好市多 (COST) 2009 Q4 法說會逐字稿

Good morning.

My name is Julie Ann, and I will be your conference operator today.

At this time, I would like to welcome everyone to the conference call discussing the fourth quarter and year-end results and September sales results.

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

After the speakers' remarks, there will be a question-and-answer session.

(Operator Instructions) Thank you.

I would now like to turn the conference over to Mr.

Richard Galanti, Chief Financial Officer.

Please go ahead, sir.

Thank you, Julie Ann, and good morning to everyone.

This morning we reported our 16-week fourth quarter and 52-week fiscal year-end operating results for fiscal 2009, both ended August 30, as well we reported our five-week September sales results for the five weeks that ended this past Sunday, October 4.

As with every conference call, I will start by stating that the discussions we are having will include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, and that these statements involve risks and uncertainties that may cause actual events, results, and/or performance to differ materially 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 fourth quarter operating results for the quarter, we reported EPS at $0.85 a share, down 6% from last year's reported Q4 EPS of $0.90.

The $0.85 figure for this year's Q4 also compares to First Call EPS estimate of $0.77 per share that was out there this morning.

As outlined in this morning's release, both fiscal fourth quarters included the impact of certain items that complicate a little bit the quarter-over-quarter comparison.

Last year's fourth quarter included two items of note, a $32.3 million pretax, or $0.05 a share, LIFO charge and a $15.9 million pretax, or $0.02 per share, charge related to a litigation settlement.

Together these two items impacted last year's $0.90 reported Q4 results by $0.07 a share.

So excluding last year's Q4 results would have been $0.97 a share.

Conversely, this year's fourth quarter results included a $16.6 million pretax, or $0.02 per share, LIFO benefit.

So when you compare our Q4 over Q4 earnings results these three items, two of them negatively impacting last year's fourth quarter results, and one helping this year's fourth quarter results, represented a $0.09 per share year-over-year swing.

Now several other factors also impacted the comparison of this year's Q4 results versus those of last fiscal year, and generally went the other way, ie, that is they represented a negative year-over-year impact.

I'll talk about some of these later but these include FX headwinds.

Our foreign country earnings results when converted and reported in US dollars has hurt us all fiscal year since last fall when the US dollar greatly strengthened against many of the currencies with which we operate.

In the fourth quarter, we were hurt by a little over $21 million pretax or $0.04 a share after tax.

That is assuming FX exchange rates were flat year-over-year, our foreign country operating results in Q4 when reported in US dollars would have been higher by that amount.

By the way, for the entire fiscal year, the impact of FX, assuming FX rates had remained constant, was to reduce our total Company reported sales by $2.42 billion and reduce pretax earnings by almost $95 million pretax or $0.14 a share after tax.

This calculation simply takes the currency exchange rates for the prior fiscal year and assumed that they remained at those levels throughout fiscal 2009.

The next item, higher employee benefits costs mainly consisting of higher US healthcare expense, that was about $0.04 per share negative impact in the fourth quarter.

And when we say the $0.04 per share that's what we estimated was above and beyond normal increases in those charges.

I'll talk further about this later in our discussion.

As you can see in our income statement, our income tax rate while lower than it had been over the last several years, was, in fact, higher year-over-year in Q4 and that had to do with the fact in that both quarters there were some discrete items that went our way, if you will, and, therefore, lowered the tax rate, but the tax rate this year was 35.5% in the fourth quarter, up from 34.5% last year.

Not a big item, but, again, this represented a little over $0.01a share impact to this year's fourth quarter results.

Two final items impacting our Q4 P&L, recall that gas profits in Q4 2008 and very much so in Q1 2009 during this time when gas prices were plummeting profits were great.

This year's Q4 gas profits were good, but nearly $0.04 a share lower than the year earlier Q4.

Lastly, in terms of year-over-year things that we believe looked like they stood out, with interest rates earned on investable cash balances down substantially from a year ago interest income this year in Q4 was $15 million pretax or $0.02 a share lower than a year ago.

So you've got a $0.09 swing one way as I described in our press release, and you have about $0.15 swing the other way.

All in all our results came in, I think, much better than many of you out there expected.

Earnings for the 2009 fiscal year came in at a reported $1.086 billion, or $2.47 a share compared to $1.283 billion or $2.89 in last year's fiscal 2008.

In terms of sales for the fourth quarter, we reported on September 3 our 16-week reported comparable sales figures and they showed a 5% decrease, a minus 6% in the US, and a minus 3% internationally as expressed in US dollars.

Excluding cash deflation and the impact of FX from the US dollar strengthening year-over-year, the minus 6% US comp would be a minus 1%.

The minus 3% international comp, reported international comp, would be a plus 7%, and the minus 5% total Company comp for the fourth quarter would be a plus 1%.

Now we also reported this morning our September sales results for the five weeks of September which ended this past Sunday.

These were with the US coming in at a reported minus 1%, international a reported plus 6%, and total Company, therefore, a reported plus 1%.

Again, you still have throughout this year, it will soon be anniversarying, but the impact of gas deflation and FX.

For the five-week September period the minus 1% reported US comp would be plus 3%, but -- and that's without the roughly 3.5% impact of gas deflation.

Given the US dollar's relative strength vis-a-vis other currencies in the past month, our reported 6% international comp would have been plus 9% if expressed in local currencies.

Excluding gas and FX, our reported 1% plus September comp for total Company would be a plus 4%.

A couple of other comments on September sales results.

The reported plus 1% comp sales result was comprised of a 6.5% plus traffic increase.

That's helped a little bit by week one of the five-week period with the shift in Labor Day.

If you look back over the last nine weeks of August and September, the combined traffic increased, so taking that impact of how Labor Day fell was a 5.5% increase in traffic on average over the nine weeks.

Offsetting that, of course, was 5.5% average ticket decrease, and this is September still.

Now, in September the minus 5.5% average transaction decrease included the combined negative impact of gas and FX of about 3.5 percentage points.

Other topics of interest I will review this morning, our opening activities and plans, we opened a total of 15 net new locations during the fiscal year, during the past fiscal year, which ended this past August 30.

Plus one in Mexico.

Of the 15, eight new in the US, two in Canada, and one each in the UK, Taiwan, Korea, and Japan.

And, of course, just a few weeks ago we opened our first location in Australia in Melbourne.

We also relocated two units in 2009 to bigger, better located facilities.

Now for fiscal 2010, we plan to open somewhere in the 15 to 18-range of new locations, about three-quarters of it in the US as well as up to two to three relocations.

I'll talk about expansion a little bit later.

Since fiscal year end, we have opened one new location in Phoenix, Arizona at the Paradise Valley shopping center with five additional openings planned before our November 22 Q1 end.

One relo in Redwood City, California.

Possibly a second, although I think it's been delayed a week, so it will be in the first week Q2, and a new locations in each of Colorado, Missouri, and Ohio, and on November 12 we open our first unit in Manhattan at 116th Street and FDR Drive.

We now operate 560 locations around the world and that includes the 32 in Mexico which we do not consolidate as we are a 50% owner, not more than 50%.

Also this morning, I will review with you our online results, membership, additional discussion about margins, and also our balance sheet for this fiscal year ended.

Okay, to the discussion of our quarterly results.

Very briefly, sales for the fourth quarter were $21.9 billion, down 3.3% from last year's $22.6 billion in the fourth quarter.

And on a reported comp basis, again, the Q4 comp sales were down 5%, but excluding gas and FX, the minus 5% figure would be plus 1%.

For the quarter, our minus 5% reported comp sales were a combination of an average transaction decrease of minus 9.5%, and an average frequency increase of plus 4.5%.

Included in the average decrease of 9.5% minus, a weak FX represented a little over 2% negative and the quarterly comps in gasoline deflation a little over four percentage points.

Cannibalization has not been a big impact in the last several quarters.

It's about a 40-basis-point hit to the comp number, but that's been pretty consistent as compared to, not that much different as compared to past recent months and quarters.

Now that we're at fiscal year end, the average volume of our -- all our locations Company-wide for fiscal 2009 averaged $131 million.

That's about 4.4% lower than the $137 million average a year ago.

Of course, a chunk of that is gas deflation and FX.

The $131 million Company-wide compares to the US only of $133 million.

Now, in terms of geographic -- sales comparisons geographically, couple comments.

Within the US, all but one small region showed improvement from Q4 comps results to the September comp results.

The largest positive delta, and when I say positive delta I'm saying what were the comps for this region and for all of the fourth quarter versus what were they in September.

And, of course, September overall was better than the fourth quarter.

The largest positive delta was Southern California, followed by the Bay Area, then the Northwest, then the Northeast.

In September, just looking at September geographically, all of California came in at a minus 1% or a plus 2% without gas deflation.

In terms of merchandise categories, September comp sales all four core merchandise categories, food and sundries, hard lines, soft lines, and fresh foods, showed positive comps in September.

In fact, hard lines and soft lines positive September comps represented the first time since over a year ago that these departments had comp sales figures without a negative sign in front of them.

Within Q4, in terms of merchandise categories, within food and sundries comps were slightly positive.

No real standouts, a pretty narrow range among sub-departments.

Keep in mind that it is in many of these categories where we've been experiencing pretty decent levels of consumer products price deflation.

Within hard lines we showed positive comps in majors, mid-single-digits.

Everybody asks about how TV sales were.

They were, in terms of units, up 35%, again, mid-single-digits in terms of -- by the way, that's not quarter, that's September.

Hard lines also in September, [arhaba] in high-single-digits.

Hardware, low-double-digits and sporting goods double-digits.

Within positive soft lines comps, again, not a whole lot of standouts for the quarter.

However, for September, we saw decent numbers with housewares, small appliances and domestics, the latter two of those being right around 10%.

Fresh foods was also up mid-single-digits which is an improvement from the past few months.

In the past few months, as well as September, the standout has been unit sales increases in the low-double-digits.

Deflation is still there, but not as strong level of deflation as July and August.

While we can't predict where these go in the future, by the end of this month we will have anniversaried both peak gas prices and the strengthening -- what happened last year when the dollar strengthened against many of the currencies.

So those two things hopefully will help but we'll have to see.

We really can't predict that.

Moving down to the line items of the income statement, we'll start with membership fees.

Reported in the fourth quarter, membership fees were $490 million or 2.24% of sales.

That's up a little under 4% and a little over -- about 15 basis points higher from the $473 million or 2.09% from a year ago.

So about a $17 million reported increase.

Of course, these numbers are impacted by FX.

Again, with the strengthening dollar, membership fees in international currencies, when converted to US dollars were lower than they would have been if the FX rates had stayed constant.

So that $490.5 million reported, if we'd had constant FX in 2009 as compared to 2008, the $490.5 million would be $500.5 million or 2.29%, so a little under 6% increase, or 20 basis points up.

Either way, good showing in our view.

Strong renewal rates still in the mid 87% plus range.

Continuing increasing penetration of the executive membership.

And the third factor impacting Q4 membership in the current results, three very strong Asia openings this past July.

Now, that's impacting sign-ups, recognizing we account for membership fee income on a going forward basis, if you will, and so even if we got them all in August, we had a very little bit of that income in August, it will be stretched out over the next 12 months.

Very large new member sign-ups in the three openings in July that we did in Taiwan, Korea, and Japan.

We also had a great opening both in sales and membership sign-ups in the new country, in the City of Melbourne in Australia in August.

Our new membership sign-ups in Q4 were down 3% year-over-year in the fiscal quarter.

Recall that they were down 7% in Q2 year-over-year and down 5% in Q3 year-over-year.

Pretty much the same reason why.

We don't feel this is a big issue.

We're still feeling the impact of fewer year-over-year openings.

In Q4 2008, we opened a net of six openings but we actually opened 13 openings including [relos] compared to six which include two relos this year.

So if you recall back even in Q2, in 2008 in Q2 we opened seven openings compared to zero.

So, again, you've got a lot of new sign-ups and new buildings with fewer openings this year versus last.

Overall fewer openings are impacting the new sign-ups, so, again, we believe that's the biggest factor for that.

In terms of number of members at Q4 end, we ended Q4 2009 with 21.4 million members, up from 20.9 million at the end of Q3.

Primary business remained at 5.7 million.

Business add-on remained at 3.4 million.

So all told, 30.6 million compared to 30.0 million at Q3 end.

Including spouse cards, we went from 54.9 million at the end of Q3 to just 8,000 shy of 56 million at the end of Q4.

At fiscal year end, paid executive memberships totaled [8,936 million], an increase of 408,000 or 5% since Q3 3 end, that's just under 26,000 a week increase.

That's new as well as conversions to the executive membership.

I might point out that we did introduce the executive membership program in the UK this past fiscal quarter.

That would make it the third quarter that we now have the executive membership.

Of the 408,000 executive members that became executive members during Q4, 62,000 came from the introduction of this program in the UK.

So, again, taking that out, the 5% increase in that 16-week quarter would have been a 4% increase for the rest of the existing Company.

In terms of renewal rates, remained a shade under 87.5% coming in rounding to 87.3%, 92.2% on the business which is actually a slight improvement from Q3 end, and 86.0% which is one-tenth down from Q3 end, but averaging 87.3% overall.

Going down the gross margin line, in the fourth quarter year-over-year the gross margin was up 56 basis points at a 10.85% compared to 10.29% last year.

This is where I ask you -- one of the two times I ask you on the call to jot down a few numbers to help you understand our numbers.

We'll have three columns.

Q2 2009, Q3 2009 and Q4 2009, and about six line items, core merchandise, second line is ancillary, third line is 2% reward, fourth line is LIFO, and last line is total.

Going across, core merchandising in Q2, year-over-year, core merchandising was down seven basis points.

In Q3 up 42 basis points.

In Q4 up 48 basis points.

Ancillary businesses, and how it contributed or opposite to the quarter.

Q2 minus 19, Q3 plus eight basis points, and Q4 minus three basis points.

The 2% reward all three quarters was minus nine basis points.

LIFO, plus four, plus four, and in Q4 plus 22.

That relates, of course, to the $16 million LIFO credit I talked about.

In total, minus 31 in Q2, plus 45 in Q3, and plus 56 in Q4.

Recall, of course, in that Q2 we were very aggressive on pricing, and I talked about that back in Q2, leading up to the Christmas Day.

As you can see our overall gross margin was higher by 56, and our core merchandise gross margin was up 48 basis points.

But as was in the case of both Q2 and Q3, the 48 basis points year-over-year core merchandise result is good but like in the past two quarters a large component of this increase reflects reduced gasoline sales penetration which is a much lower gross margin business.

Our lower margin gas business represented 12% of Q4 2008 sales and only 8% of Q4 2009 sales as the average price per gallon dropped precipitously.

Thus, sales penetration of our core merchandise business was up year-over-year.

So while gross margins of these areas were higher year-over-year by six basis points, its aggregate higher sales penetration caused it to be up significantly more in the matrix of the 48.

But, again, if you look at like sales in those four categories to gross margin on those four categories divided by sales of those four categories it showed improvement of six basis points.

Of the four major departments, food and sundries and hard lines were up year-over-year in Q4 as they were in Q3.

Soft lines was down ever so slightly and fresh foods was down somewhere in the mid 40, 50 basis points, similar as they were in Q3.

That, again, we're doing a lot more volume but with lower price points.

We felt we did okay there.

The impact from increasing executive membership -- executive member business continued in Q4 at a minus nine-basis-point impact.

Again, the same nine-basis-point impact that occurred in both Q2 and Q3.

The implication that means that about 4.5% of our sales penetration is increased executive membership, to executive member sales.

We view this as a positive and it reflects increasing sales penetration to our most loyal members.

As mentioned in our press release, LIFO represent a large credit in Q4, $16.6 million pretax compared to the $32.3 million LIFO charge in Q4 last year.

The deflationary trends, of course, began back in Q2 and continued throughout this past fiscal year.

Moving on to SG&A, our SG&A percentage Q4-over-Q4 were higher by 63 basis points, coming in at 10.29% of sales this year compared to 9.66% last year.

Again, I'll ask to you jot a few numbers down.

We'll use the same three columns, Q2 2009, Q3 2009, and Q4 2009.

The line items are operations, second line item is central, third line item is stock compensation, or equity compensation.

Fourth line item, quarterly adjustments, and then total.

And I will actually have a memo line item below the total called gas mix effect.

Going across, operations in Q2 2009 year-over-year compared to Q2 2008, it was minus 34 or higher by 34 basis points.

Q3, minus 67 basis points, and Q4, minus 61.

Central, minus four, minus 15, and minus eight.

Equity, minus one, minus five, and minus one.

Quarterly adjustments, zero, minus nine, and plus seven.

And total, minus 39, minus 96, and minus 63.

Now, the memo item, the gas mix effect, and basically this is the number that when you look at the operations line, the 34, 67 and 61, of that these three numbers relate to the lower gas penetration which, while it boosted reported margins, it also boosts the percentages of reported SG&A.

Of that minus 34, minus 28 was gas mix effect.

of the minus 67, 38, and of the minus 61, minus 40.

So, again, a big chunks of those numbers relate to that.

And, again, hopefully gasoline deflation, or these giant swings is getting ready to anniversary.

In terms of a little editorial on these SG&A issues, I will point out the following.

Again, operations was higher by 61.

But again, as I mentioned, the gross margin percentage is where it helped us.

It correspondingly hurt is here in SG&A.

Our central expense was higher year-over-year in Q4 by minus eight basis points.

About three basis points of gas mix and most of the other five basis points was higher payroll and benefits as a percent.

Health benefits is a big chunk of that, within that number, but certainly payroll was up small single-digits on essentially flat sales.

Our stock compensation expense was almost flat in dollars year-over-year in Q4.

Down about 3% on slightly lower sales but up one basis point in terms of percentages.

Benefits, I mentioned Q4 year-over-year percentage was higher by [16] basis points.

This includes a sizable year-over-year spike in healthcare utilization.

For the quarter, the amount we spent on US healthcare was up over 25%.

Three factors fueled this large rate of increase.

Normal healthcare inflation that we all hear and read about, increased utilization per person, some would argue that's related to everything going on in the economy and stress and what have you, but we don't know.

And greatly reduced -- and the last one is greatly reduced employee turnover.

With regard to the reduced employee turnover, there is -- there's a smaller percentage of our employee base who are not yet eligible for benefits.

Over 90% of our new hires tend to be entry level part-time hourly employees.

Our part-time hourly employees become benefits eligible on average around six and a half months after they begin.

It's the first of the month after they start plus six months.

As we have opened fewer units, as well as existing employees aren't turning over as fast in this economy, you've got more people that are benefits eligible.

For the last several years, the percentage of our employees that are benefits eligible was right around 80%, 82%.

In the last year, it has gone to 92%, the low 90s.

So again, that's not going to go away, and that's economy related.

My guess is as the economy improves slowly you will see a reduction in that, but it will be probably minor levels of reductions over a few years, assuming that people's expectations out there, that it's going to take that long for the economy to improve.

But nonetheless, that's also exacerbating it a little bit.

In terms of quarterly adjustments, the plus seven simply relates to the fact that in Q4 last year we that had $15.9 million pretax charge for a litigation settlement versus nothing this quarter.

Overall, not a bad SG&A performance given sales levels, the huge gasoline deflation and increased benefits costs.

I don't see benefits costs changing dramatically.

I think it's going to continue to be relatively high, but we've worked that into our numbers this coming year.

In terms of factors that will impact our outlook, 2010, probably the single biggest question is sales trends, and where that goes, and, of course, the anniversarying of gas deflation that will help a little bit.

Next on the income statement is pre-opening expense, $5.8 million higher this year, coming in in the fourth quarter at $17.8 million.

I'm sorry, lower this year, coming in at $12 million this year in the fourth quarter versus $17.8 million last year.

No real surprise.

Last year in the fourth quarter including relos we opened a total of 13 units.

This year in the fourth quarter, including the two relos, we opened six new openings.

In terms of provision for impaired assets and closing costs, in Q4 2008 last year we had a net credit of $6.2 million for the quarter.

That was comprised of about a $12 million in real estate gains offset by about $6 million in actual closing costs.

In the fourth quarter this year, we didn't have any real estate gains but we did after net charge of $2.7 million in closing costs.

So there you have almost a $9 million pretax year-over-year negative swing in Q4.

All told, operating income in Q4 2009 was down about 1% year-over-year, from $604 million last year to $597.8 million this year, or a decrease of about $6 million.

Below the operating income line, reported interest expense was slightly higher year-over-year with the fourth quarter coming in at $33.3 million versus $32.1 million last year, so a little over $1 million.

These amounts mainly reflect the interest expense on our $2 billion debt offering that we did in February 2007.

Interest income, however, interest income and other was lower year-over-year by $20 million in the quarter, reported at $15 million this year versus $35 million last year.

As I mentioned earlier, of that $20 million swing, about $15 million of it was lower interest income.

The other $5 million is basically the weak peso.

We account for Mexico on an equity method which means we simply add -- since we own half of it we add half of their earnings into this interest income and other line.

The peso in 2008 was around 10 to the dollar.

The peso in 2009 was closer to 13.

So, again, about $5 million of that number there is the weakness when expressed in US dollars.

Overall pretax income was down 5% from $607 million last year down to $579 million this year.

Tax rate, our Company's tax rate this quarter came in at 35.5%, a bit higher than last year's very low fourth quarter rate of 34.5%.

Again, in both fiscal quarters our tax rate benefited, or was lower due to a handful of positive discrete items.

These typically represent a state income tax where perhaps a state has made a claim, we're reserving for it while we're arguing the point and sometimes they go our way.

Now for the quick rundown of other usual topics, start with the balance sheet at August 30.

This, by the way, will be in the Q&A that we put online, and I believe it's already out there.

So you'll that, but I will go through it real quick.

Cash and equivalents and short-term investments, $3.727 billion.

Inventories, $5.405 billion, other current, $1.205 billion.

Total current assets, $10.337 billion.

Net PP&E, $10.9 billion.

Other assets, $742 million, for a total assets of $21.979 billion.

On the right-hand side, short-term debt, 97, accounts payable $5.450 billion.

Other current, $3.734 billion.

For a total current of $9.281 billion.

Long-term debt, $2.206 billion, recognizing the $2 billion as the 2007 debt offering.

Deferred and other, 388.

Total liabilities of $11.875 billion.

Minority interests of 86.

Stockholders equity of $10.018 billion, for a total right-hand side also of $21.979 billion.

We'll have the cash flow later for you, not today.

Many of you ask -- call us and ask about depreciation and amortization.

For the fourth quarter, depreciation and amortization was $241 million and for the year $728 million.

The balance sheet, of course, continues to be quite strong.

One of the numbers we've always shared with you is not only the percentage of inventories that are funded with accounts payable, but then tell what you it is just looking at merchandise inventories recognizing we have accounts payable related to construction and capital expansion as well.

While we reported in the fourth quarter last year 104% AP to inventory ratio per the balance sheet, that's 101% in this past quarter.

The 104% last year, again, looking just at merchandise inventories, versus merchandise accounts payable was an 86, and this year an 84.

Again, lower sales, no big deal there other than the fact that our goal is to continue to see that going in the upward direction.

Average inventory per warehouse last year was $9.843 million.

This year it was $10.257 million, or up 4% or $414,000.

Now during 2009, the biggest factor -- the biggest component of this increase in $414,000, there's three that I'll talk about, was at year end we recorded an adjustment to accrue about $170 million of what we refer to as in-transit inventory that we own or take title to from the point of shipment from our foreign vendors.

Imports, if you will.

Previously, we did not record in-transit inventory because A-- it's not material, amounting to less than 3% of inventory, and it's generally not easily quantifiable.

We thought that was appropriate to put that on.

All does it is add that amount to inventory and add a comparable amount to accounts payable.

So actually helps your accounts payable ratio a little bit.

The adjustment recorded in 2009 resulted in an increase in average inventory per warehouse of about $326,000 which is simply the roughly $170 million divided by the non-Mexico locations.

So that was the biggest chunk of the $414,000.

FX actually reduced the number by $80,000, $79,000.

Now you take these two factors out and you have about $167,000 left of higher year-over-year inventories.

A little more than all of that.

About $200,000 was majors, as well we consciously brought in some seasonal items a little early in mid-August rather than early September.

And we think that was the right thing to do as people are starting to spend a little more.

In terms of CapEx, in Q4 2009 we spent $382 million, and for the year $1.279 billion.

I would estimate that for 2010 our CapEx will be in line with last year's figures, perhaps in the $1.2 billion to $1.3 billion range.

In terms of dividends, earlier in May we increased our quarterly dividend from $0.16 to $0.18.

The current $0.72 per share annualized dividend represents a total cost to the Company of right at, just about $320 million.

Next topic, Costco Online, which a combination of Costco.com plus Costco.ca, which is our Canada Costco.com.

Quite profitable, although sales were down about 4% in 2009 from $1.7 billion down to $1.6 billion.

These results were certainly impacted this past year given our big ticket and discretionary type of product items focus.

And in this economy we were certainly impacted by that.

In Q4, our sales were down about 7% but we actually showed a slight increase in September.

Our e-commerce business as I mentioned is quite profitable, but it was below plan, of course, this past year, not knowing what was going to happen with the economy.

Next discussion on the list, expansion.

As I mentioned, we opened 15 net new units plus one in Mexico, so 16 net new units.

To be at 543 including Mexico at fiscal year end.

That's about a 3% increase in unit and square footage growth.

Total square footage at the end stood at 75.2 million square feet.

We would -- that includes Mexico with 74.939 million in the US I'm sorry, everywhere but Mexico.

In fiscal 2011, we would expect increased expansion levels as we get through the past two years where we put some locations on hold.

Anything that wasn't signed we went to renegotiate which delayed some, and in a few instances the developer and/or the bank was having problems.

In one case the developer had had problems, we went with the developer to the bank, and while negotiating the bank went under.

So some of the things got tied that up way, but we would expect and our goal is in 2011 is to increase expansion.

That's basically about it.

Our supplemental information package, Q&A package we call it, which includes a variety of stats as well as our balance sheet is now posted on our Investor Relations site.

Before I turn it back to Julie Ann for Q&A I would like to make two final comments.

One, is our upcoming opening in Manhattan on November 12.

We are having an analyst investors meeting at the warehouse on a different floor.

We're the first tenant in this five-story building.

So there will be some space on another floor that will be suitable for having a presentation.

That will be the prior day on November 11th, from 3:30 to 5:30 in the afternoon.

That will be followed by our pre-opening party which we do at all locations.

I know all of you guys want to come to have the free hot dogs and sodas and what have you.

That will be from 6:00 to 8:00 at the location that evening.

Bob Nelson and his group will be sending out an e-mail invitation for people to RSVP to.

Given space limitations it is important that we hear back from you.

By the way, should you not get the e-mail, and I believe it's going to go out no later than tomorrow, should you not get the invitation please call, please e-mail the following e-mail address and we'll send you one.

The e-mail address is C like Charlie, Watson, so cwatson@Costco.com.

The last thing, while we are not giving specific earnings guidance, do recall that in the first quarter 2009 earnings results were greatly helped by outsized gasoline profits.

And we'll go from there.

With that, I will open it up to Q&A, and I will turn it back to Julie Ann.

Thank you.

(Operator Instructions) Your first question is from the line of Deborah Weinswig with Citi.

Good morning, Richard.

You obviously went into a lot of details in terms of the U.S.

performance.

Can you please provide some more color on performance outside the U.S.?

Sure.

In the fourth quarter, our international, of course, without FX was up 7 in the fourth quarter, and that up 7 was pretty constant May, June, July, and August, ranging from 6 to 8.

In September our comps, which, again, international was a plus 9, based on local currency.

When I look at the plus 9 in local currency, Canada, which is the biggest piece of international, of course, Canada is about 10% or 12% of our total Company, and all international is, what, about 18% or 20%.

Canada was in the mid to high-single-digits in local currency.

All three Asian countries were in the mid-teens.

So that's where you get to that number that I just mentioned.

So continuing to do quite well over there.

Okay.

And then executive membership growth obviously continues to be impressive.

What percent of your sales do these customers represent and what do you think continues to drive growth there?

It's around 60.

Now recognizing about 50, just under 50% is rewardable, because we don't include in the -- in the 2% reward gas, tobacco, and alcohol.

They, of course, are all low margin businesses, and different states have different rules on discounting of alcohol, anyway.

So those have always been excluded.

And in terms of reasons, we ask ourselves the question as we entered the crappy economy a year ago, with people up -- spend more to be able to spend more.

And the answer is, yes.

I think they see it as a savings.

We're thrilled about because, they have -- within that 87%, roughly 87.5% renewal rate, executive members are a little over 90%, they spend more, they grow -- when they first convert they grow at a much higher rate of purchase, and then once they get to a higher level, they are still spending comparable to the non-converted, if will you.

And I think part of it is also we are doing a better job of converting new sign-ups.

If you go back to a year and a half ago two, years, a for every 100 new sign-ups in a warehouse, whether existing or new markets, in the U.S.

and in Canada, where we have the program, we had, I think about 10 or 12 that started as an executive member.

We talked them into that.

Today that's in the low to mid-20s, and our marketing people here would argue that we're doing a better job explaining it at the warehouse.

As you know, we don't have commissioned people doing anything at Costco.

And it's really a matter of training the employees how to sell it, if you will.

Great.

And then last question, can you talk about the competitive environment and deflation on how you approach 2010 planning?

I'm sorry, could you repeat that?

Can you just talk about how how the competitive environment and also the impact of deflation has approached higher planning the upcoming fiscal year?

Let's do the last one first.

Deflation is continuing.

We all know on the consumer product side it started back in April-May.

And we had some big items, your paper goods, a lot of your branded consumer products items, as well, part of that deflation related to the fact that more penetration is going to private label which tends to be 20% and 30% lower price points.

So we see that continuing.

I guess it anniversaries somewhere between January and May, I guess.

When talking to the food and sundries people here, to the extent that there's been some price point or deflationary pricing from the manufacturers, it's not like there's another one coming three months later for that same item.

So you've gotten some big stuff out of the way.

My guess is it will be maybe less -- a little less impactful, but still in that direction over the next few months.

In terms of competition.

We're all still pretty tough.

There's a handful of big boxes, of course, notably Sam's and Wal-Mart, and B.J.'s to some extent, and we're out there being tougher, and we don't see it getting more competitive but it's not like anything has lightened up a lot, either.

Great, thanks so much.

Best of luck.

Thank you.

Your next question is from the line of [Robby] Ohmes with Bank of America-Merrill Lynch.

Oh, thanks.

Hey, Richard, actually two quick questions.

Can you, you probably won't do this, but could you quantify the food deflation impact on the quarter or September?

Yes, I mean, let me tell you our methodology, because it's not exact.

Take to top 20 items in each sub-category.

Let's say within food and sundries, there's 10 sub-categories, eight or 10 sub-categories.

Within each of those the top 20 items, so that's 150 items, let's say 160, 180 items.

As a Company, our top 200 items are just under 40% of our total sales.

And, of course, these are the most competitive items.

The deflation within those categories, looking at the top 20 of those sub-categories is just under 2%.

Now, that's about -- that's looking at about 60% of our sales base, the food and sundries categories.

So probably 3%, 3.5%.

I mean, that's a guess.

Somewhere more than 2% and less than 3.5%.

It's 3% in those departments.

It's 3% in those departments.

For the Company it's about 2%, just under 2%.

And just to clarify, the pressure from that you see alleviating already?

Well, again, it's anecdotal from the standpoint that in the past few days talking to our heads of fresh foods and heads of food and sundries and what are they seeing?

Their sense is that you've already seen some big categories with big volume, paper goods, dry goods, big chunks of sales come down in price.

I mean, about, what was it, three or four months ago, the 35-pack of half liter KS, Kirkland's, water bottles on the West Coast, our sales price went from $4.39 I believe to $3.59.

Well, it didn't take very long for the national brands or the regional brands in those respective markets to come down because they were losing dramatic market share.

Well, that's done now.

We don't see it coming down a lot more, again, any time soon.

I think it's more of the fact that you've had big chunks of stuff happen, and you'll probably get a little more, but not as much as you saw already.

Got you.

Sorry -- the other question I had was just you mentioned bringing seasonal in early as part of the inventory growth.

I think you mentioned better sales trends.

Can you just maybe qualify what you saw?

Was it more category specific or did you just broadly see things pick up?

Was it just traffic picked up and you said we've got to bring more inventory in?

Help us understand what you were feeling in, I guess it was August that made you want to accelerate that?

Well, a couple things.

As it relates to toys and a limited amount of sporting goods, some of it had to do with a year ago you had the issues with product safety.

Remember with all the lead issues and, I forget some of the issues, but there was a lot of delays because both manufacturers overseas and every major retailer on this side was insisting on greater testing of product coming into the U.S.

So there were -- some of it was delayed, and we also felt that our whole business from the beginning of time has been in and out of seasons early, whatever the season happens to be, whether it's lawn and garden, we bring in patio sets essentially the day after Christmas or New Year's, probably a couple months earlier than most out there.

Two to three months earlier.

So some of it is normal stuff, some of it relates to the fact that last year was a little bit of anomaly.

But I'm not talking about big stuff, huge stuff.

I mean, if you are look at that time toy selection we had the day before September, it was -- more than a year ago?

Yes.

Was it all Christmas out there?

No.

It is much more like that today than it was five weeks ago.

What you don't see out there a bunch of trim-a-tree and Christmas trees yet.

You are starting -- now you are starting.

I'm talking about a month ago.

You saw a little of it, but not a lot.

Got you.

Thanks a lot.

Your next question is from the line of Charles Grom with JPMorgan.

Good morning, Richard.

It sounds like California is getting a little bit better, up, I think you said up 2% in September.

I know that Northern Cal has been better, but I was wondering if you could sort of flush out how much of that is traffic ticket and I guess a little bit more color regionally within the state?

I don't have that handy, Chuck.

The Bay Area is the best.

We kind of separate it into three regions.

Bay Area, L.A., and San Diego.

Then within San Diego, we take it out, Colorado and New Mexico, which is part of our operating region, to just look at California.

Again, the biggest delta was in Southern California.

The area was bigger in aggregate to start with.

I don't have that broken out, though, in terms of traffic.

But it is both.

I don't think -- I feel 99% certain it's both traffic and -- traffic's up.

Okay.

Thus far in the third quarter, based on some channel work we've done, we've heard that merchandise margins are in pretty good shape, and gas profitability, particularly in California is in good shape.

Can you give us a little color on what you're seeing so far quarter to date?

Not allowed to.

Okay.

I'll try on the annual.

It sounds like you're not going to give us specific EPS range, but given the rebound, particularly in sales in September, it does seem like a double-digit EPS growth rate could be feasible, particularly given you're cycling about $0.20 of one-time items.

Any sort of direction on an annual basis for our modeling?

I'd love to but I've got people looking at me with evil eyes in this office, from the legal side.

We're going to -- frankly, we're going to talk a little bit about that tomorrow at our normal quarterly board meeting about guidance.

But I think the sense around here in talking to Jim and a couple others is that, again, there's still a lot of unpredictableness out there.

I did want to at least mention in Q2 last year we had, again, I agree with your comment because you can pretty much publicly figure that out, in terms of gas profitability, although last year was nuts because of the dramatic decline in gas praises and how that is inversely related to our gas profitability.

So whatever you do, recognize that Q1 has that gas year-over-year challenge, and beyond that, you guys are pretty bright.

Again, I can't really tell you a lot.

I would love to but I can't.

Okay.

Maybe just at a minimum, last quarter you said you were comfortable with where the street was for the quarter and year.

Maybe could you bless that?

I can't.

I don't recall -- if I said that, I was in a moment of weakness.

Not weakness of earnings, weakness of my character.

Okay.

I appreciate it.

Thanks a lot.

Your next question is from the line of Bob Drbul with Barclays Capital.

Hi, good morning, Richard.

Can you give a little bit more color on September comps?

Was it mostly back-to-school Labor Day bump, or did it slow at the end of the month?

Maybe give us a little bit more week-to-week trends?

Yes, Labor Day was maybe a half a point, that's our best guess.

But there's wide variety.

We had a weak week, and the last week was a stronger week.

Part of it has to do with timing if our MVN mailers, where the aggregate is not a big difference, but one started a week early last year, but ended a week early.

So clearly people are shopping more with coupons than they have before, and that's, I don't think, just at Costco, that's the consumer in America as well.

And just a couple -- another question on the healthcare side of it, healthcare costs, Richard.

Have guys changed at all your benefit design, deductibles or anything?

You're talking about the higher costs and what you have planned for this year?

What are the ways that we should think about the ways that these costs are flowing through and hitting the P&L?

There's nothing that we're planning to do right yet.

As you -- many of you know who have followed us for a long time, for nine or 10 years, from essentially 1994 the time of merger with Price and Costco to 2003, we did not change what we charged our employee.

Then, of course with that and with inflation, the employees went from paying around 12% of healthcare down to less than 5%.

In October of 2003, we implemented new plan designs, which also increased the cost to the employee but still have a very good plan for a very nominal cost to the employee.

That was implemented and structured so that the various changes that would, frankly, help mitigate some of the cost increases to the Company were put in over four years.

So we saw reductions as a percent of sales, and lower growth rates than inflation in general out there for healthcare from 2003 to 2007.

We have not -- again, just to last five or six months that we've seen this big spike, recognizing that in our view, two of the three factors of the spike, one, more people are covered because of lower turnover and a lower growth rate of new openings where you have got all these new employees that aren't covered yet will subside.

Our sense is over a few years, but it happened over 10 months.

In terms of the increase.

The other is increased utilization per employee.

The average cost is going up.

In talking to our third party administrators, on an anecdotal basis, basically people are increased utilization, whether it's fear of losing one's job, although we haven't had layoffs, that they're going to get stuff done beforehand, whether it's additional pressure which even emotional pressure can manifest itself in more accidents, more whatever.

Again, those things have come up in the last six or eight months.

Hopefully, as the economy improves, two of those three things will subside, subside slowly probably.

As it relates to us making plan changes, don't count on it in the next few months.

I'm sure we'll look at everything and talk about it, but we try to view that -- when we did it, as some of you know, it took several years of, frankly, Jim saying no, we're not going to change what we charge the employee.

And then probably a couple years of saying, okay, yes, but let's figure out how we can mitigate it, then spread it out over a period of time.

It's just the last six months that we've seen these issues.

I think we would want to wait and see what happens over the next six months as it relates to hopefully the trend line of the percent covered, not going up any more and maybe even coming down a little, and that's all based on openings.

And turnover of employees, and we'll have to wait and see.

Great.

One final question for you, Richard.

Just with the cash balance that you guys are sitting on now, the share repurchase program, can you maybe just give us any updated thoughts around that?

I'm not trying to be coy.

We did, as you know, we stopped in late September last year, more to do with the fact that there was all the questions about liquidity and the craziness in the money markets out there.

Fortuitously, it was also when we, I think the last share we bought back down was in the low to mid-60s a share.

We did step our toe back in the water, I think it was March when the stock dipped below $40 one day.

Out of sheer coincidence the next three days we had to be out of the market because our 401(k) plan which once a year buys stock for employees, we give all employees in the U.S.

a percentage of their annual wage based on years of service.

So anywhere from 1% to 9% of their wage, capped for $200,000 a year and more in wages, but that hits a very few people.

But that's a number that totals about $150 million, $160 million.

About 40% of that is Costco stock so we are out there for over three-day period buying in that the market, spreading it over three days in theory so that you're not impacting the stock price.

It was a matter of -- the day we bought, I think, was in the $38, $39 range.

The next three days was probably somewhere there, but in a matter of a week with no news the stock went way back up to the mid to high 40s.

Now, again, hindsight is wonderful, and the mid-to-high 40s would have been wonderful as well.

But we take it as we see it, and I think over time we'll continue to look at it.

I think longer term we'll continue to be a buyer, and we're not trying to be coy.

We haven't, of course, in the fourth quarter.

It's a subject that we talk about at each board meeting.

We've got a handful of people who I think have very good thought and have respect of their view of that, and then Jim and I sit down and decide what we're going do.

So I'm not trying to wink and say stay tuned for tomorrow or say maybe another quarter.

We'll have to wait and see.

Thank you.

Your next question is from the line of Peter Benedict with Robert W.

Baird.

Hey, Richard, thanks for taking the question.

First on 2010 CapEx I think you said $1.2 billion to $1.3 billion.

First of all, is that right?

Then I thought I had in my notes from third quarter you were thinking something more along the lines of $1.5 billion to $1.6 billion.

Am I right on that?

If, so why the pull-back?

I think part of that was, our view was, the number of units had continued to dwindle a little bit this year.

And I think part of that was my mistake.

I was shooting from the hip a little bit, based on looking at the real estate guys estimates, and by location of what would they have in the hopper.

The reality is, is that what they had in the hopper, and it makes sense to me at the time, if we had tried to do closer to 20 this past year, and we did 15, then we look at their active list and their best guess and probability of what things are going to happen, we were back in the low 20s.

The reality is, a few units have gotten hung up with developers and or banks' issues.

A few units have gotten hung up because we pulled the plug to renegotiate, and as you may have heard, there are some reluctant sellers out there.

Not every seller has realized that they're not going to get their price.

And, again, the pipeline is still pretty good, and we expect that as we approach near the end fiscal 2010 and go into 2011 we will see that change.

So the other little piece of it, there's probably $50 million to $100 million of reduced expectations for remodel activity.

Again, that's more to do with the fact that it's a number that has continued to increase a little bit, and I really had not paid as much attention of where we were in the cycle.

As an example, there's not as many remodeled gas stations because we basically are now only -- we would like to do them all but we're landlocked or zoning locked or to have buy an adjacent parcel, rather than having units that it's just a matter of working through the zoning of it and the planning of it.

Thank you, that's helpful.

Moving over to the Kirkland's private label penetration rates were moving materially higher in the first half of 2009.

Can you give us a sense of where they were?

Where did Kirkland's come in for the year in terms of sales penetration?

How did that compare to last year?

We're up about 3 percentage points, 2.5 to 3 percentage points of penetration Company-wide.

That would be a higher number if you looked at the roughly 55% of our sales are food and sundries because that's where you have the higher level of penetration in KS.

Historically that's only grown a little less than one percentage point.

Is that true?

It seems like it's been anywhere from a half to three-quarters of one percent a year for the last five years up until this past year.

The other thing, I think I mentioned on probably the Q2 conference call, in the first 24 weeks within food and sundries we saw almost a 300-basis-point swing.

So that level of increase has continued, but again, that's on that 60% of our sales base.

Perfect.

Last question, I'll let somebody else gate chance here.

The FX adjusted MFI growth was just under 6% in the fourth quarter.

How should we think about that trending as we look into 2010?

Well, we continue to be surprised by the strength of conversions to the executive membership.

At some point that's got to slow a little bit.

I'm not saying it's going to slow tomorrow, but sometime here, it's going to slow, so that will impact it a little bit.

I think with the fact that we opened only 15 net units last year and some number there or slightly above there this coming year, that having a 3% square footage or unit growth instead of 5%, 4.5% to 5% that we'd had prior to that, that impacted these two years.

My guess is in 2010, you will have some slowing of the executive member rate of increase, but it will still be some life in it.

You will still have the reduced number of new units, but then as we -- as the life of executive membership conversions and growth subsides over the next year we'll start the process of hopefully opening more units in 2011.

That's an artistic version, a qualitative version of what I'm trying to explain because it's hard to say.

Okay, fair enough, thanks a lot.

Your next question is from the line of Colin McGranahan with Bernstein.

Good morning, Richard, thank you.

Just wanted to focus first on SG&A.

And knowing the pressures you've enumerated here, but still, if my math is right and we try and adjust that for FX it looks like the core growth of SG&A was maybe 6% or so year-over-year which would have been one of the better performances in the past couple years and certainly less than the last few quarters.

Obviously, you're looking at U.S.-only SG&A, which we don't have, but can you comment maybe on what some of the positives were in terms of being able to control that dollar growth in SG&A a little better?

First of all, the U.S.-only as related to healthcare, when I talked about SG&A in general, though, it's the whole Company.

Certainly you're having mid to high-single-digit comps in the roughly 20% of our business that's overseas helps you.

That's the downward pressure in SG&A, those levels of comps.

A lot of it has to do with the fact that I was saying to somebody a couple weeks ago, for years, I talked about the fact that there, quote/unquote, aren't a lot of silver bullets because we're running a pretty good ship out there.

Well, guess what?

When times are tough everybody figures out how to save a little.

I used one silly anecdotal example.

We took the copy machines in our central and regional offices, plus the two big copy machines in each warehouse, there's several smaller ones, but there's one back in receiving and one in the office, and simply made you opt-in to color printing.

They're all set so that if it's color scan it will print out color.

Just by changing that to a opt-in, you're still allowed to do it if you have a presentation, but 90% of the time you don't need it.

That will save, we estimate, $1.4 million a year.

I think the warehouse managers, of course, are trying to button up schedules a little bit.

The big changes, we're not going to make, and we're not going to just try to figure out how to charge them more for healthcare.

We're not going to change our wage structure.

But one big thing we're looking at, every three years we come out with an employee agreement.

The next one will be in March 2010.

We are, I still expect for us to give top of scale people and top of hourly scale is about 60% of our employee base in the U.S., still to get increases each year.

But we have to recognize what we're seeing out there in terms of the economy and deflation right now.

We're not going to do nothing but we have to look at it.

So there are avenues to look at things but I don't want to promise anything because we're not there yet.

Okay, that's helpful.

Then just in terms of the gas profitability, obviously, the rapid declines in first quarter of 2009 helped a lot.

Can you just remind us in terms of quantifying the impact, either in EPS or basis points what you think that contributed to first quarter last year?

I think it was $0.09 or $0.10.

Okay.

And then final question on just the core category merchandise margins, I think, were up six basis points here in the quarter.

Was that -- anything notable there?

A little bit of private label help?

Anything else that we should be aware of?

Nothing that really stands out, frankly.

I think the only -- if I look back at the prior several quarters the most notable thing was our own aggressiveness on pricing of commodity goods before commodity prices from our suppliers went down, and that was, of course, the hit that we took in Q2.

In four or five weeks I think we had about $30 million to $35 million of pretax markdowns with no contribution from vendors.

The concern there was, is, oh my God, they're back to doing that, and fortunately as we showed in Q3 and in Q4 that was more of a perfect storm with the deflation and commodity prices that we chose to be a little more aggressive faster to help spike sales a little bit and drive sales in the right direction.

Okay, thank you.

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

Hi, good morning, Richard.

Could you walk us through a little bit of the arc of the non-food comps?

Just how bad did it get last year, and I know your August non-food number was down modestly.

What was the overall number for September in non-food?

Somebody will get that while I'm talking to you.

If I think back a year ago when we started getting hit for the big-ticket discretionary items, or the non-food categories, we had many categories that ranged from a minus 5% to minus 20% in comps, with the minus 20s being more like big ticket items like furniture and patio, and jewelry.

September's comps were in the low, mid-single-digits.

Okay.

It just seems to me that that's got to be the source of a lot of operating margin swing for you.

Some of those are lower margin percentage categories, but the gross margin dollars are probably pretty good there.

If you could talk about the opportunity to get some operating margin leverage as some of those non-food areas turn?

Clearly, incremental sales help you.

Now in terms of margins, our margins on the non-food side are not that different from the margins on the food and sundry side when you include fresh foods.

Fresh foods are higher than average margin.

Certainly commodity items like tobacco and soda pop and detergent and butter and milk are a little lower, but you've got a lot of specialty food items that are in the low to mid-teens.

So overall, if I go back 15, 20 years ago when half the business was food and half was non-food, to get to an X number for a number of X% for the total Company, food and sundries was X minus 1%, and non-food was X plus 1%.

Today they are pretty much close to the same.

Okay.

And also we talked a little bit about deflation in the food area, but there was also some pretty severe deflation in some of the big hard line areas?

How bad did that get and when do we lap out of all that?

Well, the biggest was electronics.

Again, I think a big chunk of that was sometime around October when the market was falling the out of bed, consumers were freaking out, and you've had over the last few years some new, big players, notably Target and Wal-Mart, in big ticket electronics items over the last few years.

And there were many retailers, not only between them but others, that cut back electronics orders for Christmas.

That's when we took advantage of that and I think there's one manufacturer, we bought like 40,000 units, over a three-month period we sold a two-pack at about $300 per TV or $500 or $600 per sell unit lower than we were buying them for the day before.

So that's why our sales were up dramatically, but that's also why the average price points out there of items were down way beyond normal product deflation in electronics.

The feeling is that it is subsiding as we enter Christmas, because, one, there's not the type of over production and over inventory that the manufacturers have.

What's normal deflation now in electronics?

I'm guessing, but my guess is 10%, 8% to 15%, whereas last year it was -- it was as high as 45%, 42%.

Okay.

Some of those items.

Okay.

Thank you very much.

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

Hi, good morning.

A follow-on to the prior set of questions regarding average ticket.

It seems like this would be a critical element for Costco to be able to leverage the SG&A, assuming you can keep your same traffic trend.

Richard, for all of 2009, if we take out gas and FX, you gave us the deflationary impact, but what would have been the mix impact?

And then when you speak to the merchants, what's the assortment planning for 2010?

As you're seeing consumer confidence come up, some of the higher income demographics, do you think we can get that average ticket going in the positive direction with some of the bigger ticket items?

Let's -- let me answer the last question, then I'm going to ask you to repeat the first part of the question.

But as it relates to the average ticket, two things that are purely cosmetic, not talking about the branded cosmetic goods, I'm talking about it's more on the face of it, not substantive, is the hopeful -- the anniversarying, the presumed anniversarying of gas deflation and FX strength.

Both of those things will help the average ticket assuming that it anniversaries and doesn't go crazy again in the wrong direction.

Beyond that, hopefully there is some confidence out there that will help a little bit.

We generally have not been one to say, uh-oh, we're not selling big ticket items, let's greatly reduce price points, let's limit that stuff.

I think generally speaking the evolution of it through this economy has been still more fresh foods penetration because that's what's driving business, and people come in and we've got great fresh foods at great prices.

Part of it is -- but Jim has reminded the buyers, as has Craig Jelinek, our head of merchandising, every month in the last several months don't be shy.

We have the ability, we still are the fastest -- our industry and us within the industry are the fastest turner of inventory.

We are selling the top 20% of the goods not the bottom 80%, so less fashion risk, less everything risk.

If we get unlucky we've got an extra couple weeks of TV supply, we just won't bring in the new one yet.

That being said, when we saw big ticket patio furniture come down dramatically of sales in this past January through March, and we had great $3,000 stuff for $1,299, are we going to try some $999 stuff?

I think we will.

But let's not get rid of all the $1,299 stuff.

Whoever is going to jump first in terms of improving their purchasing, growing their purchasing, in our view, it's going to be our member versus others, because we've got them coming in more often, they're more upscale than the average person out there, on average.

And so we think that we -- again, I think it's fortunate in our view that our model allows us to be more aggressive than the average traditional retailer out there, given what's gone on in the economy.

Now, the first question was?

For the first question was, your average ticket for all of fiscal 2009, taking away gas and foreign exchange, what was the decline?

So if like-for-like items were down, I think you said close to 2%, the balance would be mix.

So I'm trying to understand how much that was down, and presumably some of that was just extreme set of circumstances, hopefully up by a similar amount in fiscal 2010.

I think the average ticket, first of all, the average ticket, I think, and I've got two guys sitting here looking at some numbers, I'm pretty sure that if you take out gas and FX, the average ticket was generally in the range of plus or minus 2%.

Not dramatically different than that.

And darn close zero.

Which is pretty good given what's going on out there.

And that's including deflation of late, including regular deflation, not gas deflation.

Separate, unrelated question.

You've had great results in Asia.

I think you've said your returns are higher in Taiwan and Korea, great opening in Australia.

What's the longer term outlook for number of stores or unit openings?

How quickly could you accelerate that?

I don't have the numbers in front of me, but if I think about probably in 2008 between those three countries of Taiwan, Japan and Korea, we were maybe opening two units a year between all three countries.

This past year we opened four.

I'm not sure what we have for 2010.

Somebody is looking for that for me.

Five to six international --

I think five to six international, but that probably includes one or two in the UK.

Probably four again this year, three to four.

I would expect and plan that we would be at six to eight in the few years after that, 2011 and 2012 and 2013.

So we've stepped it up a little bit, but we're growing as we feel comfortable about.

It's also in some cases harder to find sites.

We're building up, not out, but it's still hard and expensive.

In Australia, we're thrilled about the first site and about the press we're getting over there, national press.

And I think that's part of our desire to raise the bar a little bit, but it's not like we're going to go from opening four units among the three Asian countries to 15.

I think it will be four to six to eight to 10 hopefully, or four to six to eight.

Okay.

Thanks a lot.

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

Hi, good morning.

It's Dan Binder.

I don't know if you said, but in fiscal year 2011 would you expect the expansion to pick back up to around 5%, or are there opportunities that are presenting themselves that would allow you to accelerate it from there?

Well, 5% on 500 plus is about 25 to 30.

Think it will take -- if Jim were here, as he said in our budget meeting yesterday, his goal is to figure out how to get back to 35 or 40.

We've only been to 35 or 40, I think, once.

I think we've add number with a three in front of it maybe twice or three times max.

I would expect to us get to 25 before we got to 30 on any given year.

So my guess is the 3 goes to 4 for a few years before it heads to 5, if we can ever get to 5.

Are you seeing -- as a result of this downturn are you seeing any real estate opportunities in areas of the country, particularly high density areas of the country where you're under indexed like the Northeast?

Yes, but Jeff Robin, our chairman who runs real estate, was here he would say, yes, but they're still reluctant, sellers who are reluctant at the prices that they need to have it at to sell it.

And in some cases, of course, they can afford to hold on, particularly where they say what am I going to do with my money right now anyway.

But there's more in the pipeline now.

Of course, I mentioned this a couple times.

We clearly, among warehouse clubs, our view is that any shopping center that wants to put us in their parking lot, we're going to be the one of choice to do that with.

The Paradise Valley Mall was the fifth or sixth one we've done in the past few years.

You'll see a few more of those each year in the next several years.

There are markets not only in the Northeast but greater L.A.

It's less hard, but it's still hard.

So if you look at the complexion of your growth over the next, call it year or two, based on what you know today is there a particular emphasis on one part of the country versus another?

No, I think that given that our most successful densely populated areas in our view still provide for opportunity to grow, and I think I and Jim on various calls have used the example of the greater L.A.

market.

And I talked about L.A.

as south of Santa Barbara, down to Irvine, out to San Bernardino.

So Greater L.A.

But there's a market where 10 years ago we felt, right after the merger with Price Club and Costco, I think we had somewhere in the low 30s and there might be two or three units we would close.

Today we have the low to mid-40s units, and we feel there's another 10 or 15.

Two years ago, if you asked about those 10 or 15, we'd say, God, we'd be lucky to get five of them open in the next eight or 10 years.

I think now the feeling is maybe we can get 10 or 12 open in the next eight or 10 years.

So they are still hard, but there is more available.

It's less tough but it's still tough.

Hopefully, the Northeast presents more opportunities where certainly we have a lower market penetration.

Final question.

Can you give us an idea, sort of all else being equal with FX and gas, where your leverage point is for SG&A in the coming year?

Is it still up around 4% or is your payroll and healthcare costs going to come down somewhat to bring that leverage point down?

Well, I would hope it's somewhere 4.

My guess is healthcare brings it up a little bit from there.

What we learned about five or six years ago it's just darned impossible to predict -- it's always something.

Right now the something is healthcare.

I think this tough year has made us a little better out there in the warehouse and more conscious, as good as we all think we are.

I think it helps us improve a little bit.

Is it 5 instead of 4?

I don't know.

Okay, great.

Thanks.

Your next question is from the line of Laura Champine with Cowen.

Richard, as we look at the changes, the reversal in gas prices, it's obviously going to have an impact on gross margin offset by SG&A.

Can you help us forecast next year on a net basis what we should think about in terms of margin impact from the change in gas prices assuming they basically stay where they are today?

Well, over the last year, a greatly reduced penetration of gas, I think hits you about, what, 30 basis points or 30 to 40 basis points.

If it's flat it doesn't hit you.

I think even this past year our comp gallons were 2% or 3%.

And so that 2% or 3%, I can't do -- I can do it but I can't do it right now.

If you think about it, let's say gas, as I mentioned, in Q4 was 8% of sales.

Assume the other 92% is some number.

I'm making this up, but let's say it's 11 and gas is 3.

Sometimes it's 1, sometimes it's 4, but let's say it's 3.

You can then change that.

What if total sales grow by X%, but even if you 2% -- if you had flat gas prices and 2% or 3% gallonage comp, you're still going to get some little benefit to the reported margin, but not the 30 or 40 when you saw the penetration grow from 12 to 8 over a quarter -- over a year.

Got it, thank you.

Let's take two more questions.

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

Thank you.

Richard, just really wanted to step back and just help us think about strategically, philosophically how you guys are thinking about the operating margin?

As you mentioned, there always seems to be something, and there's obviously a lot of moving pieces with gas and deflation and whatnot, but when you think about where margins are and when you look out over the next few years should we be thinking about expansion opportunities, and if that's the case what are the drivers?

As you've consistently said there are no silver bullets on the expense side, you did a little better.

Is there somewhat of a change going on there, or should we expect gross margin in the core merchandise margin to be the driver?

Thanks.

My guess is the driver is still going to be -- the goal would be the driver to be SG&A.

The reality is, is that we're toughest on ourselves, and my guess is that all things being equal for every X percent, X number of basis points, something more than half of them will come from margin improvement.

If it's an improving number.

Again, we're just settling down hopefully where those numbers went, and hopefully we'll have a little bit more consistent gas pricing so it doesn't distort it like it did.

But I think that -- I think that as I've said, and I know as Jim has said over the last year when he's spoken or has been in our office when a group of you guys come out, margins are not our problem, recognizing from your perspective, (inaudible) faster, but I believe that.

We have the ability to improve margins, but we're going to do it on our schedule and when we think it makes sense.

And I think we've shown -- keep in mind, our reported gross margin over the last six, seven years since the time we introduced the 2% reward, and again, increased penetration of that hits margin.

The 9-basis-point hit to margin this quarter implies about a 4.5% increase in sales penetration, those people get that 2% reward.

I think we're closing in on a 100-basis-pointed hit to reported gross margin over the last six or seven years.

Notwithstanding that, our margin has done okay.

So that will, A) that number, by definition, has to subside a little bit because you can't go -- there's some [asitonic] limit, but beyond that, I think we feel that we or the toughest competitor out there and we have the ability to improve a little bit as we see fit.

And we will.

I think that it's easier around here to improve your margins a little when you have strong sales in a good economy than when you have tougher sales, even though some retailers feel pressured to try to generate a little more margin, we're the opposite.

Great, thank you.

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

Hi, guys, thanks.

Wanted to drill down on the membership trends a little bit.

I know that the new membership trend is improving on a sequential basis.

Still down 3% but the trend appears to be improving.

I know a lot of it is related to stores, but there's definitely, in my view, a lag time between some of these -- the lower store openings you've had had now between where we get to 2011 and get to some of the accelerated store openings.

How should we think about new member trends going forward and what the lag time really is on that?

Well, think it's going to be although bit of a drag for next year because we're not dramatically changing our opening schedule in terms of numbers compared to the previous year.

Maybe a couple or three higher but not a lot higher.

Again, as I mentioned, if I'm sitting here a year ago, I would have said there's no way that we'd see a -- about a 4% increase per quarter, not year-over-year, but quarter over the prior quarter of new sign-ups in executive membership.

I'm taking out the UK -- I mean I'm taking out, which one did we just do, Japan?

UK.

Taking out UK.

Just existing U.S.

and Canada it's still growing faster than we anticipated.

I have to believe it's got to slow down.

If you had asked me a year ago I would have said sometime in the first half of last year it'd slowed down, and it hasn't.

Well, and also on the new member trends, can you help us -- my understanding is that also the renewal rate is obviously the bulk of where you get the revenue.

So how much revenue do you generate from these new members anyway as a percentage of, say, total membership revenue?

Well, the think about it this way.

If we've got roughly 30 million member households, and we have an 87.5% roughly renewal rate, so 30 million times 12.5% non-renewal is 3.75 million members.

That's excluding new warehouses, okay.

So somewhere 4 million, 4.5 million new members out of -- so say 4 million out of 30, about somewhere between 12% and 15% of our members are new members.

Not new warehouse members, at new warehouses, but new members signing up.

Got it.

Okay.

All right.

That's helpful.

Thanks.

Just one follow-up.

In the past you've talked about the couple of stores you're testing with food stamps.

Any update on that, and plans to expand that further?

We're doing it now, I believe in the five burroughs, and we'll, of course, do it in Manhattan when we open there in November.

I would expect to see it other places.

For us, historically we haven't done it.

If you go back, today, first of all, it's a lot easier to accept.

From the standpoint of just not slowing up the front line.

Years ago when it was paper food stamps, it was additional pieces of paper currency, if you will, you had to separate the stuff, and have two separate transactions.

Today you can run everything through, and the register, if you will, knows what's food stamp able and food stamp not able, to be purchased with food stamps, and at the end you just basically tender your food stamp card first, which is now an electronic card.

So it's -- today's technology is a lot better in terms of not slowing down the front end.

I think also our view was it's not -- we would not get a lot of food stamps because our member on average is a little more upscale.

Well, I think that was probably a little bit arrogant on our part.

I think the pressure and the encouragement that was put on to us accept it was a good one, a good piece of encouragement, and I don't know if we'll roll it out everywhere, but we're going to try it in a few other places as well.

The one good thing about it, by the way, it's not just a question do we get some additional sales from an existing member.

We're finding in a small way, but we're finding we're getting new members that didn't shop at Costco because we didn't have them.

And I would expect that some of those have chosen to move over from our competitors.

And again, it's something that we haven't had, and now we offer.

But we'll have to see.

Certainly this economy was a wake-up call.

It is not just very low end economic strata that are using these that typically don't have purchasing power.

It's a lot of people that are using this as a source of their overall consumption.

Got it.

Thanks.

Good luck with the next quarter.

Thank you.

Okay, well, thank you very much, and we'll talk to you soon.

Thank you, Julie Ann.

Thank you all for participating in today's conference call.

You may now disconnect.