Good morning. My name is Crystal and I will be your conference operator today. At this time, I would like to welcome everyone to the Second 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 session.
Thank you. Mr. Richard Galanti, CFO, you may begin your conference.
Thanks, Crystal. Good morning to everyone. This morning's release, of course, reviews our Q2 and fiscal first half twenty thirteen operating results for the periods ending that ended on February 17. 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.
So to begin with our 12 week Q2, we reported earnings per share of $1.24 up 38% from last year's $0.90 reported number. As noted in this morning's release and as I had mentioned during our Q1 conference call earnings call back on December 12, This quarter's net income was positively impacted by a $62,000,000 or $0.14 per share income tax benefit that was in connection with the portion that portion of the special cash dividend paid by the company in December of 2012 to company 401 plan participants. Excluding this one time benefit, earnings per share for the quarter would have been $1.10 or up 22% year over year. In terms of sales for the 2nd quarter, total sales were up 8% and our 12 week reported comparable sales figure was up 5%. For the quarter, sales were very slightly benefited by gasoline inflation less than 10 basis points of an impact and were also benefited by strong foreign currencies overall relative to the U.
S. Dollar year over year by net added about 60 basis points. Even so, the 5% U. S. Comp sales excluding the gas inflation remained at 5%.
And while the reported 6% international comp figure assuming flat year over year FX rates would have been 4, Total company comps both were reported at 5%, excluding both gas and FX they still came out to 5% for the company overall. And as announced last week, for our 4 week month of February, which of course includes 2 weeks in the last 2 weeks of fiscal Q2 and the 1st 2 weeks of our fiscal Q3. But in terms of those 4 week month of February comps came in at a 6% both for the U. S. And the total company.
In terms of new openings, after opening 9 new locations in the Q1, which ended November 25, we opened 5 new locations in the Q2, 1 in Washington D. C, 2 in Canada, 1 in Oshawa, which is in the Toronto market of Ontario and one in Drummondville, which is in the Montreal market in Quebec. We also opened in Leicester, U. K. And Central England and in Gwangmyong, which is outside of Seoul, Korea.
All told that puts our 2013 fiscal year openings through the Q2 end at 14 new locations, such that we now operate at 6 22 locations around the world. Between now and the end of fiscal 2013, which I think ends on September 1, we expect to open an additional 14 locations, 5 in the current fiscal quarter and 9 in the Q4. Of these 14 before fiscal year end that we haven't opened yet, 4 will be in the U. S, 5 will be in Japan, 2 in the U. K.
And 1 each in Taiwan, Australia and Mexico, such that we will most likely end the fiscal year with 28 new openings this fiscal year and be operating a total of 636 COSCOs worldwide at that time. I'll also talk later in the call about e commerce, membership trends and discussions of course about margin SG and A. On to the quarter itself, again sales were up 8%, comps were up 5%. In terms of the reported 5% comp number that was the product of an average transaction increase of a little over 2% for the quarter and an average frequency increase of a little over 3%. The trend the frequency trend for the last 3 calendar months that we reported was a 5, a 3 and a 4 for December, January February and year to date we're at 4.
In terms of sales comparisons by geographic region, overall the Southeast Texas and Midwest regions were the strongest. Internationally, in local currencies, Korea and Japan were the weakest, again, mostly due to the cannibalization on a relatively small base of existing units. And with Canada and Mexico being the strongest internationally in local currency. In terms of merchandise categories for the quarter, for the Q2 within food and sundries overall in the mid single digits, frozen foods, candy and deli were the relative standouts. In hardlines, overall in the low single digits.
Tournaments, the strongest results were hardware, patio garden and lawn and garden and tires. Consumer electronics sales were slightly negative, mostly due to the timing of the fiscal calendar as the typically strong Black Friday sales around Thanksgiving benefited Q2 last year and benefited Q1 this year. So and you take that out and with that those numbers would have been a little better. Within the higher single digit soft lines comps, small electrics, domestics and jewelry were the standouts with media of course continuing to be the relatively weak area. And in fresh foods comps in the mid singles, deli and produce were a little better than the 2 other large categories.
Moving on to the other line items, membership fees. We came in at $528,000,000 or 2.17 percent of sales. That's up 15% in dollars or up $69,000,000 from the $459,000,000 last year and up 13 basis points. In terms of membership, we continue to enjoy strong renewal rates and I'll go through a little bit of that in a minute. Continued increasing penetration of the executive membership, which is the $110 roughly $110 a year fee.
And we're still of course benefiting from the $5.10 membership fee increases that began a little over a year ago in both the U. S. And Canada. And of the $69,000,000 increase year over year membership fees, right at a half of it or about $35,000,000 was due to the fee increase. Our membership fee income as I've talked about in the last few quarters based on the deferred accounting nature of those increases and recognizing the increases occurred over a 12 month period based on when somebody originally signed up and then the income comes in over the succeeding 12 months of that first increase.
Basically, we'll continue to show year over year benefits from that fee increase throughout fiscal 2013 and to a lesser extent into the Q1 of fiscal 2014 this coming fall. And again that's due to the deferred accounting treatment for membership fee income. New membership sign ups in Q2 company wide were up about 1%. There were more locations open this quarter 5 versus last year's 2. It's mostly reflective of the very strong sign ups we have internationally most particularly in Australia and Asia.
Last year, we opened 2 units in Japan during the quarter and 2 right at the end of the quarter in the 1st few days of Q3. Of the 14 units opened thus far this fiscal year only one of them has been in Asia. And again, we pretty much oversized sign ups in some of those new units. In terms of number of members at Q2 end, Gold Star 27,800,000 up from $34,600,000 at Q1 end. Primary business remained at $6,500,000 Business add on went from 3.6 down to 3.5%.
Again that's somewhat reflective I believe of people as they switch into their own membership as an executive member. All told, total members went from 37,400,000 at the end of the first quarter to 37,900,000 dollars And including extra cards, spouse cards $68,200,000 went to $69,100,000 at Q2 end. At Q2 end paid executives were a shade over $13,000,000 an increase of $181,000 over the last 12 weeks or about 15,000 new executive members and that's both new members and conversions from the base Gold Star membership. Executive members are approximately a third of our membership base and a little over 2 thirds of our sales. In terms of renewal rates, they've continued to tweak up in the U.
S. And Canada, which is about a little over 80% of our total company and certainly the oldest and most mature part of our company. Business renewals, which ended the fiscal year at a 93.7% rate and at the end of the Q1 was 93.8% or now at 93.9%. And Gold Star which was 88.7% and remained there at the end of the Q1 was 88.8%, such that total U. S.
And Canada was went from an 89.7% essentially to an 89.8% over the last quarter. And worldwide recognizing in newer markets you start off with lower renewal rates anyway. We went from an 86. Point 4 percent at year end, remained there at the end of Q1 and it tweaked up to an 86.5 percent. So really since we over the last year since the fee increase we've always been asked a lot about renewal rates.
Basically, each quarter have been either the same as the prior quarter or slightly up and then they continue to tweak up almost a full percentage point in the last year and a quarter. Going down the gross margin line, reported margins were up 6 basis points from a 10.5.3 to a 10.5.9. Here we get to write down a few numbers. A little chart with 5 line items and 4 columns. Basically, we'll do 2 columns for each of Q1 and Q2.
And of course, those of you who've heard this before, this relates to the fact of how many basis points of margin reduction or improvement come on a year over year basis in the comparison. And once we do the chart, I'll give you a couple of comments. In terms of core merchandising, reported in Q1 was minus 7 basis points year over year and without gas On ancillary business, the second line item, plus 14% On ancillary business, the 2nd line item, plus 14% and plus 15% in the Q1 columns, plus 2% and plus 3% in the Q2 columns, 2% reward, minus 2% and minus 3% in the Q1 columns and minus 1% and minus 1% in the Q2 columns LIFO plus 1+1 in the Q1 columns and plus 5+5. And lastly, total reported Q1 was a +6%, which will be the sum of column 1. That's what we reported in Q1 year over year margins.
Without gas inflation, it adds up to a +12. And then of course for Q2 reported, as I just mentioned, we were up 6 basis points, which would be that 3rd column summation and without gas inflation plus 7 recognizing there was a very little gas inflation. Basically, again, core margins were basically flat year over year. Those are the 4 core businesses food and sundries, hard lines, soft lines and fresh foods, which is a big piece of our business. Basically not a bad showing.
If you look back, of course, as you know over the 4 quarters of fiscal 2012 on average year over year prior to fiscal compared to fiscal 2011 those numbers were minus 13 without gas inflation. And the trend in Q1 year over year was minus 1 and of course now it's 0 year over year. And secondly, ancillary businesses, you'll note that in Q1 it was 15 year over year, a big chunk of that as I mentioned in the Q1 call was strong gas margins year over year and some inflation. I think I said in the Q1 call about 2 thirds of that plus 15 related to that. In Q2 gas reversed as gas prices went up margins go down.
As cost of gas goes up we make less and that plus 3% reflects strong ancillary business margins offset by probably 5 or 6 basis points of negative related to gas. 2% reward is simply a fraction of a little higher sales penetration to those earning the 2% reward. And LIFO was a +5. Again, that's a LIFO credit of I mentioned that I'll mention a minute is about $9,000,000 of a credit versus a $2,500,000 LIFO charge in the same fiscal quarter a year ago. Mind you, when LIFO is a positive, it means the cost of the merchandise are coming down.
And as you might expect, we tend to reflect that in our sales price as well, which should be on the merchandise margin line. For the Q2 year over year food and sundries gross margins were flat, hard lines and soft lines were up and fresh foods was lower. As I mentioned on ancillary, overall, in the chart you saw it was a plus 3 without gas inflation. Again, all the other ones pharmacy optical hearing aids, food courts were all up during the quarter more than offset or offset by what I just mentioned about gasoline. The impact of the membership on executive member I already mentioned and LIFO I mentioned as well.
Moving to reported SG and A. Our SG and A percentage, 2nd quarter year over year was slightly higher or worse by 2 basis points coming in at 9.7 percent versus a 9.68%. Again, we'll write down 4 columns, the same 4 columns, 2 for Q1 reported and without gas and then 2 for Q2. And the five line items would be our core operations, central, RSUs, which would be stock compensation, quarterly adjustments in total. Going across in Q1, the two columns were plus 10 basis points and plus 5 meaning lower plus means good lower.
And in Q2 0 and 0. Central was minus 7 and minus 8 last year and 0 and 0 this year in Q1 and then 0 and 0 in Q2. Stock compensation was minus 4 and minus 4 and in Q2 was minus 2 and minus 2. Quarterly adjustment in Q1 was +8+8. That was the that +8 last year was compared to the prior year a one time charge for the an initiative in Washington State that we funded for alcohol.
And then quarterly adjustment was 0 and 0 in Q2. So all told reported in Q1 was a +7, meaning that SG and A was better or lower by 7 basis points in Q1 year over year, plus 1 at total without a gas inflation. And then in Q2, again, it was minus 2 and minus 2, so again, higher by 2 basis points. Within core operations, our payroll as a percent of sales improved year over year by 5 basis points. It was lower by 5 basis Total payroll dollars increased about a little over 6% in Q2 compared to this 8% sales increase.
So good showing there. This improvement in payroll was offset by higher costs and benefits and health care including health care and workers' comp pretty much a wash between those things. Some of that was accrual related. Again, these are big expense numbers that we also do actuarial things for. Our central expense, it was flat year over year in Q2, notwithstanding ongoing IT modernization costs.
I think in Q1 we talked about that was 6 or 7 basis points year over year increase. On an ongoing IT modernization basis as we're halfway we're not halfway through, but into the 2nd year of a 3 plus year project, It represented on an ongoing basis, we estimated it's about 3 or 4 basis point hit over the coming quarters year over year. Next on the income statement line is preopening. It was $6,000,000 in both Q2 last year and this year. Now last year we only had 2 openings this year 5.
Really no surprises. A lot of it has to do with timing, preopening starts in some cases many months before the actual opening in terms of the costs associated with it. All told, operating income in Q2 was up $94,000,000 or 15% as operating income went from $644,000,000 to 738,000,000 dollars year over year. Offsetting this reduction hold on a second. In terms of below the operating income line, reported interest expense was lower year over year with Q2 coming in at $25,000,000 $2,000,000 lower than the $27,000,000 last year.
Basically, we had one big reduction in interest expense in the quarter and then an increase related to the recent debt offering. As you recall last year on March 15, we paid off $900,000,000 of what was 5 year maturity fixed rate debt. The annual pre tax interest savings to Costco paying that off, I think I mentioned back then was about $46,000,000 pre tax per year or about 10,500,000 dollars pretax for this quarter. So that was that would make it lower have made it lower by $10,000,000 Offsetting this reduction of course was the was about $8,500,000 of additional interest expense related to our recent debt offering. As you know on November 28, we completed a $3,500,000,000 debt offering in the of senior notes, a combination of 3, 5 and 7 year notes with a weighted average maturity of 5 years and all in annual rate of interest just under 1.25 percent, which again is about $44,000,000 pre tax per year currently.
And so that's about a $9,000,000 increase in interest expense for the roughly 11.5 of the 12 weeks weeks of the 12 weeks that it was issued and outstanding during the quarter. So pretty much a wash between those things and that's why interest expense year over year was pretty much in line with last year. Interest income and other was higher year over year by $16,000,000 in the quarter. Last year was $10,000,000 this year it was 26,000,000 dollars Actual interest income for the quarter came in as $11,000,000 the same amount year over year. The other component of interest income and other was related to foreign forward foreign exchange contracts we use to manage the cost of U.
S. Dollar merchandise purchases in our international operations. These contracts are required to be mark to market at each quarter end and the change year over year was attributable to the general strengthening of the U. S. Dollar as of the end of Q2 of year versus a general weakening compared to the U.
S. Dollar and these various foreign currencies in Q2 of last year. Last year, we again recognized a small loss related to it. This year we recognized the gain. Now mind you, again this doesn't show as part of our gross margin.
This is where you put this FX contracts. But these are generally done by our buyers in foreign countries where they are basically locking in typically foreign currency or U. S. Dollar merchandise purchases in many cases where they've locked that in. And so again as it relates to the buyers, they many of them consider that part of their margin although we show it here.
Our company tax rate this quarter came in at 25 percent 25.1% versus 34.2% last year in Q2. As discussed earlier on the call, the income tax line benefited primarily from a $62,000,000 tax benefit in connection with that portion of a special cash dividend paid by the company in December of 2012 to employee 401 plan participants. At such time, Costco shares held by employees in the plan approximated 22,600,000 shares. These were held through employee stock option plan employee ESOP established several years ago. Dividends paid on these shares were deductible for U.
S. Income tax purposes and we recognized that one time tax benefit during the quarter. Excluding the one time benefit, our tax rate in Q2 came in at 33.5%, slightly lower compared to the last year's 34.2% during that. Basically a combination of a few positive discrete items that went our way in Q2. Generally, let's say ongoing, we'd estimate our effective tax rate barring anything unusual for the balance of 13% to be in the range up to 35%.
Overall net income was up 39% versus last year's Q2 and excluding the one time benefit of 39% increase would have been 23% on a net income basis and as I mentioned earlier 22% on an earnings per share basis. A quick rundown of a couple of other topics. The balance sheet will be included in the info packet that you can get online. Actually it was in the press release as well. Depreciation and amortization for the quarter was $217,000,000 $430,000,000 year to date.
The other component that we're asked about is our inventories to payables ratio, since we're a high turn business and we fund a lot of our inventories with trade payables. Improved year over year in the as of the Q2 end. On a reported basis, it looks really great 98% at the end of Q2 versus 91% AP as a percent of inventory. There's a lot given our ramped up expansion right now, there's a lot of nonmerchandise payables there for construction and related stuff. So, a merchandise inventories to merchandise payables, it was 86% a year ago and it showed a little improvement to 87% this year.
So it's certainly in the right direction there. Average inventory for warehouse was up $600,000 from $11,600,000 per warehouse a year ago to $12,200,000 this year, so up about 5% on the 8% sales increase. Just under a little under half of that $600,000 per warehouse increase related to higher levels of merchandise in electronics and small electrics consumer electronics and small electrics with the balance mostly spread over mostly other non foods departments. Overall, our inventories are in good shape. No big markdown issues through the recent holidays as well as our mid year fiscal inventories, which we take in January February halfway through our fiscal year were our best ever.
Of capital expenditures, in Q1, we spent $488,000,000 In Q2, we spent $455,000,000 for a total of $943,000,000 through the first half. I'd estimate that for the year it will be in the $2,000,000,000 range compared to last year for the whole year of about $1,500,000,000 And again that certainly reflects our ramp up in openings. In terms of cost go online, we as you know we operate both in the U. S, Canada and the U. K.
Now. Both sales and profits were up again in Q2 and Q2 year to date. As you know, we replatformed the site last fall and also have our first apps and so far so good. In terms of next on the discussion list expansion, as again I mentioned, we have no reloads or closings this year. So but in terms of units basically for the 4 fiscal quarters 9 in Q1, 5 in Q2, 5 in Q3 and 9 in Q4.
That would put us at 28 for the year up from 16 net new openings in fiscal 2012 and 20 in fiscal 2011. So finally we got up a little bit there. If you go back to fiscal 2012, the 16 units on the base of 592 was about 3% square footage growth. The 28% this year assuming we can get them all open on a base of 608 that we began the year with which would be a square footage growth in the 4.5% to 5% range. New locations by country for the year would be of the 28 would be 13 in the U.
S. And 3 in Canada, 3 in the U. K. A total of 7 in Asia, 1 in Taiwan, 1 in Korea, and 5 in Japan and 1 each in Australia and Mexico. As of Q2 end, total square footage stood at 88,000,980 6,000 square feet.
In terms of stock buybacks, we did not purchase stock in Q2. As you know, we purchased quite a bit less than we had in the last few years couple of years in Q1. Certainly, we during the 1st several weeks of Q2, we completed the special dividend and the debt offering and through the holidays. I don't think there's a whole lot to read into that at this point. Sometimes we'll buy a little more, sometimes a little less.
And as we've said in the past, we'll let you know each quarter. In terms of dividends, our current quarterly dividend stands at $0.275 per share per quarter or $1.10 a year. This currently represents annualized dividend costs for the regular dividend of 480,000,000 dollars That's of course in addition to the $7 special dividend, which totaled a little over $3,000,000,000 paid out to shareholders in December of 2012. As I mentioned, the supplemental information packet will be posted to the Costco Investor Relations site later this morning. Lastly, I'll go ahead and our Q3 scheduled earnings release date will be May 30.
That will be for the 12 that's a Thursday I believe. That will be for the 12 week Q3 which ends on May 12. With that, Crystal, I'll turn it back to you for Q and A.
And your first question comes from the line of John Heinbockel with Guggenheim Securities.
There's a couple of things. Drilling into payroll and benefits a little bit. If you looked at total labor cost, payroll is probably what 80% and benefits are 20% or something like that? No. It's well, keep in mind benefits is everything from health care to FICA to vacation and sick leave.
It's everything. It's not just health care. The big one that has the most inflation in it, of course, is health care costs and to a lesser extent, but percentage wise this quarter workers' comp. But roughly for every payroll dollar, it's about 50%, another $0.50 in the U. S.
And less in other countries. Well, because I'm wondering eightytwenty is maybe eightytwenty if you just did health care and benefits, yes. But I don't have the exact number off
the top of my head.
Well, because if you look because Helen, you said payroll was up 6%, right? Yes. Dollars? So if you look at the other part that would have offset that the all in benefits was probably up what double digit or not that high? I don't think it was up that high, no.
Okay. I don't have that
double detail in front of me. But I mean the big issue is as I mentioned earlier, accruals keep in mind given we're talking about $20,000,000,000 $25,000,000,000 sales numbers every basis point is $2,000,000 $2,500,000 Just accruals on $1,000,000,000 annual U. S. Health care cost and $150,000,000 $150,000,000 annual workers' comp cost when you look at different actuarial numbers, you're always going to get plus or minus a few basis points, sometimes plus, sometimes minus. And it's kind of like the as I mentioned on some of the discrete income tax items on all those small little things more went in the positive than the negative.
A couple of them went in the negative than the positive here. So is healthcare and workers' comp in the U. S. Still inflationary? Yes.
It's still healthcare I think is definitely in the low double digits in terms of percentage dollar growth in Q2. And you still think you need what about a 4.5% comp to leverage expenses or has that changed? It's somewhere in the 4 to 5 range. We've given up on trying to figure it out since there's so many other moving parts now with international and manufacturing businesses and everything else we do in life. Another thing on so on Kirkland, where does that stand roughly when you think about percent of units sold and percent of dollars?
And to what degree has that been growing? Well, I think units, I don't know the units off the top of my head. I would guess we tend to try to build bigger packs and better quality. And there are examples as you've known in the past from the Tuna Fish where we sold our brand, which is a package at a higher spec higher quality than the leading national brands at a higher price, but a greater value. But let's assume on average it's a lower price point by 10% or 20% versus what we would sell the brand for.
Private label is in the low 20s and continues to grow. And I mean when we talk about aspirational numbers, we'd like to see a 3 in front of it instead of a 2. But I don't know how long that takes and but certainly we keep adding new items. In the last couple of years, we certainly added several items in apparel and canned goods, those types of items. I think I mentioned last quarter on the call, like the KS men's wool slack, which is a very high quality slack at $50 or $60 $65 where we've gone from low six digit units to closing on 1,000,000 units a year.
So those are the kind of things that eke out some numbers too. And it's growing is it growing as a percent of SKUs inside the club? I imagine maybe a little bit. Absolutely. So that mix that you're getting because if you're managing well, it's coming out to a flat gross.
The positive mix you're getting from Kirkland to some degree is getting reinvested in price somewhere. I don't know where, but somewhere, right? Again, there's 100 moving parts. At the end of the day, I think that we've seen as you know, I think you were one of the ones that pointed out earliest back in Q4 of 2011 as we were investing in price and seeing some of the numbers come down year over year overall gross margins. And certainly as I mentioned in the quarter is where a lot of it is.
We saw that year over year trend flatten out in the last two quarters relative to being down 10 to 15 basis points on a year over year basis each quarter last year.
All right. All right. And then
just one last thing. I don't know if you can
have anything to say about this, but
what are you seeing in Texas with Sam's membership fee increase? Anything different competitively than what you're seeing from them elsewhere since they have that fee to play with? We really don't see a lot of difference elsewhere. I mean we're we generally are we try to be fiercely competitive everywhere. And first of all, I think it'd be too early to tell.
Nothing is I haven't looked that closely, but nobody has also mentioned in the last few budget meetings anything regionally big in terms of margin change. But I'm not suggesting it's not a little lower. It may very well be.
I just don't know off the top of my head. All right. Thank
you.
And your next question comes from the line of Karen Weinsberg I'm sorry, Weinsberg from Citigroup.
It's Deb Weinsberg. Hi, Richard. Can you talk about your e commerce strategy as you move outside of Canada, the U. S. And the U.
K? How should we think about it on a market by market basis? And then just from a SKU perspective, how should we think about your overlap between kind of online and offline?
Well, just like we've done with our brick and mortar warehouses, we go into a new country, we do it slowly and we see how it goes. So don't expect a lot of don't expect to see us in 5 more countries in the next 12 months. We certainly want to expand it and we'll do so over the next few years in a methodical way. So our strategy is the same, do it as we normally do stuff. In terms of I think we've expanded some of the product categories to test some apparel items.
And there's a little overlap there, but it's still small. If historically over the last few years, the view was this was an extension of our product line not the same product line that we have in the warehouse. Typically, I used to hear numbers in the 80% to 90% range was not overlapping with the warehouse. And maybe it's a little lower percent today, but by no means going dramatically in that other direction. We still don't put our stuff online of what's in every warehouse and what the sales prices are in the warehouse and the brick and mortar.
One of the challenges in a fast turning like ours is we could sell that stuff pretty quickly. I'd hate for we'd hate for a member to look at something and it says we have units in locations they're going to go shop at or something and not be there.
All right. So at
this point yes, at this point, we'll continue to do what we do and we're pleased with what we've seen so far with the re platforming and all the little growth pains that you have when you redo stuff. And as you might expect, it was more of a hassle for the buyers as they're learning how to use the new system and put stuff on, but we're doing fine.
Okay.
And then what do you
attribute your renewal rates tweaking up to?
I'd like to think it's we're wonderful. Of course you are. It's everything we do. I mean, it's the mantra around here is all as you've known for a long time is constantly driving quality up and prices down and never being static and constantly pushing ourselves and improving. I think executive members certainly helps.
Gas and food I'm convinced over the last 4.5 years of a bad economy has certainly driven more frequency that helps and more food. And so anytime we get another reason why you want to come shop at Costco, it's another reason why you're going to renew every year. And we try not to disappoint. And then to a lesser extent, it's the on AmEx there's auto renewal of course. You can opt out of it.
Employees a member a cardholder can opt out of it. But certainly that's in my view less of an issue right now because the rate of increase is not as
big as it used to be.
Okay. I increases is not as big as it used to be.
Okay. And the last question, if I go back and look over our model for a long period of time, it does seem from an SG and A perspective on the operations line that there is a more consistent pattern in terms of leveraging the operations. Can you just discuss if there is anything that's significantly changed in terms of how you approach the operations or any kind of philosophical changes I guess?
Nothing new philosophical. I mean, a couple of things I've mentioned on prior calls in the last several fiscal quarters are things like increased penetration in non U. S. And Canada markets where certainly in non U. S.
Markets that relate to health care costs, lower higher lower wage relative to price points in those markets. So you have a little lower payrolls. You have You certainly have lower health care costs. Those types of things help that increasing penetration. I think as the I know I've mentioned over the last few years a couple of times on a qualitative basis the word focus.
And as wonderful again as we think we are in being efficient, when the economy got bad, everybody looks to see what can you do better and what should you stop doing that you used to do, but you don't need to do. And it's those little things. I think in the past year I mentioned the example of overtime hours. We are probably pretty good at managing and minimizing overtime hours. But once we started getting all the 12 or 15 or so senior VPs of operations around the U.
S. And the world every month at the budget meeting to report on it, guess what? When total hours were going up 3 plus percent year over year or 3.5 4% whatever it was. Overtime hours were going down 20 plus percent. Again that's a year or 2 trend benefit, but those are the kinds of things I think that we've gotten better at.
I think getting back to John Heinbuchl's question earlier about expense, what do you need in comp sales? One of my canned answers in the last few years has been, you don't it's hard to know what who knows what exactly the expense leverage is. I can only tell you that I believe that whatever it used to be it's a lower number now because we've gotten a little better in the bad economy.
Okay, great. Well, thanks so much and best of luck. Thanks.
Your next question comes from the line of Karen Short with BMO.
Hi, there. Thanks for taking my question. Just on merchandise margins, it sounded like giving us what your core merchandise margins did in 2011 and 2012 and then comparing that to what happened in the first half of this year. It sounds like you're trying to signal that we should not expect this first half of the year to be the trend for the remainder of the year. Did I read that right?
Well, we try not to signal other than to say, I know last year as each quarter we showed that the core year over year prior versus compared to the prior respective quarters of the prior year when they were down 10 15 basis points year over year that people would say, well, once you anniversary that for 4 quarters, does that mean your quote investing in prices isn't getting any more? And of course, I would say there's no telling what it will be. We'll continue to do what we do for a living. Certainly, we are cautioned that we want to try to increase earnings and sales and but we're going to try to do it by driving sales and lowering expenses first. But so far so good.
There's 2 quarters behind us this year that have shown certainly a better relative trend than the 4 fiscal quarters last year. But again, I can't really tell you what the next quarter or next year is going to be.
Okay. Thanks. And then one of your competitors also kind of signaled that they had accelerated their price initiatives. I guess, are you seeing anything on that front? Or are you changing anything in terms of your pricing in response?
We I don't want to sound arrogant, but we do what we do every day. And we haven't seen any big changes out there in general. And again, we're all we and our competitors and probably the one you're talking about are both fiercely competitive. And as I've said in the past, direct warehouse club competition most particularly with Sam's is going to be the most competitive that we have and that hasn't changed over the years. As we get questions about what happens when the supermarkets are doing something or other forms of retail food and sundries as an example, that's less of a direct impact with the exception of a few areas like some of fresh foods areas like fresh meats and everything and some cuts of But other than that, we haven't seen any dramatic deltas.
Okay. That's helpful. And then just last question. You've been kind of giving this cannibalization impact on your total comp of about 50 basis points. Is it fair to say that that's kind of steady state for a while?
I mean, I know you gave the cadence and the locations of new store openings in the back half of the
year. Yes. Years ago, it used to be bigger because we had smaller base of units even in the U. S. And we're opening half a dozen units in L.
A. Or something like that. And we've always just given it out. Then it got down so it was maybe 0.25 percent cannibalization. And now it's gotten up to 50% or 60% in the last year.
And yes, it's not going to change dramatically from that. Certainly, as we continue to ramp up expansion, it stays in that range. I don't ever see it going to 1.5% or 2%. I don't know if it gets up from 50% or 60% to 80%. But it probably stays up there as we continue to open particularly in some of these new international markets where we have very high volume units that we've got to cannibalize them and get more locations
Okay. That's helpful. Thanks.
Your next question comes from the line of Colin Granahan from Bernstein.
Good morning. Good morning, Richard. First question on expansion. It looks like you're now targeting 28 units this year. I think last quarter the budget was 30, although you've always said units can slip.
It looks like you lost to Korea and the U. S. Anything of note there and anything to read into that?
No. I think the U. S. One is one that's just delayed for 6 or 9 months. And I'm not sure about the other one.
No, nothing unusual.
Okay. And then just sticking with expansion, there's been a few press reports of some interest in Europe and France and maybe you can update us in your thinking of Continental Europe as a longer term future opportunity.
Well, we I think we've spoken generally and there have been articles in the local and national press in those countries like France and Spain. And I would say over the next couple of years, we hope to be open. But it's a long process in some of these countries as it relates to the zoning and the permitting and the approval and the appeals of residential and other businesses can appeal. So there's a lot of things going on. But we have people landed in a few different countries including those 2.
And those are the most likely. But again, once we know more, we'll let you know.
Okay. Fair enough. And then just on the LIFO, obviously, you had a little bit of a benefit. How are you thinking about that through the year in terms of inflation, deflation? What are the merchants saying about what's coming down the pipe?
The only area I'm hearing a little more inflation still is in protein, beef and poultry and pork. And that relates both to international demand for some of those items as well as the costs associated with the drought last year and grain prices and corn and wheat and things like that. As it relates to as freight costs have gone up a little, it has I don't think they went all the way down when freight costs peaked a few years ago and then came back down. So I'm not hearing a lot of inflationary talk out there. On balance, there's not a lot going either way with the exception of protein.
That's really all I've heard from our buyers.
Okay. That's helpful. Final question just on MFI. These came in a little above our estimate, but it looks like we were fairly good at figuring out the dollar value of the membership fee increase. So two questions there.
Was there anything else? Was it or was it just you had 1% growth in new members and high renewal rates that drove the little bit of upside to MFI? That's the first question. And then just kind of
out of
curiosity, is there any lumpiness through the year in terms of when renewals happen?
On the first question, your thoughts are generally correct. On the second question, there's I probably need to go look at it again, but historically since we generally try to get openings done, ideally, if we could I'm thinking of the U. S. Holiday and seasonal calendar here, but you could take it to each country and do that as well. But generally speaking, we'd love to get every open every location opened A, as soon as possible and every location opened the week before back to school and Labor Day and to enjoy again Labor Day back to school Halloween Thanksgiving Christmas seasonal you name it New Year's.
And that's why there's typically more done. And then of course, if you're trying to push those units to get open, you probably slow down a little bit in January February. So if I think you look back at the calendar, probably there is a little lumpiness of openings, probably not as much as there used to be. But then because of deferred accounting, it's and such a big piece is the total now, it's not as lumpy as it buffer it tempers some of that lumpiness even more.
Okay. That's helpful. And I said that was my last question, but let me slip one more in. The U. S.
Comps have been really, really consistent. It looks like your business has been incredibly resilient and impervious to some of the pressures out there like the payroll tax hike, the delay in tax rebates that other retailers have pointed out. Have you guys done any work on how that might be impacting your business and any offsets to that?
No. We haven't as we kind of joke about that we don't don't spend a lot of time trying to analyze other than driving quality and lowering the prices and everything else to take care of itself. But I know back when the payroll tax holiday occurred and some of those same companies were talking about how it did help them a little bit. And when asked, we basically indicated and looked at it indicated that we didn't really see much benefit from it. So I think the same thing is happening on the tail end the other way.
It can't help, but it doesn't seem to really be impacting our numbers.
Great. Thank you very much, Richard.
Your next question comes from the line of Chris Harbors from JPMorgan.
Thanks. Good morning. Executive membership 15,000 per week. It slowed down here in the second quarter. Does that have to do with the timing of the opens in Japan?
Do you generally index over index to executive in those countries versus domestic? And do you sit there and say, hey, we need step up executive membership to a higher percentage of sales as you think about what traffic could be in the future? Is it something that you're watching and maybe saying, you know what, if executive membership doesn't grows at a slower rate then maybe our traffic could fall below that recent very consistent trend?
I don't think look every day people in our membership marketing department are coming up with ways to drive both new members, both people both new members and converting members to the executive member, then signing them up, higher percentage of new members are signing up as executive members. I think we've done a good job over the last few years of doing that. I remember a few years back for every 100 members that signed up in the U. S. 20 or 21 were executive or 10 or 12 were executive members and then a few years later it was in the low to mid-20s.
Why? Because we started focusing on it a little bit in the warehouse. Not doing a whole lot of fancy stuff, but just doing the eightytwenty rule that we're pretty good at. What are the simple things we can do to drive this? Certainly, trying to get people to also do the triple value play what we jokingly call it is that to also sign up for the Amex co brand card.
So all those things drive frequency, drive loyalty, drive sales. And so we're constantly looking at ways to do that. I think part of it's ultimately it's got to slow down a little bit. We've now had it in the U. S.
For 13 or 14 years and Canada for 7 or 9 years I think and a few other countries for less time than that. Those other countries though were much smaller piece of the total company pie. So I think it's I would expect it to continue to come down a little bit. And I actually think 15 a year is still pretty good, 15 a week.
Yes, absolutely. Can you talk about you said 1 third of your members are executive and 2 thirds of the sales. Can you talk about the deviation around that? Like with some of your is that a is there a wide deviation around that among your stores? And maybe where some of your better and best stores are as an indicator of where potentially that could go?
Well, I think it has more to do less to do if I think about it I'll take the United States. I think it has less to do with the typical geographic areas other than the people the operators in those areas that push it a little harder. And we try to learn from them. And one of the benefits I think of our 13 4 week meeting every 4 weeks, so 13 times a year or 13 fiscal period meetings out here for 2 days, day and a half, is each of those 15 or so senior VPs of operations in this example in the U. S.
The 8 senior VPs of operations gets up and one of the things they talked about is what's going on in these areas. What are the new things they've done to drive whatever? And I think some do focus more than others. And we try to learn from that.
And so I guess you have some stores where it's 40% to 50% of your membership base?
Absolutely. Yes. Okay. I see what you're saying. Yes, I don't have that number in front of me, but I would assume if you're saying if I'm assuming let's say something and if it's roughly a third or a little over a third overall, it's probably in the U.
S. In the mid to high 30s. Let's just make up a number here 36. If it's 36, I would bet you across the 430 plus locations, it would range anywhere from the high 20s to the low 50s.
Okay. But I'm shooting
from it with that answer. Sure.
Very helpful. And can just from an accounting perspective, can you talk about how the calendar shift might impact total sales versus comp in the next two quarters?
I don't think it's a big deal in the next two quarters. There's no Easter shift in the same month? In Q4. It's in the same month in quarter. I don't think there's a whole big deal there.
I think now of course in Q4 last year it was 17 week quarter. And I don't look that far out in terms of when Labor Day falls and all that stuff. I think Labor Day well, if Sunday 1st we end on Sunday, Sunday 1st September 1 is fiscal year end. So I guess Labor Day is 2nd. So that might affect a little bit too, but I haven't thought through that yet.
Okay. And last question. Online, you accept credit card purchases. So how does that change the profitability of an online versus an in store transaction? Thanks.
Well, one of the cost components of course online is or and in store as well is what we call bank charges, which is credit, debit and other fees related to vault and cash and currency and check cashing. And online, we of course have the ability to since you can't pay by cash or check online, we also accept other national forms of credit cards of course in store it's exclusively American Express in terms of branded national cards. And it's higher merchant fee elsewhere. So we have a higher bank charge line, although we have overall a much, much, much lower SG and A number online because 75 plus percent of the goods are shipped factory direct. So there's a lot less handling.
And it's a as a percent of sales online is a more profitable business than brick and mortar, but we do both.
Thank you.
Your next question comes from
the line of Mark Miller with William Blair.
Hi, good morning. It's encouraging to see the step up in club openings particularly more coming in the first half of the year. I wanted, Richard, to get your view on I know there's an objective to possibly accelerate the club growth further. I think had been potentially as high as 6% you'd hope over the long run. But is that upper end of the objective becoming more credible in your view?
And maybe you can just talk about that pipeline of club openings you look at, I think, that pool going out say 3 years. Is that group of opportunity stores growing at that type of rate?
Probably 6% is a little high. But given that we were at 3% and now we're getting towards 5% that's a good sign. I think there's certainly a lot more in the pipeline now to give I think us a little more be a little more credibility with you in terms of what we talked about at the beginning of the year. There's always going to be a couple that fall out because we try to be optimistic that everything we've got going on is going to work and get done on time and maybe push the envelope at the end of any fiscal year to get them still open. But I'm feeling better now that 2 years ago I was feeling that let's try to get into the low 20s at least and we did 20 2016.
We began this fiscal year talking about 30 and I think we have a good chance of actually hitting the 28. That's and I think that going forward, I think Craig would like to see it in the have a 3 in front of it, but it probably a very low 3 in front of it. So if I was a betting person over the next 3 years fiscal 2014 2015 2016 2016 27 to 33 or 4 which would give you a 30 estimate, but I could be off a few. But I think we've got enough of the pipeline to be able to do that and we'll go from there.
Great. Thanks. And then on preopening, you indicated that it was nothing particularly unusual there. But the preopening costs first half were up about a third, but the number of openings was more than double first half. Is that because you've got the openings coming late in the year with the 9 club openings in Q4?
Or is the preopening cost coming down
a little bit for you? I would be willing to bet it's the former reason not the latter. A lot of it just has to do with timing. Now keep in mind preopening. Let's say that we're doing a lease not an owned and you've got a you get the property 4 or 5 months in advance of opening.
And we might have a few $100,000 charge per period for rent expense, which is preopening prior to the opening day. That alone might be $1,000,000 or a little over $1,000,000 on a location. Now that's the exception not the rule since we own a lot of the units. And certainly when we're building a multi story with parking and 2 stories of retail on a 2 acre site in Japan or Korea, it takes a lot longer to do so you might have even more preopening. And some of those are leased.
So those are the kinds of things that will buck that number up the other way. So it's overall, I mean, again, like everything around here, each location has preapproved by senior by Jeff and Greg and the heads of respective operations heads in those areas of what preopening is going to be. And we hit it and miss it. But overall, we have a pretty good handle on what it is. The thing we don't have a good handle on sometimes when there's a delay, again, a 2 or 3 month delay because of soils issues or rain or freezing ground, you couldn't get the foundation laid before the ground froze.
They could be 300 dollars to $800,000 on a location of preopening during those several months.
All right. Fair enough. Thanks.
Your next question comes from the line of Greg Milich from ISI Group.
Hi, thanks and good morning, Richard. I want to follow-up on the LIFO gain, which area was actually deflating or which categories? And did any of that actually close to retail deflation?
On the deflation, I mean, if I look at the big pools, what we call foods and sundries, foods was down a little about 0.5%. Sundries was up less than 20 basis points. Apparel is down a little bit. Electronics and appliances are down a little bit more than that, but still less than 2 percentage points. Pool 5 which is a mix match a mixture of things including gas and sporting goods and office and auto is down a shade.
And then alcohol as a backroom beer and wine is up a shade. But overall, again, it's down a little over 0.5% from the beginning of the year. Got it. Got it. And again, there's certainly the bigger deflationary items are still electronics.
And sometimes there's deflationary items like I'm just looking at the top 20 deflationary components. There's aside from gas and a small amount from gas and the biggest chunk is electronics, pecans. They're down 20%. Well, that's because they're probably double less or whatever it was. So sometimes you have these giant commodity price increases a year ago, particularly in the nuts category some of the grains and then it comes down the other way.
Got it. And on the $600,000 increase in inventory per warehouse, could you help us sort of break that down and figure out where it's going into that investment?
I think right at $200,000 of it was electronics and another $75,000,000 plus of it was small electric. So and then I think there was a we definitely expanded apparel. I gave the example of the wool pants. We've got a much better I think present commitment to apparel. But and then there's a lot of little stuff everywhere else.
But the single biggest component is consumer electronics. And yes, you go into the warehouse, you see a lot of 60 inches 80 inches TVs now and tablets And just
to maybe understand a little bit better as you grow the online business, how should we think about the inventory per warehouse visavis the online growth? Is it the same SKU assortment? Is it an extended assortment? Will that
Well, right now it's an expanded assortment. It's not the same. I mean, certainly you're going to see some overlap on electronics or few apparel items or some, but you're going to see more SKU selection online and perhaps and so whatever changes you're going to see there are going to be very slow in terms of percentages because the brick and mortar is so big.
Right. Great. And then lastly, you mentioned on the accruals and we know that just $2,000,000 or $2,500,000 is 1 bp. But the ones that you cited in this quarter, was that sort of a one off catch up accruals? Or do you think now there's a different sort of accrual run rate for those things you cited?
No, no. There was I think as it relates to I don't have the exact basis points in front of me. But like on workers' comp, I think there was a couple of basis points there. It's and that's just looking at that's probably my guess is there's a little catch up in that number. But again, it's more when it's kind of again, I get back to the income tax.
We benefited by several $1,000,000 I'm not talking about the big $62,000,000 number, but there's discrete items. Usually when you've got discrete anything, there's 2 or 3 pluses and 2 or 3 minuses and it balances out to be very little a basis point or 2. My guess is there are 3 or 4 here. So it's not a whole lot. I wouldn't read a lot into that.
Okay. Great. And then lastly on the club openings, as we do more outside of North America, how should we think about CapEx in terms of how many of those might actually be leased? I mean, I know you're well over your 90% plus here, but as we go international, are most of those units in Asia and elsewhere going to be leased?
Probably a little more of them are leased or at least ground leased and with long term ground leases. We still try to buy where we can and I think we're getting a little more aggressive on that. But it's hard to predict. I think overall we're in the low 80s in terms of how much we own. But I think what I know even in the U.
S. When interest rates plummeted 4 years ago, all of a sudden you'd have a land and a lot of times when you have an individual landowner, they don't want the cash. And so we would we've done a few more leases in the U. S. As well over the last several years.
But certainly there's probably a higher proportion of those done in areas like Asia. I think we own more in Japan than we do in other like Korea I think we lease more. But every country is a little different. But if I had and I took the 3 Asia countries I think overall there's more leases there of course than in the U. S.
So maybe to ask a different way, if there's 27 or 28 openings, is it fair to say that maybe this year given where they are that half are leased and half are owned? Or would that be too extreme?
No. We'll still own more.
Still own more. Okay, great. Thanks a lot.
Okay. Your next question comes from the line of Dan Binder from Jefferies.
Hi, good morning. It's Dan Binder. A couple of questions. First on IT modernization costs, I didn't hear you call it out this quarter. I know it's been adding some pressure.
Are we now kind of through the worst of that? No. I think on an ongoing basis looking over the next few quarters and this is a guess somewhere in the 3 to 4 basis point year over year. I think it was higher in Q1. It was closer to flat in Q2.
But some of that is just again timing of things. You also capitalize some of those costs. And again, overall it's going to my guess over a 2 or 3 year period, it's going to add sometimes 3, sometimes 5. Right. Okay.
Yes, I remember last year you guys were very focused on some of the operational opportunities to improve your cost structure. You called out some of that today. Overtime reduction was one of them, which you mentioned earlier. I'm just curious as you look at the organization today, are there any big buckets where you can still pull costs out? I don't think there have been any big buckets.
Even by the way like the as I did mention the overtime, 20 plus percent reduction in overtime hours. That was several $1,000,000 a year maybe a basis point or 2 over a couple of years, but nothing so dramatic that's going to change. Nothing like everybody thought that RFID would free up the front end and reduce our biggest labor cost area. That ain't happening. But we have done a better job at front end labor kicking and tackling little things.
And there's still the focus out there, but I can't think of I can't other than driving sales and we I mean, again, these are I'm shooting from little things here, but we've streamlined and tested and now rolling out how we return merchandise. And in some cases, not doing it at the warehouse, but bringing it into some of the depots. And if that can continue to work, do we save a few million here and $5,000,000 there? Yes. But there's no giant thing out there.
I'm sorry if I missed it, but did you comment on the dotcom sales growth and the contribution to comps this quarter? No. I think it was in the low teens in terms of sales growth. Okay. And what does that look like in terms of contribution to comp?
I don't know. I mean, we're going to do in the high 2s for the year on 100 whatever your budget is for total sales for the company. So it's 2.5% of sales and up in the low teens. Okay. Great.
And then on consumer electronics sales, I know you called out the calendar issue that affected the quarterly number. But generally, your monthly sales updates have been pretty showing some pretty good strength in that category. I was just wondering if you could speak to some of the bigger trends that you're seeing take place in the club there? Well, I think electronics the biggest takeaway is our TV sales in general, even though they were again that's the biggest TV sales are the biggest piece of electronics. While that was down slightly in February, it is over the last several months, it's been up in the mid to very high single digits.
And a lot of that I've been told in the budget meetings as it relates to the fact that we've done very well with 60 inches to 80 inches TVs. We've done relatively well. We've now cycled by not selling as you know, we stopped selling some of the Apple products, the ones that we were allowed to sell, well over a year, maybe 2 years ago. So that on that low base, we are selling starting to sell some of the other tablets and the like. The cell phone business is pretty good.
But again, it's all dwarfed by TVs. Great. Okay. Thanks.
And your next question comes from the line of Sandra Barker with Muntag and Caldwell.
Richard, I just had a clarification on the website. What impact have you seen from making it searchable and adding the mobile apps? I mean has it been anything notable now that you're sort of more visible?
Well, I think sales are up a little better than they have been. But the first thing is, as I know for the months leading up to it, everybody's warning us from our own dotcom people to the IT people that the day you flip the switch is not the day you start to see immediate benefit because it takes time to build the clicks and all that stuff. But again, kind of like the other things we do, we're methodical and slow about it and it's showing some improvement. But off the top of my head, I can't give you any specifics.
Great. And I can't remember. Is Jim still in the building a little longer or what's he focused on?
Jim is on vacation this week, but yes, he's still here a lot. So he's general somebody asked me the other day, I mean, you go to Craig to ask questions and get permission to do stuff. And Jim is still traveling and he's still on the board of course. And I see him quite a bit. But he's and to his credit and I think to the company's success, it's been a very good really 3 a little over 3 year transition with he and Craig.
And he's still traveling a lot to openings and with the merchants and with Craig and spends a lot of time with Craig and Jeff still. But he's doing a good job of staying away a little more. If you asked me 6 months ago, I would have said he's in the office 80% of the time. Now it's still well above 50%, but we'll see. He's still doing
well. Thanks.
And your final question comes from the line of Bob Drbul from Barclays.
Hi, Richard. Hi. I just have two questions for you. The first one is, can you talk a little bit on the numbers around I think you said new member sign ups in the metrics in international markets versus the U. S.
And Canadian markets, the number is higher abroad. Can you give us can you tell us how much higher it is? And the second question is, you talked about the buyback
a little bit. But on
the buyback going forward, is there any reason why you wouldn't be active at these levels where the stock is?
Well, I'll take the last question first. No, I mean, we're going to we look at it and we'll keep looking at it. I think generally speaking, as I mentioned in the past, we issue our issues that add 3,500,000 shares a year. It'd be nice to cover that, but we don't feel pressure on a given day or week to do something. Generally speaking, we still feel good about the company long term.
And again, I think at this point, we'll wait for 12 weeks and see what we're doing. On the other question, what was it?
How much higher are sort of the new member sign ups in international markets versus U. S, Canadian?
I'll give you some general numbers. I mean, we've had numbers. Keep in mind, when we talk about opening day sign ups, it's for the generally 8 to 12 weeks leading up to the opening day where we'll the parking lot's partly done and you can get in and out of parking lot and people can come up and come in and sign up in advance of opening. There's the little the flags outside in the whole bed and the table holding activities. And in the U.
S. When we've opened a new unit even in a very strong existing market, you might have a few 1,000 sign ups, because you've got a lot of people in that market and it's not like this giant thing for a new market. We opened I know I was at an opening back in the Carolinas 3 or 4 months 4 or 5 months ago. And it's a relatively medium sized town less than 1,000,000 people in a brand new market and through opening day, so opening day sign ups for those several weeks and they're all booked if you will starting on opening day was in the 6,000 or 7,000 which was better than we were thought. We have some openings that we've done over in Asia and Australia whereas through opening day we've had anywhere from 20000 to 60000 members signed up.
Now mind you you're going to have a much lower renewal rate on those a year later. But we have units, I think our membership numbers and we've been in Japan for a while now, but we also have some new units there. The number of members per unit over there is a little over double what the company is running. So it's a little different metric in some of those markets quite a bit. So when you open 4 or 5 of those that's going to jump your membership increase, the number of members recognizing we don't use deferred accounting for accounting members, but for their dollars we do.
Great. Thanks very much.
Okay. Well, is that it, Crystal?
And there are no further questions at this time.
Okay. Well, thank you, Bob and Jeff and I around. Appreciate your time today.
Thank you. This concludes today's conference call. You may now disconnect.