Good morning. My name is Bridget, and I will be your conference operator today. At this time, I would like to welcome everyone to the Quarter Three Earnings 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 this time, simply press star, then the number 1 on your telephone keypad. If you would like to withdraw your question, press the pound key. Now I'd like to turn the call over to Richard Galanti, CFO. Mr. Galanti, you may begin your conference.
Thank you, Bridget, and good morning to everyone. This morning's press release reviews our third quarter operating results for the 12-week period ended May 11th. The discussions we're having will include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements involve risks and uncertainties that may cause actual events, results, and/or performance to differ materially from those indicated by such statements. The risks and uncertainties include, but are not limited to, those outlined in today's call, as well as other risks identified from time to time in the company's public statements and reports filed with the SEC. To begin with, our 12-week third quarter operating results. For the quarter, our reported earnings per share came in at $1.07 a share, compared to last year's third quarter earnings per share of $1.04.
As I go through the line item detail on the income statement, I'll point out a few factors that impacted earnings both up a little and down a little. One item that I'll point out up front, of course, is the FX impact to the entire income statement. The FX impact of weaker foreign exchange rates year-over-year on reporting profits from our international operations. That represented a little over $17 million pre-tax, or between $0.025 and $0.03 a share impact to the P&L to the negative. As an example, year-over-year in the third quarter, the Canadian dollar relative to the U.S. dollar was down about 8%, JPY down about 6% year-over-year. Offsetting a little bit from strengthening foreign currencies in the U.K. and Korea and a couple of others, but dwarfed, of course, by Canada.
In terms of sales for the quarter, total sales were up 7%. Our 12-week reported comparable sales figure was up 4%. For the quarter, sales were negatively impacted by gas price deflation, which was about a 25 basis points impact, and by weaker foreign currencies relative to the U.S. dollar year-over-year, which in the aggregate impacted sales by about 140 basis points to the negative. Excluding gas, the reported 5% U.S. comp sales increase in Q3 would've been a 6%, and the reported plus 3% international comp figure, excluding gas and FX, would've been a plus 8%. Such that the total company comp, which we reported at plus 4% for the quarter, excluding gas and FX, would've been plus 6% for the whole company.
In terms of new openings, after opening 16 new locations in the first half of fiscal 2014 and the closing of our Acapulco location earlier this fiscal year due to the hurricane damage, we opened four new locations in Q3, two in the U.S., one in Louisiana and one in Texas, and one each in Japan and Korea. All told, that puts our 2014 fiscal year openings through the third quarter end at 20. Since the third quarter end, on May 15th, we opened our first Costco in Spain, in Seville. This week we are opening our sixth location in Australia, in Brisbane, our 11th Korea location, and our 20th Costco in Japan. Three openings outside of the U.S. this week. By weekend, we'll be operating 657 locations worldwide.
After that, and through the end of the fiscal 2014 on August 31st, we expect to open six more locations, four in the U.S. and one each in Canada and the U.K. Such that we'll most likely end the fiscal year with 30 new openings, less the one closing in Acapulco, or 663 Costcos worldwide as of August 31st. This morning, I'll review with you our e-commerce activity, our membership trends and renewal rates, recent common stock repurchase activities, and of course, a discussion about the various line items of the income statement. Onto the results. As I mentioned, actually, total sales for the quarter came in at $25.2 billion, up 7% from last year's $23.5 billion. On a reported comp basis, Q3 comps again were 4% for the quarter on a reported basis, 6% excluding gas and FX.
Looking at the 4% reported comp sales figure, it was a combination of an average transaction increase of 0.2% up. Of course, that was on a reported basis. Truly, FX, the average transaction was up just under 2%. An average frequency increase of up 4.3%, which, by the way, is the same number year-to-date through the third quarter. In terms of sales comparisons by geography, within the U.S., the Southeast and the Midwest were the strongest in high single digits. Internationally, in local currencies, Australia was the weakest due to cannibalization on a relatively small base of existing units, with Korea, Taiwan, Mexico, and Canada all coming in local currency, in the +8% to +10% range. In terms of merchandise categories and sales results for the quarter. For the third quarter within food and sundries, overall in the mid-single digits.
Frozen food, candy, and meat deli were relevant standouts. Hard lines, which overall was just above flat, about a half a percent up. Departments with the strongest results were office and automotive. Consumer electronics sales were down in the low-to-mid singles. Within the mid to high single digit softline comps, small electrics, domestics, and apparel were standouts. In fresh foods, comp sales were up 8%, with produce and meat being strongest. A little inflation on the meat side. Moving down the income statement, membership fees came in at $561 million, up 6% or about $30 million year-over-year, and down three basis points as a percent of sales. Again, FX, that $30 million increase would've been $38 million if assuming flat year-over-year currency exchange rates. In terms of membership, we continue to enjoy strong renewal rates, continue to tick up a little bit.
U.S. and Canada for the quarter was up. The renewal rate through the quarter end was at 90.6%. First time averaging rounding upward, and 87.3% worldwide. Again, we see continued increased penetration of the Executive Membership, and I'll speak about that in a minute. Overall, new member sign-ups in Q3 were up about 1%. A lot of that, sometimes it's up a little, sometimes it's down a little. It really is impacted particularly by some of the Asia opening schedules where we get outsized new member sign-ups. In terms of members at year-end, I'm sorry, Q3 end. At the end of the third quarter, Gold Star members total $30.6 million, up from $30.1 million 12 weeks earlier. Primary business, $6.8 million, up from $6.7 million 12 weeks ago. Business add-on was steady at $3.5 million.
All told, member households, $40.9 million at Q3 end, up from $40.3 million at the end of second quarter. Including the add-on cards, the extra card, total cards outstanding $74.6 million at Q3 end, up from $73.4 million 12 weeks earlier. At May 11th, Q3 end, paid Executive Memberships were just shy of $14.4 million, representing an increase during the quarter of a little over 300,000 new Executive Members or about 26,000 per week increase in the quarter. Executive Members continue to be about a little over a third of our member base and a little over two-thirds of our sales. As I mentioned earlier, our renewal rates have continued to tick up. Business members at Q3 end were at 94.4%, up from 94.3% renewal rate 12 weeks earlier. Gold Star, 89.7%, up from 89.6%. All told, 90.6% versus 90.4%. Worldwide, I mentioned the 87.3% number.
That was up from 86.8%, 12 weeks earlier at the end of Q2. Continuing down the income statement to gross margin. Gross margin year-over-year in the third quarter came in at 10.62% of sales, down 5 basis points from last year's 10.67%. If we jot down the following little matrix, I'll explain it. I'll walk through it. There will be 4 columns and 6 line items. The line items would be core merchandising. Second line item would be ancillary businesses. Third line item would be 2% reward. Fourth line item, LIFO. Fifth line item would be other, the total would be the sixth line item total. The 4 columns would be reported in Q2 2014. The second column would be without gas deflation in Q2 2014, columns 3 and 4 would be for Q3 2014, both columns, again, reported and without gas deflation.
Again, going across those 4 columns. Core merchandising was +1 basis point in Q2 2014 on a reported basis year-over-year. Without gas was -1. For Q3, it was +9 and +7. Ancillary businesses were, again, reading across the 4 columns, 0, +1 and 0. 2% reward, -1 and -1, for Q3 2014, both reported and without, would be 0 and 0. LIFO, -6 and -6, for the Q3 2014, -8 and -8. Other, 0 and 0, Q3 2014 would be -7 and -7. All told, it was -6 basis points year-over-year in Q2 2014 on a reported basis.
In Q2 2014, without gas deflation, it was minus eight basis points total, then in Q3 2014, reported and without, would be minus five and minus eight basis points respectively. As you can see, the overall reported gross margin was lower year-over-year by five basis points, minus eight without gas deflation. However, our core merchandise gross margin was up year-over-year, both with and without gas deflation of nine and seven basis points respectively. For the third quarter, on the merchandise categories on sales, food and sundries gross margins were up in the 20 basis point range year-over-year, while hard lines and soft lines were in the high single-digit basis points increase range year-over-year.
Fresh foods gross margins was just slightly lower year-over-year, less than five basis points delta, which is actually a relative improvement from recent quarterly performance in that area. At LIFO, in the third quarter, we recorded a $12 million or five basis point minus pre-tax charge in the quarter. That compared to last year in Q3 of an $8 million or plus three basis point pre-tax credit due to deflation a year ago. Year-over-year is a $20 million swing or about $0.03 a share. In terms of inflation, LIFO, if I looked at just as one representative factor in that data point in that, if I looked at our U.S. inventories, looking at the LIFO calculations at Q2 end versus Q3 end in the 12 weeks, there was about a quarter of a percentage point delta in the LIFO index.
With foods, not food and sundries, but canned goods and the like, was up a little over 1% during those 12 weeks. Lastly, other. Last year in the quarter, gross margin benefited from a non-recurring legal settlement received last year in Q3. This accounted for about a seven basis point minus swing year-over-year, both with and without gas. It was a little over a $17 million pre-tax benefit last year in Q3, again, related to this legal settlement, which was right around $0.025 a share. Moving down to our SG&A. Our SG&A percentages were higher by four basis points year-over-year, coming in at 9.86% of sales this year compared to a 9.82% a year ago. As I did with our gross margin, I'll ask you to do the four columns.
First two columns are Q2 2014 and Q2 2014, both reported and without gas deflation. Then Q3 2014 and Q3 2014 reported without gas deflation. The five line items would be operations, then central, then RSUs or stock compensation, then quarterly adjustments, and then total. Again, going across operations, the first number would be minus 12 basis points, meaning that in Q2 2014 year-over-year, the core represented a 12 basis point increase year-over-year in SG&A. Then a minus nine, then in Q3 2014, those two columns would be a plus three and a plus five, or the core operations was improved by three and five basis points respectively. Central, going across the four columns, zero and zero, then minus two and minus two, meaning a little higher year-over-year. RSUs, minus one and minus one, then in Q3, minus five and minus four.
There were no quarterly adjustments. In that fourth line item would be zeros across. The final column, the total. Final row, the total, minus 13 and minus 10. In Q3 2014 reported, SG&A again was higher year-over-year by 4, so minus 4 there, without gas at minus 1. In terms of a little editorial on these numbers, the operations component of SG&A again, was 3 basis points better year-over-year in Q3, and 5 better excluding gas deflation. Within warehouse operations, our payroll's percent of sales was lower year-over-year or improved by about 5 basis points. Total payroll dollars increased a little over 5% in Q3 compared to that 7% total sales increase. Benefits of workers' comp hit SG&A by about 3 basis points year-over-year, so that was a little bit of an offset to that improvement.
Our central expense, it was higher year-over-year in Q3 by 2 basis points, which is actually the same number as related to the ongoing IT incremental modernization cost. That was about 2 basis point hit to the quarter. There are a couple other things that went both ways, that would be the one thing I'd point out there. Next on the income statement is pre-opening expense. Pre-opening expense was up $6 million from $10 million last year in Q3 to $16 million this year. We actually had one more opening last year, five last year versus four this year, although that timing of that relates to both things after the quarter as well. I might also point out, of course, with the opening of Spain, we always have a significant pre-opening expense related to the opening of the country itself.
That first warehouse, that was about $4 million of that $16 million number for Q3 this year. All told, operating income in Q3 2014 came in at $737 million, higher by $15 million from last year's $722 million. Below operating income, interest expense came in at $25 million in both this year's and last year's fiscal third quarter. Over 95% of it relates to the interest expense related to the 10-year maturing $1.1 billion debt we have that matures in 2017, and the $3.5 billion of debt that matures over the next two to six years that we did back in December of 2012. Interest income and other was lower year-over-year by $3 million. If you're looking at $15 million last year relative to this quarter at $12 million positive. Actual interest income for the quarter was higher by $2 million.
The other component of interest income and other amounted to a $1 million positive this year versus a $6 million positive last year. A minus $5 million swing. The majority of this negative variance relates to the negative impact of mark-to-market adjustments on forward FX contracts used to source U.S. goods in certain foreign operations. Swings are caused by changes in the U.S. dollar relative to local currency in certain foreign locations as compared to the prior year. We just pointed out as part of that impact, sometimes it's a little positive, sometimes it's a little negative. Overall, pre-tax income was higher year-over-year by $12 million in third quarter, coming in last year at $712 million and this year up $12 million to $724 million. In terms of income taxes, our tax rate this quarter came in a little better or lower at 33.9% versus 34.8% last year.
This was primarily due to the higher year-over-year penetration of profits coming from our foreign operations, which overall have lower tax rates than in the U.S. Overall reported net income of $459 million last year compared to the $473 million of net income this year in third quarter. For a quick rundown of other topics, the balance sheet is included in this morning's press release, but I'll point out a couple of balance sheet info items. Depreciation and amortization for the quarter was $237 million. Year to date, $708 million. AP as a percent of inventories came down at two to three percentage points. On a reported basis, it showed last year 102% accounts payables percent of inventories. This year, 99%.
If you look at just merchandise payables, not other types of payables like construction payables, last year in Q3, that 102 was a 91, and this year the 91 went from a 99 is an 89. Still down a couple percentage points year-over-year. Average inventory per warehouse was up about 7% on a per warehouse basis, coming in at $13.0 million this year, up from $12.2 million last year. The increase was pretty much spread over many departments. Apparel was probably the biggest delta. The men's, women's, and children's apparel was up year-over-year of about a little under $200,000. Foods and Candy was up about $150,000. Overall, though, we feel our inventory is in good shape and not a whole lot to talk about there. In terms of CapEx, in the first quarter, we spent $574 million.
In the second quarter of this year, we spent $447 million, and in the third quarter just ended, we spent $405 million. Q3 year to date, we're just a little over $1.4 billion. Our estimate for the year for CapEx will come in at about $2.2 billion, compared to last year's expenditures for the whole year of $2.1 billion. Up slightly from last year. In terms of Costco Online, we continue to operate Costco Online in the four countries that I've mentioned in the prior quarter, U.S., Canada, U.K., and Mexico. U.K. and Mexico, of course, being much newer than the U.S. and Canada operations. For Q3, sales and profits are up. Sales were up 16% year-over-year in the quarter. A little impact from, again, the weak Canadian dollar. Overall 16% on a reported basis.
I've talked about the various things we've done in the last year and a half, in terms of re-platforming and adding mobile apps and combining some of the e-commerce merchandising buying efforts with some of our inline efforts. We've added a few categories like apparel, some limited apparel items, and some limited health and beauty items. We've started to ship out of more than one depot to improve timing of shipments and some of the bigger ticket items as well. Outside of e-commerce, there's a couple things that in the internet area or things that we're testing. I mentioned before the Google test, Google Shopping Express in the Bay Area. More recently, in the last several weeks, it's being tested in Los Angeles with several retailers, not just us, but in Los Angeles at our Culver City location and in Manhattan at our Manhattan location.
Both those two cities are just in the last four to six weeks. Also, we tested a few from a membership sign-up standpoint, a couple of social media initiatives with LivingSocial and Zulily. Next on the discussion list, in terms of expansion, again, through Q3 end, we've opened 20 units and again, had the current closing of the Acapulco location earlier this year because of the hurricane. Q4 in total, including the few that we've already opened, we'd expect to open 10. Again, 30 openings plus the Acapulco location would be a 29 net increase for the year. Looking back over the last year and a half, in fiscal 2013 for the entire year, we added 26 units on a base of 608, about 4.5% square footage growth. This year, assuming the 30 net new units, that'd be a 4.5%-5% square footage growth.
Again, of the 30 openings this year, 17 would be in the U.S., three in Canada, one in the U.K., two in Korea and two in Japan, three in Australia, and one each in Mexico and Spain. As of Q3 end, total square footage stood at 93.7 million square feet. Next item, stock repurchases. As mentioned on the call, I guess about 12 weeks ago, that we anticipated we'd begin buying back some stock. We began our recent repurchase activities on March 7th. I think that was the day after our second quarter earnings results were released. For those nine weeks since then through the end of the third quarter, we purchased a little over 1.6 million shares at an average price of $113.14 for total dollars expended during those nine weeks of $183.6 million.
In terms of dividends, our quarterly dividend per share increased with the May dividend payment from $0.31 a share on a quarterly basis to $0.355, about a 14.5% increase. This $1.42 per share annualized dividend represents a total cost to the company of about $625 million a year. Lastly, our fourth quarter scheduled earnings release will be Thursday, October 9th. That'll be for the 16-week fiscal fourth quarter ending on August 31st. With that, I'll open it up for Q&A and turn it back to Bridget. Bridget?
At this time, if you would like to ask a question, press star then the number one on your telephone keypad. Again, that's star one to ask a question. Your first question comes from the line of Chuck Grom with Sterne Agee.
Hey, Richard. Good morning. How are you?
Good.
Just on the core up seven and then the fresh foods being down slightly year-over-year, just wondering if you could remind us how that fresh food margin has trended over the past couple of quarters. Given the inflation that we're seeing today, what's your expectation for that over the next 16 weeks?
Yeah, well, you can see I can't give you a whole lot of information about the expectations. I can tell you a little bit about what's happened over the quarter and year-to-date. If I look year-to-date at those components, fresh foods year-to-date-- Do I have that here? Hold on. I'm looking at the wrong sheet here. The total consolidated. Fresh foods year-to-date was down about 22 basis points, and that includes down the four or five or sub five this quarter. For the first half of the year, it would've been more than that minus 22.
Okay. What's the change? What's changed as part of that? Is it a little bit of relief on the pricing front, or is it something different?
I think the one thing that I pointed out last is certainly, I mentioned historically that we've kept the rotisserie chicken the same price for the last two years when costs dramatically increased. We've seen some relief there in the last quarter, a little of it is that probably, but that's one item, and that's a huge item in terms of this factor. Beyond that, it's a conscious effort to be ever competitive, but we're also trying to show a little margin improvement. That's the only thing I could point out. In general, as it relates to inflation, we tend to be the laggard when there's inflationary pressure. My guess is that when I look at the core components of the food and sundries up, that that's where there was more inflation. There's also some LIFO charge related to that.
Overall, when prices are going up quickly, ultimately we have to raise some of them, but we're probably going to be slower than others. Again, that's on a general basis. Overall, beyond that, I don't think there's a whole lot to talk about in terms of trend there.
Okay. I know you probably disclose this in your Q, but if you could just shed a little bit of light on operating margin performance internationally and then also in the U.S. and how that compared to last year.
I think we're still cross-checking those numbers and that'll be on the Q. Generally speaking, the trends that you've seen continue. FX doesn't play into those numbers from the standpoint of percentages because FX hits every line item on a Canadian P&L, as an example. Canada continues to be more profitable as a percent of sales than the U.S., and other international overall tends to be in that direction. It's skewed a little bit on a smaller base of total units when you open in Spain or you cannibalize some units in a country. Overall, I think that it's fair to say that columns two and three, with column one being in the U.S., are more profitable as a percent of sales than the U.S.
Just last question. In April, you called out the state of California as improving the entire state. Just wondering if you could elaborate on that improvement. Do you think it's sustainable? I guess, what do you think was driving it?
Well, I don't know. It's sustainable so far. I don't know the future. When I called out just geographically some of the numbers, I think California, again, the ones that I called out were Southeast and Midwest. California actually was a little better than the Northeast and the Northwest, pretty close to the total for the company. Overall, I'd say California continues to do a little better given its maturity and size. I can't tell you why, though.
All right, good. Thanks.
Your next question comes from the line of John Heinbockel with Guggenheim Securities.
Richard, just a quick follow-up on the inflation question. A number of companies have said, in the last four to six weeks, they've seen a sea change in some items. I've heard it's all perishable. Have you seen anything like that, or what you're seeing is more gradual?
Well, when I look at just, again, the various LIFO pools for U.S. inventories, which is one indication, the LIFO pools, of course, are the cost pools where they act like items year-over-year. Again, you start the new year at a cost of 100.00 for everything. If I look at what I'll call the foods pool, this is not fresh foods, but it's canned goods, cereal, all types of food items like that's up a little over 2.5% from the beginning of the fiscal year. In the last quarter, in the last 12 weeks of these 36 weeks, it's up about 1.2%, so almost half of that delta.
Got it.
Yes, is it a sea change? I haven't looked at it that closely, in fairness. When I look across items in terms of inflationary items, again, I'm just shooting down the list, looking at the top 25 most impactful items to our LIFO calculation. There's several nuts on there, almonds, pistachios, walnuts, all in the high teens to low 30s. There's some seafood items. Generally speaking, those are the types of items. There's some few produce items. That tends to be item-based, not all produce based on where a drought or a freeze or a rain was. On the deflationary side, it's the usual suspects, a bunch of electronics.
Right.
That's a lot of the items. A couple of small apparel items.
Okay. I guess, beef in total would be a bigger sales item in total than your chicken products?
Sure. Yeah. Beef overall, I think beef prices are up 10% plus in the last quarter on a year-over-year basis. Yes, totally there's more inflation in that. I think on the poultry side, there's been some inflation, we were successful in locking in some stuff as well a little earlier.
Another topic on payrolls, you said up 5% dollars. What's the trend line been on that, which actually seems like a pretty good performance for you? Are you doing anything different process-wise in the clubs to try to tweak that a little bit?
Yeah, I don't have it in front of me, but I think the last few quarters when I pointed out payroll, that's generally been a slight benefit basis point-wise, which would indicate the $ increase a shade less than total sales increase. I think first and foremost, it's sales. Driving the top line is our biggest benefit. Beyond that There continues to be a focus on things like overtime hours, lots of little things like that. I don't know if there's any giant process changes in the warehouse of late that I can think of.
That's a total number, right? If you looked at payroll and comp clubs, it would be up less than that, right?
I'm sorry, what was that?
The 5% is a total number. If you looked at it on a comparable basis, it would be less than that. When you think about, at least on a labor expense, what comp do you need to get leverage? You can get leverage on a lesser comp than you've been getting. Fair?
Yes. Probably a little higher than some other retailers, but a little lower than it has been historically for us. We also probably get a little benefit from increasing penetration overseas, where as a percent of sales, it is a lower labor percent.
Yep. Okay, just one last thing. Monthly coupon book performance. Just curious, you've been doing a much better job in the clubs signing what items are in that coupon book. Has that done anything to performance of the items in the book or no, not really?
I'd like to find out how you concluded that first.
Sure.
I think, look, they keep working it, and it's a challenge. We've done it for a lot of years. I think we've, first of all, gotten better at timing and such, so that they're easier to manage, both by the buyers and having it essentially, usually like a week in between them, give the warehouses time to move out what remnants are left from the old MVM and being able to bring in the new stuff. Overall, every time you do an MVM, you have more experience about something that maybe has petered out a little bit.
Right
if you've been running it every year or every six months, and other things that did surprisingly well, but perhaps even on a regional basis, that we want to push everywhere. As you might expect, we work with our vendors on that, figuring out how to best spend that money to both ultimately drive sales.
Yeah. No, my comment was just that on the shelf itself, I'm seeing more, "This item is in our coupon book this month.
Oh, okay.
Which I hadn't seen going back a few months.
Fair enough. You're right on that.
Okay. Thank you.
I agree.
Your next question comes from the line of Dan Binder with Jefferies.
Hi, good morning. Just had a few questions for you. First, on inventory. You've seen inventory tracking decent amount above sales the last 4 quarters or so. The clubs look clean, at least the ones I visit. I'm just curious what the driver is. Is it the new clubs? Is it Costco.com? Maybe a little bit of color on that. I know you had an amazing turnout for job applications in Spain. Curious what the early days are looking like in that club. On the IT spending, I imagine you probably have a pretty good idea of what that looks like for Q4. Should we expect a similar sort of 2 basis point incremental impact there?
Okay. Well, on inventories, the question related to where the increase is coming from?
Yeah.
I think, clearly, yes, we do have more inventory in e-commerce because we're now shipping out of more than one location, but that's relatively small to the total when I look at the total average per location. Again, the big areas with a conscious effort on our part in apparel. One of, I think, our successes that we've talked about for the last several quarters is mapping out and making bigger commitments to some items that have done what I'll call fashion basics, but everything from true basics to seasonal items like shorts and bathing suits, and KS items. We've done really well on some of those items. We've certainly committed more inventory in that area. By the way, that area tends to be usually in the middle center area where we've shrunk some areas like media over the last few years. What the next question was?
Just early days in Spain.
Well, Spain, so far, so good. We're only open for two weeks. We've had good sign-ups. Not like Japan and Korea, but very good in our mind, and we're pleased with the results so far in terms of sales, and it's growing. You're going to get small baskets when people come in for the first time, but we're pleased with the results. I really don't want to be cued either way. It's so far, so good. The last question related to IT. If you'd asked me before, I said -2 a couple of weeks ago, I would've said it's probably -3 just because it tends to be in that 3-4 range on average. It's probably in the -2 to -3 range next quarter, but we'll have to wait and see.
Starting near the end of the quarter and into Q1 of 2015, there'll be a couple of projects that go online, because you depreciate, you capitalize those and then amortize them over typically a five-year period, sometimes a little less, sometimes a little more, up to seven, and generally no less than three. Usually, I'd say five is a good single point average. My guess is it'll tweak up a little bit again. As I've said, our best guesstimate over a three or so year period in terms of incremental impact to SG&A would be 10+ basis points. We look now, I think this is about the seventh fiscal quarter we've talked about it.
If I had to average, you look at all of fiscal 2013, those four numbers, and annualize the three quarterly numbers this year, we're probably in the six or seven basis point, 5-7 basis point range incremental, and we probably have another three or four to go after that. This is a guess and a decent estimate, but we'll wait to see.
Great. Thank you.
Your next question comes from the line of Meredith Adler with Barclays.
Actually, my question's been asked already. Thank you.
Your next question comes from the line of Matthew Fassler with Goldman Sachs.
Thanks a lot. Good morning. Two questions. The first, Richard, relates to online. If you could give us a sense as to what your members are asking for more of. It sounds like you're evolving the mix. Are there areas where you'd expect to grow the assortments incrementally based on member demand?
Well, I think the areas that we've grown over the last year relative to prior to that have been some limited apparel items, some health and beauty aid items, and perhaps some other replenishable office items, K-Cup, health and beauty aids, some small office needs. As you probably are aware, for the first many years, many of our items were big ticket and in many cases deliverable, and in some cases, white glove installed items like big screen TVs and patio furniture and swing sets and the like, and furniture. Certainly some of those are still our biggest categories. For one, they've been on for longer, and two, they're bigger ticket items.
We're in our own way, looking to see how we can get items on there that are more regular and frequent and get people to come to Costco.com. I think we're doing a little better with signage even in the warehouse that certain items, somebody doesn't want to necessarily have to schlep it home and install it. They're willing to pay for that delivery. Certainly our prices are very attractive even on that basis.
Just follow up on that, as you think about the vintage of member that's doing business online, is there a difference between those who've been Costco members for many years and maybe those who are newer to the company?
Well, generally speaking, newer to the company means less purchases. Certainly, when we get a new sign-up online because they're buying online, I would say generally they tend to be lower. I don't have exact numbers there. When we've looked at the age breakdown of our members based on how long they've been members or throughout the U.S., we looked at new member sign-ups through some of these social media things that we've done in recent months, it's what you would expect it to be. You've got a younger member signing up through LivingSocial and through Zulily. It's a relatively attractive cost of acquisition. We're not going crazy here. We're taking baby steps, some of this stuff works.
That's very helpful. Thank you so much.
Your next question comes from the line of Jason Deuchner with UBS.
Hey, it's Jason Deuchner here. I wanted to ask a question on the margin decision on some of the food items that you sort of have a fixed price, and I guess I just want to understand the rationale for not changing those. The comparison I want to make, whether it's fair or not, is that your fuel prices are not a fixed price, and it varies with what's happening in the market. Why not with rotisserie chicken and hot dogs and things like that?
Yep. Well, that's like behind the black curtain here. Look, at the end of the day. First of all, I want to make one other point about the previous question. Let's get to your question first. In terms of fixed items, in retail, there are price points that are hot. I mean, the $1.50 hot dog and soda. I think we didn't sit down one day and said, "Let's decide that the rotisserie chicken should be it." As prices changed dramatically and we saw the competition raising the price, it was a hot price and let's take a little less margin. Take a little less margin. Take little or no margin. I think there are few examples of that extreme.
Gas historically has always been an item that there's some locations where we comp shop the price three or four times a day compared to the locations nearest us. I think it's just the nature of retail and the nature is what we do. We don't sit down and try to optimize everything. We're merchants. There are key price points, and that's how we do it.
Okay.
Gas, by the way, is a lot more volatile and a what, a $12 billion or $13 billion business for us, but it's very visual out there. You go to some of these apps like GasBuddy.com, there's a reason that we're comp shopping that item in some locations three or four times a day.
Okay. No, I know it's an unfair comparison, but I thought we've learned. I don't know, just help try to understand the thought process.
Sure
between things like that. I guess as the follow-up on the last question, maybe it'll let you continue to follow up on the answer to the last question. As you try out social media or the LivingSocial type promotions to get younger members to sign up, how do you manage with a limited number of SKUs to keep both your core boomer shopper happy and then also have enough relevant items for a millennial shopper? Or do you think that doesn't matter?
Well, we'll have to wait and see. We're not going to keep our head in the sand on it. Extreme value works. Again, to follow up on the previous question, what I was going to mention was the test that we're doing with Google now in three major markets, in the Bay Area, L.A., and New York City. Arguably, if you look at the age breakdown of those, it's younger. That's a positive. I don't think we're ever going to get your one box of Life cereal and one box of FRUITY PEBBLES and two different types of half gallons of milk delivered to your doorstep at 6:00 A.M. There's a lot of things that we have. We've certainly changed and frankly expanded the items out of the locations in the Bay Area. You'll continue to see that.
We're excited to see what the Instacart and the Boxed are doing as customers of ours. They're small, they're new. There's going to be a lot of things. I think there's still a lot of reasons, not everybody wants to just sit home and type in stuff to have it delivered in the morning. People like to go out and do stuff. We're pretty good at getting you in the warehouse. We'll have to evolve over time as well. There are certain things in our model. There's a reason that we're able to mark up goods on average 11%, on arguably buying power that's at the top of the heap, in terms of strength. Not all is good. We're open-minded. Don't expect us to deliver to everybody's doorstep.
If others want to, we'll be happy to accommodate and help them do that with our stuff. I mentioned this last time. Jokes aside, organic is getting bigger, not just for us, but for everybody. Again, just like we wow members in our produce department with great quality on slightly oversized items for families, that whole organic thing is arguably. I don't think we sat down and strategically thought about it. We look at what items work well and try some things. When it works, we really go after it. We've seen surprisingly good success on organic and produce and fresh meat and fresh ground beef. The challenge is the supply, frankly. There's not much enough supply. If we can show great value, we'll figure it out.
Okay, actually that was what I was going to finish up on as an example of something for a younger consumer based on the demographics. You think that when you put these items on the shelf, like organic compared to conventional, you're getting enough rate of sale that all the economics from your point of view work, or if it's not quite that level, you're willing to stick with it?
Well, first of all, the level of economics are still on an item basis. To the extent there's less supply, we just don't put it in all the locations. We'd love to have twice as much in some locations. Items live and die around here since the beginning of time, since 30 years ago. Certainly some of these organic are really starting to take off. I think so far, one of the benefits that we think that we've had, I think I mentioned this before, not only in some cases, I think I've used the fresh ground beef example of organic. It's a higher price point. We get a slightly better or full margin by our definition of full margin, because it's not football every day out there in every supermarket chain.
To our pleasant surprise, 75%-80% of these sales of this new item was truly incremental. It was existing members that didn't buy ground beef at Costco because they did buy organic. It was incremental. Now these are all small examples, but they're going to grow over time.
All right, great. Thank you.
Your next question comes from the line of Peter Benedict with Robert W. Baird.
Hey, Richard. Couple questions. First, can you talk about the level of new member signups that you guys tend to see when you open up a club internationally versus what you see in the U.S.? How dramatic is that difference?
Well, I don't have exact numbers in front of us, but when we're in a well-penetrated, very successful market like L.A. or parts of Virginia or New York, what we look at is during the eight to 12 weeks prior to opening, when you've got the parking lot partially done, and there's some tabling activities outside where people can come and sign up. You might have as few as 3,000 or 4,000 new signups through those eight or 12 weeks. In a new small market, like somewhere in the Southeast, like Louisiana, Baton Rouge or New Orleans, or Knoxville, a couple of years ago, you might have 8,000 to 12,000, because even though it's a much smaller market, it's new. We've had some extreme examples during those first many weeks prior to and through opening day of 30,000 to 40,000 members in some of the Asia countries.
It's somewhere in between there for Spain and Australia. Better than the U.S., but again, the benefit is when you open up in an L.A., Huntington Beach a few years ago or something like that, you may have fewer net new signups, but you get existing members that are going to shop more frequently because they've got a unit 10 or 15 minutes from their home instead of 30 minutes.
Okay. That's helpful. Then there was no gross margin headwind from the Executive Reward, 2% reward this quarter. What's happening in the spending patterns between your Executive Members and your regular Gold Star members? Are the Gold Star members kind of picking up incrementally? And just remind us where you have the Executive Membership being offered, and what countries you don't have it, and where you don't have it, what are your plans for getting it there? Thank you.
Well, theoretically, our plan is to put it wherever we can and it makes sense. I don't know if I know off the top of my head where else it's going. Currently, we have Let's see here. U.S., Canada, U.K., and Mexico. I know we're looking at a couple of countries, but I'm not going to say when. My guess is in the next year or two, we'll have at least one more country. Part of it, of course, is based on size and number of warehouses and number of members in that country. We want to get a handful of offerings going, be able to go with a handful of offerings to start with. I don't think the delta, one, as we've opened, there's probably a little more sales penetration in some of those new markets, those new international markets where we don't have it.
That probably impacted a little bit. I'm not terribly concerned. It's generally been in the one or two basis point delta year-over-year in terms of how that reward impacted it. This time it was at zero. I don't know off the top of my head. I haven't heard anything or seen anything at the monthly budget meetings about any concern about that. If anything, my one surprise yesterday in looking, or a couple of days ago, looking at these numbers, was the fact that we probably, the 25,000 or 26,000 new Executive members, new and converted Executive members per week during the quarter, is a little higher. It was certainly a lot higher than Q2, I think a little higher on average than the last several quarters on average. We're still getting a lot of people to convert, and that's good.
Yeah, no, that certainly looks like that trend continues to be healthy. It looks like the Gold Stars are definitely doing better. Last question, just early thinking on your openings for 2015. If there's not a number, maybe just a geographic split, how you're thinking international versus the U.S. Thank you.
I think it'll be similar to this year, 30, maybe a little, hopefully a little, 30 plus. I think I mentioned this year, if we get to the 30, it's going to be 17 in the U.S. A little more than half. I would guess half. Is it 45%-52% or something next year, not 55%. Overall, we still think we've got opportunity in the U.S., and Canada, and other markets that are seemingly well-penetrated. We definitely have the pipeline more filled overseas now. If I had to guess, it'll be a number north of 30 and south of 34.
Okay, thanks very much.
Yep.
Your next question comes from the line of Scott Mushkin with Wolfe Research.
Hey, thanks, Richard. Thanks for taking my question. It's actually more of a big picture question, going back to some of the e-commerce discussions, and just noting that one of your biggest competitor's CEO was on record yesterday saying that, "If consumers just don't want stores, maybe we won't have stores," when talking about the trajectory here in the U.S. and e-commerce and whatnot. Maybe that's because his stores aren't performing as well as yours. I guess one of the things I'm wondering is, you could say that Costco doesn't have as well-developed of an e-commerce platform. You could also say that a lot of stuff you guys carry, Amazon's been pretty aggressive in. Yet your stores are doing great. Why do you think that is?
What's the number one reason you think you're overcoming maybe demographics, e-commerce, and really just putting up some of the best sales in retail?
I think you mentioned some of them. It's merchandising, it's quality, it's quantity relative to price. It's the extreme value. Arguably, our demographic, I don't think you need to be an economist to understand that our demographic has probably been impacted less than the lower demographic retailers. Clearly, gas brings you to the parking lot. Clearly, our fresh foods is a signature category. Fresh foods is something, jokes aside, if you like our rotisserie chicken, or our home meal replacement items, or any of those great fresh food items, or organic produce, it's a reason for you to come in. If you walk by the sweaters and the batteries and the patio furniture and the active wear, you're gonna buy some more stuff. We think that, again, delivering small quantities of stuff to home is not free. Ultimately, somebody's got to pay for it.
If we're going to lose sales over time to some of that, we'll figure out how to not lose as much and how to drive sales in other ways. I think we've been pretty good at that. Starting with an average gross margin of 11%, which is incredible, nobody comes close to that, I think we'll be pretty good. We're also open. Without trying to put any fluff in it, we like the fact that it's been exciting to work with a Google to look at opportunities to drive business and to drive business that might go somewhere else. Some of these other new companies that are doing things and using us as part of their platform to pick up and deliver to members at a small cost. That's great. We'll keep figuring that out.
Hopefully there's also some items that we only have, and usually that starts with the name Kirkland Signature or some crazy items that we only have, that somebody bragged about that they can get at Costco. Whether it's some incredible price on a branded-
Handbag
Handbag or bicycle or kayak or whatever. There's all kinds of reasons to come into Costco.
That's a terrific answer. When you think about your own e-commerce business, how do you prevent it from basically cannibalizing the heck out of your own stores? We've used it before, but we've been using most of your e-commerce for furniture stuff I would never get at your warehouse. How do you guys think about it as you grow this business and how it doesn't just cannibalize yourself and take your ROICs down?
Well, I get back to the question is, if somebody's going to take that business, we'd rather take it. We also recognize that, I'll call it the good old days, when there was no such thing as the Internet. You only had one choice. If you wanted to get that TV or that patio furniture at that price, you either find a friend with a pickup truck or go get a U-Haul and get it home. You have choices now, we do believe that we're selling some of those items that would not have been bought in store. Not everybody's going to take those big-ticket items home that way.
We have to change with the times there, but we also recognize we also have to get you in on a hopefully, increasingly frequent basis, so you pass by all those items that you go, "Wow." I think so far, we've done pretty well with that.
Indeed. Thanks for taking my questions. I appreciate it.
Your next question comes from the line of Greg Melich with ISI Group.
Hi, thanks. I wanted to follow up on the membership fee income. If my math is right, it was up a little over 7% in local currencies.
Yes.
Is that right? A shift about 3% per club.
Yes.
Could you help us understand what's driving that 3% per club? Is it that Executive Membership shift? Is it international? What's the bulk of that up 3% per club?
Executive Membership is a good chunk of it. On an international basis, again, I'd have to analyze a little more. There's more sign-ups per location, although in some countries, converted into U.S. dollars, it's a little less than $55, and of course, we don't have $110 in some of those countries. I think it's probably the fact that we do get more sign-ups internationally, is probably the biggest reason.
You think Executive is still a bigger portion of that than international, if you had to take a guess, something to follow up on?
If I had to guess, I'd probably say half and half. I just don't know.
Okay. Fair enough. Given the renewals internationally continue to improve, is there a threshold or how should we think about raising the fee in markets outside the U.S., given that we sort of know how it works in the U.S., the 5- to 6-year pattern. How should we think about either a threshold or renewal rates or members per club where we start to model that in the international side?
I don't know. We don't talk about it a lot. We like the fact that in new markets, recognizing these new markets are also much smaller percentages of our total company. Let's work to just drive business and drive sign-ups, and we can worry about all of that later. We look at it every year or so, but spend all of about 10 minutes looking at it, and we'll see in the future. I mean it. I don't see any current plans that make any major changes out there.
Fair to say the focus internationally is still getting the sign-ups rather than trying to take the fee up.
Yeah. I think that's not even on page one of a 25-line page. The first order of business is opening units and getting them to work right. Even in very successful countries, and even with the support of its parent in the U.S., when you're going from nine to now 20 units in Japan over a little over two years, and going from three to six locations in Australia in a little over a year and a half, there's challenges. Nothing major, and believe me, every week there's somebody from one of my departments going over to help out on something somewhere, which is good. At the same time, you'll always have some growing pains with that kind of stuff.
Great. A little bit of a housekeeping. I think on the SG&A, you mentioned workers' comp hurt three basis points. Is that?
Actually, benefits of workers' comp. I think workers' comp was actually a very slight improvement year-over-year as a %. Benefits was the bigger culprit.
Benefits was the culprit. Workers' comp helped. That was a net figure, the 3 basis points was benefits and workers' comp?
I think it was like 4 and 1. Plus 4 and minus 1. Benefits, workers' comp, we kind of always summarize together.
Got it. That benefits trend looks like it's sort of an ongoing thing as opposed to anything that sort of.
The one thing that helps it, we read about hospital costs are becoming less inflationary in the U.S. We, and I've talked to a few other different types of companies at a recent meeting outside of Costco, and we're not seeing the lowest low numbers. I think maybe on a per charge at a given hospital or a given doctor, some things might be lower if it's only through the Medicare system, as an example. Some of the things that have been added, like the up to 26-year-old instead of 18 to 22, based on if your kid's in college or not, your dependents, on mental and medical health parity, on no limits. There's all these things have added one and one and a half percentage points to an already large number.
The thing that's frankly going to help us more than that, whether inflation is 5% or 10% or 3%, certainly if it comes down into lower single digits, that's a positive for us. The bigger thing is the increasing penetration outside of the U.S., where healthcare costs as a percent of sales respect to sales ex-country is a lot less.
Got it. Lastly, on the gross margin, I think last quarter you talked about some of the gross margin, about half of the hurt was self-inflicted or something you decided to do. It sounds like this was a quarter where you felt that you didn't need to decide to do that again. Am I summarizing that correctly?
Again, I use the extreme example of the chicken. Again, we went from 2 years of an item that arguably represents several hundred million in sales of having very little, if any, margin, to indicating that as underlying costs have come down a little, we didn't change the price, but we improved the margin a little bit. It's one item, but it's one item that probably impacted us incrementally by three or more basis points over the last couple of years and is now helping. Some of that's reversing, not all of it. Again, a lower increasing penetration overseas helps you a little bit.
Okay. All right. Thanks, Richard.
We don't try to get lower margin. We try to get lower prices, we still look to see where we can get a little.
Okay. Thanks.
Your next question comes from the line of Chuck Cerankosky with Northcoast Research.
Good morning, Richard. If we're looking at what proteins are doing, especially some of the strong inflation we're seeing in certain categories, how are you seeing your members switching between those, and what is that doing to your gross profit margin in the edible protein category?
I think from the last budget meeting, there was some switch from beef to poultry, as you might expect, with the rising prices of beef. I don't have an exact number on it. I look at all overall fresh foods margins of, again, pounds like beef are a little down, but dollars are up because of the price. I don't know off the top of my head, check that detail.
All right. Just a quick follow-up with regards to Spain. Anything worth pointing out there with regard to the product mix as you open up that's unique to Spain?
In the pictures that I saw, there's certainly some unique local items to Spain and Europe. Generally speaking, many of the pictures that I saw look a lot like a Costco that you would see. As you might expect, like any opening, and certainly like a new opening in a new country, there are probably a lot of hot non-food items where we were able to procure merchandise and really show great value on some exciting stuff. I'm shooting from the hip with this answer.
Got you. We both need to get over there then.
Fair enough. Well.
Thank you.
Your next question comes from the line of Christopher Horvers with JPMorgan.
Thanks. A couple quick model questions. By the nature of the LIFO calculation, you had a 7 basis point benefit last year in the fourth quarter. Just by the fact that you have a benefit, does that end up being a negative this year in the fourth quarter?
No, that negative related to how it rests versus the year before that. We now start with that base of cost, if you will, a year ago. Really, you started with a basis at the beginning of this fiscal year. How do prices trend? Again, using an index of 100.00 at times zero at the beginning of the fiscal year, and let's say through the end of the third quarter, I mentioned as an example, what I'll call the food and sundry pool, or what we call a food pool, which is canned goods and cereals and things like that. From the beginning of the fiscal year, it was up 2.6%. It may go up or down a little in Q4 from that 102.6% number.
If it went down a tenth, there'd be a LIFO credit in the quarter, even though that was a small offset to the big LIFO charge year to date through the first three quarters.
I understand.
It's really, if you think about it, what's going to happen in Q4 is what the index was for all the pools at Q3 end and what it'll be 16 weeks hence.
You mentioned that it was all I understand. Sequential. You also mentioned that prices accelerated in the back half of the quarter, so it sounds like it's more likely to be a negative.
It could be, but it probably will be, but I just don't know.
Okay. On the buybacks, you bought back 1.6 million shares. The share count ticked down 0.1 sequentially. Just curious, was there more of a big impact from the stock option exercising?
There's not a whole lot of stock option exercises. In fact, they're using the treasury stock method. That's kind of implicit of the number anyway, for options. If you have a big in-the-money option, which our remaining small amount of options that were granted in 2005, I believe. They expire in 2015. 2004 and 2005, so expired this year and next year. We're down to a very few left. Making the math simple, if you had a $40 exercise price on $120 stock price, for every option out there, you'd exercise three of them and then buy one share back. It'd be a net increase of two shares. That number is not a big number. We've bought stock during the quarter, relatively speaking, proportional during the course of the period.
If it was 1.6 million shares, my guess is that the rough subtraction to the total shares outstanding would be about half that number, about 800,000. To the extent the calculation only went down 100,000, it would be some additional vesting, since then, on RSUs and to a very small extent, to the extent the stock price was a little higher versus a quarter ago, and I don't know if it was or it wasn't, that would maybe impact it a very shade. The big things would be roughly adding 800 and then subtracting, I mean, subtracting 800 and then adding some due to just ongoing vesting of previous grants.
I got you. Last quarter, you talked about your intent to buy back more stock. Any thoughts on going forward here?
No, other than we've started. Again, I don't want to be cute or coy. We continue to buy a little, but we're not suggesting that if you took the exact those nine weeks times those shares, I think you'd get to a number in the $900 million a year range. I don't know if it'll be less or more than that next quarter on an annualized basis, it could be a little less. We'll just see. It probably is either a little less or a little more, not a whole lot different, but we'll see.
Okay. Last one, just in terms of, you had the Spain pressure in the pre-open. As you look forward, is the sort of pre-open per store normalize back down to levels that we've seen historically?
Say that again, I'm sorry.
The pre-open. If I look at pre-open expense, it ticked up partly because of Spain. As you look going forward, does the pre-opening dollars per store go back down to more normalized levels?
Yes, generally, because it was clearly skewed because of Spain. To the extent that we open more international, they tend to be a little higher. Assuming we open France next year, and again, we don't know when that'll happen, there'll be another little tick upward in that quarter.
Understood. Thanks very much.
We'll take two more questions.
Your next question comes from the line of Paul Trussell, Deutsche Bank.
Hey, guys, it's actually Matt for Paul. A lot of questions have been answered, but I was just curious on online with some of the newer countries you're entering. Do you have a different plan in terms of the rollout of your online platform relative to the stores than you've kind of done historically? Thanks.
Well, I know we're looking at other countries to open in, countries where we operate. I don't know if there's We haven't stated anything about when.
Thanks.
Two more questions.
There are no further questions at this time.
Okay. Well, thank you, everyone, and thank you, Bridget.