Costco Wholesale - Earnings Call - Q3 2011
May 25, 2011
Transcript
Speaker 6
Good morning. My name is Demetris, and I will be your conference operator today. At this time, I would like to welcome everyone to the third quarter and year-to-date operating results for fiscal year 2011. 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. Galanti. You may begin your conference.
Speaker 3
Thank you, Demetris. Good morning to everyone. This morning's press release reviews our third quarter 2011 operating results for the 12 weeks ended May 8. As with every conference call, I'll start by stating that the discussions we are having will include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, and that these statements involve risks and uncertainties that may cause actual events resulting in 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 by the SEC. To begin with, our 12-week third quarter operating results for the quarter, our reported EPS came in at $0.73 a share, up 7% from last year's reported Q3 EPS of $0.68.
As I'll discuss in more detail in a moment, both this year's and last year's results and a comparison of these results, each included one item of note, which we outlined in the press release. They include the following: first, last year in Q3, our SG&A line was reduced or benefited by a $14 million pre-tax reversal of part of a charge related to a Canadian tax liability. A one-time $0.02 per share benefit was included in last year's reported earnings. Second, this year in Q3, as you saw in the release, we had a pre-tax LIFO charge of $49 million or $0.07 a share. As I indicated in the previous quarter's earnings call, inflation clearly is back and to expect LIFO charges at least for this quarter or the next, and who knows? The $0.73 reported Q3 EPS number includes a $0.07 per share charge for LIFO.
In Q3 last year, and in fact, in all four quarters last fiscal year, there were no LIFO charges. I'll speak a little more about LIFO when I review with you our gross margin in a moment. We continue to benefit a bit this year in Q3 from FX tailwinds. Our foreign operations earnings results, when converted and reported into U.S. dollars, helped us this year by a little over $14 million or $0.02 a share. That's assuming that FX exchange rates were flat year over year with the dollar weakening relative to many of the foreign currencies in the countries in which we operate. That's been a benefit to our P&L. As I mentioned in each of the last two quarterly earnings conference calls, effective at the start of this fiscal year back in September, we began consolidating the results of our operations of our Mexico joint venture.
Historically, these operations had been treated as an equity method investment. Thus, we only reported our 50% share of the joint venture's net income within non-operating interest income and other line items on our income statement. Since the first quarter of this fiscal year, we were required to adopt a new accounting standard, which makes it appropriate to fully consolidate the Mexico joint venture operations into our statements. In effect, it adds about 3% to the top line sales as well as to assets and liabilities.
100% of the venture's financial statements are now included in our P&L and balance sheet and cash flow, and then the 50% portion held by our joint venture partners is backed out at the bottom of our income statement to offset it, such that there's no net effect to our bottom line or EPS, but it does change some of the percentages, and as we've done in each of the last two quarters, we'll point that out to you. That discussion of gross margin, SG&A basis points, and of course, the interest income and other line we'll talk about. In all, as we go through these numbers, we look at our Q3 results. Sales have improved, membership renewals continue strong, and new signups as well. As I'll discuss in the next 20 or so minutes, our underlying margin and expense percentage are continuing in the right direction.
Further, we've got a lot of new openings coming up planned for Q4 2011 and into fiscal 2012. In terms of sales for the 12-week quarter, reported sales were up 16%, and our 12-week reported comparable sales figure was up 12%. For the quarter, both the sales and the comp sales were positively impacted by both gasoline price inflation and by the strengthening foreign currencies relative to the U.S. dollar year over year. On a comp sales basis, the 10% U.S. sales increase in Q3, excluding gas inflation, would have been up 6. The reported 18% international comp figure, assuming flat year-over-year FX rates, would have been up 11. Local currencies foreign operations were up 11% on a comp basis.
Total company comps, again, we reported at 12, but excluding those two items, gas inflation and excluding FX changes, it would have been up 7% for the company overall in the quarter. Other topics of interest I'll review are opening activities and plans. We opened one new location in Q3. That's in Tucson, Arizona, actually our third Tucson location. We also had two temporarily closed locations occur in Q3 due to the Japan earthquake. One in Makuhari reopened last week on May 20, and the other in Tama Sakai, which was more heavily damaged, is scheduled to reopen in the first fiscal quarter of fiscal 2012 this fall. In Q4, we expect to open a total of 12 locations, including the Makuhari reopening and one relocation. At Q3 end, we operated 580 locations worldwide.
Assuming our Q4 openings go as planned, we'll end fiscal year 2011 with 592 locations worldwide, up 20 from the beginning of the fiscal year. Also, this morning, I'll talk about our expansion plans for 2012 a little bit, our online results, our membership, a little bit of discussion, of course, about margins and SG&A, which many of you have already pre-written about. Those are things that you guys want to know as well. An update on our stock buyback activities, and of course, we recently announced a dividend increase and a new stock repurchase authorization going forward for the next four years. On to the discussion of the results. Sales for the quarter, again, were $20.2 billion, up 16% from last year's $17.4 billion. Again, comps on a reported basis were up 12%.
The 12% third quarter comp, while not an exact month-to-month, but on our monthly reports of February, March, and April, we had an 8% in February, a 13% in March, and a 12% in April in terms of comp sales. The 8%, 13%, and 12%, excluding gas inflation and FX, would have been a 5%, 8%, and 7%. March and April are certainly higher than previous recent months and previous recent quarters by a couple or three percentage points. The 12% reported comp was positively impacted by a little over 1.5% due to year-over-year strengthening of foreign currencies. As I mentioned, our international comps, just looking at international, not total company, the FX impact was 7 percentage points. The reported 18% would have been an 11% on a local currency basis.
Gasoline had a big impact not only on sales, of course, but on how we, on the percentages that we calculate for margin and SG&A and the like, and I'll talk about that in a minute. For the quarter, our 12% reported comp results were a combination of an average transaction increase of just under 7% for the quarter and an average frequency increase of nearly 5%. The frequency trend during the past three months of February, March, and April were plus 4, plus 5, plus 4. These frequency figures, by the way, are on top of a little more than 3.5% frequency increase during the third quarter a year ago.
I think part of it is the continuing focus on our strengthened food and sandwiches and fresh foods, as well as Gasoline, not in terms of the inflation, but the fact that because of the high gas prices and it's very much top of mind, we're seeing a lot more gallonage comp increase as well, not just price increases, but gallonage comps. Our gallonage comps in Q3 were up 16%. That compares to the low to mid-single-digit typical numbers that we've seen in prior good times. In terms of sales comparisons by geographic region, the quarter, California, Midwest, Southeast, and Texas were the strongest. Internationally in local currencies, we continue to do quite well, up in the low double digits in local currency. Korea and Japan were the strongest, and UK showing some good life.
As you know, UK in local currency for the last couple of years has been positive, but just slightly positive. It was up 6% in local currency in the third quarter. Canada's comp sales figures in local currency continue strong. Their economy has been quite robust the last couple of years, and after an 8% local currency comp in all of fiscal year 2010, we've seen a 5.8% in the last three quarters in 2011. Canada has been a good economy for us. In terms of merchandise categories for the quarter, within food and sandwiches, every subcategory but tobacco was positive in Q3, the positive subcategories ranging from a plus 5 to a plus 16. Within the 2.5% hardlines comp, the strongest subcategories were sporting goods, HABA, health and beauty aids, lawn and garden, and tires, electronics being the laggard, as we talked about in the point.
Typically in electronics, you're seeing up units and depreciating average selling prices. Within the softlines comp, which is in the high single digits, houseware, small electrics, and jewelry were standouts. Within fresh foods, positive low double digits. All subfresh food categories were positive, each in the high single digit to low teens comp range. I mentioned that Japan was one of the stronger foreign local currency comp sales countries. We're constantly asked questions from you guys and others about what's going on there since the tragedy in early March. As you know, our Japan operations, we opened our first location in April of 1999. We opened our ninth location in July of 2009. On March 11, when the major earthquake hit, followed by, of course, the tsunami and the aftershocks and all the other issues going on, we had nine locations in operation.
Tragically, two members were killed when a parking ramp collapsed at our Tama Sacai warehouse. With the earthquake, two locations were ultimately closed for repair, one of which I mentioned was since reopened last week, Maka Hari, and the other one, Tama Sacai, which was the more heavily damaged one, was planned to reopen in November. In addition, four additional Japan locations, new locations, are planned to be open between now and November. Hopefully, God willing, by the end of November, we'll have 13 locations operating in Japan. Two of those, by the way, were delayed from the July-August timeframe given the earthquake and the issues with supply of certain construction items. Japan has certainly been a growing, profitable, significant per warehouse membership-based operation for us. The recent tragedy has struck Japan and its people.
Despite its tragedy, we've been able to continue the flow of product, I think in some cases as well, if not better than some retailers in the country, because of our ability to get in containers and distribute through that process. I'm proud to say that subsequent to the tragedy, as we've done in a couple of other things around the world, I'm sure many other companies do this as well, we use the benefit of our members through the cash register to make donations to the Japan relief effort. Over just a couple-week period, we, through our members, raised a little over $5 million that was passed on to the various in-country Red Cross or Red Crescent societies and designated for the Japan relief efforts. Lastly, we're asked about the issues that impact financial in the company or Costco. Very minor reserves taken for losses associated with the earthquake.
Those, of course, the reserves we've taken are net of anticipated insurance coverage, and they were not significant. Moving on to income statement line items. In Q3, our membership was $435 million, up 10% or up $40 million from $395 million a year ago. That represented a year-over-year percentage-wise an 11 basis point decline in those % of sales. Excluding FX, again, the weak dollar has made all the foreign countries' numbers bigger. Instead of being up 10% and $40 million, it was up 9% and $33 million on a local currency basis. Of course, the percentage would be the same, 11 basis points down. As you'll see, the 9% dollar increase is a result of what I'll show you in a minute, the continued strong renewals and strong new signups during the quarter.
At year end, I'm sorry, at Q3 end, we had 24.3 million Gold Star members, from 23.9 million at the previous quarter end. We had 6.3 million primary business members, rounding to the same number from a quarter ago. We had just under 3.9 million business add-ons, a total of 34.4 million households, and including spouse cards, 62.6 million, up from the previous quarter at 62.0 million. At third quarter end on May 8th, our paid executive member base was a little more than 11.3 million, an increase of about 350,000 or 3% from 12 weeks prior at Q2 end. On a weekly basis, we increased the executive member roles by 29,000 a week. We consider those quite good results in terms of continuing to convert people to the membership, which, needless to say, they tend to, on average, buy more and are more loyal.
Executive members represent roughly a third of our worldwide membership base and about two-thirds of our sales. In terms of membership renewal rates, at Q3 end, business renewal rate was 93.2%, up a couple of tenths from Q2 end. Gold Star was 88.0%, up about three-tenths of a percent from Q2 end at 87.7%. Total was 89.1%, up from 88.8% at Q2 end. In the last couple of quarters, these numbers historically had always been U.S. and Canada because the newer foreign countries have much lower rates to start with in the first few years. Worldwide, our number at Q3 end was 86.0%, up two-tenths from 85.8% at the Q2 end. Last point with regard to memberships, effective with our mailing to the March renewers, we increased our business add-on annual fee in the U.S. and Canada from $40 to $50.
Historically, a primary business member was $50, and they could have, I believe, up to six add-on members, typically employees, family members, whatever, separate memberships, but under the primary business membership. Historically, those were $10 less, or $40 compared to the normal $50. Starting with the March renewers, over the course from March to next February with renewal notices, those add-ons will be $50 instead of $40. No issue relating to the first couple of months of that in terms of any major issues with our members. There are about 2.0, up to 3.4, whatever number I gave you on the business add-ons, 3.9, I'm sorry, 3.9 million. 2.6 million add-ons are in the U.S. and Canada. So, roughly a little over $25 million in increased annual fees. Please note that this increase will flow into the income statement over about a 23-month period beginning in March of this year.
I'll give you a quick example. Just doing simple math, assuming the 2.6 million were roughly one-twelfth a month, it's a little over 200,000. If you assume there are 200,000 add-ons were March renewers, so in February they got the renewal notice, and assuming that they all paid their $10 increase in March, this incremental $2 million would flow into the fee income line, essentially one-twelfth a month for 12 months starting in March through next February. With an approximate 200,000 April renewers, same thing, that incremental $2 million would flow in over a 12-month period beginning in April through the following March and so on. This is due, of course, to our deferred revenue recognition accounting for membership fees.
A very, very nominal amount of the Q3 membership fees, essentially one-twelfth or so, or one or two-twelfths or so of the March renewers and one-twelfth of the Aprils, not a big deal so far. Going down the gross margin line, our reported gross margin last year in the quarter was at 10.88%. This year it was 10.50%, so on a reported basis, down 38 basis points. I'll ask you to do a little matrix with four columns. The column will be Q1 2011, Q2 2011, Q3 2011, and the last column will be Q3 2011 adjusted toward gas inflation, so without gas inflation. That column simply reduces the sales denominator not by any gallonage improvement, but by just taking last year's third quarter average gasoline price per gallon that we sold at that, and assuming that was the price per gallon we sold at that this fiscal year.
As you can see, I'll go through the line item. First would be merchandising core, second ancillary businesses, third 2% reward, fourth LIFO. Fifth line item is total. I'll add two additional line items, the impact that Mexico had on our margin, and as you'll see in a minute on our SG&A, and then the last line item would be without Mexico. Going across, our merchandising core in Q1 2011, year over year, was up 19 basis points. In Q2 2011, up 24. In Q3 2011, down 14. In Q3 2011 adjusted for gas inflation, excluding gas inflation, up 17. Ancillary minus 9, minus 5, minus 3 in Q3 2011, and plus 2 without gas inflation. 2% reward minus 1, minus 1, plus 3, and 0. LIFO 0, minus 3, minus 24, and minus 25.
You might ask why there's another basis point in the last column versus the next to last column. It's simply because the denominator of sales has been reduced because we took out gas inflation. All told, the reported gross margin year over year in Q1 2011 versus Q1 2010 was at 9 basis points. In Q2 2011, up 15 year over year. In Q3 2011 on a reported basis, down 38, and again adjusted down 6. Mexico, again, as we consolidate these numbers, and by definition, since these are pluses here, the gross margins are a little bit higher, plus 3 basis points, plus 6, plus 3, and plus 3. Without Mexico, the plus 9 would have been a plus 6, therefore. The plus 15 in Q2 reported would have been a plus 9, excluding Mexico's benefit.
The minus 38 would be a minus 41, and the minus 6 would have been a minus 9. Keep in mind, without inflation, the minus 6 and minus 9, the reported minus 6 still includes the hit of 25 basis points related to the LIFO charge. As you can see, our overall reported gross margin was lower by 38. The big impact was the two big impacts were the gas price inflation and the $49 million LIFO charge. Let me go through this. Within the 38 basis point reported figure, our core merchandising gross margin was minus 14. In ancillary businesses, as I mentioned, it was minus 3. Our gas business, and its currently higher level of price inflation, it really impacts these margin comparisons.
Sales penetration of our higher margin core business was down over 2 percentage points in Q3, from a little under 81% a year ago to a little over 78%. Whereas sales penetration of our ancillary businesses was up 2.6 percentage points. Within that 2.6, in fact, gasoline was up 3 percentage points. While standalone gross margins of our core merchandise business, and I talked about core including sandwiches, hard lines, soft lines, and fresh foods, they were higher year over year in Q3 by 19 basis points. The core's aggregate lower sales penetration, however, caused the year over year increases to show this minus 14 that you see in the chart. The underlying businesses, the margins are doing fine, and we're up 19 basis points year over year in the quarter.
That's food and sandwiches margins on food and sandwiches sales, hard lines margins on hard line sales, soft line and pet foods as well. The merchandise category gross margin increases year over year in Q3 were strongest in hard lines, followed by food and sandwiches. Fresh foods margins were up slightly in Q3 compared to these being down slightly in Q2 year over year. All in all, I think it continued to go good, solidly in our core gross margin. The impact upon executive membership showed a benefit of 3 basis points that would reflect a slightly declining sales penetration of rewardable sales. Again, it's gas. With the gas price inflation, gas, tobacco, and alcohol are non-rewardable items. Given the gasoline sales penetration is up dramatically in the quarter year over year, that's caused that impact.
In terms of LIFO, as I mentioned again a quarter ago in early March in an earnings conference call, inflation is clearly back, and we did expect and now did realize more in Q3. We saw quite a bit of inflationary pricing pressures, again, beginning in late Q2 and into Q3, and we're seeing some more in Q4 so far. One possible caveat to the LIFO charge in Q4, keep in mind the $49 million Q3 charge included about $11 million from gasoline price inflation alone. Since Q3 end, gasoline prices have come down the last couple of weeks, but that certainly does not, it will certainly, we have no way of knowing what tomorrow's inflation or deflation will be.
Also, as I've mentioned before, and as I'm sure you guys all know with regard to LIFO, you guys all know, it's a book charge to our cost of sales and, in fact, results in positive cash flow savings through the reduced income taxes as the company is on a tax LIFO basis. Now after taking all this margin information into account, I think the easiest way to summarize Q3 2011 over Q3 2010 gross margin is by looking at the rightmost column of the matrix we just drew. Excluding gas price inflation, year over year in Q3, our core merchandising gross margin, ex-LIFO, was up 17 basis points. Those trends so far have been, in our view, pretty good.
Moving to the reported SG&A, our SG&A percentage year over year was lower or better by 43 basis points, coming in at 9.86% of sales compared to 10.29% a year ago. Again, the same impact, you've got a much bigger than average denominator in terms of sales that's impacted by gas price inflation more than anything. In terms of, let me give you your chart here, again, four columns, the same four columns, Q1 2011, Q2 2011, Q3 2011, and Q3 2011 without gas inflation. The line items are core operations, central, stock compensation, quarterly adjustments, total, and then two lines below the total, the impact of Mexico, and then the total without that impact. Going across, plus numbers here are good, meaning lower year over year SG&A basis points.
In terms of core operations, in Q1 2011 year over year, it was plus 17 basis points, in Q2 plus 13, in Q3 plus 46. Excluding gas inflation, it was plus 20. Still better by 20, but I think that's a fairer way to look at it than the plus 46. Central, plus 1, minus 2, plus 3, and plus 1. Stock compensation, plus 1, plus 1, plus 2, plus 1. Quarterly adjustments, 0, plus 12, minus 8, and minus 8. That minus 8 is the $14 million reversal of a Canadian tax liability a year ago with no compensating benefit to this year's SG&A. Total reported year over year SG&A comparison, plus 19 or lower by 19 in Q1 year over year, plus 24 in Q2, plus 43 in Q3, and adjusted for gasoline inflation, plus 13. Mexico had, like with margin, lower SG&A percentages than our company overall.
Now that we're consolidating, that helps those reported numbers I just mentioned. The Mexico impact was plus 7, plus 11, plus 6, and plus 7. Without Mexico impact, plus 12, plus 13, plus 37, and plus 6. A little editorial on these numbers. In terms of the Q3 2011 column, with gas inflation, it was a reported 43 basis point improvement. I think a more meaningful way to look at this is to look at Q3 SG&A in the last column without gas inflation. When looking at this column, you can see the following. Core operations was lower or better by 20 basis points year over year. I might add that both payroll and healthcare costs as a percent of sales contributed to this improvement.
11 basis points of the 20 basis points was an improved warehouse payroll percentage, and 4 basis points was an improved total benefits percentage, which I think is the first time that we've had an underlying improvement there. Still growing at a decent amount, but so are top line sales, even excluding gas inflation. Our central expense was lower year over year, better by a basis point, as was stock compensation. Not a whole lot to explain there. Quarterly adjustment I mentioned to you. Overall, again, we think a pretty good performance in SG&A trend-wise. We continue to work hard, and I feel we're seeing some of the fruits of focusing even more so on SG&A. Sales certainly help as well, of course. Next on the income statement is pre-opening expense. Pre-opening expense last year was $3 million. This year was $8 million, two basis points higher.
We only had one opening in each of the quarters. The big difference, there really is no surprises. The big difference, the big dollar delta, if you will, year over year was about $4 million in international pre-opening costs in this year's Q3. Those are for openings scheduled in either Q4 or Q1. I mentioned we had a couple of delays of openings that were planned in July, August in Japan that were moved into the fall, as well as two additional ones that were planned for the fall. Those four alone, we're seeing the pre-opening costs, particularly those first two that were delayed in that quarter. I mentioned we've got a number of locations, a much larger number of locations planned for Q4 and into Q1 of 2012, and I'll point that out in a moment.
In terms of revision for asset impairment and closing costs, last year we had a charge of totally $3 million a quarter compared to a charge of $1 million this year. Not a big deal either way. All total operating income in Q3 was up $66 million or 13% from $490 million last year in the quarter to $556 million this year. Recall, and please remember that the $66 million operating income increase was impacted by the $14 million expense reversal last year that benefited last year's Q3 earnings and by the $49 million LIFO charge this year that reduced this year's Q3 operating earnings. Below the operating income line, reported interest expense was essentially the same year over year, coming in at $27 million. These amounts mainly reflect the interest expense on our $2 billion debt offering that we did in February of 2007.
$900 million of that debt, by the way, was five-year debt and will become due in March of 2012. We'll basically cut a check for it and see the earnings improvement from reducing interest expense to a greater level than causing us a little reduced interest income from use of that cash. Interest income and other was lower year over year by $5 million. $5 million this year of a number on the line item versus $10 million a year ago, so lower by $5 million. Actual interest income was higher this year in Q3 by about $6 million, a reflection of both higher cash balances and a little higher interest rate as we had actually locked in some still safe, but higher than darn near zero interest income rates in preparation for paying that March debt payment.
Offsetting this positive variance of $6 million in the actual interest income was an $11 million variance related primarily to the consolidation of Mexico's investment income in our financial statements. In the current year, as I mentioned, 100% of Mexico's results are fully consolidated into each line item of our income statement. Previously, like last year, the joint venture partners' 50% share was just added to interest income and others. Last year you had the benefit of half the earnings of Costco Mexico's quarterly earnings. This year you have no benefit there and it's spread out everywhere else. Overall, pre-tax income was up 13% on a reported basis from $474 million last year to $534 million. Again, the two impacts that I won't repeat, but they were in the press release. You can look at those as well.
Onto our income tax rate, our company tax rate this quarter came in at 36.1% versus 34.5% last year, so about 1.6 percentage points higher year over year in the quarter. Last year's tax rate, as I mentioned, had a couple of positive discrete items that helped lower the rate a bit. This year, there are a couple of negative discrete items that hit it or increased our effective tax rate a bit. No big deal either way. It happens every quarter. Again, a higher tax rate this year than compared to last. Quick rundown of other topics. The balance sheet, along with some other pertinent information, will be in the supplement that is posted, will be posted shortly after the call. You know, we have, as you know, quite a strong balance sheet.
Some of you always ask for, since we don't include the cash flow statement until the 10Q, what depreciation and amortization was for Q3. In Q3, it was $196 million, and year to date pre-Q3 depreciation and amortization was $582 million. Another metric that many of us and you look at are accounts payable as a percent of inventories, how much of our trade payables are being funded by, how much of our inventories are being funded by trade payables. On a reported basis, the number is over 100%. In Q3, it was 106% compared to 108% a year ago. In that payable, though, it's not just merchandise payables. It also includes construction payables. Again, we've got 112 or so openings coming in the next quarter. You might expect quite a bit of payable in there.
If you take out that and just look at merchandise payables and merchandise inventories, the number a year ago was 90% of our inventories would be funded with trade payables, up 1% to 91% in Q3 of that year. Average inventory per warehouse last year at Q3 end, it was $10,366,000 a warehouse. This year at Q3 end, it was $11 million, right at $11 million. Up about $640,000 or 6%. That number is impacted greatly by the FX. If you had FX and assumed FX with no impact from a year ago, the same currency from a year ago, that $642,000 per warehouse higher figure would be $388,000 or about 3.8% higher year over year. The increases, of course, spread through many merchandise categories. There was no one category, and it ranged from, seemed to, like $20,000 to $60,000 per subcategory. Some of that's inflation.
Some of that's a little higher inventory, but really no inventory concerns on our part. In terms of CapEx, in Q3, we spent $139 million. Last year, in Q3 this year, we spent $278 million. Year to date, $818 million. Again, we've got a bunch of stuff coming up right as we speak. I'd estimate that our CapEx for the year will be somewhere between $1.3 and $1.4 billion range. Cost-to-order lines for Q3, sales and profits were up over last year. Sales were up 11%, and e-commerce profits were up 31% for the quarter. While our average ticket has come down, recognizing we're known for higher average tickets, higher average ticket merchandise on there, our site traffic continues to grow and was actually up 17% in the third quarter year over year. Next on discussion, expansion. This year, it looks like we'll open a net of 20.
We'll have opened 23. That includes three relocations. I believe it includes two relocations and then the reopening of the Maka Hari, which we closed and then reopened prior to this fiscal year. A net of 20 net new units. Adding 20 units on the original base at the beginning of the year of 572, that's about 3.5% unit growth. Closer probably to 4% square footage growth, given that the new units tend to be a little bigger, and we constantly are doing remodels and relocations of existing units as well. Our square footage total at Q3 end was 82,916,000. Some of you asked for that number. In terms of expansion plan for 2012, you know, we're still, I need to say, four or so months out from the beginning of the fiscal year. There are currently 30 active projects on the current construction list.
My guess is that figure for 2012 will ultimately be around 25 plus, including about a little under half, about 12 or so outside of North America. Continue to ramp up in other countries where we have been pretty successful overseas. In terms of stock repurchases, since June of 2005 and through third quarter end, we've repurchased 104 million shares at an average price of $55.02 or $5.7 billion. As you know, I guess a month ago, we had a press release announcing both an increase in our quarterly dividend rate, which we typically have done every spring, as well we had a small amount of stock repurchase authorization that was going to expire in July. Basically, that additional authorization was canceled and a new $4 billion board repurchase authorization was put in place with a four-year life to it.
In the first quarter of this year, we bought back $150 million in stock, in the second quarter $94 million, and in the third quarter $102 million. We would expect to continue to do so, and we'll let you know each quarter. With that, I did mention that the dividend increase, we increased it on an annual basis from $0.82 a share annually or $0.20 a quarter. We increased it 17% effective with the current quarterly dividend or $0.96 to $0.96 or $0.24 per share per quarter. With that, I'm going to turn it back over to Demetris and happy to open it up for questions. Thank you.
Speaker 7
At this time, I would like to remind everyone, in order to ask a question, please press 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 Adrienne Shapira with Goldman Sachs.
Speaker 4
Thank you. Richard, just if you could talk a little bit about the inflation levels, what it was in the quarter, how you're seeing that, what you expect going forward, and how we should be thinking about future LIFO charges. It seems like this quarter we had a pretty big step up, and I'm wondering how we should be thinking about it going forward.
Speaker 2
Gordon?
Speaker 3
Okay, first of all, keep in mind, LIFO is a U.S. accounting phenomenon, and we've got a little over $4 billion of U.S. inventory. $49 million, rough number, would be about 1.2%, I'm rounding here, inflation from the beginning to the end of the fiscal quarter. Mind you also that this is an annual event. In theory, in reality, the calculation will be done, what was your inventory at cost at the beginning of the year by item, and then what is it at the end of the fiscal year. If you're early in the year, you're supposed to guess as best you can what you think it's going to be. We've always historically chosen to take the entire amount that occurred in that quarter. A lot of these big increases came in the last, you know, 12 to 16 weeks.
Just examples, and I'm not going to give brand names, but these are all branded items. Everything from dry dog food of 3.5% to all your detergents of 10+% to various waters, 10% or so, to all your plastic dinnerware, your plates and your plastic cups and everything, 8% to 9%. Plastic trash bags, 4% on top of other ones. Again, you can't just say everything's up 4% to 10% because sometimes the private label is a little less because of our buying power. The reality is, these are hitting, it doesn't rain just on us. My guess is it's impacting us a little sooner because we turn our inventory faster, so we're buying more recent, if you will. Mind you, we are able to pass on these increases. Ultimately, we all have to.
We're going to try to keep, if a manufacturer typically will say, okay, next Monday there's a price increase or a week from Monday, we'll allow you to buy four or six or so many weeks at the old price based on your prior six months of average weekly purchases. We're always going to take full advantage of that, which I assume most retailers, be it supermarkets or other big discount stores, are going to take advantage of. We feel that we always know we take full advantage of it, then we'll hold the price for a few of those weeks and benefit on the tail end of it and cover our costs. We're going to hold the prices as long as we can. I've given you in the past quarters a couple of examples where we will hold it even further and eat into our margin.
Those are the exception, not the norm. Ultimately, when all your merchandise is going up, you're going to have to, A, be competitive, but I think you've seen in my readings of some of your guys' reports out there on the supermarkets and the discount stores that, ultimately, it has to be passed on. There's still a lot of vendors announcing increases to retailers. I think there was an article in the Journal just a couple of weeks ago that cited four or five well-known consumer product brand names where their comments, or maybe it was an analyst report, but their comments in the last couple of months of what they're announcing. Again, they're announcing. They're not asking all the time.
We, of course, have to be ever diligent, and Jim and Craig and Doug are constantly reminding the buyers that don't just take it for face value, push and push and push, and be willing to switch sometimes. Overall, inflation's hitting everybody. It's going to continue. At least it's continuing so far this fiscal quarter. I can't tell you what it's going to be starting next Thursday other than there are some pending price announcements, price increase announcements from, including some of the ones I just mentioned that are effective in early and mid-June all the way out into then. Those are pushing. I think yesterday we saw publicly there was one of the coffee suppliers announced 11% increases in wholesale coffee prices to their retail customers, their retail vendors, their retail retailers. That was the fourth increase in coffee that they've passed on in the last 12 months.
It's here. When will it subside? Hopefully soon. We're going to, we probably get hit first, I think back in Q4 of 2008, when we had a big LIFO charge, when the floodgates of inflation had opened before they were shuttered quickly in late 2008 with the economy and the stock market. I think then too, we were one of the first ones to have a big LIFO charge. I don't think you're going to be surprised. I'm not going to be surprised by seeing what other retailers on LIFO are going to do over the next several months when they announce various numbers. It is what it is. We're fighting, as you might expect, to keep them lower, keep them delayed, and get as much at the old price we can before it goes up. We'll go from there.
Oh, one other, I think I mentioned, maybe I didn't mention it, one small caveat in terms of LIFO outlook for the quarter. Again, we can't predict what exactly it was going to be. In the first couple of weeks, gas prices have come down. Whereas gas alone in the $49 million charge was a little over $11 million, in the last couple of weeks, it would probably be $1 million, $1.5 million reduced. Not promising. You know, even zero would be nice, frankly, out of whatever X is in Q4. We'll see.
Speaker 4
Okay, Richard, just following on that, in light of the fact that we might see continued increases, any sense the $49 million in LIFO charge, does it anticipate continued price increases?
Speaker 3
The $49 million charge is simply the calculation of our LIFO inventory as of the beginning of Q3 and the end of Q3. Period, end of story. I'm sorry, fiscal year end. It is the incremental amount. We had an amount at Q2 end, which was only the $6 million, which had it through that from the beginning of the year to that. It is really the delta since Q2 end for the most part. Again, as I understand it, and now our Controller, Dave Peterson, is here, will shake his head yes or no if I'm wrong and shake it no. My understanding is that let's say we were just reporting our first fiscal quarter and we had this calculation and indicated it's $49 million.
If we believed and if we talked to our buyers and felt that, you know what, pretty much the inflation party is over and from the vendor's perspective and we're not seeing, we've seen a lot, the rate of increase has slowed down, we could correctly choose to take less of it because if our anticipation was, hey, we know through the first 12 weeks of our fiscal year it was $49 million, and our best guess it's going to be, I'm making this number up, $80 million for the whole year, a totally made-up number, then you might only choose to take a quarter of the $80 million because you think it's going to be $80 million. Our view is that it is what it is. We're also in the third quarter, not the first quarter, and we're going to be, I think, take a conservative approach to it.
I can tell you, again, there are price increases that have not hit yet our balance sheet, including some ones in later May and in June that I mentioned just a few minutes ago.
Speaker 4
Okay, that's helpful. If we could talk a little bit about the merchandise margin. You gave us a lot of detail. I'm just wondering, since you're lapping by the easiest compare from a year ago, the down 10 basis points on your merchandise margin, how should we be thinking about that compared to ex-cash? I mean, the plus 17, given the fact that Q2 last year was up against a tougher compare and then it decelerated to down 10, given that you had an easier compare, I'm just wondering how we should put the plus 17 in context up against that easy compare and what maybe an apples-to-apples comparison is year over year ex-cash from a year ago.
Speaker 3
You know, Adrienne, it's hard to say. Who the heck knows what's gas? I read a research report yesterday from someone who follows not only us, but Kroger and Safeway, who also have a lot of gas stations. Their view was, I think correctly so, that with a declining gas price, it's more profitable. You guys know that from what we've said in the past. That'll help a little. It'll also help because there'll be lower sales penetration from gas inflation. I think the trend over, I don't have in front of me last year's exact numbers, but the trend in the last couple of quarters has been that the core underlying core margins have been up. I can't predict what tomorrow is going to bring.
Speaker 4
Okay, thank you.
Speaker 7
Your next question comes from one of our colleagues, McGarnihan with Bernstein.
Speaker 1
Good morning, thank you. First question, just on the increase in the business add-on membership fee. Richard, can you talk about what the rationale for that was and how that's maybe influencing your thinking about an overall membership fee increase?
Speaker 3
I know there have been some off-and-on discussions over time. I think originally the focus on the add-on theme being $10 lower was simply for small businesses who've got two or three family owners or a handful of employees. It could be a benefit to them, and we wanted to incent, in some cases, perhaps that owner of that business to buy memberships for their employees. Over time, two things have happened, particularly in the last few years. If you wanted to be an executive member and get the executive member benefits, you would roll out from under that primary business member and become your own member. You'd go effectively from $40 to $100. That has happened over time. That trend has continued. I think the view at the end of the day was that we've got a loyal membership base.
We think that we've continued to provide even greater value every time, and I know this sounds a little noble, but we sincerely believe that when we have increased fees in the past, and this time as well, we've created significantly more value than that increase. At the end of the day, as you know, we keep things simple. It's simpler to have a $50 instead of a $50 and a $40. It evolved into the $50. I don't think there was a lot of science that went into it other than that ongoing discussion, the ongoing trend towards some of those people moving out from underneath anyway to become their own executive member. In terms of the rationale going forward, I think what I said in last fiscal quarter, you guys will know after we send out the first month of renewal notices that has an increase in it.
We have not made that decision. We have shown over 25 years that we're not afraid to. I've communicated to you time and again that our renewal rates continue to be quite strong. We are not completely terribly concerned about what our members, what our competitors' fee levels are. We're also cognizant of what the economy is right now, and we're not going to be completely arrogant out there. At some point, we'll see, and stay tuned.
Speaker 1
Okay, that's helpful. A second question, kind of a little bit different, given that we get the segment data on a lagged basis in the queue. If you look at the last couple of quarters, the last three or four quarters, there's been a fairly dramatic improvement in the profitability of other international, you know, up 100, 90, 200. Pretty nice improvement in Canada and really no improvement in the U.S. Can you comment on what's driving the significant improvement in the other international and Canada, which are already dramatically more profitable than the U.S.?
Speaker 3
Sure. You know, every country has a little bit of a different story. On average, forgetting about some overall metrics, looking at the overall metrics of your basic core items, in Canada, we are the only club operator. In the U.S., we have dramatic competition in many of our markets. That's going to be some amount of basis points, more than 50 and less than 200, depending on where and how close. It can be significant. You have a dramatic, the other line item components that are different, that can be significantly different than a % of sales is payroll. Even though we're always going to pay relatively higher in a given country, the average wage in the U.S. is approaching $20. In another country, it might be $9 or $12 or $15 or $8. It really is in those kind of ranges. Conversely, healthcare is the other big one.
Healthcare in the U.S., I always, for the last several years, as I've talked about healthcare, I've talked about U.S. healthcare, which is dramatically higher than any other country that we're in and grows at a dramatically higher rate than anyone we're in. The other thing, of course, is comps. In Canada, as I mentioned, underlying local currency comps in the last two years now, two and a half years, throughout this horrible economy in the U.S., it has been pretty robust up there. They didn't have the craziness of the market breakdown and meltdown, and certainly they've enjoyed a pretty robust economy. Mid to high single-digit local currency comps have helped up there as well. In Asia and other countries, I think part of it is Asia is a bigger and bigger component of other international.
As I mentioned also in this call, our comps in local currency in the UK actually showed some life this past quarter, up 6%. It had been quite a bit closer to flat the last couple of years. That was a bigger piece of other international as we've gone from zero to 23 units in the three Asian countries, which on average are higher margin, more profitable, higher sales volume, more profitable businesses for us. Now, why has the U.S. been coming down? You look at our comps over the last few years, while notwithstanding they've been quite a bit better of late and somewhat better over the last year versus the prior year or two, we've enjoyed for a number of years high volume, decent comp U.S. numbers, and they got hit for a while.
They're coming back a little, but certainly we recognize too that our growth and profitability over the next few years, while we'll continue to come from some of this improvement and critical mass in countries where we are expanding now, the bigger piece of this ship is the 73% or 74% or whatever % it is of our company that's U.S. We're working on it, and as Jim and Craig would tell you, top line sales growth is the best thing you can do for it.
Speaker 1
Okay, great. Thank you.
Speaker 7
Your next question comes from a line of Dan Binder with Baird.
Speaker 0
Hi, it's Dan Binder. Richard, just wanted to clarify a point on this LIFO charge. If I understood you correctly, you're saying that you're basing your LIFO charge in the quarter on where you think your inventory is going to be at the end of the year and the inflation that you're seeing to date. Is it fair to say that you have not factored in price increases that you know are coming next quarter? If that's the case, based on what you know today, I mean, very round numbers, what should we be thinking about for a LIFO charge in Q4?
Speaker 3
On the latter part of that question, we don't know. Keep in mind, we booked the entire calculation in Q3 because we're nearing the end of the year. You know, we could have probably saved a little if we, I doubt we would have saved anything because knowing what we know for some pending price increases in the first, and mind you, you're not getting price increases on 4,000 items, but all you need is 10 or 15 of these big items, and you know you're going to have some. We'll have to wait and see. I really can't tell you because we don't know.
Speaker 0
Okay, I mean, it's fair to say that the LIFO charge we saw this quarter is incorporating, is it incorporating all price changes that you're aware of or just the ones that have happened?
Speaker 3
Just the ones that have happened. Yeah, we're aware of price changes that will be a hit to an increase in LIFO in Q4. I'm looking at just that side of the equation. I'm looking at other things, be them few, that have come down a little. What else is going to happen? If you had a big increase in some key items throughout Q3, even if there's been a few increases over the course of a year, you may be at the end of that. You're not going to have any increase in Q4. Gas, again, was over 20% of Q3. I only have two weeks of history, and I can't predict from that, but so far, gas is less than zero.
Speaker 0
Okay. Just two other quick questions. In terms of the buyback, what do you think is a reasonable number or goal to shoot for on an annual basis, given your balance sheet and cash flow? Is there any chance you would refinance that debt that's coming up in March of 2024?
Speaker 3
I don't anticipate refinancing the debt. I expect to write a check for $900 million in interest and, you know, sending annual interest expense payment in March of 2012 and save 5+% interest with darn near, you know, a little over 0% interest income reduced. That's a no-brainer. We've got plenty of cash. Some of you would like to see us ramp it up more. We feel we've done pretty well by kind of on a regular basis, as long as we feel good about our future, which we did have and we continue to, we'll be a regular buyer. As you guys know, the stock has moved very rapidly. We historically have, in the last few years, bought through blackouts with using 10B5-1s.
Sometimes, given the stock price speed at which it moves, it moves past that little matrix that we have in place, and we might not buy for a week or two. At the end of the day, we're going to continue to buy. I can't predict what it is. I can tell you that the board authorized $4 billion with a four-year life. That's as good a guess as anything in terms of simple math.
Speaker 0
Okay, thanks.
Speaker 7
Your next question comes from a line of Robbie Ohmes with Bank of America.
Speaker 5
Oh, thanks. Hey, Richard. Just a few quick follow-ups. One was just on the, you know, in the areas where you have seen some price increases. I think one of your regional competitors had mentioned things like, you know, acceleration of private label and trade down to, you know, smaller pack sizes. Can you just comment on any sort of behavioral changes you've seen in your customer related to that, if any? The other question was just the March-April acceleration. Is it just increased traffic, you know, from your gas stations supporting that, or is there something else going on that's causing the acceleration? Thanks.
Speaker 3
Traffic is certainly a big part of it. The average ticket, net of inflation, net of everything else, is flat up slightly. I think it's overall improved a little bit. The net number's improved, but we try to give you as much information as we have ourselves on that. It's continuing. So far so good. I hope the last two months portend what the next few is, but we won't know until we get there. We continue to see private label and increased sales penetration, partly because we keep adding items. Starting last fall, we began, as an example, expanding private label into some canned goods, fruits, and vegetables, where the quality, the amount of water in the can is lower. The quality is a little better in our view. It's a higher end at a great price. That helps that penetration.
If you go back to late calendar 2008 when the stock market went to hell and everybody was feeling a lot poorer, during those next six months in 2009, we saw, I think we saw like a 300 basis point increase in private label sales penetration. That was a real big change. We're not seeing that now. We're seeing normal progression of it. In terms of the trade down thing, you're really not going to see that here because we don't do it. The only area where you are going to see some average price declines is probably in Pharmacy, where there's a, we've all read about it, there's some very well-known branded items that are going to become generic this coming year.
In terms of regular merchandise out there, even at the, while we tested it in fairness, we tested a couple of patio sets in the early calendar 2009 with, instead of a $1,299 price point, a $999, but we still had the $1,299 in there. Guess what? The $999 sold better. It didn't then, we didn't rush to do everything at $899 and $999 to the opposite. By spring of 2010, we got out of those price points and tried to trade the customer up because if you're trading the customer down, it's darn tough to get them back. We have not reduced pack sizes. The only time we're going to reduce a pack size, I can't say we never. The examples that come to mind in the last few months are on what they call limited quantity commodity resource, limited resource commodities like pine nuts.
Some obscure item where, and these are not exact numbers, let's say we were selling a four-pound pack and nobody but us sells a four-pound pack for $19.99. Now it's a two and a half or three-pound pack for $16.99 because the price per pound has doubled or whatever. Whatever that X is, there have been some examples like that. For the most part, we are not, you know, reducing the ounces in the can of coffee or the number of M&Ms in the M&M bag. We conversely are pushing the envelope the other way. I think our customers are the higher-end customers so that we're not as impacted perhaps than some of the lower medium-end customer retailers, perhaps. At the end of the day, we're not seeing the trade down thing.
Speaker 5
Got it. That's very helpful. Thanks, Richard.
Speaker 7
Your next question comes from a line of Chuck Grom with North Coast Research.
Speaker 1
Good morning, Richard. When you're looking at some of these new members' signups, especially in the U.S. where you have the gas, how are they reacting to the gasoline? Can you look at the sales data and see how the availability of this kind of gas is attracting members?
Speaker 3
Chuck, if you looked at that 16% comp in gallonage in Q3, that's huge. In good economies, we've seen, call it mid-single-digit numbers when I assume the overall U.S. economy gallonage comps were slightly lower than that, but still positive. I don't know the source, but I remember reading recently in this economy, whatever total U.S. gallonage comps for the economy was X, it's now X minus a couple %, maybe 2% instead of 4%, whatever X was. We went from that mid-single up to the mid-teens. Gas is top of mind. It's on the news many nights in many cities. That frequency, I haven't seen any numbers internally lately like how many of those members are doing an incremental shop, but we know that our traffic is up.
When we talk about traffic frequency, by the way, we talk about front-end registers frequency, not Pharmacy or Optical or gas station frequency. Clearly, part of our increased frequency is people coming to get gas and some portion of those saying, "Hey, I'm going to go in and shop a little bit." Some of those shops are incremental, not just replacing one from two days later. That would have happened anyway.
Speaker 1
Gotcha. Looking at how the consumers behave overall, would you be able to give us some idea of sales comps growth between consumables and general merchandise?
Speaker 3
If you look at the subcategories, all the basic food and sandwich categories are, other than tobacco, pretty consistent and up in those mid-single or mid-to-high single digit. Again, a little of that, you know, if you look at LIFO is not a perfect extract, but if you look at the $49 million on $4 billion in sale, a little over $4 billion, that's a little over 1% inflation in our inventory. In that 12 weeks, we saw inflation, and a lot of that was in those consumer products. You look at comps in what I've called the middle price ticket discretionary non-food items like small electrics and domestics and surprisingly jewelry, which are quite strong in the teens and 20s. For months now, I mean, you know, they vary, but on average, they've been much stronger. Who the heck knows?
Other than that, people are buying, and maybe they're not buying as big of a ticket, but they're buying.
Speaker 1
All right. Thank you very much.
Speaker 6
Chuck Grom from Deborah Weinswig with Citi?
Speaker 3
I'm sorry, Deborah, you were in and out.
Speaker 6
What was your biggest surprise on the gross margin side in the quarter?
Speaker 3
I mean, again, it's hard to get surprised when we see weekly stuff here. I mean, what was your biggest surprise, LIFO? I feel good about the fact that despite my confidence that we are ever more competitive and we're always leading the pack and being the toughest out there, all you got to do is look at our gross margins compared to anybody else, that we're able to still improve underlying margins while remaining very competitive. I think Jim, he hasn't been on a lot of calls in the last few years, like these calls, but he's always, when he's here, he'll talk to you. He's always, when asked that kind of question, basically saying, "Guys, margins aren't our problem. We're going to still be very competitive, but the good news is we still know, we think we're smart enough how to make some margins." It's still driving traffic.
When they're ready to buy, they're in our location, they're in. That's good. The loyalty is great. I think there really haven't been, honestly, a lot of, I can't think of any real surprises on margin.
Speaker 6
I think last quarter we discussed the fresh food margin. Can you just dive into some details there this quarter?
Speaker 3
I think the thing I mentioned on Q2, I gave, again, some examples which spooked everybody a little bit, that, you know, as commodity prices, underlying raw material prices were rising, there are some key items that we chose to see our realized gross margin go from the low to mid-teens down to the low single digits in some examples, some extreme examples. It would be like pizza. We're not going to change the price of pizza every day, even though cheese prices skyrocketed. We're not going to change the $15 or so pack of muffins that restaurants and commissaries and daycare centers and everybody else buys from, I'm making the number up, from $5.99. What happens is the margin, I don't know if it's a word, but devolves, declines over a four or six-month period.
Then, you know, finally, they're allowed to take the price point from, making it up, from $5.99 to $6.49. We were right back to the high teens. It's not a permanent reduction, but it's kind of stair-stepped because we want to be fiercely competitive. Those are more of the exceptions rather than the rule. In Q2, when I was sharing why I believe bakery margins were down year over year in a quarter, it was because we were holding the price, many of which we've since taken up. Again, trying to, I think I scared everybody saying this is the old, we're just going to keep them down and damn the torpedoes. That was not the case. We're going to be competitive. Ultimately, you got to take those price increases into account.
Speaker 6
Okay. We appreciate the call on the color around SG&A. Historically, we don't necessarily have a profile of hot gas, but you impacted our model pretty far. It looks like one of the best performances historically. How sustainable should we think about some of the improvements that you called out?
Speaker 3
I think in terms of our focus on driving the cost down, which I probably reiterated more in the last three or four quarters than before, I used to always say there's not a lot of silver bullets. We're pretty efficient. The fact of the matter is, you know, and let's face it, you know, Craig, who's our President, his background is 40 years in operations or maybe 35 plus in operations and five or so in merchandising. Certainly, he would say himself, he's an operator first. He is completely focused on that, and so are the operators, the EVPs, Senior VPs, and all the way down. I think there's some sustainability. Top line sales are going to do more for it than anything else.
Again, I feel, I can't tell you what the consumer is going to feel tomorrow, but I feel confident that our merchants are at the top of their game. We got a lot of good stuff going on.
Speaker 6
Okay. Last question, can you just talk about how your new clubs are performing inside the U.S. versus internationally?
Speaker 3
I'm sorry, you were in and out again. What was that?
Speaker 6
Sorry. Can you talk about how your new clubs are performing inside the U.S. versus internationally?
Speaker 3
Really, as expected. I mean, you know, you're always going to have a few that are a little better or a little worse. Overall, existing U.S. markets are no-brainers. There aren't a lot of new U.S. markets. They tend to be no-brainers. They start off slower. Probably the thing that has been on the upside, surprisingly successful, is Asia and Australia. We only have one in Australia, but it's our best opening ever, sales-wise. We have, and again, some of these numbers are helped also by the weak dollar because I'm stressing the numbers of dollars. I think we have one unit this fiscal year that is teetering on having a four in front of it, $400 million or very high threes. Certainly, that's fun.
Beyond that, I don't think, again, it's not like 2002 or 2001 and 2002 or 2002 and 2003 when we opened in two years, 61 units, 45 of which were in the Midwest or quoted new markets or Midwest and Texas, where we knew that it was going to be slow growing. Those are all doing pretty well. When we opened our 16th, 17th, and 18th or 15th, 16th, and 17th Chicago units this past fiscal year in a one-week period, they all started off pretty well.
Speaker 6
Great. Thanks so much. Best of luck, Richard.
Speaker 3
Thank you.
Speaker 6
The next question comes from a line of Laura Champine with Baird.
Speaker 7
Hi guys. Richard, the growth that you talked about in Asia is a little faster than what we expected, and particularly in Japan. You just mentioned that your new store productivity is strong there, but any other reasons you want to call out for Costco stepping up its growth in Asia at this time?
Speaker 3
We got a lot of money. We feel the pressure not just from you guys, but from ourselves, that we want to ramp up the expansion, recognizing we're also our own toughest cost controller. When a unit comes in and it's, oh, we'll just spend an extra $3 million or $5 million. You know, Jim is, as you might expect, saying, no, go find something more reasonable. We're trying to open. The other thing is, I think this is our history. We've tended to be relatively slow growing in a foreign country until we get five or eight units, and then there's a little bit of a spurt afterwards. Look, Japan is a huge economy. It clearly, and not just Japan, Korea and Taiwan, the concept clearly works. There aren't a lot of players necessarily looking at going in, and we're profitable. Let's benefit from that.
I think probably more than anything is that we're certainly comfortable in all those countries, and we certainly have the money. Let's ramp it up a little bit.
Speaker 7
Great. Thank you.
Speaker 6
The next question comes from a line of Greg Melich with Evercore ISI.
Speaker 4
Hi, thanks. I just wanted to follow up on the traffic and ticket and inflation a little bit. If the U.S. comp was around 6%, what's the break between traffic and ticket that ex-fuel? It seems to me like traffic might be up two or three, and the rest ticket. If that's the case, what portion of the ticket would you ascribe to inflation that you've actually seen already?
Speaker 3
I think our U.S. traffic is about the same, Greg. It's like four-ish. I don't have that detail in front of me.
Speaker 4
Is the U.S. traffic like the global?
Speaker 3
It's maybe a shade lower, but you know, less than a, it could round to the same number. It might round to 1% difference.
Speaker 4
Got it.
Speaker 3
U.S., okay. Jeff Elliott just gave me it. U.S. in the quarter was 3.7 frequency in the U.S.
Speaker 4
Got it. The remaining 2.3, should we just think of the inflation as being the 100, you know, the 1.2% that we saw in the inventory, or do you think it's a little more?
Speaker 3
I would say it's a good barometer. On the one hand, you say, yeah, maybe it is a little bit, but the other way you can look at it is any incremental trend in private label when you switch from the branded item and the private label is 20% to 25% lower price on average, you know, that's going to deflate it a little bit. That still inflates your inventory cost, but it deflates your sales comp numbers, your item numbers. I think it goes the other way a little bit. I don't have the numbers in front of me to look at that.
Speaker 4
Is it fair to say that the gasoline, it's nice to break it out of the denominator on the margin shifts, but was the profitability of gasoline hurt in the quarter given the rapid rise in gas during the quarter, how you burn through the inventory so quickly? Did that have an impact?
Speaker 3
Yes. Yes. It was still profitable, but not a whole lot of fun. You know, I'll quote one of the analysts that follows us in Safeway. They said the last couple of weeks have been a lot of fun profitability-wise. It is more profitable with prices coming down.
Speaker 4
In your matrix, where would that show up, that portion of the Gasoline profitability?
Speaker 3
It would be under ancillary businesses, but it's kind of distorted because when prices are going up and even more exacerbated now because gallonage is so far up because it's such a high price, it's also a time when profitability, even the gross margin of a Gasoline business itself, is coming down a little bit. In the matrix, you've got increased sales penetration times a lower margin number. They kind of offset each other in that matrix. You know, we're trying to keep it simple and not do a 3D matrix.
Speaker 4
Yeah, we will try our best. Basically, that whole thing compresses as a result, so you do not see it, but that is where it is.
Speaker 3
Yes.
Speaker 4
Lastly, you mentioned in hard lines, electronics being still the store point. Can you just fill us in on what the actual, you know, the past you sort of told us were TVs in particular, up or down in dollars? I know you put some more inventory there. Did it actually net out to slightly up or was it still down?
Speaker 3
I think we give it, I know we give it out specifically for every month. I believe we're slightly, it's still deflationary. It's almost the sales number for the whole department is down mid to high singles in the last couple of months. I don't know what the quarter was. I know a month or two ago when the department was mid-single down, TVs themselves were roughly flat. You know, average selling price was down 9 or 10% and units were up 10 or 11%. You know, the computers are down. Units, a part of that down, I think in the last several months was everybody was waiting for the new Intel chip or something. That was something that our buyer mentioned at the budget meeting. We're also not selling Apple product. That is a small piece of it.
It has a negative in front of it because we had, we were selling iTouches and iMinutes, iTunes cards last year to zero.
Speaker 4
On electronics now, it sounds like the TV trend hasn't changed much, but maybe some of the computing and notebooks may be a bigger negative than TVs. Is that fair?
Speaker 3
Yeah, I would say that's fair.
Speaker 4
All right, great. Thanks a lot.
Speaker 6
The next question comes from the line of Peter Benedict with Baird.
Speaker 4
Hey Richard, a couple of questions. First on the U.S. healthcare expenses. I think last year they were just over $800 million. Where do you see those coming in this year now that we're three quarters through? It sounds like you obviously did well with the benefits in the third quarter.
Speaker 3
I think dollar-wise in the quarter, they were up like 8 or 9%. Maybe it was below 10% in actual dollars. That's a reduction in the level of increase from prior quarters. Notwithstanding, there are some things that have increased it, like, you know, mental health parity effect at the beginning of this last fiscal year. If you took that quarter and let's say it was 9 or 10% times $800 million, that's $880 million or $870 million. It's probably in the high eights.
Speaker 4
All right, good. With respect to May, trends in the U.S., can you comment on any regional trends you're seeing thus far? There's some crazy weather out there. Just wondering how the business has gone so far in May.
Speaker 3
Yeah, we have not really been impacted by the tornadoes and the what have you since we're not very well penetrated down there. You know, you don't want to be a boat seller in the Northwest. It's still winter. I'm thinking of just the regional operators at the last two budget meetings. There really hasn't been a lot of issues. I mean, the strength has continued. It's really, you know, all the ships have risen with the regional, the geographically regional ships here have risen.
Speaker 4
Okay, great. Thanks very much.
Speaker 6
Again, if you'd like to ask a question, press star one. Your next question comes from a line of Bob with Barclays.
Speaker 2
Hi Richard, just two quick ones from me. The first one is, are you seeing more opportunities for co-brand private label given some of the inflationary trends? The second one is, are you seeing any more opportunistic buys in areas where, you know, inventories are maybe getting out of line a little bit? I'm talking about maybe the apparel category and soft lines.
Speaker 3
I don't think there's any, the answer to both is yes, there are them. There are some. Again, nothing like the first half of calendar 2009 after the economy went to hell. We are saying, yeah, we continue to do both for a lot of reasons, but it's not like the huge inventory build-up problems that many high-end non-food manufacturers had, whether it was furniture or apparel or luggage or you name it, or watches. That came all at once when the economy got hammered in late 2008. Those types of over-inventory positions out there are fewer and further, but it's farther between. We keep adding new stuff.
Speaker 2
Great. Just my last question is, on California, you talked about it being one of the stronger regions for you this quarter, areas this quarter. Can you talk a little bit about any of the trends in California, what's really changed there and what you're seeing in California?
Speaker 3
I think the biggest change is they're buying it more. I mean, I would say I don't do anything to be cute, but it's cross-category. The regions that were hit the hardest after November or so of 2008 have come back. Gas also. Our savings, you know, again, gas is all regional and there's more pricing volatility in California, Southern California, than anywhere in the country, I think. Our savings right now, I believe, in California are bigger than other parts of the country. It's all a function of all the different state rules and winter gas and summer gas. You name it, there's those variances.
Speaker 2
Great. Thanks very much.
Speaker 3
I'll take two more questions.
Speaker 6
The final question comes from a line of Michael Lasser with UBS.
Speaker 2
I think that's Michael Eckstein, but I'll take the opportunity anyway. Richard, can you just follow up on Chuck's question in terms of frequency? What sort of the attachment, if you have 16% more gallons of gasoline sold, what was that in terms of frequency? If you go into and fill up with gasoline, do 90% of the time you go into the warehouse, do you track that specifically?
Speaker 3
I can tell you what we have tracked of late is the percentage of people that bought gas stopped on the same day has not changed. It's still about 30%, low 30%. If it used to have, you know, 3% or 5% gallonage comp and now we have 16%, there's 10% plus percent more people, about 30% of whom are coming in to shop.
Speaker 2
Okay, that is very helpful and thank you.
Speaker 3
Sure.
Speaker 6
There are no further questions at this time.
Speaker 3
Thank you, everyone. Have a good day.
Speaker 6
Thank you. This concludes today's conference call. You may now disconnect.
