Good morning. My name is Brittany, 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 speaker's remarks, there will be a question and answer session. If you would like to ask a question during that time, simply press star then the number one on your telephone keypad. If you would like to withdraw your question, press the pound key. Thank you. Mr. Richard Galanti, CFO, you may begin your conference.
Thank you, Brittany. Good morning to everyone. Last night's press release presented our third quarter operating results for the 12 weeks ended May 10th, 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. To begin with, our 12-week third quarter fiscal 2015 operating results.
For the quarter, earnings per share came in at $1.17 a share, a 9% increase over last year's third quarter earnings results of $1.70 a share. Couple of factors that impacted our third quarter earnings comparison year-over-year. First, FX. As compared to a year ago in the third quarter 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 million pre-tax or $0.06 a share than these earnings would've been had FX rates been flat year-over-year. Second 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&A expense percentages through this fiscal year and certainly into next year, especially as new major systems are placed into service and depreciation on those begin. In Q3, on an incremental year-over-year basis, these costs impacted SG&A by an estimated $19 million pre-tax, or seven basis points, five basis points without gas deflation and FX. A third note, LIFO. Last year in Q3, we recorded a $12 million pre-tax LIFO charge. This year in Q3, we had a $7 million pre-tax LIFO credit, which benefited Q3 this year by $0.01 a share. Last item of note, while we enjoyed the benefit of strong year-over-year gross profits in the first half of the fiscal year, both Q1 and 2.
In Q3, it was additive, only by $0.01 a share. Pretty much back to normal this quarter. Although next quarter will be a little bit tougher comparison. In terms of sales for the third quarter, total sales were up 1%, and our 12-week reported comparable sales figure came in down 1%. For the quarter, sales were negatively impacted, as you well know, by gasoline price deflation that represented about a 350 basis point negative impact and by weaker foreign currencies relative to the US dollar year-over-year. That impact was a little over 300 basis points. Excluding gas, the reported +1% U.S. comp number increase in Q3 would've been +5%, and the reported -6% international comp figure, excluding gas and FX impacts, would've been +7%, such that the total company comps reported at -1% for the quarter.
Excluding gas and FX would've been +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 first couple of weeks of May are just fine. In terms of new openings, after nine new locations in the first half of fiscal 2015, including the relocation of Wayne, New Jersey, we opened four locations in Q3. One in Quebec, Canada, one in Mérida, Mexico, which was a relocation, and one in Culiacán, Mexico. We also converted our existing Bedford Park, Illinois warehouse into a business center. A net of two additional locations in the third quarter.
All told, that puts our fiscal 2015 opening schedule so far through the third quarter at 10 net new locations. Next week kicks off a very busy fiscal fourth 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 fourth quarter, including four additional new U.S. locations, one new location in each of U.K., Taiwan, Korea, and Mexico, and three 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 and construction issues.
In fact, between September 1st and the end of the calendar year 2015, or the first four months of fiscal 2016, we expect to open somewhere between 15 and 18 new warehouses. A very busy seven-month period ahead 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&A, and other items in Q3. For our third quarter results. In terms of sales for this year's third quarter, the 12 weeks ended May 10th, were $25.52 billion, up 1% from last year's third quarter results of $25.23 billion. Excuse me. On a reported comp basis, Q3 comps were -1%, +6% excluding gas deflation and FX.
For the quarter, our -1% reported comp was a combination of an average frequency increase of about 3.5% and an average transaction decrease of -4% for the quarter. Recognizing that that -4% is reported excluding FX and gas, that -4% average transaction would have been +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 third quarter within food and sundries, overall in the low to mid singles. Deli, low it reported, mid if you take the FX out. Deli and frozen were the relative standouts. For hard lines, the departments with the strongest results were hardware and garden.
Consumer electronics comps were slightly positive, excluding FX. Within the low single-digit soft lines comps, men's apparel and housewares were the standouts. 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 million, or 2.29%. That's a 4% increase and a seven basis point increase and a $23 million increase versus last year's third quarter. Again, these numbers are impacted, of course, by FX. The $584 million 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. and Canada and 88% worldwide, and also continuing increased penetration of our executive membership. New member sign-ups in the third quarter were slightly down year-over-year.
This has to do essentially with timing of four openings in Asia last year, two in Japan and two in Korea, which generate typically larger than normal sign-ups. In terms of number of members at Q3 end, Gold Star, 33.2 million at Q3 end, which is up from 32.7 million 12 weeks earlier at Q2 end. Primary business, the same at 7.0 million. Business add-ons, the same at 3.5 million. So all told, we ended the quarter with 43.7 million member households, up from 43.2 million, and including extra cards, 79.6 million at Q3 end versus 78.7 million just 12 weeks earlier. At May 10th, Q3 end, paid executive members came in at 15.7 million, 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 and approximately two-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% last year, up to 11.09% this year. Now that 47 basis point increase is a +nine basis point increase without gas deflation. If you jot down a few numbers, as I always ask you to do, we'll have four columns. The first two columns will be first half of 2015 as reported. Second column will be first half of 2015 without gas deflation, and then Q3 2015 and Q3 2015 reported and without gas deflation for the third and fourth 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 deflation, it was down 17 basis points. For Q3, reported was +23, and without gas deflation, -10. Ancillary businesses, +34 and +29 for the first half. For the third quarter, +23 reported and +15 without gas. 2% reward, -3 and -1. For the quarter, -6 and -3. LIFO, +2 and +2. For the third quarter, +7 and +7. Other was +3 and +3 for the first half, and 0 and 0 for the third quarter. For total, for the first half, we were up 38 basis points, and without gas deflation, up 16.
Reported for the third quarter, we were up 47, and as I just mentioned, +9 on a without gas deflation basis. 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, hard lines, soft lines, and fresh foods, as a percentage of their own sales, were up 10 basis points year-over-year, with food and sundries and soft lines being up year-over-year and hard lines and fresh foods being down year-over-year. The net of the four on their own sales was up 10 basis points. A good margin performance at the core.
Ancillary and other business gross margins were up 23 and 15 without gas deflation in the third quarter. We basically enjoyed fairly broad-based strength within all of our ancillary businesses with year-over-year gross margin improvements in gas, optical, hearing aids, and food courts, as well as improved year-over-year sales penetration within pharmacy, e-commerce, and travel, which all 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 a 3 basis point hit without gas deflation. This is good. It's the 2% reward feature, which reduces sales, and the fact is that as more members switch to executive member, we think that's good for us long term.
LIFO, as I mentioned, a $7 million pre-tax benefit this year compared to a $12 million pre-tax charge last year, for a $19 million or 7 basis point year-over-year positive variance to gross margin. 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&A. Our SG&A percentages in Q3 year-over-year were higher by 25 basis points, coming in at a 10.11% of sales this year, compared to a 9.86% in last year's third quarter. Again, better or lower by 10 basis points excluding gas deflation. In terms of SG&A, again, we'll do the same four columns, first half 2015, both reported and without gas deflation, and Q3 2015, both reported and without gas deflation. First is operations.
We were plus 6, a 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 third quarter, reported and without gas deflation. Stock compensation, minus 8 and minus 7 for the first half, and plus one and plus two for the third quarter. Quarterly adjustments were not an issue, zero 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 third quarter was minus 25 basis points or higher by 25, lower or plus 10 basis point without gas deflation. The operations component was again a minus 16. Within operations, excluding gas deflation, payroll and benefits represented 10 basis points of that year-over-year improvement. Good expense control on payroll and stuff, and benefits. Our central expense was higher year-over-year in the third quarter by 10, 6 without deflation. Ongoing IT modernizations represented about seven of that or five without gas deflation in FX. 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, and 35-year tenures, where some of those are accelerated, as well as, of course, every October we do the annual grants. Next on the income statement line is pre-opening expense.
No real big issues here. 16 million last year in the quarter, 14 million this year, this expense item lower by $2 million. We had four openings in each of Q3 2014 and Q3 2015. All told, operating income for the third quarter came in at $821 million, higher by $84 million or 11% from last year's operating income figure of $737 million. Below the operating income line, interest expense came in at $31 million this year versus $25 million during last year's fiscal quarter. This increase is a result of the $1 billion of senior notes issued during the second quarter, in conjunction with the recent $5 per share special dividend. Interest income and other was lower year-over-year by about $3 million, coming in at $9 million this year versus $12 million a year ago in the quarter.
Actual interest income for the quarter was lower by $1 million of that. $1 million of that $3 million was actual interest income. The other component, which was about minus $2 million year-over-year, this principally relates to mark-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 changes in the U.S. dollar relative to those currencies. Overall, pre-tax income was higher by a little over 10% year-over-year or higher by $75 million in the third quarter, coming in from last year, $724 million in the quarter to this year, $799 million. In terms of income taxes, our company tax rate this quarter came in right at 35.0%. That compares to 33.9% last year in the third quarter.
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 $516 million this year in the third quarter represented a 9% increase as compared to the $473 million net income figure last year in Q3. For a quick rundown of other usual topics. The balance sheet of course is included in this morning's press release. 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, the net 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, at 90% this year versus 89% a year ago. Average inventories per warehouse were up on a reported basis about $188,000, coming in at $13.2 million per location versus $13.0 million a year ago. Again, without FX, inventory levels per warehouse. If FX had been flat year-over-year, would've 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 backlogged inventories from the West Coast port slowdown. That's pretty much behind us, and we should see a little of that burn off. Overall, our inventories are just fine.
As I mentioned in the second quarter earnings report, our mid-year fiscal inventories came in as good as they ever have. In terms of CapEx, in the first quarter, we spent $555 million. In Q2, an additional $612 million, and in Q3, $421 million. For a year-to-date total of CapEx of $1.6 billion. Given that a couple of units have been pushed into the fall, current estimate for CapEx this year is somewhere in the $2.4 billion-$2.5 billion range. That compares to last year's fiscal 2014 expenditures for the whole fiscal year of right at $2.0 billion. In terms of Costco Online, we continue to operate it in four countries, U.S., Canada, U.K., and Mexico. For the third quarter, sales and profit were up nicely.
Sales were up 18% in U.S. dollars for the quarter, excluding FX and our e-commerce business in local currencies, sales were up 21%. On the discussion list, expansion. As I mentioned, in terms of net new openings, we opened eight in Q1, none in Q2 or Q3, and 14 anticipated for Q4 net. That would be 24 net increase for the year. As I mentioned, somewhere in the 15-18 more in the last four months of calendar 2015, which will be the first four months of fiscal 2016. For fiscal 2015, again, these 24 would represent about a little over a 3.5% unit increase, so probably about a 4% square footage increase. At Q3 end, we ended with total square footage of 96.7 million square feet.
In terms of common stock repurchases, in Q1, we started buying back a little again at $18 million in purchases. In Q2, it was $92 million in purchases for that 12-week quarter. For the third quarter, that 12-week quarter, we did $124 million in purchases, having purchased about 839,000 shares. Again, in terms of an annualized basis, doing more in Q3 than we had in the previous two quarters. Year to date, 234 million shares. In terms of dividends, our quarterly dividend per share increased with the May dividend payment from 35.5% to $0.40 a share for the quarter, a 12.7% increase. This $1.60 a share annualized dividend represents a total cost to the company of right at $700 million a year. This regular dividend, of course, was in addition to the $5 a share special dividend, which totaled $2.2 billion to our shareholders.
That was paid on February 27th. 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 four weeks ending Sunday, May 31st. As well, our fourth quarter scheduled earnings release will be Wednesday, September 30th, after market close at 6:00 P.M. Pacific Time. The earnings conference call will occur the following morning. With that, Brittany, I'll turn it back over to you for Q&A. Thank you.
You're welcome. Ladies and gentlemen, as a reminder, if you'd like to ask an audio question, please press star one on your telephone keypad. Your first question does come from the line of John Heinbockel with Guggenheim.
Richard, two questions about gross margin. Number one, the gas benefit moderated, but you still had pretty good performance out of ancillary. Were there some other non-gas ancillary departments that were particularly robust, really up quite a bit in gross? That's number one. Then two, if you look at sort of core merchandise, ex deflation, you're still down there. I think you're making some investments. Can you talk about how you think about tying gasoline windfall or gasoline benefit or ancillary benefit to investments in price? Is one of those the idea of pass along less meat inflation because you've got some gas wind at your back?
First of all the ancillary businesses were good this quarter. They've generally been good. 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 for gas profits versus the first two quarters, as we mentioned in those first two quarters. Again, that'll cycle over the next three quarters when we had strong Q4 a year ago and strong Q1 and two earlier this year. Those could be tougher comparisons. In terms of investing in price, that's what we do. It's not a scientific function here. It's an art form, we're always going to be competitive.
Frankly, 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 million or $40 million of margin reduction year-over-year. It was $0.05 or $0.06 a share as a company when we had no gas impact. 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, I wouldn't say we don't use a certain percentage of it. Certainly don't use all of it, certainly don't use some fixed percentage either. We do what we do each quarter in all the competitive departments. I think I answered all your questions. Did I miss anything?
I was just curious about meat in particular. It's been very inflationary. It's a big category for you. That strikes me that that's one where you may have delayed putting some pricing through.
Yeah. 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 Labor Day, you name it. 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. 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. I remember right after the economy got hammered in late 2008, there were some fiscal quarters in calendar years nine and 10, where we were upwards of a third of all the prime meat sold in the U.S., when usually that was nothing or very little because it all goes to restaurants and hotels. We have a customer that when prices come down, we can sell it and that kind of stuff. On organic, we can protect our margin a little bit because everybody else is trying to make more and we try to make fair. All those things. By the way, on the other comment, a question you had asked earlier about the core being down 10.
It is recognizing core margin on core sales was up 10. The fact of the matter 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 sales penetration-wise. Again, we're going to do what we do competitively first and foremost. Knock on wood, at the end of the day, it comes out pretty good.
All right. Just lastly, again, on the topic of mix here. If you think about KS, just remind us the margin spread, and I know it'll 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 along, or is KS margin actually getting a little bit better?
Yeah. Of core merchandise, Kirkland Signature is about a quarter of our sales and increasing. Hopefully it'll continue to increase to some higher level. I would say, again, if I think back of some of the big volume items, paper goods, we have some KS items that are several hundred million 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 a half a dozen percentage points, and sometimes one, zero to two. Really, again, and part of that's price point driven. If the right margin to get to some margin percentage was 11.39, you can well bet it's going to be 10.99.
When it goes the other way, we're not going to go up past some percentage point because we are pretty disciplined on that. Overall, if it's changed, it's changed very little because most of the big wide ones had been done so many years ago. Now the only extra of that is just a little extra penetration. I would say that's 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. I don't know how your prices trended. You still eked out a little bit of a benefit. Did you do anything different to manage it? You typically lag, I guess, the market, but were you more cognizant of the interplay between wholesale costs and retail prices this quarter?
Nothing out of the ordinary, no.
Okay. Then my follow-up is on investments and SG&A spending. I think we ask 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. Yep.
Yeah, I think if I go back two and a half years ago, we felt that it's probably sometime in early 2016. Maybe I'm off by a half a year or a year. Maybe it's a little longer. The good news is the denominator in that calculation keeps getting higher, too, the sales denominator. 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. We'll still see it eke up a little bit over certainly the next four quarters, maybe six. It's hard to predict. Maybe it's seven. I don't know yet. 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.
When you said 2016, are you referring to calendar or fiscal?
Well, I'm referring to fiscal, it could be a little longer than that. If it is, it's coming down as these are smaller, in my view, they're going to be smaller year-over-year, higher SG&A basis points than they have been. 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, we're getting better than the last installation. 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. Hi, 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. 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.
Maybe more theoretically. It has to do with giving the hens bigger cages, and that meant there was a shortage of supply. I learned that from another retailer yesterday.
Yeah.
What is your philosophy about chickens and 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 million-$40 million a year in gross margin by keeping it at $4.99. 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 U.S.?
On the protein side, it's been involved for various reasons. Pork was volatile because of a virus that reduced the supply. I'm trying to think. Beef was, as I understand it, in an 18-month transition where when feed prices skyrocketed, a certain part of that 18-month cycle of growing cattle was reduced as farmers sent them to process sooner because it cost too much to feed them. We're going through that cycle of limited inventory there. Then there's also higher demand overseas, which has been muted a little bit by the stronger dollar. 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 and 8%-20% range year-over-year. On the deflationary side, again, it's all over the board. Nothing that stands out in terms of big trends. I think overall, proteins are up a little more than they had been three and six months ago in terms of that 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 back down. Again, it's hit and miss.
I get back to my comment I made earlier on this call. 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 first out there lowering them. It's a very competitive field out there. We're benefiting, I think, a little bit with increasing organic and fresh foods in general, not necessarily protein. I think that trend of benefiting from that 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.
Good morning. This is Steven Zaccone on for Oliver Chen 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 about 30% of your store base. Could that get to 50% over time? 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 480 U.S., we're opening 12 or 14 a year this year, 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'll continue. I think even the percentage of annual openings each year will continue to grow outside of the U.S. as that's limited. If anything, versus our expectations five years ago, there's probably more openings in the U.S. still than we had anticipated. That's good news U.S., but we'll still see more grow internationally. Could it be 50/50 one day? Probably. I'm not sure when, but it'll keep growing.
Okay. I guess, like specific, we'd like to get your views on the competitive environment. Some of your traditional warehouse competitors are struggling. Conversely, there's a lot of new grocery concepts that are emerging. How do you guys see the environment changing? 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 competitive field. There's some great supermarket chains out there, both nationally and regionally. We still respect our direct competitors. I think 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. 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. Many years ago, we tried a smaller box size concept in the 72,000-foot range compared to probably back then, the average Costco was in the 135,000, 140,000. We're building Costcos in the 155,000 range now in terms of thousands of square feet.
I don't see us trying a smaller box anytime in the near future because we got plenty going on with the regular size box. I mentioned on the call earlier, we converted the Bedford, Illinois unit from a warehouse club to a business center. That's our 10th business center. I think the last five of those 10 business centers are over the last four or so year, five years. We'll probably open a couple or three of those a year going forward, as they've started to perform better. 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 Gral with Sterne Agee.
Good morning. This is actually John Park on for Chuck. I guess, can we dig into the core margins by category a little bit? I mean, it seems like the ten basis point improvement as a percentage of own sales is the best in a few quarters. What drove that performance, I guess, in the food and sundries and soft lines categories?
Well, it was, again, food and sundries. Soft lines was bigger improvement year-over-year than the food and sundries. Frankly, I don't remember if it's because it was a weak comparison from last year. Food has a much bigger penetration, mind you. Food and sundries is our biggest core category. There's nothing specific. Again, I think that 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, the gap is improving. It's getting bigger a little bit, not a lot. In our view, we're as, if not more competitive, while still showing some improvement in the core.
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. I think we feel at this point quite comfortable with where our margins have been, and hopefully that'll continue.
Got it. Thanks. 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 with Alibaba, Google Express, and Instacart?
Sure. Well, pretty much the same as a quarter ago. We're certainly testing in six 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 a few months ago. There's a couple other smaller ones in some regional markets. 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.
The good news is getting our name known over there as more stuff is shipped in and more the Kirkland Signature name than the Costco name, frankly, and that's good too. In terms of other digital initiatives, I know we did one thing in one of our smaller regional markets with Groupon, but relatively small. Good results, but small geographic impact. That's pretty much it at this point. We plan an e-commerce. Again, we're currently in four countries. In the next 12 months, we'll be in two more and probably a seventh, if you will, the third of three more, will be probably a year and a half, two years out. 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 billion plus, but I'm happy to say over the last probably 10 or so, two and a half, two and three quarter years, we've seen year-over-year increases right around 20%, 18%-20%, which is both mostly comp. 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 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 fingers and hope it'll 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. Certainly, as many new locations that can get gas, get it, which is more than the company average. 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. At the end of the day, that's what we do. In my view, fresh foods, gas, executive membership, opening in new geographic markets outside the U.S., all those things are net positives.
When the economy kind of crashed in late 2008, I remember at the end of calendar 2009, when we had a full year of right around 4%, maybe 4.1% or 4.2% 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 six 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.
Are you seeing any differences in the month-over-month, like more variability?
Where the variability has been of late is, Easter fell two or three weeks different year-over-year. It's kind of like you need to look at an eight-week average, the two-month average or eight or nine-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. 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. How are you going to balance out the activity? Thanks so much.
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 first and foremost directive. We do have a little debt to pay down. We are cognizant of the fact that, and I think as a board can be pro shareholder and having done now, we have two data points for special dividends, but two points does 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've mentioned in the past, we'll continue to buy, sometimes on a regular basis, sometimes periodically. 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.
If we buy over a longer period of time on a regular basis, we generally like that way to do it. We certainly picked up in the last couple of quarters, and there's no reason to change that, 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 can 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. 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. Just like when we price goods, the old adage was, for every $1 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. 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 it with the monthly data that comes out. I know that the months don't align with the quarters necessarily, but I think you had two sevens and a four, and the straight average of that would be around a six, and you printed a five. What would account for the variability in the U.S. comp ex gas that we saw for the quarter and the months that comprised most of it?
Well, without even looking at 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 was the end of Q2, and part of it's the beginning of Q3. The same thing with May. The first week of May was part of Q3, and the next three weeks are going to be part of Q4. I did mention earlier in the core call because we did see a comment or two. I don't know if one of those 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. 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. Membership sign-ups are just fine, probably a little stronger than our original plan. The renewals so far are good. Recognizing our first opening there was where we could get open first, 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 two units in Madrid, which is a bigger market. It's again, a little bit lower sales than originally planned, but Membership sign-ups are good and actually a little better than planned. We'll be fine.
Cost of doing business and the whole cultural dynamic you're finding is in sync with what you expected?
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. As it relates to any restrictions on labor or whatever, or closing in one country in Asia, we have to close two Sundays a month, as do other big boxes. 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 J.P. Morgan.
Thanks. Good morning, guys. I wanted to follow up on the traffic question a little differently. If I look at the trend, right? Last August, traffic inflected by about 100 to 150 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. I guess, what do you attribute the acceleration and then recent deceleration to? Does it line up at all with how your gallonage comps changed over that period as you have widened the gap out versus the market bringing price down more slowly?
If I knew the exact answer, I'd retire and just give that out as a consulting basis. Some of it, I think, has to do with gas. When prices fall dramatically, we get a lot more press. 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. Nothing is that predictive. I think the last couple of months, I remember several weeks ago, we were looking at a several-week period, and again, frequency had come down, like you say, from something above a four to something below in the mid to high threes, and we're saying, "Is this the beginning of that?" The next week it was back up. It's really not predictable.
If you asked me six years ago and today, is 4% sustainable? No. We're going to keep working at it. One of the things that can help it go in a positive direction, adding gas stations to existing units, not just in the U.S. and Canada, but elsewhere. We have two or three in Australia, one or two. I think three and a couple more coming. We're going to open them up in a couple of other countries. Again, it's 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 and new markets that are much less saturated markets will help that number. I think all the Executive Membership penetration increasing will help that number.
What won't help the number is that it's a hard number to sustain, and I'm pleased to say that for six and a half years, we have, and we'll see what tomorrow brings again. We feel pretty good about what we're doing, and all those things should help.
Yeah. Absolutely. I think we all agree, like a 3.5 to 4 is sustainable. What were gallonage comps? I think if you look back to past, prior to the gas price drop, they are running sort of mid-single digits. They had, I think, revved up to about 15%. Had 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. It comes out occasionally when 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. 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. I guess, what's the degree of difficulty in terms of actually seeing margin expansion as you lap those, I guess, two big quarters where you had tens of basis points of gas benefit?
Yeah. You're talking about operating margin?
Yeah.
Yeah. Look, we're up against Q4 of last year was the first in a while outsized gasoline profitability. Should be pretty good this quarter, but I don't know if we'll get all the way to where we were last quarter. As I mentioned, in Q1 and Q2, they were outsized to some extent. Again, Q3 is not even a factor other than the factor is it's virtually nothing versus it was bigger in those three fiscal quarters. That'll be a tougher comparison. Mind you, we've also gotten hit by, it seems like $0.04, $0.05, and $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 well, maybe it's another year of FX weakness for us first.
At some point, I think that impact will mitigate. 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. 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 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.
Yep. Just one last follow-up. You have had 10 to 20 basis points of payroll leverage these past couple of quarters, despite a total reported comp that was hit 600, 700 basis points by FX and gas. Your leverage point seems a lot lower now. Should we expect that to continue as you go against the tougher gas margin comparisons? Thanks.
By the way, that 10-plus basis point is payroll and benefits, because a chunk of it has also been healthcare, 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. Just on benefits, which is primarily healthcare, 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&A item because healthcare costs in the U.S. are so much higher than everywhere else. 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.
Increasing penetration in some of those countries helps. We 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&A, 60%-plus of SG&A, more than anything. If we can drive sales, that helps a lot. What also helps those numbers, fortunately, is increased penetration outside the U.S. In the last couple of quarters, we've also benefited on healthcare in the U.S. as we started to see a few things we've changed, like preferred provider networks, but still giving great coverage to our members, to our employees.
Very helpful. Thanks.
Your next question comes from the line of Paul Trussell with Deutsche Bank.
Good morning. 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. Just speaking broadly and historically, you've had a 150 to 200 basis point favorable gap 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%-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 when we go into a new country, by definition, we lose money for the first few years, as we did in Japan many years ago. Then when we went from 9 to 20 units in about a two-year period in Japan, we cannibalized the hell out of the existing units. We've now started to see that improve, and the rest of this calendar year, we'll open four more in Japan and several more in the future.
I think that at least for the 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. Having an increased sales penetration outside the U.S., which has a higher than U.S. profitability, should help a little. 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. Overall, I think that those trends will continue. 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. 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 store openings this year, with some slipping into the first quarter. 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 think about next year?
Yeah, 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 six weeks of the fiscal year. We're pushing for it, we're trying. Inevitably things happen, whether it's cold weather, and you got to wait for the ground to thaw out or some other roadblock with one of the permits to get open. There are lots of different reasons. When we start, 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. 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. I think given that the 30-plus number this year came down to an actual 24, gives me a lot more confidence next year's 30, low 30 number is much more achievable. If we do 15 to 18, even if we only do 15 in the first four months, that gives me pretty good confidence we can get to 30 for sure. 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. A couple things. Just back to the sales, 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 was up 0.8%, and then the quarter full 12 weeks was up 1.1%. It seems pretty clear that May started off at least on a pretty 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 first couple of weeks of May are just fine.
Yep. Okay, good. The other, Executive Membership rollout, you're currently, I think, in four 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, needless to 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 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. We need more than a few units to do that. We like it. If we could have it everywhere, one day we will. 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 in Mexico in the low to mid-30s, number of units, and certainly Canada and the U.S. With Japan, 20 going to 24, that just looks at how many units we have. I'm not suggesting it.
I don't know if we have any plans currently to do it. Right now, our plans are to get a bunch more openings in these countries. The country past those four with the most units right now is Japan, and that trend will continue. We'll see.
Okay. Lastly, just the gas mix in the third quarter. What was it as a % of sales and what was it a year ago? Thank you.
I believe it was about somewhere between nine and 10 for this quarter. I'm guessing, we're looking it up as we speak, but I'm guessing it's somewhere in the 11 range, maybe. Maybe 12. Nine 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, 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, and it's up seven basis points. Overall, a good number.
Okay.
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. That's continuing to be probably a little bit number than I would have guessed. I would have thought anybody who's wanted it already has it. I think we're doing a better job of communicating to the member why it's a good deal.
Got it. That's helpful. 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 may be a little bit challenging. What are you doing to work around that?
First of all, I think it was about six or nine months ago, I had mentioned that it was about $3 billion, up kind of a double in the past two years. I guess that it at least has a four in front of it now, given just extrapolating that. Probably the challenges are still out there, although they're becoming less formidable because we, like everybody else-- 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. 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 note was when we introduced 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. It had the benefit of being mostly incremental business to us, at a little better margin, at a greater savings versus our competitors, because it's organic. That'll continue to be nice, but 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. 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? If so, is it getting better now, or just any color there?
The advice I always get from our fresh foods buyers are as soon as something good happens, then 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 in Australia. While a lot of that fresh stuff is air freighted anyway, 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. Notwithstanding that, our fresh margins were actually quite good in the last month or two.
Okay, thanks. That's helpful.
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, I guess a little bit bigger picture question. Could you give us some insight into the portion of new member signups 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. Actually, the gap between our average age member and the U.S. average age has actually been reduced a little bit. I think we've historically been a couple of years older than the average U.S., and now it's a little bit less than that. All I can tell you is it's trending in the right direction. We're not terribly concerned about it 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'd think that younger demographic, the millennial, might be converting to e-commerce at a faster rate.
They may be, but not everybody's 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. It's kind of hard to get gas delivered to you. If we can get you in the parking lot, that helps. Ultimately, it's value. We recognize that convenience is a value. 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 7:00 A.M. as long as you order by 10:00 P.M. the night before, or soon by 3:00 A.M. in the morning, probably. We'll sell to some of those people, and more importantly, there's a lot of reasons to come into Costco. We have a unique value proposition.
First of all, we'll get some of the 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. All those things help us, but I can tell you, we don't have our head in the sand, but we know there's certain things we can't do as well. What we can do really well is value in terms of quality and the things that we sell, and we'll keep doing that.
Yeah, it's clearly working. Other question is the 2% reward impact, in the fiscal third quarter, minus three basis points versus minus one in the first half, all ex gas. I am assuming that FX may be partly contributing to that because of smaller penetration outside the U.S., but is there anything else that's causing that?
That's it. No. Mind you, any basis point or two hit to that number means an increase in 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 have one question. I think you said you're launching two 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 two of the three Asia countries and
Korea and Taiwan
Korea and Taiwan, I believe.
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 nine countries. Mind you, one location in Spain, and seven in Australia. We're nine countries. We currently are in four, so that'll put us at six of nine.
Okay.
A higher percentage than six-ninths of the 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 tongue in cheek, the biggest benefit is we haven't screwed it up. Look, we probably felt that we should've been modernizing for a number of years. We were really good at keeping stuff cheap and band-aided. We also recognized that if we're gonna 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. In 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. First and foremost, it was a necessity. Secondly, as a very simple example, our membership system.
There's two ways you can change your mailing address or your phone number or anything else, or add on a, or take off a business add-on member. 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 that. 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-plus million member households, only a small percentage of those have to want to change their address or move or change the members on it or change a phone number. 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. I'd say there's still more cost than benefit. The big benefits are going to come when we get 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. 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 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. Again, the depot management system will be a little earlier than that, I believe. 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. 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. 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 port. Can you just give us some color on 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, TV sales have been up slightly on average, in terms of dollars. My guess is, again, I don't have the numbers in front of me, ASPs have probably come down a few percentage points. We tend to sell bigger ticket TVs, the newer ones, the bigger screens as an example. If anything, I'd 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.
Got it. Thanks. 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 standpoint as well as cross-shop treasure hunt standpoint of potentially doing something like that? The follow-up to that is, another competitor's got a beta test this summer, with $50 shipping. I understand there'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, in our business centers, deliver to businesses, not to homes. 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's actually in store, it's huge. We want them in store. When you order online, there's a cost and inconvenience in terms of just ordering and picking up. We'd like not to have to do that. 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 in newspapers. I'm sure they work, but it's nothing that we want to do at this point.
Got it. Thank you.
Thank you.
Your next question comes from the line of Scott Mushkin with Wolfe Research.
Hey, guys. 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% in the U.S., Richard.
U.S., Canada.
Do you actually have the exact number? U.S., Canada. Do you have the exact number? I know I think it was like 90.7% last time. I was just trying to understand where the-
It still rounds up to 91. It's about the same.
Okay.
Maybe Bill's better, 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, and obviously the ancillary businesses are going well. 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. How do you envision maybe getting the word out better to the membership base over time? Then that's my last question.
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. Again, our membership marketing department is starting to test a few things, whether it's on different internet sites and what have you. 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. 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. We're getting better at letting people know about that stuff. We're not going to go crazy. It works for us the way we do it.
The goal is to try to keep getting you in the door, because when 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.
All right. Perfect. Thanks for taking my question.
Your final question comes from the line of Christina 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, again, this was the first quarter in like the past three or four where inventory growth did outpace sales growth. Presumably some of that's the FX, 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.
Yeah. 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 two or three-month period of catching up and backlog. 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. 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'm guessing, again, we'll wait and see until the fourth quarter ends, but I'm guessing you'll see that trend reverse a little, 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.
Excuse me. 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.