Good afternoon. My name is Amanda, and I'll be your conference operator today. At this time, I'd like to welcome everyone to the Q4 earnings 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. I would now like to turn the conference over to Mr. Richard Galanti. Please go ahead.
Thank you, Amanda, and good afternoon to everyone. As you know, 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 in 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. Today, we reported our fourth quarter and year-to-date fiscal 2016 operating results for the 16 and 52-week periods ended this past August 28th.
For the quarter, earnings came in at $1.77 a share, up 2% or $0.04 over last year's fourth quarter earnings of $1.73 a share. In comparing the year-over-year fourth quarter earnings results, a couple of items of note in looking at the comparison. FX, as compared to a year ago during the fourth quarter, foreign currencies in the countries and other areas where we operate were weaker overall versus the U.S. dollar, primarily in Mexico, Canada, U.K., and Korea. This resulting in our foreign earnings in Q4, when converted into U.S. dollars, being lower by about $13 million after tax, or $0.03 a share, had exchange rates been flat year-over-year. Gasoline profitability. Our profits from gasoline during the quarter as compared to last year's fourth quarter were lower by about $27 million pre-tax, or $0.04 a share.
Primarily a function of last year's very strong profit results in the fourth quarter. Our numbers were fine this quarter, but we did pretty well last year as well. IT modernization. That was about a $0.02 year-over-year impact. I'm not going to go through the detail on that, but that was about $16 million pre-tax or four basis points primarily to the SG&A line. Income taxes. Both this year and last year's fourth quarter results had several net positive tax benefits that, in the aggregate, benefited each of the fourth quarter's earnings per share figures by $0.05. Excluding those positive tax items, this year's underlying Q4 tax rate was about six tenths of a percentage point higher than last year's. That would've been about $0.02 a share.
Again, year-over-year in the quarter, each of those fiscal quarters benefited by about $0.05 a share from positive items. LIFO. This year in the fourth quarter, we reported a pre-tax LIFO credit of $31 million. That compares to last year in the fourth quarter of $14 million. Both deflationary, although we've all talked about the increased levels of deflation of recent time. At a year-over-year delta of $17 million or about $0.02 a share, related to higher deflation and LIFO credit in the quarter, up by higher by that amount. In terms of sales for the fourth quarter, total reported sales were up 2%. Our 16-week reported comparable sales figures were flat year-over-year. Comparable sales were negatively impacted by gas price deflation. That was a little over 200 basis points of impact to the company.
By weaker foreign currencies relative to the U.S. dollar, the latter about one percentage point of impact to sales. Excluding deflation, the flat U.S. comp sales figure for the fourth quarter would've been +2%. The reported Canadian comp figure of +2% would've been +5% ex-gas and FX. The reported -2% other international comp figure, ex these two factors, would've been +1%. Total comps were reported as 0% for the quarter, and again, excluding gas and FX, would've been +3%. Of course, that +3% adjusted figure is still being impacted by a bit of increased general merchandise deflation outside of gasoline. Openings. In Q4, we opened 10 new locations and also completed one relo.
For the fiscal year, we opened 29 net new locations on top of that of four relocations, I believe two of them which were relocated, and the old units converted into new business centers. Of the 29 locations, 21 were in the U.S., two were in Canada, two were in Japan, and one each were in U.K., Taiwan, Australia, and Spain. This afternoon, I'll also review with you our membership trends and renewal rates, additional discussion about margin and SG&A, talk about e-commerce, and a few other items of note, including an update on our recent switch over to the new Citi Visa Anywhere Card. This occurred on June 20th after six weeks into the fourth quarter. On to the fourth quarter results. Quickly, sales for the fourth quarter were $35.7 billion, up 2% from last year's fourth quarter sales of $35 billion.
Again, a flat comp on a reported basis, +3% excluding gas deflation and FX. The flat comp sales results on a reported basis, that consisted of an average transaction decrease of 2.8%. Again, excluding gas deflation and FX, the average transaction was slightly positive year-over-year. An average shopping frequency increase of right around 2.5%. In terms of sales comparisons by geography, Texas, Bay Area, and the Midwest regions within the United States showed the best results. Internationally, in local currencies, better performing countries were Canada, Mexico, Spain, and the U.K. In terms of merchandise categories for the quarter, sales for that within food and sundries overall, slightly negative year-over-year in the fourth quarter. Within that, though, spirits, sundries, and deli came in best. Tobacco was the big negative, of course, as we've talked about that.
That was down 21% year-over-year as we continue to see lower sales in that category. If I look at the food and sundries category, that again, on a comp basis, was slightly negative year-over-year for the quarter. Ex the tobacco department, it was plus 3%. You'll continue to see tobacco impacting us into the early spring. Hardlines overall up mid-single digit. The departments with the strong results were majors, electronics, sporting goods, health and beauty aids, hardware, and tires. Within softlines, which has been the low single digits, apparel, small electrics, and home furnishings were the standouts. Within fresh foods, produce and deli were the strongest of the four departments. Of course, meat and other types of protein had a weakness relative to deflation. In ancillary businesses, hearing aids, pharmacy, and optical showed the best results.
I mentioned earlier, we've recently seen a little pickup in the level of deflation overall. Some categories in the low to mid-single digit range, and several fresh food categories, notably, meat and pork and things like that, in the 5%-10% range in some cases. Overall, though, we're seeing a net increase in deflation, but not at those levels. Some non-food categories as well. Moving to the line items on the income statement. Membership fees, we saw good results for the quarter. Reported were $832 million, up nine basis points and $47 million, or up 6% in dollars versus last year's fourth quarter. The $47 million would have been up $50 million if you had adjusted for FX. In terms of membership, we continue to enjoy strong renewal rates, 90% in the U.S. and Canada, and 88% worldwide. Continuing increasing penetration of Executive Memberships as well.
In terms of number of members at fourth quarter and year-end. At year-end, we had 36.8 million Gold Star members, up from 36.2 million 16 weeks earlier at the end of the third quarter. Primary Business ticked up to 7.3 million from 7.2 million. Business Add-on remained at 3.5 million. For a total of 47.6 million member households at Q4 end, compared to 16 weeks earlier when it was 46.9 million. Including add-on cards, in terms of people walking around with a Costco membership card in their wallet, 86.7 million at year-end, up from 85.5 million just 16 weeks earlier. In terms of Executive members, of the 47.6 million member households, we have 17.4 million. That was an increase of 370,000 during the 16-week fourth quarter, or about 23,000 a week increase.
That's a combination, of course, of new members signing up as an Executive member, as well as members converting to it. Executive members now account for a little over a third of our base and a little more than two-thirds of our sales, where Executive members are offered. In terms of membership renewal rates, we ended the year at 90.3% in the U.S. and Canada. That's ticked down from 90.4% at the end of Q3. In the first half, it was 90.5%. Worldwide, 87.6%, which was the same at Q3 end, ticking down from 87.7% in the previous quarter, at the end of the second quarter.
As I've talked about in the last few quarters, in Canada, we finally in Q4 saw a reversal of some reductions in renewal rates, which we had anticipated when we converted a year and a half or so ago to a new co-brand card up there. In that case, the portfolio from American Express wasn't purchased, so it really had to start all over, and you don't have as many auto renewals to start with. That's quickly changed, and again in Q4, we saw a slight increase in the renewal rate there. A little different reason, but the same thing a little bit in the U.S. with having no new signups for the last nine months prior to June 20th, as we were switching over on June 20th. Overall, pretty much the same, and we'll see where that goes from here.
Regarding membership fees, effective the beginning of this month, we increased annual membership fees by about 10% in three Asia locations, Taiwan, Korea, and Japan, as well as in Mexico and the U.K. On an annual basis, as you know, fee increases hit the membership fee income line over about 23 months based on deferred accounting. For example, the first month of people that are seeing this in September, those are people that originally signed up presumably in September, and this is when they renew. People that didn't sign up or aren't renewing until next March, it'll be in March and for 12 months hence, so hence the 23 months overall. That'll be about $50 million pre-tax to the membership income line. I'm sure there'll be some offset in terms of what we do in terms of competitive pricing and everything.
Before continuing down the income statement line items, let me spend a minute updating you on our transition from American Express to Citi Visa in the U.S. and Puerto Rico. As I mentioned, this took place on June 20th, the beginning of the seventh week into the fiscal fourth quarter. Beginning June 20th, we stopped accepting American Express at all U.S. and Puerto Rico Costcos and on costco.com and began accepting all Visa cards, including, of course, the new Citi Visa Anywhere card. It was a lot of effort, and as you know, there were a few operational glitches during the first few weeks after the cut-over. We're now past that, and more importantly, the new card is fantastic for our members in terms of increased cashback rewards.
We estimate it's about a 40%-50% improvement in the reward program, which was already previously a very good reward program to the members using the Citi Visa Anywhere Card. It's also great for us in terms of driving member value and sales over the next years, and of course, lowering our effective cost of accepting credit and debit cards. In terms of improved cashback member rewards, our former card provided a 3% cashback on gas, 2% on restaurant and travel, and 1% everywhere else, including everywhere at Costco other than the gas. With the new Citi Visa Anywhere Card, 3% on gas now is 4%, 2% on restaurant and travel is now a 3%.
Probably the most significant rewards improvement in terms of the total bucket here is the previous 1% reward on all other Costco purchases doubled from the previous 1% cashback reward to now the 2%. We think this is big, and it is even bigger for our executive members who also earn a 2% reward from us on most Costco purchases. Combined, an executive member using the new card with just a few exceptions will earn 4% back at Costco. We think that is exciting, and we think it will be good for our business over the next several years. Lastly, for all other purchases outside of Costco on the card, it will remain at a 1% cashback reward. A few basic stats on the new card. Approximately 11.4 million American Express co-branded cards, representing about just under 7.5 million accounts, were transferred over to Citi during the conversion.
Nearly 85% of those cards we considered active. That is, the card had been used for purchases over the previous 60 days. Currently, over 85% of the accounts transferred over have now been activated with Costco. Since June 20th, in just the past many weeks, 1.1 million members have applied for the new card, and over 730,000 new accounts have been activated, or a little over 1 million additional Citi Visa cards in circulation. It is still early. We launched only 14 weeks ago, but so far, we are beating our initial expectations in terms of conversion usage and new sign-ups to the card. In terms of gross margin, our reported gross margin was higher year-over-year in the fourth quarter by 28 basis points, up from 11.14% a year ago to 11.42%. I will let you jot down the normal numbers that I ask you to jot down.
We will have four columns. Reported and without gas deflation, Q3 2016 and Q3 2016 would be the first two columns. The third and fourth columns would both be Q4 2016, and also reported and without gas deflation. The core merchandise in Q3 on a reported basis was higher year-over-year by 16 basis points, but without gas deflation, down 2 basis points year-over-year. In the fourth quarter, up 29 basis points of 2016, and again, ex gas deflation, up 9 basis points. Ancillary businesses in Q3, +9 and +4, reported and without deflation. In Q4 2016, ancillary businesses are reported -4 and -9 without gas deflation. 2% reward, a 0 and a +2 in Q3, and a -2 and a 0 in Q4. LIFO, +2 and +2, and in Q4 2016, +5 and +4.
Other, in Q3 2016, both columns had a +7, and in Q4, no issue, a 0 and 0. All told, reported on a year-over-year basis in Q3 of 2016 compared to the prior Q3, up 34 basis points on a reported basis and up 13 on an ex gas deflation basis. This year in the fourth quarter, of course, you saw the 28 basis point up. That would have been +4 ex gas deflation. I might add that the +7 a year ago, I am sorry, in Q3, that was simply a one-time legal settlement that benefited margin. As you can see overall, again, our margin was higher by 28, but without gas, +4. The core merchandise component that I have just mentioned, the +29 or the +9 ex gas deflation, that is the thing I will focus on to start with.
Our core gross margins, which is fresh foods, food and sundries, hard lines, soft lines, and fresh foods, as a percentage of their own sales, were higher year-over-year in the quarter by 12 basis points, with food and sundries and hard lines showing higher year-over-year gross margins slightly, soft lines being about flat year-over-year, and fresh foods being ever so slightly down year-over-year. Ancillary and other business gross margins were down four basis points, ex gas deflation down nine, all a function of lower year-over-year gas profits. As discussed earlier in the call, but excluding gas, all other ancillary and other businesses' gross margins as a percent of their own sales were up six basis points. Margins were fine in the quarter overall. Again, LIFO added four basis points to the equation.
In terms of SG&A expenses, for the quarter year-over-year, we were up 34 basis points, coming in at 10.34% versus 10.00% a year ago. Again, that 34, I'll have you jot down a couple numbers. That 34 ex gas deflation is a minus 13, or higher by 13, not higher by 34. Again, the same four columns, Q3 2016 for reported and Q3 2016 for without gas, and the same two column headings for Q4 2016 and Q4 2016. Operation, core operations, minus 24 basis points. A minus means higher by 24 basis points in Q3 2016 on a reported basis, higher by eight ex gas deflation. In the fourth quarter, higher by 24 and higher by six. Central, higher by six and higher by four in Q3, Q4, higher by nine and higher by seven ex gas deflation.
Stock compensation, higher by three and higher by two in the third quarter, and higher by one and flat in the Q4 columns. Total that we reported for Q3 2016 compared to Q3 2015. On a reported basis, SGA was higher by 33 but really higher by 14 ex gas deflation. The higher by 34 this time was higher by 13. Not that different looking at it that way. The operations component, the minus six core operations ex gas deflation, that consisted of higher payroll and benefits, partly due to the slightly weaker sales and the deflation, particularly in fresh, that impacts that number. Somewhat offset by a variety of other controllable expense improvements, in particular, lower year-over-year bank fees as a result of the Amex Citi Visa switch during the quarter. Central expense was higher year-over-year by nine, 7 ex gas. Increased IT spending related to modernization.
That was four of those seven. A couple other basis points higher from a few small legal settlements in the quarter. Again, stock compensation was really not an issue year-over-year. Next on the income statement, pre-opening. Pretty much in line with openings themselves. Last year we had $27 million of pre-opening expense. This year, $3 million lower or $24 million. Last year in the quarter, we had 13 openings. This year in the quarter we had 11, which includes that reload. Pretty much in line again with what we'd expect. All told, operating income in the fourth quarter came in at $1,191,000,000, which is $35 million higher or 3% higher year-over-year than last year's $1,156,100,000. Below the operating income line, interest expense in the fourth quarter came in at $39 million this year versus $40 million last year. Essentially flat year-over-year.
Essentially the same amount of debt outstanding at the various interest rates. Interest income and other was lower year-over-year by $11 million in the quarter, coming in at $29 million versus $40 million a year ago. Actual interest income was a little lower year-over-year. The big difference was the other category, which was $16 million, primarily various FX transactions. This year in the fourth quarter, if I added up all the various FX, which is marking to market items and FX from foreign exchange contracts, we made about $11 million pre-tax. A year ago, it was a little outsized. We made $26 million. That generally fluctuates. Usually it's plus or minus $5 million, sometimes it's a little more or less. Overall, pre-tax income was higher by 2% or $25 million higher, coming in at $1,181,000,000. In terms of taxes, I mentioned that earlier.
Both fiscal fourth quarters this year and last year each benefited by about $0.05 a share from various positive items. Excluding these items, the normalized rate this year was still up about 0.6% from a year earlier. Again, net income coming in at $779 million for the fiscal quarter was up 2% from a year ago. A quick rundown of some other topics. In this afternoon's release we provide you balance sheet information. One thing that is not on the balance sheet that I'm always asked about is D&A. For the fourth quarter that came in at $408 million. For the entire fiscal year, D&A came in at $1,255,000,000. One thing that I looked perhaps a little at on the balance sheet was cash levels and accounts payable and the like.
That has to do with modernization and switching our basic accounting platform over. This has been a two-plus year effort. It was installed and it's really the platform that a lot of the legacy systems will now sit on as we continue to develop them over the next couple of years. Not only was it a big effort, it was an expensive effort. Nonetheless, to make sure that we had an extra week at the beginning since this new system went in on day 1, anything that was set up in the system, any merchandise or other payables that were set up in our system to be paid during week 1 of the new fiscal year, we prepaid a week early, up to a week early the prior Friday, I believe. We paid about $1.7 billion extra in week 52 of this past fiscal year.
That's why you'll see the cash levels down and the payables levels down associated with that. Again, one of the statistics we always share with you is accounts payable as a % of inventory. Last year at fourth quarter end on a reported basis was 101%. What you'll see now it's 85%, but again, taking out that $1.7 billion, it's 104%, actually a slight improvement in our payables ratio. Excluding construction payables and other types of non-merchandise payables, last year was an 89%. Again on what I'll call a normalized basis, assuming we hadn't prepaid $1.7 billion of payables, the 89 would have been up a couple percentage points to 91%. Seem to be managing that okay. In terms of average inventory per warehouse, last year at fourth quarter end, it stood at exactly $13 million per warehouse.
This year, it came in at just slightly over $12.5 million or about $460,000 lower or 3% lower. Lower per warehouse inventory is pretty much spread across many categories, including the impact of deflation in many of the food and fresh departments as well as electronics. A little bit of it has to do with FX, most of it is just coming down a little bit on inventory levels. In terms of CapEx, in Q4, we spent approximately $850 million. For all of fiscal 2016, we came in right at $2.6 billion. That $2.6 billion, by the way, compares to $2.4 billion for the prior fiscal year 2015. Our estimate for fiscal 2017 CapEx is in the range of $2.6 billion-$2.8 billion. About the same level as compared to last year, perhaps a little higher, depends on timing. Next, Costco Online.
We're currently in the U.S., Canada, U.K., Mexico, and more recently launched in Korea and Taiwan. For the fourth quarter, sales and profits were up year-over-year. Total sales were up 12% in the quarter, 13% ex-FX, and for all of 2016, 15% reported plus 17% ex-FX. On a comp basis for the quarter, we were up 10% reported and 11% excluding FX, and for the year, 14% and 17%. Next discussion in terms of expansion. As I mentioned, in terms of net new locations this year, we opened 29. That's up from 23 openings in all of 2015. This current year, we've got in our budget 31 net openings, three of them are reloads. Something certainly in the high 20s, I think our current best guess is the 31.
If you look back over the last couple of years, the 23 we opened in 2015, that represented about a 3.5% square footage growth. In fiscal 2016, the 29 units, recognizing they tend to be a little bigger and we've also expanded a few units, it's about 4.5% square footage growth. In 2017, assuming we got to 31, that would be in the low to mid fours as well in terms of percentage of square footage growth. Our planned fiscal 2017 locations, assuming the 31 number, would be 17 in the U.S., 7 in Canada, and 1 each in Taiwan, Korea, Japan, Australia, Mexico, France, our first in France, and also a unit in Iceland. Both France and Iceland are currently targeted for late spring in calendar 2017. As we know, sometimes these may slip, that's our best guess at this point.
Note again, these are our first locations in France and Iceland, and we look forward to seeing some of you over there. As of fourth quarter end, total square footage stood at 103.2 million square feet. In terms of common stock repurchases for the fourth quarter, we purchased $131 million worth of stock or 856,000 shares at an average price of just over $153 a share. For all of fiscal 2016, we purchased $477 million of stock. That compares to $493 million in 2015 and $333 million in 2014. In terms of dividends, our current quarterly dividend stands at $0.45 a share. We increased that this past spring, a few months ago. That was a 12.5% increase from the prior quarterly and annual rate.
This year at $0.45 a quarter, this yearly $1.80 a share dividend represents an annual cost to the company of just under $800 million. Next Wednesday, October 5th at 6:00 P.M. Pacific Time, we will announce our September sales results for the five-week period ending Sunday, October 2nd, this coming Sunday. This five-week period will include 34 selling days in the U.S. and Canada, recognizing the closure of business and the observance of Labor Day in those two countries. Lastly, our fiscal 2017 first quarter results for the 12 weeks ending November 20th. We will do it as we've done this time. We'll report shortly after the market close on Wednesday, December 7th, with the earnings call that afternoon at 2:00 P.M. With that, Amanda, I'll turn it back to you for Q&A.
My pleasure. As a reminder, if you'd like to ask a question, please press star, then the number 1 on your telephone keypad. That's star 1. We will pause for a moment to compile the Q&A roster. Your first question comes from John Heinbockel.
Richard, let me start with expansion. I think you said seven in Canada. Was that right?
Yes.
Which I don't Not in recent years have you opened that many in Canada. What sort of drove that? Some unique real estate opportunities? Does cannibalization pick up over the next year in Canada? Sort of tying that back to the U.S., when you think about where you sit today, have you really done any deeper thinking about what the saturation level in the U.S. could be, beyond where we sit today?
Well, first of all, in Canada, I think it's a couple of reasons. If you think back five or so years ago, or even eight or 10 years ago, when we had probably 65, 70 units, we thought the market might be 90 one day, and today we have 90 or 91. We think that it'll certainly be over 100 and we keep adding a few to that concept. I think the fact that we're opening so many right now has to do as much with very strong sales over the last few years. We've been enjoying 5%-9% comps in local currency in each of the last few years up there. It keeps getting stronger.
Just like in the U.S., even in mature markets, we find that while there'll be some cannibalization, the net business that's added when we open a unit, even though it's cannibalizing, net of cannibalization, we'll find that existing members will then be shopping more frequently because they're closer. I think it's a combination of those things, and I don't know what the new five or 10-year guesstimate is in Canada. I don't think we can open seven a year, but once we decided to go to look and see where we're going and how strong we've been, this is the result of probably an effort that started over a year ago to put a few more in the pipeline up there. In terms of the U.S., I think the same story holds true.
If you'd asked us five or so years ago, by now, how many would be in the U.S. versus outside the U.S., we would have said probably we'd be down from 75%-80% in the U.S. to 50 and heading south of there as we saturate. We found in the U.S. that we can put more units in existing markets. I think in a couple of months, we're getting ready to open our 17th or so unit in the Puget Sound, having opened our 16th or so unit just less than a year ago. The other thing, of course, in the U.S. that we have perhaps up to our expectation is markets that five or so years ago, we didn't think we'd have any near-term interest in considering medium-sized markets where other direct competition was there.
What we found is we've done pretty well when we go to these markets. Now, some of these markets are smaller, and it takes a little longer, but there's clearly an opportunity for us there. As we've gone into Tulsa and New Orleans and Birmingham and Rochester and lots of Toledo, these are markets that, again, weren't high on the radar seven or eight years ago. What we've seen is that our deal works. The last thing, of course, includes adding to some of the business centers. For many years, we only had six or eight or so business centers. We opened four last year to be at 11, and we're planning to open four this year to be at 15, including our first business center in Canada. Again, that just adds a few in both the Canada question and the U.S. question.
It includes that opportunity on a small basis. An aside on that is, as I mentioned, I think 2 of the 4 business center openings this year were reloads. One back in many of your neck of the woods, when we took an older, smaller parking lot, no gas station, Hackensack Costco, and relocated it to Teterboro nearby with a big size unit with lots of great parking, great ingress and egress, and a gas station, and converted the Hackensack unit into the business center. Just a small additional benefit in terms of having a use for units as we move some of those to bigger locations. All that's, I think, been part of it.
All right. Then just lastly, have you finalized or thought about the percentage of the Amex to Visa benefit that you're going to get, how much you keep versus providing that back to members? When you think about putting it back to members, when you think about price, labor, and or service and then maybe product development, where is the most lucrative place to reinvest? I don't know if it'd be price, but is it something like product development and pushing the envelope more on Kirkland?
Well, some of those things that you threw out as possible ways to use parts of this bucket of money, we do all those anyway.
Yeah.
I think probably the best, simplest answer is that just like when we buy a physical product better, whether it's lower freight, greater purchasing power, or greater production efficiencies or whatever we figure out with our supplier, we generally want to take 80% or 90% of that, the vast majority of it, and give it back to the customer in terms of lower price, because that's what drives us and drives our business. If we do it more next year, we'll give 80% or 90% of that back. It's not an exact number, but it's well closer to 80 or 90 than not. That same MO and philosophy occurred here. When we sat down and negotiated all the various levers that relate to what I call this bucket of money, there are lots of ways one can use it.
Most importantly, by improving the reward on the card to the member that's going to utilize it, that'll drive value to that member and loyalty to us and also more business to us. Secondly, what's left over, and when we originally did it, we did it such that we're going to keep a small amount of it. To the extent, we're not going to change the rewards program every afternoon if we see that there's more money in the bucket, that will additionally accrue to us, but it's not changing what we're doing with it. We're going to still do those other things.
Again, I think over time, we'll look at it, and you can rest assured in a few years, if the success of the card and the economics of the card to us, we're not going to allow ourselves to keep a lot of it extra. We start with a small amount of a big bucket is good, and if it's a little better because the card's working in directions that are even better than we expected, that's good. We're still going to do those other things anyway.
Okay. Thank you.
Your next question comes from Simeon Gutman.
Thanks, guys. Simeon Gutman. Richard, thinking about the top line, we're on the verge of cycling some of the worst of food deflation. I know you mentioned it's picking up a little. Some of the traffic that the business got from on the gas side, and I think the tobacco headwinds you mentioned, there's still a little more to go. First, is that fair that we're on the verge of cycling that? Then if we are, should we expect a pickup in the business from a top line, or are you expecting the pickup? Just curious how you think about that.
What was the last part of the question, Simeon?
Should we see the business inflect from a top line as some of these, I guess, deflation/top line headwinds abate?
Yeah. First of all, when I ask different buyers in different merchandise categories, their view is it's going to be 3 to 6 more months. Recognizing these are also guesses. They're perhaps educated. Unless you know that something specifically is happening, like you're anniversarying the bird flu or you're anniversarying really high feed prices on the commodity side, sometimes there's a little more predictability on that side. Beyond that, I would say probably best guess is 5 or 6 months of continued deflation at these newer levels in some cases. Gas, who the heck knows? What?
Barring a change from today's.
Yeah. Bob's here. Barring any major changes out there, you'd see an inflection point probably in the-
Well, more neutralish.
More neutralish.
Late fall.
Late fall? It's a few months.
Yeah.
That sounds like a definite maybe.
I guess, if you take the deflation in the food categories, if you take some of the deflation maybe in electronics or do this analysis of looking at the units versus the sales, I guess, what is that delta, if you put it all together? Your best guess at that.
I'd have to get back to you on that. I can give you some sound points, if you will. There's some examples, particularly like in meats. We see them every month at the budget meeting where we'll have literally a 10 or so percentage point drop in the price per pound and a 3 or 4 or 5% increase in labor productivity per pound and less efficiency, because of the fact that the price per pound went down much more than that. That's the kind of stuff that hits your profitability, of course, too. There's some interesting things going on with some commodities. I was just looking at a chart. Coffee, these are average sale, but it's consistent with average cost, down 16%. Certain cheeses are down 10%-20%. I believe eggs are way down right now. Those things are all impacting you.
It impacts you on selling eggs. It helps you a little bit in selling muffins because we're not instantly changing a 16 pack of muffins from, I'm making the numbers up, I don't know what we sell them for, but $5.99 down to $5.89. I'd say the net of those two is still a detriment to us.
Okay. One follow-up. Yeah.
By the way, what I mentioned earlier about late fall, that had to do specifically with gas. It looks like we're going to see an inflection point with gas, all things being equal out there, in the next couple of months.
Okay. My follow-up is related to the credit card. I guess looking back, you've only had a couple of months, but are there signs that there was some deferred spending on either big ticket items? If you have the data, is the same member who is either buying on Amex or not on the co-branded card, is their spending up individually year-over-year, meaning they're incented by the card and they're actually spending more with you?
As it relates to the first question, absolutely. We probably saw it biggest in something that the millennials don't buy, hearing aids. We saw a big decline for a few weeks leading up to it and a big increase right afterwards. Also on big ticket, generally speaking, jokes aside on millennials, across the board, we saw some bigger ticket purchases, which again, that makes sense. People are waiting. There's all types of movement in both directions. You had a member with existing Visa cards in his or her wallet, and maybe they're using that one, not ours. That's fine. We still have a negotiated good rate on certain things. You have people that were using debit their whole lives because they perhaps did not want an American Express card, or they applied for one and did not get one.
For 16 years, they used cash, check, and debit. Now for the first time, they can use a credit card, I'm sure that's where we saw many of these new signups as well, or part of them. In terms of, are they buying more with us? Anecdotally, we're hearing that from our warehouse managers who talk with their biggest wholesale customers. It's purely anecdotal at this juncture, and I think we'll see more of it. I haven't actually looked at any statistics on that.
Okay. Thanks, Richard.
Your next question comes from Matt Fassler.
Good afternoon, Richard. Matt Fassler from Goldman Sachs. A couple of questions. First of all, you spoke in fairly general terms about how you plan to make use of the better economics of the credit card, where you hope to direct it. If you think about the impact on the P&L this quarter along with launch, I do not know if there are special provisions in place for the cost of launching the card. I am not sure if there are elements of the changed arrangement that started to impact it, but would you say that there was any offset to SG&A or meaningful offset to gross margin that resulted from the transition this quarter?
Certainly certain costs were subsidized on the transition from our partners. At the end of the day, yes. I mentioned, I think, when I was going through the SG&A, payroll and benefits for our company were up year-over-year in the quarter in SG&A, and that was somewhat offset by, I said in particular, I rounded up into everything related to this credit card transition. Yes, there is improvement related to that.
Got it. Second question, if we think about other international, you obviously did not call out Asia and any Asian countries as strong countries. You have spoken over the course of the month at releases about comping some of the big openings that you had in recent years. In the other international comp number, XX, was a bit lower than we had typically seen. Anything to think about the franchise in those markets or the macro or how you are resonating in that part of the world?
No. It has more, I think, to do with a little bit of cannibalization in a couple of those countries where you've got 10 or 12 locations in Korea and Taiwan, or I think we had a cannibalization in Australia as well. One location, you'll take a $200 million or $300 million building down $70 million-$80 million. That's what's in your comp, not the new building.
And it-
That's as much to do with it as anything.
And as you think about-
We feel very good about our markets.
Sorry.
We feel very good. As we've said, the one market that has been a weak start, which we remind ourselves that there was a time when we were going to close Korea and Taiwan, and they're our most and almost our most profitable and productive countries and locations. We've talked about our first unit in Sevilla got off to a slow start. It's growing nicely now. Madrid got off to a much better start, and it's growing nicely. Again, we're patient. In terms of that other international comp number, I would guess, and I don't have the detail in front of me, but what I've seen before is, in recent times, is that it's cannibalization more than anything.
That's good to hear on Spain, by the way. If you think about the cadence of openings and year-ago openings and where the new stores are going to open in some of those markets, is this an issue, the cannibalization issue, that should stay with you for a little while? Or is it set to abate at some point over the course.
Which one?
-of the new fiscal year? The cannibalization primarily in Asia, presumably.
I hope it doesn't abate. That means we're working hard to get more openings there.
These are generally no-brainer locations in terms of very predictable, successful locations for us. We feel we've developed a great franchise over there with great loyalty and great success and we would like to do it a little more if we can. We're working hard to get more locations in both Korea and Taiwan, as an example, and it just takes a long time in Taiwan and longer than a long time in Korea because of zoning and other restrictions. It rains on everybody. Other big boxes in those areas have the same impact.
Great. Thank you so much.
Your next question comes from Michael Lasser.
Good evening. Thanks a lot for taking my question. Richard, are you seeing any evidence that you're attracting new members to your club as a result of the more lucrative credit card offer?
Yes. Again, this is very early. We have seen in the tens of thousands of sign-ups or people that were members that signed up because of activities in Citi branches and bank branches. We've seen from the blogs. Of course, the first few weeks of the blogs, all we saw was is about the 30-minute waiting times or longer and other hassles like that. The reality is, we have seen, I would say it's still a small percentage, although when I mentioned there was 730,000 new accounts, I would guess well less than 100,000, but call it 50,000-100,000, I'm guessing would be that. A lot of it has to do with existing members that are seeing the value of that card when they walk in.
Do you have any plans to try and accelerate the sign-up of new members by raising awareness of the card through marketing efforts?
We're doing that already, maybe we're not doing a good enough job. There's nothing else that we're doing right now. When I say us and our partners as well, because they're doing some things as well. We're getting the word out in a big way in the warehouse with handouts, with signage. The word is getting out. We are, again, as I mentioned earlier, we're beating our own expectations of what we had planned for these initial 14 weeks, if you will. So we feel pretty good about it.
My follow-up question is, you're beating your expectations on the credit card overall. You mentioned that spending for maybe some of your larger customers on the card has been a little bit better and may have picked up as a result of it. Yet your overall comps have been a little bit more sluggish in the last couple of months.
Right.
Does that suggest that you're seeing either that marginal customer, that marginal member go away or some other behavioral change that's driving a bit of slowdown?
It's really hard to tell. Arguably, there's probably 50 different factors that impact sales every day and every week and every month. We try to look at the big picture here. We feel very good about what we're doing merchandising-wise. We feel very good about what we've seen with the crossover to this. Our view has been, we don't think that many people left Costco because they can't use their American Express card. American Express is a great brand, and it was a great relationship for many years. At the end of the day, they're coming to Costco because of our quality and our value. When we looked around, and as you would well know, we get a lot of questions all the time. Well, are we going to be impacted by the Internet, losing some? The Internet is taking from everybody.
Our view is it takes a little less from us. Interestingly, when you look at the categories within our slightly lower sales over the last few months, the categories that have bucked that trend have been discretionary non-food categories like apparel and housewares and electronics. Now, when we look at food and sundries, we absolutely do not believe it's delivery services. We do absolutely believe it's deflation more than anything. Again, everybody takes a little piece of something. It's a little piece that we would rather have ourselves or not lose. Again, we feel good about what initiatives we've got going on. Again, when I talk about the new card being a reward to the member based on their previous spending habits, 40%-50% greater reward, that's big.
When I talk about going from 1% to 2% on Costco purchases when they use that card, that's big. It's not big overnight where they just change their habits completely. You'll see it first in business members, and that's where we have seen it. Mind you, during the transition, there was probably a little loss of sales from some of those business members in some cases. I'm sure American Express didn't sit around not doing anything. They're good at what they do, and they were able to figure out how to get people their marketing elsewhere. We think that our members at Costco, primarily for us, I think, again, it's a lot of different things on different factors.
Again, having gone to our budget meeting forever, but having gone every four weeks, just even in the last few, some of the initiatives I see going on merchandising wise, I think we've got a lot of good things going on. Not that we're trying to solve a problem from yesterday. It's what we do every day.
Thanks so much.
Your next question comes from Dan Binder.
Hi, it's Dan Binder. Thanks. Just following on to your comment about the web taking a little bit from everybody. Does that change the way you think about your own web strategy and the type of items you're willing to put on, and delivery times, et cetera, just to create greater convenience? Because price doesn't really ever show up on our screen as the major factor.
First of all, yes, we're doing some things anyway, are we doing more things? Absolutely. We're not freaking out about it. We recognize that we're not going to be the provider. We may be the provider to somebody that wants to deliver, like an Instacart or a Google Express. We're not going to be dropping off small items at our prices at your doorstep. That being said, we have, and we continue to add things. On the merchandise initiative side, we've added various sundries items and health and beauty aids items, and on the apparel, trying to get to a more treasure hunt. I think you're going to see big differences literally in the next several weeks of the types of hot items that you see on there, on the non-food side, in that treasure hunt. I think that's probably the biggest single thing.
Operationally, there's a few things. We are by no means near one click. We recognize our site has had some challenges. You're going to see in the next few months, a big improvement in the number of clicks. You're going to see, in the next six or eight months, some big improvement on search. You're going to see a much streamlined returns process. We've never been big on convenience. Our success has been based on price and value, quality, and quantity at the lowest possible price. We do appreciate that value also is convenience. We're going to greatly improve what we do, it doesn't mean we're going to get something to you in two hours. I think, again, though, when I look at some of the things that we're doing internally, I'm not trying to be cute here, there's certain things I can't talk about yet.
You will see some differences, most of these differences are from an offensive standpoint, not a defensive standpoint. We look at our core business of getting you into the store still is paramount to what we want to do.
If I heard the numbers correctly, it sounded like the growth rate slowed a little bit this quarter on costco.com. Any particular call-outs in terms of merchandise that was offered this year, not last year, or any particular categories that are slower?
I wasn't going to bring that up, only because I didn't want to sound defensive. There were two things last year in electronics that were big. The iPhone 6 launch last year was huge. The iPhone 7 launch was not as huge. The other thing is last year was the introduction of the Windows 10. There were two things. Prior to a year ago comparison, a few months prior to that, people were waiting for the Windows 10 launch, you had a lot of pent-up demand and the launch itself and compared to a year later. Those two things alone were part of that. That's frankly, I think, one of the bigger things.
Again, I think, as I've said half seriously and half jokingly in the past, some of the things that we haven't done historically gives us a great opportunity to do these. There's still some blocking and tackling, like a couple of things that I just mentioned. We have greatly improved our delivery, but it was from bad to better. It still takes too long. Again, we're not going to get something to you in two hours, but you're going to see logistically some things. Handling returns, particularly big-ticket returns. We haven't done a good job of that's already in process. You'll see some changes that'll help. The biggest thing, though, is going to be the merchandise initiatives.
I think you're going to see we have added items and we are adding some items, but we're not trying to figure out what 20,000 additional items, because that's not what we're going to do. There will be velocity items or repetitive items in the sundries area as well. You're right. When you look on your radar screen, price is not way up there. I challenge anybody on the call to compare the exact branded items, and a big basket of them, not just an occasional loss leader that some retailer or dotcom may have out there. You're going to see, yes, it's savings here, but you'll be shocked how much savings. We recognize also we've got to move a little direction, and we're doing that.
Great. Thank you.
Your next question comes from Karen Short.
Hi. Thanks for taking my question. I guess it's hard to butcher my name in general. I was just curious on the gas impact. You gave the $0.02 impact, I was wondering if you could give some color on how much of that was gas margin versus maybe weaker gallon comps in light of fuel prices being down. I'm wondering, as price per gallon increases, I'm thinking it should obviously help traffic. Is that fair, or is there anything else to consider in terms of the state of the consumer or the competitive landscape? I had a follow-up.
Well, yeah, the gas was $0.04. Last year we had very strong gas profits.
Oh, sorry, $0.04, yeah.
No worries. The year earlier, in Q4, we had very strong gas profits. That's why a year ago, we didn't really talk about it a lot. This year, we actually beat our own internal budget by a little from the beginning of the year. Again, it was $0.04 a share lower than it was in Q4 a year ago. Generally, when prices go down, while it impacts some of these basis point % calculations, we make more money. When it goes up, we make a little less money. Although I would say for the last couple of years, there's been a new normal, where when prices went down, our view is, retail gas overall, they've lowered their prices, but not as much as they could have. We lowered it more than that, and we're still able to benefit a little from it.
That was a positive. I think. Yeah. It's the value proposition more than anything that gets people in our parking lot. We're helped by the GasBuddy.coms out there that for two years in a row that they've done it. Then the 4% rebate. There's a lot of different promotional things at the majors out there, where there's $0.10 a gallon off. 4% is big. As the price per gallon goes up, 4% gets bigger. I think that'll be a positive for us as well. If you've been to our gas stations, when you've got, in some cases, 20 pumps now pumping at the same time, and the lines move fast, but there'll be six or eight people in each line.
That not only drives the success of the gas business, but 51 or so of those people for every 100 come in, and even if one of them is incremental, that's good for us.
Can you give some color on what gallon comps were doing this quarter?
I don't know if we do that, but I know it continues to be higher than the U.S. average. My guess, I'll get back to that answer in a minute. Somebody's looking it up for me.
Okay. I guess any comment.
I believe it's in the mid-singles. It's in the mid-singles unless I say otherwise.
Okay. Just to clarify on your comments on deflation, I know you were talking about deflation in food, and then there was also deflation, I guess, in fuel. You had said that fuel prices should start to rebound in late fall, but deflation in food, are you, just to clarify, five or six more months in deflation in food? Is that what you're trying to say?
That's our best guess.
When you're talking to buyers.
Talking to the buyers, that's our best guess.
Can you call out any categories in particular?
Well, the biggest ones would be proteins. Then you've got some other things. I was looking at my sheets here. Hold on a second. This is just our year-over-year this past month. Walnuts are down 47%. That's our sell price. No, I'm sorry, that's our cost. Now, a year ago, they had doubled from the prior year, so they're kind of back where they were. Almonds down 38%. Whole eggs down 54%. Large eggs down 53%. I just was looking down the sheet at the top 50 items.
Yeah.
Those things, particularly things like eggs, really add up. On the inflation page, just for fun, Well, there's some 20s and 30s, but if I look at the top 25 or so items, just in the last four weeks of the fiscal year, regular unleaded gasoline was down 12.8% and was over $3.5 million of credit, if you will, to LIFO. We don't book it every month like that, but that would've been $3 million. The biggest items on the deflation sheet add to the LIFO credit of $2 million-$3.5 million, $2 million-$4 million. The biggest items on the inflationary sheet add $300,000-$500,000 of LIFO charge. Again, it gives you a sense of where it's going. Again, another data point is the U.S. inventories at LIFO. That's a U.S. accounting concept.
I looked at the indices where you start off for cost on the exact items at the beginning of fiscal 2016 at 100.00, and where does it go to? Food is down 2.25% with about 0.5% being in just the last couple of months. Sundries was down at less than 0.5% and not terribly changed in the last three months. Apparel almost right at the same 100.0 a year ago, almost right there. Computers that you spec'd down a little under 2%. It's all over the board. Again, you have extreme categories like meat, which is high volume. Meat is also, we turn it so much faster. It has a higher turn. It turns, I would think, more than 52 times a year. That's a deflationary item.
If you have an inflationary item that is turning eight times in non-foods, it's going to be a different story of how it impacts.
Any color on produce? That was one category I had mentioned.
I didn't have that in front of me. It was not as big. I think it was in the three to low to mid singles.
Inflationary or deflationary?
I'm sorry. It was up a little inflationary in the last few weeks.
Got it. Okay. Thanks very much.
Next.
Your next question comes from Paul Trussell.
Hey, good afternoon, Richard. First, just wanted to ask, is there anything you've seen from Sam's Club or BJ's or other competition, whether it's on price or membership, that you've felt like you needed to react to? Second, look, I know it's been, I don't know, six or seven years since you've given guidance, but we're moving into a new fiscal year and just big picture wanted to know if there's anything you can highlight that we should keep an eye on as we model out, whether it's traffic, comps, thoughts on LIFO, IT spend, payroll, any help would be nice.
Well, first of all, as it relates to competitive reaction, the answer is really no. We do that for a living daily and weekly, They do it literally to the weekly comp shops in every market with direct warehouse club competition. Certainly, the fresh foods people do more direct pricing competition on sale items at supermarkets, particularly on holiday weekends and things like that, and soda pop. At the end of the day, if anything, our view is the moat has continued to get bigger. In other words, our competitive position, pricing-wise, is stronger than it's ever been. We are not resting on that. We're constantly trying to figure out how to widen it. That's what we do. As it relates to guidance, we don't give guidance.
The points of headwinds and tailwinds and anniversary of headwinds and tailwinds, things that we've talked about in the past, we're hopeful that just from a simple FX standpoint, for 2+ years now, the dollar has strengthened year-over-year. It was more than a one-year anniversary. There was an inflection point of late, although, nobody knows what tomorrow brings on that. It looks like it won't be as impactful to the negative. We got through the headwind of the conversion. That should be a net positive. I think it'll be a net positive over the next few years and probably not easily calculable, but we'll try to figure that out. We know that we'll improve our SG&A component of what I'll call merchant and bank fees. In other words, things related to the new card offering.
Again, we'll be more quantitative as we get through the next couple of quarters, and it's more definable than just for 14 weeks. Again, it's good, and we look forward to doing that. I mentioned the international membership fee increases in those certain areas. That's, again, that'll improve over a nearly two-year period by about $50 million pre-tax to the membership fee line. I imagine you'll see some of that offset on some of the margin line, although to be more competitive, but not reacting to competition. I'm trying to think of the other things. Gas. Gas. Again, I think there's a new normal on gas. There are going to be swings from time to time, but I don't think we are planning anything big.
I think the other issue is we have, and some of you have heard this before, we have lots of little things that are positive for us that continue to drive value, whether it's pharmacy, optical, hearing aid, whether it's Costco Travel. These are all things. Our ticketing program in the warehouse. A new program, which is brand new. We're just testing it in Southern California with Ticketmaster. You can go to costcotickets.com and check it out. Again, some real savings on high-end stuff. There's a lot of things we're doing. We seem to have gotten some breakthroughs on the cosmetic side with SK-II. We hope that brings on others. Clearly, given some of the challenges that brick and mortar in that area are impacted by, we can sell the heck out of that stuff and provide great value to our members.
It's the kind of member that we believe that these manufacturers want. Now, talking to myself, I've talked myself into it, we've got to talk them into it. In terms of gas stations and hearing, we continue to add gas stations and hearing aids, not just to new locations, but to existing locations. I would say all those things help a little bit. U.K. and Japan. Hello.
Just lastly, on IT, modernization spending for this upcoming year
Yeah. Look, we'll still have an impact, a hit to SG&A this year and probably into next year. I keep pushing it out a year. I guess the amount I push it out keeps getting shorter. It used to be a couple of years I'd push it out, and then a year, and hopefully it'll be six months. We are seeing deliverables, we are seeing lights at the end of the tunnel. Our single biggest, most expensive piece, which is the platform on which all the legacy buying systems and transportation systems, as they're in the process of being rewritten and improved. I think you'll get some real savings from some of those things. I know you will. The first order of business is getting this in place.
These are big chunks, I can't tell you when that inflection point was going to be. A couple of years ago, let's say at the end of 2014, I would guess that sometime in late 2016, early 2017. Today, I would say sometime in 2018, probably. And if it is a little longer, it's because we've got more things that we're doing, not because anything's screwed up. We've already gotten past a lot of the screw-up where we know what we're spending money on, and we're seeing some deliverables, and there's more to do.
Thanks for the color, Richard.
Your next question comes from Sean Naughton .
Just continuing on the merchandise trends, you were going over some of these things. You didn't mention organic food. Just curious how that's still performing for you. I know that's been a good growth driver. I think it's a margin enhancer. Are you seeing any tightness in supply? Are we experiencing the same sort of deflation in that category as you saw are in the rest of the food across the store? Any commentary there on where that's going?
Thank you for reminding me. I didn't call you to remind me. We expect organic to be up 20% this year. Some of that will be some cannibalizing of some traditional, conventional but no, it's the perfect items for us because it's our member. It helps us with millennials on top of that, we get that. It creates a bigger competitive pricing moat because we have as good, if not better quality, at much better pricing. In terms of supply, I think the supply is starting to catch up with the demand out there. You've heard me talk in the past about many of our global sourcing initiatives. I think that's going to continue to help us and make it more competitively advantageous to us.
We have long-term relationships that we have had for a while now and have continued to build. There's going to be pockets of supply issues on different items sometimes. Overall, we're doing a lot in that regard ourselves, whether it's produce with farmers, seafood, poultry, you name it.
Okay, great. Just another question, I think this is on a lot of people's minds, just on the membership fee increase potential here in the U.S. or Canada. I think we're close to the five-year anniversary mark. I think this is something that I know there's no schedule, but typically done every five to six years. Can you just update us just on your thought process there with respect to MFI in the U.S.?
It would be U.S. and Canada. We would say we can't say anything or give any direction on it other than you're right, every five or six years, we've done something. I think the exact fifth anniversary and the last time would be this January. The sixth anniversary would be the following November, and the next November would be the sixth anniversary. Early this year, we've simply just said is we're going to get through the credit card conversion first, which we've now done. The only other comments I've made in the past is that when we look at our member loyalty, the impact that previous increases had on renewal rates and anything like that, it's really a non-issue. When we do it, we of course, use it to be even more competitive. It becomes a few year benefit, not a one-time benefit.
We'll let you know when we know. We haven't made any decisions yet and really haven't talked about it a lot internally.
Okay. That's great.
We act pretty quickly when we do things.
Yeah. Real quick, just the $50 million pre-tax on the international price hike that you did in a number of markets, that's over the 23 or 24 months. That's correct, right?
That would also be over 23 months starting in September now.
Thank you.
Sure.
Your next question comes from Greg Melich.
Hi. Thanks. I have a couple of questions. One is, I just wanted to make sure I understood the dynamic of the new people signing up for the card. It was 730,000 new signups in just a couple months.
New accounts. Right.
New accounts.
Yep.
Now that you're getting the payments for signing those people up, in terms of the SG&A, core ops may have deleveraged six basis points, but that's where the benefit of those signups would have showed so that the payroll may have deleveraged 10 or 12, and that gave you some net. Am I thinking about that the right way?
Yes, although I believe. Again, there's different pieces. I look at it all pretty just straightforward and simple. What is our effective merchant fee? Unfortunately, it doesn't all go on the SG&A line. There are certain items that benefit sales. I believe bounty is one of them.
Goes into bounty, right.
Bounty goes to sales, which improves your margin a little bit. That might be a couple of basis points in there. I haven't calculated it out. Yes, some of the offset Again, we're talking a small piece of a big bucket is still decent to us, but we're only in it for a few months.
Got it. The headwinds from payroll, how much of that was related to some of the wage?
We do increases at top of scale every year. Every three years, we announce what it's going to be to our employees for the next three Marches. This past March, we also, in the U.S. and Canada, raised the bottom of scale by $1.50. $11.50 went to $13, and $12 went to $13.50. Just that piece, the $1.50 at the bottom of scale, was, I believe, $39 million a year. Call it $40 million a year. That would be March to March, so through the first month of Q3.
Yeah. That's great. That's helpful. I guess lastly, I'm sort of thinking about how the card is being used. I know you said it's better than your expectations. I guess, could you give us a little more color there, especially with the people that are new to the card, new to Costco with it, as to how much the card is being used outside of the club now that people have it.
I'll be able to give more color on that in the next quarter. What I can tell you is, one of the assumptions going into this, we want this card just like we wanted our previous co-brand card to be our members' top of wallet card. They're not only using it here, they're using it everywhere. The fact that historically, I could not use my other card at, in my case, my local dry cleaner or the little local restaurant, if it is your top of wallet, there are more places you can use it. That grows that small merchant, whoever's card is being used at that small merchant, they pay a higher merchant fee. There is this whole equation of co-branding, and revenue share helps us. I believe we are already above what we were on the old card, in terms of outside to inside spend.
It's higher than it was. It's higher than it was after increasing it over a period of time. We would've expected that. We would've certainly hoped it, we would've expected it. I don't think we necessarily knew what to expect to start with, and we probably are a little pleasantly surprised that it's already over that amount. I think it'll continue to grow. We can't jump to conclusions. Yeah. Bob is whispering in my ear. We cannot jump to conclusions on this. It's all of 14 weeks old. As it relates to new people that signed up, again, it's in the tens of thousands out of that 730,000. It's not 100,000, it's not 200,000. I actually haven't even looked at the data on this. People have also signed up throughout the course of the year, so we don't have that much history on it.
Another good comment Bob's making late in the day here. It's been 14 weeks. Some of them signed up last week or two weeks ago, I guess.
Yeah. One last housekeeping. You said membership fee income was up 6% in U.S. dollar terms.
Yeah.
What was it up in local currency?
I believe it was the same. It was $47 million versus $50 million. The same. I would think it was the same percentage increase.
Okay. Great. Thanks.
Yeah. Why don't we take two more questions?
Your next question comes from Oliver Chen. Oliver, your line is open.
Can you hear me?
Yes.
Oh, hi, you guys. Thanks, Richard. Congrats on solid results. A lot of our survey data at Cowen does indicate that the Amazon Prime crossover has mathematically increased over a multi-year period. Just what would you highlight as some of the features of your story that make you un-Amazonable for the long term? As you do your consumer insight and your consumer research, are there aspects of your business model which you're just wanting to really be on top of, just to make sure that you continue to appeal with millennials and Generation Z and as shopping habits kind of shift?
I think the first piece of that question as it relates to the Cowen research piece that talked about, I guess you guys have surveyed people over the last five or six years. How many people used to have just a Costco card, and then how many people had just an Amazon account, Amazon Prime? Of course, over time, Amazon has picked up a lot, and there's not as many unique ones. We would've expected that. My family has an Amazon card. Not a card, but an account. Although I don't let them buy a lot. No, just kidding. At the end of the day, we would expect that. The internet, in general, is going to take its percentage of different categories. It's going to impact different categories and different retailers of such categories at different levels.
I read the reports that some of you have written about that we and maybe one or two other retailers out there that are unique are Amazon-proof or internet-proof. We don't buy that for a minute. We do believe that we do rely and we do expect we're going to be impacted less. We also don't believe we have to go crazy on the other side. We want both, but our value proposition is best served for us when it's in store, getting members to come in and buying when they can see everything there that we have. We think that we can win on both parts. Have we lost a sale of something to an internet provider out there? Whether it's Amazon or someone else, I'm sure we have. Have we gained more often than not? Absolutely, as the whole media business, videos, CDs, and books.
Many years later, books for us is a new normal, and it's still quite strong. Maybe it's 70% or 80% of what it used to be, but it's strong and growing. The other two have changed for a lot of reasons, including streaming. That being said, an area that a lot of traditional retailers are getting killed in out there is apparel. We are now in our third year, averaging, compounding over the nearly three and a half year period in the low to mid-teens. Probably the mid-teens, I don't have the numbers in front of me, and growing. I think on the fresh food side, we're glad that fresh is difficult, and we don't believe that everybody is going to just have everything delivered. We're going to work hard to make sure that they want to come and see us.
What was the last part of your question you were asking about what are we doing?
I'm curious about demographics, as you think about younger versus older in your core, where your age profile is shifting. Just the reality of new customers is this seamless shopping experience and what you talked about earlier, Richard, in terms of the axis of convenience being a factor in terms of that and what you're thinking as you modernize and continue to stay fresh with younger customers as well.
Well, again, we have our limits, by the way, on some of those realities. I think for a long time, again, convenience wasn't a word we even thought about. There are certain things we're not prepared to do. Again, sell smaller sizes at our pricing, and have everything in the world available to you. Part of our strength is what we do. I think going forward, even with millennials, when our success in organic didn't start by seven or 10 years ago, us sitting around a table and saying, "How are we going to go after this new generation that want this stuff?" We have great merchants and great operators in eight different regions in the U.S. and elsewhere, they're out there trying things. Every month, as it got better, in this case, the Bay Area region, their compatriots tried some things in other regions.
We turn around, nobody can benefit as much and do it as well as we do. I don't think we sat around strategically saying: How do we go after them? It evolved into that. Now that we're there, though, what else can we do for them? Whether it's food items or other things. Our membership marketing people had done a study recently, a presentation recently, it showed whatever the previous generation was before, it was a gen whatevers. I know I'm one of those baby boomers, which is not a baby anymore. Our average age versus the U.S. population, just in three or four years, has come down two years from a four-year gap to a two-year gap. Our goal is not necessarily to get it to a zero gap. Our goal is to drive more business.
When we look at the age group of millennials versus that same age group when the previous generation was that age, they're buying a little less, but not a lot less. When we look at what we did, these are, again, data points or sound bites, when we look what we did two and a half years ago on LivingSocial, now we have a full year of renewals on them, it was very interesting. Clearly, we would expected more of those people to be millennials that signed up on that LivingSocial 10 or 12-day initiative that we did. That was correct. What we were surprised at is that they actually shopped a little more frequently, bought a little less each time, but the aggregate of those two, they bought more over that year.
A little more, I mean, in the low single digits, but it was more. It didn't have a bracket around it. They renewed at a slightly higher rate. Now, than the walk-in people that same month that had come in on their own to sign up, just walk in the counter. The people that had walked in were, on average, a little older and about a 10-15 percentage point fewer penetration of millennials. That was encouraging to us. While there's certainly extreme examples in New York and the Bay Area and tech, there's a lot of people that still aren't embarrassed to tell you that they shop in store, and we got to have a lot of reasons to get you there.
I'm also excited of what we see we're going to be doing on costco.com, I'm not suggesting it's going to be trying to get your dinner there delivered to your doorstep if you order by noon. That's not going to be us.
Okay. Thanks, Richard. That's super helpful. The last question is, we're really enthusiastic and encouraged by how well you've done with your store traffic, your core store traffic trends. Is your expectation for this kind of steady, low single-digit positive momentum to continue? Do you foresee that being somewhat volatile, just given the reality of traffic trends? As we do our models, is there anything we should know as the jet.com deal closes as well? Thank you.
Well, with regard to the latter, if they're doing a little business with us, they'll probably stop doing a little business with us. There were a few items on there, I think, that they bought from us, not a lot. What was the first question I got off on a tangent there?
About store traffic, just the store traffic trends.
No. Look, we look at all these things. We block and tackle every day. I'm very excited about our merchandising initiatives in store as well. I'm excited about some of the global sourcing stuff we're doing. We come back from our every four-week budget meeting. We got some neat stuff coming out. I'm excited. It's small, but being able to sell directly SK-II and selling a heck of a lot of it, in terms of the total market of that product, people are talking about it. Again, over 90% of our members coming into a Costco buy a fresh food item. They're coming there. Those are the kind of things, how do we get you in store? Because if we can get you in store, you're going to buy a lot more. We've seen that even with Google Express.
That customer will shop a few less times in store, shop several more times online as well, do both. They'll buy a little more over the course of the year, but they're buying a lot more each time when they go in store because they see all that stuff. That's what we kind of keep doing. I think the value thing, I would encourage to look at some, do your own pricing study of exact like items. Maybe you got to adjust for quantity because you got to buy 128 of something, 124 something instead of 24 something. At the end of the day, you'll be shocked the difference in pricing, not just here. We think we got a lot of things going on for us.
We have no illusion, though, that the internet is going away or that we should do more of it online ourself as well. Clearly, we feel good about what we're doing in store and what we're going to continue to do to drive that business.
Thanks. The SK-II is going to be great. Baby boomers and luxury shoppers are going to love it, congrats on that as well.
Thank you.
Your final question comes from Dan Farrell .
Hi, this is Dan Farrell in for Brian Nagel. I was just wondering, thanks for sneaking us in, too. In terms of the membership benefits and some of the sales benefits you guys have been seeing after the new credit card signups, I was just wondering if you had any expectation on kind of how long those would persist throughout the year.
Well, I think your big hit is going to be in the first three or four months. Really, my guess is through Christmas, because there is going to be a lot of people are buying more items, bigger ticket items during that period of time. There will be additional initiatives like there were for 16 years, whether it is tabling activities or other marketing pieces that we will continue to do. I made a comment probably six months ago on one of these calls. In its own way, we think that this could be, in a way, a gift that keeps on giving. The value proposition of what we sell is great. Some of the new things that we have done merchandising wise, whether it is our ticket, not meaning the Costco tickets for events down in Southern California as a test.
I am talking about the ticketing programs that we have in store, the ever-increasing quality of our fresh foods, what we have done in apparel. There is a lot of things going on that I think will help us. Again, I think the credit card and the new value proposition will be one of them. When you think about the fact that effectively, on virtually everything, you can get 4% off at Costco between if you are an executive member and use the co-branded Costco and Citi Visa Anywhere card. For a company that marks its goods up 10% or 12%, I would think that we are considered one of, we can buy pretty well and put all our purchasing power in 3,700 items and then give you back up to 4% of that. That is a pretty good value.
We have seen that anecdotally in a big way already from businesses, and I think we will continue to see it.
Okay, great. Then just a follow-up regarding the transition. Did you guys see any, I guess, inflection in sales of things like big ticket items that people may have been holding off on early when the card was being transitioned, and then once the transition cards were activated, did you see any inflection in those items?
We did. Again, it's more a dinner party discussion. The biggest area we saw was hearing aids, of all things. Of course, that's not millennials. The other thing would be big ticket electronics and the like. My guess is in the case of the hearing aids, I wouldn't be surprised since there's a direct Costco employee member conversation, eye to eye. I wouldn't be surprised if there was some people out there that over the several weeks leading up to it, they said, "If you wait and use this card, you'll get another 2% off on a $2,000 item." My guess is that impacted that a little bit, too.
There are no further questions.
Okay. Well, thank you everyone. Have a good day.
That does conclude today's call. You may now disconnect.