior level in terms of, you know, data analytics. That's not the only thing they're working on in their group that he's put together. You know, I think those are things that'll come over time in the next few years. That's pretty much what I can tell you about that.
Okay, thank you.
Okay, I'm gonna take two more questions, Sadie.
Will do, sir. For the next question, we have Laura Champine from BMO Capital. Laura, line's open.
Thanks, Richard. Mine will be quick. It's a follow on. I mean, you'd mentioned that renewal rates are still headed higher, in part because of, likely because of the auto renew. What percentage of your membership is on auto renew at this point?
A little over 50 U.S.
A little under 50.
It's about 50% in the U.S. and Canada, which would imply that's really where we have it, where we have the co-brand cards. U.S. and Canada is about 80% of our company, so the 50% becomes a 40% if you do the math. Rough numbers. s.
Mm-hmm. Got it.
Oh, I'm sorry. You can do it on any card, not just co-brand. In the U.S. and Canada, it's about 50%.
Understood. Thank you so much.
For our last question, we have Kelly Bania from BMO Capital. Kelly, line's open.
Oh, thanks for squeezing me in here. Just wanted to talk, Richard, about just the inflationary environment. You've talked a little bit in the past couple quarters about how your price gaps have widened. Do you think this kind of magnitude of inflation is just good for Costco's business? I mean, have you seen anything like this in the past where it could possibly just drive even more volume into your doors?
I mean, from an argument that things are more costly, on the one hand, maybe it reduces demand overall in the sense that we're the extreme value proposition that helps us. You know, who the heck knows? You know, I think what I was reading this morning in the paper was this is the highest inflation in so many years. It wasn't that long ago, though, you know, 10+ years ago that regular inflation was 2% or 3% a year and of course, it's gonna be a little more right now for a year. At the end of the day, I think it helps us a little, because of the value proposition that we have.
That makes sense. A lot has been asked here, but just wanted to also just check on self-checkout and where you are with that, and if there's any color you can help us understand on the savings or the impact on the cost structure when you put in some self-checkout and the potential for that initiative going forward.
We pretty much have it now in most locations, and I'm speaking of the U.S. and Canada, and I know even across the street in many locations, we've expanded it from originally, two lanes of three or six to three lanes of three or even four lanes of three. In a four-lane area, you could have 12 people checking out. My guess is it's still gonna grow a little as we expand existing units to offer a little bit more of it. It's been a positive.
Okay, thank you.
Well, thank you, everyone, and have a good holiday season, and we're around to answer additional questions. Have a good day.
Ladies and gentlemen, this concludes today's conference call. Thank you all for participating. You may now disconnect.