Good morning. My name is Jody, and I will be your conference operator today. At this time, I would like to welcome everyone to the Costco's Q2 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 one on your telephone keypad. If you would like to withdraw your question, press the pound key. Thank you. I would now like to turn today's conference over to Mr. Richard Galanti, CFO of Costco. Please go ahead, sir.
Thank you, Jody. Good morning to everyone. This morning's release reviews our second quarter and first half fiscal 2014 operating results for the 12 and 24 week periods ended February 16th. Our monthly sales results for the four-week reporting month of February, which ended this past Sunday, March 2nd. The discussions we are 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 second quarter. For the quarter, we reported earnings of a $1.05 a share.
This compared to last year's second quarter earnings reported at a $1.24. As noted in this morning's release, last year's earnings figure was positively impacted by a $62 million, or $0.14 per share, income tax benefit that was in connection with the portion of the special cash dividend we paid in December of 2012 to company 401(k) plan participants. Several factors impacted our second quarter earnings beyond that. These included lower sales and gross margins in hard lines, most particularly during the four-week holiday period between Thanksgiving and Christmas. Lower year-over-year gross margins in fresh foods. The FX impact of weaker foreign exchange rates year-over-year when reporting profits from our international operations. This represented, if you assumed no change year-over-year in the currency exchange rates, about $23 million pre-tax, or a little over $0.03 a share.
For example, this year in Q2 versus a year ago, the CAD relative to the USD is down 8%. JPY about 15%. In addition, an income tax rate, even after excluding that tax benefit I just mentioned, it was still one and a half percentage points higher year-over-year in the second quarter. Last year in Q2, as I had mentioned then, there were a couple of positive discrete items that have lowered last year's rate by about $10 million or $0.02 a share. As well, in both this year's and last year's second fiscal quarter, there were few other discrete items that in the aggregate represented a year-over-year negative swing to our SG&A expenses by about five basis points or $0.02 a share.
While earnings results for the first 4 weeks of Q2 were very weak, earnings in the subsequent 8 weeks of the second quarter showed improvement. In terms of sales for the quarter, total sales were up 6%, and on a comp basis, up 3%. For the quarter, sales were negatively impacted by gas price deflation as well, and a bigger impact by weakening foreign currencies relative to dollar year-over-year. That alone was about 200 basis points. Excluding gas, the reported 4% U.S. comp in Q2 would've been +5%, and the reported flat international comp, assuming flat year-over-year FX rates, would've been +7%. Such that the total company reported, which we reported again was 3% comp for the quarter, excluding gas and FX, would've been +5%.
For the 4-week month of February, which included the last 2 weeks of the fiscal second quarter, comps came in at +2%. This consisted of a +3% reported in the U.S. and a -1% internationally. Again, gas deflation and FX had an impact, such that the 3% reported U.S. comp increase for February would've been +4%, and the -1% international excluding same FX exchange rates year-over-year would've been +5%. The total company, the +2% that we reported, would've been +4%. Now I'll mention, which I haven't in quite a while, weather. It's been all over, particularly in the U.S. Snow, rain, just crazy weather. We estimate that the weather impact of February sales results represented about a one percentage point hit to the 4-week reporting period.
In terms of new openings, after opening 13 new locations in the first quarter, as well as closing our Acapulco, Mexico location due to the hurricane damage, we opened 3 new locations in the second quarter, 2 in the U.S., one each in Illinois and Texas, and one also in Ontario, Canada. All told, that puts our fiscal 2014 openings through the second quarter at 16 new locations, and we now operate 649 locations around the world. Between now and the end of fiscal 2014, we expect to open an additional 14 locations, 3 in the third quarter and 11 in the fourth quarter.
These 14, which again, this will be before fiscal year end on August 31st, 6 are planned for the U.S., 2 additional locations in each of Japan and Korea, and one each in Canada, U.K., Australia, and of course, our first location opening in Spain, in Seville, this spring. Such that we'd expect to end the year with 30 new openings for the year. This morning, I'll review with you, of course, our membership trends and renewal rates, our e-commerce activity, and of course, additional discussion about margins and SG&A. To start off, again, sales, total sales were up to $25.76 billion, up 6% year-over-year, and comps again was a reported 3% and a +3% and a +5% excluding gas and FX. In terms of the +3% reported comp sales, the average transaction was -1% for the quarter on a reported basis.
FX has impacted that as well. Would've been a little over 1% plus on a flat currency year-over-year. Average frequency was a little over 4%. For the three recent months, frequency was just under 4%, just under 5%, and just under 3% for December, January, and February. Year-to-date, shopping frequency continues to be in the 4.25% range. In terms of sales by geographic region, both for the 12-week quarter and the four weeks of February, geographically, Southeast, Midwest, and San Diego regions were strongest. Internationally as well, both for the quarter and the four weeks of February, the strongest regions in local currencies were Mexico and Canada. For the second quarter, in terms of merchandise categories, that would include sundries overall in the low single digits. For hard lines, overall in the mid-single digits.
Within that, we are asked about consumer electronics that were slightly positive for the quarter overall. Within the mid-single digit comp range for soft lines, in fresh foods, up in the mid to high single digits overall, with produce being strongest. For February, the traffic was up just under 3% shopping frequency. The reported average transaction was down about a little over 1%, big impact from gas and FX. In fact, just during the month of February year-over-year, the average sale price for gasoline was down about 10% for the month, pre-calendar. From a merchandising category standpoint, food and sundries overall was in the low single-digit range. Hard lines overall came in slightly negative, with electronics being down in the mid-single digit range. Soft lines was the strongest area in the mid to high single-digit range.
Finally, fresh foods, mid-single digit range overall. Produce being particularly strong. In terms of moving down the income statement, in terms of membership fees, $550 million, up from 4% or $22 million from a year earlier, $528. You've got the impact of FX. If we assumed flat year-over-year FX, that reported $550 million membership fee number would've been $563 or up 7% year-over-year. In terms of membership, our renewal rates continue at record levels, we continue to see increasing penetration of the Executive Membership. New membership sign-ups in the second quarter company-wide were up 13% year-over-year. Mostly reflective of very strong sign-ups at some of our international openings, including recent new openings in Japan and Australia. In terms of number of members, Gold Star, we ended the first quarter three months, 12 weeks ago at 29.6 million.
At Q2 end, it was 30.1. Business Primary rounded both at Q1 end and Q2 end at 6.7 million. Business Add-On at 3.5 million each. All told, 39.8 million at Q1 end, up to 40.3 at Q2 end, including the additional card, 72.5 million at Q1 end was up about 900,000 to 73.4 at Q2 end. Also at the second quarter end, paid Executive Memberships were just over 14 million, an increase of almost 200,000 since Q1 end, or about 16,000 a week in the quarter. Executive members are roughly 35% of sales and a little over two-thirds of our sales. 35% of our membership base, a little over two-thirds of our sales. In terms of renewal rates, as I mentioned, they continue to tweak up a little bit. At Q1 end, business memberships renewal rates were 94.1. At Q2 end, it was 94.3.
Gold Star 89.3% went to 89.6%. All told, 90.2% up to 90.4%. Of course, that's U.S. and Canada, 80% of our company in our most mature markets. Worldwide, including all the new countries over the last several years, 86.5% went to 86.8%. Again, continuing good trends in membership renewal rates. Going down to the gross margin line, we were down year-over-year 6 basis points in the quarter from a 10.59% down to a 10.53%. Again, I'll ask, as I always do, ask you to jot down the following 4 columns and 6 line items to give you a little explanation of the components of margin. The first 2 columns would be the Q1 2014 reported and Q1 2014 excluding gas deflation. Columns 3 and 4 would be Q2 reported, and column 4 would be without gas deflation Q2.
Going across, merchandise core reported in Q1 was up 12 basis points year-over-year, but excluding gas deflation was up 3. Again, continuing across, reporting Q2 was +1 and without gas deflation -1. Ancillary +5 and +2 reported and without gas in Q1, and 0 and 0 in columns 3 and 4. 2% reward -3 and -2, and then in the second quarter, -1 and -1. LIFO -1 and -1, and in the second quarter, -6 and -6. Other, which I didn't need to add here, was 0s across the columns there. All told, in total in Q1 2014, we reported year-over-year gross margin up 13 basis points, but taking out the effect of gas deflation, it was up 2.
Again, today we reported +6, I'm sorry, -6 in lower margins year-over-year in the second quarter. Without gas deflation, it would have been -8. As you can see, again, the -6, -8 without gas deflation, and our core was essentially flat, +1, -1 with and without gas deflation. For the second quarter year-over-year, food and sundries and softline gross margins were up in the second quarter year-over-year in the 5 to 20 basis point range, while hard lines and fresh foods margins were lower year-over-year in the -30 to -50 basis points range. Ancillary business gross margins percentages were essentially flat year-over-year. Again, you've got the sales impact of a 10% year-over-year lower gallonage comp, gallonage in terms of price of gas.
The impact of the increasing Executive Membership, again, a basis point hit, just meaning more dollars are going to the rewards-based membership, Executive Membership program. In terms of LIFO, in the second quarter, we recorded a $5 million pre-tax charge this year in the quarter. That compares to a $9 million pre-tax credit last year. Year-over-year, a $14 million or $0.02 a share swing, and that was the 6 basis points year-over-year negative. As I said, when there's both either a LIFO credit or a LIFO charge or this type of swing, positive or negative, the fact is, we really look at that as part of our core, given that they work in tandem. Moving down to reported SG&A.
Our SG&A percentages Q2-over-Q2 were higher or worse by 13 basis points, coming in at 9.83% of sales compared to 9.70% last year. The -13 translates to -10 ex gas deflation. Again, we'll put down 4 columns. In this case, 5 line items. Q1, first 2 columns, Q1, both reported and ex gas deflation, and then Q2 reported and ex gas deflation. Going across, Core Operations was a -9 in Q1 reported. I mean, higher by 9 basis points. 0 without gas deflation in Q2 was a -12 and a -9. Central in Q1 was a -3 and a -2. Both 0s. 0 and 0 in Q2. RSUs, our stock compensation, -5 and -5 in Q1 and -1 and -1 in Q2.
Quarterly adjustments were 0s across the board, then total was a -17 year-over-year higher SG&A in Q1 reported. Again, ex gas deflation was a -7, and in Q2, reported a -13 becomes a -10 that I just mentioned. In terms of these SG&A figures, the Core Operations again was at -12, but -9 ex gas deflation. Within Core, our payroll as a % of sales was higher year-over-year by 2 basis points. Payroll benefits and workers' comp combined hit SG&A by about a basis point. Utilities, of course, a lot of cold weather was higher by 2 basis points.
As I mentioned earlier, in both this year's and last year's second fiscal quarter, we had a few discrete items that in the aggregate represented a year-over-year swing in our SG&A expense by 5 basis points or $14 million or $0.02 a share. That generally is the luck of the draw. Sometimes that helps us, sometimes that hurts us, but it was a net negative year-over-year swing. Central was flat year-over-year, notwithstanding ongoing IT modernization costs, which will continue, which represented about a 3 basis point higher year-over-year hit to SG&A. Next on the income statement line is pre-opening. Last year was $6 million. It's up $2 million to $8 million this year. Even though last year we had 5 openings and this year we had 3. Some of that's the timing of openings, pre-opening impacts several months.
A big chunk of it also is the more significant pre-opening expense related to our upcoming opening in Spain as we essentially are opening a new country. All told, operating income in the second quarter came in at $724 million year-over-year, down 2% from last year's $738 million. Below the operating income line, reported interest expense was higher year-over-year by $1 million, coming in at $26 million this year versus $25 million last year. Virtually all of that is interest expense related to not only the $1.1 billion fixed rate 5.6% interest debt that we have that will mature in March of 2017, but also the $3.5 billion debt that we issued last December, which has a weighted average in the low 1% range.
Interest income and other was higher year-over-year by $4 million in the quarter, coming in at $30 million this year versus $26 million last year. Actual interest income was about half of that $4 million increase, $2 million higher year-over-year. The other component was a $2 million swing, $5 million plus last year versus $3 million plus this year. $2 million better year-over-year. Overall, pre-tax income was down 1.6% or $11 million in the second quarter, down from $739 million to $728 million this year. Our tax rate in the quarter came in at a 35.0%. Last year was 25.1%, and as discussed earlier, a big chunk of that was the income tax benefit from that $62 million benefit in conjunction with a special cash dividend.
Excluding that one-time benefit, our tax rate last year, Q2, that 25.1% would have been a 33.5%, still lower when compared to this year's 35.0%. As I mentioned in last year's second quarter conference call, there were a couple of positive discrete items that went our way in Q2 last year, to the tune of about $10 million after tax, because it's a tax line or $0.02 a share last year that we didn't have the benefit of this year. Overall reported net income of $547 million last year in Q2 Excluding that $62 million income tax benefit would have been $485 million, and that compares to our $463 million this year, down a little bit. In terms of balance sheet, which is included in this morning's press release, I will note a couple of balance sheet info items.
Depreciation and amortization for the second quarter was $240 million and $471 million year-to-date. Accounts payable as a percent of inventories on a reported basis year-over-year is down from 98% to 93%, although some amount of that in the payables calculation is non-merchandise payables, such as, most importantly, construction payables. Looking at merchandise payables as a percent of inventories, the 87% last year would have been 83%. Average inventory per warehouse is up about 4%, about $500,000 from $12.2 million to $12.7 million. This increase was pretty much spread over all the departments, nothing that really stood out. Overall, our inventories are in good shape. As well, our mid-year physical inventories, which we do at the end of the second quarter, were essentially tied with last year's best-ever results in terms of low shrinkage results.
I think, in our view, a good indication of the inventories being managed pretty well. In terms of capital expenditures, in first quarter of 2014, we had spent $574 million. In the quarter just ended, we spent an additional $447 million. All told, just a little over $1 billion year-to-date. Total CapEx for fiscal 2014, we would expect to be approximately $2.3 billion. I think it's a little up from what I mentioned a quarter ago, up from $2.1 billion last year, and again, reflecting a little ramp-up in openings. In terms of e-commerce operations, we had four countries, U.S., Canada, U.K., and most recently, a few months ago, we began e-commerce operations in Mexico. For the second quarter, sales and profits were up over last year. While we don't share the profit stuff specifically, the sales were up 20%.
In fact, a little higher given the local currencies given Canada. About 20% year-over-year. Over the past one, 1.5 years, as you know, we've re-platformed the site. We've added some mobile apps. We've combined some e-commerce merchandise efforts with our inline efforts. We've added a few categories to e-commerce, most recently apparel and some health and beauty aids. We've improved the timing of shipments by shipping out of three depots instead of one. We're currently testing, not that it's specifically related to our e-commerce operations, but we're testing in the Bay Area, one of several retailers would be Google Express, and also testing a few other things that we'll let you know more about as we do it. Next on the session list, expansion. Again, we opened 13 in Q1. We had that closed in Acapulco with the hurricane, so a net of 12.
In Q2, three. In Q3, three. In Q4, 11. So 30 openings less the Acapulco closing so far. That would put us a net increase for the year of 29, which would be about a 4.5% square footage growth, 4.5%-5%. New locations by country for the 30 openings, 17 in the U.S., three in Canada, one in the U.K., two each in Korea and Japan, three in Australia, and one each in Mexico and Spain. As of second quarter end, square footage stood at 93,098,000 square feet. In terms of dividends, our currently recorded dividend stands at $0.31 a share. This $1.24 a share annualized dividend represents a total cost to the company of about $540 million. Lastly, our third quarter scheduled earnings release date will be Thursday, May 29th. That will be for the 12-week quarter ending on May 11th.
Before I turn it back to Jody, one comment about Q3 I do want to make. Last year, Q3, we had mentioned that there was that litigation settlement that benefited last year's third quarter gross margin results by about $17 million pre-tax, or about $0.025 a share. We'll be up at the end of that comparison, of course. Let me just say that overall, hopefully, I've helped you understand a little bit about the factors impacting our results in this fiscal quarter, how the earnings performance trended positively during the quarter from a very tough first four-week period, and the continuing strength in sales, comps, shopping frequency, and the like. With that, Jody, I'll turn it back over to you.
Thank you. At this time, I would like to remind everyone, in order to ask a question, please press star then the number 1 on your telephone keypad. We'll pause for just a moment to compile the Q&A roster. Your first question comes from the line of Dan Binder from Jefferies.
Hi, good morning, Richard. I was wondering if you could just discuss a little bit of your current thoughts on buyback, and then separate question, any thoughts on international membership fees and whether or not they're due for a hike or not?
Well, in terms of buyback, again, while we let you guys know once a quarter when we have our quarterly earnings announcement, our intention is to start buying back some stock this quarter. We continue to look at it, but I think it's a good statement to say that we will be buying something this quarter. As it relates to international, we're always looking at our membership fees. You know us, we tend to be long-term focused, and when things are very strong over there, we want to keep pushing for even more memberships.
We have the added benefit in most countries of being the only club operator, and we'll continue to use that benefit to look at it, but we're not in any hurry to do that.
Just lastly on the expense leverage or expense deleverage in the quarter. Obviously, FX is hurting a little bit, but where do you think sort of the level is this year for expense leverage in terms of the comp, where you need to be on a reported basis? Is it still closer to five?
Well, I think so, recognizing nothing's perfect. You take those things that I pointed out and that in the aggregate were five basis points. Not trying to be cute here, but there's always those things that add up or offset each other, and this quarter, year-over-year, they didn't. That's five of it. The other thing is the biggest impact to our numbers were in those first four weeks. It's a combination of things. I think probably we budgeted a little aggressively. Our numbers were still not bad for December, for that four-week period. It was for five less Christmas shopping days between Thanksgiving and Christmas, just based on how Thanksgiving falls, that fell this year. The other thing is FX had a little less to do with it because that affects all the line items, both the sales and the margin dollars.
I think some of it also is, while sales overall were satisfactory, they were a little less than satisfactory in things like certain non-food seasonal categories or the like, and a little stronger in fresh foods. Again, as we mentioned, fresh foods margins were down more, and then you had a double whammy in some of the non-food categories. On the level of sales we have now, those types of things make a big difference. Again, I think overall, our margins were a little lower than we had planned, but some of it we're very conscious of, as you know, in some of the fresh foods areas.
Right.
To get back to the leverage question, yes, I think a 4-5 should be able to do it, but we had a few anomalies this quarter as well.
Okay, thanks.
Your next question comes from the line of John Heinbockel from Guggenheim Securities.
Richard, I wanted to drill down a little bit on the fresh food category. The margin pressure, how broad-based is that or is that a handful of items? What could you call out among items? Then, is that more you making proactive investments or delaying price pass-through?
It's more almost all us. I would say it's aggressively it is all us. In terms of where it is, as you might expect, it's particularly in the proteins. We've talked about chickens before. We've held the price on that chicken. Those 65 or 70 million rotisserie chickens are just part of the chicken. It's also frozen and fresh. We are seeing a little relief in some of the pricing there and some of the costing. That's just starting. I think it's starting a little later than we anticipated 6 months ago, but we should see a little bit of relief there. Really beyond that, Meat's very competitive, and beef's at an all-time high in some categories, but that's raining on everybody. Beyond that, sometimes in produce we have a little issue.
Even though produce was the strongest, it depends when it hits, with some of the shortages, that's impacted us a little bit. Overall, I'd say meat, pork, and poultry is the biggest culprit there, and it's mostly us.
As a follow-up to that, when you look at having some more consistent markups than others, how do you guys think about strategically, because of your strength in perishables, we can or should operate with a somewhat lower margin because we get that traffic, right, which then feeds into all of the higher-ticket non-foods that you might sell. Is that a holistic approach or not really?
That's part of the approach, but again, without trying to be too granular here, clearly, the comment about how the impact of margins and P&L, of course, in the first four weeks versus the subsequent eight weeks, that was dramatic. Part of that again was seasonal markdowns, both being aggressive and proactive and then a little less sales in some areas. While TVs overall, I think in the quarter were pretty good, you've got other areas. Cameras industry-wise are down quite a bit, as you might expect with everybody using smartphones. Laptops and desktops as well. There's some of that pressure. I really think that we probably budgeted a little off given the five days, the five fewer days.
At the end of the day, it's hard to know what it is other than I can tell you is a heck of a lot more of it was in those first four weeks. Trend wise, that's good, but that doesn't tell you anything about the upcoming quarter other than we know that February was a little impacted by weather. We're starting off the quarter in those first two weeks. The last two weeks of February, which is the first two weeks of Q3, weren't as thrilling.
Lastly, would you say when you look at either gross margin or fresh food or some of the individual categories, I imagine there is a fair bit of difference country to country or not. Is there more pressure outside the U.S. or less?
I'd say overall, there's a lot less pressure outside the U.S. The U.S. is clearly the most competitive with regard to the club business.
Yeah.
As well as competitive with supermarkets are probably the most competitive in the U.S. compared to major chains everywhere. Certainly that's the case. U.S. is a little over 70% of our company.
Yep. All right. Thank you.
Your next question comes from the line of Charles Grom from Sterne Agee.
Hey, good morning, Richard. Just to follow up on that last question. When you think about the progression of your margin performance and it getting better throughout the quarter, the hard line margins getting better, I guess, intuitively makes sense as you move away from the holiday markdowns. I was wondering if you could discuss, I guess, if that's the case. Two, was the same true for fresh foods? Did margins in that category also improve as you progressed throughout 2Q?
I believe they did a little bit, again, as you know, we're all about being competitive out there and being proactive in that. We also want to make money, and we want to hopefully show some improving margins. We're going to do what's right each day on pricing, irrespective of how it's going to impact margins that day. Overall, clearly, we looked at the first four weeks, and we took some actions. I'm not going to tell you where, but it showed some relative improvement, and that we feel good about. Again, this quarter is a new quarter, and other than sales starting off a little weaker, we'll see where it goes. A lot of that, I think, is weather. We all got crammed in the Midwest and the Northeast and the mid-Atlantic.
The rain last week, I'm not trying to make excuses, but it's been unbelievable. Japan, we had several locations actually closed for a few days with the snow, the worst snow they've ever had. Lots of little things, and I'll try to not remind you next year when it shows a little better compared to those things.
All right. Then just to follow up to Dan's question earlier, when you sit down with the board every month or every quarter, what exactly is the pushback to unleashing your balance sheet and getting more aggressive, and what's the thought process currently amongst the board?
I think it's a topic that we always talk about. I don't think there's a pushback either way. As you know, we did a little over $3 billion payout to the shareholders via the special dividend last year as the stock was ever increasingly strong. As I noted in a couple of the analysts before the market open comments, we've been a little under consensus expectations, although that's not our direction. Clearly Q2 was a larger gap there. Again, I think my comment that we plan to buy some this quarter is a step in that direction. I don't want to be coy or cute about it, but we'll let you know in a quarter, but we will be buying some, and we'll go from there.
Long term, I think the board, as I am, are positive about our company, and certainly, it is accretive, but at the same token, we try to be judicious about it. Perhaps we've been a little conservative, but we also had the $3 billion dividend that we did last December that helped us be a little conservative. I think you'll see that change some.
Okay, good. Then just my last question I'll pass it on is just on the price investments. I know you guys have been doing it religiously for as long as I can remember. I'm wondering with some of the new technologies you're putting in place, are you studying it a little bit more closely? Do you feel like the elasticity is there to justify the increase in price investments by you guys?
We would never look at it that way. I think, again, getting back to the simple chicken example, it's not unlike the hot dog example of years gone by. When prices went up, we just saw that as the strength of that and the growth and the number of chickens we're selling, that gets people in. We don't study and say, "What if we took it to $5.49 and we've had this many fewer shops or whatever." We know it's the right thing to do. Again, I think the Q2 in that first four-week period, it exacerbates everything because you had all those things, some weaker sales of some bigger ticket items, some margins on top of the ongoing fresh foods margins.
I'm very emphatic about the fact that our fresh foods margins are us, our pricing, and we'll see some improvement there, but we'll do it when we feel good about it.
Okay. Thanks a lot.
Your next question comes from the line of Paul Trussell from Deutsche Bank.
Hi, good morning, Richard. Just to go back to the comments you made about expenses, if you can just help us provide a little bit more clarity on how we should think about that going forward, maybe an update on where you are on kind of the IT modernization process, anything else of note on healthcare, payroll, and some of the other items.
Well, on IT, I think now it's been about six quarters that I've mentioned it, and it's probably on average over the scores, I don't have the number in front of me, about a four basis point. So quarters five and six in this process are four on top of four or three on top of five or whatever. That'll probably continue for another Half dozen quarters. It's a five or so year effort with at least a three-year buildup in those types of things. There'll be some quarters on a year-over-year basis when it's a couple basis points, and there'll be some when it's four or five, depending on what systems are being input. We got a lot going on. The user groups are excited about some of the things they're seeing.
We're going to just start implementing some of the components of it, starting in early summer to late summer. Again, I'm not going to try to be cute or coy here. It'll take some time, but we got a lot going on. Again, part of that is the fact that for 25 years, we pride ourselves in having very simple systems, and they're still simple, probably relative to others. For us, it's an entire effort. Again, so far so good, but we're a year and a half into it. So that's going to still hit us, for at least another year, maybe a little longer, on that line.
Beyond that, in terms of SG&A, some of it's just how the numbers work in terms of the fact that you've got FX, a lower weighted average of countries where some of the payroll % is the % of sales in those respective countries. Certainly the healthcare's % of sales in those countries is a little lower weighted average when you've got the CAD rate down 8% year-over-year, the CAD exchange rate. You've got Japan in Q2 down 15%, the JPY. In Australia, it's down 14.5% year-over-year in the second quarter. All those things add a little insult to injury. The underlying numbers, they were a little worse in terms of expense percentages, but big chunks of this were the things that I mentioned. Again, there's lots of little things, and they all seem to hit at the same time.
On top of the fact that in the quarter where you get a lot of leverage, the 4-week period where you get a lot of leverage was a little weaker than planned.
Understood. Then, if you can just comment on kind of inflation, deflation, what you're seeing across various categories, and just how we should think about LIFO, if you think that will still be a factor in 3 Q like we saw here in the second quarter.
If I look at compared to year-end, just our entire LIFO pool, at mid-year, it's up about a quarter of a percent. Just light cost of all items. There was a $100 item that we paid for $100 for at September 1st, if you will. At February 16th, we were paying on average $100.25. As you'd expect, there's some deflationary pools like computers, what have you. You've got probably the most inflation in food and sundries, a little over 1%. You've got a shade of gas inflation, although that's ticking down right now a little bit. Overall, there doesn't seem to be a lot of inflation.
On a $4-plus billion LIFO is a U.S. concept only. On a $4-plus billion, probably $5 billion LIFO pool, 1% would be $50 million. A quarter of a percent would be 12.5. I don't think it's going to be a lot. I don't have in front of me last year's LIFO numbers for Q3 and 4. I thought I did. Not right there. Not that this tells you anything, in Q3 and 4, because I'm not sure I can. Timothy. Thanks. Last year, in Q3 and 4, LIFO was a credit, a benefit of about $8 million, $7.5 million, $8 million in each of Q3 and 4.
If it is a little inflationary, we'll see that same kind of, a similar kind of swing that we saw in Q2. We'll wait and see. Mind you, when there's a LIFO charge, there's probably Again, I look at the combination of that with a core 2% because they tend to work, not always, in tandem, one opposing the other. Not a lot of inflation.
That's helpful. Thank you.
Your next question comes from the line of Christopher Horvers from JPMorgan.
Thanks. Good morning. Two questions. First, as you model out FX at the end of the period, when do you think that the FX might stop, turn into sort of a flat scenario of the total comp versus the core comps?
I don't know. I'm not even a student of some of this FX, this foreign exchange stuff. When you see, as an example, in Japan, first quarter year-over-year was down 20%. Second quarter year-over-year, it was down 15% for us in terms of the Japanese yen. There's been a lot of weakening. At some point, it's going to bounce back a little bit, but I can't tell you when. Canada has been awfully strong for many years, and it's now subsiding a little bit. Who knows? Then adds that the craziness in the world of events that impact these numbers.
Usually, when there's world issues going on, the dollar strengthens, and I think that's a little bit of what's happening now, also, particularly in the case of Canada, I remember 20 years ago when the Canadian dollar was $0.65 on the U.S. dollar. It had actually gotten above $1 on the U.S. dollar, it's come down a little bit, kind of bounced off of that peak, I can't tell you when that's going to be.
Okay. Just as a follow-up, the ancillary business. The margins in that business had been a positive for quite some time, and it looks like, if I got the numbers right, it was flat this quarter. What piece of the business is changing, and is there anything you could say about the outlook?
A lot of it has to do with gas deflation, just the weighted average of that chunk. Mind you, gasoline sales as a percent of our company total sales is 11% or 12%. It's a huge chunk in where you've got gas deflation, that alone. Gas, you will say, our reported gross margin is in the, whatever, 10 and a half plus range, 10%-11% range. Within that number, gas is in the 1%-5% range every quarter. That weighted average coming down has an impact on that number. You got to look at it both ways. Overall, ancillary businesses were fine. Our pharmacy business continues strong. Our hearing aid business, although smaller, is very strong.
One hour photo, as you would expect, continues to be a little weaker because of nobody takes as many pictures, but we've been a little creative over there to try to do a few other things. It's still very profitable, but not as profitable as it used to be. You add it all up, gas deflation was probably the biggest reason.
Okay, perfect. Thanks very much.
Your next question comes from the line of Mark Miller from William Blair.
Hey, good morning, Richard. You gave us some additional detail this quarter on the four-week versus the eight-week, and I want to make sure we have the right impression from this. Given you said that the margins, if I heard this right, on hard lines and fresh foods being down 30 to 50, does that mean in the remaining eight weeks of the quarter, you would have actually had gross margins up overall? Is it a fair impression that without those first four weeks, earnings are closer to the double-digit type growth range?
In the first four weeks. Well, one of the things we talked about in the press release was those hard line categories, that was more impactful in the first four weeks. Whereas fresh foods is more, again, us and continued through the quarter. The 30 to 50 range for those types of categories that were down year-over-year was for the entire quarter. I don't have the detail by period here, but directionally, I would think it's given the first four weeks was worse. It clearly showed some improvement.
All right. Has Costco done market research looking at the number of your members that also have an Amazon Prime membership? Do your merchants have any sense for how much this might be impacting spending at Costco? Do you think that might have been a bigger factor in the holidays with gift-giving, or do you think it's not a material change?
Actually, I think some of you guys out there do more surveying of that than we do. Honestly, I've read some research out there that talks about the overlap. There is overlap. My guess is clearly in areas like the books and CDs, that's changed business over the last many years. TVs, frankly, were not bad overall, and particularly if you add our e-commerce to our inline, were up a shade for the quarter. I can't tell you what happened in the 4 weeks of February because they were what we call majors or electronics, was down in the mid-single digits year-over-year. For overall, we probably fared better than most in line. All that stuff takes away a little bit. We're looking at ways, as we have now for a while, to get younger people in here as well.
We recognize that, and we'll continue to do that. I know the answer is no, there's not a lot of discernible concern at this point in that.
Okay. Thanks, Richard.
Your next question comes from the line of Meredith Adler from Barclays.
Hey, thanks for taking my question. I'll start by just jumping off from the last question about trying to get younger people into the warehouses. Can you talk a little bit about what it is you have done or would consider doing to make that happen? What tools do you have?
Well, first and foremost, we're not going to do anything rash, but we're also not going to have our head in the sand here. One of the things, the test as an example with Google, among several retailers, but in the Bay Area, has been interesting. I'm not going to, again, talk about any detail yet. We've done a few things with some of the social media things out there. One of the impacts, which is what we do, is the rise in organic. It's a big business. It's growing fast. We can actually show a better savings on those bigger ticket price point items. We've seen that time and again, whether it's organic ground beef or those giant packs of kale or you name it, and milk. We're doing huge business in that. That, I think, also is driving in some younger people.
One of the first systems go in our modernization effort is a new membership system, which we'll start rolling out in the U.S., I believe, June, July. Again, there'll be a lot more bells and whistles, but as you know, our systems have been pretty basic and primitive, and we're not going to go crazy overnight on it, but we're doing a few things, and it works, and we'll keep doing some of those things. That's what I can tell you at this point.
Okay. Thank you. Then I just have a sort of bigger picture question. It's obvious that it's your philosophy to provide very great value, especially in fresh foods, to your customers, and you'll absorb some inflation. What do you do? Everything I see, meat has been inflationary for a while, especially beef. Do you have to sit down and think about your strategy, if it looks like there are items that are just going to be inflationary for the long term?
Well, part of the answer is no. We do what we do, part of it, though, is we also recognize that our goal is just to maximize shareholder value, and ultimately, that comes into long-term driving earnings. We're not going to necessarily do something in the short term or any given quarter to do that. Again, looking at Q2, it was a combination. I think I probably said six or nine months ago, using the simple chicken example, that there seemed to be, in the few months looking forward six to nine months ago, that poultry pricing costing was going to improve, which would improve our margins because we were not lowering the price, we just not raised it prior to that. That's finally starting to happen. Those are the kinds of things that we'll do.
Strategically, at the end of the day, we've got to show improvement in bottom line. Ultimately, it's not going to come from 10% and 15% comps for a company. We're going to have good comps, but at the levels that we have, and assuming they're still going to be better than others, it's still going to require some margin over time, and we look at that, but we're not terribly concerned about how it impacts the given quarter. Organic helps. The fact of the matter is, I think you mentioned this as an example, and one of the things that, again, talks about the younger member as well. What we found is when we tried fresh organic ground beef, I think in the first year, we did $25 million-plus in an item or two.
This is at a higher price point and a greater savings and a fair margin for us, a better margin for us relative than the more competitive regular ground beef. The cool thing was is that 80% of those sales were members that had not bought ground beef with us before. They love Costco, but they are organic. On average, I would say they tend to be a little younger. That's my guess. Those are the kind of things that I think are going to help us a little too.
The fact that increasing penetration of our company is overseas over time, notwithstanding the weak exchange rates this quarter, we generally tend to have a little higher margin overseas where you don't have. Even in the U.S., when you don't have a direct competitor in the market a mile away or less, you're going to have a little better margin. All those things, I think, should impact us positively. We're not going to change what we do in terms of occasionally identifying those key items that we're just not going to budge on.
Okay. Thank you for that. One final question, which is kind of related, We obviously saw softness in some hard line categories. Electronics has been bad for a while. Do you think at all you have to rethink the products that you're offering because of that? Is there something else that you would be more aggressive on? Would you take space away? How are you thinking about that longer term?
Well, as you know, electronics is what greets you when you walk into a Costco. Certainly, the online is part of that. We do a strong business online. Part of it is because they're bigger, not only bigger ticket, but bulkier, physical bulkier items. We have a White Glove alternative where installation as well, That business is growing. Getting people in the door at Costco, we sell a heck of a lot of TVs as well that way. Again, you have a few unusual things happening right now. Cameras, I understand, cameras are down 30+% in the industry. We're not that different. In fact, that was a very successful, and it's still a big volume business, but that's been weak year-over-year in a bigger way for the first time. Desktops and laptops.
We're starting to get some traction on pads, on tablets of late. I think that's a business that will be tough, but I don't think we're necessarily rethinking allocation of space. If anything, it's still a strong area for us, but it got hammered a little bit over that Christmas selling season.
Okay. Thank you.
Again, a lot of it wasn't TVs, it was some of those other items.
Okay, great. Thank you very much.
Your next question comes from the line of Robbie Ohmes from Bank of America Merrill Lynch.
Good morning, Richard.
Hi.
Hey, two follow-up questions. The first, just on the gas deflation that you're now starting to see, can you remind us, historically, does it impact your traffic trends as gas in general, if it does get very deflationary and come down a lot, do you have to find other ways to drive that traffic comp?
Interestingly, when prices are coming down, we actually historically save the member a little more because we turn it so fast. We're buying every day, if you will. The guy down the street is buying it every six or eight days or nine days. When it's going up, it's costing us a little more and we're competitive. We're still the lowest price, hopefully, but there's a little less savings. There's a little less news about it out there. I think overall, on a macro basis, when prices are coming down, even though we're saving the customer a little more, it's less newsworthy, the fact that it's not on the nightly news. There's probably a little less positive there. Given how big we are in that business now, it's not as impactful either way.
Got you. Just a different question. Could you remind us with your international business, how you're thinking about new markets? I think France, you've mentioned before. Any update on timing of when you could open a new country?
Well, Spain is April or May? May. May. France is hopefully about a year hence. Beyond that, we haven't disclosed anything. In terms of how, there's generally, the three likely areas, in no order, is other parts of Europe, South America, and China. We haven't really stated beyond France and Spain what our plans are beyond that, nor do we plan to discuss that right now.
Got it. Thanks very much, Richard.
All right.
Your next question comes from the line of Matthew Fassler from Goldman Sachs.
Thanks a lot. This is Stephen Deninger in for Matthew Fassler. Just a quick one on gross margins. It sounds like much of the year-on-year decrease was sort of intentional, or through price investments, if you will. We just want to know how to think about that going forward. In the next few quarters at a minimum, do you think the trend's likely to sort of stay this way, or how are you guys thinking about that near term?
Well, first of all, let me correct, with all the different numbers going around here. In terms of Q2, fresh was intentional. The rest of it was not intentional. Some of it's promotional. Some of it is we do what we do to have clean inventories, took some extra seasonal markdowns in some areas, including a little bit of electronics. Some of it was that. In terms of the trends going forward, again, I've alluded to the fact that we're starting to see a little better costing on the poultry side. Meat continues to be competitive and rising. Beyond that, I can't tell you a whole lot.
Okay.
Again, meat, not produce. Fresh foods was our proactive aggressiveness. The rest of it is doing what we do and responding to competition and responding to weak sales being a little weaker and getting rid of stuff.
Understood. That's very helpful, actually. Just on the membership fees, we seem to underestimate the impact of FX there, but it also does seem like, if I think about FX and the overall comp, you guys talked about sort of a 2 percentage point drag. It looks like it was more like 3 on member fees. Is there anything you could sort of help us as we think about the split there, international versus U.S., and how to get that right going forward?
I think the biggest impact FX-wise was in Canada, which is 10, 12% of our company, and I think a strong penetration of Executive Memberships, which is the higher fee. Those things probably pushed it a little bit.
Got it.
In terms of guessing in the future, your guess is as good as mine. As good as mine.
Understood. Understood. Just to confirm this, there were no buybacks in the second quarter, correct? You guys are intending to buy back in the third quarter.
Correct.
All right. Thanks a lot.
Your next question comes from the line of Bob Stubbs from Nomura.
Good morning, Richard. I just got two questions for you. The first one is, can you comment a little bit, Canada was strong for you fundamentally. Can you just talk a little bit about the market, what's going on there, with Costco's positioning? The second question is, can you just give us an update on the private label initiative and Kirkland Signature and sort of new products or new categories that you guys are excited about looking forward?
Canada's strong. Canada, thankfully, is not only we're the only club in town, which is a positive. Historically, in the last several years, everything good about it. It has a good economy. It didn't have the financial crisis issues that the U.S. had. Of course, a part of its economy is natural resource-based, which has been on fire. Those are all positive things. It has lower healthcare expenses as a percent of sales, just by the nature of the healthcare up there versus here. All those things have been positive for us. Again, though, when you've got an 8% decline year-over-year in the currency, that washes that away in terms of how we report it for the company. In terms of private label, I think some of the areas, apparel has been one that continues, I think, to be exciting.
I've talked ad nauseam in the past about, in the last year, about the wool slack. We've got a great gabardine slack now that's, I think $19.99. I know we have some additional women's athletic items. That'll be an area I think that'll continue to grow for us. On the food side, organic, we're doing a few more items, and pretty much in a lot of places, it'll continue to grow. I think what probably over time we haven't appreciated is the strength of it, not only in the U.S. or in Canada, but these items, being able to take them to other countries where, when we take a regular branded international item to that country, we show an incredible savings where prices have always been high. On these items, given the quality level and the pricing, that strength is I think exacerbated even more.
That's a positive.
Great. Thank you.
Your next question comes from the line of Peter Benedict from Robert W. Baird.
Hey, Richard. Most of my question's been asked. Just a quick one on February. You made the decision to call out weather and the impact there. Was the weather materially different than what you saw in January? You said there was some stuff that happened in Japan. Is that what tipped it? Because in the U.S., it just feels like January, February were basically pretty similar.
Well, you probably live in that area. No, it was more severe in February. As an example, just in the last week of February, the Southwest got hammered with rain four or five days. Japan, to the company, was just another insult to injury, if you will. I think we have, what, 18 units in Japan. I don't have the exact detail in front of me. Let's assume a half a dozen or six or eight of them were impacted in the Tokyo market. Again, that was just a little bit more. Overall, yes, it was more extensive than we've seen before.
That's a good color. Thanks. Just on the club openings, looks like you're going to get to that 30 kind of gross number this year that you guys were hoping for. What about as we look to next year? Are you still confident you can get that number north of 30?
Yes. Craig and Jeff Brotman's goal are to get into that low 30-plus range. I'm sure now that I've said it, we'll get 28 or 29, at the end of the day, we're shooting for 30 to 35 a year for the next five years.
Okay. Sounds good. Thank you.
Your next question comes from the line of Craig Moffett from ISI Group.
Hi, thanks. Richard, two questions. First on electronics and then on membership. You mentioned it was up, but then you listed some categories like cameras and such that are all down. Was it just TVs that drove CE, and was that ASP or volume?
Excuse me, what?
Tablets.
Also, Tablets were part of it. The quarter overall was different than February. February was a little weaker in electronics.
if we look at.
The biggest chunk is TVs just by volume. That is partly why TVs were weaker in February, relatively speaking, than they were for the quarter. They were actually about flat. I think the average sale price is about flat. It had been up. Bob is saying it is up. I have a sheet. Here. Hold on. I have to tell you. In the second quarter, the average price point looks like it was up a couple of %, and that is partly because we are selling bigger TVs, smarter TVs.
It is on inflation.
By the way.
Next.
No. By the way, one of the comments that I heard at the budget meeting last week was that the rollout of the next generation of technology and TVs has been a little bit delayed, and it's going to be in a few months. April instead of January. I'm being coached here. Again, that should help it a little bit, but we'll see.
Okay, great. I don't think you need any coaching for the next question. On memberships, just want to make sure I'm getting this right. We finally have a quarter that's telling in terms of the fee increase.
Yes.
If we're up seven-
In local currency
local currencies.
Yes.
Is it fair to say that in the U.S., while membership renewals are great and you have the mix towards Executive Membership, that memberships per club in the U.S. is actually trending down a little bit? If that's the case, has that shifted at all?
I don't have that detail here. I'd have to look. To the extent that we've opened 14 or so U.S. warehouses, it may be a little bit. Actually, I don't know if I'm correct on that. I'll have to look.
It might be slightly down.
Okay, we can follow up on it. Conceptually, you still have the mix shift going on to Executive.
Yeah. By the way, one of the things is, I'll give you an example. We opened, just a couple or three years ago, in Huntington Beach, California, in L.A. We have 50% plus of the households or more in the greater L.A. market, where we've got 40 or so locations. We may open up in a new market area. With the eight to 15 weeks prior to opening, you sign up for tabling activities. As of opening day, we might have 5,000 or less new members. In the meantime, that's a unit that may very well exceed our company average for the first year. We do $150 million, $100 million of which is new and $50 million which is cannibalized. You've got members that are closer, they're going to shop more frequently for the first time.
Contrast that in Asia, where again, during those eight to 15 weeks prior to opening, as of opening day, we see numbers in the 25,000 to 50,000 new member sign-ups with a bigger non-renewal, a lower renewal rate year hence. Nonetheless, that should be a big difference.
Okay. That's helpful. Thanks.
My guess is that yes, it could be flatter down slightly, but that would be expected in that example.
Given the cannibalization. Got it. Thank you.
Your next question comes from the line of Budd Bugatch from Raymond James. Budd, your line is open.
My questions have been all asked. Thank you.
Your next question comes from the line of Scott Mushkin from Wolfe Research.
Hey, guys. I'll be quick because it's at the end of the call. Just want to follow up on the inflation question and produce inflation, deflation, whatnot with the potential of some inflation working into produce, you guys investing in price there. How is that going to work through as we work through the next, say, quarter or two, if we do get some spikes in produce inflation, how does that work through your numbers?
My guess, it would help a little, unlike meat is so much more, as an example, meat is so much more out there. Produce, everybody's got different items, different pack sizes, different qualities, and we can still show great savings, but in my view, it's just not the same type of level of competition. I don't think that's going to impact us as more. That'll impact us as much. The biggest thing in produce is when there's a drought or a freeze, and we're doing hundreds of millions of dollars of items, be it strawberries or blueberries, and when in a given month, you did 5 million in an item instead of 15 during a holiday item for that produce because of a freeze, that's more impactful than competition.
Then, just one last one that's a little bit more strategic, and if you don't want to take it, we can always talk offline, just as you guys expand internationally, that becomes much more a focus of the growth. We've seen other retailers try this, and it has worked well. It's working well for you guys. Just talk about the structure a little bit you're putting in place to make sure that you can kind of keep the momentum up overseas. Thanks.
First and foremost, we start every country with existing employees that are from our company. The woman running Spain is a seasoned operations person, executive from Canada for many, many years. The guy running Taiwan goes back to the Price Club days in Southern California. The guy running Korea started as a warehouse manager at Costco, and before that, I believe FedMart. When we go over, we send a core group of a half a dozen people, three or four people to merchandising and operations. I think the biggest thing to make sure everybody's on the same page is, these individuals travel to Seattle every four weeks, so 13 times a year for a day and a half budget meeting, and they're typically here for an extra day and doing some other operations and merchandising-specific meetings.
Then, like Jim for many years, Craig and others are traveling to those countries often. Craig's out of the country today. So the biggest way we do it, I think, is everybody being on the same page. The other thing is, I'll give you a good example. When asked before why have we been so successful in several countries, including some of these countries in Asia, we think part of it is not only does our value proposition more extreme over there, and also that people actually do like big American stuff. The fact is that some of these private label items that we're developing now have been huge successes in some of these other countries. Those are U.S.-sourced goods. I think all those things play well into our hand, but that's going to change over time.
So we do what we do best, is we're constantly focused on it. When these heads of countries and merchants of countries come to Seattle every four weeks, one of the things that each of the Senior VPs of operations around, and every country has one, Canada has two, and the U.S. has eight, but all those foreign ones, they come here, and one of the things that they report on is what initiatives, in terms of global sourcing, procuring goods from a multinational manufacturer where the U.S. buys a heck of a lot from. Perhaps Canada does because we're big and have been around a long time. Because of whatever it is, a licensing arrangement or regional pressure on their side, it's a work in progress, and we're making good success there. All those things, they're little things, but they help us every day.
I think that'll continue. It's really a lot of that blocking and tackling, and just like we did when we went to Alaska for the first time and to Hawaii for the first time, we feel that we've really lowered prices in those markets, and made it more competitive, but we still shine better competitively versus other retail formats. Given the fact that in some of these countries, pricing has been a lot higher, I think that has helped us. Then bringing goods, whether it's the jumbo cashews or the fresh blueberries to countries where they're buying a lot more of it.
Perfect. Thank you.
I'm going to take just two more questions and that's that.
Okay. Yes, sir. Your next question comes from the line of Sandra Barker with Montag & Caldwell.
Hi, Richard. I just wanted to clarify, maybe you said this and I missed it, but when you talked about the 30 to 50 basis points of gross margin impact, how much of that would have been sort of those responsive price cuts versus proactive?
Well, I guess there's three things you're talking about. I can't tell you exactly. I know in fresh foods, it's us just wanting to keep the price where it is on key items and doing what we do. If you think about, let's take hard lines, let's take whether it's electronics or toys or whatever. If sales are a little soft, we're proactive to mark things down to get rid of them before the season ends.
Structurally, we have the benefit, I think, from being in and out of seasons early, but that doesn't mean we still don't have to take some excess markdowns sometimes.
In terms of responsive, I would say proactive is more impactful than responsive. The issue of needing to be responsive. There's some responsive too out there.
Do you see any changes in the competitive landscape and where is it coming from?
No, we really haven't. There's still a lot of tough competition out there. Part of the challenge with the Internet and delivery, does delivery included and what extra things, I think we're getting a little better of communicating what's the value in our product, in terms of an extra controller or whatever it is, or the shipping. Because when we do price shops, the least competitive ones are some of those that are on the Internet. I don't mean to name names.
Okay, great. Thanks.
Your next question comes from the line of Joe Feldman from Telsey.
Hey, guys, thanks for taking the question, and sorry for prolonging this call. Just wanted to ask you competitively, I've seen a lot from your other big major club competitor out there lately in terms of testing some stuff with online membership or being a little more aggressive in different countries, and I'm just wondering if you guys are seeing any impact of that or any pressure or just how you're dealing with kind of the competitive issues.
Well, in terms of direct club competition, no. They did, I believe Sam's did a fee increase, that they tested originally in Texas, and they've rolled that out now in the U.S. They're only, by the way, in the U.S. and Mexico. Sam's is very competitive, but we haven't seen any giant changes in that or us needing to respond to something that they have done.
Got it. Thanks, guys. Good luck with this quarter.
Thank you.
Thank you. There are no further questions at this time. I will turn it back over to management for closing remarks.
Well, thank you everyone, and look forward to chatting in 12 weeks. Have a good day.