Good morning. My name is Dawn, and I will be your conference operator today. At this time, I would like to welcome everyone to the third quarter and year-to-date operating results for FY 2012 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 one on your telephone keypad. If you would like to withdraw your question, press the pound key. Thank you, Mr. Richard Galanti. You may begin your conference, sir.
Thank you, Dawn. Good morning to everybody. This morning's press release reviews our third quarter operating results for the 12 weeks ended this past May 6th. As with every conference call, I'll 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, for the quarter, our earnings per share came in at $0.88, up a little over 20% from last year's third quarter earnings per share of $0.73, and a $0.01 greater than the first call consensus of $0.87. As was mentioned in this morning's release, this year's third quarter included a pre-tax LIFO charge of $6.5 million, or about a $0.01 a share. Last year's Q3 had a pre-tax LIFO charge of $49 million pre-tax, or about $0.07 a share. A few other items of note when reviewing the year-over-year earnings comparison. Again, our sales results, an 8% overall sales increase and a 5% comp sales increase. The FX impact from earnings of our foreign operations year-over-year, assuming FX rates have been flat year-over-year, that was a hit to pre-tax earnings of about $8 million, or also about a $0.01 a share.
Also, we had a 9% increase in membership fees that I'll talk about. This increase included a small benefit from last November's fee increase in the U.S. and Canada, also about $8 million pre-tax or about a $0.01 a share. Lastly, we had a favorable year-over-year income tax rate comparison, similar to what we saw in Q2. In terms of sales for the quarter, our reported sales were up 8% total, and on a comp basis up five. For the quarter, both total sales and comp sales were impacted by gasoline price inflation, which was largely offset by the weakening of foreign currencies on average relative to the U.S. dollar year-over-year. On a comp sales basis, the 5% U.S. comp sales increase in Q3, excluding gas inflation, would have been a four, and the reported 5% international comp figure, assuming flat year-over-year FX rates, would have been a plus eight.
If you take those two together, they offset each other and the reported 5, excluding both gas inflation and FX, would have remained at a 5 for the total company on a comp basis. Other topics of interest are opening activities and plans. After opening 4 new locations in Q1, which ended last November 20th, we opened 2 locations in Q2, both in Japan. In the third quarter, we opened another location in Japan near Osaka, and also reopened our Tamasakai warehouse in Japan, which had been closed since the tragic events of last March 11th in Japan. We also relocated a unit in Ontario, Canada, and opened 2 new units in the third quarter as well in Pharr, Texas and in Huntington Beach, California. At the end of Q3, our worldwide unit count was 602.
All told, that would put our fiscal 2012 expected opening schedule at 16 net new units. The 10 we've opened fiscal year to date and six more planned by fiscal year-end here in the fourth quarter. These total 16 would include 10 in the U.S. and six in Asia, one in Korea, one in Taiwan, and four in Japan. A quarter ago, I had indicated we expected the total number for the year to be 17. One has since slipped into early fiscal 2013. Also this morning, I'll review with you our e-commerce results, our membership results, and also a little further discussion on margins and SG&A and repurchase activities. Again, sales were $21.8 billion, up 8% from last year's $20.2 billion and 5% comp.
For the quarter, the 5% reported comp figure was the result of a combination of average transaction increase of 1.7% for the quarter and average frequency increase of 3.6% for the quarter. In terms of sales comparisons by geographic region, in the U.S., the Midwest, Northeast, and Southeast regions were the strongest. International and local currencies, Canada and Mexico were the strongest, with Taiwan and Japan being the weakest, mostly due to the small base of existing units in both of those countries and the cannibalization associated with recent openings over the last year, as well as a year ago, the very strong post-earthquake business that we experienced in Japan in the third quarter.
In terms of merchandise categories for the quarter, within food and sundries, we had a comp result in the mid-single digit range, a little below where it had been running in each of the past couple of fiscal quarters. All subcategories were positive, ranging from 1% to 11% each among those 7 or 8 subcategories. Within hard lines, which was in the low single digits positive, the strongest subcategories were hardware and automotive, with electronics being slightly negative for the quarter. Within the high single digit soft lines comp, small appliances, domestics, and apparel were the strongest performers. In fresh foods, all subcategories were all centered around the mid-single digit range and as was the entire category.
Food and sundries and fresh foods continue to experience inflation on a year-over-year basis in the low single digit range, but we are seeing a little bit of inflation abatement, if you will, in the past few weeks. In fact, some price reductions on some food items. Like milk, cheese, bacon, butter, coffee, olive oil, flour, et cetera. Still some inflation we see in beef and across many of the nuts categories. On the non-food side, not much inflation expected going forward right now, although probably a little bit of reduction on the apparel side. That being said, you never know until we get there. Moving down the line item, the income statement. Membership fees, we reported $475 million versus $435 million a year ago, so up one basis point or $40 million. A year-over-year dollar increase up 9%.
As I indicated near the beginning of the call, the U.S. and Canada fee increases that went into effect last November benefited Q3 results by about $8 million. Excluding this fee increase benefit, if you will, as well as a slight negative impact of about $3 million from the FX that I mentioned earlier, in terms of assuming flat FX year-over-year, the 9% dollar increase in normal membership fees would've been up 8%. In terms of membership, we continue to enjoy strong renewal rates, which I'll talk about in a minute, and continue to enjoy increasing sales penetration and membership penetration from our Executive Members. Our new member signups in Q3 were quite strong, up 9% on a year-over-year basis, largely that's due to the strong international openings this past year in Asia and Australia.
In terms of number of members at Q3 end, Gold Star, we had 26.4 million, up from 25.9 million 12 weeks earlier. Business primary at 6.4, also at 6.4 a quarter ago. Business add-on, 3.6, compared to 3.7 a quarter ago. That a lot has to do with as people convert to Executive Member, they go out of the add-on category and become their own member. All told, we ended the quarter with 36.4 million member households versus 36.0 million at the end of the second quarter. Including spouse cards, total cardholders, 66.5, up from 65.7, 12 weeks earlier. At Q3 end, our paid Executive Members were a little over 12.3 million, an increase of almost 200,000 in the 12-week fiscal quarter, about 16,000 new Executive Members per week. That's a combination of new sign-ups as well as conversions.
In terms of renewal rates, they continue strong. The trends in the U.S. and Canada have sequentially been up every quarter for the last several quarters. As of Q3 end, our business renewal rates were at 93.6, up from 93.5 a quarter ago and up from 93.3 at the end of the fiscal year. Gold Star, 88.6, up from 88.4 and 88.1 at the quarter and fiscal year end. All told, in the U.S. and Canada, 89.6 versus 89.4 a quarter ago and an 89.1 at the beginning of the fiscal year. On a worldwide basis, we're at an 86.2, up from an 85.6 a quarter ago, and 85.7 at the end of the fiscal year.
All told, continuing to trend in good directions, notwithstanding the fee increases that we began in November in the U.S. and Canada. As most of you know, we increased the annual fee for Gold Star and Business and Business Add-On. They are all now at $55 in the U.S. and Canada. For Executive Member, it went from $100 to $110. As I mentioned, those were effective November 1, but in terms of size, it really was effective January 1. It was effective November 1 for new signups in the warehouse, but in terms of renewers, the renewers started in January and will continue through this December. In all, about 22 million members were impacted or will be impacted by this increase, about half of whom are Executive Members and half of whom are the $55 member.
In terms of timing of these increases hitting the income statement, please recall that the fees are accounted for on a deferred basis. Really the first big impact to the P&L on that membership fee income line will be in the upcoming fourth quarter and into Q1 and Q2 of next year. As I previously mentioned on the first and second quarter calls, there was essentially no impact in Q1 to the membership line. About a $1 million pre-tax impact to Q2. As I mentioned earlier in this call, about $8 million pre-tax in Q3. Again, it will be much more meaningful in Q4 and into Q1 and Q2 of next fiscal year. It is essentially a 23-month timeline, as I have talked about before, how we recognize the $5 and $10 increases starting when the increase is paid, and then spread out over the next 12 months.
With regard to Executive Membership, also in conjunction with doing the increase, as I mentioned earlier, we increased the 2% annual reward from a maximum of $500 a year to a maximum of $750 a year based on eligible purchases. While it is still pretty early to see the complete impact of the renewals on renewal rates from the increase, so far so good, and in our judgment, we do not expect any issue here. Going down to the gross margin line. Margins were up on a reported basis, five basis points from a 10.50 to a 10.55. I will ask you to, as usual, drop down the following. Four columns and five line items. The line items will be merchandising core, ancillary. Third line item will be 2% reward. Fourth line item will be LIFO, and then total.
The four columns, there will be two columns for each of Q2 and Q3. The reported column for Q2, and then the second column would be without gas inflation. We try to show you that to compare things on an apples-to-apples basis. The same thing for Q3, so columns three and four would be reported, and column four without gas inflation. Going across, core merchandise in Q2, as you recall, we reported core merchandise margin down 25 basis points. Without gas inflation, it was down 16. In Q3, it was down 21 reported and down 14 without gas inflation. Ancillary minus five and minus four in Q2, and in Q3, plus seven and plus eight. 2% reward, minus two and minus three, and the same numbers for Q3, minus two and minus three again.
LIFO, +2 and +2 in Q2, and in Q3, +21 and +21. All told, in Q2, we reported 30 basis points year-over-year lower margin. Without gas inflation, 21 basis points to the negative. In Q3, as I just mentioned, +5 reported and without gas inflation, a +12. Now mind you, the big change there is still the LIFO effect of going from $49 million last year in Q3 to $7 million this year. As you can see, our core merchandise was down 21 basis points on a reported basis, but the impact of gasoline sales now being almost 12%, about 12% of our sales, up a little bit from last year. That increased penetration caused that number. Taking that out, it was minus 14 basis points. Within the four merchandising categories of hard lines, food and sundries , hard lines, soft lines, and fresh foods.
Hard lines was up in margin year-over-year with the other three categories, food and sundries, soft lines, and fresh foods down a little bit year-over-year. Ancillary businesses and gross margin, as I mentioned, were up 7 basis points or 8, excluding gas inflation, mostly a function of higher gasoline gross margins and the higher sales penetration as well. Looking at those two together, we did a little better in Q3 versus Q2. The impact from increasing executive membership is minus 2 basis points, implying another percentage point of sales penetration going to those executive members and their eligible purchases. Again, of course, the big delta here looking at these numbers this way is the LIFO that I already mentioned. Moving on to SG&A. Our reported SG&A percentage Q3 over Q were lower or better by 2 basis points, coming in at a 984 compared to last year's 986.
Again, I think the best way to look at this and explain it is to do the same four columns reported and then without gas inflation and for both Q2 and Q3. The line items would be operations, second line item, central, third line item, stock compensation. Actually just those three items and then a total. Going across, for operations, +25, meaning that in Q2 last year, our SG&A from operations was lower year-over-year by 25 basis points. Plus means good. Then without gas inflation, the +25 was +18. In Q3, it was +10 and +4. Central, +5 and +4 in Q2 year-over-year. This year in Q3 versus last year, minus 8 and minus 9. Stock compensation, minus 1 and minus 1, and then 0 and 0.
All told, in Q2, we reported an improvement of +29 basis points year-over-year, or +21 without gas inflation. This year, as I mentioned, +2 and then minus 5 without gas inflation. A little editorial here. Just like the gross margin percentage where increased gasoline sales penetration hurt us, it correspondingly helped the core operations SG&A by about 6 basis points, such that excluding gas inflation, our core SG&A was lower or better by 4 basis points in the quarter. This is despite increased healthcare and workers' comp costs, which together represented a Q3 year-over-year hit to SG&A in the high single basis points level. In Q2, by the way, healthcare and workers' comp and benefits had actually helped the year-over-year comparison. Payroll, by the way, within the core business was up about 7% in dollars compared to the 8.2% sales increase.
Our central expense was worse or higher year-over-year by eight basis points or nine basis points, excluding gas inflation. About half of this negative basis point increase is due to higher IT costs related to a combination of things going on, including the modernization of our systems and related activities that we've embarked on of late. This includes, among many other items, the re-platforming of our e-commerce site, as well as our move to a new data center in Central Washington. Central expense was also impacted a little bit, a couple basis points by healthcare and benefits, as well as a basis point on legal fees, which can go either way. Next on the income statement is pre-opening expense, $8 million last year in the third quarter and $6 million this year, so $2 million lower.
We actually opened four units in Q3 this year, including Tamasakai, compared to just one last year. No issues, simply the timing of these expenses related to the openings before, during, and after the 12-week third quarter in question. In terms of asset impairment and closing costs, last year we had a charge of $1 million. This year, we had a similar charge of about $1 million. All told, operating income in Q3 was up by $67 million from $556 last year to $623 this year. Below the operating income line, reported interest expense was lower year-over-year, with Q3 coming in at $19 million this year versus $27 million last year, so about $8 million lower year-over-year. This mainly reflects the interest expense on our $2 billion debt offering and the fact that on March 15th, that offering back in February of 2007.
On March 15th, this last month, a month and a half ago, we paid off $900 million of debt. The anticipated annual pre-tax interest savings, given that we're paying off effectively 5.4% debt and foregoing interest income on our cash in the 20-50 basis point range, is about $46 million pre-tax per year net pre-tax savings to us. For Q3, this represented a pre-tax savings and interest expense for about seven weeks or about $7 million. For Q4, which by the way, this is a 53-week fiscal year and therefore a 17-week fiscal fourth quarter, we had a pre-tax positive bump of about $15 million. Again, on an annualized basis, given where current cash interest rates are, it's about $46 million a year pre-tax savings to us.
In terms of interest income and other, that was $13 million better, $18 million this year versus $5 million a year ago. Actual interest income was higher year-over-year by $1 million. The biggest components of the $13 million year-over-year change was related to FX impacts on our business. As discussed with you in the past couple of quarters, internally, about $4 million of this benefit or this year-over-year positive change related to gains on FX contracts that we look at internally as part of our merchandising efforts, but on a book basis, GAAP basis, it goes on this line. Also, about $7 million benefit of this change increase related to gains on non-functional currencies held in foreign operations.
Notably, the fact that in Costco and Mexico, we hold some of our cash in dollars, given that we also procure significant goods from our U.S. operation on behalf of that operation. For example, as the dollar strengthened these past couple of months, Costco Mexico generated a book gain. Half of that's ours since we own half of the operation, but all of the $7 million goes on this line. It was recorded on this income statement line with the offset going down below in the non-controlling interest line near the bottom of our income statement. A little convoluted, but that's how you report it. In terms of income taxes, our company tax rate for the quarter came in at 34.8% versus 36.1% last year.
Our lower effective tax rate is due both to a few discrete Q3 items year-over-year, the sum of which reduced our Q3 taxes versus last year, and as well to lower income tax rates in several of the foreign countries where we operate. For example, the statutory federal rate in Canada has come down in the last year by nearly two percentage points. We've seen similar type things in a couple of the other countries. Not unlike Q2, where we saw the tax rate come down a little bit year-over-year, we've seen this as well. And to the extent that it's related to the changes in tax rates in these countries, that's, at least for now, a little more permanent. Discrete can go either way.
Balance sheet was part of the press release, we won't go into that detail other than the fact that the couple of metrics that we always talk about, the accounts payable as a % of inventories, how much of our inventories are being financed with trade payables. What's reported on the balance sheet is all types of payables, not just merchandising, but construction payables and things like that. On the balance sheet, last year it showed payables as a % of inventories as 106%, and this year, 104%, so down a couple percentage points. If you just look at merchandise payables and inventories, it was 91% last year versus 92% this year, so a little bit of a positive bump there in terms of trade payable financing. Average inventory per warehouse last year in the quarter was $11.0 million.
This year, $11.7 million, up $700,000 on average per warehouse. This compares to higher year-over-year per warehouse inventory levels at the end of the second quarter of $11.1 million and at $10 million at the end of Q1, a little bit reduced from those higher levels. The $700,000 increase per warehouse in Q3 is really spread among many merchandise categories. Obviously includes also the impact of inflation year-over-year. Our inventories, we feel are in very good shape. CapEx, in Q3, we spent $278 million. Last year, almost the same this year, $268 million. Year-to-date, right at $900 million. Given the expansion we've got going on in Q4, as well as some ramped up expansion in the first three or four months of fiscal 2013 starting in September, we expect CapEx for the fiscal year 2012 to be right in the $1.4 billion range.
In terms of Costco.com, currently that's Costco Online. That's a combination of Costco.com in the U.S. and Costco.ca in Canada. Year-to-date sales and profits are up over last year. Our average ticket continues to be a little down, given the nature of the types of products that we sell. Our site traffic continues to grow and was up year to date versus last year and for the quarter. Lastly, as I mentioned before, we're re-platforming our .com site, which should be completed and in operation by the end of the summer. Also, as I mentioned, I think briefly last time I was asked about, we are in the process of getting ready to launch our first two applications for mobile, both an Apple and an Android. Those are expected to be published and available within the next few weeks. Let's see. Next topic. Sorry. Expansion.
Again, for the year, we expect to open a total of 17 units, one of which is a relo, so a net of 16 new units. On the base that we started with 592, that's a little under 3% unit growth and about 3% square footage growth. As of Q3 end, our total square footage stood at 85,885,000 sq ft. As I mentioned earlier, in terms of our plans for CapEx for the year, that includes also a little bit of a ramp up in the first part of next year. There's plenty in the pipeline next year. We currently have 13 openings planned for the September to December period versus 6 that were actually opened in the comparable 4-month period, calendar 4-month period in calendar 2011.
There's always a possibility that a couple of those may slip, those are all ongoing projects that are in different stages of site work or real estate planning or construction. In terms of common stock repurchases, in Q1, we purchased $173 million worth of stock, Q2, $145 million, in Q3, $130 million. That would put us inception to date since the middle of 2005 at 113 million shares and an average price of $57.12 a share, or almost $6.5 billion we spent on stock repurchases. Lastly, our scheduled fourth quarter earnings release, believe it or not, will be on Thursday, October 11th. Again, that's for the 17-week and 53-week quarter and year ending this coming September 2nd. With that, I'll open it up to questions with Dawn, I'm going to put you on the speakerphone here, Dawn.
As a reminder, if you would like to ask a question, please press star, then the number 1 on your telephone keypad. Your first question comes from the line of John Heinbockel with Guggenheim Securities.
Hey, Richard, couple of things. On the cost side, the incremental IT expense, I assume that has a finite timetable, I'm not sure what that is, but what might that be? Or is there some ongoing piece of that that'll be elevated?
I think you'll continue to see that. First of all, you'll certainly continue to see that over the next year in terms of We've a lot of things going on that have all started in the last year, in the last several months as well. It's hard to say exactly. We're in the process of putting our budget together for 13 in detail. Certainly it's not going to go from a few this quarter to nothing next quarter. It'll certainly be for the next few quarters. Whether it increases beyond there, we'll have to see.
All right. On-
We've got a lot. Most of those activities are now in place and ongoing.
Okay. On the healthcare, is that something strange in there in terms of something that hit or a change in trend? Because the trend had been going very much in the right direction. Or is something temporary in there changing that trajectory?
Yeah, it's a little of both. It's a little bit of a change in trend. Frankly, the biggest issue, mind you, in U.S., our U.S. operations are roughly low 70% of our company in terms of sales and what have you. U.S. healthcare costs and other related health, medical, dental, vision are higher per employee than any other country. Overall, we have I'm just looking at the numbers here. Yeah. A, as I mentioned, the trend's higher. The other thing is that this is just the U.S. health and benefit costs are approaching $1 billion. On this number, at the end of every quarter, you also actuarially look at what's called IBNR, Incurred But Not Reported.
In other words, you know based on actuarial history, that even though as of that Sunday night of a quarter end close, for example, you have employees and their dependents, spouses and children, who have gone to the doctor or had a procedure done or service done, performed, but it hasn't been reported yet to us or the claim hasn't been in. I call that the big black box because it's an actuarial number. That actually benefited Q1 and Q2 by a few million dollars and hurt Q3 by $4 or $5 million. Again, getting a little more detail, but that alone was a few basis points swing year-over-year. I think it's a little of both that claims have gone up. You have a combination. There is inflation in the mid to high single digit range.
You don't have any kind of abnormal increase in participants. The fact that we have, in the last few years, opened fewer warehouses in the U.S., you don't have as many freebies, what I'll call the new employees that are starting. It's a tough economy, not a lot of employees have left. Without opening a lot of new units, you don't have a lot of new employees that in the first three to six months, they're not eligible for those first three to six months based on their hiring status. It's a combination of all those things, but again, a lot of little things just went negative instead of positive in the quarter. I wouldn't read as much into it beyond that.
Finally, when you think about disinflation or deflation, what's your sense of volume sensitivity to those changes in price, i.e., take dairy and produce as two obvious ones. As the price thing comes down, I know it's going to vary by category, big category, then subcategory, maybe think about some of the bigger ones, what that does to volume purchases. How much more milk are people going to buy or certain produce items or apparel, for example?
I think different categories are different. I don't know how much more milk people will drink.
Yeah.
I think that on apparel, I'm shooting from the hip over here a little bit. The view on apparel, if it's enough of a change to get the KS shirt down $1, that's real because you people notice that difference. Where it impacts us a little bit, is on some things where we have always been known, as you guys know, to hold the price. I've mentioned on several of the quarters over the last couple of years when we had huge inflation in cheese, as an example. That impacted the profitability of our food court because we held the price on pizza. Good news. It's coming down, we're still holding the price, we're getting back to perhaps a better margin on I'm giving you a single data point item, nonetheless, a high volume item.
Those types of things, on some of those food commodity items, help us in different ways other than driving traffic.
All in, less inflation, do you think that's neutral to gross profit dollars? I mean, I know there's tons of different moving parts, but neutral to gross profit dollars, is that fair? Versus higher inflation?
Given that with higher inflation, we tend to lag a little-
Yeah
Because of our nature. I guess given a little less, that's good for us, but I'd be hesitant to know which way directly it's going to go if you add up all the pieces.
Yeah.
I guess it can't hurt, and it might help.
Okay, thanks.
Your next question comes from the line of Charles Grom with Deutsche Bank.
Thanks. Good morning, Richard. It's been a good two to three years now that your traffic's been really strong, up over 4% most months, just wondering when you look ahead, how critical of a metric is that for you guys internally when you guys look to balance your price investments over the next couple of years?
Well, it's hard to answer because we give you the aw shucks answer here. We're always going to invest in price, but it's not something that we look to do forever. We have always felt that we're not going to sustain 4% or 5% frequency increases. It's still fluctuating week to week up and down a little bit. Up, but how much up? We're still feeling pretty good about the fact where it is. I don't necessarily believe that those two things are linked. I would say that one of the things that, in my view, has happened as we've enjoyed 4% to 5% frequency increases now compounding for three years running, in my view, and taking gasoline out of it, that just the sheer fact that they're coming a little more frequently in our view is fresh foods.
If they're doing that, there is still a limit to how many TVs they're going to buy, and that extra shop doesn't get the same percentage of extra non-food discretionary items. To the extent it comes down a little bit, you have a little bit of offset by the ticket may hopefully going up a little bit. I'm talking theory here. Who knows? We feel pretty good about where we are and where we're continuing.
Just to follow up on the gross profit margin question, with food costs beginning to fall and then holding retails, how much do you think that helped out you guys here in the third quarter?
I don't know exactly. Honestly, I still feel very strongly that the margins are the levers that we choose to control rather than what's going on third party in most instances.
Just my final question is just on store growth. When you take a multi-year view, the pace of openings has really begun to slow the past few years in this 15-20 per year range, and it's clearly not a capital constraint given your balance sheet. I'm just wondering why you guys don't think you can open up more stores. Is it you need to invest more in your real estate team? Is there site issues? If you could just flush that out for us.
One of the reasons I went as far out to mention on the call what we have planned for the fall is to tell you that next year is starting off stronger in terms of number of openings, part of that is an investment in additional real estate efforts. We have more people landed in different countries. One of the comments I've mentioned, I believe on these calls as well as when people have come out or called us, that Craig has indicated, Craig Jelinek has indicated a desire to ramp that up a little bit, but do it within the controls that we have. I think that part of it is the switch from international to domestic, you're having a high percentage international. There's been a longer window to get those open. The pipeline has more in it, and will continue.
I think this sounds like a broken record, but I can't go beyond talking about the last four months of calendar 2012 because it gets a little less exact. Certainly, and hopefully that's an indication that we'll see some improvement or increase in that number.
Great. Thanks.
Your next question comes from the line of Daniel Binder with Jefferies.
Hi, good morning. I had a couple of questions. First, on the gas business. The last couple of months, you've had fairly high gas prices, but the comp gallons pumped, which we sort of think of as a proxy for traffic at the pumps, seems to have flattened out a little bit. I'm just curious what your thoughts are on that. The second question was related to membership. I think you said your member growth was being, in part, largely driven by international. I was wondering if you could just give us what the U.S. comp member growth looks like.
Well, on the latter question, I don't have that detail in front of me. Clearly, it's a lot less. Generally speaking, over the last couple of years when we have not opened a lot of international locations, the number might be a couple percentage points to the minus or five percentage points to the positive, depending on openings. Generally speaking, the fact that our renew rates improved a little and we're still seeing net increases in our total membership base, we're still maintaining that. The big difference is when we opened Huntington Beach, California, I don't have the specifics, just a week or two ago, needless to say, we've got a lot of units in the greater L.A. market. A lot of those members are existing members. We're not getting as many new signups.
I don't have the exact number of how many signups we had as of opening day. It could be 3,000, it could be 8,000, but it's not 30,000 and 40,000 or 50,000 like we've had in some of these international openings. When I say as of opening day, it's the sign-ups that we have during the six or eight or 10 weeks prior to opening when we've got the folding tables and the flags and the balloons out front, so people who come by and sign up in advance. The numbers are just chart-popping in some of these Asian and Australian countries. In terms of gallons comp, our trends, again, for, gosh, six, eight months ago, we were enjoying some months where the gallons comps were in the 10% range, 8%-10% range. I believe of late, it's been in the 3% range, 4% range.
Again, for how long can we sustain that? The fact that gas prices have actually come down a little bit in most of the country, that swing does make some changes to that number. Again, I don't think we can sustain tens. I feel confident we can continue to sustain numbers better than the U.S. economy or the U.S. gasoline sales overall, which we've done handily, and we'll go from there.
Great. Do you have a number on dotcom sales growth for the quarter?
I don't. We don't give out as much detail on some of the components that we used to.
Okay, thanks.
Your next question comes from the line of Deborah Weinswig with Citi.
Hi, Richard. This is actually Nathan Rich filling in for Deb today. If I could start, I wanted to get your thoughts on the macro environment and how you feel about the discretionary side of your business right now.
Well, first of all, in terms of our discretionary business, as I think I mentioned, soft lines is up in the high single digits. Hard lines is ex electronics is in the low single digits. Wood electronics is a little lower because majors is down a little bit. Again, this is one person's view with reading the same things that many of you read. Our view is notwithstanding our relative sales strength and members sign-ups and renewal rates , all that stuff, we still think it's pretty fragile out there. We are gratified that we can get people in more frequently than we ever have. We believe fervently that's related not only to the extreme value proposition but to fresh foods and gas. Those are things that have driven more people in more frequently.
If we got you walking by the TV or the batteries or the patio set or whatever it might be, there's a chance you might buy it. We get a little jaded given our relative success out there, but we're not seeing any big risk of a big shoe dropping here, but we're also not seeing anything that's driving it in a big way that's sustainable right now. You look at the housing starts and you look at these things, they're improving slightly, but it's got a long way to go.
The good news for us, I think is that notwithstanding, this is not a change from our position, we've felt this way for a few years now, that there's not a big engine underneath a lot of this, it is to the credit of the activities that with monetary policy and good fortune that we have in the U.S. that things are actually growing a little bit. That's a positive, it's not like we're not concerned about what's going to happen tomorrow in the economy. That being said, given that we have extreme value proposition, that we're in and out of seasons early, we are still, throughout these last three years and continuing, we are aggressive on discretionary items, whether it was patio furniture, which we did well with, apparel, which we are doing well with. Patio did well with the seasons behind us pretty much.
In our view, we can afford to be more aggressive even given those concerns in terms of merchandising.
Great, thanks. I also wanted to ask you if you think that you've gotten a benefit in your pharmacies from Walgreens being out of the Express Scripts network, and if that's driving traffic to the rest of the club as well.
A little bit, I wouldn't say that's something that anybody's talked big around here in our budget meetings. I'd have to look at it more detail, but I can tell you nobody's mentioned that as being a big reason why we're getting more frequency. What I hear and what we see is when you've got fresh foods being whatever, 12%, 13%, 14% of sales and growing nicely, when you've got gas driving more people into the parking lot and the percentage of those, that's a much bigger impact than some modest improvement in the pharmacy scripts.
Great. Thanks so much.
Your next question comes from the line of Adrienne with Goldman Sachs.
Thank you. Richard, if we could just look at when we look at traffic and ticket, we've seen the ticket has been inching down sequentially the last few quarters. I'm just wondering is that a function of inflation abating and how we should think about ticket if we see continued abatement across the inflationary line. Would you expect that offset in volume?
Well, clearly some of it's inflation abating. Some of it's increased penetration of private label. I think that probably continues a little bit. Again, I use the silly example of cheese coming down. That doesn't affect the price of our pizza because we were No pun intended, eating that increased cost, and incurring a lower margin. I think the same thing could be said for some of the raw material products and bakery. It's a combination of some things that help you a little bit and some things that hurt you a little bit on that.
Okay.
I guess the last thing is we're always trying to upscale the item and upsize the item.
Right. Okay. A follow-on to that, as others are also seeing some of those costs coming down, what are you seeing competitively? Obviously, we just saw the quarter that Walmart put out there. They seem very committed to the price investments. It finally seems to be working. What are you seeing competitively as others' cheese prices are coming down? Are they starting to come closer to you? Thanks.
First of all, just following up on the last question and my response. The other thing that's impacted that number, at least not year-over-year, but from the last quarter or two, gas prices have come down, and that's in that average ticket. Also FX has impacted it a little bit, year-over-year on FX. Getting to the other question, again, I don't want to sound cavalier about it, but our view is we're always fiercely competitive. We haven't seen on a cross-retail, every type of competitor basis, any big changes of how we have to react. We are always reacting strongly. Certainly, there's always going to be items where, whether it's Walmart or a supermarket chain or The Home Depot for that matter, Lowe's for that matter, where we're going to respond and get down, and come down in price. There's other things that are going the other way.
One of the things that helps us a little bit is specialty items, whether it's high-end nuts or organic items. As we take some of our penetration in anything from ground beef to fresh turkeys to organic milk, our higher end member, we can A, show a better savings on those items, and there's a little bit more margin protection on those items. Again, there's 100 different things that are affecting it up and down. I'm not terribly concerned about the question that you asked of how that's going to impact us.
Okay. Then lastly, just on the 53rd week, any help you could provide us on line items in terms of how the week impacts gross margin or SG&A?
It really doesn't impact it a lot. Most all things are spread over the extra week. You have an extra 2% of weeks, if you will, one over 52. It's not like you get a free week of rent. All that stuff. There's a small amount of depreciation benefit, not enough to move the needle a lot. The big things like payroll, vacation, health benefits, rent, although we don't have rent on all but 20% of our units that we lease, utilities, all those things, you have an extra week of those costs in that 53rd week. If one over 52 is the incremental weeks, a shade better than that is what you'll see from that week.
Thank you. Best of luck.
Thank you.
Your next question comes from the line of Colin McGranahan with Bernstein.
Good morning. I just wanted to follow up first on the competitive question a little bit. I think first quarter we've seen that Sam's on an ex gas basis, had a little better comp than you did on an ex gas basis. Just kind of curious what you think they're doing right, or is it just a matter of easier compares? Have you seen any change out of BJ's, since they've exited the public realm?
I think that they're doing a better job than they were before, is what I hear from our operators, to their credit. I think they had a little easier comparison, but I'm not going to take that away from them. On BJ's side, the only thing we've seen is they're still aggressive on openings. They tend to, in my view, from, again, the last few months of budget meetings, there's not a lot of discussion at our budget meetings about pricing necessarily, but more about they're opening new units and they're tending to open these, I forget if they're 75,000 or 85,000 square foot units. They're continuing to grow. Hold on one second. Bob has made a good point. When we do our weekly competitive shops, and we see those at our budget meeting by region every four weeks here.
In terms of the delta of competitive like items, commodities, Bounty paper towels, Tide detergent, soda pop, Advil, you name it. From our own pricing versus our competition, we're not seeing any big change in those deltas.
Okay. That's really helpful. Actually, it's a nice lead into my second question, which is if you look at the underlying merchandise margin, I think we've had three quarters now of some moderate compression on the underlying merch margin. Next quarter, you begin to anniversary a much, much more moderate expansion, and then in the November quarter, you actually start hitting anniversary and compression. How are you thinking about price investment given that you're not seeing any deltas combined with traffic that has slowed down a little bit?
Well, I guess I don't want to be too assertive or aggressive here. When we anniversary that, the next quarter, you're right, it will be the fourth quarter of this anniversary of year-over-year lower core merchandise margins. There's no desire here to drive that in one direction. Even during these last few quarters, we've stated that we feel good about our ability to generate margin when we need to and still be very competitive. Again, I can't predict what's going to happen in Q1, but certainly your comment is a good one.
Okay. Final question. We obviously get this on a lagged basis, segment margins. We've had now a couple quarters in a row where the other international seg margins are down. Obviously, it's a quarter ago, what's driving that?
Well, I think two things. The price investment that we've talked about, also in a couple of those countries, the cannibalization, that's impacted as well a little bit.
Okay, great. Thank you very much, Richard.
Sure.
Your next question comes from the line of Peter Benedict with Robert W. Baird & Co.
Hi, Richard. A couple questions. First, just on May, it looks like from your reported sales numbers that maybe perhaps the month got off to a softer start. Just curious as to how you've seen this month flow so far. That's my first question.
Well, I can't talk about May until we report May.
Okay. Shifting over to the accounting for the extra week. How does that impact the MFI? Will you get an extra week of MFI, or is the accounting different on that?
Yeah. You'll get an extra week. It's daily.
Yeah.
That extra week, you'll get an extra week of membership fees.
Okay. Just lastly, with Craig now in the CEO spot here for five months. Just speak to maybe, are there any strategic differences that you're hearing, seeing from him versus Jim, whether it be on day-to-day stuff or even capital allocation. I mean, you've got 13% of the market cap, I think, in net cash right now. Just trying to understand some nuances there with him in charge right now. Thanks.
I think Craig has summed it up best when asked the question. He, by the way, is in Australia today, looking at new sites with Jim and with Jim Murphy, our head of international. Craig said it best. He says his goal is, A, not to screw things up, and also he certainly appreciates the culture and what we do. The things that he's mentioned and that I've noticed as well, is a desire to get a few more openings done more quickly. Clearly, his background of 30-plus years in operations, I think I've talked about the fact that certainly, he's focused on some efficiencies in the warehouse. The fact that the eight or so years he spent in merchandising, but then handing that baton back to Douglas Schutt, who's now in charge of all merchandising. As Douglas, most of his career was spent in merchandising.
I think those are positive things for us. Again, I don't expect to see big changes. I expect to, again, growth being one of them. I think he's giving Douglas and Ginnie Roeglin under Douglas, a little bit more leeway to see what they can do with .com. Don't expect giant changes. I mean, the more significant changes to start with are re-platforming and adding a couple of apps, but the focus is going to be on hot merchandise at great prices and making sure we're communicating that to our members.
Anything on the capital allocation front, Richard?
The biggest thing on the capital allocation front is going to be, hopefully, a ramp up in expansion.
Okay.
Beyond that, we just announced another higher than earnings growth increase, if you will, looking at history of dividend. We continue to buy stock back. The core issue of having a lot of cash, as you just said, isn't going to go away overnight. Nor do we feel compelled to do it for the wrong reasons. Clearly, we do feel compelled to ramp up expansion, and certainly, we're doing that.
Okay, terrific. Thanks so much.
Your next question comes from the line of Mark Miller with William Blair.
Hi, Richard. Good morning. Clarification on the renewal rates. I think you said that sequentially in the U.S. and Canada, you went up by 20 basis points, then worldwide, you went up by 60 basis points. Did I take that down correctly in, I guess what that is?
That's true. I think it was 50, 85.7 versus 86.2 worldwide. That would imply a bigger increase in the 20% of our company or 18% of our company that's non-U.S. and Canada. Mind you, if you go back to the beginning of time in the U.S., if we signed up 100 members in year one, about 70 renewed in year two, renewed that first time. In year two, you also had another 100 sign-ups. In year three, that new 100 was 70 in year three, their first year of renewing. The 70 from year two and their second year of renewing was a higher percentage than 70, let's call it high 70s maybe.
Of course, over time, when you've got a lot of mature members in mature locations, we're up to that 89 number in the U.S. and Canada, 89 plus number in the U.S. and Canada. When you're signing up so many more people in a new market, you also have an even lower than 70% rate. I think it's closer to 60 in that first year overseas. We're still getting more. In Asia, I think the average number of members per location is almost double the company average. We're still adding a lot of people over there, albeit at not only a lower renewal rate. That's why you see that number jumping implies that, yes, you're having a bigger improvement overseas, you started at a lower base overseas, a lower renewal rate.
Right. Okay. Just on the same maturity level, would you be tracking similar to the U.S. and Canada to adjust for that mix effect?
Well, I'd say no, because you're starting lower overseas. If we open a new unit here in the United States, it's not that new. Certainly people know us even in a new state, which there aren't a lot of those anyway. Whereas over there, it's been a little bit of a positive frenzy, you're going to get a lot more people come in to look, see, and by definition, more of them not renewing in that first year. Relative to what we've seen over the last several years in those countries, I would say that new units that are two and three years old are trending better than the units that we opened eight or nine years ago that were in their first, second, or third year.
Okay. Most of my other questions have been answered, but one back on the gross margin. As you have a moderation in input costs, should we think of that possibly flowing through to a little bit better margin? Then, can you just highlight what extent markdowns played a role in this quarter, if it was significant?
Markdowns weren't an issue at all on a year-over-year basis. The first question I can't answer because I'd get shot.
Okay. Well, maybe in this period as you saw moderation going through the quarter, did that help you as you progressed through the quarter?
I'm sorry, repeat the question.
Some of the food costs are beginning to moderate. Take Whole Foods, they saw an increase in their gross margin partly from that. I guess I would think that would start to help you on the food side. I guess I'm curious if that's happening, and if it's not, why not?
Yeah. Well, again, I think we're always the first to go down, and frankly, I don't think we even price shop Whole Foods. I don't think that's been an impact back to us. I think, again, where we're getting some margin improvement on lower commodity costs are those items where we held the price, and as I mentioned in previous quarters, it's hurt us a little bit. The fact that we tend to lag when there's inflation, the fact that there's less inflation is an improvement on that. Again, I think that's generally been a little better for us than not. We're still investing in price. Again, it's not completely scientific. We do what we think we need to do, and we think we're driving our business in the right direction, and we're stronger today than we've ever been.
Okay, great. Thanks.
Your next question comes from the line of Brian Nagel with Oppenheimer.
Hi, good morning. Most of my question's been asked, but I did want to just touch on the consumer electronics category. Look at your stores, you like others, have started, I think, really pushing into the bigger screen TVs. I guess the first question is that true? With that, what type of consumer response are you seeing with these bigger TVs? Richard, maybe just a comment on any thoughts on what we're seeing out of the manufacturers in the TV categories that are attempting to put processes in place to maybe keep pricing more firm.
Our TV sales actually improved throughout the quarter. We are driving bigger TVs, you're right there. The average price point of our TVs, I'm looking just at the last four weeks of the quarter, I've got some little detail. The average selling price per TV was about the same year-over-year, even though there's deflation. It's all about driving the customer towards a little bit higher screens. We're doing 60s, 70s, and even 80s now out there, as well as the smaller ones. The second question, I'm sorry?
Some of the manufacturer efforts out there now to try to limit promotional activity in their TV sets. Have you guys seen any impact of that, or what are your thoughts going forward?
I haven't yet. What I know is what you know, based on what I think I even read yesterday, talking about that. We haven't seen the big promotional stuff, like $300 and $400 off on a TV in our MVMs for a few years. That went to nothing for a while, then to something. I'd say it's still something, but not as good as it was a few years ago and not as bad as zero. Not a big change yet. Part of that, I think is that we've tried to drive the TVs in towards the bigger sizes, where there's perhaps a little better.
Yep. If I could, a separate question, more of, I guess, longer-term type question, but we've talked for a while about the traffic driving benefits of the fresh food category. I guess, as you look at the Costco enterprise now, how much more is there still to come from the benefit of fresh foods? As far as maybe expanding the categories, putting into more centers. For how much longer will this be an incremental driver of traffic, you think?
That's a hard question to answer. I can tell you that, again, when we attend the monthly budget meetings and the merchants get up and talk, they still are coming up with new stuff. I look at something like bakery, which a few years back. After years and years of great growth, was kind of slowing. Guess what? Sue McConnaha, our VP of Bakery Operations and longtime employee of Costco, and her staff, they came up with a lot of new items, and what we're doing now in that area is there's a lot of in-and-out items during the year, whether it's the red velvet cake or the cupcakes or not just having the same old great giant chocolate cake and apple pie and specialty breads, artisan bread.
I think we do well what we do in terms of being merchants and mixing it up a little bit. I still feel pretty confident when I hear the presentations from the various merchandising categories, particularly on the fresh food side, that we've got a lot of good things going on, whether it's specialty items, high-end commodity items from around the world, organic items, things that separate us from our competition and continue to drive our business in the right direction. The challenge is always going to be on the non-food side, I think we've, again, I look at things like apparel, where we've driven more business. You see more presentation out there. We've got good comps from that.
We're always trying to drive the non-food side because we know we got you in to get the chicken and the paper towels. How can we get you to buy some more of those things? It's that ongoing focus for treasure hunt, that ongoing focus for those specialty items. I feel, again, it's a qualitative answer, but we feel pretty good that we've still got a lot of runway, but that's partly because Craig is, and Doug are pushing that with the buyers.
Thank you.
Your next question comes from the line of Christopher Horvers with JP Morgan.
Thanks. Question. Most retailers saw some sort of lift from the weather in February and March, and then some sort of moderation in April. It doesn't seem to be the case for you. Perhaps you can share your thoughts on whether there was any pull forward, and if not, why don't you think that it happened?
Bob is helping me here with this answer. It did happen, but we haven't really quantified it. It's probably not as big of an impact. Certainly, we're in 42 states, so we're across the country. Certainly, I mean, what always surprises me that it could be raining and we're bringing out patio furniture in the end of December 26th and all through January, and it's selling like heck because it's selling well because people, it's a great deal and people know if they don't buy it then, they're not getting it. I think we're a little bit of an unusual animal as it relates to some of the weather impacts. Even seasonal apparel, we're bringing it in a month or two earlier than typically a traditional retailer in those areas would be.
In my view, we don't see as much of an impact of weather, even in a geographically discrete area.
You're saying there was a small one. There was a small impact, but it was small.
Yeah, there was a small impact.
Then as you think about last year, I think gas prices peaked in May last year and started out flat to start the year and maybe up 35% year-over-year in May. I mean, in retrospect, do you think, is there a number you could put out there and say, you know what, in these months, traffic maybe got 100 basis point lift because of the gas, but that seemed to be in the rearview mirror now?
Well, it's hard to say. We know that when gas spikes, it helps our frequency, and when gas subsides, it hurts or doesn't help it anymore, the frequency. We know that every person that comes in the gas station, about 30% of them do come in to shop that same day. Whether they came to shop or to do gas, who knows? It's got to be a positive. Again, I can't tell you more than that.
Fair enough. Finally, West Coast, it's not been in the best category for some time. Can you talk about if weather actually had any negative impact there? Is there something that you're seeing with the consumer maybe feeling better, going out to eat more, so frequency going down, something like that?
I'd be hard pressed to know the exact reasons. I know one of the things was, is that California, as an example, was particularly strong comp-wise, if I go back, when it was a standout for the first time. It's coming off of some very strong comparisons from a year earlier. I can't tell you that's the only reason, but certainly, that was one of the reasons.
Okay. Thanks very much.
Why don't we take two more calls?
Your next question comes from the line of Mark Wiltamuth with Morgan Stanley.
Hi, Richard. Could you give us the number of Asian stores that are in your pipeline over the next two to three years? When do you think you'll really start kicking up in the mix of international in the store openings as you look out in the five-year period?
Well, I think if you look at this year, 16 of 10 in the U.S. and six elsewhere, I would have guessed it was 50/50, if I don't have the original budget in front of me. Part of that is they do take longer, and when they run into a little snag, it's more than a month little snag. Again, going forward, I would say the trend will go from six out of 16 this year, whatever percentage that is. Six out of 16, 37%. I think it'll be 50/50 or close to that next year and then higher than that in the year following. That's based on what's in the pipeline now and the fact that certainly these countries are less saturated than the U.S.
How about the number of them that are going to be Asian stores in the next few years?
Our activity in those three countries started sooner, there's more in the pipeline, sure. Again, I can't predict exactly how quickly. Yes. As I mentioned, the guys are over in Australia for the last two days looking at a bunch of sites. I'd throw that in the pipeline, recognizing there's only three there right now.
Okay. You got three Asian stores in the pipeline right now in total?
No, there's three Australian locations.
Okay
already open. I'm sure that'll be ramped up, given that we're looking at a lot of sites. Same thing with Asia. I was just trying to get to that page. Hold on. We end this fiscal year with Hold on. 30 locations between the three countries. My guess is, we'll have gone in those three countries from opening two or three a year in the total a couple of years ago, to having opened eight this fiscal year, if all goes as planned. I would say easily more than eight over the next couple of years. The trend is in the right direction in that regard. Again, they take a little longer too. As I mentioned earlier, we have ramped up our expansion, our real estate personnel efforts, we've got more in the pipeline.
Okay, thank you.
Your next question comes from the line of Sean Naughton with Piper Jaffray.
Yeah, thanks. Just following up on one of the economic questions on the consumer. Obviously, a lot of concern out there, a lot of negative headlines. Have you seen any more exaggerated kind of peaks and valleys in your traffic trends on a week-to-week basis in Q3 versus Q2? Just secondly, following up on the international side, can you comment on how the U.K. business did in the quarter?
I'm sorry, what was the second question?
The U.K. business.
Okay. Well, on the first question, the biggest thing in the last few months has been holiday shifts, like Easter, Mother's Day even. Those things shift a week or two weeks, and it wreaks havoc with our comparisons of traffic and volume. There have been a little bit geographically on weather, but that's usually in one region where if Southern California had huge rainstorms for a few days, that's going to impact a two-week period down there, minus and plus. In the U.K., its comps in local currency for a few years have been pretty tough for us. Flat to up a little, and they're up a little better than that right now.
Okay, I guess just following up on that, you talked a little bit about being on the ground with actually some people in Europe over the last 12, 18 months. Does what's going on over there change anything with respect to the timing of anything that would potentially be in the pipeline, or you're thinking around that particular market? Thanks.
I don't think it changes the timeline. If anything, given that we'll be using $ to convert into different currencies, it's actually a little less expensive. I guess the question is, it's a little less expensive because you're going to be there. The economy is tough right now. If anything, it's making it a little easier for us, I don't think it's speeding anything up for us. Again, as our history has shown, don't expect us to go into any country and have 10 locations in operation two years out. We'll open a unit or two in the first couple of years and go from there and see how it goes. So, we have a lot of patience in that regard.
Okay, great. Thanks for taking the question, best of luck.
Thank you.
At this time, there are no further questions. Sir, I will now turn the presentation over to you for any closing remarks.
That's it on our side. Bob and Jeff and I are around to answer any additional follow-up questions. Thank you very much. Have a good day.
This concludes today's third quarter and year-to-date operating results for FY 2012 conference call. You may now disconnect.