Good morning. My name is Debbie and I'll be your conference operator today. At this time, I would like to welcome Thank you. Mr. Richard Galani, Chief Financial Officer.
Please go ahead.
Thank you, Debbie. Good morning, everybody. This morning's press release reviews our Q2 of fiscal 2011 operating results for the 12 weeks ended February 13 and of course our 4 week February sales, which ended Sunday, February 7. As with every conference call, I'll start by stating that the discussions we are having will include forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and that these statements involve risks and uncertainties that may cause actual events, results and or performance to differ materially from those indicated by such statements. The risks and uncertainties include, but are not limited to, those outlined in today's call as well as other risks identified from time to time in the company's public statements and reports filed with the SEC.
To begin with, our 12 week Q2 of fiscal 'eleven. For the quarter, our earnings per share came in at $0.79 up 18% from last year's 2nd quarter earnings per share of $0.67 As was noted in the press release, in last year's Q2, we had a $22,000,000 or $0.03 a share charge that was recorded related to a change in the company's employee benefits. Excluding this charge, Q2 EPS last year would have been 0 point 7 $0 and the 18% EPS increase would have been 13% on a more normalized basis. And looking at the year over year Q2 earnings comparison, our gasoline operations were still profitable in Q2 this year, but less so than in Q2 last year to the tune of about $0.02 a share. So that hurt us a little bit year over year.
As was previously disclosed, we're taking a 4.9 percent pretax accrual in the 2nd quarter to pay pending court approval, some attorney's fees and a derivative suit. LIFO, it's back after 9 at least 9 fiscal quarters with no LIFO charges. In fact, back in 'nine, all 4 quarters had LIFO credits. We recorded in Q2 here a $6,000,000 pretax LIFO charge. And based on the way things are looking, we'd expect more in the coming fiscal quarters.
And lastly, currencies, foreign FX, many of the foreign currencies in the countries which we operate have strengthened relative the dollar year over year. And as compared to the U. S. Dollar such that when we consolidate the profits from these foreign operations by converting such profits into U. S.
Dollars, this helped Q2 by approximately $0.02 a share. If you take those four items that I just mentioned, gasoline profitability, the $4,900,000 accrual for legal fees, LIFO of $6,000,000 and the FX benefit. Add together, these 4 items collectively hit this year's Q2 EPS by approximately $0.02 a share. One other item of quick note, as I had mentioned in last quarter's conference call, effective the start of this fiscal year back in September, we began consolidating the results of our Mexico operations, our Mexico joint venture. Historically, before this fiscal year, these operations were treated on the equity method investment method.
Thus, we only reported our 50% share of the joint venture's net income within the non operating interest income and other line item on our income statement. Since the beginning of this fiscal year, we now fully consolidate Mexico venture. And in fact, it adds 2% to 3% to top line sales, assets and liabilities. 100% of the venture's financial statements are included in our P and L and balance sheet and cash flow. And then the 50% portion held by our joint venture partner is then backed out at the bottom of our income statement to offset it, such that there's no effect to our bottom line or our earnings per share.
It does, however, impact the discussion of the percentages of gross margin and SG and A and the like and earnings basis points, and I'll point that out as I discuss our results in the next few minutes. In terms of sales for the Q2, our reported total sales were up 11.4% and our 12 week reported comparable sales figure was up 7%. For the quarter, as has been the case for several quarters now, both total sales and comp sales were impacted by gasoline price inflation and by the strengthening foreign currencies relative to the U. S. Dollar year over year.
On a comp basis, the reported 5% U. S. Sales increase, if you exclude gas inflation, would have been 3%. The reported 12% international comp figure, assuming flat year over year FX rates would have been plus 8%, resulting in the total company comps, which again we reported as plus 7%, excluding gas inflation and excluding FX, would have been plus 4% for the company. And in terms of the February the 4 week month of February, which we're also reporting this morning, it's directionally similar to the quarter, again, excluding gas inflation.
The 6% reported U. S. Comp would be +4 14% reported international comp would be plus 7% in local currency. So that such that excluding both gas for the month of February, this what I'll call the normalized plus 5% for the month of February, this what I'll call the normalized plus 5% compares to a normalized plus 4% for the entire second quarter. Other topics of interest that I'll review this morning, our open activities and plans.
After opening 8 new locations in Q1, we opened 2 new locations in Q2, one net. One is a new location in the suburb of Minneapolis in Burnsville, Minnesota. And our second location in Vancouver, Washington, which is just north of the Oregon Washington border, north of Portland. We also closed a unit in the quarter in San Marcos, California. This unit is being torn down and rebuilt on the same site.
It will open again later this summer before the fiscal year end. Since Q2 end, on February 13, we have not opened any new locations, but we'll open a 3rd unit in Tucson, Arizona in mid April. And our plans are for 14 buildings to open by fiscal additional 14 buildings to open by fiscal year end, including the relocation of that San Marcos the reopening of the San Marcos site. All told, that would put our fiscal year 2011 opening schedule at 24 net new units. That would include 14 in the U.
S, 3 in Canada, 5 in Asia, all of which are planned for our Q4, which starts in early May, and 2 in Australia, which will be our 2nd and third units in Australia. Also this morning, I'll briefly review our dotcom results, our membership trends, again talk about margins and SG and A in the quarter, mention what we bought in terms of stock repurchase and a couple of other miscellaneous items. Okay. So on to discussion of our quarterly results. Sales for the quarter, as I mentioned, were 20,400,000,000 up 11.4 percent from 18,400,000,000 a year earlier.
And again, our reported comp was 7, which of course is benefited by the inflation and the FX. For the quarter, the 7% reported comp resulted from the combination of an average transaction increase of +3 percent and an average frequency increase of about 3.5%. The frequency trend, by the way, during the past 3 calendar reporting months for December, January February was basically 3.5%, 4.5% and 4%, a little under 4%. And for the we're now going on to 2 plus years with year over year frequency increases in the 3% to 5% range on a year over year monthly basis. And that's after, as you many of you know, after years of frequency figures in the really 0% to 2% range.
For the February reporting month, much like the quarterly comps, our 8% reported comp figure was a combination of an average transaction increase of 4.2%. And again, that includes the FX benefit and the gas benefit. It would have been somewhere between 0.5% and 1% net of those 2 and an average frequency increase of sales comparisons by geographic region, for the quarter, the Midwest, the LA and the San Diego regions were the strongest, followed by good showings in the Bay Area in the Southeast. The weakest U. S.
Region was Northeast. Of course, that was impacted by the ongoing inclement weather. Internationally, in local currencies, U. K. Has been the weakest as it has continued to be about flat with Canada and Taiwan in the mid singles and everywhere else and all the other countries in the double digit comp range in local currency.
For February, we've continued again to experience weather in different parts of the country. During February, there were impacts in Midwest, Texas, Northwest and Canada. We estimate that detriment to what we would have in terms of lost sales somewhere in the half to 1% range. On a regional and country basis for the month of February, U. S.
Regions with the strong results with the Midwest and all three California regions, Bay Area, Los Angeles and San Diego. Recall that San Diego region also includes not just the San Diego market, but Colorado and Arizona. The weakest U. S. Regions were the Northeast and the Northwest, again, both impacted by strange weather.
Internationally in local countries and local currencies, we're doing fine. Canada up high single digits and Korea and Japan in the teens. One quick comment on weather and its impact on our sales. I was recently read an Internet article about our comments on weather. While negative impact to our year over year sales increases, it's not really an issue because we had similar reasons a year earlier in discussing sales.
We understand that. We're just trying to share with you what our operators look at in terms of what we thought we lost whenever you have the kind of weather we've had. Some of those sales are not recoverable and we give our best guess our operators give us their best guess of what they lost, which then Jim discounts a little bit. That's what we give you. Inflation in fresh foods continues in the low to mid single digits range and in food and sundries in the low single digit range similar to January.
Looking ahead to March, March is a 5 week sales reporting month. We'll have a full 35 selling days this year compared to 34 days last year. That's due to the timing of Easter, which is 3 weeks later on the calendar this year versus last year. Last year, Easter fell on April 4, which this year is also on 24. The March reporting period will end Sunday April 3 and we'll report on the 7th April.
In terms of merchandise categories by quarter, in terms of sales, for February. Within food and sundries, all subcategories were positive ranging from plus 3% to plus 12% for the month with essentially a flat hardlines comp sales increase. The strongest subcategories within hardlines for the month of February were automotive, sporting goods and office. Majors, which is electronics overall, were negative. That's the offset to the other areas.
The big dollar negatives were in computers and other miscellaneous electronics like audio and what have you, which overall weaker both in terms of average selling price and units. The one positive note within that negative majors is TVs. While the average sales price per television is down, the TV unit sales in February were up 9%, which resulted in about flat dollar sales in TV. So you can figure out what the average sales price decline was, but nonetheless, good unit sales increase in TVs. Within high single digit comps of soft lines, housewares, home furnishings, small appliances and jewelry showed the strongest results.
And within fresh foods, all right around 10%, plus or minus a couple of percentage points, all 4 sub fresh food categories, meat, bakery, deli and produce in the high single to low double digit range in each of those subcategories. Moving on to the line items in the income statement, we'll start with membership fees. We reported $426,000,000 or 2.08 percent in Q2 of 'eleven. That's up 10 percentage points in dollars or up about $40,000,000 from last year, about 2 basis points less. Again, I can go through all the explanations of gas inflation that inflation that impacts it, but nonetheless, in dollars, it was up 10% or $40,000,000 If you take FX out, it was up 9%.
That's still a good showing. In terms of membership, we continue to enjoy strong renewal rates and continued increasing penetration of the executive member. We had one as I mentioned, we had 2 openings in Q2, but actually and then one closing with that San Marcos, but 2 openings. Our new membership sign ups in the quarter were still up slightly year over year in the fiscal quarter, net new sign ups overall. In terms of number of members at Q2 end, at the end of the first quarter, we had 23,500,000 Gold Star members.
It's now 23,900,000. Primary business, 6.2 quarter, dollars 6,300,000 at the end of the second quarter business add on $3,600,000 $3,900,000 and total households would be $33,300,000 $34,100,000 And if you include all cardholders, some households, of course, have 2 cards, €61,200,000 at Q1 and €62,000,000 at Q2 end. These figures, of course, include Mexico now that we consolidate, but both Q1 and Q2 and have apples to apples comparison there. At Q2n on February 13, our paid executive members were just shy of 11,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000, that's an increase of 210,000 or about 17,000 a week, 17,500 a week during the last 12 week quarter. In terms of renewal rates, they've actually continued pretty strong.
At the end of the year, our U. S. And Canada renewal rate was 87.7%, which is the number we've always reported. At Q1 end, it was 88.2%, and at 2. And at Q2 end, it was 88.8.
Certainly, part of that, I believe, is the continuing increasing sales penetration of the higher renewal rates that we engender from the executive membership base. We see the same trends on a world wide basis in many of the new markets where you have units that are a lot younger. You start off typically in the 70% range and trend up towards our company average. Overall worldwide, we're around 86%. Going down the gross margin line, gross margin in the quarter was higher year over year by 15 basis points.
This way, you get out your patent and we'll jot down a few numbers. We have 3 columns fiscal 'ten, Q1 'eleven and Q2 'eleven. We have several line items, core merchandising is line 1, ancillary business is line 2, 2% reward line 3, LIFO line 4, other well, actually, there is no other these quarters total. And then I've added 2 lines, Mexico impact and then the last line below Mexico impact would be without Mexico. Again, because we are consolidating Mexico starting this fiscal year to give you the true reflection of the basis point changes we show you with and without that.
So going across these line items, core merchandise for of 10, it was up 6 basis points, so plus 6 basis points. In Q1 2011, up 19 basis points. In Q2 2011, up 24 basis points. That's again on a year over year basis of how the margin improved. Within ancillary businesses, its contribution to the total change, plus 3% in fiscal all fiscal 'ten, minus 9% in Q1 'eleven and minus 5% in Q2 'eleven, a 2% reward, which simply reflects the increasing sales penetration, so a higher reward being paid back our members, minus 2 basis points in 10, and then minus 1 in each of Q1 and Q2 2011.
LIFO was a charge of 5 basis -five rather not a charge, but a year over year comparison of -5 note in fiscal 'ten, 0 in Q1 'eleven and -three basis points in Q2 'eleven for a total reported year over year change in margins of plus 2 basis points for all of fiscal 'ten, plus 9 for Q1 'eleven and plus 15 for Q2 'eleven. As I mentioned, the consolidation in Mexico benefited both of these numbers in Q1 into Q2. So, in terms of Mexico impact, no number in the first column, Q1 plus 3 basis points and Q2 plus 6. So without Mexico, it'd be plus 6 for Q1 overall and plus 9 basis points in Q2. So with that chart in front of you, as you can see, our overall reported gross margin was higher by 15%, that's what we reported.
Within this plus 15%, our core merchandise contributed 24%. And ancillary business gross margins, principally GAAP, here to reduce our Q2 gross margin by 5. In fact, the GAAP gross margin component was minus 6 or more than all of that minus 5 with the other ancillary businesses and on that basis contributing 1 basis point. In Q2, the gas sales lower gross margin business to start with and in fact within the gas business, the margin was reduced year over year with the rising gas prices. That's what we see.
Our lower margin gas business represented 7.2% of last year's Q2 sales compared to 8.5% of this year's Q2 sales. So, again, as the sales penetration of our core merchandise was lower year over year, that tends to temper that 24 actually is tempered in the fact that on a like basis, if you look at the 4 core merchandising areas, which is a little about 80% of our business, which is food and sundries, hard line, soft lines and fresh shoots, just those component, sales divided those gross margin dollars for those 4 main departments divided by the sales for those 4 main departments were Basically, within those 4 categories, food and sundries, hard lines and soft lines were all up nicely. Fresh foods was down ever so slightly, less than 10 basis points down year over year, primarily down due to commodities price inflation and the fact that we tend to hold pricing as long as we can, particularly key small business items like 15 packs of muffins and some of the items at the food court as well, and then the bakery and the deli rather. Overall, Q2 margins were just fine. The impact, as I mentioned, from executive membership was 1 basis point, which back to the envelope basis implies about and we took a charge of $6,000,000 or 3 basis points in Q2.
And again, there's no way to predict what will happen other than my crystal ball tells me that certainly it will be a LIFO charge in Q3 and most likely Q4 at this point. Mexico again has the positive impact that we just mentioned. Moving to reported SG and A, our SG and A percentages Q2 over Q2 were lower or better by 24 basis points coming in at 9.96% as a percent of sales this year compared to 10.2% last year. In last year's Q2, as we mentioned in the press release, we had the $22,000,000 charge related to the change in employee benefits. That was a detriment last year in Q2 on a year over year basis by 12 basis points.
So really, when we report a 24 basis point increase, it's really an improvement of 12 basis points net of that. Again, like margin, we'll jot down a few numbers, same three columns, all of fiscal 'ten, Q1 '11 and Q2 'eleven. And the line items will be core operations, central, stock or equity, quarterly adjustment total, and then again, adjustment total and then again 2 new line items Mexico impact and then total without Mexico. Going across and plus numbers here means lower SG and A plus is positive. Operations in fiscal 'ten was plus 2 basis points year over year.
In Q1 'eleven, plus 17 basis points. In Q2 'eleven, plus 13 basis points, so better by 13. Central, plus 1, plus 1 and minus 2. Equity, 0, plus 1 and plus 1. +1.
Quarterly adjustments, +7, 0 and plus 12. That plus 12 by the way is that employee benefit, the $22,000,000 ran out. Total would be plus 10, plus 19 and plus 24. Now Mexico in Q1 'eleven, there's no numbers in the fiscal fiscal 'ten column. In Q1 'eleven, it was plus 7 and in Q2 'eleven, plus 11.
So excluding Mexico, it'd be plus 12 and plus 13. In terms of a little editorial on SG and A, we did have the negative impact of the $4,900,000 legal fee related to the derivatives settlement. That's a couple of basis points. There's about a 5 basis point negative impact from benefits costs, including healthcare and workers' comp. On a positive note, our payroll percentage year over year benefited SG and A by 14 basis points.
Total payroll dollars for the whole company increased 7.3% in Q2 compared to an 11.4% total sales increase. Both of those numbers include higher increases because of FX, but again, it's on an Apple. Both numbers do so. It's a light comparison. Again, small changes in Central and Equity, nothing big to talk about there.
Overall, we feel a good performance in SGA given the continued escalating costs in healthcare and that additional small legal expense. In terms of preopening expense, a little over $3,000,000 in Q2 and a little over $4,000,000 in Q2 this year versus a little over 3,000,000 last year. Both numbers were calculated out to 2 basis points. No big issue in both quarters and 2 openings. In terms of provision for impaired assets and closing costs, last year, we had a very minimal charge of just under 200 $1,000 for the quarter.
This year, just under $2,000,000 So all told, operating income in Q2 was up 27% from 4.70 $1,000,000 last year to $597,000,000 this year. Again, if you exclude that $22,000,000 charge that hurt last year's number, the $127,000,000 increase in this line item would be $105,000,000 Below the operating income line, reported interest expense was slightly higher year over year with Q2 coming in at 27,000,000 versus 26,000,000 a year earlier. These amounts almost entirely reflect the interest expense on the $2,000,000,000 debt offering in February of 'seven. If you recall, in February 'seven, dollars 900,000,000 was 5 year money, which will become due and payable in March of 2012. That'll be a nice change given that we're earning a lot less on our excess cash right now and we'll be paying that off by essentially writing a check, €900,000,000 of that €2,000,000,000 in March of 2012.
In terms of interest income and other, which again like Q1 was much lower year over year, it was lower by $6,000,000 just under $4,000,000 versus a little under $30,000,000 last year in the quarter. The big change there of course is again Mexico. Actual interest income was higher year over year by about 4,000,000. That's a reflection of higher cash balances, certainly not because interest rates have reduced a lot, but also the consolidation of Mexico's investment income into our financial statements. However, the biggest component of this 26 $1,000,000 plus year over year change was the earnings from Mexico, which are now consolidated and to a lesser extent, profit on FX contracts used in our business.
Overall, pretax income was up 21% from $474,000,000 last year to $573,000,000 this year. And again, excluding the $22,000,000 charge, pretax earnings were up 16%. Our company tax rate is pretty similar year over year in the Q2. It came in at 35.5% this year versus 35.6 percent last year in the quarter. We generally have seen that trend down a little bit.
The effective rate in the U. S, which includes federal and state is higher than and some of the foreign countries, which have lower federal income tax rates given our increasing profitability overseas, we've seen that number over the last few years trend down a little bit. No big changes or issues in the tax rate. Quick rundown on other things, we'll include in the what you have online what we call the Q and A, which talks about quarterly LIFO charges, summaries of openings, calculations of earnings per share and also the full balance sheet. So we won't go over the balance sheet here.
What's not on there is when some of you asked for is depreciation and amortization. For Q2, depreciation and amortization was $195,000,000 and year to date, dollars 386,000,000 We have a strong balance sheet, as many of you know, lots of cash, net cash even better than $2,000,000,000 of debt, strong debt to cap ratios. Accounts payable, if you look at it on a reported basis a year ago, accounts payable as a percent of inventories was 104% at the end of the second quarter. The end of this year's Q2 was 97 If you take out all the non merchandise payables, notably and most importantly, construction payables, It was flat year over year at 87%. Inventory per warehouse, dollars 10,000,000 right at $10,000,000 last year at Q2 end and about $10,500,000 at Q end this year, so up about $500,000 or 5% work for warehouse.
FX is about 170,000 of that 500,000. So it's really flat currency basis, dollars 330,000 and on that 330,000, about a little over a third of it, to speak of. We feel we did a good job of taking markdowns through the holidays and our inventory is in good shape. And in fact, our physical inventory our physical inventories, which we take at mid year and year end, our mid year numbers continues the trend of improving ever so slightly the basis points of inventory shrink. In terms of CapEx, in Q2, we spent $234,000,000 so year to date, $540,000,000 As I mentioned earlier, we've got a lot of openings planned for the last 4 months of the fiscal year starting in mid May.
And for all of 11, we'd expect CapEx to still be in the $1,500,000,000 range. In terms of costco.com and above here in Canada, sales are up a little over 10 percent. It continues to be a profitable business. Our average ticket has come down a little, but the site traffic continues to grow and was up a little more than this total sales increase. In terms of expansion, as you know, in fiscal each of 'nine and 'ten, we opened about 15 units.
I think it was 'thirteen in 'nine net and 'sixteen in fiscal 'ten. This year, as I mentioned, plan to do 24%, which includes 8% in Q1, a net of 1% in Q2 was 2% less the reload or the closing of San Marcos. In Q3, 1% with no reloads, Q4, 2014. So all told, we'd have 24 net new increases on a starting base of $572,000,000 So about 4% unit growth, which would translate to about 4.5% square footage growth given some expansion of existing locations, adding some square feet here and there as well as opening on average units that are on average a little higher than the company than the existing company average. As of Q2 end, square footage stood at 84,000,084,000 square feet.
In terms of stock repurchases, since the beginning of our program back in summer of 'five and through the end of fiscal 'ten back August, we'd repurchased just under 100,000,000 shares at an average price or about $5,370,000,000 an average price of about $54.37 a share. In Q1, we purchased those 12 weeks, we purchased $150,000,000 worth at an average price of a little under $2 and in Q2, dollars 94,000,000 worth of stock at $71,000,000.73 per share. We're generally buyers every day including each of the past 11 or so business trading days since Q2 end and no change in those expectations going forward in terms of being out there. That's about it. As I mentioned, supplemental information will be posted on the Investor Relations site later this morning.
Lastly, our Q3 scheduled earnings release will be on Wednesday, May 25. That's a little bit out there. And with that, I'll turn it back over to Debbie for Q and A.
Your first
Your first question comes
from the line of Charles Grom from JPMorgan.
Thanks. Good morning, Richard.
Can you just dig into a
little bit the Fresh Foods margins being down? Is that because you guys haven't been willing to pass on the price increases? And then I guess looking ahead, do you expect to see similar pressure over the next couple of quarters because obviously those costs are going to continue to rise here?
Yes. I mean, it's us more than anything. When you look at if I and I'm making these exact numbers up, but if you look at a 15 pack of muffins something that we sell a heck of a lot of those to restaurants and businesses and convenience stores that then sell them in each. And I don't know the price off top of my head right now, but if it was at $5.49 or $4.99 or whatever the X was, you tend to hold off and see realize a lower margin for several weeks or a few months and then finally bring it up to that next level of $0.30 or $0.50 extra and get back to your regular margin that stuff. That's not a competitive issue other than we want to protect the prices to the members that are buying these items.
And we feel that overall our margins have been quite good and we continue to do that kind of stuff. We really don't see any major competitive issues in our fresh foods.
Okay, fair enough. And then you said gas pricing hurt by I think you said $0.02 in the Q2. Can you give us a little bit sense given how quickly gas prices have been moving up here in the past 3 weeks since your quarter end? How the profitability is looking for you guys?
Well, it impacts it. I mean, it's as extreme as it used to be. Years ago, you lost a bunch in those weeks and you made some amount in most of the other weeks. You tend to make a little more in those other weeks and you lose less or make a little in those weeks. I mean, it's tempered relative where it used to be.
The big issue here was the comparison year over year. We had huge profit gains in Qs profits in Qs 1 and 2 last year. And I think like this $0.02 delta we talked about here in Q2, I think it was a little over $0.03 in Q1 on a year over year basis. So again, it's going to move around. Gas is still a profitable business, a very low margin business, a business that I've mentioned before requires some stomach lining occasionally.
But nonetheless, we're getting good frequency. I think that's part of the frequency issue as well. And but certainly when prices for a week or 2 here, you see some relatively flat numbers whether it's plus a little bit of profit or minus a little bit of loss. It's not a real big issue. And looking last year, Q3 was not as impactful, it was not as profitable as Q1 and Q2.
Yes.
Okay. And you called out for February California continuing to be strong. Is it at the company average in the U. S. Or is it ahead now?
I think it's about the same. It's in line. It's in line, yes.
It's in line. Okay.
And then lastly, it looks
like you bought back about $100,000,000 worth of stock here in the quarter. What do you is there any change in the company's cash priorities? You're really starting to build a pretty big balance, I think like close to $12 per share. Just wondering at some point,
do you accelerate that?
Or do you step up the dividend or what?
Well, every spring historically over the last 6 years we have. I can't tell you what we're going to do this time, but we generally haven't done anything giant special. We just increased it methodically historically and then we'll look where we do come this spring. CapEx certainly has been ramped up and will continue although so is cash flow. I mean, so it's a high quality problem.
One of the issues and I think in a roundabout way what you're asking is you bought less in Q2 than you bought in Q1 while your cash is going further north. Part of that has to do that we tend to historically have bought through blackout periods with 751s. You have to put those in place before you know anything
material about what you're going to report, whether it's monthly sales,
which is a week and a half earnings number, 4 or 5 weeks before. Again, I think the high quality problem has been we put a matrix in place, if you will, with how much we're going to buy at different stock prices out there and put some reasonable numbers above what existing stock prices. During those 4 weeks, the stock price then climbs quite a bit. And so a part of it is simply a fact that you locked in a matrix 4, 5 weeks ago based on where the stock price was then. Again, I think it's a little ebb and flow.
And I think the message here and the message I've gotten in talking with the Board and Jim and Jeff, of course, is that we are certainly continuing to be comfortable buying stock back. And you're not going to find us one to make some big announcement that because it went down $3 we bought a lot extra today. We're going to buy more each day when it goes down a little and still buy when it goes up a little and then we get caught in these 4, 5 week 10b5-1s when the stock jumps a lot. And so that mitigates the amount that we bought as well. But overall, we're still a buyer out there and we'll see where it goes.
Your next question comes from the line of Mark Wilde from Morgan Stanley.
I just want to follow-up a
little bit on that California question. If California is kind of in line with the company average, how much more room of recovery does it have? Or another way to ask that is how much stronger was California versus the average back before the downturn?
Well, California was always a little weaker and I'm pulling these numbers from the air here. But if you looked at what was the total U. S. Comp in good times a few years ago was I'm making it up at a 6, California was a 4. Now part of that was as we had more cannibalization in California relative to the rest of the U.
S. At that time as well. That was a little bit of it. And then when the economy got hammered, California went down further. So again, using my nomen picture, if the spread of California comp versus the rest of the U.
S. Comp and few years ago was at 200 basis points delta, there were times at the trough of the economy a couple of years ago where that gap was 4, 4.5 percentage points. So California got hurt harder. It's now back in terms of actual comp dollars. So part of the you might say the gap is closer to 0 now than even 2.
And part of that is because it was weaker a year and 2 years ago. So again, trend wise, it's encouraging. We hope it's got some more room. We'll see.
How about sales per warehouse? Is that not metric back to normal?
I don't have that in front of me. My guess is if you take out gas, it's probably still a little lower. Gas is an unfair benefit here. But keep in mind, you had a couple of I would bet it's closer on its way there, given where we've seen comps in the last few months.
Okay. And then on inflation for food, have you seen manufacturers providing some promotional support as the increases have been rolling in?
Yeah. Mean some of the biggest promotional report promotional support that you see is typically they announced an increase and then they allow you buy in at the old price 2 weeks, 4 weeks, 6 weeks at the old price. And of course, we take advantage of every one of those, I would assume many retailers do. We probably then hold the price longer than anybody else as well because of that. And so, yes, that's the kind of thing you're seeing.
I think there has been some pushback by the retailers, not just us as I would imagine. But at the same token, some of it's coming through. I mean, you can't when you see underlying commodity costs go up, you see the improved penetration, a little bit extra penetration in private label. And it's funny when you look at the when our merchants show us in the monthly budget meetings that this commodity went up 28%, this one went up 42%, but then the average price point went up 2% to 6% on an item. Well, partly it's the wall materials, partly it's the pressure we can put and come to bear on manufacturers, part of it's the pressure competitiveness of private label.
But ultimately, some of it has come through. And again, I would expect to see more not less in the last in the next spiking? I don't think we have diesel, do we? Yes.
Well, we're getting gas on your transportation.
Oh, I'm sorry. In terms of transportation, I'm speaking from a couple of years ago. So add 15% in terms of how we're bigger 15% or so in total. What I'll call the freight surcharge that runs through our depot operations and we've estimated back couple of years ago that every percentage point in that was about $18,000,000 of freight costs in the system, both inbound freight to us from vendors as well as to us from vendors as well as the outbound freight from depots to warehouses. My guess just rounding to $20,000,000 most that's passed on.
It's passed on when the buyers are buying and increases their cost on which they marked up. I would think that the freight is less of a lagging issue than when a manufacturer raises the price of the item, we try to hold a little longer. So
it's an impact, but it's
a modest trend impact. I don't think that's a big issue here. If anything, we've shown our those numbers by the way are our margin numbers. It's part of the cost of goods. And we've shown that our margins have been pretty good this last year and this last quarter year over year when I guarantee you the freight costs within those merchandise sales have gone up in the last 12 weeks year over year.
Your next question comes from the line of Mark Miller with William Blair.
Hi, good morning, Richard. I've got a
couple of questions on the average ticket. Can you first of all give us the comp sales leverage point for expenses we might see in the back half of the year? And then how much might that leverage point come down if we see further strengthening in the average ticket as a proportion of the total comp increase. So that versus the Q1 improved for you. We didn't see that much of an improvement in the G and A trend though, I guess there was some noise there and outside of that payroll did improve a little
bit? I mean, it's hard to guesstimate what the actual point of leverage is. I can tell you that we the operators feel confident in the last couple of years, we like everybody out there got a lower number and I think that's why we've seen things like the payroll percentage improve like they have. With healthcare, it's always something. Some of these increases don't even relate to some of the new changes that are coming over the next couple of years.
And so that's a challenge. I think now the fact to the extent that a sales increase includes inflation on like items, clearly that's the good stuff in terms of leveraging SG and A. Again, it'll help. I'm sorry, I can't quantify it anymore, but I think that it's going at least in the right direction.
Okay. My other question on average ticket, while it's going up in the stores, you said down a little bit in e commerce. Why do you think that might be different? And is that a function of members not buying as many of the higher price point items on the website or is it due to changes your merchants are making?
The single biggest reason is the average price point of an item going through the front end checkout is what $10 or $12 The average item online is just somewhere in the $375 to $400 range, I'm guessing. And so part of it I think is as the economy got worse, we know it I remember it falling in 'nine permeate that site.
Okay, thanks.
Your next question comes from the line of Adrienne Shapiro from Goldman Sachs.
Thank you. Richard, just to follow-up keep on the inflation topic as you're holding prices flat on food as in the face of rising commodity costs.
Any sense of what
competitors are doing? Yes, again, I'm competitors are doing?
Yes, again, this is from what I hear at the budget meetings from Tim Rose and others. We strictest, not to imply that everybody else is not, that our sense is that some retailers try to get margin where they can. We try to hold it a little bit when we can. And given that we've had some relatively strong margin improvements in other areas, which includes different components. As we changed our electronics returns policy 2 years ago, we're still seeing some modest increases and improvement in what we call D and D damaged and destroyed, which is a cost of sales to total gross margin.
Our shrink numbers got a little better just under a basis point better. Well, the basis point is $8,000,000 of $5,000,000 or $6,000,000 this year implied tin foil and paper goods and cereals. Those things we tend to move along. I'm talking more about items within the bakery where you don't want to change prices every week. And so historically what we've always done is if you pick an item that forever it seemed that was at $5.99 ultimately you're going to take it to $6.49 Well, you're not going to take it from $5.99 to $6.09 to $6.19 sequentially.
But once you get there, you're fine. And if it takes 5 weeks or 12 weeks or whatever, that's fine. Same thing in the food court, which is not part of fresh foods, but with rising prices and cheese and things like that, that's impacting the profitability of pizza. Not a big deal to the company overall, but all those things impact margins a little bit. We certainly have had strength in our overall margin and feel very comfortable doing that and feel very comfortable that all the metrics are going in the right direction in terms of frequency and little improvement in G and A and the like.
Yes, understood. And in these budget meetings when you are hearing from the buyers, any sense of how they see the direction of inflationary pressures? And following on that, given that you've had success on controlling what you can on shrink and payroll, is there a tipping point? Is there a point at which in the face of these inflationary pressures, it is hard to hold prices? At what point does it get a little bit tougher to kind of hold off the price?
Find you, we're not holding prices on every item
in the
location. And that's what I challenge. It's kind of like in a budget meeting when a buyer gets up and talks about sales of this small subcategory or this item was up 30%, while your department was up 4%, so what was down? And so we hear about that cotton has doubled in price and the tin has gone up, so tin foil is up. And there are items like tin foil, I believe, and I don't know if it's happened yet, but their price increase is coming from the manufacturers in the high single digits.
Well, we're not going to sustain that. I mean, you've got to pass a good chunk of that on. But so when I highlight something like bakery and front end, we're not going to change the cost of a slice of pizza until we really have to. And we can well afford in that small sub department to do so. So it's kind of like when you hear that the average price increase out there in the consumer price index was 1.5% or 2%, you're thinking, wait a minute, gas went up 28% and my health care costs have gone up, whatever, high teens and all these other things.
So overall, ultimately, you've got to pass on cost increases, but we want to hold it longer and particularly on those business items like the 2 packs of muffins.
Great. And I'll just ask the membership fee hike increase. I mean, we understand you're doing well with controlling what you can and maybe you don't need the fee hike, but perhaps give us an update in light of the fact that frequency is strong and ticket is improving and all the metrics are heading in the right direction that would seem to suggest that perhaps the backdrop is right for a fee hike?
Well, all the reasons that you would list on a page of why we should or shouldn't do it, you get comfort by the fact that you said renewal rates and frequency and all that stuff and the customer loyalty, all that stuff is fine. We haven't made any decision yet. We will at some point discuss it and you all will be the next to know. We did it the last time we did it was, I think, May or June of 'six. So 5 years hence would be May or June of this year.
I think I with someone on you guys on the last call or maybe the previous call that back in the middle of 2009 at the height of the terrible economy, the trough of the economy, when everybody was still feeling very poor from their 401 plans and their house price values and their job layoffs. All things be equal, and we had very good frequency and loyalty everything then, if that was a time that we would think about doing it, would we? And the view was generally no. There's no rush to do it. We'll do it when we want to do it.
And I think I added to that, that if you're looking at the next 3 or 4 year model, is it likely at some point? Yes. But I can't tell you when. And it's and we really don't have any indication at that at this time.
Thanks. Best of luck.
Your next question comes from the line of Bob Drbul from Barclays Capital.
Hi, Richard. Good morning.
Hi. Just a question that I have,
just a couple of things. Could you just give us a feel for where you think your consumer is and your ability to pass through some of the inflation? And I guess, it's more on any general economic thoughts in terms of where we are
right now? Well, we've been asked about like the 2% payroll tax benefit that everybody gets. It's kind of like when there was the $300 tax gift from a few years several years ago to the $600 one. Generally, upscale retailers and Costco tended not to feel the benefit of that as much as the lower medium end discounters and the dollar type stores. The same thing here, we don't really see that as a big evidence for us.
Again, as it relates to our abilities, I think we have the good news is, competitive we're our own toughest competitor. And we recognize you've got to pass on increases, but we're in a pretty good position to be able to delay that for short periods in some instances. This is by no means the example of late 'eight when we took an extra $30 or so 1,000,000 of markdowns on a half a dozen or a dozen key items to try to drive business a little. Business is fine. Some of these increases are being passed through and ultimately you've got to pass them through.
Great. And
can you make a comment on that? Again, I guess I'll say the same thing that and again, many of us here are economists, but as we read and listen to the same news that you guys listen to, it doesn't seem like anything is causing it to get better fast. It doesn't feel like there's another big shoe that's going to drop other than the current thorn is oil prices and what does that do and how does that impact it. But again, we're adding jobs as we open units. I think I read recently that Target was adding a bunch of jobs.
And so, I mean, there's lots there's some jobs coming, but nothing huge and this housing concern is still an issue. So, feel that our number we feel confident in our numbers and our frequency and in our comps and unit comps and everything else in the face of not terribly exciting expectations about the economy.
And speaking of Target entering Canada, can you maybe just talk about the environment in Canada and how your clubs are doing up there with the 80 that you have?
Well, it's been great. I mean, in local currency for a couple of years now, we've been running comps in the mid to high single digits. So compounded for the 2 years. Their economy is strong. It's a big chunk of their economy, I believe, is natural resources, which have gone up.
They did not have any or nearly any fallout from what happened in the finance and banking and the subprime issue. Funny thing, they didn't allow that kind of stuff. And so it's a pretty good economy up there. So our numbers up there have been quite good. It's very competitive up there.
I mean Walmart is huge up there over the last 7 or 8 years. There's some strong retail competitors like Loblaws and others up there. And so Target, I would think will do well up there and we'd like them all to close and just be us, but that's not going to happen. But we're doing fine up there.
Great. And then my last question, Richard. Are there any new items that you're really excited about as you look to this calendar year?
Gosh, you caught me off guard on that one. I'm just trying to think at the top my head. No, I mean, it's more of the same if I think in a category specific, apparel has been pretty exciting in terms of vendors that are not necessarily new people selling us, but really major increases in nice anything from outerwear to shorts and pants to shirts to bathing suits as we start entering that category. So it's a bit to kids clothes and baby clothes. I'm trying to think what else.
There's a lot of electronic stuff coming out to compete with some of the products that are already out there like the iPad and there's 3 d is not the most exciting thing, but I'm not telling you anything you don't know. But TVs are again unit sales in TVs overall are pretty good. PCs, there has been a little hiccup, I think, in the last several weeks with this new chip coming out that delayed some of the new laptops and PCs that people are waiting for. Not big to our company, but a little thing there. I can't think of anything specific other than more to say fresh foods.
It never ceases to amaze me when the buyers get up in the budget meetings, whether it's new bakery items to drive what was the sluggish sale and then it's a good sale good sales. And we're very strong in the meat and protein department. So overall, I think we're doing well. And that's up. But this I can't tell you this one late great item.
Your next question comes from the line of Deborah Weintzwig with Citigroup.
Growth going forward? And also in light of that, how should we think about the margin contribution of those clubs?
Well, first of all, you get every quarter you get to see in the Q, the segment reporting analysis. We've kind of implied that probably outside of we show U. S. As a separate column and Canada as a a separate column and Canada as a separate column and then other international. Within other international, Mexico terms of their economy and our sales our comp sales over there.
Asia, the 3 countries in which we are in Asia continue to do quite well. Australia is great, but it's all up one We'll have 2 more this calendar year, this summer, hopefully. And maybe 1 will fall into early fall, but I think this summer. And so overall, I would say margins reflect the strength or the weakness. So we're going to drive sales in the UK.
We work on a little tougher margins. In Asia, they're a little stronger. But there's other metrics that impact the profit of every other countries. On average, benefits expense as a percent of sales is lower everywhere other than the U. S.
Labor costs, while relative to local labor costs in those countries, we still pay the best wages for hourly out there. It's a much lower percentage in certain of those countries and a somewhat lower percentage in other countries than the U. S. In some cases, there's a little more occupancy like in Asia, but we're driving big sales dollars in Asia too. So that helps.
So there's lots of little things overall. I think the margins outside of the U. S, the pretax return on sales, you'll see in those columns is higher than the U. S.
Right. And then it's really been now 2 really impressive quarters in the core merchandise margins. Should we think of this as an inflection point of impressive performance against tough comparisons? And can you provide some additional details?
I hope it's not an inflection point. I mean, we'll see.
I don't even like the point on the positive.
We feel confident that we are still the most competitive pricing out there. And we still been able to show some margin improvement. But it's a tough business. And as we get a little too strong, we're departments. I've seen that in departments.
I've seen that in countries where things were really strong and we bring it back a little bit and continue to drive sales and ultimately long term profitability. So I think we are I think Jim summed up recently at a budget meeting, he says, we don't have a lot of issues with margin right now. And we don't see that being an issue in in the near future. Beyond that, we'll see.
Okay. And then one last question. Can you just comment on what you're seeing out of
your small business customer? Actually, it's I don't have the exact date in front of me. When we look at the small business sales penetration and you got to take gasoline out there because gasoline is generally a consumer item even if it's for the small business. It got hit a little bit in 'nine, came back not all the way in 'ten and my guess is it's continuing to come back a little bit maybe not be where it was before late 'eight. But when you look at things like restaurant business, the restaurants got hit the hardest where the business restaurants, the high end steak houses, not the neighborhood, not as much in the neighborhood ethnic restaurant or the diner.
And those that did get hit a little bit, come back a little. So that's a very vague answer because I don't have these statistics at the tip of my tongue here. But generally speaking, that's the trend we've seen I know over the last couple of years.
Great. Thanks so much. Appreciate all the insights.
Next question comes from the line of Chuck Cerankosky from Northcoast Research.
Good morning, Richard. I was wondering if you we can go back to the promotions question again from the packaged goods companies. How are they looking at contributing to your coupon mailers as prices begin to go up faster?
I think it's really a separate issue. I mean, I can tell you that we've got more demand to be in those than we have spaces. And it works well. They like it and we like it. So again, that's another way for them to give us some competitive monies.
It's a vehicle for them to provide some discounts. But again, we're full pretty full in that stuff already in terms of the vendors liking it.
Yes. Would it be you talk about space, is it something you could expand as part of as part of the marketing approach to the members as inflation picks up?
I assume so. But again, I'm shooting from the hip here. As you know, we've expanded it in terms of number of days or weeks. There are various coupons out there. We've expanded the offerings a little bit over time as well.
Clearly, as prices go up, there is an opportunity to drive more business of a given item. So again, conceptually, yes, I just I'm not I guess I'm not I don't have the numbers specific to that to Curry
with UBS. Hi, from the line of Neil Currie with UBS.
Hi, Richard. Good morning to you.
Hi. I
just wanted to go through the gross margin table again that you gave us because just allied to what Deb was asking, it looks to me that if you take out Mexico that in the first quarter, there was still quite a nice increase in core operating gross margin. But in the second quarter, once you take out the quarterly adjustment to Mexico, the core merchandise margin was pretty flat. Is that the right way to look at it?
I'm sorry, say that again. I was just turning to that page.
So if you look at the
Q1, total gross margin was up 19 bps. And if you exclude Mexico, it was up 12 bps. And so the core margin still had nice useful, at least 10 bps growth there.
If you look at
Q2, if you exclude Mexico, it was up 13, but the quarterly adjustment was 12 of that. So it would indicate that the core merchandise margin was pretty flat.
The quarterly adjustment is an SG and A item, not a margin item.
Sorry, I'm looking at the wrong page. Okay. So if I was to look at the first and second quarter then and look at the strength in the core merchandise margin, what's going on there is because obviously, it seemed a difficult environment in which to raise margins given the fact that costs are going up. Is there a mix shift going on?
There may be a little bit of that. Frankly, I stand by my comment earlier that we're our own toughest competitor historically. And part of it is the comments, which I actually didn't talk about today is the whole area of sustainability. As we take packaging and freight costs out of items, sometimes they're a small enough amount that you're not lowering a price point or something. But the example I gave a couple of years ago, I remember was just on the plastic container that grapes that we sell the 4 pounds of grapes in.
We reduced the height of that container by 3 or 4 centimeters. It allowed you to get an entire additional line, if you will, slip sheet of layer of those cell units on a pallet, just the actual cost of the light number of plastic containers was like $300 of savings. I mean every budget meaning the buyers whether it's going from around to a square cashews. By going from a round to a square container, we reduced the unlike unit volume, the throughput of pallets in our U. S.
System by 32,000 pallets and however many couple of 1,000 truckloads. A lot of those freight costs don't necessarily lower the price by $0.08 a unit or something. We don't lower the price on something like that necessarily. So I think you get the fact that we improved each year even in the last 5 years probably on average half to a basis point of shrink. The fact that we had a little bit as a percent of sales slightly lower returns in part because of the change in the electronics policy a few years ago.
All those things help as well, not just pricing.
Okay. So it's basically it's not that you're raising seeing benefits here, there and everywhere and that's reflecting in your in a slightly improved cost of goods sold.
Sales penetration of private label, I meant to sit here and say that it hasn't happened, but I got to tell you that's the buyer looks at because they know they're going to be looked at.
Okay. So in the past though, you've generally tended to pass through a lot of the savings through to shoppers and it seems that you're getting some savings building up and building up here. Could we expect you to maybe perhaps reinvest in the future? Or you as Jim saying, margins are looking good here. You just you're happy just to take the margin as we see it now?
Well, I can't tell
you what is going happen next week, much less next quarter, other than we feel pretty comfortable about how we're doing right now. We certainly have a confidence level in our renewal rates and our frequency that until it changes, we'll feel comfortable about it. We feel very comfortable that there's some tough competitors out there, but we're in the toughest. And I say that feeling very honest about that from what I hear from the the buyers know that they can't get too aggressive on things. And again, we still take key items down and we used to talk about the hotdog etcetera for $1.50 and then we added the rotisserie chickens to that cadre of items.
And then we added the 35 count, I think, of the 0.5 liter water. That's the KS has gone from $439,000,000 to $355,000,000 I think now. Maybe it's a little higher now with freight, but that was a couple of months ago. So we're I kind of look at us as having our cake and eating it too. We're able to have some decent margins and still feel very comfortable.
The priority is still going to be the toughest competitor. Keep in mind, again, when you look at the fall of 'eight when everything hit, we had and we specifically talked I specifically talked about the $30 or so million of extra markdowns. That's because comps for the first time and close to ever were approaching 0 and we wanted to reverse that trend. That's not the case right now. And again, overall, we feel that things are going in the right direction.
So again, I can't sit here and tell you it will continue and
been very successful for a number of decades, particularly with a shopper that started off with you as family shoppers and they've grown with you. And you still have a lot of appeal among the boomer generation. How do you feel that your appeal is going with some of the younger shoppers now who are starting to form families who are perhaps thinking about where they should buy some of their consumables in bulk and with more options like the Internet. How do you think your appeal is to these sort of younger shoppers, the Generation Y shoppers?
We want each of them to have 3 children. Look, at the end of the day, we ask ourselves those question too. We're not going to be everything to everybody. To the extent that trend has occurred in the last 3 or 4 years, it's occurred in spite of that, our frequency is up and our comps are a little better than others in general for such a big retailer as ourselves. We're cognizant of that, but we don't we keep coming trying to come out with the right merchandise at the right price and we change it.
And when there's no item that has a lock on its face and we're constantly bringing things out. Organic would be an example of areas which are growing nicely. Some things work by the way in that area and some things don't. And some things we're just waiting for more supply because we could exceed the entire U. S.
Production of certain given organic items. Now as it relates to Internet,
are
we always a little behind everybody else? Yes. I think we've saved ourselves from stubbing our toes occasionally and some would argue that the opposite that we're not looking as hard and fast. I can assure you we're looking, but we want to stay true to the things that we do. We think that frankly there's abilities to drive more traffic into the warehouse by using some of those same tools.
We recognize we've got one of the largest manual social networks. You say the word cost when people around you start talking about it. So we're looking at some things, but I want to suggest that there's a lot of things coming tomorrow afternoon. I guess, this is question that will be better addressed if and when we see some reduction in some of the things I just mentioned. But we have some people looking at that all the time, but we also don't want to hear from what we've seen be successful.
Okay. Thanks very much. Why
don't we take 2 more questions?
Okay. Your next question comes from the line of Greg Nielek with ISI.
Hi. Thanks, Richard. Two questions. One, hopefully a bigger picture on inflation and then on inventory. On the inflation side, I think you mentioned that food was up mid single digits and sundries up low single digits.
If we just think about the mix of your sales, would you say that probably impacted comps for the company about 150 bps in the quarter, if you were to compare it to the U. S.
Foods number, not the food and service.
So if we were to think about general food, fresh food coming compared to that 3% U. S. Comp number ex gas?
I can't exactly calculate it. I can think of some of the offsets to what your premises and there would be things like the average price point on televisions down close to 10% on a much bigger ticket item.
So in that, if you look at it that way, was there inflation in that 3% number overall, at least a little bit or do you think that some of the pressure?
Absolutely. My guess is there's some inflation. Now the other thing that and I'm just shooting from the hip here, any increase we might have inflation on a KS item, but we also have increased unit sales penetration
guess.
Okay, fair enough. Then on the inventory side, I think you mentioned that it was 330,000 on a true like for like basis, up per club and most of it was electronics. Is that can you just fill us in on what actual products that was, which parts of electronics or and did that sell through in February, is that sort of a historic number?
A little bit has to do with a year ago, there were some shortages in some of the flat panels. We've got more SKU selection in TVs than we had a year ago. That probably helped the unit sales of TVs by the way. And a little of it is if you talk about the pendulum swing in terms of goal of SKU selection, I remember 3 or 4 years ago in the U. S.
Example of the SKU selection, the SKU goals on average warehouse was probably somewhere around 4,000, 4,050. You turn around and you got up to about 4,200 and then we brought it down about 4,000 again. And actually before the economy got hammered a couple of years ago, on a conscious way, we said let's bring it down to 3850, 3900. There's got to be the top 200 items or top roughly 5% of the items are in the mid to high 30% of sales that tells you what the bottom 200 items are. And so it's a little bit of an art form, but I think that we probably have moved it.
We got as you got a little too high towards 4,200, it probably got a little too low towards 38,350, let's come back a little. And if I look at it, again, I think I mentioned about $130,000,000 of that $330,000,000 was electronics. The rest of it, if you look down about 7 or 8 sub departments, it was 20 to 40 each.
Got it. And that would be indicative of the SKUs, maybe adding back 50 or 100 of those SKUs?
Yes. Again, there has been no indication on even on seasonal stuff that we've got any big problems out there. And in fact, there's been confidence in the last couple of other meetings about whether it's patio furniture or getting through outerwear last fall and getting into some of the spring and summer apparel items now.
And then could you just maybe just touch on the decision to take the Apple products out of the store?
No, there's really not a whole lot to say. Basically, the 2 of us can figure out how to make both of us happy and we're both out there still selling merchandise, but just different merchandise.
Okay, great. Thanks a lot.
Okay, one last question.
Your last question comes from the line of Robbie Ohmes from Bank of America.
Thanks. Hey, Richard, a quick one. Just can you just remind us on the international outlook and sort of thinking the next 3 years plus, where are you most excited and where are your people most aggressively trying to get real estate sites and weave into that? I think you've added 1 more store in Australia than
we were
expecting today. And just an update would be terrific on that outlook? Thanks.
Well, again, as I've said in the last couple of quarters, the 3 existing or 2 to the total of 3 countries a year. We're going to open 1 or 2 to the total of 3 countries a year. We're going to open 5 in the 4th quarter, which is also I think 6 for the year in total. And so we've stepped it up there. Australia, again, so far so good, but it's one unit.
I'm pretty confident that a year from now, we'll say so far so good, but it's only 3 units. But we'll continue to look there. The only other areas that the fact that I think that we're opening 3 units in Canada this year implies that we're still think that we're not saturated in a country that has 80 plus units. It wasn't that long ago that we felt that as we had 50 going to 60, we said at some point here we're going to fill the country and we are happily finding that's not the case. And Mike Sinegal who don't hold against him that his dad's gym, but Mike's been here for 24, 25 years since college and he opened and ran Japan for us.
And he did spend a couple of early years with Carefor, with Carefor owned 10% or 20% of Costco years earlier. And he speaks in addition to English and fluent Japanese, he speaks fluent Spanish and French. And so he is over there in Europe and there is no promises, but my guess is in the next 2 or 3 years, you'll see us announce if not open in a unit or 2 in a couple of countries over there. But our MO, I think, will continue there as well. It takes us a while to open a few units and make sure we like what we see and we understand all the issues will it will be additive and increasing penetration if you will.
But even in this year with 24 net new units, I think I mentioned 17 of them, 14 in U. S. And 3 in Canada are in very predictable, very comparable countries. Comparable countries. Got it.
But 7 out of 24 was more than we did the year before and more than we did the year before that.
Great. Hey, thanks a lot Richard.
Okay. Well, thank you everyone. Bob and Jeff are here as well and appreciate your time.
This concludes today's conference call. You