Good morning, ladies and gentlemen. My name is Karen, and I will be your conference operator today. At this time, I would like to welcome everyone to the Q3 earnings conference call. All lines have been placed on mute to prevent any background noise. After the 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 one on your telephone keypad. If at any time you would like to withdraw your question, please press the pound key. I would now like to turn today's call over to Mr. Richard Galanti, Chief Financial Officer. Mr. Galanti, you may begin.
Thank you, Karen, and good morning to everyone. Before I begin, please note that these discussions will include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements involve risks and uncertainties that may cause actual results, events, and/or performance to differ materially from those indicated by such statements. The risks and uncertainties include but are not limited to those outlined in today's call, as well as other risks identified from time to time in the company's public statements and reports filed with the SEC. Forward-looking statements speak only as of the date they are made. We do not undertake to update these statements except as required by law. Last night's press release reported our third quarter and year-to-date fiscal 2016 operating results for the 12 and 36-week periods that ended this past May 8th.
For the quarter, our reported earnings per share came in at $1.24, up 6% over last year's third quarter earnings per share of $1.17. In comparing our third quarter results year-over-year, there are a few items of note. As usual, FX, as compared to a year ago during the quarter, the foreign currencies in the countries where we operate weakened overall versus the US dollar, primarily in Canada, Mexico, and Korea. This resulted in our foreign earnings in Q3, when converted into US dollars for reporting purposes, being lower by about $15 million, or $0.03 a share, than they would have been had the various foreign exchange rates versus the dollar been flat year-over-year. Gross margins. On a reported basis, it was higher by 34 basis points. This included a $19 million benefit from non-recurring legal settlements.
This represented seven basis points of margin improvement, or about $0.03 a share. Number three, our co-branded credit card transition in the United States. With the transition to our new co-brand Citi Visa card next month, co-brand Amex credit card signups stopped, as you know, late last calendar year, I think in October, November. The short-term negative earnings impact of the lost co-brand credit card signups in the quarter year-over-year was about $11 million, or $0.02 a share to the negative. We expect to have the new co-brand Visa cards in the hands of our members by the end of May, early June. Some of you may have already received them in the mail, with a go live transition date of Monday, June 20th. Number four, wages.
As I mentioned on second quarter's earnings conference call back in March, in addition to what we do, a top of scale increase each year, which we generally, again, have done every year, each March. This year, we also increased our bottom of scale hourly rates in the U.S. and Canada, which is about 80% of our company. Effective this past March 14th, we increased our starting wage of $1.50 an hour to $13 and $13.50 an hour. The new bottom of scale wage increase resulted in a year-over-year incremental payroll expense of about $6 million or $0.01 a share in the quarter. We estimate that this will be anywhere from $0.01-$0.02 a quarter in each of the next three quarters, depending on which way it rounds. Number five, IT modernization.
IT modernization efforts negatively impacted SG&A expenses in Q3 on an incremental year-over-year basis by about $16 million, which is about five basis points or $0.02 a share to SG&A. I believe in first and second quarters this year, that year-over-year delta of modernization expense was seven basis points to the negative in Q1 and three in Q2. Looks like it's averaging around five a quarter for the first three quarters of the year. LIFO. This year in Q3, we picked up a little bit there from a LIFO credit. We recorded a pre-tax LIFO credit of $13 million in the quarter. Last year, it was also deflationary, but as you know, deflation has continued with $7 million. Again, about a $6 million or $0.01 a share delta there. Those are the items I'd point out. Turning to our third quarter sales.
Total reported sales, as you know, as reported, was up 2%, and our 12-week reported comp sales figure was flat or zero. Sales, of course, were negatively impacted by Gasoline price deflation. That was almost two percentage points impact of about 190 basis points and by the weakening foreign currencies relative to the dollar that I just mentioned. That was about 145 basis points. Excluding gas deflation, the flat U.S. comp number we reported would have been a +3%. In Canada, the +1% reported Canadian comp would have been a +8 in local currency, excluding gas deflation and flat FX rates. The reported -2 other international, excluding gas deflation and excluding flat year-over-year FX, that would have been a +3. All told, a reported zero comp for the quarter, ex gas and FX, would have been a +3.
In terms of new openings, in the quarter, we opened seven new locations and also completed one relo. Year to date, for the first 36 weeks, we've opened a total of 19 new warehouses and three relos. For all of 2016, we have a current plan of 29 net new locations. A little over two-thirds of them, 21, will be in the U.S., two in Canada, two in Japan and one each in the U.K., Taiwan, Australia, and Spain. This morning, I'll also, of course, review with you e-commerce activities, membership trends and renewal rates, additional discussion about margins and SG&A in the quarter, and a couple of other items. Going down the P&L, again, for sales, total sales were up 2%, with reported comps flat, reported up +3 excluding gas and FX.
The zero flat comp on a reported basis was a combination of an average transaction decrease of a little under 3%, at -2.7% on a reported basis. Again, ex Gasoline and FX, the average transaction increase would have actually been up 0.5%. The average shopping frequency increase was up 3% for the quarter, which is most of February, all of March, all of April, and a little of May. In terms of sales comparisons by geography, in the U.S., Texas, Midwest, and Southeast regions were the stronger ones. Internationally, in local currencies, better performing countries were Mexico, Canada, and U.K. In terms of merchandising categories for the quarter, within food and sundries, which was overall flattish year-over-year, sundries, foods, and meat/deli were the leaders.
Tobacco, as I think we mentioned a little bit on the April sales call, was negative in the low teens as we continue to eliminate tobacco from various locations. For hard lines, overall in the mid-single digits. The departments with the strongest results were sporting goods, toys, seasonal, automotive, consumer electronics, and garden patio. I think I'll have to go look at what was down because those were all pretty good big departments within hard lines. Within low to mid-single soft line comps, single-digit soft line comps, small electrics, men's apparel, and home furnishings were the standouts. Lastly, in fresh foods, comp sales overall in the low single digits. Produce and deli showed the best results. Of course, we probably had the most deflation, I think, in the meat, poultry, and pork areas.
In the U.S., we continue to see deflation in the low single-digit range for food and sundries, and as I mentioned, fresh foods, and a little in some of the non-foods areas as well, notably electronics. Moving down the income statement. Membership fees came in dollars were up 6% and up seven basis points as a percent of sales, coming in up $34 million from $584 million last year to $618. FX currencies exchange rates impact this number. Without FX, we're assuming flat year-over-year FX, the $618 would have been up seven more million. The 6% dollar increase year-over-year would have been up seven. Same number of basis points, of course, up seven. In terms of renewal rates, we continue strong renewal rates, 90%+ in the U.S. and Canada, 88% worldwide.
Continuing increasing penetration of the executive membership, and I'll talk about that in a second. New member sign-ups for the quarter company-wide were up 15% year-over-year, in part driven by strong sign-ups at our new openings in Taiwan and Japan. The Asia openings always have outsized new sign-ups. We also had very strong sign-ups in Tulsa for that matter. Overall in the U.S., in fact, it was up 15% as well. In terms of number of members at third quarter end, Gold Star was 36.2 million, up from 12 weeks earlier at 35.4 million. Primary business, the same at 7.2 million. Business add-ons, the same at 3.5 million at the beginning and the end of the quarter. All told, 46.9 million member households versus up 800,000 from 46.1 million at Q2 end.
Total cardholders is 85.5, up $1.5 million from 84.0 at the end of the second quarter. I mentioned executive memberships. We came in at the end of Q3 with right at 17 million executive members, which is an increase of actually 402,000 over the 12-week period or 33,000 a week increase in the quarter. I think that tends to be on the high end of that kind of weekly increase in many of the last recent quarters. Executive members are approximately 36% of our member base and about two-thirds of our sales. Again, continues to improve penetration. In terms of renewal rates, excuse me, business members were 94.4 at the end of the quarter, tweaked down from 94.5. Gold Star, 89.6, another a tenth down, also 89.7. So total U.S. and Canada, 90.4, down from 90.5. Worldwide at 87.6 at the end of the quarter.
Again, a tenth down as well. Within the U.S. and Canada, of course, we've seen a bigger tick down than a tenth of a percent in Canada. That has to do as we anniversary now about 18 months when we initiated the change in credit cards up there, which was actually everybody having to sign up again. I think part of that is the auto renewal. I feel a little of that in the U.S. since we haven't been accepting new applications for the current credit card, the co-branded credit card since past October. Pretty much in line with what we thought. In terms of gross margin, our reported gross margin, as I may have mentioned, was up 34 basis points, 11.43% this year versus 11.09 last year. As usual, I'll ask you to jot down four columns of numbers to provide a little edification here.
The four columns would be Q2 '16. Columns one and two are both Q2 '16. These are year-over-year changes in basis points. First column would be reported figures for margin. Second would be without the impact of Gasoline deflation since that tends to distort the numbers wildly. Then columns three and four would be Q3 '16, both reported, then column four, Q3 '16 without Gasoline deflation. In terms of the line items, first line item going across would be core merchandising. Q2 '16, we reported a plus five basis point year-over-year. Ex Gasoline deflation, it was minus three. In Q3, reported plus 16 and ex Gasoline minus two. Ancillary, a plus nine and a plus seven, and in columns three and four, a plus nine and a plus four. 2% reward, minus one and zero.
In Q3, reported without Gasoline, zero and plus two. LIFO in the second quarter, plus four plus four. In the third quarter, plus two plus two. Other, zero and zero in the first two columns, and the plus seven in columns three and four. Those are non-recurring legal settlements I talked about earlier. You add up those columns, reported in Q2 year-over-year, we had up 17 basis point margin and up eight on an ex Gasoline deflation basis. Again, while we reported a plus 34, it's a plus 13 ex Gasoline deflation. In terms of the core merchandise component, which again, reported plus 16, but minus two. If you look at the four key categories, which is 80-plus percent of our business, food and sundries, hardlines, softlines, and fresh foods.
As a percentage of their own sales, they were positive year-over-year by 16 basis points, with food and sundries, hard lines and soft lines all being up year-over-year, and fresh foods being slightly down during the quarter year-over-year. By the way, those numbers exclude that non-recurring items that I mentioned. Ancillary and other business margins were up nine basis points, up four without gas. Within the quarter on their own sales, gas, Optical, and hearing aids all showed higher gross margins year-over-year as a percent of their own sales. I mentioned LIFO already. That was a two basis point benefit year-over-year. Other, again, the seven basis point improvement year-over-year. Even ex that on an ex-gas deflation basis, margins were up a few basis points year-over-year.
Moving down to expenses, SG&A. On a reported basis, we're higher by 33 basis points, coming in at 10.44 compared to a 10.11 a year ago. Again, we'll do the same four columns. Q2 reported and without gas, and then Q3 reported without gas. Core operations, -22 reported year-over-year, and a minus means higher year-over-year. Ex-gas in Q2 was a -16. Columns three and four, -24 and -8. Central in Q2 was a -8 and -7. Q3, -6 and -4. Stock compensation, -4 and -4, then a -3 and a -2. No quarterly adjustments. All told, we reported year-over-year in Q2, SG&A higher by 34 basis points on a reported basis and 27 ex-gas. This quarter, Q3, reported higher SG&A by 33, 14 higher ex-gas.
Basically, if you go back to the core operations or operations, the ex-gas deflation, the eight basis point year-over-year higher, that consisted of higher payroll and benefits year-over-year, which impacted that -8 by -12, so more than the -8. These items were somewhat offset by a variety of other controllable expense items. Q2 is, of course, always the lowest volume quarter. Of course, as we know, sales were a little weaker for a variety of reasons, including some deflation. Central expense was higher year-over-year in the quarter by six, ex-gas by four. IT is the four on an ex-gas basis. As I mentioned, it was -500 reported, but essentially ex that, central, I think we did a pretty good job in the quarter of controlling that. Again, stock compensation expense, no surprise there.
Next on the income statement, pre-opening. A little higher year-over-year, $18 million for the quarter versus $14 million a year ago, so up by a basis point. This year in the quarter, we had eight openings, including one relo. Last year in the quarter, we had four openings and one relo, including one relo. Some of that is not necessarily related to those specific openings as it may include some right before the quarter opened as well. All told, operating income came in at $858 million for the 12-week quarter, up $37 million or up 5% year-over-year from last year's $821 million. Below the operating income, interest expense. Interest expense came in at $30 million this year versus $31 million a year ago, essentially flat. No surprises there.
Interest income and other this year was $7 million, lower by $2 million versus last year's $9 million. Actual interest income within interest income and other was essentially similar year-over-year at about $10 million. The balance of that delta year-over-year was the other category coming from small foreign exchange adjustments and slight year-over-year changes in whatever other is, other earnings. No big surprise there. Overall pre-tax income was higher by 4.5% or $36 million, coming in at $835 million, up from $799 million a year earlier. Our tax rate was a little lower or better year-over-year, coming in at 34.2%, down from 35% last year in the third quarter. Basically, this year's third quarter income tax percentage benefited from, again, just a few positive street items in the aggregate going our way. That's why it was a little lower.
Our normalized rate is actually just a shade over 35% in both of those quarters. Overall, reported net income of $545 million for the quarter compared to last year's $516 million, or up 5.5%. The balance sheet is included in the morning's press release. Couple of balance sheet info items that you may not see on there. Depreciation amortization in the quarter was $291 million and $847 million year-to-date. Accounts payable as a percent of inventories. On a reported basis, it was 99%, a percentage point lower than a year ago at 100%. That, of course, includes non-merchandise payables, such as construction payables. Same kind of delta. The 99% reported this year would've been at 89%. The 100% would've been 90%. Again, right around the same year-over-year.
Average inventory per warehouse was actually down about a half a million dollars or down 4%. About a third of that is FX, almost exactly a third, $173,000 of $517,000. The rest is pretty much spread across many categories, including the impact from deflation. If you assume, and again, you never know exactly what the deflationary cost amounts are, but if you assume a 1% deflation, you get somewhere about half of that remaining being gas and the rest being just lower inventories. Again, lower year-over-year by the half a million dollars. In Q3, in terms of CapEx, we spent $460 million during the 12-week period. Essentially year-to-date, we're right at $1.8 billion. I'd estimate for the year we'll come in around $2.5 billion-$2.7 billion, compared to fiscal 2015 total expenditures of $2.4 billion.
Up $100 million-$300 million from a year ago based on whatever timing we have left here and what expenditures are made. In terms of Costco Online, as you know, we're now in six countries, U.S., Canada, U.K., and Mexico, plus the recently launched countries of Korea and Taiwan. In the quarter, sales and profits are up. Sales were up on a reported basis, 14% in the quarter, up about 15.5% ex FX. On a comp basis, that'd be 13% and 14% ex FX. In terms of expansion, again, I mentioned in the quarter that we're in now, which is a 16-week quarter, we would expect to open 10 new openings plus one relo. Again, that would put us at 29 net new openings, 33 openings, but four of those were reloads, 29 overall.
In fiscal 2015, we added 23 net new units on a base of 663, so about 3.5% square footage growth. In 2016, the 29 on the new base would be about 4.5% square footage growth, slightly lower unit growth, but you tend to open a little bigger units, and you've got the reloads as well. New locations by country, again, 21 in U.S., two in Canada, one each in the U.K., Taiwan, Australia, and Spain, and two in Japan. As of third quarter end, our total square footage was right above 100 at 101.7 million sq ft. In terms of stock buybacks, if you recall, in Q1, we repurchased $130 million of our common stock. In Q2, $80 million. Both of those, of course, are 12-week quarters as well. In the 12-week third quarter, we purchased $136 million.
Such that year-to-date, we've spent about $346 million, with an average price per share of $148.64. If you annualize those quarters, and again, we'll see what we do this quarter, but if you annualize it, we're right at a half a billion for the year. We'd be right at a half a billion for the year. We'll see where we come out. In terms of dividends, as you know, last quarter, we raised our quarterly dividend rate year-over-year to a quarterly amount of $0.45. I believe that was up from $0.40 for the prior year, each quarter. That $1.80 a share annualized dividend represents a total cost to company of around $790 million. Before I turn the call back to Karen for Q&A, I want to mention a slight timing change each quarter when we report our quarterly results.
Many of you have asked about the fact that we report earnings the night before, usually around 6:00 P.M. Pacific Time. You get to wait until the next morning to hear the call. Beginning with our fourth quarter earnings release, we're going to change the timing of that release in the conference call, such that for the fourth quarter, we'll issue results after the market closes on Thursday, September 29th, followed up shortly thereafter with a live conference call that afternoon and a Q&A session at the end of that call. This new schedule will be our plan for earnings releases going forward, and I think it'll be helpful and certainly in response to several of your comments out there. The last quick item, next week, we report the four weeks of calendar May sales. This is the four weeks ending this coming Sunday, May 29th.
I'll mention to you that based on how Memorial Day falls year-over-year, this year, Memorial falls on day one of the June retail calendar month. This year, we have 28 days versus last year's 27 days, so that'll be a little benefit. Again, we'll point that out. June, there's really a wash. While you've got a detriment related to Memorial Day, you've got a day pickup on the other end of June with how July 4th falls. Finally, we'll get through that silliness in July where we report July sales. With that, I'll open up to Q&A, and I'll turn it back to you, Karen.
Participants, if anyone has a question, please press star one on your telephone keypad. We will pause for just a moment to compile the Q&A roster. Your first question comes from the line of Oliver Chen of Cowen and Company.
Hi, good morning. This is Steven De Cohen on for Oliver Chen. Thanks for taking our questions. Just two questions from us. Firstly, we wanted to get your take on the health of the customer base for you. There's been some different trends among retailers reported thus far in earnings. We wanted to just get your sense. Have you seen any changes in trends or spending habits? Second question, we just wanted to get your thoughts on progress with some of the third-party partnerships in grocery delivery. How has growth in those channels performed relative to expectations, and then what are your thoughts about expanding into new markets. Thanks very much.
Okay. Well, in terms of the customer, so far so good. We don't see any dramatic change. Many of you have asked questions or have had some concern about our traffic coming down from this 4+% number over seven years. We feel pretty good about where our numbers are. We don't really see a lot of different changes. Interestingly, when you look at non-discretionary items like food and sundries versus discretionary items across the non-foods categories, including big-ticket items like furniture and electronics and the like, we've actually had, relatively speaking, a little more strength in some of those non-food categories. That I think allays some of any concerns that some people have had. Generally speaking, I'd have to say our customer is still pretty healthy and we're still getting good renewal rates, notwithstanding a very small impact from some of the credit card transitions.
We feel pretty good at this point about that. Certainly, I feel good about some of the merchandising stuff we've got going on. By the way, one of the other data points I've been asked several times in the last few weeks, each time we've recorded sales in the last couple of months, is it deflation? Is it weakness? Is it .com? Whatever. The fact of the matter is, if you look at during the 12-week quarter on a year-over-year basis, if we just take the average items per unit in the basket going through the front end, U.S. only, it was up 1.4%. We're getting people to buy more items, if you will. The average basket value is up 4/10 of a percent. The simple implication there is you've got deflation, presumably, you have deflationary pressures of about 1%.
That's a good educated guess. There could be other impacts of sizes, but typically we go into bigger sizes, not smaller sizes, bigger pack sizes. I think overall, there's probably still a little bit more deflation than we've seen over the last couple of quarters spread to other items in the non-food category as well as we've seen. In terms of third-party partnerships, we're pretty agnostic. We have good relationships with Google with regard to Google Shopping Express. Google's in 6 large communities in the country, the Bay Area, the L.A. area, and a few others. Instacart, I think, is now in well over 15, maybe even 20 markets where we participate with them. Also a few of the others out there. In terms of expectations, we didn't know what to expect.
I believe that we generally are the anchor tenant, if you will, in many of these opportunities where there's more than just Costco items being purchased and sold to provide to the end consumer. We think it's been good. It's still small relative to, we still want you to come into the warehouse, and we're going to still figure out how to continue to do that. It's growing nicely and it's certainly, on a small scale, a bit of a help. In terms of expansion plans, I think you asked about openings. Looks like our goal is still similar next year, about 30. We'll shoot for something a little over 30 and end up about 30 if history repeats itself. We probably had a few more relative to that 30 number.
Few more in the U.S. this year than we would have anticipated if you had asked me a few years ago. I think some of that is timing. We've had success in the U.S., probably the expectation of some of the markets we've gone into in the last couple of years, if you'd asked me 5 years ago, would we be going into some of these markets where we have never been in and our competitors have been in for up to 30 years. We've had success in those markets, whether it's Mobile or Tulsa or Toledo or Rochester and New Orleans, probably there's a few more in those markets on top of the few that we open, like the whatever teeth number we have in the Puget Sound or L.A., where they're harder to find because we're very specific locations to fill in markets.
I think that's probably one thing. Looking at the 30 next year, this is a guess, it's probably not two-thirds of that 21 over 29.
A little less than half.
Yeah, about a little less than half. 50%, 52%. Again, that's a guess at this point.
Thanks very much.
Your next question comes from the line of Simeon Gutman of Morgan Stanley.
Hey, good morning. Simeon Gutman. Richard, the Visa transition, besides the timing that started a little later, anything else to think about? Interchange fees probably start to go down when it happens. Are there other costs that makes your SG&A or any other line items elevated temporarily?
No. Same old stuff that we talked about in terms of some of those things like having not signed up new co-brand cards since last October, November. Part of any of these equations are different pockets of income, including generating new credit card signups. That's been about $4 million-$5 million a month, which is easy. It used to be something. Now it's nothing until June. Other than that, we just got a lot of people on our side and on the issuer side doing a lot of work to make sure it goes as smoothly as possible. We're excited about it. It's a great reward for our members, improvement-wise, and we'll keep a little of it ourselves in terms of merchant fee reduction. Really there's not a whole lot.
Cards are hitting, aren't they?
Yeah, cards are hitting right now, in fact. They'll continue to hit.
I know.
literally over 10 million pieces of mail going out, it's spread over a few-week period, I think they just started hitting. Cards should be in everybody's hands at least a few days to a week before the June 20th D-Day here. We'll be able to tell you more in September, on the late September, when we do the fourth quarter earnings call. Again, we're ready to go, and we're excited about it.
The marketing dollars, the in-store kiosk, like you said, the mailing, we're not going to see a blip, good or bad, in the SG&A dollar run rate. There's nothing unusual that should happen as we sequence there.
Absolutely.
Okay. Go ahead, sorry.
I'm sorry, what was the last piece?
My follow-up on gross margin. I think you mentioned that looking at the, I think it was the Gasoline with the Optical business, I think you said it was higher year-over-year. If that's the case, can you explain, I guess, how you're doing it? I thought we were cycling the hump of some of the best performing Gasoline gross margin quarters a year ago. Maybe it was the mix of Optical, but figured that the gas is a bigger input.
Yeah. It'll come in Q4. This quarter was an odd quarter. In the first part of the quarter, it was better than we expected. With gas prices going up and down, like going up right now, it's been a little weaker the last couple of weeks, but it was probably a little stronger near the beginning and into the middle of the quarter than we'd anticipated. It's generally two things. I think the bigger factor is when there's daily price changes up and down in the procurement costs of both us and other gas station operators. Then when it goes down, we seem to feel that we get a little extra margin, in part because our competitors don't give as much back as fast as we do. We still give way more back, but it helps us a little bit.
I think part of that new normal, if you will, over the last couple of years in that regard, it's probably on average a little better.
Okay, thank you.
You'll see it in Q4, though. I say that today. Day to day, sometimes it changes relative to what, just when we think we're smart and safe to go out, it goes the other way. So far, I guess it'll impact us in Q4.
In Q4 being the hump, and then it gets easier after that.
Yes.
Okay, great.
Your next question comes from the line of Matthew Fassler of Goldman Sachs.
Thanks a lot. Good morning, Richard. My first question relates to margin. Can you just talk about the degree to which moving food prices, I guess the deflation issue and/or FX would've contributed to margin rate in any way?
FX doesn't. The only thing FX does is, needless to say, in most other countries, some of their goods are U.S. sourced or U.S. dollar payable. In Canada, it's substantial, frankly. We manage that and we lock in a way, natural hedges during the quarter, once the buyers are comfortable with that exchange rate and what they're going to be able to price to that. My guess is there's still Let me see. Here it is. If you look at, let's say, Canada year-over-year in the Canadian dollar is 17% weaker, incrementally just in a quarter, 5% weaker from the previous month. You got that kind of stuff going on from the previous quarter. You're going to have probably a little margin pressure there. That notwithstanding, the margins are up a little. I think generally,
Pressure's dollars.
Yeah, we try to bring down prices when there's deflation. Probably doesn't impact us as much because it prices a little sooner than others. That's pretty much it.
Got it. Then, LIFO, I guess it's the seventh consecutive quarter where this has kind of gone your way. I know you market to the best of your expectations at the end of every quarter. How much of this is food? If we think about commodity prices, I know, once again, it should be zero in a normative environment. Any sense of whether there's more momentum that could prove helpful to you here?
Again, deflation from the end of the year is down about 0.8% on it in terms of a LIFO index. The other comment I made, it was about 1%. Ask the question again. I was looking at one thing. Go ahead.
I guess the question is how much of the movement in LIFO or the ongoing credits relate to food? Based on commodity prices that you see, any desire to venture a guess as to where LIFO goes next?
We don't know. If you talk to our fresh foods buyers, they continue to expect some deflation. I get different answers from some of the non-foods buyers. Mind you, when we look at fresh foods year-over-year, those margins were down slightly in the low double-digit basis points year-over-year. Again, not a big impact there. It's the other categories where it was up a little bit, the net of that, all those four main categories was up 16 basis points.
Finally, any sense, thinking about the very long run, about how your food market share moves, if at all, when prices are deflationary and perhaps consumers see some of the prices that they had only seen at Costco for a long time at other retailers?
Well, first and foremost, I think we continue to believe that we'll continue to see increasing penetration of the stuff we sell in fresh foods. Nobody does it like us. The quality levels and the values are awesome. Some of the things we're doing with global sourcing initiatives and poultry plants and organic. Our pounds in beef are way up, but you've got deflation in beef more than some of the other protein categories.
The first to go down.
Yeah. We're the first to go down on some of those items when there is deflation. I think our numbers have actually, the deflation in some of the fresh food categories, I think, mask some of the pound strength, if you will, or the unit strength that we have, whether it's protein or produce. I would never be so arrogant to say that nobody could catch us, but we've got some great things going on in terms of, again, global sourcing, working with vendor partners and we look at our produce today, which is I think a $6 billion business now, approaching a $6 billion business, which is as big as protein. I don't think many retail food places do those kind of numbers.
I think it has more to do with that than, yes, there's probably going to be a little bit of a macro shift, whatever. I think what we do and how we do it dwarfs those other impacts. There's other players coming to market. There's, I think, just this week you've got a 365 opening, and you got other people coming to town with different health related, organic related types of retail formats. We're pretty good at that stuff, too, and again, you got to buy bigger sizes, but we're pretty awesome in the fresh area, and I think It should be for us an increased sales penetration area and something that'll keep driving our members as well.
Thank you so much. Appreciate it. Thanks, Richard.
Your next question comes from the line of Michael Lasser of UBS.
Thanks a lot for taking my question. Richard, you sized the P&L impact of the credit card transition at $11 million. Presumably, that's just from lost sign up, credit card sign ups. Are you able to tease out any impact from spending as a result of this transition? For example, maybe some of the holders don't know that they can still use their card, and so they put it away and that changes their behavior at all.
There's always going to be a little confusion. To the extent that we haven't signed up new co-branded credit card members, I don't think many people coming in to sign up for a Costco membership have walked away because they can't sign up for a new Amex card. If they have an Amex card in their wallet, they can use that one. Now, to the extent that they don't have an Amex card in their wallet, or to the extent that Keep in mind, not everybody that signed up for one over the last 16 years got it. It was still a credit eligibility decision that the issuer made, it'll be that way in the future.
The fact of the matter, though, is that to the extent that they signed up as a member, again, I don't think it was that impactful for somebody to walk away because they can't get an Amex card, they have to use a debit card in their wallet or cash or check. On a macro basis, does that impact some of the big-ticket items? Yeah, it probably does. Although our TV sales have been pretty darn strong, I could talk out of both sides of my mouth on this one.
Does that mean that some of the comps slowdown just may be a function of the law of diminishing returns math taking over?
It could be. Again, the ones we can quantify easily, we look at. We could drive ourselves crazy. We know that, let's face it, in April sales, when we've shared with many of you on our audio, it's everything. It's deflation, it's a little of the Amex, maybe it's getting closer to the line of maximizing marginal whatever. At the end of the day, we're still rolling out gas stations. We're still rolling out some of the ancillary businesses. We're still opening up new warehouses. We're expanding fresh foods as we have over the last several years. People ask us about what are some of our new areas. That's certainly what we do with ticketing and executive member services. All those things. Wine and spirits, I think we've been surprised by that. These are all small things. They're all needle movers, but small movements.
I've always said there's lots of little things that help us here.
My last question is, to the extent that you've already seen some of your existing Amex cardholders clip up their card and switch to Visa and it's having an impact on your sales, do you think that's going to only intensify as you get closer to the June 20th transition date? For example, are you seeing even slower trends in May so far?
Well, first of all, I don't think anybody's clipped up anything. They still have to use that co-brand Amex card through June 19th. Nobody can actually use the new card, even if you got it in the mail, until June 20th. That's part of our original agreement with our previous service provider, and that's fine. All stuff will happen June 20th and beyond. Rest assured, there's going to be a lot of stuff happening in terms of our continued communication, of course, to our members. There's a lot of members out there that don't have account. A little over 40% of our U.S. sales were done on Amex, I think over two-thirds of that, a little over half to two-thirds of that being on the co-brand card. Some people want Delta points or Starwood points, so they're using a different one.
Same thing will happen with Visa. Our goal is to get that co-brand card, as we did successfully with the Amex co-brand card, that to be your top of wallet card. We think that there's going to be a lot of things that drive that, including the people out there on blogs independently and others that look at what is currently a 3-2-1 is going to be a 4-3-2-1. That's huge. My personal view is it'll be something that's not going to all hit on day one. Let's get through day one in the transition first, but it'll be something that will continue for a couple to several years.
Okay. Good luck. Thank you.
As a reminder, again, if any participant has a question, please press star one on your telephone keypad. Your next question comes from the line of John Heinbockel of Guggenheim Securities.
Rich, do you think this 30 annual openings, certainly, you have the people and the capital to do more. Is it a real estate bottleneck or you're comfortable at that level? Can you go solidly beyond that? I think internationally, outside of North America, as you go into more countries, you would think that there's an opportunity to do 15, 20 a year comfortably. Can you ever get to that level?
Well, first of all, clearly it's not capital. We got plenty of capital.
Yep.
I would argue we have too much capital out there. We like it that way. It's people. It is people. Years ago, I didn't appreciate it as much as I do now, particularly in these countries. If you think about in Japan, I think there was about an 18-month period a few years ago where we went from nine to 20 units in about a year and a half, two years. It's not like we're sending a bunch of experienced warehouse managers to go open and operate and be warehouse managers in Japan from different countries. You do that a few at the beginning, and you may do it occasionally on a onesie basis, but at the end of the day, you're growing from within and developing those local country people.
First and foremost, from an international standpoint, you've got that can be a little bit of a challenge. Then you've got things take longer there. There's some countries that I understand are very difficult, just because of zoning and restrictions that are placed, not just on us, but any big box, even local company big boxes in the hypermarket area and the like. It's gonna take a little longer there. The other thing, do I think we can go above 30? Look, we shoot for low 30s and then next year, you shoot for the mid-30s, and I think you've certainly heard me say that we wanna be around 30, and five years from now, we should be doing 35. Maybe we'll fall a little short from that, maybe we won't.
We've got more feet on the ground real estate-wise in other countries as well as U.S. than we've ever had. It does take a little longer, could we physically open more? Sure. We like what we do and the way we do it. Probably we also have a comfort level that it's not like we're gonna miss out. We're, in our view, the preferred club out there. So when we go into a market, if we take a little longer to get there, people are waiting for us. It might be a little harder, but the fact of the matter is we feel comfortable how we're doing it.
As the traffic in the U.S. has moderated, back to what, maybe you said you were at a level that couldn't be sustained, back at a level that can be. Are there discussions internally that it is just a natural moderation? Because you talked about within the categories, the 16 basis point improvement in margin, that there are things you can do proactively to give more back to the member, and would that do anything to traffic? That sort of discussion internally about the balance of earning versus trying to maybe drive traffic a little more. Can that be done?
Well, first and foremost, if you haven't seen the slide before, it's reiterated and put out here internally every day of the year and at our managers' meeting, Jim used to, and Craig does now. We are a top-line company. We wanna drive sales.
Yep.
The fact that margins year-over-year are up on those core categories up 16 basis points, we're not smart enough to figure out how to get there all the time.
Yep.
We always want to drive margin a little bit where we can, we do it the right way by giving most of any savings back to the customer. If I look at our competitive stance, our pricing competitive stance versus our direct competitors, the gap has never been wider.
Yeah.
We could make a little more this, we don't. At the end of the day, we're always looking for ways to do that. When we do membership fee changes, historically, we are always looking to give some of that back. All those things go into it. At the end of the day, what helps margins? Private label, fresh food strength
Yep
some of the ancillary businesses, all those things are helping as well. Again, we feel I got to tell you, we don't look at it and say, "Hey, frequency came down a little bit," or, "The comp is a new normal, a little bit lower." We want to do more. Even when we were doing a 4% shopping frequency , how do we hit it higher, even though that was kind of tough. We're going to continue to do things in that direction. We don't necessarily worry about, "That came down a little bit, so we need an extra few basis points of margin." That's never the case around here.
All right. Lastly, is KS having any kind of real impact that you can see on basket size or not really?
I don't know. We subtract and add KS items, they live and die by the same metrics. If it's not a great item, we stop it. There aren't any giant items like toilet paper and water, those types of things, or disposable diapers several years ago. There are lots of little ones, I think, again, we would see that continue to increase penetration, but at a slower rate of growth in the future as well for the same reasons.
Okay, thanks.
Getting back to your question, I don't think that's a big reason of why the basket size has changed. If anything, many of those items, it's a lower price point. If we were doing brand only and we brought in the Kirkland next to it, many instances, it may be the same because we go to a bigger pack size. In many instances, you've got a lower price point on the same number of units.
Your next question comes from line of Greg Melich of Evercore ISI.
Hey, guys. This is Michael Montani on for Greg. Thanks for taking the question. Wanted to ask, first of all, Richard, you mentioned that there was obviously a little bit of extra strength maybe in some of the discretionary versus non-discretionary categories, and that was something that gave you comfort that the consumer hadn't changed that much. Can you provide any updates? Obviously early on here, but from May results so far, have you seen sequential improvement in traffic versus even April trend?
We really can't talk anything about May yet. There's no giant surprises either direction. The comfort level, I think earlier in the call, I was responding to many calls that I received from both institutional investors and analysts out there about the concern. When we look back at it, we reported April sales, we said, "Okay, one of the reasons why it had come down a little bit, it was a little weaker." What gave us comfort, one little data point of comfort was the fact that some of those discretionary categories are actually doing a little better than one would have thought, given the total number. Not as much as I would read into that.
Got it. Okay. Thank you.
We'll tell you next Wednesday for May.
If I could, just to follow up on gas a little bit, can you provide the price per gallon for the quarter and also the comp gallon trends? If there was any material impact to EPS that I may have missed.
The price per gallon was down for the quarter 19.7%. Basically, $2.59 a year ago and $2.08 this year. What was the last part?
Just asking about what was the comp gallon % change, then also was there any material EPS impact on this quarter? If you could help us size up exactly what we're up against in next quarter.
I think year-to-date, we're up in the low single digits in terms of comp gallons. Again, the big comparison was it was a year ago when it was really outsized comp gallons up 7%, 8%. I know in April, I think a year ago, it was 8% in the U.S. That was part of that anomaly in April.
Just the EPS impact, Richard, I'm sorry, on $0.01 per gallon.
It was within $0.01 or two, really no change year-over-year. I think it might have been $0.01.
Thank you.
Our next question comes in line of Peter Benedict of Robert W. Baird.
Hey, Richard. Thanks for taking the question. One on gas and then another on a different subject. Just, you've been adding 20-30 gas stations a year the last several years. I think your penetration's, like, 70% across the clubs. How do we see that going forward? Is that pace of growth going to continue? Where do you think you can get the penetration of gas stations called a few years out?
In the U.S., first of all, in every new unit we do, where it's possible, we put in a gas station. We're even doing a few in countries like Japan and Australia, which we hadn't done historically. We relocate a few units in the U.S. We just moved Hackensack to Teterboro. The Hackensack became, I think, our 11th business, 10th or 12th business center, and the new Teterboro one is a big new Costco with a gas station, with better parking and great. If we did three or four, I don't have it in front of me, but if we did four reloads this year, my guess, at least three of them have gas stations, and those three don't. We're starting to max that out. In the U.S., at the end of the quarter, we had 420 gas stations out of 481 warehouses.
In Canada, 55 out of 90. I'm guessing in Canada, we still have a little bit more room to grow because we started there later. We have five. Spain, 50% of them, one out of two. Australia, five out of eight, I believe. Yeah, again, it's not like five years ago in terms of just adding a bunch of gas stations. It still, I think, moves the needle a little bit.
Okay. That's helpful. Maybe, can you take a minute and discuss the senior management ranks at Costco? There's been some turnover lately. Doug, I think his last day may be tomorrow, I guess. Just talk about what's going on in terms of transition, future transitions, and maybe what changes, if any, these new leaders have kind of implemented. I understand it would be only marginal, but just curious your thoughts on all that.
Look, you talk about shopping frequency staying at 4% for seven years. People have stayed for 30, including me. You're having some turnover, of course. Over the last few years, you've had people that are retiring in their early 70s that have worked together starting 55 years ago at FedMart in San Diego. I think from a merchandising and operations standpoint, that's been well thought out. Let's face it, the first big concern was what's going to happen when Jim leaves. I think while we were comfortable here internally, I think we've shown, and certainly Craig has shown, that the transition and the maintaining of the culture has continued without missing a beat. In merchandising, over the last few years, we've took certain categories, like what we used to be with Non-Foods, which is a combination of hard lines and soft lines.
Dennis Knapp, who was a senior executive over that and has since retired, we promoted 2 people and broken out hardlines and softlines. In operations, we've made several promotions and changes of people, again, typically low tenure people, like they've only been here 20 to 25 years, that are going from VP to Senior VP levels. I think we've got 16 Senior VPs of operations in the U.S. geographically. Now in terms of Doug, as you know, has been head of U.S. merchandising and certainly involved in a lot of merchandising beyond that as well. Doug's great. He's leaving for no negative issues, both internally or with himself. We're all kind of jealous. He's on the younger side of the senior management team.
Craig has a plan, he's looking at a few things, over the next few months, we'll be announcing how that changes. We've got good people in place, and we don't think that there's an issue at all there. In Asia, Richard Chang, who goes back to the Price Club days, probably 25-plus years ago, ran operations for Taiwan, was promoted as Senior VP over Asia, and we've brought some new people in there as well. New people, meaning existing Costco people, of course, and from the U.S. I think we feel pretty good about the change. It sped up because it was at zero. In the last couple of years, it's been a couple, and now it's a few and a few more, I think we're pretty well-positioned for that.
I don't see a big change in what we do and how we do it.
Okay, great. Thanks, Richard.
Your next question comes from the line of Bob Drbul of Nomura.
Good morning. I was wondering if you could comment a little bit more around some of the geographic trends that you're seeing and just update us on your thoughts around the trends in California.
Well, I think we pointed out California last month for April because it was, while U.S. overall had, again, was a little weaker than it had been, it was really California. California is about a third of our U.S. company operations, and it's probably a little bit more penetrated gas-wise. Again, a year ago, we had gallon comps, which not only drives Gasoline, but more importantly, drives people in the parking lot and 52 or three of every 100 come in to shop. That was where we saw a bit of a distortion, California versus the rest of the U.S. I believe there was a, I don't have the number in front of me, but to get to a one, the other U.S. was a two and California was a minus one. I'm off by a little bit there, but it was that kind of direction.
That was a little unusual. Again, I can't predict what that means for the future. Other than that, there's some markets where I think the positive that we see is we've been successful in some of these new medium-sized markets. We had the most new sign-ups, I believe, in many years in terms of a new medium-sized market in Tulsa just a few weeks ago through opening day. We had more sign-ups than we've had. I'm not talking about Asia, that's a whole different story in terms of sign-up levels. Again, things look pretty good. I don't know if there's a lot of geographic changes other than the thing we called out on California, and I personally believe a lot of that related to some of the gas issues.
Got it. I saw that you're doing, what is it, a pickup truck with GMC. Are you getting other vendors that are coming to you to look for marketing opportunities, given the success of the business?
Well, sure. In the car business, I think last year, just the U.S., we did just under a half a million new cars. We've always done, when car manufacturers have come out with something new, we could do, by putting one of those cars or trucks in front of each of our locations and doing Extra amount of incentive, we can drive a ridiculously large percentage of those six weeks of sales in that car or truck. In this case, we've toyed with the idea for several years and talked to other manufacturers about doing a KS vehicle. A great value with all the bells and whistles and even better value than you get as a Costco member or as a Costco Executive member. I know we had started and stopped a couple of times with a couple of different manufacturers. We're pleased with it.
We think the manufacturer is, the dealers are, and sure there'll probably be more in the future, but we'll see. Great. Thank you very much. That goes with other products, too. We just keep bringing it to a different level. Why don't we take two more?
Next question comes from the line of Paul Trussell of Deutsche Bank.
Hey, good morning, Richard. Just want to clarify a few things, if you don't mind. First on the new member sign-ups, I think you said up 15%. Certainly, international store openings has a lot to do with that, but you're also seeing success in the U.S. If you can maybe just give us a little bit more detail around what's driving that.
Well, I don't know what's driving it. We do a pretty good job of getting people in the door. Opening some of these new markets help. It's just been overall strong. If the U.S. is 15% and the whole company is 15%, where was it down? It was up relative to the 15%, of course, in the JPY and places like Taiwan and Spain, of course, was huge, but it's huge on a base of one. It was a little lower in Canada, where we had very few new openings. Mexico, same thing. No openings last year. Yeah, Mexico, last year, we had a huge opening on a base of about 34 or 35 units. A huge opening which had outsized numbers, so we're comparing against that with no new openings this year. Same thing in Canada.
We had a huge opening in a location there a year ago in that quarter versus none.
Got it. On core merchandise margins, I just wanted to make sure, the 16 basis point gain you're referring to, that's the true core merchandise margins on the fourth category that compares to the 11 basis points. Is that correct? Also, you made a comment earlier in the call regarding AUR. Is your view of total store deflation around 1%?
Well, if I look at my LIFO index, we don't know exactly. If I look at my LIFO index, which is 70% of our inventory, it's a U.S. accounting principle. From the beginning of the year to now, that's about a percentage point, nine tenths of a percent. If I look at just the total through the U.S. front-end registers, number of items in a basket was up year-over-year 1.4 percentage points. The average basket was up 0.4 percentage points, so a 1.0 percentage point delta there. That, again, I think just affirms that roughly 1% deflationary number on average. It's educated art, not complete science there. The margin is on its own sales. Yeah, the margins of the 16 is on its own sales. Each of those four categories by each of those four category sales.
Great. Thank you, and good luck.
Appreciate it.
Your last question comes from the line of Scot Ciccarelli from RBC Capital Markets.
Good morning, guys. Scot Ciccarelli. Thanks for getting me in at the end here. Richard, can you remind us where you are in the IT modernization investment program, when some of those pressures may start to ease? Secondarily, are there any other investment bubbles we should be mindful of as we think about the next two to three years?
Well, IT is one of the gift that keeps on giving. We started about three and a half, four years ago. As we look at it today, what we thought might take four or so years to do the big chunks of this will take six, as we thought it would cost X, it cost one and a half to two X or whatever it is, which is typical. Our guess that it'll still be slightly detrimental in fiscal 2017. Actually, technically, it may even flat to improve a little in 2017, but you got a 53-week year, so there's a little cheat there. Generally speaking, flat to up a little in 2017, maybe up a little in 2018 or flat, maybe down a little, we don't know yet.
We're starting to get to that inflection point, my guess is that inflection point will come sometime towards the end of 2017 or into 2018. Keep in mind, these numbers don't assume anything weighs in many ways, there'll be other things we'll add to it. The bulk of it, of course, is getting behind us, we'll go from there.
Okay. Any other incremental expenses that we should be mindful of? Like you finish one program and typically there's another one waiting or lurking right behind it.
I don't think there's anything big out there that way. We just did the bottom-of-scale increase, which is a little unusual. Not a big number, but it's $0.06 or so a year. There's no giant changes coming to healthcare. We still give great health, medical, dental, and vision benefits to everybody. If we increase sales penetration outside of the U.S., certain structural expenses help us. Healthcare in the U.S. is easily 20-60 basis points as a percent of sale higher than every other country in the world. Just by doing more elsewhere, that'll help that number a little bit. Same thing with labor costs. We pay similarly great labor wages relative to whatever in-country norms are. Certainly, the numbers in the U.S. and Canada are higher than some other countries. Those things will help us a little bit.
There's nothing huge going on out there. I don't think we have any big shocks to the system.
Got you. All right. Thanks a lot, guys.
Thank you guys. We'll be around. Have a good day.