Gary Millerchip
Executive Vice President, Chief Financial Officer at Costco Wholesale
Thanks, Ron. In today's press release, we reported operating results for the second quarter of fiscal 2025, the 12 weeks ended February 16th. We have once again published a slide deck on our investor site under Events and Presentations with Supplemental Information to support today's press release.
You might find it helpful to have this presentation in front of you as I walk through our results. Net income for the second quarter came in at $1.788 billion or $4.02 per diluted share, up from $1.743 billion or $3.92 per diluted share in the second quarter last year.
Last year's results included a tax benefit of $94 million, or $0.21 per diluted share related to the tax deductibility of the special dividend paid to 401 participants. Excluding this discrete tax item, net income and earnings per diluted share both grew 8.4%. A couple of additional data points that may be helpful. Relative to our reported net income, operating income in the quarter increased 12.3% compared to last year. This was partially offset by a $70 million year over year headwind in interest and other and I'll share more detail on these items a little later and Foreign exchange rate movements negatively impacted the translation of international net income to US dollars by $57 million, or US$0.13 per diluted share. Net sales for the second quarter was $62.53
Billion, an increase of 9.1% from $57.33 billion in the second quarter last year.
US comparable sales were up 8.3% while or 8.6% excluding gas deflation. Canada comp sales were up 4.6% or 10.5% adjusted for gas deflation and FX. Other international comp sales were up 1.7% or 10.3% adjusted, and this all led to total company comp sales of 6.8% or 9.1% adjusted for gas deflation and FX. Finally, e commerce comp sales were up 20.9% or 22.2% adjusted for FX. In terms of Q2 comp sales metrics, foreign currencies relative to the U.S.
Dollar negatively impacted sales by approximately 2.1%, while gas price deflation negatively impacted sales by approximately 0.1%. Traffic or shopping frequency increased 5.7% worldwide and and 5.6% in the U.S. our average transaction or ticket was up 1% worldwide and up 2.6% in the U. S. This includes the headwinds from gas deflation and FX.
Adjusted for those items, ticket would have been up 3.2% worldwide and up 2.8% in the U.S. moving down the income statement to membership fee income, we reported membership fee income of $1.193 billion and an increase of $82 million or 7.4% year over year membership fee income growth was 9.4%
Excluding FX. The recent membership fee increase contributed approximately 3% of fee income in the quarter. Due to the effects of deferred accounting, the majority of the benefit from the membership fee increase will come over the next four fiscal quarters, with the largest impact in Q4 fiscal year 2025 and Q1 fiscal year 2026.
In terms of renewal rates at Q2 end, our US and Canada renewal rate was 93%. The worldwide rate came in at 90.5%. As cohorts of new members move in and out of this calculation, there could be one or two tenths of volatility in the reported number quarter to quarter. The biggest impacts come from digital promotions and Asia warehouse openings, both of which generate outsized membership sign ups but also have lower renewal rates. We ended Q2 with 78.4 million paid household members, up 6.8% versus last year and 140.6 million cardholders, up 6.6% year over year. At Q2 end we had 36.9 million paid executive memberships, up 9.1% versus last year. Executive members now represent 47.1% of paid members and 73.8% of worldwide sales.
Turning to gross margin, our reported rate in the second quarter was higher year over year by 5 basis points, coming in at 10.85% compared to 10.8% last year and up 4 basis points excluding gas deflation. To simplify the gross margin matrix provided in our slide deck starting this quarter with we have incorporated 2% reward as part of the business area which generated the reward. This is split between core and ancillary and other businesses. Core was higher by 5 basis points and higher by 4 basis points without gas deflation.
In terms of core margins on their own sales, our core on core margins were lower by 8 basis points. This decline was due to investments in supply chain to support higher inventory and some mixed changes. In our non food categories. Ancillary and other businesses gross margin was higher by 1 basis point and flat without gas deflation. E Commerce again showed considerable strength year over year, but this was offset by lower gas profitability. LIFO was lower by one basis point and flat without gas deflation.
We had a $12 million LIFO credit in Q2 this year compared to a $14 million credit in Q2 last year. Moving on to SGA, our reported SGA rate in the second quarter was lower or better year over year by 8 basis points, coming in at 9.06% compared to last year's 9.14%. SGA was lower or better by 9 basis points adjusted for gas deflation. The operations component of SGA was lower or better by 7 basis points and 8 basis points without gas deflation. Higher labor productivity and great cost discipline by our operators drove this improvement.
Central and stock compensation were flat both with and without gas deflation and preopening was lower or better by one basis point both with and without gas deflation driven by fewer new warehouse openings in the quarter this year. As Ron mentioned earlier, our new employee agreement went into effect earlier this week. While there was no impact in Q2, we estimate that this will create a headwind to SGA of 13 basis points from March 3. However, we will also lap a smaller increase from the same point in the prior year. So the net year over year basis point headwind from this wage investment is expected to be mid single digits below the operating income line. Interest expense was $36 million versus $41 million last year and interest income was $109 million versus $147 million last year.
As indicated on last quarter's call, interest income faced headwinds due to lower cash balances subsequent to our $6.7 billion special dividend in January 2024 and lower interest rates. While we expect interest rates will continue to be a year over year headwind for the remainder of the fiscal year, we have now lapsed the lower year over year cash balances following the special dividend FX& other was a $33 million gain in Q2 this year versus a $69 million gain last year.
In terms of income taxes, our tax rate in Q2 was 26.2% compared to 22.1% in Q2 last year.
Recall, last year's rate benefited from a $94 million discrete item related to the tax deductibility of the special dividend paid to 401 participants. Adjusted for this benefit, the tax rate for fiscal year 2024 Q2 would have been 26.3%. Turning now to some key items of note in the quarter, capital expenditure in Q2 was approximately $1.14 billion and we estimate capex for the full year will be approximately $5 billion. Taking a deeper look into core merchandising sales, our non foods category led the way this quarter with comparable sales in the mid teens.
Our buyers continue to bring in new and exciting items at great values. This included big ticket consumer electronics products such as 98 inch and 100 inch TVs, Stern pinball machines and gaming computers, all of which performed very well during the holiday season. For the quarter overall, golden jewelry, gift cards, toys, housewares, appliances, sporting goods, home furnishings and small electrics were all up double digits. Fresh in Q2 was up high single digits. This was led by double digit growth in meat where we continue to see a shift toward lower cost. Proteins such as ground beef and poultry, bakery and produce also performed well this quarter. Food and sundries had low to mid single digit comps which with kola and international foods shown the strongest results.
We continue to look for ways to increase the value for our members both with national brand items and our private label offerings.
Our goal is always to be the first to lower prices where we see opportunities to do so and the last to increase prices in the face of rising costs. A few examples of lower prices this quarter include KS Refined Olive Oil single 3 liter from 29.99 to to $27.99, KS Organic Peanut Butter from $11.49 to $9.99 and KS Tortilla Strips from $5.69 to $4.99. Another way we have been able to lower prices is by continuing to expand the local sourcing of our bulky private label items across the globe.
In Q2 we introduced a KS purified water SKU for the China market that is produced. By moving production into the region we were able to bring member savings of greater than 20% versus the prior branded water offering. Our merchants also continue to drive innovation with Kirkland Signature. Most notably this quarter we worked with a new supplier to rework our Kirkland Signature diapers. Improvements versus the prior offering include a longer and thicker absorbent layer, softer outer cover and two times more stretch in the waistband. As well as improving the quality of this item, we were able to increase the value by 11%. Other new KS offerings this quarter include KS French fries, KS vodka and soda and new KS lager. Kirkland Signature continues to grow at a faster pace than our business as a whole. Within ancillary businesses, pharmacy and food court departments led the way.
In the food court we have introduced a new strawberry banana smoothie and are excited to announce the fan favorite Turkey provolone sandwich is making a return in Q3. Gas comps were negative low single digits during the quarter driven by the average price per gallon being down slightly now. A few comments on Inflation While there was a fair bit of variability across departments, overall inflation in the quarter was low single digits. Fresh was the most inflationary of our categories driven by meat and bakery, food and sundries. Inflation remained relatively low as inflation in eggs, cocoa, coffee, cheese and corn were partially offset by deflation in commodities such as sugar, butter and flour. The supply chain continues to be relatively stable, albeit shipping delivery dates are still less predictable than they were pre Covid in non foods.
Our buying teams have been proactive in ordering higher levels of inventory over the past year, which has helped support our strong sales momentum and overall we are pleased with sell through rates Turning to Digital and E Commerce we continue to make progress with our technology Roadmap. The new warehouse tool in our app which allows members to view local warehouse item availability and prices had over 43 million visits on personalization for the first time in Q2, we sent out multiple versions of our digital MVM, differentiating the message for members based on their previous shopping behavior. We still have a lot of work to do in this area and are excited about the potential to improve the member experience through more relevant targeted messages and experiences.
While strength in Bullion was a meaningful tailwind to E Commerce sales, home furnishings, small electrics, hardware and sporting goods were a few of the other departments that grew double digits year over year. Costco Logistics had a record holiday season with over 500,000 deliveries as we continue to grow share in big and bulky items and Costco Next Accurated Marketplace also had record holiday sales. We are now approaching 100 vendor sites and significantly grew average order value in the quarter.
Shifting gears to alternative revenue streams, we made some improvements to our CO Brand credit card this quarter. The card is a great way for members to increase the everyday value they receive when shopping at Costco, offering attractive cashback rates with no annual fee. Executive members who use the card can double their cashback on the majority of purchases in warehouse and@costco.com, from 2% to 4%. And last quarter we increased the reward on gas purchases at Costco locations to 5% on retail media following our first off site retail media campaign in Q1, we have entered into a number of additional similar campaigns with roughly 10 different partners live currently and many more in the pipeline.
Turning now to our February sales results for the four weeks ended this past Sunday, March 2nd, compared to the same four retail calendar weeks last year.
Net sales for the month of February came in at $19.81 billion, an increase of 8.8% from $18.21 billion last year. Comparable sales for the month were as follows. U.S. comparable sales were up 8.6% both with and without gas deflation. Canada Comp sales were up 3.2% or 8.7% adjusted for gas deflation and FX. Other international comp sales were down 0.6% or up 6.5% adjusted. This resulted in total company comp sales of 6.5% or 8.3% adjusted for gas deflation and fx. Finally, e commerce comp sales were up 19% or 20.2% adjusted for fx. Our comp traffic or frequency for February was up 5% worldwide and 5.8% in the U.S. foreign currencies year over year relative to the U.S. dollar negatively impacted total and comparable sales as Canada by approximately 6%, Other International by approximately 7% and Total Company by approximately 1.8%. Gasoline prices were flat year over year in the month.
Worldwide, the average transaction for February was up 1.4% including the negative impact from foreign exchange. In terms of regional highlights, U.S.
Regions with the strongest comparable sales were the Midwest, the Northeast and Los Angeles. Other international in local currencies, we saw the strongest results in Mexico, Taiwan and Korea. Moving to merchandise highlights the following comparable sales results by category for the month exclude the negative impact of foreign exchange Food and sundries were positive mid single digits.
Cooler frozen foods and sundries were the strongest departments. Fresh foods were up high single digits. Better performing departments included meat and produce. Non foods were up positive low teens better performing departments included jewelry, gift cards and housewares. Ancillary business sales were up low single digits. Pharmacy and optical were the top performers and gas was down low single digit on lower volumes and finally, in terms of upcoming releases, we will announce our March sales results for the five weeks ended Sunday, April 6th on Wednesday, April 9th after market close. That concludes our prepared remarks and we'll now open the line up for questions.
