Costco Wholesale - Earnings Call - Q2 2012

Transcript

Speaker 4

Good morning. My name is Dawn, and I will be your conference operator today. At this time, I would like to welcome everyone to the second quarter and year-to-date operating results for fiscal year 2012 and February sales conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star, then the number one on your telephone keypad. If you would like to withdraw your question, press the pound key. Thank you, Mr. Richard Galanti, CFO. You may begin your conference, sir.

Speaker 5

Thank you, Dawn. Good morning. This morning's press release reviewed our second quarter fiscal year 2012 operating results for the 12 weeks ended February 12th, and our February sales results for the four weeks ended this past Sunday, February 26th. As with every conference call, let me start by stating that the discussions we're having will include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, and that these statements involve risks and uncertainties that may cause actual events, results, and/or performance to differ materially from those indicated by such statements. The risks and uncertainties include, but are not limited to, those outlined in today's call, as well as other risks identified from time to time in the company's public statements and reports filed with the SEC.

To begin with, our 12-week second quarter results for the quarter, earnings per share came in at $0.90, up 14% from last year's second quarter earnings per share of $0.79. This was on a 10% sales increase. There weren't any big unusual items either in this year's or last year's second quarter earnings, but as we go through our note, you'll note the comparison includes not only a 10% overall sales increase, an 8% comp sales increase, and normalized a 7% comp increase excluding gas inflation and FX impact. The FX impact on our foreign operations year-over-year in Q2, assuming flat year-over-year FX rate, essentially hit us by about $5 million pre-tax earnings in the second quarter. We had an 8% increase in membership fee income. This included very little impact from the recent announced fee increase, a little less than $1 million.

This is due to the nature of deferred accounting, and I'll talk about that in a minute. We had a lower year-over-year gross margins as we continue to invest in pricing. We had good SG&A expense improvement. We had a smaller year-over-year LIFO charge, $6 million last year in the quarter versus $2.5 million, and we had a favorable year-over-year income tax rate comparison. In terms of sales for the second quarter, reported total sales were up 10%, and our 12-week reported comparable sales figure was up 8%. For the quarter, both total sales and comp sales were positively impacted by gas price inflation, offset a little bit by the slight weakening of foreign currencies relative to the U.S. dollar year-over-year. On a comp basis, the 8% U.S. sales increase reported in Q2, excluding gas inflation, would have been 7%.

The reported 8% international comp figure, assuming flat year-over-year FX rates, would have been plus 10%, and total company comps reported again at 8% for the quarter, excluding both gas inflation and FX, would have been plus 7% for the company. This plus 7% quarterly comp sales increase figure is the same level of increase achieved in each of the past three fiscal quarters, again on a normalized basis, including the effects of gas pricing and FX. In terms of sales for the four-week month of February, it's pretty similar to the quarter. Excluding gas inflation, the 8% reported U.S. comp was 7%. The 8% international comp was plus 9% in local currency, and excluding both of those, total company reported comp of 8% would have been a plus 7%. Other topics of interest are opening activities.

After opening four new locations in Q1, which ended last November 20, one each in Pennsylvania, Texas, Wisconsin, and Georgia, we opened two new locations in the second quarter, both in Japan, one in Yawata near Osaka and one in Zama near Tokyo. Since Q2 end on February 12, we opened last week one new location in Kobe near Osaka, Japan, and also last week we reopened our Thomas Sakai warehouse in Japan. This had been closed since the tragic earthquake last March 11. All told, that would put our fiscal 2012 expected opening schedule at 17 net new units, the 8 we have opened fiscal year to date, and 9 more to open by fiscal year end. These 17 consist of 10 in the U.S., 1 in Canada, 2 in Korea, and 4 in Japan.

With the opening last week, the two openings last week, we now operate 600 locations around the world. I'll also touch on Costco.com membership results, additional discussion about margins and SG&A, and recent stock repurchase activities. Onto the results. Sales for the quarter were $22.5 billion, up 10% from last year's $20.4 billion. Again, on a reported comp basis, Q2 sales were reported at plus 8% and plus 7%, what I'll call normalized, after excluding gas and FX. For the quarter, our 8% reported comp figure was a result of a combination of the average transaction size of plus 2.4% and an average frequency increase of plus 5.2%. The frequency trend during the past three months of December, January, and February was plus 5%, plus 5.5%, and plus 5.3%. For the 12-week quarter, it was plus 5.2%.

We're now going into our fourth calendar year of year-over-year frequency increases over 4%, and that, of course, is after years of frequency increase figures generally in the 0 to plus 2% range. For the February reporting month, much like the quarterly comp figures, our plus 8% reported comp was a combination of an average transaction increase of 2.9%, so a little higher than the 2.4% for the quarter overall, and an average frequency increase of 5.3%. In terms of sales comparisons by geographic region, first for the quarter, in the U.S., the Midwest, Northeast, and Southeast regions were the strongest. Overall, U.S. was very similar to the total company. Internationally, in local currencies, we had the same comp percent increase, about 10% as the 10% in our prior two fiscal quarters, both Q4 of last year and Q1 of 2012.

What I'll say is our local in local currencies, international comp was also 10%. For February, on a U.S. regional basis, our strong results were in the Midwest, Texas, and both the Northeast and Southeast. Internationally for February, again in local currencies, the plus 9% result for February compared to a plus 9% in January and a plus 11% in December, going back a couple of months. In terms of merchandise categories for the quarter and month, excluding the impact of FX, I'll just talk about February here since we do this monthly. Within food and sandwiches, all subcategories were positive for the month and averaged in the high single digits. In terms of hard lines, the comp was in the low single digits as it has been for the last several months and a couple of quarters.

Within hard lines, the strongest subcategories were hardware and automotive, with electronics just below flat for the month. Within the low double-digit soft lines comps, the strongest subcategories were small appliances, domestics, and special events. Within fresh foods, a positive high single-digit comp, and all fresh food subcategories were positive. Now moving on to the other line items in the income statement, membership fees, $459 million this year, or 2.04%, compared to $426 million or 2.08% last year in the second quarter. In dollars, that's up $33 million or 8%, and as a percent of sales, down four basis points. We continue to enjoy strong renewal rates and increasing penetration of our executive membership. Our new member signups in Q2 company-wide were up 11% year-over-year, mostly due to the strong international openings this past year and this past 12 months in Asia and Australia.

In terms of members at Q2 end, Gold Star 25.9 million, up from 25.5 million at the end of the first quarter. Business primary remained at 6.4. Business add-on was 3.7, down from 3.8. A lot of that, again, has to do with as add-ons become executive, they go into the other two categories. All told, 36.0 million versus 35.7 at the end of Q1, and including add-on cards, spouse cards, 65.7 total versus 64.9 at the previous, the first quarter end, so up about 800,000. At Q2 end on February 12th, our paid executive memberships were 12.15 million, an increase of a little over 100,000 since Q1 end, and that's about 8,400 a week. In terms of membership renewal rates, they continue strong. Our business membership renews, and this is U.S.

and Canada, which was the bulk of our business for a long time, was up 93.5%, up from 93.3% at the end of Q1. Gold Star 88.4%, up a little bit from 88.2% at the end of Q1. Total, 89.4% compared to 89.2% at the end of Q1 end. Worldwide, 85.6% at the end of Q2, versus 85.4%, so up a little bit. That number fluctuates a little bit because of the small base in many of these international countries, and you're always going to have much lower renewal rates in the first year or two of a new warehouse and in a new market in many cases. As you all know, we recently increased our annual membership fees in both the U.S. and Canada. The annual fee for the Gold Star and business and business add-on members are now at $55 in U.S.

dollars and in Canadian dollars, and the annual fee for the executive membership in the U.S. and Canada now stands at $110. These increases became effective November 1st for new members and effective January 1st with regard to member renewals, which, of course, is the bulk of our membership data. In all, approximately 22 million will be impacted by this increase over the 12-month period that people renew, approximately half of whom are executive members, so roughly half at the $10 rate and half at the $5 rate. In terms of the timing of these increases hitting the income statement, please remember that membership fees are accounted for on a deferred basis.

Just using an example of one member who paid an extra $10 for an executive membership, and let's say they renewed in January, that $10 would be then spread over the next year, in our case, the next 13 four-week periods. The full impact or benefit to the membership income line will be over essentially about 23 months, peaking at 12 months out. Of course, the 23rd month will have the last remnant of the renewers that were just notified of the renewal 12 months into this announcement. In terms of given the deferred accounting, there was essentially no impact in Q1, as I mentioned last quarter. There's very little impact in Q2, just under $1 million pre-tax. A small amount in Q3, about $7 million pre-tax or about a penny a share. Much more meaningful starting in Q4 and beyond. Q4, of course, is a 17-week fiscal quarter.

It's always been a 16-week quarter, but this is a 53-week year. Into Q1 and Q2 of next year, we'll see that impact be more meaningful. The full impact of these increases, as I mentioned, is 23 months, and we'll see that when we see it. With regard to executive membership, the 2% reward, along with the increase, the 2% reward associated with the executive membership was increased up from $500 per year to $750 based on eligible purchases. That's about a $4 to $5 million annual, and a small amount of that was accrued for this quarter to catch up for, we're going to do it on a, you know, based on whenever the renewal rate is. While it's still very early to see any impact on renewals from the fee increase, as we only have really one month, January, and even in January, that's partial data.

Based on that limited data, and in our judgment from the marketing people here, we don't expect any issue. Going on to the gross margin line, the gross margin year-over-year was down 30 basis points from a 10.83 last year to a 10.53. I'll get to do the little matrix here, four columns. Columns one and two will be Q1 2012, and column one will be the reported figures, and then column two, we take out gas inflation because that makes it more meaningful without the impact of gas inflation on these percentages. Reported and without gas would be Q1 2012 and Q1 2012 again. Columns three and four would be for Q2, both reported and without gas inflation. The line items, merchandising core, second line item, ancillary, third line item, 2% reward, fourth line item, LIFO, and last line item, total.

Going across the core merchandising, we reported in Q1. As we reported in Q1, it was down year-over-year 32 basis points, but without gas inflation, down 10 basis points. In Q2, reported down 25, and without gas, down 16. Ancillary, minus 2 and then plus 2, and for the second quarter, minus 5 and minus 4. 2%, minus 1 and minus 3, and for Q2, reported minus 2, and Q2 without gas, minus 3. LIFO, 0 and 0 in the first quarter, and in Q2, reported plus 2 and without gas inflation, plus 2. You add those line items up. In Q1, as you recall, we had reported year-over-year gross margins down 35 basis points, without gas inflation, down 11. For this quarter, the reported down 30 basis points, adjusted gas inflation would be down 21.

As you can see, again, our overall reported gross margin, while it was down 30, within that 30, our core was down 25. Our lower gross margin gas business, and in fact, increasing sales penetration in our gas business as well, caused that impact of about 9 basis points. The 25, we're looking at it without gas inflation impact, was at 9. Was minus 16. Now, while gross margins in our core business, which is food and sundries, hardlines, softlines, and fresh foods, were still lower year-over-year in Q2 by 16 basis points, in the quarter, hardlines and fresh foods were about flat year-over-year, and one a few basis points higher and one a few basis points lower year-over-year. Food and sundries and softlines were down year-over-year a little bit more than that, for an average of that, minus 16.

We continue to invest in price, to strengthen our business long term, and we think it's doing what we want it to do. Ancillary businesses' gross margin, as reported, was down 5 basis points year-over-year, hit in Q2, partly due to gasoline inflation and slightly lower year-over-year gas margins in the quarter, as well as quite a bit lower year-over-year gross margins in our Food Court. This continues to be due to our decision to hold prices on many items, even as some commodity costs have increased. You've heard that again and again. That's what we do. We do it not only there, but in a few other areas as well.

The impact from increasing executive membership represented a 2 basis point hit to gross margin, again, due to the 2% reward feature in the membership, including that small amount of annual expected increase due to increasing the maximum from $500 to $750. LIFO benefited us in terms of P&L, benefited by $4.5 million, $6 million pre-tax charge last year compared to $2.5 million this year. Moving down to SG&A, our SG&A percentage to Q2 over Q2 was lower or better by 29 basis points, coming in at 9.67% this year compared to 9.96% last year. Again, the matrix, four columns, the first two columns for Q1 with and without gas inflation, and the third and fourth columns for Q2, again, with and without gas inflation. Reading across, and pluses here mean good, mean lower as a percent of sales, lower SG&A as a percent of sales.

Core operates 28, reported in Q1, plus 9 after gas effect taken out. In Q2, plus 25 and plus 18 without gas. Central, plus 4 and plus 2, and for Q2, plus 5 and plus 4. Equity, minus 6 and minus 7, and for the second quarter, minus 1 and minus 1. Total, again, last first quarter, we reported year-over-year, 18 basis points improvement or plus 18. Without gas inflation, it was actually minus 4 or lower by 4. I'm sorry, there was an adjustment last quarter that I forgot to mention, the 11.83 that Washington State Liquor initiative. That was 8 basis points to the negative. The minus 4 reported, without gas inflation in Q1, also had the impact. That minus 4 is after the impact of the minus 8. For Q2, again, we reported 29 basis point improvement year-over-year and without inflation, plus 21.

In terms of a little editorial on SG&A, again, the operations component of plus 25 was 18 without gas, so about a 7 or 8 basis point improvement, 7 basis point improvement in core operation, that helped us with, but 18 without gas. Our payroll percentage, year-over-year, benefited the SG&A comparison by more than 11 basis points. Total payroll dollars in our company increased 6.5% in Q2 compared to the 10% total sales increase. As well, increases in healthcare costs were a little lower than we anticipated. Hopefully, that's a trend, but you never know. Central expense was better, lower year-over-year in Q2 by 5 basis points, and as you saw, stock compensation expense was about 1 basis point higher. Overall, we consider Q2 a good performance in SG&A, and hopefully, that can continue.

Moving down the income statement, pre-opening, $4 million last year in Q2, $6 million this year, so $2 million higher or 1 basis point. In both fiscal quarters, we had two openings. The bigger difference has to do with when they open and where they open. Some countries have much higher pre-opening per unit. There's also, based on remodels and other expansion activities. In terms of provision for impaired assets and closing costs, in both Q2 2011 and Q2 2012, we had a charge of $2 million. All told, operating income in Q2 was up $48 million from $596 million last year to $644 million this year. Below operating income, reported interest expense was about the same year-over-year, with Q2 2012 coming in at $27 million compared to $27 million a year ago as well.

These amounts mainly reflect the interest expense on our $2 billion debt offering we completed in February of 2007. As I mentioned last quarter and probably the quarter before that, this month, next month, on March 15th, in about two weeks, we'll pay off $900 million of this debt. The anticipated annual pre-tax interest savings to Costco, assuming we're paying 5.3% coupon and a small amount of amortization of issuance costs, about a 5.4% hit of benefit to the hits in the P&L currently, and will be a foregoing interest income on our cash in the 20 to 30 basis point range. That's about $46 million pre-tax per year. For Q3, given that we're doing this effective March 15th, we'll get a pre-tax positive bump of about $7 million. For Q4, and again, it's 17 weeks, not 16, a pre-tax positive bump of about $15 million.

You could divide that by the number of weeks in Q1 and Q2 next year, it'll be 12 weeks each. In terms of interest income and other, it was higher year-over-year by $6 million, $10 million this year in the quarter, $4 million last year. Of that $6 million increase, actual interest income was higher year-over-year by $2 million, a reflection of higher cash balances. However, the biggest component of the $6 million change was interest income and other, and interest income and other was related to the foreign exchange impacts on our business. This positive was much bigger in Q1 year-over-year, but as I explained at last fiscal quarter, we consider this part of our gains and these, whether the gains and losses, as these contracts are done mostly by our merchants and are offset or in addition to their merchandise margin, which is recorded up at gross margin.

Overall, pre-tax income was up $54 million or 9.5%. Last year, it was $573 million. This year, pre-tax income $627. In terms of income taxes, our tax rate was a little lower, 34.2%, versus 35.5% last year. Our lower effective tax rate is due to a few discrete Q2 items, that, you know, any number of things, whether it's state or federal and audits going on and whatever, the sum of which reduced our Q2 taxes. This was about a third of that lower, in our view, a lower tax rate increase, versus last year in Q2. The rest of it mostly related to decreases in foreign tax rates for overall average foreign tax rate. Now, for a quick rundown of other topics, I'm always asked about depreciation and amortization. For Q2, it was $209 million, giving a year-to-date D&A of $414 million.

Our accounts payable as a percent of inventories, last year, we reported it was 97%, 87 a few, just look at merchandise payables, not construction and other payables. This year, the reported number was 91. Again, that comparison 97 a year ago. Again, looking at truly at merchandise inventories and payables, this year, the AP ratio was 86, down just a little bit from 87 a year ago. Average inventory per warehouse was up $1.1 million, $10.5 million last year in the quarter, $11.6 million this year. Very little, almost zero impact from FX. Really spread across many, many subcategories. Obviously, this includes the impact of inflation. As I mentioned in Q1, year-over-year, we were up just under $1 million, $900,000, almost $1 million, so pretty much in line with that level of increase. That being said, there are no inventory concerns.

We feel we did a good job of taking markdowns for the holidays, and our inventories are in good shape. As well as our mid-year, we take in physical inventories twice a year, mid-year and year-end. Our mid-year fiscal year physical inventories were our best ever for mid-year. In terms of CapEx in Q2, we spent $234 million last year. In Q2 2012, we spent a little bit more, $289 million, and year-to-date at $632 million. We would estimate for the year our CapEx will be in the $1.4 billion range. In terms of Costco.com, both sales and profits were up over last year in Q2. Our average ticket has come down a little bit, but our site traffic continues strong and was up a little over 9% in the quarter, year-over-year. We are transitioning to a new platform this summer. I'll bet on mid to end summer.

The new technology will give us greater visibility on the internet, and we hope we'll bring users to Costco.com via search engines, which our much older current system does not allow. In early summer, we'll launch the first app on smartphones, and assume both, over the course of the next few months, a couple of those. We will introduce Costco.com elsewhere later this calendar year and into next calendar year outside of the U.S. and Canada. In terms of expansion, I mentioned 17 units this year. Now the 8 remaining that we have, that's the 8 that will be in Q4. This is down 3 from the previous 11 that I spoke about. These are all delays. They're still happening. They were all scheduled for August. They're now in either October or November, so into Q1 of fiscal 2013.

Adding 17 units to the original basis fiscal year of 592, that's about 3% unit growth and a little over 3% square footage growth. At Q2 end, our square footage stood at 84,998,000 square feet. In terms of a stock repurchase, during the quarter, we spent $145 million. That's a little lower than Q1 of $173 million. We're generally buyers every day, and to date, since June of 2005, we've bought back a little over 111 million shares at about $56.74 a share for about $6.3 billion total dollars. We currently have, I think, roughly just under $3.4 billion of authorization left in our program. As I always mention, supplemental information will be shortly posted on our investor relations site, which has some additional information. Lastly, our Q3 scheduled earnings release date will be Thursday, May 24th. That will be for the 12-week third quarter ended May 6th.

With that, I'll turn it back to Dawn for questions and answers. Thank you, Dawn.

Speaker 0

At this time, I would like to remind everyone, in order to ask a question, please press star and the number one on your telephone keypad. We'll pause for just a moment to compile the Q&A roster. Your first question comes from the line of Deborah Weinswig with Citi.

Speaker 2

Congratulations on a great quarter, Richard.

Speaker 5

Thank you, Dawn.

Speaker 2

As we look out for the rest of fiscal 2012 and you start to cycle much easier, gross margin compares, how should we think about gross margins for the rest of the year, especially with one of your competitors talking about very aggressive price investments?

Speaker 5

I think, you know, needless to say, I can't give you any guidance since we don't guide, but clearly, I think our message has been that we continue to invest in price, and I think we do it more than talk about it, frankly. We'll continue to do that, but that's what we do. I think the other message that we've tried to convey over the last couple of quarters, and we'll continue to do so, is while there's certainly a lot of tough competitors out there, this is us, not them, in terms of what we do for a living. We're not, in our view, while we, you know, every day, every competitor responds to one another, but overall, we are responding to ourselves here, more than anything.

Speaker 2

Okay. Can you talk about anything that you're doing in terms of improving productivity on the floor?

Speaker 5

It's a never-ending battle. We constantly are working to speed the front-end line, whether it's redoing the software for credit and debit, printing out all the things that all of us do out there. This last year, I know one focus, and these are all anecdotal, has been in operations, and I think this is where Craig has put a lot of effort into, given his operations background. Operators have put a focus on overtime hours. You're always going to have overtime hours, whether it's because of weather, people didn't come in for they were sick, a holiday where you misjudged something, whatever it is, or physical inventories. That being said, with a focus on it, and that's the keyword, focus, we saw just in the last couple of quarters a few million dollars just by having fewer actual hours.

Saying those hours, even if they were still worked, those hours were worked as regular hours rather than overtime hours, that extra half was a reduction. Those are the types of things we're doing. I think we still get a lot of benefit from what I've talked about over the last couple of years, sustainability. It's not all us. It's everybody. It's the vendors. We're all working towards the sun. It's taking grams of resin out of water bottles and packaging into square containers instead of round, and making liquid everything, detergents and the like, more concentrated. All those things are having, I think, real benefits to all of us. I think we do a good job of managing healthcare and workers' comp and, in our view, relative to what our third-party providers tell us, they're seeing elsewhere.

It's a lot of blocking and tackling and trying to not do things that we're doing that we don't need to be doing. In the last three or four years, our active SKU count has come down from 4,100 plus down to 3,800, 3,750. That was our doing, a conscious effort to say, if the top 200 items out of roughly 4,000 are 35% to 40% of sales, you can imagine what the bottom 200 are. Every time we can take a pallet of something out that doesn't make sense, and then you're always going to have some slow things because it makes sense for the small business owner, the restaurant owner, whoever it might be. If every time you could take a pallet out and mass out something, some existing item bigger, you're going to have more productivity.

All those things that we do, I think, for those of you who have followed us for many years, I feel that we have continued to do little things that have helped us. We've all been helped by what's happened in the economy and trying to be more efficient. There's no one big thing.

Speaker 2

Okay. Lastly, throughout this earnings season, we've heard a lot about volume declines. Can you talk about maybe what's happening with the national brands and then maybe also with Kirkland Signature?

Speaker 5

I heard you the question, but what was the first part you said?

Speaker 2

We've heard a lot about volume declines throughout the quarter on the HBA and CPG side. Could you maybe talk about what's happening, you know, national brands versus private label?

Speaker 5

Again, sub-department-wise, we haven't seen any of that kind of issue in general. You see the constant pressures on what we call media and, you know, one-hour photo. In terms of, we see a continued increase in penetration of private label, even within existing private label items, recognizing the bigger part of that increase tends, in my view, to be where we continue to add items. In the last year, year and a half, we've continued to add some canned good items as an example, you know, canned vegetables, canned fruits, and the like. We've got that great peanut butter pretzel that I love.

There are a lot of things out there that we're doing, but we've not seen any giant change as it relates to the kind of impact we saw in the first half of calendar 2009, right after the financial crisis, where I think in a given year, we probably see a, you know, three-quarters of a % increase in penetration, maybe a half, maybe 1. I remember in that six months, we saw 2 to 3 percentage points just in six months. That was, again, people focusing on figuring out how to save money. I think one of the things that we continue to see impactful is when we introduce a private label item, it not only drives penetration to that item, which generally is a little bit, is a better margin, but also gets the brand to choose any instances to be more competitive, because they're losing market share.

It's a win-win for us and our members.

Speaker 2

Great. Thanks so much, Richard, and best of luck.

Speaker 5

Thank you.

Speaker 0

Your next question comes from the line of Chuck Grom with Deutsche Bank.

Speaker 3

Hey, thanks. Good morning, Richard. Just on the price investments that you're doing, I'm just curious, are the number of SKUs increasing each month that you're lowering prices on, or is it the same basket of products each month? I guess, in the second follow-up, would be, how are you guys measuring the success of those price investments? Are you seeing a big increase in unit velocity when you do the price investments?

Speaker 5

We are not the most formal when it comes to trying to analyze, did it work or not? I remember years several when we had rampant inflation in the middle of 2008, and we lowered the price of our chicken, or, you know, at the end of 2008, when we were trying, you know, we saw comps going towards zero. I gave examples. I think over a four-week period, we had about $32 million of actual, you know, markdowns on a limited number of highly visible items. One of them was the rotisserie chicken that had gone from $4.99 to $5.99, and we brought it back to $4.99. If you put a dollar divided by 6 by the $5.99, that was darn close, in my view, to the margin, the entire margin. No matter how many more chickens you sold, it didn't help margin. It hurt it.

We, you know, we're merchants at heart, and we drive the we attempt to drive the top line. I'll give you another anecdotal example. Last August or so, in Canada, where historically the soda and Coke, the soda and, and, and hot dog was $1.99 Canadian. Many years ago, the Canadian dollar was about $0.65 on the U.S. dollar. In one fell swoop, Jim said, "Take it down to $1.50." That's just because that's the right thing to do. Clearly, that impacted the bottom line negatively. I got to tell you, in a country where they've had a good economy and there's a lot of talk about inflation up there, we got national attention of being the only game in town that's lowering the prices on anything. We saw increases in traffic and certainly increases in food courts as well. That's what we do.

We feel good about the quarter and that, you know, we're getting our improvement from expense leverage and buying back a little stock and the like. Certainly the membership fee, as that improves in the deferred accounting, that helps you. We feel good about, you know, what we do with pricing, and we'll continue to do it. We've always shown that we, when we need a little margin over time, we figure out ways to do it and do it the right way.

Speaker 3

Right. Could you just remind me, in late 2008, when you did do the price investments, did it last for more than a few quarters, or was it longer than that?

Speaker 5

That was more of what I called back then the perfect storm. You know, again, we're heading towards zero, and we wanted to go into Christmas in early January with some driving it. You know, whether that was the reason, comps did turn around a little bit then. You know, this is more that, you know, we feel that we're strong. We've got a lot of good things going on. We're always reminded by Jim and now by Craig, let's not get, you know, too ahead of ourselves in terms of our success and let's keep driving that top line. Again, I can't give you guidance that it's going to be for another 6 weeks or another 25 weeks, but, you know, we don't worry about it, honestly, and not because we're cavalier, because we know that we have the ability to continue to drive sales.

If we need a little margin over time, we feel we can get it.

Speaker 3

Gotcha. Okay. Just, you know, a little surprise, only $145 million to buy back and a quarter to the cash balance. I mean, I know you got the $900 million tranche coming due in a couple of weeks, but, you know, what are the board's thoughts on accelerating the buyback here? Clearly, trying to open up more than 20 to 25 stores a year has been challenging because of delays, and your cash position is only going to continue to grow. You know, what are you guys going to, what's the priority here?

Speaker 5

The board, every quarter, talks about it. We'll say what we do, they're certainly knowledgeable of and comfortable with, do is to strengthen our stock price. We kind of look at it, you know, on a periodically updated, but kind of matrix pricing, buying more as the stock goes down and less as it goes up a little bit, and then adjust that upward over time as the stock has gone up. There were a number of weeks in the quarter where, on a given daily basis, we bought a little less. We feel comfortable. We'll continue to look at it. I don't want to judge what we and the board will consider and do. We recognize that we have a high-quality challenge with cash. You've heard it before, but I still mean it. I am confident that we will continue to increase our expansion.

Some of that expansion is going to be more expensive given the international rate of expansion. Over time, all things being equal, I would guess we'd increase it. We're not going to feel pressured to do it this Thursday or next week. You will continue to see us buy stock back, and the board is supportive of that.

Speaker 3

Okay, thanks very much.

Speaker 5

I'm not a big answer. Sorry.

Speaker 3

That's all right. Thanks.

Speaker 0

Your next question comes from the line of Robert Carroll with UBS.

Speaker 1

Hey, guys. Just drilling down on the price investments a little bit more. I know given kind of the 10 basis point decline in kind of core business, is that the rough level that we should think about until things start to anniversary in Q4?

Speaker 5

Again, we can't guide you.

Speaker 1

Okay. All right. No problem. In terms of the precedence, I guess, from this time last year when gas prices started accelerating meaningfully, are there any lessons learned from that period that you guys will be putting in place as we see, let's just say, gas prices catch a bit of a tailwind?

Speaker 5

I think the big thing has been our frequency. There's nothing, you know, we're to, it's a very low-margin business. To try to hedge yourself a little bit, all you're doing is, if you will, maybe smoothing the profitability out. However, there's a cost to that hedge, and on a low-margin business, that's a big cost. We don't. This is going to continue to be volatile. Whenever it's been a big year-over-year impact to earnings, we talk about it's a few cents better or worse or $0.05 better or worse. Clearly, I think last year in the fourth quarter, we had huge profits in Gasoline, and we shared that with you at the time. When prices rise, we get more action. We're on the news more. People, there's more frequency. I looked at some statistics recently in U.S. gallon consumption, not just Costco, but the U.S.

consumer's gallons consumption, which in good economies is up a couple of %, 1% or 2%, had been down 3% or 4%, and of late, has been down 5% or 6%, I believe. I have to check that. We're still up in the mid-single digits. We got, you know, we're driving people into the parking lot, no pun intended, and a portion of them come in to shop. It's just reinforcing that image.

Speaker 1

For the gas sales penetration, I know you said it was up year over year. Do you have that number?

Speaker 5

I don't. Gas sales penetration, I think it was, it wasn't as much as Q1. I think it was up about 1%. Yeah, I think it was around 8.5 and the low 9s.

Speaker 1

Great. All right. Thanks, guys.

Speaker 0

Your next question comes from the line of Brian Nudell with Oppenheimer.

Speaker 1

I just want to add, I also had a question regarding the, you know, the pricing actions you're taking and then the results and impact we've seen on your core gross margins. We've seen it now for, I guess, a few quarters. The first question I have is, as you think about the actions you're taking within your clubs, what's driving, so to say, the cadence of those? Are you going product category by product category, or is it a reflection to some extent of the underlying input costs in those products where you're deciding to make actions? The second question I have along those same lines is, after these actions are taken, how are you priced relative to some of your competitors?

We've talked a lot about, you know, another question's asked too about competitive pricing out there, but are you generally speaking then lowering prices below competitors, or are you matching competitors, etc.?

Speaker 5

First of all, we're always going to match or try to be lower than our competitors. You know, keep in mind, I don't know if it's half or more of our business are very competitive commodity items, whether it's milk, cheese, and butter, or soda pop, or Advil, or diapers, or you name it. Private label helps that impact with us and others as well. I really do mean it. We don't, it's kind of like all the merchants are, you know, going into Christmas as an example. The merchants were directed in every category. It says, "Come up with some ideas of where we could get sharper and be exciting out there." Be, have hot buys and have hot items and hot selling prices. That's what we do.

When we do price comp price shops, and we do it most with, most importantly, directly with Sam's, Pays Art, the two warehouse club operators, we're not comparing every price. Are the fresh food buyers looking at the ground beef ads and the chicken fryer ads or whatever else? Yes. We're not comp shopping supermarkets because keep in mind, our margins are on average 11%, and theirs are in the mid-20% or more in some cases, or the home improvement retailers in the low to mid-30%. When you look at the most direct warehouse club competition where we're across the street from each other or down the road from each other on key commodity items, which is, I don't know if it's 40% or 60% of our business, but call it half, we're all very close. When we look at it on exact items, we're going to be lower.

It could be a quarter of a percent. It could be 1.5%, 2%. It's small. Where we find the big differences is on those non-commodity or highly competitive items. Where we're selling a better quality item, there's not as much of a direct price comparison because it's not the exact item on a lot of things like domestics and housewares. That's where the quality of some of the home replacement items at Costco versus elsewhere comes in. That's where others we feel can make a little more margin, and we can too, but not as much. That’s what we do as merchants, though. It really is all over the board.

Speaker 3

All right. Thank you.

Speaker 1

Your next question comes from the line of Adrian Shapiro with Goldman Sachs.

Speaker 6

Thanks. Richard, if I recall, the last time you made some price investments, it was ahead of easing prices. You were the first to lower, and it obviously paid off remarkably well with strong share. Is that true this time around as well? Maybe give us a sense of what you're seeing in terms of inflationary pressures potentially easing, especially in food?

Speaker 5

No. The example we're talking about and that you just mentioned as well is in late calendar 2008. The economy crisis, the rampant inflation of mid-calendar 2008 towards the fall of calendar 2008, there were rising gas prices, rapid inflation. That was coming to an abrupt end. In many instances, our suppliers who had committed to raw materials, it was going to be four, six, eight weeks out before the underlying prices to us and to other retailers were going to come down. We saw comps heading towards zero. I think we called it the perfect storm. That is completely different. That was hopefully a one-time perfect storm, and we acted upon it. I think this has more to do with the fact that we are very strong, we feel. We're driving sales and comps. We're seeing increasing relative levels of profitabilities in some of these other countries.

It's a constant internal reminder, again, for years and by Jim and now by Craig, let's not be too sure of ourselves. Let's keep doing what we're doing. As long as we're growing the company and growing earnings, we'll do that. As Jim used to say, we think we deserve to make more, and we will.

Speaker 6

I understand it's different in that it's not as abrupt, but maybe shed some light in terms of are you seeing any easing of some of the inflation that we saw last year?

Speaker 5

Oh, I'm sorry. Yes, we are. As an example, while there's a very minor LIFO charge, I mean, using $100.00 as the starting point at the beginning of the fiscal year for LIFO indices, I think we're up 11 basis points for the first half of the first 24 weeks of the year, so virtually nothing. That includes gas, which is a chunk of that. Are we seeing some declines? I know, as an example, cotton prices have come down from its peak. We will see some declines going forward. Yeah, there's some of that. Clearly, to the extent that we self-inflicted tend to lag when there's inflation, given that there's less inflation, there's no lag to be lagging on. Again, does that answer it?

Speaker 6

I think the point is that while we saw sequentially some degradation in core merchandise margins, if we're seeing some easing cost pressures, perhaps going forward, we shouldn't see as negative of a hit on the margins going forward if you're seeing some relief there.

Speaker 5

I'm going to bet on you then.

Speaker 6

Hey. Okay. My next question, as it relates to, you know, with gas prices, obviously, that would seem as if, as you mentioned, the frequency and the traffic should continue to at least hold, if not get better. You know, help us think about, you know, are you starting to see how are you addressing the throughput issues? I would imagine some warehouses, given what is just unbelievable traffic trends, what are you doing to kind of accommodate this kind of frequency? I know Jim was very focused on making sure the lines were not too long. What, if anything, is going on to accommodate what's just fantastic traffic?

Speaker 5

There are pretty much two things you can do. Other than trying to speed up the register a little bit, you could put more people up front, which we do. The worst thing is when you have long lines and registers that aren't open, and that's a no-no. Clearly, one of those slides we've shown at conferences that show the number of units that are doing 200 to 250 and 250 to 300 and more than 300, there are more of them. We look for more sites. We've taken a couple of units over in Asia that were in the 300-plus range and have open sites. That impacts cannibalization, but that's what we have to do. We'll continue to do that. We recognize that's a high-quality problem, but we have to continue to address it. There are, again, those three things. You can add more people.

You can improve technology a little bit. That's an ongoing iterative thing, but not a lot, other than when you can just push the basket through the archway and it tells you what you owe, and then open more units.

Speaker 6

Right. Just last.

Speaker 5

We're also remodeling and expanding. I mean, this is anecdotal, but an example is we're under construction in Maui. We're adding a significant amount of parking. I forget how many square feet we're adding to the physical building itself, and we're adding a gas station. Most importantly, we're adding parking. If anybody's even over there, it's approaching $300 million, and it's mind-boggling how small the parking lot and the building is.

Speaker 6

Right. Just my last question as it relates to online. You talked a little bit, maybe give us a sense of where is that business in terms of sales, profitability, how pleased you are with it. You talked about some tweaks and some changes coming this year as well as sort of expansion overseas. Maybe kind of give us a sense of what we should expect online and what sort of trajectory you'd be pleased with as that channel continues to grow. Thanks.

Speaker 5

Yeah. As you know, we are a little different than others. We have few items on it, big ticket items, more big ticket items. We cater mostly to our members, and it's a product extension of what we do. We don't have a, you know, 100,000 or a million items on there. I think the replatforming is a no-brainer, from the standpoint that I think I said it last call. You go online and punch in Kirkland Signature or something, and you don't get Costco.com, because our platform is an old platform that doesn't allow search engines to crawl on it. That's a duh. That'll happen at the end of the summer, and then it takes several months for the hit to improve your pull position, if you will.

Beyond that, we've found success in, again, big ticket items, white glove items, whether it's furniture or a lot of big ticket electronics. It's a lower gross margin business and a higher pre-tax as a percent of sales business, so it's still small relative to our company. For a company that's going to do $95-plus billion this year, it's 2.5-ish, so it's small. Does it drive us crazy when others do a lot of business? Yes. We recognize we do some things that they can't do, and they do things that we're not going to do. We want to do better, and we will, and we're growing, but we can always do better on it.

Speaker 6

Thank you. Best of luck.

Speaker 0

Your next question comes from the line of Greg Melich with Evercore ISI.

Speaker 7

Hi. Thanks. Just to follow up on that last question, Richard, when you talked about dot com, is that dynamic of lower gross margin, higher pre-tax profit, is that entirely because of MEX, or does it have to do with the business itself?

Speaker 5

Say that again, Greg. I'm sorry.

Speaker 7

Is it that entire dynamic on Costco.com that you described, a lower gross margin rate, higher pre-tax profitability, is that entirely driven by MEX, or is it something with the actual business?

Speaker 5

It's certainly bigger ticket items help, but I would guess, and I'm just shooting from the hip here, the biggest thing is lower operating costs. A high percentage of the items, I don't know if it's 70% or 80% today or more, is factory direct shipped. It's, you know, the cost is the electronics, you know, running is running the physical system and the buyers and not a whole and not a hell of a lot more.

Speaker 7

Got it. Great. You mentioned inventory up $1 million per club globally, FX not an impact, but inflation was key there. Could you help us quantify that a little bit more? Was inflation all of it, half of it?

Speaker 5

Yeah. On a year-over-year basis, my guess is inflation was 2% to 3%, probably closer to 3%. I don't have the exact number. You know, 2.5%, so call it 2.5%. That was a rough number on $10,250,000. The rest of it is, you know, we tend to have more in electronics right now, but a little bit. I mean, it really was across the board. Historically, it was in one or two categories, but I think it's partly driving the business.

Speaker 7

It sounds like with fewer SKUs, but then inflation being $250 of it, it means there's $750,000 of actual just more depth in the SKUs you have.

Speaker 5

More depth and higher tickets, not just because of inflation.

Speaker 7

Got it. Okay. Great. Lastly, on gasoline, could you highlight a little bit the, I think you mentioned gas profitability in the ancillary. I imagine that's because of the rate of increase and the replenishment of your inventory. Could you just give maybe a little more color on that? Did that dynamic, was that what hit you in this quarter?

Speaker 5

In ancillary, that hit us. I get the Food Court I mentioned, I think. That's a big chunk of it as well. That's, again, I think I've talked about that in a couple of the last three or four quarters. Again, that is clearly us. I mean, we've held the price of the pizza when cheese prices skyrocketed, and we're driving, it's still profitable, needless to say, but it's at a lower level of profitability.

Speaker 7

That negative 4 bps to gross margin, you mentioned the Food Court, but the part that's gas margin, I imagine that's not just the fact that gas mix went up. That's the actual.

Speaker 5

No, that's yes.

Speaker 7

Profit of Gasoline.

Speaker 5

Yes.

Speaker 7

Okay. Great. Just given the cadence of what we're seeing, there's no reason to think that that would change. In fact, could it get worse here before it gets better?

Speaker 5

First of all, with gas, who knows what happens? If we can, you know, it was just a few days ago that everybody was talking about gas and there were speculators, and there's no reason it should be going up so much. In the same breath, everybody's saying that summer gas prices rise starting Memorial Day. You know, when gas prices rise, our profitability lessens. There are weeks when we lose money in gas. That being said, I mentioned last, yeah, I think last summer is when we made a lot of money, and it was I imagine prices were going down at the time. It's hard to say. That's why we try to point out gas because it is such a volatile thing.

Speaker 7

All right. Great. Thanks a lot.

Speaker 0

Your next question comes from the line of Christopher Horvers with JPMorgan.

Speaker 7

Thanks, and good morning. Richard, continuing the long thread on gross margin, maybe going at it in another way. When we last met, you talked about how the first membership fee years ago, Jim basically said to all the merchants, "Hey, we have an extra $20 million of price investment that we can create." As you think about going forward, and the fact that membership fee income growth really accelerates into the back half, as you talked about, do you think that will allow you to accelerate the price investment?

Speaker 5

Yeah, maybe yes, maybe no. I've always looked at it. Again, and I think the example you're talking about is probably something from 20 years ago, literally. There's lots of reasons, we are competitive on pricing. Direct competition, private label, given competition geographically in a current given state or country, our level of strong profitability. I mean, and, you know, is the success of our membership fee income a factor in how we operate our business? Yes, but by no means is it any different than all the other factors. Some are bigger than others, and sometimes they're not. Again, I can't really, I can't give you any direction. Our goal is not to drive you guys crazy with what we do. It's to drive our business in the right direction.

Speaker 7

Understood. Is there any, how much of the price investment maybe relates to what's going on in Canada? It seems like there's a, you know, war brewing with Walmart accelerating and Target launching next year.

Speaker 5

I'm not going to comment specifically. What we do everywhere in the world, as we enter a new state in the United States, as somebody comes into one of our markets, we're more competitive. We respond most, usually our most direct response and impact of that direct response is when it's direct warehouse club to warehouse club. Certainly, as Target, which is a new entrant into the Canadian retail market, and Walmart, a very strong retailer up there as well, and other Canadian retailers, there's going to be a lot of pricing competition and advertising. Certainly, we're going to continue to drive our business. That's what we do. That's one of the things we do, but we do those things elsewhere as well.

Speaker 7

Understood. In final question on the weather, our other favorite topic, it seems like there's some speculation out there whether or not this is core consumer getting better, or maybe January and February is seeing a lift out of the weather. Is there anything you can say to that topic or anything you're seeing on the category level that you think is instructive?

Speaker 5

Bob was whispering that this year was a little better than last year weather-wise, but not a big impact in our view.

Speaker 7

Thank you.

Speaker 0

Your next question comes from the line of Mark Willemouth with Morgan Stanley.

Speaker 7

Hi, Richard. It's Mark Willemouth. I wanted to get your thoughts on foreign exchange drag that we could see in the second half of the year at this point.

Speaker 5

Yeah, who knows? It depends on what's going on. I was looking back at the last several quarters. For a long time, the dollar weakened, and then it strengthened dramatically, and then it's coming off from that strength. Right now, it's likely negative. There's nothing giant brewing out there. The Europe thing is less of an impact, but who knows?

Speaker 7

Okay. Then.

Speaker 5

I don't know.

Speaker 7

Looking back through the holiday period, you were clearly one of the holiday winners in terms of sales trend. If you look at those margin investments you did make, were those all planned investments, or did you have any of that holiday promotion that was kind of reactionary?

Speaker 5

I don't think anything we did was reactionary. It was all done in advance. Maybe one or two things, but I don't even remember thinking or hearing about that.

Speaker 7

Okay. As you look at how things are going on expenses right now, what level of comps do you think you need to lever SG&A in the back half of the year?

Speaker 5

For the last several years, we've tried not to predict because we realize we don't know. I think whatever X is, it's a little bit lower sales comp number than it used to be because we, like everybody, have gotten a little more efficient in the last few years with the economy. I hesitate to know what it would be.

Speaker 7

Okay, thank you very much.

Speaker 0

Your next question comes from the line of Robbie Ohmes with Bank of America.

Speaker 1

Oh, hey, Richard. Just a couple of quick questions. I just want to follow up on your answer to Greg Melich's question where you said higher tickets, but not just because of inflation. I was wondering if you could just give us a little more insight to the type of category shifts that you've been seeing recently and what maybe you expect, you know, for this year that could be different from what you've seen the last couple of years. Are you adding higher ticket items to the assortment, you know, broadly, or is it in the soft lines category? Maybe just a little help, helping us see what you may be feeling. We won't hold you to it, but,

Speaker 5

Yeah, that's.

Speaker 1

Any changes you're seeing?

Speaker 5

Look, it's all over the board. I mean, jewelry is up, needless to say, because of inflation. You know, the average price point of a TV is up a little bit versus being down typically year over year. Cameras are up a little bit. Both of those have to do with the earthquake in Japan and the floods in Thailand, I think, with regard to cameras and hard drives or whatever. Some of those things haven't been deflationary. I noticed, again, I'm telling you this as a shopper, some of the private label items we've had in canned goods are eight packs, not six packs. Those are the things we do out there. I know we have a few more home replacement items. I think it's really all over the board.

I would think some of it also is more physical units out there because it can't all be the first. Again, our inventories are clean, and our shrink numbers at mid-year were great.

Speaker 1

Just one other question on online. Are you guys contemplating a change in how you charge for shipping related to this redo?

Speaker 5

I'll tell you as soon as I know. I don't know what plans that I have or haven't heard about yet. We keep doing what we do.

Speaker 1

All right. Great. Thanks a lot, Richard.

Speaker 0

Your next question comes from the line of Chuck Grom with North Coast Research.

Speaker 7

Good morning. Richard, first thing, just a data point. Do you have the square footage at the end of the quarter?

Speaker 5

Yes. Hold on, I got it right here. $84,998. $84,998.

Speaker 7

All right. Thank you. I want to poke around in another category, apparel. How did that behave during the quarter, and any comments on what you might be doing there?

Speaker 5

I can tell you, hold on. Apparel was up in the mid to mid-high single digits. We continue to get brands and continue to try to diverse brands that won't sell us. It's been relatively decent.

Speaker 7

On the electronics category, you mentioned before in the comp commentary, I think you said just below zero, but you had some dollar increases in TV. How are units tracking overall in electronics?

Speaker 5

It's a little bit below zero. I don't have that in front of me. My guess, it's in the low to mid. It's not dramatically different than that.

Speaker 7

When you're looking at the cash the company has, you're going to pay down a chunk of debt. How about the dividend? What's the board or management's thought on boosting the dividend meaningfully?

Speaker 5

You know, we talk about it. There's a formal discussion every year at our April board meeting, but I can't give any direction of what we discuss until we have something.

Speaker 7

All right. Great quarter. Thank you.

Speaker 5

Thank you, Chuck. Why don't we take two more questions?

Speaker 0

Your next question comes from the line of Mark Miller with William Blair.

Speaker 1

Hey, good morning, Richard. On the club opening delays you're seeing, that was also down from the prior plan. I'm trying to think of many comparable situations for companies that have such strong consumer demand, high comps, great return on capital. Is it your fate at this point to be driving around 3% footage growth due to the size, or are there any changes you can make to reaccelerate unit openings? Expanding the real estate team or changes in property siting?

Speaker 5

We have expanded the real estate team in the last year or so, including putting people on the ground in a few of these other countries, more so than we had in the past. We currently are focused more internationally, which has a little longer timeline. There is a lot in the pipeline. Craig clearly is committed to that. I hope we can all sit here and, you know, soon and say, "Okay, it finally happened." You know, one of the things that I've said before as we reflect on this question is that, you know, in our view, one of our strengths, in some people's view relative to how quickly we open units, people think it's a shortcoming, is we're very hands-on.

Speaker 4

We particularly, yeah, I kind of viewed it as a real positive in terms of rapid rate of expansion for years in between the three countries in Japan, Korea, and Taiwan. Between the three countries, we had about 20 units, so six or seven per, you know, five to eight per country. In between those three units, we may open one or two a year in total between those three countries. That was six in the last year, I think, and it'll be more going forward. We've got more on the plate, and I think you should see that turn somewhat, at least directionally, upward. I'm tired of listening to me also.

Speaker 5

On the pipeline, that sounds encouraging. Is there a figure you could share with us in terms of sites that have been approved or some way for us to look at 13 and whether that number can push higher? Thanks.

Speaker 4

At the end of the day, I would assume, and I'm shooting from the hip here, the number should be in the mid-twenties, which would give me more confidence that at least it'll be in the low twenties, but we'll have to see. We got a lot going on. A lot, we have more going on now than we had a year ago or two years ago.

Speaker 5

All right. Thanks, Richard.

Speaker 0

Your next question comes from a line of John Heinbockel with Oppenheimer.

Speaker 4

Hey, Richard, a couple of things. When you look, I mean, obviously, your customer is very loyal, but when you look at loyalty, is the fresh food customer, and/or the Kirkland customer, when you look at those two, are they significantly more loyal than people that don't put as much fresh food or Kirkland in their basket? Have you looked at that?

Speaker 2

I'm happy to, but I have not.

Speaker 4

Okay. Secondly, you know, with respect to real estate, is there more, the sites you're looking at, because there's less, there seems to be fewer people looking to grow as there had been, you know, the quality of sites that you would look at, is that now opening up a bit or not? It's still, that's still not where, you know, you'd like it to be in terms of availability.

Speaker 2

It's certainly up a bit from, you know, pre-financial crisis. While there's some slowing, you know, there's still people growing out there. The other impact aspect of that, particularly in, let's say, the U.S. or Canada where we are, locations are more, you know, pinpoint shots rather than, you know, wide blasts of geographic area. Anything within a five-mile radius, we're looking within this mile radius because it's between two locations, six and eight miles in each direction. That becomes a little more challenging. That's why there's more effort being put into it.

Speaker 4

Does it?

Speaker 2

Yes, the answer is yes. The economy has helped that process, but it's not like gone from difficult to easy.

Speaker 4

Do we ever get to a point where you think about playing around with the size of the box to open up the potential number of locations? You know, a lot smaller?

Speaker 2

Not yet. You know, years ago, it's probably 15 or 17 years ago. In the Northwest, we opened four units: the coast, Astoria, Oregon, Juneau, Alaska, Kamloops, British Columbia, and one more. I can't remember exactly which one. They were 72,000-foot units. Over time, we've changed three of them into 140,000 or 145,000-foot units, and they're doing quite well. Our focus is keeping it focused on what we do.

Speaker 4

All right. Are healthcare costs now into the single digits in terms of growth or not yet?

Speaker 2

I think they actually were in Q2. I don't have the sheet in front of me. Given the total sales increase was 10% and we increased, we had a few basis points improvement, the answer is most likely yes.

Speaker 4

You haven't done anything differently with the plan. I'm not talking about being less generous. I'm talking about just sort of being more diligent about how that money gets spent. Has that been the case, or has it just happened more naturally?

Speaker 2

It's mostly more naturally. We haven't done anything to the plan in terms of detrimenting, improving the bottom line of the cost of it by, you know, passing something on to the employee. We have not done that. I think that we're always doing, in the last several years, we focused a lot more on preventative stuff, needless to say, and getting people back to work and workers' comp. Beyond that, there's nothing to speak of. I know our what we call high-cost claims, which are $100,000 and over, are down a little bit in terms of frequency.

Speaker 4

All right. Lastly, wage growth in comparable stores, that hasn't changed much here in the last couple of quarters, has it? I'm sort of thinking about, within that 6.5% growth, whatever wages were growing, maybe when it was 3% or 3.5%, that hasn't changed.

Speaker 2

I don't think it would. To the extent that we're opening more units overseas, some of those countries have a lower effective wage than the U.S. does, yep, but still very well compensated relative to that country's regular retail rates. That slight change there probably helps you a little bit.

Speaker 4

Okay, thank you.

Speaker 0

At your request, Mr. Galanti, there are no further questions. I'll turn the floor back over to you for any closing remarks.

Speaker 4

Thank you very much. Bob and Jeff and I are here. Oh, and we'll talk to you soon. Thank you.

Speaker 0

This concludes today's conference call. You may now disconnect.