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 speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, please press star, then the number one on your telephone keypad. If you would like to withdraw your question, press the pound key. Thank you. Mr. Richard Galanti, CFO, you may begin your conference.
Thank you, Josh, 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, 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, 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 third quarter of fiscal 2018, the 12 weeks that ended on May 13th.
Net income for the quarter was $750 million, or $1.70 per share. That compared to $700 million or $1.59 per share last year in the third quarter. Last year in the third quarter, net income was positively impacted by an $82 million or +$0.19 per share tax benefit, That was in connection with a $7 per share special cash dividend that we had done at the time. I'll start by reviewing our third quarter operating results Then allow some time, of course, for Q&A. In terms of sales, net sales for the quarter came in at $31.62 billion, or a 12.1% increase over last year's third quarter sales of $28.22 billion. Net sales for the first 36 weeks of fiscal 2018 increased 12.0% to $95.02 billion, up from $84.82 billion last year for the first three 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 at 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%, Ex gas inflation and FX impact was up 4.8%. Other international reported at 11.8%, ex gas inflation and FX, 5.8%. 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. That continues strong. Similar statistics in the press release for the 36 weeks year to date. In terms of third quarter sales metrics, third quarter traffic or shopping frequency was up 5.1%, 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've 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 to $737 million, up $93 million from $644 million during Q3 of last year, or up 14.4%. The benefit of strong foreign currencies was about $9 million of that $93 million increase. So ex that, it would have been up $84 million.
Of the $93 million increase year-over-year, a little over half related to the membership fee increases we have taken in the last year and a half, the majority of which came from the $5 and $10 annual fee increases taken last June 1st in the U.S. and Canada. There's 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 1st of 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'll peak in Q4 this coming quarter, the 16-week quarter, and then still year-over-year increases, but at least three, maybe four of the all of next year in fiscal 2019 as well. In terms of membership fee renewal rates, our U.S. and Canada member renewal rates at Q3 end came in at were 90.1%, similar to where they stood a quarter earlier at 90.1%. A slight uptick, but still rounding to the 90.1%. Worldwide rates improved to 87.5%, up from 87.3% 12 weeks ago at Q2 end, with the uptick in renewal rates in 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 50.4 million, and 12 weeks later, at the end of Q3, it then stood at 50.9 million.
Total cardholders, 92.2 million a quarter ago, 12 weeks ago, and at Q3 end, 93.0 million. During the fiscal quarter, we had two new openings. Also at Q3 end, as of Q3 end, our paid executive member base stood at 19.0 million households. That's an increase of 199,000 households from 12 weeks earlier, 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, as I mentioned, will continue to benefit both Q4 and into several quarters next year, but on a diminished amount each year-over-year quarter. Going down to the gross margin line, our reported gross margin third quarter was lower year-over-year by 46 basis points, coming in at 11.05% during the third quarter of fiscal 2018 compared to 11.51%.
That minus 46 basis point figure year-over-year on a reported basis, excluding gas inflation, it would've been minus 28. 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 five line items, the 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 six ex gas inflation. 2% reward, plus two as reported and flat without gas inflation. Other, minus five and minus five, and I'll talk about that in a second.
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. 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 four basis points. Sub-categories within core gross margin year-over-year in Q3, food and sundries was up slightly and hard lines, soft lines, and fresh foods, the other three components of core, were down just slightly. The slightly year-over-year core on core gross margin third 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 six 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 businesses were down a little bit as well. 2% reward was flat ex gas, as I mentioned, and other, which was a minus five year-over-year comparison, 5 basis point. Last year we were incurring some incremental costs. As I mentioned, the last two 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 one more quarter in Q4. In each of the prior two quarters, I'd mentioned on a sequential basis on a year-over-year Q1, we estimate it was about a 7 basis point negative impact. In Q2, minus six, and in Q3, minus five.
Again, there'll be some small detriment, I assume, in Q4, and then we'll have anniversary that. Moving to SG&A. Our SG&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% of sales this year reported compared to 10.30 last year. Like with gross margin, I'll ask you to take the two columns. First one's reported Q3 2018, and the second column would be excluding the impact of gas inflation for Q3 2018. First one, operations, better or plus 26 basis points on a reported basis and plus 13 basis points or lower in ex gas. Central, minus one and minus three. Stock compensation, plus two and plus one. Other, plus five and plus five.
If you add those two columns up, the first column would add up to the reported 32 basis point improvement in SG&A. Again, ex gas inflation, it would be +16 basis points. Basically, it's all about sales. Core operations lower or 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 one basis point on a reported basis and three without gas, primarily related to our continuing IT efforts. Stock compensation, again, lower by a little. Again, strong sales helped that. Other, better by five. That really is nothing this year. It's last year we pointed out that there were two non-recurring legal items in Q3 last year totaling $14 million or five basis points.
We didn't have any detriment related to that this year. Next on the income statement is pre-opening. Pre-opening this year came in at $8 million, lower by $7 million from last year's $15 million. This year in Q3, as I mentioned, we had two openings, one in Mexico and one in Korea. Last year we had three openings, one each in the U.S., Canada, and Mexico. Last year in the number, we also had some additional spend in Q3 relating to the fourth quarter openings last year in France and Iceland. Upcoming in Q4 this year, we have 15 total openings, 13 net new units plus two relocations. That compares to 12 gross and net locations last year in the quarter. All told, reported operating income in Q3 came in at $1.067 billion or up $99 million or 10% higher year-over-year than last year's $968 million.
Below the operating income line, reported interest expense came in at $16 million higher year-over-year at $37 million this year. That compares to $21 million a year ago. That's mostly a result of last May's $3.8 billion debt offering that we did in conjunction with our special dividend. Interest income and other was higher or better year-over-year by $23 million in the quarter. Actual interest income and mostly interest income for the quarter was better or higher by $6 million. We also benefited year-over-year comparison by various FX items to the tune of $17 million. That's the number that fluctuates both ways. Generally speaking, it's in the $0-$15 million range. This one was +17. Overall, pre-tax income was higher by 11% or $106 million in the quarter, coming in at $1.071 billion, compared to last year's $965 million.
In terms of income taxes, our tax rate in the third quarter this year came in at 28.8% compared to last year's reported tax rate of 26.8%. Last year, of course, on a normalized basis, as I mentioned that we had that $82 million 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 vis-à-vis these savings.
As I've mentioned last quarter-end, we 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 stock buybacks as well. As mentioned on last year's earnings call, 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 11th, our U.S. starting wages will increase from $13 and $13.50 an hour to $14 and $14.50 an hour. So a $1 an hour for entry level, with all other hourly warehouse employees receiving hourly increase of anywhere from $0.25-$0.50 per hour.
The estimated annualized cost of these increases, that will impact about 130,000+ employees in the United States, will be $110 million-$120 million pre-tax, with Q4 being impacted by a little more than $25 million pre-tax. Next, we have been investing and will 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 this way will fall to the bottom line indirectly by investing in driving value and 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 fourth quarter, which include two relos. So we'll have 13 net openings.
That would put us at 21 net new openings for the fiscal year, 25 total, less four relos. In Q1, we opened seven locations, net of five. In Q2, we opened one. In Q3, as I mentioned, we opened two. And for all of fiscal 2018, again, the 21 net new. Of those 21 net new, a little under two-thirds of them will be in the U.S. Additionally, for fiscal 2018, we'll relocate the four, 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 million sq ft. In terms of stock buybacks in Q3, $55 million was expended. So Q3 year-to-date for the 36 weeks, we repurchased $233 million worth of stock, or 1.337 million shares at an average price of $174.30 per share.
In terms of our e-commerce activities, we currently operate e-commerce sites in the U.S., Canada, U.K., Mexico, Korea, and Taiwan. Total e-commerce sales for the third quarter were up 37% year-over-year. Again, that was the Q3 of 36.8%, year-to-date 36.1%. And for the four weeks of April, which we had previously reported, it was up 43.1%. 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 looking at it, opening their emails, and transacting. This stuff works and we believe to see some good results there. In the third quarter, our site traffic, conversion rates, and orders were continuing to improve year-over-year.
Again, we would expect that to continue, at least in the near term. Online grocery, both our dry grocery two-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 Buyers' Picks with buy online and pick up in 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 this stuff benefit us, and I've given examples in the past. Most recent probably good example is household furniture. Historically, this was only in the warehouse and generally for eight or so weeks per year. 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 220 of our roughly 520 U.S. locations, what I'll call e-commerce product showcases and online ordering capabilities. All U.S. locations will have something in place by this year's upcoming fall holiday season. In terms of upcoming releases, we will announce our May sales results for the four weeks ending June 3rd, next week on June 6th, and our fiscal 2018 fourth quarter scheduled earnings release date for the 16-week fourth quarter ending September 2nd. This will be after the market closes on Thursday, October 4th, with the earnings call that afternoon at 2:00 P.M. Pacific Time. I do want to point out that last year, fiscal fourth quarter was 17 weeks. This year, it's 16 weeks.
Keep that in mind as you plan your numbers. As a reminder, last year's fourth quarter was 17 weeks, as I mentioned. With that, I'll open it up for Q&A. Josh, I'll turn it back over to you for that.
Certainly. At this time, if you'd like to ask a question, please press star, then the number one on your telephone keypad. Your first question comes from Simeon 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 four. 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?
Well, starting with the 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 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. The other thing is, as you've all heard over the years, when costs are going up, we want to be the last to go up, and when prices are going down, costs are going down, we want to be the first 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. I can't really tell you where we'll go with this other than we feel good about where we're doing. Keep in mind also that some of this has to do with not core on core, but some of the sales penetration of things like low margin gas. We feel really good about where we are pricing wise and what we're doing with it and driving our business.
The $110-$120 of pre-tax wage investments, do you think about investment and price any differently, or the two are unrelated in the way you manage the business?
Well, they're two. 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. We don't look at them, let's take a third, a third, and a third. It's just this is how we're doing it. We recognize that there's a lot of things to be able to do with it. If you go back years ago, when I look at my comment on some of it will fall to 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. 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 couldn't have it delivered to where they work, didn't want to leave it on their doorstep. 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, 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.
Is it having an impact on your margin structure at this point?
No, not really. 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 two 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. No, when we're doing some of the things, Hot Buys, some of that is our vendors, 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 $1 that we have to use, we feel we get a bigger bang for that buck than others, simply because of limited targeted items.
My follow-up question is, this year's third quarter ended a week later into May and began a week later in February. 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 third quarter?
Not for the quarter, no.
Okay. Thank you.
It was Q1. Yeah. Thank you.
Your next question comes from Chuck Grom 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? Separately, can you remind us the SKU count online today, and where you see it going forward?
Well, 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 aid 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. All those things I think we'll continue to see. I'm sorry, the first part of the question?
Just the type of shopper-
Oh, the shopping part. It's really too early to tell. We clearly are getting some customers. In the case of the two-day, which is dry, it covers the entire continental U.S. Yeah, we are picking up some members that we never had before because we were 1,500 miles away from the nearest physical Costco. I talked at the last end of the 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. 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 in the Bay Area, which didn't offer fresh, by the way. You saw perhaps an existing member shop a few less times that year, but shop several times online.
In some cases, it's fill-ins, and they're still coming in. The sum of the two was still 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 benefits us in some ways that I think we're fortunate that some traditional retailers don't have that same benefit.
Okay, thank you. 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 five to 10 years.
Well, again, we'll have to see. 21 this year is probably a few less than we had thought we were going to 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. As you know, if you look back at Japan, I think we got to six over the first five years, fast-forward several years, we're in the mid high 20s. We got to three over two and a half or three years, two and a half plus years in Australia. I think you'll see those numbers go up.
If I had to guess, and it's an honest educated guess, somewhere in the mid-20s over the next 5 years, probably a couple a year in business centers. Two to three, who knows? 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. Logic would say maybe it comes down a little bit, maybe it's up a little by business centers. We'll have to see. 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 Costco from 30 to 15 minutes can be very meaningful, as we've seen in places like San Jose and Redmond and other places. We'll see.
Great. Last question, just on the grosses. You said the core-on-core down four. Anything unusual in the quarter? Was there any mixed pressure or any inventory issues given some of the weather? 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, 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. I think there was a little sales penetration detriment in the number that was part of that. Again, there's lots of moving parts and pieces, not just the core-on-core, but other ancillary businesses. 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.
Richard, a couple of things maybe along the lines of convenience. When you think about BOPUS inside the box, has there been much thought about doing more items and maybe bulkier items that take up space, get them out of the cart, pick them up on your way out? If so, do you guys think that would lead to more items per shopping trip if people were buying paper and beverage not in the box, but on the way out or in the lot?
The short answer is no.
Okay.
Will there be some things added to the buy online and pick up in store? I'm sure there'll be a few other things, 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. Also, take something as simply as bulk paper goods and bulk water. It's like, where is that located in the warehouses? At the back corner. What does that make you do? Makes you go through the whole warehouse. Not unlike having the fresh foods at a supermarket in the back, as we do as well. 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'll change and increase somewhat over time.
Okay. Secondly, I think in the past, maybe the topic of smaller box size comes up. You've always liked the economics of the large club. 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, never say never, but it's not on the plate right now. It's not even on the second page of the plate. We feel we've got plenty going on, in terms of regular size boxes and big size 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, with delivery. We've got a lot of good, in our view, good things going on, and pretty happy that there's plenty of regular size 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 questions. I just want to clarify, I guess, in terms of the tax dollars. You did say dollars would go to investing in price. 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? You did mention fresh margins were down this quarter, and I think they were up in the prior quarter. Should we expect to see a little bit more pressure on the core gross margin going forward as you do take those tax dollars and invest?
Need to say, I can't tell you where it'll go in the future. I can tell you is that it's not just the tax dollars, it's the credit card, it's the fee increase. There's a lot of things going on out there. Have we 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. We feel comfortable holding it and catching up at some point, as we have. I think 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, I don't think that's changing very quickly as we come up with new things to do.
Okay. I guess I was also wondering, obviously, you've had unbelievably strong sales now going on almost a year. 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, 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 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. It seems like there's a little there, but it's hard to really dictate that. We know that investing in price works. 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 this lower price point. As it drives more volume, not have to take on any of that ourselves. There's lots of different ways to do this.
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 one or call your friend because we don't deliver. That's changed anyway. Even so, we're still doing very well in store for those 8 or 10 weeks in this example. All of a sudden, we've got 40-plus more weeks where we're doing truly incremental business in the hundreds of millions of dollars and growing. Those are the things that I think that make us additional. It's not just price. Price is at the top of our list.
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, last question for me, just inflation at core and at retail this quarter?
I think on the food and sundry side, it's picked up a little bit. Again, in talking to the buyers, a big chunk of that has to do with freight. I think one of the analyst reports out there, the title is called "Frightening Changes to Costs." At the end of the day, it rains on all of us. I think on the food center side, it was up in the 2%-3% range, and probably two-thirds of X was more related to the freight-related costs.
That's at cost or at retail or both?
That's at cost. These will say if there's on 35%-40% of your business, $200 or more cost basis and core on core is down four. Ultimately, you got to pass that on. 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, 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 three-year employee agreement. The last one was March of 2016. The one important thing in there, of course, is where do our top-of-scale hourly employees move each March of 2017, 2018, and 2019. That's prescribed in that March of 2016 new employee agreement. That's prescribed. Historically, we've always done something at top of 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, so we'll have to see. 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. Again, I'm not trying to be coy.
Expect whatever most people are going to do, we're going to do a little more around wages.
No, that makes sense. A quick question on the competitive tone in the market. 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, 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, and we said that on an annualized basis next year, if you do simple math, roughly seven percentage points of our effective rate from the 35-ish to the 28-ish on you take the pre-tax dollars, it's some low $300 million after-tax benefit. Somebody asked the question, "Well, does that mean you might do a special dividend?" Well, our special dividends, the three that we've ever done, are in the $2 billion-$3 billion cost range.
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. I think overall, because my gut and from what I've read, does it help the consumer? Sure, it helps the consumer. Some of the consumers as employees are benefiting from it. All that's good. Certainly, competition in general is benefiting consumers in terms of pricing. We feel fortunate that that pricing moat 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. Part of it depends on when you're opening and where you're opening. In the last couple of quarters, we've opened three 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 the examples of where we've done an infill in a very strong market like San Jose area or Redmond, Washington area near Seattle. We might average in three zippy locations, 60,000 or 65,000 members per building, add only 3,000 to 5,000 new members in that new building, but add net of cannibalization, $100 million to $120 million of annual sales in the first 12 months of that new opening. That is all about being close to your customer and driving more business.
What was the first part of the question again?
Well, are you seeing 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 signups. Again, there haven't been as many right now. Lastly, we've done, I think, in the past three or four LivingSocial 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 two-week period. That'll help a little bit this quarter, as well opening 13 or whatever number of new units, as well opening a couple more international ones. All those things. One of the questions we've been asked in the last couple of quarters was new membership growth has slowed a little bit.
When you look at existing warehouses, net of cannibalization, and take out all the units that were new, and the ones that those new ones cannibalized in those markets. We're still seeing a number in terms of member growth per warehouse in the mid to high threes, I believe, 3.7, 3.8. I think it was four, six months ago. That certainly gives us confidence, and we think it 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. It's come back from that to 19. Some of that is, ultimately, you do saturate it a little bit.
Part of it also, in terms of new countries, we currently offer it in U.S., Canada, U.K., and Mexico. 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-thirties in the U.K. and in the low to mid-thirties in Mexico. Part of that is, you need a critical base because of the services that you offer that also, it's not just the 2% reward, it's the services you offer for it. I would guess that you'll see it in other countries, and that'll help a little bit in terms of driving that, but probably more of it will come from us driving 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 Citi Visa. If I buy a TV that way, it's a four-year warranty, not a two-year warranty. All those things get people the car business. Last year, we represented over a half a million new car sales. If you're an Executive Member, and some of those marketing items, you got a cash card that was a few hundred dollars more than if you were a Gold Star Member. You can rest assured that there were people that converted for that reason. Once they did, they start to look at the other benefits of it. 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. With the level of cash that has come in from the membership increases and the tax reform, do you think your price investment is going to result in greater gaps historically, given the amount that you've been able to invest?
I think they have. On a general picture, if you look at just the traditional grocery industry, there's more competition generally out there. 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 recognizing there's been some product additions that are higher margin items, especially items in the supermarket industry over time. Over 20 years, this goes back a few years ago, so five 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 twenties to the mid and high twenties. The big home improvement companies had gone from the high twenties to the mid-thirties. What has our gross margin or our markup done?
It's gone up from 10 to 12. In fact, it's gone up from 10 to 12, 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. Cost of sales, but a higher markup to cover the cost of pharmacists and optometrists or what have you. I think when all is said and done, in our view, just looking at the pricing gap, we've gotten stronger. 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. My second question was just on the international business. I wondered if you could remind us of the timeline or your expectation for profitability or for the newer stores in France and Spain to be profitable.
Yeah. I think at the store level in Spain, we're pretty much there or very close. Mind you, we own many of these locations around. We own 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. On a store contribution level, yes. France is brand new. 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 as had been planned.
If I go back again, a number of years ago, our original budget in Japan, this was 20 years ago, was to open five units in five years and be break even or start profitability towards the end of year five or early six. We ended up opening six, and I think we were profitable right before the end of year four. 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 two units to 10 units in a market, it's going to grow a lot less than five-fold. The pre-opening 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. You know you're going to have, in some cases, very low or negative gross margins sometimes in those. I think the timeline, we're patient. We're also not going into any market and trying to get 10 or 20 openings in one year or two years. I think we've done a decent job of balancing that process.
That's very helpful. Thank you.
Your next question comes from Daniel Binder with Jefferies. Your line is open.
Thanks. Daniel Binder. I had a couple of questions. First was on.
Daniel Binder with Jefferies, your line is open.
Can you hear me?
Yes, I can hear you.
Okay.
Your next question comes from Chuck Cerankosky from Northcoast Research. Your line is open.
Hey, Josh. Can you hear me, Josh? Josh?
Chuck Cerankosky from Northcoast Research, your line is open.
Josh.
Richard, I can hear you. This is Chuck Cerankosky.
Your next question comes from Laura Champine from Loop Capital. Your line is now open.
Somebody call him. Hold on, we're having a problem with the third party here. 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. We're going to Laura, hold for a minute. I've got this.
Kelly Bania with BMO Capital. Kelly Bania, your line is open.
Okay, guys, hold on a second. I'm just calling him. Just hold on a second.
Kelly Bania, your line is open.
Hi, Richard. It's Kelly. Can you hear me? Should I go ahead, or do you want to circle back?
I would wait because I don't think Josh can hear.
Sure, no problem.
Sorry, I can hear you now.
Oh, hi there, Josh. Why don't we go back? There are a few people that Chuck Cerankosky and Dan. I think Daniel Binder was the first one that did not. Daniel Binder is the first one that you couldn't hear, but we could hear. Can we go back to him?
Sorry. You'll just have to get them to re-queue up, and I'll promote them again.
Okay, thank you. Go ahead.
You're welcome.
Put it back to you, Josh. Who's next?
I'm sorry, this is Kelly Bania from BMO Capital.
Okay.
Thanks, Richard. Wanted to first ask quickly on gas. Did you clarify the impact from just the mix of higher gas prices versus the actual gas margins?
We didn't. In terms of dollars, margins were down, and we made it up in volume. Profitability was pretty even year-over-year.
Got it. Okay. 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 cost input item is inflationary, we're going to hold off longer than others, but ultimately, you got to do it. We, like any other retailer, would push back with the vendor and try to figure out smarter ways to do things. Overall, it's a small delay. We're noble, but we're not crazy.
I guess, do you think this could result in some just broader food inflation over the next several quarters that just we haven't seen in a long time?
Oh, I think you'll see that, generally. If costs are up two to 3%, input costs on the food and sundry side, a big chunk of that is freight-related. Ultimately, that's going to compel. 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 more competitive.
Got it. Just one more on the online grocery, the non-perishables offering.
Hold on. Can I really interrupt you for one second?
Sure.
Josh?
Yes.
We had a couple of calls externally here that people in our office cannot hear the call all of a sudden. 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 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. We have capacity within our business centers, which we're already set up to do by online and actually deliver this way. It's just you had to buy some box-making machinery. The good news for us is that we feel that either, yes, ultimately, God willing, we'll have to build new 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. So yeah, there's a trade-off. 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 that we're doing to invest in driving the business and marketing it and things. It'll 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 Daniel Binder with Jefferies. Your line is open.
Hi, it's Daniel 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. 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. 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?
First of all, just to clarify one thing. If we go back to, it was Q2 of last year when it was a little disappointing. A lot of it had to do with the stuff that we did to change the MVM 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 Buys as well. More of the offsets of that that we didn't anticipate from a negative standpoint was fewer MVM days. If you went down, I think it was the four-week reporting month of February of 2017, 28 days, we had eight 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. That worked nice.
By having those significantly fewer days of having something that is a promotional thing that gets members in the door, we changed that. It took us two months to change that. Since then, that's been fine. 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. 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 the above, and we'll keep then trying to figure out how to drive that in different ways. 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 sales lift of an item gets a little less. People are waiting for that regular thing twice a year for three weeks. A, the values have to be greater to drive more lift, and B, you got to shake it up a little bit. I think the good news is work with vendors. We're not just forcing vendors to 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 until we can show them the type of unit lift that will generate. Sometimes that works, and sometimes it doesn't.
With regard to benefit, you're seeing a membership in comps, for neighboring clubs where there was a competitor closing?
A little bit. I think our estimate was when people asked with the Sam's Clubs closing, how might that impact us? First of all, some of those closings were a couple or three Sam's closings in the existing Sam's market. They were just adding a lot of those sales to other units they already had. Our view was, is we'd get 10%-20% of it, and we have, of what we guessed their sales would be. Some of it is not our member. Some of it, we're too far away from that member. Maybe that 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 Sam's in the market. We definitely saw some benefit in membership, number of members.
Again, not huge, but it certainly helps.
Great. Thanks.
Your next question comes from Chuck Cerankosky with Northcoast Research. Your line is open.
Hi, Richard. Want a little update on food manufacturing projects you have underway, the construction, where's that at? Then I want to ask you another question about the online.
I'm sorry. Ask that first question again.
Sure. You've got a couple 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. Need to say, it'll 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. On plan is a relative term in terms of we know it's going to take a year plus to get there, but it's doing fine. Anything else, guys?
No.
Oh, 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. The good news there is the Tracy one, along with the added capacity of the hotdog plant at the same property location. We're at capacity, basically, and we've been able to push that over.
Okay. You mentioned before you've got 10,000 SKUs online. Is that the count all the time? 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 email and promotional activity's picked up. What is the cadence to refresh the mix and assortment that you have?
Well, look, I think, 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'll 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. Sometimes you'll 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 two 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. 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? 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.
There is.
It's not our brand. In a 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. Kirkland Signature is the only brand you're going to see at Costco.
Got it.
As it relates to how much, gas is under the Kirkland Signature label, but excluding that, which is 10%+ of our sales, it's about 24%+ 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. At the end of the day, we still want brands, and we still covet it, and our members certainly value brands as well, and in our view, it enhances our brand value. 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'll take.
Got it. Thank you.
Your last question comes from Brian Nagel with Oppenheimer. Your line is open.
Hey, Richard. It's David Bellinger on. Just a couple quick questions. Can you talk about regional performance in the quarter? 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 at the budget meeting. Hold on, we're just looking real quick. It really wasn't that impactful to us.
Okay. I'll just follow up on margins as well. Seems that the major drag came from the higher gas prices this quarter. Can you help us frame what percentage of sales gas represented this quarter? I know you just mentioned was on an annual basis, it's above 10%. 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?
Yeah. 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. 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. By the way, it's about 10%-12% of our business. The thing that we like to see 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. That's meaningful. It means that more people are coming into our place.
When about half of them come in to shop, you don't need more than one or two 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, you need a strong stomach lining based on the volatility sometime day to day and week to week, but for profitability. Overall, it's been a good business in its own right.
That's helpful. Thanks for squeezing me in. Appreciate it.
Thank you. 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.