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Costco Wholesale Corp (NASDAQ:COST)
Q3 2020 Earnings Call
May 28, 2020, 4:30 p.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
Ladies and gentlemen, thank you for standing by and welcome to the Q3 Earnings Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. [Operator Instructions] Please note that this conference is being recorded. [Operator Instructions]
And I would now like to hand the call over to Mr. Richard Galanti, CFO. Please go ahead sir.
Richard A. Galanti -- Executive Vice President, Chief Financial Officer
Thank you, Joseph, and good afternoon to everyone. I'll start by stating that these discussions will include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. 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 are made and the company does not undertake to update these statements, except as required by law.
In today's press release, we reported operating results for the third quarter of fiscal 2020, the 12 weeks ended May 10. Reported net income for the quarter came in at $838 million or $1.89 per diluted share. This compared to $906 million or $2.05 per diluted share last year in the third quarter. Now, this year's third quarter was negatively impacted by direct expenses of $283 million pre-tax or $0.47 per diluted share, from incremental wage safety and sanitation costs related to COVID-19. And last year's third quarter number of $2.05 included the benefit from a non-recurring tax item of $73 million or $0.16 per diluted share.
Net sales for the quarter increased 7.3% to $36.45 billion, up from $33.96 billion last year in the third quarter. On a same-store or comparable sales basis for the third quarter, for the 12 weeks on a reported basis, the US was a 5.9%, excluding gas deflation and FX impact, the 5.9% would have been for the 12 weeks at 8%. Canada, on a reported basis was minus 2.5%, ex-gas deflation and FX plus 3%. Other international came in on a reported basis at 6.2% and again ex-gas deflation and FX plus 12.2%. All told, the total company came in with a reported 4.8% and again ex-gas deflation and FX. The 4.8% would have been 7.8%.
I might also note that e-commerce on a reported basis was 64.5% comp and ex-gas deflation or ex-FX 66.1%. Now foreign currencies relative to the US dollar negatively impacted sales by approximately 110 basis points and gasoline price deflation negatively impacted sales by approximately 190 basis points for the total company therefore to 300 basis points. Additionally, gasoline volumes or gallons were down about 20% year-over-year in the quarter as a result of less driving due to the pandemic. These adjusted figures -- the impact of gasoline gallons is not in the adjusted figures that I just described above.
In terms of traffic, our shopping frequency or shopping frequency decreased in the quarter, worldwide by 4.1% and in the US by 2%. Our average transaction or ticket was up 9.3% during the third quarter and 9.3% does include the negative impacts from gas deflation and FX. Now our third quarter comp sales figures did reflect also that a few of our businesses, notably optical hearing aids, and photo, were closed for much of Q3 and a good portion of our food court item offerings were eliminated, also for much of Q3 as well, we eliminated the food court seeding during this time. Re-openings of these began -- stores begin on April 30, 10 days prior to the third quarter end, with about 20% of the locations best operating by Q3 end. In the past two weeks to three weeks, nearly all will be back in operation by mid-June. In terms of the food courts, which have been open, but again a much more limited menu, we've added some but not all the items back, as of now. In all an estimated hit to the reported sales numbers that we gave you earlier in Q3 by one to two percentage points by those items being closed or restricted.
Next on the income statement, membership fee income reported came in at $815 million or 2.24%, up 5% or $39 million for $776 million or 2.9% last year in Q3. Ex-FX weakness the $39 million increase and 5% increase would have been up $47 million or 6%. During the quarter, we had two new openings, a total of four year-to-date. In terms of renewal rates, at Q3 end, our US and Canada renewal rate came in at 91%, a tick up from where we were at Q2 end and the worldwide rate came in at 88.4%, the same as it was a fiscal quarter ago. Keep in mind that any impact on renewal rates from COVID, positive or negative, are reflected over the next several months.
In terms of the number of members at Q3 end, member households and cardholders, in terms of households we ended the third quarter with 55.8 million households, up from 55.3 million 12 weeks earlier and total cardholders came in at 101.8 million, up from 100.9 million, 12 weeks earlier. At Q3 end, paid executive memberships came in at $21.8 million, an increase of $135,000 over the last 12 weeks.
Going down to the gross margin line. Our reported gross margin was higher year-over-year by 54 basis points on a reported basis, coming in at 11.53% up from 10.99%. Now the 54 basis point, ex-gas deflation, would have been plus 33 basis points. As I usually do, I should try to write down a few numbers in two columns and then we'll go through that explanation. In terms of reported, in Q3 '20 year-over-year, the core merchandise was up 51 basis points on a reported basis and without gas deflation, up 33 basis points. Ancillary businesses was on a reported basis, plus 26 basis points, ex-gas deflation plus 21 basis points, the 2% reward minus 6 basis points and minus 4 basis points. Other minus 17 basis points and minus 17 basis points. And you add up those two columns, total reported, again up 54 basis points on a reported basis and up 33 basis points. The gross margin was up 33 basis points, ex-gas deflation.
Now the core merchandise component of gross margin, again higher by 51 basis points or 33 basis points, ex deflation. Keep in mind that in the quarter, we had a decent sales shift from ancillary and other businesses to core businesses, which resulted in higher contribution of our total gross margin dollars coming from the core.
Looking at the core merchandise categories in relation to only their own sales or what we call core on core, margins year-over-year were lower by 17 basis points, 5 basis points by the way of which was the losses related to our new poultry complex. This is something I've pointed out in the last two quarters and will probably do so next quarter as well. In total, pretty similar in fact year-over-year impact in Q2. So while higher penetration of our total sales came from the core this year, it was at a slightly lower gross margin percentage year-over-year. This is mostly attributed to sales mix both between and within merchandise categories.
Our fresh foods gross margin percentage was up again despite any first year headwinds from the -- from the ramp-up costs associated with the poultry complex. The strength in fresh was a result of high sales driving down our spoilage, as well as labor costs as a percent of sales being able to leverage those at a greater than normal rate. Soft lines, food and sundries, and hardlines, all had lower margin percentage year-over-year in the quarter. One example non-foods, which is both hardlines and softlines, non-foods was impacted by shift in sales toward lower margin departments, particularly things like majors and big ticket electronics.
Ancillary and other business gross margin in the two columns, higher by 26 basis points, again 21 higher basis points ex gas deflation. This result was primarily due to strength in gas and e-com gross margin dollars year-over-year, partially offset by a lower penetration of ancillary sales, due to lower gas prices and volumes and the closures of some of those ancillary businesses that I talked about earlier, several of those businesses have higher gross margins. 2% reward was higher or was hit to gross margin by 6 basis points on a reported basis and 4 basis points, ex deflation implying that slightly higher percentage of our sales were eligible for the executive member reward.
The other line item, 17 basis points to the negative, 12 basis points of the 17 basis points is attributable to the COVID costs and the 12 basis points, that's about $44 million of the $283 million number that was mentioned in the press release. These are the costs for incremental wages, safety, and sanitation across, allocated to our cost departments and merchandise fulfillment operations. So I'll just say it hits the margin. The other 5 basis points or $19.7 million came from accruing reserve for certain third-party gift cards and ticket programs. This latter $19.7 million was not included in the $283 million total amount that we called out as a direct incremental expenses from COVID.
Moving to SG&A, our reported SG&A percentage year-over-year was higher by 59 basis points, coming in at 10.51% of sales, up from 9.92%; ex-gas deflation the minus 59 basis points would have been minus 40 basis points or higher by 40 basis point. If you can please jot down the following SG&A components and then we'll go through that. Core operations reported was plus 9 basis points or lower by 9 basis points, benefit of 9 basis points; ex-gas deflation plus 24 basis points or benefit of 24 basis points. Central, zero basis points and plus 2 basis points; stock compensation plus 3 basis points and plus 3 basis points; other minus 71 basis points and minus 69 basis points and you add up those two columns, you get to the reported SG&A increase of 59 basis points and ex-gas and FX -- ex-gas deflation rather, minus 40 -- higher by 40 basis points.
Now again, the core operations component lower by 9 basis points and ex-gas deflation lower by 24 basis points. SG&A in the core operations excluding, that's excluding the COVID related expenses that I'll talk about in a minute, they were -- needless to say leverage with strong core merchandise sales. Central was essentially flat and a slight improvement relative including ex gas deflation. Stock comp, no surprises there, a slight benefit to SG&A by 3 basis points and again the other component of 71 basis points or 69 ex-gas deflation under 71 basis points, 66 basis points of the 71 basis points is attributable to the incremental cost of COVID-19 or $239 million of that $283 million total amount that was in the press release. Again, these are the cost for incremental wages and safety and sanitation related direct expenses. The balance of the 71 basis point figure was 5 basis points or $18.5 million, this came from the cost associated with the acquisition and integration-related expenses of our recent acquisition of Innovel, that last mile delivery and installation operation for $1 billion that we acquired a few months ago.
Next on the income statement is pre-opening expense. Pre-opening expense was lower by $6 million coming in at $8 million in the quarter versus $14 million a year ago. Again we had two openings this year. Last year in the quarter, we had three although chunks of these --each of these numbers relate to a pending openings in Q4 as well. All told, reported operating income in the 3rd quarter of 2020 increased by 5.1% coming in at $1.179 billion compared to $1.122 billion a year ago. Now this 5% increase is notwithstanding the incremental costs that we talked about -- that I just talked about the $283 million as well as the 19.7 [Phonetic] and the 18.5 [Phonetic] that I just mentioned as well. Those are all taken in the third quarter.
Below the operating income line, interest expense was higher year-over-year by $2 million coming in at $37 million this year in the quarter versus $35 million a year ago. Recall that we completed a $4 billion debt offering on April 20, during the third quarter. Following the completion of the debt offering, we called the outstanding debt due May 20 -- May of 2021, that was a $1 billion tranche and additional $5 million tranche that was due in February of 2002, both of these tranches we've paid off this morning. After a 30 day call notice. There will be a pre-tax expense of $36 million related to the early retirement or make all of these, this debt, which will hit our Q4 results on the interest income and other line in our P&L.
Next on the income statement, interest income and other for the quarter it was lower by $15 million year-over-year mostly attributable to lower interest income and mostly attributed to lower interest rates within that. Overall reported pre-tax income in Q3 fiscal '20 was up 3.6% coming in at $1.163 billion versus $1.123 billion last year and again the $1.163 billion is after taking the impacts of those charges that I previously mentioned.
In terms of income taxes, our tax rate in Q3 was -- this year was 26.7%, last year was 18.5% tax rate again last year it included a benefit of a non-recurring tax item of $73 million. A few other items of note, in terms of warehouse expansion, as I mentioned we opened two units in the third quarter. That puts us at five -- actually five units total through the first three quarters. We expect in Q4 to open 10 including two relos so net of eight. So it looks like our net total this year will be somewhere around 13. There has been a few that have been impacted by COVID-19 in terms of construction delays and have been pushed into the first part of fiscal '21 which starts in early September. As of Q3 end, total warehouse square footage stood at 115 million square feet.
In terms of capital expenditures, the third quarter of fiscal 2020 total spend was approximately $626 million and our estimated capex for all of fiscal '20 is currently in the $2.7 billion to $2.9 billion range. A slight decline from what we had estimated an estimated a quarter ago. And again, I think that has to do with some of the delays in construction since this COVID issue.
In terms of e-commerce, as I mentioned earlier, overall our e-commerce sales on a reported basis increased 64.5% and 66.1% ex-FX. I might mention -- I should note that within that 61 [Phonetic]. Like many retailers out there, we saw an increasingly level of strength in e-commerce sales over the last few months. If I look at the 12 week -- the three, four week periods that comprise our 12 week third quarter, roughly that 66.1 -- or that 54.5% reported number in the first four weeks was in the 25% range. And the next four weeks in the 50% increased range and the most recent -- and the last four weeks in the 90% range. But totaling that 64.5% on a reported basis.
A few of the stronger departments health and beauty aids, office, majors, housewares and small electrics total online grocery grew at an incredible rate within the third, during the third quarter, as I'm sure did in many places. The comp numbers just mentioned again follow, that's the 64% number, they follow our historical convention where we exclude our third party or same day grocery program, since that those that comes into the warehouse to be picked up by the third party and delivered to our member. If we were to exclude [Phonetic] that third-party in our e-commerce number that mid 60% comp number would be slightly over 100%. So we've seen big strength and driving the business that way. Overall, our e-com sites have worked pretty smoothly during the quarter despite dramatic, volume increases and as well, we're able to improve on delivery times throughout the quarter as we adjusted to the ramped up order volumes.
Now turning to the coronavirus and all the issues and impacts surrounding it. From a sales perspective, as discussed last quarter and indicated by our monthly sales results that we do, we started Q3 strong, I think it started actually in the fourth week of February then into the first 2.5 weeks of March, with very strong sales as people were stocking up prior to the implementation, the concern about availability of certain key products as well as the implementation of various stay at home orders. The middle of the quarter was -- it was weaker as many of the geographies in which we operate had issued mandates limiting movement as well we have implemented our own restrictions during these times. Recently, our sales have started to recover somewhat as states have begun to relax restrictions.
Within the merchandise categories foods, fresh and other essentials have been very strong, despite out of stocks on some items throughout the quarter, such as toilet paper, paper towels, cleaning supplies, etc. meats and proteins toward the end of the quarter, hand sanitizers and the like. Office and majors were also strong during the quarter driven by work from home initiatives well, most of the other discretionary categories were a little weaker during the quarter, such as jewelry, luggage, third-party gift cards they were generally weak. Other weak categories, which include things like sporting goods, lawn and garden, patio and apparel, while they were weak, they have rebounded somewhat toward the end of the quarter.
From a supply chain perspective, I'm going to give you a 40,000 preview of that. On the non-food side as it relates to imports from China, most of the factories are now up and running, other major country suppliers, India for textiles and domestics, Mexico primarily for things like TV assembly, a few weeks behind China in terms of getting back to normal, but each week is showing improvement. On the foods and sundries sides, paper goods still on allocation and idle limits on certain items in certain regions. Sporadic limited -- Sporadic limited limits on canned foods items like tuna and chicken. Toughest areas again are still hand sanitizers, disinfecting wipes, and Lysol sprays and the like. Items like milk and butter are generally OK. And we've also -- we have eliminated like frozen -- certain host frozen proteins like chicken and beef items.
In terms of fresh, the protein side, the merchandise is there but challenging from a production and processing side. Currently for us pork is the least affected, but somewhat affected but what we've done over the last couple of three weeks I believe on fresh beef, chicken, and pork items. Those protein items we limit. Three fresh items in total. We also have limits on a per SKU on certain frozen items like 10 pounds of hamburger patties or chicken breast or the like.
In terms of seafood and produce that's all good. And again talking to our buyers in these categories that generally again probably with the exception of the hand sanitizer because it is just -- it's not just people who are hoarding it. A great increase in use in demand of those items continued, but we expect continued improvement generally each week.
And then lastly, Costco Travel it was let's say significantly impacted during the quarter due to reduced demand as well as cancellations of previous booked trips. Members are now starting to actually book travel again although generally further out than we have historically seen. And of course we book those results when the trips or activities occur. Warehouses have overall remained open. Although we did operate reduced hours at most of our US locations for several weeks during the quarter. Regular hours resumed May 4 with an additional hour on weekday mornings for seniors and persons with disabilities. Warehouses are still following social distancing and sanitation guidelines. Additionally, as discussed some of our warehouse businesses like hearing aid, optical, and photo and to a partial extent the food courts were closed or mitigated during the majority of the quarter. Also effective May 4, we now require all our members and employees in the warehouses to wear masks. During the quarter included in that, again that big $283 million number, we spent about $32 million on masks, gloves and incremental cleaning and cleaning supplies and things like Plexiglass partitions and you name it are related to COVID, but that's in that $283 million number. Some of the initiatives, some of the initiatives related to $283 million and cost will extend into Q4. We would expect the incremental expenses related to COVID -- these types of expenses related to COVID to exceed $100 million in Q4, but be quite a bit lower than the $283 million that we had in Q3, we'll have to just wait and see though.
Finally, in terms of upcoming releases. We will announce our May sales results for the 4 weeks ending Sunday May 31 next Wednesday, June 3 after market close. With that I will open it up for Q&A and turn it back to Joseph. Thank you.
Questions and Answers:
Operator
Thank you, sir. [Operator Instructions] We have our first question from Simeon Gutman from Morgan Stanley, your line is open.
Simeon Gutman -- Morgan Stanley -- Analyst
Hey, Richard. I know we have to wait till we get the May results, but I don't know how much you can preview us just given how dynamic the environment is in terms of the mix of product that's being sold, traffic to warehouse because the environment now you are starting to see other states in the stores open curious if there's anything you can call out as a preview for May?
Richard A. Galanti -- Executive Vice President, Chief Financial Officer
I really can't call anything as a preview. Some of the comments I made in this document as it relates to toward the end of the quarter, we saw certain things pick up. The fact that we went back recently to full hours -- we're all better, both us, our employees in our members of better getting through the warehouse so seasonally I think some of the items that were online has picked up that we talked about and, but we'll wait and see next week.
Simeon Gutman -- Morgan Stanley -- Analyst
Okay. And then my follow-up on memberships. I think you said ex FX, they were up 6, if I caught that, can you parse out US in the quarter relative to that 6, if that is the right number and then anything that surprised you with regard to the pace of new members growth of the actual amount or anything geographic?
Richard A. Galanti -- Executive Vice President, Chief Financial Officer
Generally no, but what we talked about way back when -- at the end of Q2 and the beginning of this quarter, we saw some pickup when there was a lot of, we had these crazy strong numbers and people who are coming into buy all those essential in short supply -- high demand and short supply items. We saw some additional sign ups, but not meaningful relative to our whole company in those weeks toward the end of February and first half of March. Other than that I think the fact that the traffic is down a little bit, but the average ticket is up, you've got some members that are coming in and bulking up a little more, but and then you have some members that are not coming in as often, so that hit you a little bit, but overall we think that we're in pretty good stead.
Simeon Gutman -- Morgan Stanley -- Analyst
Okay. Can I just sneak in one more. I just want to ask on [Speech Overlap]
Richard A. Galanti -- Executive Vice President, Chief Financial Officer
One other comment is that we have also seen a switch from walk in sign-ups to online sign ups and that's good when you sign up online, I know you're also required to have auto bill, which is positive for renewal rates long-term.
Simeon Gutman -- Morgan Stanley -- Analyst
And then the last one is on e-commerce, the assortment, the SKU assortment, any like strategic thinking that we should have a bigger assortment than you do. I think you were always adding, but is there a rethink as far as the total number of SKUs?
Richard A. Galanti -- Executive Vice President, Chief Financial Officer
I don't think necessarily the only total increase is where we've gone to some additional flyers and some very limited items. So we've expanded our supplier network in some limited cases beyond of that it's more of a shift. It started with if you will some of the big and bulky items and just started well before COVID like white goods and that's continuing. And certainly the strength that we've had online whether it's reported online through our two day grocery or through e-commerce or certain third-party providers like Instacart and shipped in others. All that stuff is driven some of the business from the warehouse online and again I think we've, if I go back six weeks, eight weeks, 10 weeks ago, whatever the normal time to get something was particularly like two day grocery was well more than two days, were back to two days. Same day our third-party suppliers had challenges they ramped up in the 200 plus thousand new employees in a matter of weeks that too has gotten a lot better in the last few weeks. So, I hate -- hesitant to use -- use the word strategic, we certainly know that big and bulky can be done very effectively. Online with a few displays in the warehouse as well but have that delivered installed through online and that will continue. It probably has been expanded a little bit because of this people at home, things like exercise equipment, and big electronics and things.
Simeon Gutman -- Morgan Stanley -- Analyst
Okay. Thanks, Richard.
Operator
We have our next question from Chris Horvers from J.P. Morgan. Your line is open.
Christopher Horvers -- J.P. Morgan -- Analyst
Thanks. Good evening. So, a couple of questions on the margin front. Can you talk about -- break down the ancillary margin a little bit in terms of what you saw in terms of the benefit of gas versus the headwinds that you would see from mixing down in those other categories? And as you look ahead, given where you see gas prices are at this point, would you expect that benefit of gas to -- if prices held to be higher in the current quarter?
Richard A. Galanti -- Executive Vice President, Chief Financial Officer
Well, there was a perfect good storm in the last quarter as it relates to margins and gas. And I think there's -- not even our information, but there is public information on strength in retailers that sell gasoline in terms of gross margins, we certainly benefited from that. A little offset to that was a reduced number of gallons, but nonetheless it was particularly strong and I think that's evidenced in the matrix. You have higher margins on some of those other ancillary businesses like optical and hearing aid, while small in size, there is a higher margin because we have to account for the additional cost of optometrists and hearing aid technicians and the like. And so, those types of things -- gas being the biggest piece of it toward the other stuff, but it all adds up to is net-net, good for us in the quarter.
Christopher Horvers -- J.P. Morgan -- Analyst
And so, was there any -- did you have any impact in terms of like the apparel category? Did you have to take any markdowns? And as you look ahead, how are you thinking about that -- the potential risk of that category impacting? Or are you seeing some rebound in that category and don't expect that to be a headwind in the next quarter?
Richard A. Galanti -- Executive Vice President, Chief Financial Officer
Fortunately, we haven't seen a lot of markdowns. I mean, apparel for us is a pretty -- there's a big component of it is seasonal. And when this thing first started, we were able to talk to suppliers and work deals where, in some cases, certain things had been made yet or they had the raw materials, but they hadn't finished the product. So, let's pay for part of the finished -- for the raw materials but hold off until next season. We've held on -- we'll have -- we've -- one of the reasons we went and borrowed money was looking at the worst case, which in our view, has not happened, but what if we had to hold some big volumes of seasonal stuff. We were going to -- whatever commitments we had we were going to respect. But I think the combination of working with our vendors, as well as sales have rebounded in those areas a little more than we expected. It's not the people are coming in and going down every aisle. Some are just going and getting their essentials and heading out of dodge. But at the end of the day, I think as the weather has turned, we've been a little bit more -- felt a little bit more good about things. Who knows what tomorrow brings, though.
Christopher Horvers -- J.P. Morgan -- Analyst
Okay. And then just the last question also on gross margin. Did you mention that e-commerce was actually a benefit? Most retailers we've seen have a substantial headwind as e-commerce growth accelerated, but it didn't seem to occur here because -- so could you elaborate on that?
Richard A. Galanti -- Executive Vice President, Chief Financial Officer
Well, first of all, it's -- like, I think everybody, for us, it's certainly a lower margin business as we try to build it over time. Where the gross margin -- it's really the gross margin dollars are stronger, because of the huge sales volume. We are spending more money on it. And so, probably -- I don't have it in front of me, but as a percent of -- profits as a percent of sales, I'm sure is down a little bit and that's expected. But the total gross margin dollars are up, simply because of the sheer strength of it.
Christopher Horvers -- J.P. Morgan -- Analyst
Understood. Thanks very much.
Operator
We have our next question from Michael Lasser from UBS. Your line is open.
Michael Lasser -- UBS -- Analyst
Good evening. Thanks a lot for taking my question. Richard, are you reaching an upper bound of your membership potential in the US with the view that if a pandemic is not going to motivate a regular consumer to sign up for a membership, then it may be hard for them to sign up under any scenario?
Richard A. Galanti -- Executive Vice President, Chief Financial Officer
Well, we certainly don't believe that. There's going to be two or three new normals over the next two or three years, and probably not a real new normal and then with its own set of difficulties besides that. We were asked a question constantly, when I talk about this giant 10-plus-fold increase in same-day grocery delivery, that's certainly because people -- there is a group of people that don't want to go out, there's others that want to come in, but they come in less frequently and buy more each time. There's going to be some new normals. Our guess is, is that, whatever it's gotten to is not going to necessarily -- does it back down a little bit at some point, still be higher than it was the day before all this? Sure. But who knows? That's everything that we talk about everyday around here. And I think over time there's been a lot of questions and we're happy with our renewal rates. And we're all going to have to get past this.
One of the things we and some others of, what I'll call the big essential retailers, we've all been fortunate that we've been opened. And when you talk to people anecdotally, they feel frankly more comfortable coming into Costco, which is bigger, more wide open with the -- with certainly the six feet apart that we're all doing with the mask requirements, there are few people who don't like it, but there is most people do. So I think all the things that we're doing, including the visible things that you see in store. And then, look, at the end of the day it's a value proposition. Our average gross margin is in the very low -- very, very low-double digits, 11% or 12%, implying whatever 13-or-so percent markup. Traditional retail grocers are in the mid- to high-20s and other big boxes are above that and regular retail is way above that. So, ultimately, it's got to be a combination of all those things. We got to figure out ways to get you in and I think we've so far, at least successfully, sometimes progressively, been successfully figuring out how to get you stuff online as well, and it will be a combination. But we'll have to see over time.
Michael Lasser -- UBS -- Analyst
And my follow-up question is speaking of online, given the success that you've enjoyed as of late, coupled with the acquisition you made a couple of months ago and the overall increase in online penetration that we've witnessed across retail in the last few months. Is there an inclination within Costco to push harder to market your online channel more to expand your offering to consumers or because of the desire to still push consumers into the store that you will maintain your posture?
Richard A. Galanti -- Executive Vice President, Chief Financial Officer
Well, I think by necessity, we have responded. And maybe for those of you -- sometimes, I'm not suggesting you, Michael, but the feel that we've been a little stubborn or not wanting to do some of this stuff. We still want you to come in. You're going to buy more stuff when you come in, period. And -- but we think we can do both. I mean, we recognized and I think white goods was the best example, way before COVID, four years ago in the US, we did $50 million in white goods sales. Three years later we did $600 million on our way to $1 billion, which is getting there faster simply because of COVID right now. Certainly, the acquisition of Innovel helps a lot of higher ticket, big and bulky items, many of which people don't want to put in their -- back of their suburban or trucking take home. So I think we'll have to see over time. We feel we've also been pretty good. Again, COVID has change things a little bit right now of doing marketing and having email promotions that are in warehouse. And again, time will tell over time and we'll figure it out together.
Michael Lasser -- UBS -- Analyst
Understood. Thank you very much. And good luck moving forward. I appreciate, Richard.
Operator
And we have our next question from Chuck Grom from Gordon Haskett. Your line is open.
John Parke -- Gordon Haskett Research Advisors -- Analyst
Hey. Good afternoon, Richard. This is actually John Parke on for Chuck. Can you talk a little bit more about what you're seeing from a gas gallons perspective toward the end of the quarter? How crossover to the business in the club? And then has some of those metrics have changed as certain areas have opened back up and are starting to normalize?
Richard A. Galanti -- Executive Vice President, Chief Financial Officer
Yeah. Look, just driving to work there is less gas gallons being bought. I think it has picked up a little. And just hearing from the news and seeing I know in the State of Washington, they have each day the percentage of cars traveling on different interstate's is improving a little bit. Part of it is some of the stay at home stuff is and part of it is the weather has got nicer and people want to get out of dodge. It does -- it has to impact a little.
One of our frequency catalysts -- or -- the frequency catalysts that we've always talked about are fresh foods, executive member and gas. And so, the extent the gas has come down a little bit that hurts a little bit. Offsetting that has been the fact that, one, the average ticket in the store was way up, which helps to offset the lower traffic. And again, who knows what tomorrow brings, we're encouraged of how we got through so far. We've seen some things pick up a little bit in the last several weeks in terms of categories or as weather turns. Certainly, some of the openings I think should help us. But again, we'll let you know.
Hello?
Operator
Chuck Grom still on the line, sir. Okay. We have our next question from John Heinbockel from Guggenheim. Your line is open.
John Heinbockel -- Guggenheim Partners LLC -- Analyst
Hey, Richard, when you think about the Innovel, what's the biggest impact that's going to have from a customer perspective? And maybe it's just coincidence. It looks like if you look at some of the mailers, you've been pushing big, big and bulky a little more here. Is that -- I guess, that's not tied to Innovel. That's just what you would have done anyway.
Richard A. Galanti -- Executive Vice President, Chief Financial Officer
I think it's kind of what we would have done anyway. It certainly is because we now have the confidence that we can provide a better service, frankly, a lower total price. Innovel was one of our suppliers that has always done a good job, as had for some others. But we -- and as we build more volume on it and get more density that tool will allow us to lower the cost and lower the cost to our members. Certainly, with that, and what we've seen, again, I think if you'd asked us four months ago, hey, we're going to have this big COVID thing and this is what's going to happen, we certainly weren't -- didn't know that we would sell more big and bulky items.
What we're finding is, is because people are at home, notwithstanding some of the economic things of layoffs and furloughs, people are buying things for the house. We saw that again more recently was not related to big and bulky, but lawn and garden. If you'd asked us two months ago, how is lawn and garden going to look, we'd say it's going to not be very good because of all the economic issues. So, I think at the end of the day, we are marketing additionally right now because we have the confidence that we can -- we've seen the delivery times on certain big and bulky items improved dramatically on small groups of items as we on board some of those items. It's a year-plus process.
John Heinbockel -- Guggenheim Partners LLC -- Analyst
And on the savings book, thought process there, it looks like the assortment sort of getting back to normal, right, from a food and sundries standpoint. When is that fully back to normal? And do you go back to mailings or stay digital-only for now?
Richard A. Galanti -- Executive Vice President, Chief Financial Officer
We will go back to mailings in June. And the assortment normalizes in June as well. Yeah. For the most part, yes.
John Heinbockel -- Guggenheim Partners LLC -- Analyst
Okay. Thank you.
Operator
We have our next question from Karen Short from Barclays. Your line is open.
Karen Short -- Barclays -- Analyst
Hey, thanks very much. A couple of questions on, I guess, e-com in general. I'm wondering first within the membership growth, any color you could provide on growth in online sign-ups versus walk-in? And then I want to just ask a little bit more about e-com generally. I mean, I know you've kind of -- obviously, you're blessed and cursed with very high velocity units than you've had to do the distancing, which has impacted traffic. But would that kind of cause you to rethink potentially much more robust click and collect model? And then I just had one other follow-up.
Richard A. Galanti -- Executive Vice President, Chief Financial Officer
Well, first of all, in terms of online sign-ups, a member that -- again, there are some members that aren't coming in and coming in less frequently. To the extent they didn't come in the first part of this month and this is normally when they would come in and when they went through the checkout, it would notify them that they're up for renewal. They are now getting their email, which they would have gotten had they not renewed. And so, that's pushing some of it that way. Certainly, that -- certainly, anecdotally have been plenty of people that are signed up and become members simply because of the one-day fresh or the two-day dry grocery. And we're seeing -- so we're seeing a big push. I think it's too early to tell what happens in the future. I think more of it will go online just like everything else in life and we'll do that.
In terms of click and collect, we have very limited click and collect right now. It's in some of those high-value jewelry, small electronics. We did add a pharmacy to it, and that's -- not only click and collect, that's click and deliver through -- we're expanding, we're not everywhere yet with the benefit of Instacart. Tires were doing that, where you could go online, order it and schedule it -- schedule your tire installation. Photo. So, we are doing more things. But if you're asking the question to buy online and pick it up in store in general, we're not looking at doing that on a regular product basis. We do delivery instead, again through third parties in a big way, as well as our own around two-day.
Karen Short -- Barclays -- Analyst
Okay. And then, I mean, I know it's kind of seems like a lifetime from now. But when we look toward the fall, as it relates to merchandising like back-to-school, Halloween. I guess, the question is, well, two, how much flexibility do you have to pivot to the extent that there really isn't much of a Halloween or back-to-school? And then the second question is just bigger picture. Everybody loves to go to Costco for the sampling. So, I'm just curious how are you thinking about that going forward. Is that something that we'll not likely ever see again? Is there anything that you're discussing in terms of how you could reintroduce that safely? Anything there?
Richard A. Galanti -- Executive Vice President, Chief Financial Officer
Yeah. Karen, I missed the second part of the question. In terms of how do we feel that our ability to a pivot it? And look, if you go back two or three months ago, we were cutting order -- reducing orders recognizing there's going to be plenty of merchandise out there in these categories. Certainly, for things like Christmas, we -- I think we reduced the selection of a few things. And so, a little more regular items than out there items. But -- and now we're pivoting to try to get a few of those items, which are available. So, I think -- frankly, I think, in some ways, it's been easier for us because we have so many fewer SKUs and we're willing to try a few new things.
And now, I didn't get the second part of your question.
Karen Short -- Barclays -- Analyst
The other part of it was just people love going to Costco for sampling -- food sampling, that's a big part of the experience. So, how are you thinking about that just bigger picture? When we get to a new kind of abnormal?
Richard A. Galanti -- Executive Vice President, Chief Financial Officer
We're going to start doing some things in mid-June on a slow rollout basis in sampling. I can't tell you anymore, but it's needless to say, not going to be where you go and just pickup and open sample with your fingers. But sampling and both food and non-food items are popular. And road shows, as well. I think you'll see a little bit more excitement on the roadshow side. So things that we can do to get people excited about coming in.
Karen Short -- Barclays -- Analyst
Okay, great. Thanks.
Operator
We have our next question from Greg Badishkanian from Wolfe Research. Your line is open.
Spencer Hanus -- Wolfe Research -- Analyst
Good afternoon. This is actually Spencer Hanus on for Greg. Just turning to e-commerce again. Can you give us any color on their repeat rates that you're seeing from the new customers that it looks like you're adding to the platform? And then, have you been able to take advantage of some of the lower online advertising costs that are in the marketplace today?
Richard A. Galanti -- Executive Vice President, Chief Financial Officer
On the second question, the latter question, I don't know. I'm not up to speed on that in terms of lower prices. I would assume -- it's what I've read in the paper in general. So I'd assume we have some of that ability, recognizing we don't spend a lot to start with.
On the first question was what? Oh, repeat business.
Spencer Hanus -- Wolfe Research -- Analyst
What is it with the increasing [Phonetic] rates?
Richard A. Galanti -- Executive Vice President, Chief Financial Officer
Yeah. You know what? That's another one that I don't know off the top of my head. Sorry.
Spencer Hanus -- Wolfe Research -- Analyst
Great. And then just if we could turn to small business customers. Can you talk about what you're seeing there? How did the sales go throughout the quarter for that segment of your customer base?
Richard A. Galanti -- Executive Vice President, Chief Financial Officer
Well, look, I mean, foodservice-related small business is down everywhere. It's been helped a little bit by some of -- we're less about serving the big restaurant chains, but the mom and pop restaurants. And so, the takeouts in your neighborhood, the Japanese, the Chinese, the Thai, those types of things, they're doing some business. Arguably, what business we're losing on some of those things, we're gaining because you're eating at home. So, overall, I think just in looking at fresh foods and the food items of what we call food and sundries, it's been way up, particularly in fresh foods and somewhat in the rest. So, I think overall we've been blessed [Phonetic].
Now, the question beyond that is what happens when everything is opens up? I think it's going to be a -- the new normal is still going to take some time. And we -- you see on the news that even in states where it's been open, there is not everybody running to sit down and then there is restrictions on how many people can be in a certain place at this given time. So, again, having fresh foods has been certainly something that has been very positive for us.
Spencer Hanus -- Wolfe Research -- Analyst
Great. Thank you.
Operator
We have our next question from Kelly Bania from BMO Capital. Your line is open.
Kelly Bania -- BMO Capital Markets -- Analyst
Hi. Good evening. Thanks for taking my question. Richard, I think you mentioned executive penetration, if I heard it correctly, was up 135,000, which seemed to be just a little bit of a slowdown. I'm wondering if it was just impacted by the environment. And if you have to do anything to change your process in terms of convincing members to upgrade there?
Richard A. Galanti -- Executive Vice President, Chief Financial Officer
Yeah. It fluctuates all over the board. Certainly, it shows improvement when we add a country like we've done in Japan and Korea in the last couple of years. It certainly is down from its peak a few years back. Probably the biggest things are that -- getting back to traffic. Traffic is down a little bit. The other thing is, one of the things we do in-store lock is something we internally call e-blocks or electronic blocks. So based on -- when your membership is scanned, based on your historical purchases, it makes all the sense in the world for you to upgrade to an executive member. We've chosen for the last couple of few months not to do e-blocks because it's one-on-one direct contact with the member while they're waiting in line at the register. And so, we've probably -- my guess would be a little higher. But -- and then we have an open a lot of warehouses year-to-date. So, we'll get back to normal in these things. But I -- we don't -- it does not raise the concern for us at all at this point.
Kelly Bania -- BMO Capital Markets -- Analyst
Okay. And just as a follow-up, in terms of renewal rates, I think you mentioned any impact from COVID there will be in the next few months. Maybe just can you give us any color on what we should expect to see? I was thinking maybe there could be a positive impact to renewal rates from this environment. But any color you can share would be helpful?
Richard A. Galanti -- Executive Vice President, Chief Financial Officer
Well, we do what's called -- we've always done it this way, a fully captured rate for renewal rate. So, let's say, you signed up originally in January. And so, in sometime in December, you get your renewal notice. And, let's say, we ultimately get to that 91% renewal rate in the US and Canada. By the end of January, you went for all the people that signed up in January, maybe by the end of January -- I'm making these numbers up here at 75% and by the end of February, you're at 82% and by the end of March you're at 85%, and it takes -- you might even get the last 0.5% or 1% of that rural rate six months out because it's -- if somebody there is a snowbird or somebody that just doesn't come in that often, there's always going to be that.
In addition, whenever you have a group of new members irrespective of whether it's online and in-store or in a new country, you have a lower renewal rate in that first respective year and then it builds each year over as year three becomes the combination of somebody renewing for the second time at a higher percentage than those that did signed up originally in year two and signed -- and were renewing for the first time in year three. So I -- and I just want -- we don't know which direction. We know that -- we wanted to say that because we don't know where it's going to go, but the renewal rate right now is mostly related to stuff that happened four, five and six months ago and seven months ago.
Kelly Bania -- BMO Capital Markets -- Analyst
Thank you.
Operator
We have our next question from Paul Lejuez from Citi. Your line is open.
Paul Lejuez -- Citigroup -- Analyst
Hey, thanks. Richard, can you remind us of the economics of an online order in terms of basket size and what's in that basket? And then separately, curious if there are any categories within the box that you would say you're a bit high from an inventory perspective. Thanks.
Richard A. Galanti -- Executive Vice President, Chief Financial Officer
Well, first of all, from online, there is regular online which includes a lot of the big ticket items. So, I don't have the number in front of me but if our -- if in-store, the -- during regular times, the average front-end transaction was in the 160 range, 140 range -- I'm sorry, 140 range. Online, which include a lot of big ticket items was probably 300 to 400 range. As we've added two-day grocery, that number has come down. Certainly, while we don't again include in e-com the same-day grocery that the likes of Instacart and others come in and do, that's going to be lower as well. So, all these things are in flux right now.
Paul Lejuez -- Citigroup -- Analyst
Got you. And then on the inventory side?
Richard A. Galanti -- Executive Vice President, Chief Financial Officer
Again, I'm happy to report that this less than we braced for the worst case a few months ago or a couple months ago when we decided to raise some extra capital. Might we have to take things like seasonal apparel and seasonal lawn and garden and luggage -- we do have some luggage to sell you, but it's a small category. But at the end of the day, all those things are less than we thought. So, yeah, there will be a small amount of items of -- I mean, probably in the few hundred to several hundred million dollars that will hold for a season or up to a year. But these are not things that are going out of style, even in items like apparel, which again I think we did -- our buyers did a very good job of mitigating that impact initially with the suppliers. And also it's come back a little better than we thought. Not all the way back by any stretch but better than we thought.
And in addition, we're not exactly high-fashion, where things are going out of style. A lot of the things that we have, whether it's some furniture items or apparel -- our senior merchant in the room is not pleased with that comment. But, yeah, we're basic. We're fashion basic. We are not [Indecipherable] about that.
Paul Lejuez -- Citigroup -- Analyst
Got you. And then just Richard, what percent of members shop the club in 3Q versus last year? And did this quarter mark a peak in that metric?
Richard A. Galanti -- Executive Vice President, Chief Financial Officer
I never looked at it. I mean, it's a good question. We'll have that for next time. Certainly, it's a lower percentage this quarter simply because of new members or people that have decided -- I mean, I have friends that have not -- chosen not to go physically anywhere and they are having things delivered and they love the same-day fresh. So, my guess has come down a little.
Why don't we have two more questions?
Paul Lejuez -- Citigroup -- Analyst
Thanks. Good luck.
Operator
We have our next question from Greg Melich from Evercore. Your line is open.
Gregory Melich -- Evercore ISI -- Analyst
Hi. Thank you. So, Richard, it seems -- sound like e-commerce was probably 8% of the business in the quarter. And if I'm interpreting it correctly, should we think of it as that that would have grown to over 10% if you include the Instacart as part of e-commerce?
Richard A. Galanti -- Executive Vice President, Chief Financial Officer
Yes.
Gregory Melich -- Evercore ISI -- Analyst
Okay. And then second is on inflation. You talked about, obviously, deflation in gas and what that did to the top line. Has there been any inflation, especially given some of the shortages and proteins, etc., that's worth noting as an offset?
Richard A. Galanti -- Executive Vice President, Chief Financial Officer
Overall -- ex gas, overall, it's very small. I'm actually guessing because it's a lot more sales volume than there is inventory level. But on certain limited items, we've seen extreme examples were like eggs for a period of time, some of the protein items like meat. But I would guess that it's impacting us a little less than others in some of those categories because of some of our supply relationships and strength. But it depends on -- and it's coming back now, it's coming down. So, overall, it's -- I would say, very little difference [Technical Issues] seen.
Gregory Melich -- Evercore ISI -- Analyst
Got it. And then on Innovel, just a follow-up on that. How much of Innovel's business was distributing other people's things? And where does that revenue show up? And how are you thinking about either growing or reallocating that capacity?
Richard A. Galanti -- Executive Vice President, Chief Financial Officer
Well, keep in mind, Innovel is a business built over decades to serve Sears, its owner. And Sears, of course, has come down dramatically over the last few years. And while I can't disclose all the numbers I'm aware of, the component that was actually still servicing their needs had come down. And then also they had gone through their own reorganization as a retail company. And with that, I think they lost the business along the way. So, there is an infrastructure and a capacity in place -- infrastructure in place with great capacity. And so, we view this as an ability to do great things with.
Gregory Melich -- Evercore ISI -- Analyst
Could you describe that capacity a little bit, like just number of employees or footage or...
Richard A. Galanti -- Executive Vice President, Chief Financial Officer
Employees were about -- I think employees were 1,500 to 1,550 -- 1,500. There are about a 100 -- there's about -- there is I think 11 large facilities, call it, the roughly 800,000 to 1.2 million square foot facilities. And then about 105 smaller facilities which could be as small as 8,000 or 10,000 feet or as big as 50,000 or 60,000. And spread out generally serving, I think, 85% or 90% of the US. And, again, there's a lot of ability to -- it has a lot of capacity. And we were doing -- we worked with them for five-plus years, I believe. And -- but like anyone else working with them, we are doing a small piece of our business because we didn't know what was happening to the business as parent was going through its own restructuring.
Gregory Melich -- Evercore ISI -- Analyst
Got it. Thanks. Well, good luck.
Richard A. Galanti -- Executive Vice President, Chief Financial Officer
Thank you. Last question.
Operator
We have our last question from Rupesh Parikh from Oppenheimer. Your line is open.
Erica Eiler -- Oppenheimer & Co. Inc. -- Analyst
Good afternoon. This is actually Erica Eiler on for Rupesh. Thanks for fitting us in and taking our question. So, I wanted to touch on the store capacity restrictions that you put in place. You talked a little bit about the impact from some of the ancillary businesses being closed had on your sales. Are you able to quantify for us what you think the impact may have been to sales from the store capacity limitations and restrictions that you put in place? And as things start to open back up in certain markets, are there any changes in these restrictions you put in place? And can we expect to see these restrictions weigh up on sales for a bit longer?
Richard A. Galanti -- Executive Vice President, Chief Financial Officer
Well, the only thing that we pointed -- I pointed out earlier was is, those businesses like optical, hearing aid, a reduced food court, those things was somewhere in the middle between 1 and 2 percentage points impact in Q3. Aside from that, when we went from generally closing Monday through Friday at 8:30, we went to, I think, 6:00. But we also added an hour in the morning for elderly and expanded that from two days to three days and now to five -- all five weekdays. We have not tried to quantify that.
I can tell you that when we've had some very busy locations historically and we said let's add an hour in the morning or an hour later at night, what we found is, we tended to just spread the business. So I think the same thing here. There is not a lot of big impact other than -- our view was -- our qualitative view was that there's a lot more impact from shelter-in-place and stay-at-home and come and get what you need and leave than there is from anything else. And again as that, I was encouraged by some of the things I've seen with a couple of the other retail apparel stores that have just started to open and are showing good numbers, because people are coming back. So, I think that net-net is encouraging. But I don't think it's a big -- it was a big impact to us either way.
By the way, yes, there was and you noticed in our numbers, Canada was weaker than the US. In Canada -- in Quebec, there's actually -- there's current outstanding limitations of Sunday closes, which is new over the last few months. And there is also I think been a little bit more stricter generally over -- up there -- either stricter or people listening better to stay-at-home issues. And so, we've seen -- in a country where we're the only game in town in terms of warehouse clubs, we've seen weaker traffic and therefore, slightly weaker numbers than the US.
Erica Eiler -- Oppenheimer & Co. Inc. -- Analyst
Okay. Well, I guess, that's a good segue into my next question. So, I was just curious on international side. If there is any more color you can provide on what you are seeing internationally with regards to Coronavirus impacts? Are there any notable differences in terms of behavior or any other callouts versus the US?
Richard A. Galanti -- Executive Vice President, Chief Financial Officer
Well, I think -- again, putting on my blinders for a minute. I mean, Taiwan and China are the most encouraging. China, we have one location, of course, that's been open for less than a year. So we don't have a year-over-year comparison. Taiwan is quite strong. Japan is quite strong, maybe a few weeks behind that. We see Australia coming back. So, overall, that gives us encouraging news for the US and Canada. But part of that answer is so what until we see it.
Erica Eiler -- Oppenheimer & Co. Inc. -- Analyst
Okay. Great. Thank you so much.
Richard A. Galanti -- Executive Vice President, Chief Financial Officer
Okay. Well, thank you, everyone. And me and my guys here are around to answer questions. Have a good day.
Duration: 60 minutes
Call participants:
Richard A. Galanti -- Executive Vice President, Chief Financial Officer
Simeon Gutman -- Morgan Stanley -- Analyst
Christopher Horvers -- J.P. Morgan -- Analyst
Michael Lasser -- UBS -- Analyst
John Parke -- Gordon Haskett Research Advisors -- Analyst
John Heinbockel -- Guggenheim Partners LLC -- Analyst
Karen Short -- Barclays -- Analyst
Spencer Hanus -- Wolfe Research -- Analyst
Kelly Bania -- BMO Capital Markets -- Analyst
Paul Lejuez -- Citigroup -- Analyst
Gregory Melich -- Evercore ISI -- Analyst
Erica Eiler -- Oppenheimer & Co. Inc. -- Analyst
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Costco Wholesale Corp (COST) Q3 2020 Earnings Call Transcript - Motley Fool
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