好市多 (COST) 2004 Q3 法說會逐字稿

Good morning. My name is Mary Ann and I will be your conference facilitator today. At this time I could like to welcome everyone to the Costco Wholesale corporation quarter three earnings conference call. All lines have been placed on mute to prevent 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 1 on the telephone keypad. If you would like to withdraw your question, press the pound key. Thank you.

I would now like to turn the conference over to Richard Galanti, Chief Financial Officer for Costco Wholesale Corporation. Mr. Galanti, you may begin your conference.

Thank you, Mary Ann. And good morning to everyone. This morning as usual, I would like to review several items, to begin with our 12-week third quarter fiscal 2004 operating results. This is the period that ended May 9. Needless to say, it was a great quarter. We came in 42 cents a sharem or up 9 cents a share from last year's reported earnings of 33 cents a share. At at total dollars net income increased to $45 million or 29% from 153.8 million last year to 198.7 million this year.

These 42 cents a share results were well above the 35-37 cents per share EPS guidance I gave to you on our second quarter conference call back in March and 4 cents above the current first call estimate of 38 cents. Which had alreayd been ratcheted up each month as we reported strong comp sales in February, March and April. This year's fiscal third quarter results did include about 1.5 cents a share of income from real estate gains. Our results were still up over 20% even without these gains.

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 year to date 36-week period. Regarding our comps for the four week reporting month of May, these will be reported next Thursday, June 3. Other topics I'll review with you this morning include our opening plans.

And we've opened a total of 13 locations since the beginning of the fiscal year On September 1, last year. 11 new in the U.S., two in Canada. These 13 are consolidated into our operating results. As well we opened two additionalunits in Mexico, that operation we account for on an equity basis. So, those are not included in our total consolidated numbers. Three of the 13 openings occurred in the third quarter and we expect at least 7 additional locations by fiscal year end.

This is 3 more than I had mentioned to you on the March conference call. I think at that time we had indicated that we thought we were going to get 17 open for the year. It looks like it will be 20. I'll also discuss with you this morning and spend a little bit of time on the two Emerging Issues Task Force pronouncements, EITF 2-16 which has impacted our year over year comparisons since the first quarter and will continue to do so for this quarter and next quarter. And EITF 3-10 which will impact our comparisons beginning with this the third quarter for the next four quarters.

Also our ancillary business results, Costco online results, membership trends, of course, our balance sheet for the fiscal quarter just ended and I'll review guidance for Q4. 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 1995 and these that 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 I'll get on to sales here. Sales for the third quarter, the 12 weeks ended May 9, were 10.7 billion up 14% from last year's 9.3 billion in the third quarter. On a 12-week to 12-week comp basis, Q3 comp sales were up 11%. As I will explain later in my presentation, the impact of EITF 3-10 which is effective as of the beginning of this fiscal third quarter, that reduces sales and cost of sales by a like amount.

Had EITF been in effect last year, our Q3 comp instead of the reported 11% figure on an apples to apples basis would have been up 13%. For the quarter, our 11% reported comp sales results were a combination of an average transaction increase of around 6.5% for the quarter and an average frequency increase of about 4.5% for the quarter. Included in the average transaction increase of 6.5%, we have continued to benefit from a relative weak U.S. dollar, relative to foreign currencies in those other countries where we operate.

During the quarter that represented a boost to comps of about 180 basis points in Q3. And that would be taken out of the 6.5% average transaction, of course. I should mentioned that FX which had boosted reported sales by as much as 300 basis points several months ago and 180 basis points this quarter has come down quite a bit in terms of its impact. We estimate that the impact of sale is only going to be 40-50 basis pointed based on the three-week trends. Particularly as it relates to the relative weakening of the Canadian dollar. In an effort to simplify and abridge the information we give out each quarter, I will give you a couple of new matrixes. And I'll start by summarizing the geographic and merchandising breakdowns for sales as follows.

Total U.S. comps in Q1 if you recall were 9% and Q2 10% and in Q3 11%. Again, and then international comps in Q1 were 23% in Q2 20% and in Q3, 13%. For total company comps in each of the three quarters of 11% each. In terms of the U.S. comps, every region was higher in Q3 than in Q2. And with the two coasts ranging from 8-14% and the newer midwest markets just over 20%.

These numbers by the way, are not EITF 3-10 adjusted so again, on an apples to apples basis, you would see those numbers slightly higher. By the way, we are often being asked about sales trends in Southern California, since the supermarket strike ended a few months ago. To date we seem to be keeping nearly all of the higher sales levels achieved during the strike. We just keep doing what we're doing but that's what the numbers so far indicate.

Regarding international comps, the change from 20% in Q2 to 10% in Q3 is mostly relative strengthening of the U.S. dollar from Q2 to Q3 and a little bit of it just the local currencies coming down a little bit. In terms of merchandising categories, all main departments were right around 10%. Fresh foods was a little better than that in the 16% range. And ancillary north of 20 with and without gasoline.

Within the categories that showed strength hard lines during the quarter was majors, hardware and lawn and garden. Strength in soft lines was helped by basics like housewares small electrics, women's apparel as well as jewelry. And fresh foods continues to show strength in meat, produce and deli. Before moving on to the rest of the income statement,I would estimate that assuming relatively decent sales trends for the remainder of the year, our fiscal '04 average sales per warehouse should be in the $114-$116 million range up from 105 last year. That's total company.

Now moving on to the rest of the income statement line items. I'll start with membership fees. A reported Q2 sales-- I'm sorry membership fees Q3, 224.5 million or 2.11% in Q3 of this year compared to 198.1 million or 2.12% in Q3 of last year. That's in dollars up $26.4 million or up 13% and on a percent of sales down 1 basis point.

We believe a very good showing given the tremendous sales strength. In terms of membership, we continue to benefit from strong renewal rates as well as the increasing success and penetration of the $100 per year Executive Membership program which of course includes the roll-out of that program into Canada beginning this past fall. In terms of number at Q3 end: Gold Star 14.7 million, that's down a little bit from 14.8 million with rounding from Q2 end.

Business primary, 4.8 million which is up from 4.7 million. Add-on, both at Q2 and Q3 end were 3.6 million so total members 23.1 million including spouse cards both at Q2 end and Q3 end 41.8 million. The actual total number again rounding, was exactly the same it was down about 40,000 from Q2 end. This has all to do with the reduction and the freebies that we had are falling off from the prior two years membership roles as we entered many new markets.

No locations are we doing freebies this past year. There are a few new markets where we have done something that's less than a freebie but again, most of that now we are cycling through from '01 and '02 when we opened a lot of new market units. May 9, 04 Q end paid Executive Memberships were just under 3 million. During the quarter, it was a 10% increase from the end of the second quarter up 257,000 members or 21,000 a week.

A lot of that has to do with oujr Canada's success over the last several months. In terms of membership renewal rates, they continue strong. Actually are still rounding to 86% but inched up a little bit from Q2 end. Business was 92% at Q3 end as it was at 92 end. Gold Star members was actually at Q3 end 84% up from 83% in Q2 end again still rounding to that all-time company high of 86% renewal rate.

Now going down to the gross margin line. Our gross margin third quarter was higher year over year by 5 basis points coming up from a 10.56% of sales last year, the 10.61% this year. Now, before I ask you to jot down a few figures, again, I'm going to change and hopefully simplify the format of what I present. Which hopefully will simplify our explanations.

In terms of the detailed components of gross margin, I know in the last quarterly conference call, perhaps even the one before that, there seemed to be a little confusion on the conference call as related to gross margin and I think that partly that I myself caused. Over the years as we've continued to add line items to the little detailed components chart to explain something, we find ourselves having to explain things that may confuse you.

In my Q2 discussion, for example, I stated that year over year quarter gross margin represented minus 16 basis points of the margin change year over year. But that the core departments themselves were actually up. For example lower sales penetration in the core which more than offset the actual gross margin improvements in those specific core departments. We felt that was a positive. Some of you were a little confused by that. And so In order to simplify it, in the future I'm going to be combining the core with international and ancillary and then just highlight any big outlier as an example the gasoline markets.

So with that I'll ask you to make a new matrix, a new and improved matrix with five line items. The first one would be merchandising which is basically our whole business. Second would be the 2% reward which of course with its success as it impacts on margin but also it impacts on sales and membership. LIFO. I've added two line items which I'll include for the next couple of quarters and these are the two EITF columns the line items. First one being the EITF 2-16 and I'll go into some detail in a minute. And EITF 3-10 would be the next line item.

Three columns, the first half of the year with the Q2 year to date. Column 2 would be Q3. And column 3 would be Q3 year to date. In terms of going across here, merchandising in the first half was plus 14 basis points. Q3 was plus 10, and Q3 year to date plus 14. 2% reward minus 10, minus 13 and minus 11. LIFO, 0, minus 11 basis points and minus 3.

EITF 2-16 for the first half it was minus 11, third quarter, plus 6, Q3 year to date, minus 7. EITF 3-10 which again didn't impact the first half, it begins in Q3 so zero in the first half, plus 13 in Q3 and plus 4 year to date. For a total first half margin year over year minus 7 basis points, plus 5 in Q3 and minus 3 in Q3 year to date.

Now, the one important factor that's impacted the merchandising gross margin in Q3 as compared to the first half and maybe parenthetically you could jot this down, of the plus 14 basis points in the first half, this included plus 24 basis points from strong anciallary business gross margins principally gasoline. As you recall actually in Q1 we had very strong margins related to strong profitability there. So again, that plus 14 really was comprised of plus 24 in ancillary and minus 10 other. Which is principally the rest of the business. On the last quarter's conference call, I pointed out that in today's reporting Q3 this year that last year ancillary gross margins were very very strong so that would be a tough comparison this year, and in fact it was.

In Q3 this year, the plus 10 is comprised of minus 8 in the ancillary and plus 18 everything else. So really what you can see is whereas in the first half other than ancillary, you had a minus 10 that went to plus 18 in Q3. Thus, the underlying gross margin trends in our view are showing good improvement this year throughout the three quarters. In terms of other gross margin components, the 2% Executive Membership renewal impacted gross margins as I mentioned by 13 in the quarter. It's simply indicating the continued growth and success of the Executive Member program which included this again, year's roll-out to Canada.

In terms of LIFO, after a few years of deflation as I mentioned in last quarter's conference call, we are seeing the beginnings of inflation. In Q3 last year we actually again in a deflationary year, we had a $5 million LIFO credit. However, this year in Q3 we took a $5.5 million LIFO charge or year over year swing of $10.5 million or 11 basis point delta. Minus 11 basis points delta.

I would expect that this impact, this to continue to impact Q4 proabably even more meanfully as last year in Q4 we had a $14.65 million LIFO credit. At this point I would guess that in Q4 year over year, LIFO could possibly be a negative a swing year over year in success of $20 million ie. from the plus 14.6 million last year to perhaps up to 6 million plus or minus a little this year. If that were the case, and again it's based on what continues with inflation.

That would represent a nearly 3 cent year over year detriment to earnings per share. Now the last two components of the year the gross margin variants and I spoke to you about these in the past conference calls are the new accounting treatment requirements for vendor incentive monies one of which impacts the timing of margin dollars during this fiscal year. The other one which doesn't change the bottom line but does change the percentages because it impacts reported sales.

I touched on the first item way back on our December 9, first quarter conference call stating that the impact was more quarterly timing than fiscal year timing. In in fact total in fiscal '04 total year impact to Costco was still estimated to be about a half a cent a share, maybe as much as 3/4 cent a share at most. The first one known as EITF 2-16 and technically known as accounting by a customer for certain consideration from vendors, aka how do retailers account for rebates, advertising revenues, slotting allowances et cetera.

In our case, the timing impact relates mostly to margin dollars we receive when we publish our monthly Costco Magazine, our cookbook and some of our other marketing related items. As I shared with you on the December conference call, the timing adjustments by quarter will reduce or increase our gross margin dollars and therefore our line. By the following each of fiscal 04's four fiscal quarters. These numbers on a pre-tax basis, if you recall back in Q1 was a hit to margin of $32 million pre-tax. And in Q2 it was a pickup in margin of 9 million. And Q3 and I think a quarter ago we had previously estimated it to be 8 million. In fact it was 7 million to the positive.

And then Q4 we estimate it to be about 10 million recognizing Q4 to 16 weeks, not 12 weeks. All told that would be about a $5-$6 million or a 1/2% to 3/4% after tax hit to this fiscal year which again is pretty much in line with what we had said. Now the second EITF pronouncement what I refer to is a cousin of EITF 2-16, I mentioned this one to you on our March conference call.

Let me take a moment here to discuss again with you this new EITF accounting rule wrinkle known as EITF 3-10. Whereas EITF 2-16 tended to defer certain gross margin dollars and therefore earnings into subsequent periods, EITF 3-10 deals with certain manufacturer sales incentives to retailers that are resaler specific. In other words, where we have specifically negotiated a deal that is not open to everybody. Rather than broad-based to many resalers, like an example would be the coupons that you find in the newspaper that are accepted by many retailers. The impact of EITF 3-10 is to reduce sales and cost of sales by the same amount. And therefore no change to gross margin dollars or bottom line.

But, with reduced sales being reported, you have an increase in the gross margin percentage and SG&A percentage because those dollars are now being divided by a denominator with a slightly lower sales number. Under the EITF 3-10 rules, let's say for example we had a television for $300 and we bought it for 270, rough number that's about a 10% margin. And let's say then in our passport program we got $50 off on it. Basically, historically under correct accounting, we would report $300 of sales, 270 cost of sales and $30 in gross margin.

Under EITF 3-10, instead of $300 of sales, we will report 250 which basically is the 300 minus the $50 Costco negotiated coupon and report cost of sales instead of 270, 220. Again you have the same $30 of gross margin but you would have a higher gross margin percentage because sales have been reduced. For Costco, the impact of EITF 3-10 which begins for us in Q3 will be to reduce current annual sales and cost of sales by an excess of $400 million over the twelve months. It's large because so many of our deals related to our passport and wallet programs and several other customer rebate programs are Costco specific versus general newspaper coupons redeemable at a variety of retail outlets.

For the upcoming four fiscal quarters including the one we reported today, so therefore Q3 and 4 of this year and Q1 and 2 of next year, reported sales dollars, will again be lower by an excess of 400 million of an annual or a little under 1% of sales. 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.

Of course, any line item on the income statement as a percent of sales will change accordingly. What I indicated to you on the March conference call, we estimated on average over these next four quarters about a 10% basis point increase in year over year gross margin and a like 10 basis point increase in year over year SG&A. And as I stated again on the last quarterly conference call probably skewed up a bit a basis point or two higher in Q3 and Q4 and a basis point or two lower in Q1 and 2 just based on timing of when we do our marketing things.

In Q3 the actual impact EITF 3-10 on our gross margin was plus 13 basis points. Again, no impact to anything but topline sales. But for the next four fiscal quarters, something else I'll get to explain to you all for three more fiscal quarters. So overall, third quarter gross margins trended in the right direction, we feel with merchandising gross margins showing continued improvement over the past several quarters. In terms of our gross margin outlook for the fiscal quarter of '04,again we feel overall our margin trends will be fine.

As we stated previously, we believe we can continue to remain competitive and stille over time improve our gross margins. That being said, Q4 year over year comparison will be tough due to an expected tough year over year comparison in LIFO which could be up to $20 plus million or 3 cents a share swing in year over year in Q4. Before going into SG&A, in terms of ancillary businesses we ended the quarter with 351 pharmacies up 4, 405 food courts, up 3, 401 one-hour mini labs, up 3, 389 optical, up 3. Continued to stay at 11 print and copy shops, 143 hearing aid centers, up 4 and 205 gas stations, up 5.

These businesses overall are doing fine. In total our ancillary business comps for the quarter were up 24%, up 22% without gasoline. Now, moving on to SG&A, I'm happy to report that after again if you recall when we reported Q2, we finally showed some improvement in our core SG&A showed some leverage after 16 fiscal quarters of increasing SG&A percentages. And again, we saw the first slight positive trend in Q2. I'm happy to say that these continued and were even better in Q3.

In Q3 of '04 as you will see in a moment, our SG&A year over year was lower or better by four basis points coming in at a 9.84 this year versus a 9.88% of sales last year. Again new charts, so get your pencils ready. The line items will be operations. Second line item central. Third line item stock options, fourth line option EITF 3-10. Again, that's the only one that impacts SG&A percent, not the EITF 3 not the other one. And then the next line item would be the quarterly adjustment which was the worker's comp adjustment that we had as you know last year and then a total.

To show you the trends, I'll ask you to draw four columns. All of fiscal '03 would be column one and then the next three columns would be Q1, Q2 and Q3 of '04. In terms of operations again reading across, for all of '03, SG&A was a negative 30 basis points and negative means higher or bad. Q1 was minus 13 basis points. Q2 was minus 5 and Q3 was plus 12.

In other words our basic operations were including international were 12 basis points better year over year. Central was zero in '03 so flat as a percent of sales year over year. In Q1 was plus 6 or 6 basis points lower, in Q2, plus 5 and in Q3, plus 8. Stock options, as you know this is the second year that we are expensing stock options and that will continue to have a slight negative impact in SG&A in each of the first five years of that expensing. Since the way you do it is based on when it vests.

So last year is was 1/5 of the first year of vesting. This year it's 1/5 of each of the last years of stock option grants. That tip to basis points in '03 was 3 basis points, in Q1 minus 5 basis points or higher, in Q2, minus 5 and in Q3, minus 4. EITF 3-10 which again did not impact '03 and did not impact the first 2 quarters in '04 so zero, zero and zero. In Q3 was minus 12. or higher by 12. And then the quarterly adjustments for worker's comp, minus 9, minus 3, plus 23 and, again that was because in Q2 of '03 we had the bit charge of $26 million and then this year, zero -- this quarter, zero.

All told '03's SG&A was higher year over year or minus 42. Q1 higher year over year or minus 15. Q2, plus 18 or better by 18. And Q3 better by 4. As you can see the SG&A trends continued to show improvement helped of course by strong comps I believe, but also due to our change in our healthcare plans and some basic efficiencies in our warehouse that we continue to experience.

When you look at the first two items, the first two line items of the chart I just gave you, I think that's the ongoing operational part of our business. '03, those two, the sum of those two was 30 basis points higher. Q1 was 7 basis points higher the minus 13 and the plus 6. Q2 was zero and Q3 was 20 basis points better. So, clearly those trends have been good and the last two quarters, all three quarters in fact, were on the same comp of 11%.

In terms of worker's comp, we get a lot of questions about that given the initial legislative changes that occurred- were announced back in January and additional legislative changes that were announced more recently some of which don't go into effect until January 1 of '05. As I stated back in December that despite these changes, we would have to actuarily be able to wait probably as many as nine months before we saw any changes to our assumptions where we could accrue numbers that were hopefully improved.

That's probably a quarter away, maybe six months out. But I would believe that it should be a positive news for our SG&A outlook over the next couple of years. And again indications are that our incident rates are fine and the legislative changes, we are still going through them and estimating what the financial impact. I would assume by Q4 when we announce Q4 will be more definitive on what we expect those impacts to be, but we would have to think it's got to be good. In terms of SG&A outlook for the rest of the year, it will depend of course on where comps come in this quarter.

There are certainly several factors that help year over year comparisons. The healthcare changes that are now in effect of course the big impact started this quarter and we would expect that to continue. One little thing as you recall last August when we had an earnings warning announcement actually a year ago. We indicated that a small piece of that earnings warning had to do with the fact that we made a conscience decision to increase the front end labor cost to improve customer service at checkout. Given that was one place that we felt we were vulnerable. Given our very high sales volumes per location.

That will anniversary this July and August and so we'll get a little feebie pickup in SG&A for a couple of quarters there. Strong comps hopefully that will continue and possibly and we would expect again new worker comp legistation in California. Whether we see any of that in Q4, we have our fingers crossed. But certainly we would expect something in the next year based on what we see so far. Next on the income statement is preopening expense. It was 5.9 million last year in Q3.

This year was 4.6 million or lower by 1.3 million or 2 basis points better. Basically no big surprises. Last year in Q3 we only one opening but there was a lot of carry over of preopening dollars from last year related to non-Q3 openings. This year we actually had three openings in the third quarter so no real surprises here. In terms of the provision for impaired assets and closing costs, this line also includes any gains and losses on any property sales.

During the quarter we had $12.2 million of pre-tax gains mostly due to the sales of two properties. Including this gain for third quarter '04 we had on this line item rather than expense, a net amount of pre-tax 8.5 million of income comprised of 3.7 million of actual closing costs which was more than offset by the $12.2 million in property gains. In Q3 '04 last year closing costs with of course no gains associated totalled 6 million for the quarter. I would expect that Q4 will be normalized on a relative basis with no anticipated gains.

So all told, operating income in Q3 was very good up 60.6 million over last year's third quarter figure. Or up 24.3% to $310.1 million. Below the operating income line reported interest expense was essentially the same year over year with Q3 '04 coming in at 9 million versus 8.7 million last year. No surprises. And like Q2, interest income and other was quite a bit higher year over year by about $5 million coming in at 14.2 million this year versus 9.2 last year.

The $5 million number was split a little more due to higher investment income earned on higher cash balances. As well as some also due to higher earnings from our Mexico operations. Again, we don't consolidate those figures, we count for them on equity method and our portion of those earnings appear on this line. So, overall pre-tax income was up 26% versus last year's third quarter from 250.1 million last year to 315.3 million this year.

In terms of our effective tax rate for the first three quarters of '03, it was 38.5%. It came down dramatically in '04 to round out the year to a slightly lower number I think 37.5. For all three quarters this year, we're at 37.0 and for estimating purposes, I would continue to use 37 for the remainder of the year. It might come down a little. We're Talking 1/10s of a percent here, not halves or wholes but we'll assume the 37 is the number for our estimating purposes.

Now , a quick rundown of our balance sheet as of May 9. Cash and equivalents $2.782 billion. Inventories 3.612 billion. Other current 531. Total current 6.925 billion. Net PP&E, net 7.149 billion. Other assets, 541. Total assets, 14.615 billion. Short-term debt on the right hand side 18. AT, 3.557 billion. Other current, 2.269 billion. Total current 5844. Long-term debt 1292. Deferred and other, 205. Total liabilities, 7.341 billion. Minority interest, 62. Stock holders equity 7.212 billion for a total right-hand side also 14615.

Needless to say, balance sheet is strong. Debt to capital is around 15%. Other things we highlight each quarter are AP ratio. As reported, last year in the third quarter AP as a percent of inventories was 89% reported last year. This year 98%. I think more meanfully is a number that doesn't occur on the balance sheet is this AP also includes construction payables for new buildings.

But if you just took merchandise AP as a percent of inventories, a year ago it was 79%. This year and it was 84%. So again a continued improvement in that number. A combination of good sales, good turns and buyers consciously seeking to improve dating. In terms of average inventory per warehouse at Q3 and last year it was 8.273 million per warehouse. This year end it was 8.810 million up about a little over 500,000 or 6%. Just as a comparative at the end of Q2, on average each warehouse was up about 720,000 or up 8.7%. So slightly reduced trend there.

A combination of strong FX helps it a little bit. Significantly higher consumer electronic inventories given brand availability and sales strength in many of those categories but it was throughout. Other areas, pharmacy, health and beauty aids, you name it. In terms of capex in '03 we spent 805 million. I would estimate that our capext Q4 will be a little lower given that we're opening 20 warehouses and I think only one remodel, not remodel but relocation. So perhaps something in the $700 million range.

I also wanted to mention that tomorrow we'll be paying out our first quarterly dividend, 10 cents a share to record holders as of May 10. This 40 cents a share annualized dividend represents a cost to the company of just about $1850 million, on an annual basis, based on our current total shares outstanding of 459.4 million. Also I know I'll be asked about what else we'll do with our cash flow. I can tell you stay tuned.

We continue to talk about that at quarterly board meetings. We think that this initial dividend was a step in that direction. Costcot online, next topic, continues to do very well. Sales during the quarter were up 67% which puts year to date up to 64%. E-commerce is quite profitable and should have sales in excess of 350 million this year.

In terms of expansion, as I mentioned to you compared to what we had estimated at Q2 end, we said that we'd be as few as 17 openings this year and now looks like it will be right around 20. So that would a starting base of 397 a 5% unit growth and 6% square footage growth. Fiscal '05 should be a more expansive year. I will say 25 at this point recognizing our final budgets are not near put to bed yet. But I believe that in talking to our real estate department and Jeff and Jim that this 25 is probably a little more solid than in the prior couple of years where we've seen our estimate come down a little bit.

That's probably a better figure recognizing that we're still four months before the beginning of that fiscal year. Assuming 25 for next year. It would include mostly existing U.S. markets plus 4 to 5 in Canada and at least 2 in Asia. Plus a second Costco home store which will open this fall in the Phoenix market. Finally before I turn it back to Mary Ann for Q&A, let me review where we are in terms of earnings outlook. As you know, the current first call to report this morning's earnings estimate assumed 57 cents for Q4 and $1.76 for the year.

Recognizing that $1.76, assume 38 cents for the quarter we just reported which was 4 cents higher there. Actually, in looking at my transcript from last quarter, I had indicated 56-57 cents last year. Given that we estimate that just on LIFO, we'll probably have close to a 3 cents a share deficit.

We're going to keep that range where it is right now. Recognizing with that 3 cents we'd be adjusting for that 3 cents a share. We would be on that 56-57 range would be something in the mid to high teens still. Next year I know that first call is at a $1.98. Again, that number I assume is impacted by the quarterly just reported. As well as the outlook. Given our strength in Q3. Again some of you may suggest we're being a little conservative. I hope so. Let's see what happens. Remember LIFO alone could be upwards of 3 cents a share. With that I'll turn it back over the Mary Ann and open it up for Q-and-A.

At this time I would like to remind everyone in order to ask a question, please press star then the number 1 on your telephone keypad. The first question is from Deborah Weinswig with Smith Barney.

Good morning Richard. Can you be a little bit more specific in terms of some of the inflation that you're seeing by category?

Inflation by category, some of the things that you hear on the news every day, I just heard this morning on CNBC, another retailer talking about paper goods, dairy products, butter, milk, steel and plastics, I mean, in a lot of different areas, some of those things have been able to hold off on. Anecdotally, some of the big paper users and paper suppliers many months ago started indicating they've started to see some trends in terms of cost increases.

I would assume us and other large retailers were basically saying, you know, tough. But at some point it seems over the last couple months, many of them have come out with specific announcements that the price of this will increase on June 1 or July 1 or May 15 or whatever. So, they went from talking about it to announcing it and again it's indicative of what we see out there. The areas of deflation of course are, the biggest one is consumer electronics.

Okay. And in terms of as we are approaching September of 2004, it's about time for us to see an additional membership fee increase. How should we think about it as we are doing our modeling?

Not to be coy or vague, but we haven't made decisions yet. As you know we were asked the same questions about this time last year, what about September '03. At that time I think it was fair to say that despite better than everybody else's comps and our historically high renewal rates and feeling good about ourselves, we felt that given increased competition in our sector that it was not the time to do something.

We continue to say, needless to say, strong about our comps, we continue to fell good about our renewal rates but we honestly haven't sat down and talked about it. I would assume that over the next couple of months we will talk about it. That may or may not lead to an increase. We'll see. I'm not trying to lead you in either way.

Okay, and then last question, in terms of 2004 and 2005 fiscal new stores, or new clubs and new markets how should we think about this percentages?

Well, less. I think that we started this year and I'm going back several months, but we estimated that with openings this year, it was going to be more like 65 existing markets and 35% new markets. My guess is it's that if not 70-30. Just perusing the list, I would guess that next year is probably 80/20 existing markets and the new markets are less new, it's adding second or third unit to a market we've already opened.

Okay, great. Thank you so much.

Your next question comes from Gary Balter with UBS.

Hi Richard. You talked about LIFO on the negative side in terms of what it could do. What's the opposite of that in terms of where it is in comps and anything to do on the margin side?

Well, in theory, it should help. Given that we are noted for always being the last to raise prices, the last to raise prices and the first to lower prices, there might be a little timing impact that my guess is again, this is all starting right now. If we look at the end of Q1 and Q2 as an example, we had no LIFO charge. We took no LIFO charge to our credit. Even though at the end of Q1 based on what inflation we saw in that first 3 month, if that had just stayed at that level, we would have had probably close to a $20 million LIFO credit this year.

By the end of Q2, we saw that more than half. By the end of Q3, as you saw, we took a $5.5 million charge. Now I think we've seen some stabilization. In fact, some reduction in a couple of categories relative to its peak of inflation this year. And so that's why we are, again, this is a little bit of a guess at this point. But we're guessing there will be a modest amount of increase but not a lot more. But a lot of it is changed really in terms of our looking at in terms of actual increases just in the last quarter. I would guess some of them would be offset but not all of it.

The question that we get a lot is as you get further in the year, and I'm sure you get a lot, is the comps get tougher and you've shown really good trends, you've talked about California sustaining itself even with the strike being over. What are your thoughts on comp guidance as we get into next year's first half?

We agree with everybody that asks us, we can't sustain these and then every month we seem to do okay. I would guess, again, we don't have, we just started a budgeting process with our operators and our merchants. But, I'm shooting from the hip here. My guess is we're going to see a comp assumption in the mid-to high single digits and then the next question you ask is what assumptions does that have for inflation. The answer is, I don't know because we are starting, I don't think that our each warehouse manager has thought about inflation yet. So, my guess is that we'll have a number, an assumption that given inflation may be a little better when we all sit and aggregate ourselves but we'll have to wait and see.

Okay, that's great. Thank you.

Your next question comes from Dan Binder with Buckingham Research.

Good morning. A couple of questions for you. First, can you just kind of give us a sense, you know you've got a lot of moving parts in the expense side. What you think it takes next quarter to continue the expense leverage with all things considered? That's the first question. And then on a different topic, I was wondering if you could give us an update on what you're doing or planning for Costco delivery particularly as it pertains to servicing small businesses with additional products like office products, for example.

Sure. As it relates to expense leverage, I went through the 12-step program myself of trying not to predict that because I got so bad at predicting it. Recognizing there were lots of moving parts; skyrocketing healthcare, our unwillingness to change the program for a couple of years, skyrocketing worker's comp, skyrocketing energy costs, digesting two years of doubling our rate of expansion in new markets.

If I look again, what I look at is over the last three quarters we've had comps for the company of 11, 11 and 11 and we've seen again as I showed you on that chart, the trends going in the right direction on a 40,000 foot level certainly healthcare helped. We believe that worker's comp will help next year somewhat. Energy costs, it's a crapshoot but who knows.

My guess is some number lower than 11 because we're starting to get some help from these other things but I can't sit here and say we, our best guess is 5 or 6 or 7. My best guess it's not 2 or 3. But, again as I've said during the three years of inflation, a little inflation, not a lot of inflation but a little inflation would help us I think, in that regard because ultimately you do pass that on. And we are incurring all that on the expense side. But we experienced the last three years a deflation. So, I think we've got a few things in our holster, if you will, like the continuing healthcare, like worker's comp hopefully and we're also assuming, of course, that comps don't go to 2%.

The answers I don't know exactly. My guess is something north of 4 and south of 8 or 9. And we'll have to wait and see.

And on the second question.

I'm sorry, what was that again?

Just regarding what you're doing and Costco delivery today and you've been doing a long time. What your plans are with that business. Particularly as you focus on adding value to small businesses.

We're really staying the course which is hopefully aggressive and innovative on what we do. Our business to business members has experienced generally the same trends as our reported comps so we are doing something right there. We have do four business centers, one in the Seattle market, one in the Bay Area, one in Phoenix and a smaller one in San Diego, Chula Vista, a smaller one in San Diego. Two here. We have five.

And the four big ones average close to $100 million and we're pleased with them but we're not necessarily rolling them out very fast. We're still learning from it. I think in store over the years we have expanded our office products. So I think we'll keep doing what we're doing.

Okay, great. Thanks.

Your next question comes from George Strachan with Goldman Sachs.

Thank you. Just a few things we've observed in the units lately, LED signage on commodities up in Danbury, expanded perishables in Bridgewater and also we've seen some added coupon event mailings that are not related to passport, maybe it's just to executive members. Could you comment on that? Are these all tests or just specific unit things or what's going on?

Let me take the easy one first. In terms of expanded fresh foods, we are constantly doing that everywhere. Not in every location but we're constantly trying new things and I would expect to see more rather than less than that. Food has been a great driver to our business. You take something as silly as a rotisserie chicken which was nonexistant 5 or 6 years ago is now a $100 million business for us. And we're continuing to add to that category and I would see more of that. Different regions we're trying different things and we report back each month to see what works. I'm sorry the first one you mentioned, George? Light LED?

LED signage on commodities up in Danbury.

I'm personally not aware of that. I was aware of something that I was talking to our IT department about. Wait, in Connecticut? That may have something to do with a state law in terms of showing price per unit or something? Just on fresh produce?

No, we noticed it on commodities, primarily.

I'll have to get back to you separately. I believe it's something to do in Connecticut with some state laws requiring something unusual and I think that's what that is. I won't guess of any other likelihoods. In terms of additional couponing as you described, our passport and wallet programs have been, we've enjoyed those and they've been good to us and we seem, the vendors seem to like it.

We've tried additional things and will keep doing that. We've done some mailers specifically to executive members where we've gone to some vendors to say, hey, what can we do. We've done some fence promotions. We've done something here to kids. We've done something geared to what I'll call the P&G products, then we did a P&G mailer. Again, limited not everybody. We had one called HP week for HP Computers and other products. So, I think we're just we're constantly out there looking to see what values we can bring to our members and create some excitement in the warehouses.

With respect to the LED, so it sounds like you don't see a broader application for that at this time anyway?

I believe, George, if I'm wrong, I'll correct it and let everybody know, but I believe it's something to do with some specific Connecticut state requirements in terms of what has to be on the sign.

Great. Thanks very much.

Your next question comes from Robert Toomey with RBC Dain Raucher.

Hi good morning. Richard, a couple of questions ago, you were talking about, I thought the initial question was areas of potential cost leverage in '05 and you ended up saying that your guess was up 4-9%. I'm not quite sure, were you saying 4-9% basis point improvement in '05 or was that comps.

I think Dan Binder asked the question, what comp do you need to get flat or no leverage or deleverage over which you get some leverage. And my response was, is I've stopped guessing but if I had to guess it's probably something north of 4 and south of 8 or 9, something in the mid-single digits. Recognizing we have a few things helping us like some anticipation of worker's comp relief continued reimprovement over the first couple years in healthcare even freebies like the anniversarying of our increased labor at front end which started in July and August.

Okay. So going forward, do you still think the worker's comp and healthcare would be where you get the largest benefits say in fiscal '05? Or do you think there are other things that could come from warehouse efficiencies?

I think that I haven't really spent a lot of time. My guess is worker's comp, I'm crossing my fingers, yes. Healthcare probably less in '05 than the second half of '04 but still yes. Comps, of course, and I think still some from warehouse efficiencies. I can't go through each thing we are doing but there's some real things that the warehouses have done that we've seen some benefit. And when I look at in Q2 and Q3 like comps, not all of that relative improvement in core warehouse SG&A was just healthcare accruals. I mean some of it was payroll. And some of that has to do with some of the blocking and tackling that we are doing in the warehouse.

And then one other question I had relates to return on investment as you look at your business and your return on capital, what do you think are the main drivers? You seem to have slowed down your your store openings. And I'm wondering is there a strategy that you're pursuing relative to maximizing return for square foot that is notable or changed or maybe it's not a relevant question because you're always trying to do that. But is there anything you can comment on that in maximizing return on capital?

Well, I think first of all, in terms of adjusting our expansion, clearly after two years of dramatically ramped up expansion back in '01 and '02 we tended to catch our breath a little after that in '03 and perhaps into '04. I think that our opening schedule, a little has to do with timing and less a conscious effort to sayt let's improve the bottom line. More early on in '03 and into early '04, let's catch our breath a little bit. And then frankly a few things fell out of bed. Again though, just three months ago our best collective guess is we'd end up opeening up about 17 this year.

We heard from you some concern about that, what does that portend and clearly it portended that it's easy to get a few more open when we are. So a lot of it was just this little timing slippage. Jim and Jeff are pushing real estate to get as many as possible open. My guess is that over the next three or four years, you're going to see numbers in the 25-30 a year range. Jim would like, frankly, to see it a little higher.

I know our experience is some tend to fall out of bed. I know our real estate department is working overtime. More people devoted to that effort as we're working. We have a list of in excess of 200 locations that are active projects recognizing some of them are active, three active knowing that we'll just do one in that market or that city or one in that community.

Also knowing that some of them are outliers because they are difficult relative to zoning and aggregating properties and everything. We feel, I would say today we feel better about getting to that level than I did a year ago. As it relates to doing everything possible to maximum return on capital, recognizing some of you on the call thinking; well, you could really maximize youjr return on capital if you bought back a lot of stock or something. We are looking at everything.

We will try to open as many units as possible recognizing that if it's plus or minus a few it's not going to have a dramatic improvement in bottom line. I think the biggest improvement from return on capital hopefully over the next two years is Jim's comments at both our analysts' meeting last December and as we've said time and again, as he said time and again over last year, we acknowledge we deserve to make more money and our goal over the next 5 or 6 years is to improve that bottom pre-tax return on sales. And I think so far, at least, in the last couple of quarters we've tended in that direction since his comments last year.

Okay. Great. And then just one last quick one. Did you mention what gasoline price impact was on comps?

I think it was about -- hold on. I have it . I think it was a little under 1%. 83 basis points. About half this price is half of gallonage.

Okay. Thanks very much.

Your next question comes from Emme Kozloff with Sanford Berstein.

Hi there. In terms of worker's comp, can you give us some more color on the differences between the bill passed last September and the one passed more recently in California? And should we assume that the positive final impact next year will be an adjustment to the accrual rate or a reversal of reserves or both? And then just separately can you comment on the competitive environment in the club space currently?

Well, as it relates to and I'm still learning about worker's comp from our HR people. Even after I got the summery of bullet points, I had some questions on it. In brief summary, the difference between the initial changes that were done right before Gray Davis left office and was signed in law was in our view a bandaid approach. It was a small amount of positive impact but not a lot.

What was put through with help from, frankly, us and our members signing petitions and the overriding possibility that Governor Schwarzenegger was going to send this to the public for vote in November if significant meanful legislative change didn't happen, happened. So what are some of the things? These are random. I don't have the notes of front me. But, one example would be limitation on how many physical therapies you can get before you have to go back to a medical doctor to be reviewed.

One would be limitations on permanent disability that as an example, in California, let's say you strained your back and three weeks later, four weeks you're back at work doing some light work and four weeks after that you're back full time. And maybe for several months you're going to the chiropractor or physical therapist to get some additional physical therapy. You may have been deemed, I'm making this up, but 10% permanently disabled. Under that, if you're making 40 grand -- or 5% disabled, under that if you were making 40,000 you basically are getting $2,000 a year for the rest of your life. On top of the fact that you're making your full income when you came back to work.

Under California worker's comp law, in theory, you could strain your back again six times and now you're getting 30% disability. Under the new rules, those aren't additive. In theory, there are people in California that are back at work getting their full pay and receiving more than 100% of their pay in permanent disability. That's how screwy those laws were. Those are some of the things. I'm happy, there are some summaries that were published by independent parties people down in California that summarize some of the laws. And I'd be happy to, anybody who wants to e-mail me, I'm happy to send it to them.

In terms of though the positive potential financial impact, is that an accrual or drop or reserve reversal or both?

By the way, one other meanful one to us to companies is that much like a healthcare plan, you'll be able to have your own group of doctors, in our case, similar to our helthcare plan. Which again have both the company and the employees are looking independently and objectively hopefully at both sides rather than having outside attorneys and their doctor friends deciding that it's a lot worse in our view.

In terms of the impact, again we don't know what the impact will be yet. One would assume that it will have a short-term impact of changing the reserve and a more meaningful or a longer term impact of changing the accrual rate. Now, does that mean that you take a number that's 80 or 100 million a year instead of growing it 20% or plus it stops growing that year? Maybe you have a year or two of that. Maybe you have a year of that and some modest growth the next year, it's a guess at this point.

And the competitive landscape?

Thank you for reminding me of your questions. In terms of the competitive landscape, it's still very competitive out there. We don't see any change in that. From week to week it changes in regions. Each month, I mean this is anecdotal, when I hear from each of the Senior VPs of Operations and what's going on with our competition, it's every bit as competitive as it has been over the last year. Sometimes there's a lightening up in one area and a strengthening in the area.

Great. Thanks.

Your next question comes from Lloyd [Bightman] with Berstein Investments.

Hi, Richard. Regarding your comment about stores in new markets given that the number in new market is coming down, I was wondering if you could comment on the impact of cannibalization and what it looks like now and might we expect that to change meanfully in '05?

It's not going to be dramatically different. It seems like over the ten months maybe it peaked at 1%. Our guess it will be, then it's come down to 70 or 80 basis points. My guess it's going to plus or minus that number 10 or 20 basis points. Plus or minus that - 70 or 80 plus or minus 10 or 20. So, something in the 50-90 range each month. No meanful difference. Keep in mind some of the change from new to existing market is simply a function, of Chicago, for example, or Detroit.

Let say in Detroit, which was ostensibly a new market for a few years is certainly not a new market. Even Chicago which is new in the sense that it's about three years old when we first entered Chicago. We now have 11 units and getting ready to open our twelfth. I would call that twelfth unit an existing market unit not a new market unit because we are doing quite well in Chicago. Even though it will have little if any impact on cannibalization because it's still a relatively new market for us.

Thank you.

Your next question comes from Bob Drbul with Lehman Brothers.

Hi Richard. Two questions. The first one, around the gas business, can you talk a little bit about the expectations on margins with the gas business and within the East Coast, there was a few stores that we read about in terms of having to open them up to everyone with gas prices being where they are. Can you give us your thoughts around that?

Well in terms of gas margins, as you know it's been unpredictable and volatile. As evidenced by the tremendous strength in our company gross margin due to ancillary business in gas in Q3 last year. As well as this year in Q1. I'd have to say if I look back over the last eight fiscal quarters, if you go back over a couple of years ago, it seemed to be that the profitability of gas would range from losing money in a given quarter to losing X to making X.

Now in bad months or weeks, we are breaking even or making a little or losing a little and in good weeks we're making a little more than we used to. Seems almost like there's still a wide variation but the low is not as low and the high is a little higher. But still quite volatile. There are markets when we make zero gross margin and there are markets where we make the 14 or 15 gross margin. It's all over the board.

I think, again, anecdotally, it seems to be a little less competitive pressure but still a lot. But a little less than it was. In terms of the comment you made about opening up the gas stations, I think you're referring to New Jersey where we have two gas stations among our many locations there where the state has required us with big fanfair to open them up to the public. We disagree with the ruling but we abide by it. And they are open up to the public and we are challenging it.

Richard, in terms of the Executive Membership, the increases that you're seeing there, what's driving that in terms of the U.S. and in Canada? What are your expectations for continued penetration there?

I'm sorry, the first part Executive membership, you're talking about?

Yes, in terms of the increases that you are seeing.

I think, a number of years ago, almost back in the mid-90s right after the merger, I think Price Company Canada had a couple of, it wasn't an Executive Membership program but it was a reward-based program where, did they charge a little more for that? I think they charged a little more for it and basically it was de facto a reward program. It has been successful in Canada at the time. We did away with it subsequent to that but I think there's some positive from that that has helped us get off to a strong start in Canada this year.

My guess is that has to subside because we've gotten to a higher level faster in Canada than we did in the U.S. And so a lot of this increase you're seeing in the last couple of quarters has to do with that. Although I must add that the U.S. penetration continues to improve. We think it's a positive and it's a competitive advantage for a couple of reasons. Those members do comp at a higher rate. They're more loyal. And I think in hindsight, it was a little painful to get started because you always deal with adverse selection to start with.

Who's the first to sign up is the person that's already buying more than $25,000 a year from you that overnight pays $55 and gets a $500 reward at the end of the year. Now as an example to the U.S., here we are in year four, year four plus, there's no adverse, there'e no net adverse selection any more that generally speaking we're getting people that are even on the cusp of having break even. But affinity programs work. They buy more. And so we think we're ahead of the game on it and it's doing just fine.

Okay. One final question, Richard, is on the private label, was there any significant change this year in terms of your penetration this quarter on a SKU count or a percentage of sales basis? And sort of how do you see that trending?

I think year over year it's up in terms of sales penetration a little over a percent. I don't have the number right in front of me. I would say the changes that you had asked us three or four years ago let's say when private label sales were 12% or 11%. We had estimated that 5 or 8 years hence it might approach the high teens or 20. If you asked today, when it's about 15% or about 14%, 13.5% that we would say 5-8 years from now it's probably in the low 20s. So, there's probably been a little shift upwards but still a great reliance on our success in getting branded goods. Where it makes sense, we're going to keep doing it. And certainly we've created a high quality name for ourselves.

Great. Okay. Thank you.

Your next question comes from Don [Delling] with JP Morgan.

Should is Sherry Eberts from JP Morgan. Is this my line?

Sure.

Okay. Sorry about that. Richard, a question for you, just did you comment on the lower healthcare costs and how much of that actually did benefit the margin in the quarter?

Yeah. I don't think I gave you a specific basis point number but clearly in our SG&A, in net core and in central lower healthcare costs were part of it.

Can you give us more specific number in terms of that?

No.

Okay. And just in terms of circling back on the real estate, you mentioned that you're feeling more confident about the 25-30 units going forward, can you comment on why you are feeling more confident?

First of all, for '05, my best guess at this point is 25. For '05 through '08, let's say over a four year period, I would say that the confidence level is that given what we have going on right now and given Jim and Jeff's desire to try to open a few more that 25 to 30 would be the range. I think the confidence is simply a greater focus on it and more effort being put forth.

Okay. And then just last question back on the membership fee question, just as you think about the membership fees, is the gap with other competitors more important in terms of the membership fee, amount or just your renewal rates which are more important? How do you think through those issue? Could you have a different fee for your Gold Star versus your Business? How do you think about those issues?

Well you as know, we got away from the difference between the two. Gold Star and Primary Business Member are both 45. Business add-ons are a little less. Frankly, there's never been a great concern about having a fee different than our competitors. And if Jim were here, I think he would say that very strongly. That being said, we have to keep, I can play both sides of that coin.

Why would we likely raise it? It's because we have great confidence in our sales and our renewal rates and our value proposition relative to our competitors. Why will we not raise it? Because we don't want to, we want to make sure we're not fooling ourselves and we're not a little too arrogant for our own good. I think there's a little bit of emotional play in that and let's make sure we feel comfortable with it. If you asked the question will the fee increase at some point? The answer is unequivocably yes.

But we don't want to suggest it's going to be now or later, we'll let you know. We honestly have not talked about it at any of our last three or four executive committee meetings over the last year and a half. I might add though we did talk about it in September of '00. When we did it in September of '00 Around here we do things quickly. At such time we talk about it we'll figure it out. I don't want to give you an indication either way.

Okay. That's helpful. Thank you.

Your next question comes from Chuck Cerankosky with KeyBanc.

Hello, this is Bill Keller on for Chuck. You talked a little bit about how inflation has impacted LIFO. Can you comment on whether you're seeing a strengthening economy specifically in your sales mix and members' willingness to spend more on discretionary items?

I'm sorry, repeat the last part of that?

Are you seeing the inflaction are you seeing it impact at all on your sales mix specifically members' willingness to spend more on discretionary items?

Yes. Nonfoods is just as strong as foods in the last several months. Which is nonfoods has picked up a little relative to what it had been. But it helps that consumer electronics, is a department that has tremendously lower prices on a bunch of cool items. Digital cameras, the quality of a printer, copier, fax, scanner, photo maker is half of what it used to cost with less of those features. TVs are a lot cheaper for better stuff. So I think that's helped us as well.

By the way, getting back to the sign in Connecticut, on the price signs. Somebody in our office was thankfully listening to the call and legal let me know that electronic price signs are allowed under Connecticut law as an alternative to item pricing each and every item. So that's the isse there. That Connecticut law requires every single item to be individually priced and of course we have item numbers, not prices. So don't expect to see that in other states. Why don't we take two more questions.

Your next question comes from Bob Dunn with SAM Investment.

Thank you. I think that you mentioned you continue to talk with the board about uses of cash flow. In 2005, how much do you think, what's the amount of money that you're talking about after store openings and dividends?

Free cash flow, again, if you take rough numbers and I'll use first call consensus just to make this objective, but using first call consensu next year, $1.98 which is what it was yesterday. I'm sure it's up a little now. So $1.98 times on a fully diluted basis about 580 million shares. What? I'm sorry, 480. Hold on a second. So that would imply something in excess of 900 million in net income.

Depreciation which seems to be increasing by about 40-50 a year will be a little under a half a billion next year, say 475. And let's say capex is a billion. Just sort of as a round number, maybe 900 million to a billion. We'll call it 950. And then 185 in dividends, that would imply 290. And we do have in '05 $300 million debt payoff from a ten-year note due that will be due, I think it's June of '05. So magically all those numbers equal right around zero.

Okay. Thanks.

Your final question comes from Daniel Barry with Merrill Lynch.

Hi, Richard. A question about the dividend. I realize the dividend is a policy of the board not management. But you've been under pressure to pay a dividend for a long time and the board finally agreed to did it. What was the consideration that sort of tipped them over the edge?

I think that probably the cash -- our cash. And probably just an evolution of a changing feeling. If you go back ten years ago, growth companies don't pay dividends and things have changed as interest rates have gotten lower. Certainly we are mindful we've heard from plenty of probably more buy side people than sell side people but on the thought process.

But I think it was a realization that if you go back three or four years ago when those two years when we opened in like 31 units a year, and we also had a significant amount of capex to our depot operations, so we had a couple of years when it was 1.4 billion one year and 1.1 or 1.2 billion one year. We were negative flowing 200 or 300 million a year and we only had about 7 or 800 in cash. Based on that outlook we said God, this is not the time to start thinking about that.

This past year, several things have happened. One, of course, earnings are increasing, depreciation is increasing. We even had a couple hundred plus million dollars of cash flow come back from Canada as it relates to some tax planning that we knew about. This is a year where net-free cash flow is well in excess of $7-800 million.

So, I think hust a realization we've gone from 7-800 in cash to 1.2 billion in cash to 1.5 billion in cash to here we are 2 plus cash. The feeling is it's time to do something that we feel confident. Certainly the confidence level that we feel about our ongoing business, that we're not going to use it all. We're not going to 50 locations, not because we don't want to but because we feel comfortable doing what we're doing. It wasn't a one day high experience, I think it was a discussion topic informally over the last couple years, a little more formally six or eight months ago and most formally about a month ago when we announced it.

And then historically when a company initiates a dividend they usually raise the fee average or slightly over time over the next several years. Do you think that would happen here for modeling purposes?

I read that same chapter in the dividend book. Hopefully, but who knows.

Okay. Thank Richard.

That concludes our question and answer session. I will turn the conference back over to Mr. Galanti for any closing remarks.

Okay. Well Thank you everyone. Bob and Jeff and I are all here and feel free to give us a call if you have any follow-up questions.

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