Good morning. My name is Angela and I will be your conference operator today. At this time, I would like to welcome everyone to the 3rd Quarter FY 'thirteen Operating Results 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 Thank you.
Mr. Richard Galanti, CFO, you may begin.
Thank you, Angela, and good morning to everyone. This morning's press release reviews our Q3 operating results for the 12 weeks ended May 12. As with every call, let me start by stating that the discussions we're 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 our 12 week Q3.
For the quarter earnings per share came in at 1.4 dollars per share, up 18% from last year's Q3 earnings per share or $0.88 For the Q3, total sales were up 8% and our reported comparable sales figure was up 5%. During the quarter, sales were impacted by both gasoline price deflation and by weakening foreign currencies relative to the U. S. Dollar year over year, such that the 6% U. S.
Comp sales increase in Q3 excluding gas deflation would have been 7%, our reported 4% international comp figure assuming flat year over year FX rates would have been plus 7% and total company comps again reported for the quarter at 5% excluding both gas deflation and FX impact would have come in at 7% as well for the quarter. Openings, after opening 14 new locations during the first half of the fiscal year, we opened 5 additional Costco's in the 3rd quarter, 2 in Japan, in Kidekiyushu and Hiroshima and 1 each in Chihuahua, Mexico Wheaton, Maryland and Southampton, U. K. All told that puts our fiscal year 2013 openings through the Q3 at 19 new locations and we now operate 627 Costco warehouses around the world. Between now September 1, the end of our fiscal year, we expect to open an additional 9 locations, 3 in the U.
S, 3 in Japan and one each in the U. K, Taiwan and Australia. Such that we'll most likely end the fiscal year with 28 new openings for the year and that's up I believe from 16 net openings in fiscal 2012. Also this morning, I'll review with you our membership trends, our e commerce activity and of course additional discussion about margins and SG and A. For our Q3 excuse me.
For our Q3, again sales were up 8% from $21,850,000,000 last year in Q3 to $23,550,000,000 Again, comps on a reported basis were plus 5%. 5% reported comp sales results were a combination of a flat average transaction for the quarter. Of course, that included the detriment from both the FX and gasoline, which together represented about 1.5 percentage points. And an average shopping frequency increase of about 5.5%. That compares to a fiscal year to date shopping frequency number of up 4.5%, so pretty strong frequency there.
Cannibalization for the quarter was pretty similar to what it was the prior quarter that negatively impacted sales by approximately 60 basis points. And given our expansion, I don't anticipate much change in that. In terms of sales comparisons by geographic regions, all U. S. Regions were in the mid to high single digit comp increases with Texas and the Southeast being the strongest.
Internationally, expressed in local currencies, Korea and Taiwan were on the weekend of that range with Canada and Mexico being the strongest in terms of comp sales increases. In terms of sales in terms by merchandise category for the quarter, for the Q3 within Food and Sundries, mostly in the mid single digit range with deli, beer and wine and candy being the relative standouts. Within hardlines, overall in the high single digit range, the departments with the strongest results were hardware, lawn and garden and consumer electronics. Consumer electronics by sales were in the mid to high single digit range for the quarter. For softlines, up about 10%, small electrics, housewares, jewelry and apparel were standouts with media as expected continuing to be on the relatively weak side.
And within fresh foods where comp sales were in the high single digit range, deli and produce showed a little better results than the other areas. Moving to the line items of the income statement. Membership fees came in at $531,000,000 up 12% or $56,000,000 from last year's $475,000,000 also representing about an 8 basis point increase year over year. In terms of membership, we continue to enjoy the strong renewal rates and I'll go through that in a minute. Continued increasing penetration of the executive membership.
And of course, as I've mentioned for several quarters now, we're still benefiting from the $5 $10 membership fee increases that began in November 2011 in the U. S. And Canada for new sign ups and in January of 2012 for renewals. Due to deferred accounting treatment for membership fees of that $56,000,000 increase during Q3, a little over half of it was due to that annual fee increase and how that rolls into the book P and L over about just under a 2 year period. And as previously mentioned, membership fee income will continue to benefit from this deferred accounting for that fee increase throughout the Q4 of 2013 and to a lesser extent into the 1st fiscal quarter of fiscal 2014 this fall.
New memberships excuse me, new membership sign ups in Q3 company wide were very strong up 19% year over year. That strong performance is mostly reflective of the very strong sign ups we had in our Asia openings this past March in Japan. In terms of number of members at Q3 end, at Q2 end we had 27,800,000 Gold Star members. At Q3 end 12 weeks later that was 28,200,000. Primary business went from $6,500,000 a quarter ago to $6,600,000 Add ons remained at 3,500,000 dollars And you add those numbers up Q2 end we had 37,900,000 member households and 38,300,000 at the end of the quarter.
With the Extra Spouse card $69,100,000 at Q2 end and $69,900,000 at Q3 end. At May 12, the Q3 end paid executive memberships were $13,300,000 The vast majority of that of course is in the U. S. And Canada. We also offer it now in the U.
K. And Mexico. That $13,300,000 by the way during the 12 week quarter represented an increase of just under $250,000 or about 21,000 additional paid executive members per week increase. Executive members are just over a third of our member base and a little over 2 thirds of our sales. Within the quarter, the I'm sorry on a year over year basis, the percentage of members of being executive members was up about 1 percentage point, which of course would translate into about a 2 basis point hit on margin as with the reward.
In terms of renewal rates, they continue strong. Again, going back a quarter ago business renewal rates were 93.9%. At the end of the quarter, they remained at 93.9 percent. Gold Star went from 88.8 percent, tweaked up a little bit to 88.9%. So total in the U.
S. And Canada, these are U. S. And Canada numbers, was 89.8% at the beginning of the quarter or the end of last quarter and tweaked up to 89.9% at the end of the third quarter. Worldwide, at the end of the second quarter, we were I mentioned last quarter, we were up at 86.5 percent and that's weak down 1 tick to 86.4 percent.
Again, when you open new warehouses, you tend to start off with a lower renewal rate, particularly in countries where outside of the U. S. And Canada. And so that's to be expected. Going down the gross margin line.
Our gross margin in the 3rd quarter was higher year over year by 12 basis points coming in at a 10.67% in Q3 versus last year's 10.55%. As usual, I'll ask you to jot down a few numbers. The columns would be we'll just do the Q3 here, 2 columns reported and then without gas deflation. And the line items would be core merchandising. The second line would be ancillary businesses.
The 3rd item line item would be 2% reward. The 4th item would be LIFO. The 5th item would be other and then a total of course. So again going the 2 columns going across, the reported core merchandise margin was down 5 basis points and without gas deflation down 11. Ancillary businesses were plus 6% and plus 5%.
2% reward was minus 2% in both columns. LIFO was a credit, so plus 6 in both columns and other which is a non recurring lawsuit recovery, which benefited margin this quarter by 7 basis points, so plus 7 and plus 7. If you add the 2 columns up, the first column of course reported comes up to the plus 12 basis points that we reported and without gas deflation plus 5. The core merchandise component again was a minus 5 on a reported basis and a minus 11 excluding the benefit of gas deflation. The 4 core categories food and sundries, hard lines, soft lines and fresh foods each showed lower year over year gross margin percent as we continue to invest in price both in our domestic and our international operations.
And as I've stated before, this is Costco playing offense. It's driving sales, member shopping frequency, member sign ups and renewals and market share. Ancillary business gross margins, as I mentioned, was up 6% or 5% without gas deflation basis points. Margins were stronger in the 1 hour photo, mini labs, the optical and the hearing aids, slightly lower in pharmacy and gas was slightly positive. The impact as I mentioned earlier on the executive membership increased
penetration was minus 2 basis points.
And as I mentioned, LIFO, the We recorded $8,000,000 or 3 basis point pre tax credit during this quarter. And lastly, other as I mentioned is a non recurring legal settlement that we received in Q3. Moving to reported SG and A. Our SG and A percentages Q3 over Q3 were lower or better reported 3 basis points coming in at a 9.82% this year versus the 9.85%. And again, the two columns reported and then without the gas deflation.
And 5 line items core operations, central, RSUs, quarterly adjustment in total. In terms of core operations, the reported piece was plus 2 basis points. Without gas, it would have been plus 7 or better and a plus means lower or better. And so we had 7 basis points of positive there. Central was plus 2 and plus 2.
RSUs was minus 1 and 0. Quarterly adjustments actually was 0 and 0 such that total we reported a +3 or SG and A lower by 3 basis points. Again on a more in our view on a more normalized basis it would have been lower by 9 basis points if excluding the impact of gas deflation. In terms of a little editorial on SG and A, again, the reported 3 excluding the deflation would have been better by 9. The core operations component was better or lower by 2 year over year and again 7 by excluding gas deflation.
Within core, our payroll as a percent of sales improved year over year by 4 basis points. Total payroll dollars actually increased about 6.5% in the quarter compared to the 8% total sales increase. In addition to improvement in payroll, we were able to leverage benefits including health care and workers' comp. They were leveraged during the quarter by a few basis points. Actual health care costs in the U.
S. Which is the key driver of this area eased a little bit up around 6 percentage points in dollars during the quarter. That's down from low double digits in the past couple of quarters. Our central expenses as I just mentioned was better or lower by 2 basis points. That's by the way notwithstanding the fact that the ongoing IT modernization costs which I've talked about in the last few quarters.
During the quarter that represented about a hit to SG and A or higher SG and A by about 5 basis points. So notwithstanding that impact of minus 5 in the central category, we still showed a lower by 2 there. So overall, I think pretty good expense control and certainly helped by strong sales results as well. Next on the income statement preopening $6,000,000 last year $10,000,000 this year. We opened 4 openings net openings last year in Q3 and 5 this year.
All told operating income in the Q4 was up $100,000,000 or 16% from $623,000,000 last year to $722,000,000 this year. Below the operating income line, reported interest expense was $6,000,000 higher year over year in the quarter, coming in at $25,000,000 versus $19,000,000 a year ago. If you recall last year on March 15, so about a little over a month into the fiscal quarter, we paid off a $900,000,000 fixed rate 5.4 percent interest debt. This represented about a $4,000,000 reduction in interest bank year over year in the quarter. Offsetting that $4,000,000 reduction of course was our December offering of $3,500,000,000 debt offering in late November of senior notes with an average a weighted average interest rate of just under 1.25%.
For the 12 weeks that's about $10,000,000 increase of course in interest expense. So the 4 reduction and the 10 increases is the 6 net increase that we're talking about here. Interest income and other was lower year over year by 3 $15,000,000 this year versus $18,000,000 a year ago. About 2 thirds of that $3,000,000 delta is actual interest income being lower this year, coming in at $9,000,000 this year compared to $11,000,000 last year and other rounded to the last $1,000,000 both relatively similar numbers within the interest income and other line. Overall, pre tax earnings were up $90,000,000 or 14% from $622,000,000 last year in the quarter to $712,000,000 this year.
In terms of our income tax rate, very close to being the same in both 3rd fiscal quarters, 34.81% this year, down just a tick from 34.84% last year, so essentially the same year over year. Overall net income was up 19% from $386,000,000 last year to $459,000,000 this year. While the balance sheet is included in this morning's press release, a couple of items I usually point out. Depreciation and amortization for the quarter totaled $221,000,000 and that brings year to date for the 3 quarters to $651,000,000 If you look at the balance sheet, of course, if you look at accounts payable as a percent of inventories on a reported basis, it was 104% a year ago and 102% at Q3 end. That includes payables for things other than merchandise, most particularly all the construction and expansion activity we got going on.
So if you look at just merchandise payables to actual inventories, it was 92% last year and a tick down at 91% this year. In terms of average inventory per warehouse, I think in the last several quarters on a year over year basis, we've generally shown numbers in the $600,000 $700,000 $800,000 increase range or 5% or 6% or 7%. This quarter on a year over year basis it was up $400,000 or 3% coming in on an average of $12,200,000 versus $11,800,000 a year ago. Just over half of the $400,000 increase related to higher levels of merchandise and food and sundries scattered among various sub departments. About $100,000 was consumer electronics with a balance spread over a variety of other non foods departments.
Overall, inventory is in good shape. As well our mid year fiscal inventories, which were taken back in January February were our best ever. So we continue to do well in terms of in our view in terms of inventory control and how that relates to operations safety as well. In terms of CapEx, in Q1 we spent $488,000,000 in Q2 455,000,000 and the quarter just ended $435,000,000 so to date just under $1,400,000,000 Our estimate for the year is right at $2,000,000,000 and that of course compares to fiscal 12 expenditures and CapEx of $1,500,000,000 And of course reflects the fact that we're opening quite a few more units than we did a year ago. In terms of Costco Online, we currently operate Costco e commerce activities in the U.
S, Canada and more recently in the U. K. For the 3rd quarter sales and profits were up nicely over last year. Q3 e commerce sales were up over 20% both
in the U. S. And Canada. And as
I mentioned Costco UK started less than a year ago. In terms of expansion, and as you recall in the last full fiscal years in 2011, we opened 20 net new units in 2012 2016. To date for the 1st 3 quarters this year 2019 and our plans are to open 9 in the quarter. That would put us at 28 for the year. So as compared to fiscal 2012's expansion of about 3% unit and square footage growth, this year's 28 units on a base of the beginning base 608 would be about 4.5%.
New locations by country for the year of the 28, assuming the 28 would be 13 in the U. S. And 3 in Canada, 3 in the U. K, 7 in Asia, 1 in Taiwan and Korea each and 5 in Japan and then as well one additional unit in Australia and 1 in Mexico. As of Q3 end, our total square footage was 89,709,000 square feet.
So again, an increase of about 4.5% year over year. In terms of common stock repurchases, as you know, we purchased a small amount in Q1 about $34,000,000 worth. And that's all the activity we've done so far. We did no additional repurchases in the second and third quarter. In terms of dividends, our current quarterly dividend stands at $0.31 a share that was recently increased at the about a month ago, up 13% from the previous 27.5 percent share.
This annualized number of $1.24 per share represents a total cost of the company of about $550,000,000 a year. These quarterly dividends of course are in addition to the $7 per share special dividend, which totaled about just over $3,000,000,000 that we paid out to shareholders back in December of 2012 or in Q2. The usual supplemental information will be posted on the Costco Investor Relations sites a little later this morning. Lastly, our scheduled earnings for Q4, which is the 16 week quarter that ends September 1, it's currently planned for Wednesday, October 9. And that will again be for the 16 week Q4 ending September 1.
Mind you last year we had it was a 53 week year and therefore a 17 week fiscal 4th quarter. So that was about 6% more days in the quarter if you will. With that, I will turn it back to Angela and be happy to answer any questions.
We have a question from Deborah Weinstein. Good morning, Richard. Thanks so much.
Hi.
Hi. Can you talk about your frequency which was obviously very strong in the quarter on an absolute and relative basis? Can you talk about any unique drivers behind that?
Not really. I mean, we're not doing anything different other than continuing to be aggressive on pricing. And if you haven't tried our rotisserie chicken, the new hotdog in terms of 4.99 chickens. We haven't changed there's not been a lot of difference year over year in any of the MVN mailers, the coupon mailers. So not really.
We certainly are getting our share of free press out there, whether it's the late night talk shows or the morning business shows. So I think we certainly are getting a lot of but that's all anecdotal of course. But there's nothing specific that we have done different of late.
Okay. And then can you also discuss your inflation outlook as it stands right now?
Talking to the buyers, there's not a lot of anticipatory inflation with the exception of some aspects of protein. They continue to see inflation in some of those items beef, poultry and pork. Some of the what we call limited resource commodities like nuts because of increased world demand with increasing the increasing middle class if you will Those have spiked up. With a few with those few exceptions, there's not a lot. I think to date, we are if you look if you use as your benchmark the LIFO calculation, which looks at what our U.
S. Inventories by item at cost were and how those costs have changed as of from the beginning of the year to now. Again, it's an ever so slight credit in each of the this quarter and the last quarter. I think together it's if 100.00 percent was the base as of the beginning of the fiscal year as of Q3 end, it was 99.41 percent, so 6 tenths of a percent lower cost inflation. Now that's again that's one measurement that's easy to look at because it's basically our U.
S. LIFO inventory counts. So but that wasn't that discernibly different than a quarter ago. But we don't really see a whole lot of trend upward beyond those small areas that I mentioned. And then gas is always that who the heck knows.
Right. Okay. And then on the executive membership side, which has obviously been incredibly successful in the U. S. Beyond Canada, the U.
K. And Mexico, how should we think about the growth there?
Well, there's we continue to look at it in all countries. I think we seem to like it. It works for us. Generally speaking, we like to have a core number of locations there because and start off with some small number, but more than 1 or 2 of services that we can provide under the executive member format. So the member services where the executive members in some cases get a better deal on those on some of those services.
So we'll continue we continue to do it. I would guess over time we'll continue to roll it out to other countries. I mean again the $13,300,000 I think all but about $400,000 that are U. S. And Canada, which of course are U.
S. And Canada is probably 80% roughly 80% of our company in terms of sales or locations or what have you and well over 95% of the executive member base. But that's because it started here.
Okay, Great. Thanks so much and best of luck.
Thank you.
Your next question comes from John Heinbockel.
So Richard a couple of things. The price investments, do you is there more of a skew toward consumables or no it's more broad based than that?
It's more broad based than that. Given just the sheer volume of items, what we need to make sure is we don't want to spread it out. You've got to be wow if you will on items and not just spread it across all categories and all items. And so we try to do a pretty good job of that, but it's spread among categories. I little tongue in cheek talked about the chicken.
I mean as protein prices go up, our costs go up and we've been very successful, we think in driving sales. And if we can get you into go to the back of the location and get that great chicken for $4.99 you're going to shop do other things. So but it's across the board.
So the idea no matter what department you're talking about, the idea here is not so much where you can get your costs down, but where you can make a clear impression on the customer perception wise?
Sure. I mean ultimately it's an art form and it's merchandising and it's across the board. Sometimes we work with vendors and sometimes we'll rotate items in and out. It's not unlike what we do historically on the fence. You're always going to see or end caps.
You're always going to see some try to create excitement as you walk down those larger aisles down the main aisles.
Do you think as you guys look at it, do you think the price gap has changed or widened versus your various competitors or no? It's about what it was.
I think it's been pretty similar over the last few years. We don't see any dramatic change in it. If anything, we tend to sincerely play offense and irrespective of what's going on out there. I mean, you're always going to see what be it our direct competitors of Sam's and BJ's or other category dominant retailers or you're always going to see items and departments. But for the most part, when we do our weekly by location market baskets on key competitive items, those ranges in our view of our competitiveness is pretty similar to what it has been, if not a little higher, a little better.
More favorable to you?
Yes. But I don't think Okay. And
then just two last things. The is there about $30,000,000 left of incremental benefit on the membership fee increase? Is that about the residual number?
Yes. It has a 3 in it. It's a little higher than 30. It starts with What's that? It starts with a 3, but it's higher than 3.
Okay. And then lastly, when you look at Kirkland, where are you roughly now at SKU count? And do you think as a percent of club SKU count that inevitably goes higher? And I know you don't want to force it on people, but obviously there's you continue to find value added items. Does that just go higher over time as a percent of total if you have?
Yes. Absolutely. I think it's still in the low to lower mid-20s and but it keeps going up incrementally. Part of that is the increased penetration of some of those items overseas where whatever extreme value we are, it's even more extreme on those kind of things. I mean, we have items that do $2,000 $3,000 $4,000 a pallet position in the U.
S. That do 5,000 and 10 times that in some of the Asia countries is simply because it's a great value on great stuff. And we can even be more extreme over there so versus brands. And so yes, we continue to look at different areas. And we've in this past year, I know we've put it on some women's exercise apparel activewear, which been very successful.
We continue to put it on I know we have several men's summer items, whether it's shorts or what have performance polo shirts and so all those types of things. So it's not just it's food and not food. I don't see any discussion of putting it on a television or anything anytime soon. But certainly there's a lot of categories. All the low lying fruit, paper goods, water, those are all done.
But probably the lowest lying fruit in the last few years was probably the disposable diapers. But there's lots of things. It always amazes me when individual food items, the cashew clusters or something innocuous like that is a $15,000,000 item $25,000,000 $30,000,000 a year later. And all of a sudden you've got those types of things out there. So there's I think it will scale slowly through the 20s and upward.
But it's not like we have a concerted effort to try to get to a number by next year.
Yes. Okay. Thank you.
Your next question comes from Paul Trussell.
Good morning, Richard. Just with the price investments, you've had a very consistent message over the past few quarters, past few years really in terms of Costco being on the offensive in terms of making consistent pricing investments. So should we look at the core being down this period compared to being more flattish the past two quarters as a signal that you this incremental, but this is in addition to what you've kind of done over the past few periods? Should you go deeper or wider? And how should we think about the next few quarters?
Yes. I don't in all honesty, I don't think we're that smart about it strategic about it. I think that our strategy is to constantly drive it downward. And the more we can do that, the bigger gap we have with our competitors and the more our traffic grows and the more our sales grow and good things happen. I remember somebody a few years back asking what happens if a month into a fiscal quarter you're not doing well?
What are you doing? We say we don't change what we're doing. I think that given our strength of late, we look at it and say this is a good time. When we look at certain countries where we're very profitable relative bottom line as percent sales relative to the U. S.
And to Canada and Canada is a little more than U. S. We say let's just make sure we're our own toughest competitor when things get too good. And so, again, I can't suggest that it's a trend. I think for 3 or 4 quarters prior to the last three quarters, so all of last fiscal year on comparing those quarters to their respective comparable quarters a year earlier, it was down and we were talking about investing in price.
And then the last quarter or 2 was a relatively flat. So does that suggest it's going to continue to be flat? Well, Q3 says no, it doesn't. But I don't think that you could use that as a trend line either way. We're going to continue to do things to drive our business and we're fortunately in a positive way.
We'd rather be aggressive on pricing and see the benefits of SG and A, which always has been a challenge for us. And but margins are not a problem.
And the on the international is becoming a bigger penetration of your business overall. And currently that is that segment has a few 100 basis points higher margins than the U. S. Is that sustainable? Or is there anything any changing dynamics that you see that might alter that?
Higher meaningfully higher, yes. Is it sustainable at this rate? Probably not. I mean, we know ourselves that as we take a $300,000,000 unit in Taiwan or Korea or Japan and put a new unit 15 mile or 10 miles away, we'll do 450 next year between the 2, but it's going to hit the margin. It's going to hit the P and L for a couple of 3 years.
So part of this ramp up overseas is going to impact that a little bit. And as we've constantly been reminded originally by Jim and now you can be assured by Craig is let's not have the illusion that we can just continue at these strong numbers. We want to again, I think some of what you saw and a little bit of margin reduction year over year this quarter, it was a little more so internationally. And part of that is the things I mentioned a little bit of the increased expansion. And sitting in the meeting and saying, guys, let's not get let's these numbers are growing pretty fast.
Let's make sure we're giving back price in terms of price. So it's our doing.
That's helpful. Thank you.
Your next question comes from Sandra Barker.
Hi. This is Richard. I just wanted to clarify on the price investment internationally,
don't you
have less competition there? I'm just wondering, I would imagine you had a bigger as you talked about the extreme value on the some of the private label, I would think you already had a very large price gap versus the competition. And I had another question also.
We do. But again, if you look at a company that has a pre tax return on sales in the 3 ish range, very high 2s or 3 or whatever it is now. And then you look at that U. S. Column and extrapolate from the operating percentages that it's in the low in the low to mid-2s in the U.
S, better in Canada and a lot better in other countries. We when it gets we're very good at looking at something saying guys we're making too much here. And so we want to keep driving in the right direction.
Okay. And then also just some illumination on buyback and how you think about that in the future since it seems to have dwindled away this year?
Yes. I mean, we look at it as between the regular dividend the special dividend and even assuming the $34,000,000 just the $34,000,000 in stock buyback this year. We still essentially between the 2 given back about a little over $3,500,000,000 to shareholders this year virtually almost all in the form of dividends. But we look at both and over a longer period of time, we would expect to continue to buy back stock as well. But again, we don't suggest it's going to be a certain number.
Clearly, given the relative strength and the fact that importantly the fact that we did the special dividend. We don't feel any pressure exterior pressure to just do it on a regular basis. We'll continue to do that over a period of time though.
Okay. And any commentary on any impact from Target in Canada? Just
Really no. And not to without disrespect, there's really not been in our view a lot of competitive now our margins in Canada have come down. And again that's more us than that. Certainly as I mentioned over the last year and a half, we've been preemptive knowing that they're coming in. But we're also have had very strong numbers.
Our local currency comps up there are in the very low double digits in local currency. So it's a strong economy. We're doing very well. And again, it's one of those things where Craig in the budget meeting says, guys, we're getting let's make sure we're watching let's not close our eyes and turn around one day and find out that we're not as special and let's get pricing back where it needs to be. And what that means is we're making good money up there, it's growing well.
So let's make our competitive posture stronger. But a lot of it has to do with us and not really a lot of promotional pricing issues that from what's going on with them. And keep in mind, they haven't opened a lot of unit shed either.
Sure. Thanks.
Your next question comes from Joe Feldman.
Sorry, guys. I was just on mute. So just wanted to drill down on inventory again. I know you had mentioned you feel like you're in pretty decent shape with inventory. But I mean are there areas where you could be adding more or maybe where you're actually missing a sale because of not having the right product or just opportunities within inventory management I guess in assortment planning?
Well, again, it's part science and a lot of art for it. As you probably know over the last 10 years, we have consciously taken down reduced our active SKU count in the warehouse from 41,421 200 down to 3,700, 3,800. And that's in our view driven sales because we can double mass out something versus having taking out an item and replacing it with more of the other item. In that double space, you'll do more than you would have done with 2 items. So it's always that, if you will, that intelligent loss of sales.
I can only tell you that in the 26 days a year that we spend in a budget meeting reviewing half a third of which is merchandising discussions and part of the operations discussions are also merchandising discussions. I hear many more comments from Craig and others of when we have too many of something, 5 varieties of cordless phones or whatever it might be. So if anything, we continue to look to see how we can reduce our selection a little bit. Now we're also mindful it's the buyers and the operators responsibility as they're visiting competition is identifying what they perceive as hot items not only at Sam's, but at other forms of retail be it Home Depot or category dominant retailers or specialty retailers. And so we're constantly trying to figure out what we're missing.
Generally, it's more of the opposite though. What do we have too much of too much selection of?
Got it. Thanks, Richard. And if I could ask one more. Sort of a about the traffic trend which has been just so strong for so long. I guess I'm curious I mean how do you keep sustain it?
How it keep driving? Because people are coming in, it seems like at a pretty frequent pace, 4%, 5% every month. And it's better than grocery. It's better than most anybody else out there right now. And is it just the fact that you have a membership fee, so people feel like, well, I may as well get my money's worth and go to Costco?
I mean is there anything how do you sustain it I guess? And I know it's a tougher bigger picture question, but just any thoughts on that?
Well, first of all, this is one person's view here, but I certainly believe that 2 big things that have occurred over the last 4 or 5 years in this bad economy is gas prices and the fact that 10%, 11% of our sales are gas and that clearly drives no pun intended drives people into the parking lot. And 30 or so of those for every 100 that pump gas go to shop. Clearly, even if one of those 30 is incremental, that's good aside from having a profitable gas operation. The other is Fresh Foods. All this is it, as I've read is that when the economy got hammered, people laid out less not just the steak houses for business travel, but families with neighborhood restaurants.
While it's come back, it's not back to where it originally was. And clearly, our strength in fresh foods, I think, has helped a lot. That again is a driver, in my view, of more frequency. And I get back to the but the mission of constantly coming up with wow items and getting brands that refuse to sell us to sell us and diverting more of stuff when we they won't want to sell us if we can get it. All those things are what we're about.
And again, I'm probably a little biased in my antenna or a little stronger in looking, but it seems like every day there's something thing on television about us, whether it's a national talk show or a news item or a late night talk show you name it. That's all that stuff I think is reinforcing. The last thing of course is the ramp up and expansion outside of the U. S. And Canada are most mature markets.
Clearly, you have higher frequency numbers in newer markets. So that's got to help a little bit too. I don't think that's as big a factor because this is still a small percentage of how many total units we have. So I think the bigger factors are that constant lowering of price and that constant and the gas and the fresh foods. And look as we've all seen what's happened of late with some of the relative strength in companies like Home Depot and Lowe's of the housing market.
I think I mentioned some of the category areas, merchandise category is in non foods where we've been strong. So we get a little benefit there as well. But that frequency has got to be more that I have no illusions that it can sustain itself. Seemingly for 20 years prior to late 2,008, on average, the number was in the 1%, 1.5% range and ranged generally from minus 1% to plus 2%, with the exception of a couple of outliers based on how Easter or July 4 or something falls year over year. So we're in uncharted territories.
I remember a year and a half into this recession after coming having a maybe a 4 for all of calendar 2009, reminding people that if we're 0 in 2010, that's still a 2 and a 2 for 2 years and not ever thinking that we could accomplish what we have. And so we certainly benefited by our model and perhaps by the demographic of our member and by the other things I just mentioned.
Got it. That's very helpful. Thank you so much for the response and good luck with this quarter.
Your next question comes from Chris Horvers.
Thanks. Good morning. So I wanted to follow-up on the international margin side. So the ramp and expansion understanding that you're investing in price internationally because you're more profitable there and you're not resting on laurels and also identifying the base. And that brings down existing profitability.
But what's the other side of it? Does opening up new stores that are inherently more profitable relative to the domestic? Is that a net positive to margins for the company?
I'd have to honestly pencil it out. Probably a little, but I'm shooting from hip on that one.
Okay. Okay. We can follow-up. And then also a lot of retailers have talked about pressures from the weather and variability to the weather. You had a great quarter on the traffic side and on the comp side.
But did you see much variation around whether you saw strength in lawn and garden? Do you think that was it would have been better ex the weather impact suggesting that maybe there's some pent up demand here that could flow through?
Fortunately, we are in I think 41 or 2 states in Puerto Rico in the U. S. If you will. And so when the weather was bad in one part of the country, it wasn't bad in the other part of the country. Clearly, I know I don't have the numbers in front of me, but I know over the last few months, when the regions got up and spoke, a couple of some of the regions had incredible strength as expected when expected seasonal items like seasonal clothing and seasonal patio furniture and what have you, Whereas other regions it took it came a little later.
I know that I don't have the detail in front of me, but if there's a little pent up demand, it's in a little bit of the a few of the regions and some of it's already happened in the Q3. So maybe there's a little bit there, but I don't see a whole lot of that.
So is that similar vein that the high exposure to California buffered your weather sensitivity?
California was again all the as I mentioned earlier, all the 8 regions in the U. S. Were pretty good, but they were actually at the low end of that range. I think I said mid to high single. Okay.
It's still positive, but no.
Okay. And then final question. You mentioned health care costs up 6% year over year versus low double digits in the past quarters. Is that what's changing there? Are you doing something?
Is this in anticipation of Obamacare next year and that's flowing through early? And how what's the outlook there? Thanks.
I wish I knew. For the 12 week quarters and when I look each week at just what we pay out in U. S. Health care costs, which is the thing that drives that line item, It generally speaking was pretty consistent in the mid to little higher single digits. And so we didn't have any outliers.
Sometimes when you see a week or 2 that's a 3% or 5% increase year over year, the next week's 12 percent or 14 percent. And so the average was still 10% or whatever X is. And there's not a lot of new things we're doing. We're doing a little couple of little things, but nothing that would have driven this. We're hopeful that it will continue, but we still budgeted up a little bit higher than Q3.
Thank you.
Your next question comes from Dan Binder.
Hi, it's Dan Binder. A couple of questions. First, any early view on how real estate is lining up for next fiscal year? Secondly, just curious if the you commented on the seasonal business being lumpy. Was there any kind of gross margin hit related to seasonal businesses in the quarter?
None. Nothing out of the ordinary. And the latter question. What was the first question? Real Estate.
Real Estate. Yes. I mean our best guess right now is right at that 30 number with half or a little over probably a little over half of it outside of the U. S.
And of that 30 number, I mean how many are secured or definitely going to fall into the year versus what might still be at risk?
I think there's more than 30 on the list and you kind of just use a little guesstimate by location and we come up with a number that's close to 30. So I it's a little too early to tell. It could be if you say ask me for a range, I'd probably say 3 less than 5 more than 30 27 to 35, but I'm guessing here.
Okay.
But 30 is probably a good number.
And final question on membership fee growth. Recognizing due to the accrual accounting and the sort of the tail end here of benefit that you're getting from the membership fee increase, When we take that into account and the 1 less week in the quarter, any color you can sort of provide from the 11.8% growth rate that you were at here in Q3?
Right. I mean, I think if you take out the deferred accounting over the last few quarters, the number is in the 6% to 7% range probably in dollars. And when we look at Q4 last year, 17 weeks versus 2016, 1 17th is about 6 percentage points. So I just I have no I don't have any Q4 estimates in front of me, but just those two simple math items would tell me that anything at or slightly above 0 would be expected, but I haven't looked at it.
Right. Okay. That's what we're caught up with Tim. Thanks.
Your next question comes from Mark Miller.
Hi, good morning. Richard, I
think you said payroll was up 6 percent -plus in the quarter. And so if your dollar per hour wage increase is, I think around 3%, that's implying your hours worked per club would be flattish. Is that correct? And if so, how are you managing that with the mid single digit traffic increase? I know you've got a signature change you put in with Amex, but what are the other key initiatives that are helping you here?
Cutting over time, I think has helped a little bit. I've used the word focus before. The operators I've also talked about and people asked me a year ago, what's different about Craig? I mean, Craig it's not a question of what's different about Craig versus Jim, but Craig would say himself his strength is he grew up in operations. So I think there's focus on that.
Yes, SKU account management going from X to a lower number means you're messing out more stuff and you're I think it's all the little things. There's nothing huge. I mean your comment on the signature thing capture certainly yes. Can that shave off second set of transaction all those things help. But a lot of it is the pallet presentations and what we do.
Okay. Thanks. And then can you give us some perspective on your efforts to get global pricing terms with suppliers? I mean, are you getting traction on this? I guess, if it's in the numbers, it doesn't look like we're necessarily seeing it yet.
Yes, we are getting traction. It's still not material to the size of our company. But again, every month when the country managers, the country heads from each country are here for 2 days, part of their presentation is and part of their off-site additional meetings with our merchants here is getting on a global basis our buyers here to work with multinational vendors to make sure we're getting better pricing and in some cases better availability of certain items. It's a process.
Thanks. Final question. What was the one time legal settlement?
It's I can't say what it is, but it was it's a few year period of time where we picked up money that totaled about 7 basis points in the quarter. It was good, but it's non recurring.
Better plus than minus. Thanks.
Your next question comes from Brian Nagel.
Hi. It's Brian Nagel from Oppenheimer. I wanted just to focus on unit growth. I think a couple of questions ago someone asked about the number for next year. And it sounds like you're intended to open new units at a pace next year consistent with this year.
The question I have is, what's allowing you more from a I guess stepping back philosophical standpoint, what's allowing you now to more rapidly open units? Is there something change in the marketplace or the decision internally to do it? And as we look at beyond just this year and next year, are you is the company committed to continue to open units at kind of a longer term pace consistent with what we've seen this year?
To answer their last question first, yes. We've got more people literally more real estate people on the ground in more countries. We the pipeline has taken time to fill up, but it's filled up. Once we decided if I look back a few years ago when we had just as an example in Korea, Taiwan and Japan, 6 or 7 units in each of Korea and Taiwan and maybe 8 or 9 in Japan, we've ramped that up. And so we're going from opening between those three countries a few years ago opening a couple of units a year between the three countries to opening 5, 6, 7, 8 between those three countries a year.
So but again that's partly that conscious effort both in the real estate area under Jeff Brotman and his people and Craig also pushing that. Yesterday and today, they're both out looking at sites in different parts of the country.
Okay. Well, thank you.
And we believe that we can our goal over the next 5 years, I think I've said is to it's about 150 buildings. And if we can get a little better than that great, but that's certainly a good starting point given where we've come over the last few years.
So I guess, Richard, just a follow-up on it. So as you look at it, Kevin, we talked about
it, it seems like if you go
back a few years, growth, the unit growth numbers didn't hit your targets maybe what investors were thinking and now you're showing a faster growth. So it sounds to me like you've kind of made the internal decision to grow faster. Is there to any extent is it a competitive response? Are you seeing a need to jump out in front of a competitor? Or is it just internal decisions?
Well, sometimes it's competitive only from the standpoint that as we look at our success in other countries, we have a competitor in Korea. We recognize that. We want to we're successful in several countries where we're the only one we want to do more of that. We think that if you look back at the history of Canada, there was a competitor there that chose to not stay there. And I can remember the time when we had probably 55 or 60 units in Canada and felt one day we might have 75.
Now we have in the mid-80s, high-80s and we think that we can get to a little over 100%. So we'll keep doing that to drive our business. But so it's not a react mostly it's not a reaction to others. It's a reaction that we're doing well and we want to keep ramping it up a little bit. And you have the decision to ramp up as an example internationally given there is a longer timeline to get a unit open many times was really made 2 or 3 years ago and it's now coming to fruition this year, those efforts.
Got it. Thank you.
Your next question comes from Jason Deris.
Yeah. Hi. It's Jason Deris at UBS. I wanted to ask a bit more about the membership fees. Could you maybe share a little bit actually about how the membership fee grew without FX for this quarter, an organic number?
And then if you could talk about how membership grew internationally versus U. S. That would be helpful.
Well, again, I think the 56 or whatever $1,000,000 number of increase, a little over half of it was the deferred accounting. So I think if you take that out and I think it was a 12% dollar increase so that would imply about 6% rounded up to 6% dollar increase ex that deferred accounting. Overseas, I don't have the detail in front of me. My guess is it's higher in local currency, but it was a little lower because of the FX of the fact that on average on a weighted average foreign currency is weakened relative to the dollar. So when we convert everything to reported U.
S. Dollars, it was actually a slight negative. So you just made a light bulb just went off. Actually the underlying number ex deferred accounting in local currency probably would have been a little better. But again, the numbers we speak about when we showed membership income was including the detriment of weaker FX.
Right.
And so I mean the FX would be similar to the FX impact you see on your net sales. Is that right or
Sure. Yes. Yes.
And then I guess understanding the members from another point of view in terms of the traffic, obviously you guys give an all in number. Do you have how international traffic is actually doing versus the U. S? I know you alluded to it that it's been good and there's been
It's actually very similar to the U. S. But we're not going to go down the road of detailing it, because I always find as I try to put more out there then I got to give it for the rest of my life.
You could just put it all out in one statement right at the beginning of the day, but maybe we can talk about that later. But the other question that I have in terms of this international versus U. S, obviously U. S. Fee increases are very invisible to most of the investor base, but what's happening elsewhere in the world in terms of fee increases?
And anything in the pipeline there?
We're driving the business. Historically, we've shown that we're prepared and we will increase fees, but we'll take that one step at a time. Again, I don't want to suggest that we have a plan to do it tomorrow or a year from tomorrow. But I would guess over time you would expect to see fees continue to improve to go up. But then recognize what we do when we have increased fees, we get more competitive.
Right. Makes sense. Okay. Thank you.
Yes.
Your next question comes from Bob DeBruel.
Hi. Good morning. I guess just one question that I have. Over the next several years, I think you talked about like 150 clubs over the next 5 years. How many do you think you can have in the U.
S? And how many of those clubs would you expect to be in the U. S.
Of the 100 and 50? The 150. Well, I think on our cheat sheet from last year, it was 55 out of 150 were in the U. S. And my guess is it will be a little bit more than that.
And that if we open what we say we're going to open this quarter, we will end the fiscal year with 6.30 6 units of which 4 52 would be in the U. S. And if you add 50 or 55 to that you're at 505 or 510. And my guess is the 5 years after that, it's not 50 more, but it's 20 to 30 more who knows? So I think what we have found over almost 30 years and what I assume we'll continue to find is we'll always end up opening a few more than we thought were possible.
Okay. Thank you.
Your next
question comes from
Sean. Can you hear
me? Yes.
Okay, great. I guess on the international front, just on you talked about Mexico a little bit and that does sound like one of the strengths in the international business. Can you just give us a little bit of an update on that business and how that market is performing? And is there an opportunity to grow a little bit more aggressively in this market? And how the productivity is doing in those boxes today?
We're for the 5 years up till when we acquired our the remaining 50% interest last July, I think in 5 years, we opened a total of 3 units, so less than 1 a year. I think this year, we're opening 1. And my guess is I'll quickly go to a few, a couple of 2 to 4 who knows. But we'll ramp it up. Keep in mind, we have I think 32 or 33 units there.
Sam's has well over 100 and we think there's plenty of opportunity down there. It's very profitable. And expressed in dollars, its average unit does about half the dollar volume because of just the relative currencies, but it's growing nicely. Its bottom line is much stronger than the company as a whole, but so are a few other countries in terms of the bottom line with a much stronger top line. So Mexico is great.
It's been a healthy growth for us. And if anything for unrelated reasons, we had grown a lot for those 4 or 5 years and we are starting to invest more now.
Okay, great. And then I guess from a category perspective, consumer electronics has been an area of strength. I think it inflected about maybe if I'm remembering this I guess, I guess can you talk about the strength kind of what's driving that in this category? And then is the opportunity still there moving forward? And then is this an increase in the SKU or is this more ASP related?
Yes and yes and yes. It's there's a little bit more presence out there. We have done very well not only within TVs, but higher end TVs, the 60 inches 80 inches TVs and the smart TVs. We've also done well at a much smaller scale dollar wise, but on cell phones and doing much better in things like tablets because we're selling some. We've got all but one of the main brands and names out there and those are really starting to pick up for us.
But TVs, dwarfs, everything else just ensured dollar volume. And again, they were up low double digits this month. And I think in the last year have probably been up in the probably on average in the mid to high single digits in dollars.
Great. Thanks.
Your next question comes from Peter Benedict.
Hey, Richard. Just back to the traffic question. Can you give us a sense of maybe which member group is driving more of that traffic if there is a difference? Is it the business member or the Gold Star members? Or anything discernible there?
It's executive. If you put them in simple sequence order, you've got your regular Gold Star. You've got your regular business. You've got your executive of either of those categories. And then the triple play if you will would be you've got the executive business member with the co brand Amex card.
All those things lend itself towards higher frequency and higher total purchases. But executive members clearly a driver.
Yes. Okay, good. That's helpful. And then on to the SG and A, the 5 basis point headwind that you've called out from the IT modernization efforts, how does that compare to the last few quarters? I know you've talked about I don't know if you quantified the impact, but just wondering if that's kind of typical if that's what it's been running?
And how long do you think it will persist? And when do you think we start to see some payback from those investments?
I think it's been probably in the range of 4% to 6%, but it's been pretty similar over the last few quarters. I think they'll still be incrementally up over the next four quarters, but probably a little not 5% lower than that. And then hopefully it'll subside a little bit. And hopefully then you'll get some benefit from it as well from more efficient operations whatever we're putting out from it. But it's for those of you who have known us for a long time, we pride ourselves in keeping things simple.
And we were basically a legacy shop. We wrote our own GL years And so this is new for us and we're doing it's taking a lot of effort for us a lot of money. Fortunately, it's spread out it's divided by a lot of sales of dollars. So, 5 basis points is still a lot this year. I don't know if it's 2 or 3 next year, but it's going to be lower than 5 is my guess.
And then that will then not be a discussion topic in terms of SG and A basis points.
Okay. And then one last one if I can't hear. Just back on what Bob's question was on the clubs left in the U. S. Can you talk about maybe what do the markets look like that you're going to the next 50 to 80 or so Costcos in the United States.
I mean, how are they any how are they different than kind of your existing footprint? Are there are certain regions where you're going? Or is it different types of formats, malls, etcetera? Just kind of curious on that. Thanks.
Yes. Quick back of the envelope guess would be half of it's infill in strong existing markets and half of it's in newer markets. Yes, I think even I'm just looking at the opening schedule this past year. It's been everything from another unit in Washington, D. C.
And Maryland in the U. S. To one last fall in Huntington Beach, California, which is clearly infill to several units in the Dallas and other Texas markets, which I would say have gone from new markets to very clearly good infill markets in Chicago as well infill to markets like Knoxville, Tennessee, New Orleans, Louisiana. So a combination of both, but Baxter Minnesota, I'm not sure if that's an infill or an extension of Minneapolis off
the top of my head.
All right. Well, thanks. Sounds like your voice is starting to go, Richard. We'll let you go. Thank you.
Okay. Why don't we have 2 more questions?
Your next question comes from Greg Mills.
Hi.
I just had two questions. I want to follow-up on the inflation in the quarter or lack thereof. So if I've got it right, gas and FX was 100, 150 bps. So ex those ticket was up 1 or 1.5. How did that break down?
Was there any inflation? Or was it all just items in the basket and mix that actually got some basket growth?
Very little inflation. I mean the difference just looking here.
Same with LIFO gain there might have been a little deflation and maybe items in the basket or mix helped a couple of 100
bps? Yes. So keep in mind LIFO deflation is from as of the beginning or the end of last fiscal year not just this quarter. Sure enough. But yes, I mean if I look at literally it's a couple of basis points on our LIFO inventories in the U.
S. So very little inflation or deflation other than gas.
Okay.
So that's what you're in.
Okay. And also with the that's a nice transition. What behavior have you seen with the dotcom sales up 20%? Who's driving that? Is it a small group of members that are using it a lot more?
Or do you find that a lot of your members are trying the online site?
I think it's a little of both. I mean, we're still doing it the old fashioned way and some would say the stubborn way. We are doing a few more things. Clearly, re platforming the dotcom people feel that's helped. Mobile has helped a little.
The apps are driving people to it. I forget what percentage of the total sales are coming on apps, which is both phones It's small, but it's growing. And again, we don't do a lot of stuff. Our MVMs probably in our view have had as much effect as anything when we have some of those exclusive online only MVM coupons in the mailers in the physical mailers. So we're doing a few I hate to use the phrase social networking stuff, but we're getting the name out there a little bit more.
But it's nice to see some increases that didn't have 1 digit or a 1 in front of a 2 digit.
And then lastly on the cash flow, could you help us out a little bit on the even with the CapEx up, do we still expect free cash to be around $1,500,000,000 even with CapEx up this year? And can payables actually get to inventory? And then also is it still the plan to buy back enough stock to make sure that there's no option
that. Clearly, the very ramp up in strength in our valuation. But our view is we're still on average a stock buyer over time. We don't feel pressure that we've got to do a certain amount by a certain date. In terms of cash flow, you take your estimates for net income, take depreciation up the 9% or 10% it's up.
Dividends the regular dividend seems to be going we just represented pretty close to what our 8 year average increase is about 13% or whatever. Your dividend I think right the regular dividend is about $5.50 a year. Even with no stock and assuming CapEx went from the $1.5 to the $2.0 you're going to cash flow I think a little higher than you suggested, but that assumes no stock buyback and we'll see. I would hope and I can't say expect because we don't look at it that formally every day. But over a period of time, clearly, we want to cover our RSU dilution, but we don't feel compelled that we have to do it by year end for this year.
Got it. And on the payable side
Getting to 100 is tough. I think it's been in the low seasonally it gets over 100 sure, but probably on average it's in the low to mid it's probably 94, 95 on average during the year, maybe 93%, 94%. And one of the things that happened particularly in this low interest rate environment particularly since we have a lot of cash, we'll offer vendors particularly medium sized vendors that might need to clean up a balance sheet at quarter end for certain covenants. We're being pretty aggressive on what will you give us if we pay a little early on something even though outside of the regular terms. So not big numbers, but you turn around it's 100 of 1,000,000 of dollars.
So I'm not sure if it ever gets to 100 unless the term goes from the 12, 13 up to 15 or something and that's going to be tough. But we'll keep working at it.
Got it. And how does international affect that payables or maybe you look at merchandise payables inventory? Does that force it down a little bit or
I think it's higher volumes, but I think the payables percent is a little lower in some of the countries. But the part of that is timing. If there's a bunch of the stocks you ship to Asia, if 25%, 35% of our sales over there are U. S. Sourced goods and with the exception of probably fresh fruit items that have to be air freighted, a lot of that stuff could be on 2 week plus containers.
Sometimes you're able to negotiate with a vendor to socialize that and sometimes you're not. So my guess is, is I'm just looking here at one thing. Hold on a second. This is by country though. There it is, I'm sorry.
If I talked about like the what was it I think I mentioned it was 91 for the quarter merchandise payables. And that 91, there were 2 countries that were over 100 and there were outside the U. S. And there was 1, 2, 2 countries that were below 80 and a couple in 1 in the 80s and a couple in the 90s. And of course, the U.
S. Was right on. U. S. And Canada on average are a shade above the 91 average.
And the U. S. Is right on it. So it's a little bit all over the board. Australia I would have guessed Australia would be near the lower end and that's because it's the longest place to ship goods by sea.
Got it.
Great. Thanks, Richard.
Sure. Let me take one last question.
You have a follow-up question from Sandra Barker.
Yes. Richard, I don't want to beat a dead horse about the price investment, but I just wanted to clarify. Can you explain the mix of the price investment and how much of it is going toward international versus the U. S? Because I know in the U.
S. You had a fee increase and that would be sort of a logical assumption that you would have that you'd be offsetting that there. But if it's more skewed toward international, is this a different philosophy than you've had in the past? And how are you sure that you give back more than you're giving up if you are the only club in the country or you're still sort of new and you have a ton of traffic already. I'm just trying to sort of understand the philosophy there.
Every action has a different reason. So it's not sometimes it's emotional and it's what we do for a living. Sometimes it's certainly as you just suggested given our membership fee strength in the U. S. And Canada that allows us to be more competitive in other areas and certainly that's part of it.
Given our strength and profitability in some countries that gives us an opportunity to be more aggressive in certain things. So it is I do want to emphasize it. It's not as scientific or as analytically thoughtful. But we know when sales are going in the right directions, we can be more aggressive and we choose to be. And it has worked for us.
And so I'm sorry, I can't shed more light on it. If I look at the core business is, I think probably the least the one that was least impacted was the U. S. This last quarter. But if you look at all the other countries, every country has a different reason.
And it's not every country, it's all over the board. And sometimes it's on hot items. Sometimes it's we're trying to build something.
Okay.
Thanks.
Okay. Well, thank you very much. And happy to take any calls if Bob, Jeff and I. Thank you.
This concludes today's conference call.