好市多 (COST) 2002 Q2 法說會逐字稿

My name is

and I will be your conference facilitator today. At this time I would like to welcome everyone to the Costco Wholesale Corporation Second Quarter Earnings and February Sales 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 star, then the number one on your telephone key pad, and questions will be taken in the order they are received. If you'd like to withdraw your question, press the pound key. I would now like to turn the call over to Chief Financial Officer of Costco Wholesale Corporation, Mr. Richard Galanti. Thank you sir, you may begin your conference.

Thank you

and good morning to everyone. This morning I would like to review with you several items. To begin with our Second Quarter operating results for the twelve weeks ended February 17th. Briefly we came in at 41 cents a share, up 3 cents or 8 percent over last year's second quarter, and in line with the first call consensus of 41 cents and at the high end of our prior guidance of 39 to 41 cents. And for the Quarter, for the twelve weeks of

quarter comp sales came in at seven percent and six percent year to date. And we are also reporting this morning our February monthly sales for the four weeks ended this past Sunday, March 3rd.

Normally we would do this with the normal retail monthly report sales this Thursday, but given that Earnings are being released today,

to do so. Sales for the four weeks of February were strong, coming in at eight percent for the U.S., three percent international, and eight percent for the company overall, and I am implying that the eight for the U.S. was actually a fairly strong eight. The other usual topics of interest I will review this morning, our recent openings and results. As you know, we've opened a total of 21 net new locations at the beginning of the fiscal year on September 3rd. Thirteen in the First Quarter, seven in the Second Quarter and one since February 17th.

I will go over our for upcoming expansion plans, our ancillary business results, touch briefly on Costco.com our e-commerce site. Our executive membership information as well as give you a preliminary balance sheet, the final balance sheet. And lastly, I will walk all of you through some guidance for the second, for the third and fourth quarters of Fiscal Two at the end. Overall we are progressing this fiscal year very much in line with our guidance given to you at the beginning of the year, and as with every conference call, let me start by stating that the discussions we are having 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/or 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 risks identified from time to time in the companies public statements and reports filed with the SEC. So with that said, lets begin here.

Sales for this Quarter as I mentioned were up 13 percent total and Comps of seven 7 percent for the 12-week Second Quarter. As you know, in terms of our calender month's sales reports in December we reported a seven, in January a seven, and for the four weeks of February an eight. With those four weeks of February being two weeks in Q2 and then the first two weeks of our fiscal Q3. Overall, a very good showing both versus the retail industry and in itself.

For the Quarter our Comp Sales results are despite weaker foreign currencies that actually represented about minus 60 basis points well over a half a percent detriment. When we looked at our average transaction level and our average frequency. During the quarter our average transaction was up about two and a half percent year over year. An our average frequency has continued to improve since the beginning of the fiscal year. If we go back to September, we actually saw our average frequency down slightly about a half a percent. In October, it was up, very slightly up two tenths of a percent. In November it was up a little over one percent. In December up 2.4 percent, in January up 3.1 percent and in the four weeks of February up 3.2 percent. So a combination of average frequency improving as well as the average transaction being higher, both afforded us the 7 and 8 percent Comp figures that we've enjoyed over the last three months.

In terms of sales comparisons by geographic region, one of three or four charts that I always ask you to jot down, will have three columns, Q1, Q2 and then the four weeks of February, give you a little trend there. The first region would be north-west region. In Q1, I think you'll recall our Comps were five percent in the north-west. For the fiscal Second Quarter they were 8 percent and for the four weeks of February they were 7 percent. California, again going to those three columns, 6 percent in Q1, 7 percent in Q2 and 8 percent in February. Northeast, seven and a half, ten and nine. Southeast, seven, six and eight. Midwest, 11, 18 and 15. Giving us Comps in the U.S. in the first quarter of six percent, in the second quarter eight percent and for February eight percent. Canada, which is about 15 percent of our Company, in U.S. dollars was a minus five in Q1 (it was a minus one in local Canadian currency)

reflecting the weaker Canadian dollar. In Q2 it was a minus one in U.S. dollars and a plus four in local currency. And in fact in February it showed a continued improvement, it was a plus two in dollars and a plus six in local currency.

So, we've actually finally seen some improvement in Canada after having some relative weakness there over the last few Quarters. Other international was plus ten in U.S. dollars in Q1 (plus fourteen in local currency). In Q2 a plus nine and a plus thirteen in local currency. And in February a plus eight and a plus 15 in local currency. Giving us total numbers for a First Quarter of five percent Comp, Second Quarter, seven percent Comp and again in month of February, the four weeks of February, an eight percent Comp. Now the only numbers that aren't in here would be our Mexico operations which are not consolidated into our figures.

In dollars the Comp in Q1 was at a 12 percent, in Q2, 15 and in February a 16. In Pesos it was a 10, 10 and 9. So again those are the numbers geographically. In terms of merchandise categories, the trends that began to show back in December continued through the quarter and into January and February. That is a continued strong fresh foods and

business sales growth. And of more recent - more recently a pick up in the non-food categories that had been weak, this past fallback in September through November had started showing some life in the last couple of weeks of December. So again if you jot down a couple of numbers here. And again we'll give you the three columns, First Quarter, Second Quarter and the month of February. Food and sundries which is about 50 percent of our sales showed Comps of six percent in the First Quarter, 5 percent in the Second Quarter and 7 percent in February. Hardlines, 3, 11 and 11. Again showed - that's where we saw some good improvement.

Similarly in Softlines which in the First Quarter had a minus three percent Comp, showed a 6 percent Comp in the Q2 and the trend through the quarter was positive and in February we had a 9 percent Comp in Softlines. Fresh foods were pretty consistently strong at an 8, a 9 and a10 - I'm sorry, an 8, a 9 and an 8. And ancillary business sales, a 13, a 6 and a 2. Now the big

there has to do with gasoline and the fact that the very dramatic reduction in the average price per gallon of gas. If you look at our ancillary business sales comps without gasoline, the 13 in Q1 was a 9, when gas prices were still pretty strong. In Q2, the 6, we

reported would have been a 13 without gas.

And in February, the 2 reported would have been a 9 without gas. So again, the dramatic reduction in the average price of gasoline over the last few months has impacted those comps. In terms of additional

on February's 8 percent comp sales in terms of merchandise categories, I think you will see that some of our trends had

some of the retail norms out there right now. In terms of Hardline comps, what we referred to as

, which is electronics, we're up seven percent. Notably within majors, computers were up 16 percent and televisions were up to slightly more than 40 percent. Other Hardlines categories, toys and seasonal, which is helped by video games at 28 percent. Lawn and garden and hardware, both up in excess of 25 percent. Sporting goods up 28 percent. The only things within on the Hardline side, which was about flat was office and automotive. Now automotive was somewhat flat because we had a big promotion in January for tires related to our

program. So we did an unusually large business of tires and that helped January and flattened out comps in automotive in February.

On the Softline side, again we've seen the strength of both men's and women's apparel, that was up in the mid to high teens of 17 - actually up 17 and 18 percent respectively. Media was up 13 percent. And even

and domestics were up 7 to 9 percent each. Overall, Softlines was up as I mentioned 9 percent. (Inaudible) sales have actually showed some continued strength there. Continuing down the numbers on the membership fee. We reported in the second quarter, $174.4 million or 1.90 percent membership fees. That's up 19 percent in terms of dollars or up $28 million year over year in the Quarter and up 10 basis points as a percent of sales.

On a cash basis, those trends, again that we're starting to see the wind-down of the deferred accounting deferred accounting for the fee increase we did a year ago, September and October. On a cash basis still strong numbers here. The membership fee income was $190.2 million up 12 percent or $21 million year over year and down one basis point reflecting strong

sales growth. But again these numbers are very much in line with what we expected and that continues strong.

Remember, in terms of reported book membership fee income, we are still benefiting from - as I mentioned this fee increase a year - about 16 months ago in September and October. Although as expected under such deferred accounting the incremental benefit will start to slow, so on a reported basis if you will, if you might recall in Q1 year over year on a reported basis membership fee income was up 20 basis points, in Q2, up 10. We'd expect that number to be in the low to mid single digits up in Q3.

We are also benefiting of course from some members converting to our $100 per year executive membership. In terms of total number of members at First Quarter ends, we ended the First Quarter with 14 million Gold Star Members, up about 900,000 from Q1 and recognizing that that does include free memberships in some of our new markets where we do the check mail for the first year. In terms of business members, we ended primary business members at 4.4 million in line with Q1 in fiscal year end, recognizing too that as people move into executive member, they come out of that category and

. And business addon's 3.6 million versus 3.7 million at Q1 end.

All told, we had 22 million members at Q2 end, and including free spouse cards, 39.2 million members. Those numbers are 22 million, is up 1.1 million for fiscal year end and the 39.2 million is up about 2.3 million from fiscal year end. Also Second Quarter end at February 17, in terms of number of paid executive members, we had a shade over of 1.3 million, in fact in the second quarter we had a 156,000 additional executive members or about 13,000 a week, that's up from 11,000 new executive members a week that we signed up during the First Quarter. It reflects in part, some additional

activities that we had done in the warehouses over the first month and a half of the new calender year.

In Q2, executive membership sales were 18 percent of sales in the U.S. versus 11 percent of sales at last years Q2. I say U.S. because that's where we are for the executive membership and with a comp result well above the membership

in the mid to high teens. In terms of membership renewal rates, if you recall at Q1 end, our business renewal rate was - business member renewal rate was 91 percent, Gold Star 83 and the total was 86, although as I mentioned to you it was a very weak 86, right around 85 5 and 85 6 and we expect that that might even dip down to an average of 85 as we again

through the renewal rates from the fee increase. And in fact at Q2 end, business was 90, Gold Star actually was - remain at 83 and total was 85, again that's very similar to what we said, we were actually as we start to fully capture the October, November, December renewals that have

, the fee increase from a year ago.

Again, when I say fully capture, it takes four, five, six months before we have the complete renewal rate because not everybody will renew in the first 30 days to the extent that they are out of town and what have you. We are seeing those numbers

back up as we expected and I would fully expect the next 2 to 4 months that our renewal rate will be 86 again, again given that experience we are seeing with those first renewals post a year of the increase. In terms of Costco American Express co-branded cards, we ended the Quarter with 1.6 million accounts, up a 124,000 in the quarter and 2.4 million card holders up 184,000.

And again about 20 percent of our sales penetration is with the Amex Card both co-branded and other

cards. That compares to 18 percent a year earlier. So we see the sales penetration very strong in and Amex but continuing to subside in terms of the rate of increase. All told,

the Amex relationship, we are getting new members and new co-branded card holders, we are continuing to cross marketing efforts with Amex and we are seeing good sales results with higher end numbers.

Before I continue down to the gross margin line, I would like to spend one minute addressing some of the questions that we've received in the last several weeks regarding our membership fees and the possible effects of membership pricing by some of our competitors. As you all know, there is only a 200 page of competitors

. First, the basic membership pricing structure, let me walk you through that and

Costco's and SAMS and BJs. In terms of the primary business member including spouse, Costco charges $45 a year, SAMS generally charges $30 a year and BJs $40 a year.

So we are 15 and $10 respectively, sorry 15 and $5 respectively higher than SAMS and BJs on the business membership which includes a free spouse card in each case. In terms of business add on cards, we charge $35 per business add, would be able to include the free spouse. SAMS, our understanding is charges 15 plus $10 for and add on and BJs we believe its $20, and I believe that it does include the spouse. That would imply - I am sorry, that does not include the spouse. If you looked at somebody buying a primary business with a free spouse and in add on with the free spouse, the four card total for Costco would be $80, the four card total for SAMS would be 55, and the four card total for BJs would also be $80 like Costco.

On the Gold Star side, or whatever each of the competitors

, individual membership, again including a spouse card, ours also is $45, SAMS is $35, so a $10 higher than that and BJs is actually $30. Well we, I am sorry, I am sorry BJs is $40, so again $5 higher than BJs and $10 higher than SAMS on an individual Gold Star card. Well we all do commercial programs, typically at Costco's programs are limited to do markets, with the first year of a free check mailer and perhaps some level of promotion of its website, the third or fourth unit in new market, so as an example as we went into Chicago with our fourth and fifth unit but all relatively new units still in the first year, year and a half. We may offer a discounted membership or an introductory three month membership. But for the most part we limit it to new markets, and we generally do nothing

in any existing market. I do not want to sound arrogant when asked about some of the special membership marketing deals that our competitors do from time to time, we are aware of them, we stay on top of what our competitors are doing. But today we are not terribly concerned in terms of how it has effected us.

Our renewal rates are exactly where we expected them to be, they're starting to return, as I mentioned, to the 86 percent all time high renewal rate. And frankly while we continue - we will continue to stay on top of our what our competitors are doing. We believe now more than ever, that our membership fee although the highest in terms of dollars, they're still a best value out there in terms of merchandise pricing in every market, in terms of a merchandise quality in every market and in terms of our merchandising innovation. And we'll keep you posted on that.

And now going down to the gross margin line. In first quarter, our gross margin was respectively 1 percent - one basis point lower year over year

in at the 1082 this year versus 1083 last year, and again as I'll review with you in a moment, our gross margin percentage excluding the negative impact of gasoline but actually had been 8 basis points better year over year. So, gasoline had an impact. As we've seen in past Quarters, the volatility of gasoline in some quarters is up ten plus basis points, in another quarter it's down some

. So again we are getting or just got a couple of more charts here. In terms of gross margins I will do three columns, these columns will be Q4 '01, Q1 '02, and Q2 '02, so looking it has got to be the three most recently reported fiscal Quarters and how gross margins change year over year. And again we have several line items.

In terms of the core gross margins the core warehouse gross margin. If you recall in Q4, year over year it was down 21 basis points, in Q2 it was up - I'm sorry it was down 16 basis points and in Q2 it was actually up 10 basis points. Our two percent reward was down, represented a detrimental margin of 17 basis points in Q4 and 14 basis points in each of Q1 and Q2. We will expect to see that continue to turn downward by the way. I think the reason it stayed at minus 14 as it reflects in the fact that we did a significant

activities to sign up new members during the last few months. Ancillary businesses, again this where gasoline will take an effect.

In Q4 that represented a 34 basis point improvement to margins year over year, in Q1, 16 basis point improvement and in Q2 zero basis points improvement and in that zero includes a minus 9 related to gasoline. So, again without the gas business and a volatility of it. Similarly, even plus 34 and the plus 16

have been as high. Similarly, the zero reported would have been better by 9. International plus 3, plus 6, plus 3. Nothing unusual there. LIFO, minus 8 in Q4 that has to do with the fact that last year we had LIFO charges through Q3 last year, it was seven and a half million. We actually took a $2 million dollar LIFO credit in Q4 to have a total LIFO charge last year of a 5.5 million. We probably will see something like that this year and I will share that with you in a minute.

Again, this was minus 8, 010. For a total margin year over year in Q4 was 9 basis points lower year over year in Q4 '01. In Q1 it was 7 basis points lower and in Q2 it was one basis point lower, despite the fact that we had 14 basis points detriment with the executive member

and 9 basis points of detriment related to gasoline. And I guess, those are the important as I will show you in a minute. Again, I think the improved sales mix in our food helped that as well as a conscious effort on our part to make a little gross margin, a fair gross margin where we can as long as it doesn't affect our competitive posture in the market. In terms of the executive membership in the minus 14, a chart that I started last fiscal Quarters conference call will continue here and again there is four columns, Q1, Q2, Q3 and Q4, and three line items, fiscal '00, fiscal '01 and fiscal '02. If you recall

in Q3, at the very end of Q3 we started introducing the two percent executive member reward. So in Q3 of '00, year over year we had a one basis point detriment to margin related to that.

In Q4 as it started building we had a 12 basis point detriment, in Q1

one year of year, 17 basis points detriment. In Q2 '01, 21 basis points detriment, then 23 basis point in Q3, 17 basis point in Q4 and then this year again it was 14 and 14 both in Q1 and Q2. Now if you add up the Q1 column, that shows 31 basis point

detriment to margin. Recognizing that executive membership drives sales to the mid teens in these important numbers, and recognizing that we also generate more membership fee income to the tune of a

$55,

charging $100. But looking just at the gross margin, it was 31 basis points

detriment in Q1, 35 basis points

detriment in Q2. As you will see is we'd expect a lower number than 14 but still a detriment in Q3 such that Q3 is probably in the 35 to 37 range, may be 38, we'll see, but then by Q4 we'll start to see that dramatically improve now that we have

, really the big increases in executive members are starting with zero near the beginning of Q4.

So, again while this is - will continue to be somewhat of a detriment in Q3 we'll see that will dramatically subside in Q4, it should.

. With regard to ancillary businesses we had a better

optical and food court gross margins and therefore improving profits in those areas, offset pretty much by lower gasoline margins that I have spoken to you about. In terms of LIFO, again, we had a two and a half million dollar LIFO charge both in this year's second quarter as well as last year's second quarter, no delta year over year in bases points. Like the first quarter, this is simply a reserve estimate.

Year to date we are actually slightly deflationary and if that were to hold and we certainly don't know yet, it would help record, a gross margin slightly in the Fourth Quarter up. As I mentioned last year, in the first three Quarters we accrued to a total of $7.5 million dollars to LIFO, or two and a half million a quarter and then had a LIFO income, if you will, of two million in Q4. Assuming the $7.5 million dollars of charges, or two and a half million in each of this year's first, second and third Quarters, and ultimately if we were to continue in a slightly deflationary manner,

this fiscal year, then we'd bring back at least the $7.5 million in Q4 versus a two million dollar bring back in Q4 last year.

Again this is a reserve at this point, we'll have to see what happens over the next five to six months. Before going in to SG&A, let me briefly go over our ancillary businesses. Pharmacies; we added eight pharmacies to be at 294, we added ten food courts to be at 365, I'm sorry, eight food courts, we added seven

to be at 358, seven opticals to be at 340, we remained at eleven copy shops, print and copy shops. We added seven hearing aid centers to be at 104, and we added seven gas stations to be at a 159. We would expect, so far this fiscal Quarter since the February 17th, we've opened one more gas station being at 160, and I would expect twenty-five , twenty to twenty-five more by fiscal year end, to be somewhere in the 180 to 185 range by the beginning of September.

These businesses again are profitable with the exception of the gasoline whose profitability is more volatile and up and down, and in fact down in the second quarter. But again as we look over any historical twelve month period, and look at fiscal '01 and fiscal '00, gas is profitable on a twelve month period. These businesses as you know drive our business, they bring in people more frequently. They are double digit comps, again excluding gasoline whose dollar comps are currently negative because of the dramatic price reduction per gallon of gas. Gallon

comps if you will, are still up in excess of twenty percent and these are all reasons why somebody comes to Costco to shop.

In total for Q2 our ancillary business comps were up 6 percent and more importantly up 13 percent without gas. Now moving on to SG&A, while still higher year over year as a percent of sales, due entirely - as you will see this is due entirely the 12 new locations, the 32 locations last year as well as the 20

new openings this year, we are very much

in the right direction as we - as we have guided in the past. In Q2, as you'll see, our SG&A year over year was higher, or worse by 15 basis points coming in at 9.12 percent of sales this year. I believe this is the final chart I will ask you to jot down. And in this chart, if you would, just write down, fiscal '01 would be the first column, Q1/02 and then Q2/02. If you look at the core business and how

versus

the core SG&A represents the 29 basis points, I would say minus 29, in this - in this chart, minus means higher SG&A. In Q1/02 year over year it was minus 21 basis points, and in Q2 it was minus 20.

In

it was minus three all of last year versus the prior year, it was plus five in the fiscal '01 - Q2 - Q1 of fiscal '02, meaning that we had some leverage

operating leverage there, and plus seven in Q2 of '02. Ancillary minus 11, minus 7 and minus 4, international, minus 3, minus 3 and plus 2, so actually we had a little bit of help there. So year over year in '01 versus '00, we had SG&A higher or minus 46 basis points. In Q1 year over year minus 25 basis points or higher by 25 basis points, in Q2 minus 15. This is again consistent with what we talked about in December and we would expect again in Q3 and Q4, SG&A in Q3 to be, you know, still higher year over year, but an improving trend. Again, if you look at the last five Quarters, six Quarters, all of last year it was 41, 60, 39, and 37 basis points higher year over year in those quarters, this year 25 in Q1 and 15 in Q2. By the way, in terms of the 20 basis points of detriment to core

in this quarter, I am sure you would ask

7 percent comp, like can we get some leverage there. It has to do with the dramatic number of new openings we have done, and particularly openings in new markets, as well as much of the infrastructure that we invested over the last couple of years

If we look at that minus 20, we just take out not all the units last year and the 20 units this year, but just the units over the last 12 months, which would be roughly the same 30 to 32, I would estimate. That represented about 18 to 20 basis points of that 20 basis points, so nearly all of that

. In addition, energy costs are one to two basis points higher year over the year on top of that, and which is a much better showing than we had anticipated. I think we'd done a good job of reducing megawatt usage in the warehouse - I am sorry, kilowatt usage. And in addition, bank fees year over year would be a with a - you know, increase in debit and credit cards penetration is up 2 basis points year over year. We have some things going in the area that we think that will be actually - start to subside as well.

So again thinking of just a last 12 months of openings, we show a flat core SG&A, and as we start to ur anniversary, and really anniversary, these units at '01 and '02 and given that we are going to change, continue to change next towards more existing markets which I'll share with you in a minute. We think that bodes well for, most importantly fiscal 3 and beyond. Our SG&A guidance for Q3 and Q4 again,

higher again, but better than Q2s 15 percent - 15 basis point delta. And in Q4 a little better than Q3 delta and looking for - you know roughly flattish SG&A year over year. And again that could be plus or minus a few basis points. Again '03 will be the - fiscal '03 will be the year planned SG&A improvement as we had stated. In terms of - next on the income statement line preopening expense was better by 2 million or lower by 2 million or 4 basis points slower. Pretty much as expected, lower preopening related to new warehouses whereas last year in the Second Quarter we had 11 total openings, which included 2

and in this quarter we had 7 openings.

In terms of the provision for impaired assets and closing costs for the second quarter of '02, these costs totalled $3 million pre-tax. In Q2 '01 a year ago our closing cost totalled a million dollars for the quarter, so $2 millions higher this year. Well it is 2 million higher it is very much in line with our original budget for the year. I think we have done a good job over the last couple of years of predicting and when that - those numbers

basically managing our business to when we make decisions on a relocating facilities. So all told, operating income in Q2 was up 31.8 million over the last year's Q2 figure or up a 11 percent to $319.2 million this year. Below the operating income line reported interest expenses lower year over year by 2.7 million.

While we actually borrowed a little more this year than the last, short term

borrowing costs are very low, around 2 percent currently. And as anticipated interest income and other declined by 7.9 million, 15.8 million last year versus 7.9 million this year. This again is mostly due to lower cash earnings balance - lower cash balances as well as lower interests rates being earned on those balances. So, with reported operating income up by 31.8 million and the net of interest expense and interest income lower or worse by a net of 5.2 million, we generated year over year a pre tax income, an increase of 26.6 million or up 9 percent, such that pre-tax earnings for this year came in at $320.9.

Now we believe this is a good showing given our ramped up expansion program over the last 18 months, including lots of new market warehouses, which I'll go through in a moment. A quick run down of our balance sheet before I get in to expansion and final thoughts here. (Inaudible) in February 17th our cash and equivalents were 775 million, our inventories were 3,009 million, other current assets 529, total current assets 4 billion 313. Net

six billion 160. Other assets 416 million. For a total assets of 10 billion 889 million. On the right hand side, short term debt 105 million, accounts payable of 3,089 millions. Other current liabilities of 1 billion 364, for total current liabilities of 4 billion 558. Long term debt 854 million, deferred another 125 million for total liabilities of 5 billion 537.

Minority interests 118 million. Stock holders equity 5 billion 234 million, for a total of 10,889. Let me point out a couple of things on our balance sheet. Again the balance sheet is strong, a debt to cap ratio of fifteen and a half percent.

is quite strong, on a reported basis you can see

of three billion 89 versus inventories of 3,009, that would imply a 103 percent AP ratio. Recog - recognizing that that includes other non merchandise AP as well, as well as checks written in

. On our true merchandise AP to inventory level that 103 will be 87 percent, compared to a year ago the 103 compared to 93 percent, the 87 which is the real number making up those unusual

would be 84 percent a year ago. So again an improvement there.

Again this is helped by stronger comps by continuing negotiating with our vendors as well as we

inventory warehouses ever so slightly however, year over year. At last year in the second quarter our average inventory per warehouse was 80,243,000 dollars. This year 80,228,000, so again, a shade lighter year over year. In terms of cap ex, in fiscal '01 we spent about 1.4 to 1.45 billion in cap ex. Our original budget for this year was around 1.3 billion, this is

to 35 planned new openings and seven planned

. It looks like the 35 will be in the 32 to 33 range and the seven

should happen. So with a slight reduction in openings, our current cap ex budget should come in somewhere between 50 and a 100 million lower than our current - than our original budget for the year. No big surprise there, that this is just more of timing issue than a planned reduction in number of openings.

Next topic, Costco online, costco.com. It's profitable. Last year

sales

in costco.com was 73 million. In the first quarter we saw increases of 35 percent and in the second quarter of increases of over 100 percent, such that in the last six weeks our annualized sales were approaching $180 to $200. We will see where it goes. It's really caught us by pleasant surprise over the last several weeks, and we have seen some continued improvement helped by some of the Costco

as well.

But even after the Costco

we've seen some good results annualized in the last in the week or so in excess of 150 million. And again it is profitable on a fully allocated, fully expensed, including depreciation, all the direct labor and all other costs associated with it. Next on discussion was expansion. Again, we opened 20 units in the first half of the year and total of 21 now having opened in Overland Park Kansas on February 21st, post the end of Q2.

Between now and September 1st we plan to open 10 to 12 additional units for a total of 31 to 33 units for the year. We have opened to date three reallocations and have four planned for the second half of the year for a total of seven. So our total including relose, we would expect 38 to 40 locations for the year including the 31 to 33 in net new locations.

In the third quarter which we are currently in addition to Overland in Park Kansas on February 21st, we will have in the first week of May three openings in the U.K. to bring us from a 11 to 14 units there. As well as we are hoping to get in before Q3 in

.New York, sometime in early May. In Q4 68 new units and 4 relose. An overall comment on our new openings, on a total fiscal year basis.

Our new openings in the aggregate are

very close, within $2 million to our original

budgets for fiscal '02. Before I turn it back to

for Q&A, let me provide some direction for Q3 and 4 overall and a little bit about the fiscal '03 and beyond. If you recall, as we will go back to last August when we provided initial guidance for this fiscal year, our guidance for the first quarter had been to be flat or down a penny a two.

We actually came in at flat so that was actually hired by - at the high end of that range, and the second quarter which is we are currently in, we came in the high end of that range, 39 to 41 up 8 percent. In the third quarter our current estimate is 28 cents and the current fourth quarter fiscal estimate is 50 cents. We feel that those numbers are again at the high end of our range but as we have seen in the past we have been able to achieve that, we'll have to see. I'd like to see a range out there of 26 to 28 cents for Q3 and 48 to 50 cents for Q4, which would imply 13 to 22 percent up in Q3 and 17 to 22 percent up in Q4. We'll see when we come out.

So far, you know, sales are continuing strong. We are

of the fact that we want to try achieve what's out there but please keep in mind for those who've known for many years. We don't start with numbers that are

numbers, these are these are the kind of ranges that we have feel comfortable with and we will certainly try hard to achieve the high end of those ranges which is, where the first call is currently. We think that those numbers would be very good to achieve given that we've opened 53 new warehouses in just the past 18 months, three quarters of which have been in new markets.

Also the high infrastructure investments in depots and buying offices, energy costs and other factors as well. It is important, importantly in '03 these trends should continue that we've seen so far, allowing '03

to be up at least 15 percent next year on the assumption of 5 to 6 percent comp sales growth, slight gross margin improvements and actual improvements in SG&A.

In '03 we'd expect to show real improvements in the

'01 openings which are 80 percent new markets. We would expect to continue leveraging in the infrastructure investments that we've been making. And in terms of '03 openings, we would plan to open fewer than 50 percent of our '03 new openings in the new markets. Recall that in '01 we opened 80 percent of our units in new markets, these by definition loose money in the first couple of years. In '01 about 65 percent - 60 to 65 and again in '02 - I'm sorry, in '01 it was 80 percent, in '02 it will be 60 or 65 percent. In '03 we expect it to be a fewer than 50 percent.

And even with the short term detriment of gross margin from executive membership that should greatly subside as I mentioned in Q4. To make - put all this together we strongly believe that we not only should but deserve to make an improving profit structure such that over the next three to five years we believe that profit should grow at a rate greater than sales growth and that this can easily be accomplished particularly given the detriments to our

that we've done in SG&A with all these new openings over the last 18 to 20 months.

With that I would turn it back to

for Q&A.

Thank you, sir. At this time I would like to remind everyone, in order to ask a question, please press star, then the number one on your telephone keypad.

Please hold for your first question.

Your first question comes from

of J P Morgan.

Good morning, Richard, how are you? I was hoping that you could talk a little bit more about the shift to openings in less new markets. Is this just that there are fewer new markets to go into, or how are you thinking about that and does this change the long term opportunity in terms of club openings for Costco or the industry?

Answering the second question first,

, it absolutely does not change our outlook for how many openings we can do in the U.S., as an example. This is a conscious effort on our part to make sure that we can hit proper numbers. We recognize that we have - you know, we have

our

short term. Not withstanding the fact that we are very close to our budgets for these new markets, you know they are painful in the first year or two.

Probably a year ago we, you know, having opened may be you know six eight months ago having opened all those units,

and

you know with our real state department had - you know put a renewed emphasis on trying to do a better balance there such that we can get some short term benefit from it as well.

And so I think it's reflective of the view that we are not just saying you know

the

here that we are conscious that we want to show improving trends and we think we can do both and I think its probably a little change from what we've seen in the past but we do not see that that's any reflection of what opportunities we see in new markets.

unid. OK. And then secondly, I don't know if it too early but can you talk a little bit about the renewals you're seeing in the new market you market you went to last year especially the one that

SAMS with the lower our membership fees?

galanti. You know, if I look at the last what I will call new market units over the last four or five years starting with the

, we - you know I don't have the number in front of me but that's probably 30 units, something like that. We've seen renewal rates on the freebies range from the low 20s to the high 30s, and average around 30. I would - and again I'm sorry I don't have these numbers in front of me but I would guess that in the markets where its - where it has been most directly competed its probably in the high 20s a little below the average.

unid. OK. Thanks very much, Richard.

galanti. By the way, the last comment on that though is this, the other thing is this, what is interesting here is this, when we - in terms of the total number of new sign ups of those freebie sign ups we have in a new market during that roughly 20-week period, 10 weeks before opening and 10 weeks after. We've seen that number also fluctuate so its that sometimes we have a low renewal rate but we have lot more sign ups. So we had 80,000 new members sign up and the renewal rate was you know 25 to 30 percent and in another market maybe we had 55 or 60 thousand new sign ups but the number was 35 percent so you know it fluctuates and it tends to be all

in that range.

unid. Thank you.

As a reminder, please press star, and the number one to ask a question. If you would like to ask a question

.

As a reminder if you would like to ask a question please press star and then number one on your telephone key pad. If you do ask a question please pick up your handset before stating your question. The next question comes from

. His question has been withdrawn.. The next question comes from George

. Please hold one moment sir.

Hello?

George, go ahead.

Yeah. Richard, could you go through the dynamics of the American Express relationship in terms of - you know, what kind of average ticket you're seeing there or what - you know, benefits you seeing on the top line versus the

that it is having on SG&A, and also any joint marketing ventures and how those appear to be working at this point?

the average ticket - I think our average ticket right now overall is running about some where between a 107,108 on the low-end, 112, 113 on the high-end depending on which day and which week. If I look at AMEX, that number is in the mid 130s on the average ticket, up about $10 from a year ago, and so again the

is nice and strong as well and we are - they are doing - they do lot of things, as an example we did a Costco Wallet program, which is the - you know, the winter version of our passport program, when we sent out time sensitive coupons that are over in the case of winter program about seven or eight weeks. They actually send that out to, I think over a million of their card holders who are not Costco members, and we got - we received, I don't want to give the number away but in the tens of thousands of new members that signed up that had not been Costco members in the past, that in order to sign up had to pay us $45. So, you know, those are the type of things that they do for us on an ongoing basis. We of course hopefully do things for them as well in the sense that we are constantly promoting the co-branded card in the store and all our warehouses with signage and reminding people that they can

not only Costco on the co branded card, but elsewhere. We are also doing the

and home owners insurance. Although new, we actually have some decent penetration of that through American Express property and casually. It's those types of things that we're ongoing, we have again a very good and open relationship with AMEX, and I believe that we are one of their top two or three merchants.

And on balance then would you say that this more than offsets any detriment to earnings related to the switch in payment media?

I - we think so. Keep in mind that if I look at what we call internally the bank charge line which is merchant fees, debit card fees, as well as

, but for the most part that delta if you recall in the first year, a year over year ago and a couple of years ago when we did AMEX co-branded card, I think year over year over year there was a 10 to 12, maybe 13 basis points detriment to SG&A related to bank fees. In this quarter it was 2 basis points. So, that pretty much has run it's course and I would guess next year it is zero to one basis point. In addition, we have tested some other things in a couple of our gas stations. We have tested not taking Master Card and Visa and Discover simply because when you are off-premise, if you will, when you don't have a cashier looking at the person signing the card, there is a different merchant fee structure such that our merchant fees and gasoline for those using Master Card and Visa are an excess of 2 percent. What our finding is, is very little detriment to sales of gas, which quite frankly right now ain't so bad anyway given the low margins of gas.

Also, one of the things I didn't mention on the call, we are about to role out, what we're going to call the Costco Cash Card, which is a - will be an additional alternative. So, somebody can pay with debit with AMEX Credit, with household credit which is our private label card, and effective in early May with the Costco cash card. This will be a stored value card that could be initialized at the register inside, even - not only buy it for yourself if you don't have a American Express Card, but you can also buy it for your kids off at school or your kids at high school. Then they can - they can use that to buy a gas from the gas pump or merchandise inside Costco. We'll also use the cash card to speed up the front line as well as speed up the membership refund line, like being able to give people a stored value card they can come in and use rather than cash refunding.

Exciting stuff, thanks.

Your next question comes from Mark Miller of William Blair.

I'll try again. When we started the year, the consensus was for a dollar 50 this year and I think internally you hope to beat that. It now looks you're guiding to a dollar 45. Now, I'm trying to understand what has changed given that comps have actually accelerated and energy has come in favorable to plan, also the new store sound like they're tracking very close to your top line expectations. Is there any change in the bottom line performance of those new stores or what else Richard, has changed?

Well, I think your energy costs were - are little better, but most of that improvement we had implied because the economy was already turning. So, some of that was already in our budget. Yeah, I think, you know, again this is a tough budget year from the standpoint that not only did we have the 32 new market units from last year, we've got a lot going on, and again - our original budget was aggressive to start with, internally. We set - we set the standards high for ourselves. We got off to a slow start as you know with 4 to 5 percent comps in the first couple of months, and you know, it's, we tried very hard to come up with numbers that are achievable but aggressive and not stand by our own numbers, and I think we just came in with an original budget. It was perhaps a, you know, couple of

higher and we miscued one, we miscued one even though we came in at the high end of the range, we're able to talk about that range but our original budget we missed it by a couple of cents.

So, again I think if I look at the trends, and let's assume optimistically, we can achieve Q3 and Q4 first goal numbers, that would imply that we were flat in Q1 up 8 percent in Q2, up something in the - in the high teens, the low twenties in Q3 and 4. You know, if we are up in the high teens instead of the low twenties in Q3 and Q4, that trend is still very good given the dramatic kind of stuff that we got going on here, and I think we still feel very good about our numbers for this year and we know that in '03 , now that we're starting to really get beyond the

, full year to full year comparisons of the '01 units, is positive. There's not really anything dramatically that has changed.

Separate question, the percentage of operating income at Costco coming from the membership fees is now about two-thirds of your operating income this year, roughly, and that's up from a little over 50 percent in the three prior years. When you think about the business going forward, how do you - how much of the profitability do you think comes from fees on a sustained basis and you know, how do you - how do you look for the relationship change to grow.

I was, you know, first of all, for two, you know, when you say an average of 50 percent for the last three years without looking at the numbers, I would guess that that was an increasing number so it continued to increase, so it didn't just go from 50 to 70 overnight. Clearly, over the last 16 months with a $5 fee increase, that was roughly over two years, $80 million on a billion dollar pre-tax number for the company as well, you know, we've gone from, in the last year and a half, from zero to a million three executive members. That's another $65 plus million, so it's another 5 or 6 percent. And so, those two things alone account for a lot of that. I would see, you know, in terms future fee increases on the 45 dollar number, I would assume at some point that occurs, probably you know a year or two from now, but we don't know we'll wait and see, but we are

of what others are doing. But assuming that occurs you'll see that blip every couple of years, I would guess the severity will start to ease when the rate of increase in executive members will start - will start to come down. I also believe in terms of earnings growth, we will see again SG&A, certainly we would expect certainly to improve next year, we would also expect to see some margin improvement next year and the years over the next few years, such that we can see you know bottom line improvement coming from other lines and a more flattening out of membership fee income, if not a few basis points of reduction in membership fee income as we've seen historically. So, my guess is that 50 was probably a little lower than it will be going forward, the 70 is historically high and will subside a little bit.

Thanks.

Your next question from some Daniel Berry of Merrill Lynch.

Morning Richard. You indicated that you were close to budget on your new stores, but just close to but not being on budget. Where are you falling short on the new stores. Is it - is it in certain types of stores or regions of the country or just where is the short fall.

You know Dan, it's all over. You know, if I look at the numbers - year to date, I'm sorry, not yearly, year to date including our current updates for the next three months and then extrapolating that for the remaining couple of months, we will be within, I think, $2.5 million of our bottom line budget for all the new units. They range - that's 132 units roughly. The delta ranges from probably -500 grand on a given unit for a

year to plus a few hundred grands for a unit on a given

year. So, it really is all the woodwork. Typically, you know, you get hurt when your budget unit in a new market that's going to do a million a week or million one a week and it ends up doing 800 a week, and again, the low lyers will be there. In the case like, you know, Houston, you know, we budgeted a million, one million two a week and it's a million three million four a week. So, a little better than planned.

Is there any regional differences in the terms of the mix up.

No.

OK.

It really is at random - it is almost like throwing guards relative to where we are on those.

OK in terms of your program going forward to more existing markets, are you also in any way changing your world trading units. Is that supposed to stay at about 10 percent rate.

Yes, it will.

OK, great, thanks.

Your next question comes from Deborah Weinswig of Bear Stearns.

Good Morning Richard, as your company gains front in the back half of calendar '02, do you anticipate a shift in either a frequency or transaction size, and what is built into let's say, you know, not only fiscal but also a calendar expectations for '02 in terms of recovery?

galanti Well, you know, I mean I'm a, you know,

economist based on what our sales are doing here and what I see on the news at night, you know, I would expect our frequency to continue strong. I mean if I look at the last five or six months, the trend has been ever so slightly up every month, and that makes us feel good. Certainly the strength and things like

which had been weak. Our ability to get branded goods and certain non food categories. All those things, you know, adding 25 more gas stations, all those things make me feel that the frequency will not be an issue at all. I don't sense that I'll see the average ticket go down either. So, you know, people say what are our budgets for the next five months or the remainder of the fiscal year for

. You know, it's little bit like a buyer rhythm. If you did well yesterday, we feel pretty good about tomorrow, and in total that changes - we'll see.

We started off the first couple of days this week fine. My guess is that when we are reporting, you know 5 percent comps, we were saying 4 to 5, when we're reporting 7s and 8s we're saying 6 to 7. That didn't imply that we think that 6 to 7 is - we're saying it's coming down from 8. The eight was, you know, we got a little lucky there, and hopefully we'll continue to be a little lucky, but we recognize it's got a lot of good merchandising initiatives going on. I think that again, on the non-food side we're seeing some good stuff of electronics, media, still strong media was up 13 percent in February, media being books, CDs, videos, DVDs, and so I would guess that, you know, cross our fingers. We'll say 6 to 7 and see where we go. Looking into the remainder of calendar '02, there is no reason to believe that anything will be worse, in fact you know we're still comparing against relatively weaker comps the 4s & 5s instead of the 6s, 7s and 8s.

Could we also assume then that due to the recession last year that you gained market share and that, you know, as the economy does gain strength that that should also benefit, you know, for the longer term?

Well, I mean we definitely feel that way, we feel that, you know, the fact our comps along with some of our esteemed competitors like Wall-Mart

and Target had generally shown better comps than retail overall. You know, our firm belief is that good companies grade - create, you know, improve market share in weaker times and we think certainly that the value proposition that we offer and some of our competitors offer, is what plays well. We have - we believe the added benefit that we're doing it with higher

versus higher merchandise and there is nothing but good news coming out of our buyers right now in terms of the ability to provide - to find new items, to get additional branded goods and then we look at things like fresh fruits and no matter how much our competitors improve, we think that we are - we are again in this, we think that we are second to none in the quality of our signature categories like fresh fruits.

So we think if all those things drive business, we think that the level of pricing competition out there among super markets has lessened not strengthened. We think that the pricing competition against category killers has lessened slightly and we think that the pricing competition against our direct competitors has certainly not increased and some markets it has lessened very slightly. So, nothing is changed to the negative if you will in terms of pricing competition, and if anything, we in our belief remain the price competitor out there.

Great, thank you very much.

Your next question comes from Robert Tommy of RBC Dain Rauscher.

Yeah, Good morning. Richard, you were earlier talking about capital spending for '02 and you indicated that it's going to be down slightly and I didn't - I didn't catch what that - what that number was?

We said that our original budget was about a billion three. (Inaudible) are coming in 50 to 100 less than that, a little, you know, roughly, 50 although would be the fact, we open a unit or two fewer, two or three units fewer. The other 50 is timing.

Also, can you comment on how you're seeing comps in the stores that have been opened recently in the last 12 to 24 months or in your newer stores?

Sure, do I have that

hold on a minute

Thanks. (Inaudible)

Let me look at the last - hold on a second, now if you look at, the mid-west would be an example, those are, you know, I think the oldest unit in the mid-west was you know was late 98 - it was May of 1998 in Detroit and we've got 18 or 20 units there now. In the mid-west, you know, constant running in the mid teens, 15 percent in February and also 15 percent for the 26 weeks here to date. If I look at, bare with me, one second, when I look at the last four or five weeks, in - well in Texas they're slightly negative, but it's only two units and it's comparing against the market in Dallas, where

market where we've got, we've opened two more and Sam's, I believe, opened one more in that market to have eight or nine now.

What are their market shares?

In Florida, some of the south Florida units, I'm looking at comps in, you know Fort Meyers and Naples, which again were opened a year and half, two years ago, once in the 29 percent range for the last four or five weeks, once in the 35 percent range. If I look at - yeah, I would say generally speaking they range from slightly up to up 35 percent and probably average in the mid high teens.

OK. So, you're still holding that kind of average?

Yes, and recognizing that's an average based on higher starting points. I mean - with the free membership, we are getting arguably a slightly higher average. Now, if you look at our, you know, the class of '01 and '01s then I think 55 million on a partial year in the class of '02 and '02 was doing like

, and those numbers aren't that different than the class of '00 and '00. The difference is that in '01 we had 80 percent new marketing units. So, we're starting off our new marketing units at a level higher than we had when we didn't do the freebie.

OK.

Comping off - comping off of that number

, it's certainly a good number.

OK, great, I do have a couple of other ones too. And your comps and ancillary were slowing a little bit, do you - is that any concern for you or do you still feel good about your ability to sustain, you know, double digit comps and ancillary?

Actually if you take a gasoline out and again - in the last few months, gasoline has been - the gasoline dollar comp number has been negatively affected by the average price of gas down 40 cents a gallon year over year. Actually without gas, ancillary has been strengthening. We saw a, I believe, a 13 percent comp in February related if you exclude gas. So, in the contrary are other ancillary business notably, pharmacy, optical, one-hour photo, food court, are all comping in the high single, low to mid digit - low to mid teen numbers.

OK.

And that will continue, we see no slow down in there.

OK, great.

If anything, and our most formidable ancillary business other than gas, that being pharmacy, which I think last year did about a billion, two billion or 3. The comps there are in the mid teens.

And you know that's a very competitive area because everybody and their brother and sister are getting into the pharmacy business, discount stores, supermarkets, drug stores themselves, of course.

What would you say is - would be your most significant new merchandise initiatives that you - that you could talk about with us?

Well, probably the most significant one of late, would be our - our in store special order

program. This is where we've taken a one run of steel if you will with about 18 or 20

positions and we're offering everything from custom leather couches to special wheels and tires to plumbing fixtures to jewelry to

and sporting goods, all on special order basis. We have that in, I think just over 200 locations in the U.S., I'm sorry, all the U.S. locations now, and our original budget two years ago was that incrementally in a $100, 000,000 business that those sales could approach a million dollars per unit incremental.

This year we should be trending towards 300 plus million in the roughly 285 locations. So, it took us about a year and a half to two years to get there, but it is a just - you know, you again, 300 million on a 35 to 38 billion or 38 billion this year, is a little under one percentage point of growth over a two-year- period. E-commerce again has taken us by surprise again growing from I think 50 million to 73 million, our budget this year was to be above a 100 million, but not a whole lot above 100 million. I would guess, now that our budget is probably in the 150 plus million range and we think that in a few years we have our plans and - for that to be a billion dollar business. Again, it's going to be a billion of God-willing 50 plus billion of our total company, but nonetheless again that's showing some signs of life.

OK., great. One last question if I might, Richard, and that has to do with Wal-Mart. We've seen them kind of growing their presence in the Northwest. Can you say anything about that, I mean you - normally you compete well against them in most markets, but is that any concern for you right now?

Well, you know, I'll use a quote from a famous person named, James

, my boss, he says by definition, we're paranoid people. We are - certainly have a great deal of respect for, you know, Wal-Mart and Sam's and Supercenters and everything else they do. We feel very strongly - strong that we do what we do very well and we compete very effectively against them in all their formats. While we'd like to not to see them around so much, the fact is they are around. If I look at in again the Northwest region, our comps, you know, for the last few , you know, year to date in the northwest, our comps are, you know, six and a half percent for February that's seven percent. That's on - that's on average units that are probably 12 to 14 years old, an average units who average volume - whose average volumes exceed $130, 000, 000.

Uh-huh.

So, you know, let everybody comp and we - we are paranoid by definition, and as again those of you who know us, the merchants and the operators, live out there in the field, visiting not only Costco's, but also other competitors, direct competitors and other forms of retail, and we as big as we are, we deal with this like we're the owner of a single store competing as every body in our city -and we think that makes us better and again, if you look back at our history, yearly, every innovation in the warehouse

business has come from us and we aim to keep it that way.

OK. Thanks very much.

Your next question comes from Jonathan

of

.

Good Morning Richard and Bob. I'm going to just pursue sort of your discomfort level with the first fall numbers out there. It seems like you have got great sales from that and then you are talking - and I know you are going into the new markets, but margins seem to be getting better. Are you concerned about the gas situation and the fact that prices are now going up and it's not really where the penalty lies, can we isolate it to that and then, as a part of that question, is there anything you can do the hedge gasoline in markets like this?

You know, the gas is a part of it. It is not the reason, it's - it's just, you know, another try. Again, I want to reiterate. We started off setting the bar high for ourselves. The numbers out there are still within our range of the bar. But again, we don' start with same day numbers. Clearly, if comps continue at, you know, seven percent plus, that's a great - that's great and we're all some people who all worry for nothing. I - again it's - sometimes I ask myself the question are we - are we micro-managing this so much. If we miss or if we come in within our range but we miss a number by a penny, three quarter or four quarters out when we started this process, in a year where we've opened just a whole bunch of units versus in the prior year where we were able to put a whole bunch of new units, I think we're doing OK.

Clearly, margins - I definitely feel that we are gonna be able to improve margins. I think that we'll be able to improve that not in a step-wise exact manner. When Jim says to me and to some of you who he has met with, on an ongoing basis, we deserve to make more money. We deserve to make a higher pre-tax profit margin as a percent of sales. But we're not gonna

react to that. I have comfort when he tells me that, and hopefully you do too. I think that over the next, you know, two or three years, we will see sales growth lower than earnings growth.

So your earnings growth is higher than sales growth.

OK.

So, I was just wondering if the loss in gas is material and in fact could continue if we have some ratcheting up in gas prices.

No, that'll be part of it. In terms of being able of hedge gas?

Yeah.

Look at it, the cost of hedging - there's no - there's no such thing as a perfect hedge. You could buy different types of oils you choose or the like. What we have found - we are talking to some of the major finders. We believe that the - we fervently believe that there are games being played out there, that more money is being made in refining than it is in - at the regional gas stations of the majors. We'd love to be able to prove that. We hope

prove that. But, you know, we know that we're gonna be around, we know that if there's a short term pain from it then long term, its

. First of all, if you - if you have the increment on business that it adds to our business, it's a no-brainer.

Right.

And - but again, when we're trying to micro-mange to a penny a share plus or minus in a given quarter, and this is formidable enough to be a penny a share or, you know, plus or minus a penny, so a range of two pennies there, that's the thing that, you know, causes a little consternation. When looking at - even an imperfect hedge, frankly the cost of it is more than its worth in our view.

OK. To follow on, what would you say your updated numbers would be on your business numbers percentage of sales right now?

I'm sorry, the question?

Yeah - why don't we just say your business versus Goldstar as a percentage of overall sales. Any kind of trend there is or what the current number might be?

If I look at last few weeks, business numbers are, yeah still in the - yeah mid to high 50s week in and week out.

OK..

Major

. By the way getting back to your question on gasoline for one second. Right now when we're again going through the throes of having minus five percent earnings last year?

No.

You know flat earnings in Q1 of eight percent and Q2 so call it four percent earnings throughout Q1 and 2. You know a penny matters more next year in the year after when I am convinced that we'll have you know earnings mid teens or higher.

Okay, sure make sense. I guess my question on business is this is important as it is and seems to be holding up really well. There really wouldn't be any penalty for you for raising membership fees would there, you mean it would actually be a good news thing to do.

For a penalty we again, I, we like this we have to keep reminding ourselves to the lets not be too arrogant here. Again history shown that we did it about three to four years so we did it in at the end of calendar '01 which I think was about just under three years ago. I'm sorry the end of calendar '00 and the prior time we had done it was about three years prior to that so the implication would be sometime on or after the follow of '03. So we're still you know a year and a half to two years away from that. We have no reason to believe that we couldn't but we'll have to wait and see.

Okay. And then finally I've noticed you've done a joint venture in Japan or some kind of venture with

in the opening a new club there?

That is simply a real estate deal.

Okay.

We got control of a partial land that was knowingly that was much larger than we needed and we negotiated a deal and when frankly, it was a fair deal for us in the sense that this was a open market negotiation and others were negotiating under this well and we are pleased to have

there.

I was just wondering because you've had relationship with them certainly in the past and I think ongoing is any opportunity to work with them and may be penetrating or going over to the continent. You're thrilled of the UK I understand. I'm just wondering if there is anything we can look into there.

I don't think there is anything major then would you love a good relationship with them I know that Jeff and Jim and Daniel Bernard talked periodically but you know I think while Costco and therefore with little bit of two peas in a pod we both have strong - our view and our view and hopefully their view of us and our view of them, strong leaders and the old joke was is that you know we can help them with hydro markets some markets where we know the markets so we should be in charge of it and Europe they can help us, with their European expertise but we would be in charge of that too because

and I would expect they'd say the same thing the other way so you know we do talk but we don't see anything.

Okay thanks.

Your next question comes from David Schick of SunTrust.

Hi Good Morning! Two questions related to gross margin, first could you give an example of somewhere in the non-gasoline core business where you're taking, you didn't really say, you know, taking where you can get it, but capturing will be a little bit more of the opportunities you have, and second, we talked about that roll off of the executive member detriment the gross margins, would you expect that full delta then to show up, in other words, when we are going to Q1 of '03, should that be a year over year delta of 10 basis points, 14 basis points and would you capture the whole thing or would you sort of

, how do you think about that, thanks.

OK, first of all, in regards to the gross margin question, we see a tremendous amount of local placing opportunities, we are finding from a half a million to $5 plus million on a given deal for a given upcoming year, a calendar year or a twelve month period. Now when we get those deals, that rolls into our margin one-twelfth a month for the next 12 months, so again, we see those types of opportunities out there. And we just did a deal on major item with, you know, with a $10 plus million additional ability and margin, where again we'll pass, you know a good chunk of that on, but there is several million dollars for us as well but in certain items - in items where we have always had a historically low margin, so again our view we deserve a little extra, but we are going to live through to our margin structure, but we think that there is plenty of millions and plenty of areas where we can get and still be the most competitive out there, we are just gonna take a little of it, not a lot of it but we gonna take - we gonna, as Jim would say we deserve to take a little of it.

And the other question was of the executive membership, again if you go back to the numbers I talked about earlier, the big increase executive membership started in q4 of '00. So again in Q3 - and then continued through all of '01, so in Q3 of '01, I would expect, you know, again a gross margin detriment related to executive membership of somewhere in the 8 to 12 basis points range and if it gets to this point, in q4 it should drop dramatically to you know 4 to 5 basis points and then be less than a few basis points all of next year, so I think the big growth of the executive membership in terms of going from zero non-executive members to 1.3 in just the first two years and arguably having the most adverse selection to start off with because

regular executive members, the one that's going to automatically get up to a $300 rebate to start with. I think that, you know, in q3, let me be conservative, let's say q3, as I said 8 to 12, I think it is 10 to 14, my guess it will be less than 14 and it will be closer to 10. Again in q4 we'll finally

and will be in the mid singles and the next year, it will be in the low singles.

Right. But -- I guess what I'm asking is with that delta of the delta, will you show that gross margin or will you, you know, internalize that and use it somewhere else? Everything else being equal? If everything else is equal as you roll into a quarter

, were your delta last year was, you know, - detrimental by 17 as was the delta, you know, five, is that 12 going to show up in gross, if everything else is?

We'll look at that as part of the margin we deserve.

schick Right. OK.

Your next question comes from Chuck Cerankosky of McDonald Investments. Chuck, please respond with your question.

The question I have Richard is looking at more openings in existing markets, how will that affect the balance sheet going forward? Do you get - you're gonna get a cash return quicker and see less external financing and perhaps a cash build up as a result of that?

Well, very little Chuck. I mean in the first couple of years, lets take a worst case new market and a best case existing market, you know, and lets assume in both cases you got $20 to $25 million of cap ex. In the worst case example, you lose a couple of million a year for the first couple of years, so let's say you've got another $4 million of investment, if you will, not that that's how we look it, but you know, you've spend another $4 million in losses. In the best case, new market maybe you make two or three million in the first year and three to five in the second year, so maybe its a 10 million - over two years its maybe a $10 million swing. And again relative to our whole company, I don't think either is that material to our balance sheet.

All right. Thank you.

Why don't we take two more questions, Bobby?

That's fine sir. Your next question comes from Elizabeth Armstrong of GIC.

the questions and answers. Thank you.

Your next question comes from Asma Usmani of Edward Jones.

Good morning Richard. Could you tell me what the

within a five mile radius Costco has with Sam's. And how do you expect this to trend going over the next three to five years?

Well, you know, probably in the U.S., 60's is, I'm guessing 60 to 70 percent of our units compete with Sam's, probably somewhere around half of those, I'm guessing here, are within five or six miles of Sam's. We've something of an - in Torrence, California, we're across the street from each other and one of our Atlanta units we're across the street from each other, in couple of our Dallas units we're within a mile of each other. So I'd say we're getting closer not further away. But whether we're a mile or five miles, I don't think matters much. I don't think that's a big difference - the places we're going where the population is and where the traffic ingress and egresses.

So around about 50 percent of your units are within a five miles radius of the Sam's.

galanti I would guess, this is a rough number, assuming that 70 percent of our units compete with Sam's in the US.

OK

I would guess at least half of those are within five miles may be 60 percent, so probably somewhere between 30 & 40 percent of our US units are within five miles of Sam's, I could be off by 5 percentage points here.

OK, and then what potential do you see for Warehouse Clubs in the United States, Canada and the UK.

Well, in Canada we have 60 locations currently, we would guess over the next ten years, you know, probably averaging one or little more than one a year, in the US, we have 286 I believe, yeah, 286 units, we think that we could add 200 more units over the next 10 years, and you know, in our view that's the number that has continued to

it upwards, if you would asked us three or four years ago when we had some number in the low 200s, we would have guessed we probably couldn't go above 350 to 400, now we feel we can go to 500. Part of that is the market share issue we've talked about and the ability of

and opening up new units.

We have been pleasantly surprised when we've opened units, we opened a unit about 15 miles south of the Seattle Airport and about 10 miles east of the Seattle Airport in the city of

and I know you never heard or I am sure none of you can spell

. (Inaudible) is doing in excess of hundred million a year,

in excess of 15 person and let's say its assuming, you know, this year will do over $ 120 million, less than 25 million of that is cannibalized business from nearby Costco's. It is probably five to seven miles from two other Costco's, one in each direction, and so there is an example of, in a market which we dominate, being able to open a unit that even taking cannibalized sales away, we will do $70-80 million in the first couple of years or year.

OK.

We think that there is plenty of opportunity and you know, part of that assumption is that we're going to keep being exciting to our members, we're going to keep coming up with new stuff recognizing that as Jim said to somebody the other day, using his hands and waving his hands, you cannot love us as a customer and everything we do is to drive prices down, to merchandise quality up and it's a great

we think in terms of continuing

What about the UK?

The UK, if we could have 50 units there tomorrow, we would. There is tremendous restrictions in zoning and planning and we are quite frankly very happy to have these three openings coming up, to go from 11 to 14. You know, two or three years ago, I think, we had about seven units there and our hope was we'd open one or two a year. Now our hope is to open, you know, four to six a year. So we're working on many fronts and we are hopeful that that can continue, we've had a tremendous success over there so far, and we will keep trying.

Would you say the UK market is in terms of the international market, you have a presence and has the most potential for Costco, which overseas market actually has the most potential for

.

In terms of the markets we are currently in - UK probably has the most visible potential, short term potential because we have proven it already. Like Japan has the most

. As planned we will open our third unit this fall, which will be our second Tokyo area unit. They are more expensive, they are more risky, but as we said, when we first open it's going to be five years before we know what we have there. If we can figure it out, we recognize that Japan is the second largest retail economy in the world. That gives us some excitement. If it is not successful, we will spend, you know, 40 or 50 million dollars over the five years to find out.

: And then my final question, could you just refresh me on what metrics the company uses in deciding where you are going to open a location, in the United States.

You know, we use the standard, you know, real estate one to one metrics of the population, growth statistics, average household income, number of small businesses, number of household, and then that, you know, probably 60 or 70% of the analysis and the more important in last 30 or 40 is what I would refer to is Kentucky Vintage. It is the senior executives, the operators, the merchants, including Jim and Jeff personally going through the market and shopping the market for a day or two, and seeing who is there, and what's there, and the traffic patterns and getting a better feel for it. And you put all that in big box, store it up and that's how we do it. You know, we, overall we've been pretty successful doing that.

: Now could you -- give me that metrics for the 50% of you mentioned in terms of household incomes, and so forth.

Well. I mean, we just looked at them. The house hold income, if again, I don't know what statistics you are looking at, but the average household income right now is around 40, we would expect to have metrics in the surrounding five miles where we operate, in excess of 45 to 50. That would be an example.

: OK, and then the population and a particular market you open a location in.

If you would like to call me back off line, I'd be happy to put you online with our real estate person who knows more about that than I do.

: Okay, thanks very much Richard.

Let me take one last question.

Your final question comes from Daniel Binder of Buckingham Research.

This is a question on -- first on the store opening, you indicated that as result of time you might have a couple of less openings this year, those get shifted into next year, in another words did the growth rate and square footage move up a little bit more for next year?

Yeah it's really timing, Dan We -- the two of the opening - I think we are bringing that number down two or three for the year, well two of them is Puerto Rico and the third one is

we got three to four openings in August. One of them makes

a month. So there is nothing really dramatic there, and does it add another million of pre-opening or a million, million and a half, two million of pre-opening Q1 versus Q4. Yeah. That's about it.

OK, and then given the fact your square footage has accelerated over the last three years or so from like 6% to 10 or 11% and the complimenting has - continuous to be good. Is there any reason why, as we go out 03 and better that the growth rate couldn't inch up from what has been a target of 15% into the high teens?

Yeah, we think so, but again I'll be - again with the risk of being accused of being little conservative, yeah, we kind of setting it at a three to five year goal in that range and it could really well be a little better than that.

OK, and then just lastly on the gas business. You know, assuming that gas prices stabilize somewhat which, it looks like they have little bit in the last week or two. What would you expect in terms of margin impact in the next two quarters comp impact and so forth. Have you worked through that?

Yeah, yes. Half of it is done, half of it - just competition has gotten tougher. There is a lot of people in the business now, and again because we've got 3000 destination shoppers per location per day, we think that it - while we do a lot of volume in that higher competitive level and they cause us a little - those same people, there is some group of people that are coming to get gas and then by the way will stop and buy merchandise. So we still see numbers that are very good relative to incremental business and store. And I think that the level of competition will subside a little bit, but again that is just based on the fact that things tactically swing a little further, kind of like stock prices further in each directions than they should.

Why, I guess when we are getting out of this -

these big declines in gas prices, it was seen that we should see some stabilization in terms of the impact on gross margins and comps. Is that fair?

You will see some stabilization, and you know in Q3 we should be better simply because Q3 was volatile down last year, and Q4 that can be a little tougher because it was volatile up last year. Again it tends to go up and down, and some of which is based on what's going on with gas prices, some of which is based on going on - what's going on with gas competition. And it's not just the - it's more of the independence in the Majors by the way, I mean it's the AM, PM, mini-marts, it versus the Majors.

Can you tell us that you've anything going on in the minor market this year, in terms of expansion?

Nothing this fiscal year, I know we're working on a couple of more sites and it won't be until '03, even the second half of '03, before they opened.

OK then lastly,

, potential

benefit in Q4, I assume that is not taken into your assumptions.

A little of it is, not all of it.

OK, great. Thanks

OK, thank you and thank you everyone, OK, thank you.