Costco Wholesale Corporation (COST) Q3 2018 Earnings Conference Call Transcript

Costco Wholesale Corporation (COST -0.24%)
Q3 2018 Earnings Conference Call
May 31, 2017, 5:00 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good afternoon. My name is Josh, and I will be your conference operator today. At this time, I would like to welcome everyone to the Q3 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. If you would like to ask a question during this time, please press * then the number 1 on your telephone keypad. If you would like to withdraw your question, press the # key. Thank you.

Mr. Richard Galanti, CFO, you may begin your conference.

Richard Galanti -- Chief Financial Officer

Thank you, Josh, and good afternoon to everyone. I'll start, of course, by stating that these discussions 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. Forward-looking statements speak only as of the date they're made, and the company does not undertake to update these statements except as required by law.

In today's press release, we reported our operating results for the third quarter of fiscal 2018, the 12 weeks that ended on May 13^th. The income for the quarter was $750 million, or $1.70 per share, compared to $700 million or $1.59 per share last year in the third quarter. Now, last year in the third quarter, our net income was positively impacted by an $82 million or plus $0.19 per share tax benefit. And that was in connection with a $7.00 per share special cash dividend that we had done at the time.

I'll start by reviewing our third quarter operating results and then allow some time of course for Q&A. In terms of sales, net sales for the quarter came in at $31.62 billion, or 12.1% increase over last year's third quarter sales of $28.22 billion. Net sales for the first 36 weeks of fiscal '18 increased 12% to $95.02 billion, up from $84.82 billion last year to date, last year for the first three quarters of the year to date. In terms of comparable sales, which were recorded in the press release, for the 12-week period, the U.S. was a 9.7%, excluding the impact of gas inflation, it was 7.7%. Canada, on a reported basis for the 12 weeks, comps were 11.3%, and ex-gas inflation and FX impact was up 4.8%. Other international reported at 11.8, ex-gas inflation and FX 5.8. So, all told, total company, 10.2% comp, and ex-gas inflation and FX up 7%. Ecommerce, which we of course separated out here, is 36.8% for the 12 weeks and 35.5% ex-FX. So, that continues strong. Similar statistics in the press release for the 36-week year-to-date.

In terms of third quarter sales metrics, third quarter traffic or shopping frequency was up 5.1%, both worldwide and within the U.S. Strengthening foreign currencies relative to the U.S. dollar impacted sales by approximately 145 basis points to the positive. And gasoline inflation added an additional 170 basis points. Cannibalization weighed on the comp to the tune of minus 60 basis points. Our average frontend transaction or frontend ticket was up 4.9%, and again, excluding the benefits from both gas inflation and FX, that average ticket would have been up somewhere in the mid-high single digits, about 1.7%, 1.8% up.

Next on the income statement, membership fee income. Reported in the quarter, $737 million, up $93 million from $644 million during Q3 of last year, or up 14.4%. The benefit of strong foreign currencies was about $9 million of that $93 million increase, so ex that, it would have been up $84 million. Now, of the $93 million increase year-over-year, a little over half related to the membership fee increases we have taken in the last year, year-and-a-half, the majority of which came from the $5.00 and $10.00 annual fee increases taken last June 1st in the U.S. and Canada. There's a small balance of that from the fee increases taken in other international operations starting back in September of 2016.

We will continue, by the way, to see membership fees based on the deferred accounting, the June 1st of '17 increases in the U.S. and Canada last year. We'll continue to see the benefit of that year-over-year increasing the membership fee line. I'll peak in Q4 this coming quarter, this 16-week quarter, and then still, year-over-year increases, but -- and all, or at least three, maybe four, all of next year and fiscal '19 as well. In terms of membership fee renewal rates, our U.S. and Canada member renewal rates at Q3 end came in at -- were 90.1%, similar to where they stood a quarter earlier at 90.1%. A slight uptick, but still rounding to the 90.1%. Worldwide rates improved from 87.5% -- improved to 87.5%, up from 87.3% 12 weeks ago at Q2 end, with the uptick in renewal rates in our international operations led by Asia, both Taiwan, Japan, and Korea.

In terms of number of members at Q3 end, in terms of total number of households, at the end of Q2, it stood at 50.4 million, and 12 weeks later at the end of Q3, it is now -- it then stood at 50.9 million. Total cardholders, 92.2 million a quarter ago, 12 weeks ago, and at Q3 end, 93.0 million. During the fiscal quarter, we had two new openings. Also at Q3 end, as of Q3 end, our paid executive member base stood at 19.0 million households. That's an increase of 199,000 households from 12 weeks earlier, about 17,000 new Gold Star members per week.

Related to the benefit from last year's fee increases, that year-over-year quarterly fee increase, as I mentioned, will continue to benefit both Q4 and into several quarters next year, but on a diminished amount each year-over-year quarter.

Going down to the gross margin line, our reported gross margin third quarter was lower year-over-year by 46 basis points, coming in at 11.05% during the third quarter of fiscal '18, compared to 11.51%. Now, that minus 46 basis point figure year-over-year on a reported basis, excluding gas inflation, it could have been minus 28. And let me again ask you, as I usually do, to jot down just a couple of columns for Q3 '18. The first one would be as reported. The second one would be excluding the impact of gas inflation. The five line items, the first one would be merchandise core. In Q3 '18, on a reported basis, that was down year-over-year by 33 basis points, and ex-gas inflation, down by 17 basis points. Ancillary businesses, reported minus 10 basis points year-over-year, minus six ex-gas inflation. 2% Reward, plus two, as reported, and flat without gas inflation. Other minus five and minus five, and I'll talk about that in a second. So, total, if you add up those two columns on a reported basis, again, gross margin was lower by 46 basis points, ex-gas inflation, lower by 28 basis points.

As I mentioned, looking at the core merchandise categories in relation to their own sales, so core-on-core, if you will, margins year-over-year in Q3 were lower actually by four basis points. Some categories within core gross margin year-over-year in Q3, Food and Sundries was up slightly, and Hard Lines, Soft Lines, and Fresh Foods, the other three components of core, were down just slightly. The slightly year-over-year core-on-core gross margins in the 3rd quarter resulted from our continuing investment in price to drive sales, and widened the value gap between us and our competition. Ancillary and other businesses gross margin were reported down 10 and down six ex-gas. Some of that is increased gas sales penetration, which is a much lower margin business. Other parts of it is -- some of the other ancillary businesses were down a little bit as well.

2% Reward was flat ex-gas, as I mentioned, and Other, which was a minus five year-over-year comparison, five basis points. Last year, we were incurring some incremental costs. Well, we had been -- as I mentioned the last two quarters, we'd been incurring some incremental costs, primarily related to the role out of our new centralized returns facilities. This will continue to impact us for one more quarter in Q4. In each of the prior two quarters, I had mentioned on kind of a sequential basis on the year-over-year Q1, we estimated it was about a seven basis point negative impact; in Q2, minus six, and in Q3, minus five. And again, there'll be some small detriment, I assume, in Q4, and then we'll have anniversaried that.

Moving to SG&A, our SG&A percentage in Q3 year-over-year was lower or better by 32 basis points on a reported base, and ex-gas inflation, better or lower by 16 basis points, coming in at a 9.98% of sales this year reported, compared to 10.30 last year. Like with gross margin, I'll ask you to take the two columns. First one's reported Q3 '18, and the second column would be excluding the impact of gas inflation for Q3 '18. First one, operations. Better, or plus 26 basis points on a reported basis, and plus 13 basis points, or lower, ex-gas. Central, minus one and minus three. Stock compensation, plus two and plus one. Other, plus five and plus five. So, if you add those two columns up, the first column would add up to the reported 32 basis point improvement in SG&A. And again, ex-gas inflation, it would be plus 16 basis points.

Basically, it's all about sales. You know, core operations lower, better strong topline sales lead to improvement in payroll and benefits, and other variable and fixed costs, generally speaking. Central expenses higher year-over-year, as you can see in the little chart we just made, by one basis point on a reported basis and three without gas, primarily related to our continuing IT efforts. Stock compensation, again, lower by a little. Again, strong sales helped that. Other, better by five. That really -- nothing this year. Last year, we pointed out that there were two nonrecurring legal items in Q3 last year, totaling $14 million or five basis points. And we didn't have any detriment related to that this year.

Next on the income statement is preopening. Preopening this year came in at $8 million, lower by $7 million from last year's $15 million. This year in Q3, as I mentioned, we had two openings, one in Mexico and one in Korea. Last year, we had three openings, one each in the U.S., Canada, and Mexico. Last year in the number, we also had some additional spend in Q3 relating to the fourth quarter openings last year in France and Iceland. Upcoming in Q4 this year, we have 15 total openings, 13 net new units plus two relocations. That compares to 12 gross and net locations last year in the quarter.

All told, reported operating income in Q3 came in at $1,067,000,000, or up $99 million, or 10% higher year-over-year than last year's $968 million. Below the operating income line, reported interest expense came in at $16 million higher year-over-year, at $37 million this year. That compares to $21 million a year ago. That's mostly a result of last May's $3.8 billion debt offering that we did in conjunction with our special dividend.

Interest income and other was higher or better year-over-year by $23 million in the quarter. Actual interest income and -- mostly interest income in the quarter was better or higher by $6 million. We also benefited year-over-year comparison by various FX items to the tune of $17 million. That's the number that fluctuates both ways. Generally speaking, it's, you know, in the $0 to $15 million range. But this one was $17 million.

Overall, pre-tax income was higher by 11%, or $160 million in the quarter, coming in at $1,000,071,000, compared to last year's $965 million. In terms of income taxes, our tax rate in the third quarter this year came in at 28.8%, compared to last year's reported tax rate of 26.8%. Now last year of course, on a normalized basis, I mentioned that we had that $82 million tax data that related to the national dividend. Last year's normalized rate was 35.5. For fiscal '19, based on our current estimates, which of course are always subject to change, we anticipate our effective total company tax rate for the entire year -- with the change in U.S. tax rates benefiting the entire year, the tax rate to be approximately 28%, as we'll have the full fiscal year under the new U.S. federal rates.

Before I leave the subject of tax law changes, I'll make several comments on that in terms of what our plans are vis-a-vis the savings. As I mentioned last quarter end, we really don't expect any major changes to our capital allocation plans. We generate good cash and pretty much do the things that we want to do in terms of expansion and in terms of regular dividend, and in terms of stock buybacks as well. As mentioned on last year's earnings call, where I said we would use some of the income tax savings in the U.S. to benefit our U.S. employees, and that there will be increases in their hourly wage rates, effective June 11th, our U.S. starting wages will increase from $13.00 and $13.50 an hour to $14.00 and $14.50 an hour, so $1.00 an hour for entry level, with all other hourly warehouse employees receiving an hourly increase anywhere from $0.25 to $0.50 per hour. The estimated annualized cost of these increases that will impact about 130,000-plus thousand employees in the United States will be $110 to $120 million pre-tax, with Q4 being impacted by a little more than $25 million pre-tax.

We have been investing -- second, next, we have been investing and will continue to invest some of the savings to drive our business, and this will certainly include investing in price as well as other activities. Some of the tax savings this way will fall in the bottom line indirectly by investing and driving value in sales. And then some of the tax savings will go straight to the bottom line.

A few other items of note. In terms of expansion, I mentioned we have 15 total openings scheduled for the upcoming 16-week fiscal fourth quarter, which include two relos, so we'll have 13 net openings. That would put us at 21 net new openings for the fiscal year, 25 total, less four relos. In Q1, we opened seven locations, net of five. In Q2, we opened one. In Q3, as I mentioned, we opened two. And for all of fiscal '18, again, the 21 net new. Of those 21 net new, a little under two-thirds of them will be in the U.S. Additionally, for fiscal '18, we will relocate the four, all of those in the U.S. and those relocated to better and larger facilities. As of Q3 end, total warehouse square footage exceeded 108 million square feet.

In terms of stock buybacks in Q3, $55 million was expended. So, Q3 year-to-date, for the 36 weeks, we repurchased $233 million worth of stocks, or 1.337 million shares, at an average price of $174.30 per share. In terms of our e-commerce activities, e-commerce, we currently operate commerce sites in the U.S., Canada, UK, Mexico, Korea, and Taiwan. Total e-commerce for the third quarter were up 37% year-over-year. Again, that was the Q3 of 36.8%, year-to-date, 36.1%. And for the four weeks of April, which we've previously reported, it was up 43.1%.

We continue improving and slightly expanding our offerings. We've been helped of course by improved member service and better search and checkout and returns processes. But first and foremost, we're delivering greater value to members, and more people are actually -- are looking at it, opening their emails, and transacting. This stuff works, and we'll continue to see -- we believe, see some good results there.

In the third quarter, our site traffic conversion rates and orders were extending and improved year-over-year. And again, we would expect that to continue, at least in the near term.

Online grocery, both our dry grocery two-day delivery and our same-day fresh delivery through Instacart, both of these were rolled out last October and continue to grow nicely. Still a small percentage of the total company, but growing, and we're seeing good things from it, both in existing markets, plus, in some cases, markets where an existing Costco might be a little further away.

We continue to improve the online merchandise and services offerings, with Hot Buys and Buyer Picks, with Buy Online and Pickup in the Store. Some limited big-ticket items like jewelry with some laptops, and most recently handbags. One other additional comment is that we're seeing that plus or minus about half, a little under, a little over, of those people will come in and shop as well before they pick up the item.

Another example of how we're seeing some of this stuff benefit us, and I've given examples in the past -- the most recent, probably a good example is household furniture. You know, historically, this was only in-warehouse, and generally for eight or so weeks per year. Now it's online all 52 weeks, and we're seeing good increases in sales there, incremental sales similar to our success in selling appliances that I've discussed in the past.

Overall, all these efforts are positively impacting our business, both online and in-warehouse, and are helping our sales momentum and increasing member awareness of our digital presence at the same time. We're seeing good traffic increases, and hopefully we can continue with these types of activities.

Overall, omnichannel is certainly working to enhance and increase our business. One last example, we now have, in 220 of our roughly 520 U.S. locations, what I'll call e-commerce product showcases and online ordering capabilities. All U.S. locations will have something in place -- in effect in place by this year's upcoming fall holiday season. In terms of upcoming releases, we will announce our May sales results for the four weeks ending June 3rd next week on June 6th, and our fiscal '18 fourth quarter scheduled earnings release date for the 16-week fourth quarter ending September 2nd, this will be after the market closes on Thursday, October 4th, with the earnings call that afternoon at 2:00 PM Pacific Time.

I do want to point out that last year, fiscal fourth quarter was 17 weeks. This year, it's 16 weeks. So, keep that in mind as you plan your numbers. As a reminder, last year's fourth quarter was 17 weeks, as I mentioned. With that, I'll open it up for Q&A, and Josh, I'll turn it back over to you for that.

Questions and Answers:

Operator

Certainly. At this time, if you'd like to ask a question, please press * then the number 1 on your telephone keypad.

Your first question comes from Simeon Gutman with Morgan Stanley. Your line is open.

Simeon Gutman -- Morgan Stanley -- Analyst

Hey, Richard. My first question is on the gross margin. The core-on-core has been roughly flattish to down a little bit low single-digits. I think you said down four. I know you don't guide to it. But I wanted to ask if that's roughly the ballpark that we should think about, or is that a consequence of just that's how the margins of the business and the sales play out?

Richard Galanti -- Chief Financial Officer

Well, starting with the first part of the question was -- and I, you know, don't want to comment on it. Look, at the end of the day, there's lots of moving parts to it. All I can tell you is we've been fortunate to have, you know, a few different buckets of money to be able to do a lot of things, starting with the credit card transition, continuing with membership fee increase, continuing with the income tax, and even add a little to that, some of the Sam's closing. All these things, we were able to do. We feel very good about what we're doing, and you know, and the other thing is, as you've all heard over the years, when costs are going up, we want to be the last to go up, and when prices are going down, when costs are going down, we want to be the first to go down.

When you look at some of the things that have happened, whether it's inflationary freight costs, those things generally are now in there. But we pride ourselves on holding off on some of those things. So, I can't really tell you where we'll go with this, other than we feel good about what we're doing. Keep in mind also that some of this has to do with not just quarter-on-quarter, but some of the penetration, the sales penetration of things like low-margin gas. We feel really good about where we are pricing-wise and what we're doing with it in driving our business.

Simeon Gutman -- Morgan Stanley -- Analyst

And the 110 to 120 pre-tax weighted investments, do you think about the investment in price any differently, or the two are unrelated in the way you manage the business?

Richard Galanti -- Chief Financial Officer

I think they're -- well, and keep in mind, given that the income tax changes were unique and don't happen every day, we certainly felt the right thing to do was to allow it certainly to help our employees, as well as drive our business and improve the member value. I look at how we've done it -- we feel pretty good about what we've done and where we're going with it. And but we don't look at it as let's take a third, a third, and a third. It's just, this is how we're doing it. And we want to -- we recognize that there's a lot of things to be able to do with it, and you know, if you go back years ago, when I look at my comment on some that have fallen to the bottom line, we view that as part of the process here too.

Simeon Gutman -- Morgan Stanley -- Analyst

Okay. Thanks, Richard.

Operator

Your next question comes from Michael Lasser with UBS. Your line is open.

Michael Lasser -- UBS -- Analyst

Good evening. Thanks a lot for taking my questions. So, when you look at the ecom transactions, how are those impacting your profitability, both with just the e-commerce transactions themselves, and then those that are being picked up in stores? Does half of those include a Shop in Store that goes into the warehouse?

Richard Galanti -- Chief Financial Officer

Well, first of all, the Buy Online and Shop in Stores is some limited, high-ticket, small size items, where in many cases, we find members would love to buy it but didn't want to -- you know, couldn't have it delivered to where they work, didn't want to leave it on their doorstep. And what we found is, which we were a little surprised by, is when they do come in, a lot of them come in and shop first and then pick it up. And shop quite a bit, frankly. It's a small piece of business. We're not looking to have people come in and have to refrigerate stuff and order online, and then we've got to have refrigerators and freezers filled, waiting for them to come. These are limited areas where we think we can drive business and provide that member service.

Michael Lasser -- UBS -- Analyst

And is it having an impact on your bargain structure at this point?

Richard Galanti -- Chief Financial Officer

No, not really. I mean, you know, keep in mind, like a lot of companies out there, we're doing a lot of things. If you think about what we're doing with the two delivery things, there's some inefficiencies of starting it up and ramping it up and buying equipment for box-making and whatever else. We're not really talking about all these little things, but there's things there. But no, when we're doing some of the things, Hot Buys, some of that is our vendors, and some of that is the monies that we have to be able to use. As I mentioned before, I think that for every dollar that we have to use, we feel we get kind of a bigger bang for that buck than others, simply because of limited targeted items.

Michael Lasser -- UBS -- Analyst

And my follow-up question is, this year's third quarter ended a week later into May and began a week later into February. So, you probably got a higher volume week and gave up a lower volume week. Did that calendar shift effect have any impact on your sales and profitability in the third quarter?

Richard Galanti -- Chief Financial Officer

Not for the quarter, no.

Michael Lasser -- UBS -- Analyst

Thank you.

Richard Galanti -- Chief Financial Officer

Yes, thank you.

Operator

And our next question comes from Chuck Grom with Gordon Haskett. Your line is open.

Chuck Grom -- Gordon Haskett -- Analyst

Hey, thanks, Richard. On the digital front, any learnings so far from Costco Grocery? In particular, are you seeing a new shopper, or is it an existing shopper that's making an incremental purchase? And then separately, can you remind us of the SKU count online today and where you see it going forward?

Richard Galanti -- Chief Financial Officer

Well, on the last question, SKU count, I think it's approaching 10,000. We don't see it getting a heck of a lot bigger, but you can keep in mind, over the last couple of years, we've added lots of what I'll call velocity items, food and sundries items, health and beauty items, apparel items, which is getting people to open their emails, if you will, and think about coming back more often to take a look without us having to remind them. And so, you know, all those things, I think we'll continue to see. And then I'm sorry, the first part of the question?

Michael Lasser -- UBS -- Analyst

Just the --

Richard Galanti -- Chief Financial Officer

I mean, it's really still too early to tell. We clearly are getting some customers. And in the case of the two-day, which is dry and covers the entire continental United States, yeah, we are picking up some members that we never had before because we were 1,500 miles away from the nearest physical Costco. And we're really just -- and I talked in the last quarter about there's really been very limited marketing of that, as we're just getting it up and running and rolling it out. And it's too early to tell what impact, if any, it has in terms of same-day grocery. Historically, we saw in some early cases, actually like in the Bay Area, which didn't offer Fresh, by the way, you saw perhaps an existing member shop a few less times that year, but shop several times online, in some cases as fill-ins, and they're still coming in. The sum of the two was still better, a little better than it was before. I think we'll have to see. As you might expect, we're gonna figure out how to do it so it's not -- it benefits us in some ways that I think we're fortunate that some traditional retailers don't have that same benefit.

Michael Lasser -- UBS -- Analyst

Okay, thank you. And then just on -- it's been a while since you've updated us on your long-term Club goals. Just curious where you see saturation, where you think you could see the Club base looking out maybe five to 10 years.

Richard Galanti -- Chief Financial Officer

Well, again, we'll have to see. Again, you know, 21 this year is probably a few less than we thought we were gonna be able to get done, so that has a couple delays. Some of it's international; it takes a little longer. Some of it is our condition, particularly in some of the newer countries. We want to grow people there, and as you know, if you look back at Japan, I think we got to six over the first five years, and fast-forward several years, we're in the mid to high twenties. We got to three over two-and-a-half or three years, two-and-a-half-plus years in Australia. So, I think you'll see those numbers go up. If I had to guess, an honest, educated guess, somewhere in the mid-twenties over the next five years. Probably a couple in business centers, two to three, who knows.

And in terms of U.S., on a base of 520 today in the U.S., is somewhere in the 15-ish range over the next few years, and largely would say maybe it comes down a little bit, maybe -- it's helped a little by business centers. We'll have to see. We still -- we keep finding and surprising ourselves as it relates to the ability to put another unit in, and even getting somebody to cut their drive time, if you will, to the nearest Costco from 30 to 15 minutes can be very meaningful, as we've seen in places like San Jose, and Redmond, and other places, so we'll see.

Michael Lasser -- UBS -- Analyst

Great. And my last question, just on the grosses, you said the core-on-core down four. Anything unusual in the quarter? Was there any mix pressure or any inventory issues, given some of the weather? And it sounds like most of the price investments have been proactive. Just wondering if you guys have done a deeper dive look into elasticity just on some of those price investments.

Richard Galanti -- Chief Financial Officer

Elasticity is not a word we will ever use or think about. You know, we're merchants, and we're constantly driving value. I think you've heard us say before, this is all about us. Who's our toughest competitor? It's us. And I think there's a little sales penetration detriment in the number that was part of that. But again, there's lots of moving parts and pieces, not just the core-on-core, but other ancillary businesses. And again, I gotta tell you, we feel pretty good about our pricing ability and our ability to drive the bottom line through good sales and the like.

Michael Lasser -- UBS -- Analyst

Great. Thanks and good luck.

Operator

Your next question comes from John Heinbockel with Guggenheim Securities. Your line is open.

John Heinbockel -- Guggenheim Securities -- Analyst

So, Richard, a couple of things, maybe along the lines of convenience. When you think about bulk as inside the box, has there been much thought about doing more items and maybe bulkier items that take up space, kind of get them out of the cart, pick them up on your way out? And if so, would that -- do you guys think that would lead to more items per shopping trip if people were kind of buying paper and beverage not in the box, but on the way out or in the lot?

Richard Galanti -- Chief Financial Officer

The short answer is no.

John Heinbockel -- Guggenheim Securities -- Analyst

Okay.

Richard Galanti -- Chief Financial Officer

Well, there would be some things added to the Buy Online, Pickup in Store. I'm sure there will be a few other things. But it's not like we're saying, hey, what else can we do there? We're doing a little of that because the few things that we've done have worked. But you know, also, take something as simple as bulk paper goods and bulk water. It's kind of like, where is that located in the warehouse? It's in the back corner. What does that make you do? It makes you go through the whole warehouse, not unlike having the fresh foods in a supermarket in the back, as we do as well. So, there's lots of different ways you can skin that cat. And I don't see us doing a lot of that. I'm sure it'll change and increase somewhat over time.

John Heinbockel -- Guggenheim Securities -- Analyst

Okay. And then secondly, you think about -- I think in the past, maybe the topic of a smaller box size comes up. But you've always like the economics of the large Club. So, if you think about maybe a box that's half as big, more convenient planning in the What's for Dinner Tonight space to a greater degree, does this ever become an attractive option for you, or not just because the economics don't match the big box?

Richard Galanti -- Chief Financial Officer

Well, never say never, but it's not on the plate right now. I mean, it's not even on the second page of the plate, so. We feel we've got plenty going on in terms of regular size boxes and big sizes boxes in terms of business centers, in terms of some vertical things that we're doing, like in the fresh and in the protein area. Some more things going on with private label and delivery. I mean, we've got a lot of good -- in our view, good things going on, and pretty happy that there's plenty of regular size box opportunities.

John Heinbockel -- Guggenheim Securities -- Analyst

Okay, thank you.

Operator

Your next question comes from the line of Karen Short with Barclays. Your line is open.

Karen Short -- Barclays -- Analyst

Hi, thanks. A couple questions. I just want to clarify. In terms of the tax dollars, you did say dollars would go to investing in price. So, I guess the first question I have is asking about the gross margin a little differently, was that something that maybe did kick up a little bit this quarter? Because you did mention fresh margins were down this quarter, and I think they were up in the prior quarter. Or should we kind of expect to see a little bit more pressure on the core gross margin going forward as you do take those tax dollars and invest?

Richard Galanti -- Chief Financial Officer

Look, obviously I can't tell you where it'll go in the future. What I can tell you is that it's not just the tax dollars. It's the credit card, it's the mem fee increase. There's a lot of things going on out there. And have we been able, as freight costs skyrocketed in the last year for everybody, to hold that a little bit? Absolutely. Ultimately, we've got to catch up on that. And we feel comfortable holding it and catching up at some point, as we have. And so, I think, you know, we feel -- all I can tell you is we feel quite comfortable as to what we're doing and how we're doing it, and that we feel very comfortable that we are our own toughest competitor, and we control those valves a little bit at that point. We don't know what's gonna happen in the future, but I don't think that's changing very quickly as we come up with new things to do.

Karen Short -- Barclays -- Analyst

Okay. And so, I guess I was also wondering, I mean, obviously you've had unbelievably strong sales now, going on almost a year. But more recently, I guess what I'm wondering is do you think that the strength in sales is just a function of stronger, not that you weren't executing before, but stronger execution in price points? Or do you think there is some benefit that you're seeing from the consumer perspective from tax dollars or tax reform dollars in their pockets? Do you have any color on that?

Richard Galanti -- Chief Financial Officer

The only color we can give in relationship to the tax reform dollars is what you and I and others here read in the paper and hear from some economists. Certainly we've heard from some of our business partners, whether it's the credit card issuers, the networks, or other types of third parties. And it seems like there's a little there, but it's hard to really dictate that. We know that pricing -- investing in price works. And we know that it tends to work generally very well, such that even in working with suppliers, in some cases, we'll partner with them to get to that -- to a lower price point, and it drives more volume, and not have to take on any of that ourselves. So, there's lots of different ways to do this.

But I think that one of the things that we've commented on, of course, is also some of the low-hanging fruit and benefits that we have because of things we have done historically. You look at the examples of appliance and look at the examples of furniture. You know, it used to be if you wanted to buy a household furniture item, if you don't have a truck, go get one or call your friend, because we don't deliver. That's changed anyway. But even so, we're still doing very well in store for those eight or 10 weeks of this example. But all of a sudden, we've got 40-plus more weeks where we're doing truly incremental business in the hundreds of millions of dollars and growing. Those are the things that I think that make us additionally -- it's not just price. Price is at the top of our list. But beyond that, there's other things that I think are benefiting us. Certainly fresh foods and what we've done there in terms of the quality and the consistency, and coming up with new items.

Karen Short -- Barclays -- Analyst

Great. Okay. And then, last question from me, just inflation at core and at retail this quarter?

Richard Galanti -- Chief Financial Officer

I think on the food and sundries side, it's picked up a little bit. And in talking to the buyers, a big chunk of that has to do with freight. And I think one of the ANOS reports out there, and the title is called "Freightening Changes to Costs". But at the end of the day, it rains on all of us. And I think on the food and sundries side, it was up in the 2% to 3% range, and probably two-thirds of ex, it was more related to freight-related costs.

Karen Short -- Barclays -- Analyst

And that's at cost or at retail, or both?

Richard Galanti -- Chief Financial Officer

That's at cost. Needless to say, if there's 35%, 40% of your business, 200 or more cost basis and core-on-core is down four, ultimately, you gotta pass that on. And ultimately, we have some additional monies to be able to use toward that to be more competitive, so.

Karen Short -- Barclays -- Analyst

Okay, thanks.

Operator

Your next question comes from Peter Benedict with Baird. Your line is open.

Peter Benedict -- Robert W. Baird -- Analyst

Hi. Thanks, Richard. The move on wages, does that effectively pull forward what you might have done or was likely to happen I guess next spring, when I think you guys are due for your next employee agreement?

Richard Galanti -- Chief Financial Officer

If you look back over many, many years, we have a three-year employee agreement. The last one is March of '16. So, and the one important thing in there of course is where do our top-scale hourly employees move each March of '17, '18, and '19 that's prescribed in that March of '16 new employee agreement? And that's prescribed. And historically, we've always done something at top of scale, and I don't see that changing. We have once or twice moved a bottom scale up. We'll see what tomorrow brings. This probably won't be the last time, particularly. And so, we'll have to see. But we really looked at it independently of that. Ultimately, if you're gonna do something and you're doing something now, it doesn't mean you're not gonna do something on that top of that next time. And again, I'm not trying to be coy. I expect whatever most people are gonna do, we're gonna do a little more on an ongoing basis.

Peter Benedict -- Robert W. Baird -- Analyst

Yeah. No, that makes sense. A quick question on the competitive tone of the market. I mean, you just kept on saying earlier that you're always your toughest competitor. But maybe, can you comment on what you're seeing as you guys are looking at some of your competitors, whether it be Club or non-Club? With all these tax dollars moving around, are you noticing them being sharper in any areas?

Richard Galanti -- Chief Financial Officer

No, I honestly believe, while there's been some -- I think all companies, not just in retail, tend to -- I'm sure many companies feel that one, there's a desire to use some of this to help employees, to share that wealth, if you will, to drive their business. I don't think it's been life-changing for any company, in the sense that one of the questions we were asked right after the announcement, we said that on an annualized basis next year, if you do simple math, roughly seven percentage points of our effective rate, from the 35-ish to the 28-ish on you take the pre-tax dollars is some low $300 million after tax benefit. And somebody asked the question, well, does that mean you might do a special dividend? Well, our special dividends, the three that we've ever done are the $2 to $3 billion-plus range.

So, this really doesn't change anything there. We're already generating cash flow to do other things. And maybe we're in the higher quartile than viable position financially, but I think overall, I think my gut and from what I've read, does it help the consumer? Sure it helps the consumer. Some of the consumers as employees are benefiting from it, and all that's good. Certainly, competition in general is benefiting consumers in terms of pricing. We feel fortunate that that pricing mode continues to widen to our benefit.

Peter Benedict -- Robert W. Baird -- Analyst

Okay, thanks for that. And the last question's just around the executive membership numbers. Those were growing, call it by single digits, in the past, even last year. This year, they're starting to grow more like mid-single, some deceleration there. Can you just talk about maybe opportunity to continue to grow executive membership here in the U.S., and then thoughts on maybe when you could be adding that to some newer markets internationally? Thank you.

Richard Galanti -- Chief Financial Officer

Sure. Well, in terms of total membership, we feel, again, pretty good about -- it partly depends on when you're opening and where you're opening. And the last couple quarters, we've opened three units, I think, in the last two quarters. We've got a bunch coming. It also depends on where you're opening. As you know, and I've given the examples of when we've done an infill in a very strong market like San Jose area or Redmond, Washington area near Seattle, we might average in three existing locations $60,000 or $65,000 per building. Annually, 3,000 to 5,000 members in that new building. But add net of cannibalization $100 to $120 million of annual sales in the first new year, the first 12 months of that new opening. And so, that is all about being close to your customer and driving more business. What was the first part of your question again?

Peter Benedict -- Robert W. Baird -- Analyst

I wanted to just [crosstalk] opportunity and then internationally?

Richard Galanti -- Chief Financial Officer

I'm sorry. The other thing is, as we've said that you're aware of, in international, we tend to do outsize number of signups. Again, there have been as many right now. Lastly, I mean, we've done I think in the past three or four LivingSocial or Groupon type activities, and they worked quite well. So well that we don't want everybody to get used to it, so we don't do them that often. We actually just started one yesterday for a two-week period. And so, that'll help a little bit this quarter, as well opening 13 or whatever number of new units, as well opening a couple more international ones. So, all those things. When we look at -- one of the questions we've been asked for the last couple of quarters was new membership growth has slowed a little bit. When you look at existing warehouses net of cannibalization, take out all the cannibalizing, the units that were new and the ones that those new ones cannibalized in those markets, we're still seeing a number in terms of member growth per warehouse in the high threes, mid to high threes, I believe. 3.7, 3.8. I think it was four six months ago. So, that certainly gives us comfort, and we feel that it should give you.

In terms of executive, yeah, I think on a weekly basis, forever it seemed like it was 20,000 a week, 22,000 a week. I think there were couple of quarters where it was in the mid-teens or maybe the low double digits. So, it's come back from that to 19,000. And some of that is ultimately, you do saturate a little bit. But part of it also, in terms of new countries, we currently offer it in the U.S., Canada, UK, and Mexico. And I think if you just looked at simply how many units we have in each of those markets -- certainly Mexico and the U.S. is not an issue. We're in the low to mid-30s in the UK, and in the low to mid-30s in Mexico. And part of that is a unique kind of a critical space because of the services that you offer that also, it's not the 2% Reward. It's the services you offer for it. I would guess that you'll see it in other countries, and that'll help a little bit in terms of driving that. But probably more and more will come from us driving the Executive -- the value of it.

We've seen some improvement when people realized that, hey, if I sign up for the Executive member card and I sign up for the cobrand Citi Visa card, that's not only the 2% from Costco, but the 2% from on the average of whatever it is from Citi Visa. And if I buy a TV that way, it's a four-year warranty, not a two-year warranty. So, all those things get people -- the car business. I mean, last year, we represented over a half a million new car sales. And if you were an Executive member in those some of those marketing items, you got a cash card that was a few hundred dollars more than if you were a Gold Star member. You can rest assured that there were people that converted for that reason, and once they did, they start to look at the other benefits of it. So, all those things help. We do a better job when you sign up of getting you to sign up as an Executive as best we can.

Peter Benedict -- Robert W. Baird -- Analyst

Okay. Thanks so much, Richard.

Operator

Your next question comes from Kate McShane with Citi. Your line is open.

Kate McShane -- Citi -- Analyst

Hi. Thank you for taking my questions. I know this has been asked a couple of times, but I just wanted to ask it maybe in a little bit different way. But with the level of cash that has come in from the membership increases and the tax reform, do you think your price investment is gonna result in greater gas historically, given the amount that you've been able to invest?

Richard Galanti -- Chief Financial Officer

I think they have. I mean, and on a general picture, if you look at just the traditional grocery industry, there's more competition generally out there. And have others come down in certain pricing? I think a little. Have we come down more? Yes. This is an old statistic, but I remember looking at traditional grocery markups, and recognizing there's been some product additions that are high margin items, especially items in the supermarket industry over time. But over 20 years -- this goes back a few years ago, so five years ago and 25 years ago or whatever, it seemed like, generally speaking, the grocery industry was going from markups that had been in the very high teens to low twenties to the mid and high twenties, or you know, and the big home improvement companies had gone from the high twenties to the mid thirties. And what has our gross margin and our marks have done? It's gone up from 10 to 12. And in fact, it's gone up from 10 to 12, despite the fact that -- and some of that is -- not despite.

Some of that is just some higher margin business, like Dravo, which has very little cost of sales, or some of the ancillary businesses, like Pharmacy and Optical, that have a very low cost of sale, so relatively speaking. And cross-sales with a higher markup to cover the costs of pharmacists and optometrists and what have you. So, I think when all's said and done, in our view, just looking at the pricing gap, we've gotten stronger. And I think we get a little more kick out of a dollar used in certain ways than perhaps others do. We're fortunate in that regard.

Kate McShane -- Citi -- Analyst

Okay, great, thanks. And my second question was just on the international business. I wondered if you could remind us of the timeline or your expectation for profitability or for France -- the newer stores in France and Spain to be profitable.

Richard Galanti -- Chief Financial Officer

Yeah. Well, I think the store level in Spain, we're there, or pretty much there or very close. And mind you, we charge -- we own many of these locations. Around -- we own around 80% of our locations. We charge a higher than current market rent factor internally just to have everything and get all our warehouses on the same schedule. And I'm talking about after that imputed rent factor as well. But on a store contribution level, yes. France is brand new. Iceland is a unique -- brand new in the last couple years. Iceland is unique because it's just a great market for us, so it's done better than planned. The others pretty much have been planned. If I go back, again, a number of years ago, our original budget in Japan -- this is 20 years ago -- was to open five units in five years. And we'd break even or start profitability toward the end of year five or early six. We ended up opening six, and I think we were profitable near the end of -- right before the end of year four. These are rough numbers.

But at the end of the day, that includes the cost of a central operation that's not gonna grow -- as you go from two units to 10 units, the market is gonna grow a lot less than five-fold. And the preopening cost of a new unit, and then the fact that you're also building your business. We start with the slow volume building as expected in some new countries, not all new countries. You're pricing your fresh foods as if you're doing a lot more business. And you know you're gonna have some cases, very low or negative gross margins sometimes with those. So, I think the timeline -- we're patient. We're also not going into any market trying to get 10 or 20 openings in one year or two years. And so, I think we've done a decent job of balancing that process.

Kate McShane -- Citi -- Analyst

That's very helpful. Thank you.

Operator

Your next question comes from Dan Binder with Jefferies. Your line is open.

Dan Binder -- Jefferies -- Analyst

Thanks, Dan Binder. I had a couple questions. First was on --

Operator

Dan Binder from Jefferies, your line is open.

Dan Binder -- Jefferies -- Analyst

Can you hear me?

Richard Galanti -- Chief Financial Officer

Yes, I can hear you.

Dan Binder -- Jefferies -- Analyst

Okay.

Operator

Your next question comes from Chuck Cerankosky from North Coast Research.

Richard Galanti -- Chief Financial Officer

Hey, Josh? Josh? Can you hear me, Josh? Josh?

Operator

Chuck Cerankosky from North Coast Research, your line is open.

Richard Galanti -- Chief Financial Officer

Josh.

Chuck Cerankosky -- North Coast Research -- Analyst

Richard, I can hear you, and this is Chuck Cernakosky.

Operator

Your next question comes from Laura Champine from Loop Capital. Your line is now open.

Richard Galanti -- Chief Financial Officer

Somebody call him. Hold on, we're having a problem with the third party here. But Chuck, why don't you go, because my guess is everybody else can hear us.

Laura Champine -- Loop Capital -- Analyst

I'm not sure he's on. It's Laura Champine. Which one of us can you hear?

Richard Galanti -- Chief Financial Officer

I can hear Laura now. So, we're gonna -- let's hold for a minute. Okay, guys, hold on a second. I'm just calling him. Just hold on a second.

Kelly Bania -- BMO Capital -- Analyst

Hi, Richard, it's Kelly. Can you hear me? Should I go ahead, or do you want to --

Richard Galanti -- Chief Financial Officer

I would wait a minute, because I don't think Josh can hear.

Kelly Bania -- BMO Capital -- Analyst

Sure, no problem.

Operator

Sorry, I can hear you now.

Richard Galanti -- Chief Financial Officer

Oh, hi. Yeah, Josh. Why don't we go back? There are a few people that -- Cerankosky and Dan -- I think Dan Binder was the first one that -- Dan Binder is the first one that you couldn't hear but we could hear, so can we go back?

Operator

You'll just have to get them to requeue up, and I'll promote them again.

Richard Galanti -- Chief Financial Officer

Okay, thank you.

Operator

You're welcome.

Richard Galanti -- Chief Financial Officer

So, go ahead. Back to you, Josh. Who's next?

Operator

So, this is Kelly Bania from BMO Capital.

Richard Galanti -- Chief Financial Officer

Hey.

Kelly Bania -- BMO Capital -- Analyst

Okay, thanks. Thanks, Richard. Just wanted to first ask quickly on gas. Did you clarify the impact from just the mix of higher gas prices versus the actual gas margins?

Richard Galanti -- Chief Financial Officer

We didn't. In terms of dollars, margins were down, but we made it up in volume. And so, you know, profitability was pretty even year-over-year.

Kelly Bania -- BMO Capital -- Analyst

Okay. And then just also wanted to go back to the comments on the food and sundries inflation, the cost inflation, I guess, of freight given -- are you seeing an acceleration in that? Are you not quite passing all of that along? Do you see your competitors passing along? Do you see that kind of accelerating as more of these vendors that maybe are feeling it are first starting to push that through?

Richard Galanti -- Chief Financial Officer

Well, I think a general comment would be is whatever cost input item is inflationary, we're gonna hold off longer than others, but you gotta do it. And you know, we, like any other retailer, we push back with the vendor and try to figure out smarter ways to do things. And but overall, it's a small delay, and don't -- we're noble, but we're not crazy.

Kelly Bania -- BMO Capital -- Analyst

I mean, do you think there's good results in some just broader food inflation over the next several quarters that just we haven't seen in a long time?

Richard Galanti -- Chief Financial Officer

Oh, I think you'll see that generally. I mean, if costs are up 2% to 3%, input costs on the food and sundries side, a big chunk of that is freight-related. Ultimately, that's gonna compel. Now, some of that will also compel to private label, in some cases. In our case, we generally see this as a positive, because we can be a little tougher in pricing in terms of being more competitive.

Kelly Bania -- BMO Capital -- Analyst

Got it. And then just one more on the online grocery, the nonperishables offerings.

Richard Galanti -- Chief Financial Officer

Hold on. Let me interrupt you for one second. Josh?

Operator

Yes.

Richard Galanti -- Chief Financial Officer

We had a couple calls externally here that people in our office that they cannot hear the call of a sudden, so while we continue here, can you check to see what's going on there?

Operator

Certainly. Not a problem. I'll look into that for you.

Richard Galanti -- Chief Financial Officer

Okay, thank you. Go ahead, I'm sorry.

Kelly Bania -- BMO Capital -- Analyst

Okay, I'll ask one more, maybe, while others are getting back in queue. Just on the nonperishables offerings, how do you feel about the process of fulfilling those and scaling that over time? Do you think you need any more -- any sort of automation technology to fulfill those orders and make that profitable longer-term, or are you happy with the way that that process is working?

Richard Galanti -- Chief Financial Officer

Well, first of all, this stuff is profitable. It's small, and it's growing nicely. But we have the capacity within our business centers, which are already set up to do buy online and actually deliver. This way, it's just you had to buy some box-making machinery. And the good news for us is that we feel that, A, yes, ultimately, God willing, we'll have to build new facilities for additional facilities for this. Just like when we started, we had one e-commerce fulfillment facility in Mira Loma that covered the whole country years ago. And so, you know, there's a trade-off. But I think that, A, we feel very good about how we're doing it, that we can be profitable almost from the start, other than things we're doing to invest in driving the business and marketing it and things, and it'll be fine. Again, I think we're fortunate in that regard. With so few items, it's a lot easier to do these things.

Kelly Bania -- BMO Capital -- Analyst

Thank you.

Operator

Your next question comes from Dan Binder with Jefferies. Your line is open.

Dan Binder -- Jefferies -- Analyst

Hi, it's Dan Binder. Thanks. Thanks for getting me back in the queue there. I had two questions. First was on the benefit that you're seeing in Clubs where you've had competitor closings. Obviously there were a lot, so I'm just curious what you're seeing in terms of the comps benefit and the membership benefit. And my second question was around price investment. A little bit different angle. Just trying to understand more about couponing versus everyday low price. I think it as probably a year or so, maybe a little over a year ago, where you had backed off I think on the vendor items a little bit, and that hurt the comps, and then you kind of brought it back. And I'm just curious, as you think about price investment going forward, will it more through the vendor mailer or more through EDLP?

Richard Galanti -- Chief Financial Officer

Well, first of all, if we go back -- this is to clarify one thing. If we go back to -- it was Q2 of last year when it was a little disappointing. And a lot of it had to do with the stuff that we did to change the MVM and take some items and test with vendors everyday low pricing, or some greater values, but still be at the table in the MVM. Maybe a few odd picks as well. More of the offset to that that we didn't anticipate from a negative standpoint was fewer MVM days. So, if you went down -- I think it was the four-week reporting month of February of '17, 28 days, we had eight less MVM days. The MVM items themselves did as expected, more lift, more value than ever, and less gross margin per item, but more gross margin dollars to us. So, that worked nice. But by having those significantly fewer days of having something that is a promotional thing to get members in the door, we changed that. It took us too much to change that, and since then, it's been fine. And of course, it's gotten better than that since then.

I don't think there's any magic. If there were any exact formula that we knew, we wouldn't tell anybody. And at the end of the day, we keep trying new things with different vendors, and see what works and doesn't. I think we have kind of settled on a mix that includes all of the above, and we'll keep then trying to figure out how to drive that in different ways. So, and again, I don't see there's a big shift. The shift was over a couple years perhaps leading up to February of '18 or late calendar '16, was over 20 years, some of the stuff gets -- some of the sales width of an item gets a little less. People are waiting for that regular thing twice a year for three weeks. And so, A, the values have to be greater to drive more lift, and B, you gotta shake it up a little bit. And you know, I think the good news is we work with vendors. We're not just forcing vendors to try something, try one thing versus another. We're working with our vendors hopefully to do well for both of us, and to even partner with them when there's a little indigestion on how much additional savings, until we can show them the type of unit that we'll generate. And sometimes that works and sometimes it doesn't.

And then with '03 Sam's closings in the existing Sam's markets, so they were just adding a lot of those sales to other units they already had. Our view was is we'd get 10% to 20% of it, and we have, of what we guessed their sales would be. Some of it is not our member. Some of it, we're too far away from that member, maybe, that was on the other -- was 10 miles from the other side of the existing Sam's Club, and we're 10 miles the other way, so now it's 20 miles. It's just too far. And in some cases, the business went to another existing Sam's market. We definitely saw some benefit in membership, number of members. Again, not huge, but it certainly helps.

Dan Binder -- Jefferies -- Analyst

Great. Thanks.

Operator

Your next question comes from Chuck Cerankosky from North Coast Research. Your line is open.

Chuck Cerankosky -- North Coast Research -- Analyst

Hi, Richard. Wanted a little update on the food and manufacturing projects you have under way, the construction, where's that at? And then I wanted to just get another question about the online.

Richard Galanti -- Chief Financial Officer

I'm sorry. Ask that first question again?

Chuck Cerankosky -- North Coast Research -- Analyst

Sure. You've got a couple food plans under construction. Where are we at one those, and any expected opening dates?

Richard Galanti -- Chief Financial Officer

Well, the Bakery Commissary in Canada is open and running. Yeah, we did say it'll take a year-plus to get it to increase capacity and everything, but that's going as planned. Our chicken plant in Nebraska is a year-and-a-half away, a year-plus. It's under construction, but it's -- and on plan is a relative term, in terms of we know it's gonna take a year-plus to get there, but it's doing fine. Anything, else, guys? Oh, we opened, outside of Chicago in Marest, Illinois, a second meat plant, basically a sister plant, if you will, to the one in Tracy, California that we've had forever. And the good news there is the Tracy one, along with the added capacity of the hotdog plant at the same property location, we were at capacity, basically, and we've been able to push that over.

Chuck Cerankosky -- North Coast Research -- Analyst

Okay. And you mentioned before, you got 10,000 SKUs online. Is that the count all the time? And then when you look at how you remerchandise the online assortment over the course of the year, how often are you changing that? It seems like the email and promotional activities picked up, but what is the cadence to refresh the mix and assortment that you have?

Richard Galanti -- Chief Financial Officer

Well, I think, A, it's not unlike in warehouse. The exception is, of course, online, we want to be able to resist, it's just climbing because it's virtual and it's easy, because it still adds cost. You know, we've added velocity items. We've added sundries and some shelf stable items, and the delivery, and that's another avenue as well. I think it'll ebb and flow. Don't expect any late changes to what you're seeing now, other than a constant evolution of that. The other thing is, in some cases, there's products and vendors that will sell to us online that weren't prepared to sell us certain things in store. And sometimes you'll have to be a member to get to the price online at Costco, which is fine. And our member understands that, and they're gonna go see it.

Chuck Cerankosky -- North Coast Research -- Analyst

All right, thank you.

Richard Galanti -- Chief Financial Officer

I'm gonna take two more questions.

Operator

Your next question comes from Laura Champine with Loop Capital. Your line is open.

Laura Champine -- Loop Capital -- Analyst

Great. Thanks for taking my question. It's one the private label business. I mean, obviously a lot of Clubs have been streamlining the number of brands they offer. Kirkland is used almost throughout Costco. But there are some other brands, like the Charisma and some of the textiles. Why not go for Kirkland across the board? And do you have goals on how much of your sales you'd like to drive through that private label brand?

Richard Galanti -- Chief Financial Officer

Unfortunately, our head merchant is traveling to an opening today in California, or he's at an opening day in California. I'm not sure, and in my mind, Kirkland Signature is it. To the extent there's a brand called Charisma, but it's not our brand. In a way, it's not our brand. Now, maybe it's a brand that's not as well known as others, but it's not our brand. Kirkland Signature is the only brand you're gonna see in Costco.

Laura Champine -- Loop Capital -- Analyst

Got it.

Richard Galanti -- Chief Financial Officer

Now, as it relates to how much, we've got gas that's under the Kirkland Signature label, but excluding that, which is 10-plus% of our sales, it's almost 25% or 24-plus% of our sales. Where do we want it to go? I don't know where we want it to go. Will it increase? Yes. You know, years ago, I said, well, you'll never see it on this, and now it's on that. But at the end of the day, we still want brands and we still covet it, and our members certainly value brands as well. And in our view, it enhances our brand value. But you know, does the 24% keep increasing to the 25% and 26% and 27% I'm sure it will, but I can't tell you how long that'll take.

Laura Champine -- Loop Capital -- Analyst

Got it. thank you.

Operator

Your last question comes from Brian Nagel with Oppenheimer. Your line is open.

David Bellinger -- Oppenheimer -- Analyst

Hey, Richard. It's David Bellinger on. Just a couple quick questions. Can you talk about regional performance in the quarter? Is there any weather impact on traffic that you can call out specifically, and was there any improvement toward the end of the quarter?

Richard Galanti -- Chief Financial Officer

There weren't a lot of weather-related comments to the budgeting. Hold on, let me just look real quick. There was a little. It really wasn't that impactful to us.

David Bellinger -- Oppenheimer -- Analyst

Okay. And I'll just follow up on margins as well. It seems that the major drag came from the higher gas prices this quarter. But can you help us frame what percentage of sales gas represented this quarter? I know you just represented it was on an annual basis, like above 10%. But if you don't want to get too specific, can you just give us some indication of how that's changed over the past few quarters and how that impacted here in Q3?

Richard Galanti -- Chief Financial Officer

Yeah, we really don't go into that level of detail. Generally speaking, when gas prices go up, we make a little less margin. When they go down, we make more margin. Happy that they went down yesterday a little bit. But at the end of the day, it's been a good business for us in its own right, as well as driving business into our warehouses. By the way, it's about 10% to 12% of our business. And the thing that we like to see is when you have had the total U.S. gallon gas consumption as a country for everywhere be up in the very, very low single digits. Our gallon increases are in the very, very high single digits or very, very low double digits. And so, that's meaningful. It means that more people are coming into our place. And when about half of them come in the shop, you don't need more than one or two of those 50 out of every 100 to be somewhat of an incremental shop to be meaningful to our company on an ongoing basis.

Aside from the business itself having a level of, even a strong summit gliding based on the volatility sometimes day to day and week to week profitably, but overall, it's been a good business in its own right.

David Bellinger -- Oppenheimer -- Analyst

That's helpful. Thanks for squeezing me in. Appreciate it.

Richard Galanti -- Chief Financial Officer

Good. Thank you. We're all around, guys, and feel free to call with any additional questions, and we'll be here tomorrow as well. Thank you.

Operator

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

Duration: 68 minutes

Call participants:

Richard Galanti -- Chief Financial Officer

Simeon Gutman -- Morgan Stanley -- Analyst

Michael Lasser -- UBS -- Analyst

John Heinbockel -- Guggenheim Securities -- Analyst

Karen Short -- Barclays -- Analyst

Peter Benedict -- Robert W. Baird -- Analyst

Kate McShane -- Citi -- Analyst

Dan Binder -- Jefferies -- Analyst

Chuck Cerankosky -- North Coast Research -- Analyst

Laura Champine -- Loop Capital -- Analyst

Kelly Bania -- BMO Capital -- Analyst

David Bellinger -- Oppenheimer -- Analyst

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