Good morning. My name is Christie, and I will be your conference operator today. At this time, I would like to welcome everyone to the Third Quarter Earnings Release 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.
Thank you, Christy. Good morning to everyone. This morning's press release reviews our Q3 fiscal twenty ten operating results for the 12 weeks ended May 9. 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 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 Q3 fiscal twenty ten operating results for the quarter, our earnings per share came in at $0.68 up 42% from last year's reported earnings per share of $0.48 As will be discussed in more detail in a moment, both this year's and last year's Q3 results and the comparison of these results included a couple of items of note. These were outlined in this morning's press release and include the following. First, you will recall that last year in Q3, we took a pretax charge of $34,000,000 related to a litigation settlement covering our membership renewal policy. This charge hit the membership fee income line of our income statement last year in Q3 for $27,000,000 and our SG and A line item for $7,000,000 negatively impacting last year's Q3 earnings by $0.05 a share. This year in Q3, our SG and A line was reduced or benefited by a $14,000,000 pretax reversal of part of a charge related to the Canadian tax liability that we had previously taken in the Q2 of fiscal 2007.
This had to do with stock option protection, the option issues and protecting our employees in Canada who receive such options. This is an SG and A impact, not an income tax impact. So adding back to $0.05 to last year's Q3 EPS of $0.48 and subtracting the $0.02 EPS pickup I just described, year over year Q3 EPS would have gone from $0.53 last year to $0.66 this year for a 25% year over year increase. As I will discuss, there are other items of note that impacted each of last year's and this year's fiscal Q3 results, some positive items, some negative from income tax rates to LIFO to FX, closing costs, etcetera. I will mention the FX issue right now, what I refer to as FX tailwinds.
As you know, the U. S. Dollar this year as compared to last year relative to several of the foreign countries and countries in which we operate had weakened. So our foreign earnings results when converted and reported in U. S.
Dollars has helped us this year and has helped us in Q3 by a little over 20 $8,000,000 pre tax or $0.04 a share. That is assuming FX exchange rates were flat year over year. This year's foreign operating results in Q3 would have been lower by that amount. In all, we took we look at our Q3 results as a continuation of positive trends that we saw in Q2. In terms for the 12 week quarter, reported total sales were up 12% and our 12 week reported comparable sales figure was up 10%.
For the quarter, both total sales and comp sales were positively impacted by gasoline price inflation and by the strengthening foreign currencies relative to the U. S. Dollar year over year. On a comp sales basis, the plus 6% U. S.
Sales increase in Q3 that's outlined in the press release, if you exclude gas inflation, that would have been a +3%. Similarly, the reported plus 26% international comp figure assuming flat year over year FX rates would have instead been plus 8%. And total company comps, again, we reported a plus 10% for the quarter, excluding both the gas inflation and excluding FX changes would have been plus 4% for the company during the fiscal quarter. Other topics of interest, our opening activities and plans, we opened one new location in Q3 in Pacoima, California that's within the city limits of Los Angeles. In Q4, which began on May 10, we plan to open 6 new locations.
The first of these 6 opened this morning in St. John's, New Brunswick, Canada. This is our 78th Canada warehouse location and brings our total warehouses worldwide to 568. The 5 additional buildings we plan to open by fiscal year end include 2 additional ones in Canada, one in Queens, New York, an area called Regal Park, one in Roseburg, Oregon and our 22nd location in the UK in Coventry, which is about 95 miles northwest of London. Also this morning, I'll review with you our expansion plans for fiscal 2011, which are up, Costco online results, membership trends, certainly discussion a little bit more about margins and SG and A, an update on our stock buyback activities and a couple of other items of interest.
In terms of discussion of the quarterly results, again sales for the quarter were 17,400,000,000 dollars up to 12% from last year's Q3 of 15.5%. Again, on a reported comp basis, it was at plus 10%. The plus 10% 3rd quarter comp was comprised of a 9% in February, a 10% in March and 11% in April. There were some seasonal some holiday changes, but essentially pretty close range there. And again, excluding gas and FX, the 9, 10, 11 for February, March April would have been a 4, 3 and 4.
The 10% reported comp was positive impacted by about just under 4% due to the year over year strengthening of foreign currencies relative to the dollar. And as I mentioned, the local currency comp rate, if you will, for all the foreign countries was a +8, but when converted into U. S. Dollars because the FX was plus 26. As I mentioned, gasoline had a big impact about 3 percentage points, such that the reported U.
S. Comp of 6 would have been a 3 without that. Our average transactions increase was a little over 6% for the quarter, which of course includes gas inflation and FX. And the average frequency increase was a little more than 3.5%. In fact, the frequency trend during the past three calendar reporting months of February, March April was a 3.7%, a 3.5% and a 3.7%, so pretty consistent.
I think most importantly that these strong frequency continuing, recognizing people seem to be coming in more frequently, but are buying a little less each time, perhaps buying a little more on the food side as well. For the quarter, in terms of sales comparisons by geographic region, for the quarter, the Midwest, Southeast and Texas were the strongest, followed by a good showing in the Northwest. California actually had a trend wise over the last four quarters that also had a good improvement track record, but at a lower level. Internationally, in local currencies, we're doing quite well despite all the craziness around the world. Canada in local currency is up close to 10% with Taiwan, Korea averaging in the mid teens.
UK is closer to flat. In terms of merchandise categories for the quarter, soft lines was the strongest core category followed by fresh foods, food and sundries with hard lines being the relative weakest one of those 4. Within food and sundries, every subcategory was positive in the quarter ranging from 1% up to 12% up. Tobacco was actually a little bit higher than the 12%, but that was an anomaly related to, I believe, an increase last year that tends to greatly vary sales levels based on the pending tax increase, tobacco tax increase. Within hardlines, the comp, the strongest subcategories were sporting goods, hardware, health and beauty aids, lawn and garden and tires.
The one of note that was a slight negative comp was what we call majors or electronics. That's not inconsistent with what I think Bob Nelson has said on the monthly sales voice calls. What we're seeing in TVs is there's not a lot of promotional activity out there as the underlying components of these flat screens, notably the panels, as demand has increased in Asia from Chinese consumers and what have you, that there's less need for the manufacturers to provide incentives. And as you've seen in our VM mailers over the last several months, there's not as much exciting activity in terms of promotional activity for TVs. Within the soft lines comp, most every category was strong.
Generally, every subcategory, but one was in the 9% to 22% comp range with housewares, small electrics, domestic, media, home furnishing being standouts. And within fresh foods, all sub fresh food categories, meat, bakery, produce and what have you were all positive each in the mid to high single digits and averaging in the high single digits. Now moving down the line items of the income statement, I'll start with membership fees. And again, recall membership fees, first, I want to take out this of that $34,000,000 charge from last year, dollars 27,000,000 of which hit last year's Q3 membership fee income line. So, I'm going to take out in terms of comparison.
And then, of course, I'll show you without FX since the relatively weaker U. S. Dollar, we show dollar increases greater in different countries. On a reported basis for the quarter, this year, we had $395,000,000 or 2.27 percent. Reported last year was $329,000,000 but again, I want to add in the $27,000,000 so the comparison to 395,000,000 will be 356,000,000 or 2.30 percent.
That's again without that membership litigation settlement in Q3 of last year. So, on that basis, dollars 3.95 versus $3.56 were up 11% and basis points were down 3 basis points. And in dollars, it was up $39,000,000 Now again, another complication is gas inflation, which tends to screw up some of the percentage comparisons. That minus three basis point number without gas inflation would have been plus 4 basis points. So, pretty good showing given the sales strength and relative membership strength.
Now, let's talk about FX. Again, FX last year, the 356 number would be the starting point. The 395, excluding assuming flat FX year over year would have been $381,000,000 which I think is probably the most appropriate comparison. That would show that dollars were up $25,000,000 excluding FX or currency, up 7%. The same reported minus 3 basis points, but excluding gas inflation would have been plus 4 basis points.
A lot there to digest, but I think that's the best way to look at it. In terms of membership, we've got strong renewal rates. We continue to see improving and increasing penetration of the executive membership. And really despite only 2 net new openings in the past 6 months in Q2 and Q3 combined, our new membership sign ups in Q3 were up 2% year over year in the fiscal quarter. That's actual new sign ups.
In terms of number of members in Q3 end, we had a gold star 22,200,000 that compares to 22,000,000 at the end of Q2. Business primary, 5,750,000 versus 5,700,000 at the end of Q2, so slightly up there. Business add on rounding down to 3.3 from a 3.4 a quarter ago. Part of that is that as add ons become executive members, if they're individuals that go into the Gold Star category. So really, I think the $22,000,000 to the $22,200,000 in Gold Star probably is a little lower than that $200,000 person increase and which is part of that is an offset to the reduction in add on.
All told, the add up to numbers is 31,100,000 households at the end of Q2 and up 31,300,000 households at the end of Q3. And if you include spouse cards, we went at the end of Q2, 50 6.9 up to 50 7.4. Now these numbers, by the way, do not include Mexico since we don't consolidate. Including Mexico, the 57.4 would be 60.3. At Q3 end on May 9, our paid executive member base was 9.9 just a shade over 9,900,000, an increase of 292,000 or percent in just the 12 week Q2.
So we added about 24,000 executive members per week during the 12 week Q3. Executive members now represent about a third of our membership base and just about 2 thirds of our sales. In terms membership renewal rates, they actually tweaked up a little bit in the quarter. We went from a 92.0 on the business side renewal rate at Q2 end to a 92.1. And on the Gold Star side from an 86.0 at the end of Q2 to an 86.3 at the end of Q3.
All told, an 87.4 is now an 87.5. Those are figures by the way, which they've always been for US and Canada since some of countries have a lot of new locations, which tend to distort that. So we've always done it that way. Now going down to the gross margin line, our gross margin in the Q3 was lower year over year by 11 basis points from a 10.99 down to a 10.88 this year. The 2 things I asked you to jot down, of course, are the 2 matrixes for gross margin SG and A.
We'll start here with the gross margin. The line items are merchandising core, ancillary businesses, 2% reward and LIFO and then of course total. And we'll look at Q3, Q1, Q2 and Q3 for this fiscal year going across merchandising core, plus 15 basis points in Q1, plus 15 in Q2, minus 10 in Q3, ancillary minus 20, plus 16 and plus 6, 2% reward minus 3%, minus 1%, minus 3%, LIFO minus 1%, minus 4%, minus 4%. For a total, in Q1 year over year, we were minus 9 basis points, in Q2 plus 26, and in Q3 minus 11. Now again, the craziness here in terms of understanding percentages has to do with gas inflation or last year we were explaining gas deflation.
Keep in mind, if you have gas inflation this year, your denominator in calculating any number over the reported sales number is going to tend to lower the percentages. So on the margin side, lower means it looks a little worse. On the SG and A side, lower means it looks a little better and we'll try to explain that to you here. So if you'd start with the overall number of 11 basis points, within this 11 basis point figure, our core merchandising gross margin as I showed the matrix was down 10 basis points and ancillary gross margins, principally gas contributed 6 basis points. On a standalone basis, our gas gross margin was actually up close to 50 basis points.
But because it's a gross margin business that's 700 or 800 basis points lower gross margin than the rest of the company in the low to mid single digits, that increased penetration at that lower amount notwithstanding a pretty good year over year gross margin improvement in the gas business contributed 6 basis points there. Sales penetration of our higher margin core businesses was down 2 percentage points in Q3, representing 81% of our sales this year versus 83% of our sales last year. So whereas sales penetration of our ancillary business, again, gasoline sales, which is a much lower margin business, was up 2 percentage points. The rest of the business was down 2 percentage points. The sales penetration of our core merchandise business was down year over year.
And as you see here, the minus 10 basis point number. If you look at just the core merchandise business margin versus the core merchandise business sales and that's again, that's food sundries, hardlines, softlines and fresh foods which represents right around 80% of our total company. Those realized gross margins in those realized businesses in Q3 were up 14 basis points year over year. But again, the lower sales penetration cost it to be down on this chart. The respective The respective merchandise category gross margins were the strongest in hard lines followed by soft lines and then food and sundries.
Fresh foods margins were actually down year over year primarily to lower gross margins in meat. In talking to Jeff Lyons, who's Senior VP in charge of fresh foods, meat has tended to be good showing in gross margin line with nice increases in 3 of the 4 core subcategories and good increases in the gas margins as well. The impact from growing our executive member business, which results in higher 2% rewards, as you showed, jumped 3 basis points. The implication there is that sales penetration of rewardable merchandise was up about 1.5 percentage points. LIFO, last year in all four quarters, we took LIFO credits, I think totaling over $30,000,000 pretax for the fiscal year 'nine.
This year, now that we're essentially, you can't go below 0 the way I could describe it. And even though there's been slight deflationary this year, that's starting to switch, but nonetheless slight deflationary trends, you can't go below 0. So there's no LIFO charge or credit in Q3 compared to a $6,000,000 LIFO credit last year. So that was a 4 basis point detriment to this year versus the comparison of last year. This is one of those items that I mentioned early on in terms of the pluses and minuses and looking at the Q3 year over year comparison.
Now, after gasoline sales year over year, costcoast gross margins would have been up in Q3 by 5 basis points. And this is notwithstanding the minus 3 basis point of variance year over year from the 2% reward and the minus 4 basis point variance from LIFO. Moving on to SG and A. Our SG and A percentages in Q3 over Q3 were lower or better by 40 basis points coming in at that 10.29% of sales this year compared to 10.69% last year. Again, I'll ask you to jot some numbers down and then try to as best I can explain it here.
These line items would be operations, central, stock options, quarterly adjustments, total and again looking at the 3 columns will be Q1, Q2 and Q3. In operations, it's minus 16 going across and minus means higher or bad. Q2 is 0 and Q3 is plus 14. Central -3, plus 2 and plus 4. Stock options or stock or equity compensation now that we do our issues, -3, plus 1 and plus 5.
Quarterly adjustments, plus 18, minus 12 and plus 17. Total, minus 4, minus 9 and plus 40. So, let me give you a little editorial here. Looking at the first thing, operations was lower or better. Core operation was lower or better year over year in Q3 by 14 basis points.
But it's all about sales mix change. Just like with gross margin percentages where increased gasoline sales penetration hurt us, it correspondingly helped SG and A by about 22 basis points. So the plus 14 minuteus the 22 if you will is a -8. So where is the -eight in the core operations? It's mostly higher healthcare and other benefits related costs.
But as I will explain in a minute, there seems to be a little light at the end of that healthcare tunnel. The rate of dollar increases in these benefits related areas increased year over year in Q3 at a rate of increase lower than has been the case in the last 3 fiscal quarters. I also mentioned that while that was why the plus number went to a minus number, one of the positives was the payroll comparison, which we're seeing some payroll leverage in Q3 over Q3. Payroll percentages showed improvement of 10 basis points year over year in Q3, pretty good given the relatively low underlying levels of sales growth. Now in terms of healthcare costs, in fiscal 'nine, U.
S. Healthcare costs jumped 26% in Q3 'nine versus Q3 'eight and 27% in Q4 'nine versus Q4 'eight. If you recall, that's when we started talking about what I call the double whammy. 1, there's healthcare inflation and 2, with the reduction of new openings of warehouses, which is where you have a lot of new hires, particularly new part time hires that take up to 6 months to become benefits eligible. As we opened fewer warehouses, that meant that the mix of employees became more As we opened fewer warehouses,
that meant that the mix of
employees became more eligible instead of having these new part timers. Similarly, existing employees aren't leaving their jobs. Our turnover rate overall, which in good times, good economy, economic times a couple of years ago tended to be in the 20% range, is now in the 10% range. So again, that we've seen a double whammy, which seems to be now anniversarying that we have more higher percentage of our base of employees in the US being covered with healthcare. So again, looking at Q3 and Q4 last year as compared to their respective quarters the prior year, we saw U.
S. Healthcare costs go up 26% 27%. In the first half of this year, Q1 and Q2 combined, the increases were about 20%. And in Q3, the quarter that I'm talking about right now, as we've anniversaried at least the big increase in percentage of employees who are benefits eligible, our Q3 year over increase in health costs was up a little over 11%. So hopefully that trend will continue.
Our central expense was lower or better year over year in Q3 by 4 basis points. Again, a chunk of that is the gas inflation and stock compensation expense was 5 basis points better. The latter, a slightly lower dollar figure on strong total reported sales figures. Finally, the quarterly adjustment line of 17 basis points in SG and A consists of last year's that component of the 34,000,000 that hit SG and A line about 7,000,000 of that 34,000,000 and this year's $14,000,000 credit for the partial recovery of the Canadian charge taken in 'seven. Again, that Canadian charge was Canadian taxes to our employees that we protected those employees that received those options up there.
That hit the SG and A line, not the income tax line. And then there were about 4 basis points of miscellaneous items hurting Q3 last year, but more on a one time basis. Overall, I think probably in the last couple of years, one of our better SG and A performances given the current sales levels and the slowing rate of growth, but escalating still escalating costs in healthcare. We continue to work hard and we're focused on reducing SG and A. That's a primary focus of Jim and Craig's.
And next on the income statement line, pre opening expense, dollars 9,000,000 last year in Q3, dollars 3,000,000 this year in Q3, so $6,000,000 or 4 basis points better. Last year in Q3, we had 5 openings. This year in Q3, we had one opening. Also last year in Q3, we had quite a bit of pre opening, about half of it expanded in Q3 related to several then upcoming openings in international. No real surprises here, it will fluctuate.
Of course, preopening expenses will start to increase as our opening plans for Q4 and fiscal 'eleven start to increase. In terms of provision for impaired assets and closing cost line, in Q3 'nine, last year, we had a charge of $7,000,000 for the quarter compared to charge of $3,000,000 this year. Last year's $7,000,000 charge included a $5,000,000 reserve to cover the closing costs and asset impairments related to the then planned closing of our 2 Costco home units, which actually took place on July 3 last year. So all told, operating income in Q3 versus operating income in Q3 a year ago was up 36% year over year. And of course, excluding the items noted in the press release, that operating income increase year over year would have been up 21%.
Below the operating income line, reported interest expense slightly higher year over year in Q3 and Q3 coming in at $27,000,000 versus $25,000,000 in last year. That's actually a little under $1,500,000 increase. It's due to rounding the $27,000,000 and the $25,000,000 These amounts mainly reflect the interest expense on our $2,000,000,000 debt offering that we did in February of 'seven with the amount of capitalized interest in the quarter being virtually the entire reason for that year over year $1,000,000 difference. Interest income was higher year over year by 4,000,000 came in at 10,000,000 versus 6,000,000 a year ago. Interest income was higher year over of that $4,000,000 delta, interest income was actually higher year over year by $1,000,000 Rates have not gone up dramatically needless to say, but the amount of cash has with most of the rest representing higher year over year Q3 earnings from our half interest in Cosco Mexico.
Overall, pretax earnings were up 39% in Q3 from $340,000,000 last year to $474,000,000 this year. Of course, excluding the items outlined in this morning's press release, that being the $34,000,000 charge taken in Q3 last year and the $14,000,000 benefiting this year's Q3. Pretax income would have been up 23% from 3 74 last year to 460,000,000 this year. Our company tax rate came in at 34.5% this year versus 37.75% last year. Last year's tax rate had a couple of discrete items that added slightly to the rate, whereas this year, we had a couple of items that benefited or lowered the effective rate slightly.
Again, there's the multitude of state, various state and government related tax audits and that will always fluctuate a little bit from that roughly 36.5%, 37% underlying number. For a quick rundown of other topics, I won't be going over the balance sheet as it is included in this morning's press release. So you have that already. I will mention depreciation and amortization for Q3, it was $180,000,000 and year to date for the 1st 3 quarters was $549,000,000 In terms of the balance sheet, we will say quite strong, low debt to cap ratio. Accounts payable in terms of us being able to show dramatic improvements and not having to fund a lot of our inventories.
On a reported basis, last year in Q3, at Q3 end, our accounts payable as a percent of inventories was 100 and 2%. This year in Q3 reported was 108%. That includes other payables in addition to again, an improvement there, a reflection of some finally, some small amount of sales strength and very little increase, effective increase in inventory levels. Average inventory per warehouse was up $277,000 per warehouse from $10,089,000 to $10,366,000 or up 3%. Actually that $277,000 figure would only be up $90,000 if you exclude the year over year FX impact of $187,000 So no inventory concerns.
If anything, we saw some examples like seasonal patio furniture. The last several weeks, we've been scrambling as we sold through that pretty well early in the seasonal season. In terms of CapEx, in Q3 'nine, we spent 226,000,000. In Q3 'ten, we spent 139,000,000, so a little less as you might expect. Year to date, we've spent all of 644,000,000.
I'd estimate that our FY 'ten CapEx will be somewhat lower than last year's figure, probably $950,000,000 to $1,000,000,000 In terms of that of course will increase and I'll talk about expansion in a minute. As you know in 2009, Costco online was down about 4% or 5%. For the Q3 and the third quarter year to date, sales were up 5% in the quarter and 7% year to date. E commerce profits were up 7% in the quarter and 14% year to date. So our average ticket has come down a little as you might expect with the fact that we have a very high average ticket because of the items that we sell.
But site traffic continues to grow and was up 9% in the quarter year over year. Like the 4 walled warehouses on e commerce, a big chunk of the business is electronics. And again, there hasn't been a lot of promotional excitement or lower price per site excitement on the flat screen side with increased worldwide demand of flat screens. That seems to be coming to a near end and the sense I got from our GMM in charge of electronics who just yesterday came back from Asia talking to the electronics manufacturers that supplies and hopefully pricing will ease up as we of expansion, I mentioned we opened 1 unit in the quarter. We planned 6 for Q4.
That would give us a net total of 15 openings, one of which was a relocation, so 14 net openings in 10. In 11, current construction schedule shows 26 locations, including 2 relos, so 20 net. Now, I'll mention before I go into a lot of fiscal 'eleven, I'll mention that the Q3 end, our total square footage, some of you have asked for that stood at 76,190,000 square feet of retail space. Now in terms of expansion plan for 11, currently there are 24 projects, net new projects active on the current construction list. 9 of these are planned for months 1112 of that year, but they are active real projects.
So my guess is that the figure for 11 will ultimately be around 20 to 22, including 7 or 8 outside North America as we've ramped up some of our Asian expansion. Lastly, I want to talk about our stock repurchases, which we began after buying nearly $5,000,000,000 of stock between July of 'five and into the late summer of 'eight before the market went to heck and the concerns about liquidity in general became a major concern. We purchased so again, we purchased quite a bit back then. During the week of February 8, which was the last week of our fiscal Q2, we got back into the market buying about 250,000 shares that week or about 50,000 a day. During the 12 weeks of Q3, we purchased 1,925,000 shares.
Now there are 2 or 3 weeks, there are several weeks that we were in blackout where we did not buy any. On the days that we did buy, we bought about 50,000 a day during that week last week of Q2. During the 1st couple of weeks of Q4, we've averaged 100,000 shares a day. And it's principally a reflection of what I've stated in the past. We've got analysis that we update on a periodic basis.
And generally speaking, we're not trying to be perfect in deciding when to buy. But as the stock shows a little weakness the market, not related to us, but in general, we buy a little more and when it shows strength, we buy a little less. But overall, we've been a net buyer. With that, again, there's supplemental information that will be posted on the Costco Investor Relations site right away within the next hour. We already have the balance sheet, the other stuff in there relates to the quarterly LIFO items, the actual calculation of EPS to show you the little components of it to do your fully diluted calculations and the like.
With that, I'll turn it back over to Christy for Q and A.
Your first question comes from Robbie Ohmes with Bank of America.
Hi, good morning. A couple of quick questions. Great quarter guys. One question was I was hoping you could talk a little bit more about the executive membership program and I think you said it's 1 third now. Where do you foresee that potentially going?
If you dreamed the dream, where do you think executive membership could get for you guys? And then just the second question unrelated is, I might have missed it, but can you just discuss what the current expectation is for food inflation for you guys over the next 6 months? Thanks.
In terms of executive membership, and the assumption is we're not going to just doing that executive membership. And I'm not implying anything by that. There have been no discussions. At what point do we just say, hey, we're only going to offer an executive membership. And that has not been discussed.
But I guess my personal biggest surprise has been the ongoing increase in penetration even in the most mature country U. S. Where we've done it for gosh, 8 or so years now. And the good news there is the up for this 7, 8 years ago? It was the owner of a restaurant or a convenience store that's already buying $25,000 or more of membership rewardable merchandise.
And so for doing nothing other than paying an extra $50 or so, they get a check at the end of the year for $500 Needless to say, all those people have done this for a long time. Today, if I had to profile the member who is opting to convert or opting to sign up as an executive member. It's somebody that is likely annual purchases are more towards the breakeven of this program. In other words, dollars 50 extra divided by 2%, they have to buy $25100 a year in rewardable merchandise. And those are the people that on an affinity basis looking at affinity program and are incented to buy more.
So even though these are smaller rates of increase, I'm surprised they're continuing at the levels that they are. And I think that's good news. The longest period. Canada has probably been gosh, 3 or 4 years now. And the U.
K. And Mexico, although Mexico we don't consolidate, so they're not in these numbers. In the U. K, we just started at least about 6 months ago, not a big number yet, but again, it's UK is 20 we're just getting ready to open our 22 units out of 500 plus. So I think that will continue.
The other piece of that is that if you go back a couple of years ago, for every 100 new members signing up, we tended to get 10 or 12 to actually sign up originally as an executive member. Today, that number is in the low to mid-20s. And I think that's partly because we do a better job at the counter, if you will, when somebody is coming in to sign up, explaining the virtues of it. So all those things bode well. These people shop more frequently.
They buy more. They when they those that convert, once they convert, they buy at an increasing rate as compared to their as compared to the control group. And so all that's pretty good. In terms of food inflation, in pulling buyers in all merchandise categories a couple of weeks ago, the general view is over the next 6 months, there is inflation, but not a lot. And I think that their view was somewhat influenced by rising oil prices and rising gas or freight costs and manufacturing costs.
And that has subsided in the last couple weeks. But if you ask them today, they're still going to say a little bit of inflation. In fresh foods, whether it's meat, produce, there's all kinds of anomalies that impact inflation and deflation there, not just the economy. But overall, I would say sub 1% or 2% and then that is tempered a little bit at Costco because of the deflationary trends related to increasing penetration of private label. So very modest inflation.
Great. Thank you very much.
Your next question comes from the line Mark Miller with William Blair.
Hi, good morning. Two main areas of questions. First on the multi vendor meetings, what's been the, I guess,
net impact to sales and also
margin year to year? Couponing, which hurt the comps and I think you're going to try to take some action here in May. I'm also curious whether that has helped the business this month.
Yes, by the way, the action is more of a timing issue. I think on a fiscal year over fiscal year basis, it's maybe 31 versus 33 weeks or 33 versus 35. I mean, it's a couple of extra weeks. As it related to April and Bob's comments on the monthly call, that had to do more with timing of the given mailer where one started earlier last year. And so we benefit a little one you heard a little one month and benefit a little the other month.
The bigger issue with MVMs is if you go back a year ago or year and a half ago, there was always 3 or 4 or 5 items that were $1,000 TVs or $1200 TVs with a $300 off or $900 for $200 off as well as a little less of an issue, but the same thing on PCs or laptops. Again, right now, there's very little of that. What is so I don't have the exact dollar numbers. There's probably been a slight less on a per week basis, a dollar amount of sales from the MVMs. But also people are pushing more piece of people are pushing more basic household goods where again when we talked about on a monthly basis, some of the non foods categories that have been in the low to teens comps, some of those are influenced by some of the items you see there.
There's lots of $30 to $80 items in the MDMs, whether it's I don't have the one in front of me, but things for the home and but not the $1,000 items that and so that's part of the impact there. The view is that will start to lighten up near the end of the summer in terms of being able to offer some promotions, but there's no guarantee.
Okay. My other question is on the gas operations. What actually was the year to year EPS benefit to you in the fiscal Q3? And then we've that the gas price advantage for Costco seems to have widened versus competitors, maybe $0.03 per gallon over the last 6 months?
I'm sorry, what's the latter part of that question?
Well, it's a question about has your gas margin sorry, your gas price per gallon, it looks like it's widened versus the competition over the last 6 months. If we're correct on that, has that resulted in better comp gallons? And then with the big drop in oil, can you remind us how it's impacting the business? I mean, you turn the inventory faster. Would you be seeing a bigger benefit to the bottom line or would you be putting that into more aggressive pricing?
Sorry, I know there's a bunch of questions there.
Well, in general, gas is one of those things that it's like a teenager, you love them, but drives you crazy 2. But usually we don't talk about that other than when it's a big delta. In terms of the GAAP of $0.03 to $0.05 are you saying that suggesting that we that our price compared to our competitors that gap is spread?
The gap has widened as we've looked at it Richard.
Yes, I don't see well, I don't see that. I think that may be more regional, but we all I tell you is, we comp shop our gasoline in some locations 2 or 3 times a day versus all locations. So we feel we're very competitive. We're all I assume we're all making more money this week versus 2 or 3 weeks ago as gas prices came down, that's good for us. So we entered Q4 positively, although we made a decent chunk of money in gas last year in Q4.
And what I've learned is, is even though we're 2.5 weeks into Q4, I can't extrapolate for 16 weeks as soon as you bring out the party frills, something happens and gas prices go up and oil prices go up and the profitability is tempered some, but we're starting off well.
That's helpful. The other small question in there was the change in the comp gallon trend. Has there been any?
Gallons are up. I don't think there's been if anything last year the trend was flat a little bit and it's improving a little bit this year. Great. Thanks. Where we saw a big comp gallon change was in 'eight when prices went through the roof and people were talking $4 gallon gas 'eight.
That's when we and I'm sure some other warehouse clubs, but virtually in every market in the country, whether it was Missoula, Montana or Los Angeles, when the local TV consumer advocate was on the nightly news talking about where is the cheapest place to buy gas, we benefited greatly from that. And we saw so as prices fell dramatically, again it was flattish and now it's up a little. Next question?
Comes from the line of Charles Grom with JPMorgan.
Good morning, Richard. I just wanted to go into the gross profit and make sure I understood I heard you correctly. So the total is down 11%. If you look within core, you're down 10%. But I believe you said the core, I guess, within the core was up 14%.
Is that correct? So you're within the 40% to 80% of the businesses was up 14%?
Yes, that's correct. We think about it and I don't these are not exact numbers. I'm just doing this in the back of the envelope here. If you assume that the core relative to gas is 800 basis points delta and you have it might be a little more than that. If you have 800 basis points and a little over 2 percentage points of reduced sales penetration of that higher margin stuff, the core, 2 point quarter or 2.5 percentage point about 2, 3 penetration difference times 800 or 900 is 20 basis points.
Okay. So that 14 compares to the plus 5 a year ago, right? Yes. Okay. So that's a plus 19 versus a down 3 last quarter.
So I'm just trying to get a sense for what changed within the quarter led to such a big improvement? Was it markup rate? Was it IMU? Was it lower markdowns?
I think it's a little bit of everything. It's higher penetration of fresh foods. It's slightly lower what we call D and D, slightly lower what we call D and D. It's an improvement in our sales returns reserve a little bit, which impacts the margin through the salvage estimates. It really is a lot of little things.
It's not like we sat around the table 12 weeks ago and said, how can we improve margins more? There's generally a trend that margins are not the issue that we can show some improvement and still be competitive. And Bob Nelson is here saying, well, you and I did. Yes, but we're not the merchants. But the fact is that it is a lot of little things.
Okay, fair enough. And then just my second question, just moving down the P and L. Interest income in the second quarter was $30,000,000 this quarter. I believe it was $10,000,000 Your cash balance increased. So I'm just trying to get connect dots.
Is that just lower other income coming from the JV from Mexico that led to the
No, I'm sorry. Interest income was 10 versus 6 percent, 10 versus 6%.
Last quarter was 6%.
Well, I'm sorry, last quarter.
I'm looking at
Interest income
It was down $20,000,000 sequentially. It's a pretty big drop off.
Just you too, hold on. We're looking at it. I don't there's nothing let me I need to find out what it is, I just don't have it in front of me. I'm happy to call you.
All right. I'll circle back with the offline. And I guess my last question would just be, if you look at cash and short term investments per share, you're sitting at I think an all time high of $12 It sounds like you're starting to buy back stock, but just is there any other plans to utilize cash in any other way you're going to get a little bit more aggressive on the buyback or sit with a lot of cash?
My comments a minute ago implied that we are more We are more aggressive in the latter part of Q3 than the beginning of Q3. We are more aggressive in the 1st 2 weeks of Q4 than all of Q3 or the latter the $2,000,000,000 debt was 5 year money that comes due in March of 2012, which is now only less than 2 years away. We'll write a check for that. So there's $900,000,000 that we'll spend. And CapEx should ramp up nicely in 2011 and 2012 compared to the roughly little over 1,000,000,000 in €8,000,000 €9,000,000 So those are the three areas that I would see more.
Okay, great. Thanks a lot.
Your next question comes from the line of Mark Weltemath, Morgan Stanley.
Hi, good morning. Richard, if you look at the average of the monthly comps you've been announcing for the U. S. Business, that 3 percent ex gas number that you posted this morning for the quarter, that implies that the stub of the 1st 9 days of May maybe up. Could you maybe comment on that a little bit?
I'm sorry, somebody was chatting here. Could you repeat the question?
So the average of the 3 monthly numbers that you've released already comes in below the 3% comp that you reported today for the U. S. Business excluding gas. And I'm wondering if that implies that the 1st 9 days of May is trending above what you did on those April numbers?
There's a little bit of anomaly because our quarter is like February 10 or so.
You gave out February, March, April.
Yes, I gave out February, March, April, so we didn't give anything for May. But he's saying that the implication is, it's a little better. I'd have to look at the numbers. I don't think there's any major change either way.
Okay. And then also if you give us a little update on what's going on competitively out there. Walmart is getting more aggressive on rollbacks. We're starting to see that roll into the beverage area a little bit. Are you feeling any impact from that or can you see it at all in your stores?
We have not seen it, but it is top of mind discussion every day around here. And the merchants are out there looking, recognizing we're less impacted by what Walmart is doing versus what Sam's is doing. And Sam's has always been very competitive as have we. They are taking certain items down dramatically and there are certain items, I'm not going to talk say which ones that we have taken down to cost, very small number by the way, and we'll do what we have to do. But overall, that has not really been a big impact to us.
I think it's a much bigger impact to supermarkets and general merchandise retailers.
Okay. And on the quarter here, part of the margin performance you posted was a much better SG and A control. In fact, you said this is one of your best SG and A control quarters in some time. Is there anything you point to specifically that you're doing that we could that may give us some comfort that that trend will continue or is it just lapping some of those health care problems?
Well, the healthcare is lapping, but all the healthcare and related benefits costs were still a detriment, but a much lower detriment in Q3 over Q3 as compared to Q2 over Q2 or Q1 over Q1. I think payroll was the biggest one. I think we've in the last year, we've reduced the average SKU count, which means we still have the same square footage. So we're just maxing out and are more efficient in what we are selling. We have gone back and I think I've used the comment that for many years, I'd always say, well, there's not a lot of silver bullets because we're pretty efficient.
But in tough times, one gets more efficient. And everybody out there, I think, is working a little harder. And even the little things we're doing, whether it was changing out the color copiers to being you have to opt into color. I use that example. There's lots of little things.
There's no big giant changes out there in the warehouse other than a renewed focus on expenses.
Okay. Thank you very much.
Your next question comes from the line of Adrienne Shapiro with Goldman Sachs.
Thanks. Richard, if we could just continue on that line of the expense control. It looks as if that ten basis points of payroll leverage is quite good. Could you remind us what happened with the renegotiations of the leverage opportunity going forward?
Well, every 3 years, which the 3 year periods are most recently was March of 2010, we rewrite our employee agreement. It's not a contract, it's actually an employee agreement that we sent to them. On the 60 locations out of 500 plus that our union, union, that is a contract, but it's very similar to what you see in the employee agreement for the non union employees. And the question if you go back a year ago that with economy bad, what happens to top of scale, which is about little over half of our hourly employees are at top of scale, what type of increases are they going to get each year? Basically, very little change from prior years.
And if you look back at the last 2 or 3 year employee agreements, so 2,007 and 2010, 2,004 and 2,007 and so on, once they're on top of scale, they rise quickly from when they start here over those 1st 4 or 5 years to get to top of scale with big increases each year. Once they hit top of scale, historically, it's been somewhere around a 2 point 5% increase. So rough number at top of scale is $20 you assume, dollars 0.50 an hour would be 2.5% increase. We went into discussing things, but generally speaking, we felt it was this was an important time to continue benefit to the bottom line from saying, hey, we can only do half as much because we chose to do as much. I think where we're going see a benefit on the labor side is we have great employee relations.
I think we've seen some of the improvement in payroll percent is that people get it, our people get it and they are working harder and smarter. I think also if we get a little leverage from sales that will help. Where I think the opportunity is going to be is some actions that we can take on the healthcare side. That's a big nut. It's growing, forgetting about the increased number of people eligible because of slowing warehouses that will improve as we ramp up warehouse a little bit, but more importantly making our employees better consumers.
We're not going to do takeaways, but we like a a lot of companies are looking at a lot of things like I give you a simple example. In the Greater Puget Sound, let's say there's 20 places, hospitals, major items. The contract and negotiated large company here rates could range there could be a 4 fold delta between the cheapest and the most expensive in the community. Now we're not going to just say you can only go to the cheapest, but it's been structured so they can go anywhere. And there's got to be some rationale there that something that costs $1,000 in one hospital and 8 miles away in another well known hospital cost $2,800 We're not doing anything that other companies aren't doing, but we're looking at all those types of things and we think we can save money to help control that a little more.
Okay. So just to be clear on the employment agreements,
earlier question a small number
of items you priced at earlier question a small number of items you priced at cost. Can you just perhaps dig into that a little bit? I know not that long ago, a year ago, you guys got a jump on being quite aggressive and we saw traffic picked up, but we also saw the impact on margins. Could you give us a sense as you talk about Walmart is top of mind and top of center around the discussion around there with as it relates to the rollbacks. What would be sort of the tipping point in terms of getting more aggressive like we saw last year?
Well, first of all, last year, which we were talking about is essentially December of 'eight when commodity prices had fallen precipitously, but the underlying commodities from vendors were lagging 4 to 8 weeks. And we chose to given the comps were heading towards 0 and we chose to basically take upon ourselves about $30,000,000 to $35,000,000 in commodity markdowns on a limited number of items, but in the aggregate $30,000,000 to $35,000,000 rotisserie chickens, milk, cheese, butter, it's a drive traffic and we saw an improvement in frequency. And that was the perfect storm as I described it back then because we knew that it was a matter of weeks, not months or years where the underlying procurement cost us would come down and fall in place. But that's hurt us because we didn't get price protection on that. I don't see any current scenario that.
Again, Walmart is amazing in what they can do and what they're doing right now. But a lot of that's Walmart versus supermarkets, not Sam's versus Costco. I think we and Sam's and BJ's, but and Sam's in this regard are fiercely competitive and have always been. I think we both know that if one of us gets aggressive, the other one is going to be equally aggressive. And arguably, we've got Jim and we're aggressive.
And I don't see that as a current issue. Things could change tomorrow, but we're going to hold our stand here. And but there's nothing in today's tea leaves that tell me differently.
Okay. And the items that are down to cost in terms of could you be a little bit more specific in terms of categories where they
are? There is one I heard one example yesterday in a meeting and it wasn't a meeting on Walmart, it was a meeting on a lot of things and there was one item in health and beauty aids where they're selling it below cost and we've taken it down to cost and we'll get out of the item. It's one little item. And I don't want to say what it is, but it's meaningless to the company. Other than I'm sure there's some other things out there.
But we are let's face it, we and Sams are fierce competitors and respect to one another. And we both also have pressure to make money. And I think that we will hold our own here.
Okay. And then just lastly on California, an update there, the trends that you're
seeing? Again, at a lower base, but quarterly sequence over the last 4 quarters have been good, including Q3.
Great. Thank you.
Any more questions?
Yes, sir. Your next question comes from the line of Peter Benedict with Robert Baird.
Just a couple. Quickly, just Richard, the 3rd quarter buyback, how much money did you spend
to buy those shares back? Right here, dollars 114,600,000 Okay.
Thank you. And then the D and A growth, I think you said it was $180,000,000 so the growth was about 5% year over year. That was a big step down. I think in the second quarter, D and A was up 15% year over year. Is that correct?
And if so, is it just a slowdown in the clubs? I mean, it seems like a pretty steep drop off. Is that what we should be thinking going forward?
I think it's more than anything timing of openings. I asked the same question this morning when I said sequentially, looked like it was a little less of an increase in Q3. It's just timing of a few things, nothing dramatic there. Once we ramp up expansion and I think part of it also is we had committed a little more over the last year to IT, which has 3 5 year write downs. So nothing earth shattering there.
Okay. And then just lastly on private label, can you give us a sense what the penetration was in the
one little over 1.5 percentage points, about 1 percentage point, maybe 1 in a
quarter. Great. Thanks very much.
Your next question comes from the line of Robert Drbul with Barclays Capital.
Hi. Good morning, Richard. Two questions for you. 1, you talked about a lower SKU count in the store. What's the current number that you guys are operating with?
SKU
count,
3750. Okay. And is there
a plan to change that or take that any lower from where you are today?
I think we're comfortably low right now. Keep in mind, probably 4 years ago was when it was when the stated goal was internally was 4,000, it was inching towards 4,200. When Jim every monthly budget meeting would say, guys, would you like me to do it or would you like to do it or would you like me to do it? It'll take them about half an hour. And I think and then the feeling was is as the top 200 items or 5% of the items represent darn near 40% of sales, you can imagine with the bottom 200.
And let's match out and we'll do more aggregate volume. So I think that we feel comfortable where we are right now.
Okay. And then are there any new brands or in different categories that you're excited about things that you're selling now or you're looking to get that you can talk
about? I think in terms of there's certainly and I'm sorry, I just don't have I missed that one. So I don't have that list in front of me. I know there's more brands in apparel and more availability of some apparel. There's in terms of the KS, I think between now and the end of the year and into next year, looking for some more branded private label items in lots of supermarket consumables, canned goods and things like that.
And I think in the last 6 months, you've seen things like, I guess, macaroni and cheese and the like. And so both dry and canned foods. Electronics, I think again is 3 d will happen. I'm not sure everybody is going to jump on it the 1st day, but we'll be there. LED backlit, there's some things there that are kind of exciting on that side, but I'm stretching here.
All right. And so Richard, when you look overall at the trends, when some of the things you're naming, but discretionary versus non discretionary. Where do you think we are from a consumer perspective today?
Look, I think the biggest change from now versus a year and a half ago was the fact that as TVs, flash screens went from 2000 to 1500, 12 100 to 900 to 800 to 700 demand units were up huge. And finally, I think that's been safe to the little bit, their appetite as well with increasing demand worldwide like in China and India and what have you is what I'm being told that for the first time in a long time over the last few months, the underlying cost of the panels, the OEM cost of the panels was up dramatically. And so there's not a lot of promotional money to do in the multi vendor mailers and things like that. So not only do you have price deflation in some of those categories over the last couple of years, you've got a little less demand than you've had historically. I think that being said, I think we what is a positive surprise.
We went into this season for patio furniture, which we sell between January March pretty couple of months before the season starts and want to be out couple of months before the season ends. We've been scrambling for probably by mid March, we were scrambling for extra inventory because we while we were a little conservative committing this year, not a lot of conservative, but a little conservative, we sold through it very well. So where people my favorite article that I read about all this was called frugality fatigue. People were frugal last year, some of them are a little tired of being frugal. And they're buying things for the home and whether it's doormats or housewares or coffee machines or live goods, plants, that's stuff that's been strong.
Great. Thank you.
Your next question comes from the line of Laura Champine with Cowen and Company.
Christian, I know that you guys can appreciate the difficulty for us gas itself now. But do you think that gas will have a more or less of an impact on company wide gross margins in Q4? What's the trend right now?
Well, I think Bob is saying here, yes, I was just saying, I think it will be a slight a lesser negative. You're still going to have year over year inflation in gas. And so that penetration on lower margin, you'll have better margins probably year over year, but not as great as I mentioned here in Q3. Year ago in Q3, we lost a little money. This year, we made a little money.
Last year in Q4, we made it more than a little, not a huge amount, but more than a little. We're doing we're entering this quarter dwarfs it. Got it. Great. Thank you.
Thank you. Dwarfs
it. Got it. Great.
Thank you.
Your next question comes from the line of Debra Weinstein with Citigroup.
So can you talk about what you're seeing in terms of spending by small business members?
Our sales penetration, all I can tell you is the sales penetration has been fine. There's not been any dramatic change. I think one of the issues for us has been over the last year when we saw everybody talked about restaurant business is down. Well, restaurant first of all, business was more down for the bigger restaurants, the bigger higher end restaurants, which is not necessarily our customer. And then those in the case that restaurant was down who benefited supermarkets and warehouse clubs.
So I think we had some offset there.
Okay. And then you said you were impressed with higher traffic on top of difficult comparisons. Can you talk about what the basket look like?
Well, when I go out there, it's a lot of foods and sundries. I mean, there's fewer TVs in the basket, not a lot fewer, but fewer. And again, I think we have become I think if there's a silver lining to this horrible economy over the last year and a half is that the warehouse clubs and us in particular are the extreme value proposition. 1 of our signature categories in our view is fresh foods. People are shopping with us more frequently than they used to.
Some of that is restaurant business. In my view, some of that is supermarket business that people are getting more of their stuff at Costco.
So they shopping more frequently, but the overall ticket is less?
Yes.
Okay.
All right. And then can you talk about international
and local currencies is quite strong. Canada is the one that Everybody else's local currencies is quite strong. Canada is the one that is most impressive from the standpoint in my view from the standpoint that it's 70 or 80 units. It's as old almost as old as our whole company operation. International
margins? Positively, about international margins?
Positively. Okay.
All right. And then lastly, I just wanted to confirm that the target rate for private label is still 37%.
Yes, I think it is, but that when your children go to college, yes, I think directionally, yes, but it's going to take some time. And clearly, as I get into the remainder of the calendar year, we'll be able to talk more about some of the things like some canned goods and some other items recognizing, we tried a mayonnaise 2 or 3 years ago on a peanut butter and we under branded goods. We want to offer both. We want to show our member the quality that we can offer. And clearly, if we can get them to be loyal to the KS brand, that's great long term.
And we're going to we're pretty much prepared to try everything.
Okay. And then last one which we're out there. Based on the average household income of your member, have you been surprised at the uptake in EBT as a form of tender?
No, I think it's positive. It's still small, a very small percentage. Yes, I think it rounds to 1%. But I think we looked at ourselves in the mirror and said, we probably were a little bit of a little arrogant not for a long time, we didn't do it for whatever reason. And even though technology wise, it got a lot simpler and it did not have any real impact.
In our view that it really isn't our member. Well, the reality is, And our view that it really isn't our member. Well, the reality is it's everybody's member. And if we can help and it's not very costly to do, which is the case, then it's a positive. It's a slight net positive.
Great. Well, thanks so much and best
of luck.
Thank you.
Your next question comes from Conor McReynolds with Bernstein.
Hi, Richard. Thanks for taking the question. Just a quick follow-up on 2 picks that have been discussed already. On SG and A, you gave us the cadence of the growth rate of healthcare. And I know some of the things you're looking at in terms of making your employees better consumers, those are kind of long tailed.
Do you think this 11% growth rate now is more of a steady state growth rate for some period of time or period of time or should that continue to inch down as the compares maybe get a little easier still?
I think that on the one hand, there are things first of all, the long tail is not completely long. This is not like smoking cessation programs or weight loss programs or exercise more or eat better. So you'll have less heart attacks 10 years from now. This is some of these changes can be made in the next year and each one could be a few $1,000,000 So it's not giant, but they'll all help. I was going to say one other thing.
The offset to that is I was going to say one other thing. The offset to that is changing health care legislation and they're not just the new plan. One example, next year and this is I don't think this is even part of what's referred to as the Obama Health Care Plan is that currently currently, dependents of employees who are under 18 or under 22 if they're in college can be on their parents' health care plan. And needless to say, there's a cost to that to the employer. The new law is that I think goes into effect January either January 1 or September 1 based on fiscal year, but I think it's January 1.
The new law is up to 26 and you don't have to be in college. If we look at our current employee base in the U. S. Of 95 or so 1,000 people, existing employees who had dependence in the plan, but based on their age, they left our plan either at 18 if they weren't going to college or 22 if they were going to college. We have about themselves and many of them are, if they're eligible for their own plan, they can't go on our plan.
But let's assume half of them do. That's 7,000 and they're young and they're healthy, but even if the average cost was only $2,000 there's $14,000,000 a year. So there are things that will mitigate some of the savings. But nonetheless, I think that I can't guess I would expect the growth rate in dollars in Q4 given that we had a high increase last year in Q4 Q4 is around the same or a little better and hopefully gets a little better, but it's still going to be in the at best in the high single digits going forward over the next couple of years.
Okay. That's really helpful. And then just final follow-up, through the quarter and really focusing on the U. S. Business, the average ticket didn't really kind of improve maybe as much as we might have expected it to.
And I know you've talked about more frequent trips still happening. But any other thoughts on that? I would think that as the discretionary categories are showing a little bit of life that maybe that average ticket trend should be getting better faster?
Well, keep in mind, they are coming in more, they're buying a little less each time and also they're buying more food and sundries and less $1,000 TVs. That goes a long way to changing that average ticket a little bit. I think we're probably to a little more than half or half to a little less than halfway through a year cycle in that in terms of the pressure of less TVs. I mean, just if you go back a year or 2 or 3 years ago, dollars 1,000 television in our MBM. In 2 or 3 weeks, we could sell $20,000 or $30,000 units or $20,000,000 or $30,000,000 of one item.
There are none of those right now. So those are things that impact. And now is it offset by coffee makers and toaster ovens and exercise equipment and a lot of other things? Yes, we're doing a pretty good job of fine tackling. My view is a simple one is that we got them coming in more frequently and then it's not like they're buying it somewhere else.
When they start buying, they're buying it at us.
Okay, great. Thank you.
Your next question comes from the line of Neil Currey with UBS.
Thanks, Richard. I wonder if I can just ask a follow-up on that question earlier about average ticket. And you mentioned consumer electronics and selling less TVs. I think you've spoken in the past and you've talked about how there's been more of a shortage of big TVs and that's led to better pricing potentially but lower sales. I just wonder if you can give us any view on how that's going to change over the next 6 months or so, whether you see more new TV models coming into the system, whether that we should start to expect TV sales to start going up again?
The big issue over the last 4 to 8 4 to 10 weeks, let's say, has been less promotional opportunity for us in MDMs and arguably less offset a little bit by less deflationary trends in there. Again, our VP of Majors in Electronics literally just got back yesterday from a week in Asia, meeting with all the manufacturers. And the view is that availability will be greatly enhanced by mid to late summer, that capacity is up. And so there is a feeling going into the seasonal parts of September through Christmas, there'll be a little bit more promotional opportunities. And I hate use the word promotional, but let's face it, when you have had something that's been declining on its own $200 or $300 a year and then on top of that a couple of $100, $300, 3 week $300 off in an MVM mailer that drives business.
And again there's not a lot of that excitement in the MVN mailer related to those bigger ticket items right now.
Do you think in the Q1 or share also we should start to see them back in the NVM mail a bit more.
4 months from now when I in early October when we talk about Q4, we'll talk about it was still an impact in Q4, but near the tail end of Q4 and into the 1st month of Q1 of September, we saw see a change. I mean, that would be my hope.
Okay. Why is the UK so flat against other international markets? Is it just economy based or is there something else going on in terms of?
A little bit has to do with in UK we operate under a slightly different format. If you walk in, it's a membership warehouse club. It looks like a warehouse club. It smells like a warehouse club and it walks and talks like a warehouse club. The one difference there is that in order for us to make economic sense, we locate our facilities in what are called commercial trade areas, not retail areas, which are still expensive, but not as expensive and are more available.
Because of that, each and I forget if it's cities, states, provinces, but each locale has a minimum required of business to the trade. So we do not market nearly as strongly to non trade members or non business members. So we have less of a consumer piece over there. And so that always has impacted us a little bit over there.
So Basically, what you're saying is the business community there isn't recovering.
That's my guess. I can't read a lot of it. I'm not
really getting into the any consumer recovery.
Look, our view is our pricing is more favorable over there relative because there are other warehouse clubs over there and discounting is not as dramatic. But again, business recovery, but also the is it's a little bit of a small business recovery, but also the fact that of how we have to market.
Thanks. And just finally, any thoughts on the West Coast, any changes you're seeing to the California economy in particular?
Well, again, I think that sequentially, think we're all looking for tidbits every week or every day when you hear something about finally there is a reduction in the foreclosures or but the is again I think the frugality fatigue helps a little bit and but we are seeing a little pickup and there's at least not the concern that the sky is falling.
Okay. Thank you.
Why don't we take 2 more questions?
Your next question comes from the line of Dan Binder with Jefferies.
Hi, good morning. Question on membership growth going forward. You've had a nice little acceleration off of lower levels in prior quarters. How would you expect that to play out in local currency over the next couple of quarters still at that 7% level? Or does that start to get a little bit better you think?
Could you repeat the question? It broke up.
The question was regarding membership growth. It's shown some nice improvement in local currency in the last couple of quarters. And I was just curious what your thoughts were over the next couple of quarters. Does it maintain this 7% rate or so or do you think it can improve off that level?
I would hope it accelerates somewhat because we're going to we've gone from opening 1 unit in each of the last two quarters to 6 in Q4 and God willing around 5 or 6 a quarter in all the quarters next year. Recognizing whatever so that will be should be an improvement and acceleration. Recognizing any acceleration in terms of the P and L, we record membership fee income on a deferred basis. So if we get an incremental new member tomorrow at $50 it's basically $4 a month extra incrementally into the next 12 months. And so that will temper that rate of acceleration.
Okay. And then we through this earnings season, we've heard retailers talk about some softness or choppiness related to weather in May. And obviously, we had a lot of turmoil in the markets over the last few weeks, and I realize comps are next week. But I'm curious, are you seeing choppiness or any increased volatility in your business over recent weeks as this has unfolded?
The only choppiness that we see relates to how on holiday falls like Memorial Day, fellow week off. So it helps you one week, hurts you the next week or vice versa. And the timing of an MVN mailer where if I'm making this up, but let's say last year it was in weeks 1 through 3 of a month and this week it's weeks 2 through 4. In week 1 this year, since you had an NVM last year, but not this year, you see sales down and in week 4, it catches back up. Okay.
And then just some housekeeping items. I don't know if you mentioned earlier, but do you have an expected tax rate for the full year? And I was just curious where you think preopening and net interest will fall out for the full year also?
Well, pre opening should start to escalate some. I'm sorry, I don't have that in front of me looking at last year, but it should escalate from where it's been, more openings. And interest income, by the way, getting back to I think it was Chagram's question on Q2 interest income, the big delta in Q2, interest income, I looked at my notes from Q2 while we were on the call here. And interest income actually was only up a few $1,000,000 year over year in the quarter. The big difference sequentially that Chuck you had mentioned was related to 1st of all Q2 as Christmas and Mexico our half of Mexico earnings are dramatically higher than.
In addition, as I mentioned I did mention in the Q2 conference call, we did pick up some incremental dollars on FX contracts. Usually, that's something that's no more than plus or minus a couple of 1,000,000 dollars and I never talk about it. We happen to have in Q2 a benefit of probably a penny, $7,000,000 or $8,000,000 And so that was an anomaly in Q2 that is more of an anomaly, whether it was a plus or minus in Q2, it was not less anomaly. And that other big chunk was just quarterly profits in Q2 and Mexico dramatically different than Q3. But looking to Q4, I don't see a big change.
Again, it doesn't matter how much cash you have, there ain't a whole lot of money. Given that we know that we're going to pay off $900,000,000 in March 2012. In the last few months, we have taken extra 80, 90 basis points. So, say 900 times 80 basis points is 7,000,000 a year. So, maybe annualized you get a couple of 1,000,000 a quarter from that, but that's not earth shattering.
And the tax rate for the full year?
I think our tax rate I start every quarter with a tax rate assumption of around 37% or high 36% s and usually it's between again, the percentage in Q3, which was 34.4%, part of that is, is Q3 is a lower profit quarter. So when you've got a $3,000,000 or $5,000,000 benefit or hit in a quarter on a lower percentage that changed the percentage more on a lower base.
Okay, great. Thanks.
Your final question comes from the line of Chuck Cerankosky with Northcoast Research.
Good morning, everyone. Richard, my question has been answered. So why don't you give this to somebody else?
Your final question will be from Damian Witowsky with Gabelli and Company.
Hi, good morning, Richard. Just going back to your comments on regional strength, any sense of what percentage would you attribute or just what's is it the region improving or is it that you're just taking share in those regions?
Well, I think in the Midwest and Texas, a little of it has to do with we're newer there. I mean, when I I'm always can't say newer anymore because we've been in those regions now for 10 or so years, but we're not there for 25 years. I think, Texas, Texas, again, we've been there for 10 or so years and our competitors have been there for 25 years. I think we just are showing some nice