Good morning. My name is Jasmine and I will be your conference operator today. At this time, I would like to welcome everyone to the Q1 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session.
Thank you. I would now like to turn the conference over to Richard Delanti. Please go ahead, sir.
Thank you, Jasmine, and good morning to everyone. This morning's press release reviews our Q1 earnings results for the 12 weeks ended November 24th. As with every conference call, I'll start by stating that the discussions we are having will include forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 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, for the quarter, our reported earnings came in at 0.96 dollars a share compared to last year's earnings per share of $0.95 Several items of note that impacted the year over year comparison.
I'll go through 6 items. Membership fee increase as I've been mentioning for the last many quarters, the fee increase that we did in the U. S. And Canada in late 2011 early 2012 that benefited this first quarter earnings by about $8,000,000 pretax or $0.01 a share. That will be the tail end of the benefit of that increase showing hitting our numbers.
Interest expense was higher year over year in the Q1 by $14,000,000 pretax or $0.02 a share. This of course related to last December's $3,500,000,000 debt offering in conjunction with a $7 per share special dividend. FX in the Q1, the foreign currencies where we operate weakened versus the U. S. Dollar, primarily in Canada and Japan.
This resulted in our foreign earnings in the Q1 when converted into U. S. Dollars being lower by about $14,000,000 pre tax or $0.02 a share. Those earnings would have been had FX exchange rates been flat year over year. Gas lean profits, gas is a very good business for us.
It drives frequency we feel. And year over year it's always profitable, although it tends to be volatile. In the Q1 that impacted earnings by a little over $0.02 a share. Stock expense that's the line item that we have in our SG and A. It was higher year over year in the Q1 by a little over $0.02 a share as well.
We have over 4,000 people, generally managers and buyers and above who receive restricted stock units as a significant part of their annual compensation. Such grants are made annually each October or in our 1st fiscal quarter. These RSU grants then typically vest over a 5 year period with accelerated vesting when a recipient receives reaches 25, 30, and 35 years of employment with the company. Now factors driving this increase included a 24% increase year over year in our stock price on the dates in which the RSUs are granted each year, additional levels of accelerated vesting given many employees' long tenure with the company and a large number of employees in the plan. I should note that this October this past October, our RSU grants were reduced by an average of around 15%.
That is the number of RSU's granted to each recipient. The increased expense occurred of course notwithstanding that reduction. IT modernization, I've talked again about that. We're in our probably 2nd full year of a major modernization effort. And as discussed in the past several quarters, these efforts will continue to negatively impact our SG and A expenses throughout fiscal 2014 and probably a little beyond that, especially as the new systems are placed into service and depreciation begins.
In the Q1, on an incremental year over year basis, these costs impacted SG and A by about $12,000,000 or about 3 basis points. Turning to our sales for the Q1. Our 12 week reported comparable sales figures for the Q1 showed a 3% increase, 3% in the U. S. And 1% internationally.
As indicated in our release, excluding gas price deflation and impact of FX, the 3% reported U. S. Comp would have been 4% for the quarter, the 1% international would have been up 6% and the overall 3% for the company would have been plus 5% on a basis excluding gas deflation and FX. Other topics of interest, opening activities and plans. We opened 13 locations during the Q1 of fiscal 2014, 9 throughout the U.
S, 1 in Alberta, Canada 1 in Monterrey, Mexico, our 3rd in that city and 2 new units in Australia, bringing Australia now to 5 total units in operation. During the fiscal quarter, one location was closed in Acapulco, Mexico. This was due to the extensive damage that resulted from the severe flooding down there from tropical storm Manuel. That may or may not open reopen this fiscal year, but most likely certainly in calendar 2014. Since the end of the Q1, we have opened in the second in Q2 2 new locations, 1 in Illinois and 1 in Canada and Ontario.
That gives us 15 new openings thus far in fiscal 2014. For the entire fiscal year, we have a current plan of 30 new locations, 16 of which are planned for U. S, 4 in Australia including the 2 we recently opened, 3 in Canada, 2 of each in Korea, Japan and Spain. And of course, those will be our first two units in Spain and one additional location in Mexico. I'll also discuss later in the call, e commerce activities, membership trends and of course, discussion on the components of margin and SG and A.
Again, quarterly results. Total sales were up 5% to $24,500,000,000 On a comp basis, I reported 3% which again excluding gas deflation and FX was a 5% on a normalized basis. In terms of the 3% reported comp, that was a combination of an average transactions decrease of 2%, actually up almost 1% excluding deflation and FX and an average frequency increase of just under 4.5% for the quarter. In terms of sales comparisons geographically, For the Q1, the better performing regions in the U. S.
Were the Southeast, Midwest and Texas. Internationally, in local currencies, the better performing countries were Mexico and Australia. In terms of merchandise categories for the quarter, for the Q1 within food and sundries, candy, deli and refrigerated were the relative standout. Hardlines was probably the most challenging category. Majors came in negative for the quarter, challenging of course in televisions and in cameras and better performing departments within the hardlines were office and automotive, but slightly negative overall for the department.
Within the low double digit soft lines positive comps, small electrics, apparel and jewelry were the relative standouts. And within fresh foods, comps in the mid singles, better forming departments included produce, in at $549,000,000 or 2.24 percent of sales. That's a 7.3% or $38,000,000 increase versus the Q1 of last year and as a percent of sales up 4 basis points. As I mentioned earlier that did include the extra of membership, we continue to benefit from strong renewal rates, a little over 90% in Canada and U. S.
And just under 87% worldwide. Continued increased penetration of executive members and of course the benefit I just mentioned from the fee increase. Our new membership sign ups in the Q1 company wide were up 17%. That's of course due to the fact that we opened 13 units this year in the Q1 versus 9 a year ago. And this year's Q1 included 3 international openings which tend to have higher sign ups at opening.
In terms of number of members at Q1 end, Gold Star members came in at the end of the Q1 at 29,600,000 dollars up from $28,900,000 12 weeks earlier at the end of the fiscal year. Primary business at $6,700,000 up from 6,600,000 dollars 12 weeks ago. Business add on at $3,500,000 each. So total member households, which at the end of the fiscal year had been at $39,000,000 even came in at the end of the first quarter at 39,800,000. So all told we have 72,500,000 cardholders out there at the end of the Q1, up from 71,200,000 at fiscal year end.
In terms of paid executive members, they stood at $13,900,000 of those totals, an increase of about 330,000 during the quarter, So we're about a little over 27,000 new executive members per week increase. They represent about 35% of our member base now and over 2 thirds of our sales. In terms of renewal rates, as I mentioned, they've continued to be strong. Our total membership Our total membership has eked up a little bit from a 90.0 at the end of the fiscal year to 90.2 in the worldwide from an 86.3 to an 86.5. Going down the gross margin line, our reported gross margins were up 13 basis points up to 10.81%.
As usual, I'll ask you to jot down 4 columns and 6 line items. Basically, the first two columns would be reported for the entire fiscal year of 2013 and then the second column would be also for the entire year of fiscal 2013 but without gas. And then for the Q1 columns 34 would be reported and then without gas deflation. Going down the lines, it'd be core merchandise year over year, ancillary businesses, 2% reward, LIFO, other and total. So again going across core merchandising for the fiscal year fiscal 2013 versus fiscal 2012 was lower by 4 basis points in both of those columns.
Ancillary businesses was better in the fiscal 2013 plus 6% in both of those columns 2% reward minus 2% in both columns LIFO plus 5 basis points in both columns other plus 2 in both columns that was a net non recurring legal segment which benefited our margins last year. And the total fiscal 2013 over fiscal 2012 was up 7 basis points both on a reported basis and without gas. For the Q1, merchandise core reported was up 12, but without gas deflation up 3. Ancillary up 5, but without gas plus 2. 2% reward minus 3% and minus 2%, LIFO minus 1% and minus 1%, other 0 and 0%.
So again total reported for the Q1 year over year in the Q1 was 13 basis points up, but taking out gas deflation was up 2 basis points. Now the core margin in terms of core merchandising, the component gross margin being up again 12%, but 3% excluding gas. Both food and sundries and hardline subcategories were up in basis points year over year, while softlines was down slightly year over and fresh foods had lower year over gross margins as well. Ancillary business gross margins were up, as I mentioned 2 basis points without gas. E commerce, business centers and pharmacy all showed higher margins year over year offsetting slightly lower gas margins.
Our 2% reward again increasing sales penetration of that and therefore increasing executive member rewards caused a 2 basis point year over year reduction in margin due to the reward program. And LIFO, last year in the quarter we had a $2,000,000 LIFO credit. This year there was a very small LIFO charge of about $1,000,000 so about a 1 basis point swing year over year. Moving on to SG and A. Our SG and A percentage in the Q1 was higher or worse by 17 basis points coming in at 10.22% versus this year in the Q1 compared to 10.05% last year in the Q1.
Again, we'll do the same four columns reported for all of fiscal 2013 and then without gas and then the columns 34 reported for the Q1 year over year and then without gas for the Q1 year over year. In terms of operations, in the fiscal year both columns are the same columns 1 and 2, 0 and 0 for operations, central 0 and 0. RSUs or stock compensation minus 3 and minus 3 quarterly adjustment plus 2+2 for a total in fiscal 2013 SG and A was higher by 1 basis point or minus 1 year over year. Columns 34, operations on a reported basis was 9 basis points of that 17 minuteus 9 without gas 0 central minus 3% and minus 2% stockholder RSU compensation minus 5% and minus 5%, no quarterly adjustments And then again total minus 17% or 17 basis points higher year over year in the Q1 and again without gas minus 7%. Now core operations again was flat excluding the impact of gas deflation.
Within operations, our payroll SG and A percentage was actually 2 basis points better year over year, while benefits workers' and related expenses were about 4 basis points worse year over year. So those are the big the 2 big factors within SG and A before. Central expense was higher year over year, 2 basis points without gas, again primarily related to the increased IT spending as we continue our modernization efforts. This will as I said, this will continue to be a drag on SG and A, especially as the new systems are placed in the service and depreciation begins. And finally, SG and A expense related to stock compensation, I mentioned earlier, I won't go through the detail again, was at 5 basis points year over year.
In terms of preopening, $6,000,000 higher coming in at $24,000,000 in the Q1. Last year in the Q1, we had 9 openings. As I mentioned, we had 13 openings this year, so no real surprises there. All told, reported operating income in the Q1 totaled $639,000,000 last year and was up to $668,000,000 this year or an increase of $29,000,000 And I won't go through the items I mentioned earlier. Below the operating income line, reported interest expense was higher last year higher versus last year coming in at $27,000,000 up 14,000,000 dollars from last year's $13,000,000 in the quarter.
That's essentially the $3,500,000,000 debt offering we did and the interest expense associated with that. We did that I believe in mid December. So there'll be a little bit of a year over year negative impact in Q2 and then it'll be a no delta year over year. Interest income and other was lower by $2,000,000 in the quarter coming in last year at $20,000,000 and this year at $18,000,000 Actual interest income component was slightly up, the other component was slightly down, nothing of size to mention. Overall, pre tax income was up from 6 $46,000,000 last year in the Q1 to $659,000,000 this year.
Below pre tax rates, our effective tax rate this quarter came in at 34.6 percent or about 2 tenths of a percent better or lower than last year's rate of 30 4.8%. I think most of it related simply the various discrete items that impact each year and so a little bit of improvement there. Overall, net income was up $416,000,000 last year to $425,000,000 this year in the Q1. Quick rundown of other topics. Balance sheet of course is included in today's press release.
In terms of depreciation and amortization for the Q1, it was 231 $1,000,000 One of the metrics we always talk about is our accounts payable as a percent of inventory. On a reported basis last year it was 108%. This year in the Q1 it was 99%. Now both of those numbers include quite a bit of non merchandise payables particularly as we ramp up expansion to construction payables if will. If you just looked at merchandise accounts payable to inventories, last year's $108,000,000 was $94,000,000 and this year's $99,000,000 was $89,000,000 I'll talk about that in a moment of why that came down a little.
Average inventory per warehouse last year in Q1 was $13,200,000 This year in Q1 it was up 1 point $2,000,000 to $14,500,000 or
up
about 9%. Both of those AP ratios and the higher inventories is for the most part because of how thanks giving fell 1 week later in the calendar this year. So the 1st week of Q2 versus last year was the last week of Q1. That much of that excess has since been burned off. And talking to the senior merchants there's really no issues their view is no issues with inventory levels going into the last few weeks before calendar year end.
In terms of CapEx, for the quarter it was $572,000,000 Our CapEx is estimated to be about 2 $400,000,000 this year compared to $2,100,000,000 last year, higher year over year spend of course due to the increased level of planned openings. In terms of dividends, our quarterly dividend remained at $0.31 a share or $1.24 on an annualized basis. Based on shares outstanding that's about a $540,000,000 annual expenditure. Costco Online. We're now in 4 countries U.
S, Canada, U. K. And most recently Mexico. Mexico E Commerce commenced operations in late October. For the Q1, sales and profits were up over last year.
Q1 e commerce sales were up 24% and company running about 2.5% of our total sales. We've had a variety of initiatives in that area. We're always asked those questions. So I'll point out a couple of things. Of course, 1.5 years ago, we re platformed the site and shortly thereafter added mobile apps.
We've combined in the last year, we've combined some e commerce merchandising efforts with in line efforts. We think that's given us a better merchandise capability there. We've added a few categories most particularly apparel, some apparel items. And we've done I think a better job of improving the timing of shipments by expanding the various shipping points, so getting the merchandise more quickly to our members. In terms of expansion, last year we opened 26 units and ended the year started fiscal 2013 a year a quarter ago at 608 units ended at 634, so it was up a little over 4% square footage growth.
This year assuming we get to the 30 net units on a base of 634 that would be that would round up to about 5% square footage growth. And again the 30 would if we get to 30 it will be and we expect to 16 in the U. S, 4 in Australia, 3 in Canada, 2 each in Korea, Japan and Spain and 1 in Mexico. And square footage at Q1 end totaled 92,654,000 Square Feet. With that, I'll turn it back to Jasmine for Q and A and I'll put myself on speakerphone
here. Your first question comes from the line of John Heinbockel from Guggenheim Securities.
Hey, Richard. So on the gross margin by category, can you give a little color, right? 2 were up, 2 were down. I know mix might be some of the explanations, right? Say hard lines up because maybe majors and TV is down, but a little more color on that.
And are there clear areas where you're making some price investments in that grouping of 4? Well, I mean, clearly, fresh foods is the one I talked about in the past. While fresh food margins year over year in the quarter were down, frankly, they were down I think less in Q4. It was a bigger down year over year. There are a lot of moving parts of course, but those are when I go to the budget meeting each month and hear the merchants talk, certainly fresh foods is an important part.
As we go into the seasonal period of September through December, you're trying to do some hot prices on exciting non food items as well whether bigger ticket items. I don't think TVs has in my view has a little more to do with SG and A. When you sell a few less $1,000 price point items that probably impacts your SG and A a little bit. But I don't even know how much it moves the needle given it helps, but it's one of many things. So we keep doing what we're doing.
We I don't think there are any big surprises to us in these numbers. If anything one of the things I mentioned last quarter when I pointed out fresh foods were I think 80 or so basis points lower year over year and it's quite a bit less than that delta in the Q1. Part of that was as we've maintained some key prices on some very high volume key items like the the rotisserie chickens as some of the underlying costs come down a little from their peak that helps margin a little bit. So I think it's more we haven't changed what we do necessarily to try to reduce that delta or improve a positive delta. It's just where it came out.
We're ever diligent in being competitive out there. Do you think longer term over a 5 to 10 year time horizon that as Kirkland penetration goes up, do you think that gives you much room to get sharper on branded pricing or not really that's an independent decision? Well, I think there's 100 different honestly, there's 100 different independent decisions. That's part of it. Certainly, when we expand Kirkland Signature, it does a lot of things.
In many cases, as you suggested, we can get a little bit more margin and provide even greater value to our member. As important in some cases, it drives a lower price on the branded item as the branded item loses market share to the private label and which again serves us and our member well. So overall on an overall basis probably increasing penetration of Kayus helps you. I think increasing penetration of our total sales in locations that aren't don't have a direct warehouse club competitor helps you a little bit in some of these other countries. As you can see from our segment analysis, certainly, it would imply that in Canada, which again has been a very strong economy and good growth for us locally as well.
Not having a direct warehouse club probably works a little higher margin, not a lot. I mean we don't take great advantage of that. And in terms of expansion, so where do you and I know every country will have different levels of capacity people wise. But when you sort of aggregate it, is there a level so you do 30 this year, maybe a couple more next year, is there a level where you simply for people reasons cannot go beyond that without fearing execution might slip? For us long term is 2 or 3 years sometimes.
I think 5 years ago when we were averaging something in the low 20s, our goal was to see can we get it up to 30. The last few calls that both this year and over the next 3 or 4 years, some number in the low to mid-30s, we feel pretty good about, hopefully starting at 30 and ending at 35 in a few years. Beyond that, one would think that we could expand that a little bit if the opportunities still present themselves out there. Don't think that will be a people issue. I think more of some of it has been particularly we've done as you know a lot of ramp up in several countries.
We've gone from whatever 8 to 18 or 9 to 18 units in Japan in the last couple of years. We're going to go from 3 to 7 or 8 in Australia this year. And we're adding as fast as we can. It's harder to do in Taiwan and Korea getting sites, but we've got the pipeline full. So hopefully we'll get a little more there.
And so we that's strange a little bit because you don't want to move some of those people. If anything we've devoted more people to those areas. But I don't think that's a constraint. I mean if we did 25 a year 4 or 5 years ago and we're doing 30 ish plus a year now and 5 years from now certainly something north of that assuming the opportunities out there present themselves is certainly a likelihood.
Your next question comes from the line of Paul Trussell from Deutsche Bank.
Hey, good morning, Richard. Just if we kind of strip out the impact of gas, could you just speak more to operating margin performance this quarter in the various segments between U. S. Versus Canada and international?
I think the detail will be in the queue. I don't think there's any big trend changes from most recent year end quarters. In terms of operating profitability as a percent of sales, Canada is stronger than the U. S. It has had a great economy.
It's been a great business for us. It has no direct warehouse club operator. Its health care costs on average are a little lower. So all those things work in our favor. The other column is it generally is more profitable, but again we're opening a lot of new units, so we're cannibalizing.
Going into Spain, we'll certainly have not only initial not only a little extra preopening, but once we get open $500,000 or $1,000,000 a month just in Central over there with 1 partial unit for a few months. So I think those things tend to make that column a little harder to understand other than generally speaking many of those countries in that other column tend to be a higher pre tax percent of sales than the U. S.
Thank you. That's helpful. And then just moving to the U. S, could you just give us an update on the top line trends that you're seeing in California?
No big differences. I mean, I think the big differences in California were way back when the economy first got hit, not only California, but Arizona, Las Vegas and Florida, if I recall correctly, those are the ones that were hit hardest. I think California overall is probably a shade lower than the rest of the U. S, but the rest of the U. S.
Includes Midwest, Texas where we're opening new units and we've been pretty successful in seeing a little more robust top line sales growth.
Got it. And just my last question. Can you just remind us and give us on expense side, how should we think about some of these investments that you're making and the impact over the next few quarters? Thanks.
Well, the one that I pointed out for now the last probably 5 fiscal quarters all of the quarters last year and plus this Q1 is IT modernization. We have finally had the courage I think a few years ago to recognizing that we had great homegrown systems that were kept together and allowed us to do what we want to do. But as we're becoming more global and bigger and getting to a platform and a whole IT infrastructure that will serve us as we go from hopefully $100,000,000,000 to $200,000,000,000 in the next many years. That's several 100 of 1,000,000 of dollars over 3 or 4 years. We're halfway into it, maybe a little under halfway into it.
And so again, my guess is I'll be talking to you about a few basis points each quarter year over year and incrementally probably into 15% before it starts flattening out and coming down. But those have not only is a lot of that expenditure necessary, there's dividends that will come we believe that will come from it too. I in a way, one of the first modernizations things we did even before we called it modernization was replatforming.com a year and a half ago. We feel that that is again we had a website that didn't the search engines couldn't even crawl on it to give you a simple example. We see the potential there.
Still small relative small business to our company, but a very profitable business. So we think there's a lot of opportunities as we re platform and rewrite the membership system, the basic buying systems, the depot systems and but it's necessary as well. So beyond that, I mean, it doesn't seem like health care costs are going to change dramatically in the U. S. As a higher percentage of our total company is from overseas outside of the U.
S. For the most part, every other country that we operate in, the health care related costs are lower as a percent of sales. I might be wrong on one country, but for the most part, that's correct. So those are the kinds of things that I again, there's some probably a few structural things that as non U. S.
Sales become a higher percentage of the total company, whether it's a lack of direct warehouse competition in many of these countries, whether it's lower health care costs as a percent of sales, in some cases a little higher membership fee percentages as a percent of sales. Maybe in some cases occupancy as a percent of sales is a little higher, but more than offset by the other things I mentioned. So generally speaking, I think that will tend to help us a little bit and I try to point that out as we go along here.
Your next question comes from the line of Meredith Adler from Barclays.
Hi. Thanks very much. I'd like to start as you're talking about international and you are going to be opening a couple of clubs in Spain. Could you talk a little bit about what your strategy is about Europe? Is there a reason for Spain and not for France or Italy?
Just wondering how you think about that?
Well, we've talked about Spain and France with Spain coming first and France hopefully the following year. So we have a few people on the ground in France or less than a few and but we're working towards that. And when we looked at where we're going to go before we decided on those 2, there's various different parts of the world. We felt that we've had a place of operation in the U. K.
For many years under a little different format in terms of how we market to our Gold Star members in the U. K. But we always looked at Western Europe as a good opportunity for us. Frankly, the economies over there, we feel have allowed us the opportunity to get in and to be welcome. We provide good high paying jobs.
We're great competitors. And frankly, we see the economy a little better than some of the numbers you just read about unemployment. So we think that it was A, an opportunity for us to get in when historically it was a little harder. And we'll see where we go from there. But to start with, it will be Spain 1st, France 2nd and then we'll let you know when we know.
Okay. And is it fair to say that you are looking at places where people are looking for those unique values? So Germany where the economy has been stronger, there would just be would be something that would come lower on the list of priorities?
Well, we do better in stronger economies frankly. I think each country has its own set of challenges compared to the United States. And again, we really haven't looked I'm not prepared to talk a lot about some of those other countries at this point since we're focused right now on really ramping up the existing countries we're in like Asia the newer countries like Asia and Australia as well as what we're doing here in these two up these new two countries over in Europe.
Okay, great. And then I have a question about e commerce. First, I was just wondering, I'm sure you do talk to your members. What kind of feedback do you get from them about how much they want e commerce to be sort of part of what they get from Costco? And is it discussions with them that has a big influence on what you actually sell online?
Or are you trying to test new things or sort of branch out in any way to e commerce?
Well, we take member comments all the time both online and in warehouse. Look, e commerce is certainly an important component of what's out there and what's growing. We recognize we're a retail competitor. It's part of the landscape. We're very much a brick and mortar.
It's 97 plus percent of our business is in store, not online. What we have done is we've looked at it as not trying to offer a 1,000,000 different items to our members. Arguably, we don't offer a 1,000,000 different items to them in store. We offer less than 4,000. And we view it as an extension of that in some categories as well as some overlap.
We've been successful in bigger ticket items or hard to deliver hard to handle items like furniture and televisions. But I think the example I mentioned earlier about apparel. We tried some apparel items several years ago in online and underwhelmed us and our members. We're trying some different things now and it seems to be working. But it's again, it's e commerce is a small percent and a given department like that is a small percent.
But we are getting some traction. Look, we want our members to buy everything at Costco, whether it's in store or online and we'll keep trying some new things.
Great. That's very helpful. Thank you.
Your next question comes from the line of Michael Montani from ISI Group.
Hey, Richard. Good morning. I wanted to ask about inflation. It looks like maybe with gasoline in total, it could have been slightly down for this quarter. Is that right?
And also what are your buyers seeing out there 6, 9 months out?
Well, currently, again, we had I think a very small LIFO charge. Given the volatility in gas, it was deflationary, although I don't think we took any of that in the Q1. We tend to wait into the year. That's what we've done over the past many years. So probably including gas, yes, it was slightly deflationary, but not reflected in our LIFO small LIFO charge.
In terms of outlook, the only thing that I can recall from the budget meetings again has to do with some fresh some fresh food items or commodities an outlook of 3 months ago the outlook was 3 to 6 months hence, so that will be now to 3 months. Generally speaking, I think that's still the case with the exception of some produce items, which are more of some produce items, which are more a function of what's going on with weather in different places. I know there's been shortages in, I think, berries and each of these items are big volumes for us, but and that drives the price of these ups and the availability of these things up. But overall, I haven't heard about a lot of from the general non food areas anything big. If I look at the last month, just scrolling down the 30 biggest inflationary items, many of them there's a few on the beef side.
There's several produce like strawberries is up 25 plus percent, blueberries up more than that on a cost basis. Then I look on the deflationary side, you have the usual suspects of electronics and gas of course as I mentioned earlier. And a few other items that generally are some commodity items that peaked a year ago and have come down some. So again, no big inflation worries at this time.
Got it. And then just a quick follow-up on Kirkland. Can you just remind us where the penetration is today? And is it still kind of 50, 75 bps type penetration increases that you're seeing?
It's in the 23 plus range. My guess it's 0.5%. And part of that is gas as gas as we roll out gas in Canada and as gas continue aside from gas deflation right now, gas overall is generally as gas for the company has gone from 9% to 10% to 11% to 12%, everything else KS is increasing relative to that other 87% or 8%.
Got it. Okay. And then just an e commerce question actually that has somewhat of 2 parts, if you bear with me. The first part is, can you just talk about some of the efforts that you have to sort of integrate your work online with the in store experience and how there's interplay there? And then the second one is, the AP to inventory ratio this quarter obviously came down a
little bit. When we look at one
of your larger competitors in Amazon, it's north of 200. So I'm just wondering if there's opportunity for initiatives there to really increase that and if we'll hear about you guys co habitating so to speak on warehouses with some vendors or anything like that?
Yes. Well, first of all, as it relates to Amazon's enviable 200 basis point, I think a lot of that as I understand it for every dollar of reported sales, they've got close to $0.50 of other throughput, which is not a sale. It doesn't report on their GAAP income statement because they're handling merchandise for others where they charge service fees for doing that. In many instances when that merchandise is sold, it's sold through Amazon, Amazon gets the money and doesn't pay those 3rd party sellers if you will until after. And so a big chunk of that has to my understanding is and I could be wrong, a big chunk of it is that.
I would assume as they handle more inventory than are their sales that will pressure that number a little bit, but by no means that's a very enviable number to have. In our case, on one hand, we look we've always kind of looked as how can we get to 100%. Can we get no cash required for our inventories? It's going to fluctuate. This one downturn here has more to do with Thanksgiving than anything.
That 1 week burning a couple of extra days of sales or incremental equivalents of a day or plus of sales, we get that back in order pretty quickly. I think that as we're ramping up expansion that will tend to reduce the number a little bit. But we've always been in the high 80s to very low 100s depending on which fiscal quarter and timing it is. And I don't see a lot of change there. Ultimately, if we can turn our inventory faster, it's going to help that.
If gas has helped it in a perverse way, I mean, when we turn our gas many times a week, forget about many times many, many times a year. So we've got a lot of payables there relative to inventory. So I think that it's going to fluctuate a little bit. The only thing I wanted to point out in this quarter was Thanksgiving had more to do with the reduction there. I think our inventory turns our goal is to continue to turn it faster.
E commerce turns it faster for sure for us, but it's 2.5% of our business.
Your next question comes from the line of Matt Fassler from Goldman Sachs.
Thanks a lot. Good morning. This is Steve Tanal on for Matt Fassler. We were hoping you could comment on the buyback. Specifically, did you guys do any this quarter?
And if so, how many shares did you repurchase? Did
you
And just a clarifying item on the stock expense. I guess you mentioned that some of the increase year on year was tenure. Is that a trend that continues here going forward? And would you expect additional pressure on that line because of it?
That will continue to have some pressure recognizing every time somebody is a given person hits 25%, 30% or I think one very few examples of 35 that's going to hit it although that reduces that amount because it's the same charge over 5 years it just comes sooner. And so it will be bumpy sometimes. When I looked at the 4 quarters this coming fiscal year, the big hit is in Q1. It dips a little bit in Q2. It bips back up in Q3 and dips a lot in Q4 relative to these increases the increase we saw in Q1.
Some of that has to do with the timing of acceleration. The in addition, we've always put again a lot of compensation focus in most of those people's cases or in many of the managers and above, if you will, over half of their annual compensation relates to stock and hopefully stock price performance. But we've tended to try to keep the number of grants each year to a given person at a given responsibility level the same. This is the first time in many years that we've reduced it, recognizing the stock has been very strong, not only this year, but the last several years. So now again, by reducing the grant by an average of around 15% per recipient, and it ranged from 0 for lower grants to 20% for our CEO and Chairman and Board.
That will continue to impact us for a few years here. But I don't I think this was a little bit more of an anomaly this quarter and it will be an anomaly in the Q3 and sometimes it will be a little less. So but overall, I think it will be a slight increase to SG and A in each of the couple next couple of years. Now one thing that will reduce it if the stock next October is at a price lower than the $1,000,000 $1,000,000 or $1,000,000,000 But we hope that goes the other way and it's a little higher expense. So we'll see.
Sure. Thanks a lot.
Your next question comes from the line of Jason DeRise from UBS.
Hey, it's Jason DeRise here. I was getting a lot of questions about why you do so well internationally. And so I was wondering if we can get some color on a few specific markets, particularly in Canada and Mexico. And I guess I'm talking about just top line success. And if you can comment at all about how you're doing with members there?
Yes. Well internationally for the most part well Canada first of all has had a great local economy. It didn't get hit with the financial crisis that we in the U. S. Did.
Much of its economy some of its economy is natural resource based, which has been on a boom for the last couple of years.
But there's more competition in Canada too. And when I at some of your competitors there, it doesn't sound so rosy. So Well,
but there's in our view there's less well, there's no direct competition. There's no other warehouse club operator. And mind you, our warehouse club business is roughly at 11% gross margin. Other forms of big box discount ranges anywhere from the very high teens to in the case of home improvement to the low to mid-30s. But call it the high teens to low-20s for general merchandise big box discount.
So and supermarkets of course are in the mid-20s and up. So at 10 or 11 that's a pretty compelling value proposition when you don't have another warehouse club operator. So I think that helps us a little bit. We don't take a lot of advantage of that. We have a little extra margins.
In some countries, while our labor costs in every country, we view our early labor rates, wage rates are at a significant premium to comparable big box hourly retail. They frankly are lower in terms of dollars in some countries. And sometimes lower the top line purchasing power is not as low. So that helps your percentages there. In some countries like Asia, we have a lot more members per warehouse when we start up.
So we have a little higher membership fee a little higher percentage of membership fees as percent of sales. Again, the only on a macro basis, the one thing internationally in some of these countries that stands out a little higher might be occupancy, but we own 80% of our units. So you don't see that in SG and A frankly a lot. You see a little more depreciation perhaps, but you don't see rent charges. And so all those things have tended to help.
By and large the one in my view the big factor is going to be no direct warehouse competitor. Okay.
And then in Mexico, I guess that's one that's every monthly sales call it's been called out as one of the strengths and we haven't seen that many openings from you. You do have a direct competitor there. So maybe talk about what's working in Mexico?
Well, it's working very well for us. We have I think 33 or 4 units. Sam's has over 100. They have been more very much more aggressive over the years. We believe we know sales wise that our units like the U.
S. Do more volume per warehouse. Until July of 2012, we owned 50% of a venture and operated it with a very good partner Commercial Mexicana down there. They had their own they had some financial issues. And so for I think 5 years leading up to July 12, over 5 years we opened a total of 2 units down there.
We have ramped up our activities and efforts down there. We opened I think 1 this year, but we've got plans for more. And you'll see that come up a little bit. We're not going to go crazy and we're not going to go from 30 to 40 in a year. But we'll you'll see that 0.4 number if you will, 2 units over 5 years increase quite a bit and continue in that direction.
And just one more question about some of the new markets. As you thought about Australia and I guess now Spain, is it more do you think it's more like the Canadian market where if you keep your margin structure in terms of your markups the same as the U. S. Or any other market you compete in that you think you just come in at a wider gap and that's why you picked it? But those markets as the next of the evolution?
Or is there something else about where you can source product that you're bringing back to the U. S? I guess there's some less known synergy about shipping to Asia creates American product and bring product back that you're selling in the U. S?
I like to think we're that smart sometimes. But I think when we look at all again, we look at all countries around the world where we're going to go. Australia, we viewed much like we did Alaska and Hawaii 25 years ago, where the margins and the markups in those two states were dramatically different than the mainland here. And Australia also has a very high price structure. As I understand 2 retail competitors have upwards of 2 thirds of the market share over there.
So we came in with very with our margins, which were even more dramatic over there. But we also look at it as what is the potential. Part of our due diligence, if you will, is in addition to looking at various metrics like population and small business and average household income is really shopping the towns and going over and visiting these places feet on the ground all the way from our Chairman and CEO key merchants and operators and see how vibrant the retail business and how competitive it is. We think that as we've gone into these countries, clearly, we are the extreme value proposition in terms of markup. Again, when we look at Spain, we think the economy is a little better than some of the numbers would portray in terms of unemployment.
But we're there for the long term also and the economy should get better over time. But it's less to do about what products come from there. It's more to do. I mean part of our success as an example in Asia and other these other countries is bringing not only Kirkland Signature items, but in some cases U. S.
Sourced goods that aren't there. And we all think of ourselves sometimes as liking things like Italian leather and cashmere from Europe. And guess what? Some of these other countries like big American stuff at great value in prices. And so we've that's helped us as well.
Your next question comes from the line of Chuck Cerankosky from Northcoast Research.
Good morning, Richard. I'd like to focus on the Q2 to date and how has the sales cadence been trending by week and how do you feel about the mix thus far as the 2nd quarters progress towards Christmas? Well, we don't of course, we don't provide any guidance. Nice try. Well, we the only thing we did say certainly for everybody, not just us in the U.
S, I think the switch of Thanksgiving a week later certainly impacted November reported sales and the November ish month of our Q1. The fact that there's 5 I think 5 less days between Thanksgiving and Christmas less selling days that's certainly going to be an impact for everybody out there, but we plan for it. All right. Thank you.
Your next question comes from the line of Scott Mushkin from Wolfe Research.
Hey, good morning, Richard. This is actually Mike Ottway in for Scott. Thanks taking the questions. Just following up on Chuck's question and kind of getting your take on the sales climate. Aside from the one last week that you talked about, a number of companies have seen their sales slow kind of post Labor Day and you guys have been somewhat immune to this slowdown although that did change a little in November.
Was that due in part to the kind of the one less week as you just mentioned? Or is there really is there anything else going on that you could comment on?
There's not a whole lot we see. I mean, I think we've not really. We commented on slower TV sales. We was very strong a year ago. I think there's a little less promotion out there.
But Yes. That's really there's not a whole lot beyond that. Okay. Our frequency continues to be strong.
Okay, great. And then just following up on that. It sounded like last quarter if my memory serves correctly that you'd be willing to keep some margin if input prices fell more quickly as you maintain kind of your competitive pricing in areas such as food. Has anything changed in the competitive landscape over the last couple of months or what you see over the next few months that could mitigate your ability to capture some of that margin if it's available?
Well, first of all separate sales and margin. We don't really see a whole lot of change in the landscape other than a few retailers opened earlier into Thanksgiving this year. But we don't really see a whole lot out there different. Okay. There's certainly more promotional stuff that I we all read about each day that some of the apparel retailers are doing in non food merchants.
That's helpful. Thanks for taking the questions.
Your next question comes from the line of Charles Glam from Cerna AG.
Good morning. This is actually Renato Bissainta on the line for Chuck. How are you guys?
Good.
Just a quick follow-up on an earlier question. You guys mentioned no buybacks in the quarter and haven't had any since 1Q 'thirteen, it looks like. Can you just maybe talk a little bit about the strategy to return cash to shareholders with regards to the various vehicles that are available to you, whether it be another special dividend or increasing the ongoing dividend or starting to buy back more shares aggressively going forward?
Well, I mean, again, it's more art form than science here. Historically, I mean, we still view our outlook and our opportunities going forward positively. 1st and foremost is to ramp up expansion, which we have done, although we're generating more cash than that. We have historically for now 8 or 9 years raised our dividend every spring, I believe. We, of course, did a big special cash dividend, a little over $3,000,000,000 last December.
And in terms of stock buy, I think you'll see all of the above. There's no we haven't looked beyond where we are now. We haven't we're not sitting around looking at special dividends as an example. I'm sure next spring, the Board will consider what they want to do with the regular dividend. And again, I don't want to be coy, but we'll continue to look at stock buybacks and let you know next quarter what we did or didn't do.
But we viewed all those vehicles as logical vehicles for us going forward. Okay.
Fair enough. And then just wondering if you could perhaps provide some perspective on the U. S. Consumer right now. The general retail environment seems to be more promotional this holiday season, while your approach has always kind of been more in terms of offering everyday value.
So I'm just wondering what you're seeing out of the consumer in terms of his or her appetite for even more competitive pricing? And do you think the generally more promotional environment is affecting your business at all materially?
I don't think it's a fact. We don't we do not think it's materially. I mean the fact is when there's a lot of promotions they work. If some traditional merchants are backed up in inventory, they're going to be very much more promotional. I think as evidenced by our frequency, we still haven't coming in.
And we haven't coming in surprisingly continued increase each year over year. Now that being said, if they stopped at one of these promotions first that's one less thing they may buy at Costco. But we feel very good about our merchandising and our own marketing our merchandise marketing activities that relates to the MBMs, some hot buys. We think that we've got a lot of good things going on. So we're not again, in talking to the senior merchants, we feel quite good about coming out of the season with nothing unusual in terms of markdowns and having clean inventory.
So I think that's in my view good evidence that we're not seeing a big impact out there.
Okay. And then just one more if I may. Can you provide an update and maybe some flavor on the progress of some of your newer merchandising initiatives, whether it be in organics or the upscaling of fresh foods and cosmetics or improved assortments in apparel? Any color there would be appreciated. Thanks.
I think you mentioned 2 or 3 of the ones that would be at the top of the list. I mean, certainly, we've talked about apparel now for 1 year, 1.5 years and and having still double digit increases year over year, 2 years out. Part of that is our own commitment to expanded apparel. Part of that is some brands. Part of that is the Kirkland Signature.
We've got a great Italian wool men's pant that's $49 but actually $39 right now. And we've gone from $100,000 to $1,000,000 pair in the last few years. We've got we're massing that out better. Cosmetics, we've got a couple of units in the L. A.
Market where we're testing some expanded cosmetics. We still would like to get more brands to sell us, but we're pretty scrappy. We're getting a few things in ourselves, but it's still a small business for us. The ticket programs, whether it's for movies or ski vacations or local restaurants, those continue to grow. So again, I think where we have been probably one good thing over the last year or so is some of these non food categories like many from apparel to domestics to housewares.
Those have had some good legs for us.
Your next question comes from the line of Michael Eckstein from Credit Suisse.
Thank you so much and thank you for the update on e commerce. Could we sort of shift another part of e commerce? Amazon announced today that they're going to start home delivery of grocery in the Bay Area. Where are you in sort of thinking about what you do with the grocery business as new threats come into it? And how do you look at that new form of competition?
Thanks. Well, look, we'll keep looking at it. We have no plans currently to deliver to homes, anything other than through e commerce, which tend to be non food items and a very limited food selection, certainly not fresh foods. We enjoy watching the landscape as others are getting into those types of businesses, some of the supermarket chains, Walmart. Google is doing something in the Bay Area as a test with a number of brick and mortar retailers, including us, where they'll deliver through the Google Mall.
They come in and buy it. We do some help in store at a couple just a couple of locations as a test, but it's small and it's a test. So I think there's going to be a lot of changes over time. Getting overnight delivery or same day delivery is great, but ultimately you got to pay for it and we'll see. I think there's probably a market for it, but we'll see how big of that market is.
We don't we keep doing what we're doing in terms of value. If things change dramatically out there, we'll figure it out. But there's a long way to go there first. Has your business in grocery in Seattle where Amazon has been most established been any different overall than elsewhere in the country? No.
Thanks.
Your next question comes from the line of Peter Benedict from Robert Baird.
Hey, good morning, Richard. It's actually Justin Kleber on for Pete. Just want to follow-up on Michael's question there on the online business. Clearly, you guys have a lot of good momentum here. In terms of just fulfillment as it relates to online orders, I mean, it sounds like you guys aren't interested in delivering to homes, but just curious where you stand in terms of developing capabilities such as buy online, pick up in store.
Is that something we should expect within the next few years? Or are these types of flexible fulfillment capabilities just not really important to your core customer?
Well, first of all, we do I mean, a lot of what online is, is that we do is delivering to home, but it's delivering televisions and swing sets and furniture and some apparel and again a very limited amount of shelf stable if you will food items. But that's and then we also do office products and things online to small business. But look 97.5% of our business is in store. It's continued to grow nicely. People actually do like to go out and shop.
And I think that probably when I've been asked the question before even on Amazon Fresh up here in Seattle or some other type of fresh delivery in other parts of the country in New York and what have you. My sense is, is probably that's taking some market share more from what are the other daily or every other day alternatives. It's when you're stopping at the supermarket 2.5, 3 times a week. Again, on an incremental basis, is there something that you're going to get that way then you didn't get a Costco? But if we keep you coming in, you're still getting a lot of key bulk items in our place on the fresh food side as well.
And we know our members, our most loyal members are still getting some of those things at supermarkets and other forms of convenience. And Amazon will be just one of those or other forms of overnight or other delivery. It's different value. Again, it's convenient and we recognize convenience is a value. I think both Amazon and some of these others out there, the quality tends to be good.
The availability sometimes is good or not. But it's you're paying for that convenience. And there's a lot of things that people are still going to buy at our place. And if we can keep you coming in, then we'll get our share of that.
Okay. That makes sense. And just a question on traffic. I think you said up 4.5% in the quarter, been pretty consistently healthy. Is there any material difference you guys are seeing between just U.
S. Frequency versus the trends internationally? Thanks.
It's pretty much the same. It's a little higher in newer markets. But if you ask me what's surprising that the U. S. Is pretty darn close to the rest of the world.
Canada is a little higher than that. And again, as evidenced by a local comp a local currency comp in the high singles mid to high singles. And by the way, some of the frequency numbers change like as we cannibalize as we go from in 2 years from roughly 9 to 18 units in Japan and add 2 or 3 more units into Tokyo, that's going to cannibalize and reduce the frequency of that existing unit.
Your next question comes from the line of Sandra Barker from Montag and Colville. Actually, my question has already been answered. Thank you. Your final question comes from the line of Budd Bugatt from Raymond James and Associates.
Hi, Richard. This is Justin on for Budd today. My questions kind of go back to international and I'm curious if you could shed some light on what other countries similar to Spain exhibit attractive characteristics that you may look to get into in the near future?
It will be a while, but and if I do I wouldn't tell you.
Okay. Fair enough. So moving on to my follow-up. Where do you see the international business going as a percent of total sales eventually and the exposure to the currency fluctuations as a result?
Well, I think look it's going to continue to increase. I mean, 5 years ago 80% of our units openings were in the U. S. Or 75%. This year it will be 50%, 55% will be U.
S. Over the next 3 or 4 years probably a shade under 50%, maybe a 40% to 45% perhaps. So I think over time it will continue to increase. I think the U. S.
Will still be above 50%. It's now around 70%, low 70s. But that will change over time. And again, the relative profitability of these other countries tend to be a little higher than the profitability penetration will probably get there a little earlier. But and in terms of currencies, arguably, we tend to have a currency in the U.
S. That on average tends to be stronger over long periods of time than others. So that will impact us. But as long as it's we'll let you know what that impact is. I don't see that being that will be part of our makeup.
Okay. Thanks for the questions.
Okay. Well, thank you.
There are no further audio questions.
Thank you, everyone. Have a good day.
Thank you. This concludes today's conference call. You may now disconnect.