好市多 (COST) 2007 Q1 法說會逐字稿

Good morning.

My name is Meredith and I'll be your conference operator.

At this time, I'd like to welcome everyone to the Costco Wholesale Corporation first quarter earnings conference call.

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

After the speakers' remarks, there will be a question and answer session. [OPERATOR INSTRUCTIONS].

Thank you.

I would now like to turn the conference over to Richard Galanti, Chief Financial Officer.

Please go ahead, sir.

Thank you, Meredith.

Good morning to everyone.

This morning's press release covers two major items, our first quarter fiscal 2007 operating results and our Form 8-K filing this morning related to a non-recurring charge that we plan to record in the second quarter related to protecting our employees from certain adverse tax and financial consequences of our historical stock option practices.

As with every conference call, I will 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 that these statements involve risks and uncertainties that may cause actual events, results and/or performance to differ materially than those indicate by such statements.

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

To begin with, our twelve-week first quarter.

For the quarter, we came in at a reported $0.51 per share.

This compares to our October 12th guidance of $0.48 to $0.51 at which time First Call consensus was $0.50.

And last year's first quarter, we came in at a reported $0.45 per share.

So on an actual calculation earnings per share, we are up 13%, helped of course by share repurchases.

If you look at net income, its growth was up 10%.

As I will discuss in a few minutes, this year's first quarter benefited by about $0.01 a share due to a revision in our method of allocating certain payroll-related expenses which we expect to be more than offset in our upcoming third quarter by a corresponding hit to EPS in Q3 of a little under $0.02 per share, with small expected benefits in Q2 and Q4 such that in total, there will be no impact on our annual figures but we believe better accounting.

I will explain that in a minute.

So in fairness, excluding this benefit, our Q1 came in at an adjusted $0.50 per share, up 11% year over year in Q1 and in line with First Call, and frankly a pretty good showing given sales this quarter and the competitive landscape out there.

In terms of sales for the quarter, as previously reported, our twelve-week comp sales figures showed an increase of 4%.

Other topics of interest that I will review this morning are our opening activities and plans.

As you know, we opened a total of 13 units, including one in Mexico, so 12 net consolidated units during the first quarter which ended November 26th, and that put 10 new units in the U.S. and two in Canada.

Since first quarter end and through the ends of this calendar year, we opened four additional locations, three more in the U.S. and one in the U.K.

Also included in this expansion, among those was on November 22nd, we opened our 500th Costco location down in La Quinta, California and today we stand at 504 locations, 474 consolidated into our financial statements plus 30 now in Mexico which we are 50% partner in.

Also this morning, I'll review with you the normal items, ancillary business results, on line results, membership and the balance sheet.

Now for the discussion of our earnings.

Again, sales for the quarter were up, total sales were up 9% from last year's first quarter, up to $13.9 billion as compared to $12.7 billion last year in the first quarter.

On a comp basis, as I mentioned, 4%.

The 4% first quarter comp was comprised of a reported 4% number in September, and also a 4% in October and a 5% in November.

For the quarter, our 4% reported comp results were a combination of an average transaction increase of about 2.5% to 3% in the quarter and an average frequency increase of right around 1.5%.

As I think I mentioned on the last call for all of last fiscal '06, our company-wide, our average annualized warehouse volume was $127 million, in U.S. only $130 million, so we entered this fiscal year '07 with that base.

Included in the average transaction increase of 2.5% to 3% in Q1, we of course had helped by an FX gain given the weak U.S. dollar.

That was about right at 100 basis points boost to these quarterly earnings and to the average transaction.

However, as I foreshadowed on our last earnings conference call, gasoline pricing hurt our comps in Q1 by about 135 basis points due to lower year over year gas prices.

This of course was due to last September as we are now anniversaring the impact that Katrina had on September, October and even a little bit into November gas prices and that was associated with the gas price and gas availability craziness that occurred back then.

In terms of cannibalization, given our ongoing ramp-up and expansion in in-fill markets with most of that in existing markets, it impacted comps by an estimated 165 basis points in the quarter so our comps are, were impacted by that negative as well.

In terms of the sales comparisons by geographic region, as you know with the 4% recorded comp, U.S. was a 3 so there's not a lot of variation there.

Within that of course, U.S. gets the entire hit, virtually the entire hit for gas price deflation as well as most of the cannibalization hits, so these numbers are impacted by there.

Basically the west coast was just around flat.

The strongest was the newer markets like the midwest.

Canada continues strong, helped of course by the strong Canadian dollar, still positive on a comp basis notwithstanding some pretty weak tobacco numbers with some things that have gone on up there.

In terms of merchandise categories, the strongest department by far has been hard lines, certainly helped by very strong nature of electronic sales, both consumer electronics and PCs and what have you.

Food and sundries and soft lines were all in the low to mid single digits.

Food sundries actually impacted negatively also by tobacco where tobacco as a comp for the Company was about minus 10%.

That represents, I believe, 7% or 8% of our total sales.

Ancillary businesses were slightly negative but again that entire impact is gas.

If you take out gas, it was about 8% positive.

We had a very strong hard lines comp as I mentioned in majors and toys, or majors which is electronics for us, and toys were the strongest subcategories, up -- majors was up in excess of 20%, toys in mid-teens.

Within a decent soft lines number, we saw particular strength in small electrics, men's and women's apparel and jewelry, offset by weaker comps in media, which is books, CDs, videos, DVDs, and what we call photo camera.

Now cameras themselves were fairly strong but the big offset there is within that department, we have film, although we don't have all the memory sticks are in electronics so there's a little bit of an anomaly there.

Fresh foods was fine with bakery being the standout, that particularly given the help of Thanksgiving week.

In terms of other components of sales, in terms of pharmacy competition, we've got a lot of questions of course with that with some of the competitive changes out there with generics.

Pharmacy comps were up in the mid single digits and actually that pharmacy is split between RX business and over-the-counter health and beauty aid type business, analgesics and what have you.

The RX piece was actually up in the high single digits and overall the entire RX business was better than our total Company comp.

A little comment about the competitive landscape.

When our competition went to a $4.00 generic drug offering on a 30-day supply of a variety of generics, initially we matched it.

Last week, we launched our own deal on a little over 200 of these generic drugs.

That's basically a straight across 100 pills for $10.

We have slightly lower costs on 30 and 60-day supplies of recognizing that the costs associated with filling prescriptions is such, we believe that our members will take advantage of the 100 pills for $10.00 which, needless to say, is pretty darn good.

Moving on to the line items of the income statement.

Start with membership fees.

Membership fees were strong, up 14% in dollars or $37 million, and up 9 basis points as a percent of sales.

That of course has to do with starting to receive on a deferred accounting basis the benefit of the $5.00 increase we did back in May.

Realistically, in May it started but July 1st is when renewals hit so we will see the associated trend of improving year over year delta there in terms of the up 9 basis points as we get the full impact of that over the 12-month period.

In terms of membership, we continue to benefit from good renewal rates, very strong renewal rates, the $5.00 increase as I mentioned, and continuing increasing penetration of the executive membership which, needless to say, lots of new members and members who spend more and spend at a faster rate.

You should see reported membership fees, as I mentioned, as a percent of sales continue to show good growth this year if for no other reason related to the entry of to deferred accounting of the $5.00 increase that we did in July.

In terms of the number of members at Q1 end, we ended Gold Star at 17.7 million, up from 17.4 million at 12 weeks earlier at FY end, Primary Business at 5.3 versus 5.2, Add-on at 3.4 versus 3.5.

A lot of that had to do with as an Add-on becomes an Executive, an individual, it goes to the Gold Star account so you have that out there.

But all told, 26.5 up from 26.1 million members at FY end and with the free Add-on card, the spouse card, 48.5 million versus 47.8 million at year end.

In terms of paid Executive members, during the quarter we added 270,000 executive members in that 12-week period, or up 5% since year end in terms of number of members.

These 5.5 million paid Executive members, roughly 21% of our membership base, generate a little over 50% of our sales, and a little over 40% is rewardable recognizing we don't reward gas, tobacco and alcohol.

In terms of renewal rates, our Business members, both at year end and at Q1 '07 end, rounded to 92%.

Gold Star, both at year end and Q1 end, 85%, and so the total actually eked up so that the Company total, I'm happy to say, for the first time I think that we've been reporting the Company average of an 86% renewal rate for gosh, four, five years now and notwithstanding the fact that you probably get a little bit of a negative from the $5.00 increase in the renewal rate, although we are not seeing a lot of that, we do get a little bit of that, for the first time in our history, the renewal rate has rounded up to 87%.

Now going down the gross margin line.

Our gross margin in the first quarter was lower year over year by 2 basis points coming in at a 1056 versus a 1058.

In terms of the numbers that I ask you usually to jot down, we will just give two columns, fiscal '06 in its entirety and Q1 '07.

The five line items would be merchandising, the second line would be 2% reward, third line LIFO, fourth line total.

That's actually four lines, I'm sorry.

In terms of merchandising, for all of last year and this would be on the year over year comparison so all of '06 versus all of '05, core merchandising business was down 4 basis points year over year.

By comparison in Q1 '07, it was up 8 basis points but I will share with you how that math works in a second.

The 2% reward for all of '06 was a 10 basis point hit to margin and again that has to do with the success of the program.

In effect, that its essentially a 5% increase in the amount of sales that are being done by Executive memberships year over year.

In Q1 '07, a corresponding 10 basis point hit.

Again, we had quite a bit of success.

I think part of it has to do with how we market it.

We on a periodic basis will do in-store solicitation at the register and so we had a jump there.

My guess is in terms of how it hits the gross margin, that rate of increase will be up but probably fall a little bit over the coming quarters.

LIFO, no change.

We had no estimated charge for the quarter.

In total, recognizing the huge deflationary aspect of electronics, and what we call majors department, we basically, and on top of that gasoline deflation.

We basically had a slight deflationary environment and therefore are assuming as best we can estimate, that there's no increase or decrease in LIFO for the quarter.

Total then would be -- whereas by the way, the fiscal '06, we had a 3 basis point pick up due to LIFO.

So if you look at '06, it was the minus four merchandising, the minus 10 and 2% reward, the plus 3 in LIFO which basically had reported margins for all of '06 down 11 basis points.

This year in first quarter, plus 8 in merchandising, minus 10 in reward, therefore total, zero in LIFO, and therefore a total of minus 2 year over year.

Now let me go through a little bit of the components of the what we call merchandising plus 8%.

Our core merchandise business, the roughly high 70s percent of our business which is the four basic categories of food and sundries, hard line, soft lines and fresh foods, that was actually down slightly year over year in Q1 by about 6 basis points.

Within these four major departments, food and sundries, which is about half the business, and soft lines which is about 12% or 13%, I believe, of the business, they were higher year over year and quite strong.

Hard lines was and fresh foods were down.

Hard lines, of course, impacted by our higher cost of dealing with returned items, primarily electronics.

Our year over year gross margin in the retail gas business was nearly flat in Q1 year over year, down ever so slightly, but it is a significantly lower gross margin business as you know than the rest of the Company.

And gas sales penetration, again if you go back to last year with Katrina, you had huge increases in gas prices.

Now they are down from that.

And our Q1 gross margin was impacted negatively by 10 basis points from higher sales penetration of the 2% Executive Member reward.

I'm sorry, it was impacted positively by that because had you a lower penetration -- hold on, let me start again.

Gas sales penetration was down in Q1 2 full percentage points in sales due to Katrina a year ago, thus the reduced penetration of a lower margin business that would increase to gross margin.

So despite fact that the core business was down slightly, the fact that this business had greatly reduced sales penetration was a net merchandising positive of 8 basis points also Q.

Also, Q1 gross margin, as I mentioned, the 10 basis points from Executive Membership program.

Lastly, despite Medicare Part D last year, which impacted negatively gross margins in the pharmacy and the very beginning of the initial competitive issues with generics, our pharmacy gross margins in Q1 were within 2 basis points of last year's Q1 pharmacy gross margin.

And its overall gross margin contribution level with last year was actually slightly higher due to continued strong sales in that area.

In terms of our gross margin outlook going forward, reported gross margins will probably be again flat to down a little due in large part to the competitive issues out there, the electronics issues as well as the, a lessening of the gas impact with a little bit of an anomaly in the first quarter.

We will probably still see a little of that benefit, if you will, by lower gas penetration but not as extreme as Q1.

The impact from increasing Executive membership again should still be a hit.

My guess is that comes down a little bit in terms of the amount of the hit given that we had done some marketing efforts.

LIFO, for the time being, we will assume it's zero for the year.

Increasing private label penetration, again that's a slow-moving trend, but nonetheless a positive to gross margin.

And again, our overall, our core merchandise groups are just fine and inventories I'm pleased to report seem to be clean going into Christmas here, going out of Christmas here.

In terms our ancillary businesses, as you know, during the quarter we opened 12 net new units.

In those 12 units, we opened 12 pharmacies, 12 food courts, 12 photo labs and 12 optical centers.

We also in the quarter opened 11 gas stations and 14 hearing aid centers.

In total, as I mentioned earlier, ancillary business sales comps were down 2% but up 8%, without, with excluding gasoline.

Now moving to SG&A, our SG&A percentages Q1 over Q1 were the same coming in both quarters at 9.98% of sales.

Again to jot down just a few numbers, two columns, total year '06 and Q1 '07, and five line items, operations, central, stock options, quarterly adjustments and total.

And a plus here means good or lower SG&A as year over year comparison.

In core operations, fiscal '06 versus fiscal '05 was plus 5 basis points or lower by 5 basis points.

Central going down was plus 4 basis points.

Stock options was a hit of 5 basis points, so a minus 5.

Quarterly adjustments was zero and total was plus 4 so for all of those six, you should please recall that SG&A year over year was lower by 4 basis points.

Now in the first quarter '07 as compared to first quarter '06, operations showed an improvement of 4.

Central was higher or minus 2.

Stock options was higher year over year or minus 8, and I'll mention, I'll talk, I got a couple of things to say about that in a minute.

And quarterly adjustments actually helped the number by 6 and I will share that with you as well in a minute.

In terms of a little editorial, operations showed an improvement of 4 basis points as I mentioned here.

Payroll in Q1 was actually a couple basis points higher year over year.

I kind of expected if you consider the hit to sales given the lower gasoline penetration which is a very low SG&A business, an overall slightly lower than planned sales results.

Our stock options expense was a little higher, 8 basis points, frankly a little higher than our original plan and looking back at last year Q1, we did have a slight year over year pickup in reduction in SG&A due to the timing, due to the chewing up of some equity forfeitures in terms of how we accounted for that.

That helped by a couple of basis points last year.

I don't think it was big enough to talk about but trying to explain why this number was a little higher and we looked back and saw that.

In addition, this year we added 1,100, approximately 1,100 assistant managers to our stock option plan.

Historically assistant managers, there's about two to three assistant managers in every warehouse, had not had stock options.

They get a one-time grant that on a periodic basis, not an annual basis -- I'm sorry, not stock options, restricted stock units.

That's what we give out now but that also had the impact of a couple of basis points to this number, and I expect that impact to be going forward for the next couple of quarters as well.

And finally in, last year in Q1, we had an expense hit related to Hurricane Wilma in Florida and the damage that grew out of that and over and above our retention.

This over and above our, what was our retention.

That helped last year by 6 basis points so on a comparative basis, that was a negative 6 hit to Q1 last year and a positive 6 therefore on a comparison basis this year.

So overall what hurt SG&A?

Declining gas sales hurt that calculation a little bit, declining comps overall a little bit in terms of being 4s and 5s instead of a little higher, increased new warehouses, of course we've ramped that up.

All those things are little impacts on it.

The stock option expense, which I mentioned, was a little higher and what helped of course is, one thing that did help was the thing I mentioned earlier that impacted the quarter by about $0.01 a share.

So let me turn to that.

This has to do with a revision to our method of allocating central payroll related, certain central payroll related expenses on a quarterly basis.

In the first fiscal quarter of 2007, we revised our method of allocating certain payroll related expenses in order to more accurately reflect actual costs for a given quarter.

Historically, these costs were estimated for the entire fiscal year but then recognized evenly over our 13 four-week periods.

Since these expenditures are disproportionately concentrated to the early part of the calendar year, which is really the middle of our fiscal year, we revised the approach to more accurately align these expenses with the periods in which they are actually incurred and to report our actual liabilities as of the interim balance sheet dates.

Let me give you a simple example.

We have a fiscal year that runs from September to August.

If you think about Social Security or FICA payroll taxes which is the 7.65%, as you go through a calendar year, some employees who are higher paid ultimately max out on the biggest component of that, the 6.2% of the 7.45.

That, and so by the end of the calendar year, many salaried people and people who have had options historically and expense them, they max out and there's no cash charge and those cash charges are greatly reduced as a percent of payroll in the latter part of the calendar year.

And again, I think as we went through over the last couple of years of SOX 404 are looking at how we can be most appropriate looking at some of the expenses on a, we think, a more appropriate balance sheet perspective, we made this change as of the beginning of this year in terms of how we allocate those.

And what that has the effect of doing, as an example, is our first fiscal quarter is in the last calendar quarter essentially of the calendar year.

We historically had booked some of that expense in there, accruing it if you will, for the actual expenses on a cash basis that occur more like in January and declined over the course of the calendar year.

Although there will be no impact in the annual consolidated financial statements, the change in approach will result in comparably higher expense being recognized in the third fiscal quarter and lower expense recognized in the first fiscal quarter.

This impact, and the impact to the second and fourth quarters are nominal but slightly positive we estimate.

The effect of this change in the first fiscal quarter of 2007 was to lower SG&A expenses again by about $0.01 per share, a shade over $0.01 per share.

The third fiscal quarter will have an offsetting effect that will increase SG&A expense by approximately, but just under $0.02 per share, but again with a small associated benefit in Q2 and Q4 such that the sum of the four quarters will be equal to zero.

In terms of SG&A outlook for the remainder of '07, we could be helped by slightly lower expense percentages and benefits in workers' comp.

The payroll, of course, is a question of where comp sales are and we will see how that goes with sales trends.

Overall again, I think given where sales were, a pretty good showing.

In terms of preopening expense, preopening expense was up $10 million, $22.7 million in the quarter or 16 basis points versus 12.3 last year in the first quarter of ten.

Now we opened last year nine openings which includes one in Mexico, so those actually, so really eight openings in terms of preopening expense and this year 12.

In addition, there's always some carry over or stuff that is pushed either before or after the quarter and given the ramp up of expansion, it's really no surprise this year.

In terms of provisions for impaired assets in closing costs, that was higher by $2.9 million year over year coming in at $4.3 million in the quarter versus $1.2, no big surprises there.

All told, operating income in Q1 was up 9% from $325 last year to $353 million or increase of $27.6 million.

Below the operating income line, reported interest expense was lower year over year coming in at $2.1 million or $1.6 million lower than last year's $3.7.

This mainly reflects lower interest expense on our convertible debt as more of its holders convert into our dividend paying common stock and recognizing that common stock is significantly in the money relative to their breakeven analysis.

Interest income and other was a bit higher, higher year over year by $1.6 million coming in at $27.1 million.

Actual interest expense was a shade lower year over year even though interest rates have gone up as we expended more money than we've generated in cash, principally because of stock buybacks.

We would expect to see that number come down.

The reason this interest income and other is up a little bit is because of the other and that's mostly higher profits in our 50% interest in Mexico which we account for on an equity basis therefore in this number is that half.

Actual interest income was slightly lower as I mentioned.

So overall, pretax income was up 9% as well versus last year at Q1 coming in at $378 million this year as compared to $347 million a year ago.

In terms of tax rates, I'm happy that we have a quarter where we don't have to explain the anomalies of why tax rate was higher or generally lower but tax rates were both right around 37.5%, coming in at 37.35% this year versus 37.86% last year.

In terms of a quick rundown of the other usual topics, start with the balance sheet.

As of November 26, cash and equivalents, $2.614 billion, so $2.614, inventories $5.389, other current 861, total current, 8864, net PP&E, 8832, other assets 719 for total assets of $18.415.

Short term debt on the right side, 396.

That, of course, includes the $300 million anticipated debt repayment of a $300 million issue that we have outstanding.

I believe that's in June of this year so it's either late spring or June.

Accounts payable, 5538, 5.538 billion, so a shade over inventories, other current liabilities, 3.013 billion for total current liabilities of 8947.

Long-term debt of 175, much of that is a convert, the remaining piece of the convert plus a little foreign debt.

Deferred and other, 257 for total liabilities of 9.379 billion.

Minority interest, 64 and stockholders equity, 8.972 billion for total right side balance sheet 18.415.

I might add that the balance sheet as well as the other calculation and summary information that we put out in our Q&A will be available shortly after the conference call on our website.

In terms of balance sheet, it's plenty strong.

In terms of accounts payable, at Q1 and last year accounts payable as a percent of inventories, a number that we look at, was 101%.

At this quarter end, it was slightly better than that at 103%.

If you take out non-merchandise payables because there's construction payables and other things in there as well, at last year quarter end, it was 85%.

This year at first quarter end 86% so again a slight improvement in the amount of inventories that are being funded in trade payables.

Average inventory per warehouse was up about 4.8% to $11.466 million a warehouse versus $10.942 million a warehouse a year earlier.

Pretty consistent with what would we've seen quarter to quarter, year over year on a quarterly basis over the last few quarters.

It's really spread out a lot of places.

FX still is about $65,000 of that, $520,000 difference.

Food and sundries is about $190,000, just lots of things like gift baskets and increasing our presence in some of those items.

Jewelry was up about $70,000.

I think that certainly is one of the reasons why our sales have been a little stronger there as well.

Pharmacy up about $62,000.

So really no one thing that stands out there, various other small increases.

As I mentioned earlier, no inventory concerns coming out of Christmas, we had to sweep it pretty clean.

My guess is that inventories have peaked and they're spread out again a little over sales comps over the last few months.

In terms of CapEx, in Q1 '07, we spent $390 million, right in line with our budget and our ramp up global expansion for the year.

I would estimate that our CapEx, which was $1.2 billion last year, we still estimate will be in the $1.4 billion to $1.6 billion range this year.

In terms of dividend, no change in the quarter.

We are still at a $0.13 per share quarterly dividend or a $0.52 per share annualized dividend.

That last increase of our dividend or quarterly dividend payment was done in May.

In terms of Costco Online, doing very well, during the quarter a 59% increase in sales.

That's on top of a 61% increase in sales for all of '06 when we did just a shade over $900 million.

Needless to say, we will well exceed $1 billion in sales this year.

In terms of expansion, as I mentioned earlier, we currently have 504 warehouses, including the 30 in Mexico, so 474 consolidated into our financial statements if you will.

One number that Bob and Jeff asked me to give out because we do get quite a few calls afterwards, after the call, is the square footage at quarter end.

Square footage at quarter end was 65,856,000, and at quarter end we had 470 consolidated warehouses.

So if you divide those two numbers, we are right at an average square footage per warehouse of 140,000.

We tend to build 148s right now on average.

In terms of expansion, if you just jot those down.

If you recall, we opened in all of '06 28, well 30 units including two in Mexico, so 28 consolidated.

Three of those were relos, so 25 net increase in the consolidated number up to the 474.

I'm sorry, up to the 433.

In Q1 '07, we opened 12, no relos, so a net of 12 plus the one in Mexico.

In Q2, we've already opened the four that that we are going to open this quarter, no relos, so another four this quarter.

We anticipate seven net new openings in Q3 with no relos, so a net of seven.

And in Q4, 11 openings, one of which is going to be a relo, so a net of ten.

Where these numbers would put you is 34, less one relo is 33, plus the one we've already opened in Mexico and perhaps another.

We are not sure how that will pan out if it's before or after the end of this fiscal year.

So the 33 is two less than we had guessed at the beginning of the year.

I think it's a pretty realistic number.

We constantly find things that go into the number this early in the year that may still happen so that number probably is around 32 to 35 for the year.

In fiscal '07, assuming we open the 33 that I mention here however, on a consolidated base of 458 that we started the fiscal year at, that would be 7.2% unit growth and a little over 8% square footage growth.

We would hope to open at least 35 a year in '08 and '09 as it currently stands.

Lastly I want to talk about our stock repurchases.

Since we really began buying stock in earnest back in June of '05, we purchased approximately 48.6 million shares at an aggregate price of $2.446 billion or $50.27 per share.

We still, so that means with the 4.5 billion of aggregate authorization we've had under a couple of these programs, we still have a little over 2 billion authorized but not purchased which authorization expires in November of '07.

For Q1 only, we purchased right around 8.3 million shares for a little over $400 million or $51.38 per share.

So let me now speak to this morning's Form 8-K filing regarding the Company's intention to protect the more than 1,000 employees who face possible adverse income tax consequences in connection with a review of stock options announced by the Company this past October 12th.

The anticipated option charge that we would plan to record in Q2 is first, of course, it is non-recurring.

As noted in the release, we estimate that next quarter, Q2, we will record a charge growing out of the previously disclosed stock option review.

The charge relates to protecting our employees against adverse stock consequences for events beyond their control.

The protection largely entails repricing upward these options with compensating payments to the employees for the difference.

A portion of this is driven by the technical requirements of Section 409 A, the deferred compensation law that grew out of the demise of Enron.

We are still evaluating how to handle, how we handle this in foreign countries and the $70 million pretax estimate is inclusive of foreign countries.

As noted in the release, the hit to cash is less than the charge to the booked income statement because the Company gets the higher proceeds from future option exercises.

These higher proceeds however do not run through the P&L so therefore that will be a lesser of a cash charge.

Finally before I turn it back to Meredith, just some direction going forward.

Again for the first quarter, we came in at $0.51.

Looking at both at Q, at the end of the fiscal year back in October when we had First Call out there, and for the year if you recall, we, the guidance at the time I believe was right at $2.60.

I believe now it's at $2.59.

Looking at the three quarterly numbers for Q2, 3 and 4, 2 seems to be a little overstated with Q3 and 4 being a shade understated so that the total we are still pretty comfortable with and that's, we are not pushing things out, it's just simply I haven't really focused beyond Q1 at the last conference call.

So kind of a wide, arguably a wide range for Q2 would be more in the $0.62 to $0.66 range and, of course, that would be before the hit for the options and tax issue.

Q3 which First Call is at $0.57.

Again, that probably is within the range but not the high end of the range for Q3,and similarly Q4, same way as what's out there currently.

So in terms of guidance, First Call is at $2.59.

We would look at a range probably in the $2.50 to $2.60 range.

If you recall at the end of the last quarter, we had said $2.50 to $2.65.

Not a lot of directional change there frankly.

Again, we are starting off pretty good relative to what we said at the beginning of the year but it's a tough world out there and we will see where it goes from here in terms of the economy.

But with that, even that $2.50 to $2.60 range, that would be a 9% to 13% increase on arguably a number last year that was a 53-week number so a little higher than that on a normalized basis.

With that, as I mentioned, Q&A will be out today in a couple of hours and also our proxy and annual report are at the printers and you should be seeing that within the next few days.

With that, I will turn it back to Meredith for Q&A.

Meredith?

[OPERATOR INSTRUCTIONS] Your first question is from the line of Charles Grom.

Hi, good morning, Richard.

Thanks.

Clearly TV returns continue to be a drag.

Can you update us on the concierge service in southern California and the potential implementation of a return policy some time in the next couple of quarters?

Sure.

The concierge service is, now, started in Southern California.

What it is basically is two things.

One, first and foremost, it's a high quality answering service that answers your questions quickly and at a higher level.

What we found, by the way, is is that a significant number of calls aren't TV related but other electronics related like dads like me calling, not tha I call but dads like me calling, to say I got my kids an IPod and I can't figure out how to get the darn songs on there, simple stuff like that which arguably helps other returns as well in a smaller way.

But also seeing that -- we are also testing, we rolled that out in all of California which is about 38% of our, of the U.S.

Company, of the total Company.

In terms of -- I'm sorry, 38% of the U.S.

In terms of the other aspect of the concierge service is a home installation service and I believe we are still testing that in Southern California and whatever we are doing, we are going to roll out between now and the first part of calendar '07 such that by spring, we would expect to be rolled out in the U.S.

That is improving the numbers but it's not fixing the entire thing.

We are looking at , as we've said for and I'm not trying to be coy but as we've said for, gosh, a number of months, we are going to do everything short of changing our return policy first but if we have to, we'll look at that.

Rest assured, it will still be a great policy.

We haven't made any announcements on that.

We continue to look at it but I think as Jim said at a recent conference in the fall in New York, at some point during the year, we will make that decision.

One thing I will mention, in looking at some of the blogs out there, I saw there was some rumors that we were going to change our policy in the beginning of the calendar year, and you better get everything back in because they are changing the policy.

Well, the reality is irrespective of what we do, if and when we change our policy, that will be on a prospective basis.

We will never change our policy for things done prior to that.

So assuming we were to make any change, whether it's early part of calendar, or middle part of calendar, whatever it is, the impact to our numbers will still be a number of months after that.

So I still see this as an impact for '07.

On a comparable basis to '06, though, we were hit pretty hard last year.

My guess is it's still a hit but on a comparable basis, not as big a hit, as it was in '06 versus '05.

Okay.

That's helpful.

Thanks.

And just with regards to your balance sheet, you've got close to $3 billion in cash, no debt, you're going to generate about $500 million in free cash and I know you have the $2.5 billion authorization, but could you speak to the appetite to accelerate the buy back and/or assume more debt and potentially leverage up the balance sheet?

I know there's been a lot of speculation out there.

I was just hoping you could address it.

We haven't said anything other than, or actually we've said that our actions speak for themselves.

As you know in the quarter, in a twelve-week quarter, we spent $424 million and for whatever 18 or so months now since June, we've spent close to $2.5 billion.

But even if you just annualized the twelve-week quarter, that gets you up to about $1.8 billion versus I think a little under $1.5 billion in the first 12 months since we started buying back stock.

So I think you will see our actions on a continual basis, that we will continue to review it.

To the extent that we saw, we stubbed our toe badly or the economy or the stock market stubbed us so badly, certainly I think we would be more opportunistic but so far it's been steady as she goes and we would expect, as I've said in the past, to continue to buy back on a regular basis.

I will make two comments.

What we are currently doing, we are bringing that cash number down on the balance sheet.

And second comment, probably about $800 million of that close to $3 billion of reported cash and equivalents is the equivalents.

And what that is is it's essentially about $500 million is weekend debit and credit card receivables that we get credit for early when business opens the next day.

The other piece, couple, two, $300 million I believe is what we call cash in transit, again cash on a weekend that we can use come Monday morning business day that's been collected by the armored car services over the weekend.

That, again it's our cash, and we can certainly borrow against it but there's about $2 billion of that that's usable cash and arguably within that two, there's a couple hundred million that you would have as just your normal cash in the Company.

So we still have, but notwithstanding that doesn't change your question, if you extrapolate what we have done historically over the last year and a half, you would say at some point we will be in a debt position.

But that will happen when it happens.

We haven't made any plans.

I know, I think it was Home Depot yesterday that announced a $5 million debt deal and we've got some questions on that.

But right now, it's steady as she goes.

Thanks, good luck.

Your next question is from Mark Rowen.

Thanks.

You mentioned on the membership growth that accelerated that most of that came from price increases.

But since you opened quite a few new clubs this year, more than you did a year ago, did you get quite a few new members in those clubs or was there a lot of cannibalization from existing clubs?

If you look at this year versus last year, the actual number of openings in the quarter was 12 versus 9 and arguably in both of those years, even plus percent, maybe 90% are existing infill markets.

So is there a shade more cannibalization?

Yes, not a lot.

We still saw a net increase in number of members, of course.

Certainly, in an existing market, you are going to have a little bit of cannibalization. arguably a little less than we had anticipate before we cannibalized in earnest a couple of years ago.

Okay.

But the bulk of the acceleration came from the price increase, did I get that right?

I would say the two biggest things would be price increase -- clearly the biggest thing is price increase because you are starting to get the benefit of that.

The other is the fact that converting into Executive members who pay $100 instead of 50.

Right.

Okay.

All right.

And then just a follow up on the flat panel TV business, you mentioned a few months ago on your sales call that the growth was still strong there but had slowed from much stronger growth earlier in the year.

Are you seeing any reacceleration as we head into the holidays in that category on flat panel TVs?

Yes, hold on.

Bob?

Part of it's the continuing increase in availability for us.

We can have pretty much anything we want now from the suppliers.

I think sales of majors which was a little over 20% comp in November, the reported month of November, TVs within that was close to 50.

Total TV sales increase.

So the numbers are nuts in TVs.

Okay, and are you seeing margins in that category come down from competition elsewhere or are you basically able to hold your margins and -- ?

What I call the initial mark up, no, we are not seeing any competitive price changes there as some of the traditional consumer electronics companies have indicated lately.

Our challenge has been the returns and how that impact on dealing with the disposition of returned TVs has impacted our gross margin.

Okay, and have the returns gotten any better this quarter with some of the programs or are they still at roughly the same levels they were a few months ago?

On a year over year basis, they've gotten better because it was a year ago that some of this craziness started with us.

It's probably gotten a little better because of that.

We still have, we are still using it as a tool to get people in the door, great prices on TVs and some of the couponing that we do in the Summer Passport or the Winter Wallet, but again, I can't really say a lot but stay tuned and we will see what we need to do.

As Jim has said time and again, it's an income statement, it's a gross margin problem for that department.

Clearly it's an impact given its size on our income statement.

At least now we are anniversaring it but we recognize it and we will address it.

Okay.

Great.

Thank you.

Your next question is from the line of Deborah Weinswig.

Hi, good morning.

It's Charmaine Tang for Deb.

If you can just talk a little more specifically about the trends you are seeing on the pharmacy side of the business given the high single digit comp in RX?

And then also, are there any plans to expand your current list of 200 drugs?

There's not a lot to say other then I'm happy that the RX is in the high single digits.

We have done a little more marketing to larger user groups, employee groups -- employer groups, rather, employee groups where we go to the employer and work out some deals so we are constantly getting into more programs, still fewer programs than the large nationals but quite a few where we are concentrated and we have a lot of openings.

I think the second piece of that was what, the question?

Second piece was any plans to expand the current list?

Yes, I talked to Charlie Burnett, our Head of Pharmacy, yesterday, and the answer is yes, and I asked what's the difference between our slightly more than 200 and Wal-Marts slightly, approximately 300.

I said there's, we are still looking at the list.

There's a few items we are not going to do based on cost but there's many items that are, as he described it, some low volume ointments and what have you, that we just haven't gotten around to do yet.

We are going through the list still and will continue to add to it.

And I'm not trying to belittle it.

I'm sure our number will get bigger.

Whether it gets all the way to their number, it probably will still fall a little short of that.

Great, and then I have one other question.

It's actually more a a macro level question.

Do you think you can share any observation you are seeing on the sales of higher ticket items?

For example, are you seeing any pockets of strength or weakness in any particular categories?

Well, electronics is nuts.

Jewelry is, I guess, a pleasant surprise for us because I think back in September and October, our jewelry comps were not down but low single digits instead of higher single digits, high single digits.

So that's nice to see that pick up as we get closer to the holiday here, to Christmas.

The thing that, of course we mentioned this summer, was what I will call the big ticket, the $900 side show for the living room that we turned into a $300 impulse item.

That didn't sell very well this summer.

Right now we don't have that kind of stuff because that stuff, that kind of big ticket bulk furniture items, are items that we bring in during the seasonally slow periods of middle of the summer before back to school and post-Christmas/New Year's and before spring lawn and garden and sporting goods.

So we will have to see how the patio furniture does, if you will, in January/February.

My guess is we are not going to back off.

We are going to look at it as great value being, as we we typically are in the season earlier than traditional retailers and hopefully out earlier, and see how that goes.

Again, jewelry, I guess, was a little bit of a pleasant surprise for us.

And electronics, who knows what the right number should be.

It's still so darn strong it's hard to say it should be higher.

I think part of the issue there is once the price points of flat screen TVs went from $1,500, even LCDs went from $1,500 to below $1,000 to many instance below $500 now, people were buying second and third ones.

The same thing with plasmas.

When they went below $3,000, you saw it pick up.

When they went below $2,000, you are seeing a much bigger pick up, and now they're in the high teens.

So, and in our case, they are a lot more available from manufacturers than they were a year ago and the year before that.

Great.

Thank you .

Your next question is from the line of Bob Drbul.

Good morning, Richard.

Question I have is can you talk a little bit about the apparel business and how that's trending for you and I guess I was just wondering if you could maybe elaborate a little bit more on current trends.

Are there any big deltas between the trends that you discussed on the quarter that you've just reported and sort of what we are looking at in the second quarter?

Not with any expertise.

A number at the end of the, I think it was the end of the fourth quarter, we talked about women's apparel was strong towards the, if I recall towards the high single digits, and men's apparel was weak, flat to plus or minus a couple of percentage points.

And I remember Jim sitting here and intervening and saying we just didn't have very exciting stuff in men's apparel.

It's more that than the economy.

That's still shooting from the hip, that's probably more of a right answer.

Why were high single digits in both this quarter or this most recent month?

It beats me.

So I really can't give you a lot of trends out there.

We have been helped, of course, not just recently but over the last few years as more manufacturers are willing to sell us more items.

You've seen, maybe you've seen the list of new vendors that are, that we are buying direct from for the first time, so I think that helps us a little, too.

But what I basically just said gives you no insight into what's going on with the apparel business.

[laughter] How about on the guidance, Richard, for the second quarter?

When you look at merchandise margin or core operations or central expense, any big changes between last quarter and the second quarter that you would call out for the 62 to 66?

Well, no, I mean the range is purposely wide because what I've learned is that on $15 billion quarters, $13 to $15 billion quarters, 10 basis points of anything in the aggregate is $0.02 per share.

And so just sales being a better by 1% or worse by 1% is $0.04. arguably, and again I want to let you know is that we are not just bringing down Q1 relative to consensus.

Frankly, I hadn't really focused on what second and third and fourth First Call numbers were at the end of our fourth quarter and we talked about Q1 and the year.

The year is pretty much the same. arguably we want to be conservative because we are in an environment that allows us to be.

We are at the top of our game merchandising wise.

We are at the top of our game expansion wise.

As you, many know Jim and company, we are pushing ahead in all directions of being, we are playing offense and that's the good news.

The bad news is we will see what happens with sales and see what happens with other expenses.

Okay.

Great.

Thank you, Richard.

And in a vague and confident way but we will have to see.

Your next question is from the line of Gregory Melich.

Hi, good morning.

Richard, two questions.

One was on some of the geographic stuff.

You said that the west was a flash comp and the midwest was stronger, and that's just a pure maturity issue or do you think there's something else going on?

I think the biggest issue is the gas.

Back when we were running comps in the higher single digits, the west was four or five.

Now it's a little less because of the, the west is where, it's where we have a higher concentration of gas stations.

If you think about it, if gas impacted the quarter by 135 basis points, that's the whole Company, and probably there's a disproportionate amount in the west coast where half our business is and same thing with cannibalization.

We have a disproportionate amount of cannibalization in California.

So I haven't put pencil to paper on that but I've got to believe if just those two things were close to 300 basis points for the Company, it's easily 500 basis points for the west coast.

Great.

And then the second question was on the gross margins, just to make sure I got this right.

They were, if they were 8 basis points positive but the core was 6 six BPs right?

Gas was down but it helped your mix 8 BPs, so where, I guess, where is the other 6?

Probably the easiest way to think about it, Greg, is if, these are purposely round number.

If you think about a department like gas and let's just make the number up here as a 5% gross margin and the rest of the company has 11.

That 600 basis points lower margin and now gas is 200 basis points lower sales penetration. 200 times 600 is 12 basis points.

Now that's a very easy, simple example.

Okay.

All right.

So the reality is gas could have been more than the 8 BPs the way you defined it?

Yes.

You think about the effect on both the sales and the mix?

Yes, and keep in mind it's kind of like, reminds me of manufacturing accounting.

There's the mix, there's the price piece and the mix piece and all these other pieces and we always try to look at it the same way.

And on the core side down but food and sundries were up.

They must have been up pretty significantly because hard lines and fresh foods were down.

Is that -- ?

Well, food and sundries is half our business, and the fresh foods is another 13% so if we have food and sundries and fresh foods as 60%.

Okay.

Thanks.

Your next question is from the line of Mark Husson.

Yes, a couple of questions that have to do with overseas.

The first one is can you just talk about the impact of the dollar on the, perhaps the P&L account in the quarter and also maybe on some of the balance sheet items that you got out there?

And the second one was in broader terms, it seems you've done a better job this year of sourcing from certainly some Asian businesses.

Can you just talk about trends of bought in gross margin on the non-foodstuff?

I have to get you off-line only because the impact of the FX and the FX is 100 basis points.

It helped, foreign entities are about 17, 18% of our Company.

I'm just going through the math here, and let's say it was equally -- it's probably a little less than equally profitable because you have some of the newer countries like Japan, so 100 basis points -- I'm going to have to calculate it -- it's too early in the morning for me.

I am going to have to calculate that and get back to you.

And as far as the procurement side is concerned?

In terms of the procurement side, the one thing that stands out in my mind from our budget meeting is more on the availability of procurement due to worldwide sourcing in things like produce.

On the fact that the dollar is weaker, I don't think we've really seen a lot of impact out there.

Things are more expensive but they are more expensive for everybody.

Okay, but just in terms of a mix of stuff that you are sourcing from lower cost environments, I mean the deals are all still done in dollars, right?

You're not having to do a translation here?

That's right.

Correct.

Again, I thought I knew a lot about retail but let's, feel free to call me.

I just don't have the information in front of me.

Okay.

Great.

Thank you.

Your next question is from the line of Don Metter.

Mr. Metter, your line is open.

Your next question is from the line of Dan Binder.

Hi, good morning.

A couple of questions.

First, just some clarification on the SG&A impact on payroll.

You had indicated that there was, it was up a couple of basis points year over year in Q1.

Did that include the impact of the allocation issue that you mentioned on the call as well?

No, because that's benefits.

Benefits, when I talk about payroll is benefits are about 40% of payroll, but when I talked about payroll specifically, that did not include those components.

Okay, and then on the buy back, you seem pretty comfortable with the pace you're at.

Lot of questions about what you could do in terms of debt.

Any sense of how much you could take on without jeopardizing the ratings at this point or are you still working on that?

We are working on it, Dan.

As you might expect, the investment bankers have come to us and there's pretty standard looking at comparison, comparable retailers and what they are -- there seems to be certainly a lot of room to maintain our rating where it is but we haven't, I'll be happy to get back to you, but it's more standardized comparisons than us saying this is how much we can do.

Right now, our desire to do exceeds, is less than our ability to do, in our view.

And then on the generic program.

Are you maintaining the $4.00 generic program as you, following the introduction of the $10.00 -- ?

No.

We now have a 30, 60, and 100.

We've got a 30-day price which is more than $4.00 and less than $10.00, and I'm sorry, I don't have that in front of me, and we have a 60-day price, and I assume on a 30-day, the $4.00 is cheaper at our competitor.

On a 60-day, it's probably about the same, rough number, probably a little better or a little worse, and on the 100-day, ours is, it's $10.00 for 100 pills instead of $13.33.

Okay.

So any margin pressure that you were feeling from the $4.00 program, would that, I guess presumably that would just go away at this point?

Yes.

Okay.

And then on the, in terms of membership growth, largely as we expected, I think, this quarter.

The way the accruals work, as I understand it, should we be expecting that rate of growth to accelerate through this year?

You should expect it -- yes.

I think in Q2, yes, in Q3, yes, and I think in Q4, it will be still growing but at a lower rate.

Okay.

By the end of the year, we could be at like sort of 16% kind of growth in that line item?

Right.

If you want to think about it in really round numbers, we talked about earlier when we announced it, we said the impact to membership line is in the aggregate, it impacts 15 million people. 15 times 5 is 75 million.

Let's, if you think about it and our quarters are 12 weeks, 12 weeks, 12 weeks and 16, but if you think about it just 12 months and 75 million, that would be 6.25 million, let's round it to 6 million a month.

What you do is in the very first month of the increase, in theory our members are spread out renewal base over the whole year, but if you think about it, we would get $6 million of extra dollars last July when it hit the renewers.

That was our first month of getting $6 extra million.

Well, we wouldn't book all $6 million because that would impact the next twelve months $500,000 a month, so in July, if you will, you have a $0.5 million of book income.

In August, you've got another $6 million of cash from that next group of renewers and you've got two times 500,000 and in September, you've got three times that.

So if you think about it in Q4, which ended in the end of August, you have one $500,000 tranch and two $500,000 tranches in August, 1/12th of each of the $6 million in July and 1/12th of the $6 million in August.

Now these are examples but that rough number does $1.5 million addition to reported membership fees.

When you think about the next three months, essentially September, October and November, you get $1.5 million in September into your books.

You've got $6 million in cash, right, because you have three tranches of $0.5 million and in October, you get $2 million, four tranches of $0.5 million, and November, five tranches.

So you have 1.5 million, 2 million and 2.5.

You're now up to $6 million of book income in the quarter, even though you've got $18 million of extra cash proceeds and so on so in Q2, these are very rough numbers, but you have 3 plus 3.5 plus 4 which is 10.5.

So you can see how the math works there.

Those are really rough numbers but it gives you a sense of how it grows through 12 months and starts growing a little less over the next 11 months.

Okay, and then my final question on membership, are you seeing any increased level of discounting from your competitors?

Yes, I was going to barge in and say no from us but we do see that and that's fine.

It's not that we are completely pure in it but we've done some marketing things from time to time but our big marketing thing that we did back in '01 and '02 when we were opening a lot of new markets was a free check mailer.

That concept has ceased to exist around here and we'll do some co-marketing things with American Express where if you sign up for the co-branded card, you get a, whatever, a $10 cash card or something like that, but we've done those kind of things historically any way.

If anything, we've probably done a little less than more over the last couple of years.

We certainly have seen not only some membership marketing things from our competitors but certainly a lot more direct advertising as well, which is fine.

Your next question is from the line of Christine Augustine.

Hi.

Thank you.

Richard, I'm wondering, I have a few questions.

One is why was the gross margin down in fresh food?

Could you just confirm the penetration of gasoline in the sales mix just on an annual basis and then does the a little bit more conservative guidance for Q2 have anything to do with how the current sales trends are in December?

Okay, what was the second question?

Could you just verify on an annual basis roughly the penetration of gasoline to total sales?

Both numbers in the mid to high single digits, so but it was an almost exactly 200 basis point delta year over year in the quarter.

In terms of fresh foods, meat sales are half of fresh food sales and meat margins were weaker.

And I assume it's a, prices are higher and labor costs are higher and not all of it is passed on to the customer because meat is a very competitive item out there.

And the last one, in terms of Q2?

Yes.

Does it have anything to do with the trend here in December, your more conservative outlook versus First Call on 2Q?

No, really it was just like when I sat down over the last few nights to start writing my little script here and I looked at First Call numbers, and I go wow, where did they get that number for Q2 out there on the First Call, as frankly a month ago, three months ago, I hadn't really focused on it looking at Q1 and into the whole year. arguably as we were in Q1, our mindset in terms of conservatism is like it was in Q1.

Things are good around here but let's see what happens with the economy.

Thank you.

Next question is from the line of Ee Lin See.

Hi.

Can you please address whether you will look to monetize your real estate value?

As you know, there are many rumors of LBOs for any retailer that owns a lot of their real estate.

Do you believe that if you do not address this that private equity will be interested in buying the Company?

Thank you.

Who knows what everybody else is thinking out there.

We have no currently plans.

Our plans, as you've seen over the last two years, is to initiate a dividend, ramp up expansion and start to buy back stock in earnest at a level we are comfortable with.

We will continue to do what we are doing.

Your next question is from the line of Chuck Cerankosky.

Good morning.

This is [Alex Vesaw.] I'm sitting in for Chuck Cerankosky.

I'm curious if you could look at your sales, excluding electronics and gasoline, if there's any trends going on with inflation, particularly within food and general merchandise?

Nothing to speak of.

The only thing that comes to memory over the last couple of meetings is nuts.

Nuts are way up and meat.

Meat is up but not as much.

We've seen not just over the last few months, but over the last couple of years, paper goods.

We saw a couple of increases of paper goods over the last couple of years probable ranging from 4% to 8% in the aggregate.

On specific nuts, we've seen 20%, 30% -- here hold on, I've got a sheet.

If I look down the list here of the top 20 items that impact our LIFO dollars, top 20 items, two, four, five are meat which is again I mentioned that.

Eggs are up huge but not a big dollar amount to the Company.

Really nothing else really stands out.

Nothing in general merchandise?

On the largest inflation items, I'm looking down the list here, of the -- of the top 25 items in terms of LIFO dollars, aggregate LIFO dollars, one of then is a non-food item.

Very helpful.

Thank you very much.

Your next question is from the line of Peter Benedict.

Thanks, Richard.

Quick question, I might have missed this.

Did you tell us what the stock compensation expense was in dollars during the first quarter?

I don't have that handy in front of me.

I don't think we generally give that out.

All right.

And then moving back to the membership fee, can you just comment on the attrition rates you've seen?

I think the last call you said you hadn't seen much in terms of attrition with the fee increase.

Is that still the case?

Yes.

Excellent.

Thanks.

Your next question is from the line of Neil Currie.

Before I answer this question, I guess I can tell you the stock compensation expense is approximately $32 million in the quarter.

Again, increased a little bit because of the addition of assistant managers.

Good morning, Richard.

It's Neil.

Just wanted to know if your guidance for the year, what sort of assumption you are making in terms of stock buyback?

The assumptions we made in the beginning of the year were somewhere and I don't have the exact numbers in front of me, somewhere, more than $1 billion and less than $2 billion.

I will give you that kind of range, somewhere in the middle.

Okay, and in terms of the trimming the top end of that guidance, for the year rather than just looking at the second quarter, that's again more based on just a conservative view of the economy or is anything you are seeing in the current sales which leads you to believe that you should be more conservative?

There's, nothing has changed, other than -- .

No, frankly, nothing has changed.

Okay.

Thanks.

The only thing that changed was, again, honestly three nights ago or two nights ago when I sat down to start writing in earnest the update of my little spiel here.

I looked at the First Call consensus for Q2 because usually we look at the current quarter of the year and provide guidance on that and I looked at Q2 and I go, wow, where did that First Call number come from when in fact it was the same First Call number from a year ago, from three months ago.

I really take in a few cents extra out of Q2.

Your next question is from the line of [Scott Mellitt].

Hey, good morning.

Just on the unit openings, I think you went from 35, you were saying on the last call maybe 35 to 40 to now 32 to 35.

Can you just go into a little more detail why is there upside to downside to those numbers?

Well, the 35 to 40 goes back in my view to August or maybe October as we do at the beginning of the year.

Within that number, there's probably seven or eight in month 12 or August of '07.

Inevitably, we fight like heck to get them open as quickly as possible but as every month passes, we know with permitting issues or rain issues in the winter because you can't get a foundation laid, those types of things occur.

I kind of said, I think tongue in cheek that last year as well, we are at least getting closer than we used to.

My guess is that when we set 35 to 40, in our view, 35 was a solid number and we are going to try to get a few more in and trying to get all of those are likely to be in month 12 in and now three months hence we are, we have a better handle on that and my guess is that the 35 was the strongest number over the 35 to 40 number, and 33 to 35 is a smaller range now.

So I think we have come down a couple.

Okay.

And then I don't want to beleaguer this point at all, I'm not trying to be difficult in any way, I just, forgetting about what First Call was and just looking at 2Q, it looked to me like the earnings growth could be anywhere from flat to 6% and with share repurchase.

I guess if I ask it that way I'm just wondering the earnings growth perspective from where you were last year, was it just that it was that strong of a quarter?

I'll have to go back and look at last year.

My guess is that's part of the answer.

Okay.

Thanks.

Your next question is from the line of Virginia Genereux.

Thanks, Richard.

I'm enjoying my two flat screen televisions from your store.

Thank you.

First on pharmacy, 100 pills for $10.00, is that basically a replacement for the $4.00, 30 pills for $4.00?

Is that what you said?

The reality is it costs us and I believe most pharmacy retailers out there more than $4.00 to fill a prescription without medicine in it, just pharmacist and the bottle and all the regulatory stuff you have to do with record keeping.

And while we matched it because we are competitive and we want to be competitive out there, we always have tried to encourage people historically on let's say a given item, even a given generic item, we might have been $6.50, $6.99, I'm making these numbers up, but $6.99 for 30, $8.99 or $9.49 for 60, and $10.99 for 90, or $10.49 for 90.

We match the $4.00 because we want to remain competitive but we lose money on it and we would expect anybody selling a $4.00 month 30-day supply is going to still try to upsell the customer.

Maybe not, we would, to a higher, to a two-month or a three-month because that's the way that they can save more and we can lose less recognizing before a couple of months ago, we didn't have a $4.00, 30-day offering.

With this deal, we look, you can skin this thing 12 different ways.

We looked at it as we can offer 100 pills for $10.00 and make money and give the customer a better deal and will we lose someone who insists on 30 days at $4.00?

Yes, there are some of those people, a small subset of those people that are $4.00, $6.00 or $7.00 or whatever it is, $7.00 here versus $4.00 elsewhere.

They may decide to leave.

We will certainly share with them what they are paying for per pill for $10.00 by comparison and to coin the phrase years ago, sometimes you have to deal with an intelligent loss of sales.

Okay, so this is a replacement?

This is effectively your pricing in response to that?

Yes.

Okay.

And are your new member sign-ups on plan, Richard?

I'm asking Sam's and BJ's, I think have said, renewal rates are great but new member sign-ups are lagging plan.

I haven't heard that lately.

If I go back, if I think back over the last year or so, every month at the budget meeting when Paul Latham, our VP of Membership and Marketing, gets up to talk, on a monthly basis sometimes versus our own plan for that month, we are a little higher or a little lower than plan and we've actually -- there have been a couple of months over the last year, not in the last month or two, where you had ever so slight negative growth for sign ups.

But when you look at it, it's because we, there's a limited number of hours or cumulative full time equivalents in each warehouse whose jobs include outside membership marketing and solicitation as well as doing price checks, comp shops and things like that, as well as doing tabling activities, some of which are required under the AMEX relationship, a certain number of weeks a year for AMEX items.

So in any given year, we've seen a net increase of new members per warehouse but it's never been a big number above zero.

So the answer I guess is no.

We haven't seen that.

There's been no trend other than when we cause it because we are doing two weeks of AMEX co-branded credit card marketing activities and those -- we have six people that aren't out on the street doing stuff.

Your next question is from the line of Mitch Kaiser.

Good morning, guys.

I was wondering if you could comment on flat panel TV margins.

I think you said that they are fairly consistent and if that's the case, is the initial mark-up similar to how you price or mark things in the rest of the house up?

To answer the second question is yes, recognizing not everything is of the same mark-up.

But talking to our electronics buyer a couple of weeks ago, the theory was is that, these big ticket items, A, it's very competitive and B, are they big ticket items so you are work on lower percentages and still make a certain number of dollars per unit sold.

Generally speaking, and this is before markdowns and before disposition costs of stuff, but generally speaking, TVs have been in a, the mid to high single-digit initial mark-ups and at those levels we feel we can generally save the customer 5% to 10% versus competition.

And so as there's been a little bit more competition out there, we haven't seen our IMUs, if you will, change dramatically.

What we see though is our returns hurting us.

Right.

And then do you feel that the differential in mark-up is starting to close?

No, not a lot.

Okay.

Recognizing, part of it is we have a great looking presentation now.

We still have probably 10 to 14 SKUs out there, three or four of which are pending to lead because you are down to the last two quantity of one item.

That's different than 50 to 100 SKUs elsewhere.

I think the challenge, my guess is you have to ask some of those competitors but my guess is that they are seeing it across a lot of inventory trying to make sure they try to get through it all.

Okay, and did I hear you correctly, you said that the initial mark-ups are in the high single digits?

Mid to high.

Mid to high.

Okay.

Thank you.

Your next question is from the line of Dan Geiman.

Good morning.

I guess irrespective of electronics, can you give a general sense of the competitive environment that you are seeing at this point?

Maybe talk a bit more about what you are seeing now versus prior periods as well.

I think on, some of the weakness we've seen over the last couple years in parts of what we call media, like whenever a hot movie or book comes out, some of the big discount retailers, the Targets and the Wal-Marts of the world and even some of the supermarkets, they will sell out at a couple of bucks below cost for two or three days before the weekend, for that first weekend, and then bring the price so it's above us.

We've seen some reduced sales penetration.

That's not a new thing.

That's over the last couple of years.

As I said before when somebody says who is our toughest competitor, our toughest competitor is us.

We are our own toughest person out there and I see it every four weeks in our budget meeting and I'm not trying to be cute or anything but when we look at all the ads in the paper and we compete with them even though some of it's, maybe we don't have to, we do.

So I don't know if we've seen any big changes out there.

If we continue to stay ahead of the game in terms of new items and that helps us.

The TV thing is really an anomaly, the increased popularity of people buying two and three now, not just one because the price points have gotten to such a point.

When tube TVs were out, when the Mitsubishi 30 whatever inch was the big TV everybody bought, that was like a $2,000 price point.

And even when big color TVs got down in the $600, $700, you didn't buy new ones all the time.

This whole concept of spending $1,200 because it's down from $2,500 and buying two or three of them over the last couple of years, is a new one.

With that, I am going to take two more questions.

You do have a question from Mark Husson.

Yes, sorry.

It's a clarification of Virginia's clarification.

Can I still get $4 generic prescriptions in Costco or do I have to buy 100 pills?

You should not get a $4.00 prescription at Costco.

If I get a $6.00 one, I have to get 100 pills.

You can get 30 or 60 and I think the 30 is going to be a couple or few dollars more the $4.00 and the 60 is going to be, probably right around the same price as $8.00.

That's great.

Thank you.

There are no further questions.

That's it?

Thank you very much.

We will be here to answer any questions.

This concludes today's conference call.

You may now disconnect.