好市多 (COST) 2011 Q4 法說會逐字稿

Good morning.

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

At this time, I would like to welcome everyone to the fourth-quarter and year-to-date operating results for fiscal year 2011 and September sales conference call.

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

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

(Operator Instructions).

At this time, I would like to turn the call over to the CFO, Mr.

Galanti.

Sir, you may begin your conference.

(technical difficulty), as well as other risks identified from time to time in the Company's public statements and reports filed with the SEC.

To begin with our 16-week fourth-quarter operating results for the quarter, reported earnings per share came in at $1.08, up 11% from last year's reported EPS of $0.97 and of course, the $1.08 figure was a penny or two below First Call estimates.

Both fourth quarters included certain items that impacted the quarter-over-quarter comparisons.

As I mentioned on our fiscal '10 fourth-quarter earnings call last October 6, last year's fiscal 2010 Q4 results included a few items that, in total, benefited last year's reported $0.97 figure by $0.02.

And while there was no LIFO charge last year in Q4, as well as the whole year, the reported dollar rate this year included a $32 million pretax LIFO charge or $0.04 a share hit to earnings.

Other items that impacted the comparison year-over-year, our foreign country earnings results again benefited from relatively stronger foreign countries on average as compared to the US dollar.

In the fourth quarter, FX helped earnings by a little over $25 million pretax or a shade under $0.04 a share.

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

Our foreign country operating results in Q4, when reported in dollars, would have been lower by that amount.

For the entire year, the impact of FX, assuming FX rates had remained constant in every country as compared to the dollar year-over-year, was to increase pretax earnings by about $63 million pretax, or $0.10 a share after tax.

Again, this calculation simply takes the currency exchange rates for the prior fiscal year and assume they had remained at those levels throughout the fiscal year.

I will also point out later in my comments, preopening expenses were higher by $12.6 million, or about $0.02 a share after tax, higher this year in Q4 versus a year ago given more openings year-over-year in the quarter.

For the entire 2011 year, net income came in at a reported $1.462 billion, or $3.30 a share, compared to $1.303 billion, or $2.92 a share, in last year's fiscal 2010.

So up 12% in dollars and up 13% on an earnings-per-share basis.

If you have followed our earnings conference calls for all of fiscal 2010, I had pointed out a few items each quarter over the course of the year.

Together, the pluses and the minuses added up to about a wash in fiscal 2010.

This fiscal year, of course, the big impact to earnings in '11 was LIFO, hitting the second, third and fourth quarters for $0.01, $0.07 and $0.04 per share respectively or a total of $0.12 a share for the entire fiscal year.

I will speak more about our outlook for inflation a little bit later in the call.

In terms of sales for the fourth quarter, as we reported on August 31, our 16-week reported comparable sales figures showed a 12% increase, 10% in the US and 19% internationally.

Excluding gas inflation and the impact of FX from the US dollar weakening year-over-year, the plus 10% US reported comp would be plus 6%, the 19% reported international comp would be plus 10% and the 12% total company comp would be plus 7%.

So the impact from gas was about 3%, while the lift from FX was about 2% and that, again, was for the fiscal quarter.

As you will see when I talk about the September numbers, the FX impact was about 1%.

So while still the dollar relatively is weaker versus on average all of the foreign countries where we operate, that impact is diminished.

In terms of comparable sales for the five weeks of September, for the five weeks, our comparable sales figures showed a 12% increase with the US coming in at 11% and international at 14%.

The 11% reported US comp would be a 7% without the nearly 4% impact from gas inflation and given, again, the year-over-year US dollar's weakness, vis-a-vis other currencies in the last month, while that has changed a little bit, but for the whole month, our reported 14% international comp would have been plus 10% when expressed in local currencies.

Overall, the reported 12% total company comp would have been at plus 8%, excluding gas inflation of about 3% and FX, as I mentioned, of a little over 1%.

For the month, our 12% reported comp sales results were a combination of an average transaction increase of 7.5% and continuing good frequency increases, an average frequency increase of a little over 4%.

Other topics I will review with you are opening activities.

We opened a total of 20 net new locations during the fiscal year that just ended, 13 new in the US, three new in Canada and two new each in Taiwan and Australia.

As well, we relocated two units in fiscal '11 in San Marcos, California and Chesterfield, Virginia.

For 2012, our current expansion plans include 20 net new locations, about half in the US and have outside the US, plus at least one relocation and of course, the reopening of Tamasakai, Japan unit, which has been closed since the tragic earthquake of March 11 this past year.

We currently operate 592 locations around the world.

During the first few months of fiscal '12, basically from September through the end of the calendar year, we plan to open seven locations, four in the US, one each in Texas, Pennsylvania, Wisconsin and Georgia.

We have a relocation plan for Ontario, Canada and two new locations in Japan.

And that is, of course, on top of the Tamasakai opening that will happen in early calendar 2012.

Also, this morning, I will review with you our Costco online results, our membership trends and of course, the upcoming fee increases in the US and Canada effective the first of next month.

Additional discussion about our Q4 operating results, of course and our stock repurchase activities during the fiscal quarter.

Okay, onto the discussion of our results.

Very briefly, sales again for the 16 weeks were $27.6 billion, up 17% from last year's $23.6 billion.

On a reported comp basis in Q4, sales were up 12% and the 12% again would be plus 7% without FX and gas price inflation.

For the quarter, our 12% comp would be an average transaction increase of 8%, an average frequency increase again of a little over 4%.

Some of you asked about what is our average sales volume per location.

In fiscal '11, the average sales volume companywide per location was $146 million as compared to $139 million the year before.

It is closer to $150 million versus $146 million this year if we exclude Mexico recognizing our Mexico operations were consolidated for the first time into our numbers during fiscal 2011.

In terms of sales comparisons by geographic region for both the fourth quarter and September, in the US, the strongest comps, both for the quarter and the month of September, were in the Southeast, the Midwest and California, but all regions were fairly good.

The 11% reported US comp figure for September, as an example, ranged from a 9% to a 13% among all regions.

Internationally, in local currencies, we continue to do well.

In Canada, which is our biggest international component, 9% for the quarter in local currency and plus 10% in September in local currency.

The rest of international averaged around 12% in the quarter and 9% in September.

Again, continuing the relatively strong comps there as well.

In terms of merchandise categories, sales for the quarter, both for the quarter and September, I will do those separately.

For the quarter, within food and sundries, comps were positive in the low double digits.

Standouts were deli, candy and foods, subdepartments ranging from -- throughout the seven or eight subdepartments ranging from a plus 7% to a plus 19%.

Our hardline sales showed positive mid-single-digit comps.

The strongest subcategories were in the low to high teens.

These were tires, sporting goods and lawn and garden, offset by a minus mid-single-digit majors, which, of course, is electronics, which represents about a third of total hardline sales, by the way, in that category.

As you'll see in a minute, in September, we saw an improvement in that department.

Within the positive softline comps, which are in the mid to high single digits, great numbers in the small electrics and jewelry, both in the 20% plus range.

Fresh foods was up about 12%.

All fresh food category sales were fine.

For the month of September now, food and sundries comps were in the high single digit range with cooler deli, foods and candy leading the category and as reported in recent months, food and sundries on a year-over-year basis, that is one area, as well as fresh foods that continues to experience inflation in the low to mid-single-digit range.

And that is based on talking to our buyers.

Hardlines were positive in the low single digit range, which is the first time we have seen hardlines positive in awhile led by hardware, sporting goods and tires.

Majors, as I mentioned, which was mid singles negative last quarter, for the month was positive in the mid-single-digit range with TV sales both in units and dollars up for the month.

Softlines comps were positive in the mid-single-digit range led by small appliances, domestics and jewelry, experiencing softer sales in housewares and media.

Media has been that way for a while needless to say.

All departments in our fresh foods categories were positive double-digit.

Overall, fresh foods, again, like food and sundries, experienced inflation in the mid-single-digit, low to mid-single-digit range over the past as compared to a year ago.

I will talk a minute about what we have seen in just the past month and it is mostly in bakery and meat.

Moving down the line items on the income statement, we will start with membership fee income reported in Q4.

Membership fee income was $590 million, up 11%, or $57 million from last year's $533 million.

It was down as a percent of sales by 12 basis points.

Again, gas inflation plays havoc on the year-over-year basis points comparison.

That minus 12 without gas inflation would have been a minus 6 and still with strong sales growth, we feel the 11% increase in dollars is pretty good.

8% by the way if you took out the benefit of FX.

In terms of membership fees and renewal rates and loyalty, renewal rates continue at the 89% plus range in the US and Canada and 86% worldwide.

We continue to see increasing penetration of the executive membership.

In terms of new member sign-ups in Q4, they were dramatically up year-over-year, up 22% in the fiscal quarter as compared to a year ago.

In Q4, of course, we had 10 new openings this year.

Five of those openings by the way -- two in Australia, two in Taiwan and one in Japan.

These international ones accounted for much of that huge Q4 spike.

But even without these five, the 22% figure would have still been up 6%.

So a pretty good showing for new sign-ups.

In terms of number of members at Q4 end, I will just give you Q3 end and Q4 end.

At Q3 end, Gold Star -- primary Gold Star was 24.3; at Q4 end, 25.0; primary Business remained at 6.3.

Business add-on went from 3.85 to 4.0; total 34.4 to 35.3; and including spouse card, 62.6 up to 64.

At Q4 end, paid Executive memberships were 11.8 million, an increase of nearly 0.5 million, about 450,000, or up 4% in just the 16-week fourth quarter.

That represents about 28,000 a week increase in Executive membership penetration.

The Executive members currently represent about a third of our membership base and a little over two-thirds of our sales.

In terms of renewal rates, as I mentioned, they continue strong in US and Canada, which is the core of our business.

The Business members at Q4 end, as of Q4 end were renewing at 93.3%, up from 93.2% at the end of the previous quarter; Gold Star 88.1% versus 88.0%; and total, 89.1% versus 89.1% due to rounding.

Worldwide, it was 85.7% at Q4 end, down slightly from 86%.

Again, that is a reflection of all these relatively newer warehouses over the past couple of years and generally a lower renewal rate both overseas, as well as given the newness of the concept in some of these markets.

Renewal rates for Q4, I'll spend a minute now talking about the announcement this morning of the pending increase in planned and annual membership fees.

First, the planned increases relate to our US and Canadian operations.

In the US, our current annual fee for our individual Gold Star, our Business and our Business add-on memberships is $50 a year.

The annual fee on both the Gold Star and the Business members has been at $50 since May of 2006 or a little over five years ago.

The annual fee on a Business add-on membership increased to $50 earlier this year in order to conform with the two primary memberships and now that, of course, is going to $55 as well.

All three of these will be $55 effective on an annual basis effective November 1 in the warehouse and effective January 1 with regard to member renewals.

January renewals are mailed out near the end of November.

Also in the US, a $100 per year Executive membership fee is being increased to $110.

This is the first membership fee increase since the inception of the Executive membership program in the US in 1997 and a few years after that in Canada.

In Canada, the current annual membership fee for both Gold Star and Business add-on members was already CAD50, CAD55 rather.

By the way, in Canada, we talk Canadian dollars, of course and it was CAD50 for the primary Business member.

So it was the CAD55 -- CAD50 primary Business member that will be raised to conform with the other two to all be at CAD55.

Again, effective November 1 in the warehouse and January 1 in terms of renewals.

And similar to the US member program, the current CAD100 per year executive membership in Canada will also go to CAD110 level at this time.

In all, approximately 22 million members will be impacted by this increase.

Approximately half of them are Executive members and the other half are the various Gold Star, Business and Business add-on.

Please remember that membership fees are accounted for on a deferred basis.

For example, approximately 1/12 of the increased fees from our January renewals will be booked in the first month with an additional 1/12 being booked in each of the succeeding 12 months.

So that increased fee in February renewers, the increase will be booked in February to the following January and so on.

So the full impact of these increases in terms of how it hits the P&L is essentially a 23-month timeline.

That is the last group of members to be billed at the new fee levels will be next December with a booking of that $5 or $10 per year increase to accrue over that month and the succeeding 11 months.

With regard to Executive membership, the 2% reward associated with the Executive membership will increase from the $500 per year cap up to $750 per year based, of course, on eligible purchases.

This change we believe and others will help us to maintain our competitive edge.

Needless to say, we feel that the enhanced value of the Costco membership over the past 5 to 10 years far exceeds the modest $5 and $10 increase in the annual membership fee levels and it will continue to allow us to bring our members even greater value on everything we offer.

Going down the gross margin line, our reported gross margin in the fourth quarter was lower year-over-year by 34 basis points, coming in at 10.54% of sales as compared to a year-ago fourth quarter 10.89%.

I ask you to jot down some line items in three columns.

The line items are core merchandise.

The second line item would be ancillary businesses; the third line item 2% reward; fourth line item, LIFO; next, quarterly adjustments; and then total.

The three columns would be Q3 '11, Q4 '11 and then Q4 '11, again, without gas inflation.

Again, the huge volume that we do in gas, plus the huge -- the 31% increase in prices year-over-year wreaks havoc on all the comparisons on a percentage basis.

So we take out gas inflation to show you those numbers on an apples-to-apples basis.

Going across, merchandise core in Q3 '11 year-over-year was minus 14 basis points; in Q4 '11, minus 24.

Without gas inflation, that minus 24 would be plus 2; ancillary, minus 3, plus 6 and plus 12; 2% reward plus 3, zero and minus 3; LIFO, minus 24, minus 12 and minus 12; quarterlies, zero, minus 5 and minus 5.

So our total of minus 38, minus 35 and minus 6.

Mexico, of course, also, again, was for the first time in fiscal '11 and therefore in the fourth quarter as well was put into the numbers.

If you take Mexico out, it benefited all of these numbers by 3 basis points.

As you can see, our overall reported gross margin was lower by 35; that is what we reported.

But as was the case each quarter, these figures require a little bit of elaboration here, an explanation.

In the fourth quarter, our core merchandise, as I mentioned, was 24 and the ancillary business gross margins, principally gasoline impacting it, contributed plus 6.

Our gasoline business and its inflationary price trends during the fourth quarter this year impacts our (inaudible) margin comparison as I mentioned to you in the past.

The sales penetration of higher-margin core business was down 2 percentage points in Q4 year-over-year, whereas the sales penetration of our ancillary businesses, again, mostly impacted by gasoline sales, which is a much lower gross margin business to start with, was up 2 percentage points year-over-year in the quarter.

So again, the core business -- food and sundries, hardlines, softlines and fresh foods -- were up slightly year-over-year.

Its aggregate gross margin hit was the minus 24.

LIFO, as I mentioned, was 12.

We continue to see year-over-year inflation as we did in Q3, although at a slower rate of impact in Q4 as compared to Q3.

The minus 5 basis point quarterly amount, that is part of what I mentioned earlier in the call that in last year we mentioned that the $0.97 figure included about $0.02 of benefits from a couple of items.

There are a couple of miscellaneous items that, again, we felt when we reported $0.97 last year that $0.95 was a more appropriate number with a couple of unusual items that had actually benefited slightly our margin and SG&A.

In terms of our gross margin outlook, no real margin issues.

Our inventories are clean, very good physical inventories at fiscal year-end.

We continue to be committed to driving top-line sales as we enter the Christmas holiday season and into the new calendar year.

In terms of inflation outlook, and talking to our buyers, their view is that we continue to see and expect year-over-year inflation with food and sundries, fresh foods and in some nonfoods areas, although at a slower rate compared to the last six months.

I will mention that in September, we did, in terms of looking at our LIFO indices, slight deflation, very slight deflation from the beginning of our fiscal year, so four weeks earlier versus the end of September.

Again, versus last year, we are still seeing some inflation, but in terms of how -- what hits the P&L in terms of LIFO, at least for the first four weeks, we see essentially flat to very slightly down -- slight deflation.

Moving on to SG&A, our SG&A percentages fourth quarter-over-fourth quarter are lower or better by 34 basis points coming in at 9.83% this year compared to a 10.17% last year.

Again, quickly jot down three columns and several line items.

The line items are operations, central, stock compensation or equity compensation, quarterly adjustments, total.

Going across -- Q3 '11, Q4 '11 and Q4 '11 without gas inflation and operations plus 46 basis points.

Meaning it was lower by 46, Q4 '11 plus 44 and Q4 without gas, plus 20.

Central, plus 3 or lower by 3; Q4 '11, minus 2; and Q4 without gas, minus 5, so higher by 5; equity, plus 2, plus 2, plus 2; quarterly, minus 8, minus 10, minus 10 for a total of plus 43.

Meaning in Q3 year-over-year, we were lower on a reported basis lower by 43 basis points and in Q4, plus 34 or lower by 34 and without gas inflation, plus 7 or lower by 7.

Again, Mexico had a low to mid single-digit impact on those numbers for the quarter and the year -- the quarter with and without gas.

Again, in terms of editorial, operations were lower or better by 44.

Again, a big component of this was due to the 31% increase per gallon for gas -- price per gallon of gas during the quarter.

Just like with gross margin percentages where it hurt, it correspondingly helped our core SG&A by plus 24, so the 44 would be plus 20 without it.

Our central expense is a bit higher year-over-year.

Really just a couple of line items, things in there on a year-over-year basis that were year-end changes, quarter-end -- year-end accrual adjustments and what have you, nothing to really speak of.

Healthcare costs in the quarter were lower by 2 basis points.

US healthcare costs, however, were up 14% in the quarter and 12% for the year.

In terms of the factors that will impact our outlook for expenses and other things in fiscal '12, again, the main items are going to be sales trends, healthcare, gasoline sales inflation or deflation and to some extent increasing penetration of our Asian operations, which have lower overall SG&A percentages.

Next on the income statement is preopening expense.

Preopening expenses were up $12.6 million higher, or minus 4 basis points to the P&L, $9 million last year in the quarter versus $21.6 million.

Last year in Q4, we had, in fiscal '10 in Q4, we had five openings.

This year in Q4, we had 10 net openings but 13 actual openings, including the two relos and the reopening of our Makuhari, Japan location.

In terms of asset impairment and closing costs, in Q4 '10 last year, we had a charge of $3.3 million for the quarter; this year, $2.6 million, so no real change there.

All told, operating income in Q4 '11 was up 10.5% year-over-year from $688 million last year to $762 million this year, an increase of $74 million.

The bigger percentage increase -- a little bigger percentage increase if you consider last year's $0.02 that I mentioned that adds to earnings and this year's $0.04 LIFO hit.

Below the operating income line, reported interest expense was about the same year-over-year with Q4 '11 coming in at $35.8 million versus $34.7 million last year.

These amounts, of course, mainly reflect the interest on our $2 billion debt offering that we did in February of '07.

I will mention that beginning in mid-March of '12, which is about a month into our fiscal third quarter this coming year, we plan to use existing cash to pay down $900 million principal amount of that $2 billion, which was five-year maturing debt at an annual pretax savings to us we estimate of about $44 million pretax, or $0.06 a share.

We get to the $44 million assumption based on all-in rate for that five-year fixed rate money of 5.37% in current return on $900 million that we have uses [or] about 44 BP that will start in mid-March of 2012.

Interest income was higher by $16 million in a quarter $45.8 million this year versus $29.6 million.

Actual interest income was higher by about $8 million.

Reflection of not only increased cash but some increased interest earned on increased cash balances outside US in some countries.

The other $80 million is a combination of things, everything from marking to market some FX forward contracts that we use in some foreign countries, to the fact that we have -- we now consolidate Mexico instead of putting half of its earnings on this line item, so taking the half out there and spreading it throughout the entire income statement, going from the equity method previously to now consolidated, as well as a couple of other miscellaneous items.

So overall, pretax earnings were up 13%, $684 million versus $771 million this year.

Our Company's reported tax rate this quarter came in at 35.3%, a little lower than last year's rate of 36.1%.

A quick rundown of other topics.

The balance sheet, you should receive -- that was received, I'm sorry, in the press release, as well, of course, like always, you will see some other information shortly that will be online.

Depreciation and amortization was $273 million in the quarter, $855 million for the year, strong balance sheet, as you guys know.

Our AP percent -- AP as a percent of inventories -- on a reported basis, it showed that last year in the fourth quarter was 105% and it declined to 99%.

On a merchandise basis, so merchandise accounts payable versus our inventories, it actually went from 89% last year up to 91%.

I think a reflection of slight improvement and increase turns and hopefully good negotiations by our buyers.

Average inventory per warehouse was up $772,000 from $10,441,000 per warehouse a year ago as compared to $11,213,000, so up about 7%.

About a third of this increase relates to the stronger year-over-year FX.

Food and sundries was up about $165,000.

That is partly due to the inflation that we have talked about in the past.

The balance of the variance is basically spread among departments.

Again, good inventory showing overall.

We feel good about how we came out of fiscal year-end with very clean inventories and we feel good about our sellthrough so far in seasonal items and hopefully we will have a good season continuing throughout this calendar year.

In terms of CapEx, in the fourth quarter, it was $472 million; for all of '11, it was $1.290 billion.

We'd estimate that fiscal '12 CapEx will be in the $1.4 billion to $1.6 billion range with increases from this level expected -- from that level expected in fiscal years 2013 and 2014.

That's a combination of we would expect increased expansion activity as we've got more in the pipeline as well as an ongoing increase proportionally of some of the overseas expansion, which tends to be a little more expensive in some of these very densely populated major cities.

In terms of our dividend, in May, we increased our quarterly dividend by 17% from $0.205 a share per quarter to $0.24.

This $0.96 per share annualized dividend represents a total cost of the Company of about $420 million.

Costco.com and Costco.ca in Canada in total sales were up about 12% for the year and up almost 15% for the quarter.

In terms of expansion, I mentioned earlier, we currently are planning about 20 for the year skewed towards the end of the fiscal year in spring and summer.

Again, of that net 20, about half will be in the US and half in international.

There is always subject to a couple slipping one way or the other, so one extra in the US, one less or vice versa.

In fiscal '12, if we are assuming we added 20 net new units, that would be about 3.5% square footage growth.

Also at fiscal year-end, some of you asked, total square footage stood at 84,415,000 square feet in our operations.

In terms of stock repurchases, we currently have repurchase authorization with the Board approval earlier this calendar year to increase the authorizations.

We currently have authorization of $3.7 billion.

As you know, in Q3, as I mentioned, we spent $102 million buying back 1.3 million shares.

If I just annualize that $102 million of buying over those 12 weeks, that would be about $440 million.

I think if you annualized at 36 weeks, you are approaching $500 million rate of purchase.

In Q4, we purchased 3.7 million shares for $294 million.

Taking those 16 weeks and annualizing it, you get closer to the $1 billion, about $950 million at an annualized rate of purchase during the quarter.

Long term, we continue to be buyers on a regular basis.

We are not going to predict up or down where the stock is going to go, but overall we continue -- we currently believe in the outlook for the Company and clearly we have got enough cash to not only pay for ramped up expansion and an increasing dividend, but hopefully stock buybacks as well into the future.

A quick reminder, fiscal '12 is a 53-week fiscal year.

The fourth quarter of '12 will consist of 17 weeks this year compared to a 16-week fourth quarter last year.

And as I mentioned, our supplemental information pack, which includes some other useful stats, will we posted on the Investor Relations site later this morning.

With that, I will turn it back over to Jeri and open it up for Q&A.

(Operator Instructions).

Robby Ohmes, Bank of America-Merrill Lynch.

Good morning.

Hey, Richard, how are you?

Good.

Hey, I was hoping you could just maybe elaborate more on the fee increase, the timing of it.

I know it is something that you guys had talked about, but the timing of it this year and also the expected response, if any, from your customers.

Do you think you will lose anybody related to it?

And I think also you mentioned something about allowing you to give even better values.

Is there an anticipated impact over the next two years on what your store level margin structure could look like or the way you are passing on inflation, etc.

related to taking this membership fee increase?

Thanks.

Well, the timing is simply we just decided to do it now.

We've talked about it and everybody out there asks about it every quarter, but at least two or three times a year when we are off campus as a senior management team, we talk about it.

We have always felt that our membership fees -- our membership value is greatly -- we've continued to greatly enhance it.

Many of you know us well long enough ago that we use it in a lot of ways and recognizing all monies are fungible, but the fact of the matter is we are always going to be competitive with or without this.

We will continue to be competitive.

This allows us to continue to be competitive, offer service -- offer more services and do what we do.

So people ask us about the economy.

We are not thrilled about it.

We are thrilled that we are performing quite well in terms of shopper frequency and driving sales in the right directions and we are going to continue to do that.

So I am not trying to be coy, but you guys know who we are.

We are going to do what's right to drive our business long term.

And now in terms of do we lose members, recognize this is a -- on the primary membership, this is a 10% increase, a $5 increase on a $50 membership fee that has been $50 for the last 5.5 years and a $10 increase on $100 that has been that way for 7 to 11 years depending on which country.

And so this is not a $5 a month increase; it is a relatively small increase.

We recognize where the economy is, historically, we have very little falloff from it.

We don't take it lightly.

We didn't take it lightly by doing it and when we do it, but we recognize that it is part of what we have done historically over 25 years, doing modest increases in the fee, but every time we have done it, we feel and we take a hard look ourselves -- we look at ourselves in the mirror and feel that we have continued to enhance the value of that membership by a lot more than that.

And we say that sincerely.

It may be we are fooling ourselves, but we don't think so.

Great, thanks a lot.

Mark Miller, William Blair.

Hey, good morning, Richard.

On the net store expansion now expecting 20 for fiscal '12, I think last quarter you commented you thought it would be closer to 25.

So I guess I am curious is there something that caused Costco to slow it down or I guess something previously unexpected in the marketplace?

This is probably the one number that we have most poorly predicted every quarter and every year for 15 years.

We have got a lot in the pipeline beyond this.

Some of the expansion overseas takes longer.

All I can tell you is that Craig and -- Jim and Craig's goal and Jeff Brotman's goal is to get that number up.

And again, I can't predict what it is going to be.

There are other irons in the fire that might tweak that up a little bit.

I try to be as realistic as I can going into the year and perhaps each year being even more realistic.

So again, could it tweak up a little bit?

It could.

My guess is you are going to see like we did more recently, there is -- again, there is a lot of irons in the fire.

I think you're going to see a lot of openings just past the end of this fiscal year into next year.

If Jim were sitting here or Craig were sitting here, their goal would be to get that number into the 25 to 30 range next year.

But I can't -- I can only tell you what we have got going on right now in terms of what we feel comfortable that we are going to be opening.

I can also assure you that those three and the real estate people and the operators are working very hard to speed up that process because there is a lot of locations we want to open.

Okay.

There is more unpredictability in terms of some of the timing and zoning, particularly in some of these foreign countries.

But they are favorable to us opening.

It is just it is a longer process and again, there is more -- there are more irons in the fire now, which will speed up that process hopefully.

Okay and then with half the clubs going outside the US in fiscal '12, I guess I am trying to integrate that into how we should think about international profitability.

It looks like you should be about or now more than 45% of your profits outside the US for all of fiscal '11.

I don't know if you can share that exact number.

But when do you think we get to more than 50% outside the US?

Do you think you get there in fiscal '12?

I know FX also is a factor.

You are including Canada?

That number sounds a little high, although you have the numbers in front of you, I don't have those -- that detail in front of me.

I would have to look at it.

Clearly the rate of increase in overseas expansion, and I include in this Canada and the international and the fact that the dollar is weakened has exacerbated it upward a little bit.

My guess is that, to the extent that that increasing penetration has occurred in the last couple of years, it probably still increases, but slows down a little bit.

And again, I am just shooting from the hip there though.

Okay.

And finally, then I will turn it over, the new member sign-up going up 6% outside of the new international club openings, was there any anomalies to that figure or what do you think explains that acceleration?

Thanks, Richard.

In terms of openings overseas?

No, the new member sign-ups.

I think you said --

Oh, I'm sorry.

In some of these markets, like the area in and around Taipei, Taiwan or Tokyo, one where we have been very successful in the three Asia countries and starting off pretty darn well in the three locations that we have in Australia, but particularly in those three Asian countries in these 20 million population cities, if you will, we get -- we have memberships per warehouse off the charts in terms of new sign-ups and even after they have been open for a few years -- I think in Japan the number of members per warehouse is double our company average, darn near double our company average.

And so it has to do -- it is nice when you have five locations in a city the size of these cities and there is plenty of opportunity to open more locations and maybe that will come down over time, but there is -- the per capita -- the number of population per warehouse is off the charts over there as well.

Mark Wiltamuth, Morgan Stanley.

Hi, Richard.

I wanted to ask about the inflation passthrough on food.

Are you having any margin drag from that?

Obviously we had the LIFO charge here, but if you take the LIFO out, what is the effect on margins here?

Yes, there is a little bit of lag.

Frankly, it is us more than anything.

If I looked at the detail, I would say that you are still impacted in the food court because we are not changing the price of the pizza or the hot dog, as an example.

You are going to see it in bakery for some of the commodity goods there.

Even though we have seen some reduction in some of the underlying commodity costs in bakery, it is still not back to where it was.

And again, I think a couple of fiscal quarters ago, I gave a couple of examples where we were going to hold the price of a 15-pack or whatever of muffins and let the margin dwindle down on it before we take an increase.

And we do ultimately.

But that is our doing and I don't think it is a dramatically big change of what we have historically done; it is just we have inflation now.

But ultimately you have got to pass the price increases on.

And on that front, we just saw some softening in some of the underlying core commodities with corn cooling off last week.

How long does it take for that to really hit your stores before it cycles through the packaged food companies and then gets to you?

Well, keep in mind, as you might expect, in my view, a couple of years ago when there started to be inflation, actually in mid-'08, there was a lot of pent-up demand, if you will, on the manufacturing side because retailers had always, on very light inflation for a number of years, strong -- large retailers -- the supermarkets, the Walmarts, the Costcos -- were able to push back.

And so some of it will stick because it was catching up from prior stuff.

Generally, it is all over the board, but generally, you will see it -- and you will see it weekly and monthly in things like beef and pork and poultry.

And you will see it in raw materials where we are buying certain raw materials for our bakery, you'll see it pretty quick.

But you're not going to see it all proportional to what you see coming down because not all -- they didn't get all of it on the way up and even when they got it, some of it was, in my view, pent-up demand.

But needless to say, part of every one of our buyers' jobs as manufacturers explain why something was going up, they are out there hitting back saying, okay, let's come down now.

So we are I think as good as anybody in pushing that envelope the other way, but it takes some time anywhere from a few weeks to a few months depending on the categories.

Okay, thank you.

One other comment on that as an example.

When cotton prices were going way up 6, 8, 12 months ago, and I think I mentioned on one of the calls, in some cases, when you are making 3, 6, 9 month commitments on everything from apparel to towels and things like that, there were some manufacturers -- many manufacturers overseas, and Asia particularly, were basically saying you have got to commit to quantity and we can't tell you what the price is because that is how fast the underlying commodity costs of cotton were going up.

And in some cases, we and everybody else had to eat some of that as cotton prices or other things have come down.

But again, we are turning that faster on average than other comparable full-line retailers in those categories.

So do we get hurt?

A little bit, but everybody gets hurt.

Okay, thanks.

Dan Binder, Jefferies & Co.

Hi, good morning.

A couple of questions.

First on the core gross margin, if I -- I think I have it apples-to-apples.

It looks like your core was up plus 2 basis points this quarter compared to more substantial gains in recent quarters.

I am just curious if there is anything that you want to point out to a change in that pace and what we should kind of expect going forward.

That was the first question.

The second question was on the membership, the Executive membership with regard to the increase in the rebate.

I am just curious what the sort of incremental drag is to that giveback to the customer.

In other words, I am sure there is probably a few members that were exceeding that $500 rebate, so now they actually have to pay them.

What kind of a drag does that bring to the P&L?

Sure.

Now I forgot what the first question was.

The core gross margin.

Oh, yes, I'm sorry.

Again, we don't view it as anything to be concerned about.

When we talk about gas inflation, the other piece of gas is gas gallonage is way up.

That also, on a low-margin business, 800 or so basis points, but an increasing penetration in gallonage.

There is lots of things, different countries, different penetration.

We really, as we looked at it, in terms of looking at the core, didn't consider -- it is a little lower than it has been in the last couple of quarters, but we will keep letting you know what it is.

And again, we don't read a lot into that as any trend either up or down.

In terms of the Executive membership and the increased reward, it is pretty small.

Recognizing that, to be at the $500 cap, your $25,000 of eligible purchases, eligible purchases meaning everything but gas, alcohol and tobacco and so -- but we are hoping that it will grow.

It is well under $10 million of impact a year and we -- but we hope it would go up because that means it is driving business.

Okay.

And then just one final.

On the other income line, when we consider that Mexico is not in that number this year, it is up quite substantially just versus where you were in the first three quarters and you mentioned FX contracts.

I am just wondering if there are some bigger items in there that you can identify.

There really aren't.

There are a few things that go both ways.

FX forward contracts in a given quarter can be plus or minus $5 million.

Usually it is plus or minus a couple million bucks.

I think that on a year-over-year basis that variation was closer to the $5 million frankly.

So that is the biggest chunk.

Okay, thanks.

Chris Horvers, JPMorgan.

Thanks, good morning.

So Richard, on the LIFO, do you think that, based on September's experience, that this would actually turn out to be a benefit in the fourth quarter if we kind of stay where we are?

And then can we just run rate that as we think about the experience into next year and the 3Q and perhaps that list gets better?

Well, again, who knows?

If I could extrapolate with absolute certainty the first month, we would have -- we'd have -- it would be flat, a very slight amount of credit.

Who knows?

I mean assuming that -- in terms of expectations for increases on top of current levels, the buyers generally view that there is not a lot of increases happening right now.

In terms of getting price reductions on things, again LIFO starts with the beginning of this fiscal year on August 29, so the index for the first four weeks, our internal four-week period was just a few basis points under a base of 100.00.

So very slight, very slight deflation.

Who knows what tomorrow brings.

To the extent from these levels from August 29 levels of pricing and costing that we see some -- as commodities come down as we see some price reductions, that would be -- that would tend towards a credit.

I am shooting from the hip, but my guess is that I would assume right now it is flat and there is no -- not a lot of risk it is going to be big inflation and not a lot of risk there is going to be a lot of deflation.

Right.

So it is not a comparison issue; it is prices actually have to come down to see the credit?

Right.

But in terms of seeing the impact in Q3 (inaudible) of a LIFO charge, that has seemed to have abated at least at this point.

Who knows what tomorrow brings.

Obviously, we are also sensitive to what is going on with the consumer.

Was there anything particular about the cadence in September that you would call out either positively or negatively?

Well, I think the thing that continues to surprise us is this continued 4% plus frequency number.

We certainly appreciate and recognize that gas gallonage comps for us are strong, certainly strong relative to the US consumer and that drives people into our parking lot.

We recognize that people are probably eating at home more than they used to.

That drives people into our parking lot.

And I think those are the issues that -- so we have been somewhat blinded by the fact that we still believe that -- we know the economy is tough.

We are as concerned as everyone of you are out there every day with the gyrations in the market and the mortgage statistics and the unemployment statistics.

We are bucking those trends in terms of driving unit frequency, customer frequency and with a little help from even inflation, dollar increases.

So we are working hard to continue to drive that marketshare and we think we are doing a pretty good job of it.

But if you asked us do we feel good about what is going on out there, no in terms of the economy.

Right.

And then one final quick one.

It seems like the FX will probably turn on you in the coming months from a top-line perspective and get a bit worse in the spring if we just held today's rates.

How does that flow through to the margin structure if it does turn in the other direction?

Well, it doesn't change percentages a lot because it is every line item.

To the extent that our foreign operation is slightly more profitable bottom line, but those that you are talking about percentages times percentages, I don't think it has a lot of impact on any percentages.

Again, like this past year, the reported $3.30 of earnings there was I think $.10 in there from just the change in FX.

To the extent that we are relatively constant until the spring and then start to show the other way, and again who knows, it could be a slight detriment this year, but we don't know.

Fair enough.

Thanks.

Peter Benedict, Robert Baird.

Hey, Richard, a couple of questions.

In the past, you have walked us through the, at least qualitatively, the gross margin trend within the four main categories.

Could you give us a sense of how that fleshed out in the fourth quarter?

Yes, I don't have it in front of me.

I think hardlines was up, fresh foods was down a little and the other two I don't have in front of me.

I am sorry.

I know overall it was up 2.

Okay, perfect.

Thank you.

By the way, one of the things that Jim has mentioned that less is more, not from -- we have always tried to convey -- give you a lot of color on things.

We are trying to wean me off of some of that going forward, not yet and so we will continue to try to do that and still give you the same color of what is going on out there though.

That is helpful.

How would you characterize kind of the mood internally in terms of that core margin line?

I mean is the goal still to kind of maintain and increase that or are you more willing to kind of give back some of that now that you have raised the fee?

That is a definite yes to both of those.

The fact of the matter is -- look, we do what we do.

Really we don't sit around here being terribly concerned about margin.

Keep in mind, over the last 10 years, Executive membership has hit the margin line for over 100 basis points.

Penetration of gasoline, which is easily 700 or 800 basis points lower than the company average margin outside of that, probably 800 plus, that has gone from 0% 10 or 12 years ago to 8% or 9% or 10% of sales, 9% of sales.

So we have hit the margin hard in a lot of ways and our margins are pretty good.

So despite us being competitive out there, we are going to do what is right for the Company long term.

We are going to drive sales.

We feel very good about our ability to do that and again, I am not trying to -- I am trying to be qualitative, but if you ask is our goal to still see pretax earnings as a percent of sales improve and have a 3 in front of it, yes.

All right.

Fair enough.

And then I may have missed this, but any early read on kind of the holiday product?

You guys bring your stuff in so early.

It would be interesting to hear -- I know September overall was good, but how about those kind of holiday, seasonal, trim-a-tree, that kind of stuff, any read you are getting?

Our seasonal sales are good and we brought stuff in early.

We had stuff out there the last week of August I think starting to come in and certainly into mid-September, so we feel good about seasonal merchandise.

Great.

Thanks very much.

Colin McGranahan, Bernstein.

Good morning, Richard.

I wanted to focus on the Executive membership fee increase given that you have never had one -- a couple of questions.

One is do you think there is anything different there about sensitivity renewal rates and whatnot?

Secondly, can you give us any sense of the number of Executive members that spend between $2500 and $2750?

Because just obviously on plain math, those are the ones that wouldn't make sense to be an Executive member anymore given the $50 to $55 differential?

And then thirdly, just the same topic, but thirdly, in the past, you have said Executive members spend more and obviously you have wanted to make more and more members Executive, but is there a cart and horse thing there?

I mean when people when they become an Executive member actually spend more or people who are spending more naturally became Executive members?

Well, on the last question, clearly they spend more and then they become Executive members and spend a lot more.

I've likened it to a TV commercial I saw a long time ago about two businessmen at a business luncheon and they both reached for their wallets to pay for the bill and one says let me get it, I get rewards.

The fact of the matter -- affinity programs work.

I don't know completely why, but you talk yourself into it.

So clearly being an Executive member, they buy more.

I think also we have gotten better at promoting it and communicating it to the member both when they sign up as a new member and as well when they are coming through with a big amount of merchandise.

And what the cashier can do when they swipe the membership card and it can show them that based on their prior year's purchases, it would behoove them to become an Executive member.

So we do a better job of it.

In terms of -- let me tell you the rationale why we kept $100 in each of the last two regular increases.

When we first did the $100 Executive membership in the US in 1997, I believe the base membership fee was $40, so it was a $60 deal.

At the time that we -- five or so years later when we went from $40 to $45 in the base, our view was is there are lots of members out there that if you just took their prior 12 month's purchases, eligible purchases, that how many of them would be at breakeven or above at $55 -- at $50 versus $55.

Then the view was, at the time, there was about 2 million, 2.5 million members that in theory would benefit based on their prior year's purchases.

Now if we even got 10% of them, we would be happy and again, I can't tell you if it was 10% or 20% or 15% or 22%, but it was something in those ranges most likely.

At the end of the day, we did that again five years ago, 5.5 years ago.

By the way, what I think has continued to surprise us is the increasing penetration of membership aside from that each of the years succeeding that delta of having in theory another 2 million, 2.5 million members go into that above breakeven calculation and how many of those can we get.

I think we do a better job overall of getting them.

I think our view at this point is the membership fee in the US in Executive has been at $100 for 11 years, I believe seven or eight years or six or seven years in Canada.

It is a nominal increase based on the period of time that we are talking about.

And keep in mind the fee relates to the core membership in the case of $100 of the $55, as well as a variety of other services.

We have many members in our view that became an Executive member first to take advantage of one of the 20 or so services that we offer and even then, they start buying more because they are Executive members.

So the fact of the matter is it does create loyalty.

We have never taken the increases lightly.

We feel very confident that -- we always assume that you are going to have some conversion delta with regard to somebody saying, well, I will just become a regular member.

Some regular members saying, well, do I really need to be a member.

But you are talking a very small group.

We feel very comfortable about the value of our membership.

As you know, historically, when our membership fee structure has been higher than some of our competitors, that is never a concern to us from the standpoint that we feel that our membership and the value that we provide our member is a good value.

And again, we didn't do it arrogantly, we did it thoughtfully and what we believe was modestly and we will go forth.

Okay, so just to follow up on that, is the number still today roughly 2 million to 2.5 million members that would be on the margin mathematically?

I haven't looked at it lately because, in terms of the breakeven, it is as good a guess as any.

It is not 1 and it is not 5, so sure.

But again, we haven't looked at it that way since five years ago.

Okay, (inaudible) and then I will get off the phone, but you are not concerned about the risk of, as you are closing the differential, you were incentivizing more Executive members who then spend more.

Now you are widening the differential and you're going to lose some Executive members because mathematically it doesn't work and theoretically as they become off-award members, they would spend less?

Sure.

Look, it won't be zero, but the fact of the matter is is many of those Executive members that were on the cusp in that theoretical equation spend a lot more today.

So many of them have gone up, not down.

Okay.

Fair enough.

Thank you.

Chuck Cerankosky, Northcoast Research.

Good morning, everyone.

Richard, when you are looking at the two-year store opening total, it sounds like you're saying you want to be conservative in fiscal '12, but we could see some blip in the first quarter of fiscal '13.

Would you be willing to talk about a two year, that it would be fiscal '12 and fiscal '13 store opening number in square footage growth rate?

Well, if you add '12 and '13 together, it will clearly be more because our expectation at this point is '13 will have more openings than '12.

So maybe approaching 50 in total?

I would hope so, but I doubt it given the timeline it takes and the efforts.

I think we will be improved in terms of grading that on a scale, but we will have to wait and see.

Again, I don't want to lead you astray.

They are working hard to get that up and there is a lot of irons in the fire and I would rather look at it conservatively to start with.

Switching to another subject, looking at member attitudes as they are shopping the stores and comparing third-quarter to the fourth-quarter sales mix, what are you seeing, what are you noticing in how shoppers are behaving in your clubs?

Well, sales accelerated in September versus taking out all the noise of FX and gas inflation.

I mean sales accelerated.

When we read every day about the doom and gloom with consumer sentiment, we see pretty good stuff at our place, but we don't take it lightly.

I mean we work hard to have that value out there and we feel very fortunate.

But we are also reminded every day by Jim and now by Jim and Craig that the key is the value proposition and being out there and being showtime ready every day and having great stuff.

And the one thing I am very comfortable about is that we are doing a great job in merchandising right now and we have got a lot of good things going on.

Thanks a lot.

Charles Grom, Deutsche Bank.

Thanks, good morning.

Just to circle back on Dan's question on the core on core.

Again, I think everybody is probably pretty surprised, including myself, that's only up 2 basis points relative to the past couple of quarters.

And I know you're not concerned about it, but can you dig in to at least on fresh foods why if your comps have been running up high single to low double in that category throughout the quarter that your margins would be down in that category?

Just trying to get my hands around why.

Well, you know us.

We like to drive sales.

And also when there is inflationary pressures on commodity items, we are not going to just take the price of something up the next Thursday afternoon to get back the margin.

We are going to lag a little bit and certainly with volatile pricing on bakery, meat, food court, that is part of it as well.

Okay.

And then were there any other categories within the four key business segments that was negative or was just fresh foods down?

I think a couple of them were.

Again, I'm sorry, I honestly just don't have it in front of me.

Okay, okay, fair enough.

And then I know when you guys report the 10-K that you will break out the segment margins between the US, Canada and international, but just wondering if you had that handy for 2011 now that we have completed the year?

I don't.

Well, I have it handy, but our securities counsel is saying I don't because you can't do it until you publish it to everybody.

Okay.

And then just on the membership fee, just wondering why $110.

What was so magical about that number?

I know in prior conversations that we have had, you've suggested maybe it would be $125 and you do like a $20 coupon.

So I guess just trying to get a sense for why $110 and looking ahead, when would you look to raise the fee in Asia and UK and Australia?

Well, first of all, I think historically when everybody has ever asked about if you took the $100 up what would you take it up and I said, look, who knows.

If you say what could you do, you could take it to $105, you could take it to $110 and I think I probably said you could take it up more than that, but then you give some of it back because that would be a big increase on a percentage basis versus the core.

Never was there any giant sensitivity analysis of what should we do here.

We priced it based on what we feel.

We recognized that some of it relates to the underlying membership, which allows you to shop at Costco.

Some of it relates to the variety of services that are important and valuable that allow you to -- that has allowed -- afforded the Executive member.

So I don't want to be too scientific about it.

We are retail merchants and we felt that that was the right price.

And then outside the US, plans to raise it?

There are currently no plans, but things change and not tomorrow, 10 years, who knows.

I say that because, right now, we focus on what we are doing here, recognizing we are a lot newer in other countries and particularly in Asia with our expansion and we will go from there.

Okay, great.

Thanks.

Deborah Weinswig, Citigroup.

Hi, Richard.

This is Nathan Rich filling in for Deb today.

My first question is just on the competitive environment.

Are you seeing any change in promotional intensity or pricing it -- either the supermarkets or any of your club competitors?

The only thing that has been pointed out to me in the budget meeting is more related to holiday, a few holiday items like soda pop before July 4 or before Labor Day, things that -- those types of items that supermarkets or Walmart would do two or three weeks leading up.

But overall, the answer would be no.

Okay, great.

And then I just wanted to comment or to clarify your comments on inflation.

You said that you are seeing inflation in food and sundries and fresh fruits in the low to mid-single digit range.

Are you expecting that to moderate kind of as we go through the next quarter or so?

Well, again, first of all, what we know is what our buyers tell us when we ask them.

What we know is what we see the LIFO index as an example.

The inventory pool of food and sundries year-over-year for all of last year was up 5% or 6%.

Now recognizing not all that translates to the bottom line.

Some of that causes increased penetration of private label, which are at lower prices.

So the LIFO index is not an exact side science -- it is an exact science in calculating LIFO index, but it doesn't -- it is not an exact applicable to what we are seeing everywhere.

It is a best guess in using that as a measurement.

So when I say this, on a year-over-year basis, we are still seeing low to mid single.

When asked the buyers when do they see price relief in our fresh foods area, our senior merchants there have said they expect relief not for three to six months in some areas simply because of commitments made by the vendor for certain materials or by us.

But some things we are seeing already.

So again, I think it is -- on a year-over-year basis, there is still inflation.

From prices today, again, in the first four weeks, we saw very modest, almost no, but very modest deflation, almost flat and hopefully though over the next three to six months from the beginning of -- as of the beginning of this fiscal year that just started five weeks ago, we will see some modest inflation, but there is no way to know.

Great, thanks.

And then just my last question, do you have the private-label penetration for the year handy and can you just discuss your kind of long-term target for private label?

Well, I don't have the exact number in front of me.

I don't know if we've gone through every department and calculated it, but it is the low 20%s.

Some of you have seen a chart that I think Jim put up a couple of years ago that said the goal wasn't defined as 5 or 10 years, but probably somewhere in there, the goal would be to be in the mid 30%s and maybe up as high as 37% with a higher proportion in the food and sundries and health and beauty aids and things like that.

I think that is a stretch goal.

It will keep going in that direction, but there is no timeline.

Last fall, we started -- we introduced a variety of things and this is just examples of canned goods, both fruits vegetables.

We continue to do that.

And so there is a lot of nut items and snack items that we have done of late and we continue to come up with new things.

We had shearling boots the last couple years and some additional apparel items, men's dress pants on top of the shirts and so again, I think the trend is in that direction.

We are not committing to an exact number other than when asked -- when Jim talked to the merchants in the different departments over the last year, what are your goals over the next 5 and 10 years, you get up to a number that certainly has a 3 in front of it if we continue in that direction, but there is no guarantee of how long it takes to get there.

Great, thank you.

Laura Champine, Cowen and Company.

Richard, just briefly, you mentioned that you are seeing a change in trend in electronics.

Is that just lapping the deflationary issues over the past year or is there something really changing in the product cycle there?

I don't know.

My guess is it is only one month, so let's see what happens next month frankly.

It is good that it had a plus sign in front of it instead of a small minus sign.

At the end of the day, I'm sure it is a combination of things, including timing of MVMs.

If you recall, a couple of years ago, one of the issues in things like big-ticket items like TVs and at the time laptops was there were a few more deals out there to be had in terms of the $300 and $400 off contributions from vendors to drive it.

There has been some of that picked up.

I think it is a combination of things.

I certainly believe that our increased frequency helps.

You walk into a Costco, what is the first thing you see?

These incredible high definition TVs with cool stuff on them.

So I am convinced that the fact that our frequency continues to be high, if it is in front of you, some of the people are going to buy it.

Thank you.

Michael Montani, ISI.

Hey, guys.

This is Mike on for Greg Melich, how are you?

Good thank you.

Richard, just two quick ones.

The first one was on dotcom.

Did you mention and perhaps I had missed it, but is dotcom now about $2 billion of sales?

Yes, a little over.

Okay.

And then just on the traffic side, for the US, can you help us understand -- I think it was about 4% traffic trend in the quarter, but how would that split out for the US versus international?

We don't break it out.

Recognizing the US is 72% or 73% of our Company, so it is going to -- even if -- it is clear -- I would guess it is lower because when you have got newer warehouses, you have got warehouses that are half, 1.5, 2.5 years old, you are going to drive more frequency, but not meaningfully lower.

Okay, so similar.

And I guess just lastly, I was going to ask about, from the Executive membership standpoint, can you share what percentage of the Executive members today spend enough to reach the 2% off maximum of $500?

We don't disclose that.

I am not trying to hide it from you.

Clearly it is a small percentage.

Okay, thank you very much.

Joe Feldman, Telsey Advisory Group.

Hi, good morning, guys.

It's Joe Feldman here.

A quick question -- a couple of questions.

Again, to go back to the fee increase and the timing of it, Richard, in past calls and discussions with you guys, it seems like you have made commentary that you weren't likely to raise fees unless you felt the economy was in a better position or a little more stable, that your core customer could handle it assuming the economy was more stable.

I mean should we read into the raise today that that is the case, that your view of the world is things are kind of stable and okay going forward?

I think that, in the past, when asked the question and me being guilty of trying to be helpful, you say what are the reasons.

One reason would be -- I think historically I have talked about the fact that we have always been confident on the loyalty of our member, that the fact that our renewal rates are high, the fact that we would be confident to do so.

One argument against it would be the economy.

By doing it now does not imply that we believe the economy -- in fact, I just recently earlier in the conversation said I would see if you asked senior management around here the collective view is things aren't getting better fast out there.

So again, there is no -- I don't think you can put all this in and predict why we did it now versus whenever.

This is when we did it.

Okay.

And then another question kind of on SG&A, I mean for as terrific a job as you guys do controlling expenses and costs, I guess we were a little surprised you didn't get a little more leverage with such a strong comp through the quarter and continues to be strong.

And I guess I was wondering was there anything there?

I know in the past you guys have done -- been generous towards your employees with giving -- helping offset some of the healthcare costs a little more than in the past.

Anything that you did this quarter like that?

Yes, we felt pretty good about SG&A frankly.

I mean given our history of where -- Yes, I did mention -- you remember that I mentioned the $0.02 last year, the benefit, it was a combination of benefit, I believe that quarterly adjustment of 10 basis points.

So that was part of it as well.

The fact of the matter is that we -- again, we choose not to do some things that might help SG&A.

There is nothing new that is hurting SG&A more.

We feel pretty good about it.

I think if you look at it, we have actually seen the underlying trends relatively speaking improve a little bit.

Got it, thanks.

And then if I could just ask one last question, kind of back to that whole customer behavior standpoint, are you guys seeing anything within the customer themselves like is your core customer -- are they trading down to some more of the private label so to speak or are they changing their tender, are you seeing more people use cash versus credit or the size of the transaction, is it smaller units per transaction, things like that?

Well, tenders have not changed.

The ongoing trend is more debit and credit for years.

Those are both big numbers now and so they still grow, but grow slightly, but we've seen no trend change in it.

The average basket surprisingly is up a little bit.

Inflation helps that a little bit, but the average basket is up a little notwithstanding the fact that the frequency is up because people are coming in more frequently to buy food and my guess is so you'd think it would be down a little bit and it is actually up a little, so that makes us feel pretty good right now.

And again, I think part of that is driving more people in, that the demographic of our member is a little higher end.

I would like to think that some of it is our merchandising and so all those things help.

But in terms of -- we have a little bit of blinders on because our numbers have been pretty darn good and the frequency has surprised us all that is compounding of 4% and 4% and 4% now for two or three years.

No, that's great.

Thanks for your help.

And in terms of -- we would say trade up to private label, but in terms of trading towards private label, there's still increasing penetration.

Nothing like we saw, and I know I mentioned back in the first half of calendar '09 right after the financial crisis at the end of calendar '08, we saw a higher rate of increase in private label faster.

I think I mentioned back then that over a six-month period on the food and sundry side of our business, we saw like a 300 basis point delta in sales penetration of private label.

That was unprecedented.

But no, we are not seeing anything like that.

It is still continuing upward, but nothing crazy like that.

Got it.

Thank you.

Thanks for the help.

Good luck with the quarter.

Bob Drbul, Barclays.

Hi, good morning, Richard.

A couple of quick questions.

First, can you give us the D&A from Q4?

The second question I have is can you give us gas gallons in September?

I don't know if you gave that out.

And then the third question that I have is can you talk about the trends in audio?

I think you are now cycling the loss of Apple in your stores.

Could you maybe talk about the trends there a little bit?

The depreciation and amortization for the quarter was $273 million compared to $855 million for the year.

And what was the next question?

Gas gallonage in September.

Comp gallons.

10%.

Got it.

And how about trends in audio?

You are cycling the loss of Apple now, is that right?

Yes, we have never -- clearly, it is down because it is zero now.

The fact of the matter is that, at least in September, our majors was up year-over-year, so we are cycling it and we go forth.

I mean Apple has great products, but we are selling a lot of other things right now.

There is not a lot of (multiple speakers).

Thanks very much.

(Operator Instructions).

Sean Naughton, Piper Jaffray.

Hi, thanks for taking my question.

Just on the -- another question on the private label for you.

Is there a big difference between, in the international markets, the acceptance of the Kirkland brand there versus domestic?

It is well-accepted everywhere.

Yes, we have a lot of products over there.

The penetration is lower because there is less -- needless to say, in the US, there is more US-sourced goods than in other foreign countries, but it is very well-accepted.

Okay, great.

And then secondly, just also on international, you talked about half of the warehouses going international next year in fiscal '12.

Can you talk about -- are you going to any new markets and when would those potentially be on the horizon if not?

There is probably no new markets in -- there will not be any new markets in fiscal '12, through August of '12.

Whether it is most likely '13, we will open in at least one new country in Europe and by '14 two new countries in Europe is our best guess and all that is subject to change.

Okay, great.

Thank you.

Why don't we take two more questions?

(Operator Instructions).

Michael Montani, ISI.

Hi, it's Greg this time from ISI.

Richard, the $1.5 billion CapEx, the $1.4 billion to $1.6 billion, do we consider that the new normal with around 20 openings because it is historically high and I just want to know if, as we go international, it is just more expensive or dotcom investment?

What sort of -- what keeps it at that level?

International is more expensive.

That doesn't count for all of it.

What it partly includes is the expectation that it is going to be a busy fall next year right after the fiscal year-end.

So we have got a lot -- again, as I mentioned, we have a lot of irons in the fire.

So it is a combination of overseas is more expensive, the assumption is in looking at our own budgets that we will be committing to land and starting construction on sites that don't hit '12, so a higher amount of that now as compared to a year ago.

There is probably an extra $50 million in IT as we are in the process over a three-year program, which inevitably goes longer of modernizing some things and creating a second data center, which we haven't had before.

Not a lot -- I mean it's always a lot of money, but not a lot relative to -- so all those things add up to a little extra.

(multiple speakers)

Great.

And then secondly on the theory of less is more, if you were to look over all of last year, that 5% US comp, what would you say was the traffic versus ticket and the ticket, how much of that do you think was really inflation at the end of the day?

I think traffic was about 3.5 to 4, probably closer to 4 and so the rest is everything else.

Inflation was probably the biggest chunk of it.

Got it.

Perfect.

Thanks a lot.

But keep in mind, frequency was up though, so that by definition brings your average ticket down.

Sure.

We are driving more frequency.

That's good.

Okay, one last question.

(Operator Instructions).

Was that it?

Thank you very much, guys.

This concludes today's conference call.

You may now disconnect.