Good morning. My name is Erica and I will be your conference operator today. At this time, I'd like to welcome everyone to the Q1 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session.
Thank you. And I would now like to turn the call over to Mr. Richard Galanti, CSO. Mr. Galanti, you may begin your conference.
Thank you, Erica. Good morning to everyone. This morning's press release reviews our Q1 of fiscal 2015 operating results for the 12 weeks ended November 23. I'll start by stating that the discussions we are having include will include forward looking statements within the meaning of the Private Securities Litigation Reform Act of 19 90 95 and that 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.
To begin with, our 1st quarter operating results for the quarter, as you saw, we our reported earnings came in at $1.12 a share, up 17% or $0.16 per share over last year's Q1 earnings of $0.96 a share. A few items of note in terms of looking at the comparison. Within gross margin, which was higher year over year in the Q1 by 22 basis points, we benefited from strong margins in our gasoline business, which I'll speak to more when I discuss our gross margin results. And we also had a $17,000,000 pre tax non recurring lawsuit recovery. This latter $17,000,000 amount represented about 6 basis points of margin improvement or about $0.03 to our per share earnings.
Interest income and other, you note was higher year over year in the Q1 by $17,000,000 pre tax or about $0.03 a share. This increase primarily related to several of our foreign operations using FX contracts to lock in U. S. Dollar denominated merchandise payables. Under GAAP, the mark to market gains or losses, in this case of course gains, are recorded on the interest income and other income statement line.
I really look at this as part of merchandising gross margin in the sense that our foreign operations buyers lock in exchange rates at prices at amounts which they're comfortable they'll be able to price their merchandise at. 3rd FX in the Q1 as you probably are aware the foreign currencies where we operate overall weakened versus the U. S. Dollar primarily in Canada and Japan resulting in our foreign earnings in Q1 when converted into U. S.
Dollars being lower by about $22,000,000 pretax or $0.03 a share than those earnings would have had FX exchange rates been flat year over year. 4th item, stock expense. That was higher year over year in the Q1 by $38,000,000 or $0.06 a share. As I've mentioned before, we have over 4,000 of our assistant managers and above who receive restricted stock units as a significant part of their annual compensation. These grants are made annually each October or in the 1st fiscal quarter.
These RSU grants then typically vest over a 5 year period, which would accelerate investing when a recipient reaches 20 30 or 35 years of employment with the company. Factors driving this increase included of course the appreciation in our stock price, additional levels of accelerated investing giving some employees long tenure with the company and large number of employees in the plant. I should note that last October, RSU grants were reduced by an average of 15%. That is the number of RSU's granted to each recipient. 5th, IT modernization costs.
As discussed in each of the past 8 or so fiscal quarters earnings calls, our major IT modernization efforts will continue to negatively impact our SG and A expense percentages through 2015 and into probably the first half of 2016, especially as these new systems are placed into service and depreciation begins. In the Q1, on an incremental year over year basis, these costs these incremental costs impacted SG and A by $12,000,000 or an estimated 3 basis points or $0.02 a share. Turning to our Q1 sales. In terms of sales for the quarter, our 12 week reported comp sales figures for Q1 showed a 5% increase on a reported basis 6 in the U. S.
And 1 internationally. As indicated in our release, excluding gas price deflation and the impact of FX, the 6% U. S. Would have been a 7, The 1% international would also have been a 7% and therefore the 5% for the total company reported on a normalized basis would have been a 7%. And as reported last Thursday, our November sales results for the 4 week month ended November 30, our comp sales increased excluding again the impact of FX and gas were even a bit stronger than these 12 weeks figures with total company comps on that normalized basis increase of 8% which included a 9% in the U.
S. And a 7% international ex gas and FX. Other topics of interest are opening activities and plans. We opened 8 new locations during the Q1, which ended November 23, 6 in the U. S, our 7th location in Australia and our 2nd location in Leon, Mexico.
During the Q1, we also relocated one location in Wayne, New Jersey to an expanded location. Also during the quarter, we about 6 weeks prior, we had experienced a severe hurricane in around our Cabo San Lucas, Mexico location. That has since been reopened. We have no openings planned for Q2. For all of fiscal 2015, however, we have a current plan of 31 new locations, 18 of which will be in the U.
S, 3 each in Japan and Mexico, 2 each in Australia and Korea, and 1 each in Canada, U. K. And Taiwan. Also this morning, I'll review with you our e commerce activities, our membership trends, additional discussion about gross margin and SG and A in the quarter and just a few other topics of interest. Now on to the discussion of our quarterly results.
Again sales total sales were up 7.4 percent to $26,300,000,000 Again on a comp basis reported a 5 ex gas and FX it would have been a 7. For the quarter, our reported 5 comp was a combination of an average transaction size of just over flat for the quarter. Ex gas and FX, it would have been up about 2.5 percent and average frequency increase of about 4.5% in the quarter. In terms of comparisons by geographic region, geographically for the quarter, the Midwest and Southeast were the strongest with Northeast close behind. Internationally in local currencies, the better performing countries were Canada, Taiwan and Mexico.
In terms of merchandise categories for the quarter, for the Q1 within food and sundries, which was up in the mid single digits, candy, deli and spirits were up with relative standouts. Within hardlines, they were also up in the mid single digits for the quarter. Majors or electronics came in positive actually in the high single digits range. In addition, better performing departments within hardlines was hardware, sporting goods and tires. Within mid single digits offline, domestics apparel and home furnishings were the standouts and fresh foods where our comps were in the high singles with meat department being the standout there.
Moving to the line items in the income statement. The Q1 membership fees were up 6% or $33,000,000 to $582,000,000 That was about given the sales strength that was about a 3 basis points decline. Again, ex FX that 6% dollar increase assuming flat year over year FX would have been up 8%. In terms of membership, we continue to benefit from strong sign ups at existing and new warehouses, continued increasing penetration of the executive member and strong renewal rates both in the U. S.
And Canada as well as worldwide in newer markets. Our new membership sign ups in Q1 year over year company wide were up 4% year over year in the quarter, even though there were fewer locations opened. We opened 9 locations in Q1 this year versus 13 last year. That of course includes all member sign ups new member sign ups throughout the company. In terms of new number of members at Q1 end, we began the fiscal year or ended last fiscal year with 31,600,000 Gold Star members.
We now had at this quarter end 32,100,000 so up about $500,000 Primary business remained at $6,900,000 Add on business remained at 3.5 $1,000,000 So all told, we went from 42,000,000 member households to 42,500,000 and including additional cardholders went from 76,400,000 at fiscal year end to 77,500,000 at the end of the Q1. Also at Q1 end, paid executive memberships totaled $15,200,000 which was an increase during the 12 weeks of about $420,000 or about 35,000 a week increase in the quarter. Executive members as you know represent more than a third of our membership base and over 2 thirds of our sales In terms of renewal rates, they continue strong. At the end of the Q4, business memberships renewed at 90 fourfour atq1 2015, so 12 weeks later 94.5 so up a tick. Gold Star remained at 89.8 total 90.6 percent at fiscal year end and 90.7 percent at Q1 end.
And when I say total that's U. S. And Canada recognizing newer markets start out at lower rates and build over 1st several years. Worldwide, we remained at 87.3% in the 4th quarter and at Q1 end, still a nice increase from a year earlier at the end of the Q1 last year at $87,300,000 that we ended the quarter with now was an $86,500,000 worldwide. As I touched on last quarter's conference call, we continue to try new things to drive sales and membership sign ups.
I did mention in this fiscal quarter, but on the last call, that in early September for 8 days we ran a nationwide promotion for new members on LivingSocial. It was a good value and we felt it worked pretty well. But we'll continue to look and see what we want to do going forward. No plans at this point. Going on to the gross margin line.
Gross margins as you saw were quite strong up 22 basis points to 11.03%. Again, I'll ask you to jot down a few numbers. We'll have 4 columns. The first two columns are for the entire fiscal year 2014 both reported and without gas deflation. And then Q1 2015 would be columns 34 reported and without gas deflation.
Moving across those lines those columns, core merchandise for the year was up 6 basis points on a reported basis and up 3x gas deflation. For the quarter, it was down 6 basis points and down 13 without gas deflation. Ancillary plus 6% and plus 6% in columns 12 for all of last fiscal year. In Q1 2015 reported plus 22% and without gas deflation plus 20 2% reward minus 1s across the 4 columns. LIFO year over year for the for all of last fiscal year was a minus 5 and a minus 5.
We actually had a very small LIFO credit this year versus a very small LIFO charge last year in the quarter. So it's a plus 1 and a plus 1. Lastly, other adjustments minus 2 and minus 2 in all of fiscal 2014 and plus 6 and plus 7 without gas deflation for Q1. That's that one time the non recurring lawsuit recovery that I mentioned earlier. So total reported was up 22% and for the quarter and up 14% without gas deflation.
Now the core merchandise I mentioned is again on a reported basis was down 6 and down 13x gas. A lot of that again is driven by this particularly the success in the gas business both in volume as well as margin contribution where the gas margins were up when gas prices go down typically. Core gross margins as a percent of their own sales were slightly negative a couple of basis points down year over year with food and sundries and soft lines showing year over year improvement and hardlines and fresh foods gross margins being lower year over year in the quarter, pretty much as what we planned what we continue to see in the Fresh Foods area with some of the raw material costs going up. Ancillary and other business gross margins as I mentioned was up 22% or up 20% without gas deflation. With the exception of slightly lower year over year pharmacy margins, most of the other ancillary businesses starting with gasoline of course, but optical hearing aid travel business centers all showed higher margins year over year in the quarter.
2% reward again increasing penetration represented a basis point hit to margin. And as I mentioned, LIFO was a 1 basis point swing. We had $1,000,000 LIFO charge last year in the quarter and a small LIFO credit of about $2,000,000 this year. Moving into SG and A. Our SG and A percentage year over year in the quarter was higher by 4 basis points coming in at 10.26% this year compared to a 10.22% last year in the quarter.
Again, we'll do the same 4 columns for all of fiscal 2014 both reported and without deflation. Columns 34, the 1st quarter both reported and without gas deflation. Going across these line items, operations were a minus 2 and a plus 1 for the year and a plus 8 and a plus 16 for the quarter. Remember pluses means lower year over year SG and A. Central minus 3% and minus 3% in the year and minus 1% and minus 1% in the quarter.
Stock compensation minus 2% and minus 2% for the year and minus 11% and minus 11% for the quarter. And total would be again reported for all of fiscal 2014 SGA was higher year over year by 7 basis points without gas deflation higher by 4. This year in the Q1 it was higher by 4% reported and better or lower by 4% without gas deflation. And a little elaboration on this. Core operations SG and A again was lower by 8%, but lower by 16% ex gas impact.
Within operations and without gas, our payroll SG and A percentage was 9 basis points better year over year, particularly good showing and certainly a reflection of strong sales as well as strong gas sales which have lower SG and A, while benefits and workers' comp related expenses were about 4 basis points worse year over year. Central expense was slightly higher year over year in the quarter by a basis point. Increased IT spending as we continue to monetize, as I mentioned within this number that was about minus 3 basis points and that will continue in those types of increments we think. The increase was partially offset of course by improved payroll in Central as well as by 2 basis points. Finally, SG and A expense related stock compensation was higher year over year by 11%.
I should point out that the year over year basis points variance for this expense item will be quite a bit less in Qs 2 and 3 and higher year over year in Q4, but not as big negative as variance as we've seen in Q1. Again, if you think about it with most of the option most of the RSUs vesting over 5 years, you take out the one that finally vested. So you take out an expense back when the stock was in the 50s and you add 1 when the stock was in the 125, 130s when we did the 1 in October this year. All told hold on. Oh, here.
Last thing on the income statement preopening expense, dollars 24,000,000 last year it was lower or better improvement by $9,000,000 so $15,000,000 this year. Again, we opened 9 units this year compared to 13 last year. So all told reported operating income for the quarter totaled $668,000,000 last year $770,000,000 this year or an increase of 15% or up $102,000,000 for the quarter. Below the operating income line reported interest expense was about the same year over year with Q1 2015 coming in at 26,000,000 dollars versus $27,000,000 last year in the quarter. Interest income and other as I mentioned earlier was quite a bit higher year over year $18,000,000 last year versus $35,000,000 this year or up $17,000,000 Actual interest income component for the quarter was slightly up.
I think it was a little less than $1,000,000 The other component of equity and earnings within this line item was higher by 16. This again relates to this marking to market the gains FX contracts used to source U. S. Merchandise in our U. S.
Principally our U. S. Merchandise in our international operations. Overall pre tax income was up 18% versus last year's quarter from $6.59 last year to $7.79 this year. In terms of tax rates, our effective tax rate this quarter came in a little higher than last year.
It came in at 35.2 compared to last year's Q1 rate of 34.6. The increase was mostly due to a few net discrete items that benefited last year by about $5,000,000 and a couple of net negative discrete items which totaled about a hit an increase in taxes of about $1,000,000 this year. Overall net income was up 17% versus last year's first quarter from $425,000,000 last year to $496,000,000 this year. Quick rundown of a couple of other topics balance sheet. Depreciation and amortization for the quarter came in at $254,000,000 In terms of accounts payable as a percent of inventories, you have the balance sheet attached to the press release.
Now on that it showed a reported number this year of 101% payables to inventories, up about 2 percentage points from 99% last year. That of course includes construction payables and other payables not just merchandise. You took out everything and just had merchandise payables as a percent of inventory last year in Q1 and it was 89%, up 3 percentage points to 92% this year. Again, I think a reflection of good inventory control, but also strong sales. Average inventory per warehouse last year in the Q1 ended at $14,453 This year it came in slightly lower at $14,372 about $81,000 lower.
If you take out FX, FX was about a minus 250, dollars 250,000 to that number. So if you take out FX, we were actually up average inventory per warehouse of about $169,000,000 still a very small increase 1.2 percent on that normalized basis compared to the 7 plus percent sales increase. No real issues with inventory levels going into the last few weeks before calendar year end and Christmas and the holidays. They're in good shape. In the past couple of months, we have received questions about possible inventory issues due to the work slowdowns and shipping along the West Coast.
I'm sure like many retailers we did what we could do to bring in seasonal merchandise a little early if required and necessary. Overall, it was not a big issue for November December and it's not currently a big issue. Looking ahead into January February, it's really not a big issue perhaps even a small issue from seasonal furniture and some other types of items like that. When talking to the merchants not big delays, but a little bit of a backup. In terms of CapEx, Q1 2015 we spent 555,000,000 Our fiscal 2015 CapEx is estimated to be in the $2,500,000,000 plus range.
This compares to last year's $2,000,000,000 so up pretty significantly year over year with our ramp up and expansion and all the complementary things that go along with that with depot expansion and of course the IT expenses that I just mentioned as well. In terms of dividends, our quarterly dividend of $0.355 a share or $1.42 annualized based on shares outstanding is about $625,000,000 annually. We did buy a little stock back in Q1 about $18,000,000 at an average price of the first, I believe, 5 weeks of this quarter, we were under blackout from the prior year with until we were able to report Q1. And so we didn't buy a heck of a lot during the quarter. Costco Online, we're now in 4 countries U.
S, Canada, U. K. And Mexico. For the quarter sales and profit were up over the year. E commerce sales were up 20%, up 19% on a comp basis and up 21% excluding FX.
It still represents about 3% of our total sales just under 3%. We continue to from really going back a couple of years ago when we replatformed the site, we've gone through a couple of iterations of improving our mobile applications. As I think I mentioned earlier, we've combined some of our e commerce merchandising efforts with our in line efforts. We think that's been a big help to us. We've added a few categories like apparel, health and beauty aids and a few extracurricular signature items.
We've certainly improved timing of shipment by shipping what we ship directly instead from the manufacturer from one depot to a few depots around the country. Our international markets, stay tuned maybe one additional country by the fiscal year end 2015 certainly at least 1 by the end of calendar 2015. In terms of a few other things that we've talked about in the past Google Shopping Express, it's now being offered in 6 markets in the U. S. Bay Area, which is now geographically expanded from its initial testing about 10 months ago.
The Los Angeles area, New York City Manhattan and more recently in October, the test continued into 3 new cities Chicago, D. C. And Boston. Again, it's too early to completely tell, but we're seeing some increased overall spend and it's been a good partner to work with Google. We continue to increase our offerings and categories in these tests as well.
Instacart, it's now in 13 markets. This is where customers in Instacart order through Instacart. They come in and buy the merchandise and deliver to the customer. That's continued to expand as well. And boxed is now in 3 markets I think up from 2.
Lastly, I think you saw a release or maybe we talked about it with Alibaba Tmall in being shipped out of our Taiwan operations. So we're shipping I think we're up to about 125, 130 items mostly various food or sundries or HAVA related items about half of them are Kirkland Signature. It's great, but it's new and we'll see where it goes from here. But certainly, again, our name note a little bit over there as well. In terms of expansion, as I mentioned, we've got a lot going nothing going on in Q2, just a few in Q3.
We have 5 openings although 2 of them are relocation so net of 3. And we've got 20 planned for the 16 week Q4. Most of those look pretty good at this point. It's just how they the timing of them. In fiscal 2014, for all fiscal 2014 which ended of course at the end of August, we added 29 units or about a 5% unit square footage growth.
And 15, assuming we add the 30 to 31 units on a base of 663, we would that would also be about a 5% square footage If we get to the 31, it will be 18 in the U. S, 3 each in Japan and Mexico, 2 each in Australia and Korea and 1 each in Canada, U. K. And Taiwan. Some of you asked for square footage numbers.
At Q1 end total square footage stood at 96,437,000 437,000 square feet. With that, I'm going to turn it back over to Erica for any questions. Thank you. Your first question comes from the line of John Heinbockel
with Guggenheim Securities.
So Rich, I want to drill that a little bit on gross by category. So 2 were up, 2 were down. The 2 that were down, so fresh food and hardline, fresh food was solely pass through of inflation and was hard lines entirely mix? Fresh foods was certainly inflation and us holding prices like you know we do. Things I know again sound bite anecdotal butter and milk is way up and so which is therefore cheese and so you've got those types of items.
On the other side, some of it's electronics that's more competitive and we're part of that. And so a little of it is mix. But in our view nothing really out of the ordinary. And then when you look at the 2 that were up, and I take it, they were not up a lot. Is that solely mix?
And where is Kirkland? I guess Kirkland would have a big impact in Food and Sundries. That's where it would show up. Is that primarily driving the better mix? Honestly, I don't have that level of detail in front of me.
I'm looking 1st of all, none of the ups or downs were they were in the 10 to 25 basis point range basically up or down. So not a lot of jumping either way. So my guess is a little of its mix. KS helped the big penetration increase of KS from 0% to 25% over the last high teens or 20 years, those increments are smaller now. And so, yes, it helps, but it doesn't help like the days when you're adding a percentage point or 2 in a year sometimes.
All right. And then lastly, on you talked about FX and inventory. Even putting that aside, obviously, inventory is under awfully good control. Is that is more of that in store or is more of that sort of backstage between your vendor and the stores? Keep in mind, if we're turning our inventories 12 plus times a year, everything's pretty fast paced.
When if you're in Canada or Japan or wherever and you're buying buyers using FX contracts because they've got in most cases it's U. S. Dollar denominated inventory payables. They're going to lock in based on what they've got coming in and what they know what they're going to have to pay out in dollars. And they at a time when they're comfortable with based on that conversion rate, they're comfortable the price point they're going to sell in their local currency in that local current country.
So it's pretty straightforward. In fairness, as you know, it's some quarters year over year it's some quarters it's a $10,000,000 gain. Sometimes it's a $10,000,000 loss. This time it was a little better. I think partly a reflection of the weakness in the strength in the dollar, how quickly that's strengthened particularly in a couple of countries.
But there's nothing you're doing structurally I was going to say there's nothing you're doing structurally to take inventory working capital out of the system. No. No, I mean, we do that all I mean, that's just kind of one of the mantras that we try to do anyway. Mind you, I mean, this is an example from gosh 20 years ago in the tobacco business, which is a very high volume, not as high volume as it used to be, but a very high volume percent discount if paid within 7 days and then they came back and said, we'll give you an extra 0.5 point if you pay one day EFT or ACH or whatever it was. So 0.5 percent for paying 6 days early.
Well, it's a no brainer, but you take a high volume item like that and it goes from a lot of probably 100% payable to 0 almost. So I mean that's an extreme example. You've got gas working the other way where accounts payable is probably 600% or 700%. Okay. Thank you.
Your next question comes from the line of Simeon Gutman with Morgan Stanley.
Good morning. This is Joshua Cyber on for Simeon Gutman. Just curious looking back how are customers reacting to lower gasoline prices? And have you seen any trade up from regular to premium?
I don't know. I think we sell more premium anyway, but I don't know that off the top of my head. I think the reflection that our shopping frequency and our comps have continued strong is probably a reflection of that. Our view historically has been on something big like this, whether it was when gas was going crazy upward towards $4 a gallon in early to mid-eight. Did it impact us?
It probably impacts a little bit, but not as much as some of the dollar type stores or lower demographic stores. We similarly are we getting a little benefit from it? Yes, but we don't think it's big either way for us. Okay. So just looking forward Sorry, what was that?
It's got to help a little.
Okay. And then looking forward, if gasoline stays where it's at right now, is there a change in profitability? Or have we seen the most of it in Q1?
Well, I'll tell you what I know. I mean, it's a volatile business as we know. Generally speaking, when it's declining is the best in terms of profitability. It is more profitable in any level than it used to be a little bit. I think part of that and again, we so it's a profitable business.
It's a lower percent of sales profitability than the company as a whole. I think one thing that's encouraging for us though is more and more people come and get their gas. For those that come in for every 100 people that shop that pump gas during opening hours a little over 50 of them now come in and shop. And so even if 1 or 2 of those 50 are incremental that's a positive. We've been helped 2 years in a row now with these outside entities like gasbuddy.com where nationwide on average we are the lowest price that's helped.
I know our gallon comps in the Q1 were low single digits, which is really off the charts in terms of getting people into our parking lot and that's good.
Okay. Thank you. And if you don't mind if I could just add one more. If you could discuss has there been a mentality or strategic shift on the e commerce front if you feel you've gotten more aggressive over the past 6 to 12 months?
I think the things I mentioned is probably been over the past 6 to 18 or 24 months. But certainly we've added a few SKUs, expanded some categories, trying to get people to think of it not just as the place that I can buy patio furniture or a big TV, but also some regular higher velocity items. And yes, so nothing I think it's been more if you look if I just looked at year over year sales increases on a comp basis, it wasn't but a couple of years ago, it was kind of in the mid single stuck in the mid single digits. And last year, it was in the high teens and this quarter, it continues in that very high teens, low 20s area. So I think that's a reflection of the things that we've done, but nothing new and dramatic in the last 6 months.
It's a continuation of that. Okay.
Thank you very much.
Your next question comes from the line of Charles Grom with Stern AGI.
Hey, good morning, Richard. Just to clarify on the gross margin grid, did you say that ex gas the core core was down 13 basis points?
The core is down, but again it's almost like under the phrase no good deed goes unpunished as over the years as I've tried to explain this in the little matrix, you almost need a three-dimensional matrix. Given the gas was strong and gas gross margins were very strong relative to a very low gross margin business, That disproportionately weighs those two lines in that little matrix such that and that's why I pointed out that if you look at just food and sundries, hard line, soft lines and fresh foods, those four core areas which gosh I better 80 plus percent of our business those were year over year were down 2 basis points, 2 of those sub departments up 10 basis points to 25 basis points, 2 of them down 10 basis points to 25 basis points. So the core business is pretty much flat year over year, but it shows in that chart that way because that high dollar penetration of gas.
Okay. So the up two basis points would more or less compare to say the up 6 or 7 basis points that you posted in the 3rd Q4?
Yes, but it was down 2.
I'm sorry down 2.
Yes, okay.
Okay, I get it. And then on the CapEx guide, you have a big acceleration from this year versus last year, yet store growth is pretty consistent. Just wondering if you could speak to the delta. Is it IT spend? Is it land?
Or just what's driving the increase?
Well, it's also 4 more locations including relos. It is IP is probably at least 100 of it. International is more expensive. We probably are spending more this year on depot type stuff. I'm rounding here, but depots I bet year over year is 100, 150 higher.
So it's probably but year over year in the prior year there was probably 75 to 100 in IT. I'm shooting from the hip here, but the big things are and certainly for the year that 2.5 to 2.6 number, we have an original budget probably a little higher than that. But we know that a couple of them will slip and some of that assumes land banking for the 1st part of next year. But clearly, we are spending more on some of these international locations in a confident way frankly. I mean, some of the ones in Asia as you know are knock on wood so far have been relatively no brainers.
Okay. Just last question on the balance sheet roughly $17 per share in cash. Any updated thoughts on getting a little bit more systematic on the buyback front doing so much each quarter or so much each year as opposed to setting up the grid? And any thoughts on the current dividend 1% yield is a lot lower than some of your consumer stable
peers? Our Board discusses it at every quarterly Board meeting. Again, I guess, I've learned that the matrix works when stocks move slowly either direction. We've had that high quality problem that we put in makers in place and then in some cases we're locked in for 5 or 6 weeks due to blackout and then it moves well above the several dollars of cushion we gave it. I think we want to be more systematic, but I can't say when it will be.
We'll talk to you next quarter. But certainly given that we grant to these 42 or 300 employees annual grants that are just in the high 3s, the 3 point 6 3,800,000 shares or something. We want to at least cover that I think on an ongoing basis. And we certainly did not do that on a quarterly basis this quarter. But the year is still young and we'll see.
We'll let you know next quarter.
All right. Thanks a lot. Good luck.
As it relates to the dividend, again, that's a conversation we continue to have and we look at all of them. We recognize that our as first priority is CapEx and then tied for second if you will are a few of the things that we'll continue to look at. And I'm sure we'll do some things over time, but it will be on a timetable that we feel comfortable with.
Thank you.
Your next question comes from the line of Brian Nagel with Oppenheimer.
Hi, good morning. Nice quarter. A couple of questions. I mean, first off on gross margin too, if you look at that, you may have discussed it in the prepared remarks, I apologize. But the ancillary gross margin benefit we saw in again here in Q1, can you just discuss the drivers of that?
And how should we think about going to sustainability of that over the next few quarters? Well, I mean the big kahoota was gas. I mean, as I mentioned, I think 5 of 6 or 5 of 7 or 6 of 7 of our ancillary businesses all had up year over year gross margins, most particularly was gas. And so is that sustainable? No.
It's never sustainable. You see where gas prices are now. So it's continuing, but again that could be fleeting. And we've been asked the question well when you get these outsized profits so you're more aggressive in pricing. We don't sit down and say let's use many dollars, but certainly we're going to be aggressive and that's what we do for a living.
So I think that buffers it a little bit as well. So that actually goes in my next question. I think Richard you already answered it. But in the marketplace, if we look at Costco Gas, right now, this is more from a competitive standpoint, Costco Gas versus competitors and you typically price below. You're saying that, you said when the price is doing what they've done, you essentially kept the competitive relationship the same in the various markets?
We've improved the competitive relationship in our mind.
Okay. All right.
Thank you.
Your next question comes from the line of Dan Binder with Jefferies.
Hi, it's Dan Binder. Congrats on a good quarter. Just on the follow-up on that gas discussion. With all the movement in the gallon comps and the pricing, where are we now as a percentage of sales for gas? I'll have somebody calculate it right now for you.
Hold on a second. Okay. My other question if you want to focus on that first is on consumer electronics. You talked to a lot of strength there. Any color you can give us around sort of the breadth of that strength, where you're seeing it, what you're seeing with 4 ks TV and competitive pricing?
Well, first of all, as you know, we introduced several Apple products over the last year. That's a very competitive business for retailers and for us as well. We know that, but we want to have that product for our members. We 4 ks TVs are going well. I believe that on those higher end TVs, we tend to be the outlier in terms of driving sales of those, but it's still small relative to the entire category that component.
Phone business is very strong. You can see what we've done with our kiosks out there. And not only phone business has been strong added to that we've added the Apple brand there as well. And then the various tablets. So there's a lot of different things in that area that are helping the sales strength.
Again, I think it tends to be a little more competitive. Apple is part of that. That's pretty much it. Nothing out of the ordinary. I mean, it's these things fluctuate up and down a little bit.
We're pleased that the strength of the comps in that area. And then by the way in terms of the question about gas penetration for the quarter it was about 10.5%. And just a quick question on the cannibalization rate. I know it hasn't really changed much. I think it's like 50 basis points in any given month on the comp.
I was just curious, can you give us an idea of what you're seeing on the bounce back of those clubs when you cannibalize it? Does it come back to sort of historical volumes within a year, 2 years? Has that been changing at all as you've been doing more fill ins? Generally, it's a year or maybe slightly over a year. I mean, generally when we open when we cannibalize our own units, you might take anywhere as much as 10% or 15% from nearby unit or units.
And a year, 1.5 years later, you're pretty much back going forward not looking back to the past year of course. And again it varies, but overall it's been pretty predictable for us. Based on zip code analysis of where the members are shopping from, we generally know and what we find is the benefit really is when we pick up a few extra members, yes, not a lot. Well, we pick up a lot in frequency. If you have a loyal member that is shopping, I'm making these numbers up, but once a month because they're a 30 minute drive away from a Costco and all of a sudden they're a 10 minute drive away and it becomes a significantly more regular shopping frequency.
Great. Thanks.
Your next question was from the line of Meredith Alder with Barclays.
It's Meredith Adler. I was wondering, I'm still somewhat new to the Costco story. If you could talk about where you see the most potential growth? Obviously, you don't have a lot of locations in Continental Europe and yet it's tough to open warehouses there. When you look at Asia, do you feel like you've still got a lot more growth in those markets?
And what about the U. S?
Well, if you'd asked me 5 years ago where we would expect to be now, I would say our goal is to get up to about 30 locations a year by this time. And probably we'd be right to that middle point of trending from the majority in the U. S. To less than half in the U. S.
If you look at this year and next, it's roughly 30 a year, still a little over half in the U. S. I think 16 or so last year and I think I mentioned 18 out of 31 this year. So and that's by the way a function that we've continued to be successful in lots of what I'll call newer markets meaning the markets over the last 10 to 15 years. And while we'll still get another unit open in the Puget Sound or perhaps in the Portland area one day or hopefully every year or 2 get another L.
A. Unit in the Greater L. A. Market of 45 or 50 units, but they're precision points now where locations where we need to go. But we're finding in a lot of these cities, again, whether it's Chicago and Dallas and Atlanta or smaller cities in Florida and the Carolinas or new markets like Baton Rouge and New Orleans last year.
So that's probably up to our expectation a little bit about our opportunities here in the U. S. Outside of the U. S, we've got 10 or 11 I believe in each of Korea and Taiwan maybe 12. We think that we can go into the mid to high 20s there over time.
But again, they take some time to get done and where. Japan is certainly a bigger market for us. We've got 23 I believe, 22 or 23. We should have a lot more than that. But we went from 9 to 21 or something in 2 a little over 2 years.
So we're doing well there. And we just as I mentioned opened our 7th in Australia. While Australia is what 2 thirds of the size population wise as Canada where we have 90 or so units. We have 7 in Australia. I'm not suggesting we're going to have 45 anytime soon, but certainly we'll get more than 7.
Western Europe or all of Europe is certainly an opportunity for us. It is tough to get in. Even in the worst of economies, we've been successful with about 4 years of effort getting one unit open in Spain with the second coming towards the middle to the end of next calendar year. And we're still fighting to get our 1st unit open in France. So it takes some time, but we're persistent and we'll be around.
Okay, great. Thank you very much.
Your next comes from the line of Mark Miller with William Blair.
Hi, good morning. A slightly different question on gas prices. And my historical recollection is that when gas prices are high, more consumers might go out of their way to drive to Costco and that that was viewed as a historical benefit to traffic, but the inverse does not appear to be happening. And so wondering what in your view has changed or I mean do you think there is a risk if gas prices stay lower that you may not get quite as much lift in terms of traffic to the stores as in the past?
I think when gas prices were skyrocketing back in 'eight going up towards $4 for the first time, we were on the news every night somewhere, whether it's a small town in Montana or Los Angeles and where's the best place to buy gas. And so that certainly was a positive. Theoretically, the argument is as the people as prices fall that will be less of an incentive. I think it's a greater membership value proposition. I mean when a gasbody.com comes out and says 40 +1000000 inputs from customer from drivers out there saying that we're the best lowest price nationally by $0.14 or $0.16 that resonates.
The fresh foods is second to none in our view. We're biased, but that drives a lot of business. The pharmacy frankly, the I think deserved credit we get for that in terms of pricing. So it's the fact that we're proud of the fact that we take care of our employees. All those things are positives.
I think once you've come to Costco for gas and we got you into the warehouse, there's reasons why you want to come back. And I think we're starting to appreciate the fact that it's all the above. It's some of the crazy KS items that or KS items where you got to buy it at Costco. Well, there are a few other places now you can buy them, but we're selling them to those
Your traffic just continues to amaze. My other question is on China. And so I understand it's very early with Alibaba. But I wanted to ask is there any change in your long term thinking on China? You did say that there's a benefit of getting your name known there.
I mean, historically, you've had some reservations, but are you should we be thinking that club growth is in the future there? And what might inform that? Thanks.
I think it's in the future, but if you'd asked me that same question 10 years ago, I would say I think it's in the future. And not being cute about it, every couple of 3 years senior management both international senior management and corporate senior management goes over there and looks around and we continue to do that. And we recognize it's look it's a giant market. We're confident about what we do. We're also very hands on and we've got a lot of things going on in a lot of directions and we kind of know we know that everybody says well somebody is getting there first.
Well, people have gotten to other places first and when we come in we do just fine. So it will be at some point and I don't know when. If you said what's the likelihood in the next 5 to 10 years? Sure. Next 2 to 5 years?
Maybe. Next Thursday? We're not ready yet.
Okay. All right. Thanks,
Richard. Your next question comes from the line of Chris Horvers with JPMorgan.
So I wanted to follow-up on the acceleration in the core comps over the past year. It seems like most of the acceleration is seen in the hard lines category. So would you agree with that? Or has there been movements toward the high end of the ranges that you provide in Softlines and Fresh Foods and so forth? And within CE, is that TV turning positive plus the addition of Apple driving the hard lines rebound?
Well, that's one of the things. I think I mentioned tires have been good this year. Automotive lawn and garden had been good. We're out of season now. Apparel has continued to be strong.
I mean, we enjoyed a couple of years on a compounded basis apparel comps apparel increases in the mid to high teens. So that of course at some point has got to come down a little bit. But the organics is helping. I think in the last 2 years, we've a little more than doubled organic sales from the low billions to closing in on $3,000,000,000 currently. And so that's all those things help.
So, but within the hard lines category, is that TV and Apple essentially that's driven that acceleration within that major sort of
I would say TV and Apple are probably the top 2 without looking at the detail. Phones are probably in there too. Could be 1st or second for I don't think the phones are first, but phones, TV and the reintroduction
of some of the Apple items. And when you didn't sell, let's say, iPads, were you selling iPhones in the wireless kiosks?
Yes. Okay. We are. And by the way, as kind of was made here in my office, those are the big volume categories, but white goods are up, not that we do a big white goods business. Audio is up, again smaller business, but we and that's not just headphones, it's sound systems and all kinds of stuff.
But the big volume areas are those 3 that I mentioned.
And was Apple sort of a point in time add back to the store base overall? Or did that start in, let's say, June and then ramp up over the past 5 months?
I think that's right. But it's not it's a piece of it. It's not the driving piece.
Understood. Understood, yes. And then on depreciation, can you give us some color how to think about the depreciation? I know you don't I don't believe you historically guide to it, but with the incremental CapEx over the past couple of years, it would seem like dollars per week or dollars per quarter. That will continue to rise for I think the next couple of years.
And so any color there
I hope it continues to rise forever. The Probably the simplest way to do it is look at what it's done for each of the last several years year over year in dollars. My guess is somewhere around 10 percent -ish. And that's probably as good a guess. Maybe if you want to add a little bit to it for IT modernization.
When we as you know over a 4 to 5 year period we're on an incremental basis we're probably spending close to $500,000,000 that generally once these different modules and components are put into operation They then get amortized over 5 to 7 years. And so maybe that adds a little bit to that $1,000,000,000 plus number.
And then where does that depreciation tend to show up in terms of the margin buckets? I know you talked about Central, but is that core as well?
It's all SG and A virtually all SG and A.
Okay. Understood. Thanks very much Richard.
Your next question comes from the line of Bob Drbul with Norma Securities. Hi.
This is Kevin Heenan on for Bob Drbul. You had called out apparel as being strong within soft lines. I was just wondering if there were any particular categories or brands within apparel that were particularly strong in the quarter?
It's really all the above. I mean, we have made a conscious over the last couple of years a conscious effort to both with brands and with Cerro Cosignature go bigger and deeper, matching out big quantities of the stuff. And so it really is all over the board names that you've come to know like Dockers and Levi's and Cole Haan and just a variety of ones. But also the KS, whether it's women's activewear or what was the men's wool pant, certainly the 5 +1000000 KS shirts, men's breast shirts that we sell a year. So it's a lot of things.
Cool. Thanks. And then just my last question. We noticed you guys have handheld scanners now in store. As you're checking out, we were wondering kind of how that test was going and just any information around that?
Yes. Well, I think the handheld scan well, there's 2 things that we use the handheld scanner. And we give some level of autonomy to the operators on that. Some regions embrace it a little more than others. Generally what we find and I say there's 2 uses.
One use is if lines are backing up and an employee with one of those handheld scanners can go and essentially scan, if it's a smaller basket, needless to say, if it's top full and you have things under other things, you can't do it. But they can help speed up the front end by scanning the in the case of a limited number of items those items give that member a little printout with a barcode on it. When the member gets up to the cash register, the cashier can simply scan that barcode. It prints out and tenders that full transaction with all the detail. So that's one way of speeding up.
The other thing it's used for is in terms of informing people when it would make sense for them to convert from a regular member to an executive member based on their prior 12 months of purchases. So if lines are backed up a little bit and we can ask a member if we can scan their card and we can let them know that based on their prior year's purchases, they would have paid an example in the U. S. Of an extra $55 $1.10 versus $55 and they would have earned well more than that. And so it's used for that.
But we don't do that all the time because as we've increased shopping frequency, the member who said no doesn't want to have to say no every week and a half. So we do that on a periodic basis.
Got you.
All right.
Thanks a lot for the information.
Your next question comes from the line of Oliver Chen with Cowen and Company.
Thanks. Congrats on the performance and thanks for the details. Regarding a bigger picture question on online, where do you think the mix should go over time? Will it remain a little bit more modest as a percentage of total? And as you look at your guests and the customers, like which factors do people want to see you guys implement over time?
And I just wanted to ask about food and protein and fresh food. What's your outlook for the inflation there? And will your pricing underprice the inflation? And how do you see that dynamic evolving?
Well, let's start with the last question. I mean, our fresh foods people view some continuation on prices like cheese and milk and butter. A lot of that to do with some shortages in China and so increased demand from China that has pushed that out a little bit. There's still some inflation in meat. I believe he said that pork expectation was coming back a little bit and cheese is finally coming down a little bit.
So the expectation is yes, but not probably as severe like meat had been up 8% to 10% prices. They don't expect that level of additional inflation going forward, but still some. In terms of pricing, generally we're going to try to take price increases as late as possible and take price decreases as soon as possible. So using the famous rotisserie chicken example, we maintained the price while price costs were going up for 2 years. We didn't when the input costs started going down, we didn't change the price, but we because we had never raised it.
So but overall, we're going to lag a little bit, because we want to be competitive. And getting back to the first question was on costco.com and mix changes. Yes, it should continue to inch up or towards when we started, it was all big ticket, in many cases, hard to take home yourself or hard to install or hard to put together items, whether it's big screen TVs or furniture or swing sets, you name it. We certainly want it to be more than just that. And I think again, we've seen some success in it.
So we're trying things. What we don't see ourselves as being the entity that's going to deliver 2 different box of kids cereals to your doorstep at 7 in the morning. Now we hope and look forward to some of these other entities that are doing those types of quick home deliveries to for us to be their supplier, which we seem to be successful in doing as well. So but overall, we want our site to be thought of on a more regular basis as well for our members. And some of those Health and Beauty Aid items, some of those sundries items will certainly help towards that too.
I've used the mobile app. Do you feel like the mobile app is going to be a key part of traffic online for you as this evolves?
It will it's continuing. And when we look at our when Jimmy Reglan presents each month at the budget meeting about cosco.com, we have higher and higher percentages of mobile app use, not nearly as much as some of the e commerce entities out there, but it's growing in that direction. So yes, I mean, we'll keep getting better. Like everything at Costco, while our site is greatly improved from the original mobile apps that we did, there's room for improvement there and we know that. Okay.
Thank you. And our last question on the higher end strength. Have you seen customer response very positive to higher price points or your assortment as we see a healthier high end customer as well as your product assortment being very appealing?
Well, that's what we've done that's what we do. I mean, since the beginning of time, we've constantly tried to trade customers up to better quality. We're still a merchant. We just want to sell a lot of stuff and higher end stuff. And frankly, we can show great savings to that.
If you go into our warehouses right now, it is probably for the holiday time and I've seen some $350,000 which are great values at those price points. Certainly our jewelry are higher end. Certainly the fact that we do a great penetration in the bigger size televisions. So that's something. And anecdotally, I remember also in at the end of calendar 2008 and into calendar 2009 when the economy went south fast.
And I remember and of course at the end of 2008 and into early 2009 when we took some extraordinary markdowns on things like patio furniture in January February because the economy just hit and people weren't buying that much that those big ticket discretionary items. I remember as we entered June July as the buyers are getting ready to commit for the upcoming end of 2009 into 2010 season, our CEO, Jim at the time and our Head of Merchandising we're reminding the buyers don't start bringing the price points down. If you want to cut back on a little volume quantity fine, but let's we've traded our members up and our members expect higher end goods. Let's keep that going because that's what we're that's what helps us one of the things that helps us stand out in our view.
Thanks for the comments on the luxury goods and that experience. Best regards for the holidays.
Thank you.
Your next question comes from the line of Matthew Flaser with Goldman Sachs.
Thanks a lot.
Good morning. It's Matt Fassler. Thanks for keeping the call going here. My one question at this stage relates to IT modernization. Richard, if you could just talk about qualitatively what you've gotten done and what is still on the common?
And then how you would expect those additional investments to further enable the online and e commerce effort? Thank you.
Well, first of all, for those of you who have known us for a long time, it's going to keep us alive and growing. I mean, our view is that we were at the top of our game in terms of keeping systems, old legacy systems as long and as cheaply as possible. And the recognition is that we did have to modernize, we knew that. And we started that really in earnest about 2, 2.5 years ago getting ready to start that process. So and our goal of course is to take us over the next 10 years to double our company.
And I'm not trying to we don't have 10 year budgets, but certainly at a reasonable growth factor that should be what we want to do. We need systems to do that particularly as we go into other countries and expand in existing smaller countries right now that we're in, smaller number of units and as we global source more. So all those things are imperative. And as you know, we've done very little historically with member data. Don't expect big things from us, but expect any little thing is still low hanging fruit for us.
So we'll be able to do a little more of that. First order of business to get it done. What has been installed so far are we've redone the front end membership system. Right now if you want to change your address or phone number, you have what two ways to do it. You call an 800 number or you go by the membership desk.
Well, if 1,000,000 or 2,000,000 if you do something every year, it's one time each for 2,000,000 people, it's 2,000,000 times for us. So some simple things like that will start early next year, early to mid next year. But there's certainly a lot more to do with that stuff even some basics. We also redid the point of sale system and that's in. That's making when I say that's in, it's just in.
For the 2 months, the last 2 months of the calendar year, we have an unwritten or a written rule, you can't don't do anything to screw up the systems in the warehouse. And so while we've now installed it in a number of locations and it's well beyond pilot and our operators want it and like it and it will save scheduling and a few other things that won't be into earnest until during half of calendar And that's for the U. S. Only to start with, which is 70% of our company. And that's again something that's making life a little easier in the warehouses and there's some small benefits to that there.
The big benefits are when we complete the things that you got to put these things including the accounting systems in place first. Our accounting systems are planned to be installed as of this fiscal year end, so the end of this August, fingers crossed. That would be the best time to do it at a fiscal year end. And currently we're on task, but we'll tell you tomorrow how we're on task tomorrow. Beyond that, I mean the big things that the users are excited about, if we look at our depot and truck fleet operation, there's some real savings on and efficiencies in our depot operations that they're anxious to get in place.
That's still going to be 6 to 12 6 to I'll say 6 to 18 months out because these are all overlapped these modules overlap each other somewhat. The challenge is going to be as we as buyers who are used to doing things one way have to do things a little different. We learned a lot of lessons when we went to Spain. We started with basically a new the new SAP oriented system. And as you might expect, there are a few Costco people that are over there.
We've learned a lot, including painting behind things. So I think that we're we know what the expenses are and we know incrementally we still got another year, year and a half of that. By its own size, it will then level off. Again, I think looking 2 to 5 years out is when we're going to we got to get over that hump and there'll be I'm sure some growing pains when we make those conversions. But we've gotten a lot better of not just doing something and then letting everybody all the users figure it out.
We're using tens and 20s and 30s of additions of people to certain departments focus entire taking existing people that know our current systems and putting them on these SAP modernization projects. And so we've done a much better job of bringing good people in and committing to 2 or 3 years in some cases those people in that area. So we'll continue. Thank you so much.
Great. Thank you.
Your next question comes from the line of Chuck Zerkowski with Northcoast Research.
Good morning, everyone. Richard, you may have said
it, but I'll double check
on this regarding the gas. What was the year over year decrease in the gas price? And can you talk about gas gallons on a comp basis increased?
The average price per gallon was down 7.3%. And the comps were the gallon comps were I think 11%. I know it was a low double digit, 10.5%. 10.5? Yes.
Okay. Thank you. And I'm curious about the buying or having merchandise shipped ahead of a little bit ahead of sales plan because of some of the slowdowns on the in the ports. Where is the extra merchandise being stored? Is it in the clubs?
Is it in your depots?
Well Or even off-site? Yes. No, it's not off-site. It's mostly in depots or the clubs. I mean, we were stacked tall, but we turned it pretty fast too.
It wasn't a huge issue. It was an issue, but in terms of logistics of handling it. But basically the depots had a little bit more for a few weeks.
Okay. So if it's selling it's there.
It just gets it there ahead of time.
All right. Thanks.
Your next question comes from the line of Scott Mushkin with Wolfe Research.
Hey, good morning, guys. This is Mike Ottway in for Scott. Thanks for taking the questions. I think first, Richard, you had said that outside of pharmacy that all the other ancillary businesses saw their gross margin rates up in the quarter. So I guess outside of gas, which is obviously transitory, how should we think about your ability to get some slight margin improvement on these other businesses over the course of the year?
On the ancillary, well most of them were up year over year. I mean a lot of it's particularly in some of the business like optometry and hearing aid. I mean they the actual markup on the goods is higher than our range because we included our own cost of sales calculation the impact of the hearing tech, ATECs or the optometrists and things like that. So it's but it's a when volume is driven, its operating leverage is certainly in my view better than the warehouse as a whole. So more than anything, I mean, we keep looking to as you've heard it before bring prices down.
Over the last couple of years when we introduced what I forgot what the 5.0 or 6.0 or whatever the next level of state of the art hearing aids under our brand, we lowered the price point by close to $2,000 on a high quality Kirkland Signature item made by well known high end people. And we really drove that business. So we say to customer, we've made fewer gross margin dollars, but a lot more units fewer dollars per unit, but a lot more units.
Okay. That's helpful. Thank you. And then I guess just switching gears on the international side. You guys obviously continue to fare pretty well given the headwinds.
But just kind of looking at profitability of the other international business outside of Canada and stepping back. Over the last few years, you saw EBIT margins come down slightly in that portion of the business versus I think in the middle part of last decade that they were moving up. What's changed? And as you add more stores kind of in this segment internationally outside of Canada, what are your expectations for getting profit to move up slightly every year? And I know some of that is new store driven and everything like that.
But any thoughts there would be great.
Well, I think Craig has our CEO has said is look the goal is to first get to 3 pretax and we'll go we'll see where we go from there. 1st and foremost, we're going to drive our business. We want to see improved profitability every year and there's lots of moving parts. And some of these ancillary businesses help. Costco Travel is a little, but it's growing nicely.
We've got new people in the over the last couple of years in our business centers. We went from what I'll call the 10 plus year test. So we have them moving in the right direction. We've got 8 of them and we'll open a few more. So there's lots of things out there.
The global sourcing initiatives does 2 things. It's generally limited resource commodity type items in some cases. And in our view what sets us apart in terms of quality and value and that drives other business. So there's I think we're less looking at saying how can we do we want to grow 1st and foremost we want to grow comps. And again take out inflation and everything else Can we get comps in that mid single digits a little higher?
If we can do that then how do we get top line sales a little higher? And then how do we leverage that? We'll keep doing what we're doing and we're not as concerned about 1 quarter or 1 year being a little less. I know we've gone up and down, but certainly we feel comfortable that we've got the things in place to keep driving bottom line hopefully a little better than top line, but there'll be fluctuations in that.
Okay, great. I appreciate it. Thanks again.
Your next question comes from the line of Ravi Ohlheims with Bank of America Merrill Lynch.
Hey, Richard, another gas question. I know you love these. From history or maybe the question would be when you when historically you've moved into a lower gas price environment big declines year over year at the pump like we're seeing and could see more of. What do you guys tell the buyers to do then? What categories tend to do better when you're having pretty dramatically falling gas pump prices?
Thanks.
Yes. I don't think we're smart enough to sit around and say this with this extra profit what will you do? I talked to Doug Schutte, the Head of U. S. Merchandising the other day and his view was is that we're doing everything we're doing anyway.
This helps some. Do we do a little more? Sure. But it just it's the it gives us a little bit more umbrella, but we're going to keep doing it.
All right. Thanks.
Your next question comes from the line of Greg Melick with Evercore.
Hi, thanks, Rich. I can't tell if I got a couple of questions left here. But could you update us on inflation across the store both in COGS and at the retail level?
Yes. If you look here you go. Basically, again, very slight deflation for the 1st 12 weeks. Food and sundries is very slight inflation. Sundries is very slight inflation like less than 10 basis points.
Apparel is very slight inflation also less than 10. Right. That's from the end of our fiscal year. And food of course for all of fiscal 2013 was up about 3.5 percentage points on a cost of goods basis. But again for the 1st 12 weeks of this month, it's ever so slightly up.
Computers and appliances and things like that are down about 1 point. Gas, of course, is down as you know a little bit. And those are pretty much the pools. And it all adds up to being down less than 0.5percentage point since the beginning of our fiscal year that's versus being up 0.5percentage point all of last year from the beginning of the prior fiscal year.
That's helpful. And that's at the COGS level or in the same
retail or okay. Yes. I would say it's in the same retail. If it's inflation maybe it's a little tick under that because of our lag. But overall it's pretty close.
Great. And then the second question was I think it was in September you switched your interchange or card partner in Canada. Could you help us understand how that changes
the dynamics either in sales or profits in the business?
And also remind
U. S?
Sure. Well, we basically had long term long term agreements in Canada and we have one here. We don't really talk about what our current contracts. We'll let you know when and if anything happens. But any ongoing contracts and anything we don't really talk about.
But in Canada, again, we made the switch currently for I think about a 3 month period ending the end of this month. We accept both. So we started accepting Mastercard a couple of months ago And we'll continue to accept as well American Express in Canada through the end of the calendar year. Look, we wouldn't have done it if it wasn't the most attractive deal for us and our member. And I would probably reverse the order if this was a 10 ks for our member and us long term, because we're going to continue to try to drive value.
And we think it's the transition is always a little bit of a hassle, but we've worked well with both our former partner and our new partner. Everybody acts professionally in this thing and these things happen. And we have a good relationship currently in the U. S. So we'll see where that goes in the future.
But as it relates to Canada, I think we're now up and it's not required yet. As of last month, we are in the 30s in terms of the percentage of people using Mastercard, recognizing 40 plus percent I have it, 40 percent plus of cardholders in Canada. We want to get that rewards based card out there and because affinity programs drive sales not only at Costco, but reward based credit card programs when we get that member using that card that co brand card and the same helps with AmeriExpress co brand. When they use it elsewhere, it changes and improves the economics for us, which allows us to again provide a better solution to our member and continue to be more aggressive out there. That's helpful.
Thanks. It's going as expected fine. And stay tuned in the U. S. What we may or may not do in the future.
That's great. Thanks a lot.
Your next question comes from the line of Joe Feldman with Tazely Advisor Group.
Hey, guys. Good morning. Thanks for taking the question. And most have been asked, but I wanted to ask something related to the food side of the business. And I know in the past we've spoken about opportunities within food like new products, maybe organic, natural more.
And I know you've made strides in with some of that. But any update on where you stand with organic and natural and how much you could do there?
Look, I think we can do a lot more. The supply chain is improving and increasing every day, not just for us. We again, I think in 2 years, we've gone in the U. S. From about $1,400,000,000 to close to $3,000,000,000 in organic, and that's with supply constraints.
So and our view is, there's a couple of positives from our view. One is, it's not always a substitute sale. I gave the example and perhaps this is an extreme example, but for the first $25,000,000 of fresh organic ground beef we did a year and a half or so ago on a multi $100,000,000 fresh ground beef program, but again $25,000,000 at first $25,000,000 organic, 80% of it was to existing members that historically didn't buy ground beef from us because they buy organic. And so that was added sales in that way. The other positive is generally in the retail business organic is a high it was always a higher price point, but it's also generally the higher margin item.
It's kind of like the sale item you see on white goods is the refrigerator without the icemaker and with a small freezer compartment, but then you go in, you want the one with all the bigger one with all the extra whistles and dolls. Same thing with this. We can generally make a little bit better margin and save the customer more and have a higher price point item. So again, it's growing. It's a $3,000,000,000 business and I can't tell you how quickly it will grow, but it's growing certainly faster than our top line overall.
Got it. Thank you. And then also wanted to follow-up with the you've mentioned the LivingSocial deal a couple of times this quarter, last quarter. Should we expect more on that front or more deal things like that to come?
Well, it's a catch-twenty 2. It worked recognizing we don't do a lot of it. But we also don't want our members to get comfortable waiting or people comfortable waiting for the next deal. So we're going to do things on a sporadic basis on a regular basis. But we at least are as Craig said to our heads of merchandising, e commerce and membership marketing, try some things.
And so we're trying some things. So we're not we're letting you know that the things that we've tried generally work, but it's not like we want to change our methodology. We want to also make sure that we that the value of the membership is the value of the membership. But we'll keep trying some things.
Got it. Thanks. And good luck with this quarter guys.
Thank you. Why don't we take 2 more questions? And I'm sure you guys are tired of listening to me. Certainly.
And there are no more audio questions at this time.
Well, thank you everyone and have a good day.
Thank you, ladies and gentlemen for joining today's conference call. This does conclude today's conference call. You may now disconnect your line.