好市多 (COST) 2011 Q3 法說會逐字稿

Good morning.

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

At this time I would like to welcome everyone to the third-quarter and year-to-date operating results for FY 2011.

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)

Mr.

Galanti, you may begin your conference.

Thank you, Demetris.

Good morning to everyone.

This morning's press release reviews our third-quarter 2011 operating results for the 12 weeks ended May 8.

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 12-week third-quarter operating results.

For the quarter our reported EPS came in at $0.73 a share, up 7% from last year's reported Q3 EPS of $0.68.

As I will discuss in more detail in a moment, both this year's and last year's results and the comparison of these results, each include one item of note which we outlined in the press release.

They include the following.

First, last year in Q3 our SG&A line was reduced or benefited by a $14 million pretax reversal of part of a charge related to a Canadian tax liability.

So a one-time $0.02 per share benefit was included in last year's reported earnings.

Second, this year in Q3, as you saw in the release, we had pretax LIFO charge of $49 million or $0.07 pretax or $0.07 a share.

As I indicated in the previous quarter's earnings call, inflation clearly is back and to expect LIFO charges at least for this quarter and a next, and who knows.

So the $0.73 reported Q3 EPS number includes a $0.07 per share charge for LIFO.

In Q3 last year and in fact (technical difficulty) quarters last fiscal year there were no LIFO charges.

I will speak a little more about LIFO when I review with you our gross margin in a moment.

Now we continue to benefit a bit this year in Q3 from FX tailwinds.

Foreign operations earnings results, when converted and reported into US dollars, helped us this year by a little over $14 million or $0.02 a share.

That is assuming that FX exchange rates were flat year-over-year.

With the dollar weakening relative to many of the foreign currencies in the countries in which we operate that has been a benefit to our P&L.

As I mentioned in each of the last two quarterly earnings conference calls, effective at the start of this fiscal year, back in September, we began consolidating the results of our operations of our Mexico venture.

Historically, these operations have been treated as an equity method investment, thus we only reported our 50% share of the joint venture's net income within non-operating interest income and other line item on our income statement.

Since the first quarter of this fiscal year we were required to adopt a new accounting standard, which makes it appropriate to fully consolidate the Mexico joint venture operations into our statements.

So in effect it adds about 3% the top-line sales as well as to assets and liabilities.

100% of the venture's financial statements are now included in our P&L and balance sheet and cash flow, and then the 50% portion held by our joint venture partner is backed out at the bottom of our income statement to offset it.

Such that there is no net effect to our bottom line or our earnings per share, but it does change some of the percentages.

And we will, as we have done in each of the last two quarters, point that out to you.

So that discussion of gross margin, SG&A basis points, and, of course, the interest income and other line we will talk about.

In all, as we go through these numbers we look at our Q3 results -- sales have improved, membership renewals continued strong, and new sign-ups as well.

And as I will discuss in the next 20 or so minutes, our underlying margin and expense percentage are continuing in the right direction.

Further, we have got a lot of new openings coming up planned for Q4 2011 and into fiscal 2012.

In terms of sales for the 12-week quarter, reported sales were up 16% and our 12-week reported comparable sales figure was up 12%.

For the quarter, both the sales and the comp sales were positively impacted by both gasoline price inflation and by the strengthening foreign currencies relative to the US dollar year-over-year.

On a comp sales basis the 10% US sales increased in Q3, excluding gas inflation, would have been up 6%.

The reported 18% international comp figure, assuming flat year-over-year FX rates, would have been up 11%, so in local currencies our foreign operations were up 11% on a comp basis.

And total company comps -- again we reported at 12%, but excluding those two items, gas inflation and excluding FX changes, they would have been up 7% for the Company overall in the quarter.

Other topics of interest I will review -- our opening activities and plans.

We opened one new location in Q3 that is in Tucson, Arizona.

Actually our third Tucson location.

We also had two temporarily closed locations occur in Q3 due to the Japan earthquake.

One in Makuhari reopened last week on May 20 and the other in Tamasaki, which was more heavily damaged, which is scheduled to reopen in the first fiscal quarter of fiscal 2012 this fall.

In Q4 we expect to open a total of 12 locations, including the Makuhari reopening and one relocation.

At Q3 end we operated 580 locations worldwide.

Assuming our Q4 openings go as planned, we will end fiscal year 2011 with 592 locations worldwide, up 20 from the beginning of the fiscal year.

Also this morning I will talk about our expansion plans for 2012 a little bit; our online results; our membership; a little bit of discussion, of course, about margins and SG&A, which many of you have already prewritten about those are things that you guys want to know as well; an update on our stock buyback activities; and, of course, we recently announced a dividend increase and a new stock repurchase authorization going forward for the next 4 years.

So on to the discussion of the results.

Sales for the quarter again were $20.2 billion, up 16% from last year's $17.4 billion.

Again comps on a reported basis were up 12%.

The 12% third-quarter comp, while not an exact month to month, but on our monthly reports of February, March, and April we had an 8% in February, a 13% in March, and a 12% in April in terms of comp sales.

So the 8%, 13%, and 12%, excluding gas inflation and FX, would have been a 5%, 8%, and 7%.

So March and April higher than previous recent months and previous recent quarters by a couple, 3 percentage points.

The 12% reported comp was positively impacted by a little over 1.5% due to year-over-year strengthening of foreign currencies.

And as I mentioned, our international comps -- just looking at international, not total company -- the FX impact was (technical difficulty).

Reported 18% would have been an 11% on a local currency basis.

Gasoline had a big impact, not on only on sales of force but on the percentages that we calculate for margin and SG&A and the like.

Again, I will talk about that in a minute.

For the quarter, our 12% reported comp results were a combination of an average transaction increase of just under 7% for the quarter and an average frequency increase of nearly 5%.

The frequency trend during the past 3 months of February, March, and April plus 4%, plus 5%, plus 4%.

These frequency figures, by the way, are on top of a little more than 3.5% frequency increase during the third quarter a year ago.

I think part of it is the continuing focus on our strength in food and sundries and fresh foods, as well as gasoline.

Not in terms of the inflation, but the fact that because of the high gas prices and it's very much a top-of-mind we are seeing a lot more [gallonage] comp increase as well.

Not just price increases, but gallonage comps.

Our gallonage comps in Q3 were up 16%, that compares to the low to mid single-digit typical numbers that we have seen in prior good times.

In terms of sales comparisons by geographic region, for the quarter California, Midwest, Southeast, and Texas were the strongest.

Internationally in local currencies, again we have continued to do quite well, up in the low double digits in local currencies.

Korea and Japan were the strongest and UK showing some good life.

As you know, UK in local currency for the last couple of years has been positive but just slightly positive.

It was up 6% in local currency in the third quarter.

And Canada's comp sales figures in local currency continued strong.

Their economy has been quite robust the last couple years and after an 8% local currency comp in all of fiscal year 2010 we have seen 5%, 8% in the last three quarters in 2011.

So Canada has been a good economy for us.

In terms of merchandise categories for the quarter, within food and sundries every subcategory but tobacco was positive in Q3.

The positive subcategories ranging from a plus 5% to a plus 16%.

Within the 2.5% hardlines comp the strongest subcategories were sporting goods, HABA, health and beauty aids, lawn and garden, and tires.

Electronics being the laggard, as we have talked about [in the report].

Typically in electronics you are seeing up units and depreciating average selling prices.

Within the softlines comp, which is in the high single digits, housewares, small electrics, and jewelry were standouts.

And within fresh foods positive low double digits.

All sub fresh food categories were positive, each in the high single digit to low teens comp range.

I mentioned that Japan was one of the stronger foreign local currency comp sales countries.

We are constantly asked questions, get questions from you guys and others about what is going on there since the tragedy in early March.

As you know, our Japan operations -- we opened our first location in April of 1999 and we opened our ninth location in July of 2009.

So on March 11 when the major earthquake hit followed by, of course, the tsunami and the aftershocks and all the other issues going on we had 9 locations in operation.

Tragically, 2 members were killed when a parking ramp collapsed at Tamasaki warehouse.

With the earthquake 2 locations were ultimately closed for repair, one of which I mentioned has since reopened last week, Makuhari.

The other one, Tamasaki, which was the more heavily damaged one, was planned to reopen in November.

In addition, 4 additional Japan locations, new locations are planned to be open between now and November.

So hopefully, God willing, by the end of November we will have 13 locations operating in Japan.

Two of those, by the way, were delayed from the July/August time frame given the earthquake and the issues with supply of certain construction items.

Japan has certainly been a growing, profitable, significant per warehouse membership base operation for us.

The recent tragedy that has struck Japan and its people -- despite its tragedy we have been able to continue the flow of product.

I think in some cases as well, if not better, than some retailers in the country because of our ability to get in containers and distribute through that process.

I am proud to say that during the -- subsequent to the tragedy, as we have done in a couple of other things around the world, I am sure many other companies do this as well, we used to the benefit of our members through the cash register to make donations to the Japan relief effort.

In over just a couple of week period we, through our members, raised a little over $5 million that was passed on to the various in-country Red Cross or Red Crescent societies and designated for Japan relief efforts.

Lastly, we are asked about the issue's impact financial on the Company or Costco.

Very minor reserves taken for losses associated with the earthquake.

Those, of course -- the reserves we have taken are net of anticipated insurance coverage and they were not significant.

Moving on to the income statement line items.

In Q3 our membership was 435 million, up 10% or up $40 million from $395 million a year ago.

That represented year-over-year percentage wise an 11 basis point decline as a percent of sales.

Excluding FX -- again the weak dollar has made all the foreign countries' numbers bigger.

Instead of being up 10% and $40 million, it was up 9% and $33 million on a local currency basis.

Of course, the percentage would be the same 11 basis points down.

As you will see, the 9% dollar increase is a result of what I will show you in a minute, the continued strong renewals and strong new sign-ups during the quarter.

At year-end -- I am sorry, at Q3 end we had 24.3 million Gold Star members, up from 23.9 million at the previous quarter end.

We had 6.3 million primary business members rounding to the same number from a quarter ago.

We had just under 3.9 million business add-ons.

Total of 34.4 million households and, including spouse cards, 62.6 million, up from the previous quarter at 62.0 million.

At third quarter end on May 8, our paid executive member base was a little more than 11.3 million, an increase of about 350,000 or 3% from 12 weeks prior a Q2 end.

So on a weekly basis we increased the executive member roles by 29,000 a week.

We consider those quite good results in terms of continuing to convert people to the membership which, needless to say, they tend to on average by more and are more loyal.

Executive members represent roughly a third of our worldwide membership base and about two-thirds of our sales.

In terms of membership renewal rates, at Q3 end business renewal rate was 93.2%, up a couple of tenths from Q2 end.

Gold star 88.0%, up about 3/10 of a percent from Q2 end at 87.7%.

So total was an 89.1%, up from an 88.8% at Q2 end.

The last couple of quarters we have -- these numbers historically had always been US and Canada because the newer foreign countries you have much lower rates to start with in the first few years.

Worldwide our number at Q3 end was 86.0%, up 2/10 from 85.8% at the Q2 end.

Last point with regard to memberships, effective with our mailing to the March renewers, we increased our business add-on annual fee in the US and Canada from $40 to $50.

Historically, a primary business member was $50 and they could have, I believe, up to 6 add-on members -- typically employees, family members, whatever.

Separate memberships, but under the primary business membership.

Historically those were $10 less, or $40 compared to the normal $50.

Again, starting with the March renewers over the course from March to next February with renewal notices those add-ons will be $50 instead of $40.

No issue relating to the first couple of months of that in terms any major issues with our members.

There are about -- of the 3.4 million or whatever number I gave you on the business add-ons -- I am sorry 3.9 million -- 2.6 million add-ons are in the US and Canada.

So roughly a little over $25 million in increased annual fees.

Please note that this increase will flow into the income statement over about a 23-month period beginning in March of this year.

I will give you a quick example.

Just doing (technical difficulty) assuming the 2.6 million were roughly [1/12] a month, that is a little over 200,000.

But if you assumed that there were -- 200,000 add-ons were March renewers.

So in February they got their renewal notice and assuming that they all paid their $10 increase in March, this incremental $2 million would flow into the fee income line essentially [1/12] a month for 12 months starting in March through next February.

With an approximate 200,000 April renewers, the same thing.

That incremental $2 million will flow in over a 12-month period beginning in April through the following March and so on.

This is due, of course, to our deferred revenue recognition accounting for membership fees.

So a very, very nominal amount of the Q3 membership fees, essentially 1/12 or so, or 1/12 or 2/12 or so of the March renewers and 1/12 of the April.

It's not a big deal, so far.

Going down the gross margin line, reporting gross margin last year in that quarter was at 10.88%.

This year it was 10.50%, so on a reported basis down 38 basis points.

I will ask you to do our little matrix with 4 columns.

The columns will be Q1 2011, Q2 2011, Q3 2011, and the last column will be Q3 2011 adjusted for gas inflation, so without gas inflation.

And that column simply reduces the sales denominator.

Not buy any gallonage improvement, but by just taking last year's third-quarter average gasoline price per gallon that we sold it at and assuming that was the price per gallon we sold it at for this fiscal year.

As you can see -- and so I will go through with the line items.

The first would be merchandising core, second ancillary businesses, third 2% reward, fourth LIFO, fifth line item is total.

And I will add two additional line items -- the impact that Mexico had on our margin and, as you will see in a minute, our SG&A, and then the last line item would be without Mexico.

So going across, our merchandising core in Q1 2011 year-over-year was up 19 basis points, in Q2 2011 up 24, in Q3 2011 down 14, in Q3 2011 adjusted for gas inflation -- excluding gas inflation, up 17.

Ancillary minus 9, minus 5, minus 3 in Q3 2011, and plus 2 without gas inflation.

2% reward minus 1, minus 1, plus 3, and zero.

LIFO zero, minus 3, minus 24, and minus 25.

You might ask why there is another basis point in the last column versus the next to last column, it's simply because the denominator of sales has been reduced because we took out gas inflation.

So all told, the reported gross margin year-over-year in Q1 2011 versus Q1 2010 was up 9 basis points, in Q2 2011 up 15 year-over-year, in Q3 2011 on a reported basis down 38, and again adjusted down 6.

Mexico, again as we have consolidated these numbers and by definition since these are pluses here, the gross margin is a little bit higher -- plus 3 basis points, plus 6, plus 3, and plus 3.

And without Mexico the plus 9 would have been a plus 6 therefore, the plus 15 in Q2 reported would have been a plus 9 excluding Mexico's benefit, the minus 38 would be a minus 41, and the minus 6 would have been a minus 9.

Now keep in mind, without inflation the minus 6 or the minus 9, the reported minus 6, still includes the hit of 25 basis points related to LIFO charge.

So as you can see, our overall reported gross margin was lower by 38.

Again, the big impact was the -- the two big impacts were the gas price inflation and the $49 million LIFO charge, so let me get through those.

Within the 38 basis point reported figure our core merchandising gross margin was minus 14 and ancillary businesses, as I mentioned, was minus 3.

Our gas business at its currently higher level of price inflation it really impacts these margin comparisons.

Sales penetration of our higher-margin core business was down over 2 percentage points in Q3 from a little under 81% a year ago to 78% -- a little over 78% -- whereas sales penetration of our ancillary businesses was up 2.6 percentage points.

And within that 2.6 in fact gasoline was a 3 percentage points.

So while stand-alone gross margins of our core merchandise business -- and I talk about core as being food and sundries, hardlines, soft lines, and fresh foods -- they were higher year-over-year Q3 by 19 basis points.

The core's aggregate lower sales penetration, however, caused the year-over-year increases to show this minus 14 that you see in the chart.

So in the underlying businesses the margins are doing fine and we are up 19 basis points year-over-year in the quarter.

That is food and sundries -- margins on food and sundries sales, hardlines margins on hardlines sales, softlines, and fresh foods as well.

The merchandise category gross margin increases year-over-year in Q3 were strongest in hardlines followed by food and sundries.

Fresh foods margins were up slightly in Q3 compared to these being down slightly in Q2 year-over-year.

All-in-all I think a continued good showing in our core gross margin.

The impact of our executive membership showed a benefit of 3 basis points that would reflect a slightly declining sales penetration of rewardable sales.

Again it's gas.

With the gas price inflation, gas, tobacco, and alcohol are non-rewardable items.

Given that gasoline sales penetration is up dramatically in the quarter and the year-over-year, that has caused that impact.

In terms of LIFO, as I mentioned a quarter ago in early March in the earnings conference call, inflation is clearly back and we did expect and now did realize more in Q3.

We saw quite a bit of inflationary pricing pressures, again beginning in late Q2 and into Q3, and we are seeing some more in Q4 so far.

One possible caveat to the LIFO charge in Q4, keep in mind the $49 million Q3 charge included about $11 million from gasoline price inflation alone.

Since Q3 end gasoline prices have come down the last couple of weeks, but that certainly does not -- certainly we have no way of knowing what tomorrow's inflation or deflation will be.

Also, as I have mentioned before and as I am sure you guys all know with regard to LIFO, you guys all know it's a book charge to our cost of sales.

And in fact, results in positive cash flow savings through the reduced income taxes as the Company is on a tax LIFO basis.

So now, after taking all this margin information into account, I think the easiest way to summarize Q3 2011 over Q3 2010 gross margin is by looking at the right-most column of the matrix we just drew.

Excluding gas price inflation, year-over-year in Q3 our core merchandising gross margin ex-LIFO was up 17 basis points and so those trends so far have been, in our view, pretty good.

Moving to the reported SG&A.

Our SG&A percentage year-over-year was lower or better by 43 basis points coming in at 9.86% of sales compared to 10.29% a year ago.

Again, the same impact; you have got a much bigger than average denominator in terms sales that is impacted by gas price inflation more than anything.

In terms of -- let me give you your chart here.

Again 4 columns, the same 4 columns -- Q1 2011, Q2 2011, Q3 2011, and Q3 2011 without gas inflation.

The line items are core operations central, stock compensation, quarterly adjustments, total, and the two lines below the total, the impact of Mexico and then the total without that impact.

Going across -- and plus members here are good meaning lower year-over-year SG&A basis points.

In terms of core operations, in Q1 2011 year-over-year it was plus 17 basis points, in Q2 plus 13, in Q3 plus 46.

Excluding gas inflation it was plus 20, so still better by 20 but I think that is a fairer way to look at it than the plus 46.

Central; plus 1, minus 2, plus 3, and plus 1.

Stock compensation; plus 1, plus 1, plus 2, plus 1.

Quarterly adjustments; zero, plus 12, minus 8, and minus 8.

Again, that minus 8 is the $14 million reversal of a Canadian tax liability a year ago with no compensating benefit to this year's SG&A.

So total reported year-over-year SG&A comparison, plus 19 or lower by 19 in Q1 year-over-year, plus 24 in Q2, plus 43 in Q3, and adjusted for gasoline inflation plus 13.

Mexico had -- again like with margin it has lower SG&A percentages than our company overall, so now that we are consolidating that helps those reported numbers I just mentioned.

The Mexico impact was plus 7, plus 11, plus 6, and plus 7.

So again without Mexico impact; plus 12, plus 13, plus 37, and plus 6.

A little editorial on these numbers.

Again, in terms of Q3 2011 column, with gas inflation, again it was a reported 43 basis point improvement.

I think a more meaningful way to look at this is to look at the Q3 SG&A in the last column without gas inflation.

When looking at this column you can see the following.

Again, core operations was lower or better by 20 basis points year-over-year.

I might add that both payroll and healthcare costs as a percent of sales contributed to this improvement.

11% -- 11 basis points of the 20 basis points was at warehouse payroll percentage and 4 basis points was an improved FX percentage, which I think is the first time that we have had an underlying improvement there.

Still growing at a decent amount, but so are top-line sales even excluding gas inflation.

Our central expense was lower year-over-year, better by 1 basis point, as was stock compensation.

Not a whole lot to explain there.

Quarterly adjustment I mentioned to you, so overall again we think a pretty good performance in SG&A trend wise.

We continue to work hard and we are seeing some of the fruits of focusing even more so on SG&A.

Sales certainly help as well, of course.

Next, on the income statement is preopening expense.

Preopening expense last year was $3 million.

This year was $8 million, so 2 basis points higher.

We only had one opening in each of the quarters.

The big difference -- really there is no surprises.

The big difference, the big dollar delta, if you will, year-over-year was about $4 million in international preopening costs in this year's Q3.

Those are for openings scheduled in either Q4 or Q1 and, as I mentioned, we have got the -- we had a couple of delays that we (technical difficulty) the rest of Japan -- the fall as well as two additional ones that were planned for the fall.

So those four alone we are seeing the preopening costs, particularly those first two that were delayed in that quarter.

I mentioned we have got a number of locations, a much larger number of locations planned for Q4 and into Q1 of 2012 and I will point that out in a moment.

In terms of provision for asset impairment and closing costs, last year we had charges totaling $3 million for the quarter compared to a charge of $1 million this year.

Not a big [thing].

All told, operating income in Q3 was up $66 million or 13% from $490 million last year in the quarter to $556 million this year.

Recall -- please remember that the $66 million operating income increase was impacted by the $14 million expense reversal last year that benefited last year's Q3 earnings and by the $49 million LIFO charge this year that reduced this year's Q3 operating earnings.

Below the operating income line, reported interest expense was essentially the same year-over-year coming in at $27 million.

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

$900 million of that debt, by the way, will be -- was 5-year debt and will become due in March of 2012.

We will basically cut a check for it and see the earnings improvement from reducing interest expense to a greater level than improving -- than causing us to reduce interest income from use of that cash.

Interest income and other was lower year-over-year by $5 million.

$5 million this year of a number on the line item versus $10 million a year ago, so lower by $5 million.

Actual interest income was higher this year in Q3 by about $6 million, a reflection of both higher cash balances and a little higher interest rate as we had actually locked in some still safe, but higher than darn near zero, interest income rates in preparation for paying that March debt payment.

Offsetting this positive variance of $6 million in the actual interest income was an $11 million variance related primarily to the consolidation of Mexico's investment income in our financial statements.

In the current year, as I mentioned, 100% of Mexico's results are fully consolidated into each line item of our income statement.

Previously, like last year, the joint venture partner's 50% share was just added to interest income and others.

So last year you had the benefit of half the earnings of Costco Mexico's quarterly earnings.

This year you have no benefit there and it's spread out everywhere else.

So overall, pretax income was up 13% on a reported basis from $474 million last year to $534 million.

Again, the two impacts that I won't repeat that were in the press release.

You can look at those as well.

On to our income tax rate.

Our company tax rate this order came in at 36.1% versus 34.5% last year, so about 1.6 percentage points higher year-over-year in the quarter.

Last year's tax rate actually, as I mentioned last year, had a couple of positive discrete items that helped lower the rate a bit.

This year there are a couple of negative discrete items that hit it or increased our effective tax rate it.

No big deal either way; it happens every quarter.

But again, a higher tax rate this year than compared to last.

A quick rundown of other topics.

The balance sheet, along with some other pertinent information, will be in the supplement that is posted, will be posted shortly after the call.

We have, as you know, quite a strong balance sheet.

Some of you always ask, since we don't include the cash flow statement until the 10-Q, what depreciation and amortization was for Q3.

In Q3 it was $196 million and year-to-date through Q3 depreciation and amortization was $582 million.

Another metric that many of us and you look at are accounts payable as a percent of inventories, how much of our trade payables are being funded by -- how much of our inventories are being funded by trade payables.

On a reported basis the number is over 100%.

In Q3 it was 106% compared to 108% a year ago.

In that payable though is not just merchandise payables.

It also includes construction payables.

And again we have got 10 -- 12 or so openings coming in the next quarter so there is, as you might expect, quite a bit of table in there.

If you take out that and just look at merchandise payables and merchandise inventories, the number a year ago was 90% of our inventories would be funded with trade payables, up 1% to 91% in Q3 of this year.

Average inventory per warehouse; last year at Q3 end it was $10.366 million at warehouse.

This year at Q3 end it was $11 million, right at $11 million, so up about $640,000 or 6%.

Again, that number is impacted greatly by the FX.

If you had FX -- assumed FX with no impact from a year ago, the same currency from a year ago, that $642,000 per warehouse higher figure would be [388] or about 3.8% higher year-over-year.

The increase is, of course, spread through many merchandise categories.

There was no one category.

It ranged from $20,000 to $60,000 per subcategory.

Some of that is inflation, some of that is a little higher inventory, but really no inventory concerns on our part.

In terms of CapEx, in Q3 we spent $139 million last year.

In Q3 this year we spent $278 million.

Year-to-date $818 million, but again we have got a bunch of stuff coming up right as we speak.

I would estimate that our CapEx for the year will be somewhere between $1.3 billion and $1.4 billion range.

Cost below the line for Q3; sales and profits were up over last year.

Sales were up 11% and e-commerce profits were up 31% for the quarter.

While our average ticket has come down, recognizing we are known for higher average tickets, higher average ticket merchandise on there.

Our site traffic continues to grow and was actually was 17% in the third quarter year-over-year.

Next on the discussion, expansion.

This year looks like we will open a net of 20, but we will have opened 23.

And that includes 3 relocations.

I believe it includes 2 relocations and then the reopening of the Makuhari, which we closed and then reopened prior to this fiscal year-end of course.

So a net of 20 net new units.

Adding 20 units on the original base at the beginning of the year of 572, that is about 3.5% unit growth.

So closer probably to 4% square footage growth given that the new units tend to be a little bigger and we constantly are doing remodels and relocations with existing units as well.

Our square footage total at Q3 end was 82,916,000.

Some of you asked for that number.

In terms of expansion plan for '12, we are still four or so months from even the beginning of the fiscal year.

There are currently 30 active projects on the current construction list.

My guess is that figure for '12 will ultimately be around 25 plus, including a little under half, about 12 or so outside of North America.

So continuing to ramp up in other countries where we have been pretty successful overseas.

In terms of stock repurchases, since June of '05, then through third-quarter end, we have purchased, repurchased 104 million shares at an average price of $55.02 or $5.7 billion.

As you know, and I guess a month ago, we had a press release announcing both an increase in our quarterly dividend rate, which we typically have done every spring.

As well, we had a small amount of stock repurchase authorization that was going to expire in July.

Basically that additional authorization was canceled and a new $4 billion Board repurchase authorization was put in place with a four-year life to it.

In the first quarter of this year, we bought back $150 million in stock, in the second quarter $94 million and in the third quarter $102 million and we would expect to continue to do so.

We will let you know each quarter.

With that, I did mention the dividend increase.

We increased it on an annual basis from $0.82 a share annually or $0.205 a quarter.

We increased it 17% effective with the current quarterly dividend of $0.96 or $0.24 per share per quarter.

With that, I am going to turn it back over to Demetrius and happy to open it up for questions.

Thank you.

(Operator Instructions) Adrianne Shapira, Goldman Sachs.

Thank you.

Richard, just if you could talk a little bit about the inflation, what it was in the quarter, how you are seeing that, what you expect going forward and how we should be thinking about future LIFO charges?

It seems like this quarter, we had sort of a pretty big step-up and I am just wondering how we should be thinking about it going forward?

First of all, keep in mind LIFO is a US accounting phenomenon and we have got a little over $4 billion of US inventory.

So $49 million rough number would be about 1.2%, I am rounding here, inflation from the beginning to the end of the fiscal quarter.

Mind you also that this is an annual event, so in reality the calculation will be done -- what was your inventory at cost at the beginning of the year by item and then what is it at the end of the fiscal year.

If you are early in the year, you are supposed to guess as best you can what you think it's going to be.

We have always chosen, historically chosen to take the entire amount that occurred in that quarter.

And, of course, a lot of these big increases came in the last 12 to 16 weeks.

Just examples -- and I am not going to give brand names, but these are all branded items.

Everything from dry dog food of 3.5% to all your detergents of 10%-plus, to various waters 10%-or-so, to all your plastic dinnerware, your plates and your plastic cups and everything, 8% and 9%.

Plastic trash bags 4% on top of other ones.

So again, you can't just say everything is up 4% to 10% because there is -- sometimes the private label this a little less because of our buying power.

But the reality is these are hitting on -- it doesn't rain just on us.

My guess is it's impacting us a little sooner because we turn our inventory faster so we are buying more recent, if you will.

Mind you, we are able to pass on these increases.

Ultimately, we all have to.

We are going to try to keep -- if a manufacturer typically will say, okay, next Monday there is a price increase or a week from Monday.

We will allow you to buy 4 or 6 or so many weeks at the old price based on your prior 6 months of average weekly purchases, we are always going to take full advantage of that which I assume most retailers, be it supermarkets or other big discount stores, are going to take advantage of.

We feel that we always know we take full advantage of it.

Then we will hold the price for a few of those weeks and benefit on the tail end of it and cover our costs.

But we are going to hold the prices as long as we can.

I have given you in the past quarters a couple of examples where we will hold it even further and eat into our margin.

But again those are the exception, not the norm.

Ultimately, when all your merchandise is going up you are going to have to A) be competitive, but I think you have seen and my readings of some of your guys' reports out there on the supermarkets and the discount stores that ultimately it has to be passed on.

There is still a lot of vendors announcing increases to retailers.

I think there was an article in the journal just a couple of weeks ago that cited 4 or 5 well-known consumer product brand names where their comments -- or maybe it was an analyst report.

But their comments in the last couple of months of what they are announcing.

Again, they are announcing, they are not asking all the time.

But we, of course, have to be very ever diligent -- and Jim and Craig and Doug are constantly reminding the buyers don't just take it for face value.

Push, push, and push, and be willing to switch some times.

And so overall, inflation is hitting everybody.

It's going to continue, at least it's continuing so far this fiscal quarter.

I can't tell you what it's going to be starting next Thursday other than there are some pending price increase announcements from -- including some of the ones I just mentioned that are effective in early and mid-June all the way out until then.

And so those are pushing it.

I think yesterday we saw publicly there was -- one of the coffee suppliers announced 11% increases in wholesale coffee prices to their retail customers, their retail vendors, their retailers.

And that was the fourth increase in coffee that they have passed on in the last 12 months.

So it's here.

When will it subside?

Hopefully soon.

But we are going to -- we probably get hit first I think back in Q4 of 2008 when we had a big LIFO charge when the floodgates of inflation had opened before they were shuttered quickly in 2008 with the economy and the stock market.

I think again then too we were one of the first ones to have a big LIFO charge.

I don't think you are going to be surprised -- I am not going to be surprised by seeing what other retailers on LIFO are going to do over the next several months when they announce various numbers.

But it is what it is.

We are fighting, as you might expect, to keep them lower, keep them delayed, and get as much at the old price as we can before it goes up.

And we will go from there.

One other -- I think I mentioned, maybe I didn't mention it.

One small caveat in terms of LIFO outlook for the quarter.

Again, we can't predict what exactly it was going to be.

In the first couple of weeks gas prices have come down, so whereas gas alone in the $49 million charge was a little over $11 million in the last couple of weeks it would probably be $1 million, $1.5 million reduced.

Not promising; even zero would be nice, frankly, out of whatever X is in Q4 but we will see.

Okay, Richard.

Just following on that, in light of the fact that we might see continued increases, any sense -- the $49 million in LIFO charges does it anticipate continued price increases?

Well, the $349 million charge is simply the calculation of our LIFO inventory as of the beginning of Q3 and the end of Q3.

Period, end of story.

I am sorry, fiscal year end.

But it's the incremental amount.

We had an amount at Q2 end which was going to $6 million which had it through that -- from the beginning of the year to that.

So it's really the delta since Q2 end for the most part.

Again, as I understand it now -- our controller, Dave Petterson is here and will shake his head yes or no if I am wrong.

He will shake it no.

But my understanding is that, let's say we were just reporting our first fiscal quarter and we had this calculation that indicated it's $49 million.

If we believed and if we talked to our buyers and felt that, you know what, pretty much the inflation party is over from the vendor's perspective and we are not seeing -- we have seen a lot but the rate of increase has slowed down, we could correctly choose to take less of it.

Because if we -- our anticipation was, hey, we know through the first 12 weeks of our fiscal year it was $49 million and our best guess is it's going to be, and I am making this number up, $80 million for the whole year -- a totally made-up number -- then you might only choose to take a quarter of the $80 million because you think it's going to be $80 million.

Our view is that it is what it is.

We are also in the third quarter not the first quarter, and we are going to be, I think, taking a conservative approach to it.

I can tell you again that our price increases that have not hit yet our balance sheet, including some ones in later May and in June that I mentioned some of those just a few minutes ago.

Okay, that is helpful.

Then just if we could talk a little bit about the merchandise margin.

You gave us a lot of detail and I am just wondering since you are lapping by the easiest compare from a year ago the down 11 -- I am sorry down 10 basis points on your merchandise margin, how should we be thinking about that plus gas?

I mean the plus 17, given the fact that Q2 had sort of -- Q2 last year was up against a tougher compare and then it decelerated to down 10, given that you had an easier compare, I am just wondering how we should put the plus 17 in context up against that easy compare.

And what maybe an apples-to-apples comparison is year-over-year ex-gas from a year ago?

You know, Adrianne, it's hard to say.

Who the heck knows what is gas.

I read a research report yesterday from someone who follows not only us but (technical difficulty) who also have a lot of gas stations.

Their view was, I think correctly so, that with a declining gas price it's more profitable.

You guys know that from what we have said in the past.

That will help a little.

It will also help because there will be lower sales penetration from gas inflation.

But again, I think the trend over -- I don't have in front of me last year's exact numbers but the trend in the last couple of quarters has been that the underlying core margins have been up.

I can't predict what tomorrow is going to bring.

Okay, thank you.

Colin McGranahan, Bernstein.

Good morning, thank you.

First question just on the increase in the business add-on membership fee.

Richard, can you talk about what the rationale for that was and how that is maybe influencing your thinking about an overall membership fee increase?

I know there had been some off and on discussions over time.

I think originally the focus on the add-on fee being $10 lower was simply for small businesses who have got two or three family owners or a handful of employees it could be a benefit to them.

We wanted to incent, in some cases, perhaps that owner of that business to buy memberships for their employees.

Over time two things have happened, particularly in the last few years.

If you wanted to be an executive member and get the executive member benefits, you would roll out from under that primary business member and become your own member and you would go effectively from $40 to $100.

And so that has happened over time, that trend has continued.

And I think the view at the end of the day was that we have got a loyal membership base.

We think that we have continued to provide even greater value that every time -- and I know this sounds a little noble, but we sincerely believe that when we have increased fees in the past, and this time as well, that we have created more, significantly more value than that increase.

At the end of the day, as you know, we keep things simple.

It's simpler to have a $50 instead of a $50 and a $40, so it evolved into the $50.

I don't think there was a lot of science that went into it other than that ongoing discussion, the ongoing trend towards some of those people moving out of -- out from underneath anyway to become their own executive member.

In terms of the rationale going forward, I think what I said in last fiscal quarter, you guys will know after we send out the first month of renewal notices that has an increase in it.

We have not made that decision.

We have shown over 25 years that we are not afraid to.

We have shown -- I have communicated to you time and again that our renewal rates continue to be quite strong.

We are not completely, terribly concerned about what our members -- what our competitors' fee levels are, but we are also cognizant of what the economy is right now and we are not going to be completely arrogant out there.

So at some point we will see and stay tuned.

Okay, that is helpful.

Then a second question kind of a little bit different given that we get the segment data on a lag basis in the Q.

But if you look at the last couple of quarters, the last 3, 4 quarters, there has been fairly dramatic improvement in the profitability of other international.

Up 100, 90, 200; pretty nice improvement in Canada and really no improvement in the US.

Can you comment on what is driving the significant improvement in the other international and Canada, which are already dramatically more profitable than the US?

Well, every country has a little bit of a different story.

On average, forgetting about some of our metrics -- looking at the overall metrics of your basic core items, in Canada we are the only club operator.

In the US we have dramatic competition in many of our markets.

That is going to be some amount of basis points, more than 50 and less than 200 depending on where and how close, but it can be significant.

You have a -- the other line item components that are different that can be significantly different as a percent of sales is payroll.

Even though we are always going to pay relatively higher in a given country, the average wage in the US is approaching $20 and another country it might be $9 or $12 or $15 or $8.

And it really is in those kind of ranges.

Conversely, healthcare is the other big one.

Healthcare in the US -- for the last several years as I have talked about healthcare I have talked about US healthcare which is dramatically higher than any other country that we are in and grows at a dramatically higher rate than anywhere we are in.

The other thing, of course, is comps.

Canada, as I mentioned, underlying local currency comps in the last 2 years now, 2.5 years throughout this horrible economy in the US has been pretty robust up there.

They didn't have the craziness of the market breakdown and melt down.

Certainly they have enjoyed a pretty robust economy.

So mid to high single digit local currency comps have helped up there as well.

In Asia and other countries, I think part of it is Asia is a bigger and bigger component of other international.

And as I mentioned also on this call, our comps in local currency in the UK actually showed some life this past quarter, of 6.

It had been quite a bit closer to flat the last couple of years.

And that was a bigger piece of other international as we have gone from zero to 23 units in the 3 Asian countries, which on average are a higher-margin, more profitable -- higher sales volume, more profitable businesses for us.

And so now why is then the US coming down?

Look at our comps over the last few years.

Well, not withstanding they have been quite a bit better of late and somewhat better over the last year versus the prior year or two.

We have enjoyed for a number of years high volume, decent comp US numbers and they got hit for a while.

Again, they are coming back a little.

But certainly we recognize too that our growth and profitability over the next few years, while it will continue to come from some of this improvement and critical mass in countries where we are expanding now, the bigger piece of this ship is the 73% or 74% or whatever percentage it is of our company that is US.

We are working on it, and, as Jim and Craig would tell you, top-line sales growth is the best thing you can do for it.

Okay, great.

Thank you.

Dan Binder, Jefferies.

Richard, just wanted to clarify a point on this LIFO charge.

If I understood you correctly, you are saying that you are basing your LIFO charge in the quarter on where you think your inventory is going to be at the end of the year and the inflation that you are seeing to date.

So is it fair to say that you have not factored in price increases that you know are coming next quarter?

And if that is the case, based on what you know today, very round numbers, what should we be thinking about for a LIFO charge in Q4?

On the latter part of that question, we don't know.

But keep in mind we booked the entire calculation on Q3 in Q3 because we are nearing the end of the year.

We could have probably saved a little if we -- well, I doubt we would have saved anything because knowing what we know for some pending price increases in the first -- mind you, you are not getting price increases on 4,000 items but all you need is 10 or 15 of these big items and you know you are going to have some.

It's a wait and see.

I really can't tell you because we don't know.

Okay.

But I mean it's fair to say that the LIFO charge we saw this quarter is incorporating -- is it incorporating all price changes that you are aware of or just the ones --?

Just the ones that have happened.

So, yes, we are aware of price changes that will be a hit to LIFO -- an increase in LIFO in Q4, but I am looking at just outside of the equation.

I am looking at other things, be them few, that have come down a little and what else was going to happen.

If you had a big increase in some key items throughout Q3, even if there has been a few increases over the course of the year, you may be at the end of that so you are not going to have any increase in Q4.

Gas, again, was over 20% of Q3.

I only have 2 weeks of history and I can't predict from that, but so far gas is less than zero.

Just two other quick questions.

In terms of the buyback, what do you think is a reasonable number or goal to shoot for on an annual basis, given your balance sheet and cash flow?

And is there any chance you would refi that debt that is coming up in March of 2012?

Well, I don't anticipate refinancing the debt.

I expect to write a check for $900 million in semi-annual interest expense payment in March of 2012 and save 5%-plus interest with darn near, a little over zero percent interest income that is reduced.

So that is a no-brainer.

We have got plenty of cash.

Some of you would like to see us ramp it up more.

We feel we have done pretty well by kind of, on a regular basis, as long as we feel good about our future, which we have and we continue to, we will be a regular buyer.

As you guys know, the stock has moved very rapidly.

We historically have -- in the last few years have bought through blackouts using 10b5-1s.

Sometimes, given the stock price speed at which it moves, it moves past that little matrix that we have in place and we might not buy for a week or two.

But at the end of the day we are going to continue to buy.

I can't predict what it is.

I can tell you that the Board authorized $4 billion with a 4-year life and that is as good a guess as anything in terms of simple math.

Okay, thanks.

Robbie Ohmes, Bank of America.

Just a few quick follow-ups.

One was just on the -- in the areas where you have seen some price increases, I think one of your regional competitors had mentioned things like acceleration of private label and trade down to smaller pack sizes.

Can you just comment on any sort of behavioral changes you have seen in your customer related to that, if any?

And then the other question was just the March/April acceleration is it just increased traffic from your gas station supporting that or is there something else going on that is causing the acceleration?

Thanks.

Well, traffic is certainly a big part of it, but the average ticket, net of inflation and net of everything else, is a flat to up slightly.

I think it has overall improved a little.

The net number has improved but we try to give you as much information as we have ourselves on that.

It's continuing, so far so good.

I hope the last two months portend what the next few is, but we won't know until we get there.

We continue to see private label increase sales penetration, partly because we keep adding items.

Starting last fall we began, as an example, expand label into some canned goods, fruits and vegetables, where the quality -- the amount of water in the can is lower, the quality is a little better in our view.

It's a higher end at a great price.

And that helps that penetration.

I think if you go back to late calendar 2008 when the stock market went to hell and everybody was feeling a lot poorer, during those next (technical difficulty) we saw, I think we saw like a 300 basis point increase in private-label sales penetration.

That was a real big change.

We are not seeing that now; we are seeing normal progression in it.

In terms of the trade down thing, you are really not going to see that here because we don't do it.

The only area where you are going to see some average price declines is probably in pharmacy where there is -- and we have all read about it, there is some very well-known branded items that are going to become generic this coming year.

But in terms of regular merchandise out there, even at the -- while we have tested, in fairness, we tested a couple of patios sets in the early calendar 2009.

Instead of a $1,299 price point, a $999, but we still had the $1,299 in there.

And, guess what, the $999 sold better.

But we didn't rush to do everything at $899 and $999.

To the opposite, by spring of 2010 we got out of those price points and tried to trade the customer up, because if you are trading the customer down it's darn tough to get them back.

So we have not reduced pack sizes.

The only time we are going to reduce a pack size -- I can't say we never.

The examples that come to mind is in the last few months are on what they call limited quantity commodity resource, limited resource commodities, like pine nuts.

Some obscure item where -- and these are not exact numbers -- but let's say we were selling a 4-pound pack and nobody but us sells a 4-pound pack for $19.99.

Well, now it's a 2.5- or 3-pound pack for $16.99 because the price per pound has doubled or whatever.

So whatever that X is there have been some examples like that, but for the most part we are not reducing the ounces in the can of coffee or the number of M&Ms in the M&M bag.

And we, conversely, are pushing the envelope the other way.

I think that our customers are the higher end customer so that we are not as impacted perhaps than some of the lower- and medium-end customer retailers, perhaps.

By the end of the day we are not seeing the trade down.

Got it.

That is very helpful.

Thanks, Richard.

Chuck Cerankosky, North Coast Research.

Good morning, Richard.

When you are looking at some of these new member sign-ups, especially in the US where you have the gas, how are they reacting to the gasoline?

Can you look at the sales data and see how the availability of discounted gas is attracting members?

Again, Chuck, if you look at that 16% comp in gallonage in Q3 that is huge.

Again, in good economies we have seen, call it mid single-digit numbers, when I assume the overall US economy gallonage comps were slightly lower than that but still positive.

I don't know the source, but I remember reading recently in this economy whatever total US gallonage comps for the economy was, X, it's now X minus as a couple of percent.

Maybe 2% instead of 4% or whatever X was.

We went from that mid-single up to the mid-teens.

So gas is top of mind.

It's on the news many nights in many cities and, again, that frequency -- I haven't seen any numbers internally lately, like how many of those members are doing an incremental shop, but we know that our traffic is up.

When we talk about traffic frequency, by the way, we talk about front-end registers frequency not pharmacy or optical or gas station frequency.

Clearly, part of our increased frequency is people coming to get gas and some of those saying, hey, I am going to go in and shop for a little bit.

And some of those shops are incremental, not just replacing one from two days later that would have happened anyway.

Got you.

Looking at how the consumer is behaving overall, would you be able to give us some idea of sales comps growth between consumables and general merchandise?

Well, again, if you look at the subcategories, all the basic food and sundries categories, other than tobacco, are pretty consistent and up in those mid single or mid to high single digit.

Again, a little of that.

Again, if you look at -- LIFO is not a perfect extract, but if you look at the $49 million on a little over $4 billion, that is a little over 1% inflation in our inventory.

In that 12 weeks we saw inflation and a lot of that was in those consumer products.

If you look at comps in what I have called the middle price ticket, discretionary non-food items, like small electrics and domestics and, surprisingly, jewelry, which are quite strong, in the teens and 20s and for months now.

They vary, but on average they have been much stronger.

So who the heck knows.

Other than the people are buying, and maybe they are not buying as big a ticket but they are buying.

All right, thank you very much.

Deborah Weinswig, Citi.

(technical difficulty) What was your biggest surprise on the (technical difficulty)?

I am sorry, Deborah, you were in and out.

What was your biggest surprise on the gross margin side in the quarter?

Again, it's hard to get surprised when we see weekly stuff here.

What was your biggest surprise?

LIFO.

Again, I feel good about the fact that despite my confidence that we are ever more competitive and we are always leading the pack and being the toughest out there, just look at our gross margins compared to anybody else, that we are able to still improve underlying margins while remaining very competitive.

I think Jim, he hasn't been on a lot of calls in the last few years, like these calls, but he is always -- when he is here he will talk to you.

And he is always, when asked that kind of a question as basically saying, guys, margins aren't our problem.

We are going to still be very competitive, but the good news is we still know -- we think we are smart enough how to make some margins.

Still, driving traffic.

When they are ready to buy, they are in, so that is good and the loyalty is great.

And I think there really haven't been honestly a lot of -- I can't think of any real surprises on margin.

And I think last quarter (technical difficulty) fresh food margins.

Can you just provide us with some details there this quarter?

I think the thing I mentioned in Q2, I gave again some examples which spooked everybody a little bit; that as commodity prices, underlying raw material prices were rising, there are some key items that we've chosen to see our realized gross margin go from the low to mid teens down to the low single digits in some examples, some extreme examples.

And it would be like pizza.

We are not going to change the price of pizza every day, even though cheese prices skyrocketed.

We're not going to change the 15 or so pack of muffins that restaurants and commissaries and daycare centers and everybody else buy from -- I am making the number up -- from $5.99.

So what happens is the margin -- I don't know if this is a word but devolves over a four or six-month period.

And then finally they are allowed to take the price point from -- I am making it up -- from $5.99 to $6.49, and we go right back to that high teens.

So it is not a permanent reduction, but it is kind of stair-stepped because we want to be fiercely competitive.

And those are more the exceptions rather than the rule.

In Q2 when I was sharing why I believed bakery margins were down year-over-year in the quarter, it was because we were holding the price, many of which we have since taken up.

So again, trying to -- I think I scared everybody saying this is the old.

We are just going to keep them down and damn the torpedoes, and that was not the case.

We are going to be competitive, and ultimately you have to take those price increases into it.

Okay.

Then we appreciated on the call the color around SG&A.

You know, historically we don't necessarily have it broken out (technical difficulty).

But we've making our model pretty far and it looks like one of the best performances historically.

How sustainable are some of the improvements (technical difficulty)?

Well, I mean, I think in terms of our focus on driving the cost down, which I probably reiterated more in the last three or four quarters than before, you say the bullets were pretty efficient.

The fact of the matter is -- and let's face it, Craig who is our President, his background is 40 years in operations or maybe 35 plus in operations and five or so in merchandising.

And certainly he would say himself he is an operator first.

He is completely focused on that and so are the operators, the EVPs, senior VPs, and all the way down.

So I think there is some sustainability.

Top-line sales are going to do more for it than anything else.

Again, I feel -- can't tell you what the consumer is going to feel tomorrow, but I feel confident that our merchants are at the top of their game and we have a lot of good stuff going on.

Okay.

And the last question, can you just talked about how (technical difficulty) inside the US versus internationally?

I am sorry, you were in and out again.

What was that?

Sorry.

Can you talk about how your new clubs are performing inside the US versus internationally?

Really as expected.

You are always good to have a few that are a little better or a little worse.

But overall, existing US markets are no-brainers.

There aren't a lot of new US markets.

They tend to be no-brainers, they start off slower.

Probably the thing that has been on the upside surprisingly successful is Asia and Australia.

We only have one in Australia, but it's our best opening ever sales wise.

We have -- and against some of these numbers are helped also by the weak dollar because I am expressing the numbers in dollars.

But I think we have one unit this fiscal year that is teetering on having a four in front of it, $400 million or high 3s, very high 3s.

So certainly that is fun.

Beyond that I don't think -- again it's not like 2002 or 2001 and 2002 or 2002 and 2003 when we opened in two years 61 units, 45 of which were in the Midwest, or in new markets or Midwest and Texas, where we knew that it was going to be slow growing.

Those are all doing pretty well.

When we opened our 16th and 17th and 18th or 15th, 16th, and 17th Chicago units this past fiscal year in a 1-week period they all started off pretty well.

Great.

Thanks so much and best of luck, Richard.

Lara Champine, Cowen and Company.

Richard, the growth that you talked about in Asia is a little faster than what we expected, particularly in Japan.

You just mentioned that your new store productivity is strong there, but any other reasons you want to call out for Costco stepping up its growth in Asia at this time?

Well, we got a lot of money and we feel the pressure, not just from you guys but from ourselves, that we want to ramp up the expansion, recognizing we are also our own toughest cost controller.

When a unit comes in and it's, oh, we will just spend an extra $3 million or $5 million.

Jim is, as you might expect, saying, no, go find something more reasonable.

But we are trying to open.

The other thing is we -- I think this is our history.

We have tended to be relatively slow growing in a foreign country until we get 5 or 8 units and then there is a little bit of a spurt afterwards.

Look, Japan is a huge economy.

Clearly -- not just Japan, Korea and Taiwan.

The concept clearly works.

There aren't a lot of players necessarily looking at going in and we are profitable, so let's benefit from that.

But I think probably more than anything is that we are certainly comfortable in all those countries and we certainly have the money, let's ramp it up a little bit.

Great, thank you.

Gregory Melich, ISI.

Thanks.

I just wanted to follow up on the traffic, ticket, and inflation a little bit.

If the US comp was around 6%, what is the break between traffic and ticket, that ex-fuel?

It seems to me like traffic might be up 2% or 3% and then the rest ticket.

If that is the case, what portion of the ticket would ascribe to inflation that you have actually seen already?

I think our US traffic is about the same, Greg.

It's like 4%-ish.

I don't know (multiple speakers).

So the US traffic is like the global?

Maybe a shade lower but less that a -- it could round to the same number.

It might ground to 1 percentage point difference.

Got it.

So then --

Okay, Jeff Elliott just gave me it.

US in the quarter was 3.7% frequency in the US.

Got it.

So then the remaining 2.3%, should we just think of the inflation in that being the 1.2% that we saw in the inventory?

Or do you think it's a little more?

I would say it's a good barometer.

On the one hand you would say, yes, maybe it is a little.

But the other way, if you could look at it the other way is any incremental trend in private label, when you switch from the branded item into private label, is 20%, 25% lower price on average.

That is going to deflate it a little bit.

That still inflates your inventory cost, but it deflates your sales comp numbers, your item number.

So I think it goes the other way a little bit, but I don't have the numbers in front of me to look at that.

Is it fair to say that gasoline, if we decide to break it out of the denominator on the margin shifts, but was the profitability of gasoline hurt in the quarter given the rapid rise in gas during the quarter, how you burned through the inventory so quickly?

Did that have an effect?

Yes, yes.

It was still profitable, but not a whole lot of fun.

Again, I will quote one of the analysts that follows us and Safeway, they said the last couple of weeks have been a lot of fun profitability wise.

And it is more profitable with prices coming down.

And then which -- in your matrix where would that show up, that portion of the gas profitability?

It would be under ancillary businesses, but it's kind of distorted because when prices are going up and even more exacerbated now because gallonage is so far up because it's such a high price, it's also a time when profitability, even the gross margin on the gas business itself, is coming down a little bit.

But in the matrix you have got increased sales penetration times a lower margin number.

They kind of offset each other in that matrix.

We are trying to keep it simple and not do a 3-D matrix.

Yes, we will try our best.

But basically that whole thing compresses as a result and so you don't see it but that is where it is?

Yes.

And then lastly, you mentioned hardlines, electronics being still the sore point.

Can you just fill us in on what the actual -- in the past you sort of told us, for TVs in particular, up or down in dollars.

I know you had put some more inventory there.

Did it actually net out to slightly up or was it still down?

I think we have given -- I know we have given out the specifics every month.

I believe we are slightly -- it's still deflationary.

It's almost -- the sales number for the whole department is down mid to high singles in the last couple of months.

I don't know what the quarter was.

I know a month or two ago when the department was mid single down, TVs themselves were roughly flat.

Average selling price was down 9 or 10 and units were up 10 or 11.

Computers are down units.

Part of that down I think in the last several months was everybody was waiting for the new Intel chip or something, and that was something that our buyer mentioned in the budget meeting.

We are also not selling Apple product.

That is a small piece of it.

It has a negative in front of it.

We were selling iTouches and iTunes cards last year.

So on electronics now it sounds like the TV trend hasn't changed much, but maybe some of the computing and notebooks may be a bigger negative than TVs, is that fair?

Yes, I would say that is fair.

All right, great.

Thanks a lot.

Peter Benedict, Robert W.

Baird.

Hey, Richard.

A couple questions.

First on the US healthcare expenses.

I think last year they were just over $800 million.

Where do you see those coming in this year now that we are three quarters through and it sounds like you obviously did well with the benefits in the third quarter?

I think dollar wise in the quarter they were up like 8% or 9%.

It was below 10% in actual dollars.

Again that is a reduction in the level of increase from prior quarters and notwithstanding there is some things that have increased it like mental health parity effective at the beginning of this last fiscal year.

If you took that quarter and let's say it was 9% or 10% times $800 million that is $880,000 or $870,000.

So it's probably in the high $800,000s.

All right, good.

Then just with respect to May trends in the US, any comment on any regional trends you are seeing thus far.

I mean there has been some crazy weather out there; just wondering how the business has gone so far in May.

Yes, we have not really been impacted by the tornadoes and what have you since we are not very well penetrated down there.

You don't want to be a boat seller in the Northwest; it's still winter.

I am thinking of just the regional operators at the last two budget meetings.

There really hasn't been a lot of issues.

The strength has continued -- it's really (technical difficulty) with the geographically regional shifts here have risen.

Okay, great.

Thanks very much.

(Operator Instructions) Bob Drbul, Barclays Capital.

Hi, Richard.

Just two quick ones for me.

The first one is are you seeing more opportunities for co-branded private label given some of the inflationary trends?

And the second one is are you seeing any more opportunistic buys in areas where inventories are maybe getting out of line a little bit?

Talking about maybe the apparel category in soft lines.

I don't think there is any -- the answer to both is, yes, there are some.

Again, nothing like the first half of calendar 2009 after the economy went to hell.

But we are seeing -- yes, we are continuing to do both and for a lot of reasons.

It's not like the huge inventory buildup problems that many high-end non-food manufacturers had, whether it was furniture or apparel or luggage or you name it or watches, that came all at once when the economy got hammered in late 2008.

Those types of over-inventory positions out there are fewer and farther between.

But we keep adding new stuff.

Great.

And then just my last question is on -- on California you talked about it being one of the stronger regions for you this quarter, areas this quarter.

Can you talk a little bit about any of the trends in California sort of what is really changed there and what you are seeing in California?

I think the biggest change is they are buying more.

I don't mean to be cute, but it's cross category.

The regions that were hit the hardest after November or so of 2008 have come back.

Gas also.

Our savings -- again, gas is all regional and there is more pricing volatility in California, Southern California than anywhere in the country I think.

Our savings right now, I believe, in California are bigger than other parts of the country.

But it's all a function of all the different state rules and winter gas and summer gas.

You name it there is those variances.

Great, thanks very much.

Michael Exstein, Credit Suisse.

I think it's Michael Exstein, but I will take the opportunity anyway.

Richard come you just follow up on Chuck's question in terms of frequency?

What are the attachment?

If you are 16% more gallons of gasoline sold, what was that in terms of frequency and if going and fill up with gasoline did 90% of the time you go into the warehouse?

Do you track that specifically?

I can tell you what we have tracked of late is the percentage of people that bought gas and shopped on the same day has not changed.

It's still about 30%, low 30%.

And so if there is 16 -- if it used to 3% or 5% gallonage comp and now we have 16%, there is 10%-plus more people, about 30% of whom are coming in to shop.

Okay, that is very helpful and thank you.

Sure.

There are no further questions at this time.

Okay.

Well, thank you, everyone.

Have a good day.

Thank you.

This concludes today's conference call.

You may now disconnect.