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 3 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session.
And now, I would 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 Q3 operating results for the 12 week period ended May 11. The discussions we're having will include forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and 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 Q3 results operating results.
For the quarter, our reported earnings per share came in at $1.07 a share compared to last year's Q3 earnings per share of 1.04 dollars 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 upfront of course is the FX impact to the entire income statement. The FX impact of weaker foreign exchange rates year over year when reporting profits from our international operations that represented a little over $17,000,000 pre tax or between 0 point 0 $0.025 0.03 a share impact to the P and L to the negative. As an example, year over year in Q3, the Canadian exchange rate the Canadian dollar relative to the U. S.
Dollar was down about 8%, Japan's yen 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% and our 12 week reported comparable sales figure was up 4%.
For the quarter, sales were negatively impacted by gas price deflation, which is about a 25 basis point 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 have been a 6% and the reported plus 3% international comp figure excluding gas and FX would have been plus 8%. The total company comp, which we reported at plus 4% for the quarter, excluding gas and FX would have been plus 6% for the whole company. In terms of new openings, after opening 16 new locations in the first half of fiscal twenty fourteen and the closing of our Acapulco location earlier this fiscal year due to the hurricane damage, we opened 4 new locations in Q3, 2 in the U. S, 1 in Louisiana and 1 in Texas and one each in Japan and Korea. All told that puts our 2014 fiscal year openings through the Q3 end at 2020.
Since the Q3 end, on May 15, we opened our 1st Costco in Spain in Seville. And this week, we are opening our 6th location in Australia, in Brisbane, our 11th Korea location and our 20th Costco in Japan, so three openings outside of the U. S. This week. By weekend, we'll be operating 57 locations worldwide.
And after that and through the end of the fiscal 2014 on August 31, we expect to open 6 more locations, in the U. S. And 1 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 Opelco or 6 63 Costcos worldwide as of August 31.
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 discussion about the various line items of the income statement. So on to the results. As I mentioned, total actually total sales for the quarter came in at $25,200,000,000 up 7% from last year's $23,500,000,000 On a reported comp basis, Q3 comps again were 4% for the quarter on a reported basis, 6% excluding EKAS and FX. Now 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 yes, Avex, the average transaction was up just under 2% and an average frequency increase of up 4.3%, which by the way is the same number year to date through the Q3.
In terms of sales comparisons by geography, within the U. S, the Southeast and the Midwest were the strongest in the 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 plus 8% to plus 10% range. In terms of merchandise categories, sales results for the quarter. For the Q3 within food and sundries overall in mid single digits.
Frozen food, candy and meat deli were relative standouts. Hardlines, which overall was just above flat about 0.5% 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 softwalling comps, small electrics, domestics and apparel were standouts.
And 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 $1,000,000 up 6% or about $30,000,000 year over year and down 3 basis points as a percent of sales. Again FX that $30,000,000 increase would have been $38,000,000 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%. So first time averaging rounding upward and 87.3% worldwide. Again, we see continued increased penetration of the executive membership and I'll speak to you 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 has is impacted by particularly by some of the Asia opening schedules where we get outsized due to member sign ups. In terms of members at year end, at year end I'm sorry Q3 end, at the end of the Q3, Gold Star members totaled 30,600,000 dollars up from $30,100,000 12 weeks earlier. Primary business $6,800,000 up from 6,700,000 dollars 12 weeks ago and business add on was steady at $3,500,000 So all sold member households $40,900,000 at Q3 end, up from 40,300,000 at the end of 2nd quarter.
And including the add on cards, the Extra card, total cards outstanding $74,600,000 at Q3 end, up from $73,400,000 12 weeks earlier. At May 11th Q3 end, paid executive memberships were just shy of $14,400,000 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 2 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%.
So all told 90.6% versus 90 point 4%. And 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 Q3 came in at 10.62 percent of sales, down 5 basis points from last year's 10 0.67%. If we jot down the following little matrix and then I'll explain it and walk through it.
There'll be 4 columns and 6 line items. The line items would be core merchandising. 2nd line item would be ancillary businesses. 3rd line item would be 2% reward. 4th line item LIFO.
5th line item would be other. And then the total would be the 6th line item total. The 4 columns would be reported in Q2 twenty fourteen. The second line item the column would be without gas deflation in Q2, 2014. And then columns 34 would be for Q3, 2014 both columns and again reported and without gas deflation.
So again going across those four lines those four columns core merchandising was minus was plus 1 basis point q2 2014 on a reported basis year over year. Without gas was minus 1. For Q3, it was plus 9+7. Percent. Ancillary businesses were again reading across the 4 columns 0, 0, plus 1 and 0.
2% reward minus 1 and minus 1. And then for Q3, 2014 both reported and without would be 0 and 0. LIFO minus 6 and minus 6. And for the Q3, 2014, minus 8 and minus 8. Other 0 and 0 and Q3, 2014 would be minus 7 and minus 7.
So all told, it was minus 6 basis points year over year in Q2 2014 on a reported basis point on a reported basis. In Q2, 2014 without gas deflation it was minus 8 basis points total. And then in Q3, 2014 reported and without would be minus 5 and minus 8 basis points respectively. So as you can see the overall reported gross margin was lower year over year by 5 basis points, minus 8% without gas deflation. However, our core merchandise gross margin was up year over year both with and without gas deflation of 9 basis points and 7 basis points respectively.
For the Q3, on the merchandise categories on sales, food and sundries gross margins were up about 20 basis points were up in the 20 basis point range year over year, while hardlines and softlines 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 5 basis points delta, which is actually an improved a relative improvement from recent quarterly performance in that area. At LIFO, in the 3rd quarter, we recorded a $12,000,000 or 5 basis point -pre tax charge in the quarter. That compared to last year in Q3 of an $8,000,000 or plus 3 basis point pre tax credit due to deflation a year ago. So year over year it's a $20,000,000 swing or about $0.03 a share.
In terms of inflation, LIFO, if I looked at just the 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 of the 12 weeks, there was about 0.25percentagepoint delta in the LIFO index. With foods, not food summaries, 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 7 basis point minus swing year over year both with and without gas. There was a little over a $17,000,000 pre tax benefit last year in Q3, again related to this legal settlement, which was about a little right around $0.025 a share. Moving down to SG and A. Our SG and A percentages were higher by 4 basis points year over year coming in at 9.86 percent of sales this year compared to a 9.82 percent a year ago.
As we did with as I did with our gross margin, I'll ask you to do the 4 columns. First two columns are Q2 2014 and Q2 2014 both reported and without gas deflation and then Q3 2014 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 and A, then a minus 9%. And then in Q3, 2014 those two columns will be a +3 and a +5 or the core operations was improved by 3 and 5 basis points respectively.
Central, going across the 4 columns, 0 and 0 and then minus 2 and minus 2 being a little higher year over year. RSUs minus 1 and minus 1 and then in Q3 minus 5 and minus 4. There were no quarterly adjustments. So in that 4th line item would be zeros across. And then the final column the total final row of the total minus 13 and minus 10.
And in Q3, 2014 reported SG and A again was higher year over year by 4, so minus 4 there without gas of minus 1. In terms of a little editorial on these numbers, the operations component of SG and A again was 3 basis points better year over year in Q3 and 5 better excluding gas deflation. Within warehouse operations, our payroll as a percent of sales was lower year over year by or improvement 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 and A by about 3 basis points year over year.
So that was a little bit of offset to that improvement. Our central expense, it was higher year over year by in Q3 by 2 basis points, which is actually the same number as related to the ongoing IT modernization incremental modernization cost that was about 2 basis points hit to the there. There are a couple of other things that went both ways, but those were the that would be the one thing I'd point out there. Next on the income statement is preopening expense. Preopening expense was up $6,000,000 from $10,000,000 last year in Q3 to $16,000,000 this year.
We actually had one more opening last year, 5 last year I might also point out of course with the opening of Spain, we always have a significant preopening expense related to the opening of the country itself in that first warehouse. That was about $4,000,000 of that $16,000,000 number for Q3 this year. All sold operating income in Q3 2014 came in at $737,000,000 higher by $15,000,000 from last year's 722,000,000 dollars Below operating income, interest expense came in at $25,000,000 of both this year's and last year's fiscal 3rd quarter. Over 95% of it relates to the interest expense related to the 10 year maturing $1,100,000,000 debt that we have that matures in 2017 and the $3,500,000,000 of debt that matures over the next 2 to 6 years that we did back in December of 2012. Interest income and other was lower year over year by $3,000,000 So a few million dollars in the $15,000,000 last year relative to this year, this quarter of $12,000,000 positive.
Actual interest income for the quarter was higher by $2,000,000 The other component of interest income and other amounted to a $1,000,000 positive this year versus a $6,000,000 positive last year, so a minus $5,000,000 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 dollar U.
S. Dollar relative to local currencies local currency in certain foreign locations as compared to the prior year. This we just pointed out as part of that impact, sometimes it's a little positive, sometimes it's a little negative. Overall, pretax income was higher year over year by $12,000,000 in the 3rd quarter, coming in last year at $712,000,000 and this year up $12,000,000 to $724,000,000 In terms of income taxes, our tax rate this quarter came in a little better or lower at 33.9 percent versus 34.8% last year. This was primarily due to the higher year over year penetration of profits coming from operations, which overall have lower tax rates than in the U.
S. Overall reported net income of $459,000,000 last year, as compared to the $473,000,000 of net income this year in Q3. For a quick rundown of other topics, again 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 $237,000,000 and so year to date $708,000,000 AP as a percent of inventories came down 2 to 3 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 inventory merchandise payables not other types of payables like construction payables, last year in Q3 that $102,000,000 was at $91,000,000 and this year the $91,000,000 comes it from a 99% it's 89%. So still down a couple of percentage points year over year. Average inventory per warehouse was up about 7% on a per warehouse basis coming in at $13,000,000 this year, up from $12,200,000 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 and 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 Q1 we spent $574,000,000 in the Q2 of this year, we spent $447,000,000 and in the Q3 just ended, we spent $405,000,000 So Q3 year to date, we're just a little over $1,400,000,000 Our estimate for the year for CapEx is, we'll come in at about $2,200,000,000 from last year. In terms of cost go online, we continue to operate cost go online in the 4 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 the weak Canadian dollar, but overall 16% on a reported basis. I've talked about the various things we've done in the last year, 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 in line 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 1 depot to improve timing of shipments in some of the bigger ticket items as well. Outside of e commerce, there's a couple of 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. And those are both those two cities have been just in the last 4 to 6 weeks.
Also we tested a few from a membership sign up standpoint a couple of social media areas 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 we haven't 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. So again, 30 openings less the Acapulco location will be 29 that increase for the year.
So looking back over the last year, year and a half, in fiscal 20 13 for the entire year, we added 26 units on a base of 60 8, so about 4.5 percent square footage growth. This year assuming the 30 net new units to be 4.5% to 5% square footage growth. Again, of the 30 openings this year, 17 would be in the U. S, 3 in Canada, 1 in the U. K, 2 in Korea and 2 in Japan, 3 in Australia and 1 each in Mexico and Spain.
As of Q3 end total square footage stood at 93,700,000 square feet. Next item, stock repurchases. As mentioned on the call, I guess about 12 weeks ago that we would that we anticipate we'd begin buying back some stock. We began our recent repurchase activities on March 7. I think that was the day after our Q2 earnings results were released.
For those 9 weeks since then through the end of the Q3, we purchased 1.6 a little over 1,600,000 shares at an average price of $113.14 for total dollars expended during those 9 weeks of $183,600,000 In terms of dividends, our quarterly dividend per share increased with a May dividend payment from $0.31 a share on a quarterly basis to $0.355 so about a 14.5 percent increase. This $1.42 per share annualized dividend represents a total cost of the company of about $625,000,000 a year. Lastly, our Q4 scheduled earnings release will be Thursday, October 9. That will be for the 16 week fiscal quarter fiscal 4th quarter ending on August 31. With that, I'll open it up for Q and A and turn it back to Bridget.
Bridget?
And your first question comes from the line of Charles Grom with Stern AG.
Hey, Richard. Good morning. How are you? Good. Just on the core up 7% 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? And given the inflation that we're seeing today, what's kind of your expectation for that over the next I guess over the next 16 weeks? Yes. Well, you said I can't give you a whole lot of information about the expectations. I can tell you a little bit about what's happened the quarter year to date.
If I look year to date at those components, fresh foods year to date let's see, 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 up the down the 4 or 5 or sub 5 this quarter.
So for the first half of the year, it would have been more than that minus 22%. Okay. So what's the change? Like 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 in the last is certainly I mentioned historically that we've kept the rotisserie chicken at the same price for the last 2 years when costs dramatically increased. We've seen some relief there in the last quarter. And so a little of it is that probably, but that's one item. And that's a huge item in terms of that of this factor.
But beyond that, I mean, it's a conscious effort to we want to be ever competitive, but we're also trying to show a little margin improvement. So 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 is 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. So but then 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. And then I know you probably disclosed this in the 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 want to that will be out in the queue. Generally speaking, the trends that you've seen continue. I mean, FX doesn't play into those numbers from the standpoint of percentages because FX hits every line item on a Canadian P and L as an example.
But Canada continues to be more profitable that 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 the country. But overall, I think that it's fair to say that columns 23 with column 1 being in the U.
S. Are more profitable as a percent of sales than the U. S. Okay. And then just last question.
In April, you called out the state of California is improving the entire state. Just wondering if you could elaborate on that improvement. Do you think it's sustainable? And I guess what do you think was driving it? Well, I don't know.
It's sustainable so far. I don't know in the future. When I called out just geographically some of the numbers, I think California, again, the ones that were 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. So overall, I'd say California continues to do a little better than given its maturity and size.
I can't tell you why though. All right. Good. Thanks.
And your next question comes from the line of Don Heinbockel with Guggenheim Securities.
So, Richard, just a quick follow-up on the inflation question. A number of companies have said in the last 4 to 6 weeks, they've seen a sea change in some items. 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, but the exact like items year over year. And again, you start the new year at a cost of 100.00 for everything. If I look at the what I'll call the food school, this is not fresh foods, but it's canned goods, cereal, all types of food items like that.
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. So yes, that's into the fee 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. There's generally speaking those are the types of items. There's some few produce items. That tends to be item based not all produce based, 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. Not a whole that's a lot of the items, a couple of small apparel items. Okay. And then again, I guess, beef in total would be a bigger is that a bigger sales item in total than your chicken products? Sure.
Yes, beef overall, I think in the last beef prices are up 10% plus in the last quarter on a year over year basis. So yes, clearly there's more inflation in that. I think on the poultry side, there's been some inflation, but we were successful in locking in some stuff as well a little earlier. Another topic on payrolls. You set up 5% dollars.
What's the trend line been on that? And which actually seems like a pretty good performance for you? And what are you doing anything different process wise in the clubs to try to tweak that little bit? Yes. I don't have it in front of me.
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 dollars increase a shade less than sales total sales increase. I think 1st and foremost, it's sales. I mean, 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.
Because 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, would be less than that.
So when you think about at least on a labor standpoint, what comp do you need to get leverage? You can get leverage on a lesser comp than you've been getting there? Yes. Probably a little higher than some other retailers, but a little lower than it had 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.
Yeah. Okay. And then just one last thing. Monthly coupon book performance, just curious you've been doing a much better job in the clubs signing in the club what the 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. But I think look they keep working it. It's a challenge. We do it. We've done it for a lot of years.
I think we've first of all gotten better at timing and such that they're easier to manage both by the buyers and having it essentially usually like a week in between them to give the warehouses time to move out what remnants are less from the old MVM and being able to bring in the new stuff. Again, overall, every time you do an MDM, you have more experience about something that maybe has petered out a little bit. Perhaps you've been running it every year or every 6 months and other things that did surprisingly well that perhaps even on a regional basis that we want to push everywhere. So as you might expect, we work with our vendors on that, figuring out how to best spend that money to both ultimately drive sales. Yes.
No, in my account it was just that on the shelf itself, I'm seeing more this item is our coupon book this month, which I hadn't seen going back a few months. Fair enough. You're right on that. Okay. Thank you.
I agree.
And your next question comes from the line of Dan Fender 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?
It the new clubs? Is it dotcom? Maybe a little bit of color on that. And then also, I know you had an amazing turnout for job applications and staying curious what the early days are looking like in that club. And then finally on the IT spending, I imagine you probably have a pretty good idea of what that looks like for Q4.
So 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? I think look, clearly, we have 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 click at the total average per location.
Again, the big areas were a conscious effort on our part in apparel. I mean, one of I think our successes that we 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 shoe basics to seasonal items like shorts and bathing suits and KS items. We've done really well in some of those items. So 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.
As it relates what was the next question was? Just early days in Spain. Well, Spain, I mean, so far so good. We're only open for 2 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 were pleased with the results. I really don't want to be cued either way. It's so far so good. And the last question related to IT.
If you'd asked me before I said -2 a couple of weeks ago, I would have said it's probably -3 just because it tends to be in that 3 to 4 range on average. It's probably in the minus 2% to minus 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. And because you depreciate you capitalize those and then amortize them over typically a 5 year period, sometimes a little less, sometimes a little more up to 7 and generally no less than 3%. But usually I'd say 5% is a good single point average.
My guess is it will tweak up a little bit again. And as I've said, our best guesstimate over a 3 or so year period in terms of incremental impact to SG and A would be 10 plus basis points. And we look now I think this is about the 7th fiscal quarter. We've talked about it. If I had an average, you look at all of fiscal 2013 those four numbers and annualized the 3 quarterly numbers this year, we're probably in the 6 or 7 basis point 5 to 7 basis point range incremental and we'll probably have another 3 or 4 to go after that.
So this is a guess and a decent estimate, but we'll wait to see. Great. Thank you.
And your next question comes from the line of Meredith Adler with Barclays. Actually my question has been asked already. Thank you. And your next question comes from the line of Matthew Fassler with Goldman Sachs.
Thanks a lot and 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 this, it sounds like you're evolving the mix. Are there areas where you would expect to grow the assortments incrementally based on member demand?
Well, I mean, 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 Cups, Health and Beauty Aids, but yes, some small office needs. And as you probably are aware, as we went for the 1st many years, many of our items were big ticket and in many cases deliverable and in some cases like club installed items like big screen TVs and patio furniture swing sets and the like. And so certainly some of those and furniture, some of those are still our biggest categories for 1, they've been on for longer and 2, they're bigger ticket items. But 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. And I think we're doing better a little better with signage even in the warehouse that certain items somebody doesn't want to necessarily have to shop at home and install it.
They want to they're willing to pay for that delivery. And certainly our prices are very attractive even on that basis.
And as you 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 COSCO members for many years and maybe those who are newer to the company?
Well, generally speaking, newer to the company means less best 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 done when we look at the age breakdown of our members based on how long they've been members or throughout the United States and we look at new member sign ups through a couple of these social media things that we've done in recent months. It's what you would expect to be.
You've got a younger member signing up through LivingSocial and through Zulily. So and it's a relatively attractive cost of acquisition. So we're not going crazy here. We're taking baby steps, but some of this stuff works.
That's very helpful. Thank you so much.
And your next question comes from the line of Jason Deras with UBS.
Hey, it's Jason Deras 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. I guess I just want to understand the rationale for not changing those. And 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. So why not with rotisserie chicken and hot dogs and things like that?
Yes. 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 as it relates to well, I'll stop on that. Let's get to your question first. In terms of fixed items, I mean, in retail there are price points that are hot.
I mean, the $1.50 hotdog and soda. I think we didn't sit down one day and said let's decide that the rotisserie chicken should be it. But as prices change dramatically and we saw the competition raising the price, it was a hot price. Let's take a little less margin, take a little less margin, take a little or no margin. And so I think there are few examples of that extreme.
Gas historically has always been an item that there are some locations where we comp shop the price 3 or 4 times a day compared to the locations nearest us. So I mean it tends 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. Yes, by the way, is a lot more volatile in a $12,000,000,000 or $13,000,000,000 business for us. But and but it's very visual out there. I mean people you go to some of these apps like gasbuddy.com, there's a reason that we're comp shopping that item in some locations 3 or 4 times a day.
Okay. No, I know it's an unfair comparison, but I thought we learned a I don't know just help try to understand the thought process between things like that. I guess as a follow-up on the last question, maybe it'll let you continue to follow-up on the answer to the last question. But as you do these as you try out social media or the living social 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, but extreme value works. And 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 3 major markets in the Bay Area, L. A. And New York City.
Arguably, those if you look at the age breakdown of those, it's younger. That's a positive. Now we're never I don't think we're ever going to get your one box of Life cereal and one box of Fruity Pebbles and 2 different types of half gallons of milk delivered to your doorstep at 6 in the morning. But there's a lot of things that we have. I mean, we're we've certainly changed and frankly expanded the items out of the locations in the Bay Area and you'll continue to see that.
So we're excited to see what the Instacart's in the boxes are doing as customers of ours. But they're small, they're new and there's going to be a lot of things. So 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 in the warehouse. And we'll have to evolve over time as well, but there are certain things in our model. There's a reason that we're able to mark up goods 11% on arguably buying power that's at the top of the heap in terms of strength. And that all is good. But we're open minded, but 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. And I mentioned this last time and jokes aside, organic is getting bigger not just for us, but for everybody. But again, just like we wow people in our produce members in our produce department with great quality on slightly oversized items for families, that whole organic thing is arguably again, we I don't think we sat down and strategically thought about it. We look at what items work well and try some things and when it works, we really go after it. And we've seen surprisingly good success on organic and produce and fresh meat and fresh ground beef.
And the challenge is the supply frankly, there's not much enough supply. But if we can show great value, we'll figure it out.
Okay. And actually that was what I was going to finish up on as an example of something for a younger consumer based on the demographics. So you think that the 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 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. And we'd love to have twice as much in some locations. But items live and die around here since the beginning of time since 30 years ago. And 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'd use like 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 footballed every day out there in in every supermarket chain. And to our pleasant surprise, 75%, 80% of the increment of these sales of this new item was truly incremental as existing members that didn't buy ground beef at Costco because they did buy organic. And so it was incremental.
And so now these are all small examples, but they're going to grow over time.
All right. Great. Thank you.
And your next question comes from the line of Peter Benedict with Robert W. Baird.
Hey, Richard. A couple of questions. First, can you talk about the level of new member sign ups that you guys tend to see when you open up a club internationally versus what you see in the U. S? And how dramatic is that difference?
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, You might have and what we look at is during the 8 to 12 weeks prior to opening when you've got the parking lot partially done and there's some tabling activities outside where people come and sign up. You might have as few as 3000 or 4000 new sign ups through those 8 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 first many weeks prior to open and through opening day of 30,000 to 40000 members in some of the Asia countries.
It's somewhere in between there for Spain and Australia. So 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 sign ups, but you're getting a lot 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. And then there was no gross margin headwind from the executive award, 2% award 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.
And I know we're looking at a couple of countries, but I'm not going to let say when. My guess is in the next year or 2, 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. And we want to get a handful of offerings going and 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.
There's 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 1 or 2 basis point delta year over year in terms of how that reward impacted it. This time it was at 0.
I don't know off top of my head. I haven't heard anything or seen anything at the monthly budget meetings about any concern about that. If anything we're continuing my one surprise yesterday 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.
So we're still getting a lot of people to convert and that's good. Yes. No, that certainly looks like that trend continues to be healthy. So 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 kind of a geographic split, how you're thinking kind of international versus the U. S? Thank you. I think it will 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. So a little more than half. I would guess half is it 45% to 52% or something next year not 55%. But overall, we still think we've got opportunity in the U. S.
And Canada and other markets that are seemingly well penetrated. And but we definitely have the pipeline more filled overseas now. And so if I if I had a guess, it will be a number north of 30 and south of 34. Okay. Thanks very much.
Yes. And 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 kind of going back to some of the e commerce discussions. And just noting that one of your biggest competitors CEO was on record yesterday saying that if consumers just don't want stores maybe we won't have stores when talking about kind of 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. So I guess one of the things I'm wondering is you couldn't say that Costco doesn't have as well developed an e commerce platform. You could also say that a lot of stuff you guys carry Amazon has 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? Well, I think you mentioned some of them. Don't think you need to be an economist to understand that our demographic don't think you need to be an economist to understand that our demographic has probably been impacted less the lower demographic retailers. Clearly gas brings you into the parking lot. Really our fresh foods is a signature category.
And fresh foods is something if you 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 activewear, you're going to buy some more stuff. So we think that again delivering small quantities of stuff to home is not free. Ultimately, somebody's got to pay for it. And 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.
And I think we've been pretty good at that. But starting with an average markup of average gross margin of 11%, which is incredible nobody comes close to that. I think we'll be pretty good. And but we're also open. I mean, we're as without trying to put any fluff in it, we like the fact that it's been exciting to work with Google to look about 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. So we'll keep figuring that out. But 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 branded Handbag. Handbag or bicycle or kayak or whatever.
So there's all kinds of reasons to come into Costco. And when you think about that's a terrific answer. And when you think about your own e commerce business, how do you prevent it from basically cannibalizing the heck out of your own stores? I mean, we've used it before, but we've been using most of your e commerce for like furniture stuff I would never get at your warehouse. I mean, 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 is going to take that business we'd rather take it. We also recognize that I'll call it the good old days when you only had one there was no such thing as the Internet. You only had one choice. If you wanted to get that TV or that patio furniture 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.
And so we do believe that we're selling some of those items that would not be that would not have been bought in store. Not everybody is going to take those big ticket items home that way. So we have to change with the times there, but we also recognize we also have to get you in on an increasingly hopefully increasingly frequent basis, so you pass by all those items that you go, wow. And I think so far we've done pretty well with that. Indeed.
Thanks for taking my questions. I appreciate it.
And your next question comes from the line of Greg Maylek with ISI Group.
Hi, thanks. I want to follow-up on the membership fee income. If my math is right, it was up a little over 7% in local currencies. And so for is that right?
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 have to analyze a little more. There's more sign ups per location, although in some countries, the converted into dollars, it's a little less than $55 and of course, we don't have $110,000,000 in some of those countries. So I think it's probably the fact that we do get more sign ups internationally is probably the biggest reason.
But you think executive is still a bigger portion of that than international if you had to I'm a follow-up.
If I had a guess, I'd probably say half and half. I just don't know what will
Fair enough. Fair enough. And 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 threshold of renewal rates or members per club where we start to model that in the international side?
I don't I don't know. I mean, we don't talk about it a lot. We like the fact that in new markets and 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 a little of that later. And so there's 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, we I don't see any current plans that make any major changes out there.
So fair to say the focus internationally is still getting the sign ups rather than trying to take the fee up?
I don't yes. I think that's not even on page 1 on the 25 line page. The first order of business is opening units and getting them to work right. And even in very successful countries and even with the support of its parent in the U. S, us, when you're going from 9 to now 20 units in Japan over to a little over 2 years and going from 3 to 6 locations in Australia and a little over a year and a year and a half.
There's challenges. Nothing major and believe me, I think we have some every week there's somebody from one of my departments going over to help out on something somewhere, which is good. But at the same time, you always have some growing pains with that kind of stuff.
Great. And then a little bit of a housekeeping. I think on the SG and A, you mentioned workers' comp hurt 3 basis points. Is that
Actually benefits of workers' comp. I think workers' comp was actually flat to a slight a very slight improvement year over year as percent. Benefits was the bigger culprit.
Benefits was the culprit workers' comp help. Was there anything so that was a net figure the 3 basis points was benefits and
I think it was like 4 and 1, plus 4 and minus 1. But benefits workers' comp we can always summarize together.
Got it. And that benefits trend looks like it's sort of an ongoing thing as opposed to anything that sort of
Yes. The one thing that helps it, I mean, we read about hospital costs are becoming less inflationary in the U. S, we and I talked to a few other different types of companies at a recent meeting outside of Costco and we're not seeing the lows 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 example. But some of the things that have been added like the 26 year old up to 26 year old instead of 18 to 22 based on if your kids college or not, your dependents on mental and medical health parity, on note limits.
There's always things have added 1% and 1.5 percent 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. But the bigger thing is an increasing penetration outside the United States where health care costs as a percent of sales respect to sales in that country is a lot less.
Got it. And then 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 didn't you felt that there was you didn't need to decide to do that again. Am I summarizing that correctly?
Well, again, I used the extreme example of the chicken. Again, we went from 2 years of an item that arguably represents several $100,000,000 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 by incrementally by 3 or more basis points over the last couple of years and is now helping some of that's reversing, not all. And 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, but we still look to see where we can get a little. Okay.
Thanks.
And 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 West Lesh being 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. When I look at overall fresh fruits margins, again, pounds like when beef were a little down, the dollars are up because of the price. I don't know if top of my head checked that detail. All
right. And then just a quick follow-up with regard 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 in Europe. But generally speaking, many of the pictures that I saw look a lot like the Costco that you would see. As you might expect, like any opening and certainly like a new opening in a new country, there were probably a lot of hot non food items, where we were able to procure merchandise and moisture weight value and some exciting stuff. But I'm shooting from a hip with this answer.
Got you. We both need to get over that.
Fair enough. Well, there's Madrid. Thank you.
And your next question comes from the line of Chris Horvers with JPMorgan.
Thanks. Couple of quick model questions. So the by the nature of the LIFO calculation, you had a 7 basis point benefit last year in Q4. Just by the fact that you have a benefit, does that end up being a negative this year in the Q4? No.
That negative related to how it rose versus the year before that. But we now start with that base up cost if you will a year ago, really start with basis at the beginning of this fiscal year. And so how do prices trend? Again, using an index of 100.00 at the beginning of time 0 at the beginning of fiscal year And let's say through the end of Q3, I mentioned as an example like what I'll call the food and sundries pool or what we call the food spool, which is canned goods and cereals and things like that. From the beginning of Fresquita, it was up 2.6%.
It may go up or down a little in Q4 from that 102.6% number. It might be if it went down a 10% 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 1st 3 quarters. I understand. So 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 whether it will be 16 weeks since. But you mentioned that it was I understand so sequential.
So 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. And then on the buybacks, you bought back 1,600,000 shares.
The share count ticked down 0.1 sequentially. So just curious, was that more based on the timing of buyback during the quarter? Or was that was there more of a big impact from the stock option exercising? Well, 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 are remaining small amount of options that were granted in 'five, I believe. So they expire in 'fifteen 'four and 'five should expire this year and next year. We're down to a very few left. But if you had a making it a mess simple, if you had a $40 exercise price on a $120 stock price, for every option out there, you'd exercise 3 of them then buy one share back.
So it would be a net increase of 2 shares. So that number is not a big number. We bought stock during the quarter relatively speaking proportional during the course of the period. So it was 1,600,000 shares. My guess is that the rough subtraction to the total shares outstanding would be about half that number about 800,000.
The calculation only went down $100,000 It would be some additional vesting since then on RSUs. And to a very, 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 to that very shape. But the big things would be roughly adding $800,000,000 and then subtracting I mean subtracting $800,000,000 and then adding some due to the to just ongoing vesting of previous grants.
I got you. And then 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 buy a little, but we're not suggesting that I mean, if you took the exact those 90 weeks times those shares, I think you get to a number in the $900,000,000 a year range.
I don't know if it will be less or more than that next quarter on an annualized basis, but it could be a little less. We'll just see. It probably is either a little less or a little more, but not a whole lot different, but we'll see. Okay. And then last one just in terms of you had the Spain pressure in the pre open.
As you look forward is sort of pre open per store normalized 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. But assuming we open France next year, again, we don't know when that will happen. There'll be another little tick upward in that quarter. Understood. Thanks very much.
And your next question comes from the line of Paul Tresselwood, Deutsche Bank.
Hey, guys. It's actually Matt for Paul. A lot of our questions have been answered, but I was just curious on online with some of the newer countries you're entering, 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 mean, I know we're looking at other countries to open in countries where we operate. And but I don't know if there's any we haven't stated anything about when. Thanks.
And there are no further questions at this time.
Okay. Well, thank you everyone and thank you, Bridget.