Good afternoon. My name is Josh, and I will be your conference operator today. At this time, I would like to welcome everyone to the Q3 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session.
Thank you. Mr. Richard Galanti, CFO, you may begin your conference.
Thank you, Josh, and good afternoon to everyone. I'll start, of course, by stating that these discussions will include forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and that these statements involve risks and uncertainties that may cause actual events, results and or performance to differ materially from those indicated by such statements. The risks and uncertainties include, but are not limited to, those outlined in today's call as well as other risks identified from time to time in the company's public statements and reports filed with the SEC. Forward looking statements speak only as of the date they are made, and the company does not undertake to update these statements except as required by law. In today's press release, we reported our operating results for the Q3 of fiscal 2018, the 12 weeks that ended on May 13.
Net income for the quarter was $750,000,000 or $7.0 per share. That compared to $700,000,000 or $1.59 per share last year in Q3. Now last year in Q3, our net income was positively impacted by the $82,000,000 or plus $0.19 per share tax benefit and that was in connection with the $7 per share special cash dividend that we had done at the time. I'll start by reviewing our 3rd quarter operating results and then allow some time of course for Q and A. In terms of sales, net sales for the quarter came in at 31 point $62,000,000,000 or 12.1 percent increase over last year's 3rd quarter sales of $28,220,000,000 Net sales for the 1st 36 weeks of fiscal 2018 increased 12.0 percent to 95,020,000,000 dollars up from $84,820,000,000 last year to date last year for the 1st 3 quarters year to date.
In terms of comparable sales, which were reported in the press release, for the 12 week period, the U. S. Was 9.7%, excluding the impact of gas inflation, it was 7.7%. Canada on a reported basis for the 12 weeks, comps were 11.3 and ex gas inflation and FX impact was up 4.8. Other international reported at 11.8, ex gas inflation and FX, 5.8.
So all told, total company at 10.2% comp and ex gas inflation and FX up 7.0%. E Commerce, which we of course separate out here is 36.8% for the 12 weeks and 35.5% ex FX. So that continues strong. Similar statistics in the press release for the 36 weeks year to date. In terms of the 3rd quarter sales metrics, 3rd quarter traffic or shopping frequency was up 5.1 percent both worldwide and within the U.
S. Strengthening foreign currencies relative to the U. S. Dollar impacted sales by approximately 145 basis points to the positive and gasoline inflation added an additional 170 basis points. Cannibalization weighed on the comp to the tune of minus 60 basis points.
Our average front end transaction or front end ticket was up 4.9%. And again, excluding the benefits from both gas inflation and FX, that average ticket would have been up somewhere in the mid high single digits about 1.7%, 1.8% up. Next on the income statement, membership fee income. Reported in the quarter, dollars 737,000,000 up $93,000,000 from $644,000,000 during Q3 of last year or up 14.4%. The benefit of strong foreign currencies was about $9,000,000 of that $93,000,000 increase.
So ex that, it would have been up $84,000,000 of the $93,000,000 increase year over year, a little over half related to the membership fee increases that we have taken the last year, year and a half, the majority of which came from the $5 $10 annual fee increases taken last June 1st in the U. S. And Canada. And then a small balance of that from the fee increases taken in other international operations starting back in September of 2016. We will continue by the way to see membership fee based on the deferred accounting, the June 1, 2017 increases in the U.
S. And Canada last year. We'll continue to see the benefit of that year over year increase in the membership fee line. It will peak in Q4 this coming quarter, the 16 week quarter. And then still year over year increases, but all or at least 3 maybe 4 of the all next year in fiscal 2019 as well.
In terms of membership and renewal rates, our U. S. And Canada member renewal rates Q3 end came in that were 90.1% similar to what they where they stood a quarter earlier at 90.1 percent, slight uptick but still rounding to the 90.1 percent. Worldwide rates improved from 87.5 percent improved to 87.5 percent, up from 87 point 3% 12 weeks ago at Q2 end with the uptick in renewal rates and other international operations led by Asia, both Taiwan, Japan and Korea. In terms of number of members at Q3 end, in terms of total member households, at the end of Q2 it stood at $50,400,000 and 12 weeks later at the end of Q3 it is now it then stood at $50,900,000 Total cardholders $92,200,000 a quarter ago, 12 weeks ago and at Q3 end $93,000,000 During the fiscal quarter, we had 2 new openings.
Also at Q3 end, as of Q3 end, our paid executive member base stood at 19,000,000 households. That's an increase of 199,000 households from 12 weeks earlier or about 17,000 new Gold Star members per week. Related to the benefit from last year's fee increases, that year over year quarterly fee increase, well, as I mentioned, will continue to benefit both Q4 and into several quarters next year, but on a diminished amount year over year quarter. Going down to the gross margin line. Our reported gross margin in 3rd quarter was lower year over year by 46 basis points coming in at 11 point 05% during the Q3 of fiscal 2018 compared to 11.51%.
Now that minus 46 basis point figure year over year on a reported basis excluding gas inflation, it was minus it would have been minus 28%. And let me again ask you as I usually do to jot down just a couple of columns for Q3 2018. The first one would be as reported and the second one would be excluding the impact of gas inflation. The 5 line items would first one would be merchandise core. In Q3 2018 on a reported basis that was down year over year by 33 basis points and ex gas inflation down by 17 basis points.
Ancillary businesses reported minus 10 basis points year over year, minus 6 ex gas inflation. 2% reward plus 2 as reported and flat without gas inflation. Other minus 5 and minus 5 and I'll talk about that in a second. So total, if you add up those two columns, on a reported basis, again, gross margin was lower by 46 basis points, ex gas inflation lower by 28 basis points. Now the core as I mentioned, looking at the core merchandise categories in relation to their own sales, so core on core, if you will, margins year over year in Q3 were lower actually by minus 4 basis points.
Subcategories within core gross margin year over year in Q3. Food and sundries was up slightly and hardlines, softlines and fresh foods, the other three components of core were down just slightly. The slightly year over year core on core gross margin 3rd quarter resulted from our continuing investment in price to drive sales and widen the value gap between us and our competition. Ancillary and other businesses gross margin were reported down 10 and down 6% ex gas. Some of that is increased gas sales penetration, which is a much lower margin business and other parts of it is some of the other ancillary business were down a little bit as well.
2% reward was flat ex gas as I mentioned and other which was a excuse me, other which was a minus 5 year over year comparison, 5 basis point. Last year, we're incurring some incremental costs. Well, we have been as I mentioned last 2 quarters, we've been incurring some incremental costs primarily related to the rollout of our new centralized returns facilities. This will continue to impact us for 1 more quarter in Q4. In each of the prior two quarters, I'd mentioned on a kind of a sequential basis on a year over year Q1 it was we estimate it was about a 7 basis point negative impact in Q2 minus 6 and in Q3 minus 5.
And again there'll be some small detriment I assume in Q4 and then we'll have anniversary that. Moving to SG and A, Our SG and A percentage in Q3 year over year was lower or better by 32 basis points on a reported basis and ex gas inflation better or lower by 16 basis points coming in at a 9.98 percent of sales this year reported compared to 10.30% last year. Like with gross margin, I'll ask you to take the 2 columns. First one is reported Q3 2018 and the second column would be excluding the impact of gas 26 basis points on a reported basis and plus 13 basis points or lower than ex gas. Central, minus 1 and minus 3.
Stock compensation, plus 2 and plus 1. Other, plus 5 and plus 5. So as you add those two columns up, the first column would add up to the reported 32 basis point improvement in SG and A. And again, ex gas inflation, it would be plus 16 basis points. Basically, it's all about sales.
Core operations lower better, strong top line sales led to improvement in payroll benefits and other variable and fixed costs, generally speaking. Central expense was higher year over year, as you can see in the little chart we just made, by 1 basis point on a reported basis and 3 without gas, primarily related to our continuing IT efforts. Stock compensation, again, lower by a little, again, strong sales helped that. Other better by 5, that really nothing this year. It's last year we pointed out that there were 2 non recurring legal items in Q3 last year totaling $14,000,000 or 5 basis points.
And we didn't have any detriment related to that this year. Next on the income statement is preopening. Preopening this year came in at $8,000,000 lower by $7,000,000 from last year's $15,000,000 This year in Q3, as I mentioned, we had 2 openings, one in Mexico and one in Korea. Last year, we had 3 openings, 1 each in the U. S, Canada and Mexico.
Last year, in the number, we also had some additional spend in Q3 relating to the 4th quarter openings last year in France and Iceland. Upcoming in Q4 this year, we have 15 total openings, 13 net new units plus 2 relocations. That compares to 12 gross last year in the quarter. All told, reporting operating income in Q3 came in at $1,067,000,000 or up $99,000,000 or 10% higher than year over year than last year's $9.68 Below the operating income line, reported interest expense came in at $16,000,000 higher year over year at $37,000,000 this year. That compares to $21,000,000 a year ago.
That's mostly a result of last May's $3,800,000,000 debt offering that we did in conjunction with our special dividend. Interest income and other was higher or better year over year by $23,000,000 in the quarter. Actual interest income and mostly interest income for the quarter was better higher by $6,000,000 We also benefited Generally speaking, it's in the $0 to $15,000,000 range, but this one was plus 17. Overall, pretax income was higher by 11% or $106,000,000 in the quarter, coming in at $1,071,000,000 compared to last year's $965,000,000 In terms of income taxes, our tax rate in the Q3 this year came in at 28.8% compared to last year's reported tax rate of 26.8 percent. Now last year, of course, on a normalized basis, as I mentioned that we had that $82,000,000 tax benefit related to the special dividend, last year's normalized rate was 35.3 For fiscal 2019, based on our current estimates, which of course are always subject to change, we anticipate our effective total company tax rate for the entire year with the change in U.
S. Tax rates benefiting the entire year. The tax rate to be approximately 28% as we'll have the full fiscal year under the new U. S. Federal rates.
Before I leave the subject of tax law changes, I'll make a couple of comments on that in terms of what our plans are visavisavings. As I mentioned last quarter end, we don't really don't expect any major changes to our capital allocation plans. We generate good cash and pretty much do the things that we want to do in terms of expansion and in terms of regular dividend and in terms of some stock buybacks as well. As mentioned on last year's earnings call, we would where I said we would use some of the income tax savings in the U. S.
To benefit our U. S. Employees and that there will be increases in their hourly wage rates. Effective June 11, our U. S.
Starting wages will increase from $13.13.50 an hour to $14.14.50 an hour, so $1 an hour for entry level, with all other hourly warehouse employees receiving hourly increase of anywhere from $0.25 to $0.50 per hour. The estimated annualized cost of these increases that will impact about 130 +1000 employees in the United States will be $110,000,000 to $120,000,000 pretax with Q4 being impacted by a little more than $25,000,000 pretax. We have been investing next, we've been investing and we'll continue to invest some of the savings to drive our business. This will certainly include investing in price as well as other activities. Some of the tax savings will needless some of the tax savings this way will fall in the bottom line indirectly by investing and driving value in sales.
And then some of the tax savings will go straight to the bottom line. A few other items of note in terms of expansion, I mentioned we have 15 total openings scheduled for the upcoming 16 week fiscal Q4, which include 2 relos. So we'll have 13 net openings. That would put us at 21 net new openings for the fiscal year, 25 total less 4 relos. In Q1, we opened 7 locations net of 5.
In Q2, we opened 1. In Q3, as I mentioned, we opened 2. And for all of fiscal 2018, again, the 21 net new. Of those 21 net new, a little under 2 thirds of them will be in the U. S.
Additionally, for fiscal 2018, we'll relocate before all of those in the U. S. And those relocated to better and larger facilities. As of Q3 end, total warehouse square footage stood at 108,000,000 square feet. In terms of stock buybacks in Q3, dollars 55,000,000 was expended.
So Q3 year to date for the 36 weeks, we repurchased $233,000,000 worth of stock or 1,337,000 shares at an average price of $174.30 per share. In terms of our e commerce activities, e commerce, we currently operate e commerce sites in the U. S, Canada, U. K, Mexico, Korea and Taiwan. Total e commerce sales for the Q3 were up 37% year over year.
Again, that was the Q3 of 36.8 percent year to date 36.1 percent and for the 4 weeks of April, which we have previously reported, it was up 43 point 1%. We continue improving and slightly expanding our offerings. We've been helped, of course, by improved member service and better search and checkout and returns processes. But first and foremost, we're delivering greater value to members and more people are actually looking at it, opening their emails and transacting. This stuff works and we'll continue to see we believe to see some good results there.
In the Q3, our site traffic conversion rates and orders were continuing to improve year over year and again we would expect that to continue at least in the near term. Online grocery, both our dry grocery 2 day delivery and our same day fresh delivery through Instacart. Both of these were rolled out last October and continue to grow nicely. Still a small percentage of the total company, but growing and we're seeing good things from it, both in existing markets plus in some cases markets where an existing Costco might be a little further away. We continue to improve the online merchandise and services offerings with hot buys and buyer picks with buy online and pick up in the store, some limited big ticket items like jewelry, tablets and laptops and most recently handbags.
One other additional comment on that is we're seeing that plus or minus about half a little under a little over of those people will come in and shop as well before they pick up the item. Another example of how we're seeing some of the stuff benefit us, I've given examples in the past. Now it's online all 52 weeks and we're seeing good increases in sales there, incremental sales similar to our success in selling appliances that I've discussed in the past. Overall, all these efforts are positively impacting our business both online and in warehouse and are helping our sales momentum and increasing member awareness of our digital presence at the same time. We're seeing good traffic increases and hopefully we can continue these types of activities.
Overall, omni channel is certainly working to enhance and increase our business. One last example, we now have in 2 20 of our roughly 520 US locations, what I'll call e commerce product showcases and online ordering capabilities. All US locations will have something in place effect in place by this year's upcoming fall holiday season. In terms of upcoming releases, we will announce our May sales results for the 4 weeks ending June 3 next week on June 6 and our fiscal 2018 Q4 scheduled earnings release date for the 16 week Q4 ending September 2. This will be after the market closes on Thursday, October 4, with the earnings call that afternoon at 2 p.
M. Pacific Time. I do want to point out that last year fiscal Q4 was 17 weeks, this year it's 16 weeks. So keep that in mind as you plan the year numbers. As a reminder, last year's Q4 was 17 weeks as I mentioned.
With that, I'll open it up for Q and A. And Josh, I'll turn it back over to you for that.
Certainly. Your first question comes from Simon Gutman with Morgan Stanley. Your line is open.
Hey, Richard. My first question is on the gross margin. The core on core has been roughly flattish to down a little bit low single digits. I think you said down 4%. I know you don't guide to it, but I wanted to ask if that's roughly the ballpark that we should think about or is that a consequence of just how the margins of the business and the sales play out?
Starting with your first part of that question was, I know you don't want to comment on it. Look at the end of the day there's lots of moving parts to it. All I can tell you is we've been fortunate to have a few different buckets of monies to be able to do a lot of things, starting with the credit card transition, continuing with membership fee increase, continuing with the income tax and add a little to that some of the Sam's closings. All these things we're able to do. We feel very good about what we're doing.
And the other thing is as you've all heard over the years, when things are when costs are going up, we want to be the last to go up and when prices are going down, the costs are going down, we want to be the 1st to go down. When you look at some of the things that have happened, whether it's inflationary freight costs, those things generally are now in there, but we pride ourselves in holding off on some of those things. So I can't really tell you where we'll go with this other than we feel good about where we do it. Keep in mind also that some of this has to do with not just not core on core, but some of the penetration, the sales penetration of things like low margin gas. We feel really good about where we are pricing wise and where what we're doing with it in driving our business.
And the $110,000,000 to $120,000,000 of pretax wage investments, do you think about investment in price any differently or the 2 are unrelated in the way you manage the business?
I mean, there are well, there are 2. And keep in mind, given that the income tax changes were unique and don't happen every day, we certainly felt the right thing to do was to allow it certainly to help our employees as well as drive our business and improve the member value. I look at how we've done it, we feel pretty good about what we've done and where we're going with it. And we don't but we don't look at them, let's take a third, a third and a third. It's just how we're doing it.
And we want to we recognize that there's a lot of things to be able to do with it. And if you go back years ago, when I look at my comment on some of the fold in the bottom line, we view that as part of the process here too.
Okay. Thanks, Richard.
Your next question comes from Michael Lasser with UBS. Your line is open.
Good evening. Thanks a lot for taking my question. So when you look at the e com transactions, how are those impacting your profitability, both just the e commerce transaction itself and then those that are being picked up in store, because you said half of those include a shopping visit to the warehouse?
First of all, the buy online and shop in stores is some limited high ticket small size items where in many cases we find members would love to buy it, but didn't want couldn't have it delivered to where they work, didn't want to leave it on their doorstep. And what we found is, which we were a little surprised by is when they do come in, a lot of them come in and shop first and then pick it up and shop quite a bit frankly. It's a small piece of the business. We're not looking to have people come in and have to refrigerate stuff while order online and then we've got to have refrigerators and freezers filled waiting for them to come. These are limited areas where we think we can drive business and provide that member service.
And is it having an impact on your margin structure at this point?
No, not really. I mean, keep in mind, like a lot of companies out there, we're doing a lot of things. If you think about what we're doing with the 2 delivery things, there's some inefficiencies of starting it up and ramping it up and buying equipment for box making whatever else. We're not really talking about all these little things, but there's things there. But no, when we're doing some of the things, hot buys, some of that is our vendors and some of that is some of the monies that we have to be able to use.
As I mentioned before, I think that for every dollar that we have to use, we feel we get kind of a bigger bang for that buck than others simply because of limited targeted items.
And my follow-up question is this year's Q3 ended a week later into May and began a week later in February, so you probably got a higher volume week and gave up a lower volume week. Did that calendar shift effect have any impact on your sales and profitability in the 3rd quarter?
Not for the quarter,
no. Okay.
Thank you. Yes. Thank you.
Your next question comes from Chuck Graw with Gordon Haskett. Your line is open.
Hey, thanks Richard. On the digital front, any learnings so far from Costco Grocery in particular? Are you seeing a new shopper or is it an existing shopper that's making an incremental purchase? And then separately, can you remind us the SKU count online today and where you see it going forward?
On the last question, the SKU count, I think it's approaching 10,000. We don't see it getting a heck of a lot bigger. But you keep in mind over the last couple of years, we've added lots of what I'll call velocity items, food and sundries items, health and beauty items, some apparel items, which is getting people to open their emails, if you will, and think about coming back more often to take a look without us having to remind them. And so all those things, I think, we'll continue to see. And then I'm sorry, the first part of the question?
Just the Petrobras.
I don't know what we're seeing. It's really too early to tell. We clearly are getting some customers. In the case of the 2 day, which is dry and covers the entire continental United States, we are picking up some members that we never had before because we were 1500 miles away from the nearest physical Costco. And we're really just I talked to her last quarter about there's really been very limited marketing of that as we're just getting it up and running and rolling it out.
We there's and it's too early to tell what impact, if any, it has in terms of same day grocery. Historically, we saw in some early cases back to like in the Bay Area, which didn't offer fresh by the way, you saw perhaps somebody an existing member shop a few less times that year, but shop several times online, in some cases as fill ins and they're still coming in. And the sum of the 2 was still better a little better than it was before. I think we'll have to see. As you might expect, we're going to figure out how to do it.
So it's not it benefits us in some ways that I think we're fortunate that some traditional retailers don't have that same benefit.
Okay. Thank you. And then just on it's been a while since you've updated us on your long term club goals. Just curious where you see saturation, where you think you could see the club base looking out maybe 5 to 10 years?
Well, again, we'll have to see. I mean, 2021 this year is probably a few less than we had thought we would be able to get done. Some of that is a couple of delays. Some of it's international, it takes a little longer. Some of it is our conviction, particularly in some of the newer countries.
We want to grow people there. And as you know, if you look back at Japan, I think we got to 6 over the 1st 5 years. And fast forward several years, we're in the mid-20s. We got to 3 over 2.5 or 3 years 2.5 plus years in Australia. So I think you'll see those numbers go up.
If I had a guess and it's an honest educated guess, somewhere in the mid-20s over the next 5 years, probably a couple of year in business centers, 2 to 3, who knows. And in terms of U. S, on a base of 520 today in the U. S. Is somewhere in the $15 ish range for the next few years.
And logic would say maybe it comes down a little bit, maybe it's helped a little by business centers, we'll have to see. We still we keep finding and surprising ourselves as it relates to the ability to put another unit in and even getting somebody to cut their drive time, if you will, to the nearest cost flow from 30 to 15 minutes can be very meaningful as we've seen in places like San Jose and Redmond and other places. So we'll see.
Great. And then last question, just on the grosses. You said the core on core down 4%. Anything unusual in the quarter? Was there any mix pressure or any inventory issues given some of the weather?
And it sounds like most of the price investments have been proactive. Just wondering if you guys have done a deeper dive look into elasticity on some of those price investments?
Elasticity is not a word we will ever use or think about. We're merchants and we're constantly driving value. I think you've heard us say before, this is all about us who's our toughest competitor? It's us. And I think there was a little sales penetration detriment in the number that was part of that.
But again, there's lots of moving parts and pieces, not just the core on core, but other ancillary businesses. And again, I got to tell you, we feel pretty good about our pricing ability and our ability to drive the bottom line through good sales and the like.
Great. Thanks and good luck.
Your next question comes from John Heinbockel with Guggenheim Securities. Your line is open.
So Richard, a couple of things maybe along the lines of convenience. When you think about BOPIS inside the box, has been much thought about doing more items and maybe bulkier items that take up space, kind of get them out of the cart, pick them up on your way out? And if so, would that do you guys think that would lead to more items per shopping trip if people were kind of buying paper and beverage not in the box, but on the way out or in the lot?
The short answer is no. Okay. I mean, will there be some of things added to the buy online and pick up store? I'm sure there'll be a few other things, but it's not like we're saying, hey, what else can we do there? We're doing a little of that because the few things that we've done have worked.
But also take something as simply as bulk paper goods and bulk order. It's kind of like where is that located in the warehouse? Is it the back corner? What does that make you do? It goes makes you go through the whole warehouse.
It's not unlike having the fresh foods at a supermarket in the back as we do as well. So I think there's lots of different ways you can skin that cat and I don't see us doing a lot of that. I'm sure it will change and increase somewhat over time.
Okay. And then secondly, you think about I think in the past, maybe the topic of smaller box size comes up, but you've always liked the economics of the large club. So if you think about maybe a box that's half as big, more convenient, playing in the what's for dinner tonight space to a greater degree, does that ever become an attractive option for you or not just because the economics don't match the big box?
Well, I never say never, but it's not on the plate right now. I mean, it's not even on the 2nd page of the plate. So we feel we've got plenty going on in terms of regular sized boxes and big sized boxes, in terms of business centers, in terms of some vertical things that we're doing like in the fresh and the protein area, some more things going on with private label and with delivery. I mean, we've got a lot of good in our view, good things going on and pretty happy that there's plenty of regular sized box opportunities. Okay.
Thank you.
Your next question comes from the line of Karen Short with Barclays. Your line is open.
Hi, thanks. A couple of questions. I just want to clarify, I guess in terms of the tax dollars, you did say dollars would go to investing in price. So I guess the first question I have is asking about the gross margin a little differently. Was that something that maybe did tick up a little bit this quarter because you did mention fresh margins were down this quarter and I think they were up in the prior quarter Or should we kind of expect to see a little bit more pressure on the core gross margin going forward as you do take those tax dollars and invest?
Look, needless to say, I can't tell you where it will go in the future. What I can tell you is that it's not just the tax dollars, it's the credit card, it's the minimum fee increase, it's there's a lot of things going on out there. And we've been able, as freight costs have skyrocketed in the last year for everybody, to hold that a little bit? Absolutely. Ultimately, we've got to catch up on that, and we feel comfortable holding it and catching up at some point as we have.
And so I think we feel all I can tell you is we feel quite comfortable as to what we're doing and how we're doing it and that we feel very comfortable that we are our own toughest competitor and we control those valves a little bit at this point. We don't know what's going to happen in the future, but I don't think that's changing very quickly as we come up with new things to do.
Okay. And so I guess I was also wondering, I mean, obviously, you've had unbelievably strong sales now going on almost a year. But more recently, I guess, what I'm wondering is, do you think that the strength in sales is just a function of stronger not that you weren't executing before, but stronger execution and price points? Or do you think there is some benefit that you're seeing from a consumer perspective from tax dollars or tax reform dollars in their pockets? Do you have any color on that?
The only color we get as it relates to tax reform dollars is what we hear what you and I and others hear and read in the paper and hear from some economists. Certainly, we've heard from some of our business partners, whether it's the credit card issuers and networks or other types of third parties. And it seems like there's a little there, but it's hard to really dictate that. We know that pricing investing in price works. And we know that it tends to work generally very well such that even in working with suppliers, in some cases, we'll partner with them to get to that to this lower price point.
And as it drives more volume, not have to take on any of that ourselves. So there's lots of different ways to do this. But I think that one of the things that we've commented on, of course, is also some of the low hanging fruit and benefits that we have because of things we hadn't done historically. You look at the examples of appliances and look at the examples of furniture. Used to be if you wanted to buy a household furniture item, if you don't have a truck, go get 1 or call your friend because we don't deliver.
That's changed anyway. But even so, we're still doing very well in store for those 8 or 10 weeks in this example. But all of a sudden, we've got 40 plus more weeks where we're doing truly incremental business in the 100 of 1,000,000 of dollars and growing. Those are the things that I think that make us additional. It's not just price.
Price is in our price is at the top of our list. But beyond that, there's other things that I think are benefiting us. Certainly, fresh foods and what we've done there in terms of the quality and the consistency and coming up with new items.
Right. Okay. And then last question for me, just inflation at core and at retail this quarter?
Think on the food and sundry side, it's picked up a little bit. And again and talking to the buyers, a big chunk of that has to do with freight. And I think one of the analyst reports out there in the title is called freightening changes to costs. But at the end of the day, it rains on all of us. And I think on the Food and Beverage side, it was up in the 2% to 3% range and probably 2 thirds of X was more related to freight related costs.
And that's at cost or at retail or both?
That's at cost. Needless to say, if there's on 35%, 40% of your business, 200 or more cost basis and core on core is down 4%. Ultimately, you got to pass that on. And ultimately, we have some additional monies to be able to use towards that to be more competitive.
Okay. Thanks. Your next question comes from Peter Benedict with Baird. Your line is open.
Hi. Thanks, Richard. The move on wages, is that does that effectively pull forward what you might have done or was likely to happen, I guess, next spring when I think you guys are due for your next employment agreement?
If you look back over many, many years, we have a 3 year employee agreement. The last one was March of 'sixteen. So and the one important thing in there, of course, is where do our top of scale hourly employees move each March of 'seventeen, 'eighteen and 'nineteen. That's prescribed in that March of 'sixteen new employee agreement. And so and that's prescribed.
And historically, we've always done something atopic scale. I don't see that changing. We have once or twice moved the bottom of the scale up. We'll see where tomorrow brings. This probably won't be the last time, particularly, and so we'll have to see.
But we I don't we really looked at it independently of that. Ultimately, if you're going to do something and you're doing something now, it doesn't mean you're not going to do something on top of that next time. And again, I'm not trying to be coy. Expect whatever most people are going to do, we're going to do a little more.
No, that makes sense. A quick question on the competitive tone in the market. I mean, you just got done saying earlier that you're always your toughest competitor. But maybe can you comment on what you're seeing as you guys are looking at some of your competitors, whether it be club or non club, with all these tax dollars moving around? Are you noticing them being sharper in any areas?
I honestly believe while there's been some I think all companies, not just in retail tend to I'm sure many companies feel that, one, there's a desire to use some of this to help employees, to share that wealth, if you will, to drive their business. I don't think it's been life changing for any company in the sense that one of the questions we were asked right after the announcement, we said that on an annualized basis next year, if you do simple math, roughly 7 percentage points of our effective rate from the 35 ish to the 28 ish. You take the pre tax dollars, it's some low $300,000,000 ish after tax benefit. And somebody asked a question, well, does that mean you might do a special dividend? Well, our special dividends, the 3 that we've ever done, are in the $2,000,000,000 to $3,000,000,000 cost range.
So this really doesn't change anything there. We're already generating cash flow to do our things and maybe we're in the higher quartile than we will position financially. But I think overall, I think because my gut and from what I've read, does it help the consumer? Sure, it helps consumers. Some of the consumers as employees are benefiting from it and all that's good.
Certainly, competition in general is benefiting consumers in terms of pricing. We feel fortunate that, that pricing mode continues to widen to our benefit.
Okay. Thanks for that. My last question is just around the executive membership numbers. Those were growing, call it, high single digits in the past, even last year. This year, they're starting to grow more like mid single, some deceleration there.
Can you just talk about maybe the opportunity to continue to grow executive membership here in the U. S? And then thoughts on maybe when you could be adding that to some newer markets internationally? Thank you.
Sure. Well, in terms of total membership, we feel again pretty good about it. Part of it depends on when you're opening and where you're opening. In the last couple of quarters, we've opened 3 units, I think, in the last two quarters. We got a bunch coming.
It also depends where you're opening. As you know, and I've given examples of where we've done an infill in a very strong market like San Jose area or Redwood, Washington area near Seattle, we might average in 3 existing locations, 60,000 or 65,000 members per building, add only 3000 to 5000 new members in that new building, but add net of cannibalization $100,000,000 to $120,000,000 of annual sales in the 1st new year 1st 12 months of that new opening. And so that is all about being close to your customer and driving more business. I don't what was the first part of the question again?
Well, just how much more opportunity and then internationally?
I'm sorry. The other thing is, as we've said and you're aware of, in international, we tend to do outsized number of sign ups. Again, there hasn't been as many right now. Lastly, I mean, we've done, I think, in the past 3 or 4, lending social or Groupon type activities. And they work quite well, so well that we don't want everybody to get used to it.
So we don't do them that often. We actually just started one yesterday for a 2 week period. And so that will help a little bit this quarter as well opening 13 or whatever number of new units as well opening a couple of more international ones. So all those things, when we look at one of the questions we've been asked the last couple of quarters was membership new membership growth has slowed a little bit. When you look at existing warehouses, net of cannibalization, take out all the cannibalizing those units that were new and the ones that those new ones cannibalize in those markets.
We're still seeing a number in terms of member growth for warehouse in the high 3s, mid to high 3s, I believe, 3.7%, 3.8%. I think it was 4, 6 months ago. So that certainly gives us confidence and we think that should give you. In terms of executive, I think on a weekly basis, forever, it seemed like it was like 20,000 a week, 22,000 a week. I think there are a couple of quarters where it was in the mid teens or maybe even low double digits.
So it's come back from that to 'nineteen. In terms of some of that is ultimately you do saturate a little bit, but part of it also in terms of new countries, we currently offer it in U. S, Canada, U. K, and Mexico. And I think if you just looked at simply how many units we have in each of those markets, certainly Mexico and U.
S. Is not an issue. We're in the low to mid-30s in the U. K. And in the low to mid-30s in Mexico.
And part of that is a unique kind of a critical base because of the services that you offer that also is not just a 2% reward, it's the services you offer for it. I would guess that you'll see it in other countries and that will help a little bit in terms of driving that. But probably more of it will come from us driving the executive, the value of it. We've seen some improvement when people realize that, hey, if I sign up for the executive member card and I sign up for the co brand Citi Visa card, that's not only the 2% from Costco, but the 2% from the average of whatever it is from City of Visa. And if I buy a TV that way, it's a 4 year warranty, not a 2 year warranty.
So all those things get people to car business. I mean, last year, we represented over 500,000 new car sales. And if you're an executive member, in some of those marketing items, you got a cash card that was a few $100 more than if you were a Gold Star member. You can rest assured that there were people that converted for that reason. And once they did, they start to look at the other benefits of it.
So all those things help. We do a better job when you sign up of getting you to sign up as an executive as best we can. Okay. Thanks so much, Richard.
Your next question comes from Kate McShane with Citi. Your line is open.
Hi. Thank you for taking my question. I know this has been asked a couple of times, but I just want to ask it maybe in a little bit different way. But with the level of cash that has come in from the membership increases and the tax reform, do you think your price result in greater GAAP historically given the amount that you've been able to invest?
I think they have. I mean, on a general picture, if you look at just the traditional grocery industry, there's more competition generally out there. And have others come down in certain pricing? I think a little. Have we come down more?
Yes. This is an old statistic, but I remember looking at traditional grocery markups and recognize that there's been some product additions that are higher margin items, specialty items to supermarket industry over time. But over 20 years, this goes back a few years ago, so 5 years ago and 25 years ago or whatever, it seemed like generally speaking, the grocery industry was going from markups that had been in the very high teens or low 20s to the mid and high 20s and the big home improvement companies had gone from the high 20s to the mid-30s. And what is our gross margin and our market done? It's gone up from 10% to 12 And in fact, it's gone up from 10% to 12% despite the fact and some of that is it's not despite that, some of that is some higher margin businesses like travel, which has very little cost of sales or some of the ancillary businesses like pharmacy and optical that have very little
cost of sales, so relatively speaking. It has
cost sales but higher markup to cover the cost of pharmacists and optometrists or so what have you. So I think when all said and done in our view just looking at the pricing gap, we've gotten stronger. And I think we get a little more kick out of a dollar used in certain ways than perhaps others do. We're fortunate in that regard.
Okay, great. Thanks. And my second question was just on profitability or for France the newer stores in France and Spain to be profitable?
Yes. I think at the store level in Spain, we're there We're pretty much there or very close. And mind you, we charge we own many of these locations around the world around 80% of our locations. We charge at a higher than current market rent factor internally just to have everything and look at all warehouses on the same schedule. I'm talking about after that imputed rent factor as well.
But on a store contribution level, yes. France is brand new. Iceland is a unique brand new in the last couple of years. Iceland is unique because it's just been a great market for us. So it's done better than planned.
The others are pretty much have been planned. We if I go back again a number of years ago, our original budget in Japan, this 20 years ago, was to open 5 units in 5 years and be breakeven or start profitability towards the end of year 5 or early 6. We ended up opening 6, and I think we were profitable near the end of right before the end of year 4. These are rough numbers. But at the end of the day, that includes the cost of a central operation that's not going to grow as you go from 2 units to 10 units in the market, it's going to grow a lot less than fivefold and the preopening cost of a new unit and then the fact that you're also building your business.
When you start with a slow volume building as expected in some new countries, not all new countries, you're pricing your fresh foods as if you're doing a lot more business and you know you're going to have in some cases very low or negative gross margins sometimes in those. So I think the timeline we're patient. We're also not going into any market and trying to get 10 or 20 openings in 1 year or 2 years. And so it's I think we've done a decent job of balancing that process.
That's very helpful. Thank you.
Your next question comes from Dan Binder with Jefferies. Your line is open.
Thanks, Dan Binder. I had a couple of questions. First was on
Dan, thank you. Jeffrey, your line is open. Your next question comes from Chuck Ceramicoy from Northcoast Research. Josh,
Josh? Josh?
Can you hear me, Josh? Josh? This is good. Chuck Cerrowe
from Northcoast Research. Your line is open.
Josh?
Richard, I can hear you. This is Chuck Cerrowein Koski.
Your next question comes from Laura Champine from Loop Capital. Your line is now open.
Somebody called in. Hold on, we're having a problem with the party here. But Chuck, why don't you go because my guess is everybody else can hear us.
I'm not sure he's on. It's Laura Champine. Which one of us can you hear?
I can hear Laura now. So we're going to I'll ask you a little bit hold for a bit. Thank you. Thank you. Thank you.
Thank you.
Thank you. Thank you. Your line is open.
Just one second.
Kelly Ganyad, your line is open.
Hi, Richard. It's Kelly. Can you hear me? Should I go ahead or do you want to start back?
I would wait because I don't think Josh can hear you.
Sure. No problem.
Sorry, I can hear you now.
Hi, there. Josh, why don't we go back? There are a few people that Chuck Serankowski and Dan, I think Dan Bender was the first one that did not Dan Miner is the first one that you couldn't hear, but we could hear. So can we go
back to you? So you just have to get them to requeue up and I'll promote them again.
Okay. Thank you. So go ahead. You're welcome. I'll put it back to you, Josh.
Who's next?
I'm sorry. This is Kelly Dania from B and O Capital. Okay. Okay. Thanks.
Thanks, Richard.
Just wanted to first ask on quickly on gas. Did you clarify the impact from just the mix of higher gas prices versus the actual gas margins?
We didn't. Margins in terms of dollars, margins were down and we made it up in volume. And so profitability was pretty even year over year.
Got it. Okay. And then just also wanted to go back to the comments on the food and sundries inflation, the cost inflation, I guess that's freight driven. Are you seeing an acceleration in that? Are you not quite passing all of that along?
Do you see your competitors passing along? Do you see that kind of accelerating as more of these vendors that maybe are feeling it are starting to push that through?
Well, I think a general comment would be is whatever input cost input item is inflationary, we're going to hold off longer than others. But ultimately, you got to do it. And we, like any other retailer, would push back with the vendor and try to figure out smarter ways to do things. And but overall, I it's a small delay. Don't we're noble, but we're not crazy.
I guess, do you think I mean, do you think this could result in some just broader food inflation over the next several quarters that just we haven't seen in all
of that? I think you'll see that generally. I mean, if costs are up 2% to 3%, input costs on the food and sundry side, a big chunk of that is freight related. Ultimately, that's going to compel. Now some of that will also compel to private label in some cases.
In our case, we generally see this as a positive because we can be a little tougher on pricing in terms of being and being more competitive.
Got it. And then just one more on the online grocery, the non perishables offering.
Hold on. Can I interrupt you for one second? Josh?
Yes.
We had a couple of calls externally here that's people in our office that are they cannot hear the call all of a sudden. So while we continue here, can you check to see what's going on there?
Certainly. Not a problem. I'll look into that for you.
Okay. Thank you. Go ahead. I'm sorry.
Okay. I'll ask one more maybe while others are getting back in queue. Just on the non perishables offering, how do you feel about the process of fulfilling those and scaling that over time? Do you think you need any more any sort of automation technology to fulfill those orders and make that profitable longer term? Or are you happy with the way that that process is working?
Well, first
of all, this stuff is profitable. It's small and it's growing nicely. But it's we have capacity within our business centers, which are already set up to do buy online and actually deliver. This way is just you had to buy some box making machinery. And the good news for us is that we feel that either yes, ultimately, God willing, we'll have to build new facilities for additional facilities for this.
Just like when we started, we had one e commerce fulfillment facility in Mira Loma that covered the whole country years ago. And so, yes, there's a trade off. But I think that, a, we feel very good about how we're doing it, that we can be profitable almost from the start, other than things we're doing to invest and driving the business and marketing and things. And it will be fine. Again, I think we're fortunate in that regard with so few items, it's a lot easier to do these things.
Thank you. Your next question comes from Dan Binder with Jefferies. Your line is open.
Hi, it's Dan Binder. Thanks. Thanks Richard for getting me back in the queue there. I had two questions. First was on the benefit that you're seeing in clubs where you've had competitor closings.
Obviously, there were a lot. So I'm just curious what you're seeing in terms of the comps benefit and the membership benefit. And my second question was around price investment, little bit different angle. Just trying to understand more about couponing versus everyday low price. I think it was probably a year or so, maybe a little over a year ago where you had backed off, I think, on the vendor items a little bit and that hurt the comps and then you kind of brought it back.
I'm just curious as you think about price investment going forward, will it be more through the vendor mailer or more through EDLP? Well, first of all,
if you go if we go back just to clarify one thing, if we go back to it was Q2 of last year when it was a little disappointing and a lot of it had to do with the stuff that we did to change the MDM and take some items and test with vendors everyday low pricing and some greater values but still be at the table in the MVM, maybe a few hot picks as well. More of the offset to that that we didn't anticipate from a negative standpoint was fewer MVM days. So if you went down, I think it was the 4 week reporting month of February of 'seventeen, 28 days, we had 8 less MVM days. The MVM items themselves did as expected, more lift, more value to the member and less gross margin per item, but more gross margin dollars to us. So that worked nice.
But by having those significantly fewer days of having something that is a promotional thing that gets members in the door, and we've changed that. It took us 2 months to change that. And since then, that's been fine. And of course, it's gotten better than that since then. I don't think there's any magic.
If there were an exact formula that we knew, we wouldn't tell anybody. But at the end of the day, we keep trying different things with different vendors and see what works and doesn't. I think we have kind of settled on a mix that includes all of the above, and we'll keep trying to figure out how to drive that in different ways. So again, I don't see there's a big shift. The shift was over a couple of years perhaps leading up to February of 2018 or the late calendar 2016 was over 20 years, some of the stuff gets some of the sales lift of an item gets a little less.
People are waiting for that regular thing every twice a year for 3 weeks, waiting. And so, A, the values have to be greater to drive more lift and B, you got to shake it up a little bit. And I think it's the good news is work with vendors. We're not just forcing vendors to try something try one thing versus another. We're working with our vendors hopefully that do well for both of us and to even partner with them when there's a little indigestion on how much additional savings so we can show them the type of unit lift that will be that will generate.
And sometimes that works and sometimes it doesn't.
And then with regard to benefit you're seeing in membership and comps for Neighbor and Clubs, were there was a competitor closing?
A little bit. I think our estimate was when people asked with the Sam's Club's closing, how about that impact us? First of all, some of those closings were a couple of 3 Sam's closings in the existing Sam's market. So they were just adding a lot of those sales to other units they already had. Our view was as we get 10% to 20% of it, and we have, of what we guessed their sales would be.
Some of it is not our member, some of it it's we're too far away from that member, maybe that was on the other it was 10 miles from the other side of the existing Sam's Club and we're 10 miles the other way. So now it's 20 miles. It's just too far. In some cases, the business went to another existing TAMs in the market. We definitely saw some benefit in membership, number of members.
Again, not huge, but certainly helps and
Your next question comes from Chuck Siermanicali with Northcoast Research. Your line is open.
Hi, Richard. I want a little update on food manufacturing projects you have underway, the construction, where is that at? And then I want to ask you another question about the online.
I'm sorry, ask that first question again.
You've got a couple of food plants under construction. Where are we at on those and the expected opening dates?
Well, the bakery commissary in Canada is open and running. We need to say it will take a year plus to get it to increase capacity and everything, but that's going as planned. Our chicken plant in Nebraska is a year and a half away, a year plus. It's under construction, But it's and it's on plans relative term in terms we know it's going to take a year plus to get there, but it's doing fine. Anything else, guys?
Morris meat plant. We opened outside of Chicago in Morris, Illinois, a second meat plant, basically a sister plant, if you will, of the one in Tracy, California that we've had forever. And the good news there is the Tracy one along with the added capacity of the hotdog plant at the same property location or at capacity basically and we've been able to push that over. Okay. And you mentioned before
you get 10,000 SKUs online. Is that the count all the time? And then when you look at how you remerchandise the online assortment over the course of the year, how often are you changing that? It seems like the e mail and promotional activity picked up. But what is the cadence to refresh the mix and assortment that you have?
Well, look, I think it's A, it's not unlike in warehouse. The exception is, of course, online. We want to be a little resistant to just climbing it because it's virtual and it's easy because it still adds cost. We've added velocity items. We've added sundries and some shelf stable items and through the delivery, that's another avenue as well.
I think it will ebb and flow. Don't expect any great change to what you see now other than a constant evolution of that. The other thing is in some cases there's products and vendors that will sell us online that weren't prepared to sell us certain things in store. And sometimes you have to be a member to get to the price online at Costco, which is fine. Our member understands that and they're going to go see it.
All right. Thank you. I'm going to take 2 more questions.
Your next question comes from Laura Champine with Loop Capital. Your line is open.
Great. Thanks for taking my question. It's on the private label business. I mean, obviously, a lot of clubs have been streamlining the number of brands they offer. Kirkland is used almost throughout Costco, but there are some other brands like the Charisma in some of the textiles.
Why not go for Kirkland across the board? And do you have goals on how much of your sales you'd like to drive through that private label brand?
Unfortunately, our head merchant is traveling to an opening today in California or is at an opening today in California. I'm not sure in my mind, Kirkland Signature is it. To the extent there's a brand called Charisma, but it's not our brand. I don't know, it's not that way, it's not our brand. Now maybe it's a brand that's not as well known as others, but that's not our brand.
Crystal Stanger is the only brand you're going to see at Costco. Got it. As it relates to how much, gas is under Kirkland Signature label, but excluding that, which is 10 plus percent of our sales, it's about 25% 24 plus percent of our sales. Where do we want it to go? I don't know where we want it to go.
Will it increase? Yes. Years ago, I said, well, you'll never see it on this and then now it's on that. But at the end of the day, we still want brands and we still covet and our members certainly value brands as well. And in our view, it enhances our brand value.
But does the 24 keep increasing to the 25% and 26% and 27%, I'm sure it will, but I can't tell you how long that will take.
Your last question comes from Brian Nagel with Oppenheimer. Your line is open.
Hey, Richard. It's David Bellinger on. Just a couple of quick questions. Can you talk about regional performance in the quarter? So any weather impact on traffic that you can call out specifically?
Was there any improvement towards the end of the quarter?
There weren't a lot of weather related comments in the budget meeting. Hold on, I'm just looking real quick. It was a little it really wasn't that impactful to us. Okay. And I'll just follow-up on margins
as well. It seems that the major drag came from the higher gas prices this quarter. But can you help us frame what percentage of sales gas represented this quarter? I know you just mentioned it was on an annual basis, it's like above 10%. But if you don't want to get too specific, can you just give us some indication how that's changed over the past few quarters and how that impacted here in Q3?
Yes. We really don't go into that level of detail. Generally speaking, when gas prices go up, we make a little less margin. When they go down, we make more margin. Happy that they went down yesterday a little bit.
But at the end of the day, it's been a good business for us in its own right as well as driving business into our warehouses. It's about 10% by the way, it's about 10% to 12% of our business. And the thing that we like to see is, is when you have total U. S. Gallon gas consumption as a country everywhere be up in the very, very low single digits, our gallon increases are in the very, very high single digits or very, very low double digits.
And so that's meaningful. It means that more people are coming into our place. And when about half of them come into shop, you don't need more than 1 or 2 of those, 50 out of every 100 to be somewhat of an incremental shop to be meaningful to our company on an ongoing basis. Aside from the business itself, having a little strong summer colliding based on the volatility sometime day to day and week to week, but profitably. But overall, it's been a good business in its own right.
We're all around guys and feel free to call with any additional questions and we'll be here tomorrow as well. Thank you.
This concludes today's conference call. You may now disconnect.