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. If you would like to ask a question during this time, simply press star, then the number 1 on your telephone keypad. If you would like to withdraw your question, press the pound key. Thank you. I would now like to turn the call over to Richard Galanti, Chief Financial Officer. Please go ahead.
Thank you, Samantha. 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. We do not undertake to update these statements except as required by law. In today's press release, we reported our third quarter and year-to-date fiscal year 2017 operating results for the 12-week and 36-week periods ended May 7th.
For the 12-week fiscal third quarter, we reported earnings of $1.59 a share, $0.35 a share above last year's third quarter reported earnings of $1.24. As noted in this afternoon's release, the $1.59 reported EPS figure included an $82 million, or $0.19 per share, income tax benefit in connection with the $7 a share special cash dividend that the company declared on April 25th, which is payable tomorrow, May 26th. The realized tax benefit related to the special dividend payable to company 401(k) plan participants, as it is considered compensation to employees under U.S. tax law. There's a little over 30 million Costco shares held by employees among other investments in the 401(k) 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-branded credit card, as was the case in both the first and second fiscal quarters of this past year, the Citi Visa co-branded card program positively impacted year-over-year margins by 16 basis points and SG&A expenses by 20 basis points. Our overall bottom line in Q3 benefited earnings by $0.14 a share. By comparison, I believe in Q1 and Q2, the numbers were a penny or two less than that per share, but still significant as we're still in the first year of the program change. Number 2, gas profitability. Our profits from gas during the quarter as compared to last year's third quarter, were higher by $37 million pre-tax, or better year-over-year by $0.05 a share. Gross margin. Last year's third quarter earnings included a $19 million pre-tax benefit from a non-recurring legal settlement.
This represented an improvement to gross margin of seven basis points year-over-year or $0.03 a share, which was in last year and not this year. SG&A. This year's third quarter earnings included a $14 million or $0.02 a share hit to SG&A this year related to two non-recurring legal items. Whereas last year had a benefit, this year had a detriment. IT expenses as a % of sales was actually flat year-over-year as a % of sales and in line with sales growth during the quarter. Number 6, FX. There are two FX items. As compared to a year ago during the third quarter, 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.
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 million 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're used to pay for U.S. dollar-denominated merchandise payables. In Q3, that benefited the P&L by $9 million or a little over $0.01 a share year-over-year. LIFO. There was no LIFO charge or credit in this year's third quarter results, whereas last year in the quarter, we had a LIFO credit of $13 million, reflecting deflation in our LIFO indices. That represented about a $0.02 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 zero. Income tax rate. As previously discussed, our third 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 third 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 five comp sales figure was helped by gasoline price inflation to the tune of about 140 basis points and offset or hurt from FX by about minus 60 basis points. By segment, the comp increases were as follows: U.S. six, Canada two, and international four.
Excluding the impacts from gas and FX, the six in the U.S. would have been a five. The reported Canada of two would have been a three, and the international reported at four would have instead been a six. Still totaling up to five 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 two new units, three total and one relo. Including our 37th location in Mexico and our first business center in Canada in 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., six 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 two days ago on 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 1st. An update on the Citi Visa Anywhere card program. Additional discussion about our margins and expenses in the quarter, e-commerce results, and quickly, the recent special dividend and the related $3.8 billion debt offering that we completed recently. Starting with third quarter results. As I mentioned, sales were up at $28.22 billion, up 8% over last year's $26.15 billion in the quarter. Again, on a reported basis, and on an ex-gas 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% was company-wide. It was 4% just in the U.S. In terms of sales comparison by geography, Texas and the Midwest regions were the 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 third quarter, 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 the last two or three quarters, that'll anniversary itself by the end of June, the tobacco component. For hard lines, 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. Soft lines also were up in the mid-single-digit range, with apparel, housewares, and domestic showing the best results. 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 sale price per year, $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 third quarter, 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 notwithstanding that we're still seeing a little deflation in the core business. Lastly, in Q3, the number of MVM promotional days, they were the same year-over-year in Q3. Quite a change from Q2 when year-over-year during the 12-week second quarter, there were 17 fewer MVM promotional days. As we mentioned on the last call, we had made changes so that the lack of promotional days wouldn't impact the company as much as it had in the quarter. Moving to the line items of the income statement. Membership fees reported came in at $644 million, up 4% in dollars or $26 million, and down eight 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. 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 37.8 million Gold Star members, up from 37.5 million 12 weeks earlier at the end of the second quarter. Business primary, 7.4 million, the same quarter-over-quarter for 12 weeks. Business add-on, 3.4 and 3.4. All told, we had 48.6 million member households, up from 48.3 million 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, 88.9 million, up from 88.1 million at the end of the second quarter.
At the end of the third quarter, paid executive membership stood at 18.3 million, an increase during the 12 weeks of 345,000 new executive members or about 29,000 a week increase from the quarter. Executive members now represent about 38% of our member base and about two-thirds of our sales, closer to 70% of sales in those countries based on the countries where it operates. In terms of renewal rates, business members renewed, and these numbers would be U.S. and Canada, which is about a little 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 in the process in the first year-over-year from moving the card over to the new Citi Visa card.
Gold Star remained both at second quarter end and at third quarter end 89.5, and its total was 90.2 both at quarter end. Again, rounding causes some of that, but those are the numbers, 90.2 both at second quarter end and at third quarter end. Worldwide, which include outside of the U.S. and Canada, at the end of the quarter, it was 87.5. It had rounded up to 87.7 at the end of the second quarter, which had been up from 87.5 at the end of the first quarter. Regarding the increases in annual membership fees in the U.S. and Canada, these go into effect again next week on June 1st. Recall that we had taken fee increases in several other countries this past September 1st, 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. With regard to executive membership, the 2% reward cap associated with the executive membership is being increased from the current $750 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 million member households will be impacted by it, about half of whom are executive members and half who are primary members, $10 or $5.
Note that the membership fees are accounted for on a deferred basis. In terms of when it'll benefit the membership fee income line of the P&L, the full P&L impact would be over a 23-month timeline based on the fact that it's over the next 12 months that renewers will get their first increase, and then it's deferred over a year period 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 fourth quarter of fiscal 2016. Recall that we began last June with approximately 11.4 million co-branded cards, which represented 7.4 million accounts that were transferred to Citi at the conversion.
As of Q3 end, we now have about 1.5 million new approved member accounts, which represents about 2 million new cards since last June 20th, and that 1.5 million represents about 290,000 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 for 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 eight basis points. I'll ask you to do our little matrix here, four columns. There'll be two columns for Q2 2017 and two for Q3 2017. Column one will be reported Q2 2017 year-over-year.
Column two will be without gas inflation. Then columns three and four, again, will be reported for Q3 2017 and then Q3 without gas inflation. 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 one basis point and ex gas it was plus nine. In Q3 reported plus seven 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, zero and minus one. Minus two and minus four. LIFO, minus fives across the board. Again, having some deflation this year, but comparing to deflation last year and a credit, but nothing to credit since we're below zero there.
Other, zero and zero in the two Q2 columns and minus seven and minus seven in the two Q3 columns. 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 plus eight reported and plus 23 ex gas. If you take the numbers that I talked to you about on the benefit from the 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 in Q3, and I believe in Q2, we also benefited year-over-year by 16. Again, if you just simply look at the total, I'll just do Q3 here.
The reported +8 would have been -8 ex that single benefit of the Citi Visa, and the +23 would have been +7 ex that. That's how it shook out. Overall, Q3 reported gross margin, again, as I mentioned, was higher by eight on a reported basis, 23% excluding. As I usually do, I'll go through the core merchandise component, which is about 80% of our sales, food and sundries, hardlines, softlines, and fresh foods. The core merchandise component of gross margin was actually higher by seven basis points year-over-year, and up 20 basis points excluding gas price inflation. Excluding the benefit of Citi Visa, -9 and +4. Again, I think the +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 +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 % 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. The net of all four on their own sales was up 12. Second, ancillary and other businesses gross margins were up by about 15 basis points and up 19 ex gas deflation. About two-thirds of that year-over-year increase was due to higher gas profits, as I mentioned earlier in the call. Even without ex that, the other ancillary businesses net year-over-year were up a little bit.
2% reward, the -2 basis points or -4 ex gas. That basically means more usage by members who get the 2% executive member reward and who tend to spend more. LIFO, I talked about twice already. Lastly, the other net -7, if you will, was the fact that last year there was a $19 million non-recurring legal settlement, which of course is zero this year, so that's a -7 year-over-year comparison. Overall margins we felt were good with solid results in the core, the +12 basis points on core sales. Gas margins, again, also positively contributing not only in terms of higher gross margin within the gas, but the 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&A.
Our SG&A % in Q3 year-over-year was lower or better by 14 basis points. Actually, that +14 would be flat or zero without gas inflation. Coming in, the +14 was basically 1,044 versus 1,030 last year. 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. Again, I'll ask you to do the little matrix with the same four columns. Q2 2017 reported and Q2 2017 ex-gas, and then Q3 2017 reported and Q3 2017 ex-gas. In terms of core operations reported in Q3 2017, we were up eight basis points, or I'm sorry, better or lower by eight basis points year-over-year. Without gas, better or lower by one basis point.
In Q3 reported lower or better by 21 and ex-gas lower or better by nine. Central minus two and minus three. In other words, higher by that amount year-over-year, minus one and minus three. Stock compensation pretty much grew in line with sales, but it's always a big impact in Q1 when we do our big grant each year. Stock compensation was minus one and minus two or higher year-over-year in Q2, the two Q2 columns, and minus one and minus one, again, a little higher in the Q3 columns. Other zero and zero in Q2, and the two Q3 columns, minus five and minus five. That relates to the $14 million, the two legal items that were non-recurring that impacted this year's Q3. All told, last year in Q2, SG&A reported was lower or better by +5 basis points.
Ex-gas inflation higher or slightly higher by four basis points. This year reported better by 14, ex-gas zero, basically flat. I'll just use the two Q3 columns. If you take out the benefit from the Citi Visa conversion, that was 20 of the 14, if you will. With ex that, it would have been higher or minus six. The zero would have been higher or minus 20. Within that, excluding the Citi Visa essential year-over-year was higher by a basis point reported and three without gas. Nothing unusual in the quarter. Depreciation expense was slightly higher year-over-year. Stock compensation expense was a basis point higher, and other was minus five. Next on the income statement line. Pre-opening expense $3 million lower this year, coming in at $15 million versus $18 million.
Quite a few less openings, eight last year in the quarter and three this year. That has to do with timing of locations too. All the pre-opening doesn't actually happen in the quarter in which the actual opening occurs. Certainly this year's figure also includes some of the pre-opening expenses related to our entry into two new countries, Iceland and France. All told, operating income in Q3 came in at $968 million or better by $110 million, which is 13% higher year-over-year. Below the operating income line, reported interest expense came in at $21 million. Interest expense in Q3 this year, that's quite a bit of a lower improvement from last year's Q3. That $21 million is nine million lower than last year's reported $30 million figure. Virtually all of it is due to the payment back in March of the $1.1 billion, 5.5% fixed rate note.
It was a 10-year note. We paid it off on March 15th. That is about $60 million a year annualized interest savings since that March 15th date. As we reported last week, we successfully completed new debt issuances totaling $3.8 billion. That was done in four tranches. There was an $800 million five-year tranche, then three $1 billion tranches at five, seven, and 10 years. The details of that can be found in the press release dated May 9th, with the new debt having a blended rate of a little over 2.6%. As well, on May 15th, we gave notice of early payoff of our December 2017 $1.1 billion, 1.8% notes. The expected payoff date will be June 15th, 2017. Next line item on the income statement, interest income and other.
It was higher year-over-year by $11 million, coming in at $18 million in Q3 as compared to $7 million a year earlier. Actual interest income for the quarter was better, but better year-over-year by $2 million. In addition, we benefited by about $9 million, I mentioned that earlier, in credits mostly relating to the various FX items that I discussed at the beginning of the call. Adding these two line items to operating income, overall pre-tax income was higher by $130 million or 16%, coming in at $965 million this year during the 12 weeks as compared to $835 million a year ago. In terms of income taxes, a reported tax rate this quarter of 26.8%. Normalized, that would be 35.3%, and that compares to last year at 34.2%. We'd expect it to be in that 35.3%-ish range for the year.
Overall reported net income came in right at $700 million, and that's compared to our reported $545 million 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. One of them is not on there, is depreciation amortization for the quarter, total $320 million. Year-to-date, $929 million. 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 third quarter. We also take out all the non-merchandise payables and recalculate it, so it's merchandise payables as a percent of inventories. That too came down two percentage points from 89% a year ago to 87%.
Still a vast majority of our inventory is being trade balance funded. Average inventory per warehouse was up $693,000, coming in at $13.4 million compared to $12.7 million a year ago. Almost, not quite 40% of it was majors, electronics. We're seeing a big shift, finally, a big increase particularly in TVs, kind of the next generation of a bigger, more 4K, and you name it, as well as some other electronics areas. Small increases in various other departments. As well, some build up 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. 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 million, in Q2 $515 million, and in Q3 $538 million. Year-to-date, we're at $1.723 billion. Overall for the year, we'll probably be in the $2.5 billion to $2.7 billion range. Probably it's maybe $100 million less than we had 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 four-week periods ourselves, they came in at 11%, which represented a 13% or 14% in the seven. The seven was weak in part due to the shift in both Eastern Mother's Day. 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. We've improved in stocks on high velocity items, as evidenced by the additional inventories in those areas and more locations of it. In April, we launched something new, GE Appliances, along with their self-services 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 we've also expanded some of our KS groceries and consumables items on .com.
If you're in the mood for A4 Wagyu center cut New York strip steaks, we apparently have a great deal on four 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, improved 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 six to nine 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 third quarter, we opened three locations, including one relo, so a net of two. Quite a lot of openings in Q4, 12 total, including Iceland just a couple of days ago. In fiscal 2016, 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. Of 26 for the year, that would be about 4% square footage growth. Of the 26, half, 13 are in the U.S., a quarter, six are in Canada, and then one each in those countries that I mentioned earlier. Again, of course, those include our first location to open in France, which is scheduled for, I believe, June 22nd. Again, Iceland just opened. Total square footage, some of you asked about. At Q3 end, it stood at 105.4 million square feet.
In terms of buybacks, in Q1, we bought back $122 million worth, Q2 $66 million, Q3 $45 million. A total of $233 million of stock, or 1.486 million shares at an average price of about $156 and a half. Regarding dividends, in addition to doing the special dividend, we increased our quarterly dividend, and that was announced also on April 25th. 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. Again, that'll also be paid tomorrow, May 26th, the $0.50 quarterly amount. The $2 a share annualized dividend represents a total annual cost to the company of about just under $900 million. As I mentioned earlier, the $7 share dividend, that will be paid out to shareholders tomorrow as well.
Our fiscal 2017 fourth quarter scheduled earnings release date. This is an extra week in the year, for the 17-week fourth quarter that ends on September 3rd. We'll do the earnings release after the market closes on Thursday, October 5th, with the earnings call that afternoon, again, at 2:00 P.M. Pacific Time. With that, happy to open up for questions and answers, and I'll turn it back over to Samantha.
Ladies and gentlemen, as a reminder, if you would like to ask an audio question, press star, then the number one on your telephone keypad. Your first question comes from the line of John Heinbockel.
Richard, first topic, expansion and business centers. 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 one, and when you think about, is there a big potential business center expansion here? 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 four this year, so 18. I could be off by one. Our first in Canada. Recall that we had business centers for, I think we'd gone from four or five to seven or eight over about 10 plus years. We continue to tweak it. Needless to say, we've found something that seems to work now, and there is a little method to that madness. It's corollary to what our primary business is opening full Costco membership warehouses.
We would continue to open more, but I think, again, this is a guess at this point, but assuming the base at the end of the year is 18, I could be off one, using that 2-7 or 2-6 or 3-5, it'll 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. So far, so good. I think a couple of years ago, we said to ourselves, one day could there be 30 or 40 of these? Who knows? I remember we said years ago, one day, could we have 100 Costcos in the U.S.? We're approaching 500. It's by no means the same as regular warehouse clubs in terms of capacity, a lot lower than that.
I just look at what we've done in the last couple of years and extrapolate that for the time being.
Okay. Is it too early for next year?
It's probably too early. It is. Our goal is going to be to get towards that, but that always seems to be a challenge each year, but we keep working towards that end.
Lastly, on gross margin. If I look at ancillary, ex gas ancillary was up maybe six or seven basis points. Did any one department drive that, and how is pharmacy doing within that? The major categories within their own sales, that was improved about five 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. Pharmacy was fine. Notwithstanding all the challenges that industry has, 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. It's not like it's 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. Thanks for the color on those bigger, more 4K TVs. My serious question is, first, the gasoline gross profit dynamics for Q4. Can you just give us a sense relative compare? I have one follow-up.
As everyone knows, 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 second quarter call, which Q2 hadn't been a great comparison, was the other way. We didn't think it was going to be this good, we also didn't know that gas prices were going to continue down. They've gone up lately. 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.
That's why we share it with you every quarter because there are going to be fluctuations that are dictated by what oil prices are doing.
Got it, okay. 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 were a few buckets of margin that were helping. Some of it's new sign-ups, some of it's 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?
Generically, the biggest bang for your buck is in the first year. On the one hand, there's a little extra because maybe there's some transition challenges right around there for a few weeks, so that's good news going forward for a little bit longer. There's also more incentive and a bigger bang for your buck the first time you offer it. You get more sign-ups in the first week than the second week than the third week. More signups mean more bounty. Generally speaking, we still think it'll be a net accretive, if you will, or additive to the company in the second year. The big bang is in the first year.
Okay, thank you.
If you look at Q4, there's five or six weeks of the big bang, if you will, before June 20th and 10 or 11 weeks afterwards. There's a little bit of both, two-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's 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% e-com 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. 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, 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 the online side, we're not really worried about what others are doing. There's a lot of good things about online, and there's challenges, and we're trying to do more of the good things. Again, we'll continue to do the way we do it. Don't expect us to increase by 69%, partly through acquisition, we're going to keep doing it organically. We think 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. 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. I've already turned that sheet to the side. 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. Certainly, the fact that our margins are strong, that we've got an upcoming fee increase that's 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. So we kind of think we can do both, have decent margins and drive our business and lower prices.
I'm just going 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 of the benefit you'll get from the fee increase, is going to go back into price?
Well, I can't really tell you that, but we're known for giving lots of things back to the consumer, to our member, and it's not completely formulaic. 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 questions here. First, curious, the penetration on the new Visa card as a use of tender here in the third quarter and relative to the first half of the year. Also curious to where it was relative to when you had the agreement with Amex.
Well, we're talking U.S. dollars because it's a U.S. program. I believe we're in the 46 range currently. That's trended up since its inception a year ago. 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 Citi Visa, because we accept all Visas. We accepted all Amex cards, not just the Costco co-brand one. I believe we got up to the 43, 44 range, 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. Again, more incentive for that card to be used everywhere, which helps us as well.
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. I think the answer is yes, it probably has a plus sign in front of it instead of a minus, but not huge. 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, two and a half plus for every dollar spent inside.
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, it creates carry balances and late fees and everything else. It's just a bigger portfolio. As one would expect, given the greater market share presence that a Visa has in the market, there's going to be more usage. If we can get that member to have that as the top of wallet, there's going to be more usage on it, and that's exactly what's happened.
Okay, great. Thanks.
If anything, the expectation's been a little better than planned on that.
Okay, to 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 million that Amazon has, but how big do you think you can grow that? Then also on the margin profile of your e-commerce business, I do believe it's better than your brick-and-mortar margins. I just wonder 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 first three quarters, something in the mid-120s. We have an extra week in there, too, this year. Again, it's well over $4 billion now, and 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. I'm sorry. In terms of profitability, nothing has really changed there. Generally speaking, the gross margin of dot.com compared to the gross margin of the warehouse, ex gas, the four walls of the warehouse, the warehouse is a little higher. The SG&A on dot.com is a lot lower, so the pre-tax earnings of dot.com is higher. Nothing has really changed there.
Okay, 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 top of my head. I think the SKU count, ex office supplies, because that's done through a third party, there's 8,000 or 10,000 office supplies, I believe. I think we've got about 8,000 or 10,000 items, and that's exclusive of about 2,000 of the roughly 4,000 in the warehouse are online.
Okay, perfect. Thanks very much.
Needless to say, fresh food's 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 question. I'm just actually trying to get a sense on the gross margin in terms of the MVM. How much of the change in the MVM from Q2 to Q3, or how much of the year-over-year change in merchandise margin in Q2 versus Q3 would've been a function of the MVM changes? Just wondering what the number of days on the MVM we can expect in Q4 2017 versus Q4 2016, and then I just had another follow-up.
Okay. Well, first of all, in terms of the number of days, I think it's four less this coming year versus a year ago. Three or four. It's a few days, so not terribly meaningful. The big meaningful was in Q2 when it was 17 less on 84 days. I'm sorry, the other question, Karen, the first one you had asked?
Well, when we just look at how the merchandise margin in Q2 versus the merchandise margin change in Q3, I guess how much of the difference in the improvement sequentially was due to the MVM changes? Like the pressure that you had in Q2 versus what we're looking at in Q3?
I think the biggest change from Q2 or year-over-year and Q3 year-over-year was the number of MVM days. We're still being pretty aggressive on the MVM being fewer items with better savings, it costs a little more, if you will, to have a seat at the table there from a vendor merchandising standpoint. We're also cognizant of the fact that we're not here just to drive margins down. We've got a lot of buckets of stuff. 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. There's so many little pieces that can affect it. Overall, we felt pretty good about the Q3 comparison versus the Q2.
Okay. I guess.
There's no material change.
Right.
There's no material change.
Okay. I guess just as, obviously, we're getting out of a deflationary period and into slight or maybe slightly inflationary, there's just been a lot of questioning as to how deflation impacted your P&L versus how inflation will impact your P&L. I guess I just want 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. 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&L as we're no longer in a deflationary period on the food side?
Well, I think for low-margin retailers, certainly we're at the low end, the lowest end of margins, for supermarkets, low on the food side. A little inflation is good. A little deflation hurts you a little bit. Yes, we've been up. The fact that deflation has modified a little bit, it still has the D in front of it, not the N. 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 second quarter or first quarter end, year-over-year, per pound, beef was down 10%. We were selling more than 10% more tonnage and certainly having lower gross margin dollars because of it. As that changes, that'll help us a little bit.
Well, I guess presumably higher gross SG&A dollars too, because of the labor content. That's kind of what I'm getting at. It seems like you don't have a lot
Well, absolutely. On the fresh foods, yes, you have higher labor. Inflation will help all those things.
Okay. Thanks.
Your next question comes from the line of Zachary Fadem.
Hi. Good evening. Kirkland Signature continues to perform pretty well. To what extent is this growth coming at the expense of branded items, if any? 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 manufacturer that's supplying us. Not always, by no means not all the time. It's another competitor, and again, we're pretty transparent about it. We want brands and private label. We'll continue to see both of those. It really is an item business. Some of the success on all the big items, paper towels, water, giant items that are hundreds of millions of dollar. We have several items that are $1 billion a year in sales, several KS items. In some cases, we have a billion-plus dollars on the branded side of the same item. Whether it's Charmin or Bounty and Kirkland Signature on those two items. Whether it's various regional brand names of water versus Kirkland Signature water.
It works for us, and we'll continue to do that. The new categories. Well, I think in the last year or two, I think the thing that has done very well for us is wine and spirits, and that continues to have some legs, substantial legs. The good news, like other KS items, when the brands lose some market share, they get sharper on their own prices, which with us, not with everybody, hopefully, which makes us even more competitive on the brands. All that stuff, in our view, works to our benefit, and having the brand loyalty certainly helps with membership and wanting them to come back to Costco. Other areas, apparel still has legs, if you will, and arms, I guess. You've got cosmetics. Organic items. 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 million-$25 million 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 two bucks, meaning we would sell it for $1.49, we're out there at sub $1 on a great item and a full margin for us and driving some real volume.
I think apparel, cosmetics, health and beauty aids, organic food items, not fresh, but packaged food items, all those are areas where we continue to, I think, have some room to grow.
Okay, thanks for the color. Richard, not to beat on e-commerce again, but could you provide some early color on the Instacart and Shipt partnerships? Is there anything notable you'd call out regarding customer response or basket sizes versus an in-store shop? 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 operates out of five cities with several markets, but they're in the process of, this is out there, offering several items, one to three-day delivery. We're participating in that 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. That's growing. There's a few others I've mentioned, Shipt and Dolly was one, and somebody else. Boxed? I don't know if we're doing it. That's back east. Yeah, look, the two big ones are Google and Instacart, there's not a whole lot of other color.
They're working. We want to sell merchandise, they help us do that. 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 Fassler.
Thanks a lot, Richard. Good afternoon.
Hi.
First question as a follow-up on inflation. We are seeing overall CPI start to recover, but we've seen the producer price index, food PPI, come back a little bit faster. Are you concerned at all about any kind of gross margin squeeze? Is what you're seeing on the cost front resembling what some of those macro indicators, or should we just think about the fact that pricing is moving higher in general as being a net positive for you going forward?
Pricing moving general is a net positive. If anything, though, I think that we create some of our own deflationary pressures because we're good. Look at the MVM example. Greater values to the member means lower prices, which means us and our vendor lowering the prices some. Most of that is driving prices down from our suppliers with the anticipation of significantly more unit volume. The good news is, most of the time, that happens. That's what we do. Those things don't always work in concert with the immediate bottom line improvement.
Understood. Second question just relates to competition. As Amazon takes tens of billions of dollars of retail share annually, and clearly the biggest share gainer by far, 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 store? Is it more consumable focused than it had been, or is it kind of business as usual with no sign of the change in the backdrop?
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. increase in sales or whatever was $50 billion, they were half of it. They were. They were $25 billion, but 25 divided by 50 is half. We were also up. The fact is, there's others in the industry that were down $50 billion, and so they were a quarter of $100. Minus 50 is a plus 50. That $25 billion 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, of course, great prices and great items, certainly fresh food, certainly gas station traffic, which brings them into the parking lot, if you will. Certainly the loyalty program, which they have one, too. All those things help us. 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. We're still pretty good at all that stuff. I think, again, the Kirkland Signature has helped that as well. So far so good. 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. Even they would acknowledge and others.
There'll be more competition in the future. 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 take share from us. We haven't really seen a 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&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&L in four Q and beyond?
I'm sorry, can you repeat that?
On SG&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 Q4 and beyond, especially since we just cycled some of the labor investments you made a year ago.
Right. Well, look, the biggest put and take is sales. If we can get another percentage point or two 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. Again, that's going to happen slowly over time in a positive way. In some quarters, the inflation in the U.S. does more than any small offset to that. IT expenditures, somebody internally said we'll probably get the question asked about it. Is the zero 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 to the end of the fiscal year, day one of the new fiscal year, when we installed the new main accounting platform on which other things will be built. We had a lot of third-party contractors, a lot of training, which you write off, you don't capitalize. Then we got a little help there. In fact, it'll come down over time, it's not going to be zero. I think we're still doing e-commerce helps you a little bit to the extent, even at 11% last quarter, or 13% or 14% in the first two-thirds of the quarter before Mother's Day and what have you. That's a higher growth rate than the rest of the company. That's a much lower SG&A.
That helps you a little bit. 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 that March, like bottom of scale. We hadn't done that, I think, in six years. Every three years, we look at everything in a formal way, 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. 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 open in another Seattle unit, which we have two in the last two and a half years, or in the greater L.A. market, it's a great success net of cannibalization, but you only get a few thousand extra members because everybody's already a member. They're just going to come more frequently because we're 20 minutes drive from their home, not 40. 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, paid signups over the eight or 10 or 12 weeks prior and through opening day, you could have 25,000-40,000 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? Yeah. Over 35,000. It's national news. Right. 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 two years ago is getting fewer signups.
Fair enough. That's helpful. Thank you. Good luck.
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.
In comp buildings? Yeah. Are the memberships going up?
Look, I think they are, but it's probably a very small number, closer to zero than the number above it. Part of that is when you're opening. Let's say we open in Redmond, where Microsoft is headquartered. That cannibalized knowingly three locations, two 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 thousand new members, but not 20,000 new members. If we average roughly 62,000, if you just take 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, on the comp of those three locations is down because some of those members now are allocated to the new warehouse.
That was funny from what I wanted to ask about, just popped into my head. How do you think about that as your business matures in the U.S.? Does that make you want to slow down your center growth? 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?" Five 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. We know, by the way, on average, they're going to be a little slower. They 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 and Redmond.
We waited on Redmond for 10 years to do, knowing that we actually owned land in Redmond 15, 20 years ago. As we opened Issaquah, Kirkland being the first one on the east side of the depot. Then several years later opened Woodinville, which is north of that, north of Redmond. We kept holding it. We actually sold the land years ago. We try to be pragmatic about what we do. 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 a half a million population to serve a warehouse, and then it was 450, and then it was 400.
We have some very successful warehouses that you divide the number of households in the population, it's in the very low 200s and a few in the high 100s. Hopefully we'll keep making that go in that direction. That'll give us a little more life. Hopefully, the business centers create some life. Hopefully dot.com continues to improve, hopefully we find a couple more countries. We think we've got plenty to go, and until that changes, we'll let you know.
All right. My follow-up question, my real question was, I noticed BJ's, a competitor of yours, is offering some pretty significant discounts on their memberships. I think you get the first three months free, if I'm remembering the commercial correctly, and I think it's $40 for the first year. Does that matter to you guys? You're putting a fee increase through, 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 advertised it, good. We don't advertise. We don't spend money on that. We love seeing TV and print ads still from both other competitors. We're not concerned about it. We think that the value at Costco is still at a significantly higher price or without a free three months is a much better value. We think that's evidenced by our success of what we've done over time and the fact that even what we've done in the past, renewal rates have not really been impacted by it.
All right. Thanks for taking my questions. Appreciate it.
Sure.
Your next question is from Brian Nagel.
Hi, good afternoon.
Hi.
I apologize. I jumped on a little late, so if you address this, already but on the gross margin, Richard, 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?
Gas helped the margins, as did other ancillary businesses as well. Again, quickly cut to the chase, the roughly 80% of our sales, which is food and sundries, hardlines, softlines, and fresh foods, year-over-year on their own sales, they were up 12 basis points. It was a lot of different things. Okay.
Your next question comes from Scot Ciccarelli.
Hey, guys. Scot Ciccarelli. Two questions. Number one, 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, 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. We had an increase in inventory for e-commerce related stuff, not at the warehouses, but we went from seven to 19 distribution points in the last year. We're getting closer to the customer. We're also working with third parties. I mentioned to the call the GE scheduling system. There's other scheduling things like that that we're doing. I mentioned the thing we're testing right now in our Bedford Park, Illinois business center I mentioned last quarter, where in addition to this 50 or 70-mile radius where we deliver with Costco trucks, through third party, there's one to three-day delivery to 17 states all the way to Pennsylvania and New Jersey.
If anything, I think it's getting quicker and cheaper to do these things for us.
Got it.
maybe we started off high to begin with based on how we did it, but we're improving it.
Okay, understood. Second question is, hopefully this is an easy calculation here. When you look at the debt redemptions, the debt issuance, looks like you guys will be incurring about $25 million more a year in interest costs, call it $6 million 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, I came in with a number that's a few million higher than that, but still has a two in front of it. No, it's pretty straightforward. You've got $3.8 billion times somewhere between 2.6 and 2.7, call it 2.65. It's a rounded number. You got the pay down of the March debt that we did, which was a $60 million a year savings. You've got the call, which we'll do shortly, of the $1.1 billion, 1.8%. That's on the interest expense line. A little bit of an offset will be the cash. As you know, we borrowed $3.8. Well, roughly $3.1 is the dividend. The other $700 is cash earning less than that interest rate, and even less than the one an eighth that's coming up.
it all melds out to something, like you said, if you go back to the March, where 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 in the MVM product versus the products that you're offering at everyday values? I know you're thinking about how to optimize that appropriately, so just curious about the status of that. The second question was about the mobile app.
Yeah.
Just the mobile app, Amazon has a really good mobile app. 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 who can help me on that one. On the first one, I forgot now. What was it? It's late in the day here. What?
The Multi-Vendor Mailer, the MVM.
Oh, yeah. No, 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. There's lots of different things.
Yeah.
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. We haven't found the answer to everything, but we feel good about what's happened in the last 12 weeks as it relates to that question.
Richard, lastly, on traffic and store traffic, you've been able to do a great job on a multi-year 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? Should we be more cautious because it's been so good on a multi-year basis? It's something we monitor, it's been impressive for you to achieve such good store traffic in a tough environment.
Well, this is where we go, "Aw, shucks." I think we're going to keep focusing on driving value of items and identify the items that make sense. I mean it. As many of you who've known us for years, we've said many times, 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., then we did in Canada for a few years. We now have, what, a dozen-plus gas stations in countries like Japan and Australia and soon a couple of other countries. Not everywhere, but 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 nobody can match, and the trust in the Kirkland Signature brand. On the spirits side, we never thought we'd be successful. It's a double positive because it's not only selling us a full margin private label item, but the brands don't like losing market share to us, and they want to get better pricing at Costco. All those things have helped us. I think the apparel area, as I've mentioned, has been something that we hadn't thought about it, but over the last two or three years, it's a $5-plus billion business that's been growing at 9-plus% compounded for three and a half years.
That has more legs, even though retail apparel is weak. We'll keep coming up with stuff. I think the first time that our traffic went from a boring 4.2 compounded for seven calendar years, 2009 through 2015, then it hit 3.8, 3.5, 3.3, 2.8. Everybody's saying Bob and I and others were the first to say, "This could very well be the new normal." Not to just punt on it, 4.2 is pretty hard to do. That being said, we still feel pretty comfortable. We've got some things for traffic drivers, Fresh food still has legs.
Yeah.
JS still has legs. Gasoline still has legs. Executive membership, so the credit card, extra value. 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.
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. To my knowledge, we've lost one or two merchants, but not in the last few years. We lose a few IT engineers, several of whom 18 months to a day call us back after they hit their cliff vesting, but that's everywhere. Look, Amazon is in our town, 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. The answer is no, we haven't, but we cross our fingers that'll continue in the future.
Congrats. Thanks a lot. Best regards.
Thank you.
Your next question is from Kelly Bania.
Hi. Good evening. Thanks for taking my question. Just another one 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. 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. 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 items, 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. 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. Again, give me a call after the holiday on Monday.
Okay.
I just don't have that information with me.
Perfect. Could I just ask one more, just clarification on gross margin. I think when you talked about the core gross margin, the up seven, up 20, with and without gas, that includes the 16 basis points from the Citi Visa. The up 12, the 80% of the core business up 12, that excludes the Citi Visa. Is that correct?
That's correct. Yes.
Great. Thank you.
Yep.
Your next question is from Peter Benedict.
Hey, Richard, just a couple quick ones. MFI trends, some underlying slowing there. Is that just the friction from the card changeovers, or are you seeing anything in terms of sign-ups that's concerning you?
The biggest issue is three openings in the quarter. Actually two net openings. One was a reload. No, nothing that's terribly disconcerting.
Okay.
Nothing that is disconcerting.
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. Nope, not really.
Okay. My last question is just around the e-commerce fulfillment centers. You said you're getting 19 of those. Where do you see that number going in the next few years? Could the clubs actually be used for the, I think 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 from 7 to 19 is a lot. 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 as fulfillment centers? Sure. I'm saying that not suggesting it's going to happen tomorrow. One of the things we're doing with the Bedford Park, Illinois Business Center, in a way, is e-commerce related. You order online, and it'll be delivered in 1 to 3 days via a third-party carrier. Certain items. I think the items have certain weight and size limitations. We're not going to be delivering sofas to New Jersey from there.
Probably we'll be delivering that. Using the business center is like using a warehouse, a different set of items. It was easy to do because it was set up in some ways to accommodate it fast. You will see. It's logical to think that would you have some locations around the country that could do some things at night when they're closed or a low volume unit that could help out. We don't expect anything on that front for at least the next year. 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.
Okay.
Your next question is from Greg Melich.
Hi. I had two questions. One, Richard, could you fill us in on what gas was as a percentage of sales? I think you said the gallons comped positive, and if you had the number, that'd be great. I had a follow-up.
Bear with me. You know what it was? Okay, we're almost there.
Should I go with the next question?
Yes.
Okay.
No.
The other question, I just want to make sure I get the timing of Visa, Citi, and how that came in last year. It's 36 basis points of help to the EBIT margin, if I got this right. In the fourth quarter, we should probably get another four or five 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. Is it just a straightforward think about that, get a few more weeks of it, but then it cycles.
I think it's like six weeks, not just three or four.
Okay.
You get.
It was June 20th. We had some disruption last year.
Yeah. There was June 20th. We had some disruption around it.
We're also very conservative on some of the assumptions.
Bob is feeding me the information here. We're also conservative on some of the assumptions. Look, it's not going to be nearly as big as it was in each of the last three quarters. It's not going to be only a quarter as big.
Got it.
In terms of the gallon comps, it's a very strong number. The guys are laughing here. It has two digits, but it's very low two digits, so I can't tell you anything.
Okay, gas as a % of the total company sales?
Yeah, hold on a second. Do you have the line item report?
maybe while you're digging that out, since I got you, membership fee growth in local currencies, how much the FX hit that line?
Yes, that's an easy one.
Okay.
First of all, gas is a little under 10%.
Okay.
The other one was membership fees. That was in my figure. Hold on.
Membership.
4% in $.
Oh, I got it right here. Membership fees reported was up 4% in $ or $26 million, and up 5% without FX. FX was a $3.6 million hit to the number.
Perfect.
If FX had been flat, the number would've been 3.6 million higher.
Higher. Got it. Thanks a lot.
The four would've been a five, yeah.
Your next question is from Edward Kelly.
Yeah. Hi, Richard. Just a couple 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 on the expense side. Almost nothing.
Okay. Just to follow up on fresh food, can 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.
Right.
Global sourcing. Being the largest purveyor of USDA Prime beef in the universe. 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.
How are you doing on capacity in some items in produce from an organic standpoint that maybe you've struggled with in the past?
I think overall, not just us, but everybody's benefiting from the 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. It's gotten less hard, but it's still, organic is there's more demand than there is supply. 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 two years ago because of the fact that there's less of a supply-demand imbalance.
Okay. Thank you.
There are no further questions.
Well, thank you everyone. Have a good afternoon and evening and holiday.
This concludes today's conference call. You may now disconnect.