好市多 (COST) 2004 Q2 法說會逐字稿

Good morning, my name is Melissa and I will be your conference facilitator today.

At this time I would like to welcome everyone to the Costco Wholesale Corporation second quarter earnings conference call.

All lines have been placed on mute to prevent any background noise.

After the speakers's remarks, there will be a question and answer period.

If you would like to ask a question during this time, simply press star then number 1 on your telephone key pad.

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

It is my pleasure to turn today's call over to Mr. Richard Galanti, Chief Financial Officer.

Sir, you may begin.

Thank you and good morning to everyone.

This morning I would like to review with you several items, of course.

To begin with, second quarter fiscal 2004 operating results for the 12 week period ended February 15.

For the quarter we came in at 48 cents a share, up 9 cents a share, or 23%, over last year's second quarter.

Of course, last year's second quarter results included a 3 cents per share after tax hit to earnings to increase our workers' comp reserves.

The 48 cents per share reported results were above, of course, the 44 to 46% guidance that I provided you back in December; on our first quarter conference call and 1 cent above the current first call consensus of 47, which, of course, had already been ratcheted up from our December guidance each month as we reported strong comps in December and January.

On an apples to apples basis, excluding workers' comp charge last year, we showed a 14% earnings increase.

In terms of sales for the quarter, our 12 week comp sales figure showed an increase of 11%, which is the same comp figure for the fiscal year-to-date 24 week period as well.

With regard to our four-week February comps, company comps were also 11%, 9% in the U.S. and 21% international.

Other topics I will review this morning are recent and upcoming opening plans.

We have opened a total of 11 locations since the beginning of the fiscal year on September 1st, nine in the U.S and two in Canada.

These 11 are consolidated, of course, into our operating results.

In addition we've opened two additional units in Mexico where we do not consolidate, those are accounted for on an equity basis.

All but two of these 11 openings occurred in the first fiscal quarter, and we expect seven more openings by fiscal year end.

I'll also discuss with you, yet another, Emerging Issues Task Force, EITF, accounting requirement.

This one is known as EITF 310.

This is something that is prospective that will impact sales over the next four quarters, but not the bottom line; and, again, beginning next quarter in Q3.

I will go into that in a minute.

I'll also talk about our ancillary business results, our line results, our membership results and, of course, our balance sheet.

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 Securites Litigation Reform Act of 1995.

These statements involve risks and uncertainties that may cause actual events, results and/or performance to differ materially from those indicated by such statements.

The risks and uncertainties include, but are not limited to, those outlined in today's press release as well as other risks identified from time to time in the company's public statements and reports filed with the SEC.

With that said, sales for the quarter were up 14.2% from -- to $11.3 billion this year up from last year's second quarter $9.9 billion.

Again on a 12 week to 12 week comp basis, 11% comps.

For the quarter, our 11% comps were a combination of an average transaction increase of around 6% for the quarter and an average frequency increase of around 5% during the quarter.

Included in these 11% comps, of course, is the strong FX, which represented about 270 basis points boost to the comps, and cannibalization year-over-year represented a hit to comps of around 77 basis points in the quarter and a like amount for the month, by the way.

For the 11% comp for the four week retail reporting week of February, transactions and frequencies switched.

Transactions were up 5% and frequency was up 6%.

And FX which, again, for the quarter was 270 basis points is starting to soften for month it was 228 basis points.

Then, again, as I mentioned, cannibalization is still about 3/4 of a percentage point.

Let me give you some quick geographic and merchandising break downs for sales both for the second quarter and for the four-week month of February.

The northwest region was 5% for the quarter and 4% for the most recent four-week month.

California was 11% and 10% during those two time periods, helped, of course, by the supermarket strike in southern California, which the strike was just voted to be ended this past weekend.

Northeast was a 7% in Q2 and an 8% in the month.

Southeast an 11% in Q2 and a 9% for the month.

Midwest 15% and a 14%, putting total U.S. at 10% for the quarter and 9% for the month.

Canada in U.S. dollars was 20% for the quarter.

Parenthetically for the quarter it was a 2% in local currency.

For the four-weeks of February we have actually seen a pickup, it was 21% in U.S. dollars; but, more importantly, in local currency coming from a 2% local in Q2, it's a 6% local increase in local currency in February.

Other international was 21% in the quarter, again parenthetically 11% in local currencies and 21% also for the February month, 7% in local currencies.

So, again, both comps for the quarter and the month total company 11%.

In terms of merchandise categories, food and sundries was 10% in Q2 and 9% for February.

The Q2 numbers helped a little bit by strong Canadian tobacco sales.

Hardlines was 13% for the quarter and continued strong at 10% for the four-weeks.

Most categories, most hardline categories are helping, most particularly majors, which is electronics, hardware, automotive and toys.

Softlines, which was 3% for the quarter, showed strength in February, up 11%, so we've recovered nicely.

In softlines we were at 2% comp for all of last year, 5% in the first quarter, 3% in the second quarter, and am happy to say we are at 11% in February.

The renewed strength in softlines was helped really, again, broadly based in terms of the basics of softlines, housewares, domestics, small appliances, home furnishings, as well as jewelry.

The only real weakness that we're seeing in softlines, as I'm sure the whole industry is seeing, is overnight photo processing and film sales, as there is a switch to digital.

Fresh foods continues strong, 17% for the quarter, 16% for February.

Pretty much broad-based strength there, including meat, produce and deli.

Ancillary, up 23% for the quarter.

In the quarter's 23% number, without gas it was 19%, so, again, you know, broad-based strength there; and similarly in February, it was 20% comp and 20% without gas as well.

So, that, again, continues, those are all still good going businesses.

Moving down the line items of the income statement, I will start with membership fees.

Membership fees were $218.8 million or 1.93% of sales; up 13% in dollars from $193.8 million last year, and down 2 basis points as a percent of sales.

Total dollar increase was about $25 million, pretty good showing given the very strong comps in terms of percentages even.

In terms of memberships, we continue to benefit from the good renewal rates, strong renewal rates, as well as increasing penetration of the executive membership card both in the U.S. as well as the recent rollout of the card into Canada back in the first quarter.

At quarter end, gold star membership stood at 14.8 million, primary business 4.7 million, business add on 3.6 for a total 23.1.

That's about 100,000 less than the beginning of the fiscal year with a little more than 100,000 being gold star; and again that's mostly attributable to the anniversarying of some of the freebies in some of the new markets we did last year, and strength and increase of about 100,000 in the primary business.

In terms of membership renewal rates, they continued strong at the 86% range, both 92% for business and 83% for gold star.

Going down to gross margin--going down the income statement to the gross margin line.

During Q2 reported gross margins were 5 basis points lower year-over-year, from a 1089 last year to-- from a 1084 last year, excuse me to a 1089 this year.

To give you some color on that, we will do what we normally do in terms of showing you the components of it.

The core margin, which was down 16 basis points in Q1, was similarly down 16 in Q2.

As in Q1, a lot of this impact is mix changes, ie. lower sales penetration of the core businesses versus ancillary and international.

In fact, of the four core departments, three of them, food and sundries, hardlines and fresh foods all had higher year-over-year margins.

Softlines was down, in part because of the weak sales of 3% comps in that quarter.

Again, the basic core departments in the aggregate showed improvement year-over-year.

There was a little bit of timing issues year-over-year for a few basis points, but that's always going to happen.

Two percent reward was a detriment to margin of 11 basis points, again, this is expected with the increased penetration of the rollout of the executive membership program into Canada.

Ancillary businesses, better by 9, as I mentioned to you back in December on our Q1 conference call when we had a huge benefit to year-over-year margins; as related to ancillary businesses.

We picked up, if you recall, 42 basis points in the first quarter.

Here we are picking up 9 basis points year-over-year.

Again, slightly improved year-over-year gas margins in Q2, but nothing like Q1; and no real surprises here.

International, pick up of 5 basis points, again as expected.

LIFO, 0, no change year over year.

In terms of LIFO, we took no charge both in this year and last year's Q2.

As with the previous two-years, and into this year, we continue to see slight deflation year-to-date.

But we are seeing some trends of some inflation in some categories, again, being more than offset by deflation in others; but the inflationary categories seem to be gasoline, which of course we already know what is happening in gas.

Some food items like vanilla and butter and some meat products; but, again, still being offset--more than offset by some deflationary areas items as well.

Now the last component of yar-over-year gross margin variance, and I spoke to you about this on the December conference call; is the new accounting treatment requirements for vendor incentive monies.

I touched on this on our December 9th conference call, stating that the impact was more quarterly timing than fiscal year timing.

In fact for the whole fiscal year '04, the impact to Costco was to be about half a penny or $4 million pretax, half a penny a share after tax.

This one, which again I talked about last time, impacted negatively, Q1, and a small positive in Q's 2, 3 and 4; we expect.

It was EITF, Emerging Issues Task Force, 0216; technically known as accounting by a customer for certain consideration from vendors, also known as how the retailers account for rebates, advertising revenues, slotting allowances, etc.

In our case the timing impact relates mostly to margin dollars we received from vendors where we publish our monthly Costco Connection magazine, our cookbook, and several other publication items.

As I shared with you on December--in December, the timing adjustments by quarter will either increase or reduce gross margin dollars as follows:

And, again, the impact in Q1 was a detriment to margin of $32 million, or about 31 basis points.

In Q2, it benefited margin by about 9 basis points-- by about $9 million or 8 basis points.

Similarly, we would expect a positive of about $8 million and $11 million respectively in Q's 3 and 4, so that, in terms of the components or margins, that should help us in the next couple of quarters as well.

I will I will talk to you about this new EITF in a moment after I review S,G&A.

In terms of gross margin outlook for the rest of '04, and into years beyond, again we feel overall our margin outlook is fine.

As we stated previously, we believe we can be competitive and still improve our margins over time, but we're not going to see a straight line and we'll ask you all to stay tuned; again the core specific departments did show some improvement.

That being said, again, if you look back at your notes from last year, in our third quarter, last year's gross margin; that will be a tough comparison because last year in Q3, again, like this year, we had a very strong ancillary business margin component in Q2.

Last year in Q3, the ancillary business component to gross margin percentage added 38 basis points to the company's overall gross margin.

Again, with very strong gasoline profits.

That will probably not be the case this year, and so we will just have to see where that comes out.

In terms of ancillary businesses, we have opened 10 pharmacies during the fiscal year, to be at 347.

We have opened nine food courts, to be at 402.

We have opened nine one-hour mini labs, to be at 398.

We have opened nine optical shops, to be at 386.

We have 11 print centers.

We've opened 7 hearing aid centers, to be at 139.

And 10 gas stations, to be right at 200 at quarter end.

Again, in total, ancillary business cornps were 23% in the quarter and 20% for the month of February; with 19 and 20% comps for those two periods of time, excluding gas.

So overall, ancillary was pretty strong.

Moving to SG&A, I'm pleased to report, finally, a little progress was achieved in Q2, even excluding the one-time workers' comp charges; and helped of course by this quarters strong comps.

In Q2 of '04, as you will see below, our SG&A year-over-year was lower or better by 18 basis points, coming in at 957, 9.57% of sales this year versus 9.75% of sales last year.

As I have asked you in the past to jot down a few numbers, we will separate the components of SG&A into six line items: core-the core warehouse business, central, ancillary businesses, international, stock options, and workers' comp; and then of course a total.

If you look at the core, back in '03 for the entire year, the core was worse or higher by 19 basis points.

In Q1, it was worse or higher by 5, and I am happy to say that in Q2, it was lower or better by 6 basis points.

Core central, which was flat in '03 for the whole year, year-over-year.

In Q1 '04 versus Q1 '03 it was better or lower by 6 basis points; in Q2 it was better or lower by 5 basis points.

Ancillary, which was minus 4 or worse by 4 basis points last year, it was worse by 7 basis points in Q1 and worse by 8 in Q2; again has to do with the increasing sales leverage of those areas-- sales penetration of those areas.

International worse minus 7 in Q3--in '03, minus 1 in '04 and minus 3 in '02, minus being worse.

Stock options, again, this is now year 2 of accounting for stock options and expensing them; that represented 3 basis points in all of '03, as we really started in earnest in the middle of '03 when we did our annual grant--our big annual grant.

For Q1 '04, it was a 5 basis point hit to SG&A.

Similarly in Q2, it would be 5 basis points.

Workers' comp, again we had some unusual things going on last year.

In--for the whole year, workers' comp represented 9 basis points last year, or higher by 9.

In Q1, it was 3 basis points higher, again, we took it-- if you recall from our Q1 conference call we added, on top of higher accruals, another $3.5 million .

And of course in Q2 '04 given, that we had a $26 million charge last year, and this year, that would be year-over-year benefit of 23 basis points or lower.

So all told, it was 42 basis points higher or worse last year, with 15 for the first quarter; and plus 18, or lower by 18 for Q2 '04.

Now, I want to focus on the core for a minute.

The core warehouse SG&A which, again, was better, or lower, year-over-year by 6 basis points; this is the first time that it's been better, or lower, year-over-year in 16 fiscal quarters.

And the 6 basis points of improvement in core included a hit of 3 basis points for first year new warehouses, which again is diminishing as we change our mix towards more existing markets; and it included a hit of 12 basis points related to employee healthcare, benefits and workers comp costs.

I think that latter part--point is important, as I will explain in a minute.

So even with the 15 basis points of negative hit to core SG&A, the core came in at, you know, lower or better by 6 basis points.

Again, strong comps certainly helped that, but we think that's been moving in the right direction in the quarter.

In terms of worker comp, I stated back in December that despite some legislative changes in California workers' comp program that were effective January 1, actuarially we would not expect to see or make any changes to our accrual assumptions which continue to be increasing, not decreasing, for up to nine months out.

That is probably now three to six-months out and we're hopeful that the accruals will come down, or at least flatten out, but we will have to wait and see.

With regard to healthcare, as you know, effective October, we implemented changes to our healthcare program.

The big impact would start come January, when all existing employees start their new year with, you know, with deductibles--payroll deductions, deductibles and co-pays.

So we would expect, as I mentioned a quarter ago, we'd expect the impact of that, really, to start in Q3.

Some of you may ask, well wait a minute, in Q2 you had at least six weeks of --since post-January 1st.

The way healthcare works though, is that a lot of people, given your co-pays and deductibles are on a calendar basis;

November and December are always very busy for healthcare usage because people are saying hey I have another pharmacy appointment --cleaning to get in before the end of the calendar year or I will loose it.

Or, I've got a free prescription of glasses that I got to get in before December 31st or I will loose it.

So what happens is that you got a lot of physical activity going on in November and December and it's mitigated, therefore, in January after that period of time.

So really we expect the impact of healthcare and the changes we made to start coming in earnest in Q3.

In terms of SG&A outlook for the rest of the year, it will depend, of course, on where comps come in each quarter.

We have blessed with good comps to date and we will see where that goes.

By fiscal year end we would hope to be close to flat year-over-year; and possibly a little higher, but hopefully we'll go to flat and then start to see that go in the right direction.

Certainly, the two biggest components, workers' comp and healthcare, we know that there are things in place that should start to help that.

Let me take a moment to discuss here with you the new EITF accounting rule known as EITF 310.

I always feel when we talk about these, that we seem to be the first retailer out there and then the one that's impacted the most; whether it's workers' comp or the other EITF or this one.

Partly in the case of these vendor monies, is it's because we do so many direct deals with our vendors and certainly the success of our own magazine, the success of our cookbook, the success of the passport and wallet programs, and specially negotiated rebates; all these things impact us a little more greatly.

In terms of EITF, this one's known as 0310, or EITF 310.

I will call it a cousin of EITF 216, but whereas EITF 216 intended to defer certain gross margin dollars and, therefore, earnings into subsequent periods and did have a slight deferring net impact to the negative this year;

EITF 310 deals with certain manufacturer's sales incentives to retailers that are reseller or retailer specific, rather than broad-based to many resellers.

The big deal here is coupons.

I will distinguish between newspaper coupons which supermarkets and traditional retailers get are broad-based, and a lot of retailers accept them and it's not a separately negotiated deal; and those specifically negotiated between that retailer and a manufacturer.

In the case of the former, there's no difference in change, but let me give you a very simple example here and we'll go through this.

The impact of 310 is to reduce sales and cost of sales by the same same amount of dollars.

Therefore, no change to gross margin dollars are to bottom line, but an increase in gross margin percentage and SG&A percentage; because reported sales will be slightly lower.

Under EITF 310 rules, I will go back to the supermarket example to show you what's not impacted and how it does impact us instead.

A newspaper coupon, for example, let's say it's Tide detergent, that is redeemable at any other supermarket or other traditional retailer would not reduce the seller sales figures; such that let's say the supermarket buys tide for $8 and they sell Tide for $10.

The customer pays $9 in cash plus presents the cashier with $1 off newspaper coupon.

To the supermarket, they will still report $10 in sales, $8 cost of sales, and this example, $2 gross margin, or 20% gross margin.

However, if the coupon was, let's say, I'll use an example of Safeway, Safeway negotiated and Safeway only specific.

EITF 210 would state that the sales are now $8, not $10, that's the $10 minus $2, and cost of sales instead of being $8 are now $8 minus $2, or $6.

Gross margin dollars are still the same, it's just $8 of sales minus $6, so it's still a $2 gross margin; but the gross margin percentage is now 25% instead of 20% because it is $2 on $8 instead of $2 on $10.

Similarly SG&A dollars wouldn't change, it has no impact on SG&A dollars, but on a lower sales figure SG&A percentages would rise.

This is an extreme example but I think it shows the point I am trying to show here.

For Costco, the impact of EITF 310 which begins for us in Q3 will be to reduce current annual sales and cost of sales by about $400 million during the coming 12 months.

It is largely because so many of our deals related to our passport and wallet programs and several other customer rebate programs that are Costco cost specific, and this is versus general newspaper coupons redeemable at a variety of outlets.

For the upcoming four fiscal quarters, that would be Q3 and 4 of this year and Q1 and 2 of next year; our reported sales dollars will be lower by about $400 million on an annual basis; or about 80 to 85 basis points.

It will reduce cost of sales dollars by a like amount.

Therefore, gross margin dollars and SG&A dollars won't change, but gross margin percent and SG&A percent will.

On average over these next four quarters, about a 10 basis basis point increase year-over-year in gross margin percent and, likewise, about a 10 basis point increase in year-over-year SG&A percent, skewed up a basis point or two higher than those numbers in Q3 and Q4 when we have the higher proportion of those $400 million; and a little lower than the 10 basis points in Q's 1 and 2 next year.

Again, no dollar impact to anything but top line sales, but for the next four fiscal quarters this will be something else to drive you guys a little crazy.

Next on the income statement is preopening expense, by the way, the direction that we have given in the past do not include that delta so you need to adjust your numbers accordingly.

Preopening expense was $7.1 million last year, or 7 basis points as a percent of sales; and there was $2.9 million lower coming in at $4.2 million this year, so 3%--3 basis points lower or better.

Quite a bit lower year-over-year as lower opening related to fewer new warehouses in the quarter.

Last year in Q2 we had five fewer openings, this year in Q2 we actually had one opening; but this year's figure had a little carryover from Q1's openings when we opened a large number of openings, no real surprises here.

In terms of asset and provision for impaired assets and closing costs, last year in the quarter we had a $4.5 million charge, this year the number was $3 million; again, no surprises here.

If you take all this into account, all told operating income for the second quarter was up $60 million over last year's figure or up 20 basis points--or up 20% to $355 million this year from $295.1 million last year.

Again, excluding the $26 million workers' comp charge that we took in last year's Q2, operating income on an apples to apples basis would have been up $34 million or 11%.

Not bad considering, you know, no improvement yet in healthcare and workers' comp, which I mentioned earlier.

Below the operating income line, reported, reported interest expense was essentially the same year-over-year, Q2 coming in at $8.3 million versus $8 million in last year's Q2.

And interesting income and other was quite a bit better--higher year-over- year by $4 million, $13.1 million this year versus $9 million last year.

The two biggest components of that $4 million higher income figure for interest income and other was higher investment income earned on higher cash balances and higher earnings in our Mexico operations.

Overall, pretax income was up 22% versus last years Q2, again, excluding the workers' comp charge, pretax earnings year-over-year were up 12%.

In terms of our effective tax rate, as you recall back in '02 it was 38.5%, dropping in '03 to 37.75%, and in '04 at Q1 it was at 37%; as it was in Q2 as well flat at 37%.

For estimating purposes I would continue to assume 37% for the remainder of the year.

If anything it might be 1/10 or 2 lower than that, but we'll assume 37% for the time being.

Now for a quick run down of the balance sheet as of February 15, cash and equivalents $2 billion 288, inventories $3 billion 642, other current assets, $569, total current assets $6 billion 499, net PP&E $7 billion 203, other assets $575, and total assets, $14277.

On the balance sheet side, short-term debt of $44 million, accounts payable of $3 billion 268, other current $2 billion 275, total current liabilities $5 billion 587, long-term debt $1 billion 313, deferred and other $204, total liabilities $7 billion 104, minority interests $61, shareholders equity $7 billion 112; again, totaling $14277.

Plenty of financial strength, needless to say.

In terms of accounts payable, still ticking up a little bit, at last year I reported accounts payable as a percent of inventories or vendor financed was 81%, stood at 90% this year.

If you take out nonmerchandise payables it relates to construction activities, last year was 81% versus 83% this year so, again, continuing to improve turns and get better dating from vendors.

Average inventories per warehouse were up actually about $700,000, or about 9% per warehouse.

About $200,000 of that is the FX impact, just the the fact that the foreign dollars when converted into U.S. dollars show higher because of the weak U.S. dollar.

We did have some buildup in California given the strength in southern California with the supermarket strike going on.

Also we saw, probably the biggest other department, was customer electronics inventories.

That is good news, we are seeing more brand availability and sales strength and higher ticket items like plasma TVs.

In terms of cap ex last year we spent $805 million.

I would estimate that our fiscal '04 cap ex will be closer to that figure of around $800 million as a few of the openings have slipped into next year.

In terms of Costco online, that continues to grow great guns, up 64% sales in Q2 and 62% year-to-date.

In terms of expansion, we would expect to get three openings in the third quarter, and in fourth quarter, five or six new openings plus one relo.

That would give us somewhere around 18 locations open for the year, or about 5% unit growth and 6% square footage growth.

That number is down from our original estimate of around 25, as we saw during the year several units which were--going back a year ago, which were planned for the last few months of the year, couple of them died and many of them just slipped into next year.

Fiscal '05 should be quite a bit more expansive, as several this year had been delayed; again, delayed for zoning and permitting and construction, no other reason.

Finally, before I turn it back to Melissa for Q&A, let me give you some updated direction.

As you know, looking at last week's First Call, First Call estimate for Q3 was 36 cents.

A quarter ago we had provided guidance of 34 to 36.

I assume that the 36 had, again, had been ratcheted up as we showed good strong sales back in December and January.

I think it's fair to to bring the range up a penny at this point.

Similarly, last--in the First Call, the consensus was 57 versus our prior period guidance for fourth quarter of 55 to 57, I think it would be fair to bring that up a penny as well.

That would bring then the range for the year, which we had previously discussed as somewhere in the $1.61 to $1.73, recognizing we beat Q3 by 3 cents, that somewhere in the $1.73 to $1.76 range which would be somewhere in the 13 to 15% range for the year.

Some of you I'm sure are going to suggest that we're being a little conservative here.

We choose to be that way and we'll see how we do, see where sales continue to go and see how we can make progress on margins and expenses.

With that I'll turn it back to Melissa for Q & A. Melissa?

Yes, sir?

At this time I would like to remind everyone, in order to ask a question, please press star then the number 1 on the telephone key pad.

We will pause for just a moment to compile the Q&A roster.

Your first question comes from Deborah Weinswig with Smith Barney.

Deborah, your line is open.

Good morning, Richard.

Can you be a little bit more specific on the store openings?

I think last year, in fiscal '03, 30 were planned and 24 were done in the expectation then that six of those were moved into this fiscal year, and now the guidance had been for for 25 and now we are looking at 18 to 19.

So, can you give us a bit more detail in terms of, you know, what the issues are and if there's any kind of focus going forward, in terms of being more aggressive on maybe looking at 35 so you can get 30 done or something along those lines?

The big thing is it's harder to get units done today.

We have increased our real estate efforts, when we started the year, I mean we take our real estate department's list, which is under the direction of Jeff Brotman and Paul Moulton; and has certainly been reviewed by Jim and the other the operators, and recognizing that any list includes openings that, not all- using this year as an example of 25.

Back in August last year, there probably 12, 13 of those that were signed, sealed and delivered or even under construction assuming they opened September and October of last year.

The other ones are all in process, some of them are signed, they're agreed to pending zoning, zoning approval by the local community.

Some of them, we feel, you know, optimistic about, and, so, okay, if all things go well.

Inevitably some fall out of bed.

We have a lot of, as an example, two of them in the U.K.

We had two planned in the U.K. this summer.

Both are now under construction, but are going to open in the fall.

I think it's fair to say, over not only the last two year, but the last couple three years that we put out our best guess but we've seemed to miss it by five or six.

I would guess that come July and August, when we provide direction for '05, we'll have a number more like 30, which then you should probably put in your model 25.

It does go more like that.

I can assure you, maybe there's one or two units that we decided not to do, I can't think of those off the top of my head, probably in a new market or something, and we said let's hold off on that one.

But the vast vast majority of any items are just deals that, you know, didn't get done; and a couple of times, we will loose out on a deal.

We were negotiating, we felt we had it done, but not signed and inevitably it fell apart.

We are out there I can assure you very aggressively.

If it were up to Jim and Jeff in '05 and '06 we'd try to get 35 a year opened, I can say pretty matter of factly that my guess is our direction--come summer our direction isn't going to be 35 for '05, it will be somewhere in the high 20s or 30.

Inevitably if the crystal ball works the way it has the past few years, we'll do something more like 25 and actually get the 25 done.

That's as good as I can get there.

Okay and with the majority of your new stores still being opened in existing markets, might there be opportunity in markets that are still untapped?

There's not a whole--even what we call new markets today, they are not as new as they were two years ago, but they're still opportunistic.

We have four locations in Atlanta.

We would expect that to more than double over the next few years, we've gone from 0 to 10 locations in Chicago, we've got more scheduled for there, including one more, I think, one more year.

We still look at existing markets like California, where, you know, last year of course we opened six in the bay area; and I think as Jim mentioned to somebody recently, unfortunately, you can't roll these out one every two months, sometimes they come all at once or one every four months.

I think there's still plenty of opportunities both in existing markets and new markets.

Domestically, I don't think there's are a lot of untapped cities that we're planning to go to.

We did open--or we either recently opened or are getting ready to open in Myrtle Beach, in March, that's a new market but it's probably a one unit market.

We recently opened a second unit in Alabama, in Hoover.

So I think that, you know, I think if you look back in August, at our analyst meeting out here where Jim put up some numbers saying that the 320 or so units that we have in the U.S, we think that 10 years from now could be 600.

You know, it doesn't take a lot to say what is the low end of that number; you know, certainly, 450 or 500 which, again, could get you up to, certainly back to the 25 plus units a year.

So we are working on it.

Okay.

And can you also give us an update in terms of the executive membership penetration, not only in the U.S. but also what you've seen in Canada; and any trends you have seen in those numbers and how they shop differently than, for instance, gold star business member?

Again, they are both gold star and business become executive members.

We are off to probably to a little faster start percentage wise in Canada, recognizing that several years ago, about eight or ten years ago eastern Canada had some type of-- not an executive membership program, but some type of reward based affinity program; and, the-- we have I think close to 200,000 Canadian executive members just in the last four or five months since we rolled it out up there.

These members comp at a much higher rate and they start at I higher rate because they tend to be skewed towards the business members or the high value gold star members.

Inevitably, I think what you'll see is--and we saw that in that hit to margin spiking back up with a rollout of this in Canada; inevitably what you will see is a little bit of adverse selection in the first instance, somebody is paying and extra $55 and they're already spending $20,000, $30,000 a year with us and they'll get a $3300, $400, $500 reward check.

But there are many in that mid-range that are quickly going to catapult their sales growth to higher levels.

I know what we saw in the U.S, that it took probably into year three where we felt that it was profitable all in, and continues to improve from there.

We're, of course, now in year five in the U.S, and Canada is, of course, a lot smaller.

So it's a program that we, needless to say, we wouldn't have rolled it out in Canada if we weren't committed to it.

We think it is an important difference, and it's been a boon to our business long-term.

Great, thanks so much.

Your next question comes from Emme Kozloff with Sanford Bernstein.

Richard, can you give us some additional detail on the gross margins in the different core subcategories?

Are there any new dynamics developing there or some sustainable trends?

And as a follow-on can you give us some color on competitive environment in terms of pricing, particularly in areas where you guys are competing directly with Sam's?

Thanks.

In terms of the four categories, three of the four categories, just looking at those categories; like food and sundries versus food and sundries core, I don't have it right in front of me, but they were up 20, 30 basis points each.

Softlines conversely was down a like amount, if not a little more.

Probably the only thing that is a current year trend is, is the film business is down, and that's again; the photo processing business is an operating leverageable business with volume, and that business is down about 10, 11%.

The other area, probably, and not just this quarter but over the last few quarters; the media department probably has a little lower margin because of the popularity of discount stores, footballing, you know, the latest and greatest movies.

Again, that is something that we've seen not just this quarter but the last several quarters.

Fundamentally, other than that, no.

You know, there's always going to be variations, unfortunately, on $10 billion in quarterly sales, a few basis points can, you know, there's always going to be some variation.

I think part of it also is, with all of this darn stuff with the EITF 216.

We try to -- try to give you our best guess of what it's going to be, similarly with this upcoming thing with EITF 210, although that doesn't impact the timing of dollars.

But all this stuff, if I look at the core, in Q1 and 2, which showed minus 16 and minus 16.

I don't know how else to say it, but the minus 16 in Q2 year-over-year was a better minus 16 than the minus 16 in Q1; and part of that has to do with some of the timing of this stuff, you know, we are trying to get to basis points here and some of this is estimates.

So again you talk to the merchants, you talk to Jim, you talk to me.

We overall feel that it's going in the right direction and, again, we'll start to see that.

As it relates to competitive position, I don't think there's been a lot of change.

Certainly, Wal-Mart or Sam's is out there, specifically, trying to go under us on certain items.

We are, you know, continue to be competitive.

We continue to feel that we have got better quality merchandise, and on like items, you know, we are all going to have to be competitive on Snickers bars; but there's a lot of other things, that if you are a little tighter on some items, there are other categories you can improve on, still living up to our own internal rules that we require our ourselves like the 14 and 15% caps on margins, things like that.

Again, asking the question of the competitive environment, it's more competitive than it was a year ago.

It's, not crazy like people, I think, were concerned, and we're omnipresent out there every week checking prices, as I know they are too; sometimes two or three times a week in some locations.

Okay, thanks.

Your next question comes from Daniel Barry with Merrill Lynch.

Good morning, Rich, I just want to know on the competitve situation; how are you doing in Canada and with the Sam's new units there?

And also unrelated question, you once said you thought you could do $1 billion in Costco.com.

Is that still your target in three-years?

First of all, I think the latter one is probably easier for me to bet.

Yes, we feel very strongly .

When we recognize that only 2% of our members--first of all virtually all of our sales are to members, and only 2% of our members have shopped online.

So we think that there's great opportunity there.

And you know this is now the third or fourth year in a row that we have been plus 50% comps, and we are seeing a lot more availability goods.

I mean, you look at our site, we've got lots of multi-hundred, if not low $1000 items, in electronics, furnishings, and we're seeing the power of our ability for people to take multi-hundred items and make them impulse items.

So we feel, we feel good about that.

As it relates to Canada, as, you know, I said nine months ago and six months ago; we are making it as inhospitable as possible.

Certainly our margins in Toronto are more competitive, given that's where their first entry has been.

Again, you'll have to ask them, they seem to be pretty aggressive on what they are saying in terms of their expansion.

We feel pretty good about what's going on in Toronto; as it relates to our sales, as it relates to our competitive position, and as it relates to the traffic that we see in their units.

It's going to be a fight for a while, and we have shown that we can profitably co-exist down here, so if they want to continue up there, which I am sure we can't talk them out of it; that we will continue to do what we have to do.

We have--and it's not just on pricing.

We have been, you know, part of the executive, the plan to rollout executive membership is a competitive positive we believe for us.

We have put more money on relo's and expansions and upgrades up there.

So we are doing all of the right things and we think that Canada will be just fine.

Okay, good.

Thanks, Richard.

Your next question comes from Christie Pedersen with UBS Global Asset Management.

Hi, guys, congratulations on the SG&A leverage, that was really nice to see.

Can you discuss the most difficult short-term challenges to overcoming that core ancillary mix impact without breaking your internal gross margin caps?

Well, I think probably the single biggest challenge that is a pain in the backside right now is all of this timing stuff as it relates to the EITF and the vendors money.

You know, it was real nice that when you earned it and you didn't have to give it back, you got to book it.

Now you have to defer it, over the next the year, and six months, and it creates a little havoc in terms of trying to manage the margins, particularly when you're doing it to the basis points.

Again, there was a couple of areas of softlines which are a little institutionally weak, not competitively, as it relates to any warehouse club specific stuff; but just in the case of what I mentioned earlier.

We have got to figure out how to do it, and I think that we will, and we are, and I think that you'll-- you know if you saw some of the components like ancillary-- well, not ancillary businesses, the 2% rebate whereas that had been dwindling down to only impacting us only 3 or 4 basis points, now it's back up to 11.

I think that will be short lived, that detriment, because Canada has gotten off to a fast start, and ultimately there is a limit as to what percentage of your members will be executive members, and it's a small piece--you know, it's only 12% of our company.

So I think that we will have a couple of quarters of that, but that's not going to be another three or four years of getting hit every year for that.

Ultimately, we can't sustain 20% comps in ancillary, and I think that as that comes down; more of it has to do with sales penetration than anything else, frankly.

And some of it has to do with all this timing stuff.

Again, we legally earned some of this money, but we have to defer it.

And, again, I think it's impacted us more than other retailers, partly because of the huge success and volumes we do in some of those programs, as well as the fact that we are so focused on single basis points, not quarter and halves of percents.

I don't mean to be vague, but, again, if you look at the bottom line, our bottom line is consistent with what Jim outlined at the budget meeting--at the analyst meeting back in August; recognizing we are only in year 1 of a 6-year goal here; but we think that we will continue to show progress.

Thank you.

Your next question comes from Adrianne Shapira with Goldman Sachs.

Thank you.

Richard you highlighted California as clearly a region where the fresh is obviously a strong category.

Just wondering how much of this lift actually sticks now that the strike is behind us?

Well, that is the $64,000 question.

In terms of what the lift was, our best guess was, that in that market, which was a little under 10% of our company, we saw somewhere in the high single-digit, call it 7 to 10% improvement in comps.

You know, some have suggested that we will probably save about half.

Half is probably the best guesstimate, I say guesstimate, not estimate, because it's the number closest to all the other numbers from 0 to 1.

My guess is that somewhere, half or slightly less than half we'll keep, and we won't know for a few weeks; you know, my guess is what will happen is that once everyone goes back to work--and I haven't--I know that they voted this weekend, I assume this week sometime they will be going back to work my guess is starting next week or the week after there's going to be a month of highly promotional supermarket stuff to get people back in the door.

Maybe we loose all of it for a couple of months and maybe get back half of it.

But that's an educated guess on my part.

As far as membership signups, how aggressive aggressive have you been in that region?

Well, we had additional signups in that region, we didn't frankly do a lot more membership marketing up there.

What we did do was make sure our places looked good, because people were coming in, and we made sure that--and again the higher sales to the warehouse might have been 7 to 10% higher comps; but it was skewed a little bit to those fresh categories, we made sure we weren't running out of rotisserie chickens, and weren't running out of steaks, and weren't running out of muffins.

So I think it was more that we benefited that way from it.

Okay, then my last question relates to the membership fee.

This fall it will be a few years since we've seen an increase, any update as far as what can expect now that it's been about two or three years since the last increase?

Not to be coy, but no update at this point.

My guess is as we go into spring and summer we will look at that and see what we want to do, but we haven't made any decision.

Great, thank you.

Your next question comes from David Schick with Legg Mason.

Hi, good morning.

Two questions, first could you update us, you added callers to the store, and that's been something you have been working past on the passed on the SG&A side; but also was helping the top line.

Just update on that initiative both on the top line and cost side.

Then secondly, you talked about self scan at the analyst day, update us on thoughts of self scan test rollout.

Thanks.

In terms of the callers, as you recall we did that back in August, I believe.

So we are still about a quarter--maybe quarter to quarter and a half away from seeing the year-over-year flatness of that.

The original estimate was is that we would get hit by 10 or 11 basis points, that we would work that down over several months to somewhere in the five to six six range, and then we might get a couple or three basis points of improvement in shrink, what I will refer to as reduction in shrink from bottom of basket.

All those trends we are seeing.

It's pretty much in line with what we felt.

We are certainly getting very positive customer response, particularly in the busiest warehouses.

The customer comments are near you unanimous that we have seen improvement out there, thank you, and yeah again it's going to be hard to measure that.

How many people on a Saturday decided to go instead of not go because they felt a little bit better about the speed of the lines.

In terms of self - scanning, I honestly don't know, I know there is stuff in the lab here that we are looking at, not only self - scanning but RFID stuff.

I will call you back on that one.

I don't have a rollout.

I know it's not in the next three or four months.

Thanks.

Your next question comes from Teresa Donahue with Newberger Berman.

Yes, good morning, Richard, the 20 to 30 basis points of negative impact from softlines.

How much of that was apparel-related and are you concerned that you have any issues with product or buying there?

None.

None of it was apparel-related.

None of it?

No.

Zippo.

Less than none.

Okay.

Thank you.

Your next question comes from Shari Eberts with JP Morgan.

Good morning, everybody.

Richard, I just want to follow up on the membership rank number that you gave.

You've been flat to down over the last several quarters.

Obviously renewals still holding very very strong, but given the club grew, obviously, the number of members per average club has been going down a bit.

I was just hoping you could comment on what you think the trend is there or if that means anything?

No, what it is really, when we went through that big slew of opening in new markets where we did a freebie, those people go into the membership rank recognizing their renewal rate a year hence is a lot lower.

So it has more to do with fewer new market openings and fewer freebies, therefore we are just kind of weaning ourselves off of that, which means that's not a lot of new freebies, but there's a lower renewal rate on the old freebies coming out.

Okay, so even three years later it is still having an impact.

If you look at business signups, they are up 100,000 from year end.

Which those are paid, so we have shown good growth there.

The other one--what you're really doing is you've got a higher quality lower gold star number.

Okay.

Then just on the cashflow, obviously, pretty large cash balance and that is helping through the P & L in the last quarter.

Can you talk us through what the potential uses of that cash would be?

I don't know if you are considering a dividend or you are buying back stock or what you might do with that.

Well, we certainly missed the stock buy back in August when the stock went down 8 bucks.

First of all, I am most hopeful that we can gear up our expansion greater next year, which will cause us to stop adding to the balance and perhaps subtracting a little bit of it, we do have a $300 million debt payment coming June of '05.

Small but, nonetheless, it is $300 million.

I don't expect us to do any acquisitions, you know, we are 0 for whatever when it comes to looking at other things.

I think people like the fact that we do what we know how to do.

I think people, including us, would like to see us ramp up our expansion a bit more and we're trying.

As it relates to other two things for cash use, dividends and stock buyback; we continue to talk about it at board meetings, but we haven't made any decisions.

As it relates to stock buyback, maybe we tend to be a little too conservative on that, we tend to be try to wait and be opportunistic.

And hopefully from a opportunistic standpoint, I hope we don't have the opportunity for a while; but we'll see.

I'm sorry I can't be any more specific than that.

Okay, then just the last question, you mentioned that by the end of the year, you hope to see SG&A be flat.

Is that including this new EITF 310 or is that before that?

That would be before that.

So you have to add the 10 basis points to that?

Right.

Okay, thank you.

Keep in mind, the number does include the stock option expense; which is about 5 basis points.

Okay, thanks.

Your next question comes from Bob Drbul with Lehman Brothers.

Hi, good morning, Richard.

Two questions, the first one is, you talked about the fresh business comping pretty well.

Can you talk about your expectations on the margins of that business going forward?

The second question is, with the discussion on new clubs, can you give us an idea if you are happy with sales productivity levels that you are seeing and your expectation for some of the newer clubs and going into the existing markets versus some of the newer markets?

Okay, in terms of fresh, I am just looking real quickly here, hold on.

Yeah, you know, there's four departments that comprise fresh, meat, bakery, deli, and produce, with meat being half of it.

Three of those four showed up margins, including meat.

So, there's, you know, again, and overall as a department it was up, year-over-year.

As it relates to-- I'm sorry, the last question I didn't jot down.

Sales productivity of some of the newer units that you are opening?

Pretty much in line with what we have seen over the last few few years, you know, we had built it up with the ability to get more warm bodies in with a free membership.

We, by the way, have stopped doing free memberships.

The biggest thing we will do in a new market now is a half price membership for a year.

So, again, I think that partly indicates the confidence that we have that that too can work and we are starting to do a little better.

The new markets are all over the board.

Some of them could be $40 million annualized, on the low end, in the first year.

Some of them will be $60 or $65 on the high end in the first year.

Existing markets are a lot better.

You know, we have some existing markets that average over $100 million in the first year-- that do over $100 million in the first year.

I would guess on average they are about probably about $80, $85.

Okay.

Thank you.

Your next question comes from Thomas Denzlo with Hamilton Investment.

Hi, I know you get asked this question kind of ad nauseum, but regarding the convertibles, it doesn't look like you would ever be able to get rid of them, other than by letting them turn into shares.

Since that's already in the share count, why not, maybe just for the reason that you don't get asked the question anymore, why not call those things?

There's about a $16 million a year reason, given that it's a zero coupon, we pay I think it's 3% on a little over $500 million now.

So about $16 or $17 million.

That hits the book expense.

It's already deducted out for a fully diluted EPS calculation, so I agree with you it is in the full calculation.

But from a cashflow standpoint, the way this convert works is that we get a $16 million book hit but also a $16 million deductible expense, so 37% on $16 million is $6.5 of real cashflow every year.

So I am getting paid $6 or $7 million after tax flow to keep this thing out there.

Sounds like a good reason.

Thanks, Richard.

Thank you.

Your next question comes from Greg Mellick with Morgan Stanley.

Hi, thanks, Richard.

A couple of questions.

One on workers' comp and then the second on real estate.

On workers' comp you said the accruals should start to come down, you are hoping in the next couple of quarters.

I am wondering, that is on the recent reforms.

That doesn't assume any other legislative changes?

Right.

It's probably a couple of quarters out, not the next quarter.

But yes, that's right.

With the changes out in California there now, given the election, what should we hope for, is there a roadmap or goal post of things you are looking for that you would like to see changed?

Yes.

Some of the things, I haven't studied up on this in a couple months, but as I understood it, the big thing was on the ability to use contingency fee attorneys, which I believe is still in tact, and that's one of the few states that allows that, which in our view creates an abusive system.

Secondly, while they have finally put some limits on physical therapy related healthcare, like somebody strains their back and they have to go to the physical therapist.

It's been capped but not near at the cap level of every other state.

Most states cap those types of therapies, subject to them going back to a medical doctor to get an appraisal to 10 to 15.

California went from unlimited to I believe 30 or 34.

So we are still seeing, in our view, a system that is still not 100% out of control, but 50% out of control.

I look at, again, at the typical, what we define as out of work workers' comp claim where there was actually an injury and they are out for a day or six months.

On average in all 26 states we booked about $26,000; on average in California we book $71,000.

I have no illusion that the $71,000 is going to go to $26,000; but even it went to $50,000 I would be happy, or $45,000.

So what are you doing now, because it was up to $71,000.

Is that still the rate you are using?

Well, actually I think this year, I think we have actually upped it a little more, I don't have the exact number, did it go from $71,000 to $73,000; but I I know that our accrual per hour of work or per dollar of wage, we have upped it a little higher this year to be conservative and not to be surprised.

Again, actuarially you have to wait six to nine months to see how the actual paids are coming, and as cases are closed was there a little benefit or detriment to what was on the reserve.

Did you have to add a little more to it or bring back into income a little of it?

Great, got you.

Second, on real estate, you mentioned that given the store growth and club wear coming down a bit that you were stepping up your efforts in real estate.

I mean, could you just describe that a little bit more?

Have you added people, are you working more on a local level with consultants?

Is there any --

Really, it's been an ongoing effort over the last couple of years, over the last three or four years, but we have, we have stepped up-- well, I think the big difference is we have stepped up our effort in existing markets more over the last year and a half.

I looked at the list, and the list is still 300 plus locations of active projects we are working on.

You were still-- it's really still a timing thing, it just takes longer to get stuff done, that is really what has changed?

In large part, yes.

Timing has to do with the fact that, of the fact of urban sprawl and traffic mitigation issues.

There was a time a few years ago that it was it man the torpedoes, how can we get you here because you provide sales tax revenue.

Now it's where can you find a good 10 to 15 acre site--there have been cases where we've put together 30 different parcels--or 20 different parcels of land to create a 10 acre site.

That's not the norm either, that's the other extreme.

I think we've got more in the pipeline today than we did; so that should hopefully do well for us.

Thanks.

Your next question comes from John Bowen with John Bowen Investments.

Hi, good morning, guys, congratulations on another great quarter.

My question was touched on earlier, but I thought I'd put a plug in anyway here.

I see that that Arkansas-based outfit with the big supercenters bumped their token dividend this morning and their stock is reacting positively, which is annoying for those of us believers out here who see you guys as so much the better value.

I've got to believe that there are a whole lot of institutions out there who would dearly love--prefer to own you guys instead of those guys, or certainly in addition to them; but can't because of the dividend issue.

While I have always been a believer in buying stocks for growth and bonds and income, I am just wondering if there has been any--some serious discussion up there and really looked at the dividend thing to further broaden the base of conservative long-term oriented shareholders?

Thanks.

Thanks, I appreciate the comments.

We do talk about it, and, again, I can't give you any indication, but we will continue to talk about it.

Your next question comes from Daniel Binder with Buckingham Research.

I apologize if you addressed this already.

I was cut out for a minute.

Can you give us any thoughts on possible membership increase at the end of the year, given perhaps the length of time since the last one and, arguably, a better consumer backdrop; and then with regard to the square footage growth, recognizing that they are more difficult to open these days, do you think that the longer term, I mean, how should we be thinking about your square footage growth let's say over the next three years or so?

Is it more like 5% or is it-

I would guess that it's bottomed out at here 5--or the square footage would be a point higher than that, so it's bottomed out at probably 6%, my guess is it ratchets back up to 7% or 8%.

That's certainly our intent.

Okay.

And then with regard to membership?

As for rates to membership, I did mention that, you know, we recognize that we have done it every three or four years, four years would be September.

We have not really talked about it yet.

I would assume that as we do, it wouldn't be until the end of the year when we decide what we want to do.

End of the fiscal year.

Okay, great, thanks.

Your next the question comes from Michael Exstein with CSFB.

Good morning, Richard, two quick questions.

One with the more more stabilized mix and trend in earnings and so forth, have you guys rethought the process of reactivating the concept of a food only concept.

Where does that stand since you have the real estate?

And, secondly, in terms of the home concept, any further thoughts about branching that out, since more and more of that stuff appears on the web?

In terms of the Costco fresh, we have not reactivated a stand alone specific Costco fresh.

We are looking at some aspects of what we do in that area.

That's been a great area for us.

We are always trying to figure out what else we can do.

Again, nothing, don't expect anything in the next four weeks, but--and don't expect a stand alone Costco fresh.

But we keep looking at what we are doing on there.

In terms of Costco home, we are planning to open another one, I believe, scheduled for this summer.

In Florida, and not in Florida-- I'm sorry, in Arizona.

Probably be-- let me stand corrected, it probably be early fall, not late summer; and it will be in the Phoenix market.

We do have a followup question from Teresa Donahue with Newberger Berman.

Yes, hi, again, guys.

I have a quick question on the flow of new stores.

When do you consider a store-- it's time to put a store in your projected count, at what stage in the planning process, and, you know, are you thinking of any changes to that?

Because relative to Deb's question, it seems as though you yourself pointed out, it's been slipping for the past few years relative to the beginning of year expectations?

Well, I think as we start, every August when we do our budgets again, we have a budget.

As an example, using this past year, last August we had a budget that assumed, I believe, 25 openings.

We actually had real P&Ls in there for about 13 to 15 of them.

We had, when I say real P&Ls, those were like under construction, we knew--or we would start construction, everything was signed, permits were done, and it was a go.

Okay.

The other ones, we look at what Jim and Jeff have approved.

And based on real estate department's best guess of when it will open, and, you know, if a unit is opening, let's say, in August-- early August, which is 11 months out, so it will only be three or four weeks, we know we have got to put in $1.5 million for pre-opening, we know we have to put a little in for sales, not a lot for bottom line.

We know that if it's mid year, we have some standards, and so in terms of looking at our budget, we are pretty close to what it is, once we get it opened, but then if a few of them fall out, they fall out.

I don't know how else to answer that.

I guess what I am thinking about, is from a real estate standpoint, when do you consider it yours?

Is it, you know, is it as of, you know, how long before contract signing or whatever.

When do you start thinking of it for your budgeting purposes and for what you tell us as your site, and, you know, you can put it in the bank?

All units that have contracts signed and delivered, of course, and the other ones, I mean, it is all over the board, Terry.

Some of them, you know, we are working towards it.

The legal people, the legal real estate people have already looked at it and say there's no apparent zoning issues, there's not a big history of local residential activism in that area, and the seller seems to be interested, and, you know, that would probably be assigned probability of 90 plus%, and 1 out of 10 of those don't work.

Maybe we tend to be a little too optimistic on some of them.

Sometimes we are working on two different sites in the community knowing that we can get one of them done.

We only want one of them done but the likelihood is higher even though the specific approxibility on both of them.

This is a little bit shoot from the hip, not necessarily scientific.

Jeff and Jim are certainly pushing real estate to find more openings.

Okay.

Thank you.

Your next question comes from Todd Slater with Lazard.

All of this talk about fresh food and Costco fresh is really making us hungry, so we are going to pass on further questions at this point.

Thank you.

There are no further questions at this time.

Okay, well thank you very much.

I will be here and Bob will be here, and Jeff will be here to answer any questions.

Thank you.

This concludes today's conference.

You may now disconnect