Good afternoon. My name is Samantha, 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. I would now like to turn the call over to Richard Galanti, Chief Financial Officer. Please go ahead.
Thank you, Samantha, and good afternoon to everyone. I'll start by stating that these discussions will include forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. 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 we do not undertake to update these statements except as required by law.
In today's press release, we reported our Q3 year to date fiscal year 2017 operating results for the 12 week and 36 week periods ended May 7. For the 12 week fiscal Q3, we reported earnings of $1.59 a share, dollars 0.35 a share above last year's Q3 reported earnings of $1.24 As noted in this afternoon's release, the $1.59 reported EPS figure included an $82,000,000 or $0.19 per share income tax benefit in connection with the $7 a share special cash dividend that the company declared on April 25 and which is payable tomorrow, May 26. The realized tax benefit related to the special dividend payable to company 401 plan participants as it is considered 4 investments in the 4 0 one plan. In addition to this one time earnings benefit, here are a few other items of note when comparing year over year results. Number 1, our co brand credit card.
As was the case in both the 1st and second fiscal quarters of this past year, the Citi Visa co brand card program positively impacted year over year margins by 16 basis points and SG and A expenses by 20 basis points. And our overall bottom line in Q3 benefited earnings by $0.14 a share. By comparison, I believe in Q1 and Q2, the numbers were $0.01 or $0.02 less than that per share, but still significant as we're still in the 1st year of the program change. Number 2, gas profitability. Our profits from gas during the quarter as compared to last year's Q3 were higher by $37,000,000 pretax or better year over year by $0.05 a share.
Gross margin. Last year's Q3 earnings included a 19 $1,000,000 pre tax benefit from a non recurring legal settlement. This represented an improvement to gross margin of 7 basis points year over year or $0.03 a share, which was in last year and not this year. SG and A. This year's Q3 earnings included a $14,000,000 or $0.02 share a hit to SG and A this year related to 2 non recurring legal items.
So as last year had a benefit, this year had a detriment. IT expenses as a percent of sales was actually flat year over year as a percent of sales and in line with sales growth during the quarter. Number 6, FX. There are 2 FX items. As compared to a year ago during the Q3, foreign currencies where we operate were mixed relative to the U.
S. Dollar, but on aggregate weakened versus the U. S. Dollar, most notably in Canada, the U. K.
And Mexico. And this resulted in our foreign earnings in Q3 when we convert back into U. S. Dollars for reporting purposes being slightly lower by about $5,000,000 or about $0.01 a share than if the exchange rates had been flat. Conversely, we had a gain reflected in our interest income and other line related to forward FX contracts and U.
S. Dollar holdings by our international subsidiaries. We do that when they used to pay for U. S. Dollar denominated merchandise payables.
In Q3, that benefited the P and L by $9,000,000 or about a little over a penny share year over year. LIFO, there was no LIFO charge or credit in this year's Q3 results, whereas last year in the quarter, we had a LIFO credit of $13,000,000 reflecting deflation in our LIFO indices. That represented about a 0.02 dollars a share benefit last year to credit last year versus nothing this year. While we do have deflation, there's no LIFO reserve to draw from and essentially you can't go below 0. Income tax rate.
As previously discussed, our 3rd quarter tax rate was very favorable due to the treatment of the special dividend. As a result, the reported tax rate in Q3 was 26.8%. Excluding the impact from the special dividend, our normalized tax rate would have been 35.3% for the quarter. Turning to our 3rd quarter sales. Reported sales were up 8% and our 12 week total company reported comparable sales figure was up 5%.
For the quarter, the plus 5 comp sales figure was helped by gasoline price inflation to the tune of about 140 basis points and offset or hurt by from FX by about minus 60 basis points. By segment, the comp increases were as follows: U. S, 6% Canada, 2% and International, 4%. Excluding the impacts from gas and FX, the 6 in the U. S.
Would have been a 5. The reported Canada of 2 would have been 3 and the international reported at 4 would have instead been a 6, still totally up to 5 overall. In terms of new openings, our opening activities and plans, we opened 12 net new locations during the first two fiscal quarters, the first half of the year. In Q3, we opened a net of 2 new units, 3 total and 1 relo, including our 37th location in Mexico and our 1st business center in Canada and Ontario. For all of fiscal 2017, we have current plans to open a total of 12 more locations, so 26 net locations for the year.
Of the 26 for the entire fiscal year, 13 were in the U. S, 6 in Canada on a base of 91, one each in Japan, Korea, Taiwan, Mexico and Australia, as well as our first openings both in Iceland, which occurred 2 days ago, on their Wednesday, and France coming towards the end of next month in June. This afternoon, I'll also review membership trends and renewal rates, the upcoming membership fee increases planned for the U. S. And Canada, those become effective next week on June 1, An update on the Citi Visa Any Work Card Program, additional discussion about our margins and expenses in the quarter, e commerce results and recent and quickly the recent special dividend and the related $3,800,000,000 debt offering that we completed recently.
So starting with Q3 results, as I mentioned, sales were up at $28,220,000,000 up 8% over last year's $26,150,000,000 in the quarter. Again, on a reported basis and on an ex guest and FX basis, comps were up 5%. For the quarter, our 5% reported comp figure was a combination of an average transaction increase of 2% and an average shopping frequency increase of a little over 3%. And that little over 3% is company wide, it was 4% just in the U. S.
In terms of sales comparison by geography, Texas and Midwest regions were strongest with Northwest, Southeast and California not that far behind. Internationally, in local currencies, better performing countries included the U. K, Korea and Mexico. In terms of merchandise categories for the quarter, for the Q3, within Food and Sundries, it was up in the low single digits. Spirits, deli and candy were the leaders.
Tobacco continues to be a negative year over year. And as we've mentioned in the last 2 or 3 quarters, that will anniversary itself by the end of June, the tobacco component. For hardlines, overall in the mid single digits, strongest department sales were in tires, hardware and health and beauty aids. Consumer electronics overall were down low singles. Softlines were up in the mid single digit range with apparel, housewares and domestic showing the best results.
And in fresh foods, comps were up in the low single digits. Within ancillary, gas had great comps in the quarter aided by, of course, the higher average sell price per year, dollars 2.42 this year versus $2.08 a year ago, as well as strong comp gallon growth. In addition, hearing aids were up in the mid teens in terms of comps, followed by optical in the high singles and pharmacy in the low to mid singles. In the Q3, the U. S.
Front end basket, U. S. Units were just under up a percentage point, while the average basket value was slightly positive. These results are not withstanding that we're still seeing a little deflation in the core business. Lastly, in Q3, the number of MVN promotional days, they were the same year over year in Q3, quite a change from Q2 and year over year during the 12 week Q2, there were 17 fewer MVM promotional days.
As we mentioned on the last call, we have made changes so that the lack of promotional days wouldn't impact company as much as it had in the quarter. Moving to the line items of the income statement. The membership fees reported came in at $644,000,000 up 4% in dollars or $26,000,000 and down 8 basis points as a percent of sales. FX had a little to do with the dollar increase and also just the number of new openings year over year in the quarter. In terms of membership, we continue to enjoy strong renewal rates, 90.2% in the U.
S. And Canada, 87.5% worldwide on a fully captured basis. And we continue to see increasing penetration of the executive membership in those countries where we offer that. At the end of the quarter, we had 37,800,000 Gold Star members, up from 37,500,000 dollars 12 weeks earlier at the end of the Q2. Business primary, dollars 7,400,000 the same year over year quarter over quarter 12 weeks.
Business add on $3,400,000 $3,400,000 All told, we had $48,600,000 member households, up from 48,300,000 12 weeks earlier, notwithstanding the effect where we just had a few openings in the quarter. Total cardholders came in at the end of the quarter 88,900,000 dollars up from $88,100,000 at the end of the second quarter. Also at the end of the third quarter, paid executive membership stood at $18,300,000 increase during the 12 weeks of 345,000 new executive members, or about 29,000 a week increase in the quarter. Executive members now represent about 38% of our member base and about 2 thirds of our sales, closer to 70% of sales based on the countries where it operates. In terms of renewal rates, business members renewed these numbers would be U.
S. And Canada, which is about over 80% of our business. Business came in at 94.1% at the end of the quarter, down from 94.3% at the end of the prior quarter, consistent with what we've seen in the U. S. As we're still 1st year over year from moving the card over to the new Visa Amex the Visa Citi card.
Gold Star remained both at 2nd quarter end and 3rd quarter end at $89,500,000 and its total was 90.2 both at quarter end. So again, rounding causes some of that, but those are the numbers, dollars 90,200,000 both at the 2nd quarter end and at 3rd quarter end. Worldwide, which include outside of the U. S. And Canada, at the end of the quarter, it was 87.5%.
It rounded up to 87.7% at the end of the second quarter, which had been up from 87.5 at the end of the Q1. Regarding the increases in annual membership fees in the U. S. And Canada, these go into effect again next week on June 1. Recall that we had taken fee increases in several other countries this past September 1 at the beginning of our current fiscal year.
Our primary membership will increase $5 to $60 and executive memberships will increase to $120 up $10 And with regard to executive membership, the 2% reward cap associated with the executive membership was increased is being increased from $7.50 per year level to $1,000 per year level based on eligible purchases by the executive members. In all, the fee increase impacts about 35,000,000 member households will be impacted by it, about half of whom are executive members and half who are primary members. So $10 or $5 Note that the membership fees are accounted for on a deferred basis. So in terms of when it will benefit the membership fee income line of the P and L, the full P and L impact would be over a 23 month timeline based on the fact that it's over the next 12 months that renewals will get their first increase and then it's deferred over a year period from which during from the time that they originally pay it. Before continuing down the income statement, a quick update and a few updated stats on the Citi Visa card offering, which began last June early in our fiscal Q4 of fiscal 2016.
Recall that we began last June with approximately 11,400,000 co branded cards, which represented 7,400,000 accounts that were transferred to Citi at the conversion. As of Q3 end, we now have about 1,500,000 new approved member accounts, which represents about 2,000,000 new cards since the last June 20. And that 1,500,000 190,000 additional accounts over the past 12 weeks since Q2 end. Overall, we're seeing the Citi Visa co brand portfolio total spend higher year over year, both organically from cards converted to Citi last June and from these new accounts. In terms of the conversion, the usage and new sign ups to the card, I think, as I've said a quarter ago and a quarter before that, so far so good.
Going down to the gross margin line, gross margins reported were up 8 basis points. I'll ask you to do our little matrix here, 4 columns, and there'll be 2 columns for Q2 2017 and 2 for Q3 2017. Column 1 will be reported Q2 2017 year over year. Column 2 will be without gas inflation. And then columns 34 again will be reported for Q3 2017 and then Q3 without gas inflation.
So this will be the year over year basis points change. The first line item is core merchandising. In Q2 year over year, it was plus 1 basis point and ex gas, it was plus 9. And in Q3 reported plus 7 and ex gas plus 20. Ancillary businesses minus 20 and minus 18 in Q2 and the two columns of Q3 would be plus 15 and plus 19.
2% reward, 0 and minus 1% and then minus 2% and minus 4%. LIFO, minus 5% across the board. Again, having some deflation this year, but comparing to a credit deflation last year in a credit, but nothing to credit since we're below 0 there. Other 0 and 0 in the 2Q2 columns and minus 7 and minus 7 in the 2Q3 columns. So all told, year over year in Q2, we reported gross margins in Q2 down 24 basis points.
And ex gas, they were down 15%. This year in the quarter, it was +8 reported and +23 ex gas. Now, if you take the numbers that I talked to you about on the benefit from this change to Citi Visa as compared to what it would have been had we had the old program, we benefit, as I mentioned, by 16 basis points year over year Q3. And I believe in Q2, we also benefit year over year by 16. So again, if you just simply look at the total, I'll just do Q3 here, the reported plus 8 would have been minus 8 ex that single benefit of the Citi Visa and the plus 23 would have been plus 7 ex that.
And that's how it shook out. Overall, Q3 reported gross margin, again, as I mentioned, was higher by 8 on a reported basis, 23% excluding. As I usually do, I'll go through the core merchandise component, which is about 80% of sales, food and sundries, hardlines, softlines and fresh foods. The core merchandise component gross margin was actually higher by 7 basis points year over year and up 20 basis points excluding gas price inflation. Excluding the benefits of CityVisa, minus 9% and plus 4%.
So again, I think the plus 4% excluding gas inflation would be the number that we would look at here. Subcategories within core, I'm sorry, I said something wrong. The plus 7 was what I had already told you about the whole company. In terms of the subcategories of core, food and sundries, hardlines, softlines and fresh foods, as a percent of their own sales, they were actually positive year over year in the quarter by 12 basis points with food and sundries and hardlines both higher year over year, while softlines and fresh foods a little bit lower year over year. But the net of all 4 on their own sales was up 12.
2nd, ancillary and other businesses gross margins were up by about 15 basis points in the 19 ex gas deflation. About 2 thirds of that year over year increase was due to higher gas profits as mentioned as I mentioned earlier in the call, but even without ex that the other ancillary businesses net year over year were up a little bit. 2% reward, the minus 2 basis points or minus 4x gas, that basically means more usage by members who get the 2% executive member award and who tend to spend more. LIFO, I talked about twice already. And lastly, the other that minus 7, if you will, was the fact that last year, it was a $19,000,000 non recurring legal settlement, which of course is 0 this year.
So that's a -7 year over year comparison. Overall margins, we felt were good with solid results in the core, the plus 12 basis points on core sales. And gas margins again also positively contributing not only in terms of higher gross margin within the gas, but good sales as well, offset by negative year over year comparisons from LIFO and the one time settlement from last year. Moving on to SG and A. Our SG and A percentage in Q3 year over year was lower or better by 14 basis points.
And actually that plus 14 would be flat or 0 without gas inflation. Coming in by the plus 14 was basically 10.44 versus 10.30 last year. If you again, as I mentioned earlier, the benefit from effectively lower fees related to taking the new card versus our old program, year over year would have been better by 20 basis points and those numbers are in here. So again, I'll ask you to do the little matrix with the same four columns, q2 2017 reported and q2 'seventeen ex gas and then Q3 'seventeen reported and Q3 'seventeen ex gas. In terms of core operations, reported in Q 'seventeen, we were up better or lower by 8 basis points year over year, without gas better or lower by 1 basis point.
And then in Q3 reported lower or better by 21 and ex gas lower or better by 9. Central, minus 2 and minus 3. So in other words, higher by that amount year over year than minus 1 and minus 3. Stock compensation pretty much grew in line with sales, but it was always a big impact in Q1 when we do our big grant each year. Stock compensation was minus 1 and minus 2 or higher year over year in Q2, the 2 Q2 columns and minus 1 and minus 1 again a little higher in the Q3 columns.
Other 0 and 0 in Q2 and the 2 Q3 columns minus 5 and minus 5. And again, that relates to the $14,000,000 the 2 legal items that were non recurring that impacted this year's Q3. All told, last year in Q2, SG and A reported was lower or better by plus 5 basis points. And again, ex gas inflation higher or slightly higher by 4 basis points. This year reported better by 14, ex gas 0, basically flat.
And again, I'll just use the 2 Q3 columns. If you take out the benefit from the Citi Visa conversion, that was 20 of the 14, if you will. So with ex that, it would have been higher or minus 6. Percent, and again, the 0 percent would have been higher or minus 20 percent. Now within that, excluding the City Visa Central, year over year was higher by a basis point reported and 3 without gas.
Nothing unusual in the quarter, depreciating expense was slightly higher year over year. Again, stock compensation expense was a basis point higher and other was minus 5%. Next on the income statement line, pre opening expense, dollars 3,000,000 lower this year coming in at $15,000,000 versus $18,000,000 quite a few less openings, 8 last year in the quarter and 3 this year. And but that has to do with timing of locations to all the pre opening doesn't actually happen in the quarter in which the actual opening expenses related to our entry into 2 new countries, Iceland and France. All of the expenses related to our entry into 2 new countries, Iceland and France.
All told, operating income in Q3 came in at 968,000,000 dollars or better by $110,000,000 which is 13% higher year over year. Below the operating income line, reported interest expense came in at 21,000,000 dollars Interest expense in Q3 this year, that's quite a bit of a lower improvement from last year's Q3. It came in that $21,000,000 is $9,000,000 lower than last year's reported $30,000,000 figure. Virtually all of it is due to the payment back in March of the our 1,100,000,000, 5.5 percent fixed note fixed rate note that we it was a 10 year note that we paid it off on March 15. So that is about $60,000,000 a year annualized interest savings since that March 15 date.
As we reported last week, we were successfully completed new debt issuances totaling $3,800,000,000 and that was done in 4 tranches. There was an $800,000,000 5 year tranche and then $3,100,000,000 tranches at 5, 7 10 years. The details of that can be found in the press release dated May 9, but with the new debt having a blended rate of a little over 2.6%. As well on May 15, we gave notice of early payoff of our December 17, dollars 1,100,000,000 1.8 percent notes, The expected payoff date will be June 15, 2017. Next line item on the income statement, interest income and other.
It was higher year over year by $11,000,000 coming in at $18,000,000 in Q3 as compared to $7,000,000 a year earlier. Now actual interest income for the quarter was better, but better by year over year by $2,000,000 In addition, we benefited by about $9,000,000 I mentioned that earlier. In credits, mostly relating to the various FX items discussed and that I discussed at the beginning of the call. So adding these two line items to operating income, overall pretax income was higher by $130,000,000 or 16% coming in at $965,000,000 this year during the 12 weeks as compared to $835,000,000 a year ago. Again, in terms of income taxes, a reported tax rate this quarter of 26 0.8%.
Normalized that would be 35.3% and that compares to last year 34.2%. And we'd expect it to be in that 30 5.3% ish range for the year. Overall, reported net income came in right at $700,000,000 and that's compared to our reported $545,000,000 a year ago. A quick rundown of the other usual topics. The balance sheet is included in this afternoon's release.
A couple of quick items that I always go through. That one of them is not on there is depreciation and amortization for the quarter, totaled $320,000,000 a year to date $929,000,000 One of the metrics we always look at is accounts payable as a percent of inventories. As per the balance sheet, came in at 97%. It was 99% a year ago in the 3rd quarter. We also then take out all the non merchandise payables and recalculate it.
So it's merchandise payables as a percent of inventories. That too came down 2 percentage points 89 a year ago to 87. So still vast majority of our inventories being trade balance funded. Average inventory per warehouse was up $693,000 coming in at $13,400,000 compared to $12,700,000 a year ago. About almost not quite 40% of it was majors, electronics.
We're seeing a big shift, finally, a big increase in particularly in TVs, kind of the next generation of bigger, more ks and you name it, and as well as some other electronics areas. Small increases in various other departments, as well some buildup in inventories related specifically to our e commerce as just in the last year, we've gone from 7 to 19 e commerce fulfillment centers in the U. S. Year over year. Now many of those most of those are connected to our depot operations.
We're not out there building a lot of new warehouses just for that. In terms of CapEx, in Q1, we spent $670,000,000 in Q2, dollars 5.15 and in Q3, dollars 5.38. So year to date, we're at $1,723,000,000 And overall for the year, we'll probably be in the $2,500,000,000 to $2,700,000,000 range. Probably it's maybe $100,000,000 less than we estimated a quarter or so ago. Just a couple as you saw in the number of expecting 26% for the year, just a few delays, nothing terribly different.
In terms of e commerce, we continue in the locations where we were 12 weeks ago, U. S, Canada, U. K, Mexico, Korea and Taiwan, and we expect to do additional countries over the next one and a half or so years. For Q3, sales and profits were up. Online sales were up 11% in the quarter as well as comps, it's the same locations.
Within the 12 weeks, we look at 4 week periods ourselves, they came net 11% represented a 13% or 14% in the 7%. The 7 was weak in part due to the shift in both Easter and Mother's Day, but overall, the number for the quarter was 11. We continue to improve our offerings, enhance our member experience. We continue to add new areas of merchandise, improved we've improved in stocks on high velocity items as evidenced by additional inventories in those areas and more locations of it. In April, we launched something new, GE Appliances, along with their self-service delivery schedule.
It's starting off well, but again, it just started off, and we'll continue to add additional names. In terms of online Kirkland Signature items, we recently launched Kirkland Signature maternity apparel and have also expanded some of our KS Groceries and Consumables items on .com. And if you're in the mood for A 4 Wagyu Center Cut New York Strip Steaks, we apparently have a great deal on 4 12 ounce steaks for $499.99 In terms of improving the experience functionality, we've improved search, streamlined the checkout process, both mobile and desktop, improve the members ability to track orders and have automated much of the merchandise returns process. Now many people have that. We're newer to it, but we've done a good job, I think, in the last 6 to 9 months of getting that member experience and functionality a lot better on the site.
Overall, good things are happening online, both in terms of member experience and expanded products and services and certainly the great values to our members. We still want you to come into the warehouse, of course. Next discussion expansion, as I mentioned for the Q3, we opened 3 locations, including 1 relos, so net of 2. Quite a lot of openings in Q4, twelve total, including Iceland just a couple of days ago. In fiscal 'sixteen, if you recall, we opened 29 units, so about 4.5% square footage growth.
This year with the 26, a few of them being delayed into this fall, 26 for the year, that would be about 4% square footage growth. Of the 26, half, 13 are in the U. S. A quarter, 6 are in Canada and then 1 each in those countries that I mentioned earlier. And again, of course, those include our first location to open in France, which is scheduled for, I believe, June 22.
And again, Iceland just opened. Total square footage, some of you asked about, at Q3 end, it stood at 105,400,000 square feet. In terms of buybacks, in Q1, we bought back $122,000,000 worth, Q2, 66, Q3 45, so a total of $233,000,000 of stock or 1,486,000,000 shares at an average price of about $156.5 Regarding dividends, we in addition to doing the special dividend, we increased our quarterly dividend that was announced also on April 25. The new amount is $0.50 per share per quarter, so $2 a year. That's up 11 from the prior $0.45 a share.
And again, that will be also be paid tomorrow, May 26, the current the quarter the $0.50 quarterly amount. The $2 a share annualized dividend represents a total annual cost to the company of about just under $900,000,000 And as I mentioned earlier, the $7 share dividend that will be paid out to shareholders tomorrow as well. Lastly, our fiscal 2017 Q4 scheduled earnings release date, and this is for the 17 week this is an extra week in the year, for the 17 week Q4 that ends on September 3. We'll do the earnings release after after the market closes on Thursday, October 5, with the earnings call that afternoon again at 2 pm Pacific Time. With that, happy to open up for questions and answers, and I'll turn it back over to Samantha.
Your first question comes from the line of John Heinbockel.
So Richard, first topic, expansion and business centers. So you've added some more, there's a couple coming here in the next month or so. How do you think about business centers versus regular clubs, number 1? And when you think about, is there a big potential business center expansion here? And then lastly on expansion, when you think about is it too early to think about 2018 and do we sort of get back to 30 openings worldwide next year?
Well, first of all, with regard to the business centers, I think we started the year with 14 and planned to open 4 this year, so 18, that could be off by 1. And our first in Canada, Recall that we've had business centers for, I think we've gone from 4 or 5 to 7 or 8 over about 10 plus years. And so we continue to tweak it. Neil will say we've found something that seems to work now and then there is a little method to that madness. And but it's corollary to what our primary business is opening full Costco membership warehouses.
We will continue to open more, but I think, again, this is a guess at this point, but on assuming the base at the end of the year is 2018, that could be off 1. Using that 2 to 7 or 2 to 6 or 3 to 5, I mean, it will be in that range for the next couple of years. We're not looking to go from 14 to 18 to 28 in a year. And but it's so far so good. I think it's I think a couple of years ago, we said to ourselves, one day could this be could there be 30 or 40 of these?
Who knows? I remember we said years ago, one day could we have 100 Costco's in the U. S. And we're approaching 500. So it's by no means the same as regular warehouse clubs in terms of capacity, a lot lower than that.
But I just look at what we've done in the last couple of years and extrapolate that for the time being.
Okay. And then is it too early for next year? Can you think about it?
It's probably too early. I mean, it is. I mean, our goal is going to be to get towards that, but that's always it seems to be a challenge each year, but we keep working towards that end.
And then lastly on gross margin. So if I look at ancillary, ex gas ancillary was up maybe 6 basis points or 7 basis points. So was that any one department drive that and sort of how is pharmacy doing within that? And then the major categories within their own sales, so that was improved about 5 basis points versus last quarter. Is there anything to that or that was fairly broad based?
I think it's more broad based than anything. I mean pharmacy was fine, notwithstanding all the challenges that, that industry has. So we've continued to knock on wood do pretty well there. No, I don't think there's anything specific. I think it gets more back to the call a quarter ago when we said things are okay.
And it's not like we've changed a lot, but these numbers are going to fluctuate some basis points up and down periodically.
Okay. Thank you.
Your next question comes from the line of Simeon Gutman.
Thanks. Hey, Richard. And thanks for the color on those bigger more KTVs. My serious question is, 1st, the gasoline gross profit dynamics for Q4. Can you just give us a sense relative compare?
And then I have one follow-up.
Well, as everyone knows, when gas when oil prices go up, we make a little less or margins come down, you make a little less, and when they go down, we make a little more. Year over year Q3, that 12 week period, gas prices generally were going down and that was good. In fact, I think the direction when asked on the Q2 call, which Q2 hadn't been a great comparison was the other way, we didn't think it was going to be this good, but we also didn't know that cash prices going to key you down. They've gone up lately. So we'll see.
We had very good profits last year in Q4. Some of that has to do as it trends down towards the end of the summer prices in general, ex what's going on in the market. But it's that's why we share with you every quarter and because there are going to be fluctuations that are dictated by the by what oil prices are doing.
Got it. Okay. And then my follow-up is on the credit card. Can you share with us we're about, I guess, almost a year away from cycling, the initial changeover. Can you share with us I know there was a few buckets of margin that were helping, some of its new sign ups, some of its the spend outside of Costco.
Can you give us a sense as we lap the initial benefit from last year, what accretes, what's additive year over year versus what goes away? I'm guessing the bounties on the new sign ups will probably fade, but can you just share with us how we should think about it?
Well, I mean generically, the biggest bang for your buck is in the 1st year. Is there a little extra on the one hand, there's a little extra because things maybe there's some transition challenges right around there for a few weeks. So that okay, that's good news going forward for a little bit longer. But there was also more incentive and a bigger bang for your buck. The first time you offer it, you get more sign ups in the 1st week than the 2nd week than the 3rd week.
As no more sign ups being more bounty. So generally speaking, we still think it will be a net accretive, if you will, or additive to the company in the 2nd year, but the big bang is in the 1st year. Okay. Thanks. And if you look at Q4, Q4, there's 5 or 6 weeks of the big bang, if you will, before June 20 and 10 or 11 weeks afterwards.
So there's a little bit of both, but 2 thirds of it's after that anniversary.
Okay, thanks.
Your next question comes from the line of Michael Lasser.
Good evening. Thanks a lot for taking my question. My first question is on e commerce growth, which was in the low double digits in the quarter. Richard, are you mindful of maintaining your relevance online, especially at a time when other traditional retailers are aggressively growing their e com presence? You had one of your big box competitors talk about 69% ecom growth in the most recent quarter.
And I believe your 11% came on an easier comparison and it sounds like it slowed throughout the period. So are you mindful of that at all?
I get to use my phrase that I used several times on the last call, not to be arrogant or cavalier about it, but we feel good about what we're doing. We've got great brick and mortar comps. We are doing things offensively in our view, not defensively online. We've got a lot of things going on, on the online side, but we're not really worried about what others are doing. And there's a lot of good things about online and there's challenges and we're trying to do more of the good things.
And but again, we will continue to do the way we do it. Don't expect us to increase by 69%, partly through acquisition. And we're going to keep doing organically. We think we've got we've made a lot of changes in the last year, probably more than we had in the last several years online, that will show some good results.
My follow-up question is on the core gross margin being up 20 basis points that's on the heels of you making some investments in everyday low price in the prior quarter. So did you get the intended effect of those price investments? And is there now an opportunity to do more, especially as your gross margin continues to float up?
Well, I think the 20 is 12 on the core. If I don't have that, I will return that sheet to the side. But, look, we're going to always do more investing in price. Just when you think it's safe to go outside, you guys, we're going to drive sales top line. And certainly, the fact that our margins are strong, that we've got upcoming fee increases just starting, that we've got additional monies from the credit card, All of those things allow us to do things in an offensive way and drive our business.
And so we kind of think we can do both, have decent margins and drive our business and lower prices.
And just to follow-up on that, because you mentioned the upcoming fee increase in your response to answering about price investments, should we expect that a good portion more than half would be of the benefit you'll get from a fee increase is going to go back into price?
Well, I can't really tell you that, but we're known for being for giving lots of things back to the consumer, to our member. And it's not completely formulaic, but we're going to constantly try to excite our members and drive our competitors crazy.
Thank you very much and good luck.
Your next question comes from the line of Charles Grom.
Hey, good afternoon, Richard. A couple of questions here. First, curious the penetration on the new Visa card as you use a tender here in the Q3 and relative to the first half of the year and also curious to where it was relative to when you had the agreement with Amex?
I think we're now we're talking U. S. Dollars because it's a U. S. Program.
I believe we're in the 46 range currently. And that's trended up since its inception a year ago. I think we were the highest we were on AmEx and that was both AmEx co brand because by the way that number I'm giving you is all Visa, not just City Visa because we accept all Visas and we accepted all AmEx cards, not just the Costco co brand one. I believe we got up to the 43%, 44% range. And so we've exceeded that, but we wouldn't expect it to, given the improved value proposition to the member and the fact that there's just more market share out there and more places for our rewards card to be used and again more incentive for that card to be used everywhere which helps us as well.
And has the basket changed at all?
I don't know. I know there were some anecdotal items at the very beginning at the transition on big ticket items like hearing aids or big screen TVs or furniture. But I think the answer is yes, it has a probably has a plus sign in front of it instead of a 9, but not huge. And again, more anecdotal stories I've heard. I haven't heard anything big.
The biggest thing in terms of the whole card is the fact the inside and outside spend. We were very successful under our old program over 14 or 16 years getting the outside spend on that card up to, I forget, dollars 2.5 plus for every dollar spent inside. And that's where these issuers, all the issuers on whatever the co brand card is, they want more spend on that card because that creates APR and it creates carry balances and late fees and everything else. And it's just a big portfolio. And as one would expect, given the greater market share presence that Avisa has in the market, there's going to be more uses.
If we can get that member to have that as a top of wallet, there's going to be more usage on it. And that's exactly what's happened. Okay. Great. The expectation has been a little better than planned on that.
Okay. And just switch gears a little bit to Michael's question on e commerce. I think you said 11% growth. Can you just remind us where the penetration is today? And also the number of SKUs that you guys are offering online fully realize you don't want to have the $350,000,000 that Amazon has, but how big do you think you can grow that?
And then also on the margin profile of your e commerce business, I do believe it's better than your brick and mortar margins. Just wondering if you could clarify that directionally?
Yes. Well, the sales are about a little under 3.5% of sales. Again, this is a year that we're going to end up doing just extrapolating the 1st 3 quarters something in the mid-120s. We have an extra week in there too this year. And so again, it's over well over $4,000,000,000 now.
And that's what we don't that's pure e commerce online. We do have delivery online. We don't include that. We have travel online. We don't include that.
It's just the normal online that we started with. And I'm sorry, in terms of profitability, nothing has really changed there. Generally speaking, the gross margin of dotcom compared to the gross margin of the warehouse, ex gas, the 4 walls of the warehouse, The warehouse is a little higher. The SG and A on dotcom is a lot lower. So the pretax earnings of dotcom is higher.
And nothing has really changed there.
Okay. And just the number of SKUs and if you have it, the percentage overlap of those SKUs relative to what's in store?
I honestly don't have that off the front end. I think the SKU count ex office supplies because that's up to a third party and there's 8,000 or 10,000 office supplies, I believe. I think we've got about 8,000 or 10000 items and that's exclusive of like about 2,000 of the roughly 4,000 in the warehouse are online.
Okay, perfect. Thanks very much.
And even say fresh foods not online other than through third parties like Instacart and the like, not Google.
Your next question comes from the line of Karen Short.
Hi, thanks for taking my I'm just actually trying to get a sense on the gross margin in terms of the NBM. How much of the change in the NBM from 2Q to 3Q or how much of the year over year change in merchandise margin in 2Q versus 3Q would have been a function of the MDM changes? And then just wondering what the number of days on the MDM we can expect in 4Q 'seventeen versus 4Q 'sixteen? And then I just had another follow-up.
Okay. Well, first of all, in services over days, I think it's like pretty 4 less this coming year versus a year ago, 3 or 4. It's a few days, so not terribly meaningful. I mean, the big meaningful was in Q2 when it was 17 less on 84 days. And I'm sorry, the other question, Karen, the first one you had asked?
Well, when we just look at how the merchandise margin in 2Q versus the merchandise margin change in 3Q, I guess how much of the difference in the improvement sequentially was due to the NVM changes, like the pressure that you had in 2Q versus what we're looking at in 3Q?
I think the biggest change from Q2 year over year and Q3 over year was the number of MVMT days. We're still being pretty aggressive on the MVMT being fewer items with better savings and it costs a little more if you will to have a seat at the table there from a merchandising from a vendor merchandising standpoint. But we're also cognizant of the fact that we need to we're not here just to drive margins down. We've got a lot of buckets of stuff. And when you have increasing penetration in some higher margin areas like fresh foods or some of the higher margin areas like pharmacy, those things help as well.
But there's so many little pieces that can affect it. Overall, we felt pretty good about the Q3 comparison versus the Q2. Okay. And then But again, there's no material change. There's no material change.
Okay. And then I guess just as obviously we're kind of getting out of a deflationary period and into flat or maybe slightly inflationary, there's just been a lot of questioning as to how deflation impacted your P and L versus how inflation will impact your P and L? And I guess I just wanted to talk through that a little because it would seem to me that deflation because you had so much tonnage, it actually is a double hit because you have so much more labor involved in meeting the demand. So I don't know if there's any way you could try to talk through a little bit of how much more easing, I guess, you'd have on the P and L as we're no longer in a deflationary period?
I think for a little well, I think for low margin retailers and certainly we're at the low end the lowest end of margins. But for supermarkets, well, on the food side, a little inflation is good, a little deflation hurts a little bit. And so yes, we've been up and the fact that deflation has modified a little, but it still has the D in front of it, not the N. And so it's still impacting us some. It hurts you most in items like, I think the example I gave last quarter was fresh meats, where year over year it was either 2nd quarter or quarter end, year over year per pound beef was down like 10% and we were selling more than 10% more tonnage and certainly having lower gross margin dollars because of it.
And so as that changes, that will help us a little bit.
Well, and I guess presumably higher gross SG and A dollars too because of the labor content. That's kind of what I'm getting at it. It seems like you don't
have a lot of things. Well, yes, well, absolutely. On the fresh foods, you have higher yes, you have higher labor. Inflation will help all those things.
Okay. Okay. Thanks.
Your next question comes from the line of Zach Fadem.
Hi, good evening. So Kirkland Signature continues to perform pretty well. Just to what extent is this growth coming at the expense of branded items, if any? And when you think about positioning the brand going forward, are there any areas where you think Kirkland is under penetrated and worth pursuing expansion?
Well, I'm sure some of it comes at the expense of branded. Some of that though, in some cases, it's the branded manufacturers that's supplying us, not always, by no means, not all the time. And but it's another competitor. And again, we're pretty transparent about it. We want brands and private label.
And so we'll continue to see both of those. It really is an item business. And some of the success on the all the big items, I mean, paper towels, water, giant items that are 100 of 1,000,000 of dollars or we have several items that are $1,000,000,000 a year in sales, several KS items. In some cases, we have $1,000,000,000 plus on the branded side of the same item, whether it's Charmin or Bounty and Kirk and Signature on those two items, whether it's various regional brand names of water versus Kirkland Signature Water. And it works for us and we'll continue to do that.
The new categories, well, I think in the last year or 2, I think the thing that has done very well for us is wine and spirits. And that continues to have some legs, substantial legs. And the good news like other KS items, when the brands lose the market share, they get sharper in their own prices, which with us, not with everybody hopefully, which makes us even more competitive on the brand. So all that stuff works to in our view, works for our benefit and having the brand loyalty certainly helps with membership and wanting them to come back to Costco. Other areas, I've always apparel still has legs, if you will, and arms, I guess.
You've got cosmetics, Organic items. And there's been several organic items probably every month at the budget meeting, we see new organic items, whether it's chicken broth or beef broth or some candy, caramel, chocolate things or nuts clusters. These are $10,000,000 to $25,000,000 full margin items for us without a competitor in terms of it's not replacing a branded item necessarily. We've done very well in some of the other snack items and energy bar items. We have items where if a bar, I won't name names here, but if a retail bar retails for $2 meaning we would sell it for $1.49 we're out there sub $1 on a great item and a full margin for us and driving some real volume.
And so I think apparel, cosmetics, health and beauty aids, organic food items, not fresh, but packaged food items. All those areas where we continue to, I think, have some room to grow.
Okay. Thanks for the color. So Richard, could you I know not to beat on e commerce again, but could you provide some early color on the Instacart and Ship partnerships? And is there anything notable you'd call out regarding customer response or basket sizes versus an in store shop? And then just going forward, how should we think about potential expansion of these partnerships?
Well, it's still a very small piece of our business, but it seems to be working in the sense that it's growing for them. We have Google Express, which is operates out of 5 cities with several markets, but they're in the process of this out there of offering several items, 1 to 3 day delivery, and we're participating with them. So that should be a positive for the program. Instacart has continued to grow dramatically. They currently operate in 40 of our cities, up from 26 a year ago, utilizing 240 of our warehouses, up from 132 a year ago.
So that's growing. And then there's a few others I mentioned, Shipt and Dolly was 1 and somebody else. Boxed, I don't know if we're doing that's Beck East. Yes, look, the 2 big ones are Google and Instacart and there's not a whole lot of other color. They're working.
We want to sell merchandise and they help us do that. But again, don't expect us to be doing anything giant and big in one fell swoop.
Got it. Thanks, Richard. I appreciate the time.
Your next question comes from the line of Matt Pfaffler.
Thanks a lot, Richard. Good afternoon. Hi. First question is a follow-up on inflation. We are seeing overall CPI start to recover, but we've seen the producer price index for PPI come back a little bit faster.
Are you concerned at all about any kind of gross margin squeeze? Or is what you're seeing on the cost front resembling what some of those macro indicators, indicators or should we just think about the fact that pricing is moving higher in general as being in that positive for you going forward?
Pricing moving general is a net positive. If anything though, I think that we can we create some of our own deflationary pressures because we're good at you look at the MVM example, greater values to the number means greater lower prices, which means us and our vendor lowering the prices some. And most of that is driving prices down from our suppliers with the anticipation of significantly more unit volume. And the good news is most of the time that happens. And so that's what we do.
But that does drive those things don't always work in concert with the immediate bottom line improvement.
Understood. And then a second question just relates to competition. As Amazon takes tens of 1,000,000,000 of dollars of retail share annually and clearly the biggest share gainer by far and the biggest one we've seen in a while. Are you seeing any obviously your comps overall are increasing at a faster rate than most of the space. Is there anything you all are seeing in the mix that we might not catch through some of the commentary that would suggest a change in complexion of how the consumer is really using your stores?
Is it more consumables focused than it had been? Or is it kind of business as usual with no sign of the change in the backdrop?
Well, so far and there's no guarantee in the future, but so far it's been business as usual. There's a number I read a few months ago about how Amazon, if the entire U. S. Sale increase in sales or whatever was $50,000,000,000 they were half of it. Well, they were, they were $25,000,000,000 but they were 25 divided by 50 is half.
But we were also up. The fact is, is there's others in the industry that were down $50,000,000,000 and so they were a quarter of 100 dollars minus 50 to plus 50. That $25,000,000,000 is still incredible and formidable, But our view is we are fortunate that a lot of the impact if it's impacting some food items or even packaged food items, It's traditional food retail that is getting hit more than us. We have to keep driving our member into our warehouse and we do that with great course, great prices and great items, certainly fresh food, certainly gas station traffic, which brings them in the parking lot, if you will. And certainly, the executive the loyalty program, which they have one too.
All those things help us. And then the treasure hunt, we love it when we hear from someone that they heard that we had something, they went the next day and it wasn't there. Well, we're still pretty good at all that stuff. And I think again, the Kirkland Signature has helped that as well. Now, so far so good.
We when we look at the specifics, even in markets where whether it's Amazon or somebody else is taking share, a lot of what they're taking on fresh or something, fresh is hard. And even they would acknowledge than others. There will be more competition in the future, but who's going to get we're asked a lot about Lidl coming into the East Coast. They're going to take share, but they're going to take share from everybody else a lot more than they can take share from us. So we haven't really seen any big change like people are buying less something at Costco because of other formats out there.
Thank you so much.
Your next question comes from the line of Paul Trussell.
Hey, Richard. On SG and A, we've recently cycled some labor investments made a year ago. Could you just outline for us some other puts and takes we should keep in mind that's going to impact the P and L in 4Q and beyond?
I'm sorry, can you repeat that?
On SG and A, on the expense front, really just want you to help us think about some puts and takes on the expense side of things in 4Q and beyond, especially since we just cycled some of the labor investments you made a year ago?
Right. Well, look, the biggest quick take is sales. If we can get another percentage point or 2 in sales, that's always good and that solves a lot of things. When you look at some of the line items, payroll is the next biggest one. Yes, we've just anniversaried some of that at the end of March.
That helps a little bit. Healthcare is still a challenge in the U. S. Increasing penetration outside the U. S.
Helps that number just by a higher penetration within the total cost of the company, a lot less everywhere else. But again, that's going to happen slowly over time in a positive way. And in some quarters, the inflation in the U. S. Is does more than any small offset to that.
IT expenditures, somebody internally said we'll probably get the question asked about it. Is this 0 year over year basis points an inflection point? Probably not. We got lucky. Sales were a little higher.
We had a lot of expenses last year leading up the end of the fiscal year, day 1 of the new fiscal year when we installed the new bank accounting platform on which other things will be built. And so we had a lot of 3rd party contractors, a lot of training, which you write off, you don't capitalize. And so that will help there. But in fact, it will come down over time, but it's not going to be 0. I think we're still doing e commerce helps you a little bit to the extent even 11% last quarter or 13% or 14% in the 1st 2 thirds of the quarter before Mother's Day and what have you.
That's a higher growth rate than the rest of the company. So that's a much lower SG and A. So that helps you a little bit. But I think we do pretty well at trying to drive the things in the right direction, but not touching certain things. We're not going to tweak wages a little bit less or have an increase that's a little bit less.
We don't do big things like some of those incremental things that anniversary in March like bottom of scale. We tend to we hadn't done that I think in 6 years, but every 3 years we look at everything in a formal way. And so we're still a couple of years away from looking again in terms of a big way. I still vote for a sales increase. If you get some extra sales, everything else will fall in place.
That's helpful. Thank you. And then just could you speak to Gold Star and overall household membership growth? The growth has slowed a little bit. Just how are you thinking about membership count in the U.
S? And also what you're seeing on the international
front? Part of it has to do where we're expanding. Several of our units in the past couple of years in the U. S, for example, have been at newer small markets, where you don't get the biggest bang. I think we had one big bang.
I gave the example of Tulsa in a new market, but that's not as small as some of the markets we've gone into. When we opened in another Seattle unit, which we have 2 in the last couple of years, two and a half years or in the Greater LA market, It's a great success net of cannibalization, but you only get a few 1,000 extra members because everybody's already members just become more frequently because we're 20 minutes from drive from their home, not 40. We also part of the growth depends on how many units we're opening overseas. When we open a new unit in Asia, as of opening day sign ups, paid sign ups over the 8 or 10 or 12 weeks prior and through opening day, you could have 25,000 to 40000 new members. Iceland, although there's only one location in Iceland, as of opening day, we had I think over 35,000 members.
Is that right? Yes. Yes, over 35,000. And it's national news. And so I don't really look into the numbers, just as much based on where we've opened.
It's not like a like opening compared to 2 years ago is getting fewer sign ups.
Fair enough. That's helpful. Thank you. Good luck.
And your next question comes from Scott Mushkin.
Hey, thanks for taking my question. I actually want to follow-up on the last one because it just made a question jump into my head. Are comp memberships actually rising in the U. S?
Comp memberships? What? In comp buildings?
Yes. The memberships going up and
I think they are, but very it's probably a very small number, I mean closer to 0 than the number above it. And part of that is when you're opening in a let's say, we open in Redmond, where Microsoft is headquartered, that cannibalized knowingly 3 locations, 2 of them doing in the low to mid 300s a year and one doing in the mid 200s or low 200s a year. We signed up several 1,000 new members, but not 20,000 new members. If we average roughly 62, if you just index our membership number of households divided by number of locations, it's about 61,000 or 62,000. In that next year of that opening, the comp of those three locations is down because some of those numbers now are allocated to the new warehouse.
So that was kind of what I wanted to ask about, just popped into my head. But so how do you think about that as your business matures in the U. S? I mean, does that make you want to slow down your center growth? I mean, how should we frame that?
Maybe the number eventually goes negative.
Well, maybe it does. I don't think we're there yet. For 25 years, people have asked, well, what's your next whatever? What's your next fresh foods? What's your next gas station?
What's your next pharmacy? What's your next geographic market? 5 years ago, I don't think any of us thought about a lot of serious about going into New Orleans and Baton Rouge and Mobile and Rochester and Toledo and Tulsa and the like. And we know by the way on average they're going to be a little slower and take a few extra years, but they still have good metrics to them. We have slowed, I think using the two examples in the Greater Puget Sound Seattle area, in the last two and a half, three years we've opened Lynnwood in Redmond.
We waited on Redmond for 10 years to do knowing that we actually owned land in Redmond 20 years ago. But as we opened Issaquah, Kirkland being the first one on the east side of the city, and then several years later opened Woodinville, which is north of that, north of Redmond. We kept holding we actually sold the land and years ago. And finally, so we are we try to be pragmatic about what we do. And but over time, you're right.
We haven't found the bottom. That's the good news in terms of again anecdotally, I remember years ago when we concluded we needed a minimum of 500,000 population to serve a warehouse. And then it was 450, then it was 400. And we asked the very successful warehouses that you divide the number of households in the community, the population, it's in the very low 200s and a few in the high 100s. So hopefully, we'll keep making that go in that direction.
That will give us a little more life. Hopefully, the business centers create some life. And hopefully, that trend continues to improve. And hopefully, we find a couple of more countries. So we think we've got plenty to go.
And until that changes, we'll let you know.
All right. So then my follow-up question and my real question was, I noticed BJ's competitor of yours is offering some pretty significant discounts on their memberships. I think you get the 1st 3 months free, if I'm remembering the commercial correctly, and it's been just $40 for the 1st year. How do you does that matter to you guys? I mean, you're putting a fee increase through, but a competitor in the Northeast and Mid Atlantic Southeast is offering significant discounts.
I just wanted to get your comments on that and then I'll yield. Thanks.
Sure. Well, I think first, if they advertise it good, we don't advertise. We don't spend money on that. We'd love seeing TV and print ads still from both other competitors. We're not concerned about it.
We think that the value of Costco is still at a significantly higher price or without a free 3 months is a much better value. And we think that's evidenced by our success of what we've done over time and the fact that even when we've done in the renewal rates have not really been impacted by it. All right.
Thanks for taking my questions. Appreciate it. Sure.
And your next question is from Brian Nagel. Hi, good afternoon.
Hi.
So I apologize, I jumped a little late, so if you addressed this right. But on the gross margin, Richard, from there was definitely a better performance here than the prior quarter. Going back to the discussion we had on the conference call last quarter, how much of the better performance reflected a, I guess, more stable gas price environment? Was that a significant contributing factor to the gross margin this quarter?
Well, yes, gas helped the margins as did ancillary other ancillary businesses as well. But again, quickly cut to the chase, the roughly 80% of our sales, which is food and sundries, fresh food and sundries, hard lines, soft lines and fresh foods, Year over year on their own sales, they were up 12 basis points. So it was a lot of different things.
Okay.
And your next question comes from Scot Ciccarelli.
Hey, guys. Scot Ciccarelli. Two questions. Number 1, in terms of the e commerce business, as you guys reach a certain scale, do you need to change your processes or do you continue to go with kind of a drop ship philosophy?
I'm sorry, what related to what? I didn't hear the first part.
Your e commerce.
Well, as I mentioned earlier, part of the inventory increase in the company, because we just take inventory divided by number of warehouses to give you a number and we'll maybe change that over time. But we had an increase in inventory for e commerce related stuff, not at the warehouses, but we went from 7 to 19 distribution points in the last year. So we're getting closer to the customer. We're also working with 3rd parties. I mentioned in the call the GE scheduling system.
There's other scheduling things like that, that we're doing. And I mentioned the thing we're testing right now in our Bedford, Illinois Business Center, I mentioned last quarter, where in addition to this 50 or 70 mile radius where we deliver with Costco truck through 3rd party, there's 1 to 3 day delivery to 17 states all the way to Pennsylvania and New Jersey. And so if anything, I think we're getting it's getting quicker and cheaper to do these things for us.
Got it.
And maybe we started off high to begin with how we based on how we did it, but we're improving it.
Okay, understood. And then second question is, hopefully this is an easy calculation here. When you look at the debt redemptions, the debt issuance, it looks like you guys would be incurring about $25,000,000 more a year in interest costs, call it $6,000,000 a quarter. Should that just be a pretty straight calculation? Or is there something else we should keep in mind as we kind of work on our models?
I did a back of the envelope this morning and I came in with a number that's a few million higher than that, but still has a 2 in front of it. Now it's pretty straightforward. I mean, you've got $3,800,000,000 times somewhere between $2,600,000,000 $2,700,000,000 call it $2.65,000,000 that's a rounded number. You have to pay down the March debt that we did, which was a $60,000,000 a year savings. You've got the recent the call, which we'll do shortly of the $1,100,000,000 1.8 percent.
That's on the interest expense line. A little bit of an offset will be the cash. As you know, we borrowed $3,800,000 Well, roughly $3,100,000 is the dividend. The other $700,000,000 is cash earning less than that interest rate and even less than the $1,800,000 that's coming up. But it all melds out to something like you said.
If you go back to the March when we had in place the March 2017, 5.5%.
Got it. Okay. Thanks guys.
Your next question is from Oliver Chen.
Thanks a lot. Hi Richard. Our question is on the multi vendor mailer. How are you feeling about what you've been doing in terms of testing and learning and the MBM product versus the products that you're offering at everyday values? And it's been I know you're thinking about how to optimize that appropriately.
So I'm just curious about the status of that. And the second question was about the mobile
app. Yes.
Just the mobile app and Amazon has a really good mobile app. So what features do you want to have in your mobile app over time that you don't have now? Thank you.
Okay. I want to get back to you on the latter question, just because I don't have somebody here, you can help me on that one. The first one, I forgot now. What was it? It's late in the day here.
The multi vendor mailer, the multi MVM
mailer. Yes. Look, I think we feel good about it. I think I said on the last call, some things we enhanced the value and kept in the multi vendor mailer an item, some of the things we took out and did everyday low pricing on. Sometimes it's still better values based on us and the vendor working towards that end and to have it more prominent.
So there's lots of different things. It was 12 weeks ago that I said to many and to you on the phone, things are fine. There's a few things that impacted us a little more or something that didn't work. I think we've improved on all those things, but we'll continue to do that. There's by no means we haven't solved found the answer to everything, but we feel good about what's happened in the last 12 weeks as it relates to that question.
Okay. And Richard, lastly on traffic and store traffic, you've been able to do a great job on a multiyear basis with physical store traffic. What are some of the opportunities ahead or what are some of the plans you have to just aim to sustain that in a sustainable healthily growing manner? And how do we or should we be more cautious because it's been so good on a multiyear basis? It's something we monitor and it's been impressive for you to achieve such good store traffic in a tough environment.
Well, this is where we go, all shucks. And I think we're going to keep focusing on driving value of items and identify the items that make sense. And I mean it, as many of you have known us for years, as we've said many times, it's the good news, it's a lot of little things. Even gasoline is a lot of little things today because it had a big help for several years in the U. S.
Than we did in Canada for a few years. We now have, what, a dozen plus unit gas stations in countries like Japan and Australia and soon a couple of other countries. And not everywhere, but it's now a lot of it's a little extra thing in some of those countries. I think the wine and spirits thing has caught us off guard in a positive way that what started as a few wine items a number of years ago, we're actually receiving rewards on price points that are nobody can match and the trust in the Kirkland Signature brand. On the Spirit side, we never thought we'd be successful.
And it's a double positive because it's not only selling us a full margin private label item, but the competitors the brands don't like losing market share to us and they want to get a little better on pricing at Costco. So all those things have helped us. I think the apparel area, as I mentioned, has been something that we didn't we hadn't thought about it, but over the last 2 or 3 years, it's a $5 plus 1,000,000,000 business that's been growing at 9 plus percent compounded for 3.5 years. And that has more legs even though retail apparel is weak. And so we'll keep coming up with stuff.
I think the first time that our traffic went from a boring 4.2 compounded for 7 calendar years, 'nine through 'fifteen, and then it hit 3.8, 3.5, 3.3, 2.8 and everybody is saying and Bob and I and others were the first to say, this could very well be the new normal, not to just punt on it, but 4.2 is pretty hard to do. That being said, we still feel really comfortable. We've got some things for traffic drivers and fresh food still has legs, KS still has legs, gasoline still has legs, executive membership. So the credit card, the extra value. So we feel pretty good about that's in a way a non quantitative answer, but all things that I think are relevant to the story.
I mean, Richard, you have very talented merchants. Does Amazon try to hire them? Is that something that comes up in terms of that capability being such a competitive advantage?
I would hope not. We haven't to my knowledge, we haven't we've lost 1 or 2 merchants, but not in the last few years. We lose a few IT engineers, several of whom 18 months in a day call us back after they hit their cliff vesting. But that's everywhere. I mean, look, Amazon is in our town and they hire a lot of people from every company in town and out of town.
We've been fortunate. People have chosen to stick around and but that's we have the answer is no, we haven't, but we cross our fingers that will continue in the
future. Congrats. Thanks a lot. Best regards. Thank you.
And your next question is from Kelly Bania.
Hi, good evening. Thanks for taking my question. Just another one on with e commerce. I think you mentioned that you have expanded some KS items online. I was just wondering if you could elaborate what categories those are?
And really just what is the pricing strategy with online versus in store for those items that I think you said 2,000 items that crossover. I mean should we expect prices are the same or is there a difference in pricing strategy online versus in the club? Thanks.
Sometimes online they're a little higher for delivery. Sometimes as we tried some what I'll call the velocity apparel item, socks and shirts and things, we eat into some of that ourselves in terms of shipping because we want to get people comfortable ordering velocity items, whether it's apparel or health and beauty aids or sundries like K Cups. And unfortunately, I don't have the list in front of me of some of the new items. There have been several KS items, but other brands as well. If you again, give me a call after the holiday on Monday.
I still have that information with me.
Perfect. And then can I just ask one more just clarification on gross margin? I think when you talked about the core gross margin, the up 7% up 20% with and without gas, that includes the 16 basis points from the Citi Visa. But the up 12%, the 80 basis or the 80 percent of the core business up 12, that excludes the Citi Visa, is that correct?
That's correct. Yes.
Great. Thank you.
Yes.
And your next question is from Peter Benedict.
Hey, Richard. Just a couple of quick ones. MFI trends, some underlying slowing there. I mean, is that just the friction from the new the card changeovers or are you seeing anything in terms of sign ups that's concerning you?
The biggest issue is 3 openings in the quarter. Actually 2 net openings. 1 was a relo. So no, nothing that's terribly disconcerting.
Okay. Sorry, go ahead.
Nothing that is disconcerting. I shouldn't have used the word
terribly. Second question, the lift in comp that you've seen over the last several months, kind of the recovery in the comp trends, has there been anything in terms of business members versus Gold Star or anything like that, that has kind of disproportionately driven that?
No, no, not really.
Okay. And then my last question is just around the e commerce fulfillment centers. You said you got 19
of those. Where do you
see that number going in the next few years? And then could the clubs actually be used, for the whether you said 2,000 items that are in the clubs that are also offered online, can the clubs be used to facilitate delivery of those?
First of all, going for 7 to 19 is a lot. And again, we're more than saving on that because we're getting the stuff to you quicker. We're spending less on freight. We did it somewhat inefficiently to start with. There'll be more.
I don't know off the top of my head. I just know those two data points for 7 and 19. The other question was, would we ever use the warehouses fulfillment centers? Sure. And I'm saying that not suggesting it's going to happen tomorrow.
And one of the things we're doing with the Bedford, Illinois Business Center in a way is e commerce related. You order online, it will be delivered 1 to 3 days via a 3rd party carrier, certain items. I mean, I think the items have certain weight and size limitations. We're not going to be delivering sofas to New Jersey from there. But probably we'll be delivering that.
But using the business center is like using a warehouse, a different set of items, but it was easy to do because it was set up in some ways to accommodate in the past. And you will see. But it's logical to think that would you have some locations around the country that could do some things at night when they closed or a low volume unit that could help out. But we haven't don't expect anything on that front for at least the next year. And I'm always suggesting the next year because we haven't really talked about it a lot other than could we.
Okay, sounds good. Thank you.
And your next question is from Greg Milich.
Hi. I have two questions. One Richard, could you fill us in on what gas was as a percentage of sales? And I think you said the gallons comped positive. And if you had the number, that be great.
And then I had a follow-up. Bear with me.
Okay. We're almost there.
Should I go with the next question?
Yes.
Okay. So the other question, I just want to make sure I get the timing of Visa City and how that came in last year. So it's 36 bps of help to the EBIT margin, if I got this right. And in the Q4, we should probably get another 4 or 5 weeks of that benefit. Am I thinking about that right?
Or is there some other thing at work? If I remember correctly, as you were running out the AmEx program, you were sort of not signing up people and not getting the payments for signing up people for the card? Or is it just a straightforward, think about that, get a few more weeks of it, but then it cycles?
I think it's like 6 weeks, not just 3 or 4. And but then you get It was June 20, but we had some disruption around it. Bob is feeding me the information here. We're also conservative on some of the assumptions. I mean, look, it's not going to be nearly as big as it was in the last three quarters, but it's not going to be a quarter is only a quarter as big.
Got it. And In
terms of the gallon comps, it's a very strong number. You guys are laughing here. It has 2 digits, but not it's very low 2 digits. So I can't tell you anything.
Low 2 digits. Okay. And gas as a percentage of the total company sales?
Yes. Hold on a second. Do you have a
line item report? And maybe while you're digging that out, since I got you, membership fee growth in local currencies, if how much the FX hit that line?
Yes, that's an easy one. First of all, gas is a little under 10%.
Okay.
And the other one was membership fees that was in my figure, hold on. Membership.
4% in dollars.
Membership fees reported was up 4% in dollars or 26,000,000 dollars and up 5% without FX. FX was a $3,600,000 hit to the number.
Perfect.
If FX had been flat, it would be 3.6 the number would have been 3,600,000 higher.
Higher. Got it. Thank you. The 4 would have been up 5, yes.
And your next question is from Edward Kelly.
Yes. Hi, Richard. Just a couple of quick ones for you towards the tail end here. On the gross margin in Q4, is there any extra leverage from the extra week in Q4 that we should expect that's meaningful at all?
Nothing on the margin, very little, very little on the expense side, almost nothing.
Okay. And then, just a follow-up on fresh food. Could you provide maybe more color on what's teed up here in terms of the things you've been talking about, particularly in organics? And is this any kind of step change or just continuation of what you've been doing? Continuation.
Global sourcing, being the largest purveyor of USDA prime beef in the universe. And we're now in the U. S, we're something like a third of all U. S. Prime beef sales.
Before 2008, vast majority of all prime beef sales went to restaurants and hotels.
And how are you doing on capacity in some items and produce from an organic standpoint that maybe you've struggled with in the past?
Well, I think overall and not just us, but everybody's benefit, in fact, there is more supply out there. I think we feel competitively from a standpoint that we're well positioned because I think we've used the number on produce. We source produce from 44 countries. Nobody does that. And that gives us some additional advantage in that area.
But it's gotten less hard, but it's still organic is there's more demand than there is supply. But if I look at the price points of organic versus conventional on most items, the premium is still a premium, but not as big a premium as it was 2 years ago because of the fact that there's less of a supply demand imbalance.
Okay. Thank you.
And there are no further questions.
Well, thank you everyone. Have a good afternoon and holiday.
This concludes today's conference call. You may now disconnect.