Good morning. My name is Britney and I will be your conference operator today. At this time, I would like to welcome everyone to the Q3 Earnings Call. All lines have been placed on mute to prevent any background noise. After the Thank you.
Mr. Richard Galante, CFO, you may begin your conference.
Thank you, Britney. Good morning to everyone. Last night's press release presented our Q3 operating results for the 12 weeks ended May 10, 2015. 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 events, results and or performance to differ materially from those indicated by such statements.
The risks and uncertainties include, but are not limited to, those outlined in today's call as well as other risks identified from time to time in the company's public statements and reports filed with the SEC. Forward looking statements speak only as of the date they are made and we do not undertake to update these statements except as required by law. So to begin with, our 12 week Q3 fiscal 2015 operating results. For the quarter, per share came in at $1.17 a share, a 9% increase over last year's Q3 earnings results of $1.07 a share. Couple of factors that impacted our Q3 earnings comparison year over year.
First, FX. As compared to a year ago in Q3 this year, the foreign currencies where we operate weakened versus the U. S. Dollar, in fact in all countries, but primarily in Canada, Mexico, Korea and Japan, resulting in our foreign earnings in Q3 when converted into U. S.
Dollars being lower by about $33,000,000 pretax or $0.06 a share than these earnings would have been had FX rates been flat year over year. 2nd item of note, IT modernization. As with the past many quarters, our major IT modernization efforts are ongoing and will continue to negatively impact our SG and A expense percentages through this fiscal year and certainly into next year, especially as new major systems are placed in service and depreciation on those begin. In Q3, on an incremental year over year basis, these costs impacted SCA by an estimated $19,000,000 pretax or 7 basis points 5 basis points without gas deflation and FX. And a third note, LIFO.
Last year in Q3, we recorded a $12,000,000 pretax LIFO charge. This year in Q3, we had a $7,000,000 pretax LIFO credit, which benefited Q3 this year by $0.01 a share. And last item of note, while we enjoyed the benefit of strong year over year gross profits in half of the fiscal year both Q1 and Q2. In Q3, it was additive but only by $0.01 a share. So pretty much back to normal this quarter, although next quarter will be a little bit tougher comparison.
In terms of sales for the Q3, total sales were up at 1% and our 12 week reported comparable sales figure came in at down 1%. For the quarter, sales were negatively impacted as you well know by gasoline price deflation that represented about a 3 50 basis point negative impact and by weaker foreign currencies relative to the U. S. Dollar year over year that impact was a little over 300 basis points. So excluding gas, the reported plus 1 percent U.
S. Comp number increase in Q3 would have been a +5% and the reported minus 6% international comp figure excluding gas and FX impacts would have been plus 7% such that the total company comps reported at minus 1% for the quarter excluding gas and the VEX would have been plus 6% for the company. One other item of note on sales, Looking at some of the preliminary reports by analysts out there, it looks like the suggestion was is that May might have gotten off to a weak start. That's not the case. The 1st couple of weeks of May are just fine.
In terms of new openings, after 9 new locations in the first half of fiscal twenty fifteen, including the relocation of Wayne, New Jersey, we opened 4 locations in Q3, 1 in Quebec, Canada 1 in Merida, Mexico, which is a relocation and one in Culiacan, Mexico. And we also converted our existing Bedford Park, Illinois warehouse into a business center, so a net of 2 additional locations in the Q3. All told that puts our fiscal 2015 opening schedule so far through the Q3 at 10 net new locations. Next week kicks off a very busy fiscal 4th quarter expansion which includes openings next week in Wichita, Kansas Mobile, Alabama and Rochester, New York. These are the first three of 14 planned new locations for the Q4, including 4 additional new U.
S. Locations, 1 new location in each of U. K, Taiwan, Korea and Mexico, and 3 new warehouses opening in Japan this August. We will most likely end the fiscal year with 24 net new openings and 687 Costcos worldwide. We had originally planned to be closer to 30 for the fiscal year.
However, several of these have been pushed into early fiscal 2016 due to timing construction issues. In fact, between September 1st the end of the calendar year 2015 or the 1st 4 months of fiscal 2016, we expect to open somewhere between 15 18 new warehouses. So a very busy 7 month period had for us. Also this morning, I'll review with you our e commerce activity, our membership trends and renewal rates, our recent common stock repurchase and dividend activities, and of course additional discussion about margins, SG and A and other items in Q3. So for our Q3 results, in terms of sales, sales for this year's Q3, the 12 weeks ended May 10, were $25,520,000,000 up 1% from last year's Q3 results of $25,230,000,000 Excuse me.
On a reported comp basis, Q3 comps were down 1%, but up 6% excluding gas deflation and FX. For the quarter, our minus 1% reported comp was a combination of an average frequency increase of about 3.5% and an average transaction decrease of minus 4% for the quarter. Recognizing that that minus 4% is reported excluding FX and gas that minus 4 percent average transaction would have been plus 2.5%. In terms of sales comparisons by geographic region Excuse me. In terms of sales by geographic region for the U.
S, the Midwest and California were the strongest. Internationally in local currencies, Australia, Mexico and Taiwan posted the strongest results. In terms of merchandise categories sales performance for the quarter, in the Q3 within food and sundries overall in the low to mid singles. Deli at low and reported mid if you take the FX out. Deli and frozen were the relative standouts.
For hardlines, the departments with the strongest results were hardware and garden. Consumer electronics comps were slightly positive excluding FX. Within the low single digit softlines comps, men's apparel and housewares were the standouts and in fresh foods, meat and deli were the strongest. Now moving to the line items of the income statement. Membership fees, we came in at $584,000,000 or 2.29 percent.
That's a 4% increase and a 7 basis point increase and a $23,000,000 increase versus last year's Q3. Again, these numbers are impacted of course by FX. The $584,000,000 number had FX been flat year over year that 4% dollar increase would have been 7% up instead of 4% reported. In terms of membership, we continue to enjoy strong renewal rates 91% in the U. S.
Canada and 88% worldwide and also continuing increased penetration of our executive New member sign ups in the Q3 were slightly down year over year. This has to do essentially with timing of 4 openings in Asia last year, 2 in Japan and 2 in Korea, which generate typically larger than normal sign ups. In terms of a number of members at Q3 end, Gold Star 33,200,000 at Q3 end, which is up from $32,700,000 12 weeks earlier at Q2 end. Primary business, the same at 7,000,000 dollars Business add ons, the same at $3,500,000 So all told, we ended the quarter with 43,700,000 member households, up from 43,200,000 dollars and including Extra Cards $79,600,000 at Q3 end versus 78 point $7,000,000 just 12 weeks earlier. At May 10th Q3 end, paid executive members came in at $15,700,000 an increase of just about $250,000 since Q2 end or about $21,000 a week increase in the quarter.
As I've stated before, executive members continue to grow. They're currently approximately 36% of our member base, approximately 2 thirds of our sales. In terms of renewal rates, as I mentioned, the business continues strong at rounding up to 95%, Gold Star around 90% and so total again the 91%
and Worldwide
88%. Our reported gross margin for the quarter was up on a reported basis up 47 basis points from a 10.62%. This last year up to 11.09 percent this year. Now that 47 basis point increase is a plus 9 basis point increase without gas deflation. If you jot down a few numbers as I always ask you to do, we'll have 4 columns.
The first two columns will be first half of twenty fifteen as reported. 2nd column will be first half of twenty fifteen without gas deflation and then Q3 twenty fifteen and Q3 twenty fifteen reported and without gas deflation for the 3rd and 4th columns. The line items, first one would be core merchandising. For the first half reported, we were up 2 basis points. For the first half, without gas inflation, it was down 17 basis points.
For Q3, reported was +23 and without gas deflation, minus 10. Percent ancillary businesses plus 34% and plus 29% for the first half and for the 3rd quarter 23% reported and plus 15% without gas, 2% reward minus 3% and minus 1% and for the quarter minus 6% and minus 3 LIFO plus 2+2 and plus 2. And for the Q3 plus 7+7. Other was 3% and plus 3% for the first half and 0% for the 3rd quarter. Anyway, for total for the first half, we were up 38 basis points and without gas deflation up 16%.
And reported for the Q3, we were up 47% and as I just mentioned plus 9% on a without gas deflation basis. Now again as you can see when these numbers core merchandising gross margin was up 23 basis points year over year and down 10% without gas deflation. This is primarily a function of improved year over year gross margins within our ancillary businesses. The core gross margins in Food and Sundries, Hardlines, Softlines and Fresh Foods as a percentage of their own sales were up 10 basis points year over year with Food and Sundries and Softlines being up year over year and Hardlines and Fresh Foods being down year over year, but the net of the 4 on their own sales was up 10 basis points. So a good margin performance in the quarter.
Ancillary and other business gross margins were up 23 percent 15% without gas deflation in the 3rd quarter. We basically enjoyed fairly broad based strength within all of our ancillary businesses with year gross margin improvements in gas, optical, hearing aids and food courts as well as proved year over year sales penetration within pharmacy, commerce and travel which contributed to the ancillary gross margin improvement. The impact from sales to our executive membership represents a 6 basis point hit to the margin or 3 basis point hit without gas deflation. This is good. It's the 2% reward feature, which reduces sales.
And the fact is as more members switch to executive member, we think that's good for us long term. LIFO as I mentioned a $7,000,000 pre tax benefit this year compared to a $12,000,000 pre tax charge last year for a $19,000,000 or 7 basis point year over year positive variance to gross margin. As you as I've said many times, whether these numbers are up or down on LIFO, it's really part of the margin in my view. Overall, we think margins are in good shape. Moving to reported SG and A.
Our SG and A percentages in Q3 year over year were higher by 25 basis points coming in at a 10.11 percent of sales this year compared to a 9.86% in last year's Q3, but again better or lower by 10 basis points excluding gas deflation. In terms of SG and A, again, we'll do the same four columns. First half twenty fifteen, both reported and without gas deflation and Q3 2015 both reported and without gas deflation. First is operations. We were plus 6% and plus means good or lower, plus 6% reported and plus 23% without gas deflation in the first half year over year.
We were minus 16% and plus 14 without gas deflation, the plus 14. Central, minus 6 and minus 4 for the first half and minus 10 and minus 6 for the 3rd quarter reported in without gas deflation. Stock compensation minus 8 and minus 7 for the first half and plus 1% and plus 2% for the Q3. Quarterly adjustments were not an issue 0 across the board. In total, we reported for the first half minus 8 basis points or higher by 8 basis points.
And in fact, it was better or lower by 12 basis points, so plus 12. Reported for the Q3 was minus 25 basis points or higher by 25 and again lower or a plus 10 basis point for without gas deflation. The operations component, again, was again a minus 16%. Within operations excluding gas deflation payroll and benefits represented 10 basis points of that year over year improvement. So good expense control on payroll and stuff and benefits.
Our central expense was higher year over year in Q3 by 10%, 6% without deflation. Again, ongoing IT modernizations represented about 7 of that or 5 without gas deflation and FX. So that's a big chunk of that. Equity compensation, a little bit of a benefit there. That fluctuates based on when people hit their 25, 30, or 35 year are accelerated as well as of course every October we do the annual grants.
Next on the income statement line is preopening expense. No real big issues here. Dollars 16,000,000 last year the quarter, dollars 14,000,000 this year. So lower by this expense item lower by $2,000,000 We had 4 openings in each of Q3 2014 and Q3 2015. All told, operating income for the 3rd quarter came in at $821,000,000 higher by $84,000,000 or 11% from last year's operating income figure of $737,000,000 Below the operating income line, interest expense came in at 30 $1,000,000 this year versus $25,000,000 during last year's fiscal quarter.
This increase is a result of the $1,000,000,000 of senior notes issued during the Q2 in conjunction with the recent $5 per share special dividend. Interest income and other was lower year over year by about $3,000,000 coming in at $9,000,000 this year versus $12,000,000 a year ago in the quarter. Actual interest income for the quarter was lower by $1,000,000 of that $3,000,000 was actual interest income. The other component is principally which is about minus $2,000,000 or $2,000,000 year over year is principally relates to marking to market forward FX contracts used by our foreign operations. Sometimes that's positive by little and sometimes that's negative, pretty small negative this time.
These swings of course are caused by change in the dollar U. S. Dollar relative to those currencies. Overall, pretax income was higher by a little over 10 percent year over year or higher by $75,000,000 in the 3rd quarter coming in from last year's $724,000,000 in the quarter to this year's 799,000,000 dollars In terms of income taxes, our company tax rate this quarter came in at right at 35.0 percent. That compares to 33.9% last year in Q3.
Compared to last year, our effective tax rate has gone up due to lower year over year percentages of earnings coming from our foreign operations. This lower penetration is primarily due to foreign exchange as well as strong U. S. Gas profits compared to last year, although they're only slightly stronger. Overall reported net income of 5 $16,000,000 this year in the 3rd quarter represented a 9% increase as compared to the $473,000,000 net income figure last year in Q3.
Now for a quick rundown of other usual topics. The balance sheet of course is included in this morning's press release by a couple of balance sheet info items. Accounts payable as a percent of inventories reported was 100% up from 99% a year ago. Payables of course in that number include construction payables not just merchandise payables. If you look at just merchandise payables against inventories, this year was also up 1% or a little better, up 90% at 90% this year versus 89 percent a year ago.
Average inventories per warehouse were up on a reported basis about $188,000 coming in at $13,200,000 per location versus 13.0 a year ago, up about 1%. But again, FX without FX inventory levels for warehouse, if FX had been flat year over year would have been up about $570,000 or up about 4% per warehouse. This increase was pretty much spread over many departments some of which had resulted from the increased flow of backlog inventories from the West Coast port slowdown. That's pretty much behind us and we should see little of that burn off. Overall, our inventories are just fine.
As I mentioned in the Q2 earnings report, our mid year fiscal inventories came in as good as they ever have. In terms of CapEx, in the Q1, we spent 5 $55,000,000 in Q2, an additional $612,000,000 and in Q3 $421,000,000 So for a year to date total of CapEx of 1,600,000,000 dollars Given that a couple of units have been pushed into the fall, we would current estimate for CapEx this year is somewhere in the $2,400,000,000 to $2,500,000,000 range. That compares to last year's fiscal 2014 expenditures for the whole fiscal year of right at $2,000,000,000 In terms of costs go online, we continue to operate it in 4 countries U. S, Canada, U. K.
And Mexico. For the 3rd quarter sales and profit were up nicely. Sales were up 18% in U. S. Dollars for the quarter and again excluding FX.
In our e commerce business and local currencies sales were up 21%. Next on discussion list expansion. As I mentioned, we in terms of net new openings, we opened 8 in Q1, none in Q2 and Q3 and 14 anticipated for Q4 net. So that would be 24 net increase for the year. And as I mentioned somewhere in the 15 to 18 more in the 1st 4 months of the last 4 months of calendar 2015 which will be the 1st 4 months of fiscal 2016.
For fiscal 20 2015, again, these 24 would represent about a little over 3.5% unit increase, so probably about a 4% square footage increase. And at Q3 end, we ended with total square footage of 96,700,000 square feet. In terms of common stock repurchases, in Q1, we started buying back a little again at $18,000,000 in purchases. In Q2, it was $92,000,000 in purchases for that 12 week quarter. And for the Q3 of that 12 week quarter, we did $124,000,000 in purchases having purchased about 8 Year to date, 234,000 shares.
In terms of an annualized basis, they're doing more in Q3 than we had in the previous two quarters. Year to date, 234,000,000 shares. In terms of dividends, our quarterly dividend per share increased with the May dividend from 35.5 percent to $0.40 a share for the quarter, a 12.7 percent increase. This $1.60 a share annualized dividend represents a total cost of the company of right at $700,000,000 a year. This regular dividend of course was in addition to the $5 a share special dividend, which totaled $2,200,000,000 to our shareholders.
That was paid on February 27. It was announced in Q2, but paid in the beginning of Q3. Lastly, next week on Wednesday, June 3rd, after the market closes, we will announce our sales results for the month of May, the 4 weeks ending Sunday, May 31. As well, our Q4 scheduled earnings release will be Wednesday, September 30, after market close at 6 p. M.
Pacific Time. The earnings conference call will occur the following morning. And with that, Brittany, I'll turn it back over to you for Q and A. Thank you.
You're welcome. Your first question does come from the line of John Heinbockel with Guggenheim.
So Richard two questions about gross margin. Number 1, so the gas benefit moderated, but you still had a pretty good performance out of ancillary. So were there some other non gas ancillary departments that were particularly robust, really up quite a bit in gross. So that's number 1. And then 2, if you look at sort of core merchandise, right, ex deflation, so you're still down there.
I know you're making some I think you're making some investments. Can you talk about how you think about tying gasoline wind fall or gasoline benefit or ancillary benefit to investments in price? And is one of those the idea of pass along less meat inflation because you've got some gas wind at your back? Well, first of all, all the ancillary businesses were good this quarter. They've generally been good.
I mean, sometimes one's a little lower year over year, but it hit all that were up. Gas was a very small benefit year over year this quarter of gas profits versus the 1st two quarters as we mentioned in those first two quarters. And again that will cycle over the next three quarters when we had strong Q4 a year ago and strong Q1 and Q2 earlier this year. Those could be tougher comparisons. In terms of investing in price, I mean that's what we do.
We don't it's not a scientific function here. It's an art form. And we're always going to be competitive. Frankly, when I can remember over the past several years when we talked about just when poultry prices were skyrocketing, there were some fiscal years when just that one item was $30,000,000 or $40,000,000 of margin reduction year over year, dollars 0.05 or $0.06 a share of the company we had no gas impact. So we do what we do, when we do it, when it's the right thing to do for our company from a competitive standpoint.
Certainly, having strong gas profits makes it a little easier, but I wouldn't say we don't use a certain percentage of certainly don't use all of it, but certainly don't use some fixed percentage either. We just we do what we do each quarter in all the competitive departments. I think I answered all your questions. Did I miss anything? Well, I was just curious about meat in particular, right?
It's been very inflationary. It's a big category for you. That it strikes me that that's one where you may have delayed putting some pricing through. Yes. Well, but that's such a front and center category when you see ads in the paper every week, particularly holiday weekends from Memorial Day or July 4th or Christmas or back Labor Day you name it.
And so we're always going to be tough on that. Historically, when commodity prices are going up, we're the first to not have them go up as much. And when they're coming down, we're going to go down as fast as we can. I think one thing that has helped offset it a little bit over the last few years is in this tough economy, we're the ones that have been I remember right after the market got the economy got hammered in late 2008, there were some fiscal quarters in calendar years 9 and 10 where we were upwards of a third of all the prime meat sold in the United States when usually that was nothing or very little because it all goes to restaurants and hotels. So we have a customer that when prices come down we can sell it and that kind of stuff.
And on organic we can protect our margin a little bit because everybody else is trying to make more and we try to make fair and so all those things. By the way, the other comment I question you had asked earlier about the core being down 10%. It is recognizing core on core margin on core sales was up 10%. The fact of the matter is, is all these things there's 12 buttons that you have to push in and this one pushes that one out as it relates to what's going on penetration wise, sales penetration wise. So again, we're never going to it's we're going to do what we do competitively 1st and foremost.
And knock on wood, at the end of the day, it comes out pretty good. All right. And then just lastly, again, on the topic of mix here. So if you think about KS, just remind us the margin spread and I don't vary by item, but margin spread KS versus a branded product, KS penetration? And then is the KS margin itself staying pretty flat over time, As you get a benefit, you pass it longer, is KS margin actually getting a little bit better?
Yes. Of core merchandise, Curriculum Signature is about a quarter of our sales and increasing. Hopefully, it will continue to increase to some higher level. I would say this again, when if I think back of some of the big volume items, paper goods, I mean, we have some chaos at water, we have some chaos items that are several 100,000,000 or more of sales a year. Some of the low hanging fruit originally was those are typically very competitive branded items where we can show great savings and still make a better margin.
It ranges all over the board. The difference between KS margin and branded margin could be sometimes as much as half a dozen percentage points and sometimes 1, 0 to 2. So it really again and part of that's price point driven. If the right margin when something was I mean to get to some margin percentage was 11.39 you can well bet it's going to be 10.99 dollars And but when it goes the other way, we're not going to go up past some percentage point because we are pretty disciplined in that. So overall, I don't think if it's changed, it's changed very little because most of those the big wide ones have been done so many years ago.
So now the only extra of that is just a little extra penetration. But I would say that's a declining probably a slightly declining penetration because new stuff is all over the board in different items. Okay. Thank you.
Your next question comes from the line of Simeon Gutman with Morgan Stanley.
Thanks. Good morning, Richard. One follow-up on gas. This quarter, it looked like there was a slightly different dynamic at play, where wholesale prices were rising different from the prior two, yet retail prices went up a bit, national prices, right? I don't know how your prices trended, but you still eked out a little bit of a benefit.
Did you do anything different to manage it? Did you typically you typically lag, I guess, the market, but did you were you more cognizant of the interplay between wholesale costs and retail prices
this quarter?
Nothing out of the ordinary, no.
Okay. And then my follow-up is on investments in SG and A spending. I think we asked this once a quarter regarding the timing in terms of when investments crest and when we should start to see those investments dwindle?
In terms of IT?
Correct.
Yes. I think if I go back 2.5 years ago, we felt that some it's probably sometime in early 2016. Maybe I'm off by half a year or a year. So maybe it's a little longer. The good news is the denominator in that calculation keeps getting higher too, the sales denominator.
But we're just starting to see some of those big projects and we've got several of them be installed and that's when you start that amortization of those items. So we'll still see it eke up a little bit over the next certainly the next 4 quarters maybe 6. It's hard to predict maybe it's 7. I don't know yet. But it's going as planned and part of the plan in a tongue in cheek way was whatever we think it's going to be, it's going to be a little more.
And when you said 2016, are you referring to calendar or fiscal?
Well, I'm referring to fiscal, but it could be a little longer than that. But if it is, it's coming down as these are smaller in my view, smaller they're going to be smaller year over year higher SG and A basis points than they have been. But we'll have to wait and see guys. Things are going along. Knock on wood, the things that we've installed so far, each time we install something, it's we're getting better than the last installation.
But as with this IT stuff, it takes a little longer than we originally planned.
Okay. Thanks.
Your next question comes from the line of Meredith Adler with Barclays. Hi. Meredith Adler from Barclays. Richard, I was wondering if you could talk a little bit about what you're seeing in terms of inflation in chicken and eggs because of avian flu?
I don't know completely. I do know that there was a requirement in California in terms of something related to eggs that caused egg prices to come up. And if you want to follow-up with me, I'm happy to find out. I just don't know off the top of my head.
Well, then maybe more theoretically, I do actually it has to do with giving the birds the hens bigger cages and that meant there was a shortage of supply. I learned that from another retailer yesterday. But what is your philosophy about chickens and chicken rotisserie chicken pricing? If you see a big increase, are you going to do what you've done before, which is just maintain your retail price?
Well, we'll have to see. I can only tell you what history has shown us is that when others were raising their chicken prices from $4.99 to $5.99 we were willing to eat if you will $30,000,000 $40,000,000 a year in gross margin by keeping it at $4.99 And that's what we do for a living.
Can you talk also just more generally about food inflation both in the U. S. And outside the
S? On the protein side, it's been involved for various reasons. Pork was volatile because of a virus that reduced the supply. The I'm trying to think beef was in as I understand it in an 18 month transition where the when grain prices when feed prices skyrocketed certain part of that 18 month cycle of growing cattle was reduced as people as farmers sent them to process sooner, because it was too much it costs too much to feed them. And so we're going through that cycle of limited inventory there.
And then there's also higher demand overseas which has been muted a little bit by the stronger dollar. So again, it's just like predicting anything. You never know what it's going to be until it gets there. When I look at overall, looking just down the list of the most deflationary and inflationary items in the last month, you've got some beef items on there for sure in the 8% to 20% range year over year. On the deflationary side, again, it's all over the board.
There's some nothing that stands out in terms of big trends. So I think overall, proteins are up a little more than they had been 3 6 months ago in terms of that expectation. And the expectation the off the cuff comment from one of our senior buyers on the fresh foods on the pork, beef and poultry side was As they come down a little bit, you can be assured that they're going to go back up. And as they go up a little bit, you can be assured they're going to come back down. So again, it's hit and miss.
When I get back to my comment I made earlier on this call, when prices are when these types of prices are going up, we're going to try to hold off as long as we can. And when they're going down, rest assured we're going to be the 1st out there lowering them. But it's a very competitive field out there. We're benefiting I think a little bit with increasing organic and that's fresh foods in general not necessarily protein. But I think that trend of benefiting from that will should continue from the standpoint that there's more supply of organic out there.
Great. Thank you very much. Your next question comes from the line of Oliver Chen with Cowen and Company.
Yes, good morning. This is Steven Zaccone on for Oliver today. Thanks for taking our questions. Looking at international, can you provide an update where you guys are versus your long term potential? Currently, international is off 30% of your store base.
Could that get to 50% over time? And then we understand France is the next country you guys are going to enter. Any other new markets you're looking to consider?
Well, international is going to most likely continue to grow if you think about it on a base of about 4.80 U. S. We're opening 12 or 14 a year this year and on about half in the U. S. And half internationally where that number of openings internationally on a smaller base of total international right now is a lot bigger.
And that will continue. And I think even the percentage of annual openings each year will continue to grow outside of the U. S. As we as that's limited. If anything, I'm probably versus our expectations 5 years ago, there's probably more openings in the U.
S. Than we still than we had anticipated. So that's good news U. S, but we'll still see more grow internationally. Could it be fifty-fifty one day?
Probably. I'm not sure when, but it will keep growing.
Okay. And then just and then I guess like specific we'd like to get your views on the competitive environment. Some of your traditional warehouse competitors are struggling. And then conversely, there's a lot of new grocery concepts that are emerging. How do you guys see the environment changing?
And then do you think there's an opportunity for Costco to eventually have a new store concept or a modified store concept? Thanks very much.
Well, it's always a a competitive field. I mean there's some great supermarket chains out there both nationally and regionally. We still respect our direct competitors. The I think we've again one of the good things about our concept from my view is that I look at organic. It started off small.
It's still small relative, but growing faster and there's certainly more supply of that out there. And it's where we shine in terms of quality and value. And I think that's nothing but a positive for us going forward at this point. I don't see us doing many years ago we tried a smaller box size concept in the 72,000 foot range compared to the probably back then the average Costco was in the 135, 140. We're building Costco's in the 155 range now in terms of 1,000 square feet.
I don't see us trying a smaller box anytime in the near future because we've got plenty going on with the regular sized box. We I mentioned on the call earlier, we opened we converted the Bedford, Illinois unit from a warehouse club to a business center. That's our 10th business center. I think the last 5 of those 10 business centers are over the last 4 or so years or 5 years. We'll probably open a couple of 3 of those a year going forward as they've started to perform better.
But again, we'll see. That's pretty much what we have going on at this point and so far so good.
Okay. Thanks.
Your next question comes from the line of Charles Grom with Stornackie.
Good morning. This is actually John Park on for Chuck. I guess, can we dig into the core margins by category
a little bit? And I
mean, it seems like the 10 basis improvement as a percentage of owned sales is the best in a few quarters. So kind of what drove the outperformance I guess in the food and sundries and soft lines categories?
Yes. Well, it was again food and sundries softlines was the big was bigger improvement year over year than food and sundries. And frankly, I don't remember if it's because it was a weak comparison from last year. Foods has a much bigger penetration mind you. Food and sundries is our biggest core category.
And nothing there's nothing specific. It's again, I think that when we we feel that we're able to make a little more margin mostly by buying better and keeping a little of it, but passing more of it on. When we look at our competitive price shops versus our direct competitors, if anything they are the gap is improving, is getting bigger a little bit, not a lot. But so it's not like and we so we in our view we're as if not more competitive while still showing some improvement in the core. But and as many of you know who've known us for a long time, we can make a little more if we wanted to.
And sometimes if we need to and sometimes if we need to we don't because it's the right thing to do. So I think we feel at this point quite comfortable with where our margins have been and hopefully that will continue.
Got it. Thanks. And then just switching gears a little bit. Can you provide an update on some of the digital initiatives you guys are doing like e commerce, Tmall, Alibaba, Google Express and Instacart?
Sure. Well, pretty much the same as a quarter ago. We're certainly testing in 6 markets with Google and probably a few other merchants with Google, the Google Express Shopping. Instacart has expanded to more cities with their announced capital raise several a few months ago. And there's a couple of other smaller ones in some regional markets.
And so that's good. We are agnostic. We're working with all of them. We like to sell merchandise and we'll see where it goes. In terms of Tmall, I think we've got about 160 items on there and it's doing quite well.
We don't disclose numbers on it. It's still small of course, but I'd say certainly significantly better than we expected to start with. And the good news is getting our name known over there and as more stuff is shipped in and more of the Kirkland Signature names in the Costco name frankly and that's good too. In terms of other digital initiatives, I know we did one thing in a small in one of our smaller regional markets with Groupon, but relatively small good results, but small impact small geographic impact. And that's pretty much at this point.
We plan an e commerce. Again, we're currently in 3 in 4 countries. In the next 12 months we'll be in 2 more and probably a 7th if you will the 3rd or 3 more will be probably a year and a half, 2 years out. And so that's let's rank it that's a business that's more profitable as a percent of sales than the core business. It's still relatively small.
It's big. It's $3,000,000,000 plus, but it's I'm happy to say over the last probably 10 or so 2.5 years, we've seen year over year increases right around 20% 18% to 20%, which is both mostly comp. And so that's been pretty good for us.
Great. Thanks a lot.
Your next question comes from the line of Michael Lasser with UBS.
Good morning, Richard. Thanks a lot for taking my question. You've been putting up such great traffic trends for so long. I think some of that's been doing due to the improvement in your fresh rolling out more gas stations. How long can that continue?
What's your expectation on the sustainability of the recent traffic performance?
Well, we cross our figures and hope it will continue. I mean we're out there every day trying to get new items and new exciting stuff and lower some more prices and organics has helped, gas helps. We're still certainly as many new locations that can get gas get it, which is more than the company average. And there's still several out there that existing locations that we're fighting hard to get gas stations or buying land next door or appealing the 12th appeal out there ourselves in one city, I can think of. But at the end of the day, that's what we do.
So fresh in my view, fresh foods, gas, executive membership, opening in new geographic markets outside the United States, all those things are net positives. I remember as when the economy kind of crashed in late 2008, I remember at the end of calendar 2009 when we had a full year of 4 right around 4%, maybe 4.1% or 2% frequency increases. I remember warning everybody that if it's 0 in calendar 2010, that's a 2% compounded, which is better than our historical average, because just how can we sustain that? We're now 6 years of a little over 4% compounded. In my view anything in and around that range we will continue to try to do but there's no predicting
it. And you're not are you seeing any differences in the month to month like more variability?
Where the variability has been of late is Easter fell 2 or 3 weeks different year over year. So it's kind of like you need to look at an 8 week average, the 2 month average or 8 or 9 week average, not just a given week because the numbers are a little screwy trying to compare them when there are things like that. Same thing with Memorial Day, which is I think a week different.
Okay. And then on the return of cash, you've been stepping up activity to be in the market over the last couple of quarters. Should we expect that to continue? It sounds like you also like the special dividend. So how are you going to balance out the activity?
Thanks so much.
So I
think what we've said in the past is that generally speaking we generate more cash than we spend on ramped up CapEx, although ramped up CapEx will be our 1st and foremost directive. We do have a little debt to pay down. We are cognizant of the fact that as I think as a board to be shareholder be pro shareholder and having done now we have 2 data points for special dividends, but two points is not a trend make. But it worked pretty well and we'll see what the future brings. I think in terms of stock buybacks, I think as I mentioned in the past, we'll continue to buy sometimes on a regular basis, sometimes periodically.
But we don't know as long as we feel good about the long term of our company, we don't know when we're going to be completely right or a little wrong. And so if we buy over a longer period of time on a regular basis, we generally like that way to do it. And we certainly picked up in the last couple of quarters and there's no reason to change that, but we'll see what tomorrow brings.
Okay, great. Thank you so much.
Your next question comes from the line of Matthew Fassler with Goldman Sachs.
Thanks a lot. Good morning to you. First of all, any initial thoughts on the transition process as you move away from Amex to your new credit card deal whether there's any friction in that process? And when do you think you'll get visibility or maybe we'll get visibility on how the economics impact the offer in your financials?
Right. Well, there's not a lot we could say at this point. Needless to say, we're excited about it. I'm not excited about the transition, because there's work to be done, but we're getting through that. And there's really not a lot that we're going to be able to say about the new program other than needless to say we wouldn't have done this unless we felt it was better for our members.
And just like when we price goods, the old adage was for every dollar we save we give $0.90 to the customer. That's not a fixed formula needless to say, but we're going to give most of it to the member. And it's a lot and we'll let you know next March or April.
That's very helpful. A second question just thinking about the U. S. Comp ex gas that you reported and trying to square with the monthly data that comes out. I know that the months don't align with the quarters necessarily.
But I think you had 2.7s and a 4 and the straight average of that would be around the 6 and you printed a 5. So what would account for the variability in the U. S. Complex gas that we saw for the quarter and the months that comprise most of it?
Well, without even looking at it, it's two things. It's going to be rounding and it's going to be the months don't align with the quarters. Part of February. Part of February was the end of Q and part of it is the beginning of Q3. The same thing with May, the 1st 2 weeks of May I'm sorry, the 1st week of May was part of Q3 and the next 3 weeks is going to be part of Q4.
I did mention earlier in the core call, because we did see a comment or 2. I don't know if one of those was was from you, but that there was some that suggested perhaps May was getting off to a weak start. And that's not the case.
Got it. That's helpful. And then finally, Spain, if you just give us some early thoughts on what you're seeing and just kind of lessons learned if you will going forward as you think about Europe more broadly?
Well, basically as I've said when people have asked sales are a little less than we had planned, but growing nicely. And membership sign ups are just fine probably a little stronger than our original plan. And the renewals so far are good. So recognizing we're our first opening there was where we could get open 1st in terms of timing. That's Seville and we're excited about being there.
Our next two openings which would be later this calendar year and early next calendar year, will be 2 units in Madrid, which is a bigger market. And so we're it's again a little bit lower sales than originally planned, but membership sign ups are good and actually a little better than planned. So Okay. And cost of doing business and the whole
cultural dynamic you're finding is in sync with what you expected?
Yes. It's as expected. The good news is whatever the labor issues are or policies, we know that we've got great product and services at the best prices and people seem to like it. And as it relates to any restrictions on labor or whatever or closing in some countries in one country. In Asia, we have to close 2 Sundays a month as do other big boxes.
So the good news is it rains on everybody. And we think all things being equal, we've got a good competitive stance.
Thanks so much.
Your next question comes from the line of Chris Horvers with JPMorgan.
Thanks. Good morning, guys. So I wanted to follow-up
on the traffic question a little differently. So if I
look at the trend, right, so last August traffic inflected by about 100 to 100 and 50 basis points from the prior rolling average. If I look at the March April period together, it looks like it decelerated back down to 3.5%. So I guess what do you attribute the acceleration and then recent deceleration to? And is it does it line up at all with sort of how your gallonage comps changed over that period as you had widened the gap out versus the retire and just
give that out as a consulting basis. Retire and just give that out as a consulting basis. The a lot of some of it I think has to do with gas. When prices fall dramatically, we get a lot more press. But then I remember when prices were very low, we were getting bumps in gallons like we had never seen before, so in the low double digits on a gallonage comp basis.
So there's no nothing is that predictive. I think the last couple of months, I mean, I remember several weeks ago, we were looking at a several week period. And again, frequency had come down like you say to that from something above a 4% to something below in the high mid to high 3% s. And we're saying is this the beginning of that and then the next week it was back up. So it's really not predictable.
If you asked me 6 years ago and today is 4% sustainable? No. But we're going to keep working at it. What are the things that could help it be go in positive direction? Adding gas stations to existing units, not just in the U.
S. And Canada, but elsewhere. We have a couple 2 or 3 of our in Australia, 1 or 2. I think 3 and a couple more coming. We're going to open them up in a couple of other countries.
Again, it's a little relative to the whole pie, but it's lots of little things. That's one of them. Fresh foods, I'm convinced is still going to be a driver going forward. Opening new warehouses in new markets that are less much less saturated markets will help that number. So I think all the executive membership penetration increasing will help that number.
What we'll see what tomorrow brings again. We feel pretty good about what we're doing and all those things should help.
Yes. Absolutely. And I think we all agree like that 3.5% to 4% sustainable. Did you see what were gallons comps? Because I think if you look back to past prior to the gas price drop, they're running sort of mid single digits.
They had I think revved up to about 15%. Did they come back down to closer to 5% in this most recent quarter?
I honestly don't have that in front of me. We generally don't give that out. We probably it comes out occasionally when it went above 10%. I don't think it's above 10%, but it's certainly positive. I just don't know off the top of my head.
Understood. Understood. And then as you think about lapping the gas margin benefit in the upcoming quarters, I guess you don't guide, but you have a lot of positive things going on underneath in the margin structure core margins. You're getting better payroll leverage than you had prior. So I guess what's the degree of difficulty in terms of actually seeing margin expansion as you lap those I guess 2 big quarters where you had tens of basis points of gas benefit?
Yes. You're talking about operating margin? Yes. Yes. Look, we're up against Q4 of last year was the first in a while outsized gasoline profitability.
It should be pretty good this quarter, but I don't know if we'll get all the way to where I don't think we get all the way where we were last quarter. And then as I mentioned in Q1 and Q2, they were outsized to some extent. Again Q3, it's not even a factor other than the factor is it's virtually nothing versus it was bigger in those 3 fiscal quarters. So that will be a tougher comparison. We mind you, we've also gotten hit by it seems like $0.04 $0.05 $0.06 a quarter on FX.
At some point the dollar is going to slow down its strength and maybe even reverse a little bit. I don't know when and if and when maybe it's another year of FX weakness for us first. And but at some point I think that impact will mitigate. So the good news is that some of these outsized gas quarters have been equally hurt by outsized FX hits just because of the strong U. S.
Dollar. Maybe there's a couple of quarters in there where you get both hits. But as long as we're we're really worried about driving frequency, driving sales, unit sales as well and having good strong membership sign ups and renewal rates and all of those things are good. Again, we recognize that looking at some metrics there may be a couple of tough comparisons in the next several quarters, but that's what we
do. And then one just one last follow-up. You have had 10 to 20 basis points of payroll leverage these past couple quarters despite a total reported comp that was hit 600, 700 basis points by FX and Gas. So your leverage point seems a lot lower now. So should we expect that to continue as you go against these the tougher gas margin comparisons?
Thank you.
The only thing that will by the way that 10 plus basis point is payroll and benefits because a chunk of it has also been health care and not this quarter, but a couple of recent quarters before this quarter a little bit of workers' comp benefit too. By the way, what helps those numbers also is increased foreign expansion. There is a just on benefits, which is primarily health care, medical, dental and vision in a large extent, there are U. S. Versus other countries.
In some countries, there's 40 to 60 basis points of delta just on that SG and A item, because health care costs in the U. S. Are so much higher than everywhere else. And then payroll, our 22 or just under $22 an hour average in the U. S, we have comparable premiums above other retail in each country.
But in some countries that comparable is $11 or $12 not $22 So increasing penetration in some of those countries help. So we've got some of those things helping us irrespective of everything else. I think again we focus on payroll and benefits which is whatever 70% of SG and A 60% plus of SG and A more than anything. And if we can drive sales that helps a lot. And what also helps those numbers fortunately is increased penetration outside the United States.
But in the last couple of quarters, we've also benefited on health care in the United States as we started to see a few things we've changed like preferred provider networks, but still giving great coverage our members to our employees.
Very helpful. Thanks.
Your next question comes from the line of Paul Trussells with Deutsche Bank.
Good morning. And thank you, Horvers, for taking all those questions. I want to just follow up on comments you're making around international margin. We will find out more details in the 10 Q around the specific performance of Canada and international margins in this period versus the U. S.
But just speaking broadly and historically, you've had a 150 to 200 basis point GAAP favorable GAAP in your international markets versus the U. S. As we think about your continued expansion, where there may be some impact with cannibalization, as we think about your move into Europe, the relationship that you have with Alibaba, with Tmall or any other external factors regarding competitive changes or labor cost in some of these markets outside the U. S? How do you feel about the sustainability of these high 3% to 4.5% margins in those markets?
Is that sustainable? Or do you think that will over time contract closer to the
U. S? If I were a betting person, it's going to be higher than the U. S. I think what I've said in the past is that ultimately some of the highest profitable countries will come down a little, but still going to be higher than the U.
S. There's just so many moving parts to that question in terms of what. I think we when we go into a new country by definition we lose money for the 1st few years as we did in Japan many years ago. And then when we went from 9 to 20 units in about a 2 year period Japan, we cannibalized the hell out of the existing units. We've now started to see that improve and we're going to the rest of this calendar year will open 4 more in Japan and several more in the future.
So I think that at least for this foreseeable future, we'll see stronger profitability percentages outside of the U. S. But hopefully, we could see the U. S. Number improve a little too.
But having an increased sales penetration outside the U. S. Which has a higher than U. S. Profitability should help a little.
And again, that's why we say that statement at the beginning of this thing. Whatever we say today, we don't have to update tomorrow until we talk to you again in a quarter. But overall, I think that those trends will continue. But when we open a new country by definition, we get hit a little bit. But it's a little bit on a much bigger company today too.
Understood. And just regarding the store count and growth, I missed some of your comments and I apologize. But I know that I think the new forecast for 24 is for 24 store openings this year with some slipping into the Q1. What would that at this point in time, what would your crystal ball say around fiscal 2016 openings given this slippage? Would it still be around 30 store openings as you Yes.
I would say 30 or low 30s. What's going to happen just like this year, I think if I go back to the beginning of time, we're going to be in the 30 or the low 30s. Inevitably 10 or 12 of those are in the last 6 weeks of the fiscal year. And we're pushing for it. We're trying.
Inevitably things happen whether it's cold weather with you got to wait for the ground to thaw out or some other roadblock with 1 of the permits to get open. And so there are lots of different reasons. But when we started this is kind of our best guess stretch effort and inevitably a few fall out. I think a few more than we had planned fell out into next quarter. But it's a matter of months.
It's not a matter of reducing the net that is something that fell out of bed completely. That happens less frequently. So I think given that the 30 plus number this year came down to an actual 20 gives me a lot more confidence next year's 30, 30 low 30 number is much more achievable. But if we do 15 to 18, even if we only do 15 in the 1st 4 months, that gives me pretty good confidence we can get to 30 for sure. But for sure is a guess until we get there next year.
Understood. Thank you. Good luck.
Your next question comes from the line of Peter Benedict with Robert W. Baird.
Hey, Richard, couple of things. Just back to the sales, to make sure I'm thinking about this correctly. Your April sales release allows you to kind of calculate the 11 week sales growth number for the quarter. So like up 0.8 percent and then the quarter full 12 weeks was up 1.1%. So it seems pretty clear that that may started off at least on a healthy note relative to how trends had been for the
rest of the quarter. Is that
the right way to look at it?
Well, it's consistent with what I said at the beginning of the call about the 1st couple weeks of May are just fine.
Yes. Okay, good. The other executive membership rollout, you're currently, I think, in 4 countries. Can you remind us how you're thinking about that? What would it take for you to kind of start introducing that into some other countries?
Well, we didn't say we like the executive membership program. In our view, we need at least a core base of units to do it, because you want to go out there and not just while the 2% reward is certainly an important part of the executive membership program. So are many of the executive member services and other benefits. And we need more than a few units to do that. And but we like it.
And if we could have it everywhere one day we will. And but we want to be a little bit more true with more locations in the market. Certainly in the U. K. With something in the mid-20s and Mexico with the low to mid-30s number of units and certainly Canada and the U.
S. With Japan 20 going to 24 that just looked at how many units we have. And I'm not suggesting I don't know if we have any plans currently to do it. Right now our plans are to get much more openings in these countries. And the country that passed those forward with the most units right now is Japan and that trend will continue.
So we'll see. Okay.
And then lastly, just the gas mix in the Q3, what was it as a percentage of sales? And what was it a year ago? Thank you.
I believe it was about somewhere between 9% and 10% for this quarter. And I'm guessing we're looking it up as we speak, but I'm guessing it's somewhere the 11% range maybe, maybe 12 9 this year, 11 last year rounding.
Okay, great. Thanks guys.
Your next question comes from the line of Kelly Bania with BMO Capital.
Hi, good morning. Thanks for taking my question. First, just housekeeping, I don't know if I missed this, but can you talk about your membership fee income growth excluding the impact from FX?
Sure. I think again the dollars assuming flat FX was up 7% for the quarter, which is I think and it's up 7 basis points. So overall a good number. I think again that's partly the fact that sign ups have been pretty good and partly renewal rates continue to be good and partly conversions to executive member. When I look at all those components, the one thing that continues to surprise me from a number of years ago, the number of new executive members, which is a combination of new sign ups and a higher percentage of new sign ups being to the executive member in those countries than it had been historically and conversions.
So that's continuing to be probably a little bit better than I would have guessed. I would have thought anybody who's wanted it or has it. But I think we're doing a better job of communicating to the member why it's a good deal.
Got it. That's helpful. And then, Richard, you mentioned organics a couple of times already. Just curious if you could talk about what the run rate is for that business at this point in terms of dollars that you're doing in organic foods? And what the opportunity is really?
You mentioned supply maybe a little bit challenging. What are you doing to work
around that?
Well, first of all, I think it was about 6 or 9 months ago I had mentioned that it was about $3,000,000,000 up kind of a double in the past 2 years. I guess that at least has a forward front of it now given just extrapolating that. And probably the challenges are still out there, although they're becoming less formidable because we like everybody there's more organic supply and producers doing it. And we're pretty good at getting out there and working with suppliers both here and around the world to commit more to it, whether it's raising eggs or ground beef processing or produce. And so it's going to still it should still drive sales and drive incremental sales.
I've given a couple of anecdotal examples over the last couple of years. One of those was when we have when we introduce organic fresh ground beef, 80% of it was to existing members that like us, but never bought ground beef from us because they're organic ground beef buyers. And so it had the benefit of being incremental mostly incremental business to us at a little better margin at a greater savings versus our competitors because it's organic. And so that will continue to be nice. But it's again, I put it under that category of the good news is it's a lot of different things and certainly that's one of them.
Great. That's helpful. And then if I could just also ask about produce supply in the quarter, some complaining about a tough growing season, maybe a little bit of impact from the ports. Did you see any impact from that? And if so, is it getting better now?
Or just any color there?
The remarks I always get from our fresh foods buyers are as soon as something good happens and something doesn't nothing something bad happens. The only impact in terms of sales from the port issue was exporting. We do a great business in Asia as an example and Whatever incremental was required was air freighted as well. So it probably impacted margin a little bit to the negative and supply a little bit to the negative overseas. Other than that, I know berries, which is a big business for us, is very dependent on what's going on with weather and crops.
And that was hit a little bit in the last couple of months. But notwithstanding that, our fresh margins were actually quite good in the last month or 2. Were actually quite good in the last month or 2.
Okay. Thanks. That's helpful.
Your next Your next question comes from the line of Mark Miller with William Blair.
Hi, Richard. I know the new member sign ups were impacted by the club openings in Asia last year, but I guess a little bit bigger question a bigger picture question. Could you give us some insight into the portion of new member sign ups that are coming from the younger demographic versus the long term historical mix at Costco?
I know it's more, I don't have the numbers completely in front of me. In our view, it's two reasons. It's organic and it's a couple of the things we did like LivingSocial, which was a lot more of that. But actually our the gap between our average age member and the U. S.
Average age has actually been reduced a little bit. I think we've already we've historically been a couple of years older than the average U. S. And now it's a little bit less than that. So all I can tell you is it's trending in the right direction.
We're not terribly concerned about at this point. We are seeing younger people join us. And certainly, we know that some of the things that we're doing like organic is a part of that.
That's great because clearly Costco is getting business from other retailers that are hurt by e commerce. But you think that younger demographic, the millennial might be converting the e commerce at a faster rate. So
Well, they may be, but not everybody is going to sit at home and do everything. I may be in a small group here, but I actually enjoy going to Costco and I know a lot of people do. And it's kind of hard to get gas delivered to you. And if we can get you in the parking lot that helps. So ultimately it's value.
We recognize that convenience is a value. And we're not the best at some convenience items. We're not going to be the company that delivers 2 different cereals to your doorstep at 7 a. M. As long as you order by 10 p.
M. The night before or soon by 3 a. M. In the morning probably. But we'll sell to some of those people and more importantly there's a lot of reasons to come into Costco.
So we have a unique value proposition. I think we benefit while all first of all, we'll get some of the e commerce business. In addition to the extent that all of us, every brick and mortar loses something to e commerce incrementally, we probably lose at least so far a little less incrementally, but we're also gaining incrementally on market share of other things. So all those things help us, But I can tell you is we don't have our head to stand, but we're not going to we know there are certain things we can't do as well. But what we can do really well is value in terms of quality and the things that we sell and we'll keep doing that.
Yes, it's clearly working. Other question is the 2% reward impact in the fiscal third quarter minus 3 basis points versus minus 1 in the first half all ex gas. I am assuming that FX may be partly contributing because of smaller penetration outside the U. S. But is there anything else that's causing that?
That's it. No. And mind you, any basis point or 2 hit to that number means an increasing penetration to that group, not only new executive members, but executive members shop more frequently and buy more.
Exactly. All right. Thanks.
Your next question comes from the line of Bob Drbul with Nomura.
Hi, Richard. I just had one question. I think you said you're launching 2 new e commerce sites in new countries in the next 12
months and one more the year after. Can you tell us what those countries are? I think there are 2 of the 3 Asia countries and Korea. Korea and Taiwan, I believe.
And so where does that put you overall in terms of the total number of countries that you'll be operating in on e commerce?
We're in 9 countries. Mind you one location in Spain and 7 in Australia. So we're in 9 countries. We currently are in 4, so I'll put us at 6 of 9. Okay.
But a higher percentage that sixnine of number of warehouses needless to say.
Great. Thank you, Richard.
Your next question comes from the line of Michael Montani with Evercore ISI.
Hey, guys. Good morning. Wanted to ask about IT modernization. You obviously mentioned some of the costs that are involved. Can you just update us on the benefits that you're seeing now and where we're at in the process and timeline of the rollout?
A little touch in cheek. The biggest benefit is we haven't screwed it up. Look, we probably felt that we should have been modernizing for a number of years. We were really good at keeping stuff cheap and mandated. And we also recognize that if we're going to try to double our business in the next 10 years and that's around it's not a plan.
It's just 7% compounded for 10 years is a double. But going into more countries and doing more things then we need better systems. And because first of all, we're going to outgrow we were starting to see the seams of some of the existing systems. So 1st and foremost, it was a necessity. Secondly, as a very simple example, our membership system.
There's 2 ways you can change your mailing address or your phone number or anything else or add on or take off a business add on number. You call an 800 number or you come into the membership desk. Soon you'll be able to do that online. But I recognize we're not the first to do But there's a lot of things like that. We think that there's big savings in transportation management and a lot of little things like that membership thing.
If you think about if we've got 40 +1000000 member households, only a small percentage of us to want to change their address or move or change their members on it or change their phone number. And you can think about how many millions fewer of things can be done online instead of talking to somebody at Costco. We're seeing some benefits in the membership desk, but we're just rolling it out. So I'd say there's still more cost to benefit. The big benefits are going to come when we get like the depot and transportation management systems, when we get the buyers on the new system after, I'm sure, a little bit of indigestion.
That's still a year and a half out. That's kind of the culmination of other modules that are going into place soon. Let me just look here at one other thing. In service so far, a new payroll system, which is not a big benefit, but it was a big necessity. The membership and point of sale systems are new and there's some efficiencies in the point of sale, both inefficiencies and enhancements to be able to do all the things we're doing with going for we and other retailers are doing with security and things like that, data security.
Pending, again, the big ones, the main accounting system will go in next year. Merchandising will shortly follow. And again, the depot management system will be a little earlier than that, I believe. But any big benefits from it will be next at least a year out maybe more. We're starting to see some little benefits from some of the things we've done.
But the big news is that it's working so far costing more than we expected, taking a little longer than we expected, but it's working.
Great. Thanks. And then to follow-up on categories just for a minute. In consumer electronics, you guys I think were up a little bit there, which is impressive given the West Coast ports. So can you just give us some color on kind of TV units and ASP and just what's driving the strength?
I don't have that in front of me. I think for the last few months, I mean TV sales have been up slightly on average in terms of dollars. My guess is, again, I don't have the numbers in the bigger screens as an example. But if anything, I guess that the dollar number is in the low single digits, low to mid single digits and the ASP represents a low single to maybe upper middle digit number and it fluctuates a little every month. I'm sorry that's what I can recall.
Good. Thanks. And the last question I had was just more conceptual, which is if you think about some of the competitive set and what they've been doing, one change that a competitor has done recently is rolling out buy online, pickup in club and it seems to have made a material impact on their business. Can you just talk a little bit about the puts and takes that you guys would have from a labor model $50 shipping. A beta test this summer with $50 shipping.
I understand that's Google Express and so forth, but should we expect any kind of direct response to that? Or is it kind
of wait and see and how you think through those two things? There's no current plan for any direct response to it. We do at our business centers deliver to businesses not to homes. And but again what we're doing so far is working pretty well for us. Your one comment or suggestion about that the incremental buying when somebody is actually in store, it's huge.
We want them in store. And when you order online, there's a cost and convenience. In terms of just ordering and picking up, we'd like not to have to do that. And so and there are no plans right now given how we're performing. We always monitor what others are doing.
There's a lot of things that others do from giving away memberships more freely or more discounted to advertising and newspapers. There's I'm sure they work, but they there's nothing that we want to do at this point.
Got it. Thank you.
Your
next question comes from the line of Scott Mushkin with Wolfe Research.
Hey, guys. Thanks and thanks for letting it go so long. I'll be quick. I just wanted a housekeeping item. I know you said the renewal rate was 91 percent in the U.
S. Richard. Do you actually have the exact number? I know we think it was like 90.7% last time. I was just trying to understand where they are.
It still rounds up to 91%. We try to just keep it's about the same, Maybe Bill's better, but or Bill's it's about the same.
Okay. Second question, when you do the tech and some of the updates, I know you said the membership desk and whatnot, obviously the ancillary businesses are going well. But the constant feedback we get from people members is, gosh, I didn't really realize Costco did travel or car buying programs or garage doors or some of
the other stuff you guys do.
I mean, is there how do you envision maybe getting the word out better to the membership base over time? And then that's my
last I think that's a good point. Word-of-mouth is certainly something that we rely on a lot. I think we do a better job today even in the Costco connection. And again our membership marketing department is starting to test a few things whether it's on different Internet sites and what have you. But don't expect us to be paying to go advertise or market it anywhere.
It's working fine for us. Clearly, travel is one of the best kept secrets out there. It's huge savings, incredible positive feedback from our members. And I personally hear both from people like yourselves to friends, when they say they had no idea and they couldn't believe how much they saved. So we're getting better at letting people know about that stuff.
But we're not going to go crazy. It works for us the way we do it. And the goal is to try to keep getting you in the door because you're in the door you're going to buy a bunch of stuff and see those garage doors and air conditioning units as well.
Perfect. Thanks for taking my question.
Your final question comes from the line of Cristina Hernandez with Telsey Advisory.
Hey, guys. It's Joe Feldman on. Thanks for taking our question. I just wanted to follow-up again on the inventory. I know you commented that you did the physical inventory and everything was pretty clean.
But again, this was the Q1 in like the past 3 or 4 where inventory growth did outpace sales growth. Presumably there's just some of that's the FX. But I guess I was wondering if you could talk about that a little bit. If there's any driver there, if there's any one area of the inventory
that may be a little heavy?
Yes. No, it really is across categories, maybe a little higher in some of those categories that come by boat ship from Asia. By the way, when the slowdown was solved that was just the beginning of a 2 or 3 month period of catching up and backlog. And so bringing in some seasonal items, not having some patio furniture as an example right after we were fine through Christmas because we like other retailers were able to get some of that stuff in a little earlier than planned. So the good news is I think because we're in seasons early, out seasons early, we were all a little later, but we're just fine.
I think you'll I'm guessing again, we'll wait and see until the Q4 end. But I'm guessing you'll see that trend reverse a little given ex FX given that some of it had to do with that. We haven't seen any change in markdowns at all related to having a little extra inventory as these containers were catching up.
Got it. Okay. Thanks guys and good luck with this quarter.
Thanks everyone and have a good morning or afternoon.
Ladies and gentlemen, this does conclude today's conference call. You may now disconnect your line.