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 third quarter FY 2013 operating results conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star, then the number 1 on your telephone keypad. If you would like to withdraw your question, press the pound key. Thank you, Mr. Richard Galanti, CFO. You may begin.
Thank you, Angela. Good morning to everyone. This morning's press release reviews our third quarter operating results for the 12 weeks ended May 12th. 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, 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 third quarter. For the quarter, earnings per share came in at $1.04 per share, up 18% from last year's third quarter earnings per share of $0.88.
For the third quarter, total sales were up 8%, 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 +7%. 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.
In terms of new openings, after opening 14 new locations during the first half of the fiscal year, we opened five additional Costcos in the third quarter, two in Japan, in Kitakyushu and Hiroshima, and one each in Chihuahua, Mexico, Wheaton, Maryland, and Southampton, U.K. All told, that puts our fiscal year 2013 openings through the third quarter at 19 new locations, and we now operate 627 Costco warehouses around the world. Between now and September 1st, the end of our fiscal year, we expect to open an additional nine locations, three in the U.S., three 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. 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&A. For our third quarter, excuse me, for our third quarter, sales were up 8%, from $21.85 billion last year in the third quarter to $23.55 billion. Comps on a reported basis were +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 one and a half percentage points, and an average shopping frequency increase of about 5.5%. That compares to a fiscal year-to-date shopping frequency number of about 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.
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 weak end of that range, with Canada and Mexico being the strongest in terms of comp sales increases. In terms of merchandise categories, in terms of sales, by merchandise category for the quarter, for the third quarter within food and sundries, mostly in the mid-single digit range, with deli, beer and wine, and candy being the relative standouts. Within hard lines, overall in the high single digit range, the departments with the strongest results were hardware, lawn and garden, and consumer electronics. Consumer electronics sales were in the mid to high single digit range for the quarter.
For soft lines, up about 10%. Small electrics, housewares, jewelry, and apparel were the standouts, with media, as expected, continuing to be on the relatively weak side. 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 million, up 12%, or $56 million from last year's $475 million, also representing about an eight 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.
Of course, as I've mentioned for several quarters now, we're still benefiting from the five and $10 membership fee increases that began in November 2011 in the U.S. and Canada for new signups and in January of 2012 for renewals. Due to deferred accounting treatment for membership fees, of that $56 million increase during Q3, a little over half of it was due to that annual fee increase and how that rolls into the book P&L over about just under a two-year period. As previously mentioned, membership fee income will continue to benefit from this deferred accounting for that fee increase throughout the fourth quarter of 2013 and to a lesser extent, into the first fiscal quarter of fiscal 2014 this fall. New membership signups in Q3 company-wide were very strong, up 19% year-over-year.
That strong performance is mostly reflective of the very strong signups 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 27.8 million Gold Star members. At Q3 end, 12 weeks later, that was 28.2 million. Primary business went from 6.5 million a quarter ago to 6.6 million. Add-ons remained at 3.5 million. You add those numbers up. At Q2 end, we had 37.9 million member households and 38.3 million at the end of the quarter. With the extra spouse card, 69.1 million at Q2 end and 69.9 million at Q3 end. At May 12th, the third quarter end, paid Executive memberships were 13.3 million. 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 13.3 million, 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 two-thirds of our sales. On a year-over-year basis, the percentage of members of being Executive members was up about one percentage point, which of course, would translate into about a two basis point hit on margin as with the reward. In terms of renewal rates, they continue strong. Going back a quarter ago, business renewal rates were 93.9. At the end of the quarter, they remained at 93.9. Gold Star went from 88.8, tweaked up a little bit to 88.9.
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, I mentioned last quarter, we were up at 86.5 and that tweaked down one tick to 86.4. When you open new warehouses, you tend to start off with a lower renewal rate, particularly in countries outside of the U.S. and Canada. That's to be expected. Going down the gross margin line. Our gross margin in the third 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. We'll just do the third quarter here.
Two columns reported and then without gas deflation. The line items would be Core merchandising. The second line would be the Ancillary businesses. The third line item would be 2% Reward. The fourth item would be LIFO. The fifth item would be Other, and then a total, of course. The two columns going across, the reported core merchandise margin was down five basis points, and without gas deflation, down 11. Ancillary businesses were plus six and plus five. 2% Reward was minus two in both columns. LIFO was a credit, so plus six in both columns. Other, which is a non-recurring lawsuit recovery, which benefited margin this quarter by seven basis points, so plus seven and plus seven.
If you add the two columns up, the first column, of course, reporting comes up to the +12 basis points that we reported, and without gas deflation, +5. The core merchandise component again was at -5 on a reported basis and a -11 excluding the benefit of gas deflation. The four core categories, food and sundries, hard lines, soft lines, and fresh foods, each showed lower year-over-year gross margin % as we continue to invest in price, both in our domestic and our international operations. 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 one-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 increase penetration was -2 basis points. As I mentioned, LIFO, the year-over-year is a 6 basis point swing. Basically, we recorded an $8 million or 3 basis point pre-tax credit during this quarter. Lastly, other, as I mentioned, is the non-recurring legal settlement that we received in Q3. Moving to reported SG&A. Our SG&A % Q3-over-Q3 were lower or better by a reported 3 basis points, coming in at a 982 this year versus the 985. Again, the two columns reported and then without the gas deflation. Five line items, core operations, central, RSUs, quarterly adjustment, and total.
In terms of core operations, the reported piece was +2 basis points. Without gas, it would have been +7 or better. Plus means lower or better. So we had 7 basis points of positive there. Central was +2 and +2. RSUs was -1 and 0. Quarterly adjustments actually was 0 and 0, such that total, we reported a +3 or SG&A lower by 3 basis points. Again, 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&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 % 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 healthcare and workers' comp. They were leveraged during the quarter by a few basis points. Actual healthcare 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 expense, 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&A or higher SG&A by about five basis points. Notwithstanding that impact of minus five in the central category, we still showed a lower by two there. Overall, I think pretty good expense control and certainly helped by strong sales results as well. Next on the income statement, pre-opening, $6 million last year and $10 million this year. We opened four net openings last year in Q3 and five this year. All told, operating income in the quarter was up $100 million or 16% from $623 million last year to $722 this year. Below the operating income line, reported interest expense was $6 million higher year-over-year in the quarter, coming in at $25 million versus $19 a year ago.
If you recall, last year on March 15th, about a little over a month into the fiscal quarter, we paid off a $900 million fixed rate, 5.4% interest debt. This represented about a $4 million reduction in interest expense year-over-year in the quarter. Offsetting that $4 million reduction, of course, was our December offering of $3.5 billion debt offering in late November of senior notes with a weighted average interest rate of just under 1.25%. For the 12 weeks, that's about $10 million increase, of course, in interest expense. The $4 reduction and the $10 increases, there's the $6 net increase that we're talking about here. Interest income and other was lower year-over-year by $3 million, coming in at $15 million this year versus $18 million a year ago.
About two-thirds of that $3 million delta is actual interest income being lower this year, coming in at $9 million this year compared to $11 million last year, and other rounded to the last million, both relatively similar numbers within the interest income and other line. Overall, pre-tax earnings were up $90 million or 14% from $622 million last year in the quarter to $712 million this year. In terms of our income tax rate, very close to being the same in both fiscal quarters, 34.81% this year, down just a tick from 34.84% last year. Essentially the same year-over-year. Overall net income was up 19% from $386 million last year to $459 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 million, and that brings year-to-date for the three quarters to $651 million. 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. 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 six, seven, $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 12.2 million versus 11.8 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 physical inventories, which were taken back in January and February, were our best ever. We continue to do well in our view, in terms of inventory control and how that relates to operation safety as well. In terms of CapEx, in Q1, we spent $488 million, in Q2, $455 million, and the quarter just ended, $435 million. To date, just under $1.4 billion. Our estimate for the year is right at $2 billion.
That, of course, compares to fiscal 2012 expenditures in CapEx of $1.5 billion, 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 third 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 U.K. started less than a year ago. In terms of expansion, as you recall, in the last two full fiscal years, in 2011, we opened 20 net new units. In 2012, 16. To date, for the first three quarters this year, 19, Our plans are to open nine in the quarter. That would put us at 28 for the year.
As compared to fiscal 2012's expansion of about 3% unit and square footage growth, this year's 28 units on a beginning base of 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 three in Canada, three in the U.K., seven in Asia, one in Taiwan and Korea each, and five in Japan, as well, one additional unit in Australia and one in Mexico. As of Q3 end, our total square footage was 89,709,000 square feet. 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 million worth. 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 about a month ago, up 13% from the previous $0.275 a share. This annualized number of $1.24 per share represents a total cost to the company of about $550 million a year. These quarterly dividends, of course, are in addition to the $7 per share special dividend, which totaled about just over $3 billion that we paid out to shareholders back in December of 2012 or the second quarter. The usual supplemental information will be posted on the Costco investor relations site a little later this morning. Lastly, our scheduled earnings for Q4, which is the 16-week quarter that ends September 1st. It's currently planned for Wednesday, October 9th, and that'll again, be for the 16-week fourth quarter ending September 1st.
Mind you, last year we had, it was a 53-week year and therefore a 17-week fiscal fourth quarter. 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.
If you would like to ask a question at this time, please press star one on your telephone keypad. We'll pause for just a moment to compile the Q&A roster. We have a question from Deborah Weinswig.
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. We're not doing anything different other than continuing to be aggressive on pricing. If you haven't tried our rotisserie chicken, that's the new hot dog 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 MVM mailers, the coupon mailers. 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. I think we certainly are getting a lot of, but that's all anecdotal, of course. There's nothing specific that we have done different of late.
Okay. 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 what we call limited resource commodities, like nuts, because of increased world demand with the increasing middle class, if you will. Those have spiked up. With those few exceptions, there's not a lot. I think to date, 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 from the beginning of the year to now. Again, it's an ever so slight credit in each of this quarter and the last quarter.
I think together, if 100.00% was the base as of the beginning of the fiscal year, as of Q3 end, it was 99.41, so 0.6% lower cost inflation. That's, again, that's one measurement that's easy to look at because it's basically our U.S. LIFO inventory counts. That wasn't that discernibly different than a quarter ago. We don't really see a whole lot of trend upward beyond those small areas that I mentioned. Gas is always that, who the heck knows?
Right. Okay. 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, 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 and start off with some small number, but more than one or two, of services that we can provide under the Executive member format. The member services where the Executive members, in some cases, get a better deal on some of those services. We'll continue. I would guess over time, we'll continue to roll it out to other countries. Again, the $13.3 million, I think all but about $400,000 that are U.S. and Canada, which, of course, U.S. and Canada is probably 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.
Richard, a couple things. The price investments, 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. We try to do a pretty good job of that, but it's spread among categories. A little tongue in cheek, talked about the chicken. As protein prices go up, our costs go up, we've been very successful, we think, in driving sales. 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 and do other things. It's across the board.
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. 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. You're always going to see what be it our direct competitors of Sam's and BJ's or other category dominant retailers. You're always going to see items and departments. 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.
Yeah. I'm talking about points.
Cool. Just two last things. Is there about $30 million left of incremental benefit on the membership fee increase? Is that about the residual number?
Yeah. It has a three in it. It's a little higher than 30. It starts with a three.
Lastly. What's that?
It starts with a three, it's higher than three, oh.
Okay. Lastly, when you look at Kirkland, where are you roughly now with SKU count? Do you think, as a % of club SKU count, that inevitably goes higher? I know you don't want to force it on people, obviously you continue to find value-added items. Does that just go higher over time as a % of total SKU count?
Yes, absolutely. I think it's still in the lower mid-20s, 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. We have items that do $2,000, $3,000, and $4,000 a pallet position in the U.S. that do five and 10 times that in some of the Asia countries, simply because it's a great value on great stuff, we can even be more extreme over there versus brands. Yeah, we continue to look at different areas, this past year, I know we've put it on some women exercise apparel, active wear, which has been very successful. We continue to put it on, I know we have several men's summer items, whether it's shorts or performance polo shirts.
All those types of things. It's not just. It's food and non-food. I don't see any discussion of putting it on a television or anything anytime soon, certainly, there's a lot of categories. All the low-lying fruit, paper goods, water, those are all done. Probably the lowest lying fruit in the last few years was probably the disposable diapers. There's lots of things. It always amazes me when individual food items, the cashew clusters or something innocuous like that is a $15 million item and $25 and $30 million a year later, all of a sudden you've got those types of things out there. I think it'll scale slowly through the 20s and upward. It's not like we have a concerted effort to try to get to a number by next year.
Yep. 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. Should we look at the core being down this period compared to being more flattish the past two quarters as a signal that this is incremental, or this is in addition to what you've kind of done over the past few periods? Did you go deeper or wider, and how should we think about the next few quarters?
Yeah. 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. 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 do you do?" We say, "We don't change what we're doing." I think that given our strength of late, we look at it and say, "Is this a good time?" When we look at certain countries where we're very profitable, bottom line as a percent of sales relative to the U.S. and to Canada, and Canada's a little more than the U.S., we say, let's just make sure We're our own toughest competitor when things get too good. Again, I can't suggest that it's a trend.
I think for three or four 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. The last Q2 was a relatively flat, does that suggest it's going to continue to be flat? Well, Q3 says no, it doesn't. 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&A, which always has been a challenge for us. Margins are not a problem.
On the international, it's becoming a bigger penetration of your business overall, and currently that segment has a few hundred basis points higher margins than the U.S. Is that sustainable, or is there any changing dynamics that you see that might alter that?
Higher, meaningfully higher, yes. Is it sustainable at this rate? Probably not. We know ourselves that as we take a $300 million unit in Taiwan or Korea or Japan and put a new unit 15 mile or 10 miles away, we'll do $450 the next year between the two, but it's going to hit the margin, it's going to hit the P&L for a couple or three years. Part of this ramp-up overseas is going to impact that a little bit. 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.
I think some of what you saw in 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, these numbers are growing pretty fast. Let's make sure we're giving back price in terms of price." It's our doing.
That's helpful. Thank you.
Your next question comes from Sandra Barker.
Hi. 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 some of the private label, I would think you already had a very large price gap versus the competition. I had another question also.
We do, again, if you look at a company that has a pre-tax return on sales in the three-ish range, very high twos or three or whatever it is now, then you look at that U.S. column and extrapolate from the operating percentages, that it's in the low to mid twos in the U.S., better in Canada, and a lot better in other countries. We're very good at looking at something and saying, "Guys, we're making too much here." We want to keep driving it in the right direction.
Okay. Also, just some illumination on buyback and how you think about that in the future since it seems to have dwindled away this year.
Yeah. We look at it as between the regular dividend and the special dividend, even assuming just the $34 million in stock buyback this year, we still essentially between the two given back about $3.5 billion to shareholders this year, virtually almost all in the form of dividends. We look at both, over a longer period of time, we would expect to continue to buy back stock as well. Again, we don't suggest it's going to be a certain number. Clearly, given the relative strength and importantly, the fact that we did the special dividend, we don't feel any pressure to just do it on a regular basis. We'll continue to do that over a period of time, though.
Okay. Any commentary on any impact from Target in Canada?
Really, no. Without disrespect, there's really not been, in our view, a lot of competitive. Our margins in Canada have come down, again, that's more us than that. Certainly, as I've mentioned over the last year and a half, we've been preemptive knowing that they're coming in. We're also have had very strong numbers. Our local currency comps up there are in the very low double digits in local currency. It's a strong economy. We're doing very well. Again, it's one of those things where Craig in the budget meeting says, "Guys, 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." What that means is, we're making good money up there.
It's growing well, let's make our competitive posture stronger.
Thank you.
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. Keep in mind, they haven't opened a lot of units yet either.
Sure. Thanks.
Your next question comes from Joe Feldman.
Sorry guys. Was just on mute. Just wanted to drill down on inventory again. I know you'd mentioned you feel like you're in pretty decent shape with inventory, 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, and assortment planning?
Well, again, it's part science and a lot of art form. As you probably know, over the last 10 years, we have consciously taken down, reduced our active SKU count in a warehouse from 4,100, 4,200 down to 3,700, 3,800. That's, in our view, driven sales because we could double mass out something versus 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 two items. 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 a third of which is merchandising discussions, 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. Five varieties of cordless phones or whatever it might be. 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. We're constantly trying to figure out what we're missing. Generally, it's more the opposite, though. What do we have too much of, or too much selection of?
Got it. Thanks, Richard. If I could ask one more, about the traffic trend, which has been just so strong for so long. I guess I'm curious, how do you sustain it? How does it keep driving? Because people are coming in, it seems like, at a pretty frequent pace, 4% or 5% every month. It's better than grocery. It's better than most anybody else out there right now. 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? How do you sustain it, I guess? 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 two big things that have occurred over the last four or five years in this bad economy is gas prices and the fact that 10%, 11% of our sales are gas, and that clearly, no pun intended, drives people into the parking lot. 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 the statistics I've read is that when the economy got hammered, people ate out less, not just the steakhouses for business travel, but families and with neighborhood restaurants. While it's come back, it's not back to where it originally was. Clearly, our strength in fresh foods, I think, has helped a lot.
That, again, is a driver, in my view, of more frequency. I get back to the mission of constantly coming up with wow items and getting brands that refuse to sell us to sell us and diverting more stuff when they won't want to sell us if we can get it. All those things are what we're about. Again, I'm probably a little biased and my antenna are a little stronger at looking, but it seems like every day there's some 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. 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 our most mature markets. Clearly, you have higher frequency numbers in newer markets.
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. I think the bigger factors are that constant lowering of price, and the gas and the fresh foods. 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 with the housing market, I think I mentioned some of the category areas, merchandise category areas, and non-foods where we've been strong. We get a little benefit there as well. That frequency has got to be more that. I have no illusions that it can sustain itself.
Seemingly for 20 years prior to late 2008, on average, the number was in the 1%, 1.5% range and ranged generally from -1% to +2%, with the exception of a couple outliers based on how Easter or July 4th or something falls year-over-year. We're in uncharted territories. I remember a year and a half into this recession, after having 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. 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.
I want to follow up on the international margin side. The ramp in 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. 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, I'm shooting from the hip on that one.
Okay. I can follow up. 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. Did you see much variation around whether you saw strength in lawn and garden? Do you think that 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 42 states in Puerto Rico, in the U.S., if you will. When the weather was bad in one part of the country, it wasn't bad in the other part of the country. Clearly, I don't have the numbers in front of me, I know over the last few months when the regions got up and spoke, some of the regions had incredible strength when expected in seasonal items like seasonal clothing and seasonal patio furniture and what have you. Whereas other regions, it came a little later. I don't have the detail in front of me, if there's a little pent-up demand, it's in a few of the regions, and some of it's already happened in the third quarter. Maybe there's a little bit there, I don't see a whole lot of that.
Is that a similar vein that the high exposure to California buffered your weather sensitivity?
As I mentioned earlier, all the eight regions in the U.S. were pretty good. They were actually at the low end of that range of, I think I said mid to high single.
Okay.
Still positive, but no.
Okay. Final question. You mentioned healthcare costs up 6% year-over-year versus low double digits in the past quarters. What's changing there? Are you doing something? Is this in anticipation of Obamacare next year and that's flowing through early, and what's the outlook there? Thanks.
I wish I knew. For the 12-week quarters, when I look each week at just what we pay out in U.S. healthcare costs, which is the thing that drives that line item, it generally speaking, was pretty consistent in the mid to little higher single digits, we didn't have any outliers. Sometimes when you see a week or two that's a 3% or 5% increase year-over-year, the next week's 12 or 14, and so the average was still 10 or whatever X is. There's not a lot of new things we're doing. We're doing a couple of little things, but nothing that would have driven this. We're hopeful that it'll continue, but we still budget it 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, 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. The latter question. What was the first question?
Real estate.
Oh, real estate. Yeah. Our best guess right now is right at that 30 number with probably a little over half of it outside of the U.S.
Of that 30 number, 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. It's a little too early to tell. If you asked me for a range, I'd probably say three less than five more than 30. 27-35. I'm guessing here.
Okay.
30 is probably a good number.
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 one less week in the quarter, any color you can sort of provide from the impact of those two things versus, let's say, the 11.8% growth rate that you were at here in Q3?
Right. I think if you take out the deferred accounting over the last few quarters, the number's in the 6%-7% range, probably in U.S. dollars. When we look at Q4 last year, 17 weeks versus 16, one seventeenth is about six percentage points. I don't have any Q4 estimates in front of me, just those two simple math items would tell me that anything at or slightly above zero would be expected. I haven't looked at it.
Right. Okay. That's what we were coming up with, Jim. Thanks.
Your next question comes from Mark Miller.
Hi, good morning. Richard, I think you said payroll was up 6%+ in the quarter, 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? 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 here?
Cutting overtime, I think, has helped a little bit. I've used the word focus before. I've also talked about when people asked me a year ago, "What's different about 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. I think there's focus on that. SKU count management, going from X to a lower number means you're messing out more stuff and I think it's all the little things. There's nothing huge. Your comment on the signatures thing capture, certainly yes. Can that shave off seconds in a transaction? All those things help. A lot of it is the pallet presentations and what we do.
Okay, thanks. Can you give us some perspective on your efforts to get global pricing terms with suppliers? 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. Again, every month when the country heads from each country are here for two days, part of their presentation 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?
I can't say what it is. It's a few year period of time where we picked up money that totaled about seven 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. A couple of questions ago, someone asked you 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, more from a, I guess, stepping back philosophical standpoint, what's allowing you now to more rapidly open units? Has there something changed in the marketplace, or is it a decision internally to do it? As we look at beyond just this year and next year, 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 the last question first, yes. We've got literally more real estate people on the ground in more countries. 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, six or seven units in each of Korea and Taiwan and maybe eight or nine in Japan, we've ramped that up. We're going from opening between those three countries a few years ago, opening a couple units a year between the three countries. Opening up five, six, seven, eight between those three countries a year. 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.
We believe that our goal over the next five years, I think I've said, is about 150 buildings. If we can get a little better than that, great. That's certainly a good starting point given where we've come over the last few years.
I guess, Richard, just to follow up on that, so as you look at it, kind of we talked about, and it seems like if you go back a few years, the unit growth numbers didn't hit your targets, maybe what investors were thinking, and now you're showing up faster growth. It sounds to me like you've kind of made the internal decision to grow faster. 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'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. 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. We'll keep doing that to drive our business. 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.
Again, 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 two or three years ago, and it's now coming to fruition this year.
Got it.
Those efforts.
Okay. Thank you.
Your next question comes from Jason De Zwirek.
Hi, it's Jason De Zwirek at D.A. Davidson. 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? Then if you could talk about how membership grew internationally versus U.S., that would be helpful.
Again, I think the 56 or whatever billion-dollar number of increase, a little over half of it was the deferred accounting. I think you take that out, and I think it was a 12% dollar increase. That would imply about a 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 fact that on a weighted average, foreign currency is weakened relative to the dollar, so when we convert everything to report in U.S. dollars, it was actually a slight negative. A light bulb just went off.
Actually, the underlying number, ex deferred accounting in local currency probably would've been a little better, but again, the numbers we speak about when we show membership income was including the detriment of weaker FX.
Right. I mean, the FX would be similar to the FX impact you see on your net sales. Is that right?
Sure. Yeah.
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.
It's actually very similar to the U.S., but we're not gonna 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, maybe we can talk about that later. 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. I would guess over time, you would expect to see fees continue to go up. 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 Drbul.
Hi, good morning. I guess just one question that I have. Over the next several years, I know you talked about 150 clubs over the next five 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. out of the 150?
Out of the 150. Well, I think on our cheat sheet from last year, it was 55 out of 150 were in the U.S. My guess is it'll be a little bit more than that. If we open what we say we're going to open this quarter, we would end the fiscal year with 636 units, of which 452 would be in the U.S. If you add 50 or 55 to that, you're at 505 or 510. My guess is the five years after that, it's not 50 more, but it's 20 to 30 more. Who knows? 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.
Two more questions.
Your next question comes from Sean.
Okay.
Can you hear me?
Yes.
Okay, great. I guess on the international front, 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?
For the five years up till when we acquired the remaining 50% interest last July, I think in five years, we opened a total of three units, so less than one a year. I think this year we're opening one. My guess is that'll quickly go to a few, 2 to 4, who knows. 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. In expressed dollars, its average unit does about half the dollar volume, because of just the relative currencies. 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. Mexico's great.
It's been a healthy growth for us. If anything, for unrelated reasons, we hadn't grown a lot for those four or five years, and we are starting to invest more now.
Okay, great. 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 correctly, about 12 months ago. It sounds like the inventory is up a little bit on a per warehouse basis. 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. There's a little bit more presence out there. We have done very well not only within TVs, but higher-end TVs, the 60- and 80-inch 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. TVs dwarfs everything else, just in sheer dollar volume. Again, they were up low double digits this month. I think in the last year, have probably been up probably on average in the mid to high single digits in dollars.
Okay, 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 member? Is there 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. Executive member is clearly a driver.
Onto the SG&A, the five 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 you think it'll persist, and when do you think we start to see some payback from those investments?
I think it's been probably a range of four to six, but it's been pretty similar the last few quarters. I think they'll still be incrementally up over the next four quarters, but probably not five, lower than that. Hopefully it'll subside a little bit. Hopefully you'll get some benefit from it as well from more efficient operations, whatever we're putting out from it. For those of you who have known us for a long time, we prided ourselves in keeping things simple. We were basically a legacy shop. We wrote our own GL years ago. This is new for us, and it's taking a lot of effort for us, a lot of money. Fortunately, it's divided by a lot of sales of dollars. Five basis points is still a lot this year.
I don't know if it's two or three next year, it's going to be lower than five, is my guess, that'll then not be a discussion topic in terms of SG&A basis points.
Okay, one last one, if I can here. Just back on what Bob's question was on the clubs left in the U.S. Can you talk about what do the markets look like that you're going to the next 50 to 80 or so Costcos in the United States? How are they different than your existing footprint? Are there certain regions where you're going or is it different types of formats, malls, et cetera? Just kind of curious on that. Thanks.
Yeah. 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. 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. I would say, have gone from new markets to very clearly good infill markets in Chicago as well, infill. Markets like Knoxville, Tennessee, New Orleans, Louisiana. 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-
I think that might be your area.
Sounds like your voice is starting to go, Richard. We'll let you go. Thank you.
Okay. Why don't we have two more questions?
Your next question comes from Greg Melich.
Greg.
Hi. I just had two questions. I want to follow up on the inflation in the quarter, or lack thereof. If I've got it right, gas and FX was 100, 150 basis points, ex those, ticket was up one or one and a half. 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'm just looking here.
Say with LIFO gain, there might've been a little deflation and maybe items in the basket or mix helped a couple hundred basis points.
Yeah. Keep in mind, LIFO deflation is from as of the beginning or the end of last fiscal year, not just this quarter.
Fair enough. Yeah.
Yeah, if I look at Literally it's a couple of basis points on our LIFO inventories in the U.S. Very little inflation or deflation other than gas.
Okay.
That's what you meant.
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. 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. It's small, but it's growing. 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. 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.
Yeah.
It's nice to see some increases that didn't have one digit or a one in front of a two digit.
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 will be around $1.5 billion even with CapEx up this year? Can payables actually get to inventory? Also, is it still the plan to buy back enough stock to make sure that there's no option dilution now that you did the big special dividend? How are you thinking about that?
Well, clearly the special dividend has some impact on that. Clearly the very ramp up in strength in our valuation. 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 eight-year average increase is, about 13% or whatever. Your dividend, I think regular dividend's about $550 a year. Even with no stock, assuming CapEx went from the $1.5 billion to the $2.0 billion, you're going to cash flow I think a little higher than you suggested, but that assumes no stock buyback. We'll see.
I would hope, I can't say expect because we don't look at it that formally every day. Over a period of time, clearly we want to cover our issue dilution, but we don't feel compelled that we have to do it by year-end for this year.
Got it. 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. One of the things that happens, 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 the regular terms, these are not big numbers, but you turn around, it's hundreds of millions of dollars. I'm not sure if it ever gets to 100, unless the term goes from 12, 13, up to 15 or something, and that's going to be tough.
We'll keep working at it.
Got it. How does international affect that payables? Maybe you look at merchandise payables to inventory. Does that sort of force it down a little bit or?
I think it's higher volumes, I think the payables % is a little lower in some of the countries. Part of that is timing. If a bunch of the stuff 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 two-week plus containers. Sometimes you're able to negotiate with a vendor to socialize that, and sometimes you're not. My guess is I'm just looking here at one thing, hold on a second. This isn't by country, though. Oh, there it is. I'm sorry. Yeah. If I talked about the, what was it? I think I mentioned it was 91 for the quarter, merchandise payables.
That 91, there were two countries that were over 100, outside of the U.S., and there was one, two countries that were below 80, and one in the 80s and a couple in the 90s. Of course, the U.S. was right on. The U.S. and Canada are on average or a shade above the 91 average. The U.S. is right on it. It's a little bit all over the board. I would've 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. Why don't we take one last question, if any of us out there?
You have a follow-up question from Sandra Barker.
Yes. Richard, I don't want to beat a dead horse about the price investment, 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.? I know in the U.S. you had a fee increase, and that would be sort of a logical assumption that you'd be offsetting that there. If it's more skewed toward international, is this a different philosophy than you've had in the past? How are you sure that you get back more than you're giving up if you are the only club in a 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. Sometimes it's emotional, it's what we do for a living. 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, certainly that's part of it. Given our strength and profitability in some countries, that gives us an opportunity to be more aggressive on certain things. I do want to emphasize, it's not as scientific or as analytically thoughtful, we know when sales are going the right directions, we can be more aggressive, we choose to be. It has worked for us. I'm sorry I can't shed more light on it. If I look at the core businesses, I think probably the one that was least impacted was the U.S. this last quarter.
If you look at all the other countries, every country has a different reason. It's not every country, it's all over the board. Sometimes it's on hot items. Sometimes 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.