好市多 (COST) 2002 Q1 法說會逐字稿

Good morning. My name is Michael, I'm your conference facilitator. I would like to welcome everyone to the Costco Wholesale Corporation first quarter fiscal 2002 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question and answer period. If you would like to ask a question during this time, simply press the number "1" on your telephone key pad. Questions will be taken in the order they are received. If you would like to withdraw your question, press the pound key. Thank you. I will now I turn the call over to the Chief Financial Officer, Mr. Richard Galanti.

Thank you, Mike, and good morning to everyone.

As usual this morning, I would like to review with you several items. To begin with, our first quarter operating results for the 12 weeks ended November 25th. Briefly we came in at, as you know, at 28 cents a share for this first quarter, in line with the first call consensus of 28 and at the mid point of our recent October 11th, guidance of 27 to 29 cents a share at the midpoint there. Comp sales, of course, as you saw, also came in at a 5% for the quarter. We'll review with you recent sales trends as well as our outlook for the five-week December month,which of course we're ten days into it at this point, but so far it's been pretty good. Other usual topics of interest, include recent openings and results, as you know, we've had a very hectic and busy schedule since September 3rd, when we opened our -- when we began the fiscal year. We opened a total of 20 new locations and three relocations in these past 14 or 15 weeks. That represents more than half of our planned openings for the entire fiscal year, which ends at the end of August next year. I will also go through our upcoming expansion plans and business results, results with Costco on-line, our E-commerce Site. Executive membership program, the completion and results of our Canadian reorganization, and our balance sheet for first quarter end. And at the end, but before I turn it back to Mike for Q & A, I will walk all of you through some updated guidance for our second quarter in fiscal '02 time periods. As with every conference call, I'll start by stating that these discussions we are about to have will include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1991, and that these statements involve risks and uncertainties that may cause actual events, results and our performance to differ from those indicated by such statements. The risks and uncertainties include, but are not limited to, those outlined in today's press release as well as other's risks identified from time to time in the Company's public statements and reports filed with the FCC. With that said, we will get into it here.

Sales for the first quarter, again, were up 11% to $8.3 billion, up from $7.5 billion during the first quarter a year ago. With comps rounding upward to 5% for the 12-week first quarter. As you know, our calendar month sales reports for September, October, November, which, roughly follows our fiscal fist quarter, were -- reported were 4, 6, and 4, with a little bit of a tobacco adjustment there. Normalized, they were basically 4, 5 and 5. So fairly consistent during the quarter, during the three months of the quarter, and continuing at a fairly recent rate given what's going on in the retail economy. And again, as I mentioned in our last conference call on October 11th, we are a little under our original owned and operating budget for the first quarter by about $150 million. But still came in with what we said we were going to come in for at that time. For the quarter, in terms of the comps, the -- well, over the last year, we've been, you know, hit a little bit with weaker Foreign currencies. That is lessening. I think in the first quarter, that that represented about a half point detriment to our reported comp. It would have been better a little better had we had year-over-year like Foreign currencies, but we're starting to see some slow down in that-- show improvement in that. Slightly increased cannibalization maybe that was --- that represented a couple tenths of a percent, not much. In terms of an average transaction and frequency, average transaction sides has actually been quite strong, whereas historically over the last few years, we've seen the average transaction size up, you know 1, 2, and 3% year-over-year. Of late, the last few months, average transaction size is actually up in the 6 to 8% range, recognizing that our comps have been in the 4 to 5% range and averaged 5 for the quarter. Our average frequency has been down 1 to 2%. Another question I've been asked a lot over the last several months, is due to the weakening economy, have we seen any shift between Gold Star and Individual Member sales and Business Member sales?

We've seen a very small shift from Business to Gold Star, less than a percentage point. That may in fact explain a little bit of the slight reduction in frequency, but a slight increase in the average ticket as they're coming in a little less frequent, but buying more each time. Needless to say, the most important number is the overall comp, and that again is 5%. In terms of sales comparisons by geographic region, as usual, I will ask you to jot down some numbers, starting with three columns. The first column will be fiscal year '01, for the year. Second column will be the fourth quarter of last fiscal year which would beat of course, [notes] this past summer. And then of course, the first quarter, which would be September through November. In terms of comp sales by region, the Northwest, for all of last year was 2%. For the fourth quarter it was 4% and for the first quarter that we just reported was 5%. So, continuing improvement trend there. California, for the year, was 6. Fourth quarter was particularly strong at 8 and for the first quarter was 6. Northeast, again, going across here was 6, 6 and 7.5. Southeast was 10, 7.5 and 7. Midwest was 9, 10 and 11. And U.S. overall for the last year was 5.5 for the fourth quarter was seven and for the first quarter was 6. Again, fairly consistent improving trend there versus all of last year. And Canada has been a little weak as you know in -- in U.S. dollars for the -- those three time periods, for all of last year, in U.S. dollars it was zero. For the fourth quarter, it was -2 and for the first quarter -5. Downward trend, similar, actually in local currency, too, for the year, it was plus 4 locally, plus 1 in Q4, and -1 in Q1. I'm happy to report that our Canada division and local Canadian dollars for the last two weeks has actually been positive, and that's the first time in a while, so I think we've seen some improvement there of late.

Other than the Nationalists continue to be strong. Last year we saw some weak International currencies relative to the dollar. So an example in fiscal --- all of last fiscal year, other International was 0 in dollars, +10 in local respective currencies. For the 4th quarter, it was a +3 in dollars and a +13 local currency. And for the 1st quarter, it was a +10 and a +14 local currency. Again, fairly good results there. That's, of course, weighted strongly with the UK given that's where we have most of those units that are included in the number. All that together, total company reported a 4 for last year, 5 for the 4th quarter and 5 for the 1st quarter. Mexico, which we don't consolidate into those numbers, has also continued in decent numbers, 12% for the most recent quarter, which is strong, not as strong as the 20% for all of last year for the first quarter, but continued at a fairly healthy rate. In terms of merchandise categories, the trends that I shared with you on the October 11th, conference call continue through the quarter. That is stronger food, and sundries, fresh food sales and slightly weaker non-food sales. Although of late, particularly in the last couple of weeks, we've seen some pick up in certain non-food categories that had been weak. I will go into some of that in a in a minute. So again, if you will please, jot down three columns. Again, the columns would be fiscal '01, second column would be the fourth quarter of '01 and the third column would be the first quarter of '02. The main categories, the first one would be food and sundries, and going across left to right here, it would be 5%, 5%, and 6%, in the most recent quarter. Hardlines, 0% for all of last year. 1% towards the end of last year in the fourth quarter and +3 for the first quarter. Softlines, 0, -2 and -3. Fresh foods, continuing strong in the weakening economy, +9, +9, and +8.

And ancillary, +17, +21, and +13. Now, just parenthetically, the -- both the +21 and +13 in ancillary, of course, that includes the strength of gasoline, with gasoline prices falling of late, if you take gasoline out of both of those numbers I didn't have it for all of last year on my sheet here, but if you take it out for the fourth quarter, it was 9% without gas and also 9% without gas in terms of comps in the first quarter. So again, ancillary businesses continue strong for us, both with gas and without gas. Trendwise over the last several months, a couple of other things I'll point out again, food and sundries and fresh foods and ancillary businesses, I think are helping our comps in terms of bringing our members in. And, non-foods, while sluggish over the last few months, has actually started to trend upward a little bit. As an example, the +3% hardlines number for the first quarter, I looked at the three months, September, October, and November, and the trend was 0, 5, and 6% comps. Similarly, the -3% Q1 comp for softlines, over those three months successfully, were -6, -1, and +1. Again, we've seen improvement there. Some of the sales trends that we've seen are logical results of both the economy and the September 11th, tragedy. In terms of the weaker economy, more food and less discretionary. Less big ticket discretionary items, like PCs and jewelry sales. As it relates to the tragedy itself, I think we've seen, at least in our numbers, a little more improvement in-- I'll call it stay at home entertainment type things, like T.V. and media sales. And similarly, with a little less travel, we've seen a little drop down in photo processing. To give you a couple quick examples, if -- in the months of September, and October and November, what we refer to as our Major's category, which is everything electric, in September, Major comps were down 6%. In October, they were flat and in November, they were up 11.

Within that up 11, T.V.s were up 45 and up 30% the prior month. We also have seen a little pickup in November, of course, in PCs after being quite weak over the last few months. Similarly, even softlines, things like media, which were down 8% in September, of course that was active period where people were doing a lot of things other than renting movies and buying movies. There was -8 in September, plus 11 in October, and plus 12 in November. Again, jewelry, which is continued weak was essentially in the -12 to -15% in each of those three months, although again, in the last couple of weeks, it's been a little better. Not a lot better, but a little better. Continuing down the numbers on membership fees, in the first quarter, reported as expected strong membership fee results. Coming in at $169.5 million or 2.05% of sales. That's up 23% in dollars and up 20 basis points as a percent of sales from last year. So, with a $31 million increase year-over-year and a reported basis in more than a $20 million increase on a cash basis. Again, that's a combination of -- of the continued trend toward some of our members converting to Executive Membership, the fact that as we opened a lot of new units last year, free memberships, some of them are now paying for the first time, and on a reported basis, of course, we get a little -- even a higher bump, the reported $30 million increase because of the deferred accounting. That will continue this whole year. We think these are great membership numbers and also pretty much in line with our original budgets. And we -- again, we think we're benefiting from some conversions to the Executive Membership. In terms of the number of members at first quarter end, Gold Star, 13.1 million, up over the last -- over the prior 12 weeks from 12.7 million at fiscal year end. Primary business, slightly up, still the same number of 4.4 million, both at Q1 and at fiscal year end. Business add on, 3.7 million at 1st quarter end, versus 3.8 million at fiscal year end.

That slight reduction is -- that has to do with that as a business add-on member converts to a Executive member, they become their own Gold Star member. That is -- that reduction is included in the bigger increase you see in Gold Star members. So, all told, 21.2 million members at first quarter end versus 20.9 at fiscal year end, and including free spouse cards, over 37 million members currently versus just under 37 million members at fiscal year end. In terms of paid executive members, we ended the first quarter with 1,151,000 Executive members, that's an increase of 133,000 from the fiscal year end, or about 11,000 a week, which is a little stronger than we had expected. In Q1, Executive member sales represented 17% of our U.S. sales, which is where we offer the program, versus 10% of sales in last year's first quarter. Again, these members are generally renewing more frequently and comping, comp increasing well above the rest of the membership pace. At fiscal year end in terms of membership renewal rates, as we stated, in each of the last few quarters, we are still rounding to the 86, but we've seen it come down from a strong 86 to a strong 85 that rounds to an 86 still. That was consistent with what we expected given the $5 increase a year ago. I might add is, we're starting to see positive trends in that side, I'm hopeful we will continue to see that rounding to 86, but it's right on the cusp but we're starting to see improving trends there now that we anniversaried the $5 increase. Historically, I might add is we've seen anywhere from the 1 to 2% detriment in renewal rates when we did a $5 increase. This time around, we've seen less than the 1% delta, which again has allowed us to stay at the 86% renewal rate. I think there are several reasons for that. One is the underlying premise, why we're here is a great value proposition at Costco.

Again, Executive Memberships tend to renew well in excess of 90%. Of course these are your most loyal members to start with. And also, as we increase the number of members that use the Co-granted Amex card or our Private Label card offered through household, both offer us stability to auto-renew those members with the charge appearing on their bill once a year. And before I continue down the gross margin line of our income statement, let me make just a couple of comments about American Express. It remains a great relationship from both of our perspectives. At fiscal year end, we had 1.5 million accounts, sorry, at Q1 end, we had 1.5 million accounts, up about $100 thousand from fiscal year end. It represents just under 20% of our sales currently being purchased with the American Express card, versus 18% for all of last year. All told, with American Express relationship, new members, and new co-granted card holders, I think we both benefited from that. Newly continued cross marketing relationships, we're now offering homeowners and auto insurance through American Express property casualty, at which was even a better rate than the program we offered before through another provider. Good sale results with higher end members. Now going down to the gross margin line, in the first quarter, gross margin was lower by 7 basis points, coming in at a 10.40, versus 10.47 a year ago, in line with our guidance on the October 11th, conference call, and not a bad showing given last year's first quarter gross margin strength year-over-year. Again, we got a couple more tables to have you jot down. This is one of them, in terms of the components of gross margin. If you look at the core business, again, I'll just ask you to jot down a couple of comps, the fourth quarter of '01, and the first quarter of '02. The core business in the 4th quarter was weaker by 21 basis points year-over-year.

And '02, it was weaker by 16. The second line would be our 2% reward which has the effect again, of reducing sales, therefore reducing gross margin. On the executive membership, was -17 in the 4th quarter and -14 in the first quarter, and again, we would -- much like the Amex deal from a few years ago, with how that affected our [inaudible] bank fees and merchant fees. This has a negative effect on gross margin, of course, you have the positive effect in membership fee income and stronger sales with these members, but that negative effect we will start to see mitigated over the course of the next year as the rate of growth of Executive membership slows. Ancillary businesses were quite strong in terms of helping improve gross margin in the 4th quarter, improving it by 34 basis points. In the first quarter it was still a decent showing, improving it by 16 basis points. I will go through some detail in a minute. International was +3 in the 4th quarter and +6 in the 1st quarter. Life row was -8 in the 4th quarter, and again that just had to do with the fact that we had a little bit less of a credit in the fourth quarter this year, but again, it was no affect in Q1. And all told, in the 4th quarter, reported gross margin was 9 basis points, weaker year-over-year and the 1st quarter as planned and expected, weaker by 7 basis points. One footnote you might add on the core and the total there, I mentioned that last year in the 1st quarter, we're comparing the particularly strong numbers of a year ago, we had total gross margin a year ago in Q1 over the prior 1st quarter up 15 basis points and within the core it was better by 30 basis points. So, again, it was a pretty tough comparison and given the mixed shift changes we saw in the first quarter out of some of the higher margin non-food and lower margin food items I think we held onto our margin pretty well. The next component of gross margin -- oh, the other point in terms of the mix, looking at that -16 core, 13 of that we estimate was related to the mix change out of non-food into food.

So as we see that cycle through in the next several quarters, hopefully, that shouldn't hurt us as it has in the last couple of quarters. Last several months. The next gross margin component is the Executive membership as I mentioned, again it was minus 14 basis points in Q1, again, it -- we're starting to see that detriment reduce and I think that will continue over the next few quarters. It may flatten out in Q2 and be in the -12 to 14 and then -10, -8 and so on, so that by fiscal '03, it shouldn't be a big delta at all to our gross margin, and we should still be reaping the benefits of the strong membership, these loyal members buying more. In terms of the 16 basis points improvement in gross ancillary business gross margin component, it really is spread out well, better gasoline profits, that was half of it and sales penetration of gasoline, as well as better pharmacy, optical, and food core profits, so again, throughout, those are businesses that are not only profitable, but I think help us, you know, comp it more than twice the rest of the company. But also drive people into the -- into our warehouses. International, a little better, due to both improving gross margin percentages, as well as increased sales penetration. Not a big factor. Life row, no delta year-over-year in terms of basis points. The reserve we incurred in both Q1 of this year and Q1 of last year was $2.5 million, or 3 basis points in each quarter. This of course, is the first quarter and for both first quarters, it's a reserve estimate. I would say, however, that we've seen a little more deflation this year than last year and if that were to hold and we certainly don't know this early in the fiscal year if it will hold, it could actually help reported gross margins slightly later in the year as we adjust our reserves downward or take a little more lifo credit towards the end of the year, but we'll have to wait and see.

So far, we definitely see a slightly higher level of deflation than we had last year. In terms of a gross margin outlook for Q2 and the rest of the fiscal year, I think in Q2 we will see a similar-like trend as we did in Q1 and improve in the back half of the year, approaching or if not even improving a little bit for the year overall. And again, that's in line with the continued sales mix change and relative to our original budget. Lastly, with respect to inventories and gross margin, we seem to be going through Christmas here in good shape inventory-wise and we should be fine mark-down wise as well. Sales have been better these past 10 days. Again, this is a five-week calendar month, so we will have to see, but in terms of these last 10 days versus these next 2 weeks prior to actual Christmas day, we are seeing good sell-through of the non-food items. Before going into SG & A, let me briefly state where we are with our ancillary business levels. Pharmacies, during the first quarter, we added 14 pharmacies to be at to be at 286 pharmacies. Food service, we added 13 to be at 358. One-hour photo labs, we added 12 to be at 354 in nearly all of our locations. Optical, we added 13 to be at 333. We actually eliminated one coffee center to be at 11, generally those are around our regional offices. Hearing aid centers, we added 16 to be at 97. And gas stations we added 13 to be at 152. As of today, we're actually at 158 gas stations with another roughly 30 planned prior to next August, fiscal year end. The -- again, as I've always stated, the businesses are doing fine, they're profitable, they drive the overall business, they have comps of more than twice the company average and yet another reason to be a Costco member.

That's why we're seeing the renewal rates continue to be fairly healthy. Moving on to SG & A, while still higher year-over-year as a percent of sales, due in large part to the new locations, we opened 32 new locations last year and 13 new openings in just the 12 weeks of q1. We're trending in the right direction. In Q1, as you will see in my last little chart I will give you, SG & A year-over-year was higher or worse by 25 basis points at 9.47% of sales. Steel, better than last year's overall SG & A detriment of 46 basis points. The Q4 SG & A detriment of 37. The last chart here, only two columns this time, all of last year and the first quarter of this year. The core business and minuses here mean higher or worse, the core business last year was worse by 29 basis points, in Q1 of this year it was worse by 21 basis points. Central was higher or negative 3 last year. This year was +5 or lower by 5 basis points. I think that's a -- a combination of hiring freeze we have at central. The hiring freeze here doesn't mean a real, real freeze it means you have to go to Jim personally to get anybody approved. That's certainly slowed it down. And we built a lot of infrastructure over the last year and we're starting with higher sales to reap a little benefit there in central now with the regional offices open. I might also add is, in central, and in the first quarter, included in our -- in our P & L as well as in the -- P & L, as well as in this number, an additional million and a half dollars in expense related to our donations we made relative to the 9/11 tragedy in New York and Washington, D.C., so that would actually that +5 would have been a little bit better without that.

And the Canada reorganization. We will start seeing some benefits now that we're into the new year. Ancillary businesses was -11 last year, -7 this year. International, -3 and -3. All told, our SG & A last year was 46 basis points higher or -46. The first quarter was -25 I mentioned that the -- the core warehouse SG & A was worse year-over-year by 21 basis points. We estimate 19 of the 21 basis points relate exclusively to all the new warehouses since last year's first quarter end. If we just simply took those out, we essentially were very close to flat, about one to two basis points higher year-over-year in the core business, with energy costs being that delta. In terms of energy costs, I think as a company we've done a very good job, we benefit from the fact that we've got more skylights per square foot of roof than anybody else I know. We've done a good job of lowering our energy consumption. So, then the negative will be less than expected this year, but I think we've already, as I mentioned before, reflected that in the operating budget for the year. Next on the income statement line is pre-opening expense. There is $2.5 million, or one basis point higher,year-over-year, coming in a $22.1 million this year in the 1st quarter versus $19.7 million last year. While total pre-opening was $2.4 million higher, new warehouse pre-opening was higher by about $3 million. We opened 16 warehouses including 3 of the relocations this year versus 14 including 3 of the relocations end of quarter. And then there was a little less pre-opening in International. In terms of the -- the income statement line item provision for impaired assets and closing costs, this is the fiscal quarter where we completed the expensing of the costs related to the consolidation and reorganization of our Canadian operations and administrative offices. As you recall, we announced that last January and this was completed effective as of the beginning of the fiscal year on September 3rd.

Many of you recall our estimate of the total Canada- related costs, related to this reorganization, would be $26 million, $3 million of which would be--- was incurred in Q3 of last year, $16 million which was incurred in the 4th quarter of last year and an estimated $7 million in the 1st quarter of this year. In fact, the total number came in at $8.5 million for the 1st quarter, putting the total Canada relocation costs at $27.5 million for the entire program. There were no additional closing cost charges in the first quarter related to anything else. So again, that $8.5 million or essentially 1% -- 1 cent per share after tax related to the one-time Canadian charges. So, all told, if -- where we are now on the income statement, operating income in the first quarter of '02 was up $3.5 million over last year's 1st quarter and up $12 million or 6% if you exclude the one-time Canada charges that we incurred in this quarter. Below the operating income line, reported income expense was actually a shade lower year-over-year, which improved our P & L by $700,000, positive to our income statement. And on the interest income line, interest, income, and other line, that actually hurt us by about $4 million. We borrowed more this year than last, short term costs are very low and are continued warehouse expansion plans actually cost capital -- I'm sorry, I'm still talking about interest expense here. The reason we saw a benefit there, even though we borrowed more is that interest rates have fallen. We're actually borrowing sub 2% now on our CP line. We're also, because of the ramp-up in warehouse expansion, the offset interest expenses increased capitalized interest,and again that was a little higher year-over-year. And getting to interest income, as we anticipated there, was a -- that was worse by $4 million coming in at $7 million last year -- this year versus $11 million a year ago in interest income.

Again, lower cash earnings balances, and lower interest rates being earned on such balances. So, with reported operating income up 3.5 million and the net of interest expense and interest income higher by 3.3 million, we were able on eek out a year-over-year increase in pretax profit of about $200,000 coming in at $216.1 million this year versus $215.9 million last year, but again, if you take out the one-time Canada charges, pretax earnings were actually up $5.4 million or 2.5% over last year's first quarter. We fell it's a good showing given the ramp up and expansion, new warehouses, sales slightly lower than budget, and merchandise mix shifts we talked about. Other topics of interest here, let's start with the balance sheet. Again, we have filed our 10K, of course, we will file our 10Q in about a week. But I -- we will, as you know, anybody of interest, anyone interested, we have a packet, if you let us know that has the current balance sheet in it. The basic details of the balance sheet at Q1 end, cash and equivalents, $824 million, inventories, $3 billion 284. Other current assets, 581. Total current assets 4689, $4 billion, 689. Net PP & E, $6 billion, 044. Other assets, 376. Total assets, $11 billion 109. On the right hand side, short term debt, 274, accounts payable 3392, $3 billion 392. Other current, $1 billion 344. Total current $5 billion 010. Long-term debt, 860. Deferred and other, 119. Total liabilities, $5 billion, 989 million. Minority interests, $117 million, stockholders equity, $5 billion and $3 million, 5-0-0-3.

Putting the total also at $111,109 on that side of the sheet. Let me point out a couple of things on the balance sheet. First of all, our debt to cap ratio remained, as it did at fiscal year, at 18%. So plenty of financial strength, not an issue there. A couple of anomalies that occurred. You see a big cash position there of $824 million. Keep in mind, while we benefit from a lot of positive float with our accounts payable, within that 824, there is a little over $400 million of credit and debit card of receivables. Over the weekend we end our fiscal years on a Sunday night. Our fiscal periods on a Sunday, therefore, basically, much of the Friday, Saturday and Sunday receipts are Friday afternoon and evening and all of Saturday and Sunday receipts. As of Sunday night our cash equivalents are not real cash, it goes the other way if you will. There is about $300 million of cash banked balances, again, relates to our cash and also a little under $100 million of Foreign-related cash balances. Likewise, on the AP side, if you look at the $3 billion 392, within the number, there is nearly $500 million of what's called bank overdraft, that's checks we've written, mailed out and haven't been cashed yet. That's positive float. When you look at our AP ratio at Q1 end and say accounts payable as a percent of inventories, that's reported at 107%, meaning we have more money than -- virtually all of our inventories are being financed with trade payables. It's misleading because of what I just mentioned. The actual number, when I take out the bank overdraft, that's cash we expect to pay shortly, the AP balance at Q1 end was 88%, that's still better than, again, adjusted balance at year end of 84%. Again, 88% of our -- of our merchandised inventories are being financed with trade payables and improved showing, I think our function of continued improvement in inventory management, in fact, at Q1 end this year versus Q1 end last year, we saw our inventory levels as planned come down a little bit, just a couple hundred thousand, about a hundred thousand per warehouse, but nonetheless, after several years of seeing inventory balances go up.

In terms of lifo, is slightly deflationary, not a lot to say there. In terms of cap-X, our original budget for this year is $1 billion 3, this represents 35 to 36 planned new openings, and 7 to 8 planned relocations. Again, 20 of the 35 and 3 of the 7 or 8 relocations have been opened. It could be higher depending on the end of the fiscal year into 4th quarter as we're continuing our expansion. In terms of our E-commerce business, Costco.Com, Costco on-line, I'm happy to say that it was profitable last month and very much will be profitable this month in December. This is not proforma- profitable, no red brackets around it, it is real profitable, really profitable. Last year recall that our sales were $73 million in the -- for the total year, in the first quarter we've seen sales increases of about 35% in the last several weeks 40 to 60%. Again, we -- our budget has been revised ever so slightly upwards to be slightly profitable instead of being slightly under profitable in the original budget. Again, not a big thing, for us, if we do a little over $100 million in sales it represents sales similar to one of our 360-plus warehouses. Next on the discussion list, expansion, as I mentioned, through -- from September 3rd, beginning of the fiscal year through today, we've opened 20 new warehouses and 3 relocated warehouses for 23 new openings. For the remaining nine months or eight months of the fiscal year, we plan to open around 15 to 16 new warehouses and four or five relocations.

Again, the total new warehouses for the year, planned to 35, you know, my guess is that it will be about that number typically, it may fall a couple by the end of the year, but my guess is given the response we've seen in the markets we opened, we will continue to look for new openings. So if we do 35 on a base of the consolidated 345, that would be 10.1% unit growth and given they're a little bigger size facilities than the company averaged, the new ones are 148,000 feet. The company averages 135. That 10.1 unit growth would be 11.1% square footage growth. And finally, before going back to Mike for Q & A, here is brief direction as it is currently for Q2 and fiscal '02 overall. Looking at first call consensus, Q1, of course, was 28 cents. Current first call consensus is 41 cents for Q2, 28 cents for Q3, 50 cents for Q4, and $1.47 for the whole year. At this point, again, we -- we found that it's better to be conservative, although again, sales have been fine the last, you know, week and a half and there's no big surprises right now. But I probably would take each of those numbers, the 41, the 28 and the 50 and put a plus and minus penny around them. Again, we will see how we do, if we go back two and three quarters ago, we're saying that Q1 was going to be the toughest quarter with the ramp up in openings, Q2 would be tough given the fact they're all opening Q2, and you will see better results on the second half of the year. So far, we've done just that. In terms of direction for some of the components,gross margin, we see

similar trends in Q2 and better in the second half, hopefully flat to slightly better for the whole year. Membership should remain good, again, we get the benefit of 10 to 12 basis points from deferred accounting on the $5 increase of last year, again, the renewal rates are good and the dramatic number of openings, the freebies, they don't renew it nearly at high a rate, it is no membership income on the new warehouses last year versus some this year. And SG & A, I think, again it should continue to be higher year-over-year, but at a less detrimental trend. Our fingers are crossed there. Also on the next two and a half weeks. We hope they're like the past 10 days. With that, Mike, back to you for Q & A.

I will remind everyone, if you have a question, please press the number 1 on your telephone key pad now. Your first question is from George Strachan of Goldman, Sachs.

Hi, Richard, George Strachan, how you doing? I was wondering, our preliminary look at sales per warehouse week suggests you were down a little bit in the quarter, could you characterize how the new units are coming on-line and how last year's units are doing in terms of the comp budget as you are beginning to round on them?

The slight decline for sales per warehouse week is we have a lot of new units. We opened 13 more this quarter. All those weeks are included in that. There's nothing surprising other than that's noted. I'm sorry, the second half of the question?

Just how you're going see last year's openings ramp up in terms of what your expectations have been?

Well, you know, if you look, I guess you can't look yet because the annual report is being printed tomorrow and will be sent out next week, the actual, if you look at all the openings last year on that little matrix thing we do in the front of the annual report, the '00 openings in '00 averaged $55 million a warehouse on an annualized basis each. The '01, warehouses in '01 averaged $57 million so actually slightly better, even with a higher proportion of new market units. We're doing fine relative to budget this year on those units. I don't know if it's plus or minus a little, but those are a little more definable.

And just in general, how does -- the new openings this year compared to last, if you could just remind us, how many are in new markets and how many are in existing markets?

The number, the new market existing market, for the 32 units last year was 80/20 or 26 of the 32. This year using the 35 or 36 new market number, it is about 60%, 60 to 65%. So, you know, less of a detriment of those. I mean, a few more no-brainers and we opened this past weekend, in Montclair, California, a big opening, similar to the types of L.A. openings we've opened over the last few years where we've infilled and do $100+ million in the first year.

Thank you, Richard.

Your next question is from Bob Toomey of Dain Rauscher.

Hi, good morning. I got on the call late, Richard and I just have a quick question. In terms of comp trends in the quarter, can you comment on what was notable about that, where you saw strength versus weakness? We had, I think, a 5% comp in the quarter?

Yeah, I think the only, again, again, normalizing for tobacco, the three months were 4, 5, and 5. Probably the thing that was most notable was is that on some of the weaker non-food areas we've seen some improving trends. Jewelry we really haven't. That's continued in the low minus-teens. Electronics, in what we call majors, you know, computers were very soft in September and October and started to show some positive numbers in November. These have been very strong. So, electronics overall has gone from minus comp in September to a plus 10 or 11 in November. So, again, we've seen a little bit of pickup in the last couple of weeks. Also, people are buying more than we anticipated.

And how with you say staples items like food, gas, how are they holding up? RICHARD GALANTI Food has been fine, no change there. I think it was an 8 versus a 9 last quarter, so, strong. Gas comps have come down, still positive, come down because of the dramatic reduction in the average price of a gallon of gas.

Okay, great.

I think in November, you know, gasoline dollar comps were 7 or 8%. Gasoline gallon comps were over 20%.

Okay. Could you also comment on the -- the -- you answered the question on new to existing opening stores, where you're opening the stores, just on the -- sort of the long-term outlook and do you think your availability of locations and places to put in new stores, I mean, do you feel there is a risk of, not so much cannibalization, but not being able to find good sites?

Well, you know, at this point, no. We -- we -- we've got plenty of stuff on the plate to be able to open 35 to 40 units a year for the next three to five years. That, of course, depends on our continued ability to absorb those, recognizing that in the new markets, they -- they take, you know, two or three years to turn the corner in some examples. You know, there is less infills of course, we're conscious of that. That's why you see a mixed change, a few more infills this year than last. Those are harder to find because, you know, we're already in these markets. But one thing that we continue to be pleasantly surprised by, is the fact that there are more infills being identified. We find that we can go into a market where we thought it was saturated, open up a new unit, do $100 million the first year, maybe 20 or 30 is cannibalized business, but 70 of it is new business. That's better than any other new market we open.

Great. Thank you.

Your next question is from Jeffrey Feiner of Lehman Brothers.

Richard, two brief questions. As it relates to the openings, can you walk us through the impact of SG & A with 23 and 35 for total, you know, where the bigger impacts might be going forward, quarter to quarter. And as you said earlier, when you made your conference call a couple of months ago and said that the first quarter would be the most difficult and moving beyond that will be a little bit easier, is your comment that the second half numbers, the delta, in terms of spreading the penny on each side, potentially could be towards the positive side as opposed to the negative side of that spread?

Nice try, Jeff. But in terms of the SG & A impact, again, right now, not only do you have the negative impact SG & A of all these new units, or of all the new market new units, but the full year impact from last year. You know, the first quarter last year you only had eight or ten locations, new market units. By the end of the year, you had all 26 of them. So, I think that, again, it's still going to be a higher trend in SG & A but hopefully, you know, less of a higher trend, and -- and improving, it could be the second half or it could be the first half of '03 where you actually see SG & A improve year-over-year that, which would be fine. That's implied -- by the way, that's implied in our numbers this year, I'm not suggesting anything otherwise. In terms of, you know, where I'm going plus and minus a penny, I'm trying to be cautious now, recognizing we don't know what sales are going to be next year. On the one hand, we've been blessed with good comps so far and even slightly improving comps of late. But everyday you read about layoffs and what's going on in the market and I'd rather just be conservative, or reasonable and conservative at this point. And our fingers are crossed. What I feel is that people ask me all the time, you know, what is the risk in our numbers? The risk is its first and second quarter of '03, instead of third and fourth quarter of '02 that we see the big turn. I'm not trying to hedge myself, we have budgets that imply that there is some improvement in the second half of this year, we just have to wait and see.

Great. Thanks a lot.

Your next question is from Shari Eberts of J.P. Morgan.

Good morning, Richard. Just following up, actually, on the SG & A impact, I believe you mentioned it was 19 basis points, I think, from the new stores this quarter, was 18 in Q4, can you be more specific, sort of how you see that progressing?

Well, I mean -- I can't -- I'll take a look at it, I've not planned to do that -- I don't have that level of detail in front of me. And looking at SG & A, I would think that in Q2 and Q3 and Q4, the level of total company detriment will continue to lessen. The implication, of course, therefore, is that we will see a lessening of that 21 as well, or that 19 as well.

Okay, and then just secondly on the membership fee income, obviously a very good result; is that what we should expect to see then, is similar to the 20 basis points and then any comments that you have on when you might need to raise fees again?

Well, you know, we -- I think that we will -- I think right now, at least it looks like we will continue to see strong membership numbers. You know, whether it's 20 basis points up or 15 or 22, notice that I went down five and up two, I'm just guessing there. I think, yes, it's going to continue to be good, and our budget assumes it's going to be something in the high teens next month. In terms of when we can raise it, well, we've shown historically, is we've done it every three to four years. My guess is that, you know, and, of course, we do it when we've added new services and new products and then use part of it to drive our pricing. My guess is that if we did it in September of '00, the most likely dart would be September of '03. I don't envision us doing anything over the next year for sure.

Okay. Great. And then just last question, I don't know if it's too early, but can you talk about just renewals in your new markets, especially the ones that are up against Sam's Club dominated markets?

If I look at all our new markets over the last year, our new rates tend to be in the 30% range. If you go back four or five years ago, I think when we opened Atlanta it was a 40% renewal of those freebies. Because somebody asked recently, internally, why is it now 30%? Part of that is I think that we've been more aggressive in our mailings, to a little wider area, and -- and we've signed -- yeah, we've signed up a lot more members. So just a lot of people coming in for the freebies. But again, when you sign up 80 or 100 thousand people on one site over a 10 or 20 week period and get 30,000+ of those to renew a year ahead, that's great. In terms of specific markets, I think you're probably asking about like a Dallas market, you know, we probably -- that renewal rate has been again, around 30, maybe even 28, 29, I think. Again, we have -- we have competition there as you know. Sam's has opened up another unit. We've opened up two more units ourselves. And again, we signed up -- in those first two units, over 100,000 members in each unit. So, I don't think there is anything discernibly different in terms of the renewal rates, whether it's 28 or 35.

Okay, and that's what you would have expected?

Yes, that's what we would have expected. Because, you've got Cub's -- people see a free six muffins or free eggs and bacon breakfast, they will drive 40 miles, look around and never come back.

Okay, thanks very much.

Your next question is from Todd Slater of Lazard.

Thank you, good morning, Richard. I just wonder, as a follow-up, if you'd comment on the sort of stepped up discounting of memberships that's going on, I'm sure you're probably aware of it, Sam's is selling new memberships in some places for $20, which is about half your rate and the business memberships, I think they are giving six supplementals, instead of one, and I know BJ's is doing $10 off instead of their normal $5. And, you know, the MFI lines, obviously a pillar of the P & L. So, I was just wondering if you would comment on what you think about that and what impact you think that might have looking forward? And also if you could elaborate on the -- just elaborate on that that, would be great.

Yeah, we talk about that every four weeks in our budget meeting and every regional operator talks about what Sam's and BJ's are doing where we are. We're really confident about it. Really no concern about that. From time to time a reflection of us coming into their markets in the case of Sam's, and trying to do things. We also try new things. I remember when we tried the freebie to start with in Atlanta. That was monumental for us because we had never done it. Is this the beginning of the end of membership fees? We feel very comfortable about our membership fee level, we do not expect -- we have not seen any big detriment in those specific markets where those have occurred and we keep our fingers crossed that we will continue to see that. Jim's focus in the budget meeting and company-wide is we should keep doing what we're doing, focusing on driving sales, on getting new name brands in. You know, just in the last several months, on merchandise, we've started to sell direct, you know, Elizabeth Arden, Sony Computers, Titlist golf balls, Levi, Thomasville furniture. These are all -- we're doing what we know how to do, and that's drive the business and make people want to come in. So far we have seen no change in our expectations of what membership fees will drive for us.

Did you mention in response to Shari that you had increased your freebies this year over last year? Could you talk about that a little more?

The increase means we've gone into new markets, what we've found is that -- you know, we've mailed out lots of, you know, we mail out to a slightly wider geographic area to drive the business. That's just, you know, it's working, let's bring them in.

Okay. So you with you would say you have been increasing your use of those types of things?

Yeah, but I wouldn't -- I don't think it's a big deal, but yes.

I understand, not a big deal. And just in -- I want to understand what do you attribute the recent pickup in comps that you just talked about the last days, relative to the previous quarter. Do you think it is more the consumer strengthening or more of a seasonal issue because people need put stuff under the tree, what are you attributing that to, do you think?

Consumer strengthening because they have to put things under the tree. As far as the case may be.

Okay. ) ) All right, great, thanks.

Your next question is from Deborah Weinswig of Bear Stearns.

Good morning, Richard. Two quick questions, one, have you seen any difference in renewal rates by region? One of our competitors, you know, whose based more heavily in the northeast had mentioned a falloff in membership renewal rates.

Um, I haven't seen anything -- looking at the sheets, nothing different i n the renewal rates.

Okay, and the second question is are you seeing consumers, you know, in the still-weak economy gravitate more quickly that you would have expected to private label and what trends are you seeing there?

We've seen actually a fairly consistent trend over the last several years, five -- six years, in private label. Where private label now is about 13% of sales, a year ago, I betcha it was 12 and before that, 11. I don't think that -- it has more to do with where we're putting private label. In the last year -- In the last six months, we've introduced a couple of baby items like baby wipes and infant formula. We've done a sports drink, a Kirkland signature sports drink to compete with Gatorade and Powerade. So that's just more of our conscious effort to increase it rather than -- just remember at Costco, a member comes in and they may not have a choice between three different brands and the Kirkland Signature. They may just see Kirkland Signature or Kirkland Signature next to one brand, so there are not as many choices at Costco.

What are your plans, longer term, for private label?

I don't think that's changed at all. Right now we're at 13%, our thought is that over the next few years it continues to trend upward into the high teens.

Great, thanks a lot.

Your next question is from Daniel Barry of Merrill Lynch.

Good morning, Richard. Can you elaborate on your softness in the Canadian comps? It is your weakest area and yet the Canadian economy is as weak as the U.S. and you really don't have any warehouse competition up there.

Well, we do have competition. Loblaws is a strong discount retailer with several divisions up there. Wal-Mart, of course, with their acquisition, you know, five, six years ago of the Woolco stores and now the Wal-Mart super centers. So, it is more competitive than you would think. I think the economy up there has been weak, I think we've exacerbated a little of late when we made the change at September 3 Keep in mind, we basically had a western Canadian buying office buying for the western half of Canada out of Vancouver, B.C., a suburb of Vancouver, B.C. And eastern Canada being bought out of a suburb of Montreal. Effective September 3rd, many of those people moved to Ottawa, and those that didn't were -- we hired new people that hadn't been at Costco or were maybe in the warehouse and were promoted into some, you know, junior buying positions. And I think even with the systems transitions, that is a little bit of what we've seen. The other thing is, we've had no new openings in the last year. That, too, you know, it is a maturing business, again, I will point out, and I call it luck for the conference call here, the last two weeks have shown the first positive comps in Canada in a long, long time.

When you talked about the non warehouse competition, are you saying they're getting tougher or they've always been good? Or are they getting tougher lately?

No, they're not getting tougher, they're growing, as we're -- they're growing faster than we are, since we haven't opened any new units in the last year. But they've always been tough.

Right. Okay, thanks.

Your next question is from David Schick of SunTrust Robinson.

Hi, I had a question on the international (outside of Canada), the all-in profitability for those units or markets, market by market. If you can talk about what that's doing now, this year, versus last, and then sort of on a longer term, future view. Thanks.

Okay, I was just looking for my 10K, hold on a second. Last year, I believe on a segment reporting basis, international (excluding Canada) showed an operating loss of $8 or $10 million, this year, it is improved to $2 or $3 million. I need to get the right number. We're running to get it here. I think that will be marginally profitable this year. UK is showing good profitability increases, although we're going to go from 11 to 14 units this year, so we'll have some more pre-opening. On an operating basis though, excluding pre-opening, it should be good. I have the real numbers in front of me now. They are actually a little better than I thought. If I look at the operating income or lost line, in '99, international (excluding Canada) was $10 million loss, in '00, it was $3.5 million loss and in '01, it will show a half a million loss. And, by the way, within the half a million loss this year, there is about $10 million of loss just in Japan because there is about 5 or 6 million in Japan Central, whether we have one or two units, as we now have two units, or whether we have five or ten units a few years from now. So, again, we're building that business. I think though, that this year, Korea is now profitable in its entirety. Taiwan is profitable in its entirety. Korea slightly, Taiwan a little more. And what's not -- is Mexico included in the number? Mexico is not even included in this other international because that's an equity line. Mexico is showing great improvement in profitability. With that it would be profitable last year as well. All told, David, these numbers are in the -- absolutely in the right direction, this is really an investment for five and 10 years from now, from an ROI standpoint, it is still very low, zero or negative right now and slightly positive this coming year. And small relative to our whole company, of course.

Thanks.

Your next question is from Daniel Binder of Buckingham Research.

Good morning. The question regards the -- the plus-one minus-one surrounding the current consensus estimates. Is that predicated on a range of a 4 to 6% comp with the 6% yielding, you know, plus 1?

I would say it's 4 to 6 comp, but you can always lose or make a penny, also, by other things, like the mix issue, you know, markdowns, although markdowns should be fine, as I've said. Gasoline profitability could be plus -- plus or minus a half a penny in the quarter. So it is a lot of things. A 6, with generally things going well gives me the plus a penny. A 6 with a few things not being as well gives me flat. I mean, there's about six different combinations there.

Okay. And then with the non-food discretionary items, picking up, you know, in the terms of sales, the last few months, would we maybe look for maybe a little bit better gross margin in the second quarter versus the first? I know you said similar, but does that assume things stay the same or continue to improve?

Yeah, I have to say we will see. Again, there's a lot of things going on in our business, you know, again, I think we're -- we're doing well in terms of getting through Christmas with clean inventories, that's good news. I don't think it's any better than a year ago, because it's generally been good news. Really the only time I think we had any higher than average markdowns at the end of this quarter was some of the seasonal apparel going into the fall.

Okay, great, thanks.

Your next question from Vic Kaboyan of Financial Management.

I don't have a question. Thanks.

Currently there are no further questions.

Okay. Well, thank you very much. We will be around, Bob and I will be around to answer any questions. Thank you, Mike.