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Costco Wholesale Corporation (NASDAQ:COST)
Q2 2018 Earnings Conference Call
March 7, 2018, 5:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good afternoon. My name is Christy, and I will be your conference operator today. At this time, I would like to welcome everyone to the Quarter 2 earnings call on February sales. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. If you would like to ask a question during this time, simply press *1 on your telephone keypad. If you'd like to withdraw your question, press the # key.

I will now turn the conference over to CFO, Mr. Richard Galanti. You may begin.

Richard Galanti -- Chief Financial Officer

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 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 second quarter of fiscal 2018, and 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 one 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 in the first quarter this year, compared to the second quarter last year. Combined, these two 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 -7 to -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%. Then we'd estimate these add the 1.4% back for the switch in the holiday. Canada, 8.7% reported, and 2.5% ex-gas and FX. Other international reported 15.7%, 7.4%, ex-gas and FX. So total company would be an 8.5% reported and a 5.4% ex-gas and FX, and a little over 1% of negative impact on that 5.4% from the Thanksgiving shift.

E-commerce reported was 28.5% comp sales, 27.3% ex-gas and FX. 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 X 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 are 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. The strengthening of foreign currencies impacted sales by approximately 180 basis points to the positive. Gas inflation contributed another 125 basis points. So together, about 3 percentage points.

Cannibalization weighed in on the comp 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 the net benefits from gas inflations and strong foreign currencies relative to the dollar, it goes 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, membership income is the next line item. Our reported in Q2, $716 million, up $80 million from the $636 million last year's second quarter, and up about 4 basis points, or 12.6% in dollars. Now, FX, the benefit of strong foreign currencies benefit the number by about $12 million.

Of the $80 million increase in membership fees increased year-over-year, about $37 million related to membership fee increases. The majority of the $37 million came from fee increases 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. All told, if you take out both of those, on a 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. 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 year and a half in the U.S. and slightly overlapping that, prior to that, in Canada. I'm happy to see what we expected came true 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 ends. Business add-ons, which was 3.2 million at Q1 end, at Q2 end was 3.3. So total member households, 49.9 million at Q1 end, up to 50.4 million at Q2 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, 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.

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 fiscal 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 of 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. We had smaller increases in the next couple, three 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 -2 basis points, it was actually +11 basis points excluding gas and FX. Within that, I'll have you just jot down two columns with 4 or 5 numbers in each column. The first column would be as reported and the 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 +1 and 0 in those two columns. And other, -6 and -6 basis points. All told, if you add up column 1, the reported year-over-year gross margin change was the -2 basis points, and ex-gas inflation was +11.

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 -8. If you look at core categories on core sales, margins year-over-year in Q2 were higher by 14 basis points. Sub categories within core margins year-over-year in Q2: food and sundries, hard lines, and fresh foods were up. Soft lines were down a little. All these improvements are notwithstanding greater values to our members, as we've continued 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 the 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're incurring costs related to the roll-out of our new, centralized return facilities. This will continue to impact us, as I said last quarter, in each of the next few quarters. Likely a little less each quarter. It was down a basis point from -7 to -6. Long-term, we believe it's a big benefit to us.

Moving to reported SG&A. Our SG&A percentage Q2 over Q2 was lower or better by 21 basis points and better by 9 basis points, +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 two columns -- reported and without gas inflation.

The first line item would be operations, +19 basis points and +8 basis points ex-gas inflation. Central, -1 basis point and -2 basis points. Stock compensation, +3 basis points in each column. Then total, +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 topline 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 pre-opening expenses. They were better or lower by $3 billion in Q2 this year. They were $12 million last year, 15. Now again, this year we only opened one new unit. Last year, we opened 4. However, we also have quite a bit of pre-opening related to two big manufacturing plants. One we just opened and one 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, operating income for Q2 came in at $1,016,000,000, 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 $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 operating.

Interest income in 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 of mostly various FX items in the amount of a positive $6 million. Overall, pre-tax earnings were higher by 22%, or $177 million hiring Q2, coming in at $986 million this year, compared to $809 million last year in the same 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 as a result of tax law changes. The primary benefit was the result of the lowering of the U.S. federal corporate income tax from 35% to 21%. Given that we don't have a calendar year, so it doesn't align with the traditional calendar year, you take the number of days 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% the remaining 245 days in the fiscal year. You get an average of 25.58%.

The impact of that lower rate on Q2 pre-tax income was $52 million of the $74 million I just mentioned. The other $22 million is basically two main things. One is a true-up of Q1, recognizing in Q1 we had no reason to assume this much lower federal income tax rate. So truing up for the first quarter so that we're in tune for the whole year. The other piece is some 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 is an additional $22 million tax benefit. So total tax benefit in Q2, $74 million. The $52 million what I'll call normalized to Q2, the $22 million related to truing up Q1 and other offsets, they go along with the original change in tax laws.

Going forward, we anticipate that the effective companywide rate for the balance of '18 in Q3 and 4 will probably be in the 29.5 to 30% range. In Fiscal '19, based on what we currently know, and of course all that's subject to change, we assume it'll 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, (1) 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. (2) As many others have done, we will use some of these savings to benefit our employees. We're working on that. Stay tuned. (3) We'll invest some of the savings to continue to drive greater value to our members. This will certainly include investing in price, as well as other activities. (4) 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. Much of that investing in value and price comes back in greater earnings, and directly perhaps a little, but again, stay tuned.

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 the current quarter, which will end in mid-May is 2 more. 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 is 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 three-quarters of those in the next two 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 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 $162.50. This quarter just ended, we expended an additional $59 million, at an average price of $187.70 per share.

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 second quarter came in at $1.5 billion, up 29% year-over-year. Overall, our e-commerce sales increases continue at very strong levels. If you look back at Q1, FX was a positive 42.1%. Again, there was a jump in there that related to the benefit of the Thanksgiving holiday shift. In Q2, 27.3%, as I just mentioned, FX.

Adding the first half together, again, taking out the Thanksgiving shift there, the first half altogether was a +33.7%. 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 prove our offerings and we continue to be helped by improved member experience with better search checkouts and return processes, as 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. That's used to help search and purchase Costco.com items for our members from our warehouses.

We continue to capture more email addresses. In addition, our improved content is resulting in an increase in our open rate of emails. Again, driving traffic both in-store and online. If you go right now to Costco.com, I think it talks about hot buys. You'll see that some of them are in-warehouse-only as supplies last. We think that we've got some excitement going here in terms of driving traffic both specifically in store using the internet and emails, 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 of our U.S. warehouses by calendar year-end.

We continue to improve the online merchandise and services offerings. Again, not only in general but with hot buys. We've improved our apparel offerings. We're doing a better job of focusing on adding items that are complementary to our warehouse offerings. We're doing some great things with some big-ticket [inaudible] [00:20:55] items where we might be out of them on a given date or start them on a certain date in store, but online we can afford greater availability of those. Then we're doing some other exciting things. Currently, there are over 100 high-end beauty items online.

In Q1 '18, we added the 2% reward to all travel purchases through Costco Travel. That's something that we had not done in the past. That's for our executive members. As well, if you use your Costco Visa co-branded card, you get 3% that way, so it'd be 5% off of what's already great values and seeing great growth in Costco Travel.

As I think I mentioned last time on the call, we're offering a very limited buy online, pickup in store. These are really basically selected, small-size, big-ticket items where many people aren't likely to want to leave them at their doorstep. So 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. We'll continue to see how it works. All these efforts that I've just mentioned are having a positive impact on our business both online and in the warehouse. We believe it helps in the sales momentum and increased awareness of our digital presence, as well as the traffic that we've enjoyed recently in our warehouses.

In sum, we're continuing to expand these activities. It's evolving and improving, and it'll drive our business both online and in the store. Certainly, some of the tax savings will go toward driving that as well.

Next, let me review the February sales results before we 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. Lunar New Year and the Chinese New Year 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 half a percentage point.

For the first 26 weeks of Fiscal 2018, we have now reported sales of $68.51 billion, a 12% 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 would 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%. Total company, 10.5% reported comp, ex-gas and FX, 7.7% to the positive. As I mentioned, e-commerce ex-FX is 37% compared to the reported 38.1%.

In terms of regional merchandising categories for February, general highlights for the month: U.S. regions with the strongest results were Southeast, Los Angeles, and Midwest. Internationally in 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, 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. Impact on the U.S. was about 40. In Canada, where we did quite a few openings this year was about 140 basis points impact from that. A very small impact 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 strongest results were tobacco, liquor, and candy. Hard lines 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 showing there, both in-store and online.

Soft lines 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 still helped by the cannibalization of gas, food court, and optical had the best comp sales results in February. 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, our 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 into Lunar Chinese New Year.

I did want to make one other comment. As you know, we reported our earnings 45 minutes before the call. The first thing that comes in some of the news releases very quickly is 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 of the 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 $0.04 or $0.05. But I'm just mentioning that because I assume there's confusion out there on everybody as we report given this 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. It'll be an after-market close on Thursday, May 31st, with the earnings call that afternoon at 2:00 Pacific time. With that, I will open it up for questions. Back to you, Christy.

Questions and Answers:

Operator

Okay. At this time, if you have any questions or comments, go ahead and press *1 on your telephone keypad. We'll pause for just a moment to compile the Q&A roster. The first question comes from the line of Simeon Gutman of Morgan Stanley.

Simeon Gutman -- Morgan Stanley -- Analyst

Hey, guys. It's Simeon. Hope all is good. First question, Richard, can you discuss what's happening with spend for member trends? It's clearly increasing ex-gas, but can you talk about if members are spending in existing categories or new ones? Then I have a follow-up to that.

Richard Galanti -- Chief Financial Officer

Well, it's a little of both. I think you also have to add in there that I don't have the numbers in front of me, but I'm willing to be that I know our average price-per-item has come down. We've done a lot of driving greater value. Just on the MBMs alone, you're seeing significant savings. In some cases, a small amount from us, but more from our suppliers because it drives more sales. We're getting, with 20 to 30% fewer items, more total sales, and more gross margin dollars. I would guess that, now, to the extent that we're doing things like -- I've given 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, year and a half, we've seen a big improvement in white goods with the advent of being supplied by all the majors. I don't have exact numbers in front of me, but I'd be willing to guess while we had some the prior second quarter, on an annualized basis, that's well over $250, $300 million a year and growing. So there's going to be a few of those things as well. It's most frequency when you look at it.

Simeon Gutman -- Morgan Stanley -- Analyst

Okay. Can you share what percentage of your members are spending online with you? Is there any change in how frequently they're visiting?

Richard Galanti -- Chief Financial Officer

I don't have the exact numbers. I'm sure it's still a lower number. I don't know, frankly, off the top of my head if it's 10 or 20 or 25. I know from last week's budget meeting when we look in terms of the open rate of emails, 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. That gets their interest. I know we're seeing a better connect rate. Again, I don't want to give you numbers that I don't know exactly, but all those things are going in the right direction, as they should. As I've said before, there's a lot of low-hanging fruit there because there's a lot of things we hadn't done in the past.

Simeon Gutman -- Morgan Stanley -- Analyst

Okay. 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?

Richard Galanti -- Chief Financial Officer

As relates to Citi Visa?

Simeon Gutman -- Morgan Stanley -- Analyst

Exactly, yeah.

Richard Galanti -- Chief Financial Officer

I'm smiling. The first four quarters, because it was so sizable, we shared with you the effective basis points of improved SG&A and margin related to compared to the prior deal. We're now in the first couple of quarters, three quarters, after that. For the year, it'll still be an improvement, but a relatively small improvement. At the beginning of 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'll 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.

Simeon Gutman -- Morgan Stanley -- Analyst

Okay, thanks, Richard.

Richard Galanti -- Chief Financial Officer

By the way, we're using some of that as well. I mentioned 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 two-year warranty. If you purchase it with a Citi Visa card, not only do you get another 2% off on that, on top of the 2% if you're an executive member, but you get another two years on your warranty, so you get a four-year warranty. On top of all that, we use some of the buckets, if you will, to drive even greater values, which drove people in.

I don't have examples in front of me, but there were literally, on a $1,200, $1,300 retail TV, where we were already a 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. I think I mentioned last time, what we see with these dollars wherever they're coming from, 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, 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've thought.

Simeon Gutman -- Morgan Stanley -- Analyst

Okay, thanks.

Operator

The next question comes from the line of John Heinbockel.

John Heinbockel -- Guggenheim Securities -- Analyst

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?

Richard Galanti -- Chief Financial Officer

Well, take your pre-tax -- well, we don't know exactly, but if you look at we've been running at about 35.5%, and subtract, and now they say it's 28%, it's around 7 percentage points. I don't know if it's 6.5 or 7.5. You've got the U.S., which, this is broad-brush strokes, 70% of our earnings. So that's the site 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 a little.

John Heinbockel -- Guggenheim Securities -- Analyst

It sounded -- you talked about the benefit to the bottom line being more indirect. Whatever that is, it sounds like the vast majority or whatever the savings are, that the plan is to reinvest that in some form. Is that fair? You listed a bunch of buckets. Are they all sort of equal sizes? You didn't mention an e-commerce bucket? Is there one of those or is that blended into the other ones you talked about?

Richard Galanti -- Chief Financial Officer

Well, when I talk about buckets, I really talk about what are additional monies that we've got 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 and legislative changes. All those things allow us to do more of what we do. So again, I'm not being cute, but will some of it fall on 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 one-time bonus necessarily. We're going to take care of things. Also what we have seen is many of the things we've done value-wise have, while maybe lower the gross margin dollars per sell unit, we've seen increase gross margin dollars because we sell a heck of a lot more units.

Some of the things that we're seeing now with the benefit of doing a better job of getting you to even open your email. 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. I think the biggest thing that we want to communicate is we feel good about what we're doing and good about what's going on. But there's never a dull moment out there.

John Heinbockel -- Guggenheim Securities -- Analyst

You talked about sort of pushing value. Anything new with regard to KS in terms of product development or your pricing versus national brands? How does that play into this?

Richard Galanti -- Chief Financial Officer

Well, the one that I read about recently in the press was our new hazelnut spread, which is basically Nutella. It is literally flying off the shelves. It's a great value and it's a great quality. There's several, in every budget meeting and every Board meeting, we see a whole litany of new items that we're getting ready to try to 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 tested and that we're going to continue to drive. So it's lots of little things.

John Heinbockel -- Guggenheim Securities -- Analyst

All right. And then just lastly, do you guys yet know or have you been able to calculate the benefits that you get to U.S. comp from the Sam's closings? I imagine you've started to see that already, right?

Richard Galanti -- Chief Financial Officer

We started to see it after the first week. You know, the first week you had everybody 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 a little bit of member sign-ups from it. It's continuing. My guess is if the average Sam's Club in the U.S., as I understand it, is in the low 90s, the 63-day close was less than that.

When I spoke to Craig immediately about it and heads of operations, their collective view was 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, but some of them aren't. Some of them it's not the same customer. We won't necessarily get it overnight and some we will. But with all the other buckets, even a small bucket is a nice thing to have here.

John Heinbockel -- Guggenheim Securities -- Analyst

All right. Thank you.

Operator

Next question comes from the line of Chris Horvers.

Christopher Horvers -- JP Morgan -- Analyst

Thanks, good evening. I think a lot of investors try to figure out the strength in e-commerce. I know there's a lot going on in terms of what you're doing in check-out and category extensions and so forth. But could you perhaps rank the benefits? Whether it's where would you put appliances versus extending the aisle and versus some of the brands and versus the roll-out of online grocery?

Richard Galanti -- Chief Financial Officer

The roll-out of online grocery is a very small piece of it. That just started but it is driving traffic. I think the biggest things are awareness and cross-marketing. Doing more activities in store to let people know what's online, and a better job of getting people to open their emails. That's come with the headline if you will, which is something that's really hot in store. If you haven't gone to the site lately, take a look. Again, I think we're starting from a low base and a low metric, given what we hadn't done in the past. So you talk to our e-commerce people and our relative department heads of merchandising and 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? The view is, there's a lot of things they've got going on that should continue to drive it. Stay tuned. We'll see. On top of that, we're getting off to a good start, albeit with a conscious soft opening of both delivery sites.

Christopher Horvers -- JP Morgan -- Analyst

That's really my follow-up. What sort of uptake are you getting in the online grocery and to compare the 2-day delivery option versus Instacart? 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. Any thoughts on that as well?

Richard Galanti -- Chief Financial Officer

Sure. Well, look, the only data that we know that's more than three months old or six months old is going back to the original data that we have from when we were 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. Then we saw an existing member who was, I'm making these numbers up, they were growing their total purchase spend by 3% a year. They grew it by more than 3%, but they came in a couple, two to four fewer times, and shopped online more times, several more times than that. Because when they shopped online, it was a lower average ticket than when they came in the store. Mind you, it's a little different.

We're seeing a bigger average spend on the Instacart site, and some [inaudible] [00:41:25] on the 2-day and we're actually adding some items. I think last time I mentioned we started through our business centers, about 10 business centers, which covers essentially the entire Continental United States, virtually the entire Continental United States. We started with about 470 or 480 SKUs out of the regular warehouse being serviced out of the business centers. We've actually added some items to that. I think the goal is to add a couple hundred over the next 6 months. It's working so far, but it's new. 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 up a little comfort at this point, but that's all it is, is that results that we've seen from the ways we communicate with our member online.

If you go on 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 into the store, so as much as -- everybody's 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, at a better price than the day before on Instacart because the prices are better today. And even a better price through Costco.com, and even better of course, as you come in. We'll keep sending that message as well. I think we're honestly at 2+ years before we really know something on that. Certainly, 9 to 12 months before we have any inkling of what it means.

Christopher Horvers -- JP Morgan -- Analyst

Understood. Thanks very much.

Operator

Next question comes from the line of Edward Kelly.

Edward Kelly -- Wells Fargo -- Analyst

Yeah, hi, Richard. I wanted to ask about price investment. Not so much about the quantity, but I was hoping that you could just maybe talk about the elasticity of price investment in your business and how maybe it differs from some of your traditional competitors. Whether having fewer SKUs, less that you need to focus on, less SKU overlaps, how that actually impacts what you're seeing from an elasticity standpoint when you actually do make those investments?

Richard Galanti -- Chief Financial Officer

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 MBMs were out there. In explaining why we did it to start with, was because overtime, whatever you do, it gets a little stale. Not in every instance, but in some instances. So you try new things. Over those few months and continuing to today, we're continuing to try new things, with our vendors as well. I use water as an example. We were a great value on 40 half-liters of Kirkland Signature. The price may be different in a given state or something based on transportation, but I think we were at $3.49, which was the best price out there and doing a heck of a lot of volume, and now we're at, I believe, $2.99 every day.

Well, you can imagine our various suppliers said, how can we do this? Well, you have huge increases in unit volumes. Guess what happened on the way to the Forum? The brand just needed 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 and get back to that word I use about more octane in the dollar that we use. You take something like that TV example, we did $30 to $40 million on one SKU in six or eight days. How do you do that? You do that because (1) it's limited; (2) it's already a great price; and (3) it's even a greater value because of what we can do with it, partly with our suppliers on it. Then, on top of that, there are these other buckets. I gave you an example of if you use your Citi Visa card.

Well, we got some signups out of that. Some new applications for that. So I think that tends to be a little different. I gave you an example last quarter at the end, for the 10 days leading up to and through Labor Day weekend, when traditional retailers out there are selling U.S.D.A. choice strip steaks at, I'm making the number up, $8.49 or $8.99, and we're at $7.99, we were at $6.99. We locked up lots of New York strip steaks in the weeks preceding that. We saw a noticeable drive into the warehouse. I think it's a lot easier to do when you've got 3,800 items out there versus 50,000 in a supermarket, or $100,000+ in multi-general stores, supercenters.

Edward Kelly -- Wells Fargo -- Analyst

Okay. 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. We heard from Target earlier this week about moving to $12.00 an hour. You are at the upper end of the pay scale in terms of what you're playing your employees. But does a rising tide just lift all boats here? How are you thinking about this philosophically? Are you looking to maintain historical wage gaps that you've had? How should we be thinking about this for you?

Richard Galanti -- Chief Financial Officer

I think we always want to maintain a significant previous overall. We have to look at all the pieces of it. It's not just the headline starting wage. It's not just a one-time bonus. It's also healthcare. If you look at the average -- I'll use U.S. because every country is different, but relative to what's in that country is the same types of premiums -- the average U.S. wage of, and 90% of our employees who 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 a little over $10,000, where we pay 90% of it, roughly.

Now, by the way, that covers spouses and dependents as well, but on average, it's a little over two 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 do, even before tax law changes. We're going to do a little more on them because we can.

Edward Kelly -- Wells Fargo -- Analyst

Great. Thank you.

Operator

Next question comes from the line of Dan Binder.

Daniel Binder -- Jefferies -- Analyst

Hi, 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. Then also on membership, you mentioned that there was a slow start to executive conversions in the quarter. I was just curious what you think that was related to, and then how you were able to shift the pace on that?

Richard Galanti -- Chief Financial Officer

Well, actually, the latter question, our membership marketing people are looking at it. I don't know exactly. My guess is we had a strong first quarter, where it averaged over 21,000 a week 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. My guess is it's not a big issue. Now, the first question?

Daniel Binder -- Jefferies -- Analyst

I just saw through personal experience that you have a $20 gift card offer for signing up for auto-renewal for members who haven't done it yet related to the new card. I was just curious how effective that program has been.

Richard Galanti -- Chief Financial Officer

I don't know specifically about that program. We do a lot of things as relates to that. It sounds silly, but we did some programs to get members' email addresses. Which we do a better job when they sign up now as a new member But we were below 50% with valid email addresses. In two instances in the last few months, in about a week or 10-day period, we got over a million members to give their email addresses by giving them something like $2 off on muffins or something.

Daniel Binder -- Jefferies -- Analyst

So with the improvement in the renewal rates this quarter, trends obviously reversed. Would you anticipate small improvements over the next several quarters based on that experience that you talked about on prior calls with what you saw in Canada?

Richard Galanti -- Chief Financial Officer

I would hope so. If I could just copy what happened over the several quarters after Canada. Canada is now above where it was before the conversion started two and a half years ago. Canada went down over six quarters from the conversion quarter to five more quarters out by, I believe, 100 basis points, the renewal rate. Now it's .20 or .30% higher than it was before that. U.S. only went down about .60%, so now it's back up .10% from that -6. History should show that will happen, but we'll have to wait and see.

Daniel Binder -- Jefferies -- Analyst

Just last item, on freight. There's been a number of retailers talking about that pressure and, in some cases, it's been a material impact on 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.

Richard Galanti -- Chief Financial Officer

Look, the higher freight costs and availability of containers impacts all of us. It's interesting, it's not talked a lot about. 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 recycles corrugated cardboard. Basically, we can make more dollars doing that. But we really hadn't done a lot of backhauling supplies, merchandise from vendors. I think that's mitigated it a little bit of late, but I think it's still at that number. My guess would be it's not as impactful to us as it is to a traditional retailer based on what I just said. 90% of our goods go through our cross dot depot operations. You've got literally thousands, but in the low single-digit thousands, 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 it's a lot easier to even do these kind of things when you've got limited items.

Daniel Binder -- Jefferies -- Analyst

Great, thank you.

Operator

Next question comes from the line of Karen Short.

Karen Short -- Barclays -- Analyst

Hello, can you hear me?

Richard Galanti -- Chief Financial Officer

Yes.

Karen Short -- Barclays -- Analyst

I just wanted to clarify in terms of tax reform benefits. In terms of the puts and takes we think for the rest of the year and into Fiscal '19, obviously, you commented on investing in employees, investing in price. Is that something we should kind of expect fairly quickly or is that something that both of those would have a little bit of lead time and you're still to be determined? Just to clarify.

Richard Galanti -- Chief Financial Officer

I'll be able to give you 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 will be forthcoming. My guess is in the next two months. So it'll impact Q3 less than a full Q3, whatever it is.

Karen Short -- Barclays -- Analyst

On both wage and price?

Richard Galanti -- Chief Financial Officer

On employees. On price, we're already starting to do a little of that. But we've also had the benefit of various buckets. You know, all these buckets are fungible.

Karen Short -- Barclays -- Analyst

Okay. Then, I don't think you gave inflation in the quarter. I'm wondering if you could give that both at cost and at retail?

Richard Galanti -- Chief Financial Officer

Inflation? Hold on a second, I'll go get it in front of me. I think it's 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. We'll go to the next question and then I'll get it for you in a second.

Karen Short -- Barclays -- Analyst

Just on Instacart, I know you just said that the ticket was larger on Instacart, so I guess two questions on Instacart. One is can you maybe give a little more color on how much larger the average trend is or average ticket is on Instacart? Then, obviously, Sam's announced a rollout of Instacart as well. Does anything change with your pricing strategy on your Instacart offerings as a function of that announcement?

Richard Galanti -- Chief Financial Officer

Well, to the latter, no. Our strategy is always to be very competitive. If we have to be more competitive, we will. We feel we're very competitive on the things that we're doing. What was the first part of the question?

Karen Short -- Barclays -- Analyst

Just some kind of quantification on how much bigger the average ticket is?

Richard Galanti -- Chief Financial Officer

Well, when I saw it's a little higher average ticket, it's a little higher average ticket than what we experienced like with Google Shopping Express, which didn't include Fresh. I believe it's a double-digit number, but in the higher double digits than the middle double digits. As it relates to inflation when I look at our [inaudible] [00:55:55] in this index that we don't use for anything anymore. [Inaudible] 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 deflationary by 14 basis points. That's from our fiscal year end, September 3rd or 4th last year. I would say overall it's slightly inflationary because that is, in looking at the turnover in the different categories. So my guess is in the last four weeks, it was exactly 0. So I could say 0 to -- this is cost. Which would lead me to believe that we're definitely deflationary compared to that because we're lower in prices?

Karen Short -- Barclays -- Analyst

Great, OK. Thanks very much.

Operator

Next question comes from the line of Chuck Grom.

Charles Grom -- Gordon Haskett -- Analyst

Hey, good afternoon, Richard. I'm just trying to understand something here. So no inflation, you're investing more in price, yet you're core-on-core margins as a percentage of sales grew, I think you said 14 basis points, which is the best performance of the third quarter. It's 3 of the 4 large categories up. Can you just help us understand the improvement in the margins this quarter and looking ahead, any sustainability of that trend?

Richard Galanti -- Chief Financial Officer

Recognizing it's not just the [inaudible] core. There are so many other little things. An improvement in our travel business, which is a very high gross margin business, right? It's not the value of that plane ticket and hotel. It's the broker commission with very little SG&A associated with it. It's a very little cost to sales. All those things help a little bit. I think within the 80% of our business, which is core on core, you know, fresh foods, hard lines, soft lines, and food sundries, in talking to our head of merchandising two days ago, probably the two biggest things are what we call internally improved D&D. It's where damage is destroyed. When we're having to mark things down, less whatever we get from our vendors. There might be a spoilage allowance or a returns allowance within something. But generally speaking, we showed an improvement there.

We've also shown a little bit of an improvement with -- and I can't quantify whether that's a basis point or a few -- but it's an example. Another one is you take the 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 to an MBM, 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 three or four years we've seen what we call apparel and a couple different apartments -- men's, women's, and kids', up 9%-ish compounded for three or four years on a $7 or so billion worldwide. So that sends me a higher margin. So my guess is it's a lot of little things. Part of it is getting 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, get more dollars. So all those things help.

Charles Grom -- Gordon Haskett -- Analyst

Okay, that's helpful. This is quickly on February, you said that our lines are up low doubles and majors were the highest that we're 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 President's Day. Did that help out?

Richard Galanti -- Chief Financial Officer

Computers being -- not only desktops, but importantly laptops and tables as well, and appliances. Those are all very strong. Online has helped us as well in those categories, in the aggregate. So some of it has to do with, and I get back to the $150 to $300 off on a TV that's already incredibly low priced if you use your Costco Visa card. All of those things to help drive the business. I want to get back to the previous question also. What I can tell you about core and core gross margins, years ago we started highlighting that success to core business.

There are lots of other things, like traffic, like gasoline -- it 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's going to be. But Murphy's Law always tells you, we continue to feel good about what we're doing and there are lots of little pieces that affect that gross margin.

Charles Grom -- Gordon Haskett -- Analyst

Okay. Then just one housekeeping. You guys said that there was obviously a sales impact on the quarterly results. I think you said 140 basis points. I was wondering if there was any bottom line impact in Q2?

Richard Galanti -- Chief Financial Officer

Well, the bottom line impact other than the sales themselves, hopefully, we're doing a pretty good job of scheduling hourly employees in the warehouse. When you do a little better than you planned, you beat the heck out of the numbers because you have fewer employees doing the same work. When you miss your number a little bit, sales will hurt 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, but I'll tell you what the issue is, is holidays, paid holidays.

When one of those falls -- that's more in our monthly budget meetings, our every four-week budget meetings when the operators will have to explain sometimes payroll percent was up 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 4-week period than we have. So that impacts it.

Charles Grom -- Gordon Haskett -- Analyst

Okay, thank you.

Operator

Next question comes from the line of Oliver Chen.

Oliver Chen -- Cowen & Co. -- Analyst

Hi, Richard. Regard the e-commerce details, what's ahead with fulfillment in terms of how you're thinking about fulfillment speeds and inventory management, and how that may flow through on a longer term basis in terms of CapEx needs and as you think about certain fixed costs associated with the march toward different fulfillment options for the consumer. The second question is about engagement. It really sounds like awareness and marketing is a factor in driving traffic to e-commerce at large. What do you think are the next steps just to improve that engagement over time? Thank you.

Richard Galanti -- Chief Financial Officer

As it relates to fulfillment and the costs, we are spending more money. We're building some actual e-commerce fulfillment centers. 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 Tracey, California, or Mira Loma. It's 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-day is us through roughly 10 of our business delivery centers, maybe 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 expanding some, adding a second one to Japan, even though we only have 27 or 28 units right now, but geographically it makes sense now. We're 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. 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 have to spend an extra $500 million on our stuff. As we go from $0 to $200 million even, what dropped out of another bucket there?

People say we have the cash flow to do it. We've never sat down and said, what could 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's some of the blocking and tackling. I know e-commerce operations, they've engaged some outside parties to help with some of what I'll call targeted marketing engagement 101 and to see what more we can do. But right now, there's still a lot to be done with just getting more email addresses, refining, getting that open rate to continue to go up in the right direction, which it is.

Oliver Chen -- Cowen & Co. -- Analyst

Okay, Richard. That's very helpful. You've made a lot of progress with buy online pickup in store What are you thinking about or what you're monitoring about what makes 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? Thank you.

Operator

Next question comes from the line of Matt Fassler.

Matthew Fassler -- Goldman Sachs -- Analyst

Thanks so much. Good afternoon. 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. You indicated that gas was a piece of that and also some of the other businesses that you discussed in Q&A as well. What's your thought process on gas and its contribution to margin, both based on the current gas price environment, which is relatively stable, and also on the comparators as they evolved through last year?

Richard Galanti -- Chief Financial Officer

Hi, I'm back. I don't know what happened there, guys. Sorry about that.

Matthew Fassler -- Goldman Sachs -- Analyst

I think Oliver might have been in the midst of asking a question when I was called onto the line, so you can deal with that or go to my question first.

Richard Galanti -- Chief Financial Officer

I'm not sure, did you hear the question? I answered the question related to CapEx and expansion of physical activities or inventory needs related to driving fulfillment. Then I answered the question he had about awareness. Did you hear that?

Matthew Fassler -- Goldman Sachs -- Analyst

Some of it. So it's really up to you.

Richard Galanti -- Chief Financial Officer

Why don't we go on with your question and Oliver, if you're there, feel free to get back on the line.

Matthew Fassler -- Goldman Sachs -- Analyst

Did you hear my question on ancillary, Richard?

Richard Galanti -- Chief Financial Officer

No, I did not.

Matthew Fassler -- Goldman Sachs -- Analyst

Okay, I'll repeat it then. The question related to the benefit that you received from ancillary this quarter, which was substantial. Some of it related to gas, as you discussed, and some to non-gas businesses. Taking a look back at a year ago, your ancillary margins were down sharply. Gas, I think had something to do with it. What's your thought process on gas margins kind of intrinsically relative to trend on a dollar basis or penny-per-gallon basis in the current environment with relatively stable gas prices, particularly as you come up against more normalized comparisons in the second half of the year?

Richard Galanti -- Chief Financial Officer

Well, a lot of the gas price per gallon is up. Profitability has been OK. It's pretty good. A lot of it has to do with gallons. I think our gallons are up 9%, almost 10% compared to a U.S. industry that's up in the low 2%. On the ancillaries, I think 2 things. One, if I look back at last year, there was -- Bob, wasn't there one thing last year that hit us that was a catch-up on something in ancillary? 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 here as well. I know that many of the ancillaries are growing nicely and improving the bottom line margin.

Matthew Fassler -- Goldman Sachs -- Analyst

If I could just ask a second question. You were 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?

Richard Galanti -- Chief Financial Officer

We don't know yet. It's too small to know yet and too new. When we look back at, again, the early days in the Bay Area with Google's Shopping Express, we saw it was a net increase in total spend per 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's we're finding is, and this is more anecdotal, there are plenty of people that are using it simply for fulfillment and still coming just as long, but we don't know yet. We're also, by the way, signing up members that we didn't have before. Both with the Instacart white label, as well as Costco's 2-day grocery, where we deliver to places that are 150 miles from a Costco. We haven't even tried to market to those people yet.

Matthew Fassler -- Goldman Sachs -- Analyst

Based on your comment on size, it sounds like even though there are over 400 clubs, it sounds like it's not material to the traffic acceleration?

Operator

Hold on just one second, Matt. Okay, you are back into the main conference. We have our next question come from Peter Benedict.

Richard Galanti -- Chief Financial Officer

By the way, I'm taking my arms off the table so I don't touch the cord and disconnect it. My apologies.

Peter Benedict -- Analyst

Matt's had a heck of a time with Q&A the last couple days, 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? If you're not going to speak to any numbers, maybe which categories is that most present in and where can you take that over the next few years?

Richard Galanti -- Chief Financial Officer

Well, I don't have a percentage calculated, but where it is, we have a hot dog plant that makes all of the [inaudible] 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 grind 5.5 to 6 million pairs of prescription glasses that we sell every year. I guess you could say we have two 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 a quarter of our needs, although another third 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 three or four 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 do many fewer SKUs than traditional retail 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 two largest commissaries up there that serve some of our bakery needs were acquired by the two largest grocery retailers over the last few years. But in hindsight, it seems to be working. I'm trying to think what else. We do lots of packaging of gift baskets and clamshell-type stuff that we do ourselves. So that's somewhat vertical, not completely. I don't know what that all adds up to.

My guess is 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 hothouse produce or doing things with chickens and cows. I don't know.

Peter Benedict -- Analyst

Good, that's fair enough. Thanks for that overview. On e-commerce, any plans to roll out the signage and the tablets beyond those, I think you said 195 clubs that are in today. How is the labor in the club used to facilitate the buy online pickup stores? Is that a new role or are you just taking existing folks and repurposing them?

Richard Galanti -- Chief Financial Officer

No, we aren't rolling it out. First of all, we have employees that actually have a tablet with them. Particularly in areas like electronics and perhaps home furnishings and seasonal items, big ticket items that in the likelihood they're there looking at it, but they still choose to buy it online. In some cases like white goods, you can look at it there, but you can only have it received and ordered online. So we're doing it. It's working so far. You can expect to see it in more locations.

Peter Benedict -- Analyst

Okay, then just with the buy online and pick up in store, how are you staffing that from a labor perspective?

Richard Galanti -- Chief Financial Officer

Just staff. They're going through third-party training. In some cases, we're working with our vendors.

Peter Benedict -- Analyst

Okay, that's fair. Then last, just housekeeping. The DNA number, I don't know if you gave that for the second quarter. Do you guys have that?

Richard Galanti -- Chief Financial Officer

Which one?

Peter Benedict -- Analyst

Depreciation.

Richard Galanti -- Chief Financial Officer

Depreciation? It'll be in the Q. My apologies, we don't.

Peter Benedict -- Analyst

No problem. All right, thanks, guys.

Richard Galanti -- Chief Financial Officer

Thank you. Why don't we have two more questions?

Operator

Okay. The next question comes from the line of Scott Mushkin.

Scott Mushkin -- Wolfe Research -- Analyst

Hey guys, thanks for taking my questions. I wanted to give another shot at the e-commerce question on margin. Richard, we've talked about it over the last couple years and the challenges of bringing omnichannel to a retailer. I was just wondering if you could talk about how you're thinking about it as you try to 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 could kind of frame it for us as that grows as a part of your business. It's clearly not hurting yet.

Richard Galanti -- Chief Financial Officer

Well, first of all, with delivery, 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. 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 that we think work for us in our environment. So far, when we do these things, it works. It works our way. It's not unlike when we first started in business and you can't sell only 3,800 items or whatever it is and have limited categories.

We recognize that value is more than just 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 are 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. 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 whatevers did when they were that age. But what we're finding is items that portend well for that and we'll see. And which of these are complementary? 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 are some things that we're going to be doing over the next year or so to continue to grow it. We'll see where we go.

Scott Mushkin -- Wolfe Research -- Analyst

My second question is with the tax and the reinvestment. Any thoughts like our surveys of consumers, and I think it's just us, is that the two stress points for consumers in going to the store at this point -- parking lots and checkout. Any thoughts on trying to ease? 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 two friction points for consumers?

Richard Galanti -- Chief Financial Officer

Well, you know what's interesting is we've got 4% traffic growth year-on-year-on-year. We've put a lot of time and effort in the front end to speed you out. One of the things we're concerned about with order online and pick up 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 there sitting for an hour waiting for a shot and not shopping. But as it relates specifically to the front end, we continually spend. In the last 8 years, 9 years, 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 now seem like that, but it's like being at a red light. It seems like it's longer than it is.

That being said, I just was at an offsite meeting last week for a day and a half and one of the things we'll be rolling out, some new things at the front end. We're testing it in about 50 locations that should continue to work on that. In terms of the parking lots, where we can we expand the parking lot. Beyond that, I can't tell you a whole lot. By the way, the other thing is we'll continue to open and infill and cannibalize units. 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 Woodville, Kirkland, Issaquah area, and a fourth one in San Jose, California. In both instances, we went from roughly, I'll call it 50,000 members per location in the 3, or 65,000, 180,000 to 195,000 members among 3 warehouses, to maybe another 5,000 members in the market.

But we added that cannibalization $110 to $125 million in annual sales, which is great. 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 in Westbury, notwithstanding the fact that we have bought -- I forget, it was a big retail store next door, a supermarket maybe or a K-Mart, but adding lots of things to it, and it's hard to get another location nearby. So we'll always have items like that, but we'll keep working on it.

Scott Mushkin -- Wolfe Research -- Analyst

Perfect. Thanks for taking the questions.

Operator

The last question comes from the line of Kelly Bania.

Richard Galanti -- Chief Financial Officer

Any others? One more?

Operator

The next question comes from the line of Chuck Cerankosky.

Charles Cerankosky -- Northcoast Research -- Analyst

Hello, Chuck Cerankosky. I just want to explore a little bit the 15 stores, actually 18 the final quarter of the current fiscal year. Which we think about in terms of pre-opening expense in that period and any SG&A burden. Then how having those clubs open sets you up for the new year, for fiscal '19, especially going into the holiday season.

Richard Galanti -- Chief Financial Officer

Well, some of the pre-opening will start before because as you open them, let's say the first several that open in the first several weeks of Q4, much of the pre-opening is incurred in the months leading up to it. But Q4 is also 16 weeks versus 12. So my guess is it'll clearly be higher in Q4. I don't know necessarily how it sets us up. There may have been a few we 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.

Charles Cerankosky -- Northcoast Research -- Analyst

All right. Thank you.

Richard Galanti -- Chief Financial Officer

Thank you, everyone. Have a good day.

Operator

This concludes today's conference call. You may now disconnect.

Duration: 86 minutes

Call participants:

Richard Galanti -- Chief Financial Officer

Simeon Gutman -- Morgan Stanley -- Analyst

John Heinbockel -- Guggenheim Securities -- Analyst

Christopher Horvers -- JP Morgan -- Analyst

Edward Kelly -- Wells Fargo -- Analyst

Daniel Binder -- Jefferies -- Analyst

Karen Short -- Barclays -- Analyst

Charles Grom -- Gordon Haskett -- Analyst

Oliver Chen -- Cowen & Co. -- Analyst

Matthew Fassler -- Goldman Sachs -- Analyst

Peter Benedict -- Analyst

Scott Mushkin -- Wolfe Research -- Analyst

Kelly Bania -- BMO Capital Markets -- Analyst

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