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Good afternoon. My name is Christy, and I will be your conference operator today. At this time, I'd like to welcome everyone to the quarter 2 earnings call and February sales. [Operator Instructions]
I will now turn the conference over to CFO, Mr. Richard Galanti. You may begin.
Thank you, Christy. Good afternoon to everyone. I'll start by stating that these discussions will include forward-looking statements within the meaning of the Private Security (sic) [ Securities ] Litigation Reform Act of 1995 that 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 second quarter of fiscal 2018, the 12 weeks ended February 18 as well as February retail sales for the 4 weeks ended this past Sunday, March 4. Reported net income for the quarter came in at $701 million or $1.59 a share, a 36% increase compared to last year's second quarter results of $515 million or $1.17 a share. This year's earnings per share included $0.17 due to a net income tax benefit of $74 million as a result of the tax legislation recently passed by Congress. Excluding this benefit, net income grew by 22% year-over-year.
This afternoon, I'll start by reviewing our Q2 operating results, beginning with sales. Net sales for the quarter came in at $32.3 billion, a 10.8% increase over the $29.1 billion of sales during the second quarter of last fiscal year. This year's 12-week second quarter included 1 additional sales day in the United States versus last year due to the shift of Thanksgiving. But while we gained a sales day in the quarter, our pre-Thanksgiving and Black Friday holiday weekend sales fell on the first quarter this year compared to the second quarter last year. Combined, these 2 factors negatively impacted second quarter sales results by an estimated 1.4% in the U.S. and slightly less worldwide, somewhat at or about 1.1%. The shift also negatively impacted e-commerce sales results by an estimated minus 7 to minus 8 percentage points in the second quarter. Recall that in Q1, we had an estimated 10% improvement relative to the shift in e-commerce, 5% to 10%. I think if you look at the 24-week fiscal year-to-date comparable sales results in our earnings release, it essentially eliminates the impact from the holiday shift altogether.
Now for the second quarter 12-week comparable sales results. In the U.S., we reported a 7.1% increase; ex gas and FX, 5.7%. And then we'd estimate that you'll add the 1.4% back for the switch in the holiday. Canada, 8.7% reported; and 2.5%, ex gas and FX. Other and International reported 15.7%; 7.4 %, ex gas and FX. So total company would be an 8.4% reported and a 5.4% ex gas and FX and a little over 1% of impact, negative impact on that 5.4% from the Thanksgiving shift. E-commerce reported was 28.5% comp sales; 27.3%, ex gas and FX. And again, we estimate that 27.3% was hit by about 7 to 8 percentage points related to the holiday shift, so something in the low to mid-30s, ex that.
In terms of Q2 sales metrics. Second quarter traffic or shopping frequency was up 3.7% worldwide and 3.4% in the U.S. Also, these numbers were negatively impacted by the Thanksgiving holiday shift, as I just discussed.
In terms of the impact on FX and gas. For the company, FX, assuming flat currency relative to the U.S. dollar over the last year that impacted sales, strengthening in foreign countries -- foreign currencies impacted sales by approximately 180 basis points to the positive, and gas inflation contributed another 125 basis points. So together, about 3 percentage points. Cannibalization weighed in on the comp by the tune of -- to the tune of 55 basis points to the negative.
Our average front-end transaction or ticket was up 4.6% in the quarter. Excluding net benefits from gas inflations and strong foreign currencies relative to the dollar, it was up a little over 1.5%.
Our February sales results were also reported in today's release. I'll review these results at the end of the call.
Moving down the income statement for the second quarter as membership income is the next line item. And reported in Q2, $716 million, up $80 million from the $636 million last year second quarter and up about 4 basis points or 12.6% in dollars. Now ex FX, the benefit of strong foreign currencies benefit the number by about $12 million. Of the $80 million increase in membership fees, increase year-over-year, about $37 million related to membership fee increases. The majority of the $37 million came from fee increases taken last June 1 in the U.S. and Canada with a smaller balance from the fee increases taken in our Other International operations, starting back in September of 2016. So all told, if you take out both of those, we would -- our normalized basis membership fees were up $31 million or about 5%.
In terms of renewal rates, our renewal rates improved in Q2 to 90.1% in the U.S. and Canada, up from 90% a quarter earlier; and worldwide, improved to 87.3% as of Q2 end, up 0.1% from the 87.2% at Q1 end. I think the most important thing here, of course, is the trends we've seen with the conversion of the credit card over the last 1.5 years in the U.S. and slightly overlapping that prior to that in Canada and happy to see that what we expected came through there, and we're seeing a slight improvement now. In terms of members at Q2 end. At Q2 end, we had 39.6 million Gold Star members, up from 39.3 million 12 weeks earlier. Primary businesses were 7.5 million at both quarter end. Business add-ons, which was 3.2 million at Q1 end, at Q3 end was 3.3 million. So total member households, 49.9 million at Q1 '18 end, up to 50.4 million at Q '18 end. Total cardholders at 92.2 million at the end of the quarter, up from 91.5 million 12 weeks earlier. During the quarter, we only had one opening. At Q2 end, paid Executive Members were 18.8 million, an increase of about 46,000 from the second quarter end or about 4,000 a week, a little softer than it had been in recent quarters. When we look at the quarter, though, it started off quite a bit weaker, and I'm happy to say that the last several weeks have been in the high teens, low 20s, on average, per week.
And lastly, in terms of the portion of membership fee increases related to the recent fee increases. That year-over-year quarterly membership fee income increase will continue to grow each quarter this year and into fiscal '19 given the deferred accounting treatment as to when it benefits our income statement. The year-over-year increase will peak in Q4 this fiscal year, so the $37 million Q2 increase related to that will increase in Q3 and increase again in Q4 based on the P&L on deferred accounting and still have even small -- yet smaller increases in the next couple or 3 quarters after that into '19.
Going down the gross margin line. Our reported gross margin came in at 10.98% or 2 basis points lower year-over-year. On a reported basis, that minus 2 basis points, it was actually plus 11 basis points, excluding gas and FX. Within that, I'll have you just jot down the 4 or 5 -- 2 columns with the 4 or 5 numbers in each column. First column would be reported, as reported, and second column would be without gas inflation. The core merchandise on a reported basis was, year-over-year, down 20 basis points, down 8 basis points without gas inflation. Ancillary businesses, up 23 basis points in the quarter and up 25 ex gas inflation; 2% Reward, plus 1 and 0 in those 2 columns. And other, minus 6 and minus 6 basis points. So all told, if you add up column 1, the reported year-over-year gross margin change was the minus 2 basis points. And ex gas inflation was plus 11.
If we look at -- as I've done in the past, if you look at the core merchandise categories in relation to their own sales, even though, again, on an ex gas inflation basis, the core as it contributed to the total company was minus 8. If you look at core categories on core sales, margins year-over-year in Q2 were higher by 14 basis points. Subcategories within core margins year-over-year in Q2, food and sundries, hardlines and fresh foods were up. Softlines was down a little, notwithstanding all these improvements are notwithstanding greater values to our members as we've continue to do.
Ancillary and other businesses gross margin, up 23 basis points and 25 ex gas inflation. Gas represented a little more than half of that improvement. It's both a combination of higher sales penetration and improved margins within the business with hearing aids, pharmacy, optical business centers and travel all showing higher year-over-year gross margins. And that contributed to that number as well.
2% Reward, again essentially flat ex gas. Lastly, in other, as was in the case of the first quarter, we've -- we we're incurring incremental costs related to the rollout of our new centralized returns facilities. And this will continue to impact us, as I said, last quarter and each of the next few quarters, likely a little less each quarter. And it was down a basis point this time from 7 to minus 6. Long term, we believe it's a big benefit to us.
Moving to reported SG&A. Our expenses, our SG&A percentage Q2 over Q2 was lower or better 21 basis points and better by 9 basis points, plus 9 basis points, ex gas inflation, coming in at 10.02% of sales this year compared to 10.23% on a reported basis. Again the 2 columns, reported and without gas inflation. The first line item will be operations, plus 19 basis points and plus 8 basis points, ex gas inflation; central, minus 1 basis point and minus 2 basis points; stock compensation, plus 3 basis points in each column; and then total, plus 21 basis points or lower or better by 21 basis points on a reported basis and ex gas inflation better by 9 basis points.
Not a whole lot of unusual items here. The core operations component again was better by 8, ex gas inflation. Strong top line sales, we believe, led to year-over-year improvement in payroll, benefits and other traditional expenses like utilities and maintenance. Central expense, higher by a couple of basis points, ex gas. We got a lot going on. Stock compensation, better year-over-year by 3 basis points, again strong sales. And usually, that's a number that's most impacting Q1 when we do the big grant every year.
Next on the income statement is preopening expenses. They were better or lower by $3 million. In Q2 this year, they were $12 million; last year, $15 million. Now again, this year, we only opened 1 new unit. Last year, we opened 4. However, we also have quite a bit of preopening related to 2 big manufacturing plants that we -- the one we've just opened and one were under construction, a new meat plant in the Midwest as well as our major new chicken plant in Nebraska that's under construction. All told, reported operating income for Q2 came in at $1.16 billion, up $172 million or 20% higher year-over-year from last year's $844 million number.
Below the operating income line, reported interest expense came in at plus $6 million -- at $6 million higher year-over-year at $37 million this year compared to $31 million a year ago, primarily a result of last year's debt offering. Interest income and other was better year-over-year by $11 million in the quarter. Actual interest income for the quarter was better year-over-year by $5 million. Also benefiting this line item is the year-over-year comparison various FX items, mostly various FX items in the amount of a positive $6 million. Overall, pretax earnings were higher by 22% or $177 million higher in Q2 coming in at $986 million this year compared to $809 million last year in the second quarter.
In terms of income taxes. Our tax rate in the second quarter came in at 27.7% for the quarter compared to 35.6% last year. Of course, the lower tax rate for Q2 this year is a result of tax law changes. The primary benefit was the result of the lowering of the U.S. federal corporate income tax rate from 35% to 21%. Given that our fiscal -- we don't have a calendar year, and so it doesn't align with the digital calendar year. You take the number of days in each -- in our fiscal year, which fall before or after December 31. In our case, it's a blended U.S. federal rate, 35% for 119 days of a fiscal year and 21% at the remaining 245 days of a fiscal year. You get an average of 25.58%. The impact of the lower -- that lower rate on Q2 pretax income was $52 million of the $72 million I just mentioned -- of the $74 million I just mentioned. The other $22 million is basically 2 main things. One is a true-up of Q2 -- of Q1. Recognizing in Q1, we assumed -- we had no reason to assume this much lower federal income tax rate. So truing up for the first quarter, I said that we're in tune for the whole year. The other piece is some -- both positives and some offsets to that relating to various things that have come with the new tax legislation. All told, the net impact of these items in Q2 was an additional $22 million benefit, tax benefit. So total tax benefit in Q2, $74 million. The $52 million, what I'll call, normalized to Q2, the $22 million relating to truing up Q1 and other offsets that go along with the original change in tax laws. Going forward, we anticipate that the effective company-wide rate for the balance of '18 in Q3 and 4 will be probably in the 29.5% to 30% range. And in fiscal '19, based on what we currently know, and of course, all that's subject to change, is approximately -- we assume it will be approximately 28%, plus or minus. As we know more, we'll share it with you. Overall, the reported net income was higher by 36%, coming in at $701 million in Q2 compared to the $515 million last year, again up 22%, ex the tax benefits I just spoke about.
Before I leave the subject of tax law changes, a few comments as to what our plans are vis-à-vis these savings. Overall, one, we do not expect any major changes to our capital allocations plans. We're generally a net positive cash flow operator, notwithstanding CapEx and dividends and what have you. As many other -- number two, as many others have done, we will use some of these savings to benefit our employees. We're working on that and stay tuned. Number three, we'll invest some of the savings to drive -- to continue to drive greater value to our members. This will certainly include investing in price as well as other activities. And number four, when asked and we have been, if any of these tax savings will fall to the bottom line, the answer is yes, most importantly, indirectly, by investing in driving value. We've seen what that does, and we know what that does. And much of that investing in value and price comes back in greater earnings and directly perhaps a little bit. Again, stay tuned.
A few others -- a few other items of note, warehouse expansion. As I mentioned, we opened only 1 unit in Q2. That's on top of 5 net new units in Q1. Our plans for this current quarter, which will end in mid-May, is 2 more. And then Q4 is the big quarter. It's a 16-week quarter, but we plan to open net 15 units, 18 openings, including 3 relos. Assuming we got there, we'd have 23 net openings for the year. My guess it will be 22 or 23, a little better than I think I mentioned a quarter ago but somewhere in those low 20s. For all of '18, again we expect to open something around 22 or 23 with 3 quarters of those in the next 2 quarters and most of it in the fourth quarter. As of Q2 end, total warehouse square footage stood at 108 million square feet.
In terms of stock buybacks. In all of fiscal 2017, we expended $473 million, purchasing just under 3 million shares at an average price of just under $158. In the first quarter, we expended, as mentioned, $119 million at an average price of about $162.5. And this quarter just ended, we expended an additional $59 million at an average price of $187.70 per share. For now, for an update on our e-commerce business. We currently operate e-commerce sites in the U.S., Canada, U.K., Mexico, Korea and Taiwan. Total e-commerce sales for the quarter -- for the second quarter came in at $1.5 billion, up 29% year-over-year. Overall, our e-commerce sales increase has continued with very strong levels. If you look back in Q1, we -- ex FX, it was a positive 42.1%. Again, that -- there was a chunk in there that related to the benefit of the Thanksgiving holiday shift. In Q2, 27.3%, as I just mentioned, ex FX. Adding the first half together, again taking out the Thanksgiving shift there, the first half altogether was plus 33.7%. And in February, as you saw in the press release and I'll talk about February overall in a minute, came in at 37%, so continued very strong sales growth and momentum in these numbers.
We continue to improve our offerings. We've been -- and we continue to be helped by the improved member experience with better search checkout, returns processes that I've shared some of that with you in the past. In the quarter, our site traffic and conversion rates and orders were up nicely year-over-year. Our warehouses are supporting costco.com with signage and tablets in the store. We now have that in 195 U.S. buildings, and that's used to help search and purchase costco.com items for our members from our warehouses. We continue to capture more e-mail addresses. In addition, our improved content is resulting in increasing our open rate of e-mails, again driving traffic, both in store and online. If you go right now to costco.com, I think it talks about hot buys. And you'll see that some of them are in warehouse only as supplies last, and we think that we've got some excitement going here in terms of driving traffic, both specifically in store, using the Internet and e-mails as well as driving traffic online. A great example of that is, again, you can look for it yourself with these hot buys in the warehouse.
Online grocery. Both our dry grocery 2-day delivery and our same-day fresh delivery through Instacart, as I mentioned last quarter, rolled out in early October. It's been quite positive year-to-date and growing. We're just starting to do some limited marketing. Instacart now is in 441 of our U.S. warehouses and should be in most of the remainder -- our U.S. warehouses by calendar year-end. We continue to improve the online merchandise and services offerings, again with -- not only in general, but with hot buys. We've improved our apparel offerings. We're doing a better job of focusing and adding items that are complementary to our warehouse offerings. We're doing some great things with some big ticket seasonal items where we might be out of them at a given date or starting with a certain date in store. But online, we can afford greater availability of those. And then we're doing some other exciting things. Currently, there's over a hundred high-end beauty items online.
In Q1 '18, we added the 2% Reward to all travel purchases through Costco Travel. That's something we have not done in the past. That's if you -- sorry, Executive Members. As well, if you use your Costco Visa card, co-branded card, you get 3% that way, so it will be 5% off of what's already great values and seeing great growth in Costco Travel.
I think I mentioned last time in the call, we're offering a very limited buy online, pick up in store. These are really basically selected small-sized, big-ticket items where many people aren't likely to want to leave them at their doorstep. So there are some jewelry, tablets and laptops, and most recently, handbags. All these things are driving shops in-store. Over half the people that are doing this are shopping in-store when they're there. But again, this is limited. This is -- we'll continue to see how it works.
All these efforts that I just mentioned are having a positive impact on our business, both online and in warehouse, and that we believe helps in the sales momentum and increased awareness of our digital presence as well as the traffic that we enjoyed recently in our warehouses. In sum, we're continuing to expand these activities. It's evolving and improving and will drive our business, both online and in-store. And certainly, some of the tax savings will go towards driving that as well.
Next, let me review the February sales results, the 4 weeks ended March 4. As reported in our release, net sales for the month came in at $10.21 billion, a 12.8% increase from the $9.05 billion last year. The Lunar New Year and Chinese New Year, that occurred in February this year as compared to January last year. We estimate that this positively impacted the Other International February sales by about 4.5 percentage points and the total company February sales by a little more than 0.5 percentage point. For the first 26 weeks of fiscal 2018, we reported sales of -- we have now reported sales of $68.51 billion, 12.0% increase from $61.18 billion, the same number of weeks last year.
I won't go through all the numbers that you see in the press release. But again, on a 4-week basis, the reported 9% U.S., ex gas and FX, will be 7.5%. The 8.4% reported for Canada would be a 3.2%. The 22.2% Other International would still be a very strong 14.1%. And total company, 10.5% reported comp, ex gas and FX, 7.7% to the positive. And as I mentioned, e-commerce, ex gas -- I'm sorry, ex FX, is 37% compared to the reported 38.1%.
In terms of regional and merchandising categories for February, general highlights for the month. U.S. regions with a strong results were Southeast, Los Angeles and Midwest. Internationally and local currencies, Taiwan, Japan and Mexico were at the top of the list this month. Foreign currencies year-over-year relative to the dollar, total company benefited by about 150 basis points. Again, I think for the last quarter, it was 180. Canada was helped by about 425 basis points, while Other International was helped by about 800 basis points. The impact of cannibalization on the total company in February was about 60 basis points, and the impact on the U.S. was about 40. Canada, where we did quite a few openings this year, it was about 140 basis points impact from that. Very small impact in Other International to the tune of 30 basis points.
In terms of merchandise highlights. Food and sundries comp sales for the month were positive mid- to high single digits. Departments with the strong results -- excuse me, with the strongest results were tobacco, liquor and candy. Hardlines were up low double digits. Better-performing departments were majors; tires; and health and beauty aids, HABA. Majors were up mid- to high 20s, led by appliances, computers and tablets, so very strong show in there, both in-store and online. Softlines were up mid- to high single digits. Better-performing departments included domestics, jewelry and apparel. Fresh foods was up in the high single digits. Better-performing departments were meat, bakery and deli. Within ancillary businesses, gas also was still helped by cannibalization, but gas, food court and optical had the best comp sales results in February. And then gas prices were higher year-over-year and had a positive impact on our total reported comps of about 135 basis points.
Our comp traffic or frequency for February was up 5.2% worldwide and 4.8% in the U.S., so an improvement over Q2's frequency figures as well. For February, the average transaction was up 5.1% for the month, which includes the impacts both of FX and gas as well as the shift of the Lunar Chinese New Year.
I did want to make one other comment. As you know, we reported our earnings 45 minutes before the call. And the first thing that comes out in some of the news releases very quickly in where we beat the number or we missed the number. When we look at first call and the 27-or-so analysts that put numbers in there, it appears to us there are about 12 to 27 over the last month or so have adjusted their numbers, their estimates for some estimate of tax reform benefit. If you adjust, based on what they were before that, it looks like the first call number of $1.46, I believe, comes down $0.05 or $0.06 -- $0.04 or $0.05. But I'm just mentioning that because there is -- I assume there's confusion out there on everybody as we report given this is the quarter of transition.
Lastly, our fiscal '18 third quarter scheduled earnings release date for the 12-week third quarter ending May 13, we'll do the same thing, and it will be in after market close on Thursday, May 31, with the earnings call that afternoon at 2:00 Pacific time.
With that, I'll open it up for questions. Back to you, Christie.
[Operator Instructions] First question comes from the line of Simon Gutman (sic) [ Simeon Gutman ] from Morgan Stanley.
It's Simeon. First question, Richard. Can you discuss what's happening with spend per member trend? It's clearly increasing, ex gas. But can you talk about if members are spending in existing categories or new ones? And then I have a follow-up to that.
Well, it's a little of both. I think you also have to add in there that our -- I don't have the numbers in front of me, but I'm willing to bet that I know our average price per item has come down. I mean, we've done a lot of driving greater value. Just on the MVMs alone, you're seeing significant savings, in some cases, a small amount from us but more from the -- from our suppliers because it drives more sales. And we're getting -- we're 20% to 30% fewer items, more total sales and more gross margins dollars. So I would guess that -- now to the extent that we're doing things like I'll give you examples over time like certain apparel items like women's athletic wear that's gone from 0 to $100 million in the last few years. Certainly, in the last year, 1.5 years, we've seen a big improvement in white goods with the advent of being supplied by all the majors. And I don't have the exact numbers in front of me, but I'd be willing to guess while we had some of the prior first, second quarter on an annualized basis, that's well over $250 million, $300 million a year and growing. So there's going to be a few of those things as well.
And can you share what percentage...
It's mostly frequency, frankly, when you look at it.
Okay. Can you share what percentage of your members are spending online with you? And is there any change in how frequently they're visiting?
I don't have the exact numbers. It's still -- I'm sure it's still a low number. I don't know, frankly, off the top of my head if it's 10 or 20 or 25. I know that when I -- from last week's budget meeting, when we look at -- in terms of the number of the open rate of e-mails, it has gone up substantially. Part of that is what we're sending them. We're sending them some really hot items that get their attention, including while supplies last in-store on some of these items. And that gets their interest. We're seeing -- I know we're seeing a better connect rate. And again, I don't want to give you numbers that I don't know exactly, but all those things are growing in the right direction, as they should, given, as I've said before, there's a lot of low-hanging fruit there because there's a lot of things we haven't done in the past.
Okay. And my follow-up is just on the Visa card. You're cycling the benefits. I know we're not talking about the buckets anymore, but can you just tell us how your profit pool is performing versus your own expectations?
As it relates to Citi Visa?
Exactly, yes.
I'm smiling. The first 4 quarters, we -- because it was so sizable, we shared with you the effective basis points of improved SG&A or -- and margin related to how it compared to the prior deal. We're now in the first couple of quarters -- 3 quarters after that. For the year, it will still be an improvement but relatively small improvement. When we start -- when you -- at the beginning of the anniversary, the first anniversary, because when you started, you got some extra money to drive things, those fall off. We're still getting new sign-ups. We're still getting new accounts. We're seeing people spend more on it. We're seeing people spend more outside on it, which, again, is part of the revenue share. So I would say we're still very pleased with it. My guess is it will continue to grow this year less than our sales growth, total company, and then probably consistent with that in the future a little from this big benefit that we started with. Now by the way, we're using some of that as well. I mentioned the -- adding the Executive Membership. We did several things that were successful over the holidays, where if on top of the fact already that if you have the Citi Visa card, if you buy a television, for example, at Costco, you automatically get a 90-day return policy and a 2-year warranty. If you purchase it with a Citi Visa card, not only you'd get another 2% off on that on top of the 2% if you're an Executive Member, but you get another 2-year warranty, so you get a 4-year warranty. On top of all that, we use some of the monies, some of the bucket, if you will, to drive even greater values, which drove people in. Where there -- examples, I don't have them in front of me, but literally, on a $1,200, $1,300 retail TV where we already had great savings. On top of that, if you use your Citi Visa card, you got $150 to $300 cash card, depending on what TV and when it was. So we're figuring out -- I think I mentioned last time what we see with these dollars wherever they're coming, whether it's from that bucket, from the membership fee income bucket, from tax reform bucket, you name it, there's a lot of buckets right now, there's -- we believe that we can use those to drive sales in lots of ways that perhaps give us a little more octane than we would have thought.
Next question comes from the line of John Heinbockel.
So Richard, if I look at the 2019 new tax rate, am I right that the tax benefit, in aggregate, is about $300 million? Is that fair?
Well, take your pretax and -- well, we don't know exactly. But if you look at, we've been running at about a 35.5%, 30% and subtract about -- and now we say it's 28%, it's about -- it's around 7 percentage points. I don't know if it's 6.5 or 7.5. It's -- you've got U.S., which is -- this is broad brush stroke, 70% of our earnings. So that's the side that gets the benefit. You have some offsets from that, clearly some of the benefits from deferred tax, foreign tax credits and things that go away and things like that. So net-net, all of it included, we estimate that it's going to be around the 28%, plus or minus, level.
It sounded -- you talked about the benefit to the bottom line being more indirect. So whatever that is, it sounds like the vast majority of whatever the savings is, but the plan is to reinvest that in some form. Is that fair? And you listed a bunch of buckets. Is there -- are they all sort of, of equal sizes? And you didn't mention an e-commerce bucket. Is that -- is there one of those? Or is that blended into the other ones you talked about?
Well, when I talk about buckets, I really talk about what are additional monies that we've gotten through things we've done in the last couple of years or benefited from during the last couple of years, notably credit card switch, membership fee increase, and of late, tax legislative changes. All those things allow us to do more of what we do. And so again, I'm not being cute. But will some fall to the bottom line? Yes. We also take care of our employees. We're looking at a lot of different things now. Whatever we do, it's going to be something that's permanent, not a onetime bonus necessarily. And we're going to take care of things. And we're also -- what we have seen is many of the things we've done, value-wise, have -- while maybe lower to gross margin dollars per sell unit that we've seen increased gross margin dollars because we sell a heck of a lot more units. And if we -- and some of the things we're seeing now with the benefit of doing a better job of getting you to even open your e-mail. Now I don't know if we've gone from a D to a C or a C to a B or a B to an A, but my guess is there's still some room for benefit there. And I think the biggest thing we want to communicate is we feel good about what we're doing and good about what's going on, and -- but there's never a dull moment out there.
How does the -- you talked about sort of pushing value. How does -- anything new with regard to KS in terms of product development or your pricing versus national brands? How does that play into this?
Well, I mean, the one that I read about recently in the press was our new hazelnut spread, which is basically Nutella. I mean, it is literally flying off the shelves. It's a great value, and it's a great quality. There are several -- in every budget meeting and every board meeting, we see a whole litany of new items that we're getting ready to try and roll out, whether it's organic, shelf-stable food items or apparel KS items and others, cosmetics. We've got a couple of fragrance items out there under our name that we've tested and we're going to continue to drive, so it's lots of little things.
All right. And then just lastly, do you guys yet know -- or maybe if you've calculate your -- the benefit you get to U.S. comp from the Sam's closings? Have you started to see -- I imagine you've started to see that already, right?
We started to see it after the first week. The first week, you had everybody rushing to get sale items on 20% or 30% off. It's small, as we expected. We each have to do our own estimate, but we think we've gotten a little bit of sales out of it and little bit of member sign-ups from it, and that's continuing. My guess is if the average Sam's Club in the U.S., as I understand it, is in the low 90s, needless to say the 63 they close were less than that. And when I spoke to Craig immediately about it and the heads of operations, their collective view was is that we'll probably get 10% or 20% of it, not 50% or 70% of it. I originally thought that was low. But when you recognize not all of them are immediately close. Many of them are, but some of them aren't. Some of us, not the same customer and that we won't necessarily get it overnight. And some, we will. But listen, it's -- with every -- with all the other buckets, even a small bucket is a nice thing to have here.
Next question comes from the line of Chris Horvers.
I think a lot of investors trying to figure out the strength in e-commerce, and I know there's a lot going on in terms of what you're doing on checkout and category extensions and so forth. But could you perhaps sort of rank the benefits, whether it's -- where would you put appliances versus extending the aisle and versus some of the brands and versus the rollout of online grocery?
The rollout of online grocery is a very small piece of it. That just started -- excuse me, but it is driving traffic. I think the biggest things are awareness and cross marketing, doing more activities in-store to let people know about what's online and a better job of getting people to open their e-mails. And that's come with the headline, if you will, which is something that's really hot in-store. And there's also hot -- you go to the -- if you go to -- if haven't gone to the site lately, take a look. And again, I think we are starting from a low base and a low metric given what we hadn't done in the past. And so you talk to our e-commerce people and our head of -- relative department heads of merchandising, our head of merchandising, they feel pretty good that this will continue. I'm not suggesting 40 on 40 on 40 every year, but even when it hit 30 for the first time. Bob Nelson and I are asking, well, what happens a year from now, and the view is there's a lot of things they got going on that should continue to drive it. But stay tuned. We'll see. On top of that, we're getting off to a good start, albeit with a conscious slow -- soft opening of both delivery sites.
And that's really my follow-up. And so how is the -- sort of what uptake are you getting in the online grocery? And could you compare the 2-day delivery option versus Instacart? And I think a lot of people ask us, is this going to diminish the trip to the warehouse? And thus sort of the overall spend that I have goes down and then the margin rate of me as a customer also goes down? Any thoughts on that as well?
Sure. Well, look, the only data that we notice more than 3 months old or 6 months old is going back to the original data that we have from when we did -- when we're doing Google Shopping Express, the longest period of time in the Bay Area where it was the strongest. What we typically saw back then -- and again that did not include Fresh though. And then we saw an existing member and I'm making these numbers up. It was -- they were growing their total purchases with us by 3% a year. They grew it by more than 3%, but they came in a couple of -- 2 to 3 less -- 2 to 4 less times and shopped online more times, several more times than that. Because when they shop online, it was a lower average ticket than when they came in-store. Mind you, it's a little different. We're seeing a bigger average spend from -- on the Instacart site and some of the -- and on the 2 day. And we're actually adding some items. I think last time I mentioned, we started through our business at about 10 business centers, which covers essentially the entire Continental United States, virtually the entire Continental United States. We started with 470 or 480 SKUs out of the regular warehouse being serviced out of business centers. We've actually added some items to that, and I think the goal is to add a couple hundred over the next 6 months. And it's working so far, but it's new. And so we can't promise anything. We recognize with fresh how much of it is going to be fill-ins versus I'll go a few times less to Costco. What gives us a little comfort at this point, but that's all it is, is the results that we've seen from the ways we communicate with our member online. And -- which if you go online right now, you'll see there are several very exciting items that are just in-store and while supplies last. That drives traffic and that gets you in the store. So as much as I think everybody is going to know somebody that's going to shop a lot less in-store because they're getting all their groceries at Costco or more stuff fresh delivered. Mind you, it's at a better price than the day before on Instacart because the prices are better today, and even a better price through Costco.com, at Costco. And even better, of course, as you come in. And we'll keep sending that message as well. But I think we're, honestly, 2-plus years before we really know something on that. Certainly, 9 to 12 months before we have any inkling of what it means.
. Next question comes from the line of Edward Kelly.
So I just wanted to ask about price investment. And not so much about the quantity, but I was hoping that you could just maybe talk about the elasticity on price investment in your business and how maybe it differs from some of your traditional competitors. Whether having less SKUs -- less, that you need to focus on less SKU overlap, how that actually impacts what you're seeing from an elasticity standpoint when you actually do make those investments.
Well, it was just a year ago when we had a slightly disappointing second quarter result, partly because of the change in the number of days the MVMs were out there. And in explaining why we did it, to start with, was is because over time, whatever you do, it gets a little stale. Or not in every instance, but in some instances. So you try new things. Over those few months and continuing to today, we continue to try new things with our vendors as well. And I use water as an example. We were a great value on 40 0.5 liters of Kirkland Signature, and the price may be different in a given state or something based on transportation. But I think we were at $3.49, which is the best price out there, doing a heck of a lot of volume. And now we're, I believe, $2.99 every day. Well, you can imagine, our various suppliers said, "Well, who's going to -- how can we do this? Well, you have huge increases in unit volumes." And guess what happened on the way to the forum? The brands need to come down in price, too, because they're losing market share. I think that's something that's unique about us, that limited selection, we can take -- I'd get back to that word I used about more octane in a dollar that we use. You take something like that TV example, we did $30 million, $40 million on 1 SKU in 6 to 8 days. And how do you do that? You do that because, one, it's limited; two, it's already a great price; and three, it's even a greater value because of what we do with our -- what we can do with it with partnering with our suppliers on it. And then on top of that, there's these other buckets, I gave the example of if you use your Citi Visa card. Well, we got some sign-ups out of that -- some applications on that. So I think that tends to be a little different. I gave the example last quarter at the end of that -- for the 10 days leading up to and through Labor Day weekend, when everybody -- when traditional retailers out there selling USDA Choice strip steaks at -- I'm making the number -- of $8.49 or $8.99, and we're at $7.99. We were at $6.99. And we locked up lots of New York strip steaks in the weeks preceding that and we saw a noticeable drive into the warehouse. So I think that having -- it's a lot easier to do when you've got 3,800 items out there versus 50,000 in a supermarket or 100-plus thousand in multi-general stores, supercenter stores.
Okay. And then I just wanted to ask you about labor generally and tax reinvestment. There's been a lot of talk in the marketplace about investing in labor. I mean, we heard from Target earlier this week about moving to $12 an hour. I mean, you're at the upper end of the pay scale for in terms of what you're paying your employees, but does a rising tide just lift all boats here. Like, how are you thinking about this philosophically? Are you looking to maintain, like, historical wage gaps that you've had? How should we be thinking about this for you?
Well, I think we always want to maintain a significant premium overall. We have to look at all the pieces of it. It's not just the headline starting wage. It's not just a onetime bonus. It's also health care. If you look at the average, I'll use U.S., because every country is different, but relative to what's in that country, it's the same types of premiums. The average U.S. wage of our -- 90% of our employees were hourly. Whether they started yesterday or 20 years ago is in the $22.25 to $22.5, I believe. On top of that, whether you're part-time or full-time, you've got a great medical, dental and vision plan that, on average, costs the company over -- it's over $10,000, a little over $10,000 where we pay 90% of it roughly. So we have a great -- now, by the way, that covers -- cover spouses and dependents as well, but on average, it's a little over 2 people per covered employee. But at the end of the day, even if the bottom of the scale gets a little closer, the delta between the entire compensation is significantly greater. Notwithstanding that, we do what we're going to even before tax law changes. We're going to do a little more because we can.
Next question comes from the line of Dan Binder.
It's Dan Binder. I saw you had a program out there on the auto renewals where you get a $20 gift card if you sign up. I was just curious how effective that program has been? And then also on membership, you had mentioned that there was a slow start to Executive conversions in the quarter. Just curious what you think that was related to and then how you will be able to shift the pace on that?
Well, as to the latter question, our membership marketing people are looking at it. I don't know exactly. My guess, it has -- we had a strong first quarter where it averaged over 21,000 a week of new. Our sign-ups during the quarter were fine. But my guess is it has to do with what did we do a year earlier or how are they collecting certain data. I'm just relieved that the second half of the quarter, it improved greatly. And my guess is it's not a big issue. Now the first question?
I just saw through personal experience that you had a $20 gift card offer for signing up on auto renewal for members that haven't done it yet related to the new card. I was just curious how effective that program has been.
I don't know specifically of that program. I know we're -- we do a lot of things as it relates to that. We did some -- it sounds silly, but we did some programs to sign up, get members' e-mail addresses, which we do a better job when they sign up now as a new member. But we were below 50% with valid e-mail addresses. And in 2 instances in the last few months, in about a week or 10-day period, we got over 1 million members, get their e-mail addresses, by giving them something like $2 off on muffins or something.
So with the improvement in the renewal rates this quarter, the trends obviously reversed. Would you anticipate small improvements over the next several quarters based on that experience that you talked about in prior calls with what you saw in Canada?
I would hope so. I mean, if I could just copy what happened over the several quarters after Canada, Canada is now above where it was before the conversion started 2.5 years ago. And Canada went down over 6 quarters, from the conversion quarter, to 6 quarters to 5 more quarters out by 100 -- I believe, 100 basis points, their renewal rate. And now it's 0.2% or 0.3% higher than it was before that. U.S. only went down around 60 basis -- about 0.6%. So now it's back up 0.1% from that minus 0.6%. History should show that, that will happen, but we'll have to wait and see.
And then just last item on freight. Just curious, there's been a number of retailers talking about that pressure, and in some cases, it's been material impact to the earnings outlook. I didn't really hear much on that today. I was curious if you have any thoughts on how it may impact you.
Well, look, the higher freight costs and availability of containers impacts all of us. It's not -- it's interesting, it's not talked a lot about. We're -- I think what it's made us do is we're doing a better job on backhauling, a more conscious effort. Historically, we always backhauled extra pallets and recycle like cardboard, corrugated and you get -- basically could make more dollars doing that. But we really had done a lot on backhauling supplies -- merchandise from vendors. And so I think that's mitigated it a little bit of late, but I think it's still a net number. My guess would be it's not as impactful to us as it is to traditional retailer based on what I just said. 90% of our goods go through our cross-dock depot operations. You've got literally thousands but in the low single digit -- several thousand trucks that are going out -- trailers that are now -- not every one of them, but picking up things, whether it's produce from Central Washington or Central California or working with suppliers because we don't do long haul. But we are able -- it's a lot easier to even do these kind of things when you've got limited items.
Next question comes from the line of Karen Short.
I just wanted to clarify in terms of tax reform benefit. In terms of the kind of puts and takes as we think through the rest of the year and into the fiscal '19, obviously, you commented on investing in employees, investing in price. Is that something that you -- we should kind of expect fairly quickly? Or is that something that both of those, they would have a little bit of lead time and you're kind of still to be determined, just to clarify?
I'll be able to give you a better clarity on that in the next call. We've continued to invest in price over the last year and we're going to continue to do that. I think we've already started a little of that on the employee side. Something that'll be forthcoming, my guess, is in the next 2 months. So it'll impact Q3, less than a full Q3, whatever it is.
On both wage and price? And then on full...
On employees. On price, we're already starting to do a little of that. But we've also had the benefit of various buckets. It's not -- all these buckets are fungible.
Okay. And then I don't think you gave inflation in the quarter. Wondering if you could give that, both at cost and at retail?
Inflation?
Yes.
Hold on a second, I don't have that in front of me. I think it's very -- ever so slightly up on a cost basis, which would lead me to believe it's flat or slightly down on a retail sales basis given what we're doing.
Okay.
We'll go to the next question and then I'll get it for you in a second.
Okay. And just on Instacart, I know you did say that ticket was larger on Instacart. So I guess, 2 questions on Instacart. One is can you maybe give a little more color on how much larger the average spend is on -- or average ticket is on Instacart? And then obviously, Sam's announced the rollout of Instacart as well. Does anything change with your pricing strategy on your Instacart offering as a function of that announcement?
Well, to the latter, no. I mean, we -- I mean, our strategy is always to be very competitive, and if we have to be more competitive, we will. And we feel we're very competitive on the things that we're doing. What was the first part of the question?
Just kind of some quantification how much bigger the average ticket is.
Well, when I say it's a little higher average ticket, it's a little higher average ticket than what we experienced with, like, Google Shopping Express, which didn't include fresh. I believe it's in -- it's still -- it's a double-digit number, but in the higher double digits rather than the middle double digits.
Okay. And I don't know if you...
As it relates to inflation, when I look at our LIFO in this index, that we don't use for anything anymore, right? I'm asking our accounting people. At some point, we will. If I look at our composite year-to-date fiscal '18 among the various categories, it's a -- it's deflationary by 14 basis points. That's from our fiscal year end September 3 or 4 last year. And I would say, overall, it's slightly inflationary because that is -- in looking at the turnover of the different categories, so my guess is it's -- and in the last 4 weeks, it was exactly 0. So I would say 0 to 2.
Cost or retail?
This is cost, which would tend -- lead me to believe that we're slightly -- we're definitely deflationary compared to that because we're lower in prices.
Next question comes from the line of Chuck Grom.
Just trying to understand something here. So you -- no inflation, you're investing more in price, yet your core-on-core margins as a percent of own sales were up, I think you said, 14 basis points, which is the best performance since the third quarter, with 3 of the 4 large categories up. So can you just help us understand the improvement in the margins this quarter? And looking ahead, any sustainability of that trend?
Recognizing it's not just the full core-on-core, there's so many other little things. An improvement in our travel business, which is a very high gross margin business, right? We don't -- it's not the value of that plane ticket and hotel, it's the broker commission with very little SG&A associated with it, so very little cost of sales. All those things help a little bit. I think within the 80% of our business, which is core on core, fresh foods, hardlines, softlines and food and sundries, in talking to our head of merchandising 2 days ago, probably the 2 biggest things are what we call internally improved D&D. It's where -- damaged and destroyed. When we're having to mark things down, less, whatever, we get from our vendors. There might be a spoilage allowance or returns allowance within something. But generally speaking, we showed an improvement there. And we've also showed a little bit of an improvement with -- now I can't clarify whether that's a basis point or a few, but it's an example. Another one is you take example of a $1,000 item that we sell for $1,100 just to make the numbers up. So $100 gross margin on $1,100, it's whatever, 9% or whatever it is. If we get an extra $150 off through an MVM, we're now selling it for $950, still making $100 gross margin. So we just improved our gross margin percent. You're talking about billions of dollars a year in the aggregate, low double digits but still real money. Fresh foods, penetration increases, generally speaking, even though fresh foods, I believe, it was slightly up. But fresh foods is a higher-margin department. Apparel is a higher-margin department. We've had good growth. I think in the last 3 or 4 years, we've seen what we call apparel in a couple of different departments, men's, women's and kids, up 9-ish percent compounded for 3 or 4 years on a $7 billion or so business worldwide. So those are -- that tends to be a higher margin. So my guess is it's a lot of little things. And part of it is getting our vendors to our suppliers, working with them. We don't want just more money from them if we can't drive more sales to make up for it to get more dollars. So all those things help.
Okay, that's helpful. And then just quickly on February. I think you said that hardlines were up low doubles and majors were the highest that we've been tracking, I think you said mid to high-20s. Can you just dissect that for us, what led to the improvement? I presume maybe appliances were very strong around Presidents' Day, but did that help out?
Computers being -- not only desktops, but importantly, laptops and tablets as well, and appliances, those were all very strong. And online has helped us as well in those categories in the aggregate. So some of it has to do with I get back to the $150 to $300 off on a TV that's already at incredibly low price if you use your Costco Visa card. All those things have helped drive the business. I want to get back to the previous question also on -- what I could tell you about quarter-on-quarter gross margin, years ago, we started highlighting that because that's the core business and there's lots of other things like traffic, like gasoline that could go up or down 300 basis points in gross margin within that department and it's 10% of your total company. Whatever it is, it'll be a little better or a little worse each quarter. I think it's more important to understand where -- I'm not suggesting, I don't know what the next quarter is going to be. But Murphy's Law always tell you -- we continue to feel good about what we're doing and there's lots of little pieces that affect that gross margin.
Okay. And then just one housekeeping. You guys said that the -- there's obviously a sales impact on the quarterly results. I think you said 140 basis points. Just wondering if there was any bottom line impact in 2Q.
Well, the bottom line impact other than the sales themselves, I mean, hopefully, we're doing a pretty good job of scheduling hourly employees in the warehouse. When you do a little better than your plan, you beat the heck out of the numbers because you have fewer employees doing the same work. And when you miss your number a little bit in sales, it hurts you on the SG&A line. I don't think that's that big of an issue. Probably a bigger issue, which I can't tell you the answer, I'll just tell you what the issue is, would be holidays, paid holidays. When one of those falls in a -- that's more in our monthly budget meetings, our every 4-week budget meetings when the operators will have to explain sometimes, payroll percent was up some 10 or more basis points, but there was an extra -- particularly around Thanksgiving and Christmas and New Year's, or Easter even, sometimes, these things will fall in a different month, in a different 4-week period than we have. And so that impacts it.
Next question comes from the line of Oliver Chen.
Regarding the e-commerce details, what's ahead with fulfillment in terms of how you're thinking about fulfillment speed and inventory management, and how that may flow through on a longer-term basis in terms of CapEx and needs and as you think about certain fixed costs associated with the march towards different fulfillment options for the consumer? And the second e-comm question is just about engagement. It really sounds like awareness and marketing is a factor in driving traffic to e-comm at large. What do you think are the next steps just to improve that engagement over time?
Well, as it relates to fulfillment and the cost, look, we are spending more money. We're building some actual e-commerce fulfillment centers. We -- in part, because we're running out of room in some of the depots where we did it at, I think we're doing one in Tracy, California? Or Mira Loma?
Yes.
An annex, but it's a major multi-double-digit millions of dollars. We have a little more inventory in the system on e-commerce because we're fulfilling from closer places as we do more business. We have a greater commitment with this delivery, whereas our 2 days -- us, through our business -- through roughly 10 of our business delivery centers with these 500 or so items, you can say that's more inventory in the system right now while we do that. So all those things are costing us a little more in that regard. That's in the numbers as well, and it will continue to be. In terms of -- if you look at a CapEx company that's in the $2.5 billion range, there's always -- just when you think you're done with cross-dock operations, we're adding -- expanding some, adding a second one to Japan, even though we only have 27 units right now, but geographically, it makes sense now. Putting one into, I believe, Australia soon. Building a bakery commissary in Canada and a chicken plant in Nebraska and a second meat plant for us in the Midwest. So all those things have been additive to it. So I think as it relates to fulfillment, you'll still see some more, but it's in the 0 to $200 million a year, not we're going to go and have to spend an extra $500 million a year on stuff. And as we go from 0 to $100 million even, what dropped out of the -- another bucket there. But needless to say, we have cash flow to do it. We've never sat down and said, "Which can we do first because we have to limit what we do based on not going over X amount of dollars." As it relates to awareness and engagement, short term, there are some of the blocking and tackling. I know e-commerce operations have -- they've engaged some outside parties to help with some of the, what I'll call, targeted marketing engagement 101 and -- to see what more we can do. But right now, we're -- there's still a lot to be done with just getting more e-mail addresses, refining -- getting that open rate to continue to go up in the right direction, which it is.
Okay, Richard. That's very helpful. And you've made a lot of progress with buy online pickup in-store. What are you thinking about, for what you're monitoring, about what made sense there? And when you think about refrigeration, will that be an option and a good option? Or what kind of items are best suited for that program? [Technical Difficulty]
Next question comes from the line of Matt Fassler.
Richard, my first question relates to the ancillary business. You had a fairly subdued comparison a year ago on gas profitability, presumably. And obviously, this year, ancillary was a big contributor and you indicated that gas was a piece of that and also some of the other businesses that you've discussed in Q&A as well. What's your thought process on gas and its contribution to margin, both on the -- based on the current gas price environment, which is relatively stable, and also on the compares as they evolved through last year?
We're back. I don't know what happened there, guys. Sorry about that.
I think Oliver might have been in the midst of asking a question when I was called on to the line. So you can deal with that or go to my question first.
Well, I'm not sure -- did you hear the answer -- I answered the question related to CapEx and the expansion of physical activities or inventory needs related to driving fulfillment. And then I answered the question he had about awareness. Did you hear that?
Some of it. So it's really up to you...
Why don't we go on with your question, and Oliver, if you're there, feel free to get back on the line.
Did you hear my question on ancillary, Richard?
No, I did not.
Okay, I'll repeat it, then. The question related to the benefit that you received from ancillary this quarter, which was substantial, and some of it related to gas as you discussed and some to non-gas businesses. And taking a look back at a year ago, your ancillary margins were down sharply. Gas, I think, had something to do with it. So what's your thought process on gas margins kind of intrinsically relative to trend, I guess, on a dollar basis or penny per gallon basis in the current environment with relatively stable gas prices, particularly as you come up against, I guess, the more normalized comparisons in the second half of the year?
Well, a lot of the gas, whilst the price per gallon is up, profitability has been okay. It had been pretty good. And a lot of it has to do with gallons. I think that gallons are up 9% -- 9%, 10%, almost 10% compared to a U.S. industry that's up in the low -- like, 2%. On the ancillaries, I think 2 things. One, if I look back at last year, there was -- Bob, what's the one thing last year that hit us? There was a catch-up or something in the ancillary?
[indiscernible]
Yes, yes. No, I think that -- my guess -- I don't have the exact stuff in front of me. My guess is I know we've had strong ancillary performance. My guess is nothing was called out last year, or if it was a little disappointing, it was, and so there's probably a little offset there as well. I know that many of the ancillaries are growing nicely and improving margin, bottom line margin.
And if I could just ask a second question. You're asked about Instacart already. If you think about the customer who's turning to Instacart as the program grows with you, do you have a sense as to what the impact is or what the contribution is of legacy Costco customers who are now moving to Instacart and how their behavior changes, if at all, as they shop Instacart in the store?
We don't know yet. It's too small to know yet and too new. When we look back at a -- again, the early days in the Bay Area with Google Shopping Express, we saw it was a net increase in total spend a year, with a few trip reductions in-store and several deliveries to more than offset it. My guess is with fresh being more dominant, of course, with Instacart, you might have a little bit -- what we're finding is -- this is more anecdotal -- there are plenty of people that are using it simply fulfillment and still coming just as -- along, but we don't know yet. We're also, by the way, finding -- signing up members that we didn't have before. And both with the Instacart white label as well as Costco's 2-day grocery, where we can deliver to places that are 150 miles from a Costco. And we're just starting -- and we haven't even tried to market to those people yet.
And based on your comment on size, it sounds like even though you're in over 400 clubs, it sounds like it's not material to the traffic acceleration. [Technical Difficulty]
We have our next question come from Peter Benedict.
By the way, I've taken my arms off the table so I don't touch the cord and disconnecting it. My apologies.
Matt's had a heck of a time with Q&A the last couple of days. So -- but anyway, we'll move on. Can you give us a sense maybe what percentage of the business today is vertical, with you guys owning product from production all the way to sale? And if you're not going to speak to any numbers, maybe just, which categories is that most present in? And where can you take that over the next few years?
Well, I don't have a percentage calculated. But where it is, we have a hot dog plant that makes all of the Kirkland Signature hot dogs for the United States. Almost all of them. We're at capacity. We have a meat plant in California that is over 4 million pounds a week, 4 or 5 SKUs just for us. It's our meat plant. We have 2 optical grinding labs that grinds 5.5 million to 6 million pair of prescription glasses that we sell every year. I guess you could say we have 2 central fill facilities both for filling prescriptions for our own pharmacies as well as mail order for ours and a few others, third parties. We're building a major chicken plant in Nebraska that will allow us to source ourselves about 100 million chickens a year, which is less than 1/4 of our needs, although another 30% to 40% of our needs are sourced in the business what's referred to as dedicated plants. We're not the only one that does it using one of the 3 or 4 large providers that we share in all the profitability and costs related to that plant. But needless to say, we think we can do that better than others because we have them make much -- have them do many fewer SKUs than a traditional retailer in that area. We do some packaging of candies and nuts. So it's semi-vertical. We have a bakery commissary that we just started production in Canada. That was done out of necessity. The 2 largest commissaries up there that serve some of our bakery needs were acquired by the 2 largest grocery retailers over the last few years. But in hindsight, it seems to be working. And I'm trying to think what else? We do lots of packaging of gift baskets and clamshell-type stuff that we do ourselves, and that's somewhat vertical, not completely. So -- and I don't know what all that adds up to, my guess, it's 10% or less in total, maybe 5%. But at the end of the day, where is it going to go in the future? I think you'll see more things related to sourcing of foods and commodities and proteins. Whether it's a hothouse produce or doing things with chickens and cows, I don't know.
Good. No, that's fair enough. On e-commerce, any plans to roll out the signage and the tablets beyond those, I think you said 195 clubs are in today. And just how is the labor in the club used to facilitate to buy online pickup in-store? Is that a new role or you're just taking existing folks and repurposing them?
No, we are rolling it out. First of all, we have employees that actually have a tablet with them and particularly in areas like electronics and perhaps home furnishings with seasonal items, big-ticket items that, in likelihood, they are there and looking at it but may still choose to buy it online. In some cases like white goods, you could only -- you look at it there, but you could only have it received and ordered online. So it's -- we're doing it. But it -- it's working so far, and we -- you expect to see it in more locations.
Okay. And then just with the BOP or the buy online pickup in-store, are those -- how are you staffing that from a labor perspective?
Just staff. I mean, we're -- they're going through training. They're going through a third-party training in some cases. I mean, we're working with some vendors in some cases.
Okay, that's fair. And then last, just housekeeping. The D&A number, I don't know if you gave that for the second quarter. Do you guys have that?
Which one?
Depreciation.
Depreciation? It will be in the Q. My apologies, we don't. Why don't we have 2 more questions?
Next question comes from the line of Scott Mushkin.
So I want to give another shot at the e-commerce question on margin. Richard, we've talked about it over the last couple of years, the challenges of bringing omnichannel to a retailer. And I was just wondering if you could talk about how you're thinking about as you kind of slowly go down that omnichannel road, and what we should think about as margin? It seems like you're almost pricing differently in the different channels. But I was wondering if you can kind of frame it for us as that grows as a part of your business. Clearly, not hurting yet.
Well, first of all, with delivery, you've got to -- somebody's got to pay for it. In some cases, we're testing to see how, do we include it in the price and do we charge for it, do we subsidize it, whatever. We're trying lots of different things. We -- when you say going slowly, arguably, we do a lot of things slowly. We started with e-commerce slowly 15 or 18 years ago. I look at it as if there's someone out there that says, "Here are the 50 things we should be doing." Let us look at the menu of 50 things and we're going to choose the 10 or 15 or however many it be that we think works for us in our environment. And every time we -- so far, when we do these things, it works. It works our way. And it's not unlike when we first started the business, they said, "You can't sell only 3,800 items or whatever it is and have limited categories." We recognize that value is more than just great -- the lowest price on the relative quality and quantity of something where we are second to none. But on top of that, convenience and delivery for some is, as well. But we can't be everything to everybody. So far, that's working very well for us, even as we move, in some cases, slowly, in some of these new areas. I think we're fortunate that we're able to find those niches. And being an item business, the same concerns that people have about, are we getting our share of millennials? We are. Are they buying as much? Well, they're buying as much as the old gen, whatever did, when they were at that age. But what we're finding is, is items that portend well for that and we'll see. And which of these are complementary? So again, I don't know where we are 5 years from now. I know we have some things that we've done on the table. We all do now. I know there's some things that we're going to be doing over the next year or so to continue to grow it, and we'll see where we go.
So my second question is with the tax and the reinvestment, any thoughts like when we -- our surveys to consumers, I don't know, it's just us, is that the 2 stress points for consumers in going to the store at this point, parking lots and check out. Any thoughts on trying to ease. I mean, it's a good problem to have, but man, the checkout process at Costco can back way up and, of course, the parking lots can. Any thoughts of using some of the money to try to ease those 2 friction points for consumers?
Well, it's interesting is we've got 4% traffic growth year-on-year-on-year and we've put a lot of time and effort in front end to speed you out. One of the things we're concerned about with order online and pickup in-store is we don't want you there if you're not going to come through. People talk about having urgent care or doc-in-a-box things. We don't want you to sit for an hour waiting for a shot, and not shopping. But as it relates specifically to the front end, we continue to expand. In the last probably 8 years, 9 years, we have reduced -- we have sped, in terms of the average number of customers through an open register, an open staffed register has gone from the low 40s to the low 50s per hour. Now it may not seem like that, but it's like being in a red light. It seems like longer than it is. That being said, I just had an off-site meeting last week for 1.5 days, and one of the things we'll be rolling out, some new things at the front end, testing it at about 50 locations, that should continue to work on that. In terms of the parking lots, where we can, we expand the parking lots. Beyond that, I can't tell you a whole lot. Oh, by the way, the other thing is, is we'll continue to open and infill and cannibalize units. We -- as one of the examples I've given in the last few calls on it for another question was last year, we opened effectively our fourth unit on the East side of Seattle in the Woodinville, Kirkland, Issaquah area and then a fourth one in San Jose in California. In both instances, we went from roughly, I'll call it 60,000 members per location in the 3 so -- or 65,000, 180,000 to 195,000 members among 3 warehouses to maybe another 5,000 members of the market. But we added net of cannibalization, $110 million to $125 million of annual sales, which is great. And so that certainly is a relief point also. Now I can't speak specifically, one of our highest volume units in the continental United States is at Westbury, notwithstanding the fact that we have bought -- I forget what, it was a retail, a big retail store next door, a supermarket maybe or a Kmart, but adding lots of things to it, and it's hard to get to that location nearby. So we'll always have items like that, but we'll keep working on it.
The last question comes from the line of Kelly Bania. The next question comes from the line of Chuck Cerankosky.
Chuck Cerankosky. I just want to explore a little bit the 15 stores, well, actually 18 [indiscernible] the final quarter of the current fiscal year. What should we think about in terms of preopening expense in that period and any SG&A burden? And then how having those clubs open sets you up for the new year, for fiscal '19, especially going into the holiday season?
Well, some of the preopening will start before because as you open up, let's say, the first several that opened in the first several weeks of Q4, much of the preopening is incurred in the month leading up to it.
[indiscernible]
But -- and Q4 is also 16 weeks versus 12. So my guess, it'll be -- it will clearly be higher in Q4. And I don't know how -- necessarily, how it sets us up. There may have been a few weeks we've pushed to get into this year just to try to get them open. So that saves you a little bit, but we do that every year.
All right, thank you.
Thank you, everyone. Have a good day.
This concludes today's conference call. You all may now disconnect.