好市多 (COST) 2002 Q4 法說會逐字稿

Good morning. My name is Princess (ph), and I will be your conference facilitator today. At this time I would like to welcome everyone to the Costco conference call to review the company's fourth quarter and fiscal year-end operating results, and its September sales results.

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 keypad. If you would like to withdraw your question, press the pound key.

Thank you. Mr. Galanti, you may begin your conference.

Thank you, Princess (ph), and good morning to everyone. As usual, I'd like to review with you several items this morning. To begin with, our 16-week fourth-quarter and 52-week fiscal year end results. Briefly our reported Q4 earnings came in at 52 cents, up 27% or 11 cents a share. Of course, as you saw in our release, we benefited by about 3 cents in the fourth quarter due to a lower 35.5% tax rate versus the 40% rate I'm sure many of you assumed.

Excluding the lower tax rate, we came in at 49 cents, up 8 cents or 20%, in line both with First Call consensus of 49 and our prior guidance of 48 cents to 50 cents a share.

For the fiscal year, we came in at $1.48. Again, benefiting by the 3 cents a share from a tax rate for the year of 38.5% versus last year's 40% rate. I will, by the way, during the conference call address where we expect our tax rate to be going forward.

Assuming the 40% rate that we had been at previous -- in the previous several years, our fiscal 2 (ph) EPS would have been at $1.45 or up 12% for the fiscal year.

As many of you know, this morning is also retail sales monthly reporting day. This morning I'll also review our five-week September sales results which came in at 5%. Other topics that I'll review, recent and upcoming opening plans, including the 29 units that we opened for the year just ended, as well as the plan for just about 30 to 32 units this coming year. So far this year, just in the past five weeks, we opened five new warehouses.

I'll go over ancillary business operations, I'll discuss briefly a couple of new initiatives that we have going on, two new tests that we're going to be doing, and an opening in both in December and next spring -- or next summer, rather. I'll review Costco online results, our executive membership program, our balance sheet, of course. I'd also like to make a couple of comments during the way about the many questions and concerns that I've received related to the management changes at Sam's and BJs, as well as some questions that some of our competitors have suggested about saturation.

And lastly, I will give you some initial guidance for the first quarter '03, and our fiscal '03 budgets and goals.

As with every conference call, let me start by stating that the discussions we are having will include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1991. Now, these statements involve risks and uncertainties that may cause actual results, events 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 company's public statements and reports filed with the SEC.

So with that said, sales for the fourth quarter and the 16 weeks ended September 2nd were $12.1 billion, up 10% from last year's fourth quarter and on a same-store basis year-over-year up 6%. Sales for the year, as you saw, were 38 billion -- about $7 million shy of 38 billion, up 11% year over year and again, a comp for the fiscal year just ended also 6%.

I might add that the 6% comp for the year was -- we benefited from both an increase in the average transaction size as well as the increase in our average frequency of shop. Both were in the two -- plus two to three percent range. As they were for the quarter, by the way. Up, again, in both average transaction was up in the 2% to 3% range for the quarter and the year. The average frequency was up 2 to 3 percentage points for the quarter end for the year.

On average, our -- for the year just ended, you know, many of you know the matrix that we put in our annual report that shows, you know, the average annual volumes of locations based on the year in which they opened. Overall for the company in '01, the average warehouse generated $101 million in sales, in '02 that number jumped to 103 million, recognizing we had a 6% comp but we also opened 29 new units.

As a footnote, whereas average annualized sales in '01 for the newest units in that first partial year was 57 million, our average annualized volume for the 29 units opened in '02 will be 58 million.

In terms of sales results for the five weeks of September retail reporting period, sales were up 10% to $3.6 billion, and up 5% on a comparable basis. And in terms of, again, for September, in terms of the -- how that's split between the average transaction size and the average frequency, we actually saw a slightly -- a slight increase, but less than 1% in average transaction size, but we were buffeted by average frequency of a little over 4%, perhaps a little due to the last year's -- the 9/11, September, people stocking up a little bit, so we saw the average ticket size not increase as much, and the average frequency, given that people were sitting around watching TV quite a bit, go up a little bit more.

Let me give you some quick geographic and merchandising breakdowns for sales for the fiscal year and the fourth quarter as well as the five months. In the northwest -- I'm sorry. The five weeks. In the northwest, our comps for the year were 6%, for the quarter 5%, and for the month of September, 4%. In California, it was 6, 4.5, and 3.5.

Keep in mind in California, I think we were here a little more than normal for two reasons. One, increased levels of cannibalization. We've opened a couple of very high-volume units just about four or five weeks ago in the Bay Area, as well as it didn't help that both Anaheim and Oakland were in the playoffs. But overall, a pretty good number.

Northeast, 8% for the year, 7 for the quarter, and 3 for September. Again, I think the northeast we saw the most stocking up last year with 9/11.

Southeast, 7 for the year, 6 for the quarter, and 4 for September. Midwest continues strong, recognizing it's a relatively new region for us, just 3 to 4 years old. It was 17 for the year, 20 in the fourth quarter, and a 17 for September.

So all told, the U.S. was a 7 for the year, a 6 for the quarter, and a 4 for the month of September.

In Canada in U.S. dollars, it was flat for the year, up 4% for the quarter, and up 10% in September. That 10%, by the way, was helped by a tobacco price increase in week 3 of the five-week month, offset a little bit by a slight reduction in tobacco sales in week 4 and 5, but net-net, it was a slight positive.

Other international, 7 for the year, 6 for the quarter, and 8 for September. All this is in dollars. And so bringing the total company to 6 for the year, 6 for the quarter, and 5 for the month of September.

Mexico has continued pretty good. 10 for the --in dollars, 10 for the year, 4 for September - or, I mean for the fourth quarter, rather, and 5 for September. I might add that in pesos the September month was 12% up.

In terms of the 5% September comps, since this is also retail reporting day for the month, first three weeks were stronger than the last two weeks of the month, although a little of, again, that skewing was due to earlier in the month, the tobacco price increase in Canada. Basically the five was comprised of a -- again, adjusting for tobacco, about a 6 in the first three weeks and a 4 in the last two weeks. Again, adjusted for tobacco.

In terms of merchandise categories, food and sundries was a 6 for all of last year, 6 for the quarter, and a 4 for September. Again, I think a little of that has to do with last year's stocking up on basics during September that we saw in some regions. Hard lines, 7, 6, and 8. So, again, that's actually showed some strength, helped by several categories. Toys and seasonal was up nearly 40%. Lawn and garden even was up over 10%. It has to do with, you know, bulbs and what have you. They're just being sold for planting.

Even majors was a positive. You know, the electronics area for us, up slightly positive, with the computers actually being double digits positive.

In terms of soft lines, 4 for the year, 5 for the quarter, and 7 for the month of September. Again, helped by several categories. Housewares and media were both in the mid to high teens. Even jewelry was in the mid-teens, as was women's apparel in the very high single digits, so again, overall, a good showing in the non-food categories.

Fresh foods has continued as it has for many years now strong, up 9% for the year, 8% for the quarter, and 8% again for September. With produce being particularly strong within that mix.

Ancillary, again, that -- these numbers have been affected by the -- both the price reduction in gasoline as well as our decision in June/July to stop accepting Visa, MasterCard, and Discover at the pump. But as you'll see, ancillary businesses for the year were up 6%, for the quarter up 1%, and for the month down 1%. But let me - those numbers, without gasoline, were up 12 for the year, up 9 for the quarter, and up 9 again for September. So again, we're seeing both deflation -- a slight deflation in gas as well as about a 9% -- recently, about a 9% reduction in gasoline gallonage (ph) related to the fact that 40% of our transactions being tendered by credit cards that we no longer accept. And that was a strategic decision on our part that we made, and actually the down 9% in gallons is actually an improvement over where it had been in the last couple months when it was down about 15.

Excuse me.

Moving on to the line items on the income statement, I'll start with the top, with membership fees. In the fourth quarter, we reported membership fees of $245.6 million, or 2.04%. In dollars, that's up 12%, or $26 million. In terms of basis points, up 2 basis points. Parenthetically for the year, we were up 8 basis points, and up 17% in dollars. That was expected. These are very strong numbers. We consider these strong numbers. The -- still an increase after now having completely and fully anniversaried (ph) the $5 increase which is now two years old, so no benefit even from the deferred accounting of those increases.

We continue to benefit from the increasing, at lower levels, but increasing penetration of executive membership, as well as the fact that many of the new markets that we opened over the last two years, as those anniversaried for the first time, those free memberships convert, you know, a percentage of those convert into paid memberships.

But all told, given the fee increase is now fully anniversaried on a deferred basis out of our numbers, the essentially - you know, the slight percentage increase is, we consider, quite good.

Keep in mind we continue to benefit from strong renewal rates, again, increasing penetration of the hundred dollar a year executive membership, and the free -- the free memberships anniversarying for the first time.

In terms of number of members at fourth quarter end, we had 14.6 million Gold Star members, up from 13.1 million -- actually, that was at first quarter end. I don't have the year end number last year. But basically 14.6 million Gold Star, 4.5 million primary business, 3.5 million add-on business, for a total of 22.6 million members -- including the free spouse card, just over 40 million people walking around with a Costco membership card in his or her wallet.

At September 1st, '02, fiscal two year end, paid executive members were just under 1.7 million, an increase of almost 650,000 from the prior fiscal year end, which represents about a $12,000-number - 12,000 members per week increase in the number of paid executive members. That's -- by the way, that weekly increase is both for the year and the quarter. And the 1.7 million has topped our goal of 1.5 million for the year.

The executive member sales for the -- all the year represented 20% of our sales, and the current run rate is about 24%, although, again, we'll see that rate of increase starting to slow as we've now been in the program for 2.5 years and it will grow, I think, more natural level consistent with sales.

In terms of membership renewal rates, they continue strong, and are at our all-time high renewal rate percentage at 86%. At fiscal year-end, business memberships in the last quarter were renewing at a rate of 91%, and Gold Star at a rate of 84%, for a total of 86%.

As I think I mentioned on the third-quarter conference call back on May 30th, one operational efficiency that should help in our renewal rate efforts and frankly get membership fee dollars in on a more rapid basis was the recent completion right around third quarter end of a major rewrite of our membership system. More -- frankly, more now can be done at the register in terms of renewing, instead of waiting for the renewal notice to get to you in the mail and then sending in the check when you have time. We can now, at the register, when we scan your membership number say, you know, your membership is coming up, is due next month. Would you like to just go ahead and pay for it now? And again, it saves them the hassle of writing us another check and it allows us to hopefully enhance renewal rate slightly or at least keep them where they are and also get the money in on an overall basis a little more rapidly.

Before I continue down the -- to the gross margin line of our income statement, a couple of quick comments about our partnership with American Express. At fourth quarter end, we actually hit 2 million co-branded accounts, including a quarter of a million that had signed up just in the last 16 weeks of the year. Again, that was boosted by the fact that we discontinued MasterCard, Visa, and Discover at the gas pumps.

And the two million accounts represent about 3 million cardholders, and just about 20% -- just over 20% of the sales penetration in all of '02 versus 18% a year earlier. Without going through a lot of detail, it continues to be a great relationship that both --we believe both parties are quite pleased with.

Going down the gross margin -- to the gross margin line, similar to the strengths we saw in the third quarter, when gross margin was up year over year 36 basis points, as you saw in this morning's release, gross margins in the fourth quarter were higher year-over-year by 40 basis points, going from a 10.37% last year to a 10.77% this year.

Let me just let you jot down a few numbers and then we can go through them.

In terms of the -- where the 40 basis points of improvement came from, the core warehouse was up 36 basis points, the increasing penetration of the executive membership and the associated 2% reward represented a 10 basis point decline in gross margin, recognizing that the 2% rebate reduces sales, but on the same cost of sales, you have a slightly lower margin. But again, we see that rate of increase coming down and starting to get closer to zero as we reduce the level of penetration there -- that level of penetration increase.

Ancillary businesses were minus 6 basis points to gross margin. Parenthetically, I might add that -- and again, I mentioned this on the third quarter conference call -- we anticipated a big negative variance in gasoline, not because this year's Q4 was so horrible, but last year's Q4 was so exceptional -- really off the charts last year.

I think year-over-year in Q4 last year, gasoline benefited gross margin by 30-plus basis points. This year, within that minus 6 basis points, gasoline represented a minus 18 basis points. International -- and again, I think that's more the (ph) variance year-over-year than the fact that it's that terrible right now.

International was plus 4, and the other unusual thing in this year was LIFO (ph), and again, I mentioned this on the Q3 conference call that we anticipated that, while we would see a negative variance in gasoline, we expected, based on the trends we saw as it relates to LIFO (ph) and deflation and inflation that we might be slightly deflationary and that that LIFO credit this year would probably offset that other gasoline variance, and in fact, it did. LIFO was plus 16 basis points.

So all told, 40 basis points improvement year-over-year, but importantly, 36% coming from the core. Similarly, it was 30 basis points from the core just in the third quarter, and 16 basis points for the core for the whole year. So, again, that trend has shown improvement in the second half of the year.

Within the fourth-quarter core improvement, fresh foods was particularly strong, as it was in Q3 and as we'd expect it to continue. Good strength we also saw in food and sundries and hard lines categories, and more modest but still improved year over year improvement in soft lines as well. Thus, all four department - major departments contributed to the core margin strength.

And I want to reiterate as I have in the past that there is no indication that -- of a lack of competitiveness, price competitiveness on our part. All of the pricing studies we perform against all varieties of retail competition in all geographic markets, we continue to see our -the spread between us and our competitors the same, if not better, in many cases. So we feel that we've been able to improve margins the right way, by buying better, by keeping some of the savings, but by still lowering prices and being ever more competitive.

The next gross margin component I mentioned was the 2% executive member reward. Again, it's pretty straightforward. You reduce sales by the 2% rebate -- by the 2% reward. That -- you have the same cost of sales, so it has a negative effect --impact on the reported gross margin, but of course, where you see the offset to that is on the improvement in membership fee percent, as well as the improved -- the fact that executive members are comping at substantially more than the remainder of the membership base as a whole.

Again, we would expect to see that level of detriment to gross margin start to subside over the next several quarters as we get beyond the fact that we've been in the program now for 2.5 years and many of the existing people that have signed up, you know, we've talked to those that are interested into signing up.

With regard to ancillary businesses, essentially all ancillary businesses with the exception of gasoline positively contributed to our gross margin improvement, and again, the year-over-year negative had as much to do with the strength --the unusually strong strength last year in Q4 as much as anything else. And again, I -- the comment that I made back in the third quarter that we expected and it actually happened that the gasoline year-over-year variance would be essentially offset by the anticipated improvement in LIFO credit.

International, no big surprises there, the 4 basis points. And let me just spend one minute on LIFO, in terms of the numbers. I mentioned that a negative -- -- let's see here. Oh. In the fourth quarter last year, the LIFO credit was $2 million, bringing the LIFO charge for all of fiscal '01 to $5.5 million. This year, in Q4 the LIFO credit was $21 million, bringing the net LIFO credit for the year to $13.5 million. So year-over-year, about a 5 basis point swing and quarter-over-quarter about a 16 basis point swing.

In terms of our gross margin outlook for Q1 of '03 and for the year overall, you know, there's no indications of anything negative happening to the trends that we've seen. While there will be no big LIFO benefit in -- expected, of course, in Q3, similarly there's no big anticipation of a negative gas variance either. And the core should be just fine in Q1.

For the year overall, I certainly would suggest that we're going to keep showing 35 and 40 basis point improvements, but certainly the indications are that they will continue to be in a positive good direction.

One other small comment that I'll just ask you to store away for a quarter or two, as it relates to gross margin, is something that doesn't affect us until probably mid-Q2. It's -- and it's how we recognize revenue on our phone cards that we sell in the warehouse.

Historically, we have carried inventory on the phone cards because it was on the -- on the floor. By doing so, revenue recognition says that you would record that as a sale. With the new membership rewrite and point of sale rewrite of our register programming, we're now able to basically have blank cards on the floor, and then when you get to the register, you can buy however many dollars worth of minutes you want, and we can initialize and put the value on at the register.

By doing so, and economically, it's definitely beneficial to the company in many ways, not the least of which is no inventory carry out in the warehouse, and no risk of shrinkage, the effect is going to be to lower sales because we report it on a net basis just the margin, if you will. And improve -- so it will be an improved margin, slightly, and low -- and an increased expense - reported expense slightly. It could be as much as, you know, 4 to 5 basis points, maybe 6 basis points -- call it 5 -- plus margin and minus SG&A.

Absolutely a positive impact to the bottom line, net-net, in terms of inventory carry, and we think sales as well. Or income as well. But, again, that's not something that will happen until probably midway through Q2. I wanted to alert you to it so it's not yet another surprise when it does happen.

The -- before we go into SG&A, let me briefly go over our ancillary businesses. At year-end, we had 306 pharmacies, which generated over 1.5 billion in sales, with a sales increase of 19% -- that's a total sales increase, but probably the comp is in the mid-teens.

Food service, food courts essentially in all warehouses, 374. Generating just under 300 million in sales. One-hour mini labs, 367 of them generating over 150 million in sales. 349 optometry shops doing approximately 275 million in sales. 12 print shops, 111 hearing aid centers and 169 gas stations. The gas stations, by the way, did 1.18 billion in sales.

All told, ancillary businesses did 3-point - nearly 3.5 billion in sales, up 12%, led by, of course, very strong and continued surprisingly strong pharmacy sales.

I might add that on the 169 gas stations, we have opened six since fiscal year-end to be at 175. Again, these businesses are doing fine, with the exception of gas. They're highly profitable. In fact, every single business improved their profitability in fiscal '02 versus fiscal '01, other than gas, but again, gas was skewed for two reasons.

One, it was very strong in year-ago Q4, and two, we did show a little weakness this year on top of that. They drive our business, they have better than company average comps, and we think that's made a difference for us versus our competition.

Moving on to SG&A, which I know is a hot topic for all of you, it has continued to be a little higher than planned. In -- due, in part, of course, to the new locations, the 29 new locations we opened during the past 12 months, two-thirds of which were new markets. In Q4, as you will see when I go through the numbers here, our SG&A year-over-year was higher by 31 basis points, coming in at 9.48% this year's fourth quarter versus 9.17 last year. Again, let's -- let me let you jot down a few numbers and then we'll go through each.

In the fourth quarter, the core component of SG&A was higher -- or I'll call it a minus 26 basis points. Minus being negative. Central was better by 2 basis points, or positive. Ancillary businesses were minus 1 basis point, worse by 1 basis point. International, worse by 6. And a total of 31 basis points higher. Now, the core warehouse SG&A was higher, again, by 26 basis points. Of that amount, about 15 basis points was first-year new warehouses, the effect of the new warehouses. If you'll recall, that's been a little higher in the past. As we see the mix change, that number should come down nicely, particularly over the next year when we have only 40% of our warehouses being in new markets versus 65% in '02 and 80% in '01.

Another approximately 15 basis points related to the increases in employee healthcare, benefits, and workers' comp costs. And then netting against those two things of roughly 15 basis points each to get to the 26, about 4 to 5 basis points of net improvements in all the other components of warehouse operating costs. Recall that I mentioned to you on the Q3 conference call that doing a preliminary review (ph) of our benefits accruals, you know, benefits, workers' comp, healthcare, what have you, that we increased third quarter SG&A by 4 to 5 basis points.

At year-end, we, of course, do actuarial reviews of all these accruals, not only for the year of claims -- the year of '02 claims but all the prior years' claims and histories and how those are trending. And in looking back at the past -- and looking back at the past three or four fiscal fourth quarters -- I'm sorry, first of all, at the fourth quarter end, we true up those accruals.

In looking back at the past three or four years of the fiscal fourth quarter, we've always had a nice bring-back here being over-accrued year-to-date. That's not the case this year. In the fourth quarter, we estimate that of that minus 15 basis points that I talked about, about 6 to 7 basis points are current increases in activities in the quarter, and about 7 to 8 basis points represent less year-end bring-back.

Now, I know somebody's going to ask, why didn't you talk about that last year when you brought it back? The fact of the matter is as far back ace can go for the last several years, we've always brought back at the end of the year but again with rising healthcare costs, there was not that this year.

What it also indicates is that we would expect healthcare costs to continue to be in that, you know, perhaps 6 to 7 basis points, maybe a little more, maybe a little less, over the next couple of quarters. I want to assure you that we are reviewing all these costs and seeing how we can more efficiently manage them, but as you would expect, remember that we will continue to have the absolute best healthcare plan among all major retailers in terms of number of employees covered, what type of things are covered, and the -- and the cost spread between what the employee pays and what we pay.

Now, what are we doing about expenses? Some of the cost savings activities -- first I want to start by saying, you know, we are our own worst critic as it relates to that. We are constantly out there trying to figure out ways to improve expenses. The reality is that we run a pretty tight ship and so there's not a lot of fluff out there to begin with. Each -- some of the things that we have done, each operating senior executive has identified specific underperforming warehouses, in terms of expense control, as well as other components, and has laid out plans to improve them. There's approximately 40 warehouses that each -- a total of 40 warehouses just in the U.S. that we consider underperforming relative to similar size, similar cost, similar location, similar volume levels, that are running in excess of 50 basis points higher, operating expenses.

We think that if we can even improve half of those, we're doing well, in terms of expense control for the company.

We are also in the process of reengineering our buildings to take out -- our goal is to take out this year $400,000 to $500,000 in equipment and fixtures in new warehouse construction, and a like amount in the construction of the buildings themselves. Again, it's not a lot of dollars, but it does represent a few million dollars incrementally a year.

As I've mentioned before, we have changed -- made a conscious decision to change our opening mix to be more existing markets this year. We'd expect again to go from three-quarters of our markets being new markets in the last two years to only 40% of the units being open in existing - being opened in new markets.

And lastly, in terms of -- we've looked at everything, at our central staff both here in Issaquah as well as our regional headquarters. We started at the very top. All executive officers are going to take no increase in salary for the coming year. And we are also capping the levels of increase for all salaried personnel in staff positions at our central. We are not looking at doing that in the warehouse, as those have continued to be reviewed and are fine.

These are some of the things we're doing. We are very focused on it. We will continue to try to get that going in the right direction, and I know that both Q3 and Q4 were a little higher than planned, but we think that just creates a little more opportunity. Maybe it takes an extra quarter or two. Yeah.

Oh, by the way, the only thing else I wanted to mention on the components of SG&A, you'll notice that international, the component of international was minus 6 basis points. All of that is related to the U.K. In the -- really at the beginning -- at the very beginning of Q4, we opened three new warehouses to go from 11 to 15 -- 11 to 14 units, and given just that small number of openings, that's about 6 basis points on the whole company versus, you know, zero year-to-date prior to that. So we'd expect that to be a slight drag for the next couple of quarters but not significant at all.

Next on the income statement is pre-opening expense. It was actually lower by $2 million year-over-year coming in at 14.4 million, or 12 basis points. That's a 3 basis point improvement. No big surprises here. Last year in the fourth quarter, we had 7 openings. This year, we had 8 -- 5 net new openings plus three relocations. A little of the difference is simply, you know, timing of when the pre-opening expenses hit and what's opening right after each -- each respective quarter.

In terms of provision for impaired assets and closing costs line, for Q4 '02 these costs totaled 5 million pretax. That compares to 16 million pretax last year. Keep in mind last year's figure was entirely the costs of consolidating our Canadian operations. Other than that, in last year's fourth quarter, we had several (ph) million dollars of closing costs which were essentially offset by a like amount of real estate gains that we had taken in that quarter, and we had recorded in that quarter.

All told, operating income in Q4 was up 20%, or $62 million, coming in at 381 million this year versus 318 million last year.

Below the operating income line, reported interest expense was slightly higher year-over-year by just under $1 million. Actually, interest expense -- cash interest expense actually improved a little. What we see here is a lot less capitalized interest which is an offset to interest expense. We had a lot more of that last year, to the tune of a couple of plus -- $2- million plus as it related to the fact that we had essentially more warehouses on the verge of opening and so you had to capitalize interest. And as anticipated, interest income and other was better or higher year over year. Last year in the fourth quarter it was $6.6 million. It was 4.5 million better this year, coming in at $11.2 million.

About half of that improvement was actual interest income being higher, and half of it was our share of improvements in Mexico earnings, up year over year by a healthy amount.

Including these figures, pretax earnings were up 21% from 318 million last year to 383.5 million this year. We believe overall, this is a good showing, given our ramped-up expansion program over the last 24 months, including lots of new market warehouses and including the various higher year over year SG&A items that I touched on earlier.

Turning to the balance sheet, as of September 1st, our balance sheet was -- cash and equivalents, 806 million. About half of that is receivables relative to credit and debit card transactions that occur over the weekend, so about 400 million of real cash.

Inventories, 3,127,000,000; other current assets, 698 million. Total current assets 4,631,000,000 (ph). Net PP&E 6,524,000,000 (ph). Other assets, 466, for total assets of 11,620,000,000.

Excuse me.

Short-term debt, 104 million, accounts payable 2,884,000,000. Other current liabilities, 1,462,000,000 (ph) for total current liabilities of 4,450,000,000 (ph). Long-term debt of 1,211,000,000 (ph), deferred and other liabilities 146 million, for a total liabilities of 5,000,000,806.

Minority interests of 120 million, leaving stockholders equity at 5,694000,000, and again, the right side of the balance sheet adding up to 11,620,000,000.

A couple of quick balance sheet items. Again our debt-to-cap ratio was under 20%, plenty of financial strength. Our AP percentage, which is an indication of how we're managing our inventories and payables, reported this year at year end was 92%. That also includes non-trade receivables related to the -- non-trade payables related to the construction project - many construction projects. The 92% at year end this year would have been, on a trade payables basis, 80%. By comparison at last year end, the 80% was 81%, so essentially in line with last year.

And again, last year we reported a hundred percent, again, because we had more payables related to more construction projects.

Average inventory per warehouses at last year's fourth quarter end was $7,938,000, on average. This year, it was 8,362,000 (ph), or an increase of $424,000 per warehouse or about a 5% increase. This is essentially due to planning for the --what actually became the hopefully short-lived dock strike. Where we see the big increases year over year is, as you would expect, given the seasonal nature, is toys, majors, seasonal, like Trim a Home (ph) and media and apparel items.

The apparel by the way is more a reflection of just good buys. In this weak economy, we've established better diverting relationships or even some direct relationships with many apparel suppliers, and this stuff is frankly doing quite well out there in the warehouse.

Let me make a quick comment with regard to the dock strike. While it is over for 80 days, although they threaten to continue to slow down a little bit, there's a backlog, and that will continue. Now, how have we been affected, both before President Bush intervened a couple of days ago, and what was our planning for it?

Back in June/July when this was becoming an issue, we like I'm sure many retailers started to plan ahead. For us, the biggest impact in terms of bringing merchandise into the mainland U.S. is seasonal, and what we did immediately was, where we could, we talked to vendors -- and I've used the example with some of you, if we were getting 25 -- if we were ordering 25 containers of a certain Christmas seasonal item, let's say outdoor lighting, to be delivered 10 containers in September, 10 in October 1st and the last five November 1st, we basically in June said bring them all as soon as you can. Recognizing some of it was still being manufactured.

So whereas, let's say, by the end of September, right before October 1st, we'd expect to have 10, perhaps we had 15 or 17. This is just an example, but where we could, we sped it up.

On the electronics side, we really have not seen any issue partly and mainly because we have -- a lot of the electronics, even though they are headquartered in Asia, we're buying from the U.S. arms where they, too, had sped up delivery and had plenty of stuff on hand in the U.S.

One of the other implications for us is outbound freight, where we are shipping to Alaska and Hawaii, off the West Coast, and the biggest issue there, again, was fresh foods, where we had a little bit of a delay, but we were actually, for a couple days there, air shipping a few items. The good news is that even before Taft-Hartley was --intervened in this process a week ago, because of the need for food in Alaska and Hawaii, both sides agreed that they would allow shipments to those two states and that occurred.

We also, again -- and I think there was one instance in one warehouse among the 10 or so warehouses between those two states where we ran out of toilet paper for a couple of -- for a day. And again, where people -- and the issue was, we were bringing in a two-week supply and people were buying it up in one day because they were storing up.

But again, in those -- all those locations for the last two or three months, we were holding essentially an extra 10-day to two-week supply of all nonperishable goods. Of the key -- not -key nonperishable goods.

We hope that it will get back to normal. We think that we've been affected probably a little less than others. Given the fact -- the facts that I've just mentioned as well as the fact that we are an item-driven business and if we are out of one thing, we're scurrying for finding something else in its place.

In terms of cap ex, in fiscal '01 we spent a little over $1.4 billion. Our original budget for this -- for the year just ended was a billion --1.3 billion, and the budget for this coming year is about 1.1, 1.15 billion.

Of course our plan is for about three fewer locations than last year, but as we see, you know, we still would expect it to be right around the 30 level.

We budget -- in terms of negative -- in terms of net free cash flow, which simply is net income plus depreciation minus cap ex, we had - whereas we had budgeted in fiscal '02 to be net free cash flow negative by about 70 to 100 million, we are actually net free cash flow positive by about 25 million, or about a $100 million delta there. Again, that has to do with cap ex coming in lower than planned.

Our budget for fiscal '03 is to be net free cash flow positive of a little over $100 million.

Next topic, Costco online. It's profitable and growing nicely. Still a small piece of the business. In the fiscal '01, we had sales of just in excess of 70 million, about 73 million, 74 million. This year, we had sales -- I'm sorry, 76 million. This year, we had sales of 138 million, so an 80% increase year over year, and a 53% increase in the fourth quarter alone.

Year over year, the profitability swing went from minus a couple or three million to plus a couple or three million this year. A couple to - about 2.5 million this year. So about a $5 million positive swing year over year. We expect both the profitability and the sales to continue to grow in the coming year and beyond.

In terms of expansion, as I mentioned, we had 29 net new openings the year just ended, representing an 8.4% unit growth, and given the fact that the new units are a little bigger and the fact that we do some remodels and relocations of smaller sized units as well, that 8.4% unit growth in '02 is probably about 9.4% in square footage growth.

Again, this year, our plan is to open up 35 locations, including 4 re-lows (ph), so a net of 31. Of the 31, 19 planned to be in existing markets and 12 in new markets. On a percentage basis, that would represent on abase -- starting base of 374 units, 8.3% unit growth, and again, a little over 9% square footage growth. Again, the important change is that two-thirds of the units are going to be in existing markets relative to a like amount the other way last year.

Next topic, let me talk -- spend a minute talking about concerns that some of you have expressed over saturation, as well as the management changes that we've seen at our two direct competitors, Sam's and BJs, over the last several weeks.

In terms of saturation and the concern of saturation, you know, in a word, we disagree. I've given a couple of examples in the past, notably one in the Puget Sound, and I'll give you a new one in the Bay Area. We in just the last few months have opened two new units in the East Bay, in Tracy (ph), California, as well as Roener Park (ph). Both of these units we fully expect to do around 100 million this year, of which 25 million to 30 million will be cannibalized sales from nearby locations.

Even so, that's -- you know, we estimate and similar to the two examples I've given in the Puget Sound the prior year, about 70 million of net new business at strong margins, given the strength of our placement in this - in these communities, as well as full membership fees. We don't do any free memberships in existing strong markets. And we believe that, again, there are many opportunities to infill existing markets profitably, even net of cannibalization.

We also think there's many opportunities, of course, in markets where we've gone over the last five years. As you know, we put a lot of short-term hurt on ourselves over the last three or four years, opening many, many units in new markets, but we think that many of those markets are starting to turn correct for us. We're seeing very good growth in many of them, and I would expect to see a combination, again, of a majority of existing markets as well as some new markets as well.

In terms of the management changes, I've read from both extremes various research reports that this is good for us and this is bad for us. Well, as you might expect, we think it's good for us, from the standpoint that if any -- if nothing else, you know, short-term, it does involve a little turmoil and that can't -- that has to help us a little bit. We are certainly mindful and -- as Jim would say -- in a healthy way, paranoid about our competition. Any changes we see out there, we double up our efforts in going in and seeing them.

Whereas, once a month, as you know, we meet and we go through our regional operations people, go through any changes they see out there. We now do that -- Jim has them do that now with him personally on a weekly basis. Jim personally is in a Sam's or a BJs every week. Every one of the regional people are in Sam's and BJs every day. And reports of any changes that we see are known immediately. As we -- you would expect it to be.

You know, you got to remember also that we're going to keep doing what we're doing and we're doing pretty well. We would expect, and based on what we've heard from our competition, maybe a little more focus at Sam's on the business customer. We're mindful of that. We believe that it's - our success is based on both the business member and the Gold Star member, both wholesale business and consumer business, but we will do what it takes to stay ahead of the pack, and I frankly don't lose a lot of sleep over that. We are mindful of going out there and checking on them every day.

Finally, before I turn it back to Princess (ph)for Q&A, let me spend a minute talking about cost --two new concepts, Costco Home and Costco Fresh, as well as give you a little direction for the Q1 and the fiscal year.

Some of you may have heard -- we have not issued any press releases, but it's been in the press as we filed for permits. We are -- this coming fiscal year, we are going to open two new locations. One is going to be called Costco Home. As you know, we have three locations called the Costco Business Center, which, again, caters more to businesses for food service and office products needs. Those locations are in Phoenix, Hayward (ph), California, and here up in north -- north of Seattle in Linwood (ph), Washington.

We took advantage of an old home-based site, about 100,000 square foot site just north of Seattle in Kirkland, and it's called Costco Home and it's going to be home furnishings. We're going to sell high-end name-brand home furnishings at the lowest possible price. Probably a little higher margin than you see at Costco, but significantly lower than you see anywhere else. The initial location will be just over 100,000 feet, about three-quarters of which space will be dedicated to merchandise sales, with the remainder dedicated to back stock.

There will be four ways to purchase merchandise, both cash and carry through the registers, cash and carry picked up at will call, order stocked merchandise for home delivery, as well as special order. We think we have several competitive advantages, both in terms of our depot and logistical expertise, the leverage we can bring in terms of corporate volume with current suppliers, the strength of the Costco name, particularly in a market where nearly two-thirds of households are Costco members and loyal shoppers already, and being a low-cost operator.

This will open in early December, and we have firm commitments from several key manufacturers. Please don't ask. You know, they're -- they certainly are getting pressure from traditional retailers, but given our success of limited furniture selection and offerings in the warehouse and the significant volumes, they're excited and we're excited about it.

I want to reiterate another thing. Our goal initially is not to hope that we can have a hundred of these around the country. That would be nice, but our first and primary goal is to see what kind of things we can sell. We're using this as a testing ground. If we can -- if nothing else, and we can only find half a dozen things that we can do better in terms of merchandising and displays, in terms of suppliers that will sell us in terms of items, and we can then roll that out to 300 and 400 Costco locations throughout the U.S. and North America, then we're doing our job.

We know it already has helped us develop new vendor relationships that will benefit not just the Costco Home but ultimately Costco overall. We think it's a lab for trying merchandising techniques -- new merchandising techniques and displays. And again, we think it's a - then lastly, we think it's an incremental profit opportunity for the company. But there -- it is just a test, and we'll see where it goes.

The second thing, which is even newer in terms of being out there in the press -- and again, it's because of the fact that we had filed for our permit about a week ago -- is a concept that probably won't open until next summer, or - late summer or even early fall, and it's going to be called Costco Fresh. This is something that has continued to evolve over the years, as our merchants and Jim and every -- Dick and everybody else are constantly out there visiting everybody from Eatsie's (ph) in Dallas and Zaybar's (ph) and Vinegar Factory (ph) in New York and Harry's (ph) in Atlanta and Stu Leonard's (ph) in Connecticut and New York and all the various specialty shows in Europe and the U.S. and trying to figure out how to do not what they all did but take pieces of things and figure it out.

Some of this concept also evolved from the plans we made -- continued to make over the last five years of trying to figure out how to get a Costco in Manhattan proper. While we haven't succeeded in getting that, certainly the concept that we envision -- have envisioned in Manhattan is not a full-blown warehouse, necessarily, but more of a food-oriented location, with the availability of additional items that you can get delivered or go across the various rivers to get there.

Again, the Costco Fresh will have -- be a value and quality concept, expanded selection of what you see in Costco. We're certainly going to capitalize on the success of -- of other food competitors we see out there. The first site will be in Bellevue, Washington within about 15 minutes of our headquarters. It's an old Kmart which we are actually, you know, scraping to the ground and rebuilding a 106,000 square foot facility. Again, we expect this to open most likely in early fall of '03.

Again, like Costco home, it's - first and foremost, it is to develop and test new items and concepts for existing core warehouse businesses, and to see what we can do.

In terms of - in terms of guidance for the upcoming year, let me -- before I -- the last thing before I talk about that, let me talk about the tax rate change. As you noticed in the fourth quarter, we had a 35.5% tax rate, which basically was a true-up so that for the year we were at 38.5. Two things occurred over the last year over the last year, year and a half. One, there has been a steady lowering of the tax rate -- of the federal tax rate in Canada from the mid-40s to the mid-30s as I think Canada is trying to be a little more business friendly, given their environment and economy. As well as we've seen several favorable outcomes on some recent federal and state income tax audits.

One that comes to mind was a recent audit which we concluded a couple of months ago, where we had --the claims made by the tax -- this particular taxing authority was in excess -- is in the $10 million to $15 million range and we ended up settling for a little under $300,000. I think that's indicative of the fact that we think we do a good job of following the rules, and the fact that, you know, we're out there fighting for it.

That -- those two things, in combination, and also winning a few things out there that we saw that some of our accruals were a little optimistic -- I'm sorry, were a little conservative.

That being said, the rate for all of '02 was 38.5%. For planning purposes, we anticipate that going forward, we will be booking a 39% rate. Not to be more conservative, but really a reflection of recent state tax law changes in New Jersey that alone will represent about 35 to 40 basis points on the company rate. So that, again, I think going forward, the 39% rate is the rate you'll see in the near future, and we'll keep you posted.

Now, how that affects the numbers. Certainly I would assume the First Call numbers out there for -- of the upcoming fiscal '03 period should be -- will be -- you guys will adjust them upward a little bit for the reflection of the -- of a 39% tax rate instead of 40. What you'll find is that it will equate to a little over 2.5 cents a share. So where you put the penny in each quarter, you'll have to figure out yourselves.

Where we are right now is the First Call consensus, as I understand it, for first quarter, is 33%, up from 28% last year. 33 cents, rather, up from 28 cents last year, or up 18%. You know, that's a fine number. You know, our guidance probably is in the -- to be conservative, is in the 32 to 33-cent range. Just, again, indications are that it should be a good quarter for us.

Q4 -- Q2, the consensus is 46 cents, up 12%, from 41 cents. Again, that's fine for right now. For the year, you're at $1.67. You can collectively earn $1.67 versus the, again, adjusted $1.45 this year. Of course, the $1.67 I would assume is going to go up to $1.69 or 70. The $1.45, of course, was reported at $1.48. That would reflect a number of about 15% increase.

I would assume that our guidance for the -- and --not would assume. Our guidance for the year includes 15%, has a range probably of 12% to 16%. And again, I'm giving myself a little downside protection, given that we're starting the year off with an economy that's not so great, although our numbers have been fine so far in the first quarter. And -- I'm sorry, in the first month that we have under our belt already.

I think I've made all of your writing hands tired now, and so with that, I'll turn it back over to Princess (ph) for Q&A.

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.

And we'll pause for just a moment to compile the Q&A roster.

Your first question comes from Emme Kozloff (ph).

Emme Kozloff (ph): Hi, Richard. I've got a question on new store openings. Can you talk about the 2000 store -- new stores that were opened and when you expect them to hit the revenue run rate to leverage SG&A? You know, given the sales trends, could that happen in Q3 or earlier?

Are you talking about 2001? I think you're talking about 2001...

Emme Kozloff (ph): Sorry. Right.

... market units. Well, you know, they were open for a partial year in '01. They had a bigger negative impact in fiscal '02 because they -- you know, again on an annualized basis, they improved slightly but on a total year basis, it was a bigger absolute dollar. '03 is when we start to see that. I think the fact that -- if I recall correctly, in our Q3 conference call, we indicated that the detriment to SG&A in the core warehouses relative to new units was 18 or 19 basis points, whereas in Q3 -in Q4, it was 15. That would indicate that trend that we're starting to see some improvement.

Our budget, by the way, this year is to -- again, and I think I've mentioned this to some of you before. If I look at the class of '01 units, in '02, again, in the class of '01 units, in '01, you know, lost X dollars. In '02, they lost about 8 million more than that, recognizing on an annualized basis it showed improvement. In '03, our budget is for those units to improve by about 20 million pretax.

So in terms of SG&A leverage, you know, I -- you know, just slightly less frustrated than you guys in trying to explain when it's going to happen, recognizing we do run a tight ship, we are out there looking at a lot of basic blocking and tackling things. You know, my guess, it's, you know, the second half of the year and we'll see.

Emme Kozloff (ph): Great. Thanks.

Your next question comes from Daniel Barry (ph).

Daniel Barry (ph): Good morning, Richard. You said earlier that you'd done price checks with your competition. I assume you meant by competition all your competition, not just Sam's and BJs.

We do pricing competition weekly in every regional -- every warehouse but also summarize in every region with not only our two direct competitors but all office -- all category dominant retailers, office products, home improvement, what have you, as well as all major supermarket chains in each location.

Daniel Barry (ph): Right. My question, though, is what do you see in pricing in these areas? I know supermarkets seem to be coming down, but what do you see generally in the pricing trends in your competition?

You know, I must tell you over the last few months while our core margin has improved dramatically, we have actually seen the spreads on a several hundred SKU market basket of goods compared to supermarkets, that spread widened slightly.

Daniel Barry (ph): How would that be if the supermarkets are lowering their prices, or claim (ph) to be?

Keep in mind with the exception of a few -- a very few items, perhaps, in some of the fresh foods areas where, you know, we allowed ourselves to get too low over time by keeping the same price point for 7 and 8 years, we have continued to lower prices while buying better. You know, I think that, again, you take any category, whether it's, you know, the hundred plus million light bulb business or the hundreds of millions of dollars of papers goods businesses, you know, you and I are in different weather, we have one brand or another of light bulb at home in our lamp.

And again, I use those as examples but those are two of a hundred examples on what I'll call the supermarket side of our business where, you know, we are selecting an item, not for brands of six sizes of the item, and by doing so, we have a tremendous amount of leverage.

The other thing that we've been enhanced by, we've really benefited over the last couple years by learning a lot about -- and becoming a lot smarter about global sourcing, which has lots of different leverage points. And I got to tell you, there's --we don't -- I don't see any slowdown in the money and the procuring ability of us to get more money and get lower prices by -- partly by being more efficient and working with vendors on everything.

When we can supply a component of their raw materials at a lower cost than them, we do it. When we can produce packaging at a lower cost, we do it. Not every instance. When we, you know, ship better, we do it. When they ship better, we have them do it. And again, I think the thing that -- it reminds me of the old anecdote and the question that we used to get about diverting of goods that, you know, years ago, diverted merchandise represented three or four percent of sales, but, you know, maybe that was only a hundred or two million of sales. You know, now diverted merchandise represents three or four percent of sales and it's billions of sales, a couple billion of sales.

There's no -- and the concern, of course, years ago is that, you know, that -- those supplies are going to dry up. How can you get more of it? The fact is that there is more out there and we can get it. We are taking advantage, I think, of being structurally in the part of the business, the warehouse club business, but by being an item driven business, we can drive that by using our buying strength and our selling strength on private label, we can do that.

We used an example in a recent investor presentation of - you know, sports drinks, where we've introduced the (inaudible) powered sports drink. We were already the lowest price on the leading national brands. Not only have the leading national brand prices to us come down, but we've switched a good chunk of the sales of those power drinks to our own item at a 20 and 30 percent savings to the already low price on the competitor's brand -- on the branded good, and we're working on a higher margin.

So all those little things add up, and that's why we are -- you know, again, we -- first and foremost, and I think Jim has reiterated this as strongly as he can in any -- in any format, be it one on one or at investor meetings -- and I've tried to do the same -- we're not going to do anything that jeopardizes our level of competition.

We have the ability, also, to skirt around items because we are an item-driven business. When an item in a given market, if somebody wants to sell something as a lost leader, we can choose to get out of it for a few months. Nobody expects to get anything at Costco, they just expect to see new things all the time.

Daniel Barry (ph): Sounds great. Thanks, Richard.

Your next question comes from David Schick (ph).

David Schick (ph): Hi. Good morning. Just wanted to know, you mentioned 40 warehouses, roughly, or about 50 basis points above cost. What have you learned so far about why they're above costs?

Ultimately -- I mean, the simple - the simple reason is management. I mean, you know, we're running the warehouses. It's, you know, just being on top of the front end. You know, keep in mind, you know, two-thirds of our SG&A, 70% of our SG&A, is warehouse payroll and benefits. We have to learn to be smarter. And, you know, it sounds, you know, limited but it's -- you know, this is, you know, straight across blocking and tackling. It's simple labor management. A lot of it has to do with that.

And by the way, a lot of it also has to go with going back -- you know, part of our greatness and part of our reason we're doing 100 million-plus in warehouses is we've got great facilities selling lots of great stuff. Well, clearly we've complicated life. We're certainly a lot less complicated than many traditional retailers. But we're more complicated than we used to be. We've got fresh foods, we've got perishables, we've got [inaudible] laws for food safety, we've got [inaudible] laws for propriety of personal information, we've got, you know, renewed safety standards because of accidents that -- knock on wood -- have been more severe in other retailers -- other, you know, warehouse format and category dominant retailers.

But at every juncture, you know, we've added labor - you know, looking back over the last five years, we've added supervisor levels. There's, you know, meat supervisors for every 10 or 12 warehouses. Not that that's going away, by the way. I want to say what we're doing is we're sitting down and -- with the operators, well, Jim is, and going through all of those to see where we can -- we can combine tasks.

The other thing is at central. As wonderful as we are in being lean and mean, and you look at some of the things we do, and I won't give any specific examples -- I'll give one specific example where -- a general example. You know, you set up something at central, they put out a procedure, and you've got 400 locations doing it. And nobody thinks about it until somebody says, why are we doing that? And there's lots of little things that we've already identified, and I don't want to go into them because some of them haven't been, you know -- literally, we're just -- three-four weeks ago were out at a two-day meeting to go through some of these things.

None of these are earth-shattering things. It's not like somebody new has come in here and said, you know what, we just have found a way to shave 20 basis points off everything in the warehouse. These are a lot of blocking and tackling issues, but it's not like we weren't doing this before, but there is certainly a renewed gases on figuring out how to get some more leverage out there. Because frankly over the last few quarters, we haven't done as good a job as we should.

David Schick (ph): Thanks.

Your next question comes from Jonathon Ziegler (ph).

Jonathon Ziegler (ph): Good morning, Richard. Good quarter.

A couple of questions. Can you give us an update on what kind of comps you think you need to do to just lever your SG&A to hold it flat, notwithstanding all you've said about your cost controls? And secondly, any guidance on comps in view of the fact that you're going to be opening more in existing markets and therefore there's going to be some self-cannibalization? Any kind of levels you're comfortable with?

First, let me take the easy one -- cannibalization. I think in the month of September, when we did a quick and dirty cannibalization factor, it was about 80 basis points.

Jonathon Ziegler (ph): Okay.

Probably about 30 or 40 more basis points than it had been eight or nine months ago. So -- and maybe the 80 goes to -- so incrementally it's been 30 or 40, in terms of versus what the normalized cannibalization was. Maybe that 30 or 40 goes up to 60 or 70 over the next few months as we have some more infills. But it's certainly less than a percentage point.

In terms of what level we get SG&A leverage, you know, I don't mean to sound, you know, curt or quick on it but, you know, we still believe that something in the 5% range -- but there's always -- as, you know -- some of it is cost structure. You know, healthcare costs, you're going to start hearing this from everybody, if you haven't already. There's new laws going in, you know, paid family leave, higher workers' comp claims per incident, all these things. We think we've done -- you know, in the last year, we had a lower number of workers' comp incidents per thousand hours of labor, and workers' comp claims went up about 10% in terms of like buildings. Go figure.

Jonathon Ziegler (ph): Yeah.

In terms of dollars. And a lot of that, by the way, is driven by the fact that, you know, nearly 40% or 35% of our company is in California, where we see the most extreme examples of increases.

So we are looking at all of that. I think that, you know, one of the comments I made here was that over the next few quarters, I think you're going to see six or seven basis points of increase year over year in healthcare and benefits. The good news is, as I mentioned, there's a few other things that we've seen finally turn the corner and go the other way, to the tune of only three or four basis points, however.

I'd like to think that we're still in the 5% range. I think we're going to -- I honestly think, though, that we're going to see a lot of benefit, once we get through this year, when we have now fully anniversaried the biggest percentage of new market units from '01 and we see some of the benefits from opening some of these new cities -- some of these infill markets.

But, you know, I'm sorry I can't be more definitive. I know we're working on all the little pieces of it, and blocking and tackling out there. And, you know, I guess as an offset to that, I feel probably a little more comfortable about our ability to improve margins to offset that, but clearly if for nothing else, we've gotten enough increase in SG&A, we should see that going -- you know, start going the other way. We'll have to see when. Hopefully in the second half of this year.

Jonathon Ziegler (ph): Okay. And going along with that, Richard, is -- I take it Jim is relenting now on letting you keep a little bit more in margin on gross. Is that part of the story? I guess you're saying you're still extremely anal on price, but that he's letting you keep a little bit more of the productivity gains.

Yes. And, you know, I think it was best said in our annual managers meeting in August, which was he and Jeff and my slide show, where he said slightly improving margins but not at the cost of our competitive edge. And I can tell you that -- I mean, we had a budget meeting two days ago, our monthly budget meeting two days ago, and one of the -- one of the 10 or 15 bullet point action points for the next four weeks is --or actually forever -- is he wants to -- he and Dick want to see the -- more of the specific detail of every pricing comparison we do out there, not only against warehouse clubs but against supermarkets and home improvement centers and office centers, because the numbers, again, indicate that they're going -- that the spreads are actually improving a little, even though our margins have improved (ph).

Jonathon Ziegler (ph): Okay. And finally, any update on when you might raise membership fee, if you might?

Well, you know, I -- certainly we might at some point. You know, history has shown that we've done it every three or four years. So history would indicate that it would be next September or the following September.

I don't think there's any rush to judgment on that. There's certainly no concern from our standpoint in terms of consternation about that. I think we feel invigorated by the fact that our -- that our renewal rates have continued at high levels, that an increasing percentage of members are opting for the Executive membership card.

So, I mean, the loyalty factor, knock on wood, is intact, and --but let's assume that it's two years from now and I'm -- and I'm picking that out from the air, Jonathon (ph).

Jonathon Ziegler (ph): Sure. Okay.

There's been no discussions on it.

Jonathon Ziegler (ph): Thanks.

Your next question comes from Sherry Ebert (ph).

Sherry Ebert (ph): Just wanted to follow up in terms of the SG&A leverage. You've mentioned a couple of times the second half of the year is when you're hoping to see that.

Can you talk a little bit about what's different in the second half of the year versus the first half of the year? And then, when you do start to see the SG&A improvements, can you talk about the magnitude you're expecting? I mean, $20 million in improvement ...

... know me pretty well.

First and foremost, the second half is further out, and I say that sincerely in the sense that, you know, I mean, looking over the last eight quarters, everything that we thought we could do, we did, up until Q3 and 4 when we missed it by, you know -- really we missed -- in my view, we missed our own Q3, you know, improving level of detriment, if you will. We missed Q3 by about, you know, 10 basis points.

If you take out the less bring-back for healthcare, which was a little bit of an anomaly in Q4, you know, really related to the whole year on healthcare, it was about 10 basis points. So, you know, excluding that. So my guess is that over the next couple of quarters, my hope is that it will be about 8 basis points. In other words, it will still be a little -- you know, in terms of that trend line that we had projected a year ago, we'll start improving on it, but from that 10 basis point higher level.

That's as close as we've come already. I mean, we have -- this starts with detailed budgets by warehouse and bringing them up. It does not include some of the initiatives that I just talked about. I mean, the initiative, again -- it's not going to save a lot of dollars to take 50 senior executives and have them at a zero increase for a year. You know, is it 1.5 million bucks or something like that? Or whatever it is, or a couple million bucks? Sure.

But it's also, I think, symbolic of the seriousness that we're placing on it. And we're looking under -- I mean, I had -- this sounds trite, but I had a memo recently from a customer -- last week looking at cell phone charges among staff people, and, you know, you get -- we're a big company and certain little things, you know, you have to make sure you're managing correctly. We found out that we've got, you know, some people on old cell phone charges because, you know, they missed the three memos that have come out over the last two years about the new program, and, you know, they're paying $100 a month extra than they need to be paying.

And this is, you know, 100 people, so there's 10,000 -- these are little things, but in the -- it's indicative of the fact that the word has gone out, turn over everything and figure out everything. And so we don't have this global thing where we're going to -- we don't bring in consultants. This is all basic tackling and blocking, and, you know, I do believe that the mix change is going to help us, and I do believe it's more like, you know, third and fourth quarter, not first and second quarter.

Sherry Ebert (ph): Okay. And when it happens, can you talk about what the magnitude might be? I mean, you mentioned that you're hoping to get a $20 million pretax swing in the '01 units, which would be pretty big from a basis point perspective.

Some of that swing -- that's not just SG&A.

Sherry Ebert (ph): Okay.

That's -- you know, in new market units, you start with a lower than average competitive margin and that improves, and new market units you have very little membership fee income and then you have more membership fee income. So clearly, you know, as a warehouse goes from 58 million to 68 million in that first to second year, in that example, you have got some sales -- you've got some improvement in SG&A. But that's more nominal.

I will try to work on that. I can't just - I don't want to just throw out a number because it would be guessing.

Sherry Ebert (ph): Okay. Fair enough. And then just secondly, I was wondering if you could provide any more information on the renewal trends by market or by age of membership. I know you did a broader offering of the new memberships in the new markets and just what you're seeing there.

Well, first, I can look on the what we have. I don't have it in front of me, that detail. In new markets, what we have seen is about a 30% renewal rate on the freebies. It has ranged from the mid-20s to the high 30s. What's very interesting is when we sign up about 50,000 new members, we see a higher renewal rate. When we sign up 80,000 new members, we see a lower.

So what we end up with is about -- it's been --it's been surprisingly similar. A year hence we end up with the same roughly, you know, 24,000 to 30,000 paid members -- about 32,000 paid members going into the second year, a combination of the lower renewal rate on the freebies plus about 40 weeks of those 52 weeks where they had to pay. You know, weeks 12 - weeks 13 through 52, if you will.

Sherry Ebert (ph): Okay.

But there's -- I must tell you that there's not a lot -- when I've looked at it in the past, we have not seen a big difference among - a big difference of change in renewal rates by region.

Sherry Ebert (ph): Okay. And then just last question -- sorry. In terms of your guidance that you gave for Q1, Q2, and the year, what kind of comp is that based on?

Something in the 5 to 6 range.

Sherry Ebert (ph): Okay.

Probably a strong 5.

Sherry Ebert (ph): Thanks, Richard.

Your next question comes from Bob Dribel (ph).

Bob Dribel (ph): Hi, Richard.

Hi, Bob.

Bob Dribel (ph): Quick question just for you. On the comps, just following up with what Sherry said, the last two weeks slowed a little bit. Are your expectations that they'll pick up for this month, and what have you seen since the month ended?

Well, we're only a couple of days into it, Bob. And on top of that, Columbus Day moved a week, so we had -- we started our Monday with a huge negative, as expected. When I say huge negative, still single digits, but for us, it's a negative. But that was expected. I'm sure every retailer out there that, you know, again, you've got your federal holiday so you've got a lot of shoppers a year ago that day. That will catch up next Monday.

Taking that out, you know, I don't see any big changes so far. You know, we are -- we're concerned because we watch the news every night.

Bob Dribel (ph): Right.

And it's the whole -- you know, the sky is falling, it's woe is everybody. This dock strike hurts us a little. I don't think - it doesn't help us. I think it hurts us less than others. But, you know, we've had good sell-through of the things that we do have. So I'm cautiously optimistic, but given what you see out there, there's nothing here that has showed us any difference yet in any big way, but we just have to wait and see. It's -- as we all know, it's hard to predict.

Bob Dribel (ph): Okay. Great. Thanks.

Your next question comes from Mark Miller (ph).

Mark Miller (ph): Hi. Richard, could you provide an update on international? It looks like the components of international that you provided, international margins kind of moved with the total company. Could you provide some color to that? And then I guess as you look out from a longer-term standpoint, what portion of the store growth of the warehouse growth would you look to come from international?

You know -- I mean, I think international is going to be relatively - you know, relatively speaking, a little slower growth. Maybe the same percentage but, you know, we've got a lot of focus right now on the U.S. When we opened, you know, a Roener (ph) Park, California or (inaudible), Washington, it is a no-brainer. It's harder to get those sites and so we've doubled our efforts in the real estate effort.

You know, clearly U.K. is profitable and growing. We just last week opened our 15th unit and we hope to open three or four a year. The Asia is slower. You know, our plan three years ago was to open a unit a year in Japan. This is our third year and we just opened unit number three. Our plan in Japan for the first three to five years is to lose a decent amount of money as we grow it and see if we can make the concept work in a market that's a lot different than the U.S.

People don't shop as often after work. They shop on weekends. And again, we're seeing progress, but I don't see any great -- we're not going to go from three units to 20 in Japan, and we're not going to go from -- if anything, percentage-wise we'll grow more in the U.K. But I still think it's a vehicle for us to look out five years from now that that will be a good baseboard to continue to grow our company, assuming in the -- you know, looking out six to 10 years, instead of one to five years, at some point things change in the U.S.

Mark Miller (ph): So as we think over the next five years, I think currently U.S. is something like 70% to 75% of total units. Looking out in terms of the incremental units, assume that the U.S. would be something higher than that?

I don't think you're going to see a big change just of the sheer size of that number over the next three or four years. I think it will be a very similar percentage.

Mark Miller (ph): Okay. The other question would be Sam's indicated at the meeting that there were 1,000 or 15 (ph) items that they felt they could not be beat on price. They had to be at least in line, if not lower. Any thoughts on how that might or might not impact Costco pricing on like items?

I can assure you we will visit them every day, and we will be the most competitive out there. Keep in mind when we do a study on 100 like items with another warehouse club in a competitive environment -- in a noncompetitive environment, it's almost 100 to zero, or, you know, or it's 70 to 30 same price to zero. Now, maybe I'm being a little extreme and biased, there, but pretty darned close.

In a competitive market, you might have -- we may both be the same price on an item, and I bet you on a hundred like items in a competitive market, at least 50 of the items were the same price. It's the other 50 where, again, it's skewed heavily towards us.

I -- you know, I think -- look, they are a formidable competitor. We have a great degree of respect and fear for them as we respected and feared them five years ago when they were making major changes to their concept, and we were fearful and scared and worked hard to do what we know how to do. I can assure you we're not going to fall asleep here. And we're going to make sure - you know, there's other ways to do that also, on both sides, both us and them.

Again, we think the 2% executive membership with the business member is an important thing. That's added advantage that we think we have, and it's something that frankly we think there is a --there is a competitive advantage and a barrier to entry, if you will, given the high-end nature of our business members -- the high-end nature of all of our members.

So, again, we're not going to lose sleep over it. We're going to work hard to make sure that we are the most competitive out there. And again, I --we're both -- the other area is that on some items, that they're going to be the lowest price on, and some items that we're going to be the lowest price on, are going to be some private label items and where there's -- or different sizes. There's going to be -- there will be ways around that that -- you know, we're both strong, rational competitors -- I would assume they are, and I know we are -- and we're going to be diligent on being competitive. I don't know what else to tell you on that one.

Mark Miller (ph): That's helpful. Thank you, Richard.

Your next question comes from Todd Slater (ph).

Todd Slater (ph): Thanks. Good morning, Richard. Could you explain just for us the strategy in not taking the credit cards at the pump, just in terms of what the offsetting benefits of the lower usage is?

Sure. When we first -- keep in mind, from our inception back in '83, or '76 in the case of price company, we took only cash and check, so we weren't the most convenient place to shop. We recognize, though, as debit cards and credit cards became more prevalent, or continued to be more prevalent, that we had an obligation.

We basically -- initially Discover and some private label suppliers, in our case household, came in with very competitive rates and good service. There's been the advent of the debit card. As we did all of that, and of course recently American Express over the last couple years, we feel that we can get -- it's the whole package, of course. It's not just the merchant fee, it's other marketing and co-marketing initiatives we have with our suppliers as well.

But the fact is that we recognized that we have a obligation to serve our members and we've seen an increasing penetration. When we opened gas stations, while in-store 60% of our trade was being tendered with cash and check, we don't accept cash and check at the gas station, so we felt an obligation to provide more alternatives, recognizing not everybody has an AMEX card, even though we'd like them to, or not everybody has the Costco private label card.

And so we -- or not everybody wants to use debit. So we, of course, started with MasterCard, Visa, and Discover as well. We don't have any special deals with MasterCard, Visa, and Discover. Our special deal - and again, it's a marketing -- it's a marketing partnership that's well beyond just the basic merchant fee with AMEX, but our deals with the others are lesser volume because frankly it's only at the gas station and online, not in store. And we were paying -- and it's considered, I guess, an offline transaction where, in other words, there's not an employee present to check your signature, in theory. And so there's a greater risk out there.

And it's a small transaction size, such that our merchant fees that we paid MasterCard, Discover, and Visa, were well in excess of 2%. On a gross margin item, gas, which fluctuates between zero and the low double digits. The effect -- first of all, the second thing is, it's not like we're making a lot of money out the rewrite (ph) right now anyway. Our feeling is, let's - you know, let's cut it off at the pass before it gets any higher because the penetration of those three cards was close to 40% out there at the gas station.

We recognize it would rub some members the wrong way, but we have an obligation to be able to sell gas cheaply and to make some money at it, and to serve our members. So we gave them a couple, three months notice. We, you know, putout take one application for AMEX and HRS Private Label. And we've seen a lot of people get those cards. And also, we initiated the Costco cash card, which is a store value card that they can use out there.

So the impact to us has been, in our view, a net improvement on the bottom line from a -- from the merchant fee expense reduction. Short-term, again, I think the gallonage declines, we've gone from being up 8% or 10% in gallonage, you know, five or six months ago to being down 15 %to 20% to this month being down, I think it was 9% in gallonage?

Yes.

So, you know -- and it's not even a full year yet. We're already seeing that dwindle. So people have figured it out and we try to communicate with them in the right way.

Todd Slater (ph): Did you -- did you have any measurable detriment in the comp on the rub-off --from rub-off sales in this decrease in gallonage?

My guess is it can't help, but it's -- we haven't measured it, and partly that's because, I think, again the original measurements were empirical. Like when we add the a gas station, what were the comps before and what were they after? When we did this, our comps have remained actually pretty strong and we haven't gone back to do that.

Todd Slater (ph): Okay. And just curious how you're looking at deflation in 2003 relative to your LIFO accrual plans.

My guess is that the -- and, you know, historical in Qs 1, 2, and 3, we take a LIFO charge of about 2.5 million. Based on current trends, we'd probably take no credit or charge in Q1.

Todd Slater (ph): So you're going to adjust it quarterly now?

Well, we always -- you know, no matter what happens at a given quarter, you know, the price of cash use could spike because of weather conditions 15% in the first quarter and then go back to below the price at the end of the year and all that matters is what the price is at the end of the year.

So in the past we've been, you know, generally let's do a small modest amount of LIFO charge and we'll true it up at year-end. This has been the unusual year. I mean, on a -- on a like -- let's assume there was the same amount of deflation in '03 as there was in '02, not that we have any idea what it's going to be. The only difference in my view is as we went through the year inspected of instead of taking the 2.5 million charge in each of Q1, 2, and 3 we take no charge, but we take no credit because it really depends on what the pricing is on day 365.

Todd Slater (ph): Right. That's helpful and then lastly a local question. You opened your new Portchester club against a pretty new club in Norwalk, and just wondering how that opening is doing and what kind of a net add are you seeing in that market and/or cannibalization on the other clubs.

It's doing fine. I don't -- I don't have the sheet in front of me but I just made a note and I'll call on you it. I'm not trying to hide anything. I just don't have the sheet in front of me.

Todd Slater (ph): Okay. Great. Thank you.

Your next question comes from Lloyd Seatman (ph).

Lloyd Seatman (ph): Hi, Richard. My question has been answered. Thank you.

Thank you.

Your next question comes from Linda Christensen (ph).

Linda Christensen (ph): Good morning, Richard. I had a question, well, relating to Sam's. They've kind of hinted that they're going to focus a little more on your markets, which I take to mean the West Coast at this point.

If you're seeing any evidence of that with new units, and just in general, this fiscal year, were you anticipating the -- kind of the competitive hot spots to be based on what you're seeing in real estate from your competitors?

Okay. Well, first of all, I owe you a call. I'll call you later. Secondly, as it relates to Sam's, I mean, it's not like they've ever backed off or asked our permission. You know, they've come into our markets for the last few years. Certainly they've indicated that there's a bigger focus on that, and, you know, again, if I go back to the last three or four months of budget meetings in terms of what they're doing in terms of openings and expansion, some of the things they're doing right now have been on the books already. You know, we'll watch them carefully.

I think a big advantage that we have relative to them is being the upscale warehouse club, I think -- I have a personal bias, of course, but I think that it's more exciting when we come into a new market that, hey, there's a new upscale club than when they come in our market. They're tough competitors but we're fortunate that they have some other formats that they are very excited about.

You know, we'll continue to watch them, as we do with their (ph) other formats.

Linda Christensen (ph): All right. What about just in general? I mean are there any markets you're particularly concerned about with respect to more competition?

We haven't seen -- Linda, we really haven't seen anything different in terms of our level of concern over the last six to nine months. You know, I mean, we've talked about in the past, in terms of the many new markets that -- you know, the 12 new states we've entered in the last five years, as we expected, and as we would expect Sam's to have reacted, the toughest - our toughest entry has been in Texas. Not in every city by the way. Some are better than others. Dallas-Ft. Worth, they were the -- I think they've acknowledged they were the most aggressive in relocating, remodeling, adding new units and so that's been a little tougher than plan.

But we're growing, and, you know, Chicago has been - you know, the markets like Chicago, Detroit, Atlanta, and others have been a little better than planned.

But I don't think there's been any heightened level of issues that we've seen.

Linda Christensen (ph): Okay. Thank you.

Your next question comes from Robert Toomey (ph).

Robert Toomey (ph): Yeah. Good morning. I have a follow-up question also on Sam's and the noises they've been making lately. Richard, can you talk a little bit about the economies of scale in purchasing that you have versus sort of the Wal-Mart juggernaut? And I know you've talked -- you addressed that issue a little bit but do you feel that you have the same economies of scale in purchasing that they do?

You know, every morning -- I say this tongue in cheek, but it's almost every true. Every morning Jim wakes up and reminds the buyers that, don't think you're smarter than anybody at Wal-Mart. No matter what our successes have been, they are four and five times our size.

On a per-team basis, we are probably two times their size on some items, but we have to recognize that, even if we perhaps buy more on a per-item basis than they do from a P&G -- I don't know if that's true or not, by the way -- you know, they're five times as much of P&G's business as we are overall.

They are very important and we are very important. I think the advantage we have is that -- versus a Wal-Mart or versus anybody that's a traditional retailer, is that we have -- we continue to get smarter every day on the components of production and manufacturing, the cost of the raw materials. We continue to get smart on -- in terms of, you know, using three competing branded vendors, recognizing we're only going to pick one of them for the limited SKU selection we have. We think that's an advantage that a warehouse company, be it Sam's or us or BJs, has over a traditional retailer, be it Wal-Mart, Target or Safeway.

I can just tell you -- and then the advent of private label. And again, you know, if it's 12% right now, or whatever, 12% or 13%, it's going to go to the high teens, but, you know, we can add an item, we can change an item, we can take a hundred million dollar branded item and make that category, if you will, of two items now, the branded item plus the (inaudible) item and drive sales -- lower the price point on Costco's market share on its (inaudible) signature by 20%, 30%, and actually raise dollars by 10% or 15% -- raise dollars of sales of the total category.

That puts added pressure on a branded good supplier to not only -- to work with us to lower pricing on their goods as well. So I think that that is not going to change. We had a -- one in particular item that I won't talk -- I won't give you the specifics on other than to say that we've recently lowered the price point on a key commodity supermarket item that does in excess of 100 -- excess of a couple hundred million in sales, and we lowered the price point by well over 10 percentage points versus --and we were already the lowest price in town. We raised our margin to -- much closer to our cap of 14 from a commodity margin.

And, you know, we're -- you know, our buyers are browbeating and, you know, chest-pounding saying that look how smart we are. And Jim and Dick reminded them, from our view -- and by the way, our competitors followed suit in terms of pricing -- our view is the competitors were all making more money. We were the schmucks not making the money. But the fact is we're going to get them competitive, and we'll make a little more money as well. So there's plenty of opportunities out there.

Robert Toomey (ph): Okay. And just one other question I had was, you mentioned gross margin earlier. Where would you see the -- the key benefits for your --in your ability to increase gross margin in fiscal '03?

I think it's going to continue. I think fresh foods is a strength, and again, that's the one area where we said we -- it is a signature area for us. We do -- we're very successful, and we deserve to make a little more margin than we've allowed ourselves. We've seen margins slip there, not because of inefficiencies in production -- the volumes have been fine. It's because we maintain price points for 8 and 9 years because it was a great price point.

We recognized that we also have to earn a living, and we -- other areas, again, are private label. Other areas are buying better and, again, keeping some of the savings. All those -- kind of the same old things. I think fresh foods is probably the one that's been a recent kick positive that will certainly last another couple of quarters.

Robert Toomey (ph): Great. Thank you very much.

Your next question comes from Derek Winger (ph).

Derek Winger (ph): Yes. Hi. You have convertible outstanding that is callable shortly. Can you give us your stance from the company's viewpoint in terms of whether you'd like to see that piece of paper continue to stay out there? I know that you issued some straight bonds that were above this rate fairly recently. Just if you could comment on that.

First of all, the straight bonds, it was a five-year deal where we essentially, the same week, swapped it into floating, such that we lowered our borrowing cost on floating to LIBOR minus 27, I believe -- n overnight rates. So, you know, right now we're, you know, sub-2% borrowing cost on that money and we just improved 27 basis points on that chunk of borrowing.

As relates to the convert, it actually - the fifth year anniversary was a couple months ago, a month-and-a-half ago, and so it's now callable at our discretion. There's no reason right now to call it. We have looked at doing a couple of things. Let me say, various investment banks have come up with ideas. They all have the same issue. They all are net positive present value on an expected present value basis, but they all can be a little negative or a lot positive, and of course my luck it will be in the little negative.

So we're exploring it. I wouldn't say there's any great sense of urgency. None of the alternatives we're looking at would make a big change in the number of diluted shares outstanding or, you know, the bottom line of the company.

Derek Winger (ph): Thank you.

I'm going to take two more questions, by the way.

Okay. Your next question comes from Gary Farber (ph).

Gary Farber (ph): Hi, Richard. A question - the Costco home, are you going to private label anything? And two, since there aren't a lot of high-end manufacturers, what about all the retailers out there? Is that an issue? And also, in Costco Fresh, do you plan on competing in the natural foods category?

As it relates to private label, I honestly don't know. I assume there's some - I assume there's going to be some no-name stuff out there, like pillows and -- or, you know, designer pillows or God knows what else, so stay tuned.

The second question was what on the home?

Gary Farber (ph): On the -- are you going to have an issue with -- there's not a lot of manufacturers out there and there's a lot of retailers. I mean, I don't know if you're going to carry Henry Don (ph) or those types of names since you didn't mention them.

Yeah. I'm not going to mention them until that day. We've had some on the fence and some have gone one way own some have gone the other way. We've got a good half a dozen of well-known names that you will all recognize out there. And one of the issues is, is that there has been a reduction over the last several years of leading national retailers that sell leading brand names. And, of course, in this economy, they're hurting a little bit.

What has happened is, you know, two times a year we have brought in furniture items between December 26th and the end of January, kind of after Christmas and before spring lawn and garden and sporting goods, and kind of early June to late July, which is kind of after lawn and garden and patio and before back to school and Christmas holidays. What -- we've frankly shocked ourselves a little bit, but have absolutely floored some of these people. We brought in a particular high-end, leading national brand bed - master bedroom furniture collection. It was one item. It was, I think, a five-piece set, you know, the headboard, the two side tables, the chest of drawers and the TV cabinet -- or the dresser and the TV cabinet.

And it's something that retailed for $8,000-plus that, when it was on sale would be somewhere around 6, and we were at 4500 or 4599 or something. You know, when we called up and said -- and we talked this manufacturer into doing it, you know, he said, how many do you want, Costco? I said well, why don't you build us a thousand of them? And it's like, we sold them in two weeks.

So we know that there's things that we can do in store. We know that in store, in the Costco warehouse, we're not going to have a 20,000 square foot furniture section, but let's see what we can do. If in a market like Seattle where two-thirds of our members are loyal, two-thirds of the households, rather, are members and are loyal, can we create something here.

We think the opportunity is right, given the fact of that presence out -- the lack of presence out there, and that -- and then our buying power, so we'll see.

Gary Farber (ph): Okay.

As it relates to Costco Fresh, I'm asking a couple of guys in here. Do you know about organic foods?

I have no idea.

Gary, I will call you back with that. I honestly don't know.

Gary Farber (ph): Do you expect it to drive existing memberships in new markets? Is that one of the ideas behind this?

Well, the big idea behind it is again on the fresh side, that evolved from all of the work that we've done in fresh foods over the last 15 years, including visiting every specialty fresh food shop all the time everywhere in the world, as well as, you know, the -- kind of the evolving Costco version of something if we ever got a small site in Manhattan. Not that that's happening right now. But -- so there's that ...

(inaudible)

And organic, I'll have to find out. But keep in mind, whatever -- I think we're doing today, or I'll find out what we're doing today. I'm sure it will change by the time we open next August or September.

Gary Farber (ph): Okay. Thanks, Richard.

Your last question comes from Michael Egsten (ph).

Jen (ph): Hi. This is actually Jen calling in for Michael Egsten (ph). Michael (ph), I was wondering if you could give us the dollar figure for the depreciation and amortization in '03, and also what you expect your share count, both primarily and fully diluted in '03.

Okay. In '03.

Jen (ph): Yes.

Hold on a second. Accumulated depreciation for fiscal '02 is depreciation and amortization is 342 million.

Jen (ph): 342 million. And that was for ...

Hold a on a second. Hold on.

(inaudible)

Oh, 359. I had to add two lines, sorry.

Jen (ph): So 359 for this year.

'02 versus 318 for '01.

Jen (ph): 318.

'03? No, no. For depreciation in '03.

Jen (ph): Okay. And expectations for '03?

We're (ph) going to add about 40 million. In terms of share counts, do you have the quarterly (inaudible) for this year?

(inaudible)

Oh, yeah. Good point that Bob Nelson is making. I think we ended the year with a fully diluted share count of about 479, and for the quarter, it was 479.2 million. For the year, it was 479.3 million.

While we will continue to grant options, as we have in the past, the one issue is stock price. You know, our stock price, as you know, for -- I would say -- I don't have the exact number, but probably the average stock price for all of '02 was in the high 30s. You know, God willing we'll see that again in '03, but recognizing we're starting the year in the low 30s. That has a big effect on the treasury method of how many options go in the fully diluted calculation. You know, if the stock stayed where it is now, even with stock option grants, I would see it flat or down a little bit, but I think a fair number to be conservative would be assume that it goes up, you know, 3 million to 5 million shares, maybe, incrementally a million a quarter, and if -- and hopefully -- and that would be more likely if the stock was going up a little.

Jen (ph): Okay.

And if the stock doesn't go up, then it will come down a little.

Jen (ph): Okay. Thank you very much.

Well, thank you very much for the call. I know it went on a little longer than planned. If you have any questions, we'll be around. Thank you.

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