Richard A. Galanti
Executive Vice President and Chief Financial Officer at Costco Wholesale
Thank you, Lateef, and good afternoon to everyone.
I'll start by stating that these discussions will include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, and 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 fourth quarter of fiscal 2022, the 16 weeks ended this past August 28th.
Net income for the quarter was $1.868 billion or $4.20 per diluted share compared to $1.67 billion or $3.76 per diluted share a year ago. Last year's fourth quarter was negatively impacted by an asset write-off of $84 million pretax or $0.14 per diluted share. Net income for the fiscal year totaled $5.84 billion or $13.14 a share compared to $5.01 billion or $11.27 per diluted share the prior fiscal year. Net sales for the fourth quarter increased 15.2% to $70.76 billion as compared to $61.44 billion reported last year in the fourth quarter.
On a comparable sales basis from the fourth quarter, U.S. for the 16-week period on a reported basis had comp sales of 15.8%. When you exclude gas inflation and FX -- gas inflation [Phonetic], it'd be 9.6%; Canada, 13.4% reported; 13.7% ex gas and FX; Other International, 2.9% reported; and 11.3% ex gas and FX. So all told, total company was reported as 13.7%, and excluding gas and FX, plus 10.4%. Separately, e-commerce 7.1% reported and again excluding FX, 8.4%.
In terms of the Q4 comp sales metrics, traffic or shopping frequency increased 7.2% worldwide and up 5.2% in the U.S. Our average transaction or ticket was up 6.0% worldwide and up 10.0% in the U. S. during the fourth quarter. Foreign currencies relative to the U.S. dollar negatively impacted sales by a little over 2%, and gasoline price inflation positively impacted sales by approximately 5.5%.
The best-performing core categories in the quarter were candy, frozen, kiosks, tire, lawn and garden, jewelry, toys, bakery and deli. In terms of ancillary businesses, the best performers were gas and food courts. And in other businesses, travel and business centers performed best relative to the prior fiscal fourth quarter results.
Going down the income statement to membership fee income on a reported basis. Membership fee income came in at $1.327 billion or 1.88%. That was up $93 million or 7.5% on a reported basis, again, with weaker foreign currencies relative to the U.S. dollar. That number, excluding the impact of FX, would have been $29.8 million higher, and the 7.5% reported increase would have been a 10% increase.
In terms of renewal rates, we again hit all-time highs. At Q4 end, our U.S. and Canada renewal rate came in at 92.6%, which is three-tenths of a percentage point higher from 16 weeks earlier at Q3 end when we were at 92.3%. And our worldwide renewal rate came in at the end of the fiscal year at 90.4%, up four-tenths of a percentage point from Q3 end when it was 90.0%.
In terms of the number of member households and cardholders, at Q4 end, we ended the fourth quarter with 65.8 million paid household members and 118.9 million cardholders, both up 6.5% from a year earlier. And that 6.5% increase in number of members and cardholders is on about -- just under a 3% increase in the number of locations. During the year, we opened 23 locations on a base that began the year with 815 warehouses.
At Q4 end, our paid executive memberships totaled 29.1 million, an increase of 1.2 million or 74, 000 per week during the 16 weeks since third quarter end. Executive members now represent over 44% of our members and just under 72% of our worldwide sales.
In terms of membership fees and a possible increase, there are no specific plans regarding a fee increase at this time. We're pleased with our growth in both top line sales and membership households over the last several quarters, and member loyalty is reflected in increasing member renewal rates. We'll let you know when something is about to happen.
Moving on to fourth quarter gross margins. For the quarter, gross margin on a reported basis came in at 10.18% compared -- down 74 basis points from last year's reported gross margin of 10.92%. Now the 74% -- the 74 basis-point year-over-year reduction is on a reported basis. Excluding gas inflation, it was minus 22 basis points. And as we normally do, we actually jot down a few numbers, and then we'll elaborate a little bit more on margin. So, the two columns would be reported year-over-year change and the second one would be ex gas inflation, net year-over-year change.
So, the core merchandise margin on a reported basis, minus 67 basis points year-over-year; ex gas inflation, minus 23 basis points. Ancillary and other businesses, the second line item, plus 20 and plus 34; our 2% reward, 0 and minus 5; LIFO, minus 27 and minus 28; and all told, total minus 74 reported, as I mentioned, and minus 22 on -- excluding gas inflation basis.
Starting with the core. Core merchandise's contribution to gross margin was lower by 67 basis points year-over-year and by 23 ex gas inflation. The sales mix negatively impacted the core, primarily from the lower sales penetration of total core sales relative to our increasing and outsized gasoline sales.
In terms of the core margin on their own sales, in Q4, our core and core margins were lower by 26 basis points. That's pretty much in line with each of the last three quarters when it ranged from minus 39 basis points year-over-year in Q3, minus 28 in Q2 and minus 18 in Q1 on a year-over-year basis. So again, for the quarter, it was minus 26 core-on-core.
Ancillary and other businesses gross margin was higher by 20 basis points and higher by 34 basis points ex gas inflation in the quarter. Gas, of course, as well as business centers and travel were better year-over-year, offset somewhat by e-com, pharmacy, food court and optical, but overall, a positive year-over-year change.
Our 2% reward, as I mentioned, on an ex gas inflation basis was higher or down 5 -- lower or down 5 basis points, implying higher sales penetration coming from our executive members.
In terms of LIFO, LIFO as you know with inflation has been increasing, it was 27 basis points down year-over-year -- higher year-over-year. LIFO charge this year on an ex gas inflation basis, 28 basis points higher, and that represented a $223 million charge in the quarter. Recall that our LIFO charges were relatively small in the first part of the year at $14 million; last quarter, in the third quarter, $130 million; and then as I mentioned here, $223 million for the quarter.
Moving to SG&A. We showed good results. Reported SG&A came in at 8.53% compared to last year's 9.22% or an improvement of 69 basis points. But again, ex gas inflation, the improvement was still good at 26 basis points lower year-over-year.
Again, jotting down a few numbers here, jotting down the numbers on a core operations basis, on a reported basis, that was plus 50 basis points or positive reduction of 50 improvement; ex gas inflation, plus 12 basis points; central, plus 2 and minus 3; stock compensation, plus 2 and plus 1; preopening expense, plus 1 and plus 2; other, plus 14 and plus 14. That gets you down to again on a reported basis, year-over-year SG&A was improved by 69 [Phonetic] basis points; and ex gas inflation by 26 basis points.
In terms of the quarter year-over-year, the core operations was, again, better by 12, excluding the impact of gas inflation. Keep in mind, these results include the starting wage increases we instituted in October of 2021, so in the first quarter of this fiscal year -- this past fiscal year as well as new wage and benefits increases implemented during the third quarter in March of this year as well as the impact of eight weeks in this quarter as we increased the top-of-scale increase that went into effect July 4th. So, a few increases that we've done this year. And still, we feel pretty good SG&A improvement given our sales strength.
Central was lower by 2 basis points and higher by 3 ex gas inflation. Nothing big to talk about there. Again, stock compensation I mentioned. Preopening, I've just -- we've noted that since we now include preopening on the income statement as part of SG&A instead of a separate line item. And other, again, the 14 basis points, recall that that included that last year's write-off in the quarter, totaling $84 million. All told, reported operating income in the fourth quarter increased 10%, coming in at $2.497 billion. A little of that benefit was that asset write-off last year.
Below the operating income line, interest expense was $48 million this year versus $52 million last year, relatively similar. Interest income and other for the quarter was lower by $1 million year-over-year, coming in at $67 million this year versus $68 million last year. Interest income was actually higher, but that was offset by unfavorable FX impact, which pretty much offset each other to be roughly flat year-over-year. Overall, reported pretax income was up 10%, coming in at $2.516 billion this year, up from $2.291 billion a year earlier.
In terms of income taxes, our tax rate for the fourth quarter was 25.4% compared to 26.1% in Q4 last year. The fiscal '23 effective tax rate, we estimate, is currently projected to be approximately 26%.
One thing I'll mention -- we have [Phonetic] mentioned in the past, net income attributable to Costco, that line item was up 12%. Recall that on June 30th this past year, we acquired the 45% minority interest from our JV partner in Taiwan. So, we now own all of Costco Taiwan. As a result, net income attributable to non-controlling interest was better by $14 million in the quarter. The non-controlling interest line will become zero going forward, essentially, a small amount, but pretty much zero.
A few other items of note in terms of warehouse expansion. In the fourth quarter, we opened nine net new warehouses. So for the full year, we opened 26 warehouses, but that included three relocations, so a net increase during the year of 23 locations. In the fourth quarter, of the nine we opened, five were in the U.S., two were in Canada and one each in Korea and Japan. In fiscal '23, we expect to open 29 new warehouses, including four relos, so for a net of 25 new warehouses. These 25 planned net new openings are made up of 15 in the U.S. and 10 in Other International including our first locations in each of New Zealand and Sweden, and our third and fourth locations in China.
Regarding capital expenditures, our fourth quarter Q4 spending capex was approximately $1.26 billion. And for the full year, capex expenditures were $3.9 billion. Our estimate for the upcoming year fiscal '23 capex to be approximately the same in the $3.8 billion to $4 billion range.
In terms of e-commerce business, e-com sales in the fourth quarter ex FX increased 8.4%. Stronger departments in terms of year-over-year percentage increases were tires, lawn, patio and garden, prescription pharmacy and health and beauty aids. The largest e-com merchandise department in dollars, what we call majors, which includes everything from computers to appliances to TVs to audio, etc., was up in the high single digits. And Costco Grocery, including our third-party delivery, two-day dry, fresh and frozen, continued to grow. They were up 20% in the quarter.
An update on Costco Logistics. With Costco Logistics, we continue to transition from vendor drop ship to direct ship from our own inventory, particularly in big and bulky items. Overall, this lowers the cost of the merchandise and improves delivery times on service levels to our members, and I'll share with you some statistics to that in a minute.
Prior to this acquisition in the U.S., we were completing a few years ago about 2 million big and bulky deliveries and installations per year. In fiscal '22, we completed 4.3 million big and bulky deliveries and installation. Previously, all of those 2 million deliveries and installations were made by third parties. In fiscal '22, about 70% or a little over 3 million of the 4.3 million were done by us. In the fourth quarter, in fact, that percentage of deliveries and installations done by -- performed by us was 81%.
Pre-acquisition, the estimated average days to deliver was above 15 days, and we were working with over 100 delivery partners. Today, our average delivery time for big and bulky is just under five days, and we're continuing to work to improve that. And we were down to eight delivery -- primary delivery partners.
A few comments regarding inflation. We've seen minor improvement in a few areas. But all in, pressures from higher commodity prices, higher wages and higher transportation costs and supply chain disruptions, they're still present, but we are seeing just a little light at the end of the tunnel. And if you recall in the third quarter, we indicated that price inflation overall was about 7% plus for us. For the fourth quarter and talking with our merchants, the estimated price inflation overall was about 8%, a little higher on the food and sundries side, a little lower on fresh foods, and both higher and lower on the nonfood side.
We're seeing commodities -- some commodities prices coming down, such as gas, steel, beef, relative to a year ago, even some small cost changes in plastics. We're seeing some relief on container pricing. Wages are still the higher thing when we talk to our suppliers. And as we all know, wages still seem to be the one thing that's still relatively higher. But overall, some beginnings of some light at the end of that tunnel. And of course, that could change each week.
In all, despite current inflation levels, we believe we continue to remain competitive versus our others and able to raise prices as cost increases, hopefully, of course, a little less than others with whom we compete.
Many of you have asked about private label with the recent inflationary environment and what's happening, are people trading down? And of course -- our first response, of course, is they're not trading down, they're trading up or certainly trading the same.
In terms of Kirkland Signature merchandise penetration, excluding gas and other businesses that carry the Kirkland name, Kirkland Signature merchandise is up just under 1% in terms of penetration compared to a year ago. Our KS merchandise penetration is about 28% for the year. This is similar to historical trends where it's increasing slowly and steadily over time. So, no big dramatic change from the past there.
In terms of supply chain. Generally, supply chain has improved a little, including on-time deliveries. We started seeing container prices coming down. First place you see it, of course, is in the spot market and then you'll start to see it hopefully in some other contracts as they continue. No longer any big capacity issues or container shortages. Domestically, port delays have improved. And while the rail strike that was in the news a few weeks ago was thankfully averted. In anticipation of strike, there were some rail ramp closures and delays in restarting that. But the view from our buyers is that this should be eliminated for the most part towards the end of this week.
Switching over to inventory levels. Our total inventory at Q4 end was up year-over-year, just -- was up just under 26% year-over-year. At the end of the third quarter, it was up just over 26%. Of the 26% increase, an estimated 10 to 11 percentage points of it is inflation. That's that 8% number. And new warehouse growth, that's that 3% number in terms of unit growth over the last year, but still up year-over-year.
Additionally, we're lapping some low stocks in certain departments as a result of last year's high demand, specifically in nonfood areas where last year, we were about 90% of our targeted inventory levels. Food and sundries and fresh are in good shape, we feel. Our weak [Phonetic] supply is comparable year-over-year.
In terms of nonfood inventories, it's up in certain categories. Again, this is in part a result of being light in certain departments last year as mentioned earlier. The good news so far, initial seasonal sales seem to be going well, as evidenced in our monthly sales reports. And all told, we would expect the 26% year-over-year increase to start to head down as it has in just the past few weeks a little bit.
Lastly, as a reminder, in terms of upcoming releases, we will announce our September sales results for the five weeks ending Sunday, October 2nd, this next week on Wednesday -- in two weeks, on Wednesday, October 5th, after the market closes.
With that, I will open it up to questions and answers with Lateef. Thanks.
