好市多 (COST) 2008 Q4 法說會逐字稿

Good morning.

My name is Tina and ill will be your conference operator today.

At this time, I would like to welcome everyone to fiscal fourth quarter and year end results and September sales release for Costco conference call.

(OPERATOR INSTRUCTIONS).

Thank you.

Mr.

Galanti, you may begin your conference.

Thank you, Tina.

Good morning to everyone.

As with every conference call I'll start by stating the discussions we're having will include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

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

The risks and uncertainties include but are not limited to those outlined in today's 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 16-week fourth quarter of fiscal 2008, our operating results, for the quarter we came in at a reported $0.90 a share compared to last year's fourth quarter of $0.83 a share.

Both fiscal fourth quarters included a couple of items that were pointed out in this morning's press release.

Last year's fourth quarter we recorded a one time non-cash charge of $56.2 million pre tax or $0.08 a share related to refunding our accounting for deferred membership revenues.

Excluding this charge our Company's reported $0.83 fourth quarter last year in the fourth quarter it would have been $0.91.

Also mentioned in this morning's release this year's Q4 included two items.

A $0.05 per share LIFO charge, our first significant LIFO charge in years, and a $0.02 per share charge related to a litigation settlement.

Together, these two items impacted the $0.90 reported fourth quarter number this year by $0.07.

Excluding these items, this year's fourth quarter results would have been $0.97.

On an apples to apples basis, the $0.97 would compare to a more normalized last year of $0.91.

So a 6% year-over-year increase on an apples-to-apples basis.

For the fiscal year we came in at a reported $1.28 billion or $2.89 a share, compared to $1.08 billion or $2.37 share in last year's fiscal 2007 in last year's fiscal 2007.

As you know, and as I will outline for you in a few other items in last fiscal year, both in Q2 and Q3 of '07, again, I will go through all the details in a few minutes.

For an apples-to-apples comparison we would look at a more normalized fiscal 2000 earnings amount of $2.63 a share and a more normalized fiscal 2008 excluding the two items that we mentioned in the press release this morning at $2.96 a share.

So on an apples-to-apples basis, 13%.

In terms of sales for the quarter, as we reported on September 4, our 16-week comparable sales figure showed an increase of 9%.

That 9% was comprised of a 9% in the US, actually about an 8.5%, just a little stronger than that, and 11% internationally.

We also reported this morning our September sales -- I'm sorry, it was a 9%.

We also reported this morning our September sales results for the five weeks of September.

These were with the US coming in reported 8%, actually very close to an 8.5%, international coming in at a 2%; therefore, the total company coming in at a 7%.

For the five-week September period the strong 8% comp would 6% without roughly 2.5% impact from gas inflation.

And given the real turn around in the US currency, US dollars relative strength to foreign currencies in the past month, the exact opposite of what occurred most of last year.

Whereas most of last year we benefited when we converted foreign sales into US dollars in the first month here, that 2% international comp would be an 8% if expressed in local currencies.

Other topics I'll review with you this morning is our opening activities.

We opened a total of 24 net new locations during fiscal 2008 which ended this past August 31, plus one in Mexico, 15 -- of those 24, 15 were in the US, four if Canada, one each in UK, Taiwan and Korea, and two in Japan.

We also relocated a record 10 units in fiscal 2008 to bigger, better located facilities compared to no relocations in all of 2007.

For fiscal 2009 our current plan is 25 new locations, about three-quarters of which are in the US plus two in Mexico as well as possibly two to three relocations.

Lastly, I'll review with you our ancillary business results.

Our online results, membership trends, update our recent stock purchases, a few comments about inflation, our balance sheet for fiscal year-end and, lastly, just provide you some guidance and direction for Q1 and for the upcoming fiscal year.

As I review with you our fourth quarter and fiscal year results I will discuss not only the reported figures but also the year-over-year comparison on an adjusted basis, that is without the various notable items that impacted our fiscal 2007 second, third and fourth quarters and the impact of the items that we mentioned in the press release today on the fourth quarter for 2008.

We believe that these results, these more 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 the future, recognizing full well that things like LIFO are pretty unpredictable and litigation tends to be the name of the game these years.

With that said, reported sales for the fourth quarter, the 16 weeks ended August 31, were $22.6 billion, up 13% from last year's $20.1 billion.

On a comp basis, Q4 comps were up 9%.

For the quarter, our 9% reported comp sales results were a combination of an average transaction of a little bit better than 6% for the quarter and continuing strong average frequency increase of about 3% for the quarter.

Keep in mind that the 9% US comp and the slightly greater than 6 average transaction both include about 300 basis points from gasoline inflation year-over-year in the fourth quarter.

Now, for the five weeks of September, again, US comps came in a reported 8%, darn near 8.5%, with about 2.5% of that coming from gas inflation so, again, a 6% without gas.

So both for the quarter and for the first month of this year the non-gasoline US comp would have been a 6%.

Our international results in the fourth quarter, 11% comp again for all of last year and it's continued, while it was trending towards the other way in the fourth quarter it's still the US dollar was relatively weak year-over-year.

International results, our 11% international comp was actually an 8% in local currencies.

And, again, with that big 180-degree swing in just the last several weeks, the 2% international comp for September was really an 8% in local currency.

Our average building continues to enjoy great sales productivity.

In '07, Company-wide, our average warehouse generated $130 million in annual sales and for the US, $132 million.

For fiscal '08, the average Company-wide has gone from $130 million to $137 million and the US has gone from $132 million to $138 million, so a very strong average sales productivity per location.

In terms of giving you a little flavor geographically, what's going on with comps, certainly the Midwest and the Southeast are the strongest regions.

Of course, the Midwest is relatively young relative to the Southeast so both pretty good showings both in quarter end and in September.

Internationally, our Asia operations are the strongest, seeing some great growth in the three countries we're in over there in terms of sales strength.

In terms of merchandise color from the comps, the last several months has become a story of almost bimodal comps.

The non-discretionary food, sundries, health and beauty aids, fresh foods tends to range anywhere from the high single digits to the mid-teens whereas the bigger ticket non-discretionary items like furniture, jewelry, electronics, even some of the lesser ticket non-food items like housewares and domestics tend to be in the zero to minus 10 or 12 range.

All over the board there.

Certainly benefiting from the food strength and getting people into our buildings.

Within food and sundries, notwithstanding the fact that food and sundries is a strong high single digit comp, that includes a negative comp in tobacco, which is about 11% of food and sundries, so reflecting even a little stronger if you take that out.

While food has shown strength in the economy, as I mentioned, non-food has not.

Within our slightly positive hardlines comp, office and majors was slightly negative, actually a shade better than they had been on the majors side, and most of the other categories were mid single digit positive, so not terrible.

Within the slightly negative soft line comps, the unusual outlier on the high side was small electrics, up low double digits with both men's and women's apparel being just slightly below flat.

I think that's an indication notwithstanding the fact that general retail apparel sales are quite weak, our ability to access many brand names in that area has helped us in that area.

Fresh foods came in in the high singles with bakery, deli and produce being in the low doubles and meat being in the mid-singles.

Ancillaries, again taking out gas which is off the charts high with gas inflation and a little bit of comp, excluding gas, ancillaries tend to be in the mid singles.

In terms of September sales results, the 7% total Company comp again included an 8% in the US, 6% without gas inflation, and a 2% internationally, an 8% without foreign currency on a local basis.

FX for September, again, last year it was 100 -- generally 50 to 200 basis points of a positive to our Company comp.

In September it was a hit of 130 basis points to the whole Company.

As I mentioned, gas inflation is a little over 2.5%.

In terms of looking at the 7% number -- or the 8% number for the US, the average ticket, it's pretty evenly split between the average ticket and average traffic, about 3.5% each.

Moving down the line items on the income statement.

Membership fees, again last year we reported a membership fee with $56 million charge to it, non-cash charge to it.

So last year's reported membership fees were $388.2 million or 1.93% compared to this year $473 million or 2.09%.

Excluding this one-time hit to membership fees last year I think, again, on an apples-to-apples basis our membership fees last year would have been $444 million or 2.21% compared to $473 million or 2.09%, so an increase of $29 million exclusive of that one-time charge last year, about a 7% increase in reported dollars, about 8% on a cash basis and about 12 basis points lower.

Again, that negative basis point is skewed somewhat by the fact that you have disproportionate increases in sales in gasoline which distorts many of our percentages which I'll go over in a minute as it relates to merchandise, gross margin, and to SG&A.

In terms of number of members at year-end, Gold Star at 20.2 million, up about 0.5 million from Q3 end.

Business primary, 5.6 million, up about 50,000.

Business add-on about 3.4 million.

So all told, 29.2 million total members or about 57,000 per warehouse average.

A shade better than the 56,800 that we had at Q3 end.

Including spouse cards, we ended fiscal '08 with 53.5 million cards out there versus 52.6 million just a quarter ago, and 50.4 million a year ago.

At fiscal year-end on August 31, our executive membership continued to grow 7.63 million members, that's an increase of 344,000 just in the 16-week fourth quarter so -- or about 21,000 a week increase during the quarter.

For the year, paid executive membership increased by 1.3 million members or just over 20% of the base -- an increase.

And the 1.3 million increase in executive membership is actually slightly greater than the 1.1 million increase we had in fiscal '07 benefiting in part from rolling out in Canada a little over a year ago and certainly continuing to promote on our own end.

I should point out that this 26% of our membership base up from 23% a year ago generated about 57% of our total US and Canadian sales and this percentage continues to increase at a rate faster than the remaining part of our membership.

In terms of renewal rates, they continue strong at an all-time high renewal rate, 92% on the business side and 86% on the Gold Star side and 87% Company overall.

Going down to the gross margin line, please bear with me as I go through our year-over-year Q4 margin comparison.

There are a lot of moving parts, LIFO, inflated gasoline sales, gasoline margins, sales mix changes, such as weaker higher margins, soft line sales.

And, of course, the lag in passing on some of the inflationary product and freight costs which I spent a bit of time discussing on our July 23 guidance conference call.

So starting with our reported gross margin, it was lower year-over-year by 45 basis points coming in at 10.29% this year versus a 10.74% this year.

I'll try to limit all the numbers I put in the little matrix, but let's do three columns.

Q3 '08 year-over-year, Q4 '08 year-over-year and then for the fiscal year '08 year-over-year.

And the line items would be merchandising, core merchandise, second line item would be ancillary businesses, the third line item would be 2% reward, the fourth line item would be LIFO, and the fifth line item would be federal excise tax claim which will go away soon.

And the next line item would be the returns gross margin adjustment and the next and last item would be the returns sales adjustment.

Keep in mind, those last two relate to the changes we made in fiscal '07 to our sales returns, how we accounted for sales returns and the reserve not only for sales but associated gross margin where we had some big variations in our percentages there, and then a total line.

So going across, merchandising, year-over-year in Q3 we had picked up 27 basis points plus 27, in Q4 minus 19, and in all of '08, plus 17.

Ancillary businesses, minus nine in Q3, minus six in Q4 and minus 13 for all of '08.

2% reward minus one, minus two and for the year, minus three.

LIFO, 0 in Q3, minus 14 basis points in Q4, and minus five for the whole year.

Federal excise tax claim, zero, zero and minus one and then the returns, gross margin adjustment plus 32, minus four in Q4, and plus 14 in '08 for the whole year.

Returned sales adjustment minus 16, zero and minus eight.

And totaling all those numbers for the total for Q3 year-over-year we had plus 33 basis points, Q4 minus 45, and for all of '08, plus one.

Let's start with the core merchandise gross margin being lower year-over-year by 19.

As I will discuss in a minute, three of the four departmental gross margins were up year-over-year and that's despite some of the lags in passing on some of the freight and merchandise costs that I spoke to you about on July 23 as well as our decision to hold prices on a few items like the rotisserie chicken example I gave on July 23.

That simple example I estimate was about $3 million hit to margin in the quarter.

Our core merchandise sales which is food and sundries, hard lines, soft lines and fresh foods represents between 75% and 80% of our total sales.

During the fourth quarter, three of these departments, all but fresh foods, showed year-over-year gross margin gains ranging from 10 to 90 basis points and one showed a gross margin reduction of about 50.

All together, these four core departments divided by their respective sales and again representing over three-quarters of our total Company sales actually showed a year-over-year gross margin increase of 19 basis points.

And that's on top of last year's fourth quarter year over increase in core gross margin of 34 which, of course, is when we initiated some of the margin initiatives that we had a big quarter starting last year.

Despite the fact that we anniversaried that, the core business is doing just fine in terms of margin strength and still having pretty decent sales results relative to industry.

Where we get hit, of course, is in the reduced sales penetration of these areas as our low margin gasoline business saw Q4 year-over-year sales penetration increase from 8% of total sales last year in Q4 to 12% of total sales in this year's fourth quarter.

I'll speak to that in a moment.

In terms of our major ancillary businesses, pharmacy, optical, one hour photo, food court, hearing aids, pharmacy and hearing aids which was a minus six basis point to the total Company gross margin variance, pharmacy and hearing aids actually showed good improvement year-over-year in Q4.

However, One Hour Photo, food court, optical and gas were lower year other year.

One Hour Photo, of course, is a challenged business right now given the nature of people printing some of their own things and the whole transition over the last few years.

Again, we are still have quite profitable in that area, but in terms of year-over-year there's a negative there.

Our food court while margins are down year-over-year in the fourth quarter, they actually showed some significant improvement trend.

In the first three quarters of this year compared to the first three quarters of last year our profitability in our food courts showed a detriment of 200 basis points in margin whereas the fourth quarter on a year-over-year basis it was about 0.5 percentage point, 55 basis points.

A lot of that has to do with the fact that we maintained prices on things like pizza and hot dogs.

If you recall, it was probably a year ago when raw material cost like cheese was up about 80%.

Some of those things have subsided and we've gotten a little better in that area as well but, nonetheless, a little bit of a drag.

Gasoline sales are the big factor here.

While I'll show you in a moment how it helped our SG&A percentage, the tremendous increase in gas prices, 36% year-over-year in Q4, this big increase in gas sales penetration and remember gas on average runs 700 to 800 basis points lower margins than the rest of our business overall.

That less gross margin on 400 basis points of higher sales significantly negatively impacted our total margin and you see that in the core margin explanation I just described.

Before I continue on with other items impacting Q4 gross margin, a quick comment on gasoline profitability in the quarter.

As you recall, Q4 began back in mid-May with significant jumps in the price of gasoline and the expectation at that time that price increases would continue on throughout the fiscal fourth quarter.

As you recall, we make less or even lose a little money and during those times of rising gas prices and during times of falling gas prices the converse happens.

We said as much on the May 29 Q3 earnings conference call.

Then, on our July 23 conference call where we were revising downward our overall earnings expectations, we mentioned that one of the factors is that gas, while it still probably be negative it wouldn't be as impactful as we anticipated back in May.

In the end, the impact year-over-year was not an impact, not a negative impact.

Next on the gross margin explanation list is LIFO.

As outlined in our press release, LIFO represented a $32.3 million or 14 basis point charge to gross margin in the quarter.

As I discussed on July 23, the rate of merchandise cost increases as well as freight cost increases in the then prior eight or so weeks had begun to expand and accelerate with more cost inflation showing up in our US merchandise inventories which LIFO is a US merchandise accounting concept.

A potentially large LIFO charge was likely.

Ultimately the charge was the $32.3 million that we took or $0.05 a share.

The LIFO charge, of course, is a non-cash book charge to our cost of sales resulting in actually from a timing standpoint a positive cash flow.

Now, why a charge now when there were not LIFO charges in the first, second and third quarters of last year?

There was certainly inflation then.

We began fiscal '08 with a $57 million LIFO credit reflecting slight merchandise cost trends prior to fiscal '08.

While you can't book a LIFO credit to income, you can use it to offset future LIFO charges.

So in fiscal quarters one, two and three, any merchandise cost of inflation and, therefore, some LIFO charges were offset by our $57 million LIFO credit built up from previous years.

I stand corrected.

It's $52 million LIFO credit, not 57.

Year-to-date through the third quarter, our beginning fiscal '07 LIFO -- beginning of fiscal '08 LIFO credit went from to a little over $50 million to a little under $10 million, so we began fiscal fourth quarter with expectation that any Q4 inflation would be offset at least in good part by the remaining LIFO credit and, of course, that wasn't the case.

Okay.

Back to our gross margin for Q4.

The final item outlined in our little matrix of factors is the margin impact of quarterly changes in our sales returns reserve and the related impact to gross margins reserve.

In the fourth quarter it was a minus four basis point hit to margin.

Basically, a line item to our matrix that I added a year ago when we started seeing the benefits to this item resulting from our change in our electronics returns policy a year and-a-half ago in March.

The minus four figure is still actually an improvement but a much smaller improvement as compared to last year's fourth quarter figure.

Essentially, zeroing it out now and this is a line item in the matrix I'll probably take off in the future and just be a part of core business.

All told, minus 45 basis point year-over-year decline in reported gross margin includes continued margin improvement in our core merchandise sales, fresh foods, food and sundries, hard lines and soft lines greatly offset by significant sales mix change from 10% to 12% margin core merchandise sales to 2% to 5% gross margin gasoline sales.

Add to that the some weakness in our ancillary business margins and 14 basis point LIFO charge and you end up with 45 basis points.

Hopefully that's giving you a little bit of explanation and, more importantly, a little comfort that our core business is just fine and one day we'll get off of this see saw with craziness in gasoline and inflation.

In terms of our gross margin outlook going forward, as you just witnessed with my long-winded explanation of Q4 year-over-year gross margins, there are a lot of moving parts.

The impact from increasing executive member business should continue to be a small hit to reported gross margin, but low single digits it looks like.

LIFO, who knows.

Some of the inflation pressures that we were starting to be concerned that were going to continue have subsided a little bit, certainly as it relates to commodity pricing and gas pricing.

It's hard to know how much, for how much and for how long.

In our budget for this year we simply assumed an $8 million LIFO charge each quarter but that's only an estimate and a guess.

If the economy stays weak, LIFO may be less and if there's a lot of money pumped into the system it may be more, so your guess is as good as ours on that.

We expect that our our core merchandise groups should be okay, slightly positive at least so far in the first month of this year that has occurred.

Moving on to SG&A, on a reported basis, SG&A was lower year-over-year or better by 15 basis points coming in at 9.66% versus 9.81%.

Again, I'll just ask you to jot down a little matrix.

In this case we'll go back to Q2 so four columns rather.

Q2 '08 year-over-year, Q3 '08 year-over-year, Q4 '08 year-over-year and then the whole year fiscal '08 year-over-year.

The line items are core operations, second line item is central, third is stock compensation both combination of options historically and RSUs, fourth line item is 409A, a small item but I will put it in there.

Fifth item is sales returns.

And, lastly, quarterly adjustments for a total which would be the last line item.

Going across, core operations year-over-year in Q2 '08 was a minus 11 basis points meaning that it was -- I use minuses as bad here so higher minus means higher SG&A year-over-year.

Minus 11 in Q2.

Plus eight or better in Q3.

Plus 21 or better in Q4.

And plus five for whole year.

Central, plus two, plus four, plus three, and plus three for the year.

Stock compensation minus three, minus one, minus three and minus two.

409A, plus 30, minus one, plus one, and plus five.

Sales returns reserve plus 15, plus 16, zero, and plus seven.

Quarterly adjustments, zero, zero, minus seven, and minus four.

So all told, Q2 year-over-year was lower or plus 33, Q3 lower or plus 26, Q4 lower or plus 15 and for the whole year lower or plus 14 basis points.

Now, if you look at this -- first of all let me talk about, 409A recall that Q2 '08 is simply the fact that in Q2 '07 we took a huge charge related to the stock option protection that we gave to many of our employees and some of the charges we took related to stock option dating over a 10 year prior period.

So that's just the offset that in Q2 '08 it was comparing favorably against that.

The minus one was just a small update to that number.

And then plus five, of course, is for the whole year-over-year comparison.

The sales returns reserve, again, back in Q3 -- Q2 and Q3 of '07, we had -- we reduced our reported sales by greatly increasing the sales return.

So while that was a -- by reducing sales in '07, in '08 we're comparing against that so that's the reversal of that so that shows a plus here.

Little confusing but basically take it out to look at a normalized number.

Going back up to the top of this chart, our operations was lower by 21, primarily payroll and benefits and certainly helped by some of that was helped by increasing gasoline sales which is, of course, a very low SG&A business to go with its low margin side.

And, but overall, from our perspective, payroll and benefits we did a pretty good job during the quarter controlling them.

Our central expense improved year over year by three, again a little bit of a benefit, no big surprises there.

Stock compensation expense higher year-over-year.

That's simply a fact that I think in the -- when we grant -- the grants were made a year ago, stock price was unusually strong so it was a little higher.

This annual grant will be a little lower as you might expect because it's all based on what the stock is on the date of the grant.

Certainly SG&As benefit again from gasoline sales.

In terms of the SG&A outlook in '09, a lot depends on sales levels, total company sales levels as well as gasoline.

Remember, huge increases in sales hurts our gross margin but helps our expense percentage.

That notwithstanding, it's fairly unpredictable, given what's going on out there with the various moving parts.

Next on the income statement is preopening expense.

Higher this year by about $1.850 million, seeming in at $17.8 million versus $15.9 million.

Quite a few more openings in Q4.

Recognizing there's always some lag or -- actually some expenses that hit earlier than the actual opening sometimes in previous quarters.

Last year fourth quarter we opened eight openings.

This year we opened 13 including six relos so eight new openings in Q4 '07, 13 including six relos in Q4 '08.

No real surprises in those numbers.

In terms of the provision for impaired assets closing costs, Q4 '07 we had a $4.9 million charge.

Q4 '08, we had a net benefit of about $6 million.

Combination of some closing costs more than offset by some gains in the sale of assets where we had moved some locations and sold the underlying assets.

So all told, reported operating income in Q4 was up year-over-year from $555 million to $604 million or 9%.

Again, excluding the charge last year in Q4 to membership of 56 million excluding the two items mentioned in this year's press release that 9% number would have been up 7%.

Below the operating income line, reported interest expense was essentially the same year-over-year coming in at $32.1 million this year versus $32.3 million last year.

Interest income, of course, was quite a bit lower.

Down by $24 million coming in at $35 million in the quarter versus $59 million a year ago.

Primarily a reflection of much lower interest rates as our cash balances have been relatively robust.

I would like to spend a minute talking about our cash and investment balances which I spent a little time on the Q3 conference call and I think even on the Q2 conference call.

Recall that early last December we had about $1.1 billion spread of cash spread among several what was referred to as enhanced money market funds.

In early December last year we received a call from one of the funds that the fund was stopping redemptions and that the net asset value of the funds would be -- would break-- they would allow it to flow, break the buck.

This had not happened I understood since the early '90s at that time.

We immediately requested a redemption of all the funds and, fortunately, as of last week we have redeemed $960 million of the little over $1.1 billion which was in a sense reinvested into a variety of government funds.

So we have $190 million remaining.

The underlying liquidation, as the underlying securities within these funds mature, they are being paid off.

A few of the maturities go out as far as early 2010 but pretty much on a prorated basis so we're seeing nice chunks of it come off.

That has been in line all through this turmoil.

To date we have taken impairment charges of about $5 million and anticipate taking an additional charge in Q1 of $2 million to $3 million.

Again, a shoe drops occasionally in this area but it seems like there's still a lot of good credits in there.

The good news is more than 80% of it has been redeemed with very little hit.

So it's been significantly more a liquidity issue than a risk of principle issue.

We're fortunate, of course, that we've got much more liquidity than the funds that were invested here.

Now, when we switch from enhanced money market funds and we went beyond 2A7 funds, normal corporate money market funds to government money market funds, one of those, the reserved US government fund which we had about $300 million in, if you recall about three weeks ago another reserve fund called, I believe, the Pilgrim Fund, which is a 2A7 fund, a corporate fund, announced it was halting reductions and allowing to break a buck, another first as I understand out there in a number of years.

With that, anything with the name reserve in it is what I understand had a run on the bank, if you will.

All the assets, all the underlying securities in these funds are are government securities, some of which are now being backed by the big government, the Federal Government.

But that, too, has halted redemptions two weeks ago.

They're developing a liquidation.

The maturities of those spread generally over the course of one year and the average maturity is a little less than that.

So the, again, we're not terribly concerned about any impairment in that at this point.

But it just shows you what's going on out there with liquidity.

Again, we're very fortunate that we are among six -- we were among several of them and there have been no issues with any of the other ones.

Even with this one, I think it was a little unfair it had more to do with the name and there was a run on all the funds given the fact that they are the one that broke the buck.

This one has been perfectly fine to date.

Fortunately, we don't have a liquidity need here.

So that's what's going on out there.

And just fill you in on that.

So overall, reported pretax income was up about 4% year-over-year and up about 3% if you take out the items that I've talked about ad nauseum here.

On to our tax rate, we had a couple of discrete items in Q4 that were to our benefit including us winning an appeal on a tax previous paid and accrued for such that our tax rate was about a point and-a-half lower than it had been last year.

Quick rundown on the balance sheet.

This is our August 31 balance sheet and, of course, we'll have the Q&A available with some other information in terms on our website shortly, mid day today.

Cash and equivalents, $3.275 billion.

Inventories 5039, $5.039 billion.

Other current assets $1.148 billion for total current assets of $9.462 billion.

Net fixed assets, $10.355 billion.

Other assets, $865 million.

Total assets, $20.682 billion.

On the right-hand side, short-term debt $140 million.

Accounts payable, $5.225 billion.

Other current, $3.509 billion.

Total current $8.874 billion.

Long-term debt, $2.206 billion.

Deferred and other, $328 million.

For total liabilities of $11.408 billion.

Minority interest $82 million and stockholders equity $9.192 billion for a total again of $20.682 billion.

Very strong balance sheet.

Debt-to-capital of about 20%, plenty of financial strength.

As you'll see here in terms of recorded accounts payable as a percent of inventory was over 100%, 105% last year, fourth quarter end and 104% this year.

That includes, of course, a lot of payables related to construction since we've got $1.7 billion of annual capital expenditures such that if you took that out and really looked at merchandise AP to merchandise inventories and 87% a year ago and an 86%.

Nonetheless, nearly 90% of our inventories are being funded with [freight] payables.

Our average inventory per warehouse is actually down about $157,000 year-over-year.

It's really our best showing year in terms of reductions per warehouse.

Last year in the fourth quarter end it was right at $9,999,000.

It sounds like a retail price point.

This year's fourth quarter $9,843,000, so $150,000 less year-over-year.

Additionally, these figures also include a little extra buy-ins that we're doing right now as prices go up and we're able to buy in additional weeks of supply, thereby allowing us to hold down the sell price a little longer for our members.

Really no inventory concerns.

Our model is initially -- our model itself is blessed with what we sell.

Certainly our volume and our inventory turns within our industry are blessed from the standpoint that we are generally not at big risk for things and to date we haven't seen any concerns there.

The reduction in average inventory per warehouse is consistent with the goal I mentioned last year in a couple conference calls.

Reducing inventory per warehouse by $0.5 million or a little more over a two-year period and we're working on that and so far so good.

In terms of CapEx, fiscal '08 for the year we spent $1.65 billion.

I estimate that our fiscal '09 CapEx will be in the -- I'll give you a range of $1.7 billion to $1.9 billion.

My guess is more in the $1.7 billion to $1.8 billion range.

Not only about 25 new units, two to three relos, but also a little over $100 million for planned depot expansion across (inaudible), and a big increase in our remodel activities.

I also want to mention our dividend.

Every April for the last four or five years we've announced an increase as we did this past April.

So now on a quarterly basis it's $0.16 a share.

This $0.64 a share annualized dividend represents a cost to the Company of a little under $300 million per year.

Costco.com, it did well in the fourth quarter, although its growth came in a little bit less than the whole year.

Sales growth in Q4 was 26% versus 34% for the whole fiscal year.

Sales for the whole year coming in just shy of $1.7 billion, certainly beating our own budget.

However, we have seen in recent weeks a reduction, a slight reduction in the average ticket, not in frequency and transactions but in average ticket.

Recall that our average ticket in here is over $400.

So, again, indicative of the fact that big ticket items have certainly slowed and when you turn on the TV every day and see the news.

Next, discussion is expansion.

For all of '08 we opened, as I mentioned, 25 units, one in Mexico.

We actually opened 35, 10 relos, and one in Mexico.

For '09 we expect 26 to 30 new, two to three or maybe four, but my guess is two to three relos, so 24 to 26 total.

In addition to that, Mexico which we don't consolidate, a couple there.

If you look at '08 the 24 net new units, again I don't include Mexico because we don't consolidate it, based on last year's (inaudible) base of 488 was 4.9% unit growth so a little over 5% square footage growth, probably 5% to 5.5%.

We ended the fiscal year with 72.6 million square feet.

Fiscal '09 if we assume we add 25 net new units of the basis of 512, again that would be 5% unit growth or maybe 5.5% to 6% square footage growth.

Stock repurchases.

Since June of '05, and through the end of '08, fiscal '08, we purchased 87.8 million shares at an aggregate price of $53.99 so we still have repurchase authorization in our programs of a little over $2 billion.

We have a total of 6.8 billion of authorizations in the last four years, which authorization expires at various times between now and mid 2011.

For all of '08 we repurchased 13.8 million shares for $887 million or $64.22 a share and we're going to see what happens now.

With liquidity issues we're going to wait and see, recognizing offsetting that is what's going on with not only our stock price but everybody's stock price out there so we'll see how the next year goes.

We certainly have a very strong balance sheet to do what we want to do.

Before I provide some guidance for the upcoming year, as we all know things are tough out there.

Thankfully, our comps have remained relatively strong.

We believe we are continuing to build market share in our business and I think we've been in a good position to take advantage of available merchandise from manufacturers who wouldn't sell us in the past, to continue to be opportunistic on real estate possibilities and given the fact that our food business has been so strong and our gas business has been strong, bringing people into the parking lot.

We've been fortunate in that regard.

As I mentioned, we have a strong balance sheet with good cash and investments.

Our cash flow from operations both in '08 and hope in '09 are approaching or slightly exceeding $2 billion strong membership fee income and strong renewal rates as well.

We are certainly cognizant of what's going on out there with the economy but have appreciated the fact that we benefit from a few things like selling food, like being the extreme value proposition, like having availability of some of those high-end brands that historically wouldn't sell us.

Some of them are currently not selling us but at least it's more available out there.

So we are hopeful that we can continue to build and grow our business this year and certainly feel that we'll gain market share during the course of it.

Finally, before I turn it back to Tina for Q&A, some direction for the quarter and the year.

I believe current First Call for the first quarter is $0.64.

We're comfortable with that.

Probably have a range which throws a few cents below it and $0.01 above it but somewhere in the $0.61, $0.65.

We feel that that's an appropriate range.

For the year, I believe First Call went down from $3.26 -- to $3.25 yesterday.

We, like you, read the news every day and we are approaching fiscal '09 very conservatively.

Give you a very wide range of $3 to $3.25, which is the top end of the range.

Hopefully we can do more towards the top but there are no guarantees out there.

We're starting off with a decent first month which we closed, but that's one of 13 four-week months that we have here and so we will have to see.

Again, whatever happens out there, we are well positioned to do better than the average and we will see what happens.

Lastly, in terms of looking ahead in '09.

As I mentioned, we will post to the Costco investor relation site, the balance sheet details calculation and a few other tidbits of information.

With that, I will turn it over to Tina for Q&A.

Tina.

(OPERATOR INSTRUCTIONS).

Your first question comes from the line of Deborah Weinswig with Citi.

Ms.

Weinswig your line is open.

Your next question comes from the line of say Adrianne Shapira with Goldman Sachs.

Thanks, Richard.

I was just wondering if we could spend a little more time on the core merchandise margin.

If I understand correct -- well, perhaps to understand the classification, could you help us understand what gas impacted Q1 of last year?

I don't have that handy.

Gas last year, it was a lot less of an impact just because of sales.

You could take your own numbers, anybody could take some numbers and just assume to get to a weighted average when it was 92, 8 a year ago in the fourth quarter and now it's 88, 12 in terms of sales penetration of gas.

Pick a number for in the 11 or 12 range for the Company and report something in the high 10s, it's got to be 12ish and then the gas is in the low single digits.

You can get a sense of how it is impacted.

The impact was a lot less last year because it was only two-thirds the penetration, 8 instead of 12.

Okay.

I'm trying to understand in terms of classification of the core margins because it sounds like the plus 19 basis points is encouraging but it seems like the swing is all due to the greater penetration of gas.

I'm just wondering if we think about on a go-forward basis if gas maintains at these levels what is the mix impact to margins going forward?

Well, right now it's going the other way.

But now is now and tomorrow is tomorrow.

It's so unpredictable.

If gas were going to go up 30% a year, the gas, the price of gas, then you would see that continuation of what we saw in Q4.

Keep in mind in Qs one, two, and three while the core was up, which includes gas, one, we had more margin initiatives.

We hadn't anniversaried them.

We were still in our first year of honeymoon there and the year-over-year gas was 8, 9 going to 10 going to 11.

Now, again, I look at it as the core itself was up, notwithstanding the fact that we anniversary, we're now into our second year of showing some merchandise initiatives but you got hammered by this giant increase in gas penetration.

Similarly if a year from now in Q4 of '09 gas sales penetration is tense, because gas had come down another $0.50 a gallon.

That will be just the opposite.

You'll see a huge benefit to reported gross margin and core merchandise margin.

That's why I've tried to at least share with you the underlying components.

Right, that's I guess my point is that the core is, you see encouraging, but it's more of a penetration impact and so again, if that wanes it should be an opportunity.

None of us want to be optimistic in a naive way.

Right now, you could be conservative on the economy and feel pretty comfortable that gas prices are going to go down, not up, with the changes in world demand and what's going on out there.

But, again, it's entirely unpredictable.

Sure.

Okay.

Just looking at the SG&A, good improvement on the payroll benefits.

Kind of help us understand how we can think about that on a go-forward basis.

It's tough.

I It's tough for us and we have all the detail.

What we find is is that we're pretty good at predicting, sometimes, bottom line and you know that the sum of all the big three things, membership, gross margin and SG&A, then you just pick which one you want to change a little bit.

I'm not trying to be flip about it, but it's tough.

Again, given that there's some expectation of still some moderate -- some moderate year-over-year gas inflation, not gas deflation year-over-year, that would give you a little bit of a tail wind and benefit to SG&A.

So if you were modeling out there, I would assume, and given that gas right now at least, it's only right now, it's not four weeks ago and it's not four weeks from now, but if the trend continued, even if there's a modest amount of gas inflation and not 36% year-over-year, you'll see that impact to margin mitigate to show not as big a detriment and hopefully at some point a positive and you'll see the SG&A benefit be a little less too.

Sounds good.

Thanks, Richard.

Sure.

It's kind of tough to model.

Your next question comes from the line of Mark Miller with William Blair.

Good morning.

I'd like to have you elaborate a little more on the merchandise mix and how much of the margin impact is coming from the faster growth of lower margin consumables versus the non-consumables.

So if you take gas out, what would that impact be, Richard?

Well, again, the -- you add up the 75% to 80% of the business year-over-year it was up 19.

Within that, your higher -- actually, what I'll call food and sundries tends to be close to the Company average if not a shade higher like in fresh foods.

Where you get hit a little bit is is having essentially flat or slightly down comps and soft lines.

Soft lines is typically higher than average, is a higher than average gross margin business so it's not only the gas but certainly food and soft lines, weakness in soft lines is hurting you a little bit on margins.

Hard lines tends to be a little bit more in line, even a shade, not a lot, but a shade less than the Company average.

In your range for fiscal '09 EPS, roughly what would the comp range be excluding gas and excluding currency and what in that range would the mix assumptions be?

It's in the mid singles but it's -- again, I could give you three dimensional matrix, which I'm not, of assumptions here.

Our assumptions is the underlying comp is going to be a little less than it was in September, our original budget.

But, again, it's hard to predict.

And then in terms of the mix, would you --

By the way, in terms of -- if you just think about on a base sales of -- what did we do for the year?

7?

71 billion.

Every percentage point in comp is $710 million arguably at 4.5% pretax is 0.045 times 71 billion -- hold on a second.

Times 0.01.

It's like $32 million pretax is 4.5 cents a share.

So I mean, a good kind of a base metric to help you would be somewhere between 4% and 5% pretax on an incremental percentage point.

So an extra 2 percentage point helps you by $0.08 to $0.10 and a 2 percentage point hurts you by that amount.

My other question is on the gas impact in the business.

The margin comparisons are very confusing.

It's -- I was hoping you could help us on an EPS basis.

You said it was not a negative but was it actually a positive in the quarter because as wholesale gas prices have fallen, most convenience stores are showing a lot higher profit margins year to year.

I was wondering if there was some anomaly in your business or -- ?

It was a very small benefit instead of being a negative.

However, we had unusually strong profits a year ago.

And then if gas prices fell $0.50 or $1 per gallon a year from now, would that be -- ?

You would be happy in how it impacts our P&L.

Great.

Thanks.

Your next question comes from the line of Mitch Kaiser with Piper Jaffray.

Thanks, Richard.

Good morning.

I was hoping you could talk about the four major categories.

You've experienced some very good core merchandise margin expansion in those.

I mean, as you look to 2009, kind of how do you feel in terms of continuing that trend and where do you think -- which inning do you think we might be in on those?

Well, in terms of -- clearly, the sales strength which gives me more confidence with margin strength is in food an sundries which is 40 plus percent of our business, food an sundries is over 40% of our business and fresh foods which is another 13 or so percent of our business.

That's where I have the most comfort.

The biggest challenge, of course, is we like many retailers out there have approached Christmas as an example with toys and trim a home and trim the tree with the exception of things like the Wii conservatively.

Particularly, we don't want to end up with any Christmas ornaments the day after Christmas since we don't like a lot of markdowns.

We're not being conservative but we're being I'd say less aggressive.

If we're wrong, you can always get hit a little bit there.

But again, our merchandise is spreading across so many categories, there might be a weakness in that stuff but there's strength in apparel because of the availability of goods.

We got some great names coming in.

Okay.

And your optimism on food an sundries and fresh food is that based on the underlying input costs or better purchasing leverage or how should we categorize that?

Parts of my confidence is the people in charge of those two areas exude confidence in our budget meetings as recently as yesterday.

Recognizing that we have -- we feel comfortable that it's very competitive out there and nobody's more competitive than we are.

And notwithstanding that, we've shown that we can show some improvements there.

We don't see anything changing that model right now.

Okay.

So it's more cost rather than taking pricing?

Clearly, more cost than taking pricing.

But we talk about buy-ins.

There are -- we think that, again, we've benefited -- buy-ins are offered to everybody from supermarket chains to Wal-Mart and Target.

We have we think a unique opportunity with our depot stock operations that if we can bring in an extra six or eight week supply or two weeks or whatever the vendor will allow at a lower price, we'll keep it low for as long as we can but still make a little tail end of it.

Those things help you a little bit.

But the big underlying thing is just the stuff we sell every day.

And certainly within -- again, the risk more is going to be on the weaker sales results like the big ticket items, with the exception of apparel principally because we can almost sell much of the stuff that we can divert or buy directly on brands that you never saw before.

Okay.

Thank you.

Good luck.

Your next question comes from the line of Charles Grom with JP Morgan.

Thanks.

Good morning, Richard.

When you look at the gross profit margin outlook embedded in your 3 to 325 view, can you give us a range if you assume gas is neutral?

You have a lot of things you're cycling in the first half of the year.

Not really.

I mean, I just don't have that ready here.

Would down 10 to 20 basis points seem about right?

Every 10 basis points is usually about $0.10, $0.11 of earnings, so just kind of back of the envelope.

If you look at a range of 3 to 325, that's $0.25 and -- which before tax is 39 -- I'm sorry, $0.25, $7.4 million, divided by 0.63 -- yes, whatever, that's 37% is $2.93.

No.

Chuck, I'll have to --

Okay.

I'll get back to you offline.

Just switch gears, [MFI] growth in the quarter was a little bit slower, not much slower on a two-year basis but a little bit slower.

I know you gave the statistics on renewal rates but I was just wondering if we can dive into the churn rate a little bit and if there's been any change in the churn rate and renewals for people in year two, just wondering if you've seen any change on that front because Sam's has spoken a couple times about having that as an issue.

Wondering if you could comment on that front.

We have not seen that.

Again, our renewal rates have been frighteningly consistent over the past several quarters.

Frightening in a good way given what's going on in the economy.

So the answer is no, we have not seen that.

We -- it's interesting.

In a given week, all of a sudden we'll see a slowdown or a pickup in business membership signups or a slowdown or a speedup in executive member.

Inevitably what it is is what the marketing department here at central is pushing out to the warehouse in terms of activities to focus on this period, this four-week period.

What we have done -- nothing new this year -- is when we see a little weakness out there, we put a little more effort into it and generally it works.

Okay.

That's good.

And then I may have missed this but with the dollar weak this year, did you quantify how much of a benefit you guys received from FX translation?

I don't know if you said it.

No, we didn't.

But in our budget -- clearly, if you look, when the 10-K comes out next Friday you'll see the segment analysis and clearly we picked up an extra 10% last year, '08 versus '07.

We adjusted our budgets for what we saw between mid-August and the second week in September downward a little bit.

So it's incorporated in there.

Got you.

All right.

Thanks, good luck.

Your next question comes from the line of Robert Drbul with Barclays Capital.

Good morning, Richard.

Two questions that I have.

When you look at the quarter that you just ended and you look into the holiday quarter, what happens in terms of the sales mix or merchandise mix of discretion, non-discretionary, how does it change as you head into the holiday season?

Well, it's funny.

You pick up on the food side because there's a lot more family dinners and holiday dinners and weekend activities.

You clearly -- you have a big pickup in the toys area and certainly you have a whole new area like all the trim a home and trim a tree and gift baskets.

So there's -- in looking at the sales penetration, there's about a couple hundred basis point switch towards non-food during the last couple months of the year as people are buying more gifts for people.

Okay.

By the way, I want to answer -- respond a little bit to that question, the previous question about the FX headwind this year.

If you just -- again, when it comes out next week, you take our own segment in that stuff and adjust it based on assuming, you have to make some assumptions on currency because we're not -- we've proven not to be a good predictor of what's going to happen next week with the currency exchange rates.

But if you take what's happened even in the last month with currencies, you're talking -- we adjusted our own budget down by about $20 million on a pre tax line.

So it's not a big deal.

It's $0.03.

But we incorporated what has happened so far.

Sorry.

Go ahead.

That's all right.

And then the other question I have, Richard, is have you seen in terms of your private label initiatives and the consumer at all sort of trending more towards your private label and sort of how in the environment you've seen inflationary versus branded, how has that developed for you over the last few months and into the next couple of months?

There's been a small pickup -- I just asked this question to our two key merchants just last week, particularly our food and sundries merchants, they've seen a small tickup but it's not like oh, my God, look at this big change in private label.

So, small pickup but nothing that you could look from 100 feet away and say wow, look at that difference.

Okay.

And then the last question I have, Richard, as you look into the holiday quarter, any new vendors or new product that you guys are excited about or things that you can talk about that you've seen that you hadn't seen before?

Any specific product names or anything?

Well, yes, but I want to make sure -- I don't have the merchants here to let me know which ones I can tell you about yet.

Sometimes when I mention something we find out the next day it's no longer available so we want to get it in first.

Something that's a pleasant surprise right now is the sale of five Starbucks cards for 79 -- five $20 Starbucks cash cards for $79.99.

That's out there in warehouses already.

Thank very much, Richard.

Your next question comes from the line of Peter Benedict with Wachovia.

Hey, Richard.

Just to follow up on the NFI.

Can you talk a little bit about the growth outlook that you're assuming in dollars to get to that 3 to 325.

You said the cash NFI grew about 8% in the fourth quarter.

How about on kind of an income statement basis, what do you think we should be thinking about NFI growth for 2009.

I hate to ask you this, but could you repeat that?

There's a little bit of noise on this side.

Sorry.

The MFI growth for 2009, I think you said the cash MFI was up about 8% in the fourth quarter.

What do you thing on an income statement basis we should be thinking about for MFI growth in 2009?

I would assume roughly the same if not a shade lower.

Generally speaking, there's no current anticipation of changing the prices of our membership fees this coming year.

All things being equal, if you have a little bit positive comp, you probably have a slight detriment, two to three basis points of detriment there.

Okay.

And then just to confirm, it sounded to me like you're expecting gas prices to be above year-ago levels throughout 2009.

Is that correct?

Yes, we really don't know.

I know you don't know.

But in terms of -- when you're saying 3 to 325, you're not expecting gas prices to be significantly below last year or anything like that?

The reason we put a large range on it for the year is -- I jokingly said to Jim a couple months ago, every four weeks we have a budget meeting.

We close our period on a Sunday.

We close our books two days later on Tuesday.

By Thursday, all the input on a grounds-up basis from every merchant, every warehouse manager inputs new numbers to update the month that they're now in, four or five days into.

So we already know how the month has started.

We know how last month ended and when we look at the year -- now, if you think about a company whose pre tax is in the high 1.1 whatever, 1.7 or 8 divided by 13 four-week periods, you're talking about $120 to $135 million a period on average.

Despite some wonderful input from so many people on the grounds up, we can miss our update for the month by $20 million right now.

I jokingly said to Jim we could take our variance public it's so profitable.

A couple times it's gone the other way, but not as much.

The fact of the matter is is there's a lot of moving parts.

Gas being the biggest variable.

There have been fiscal months when we budget we're going to break even and we make $10 million there have been when we budget 5 and we break even.

It's all over the board.

Understood.

That's fair enough.

Just lastly, you commented a little bit about this in your prepared remarks but just the discussions you're having with vendors now, how they've evolved over the last couple of months with respect to the vendors trying to push through some cost increases, you've got oil down to 90, it's not 140.

How quickly are you kind of returning or pushing back for lack of a better term on prior increases that they've asked for under the old kind of oil price environment?

Can you just talk a little bit about that, please?

Thanks.

Well, all the commodity stuff, whether it's meat, beef and poultry, all the raw materials that go into baked goods, things like that, those change daily and weekly and they change downward as well.

When you're talking about basic goods like soap, detergent and paper towels, our collective view has been while it's important for us to understand why a price increase -- what caused the price increase, our view also is is that some of it was pent-up demand, if you will, for the retailers having incredible strength to hold off on pricing, to hold back price increases from the manufacturers because all the power was with us.

Again, we saw that window of opportunity last quarter when, again, we were -- when we saw the flood gates opening and everybody coming to us.

On the freight side of it, I believe we started fiscal '07, fiscal '08 a year and a month ago with a freight rate based on a base of 100 a year or so before that of something in the 120, 125 range, I think it peaked above 150 and now it's back at 130.

So I mean, that's -- again, those freight surcharge rates change daily or weekly.

So I think in some of the items, we've seen a slowdown of late is the flood gates have closed a little bit.

Everybody is worried about sales, the manufacturers, everybody is worried about getting their product out there and pricing has come down.

So I would guess that there's a little less increases.

The inflationary trends that we were concerned might continue for a while.

As of today, it's only today, they've subsided a little.

Great.

Thanks so much.

Your next question comes from the line of Mark Wiltamuth with Morgan Stanley.

Hi.

Good morning.

I was curious what kind of consumer reaction you're getting to the areas where you have been putting through the inflation.

Have you seen any scaling back on volumes at all?

You've seen our comps.

And, again, we're doing -- our view is is we hold off as long as possible but inevitably it has to be passed on and I think we're comforted by the fact that we've always been the extreme competitor and so that's not been -- we haven't seen any issue there.

Is there any way you could walk us through some of the regional differences on how the comp is trending out there?

On a qualitative basis, sure.

Hold on a minute.

If I look at -- probably a big strength -- if I look back all the way to '07 when the US was a five or all of '07 and then all of '08 US is an 8, I'm sorry, US was for the whole year was a 6-1/2.

Now, the 5 was probably darn near close to a 5, maybe 4, 4-1/2 without gas and 6-1/2 is probably about a 4 for the year ex gas inflation.

Within those numbers, one of the biggest strong -- the two strong regions from '07 to more recently is Northwest and the Southeast.

The Northwest is one of our most mature regions and highest volume regions, save Southern California.

California, again, has always been weaker than the rest but that's where we've done a lot of cannibalization and we start with the highest volume units.

I think the best way I described it was several months ago, maybe even eight or nine months ago when I was describing sales, and if you look back over the previous couple of years if you split the US into California and the rest of the US, and it was roughly one-third, two-thirds, or a little over one-third and less than two-thirds split of the country, California versus the rest of the country, that whatever our weighted average comp was for all of US, if you looked at just the gap between California and the rest of the US, going back a year and two years, that gap used to be in that 200 to 250 basis point range.

At its widest gap, call it six months ago, it was at 3-1/2% to 4%.

It was come back.

It's not quite back at 2 but it's not 3-1/2 to 4 anymore.

So there's probably been a slight improvement in California relative to the rests of the country.

A nice improvement in the northwest and the southeast, but still being hit by those lower -- the lower comp California areas.

Okay.

That's helpful.

Thank you very much.

The biggest strength we have throughout our company is Asia.

We are having wonderful comps.

But we recognize part of that is it's relatively young and when you have four or five units in a 20 million population city and it catches on your comps go through the roof and it takes some time to get some more units going.

Okay.

Thank you very much.

Your next question comes from the line of Dan Binder with Jefferies.

Hi, it's Dan Binder.

Couple questions for you.

As you look your around, recognizing that your prices are anywhere from 20% to 30% lower than local grocers, but you look around and you see folks like Safeway cut prices.

I'm curious as you think about last year as you see the gap shrink between grocers and Costco on price, are you inclined to open that gap up again to keep the top line going?

How much are you willing to let the gap shrink if you don't feel a need to do that?

I think the answer is yes, we're always going to drive sales.

I'm less concerned, notwithstanding what all the others do, we have a little bit of a unique ability because it's not -- first of all, there's not a whole lot they can do on so many high volume commodity items where we're both working on low margins to start with, and it's all those specialty items when we can bring in cheeses and replacement items and unique co-branded items whether it's Pepperidge Farm cookies or -- I don't know even know if that's a co-brand anymore, I'm trying to think of examples.

So many of our items -- part of our goal is to upscale and to be more gourmet and so we're competing even within the supermarket business, clearly we're competing with them on all the commodity items.

Soda pop and detergents and analgesics, health and beauty aids and paper towels.

It's those specialty items, those upscale items which if you haven't tried it, that big can, 40-ounce can of those crispy peanuts, the Virginia-type peanuts, nobody can compare.

We're $6.99 for 40-ounces and the local supermarket where my family shops, is another $1 for 18 ounces.

So there's so much room there.

I really don't lose a lot of sleep about that question.

Okay.

And then I think you in the last call you talked about having a wage agreement in place with your workers.

Can you just remind us, when does that come up for renewal and is it next year and what would you -- how would you anticipate that impacting the SG&A?

Every -- we have -- first of all, we have 540 so odd warehouses, 60 locations are affiliated with teamsters, the same 60, roughly 60 that were here the day the merger of two roughly 100-unit companies pricing Costco back in late 1993.

It's a good relation.

Wages and benefits similar to what we pay the employees in the other 480 warehouses, although it's all US where that is.

And we basically have in place for our unaffiliated employees, which is the vast majority, an employee agreement which is republished every third March.

Right now, we're about a year and a half between it.

So we're right in the middle of that three years.

So nothing will happen between now and a year and a half to go.

Recall that about two years ago, I believe, maybe two and a half years ago we raised the bottom of the scale from 10 to 11 and 10-1/2 to 11-1/2.

We'll have to see.

I think the pressures on us are a little less than retailers that pay less.

Our average hourly wage in the US is roughly $19 which is several dollars, if not more, than most big boxes out there per hour.

And so -- now, that being said, we always want to be the one that has that big gap.

We'll see.

Could something happen in March of '0 -- March 10, March of 2010?

It's possible but we'll have to say wait and see.

There's no expectation at this point.

We'll always by the way raise top of scale.

Every year, even people that have been at top of scale for 10 years knows there's going to be some nominal amount of increase.

Two final things.

If you could give us a little color on what's happening with TV sales right now and the inventory in the channel, how you think that may impact pricing and margins for the holidays.

Lastly, I think prior to today we were factoring in about a billion dollars of buyback for the comp year.

Based on your comments earlier, it sounds like it may not quite reach that.

Any thoughts in terms of was kind of buyback assumptions you have in that guidance you provided today?

I mean, electronics changes month to month.

On average, I know back in August and I -- we just -- I haven't seen the detail in September yet.

Back in August in what we call majors, which is all electronics, which was down I think mid single digits in comps, within that TVs were actually closer to flat, still down, had a negative in front of it but closer to flat.

Our challenge actually this Christmas has been to get availability, particularly of LCD screens.

So to the extent that others are cutting back, that will help us a little bit.

We're not being aggressive on it but we don't -- so far, we don't see any big issue there.

Recognizing for us, we don't have 75 SKUs of televisions and a three-month supply of each one.

We've got 15 or 20 SKUs, if that, probably 15 or 20, five of which are pending delete because we're down to the last two sell units on a pallet.

If we overbuy, maybe it takes an extra week or two to sell through the anticipated eight or ten-week supply that we bought in on a given SKU.

Was there another part to the question?

Just the last question had to do with the buyback of assumptions.

Buyback assumption is simply, let's face it, it was a week ago that the stock was in the mid-to high 60s.

Certainly expectations change a little bit.

What I wanted to share, the comment I made in the call was simply with the concerns about liquidity out there and, again, when we were shocked with enhanced money market funds back in December of last year, we did what was we thought prudent, earn even less of a return but be just government funds, not outright direct treasuries but government funds but then one of those locks up.

It's more from the comment that let's see what shoe drops tomorrow and hopefully while shoes are dropping daily and who knows what's going to happen each day that two and three months from now things change quite a bit.

So on the one hand, as the stock comes down we want to be a little more aggressive.

Given the liquidity issue right now, I mean today and -- well, today we can't buy anyway because we're in blackout, but after tomorrow -- there's no commitment yet, other than we'll let you know at the end of each quarter.

Okay.

Thanks.

Your next question comes from the line of John Lehman with State of Wisconsin.

Hi.

Thank you for taking my call.

Real quick.

I'm trying to get myself wrapped around the range of the earnings per share.

What percent of that range, the quarter range, would you consider due to volatility of gas prices?

For the year?

Yes.

What I'm saying is the a lot of the volatility in the range due to your -- the uncertainty of gasoline prices or is it driven by something else?

My guess would be half of it.

Okay.

But it is, pardon my French but it is truly a crap shoot two weeks into a month of what our predictability of gas profits are.

Mind you, right now we're having fun this week.

Certainly appreciate that.

Four or five weeks ago we were going woe is me.

It's a nutty business.

Secondly, can you -- I'm ramping up on your name, sticking to coverage, what percent of the footprint do you share with, say, Sam's and Wal-Mart?

It's predominantly a US -- well, Mexico too, but we don't consolidate that.

In the US, depending on how you define it, as an example, in the Pacific Northwest and western Washington, we have upwards of 20 units and I believe they have two or three.

And some would say that's 20 versus three in the competitive footprint and we would argue at the other extreme, it's as little as four or five versus their two or three.

So maybe if you made the four or five seven or eight, everybody would be happy in this analysis.

But something over half are competitive in the US.

US being about 80% of our company.

I believe Sam's in Canada has four to six units in and around Toronto, I believe, mostly.

And we, of course, have 75 or so throughout the country.

Okay.

So if I understand, you share about 50% of the same location -- close location as Sam's or Wal-Mart?

Sam's, not Wal-Mart.

Wal-Mart is everywhere.

Mostly everywhere.

But whether it's Wal-Mart or Target or Home Depot or Kohl's, I mean, those are all everywhere.

So that's -- really, the biggest issue is the direct competition with Sam's and BJs.

We're certainly doing comp shops with others from supermarket chains to Home Depot on different categories to Office Depot and Staples.

But the real competitive issue has to be with other clubs.

Great.

Thanks for the color.

Your next question comes from the line of [Uta Warner] with Bernstein.

Good morning, Richard.

You had mentioned earlier in the call that the non-discretionary items had been comping in the high single digits to mid teens.

Some of the furniture, jewelry, electronics, housewares had been zero to minus 10% to 12%.

Would you mind commenting on what the mix is on the dot-com channel?

Well, the mix -- first of all the mix on dot-com is very little food.

If anything it is gift baskets and some steaks and some wine and cheese.

It's almost non-existent.

I mean, electronics, furniture, sporting goods, jewelry, exercise equipment, by far the biggest category is electronics.

I mean, it's not half.

It's probably not even 25%.

But it's not 5%.

And so the comps -- if the overall channel has been growing at mid-20s --

Positive, like this past month we still have a positive comp, dollar comp of 20 plus in the last month.

But we've seen a change even within that number.

Traffic has been good, number of transactions has been fine, it's all been in average ticket.

Our average ticket has been historically over $400 over the last couple years.

So again, no matter how good the savings is on that $2,800 furniture set or sofa or gadget, on a macro basis, some people are saying we'll hold off a little bit.

Well, when you look at the combined sales in these more bigger ticket items across stores and dot-com, how much of that slower growth you're potentially seeing is really coming from the macroenvironment or potentially that your consumer base is starting to get saturated with those items?

Who knows?

I mean, defensively, I argued when asked the question that hey, the Wal-Marts and Target -- six months ago are showing decent electronics games and your major sales have slowed down a little bit.

Well, we also for two years prior to that running we had 20 plus percent comps in a deflationary business so units wise even more than that.

Yes, you're right, our customer bought faster and bigger earlier.

So there's probably a little bit about that.

But we just worry about what today looks like and so far, I mean, relatively speaking we're holding our own.

Another question, Richard.

When you think about how consumers pay currently, has there been any change in terms of how much has been charged on credit cards versus other methods of payment?

Keep in mind, our relationship [Amex] was started about eight years ago now and if you go back 15 years ago when it was all cash and check, there were no debit.

Today, and there's a private label credit card as well which is a small percentage.

But credit card is probably in the mid-30s.

Debit, a little less than that and the rest, cash and check.

There's been no dropoff in credit card purchases in the last couple of months but there's been a constant increase of penetration.

That has more, I think, to do I think with the fact that our partnership with American Express is a very good and strong one and we work well together and in our warehouse activities and their marketing efforts to channel people into Costco.

So it's worked well for both of us in that regard.

And we have not seen any giant dropoff or anything.

Okay.

My final question, could you comment a little bit on cannibalization the last quarter?

Cannibalization in the fourth quarter was minus 70 basis points.

Trending less towards the end.

August it was -- in May it was 80, minus 80, in August it was minus 50.

Generally speaking, I mean at its peak a couple years ago when it was almost 200 and when we're doing very little cannibalization it's like 30 to 50.

My guess it stays in the high double percentage numbers here.

Maybe it goes a little over 100 but then down to 50 again.

Just fluctuate in that range.

Makes sense.

Thanks, Richard.

Appreciate it, good luck.

Next question comes from the line of [Chuck Sarankoski] with FTN Midwest.

Good morning.

Chuck Sarankoski.

Richard, when you're looking at the new members, as you rotate some out, got the new ones coming in, how are they shopping the club?

I'm looking for is there a balance between both sides of the club or are they mainly joining for the non-discretionary and the Staples items?

Well, the one thing, this is more anecdotal but one thing I've heard some of the operators talk about is when gas spiked a few months ago, there was another run, if you will, to sign up.

You know, when there's that spike it always becomes the topic on the news stations on where's the cheapest place in town to buy gas and 95% of the time it's us.

So that helps.

With that exception I haven't heard a whole lot.

When you -- do you look at what these people are buying, the newer members?

Do you sort of train them, coax them to shop the entire club?

No.

It's kind of funny.

We're probably a little simpler than that.

And as Jim would say, we spend most of our time making sure we're not out of stock in toilet paper and coming up with some really cool treasure hunt items and always being the great value proposition.

Again, looking at sales penetration, the fact that you're seeing bigger comps in those other areas by definition, but we haven't really segmented, I certainly haven't segmented it looking at it that way between new members and old members.

Thank you.

Your next question comes from the line of Deborah Weinswig with Citi.

Sorry about my technical difficulties earlier, Richard.

You had alluded to previous question with regard to Asia being strong.

But can you talk about the other areas of globally that you're operating in and just your performance in those areas?

I'm sorry, there was a little noise here.

Could you repeat that?

Basically, you had spoken about Asia being a strong international market for you.

Could you discuss your other international markets as well?

In local currency, Canada actually had been slow a couple years ago in the very low single digits and has come back a little bit.

It's still low to mid single digits but overall pretty good for us.

And their economy has not been impacted nearly as bad as the US with their strength in natural resources.

UK, has been -- local currencies -- which one was that?

Which country?

UK has actually shown some strength of late in the mid-to high single digits after arguably a couple years of what I would call slightly lower than average comps versus the rest of the Company.

In regards to square footage growth where do you think there are the greatest opportunities internationally?

Well, percentage wise it's clearly Asia because we've own got four to eight locations in each of those three countries.

UK, the opportunity is great.

The speed at which approvals come in that country are greater or the lack of speed.

And so we're thrilled if we can get two units a year open there on a base of 20ish, 21.

And then obviously a discussion on the private label, could you give us your current penetration levels and could you also, if we thing down think down the road, three to five years, what do you think those could possibly reach?

Right now around 17 1/2, the feeling is over the next five to eight years it could get into the mid-20s.

If you followed us for 20 years, we always do a little better than what we think.

But it's not like we've got this great effort all of a sudden because the economy is going to be weak for a year that we're going to put a new effort, renewed effort on it.

We've got a pretty strong effort to develop new products, both private label and co-brand private label.

Then last question, obviously a lot of questions and concerns on the inflationary pressures on the business.

Could you give us any additional details in terms of what you're doing to mitigate those pressures?

The biggest in terms of mitigating inflation is buying in as much as you can when there's a price increase announced or happening.

We are not bringing down price points.

We're not lowering the quality or the price point of the goods so that -- to look at it that way.

Other than that, I don't see a lot that we can do.

Okay.

Great.

Well, thank you so much and appreciate the color.

Your next question comes from the line of Neil Currie with UBS.

Thank you for taking the question.

I wondered, you said earlier, you say memberships spike up as gas prices peaked.

If gas prices come down do you think there will be a traffic impact on the negative side or do you think basically as people have taken out the memberships, gotten used to coming to Costco, if they weren't coming before, do you think traffic levels are pretty robust here?

Yes, we certainly haven't seen that yet and probably in terms of my most arrogant response of the day, I think once we get you into the place, we generally do a pretty good job of keeping you.

Sure.

Another question about the economy, maybe in a different way, is obviously Wal-Mart and BJs are doing a fantastic job of taking share.

Maybe one of the things that differentiates you from Wal-Mart is you have to spend quite a bit in terms of cash flow to get the savings because you buy in bulk.

Do you think if the economy continues to worsen, the credit squeeze continues for consumers that there might be a risk that sort of the cash flow challenge of shopping at Costco could become an issue for a certain proportion of your shoppers.

I remember when even a couple of years ago when people were saying hey the economy may slow down here and that should help you because you guys are the value proposition and I would retort back every time, there is also the other side is that people say hey, I spend $300, $400, I can't get out of there for less than $300.

Actually, you can get out of there for about 140 because that's our average.

$138 or whatever.

The fact of the matter is we have not seen that.

And I think what you're seeing is that our members coming in and they are maybe being a little bit more disciplined, that they are holding off on buying those big ticket items.

If our rough gross margin is 11% or 12% and regular supermarket chains are in the low to mid-20s and the Home Depots and the Lowe's are in the low to mid-30s an and mall stores are in the 35 to 50s, our savings are so extreme that you can't not come there.

I'm biased, mind you, but that argument has not played out.

It certainly is an argument.

Have you ever seen it played out historically or has it always remained very robust like that?

I think it's kind of hard to tell, Neil.

Someone asked me just yesterday about how do we think our performance has gone just on sales and what we already reported over the last several months compared to previous recessions or weaknesses in the economy.

And I said frankly, I mean, one of them was in the early 2000s.

The previous one was in the early 1990s.

The early 1990s we were seven or eight years old and still growing and didn't know that anything was going on outside our world.

Even in the early 2000s, relatively speaking we had had just come off of enjoying the late '90s where earnings were compounding at 24% a year.

This is really kind of the first time we've been like this.

And we're so far, pretty pleased with our ability to drive business in this environment.

Great.

And just a final question, if I may.

The tax rate, you got a useful benefit in the fourth quarter compared to maybe what we expected.

How about for '09 what are your expectations on the tax rate there?

Probably 36.5, maybe 37, to be conservative.

And kind of -- I think generally speaking, we have had the benefit of more positive discrete things, in other words something helping our tax rate in a given quarter in the negative and part because I think we've done a pretty good job of being conservative in how we things there and occasionally actually winning on appeal on a disputed item.

So but I think you always have to assume something in the mid-36s to 37 as a base rate.

Okay.

Thanks and good luck with the year.

Thank you.

We'll take two more questions.

Your next question comes from the line of [Sandra Barker] with [Monteg and Caldwell].

Hi, Richard.

I just wanted to clarify a couple of things.

When you talked about delaying the pass-through of inflationary price increases, how far along are you in that?

I mean, how much do you still sort of have to catch up on things that you really still need to absorb?

That's the first question.

That one, further -- a lot further along than we were when we chatted on July 23.

Given that there's been a little subsiding of some of the price increases coming through, recognizing some of these are coming through right now, we've done four, six, eight weeks ago where we were able to buy in.

So they are just hitting right now but I would say it's slowed a little bit.

So you think it would -- just what you are already still absorbing would affect the next quarter but then you'll sort of be on a more normal footing?

Affects the first quarter a little bit but not nearly as much as Q4.

Okay.

Secondly, are you noticing any difference in trends if you compare sort of the gold star customer versus the business customer or maybe looking at executive members or the American Express card holder, I mean, this a lot of difference or is everybody pretty much shopping similarly in terms of what they buy.

Overall, I would go with the latter.

Clearly, our executive members when they first become an executive member spend a much more over the next year and then start comping back at the general public's average, but then at that higher base.

And so we still see that with new executive members.

Beyond that, there's not a lot that we've discerned from it.

Seen a difference.

Okay.

Also, two other quick things.

One, when you talked about these extraordinary items, treasure hunt-type things that you haven't normally been able to get, are you still getting good sell-through of all those things or are you running against price, against a buyer resistance on those things too or is it just those things are still such a great unexpected item.

Those things have been no brainers.

We got our hands of 5,000 units of X, it's a no-brainer, 10,000 units or 1, 000 units because the value is so much there.

And last question, just to spell out a little bit more about your attitude about your margin initiatives, I know there are a lot of other things going on, but are you still trying to improve that given everything else that's going on or what's your attitude about how much progress you can make?

I would say we're being prudent about it.

Jim reminds us each month, the merchants that let's not get too ahead of ourselves.

Again, we were comforted about how we did in the first four weeks of this fiscal year and Jim's out there reminding us that let's make sure that we don't get too ahead of the game here.

So I think -- again, I think the gap between us and everybody has been so great for so long and mind you even within our direct competition where the opportunities are to make a fair margin a little fairer, if you will, is on those items that they're not directly competitive.

We have different brands, different items, different custom packs, whatever it is and so clearly as we all know, as we know, as BJ knows as well as Sam's knows, we're not going to let them get away with anything and they're not going to let us get away with anything if they can.

When you have unique items that helps you a little bit.

Your next question comes from the line of Joe Feldman with Telsey Advisory Group.

Hi, guys.

Thanks for taking the question.

Just one more, just to follow up on the pricing a little bit, just as you think about the LIFO charges going forward, and I know it's fairly difficult to project, but should we think about it in the same kind of magnitude that you saw in the fourth quarter?

I know the fourth quarter is a 16-week quarter, but is it going to be a few pennies for at least the first half of the year as you kind of -- until we get into a more normalized operating environment?

We analyze it each quarter.

If I extrapolated out the first four weeks of this 12-week quarter, the answer would be no, it would be less.

But who knows what tomorrow brings.

Got it.

Got it.

That was it.

Thanks.

Thanks everyone and Jeff and Bob and I are around and appreciate your patience in hearing all the explanations.

Thank you.

This concludes today's conference.

You may now disconnect.