Good morning. My name is Dawn and I will be your conference operator today. This time, I would like to welcome everyone to the 3rd quarter and year to date operating results for FY12 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, you may begin your conference, sir.
Thank you, Don. Good morning to everybody. This morning's press release reviews our 3rd quarter operating results for the 12 weeks ended this past May 6. 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 and that these statements involve risks and uncertainties that may cause actual events, results and or performance to differ materially from those indicated by such statements. The risks and uncertainties include, but are not limited to, those outlined in today's call as well as other risks identified from time to time in the company's public statements and reports filed with the SEC.
To begin with, for the quarter, our earnings per share came in at 0.88 dollars up a little over 20% from last year's Q3 earnings per share of $0.73 and a penny greater than the first call consensus of 0.87 dollars As was mentioned in this morning's release, this year's Q3 included a pre tax LIFO charge of 6,500,000 dollars or about $0.01 a share. Last year's Q3 had a pre tax LIFO charge of $49,000,000 pre tax or about $0.07 a share. 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 $8,000,000 or also about a 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, reported sales were up 8% total and on a comp basis up 5%. 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 4% and the reported 5% international comp figure assuming flat year over year FX rates would have been a +8%. If you take those 2 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 20, we opened 2 locations in Q2, both In the Q3, we opened a location another location in Japan near Osaka and also reopened our Thomas Sakai warehouse in Japan, which had been closed since the tragic events of last March 11 in Japan.
We also relocated a unit in Ontario, Canada and opened 2 new units in the 3rd 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 6 more planned by fiscal year end here in the Q4. These total 16 would include 10 in the U.
S. And 6 in Asia, 1 in Korea, 1 in Taiwan and 4 in Japan. A quarter ago, I had indicated we expected the total number for the year to be 17, has since slipped into early fiscal 2013. Also this morning, I'll review you our e commerce results, our membership results and also further discussion of margins and SG and A and repurchase activities. Again, sales were $21,800,000,000 up 8% from last year's $20,200,000 and 5% comp.
For the quarter, the 5% reported comp figure was a 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 terms of 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 Q3. In terms of merchandise categories for the quarter, within food and sundries, we had comp result in the mid single digit range, a little below where we've been running in each of the past couple of fiscal All subcategories were positive ranging from 1% to 11% each among those 7 or 8 sub categories.
Within hardlines, 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, although 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, etcetera.
Still some inflation we see in beef and across many of the NEX categories. On the non food side, not much inflation expected going forward right now, although probably 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 $475,000,000 versus $435,000,000 a year ago, so up one basis point or $40,000,000 and then a year over year dollar increase up 9 percent.
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 $8,000,000 Excluding this fee increase benefit, if you will, as well as a slight negative impact of about $3,000,000 from the FX that I mentioned earlier in terms of assuming flat FX year over year. The 9% dollar increase in donor membership fees would have 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 sign ups in Q3 were quite strong, up 9% on a year over year basis, largely as 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 26,400,000 up from 25,900,000 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 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 36,400,000 member households versus 30 6,000,000 at the end of the Q2.
And 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 $12,300,000 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. At Q3 end as of Q3 end, our business renewal rates were at 93.6 percent up from 93.5 percent a quarter ago and up from $93.3 at the end of the fiscal year. Gold Star $88.6 up from $88.4 $88.1 at the quarter year fiscal year end. So all told in the U.
S. And Canada 89.6% versus 89.4% a quarter ago and 89.1% at the beginning of the fiscal year. On a worldwide basis, we're at an 86.2 up from 85.6% a quarter ago and 85.7% at the end of the fiscal year. So all told trending 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 the increases we increased the annual fee for Goldstar and business and business add on. They're all now at $55 in the U. S. And Canada.
That was and 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 sign ups in the warehouse in terms of renewals. The renewals started in January and will continue through this December.
In all, about 22,000,000 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. So really the first big impact to the P and L on that membership fee income line will be in the upcoming Q4 and into Q1 and 2 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 $1,000,000 pre tax impact to Q2. And as I mentioned earlier in this call, about $8,000,000 pre tax in Q3.
And again, it will be much more meaningful in Q4 and into Qs 1 and 2 of next fiscal year. It's essentially a 23 month timeline as I talked about before, how we recognize the $5 $10 increases starting when they renew with the receipt the increase is paid and then spread out over the next 12 months. With regard to executive membership, also in conjunction with doing increases I mentioned earlier, we increased the 2% annual reward from a maximum of $500 a year to a maximum of $7.50 a year based on eligible purchases. While it's still pretty early to see the complete impact of the renewals renewal rates from the increase, So far so good and in our judgment we don't expect any issue here. Going down to the gross margin line, margins were up on a reported basis 5 basis points from a 10.5.0 to a 10.5.5.
I'll ask you to as usual jot down the following. Four columns and 5 line items. The line items will be merchandising core, ancillary. 3rd line item would be 2% reward. 4th line item will be LIFO and then total.
And the 4 columns, there'll be 2 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 3 and 4 would be reported and column 4 without gas inflation. So 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 5 and minus 4 in Q2 and in Q3 plus 7+8. 2% reward minus 2 and minus 3 and the same numbers for Q3 minuteus 2 and minus 3 again. LIFO plus 2 and plus 2 in Q2 and in Q3 plus 21 and plus 21.
So all told in Q2 we reported 30 basis point year over year lower margin without gas inflation 21 basis to the negative. In Q3, as I just mentioned, plus 5 reported and without gas inflation of +12. Now mind you, the big change there is still the LIFO effect of going from $49,000,000 last year in Q3 to $7,000,000 this year. As you can see, our core merchandise was down 21% 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 income increased penetration caused that number.
Taking that out, it was 14 basis points minus. Within the 4 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, softlines 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 2 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.
And again, of course, the big delta here on looking at these numbers this way is the LIFO that I already mentioned. Moving on to SG and A. Our reported SG and A percentage Q3 over Q were lower or better by 2 basis points coming in at 9.84% compared to last year's 9.86%. Again, I think the best way to look at this and explain it is to do the same 4 columns reported and then without gas inflation for both Q2 and Q3. The line items would be operations, 2nd line item central, 3rd line item stock compensation, 4th that was actually just those 3 items and then a total.
Going across for operations plus 25, meaning that in Q2 last year our SG and A from operations was lower year over year by 25 basis points plus means good. And then without gas inflation, the +25 was +18. In Q3 it was plus 10 and plus 4. Central plus 5 and plus 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. So all told in Q2 we reported an improvement of plus 29 basis points year over year or plus 21 without gas inflation. And this year as I mentioned plus 2 and then minus 5 without gas inflation. So a little editorial here. Just like the gross margin percentage where increased gasoline sales penetration hurt us, it correspondingly helped the core operations SG and A by about 6 basis points such that excluding gas inflation, our core SG and A was lower or better by 4 basis points in the quarter.
And this is despite increased healthcare and workers' comp costs, which together represented a Q3 year over year hit to SG and 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 8 basis points or 9 basis points excluding gas inflation. About half of this negative basis point increase is due to higher IP 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 expenses also impacted a little bit, a couple of basis points by healthcare and benefits as well as a basis point on legal fees, which can go either way. Next on the interest statement is preopening expense, dollars 8,000,000 year in the Q3 and $6,000,000 this year, so $2,000,000 lower. We actually opened 4 units in Q3 this year compared including Thomas Sakai 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 Q3 in question.
In terms of asset impairment and closing costs, last year we had a charge of $1,000,000 this year we had a similar charge of about $1,000,000 All told operating income in Q3 was up by $67,000,000 from $556,000,000 last year to $623,000,000 this Below the operating income line, reported interest expense was lower year over year with Q3 coming in at $19,000,000 this year versus $27,000,000 last year, so about $8,000,000 lower year over year. This mainly reflects the interest expense on our $2,000,000,000 debt offering and the fact that on March 15, we paid that offering back in February of 2007. On March 15, this last month, 1.5 months ago, we paid off $900,000,000 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 basis point to 50 basis point range is about $46,000,000 pre tax per year and that's net pre tax savings to us. For Q3, this represented a pretax savings and interest expense for about 7 weeks or about $7,000,000 For Q4, which by the way, again, this is a 53 week fiscal year and therefore a 17 week fiscal Q4, we had a pre tax positive bump of about $15,000,000 Again, on an annualized basis, given where current cash interest rates are, it's about $46,000,000 a year pre tax savings to us.
In terms of interest income and other, that was $13,000,000 better, dollars 18,000,000 this year versus $5,000,000 a year ago. Actual interest income was higher year over year by $1,000,000 The biggest components of the $13,000,000 year over year change was related to FX impacts on our business. As discussed with you in the past couple of quarters internally about 4,000,000 dollars of this benefit or this year over year positive change related to gains on FX contracts that we look at internally as efforts of our part of our merchandising efforts, but on a book basis increase related to gains on non functional currencies held in foreign operations, notably the fact that in Mexico, we held 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, so as the dollar strengthened in these past couple of months, Costco Mexico generated a book gain. Half of that is ours since we own half of the operation, but all of the $7,000,000 goes on this line, it was recorded on this income statement line with the offset going down below 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, some 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 2 percentage points. And we've seen similar types of things in a couple of the other countries. So not unlike Q2 where we saw the tax rate come down a little bit year over year, we've seen as well. And to the extent that it's related to the changes in the 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, so 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 percent 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. So on the balance sheet, last year it showed the payables as a percent of inventories as 106% and this year 104%, so down a couple of 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 in terms of trade payable financing. Average inventory per warehouse last year in the quarter was $11,000,000 this year $11,700,000 so up $700,000 on average per warehouse.
This compares to higher year over year per warehouse inventory levels at the end of the Q2 of $1,100,000 and at $1,000,000 at the end of Q1, so 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 believe we feel are in very good shape. CapEx in Q3, we spent $278,000,000 last year almost the same this year $268,000,000 a year to date right at $900,000,000 Given the expansion we've got going on in Q3 in Q4 rather as well as some ramped up expansion in the 1st 3 or 4 months of fiscal 2013 starting in September. We'd expect CapEx during for the fiscal year 2012 to be right in the $1,400,000,000 range.
In terms of costco.com, currently that's or 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 we sell. But our site traffic continues to grow and was up year to date versus last year and for the quarter. Lastly, we are as I mentioned replatforming our dotcom site, which should be completed and in operation by the end of the summer. Also as I mentioned, I think briefly last summer it was asked about we are in the process of getting ready to launch. Our first two applications for mobile, both in Apple and an Android, Those are expected to be published and available within the next few weeks.
Next topic, sorry, expansion. Again, for the year, we expect to open a total of 17 units, one of which is a relo, so 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 Q3n, our total square footage stood at 85,885,000 Square Feet. 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 1st 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, but 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 $173,000,000 worth of stock, Q2 $145,000,000 and Q3 $130,000,000 So and that would put us inception to date since the middle of 2005 at 113,000,000 shares at an average price of 57.12 a care or almost $6,500,000,000 we spent on stock repurchases. Lastly, our scheduled 4th quarter earnings release believe it or not will be on Thursday, October 11.
Again, that's for the 17 week and 53 week quarter and year ended ending this coming September 2. With that, I'll open it up to questions with Don and I'm going to put you on the speakerphone here, Don.
Your first question comes from the line of John Heigenbaum Securities.
Hey, Richard. A couple of things. On the cost side, the incremental IT 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 will 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 have a lot of things going on that have all started in the last year, in the last several months as well. And I don't it's hard to say exactly. We're in the process of putting our budget together for 13 in detail. But certainly, it's not going to go from a few this quarter to nothing next quarter. It will certainly be for the next few quarters.
Whether it increases beyond there, we'll have to see. All right. Then 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 of the trend had been going very much in the right direction? Or is it something temporary in there changing that trajectory?
Yes. 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.
Operations are roughly 70% low 70% of our company in terms of sales and what have you. U. S. Health care costs and other related health, medical, dental, vision are higher per Yes. So A, as I mentioned, the trend is higher.
The other thing is that this is just the U. S. Health and benefit costs are approaching $1,000,000,000 And on this number, every 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 if you 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 services done performed, but it hasn't been reported yet to us or the claim hasn't been been reported yet to us or the claim hasn't been done. So and I call that the big black box because it's an actuarial number.
That actually benefited Qs 1 and 2 by a few $1,000,000 and hurt Q3 by $4,000,000 or $5,000,000 So again, getting a little more detail, but that alone was a few basis point swing year over year. So I can't 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 a lot 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. And without opening a lot of new units, you don't have a lot of new employees that in the 1st 3 to 6 months they're not eligible for those 1st 3 to 6 months based on their hiring status. So 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 as beyond that. All right.
And then 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 is 2 obvious ones. As the pricing comes down and I know it's going to vary by category, big category and then subcategory, but 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?
Well, I think different categories are different. I don't know how much more milk people will drink. I think that on apparel the view on apparel is and I'm shooting from the hip over here a little bit. The view on apparel, if we can if it's enough of a change to get the KS shirt down $1 that's real, right, 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.
And I've mentioned 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. Well, good news, it's coming down. So we're still holding the price, but we're getting back to perhaps a better margin on I'm giving you a single data point item, but nonetheless a high volume item. So those types of things on some of those food commodity items help us in different ways other than driving traffic.
So it's 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?
Well, given that with higher inflation, we tend to lag a little 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. 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. Think it's been a good 2 to 3 years now that your traffic's been really strong up over 4% most months. And just wondering when you look ahead, how critical metric is that for you guys internally when you guys look to balance your price investments the next couple of years?
Well, I mean, we it's hard to answer because we don't we kind of 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. I mean up, but how much up?
And 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 5% or so percent 4% to 5% frequency increases now compounding for 3 years running. In my view and taking gasoline out of it that people that just the sheer fact that they're coming a little more frequently in our view is Fresh Foods. And 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.
So 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? But we feel pretty good about where we are and where we're continuing.
Okay. And then just to follow-up on the gross profit margin question with food costs beginning to fall and holding retails. I mean, how much do you think that helped out you guys here in the second sorry, in the Q3?
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 3rd party in most instances.
Okay. Then just my final question is just on store growth. When you take a multiyear view, the pace of openings has really begun to slow the past few years in this 15 to 20 per year range. And it's clearly not a capital constraint given your balance sheet. So 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 up for us.
Well, one of the reasons I went as far out to tell you got 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. And part of that is an investment in additional real estate efforts. We have more people landed in different countries. And one one of the comments I mentioned, I believe on these calls as well as when people have come out or called us that Craig has indicated Craig Jamek has indicated a desire to ramp that up a little bit, but do it within the controls that we have. So 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. But I think you'll it sounds like you broke the record, but I can't go beyond talking about the 1st 4 months of or the last 4 months of calendar 2012, because it gets a little less exact. But certainly, hopefully 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 Dan 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 kind of curious what your thoughts are on that. And then 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. I mean, generally speaking, when we haven't opened over the last couple of years, when we have not opened a lot of international locations, the number might be a couple of percentage points to the minus or 5 percentage points to the positive depending on openings. Generally speaking, the fact that our renewal rates improved a little and we're still seeing net increases our total membership base. You're still getting we're still maintaining that. But the big difference is when we opened Huntington Beach, California and I don't have the specifics just a week or 2 ago.
And needless to say, we've got a lot of units in the Greater LA market. So a lot of those members are existing members. We're not getting as many new sign ups. And I don't have the exact number of how many sign ups we had as of opening day. But it could be 3,000, it could be 8,000, but it's not 3,040,000 or 50000 like we've had in the last in some of these international openings.
When I say as of opening day, it's the sign ups that we have during the 6 or 8 or 10 weeks prior to opening when we've got the holding tables and the flags and the balloons out front, so people can come by and sign up in advance. I mean, the numbers are just chart popping in some of these Asian and Australian countries. In terms of a gallonage comp, our trends, we again for gosh 6, 8 months ago, we were enjoying some months where the gallons comps were in the 10% range, 8% to 10% range. I believe of late it's been in the 3% range, 4% range. And again, it's how much 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. I think that again, I don't think we can sustain 10s. I think I feel confident we can continue to sustain numbers better than the U. S. Economy, the U.
S. Gasoline sales overall, which we've done handily and we'll go from there. Great. And then 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 Weinsley 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, you look at 1st of all in terms of our discretionary business as I think I mentioned the soft lines is up in high single digits. Hard lines is ex electronics is in the low single digits. Wood electronics is lower because majors is down a little bit. And again, this is one person's view with the same things that many of you read. Our view is notwithstanding our relative sales strength and member sign ups and room 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. And so those are things that have driven more people in more frequently. And if we got you walking by the TV or the batteries or the patio set or whatever it might be, there is a chance you might buy it. So 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 are improving slightly, but that's got a long way to go. So we are the good news for us I think is that notwithstanding and this is not a change from our position. We've felt this way for a few years now that there's nothing that's there's not a big engine underneath a lot of this, but it is to our to the credit of what 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.
But it's not like we're not concerned about what's going to happen tomorrow in the economy. That would be being said, extreme value proposition that we're in and out of seasons early, we are still throughout this last 3 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 Patty, we did well with the seasons behind us pretty much. But we can in our view, we can afford to be more aggressive even given those concerns in terms of merchandising.
Great. Thanks. And then 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, but I wouldn't say that's something that anybody has talked big around here in our budget meetings. I'd have to look at it more detail, but I'd say nobody's mentioned that as being a big reason why we're getting more frequency. I mean, 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
Adrienne Shapiro 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? And 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. But again, I use a 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 having a and carrying a lower margin. And I think the same thing can be safe for some of the raw material products and bakery. So it's not all it's a combination of some things that help you a little bit and some things that hurt you a little bit on that.
And I guess the last thing is we're always trying to upscale the item and upsize the item.
Right. Okay. So 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 2, gas prices have come down and that's in that average ticket and also FX has impacted a little bit, so year over year on FX. Getting to the other question, again, I don't want to sound cavalier about it, but our view is, 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 Home Depot for that Menlo's for that matter, where we're going to respond and get down, but and come down in price. But there's other things that are going the other way. Our 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. So all those again, there's 100 different things that are affecting it up and down.
I'm not terribly concerned about what you the question you asked of how that's going to impact us.
Okay. And 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 and A?
It really doesn't impact it a lot. Most all things are spread over the extra week. So you have an extra 2% of weeks, if you will, yes, one over 52, but 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. But the big things like vacation, payroll, vacation, health benefits, rent, although we don't have rent on all the 20% of our units that we lease, Utilities, all those things are you have an extra week of those costs in that 53rd week.
So if 1 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 McBranan with Bernstein.
Good morning. I just wanted to follow-up first on the competitive question
a little
bit. I think Q1 we've seen that Sam's on an ex gas basis had a little better comp than you did on an ex gas basis. So just kind of curious what you think they're doing right? Or is it just a matter of easier compares? And then have you seen any change out of BJ's since they've exited the public realm?
Well, 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, we the only thing we've seen is they're still aggressive on openings. They tend to in my view from the again the last few months of budget meetings, is 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. So they're continuing to grow.
Competitive. Hold on one second. Yes, when we do Bob has made a point good point. When we do our weekly competitive shops and we see those at our budget meeting by region every 4 weeks here, in terms of the delta of competitive like items, commodities, Downey 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. And then 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 3 quarters now, it's a 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.
So how are you thinking about kind of price investment given that you're not seeing any deltas combined with traffic that has slowed down a little bit?
Well, I mean, if that I guess, I don't want to be too assertive or aggressive here. When we anniversary that the next quarter you're right will be the Q4 of this anniversarying of year over year lower core merchandise margins. There's no desire here to drive that in one direction. I mean, we always 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. So 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 very on a lag basis. But segment margins, we've had now a couple of quarters in a row where the other international segment margins are down. Obviously, it's a quarter ago, but what's driving that?
Well, I think 2 things, the price investment that we've talked about and also in a couple of those countries that like 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 Baird.
Hi, Richard. A couple of questions. First, just on May, it looks like from your reported sales numbers that maybe perhaps the month got off to softer start. Just curious as to how you've seen this month flow so far? That's my first question.
Well, we said I can't talk about May until we report May.
Okay. And then 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?
Yes. Get an extra week of it's daily. So that extra week you'll get an extra week of membership fees.
Okay. And then just lastly with Craig now in the CEO spot here for 5 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 percent 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.
Sure. Well, I think Craig you 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. And the and Craig said it best. He says his goal is A, not to screw things up and also to 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 talked about the fact that certainly he's focused on some efficiencies in the warehouse. The fact that the 8 or so years he spent in merchandising, but then handing that baton back to Doug Schott, who's now in charge of all merchandising. And Doug's most of his career was spent in merchandising. So 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 Doug and Jenny Ragland under Doug a little bit more leeway to see what they can do with dotcom. Although don't expect giant changes. I mean the more significant changes to start with are replatforming 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.
And anything on the capital allocation front Richard?
Well, the biggest thing on the capital allocation front is going to be hopefully a ramp up and expansion. And beyond that, we just announced another higher than earnings growth increase if you will and looking at history of dividend and we continue to buy stock back. But 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. But 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 and then worldwide, you went up by 60 basis points. Did I take that down correctly? And I guess if that is
That's true. I think it was 50, 85.7 versus 86.2 worldwide. So 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 that I mean if you go back to the beginning of time in the U. S, if we signed up 100 members in year 1, about 70 renewed in year 2 renewed that first time. And in year 2, you also had another 100 sign ups. In year 3, the 70 that new 100 was 70 in year 3, their 1st year of renewing, but the 70 from year 2 and their 2nd year of renewing was a higher percentage than 70 and let's call it high 70s maybe. And then of course over time when you've got a lot of mature members in mature locations, we're up to that 89 plus number in the U.
S. And Canada. Given that we've and when you're signing up so many more people a new market, you also have an even lower than 60% 70% rate. I think it's closer to 60% in that 1st year overseas. And but then we're still getting more.
I mean in Asia, I think the average number of members per location is almost double the company average. So we're still adding a lot of people over there, albeit not only a lower renewal rate. So that's why you see that number jumping implies that yes, you're having a bigger improvement overseas, but you started at a lower base overseas, lower renewal rate.
Right. Okay. I mean just on the same maturity level then, would you be tracking similar to the U. S. And Canada to us 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. I mean, 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. And so you're going to get a lot more people come in to look see and by definition more of them not renewing in that 1st year.
So but relative to what we've seen over the last several years in those countries, I would say that new units are starting off units that are 2 years or 3 years old are trending better than the units that we opened 8 or 9 years ago that were in their 1st, 2nd and 3rd year.
Okay. And 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? And then can you just highlight what extent markdowns played a role in this quarter if it was
first question I can't answer because I'll get shot.
Okay. Well, maybe in this period as you saw moderation going through the quarter, did that help you as you progress through the quarter?
Well, 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. So I guess, I'm curious if that's happening. And if it's not, why not?
Yes. Well, again, I think we're always the first to go down and we're not frankly, we're not really I don't think we even price shop Whole Foods. So I don't think that's been an impact 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 those are that's generally been a little better for us than not. But we're still investing in price. And 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 questions have 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 to the bigger screen TVs. So I guess the first question is that true?
And then with that what type of consumer response are you seeing in these bigger TVs? And then 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 process 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. So the average price point of our TVs, I'm looking just at the last 4 weeks of the quarter, got some little detail. The sales the average selling price per TV was about the same year over year, which is Even though there's inflation.
Even though there's deflation. So it's all about driving the customer towards a little bit screens. I mean, we're doing 60s, 70s and even 80s now out there as well as the smaller ones. And the second question, I'm sorry?
With the 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. And 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 we're $300 $400 off on a TV and our MVMs for a few years. And that went to nothing for a while and then to something. And I'd say it's still something, but not as good as it was a few years ago and not as bad as 0.
So not a big change yet. And part of that I think is that we've gone we've tried to drive the TVs in towards the bigger sizes where there's perhaps a little better.
Yes. And then if I could just 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 still to come from the benefit of fresh foods? I mean as far as maybe expanding the categories, putting into more centers, how much longer this be an incremental driver traffic you think?
Yes. I mean 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 mean I look at something like bakery, which a few years back after years years of great growth was kind of slowing. Well, guess what?
Sue McConaughey, our VP of Bakery Operations and a long time 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 breads. So I think we do what we we do well what we do in terms of being merchants and mixing it up a little bit. So I think there's still I still get 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.
And I think we again, I look at things like apparel where we've driven more business, you see more presentation out there. Then we've got good comps in 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 and how can we get you to buy some more of those things. And so it's that ongoing focus for treasure hunt and that ongoing focus for those specialty items. And so I feel again, it's a qualitative answer, but we feel pretty good that there's we 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 JPMorgan.
Thanks. Question, most retailers saw some sort of lift from the weather in February March and then some sort of moderation in April. It doesn't seem to be the case for you. So 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 has helped me here with this answer. We don't 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 26 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 and they may not get it.
So I think we're a little bit of an unusual animal it relates to some of the weather impacts. Even seasonal apparel, we're bringing it in a month traditional retailer in those areas would be. So we don't see as much in my view, we don't see as much of an impact of weather even in a geographically discrete area.
But you're saying there was a small one. There was a small impact, but it was
Yes, there was a small impact.
And then as you think about last year, I think gas prices peaked in May last year and start 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 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, we know 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 We know that every person that comes to the gas station about 30% of them do come into shop that same day, whether they came to shop or to do gas who knows. But it's got to be a positive.
And again, I can't tell you more than that.
Fair enough. And then 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? Or 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 can't I'd be hard pressed to know the exact reasons. I know one of the things was that California as an example was particularly strong comp wise if I go back when it was a standout for the first time. So 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 2 more calls?
Your next question comes from the line of Mark Wiebellemauth Morgan Stanley.
Hi, Richard. Could you give us the number of Asian stores that are in your pipeline over the next 2 to 3 years? And when do you think you really start kicking up in the mix of international in the store openings as you look out in the 5 year period?
Well, I think if you look at this year, 16 of 10 in U. S. And 6 elsewhere, I would have guessed it was fifty-fifty, if I don't have the original budget in front of me. Part of that is, is they do take longer and when they run into a little snag, it's more than a month little snag. But again, going forward, I would say the trend will go from 6 out of 16 this year whatever percentage that is, 6 out of 16, 37%.
I think it will be fifty-fifty or close to that next year and a little or close to that and then higher than that in the year following. But and that's based on what's in the pipeline now and the fact that certainly these countries are less saturated than the U. S.
And how about the number of them that are going to be Asian stores in the next few years?
Well, our activity in those three countries started sooner and so there's more in the pipeline, so sure. But I don't again, I can't. And as I mentioned, the guys are over in Australia for the last 2 days looking at a bunch of sites. I throw that in the pipeline recognizing there's only 3 there right now. Okay.
So you got 3 Asian stores in the pipeline right now in total?
No, no. No, no, no. There's 3 Australian locations already open. And I'm sure that will ramp up given that we're looking at a lot of sites. Same thing with Asia.
There's I was just trying to get to that page. Hold on. We end this fiscal year with hold on 30 locations between the 3 countries And my guess is, we'll have gone in those three countries from opening 2 or 3 a year in the total a couple of years ago to having opened 8 this fiscal year if all goes as planned. And I would say easily more than 8 over the next couple of years. So the trend is in the right direction in that regard.
But again, they take a little longer too. But as I mentioned earlier, we have ramped up our expansion, our real estate personnel efforts. And so we've got more in the pipeline.
Okay. Thank you.
Your next question comes from the line of Sean Naughton with Piper Jaffray.
Yes, thanks. So 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? And then 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, 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 2 weeks and it wreaks havoc with our comparisons of traffic and volume. There have been a little bit geographically on weather, but nothing to that's usually in one region where if Southern California had huge rainstorms for a few days, that's going to impact a 2 week period down there minus and plus. And the U.
K, it's come off of it has been its comps in local currency for a few years have been pretty tough for us, flat up a little and they're up a little better than that right now.
Okay. And then I guess just following up on that, you talked a little bit about being on the ground with essentially some people in Europe over the last 12, 18 months. What's going on over there change anything with respect to the timing of anything that would potentially be in the pipeline or your thinking around that particular market? Thanks.
I don't think it changes the time line. If anything in given that we'll be using dollars 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 are also going to you're going to be there. The economy is tough right now. If anything, it's making it a little easier for us, but I don't think it's speeding anything up for us.
And again, as our history has shown, don't expect us go into any country and have 10 locations in operation 2 years out. We'll open a unit or 2 in the 1st couple of years and go from there and see how it goes. And so we have a lot of patience in that regard.
Okay, great. Thanks for taking the question and best of luck.
Thank you.
And 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 Q3 year to date operating results for FY 12 conference call. You may now disconnect.