Good morning. My name is Brandy and I will be your conference operator today. At this time, I would like to welcome everyone to the Costco 4th Quarter Earnings Conference Call and Year End 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 Mr.
Richard Galanti, CFO, you may begin your conference, sir.
Thank you, Brandy. Good morning to everyone. This morning we reported our 16 week 4th quarter 52 week fiscal year 2014 operating results, both which ended on August 31. These results are compared to the similar 16 week 52 week periods in the prior fiscal year, the 13 which ended last year on September 1. In addition, we're reporting this morning our September sales results for the 5 weeks ended this past Sunday, October 5.
I'll start by stating that the discussions we are having will include forward looking statements within the meaning of the Private Securities Reform Act of 1995 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 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 Q4 earnings results for the 16 week Q4 earnings came in at $1.58 a share, up 0.18 dollars or up 13% from last year's Q4 earnings of $1.40 In terms of sales for the Q4, total sales were up 9%. Sales were up 6% on a reported basis and excluding gas and FX impacts were up 7%. For the quarter, gas prices year over year were essentially flat, so no impact on the 6% U.
S. Comp figure. However, foreign currencies overall weakened relative to the U. S. Dollar year over year in the Q4 with the biggest impact in Canada, such that our reported 6% international comp figure assuming flat year over year FX rates would have been up 8%.
In terms of sales for the 5 week September period, total sales increased 7% year over year and reported comp sales increased 4%. And again excluding both gas and FX impacts comp sales would have been up 6%. In terms of comparing our $1.58 earnings figure for the Q4 this fiscal year to last year's Q4 of $1.40 there are 5 items I'd like to point out. First FX. In the Q4 year over year currencies in the foreign countries where we operate on an overall basis weakened versus the U.
S. Dollar resulting in our reported foreign earnings in Q4 when converted into U. S. Dollars being lower by about $14,000,000 pretax or $0.02 a share than these earnings would have been had FX exchange rates been flat year over year. 2nd point LIFO.
Last year in the quarter, we recorded an $8,000,000 pretax LIFO credit or a pickup of a little over $0.01 a share. This year in Q4, we had a LIFO charge of almost $11,000,000 or about $0.02 a share charge. 3rd point, income taxes. Our income taxes this year in Q4 included several discrete items that the aggregate increased our income tax line by about $8,000,000 The $8,000,000 of additional taxes included a few positive items that benefited or lowered our tax by about $7,000,000 in total. However, these positive items in total were more than offset by a $15,000,000 income tax related to our decision to repatriate from Canada back to the United States about US1.2 billion dollars or US1.3 billion dollars of our Canadian cash operations cash balances in the near future.
In all, the CAD8 million net income tax increase from these discrete items, a negative impact earnings of about $0.02 a share. 4th item, our company bonus accrual. I discussed in last year's earnings call that our 4th quarter 2013 quarter results benefited by reversing or bringing back a portion of the company's bonus accrual as our fiscal 2013 results caused us to pay bonuses at a lower level than we had accrued throughout the year. This year in Q4, our accrual for the year end bonuses was not reduced in the Q4 as it was as it had been last year. Overall, this represented a $0.04 a share negative swing year over year to our bottom line.
Mind you that the bonus program impacts a little more than 4,000 people who participate in it throughout the company. And last item I'll point out is gas profits. This year our gas profits in Q4 were quite strong representing an additional 0 point 5 dollars a share to earnings year over year. Overall, a $1.58 earnings figure for the year's 4th quarter was reached despite several discrete items, representing 0 point 5 dollars or 0.6 dollars shares in the aggregate that did not go our way. Now to the subject of new openings.
For all of fiscal 2014, we opened 30 new locations, 17 new in the U. S, 3 each in Canada and Australia, 2 each in Japan and Korea and 1 each in the U. K, Mexico and Spain that being our first unit opening in Spain. We ended fiscal 2014 with 6 63 locations operating worldwide. For the current fiscal year fiscal 2015, our plans are to open 31 new warehouses and also relocate 4 existing locations.
19 of the planned 31 new locations will be in the United States, with the remaining in international markets. Inevitably, up to a few of these will get delayed. So I'd estimate that the number of new units in fiscal 15 will most likely be either in the very high 20s or up to 30 plus the 4 relos. During the 1st 4 months of fiscal 20 15, basically September through this coming calendar year end, we plan to open 8 of our fiscal 15 locations, 6 in the U. S.
And 1 each in Australia and Mexico as well we'll complete 1 warehouse relo in Wayne, New Jersey. This will occur in 2 weeks from tomorrow on 23rd. This morning, I'll also review with you our membership trends and other activities, our e commerce activities, additional discussion about margins and SG and A, our stock repurchase activities during the quarter. I'll also comment on the recent switch in Canada of our co branded credit card offering that's going on right now. Okay.
For the 4th quarter results, sales again for the 16 week 4th quarter were up 9% to $34,800,000,000 up $3,000,000,000 from $31,800,000,000 a year ago in the 4th quarter. On a reported comp basis, Q4 comp sales were up 6%. For the quarter, our 6% reported comp was a combination of an average transaction increase of a little under 2% for the quarter and this included an FX detriment of about 0.5% and average frequency increase of 4.2 percent. In terms of sales comparisons by geographic region, in the U. S.
With a 6% 4th quarter comp overall, most U. S. Regions registered in the mid single digit comp increases with Midwest Southeast being even stronger. Internationally within the plus 8% local currency comp, Australia and Japan were the weakest due in large part to cannibalization with Taiwan, Korea, Canada and Mexico all coming in strong in terms of comp sales increases. In terms of comp sales by merchandise categories for the quarter, both Food and Sundries and Hardlines comps were both in the mid single digits range for the quarter and both Softlines and Fresh Foods comps were in the high single digits range for the Q4.
Within Fresh Foods, of course, we're still experiencing inflation in the low to mid single digit range on average. For our September sales results, sales for the 5 week September month which ended October 5 were $10,570,000,000 up 7 from last year's September reporting period, again on a comp basis reported plus 4%. For September, our plus 4 percent reported comp sales results were a combination of a slightly positive average transaction notwithstanding almost 2 percentage points impact from FX and gas deflation and average frequency increase of right at 4%. Cannibalization for the month negatively impacted our sales by just under 0.5 percentage point. Excluding FX and gas effects, comp sales for the month of September as I mentioned were up 6%.
In terms of sales by geographic region, most U. S. Regions were in the 4% to 5% comp sales range with the Midwest and Southeast being even stronger. Internationally in local currencies, Japan and Australia being impacted by cannibalization were the weakest performers, while Canada and Taiwan were the strongest in terms of comp sale increases. In terms of sales by category for this September, our Food and Sundries and softlines both enjoyed mid single digit comps, hardlines low single digit comps and fresh foods high single digit comps again having a little bit of extra inflation there as well.
Ancillary business comps overall in the mid single digits led by optical and food courts. Gas comps were in the mid single digits range despite average sale price of gasoline during the month being down 4 percentage points year over year. Moving to the line items on the 4th quarter income statement. Membership fees, we came in at $768,000,000 or 2.21 percent of sales. That's up 7% or $52,000,000 year over year from 7.16.
It's down 4 basis points as a percent of sales. Again, we had strong sales in the quarter. In terms of membership, we continue to enjoy strong renewal rates coming in at rounding up to 91% in the U. S. And Canada and a little over 87% worldwide.
We continue to enjoy strength in our executive member program with continued New member sign ups in Q4 overall, a little over 2,000,000 new sign ups in the company. These was about a 7% increase year over year. This was helped of course by strong new sign ups and a few overseas openings in Australia, Korea and Spain over the past year. In terms of members number of members at Q4 end, our last reported number of course was a fiscal quarter ago in mid May. We had Gold Star members at the end of Q3 at $30,600,000 at the end of the fiscal year it was up $1,000,000 to 31,600,000 Primary business was up $100,000 from $6,800,000 to $6,900,000 Add ons remained at $3,500,000 So overall total paid member households $40,900,000 at Q3 end and up $1,100,000 to $42,000,000 even at Q4 end.
With excluding Extra Cards $74,600,000 at Q3 end up $1,800,000 to $76,400,000 at the end of the fiscal year. Also at the end of the fiscal year, executive memberships stood at just under $15,000,000 an increase of about $450,000 just in the 16 week quarter or about $28,000 increase per week of new executive members. In terms of membership renewal rates, day 2 continued strong. Again at the end of the Q3 business renewal rates were 94.4%. They remained there at Q4 end.
Gold Star renewal rates ticked up a little bit from 89.7% to 89.8%. So overall, we remained at 90.6% rounding up to 91%. And again, worldwide, we continued at 87.3%. Now as I've touched on the last couple of quarters conference calls, we continue to try a few new things to drive sales and new member sign ups. In early September, this would be the 1st couple of weeks of the Q1 of the fiscal of the new fiscal year.
For 8 days, we ran a nationwide membership promotion for new members on LivingSocial. With the purchase of a full price $55 membership, the new member received a $20 Costco cash card coupons for free items. As you might expect, they include a Kirkland Signature bath tissue, an apple pie and a rotisserie chicken. Also a free 3 month membership for identity protection and a bonus coupon of $25 off of any costco.com offer of purchase of $2.50 or more. These types of promotions, we believe will allow us to get in front of younger demographics and with an appealing offer.
This one worked well and we'll keep you posted. Lastly, I want to mention that in Canada, it was announced last week that the Costco Canada's co branded credit card offering is being switched from a Costco American Express co branded card to a new co branded Costco Capital 1 Platinum Mastercard. This will be exclusive to Costco members. We have already begun to issue the new Mastercards and we will continue to accept all Amex cards through December 31st this year. Our new no annual fee credit card doubles as the membership card and allows our members to earn cash rewards on all purchases made both inside and outside of Costco with no cap on the amount of rewards that can be earned.
Getting back to the income statement. Our gross margin in the 4th quarter was quite strong coming in up 15 basis points year over year from a 10.5% a year ago in the 4th quarter to a 10.7% during the Q4 of this past fiscal year. As usual, I'll ask you to jot down a few numbers. We'll do 4 columns. This time the 4 columns will be for Q4, 2014 both as reported and without gas inflation.
And then for the entire fiscal year, 2014 reported and and without gas inflation or deflation. First line item is core merchandise. In the Q4, we have year over year, the core was up 6 basis points both with and without gas, because gas year over year was essentially flat. For the year, plus 6 percent reported and a +3 percent without gas. Ancillary and other businesses, a big contributor in Q4, plus 15 basis points in the first two columns there and for the year, plus 6% and plus 6%.
The 2% reward, no impact in the Q4, both of those two columns, a minus one basis point impact in the both of those two columns, a minus one basis point impact in the next two columns. LIFO, as I mentioned, of course, there's it was a charge this year versus credit last year, 6 basis points year over year both in the 4th quarter columns and minus 5 basis points year over year for the entire fiscal year in both columns. Other no additional items in the 4th quarter. In the last two columns for fiscal 2014 at minus 2 basis points year over year that related to a lawsuit recovery over a year ago that benefited us. And of course, we didn't have any unusual item offsetting that benefit from a year ago.
If you add it up, we reported margins up 15 basis points both with and without gas. Our reported total for the year was up 4 basis points, but taking out gas it was up 1 basis point. So again a good showing overall in the 4th quarter in in terms of margin improvement. Now as I mentioned the core was up 6 basis points. 2 of the 4 core categories food and sundries and fresh foods showed higher year over year gross margin percentages.
While year over year in Q4 Softlines margins were essentially flat year over year and Hardlines margins were slightly lower. Ancillary business gross margins were up over 50 basis points year over year in the 4th quarter based on their own sales with gas optical and hearing aids coming in better year over year in Q4. And LIFO again in the 4th quarter we recorded just under $11,000,000 or 3 basis point pre tax charge compared to an $8,000,000 or 3 basis point pre tax credit last year for a 6 basis point year over year swing in the 4th quarter. Next, our SG and A percentages. Year over year in the 4th quarter, they were lower or better by 2 basis points coming in at a 9.73% as a percent of sales compared to a 9.75% last year.
Again, we'll do the same four columns, 2 for the 4th quarter with and without gas and 2 for the full fiscal year with and reported and without gas. In terms of core operations, we have 2 a +7 and a+7 for the quarter and a minus 2 and a +1 for the fiscal year. So, +7 of course would mean that it was lower or better by that many basis points. Central was a minus 7 and a minus 7 for the quarter and a minus 3 and a minus 3 for the year. RSUs a plus 2 and a plus 2 and for the year a minus 2 and a minus 2 and no quarterly adjustments.
So total for the quarter both on a reported basis and without gas, again we were better by 2 basis points or a +2. For the year, we were higher by 7 basis points on a reported basis, so a minus 7 and without gas a minus 4. Now in terms of our SG and A performance, the core operations again was lower or better by 7 basis points. Within core payroll within core payroll and benefits expenses were lower or better year over year by 8 basis points, again helped by leveraging sales strength. Similarly, other operating expenses as a percent of sales in the quarter were better by 4 basis points.
So total between those 2 those three items really would be 12 basis points. The change in the bonus accrual year over year as I discussed earlier hurt the core component by about 5 basis points. In terms of Central, it was higher again by 7 basis points. About 5 of that is SG and A variance is related to the ongoing IT modernization efforts. And another 3 is the increased SG and A expense resulting from year over year swing in bonus accrual.
That's split between core and central. And lastly, our equity compensation, which is now an important component of compensation to again to about 4,000 people, this represented an improvement of 2 basis point positive in SG and A benefiting from both timing of certain vesting provisions when employees hit 25, 30 35 years of service as well as from the strong sales denominator in the 4th quarter. Next on the income statement line preopening, not a whole lot to talk about $17,000,000 last year in the quarter, dollars 15,000,000 of charges this year in the quarter. Last year, we opened 7 units this year 10. No major surprises there.
All told, operating in the Q4 increased 14% or $137,000,000 year over year from $954,000,000 last year in the 4th quarter to almost $1,100,000,000 $1,901,000,000 this year in the 4th quarter. Below the operating income line, reported interest expense was $1,000,000 lower year over year coming in at $36,000,000 last year and coming in this year at $35,000,000 for the quarter. Interest income and other, it was lower year over year by $6,000,000 $36,000,000 last year in the Q4 compared to $30,000,000 this year. Actual interest income for the quarter was up $3,000,000 coming in at $17,000,000 compared to $14,000,000 last year. The other component of interest income and other was lower by $8,000,000 primarily related to various FX items being mark to market at fiscal quarter end.
Overall, pre tax income was up 14% or $132,000,000 to 1 point 8 $6,000,000 this year versus last year's Q4 pre tax earnings of $954,000,000 In terms of income taxes, our tax rate for the quarter came in at a 35.1 percent up 3 10ths of a percent from a 34.8% tax rate all in last year, so slightly higher this year and as I explained the reasons for that earlier in the call. Overall net income was up 13% or $80,000,000 to 6 $97,000,000 versus last year's Q4 of 6.17. And as I discussed earlier, this figure being achieved notwithstanding several items that in the aggregate did not go our way. Now for a quick rundown of other usual topics. A condensed balance sheet is included in this morning's press release, but a couple of items on the balance sheet and a couple of cash flow items I'll point out here.
Depreciation and amortization for the quarter totaled $321,000,000 and for the year $1,029,000,000 dollars In terms of accounts payable as a percent of inventory, on a reported basis both last year and this year's Q4 it was right at 100%. Payables of course include things other than merchandise payables like construction payables. If you look at just merchandise payables as a percent of inventory in both fiscal quarters, we were at 89% year over year. So almost 90% of our inventory is being financed with trade payables. Average inventory per warehouse last year 4th quarter end $12,500,000 up a tick this year in the 4th quarter to $12,800,000 or up about $300,000 or 2%.
The $300,000 increase about 80% of that is in 4 of our merchandise sub departments. Majors was up about $91,000 some of that is the reintroduction of Apple products. Men's apparel was up about 55,000 dollars Foods was up $61,000 and Meats were up $39,000 the latter two being somewhat related to inflation. In terms of CapEx, in the Q4 we spent $567,000,000 For all of fiscal 2014 total CapEx was right at $2,000,000,000 Our estimate for fiscal 2015 CapEx is quite a bit higher probably in the $2,500,000,000 to 2,700,000,000 dollars range. The year over year increase in CapEx represents our plans for more openings this year.
That of course includes the 4 relos versus last year increased spending for remodeling activities expanding ancillary business operations planned expansion of our cross dock depot operations anticipated spending later in the year for some additional openings early in the subsequent fiscal year and increased level of IT spending for the modernization efforts. In terms of Costco Online, we're currently operated in 4 countries U. S, Canada, U. Dollars For the fiscal year, total e commerce sales came in just under $3,000,000,000 For both fiscal Q4 and the fiscal year sales and profits were up. Sales in e commerce were up in the high teens for both the 4th quarter and the fiscal year.
And comp sales in e commerce were up in the 18% to 19% range for both the Q4 and the fiscal year. Over the past 2 years, as I mentioned, we re platformed our site. We've introduced new apps. We've combined some e commerce merchandising efforts with in line efforts. We've added new categories, including areas like apparel, health and beauty aids and some sundries and we've improved distribution delivery time.
In addition, outside of e commerce, as you know, we've continued over the last much of this past calendar year testing Google Shopping Express. That continues with a great partner with Google. The trending is positive in terms of member spending and also signing up some new members. But again, it's still a test. We continue to add items to that delivery process.
Currently, it's in 3 geographic areas, the Bay Area, Los Angeles and New York and more to come I'm sure. Next discussion in terms of expansion. Again for fiscal 2014 that ended we opened 30. Acapulco was closed due to weather related destruction. So ended up a net increase last year of 29.
This year, assuming we opened the planned 31, we opened 35 before those are relos, so planned net new of 31. 8 would be in the 1st quarter, none in the 2nd quarter, 2 in the 3rd quarter and 21 in the 4th quarter. We've got a lot going on. I think that again we'll probably see at least a couple of 1 or 2 of those perhaps speed up a little bit, but a few be pushed into the next early the next fiscal year. So in fiscal 2014, we added 29 on a base of 634 or about 5% square footage growth.
In fiscal 2015 assuming 31, it'd be about 4 point 5% to 5% square footage growth. In terms of the 31 this year, if we get all of those open, 2019 would be in the U. S, 1 each in Canada and the U. K. In Asia overall 6, 3 in Korea, 2 in Japan and 1 in Taiwan.
One additional in Australia that we are 7th in Australia, 2 more in Mexico and one more in Spain. As of Q4 end total square footage stood at 95,300,000 square feet. One last comment regarding openings and operations in Cabo San Lucas, Mexico. Costco like many other businesses was a victim of the recent hurricane on September 14th and the subsequent looting that took place and that we're currently closed. We plan to be back up and operating by early November.
In terms of common stock repurchases, we began our recent repurchase activities on March 7, the day after our Q2 earnings release was In Q3, we purchased 1,600,000 shares at an average price of $113.14 for a total expended of just under 184,000,000 During the Q4, we purchased 1,300,000 shares at an average price of $116.11 for a total dollar amount of about 150,000,000 dollars In terms of dividends, our current quarterly dividend stands at $0.355 a share or annualized at $1.42 That's up 14.5 percent from the previous year's dividend rate. This $1.42 per share dividend represents an annual cost to the company of about $625,000,000 Lastly, our fiscal 2015 Q1 scheduled earnings release date will be Thursday, December 11th. For that will be for the 12 week fiscal Q1 ending on November 23. With that, I'll turn it over to Brandy for Q and A. Brandy?
Certainly. And your first question comes from John Heinbockel with Guggenheim Securities.
So Richard a few things. The gross margin being up in the food categories, is that cost of product to you? I know you're talking about inflation, but is that cost of product driven? Is that mix driven? Where is that coming from?
Without looking at the detail, I would guess most of it's cost of product driven. The examples of course would be I've mentioned before poultry prices to us have come down a little bit as we locked in versus where they had been. We didn't change the price, needless to save those items upward. I think we've had a little bit of a fit in the food court similarly for that reason. Do you think as Kirkland gets bigger and gets more scaled, do you think there is does can that move the needle on gross margin either in terms of margin on the product or mix?
I think it does a couple of things. Generally the answer is yes. It also as a KS product takes share from a branded product, it generally moves the branded product to come down in price to us, which again gives us even more competitive loyalty with our members. So there's a lot of good things there. Certainly, the needle the low hanging fruit occurred many years ago.
But you've heard the examples of whether it was toilet paper or disposable diapers where you have items that are very, very competitive branded items. We can come in with a great value, great quality item and make a fairer margin to us, but still a great Obviously, there's a lot going on there. Just generally speaking, Obviously, there's a lot going on there. Just generally speaking, how do you find you're performing in the UK top and bottom line today? Well, 2 things.
To finish the something I thought about after I finished the first answer. The other benefit of course is not just KS, but the increase in organic sales. That's something I think that competitively gives us a leg up because it's where more margin historically has been made in retail organic. We can provide better savings and it has other positive attributes in terms of the type of member that shops for that stuff. In terms of the U.
K, it was still positive. It was at the lower end low single digits. Actually, U. K. Has shown some improvement.
Okay. And then, Rob, lastly, you mentioned organic. What 2 things. What's happening to assortment there? And then secondly, it does look like on a variety of levels in terms of just product placement marketing, right?
You're trying to drive that significantly. So that's got to be one of the still one of the fastest growing departments in food. Is that helping you much with the millennials? Or is that yet to come? Well, it's helping.
It's probably a bigger percentage now because it's on a small base. Yes. You look at I think a couple of quarters ago I talked about like fresh ground beef, organic ground beef. It's an infinite percentage increase from 0 to 25 or so 1,000,000 that 1st year. As I mentioned earlier, what we're finding in a lot of these items is that it's incremental sales because it was loyal members that didn't buy ground beef from us before and now they are.
This year organic ground beef sales are up dramatically because the supply is up dramatically. So yes, again, it's they're big numbers on it's one of those good things, but it's lots of little things.
Okay. Thank you.
Your next question comes from Peter Benedict with Robert Baird.
Hey, Richard. A couple of questions. First, just the membership promos you're doing with LivingSocial, how are those funded? Are the vendors contributing any of that? Or are you guys funding all that?
Well, I think an example of I think we're doing most of the funding in that certainly to the extent there's the identity protection. We have some vendor support I'm sure. I don't know exactly, but I would best I'm sure we do. The other item on the food items there are items KS bath tissue, rotisserie chicken. I'm not sure if there's a little support from the manufacturers, but I would assume it's part of the member procurement costs on our side.
Right. Okay. And then the plans for the Canadian cash that you're bringing in?
It's really just moving it down here. As you we read about every day in the paper, money is stuck at multinational companies outside the U. S. We have the ability based on when the monies were earned over the last 20 years, years ago the basically the marginal federal corporate tax rate in Canada versus the U. S.
Was a lot closer than I think the roughly 13 percentage points difference now roughly 26% versus 39%. These first $1,000,000,000 if you will, dollars 1,200,000,000 dollars as I think I mentioned as translated to U. S. Dollars is at an effective rate of about 1.25% tax rate. So we opted to move it.
Canada of course is very profitable. It has its own column in the segment analysis. You can kind of figure our CapEx is our CapEx is dwarfed by our earnings up there. And so we'll continue to make money. We saw this as an opportune time to be able to start that process.
Okay. Perfect. And then last question. Just how do you guys think about the timing of introducing the executive membership option into new markets?
What are the main considerations?
And how should we think about that for getting in some of these markets where you're not in? I'm thinking of Asia.
Yes. Well, I think there's 2 things. 1 is how big is the country in terms of how many units we have? And secondly, can we get a I guess there are 3 things. That was the first one.
2nd would be putting a menu of services together that we can do. And of course as we get bigger in a relatively bigger in a given country that buying power allows us to do that. And then what else we have going on? Using Japan as an example, we've gone from what 9 to 23 or 4 units in about 2.5 years. So I think we like it.
We like the executive member program. And long term, we'd like to see it in other countries. But those are the types of factors.
Okay, great. Thanks very much.
Your next question comes from Scott Mushkin with Wolfe Research.
Hey, good morning guys. This is actually Mike Ottway in for Scott. Thanks for taking the questions. Richard, in terms of SG and A, you laid out the buckets. As we think about next year, is there any are there any buckets that are likely to move SG and A a bit higher than this year or perhaps a little lower?
I know you mentioned you're spending a bit more on IT modernization. How does that flow through the P and L? Any color there would be great.
Well, I mean, 1st and foremost, it's sales growth. I mean, if we can get good sales growth that helps a lot of things. Certainly, increased penetration in some of our overseas markets actually helps quite a bit because of various things. Health care expenses as a percent of sales are much lower in virtually every other country in the United States. Labor costs are different and generally lower in other countries as a percent of sales.
So I think those things will probably help us. In terms of like humanization as I've kind of laid out over the last couple of years each quarter, incrementally we'd expect that to be in the low to low mid teens incremental over 3 or 4 years. I think we're probably up to 10 or 11 basis points or maybe 9 or 10 basis points over the last couple of years. And we'll continue to see that this year. I don't think it's going to help us anytime soon.
It probably is a slight negative impact certainly in fiscal 2015 maybe a little in fiscal 2016 before it flattens out and hopefully starts to go the other way a little bit. Beyond that, health care is always an unknown in the U. S. And again, as I mentioned, I think to the extent that the health care continues to be the inflationary aspects of health care in the U. U.
S. And we're as you know, we haven't and aren't willing to make major changes like cutting a bunch of people out of it. That's an expensive cost to us and we're proud of the ability to be able to do that. Notwithstanding that, even if that continues in its slightly greater than sales top line sales rate of growth, increasing penetration of health care costs outside of the U. S.
Will help mitigate any damage there. So I don't think there's anything new to add to this process than those kinds of things.
Okay. That's helpful. And then just in terms of the consumer, have you seen any real change there in the last few months? And then specifically with your business in the Midwest and the Southeast, maybe what you're seeing in those regions relative to it's clearly strong, what's going on there versus some other places in the country?
Well, I think with the Midwest certainly it's a newer region relatively speaking. We're getting we seem to I think are hitting our sweet spots in some of those cities. Same in the Southeast. We've opened in areas like Louisiana and Alabama and Georgia and Florida some additional units and South Carolina. They're generally tending to do pretty well.
So I think a few extra years there have helped us frankly. I can't tell you much more than that in terms of the little color on the consumer. Some of the usual suspects, good suspects if you will in terms of merchandise categories, some of the non foods, soft lines and hard lines categories like apparel and housewares and domestics, those have all done well in part because of our commitment to them, our increasing commitment in apparel area would be one example. Clearly, having the demographic or a member I think helps. Having strength in gas, I mean gas sales were up, I think I mentioned, I think 4%, notwithstanding 3% or 4%, notwithstanding a 4% or so decline in the average sales price per gallon.
So, gallons are up nicely and that's driving no pun intended, but driving people into the Costco parking lots.
Great. Thanks, Richard. Appreciate the color.
Your next question is from there's you didn't mention opening anything in France, I think, in this coming year. Are you looking just to continue to fill out the markets where you already operate? Or are you considering moving into another new market? I mean, obviously, Spain is still very new, but
Sure. Well, both Spain and France, I think we probably started talking about those 2 countries 3 years ago. And at the time, we felt that it could be 3 or more years based on the permitting and appeal processes in various not only countries, but cities and communities. And that's certainly why we keep at this point pushing out France. We'll continue to look at that.
And again, we'll have our second opening in Spain later in calendar 2015. We haven't mentioned any other countries beyond that. If I was a betting person absolutely in the next few years, but not in the next year, year and a half.
And maybe you could just comment a little bit about real estate in the U. S. Are you finding any changes in the environment, harder to find locations, working with developers, anything different?
Well, I don't know
if it's anything different. In some markets, it becomes it's ever increasingly more difficult. In a Greater L. A. Where we've got 40 or 50 units, many, many units, we feel that over the next 10 years, we could open another 10 or 15, but they're all very pinpointed locations based on where other locations other Costco locations are.
So it's and it's densely populated and it's difficult, but that's what we do. And we've got a lot more people in the real estate area over the last few years. We've got a lot more in the pipeline and we think we'll get there. I think also in and we're fortunate in a sense that many of the markets be it Texas, Midwest, Southeast, some of the markets that we are newer in over the last 10 years not the last 30 years, we're able to go into and given our demographic, we're able to find some locations. Certainly, we also get some calls as you might expect from developers.
But it's probably an increasingly difficult effort and that's why we've added more infrastructure to pursue that. Overseas, every country is a little different. I think as I mentioned in Asia this coming year we have I think 6 planned 3, 2 and 1. Of course we've opened a bunch in Japan in the last 2 years And so, yes, again, it takes a lot longer, but we got a lot in the pipeline too. And so we'll continue to see some growth there.
Okay, great. Thank you. Your next question is from Simon Gutman with Morgan Stanley.
Good morning. It's Joshua Seiber on for Simeon Gutman. I'm curious if you are seeing areas of the store where customers are more or less sensitive to price increases and how much room you have to further pass through greater cost in these categories?
Well, we're most sensitive to us. We haven't seen any major change in level of competition out there. I mean everybody's tough and we're pretty tough ourselves. So I don't think so. I mean I think it's continuing as it goes.
I think we're some of our margin improvement of late has become as we've not raised prices, but some of the underlying costs have come down. And some of that hurts behind us, but tomorrow is another day. Okay.
Yes. Sorry, go ahead.
We've taken no, we've the list of price increases is not a big list around here.
Okay. That's helpful.
Relatively speaking.
Sure. For the members that you picked up on LivingSocial, do these customers shop online more frequently? And is there a noticeable difference in basket in terms of pricing or content?
There's so new I can't really tell you. This most recent program was early about 3 weeks ago. And the process is they redeem their coupon then they come in and a lot of them are coming in. And but I would guess generally speaking compared to the first test we did on a regional basis with LivingSocial a few months earlier, you do have a higher percentage of millennials. And but like any new member, millennials or otherwise, when a new member first starts to shop, they're generally shopping smaller basket sizes and a little bit more food oriented to start with.
And that's been historically a typical pattern. So it's too early to tell.
Okay. And then just one more housekeeping question. Is the $150,000,000 buyback that you guys spent in 4th quarter a good run rate to go forward?
I can't really respond to that. I can tell you that we historically when we have bought we have bought through blackout periods using 10b5-1s. Our longest blackout period of the year which is 6 or 7 weeks long stretching from early I guess from late July early August all the way to today, you have to basically put in place something. Well, if you go back that many weeks, the stock at the time was in the mid to high 115, 117. And so we hadn't bought for the last few weeks of the quarter.
But that would imply a little longer bigger runway, but it will go up and down a little bit. I think that we are intent on buying some stock back.
Okay. Thanks for the color guys.
Your next question is from David Schick with Stifel.
Hi, good morning. You talked in the call about the high teens growth of online and you talked about the success of the Google partnership. And you said profit growth was I think at a similar pace, but going back to what you said, if you could just give any more details how the profitability or the growth thereof is trending in online that would be helpful. Thanks.
The profitability is very good. I don't think we really give out profit growth numbers there and that 3% piece of our business. The good news is it's growing and it is more profitable. E commerce is definitely quite a bit more profitable than the rest of the company. And so 3% of sales implies a greater percent increase of earnings.
Is it more profitable on a flow through basis than it was at this time last year?
Let me correct that. 3% of sales, a higher percent of sales profitability than the company overall. So every time we can grow those sales, you'll see earnings grow nicely too.
And then is the operating margin of it if you don't want to detail that, that's fine. But is it growing beyond the revenue? Is it levering or is it expanding the total loaded margin?
Well, the problem you have is, is we've opened recently in a couple of new countries in the last year and a half. And so we're spending a lot of money on that. We spend a lot of money on apps on upgrading. And so I don't have the numbers in front of me, but I know it's growing and it's profitable. Okay.
Thank you. And we're continuing to pursue it. Thank
you. Your next question is from Greg Melich with ISI Group.
Hi, thanks. Richard, a couple of questions. I'd love to start on membership fee income. So it was up 7%. What was it in local currencies?
And in terms of membership growth, how much of that you think is driven by the new clubs?
Let me ask the first answer the first question. It was up 8% without FX and dollars. And what was the other question?
So I think you said memberships were up 7%. I was trying to get a sense of how much of that was driven by the new openings particularly in these markets where you is it very successful? You've had huge membership growth with some of the new clubs?
Yes. I don't have it in front of me. I'm sure that made it healthy. I can remember over the years when sometimes we it's a little down year over year, it's because a year ago we had some foreign operations with those outsized new sign ups and fewer international the next year. I don't know off the top of my head.
Right.
So, but you say 8% is the local currency number?
Yes.
Okay. And then second, I wanted to understand a little bit more about the gross margin in ancillary. I guess that was up you said up 50 bps in ancillary which was
Well, ancillary and if you took total ancillary gross margin divided by totally ancillary business sales, it was up a little over 50 basis points. Different ancillary businesses were up or down differently. That in addition to strong sales in those areas, so a combination of increasing penetration and increasing margins was a higher level benefit to the total company gross margin, gas being the outsized one there.
And how should we think about the sustainability of that on gas? Like are we now at what will be a normal run rate there? And also is dotcom where does that show up in your nice little bridge you do?
Well, dotcom is in the core. It's not an entry, is it? Dotcom? No. In terms of sustainability of gas profits, I only wish.
We've probably been on a little longer run of good gas profitability the last several months. Generally speaking, when gas prices are year over year are flat or declining as they are now, that's good news. We save the customer more and we make more. When they're going up fast, we save the company the customer a little less and we make it less. And so we've been blessed by having a positive run here for several months.
But it's a volatile area. Now that's just looking with full blinds on just gas operation. That doesn't take into account the fact that every time we can get somebody to come in and get gas that's incrementally a potential positive shop in the warehouse as well. And so that we of course don't consider as part of that.
Is it fair to say that the 15 bps that you cited that gas was half of that? I think you listed it first when you talked about optical and hearing aids and
gas. I don't know off top of my head. I bet it's half or more. It's not all.
Got it. And then lastly, just on the inventory increase, it sounded like you gave those 4 areas, which is all very clear. Was there anything unusual about that other than restocking Apple that you wouldn't use that as sort of a trend going forward in those categories?
Actually the trend this is I think probably the lowest year over year average increase in merchandise inventories. For a few years there, we've been running up 5%, 6%, 7%, 8% year over year in the inventory levels. In the last couple of quarters on a year over year basis, we've been down in the 2% or 3% range. So actually it's come in better in my view. I mean, whatever a 3% increase in inventories on a 2% increase in inventories on a 7% or 8% or 9% increase in total sales.
Yes, I think the anomaly there would be adding some product on that side and the anomaly of course with inflation in fresh foods, but that's going to fluctuate as well. So I think overall probably this is we looked at this as being a little bit better level of increase in average inventories per watt offset.
It sounds like you think it's sustainable at this
rate?
At this point? Sure.
Yes. Great.
Thanks a lot. That could change tomorrow. You never know.
I know. Thanks a lot.
Your next question is from Matthew Fassler with Goldman Sachs.
Thanks a lot and good morning. Couple of quick ones here. First of all, I know that you essentially mark to market for LIFO at the end of any even quarter. So your expectation is that you're probably going to be clean as you go into next year. That being said with the trends that you're seeing in pricing in key categories, what's your initial thinking on the direction that might move in 2015 relative to this past year?
It's hard to know. The only person I've actually talked to is in the area of fresh foods and there's anticipation of continuing overall inflationary trends there. Although some of it when it's deflationary is because it I think butter had skyrocketed and now it's coming down a little. I might be wrong on the commodity there, but probably still a little bit of inflation.
Okay. A quick second question here. You mentioned in your gross margin discussion that hard lines was down a bit year on year. Just interested in any color in terms of the drivers there?
Yeah. I think for the quarter it was flat. And was it nothing really stood out. I mean majors which is electronics was up slightly. Nothing really stands out there.
Okay. And then finally, you had a question earlier about some of the membership deals that you're running for example the one with Living about really who bore the economic cost. I guess my question is and I know that this is pretty small potatoes for the moment. How do you account for those subsidies? Does it reduce the membership fee income?
Or does it show up in some other line item?
It's allocated between sales and membership, but it's mostly membership.
Okay. So for the year sorry go ahead.
It's funny. That's over the year. I mean for the and it's advertised over the year. It's I'll have to find out. I don't it's so small.
But it's less than a rounding error.
Fair enough. Okay. I appreciate it. Thank
Your next question comes from Charles Grom with Stern AG.
Thanks. Good morning, Richard. Nice quarter. Just wanted to see if you could talk a little bit about Google Express. And what's the ultimate goal of that program?
Is it to drive increased membership? Is it for you to get younger? And I guess what's holding you guys back on rolling it out to more than just the few regions where it's being tested today?
Well, first of all, we talk about us and Google partnering on this. They're partnering with a number of other retailers as well. You can go to Google Shopping Express in each of those three geographic markets and see who what other retailers. We're certainly, I think, a big component of it, we're a big component of every anything we do. And it's been good so far.
I think you really have to ask them that. I would assume they are looking at additional markets, but as they're announced you'll find out as well. Generally speaking, ultimately, we're always asked about all the concerns Fruity Pebble Cereal and a quart of milk before your kid wakes up in the morning for breakfast, if you ordered it before 10 p. M. The night before.
But we are we started our business being a wholesale supplier. In this case, it's kind of a hopefully a win win, not only for Google Shopping Express, but for us. We are seeing incremental business from it. But there's again, there's a lot of nuances to it. So far, so good.
But again it's and the biggest test it's been around for 7 or 8 or 9 months I guess since January in the Bay Area and a lot fewer months in L. A. And in New York. We like it because it's our member and there's that positive aspect of it. You can't get Costco items through Google Express unless you're a Costco member.
And we have seen incremental sign ups because of that. And look we appreciate the fact that it's a way to sell merchandise as well as a way to get some members over time as well. It's a great way in our view to have ultimately, we want to get you in the store or into warehouses more frequently also and we think there's avenues to do that. But it's really too early to know other than as it is likely rolled out to other cities, we'll be part of that at this point in time.
Okay. So another initiative you guys have is to get younger is this organic offering. I'm just wondering if you could just put things into context of where you guys are today, there are number of SKUs or percentage of sales to where you were a couple of years ago?
Organic was about $3,000,000,000 I'm told by one of the many people in my office right now last year and growing dramatically part of that supply and part of that is pushing it more. I don't think we sat around a number of years ago and said let's do organic to get millennials. I think what happened is as we sell items and as those items grow and we see that it's got great attributes for us, one that we didn't even realize until we saw it. We can generally provide a better savings than others because other retailers sometimes will use it as an ability to get more margin. So we show greater savings.
It's a higher price point item than the substitute item. And again the added benefit was is in some instance I've used the ground beef example. We had existing loyal members that 80% I know in that 1st year I assume it could be a little lower now, but a large percentage of the those were incremental sales because those were existing members that didn't buy the ground beef at Costco. So to the extent that you have be it millennial or otherwise, but to the extent you have somebody that is an organic buyer, they may love Costco, but if we don't have an organic alternative, they're going to shop elsewhere for that item. Now so that helps hopefully get them in more frequently to Costco.
But we're doing it because we're selling those items. And as it increases we've had organic milk for a number of years. And certainly we're able to use our buying power and our sourcing to continue to drive that.
Okay. And just switching gears a little bit. It's been a lot since I've heard you guys articulate a longer term store goal. And I'm just wondering if you're willing to share one now. And as a follow-up to that, 19 clubs in the U.
S. This year out of, say, roughly 31, When does the pendulum shift to more international locations where you're doing 19 international say as opposed to 19 in the U. S. For this year?
I think over the next 5 years. If you look back a year ago, I think we talked about the fact that over a 5 year period, we'd expect to open roughly 30 a year, maybe starting at 28 or 29 ending up at 33 or 35 and we're kind of in that right I guess year 2 or 2.5 of that 5 years. I think the fact that we're opening a few more, if you asked me 3 years ago, I would have guessed it might be more evenly split right now. Think that's simply a function of availability and speed at which you can get things done here. When you're looking in a 20,000,000 population city in Asia, there's all kinds of issues.
And again, as I've mentioned, we've got more people in real estate on the ground in of these countries compared to very few on the ground 5 years ago. So the pipeline is definitely more filled. And I guess from looking at it in a positive way, I the question of when are you going to slow down in the U. S. Because of anticipated saturation, we're I'm having a report that that's not happening yet.
It will happen at some point, but if anything it's probably that pendulum has probably swung the other way a little bit in the last couple of years in part because of some of the strength in those markets where we've been in 10 to 15 years or less not 25 30 years.
Interesting. And any thoughts on the longer term store growth that you guys have?
Other than more, I think if you asked Jeff and Craig and the heads of operations, if over this current as I define it 5 year period, it's 30 a little over 30 a year. I think we'd like to get up to 35 a year in the next 5 years maybe a little more. So we'll continue to try to push that a little bit. We feel we have the capabilities to do that. That depends of course on continued success in these markets.
Okay. And then the last question just on the margins as a follow-up to I believe my last question. I Just wondering if you could just speak to the degree of improvement on Food and Sundries and Fresh relative to the Q3, which I believe your Food and Sundries was up 20% and then Fresh was down a couple of basis points. I know you said it was positive. Just wondering if you could give us the degree of improvement?
I think it's in the I don't have it right in front of me, but it was less than up 50 and more than up 10. I don't have it in front of me.
I'm sorry. Could you repeat that?
Less than up 50 and more than up 10 basis points. I think somewhere in the high teens or 20s. I don't have I could be off a little bit, but there wasn't one of them wasn't up one basis point and the other up 80. They were both up.
Okay. Okay, great. Thanks again.
Your next question is from Michael Eckstein with Credit Suisse.
Good morning. It's Charlene Wong on for Michael Eckstein. What's your initial experience in Spain been like?
I'm sorry, your what was the question?
What has your initial experience in Spain been like?
Well, so far, it's fine. I mean, our member sign ups are strong and continuing. As we expect, when we go into a new country, you generally see smaller baskets to start with. We haven't need to say we've only been there for 3 or 4 months, so we haven't anniversaried anything in terms of seeing any type of renewal rates. But we're pushing forward.
We're working on our site in Spain. So no major differences of expectations.
Got you. Thank you. And your final question comes from Bob Drbul with Nomura Securities.
Hi, Richard. Just got a couple of questions for you though. On the Q4, what was the percentage of sales to the total? And I'm not sure if you gave it, but can you talk a little bit about in September the impact on gas and FX were to the month of September sales?
Yes, I can. Gas was let's see FX. FX was 120 drag and gas was about 0.5 point just 48 basis points.
Okay, great. And then just the last question that I have is on the openings for the next fiscal year, the timing of them, why are they so back half weighted?
Well, the biggest reason is we try to open everything as soon as we can other than when there's some craziness because if it's up in Minnesota and it's in the snow and the ground is frozen, you might lose 4 months if you can't get the foundation the ground dug and the foundation set. But it's just timing of when they are. We would love to push a few of them sooner. That's generally our best guess of where they are. It's really I mean the impact is and I'm sure by Q3 as we know more specifics about how many will open, give a little color on preopening expense.
But other than that it's a manageable process.
Great. Thanks very much.
And there are no additional questions at this time.
Well, thank you very much. And Bob and Jeff and I will be in the second day of our budget meeting for a couple of hours, but feel free to leave a message and we'll get back to you after noon. Thank you.
Thank you. Ladies and gentlemen, this does conclude today's conference call. You may now disconnect your lines.