好市多 (COST) 2007 Q4 法說會逐字稿

Good morning.

My name is Francis and I will be your conference operator today.

At this time, I would like to welcome everyone to the fiscal 2007 earnings and September sales release 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.

Mr.

Galanti, you may begin your conference call.

Thank you, Francis.

Good morning to everyone.

As with every conference call I'll 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 from those indicated 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 your our 16 week fourth quarter of fiscal '07 operating results, which by the way compares to last year's 17 week fiscal fourth quarter, for the quarter, we came in at a reported $0.83 a share, compared to last year's fourth quarter $0.75 a share.

As outlined in this morning's release, excluding the non recurring non cash pretax charge of $56.2 million or $0.08 a share related to the refining of our accounting for deferred membership fee revenues, the Company's fourth quarter net income and earning per share would have been [$408 million and $8.91] per share respectively, representing a 15% increase in net income and 21% increase in earnings per share.

And as I mentioned, last year's fourth quarter had one extra week.

These results also compare favorably to our May 31, guidance of $0.81 to $0.83 and current first call at $0.83.

For the fiscal year we came in at a reported 1.083 billion or $2.37 a share, compared to 1.103 billion $2.30 a share.

And of course the $2.30 was last year's 53 week fiscal year.

Essentially down 2% in net income, about flat if you account for the extra week last year and up 3% in EPS.

As you know, and as I will outline for you in a few minutes, there were a few other unusual items this fiscal year.

In the second and third quarters.

Again, I will go through all the detail in a few minutes.

But for an apples-to-apples comparison, we would look at the more normalized fiscal 2007 earnings amount of 1.20 billion or $2.63 a share.

So on a normalized basis earnings and EPS for the fiscal year would have been up 9% and 14% respectively, year-over-year.

Again, this year has 52 weeks compared to last year's 53.

In terms of sales for the quarter, as we reported on September 5, our 16 week comparable sales figure showed an increase of 5%, 4% in the U.S.

and 9% internationally.

Other topics of interest I'll review this morning, our opening activities, we opened a total of 30 net new locations during fiscal 2007, plus one in Mexico which we don't consolidate into our numbers.

This year ended September 2.

Of the 30, 25 were in the U.S., three were in Canada, and one each in the U.K.

and Japan.

For '08 we plan to open 30 to 35 net new locations, plus at least one more in Mexico.

As well as up to 10 relocations.

That compares to no relocations during 2007.

I will also review with you today our fourth quarter adjustment impacting membership fee income.

Our ancillary business results, Costco's online results, our membership trends, the change back in February, March to our electronics returns policy and how we believe that impacted our fourth quarter.

An update on recent stock purchases, our balance sheet, and lastly I'll provide you a little updated direction and guidance for Q1 and the year.

As I review with you our fourth quarter results, similar to when I reviewed the second quarter results and the third quarter results, three and six months ago, I will discuss not only the reported figures but also the year-over-year comparison on an adjusted basis.

That is, without the various unusual items that impacted this year's results.

We believe these normalized results are important as they provide a meaningful comparison of prior period to current period earnings, exclusive of these items.

These normalized results are also expected to be more representative of future operating results.

With that said, we'll get started here.

Reported sales for the year, for the year's fourth quarter, the 16 weeks ended September 2, were 20.09 billion, up 3% from last year's fourth quarter sales of 19.5 billion, up a little over 9% if you adjust for last week's extra week, 16 versus 17 weeks.

On a comp basis, Q4 comps were up 5% for the quarter.

The 5% fourth quarter was comprised of a 7 in May, a six in June, a 7% in July, and then of course the 2% that we recorded last month in the five week August month.

For the quarter, our 5% reported comp sales were the combination of an average transaction increase of about 3% and an average frequency increase of about 2%.

I might add that for the fiscal year just ended, company wide our average sales per location were 130 million, up from 127 million in '06 and if you just look at the U.S., the 130 for the Company, would be 132 just for the U.S.

Included in the average transaction increase of about 3% in the fourth quarter, FX represented about 100 basis point boost to the quarterly comp.

That's reflected in our comp number because of the weak dollar.

We got hit by about 10 basis points due to the Canadian tobacco issue.

I'm sorry, gas deflation was about 10 basis points to the negative.

And the Canadian tobacco issue, which goes away this month, October, that was a shade over 100 basis points negative impact as well.

In terms of cannibalization, our expansion with most of it in the existing infill markets, it impacted comps by about 125 basis points in the negative in the fourth quarter.

So all those items are within the reported numbers.

In terms of sales comparisons by geographic region, I guess what I probably most want want to talk about is the August 2% versus the September 6% and within that, the U.S.

August 1% versus the September U.S.

4%.

Compared to a weak August comp of 2, and again 1 in the U.S., September's 6% comp included a foreign to U.S.

It represented a nice comeback, although just like I was explaining to many of you in August, some of the anomalies, certainly some of the improvement includes some anomalies as well.

I'll get to that in a minute.

In terms of the 3 percentage points of comeback, if you will in the U.S.

from a 1 to a 4 in August and September, Northwest, Southeast, and Midwest did a little better than that spread, a little better than that change with California and the Northeast similar to the U.S.

Up 3 percentage points from where they had been.

So overall pretty good.

International's strong comp showing in September relative to August was primarily due to the increasing strength of the Canadian dollar, recognizing about 12%, I think about 11 or 12% of our sales come from Canada and the Canadian dollar as you know is now pretty much on parity with the U.S.

dollar.

In terms of merchandise categories, again, looking at the fourth quarter here of 5%, within food and sundries we've been hit by tobacco and I won't go into the detail but essentially a year ago in Canada the Imperial tobacco stopped selling through what I consider sales as a wholesaler and had a big hit to our tobacco sales.

And we have been including that explanation for the last 11 months and of course past September it won't be an impact any more.

Within food and sundries, tobacco is about 12% of food and sundries and in fact 5% of total company sales.

That department, tobacco, is down 14% in the quarter.

Notwithstanding that, food and sundries overall was still up similar to the Company as a whole.

No big outliers outside of tobacco, nothing really to speak of within food and sundries.

Within hardlines comps, majors and sporting goods were tops in that department, those subdepartments.

Within soft light comps, media was actually a standout which is, I think is the first time I can say that in a few years.

With low double digits in that area.

And both men's and women's apparel were up slightly.

Within fresh foods, all had pretty good showings with produce continuing to be the standout.

Within ancillaries, all up, nearly all of the businesses comped nicely -- nearly all of them comped nicely during the quarter.

Gas was up slightly, given the slight deflationary trend in the pricing during the month.

Although we have seen that reverse itself again.

In terms of September sales for the five weeks where we have a 6%, FX benefit was bigger, if you recall, I said as I mentioned on the, for the course of the quarter, FX was about 100 basis points to the -- included 100 basis points to the better.

Within September it was 180.

And again that is reflective of the Canadian, principally reflective of the Canadian dollar strength.

Gas inflation which was slightly deflationary, ever so slightly deflationary in Q4, actually was up about 70 basis points.

So those two things alone were up about 80 basis points each versus Q4.

In terms of average ticket, within the 6% reported comp, average ticket was up 4.

With of course FX being part of that and gas inflation being part of that.

Average traffic again, was up about 2.

Tobacco was a negative hit for about 65 basis points and cannibalization has been pretty consistent, actually coming, the detriment coming down a little.

In the month it was about 115 basis points to the detriment relative to Q4 when it was 125 basis points.

In terms of the Company's comps going from the 2 to the 6 from August to September, what we look at is a little over half of it is FX, tobacco, and gas inflation with the rest of it being I think a fundamental increase in coming back from where we thought we would after August.

Now moving down the line items of the income statement, I'll start with membership fees.

Reported in Q4, last year was 379.5 million or 1.95%.

Compared to 388.2 or 1.93%.

Up about 2 percentage points on a reported basis and actually down a couple basis points.

Only about a $9 million increase.

Again, we had the big charge in there and I'll talk about that in a minute.

On a normalized basis, exclusive of that charge, membership fee dollars were up $65 million, up 17% or up 26 basis points exclusive of the $56.2 million adjustment.

It's a good showing but if you recall from last year's fourth quarter, when we had a 53 week year and a 17 week fourth quarter, I was explaining why it was a little lower than planned.

Or lower than one might think.

Some of this increase is because of we're comparing a normal 16 week quarter now compared to that unusually low number last year.

And I'll go through that in a second.

In terms of that when you look at the normalized figures here it shows the membership fees as a percent of sales were up to the 26 basis points.

About half of that is due to the impact of the last year's fourth quarter being a 17 week quarter.

Let me explain that.

Since we have historically recognized membership fees using a monthly convention over 13 periods, 13 months if you will, 13 four week periods.

Membership fee revenue in our 53 week year was the same if it had been a 52 week year.

When comparing membership revenues as a percent of sales, the percentage appears lower in a 53 week year because the membership fee revenue, the numerator, is comparable year-over-year while the sales, the denominator, is not exactly comparable because the prior year included an extra week.

Similarly, the extra quarter included an extra week.

So while last year's fourth quarter had a higher reported book membership amount on all but sales, this year was back to normal.

So we're comparing normal to something that was unusually high.

In terms of the number of members at year end -- by the way, so even if half of that 26 was unusual, still it was a good showing year-over-year, being up 13, if you will.

In terms of members at year end, we had 18.6 million gold star, that's up from 18.3 million at Q3 end, business primary, 5.4 million, same, business add-on, 3.4 million, same as the third quarter, so all told 27.4 million, up about 300,000 from the 27.1 million.

Including spouse cards, up about 700,000, rounds up to 700,000 at 50.3 million.

At fiscal year end on September 2, our paid executive members totaled 6.331 million, that's an increase of 303,000 or 5% over the last 16 weeks.

Or about 19,000 a week increase.

For the year paid executive memberships increased by just over 1 million members or just over 20%.

These members represent now 23% of our membership base and generate about 52% of our total sales.

And this percentage has continued to increase slightly.

In terms of renewal rates, they continue strong although they -- as compared to Q3 end, they are down about 0.2%.

We round down to 86% instead of up to 87.

Business membership renewals remain steady at 91.5%, gold star, which had been at 85 are now 84.8.

Again, so the 86.6 last quarter, which rounded up to 87, is now an 86.4 rounding down to 86.

Not a big deal either way.

In terms of the membership fee adjustment and charge, let me spend a minute discussing this non cash adjustment we took in Q4.

In fiscal, '99 we changed our accounting for membership fees from a cash basis to a deferred basis whereby membership fees were recognized ratably over 13 periods.

A periodic or monthly convention if you will.

Beginning with the period in which the fee was collected.

In the fourth quarter of '07 we performed a detailed analysis of the timing of recognition of membership fees based on each member's renewal date.

Our analysis recalculated deferred membership fees using a daily convention.

This represents an improvement over our historical method and also corrects an accumulated understatement in our deferred membership revenue liability.

These adjustments are necessary as our analysis showed that a higher proportion of our members pay their renewal fees earlier than we previously estimated and outweighed the memberships that are paid late.

While this is positive from a cash flow perspective, our historical accounting treatment did not ensure these early payments were being recognized over the specific membership term.

As a results we recognized a $56.2 million non recurring, non cash reduction to membership revenues and a corresponding increase to our deferred membership fees.

Deferred membership fee liability on our balance sheet.

Going forward, we are now recognizing membership fees on a daily basis and based on the specific membership terms and timing of the payments.

Prospectively, we will account for membership fee revenue on a deferred basis over one year, using the member's renewal date, daily convention, if you will, instead of the month in which the renewal payment was received.

We think it's an improvement in how we look at it.

And on a positive note, we also account for membership fee income for tax purposes on a deferred basis.

This is something we pursued with and received permission from the IRS back in 1999 when we went from cash accounting to deferred accounting.

Therefore the $56 million pretax hit to earnings will actually generate positive cash flow.

It's a timing issue but it's nonetheless positive cash flow of about $20 million.

The associated reduction in earnings from tax liability.

While this is again simply a timing issue, as long as we're in business it should continue to grow and we can always earn interest on it.

Now going down to the gross margin line, our reported gross margin in the quarter was higher year-over-year by 38 basis points, coming in at 1036 last year versus a 1074 this year in the fourth quarter.

It was a very strong gross margin result but with not that much of it being considered unusual.

In very simple terms our fourth quarter gross margin's 38 basis point increase year-over-year is comprised of three main things.

35 basis point improvement in overall merchandising, a 4 basis point detriment year-over-year from the 2% reward, i.e.

a slight increase in the penetration of sales and therefore higher membership reward amount and we estimate about 7 basis point improvement in Q4 related to the change in our returns reserve related to the change in our returns policy and electronics that we did back in February and March.

In terms of our overall merchandising gross margin, we also were helped we estimate by probably about 6 basis point related to the lower sales penetration year-over-year in our tobacco business which has a sub 3% gross margin.

Again, those are a couple of the anomalies.

Still, even if you take that out it's a very strong showing.

Our core merchandise businesses, food and sundries, hard line, soft lines, and fresh foods as a group they were up year-over-year in Q4 by about 32 basis points.

Within these measure departments, food and sundries and fresh foods were higher by quite a good amount.

Hard lines was up slightly, even with the year-over-year decline in the majors department, not as much of a decline as historically and soft lines was down ever so slightly.

In terms of the majors department, when I was explaining in the last few quarters how our margins had been impacted dramatically to the negative from the continually reduced -- continuing reduction in gross margin in that department, I think I recalled in the last quarter's conference call that year-to-date through the third quarter, that department, which is about 6 or 7% of sales, was down in excess of 150 basis points year-over-year.

So it impacted our total Company's gross margin by over 10 basis points.

In the Q4, that department was still down but not down as much, down about 50 basis points.

So we are seeing the impact of our returns policy change that began back in February and April.

Fresh foods as I mentioned was also up nicely, reversing a slight negative trend year-over-year in Qs 2 and 3.

Also Q4 gross margin was impacted, I mentioned, by the 4 basis points from the higher sales penetration of the executive membership, nothing is unusual there.

Year-over-year, the basis point hit if you will to Qs 1, 2, and 3 this year versus Qs 1, 2, and 3 last year were minus 10 basis points, minus 6 basis points, and minus 7.

The minus 4 actually might be a little bit of an anomaly.

We do expect it to continue to go down over time.

I know in the first month of this fiscal year it's back in the minus 6 or 7 range, I believe.

Not a big impact either way but we of would expect that to come down over time.

Pharmacy gross margins continue to be strong, actually up a little year-over-year in Q4, notwithstanding the increasing penetration of Medicare part D as well as the competitive issues with generics which we certainly are a part of.

As I mentioned a minute ago, we estimated that the Q4's margin benefit from improving sales returns reserve was about 7 basis points, mostly from the change in our electronics policy.

In terms of our gross margin outlook moving forward, the reported gross margin in Q1 of '08 should be positive but we'll have to see by how much.

Again, I mentioned, we'll still see some impact from the increasing executive membership base, nothing huge but something in the mid-to probably high single digits.

LIFO, we'll have to see.

For the year just ended, LIFO was essentially flat almost to the basis point, deflation in electronics pretty much offset some inflation in other areas.

Overall it was flat for the Company.

Our core merchandise groups should be okay in terms of margin.

I should mention that I was looking back at our Q1 conference call in '07 a year ago, and we did -- I did mention that some of the margin strength in Q1 a year ago related to strong gas margins in the first quarter.

So far, we haven't -- it's not horrible but we haven't seen the strength that we did last year so we might get hampered a shade by that in the first quarter.

In terms of the returns policy change, I think we can say now that in Q4 it started.

In '08 it should continue to improve going forward.

We'll try to share that with you as we go along.

Other initiatives, again, we've been a little vague on what the other initiatives are, but we have some under way and they too have started.

I think that's in -- you see that in the quarterly numbers.

Even taking out some of the anomalies that I've mentioned.

The outlook for '08 should be increased gross margins but I would ask you not to look at Q4 as a template for the upcoming year.

There are some anomalies in there and we think it will be good but certainly Q4 had some extra good.

In terms of our ancillary businesses, pharmacy we added 7 to be at 429 at year end, food courts, we added 8 to be at 482.

One hour photo labs, 8 to be at 480.

Optical, optometry shops, we added 8 to be at 472.

The print and copy remain at 8.

We added 10 hearing aid centers to be at 237.

And 7 gas station so be at 279.

Moving down to SG&A, our reported SG&A percentages fourth quarter over fourth quarter were not very thrilling.

On a reported basis, SG&A was higher year-over-year or worse by 23 basis points, coming in at a 981, versus a 958 last year in the fourth quarter.

In terms of -- looking at Q4, where the 23 basis points, there are really three components.

Core operations was worse or higher by 23 basis points, central was slightly higher by 2 basis points and we actually had a slight pickup from stock option expense year-over-year or equity related compensation expense, a pick up of 2 basis points.

A little editorial on that, I kind of look back to some of the budget meetings we've had where the numbers weren't, or a particular expense category wasn't good, and as Jim would say, in the Board room communication when the numbers weren't good, we've all managed to screw this up together this time.

In terms of the 23 basis points in core business SG&A, payroll and benefits were about 11 basis points of it.

Now, about six of that, four for wage and two for benefits, relates to the $1 an hour increase.

Which we'll cycle through coming up in the beginning of the third quarter.

I'm sure that the 2% August comp didn't help, even though the comp for the quarter was pretty good, when you miss the number you get hurt a little more than when you make the number and benefit from it.

U.K.

and Korea, particularly U.K., their expenses as a -- SG&A as a percent of sales was actually up close to 100 basis points year-over-year.

There were some anomalies in that, but overall it was not a good showing.

That small piece of the business impacted the 23 by 6 basis points.

And then the last thing is is the extra week.

There are some expenses, not many, but there are some expenses that are spread over 13 four-week periods or in the case of last year, an extra fifth week so you had a little benefit last year.

We estimate that's about 7 basis points of the number.

So there are a couple of anomalies in here.

Certainly the dollar an hour increase, a bottomless scale, certainly the extra week.

I'll take the U.K.

and the rest of the detriment, and chalk it up to not doing as well as we thought we could have.

I'm sure that we're not going to fix all of this in the first quarter.

But at least in the fourth quarter we saw good strength, probably better than expected strength in margins offsetting a little worse than expected weakness here.

In terms of the outlook going forward, again, payroll will be challenged, with part of it through the second -- through the second quarter when we anniversary the bottom of the scale.

Next on the income statement is preopening expense.

It was about -- it was pretty much the same, about 800,000 higher year-over-year, coming in to 15.9 million, versus 15.1 million a year ago.

Last year in the fourth quarter we had nine openings, this year, eight.

No real surprises there.

In terms of the provision for assets, impaired assets at closing costs that was up year-over-year in the quarter.

Last year in the fourth quarter it was 1.6 million.

This year, it was 4.9 million.

The main reason for this increase in Q4 is simply the upcoming plans for eight to ten relocations in '08 versus a year ago, our expectations for relos in '07 was zero.

Once we decide to go ahead on a relo, all remaining depreciable assets that are to be written down are then amortized over that shorter time period and so basically I think just two warehouses alone were about $3 million of that number.

So all told, reported operating income in Q4 was up year-over-year from 514 million last year to 555 million this year, or up 8%.

Excluding the membership charge of 56.2 million, operating income would have been up 19% versus last year, again, notwithstanding it being one less week this year.

And below the operating income line, reported interest expense was higher year-over-year with Q4 '07 coming in at 32 million versus only 3 million a year ago.

This of course reflects the $2 billion debt offering that was effective the first day of Q3 '07.

Basically $2 billion at roughly 5.5% at 16 weeks that's roughly your $30 plus million.

In terms of the $2 billion debt offering, we completed that in mid-February.

The offering was comprised of $900 million of five-year debt with an all in interest of 5.36% and 1.1 billion of ten year debt of all in at 5.57.

The debt was booked on our balance sheet in Q3 as the transaction was funded just after Q2 end.

On the interest income side, it was not up as much as interest expense because we're spending the money.

It was up 15.2 million year-over-year for the quarter, coming in at 59 million this year in the fourth quarter versus 43.8 a year ago.

Overall, reported pretax income was up about 5% year-over-year in the quarter to 581 million but on a normalized basis, exclusive of that membership charge, pretax was up nearly 15% versus last year's quarter and of course again, the adjusted 16 versus 17 week quarter.

I'm going to talk about tax rates, pretty much the same year-over-year, coming in a shade under 36% this year and last year in the quarter.

In terms of our balance sheet, we'll have this in the online later today in that Q&A that we do that has a few other statistics as well.

But I'll give it to you here.

Cash and equivalents of 3.356 billion.

Inventories of 4.879 billion, other current assets of 1.089 billion.

Total current assets of [9.324].

Net PP&E of [9.520].

Other assets of 763.

For total assets of [19.607].

On the right hand side, short term debt of 114, accounts payable of 5.125 billion.

Other current of 3.344 billion.

For total current of 8.583 billion.

Giving you long-term debt total -- I'm sorry, total current liabilities of 8.583 billion.

Next, long-term debt of 2.108 billion.

Deferred and other, 225.

Total liabilities of [10.914.] Minority interest of [69].

Stockholders' equity of 8.623 billion.

Total of 19.607 billion again.

Debt to cap, about 20% notwithstanding the added debt.

Plenty of financial strength.

In terms of our AP ratio, accounts payable as a percent of merchandise inventories, on a reported basis is up 5 percentage points from 100% last year to 105%.

Now, again, a chunk of that relates to construction payables with all the expansion we've got going on.

If you look at just merchandise payables as a percent of inventory it too improved by about 4 percentage points, from 83 to 87%.

With $4 billion of inventory, every percentage point is 40 million in cash.

I'm happy to report that average inventory per warehouse last year for the fourth quarter, the average per warehouse was 9.959 million.

This year it's 9.999 million, so we are up about 0.5% or $40,000, I can't recall the last time we had such a small number there.

By comparison in Q3, year-over-year in Q3, our average inventory per warehouse was up about just under $500,000 per warehouse or up 5%.

Looking at the first month this year, it's actually down ever so slightly year-over-year.

So as we said last call, we are working on trying to reduce inventories a little.

I think we've done a good -- we've gotten off to a good start in the last quarter.

We don't have any inventory concerns at year end.

Our physical inventories came in at record low shrink numbers.

In terms of CapEx, for all of fiscal '06 we spent just under, a shade under 1.4 billion.

We estimate that our CapEx in '08 will be more likely in the 1.7 billion to 1.8 billion range.

I think our budget is a shade higher than that but we never make our budget.

It's always a little -- inevitably some things get delayed.

Probably a good estimate is in the 1.7 billion, 1.8 billion, range.

Not only up to 40 new openings including the eight to ten relos, but also a little over $100 million for depot expansion and a big increase in our remodel activities which of course includes relos.

In terms of dividends, back in April we announced an increase from $0.13 a share per quarter to $0.145.

This $0.58 per share annualized dividend represents a cost to the Company of just under $250 million annually.

Costco online, it's continuing to do well.

A 36% sales increase in the fourth quarter.

Again, adjusting for the extra week, if you adjusted for this 17 weeks versus 16, that would imply something in the low to mid-40s.

And a 39% increase for the full fiscal year.

With sales for the whole fiscal year coming in a little over $1.2 billion.

In terms of expansion, I mentioned total openings of something in the low 40s.

That assumption includes 8 to 10 relos so something in the low to mid-30s in terms of net new units.

In '07, just to review, we added 30 net new units plus one to Mexico.

On last year's ending base, exclusive of Mexico, the 30 on the base of 458 for the year was 6.6% unit growth and probably right around 7% square footage growth recognizing some remodel activities include expanding square footage as well as new units tend to be a little higher than the Company average for around 140,000 feet.

In terms of '08, if we assume just in terms of net new units, we add let's say 32 or 33, that too on a base of 488 would be unit growth in the 6.5 plus range and approximate 7% square footage growth.

In terms of stock purchases, repurchases, since June of '05 and through September 2, the fiscal year end we repurchased approximately 74 million shares or about 15% of the shares outstanding, at an aggregate purchase price of $3.853 billion.

That averages out to 52.05 a share.

Recently our Board approved an additional 300 million.

That was simply to add to the existing 4.5 billion so if we spent just under 3 million with the 300 added, we've got about 947 million with still available authorization as of fiscal year end.

We did the additional 300 million simply to get through the blackout period.

You never know what's going to happen in the market.

We wanted to have some available if we needed to.

For all of '07 we repurchased 36.4 million shares for just 20 million under the 2 billion mark in dollars or an average price per share of 54.37.

Finally, before I turn it back to Francis for Q&A, looking at FirstCall, again, ask you not to go too crazy on the numbers, when we looked at -- when I looked at the FirstCall sheet yesterday, you had a FirstCall number of $0.59 or FirstCall had a number of $0.59 for the first quarter and a total for the year I believe of 2.91.

I think this happened about a year ago.

When we look at our own budgets for the year, that there is -- the FirstCall numbers tends to be skewed a little bit stronger in Q1 and a little less strong in Q4.

And if I take the same percentages of last year's actual -- of '07's actual numbers and applied it to the FirstCall numbers, the 59 would come down a few -- a couple of cents and the fourth quarter would go up a few cents.

In terms of our range, in terms of looking at Q1, again, compared to the $0.51 number this year, I think the $0.59 may be a shade high.

I mentioned gasoline, that it was very strong a year ago in Q1 and it was okay in September of this year.

But we'll have to see how the next two months ago.

Even with that I think we would see a number in the mid-to high 50s as a range.

For the year, again, I assume the expectations were up a little.

Our own budget before we even finish Q4 was up a little from where FirstCall is.

At this point I'd probably give a range from the high 2.80s to $3 and hopefully we can do a little better than that.

But it's early in the game.

You don't know what's going to happen with the economy.

We've got to improve our expenses a little.

We think the margins will be fine.

But again, I try to share with you all the anomalies, both positive and negative there.

We are getting off -- we are starting off well with some challenges given the strength of Q4.

And we have -- we're pretty optimistic about the year so far.

Lastly, in terms of outlook, again, membership should be fine.

We have now anniversaried even on a deferred basis the $5 increase that we did almost two years ago.

Gross margin, again, get a little hit from executive membership penetration but that's okay.

Electronics should be a positive and the initiatives that we have under way should continue to improve a little bit.

SG&A, again, we're now cycled through options so we shouldn't see a big plus or minus there at all.

As I mentioned, the bottom of the scale increase we still have two more quarters of.

If you include benefits in that, that's about 6 basis points of a hit.

Then we have just got the challenges of doing a little better than we did in Q4 there.

Again, later this morning we'll have some additional financial information we've posted across our investor relations site.

Including the balance and EPS calculation detail and what have you.

With that I'll turn it back over to Francis for Q&A.

(OPERATOR INSTRUCTIONS) Your first question comes from the line of Deborah Weinswig.

Thank you.

Good morning, Richard.

Can you talk about in kind of light of some of the weather trends we've seen in the most recent months, kind of how sales, seasonal items has trended and anything that you're thinking about doing differently as a result?

Well, I was just talking to the apparel buyer yesterday.

The outerwear is going out crazy here in the Northwest because it turned winter on us.

It's been in the 50s and low 60s and rainy.

However, as you well know from Chicago to New York, and parts of the Southeast, it's been unseasonably warm up until very recently in some parts and so we don't have any big concerns about markdowns.

In fact, markdowns in relative to our expectations for markdowns in the first month were a shade better than planned.

I'm talking about in the hundred thousand dollar range better.

In other words, no indication that we have any issues there.

But outerwear I think is the one issue that you have and recognizing apparel is a single digit low to mid single digit department for us, men's and women's outerwear.

Men's and women's apparel and outerwear is a component of that.

And other than that, we haven't seen a lot yet.

In terms of seasonal holiday stuff, as we shared with all of you after trying -- and trying to explain that August we felt was at least included some aspects of a blip in that we weren't terribly exciting in the second half of August, we definitely feel that the places are more exciting and we're -- what little seasonal stuff we have in, we've done fine with.

And we're in stock in seasonal stuff.

And then something I thought was interesting is that you said the fresh food trends had reversed from the negative trend in kind of the second and third quarters into a positive trend in the fourth.

Is there anything that you're doing different there?

Why do you think the change in the business?

Well, in talking to Jeff Lyons who is the Senior VP of Fresh Foods, I think it's a little bit the comment that I made, that Jim says occasionally we all managed to screw up together, if you look back at the last couple quarters, there was some issues of higher D&D or spoilage where we were -- inventories were a little -- a little bit too much was brought in when sales were just even a couple percentage points, you can get some extra spoilage.

They've been working on it.

That's a good example of where they were managing to screw up a little and they improved some of the components.

Not the pricing but the components of the margin like spoilage.

Then the last question, we're starting to hear, especially as we're pushing holiday, a lot about the competitive environment and how retailers -- looks like it is going to be a very promotional holiday season.

Can you just talk about how you're thinking about the competitive environment and what we might see, obviously don't give away any Company secrets, but what we might see out of Costco for the holiday season?

We're a little bit of an anomaly in that too.

We, it is fiercely competitive out there, we're fiercely competitive.

We haven't seen any big change in anything.

Certainly, when the traditional retailers, whether it's target or Wal-Mart or Best Buy does something promotional, that gets some more traffic in there.

We think that some of our marketing efforts, which as you guys know have grown over time, from what was originally a summer passport to the winter wallet to some weekly handouts and some other couponing, that stuff has done well for us.

I don't think there's any big change year-over-year but that's certainly helping.

In terms of competitive pricing, I don't -- I haven't heard anything that there's any need to do anything crazy there.

Other than the normal craziness that we are anyway.

Thanks again, Richard.

Appreciate it.

Your next question comes from the line of Charles Grom.

Good morning, Richard.

Thanks.

Just on the margins, is there anything more on the initiatives that you talked about last quarter and a little bit earlier that you could share with us and how much of that may have helped the most recent results today?

I don't want to go into a lot.

I don't want to go into a lot of detail.

Again, if I had to look at the number, as we were trying to pencil it out ourselves, it's probably something about a quarter to a third of the improvement.

Okay.

But again, we'll have to see what next month and the next quarter brings.

Okay.

Fair enough.

And then we were recently down in Southern California and one observation was in the seasonal category, particularly how much Kirkland product seemed to be there versus last year.

Was this just an anomaly on our end or could you remind us kind of where you were historically.

Is this kind of a focus on some of the non competitive categories that you can expand some of the Kirkland brands?

My guess is is what you may have seen is all -- there's probably an increase in a lot of the, what I'll call trim a home and trim a tree and some of the Christmas stuff and that's bulky and big and you see it out there.

So all the lighting and things like that, that's maybe part of it.

It's continued to increase.

Other than from a seasonal pane you might have seen a big chunk of the new stuff.

It's growing, if I had to guess, it grows at a 0.5% to 1% of penetration a year.

Just last, just to switch gears a little bit, could you speak to the returns and the margin profile of some of your international stores, particularly outside Continental America and where you see the biggest opportunities for store growth on this front?

Well, it's funny, every country is a little different.

Some countries have nationalized healthcare and therefore benefits are a lot less as a percent of sales.

Some companies have lower wages.

We have high wages relative to that country.

But as a percent of sales, instead of being 4% plus it's 2% plus turnaround and the occupancy cost is an extra point or two.

It's funny how it all seems to wash out and be pretty close in terms of total types of expenses.

On the margin side, we tend -- historically, Canada and the U.S.

is pretty much consistent.

I think Canada if anything might be a shade higher.

Excuse me.

Okay.

I think the other countries, sometimes we start off a lot lower in part because you start off with lower volumes in a new market but I think they're all trending towards the numbers that we see in our Company.

There's a couple of countries, smaller in Asia, that have higher than average margins.

We have some units over in Korea and Taiwan that do in excess of 200 million and one unit that does in excess of 300.

Wow.

That's on, relative to five and six years ago a weakening currency over there.

So for whatever reason, everybody likes value and we seem to have been clicking.

Now, that doesn't mean that we can -- we're going to ramp up international expansion dramatically.

We still are focusing a lot on the U.S.

I guess it's pretty much public knowledge, we'll be going into Australia over the next year.

But again, we're going to start with -- if history repeats itself in the U.K.

and any of the three Asian countries, don't expect to see more than a couple units to start with.

Okay.

Just one more, if I could.

Of the gross call it 40 to 45 you are going to open next year, how many are U.S.?

Is it about two-thirds?

No.

I think it's a little more than that.

Hold on a second.

Do you have that?

Why don't -- I'm going to--.

I could just get it offline.

Yes.

Get offline.

We'll go to the next question and they'll look that up while I'm looking.

Your next question comes from the line of Greg Melich.

A couple question.

One is first on the membership fees.

If I caught you correctly the 17% growth that we had once we add back the charge was helped because of the week -- I guess the change in one week in the quarter.

And it's 2% if you take the as-reported.

If you think about how membership fees are actually trending on a like for like basis, and what we should think about it, what you want it to be is it still in that low double-digit type growth range?

Is that sort of the optimal number for you guys?

I'm just looking here.

Yes, I mean, it looks like it should grow on a reported basis slightly above top line sales growth.

Okay.

So the -- I guess I'm trying to get to a clean number as we think about the future.

We should sort of take this year as the base as a percentage of sales and use that when we try and think about--?

I think that's fair.

Yes.

I think that's fair.

Okay.

And then the second question is on the cash, is it fair to assume going forward that you now have the debt you want and the capital structure you want so that the -- do we have the right number of cash and equivalents just to run the business or could that be lower?

We have a lot more cash than we need.

Year-end, we had -- hold on.

If we had 3.4 billion of cash and equivalents about 1.4 of it is the stuff that I talked about, the debit and credit card receivables and monies in various trusts and things.

So there's easily 1.5 to 2 billion of that number that is excess as it relates to our needs.

In terms of what the outlook was, when we did the [$2 billion] offering, of debt offering in mid-February, in very broad, simplistic terms, you've got net income both in '07 and '08, something in the low 1 point blank amount, you have depreciation in the 600 million amount, you've got dividends in the 250 amount.

So in very simple big rounded numbers, you've got -- I'm sorry, net income of the low 1.1, depreciation in the 600s, we still have 200 million to 300 million a year in stock option exercises, my guess is at least for another couple of years.

So you're talking about cash coming in and approaching the 2 billion range each year year and then in '07 of course we spent 2 billion.

At mid-year, and if you just simply annualize that through the end of '08, what we -- what the math would show would be is that we had, what we were doing was adding at mid-year when we had about 2.6 I believe in cash and equivalents so about 1 billion of excess cash, by adding 2 billion to that, 3 billion of excess cash, which at a $2 billion stock buy back rate is 1 billion every half of year or gets us through the end of '08.

There's no guarantees that we'll buy 2 billion a year.

We bought 1.4 billion in '06 and just under 2 billion, 1.980 billion or something in '07.

Our MO has been to be in the market, generally on a daily basis through blackout periods using 10b51, but there is always that caveat as market conditions warrant.

Typically, we've not tried to be too smart or too silly, when it goes down a little bit, we buy a little more, when it goes up a little, we buy a little less.

We'll have to see where we go.

I would imagine we'll continue to be in the market and we'll continue to adjust accordingly.

From a comfort standpoint, a leverage standpoint and this is simply all you guys or your banks can do the same kind of analysis, in terms of -- there's a lot of, there's still even with this debt level, there's a lot of capacity to still maintain our debt ratings.

We're not looking to do that right now.

We'll take it one step and one quarter at a time.

And what's the Board's attitude to a special dividend versus buy-backs?

Well, that attitude hasn't been really looked at in a few years.

The attitude when we were deciding what do we do with our balance sheet and how do we change its complexion a little bit and this goes back 2.5 years ago, the thought was let's initiate a dividend and raise it occasionally, let's ramp up expansion which frankly, we were doing anyway and let's buy back stock and as you have seen historically over 2.5 years, 2.25 years, we've done that at a slightly increasing higher level.

Going back 2 years ago, one of the decision processes was special dividend versus stock buy-back.

At that time the decision was to buy back stock.

I don't really think we thought about it much in that regard since then.

Okay.

Great.

Congrats on the margins and I'll let someone else go.

Before I do, let me just mention the number in terms of the -- of the 32 to 33, about 85% of the new units will be U.S.

and Canada and with a few of those in Canada and about 15% internationally outside of North America.

Next question, please.

Your next question comes from the line of Todd Slater.

Thank you.

My first question is just back on the gross margin because I'm just trying to understand especially the merchandising piece, the 35 basis point increase in that one, because I don't remember that size of a change from one quarter to another or one year to year in, I don't know, 14 or 15 years or so I've been following it.

So I'm just trying to -- if you could help us understand what is changing in the model or in the buying strategy or -- I mean, I understand the other moving parts that you mentioned but on the merchandising side, sort of what's changed there?

Well, real quickly, first of all, I did mention what we estimate about 7 basis points related specifically to the improvement in our sales return reserve because that's, the beginning of that trend, with our change in returns policy.

Was that in the 35 or excluding -- I know the 38 total was 7 but then it was 35 just on the merchandising.

I'm sorry.

You're right.

I think one of the earlier questions from Chuck or someone was what piece of this action was initiative related.

I said a quarter to a third.

It's probably closer to a third.

And that's taking a swag at it.

My guess is there's a few basis -- those are some things that are very definitive that we saw.

My guess is there are a few other straggling basis points that are part of that.

Arguably, of the 35, if it were a third, that's about 11 or 12.

If it were a half it's about 17.

Probably somewhere between there, call it, 14 or 15 for a good estimate I guess would be the beginning of those initiatives.

The fresh foods margin, again, I think we picked up a few basis points there, simply because after a couple quarters of being down year-over-year, we were up.

And that I think is sustainable because as I mentioned in Q2 and 3, we felt that there was some anomalies in there that we could do a better job just on operations, nothing to do with pricing.

I think as it relates to the initiatives, where is it?

Again, for competitive reasons we're not going to say a lot.

Recognizing you're not making it on commodities and on Tide and Crest and Snickers bars, but they're -- we've always fought this battle with being extremely disciplined and extremely low on margins irrespective if our competitors even had the item.

There are ways, as we've looked at it, there are things like imports and like things that go through our depot where we have never if you will benefited in our view from the full benefit of having those benefits.

Trying to pass on all of it to the members, or virtually all of it.

As we try to see how can we get some more margin, not go crazy, just recognize under Jim we're not going to go crazy, wee feel that there are some avenues that we can improve a little margin and maintain the integrity of what we try to do in terms of constantly try to figure out how to lower prices as well.

That's a roundabout answer.

But that's what it is.

Okay.

And then I was just wondering about on the expense side, if you could just give us your sense for '08, of what the sort of positive or negative pressures on expenses in terms of direction in the big buckets like labor, and benefits, and distribution, utilities or anything else that you think is important for us to know?

Recognized benefits are about 40%.

For every dollar of labor, there's about $0.40 of benefits.

That's everything, FICA, vacations, contribution to employees 401-K plan, healthcare, healthcare of course, being the big Kahuna, FICA and vacation being the next couple.

That's where -- so through the first half of the year, for Q1 and Q2, we will have not yet anniversaried the $1 an hour increase.

So that's about -- 4 plus 2 or about in labor and benefits, that's about 6 basis points.

Rationally into the first month of Q3, so a little maybe 1.5 basis point in Q3.

Again, equity compensation should be roughly 0, so it's not a negative but not a help.

Utilities my guess is is that they're going to run up a little bit as a percent of sales just because you hear about that on the news every day, that everybody's utilities are going up.

Notwithstanding the fact that we've done a lot, as everybody has, with computer programs to manage the lights and the temperature and all that.

I don't -- again, as I've said before, there's not a lot of silver bullets in that.

I think clearly, Jim Murphy, who runs International, feels that the U.K.

will do better.

It's not going to be overnight.

But they'll -- that kind of detriment, the estimated 6 basis points of detriment from the U.K.

to the Company, should come down and ultimately flatten out.

I still believe that a lot of it's comp related.

If you -- if we perform like we did in September, I think we can be a little better relative to what we saw and if it falls to 2%, there's no indication it's falling, by the way, I mean, but we'll see.

This week is good.

As I said a month ago, the first day of September was good and we came in fine but we'll have to see.

Thank you, Richard.

Good quarter.

Your next question comes from the line of Christine Augustine.

Thank you.

Richard, could you tell us maybe specifically what sort of initiatives you have under way to reduce the inventory per club?

Are you actually reducing SKUs or is it something to do with the flow of the inventory to the club?

Well, we are reducing SKUs, although as trends always have it, a year ago there were companies, at every budget meeting Jim was saying if you guys can't do it, I'll do it.

It will take about a half an hour.

There have been some regions where they got a little less than they should have by 100 SKUs.

I think right now we're pretty much on target with our SKU selection.

We have probably 200 fewer SKUs today than we had a year ago, maybe 150.

That does help you because you're maxing out bigger quantities of higher volume stuff.

You're getting rid of the stuff ultimately that you should be getting rid of.

There's a lot of things.

This is a silly example.

But a good example of how we can -- this has to do more with improving margin but something as simple as all the new detergents that are coming in with ultra squared or whatever it's called now, ultra three, that has -- it's half the size, half the cube.

That saves thousands of trucks.

We have greatly reduced tobacco SKUs.

I'm not talking about Canada.

But we recognize that some of our tobacco sales, while it's nice because it helps SG&A a little bit, we don't make a lot of money on the couple hundred SKUs that aren't Marlboro and Winston and the like.

It's a lot of little things.

It's constantly being more efficient.

I would say the biggest area is SKU reduction and that's a seasonal thing as well.

And again, I think we're doing a better job on that.

The number that Jim threw out about three or months ago and I think I mentioned on the third quarter conference call is that his goal, barring inflation or deflation, was to reduce inventories by 500,000 to 800,000 over the next couple years.

If you look at the average inventory of Q3 end versus -- year-over-year versus Q4 end, we improved by over 400,000.

If you look at Q4 end versus the first month, month over month, end of September, versus end of September, we picked up another 50,000 to 80,000.

I'm sure there will be months when it goes up a little, months when it goes down.

I think the trend has been that we've probably done a few hundred thousand of the 500,000 to 800,000.

On the CapEx guidance for '08, if I just take the low end of the range and I think you said there's 100 million in there for depot expansion, it looks like it's still 200 million higher than what you spent in '07 for basically the same net number of new Clubs.

So is there something else that you are spending on?

The difference there is you've got, let's assume -- I said eight to ten relos, I think we've got ten in the budget.

So inevitably one or two slip into the next year.

They will all happen.

Let's say it was nine.

Nine times -- nine times 26 or whatever is -- that's your 200 bucks.

There is an offset to that disposing, my guess is, without looking at the list of those that are being replaced.

Two or three of them are probably leases which were at the end of the lease that just go away so there's no sales proceeds from them.

And no doubt if we're replacing them they tend to be smaller, older, less well-located facilities that have been appreciated down, not going to be a big hit or gain either way probably but if we're spending let's say 26 on average for land, building and site, my guess is we'll pick up 10 or 15 on 6 or 7 of them.

So it's probably some number in the mid-250 to 275 minus 125, that gets you to something in the 150 to 200 range.

Then in your outlook for '08, how much buyback are you assuming?

I don't think I can really say what we're assuming.

What I have said in the past is our MO has been to buy daily.

I'm assuming we're going to continue to buy daily.

As I said, when it goes up, we buy a little less that day.

Clearly, we have shown that we bought more at 58 and 59 and 61 than we did at 46 two years ago.

I'm not suggesting we're going to buy more tomorrow at 68, we'll take a breath here for a minute.

My guess is we'll continue to buy back and I think you should assume something number on a regular basis, based on what I said about debt and based on that the stock always fluctuates.

In a vague way, we'll buy but I'll let you make that decision.

Thank you.

Your next question comes from the line of Mark Husson.

Good morning.

A couple of questions.

The first one is on food price inflation.

You had some -- you saw the Kroger numbers where they had a pretty decent gross margin on the back of being able to pass through some of the food price inflation now.

Could you just sort of talk about, I think you mentioned that it was a better margin.

What specifically was the contribution in the quarter from Better Food?

I'm sorry, Mark, say that again.

The question part.

The gross margin on fresh food seems to have been quite good for food retailers in the last three months and you had said there was some contribution in the quarter from fresh food in terms of margin mix.

Can you be a bit more specific?

Was the inflation pass through more efficient in this quarter?

I don't know if -- I assume it was, if we have a little better margin.

Our margins year-over-year in the quarter in fresh foods were up I think about 0.5 percentage point.

So they -- again, some of that is our own improvement in operational.

Throwing away less.

So I think the answer like what you're hearing from the other types of food retailers, I'm sure that we can do that as well, recognizing, we don't play exactly in the same game as them.

But yes, margins in fresh foods were fine.

I'm willing to bet that the 0.5% plus was at least half if not more of it was operational.

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

In terms of inflation, just looking in the first month down the list, there's a couple of items that were inflationary versus a year ago, lamb, grapes, interestingly, when I look at this list, usually the list is tobacco and gas and of course that's not the case here.

I did hear the budget meeting yesterday that we're hearing from lots of the paper people and paper is everything from towels and tissue and toilet tissue to diapers to copy paper, that expect to see some increases in the low to mid single digits there in cost.

Okay.

Two other questions.

First one, is just could you just talk about California and what you're seeing and what the outlook is there in terms of demand?

And the second question is on our sourcing surveys we noticed that your percentage of China importing has gone up about 300 basis points year-over-year to about 38%.

Is that one of the initiatives?

Not particularly.

I don't know -- I guess I would be happy to look at some of your data and see if I can get some answers.

I haven't heard anything like that.

As relates to that.

In terms of California, I think I mentioned earlier that if you just look at the U.S.

went from a 1 to a 4 in August versus September or 3 percentage points higher, that delta was the same for California, not from a 1 to a 4 but from a slight minus to a slight positive.

But again, 3 percentage points.

So it was pretty much in line with the Company, although Northwest, a couple in the Northeast were a little better than that.

Thanks so much.

Your next question comes from the line of Robert Drbul.

Good morning, Richard.

Question that I have is on the consumer electronics.

Can you just talk about your expectation on the return policy in terms of the margin impact as this year progresses versus what you already experienced in the fourth quarter?

What I have done for everyone in the past is simply talk about the fact that over the last four or five years, our realized gross margin in that department has gone from the very high single digits to just below 5% or well in excess of 400 basis points.

Closer to 500 basis points.

If it's a department that's or 6 or 7% of sales, times 60 -- mid-60s billion in sales, you're talking about $4 billion plus, times 400 or 500 basis points is 160 million to $200 million.

All I've said, because I don't know yet, we don't know exactly, is if we could get half of 160 back, over two or three years, it's accumulated about 10 or 12 basis points, four or five, four or five, three or four.

That's a guess.

We'll have to see.

It was -- as I mentioned, it was seven in Q4.

So -- but part of that may be relative to my guesstimate there, just a little bit more front-loading.

It doesn't take three years, it takes one and-a-half years.

So we'll have to see.

Clearly, there's some real dough there.

We have not seen any negative impact from customers' responses.

If anything, for every negative blog or e-mail I read, there were 10 people out there congratulating us.

I don't think it was you guys.

I think it was just customers who like us and agree that it was being abused.

Thanks, Richard.

Your next question comes from the line of [John Jayas].

Good morning, Richard.

To stay on that topic of electronics, if you look at HDTVs specifically, I'm curious what kind of trend you're seeing there.

In addition, I was in your store probably in lat August, early September and saw you setting up a very large Vizio display.

Vizio has gotten a lot of good press lately.

I'm just curious how they're performing.

Well, in terms of HD, I don't know the exact issue there, I know that LCDs are outperforming plasma but I think that's everywhere.

In terms of Vizio, it's been a good relationship for longer than anybody else.

We pretty much helped them get to where they are.

We still have a good relationship.

We're work working with them to continue to provide high end stuff at great value.

We don't typically go out and request exclusives and we feel good about what we have in that department, TVs, as well as what we have, Vizio relative to others and the types of things that we're bringing in.

You feel good about the sell-through of Vizio then, as well?

Yes.

Thank you.

Your next question comes from the line of Thomas Forte.

Yes, hi.

Thanks for taking my questions.

There are a couple items I wanted to follow-up on.

One, can you indicate if traffic was positive in California in September?

You know what?

We didn't run it.

We ran it last time because we were trying to figure out reasons why the darn thing was so low.

And I haven't seen it.

If you want to call and leave a message, we'll try to figure out.

Generally speaking we're not going to try to give out states.

We were trying to explain the negative.

My guess is that given California comp-wise was up from August to September, like the Company as a whole, that we saw a similar improvement in the components, that being average ticket and average traffic, so traffic, if it had been -- if it had gone from 0.5 to down like in July it was I think 0.5, we said and August it was like minus 4.5 my guess is it's flat to down slightly but not down to plus 0.5.

Second, can you tell us where we stand at the end of the fiscal year on private label penetration?

Last time I saw some numbers in a budget meeting, we were about 17.

Now, that had a little spike last year because of the private label diaper helped by a few tenths.

Again, I think the way to look at it is more like the penetration goes up 0.5 to 1 point a year for the--.

Okay.

Third and lastly, could you give us an update on if you're seeing anything different in competitive pricing from either Sam's Club or BJ's.

Well, BJ's has gotten more aggressive since their management changes, back to their original management a few months ago, several months ago.

Frankly, for a few years there, I don't think we were doing a lot of comp shops.

We were doing them but they didn't mean a lot because there was a -- in our view, a big delta between our competitiveness and theirs.

To their credit they've gotten more competitive.

We still feel that we are more competitive, recognizing we're in some instances we're selling different merchandise or different level of merchandise.

With Sam's, really from the get-go, four years ago when they announced a management change and that they were going to be more aggressive on pricing, they have remained more aggressive on pricing.

I wouldn't say there is any difference today than there was 3, 6, 12 months ago.

It's still very competitive.

Your next question comes from the line of Michael Exstein.

First off, congratulations, for those of us who were skeptical on the gross margin.

It's really very impressive to see what you can do when you put your minds to it.

I guess the next question we all have is how high is high in terms of the gross margin, what do you talk about internally, capable of doing without losing the competitive juices?

Thanks, Richard.

That's more of an emotional question.

What I dream about and what is reality are two different things.

The reality is, is rest assured, we're not going to crazy.

If anything, when I first saw the last couple months of -- last few months of the year, the first order of business is I hope it's not so much that the feeling is is we need to come back a little bit.

How high is high is -- I would guess is only as much as we need and I would still -- just recently, I saw us lower the price on those -- some of you have heard me talk about them, these Spanish almonds, these Marcona almonds that sell at Trader Joe's and Whole Foods at 26 and $30 a pound and we had them last year for $8.99 a pound.

We now have them from $6.99 a pound.

We're still going to go and try to wow people with things and we're still going to do that.

I think the issue is is I don't know where the number is.

It's certainly -- I don't want to imply that it's way up there.

If anything, I'm trying to temper the expectations based on what you saw in Q4.

And it will be good.

So how vague can that be?

Well, following up, four years ago you talked about a five year goal of 100 basis points.

Is that goal changed?

We're now in year five.

Yes.

Well, as you know, the good news was is for five or six quarters we did just that, 20 basis points a year for a year and-a-half.

The bad news, for the next six quarters we went right back to where we started.

If not, a few basis points under.

First of all, the 100 basis points did not assume stock buyback.

So you might temper maybe the 100 with 70.

I don't know what the exact number was.

Then the question is, I think what we've learned is is you don't know what's going to happen.

Clearly, I think there's been a little more emphasis on focusing on it to try to get some of that.

My guess is a safer number to look at is something in the mid-3s versus again, using 70 basis points from three years ago, so something like 40 or 50 instead of 70 over the next few years.

We'll have to see.

As history would show, we'll be a year late and a basis point less but still I think we do feel that over the next two to three years we've got some good wins here and we can do some things.

Thanks so much.

Your next question comes from the line of [Sandra Barker].

Hi, Richard.

I was wondering in September, certainly it was a nice rebound and I know that the iPod was not in for the whole month and the seasonal stuff was still sort of trickling in.

Was there any meaningful impact from those?

Would it have been better if you had those for the full month?

Was it meaningful?

I think we're back on target.

I think the first week of -- when we were in New York at the Goldman conference which was like Wednesday after Labor Day, I think by that time, which was if you will, three weeks since mid-August, when Jim said the second half of August we didn't look very great, very good in terms of starting to bring in seasonal, I think by the first week we were starting to see the trend going in the right -- to be not all the way there but closer to there than not there.

I don't think there's -- I don't want to build in any extra until we see how the next month comes out.

Sure.

Could you talk about big ticket trends, sort of generally?

Well, again, majors continues to be good.

Not crazy good like it was a couple years ago, so it's been still better in the Company.

Jewelry has probably softened a little bit in terms of big ticket items.

What was amazing to me is -- I know diamonds as an example in '07 in carats was up 5% so I'm sure in dollars was up a little more than that.

Let's see what else.

Those are really the two big ones.

Again, majors being up better than the Company of course and let's see, let me just look at camera.

Sporting goods, sporting goods includes everything from a 24 pack of tennis balls to golf clubs and 600 and $800 exercise machines.

So I guess there's big ticket items there.

Sporting goods was actually up double digits in September.

The two big ones, jewelry was down slightly and majors was fine.

Could I ask one other question.

What percentage of your sales are now done on some kind of coupon?

I know you've been giving out more and more coupons, just over time.

I honestly don't think I've ever seen that number.

Maybe we don't want to look at it.

But it's still a small piece.

It's got to be in the -- I'm just thinking aloud here.

Based on just the amount of coupon savings, the dollars saved on those coupons that are actually transacted, I'm guessing probably something about 5%, maybe 4, maybe 6.

Thanks.

Your next question comes from the line of Adrianne Shapira.

Thanks.

Richard, just back on guidance, you shared a wide range for guidance and it sounds as if there's a reason to be encouraged on the gross margin.

But just help us understand your top line expectations.

In other words, if comps continue in this 4 to 5% range, could we be closer to the higher end of the range?

Thanks.

Yes.

So based in towards $3 you need 4 or 5 and we get closer to $3?

Yes is the higher end assumes an assumption something that has a 5 in front of it and something that averages to 5, it might be 5 point something.

Again, there are all kinds of other things you have to assume, though, good and bad.

Great.

Thank you.

Your next question comes from the line of Teresa Donahue.

Good morning, Richard.

Great quarter.

I'm curious with respect to Todd's question earlier on the gross margins, if you add up what you indicated were contributions from initiatives as well as the change in CE, it looks as though maybe two-thirds of the year-over-year increase you've got might be sustainable and therefore I'm wondering what that does to the operating model as far as the level of comps you need to get operating margin leverage and get earnings growth?

Well, I think when you're saying two thirds you're adding my estimate of the initiatives plus the sales return.

Yes, yes, am I double counting?

No, you're not.

But I guess also in the "model of the day", expenses were a little higher in Q4 than we thought.

While I think we can fix some of that, again, nothing happens overnight.

Some of that detriment is probably a little.

My guess is we came in certainly better on margin and came in certainly a little worse on SG&A, some of which is sustainable as well.

I guess my question is the net bottom line result was that you showed a really strong increase in operating earnings on, "just" a 5% comp.

And even with the SG&A being higher.

So I'm wondering if a comp leverage point has been lowered from what you might have once said a couple of years ago?

If anything, Terry, it probably has gone up.

Keep in mind that we also had the anomaly in membership fee income which half of that 26 is an anomaly, just on having the unusual thing a year ago in the quarter with the extra week.

Okay.

Thanks.

Again, I try to share with you all these components, simply to recognize that we're going to do fine but Q4 was a little crazier than that.

I'm going to take one more question and I've got to go into a meeting downstairs.

Your final question comes from the line of Neil Currie.

Thanks, Richard.

I just wanted to ask about the -- what we used to call existing markets and new markets.

I don't know whether you still call them that.

In terms of where the units in the new markets are doing in terms of sales per square foot comparisons or sales per store comparisons against the existing markets.

Also in terms of the store opening program for '08 what's the sort of balance of stores looking like, in terms of existing versus new?

I don't have that data right in front of me, Neil.

If you think about new markets, my guess is -- and recognizing some new markets are two or three years old now.

Generally speaking, those would be somewhere probably in the 75 million to 90 million range and existing markets, I mean, -- you would solve for the equation for the existing markets are probably in the -- the Company average was 130.

My guess is they're 150.

So let's say 80 and 150.

So there's a pretty big difference there.

What's the difference in bill customer between?

In what?

Blend acquisition costs in terms of existing and new?

So trying to compare returns because if--?

I think it varies.

Certainly when Chicago was new that was as high an average as anything.

Certainly when we do a Boise two or a Albuquerque two, it's less.

I guess I'd have to look at it.

Feel free to call me and we'll talk general numbers, but generally speaking, new markets take a little longer.

We kind of look at a threshold when we do a new market of five to six years of getting to kind of a threshold returned or -- and we look at up to three years on an existing market, recognizing existing is easy.

Thanks.

Just a second question.

I know you talked about Australia earlier.

Are there any other markets outside of that in the next five years that you're looking at, thinking of South America or Asia?

Within the next two or three years, probably not.

We are constantly looking at other markets.

My guess it's more likely Asia and Europe versus South America.

Great.

Thank you.

Great quarter.

Thank you guys.

I think Jeff and Bob will be available.

I'll be available this afternoon.

Thank you very much.

Ladies and gentlemen, this concludes today's conference call.

You may now disconnect.