Costco Wholesale Corporation (COST) Q4 2011 Earnings Report, Transcript and Summary

Good morning. My name is Gerri, 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. [Operator Instructions] At this time, I'd like to turn the call over to the CFO, Mr. Galanti. Sir, you may begin your conference.

Thanks, Gerri. Good morning to everyone. This morning for us, we reported our 16-week fourth quarter and 52-week fiscal year 2011 operating results, both ended August 28, as well our 5-week September sales results for the 5 weeks ended this past Sunday, October 2 and announced our plans to increase our annual membership fees in the U.S. and Canada, effective November 1 for new member sign-ups and January 1 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 $0.11 -- up 11% from last year's reported EPS of $0.97. And of course, the dollar rate figure was $0.01 or $0.02 below first call estimate. Both fourth quarters included certain items that impacted the quarter-over-quarter comparisons. As I mentioned on our fiscal '10 fourth quarter earnings call last October 6, 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. And while there was no LIFO charge last year in Q4 as well as the whole year, the reported dollar rate this year included a $32 million pretax LIFO charge or $0.04 a share paid to earnings. Other items that impacted the comparison year-over-year, our foreign country earnings…

[Operator Instructions] Your first question comes from the line of Robbie Ohmes with Bank of America Merrill Lynch.

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? And I think also you mentioned something about allowing you to give even better values. Is there an anticipated impact over the next 2 years on what your store-level margin structure could look like or the way you're passing on inflation, et cetera, related to taking this membership fee increase?

Well, the timing is simply we just decided to do it now. We talked about it and everybody out there asks about it every quarter, but at least 2 or 3x a year when were off-campus as a senior management team we talk about it. We've always felt that our membership fees -- our membership value is greatly -- we continue to greatly enhance it. You all -- many of you know us well long enough ago that we use it in a lot of ways and recognizing all monies are fungible, but the fact of the matter is we're always going to be competitive with or without this. We'll continue to be competitive. This will allow us to continue to be competitive, offer more services and do what we do. So we're -- 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, and we're going to continue to do that. So 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. And 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 5.5 years and a $10 increase on $100 that has been that way for 7 to 11 years, depending on which country. And so this is not a $5 a month increase, it's a relatively small increase. We recognize with the economy, historically, we have very low fall-off from it. We don't take it lightly. We didn't take it lightly by doing it and when we do it, but we recognize that it's part of what we have done historically over 25 years, doing modest increases in the fee. But 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. And we say that sincerely. Maybe we're fooling ourselves, but we don't think so.

Your next question comes from the line of Mark Miller with William Blair. Mark R. Miller - William Blair & Company L.L.C., Research Division: On the net store expansion now expecting 20 for fiscal '12, I think last quarter you commented you thought it'd be closer to 25. So I guess I'm curious, is there something that caused Costco to slow down or, I guess something previously unexpected in the marketplace?

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, is that, Craig and -- Jim and Craig's goal and Jeff Brotman's goal is to get that number up. And again, I can't predict whether it's going to be -- whether there's 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. But I -- so again, could it tweak up a little bit? It could. My guess is you're going to see like we did more recently. There's -- again, there's 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 was sitting here, their goal would be to get that number into the 25 to 30 range next year. But I can't -- 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 3 and the real estate people and the operators are working very hard to speed up that process because we -- there's a lot of locations that we want to open. There's more unpredictability in terms of some of the timing and zoning, particularly in some of these foreign countries. But they're favorable to us opening, it's just it's a longer process. And again, there is more -- there are more irons in the fire now, which will speed up that process hopefully. Mark R. Miller - William Blair & Company L.L.C., Research Division: Okay. And then with 1/2 the clubs going outside the U.S. in fiscal '12, 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 '11. I don't know if you can share that exact number, but when do you think we get to more than 50% outside the U.S.? Do you think you'd get there in fiscal '12? I know FX also is a factor.

You're including Canada. That number sounds a little high, although you have the numbers in front of you. I don't have those -- 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 international, and the fact that the dollar has weakened has exacerbated it upward a little bit. My guess is, 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. Mark R. Miller - William Blair & Company L.L.C., Research Division: Okay. And finally, then I'll turn it over. The new members' sign-up going up 6% outside of the new International Club openings. Was there any anomalies to that figure or what do you think explains that acceleration?

In terms of openings overseas? Mark R. Miller - William Blair & Company L.L.C., Research Division: No, the new member sign-ups. I think you said it...

In some of these markets like the area -- and around Taipei, Taiwan or Tokyo, one where we've been very successful in the 3 Asian countries and starting off pretty darn well in the 3 locations that we have in Australia, but particularly in those 3 Asian countries, in these 20-million population cities, if you will, we get -- have membership per warehouse off the charts in terms of new sign-ups. And 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. And so it has to do -- it's nice when you have 5 locations in a city, the size of these cities. And there's plenty of opportunity to open more locations. And maybe that will come down over time, but there's a -- the per capita grower, that number of population per warehouse is off the charts over there as well.

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

Richard, I wanted to ask about the inflation pass through on Food. Are you having any margin drag from that? Obviously, we have the LIFO charge here. But when you take the LIFO out, what's the effect on margins here?

Yes, there's a little bit of lag and quite frankly, it's us more than anything. If I looked at the detail, I would say that we're still impacted in the Food court because we're not changing the price of the pizza and 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 at bakery, it's still not back to where it was. And again, 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. And we do, ultimately. So, but that's our doing and I don't think it's a dramatically big change of what we've historically done, it's just we have inflation now. But ultimately, you've got to pass the price increases on.

And on that front, 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?

Well keep in mind, as you might expect, in my view, a couple of years ago when there was starting to be inflation and actually in mid '08, there was a lot of pent-up demand, if you will, on the manufacturing side because retailers are always -- a very light inflation for a number of years. A strong -- your large retailers, the supermarkets, the Wal-Marts, Costcos, were able to push back and so, some of them will stick because there was catching up from prior stuff. Generally, it's all over the board. But generally you'll see it weekly and monthly in things like beef and pork and poultry. And you'll see it in raw materials, where we're buying certain raw materials for our bakery, you'll see it pretty quick. But 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. And even when they got it, some of it was, in my view, pent-up demand. But needless to say, part of -- every one of our buyers' jobs as manufacturers explain why something was going up, they're out there heading back saying okay, let's come down now. And so 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. One other comment on that, as an example, when cotton prices were going way up 6, 8, 12 months ago. And I think I mentioned it in one of the calls, in some cases, when you're making 3-, 6-, 9-month commitments on everything from apparel to towels and things like that, there were some manufacturers, many manufacturers overseas, and Asia particularly, were basically saying, you've got to commit to quantity or we can't tell you what the price is because that's how fast the underlying commodity costs of cotton were going up. And in some cases, we and everybody else had to eat some of that as cotton prices or other things have come down. But again, we're turning back faster on average than other comparable full-line retailers in those categories. So do we get hurt? A little bit, but everybody gets hurt.

Your next question comes from the line of Dan Binder with Jefferies & Company. Daniel T. Binder - Jefferies & Company, Inc., Research Division: A couple of questions. First on the core gross margin, I think I have it apples-to-apples. It looks like your core was up plus 2 basis points this quarter compared to more substantial gains in recent quarters. I'm just curious if there's anything that you should 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 membership -- the Executive Membership with regard to the increase in the rebate. 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?

Sure. Now I forgot what the first question was. Daniel T. Binder - Jefferies & Company, Inc., Research Division: The core gross margin.

Oh, yes. I'm sorry. The -- again, we don't view it as anything to be concerned about. It's -- we're talking about gas inflation. The other piece of gas is gas gallonage is way up. That's also on a low margin business, 8-or-so-hundred basis points, but increasing penetration in gallonage. There's lots of things, different countries, different penetration. I mean we really, as we look 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. And 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 purchase meaning everything but gas, alcohol and tobacco, and so -- but we're hoping it'll grow. It's well under $10 million of impact a year and we -- but we hope it would grow up, because that means it's driving business. Daniel T. Binder - Jefferies & Company, Inc., Research Division: Okay. And then 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 3 quarters. And you mentioned FX contracts. I'm just wondering if there's some bigger items in there that you can identify.

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 dollars. I think that on a year-over-year basis, that variation was closer to the $5 million, frankly. So that's the biggest chunk.

Your next question comes from the line of Chris Horvers with JP Morgan. Christopher Horvers - JP Morgan Chase & Co, Research Division: So Richard, on the LIFO, do you think that based on September's experience that this would actually turn out to be a benefit in the fourth quarter if we kind of stay where we are? And then can we just run rate that as we think about the experience into next year into 3Q and perhaps that lift gets better?

Well again, who knows? If I can extrapolate with absolute certainty the first month, we'd have -- it'd be flat, a very slight amount of credit. Who knows? I mean, if you -- assuming that there -- 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, again, LIFO starts with the beginning of this fiscal year on August 29. So the index for the first 4 weeks, our internal 4-week period, was just a few basis points under a base of 100.00, so 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 come down, as we see some price reductions, that would be -- tend towards a credit. I'm shooting from the hip, but my guess is, is that I'd assume right now it's flat and there's no or not a lot of risk it's going to be big inflation and not a lot of risk it's going to be a lot of deflation. Christopher Horvers - JP Morgan Chase & Co, Research Division: Right. So it's not a comparison issue. Prices actually have to come down to see the credit.

Right. But in terms of seeing the impact in Q3 in view of a LIFO charge, that seems to have abated at least at this point. Who knows what tomorrow brings? Christopher Horvers - JP Morgan Chase & Co, Research Division: Yes. And obviously, we're also 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?

Well, I think the thing that continues to surprise us is this continued 4-plus percent 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. And I think those are the issues that -- so we've been somewhat blinded by the fact that we still believe that the -- we know the economies are 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. So we're working hard to continue to drive that market share and we think we're doing a pretty good job of it. But if you ask us do we feel good about what's going on out there? No, in terms of the economy. Christopher Horvers - JP Morgan Chase & Co, Research Division: Right. And then 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?

It doesn't change percentages 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, percentages times percentages, I don't think it has a lot of impact on any percentages. Again like this past year, the 3 -- the reported $330 million of earnings, there was, I think, $0.10 in there from that, from just the change in FX. To the extent that we are relatively confident until the spring or we -- 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.

Your next question comes from the line of Peter Benedict with Robert Baird. Peter S. Benedict - Robert W. Baird & Co. Incorporated, Research Division: Richard, a couple of questions. In the past, you've walked us through, at least qualitatively, the gross margin trend within the 4 main categories. Could you give us a sense of how that fleshed out in the fourth quarter?

Yes. I don't have it in front of me. I know -- I think Hardlines was up, Fresh Foods was down a little and the other 2 I don't have in front of me, I'm sorry. I know overall it was up 2. By the way, one of the things that Jim has mentioned, that less is more. Not from trying -- and we've always tried to convey, give you a lot of color on things. We're trying to wean me off of some of that going forward. Not yet, but -- and so, we'll continue to try to do that. And we'll still give you the same color of what's going on out there, though. Peter S. Benedict - Robert W. Baird & Co. Incorporated, Research Division: 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?

That's a definite yes to both of those. The fact of the matter is, 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, the 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 8-plus-hundred, that's gone from 0% 10 or 12 years ago to 8% or 9% or 10% of sales, 9% of sales. So we've hit the margin hard in a lot of ways and our margins are pretty good. So 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. And again, I'm not trying to -- I am trying to be qualitative because -- but if you ask us, our goal is still to see pretax earnings as a percent of sales improve and get, have a 3 in front of it? Yes. Peter S. Benedict - Robert W. Baird & Co. Incorporated, Research Division: All right, fair enough. And then I may have missed this, but any early read on kind of the holiday products? I mean you guys bring your stuff in so early. It would be interesting to hear, I know September overall was good, but how about those kind of holiday seasonal, trim-a-tree, that type of stuff? Any read you're getting?

Our seasonal sales are good. And 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 in mid-September, so we feel good about seasonal merchandise.

Your next question comes from the line of Colin McGranahan with Bernstein. Colin McGranahan - Sanford C. Bernstein & Co., LLC., Research Division: Richard, I 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, I'm playing math. Those are the ones that wouldn't make sense to be an Executive Member anymore given that $50 to $55 differential. And then thirdly, just same topic, but thirdly, in the past, you said Executive Members spend more. And obviously, you've wanted to make more and more members Executive. But is there a current 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?

On the last question, clearly they spend more then they become Executive Members. They spend a lot more. I liken to a TV commercial I saw a long time ago about 2 businessmen at a business lunch and then they both reached for their wallets to pay for the bill and one says, "Let me get it, I get rewards." The fact of the matter, infinity programs work. I don't know completely why, but you talk yourself into it. And so 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 at when they sign up as a new member and as well when they're coming through with a bigger amount of merchandise. And what the cashier can do when they swipe the membership card and they could show them based on their prior year's purchases, they would have behooved them to become an Executive Member. So we do a better job of it. In terms of -- let me tell you the rationale why we kept $100 fee to the last 2 regular increases. When we first did the $100 Executive Membership in the U.S. in 1997, I believe the base membership fee was $40. So it was a $60 deal. At the time that we -- 5 or so years later when we went from $40 to $45 in the base, our view was is there's lots of members out there that if you just took their prior 12 months' purchases, eligible purchases, that how many of them would be at breakeven or above at $55 -- at $50 versus $55? Then the view was at the time, there were about 2 million, 2.5 million members that in theory would benefit based on…

I haven't looked at it lately because in terms of a breakeven, it's as good a guess as any. It's not 1 million and it's not 5 million, so sure. But again, we haven't looked at it that way since 5 years ago. Colin McGranahan - Sanford C. Bernstein & Co., LLC., Research Division: Okay. So you're -- then I will get off the phone. But you're not concerned about the risk because 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. And theoretically as they become off Reward members, they would spend less?

Sure. Look, it's not -- it won't be 0. 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. So many of them have gone up, not down.

Your next question comes from the line of Chuck Cerankosky with the Northcoast Research.

Richard, when you're looking at the 2-year store opening total, it sounds like you're saying you want to be conservative in fiscal '12, but we could see some blip in the first quarter of fiscal '13. Would you be willing to talk about a 2-year, that would be fiscal '12 and fiscal '13, store opening number in square footage growth rate?

Well if you add '12 and '13 together, it will clearly be more because our expectation at this point is '13 will have more openings than '12.

So maybe approaching 50 in total?

I would hope so, but I doubt it given the time line it takes and the efforts. I think we'll be improved in terms of grading down on the scale, but we'll have to wait and see. Again, I don't want to lead you astray. They're working hard to get that up. And there's a lot of irons in the fire, and I'd rather look at it conservatively to start with.

When you -- switching to another subject, looking at member attitudes as their shopping the stores, 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?

Well, we -- the sales accelerated in September versus the -- on taking out all the noise of FX and gas inflation, I mean sales accelerated. I mean, when we read everyday about the doom and gloom with consumer sentiment, we see pretty good stuff at our place, but we don't take it lightly. I mean we work hard to have that value up there and it's -- we feel very fortunate, but we're also reminded everyday 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. And then one thing I'm very comfortable about is, is that we're doing a great job merchandising right now and we got a lot of good things going on.

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

Just to circle back on Dan's question on that quarter on quarter. Again, I think everybody's probably pretty surprised, including myself, that it's only up 2 basis points relative to the past couple of quarters. And I know you're not concerned about it, but can you dig into at least on Fresh Foods, why peer comps have been running up high-single to low-double in that category throughout the quarter? Is that your margins would be down in that category? I'm just trying to get my hands around why.

Well you know us, we like to drive sales. And also, when there is 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. And certainly with volatile pricing on bakery, meat, food court, that's part of it as well.

Okay, okay. And were there any other categories within the 4 key business segments that was negative or was just Fresh Foods down?

I think a couple of them were. Again I'm sorry, I honestly just don't have it in front of me.

Okay. Okay, fair enough. And then I know when you guys report your, the 10-K, that you'll breakout the segment margins between the U.S., Canada, international, but just wondering if you have that handy for 2011 now that we've completed the year?

I don't. I have it handy, but our Securities Council is saying I don't because you can't do it until you publish it to everybody.

Okay. And then just on the membership fee, just wondering why $110? What was so magical about that number? I know in prior conversations that we've had, you've suggested maybe it would be $125 and you'd do like a $20 coupon. So I guess just trying to get a sense for why $110 and looking ahead, when would you look to raise the fee in Asia, in U.K. and Australia?

Well first of all, I think historically when everybody's ever asked about if you took the $100 up, what would you take it up? And I said, "Look, who knows?" If you say, "What could you do? You could take it to $105, you could take it to $110." And I think I probably said, "You could take it up more than that, but then you give some of that back because that would be a big increase on a percentage basis versus the quarter." Never was there any giant sensitivity analysis of what should we do here. 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 has allowed to -- afforded to the Executive Member. So I don't want to be too scientific about it. We're retail merchants and we felt that, that was the right price.

And then outside the U.S., plans to raise it?

There are currently no plans, but things change. And not tomorrow, 10 years from now, who knows? And I say that because 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.

Your next question comes from Deborah Weinswig with Citigroup.

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?

The only thing that has been pointed out to me in the budget meeting is more related to holiday, a few holiday items like soda pop before July 4 or before Labor Day, things that -- those types of items that supermarkets or Wal-Mart would do 2 or 3 weeks leading up. But overall, the answer would be no.

Okay, great. And then 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 kind of as we go through the next quarter or so?

Well again, 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 of that translates to the bottom line, some of that causes increased penetration of private label, which are at lower prices. So the LIFO index is not an exact science. It's an exact science of calculating the LIFO index, but it doesn't, it's not an exact, applicable to what we're seeing everywhere. It's a best guess in using that as a measurement. So when I say this on a year-over-year basis, we were still seeing low to mid single. When we ask -- when the buyer -- what we ask the buyer is when do they see price relief. In our Fresh Foods area, our senior merchandise merchants out there said that they expect relief not for 3 to 6 months in some areas simply because of commitments made by the vendor for certain materials or by us. But some things we're seeing already. So again, I think it's on a year-over-year basis, there is still inflation. From the prices today, again in the first 4 weeks, we saw very modest, almost no, but a very modest deflation, almost flat. And hopefully though, over the next 3 to 6 months, from the beginning -- as of the beginning of this fiscal year that just started 5 weeks ago, we will see some modest inflation, but there's no way to know.

Great. And then just my last question. Do you have the private label penetration for the year handy? And can you just discuss your kind of long-term target for private label?

Well, I don't have the exact number in front of me. I don't know if we've gone through every department and calculated it, but it's the low 20s. So some of you have seen the chart that I think Jim put up a couple of years ago that said the goal -- and it wasn't defined as 5 or 10 years, but probably somewhere in there the goal would to be in the mid 30s, but maybe up a size 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 time line. Last fall, we started -- we introduced a variety of things and this is just examples, of canned goods, both fruits and vegetables. We continue to do that. And so 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 other additional apparel items, men's dress pants on top of the shirts. And so again, I think the trend is that direction. We're not committing to exact number other than when asked -- when Jim talks to the merchants in the different departments over the last year what are your goals over the next 5 or 10 years, you get up to a number that certainly has a 3 in front of it if we continue in that direction, but there's no guarantee of how long it takes to get there.

Your next question comes from the line of Laura Champine with Cowen and Company.

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, or is there something really changing in the product cycle there?

I don't know. My guess is it's only 1-month, so let's see what happens next month, frankly. It's good that it was -- 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 the 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 a fewer deals out there to be had in terms of the $300 and $400 off contributions for vendors to drive it. There's been some of that picked up. I think it's a combination of things. I certainly believe that average 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. So I'm convinced that the fact that our frequency continues to be high we, if it's in front of you, some of the people are going to buy it.

Your next question comes from the line of Michael Montani with ISI.

This is Mike on for Greg Melich. Richard, just 2 quick ones. The first one was on .com. Did you mention, and perhaps I had missed it, but is .com now about $2 billion in sales?

Yes, a little over.

Okay. And then just on the traffic side, for the U.S., can you help us understand, I think it was about 4% traffic trend from the quarter, but how would that split out for the U.S. versus international?

We don't break it out recognizing U.S. is 72% or 73% of our company, so it's going to -- even if -- it's clear, I would guess, it's lower because where you have a lot -- when you've got newer warehouses, you've got your warehouse that are 1/2, 1.5, 2.5 years old, you're going to drive more frequency. But that may need to be lower.

Okay, so it's similar. And I guess just lastly, I was going to ask about from the Executive Membership standpoint, can you share what percentage of the Executive Members today spend enough to reach the 2% off maximum of $500?

We don't disclose that. I'm not trying to hide it from you. Clearly, it's a small percentage.

Your next question comes from the line of Joe Feldman with Telsey Advisory Group.

A quick question, a couple of questions. Again, 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 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. I mean 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?

I think that in the past when asked the question, and maybe guilty of trying to be helpful, you said one of 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've just recently, earlier in the conversation said, I would see if you ask senior management around here, their collective view is, is things aren't getting better faster out there. So again, there's no -- I don't think you probably can predict why we did it now versus whatever. This is what we did.

Okay. And then another question on kind of on SG&A. I mean for as terrific a job as you guys do controlling expenses and costs, I guess I'm a little surprised you didn't get a little more leverage with such a strong comp through the quarter, and continues to be strong. And I guess I was wondering, is there anything there? I know in the past you guys have done, been generous towards your employees with giving, helping offset some of the health care costs a little more than in the past. Anything that you did this quarter like that or?

Yes. I -- we felt pretty good about SG&A, frankly. I mean given our history of -- yes, I did mention -- remember that I mentioned the $0.02 last year, the benefit is a combination of benefit. I believe one of those, that quarterly adjustment of 10 basis points, so that was part of it as well. The fact of the matter is, is that, we, again, we choose not to do some things that might help SG&A. There's nothing new that has helped -- is hurting SG&A more. That's -- 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. And then if I could just ask one last question, kind of 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 units per transaction, things like that?

Well, tenders have not changed. The ongoing trend is more debit and credit for years. Those are both big numbers now. And so they still grow, but grow slightly, but we've seen no trend change in it. The average basket, surprisingly, is up a little. I know 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, so you think it would be down a little bit, but actually, it's up a little. So that makes us feel pretty good right now. And again, I think part of that is driving more people in, that the demographic of our members are a little higher end. I'd like to think that some of it are merchandising. And so all those things helped. But in terms of -- we have a little bit of binders on because our numbers have been pretty darn good, the frequency has surprised us all, that this compounding of 4% and 4% and 4% now for 2 or 3 years. And in terms of, 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 '09, right after the financial crisis at the end of calendar '08, we saw a higher rate of increase in private label faster. I think I mentioned back then that over a 6-month period, on the Food and Sundries side of our business, we saw like a 300 basis point delta in sales penetration of private label. That was unprecedented. But no, we're not seeing anything like that. It's still continuing upward, but nothing crazy like that.

Your next question comes from the line of Bob Drbul with Barclays.

A couple of quick questions. First, can you give us the D&A 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. And then 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 there a little bit?

Depreciation and amortization for the quarter was $273 million compared to $855 million for the year. And what was the other, next question?

Gas gallonage in September. Comp gallons.

Yes. 10%.

Okay. And how about trends in audio? Or in -- you're cycling the loss of Apple now, is that right?

Yes, we've never -- clearly it's down because it's 0 now. I said the fact of the matter is, is that at least in September, our majors was up year-over-year, so we are cycling it. And we go forth. I mean Apple has great products, but we're selling a lot of other things right now. There's not a lot I can say about that.

[Operator Instructions] Your next question comes from the line of Sean Naughton with Piper Jaffray.

Just on the -- another question on the private label for you. Is there a big difference between, in international market fee exception, the acceptance of the Kirkland brand there versus domestic?

It's well accepted everywhere. Yes, we have a lot of products over there. The penetration is lower because there's less. At least, say, in the U.S., there's more U.S.-sourced goods than in other foreign countries, but it's very well accepted.

Okay, great. And then secondly, just also on international, you talked about 1/2 of the warehouses going international in next year in fiscal '12. Can you talk about, are you going to any new markets and when would those potentially be on the horizon, if not?

There's probably no new markets in fiscal -- there will not be any new markets in fiscal '12, through August of '12. Whether it's most likely '13, we will be open in at least one new country in Europe, and by '14, 2 new countries in Europe is our best guess. And all that's subject to change.

[Operator Instructions] Your last question is a follow-up from the line of Michael Montani with ISI.

It's Greg this time from ISI. Richard, the $1.5 billion CapEx or the $1.4 billion to $1.6 billion, do we consider that the new normal with around 20 openings, because that is historically high. I just want to know as we go international, just more expensive or .com investment? What sort of keeps it at that level?

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-end, so we've got a lot. But again, as I mentioned, we have a lot of irons in the fire. So it's a combination of overseas is more expensive. The assumption is in looking our own budgets that we'll be committing to land and started construction on sites that don't hit '12, but sort of a higher amount of that now versus as compared to a year ago. There's probably an extra of $50 million in IT as we are in the process of our 3-year program, which inevitably goes longer, of modernizing some things and creating a second data center, which we haven't had before. Not a lot of them, I mean it's always a lot of money, but not a lot relative there. So all of those things add up to a little extra.

Great. And then 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?

I think traffic was about 3.5% to 4%, probably closer to 4%, and so the rest is everything else. Inflation was probably the biggest chunk of it. But keep in mind, frequency was up, though. So that, by definition, brings your average ticket down. We're driving more frequency.

[Operator Instructions]

Oh, was that it? Thank you very much, guys.

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