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 speakers' remarks, there will be a question and answer session.
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 written 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 4th quarter year to date fiscal 2016 operating results for the 16 52 week periods ended this past August 28. For the quarter, earnings came in at $1.77 a share, up 2% or $0.04 over last year's 4th quarter earnings of $1.73 a share. And comparing the year over year 4th quarter earnings results, a couple of items of note and looking at the comparison. FX, as compared to a year ago during the Q4, foreign currencies in the countries and areas where we operate were weaker overall versus the U. S.
Dollar, primarily in Mexico, Canada, U. K. And Korea. This resulting in foreign in our foreign earnings in Q4 when converted into U. S.
Dollars being lower by about $13,000,000 after tax or $0.03 a share had been exchange rates been flat year over year. Gasoline profitability. Our profits from gasoline during the quarter as compared to last year's Q4 were lower by about $27,000,000 pre tax or $0.04 a share, primarily a function of last year's very strong profit results in the Q4. 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 $16,000,000 pretax or 4 basis points primarily to the SG and A line. Income taxes, both this year and last year's Q4 results had several positive net net positive tax benefits that in the aggregate benefited each of the 4th quarter's earnings per share figures by $0.05 Excluding those positive tax items, this year's underlying Q4 tax rate was about 0.6 percentage point higher than last year's. That would have been about $0.02 a share. But 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 Q4, we reported pre tax LIFO credit of $31,000,000 that compares to last year in Q4 of $14,000,000 So both deflationary, although we've all talked about the increased levels of deflation of recent time.
So at year over year delta of $17,000,000 or about $0.02 this year related to higher deflation in LIFO credit in the quarter, up by higher by that amount. In terms of sales for the Q4, 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, and by weaker foreign currencies relative to the U. S.
Dollar, the latter about 1 percentage point of impact to sales. Excluding deflation, the flat U. S. Comp sales figure for the Q4 would have been plus 2. The reported Canadian comp figure of plus 2 would have been plus 5 ex gas and FX and reported minus 2 other international comp figure ex these two factors would have been plus 1.
Total comps were reported at 0 for the quarter and again excluding gas and FX would have been plus 3. Of course, the plus 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 1 relo. And for the fiscal year, we opened 29 net new locations on top of that of 4 relocations, I believe 2 of them which were relocated in the old units converted into new business centers. Of the 29 locations, 20 1 were in the U.
S, 2 were in Canada, 2 were in Japan, and 1 each were in UK, Taiwan, Australia and Spain. This afternoon, I'll also review with you our membership trends and renewal rates, additional discussion about margin and SG and 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 20 after 6 weeks into the Q4. So on to the 4th quarter results, quickly sales for Q4 were $35,700,000,000 up 2% from last year's 4th quarter sales of $35,000,000,000 again a flat comp on a reported basis plus 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 FX, the average transaction was slightly positive year over year and 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 show the best results. Internationally and 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 Q4. 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, then again on a comp basis was slightly negative year over year for the quarter ex the tobacco department that plus 3%. And you can see 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 soft lines, which was in the low single digits, apparel, small electrics and home furnishings were the standouts. Within fresh foods, produce and deli were the strongest of the 4 departments. Of course, meat has had a lot of meat and other types of protein had weakness relative to deflation. In ancillary businesses, hearing aids, pharmacy and optical show 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 digits in the low to mid single digit range and several fresh food categories notably meat and pork and things like that in 5% to 10% range in some cases. Overall though we're seeing a net increase in deflation, but not at those levels. And yes, some non food levels as well, not food categories as well. Moving to the line items on the income statement, membership fees, we saw good results for the quarter, reported were $832,000,000 up 9 basis points $47,000,000 or up 6% versus last year's Q4. The $47,000,000 would have been $50,000,000 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 4th quarter and year end, at year end, we had 36,800,000 Gold Star members, up from 36,200,000 16 weeks earlier at the end of the 3rd quarter. Primary business ticked up to 7,300,000 from 7.2 dollars Business add on remained at $3,500,000 for total 47,600,000 member households at Q4 end compared to 16 weeks earlier when it was $46,900,000 including add on cards in terms of people walking around with a Costco membership card in their wallet, $86,700,000 at year end, up from $85,500,000 just 16 weeks earlier.
In terms of executive member sign ups, executive members, we have of the 47,600,000 member households, we have 17,400,000. That was an increase of 370,000 during the 16 week Q4 or about $23,000 a week increase. And 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 2 thirds of our sales where executive membership 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 and ticking down from 87.7% in the previous quarter again in the Q2.
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 AmeriExpress wasn't purchased, so it was really had to start all over and you don't have as many auto renewals to start with. But that's quickly changed and we've 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 sign ups for the last 9 months prior to June 20, as we were switching over in June 20. So overall, pretty much the same and we'll see where that goes from here. Regarding membership fees, effective at the beginning of this month, we increased annual membership fees by about 10% in 3 Asia locations, Taiwan, Korea and Japan, as well as in Mexico and the UK. 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 1st month of people that are seeing this in September, those are people that originally signed up presumably in September and this is they renew.
People that don't didn't sign up or aren't renewing until next March, it will be in March and for 12 months hence. So hence the 23 months overall. That will be about $50,000,000 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 20, the beginning of the 7th week into the fiscal Q4. Beginning June 20, we stopped accepting American Express at all the U. S.
And Puerto Rico Costco's and on costco.com began accepting all Visa cards including of course the new Citi Visa Anywhere card. There was a lot of effort and as you know there were a few operation glitches during the 1st 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 cash back rewards, we estimate it's about a 40% to 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 costs of accepting credit and debit cards. In terms of improved cash back member rewards, our former card provided a 3% cash back 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. And 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% cash back rewards now the 2%. We think this is big and it's even bigger for executive members who also earned a 2% reward from us on most Costco purchases.
So combined an executive member using the new card with just a few exceptions we'll earn 4% back at Costco. We think that's 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'll be remain at a 1% cash back reward. A few basic stats on the new card, approximately 11,400,000 American Express co branded cards representing about 7 just under 7,500,000 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. And since June 20 in just the past many weeks, 1,100,000 members have applied for the new card and over 730,000 new accounts have been activated or a little over 1,000,000 additional Citi Visa cards in circulation. It's still early. We launched only 14 weeks ago, but so far we're 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 Q4 by 28 basis points from up from 11.14 percent a year ago to 11.42 percent.
I'll let you jot down the normal numbers that I asked you to jot down. We'll have 4 columns reported and without gas deflation, Q3 'sixteen and Q3 'sixteen would be the first two columns. The 3rd and 4th columns would both be Q4 2016, but then also reported without gas depreciation. 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 Q4, up 29 basis points of 2016 and again ex gas deflation up 9 basis points.
Ancillary businesses in Q3, plus 9 and plus 4 reported and without deflation. And in Q4 2016, ancillary businesses reported minus 4% and minus 9% without gas deflation. 2% reward, a 0% and a +2% in Q3 and a minus 2 and a 0 in Q4. LIFO, plus 2 and plus 2 and in Q4 2016 plus 5+4. Other, in Q3 2016, both columns had a +7 and in Q4 no issue, 0 on 0.
So 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 a ex gas deflation basis. This year in the Q4, of course, you saw the 28 basis point up. That would have been plus 4x gas deflation. I might add that the plus 7 a year ago, that was and I'm sorry, in Q3, that was simply a onetime legal settlement that benefited margin. As you can see overall, again, our margin was higher by 28%, but without gas plus 4%.
The core merchandise component that you see that I just mentioned the plus 29% or the plus 9% ex gas deflation. That's the thing I'll focus on to start with. Our core gross margins, which is fresh foods food and sundries, hardlines, softlines 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 hardlines showing higher year over year gross margin slightly, softlines 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 4 basis points, ex gas deflation down 9, all a function of lower year over year gas prices gas profits.
And 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 6 basis points. So margins were fine in the quarter overall. And again, LIFO added 4 basis points to the equation. In terms of SG and A expenses, for the quarter year over year, we were up 34 basis points, coming in at a 10.34% versus a 10.00% a year ago. And again, that 34%, I'll have you jot down a couple of numbers.
That 34,000,000 ex gas deflation is a minus 13,000,000 or higher by 13,000,000 not higher by 34,000,000. Again the same four columns Q3, 2016 reported and Q3 2016 without gas and the same two column headings for Q4 2016 and Q4 2016. Operation core operations, minus 24 basis points and a minus means higher, higher by 24 basis points in Q3 2016 on a reported basis, higher by 8x gas deflation in the 4th quarter, higher by 24 and higher by 6 Central, higher by 6% and higher by 4% in Q3 and then Q4 higher by 9% and higher by 7% ex gas deflation. Stock compensation, higher by 3 and higher by 2 in the Q3 and higher by 1 and flat in the Q4 columns. Then total that we reported in Q3 2016 compared to Q3 2015 on a reported basis, SG and A was higher by 33%, but really higher by 14% ex gas deflation and the higher by 34% this time was higher by 13%.
So not that different looking at it that way. The operations component, the minus 6 core operations ex gas deflation, that consisted of higher payroll and benefits, partly due to the slightly weaker sales and the deflation in 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 MX City Visa switch during the quarter. Central expense was higher year over year by 9, 7x gas, increased IT spending related to modernization that was 4 of those 7. And a couple of other basis points higher from a few small legal settlements in the quarter. And again, stock compensation was really not an issue year over year.
Next on the income statement, preopening, pretty much in line with openings themselves. Last year, we had $27,000,000 preopening expense. This year, dollars 3,000,000 lower or 24,000,000 Last year in the quarter, we had 13 openings, this year in the quarter we had 11, which includes that relo, pretty much in line again with what we'd expect. All told, operating income in the 4th quarter came in at $1,191,000,000 which is $35,000,000 higher or 3% higher year over year than last year's 1.56 $1,156,000,000 Below the operating income line, interest expense in the 4th quarter came in at $39,000,000 this year versus $40,000,000 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 $11,000,000 in the quarter coming in at $29,000,000 versus $40,000,000 a year ago.
Actual interest income was higher year over year, but I'm sorry, was a little lower year over year. The big difference was the other category, which was $16,000,000 primarily various FX transactions. This year in Q4, if I added up all the various FX, which is marking to market items and FX from foreign exchange contracts, We made about $11,000,000 pretax. A year ago, it was a little outsized. We made $26,000,000 That generally fluctuates.
Usually, it's plus or minus $5,000,000 sometimes there's a little more or less. Overall, pretax income was higher by 2% or $25,000,000 higher coming in at $1,181,000,000 In terms of taxes, I mentioned that earlier both fiscal 4th quarters this year and last year each benefited by about $0.05 a share from various positive items. And excluding these items, the normalized rate this year was still up about 0.6% from a year earlier. And again, net income coming in at $779,000,000 for the fiscal quarter was up 2% from a year ago. A quick rundown of some other topics in this afternoon's release.
We provided you balance sheet information. One thing that is not on the balance sheet that I'm always asked about is depreciation and amortization. For the Q4 that came in at $408,000,000 For the entire fiscal year, D and A came in at $1,255,000,000 One thing that I'll look perhaps a lot 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 2 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 it was a big effort, it was an expensive effort. But nonetheless, to make sure that we had an extra week at the beginning since this SUS system went in on day 1, anything that was set up in the system, any merchandise or other payables that were set up in the system to be paid during week 1 of the new fiscal year, we prepaid a week early, the prior up to a week early the prior Friday, I believe. And so we paid about $1,700,000,000 extra in week 52 of this past fiscal year. And that's why you'll see the cash levels down and the payables levels down associated with that.
So again, one of the statistics we always share with you is accounts payable as a percent of inventory. Last year 4th quarter end on a reported basis was 101%. What you'll see now, it's 85%, but again taking out that $1,700,000,000 it's 104% actually a slight improvement in our payables ratio. And excluding construction payables and other types of non merchandise payables, last year it was an 89%, again on what I'll call a normalized basis assuming we hadn't prepaid $1,700,000,000 of payables. The $89,000,000 would have been up a couple of percentage to 91%.
So manage seem to be managing that okay. In terms of average inventory per warehouse, last year at 4th quarter end, it stood at exactly $13,000,000 per warehouse. This year it was came in at 12 just slightly over $12,500,000 or about $460,000 lower or 3% lower. Really lower per warehouse inventory 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, but most of it is just coming down a little bit on inventory levels.
In terms of CapEx, in Q4, we spent approximately $850,000,000 and for all of fiscal 2016, we came in right at $2,600,000,000 that $2,600,000,000 by the way compares to $2,400,000,000 for the prior fiscal year in 2015. Our estimate for fiscal 2017 CapEx is in the range of $2,600,000,000 to $2,800,000,000 So about the same level as compared to last year, perhaps a little higher, depends on timing. Next, Costco Online. We're currently in the United States, Canada, UK, Mexico and more recently launched in Korea and Taiwan. For the 4th quarter, sales and profits were up year over year.
Total sales were up 12% in the quarter, 13% ex FX. And for all of 16, 15% reported and 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% 17 percent. Next discussion in terms of expansion, as I mentioned in terms of net new locations this year, we opened 29 that's up from 20 3 openings in all of 15. This current year, we've got in our budget 31 net openings before, but 3 of them are relos.
And so something certainly in the high 20s and but I think something 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. And in 2017, assuming we got to 31, that would be in the low to mid 4s 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. And both France and Iceland are currently targeted for mid to late spring late spring in calendar 2017. And as we know, sometimes these may slip, but that's our best guess at this point. Note, again, these are first locations in France and Iceland, and we look forward to seeing some of you over there. As of 4th quarter end, total square footage stood at 103,200,000 square feet.
In terms of common stock repurchases for the Q4, we purchased $131,000,000 worth of stock or 856,000 shares at an average price just over $153 a share. For all of fiscal 2016, we purchased $477,000,000 of stock. That compares to $493,000,000 in 2015 and $333,000,000 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. So this year at $0.45 a quarter, this year this yearly $1.80 a share dividend represents an annual cost to the company of just under $800,000,000 Next Wednesday, October 5 at 6 pm Pacific Time, we will announce our September sales results for the 5 week period ending Sunday, October 2nd, this coming Sunday. This 5 week period will include 34 selling days in the U. S. And Canada, recognizing the close of your business and the observance of Labor Day in those two countries.
Lastly, our fiscal 2017 Q1 results for the 12 weeks ending November 20. We will do it as we've done this time. We'll report after shortly after the market close on Wednesday, December 7, with the earnings call that afternoon at 2 o'clock. With that, Amanda, I'll turn it back to you for Q and A.
My pleasure. And your first question comes from John Hinkable.
Richard, so let me start with expansion. I think you said 7 in Canada. Was that right?
Yes.
So, kind of which I don't not in recent years have you opened that many in Canada. So what sort of drove that, some unique real estate opportunities? Does cannibalization pick up over the next year in Canada? And then sort of tying that back to the U. S, when you think about where you sit today, if you really don't need 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 5 or so years ago or even 8 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. And we think that it will 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% to 9% comps in local currency in each of the last few years up there.
And so it keeps getting stronger. And just like in other in the U. S. Even in mature markets, we find that we can while there'll be some cannibalization, the net business that's added when we open the 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. And so I think it's a combination of those things.
And I don't know what the new 5 or 10 year guesstimate is in Canada. I don't think we're going to open 7 a year, but once we decided to go to look and see where we're going and how strong we've been, we've 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 had asked us 5 or so years ago by now how many would be in the U. S.
Versus outside the U. S. And we would have said probably we'd be down from 75% or 80% in the U. S. To 50% and heading south of there is we saturate.
We found in the U. S. That we can put more units in existing markets. I think we're getting in a couple of months, we're getting revenue to open our 17th or so unit in the Puget Sound, having opened our 16th or so unit just less than a year ago. And the other thing, of course, in the U.
S. That we have perhaps up to the our expectation is markets that 5 or so years ago, we didn't think we'd have any near term interest in considering medium sized markets where our direct competition other direct competition was there. And what we found is, is we've done pretty well when we go to these markets. Now some of these markets are smaller and takes a little longer, but there's clearly an opportunity for us there. And 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 7 or 8 years ago.
And 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 6 or 8 or so business centers. We opened 4 last year to be at 11 and we're planning to open 4 this year to be at 15, including our 1st business center in Canada. And so again, that just adds a few in both the Canada question and the U.
S. Question, it includes that opportunity on a small basis. And aside on that is, as I mentioned, I think 2 of the 4 relos this year were 2 of the 4 business center openings this year were relos, 1 in back in many of your deck 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 the business center. So just a small additional benefit in terms of having a use for units as we move some of those to bigger locations. So all that's I think been part of it.
All right. And then just lastly, have you sort of 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? And 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
parts of this bucket of money, we do all those anyway. I think probably the best simplest answer is that just like when we buy a physical product better, lower we can buy 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. And if we do it more next year, we'll give 80% or 90% of the bat back. And it's not an exact number, but it's well closer to 80% or 90% than not.
That same MO and philosophy occurred here. So when we sat down and negotiated all the various levers that relate to what I call this bucket of money, there's lots of ways one can use it. Most importantly, by improving the award on the card to the member that's going to utilize it, that will drive value to that member and loyalty to us and also more business to us. And 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. Now 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.
So 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. So 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, but we start with a small amount of a big bucket is good And if it's a little better because the cards working in directions that we are even better than we expected, that's good. And we're still going to do those other things anyway. Okay.
Thank you.
And 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. And then 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. At first, is that fair that we're on the verge of cycling that? And then if we are, should we expect a pickup in the business from a top line? Are you expecting the pickup? Just curious how you think about that.
What was the last part of the question, you mean?
I mean, should we see the business inflect from a top line as some of these, I guess, deflationtoplineheadwinds abate?
Yes. Well, I think first of all, I think there's another first of all, when I asked different buyers, and different merchandise categories, their view is it's going to be 3 to 6 more months, recognizing these are also guesses. I mean, they're perhaps educated unless you know that something specifically is happening like your anniversarying the bird flu or your anniversarying really high feed prices on the commodity side, sometimes there's a little more predictability on that side. But 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? Yes. Bob's here. Barring any major changes out there, you'd see a reflection point probably in the More neutral. More neutral.
Late fall. So that's a few months. Yes. That sounds like a definite maybe.
If you 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, are your best guess at that?
I have to get back to you on that. I can give you some data some sound points, if you will. Some of it I mean, 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 4% or 5% 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. And so that's the kind of stuff that hits your profitability, of course, too.
There's if I looked at it, there's some interesting things going on with some commodities. I was just looking at a chart, coffee, the average these are average sell, but it's consistent with average cost, down 16%. A lot of things in the certain cheeses are down 10% to 20%. I believe eggs are way down right now. And so those things are all impacting you.
Now it impacts you on selling eggs. It helps you a little bit in selling muffins because we're not actually changing 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 And so you're going to there's but I'd say the net of those 2 is still a detriment to us. Okay. And by the way, when I mentioned earlier about late fall, that had to do specifically with gas. We'll see the inflection point.
It looks like we're going to see an inflection point with gas, all being equal out there in the next couple of months.
Okay. And then my follow-up is related to the credit card. Are you I guess looking back, you only had a couple of months, but are there signs that there was some deferred spending on either big ticket items? And then 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 and something that the millennials don't buy hearing aids. We saw a big hold on decline for a few weeks leading up to it and a big increase right afterwards. Also on big ticket, but generally speaking, jokes aside on millennials, across the board, we saw some improving bigger ticket purchases, which again, that makes sense, people are waiting. Now there's all types of movement in both directions.
You had existing 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 1 and did not get one. And so for 16 years, they use cash, check and debit.
Now for the first time, they can use a credit card. And I'm sure that's where we saw many of these new sign ups as well or part of them. And but in terms of are they buying more with us, we anecdotally, we're hearing that from our warehouse managers who talk with their biggest wholesale customers. But 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.
And 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 and L this quarter along with launch, I don't know if there are special provisions in place for the cost of launching the card.
I'm not sure if there are elements of the change arrangement that started to impact it. But would you say that there was any offset to SG and A or meaningful offset to gross margin that resulted from the transition this quarter?
Well, certainly there's certain costs were subsidized in the transition from our partners. But at the end of the day, there yes, as I mentioned, I think when I was going through the SG and A, payroll and benefits for our company were up year over year in the quarter in SG and A and that was somewhat offset by and I said in particular, I rounded up until everything related to this credit card transition. So yes, there's improvement related to that.
Got it. And then second question, if we think about other international, obviously you didn't call out Asia and any of the Asian countries are releases about comping some of the big openings that you had in recent years and the other international comp number XFX was a bit lower than we had typically seen. Anything to think about the franchise in those markets or the macro or how you're 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. But one location take you'll take a $200,000,000 or $300,000,000 building down $70,000,000 $80,000,000 And that's what's in your comp, not the new building. So that's as much to do with it as anything. We feel really good about our markets. We feel very good.
And 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 are our most and almost our most profitable productive countries and locations. And 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. And so again, we're patient.
And but 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.
And 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 of the fiscal year? The cannibalization primarily in Asia presumably?
I hope it doesn't abate. That means we've got 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've got 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 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. And it rains on everybody. It's other big boxes in those areas have the same impact.
Great. Thank you so much.
And 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 city branches and bank branches. And 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. But the reality is, we have seen I would say it's still a small percentage.
When I mentioned there was 1.73,000 new accounts, I would guess, well less than 100,000, but call it 50,000 to 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.
And 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, but maybe we're not doing a good enough job. But I don't there's nothing else that we're doing right now. And when I say us and our partners as well, they're doing some things as well. But we're getting the word out in a big way in the warehouse, with handouts, with signage, when people the word is getting out. And 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.
And so we feel pretty good about it.
And my follow-up question is, so 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 pick up as a result of it. Yet your overall comps have been a little bit more sluggish in the last couple of months. So 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
business component? It's really hard to tell. I mean, arguably, there's probably 50 different factors that impact sales every day and every week and every month. And we look at try to look at the big picture here. We feel very good about what we're doing in 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. But at the end of the day, they're coming to Costco because of our quality and our value. And when we look around and as you would well know, we get a lot of questions all the time.
Well, are we impacted by the Internet? Losing some. The Internet is taking from everybody. Our view is it takes a little less from us. And interestingly, when you look at the categories within our slightly lower sales over the last couple of few months, the categories that have bucked that trend have been discretionary non food categories like apparel and housewares and electronics.
So 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. But again, everybody takes a little piece of something. It's a little piece that we would rather have ourselves or not lose. But again, we feel good about what initiatives we've got going on.
We think the and again, when I talk about the card being a 40 the new card being a reward to the member based on their previous spending habits, 40% to 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. And but it does it's not big overnight where they just change their habits completely. And you'll see it first in business members and that's where we have seen it. Mind you, there were some during the transition, there was probably the loss of sales from some of those business members in some I'm sure AmeriXpress 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 in their marketing elsewhere. But we think that our members at Costco primarily for us, I think again it's a lot of different things on different factors. And again, having gone to our budget meeting forever, but having gone every 4 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.
And 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, etcetera, just to create greater convenience because price doesn't really ever show up on our screen as the major factor? Well, first of all, I don't see us yes, we're doing some things anyway and are we doing more things?
Absolutely. But 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, but we're not going to be dropping off small items at our prices at your doorstep. That being said, we are 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 the apparel trying to get to a more treasury run. I think you're going to see big differences in 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. On the 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 6 or 8 months, some big improvement on search. You're going to see a much streamlined returns process. We've never been big on convenience.
We've been our success has been based on price and value, quality and it doesn't mean we're going to get something to you in 2 hours. And I think again though, I'm when I look at some of the things that we're doing internally, I'm not trying to be cute here, but there's certain things I can't talk about yet. You will see some differences and most of these differences are from an offensive standpoint, not a defensive standpoint. And but we look at our core business of getting you into the store still is paramount to what we want to do. And then if I heard the numbers correctly, it sounded like the growth rate slowed a little bit this quarter on dotcom.
Any particular callouts 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. But there were 2 things last year in electronics that were big that didn't the iPhone 6 launch last year was huge and the iPhone 7 launch was not as huge. And the other thing is last year was the introduction of the Windows 10 and there are 2 things prior to a year ago comparison, a few months prior to that, people were waiting for the Windows 10 launch. And so you had a lot of pent up demand and the launch itself and compared to a year later.
So those two things alone were part of that. That's frankly, I think one of the bigger things. But again, I think as I've said jokingly and 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. And there's some greatly improved our delivery, but it was from bad to better. It still takes too long.
And again, we're not going to get something 2 in 2 hours, but you're going to see some logistically some things. And on handling returns, particularly big ticket returns, we haven't done a good job of that and that's already in process. And so you'll see some changes that will help. The biggest thing though is going to be the merchandise initiatives. And again, 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.
But there will be velocity items or repetitive items in the sundry's area as well. And you're right, when you look on your radar screen, price is not way up there. But I challenge anybody on the call to compare the exact branded items and a big basket of them, not just an occasional loss leader, some retailer or dotcom may have out there. You're going to see yes, it's more it's a lot of savings here, but you'll be shocked how much savings. And again, 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. But I was just curious on the gas impact, you gave the $0.02 impact, but I was wondering if you could give some color on how much of that was gas margin versus maybe weaker comps in light of fuel prices being down? And then I'm wondering as price per gallon increases, I'm thinking it should obviously help traffic. Is that fair?
Is there anything else to consider in terms of the state of the consumer or the competitive landscape? And then I had a follow-up.
Well, yes, the gas was $0.04 So last year we had very strong gas.
Okay. It was $0.04
No worries. The year earlier in Q4, we had very strong gas profits. So that's why a year ago, we didn't really talk about a lot. This year, we actually beat our own internal budget by a little from the beginning of the year. But again, it was $0.04 lower a share $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 percentage 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. And we lowered it more than that and we're still able to benefit a little from it. So that was a positive.
I think yes, it's the value proposition more than anything that gets people in our parking lot and we're helped by the gas buddies out dotcoms out there that the 2 years in a row that they've done it. And then the 4% rebate, there's a lot of different promotional things at the majors out there, whether it's 10¢ a gallon off, 4% is big. As the price per gallon goes up, 4% gets bigger. And so I think that'll be a positive for us as well. But 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 6 or 8 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.
And so can you give some color on what gallon comps we're doing this quarter?
I don't know if we do that, but I know continues to be higher than the U. S. Average. And my guess, I'll get back to the answer in a minute, somebody is looking it up for me.
Okay. I'll give it to the mid singles.
It's in the mid singles unless I say otherwise.
Okay. And then 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. So you had said that fuel prices should start to rebound in late fall, but deflation in food, are you just to clarify 5 or 6 more months in deflation in food? Is that what you're trying to say?
That's our best guess. Talking to buyers.
Talking to buyers, that's our best guess.
And any can you call it any categories in particular?
Well, the biggest ones would be protein. And then you've got some other things. I was looking at my sheets here. Hold on a second. And this is just a year over year this past month.
Walnuts are down 47%. That's our sell price. No, that's 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 looking down the sheet at the top 50 items. So those things, particularly things like eggs really add up. On the inflation page, just for fun, nothing well, I mean there's some 20s 30s, but if I look at the top 25 or so items just in the last 4 weeks of the fiscal year, regular unleaded gasoline was down 12.8% and was over $3,500,000 of credit if you will to LIFO. We don't book it every month like that, but that would have been $3,000,000 So the biggest items on the deflation sheet add to the LIFO credit of $2,000,000 to $3,500,000 $2,000,000 to $4,000,000 Biggest items on the inflationary sheet add $300,000 to $500,000 of LIFO charge.
So 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. And I looked at the indices where you start off for costs on the exact items at the beginning of the fiscal 2016 100.00 and what does it go to. Food is down 2.25% with half of that about 0.5% being in just the last couple of months. Sundries was about down at less than 0.5% and not terribly changed in the last 3 months.
Apparel, almost right at the same 100.0 a year ago, almost right there. Computers are you expect down a little under 2%. So it's all over the board. Again, so you have extreme categories like meat, which is high volume, but meat is also we turned it so much faster. It has a higher turn.
It turns, I would think more than 50 times more than 52 times a year, where if you have a that's a deflationary item. If you have an inflationary item that is turning 8 times in the non foods, it's going to be a different story of how it impacts.
Any color on produce? That was one category you had mentioned.
I didn't have that in front of me. It was not as big. I would guess it was I think it was in the 3 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.
Thanks.
And 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? And then second, look, I know it's been, I don't know, 6 or 7 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, Neil, first of all, as it relates to competitive reaction, the answer is really no. I mean, we do that for a living daily and weekly and they do it literally to the weekly comp shops in every market with direct warehouse club competition. And certainly the fresh foods people do more direct pricing competition on sale items at supermarkets, particularly on holiday weekends and things like that in soda pop. But 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.
But 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 I've talked we talked about in the past, we're hopeful that just from a simple FX standpoint for 2 plus years now, the dollar has strengthened year over year.
So it was more than a 1 year anniversary. There was an inflection point of late, although nobody knows what tomorrow brings on that. But 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.
But I think it will be a net positive over the next few years and probably not easily calculable, but we'll figure that we'll try to figure that out. We know that we'll improve our SG and A component of what I'll call merchant and bank fees, in other words, things related to the new card offering. And 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. But again, it's good and we look forward to doing that.
I mentioned the nearly 2 year period by about $50,000,000 pretax to the membership fee line. I imagine you'll see some of that offset on some of the margin line, although not from a competitive to be more competitive, but not reacting to competition. Trying to think other things. Gas, again, I think there's a new normal gas. I don't think 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, as we have and some of you've 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 these are all 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.
But again, some real savings on high end stuff. And so 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, but clearly given some of the challenges that brick and mortar in that area are impacted by, we could sell the heck out of that stuff and provide great value to our members. And it's the kind of member that these we believe that these manufacturers want.
Now talking to myself, I've talked myself into it, we got to talk them into it. In terms of gas stations and hearing we continue to add gas stations to hearing aids, not just to new locations, but to existing locations. I would say, all those things help a little bit.
And then just lastly on IT modernization spending for this upcoming year?
Yes. Look, we'll still have an impact to hit to SG and 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 push it out and then a year and hopefully it will be 6 months.
But 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 being rewritten and improved. And I think you'll get some real savings from some of those things. I know you will. And the first order business is getting this in place.
And so these are big chunks, but 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 'fourteen, I would guess that sometime in late 2016 early 2017. Today, I would say sometime in 2018 probably, but and if it is a little longer, it's because we've got more things that we're doing, not because anything screwed up. We've already gotten past a lot of screw up. 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 shamesh Norton.
Yes, just continuing on the merchandise trends, you were going over some of these things. You didn't mention organic food. Just curious kind of 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 our in the rest of the food across the store? Any commentary there on where that's going?
Thank you for reminding me. No, I didn't call you to remind Now we expect organic to be up 20% this year. Now some of that will be some cannibalizing of some traditional conventional, but no, and it's the perfect items for us because it's our member, it helps us with millennials on top of that and 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.
And I think that some of the 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. And so there's going to be pockets of supply issues on different items sometimes. But overall, we're doing a lot in that regard ourselves, whether it's produce, with farmers, seafood, poultry, you name it.
Okay, great. And then just another question, just
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 5 year anniversary mark. I think this is something that's I know there's no schedule, but typically done every 5 to 6 years.
Can you just update us just on your thought process there with respect to MFI in the U. S?
It will be U. S. And Canada. We will say we can't say anything or give any direction on it other than you're right, every 5 or 6 years we've done something. I think the exact 5th anniversary and the last time would be this January and the 6th anniversary would be the following January or this November and the next November would be the 6th anniversary.
Early this year, we simply just said is we're going to get through the credit card conversion first, which we've now done. And the only other comments I've made in the past is that we when we look at our member loyalty, the impact that previous increases had on renewal rates and and anything like that, it's really a non issue. And when we do it, we of course use it to be even more competitive. So it becomes a few year benefit, not a one time benefit. And but that all being said, 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.
Yes. Real quick, just the $50,000,000 pretax 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 January starting I'm sorry, starting in September now.
Thank you.
Sure.
And your next question comes from Greg
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. So it was 730,000 new sign ups in just a couple of months. Right. Of new accounts.
And so now that you're getting the payments for signing those people up, in terms of the SG and A, core ops may have deleveraged 6 basis points, but that's where the benefit of those sign ups would have showed. So that the payroll may have deleveraged 10 or 12 and that gave you some net. Is that am I thinking about that the right way?
Yes. Although I believe some of 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 into SG and A line.
There are certain items that benefit sales. I believe Bounty is one of them. So Bounty goes to sales, which improves your margin a little bit. So that might be a couple of basis points in there. I haven't calculated it out.
But 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 only in it for a few months.
Got it. And the headwinds from payroll was how much of that was related to some of the wage?
Yes. We do increases at top of scale every year. Every 3 years, we announce what it's going to be to our employees for the next 3 Marches. This past March, we also in the U. S.
And Canada raised the bottom of scale by $1.50 So $11.50 went to $11 went to $12.50 and no, dollars 11.50 went to $13,000,000 $12 went to $13.50 Just that piece, dollars 1.50 at the bottom of scale was I believe $39,000,000 a year, we get $40,000,000 a year. That would be March to March. So through the early weeks of Q3 through the 1st month of Q3. Yes.
That's great. That's helpful. And then 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, right, new to Costco with it, as to how much the card is being used outside of the club.
Now that people have
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 Go 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 my local in my case, my local dry cleaner or my the little local restaurant there are if it is your top of wallet, there are more places you can use it. That grows that small merchant whoever 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. And so I believe we are already above what we were on the old card in terms of outside to inside spent. It's higher than it was after growing, increasing it over a period of time. But we would have expected that. We would have certainly hoped it, but we would have 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. And I think it will continue to grow. Yes, I mean Bob is Whispering Mayor here. We cannot jump to conclusions on this. It's all a 14 weeks old.
And 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 And I actually haven't even looked at the date on that. So, Another good comment Bob is making late in the day here. It's been 14 weeks, some of them signed up last week or 2 weeks ago, I guess.
Yes. One last housekeeping. You said membership fee income was up 6% in U. S. Dollar terms.
And what was it up in local currency?
I believe it was the same. It was $47,000,000 dollars versus $50,000,000 But I would say it's the same percentage increase.
Okay, great. Thanks.
Yes. Why don't we take 2 more questions?
And your next question comes from Oliver Chen. Oliver, your line is open.
Can you hear me?
Yes.
Hi, 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 multiyear period. Just what would you highlight as some of the features of your story that make you un Amazonable for the long term?
And 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?
Well, 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 members over the last people over the last 5 or 6 years and there are more people how many people used to have just a Costco card and then how many people had just an Amazon account, Amazon Prime. And of course over time, Amazon has picked up a lot and there's not as many unique ones. We would have expected that. My family has an Amazon card, not a card, but an account. And 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 1 or 2 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 it but 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. And so 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 2 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 3rd year averaging compounding over the 3 nearly 3.5 year period in the low to mid teens, probably the mid teens, I don't have the numbers in front of me and growing. And so and then 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, but we're going to work hard to make sure that they want to come to see us.
As it relates to what was the last part of your question you were asking
about what it is. I'm curious about demographics and as you think about younger versus older in your core and where your age profile is shifting, just the reality of new customers is the seamless shopping experience. And the what you talked about earlier Richard in terms of the access 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 and 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 7 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 had we have great merchants and great operators in 8 different regions in the U. S. And elsewhere and they're out there trying things. And every month is it got better, in this case, the Bay Area region. Their compatriots saw it in other tried some things in other regions.
We turn around and nobody can benefit as much and do it as big and as good as well as we do. And so 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 and whether it's food items or other things. We also look our membership marketing people had done a study recently, a presentation recently and it showed whatever the previous generation was before it was a gen whatevers.
And 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 3 or 4 years has come down 2 years from a 4 year gap to a 2 year gap. Our goal is not necessarily get it to a 0 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 and these are again data points or sound bites, but when we did look what we did 2.5 years ago on LivingSocial and now we have a full year of renewals on them. It was very interesting. Clearly, we would expect it more of those people to be millennials that signed up on that living social 10 or 12 day initiative that we did.
And that was correct. What we were surprised at is that they actually shopped a little more frequently, bought a little less time, but the aggregate of those 2, 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. And they renewed at a slightly higher rate. Now, then the walk in people that same month that did come in on their own to sign up just walking the counter. And the people that walked in were on average a little older and about a 10 to 15 percentage point fewer penetration of millennials.
And so that was encouraging to us. So while there are 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 dotcom, but 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. Last question is like we're really enthusiastic and encouraged by how well you've done with your store traffic, your core store traffic trends. Do you I mean, 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? And 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, but 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 4 week budget meeting. We've 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 and people were talking about it. So and again, over 90% of our members coming into a Costco buy a fresh food item. So they're coming there. Those are kind of things. How do we get you in store?
Because we get you in store, you're going to buy a lot more than you 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. And so 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 or something, 124 something instead of 24 or something.
But at the end of the day, you'll be shocked the difference in pricing, not just here. And so 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 ourselves as well. But 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. So congrats on that as well.
Thank you.
And your final question comes from Brian Nagel.
Hi, this is Dan Farrell on for Brian Nagel. I was just wondering thanks for sneaking us into. In terms of the membership benefits and some of the sales benefits you guys have been seeing after the new credit card sign ups, 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 1st 3 or 4 months. And really my guess is through Christmas because there's going to be a lot of people are buying more items, more bigger ticket items during that period of time. Initiatives like there were for 16 years, whether it's tabling activities or other marketing pieces that we'll continue to do. I made a comment probably 6 months ago on one of these calls. In its own way, we think that this could be a way a gift that keeps on giving.
The value proposition of what we sell is great. Some of the new things that we've done merchandising wise, it's our ticket not only in the Costco tickets for events down in Southern California is a test. I'm talking about the ticketing programs that we have in store, the ever increasing quality of our fresh foods, what we've done in apparel. There's a lot of things going on that I think will help us. And again, I think the credit card, 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're 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%, and would think that we're considered one of the we can buy pretty well and put all our purchasing power in 3,700 items and only and then give you back up to 4% of that, that's a pretty good value. And we've seen that anecdotally in a big way already from businesses. And I think we'll continue to see it.
Okay, great. And 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.
Party discussion. We saw the biggest area we saw was hearing aids of all things and of course that's not millennials. But and the other thing would be big ticket electronics and the like. And my guess is in the case of the hearing aids, I wouldn't be surprised since there is a direct Costco employee member conversation eye to eye. I wouldn't be surprised if there were 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.
So my guess is that that impacted that a little bit too.
And there are no further questions.
Okay. Well, thank you everyone. Have a good day.
That does conclude today's call. You may now disconnect.