Good morning. My name is Brandi and I will be your conference operator today. At this time, I would like to welcome everyone to the Costco fourth quarter earnings conference call and year-end conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during that time, simply press star then the number 1 on your telephone keypad. If you would like to withdraw your question, press the pound key. Thank you. Mr. Richard Galanti, CFO, you may begin your conference, sir.
Thank you, Brandi. Good morning to everyone. This morning, we reported our 16-week fourth quarter and 52-week fiscal year 2014 operating results, both which ended on August 31st. These results are compared to the similar 16-week and 52-week periods in the prior fiscal year 2013, which ended last year on September 1st. In addition, we're reporting this morning our September sales results for the five weeks ended this past Sunday, October 5th. I'll start by stating that the discussions we are having will include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. 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 fourth quarter earnings results. For the 16-week fourth quarter, earnings came in at $1.58 a share, up $0.18 or up 13% from last year's fourth quarter earnings of $1.40. In terms of sales for the fourth quarter, total sales were up 9%. Comp 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 fourth quarter, 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 five-week September period, total sales increased 7% year-over-year and reported comp sales increased 4%. 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 fourth quarter this fiscal year to last year's fourth quarter of $1.40, there are five items I'd like to point out. First, FX.
In the fourth quarter 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 million pre-tax or $0.02 a share than these earnings would have been had FX exchange rates been flat year-over-year. Second point, LIFO. Last year in the quarter, we recorded an $8 million pre-tax LIFO credit or a pickup of a little over $0.01 a share. This year in the fourth quarter, we had a LIFO charge of almost $11 million or about $0.02 a share charge. Third point, income taxes. Our income taxes this year in Q4 included several discrete items that in the aggregate increased our income tax line by about $8 million.
The $8 million of additional taxes included a few positive items that benefited or lowered our taxes by about $7 million in total. These positive items in total were more than offset by a $15 million income tax charge related to our decision to repatriate from Canada back to the United States about $1.2 billion U.S. or CAD 1.3 billion of our Canadian operations cash balances in the near future. In all, the $8 million net income tax increase from these discrete items, a negative impact to earnings of about $0.02 a share. Fourth item, our company bonus accrual. I discussed in last year's earnings call that our fourth quarter 2013 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 the fourth quarter, our accrual for the year-end bonuses was not reduced in the fourth quarter 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. Last item I'll point out is gas profits. This year, our gas profits in Q4 were quite strong, representing an additional $0.05 a share to earnings year-over-year. Overall, our $1.58 earnings figure for the year's fourth quarter was reached despite several discrete items representing $0.05 or $0.06 shares in the aggregate that did not go our way. To the subject of new openings.
For all of fiscal 2014, we opened 30 new locations, 17 new in the U.S., three each in Canada and Australia, two each in Japan and Korea, and one each in the U.K., Mexico, and Spain, that being our first unit opening in Spain. We ended fiscal 2014 with 663 locations operating worldwide. For the current fiscal year, fiscal 2015, our plans are to open 31 new warehouses and also relocate four 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 2015 will most likely be either in the very high 20s or up to 30, plus the four relos.
During the first four months of fiscal 2015, basically September through this coming calendar year end, we plan to open 8 of our fiscal 2015 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 the 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&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. For the fourth quarter results, sales again for the 16-week fourth quarter were up 9% to $34.8 billion, up $3 billion from $31.8 billion a year ago in the fourth quarter. Our 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 about 0.5%, an average frequency increase of 4.2%. In terms of sales comparisons by geographic region, in the U.S. with a 6% fourth quarter comp overall, most U.S. regions registered in the mid-single digit comp increases, with the Midwest and Southeast being even stronger. Internationally, within the +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 hard lines comps were both in the mid-single digits range for the quarter, and both soft lines and fresh foods comps were in the high single digits range for the fourth quarter. Within fresh foods, of course, we're still experiencing inflation in low to mid-single digit range on average. For our September sales results, sales for the 5-week September month, which ended October 5th, were $10.57 billion, up 7% from last year's September reporting period. Again, on a comp basis, reported +4%. For September, our +4% reported comp sales results were a combination of a slightly positive average transaction, notwithstanding almost 2 percentage points impact from FX and gas deflation, an 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%-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, food and sundries and soft lines both enjoyed mid-single digit comps, hard lines low single digit comps, and fresh foods high single digit comps, again, having a little bit of extra inflation there as well. In 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 four percentage points year-over-year. Moving to the line items on the fourth quarter income statement. Membership fees. We came in at $768 million, or 2.21% of sales. That's up 7%, or $52 million year-over-year from $716 million. It's down four basis points as a % 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 Membership program with continued new sign-ups. New member sign-ups in Q4 overall, a little over two million new sign-ups in the company. This 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 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 30.6 million. At the end of the fiscal year, it was up one million to 31.6 million. Primary business was up 100,000 from 6.8 million to 6.9 million. Add-ons remained at 3.5 million. Overall, total paid member households, 40.9 million at Q3 end and up 1.1 million to 42 million even at Q4 end. Including extra cards, 74.6 million at Q3 end, up 1.8 million to 76.4 million at the end of the fiscal year.
Also at the end of the fiscal year, Executive Memberships stood at just under 15 million, 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, they too continue strong. Again, at the end of the third quarter, 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%. Overall, we remained at 90.6%, or rounding up to a 91%. Again, worldwide, we continued at 87.3%. As I've touched on the last couple of quarter conference calls, we continue to try a few new things to drive both sales and new member sign-ups. In early September, this would be the first couple of weeks of the first quarter of the new fiscal year.
For eight 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 three free items. As you might expect, they include a Kirkland Signature bath tissue, an apple pie, and a rotisserie chicken. Also, a free three-month membership for identity protection and a bonus coupon of $25 off of any costco.com purchase of $250 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 One Platinum Mastercard.
This will be exclusive to Costco members. We have already begun to issue the new Mastercard, and we will continue to accept all Amex cards through December 31 of 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 fourth quarter was quite strong, coming in up 15 basis points year-over-year from a 10.55% a year ago in the fourth quarter to a 10.70% during the fourth quarter of this past fiscal year. As usual, I'll ask you to jot down a few numbers. We'll do four columns.
This time, the first two columns will be for Q4 2014, both as reported and without gas inflation. Then for the entire fiscal year 2014, reported and without gas inflation or deflation. First line item is core merchandise. In the fourth quarter, we have a year-over-year, the core was up six basis points, both with and without gas. Because gas year-over-year was essentially flat. For the year, +6 reported and a +3 without gas. Ancillary and other businesses, a big contributor in Q4, +15 basis points in the first two columns there. For the year, +6 and +6. The 2% reward, no impact in the Q4, both of those two columns, a -1 basis point impact in the next two columns.
LIFO, as I mentioned, of course, it was a charge this year versus a credit last year, six basis points year-over-year, both in the fourth-quarter columns and -5 basis points year-over-year for the entire fiscal year in both columns. Other, no additional items in the fourth quarter. In the last two columns for fiscal 2014, a -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 four basis points, but taking out gas, it was up one basis point. So again, a good showing overall in the fourth quarter in terms of margin improvement.
Now, as I mentioned, the core was up six basis points. Two of the four 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 fourth quarter based on their own sales, with gas, optical, and hearing aids coming in better year-over-year in Q4. LIFO, again, in the fourth quarter, we recorded just under an $11 million or three basis point pre-tax charge compared to an $8 million or three basis point pre-tax credit last year for a six basis point year-over-year swing in the fourth quarter. Next, our SG&A percentages.
Year-over-year in the fourth quarter, they were lower or better by two basis points, coming in at a 973 as a percent of sales compared to a 975 last year. We'll do the same four columns, two for the fourth quarter with and without gas, and two for the full fiscal year with reported and without gas. In terms of core operations, we have a +7 and a +7 for the quarter and a -2 and a +1 for the fiscal year. A +7, of course, would mean that it was lower or better by that many basis points. Central was a -7 and a -7 for the quarter and a -3 and a -3 for the year. RSUs, a +2 and a +2, and for the year, a -2 and a -2.
No quarterly adjustments. Total for the quarter, both on a reported basis and without gas, again, we were better by two basis points, so a +2. For the year, we are higher by seven basis points on a reported basis, so a -7, and without gas, a -4. Now, in terms of our SG&A performance, the core operations, again, was lower or better by seven basis points. Within core, payroll and benefits expenses were lower or better year-over-year by eight basis points, again, helped by leveraging sales strength. Similarly, other operating expenses as a percent of sales in the core were better by four basis points. A total between 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 five basis points.
In terms of Central, it was higher again by seven basis points. About five of that is SG&A variance is related to the ongoing IT modernization efforts, and another three is the increased SG&A expense resulting from the year-over-year swing in bonus accrual. That's split between Core and Central. Lastly, our equity compensation, which is now an important component of compensation again to about 4,000 people. This represented an improvement of two basis point positive in SG&A, benefiting from both timing of certain vesting provisions when employees hit 25, 30, and 35 years of service, as well as from the strong sales denominator in the fourth quarter. Next on the income statement line pre-opening, not a whole lot to talk about. $17 million last year in the quarter, $15 million of charges this year in the quarter. Last year, we opened seven units, this year 10.
No major surprises there. All told, operating income in the fourth quarter increased 14% or $137 million year-over-year from $954 million last year in the fourth quarter to almost $1.1 billion, $1.091 billion this year in the fourth quarter. Below the operating income line, reported interest expense was $1 million lower year-over-year, coming in at $36 million last year and coming in this year at $35 million for the quarter. Interest income and other, it was lower year-over-year by $6 million, $36 million last year in the fourth quarter compared to $30 million this year. Actual interest income for the quarter was up $3 million, coming in at $17 million compared to $14 million last year. The other component of interest income and other was lower by $8 million, primarily related to various FX items being marked to market at fiscal quarter end.
Overall, pre-tax income was up 14%, or $132 million, to $1.086 billion this year versus last year's fourth quarter pre-tax earnings of $954 million. In terms of income taxes, our tax rate for the quarter came in at 35.1%, up three-tenths of a percent from a 34.8% tax rate all in last year. Slightly higher this year, and as I explained the reasons for that earlier in the call. Overall net income was up 13%, or $80 million, to $697 million versus last year's fourth quarter of $617 million. 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, a couple of items from the balance sheet and a couple of cash flow items I'll point out here. Depreciation and amortization for the quarter total $321 million, and for the year, $1.029 billion. In terms of accounts payable as a percent of inventory, on a reported basis, both last year and this year's fourth quarter, 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. Almost 90% of our inventory is being financed with trade payables. Average inventory per warehouse last year, fourth quarter end, $12.5 million. Up a tick this year in the fourth quarter to $12.8 million. We're up about $300,000, or 2%.
The $300,000 increase, about 80% of that is in four 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. 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 fourth quarter, we spent $567 million. For all of fiscal 2014, total CapEx was right at $2 billion. Our estimate for fiscal 2015 CapEx is quite a bit higher, probably in the $2.5 billion-$2.7 billion range. The year-over-year increase in CapEx represents our plans for more openings this year. That, of course, includes the four 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 four countries, U.S., Canada, U.K., and Mexico. We'd expect to be in at least one, probably two additional countries by the end of calendar 2015. For the fiscal year, total e-commerce sales came in just under $3 billion. For both fiscal fourth quarter and the fiscal year, sales and profits were up. Sales in e-commerce were up in the high teens for both the fourth quarter and the fiscal year. Comp sales in e-commerce were up in the 18%-19% range for both the fourth quarter and the fiscal year.
Over the past two years, as I mentioned, we re-platformed our site. We've introduced new apps. We've combined some e-commerce merchandising efforts with inline efforts. We've added new categories, including areas like apparel, health and beauty aids, and some sundries. We've improved distribution and delivery time. In addition, outside of e-commerce, as you know, we've continued over 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. Again, it's still a test. We continue to add items to that delivery process. Currently, it's in three 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, when it ended, we opened 30.
Acapulco was closed due to weather-related destruction. Ended up a net increase last year of 29. This year, assuming we open the planned 31, we opened 35, but four of those are relos, so planned net new of 31. Eight would be in the first quarter, none in the second quarter, two in the third quarter, and 21 in the fourth quarter. We've got a lot going on. I think that, again, we'll probably see at least one or two of those perhaps speed up a little bit, but a few will be pushed into the early the next fiscal year. 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 4.5%-5% square footage growth.
In terms of the 31 this year, if we get all of those open, 19 would be in the U.S., one each in Canada and the U.K. In Asia overall, six, three in Korea, two in Japan, and one in Taiwan. One additional in Australia. That will be our seventh in Australia. Two more in Mexico and one more in Spain. As of Q4 end, total square footage stood at 95.3 million 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. Then 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 7th, the day after our second quarter earnings release was released.
In Q3, we purchased 1.6 million shares at an average price of $113.14 for a total expended of just under $184 million. During the first fourth quarter, we purchased 1.3 million shares at an average price of $116.11, or a total dollar amount of about $150 million. In terms of dividends, our current quarterly dividend stands at $0.355 a share or annualized at $1.42. That's up 14.5% from the previous year's dividend rate. This $1.42 per share dividend represents an annual cost to the company of about $625 million. Lastly, our fiscal 2015 first quarter scheduled earnings release date will be Thursday, December 11th. That will be for the 12-week fiscal first quarter ending on November 23rd. With that, I'll turn it over to Randy for Q&A. Randy?
At this time, if you would like to ask a question, simply press star 1 on your telephone keypad. Again, ladies and gentlemen, that is star 1 to ask a question. We will pause for just a moment to compile the Q&A roster. Your first question comes from John Heinbockel with Guggenheim Securities.
Richard, a few things. The gross margin being up in the food categories, is that cost of product to you? I know you talked about inflation, but is that cost of product driven? Is that mix driven? Where's 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 say, those items upward. I think we've had a little bit of it in the food court similarly for that reason.
Do you think as Kirkland gets bigger and gets more scaled, 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. There's a lot of good things there. Certainly, the low-hanging fruit occurred many years ago. You've heard the examples of whether it was toilet paper or disposable diapers where you have items that are 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 savings to the customer. It works, but it moves the needle slightly.
All right. One of the countries you didn't talk about, good or bad, was the U.K., where obviously there's a lot going on there. Just generally speaking, how do you find you're performing in the U.K., top and bottom line today?
Well, two things. To finish 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 or 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.
We're profitable.
You mentioned organic. Two things. What's happening to assortment there? Secondly, it does look like on a variety of levels in terms of just product placement, marketing, you're trying to drive that significantly. That's got to be still one of the fastest-growing departments in food. Do you think that is helping you much with the millennials, or is that yet to come?
It's helping. It's probably a bigger percentage now because it's on a small base.
Yeah.
I think a couple of quarters ago, I talked about fresh ground beef, organic ground beef. It's an infinite percentage increase from 0 to $25 million or so that first year. As I mentioned earlier, what we're finding 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. Now they are. This year, organic ground beef sales are up dramatically because the supply is up dramatically. Yes, again, they're big numbers. It's one of those good things, but it's lots of little things.
Thank you.
Your next question comes from Peter Benedict with Robert W. Baird.
Hey, Richard. A couple 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 we're doing most of the funding of 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'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 cost on our side.
Right. Okay. Then the plans for the Canadian cash that you're bringing in
It's really just moving it down here. As 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, 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 billion, if you will, $1.2 billion, as I think I mentioned, as translated to US 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 that out.
While we are still adding two or three units, our CapEx is dwarfed by our earnings up there. We'll continue to make money. We saw this as an opportune time to be able to start that process.
Okay, perfect. 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.
Yeah. Well, I think there's two things. One is how big is the country, in terms of how many units we have. Secondly, can we get a I guess there are three things. That was the first one. Second would be putting a menu of services together that we can do. Of course, as we get relatively bigger in a given country, that buying power allows us to do that. Then, what else we have going on. Using Japan as an example, we've gone from what, nine to 23 or 24 units in about two and a half years. I think we like it. We like the Executive Membership program and long-term, we'd like to see it in other countries. 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 Otway in for Scott. Thanks for taking the questions. Richard, in terms of SG&A, you laid out the buckets. As we think about next year, are there any buckets that are likely to move SG&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&L? Any color there would be great.
Well, first and foremost, it's sales growth. 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. Healthcare expenses as a percent of sales are much lower in virtually every other country than the United States. Labor costs are different and generally lower in other countries as a percent of sales. I think those things will probably help us. In terms of IT modernization, 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 three or four years. I think we're probably up to 10 or 11 basis points, or maybe nine or 10 basis points over the last couple of years. 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, healthcare is always an unknown in the U.S., and again, as I mentioned, I think to the extent that the healthcare continues to be the inflationary aspects of healthcare in the U.S., and as you know, we haven't and aren't going 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 top-line sales rate of growth, increasing penetration of healthcare costs outside of the U.S. will help mitigate any damage there.
I don't think there's anything new to add to this process.
than those kinds of things.
Okay. That's helpful. Just in terms of the consumer, have you seen any real change there in the last few months? Specifically with your business in the Midwest and the Southeast, maybe what you're seeing in those regions. 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 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. 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, softlines and hardlines categories like apparel and housewares and domestics, those have all done well, in part because of our commitment to them, our increasing commitment. Apparel area would be one example. Clearly, having the demographic of our member, I think, helps.
Having strength in gas. Gas sales were up, I think I mentioned up, I think 4%. Notwithstanding a four or so % decline in the average sales price per gallon. Gallons are up nicely, and that's driving, no pun intended, but driving people into the Costco parking lots.
Great. Thanks, Richard. Appreciate the call.
Your next question is from Meredith Adler with Barclays.
Thanks for taking my question. I was just hoping to talk a little bit about as you think about international growth, I noticed that 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? Obviously, Spain is still very new.
Well, both Spain and France, I think we probably started talking about those two countries three years ago, and at the time, we felt that it could be three or more years based on the permitting and appeal processes in various, not only countries, but cities and communities. That's certainly why we keep, at this point, pushing out France. We'll continue to look at that. 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 and a half.
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'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 Costco locations are. It's densely populated, and it's difficult, but that's what we do. We've got a lot more people in the real estate area over the last few years, and we've got a lot more in the pipeline, and we think we'll get there.
I think also, and we're fortunate in the 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's a little different. I think as I mentioned, in Asia this coming year, we have, I think, six planned, three, two, and one. Of course, we've opened a bunch in Japan within the last two years already. 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 Simeon Gutman with Morgan Stanley.
Good morning. It's Joshua Siberon for Simeon Gutman. I'm curious if you guys 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 costs in these categories.
Well, we're most sensitive to us. We haven't seen any major change in level of competition out there. Everybody's tough, and we're pretty tough ourselves, so I don't think so. I think it's continuing as it goes. I think 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 hurt's behind us, but tomorrow's another day.
Okay.
Yeah.
Sorry, go ahead. I didn't want to.
The list of price increases is not a big list around here.
Okay. That's helpful.
Relatively speaking, yeah.
Sure. For the members that you've 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?
They're so new, I can't really tell you. This most recent program was early, about three weeks ago. The process is they redeem their coupon, then they come in, a lot of them are coming in. 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. 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. That's been historically a typical pattern. It's too early to tell.
Okay. Then just one more, a housekeeping question. Is the $150 million buyback that you guys spent in fourth quarter a good run rate to go forward?
I can't really respond to that. I can tell you that historically, when we have bought, we have bought through blackout periods using 10b5-1s. Our longest blackout period of the year, which is six or seven weeks long, stretching 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.
We hadn't bought for the last few weeks of the quarter. That would imply a little 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, you talked about the success of the Google partnership, you said profit growth was, I think, at a similar pace. Going back to what you said, if you could just give any more details on how the profitability or the growth thereof is trending in online, that'd 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, it's growing and it is more profitable. e-commerce is definitely quite a bit more profitable than the rest of the company. 3% of sales implies a greater % 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 % of sales profitability than the company overall. Every time we can grow those sales, you'll see earnings grow nicely, too.
is the operating margin of it, if you don't want to detail 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 we've opened recently in a couple of new countries in the last year and a half, we're spending a lot of money on that. We spend a lot of money on apps, on upgrading, I don't have the numbers in front of me, but I know it's growing and it's profitable.
Okay. Thank you.
We're continuing to pursue it.
Thank you.
Your next question is from Greg Melich with ISI Group.
Hi, thanks. Richard, a couple questions. I'd love to start on membership fee income. It was up 7%. What was it in local currencies? In terms of membership growth, how much of that you think is driven by the new clubs?
Let me answer the first question. It was up 8% without FX in dollars. What was the other question?
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 have been very successful, and you've had huge membership growth with some of the new clubs.
Yeah. I don't have it in front of me. I'm sure that made it healthy. I can remember over the years when sometimes it's a little down year-over-year 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.
All right. We use 8% is the local currency number?
Yes.
Just okay. Second, I wanted to understand a little bit more about the gross margin and ancillary. I guess that was up, you said up 50 basis points in ancillary, which was.
Well, ancillary, if you took total ancillary gross margin divided by total ancillary business sales, it was up a little over 50 basis points. Different ancillary businesses were up or down differently.
Right.
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.
How should we think about the sustainability of that on gas? Are we now at what would be a normal run rate there? Also is costco.com, where does that show up in your nice little bridge you do?
Well, costco.com is in the core. It's not ancillary, is it, costco.com? 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 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 customer a little less, and we make less. We've been blessed by having a positive run here for several months. It's a volatile area. Now, that's just looking with blinds on of 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.
That we, of course, don't consider as part of that.
Is it fair to say that the 15 basis points 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 the top of my head. I bet it's half or more. It's not all.
Got it. Lastly, just on the inventory increase, it sounded like you gave those four 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 have been running up five%, six%, seven%, eight% 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 two% or three% range. Actually, it's come in better, in my view. Whatever, a three% increase in inventories on a two% increase in inventories on a seven% or eight% or nine% increase in total sales. I think the anomaly there would be, adding some product on that side and the anomaly, of course, with inflation in fresh foods. That's going to fluctuate as well. I think overall, we looked at this as being a little bit better level of increase in average inventories per warehouse.
It sounds like you think it's sustainable at this rate.
At this point? Sure.
Yeah. 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. 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 given quarter. 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 deflating, it's because I think butter had skyrocketed, 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-over-year. Just interested in any color in terms of the drivers there.
I think for the quarter it was flat. Nothing really stood out. Majors, which is electronics, was up slightly. Nothing really stands out there.
Okay. Then, finally, you had a question earlier about some of the membership deals that you're running. For example, the one with LivingSocial, 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.
For the year Sorry, go ahead.
That's over the year. It's advertised over the year. I'll have to find out. It's so small. It's less than a rounding error.
Fair enough. Okay, I appreciate it. Thank you.
Is that it?
Your next question comes from Charles Grom with Sterne Agee.
Thanks. Good morning, Richard. Nice quarter. Just wanted to see if you could talk a little bit about Google Express. What's the ultimate goal of that program? Is it to drive increased memberships? Is it for you to get younger? 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 what other retailers. We're certainly, I think a big component of it, but we're a big component of anything we do. 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 with delivery and e-commerce and all that stuff, and we recognize we're not going to be the guy that drops off Fruity PEBBLES cereal and a quart of milk before your kid wakes up in the morning for breakfast if you ordered it before 10:00 P.M. the night before. We started our business being a wholesale supplier. In this case, it's kind of, hopefully, a win-win not only for Google Shopping Express, but for us. We are seeing incremental business from it. Again, there's a lot of nuances to it. So far so good. Again, in the biggest test, it's been around for seven or eight or nine 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.
Right.
We have seen incremental sign-ups because of that. Look, we appreciate the fact that it's a way to sell merchandise. As well, it's a way to get some members over time. As well, it's a great way, in our view. Ultimately, we want to get you into warehouses more frequently also, and we think there's avenues to do that. 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. 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, the number of SKUs or % of sales to where you were a couple of years ago.
Organic was about $3 billion, I'm told by one of the many people in my office right now, last year, and growing dramatically. Part of that's supply and part of that's us 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. It would show greater savings. It's a higher price point item than the substitute item.
Again, the added benefit was, in some instances, I've used the ground beef example, we had existing loyal members that, 80%, I know in that first year, I assume it could be a little lower now, but a large percentage were incremental sales because those were existing members that didn't buy their ground beef at Costco. 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. That helps hopefully get them in more frequently to Costco. We're doing it because we're selling those items.
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. Just switching gears a little bit, it's been a while 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. 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 and ending up at 33 or 35. We're kind of in that right now. I guess year two or two and a half of that 5 years. I think the fact that we're opening a few more, if you asked me 3 years ago, I would've guessed it might be more evenly split right now. I 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 million population city in Asia, there's all kinds of issues.
Again, as I've mentioned, we've got more people and real estate on the ground in each of these countries, compared to very few on the ground 5 years ago. The pipeline is definitely more filled, and I guess from looking at it a positive way, the question of when are you going to slow down in the U.S. because of anticipated saturation, where I'm happy to report that that's not happening yet. It will happen at some point, if anything, 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 10-15 years or less, not 25 and 30 years.
Interesting. Any thoughts on a longer term store goal 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've defined it, 5-year period, it's 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. 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. The last question, just on the margins as a follow-up to, I believe, the last question. I just wonder if you could just speak to the degree of improvement on food and sundries and fresh relative to the third quarter, 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 don't have it right in front of me, but it was less than up 50 basis points and more than up 10 basis points. 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.
Okay.
I think somewhere in the high teens or twenties. I could be off a little bit, but one of them wasn't up one basis point, the other up 80. They were both up.
Okay. Okay, great. Thanks again.
Your next question is from Michael Exstein with Credit Suisse.
Morning, it's Charlene Wong on for Michael Exstein. What's your initial experience in Spain been like?
I'm sorry, what was the question?
What has your initial experience in Spain been like?
Well, so far, it's fine. Our member signups are strong and continuing. As we expect when we go into a completely new country, you generally see smaller baskets to start with. Needless to say, we've only been there for three or four months, so we have an anniversary to anything in terms of seeing any type of renewal rates. But we're pushing forward. We're working on our site in Spain. No major differences of expectations.
Got you. Thank you.
Your final question comes from Bob Drbul with Nomura Securities.
Hi, Richard. Just got a couple of questions for you, though. On the fourth quarter, what was the percentage of sales to the total? 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?
Yeah, I can. Well, let's see. FX was 120 drag, and gas was about a half a point, just 48 basis points.
Okay, great. 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?
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's frozen, you might lose four months if you can't get the foundation, the ground dug, and the foundation set. 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. The impact is, and I'm sure by Q3 as we know more specifics about how many will open, you have a little color on pre-opening expense. Other than that, it's a manageable process.
Great. Thanks very much.
There are no additional questions at this time.
Thank you very much. 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.