Costco Wholesale Corporation (COST) Q1 2021 Earnings Call Transcript

Costco Wholesale Corporation (NASDAQ: COST) Q1 2021 earnings call dated Dec. 10, 2020

Corporate Participants:

Richard A. Galanti — Executive Vice President and Chief Financial Officer

Analysts:

Simeon Gutman — Morgan Stanley — Analyst

Michael Baker — D.A. Davidson Companies — Analyst

Chuck Grom — Gordon Haskett — Analyst

Michael Lasser — UBS — Analyst

Scot Ciccarelli — RBC Capital Markets — Analyst

Karen Short — Barclays Investment Bank — Analyst

Oliver Chen — Cowen and Company — Analyst

Edward Kelly — Wells Fargo Securities LLC — Analyst

Christopher Horvers — JPMorgan Chase & Co. — Analyst

Robert Moskow — Credit Suisse AG — Analyst

Gregory Melich — Evercore ISI — Analyst

Rupesh Parikh — Oppenheimer & Co. Inc. — Analyst

Kelly Bania — BMO Capital Markets — Analyst

Stav — Jefferies LLC — Analyst

Presentation:

Operator

Thank you for standing by, and welcome to the Q1 Earnings Call. At this time, all participants are in listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] Thank you.

I would now like to hand the conference over to your speaker today, Mr. Richard Galanti. Please go ahead.

Richard A. Galanti — Executive Vice President and Chief Financial Officer

Thank you, Cindy, and good afternoon to everyone. I will start by stating that these discussions will include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements involve risks and uncertainties that may cause actual events, results, and/or performance to differ materially from those indicated by such statements. The risks and uncertainties include, but are not limited to those outlined in today’s call as well as other risks identified from time to time in the company’s public statements and reports filed with the SEC. Forward-looking statements speak only as of the date they are made, and the company does not undertake to update these statements, except as required by law.

In today’s press release, we reported operating results for the first quarter of our fiscal year 2021, the 12 weeks ended November 22nd. Reported net income for the quarter came in at $1.166 billion or $2.62 per share compared to $844 million or $1.90 per diluted share last year. This year’s first quarter included tax benefits of $145 million or $0.33 per share, $0.16 of which was due to the deductibility of the $10 per share special cash dividend to the extent received by the Company’s 401(k) plan participants and $0.17 related to stock-based compensation. Last year’s first quarter included a $77 million or $0.17 per share tax benefit related to stock-based compensation as well. And this year’s results also included the costs related to our COVID-19 premium wages of $212 million pretax or $0.35 per diluted share.

Net sales for the quarter increased 16.9% to $42.35 billion, up from $36.24 billion last year in Q1. In terms of our first quarter comp sales metrics, on a reported basis for the US, we reported a 14.6% figure, excluding gas deflation and FX, impacts the 14.6% for the 12 weeks would have been 17.0% increase. Canada for the 12 weeks reported 16.2%, ex-gas in FX, 16.8%. Other international reported 18.7%, ex-gas and FX, 17.7%. So also for the total company, we reported 15.4% comp sales increase and excluding gas deflation and FX, the 15.4% would be 17.1%. E-commerce, on a reported basis for the 12 weeks was 86.4% and excluding FX 86.2%.

In terms of Q1 comp sales metrics, traffic or shopping frequency increased 5.5% worldwide and plus 7.6% in the US. Our average transaction size was up for the company, 9.4% in the quarter year-over-year and up 6.5% in the US. These included negative impacts from gas deflation and the positive impact from FX. Foreign currencies relative to the US dollar positively impacted sales by about 30 basis points and gasoline price deflation negatively impacted sales by approximately 200 basis points.

Going down the income statement, membership fee income came in at $860.9 million, up $57 million or 7.1% ex-FX would have been up $54 million or 6.7%. During the quarter, we opened eight new units.

In terms of renewal rates, our US and Canada renewal rate as of the end of Q1 ’21 was 90.9%, that compares to a quarter ago of 91.0%, and worldwide it was 88.4%, which was the same as it was a quarter ago. Now, the US and Canada rate of 90.9%, compared to the 91.0%, this 0.1% decline was primarily result of what we believe to be deferred renewals in Canada during the pandemic. For example, traffic of frequency in our Canada warehouses in Q1 came in at minus 1.3%, compared to a plus 7.6% for the year in the United States. By the way, the US renewal rate was the same in both quarters end.

In terms of number of members at Q1 end, total paid households at Q1 end was 59.1 million, up from 12 weeks earlier Q4 end of 58.1 million and total cardholders at Q1 end was 107.1 million compared to 12 weeks earlier 105.5 million. Also at first quarter end, paid executive memberships totaled 23.3 million, an increase of 642,000 during the fiscal first quarter.

On to the gross margin line, our reported gross margin in the first quarter was higher year-over-year by 50 basis points coming in at 11.55% of sales, compared to 11.05% a year ago. Excluding gas deflation, the 50 basis point increase would be 30 basis point. If you jot down two columns of numbers here to shed a little light on the components of gross margin, on a reported basis in Q1 ’21, the core merchandise margin year-over-year was up on a reported basis, 83 basis points, plus 83; second column without gas deflation would have been plus 66 basis points. Ancillary businesses minus 15 basis points reported and minus 20, ex-gas deflation, 2% reward minus 6 basis points and minus 4%, other minus 12% and minus 12%. And if you add up the two columns on a reported basis, again, gross margin is reported as a percent of sales. Year-over-year and the quarter was up 50-basis points on a reported basis and ex-gas deflation, up 30 basis points.

Now, the core merchandise component gross margin shows was higher by 83 and up 66, ex-gas deflation. Similar to last quarter, we had a sales shift from ancillary to core. This resulted in a higher contribution of our total gross margin dollars coming from the core operations versus last year. Looking at core merchandise categories in relation only to their own sales on core if you will, margins year-over-year in the quarter were higher by 65 [Phonetic] basis points. Fresh foods was again the biggest driver here. With strong sales in fresh, we benefited from efficiency gains and labor productivity and significantly lower products spoilage. Food and sundries, softlines and hardlines they are the three main core components, all had higher margins year-over-year in the quarter as well, but fresh foods was the driver. Ancillary and other businesses gross margins, as I showed you here was lower on a reported basis by 15 basis points and minus 20 ex-gas deflation. Most of the impact coming from travel and to a lesser extent from gas, optical, hearing aids and food courts.

Costco Logistics, which is the name for the acquisition of Innovel, that we did several months ago, impacted ancillary margins by minus 6 basis points, slight relative improvement from the prior quarter year-over-year. 2% Reward, nothing surprising there. And the other, the minus 12 basis points, all of this was attributable to the costs of the COVID-19 of $53 million of the $212 million the total amount previously mentioned. These are the direct costs for incremental wages allocated to our manufacturing production and fulfillment operations. All told, even with the $53 million of COVID costs hitting the margin, Q4 year-over-year gross margin on a reported basis, ex-gas still up 30 basis points year-over-year.

Moving to SG&A, our reported SG&A in the first quarter as a percent of sales was lower or better year-over-year by 15 basis points coming in at a 10.15% of sales compared to a year earlier, first quarter of 10.30%, and ex-gas deflation, the 15 basis improvement would be 32 basis points of improvement. Again jotting down two columns of numbers, reported and without gas deflation, core operations in Q1 on a reported basis was lower or better by 49 basis points, so a plus 49 basis points; ex-gas deflation of plus 62 basis points, central plus 1 basis point and plus 3 basis points, stock compensation plus 3 basis points and plus 4 basis points, other minus 38 basis points and minus 37 basis points, and summing of those two columns up total reported SG&A year-over-year was better plus 15 basis points, and ex-gas deflation plus 32 basis points.

Now SG&A at the core, again it shows ex-deflation improvement of 62 [Phonetic] basis points. This excludes the COVID costs, which I’ll talk about in a minute. There was significant — they were just basic significant leverage with strong core merchandise sales increases. In terms of other, the minus 38 basis point or minus 37 basis point number ex deflation, gas deflation. These were our incremental costs for the COVID-19 or $159 million of the $212 million total number that we had mentioned earlier. The premium wages have been extended through January 3rd at this time. Again even including these $159 million of COVID-related premium pay expenses, SG&A year-over-year improved nicely.

Next on the income statement is pre-opening expense, $22 million this year in the first quarter compared to $14 million a year earlier. We had 10 openings, eight net of two relocations during the quarter and four openings gross three net of one relocation, a year earlier. Last year’s $14 million number did include a couple of million dollars related to pre-opening on our poultry complex, which was opened and went into business right before the beginning of Q1. All told, reported operating income for Q1 ’21 increased 35%, coming in at $1.43 billion this year compared to $1.061 billion last year, and even at a higher percent increase, of course, it would have been higher, now we had those the premium pay.

Below the operating income line, interest expense was $39 million this year versus $38 million last year. Interest income and other for the quarter was lower by $6 million year-over-year. Interest income itself within interest income and other was lower by $22 million year-over-year, due in large part to lower interest rates, offset by FX and other which was up — which was higher or better by $16 million year-over-year. So overall, reported pre-tax income in Q1 ’21 was up 34% coming in at $1.42 billion this year compared to $1.058 billion a year earlier.

In terms of income taxes, our tax rate in the first quarter of fiscal ’21 was 16.8% compared to 19.1% in Q1 last year. Both year’s tax rates benefited from the tax treatment of stock-based compensation as mentioned earlier. This year’s tax rate in the first quarter also benefited from the tax deductibility of the special dividend payable to Company 401(k) participants as discussed that portion payable to 401(k) participants as discussed earlier in the call. This full fiscal year’s effective tax rate, excluding these discrete items is currently projected to be between 26% and 26.5%.

In terms of warehouse expansion, as I mentioned in the first quarter of this fiscal year, we opened eight net new units. Our plan for the year is somewhere in the 20 to 22 range, none in the second quarter and six or so, five or six in Q3 and seven or eight in Q4. As of Q1 end, total warehouse square footage stood at 117 million square feet.

In terms of capital expenditures, in the first quarter of ’21, we spent approximately $893 million. Our full year capex spend for fiscal ’21 is still estimated to be in the $3 billion to $3.2 billion range.

In terms of e-commerce, overall, our e-commerce sales in Q1 FX increased at 86.2% year-over-year. A few of the stronger departments food and sundries, housewares, pharmacy, OTC and health and beauty aids, small electrics and TVs and other electronics. Total online grocery grew at a very strong rate in Q1, nearly 300%. The comp numbers that I mentioned 86.2% for year follow our usual convention which excludes these third-party same-day grocery program as they come in themselves and shop at our warehouses and then deliver to our members. If we include the third-party same-day in our e-commerce comps, the 86.2% result would have been just over 100%.

Innovel, now re-branded as Costco Logistics, continues to grow and we continue to push more big and bulky items to the site. We’ve added — in the past quarter, we added an in-court scheduler this quarter, where members can select specific delivery dates for most big and bulky items and made improvements to our call center with specifically trained agents as well, that continues to grow nicely.

And lastly, a couple of fun sports items just loaded two days ago. We have a [Indecipherable] baseball for $64,000 and the TYCA [Indecipherable] Louisville Slugger bat for $160,000. We’ve also recently sold a number of memberships for wheels up a private jet service operator.

Now turning to COVID and some of the issues and impacts surrounding it. From a sales perspective, similar to our strong sales results this past summer in our fiscal fourth quarter, we have continued to enjoy strong sales results during the first quarter of fiscal 2021. We continue to generate strong sales in food and sundries and health and beauty aids and fresh foods and alike and we’ve also benefited from improved sales and products and items for the home. As people are spending less on air and travel and hotel and dining out, they seem to have redirected at least some of those dollars to categories like electronics, furniture and mattresses, exercise equipment, housewares, cookware, domestics, etc. And as mentioned earlier, sales in most of our ancillary businesses were lower year-over-year in the quarter, travel gas, hearing aids and food courts.

From a supply chain perspective, 40,000 food view, if you will. Most factories are up and running and our suppliers, and in many cases production capacity has been increased. However, even higher increases in demand of some products are still creating some supply issues. There are instances of 50% or 100% or even more sales increases of an item and if we could procure more we’d have even higher sales. Examples would include things like exercise equipment, certain major appliances, certain electronics items, as well as certain housewares and small electric items.

On the transportation front, there have been some container shortages at origin, as well as some congestion at destination ports here in the States. The latter typically two days to four days, but a little longer in some cases. We’re managing through it and expect relief not until March or so of 2021. As well the past few weeks there have been some challenges that you may have read about in the industry, in terms of delayed delivery times of items just given the number of items being shipped now through third-party carriers. While this may reduce, some sales of members are not confident in time [Indecipherable] delivery, we like others I’m sure have done a couple of things. We’ve adjusted stated back to delivery times on our side to remind other people to shop early. And in our case, we took several hundred non-food items — non-food online items that are also in line and are providing same-day delivery through Instacart, including other items like airpods and instapods, laptops and many over-the-counter and health and beauty aid items, as well as some other home essentials.

In terms of food and sundries, continue limits on some paper goods, demand and sales went up as COVID began spiking again. Our toughest areas, natural gloves, surface cleaning wipes and sanitizing sprays. Also in some cases, some paper goods. Overall, dairy items are in good shape as well as proteins and products on the fresh side.

In terms of Halloween merchandise planning and results, Halloween, we went into it a little more conservative in terms of costumes and Halloween specific candy items. We came out of Halloween with pretty clean inventory levels. Christmas, as I think you mentioned on the last earnings call, responding to a question. We went a little more basic in terms of needs and uses for the house. So very strong. We have run into it with fundamental items for the home like housewares, TVs, electronics. Even added items like barbecues and pressure washers and furniture items. A little less, we’d cut back a little bit on seasonal items like Halloween decorations and gift wrap and some of the candy and food baskets, and some instances as we’ve already sold through those inventories.

Our warehouses overall have remained open and are mostly back to regular hours with an additional hour on any mornings for seniors and persons with disabilities. Warehouses are still following social-distancing and sanitation guidelines. And in some jurisdictions, we have to limit occupancy. Since May 4th, as you may recall, we’ve required members and employees to the warehouses to wear masks. And since November 16th, we required face shields for those unable to wear masks. Some of these initiatives of course will extend well into Q2 of this fiscal year. Finally, in terms of upcoming press releases, we will announce our December sales results for the five-weeks ending Sunday, January 3rd, and Wednesday, January 6th, after market closes.

With that, I will open it up to questions-and-answers. And I’ll turn it back to Cindy. Cindy?

Questions and Answers:

Operator

Thank you. [Operator Instructions] And your first question comes from the line of Simeon Gutman from Morgan Stanley. Your line is now open.

Simeon Gutman — Morgan Stanley — Analyst

Hey, everyone. Good afternoon. Richard, I wanted to ask us following on, you talked about some of the merchandising plans around Halloween and Christmas. You’re going to begin to lap some pretty massive surges in growth when you get into the thick of 2021. I know you don’t guide, but you’re probably planning inventory purchases. So I wanted to ask how you sort of manage with a pretty wide range of outcomes. And I don’t know, if you have any guide post to thinking about some of the gains you’re making in fresh food as far as the spoilage in the markdowns that don’t seem to be happening. So how do you think — how do you plan for lapping some of those as well?

Richard A. Galanti — Executive Vice President and Chief Financial Officer

Well, I mean there is a few different things and time periods that will be in question. If you recall, there was a big surge in frequency and sales results. The last week in February and the first two weeks or three weeks of March, when people were coming in and hoarding in our view. And of course, we are running out of everything basics from water to paper goods to cleaning supplies and things like that, and in some cases. And then beyond that into April and May, there were some issues as there were some COVID spiking at many fresh plants, protein plants, meat and poultry and alike. And so it’s hard to project completely. I think historically — of late, we have tried to build a little extra inventory where we can and some of those key things that are going to go out of style like paper goods and cleaning supplies. Although the next rush of spiking and whatever extra inventory you had it goes away pretty quickly.

Look, we’ll continue to work around it, we work. I think in some cases, it’s a little easier in the sense that we have fewer suppliers to deal with, fewer items to deal with. Arguably in other cases given our huge volumes that creates its own challenges sometimes. I think the bigger challenge is going to be post May last year, this past year [Indecipherable] when we saw kind of sales strength not just in those key essential categories like fresh foods and foods and sundries and paper goods and health and beauty aids, but also on the non-food side items for the home, if you will, and those types of basic items. And again people spending some of those dollars. Look, some things will improve and some things may degrade a little bit, some things that are degraded may take a while and not everything is going to happen like what was actually go off one day and everything is going to get better from a food standpoint in terms of restaurants being opened. So I think we’re running together and we feel pretty good that we’ve got a good format to serve our members as well and we’ll go from there.

Simeon Gutman — Morgan Stanley — Analyst

And as far as I don’t know events, I know, roadshows, I don’t know how prevalent they’ve been. Your mailers, are there things that you can change the cadence of either to get more aggressive. Grocery, you’ve taken a huge amount of share this year. Is that an area you’re going to lean into stronger? Just curious how thinking about the merchants are prepping for the upcoming year?

Richard A. Galanti — Executive Vice President and Chief Financial Officer

Well, as it relates to promotional forms that we do like the — and via mailers or even online type of mailers, we will see some of those have been changed because some of the big-ticket non-food — not big ticket, I’m sorry, some of the big-sized items that are always in their light paper goods like cleaning supplies. In some cases, we got to eliminate some of those items from the mailer. We put other items in. And in some cases, it’s done fine, in some cases it’s a little bit less of a sales increase, but that’s not just, going forward, that’s been in the last few months as well that we’ve changed those things. I think we’ve been pretty good at pivoting and adding new items, I think the examples of — for Christmas. while we may have — maybe went a little too deep into cutting back, not that they were big cuts, but we’re running out of some of those decorative things a week or two earlier than we would have liked to. We also though found success in lots of essential, basic fundamental items. I don’t think — I think the first Christmas, we probably brought in barbecue grills and pressure washers into market and they’re doing well, because people are buying gifts for the home.

Simeon Gutman — Morgan Stanley — Analyst

Thank you.

Operator

And your next question comes from the line of Mr. Mike Baker of D.A. Davidson. Your line is now open.

Michael Baker — D.A. Davidson Companies — Analyst

Hi, thanks. I was a little bit curious on the holiday trends. Two questions really, one, by trying to advertising get customers to spread out their sales and comment a little bit early, do you think there is any pull forward of holiday sales into November from December?

And then the second part of the holiday question. I think you said that you’re out of stock quickly in some of the seasonal items. Do you think you could have made a little bit more aggressive on the seasonal stuff, how much do you think your sales could have been up, if you had done that?

Richard A. Galanti — Executive Vice President and Chief Financial Officer

Yeah. Well, first of all, talking to the buyers they definitely feel that some of the merchandise sales were pulled forward into November, not only from December, but even though week of November. There’s been articles out there about Thanksgiving, and overall not across the specific, but just in general about what’s going on online [Indecipherable]. And so certainly some of that you kind of got push forward.

In terms of some decorative things, there are examples where instead of buying 10% more this year of a given item, we bought 10% or 20% less. So we still bought a lot. We just don’t like we cut our order back by half, but in retrospect, we probably could have sold a little bit more. I don’t have a dollar number, It’s probably not that meaningful. For every negative there is another positive and we will say our comps overall have been very strong.

Michael Baker — D.A. Davidson Companies — Analyst

Yeah. Well, that’s fair. And if I could ask one more, I guess unrelated question. The MFI, the 7.1% increase, that’s better than it has been a nice acceleration there. Any color as to where that acceleration came from 4%, 5% range in the last few quarters?

Richard A. Galanti — Executive Vice President and Chief Financial Officer

Well, I think in terms of shopping frequency?

Michael Baker — D.A. Davidson Companies — Analyst

Correct.

Richard A. Galanti — Executive Vice President and Chief Financial Officer

I’m sorry. Okay. I didn’t hear the first part of the question. Well, I think we opened a few more units than we did a year earlier that without looking that deeply that’s probably most of it.

Michael Baker — D.A. Davidson Companies — Analyst

Okay. Fair enough. I appreciate the color.

Richard A. Galanti — Executive Vice President and Chief Financial Officer

Thank you.

Operator

And your next question comes from Chuck Grom of Gordon Haskett. Your line is now open.

Chuck Grom — Gordon Haskett — Analyst

Hey, thanks. Hey, good afternoon, Richard. When you look at your online offering, can you remind us where it stands in terms of total mix of business and also level of profitability relative to the store? And looking ahead, what categories you may start going into more?

Richard A. Galanti — Executive Vice President and Chief Financial Officer

Well, I think in terms of in-store of course and warehouse we’ve got about 3,800 active items. Online, we typically have somewhere in the high single-digit thousands, I mean call it 9,000 plus, I’m sorry. And in terms of percent of sales, it’s about 7% of sales. Now we don’t include in that number as I mentioned, like the third-party sales like the Instacart same-day fresh, because they are employees or contracted employees coming into Costco shopping just like any other customer who come in the shop. So you could add a little bit more to that. But in terms of what we call online is about 7%, I think it was 6% in fiscal 2020 for the entirety. And of course, it was halfway through the year when you saw e-com percentages increases jumped dramatically with the advent of COVID.

Chuck Grom — Gordon Haskett — Analyst

And then just what about profitability?

Richard A. Galanti — Executive Vice President and Chief Financial Officer

Overall, e-commerce is a little less profitable. You’ve got category-wise, it’s profitable. Category-wise, you’ve got merchandise categories that don’t include some of the highest gross margin components of our business. Like fresh, like apparel in a big way, in terms of the penetration. You’ve got electronics, which is a lower than average margin business both in-store and online and so much bigger percentage of penetration online. Those are examples.

Certainly, in the profitability the e-commerce has been helped with the types of comp sales increases we’ve had over the past year, but also over this past year there is some of the cost inefficiencies of growing it so fast. In terms of fulfillment, as we are continually adding locations, where it can be shipped out of and getting closer to the customer as this overall size of the business has grown a lot. Yeah. And as I mentioned earlier in the investment in Innovel, we call it Costco Logistics, that was — as we expected a hit year-over-year to the margin simply because it’s being ramped up and upgrading.

Chuck Grom — Gordon Haskett — Analyst

Got you. And then just a follow-up on next question, and I pardon my near-term orientation of it. But when you look at the comp in November and the fall off at the end of the month, albeit, still strong. Just when you look back, if there is any learnings on to why you think sales fell off. And I’m curious. if the revenue trends have started to bounce back?

Richard A. Galanti — Executive Vice President and Chief Financial Officer

I think it’s — I mean our best guess is it’s complete cohort. I mean the fact is, people who’ve been marketing bigger ticket items and some of those types of holiday items earlier in November. Yeah, Bob here mention that Black Friday promotions this year, more of those things we promoted earlier in the month and not assessment everybody else out there too.

Chuck Grom — Gordon Haskett — Analyst

Got you. All right. Thanks a lot.

Operator

And your next question comes from Mr. Michael Lasser of UBS.

Michael Lasser — UBS — Analyst

Good evening. Thanks a lot for taking my question. Richard, you outlined nice holiday, but some people on this call might be considering getting for loved ones this season. When you look at your sales compared to the rest of the consumable retail landscape, most others are seeing a deceleration in their comp whereas Costco has seen an acceleration in its comp. Why do you think that is it simply because members are coming in to buy their discretionary goods moving up their baskets with the consumable item?

Richard A. Galanti — Executive Vice President and Chief Financial Officer

We definitely think that. Look, be essential in recognizing the people clearly are coming into buy food and key cleaning items and health and beauty aids and alike. That gets you on the door. And certainly in our view, given that money is being spent on other things in normal years perhaps is being spent more for things for the home. We have that as well and I think that has helped us in that regard.

Michael Lasser — UBS — Analyst

Okay. So it really comes down to mix in the Costco [Speech Overlap]

Richard A. Galanti — Executive Vice President and Chief Financial Officer

Buyers I like to take part of it is, as people feel hopefully, at least relatively safe coming into a big wide open-box environment, where we’ve done, we think a pretty good job of social distancing and other safety protocols.

Michael Lasser — UBS — Analyst

Okay. In the core and core gross margin increase, it seems like it’s a function of just the strong sales allowing Costco to be able to sell through better than it might otherwise have been able to. Is that right that we should [Speech Overlap]

Richard A. Galanti — Executive Vice President and Chief Financial Officer

Yeah. I think most of the strong sales, which shows its brightest colors with fresh food, where you’ve got two cost components that have improved dramatically, spoilage and labor productivity. So that has certainly helped. The other Michael is, I think you’ve all read about this from an industry perspective. There’s been less promotional activities out there, while we’re still getting great values on things. When you look at TVs in general, while prices have come down across the board just because they always do over-time and it seem to be getting better, bigger and less expensive. There is not the kind of promotional money being thrown at it by the manufacturers because they haven’t had to. And so I think that too has had some impact.

Michael Lasser — UBS — Analyst

That’s helpful. I hope you have a great holiday. Thank you.

Richard A. Galanti — Executive Vice President and Chief Financial Officer

You as well.

Operator

And your next question comes from the line of Mr. Scott from RBC Capital Markets.

Scot Ciccarelli — RBC Capital Markets — Analyst

Not any attempt there. Hi, guys. Scot Ciccarelli. So I believe some products you guys still be your website or e-commerce are for members-only, but not all of them or it doesn’t look like that from a labeling perspective. So I think it’s not just a labeling difference. How much of your e-commerce sales are coming from members?

Richard A. Galanti — Executive Vice President and Chief Financial Officer

Virtually all. I believe part of the challenges is some items, as we work with our suppliers and ourselves as well, we want you to be able to have decided to see the prices.

Scot Ciccarelli — RBC Capital Markets — Analyst

I got it. Okay. And then, Richard, what’s the update today regarding how much of your e-commerce sales are being dropped ships from vendors versus kind of delivered through Costco?

Richard A. Galanti — Executive Vice President and Chief Financial Officer

About 50-50. A little less than 50 is being drop shipped.

Scot Ciccarelli — RBC Capital Markets — Analyst

Got it. All right. I appreciate it. Happy holidays.

Richard A. Galanti — Executive Vice President and Chief Financial Officer

Same to you.

Operator

And next question from Karen Short of Barclays. Your line is now open.

Karen Short — Barclays Investment Bank — Analyst

Hey, thanks very much. A couple of questions I wanted to ask. So first just on COVID and wages. So the $212 million, you called out, obviously, gave us the breakout on the impact on cost of goods versus SG&A. But that was a little higher than the number, I think the $14 million per week that you’d guided. So wondering if that’s what the delta would have been, because that would have gotten us to about $168 million. And then wondering if you can give a little color on what they like other cleaning component might be would have been in this quarter, and then how to think about it into next quarter, because presumably just like I asked last quarter that January 3rd date is probably not the end date, I would assume.

Richard A. Galanti — Executive Vice President and Chief Financial Officer

Well, we’ll find out. Previously, I did comment on that, but a big chunk of the difference of $14 million and they’re honestly down to $14 million and now it’s surrounding up to whatever, but at the end of the day, there’s more hours is the biggest delta, more [Speech Overlap].

Karen Short — Barclays Investment Bank — Analyst

Okay. And then the cleaning component?

Richard A. Galanti — Executive Vice President and Chief Financial Officer

That’s relatively as well.

Karen Short — Barclays Investment Bank — Analyst

Okay. And then I’m wondering if you could give a little color on the expansion of the Instacart relationship. You have obviously listed a couple of SKUs that you’ve added on to that with respect to the third-party. Can you give a color on what the markup is on non-food items versus food and then give a breakdown on what that would be for members versus non-members on the markup?

Richard A. Galanti — Executive Vice President and Chief Financial Officer

Well, I can’t be that specific. We continue over the last three years or four years. We’ve continued to work to lower the effective average mark-up across the board on items. There is some discretion on some to be lower than that and some to be higher, but there’s average, which includes both their mark-up plus whatever other fees that person is spending, whether it’s a per delivery fee or per monthly fee to Instacart. As given some of the unique issues during the end of the year with the high demand for shipping and the capacity issues out there with the third-party shippers, we had given that it’s always coming in. We’ve added some items to the fray. In some cases, there is a maximum markup on those that don’t — that is in many cases smaller than that — quite a bit smaller than that other — that mid to high-teen number percentage-wise.

Karen Short — Barclays Investment Bank — Analyst

Okay. And then just last question, in terms of the MFI, obviously, I think January of ’21 would be the new timeline in terms of the tax deductibility in California. Is there any thoughts in terms of timeline, in terms of how you would think about an MFI or a membership fee increase, because I think in the past, you’ve historically done that when you’ve actually seen counter-intuitively traffic slowing and it seems like you may be looking at slower traffic to us based on tough compares as we get into parts of next year? So philosophically, color on them?

Richard A. Galanti — Executive Vice President and Chief Financial Officer

Well, I mean historically as you know for 35 years, we’ve effectively raised the basic fee $5, every roughly five years, and I say roughly it could be five years, 5.5 years and the executive membership has been raised originally started at $100, now it is $110 and $120. The last time we did the increase was I believe was in June-ish of ’16, so five years — that was June ’16. I will check on that. It was June of one of the years either ’16 or ’17, but it will be five years from then, than we might look.

You’ve mentioned that, we’ve done it when things — when sales have been stronger, when sales have been weaker when the economy took a hit or whatever else. We look at it, somewhat independently of that. We look at and we feel have we improved the value of the membership by more than that $5 — respect to $5 or $10. And I’m not suggesting we might wait or not, but time will tell. Historically, we’ve always felt very good about when we’ve done it, certainly the value proposition has been enhanced at a much greater multiple than the $5 or $10.

Karen Short — Barclays Investment Bank — Analyst

Thanks. Have a great holiday.

Richard A. Galanti — Executive Vice President and Chief Financial Officer

Thank you, Short.

Operator

Your next question is from Oliver Chen of Cowen.

Oliver Chen — Cowen and Company — Analyst

Hi, thank you very much. Hi, Richard. Regarding what’s ahead with vaccinations. Do you see a role that your pharmacy will play in that. And also in this dynamic environment, how are you thinking about managing inventory versus sales as we look forward to hopefully a pathway to vaccination, etc? Thank you.

Richard A. Galanti — Executive Vice President and Chief Financial Officer

I believe that we the country are currently in the first phase of the vaccination process. We are not participating in that, but I believe Phase 2, which will be just a short period down the road. Our pharmacies will also be part of the many pharmacies throughout the country that are going to be providing the service of vaccinations for that. We are in Phase 1 in the state of Alaska only, currently. But I think throughout the country, we plan to be in Phase 2, which will be the big push after this first initial round.

And in terms of managing inventories, while space is not infinite, certainly the cost of carrying a little extra inventory isn’t very expensive right now given the very low interest rates. But at the end of the day, as I mentioned a little earlier, I think we planned positively in terms of how our sales have been and to the extent that these ample of those seasonal items we came down a little bit, but not a lot. And I think we’ll continue to do that kind of planning a lot of times on items that are short, but there’s certainly no risk of having the only risk of having some extra paper towels for few weeks is the risk of having them. There is not any obsolescence or markdown risk on it. We always tried in times when there’s more of that available will build up a few extra weeks of supply. But overall, I don’t see a big change in our inventory turns or payables ratios.

Oliver Chen — Cowen and Company — Analyst

Okay. And e-commerce?

Richard A. Galanti — Executive Vice President and Chief Financial Officer

We dictated more by comp sales than anything. When we were enjoying a pre-COVID, 6% to 8% comp sales number, inventories as a percent of — payables as a percent of inventories was whatever the number was. When we saw the big increase in comps, you saw the payables as a percent of inventory is going up.

Oliver Chen — Cowen and Company — Analyst

Got it. That’s very helpful. And on the topic of e-commerce as we think about longer-term growth rates as well as new customer acquisition that you’re seeing an engagement online. What are some of the major catalysts for innovation going forward that you’ll implement or that you’re looking to implement. And then how do you think growth rates may involve as hopefully re-openings occur eventually?

Richard A. Galanti — Executive Vice President and Chief Financial Officer

Well, look, we as much as say one things to get back to normal, from a business standpoint, but also probably from a personal standpoint. And over the next couple of years, God willing, is starting with this process of vaccinations and hopefully, a big chunk of this progress through by the beginning during the summer, people will get out more, will be going back to restaurants and like and will that have an impact on our food sales, of course it will. Some of this positive will be sticky. Some of the new members will be sticky and we’ll go from there. I think that you know there are lots of attributes to value and customer loyalty. Certainly, the best prices on great quality merchandise that the member trust in our view is the biggest attribute and that’s where we start from.

E-commerce is certainly and the acquisition of Innovel, in terms of big ticket items and having a great service at a great value for those items we think helps us, but ultimately we still want our members to come into the warehouse. When they come in, they see the items and they are more likely to buy some of those items and certainly driving them in with great value and great quality is what we’re all about.

Oliver Chen — Cowen and Company — Analyst

That’s helpful. And lastly on that Logistics, Costco Logistics part. What should we know about as we model that going forward in terms of the margin headwinds and the dimensions around the size of that business relative to total? Thanks.

Richard A. Galanti — Executive Vice President and Chief Financial Officer

Well, the only two data points we’ve given you is, in Q4 year-over-year it was about, I think an 8 basis point margin hit in Q1, which we just reported for this new fiscal year, which is 6 basis point margin hit. As guessing games go, assume that there’ll be constant improvement in that over the next several quarters, so that it [Indecipherable]. And I will remind you, that doesn’t include any benefit we get from increased sales of those items in the margins associated with that. But yeah, when we bought this thing, we knew that it would be dilutive from an earnings standpoint, certainly in the first year and perhaps into the second year, hopefully on a decreasing basis and certainly the first two quarters would indicate a little of that, but at the end of the day, we think it — those companies that have had their own infrastructure to be able to do last mile delivery and installations, it’s a positive. Certainly, the proven companies have done that on the retailers and it worked out for us and we’re excited about what we can do with it.

Oliver Chen — Cowen and Company — Analyst

Thank you very much. Happy holidays. Best regards.

Richard A. Galanti — Executive Vice President and Chief Financial Officer

Same to you.

Operator

Your next question from Edward Kelly of Wells Fargo. Your line is now open.

Edward Kelly — Wells Fargo Securities LLC — Analyst

Yeah. Hi, Richard. Good afternoon. You mentioned freight. I was hoping you could provide just a little bit more color on the headwind? And then you talked about an improvement maybe coming in March? Any more color behind that?

Richard A. Galanti — Executive Vice President and Chief Financial Officer

Not really. Before each call, I’ll sit down with the head of the merchandising and some of the other senior people in merchandising just get the color on their departments and what’s going on. And it was by the way comment that with things coming from Asia, as an example, there is — or in general, there’s container shortages. And so it may take a few extra days to get things on to a ship or the ship that you’re sailing not fall in some cases. And the same thing is on some of the big ports in the United States like on the West Coast, strategically. They had mentioned two days to four days of delay. Again, two days for us is not a lot, but when you move into inventory fast, you want to have it, once you’ve ordered it, you want to build and put on the ship and get here and onto our floor. So it’s not a big deal. And it kind of was, I said what will improve and said probably not until February-March. So I’d just, that’s why threw out not anymore impactful than that.

Edward Kelly — Wells Fargo Securities LLC — Analyst

Okay. And then I just had a question on e-com and just digital strategy, generally. Any updated thoughts on a buy online pickup at store. I mean it has essentially kind of become a standard offering across the industry and we’ve obviously accelerated a lot of digital adoption. Just curious as to whether you’re rethinking that at all?

Richard A. Galanti — Executive Vice President and Chief Financial Officer

We’re not rethinking it. We continue to look at it, scratch our heads a little bit. But at this juncture, we don’t have any current plan to do so.

Edward Kelly — Wells Fargo Securities LLC — Analyst

Okay. And then just lastly for you, fuel, I think gross profit per gallon this quarter was probably up quite a bit. I mean I look at the open state, it looks like maybe double. Is that about, right? And then what did gallons sold do this quarter?

Richard A. Galanti — Executive Vice President and Chief Financial Officer

We don’t — gallons sold were down, not down as much as they had been in its trough, a few months ago. And you’re right on margins, not a double, I can’t give you any quantitative number there. But in terms of margins, we’re up year-over-year as a percent, gallons were down year-over-year.

Edward Kelly — Wells Fargo Securities LLC — Analyst

Okay, thank you.

Operator

And your next question is from Chris Horvers of JPMorgan.

Christopher Horvers — JPMorgan Chase & Co. — Analyst

Thanks, good evening. So I want to follow-up on the holiday pull forward question. I was curious, what the merchants are thinking about how the season progresses, particularly as we get close to Christmas. Some retailers think that given the earlier cut-off time to get the gifts in time for Christmas that there could be a big brick-and-mortar surge. I think other retailers are saying that now, which has started like with Prime Day, and it’s just been a pull-forward. So don’t expect anything unusual close to Christmas. So curious, what our merchants are thinking?

Richard A. Galanti — Executive Vice President and Chief Financial Officer

Well, merchants are feeling pretty, I’d say aggressive with a small A. They feel that again some of it was pulled forward, but there is still. And again running out of — so gift wrapping paper two weeks before you wanted to is not the end of the world, but every sale is a sale that we want. At the same token bringing in fundamental items that if you end up having a few extra SKUs or a few extra quantity of certain SKUs the day after Christmas is not going to tell you because it’s not stuff that seasonal that has to be marked down in a big way. So I think that we’re really into it. Recognizing that our sales overall, particularly brick-and-mortar have done well that we’re basically in their assumptions of what we’re going to do even over the next two weeks positive relative to this, recognizing there, so there could be some pull forward. And it could be some, because of the dates got a little longer on shipping. But at the end of the day, we think that we agree with you that could help the in-store experience and we’ll see.

Christopher Horvers — JPMorgan Chase & Co. — Analyst

Got it. And then in terms of — you called out travel in gross margin has a big impact, or is there something around accounting of that, you haven’t called it out prior, maybe it was just because it’s a relative to other things and the ancillary business, but is there an accounting thing, is there seasonality to that and what do we expect that to sort of get worse for some reason?

Richard A. Galanti — Executive Vice President and Chief Financial Officer

Well, what the accounts make you do is just like in the 10-K, you got to put the — you got to rank them in order of dollars. So in the case of travel, first of all, it’s a very high gross margin business. To the extent that we’re simply acting as a broker like car rentals. There is sales and no cost of sales equals gross margin, or a very little cost of sales. Only when we curate and item and take ownership of it, you will like 100 cruise ship weeks or whatever, I am making this example up, where you sell $100,000 or something and make few thousand dollars or $5,000 of margin. That’s a 5%, but you have big chunks of that business that are 80%-plus margin. So it’s a business that started to show a little bit of life as we entered summer. But with the spiking of COVID in the last several weeks that has dissipated quite a bit. And even some of the life that occurred in the summer, where bookings out as — for Christmas, some of those are being canceled as you would expect them to be. So it’s the rank order of them, which will hit harder a little bit.

Christopher Horvers — JPMorgan Chase & Co. — Analyst

Got it. And then the last question is on price gaps relative to peers and club and grocery. How are you — have they widened? Where do you see them now? I think, if you go back to this ’09 timeframe where sort of lap peak food at home inflation and you lap some food at home, while at gains you seem to get more aggressive on price. So just want to get your thoughts on where you see the price gaps now and how you’re thinking about that into ’21?

Richard A. Galanti — Executive Vice President and Chief Financial Officer

Well, I mean when we looked at our comp shops compared to their warehouse clubs as well as comp shops specifically on certain items and other traditional retail formats, we feel very good about our competitive moat, if you will. And we don’t think that’s an issue at all for us right now. But we’re the ones that keep pushing the limits further.

Christopher Horvers — JPMorgan Chase & Co. — Analyst

Got it. Have a great season, guys. Thanks.

Richard A. Galanti — Executive Vice President and Chief Financial Officer

Thank you.

Operator

And next question from Robert Moskow of Credit Suisse.

Robert Moskow — Credit Suisse AG — Analyst

Thanks for the question. Richard, if you mentioned that manufacturers, I guess the packaged goods, they’re not promoting as much not giving us any discounts, as usual, because they don’t have to. At any point do you think that could flip the other way. And if so, what would drive it? Is it availability of supply or maybe a more intense competitive environment?

Richard A. Galanti — Executive Vice President and Chief Financial Officer

Gosh, when I find out, I’ll let you know. I mean what’s happened of course with everything, both the strength in electronic items, TVs, AirPods and everything else in between and laptops. And the demand for those things is enormous. And in some cases, some shortages of supplies in general, even if capacity has gone up, that could get a lot more. So it’s hard to say.

Robert Moskow — Credit Suisse AG — Analyst

Okay. I was thinking more on the lines of packaged food. We’ve heard some categories putting promotions back in. Do you have any insight into that?

Richard A. Galanti — Executive Vice President and Chief Financial Officer

Okay. I don’t. I’m sorry.

Robert Moskow — Credit Suisse AG — Analyst

Okay. All right. Thank you.

Operator

And next question is from Gregory Melich of Evercore ISI.

Gregory Melich — Evercore ISI — Analyst

Hey, it’s Greg Melich. I think that was me. Hello, there’s really two questions. One was there any grocery inflation showing up and we see CPI for gross picking up and with less promotion? What are you guys seeing there?

Richard A. Galanti — Executive Vice President and Chief Financial Officer

Very, very, very little.

Gregory Melich — Evercore ISI — Analyst

Sort of something, but it’s nothing like 4% or 5%, some of those other numbers we see out there.

Richard A. Galanti — Executive Vice President and Chief Financial Officer

It’s not even 8%. Very, very, very little. Three very.

Gregory Melich — Evercore ISI — Analyst

On cash, so that the special dividend, congratulations, and keeping it special and getting it done. We should be back a little under $10 billion of cash. What’s the right number that you want to run the business with, either still during COVID or even on the other side of it?

Richard A. Galanti — Executive Vice President and Chief Financial Officer

Well, keep in mind that there is a chunk of it that is weekend debit and credit card receivables that could be $1 billion or $1.5 billion. There is upwards of just under $1 billion that is related to insurance captives and alike. There is a $2 billion to $3 billion that’s overseas and different countries which for whatever reasons is the last whether you want to bring back because of whatever withholding your other taxes related to it. So, at the end of the day, someone asked the question after we announced the $10 dividend we could have done more. The answer is we could have but why rush? I mean, right now, we still don’t know what’s going to happen with COVID and what may happen next year in the economy. And so, we’ll probably have a little more cash than normal — than pre-COVID if you will. But that’s okay too.

Gregory Melich — Evercore ISI — Analyst

And then, last, could you just — what are average rates today? The sort of levels that or the — we know the COVID up, thanks for that helping us there. But where are we now before all that?

Richard A. Galanti — Executive Vice President and Chief Financial Officer

You mean, the average US hourly wage?

Gregory Melich — Evercore ISI — Analyst

Yes.

Richard A. Galanti — Executive Vice President and Chief Financial Officer

I think we are in the — well, ex the $2 we are either right above or just approaching $24 average in the US.

Gregory Melich — Evercore ISI — Analyst

Excellent. $24 in the US And so, the — and the changes for the base rates going up, that was — you did that, that was completed when?

Richard A. Galanti — Executive Vice President and Chief Financial Officer

In March I believe, last year. Last March. Beginning of March. March of 2019. I believe it was at the beginning of March. Whatever that Monday start for that weekly pay period was or bi-weekly period was. And that was $2 across the board.

Gregory Melich — Evercore ISI — Analyst

Right. And the COVID stuff up on it?

Richard A. Galanti — Executive Vice President and Chief Financial Officer

Excuse me.

Gregory Melich — Evercore ISI — Analyst

The COVID, it was on top of the actual wage rate?

Richard A. Galanti — Executive Vice President and Chief Financial Officer

Yes.

Gregory Melich — Evercore ISI — Analyst

All right. Got it. Great. Well, good luck. Have a great holiday.

Richard A. Galanti — Executive Vice President and Chief Financial Officer

Thanks. You too.

Operator

And next question from Rupesh Parikh of Oppenheimer. Your line is now open.

Rupesh Parikh — Oppenheimer & Co. Inc. — Analyst

Good evening. Thanks for taking my question. So, I wanted to ask about just some of the countries where you have lower COVID infections, China, Australia seems to be normalizing now. How is purchasing behavior in those markets return back to — whether maybe pre-pandemic. I am guessing, Australia is probably a better read than China?

Richard A. Galanti — Executive Vice President and Chief Financial Officer

They both have stronger comps.

Rupesh Parikh — Oppenheimer & Co. Inc. — Analyst

From a carry forward perspective, have you seen the carry forward shift to I guess, maybe where they were pre-pandemic if you look at the mix?

Richard A. Galanti — Executive Vice President and Chief Financial Officer

Well, I don’t have that detail in front of me unfortunately. And when I look at comps by country, in local currencies, in most countries, we are back to normal, if not a little better.

Rupesh Parikh — Oppenheimer & Co. Inc. — Analyst

Okay, great. And then, just in the U.S. just given we seen spikes in infections and California has had more restrictions recently put in place. Just curious if you can just comment on anything you are seeing more recently in terms of the changes in consumer behavior or traffic to your stores?

Richard A. Galanti — Executive Vice President and Chief Financial Officer

The only thing that I’ve noted is, is that when it first started a few weeks ago, or when — the California, everyone there was waiting for – in California, everybody was waiting to hear what the new restrictions was going to be in terms of lockdowns. There was a spike in shopping and people were coming in. So we had particular strength over a couple of week period when more spiking was occuring.

Rupesh Parikh — Oppenheimer & Co. Inc. — Analyst

Okay, great. Thank you. Have a great holiday.

Richard A. Galanti — Executive Vice President and Chief Financial Officer

Thank you. You too. We’ll take two more questions, Cindy.

Operator

Okay. Your next question is from Kelly Bania of BMO Capital.

Kelly Bania — BMO Capital Markets — Analyst

Great. Thanks for fitting me in here. Richard, just wanted to back to the buy online and pickup at store question. I know you’ve said for several quarters now you continue to scratch your head, but it does seem like a lever that maybe you could pull one day that’s already been pulled by pretty much everybody else in retail. But I guess, just given the massive growth that you’ve seen with Instacart and your third-party partners there, this does clearly seem to be a segment of your membership base that’s willing to pay a premium or that markup for that service. So I am just curious if you thought about even a markup type structure for pickup or even like a higher price point membership for a pickup type service?

Richard A. Galanti — Executive Vice President and Chief Financial Officer

Well, as it relates to general conversations about it, those are topics that are discussed. One of the challenges right now is there is a lot of the buy online and pickup in store traditional retail promotions are at the same prices which you can come in and buy it for. So somebody is paying for the picking it up and storean [Phonetic] waiting for you to pick it up. I think that will shake you out too over-time as people — as somebody has to pay for either the company or the customer. I am not trying to be cute, we are looking at all those things, but we haven’t made any decisions to go forth with it.

Kelly Bania — BMO Capital Markets — Analyst

Okay. And just maybe quick follow-up, you mentioned the 7% e-com penetration from a sales perspective, but just curious if you could share just the percent of your maybe membership households that are engaged with Costco from a digital e-commerce perspective?

Richard A. Galanti — Executive Vice President and Chief Financial Officer

We don’t give out that information yet.

Kelly Bania — BMO Capital Markets — Analyst

Okay. Thanks.

Richard A. Galanti — Executive Vice President and Chief Financial Officer

As you might expect, it’s growing.

Kelly Bania — BMO Capital Markets — Analyst

Of course.

Operator

And your last question from Stav [Phonetic] of Jefferies.

Stav — Jefferies LLC — Analyst

Thanks. Good afternoon, everyone and thanks for squeezing us in. I just want to follow-up on Rupesh’s earlier question, but ask it a slightly different way which is looking at your cohort of new members that have joined really kind of the third quarter of last year, any performance distinctions or category mix distinctions that might give you encouragement that those members might be a bit more sticky going forward or might be a bit longer lifetime value customers for into the future? Thank you.

Richard A. Galanti — Executive Vice President and Chief Financial Officer

We don’t have a lot of that information yet. Recognizing that some of them sign up because of COVID and because we can deliver through Instacart food fresh and or we serve them online, but there is not a lot to go on yet.

Stav — Jefferies LLC — Analyst

Okay. Thank you.

Richard A. Galanti — Executive Vice President and Chief Financial Officer

Well, thank you everyone. Hopefully, you have a happy and healthy holiday season and on to better 2021. Have a good day.