Costco Wholesale - Earnings Call - Q4 2011
October 5, 2011
Transcript
Speaker 3
Good morning. My name is Jaree, and I will be your conference operator today. At this time, I would like to welcome everyone to the fourth quarter and year-to-date operating results for fiscal year 2011 and September sales conference call. All lines have been placed on mute to prevent any background noise. At the conclusion of the speaker's remarks, there will be a question and answer session. To ask a question during this time, simply press star then the number one on your telephone keypad. To withdraw your question, press the pound key. Thank you. At this time, I'd like to turn the call over to the CFO, Mr. Galanti. Sir, you may begin your conference.
Speaker 2
Thanks, Jaree. Good morning to everyone. This morning, of course, we reported our 16-week fourth quarter and 52-week fiscal year 2011 operating results, both ended August 28th. As well, our five-week September sales results for the five weeks ended this past Sunday, October 2nd, and announced our plans to increase our annual membership fees in the U.S. and Canada effective November 1st for new member signups and January 1st for member renewals. I'll start by stating that the discussions we are having will include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, and that these statements involve risks and uncertainties that may cause actual events, results, and/or performance to differ materially from those indicated by such statements.
The risks and uncertainties include, but are not limited to, those outlined in today's call, as well as other risks identified from time to time in the company's public statements and reports filed with the SEC. To begin with, our 16-week fourth quarter operating results for the quarter reported earnings per share came in at $1.08, up 11% from last year's reported EPS of $0.97. The $1.08 figure was a penny or two below First Call estimates. Both fourth quarters included certain items that impacted the quarter-over-quarter comparisons. As I mentioned on our fiscal 2010 fourth quarter earnings call last October 6th, last year's fiscal 2010 Q4 results included a few items that in total benefited last year's reported $0.97 figure by $0.02. There was no LIFO charge last year in Q4, as well as the whole year.
The reported $1.08 this year included a $32 million pre-tax LIFO charge, or $0.04 a share, hit to earnings. Other items that impacted the comparison year-over-year are foreign country earnings results, again benefited from relatively stronger foreign countries on average as compared to the U.S. dollar. In the fourth quarter, FX helped earnings by a little over $25 million pre-tax, or a shade under $0.04 a share. That is, assuming FX exchange rates were flat year-over-year, our foreign country operating results in Q4, when reported in dollars, would have been lower by that amount. For the entire year, the impact of FX, assuming FX rates had remained constant in every country as compared to the dollar year-over-year, was to increase pre-tax earnings by about $63 million pre-tax, or $0.10 a share after tax.
Again, this calculation simply takes the currency exchange rates for the prior fiscal year and assumed they had remained at those levels throughout the fiscal year. I'll also point out later in my comments, pre-opening expenses were higher by $12.6 million, or about $0.02 a share after tax, higher this year in Q4 versus a year ago, given the more openings year-over-year in the quarter. For the entire 2011 year, net income came in at a reported $1.462 billion, or $3.30 a share, compared to $1.303 billion, or $2.92 a share in last year's fiscal 2010. Up 12% in dollars and up 13% on an earnings per share basis. If you have followed our earnings conference calls for all of fiscal 2010, I had pointed out a few items each quarter over the course of the year.
Together, the pluses and the minuses added up to about a wash in fiscal 2010. This fiscal year, of course, the big impact to earnings in 2011 was LIFO, hitting the second, third, and fourth quarters for a penny, $0.07, and $0.04 per share respectively, or a total of $0.12 a share for the entire fiscal year. I'll speak more about our outlook for inflation a little bit later in the call. In terms of sales for the fourth quarter, as we reported on August 31, our 16-week reported comparable sales figures showed a 12% increase, 10% in the U.S., and 19% internationally. Excluding gas inflation and the impact of FX from the U.S. dollar weakening year-over-year, the plus 10% U.S. reported comp would be plus 6%, the 19% reported international comp would be plus 10%, and the 12% total company comp would be plus 7%.
The impact from gas was about 3%, while the lift from FX was about 2%. That, again, was for the fiscal quarter. As you'll see when I talk about the September numbers, the FX impact was about 1%. While still the dollar relatively is weaker versus, on average, all of the foreign countries where we operate, that impact is diminished. In terms of sales for the comparable sales for the five weeks of September, for the five weeks, our comparable sales figures showed a 12% increase, with the U.S. coming in at an 11% and international at 14%. The 11% reported U.S. comp would be a 7% without the nearly 4% impact from gas inflation. Given, again, the year-over-year U.S.
dollar's weakness vis-a-vis other currencies in the last month, while that's changed a little bit, for the whole month, our reported 14% international comp would have been plus 10% when expressed in local currencies. Overall, the reported 12% total company comp would have been a plus 8%, excluding gas inflation of about 3%, and FX, as I mentioned, of a little over 1%. For the month, our 12% reported comp sales results were a combination of an average transaction increase of 7.5% and continuing good frequency increases, an average frequency increase of a little over 4%. Other topics I'll review with you are opening activities. We opened a total of 20 net new locations during the fiscal year that just ended, 13 new in the U.S., 3 new in Canada, and 2 new each in Taiwan and Australia.
We relocated two units in fiscal 2011 in San Marcos, California, and Chesterfield, Virginia. For 2012, our current expansion plans include 20 net new locations, about half in the U.S. and half outside of the U.S., plus at least one relocation, and of course, the reopening of a Tomisekai, Japan unit, which has been closed since the tragic earthquake of March 11, 2011. We currently operate 592 locations around the world. During the first few months of fiscal 2012, basically from September through the end of the calendar year, we plan to open seven locations, four in the U.S., one each in Texas, Pennsylvania, Wisconsin, and Georgia. We have a relocation plan for Ontario, Canada, and two new locations in Japan. That is, of course, on top of the Tomisekai opening that'll happen in early calendar 2012.
Also, this morning, I'll review with you our Costco online results, our membership trends, and of course, the upcoming fee increases in the U.S. and Canada effective the 1st of next month. Additional discussion about our Q4 operating results, of course, and our stock repurchase activities during the fiscal quarter. On to the discussion of our results. Very briefly, sales, again, for the 16 weeks, were $27.6 billion, up 17% from last year's $23.6 billion. On a reported comp basis in Q4, sales were up 12%, and the 12% again would be plus 7% without FX and gas price inflation. For the quarter, our 12% comp would be an average transaction increase of 8% and average frequency increase, again, of a little over 4%. Some of you ask about what is our average sales volume per location.
In fiscal 2011, the average sales volume company-wide per location was $146 million, as compared to $139 million the year before. It's closer to $150 million versus $146 million this year if we exclude Mexico, recognizing our Mexico operations were consolidated for the first time into our numbers during fiscal 2011. In terms of sales comparisons by geographic region for both the fourth quarter and September, in the U.S., the strongest comps, both for the quarter and in the month of September, were in the Southeast, the Midwest, and California. All regions were fairly good. The 11% reported U.S. comp figure for September, as an example, ranged from a 9% to a 13% among all regions. Internationally, in local currencies, we continue to do well. In Canada, which is our biggest international component, 9% for the quarter in local currency and plus 10% in September in local currency.
The rest of international averaged around 12% in the quarter and 9% for September. Again, continuing relatively strong comps there as well. In terms of merchandise categories, sales for the quarter, both for the quarter and September, I'll do those separately. For the quarter, within food and sundries, comps were positive in the low double digits. Standouts were deli, candy, and foods, sub-departments ranging from throughout the seven or eight sub-departments ranging from a plus 7% to a plus 19%. Our hardline sales showed positive mid-single-digit comps. The strongest subcategories were in the low to high teens. These were tires, sporting goods, and lawn and garden, offset by a minus mid-single-digit in majors, which of course is electronics, which represents about a third of total hardline sales, by the way, in that category. As you'll see in a minute, in September, we saw an improvement in that department.
Within the positive softline comps, which were in the mid to high single digits, great numbers in the small electrics and jewelry, both in the 20% plus range. Fresh foods was up about 12%. All fresh food category sales were fine. For the month of September now, food and sundries comps were in the high single-digit range, with cooler, deli, foods, and candy leading the category. As reported in recent months, food and sundries on a year-over-year basis, that's one area, as well as fresh foods, that continues to experience inflation in the low to mid-single-digit range. That's based on talking to our buyers. Hardlines were positive in the low single-digit range, which is the first time we've seen hardlines positive in a while, led by hardware, sporting goods, and tires.
Majors, as I mentioned, which was mid-singles negative last quarter for the month, was positive in the mid-single-digit range, with TV sales both in units and dollars up for the month. Softlines comps were positive in the mid-single-digit range, led by small appliances, domestics, and jewelry, experiencing softer sales in housewares and media. Media has been that way for a while, needless to say. All departments in our fresh foods categories were positive double-digit. Overall, fresh foods, again, like food and sundries, experiences inflation in the mid-single-digit, low to mid-single-digit range over the past, as compared to a year ago. I'll talk a minute about what we've seen in just the past month, and it's mostly in bakery and meat. Moving down the line items of the income statement, we'll start with membership fee income.
Reported in Q4, membership fee income was $590 million, up 11% or $57 million from last year's $530 million. It was down as a percent of sales by 12 basis points. Gas inflation plays havoc on the year-over-year basis points comparison. That minus 12 without gas inflation would have been a minus 6. Still, with strong sales growth, we feel the 11% increase in dollars is pretty, pretty, pretty good. 8%, by the way, if you took out the benefit of FX. In terms of membership fees and renewal rates and loyalty, renewal rates continue at the 89+% range in the U.S. and Canada and on an 86% worldwide. Continue to see increasing penetration of the Executive Membership. In terms of new member signups in Q4, they were dramatically up year-over-year, up 22% in the fiscal quarter as compared to a year ago.
In Q4, of course, we had 10 new openings this year. Five of those openings, by the way, two in Australia, two in Taiwan, and one in Japan. These international ones accounted for much of that huge Q4 spike. Even without these five, the 22% figure would have still been up 6%. A pretty good showing for new signups. In terms of number of members at Q4 end, I'll just give you a Q3 end and Q4 end. At Q3 end, primary Gold Star was 24.3. At Q4 end, 25.0. Primary business remained at 6.3. Business add-on went from 3.85 to 4.0. Total 34.4 to 35.3, and including spouse cards, 62.6 up to 64. At Q4 end, paid Executive Memberships were 11.8 million, an increase of nearly half a million, about 450,000, or up 4% in just the 16-week fourth quarter.
That represents about 28,000 a week increase in Executive Membership penetration. Executive Members currently represent about a third of our membership base and a little over two-thirds of our sales. In terms of renewal rates, as I mentioned, they continue strong. In the U.S. and Canada, which is the core of our business, the business members at Q4 end, as of Q4 end, were renewing at 93.3%, up from 93.2% at the end of the previous quarter. Gold Star 88.1% versus 88.0%, and total 89.1% versus 89.1% due to rounding. Worldwide, it was 85.7% at Q4 end, down slightly from 86%. Again, that's a reflection of all these relatively newer warehouses over the past couple of years and generally a lower renewal rate both overseas as well as given the newness of the concept in some of these markets. Renewal rates for Q4, let's see, that's it there. Sorry.
I'll spend a minute now talking about the announcement this morning of the pending increase in planned and annual membership fees. First, the planned increases relate to our U.S. and Canadian operations. In the U.S., our current annual fee for our individual Gold Star, our business, and our business add-on memberships is $50 a year. The annual fee on both the Gold Star and the business members has been at $50 since May of 2006, so a little over five years ago. The annual fee on a business add-on membership increased to $50 earlier this year in order to conform with the two primary memberships, and now it, of course, is going to $55 as well. All three of these will be $55 effective on an annual basis, effective November 1 in the warehouse and effective January 1 with regard to member renewals.
January renewals are mailed out near the end of November. Also in the U.S., our $100 per year Executive Membership fee is being increased to $110. This is the first membership fee increase since the inception of the Executive Membership program in the U.S. in 1997 and a few years after that in Canada. In Canada, the current annual membership fee for both Gold Star and business add-on members was already $55. By the way, in Canada, we talk Canadian dollars, of course. It was $50 for the primary business member. So it was the $50 primary business member that would be raised to conform with the other two, to all be at $55. Again, effective November 1 in the warehouse and January 1 in terms of renewals. Similar to the U.S.
member program, the current $100 per year Executive Membership in Canada will also go to a $110 level at this time. In all, approximately 22 million members will be impacted by this increase. Approximately half of them are Executive Members, and the other half are the various Gold Star, business, and business add-on. Please remember that membership fees are accounted for on a deferred basis. For example, approximately one-twelfth of the increased fees from any of our January renewals will be booked in the first month, with an additional one-twelfth being booked in each of the succeeding 12 months. Increase fees in February renewers will be booked in February to the following January and so on. The full impact of these increases in terms of how it hits the P&L is essentially a 23-month timeline.
That is, the last group of members to be billed at the new fee levels will be next December, with a booking of that $5 or $10 per year increase to accrue over that month and the succeeding 11 months. With regard to Executive Membership, the 2% reward associated with the Executive Membership will increase from the current $500 per year cap up to $750 per year, based, of course, on eligible purchases. This change, we believe and others, will help us to maintain our competitive edge. Needless to say, we feel that the enhanced value of the Costco membership over the past 5 to 10 years far exceeds the modest $5 and $10 increase in the annual membership fee levels, and it'll continue to allow us to bring our members even greater value on everything we offer.
Going down the gross margin line, our reported gross margin in the fourth quarter was lower year-over-year by 34 basis points, coming in at 10.54% of sales as compared to a year ago fourth quarter 10.89%. I ask you to jot down some line items in three columns. The line items are core merchandise. The second line item would be ancillary businesses. Third line item, 2% reward. Fourth line item, LIFO. Next, quarterly adjustments, and then total. The three columns would be Q3 2011, Q4 2011, and then Q4 2011 again without gas inflation. The huge volume of what we do in gas plus the huge 31% increase in prices year-over-year wreaks havoc on all the comparisons on a percentage basis. We take out gas inflation to show you those numbers on an apples-to-apples basis. Going across merchandise core, in Q3 2011, year-over-year was minus 14 basis points.
In Q4 2011, minus 24. Without gas inflation, that minus 24 would be plus 2. Ancillary, minus 3, plus 6, and plus 12. 2% reward, plus 3, 0, and minus 3. LIFO, minus 24, minus 12, and minus 12. Quarterlies, 0, minus 5, and minus 5. For a total of minus 38, minus 35, and minus 6. Mexico, of course, is also, again, was for the first time in Q and fiscal 2011, and therefore in the fourth quarter as well, was put into the numbers. If you take Mexico out, it benefited all of these numbers by 3 basis points. As you can see, our overall reported gross margin was lower by 35. That's what we reported. As was the case each quarter, these figures require a little bit of elaboration here and explanation. In the fourth quarter, our current merchandise, as I mentioned, was 24.
The ancillary business gross margins, principally gasoline, impacting it contributed plus 6. Our gasoline business and its inflationary price trends during the fourth quarter this year impact our total score of margin comparison, as I mentioned to you in the past. The sales penetration of higher margin core business was down 2 percentage points in Q4 year-over-year, whereas the sales penetration of our ancillary businesses, again, mostly impacted by gasoline sales, which is a much lower gross margin business to start with, was up 2 percentage points year-over-year in the quarter. The core business, food and sundries, hardlines, softlines, and fresh foods were up slightly year-over-year. Its aggregate gross margin hit was the minus 24. LIFO, as I mentioned, was 12. We continue to see year-over-year inflation as we did in Q3, although at a slower rate of impact in Q4 as compared to Q3.
The minus 5 basis point quarterly amount, that's part of what I mentioned earlier in the call that in last year we mentioned that the $0.97 figure included about $0.02 of benefits from a couple of items. There were a couple of miscellaneous items that, again, we felt when we reported $0.97 last year that $0.95 was a more appropriate number with a couple of unusual items that actually benefited slightly margin and SG&A. In terms of a gross margin outlook, no real margin issues. Our inventories are clean. Very good physical inventories at fiscal year end. We continue to be committed to driving top-line sales as we enter the Christmas holiday season and into the new calendar year.
In terms of inflation outlook and talking to our buyers, their view is that we continue to see and expect year-over-year inflation with food and sundries, fresh foods, and in some non-foods areas, although at a slower rate compared to the last six months. I will mention that in September, we did, in terms of looking at our LIFO indices, slight deflation, very slight deflation from the beginning of our fiscal year, so four weeks earlier, versus the end of September. Again, versus last year, we're still seeing some inflation, but in terms of what hits the P&L in terms of LIFO, at least for the first four weeks, we see essentially flat to very slightly down, a slight deflation.
Moving on to SG&A, our SG&A percentages fourth quarter over fourth quarter were lower or better by 34 basis points, coming in at 9.83% this year compared to 10.17% last year. Again, quickly jot down three columns and several line items. The line items are operations, central, stock compensation or equity compensation, quarterly adjustments, total. Going across Q3 '11, Q4 '11, and Q4 '11 without gas inflation, in operations, plus 46 basis points, meaning it was lower by 46. Q4 '11 plus 44, and Q4 without gas plus 20. Central, plus 3 or lower by 3. Q4 '11 minus 2, and Q4 without gas minus 5, so higher by 5. Equity, plus 2, plus 2, plus 2. Quarterly, minus 8, minus 10, minus 10. For a total of plus 43, meaning in Q3, year-over-year, we were lower by, on a reported basis, lower by 43 basis points.
In Q4, plus 34 or lower by 34. And without gas inflation, plus 7 or lower by 7. Mexico had a low to mid-single-digit impact on those numbers for the quarter and the year, and of quarter and with and without gas. In terms of editorial, operations were lower or better by 44. A big component of this was due to the 31% increase per gallon for gas, price per gallon for gas during the quarter. Just like with gross margin percentages where it hurt, it correspondingly helped our core SG&A by plus 24. The 44 would be plus 20 without it. Our central expense was a bit higher year-over-year. Just a couple of line items, things in there on a year-over-year basis that were year-end changes, quarter-end, year-end accrual adjustments, and what have you. Nothing to really speak of.
Healthcare costs in the quarter were lower by two basis points. U.S. healthcare costs, however, were up 14% in the quarter and 12% for the year. In terms of factors that will impact our outlook for expenses and other things in fiscal 2012, the main items are going to be sales trends, healthcare, gasoline sales, inflation or deflation, and to some extent, increasing penetration of our Asia operations, which have lower overall SG&A percentages. Next on the income statement is pre-opening expense. Pre-opening expenses were up $12.6 million higher or minus 4 basis points to the P&L. $9 million last year in the quarter versus $21.6 million. Last year in Q4, we had, in fiscal 2010 and Q4, we had 5 openings. This year in Q4, we had 10 net openings but 13 actual openings, including the two reloads and the reopening of our Makahari, Japan location.
In terms of asset impairment and closing costs, in Q4 2010, last year we had a charge of $3.3 million for the quarter. This year, $2.6 million, so no real change there. All told, operating income in Q4 2011 was up 10.5% year-over-year from $688 million last year to $762 million this year, an increase of $74 million. The bigger percentage increase, a little bigger percentage increase if you consider the last year's $0.02 that I mentioned, the adds to earnings, and this year's $0.04 LIFO hit. Below the operating income line, reported interest expense was about the same year-over-year, with Q4 2011 coming in at $35.8 million versus $34.7 million last year. These amounts, of course, mainly reflect the interest on our $2 billion debt offering that we did in February of 2007.
I will mention that beginning in mid-March of 2012, which was about a month into our fiscal third quarter this coming year, we plan to use existing cash to pay down $900 million principal amount of that $2 billion, which was five-year maturing debt. An annual pre-tax saving to us, we estimate, of about $44 million pre-tax or $0.06 a share. We get to the $44 million assumption based on an all-in rate for that five-year fixed rate money of 5.37% and our current return on the $900 million that we'd use of about 44 basis points. That's where we get to $44 million. Again, that all started in mid-March of 2012. Interest income was higher by $16 million in the quarter, $45.8 million this year versus $29.6 million. Actual interest income, you know that this line is interest income and other.
Actual interest income was higher by about $8 million, a reflection of not only increased cash but some increased interest earned on increased cash balances outside of the U.S. in some countries. The other $8 million is a combination of things, everything from marking to markets, some FX forward contracts that we use in some foreign countries, to the fact that we now consolidate Mexico instead of putting half of its earnings on this line item. Taking the half out there and spreading it throughout the entire income statement, going from the equity method previously to now consolidated, as well as a couple of other miscellaneous items. Overall, pre-tax earnings were up 13%, $684 million versus $771 million this year. Our company's reported tax rate this quarter came in at 35.3%, a little lower than last year's rate of 36.1%. A quick rundown of other topics.
The balance sheet you should receive, that was received, I'm sorry, in the press release. As well, of course, like always, you'll see some other information shortly that'll be online. Depreciation and amortization was $273 million in the quarter, $855 million for the year. Strong balance sheet, as you guys know. Our AP percent as a percent of inventories. On a reported basis, it showed that last year in the fourth quarter it was 105%, and it declined to 99%. On a merchandise basis, so merchandise accounts payable versus our inventories, it actually went from 89% last year up to 91%. I think a reflection of slight improvement in increased turns and hopefully good negotiations by our buyers. Average inventory per warehouse was up $772,000 from $10,441,000 per warehouse a year ago, as compared to $11,213,000, so up about 7%.
About a third of this increase relates to the stronger year-over-year FX. Food and sundries was up about $165,000. That's partly due to the inflation that we talked about in the past. The balance of the variance is basically spread among departments. Again, good inventory showing overall. We feel good about how we came out of fiscal year end with very clean inventories, and we feel good about our sell-through so far in seasonal items. Hopefully, we'll have a good season continuing throughout this calendar year. In terms of CapEx, in the fourth quarter, it was $472 million. For all of 2011, it was $1,290 million. We'd estimate that fiscal 2012 CapEx will be in the $1.4 to $1.6 billion range, with increases from this level expected in fiscal years 2013 and 2014.
That's a combination of we would expect increased expansion activity as we've got more in the pipeline, as well as an ongoing increase proportionally of some of the overseas expansion, which tends to be a little more expensive in some of these very densely populated major cities. In terms of our dividend, in May, we increased our quarterly dividend by 17% from $0.205 a share per quarter to $0.24. This $0.96 per share annualized dividend represents a total cost to the company of about $420 million. Costco.com and Costco.ca Canada, in total, sales were up about 12% for the year and up almost 15% for the quarter. In terms of expansion, I mentioned earlier, and we currently are planning about 20 for the year, skewed towards the end of the fiscal year in spring and summer. Again, of that net 20, about half will be in the U.S.
and half in international. There's always subject to a couple slipping one way or the other, so one extra in the U.S., one less, or vice versa. In fiscal 2012, if we're assuming we added 20 net new units, that'd be about 3.5% square footage growth. Also, at fiscal year end, some of you asked, total square footage stood at 84,415,000 square feet in our operations. In terms of stock repurchases, we currently have repurchase authorization with the board approval earlier this calendar year to increase the authorizations. We currently have authorization of $3.7 billion. As you know, in Q3, as I mentioned, we spent $102 million buying back 1.3 million shares. If I just annualize that $102 million of buying over those 12 weeks, that would be about $440 million. I think if you annualize that 36 weeks, you're approaching $500 million a rate of purchase.
In Q4, we purchased 3.7 million shares for $294 million. Taking those 16 weeks and annualizing it, you get closer to the billion, about $950 million at an annualized rate of purchase during the quarter. Long term, we continue to be buyers on a regular basis. We're not going to predict up or down where the stock's going to go, but overall, we currently believe in the outlook of the company, and clearly, we've got enough cash to not only pay for ramped-up expansion and an increasing dividend, but hopefully stock buybacks as well into the future. Quick reminder, fiscal 2012 is a 53-week fiscal year. The fourth quarter of 2012 will consist of 17 weeks this year compared to a 16-week fourth quarter last year. As I mentioned, our supplemental information pack, which includes some other useful stats, will be posted on the Investor Relations site later this morning.
With that, I'll turn it back over to Jaree and open it up for Q&A.
Speaker 1
Thank you. At this time, to ask an audio question, press star one on your telephone keypad. Again, that's star one to ask a question. Your first question comes from the line of Ravi Owens with Bank of America Merrill Lynch.
Speaker 0
Oh, good morning. Hey, Richard. How are you?
Speaker 2
Good.
Speaker 0
Hey, I was hoping you could just maybe elaborate more on the fee increase, sort of the timing of it. I know it's something that you guys had talked about, but the timing of it this year and also the expected response, if any, from your customers. Do you think you'll lose anybody related to it? I think also you mentioned something about allowing you to give even better values. Is there an anticipated impact over the next two years on what your store-level margin structure could look like or the way you're passing on inflation, etc., related to taking this membership fee increase? Thanks.
Speaker 2
The timing is simply we just decided to do it now. We've talked about it, and everybody out there asks about it every quarter. At least two or three times a year when we're off campus as a Senior Management team, we talk about it. We've always felt that our membership value is greatly enhanced. We've continued to greatly enhance it. Many of you know us well long enough ago that we use it in a lot of ways and recognizing all monies are fungible. The fact of the matter is, we're always going to be competitive with or without this. We'll continue to be competitive. This allows us to continue to be competitive, offer more services, and do what we do. People ask us about the economy. We're not thrilled about it.
We're thrilled that we are performing quite well in terms of shopper frequency and driving sales in the right directions. We're going to continue to do that. I'm not trying to be coy, but you guys know who we are. We're going to do what's right to drive our business long term. Now, in terms of do we lose members, recognize this is a, on the primary membership, this is a 10% increase, a $5 increase on a $50 membership fee that has been $50 for the last five and a half years, and a $10 increase on $100 that has been that way for 7 to 11 years, depending on which country. This is not a $5 a month increase. It's a relatively small increase. We recognize where the economy is. Historically, we have very little falloff from it. We don't take it lightly.
We didn't take it lightly by doing it and when we do it. We recognize that it's part of what we have done historically over 25 years, doing modest increases in the fee. Every time we've done it, we feel and we take a hard look at ourselves. We look at ourselves in the mirror and feel that we have continued to enhance the value of that membership by a lot more than that. We say that sincerely. Maybe we're fooling ourselves, but we don't think so.
Speaker 0
Great, thanks a lot.
Speaker 1
Your next question comes from the line of Mark Miller with William Blair.
Speaker 0
Hey, good morning, Richard. On the net store expansion now expecting 24 fiscal 2024, I think last quarter you commented you thought it'd be closer to 25. I'm curious, is there something that caused Costco to slow it down or something previously unexpected in the marketplace?
Speaker 2
This is probably the one number that we have most poorly predicted every quarter and every year for 15 years. We got a lot in the pipeline beyond this. Some of the expansion overseas takes longer. All I can tell you is that Craig and Jim and Craig's goal and Jeff Brotman's goal is to get that number up. I can't predict what it's going to be. There are other irons in the fire that might tweak that up a little bit. I try to be as realistic as I can going into the year and perhaps each year being even more realistic. Could it tweak up a little bit? It could. My guess is you're going to see like we did more recently. There are a lot of irons in the fire.
I think you're going to see a lot of openings just past the end of this fiscal year into the next year. If Jim were sitting here or Craig were sitting here, their goal would be to get that number into the 25 to 30 range next year. I can only tell you what we've got going on right now in terms of what we feel comfortable that we're going to be opening. I can also assure you that those three and the real estate people and the operators are working very hard to speed up that process because there's a lot of locations that we want to open.
Speaker 0
Okay.
Speaker 2
There's more unpredictability in terms of some of the timing and zoning, particularly in some of these foreign countries. They're favorable to us opening. It's just it's a longer process. There are more irons in the fire now, which will speed up that process, hopefully.
Speaker 0
Okay. With half the clubs going outside the U.S. in fiscal 2012, I guess I'm trying to integrate that into how we should think about international profitability. It looks like you should be about, or now more than 45% of your profits outside the U.S. for all of fiscal 2011. I don't know if you can share that exact number. When do you think we get to more than 50% outside the U.S.? Do you think you get there in fiscal 2012? I know FX also is a factor.
Speaker 2
You're including Canada? That number sounds a little high, although you have the numbers in front of you. I don't have that detail in front of me. I'd have to look at it. Clearly, the rate of increase in overseas expansion, and I include in this Canada and other international, and the fact that the dollar is weakened has exacerbated it upward a little bit. My guess is that to the extent that that increasing penetration has occurred in the last couple of years, it probably still increases but slows down a little bit. Again, I'm just shooting from the hip there, though.
Speaker 0
Okay. Finally, I'll turn it over. The new member signup going up 6% outside of the new international club openings, was there any anomalies to that figure? What do you think explains that acceleration? Thanks, Richard.
Speaker 2
In terms of openings overseas?
Speaker 0
No, the new member signups. I think you said it.
Speaker 2
Oh, I'm sorry. In some of these markets, like the area in and around Taipei, Taiwan, or Tokyo, we've been very successful in the three Asia countries and starting off pretty darn well in the three locations that we have in Australia. Particularly in those three Asia countries, in these 20 million population cities, if you will, we have memberships per warehouse off the charts in terms of new signups. Even after they've been open for a few years, I think in Japan, the number of members per warehouse is double our company average, darn near double our company average. It has to do, you know, it's nice when you have five locations in a city the size of these cities. There's plenty of opportunity to open more locations, and maybe that'll come down over time.
The per capita per number of population per warehouse is off the charts over there as well.
Speaker 0
Hello?
Speaker 1
Your next question comes from the line of Mark Wiltamuth with Morgan Stanley.
Speaker 0
Hi, Richard. I wanted to ask about the inflation pass-through on food. Are you having any margin drag from that? Obviously, we had the LIFO charge here, but if you take the LIFO out, what's the effect on margins here?
Speaker 2
Yeah, there's a little bit of lag. Frankly, it's us more than anything. If I looked at the detail, I would say that you're still impacted in the Food Court because we're not changing the price of the pizza or the hot dog, as an example. You're going to see it in bakery for some of the commodity goods there. Even though we've seen some reduction in some of the underlying commodity costs in bakery, it's still not back to where it was. I think a couple of fiscal quarters ago, I gave a couple of examples where we're going to hold the price of a 15-pack or whatever of muffins and let the margin dwindle down on it before we take an increase. We do ultimately. That's our doing. I don't think it's a dramatically big change of what we've historically done. It's just we have inflation now.
Ultimately, you've got to pass the price increases on.
Speaker 0
We just saw some softening in some of the underlying core commodities with corn cooling off last week. How long does it take for that to really hit your stores before it cycles through the packaged food companies and then gets to you?
Speaker 2
Keep in mind, as you might expect, in my view, a couple of years ago when there started to be inflation, actually in mid 2008, there was a lot of pent-up demand, if you will, on the manufacturing side because retailers had always been on very light inflation for a number of years. Strong large retailers, the supermarkets, the Walmarts, the Costcos were able to push back. Some of it will stick because it was catching up from prior stuff. Generally, it's all over the board, but generally, you'll see it in, and then you'll see it weekly and monthly in things like beef and pork and poultry. You'll see it in raw materials. When we're buying certain raw materials for our bakery, you'll see it pretty quick.
You're not going to see it all proportional to what you see coming down because not all they didn't get all of it on the way up. Even when they got it, some of it was, in my view, pent-up demand. Needless to say, part of every one of our buyers' jobs, as manufacturers explain why something was going up, they're out there hitting back saying, "Okay, let's come down now." We're, I think, as good as anybody in pushing that envelope the other way, but it takes some time, anywhere from a few weeks to a few months, depending on the categories.
Speaker 0
Okay, thank you.
Speaker 2
One other comment on that, as an example, you know, when cotton prices were going way up 6, 8, 12 months ago, and I think I mentioned on one of the calls, in some cases, when you're making three, six, nine-month commitments on everything from apparel to towels and things like that, there were some manufacturers, many manufacturers overseas in Asia, particularly, were basically saying, "You got to commit to quantity, and we can't tell you what the price is," because that's how fast the underlying commodity costs of cotton were going up. In some cases, we and everybody else had to eat some of that as cotton prices or other things have come down. Again, we're turning that faster on average than other comparable full-line retailers in those categories. Do we get hurt? A little bit, but everybody gets hurt.
Speaker 0
Okay, thanks.
Speaker 1
Your next question comes from the line of Dan Binder with Jefferies & Company.
Speaker 0
Hi, good morning. A couple of questions. First, on the core gross margin, if I'm, I think I have it apples to apples. It looks like your core was up plus two basis points this quarter compared to more substantial gains in recent quarters. I'm just curious if there's anything that you would point out to a change in that pace and what we should kind of expect going forward. That was the first question. The second question was on the Executive Membership with regard to the increase in the rebate. I'm just curious what the sort of incremental drag is to that give back to the customer. In other words, I'm sure there's probably a few members that were exceeding that $500 rebate. So now that you actually have to pay them, what kind of a drag does that bring to the P&L?
Speaker 2
Sure. I forgot what the first question was.
Speaker 0
Just the core gross margin.
Speaker 2
Oh, yeah, I'm sorry. Again, we don't view it as anything to be concerned about. When we talk about gas inflation, the other piece of gas is gas gallonages way up. That's also on a low-margin business, you know, eight or so hundred basis points, but increasing penetration of the gallonage. There are lots of things, different countries, different penetration. We really, as we looked at it, and in terms of looking at the core, didn't consider it. It's a little lower than it has been in the last couple of quarters, but we'll keep letting you know what it is. Again, we don't read a lot into that as any trend, either up or down.
In terms of the Executive Membership and the increased reward, it's pretty small, recognizing that to be at the $500 cap, you're at $25,000 of eligible purchases, eligible purchases meaning everything but gas, alcohol, and tobacco. We're hoping that it'll grow. It's well under $10 million of impact a year, but we hope it would grow up because that means it's driving business.
Speaker 0
Okay. There's just one final. On the other income line, when we consider that Mexico is not in that number this year, it's up quite substantially just versus where you were in the first three quarters. You mentioned FX contracts. I'm just wondering if there's some bigger items in there that you can identify.
Speaker 2
There really aren't. There's a few things that go both ways. FX forward contracts in a given quarter can be plus or minus $5 million. Usually, it's plus or minus a couple of million. I think that on a year-over-year basis, that variation was closer to the $5 million, frankly. That's the biggest chunk.
Speaker 0
Okay, thanks.
Speaker 1
Your next question comes from the line of Christopher Horvers with JPMorgan.
Speaker 0
Thanks. Good morning. Richard, on the LIFO, do you think that based on September's experience, this actually turned out to be a benefit in the fourth quarter if we kind of stay where we are? Can we just run with that as we think about the experience into next year and its re-Q, and perhaps that lift gets better?
Speaker 2
If I could extrapolate with absolute certainty the first month, we'd have it be flat, a very slight amount of credit. Who knows? I mean, assuming that in terms of expectations for increases on top of current levels, the buyers generally view that there's not a lot of increases happening right now. In terms of getting price reductions on things, LIFO starts with the beginning of this fiscal year on August 29, 2023. The index for the first four weeks, our internal four-week period, was just a few basis points under a base of 100.00. Very slight, very slight deflation. Who knows what tomorrow brings? To the extent from these levels, from August 29 levels of pricing and costing, that we see some as commodities have come down, as we see some price reductions, that would tend towards a credit.
I'm shooting from the hip, but my guess is that I'd assume right now it's flat and there's not a lot of risk it's going to be big inflation and not a real risk it's going to be a lot of deflation.
Speaker 0
Right. It is not a comparison issue. Prices actually have to come down to see the credit.
Speaker 2
Right. In terms of seeing the impact in Q3 and Q4 of a LIFO charge, that seems to have abated, at least at this point. Who knows what tomorrow brings?
Speaker 0
Yes. Obviously, we're all so sensitive to what's going on with the consumer. Was there anything particular about the cadence in September that you would call out either positively or negatively?
Speaker 2
I think the thing that continues to surprise us is this continued 4+% frequency number. We certainly appreciate and recognize that gas gallonage comps for us are strong, certainly strong relative to the U.S. consumer, and that drives people into our parking lot. We recognize that people are probably eating at home more than they used to. That drives people into our parking lot. I think those are the issues that we've been somewhat blinded by the fact that we still believe that we know the economy is tough. We are concerned, as every one of you are out there every day with the gyrations in the market and the mortgage statistics and the unemployment statistics. We are bucking those trends in terms of driving unit frequency, customer frequency, and with a little help from even inflation, dollar increases.
We're working hard to continue to drive that market share, and we think we're doing a pretty good job of it. If you ask us, do we feel good about what's going on out there? No. In terms of the economy.
Speaker 0
Right. One final quick one. It seems like the FX will probably turn on you in the coming months from a top-line perspective and get a bit worse in the spring if we just held today's rates. How does that flow through to the margin structure if it does turn in the other direction?
Speaker 2
It doesn't change %s a lot because it's every line item. To the extent that our foreign operation is slightly more profitable, bottom line, but those that you're talking about %s times %s, I don't think it has a lot of impact on any %s. Again, like this past year, the reported $3.30 of earnings, there was, I think, $0.10 in there from just the change in FX. To the extent that we are relatively constant until the spring and then start to show the other way, and again, who knows? It could be a slight detriment this year, but we don't know.
Speaker 0
Fair enough.
Speaker 2
Thanks.
Speaker 1
Your next question comes from the line of Peter Benedict with Baird.
Speaker 0
Hey, Richard. A couple of questions. In the past, you've walked us through, at least qualitatively, the gross margin trend within the four main categories. Could you give us a sense of how that fleshed out in the fourth quarter?
Speaker 2
I don't have it in front of me. I know I think hardline categories was up, fresh foods was down a little, and the other two I don't have in front of me. I'm sorry. I know overall it was up too.
Speaker 0
Okay. Perfect. Thank you.
Speaker 2
By the way, one of the things that Jim has mentioned, that less is more, not from trying to—we've always tried to give you a lot of color on things. We're trying to wean me off of some of that going forward. Not yet, but we'll continue to try to do that. We still give you the same color of what's going on out there, though.
Speaker 0
No, that's helpful. I mean, would you say how would you characterize kind of the mood internally in terms of that core margin line? I mean, is the goal still to kind of maintain and increase that, or are you more willing to kind of give back some of that now that you've raised the fee?
Speaker 2
That's a definite yes to both of those. The fact of the matter is, look, we do what we do. Really, we don't sit around here being terribly concerned about margin. Keep in mind, over the last 10 years, Executive Membership has hit the margin line for over 100 basis points. Penetration of Gasoline, which is easily 700 or 800 basis points lower than the company average margin outside of that, probably 800. That's gone from 0% 10 or 12 years ago to 8% or 9% or 10% of sales, 9% of sales. We've hit the margin hard in a lot of ways, and our margins are pretty good. Despite us being competitive out there, we're going to do what's right for the company long term. We're going to drive sales. We feel very good about our ability to do that.
I'm not trying to—I am trying to be qualitative because, but if you ask, is our goal to still see pre-tax earnings as a percent of sales improve and have a three in front of it? Yes.
Speaker 0
All right. Fair enough. I may have missed this, but any early read on kind of the holiday product? I mean, you guys bring your stuff in so early. It'd be interesting to hear. I know September overall was good, but how about those kind of holiday seasonal trimmetry, that type of stuff? Any read you're getting?
Speaker 2
Our seasonal sales are good. We brought in stuff in early. We had stuff out there the last week of August, I think, starting to come in and certainly through into mid-September. We feel good about seasonal merchandise.
Speaker 0
Great, thanks very much.
Speaker 1
Your next question comes from the line of Colin McGranahan with Bernstein.
Speaker 0
Good morning, Richard.
Speaker 2
Hi.
Speaker 0
Wanted to focus on the Executive Membership fee increase given that you've never had one. A couple of questions. One is, do you think there's anything different there about sensitivity, renewal rates, and whatnot? Secondly, can you give us any sense of the number of Executive Members that spend between $2,500 and $2,750? Because just obviously on plain math, those are the ones that wouldn't make sense to be an Executive Member anymore, given the $50 to $55 differential.
Speaker 2
Sure.
Speaker 0
Thirdly, same topic, but thirdly, in the past, you've said Executive Members spend more, and obviously, you've wanted to make more and more members Executive. Is there a cart-and-horse thing there? I mean, do people, when they become an Executive Member, actually spend more, or people who are spending more naturally became Executive Members?
Speaker 2
On the last question, clearly, they spend more when they become Executive Members and spend a lot more. I've likened it to a TV commercial I saw a long time ago about two businessmen at a business luncheon, and they both reach for their wallet to pay for the bill, and one says, "Let me get it. I get rewards." The fact of the matter is, affinity programs work. I don't know completely why, but you talk yourself into it. Clearly, being an Executive Member, they buy more. I think also we have gotten better at promoting it and communicating it to the member, both when they sign up as a new member and as well when they're coming through with a big amount of merchandise.
What the cashier can do when they swipe the membership card is it could show them that based on their prior year's purchases, it would have behooved them to become an Executive Member. We do a better job of it. In terms of the rationale why we kept the $100 in each of the last two regular increases, when we first did the $100 Executive Membership in the U.S. in 1997, I believe the base membership fee was $40. It was a $60 deal. At the time that we, five or so years later, went from $40 to $45 in the base, our view was there are lots of members out there that if you just took their prior 12-month eligible purchases, how many of them would be at break-even or above at $65 versus $55?
The view was, at the time, there were about 2.5 million members that in theory would benefit based on their prior year's purchases. If we even got 10% of them, would you be happy? I can't tell you if it was 10% or 20% or 15% or 22%, but you know it was something in those ranges most likely. At the end of the day, we did that again five years ago, five and a half years ago. By the way, what I think has continued to surprise us is the increasing penetration of membership aside from that, and each of the years succeeding that delta of having, in theory, another 2 million, 2.5 million members go into that above break-even calculation, and how many of those can we get? I think we do a better job overall of getting them.
Our view at this point is the membership fee in the U.S. at Executive has been at $100 for 11 years, I believe seven or eight years, or six or seven years in Canada. It's a nominal increase based on the period of time that we're talking about. Keep in mind, the fee relates to the core membership in the case of $100 of the $55, as well as a variety of other services. We have many members that, in our view, became an Executive Member first to take advantage of one of the 20 or so services that we offer. Even then, they start buying more because they're an Executive Member. The fact of the matter is it does create loyalty. We have never taken the increases lightly.
We feel very confident that we always assume that you're going to have some conversion delta with regard to somebody saying, "I'll just become a regular member," some regular member saying, "Do I really need to be a member?" You're talking a very small group. We feel very comfortable about the value of our membership. As you know, historically, when our membership fee structure has been higher than some of our competitors, that's never concerned us from the standpoint that it reveals that our membership and the value that we provide our member is a good value. We didn't do it arrogantly. We did it thoughtfully and what we believe is modestly, and we'll go forth.
Speaker 0
Okay, just to follow up on that, is the number still today roughly 2 to 2.5 million members that would be on the margin mathematically?
Speaker 2
I haven't looked at it lately because in terms of a break-even, it's as good a guess as any. It's not one and it's not five, sure. You know, again, we haven't looked at it that way since five years ago.
Speaker 0
Okay. You're not concerned about the risk of, as you were closing the differential, you were incentivizing more Executive Members to then spend more. Now you're widening the differential and you're going to lose some Executive Members because mathematically it doesn't work. Theoretically, as they become off-award members, they would spend less?
Speaker 2
Sure. Look, it won't be zero, but the fact of the matter is, as many of those Executive Members that were on the cusp in that theoretical equation spend a lot more today. Many of them have gone up, not down.
Speaker 0
Okay. All right. Fair enough. Thank you.
Speaker 2
Good.
Speaker 1
Your next question comes from the line of Chuck Grom with North Coast Research.
Speaker 2
Good morning, everyone. Richard, when you're looking at the two-year store opening total, it sounds like you're saying you want to be conservative in fiscal 2012, but we could see a blip in the first quarter of fiscal 2013. Would you be willing to talk about a two-year, that it would be fiscal 2012 and fiscal 2013 store opening number and square footage growth rate? If you add 2012 and 2013 together, it'll clearly be more because our expectation at this point is 2013 will have more openings than 2012.
Speaker 0
Maybe approaching 50 in total, you know.
Speaker 2
I would hope so, but I doubt it given the timeline it takes and the efforts. I think we'll be improved in terms of grading that on a scale, but we'll have to wait and see. I don't want to lead you astray. They're working hard to get that up. There are a lot of irons in the fire, and I'd rather look at it conservatively to start with. When you.
Speaker 0
Switching to another subject, looking at member attitudes, is there shop in the stores in comparing the third quarter to the fourth quarter sales mix? What are you seeing? What are you noticing in how shoppers are behaving in your clubs?
Speaker 2
Sales accelerated in September versus taking out all the noise of FX and gas inflation. I mean, sales accelerated. I mean, when we read every day about the doom and gloom with consumer sentiment, we see pretty good stuff at our place, but we don't take it lightly. We work hard to have that value out there, and we feel very fortunate, but we're also reminded every day by Jim and now by Jim and Craig that the key is the value proposition and being out there and being showtime ready every day and having great stuff. The one thing I'm very comfortable about is that we're doing a great job merchandising right now, and we got a lot of good things going on.
Speaker 0
Thanks a lot.
Speaker 1
Your next question comes from the line of Chuck Grom with Deutsche Bank.
Speaker 0
Thanks. Good morning. Just to circle back on Dan's question on that core on core, I think everybody's probably pretty surprised, including myself, that it's only up two basis points relative to the past couple of quarters. I know you're not concerned about it, but can you dig into at least on Fresh Foods why, you know, if your comps have been running up high single to low double in that category throughout the quarter, your margins would be down in that category? Just trying to get my hands around why.
Speaker 2
You know us. We like to drive sales. Also, when there are inflationary pressures on commodity items, we're not going to just take the price of something up the next Thursday afternoon to get back to the margin. We're going to lag a little bit. Certainly, with volatile pricing on bakery, meat, Food Court, that's part of it as well.
Speaker 0
Okay. Okay. Were there any other categories within the four key business segments that was negative, or was just Fresh Foods down?
Speaker 2
I think a couple of them were. I'm sorry. I honestly just don't have it in front of me.
Speaker 0
Okay. Fair enough. You know, I know when you guys report your 10-K that you'll break out the segment margins between the U.S., Canada, and international, but I'm just wondering if you had that handy for 2011 now that we've completed the year.
Speaker 2
I don't have it handy, but our securities counsel is saying I don't because you can't do it until you publish it to everybody.
Speaker 0
Okay. On the membership fee, just wondering why $110? You know, what was so magical about that number? Prior
Speaker 3
Conversations that we've had, you've suggested maybe it'd be $125 and you'd do like a $20 coupon. I guess just trying to get a sense for, you know, why $110 and, you know, looking ahead, when would you look to raise the fee, you know, in Asia and the UK and Australia?
Speaker 2
First of all, I think historically when everybody's ever asked about if you took the $100 up, would you take it up? I said, "Look, who knows? You know, if you say what could you do, you could take it to $105, you could take it to $110." I think I probably said that you could take it up more than that, but then you give some of it back because that'd be a big increase on a % basis versus the core. Never was there any, you know, giant sensitivity analysis of what should we do here. If, you know, we priced it based on what we feel. We recognize that some of it relates to the underlying membership, which allows you to shop at Costco.
Some of it relates to the variety of services that are important and valuable that allow you to, that is allowed to the executive, afforded the Executive Member. I don't want to be too scientific about it. You know, we're retail merchants and we felt that that was the right price.
Speaker 3
Outside the U.S., plans to raise it?
Speaker 2
There are currently no plans, but you know, things change. Not tomorrow, 10 years from now, who knows? I say that because, you know, right now we focus on what we're doing here, recognizing we're a lot newer in other countries, and particularly in Asia with our expansion, and we'll go from there.
Speaker 3
Okay, great. Thanks.
Speaker 1
Your next question comes from Deborah Weinswig with Citigroup.
Speaker 3
Hi, Richard. This is Nathan Rich filling in for Deb today. My first question is just on the competitive environment. Are you seeing any change in promotional intensity or pricing at either the supermarkets or any of your club competitors?
Speaker 2
The only thing that has been pointed out to me in the budget meeting is more related to a holiday, you know, a few holiday items like, you know, soda pop before July 4th or before Labor Day, you know, things that, you know, those types of items that supermarkets or Walmart would do the two or three weeks leading up. Overall, the answer would be no.
Speaker 3
Okay, great. I just wanted to comment or to clarify your comments on inflation. You said that you're seeing inflation in food and sundries and fresh foods in the low to mid-single-digit range. Are you expecting that to moderate as we go through the next quarter or so?
Speaker 2
First of all, what we know is what our buyers tell us when we ask them. What we know is when we see the LIFO index, as an example, the inventory pool of food and sundries year over year for all of last year was up 5% or 6%. Now, recognizing not all that translates to the bottom line, some of that causes increased penetration of primary label, which are at lower prices. The LIFO index is not an exact science. It's an exact science on calculating the LIFO index, but it's not an exact applicable to what we're seeing everywhere. It's a best guess in using that as a measurement. When I say on a year-over-year basis, we are still seeing low to mid-single. When asked the buyers, when do they see price relief?
In our fresh foods area, our Senior Merchandise Merchants over there have said they expect relief not for three to six months in some areas simply because of commitments made by the vendor for certain materials or by us. Some things we're seeing already. I think it's on a year-over-year basis, there's still inflation. From the prices today, in the first four weeks, we saw very modest, almost no, but very modest inflation, almost flat. Hopefully, though, over the next three to six months, as of the beginning of this fiscal year that just started five weeks ago, we will see some modest inflation, but there's no way to know.
Speaker 3
Great, thanks. Just my last question. Do you have the private label penetration for the year handy? Could you just discuss your kind of long-term target for private label?
Speaker 2
I don't have the exact number in front of me. I don't know if we've gone through every department and calculated, but it's the low 20s. You've seen a chart that I think Jim put up a couple of years ago that said the goal wasn't defined if it's five or ten years, but probably somewhere in there. The goal would be to be in the mid-30s and maybe up as high as 37 with a higher proportion in the food and sundries and health and beauty aids and things like that. I think that's a stretch goal. It'll keep going in that direction, but there's no timeline. Last fall we started, we introduced a variety of things, and these are just examples of canned goods, both fruits and vegetables. We continue to do that.
There's a lot of nut items and snack items that we've done of late, and we continue to come up with new things. We had shearling boots the last couple of years and some additional apparel items, men's dress pants on top of the shirts. Again, I think the trend is that direction. We're not committing to an exact number other than when asked, when Jim talked to the merchants in the different departments over the last year, what are your goals over the next five and ten years? You get up to a number that certainly has a three in front of it if we continue in that direction, but there's no guarantee of how long it takes to get there.
Speaker 3
Great, thank you.
Speaker 1
Your next question comes from the line of Laura Champagne with Cowen & Company.
Speaker 0
Richard, just briefly, you mentioned that you're seeing a change in trend in electronics. Is that just lapping the deflationary issues over the past year? Is there something really changing in the product cycle there?
Speaker 2
I don't know. My guess is, you know, it's only one month, so let's see what happens next month, frankly. It's good that it had a plus sign in front of it instead of a small minus sign. At the end of the day, I'm sure it's a combination of things, including timing of MVMs. If you recall a couple of years ago, one of the issues in things like big ticket items like TVs and at the time laptops was there were fewer deals out there to be had in terms of the $300 and $400 off contributions from vendors to drive it. There's been some of that picked up. I think it's a combination of things. I certainly believe that our increased frequency helps. You walk into a Costco, what's the first thing you see? These incredible high-definition TVs with cool stuff on them.
I'm convinced that the fact that our frequency continues to be high, we, you know, if it's in front of you, some of the people are going to buy it.
Speaker 0
Thank you.
Speaker 1
Your next question comes from the line of Michael Montani with Evercore ISI.
Speaker 2
Hey guys, this is Mike on from Greg Melich. How are you?
Good, thank you.
Richard, just two quick ones. The first one was on dotcom. Did you mention, and perhaps I had missed it, but is dotcom now about $2 billion of sales?
Yes, a little over.
Okay. Just on the traffic side for the U.S., can you help us understand, you know, I think it was about 4% traffic trend on the quarter, but how would that split out for the U.S. versus international?
We don't break it out. Recognizing the U.S. is 72 or 73% of our company, it's going to, even if it's clear, I would guess it's lower because you have a lot, you know, when you've got newer warehouses, you've got warehouses that are a half, one and a half, two and a half years old, you're going to drive more frequency, but not meaningfully lower.
Okay, similar. I guess just last, I was going to ask about, from the Executive Membership standpoint, can you share what % of the Executive Members today spend enough to reach the 2% maximum of $500?
We don't disclose that. I'm not trying to hide it from you. It's clearly a small percentage.
Okay, thank you very much.
Yep.
Speaker 1
Your next question comes from the line of John Feldman with Chelsea Advisory Groups.
Speaker 2
Yeah, hi, good morning guys. Joe Feldman here. Quick question, a couple of questions. To go back to the fee increase and the timing of it, Richard, in past calls and discussions with you guys, it seems like you'd made commentary that you weren't likely to raise fees unless you felt the economy was in a better position or a little more stable, that your core customer could handle it, assuming the economy was more stable. Should we read into the raise today that that's the case, that your view of the world is things are kind of stable and okay going forward or?
No, I think that in the past, when asked the question and me being guilty of trying to be helpful, you say, you know, what are the reasons? One reason would be, I think historically I've talked about the fact that we've always been confident on the loyalty of our member, that the fact that our renewal rates are high, the fact that we would be confident to do so. One argument against it would be the economy. By doing it now does not imply that we believe the economy. In fact, I just recently, earlier in the conversation, said I would see if you ask senior management around here, the collective view is things aren't getting better fast out there. Again, there's no, I don't think you could put all this in and predict why we did it now versus whenever, this is when we did it.
Okay. Another question, kind of on SG&A. For as terrific a job as you guys do controlling expenses and costs, I guess we were a little surprised you didn't get a little more leverage with such a strong comp through the quarter and continues to be strong. I was wondering, was there anything there? I know in the past you guys have been generous towards your employees, with giving, helping offset some of the healthcare costs a little more than in the past. Anything that you did this quarter like that?
Yeah, we felt pretty good about SG&A, frankly. I mean, given our history of where, I did mention, you remember that I mentioned the $0.02 last year, the benefit, it was a combination of benefit. I believe one of those, that quarterly adjustment of 10 bps, so that was part of it as well. The fact of the matter is that we, again, we choose not to do some things that might help SG&A. There's nothing new that is helping SG&A more. We feel pretty good about it. I think if you look at it, we've actually seen the underlying trends, relatively speaking, improve a little bit.
Got it, thanks. If I could just ask one last question, back to that whole customer behavior standpoint, are you guys seeing anything within the customer themselves, like, is your core customer, are they trading down to some more of the private label, so to speak, or are they changing their tender? Are you seeing more people use cash versus credit or the size of the transaction? Is it a smaller unit per transaction, things like that?
Tenders have not changed. The ongoing trend is more debit and credit for years. Those are both big numbers now, and they still grow, but grow slightly. We've seen no trend change in it. The average basket surprisingly is up a little. Inflation helps that a little bit, but the average basket is up a little, notwithstanding the fact that the frequency is up because people are coming in more frequently to buy food, and my guess is, you'd think it would be down a little bit, and it actually is up a little. That makes us feel pretty good right now. I think part of that is driving more people in. The demographic of our members is a little higher end. I'd like to think that some of it's our merchandising. All those things help.
In terms of, we have a little bit of blinders on because our numbers have been pretty darn good, and the frequency has surprised us all, that this compounding of 4% on 4% on 4% now for two or three years.
Yeah, no, that's great. Thanks for your help.
In terms of, you know, we would say trade up to private label, but in terms of trading towards private label, there's still increasing penetration. Nothing like we saw, and I know I mentioned back in the first half of calendar 2009, right after the financial crisis at the end of calendar 2008, we saw a higher rate of increase in private label faster. I think I mentioned back then that over a six-month period on the food and sundry side of our business, we saw like a 300 basis point delta in sales penetration of private label. That was unprecedented. No, we're not seeing anything like that. It's still continuing upward, but nothing crazy like that.
Got it. Thank you. Thanks for your help. Good luck with the quarter.
Thank you.
Speaker 1
Your next question comes from the line of Bob Nelson with Barclays.
Speaker 2
Hi, good morning, Richard. A couple of quick questions. First, can you give us the DNA from Q4? The second question I have is, can you give us gas gallons in September? I don't know if you gave that out. The third question that I have is, can you talk about the trends in audio? I think you're now cycling the loss of Apple in your stores. Can you maybe talk about the trends here a little bit?
Depreciation and amortization for the quarter was $273 million compared to $855 million for the year. What was the next question?
Gas gallonage in September. Comp gallons.
Yeah. 10%.
Got it. What about trends in audio? Are you cycling the loss of Apple now? Is that right?
Yeah, we've never, clearly it's down because it's zero now. The fact of the matter is that, at least in September, our majors was up year over year, so we are cycling it. As we go forth, Apple has great products, but we're selling a lot of other things right now. There's not a lot of concern about that.
Speaker 1
Once again, to ask an audio question, press one.
Speaker 2
One less.
Speaker 1
Your next question comes from the line of Bob Nelson with Piper Jaffray.
Speaker 0
Hi, thanks for taking my question. Just on another question on the private label for you. Is there a big difference between in international markets, the acceptance of the Kirkland brand there versus domestic?
Speaker 2
It's well accepted everywhere. Yeah, we have a lot of products over there. The penetration is lower because there's less, you know, needless to say, in the U.S., there's more U.S. source goods than in other foreign countries, but it's very well accepted.
Speaker 0
Okay, great. Secondly, just also on international, you talked about half of the warehouses going international next year in fiscal 2012. Can you talk about, are you going to any new markets and when would those potentially be on the horizon if not?
Speaker 2
There's probably no new markets in fiscal, there will not be any new markets in fiscal 2012 through August of 2012. Whether it's most likely 2013, we will open in at least one new country in Europe, and by 2014, two new countries in Europe is our best guess, and all that's, you know, subject to change.
Speaker 0
Okay, great. Thank you.
Speaker 2
Why don't we take two more questions?
Speaker 1
Once again, to ask an audio question, press one. For your last question, a follow-up from the line of Michael Montano with Evercore ISI.
Speaker 3
Hi, it's Greg this time from Evercore ISI. Richard, the $1.5 billion CapEx or the $140 to $160, do we consider that the new normal with around 20 openings? Because it is historically high. I just want to know if as we go international, it's just more expensive or dot-com investment. What sort of, what keeps it at that level?
Speaker 2
International is more expensive. That doesn't account for all of it. What it partly includes is the expectation that it's going to be a busy fall next year, right after the fiscal year ends. We have a lot, again, as I mentioned, we have a lot of irons in the fire. It's a combination of overseas being more expensive. The assumption is in looking at our own budgets that we'll be committing to land and starting construction on sites that don't hit 2024. A higher amount of that now versus as compared to a year ago. There's probably an extra $50 million in IT as we are in the process over a three-year program, which inevitably goes longer, of modernizing some things and creating a second data center, which we haven't had before. It's always a lot of money, but not a lot relative to that.
All those things add up to a little extra.
Speaker 3
Great. Secondly, on the theory of less is more, if you were to look overall last year, that 5% U.S. comp, what would you say was the traffic versus ticket, and the ticket, how much of that do you think was really inflation at the end of the day?
Speaker 2
I think traffic was about 3.5% to 4%, probably closer to 4%. Yeah, yeah. The rest is everything else. Inflation was probably the biggest chunk of it.
Speaker 3
Got it. Perfect. Thanks a lot.
Speaker 2
Keep in mind, frequency was up though, so that by definition brings your average ticket down.
Speaker 3
Sure.
Speaker 2
We're driving more frequency.
Speaker 3
That's good.
Speaker 2
Okay, one last question.
Speaker 3
Thanks.
Speaker 1
Once again, to ask an audio question, press star one.
Speaker 2
Was that it? Thank you very much, guys.
Speaker 1
This concludes today's conference.
