好市多 (COST) 2005 Q2 法說會逐字稿

Please stand by for Costco conference call.

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

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

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

After the speakers' remarks there will be a Q&A period. [OPERATOR INSTRUCTIONS]

At this time I would now like to turn the conference over to Richard Galanti.

Please go, ahead, sir.

Good morning.

This morning as usual I would like to remember review with you several items, our 12-week second quarter fiscal 2005 operating results.

Briefly, while we reported EPS of $0.62 for the second quarter, and as I will explain excluding a couple of non-recurring items, the aggregate of which added about $0.08 per share to our earnings, we came in excluding that, at $0.54 per share, up $0.06 or 13 percent over last year's second quarter EPS.

These results are within the range of our previous guidance for Q2 given to you on the December 9, first quarter conference call.

I might also add that on a pretax income as a percent of sales basis, and again excluding these two non-recurring items, earnings were up 22 basis points year-over-year in the second quarter.

In terms of sales for the quarter our twelve-week comp sales figure showed an increase of 7 percent, 8 percent excluding impact of EITF, which I am happy to say is now finally anniversaried, and we are back commencing with the third quarter on an apples-to-apples comparisons of sales.

In terms of the three retail reporting months of December, January and February, our report comps were 9 percent, 4 percent, and for the four-week month of February which we are also announcing this morning, 7 percent.

I will speak more to the four-week 7 percent February comps in a few moments.

Other topics of interest I'll now review this morning, are recent openings, we opened a total 13 locations since beginning of FY on August 30, 7 in U.S. including 1 relocation, and 1 Costco home. 3 openings in Canada, including 2 relocations.

One new location in each of Japan which is our fifth Japan opening, and one new location in Taiwan, our fourth in that country, as well as one new location in Mexico, which we account for on an equity basis.

The latter one.

I will also discuss the other usual items this morning.

Our ancillary business results, Costco Online, membership trends, our balance sheet for the fiscal quarter just ended, and lastly I will provide you with updated directional guidance for Q3 and fiscal '05 overall.

As with every conference call let me state 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 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 let me continue.

Sales for the as I mentioned for this year the second quarter 12 weeks ended February 13, were $12.4 billion, up 9.6 percent from last year's second quarter sales of 11.3 billion.

On a twelve-week to twelve-week comp basis Q2 comps again were reported at 7 percent for the quarter, and again up 8 percent, excluding impact of EITF 03-10.

For the quarter our 7 percent reported comp sales results, which by the way was on top of an 11 percent reported comp sales increase last year in Q2, this quarter's results included the impacts of the EITF which was a little over 1 percent negative, also included a positive of about 1.4 percent due to FX.

Also included we estimate about 1 percentage point negative given that the California supermarket strike was ongoing during the month of February.

It by the way ended last February 28, so going forward, we don't see the impact of that in the numbers.

And lastly we picked up a little on gas inflation.

We estimate about 0.75 of a percent.

Add all those up you get to the 7 percent reported number that we started with.

In terms of the, how the 7 percent comp breaks out between average transaction size and average frequency during the quarter, virtually all of it was transaction size and again about 1.4 percent of that was due to FX.

In terms of the sales for the quarter, geographically no major trends changes from the prior couple of quarters.

Strength -- regions that were strongest were Texas, southeast and midwest.

These of course are some of the newer markets for us, particularly as relates to midwest and Texas.

And again FX helps the foreign reported sales as we express them in U.S. dollars.

For the quarter by manufacturing categories, within food and sundries no major outliners, either plus or minus, hard lines stronger subcategory was majors, that was in the mid to high single digits.

Soft lines, we saw strength in domestics, home furnishings and women's apparel, offset by slightly negative comps in media and camera and film.

Now in terms of comp sales for the month of February, again the four weeks of February was a 7.

On a geographic basis the U.S. regions were the strongest results were again, Texas, midwest and southeast.

On an international basis we are seeing strongest results both locally and in U.S. dollars in Japan, Taiwan and our Korea operations.

The positive impact on comp sales from foreign currencies again continue to benefit us, particularly the weakness of the dollar relative to the Canadian dollar and the Pound sterling.

Total international comps for the four weeks came in at 9 percent in local country currencies, a result in strong reporting comp of 14 percent expressed in U.S. dollars. dollars.

And overall that implies a foreign exchange benefit in the month of 110 basis points, as compared to about 140 basis points for the quarter.

Moving to our merchandising categories, within our food and sundries category we saw strength across the board, with the strongest results in deli, frozen and sundries departments.

Within our hot lines categories we saw strength in majors again, as well as sporting goods, as well as hardware, and we showed slightly softer sales in automotive and office.

Within our soft lines category we saw strength in women's apparel and home furnishings, and slightly softer sales in small appliances, photo, camera and media.

Within fresh foods we showed strength in produce and service deli, fresh foods overall is continuing generally tends to be the strongest overall sub-department.

Finally our ancillary businesses include pharmacies, optical, food courts, one-hour photo, hearing aid centers, print shops and gas stations, these continue to show substantial year-over-year comparable sales increases.

Gas stations, optical shops and pharmacies show the strongest considerations results recognizing within gas the average price per gallon year-over-year was up $0.20, to $1.87 per gallon.

This has added about 40 basis points to the month, the inflation aspect.

In terms of our average transaction size, it spread 6 percent to average transaction, average size of transaction, and 1 percent to frequency.

On cannibalization, no big change there year-over-year, about a 60 basis points impact and anniversary of last year's California grocery strike which again concluded a year ago on February 28, negatively impacted our February comps by about 100 basis points.

Moving on to the line items of the income statement, let's start with membership fees, we had again strong membership fees in the second quarter, 245.5 million, or 1.8 percent in the second quarter.

That's up 12 percent in dollars, and up 5 basis points from the 1.93 percent of sales last year, or up $27 million year-over-year in the quarter.

Very good showing given our 7 percent comp results, again an indication of ongoing strong renewal rates, increasing penetration of the $100 a year Executive membership, as well as a little from new market openings.

In terms of number of members at year end, at fiscal second quarter end, Gold Star, 15.6 million at the end of the second quarter, that's up 300,000 from Q1 end.

Business primary, 4.9 million, business add on, 3.5 million; total, 24.1 million; about 400 higher than first quarter end, and including the free spouse card, up 700,000 to about 44 million.

Also at February 13 second quarter end, our paid executive members, 3.65 million, an increase of about 185,000 or 5 percent, just from first quarter end.

So still during the quarter adding about 15,400 new executive members per week, recognizing that quite a bit of that is conversion of existing Gold Star members.

In terms of membership renewing rates, it's been quite awhile now.

They continue strong.

Our all time high renewal rate percentage of 86 percent.

On the business side 92 percent, on the Gold Star side, 84 percent.

We are up about half a percent still, still averages to 86, but we are up about half a percent versus a year ago Q2, in terms of renewal rate.

Now going down to gross margin line, to the gross margin line in Q2, gross margin was higher by 9 basis points from a 10.84 last year, to 10.93 percent of sales in this year's second quarter.

In terms of the components of gross margin in Q2, versus last years second quarter, very similar to the first quarter year-over-year variances.

Plus nine is comprised of the way I described it to you in the past four different line items, the core merchandising business, which is all aspects of merchandising.

We saw year-over-year improvement of 9 basis points.

The increasing penetration of the executive member program which has the impact of lowering reported gross margin.

That was an impact of minus 11 basis points.

You will note that we had a $2.5 million LIFO charge in Q2, as compared to zero a year ago.

So that's a 2 basis point swing year-over-year to the negative.

And again the EITF 03-10 which again is now anniversarying that on a reported basis, improved reported gross margin percentage by 13 basis points.

So, essentially the 9 in merchandising, and the 9 followed down with all those other adjustments, to a 9 for the quarter reported.

The favorable comparison in the core merchandising gross margin, two of our four primary departmental categories, food and sundries and soft lines, showing strength year-over-year slightly lower year over year gross margins in hard lines and essentially flat year-over-year gross margins in fresh foods, nothing terribly surprising our outlying in any of those major four categories, and again higher year-over-year gross margins in all but one of our ancillary businesses.

Overall the end all in gross margin, trends as you will agree continued to show improvement during Q2.

The next thing I will talk about, in terms of a couple of the components, executive membership, you will note that that was an 11 basis point reduction in reported gross margin.

That compares with just starting to anniversary the roll-out of the executive membership program in Canada a year ago.

We saw that detriment to margin in Q3 and 4 year-over-year being 13 and 15 basis points in Q1, 12 and again in Q2 as I just mentioned, 11.

We should see this quote negative year-over-year delta to gross margin continue to be reduced and subside over the coming several quarters.

In terms of LIFO, I mentioned the 2.5 million again I'm happy to see that the EITF is now behind us.

Let's see here.

Okay.

Overall, Q2 gross margins continue to trends in the right direction.

With the merchandising only gross margin showing the 9 basis points improvement.

In terms of our outlook for gross margin, the remainder of '05, overall our first year, our FY '05 margin trends should hopefully continue to be in line with recent trends.

With regard to Q3 specifically, reported margins will be challenged by the elimination of EITF 310 which is added about 10 to 12 basis points to our gross margin percentage in each of the last four fiscal quarters.

We should be okay, though, as we look forward here.

Before going to SG&A, let me briefly go over our ancillary businesses.

We added 3 pharmacies during the quarter to be at 368, 4 food costs to be at 419, 4 mini labs to be at 415, 4 optical to be at 406.

Continue to have 10 copy centers. 1 hearing aid center, to be at 155.

And 3 gas stations to be at 218.

In total as I mentioned ancillary business sales the comps in the month for the quarter, rather, were up 20 percent, up 10 percent without the inflationary impact of gasoline.

Now moving on to SG&A, it's now I'm happy to say five quarters in a row that we've seen positive trends in SG&A leverage, that began in Q2 last year.

They improved again in Q2 of this year, and this improvement was on a lower comp sales increase that was was recorded in each of the previous four fiscal quarters.

Although still a pretty good comp sales increase.

In Q2 '05, as you'll see, our SG&A year-over-year was lower or better by 2 basis points, coming in at 955 versus 957 in last year's Q2.

This 2 basis point improvement in Q2 year- over-year was despite an 11 basis point detriment to SG&A from the EITF 310.

And 4 basis point higher SG&A, due to increased stock option expense, which we began expensing as you know 2.5 years ago.

So we are now in our third year of what amounts to a five-year trend, in terms of how it goes into the income statement.

So in terms of where did the improvement in SG&A come from to end up with a plus 2 basis points lower year-over-year?

We saw 16 basis points of improvement year-over-year in Q2 in terms of lower , what I will call operations SG&A.

Several expense line items within SG&A helped, with the biggest Q2 over Q2 improvement coming from last year's changes to our healthcare plans.

Some changes that were made a little over a year ago but really started to impact our P&L just over a year ago.

And a small amount of SG&A improvement in central expense, as well during the quarter.

Overall SG&A continued to show improvement in the second quarter.

And I think we will continue to see some of that.

In terms of our SG&A outlook for the rest of '05, it will depend on the course of where comps come in each quarter.

There are certainly several factors that should help our year-over-year comparisons.

While we are now anniversarying the first full year of healthcare changes, our plans and changes that we put into place a year ago have a positive impact, although the biggest impact is in the first year, has continuing positive impact in the second and third succeeding years of the plan as well.

Additionally, we hope for good comps, and the last thing of course would be Workers' Comp.

Many of the legislative changes that occurred in California finally while they were put into, voted into law during calendar '04, many of the substantive economic changes, the impact of those will be felt starting January 1 of '05, and based on actuarial calculations, it may take a couple of quarters to see some of that.

But hopefully we will be able to see some of that going forward.

Next on the income statement is pre-opening expense.

Our reported pre-opening expense in Q2 was $23 million.

This of course included the $16 million one-time non-cash charge that was explained in this morning's press release.

Essentially as relates to the $16 million, this was in response to the Securities and Exchange Commissions' recent statement concerning accounting standards related to leases.

The Company therefore adjusted its method of accounting for leases that had been entered into over the past 20 years.

These were primarily related to a specific category of locations, which are located on leased land.

Really related to the ground leases.

Let me give you a simple example.

Historically if we had had a ground lease, which was a twenty-year fixed rate lease, and we took possession of the property 5 months previous to opening the warehouse, and started paying rent as of the date of the opening of the warehouse, historically we would then record the rent over the 20 years starting with when we opened.

According to the clarification from the SEC, and as I'm sure you've seen many other retailers report similar things, basically what they suggest is, what they require is, that we spread it over the 20 years and 5 months in this example.

So whereas would you have some additional book rent expense in those first five months, and then over the 20 years and 5 months have a little less in each of those monthly periods.

The impact going backwards was the $16 million.

The cumulative, that's a cumulative pretax non-cash charge, and we recorded it as preopening expense in the second quarter.

Prior periods financial results were not, due to the immateriality of this issue to the results of operations and statements of financial position for each of the prior fiscal periods.

Interestingly as it relates to this group of leases, we will actually see a very slight positive in each of the succeeding years going forward.

Now excluding the $16 million charge preopening last year was $4.2 million or 4 basis points.

This year, $7 million in the second quarter, or 2 basis points, or $2.8 million higher year-over-year.

Last year during the quarter we opened one warehouse.

This year we opened 4 during the quarter.

Again there's almost some preopening that relates to openings that just occurred prior to the quarter end, or that occur subsequent to the end of that quarter.

No real surprises there.

In terms of provision for impaired assets and closing costs in Q2 '04, those amounts total $3 million.

These costs total $4 million pretax in the second quarter of '05.

These dollars simply relate to our ongoing relocation efforts whereby the costs associated with the closing of these to be relocated units, are expensed up front, once the decision to relocation is made.

So whereas reported operating income was up 9.8 percent in the second quarter.

Excluding the one time non-cash charge of $16 million for the change to our lease expenses, our lease expense accounting, operating income in the second quarter was up $15 million over last year's second quarter or up 14 percent, to $405.9 million.

Below the operating income line, reported interest expense was up about 700,000 year-over-year, up from $8.4 million last year Q2, to 9 million in this year's second quarter.

Interest income and other, was up significantly year over year, up over $10 million to 24.8 million this year, as compared to 13.1 million last year.

Virtually all of this increase was due to much higher investment income which relates to higher cash balances earning higher average rates of interest.

So overall pretax income excluding the one time lease item was up 17 percent versus last year's second quarter to, from 360 million last year to $421.7 million this year.

Before I speak to our normalized tax rate let me spend a moment discussing the large tax credit we recorded in Q2.

As with other companies that U.S. operations, other U.S. companies that have operations outside of the U.S. we are required to charge, if you will, those foreign entities with what I would term, a royalty or a transfer price.

For what Costco U.S. brings to the table, intellectual property, membership know-how, the membership systems, buying power, you name it.

Costco has established reserve for transfer pricing, for transfer pricing dispute between what the U.S. and Canadian taxing authorities believe is the appropriate amount.

This relates to fiscal years '96 to '03.

During the quarter I'm happy to report that the issue was resolved, and it was resolved favorably, such that we will in effect save a little over $50 million in reduced taxes over this period of time.

This resolution covers the years through fiscal '06, and then we will revisit it.

But there shouldn't be any surprises there.

In terms of our effective tax rate excluding this, for the quarter it came in at 37.54 percent.

As compared to 37.0 percent in Q1.

For the second half of the year our current best guess is 37.9 percent.

This has a little bit to do with just increasing level of state income taxes in some of the states where we operate, and level of profitability in those states.

For a quick run down of other usual topics, let me start with the balance sheet as of February 13, our cash and equivalents, 3.788 billion, inventories 4.003 billion.

Other current, 572; total current 8.363; net PP&E, 7.516 billion.

Other assets, 570.

Total assets 16.449.

On the right-hand side, short term debt, 343; accounts payable, 3.999 billion.

Other current, 2.432 billion.

Total current, 6.774 billion.

Long-term debt, 733; deferred and other 267.

Total liabilities, 7.774 billion.

Minority interest 60; stockholders equity, 8.615 billion.

Total, 16.449.

Strong balance sheet needless to say.

In terms of accounts payable as a percent of inventory reported was 100 percent this year, versus 90 percent last year.

Excluding all nonmerchandise payables, it was in the low 80s at both second quarter ends.

Again difference is typically construction in progress, or payables on construction related projects.

Average inventory per warehouse, was up a little over 400,000 during the quarter, -- versus a year ago at the end of the second quarter.

About 100,000 of that relates to FX impact , so it's really not a unit volume issue.

Also about $100,000 of higher consumer electronics, and also about 50,000 higher year-over-year pharmacy inventory as we continue to expand over the counter area of that.

Our mid year fiscal inventories were our best ever.

Our inventories according to our merchants are in good shape.

In terms of CapEx, in fiscal '04 we spent 702 million.

Our original budget this year was for right around 1 billion.

The actual to date is 411 million.

A little less than budget to date.

My guess is that for the year we'll be slightly lower than the billion dollars.

In terms of Costco Online, it continues to be strong.

During the quarter a 46 percent sales increase, we're on line to exceed the $500 plus million sales results in Costco.com.

It's profitable.

You may have noticed we've gotten some nice press over the last couple of months about a month ago we sold a $40,000 Picasso on line, and it seemed to find its way into the news for a couple of days.

As well this past week we saw some notoriety on a $190,000 diamond ring.

We are finding that our members are willing to spend money on all kinds of things as long as the value and quality are there.

In terms of expansion.

As I mentioned earlier to date through the second quarter we opened 11 units through the quarter, and 1 since then. 3 of those 11 have been relocations, so a net of 8 through the second quarter.

In addition we've opened 1 so far in Mexico.

For the second half of the year we expect somewhere between 14 and 16 openings including 2 to 3 relos, such that we would expect to be right around 20, 21 locations for the year, 19 to 21 locations for the year.

On a base of 417 that we began the year with, that would be 5 percent unit growth, and estimated 6 percent square footage growth.

I think that number has come down a couple from the last quarter, as it did from the prior quarter.

It's simply a matter of timing.

We always find ourselves pushing to get as many as we can open in the year and inevitably a few drop out, and get delayed until the first quarter of the subsequent fiscal year, as did happen a year ago.

Finally before I turn it back to April for Q&A let me give you some direction for Q3 and fiscal '05 overall.

As of yesterday First Call consensus for the third quarter was $0.47, and for the year was $2.11.

Those are, I would guess toward the high end of our expectations of a range for each of the quarter and the fiscal year.

And with that I will conclude my discussion and open it up for Q&A.

April?

Thank you. [OPERATOR INSTRUCTIONS].

First question comes from the line of Emme Kozloff.

Hi, Richard, new store productivity.

Looks like it dropped sequentially, can you us some color on it, and how to think about it going forward?

Second question on interest income, there was a huge swing, should we stick with the current rate going forward?

Finally what was the impact from healthcare on SG&A?

Thanks.

Okay.

In terms of sales productivity, I think it's more timing than sales productivity and new warehouses.

So and then there's all those other little things in there.

Off-line I will take a look at it again, and looking at it myself previously I did not see a big detriment there in sales productivity.

We've actually in some of the openings we've done a little better than planned.

I will take a look at that.

Second question, I'm sorry?

That was on the interest income.

You have that huge swing.

Should we stick with the current rate of growth going forward?

As you know our friends in Washington continue to increase the rate, and we don't speculate on the cash.

It's invested relatively conservatively.

But over the last year certainly, we are now getting from a low rate to a still low rate but not nearly double, but certainly up over 100 basis points from a year ago.

So, yes, I would expect to continue that, that trend, given the slightly higher cash balance, and the relatively speaking significantly higher interest rate.

Then on healthcare, the impact on SG&A in the quarter?

It was -- it was a good chunk of it as has been in each of the last.

We don't outline each little thing.

Healthcare, it's all benefits related.

The biggest chunk is healthcare.

We have also seen a little bit of improvement even in our general liability insurance and indemnity insurance.

In Workers' Comp. it sounds like we can't try to model any improvement because it's still relatively vague?

It's been vague and conservative on that, partly because actuarily it takes 6 to 9 months after things going in to impact.

And again last year we saw the changes.

But then we found that many of the changes -- many of the substantive changes weren't effective and weren't going to go into law to be effective until January 1, '05.

So, again, I think it's still a little bit of positive going forward.

I think it's good news is over the last several quarters, we seem to have hit our numbers pretty well, without recognizing any benefit, or potential benefit from that.

Hopefully we can see some in the future.

In California, this past quarter, we saw a little bit of improvement.

So actuarily some of the lesser substantive changes we've seen some impact of.

However in the other 36 states we saw a little bit of detriment.

Which is to be expected.

Recognizing California is still two-thirds of the number.

Right.

Okay.

Great.

Thanks.

Your next question comes from the line of Deborah Weinswig.

Good morning, Richard.

On the first quarter conference call you talked about a conscious effort internally to ramp up expansion of new club openings.

We haven't yet seen it, obviously, in 2005.

Should we think differently about 2006?

I understand the timing issue, but it's something that's been happening over the last several years.

Anything being done differently internally, or should we think differently about square footage going forward?

Well, let's face it, each year we start off with a slightly higher number, which is what is on the list, of the best guess by real estate, and by plodding from Jeff and Jim, what they want to try to get open.

It is a more difficult environment.

The effort is ramped up.

If Jim were sitting here, he's traveling today but if he were sitting here, he would saw that, yeah, you should expect closer to 30 next year, and 35 the following year.

I would then probably temper that a little bit, but clearly more than the 20ish or 21ish that we are going to have this year.

Has anything changed in the in terms of your standard store, or for club openings or along those lines?

I think we've got tougher on ourselves as well.

When you look back particularly over the units that we've opened since '00, including in '01 and '02, when 45 of those 61 units were in new markets.

We've gotten a little tougher on ourselves in terms of the plans.

I mean recognizing when you set return on investment hurdle rates, it's based on expectations for a given opening over the first 3 to 5 years of sales and earnings of that location, well ultimately, you can project what you want to project 3 and 4 and 5 years out, if you want to get it open.

I think we probably have done a better job of late, in the last couple of years, of being tougher on ourselves.

So maybe that's added a little bit to the slight reduction in openings.

But what I can tell you is that Jeff and Jim are pushing real estate to get more openings.

And last question in terms of the 211 on the high-end of expectations, during your comments it sounds like you are pretty optimistic in terms of both SG&A improvement and gross margin, is there something else that we should be factoring in as we build our models?

What I try to be is somewhat optimistic but cautious.

As you well know and many of the on the phone know, over the last three or four fiscal quarters, whenever you've, as we -- some of those met the high-end or even beat the high-end, we don't try to sand bag the numbers.

You give you our stretch best guess, and inevitably, like this quarter, we came in at the midpoint, not the high-end of expectations.

So we think things are fine.

We are optimistic on our outlook.

What we said a year and a half ago was that we would try to over a six-year period get towards that 4 percent pretax in the quarter.

As in the last four, five quarters we've been up on a pre-tax basis, 20 plus basis points.

So it's tough out there.

But I'm trying to be cautiously optimistic, but realistic as well.

Thanks so much, Richard.

Your next question comes from the line of Adrianne Shapira.

You commented that the comps seemed to be largely driven by ticket.

Is that more of a function of cycling tough traffic compares from the strike last year in California?

And going forward should we look for a more balanced ticket and traffic driven comp?

I would guess it would be a little more balanced.

If you go back to when we were reporting 10 and 11 comps, it always, the transaction was always higher, recognizing the entire FXs in the transaction side.

Also the last few months we've been an anniversarying the California strike, also as relates more to January than February.

We've been an anniversarying the [expletive ] weather we've had.

So, yeah, so my guess is, whatever X is for a quarter, it's not going to be half and half, but it's not going to be 100/0 or 90/10 either.

My guess is, not a guess but my guess is, it will go back a little bit based on why -- the logical reasons of why it occurred over the last few months.

Okay.

As part of your outlook what sort of comps should we be factoring into that back half estimate?

Well, I think we always throw out 5 to 7, so I will stick with that.

But something in the mid-singles is generally where we feel comfortable, even when we were doing 10s.

And so far so good.

Okay.

Lastly just on the share count it look like it grew about 2.5 percent.

What's management's appetite for share repurchase given obviously a very strong balance sheet?

Stay tuned, I'm not meaning to imply yes or no.

When we do something you will find out.

As it relates, recognizing we do discuss that, and I don't mean to be have any cynicism in my response.

We do talk about it at the Board meetings, and we continue to look at it.

As relates to the share count going up, the big spike you saw in the last quarter or two is really two-fold.

One as the stock has gone up from the mid to high 30s a year ago, to what is now the mid-40s, the treasury stock method has that implication.

There was a lot of pent up demand for exercising and selling probably, and I'm talking among the 2,000 or so people at Costco that have options, and have had them for a number of years, and over three or four years we saw less exercising, and we saw more the last couple quarters as the stock has shown strength.

And I'm talking about throughout that 2000 person group.

My guess is that rate of increase will subside a little bit there: Again as relates to stock buy back, I know some of you feel that we should be much more aggressive on that.

We will look at it and let you know.

Lastly on expansion given the consolidation that we are seeing in the department store sector, does Costco view that as an opportunity to maybe get in on some non-traditional locations?

You may have seen the article yesterday in the Wall Street Journal that talked about that subject.

You are seeing some traditional anchors now, are merging, 2 or 3 locations inside the same mall, and they may choose to close one.

Certainly some opportunities like that.

In addition, clearly there's been more activity over the last several months and last year probably, in terms of looking at mall type destinations.

We are in 2 malls right now.

When I say in 2 malls, it's not an old traditional department store, it's a stand-alone entity.

We have 1 that is actually attached to a mall in Virginia, and there is a couple other ones we are working on right now.

We've gone from zero to a few.

We're not the only ones.

The likes of Target and Best Buy, and others are out there as well.

Clearly what we think we bring to the table is a much higher in number than some of our competitors, and nearly twice the volume of some of our competitors.

And 5,000 or 6,000 high-end destination shoppers, 7 days a week.

So there is -- I think something that we offer is attractive and some of the needs of the malls is increased, both because of the retail economy sometimes, and some traditional retail concepts, as well as some of the mergers that are going on.

It's positive.

It's not a big positive, but it's a positive.

Great.

Thank you.

Next question comes from the line of Daniel Barry.

Nobody has asked the membership fee questions.

So I will.

What's the latest there?

Latest thinking is kind of like the stock repurchase.

Stay tuned.

We haven't made any formal decisions.

When we know you'll know.

Can you update us on the Costco home, and if there's any chance that the Costco food will be a viable entity any time soon?

The Costco home as you know these past several months, we opened a second one in Tempe, Arizona.

The exciting one versus this one here, is it is located next to a regular Costco which, again, gets that 5,000 person a day destination shopper, right next door.

So you mean some across over to the Costco home neighbor.

We like what we see but, again, when, will we open another one over the next year?

Probably, maybe two, it's not like we are getting ready to roll anything out yet, we're still in the test phase.

With regard to Costco fresh, there is nothing on the horizon in the next year.

Great.

Thanks.

Next question, Gregory Melich.

The detail you gave on SG&A can you take us through the numbers of the operations, central admin, stock options and EITF again?

Sure.

Let me just get to that page.

Operations was 16 basis points to the better.

Central was 1.

Stock options were (4).

EITF 310 was (11), for a total of plus 2.

Okay.

Great.

And then the second question was going back to the CapEx, CapEx is going to be coming in a little under 1 billion.

I don't expect the answer, obviously the share repurchase question.

But just if you can give us an idea of what the optimal capital structure as you are thinking out, say, three years, and versus CapEx.

If we are really going up to 25 or 30 clubs I imagine CapEx should be going north of 1 billion, but even with that you are generating it looks like a normalized 500 or 600 million of free cash flow.

Are we on the right page with that sort of thinking, and what sort of debt to cap, or what would you target?

Yes, you are on the right page.

And the answer would be, the debt to cap would get lower.

And the answer is we have to do something with our cash.

Is there a number of debt to cap that you think of, or a range?

Not really.

I mean I say this a little bit tongue in cheek, but I remember going to the rating agencies, 10, 15 years ago, when we felt comfortable, 40 percent debt to cap.

I am in no way implying that we would get there now.

But that's far from it.

But clearly something in the pre-teens here is as some of you on the call would say, is a little too healthy.

Okay.

Good.

The free cash flow numbers, that seems consistent.

Yeah.

Last year was.

You had a $300 million debt payment in June of this year.

We've got another $300 million debt payment, I believe in the middle of '07.

So about a year and a half.

So that offsets it a little bit.

I would expect over time that our dividend increases, although again we have not made any comments on that, but that's what most companies do out there.

But not enough to offset what you just suggested.

So.

Okay.

There's still free cash flow.

Great.

Thanks a lot.

Your next question comes from the line of Teresa Donahue.

Good morning, Richard.

I guess I'm still a little bit confused -- two questions.

I'm a little bit confused as the, with respect to the guidance because I had the impression that the 211 might have been the low end of guidance.

If you could give us a sense for the couple of points line items that in your mind are different than they might have been a few months ago?

And secondly I have a follow-up question on the expansion rate relative to Adrienne's question about consolidation in the malls.

As relates to guidance, again, you're right, you picked up on the fact that I threw out as related to the first call out there, that's near the high-end of the range.

As you saw this morning, and as I read a few of the sell-side reports that are already out there, Costco reported $0.54 , a penny below first call or a penny below somebody's estimate out there.

And within the range of our guidance but unlike a couple of quarters before, not at or above the high-end of the range.

So I think it's just being cautious as we go forward.

What would cause you to be more so going forward?

That's still not clear to me?

What has changed in this quarter in your mind?

Well, the only change is we didn't hit the high-end of expectations.

I'm not trying to be cute about it, but there's not a lot to it.

What I found over time is that for us on 12 and $14 billion quarters in Q4, with it being 16 weeks not 12, more than that, a penny a share after tax is 6 or 7 basis points pretax.

Gasoline alone could be a swing one way or another.

I'm not trying to have you -- I'm not trying to hide anything, nor am I trying to have you read into anything, other than in Q2 we came in at the midpoint instead of the top end, and we try to be realistic going forward, based on what happened yesterday.

You talk around here to the merchants and the operators and myself and Jim, we think business is quite good.

Our competitive posture is fantastic.

Our merchandise is great and clean and exciting.

And when we said, what Jim said to all of you in December of '03, we are living up to what we said we thought we could do over a six year period, albeit now 6 quarters into the 24 quarters.

And it's never going to be a straight line, but so far it's been a pretty straight line.

And I guess relative to that point, what's your best estimate for leverage point on comps these days?

It seems as though the SG&A leverage slowed somewhat on what was still a relatively healthy comp in this quarter?

Well, getting back to the first question real quick, also -- hold on one second -- yes, Bob Nelson is here, he mentioned to me, he said again we are not trying to be cute about the numbers or the guidance.

If you go back to when we reported earnings in Q1, on that day the consensus for Q2 was 54.

And we reported those numbers, and it went to 55.

And again we try to be optimistic and push ourselves as well.

So we feel good about the Company and what's going on right now.

As relates to SG&A leverage, again there's lots of moving parts.

Again when you look at it what we said a year and a half ago, is that healthcare is going to help us, more in the first year than in the second or third, but it should keep helping us a little bit.

Again, at some point we will hopefully see some improvement in Workers' Comp., although as I mentioned to you earlier we haven't seen a lot yet.

I don't think -- I don't think there's anything there, I can start giving you some excuses, the winter storms didn't help payroll for a couple of weeks.

But when you add it all up it was a pretty good quarter.

Terry, off-line I will be happy to go back with you, I will not tell you anything that I wouldn't tell anybody else, as my attorney is sitting here.

Thanks.

Okay.

I will go over it with you in further detail later on my model.

Thanks.

Your next question comes from the line of Gary Balter.

Hi, Richard, I guess I was one of those analysts that had the, you missed by a penny.

One of the things that when we look at the numbers, you mentioned you have 3.7 billion of cash?

Yes.

Given the shares keep on going up, and the stock going in the other direction, why wouldn't the Company use some of that cash?

What is the plan with that 3.7?

Are there acquisitions out there, are there other uses of the cash that you see?

Historically we've not done acquisitions.

I agree with you that there needs to be a use of the cash.

We continue to talk about it, and as soon as we do something you'll know.

Okay.

And what comps do you need for leverage?

Somewhere in the mid-single digits we've seen leverage.

Again, I would say mid-singles.

So if we do -- you saved 10 or 11 basis points on the EITF 310, so if we get to 5 or 6, we are kind of flattish on the expense line, is that a fair way to look at it?

In Q2 you are going to get that -- as an example in Q2 if you take out EITF which has now gone away, we would have been 13 better in Q2.

Right, but that was with the 7.

So we could do it at a 5 or 6.

Okay.

Good.

Thank you.

Your next question comes from the line of Bob Drbul.

Good morning, Richard.

If we can focus on the gross margin line for a second.

My question would just be, where are you with your private label penetration in terms of taking that gross margin a little bit higher, and where do you see opportunities as we look forward in terms of the gross margins?

Well, again, the private label is still around 15 percent.

And it continues to increase.

I think that's just one aspect of -- we continue to be smarter.

I chuckle.

I think in August of '03 when we missed our number in a big way, and we related a lot or at least half was related to missing our margins, if you recall Jim got on the phone and said that we are smart enough to figure out how to be competitive and still improve margins, I think we've shown that over the last year and a half.

And we've done that despite the fact that we see a detriment to reported margin from the executive membership increase in penetration.

So I feel, and the merchants feel that we can continue to do that.

There's, again, there's no, I can't say there's 3 basis points from this and 5 from that and 8 from this, and minus 3 from that.

But overall we think we are able to do both and still be pretty tough on our competitors.

Just one second question, Richard, with the bad weather that you've had in southern California has that majorly impacted your profitability this quarter?

I hate to put, start pointing out excuses but, yes, it hurts.

Does it hurt a lot for the quarter?

No, but it hurts a little.

A little could be a few basis points of something.

Clearly when will you get weather like that, your payroll percentages, and again payroll and benefits are 70 percent of SG&A, are as variable as you want to think they are, and a lot of it's variable expense, it's very sticky variable, particularly when you miss sales on a day or a few days or you still have your crew come in, and nobody is showing up because the weather is bad.

Both the rains and the snow.

Okay.

It hurts a little but I'm not going to cry about that.

Thank you.

Your next question comes from the line of Dan Binder.

A couple of questions, first, With store openings what should we be planning next year, 20 to 25, versus 25 to 30?

That's the first question.

Second, in terms of share count for next quarter should we be modeling similar to what we've been seeing, or continue to see an increase?

And then the third question, just in the interest of going through the exercise of how accretive a buy back might be, what kind of interest on cash should we be using in our models?

Okay, well, in terms of openings for next year, if I were you I would probably start with a number in the mid 20s.

And we will see where we go.

And to the extent that, you know, as we approach August and we start giving direction that we help to open X-number of units next year, and assuming X next year was somewhere in the low to mid 30s, I would would probably bring it down 5, based on history over the last couple of years.

But clearly more than what we've done last year and this year, is my best guess.

In terms of share count I would not have it go up as much on a quarter-over-quarter basis, not quarter-over-year basis, but quarter-over-quarter.

In terms of how -- it's been up a little, in terms of how accretive, you can do the math, I would assume some number in the 2.5 percent range for interest.

And.

The only reason I ask is the income just seems so much higher than a lot of us expected.

I don't know if there was anything unusual that you are using for investment vehicles or that -- ?

Absolutely not.

We have done nothing to our investment policy and it's pretty darn conservative.

If you are using some number in the mid 2s, that means a year ago the number was in the mid 1s.

Percentage wise, it's a pretty big increase.

And then lastly, In terms of stock options and drag on SG&A does it continue to be in that 4 basis point range?

That's fair.

We keep looking at it.

We are looking at alternatives but we are not made any decisions on that.

Historically, I'm not talking about hourly employees, but salaried house managers and other people at central, that receive options, and out in the field, options are a part of the pay package relative to cash pay.

And we still believe in it.

Okay.

Great.

Thanks.

Your next question comes from the line of [Lowell Seitman].

Can you comment on the other elements in interest income and other?

The minority and affiliate earnings?

How is that running?

Is that ahead of a year ago in the second quarter, and the first half?

In terms of interest income and other, hold on a second.

Have I to put my glasses on.

Again, the total reported number was up 11.6 million from 13.1 to 24.8; 11.7 million.

Around 10 of it was interest income.

So the other aspect was up a little bit but not a lot.

But that was mostly Mexico, which was added to that line.

As you know a little over a year ago we acquired the last 20 percent interest of Costco U.K. from [Carefor].

Historically. that 20 percent of earnings from the U.K. would be a negative on those lines, so as earnings in the UK grew, it dragged this line, but that's not a drag or an addition any more, whereas Mexico which we own 50 percent of, and account for on the equity method, as long as that earnings grow, it helps us in line a little bit as well.

Okay.

Also, any new competitive wrinkles out there?

Not really.

It's still tough out there, but we are tougher.

We feel good about what's going on.

Okay.

Thank you.

Your next question comes from the line of Sheri Eberts.

Good morning, Richard.

I want to talk about your updated view on your long-term growth rate, if you are Looking at the top line opportunity it sounds like a 5 to 7 comp a is what you are planning, what you've done on the real estate side is really about a 5 percent growth, so your top line is low double-digits.

Can you talk about what your EPS growth rate should look like on that type of top line?

Very simple back of the envelope type math, again if you go back to December of '03 when Jim said his goal was take a 2.8 percent pretax, up to 4 percent over six years simple math says that's 20 basis points a year.

Every 10 basis points of something, assuming it's an improvement, every 10 basis points in a given year, will add about 3.5 plus percent to earnings growth.

So take whatever your number is for top line and 10 basis points you would add about 3.75 percent, and if you, 20 basis points, you add about 7, 7.5 percent.

So, again, to make the math simple, if you assumed, I'm not assuming but if you assumed a 10 percent top line, and you said, hey, yes, we believe the company can achieve that 20 basis points a year on average that, would imply something above 15.

If you assumed, hey, that's maybe a little aggressive, we think the company can be at 10 basis points, you assume something slightly below 15.

Okay.

Thank you.

Again, that's, we will wait and see.

Your next question comes from the line of Chuck Cerankosky

Good morning.

Want to touch back on something, talking about some of these mall locations.

Would you guys look at a multi-level location, or would you have to spend a lot of money to make it suitable for a Costco?

Anything is possible.

First priority is always to find a 12 to 15-acre site with ample same level parking and same level building, second would be like downtown San Francisco, where we have a full 150,000-foot building pad on one floor, although parking is multilevel, so when a customer is leaving with their cart, they have to take an over-sized elevator, or these long ramps.

That's always a second priority and a third priority would be when you've got something like Port Chester, New York, or some locations that we have overseas, and densely populated cities, where you have the floor split between the retail selling floor, split between two floors of 70,000 or so square foot.

We look at everything, but sometimes from an ongoing operational standpoint it might be cheaper to tear something down, rather than try to figure out how to put our concept into that building.

Certainly not just us but we are all being more creative in how we look at these things.

Okay.

Take a look at the economy, what are you seeing out there that has changed that makes you feel more positive or negative about the top line prospects for Costco, and also what's your nonclub competition doing that's effecting how you guys merchandise the stores?

I'm sorry, go back to the first question, Chuck?

When you are looking at the economy, what's changed out there?

Are you seeing.

When things were good, I mean, I'm defining real good as when we were running 10, 11 percent comps.

And as you know those of you who have talked to me we were pretty cautious about that saying it can't sustain itself.

I don't think we are more bearish now because comps were a 7, instead of a 10 or 11.

We think that's pretty good.

Merchandising-wise, I can tell you the merchants feeling very strongly that we continue to be on the very top of our game in terms of procuring new merchants, that historically have not sold us, those that hadn't, some of them are, those that don't ever talk to us, are at least are talking to us, so I think that continues.

In terms of the what's going on, I was asked yesterday about the impact of things like the Federated/May merger.

I think the impact to us might be in a sense that there is some brand and apparel manufacturers that might feel more squeezed by that, and might be more open to sell to us.

As many of them already have.

We tend to be the upscale alternative in our industry, and the one that does twice the volume, so hopefully we are first dibs on some of that stuff.

The mall it's a positive in terms of expansion possibilities,s but a positive for our competitors as well.

If you look at the comps and most of it was driven by transaction size is that telling us that your typical member visit, or your typical member on a visit is willing to spend more per trip?

Absolutely.

Again getting back to my comments about what would have caused that ratio, the sum of transaction size and frequency equals comps, why is it 100/0, 90/10, instead of 70/30, a little has to do with things like the weather in California, the strike anniversarying over, from a years ago and my guess is we will see that trend go back the other way.

That's a guess.

I am going to beat up on you about the cash as well.

When you are having these discussions about what to do with it, is the company's ROA entering into the discussion?

Because as the cash increases the denominator in that calculation, but also can you prioritize uses of cash between significant increases of dividend, repurchasing, and then acquisitions, which you've traditionally kept away from?

I would say in terms of us buying a different type of operating company to run or to have run for us or whatever, that's I would say at the bottom of the totem pole.

As many of you know, Jim and others here are pretty hands-on and we are pretty busy doing what we are doing.

I think there will definitely be an emphasis to the extent we can spend another 200 to $400 million a year on CapEx versus what we are spending.

We should definitely do that, and we will.

Then as it relates, the difference between dividend and stock repurchase, I think all of you know the same answer without me saying it, I don't, at least we haven't discussed and I don't see the likelihood of paying a one-time big dividend.

Nor do I see us ramping up so dramatically that it's going to be meaningful in any given year.

Assuming we do with what most companies do, and increase it over time it's not going to double each year.

It's going to go up less than that.

So clearly stock repurchase if you have all this cash that's one way to use it.

Again, stay tuned and we will see what happens.

Thank you.

Your next question comes from the line of Mitch Kaiser.

I want to make sure I'm clear on this, the EITF 03-10 goes away after this quarter then?

It's gone away.

I will still talk about it on a year-to-date basis in Q3 and 4, but it's essentially not an impact Q3 or 4.

So is it safe to assume that if you do the mid single-digit comp like you said, I know there's other factors, though, but kind of steady state on those factors we can see some improved margin expansion then, off of G&A?

You will see improved SG&A expansion.

It's really a wash because what you see on one line SG&A, you lose on the other line margin.

Okay.

Sounds good.

Thanks.

Your next question comes from the line of Jeff Stinson.

I wonder if you can talk about food inflation, and what you might be seeing there, and with regard to LIFO what do you guys expect to see a charge moving forward for the next two quarters?

Our guess right now is we would see a charge in the next couple of quarters as we did in Q2.

I can't say how big it is.

Who knows?

This is still early in the annual game.

We are seeing inflation on coffee, on some other food items, some nuts.

We are actually seeing some relative reduction on some dairy products because there have been 40 and 50 percent increases a year ago on things like butter, so it's coming down from there.

We are seeing big deflation as everybody does in consumer electronics, although the way LIFO works, we are already at our net realizable value and you can't go below that.

Any deflation in consumer electronics doesn't lighten the load from a benefit to P&L.

My guess is we will see a slight hit in Q3 and 4, but I have to tell you, every month is a little different.

I remember last year as of the end of the first and second quarter, was implied 40 or 50 million of deflation.

Three months later, it implied half that. in one month it seems like it's going in one direction, the next month it changes a little bit, even if the trend had been slightly inflationary.

So I think we just have to wait and see.

Thanks.

Your next question comes from the line of Christine Augustine.

Thank you.

Richard, what is the current thinking with regard to new market entries internationally, and then on the consumer electronics in terms of your assortments are you actually increasing the SKUs there, or are you finding the ticket is going up just because of the addition of more digital?

Thank you.

In terms of foreign and new market entries I mean, we continue to look at a couple of other countries in Europe.

Other than that -- and again we haven't succeeded, other than that I would say we focus on the country's we are already operating.

In terms of consumer electronics I think it's more bigger ticket items.

You have more $2000 plasmas, which are down from $3000 and $4,000, but nevertheless up from $400 and $500 tube TVs.

You have 200 and 300 and $400 digital cameras, versus 100 and $200 cameras.

You've got a lot of inventory in thing like the electronic data storage devices from Sandisk, which one pallet of that is tens of thousands of dollars.

And deflating incredibly, but growing sales incredibly as well.

Thank you.

Your next question comes from the line of Mark Miller.

Hi, good morning.

The executive membership growth slowed just a little bit in the quarter, and I guess I'm wondering how many members do you think spend enough that rationally they would upgrade to an executive membership?

You do disclose some information in your 10(K) about the spending for the executive membership, and if I'm doing the math correctly of the 3 million or so members you had in '04, executive members, I think they were spending around $ 4,000 each, or getting an $80 benefit?

And then the other 20 million members, looks like they were spending about $1,800, or $35 savings.

I know those are averages, though.

What type of --

I think those are based on your calculation, and we don't disclose, clearly executive members make more.

The simple break even on the incremental $55, is that the member would spend $2,750 a year, recognizing if you have a member spending $25,000 a year, it's a no-brainer for them.

But what we have seen over time is that those members tends to comp at a higher level over the first couple of years, and once they get to that higher level they stay there, and it doesn't diminish.

So the math works.

It's a competitive advantage because it's, you have to get through the years of adverse selection to get where you are today, and we are now there, and on the increment with our average sales per member growing generally, and each year there's more people wanting to do it.

And we are not shy about talking them into it, if it makes sense for them.

You guys do a great job of marketing in the store and actually I wasn't at all questioning the benefit.

I was wondering actually as relates to the fee increase, do you, is the timing of that at all governed by the rate of uptake on the executive membership, or are those really 2 separate variables?

I would say completely separate.

Two separate.

Thanks.

Your next question comes from the line of Dan Geiman.

Good morning.

Can you just again give us a split between the new and existing markets for your new store openings this year, and also talk about how this might shift over the next year or two, also as a follow up to the question regarding international expansion, are there any thoughts on entering the China market at this point?

As relates between the split between new and existing, I don't have the exact number in front of me, it's more -- closer to 75/25, or 80/20, recognizing Chicago is no longer an existing market, as we've gone from 0 to 13 locations in the last three years.

So I would say 80/20 is probably the rule going forward over the next couple of years.

As relates to China, we've looked.

It's just not on our plate for the next year.

Beyond that we'll see.

Okay.

Great.

Thanks.

We have a follow-up question from the line of Teresa Donahue.

A question number , 50,000 on the cash, in your mind, Richard, what are the considerations on the part of management that are preventing -- that would give you guys pause with respect to instituting a share repurchase program?

Nothing.

There's a program approved.

Yes.

I think the fact that we haven't done it historically, if anything, there's always a little pressure when asked too many times, nothing personal here, we don't want to be seen as doing it for the wrong reasons, just to announce it, but not to worry.

We keep looking at it.

I can't tell you we will do it tomorrow.

I hear you, and I keep talking and the board keeps talking.

Your next question comes from the line of Dan Binder.

Hi, Richard.

Just a follow-up question.

You had briefly touched on consumer electronics earlier.

I'm just curious, is there any, I think you guys have tossed around the idea of offering warranties at some point, in an effort to get margins up.

Do you think that could potentially be an opportunity for attachment?

Actually we have never really seriously talked about warranties.

One of the company's out there I remember hearing it at a conference a few years back, was priding themselves that sales penetration of warranties was up 200 basis points, it was 65 percent gross margin business.

That's precisely why we don't do it.

We think that a lot of -- our warranty is, bring it back and we will give you a 100% refund.

So that's better than a warranty, and it's free.

And so, no, we do not plan to do warranties.

Second question and it touches on really just the math behind potential membership fee increase, and I realize you are not planning on one this second, but I think the last time you did this membership fee increase we had gone through the math on the membership base.

You had only a certain percentage of members that were actually paid members in the base, I think it was probably around 84, 85 percent.

Is that still a similar number today?

We leave you in the membership base up until your first anniversary of not renewing, recognizing that people don't all renewing in the beginning of the year meant, you've got people that have two homes and tentative, six months later end up renewing, recognizing most people renew on time, or within the first 4, 5 months.

I think over 95 percent of them review by the end of the 6 month post-renewal date. 86 percent, times the 24 million member households, you get a number, let's see, 86, times 24, of about a little over 20 million, that would be a good number to use.

Okay.

Thanks.

Your next question comes from the line of Mitch Kaiser.

Richard, I'm sorry, just a follow-up question on advanced definition televisions.

Is it fair to assume that the margins on those would be comparable to the corporate average?

And then also if you could maybe comment about, are you seeing anything in supply from China, and then just lastly do you think the service aspects of that, or the installation aspect of that is a competitive disadvantage for you guys?

The margins are fine; nothing surprising higher or lower.

In terms of the favorable -- seeing anything from China, I don't know, could you elaborate on that a little bit?

Maybe some supply coming from China on advanced definition television, a lot of people have talked about that potentially impacting the supply dynamics.

Talking about it going forward, I think it's we've seen more supply from Korea and Taiwan.

I know there's a big company, is it LG, I'm speaking as a consumer here, and as it relates to the last question was,.

On the service or installation side, particularly around plasma, and things like that on the wall.

We always struggle with that. if you look at a Best Buy, certainly one of their emphasis it seems is service oriented with higher end stuff.

I guess I go back to a phrase that [Saul Price] coined years ago, with the intelligent loss of sales, that we know we can't do everything in our environment.

We sometimes surprise ourselves in doing a little more than that.

I don't expect to see the Costco guy in the truck coming to your house to set up your home entertainment system.

But there's -- there's so much pent up demand out there, as these items have fallen in price dramatically, that we are getting our share of that business.

Your next question comes from the line of Teresa Donahue.

Hi, Richard.

I forgot one thing.

In terms of your expectations or Jim's expectations for operating margins what does that assume about fee, membership fees over that six-year period?

Without having Jim here to know exactly what his assumption was, what he said, I think is it fair to say that a -- a better way to say it is, if you had one increase that's consistent with historical increases what would that mean, one $5 increase, would be about 20 basis points spread over two years.

Okay.

Thanks.

Why don't we take two more questions.

At this time, sir, there are no further questions.

Well, thank you very much.

One last comment.

The Q&A which will include cash flow and balance sheet, will be posted in about an hour and a half on the website.

Thank you very much.

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