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. 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 2nd quarter and first half fiscal twenty fourteen operating results for the 12 24 week periods ended February 16th and our monthly sales results for the 4 week reporting month of February, which ended this past Sunday, March 2. The discussions we are having include forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and that these statements involve risks and uncertainties that may cause actual events, results and or performance to differ materially from those indicated by such statements. The risks and uncertainties include, but are not limited to, those 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 Q2. For the quarter, we reported earnings of 1.05 dollars a share. Dollars a share. This compared to last year's Q2 earnings reported at $1.24 As noted in this morning's release, last year's earnings figure was positively impacted by a $62,000,000 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 plan participants. Several factors impacted our 2nd quarter earnings beyond that.
These included lower sales and gross margins in Hardlines, most particularly during the 4 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 $23,000,000 pretax or a little over $0.03 share. For example, this year in Q2 versus a year ago, the Canadian dollar relative to the U. S. Dollar is down 8% and Japan about 15%.
In addition, an income tax rate, even after excluding that tax benefit I just mentioned, it was still 1.5 percentage points higher year over year in the Q2. 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 $10,000,000 or $0.02 a share. As well in both this year's and last year's 2nd fiscal quarter, there were a few other discrete items in the aggregate that in the aggregate represented a year over year negative swing to our SG and A expenses by about 5 basis points or $0.02 a share. So while earnings results for the 1st 4 weeks of Q2 were very weak, earnings in the subsequent 8 weeks of the 2nd quarter showed improvement. Were negatively impacted by gas price deflation as well and a bigger impact by weakening foreign currencies relative to the dollar year over year.
That alone was about 200 basis points. Excluding gas, the reported 4% U. S. Comp in Q2 would have been plus 5% percent and reported flat international comp assuming flat year over year FX rates would have been plus 7 percent. Such that the total company reported which we reported again a 3% comp for the quarter excluding gas and FX would have been plus 5%.
For the 4 week month of February, which included the last 2 weeks of the fiscal quarter, comps came in at a +2. This consisted of a +3 reported in the U. S. And a -one internationally. Again, gas deflation and FX had an impact such that the 3% reported U.
S. Comp increase from February would have been a plus 4 and the minus 1 international excluding same FX exchange rates year over year would have been plus 5. And the total company the plus 2 that we reported would have been a plus 4. Now I'll mention which I haven't been 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 1 percentage point hit to 4 week reporting period. In terms of new openings, after opening 13 new locations in the Q1, as well as closing our Acapulco, Mexico location due to the hurricane damage, we opened 3 new locations in the Q2, 2 in the U. S, 1 each in Illinois and Texas and one also in Ontario, Canada.
All told that puts our fiscal 2014 openings through the Q2 at 16 new locations and we now operate 6 49 locations around the world. And between now and the end of fiscal 2014, we expect to open an additional 14 locations, 3 in the Q3 and 11 in the Q4. These 14, which again, but this will be before fiscal year end on August 31, 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 and 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 and A. To start off, again sales total sales were up to 25.76 $1,000,000,000 up 6% year over year and comps again was reported 3% and a +3% and a +5% excluding gas and FX. In terms of the 3 the plus 3% reported comp sales, the average transaction was minus 1% for the quarter on a reported basis. Again FX is the impact of that as well.
It would have been a little over 1% plus with on a low flat currency year over year. And 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 January December, January February and year to date shopping frequency continues to be in the 4.5 percent 4.25 percent range. In terms of sales by geographic region, both for the 12 week quarter and the 4 weeks of February, geographically Southeast, Midwest and San Diego regions were strongest. Internationally as well both for the quarter and the 4 weeks of February the strongest regions in local currencies were Mexico and Canada.
For the Q2, in terms of merchandise categories, that would include sundries overall in the low single digits. For hardlines 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 and then in fresh foods up in the mid to high single digits overall with produce being strongest. For February, again the traffic was up just under 3% shopping frequency.
Again, the reported average transaction was down about a little over 1%. But again, 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 per gallon. From a merchandising category standpoint, food and sundries overall was in the low single digit range. Hardlines overall came in slightly negative with electronics being down in the mid single digit range.
Softlines was the strongest area in the mid to high single digit range. And finally Fresh Foods mid single digit range overall, again, Cronos being particularly strong. In terms of moving down the income statement, in terms of membership fees, dollars 550,000,000 up from 4% or $22,000,000 from a year earlier $528,000,000 Again, you've got the impact of FX. If we assumed flat year over year FX that reported 550 $1,000,000 membership fee number would have been $563,000,000 or up 7% year over year. In terms of membership, our renewal rates continue at record levels and we continue to see increasing penetration of the executive membership.
New membership sign ups in the Q2 company wide were up 13% year over year, again 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 Q1 3 months 12 weeks ago at $29,600,000 at Q2 end it was 30.1 dollars Business primary rounded both at Q1 end and Q2 end at $7,700,000 each. So all totaled $39,800,000 at Q1 end up to $40,300,000 at Q2 end including the additional card $72,500,000 at Q1 end was up about $900,000 to $73,400,000 at Q2 end. Also at Q2 end, paid executive memberships were just over $14,000,000 an increase of almost $200,000 since Q1 end or about 16,000 in the quarter. And again, executive members are roughly 35% of sales and a little over 2 thirds of our sales.
35% of our membership base and a little over 2 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. Percent Q2 end it was 94.3 percent Gold Star 89.3 percent went to 89.6 percent. So all told 90.2 percent up to 90.4 And of course that's U.
S. And Canada are most 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%. So 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 fixed line items to give you a little explanation of the components of margin. The first two columns would be the Q1, 2014 reported and Q1, 2014 excluding gas deflation. Columns 34 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. Going again continuing across reporting Q2 as +1 and without gas deflation minus 1.
Ancillary plus 5+2 reported in without gas in Q1 and 0 and 0 in columns 3 and 4. 2% reward minus 3 and minus 2 percent and then in the Q2 minus 1 and minus 1. FIFO minus 1 and minus 1 and in the Q2 minus 6 and minus 6. Other, which I didn't need to add here, the zeros crossed the columns there. And 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 up it was up 2%.
Again today we reported plus 6 I'm sorry, minus 6 in lower margins year over year in the Q2. Without gas deflation it would have been minus 8. So as you can see again the minus 6, minus 8 without gas deflation. And our core was essentially flat, plus 1, minus 1 with and without gas deflation. For the Q2 year over year, food and sundries and softening gross margins were up in the Q2 year over year in the 5 to 20 basis point range, while hardlines and fresh foods margins were lower year over year in the minus 30 to minus 50 basis points range.
Ancillary business gross margins percentages were essentially flat year over year. But again, you've got the sales impact of a 10% year over year lower gallonage comp and guide gallonage in terms of price of gas. The impact of the increasing executive membership, again, a basis point head just meaning more dollars going to their rewards based membership executive membership program. In terms of LIFO, in the Q2, we recorded a $5,000,000 pre tax charge this year in the quarter. That compares to a $9,000,000 pre tax credit last year.
So year over year a $14,000,000 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 as we really look at that as part of our core given that they work in tandem. Moving down to reported SG and A. Our SG and A percentages Q2 over Q2 were higher or worse by 13 basis points coming in at 9.83% as a percent of sales compared to 9.70% last year. The minus 13% translates to minus 10% ex gas deflation.
And again, we'll put down actually put down the 4 columns and in this case 5 line items. Again Q1 first two columns Q1 both reported in ex gas deflation and then Q2 reported in ex gas deflation. Going across core operations was a minus 9 in Q1 reported, I mean higher by 9 basis points. 0 without gas deflation in Q2 was a minus 12 and a minus 9. Central in Q1 was a minus 3 and a minus 2 both 0s 0 and 0 in Q2.
RSUs are stock compensation minus 5 and minus 5 in Q1 and minus 1 and minus 1 in Q2. Quarterly adjustments were zeros across the board and then total was a minus 17% year over year higher SG and A in Q1 reported, but again ex gas deflation was a minus 7 and in Q2 reported a minus 13 becomes a minus 10 that I just mentioned. In terms of these SG and A figures, the core operations again was at minus 12%, but minus 9% ex gas inflation. Within core, our payroll as a percent of sales was higher year over year by 2 basis points. Payroll benefits and workers' comp combined hit SG and A by about a basis point.
And utilities, of course, a lot of cold weather was down 2 basis was higher by 2 basis points. Again, as I mentioned earlier, in both this year's and last year's 2nd fiscal quarter, we had a few discrete items that in the aggregate represented a year over year swing in our SG and A expense by 5 basis points or $14,000,000 or $0.02 a share. That generally isn't luck for the draw. Sometimes that helps us. Sometimes that hurts us, but it was a net negative year over year swing.
In Central, it was flat year over year, notwithstanding ongoing IT modernization costs, which will continue, which represented about a 3 basis point higher year over year test G and A. Next on the income statement line is preopening. Last year it was $6,000,000 it's up 2,000,000 dollars to $8,000,000 this year. Even though last year we had 5 openings and this year we had 3. But some of that's the timing of openings preopening impacts several months.
A big chunk of it also is the more significant preopening expense related to our upcoming opening in Spain as we essentially are opening a new country. All told, operating income in the 2nd quarter came in at $724,000,000 year over year, down 2% from last year's $738,000,000 Below the operating income line, reported interest expense was higher year over year by 1,000,000 dollars coming in at $26,000,000 this year versus $25,000,000 last year. Virtually all of that is interest expense related to not only the $1,100,000,000 fixed rate, 5 0.6 percent interest debt that we have that will mature in March of 2017, but also the $3,500,000,000 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 4,000,000 dollars in the quarter coming in at $30,000,000 this year versus $26,000,000 last year. Actual interest income was about half of that $4,000,000 increase, $2,000,000 higher year over year.
And the other component was a $2,000,000 swing, dollars 5,000,000 plus last year versus $3,000,000 plus this year. So that's $2,000,000 better year over year. Overall pretax income was down 1.6 percent or $11,000,000 in the 2nd quarter, down from 7 $39,000,000 to $728,000,000 this year. Our tax rate in the quarter came in at 35.0 percent. Last year was 25.1 percent.
And early a big chunk of that was the income tax benefit from that $62,000,000 benefit in conjunction with a special cash dividend. Excluding that one time benefit, our tax rate last year in Q2 that $25,100,000 would have been a $33,500,000 still lower when percent still lower when compared to this year's 35.0 percent. Again, as I mentioned in last year's Q2 conference call, there were a couple of positive discrete items that went our way in Q2 last year, again to the tune of about $10,000,000 after tax because of the tax line or $0.02 a share last year that we didn't have the benefit of this year. Overall reported net income of $547,000,000 last year in Q2. Excluding that $62,000,000 income tax benefit would have been 4 85,000,000 dollars and that compares to our $463,000,000 this year down a little bit.
Next 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 Q2 was 240,000,000 dollars $471,000,000 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 is in the payables calculation is non merchandise payables such as most importantly construction payables. So 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 $12,200,000 to $12,700,000 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 fiscal inventories which we do at the end of the second quarter were essentially tied to last year's best ever results in terms of low shrinkage results. So I think in our view a good indication of the inventories being managed pretty well. In terms of capital expenditures, in Q1 of 2014, we had spent $574,000,000 In the quarter just ended, we spent an additional 4.47 dollars So all told just a little over $1,000,000,000 year to date. Total CapEx for fiscal 2014, we would expect to be approximately 2,300,000,000 dollars I think it's a little up from what I mentioned a quarter ago, up from $2,100,000,000 last year and again reflecting a little ramp up in openings. In terms of e commerce operations, we had 4 countries U.
S, Canada, U. K. And most recently a few months ago we entered e commerce. We began e commerce operations in Mexico. For the Q2 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, one and a half years, as you know, we've replatformed the site. We've added some mobile apps. We've combined some e current e commerce merchandise efforts with our in line 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 3 depots instead of 1. We're currently testing not that it's specifically today's our e commerce operations, but we've 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 did we have that closed in Ocipalco with the hurricane, net of 12.
In Q2, 3 in Q3, 3 in
Q4, 3 in
Q4, 11. So 30 openings less the Acapulco closing so far. That will put us a net increase for the year of 29, which would be about a 4.5% square footage growth 4.5% to 5%. New locations by country for the 30 openings, 17 in the U. S, 3 in Canada, 1 in the U.
K, 2 each in Korea and Japan, 3 in Australia and 1 each in Mexico and Spain. As of 2nd quarter end, square footage stood at 93,000,98,000 Square Feet. In terms of dividends, our current recorded dividend stands at $0.31 a share. It's 1.24 percent share annualized dividend, represents a total cost of the company of about $540,000,000 Lastly, our Q3 scheduled earnings release date will be Thursday, May 29. That will be for the 12 week quarter ended ending on May 11.
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 a litigation settlement that benefit last year's 3rd quarter gross margin results by about $17,000,000 pre tax or about $0.025 a share. And so we'll be up against 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 this fiscal quarter, how the earnings performance trended positively during the quarter from a very tough 1st 4 week period and continuing strength in sales, comps, shopping frequency and the like. With that, Jody, I'll turn it back over to you.
Thank you. Your first question comes from the line of Ben 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 do 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 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. Given that we 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.
And then just lastly on the expense leverage or expense deleverage in the quarter. I mean 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 5? Well, I mean, I think so recognizing nothing is perfect. I mean, you take those things that I pointed out and that in the aggregate were 5 basis points.
I mean and 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 5 of it. The other thing is the biggest impact to our numbers were in those 1st 4 weeks. It's a combination of things. I think probably we budgeted more aggressively.
Our numbers were still not bad for December for that 4 week period. But it was 4, 5 less Christmas shopping days between Thanksgiving and Christmas just based on how Thanksgiving falls that fell this year. The other thing is that some of the FX had a little less to do with it because that affects all the line items both sales and the margin dollars. But I think some of it also is while sales overall were satisfactory, they were a little less than satisfactory in things like certain nonfood seasonal categories or the like and a little stronger in fresh foods. So again, as we mentioned, fresh foods margins were down more and then you had a double whammy in some of the non food categories.
So on this level of sales we have now, those types of things make a big difference. And 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. And to get back to the leverage question, yes, I think a 4% to 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.
So Richard, I wanted to drill down a little bit on the fresh food category. The margin pressure is that how broad based is that or is that a handful of items? And what could you call out among items? And then is that more you making proactive investments or delaying price pass through? It's more almost all us.
And I would say it's aggressively it is all us. And in terms of where it is, as you might expect, it's particularly in the proteins. We talked about chickens before. We've held the price on that chicken. And those 65,000,000 or 70,000,000 rotisserie chickens are just part of the chicken.
I mean, it's also frozen and fresh. And we are seeing a little relief in some of the pricing there and some of the costing. And that's just starting. I think starting a little later than we anticipated 6 months ago, but we should see a little bit of relief there. Really beyond that, I don't hear meat's very competitive And beef is 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 and some of the shortages that's impacted us a little bit. But overall, I'd say meat, pork and poultry is the biggest culprit there and it's mostly us. And as a follow-up to that, when you look at having some more consistent markups than others, how do you guys think about than others, how do you guys think about strategically, right, 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. Does that always take an approach or not really?
Well, 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 and L of course in the 1st 4 weeks versus the subsequent 8 weeks, that was dramatic. And 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 dead spot perhaps as well. So there's some of that pressure. And then I really think that we probably budgeted a little off given the 5 days 5 fewer days. But 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 was it of it was in those 1st 4 weeks. And so trend wise that's good, but that doesn't tell you anything about the upcoming quarter other than that we know that February was a little impacted by weather.
So we're starting off the quarter in those 2 weeks or after weeks of February, which is the 1st 2 weeks of Q3, we're just really. And then 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. And is there more pressure outside the U. S. Or less?
I'd say overall there's a lot less pressure outside the U. S. I mean the U. S. Is clearly the most competitive with regard to the club business as well as competitive with supermarkets are probably the most competitive in U.
S. Compared to major chains everywhere. So certainly that's the case. But U. S.
Is 70% a little over 70% of our company. All right. Thank you.
Your next question comes from the line of Charles Grom from Stern Gergy.
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 margin is getting better, I guess, intuitively makes sense as you move away from the holiday markdowns. But I was wondering if you could discuss, I guess, if that's the case? And then 2, 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. But again, we're all as you know, we're all about being competitive out there and being proactive in that. And but we also want to make money and we want to hopefully show some improving margins. But we're going to do what's right each day on pricing irrespective of how it's going to impact margins that day. But overall, clearly, we looked at the 1st 4 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. But again, this quarter is a new quarter. And other than sales starting off a little weaker, we'll see where it goes. And a lot of that I think is weather.
I mean, 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 that we ever had. So 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. And then just to follow-up to Dan's question earlier. I mean, when you sit down with the Board every month, 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?
Well, 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 $3,000,000,000 payout for 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. And clearly Q2 was a larger gap there.
So 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 acute about it, but we'll let you know in a quarter. But we will be buying some and we'll go from there. There's I think the Board is as you know, we've never looked at it as let's do this because it will be a positive message to the market. But 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.
And perhaps we've been a little conservative, but we also had the $3,000,000,000 dividend that we did last December that helped us be a little conservative. And I think you'll see that change, sir. Okay. Good. And then just my last question and 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. We're out there I think again getting back to the simple circuit example, it's not unlike the hotdog example of years gone by. When prices went up, we just saw that as the strength of that and the growth in 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.
And again, I think Q4 and Q2 and that 1st 4 week period exacerbates everything because you had all those things, some weaker sales and some bigger ticket items, some margins on top of the ongoing fresh foods margins. And I'm very emphatic about the fact that our fresh rooms 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 health care, payroll and some of the other items?
Well, on IT, I think now it's been about 6 quarters that I've mentioned it. And it's probably on average all of this scores I don't have in front of me about a 4 basis points. And so quarters 5 and 6 in this process are 4 on top of 4 or 3 on top of 5 or whatever. So and that will probably continue for another half dozen quarters. It's a 5 or so year effort with at least a 3 year buildup in those types of things.
There'll be some quarters on a year over year basis when it's a couple of basis points and there'll be some when it's 4 or 5 depending on what systems are being put. But we have a lot going on. We're excited about 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 the early summer to late summer. And 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. And again, part of that is 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. And again, so far so good, but we're in we're a year and a half into it.
And 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 and 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 percent is a percent of sales in those respective countries and certainly the health care as a percent of sales in those countries is a little lower weighted average when you've got the Canada rate down 8% year over year in the Canada exchange rate. We've got Japan in Q2 down 15% with Japan yen. In Australia, it's down 14.5% year over year in the 2nd quarter. So all those things add a little insult to injury.
The underlying numbers, they were a little worse in terms of percent expense percentages, but big chunks of this were the things that I mentioned. And 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. And 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 life up if you think that will still be a factor in 3Q like we saw here the Q2?
Well, if I look at the compared to year end, just our entire LIFO pool at midyear it's up about 0.25 percent. So just light cost of all items. There was $100 item that we paid for $100 for it at September 1, if you will. At February 16, we were paying on average $100.25 As you'd expect, there's some deflationary pools like computers and 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. So it doesn't seem overall, there doesn't seem to be a lot of inflation. But on a $4 plus 1,000,000,000 LIFO and LIFO is a U. S. Concept only.
So on a $4 plus 1,000,000,000 probably $5,000,000,000 LIFO pool, 1% would be $50,000,000 a quarter of percent would be $12,500,000 I don't think it's going to be a lot. I think and I don't have in front of me Not that this tells you anything, but in Q3 and 4, so I'm not sure. So last year in Q3 and Q4, LIFO was a credit benefit of about $8,000,000 $7,500,000 $8,000,000 in each of Q3 and Q4. So if it is a little inflationary, we'll see that same kind of a similar kind of swing that we saw in Q2, but we'll wait and see. Mind you, when there's a LIFO charge, there's probably a little that's again, I look at the combination of that with the core too, because they tend to work not always, but in tandem one opposing the other, but not a lot of inflation.
That's helpful. Thank you.
Your next
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?
That is I don't know. And I'm not even a student of some of this FedEx this foreign exchange stuff. But when you see as an example in Japan, Q1 year over year was down 20%, Q2 year over year was down 15% for us in terms of the Japanese yen. So there's been a lot of weakening. At some point, it's going to bounce back a little bit, but can't tell you when.
Canada has been awfully strong for many years and it's now subsiding a little bit. But who knows and then adds to that the craziness in the world events that impact these numbers. Usually when there's issues going on world issues going on, the dollar strengthens. And I think that's a little bit of what's happening now. But 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's actually gotten above $1 on the U. S. Dollar and it's come down a little bit. So kind of bounced off of that peak, but I can't tell you when that's going to be.
Okay. And then 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 gas gasoline sales as a percent of our company total sales is 11% or 12%. And so it's a huge chunk. And when you've got gas deflation that alone and gas, we will say our reported gross margin is in the whatever 10.5% plus range, 10% to 11% range. Within that number, gas is in the 1% to 5% range every quarter.
So that weighted average coming down has an impact on that number. So you got to look at it both ways. Overall ancillary businesses were fine. Our pharmacy business continues strong. Our hearing aid business, both smaller is very strong.
1 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 and do a few other things. But it's still very profitable, but not as profitable as it used to be. So 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 4 week versus the 8 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 Hardlines and Fresh Foods being down 30 to 50. Does that mean in the remaining 8 weeks of the quarter, you would have actually had gross margins up overall? And is it a fair impression that without those 1st 4 weeks your earnings are closer to the double digit type growth range?
It was in the 1st 4 weeks well, one of the things we talked about in the press release was is those hard line categories that was more impactful in the first 4 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 given the 4 1st 4 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? And 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. And honestly, I mean, 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 2 are in line, we're 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. But for overall, we probably fared better than most in line. And all that stuff takes away a little bit. We're looking at ways to get 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. But 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 dumping 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, 1st and foremost, we're not going to do anything rash, but we're also not going to have our head in the sand here. I mean, one of the things the test is 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. And 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, I mean we're doing huge business in that.
That I think also is driving in some younger people. Some of the one of the first systems go in our modernization effort is a new membership system, which will start rolling out in the U. S, I believe June, July. And 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.
So that's what I can tell you at this point.
Okay. Thank you. And then I just have a sort of bigger picture question. It's obviously that it's your philosophy to provide very great value especially in fresh foods to your customers and you'll absorb some inflation. But what do you do?
I mean everything I've seen 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. And part of it though is that we also recognize that we need to our goal is just to maximize shareholder value and ultimately that comes into long term driving earnings. And but we're not going to necessarily do something in the short term or in a given quarter to do that. Again, looking at Q2, it was a combination.
We I think I probably said 6 or 9 months ago using the Simple Chicken example that there seemed to be in the few months looking forward 6 to 9 months ago that poultry pricing costing was going to improve, which would improve our margins because we were not lowering the price, we've just not raised it prior to that. That's finally starting to happen. So 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% 15% comps for a company.
It's going to 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. And so we 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 1st year, we did $25 plus 1,000,000 in an item or 2. This is at a higher price point and a greater savings and a fair margin for us, a better margin for us relative to a more competitive regular ground beef. The cool thing was is that 80% of those sales were existing 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.
I don't that's my guess. And so 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 wherever you even in the U. S. Where you don't have a direct competitor in the market a mile away or less, you're going to have a little better margin.
And so all those things I think are well should impact us positively. And but 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. And then thank you for that. One final question, which is kind of related, but you obviously saw softness in some hard line categories. Electronics has been bad for a while. Do you think at all you have to rethink how you 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.
And so that business is growing. But getting people in the door at Costco, we saw a heck of a lot of TVs as well that way. And but again, you have a few unusual things happening right now. Cameras, I understand cameras are down 30 plus percent in the industry. We're not that different.
In fact, we've done a lot 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. Deftops and laptops. We're starting to get some traction on pads or tablets of late. But I think that's a business that will be tough. But we're 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.
A lot of it wasn't TVs or 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 does it historically does it impact your traffic trends as gas in general?
If it does get very deflationary and come down
a lot? Does it do
you have to find other ways to keep 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. And so we're buying every day if you will. And the guy down the street is buying it every 6 or 8 days or 9 days. And so when it's going up, it's costing us a little more and we're competitive. We're still at the lowest price hopefully, but there's a little less savings.
There's a little less news about it out there. And so 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 it's not on the nightly news. And so there's probably a little less positive there. But given how big we are in that business now, it's not as impactful either way.
Got you. And just a different question. Could you remind us with your international business, how you're thinking about new markets? I think France you mentioned before. Any update on timing of when you could open a new country?
Well, Spain is April or May? May. May. And France is hopefully about a year hence. And beyond that, we haven't disclosed anything.
In terms of how, there's generally the I mean the 3 likely areas and no order is other parts of Europe, South America and China. And 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.
Your next question comes
from the line of Matthew Fassler
from Goldman Sachs.
Thanks a lot. This is Steve Tanal on for Matt Fassler. Just a quick one on gross margins. It sounds like much of the year on year decrease was sort of intentional through price investments, if you will. And we just want to if you will.
And 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 is likely to sort of stay this way? How are you guys thinking about that near term?
Well, first of all, let me correct maybe 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 is 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.
And some of it was that. So 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. And then beyond that, I can't tell you a whole lot. But a big again produce meat not produce, Fresh foods was the our proactive aggressiveness.
The rest of it is doing what we do and responding to competition and responding to the weak sales being a little weaker and getting rid of the stuff.
Understood. That's very helpful actually. And 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 that 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 higher a strong penetration in executive memberships, which is the higher fee. So those things probably pushed it a little bit. Got it. In terms of guessing in the future, your guess is it's going to mine.
Understood. Understood. And just to confirm this, there were no buybacks in the Q2, correct?
And you guys are intending to buyback in the Q3?
Correct.
All right. Thanks a lot.
Your next question comes from the line of Bob Drbul 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?
And the second question is, can you just give us an update on the private label initiative and curtain signature and sort of new products or new categories that you guys are excited about looking forward? Canada is strong. I mean Canada thankfully is not only we're the only club in town, which is a positive. It has everything good 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. It's got a of course a part of its economy is natural resource base, which has been on fire. So those are all positive things.
It has lower health care expenses as a percent of sales just by the nature of the health care up there versus here. And so all those things have been positive for us. And 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 at nauseam in the past about in the last year about the Wolf and Slack.
We've got a great gabardine slack now that's I think 1999. We I know we have some additional women's athletic items. And so we're doing that will be an area I think that will continue to grow for us. On the food side organic, we're doing some a few more items. And pretty much in a lot of places, it will continue to grow.
And 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 showed incredible savings where prices have always been high. On these items given the quality level and the pricing, it's that strength is I think exacerbated even more and 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 questions have been asked. Just a quick one on February. Just you made the decision to call out weather and the impact there. Was the weather materially different than what you saw in January?
And I mean, I know you kind of said there was some stuff that happened in Japan. Is that what kind of tipped it? Because in the U. S, it just feels like kind of January, February were basically pretty similar.
Well, you probably live in that area. No, it was more severe in February. As an example, in just the last week of February, the Southwest got hammered with rain 4 or 5 days. Japan was to the company was just another insult to injury if you will. I mean I think we have what 18 units in Japan.
I don't have the exact detail of what's assumed half a dozen or 6 or 8 of them were impacted in the Tokyo market. So again that was just a little bit more. But overall, yes, it was more extensive than we've seen before.
That's good color. Thanks. And then just on the club openings, looks like you're going to kind of get to that 30 kind of gross number this year that you guys were hoping for. What about as we look to next year? I mean, do you think are you still confident you can get that number north of 30?
Yes. Yes, I mean Craig's goal Craig and Jeff Rotman's goal are to get into that low 30, 30 plus range. I'm sure now that I've said it, we'll get 28 or 29. But at the end of the day, we're shooting for 30 35 a year for the next 5 years. Okay.
Sounds good. Thank you.
Your next question comes from the line of Greg Melich from ISI Group.
Hi, thanks. I wish I had two questions. First on electronics and then on membership. You mentioned it was up, but then you listed some categories like cameras and stuff that are rolled down. Was it just TVs that drove CE?
And was that ASP or volume?
Excuse me what? Tablets. Tablets were part of it. Also the quarter overall was different than February. February was a little weaker in Electronics.
So if we look at the The biggest chunk is TVs just by volume. And so and that's partly why February TVs were weaker in February relatively speaking than they were for the quarter and they were actually about flat. Flat. And I think the average sale price is about flat. It had been up.
It's Bob's saying it's up. I had to oh, here. Hold on. I have to tell you. In the Q2, the average price point looks like it was up a couple of percent.
And that's partly because we're selling bigger ticket, bigger TVs.
It's not inflation.
By the way 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 in TVs has been a little bit delayed and it's going to be in a few months, April instead of January, I mean, post year. And so that again that should help it a little bit, but we'll see.
Okay, great. Well, 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.
So if we're up 7
In local currency.
Is it fair to say that in the U. S. While membership renewals are great and you have that the mix towards executive that memberships per club in the U. S. Is actually trending down a little bit.
And if that's the case, has that
extent To the extent that we've opened 14 or so U. S. Warehouses, it may be a little bit, but actually it's I don't know if that's I'm correct on that. I have to look. Okay.
We can follow-up on it. But conceptually still have the mix shift going on to executives.
Yes. By the way, one of the things is I'll give you an example. We opened just of 3 years ago in Huntington Beach, California and LA. We have 50 plus percent of the households are 4 in that in a greater LA market where we've got 40 or so locations. We may open up in a new market there with the 8 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 will exceed our company average for the 1st year with do $150,000,000 $100,000,000 which is new and $50,000,000 which is cannibalized. So you've got members that are closer, they're going to to shop more frequently for the first time. Contrast that in Asia where again during those 8 to 15 weeks prior to opening, As of opening day, we see numbers in the 25,000 to 50000 new member sign ups with a bigger non renewal a lower renewal rate the year hence. But nonetheless, so that could be a big difference.
Okay. That's helpful. Thanks.
So my guess is that, yes, it could be flat or 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 at the end of the call. Just want to follow-up on the inflation question and produce inflation deflation and whatnot with the potential of some inflation working into produce you guys investing in price there. How does that going to work through as we work through the next say quarter or 2 if we do get some spikes in produce inflation? How does that work through your numbers?
My guess 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 could still show great savings, but it's just not in my view, it's just not the same type of level of competition. So I don't think that that's going to impact us as more. That will impact us as much.
The biggest thing in produce is, is when there's a drought or freeze and when we're doing 100 of 1,000,000 of dollars of items be it strawberries or blueberries. And when in a given month you did $5,000,000 in an item instead of $15,000,000 during a holiday item for that close because of the freeze that's more impactful than competition.
And then just one last one that's more a little strategic. And if you don't want to take it, you can always talk offline. But as you guys expand internationally that becomes much more a focus of the growth. And we've seen other retailers try this and it has worked well. It's working well for you guys.
But 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? And thanks.
Well, 1st 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 that part. So but when we go over there to when we go over, we send a core group of half a 1000 people, 3 or 4 people to merchandising operations.
I think the biggest thing to make sure everybody is on the same page is these individuals travel to Seattle every 4 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. And then like Jim for many years, Craig and others are traveling to those countries often. Craig is out of the country today. And so the biggest way we do it, I think is everybody being on the same page. The other thing is, is I'll give you a good example.
When asked before why we've 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 and those U. S. Sourced goods.
And so I think all those things play well into our hand, but that's going to change over time. And so we do what we do best is we're constantly focused on it. I mean, when these heads of countries and the merchants of countries come to Seattle every 4 weeks, one of the things that each of the seniorities of operations around and every country has 1, Canada has 2 and U. S. Has 8.
But all those foreign ones they come here, 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. But because of whatever it is, a licensing arrangement or regional pressure on their side, it's a work in progress that we're making good success there. All those things, they're little things, but they help us every day.
So I think that will continue. It's really a lot of that blocking and tackling. And we have 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.
And 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 2 more questions. That's that.
Okay. Yes, sir. Your next question comes from the line of Sandra Barker with Monterrey and 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 3 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 clothes 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, the issue of needing to be responsive. But I'm not there's some responsive too out there.
And is that do you see any changes in the competitive landscape? And where is it coming from?
No. We really haven't. I mean there's still a lot of tough competition out there. We wish that part of the challenge with the Internet and delivery, just delivery included and what extra things. I think we've we're getting a little better at communicating what's the value in our product in terms of an extra controller or whatever it is or the shipping.
And because when we do price shops, the least competitive ones are some of those that are on the Internet. I don't need to make names.
Yes. Okay, great. Thanks. Your next question comes from the line Joe Feldman from Telsey.
Hey, guys. Thanks for taking the question and sorry for prolonging this call. But 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.
I mean, they did I believe Sam's did a fee increase that they test originally in Texas and they filled that out now in the U. S. They're only by the way in the U. S. And Mexico.
But we have not seen any 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.