Good afternoon. My name is Kimberlynn, and I will be your conference operator today. At this time, I would like to welcome everyone to the Costco first quarter 2017 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, 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. Mr. Richard Galanti, CFO, you may begin your conference.
Thank you, Kimberlynn. Good afternoon to everyone. Please note 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. For the 12-week fiscal first quarter that ended two weeks ago, this past Sunday, earnings came in at $1.24 a share, up 14% or $0.15 a share over last year's reported earnings per share of $1.09.
A few items to point out. As was mentioned in today's release, this year's first quarter benefited from a non-recurring $51 million legal settlement. This $51 million pre-tax figure represented a 19-basis point benefit to gross margin and a benefit to first quarter's earnings per share of $0.07 a share. Last year in the first quarter, there were two non-recurring items that we mentioned that together negatively impacted last year's earnings results. In that quarter, we recorded a $22 million pre-tax charge, which represented an eight-basis point impact to SG&A to the negative, and a reduction in last year's first-quarter earnings of $0.04 a share. Stock compensation expense was 13% or $25 million higher year-over-year, so $0.04 a share more. There are about 4,800 people of our employees that receive restricted stock units as a significant part of their annual compensation.
These grants are made annually each October in our fiscal first quarter, and then typically vest over a five-year period with accelerated vesting when the recipient reaches 25, 30, and 35 years of employment with the company. Factors driving this increase included additional levels of accelerated vesting, given a rising number of our employees achieving long tenure with the company, an increased stock price with a five-year ago grant coming off when the stock price was in the 80s to last year's grant when the stock price was in the 150s. Of course, having a larger number of employees to plan. Note that the $25 million year-over-year increase in Q1 is a larger year-over-year dollar increase than we'd expect to record in each of the second, third, and fourth fiscal quarters of this year, given the October RSU grant cycle. Next, gross profitability.
Our profits from gas during the quarter as compared to last year's first quarter were lower by about $20 million pre-tax or $0.03 a share. Primarily a function of last year's very strong profit results in the first quarter for gas. Fifth, IT costs. These expenses negatively impacted SG&A in the first quarter on an incremental year-over-year basis by about $18 million or five basis points to SG&A, which is about $0.025 a share. Lastly, when I get to the discussion on year-over-year gross margin and SG&A comparisons, I'll review with you the very positive impact that our new Citi Visa deal has had on margins, SG&A, and of course our bottom line.
Turning to the first quarter sales, total reported sales were up 3%, and our 12-week reported comparable sales figure on a reported basis came in at 1% year-over-year. Comp sales were negatively impacted by weaker FX relative to the U.S. dollar and slightly impacted by gas price deflation for a combined negative impact to the reported comp number of about three quarters of a percent of sales. Excluding gas deflation, the reported 1% U.S. comp figure for Q1 remained at 1%. The reported Canadian comp figure +4 would've been +5 ex gas deflation and FX. The reported 0% other international comp figure excluding gas and FX would've been +3%. Total comps reported at 1% for the quarter, again, excluding gas and FX, would've been +2%.
Of course, this +2% total company adjusted figure is also being impacted by increases in deflation in other merchandising categories overall, primarily in foods and hard lines. In terms of new openings, in the first quarter, we opened nine new locations, which included one relo, so a net increase of eight. Later in the call, I'll discuss our upcoming expansion plans for the balance of the fiscal year. This afternoon, I'll also touch on membership trends and renewal rates. Again, discuss margins and SG&A in Q1, update on the new Citi Visa relationship and the card, which we began offering in the U.S. and Puerto Rico this past June 20th during the fiscal fourth quarter of 2016. Talk about e-commerce then a couple of other items of note.
Going down the income statement, again, sales for the first quarter, the 12-week end of November 20th, were $27.5 billion, up 3% from last year's first quarter of $26.6. Again, on a comp basis, reported 1% and ex gas and FX +2%. Again, that +2% still being impacted by other aspects of deflation that we hadn't called out historically. For the quarter, the +1% reported comp results were a combination of an average transaction decrease of 1.3% on a reported basis and an average shopping frequency increase of 2.2% to the positive. Now the average transaction decrease of 1.3%, this includes again the combined headwinds of FX and gas that I mentioned, which is about three quarters of a percent, and I'm sure other levels of deflation in other categories. I'll give some examples of that later in the call.
In terms of sales comparisons by geographic region, within the U.S., Northwest, Texas, and Midwest showed the best results. Internationally, in local currencies, better performing countries were Mexico, U.K., and Korea. In terms of merchandise categories for the quarter, in terms of sales for those, within food and sundries, overall flat year-over-year with spirit sundries and deli coming in best. Tobacco, of course, as I mentioned in the last call, was down a little over 20% year-over-year as we continue to see lower sales in that category. As I mentioned before, these big tobacco declines should anniversary this coming spring. For hard lines, also flat year-over-year. The departments with the strong results were hardware, tires, and health and beauty aids. I'll give you an example of deflation, which is impacting this department.
In November, for example, our reported November sales, TV sales in dollars were up 2% and in units were up 17%. Quite a bit of deflation on big ticket items as well as some of the fresh foods items that I mentioned earlier. Within soft lines, up low single digit comps with apparel, small electrics and special events being the standouts. Within fresh foods, produce and deli were the strongest departments. In ancillary businesses, hearing aids and optical show the best results. Again, in recent months, we've seen additional deflation overall in the low to mid-single digit range in many food and fresh meat categories, and a little more in some of the other non-food areas, as I mentioned, like electronics. Moving to the line items in the income statement.
Membership fees, good results for the first quarter, coming in up 6% and six basis points as a percent of sales, up $37 million year-over-year. In terms of membership fees, good renewal rates, 90% U.S. and Canada, actually 90.3, and 88% worldwide, rounding up to 88%. Continued increasing penetration of the executive membership. In terms of number of members at Q1 end, compared to fiscal year-end 12 weeks earlier, Gold Star, which stood at 36.8 million accounts, at Q1 end, it was 37.1. Primary business was 7.3, both at fiscal year-end and at Q1 end. Business add-ons, three and a half and three and a half. For total household memberships, 47.6 at fiscal year-end and up to 47.9 million at first quarter end.
Given that many of the people have two cards, many of the accounts have two cards, at fiscal year-end, we stood at 86.7 million cardholders, and at first quarter end, 87.3 million people with a membership card. At the November 20th first quarter end, executive members stood at 17.7 million member households, an increase of 348,000 since the end of the previous quarter. That's about 29,000 additional executive members per week increase during the 12-week quarter. As I've said before, executive members are a little over a third of our base and a little bit more than two-thirds of our sales were of executive members that are offered. In terms of renewal rates, our business renewal rate, which at fiscal year-end stood at 94.4, came in at 94.3% renewal rate as of first quarter end. Gold Star at 89.5, both at fiscal year-end and at first quarter end.
For total, 90.3% at fiscal year-end, it remained at 90.3% at first quarter end. Worldwide, at year end, it was 87.6%, and it ticked to 87.5% at first quarter end. As you know, it's been probably almost two years in Canada when we converted to the Mastercard. With that, we saw as we would've expected, a slight decline in the renewal rate. As occurred in Q4 2016, this past summer, we saw that finally reverse and we saw an uptick in renewal rates in Canada, and that continued in Q1 of this fiscal year too. We're now seeing the same thing in the U.S. Had ticked down a little bit over the last couple of quarters, and it ticked down a little bit as well in Q1. We don't see any issues there at this point.
Regarding membership fees, at the beginning of this past September, or beginning of our fiscal year, we increased membership fees in our Asia operations, Taiwan, Korea, and Japan, as well as in Mexico and the U.K. Again, that's due to deferred accounting. It's about 15% of our membership fee income base, and due to deferred accounting and the fact that it'll roll in over the next 12 months since September, that'll be a little less than $0.01 a share a quarter. Before continuing down the income statement line items, a quick update on the Citi Visa card offering. This past June 20th, midway through the fourth quarter of fiscal 2016, we stopped accepting American Express at all U.S. and Puerto Rico Costcos and at Costco.com and began accepting all Visa cards, including, of course, the new Citi Visa Anywhere card.
The new card's great in terms of increased cashback rewards for our members and great for us as well in terms of driving member value and sales over the next years. Of course, lowering our effective merchant fees related to the new program. In terms of new card, as was mentioned over the last couple of quarters on these calls, there were approximately 11.4 million American Express co-branded cards or about seven and a half million accounts that were transferred from American Express to Citi for conversion to the new Citi Visa Anywhere card. Over 85% of the accounts transferred over have been activated. Since the June 20th cut-over several months ago, we have 1 million members that have signed up for and have been approved for the new Citi Visa card.
Most of them have it in hand, but to the extent it was the last couple of weeks, they may not have gotten the card yet. In terms of conversion, usage, and new sign-ups for the card, all good so far. Turning to gross margin. Our reported gross margin in the first quarter was higher year-over-year by 29 basis points, coming in at 1,158 this year versus 1,129 last year. As usual, I'll have you jot down for the quarter a few numbers. We'll just make the two columns for the quarter, reported and without gas deflation. In terms of core merchandising, year-over-year in the first quarter, core merchandising was up 19 basis points, up 16 without gas deflation. Ancillary businesses, down 5%, -5% year-over-year, and for the quarter, -6% without deflation.
2% reward, -2 in the quarter on a reported basis, -1 without gas deflation. LIFO, -2 and -2. Other, which is the big non-recurring benefit we got from a litigation settlement, +19 basis points, both for the reported and without gas. All told, for the quarter, we reported again a 29 basis point improvement and ex-gas deflation 26 basis points. Overall, again, 26 basis points up on a kind of ex-gas basis. The core merchandise component was higher by 19 basis points year-over-year, and again, 16 without the gas deflation. The majority of the core gross margin increase, and I'm already taking out, we've separated out already the one-time legal settlement. About 13 basis points of that 16, if you will, was due to higher year-over-year revenue share and bounties associated with the new Citi Visa agreement.
Some of those monies go to the revenue line as its revenue share. Notwithstanding that, the gross margin of our core merchandising categories, which are the food and sundries, hardlines, softlines, and fresh foods, that gross margin as a percent of their own sales were higher year-over-year in the first quarter by 17 basis points, with food and sundries, hardlines, and fresh foods all showing higher year-over-year margins and softlines being down a little bit year-over-year. I know one of the impacts was the warmth of the season and outerwear issues. Ancillary and other business gross margin was down five basis points, six basis points ex gas deflation in the quarter. All a function of lower year-over-year gas profits, as I discussed earlier in the call. Ex gasoline operations, all other ancillary and other business gross margins were up six basis points.
2% reward, again, ex gas, a negative impact of one basis point, that's to margin. That's a sales penetration and the associated executive member rewards from our executive members continue to grow. LIFO in the first quarter this year, we did not book a LIFO credit or charge compared to a two basis point positive or $5 million pre-tax credit last year in the quarter. Lastly, the one-time non-recurring legal settlement, this benefited Q1 gross margin by 19 basis points as we discussed at the beginning of the call. Moving on to SG&A. Our SG&A percentage in the first quarter year-over-year was higher by 16 basis points on a reported basis and by 13 basis points ex gas deflation. Again, I'll have you just jot down a few line items.
Core operations for the quarter was higher or a -8 basis points, and without gas, a -6. Central, higher by 9 and 9, both reported and without gas deflation. Stock compensation expense, -7 and -6. Other, +8 and +8. That's that rough $20 or $22 million amount that I told you about earlier in the call that impacted SG&A to the positive last year versus nothing this year. Again, reported SG&A was higher by 16 basis points in the quarter, higher by 13 ex-gas deflation. The core operations component of SG&A, again, in the chart shows eight basis points higher year-over-year reported and six ex gas. This -6 consisted of higher payroll and benefits of about 31 basis points year-over-year. That's certainly impacted by the lower sales result, and certainly that's impacted by the deflation.
I'll give you a couple examples of that later. This was primarily offset by lower year-over-year merchant fees as a result of the switch to Citi Visa. That had a benefit to the SG&A line of +25 basis points impact to the positive. Central expense was higher year-over-year in Q1 by nine. Increased IT spending, again, as I mentioned, was five of that. Stock compensation expense, higher by five or six without gas. Lastly, the other item I mentioned, the +8, was non-recurring in nature. Next on the income statement line, pre-opening expense. It was $4 million lower this year versus last year, coming in at $22 million versus $26 million a year ago. Really a function of openings. This year in Q1, we had nine openings, last year, 13.
The nine included one relo and the 13 last year in the first quarter included two relos. Pretty much in line with that number of openings. All told, operating income in the first quarter came in up $82 million or 11%. Up $9 million or 1% year-over-year, excluding just the non-recurring items that I previously mentioned. Below the operating income line, interest expense in the first quarter came in at $29 million this year versus $33 million in last year, lower due to retirement of some senior notes in December of last year. Interest income and other was lower by $2 million in the quarter, coming in at $26 million versus $28 million a year ago. Actual interest income for the quarter was better year-over-year. This is offset by approximately $4.5 million in charges related to the FX transactions.
That usually fluctuates pluses or minus in the zero to $10 million range. No surprises there. Overall, reported pre-tax income on a reported basis was higher by 11%, again higher by 1% ex those non-recurring items that I mentioned earlier in the call. In terms of income taxes, our tax rate in the first quarter came in at 34.4% for the quarter compared to 36.1% last year. We benefited from a couple of positive discrete items this year in Q1. Our anticipated effective rate for the year is expected to be approximately 35.2%, as best we can tell at this point. Overall reported net income, $545 million this year, up $65 million from $480 million last year. An increase of 14%. Ex the non-recurring items that I mentioned, up 3%. Next, for a quick rundown of other topics.
While the balance sheet is included in this afternoon's press release, a couple of the balance sheet info items. Depreciation and amortization from the cash flow statement, which is not here for the quarter, came in at $297 million for the quarter. Accounts payable. One of the things we always look at is our accounts payables and percent of inventories. On a reported basis, it was up from 100% a year ago in the quarter end to 103%. If you take out non-merchandise payables, more of a accounts payable, merchandise versus inventories, it improved from a 90% to 93% from last year's first quarter end to this year's first quarter end. Average inventory per warehouse was actually lower by about $67,000 per warehouse, coming in right at $14.9 million a year ago and $14.83 million per location this year. FX was about roughly $70,000 lower.
FX was about $170,000 lower, just the impact of FX. About $100 net if you assume flat FX. That's about what majors was up electronics. It was up $117,000. Really not a lot of pluses and minuses over sub-departments, but pretty much in line and pretty much flat year-over-year. In terms of CapEx, we spent approximately $670 million during the quarter. Our estimate for the whole year, as I mentioned, hasn't changed from last quarter end. Our expectation for fiscal 2017 is somewhere in the $2.6 billion-$2.8 billion range, compared to $2.6 billion for all of fiscal 2016. Next, Costco Online. We're now, of course, in the U.S., Canada, U.K., Mexico, and more recently, Korea and Taiwan. For the first quarter, sales and profits were up. Total online sales were up 8% in the quarter and 7% on a comp basis. Pretty choppy.
Essentially the first several weeks and the last several weeks of the quarter were in the mid-singles with the middle part of it in the low doubles, if you will. I want to point out that over the past 3 weeks, and that would include the last week of Q1, which is the Thanksgiving week, and the first two weeks of our second fiscal quarter, e-com sales were up in the low to mid-teens, including similar results for both Black Friday and Cyber Monday. Of course, that's notwithstanding significant amount of TV sales, which were essentially flat in dollars and up 15% in units. Lastly, as it relates to our online business, we're improving our offerings and enhancing our member experience. I touched on this a little bit last quarter's call. Our current focus comes in three primary areas.
In terms of improving merchandise first, we're adding more exciting high-end branded merchandise on an everyday basis. We're improving in stocks and high velocity items, and there's a few other things that we'll be doing coming the first couple of months of the new calendar year. Second, we're improving the experience and functionality of our site. We're improving our search. We have and we're continuing to do that. We've shortened the checkout process from many clicks to two, a big improvement, recognizing this is new for us. We're simplifying and automating our returns process, a much better experience, particularly on big-ticket items. We've seen great improvement in that in the last several weeks. We're improving our members' ability to track their orders. Again, that's something that we weren't terribly good at historically. Thirdly, we're improving our distribution logistics.
We've increased the number of depots from where we fulfill online orders, so closer and faster and less expensive delivery. Again, look for more improved and quicker distribution comments from us in early calendar 2017. Next, in terms of expansion, I mentioned we had eight net new units this year, this fiscal first quarter. We plan two for Q2, a net of five for Q3, ex the relocations, and a net of 16 in Q4 for anticipated number for the year of net new units of 34 less the three relos, so 31 net new locations. Last year, recall, we opened 29, so about 4.5% square footage growth. If we get to the 31, that would be about the same, about 4.25% plus square footage growth. Assuming the 31 net new openings, the fiscal 2017 locations by country will be 16 in the U.S.
Mind you that last year it was 21 out of 29 in the U.S. Eight in Canada, which is quite a number for Canada, and one each in Taiwan, Korea, Japan, Australia, Mexico, as well as France, our first in France, and also one in Iceland. Note that these include our first locations to open in France and Iceland, and again, those will be in late spring and early summer. As you can tell by the quarterly dispersion of these, about half of the 31 planned openings are scheduled in Q4. To the extent a couple of those could slip into the next fiscal year, so be it. Somewhere in the very high 20s, if not 30 or 31, is what we would expect. As of first quarter end, our total square footage stood at 104.5 million square feet.
In terms of common stock repurchases, for the first quarter we repurchased 809,000 shares for a total of $122 million, or an average price of $151 a share. That compares to all of fiscal 2016 when we purchased $477 million, 3.2 million shares at an average price of just under $150 a share. In terms of dividends, our currently quarterly dividend stands at $0.45 a share, and that was a 12.5% increase, that was effective last spring. 12.5% increase from the prior $0.40 a share. $0.45 a share on a quarter, that yearly $1.80 dividend represents an annual cost to the company of just under $800 million.
Lastly, before I turn it back for Q&A, our fiscal 2017 second quarter scheduled earnings release date for the 12-week second quarter ending February 12th, will be after market close on Thursday, March 2nd, with the earnings call that afternoon at 2:00 P.M. Pacific Time. I will now turn it back to Kimberlynn and open it up for questions and answers. Thank you.
At this time, I would like to remind everyone, in order to ask a question, simply press star then the number 1 on your telephone keypad. We'll pause for just a moment to compile the Q&A roster. Your first question comes from the line of John Heinbockel from Guggenheim Securities.
Richard, the new Citi agreement, was that a total benefit in the quarter of 38 basis points, if I'm hearing you right? I assume that was exactly what you thought it would be.
Probably a little higher than we thought it would be.
Okay.
There's lots of nuances to the program. There's bounties that we receive for signing up new members and applications. That incents the warehouses to do that. There's revenue share on outside spend. I think that's a little more than we had anticipated. We knew and felt that over time it would go up because of the acceptance of Visa in terms of the penetration of Visa throughout all types of merchants. That happened a little faster than we had anticipated. There's also some other aspects of it. Again, there's lots of little pieces, but those are two of the bigger ones. On the merchant side, on the fee side rather, I think some of it's related to the fact that we're making estimates of the different reward buckets, if you will. Gas at four, Costco at two, those velocity categories at three.
Again, there's all kinds of equations there that as that changes, there's some sharing. It's all good at this point.
Well, as sort of a follow-up to that, recognizing there's some volatility, is roughly that level, is that what you would expect going forward? Right now it's covering soft sales and some investments in labor. Is the idea that when the soft sales changes, more of that drops to the bottom line, or do you think you find other things to invest in?
Well, time will tell, won't it? I think it's still an early program. We're in the first full fiscal quarter of it. Over the next couple of quarters, as I had said last quarter, this will be the first time we'll try to provide a little bit more insight, I'm sure we'll be able to do a little bit more each time. As you know, we're going to invest in loyalty and growth while it's raining on everybody as it relates to higher levels of deflation, we're known for deflating the sale price sooner and faster. Certainly, one other soundbite example would be meat sales.
Right.
Just in the month of November, meat sales were up 6% in dollars and 16% in pounds. That's the kind of stuff that this deflation, it's impacting all retailers, of course, it's probably impacting a lower margin quicker to pass it on, up or down, certainly down, faster. All those things go into play. Time will tell.
Just lastly, have you found or when you think about this conceptually, is it better, more impactful to make price investments when we start the reflationary cycle, so not raising while others do, as opposed to cutting more now, investing more in a deflationary cycle?
Well, we're always going to do more extreme, probably, than others. Another example would be, as I've said in the past, as it relates to some different types of competition out there, the competitive pricing mode has gotten wider, which is good. We haven't used that to improve our margins consciously in that regard. The wider, the better. We're constantly figuring out that. We're constantly going back to every supplier with our purchasing power, with our buying power as it relates to competition itself with private label, to figure out how can we bring the quantity up, the quality up, and the price down. We know we'll sell more, and each of us and our suppliers will make a little less more times. That's what we're always doing. We see that at every monthly budget meeting.
I think that we'll continue to do what we do. We're certainly not going to benefit from every extra dollar of income. We're going to figure out how to use it to drive that competitive spirit and to drive our sales. That's been a little tougher in this tough deflationary environment.
Okay. Thank you.
Your next question comes from the line of Simeon Gutman with Morgan Stanley.
Thanks. Hey, guys. My question relates to core profitability and expectations to the extent we can talk about it. The EBIT growth this quarter was, I think, about 4% adjusted. The trend line's been a little lower, I'm not taking a lot of currency into this, but if you think about the core profitability going forward, Richard, should we expect it to increase? Granted, this quarter had a tough top-line compare. We talked about maybe credit card getting in better. I'm not thinking about membership price increase, but that's something that could come. Just thinking about the overall business, how it's performing, do you expect it to do better than where it is, or it's performing about where it should be?
Well, again, I'm not allowed to tell you what I think completely. We're encouraged by the last few weeks, including the first two weeks of Q2. We feel good about our merchandising offerings. We feel good about some things we're doing operationally. We certainly feel good about the strength of KS, Kirkland Signature. Traffic has improved a little bit. I remember one of the analyst reports a few months ago was, we can exhale. We're hopefully beyond that right now. We feel that, again, the traffic has seemed to have hit a trough and have come back a little. Not that we expect it to get back to before it necessarily, certainly, it seems like it's back on the mend a little, we'll see. I feel we're doing a lot of good things. We got a lot of things up our sleeve in terms of merchandising.
We're clearly merchandising and selling from a position of competitive strength, fresh foods drives the business. The fact that renewal rates, X a little bit of impact from auto bill on the conversion, are perfectly fine. There's a lot of good things out there, I guess I'll stop there. Overall, we'll see.
Okay. My follow-up, part of it relates to what John asked, where the credit card benefit that could ramp. There also could be a membership price increase down the horizon. Thinking about what you reinvest versus what you drop down, is the investment rate being inhibited right now because you haven't had that membership price increase in a long time? Or are you going to let some of these things flow to the bottom line when we get there?
Well, first, let me go back for a minute to the monies that we've benefited from as it relates to the Citi Visa, the new agreement. In theory, you'd say, okay, if you made a little more than you passed it, did you put it back into pricing? We're doing a lot in pricing anyway. Also, you don't change the reward structure every day. It's a new program. I would assume over time, and who knows, it's hypothetical, but over the next couple of years, if the performance of the program continues to go, which we would expect it to, in the right direction, and our piece of that action, if you will, versus the rewards that our members are getting, you'd expect to see us to change that over time. We're way too early to even think about that.
Historically, as it relates to membership fee increases, we usually invest that back in the business, a lot of that in terms of competitiveness and pricing, and it kind of eases in over the next several years, and more fully into the bottom line. Notwithstanding the fact that membership fee increases take about eight fiscal quarters to get into the income statement on the membership line because of deferred accounting. First of all, we certainly haven't done anything different as we've seen in some examples when we do comp shops versus certain others, where that moat has gotten bigger, if you will, and that gap has gotten wider. We haven't said, "Hey, let's use this to get a few extra basis points of margin." We've held the course, and we continue to go in that direction.
Okay, thanks.
Your next question comes from the line of Paul Trussell with Deutsche Bank.
Hey, good afternoon, Richard. Just wanted to touch back on margins if we think about the core GPM, X the benefit from the Visa card, it was still up, but maybe a little bit less than the past few quarters. If you can maybe just touch on that. Also on the SG&A. You mentioned the higher payroll and benefits, if I recall, I think the second quarter last year is when you raised some wages. Is that correct? Should we start to cycle some of that headwind?
Well, on the last point, the wages in, I believe the U.S. and Canada, which is 80+% or 82%, 83% of our company, we took the bottom of scale up $1.50, basically, from $11.50 and $12 up to $13 and $13.50. I believe on an annual basis, that's about a $40 million incremental increase in our pre-tax costs, or about low $3 million per month number. That started in March, that's early to halfway through Q2 of our fiscal year. That's when that will anniversary. That's kind of small. I'm sorry, the first part of the question, I didn't write it down.
Just around core merchandise margins.
Oh, yeah. Keep in mind, as I try to point out on each of these calls, mentioned what was the core, the roughly 80+% of our business that is food and sundries, hardlines, softlines, and fresh foods, what is that margin on its own sales? Again, as I mentioned earlier in the call, that was up 17 basis points. When I look at the weighted average of what impact it had on our company margin year-over-year, it's a lot less than 17% because there's increased penetration of another category with a lower margin, or reduced penetration of another category with a higher margin. That's why we point that out. We don't see just because that 80% was 17 basis points up on that. That had a much smaller effect on the year-over-year for the whole company.
Got it. Just when it comes to top line, Richard, obviously, November was a tale of two periods with the first half of the month and the second half being much better. From the comments you made around e-commerce, it sounds like there's been some strength maybe that's sustained into early part of December. Just what's your view right now of the spending levels of your core customer and as we turn the corner into 2017, what's your thoughts around what our core comp expectations should be, particularly in the U.S.?
Well, again, we don't know. We'll have to wait and see ourselves. We're thrilled that the first few weeks have been good. Again, the four weeks of November was choppy, frankly, particularly the week of the election. I think it was worse than a snowstorm in terms of nobody wanting to go out and buy stuff. That's what I read about other retailers as well. Again, over the last few months, it's been, A, a little choppy, a little more in November and a little weaker. At least what we can tell you at this point is the first couple of weeks have been okay. Again, traffic has seemed to have stabilized until something changes there, who knows?
Again, we feel good about our merchandising, what's going on, one of the reasons we continue to provide monthly sales results is for that reason, to keep you guys informed, that's pretty much what I can tell you at this point.
Fair enough. Thanks, Richard.
Your next question comes from the line of Michael Lasser with UBS.
Good evening. Thanks a lot for taking my question. Richard, you mentioned that you signed up 1 million new members under the new Visa credit card arrangement. Is that above and beyond what you would normally sign up, or is that typical with your run rate, and how does that compare to your expectations?
First of all, 1 million of our members signed up for it. Many of them could very well be existing members that historically did not have an Amex card or historically used not a co-branded Amex card. They have now signed up for this because they want to sign up because of the great rewards, hopefully, or they historically, again, were using debit or a non-co-branded Amex card and are now switching to this. We did not generate 1 million new members from it. Certainly, when a new member, either online or walks in to sign up as a new member, we of course are telling them the virtues of both executive membership and these great new co-brand cards.
How are you seeing the spending patterns of those who signed up for the card or got the card versus how their spending patterns were under the Amex card?
Well, it's hard to know this quickly. Generally speaking, irrespective of what credit card it is, whether it's a co-brand or a rewards card for an airline or hotel, generally we find that people on credit cards spend more than by cash or check or debit. We also find that people with Executive Member spend more than Non-Executive Member. The trifecta, if you will, is when they are not only a member, but they're an Executive Member and they use the co-brand card. Lots of incentives for loyalty and for spend and for capacity to spend. That's what we try to do. Try to do it in a not too hard of a sell, as you might expect. We've gotten a lot better at doing the basics.
When we know a member is an existing member and buys a lot historically based on their prior 12 months, and it's a no-brainer to be an Executive Member, we make sure they know, and we've done a better job of converting or getting people to sign up as an Executive Member to start with. The credit fee, of course, is not completely in our hands, whether it was the 14 or 16-year relationship with American Express or the new relationship here. It's up to the credit card issuer, in this case, Citi, to accept or reject an application. The ones that converted over, they were all at the same deal. Anybody new, they're signing up for a new card, and there's going to be some people that get it and some people that don't.
What we do know is 1 million of the people that did sign up for it have gotten it or approval.
Okay. My follow-up question is on the prospects for import tariffs. What percentage of your goods do you import from overseas? If you could break that down between the Kirkland brand and all other, it'd be very helpful.
We were just being asked that question recently. We're putting some numbers together. Our best guess is somewhere north of 20% and south of 30%. I'm giving you a purposely large number because even you talk to some buyers in different departments, you find out it might be imported, but it's a U.S. dollar sale. My guess would be somewhere in the mid-20s.
Mid-20s as a % of total sales?
Yes.
Okay. Thank you so much, and have a good night.
In the U.S. Now, I'm including in that, like electronics. Most electronics are purchased in U.S. dollars by U.S. trading companies that are arms of the overseas manufacturer. Again, it's a little tenuous to come up with an exact number, particularly since we just started looking at it.
Okay. Thank you very much.
Your next question comes from the line of Kelly Bania with BMO Capital.
Hi, good evening. Thanks for taking my question. Wanted to ask just a different question about gross margin. If you look at the core gross margin, I think you said up 17 basis points, still very strong. Relative, I think it's been in the 10-15 basis points range. I know you've talked about online, organics, some of the higher margin categories, and the mix shift there. I was just curious if those are really still some of the same drivers or if there's anything else going on there, particularly as online seemed to slow a little bit this quarter.
I think part of it is as prices have deflated, there are instances where we can make a little more, but not a lot more, where others have not deflated them as much. Even though we're going to be the first to take it down and more, there's still a little there on the table. Private label helps. I think those are the kinds of things. We've also, in terms of driving business, working with our vendors to lower the price and drive more business. We'll participate in it, but we'll still make a little more. There's lots of little reasons. Again, I'd be remiss to say, year-over-year, we had just under one basis point in shrink recovery. In other words, better inventory shrinkage numbers.
We don't talk about it because good news is, it continues to improve a little for 30 years, essentially, meaning we're doing a better job of operating our businesses and controlling our inventories. It's lots of little things.
That's helpful. Just another big picture question. Lots of questions on the savings and how you would think about possibly maybe reinvesting some of that over the years. Hear you on online and improving that experience, the checkout experience, the search. Do you look at ways to just make things more convenient for your members? Is there anything else you think about on the convenience front versus just the price front?
I got to tell you, a little tongue in cheek here, but we arguably had been, many years ago, reluctant to even do e-commerce, did it a little begrudgingly. It took a while to do some more things. I think the things that we're doing, we're doing offensively, not defensively, but we were also probably a little stubborn along the way. There are some extreme examples of when a member orders a big ticket item, electronics or white goods or whatever, and the delivery window is much larger than anyone else's. They like to know it pops up the calendar, here it goes. When they want to return it, that process was not very good. Some of these are quick fixes. Search was not very good. That's been a quick fix to get a significant improvement, and we'll get some more improvement.
I think that we're doing some things notwithstanding decent sales.
We're investing in better convenience.
Yeah, we're investing in better convenience. By the way, that's not at the expense of we won't take our prices down a little bit. Those are truly independent. Whether it's IT monetization efforts, some of which was a necessity, or what are we going to do with regard to we need another $10 million or $50 million or whatever to enhance the site. That is totally independent of what we're doing there. As Jim Sinegal said for 25+ years, and Craig Jelinek has said for now 5+ years, we are clearly a top-line company, and we're best when we drive sales. We probably aren't as good at leveraging expenses when sales come down than others, because we're not going to do some things. We're clearly taking the offensive.
Again, there's some things that perhaps we should've done earlier, but we're already seeing some improvement in that, and we know that'll help.
Thank you.
Your next question comes from the line of Karen Short with Barclays.
Hi, Richard. This is Sean Carson on for Karen. Thanks for taking our questions. Can you talk about your outlook for deflation and any signs of leveling off or maybe even an upswing?
I'm sorry, I couldn't hear the question.
Sure. Sorry about that. Can you talk about your outlook for deflation and any signs for potentially a leveling off or potentially an upswing?
When we talk to different category buyers, probably the ones that have more specific insight are on the fresh food sides because they're dealing with commodities and negotiating. They're actually looking at the futures contracts and more of the cost of the actual item, the orange or the poultry or the pork or whatever. Whereas sometimes that's not the case. I think, usually when we ask, there's another three to six months of whatever. When it gets to the anniversarying of it, there's been some huge swings, some huge examples of swings on some nuts, which last year doubled and are now down 35%. Eggs, of course, are down well over 60% year-over-year. If eggs were down even 50%, it doesn't mean that people are going to eat twice as many eggs to have flat sales. They're going to eat some more eggs, but not that many.
By the way, a few of those things may help in the margins of the bakery. We're also not going to change the cost of 16 muffins or 15 muffins. Overall, I think the feeling is, given that the last few months have been a little more deflationary. The view is that it's another few months of that, but they all believe that it's going to come back the other way. This is a lot of estimated, semi-educated guesses among different departments.
I noticed there's also no LIFO reserve, apparently, when there's no charge or credit in the quarter. Is that right?
Right. That's correct.
Okay. Thanks for that.
By the way. There will be in the future. Yeah. As effective the beginning of this fiscal year, for 30 years, we've been on a retail cost system, a retail inventory system. Most companies historically have been on a cost-based system where you get down more granularly to item level. With the modernization, that was part of this process, too. With the cost system, the way you value your inventories will not have LIFO charges and credits in the future. We will. We will. We will, but when we restated the value of our inventory on the first day of our fiscal year, part of that cumulative difference came into it. Oh, I'm sorry. I'm learning here as we go along.
At the beginning of the year, you'll notice on our year-end balance sheet, we revalued the inventory at cost in a different way, and it was about a $60-plus million reduction in inventory. At the beginning of the year. At the beginning of the year, but not a P&L impact. Yes.
Got it. Okay.
Yes, you'll expect it. To the extent there's inflation in the future, we will have a LIFO charge. Charge. I'm giving myself a thumb up. Once you have some LIFO charges, you can have credits. To the extent that there was LIFO, is deflation right out of the box, you won't take that credit because you have no charge against to which you can take it.
Got it. All right. That explains it. Thanks for that. Just my follow-up is just an extra week this year. Can you give a sense of the impact? I think my math was about $0.10-$0.11, but curious if you think that's sort of the right vicinity.
It sounds like that's 2% of X. I don't have a calculator in front of me. 1/53 of a year. For the most part, most expenses, even though, let's say on a rental facility, you pay 12 monthly rents, we take it over the 53 weeks. You don't get a 1/53 credit for that. We advertise it over the course of the 10 years or 20 years. It generally should be, if it's 2% more weeks, it's 2% more earnings.
Okay.
Plus or minus.
Your next question comes from the line of Matthew Fassler with Goldman Sachs.
Thanks a lot. Good afternoon, Richard. My first question relates to the Citibank Visa deal. Can you tell what impact the enhanced cashback features have led to? Has it been, in your view, more sign-ups? Has Citi seen more traction with some of the categories where you increased the incentives for consumers?
Well, again, I can't speak for Citi. To you, I can't speak to them. We certainly have discussion with them, but they've made their own comments that I think are generally positive about how the program is working so far for them. What I can tell you from our perspective is some of the things I already mentioned in terms of, look, it's a significant improvement in the value proposition of the reward to the members, assuming they spent like they did. Hopefully, they'll spend more because of the 2% at Costco instead of 1% on top of executive rewards, the 4% on gas instead of 3% and the 3% on velocity categories instead of 2%. All that stuff is good.
Are there any surveys?
There's more utilization. There's more places to use the card. Typically, these are smaller merchants that only perhaps accept certain brands over others, and they pay higher fees, but we'll have to see.
Are there any surveys you've conducted that would suggest customers have really digested that extra $0.01 they're going to get back at the end of the year?
No.
Okay.
What I can tell you from talking to our head of membership marketing is, it stands out in good print on everybody's monthly statement. They see it, and it's pretty big, pretty fast. I think those are the types of things that people look at. We know affinity programs work. Based on Citi's comments publicly, it seems like it's working in the right direction for everyone, which means more spend on it.
Great. My follow-up is on deflation and gross margin. We've looked through your transcripts going back quite a while, and this is a period, I think, of remarkable deflation, particularly in the context of a decent U.S. economy. In your experience, how does gross margin progress through a deflationary cycle? You've talked about your expectations for if and when deflation turns and the number of months going forward, et cetera. In the past, as you've seen food prices in particular recover, how do your gross margins tend to behave?
It really is all over the board. With inflation, the dollars go up, the percent probably changes a little downward, so that would imply perhaps a little bit of improvement in dollars. It can be all over the board. Gas is an extreme example. It is a low-margin competitive business. As prices tumbled dramatically across general competition, prices were lowered, but not nearly proportional to the amount of savings to that retailer, we're able to improve our margins a little and widen the gap. That's a win-win. Another silly example is organics. Organics, because there's perhaps a little bit of less price elasticity to organic prices, we're able to make a little more margin, not a lot, and have a wider value proposition versus others. Those are good things for us.
Generally speaking, when there was cost inflation on milk and cheese and things like that, we would point out, as you know historically, some of those quarters where we kept the chicken at $4.99 and margins went down essentially from something to nothing to the tune of $40 million a year on one item. That was four or five years ago. Four years ago.
Conversely, when cheese prices fell, food court margins went up nicely because we've never really changed the price of a slice of pizza. There's lots of little things that don't fit in a square box or a round hole here. I would say generally, a little inflation is good. It helps sales. We could be more competitive both up and down, and when prices are going up, it probably is a little bit more margin beneficial, but not a lot.
Thank you so much. I appreciate it. Thanks, Richard.
Your next question comes from the line of Oliver Chen with Cowen and Company.
Hi, Richard. Thanks. What are your thoughts regarding bricks plus clicks and whether that be buy online, pickup in store, reserve in store, car pickup from store? We're just seeing a lot of innovation as retailers and pure plays go into physical retail that are previously digital. I want to know what you think about that and if it's meaningful for you and if we should be concerned about your long-term store traffic trends with the rise of Amazon. Mobile is about two-thirds of online traffic for many retailers.
Right.
What should we expect for your mobile app on the 5-year plan for what you want to do there to make it really exciting and fun and great?
Well, first we're fixing some of the basics and improving some of the basics, and I'm pretty excited about some of those things. You mentioned the number of mobile versus non-mobile e-commerce sales. Our numbers are lower than that mobile, but they're improving quickly. Again, we recognize there's things that we can and can't do. We think that we could and should do a lot more online, we also, as you pointed out, want to get people into the warehouses. We think that some of the things that we do in store will keep them coming. Far, it's not been an issue. While we try to point out these things each quarter in terms of traffic, in terms of even when traffic was impacted a little bit, we're asked that $64,000 question, is it all these other things?
We see some of the categories that one would think would have been impacted negatively by it aren't being impacted negatively. In terms of click and pick up, we've looked at it, and we are not prepared to do that at this point. When we see it at other places, not just the other warehouse club, you need space for it, or you need a lot less volume in the location for it, neither of which we have. We're not getting a lot of demands for it. We do that at the business centers. You can online order and get it delivered. That's more for the business member, not the individual. We recognize that we're not the retailer that are going to sell you a smaller pack size of something at even a little bit better margin, higher margin. That's not what we do.
Time will tell over time. There's a lot of things that are going on out there. We're looking at them. We've all seen the video from earlier this week about you just walk in. There's a lot of other brick and mortars that my guess would be far more impacted than us on that, but we'll have to wait and see. Again, if renewal rates trends changed. By the way, we even see in the markets where we've done things with Google and where we work with Instacart as well, Google Express and Instacart. Probably the most extreme example would be the Bay Area, where we started with Google, and that was their first market, and certainly that's where they're headquartered. It's doing fine. What we found is an existing loyal member is coming in a few less times a year, is shopping several more times.
Well, certainly several more because it was zero, but shopping more, but the sum of the two is more. They buy a lot less when they're doing it online than when they come in. Part of that is the experience of walking in and seeing it all there. Not everything is offered, but nevertheless. The good news is.
Ladies and gentlemen, the conference will begin momentarily. Please stand by.
It worked. She's on.
Can you hear me?
Apparently, you have only signed up for
You're live, Mr. Galanti.
Thank you. Hi, Oliver? Hello? Hi there. Oliver, yes.
Thanks for answering that. I just wanted to briefly ask you, does scan-and-go make sense for you, or is that something that's not conducive to your experience? As you do your own research on Amazon, which categories, or what would you say draw out your best competitive advantages, and what are your opportunities just to make sure you remain very competitive against Amazon? How are you feeling about Millennials and Generation Z? It sounded like you still had a lot of good momentum with younger demographics.
Well, look, in terms of scan-and-go, honestly, we did a version of scan-and-go literally 20 years ago with a customer. A member would walk in, get an RF gun, a radio frequency device, walk around, scan their own items, come up to the front, hand that thing to the cashier and the scanner, and they print out a receipt. Needless to say, there's a lot more efficient things today. We continue to look at scan-and-go type things. We are not testing it currently, but we are looking at it. I'm not suggesting we're going to do it. We have done self-checkout for a while. We've chosen to not do self-checkout in higher volume units because we can get people through without it.
As it relates, you had asked, in terms of Millennials and Generation Z, all those numbers are doing better for us, and part of it is things like, not that we sat down and strategically thought, "How do we get them?" We have a great value proposition. Certainly, some of the things that we sell, like organics, in my view, is a big impact to that. Certainly, some of the things we do. We've done a couple of tests with LivingSocial over the last couple of years. All those things we think help. You asked a question about Amazon is also the word for everything out there that's delivered or dot com and everything else, and certainly, they're doing a lot of things. We want to make sure we understand what all of these people are doing.
We do, not just from a competitive price shop and whether it's them or someone else. We recognize convenience is a value. There's also some things that we can and can't do. I think that we're looking at these things offensively, not defensively at this point. I think we're encouraged when we see the level of Millennials, if you will, that are signing up, when we see the average age of our membership coming down. Now, it was just a couple of years ago when the average U.S. Costco adult member was four-plus years older than the population as a whole. Now it's a little under two. That's without a lot of planning, but it's part of what we do.
I think part of that's the merchandise selection and our ability to change merchandise pretty quickly, and certainly things like, again, organics stand out in a big way. I think the fact of what we're doing, even on some things that are all related to the business, but ESG and sustainability, how we take care of our employees, the culture. Those are things that, again, we didn't say we have to do better at that. We do best at that. We do a lot of good things like that. When it comes down to merchandising, we believe that organics, the KS, what we're very good at is driving value, and we're probably not going to be the person that's the best at delivering smaller size goods to your house. There are some things we're going to do between that and nothing.
Again, stay tuned for calendar 2017.
Thanks. Happy holidays. Best regards.
Thank you.
Your next question comes from Dan Binder with Jefferies.
Hi. Good afternoon. My question was around some of the things you've already covered, including pricing and the moat that you said has opened up. In light of that, there's been a lot of debate around the traffic just north of 2% or just under 3%, depending on the month, and a lot of questions around convenience. I just wonder, as you review this online strategy, do you think there needs to be a major shift towards a broader SKU assortment? Obviously, Amazon's got Marketplace, Walmart's building Marketplace, Target's chosen not to. Do you think as part of that convenience factor, Costco just needs to materially up their SKU count online?
Keep in mind, we have materially upped it over the last couple of years, recognizing it's still a fraction of anything else out there. If we were, again, at 3,700 active items in a physical location and roughly that many online, excluding office products, which is to a third party, and there's several thousand of those items, but in terms of what we do ourselves, and we've now taken it up to eight-ish, 8,000, maybe a little more. Is it likely to go to 40,000 or 50,000? Absolutely not. Unless it does one day, but I don't think so. Is it likely to go up a little bit more? Sure. Is it likely for us to do a few more things that provide convenience? Yes. We still want you in the door. Again, to Amazon and others' credit, they're trying a lot of things.
Some will work and some won't. We're pretty good at understanding what works and figuring out how to augment it to do what we know how to do and what we want to do. We recognize that we can't be selling you a smaller size of something at our margins, nor are we prepared to double or triple the margin to do so.
Got you. My other question was around the membership fee or potential membership fee increase next year that's been talked about quite a bit. I'm just curious if there's a sensitivity and what that threshold is, at which point you would not do it. In other words, if the comp store sales were to continue being at the level that they were at in the first quarter, would you be less likely to put an increase through? Maybe an easier way to talk about it is what kind of comp level would you like to be at when you do it?
Directionally, I responded in the past by saying, if comps were a little weaker, it would be more likely to want to do it. No impact on that decision. It's all, in our view, about what additional values have we brought to the table, whatever amount of an increase might be contemplated. Have we improved the value proposition significantly greater than that amount? Which in my view, has always been a no-brainer for us. Are renewal rates okay? If sales are a little weak, it would be the time to do it, not to do it. I'm not trying to suggest that it's tomorrow afternoon. I'm just saying that generally speaking, a little bit weaker, we're going to use that to drive business.
Okay. I guess my question or response to that is if you had this widening moat in price and you are priced right, this idea that you would reinvest membership fee dollars into price, do you think that would drive an incremental gain to get comps at a higher level?
On some items, yes.
Is that the idea?
On some items, yes. On some of the things that we do. If you keep in mind, 33 years ago in the original business plan, it talked about it doesn't matter where you locate. You could be on the other side of the railroad tracks in a downtrodden area, people come to you. It's a destination. That was fine until you added to that sentence, until somebody's between you and your customer. Over time, while we're certainly not at the mall, we recognize that we have to do some things. What we're doing online right now with some of the member experience and distribution, timing and costs and capabilities, those are the types of things that we are investing in. Vertical integration in some aspects, whether it's a chicken plant or a bakery commissary up in Canada.
There's a lot of things that we're doing to drive value, not just lower the price. I don't see that being a reason to do it or not to do it. We look at it as a value proposition, price is primary, I think it will continue to be primary, but we look at a few other things as well.
Great. Thank you.
Your next question comes from Robbie Ohmes with Bank of America.
Oh, thanks. Hey, Richard. Hey, you mentioned going into Iceland and France, and I know you guys are doing Kirkland on Tmall in China. Can you just maybe catch us up on when you might ponder opening a brick-and-mortar up in mainland China? Thanks.
Sure. Well, on Tmall, I think it's about 300 items, a little over half of which are Kirkland Signature, so certainly the KS name is getting known, and that's a positive. We've continued to look at it for a number of years. Is it in the next couple, three years? It's probably more likely to say yes to that than two years ago or five years ago, but there's nothing definite at this point.
Got you. Just a quick follow-up on the credit card. Is there any, the new signups for the card, anything on the demographic side of who's signing up that's different than what you were seeing, with the Amex card?
No. Not at all.
Got it.
They're called Millennials instead of something else now, but that's, no.
Got it. All right. Thanks very much.
Your next question comes from Peter Benedict with Baird.
Hey, Richard. Thanks. Couple quick ones. First, just on the Google Express. Can you just talk about, are there any plans to expand that test? I know you mentioned the Bay Area, but where else is that being done? Are there any thoughts to moving that out into more markets?
It started in the Bay Area, but then went to L.A. area. In the last couple of years, it expanded to As well, Chicago, Boston, New York, and D.C. I believe they're expanding, and we're expanding in a few other markets as well, I believe. I don't have that list in front of me, but I know it includes a few more. So let's say it's going from six-ish to 12-plus-ish. Now recognizing we're working with them in different markets, testing different things, I think we've done a couple of small tests with some fresh foods, but it's a limited selection of items.
Right.
Each of these are a little different.
Sure. No, understood. On tobacco, the weakness in tobacco or the sell-down in tobacco, does that have any kind of a material effect on the core gross margin? I understand that's a very low-margin product.
Well, it's a low-margin business, so it would help improve the margin a little bit.
Right. I mean, is that a material benefit to your core margins right now?
No.
Okay.
Gas would be an offset to that in a bigger way, in my view.
Okay. Last, just on capital allocation, remind us, what are your thoughts there in terms of priorities and your latest views on leverage as some of your leverage ratios get down starting next year? What are the latest thoughts there? Thank you.
Well, first and foremost, CapEx is expansion is first and foremost new units or improvements in existing units a little bit. Probably an equal priority is all the things associated with it. Ancillary businesses, whether it's gas stations as well as some of the manufacturing things we're doing. We're opening up a second meat. We've had it for a number of years, a meat plant in Tracy, California, that does, I think, around 200 million pounds a year, 4-plus million pounds a week of four or five items that are us. It's our items. We're opening a meat plant on the East Coast shortly. In Canada, I think we've broken ground on a commissary for bakery.
We are investing $250-plus million, closer to $300 million, on a big chicken plant, processing plant in Nebraska that has not broken ground yet but is in the process of getting permits and stuff. There's things like that as well. We're still spending money in IT. Priority-wise, none of this stuff impacts what we're doing for expansion. We're expanding as much as we want. We look at our dividend every year. Historically, it's been about a 13-plus% increase year-over-year for the last nine or 10 years since its inception in 2005. We buy back a little stock. In terms of leverage, arguably, some would say that I would say we're well-capitalized. Some would say we're under-levered. We've got a $1.1 billion 10-year fixed rate debt instrument that comes due in March of 2017.
The good news is that it's got the low fixed rate of about, I don't have it in front of me, but 5.5%, 5.6%, 5.5%. What we do in terms of whether writing a check for it or refinancing part of it, we'll see. No big changes of what we do. We've done a couple of special dividends, one in late 2012 and one in early 2015. I'm not indicating if we are or we aren't in the future. That was something that we chose to do at that time.
Okay, fair enough. Thank you.
Your next question comes from Greg Melich with Evercore ISI.
Three pretty quick ones. Of the 15% of people that haven't activated the card, what are those people using? Are they just using another Visa in their wallet? What can you tell us about their behavior? Are they coming less frequently or using cash, or what are they doing?
Well, a bunch of them, it's between 11 and 15, but a bunch of them are people that it was not active as a co-brand Amex card. We had about 15% upon conversion, about 15% of the 11 or whatever million people in the seven and a half million or so accounts, just under 15% of them had not been used in the prior two months, I believe, the prior 60 days. Not to suggest that maybe some of them just hadn't used it, and some they will use it, or they've been out of town or whatever else. It's every answer in the sun. I think the vast majority of them would be that, though. They were using something else in their wallet.
To the extent that the membership card was on the back, they still have it in their wallet, and they still have the new one in their wallet. Hopefully, they see those giant signs, and they're reminded at the cash register by the cashier that, "Have you heard about the 4321? Or the new exciting warranty program on electronic, on TVs, where you get a four-year free warranty if you use it at Costco.
All right. Any other ads you want to put out there on it, or we'll leave it at that?
Well, I thought I would do that since I didn't have it in my script.
That's great. The second question's on international. That's an area that as traffic has been running below the U.S. now for a while, which has been kind of unusual if you look over the last few years. Could you give us some insight as to why that is and how that's behaving maybe in the markets where you raised the fee? Is it linked to that? Are renewal rates doing okay in those markets where the fee went up?
It's mostly cannibalization. We've got a $200, $300 million business. You open the second one in that city. The new one does 100 to 125, and 75 of it's bled. What's in your traffic number is the old unit that's being cannibalized. On a base of 10 or 12 units, that's the biggest single reason.
On the markets where the fee went up.
By the way, there's probably a little bit of softness in Japan beyond that. I can't tell you why, other than the economy has been tough there, but it rains on everybody.
In terms of the markets where the fee went up, what have renewal rates done in those markets?
I'm sorry?
What have renewal rates done in the markets where the fee was increased?
Well, it just happened three months ago. We don't have any numbers yet.
Yeah.
It's de minimis of anything.
Okay.
That's why I actually asked our marketing people earlier today.
First of all, it barely impacted any members. Barely any.
Yeah. Bob is saying. Yeah.
We won't know because it takes six months to get a full count.
Bob's made a good point. It takes about six months to know because you've got people, not every member comes in every two weeks. Trend-wise, we don't see any big issue there at all.
Fair enough. Good luck.
Thank you, Greg. Why don't we take two more questions?
Your next question comes from Chuck Cerankosky with Northcoast Research.
Hello, Richard. Just a quick question about what you're seeing in Visa usage from people who never were Costco Amex card holders, and how their spending behavior is changed or somehow affected by Costco accepting Visa as payment now.
It's up. To the extent somebody is choosing to use another Visa card in his or her wallet, maybe it's an airline program or a hotel program, they may not be spending more because nothing has changed in their wallet. To the extent that they were using cash or debit, that you see an increase, and we have seen that, as we would've expected.
Are you seeing any related impact on membership? Are you able to see if new members are being generated by the Visa acceptance?
Well, we know that's the case to a small extent, though. Citi, for example, has done marketing activities in their branches.
It's more existing members.
It's more existing members that are converted, and you'll get a few. A few could be in the tens of thousands, but out of a million, a couple or three or four, 20,000, 30,000, 40,000 is not a big piece of that.
All right. Thank you.
Your next question comes from Mike Montani with Evercore ISI.
We'll take one more. I think that was ISI just asked a question.
Oops. We have no further.
Okay. Well, thank you everyone. Have a good afternoon.
This concludes today's conference call. You may now disconnect.