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 speakers' remarks, there will be a question and answer session.
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, and we do not undertake to update these statements except as required by law.
Last night's press release reported our Q3 year to date fiscal 2016 operating results the 12 36 week periods that ended this past May 8. For the quarter, our reported earnings per share came in at $1.24 up 6% over last year's Q3 earnings per share of $1.17 And comparing our Q3 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 U. S. Dollar, primarily in Canada, Mexico and Korea.
This resulted in our foreign earnings in Q3 when converted into U. S. Dollars for reporting purposes being lower by about $15,000,000 or $0.03 a share than they would have been had the various foreign exchange rate versus the dollar been flat year over year. Gross margin. On a reported basis, it was higher by 34 basis points.
This included a $19,000,000 benefit from non recurring legal settlements. This represented 7 basis points of margin improvement or about $0.03 a share. Number 3, 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 MX credit card sign ups 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 sign ups in the quarter year over year was about $11,000,000 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 June Monday, June 20. Number 4, wages. As I mentioned on last quarter's second quarter's earnings conference call back in March, In addition to that but 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 scale hourly rates in the U.
S. And Canada, which is about 80% of our company. Effective this past March 14, we increased our starting wage of $1.50 an hour to $13.50 an hour. The new bottom of scale wage increase resulted in a year over year incremental payroll expense of about $6,000,000 or $0.01 a share in the quarter. We estimate that this will be anywhere from $0.01 to $0.02 a quarter in each of the next three quarters depending on which way it rounds.
Number 5, IT modernization. IT modernization efforts negatively impacted SG and A expenses in Q3 on an incremental year over year basis by about $16,000,000 which is about 5 basis points or $0.02 a share to SG and A. I believe in the first and second quarters this year that year over year delta of modernization expense was 7 basis points to negative in Q1 and 3 in Q2. So it looks like it's averaging around 5 a quarter for the 1st 3 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 $13,000,000 in the quarter. Last year, it was also deflationary, but as you know deflation has continued with $7,000,000 So again about a $6,000,000 or $0.01 a share delta there. Those are the items I'd point out. Turning to our Q3 sales. Total reported sales as you know were up as reported was up 2% and our 12 week reported comp sales figure was flat or 0.
Sales of course were negatively impacted by gasoline price deflation. That was almost 2 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. So excluding gas deflation, the flat U. S.
Comp number we reported would have been a +3%. In Canada, the +1 percent reported Canadian comp would have been a +8 in local currency excluding gas deflation and flat FX rates. And the reported minus to other international, excluding gas deflation and assuming flat over year FX, that would have been a +3. So all told, our reported 0 comp for the quarter, ex gas and FX would have been a +3. In terms of new openings, in the quarter, we opened 7 new locations and also completed 1 relow.
So year to date for the 1st 36 weeks, we've opened a total of 19 new warehouses and 3 relos. For all of 16, we have a current plan of 29 net new locations, a little over 2 thirds of them, 21 will be in the U. S, 2 in Canada, 2 in Japan and 1 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 and A in the quarter and a couple of other items.
So going down the P and L, again for sales, sales were up 2% on a report. Total sales were up 2%. We reported comps flat reported up 3% excluding gas and FX. Now the 0 flat comp on a reported basis was a combination of an average transaction decrease of a little under 3% at minus 2.7% on a reported basis. And again, ex gas and FX, the average transaction increase would have actually been up 0.5%.
And the average shopping frequency increase was up 3% for the quarter, which is most of February, all of March, all of April and the low 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 forming countries were Mexico, Canada and the 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 hardlines 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 are all pretty good big departments within hardlines. Within low to mid single soft line comps, single digit soft line comps, small electrics, men's apparel and home furnishings were the standouts.
And 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 to the income statement. Membership fees came in dollars were up 6% and up 7 basis points as a percent of sales coming in up $34,000,000 from $584,000,000 last year to 6 $18,000,000 Again, FX currencies exchange rates impact this number. Without FX, we're assuming flat year over year FX. The 6.18 would have been up $7,000,000 more and so the 6% dollar increase year over year would have been up 7%. Same number of basis points, of course, up 7.
In terms of renewal rates, we continue strong renewal rates 90% plus 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 in the quarter company wide were up 15% year over year, in part driven by strong sign ups in 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 Q3 end, Gold Star was 36,200,000 up from 12 weeks earlier at 35,400,000 dollars Primary business, the same at $7,200,000 Business add ons, the same at $3,500,000 at the beginning of the end of the quarter. So all told, dollars 46,900,000 member households versus up $800,000 from $46,100,000 at Q2 end.
Total cardholders is $85,500,000 up $1,500,000 from $840,000 at the end of the second quarter. I mentioned executive memberships. We came in at the end of Q3 with right at 17,000,000 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 time of weekly increase in many of the last recent quarters. Executive members are approximately 36% of our member base and about 2 thirds of our sales and again continues to increase penetration.
In terms of renewal rates, business numbers were 94.4% at the end of the quarter, tweaked down from 94.5%. Dollars Gold Star 89.6 dollars another 10th down also 89.7 dollars And so total U. S. And Canada 90.4%, down from 90.5%. Worldwide, at 87.6% at the end of the quarter, again, a 10th down as well.
Within the U. S. And Canada, of course, we've seen a bigger tick down than a 10% 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. So I think part of that is the auto renewal.
We feel a little of that in the U. S. Since we haven't been adding on accepting new applications for the current credit card, a co branded credit card since past October, but 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 percent this year versus 11.09 percent last year. And as usual, I'll ask you to jot down 4 columns of numbers to provide a little edification here.
The 4 columns would be Q2 2016, columns 1 and 2 are both Q2 2016. These are year over year changes in basis points. 1st column would be reported figures for margin. 2nd would be without the impact of gas deflation since that tends to distort the numbers wildly. And then the columns 3 and 4 would be Q3 2016 both reported and then column 4 Q3 2016 without gas deflation.
In terms of the line items, first line item going across would be core merchandising. So Q2 2016 we reported a plus 5 basis point year over year, ex gas deflation it was minus 3 and Q3 reported plus 16 and ex gas minus 2. Ancillary a plus 9 and a plus 7 and in columns 3 and 4 plus 9 and a plus 4, 2% reward minus 1 and 0 percent and in Q3 reported without gas 0% and plus 2%. LIFO in the 2nd quarter plus 4%, plus 4% in the 3rd quarter plus 2 plus 2. Other no 0 and 0 in the first two columns as a plus 7 in columns 34 that's the those non recurring legal settlements I talked about earlier.
You add up those columns reported in Q2 year over year we had a 17 basis point margin and up 8 on an ex gas deflation basis. And again, as while we reported a +34, it's a +13 ex gas deflation. In terms of the core merchandise component, which again reported plus 16, but minus 2. If you look at the 4 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. Ancillary and other business and by the way those numbers exclude that non recurring items that I mentioned.
Ancillary and other business margins were up 9 basis points, up 4% without gas. And 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 2 basis point benefit year over year And other, again, the 7 basis point improvement year over year. So even ex that on an ex gas escalation basis, margins were up a few basis points year over year. Moving down to expenses, SG and A on a reported basis were higher by 33 basis points coming in at 10.44 compared to 10.11 a year ago.
Again, we'll do the same four columns. Q2 reported in without gas and then Q3 reported without gas. Core operations, minus 22 reported year over year and a minus means higher year over year. Gas was a plus it was ex gas in Q2 was a minus 16. Columns 34 minuteus 24 minuteus 8.
Central in Q2 was a minus 8 minuteus 7, Q3 minuteus 6 and minus 4. Stock compensation minus 4 and minus 4 and then a minus 3 and a minus 2 and no quarterly adjustments. So all told, we reported year over year in Q2 SG and A higher by 34 basis points on a reported basis and 27 ex gas. This quarter Q3 reported higher SG and A by 33, 14 higher ex gas. Basically within the if you go back to the core operations or operations, the ex gas deflation, the 8 basis point year over year higher, that consisted of higher payroll and benefits year over year, which impacted that minus 8% by minus 12%, so more than the minus 8%.
These items were somewhat offset by a variety of other controllable expense items. Q2 is of course always the lowest volume quarter and of course as we know the sales were a little weaker for a variety of reasons including some deflation. Central expense was higher year over year in the quarter by 6, ex gas by 4. IT is the 4 on an ex gas basis. And as I mentioned, it was plus 500 minus 500 reported, but essentially out ex that Central, I think we did a pretty good job in the quarter of controlling that.
And again, stock compensation expense, no surprise there. Next on the income statement preopening, a little higher year over year $18,000,000 for the quarter versus $14,000,000 a year ago, so up by a basis point. This year in the quarter, we had 8 openings including 1 relo. Last year in the quarter, we had 4 openings and 1 relo including 1 relo. Again, some of that is not necessarily related to those specific openings as it may include some right before the quarter opened as well.
All total operating income came in at $858,000,000 for the 12 week quarter, up $37,000,000 or up 5% year over year from last year's 821,000,000 dollars Below the operating income interest expense, interest expense came in at $30,000,000 this year versus $31,000,000 a year ago, essentially flat, No surprises there. Interest income and other this year was $7,000,000 lower by $2,000,000 versus last year's 9,000,000 Actual interest income within interest income and other was essentially similar year over year at about $10,000,000 The balance of that delta was year over year, it 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 $36,000,000 coming in at 835,000,000 dollars up from $799,000,000 a year earlier. Our tax rate was a little lower or better year over year coming in at 34.2 down from a 35.0 last year in Q3.
Basically, this year's Q3 income tax percentage benefited from again just a few positive discrete 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 $545,000,000 for the quarter compared to last year's 5.16 dollars are up 5.5%. For a quick rundown of other topics typical topics, in terms while 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 and amortization in the quarter was 291,000,000 dollars 847,000,000 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 have been at 89, the 100 would have been at 90. So again, right around the same year over year.
Average inventory per warehouse was actually down about $500,000 or down 4%. About a third of that is FX, so about almost exactly a third, 100 and 73,000 to 516,000. 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 mean gas and the rest being just lower inventories. But again, lower year over year by $500,000 In Q3, in terms of CapEx, we spent $460,000,000 during the 12 week period.
And year to date we're right at $1,800,000,000 I'd estimate for the year we'll come in around $2,500,000,000 to 2,700,000,000 dollars compared to fiscal 2015 total expenditures of $2,400,000,000 So up $100,000,000 to $300,000,000 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 6 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, it'd be 13% 14 percent 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 1 relow.
And again, that would put us at 29 net new openings, 33 openings, but 4 of those were relos, so 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 relos as well. New locations by country, again, 21 in U. S, 2 in Canada, 1 each in the U.
K, Taiwan, Australia and Spain and 2 in Japan. As of 3rd quarter end, our total square footage was right above 100,000,001,700,000 square feet. In terms of stock buybacks, if you recall in Q1, we repurchased $130,000,000 of our common stock. In Q2, dollars 80,000,000 dollars both of those of course are 12 week quarters as well and in the 12 week Q3 we purchased $136,000,000 Such that year to date we spent about $346,000,000 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 $500,000,000 for the year. We'd be right at $500,000,000 for the year and 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 of the company of around $790,000,000 Before I turn the call back to Karen for Q and 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 Pacific Time. And then you get to wait until the next morning to hear the fall. Beginning with our Q4 earnings release, we're going to change the timing of that release in the conference call such that for the Q4, we'll issue results after the market closes on Thursday, September 29, followed up shortly thereafter with a live conference call that afternoon and a Q and A session at the end of that call.
This new schedule will be our plan for earnings leases going forward and I think it will be helpful and certainly in response to several of your comments out there. The last quick item, next week we report the 4 weeks of calendar May sales. This is the 4 weeks ending this coming Sunday, May 29. I'll mention to you that based on how Memorial Day falls year over year, this year Memorial falls on day 1 of the June retail calendar month. So this year we have 28 days next year versus last year's 27 days.
So that will 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 4 falls. And then finally, we'll get through that silliness in July when we report July sales.
With that, I'll open it up to Q and A and I'll turn it back to you, Karen.
And your first question comes from the line of Oliver Chen of Cowen and Company.
Hi, good morning. This is Steven Zaccone 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. Wanted to just get your sense, have you seen any changes in trends or spending habits? Second question, just wanted to get your thoughts on progress with some of the 3rd party partnerships in grocery delivery. How has growth in those channels performed relative to expectations? And then just thoughts about expanding into new markets?
Thanks very much.
Okay. Well, in terms of the customer, I mean, so far so good. And we don't see any dramatic change. Many of you have asked questions or have had some concern about traffic coming down from this 4 plus percent in December over 7 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. So that I think allays some of any concerns that some people have had. But generally speaking, I'd have to say our customers are still pretty healthy and still getting good renewal rates notwithstanding a very small impact from some of the credit card transitions. And so we feel pretty good at this point about that.
And certainly I feel good about some of the merchandising stuff we've got going on. Yes, by the way, one of the other kind of data points, I've been asked several times in the last few weeks, each time we've reported sales in the last couple of months is it deflation, is it weakness, is it dotcom 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, so U.
S. Only, it was up 1.4%. So we're getting people to buy more items, if you will. The average basket value is up 4% 4 tenths of a percent. The simple implication there is, as you've got deflation presumably of deflationary pressures of about 1%.
Now 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. So I think overall, there's probably still a little bit more deflation that 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.
We have Instacart of course is in Google's in 6 large communities in the country, the Bay Area, the LA Area and a few others. And Instacart I think is now in well over 15 maybe even 20 markets where we participate with them and also a few of the others out here. 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 just to provide to the end consumer. And so 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. But 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. We're 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 as 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. And 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 in New Orleans. And so 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 LA where they're harder to find because we're very specific locations to fill in markets. So I think that's probably one thing.
Looking at the 30 next year, and this is a guess, it's probably not 2 thirds of that 21 over 29%. If I had to guess, it's probably a little less than half, 50%, 52%. So and again, that's a guess at this point.
Thanks very much.
And 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? I mean, interchange fees probably start to go down when it happens, but are there other costs that makes your SG and A or any other line items elevated temporarily?
No. Other 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. There's part of any of these equations are different pockets of income including generating new sign ups new credit card sign ups. And that's been about $4,000,000 to $5,000,000 a month, which is easy. It used to be something and 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. And 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 and really there's not a whole lot. Cards are hitting. Yes, cards are hitting right now in fact.
They'll continue to hit when you've got literally over 10,000,000 pieces of mail going out, it's spread over a few week period and I think they just started hitting. So cards should be in everybody's hands a few days to a week at least a few days to a week before the June 20 D Day here. And nothing we'll be able to tell you more in September on the late September when we do the Q4 earnings call. But again, we're ready to go and we're excited about
it. And then the marketing dollars, the in store kiosks, like you said the mailing, that's just that we're not going to see a blip, good or bad in the SG and A dollar run rate. There's nothing unusual that should happen as we sequence there?
Absolutely.
Okay. And then my follow yes, 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. And if that's the case, can you explain, I guess, how you're doing it? I was I thought we were cycling the hump of some of the best performing gasoline gross margin quarters a year ago. Maybe it was a mix of optical, but figured that the gas is a bigger input.
Yes, it will come in Q4. This quarter was an odd quarter. It was a little bit it ended up being in the 1st part of the quarter, it was better than we expected. And with gas prices going up and down 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 had anticipated. And it's generally 2 things.
I think the bigger factor is when there's price daily price changes up and down in the cost of procurement costs of both us and other gas station operators. And 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. So we still give way more back, but it helps us a little bit. And so 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, we took the day to day sometimes it changes relative to what when we think just when we think we're smart and safe to go out, it goes the other way. So But so far, I guess it will impact us in Q4.
But in Q4 being the hump and then it gets easier after that?
Yes.
Okay, great.
And your next question comes from the line of Matthew Vassler 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 have contributed to margin rate in any way?
Well, FX does it 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. And 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. But my guess is there's still when you've got let's see here it is. If you look at, let's say, in Canada, year over year, the exchange, the Canadian dollar is 17% weaker incrementally just in the quarter or 5% weaker from the previous month. So you got that kind of stuff going on for 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 we try to bring down prices when there's deflation and probably doesn't impact us as much because it impacts us a little sooner than others and that's pretty much
it. Got it. And then LifeLock, I guess, it's I think the 7th consecutive quarter where this is kind of gone your way. And I know you market to the best of your expectations every at the end of every quarter. How much of this is food?
And if we think about commodity prices, I know once again, there should be 0 in a normative environment. Any sense of whether there's more momentum that could prove helpful to you here?
I don't think again, deflation from the end of the year is down about 0.8 percent on in terms of the LIFO index. And 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 life of the ongoing credits relate to food and desire to venture guess as to where LIFO goes next?
Look, we don't know. I If you talk to our fresh foods buyers, they're expecting continue to expect some deflation. I get different answers from some of the non foods buyers. When we look at fresh foods year over year, those margins were down slightly in the low double digit basis points year over year. So again, not a big impact there.
It's the other categories where it was up a little bit. And so the netted up all those 4 main categories is up 16 basis points. So I don't think there's lots.
And then finally, any sense thinking about the very long run about whether your food 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, 1st 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. And I mean some of the things we're doing with global sourcing initiatives and poultry plants and organic, Our pounds in beef are way up and but you've got deflation in beef more than some of the other protein categories. So yes, and we're the 1st to go down in some of those items when there is deflation.
So I think our numbers have actually the deflation in some of the fresh fruit 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. And I would never be as 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 $6,000,000,000 business now, approaching a $6,000,000,000 business, which is as big as protein. I don't think many retail food places do those kind of numbers. And so I think it has more to do with that.
Then 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. Now 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 that will continue to be it should be for us an increasingly an increased sales penetration area and something that will keep driving our members.
Thank you so much. Appreciate it. Thanks, Richard.
And your next question comes from the line of Michael Lasser of UBS.
Thanks a lot for taking my question. Richard, you sized the P and L impact of the credit card transition at $11,000,000 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? So 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?
There's probably there's always going to be a little confusion. To the extent that we haven't signed up new co brand credit card members, I don't think many members many people coming in to sign up for a Costco membership have walked away because we don't they can't sign up for 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 they keep in mind, not everybody that signed up for 1 over the last 16 years got it. And it was still a credit eligibility decision that the issuer made and it will be that way in the future.
The fact of the matter though is that to the extent that they signed up as a member and again I don't think it wasn't that impactful somebody walk away because they can't get 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? Yes, it probably does. Although our TV sales have been pretty darn strong. So I can talk out of both sides of my mouth on this one.
So does that mean that some of the comp slowdown just maybe a function of the law of diminishing returns of mass taking over?
It could be. Again, we the ones we can quantify easily, we look at. We can drive ourselves crazy. We know that let's face it, in April sales, when we try to when we shared with many of you on our audio, it's everything, it's deflation, it's a little of the AmEx. It 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 and certainly what we do with ticketing in the last in 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. But I've always said there's lots of little things that help us
here. And 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 20 transition date? So for example, are you seeing even slower trends in May so far?
Well, first of all, I don't think anybody has clipped up anything. They still have to use that co brand Amex card through June 19. And nobody can actually use the new card even if you got in the mail until June 20th. That's part of our original agreement with our previous service provider and that's fine. So all stuff will happen June 20 beyond.
And rest assured there's going to be a lot of stuff happening in terms of our continued communication, of course, to our members. But there's a lot of members out there that don't have the account. About a little over 40% of our U. S. Sales were done on AmEx with over I think over 2 thirds of that a little over half to 2 thirds of that being on the co brand card.
Some people tend to have one delta points or star award 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, it's going to be a 4, 3, 2, 1. That's huge.
And so that my personal view is it will be something that's not going to all hit on day 1. Let's get through day 1 and transition first, but it will be something that will continue for a couple of several years.
Okay. Good luck. Thank you.
Your next question comes from the line of John Heinbockel of Guggenheim Securities.
So, Rich, do you think this 30 annual openings, is that sort of I mean, certainly, you have the people and the capital to do more. Real estate is it a real estate bottleneck or you're comfortable at that level? Can you go solidly beyond that? And 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, it clearly is not capital. We got plenty of capital. I would argue we have too much capital out there. We like it that way. It is people.
Years ago, I didn't appreciate 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 9 to 20 units in about 1.5 years, 2 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. So you do that a few at the beginning. You may do it occasionally on a one time on onesie basis.
But at the end of the day, you're growing from within and developing those local country people. And 1st and foremost, from an international standpoint, you've got that. That can be a little bit of a challenge. And then you've got things take longer there. There are some countries that I understand are very difficult just because of zoning and restrictions that are placed not just to us, but any big box, even local companies big boxes in the hypermarket area and the like.
So it's going to take a little longer there. The other thing so do I think we 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 want to be around 30 and 5 years from now we should be doing 35. Maybe we'll fall a little short from that, maybe we won't.
But 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. But we also could we physically open more?
Sure. But we like what we do and the way we do it. And probably we also have a comfort level that it's not like we're going to miss out. We're the, in our view, the preferred club out there. And so when we go into a market, if we take a little longer to get there, people are waiting for us and it might be a little harder, but the fact of the matter is, is we feel comfortable how we're doing it.
And then as the traffic in the U. S. Has moderated, right, 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? Or because you talked about the within the categories the 16 basis point improvement in margin.
There are things you can do proactively to give more back to the member and would that do anything to traffic. So that's sort of discussion internally about the balance of earning versus trying to maybe drive traffic a little more. Can that be done?
Well, 1st of all, and 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 want to drive sales. The fact that margins year over year are up on those quarter categories up 16 basis points, We're not smart enough to figure out how to get there all the time. We always got to drive margin a little bit where we can, but we do it the right way by getting 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. We could make a little more this, but we don't. At the end of the day, we're always looking for ways to do that. When we do membership key changes historically, we are always looking to give some of that back. So all those things go into it.
But at the end of the day, what helps margins? Private label, fresh food strength, some of the ancillary businesses, all those things are helping as well. And again, we feel we're not we don't necessarily I got to tell you, we don't look at it saying, hey, frequency came down a little bit or the comp is a new normal, a little bit lower. We want to do more. And even when we were doing a 4% shopping, you see how do we hit it higher even though that was kind of tough.
So we're going to continue to do things in that direction. And we don't necessarily worry about, well, 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. And then lastly, is KS having any kind of real impact that you can see on basket size or not really?
I don't know. I mean, we keep adding well, we subtract and add KS items. So they have been dyed by the same metrics. If it's not a great item, we stop it. But there aren't any giant items like toilet paper and water those types of things or disposable diapers several years ago.
But there are lots of little ones. And I think, again, we would see that continuing to increase penetration, but a slower rate of growth in the future as well for the same reasons.
Okay. Thanks. I
don't think 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 had if we're 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, but many instances you've got a lower price point on the same number of units.
Thank you.
And your next question comes from the line of Greg Melich of Evercore ISI.
Hey, guys. This is Mike Montani on for Greg. Thanks for taking the question. I 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 nondiscretionary 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 like from May results so far, have you seen sequential improvement in traffic versus even April trend?
Well, we
really can't talk anything about May yet. There's no giant surprises either direction. But at the end of the day, and again, the comfort level, we're I was I think I was earlier in the call, I was responding to many calls that I received from both institutional investors and analysts out there about the concern. And again, when we look back at it and we looked at it, we reported April sales and we said, okay, what are the reasons why it came down a little bit, it was a little weaker. What again 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.
And so again, that's not as much as I would read into that.
Got it. Okay.
Thank you. We'll tell you next Wednesday for May.
And 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? And 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 $2.08 this year. And what was the last part?
Just asking about what was the comp gallon percentage change? And then also was there any material EPS impact on this quarter? And if you could help us size up exactly what we're up against in next quarter?
Well, 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 was 8% in the U. S. And so that was part of that in April.
And just the EPS impact Richard, I'm sorry on, penny per gallon?
It was within a penny or 2, not really no change year over year.
Thank you.
And our next question comes from the line of Peter Benedict of Robert Baird.
Hey, Richard. Thanks for taking the question. One on gas and then another on a different subject. But just you've been adding 20 to 30 gas stations a year the last several years. I think your penetration is 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, call it a few years out?
Well, in the U. S, we first of all, in every new unit we do where it's possible, we put in a gas station. And we're even putting a few in countries like Japan and Australia, which we hadn't done historically. We relocated a few units to the U. S.
We just moved Hackensack to Teeterboro. The Hackensack became I think our 11th business, 10th or 12th business center. And the new Teterboro 1 is a big new Costco with the gas station with better parking and great. So if we did 3 or 4, I don't have it in front of me, but if we did 4 reloads this year, my guess at least 3 of them have gas stations and those 3 don't. But we're starting to match that out.
In the U. S, we have 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 5, Spain, 1 of 50% of them, 1 out of 2. And Australia, 5 out of 8, I believe.
And so, yes, again, it's not like 5 years ago in terms of just adding a bunch of gas stations, but it still, I think, moves the needle a little bit.
Okay. That's helpful. And then maybe can you take a minute and discuss the senior management ranks at Costco? I mean, there's been some turnover lately. Doug, I think his last day, maybe tomorrow, I guess.
But 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.
Well, look, you talked about shopping frequency staying at 4% for 7 years. People have stayed for 30%, including me. So 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. But 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 gin 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 carriers like what we used to be non with non foods, which is a combination of hard lines and soft lines. And Dennis Knapp, who was a senior executive over that and since retired, we brought in 2 promoted 2 people and broken out Hardlines and Softlines. In operations, we've made several promotions and changes and people again typically low tenured people like they've only been here 20 to 25 years that are going from VP to senior VP levels on I think we've got our 16 senior VPs of operations in the U.
S. Geographically. And now in terms of Doug, Doug's as you know has been Head of U. S. Merchandising and certainly involved in a lot of merchandising beyond that as well.
Doug is great. He is leading for no negative issues both internally or with himself. And he's we're all kind of jealous. He's on the younger side of the senior management team. Craig has a plan, but he's looking at a few things.
And over the next few months, we'll be announcing how that changes. But 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 is goes back to the Price Club days probably 25 plus years ago, when he's been ran operations for Taiwan, was promoted as CVP over Asia. And we brought some new people in there as well.
New people meaning new existing Costco people for us and from the U. S. And so I think we feel pretty good about the change. It's sped up because it was at 0. In the last couple of years, it's been a few a couple and now it's a few and a few more.
And 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.
And 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. And 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 3 of every 100 come in to shop. And so 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 1, the other U.
S. Was a 2 and California was a minus 1. I'm off by a little bit there, but it was that kind of direction. And so that was a little unusual. Again, I can't predict what that means for the future.
But other than that, there's some markets where I think the positive that we see is, as 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 market, 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 story in terms of sign up levels. And so again, that's 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. I personally believe a lot of that related to some of the gas issues.
Got it. And I saw that you're doing, it's a what is it, a pickup truck with GMC in terms of and are you getting other vendors that are coming to you to look for marketing opportunities given the success of the business?
Well, sure. I mean, in the car business, I mean, I think last year we just in the U. S, we did it just under 500,000 new cars. We've always done when car manufacturers have come out with something new, We could do by putting one of those cars in front of our trucks in front of each of our locations and doing some type of extra amount of incentive, we can drive a ridiculously large percentage of those 6 weeks of sales in that car or truck. In this case, we've toyed with the idea for several years and talked to all the 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.
So we 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 suppliers, the dealers are. And sure, there'll probably be more in the future, but we'll see. Great.
Thank you very much.
And that goes with other products too. We just keep bringing it to a different level. Why don't we take 2 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. I mean, 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 15% of course, and again in places like Taiwan and Spain, of course, was huge, but it's huge on a base of 1. And then it was a little lower in Canada where we had very few new openings. And Mexico, same thing. We had openings last year.
Yes, Mexico last year we had a huge opening on a base of about 34 or 5 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 the quarter versus none.
Got it. And then, on core merchandise margins, just wanted to make sure, the 16 basis point gain you're referring to, that's kind of the core the true core merchandise margins on the 4 categories that compares to the 11 basis points. Is that correct? And then 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 a 70% of our inventories, it's a U. S. Accounting principle. From the beginning of the year to now that's about a percentage point, 9 10ths of a percent.
If I look at the just 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.
But it's educated art not complete science there. And the margins is on its own sales. Yes, the margins in the 16 is on its own sales by each of those 4 categories sales.
Great. Thank you and good luck.
Thank you. And
your last question comes from the line of Scott Ciccarelli of RBC Capital Markets.
Good morning, guys. Scot Ciccarelli. Thanks for getting me in at the end here. And Richard, can you remind us where you are in the IT modernization investment program, kind of when some of those pressures may start to ease? And secondarily, are there any other investment bubbles we should be kind of mindful of as we think about the next 2 to 3 years?
Well, IT is one of the gift that keeps on giving. We started about 3.5, 4 years ago. As we look at it today, what we thought might take 4 or so years to do the big chunks of this, we'll take 6 as we thought it would cost X, it cost 1.5 to 2X or whatever it is, which is typical. Our guess that it will still be slightly detrimental in fiscal 2017. And actually technically it may be flat to improve the loan 2017, but you got a 53 week year.
So there's a little cheat there. But 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. But we're starting to get to that inflection point. And 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 in many ways and there'll be other things we'll add to it. But the bulk of it, of course, is getting behind us and we'll go from there.
Okay. And any other incremental expenses that we should be mindful of? Like you finished one program and typically there's another one kind of waiting or working right behind it?
I don't think there's anything big out there that way. I mean 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 health care. 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 basis points to 60 basis points as a percent of sale higher than every other country in the world. And so just by doing more elsewhere that will help that number a little bit.
Same thing with labor costs. We pay similarly great labor wages relative to whatever country norms are. But certainly the numbers in the U. S. And Canada are higher than some of the countries.
And so those things will help us a little bit. No, I don't think there's nothing huge going on out there that 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.