好市多 (COST) 2012 Q2 法說會逐字稿

Good morning.

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

At this time I would like to welcome everyone to the second-quarter and year-to-date operating results for fiscal year 2012 and February sales conference call.

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

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

(Operator Instructions)

Thank you.

Mr.

Richard Galanti, CFO, you may begin your conference, sir.

Thank you, Dawn.

Good morning.

This morning's press release reviewed our second-quarter fiscal year 2012 operating results for the 12 weeks ended February 12, and our February sales results for the four weeks ended this past Sunday, February 26.

As with every conference call, let me 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 on 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 second-quarter results, for the quarter earnings per share came in at $0.90, up 14% from last year's second-quarter earnings per share of $0.79.

This was on a 10% sales increase; and there weren't any big unusual items either in this year's or last year's second-quarter earnings.

But as we go through our note, you will note the comparison includes not only a 10% overall sales increase, an 8% comp sales increase, and normalized 7% comp increase excluding gas inflation and FX impact.

The FX impact on our foreign operations year-over-year in Q2, assuming flat year-over-year FX rate, essentially hit us by about $5 million pretax earnings in the second quarter.

We had an 8% increase in membership fee income.

This included very little impact from the recent announced fee increase, a little less than $1 million.

This is due to the nature of deferred accounting, and I will talk about that in a minute.

We had a lower year-over-year gross margins, as we continue to invest in pricing.

We had good SG&A expense improvement.

We had a smaller year-over-year LIFO charge, $6 million last year in the quarter versus $2.5 million.

And we had a favorable year-over-year income tax rate comparison.

In terms of sales for the second quarter, reported total sales were up 10%; and our 12-week reported comparable sales for the year was up 8%.

For the quarter, both total sales and comp sales were positively impacted by gas price inflation, offset a little bit by a slight weakening of foreign currencies relative to the US dollar year-over-year.

On a comp basis, the 8% US sales increase reported in Q2 excluding gas inflation would have been 7%.

The reported 8% international comp figure, assuming flat year-over-year FX rates, would have been plus 10%.

And total Company comps, reported again at 8% for the quarter, excluding both gas inflation and FX would have been plus 7% for the Company.

This plus 7% quarterly comp sales increase figure is the same level of increase achieved in each of the past three fiscal quarters, again on a normalized basis, including the effects of gas pricing and FX.

In terms of sales for the four-week month of February, it is pretty similar to the quarter.

Excluding gas inflation, the 8% reported US comp was 7%.

The 8% international comp was plus 9% in local currency.

And excluding both of those, total Company reported comp of 8% would have been a plus 7%.

Other topics of interest.

Our opening activities, after opening four new locations in Q1, which ended last November 20 -- one each in Pennsylvania, Texas, Wisconsin, and Georgia -- we open two new locations in the second quarter, both in Japan, one in Yawata near Osaka and one in Zama near Tokyo.

Since Q2 end on February 12, we have opened -- we opened last week one new location in Kobe near Osaka, Japan.

Also last week we reopened our Tamasakai warehouse in Japan.

This had been closed since the tragic earthquake last March 11.

All told, that would put our fiscal 2012 expected opening schedule at 17 net new units.

The eight we have opened fiscal year-to-date, and nine more to open by fiscal year-end.

These 17 consist of 10 in the US; one in Canada; two in Korea; and four in Japan.

With the two openings last week, we now operate 600 locations around the world.

I will also touch on Costco.com, membership results, additional discussion about margins and SG&A, and our recent stock repurchase activities.

So, on to the results.

Sales for the quarter were $22.5 billion, up 10% from last year's $20.4 billion.

Again on a reported comp basis, Q2 sales were reported at plus 8%; and plus 7% what I will call normalized, after excluding gas and FX.

For the quarter, our 8% reported comp figure was a result of a combination of the average transaction size of plus 2.4% and an average frequency increase of plus 5.2%.

The frequency trend during the past three months of December, January, and February was plus 5%, plus 5.5%, and plus 5.3%.

Again, for the 12-week quarter it was plus 5.2%.

We are now going into our fourth calendar year of year-over-year frequency increases over 4%.

And that, of course, is after years of frequency increase figures generally in the zero to plus 2% range.

For the February reporting month, much like the quarterly comp figures, our plus 8% recorded comp was a combination of an average transaction increase of 2.9% -- it's a little higher than the 2.4% for the quarter overall -- and an average frequency increase of 5.3%.

In terms of sales comparisons by geographic region, first for the quarter.

In the US the Midwest, Northeast, and Southeast regions were the strongest.

Overall US was very similar to the total Company.

Internationally, in local currencies we had the same comp percent increase, about 10%, as the 10% in our prior two fiscal quarters, both Q4 of last year and Q1 of 2012.

What I will say is in local currencies, international comp was also 10%.

For February, on a US regional basis our strong results were in the Midwest, Texas, and both the Northeast and Southeast.

And internationally for February, again in local currencies, the plus 9% result for February compared to a plus 9% in January and a plus 11% in December, going back a couple of months.

In terms of merchandise categories for the quarter and month, excluding the impact of FX, I will just talk about February here since we do this monthly.

Within food and sundries all subcategories were positive for the month and averaged in the high single digits.

In terms of hardlines, the comp was in the low single digits as it has been for the last several months and a couple quarters.

Within hardlines, the strongest subcategories were hardware and automotive, with electronics just below flat for the month.

Within the low double-digit softlines comps, the strongest subcategories were small appliances, domestics, and special events.

Within fresh foods, positive high single digit comp in all fresh food subcategories were positive.

Now, moving on to the other line items in the income statement.

Membership fees, $459 million this year or 2.04%, compared to $426 million or 2.08% last year in the second quarter.

In dollars, that is up $33 million or 8%, and as a percentage of sales down 4 basis points.

We continue to enjoy strong renewal rates and increasing penetration of our Executive membership.

Our new member sign-ups in Q2 Company-wide were up 11% year over year, mostly due to the strong international openings this past year -- and this past 12 months in Asia and Australia.

In terms of members at Q2 end -- Gold Star, 25.9 million, up to the 25.5 million at the end of the first quarter.

Business Primary remained at 6.4 million.

Business Add-on was 3.7 million, down from 3.8 million.

A lot of that again has to do with as Add-ons become Executive they go into the other two categories.

All told, 36.0 million versus 35.7 million at the end of Q1.

And including Add-on cards, Spouse cards, 65.7 million total versus 64.9 million at the previous, the first-quarter end.

So up about 800,000.

At Q2 end on February 12, our paid Executive memberships were 12.15 million, an increase of a little over 100,000 since Q1 end.

That is about 8,400 a week.

In terms of membership renewal rates, they continue strong.

Our Business membership renews -- and this is US and Canada, which was the bulk of our business for a long time -- was up 93.5%, up from 93.3% at the end of Q1.

Gold Star 88.4%, up a little bit from 88.2% at the end of Q1.

So total 89.4% compared to 89.2% at the end of Q1 end.

Worldwide 85.6% at the end of Q2 versus 85.4%, so up a little bit.

That number fluctuates a little bit because of the small base in many of these international countries.

You are always going to have much lower renewal rates in the first year or two of a new warehouse and in a new market, in many cases.

As you all know, we recently increased our annual membership fees in both the US and Canada.

The annual fee for the Gold Star and Business and Business Add-on members are now at $55 in US dollars and in Canadian dollars.

The annual fee for the Executive membership in the US and Canada now stand at $110.

These increases became effective November 1 for new members and effective January 1 with regard to member renewals, which of course is the bulk of our membership data.

In all, approximately 22 million members will be impacted by this increase over the 12-month period that people renew, approximately half of whom are Executive members.

So roughly half at the $10 rate and half at the $5 rate.

In terms of the timing of these increases hitting the income statement, please remember that membership fees are accounted for on a deferred basis.

So just using the example of one member who paid an extra $10 for an Executive membership and let's say they renewed in January, that $10 would be then spread over the next year.

In our case, the next 13 four-week periods.

So the full impact or benefit to the membership income line will be over essentially about 23 months, peaking at 12 months out.

Of course, the 23rd month will have the last remnant of the renewers that were just notified of the renewal 12 months into this announcement.

So, in terms of -- given the deferred accounting, there was essentially no impact in Q1, as I mentioned last quarter.

There is very little impact in Q2, just under $1 million pretax.

A small amount in Q3, about $7 million pretax or about $0.01 a share.

Much more meaningful starting in Q4 and beyond.

Q4, of course, is a 17-week fiscal quarter.

It has always been a 16-week quarter, but this is a 53-week year.

And into Q1 and 2 of next year, we will see that impact be more meaningful.

The full impact of these increases, as I mentioned, is 23 months, and we will see that when we see it.

With regard to Executive membership the 2% reward along with the increase -- the 2% reward associated with the Executive membership was increased up from $500 per year to $750 based on eligible purchases.

That is about a $4 million to $5 million annual impact.

A small amount of that was accrued for this quarter to catch up for -- we are going to do it on a -- based on whenever the renewal rate is.

While it is still very early to see any impact on renewals from the fee increase as we only have really one month, January -- and even in January that is partial data -- based on that limited data and in our judgment from the marketing people here, we don't expect any issue.

Going on to the gross margin line, the gross margin year-over-year was down 30 basis points from a 10.83% last year to a 10.53%.

Get to do the little matrix here, four columns.

Columns 1 and 2 will be Q1 '12; and column 1 will be the reported figures.

Then column 2 we take out gas inflation because I think it makes it more meaningful without the impact of gas inflation on these percentages.

So reported and without gas would be Q1 in '12 and Q1 '12 again.

Columns 3 and 4 would be for Q2, both reported and without gas inflation.

The line items, merchandising core; second line item, ancillary; third line item, 2% reward; fourth line item, LIFO; and last line item, total.

So, going across the core merchandising we reported in Q1, as we reported in Q1 it was down year-over-year 32 basis points; but without gas inflation down 10 basis points.

In Q2 reported down 25; and without gas down 16.

Ancillary, minus 2; and then plus 2.

And for the second quarter, minus 5 and minus 4.

2%, minus 1 and minus 3.

And for Q2 reported, minus 2; and Q2 without gas, minus 3.

And LIFO, zero and zero in the first quarter.

And in Q2, reported plus 2; and without gas inflation, plus 2.

You add those line items up.

In Q1 as you recall we had reported a year-over-year gross margins down 35 basis points; without gas inflation, down 11.

For this quarter the reported down 30 basis points; adjusted for gas inflation would be down 21.

As you can see, again our overall reported gross margin, while it was down 30, within that 30 our core was down 25.

But again our lower gross margin gas business -- and in fact increasing sales penetration in our gas business as well -- caused that to have that impact of about 9 basis points.

So that again the 25, we're looking at it without gas inflation impact was 9 -- was minus 16.

Now, while gross margins in our core business -- which is food and sundries, hardlines, softlines, and fresh foods -- were still lower year-over-year in Q2 by 16 basis points, in the quarter hardlines and fresh foods were about flat year-over-year, one a few basis points higher and one a few basis points lower year-over-year.

Food and sundries and softlines were down year-over-year a little bit more than that, again for an average of that minus 16.

As we continue to invest, again we continue to invest in price to strengthen our business long-term, and we think it is doing what we want it to do.

Ancillary business's gross margin as we reported was down 5 basis points year-over-year in Q2, partly due to gasoline inflation and slightly lower year-over-year gas margins in the quarter, as well as quite a bit lower year-over-year gross margins in our Food Court.

This continues to be due to our decision to hold prices on many items, even as some commodity costs have increased.

You have heard that again and again.

That is what we do, and we do it not only there but in a few other areas as well.

The impact from increasing Executive membership represented a 2 basis point hit to gross margin, again due to the 2% rewards feature in the membership, including that small amount of annual expected increased due to the increasing the maximum from $500 to $750.

LIFO benefited us in terms of P&L; benefited by $4.5 million.

$6 million pretax charge last year compared to $2.5 million this year.

Moving down through SG&A, our SG&A percentage Q2-over-Q2 was lower, or better by 29 basis points, coming in at a 9.67% this year compared to a 9.96% last year.

Again, the matrix, 4 columns.

The first two columns for Q1, with and without gas inflation; and the third and fourth columns for Q2, again with and without gas inflation.

Reading across -- and pluses here mean good, mean lower as a percent of sales, lower SG&A as a percent of sales.

Core operations plus 28 reported in Q1; plus 9 after gas effect taken out.

In Q2 plus 25; and plus 18 without gas.

Central, plus 4; and plus 2.

For Q2, plus 5; and plus 4.

Equity, minus 6; and minus 7.

For the second quarter, minus 1; and minus 1.

Total, again, first quarter we reported year-over-year 18 basis points improvement or plus 18; without gas inflation it was actually minus 4 or lower by 4.

I'm sorry, there was an adjustment last quarter that I forgot to mention.

The 1183, that Washington State liquor initiative, that was 8 basis points to the negative.

So the minus 4 reported without gas inflation in Q1 also had the impact.

That minus 4 is after the impact of the minus 8.

For Q2, again we reported 29 basis point improvement year-over-year; and without gas inflation plus 21.

In terms of a little editorial on SG&A, again the operations component of plus 25 was 18 without gas.

So about a 7 or 8 basis point improvement.

7 basis point improvement in core operation that that helped us with.

But 18 without gas.

Our payroll percentage year-over-year benefited the SG&A comparison by more than 11 basis points.

Total payroll dollars in our Company increased 6.5% in Q2 compared to the 10% total sales increase.

As well, increases in healthcare costs were a little lower than we anticipated.

Hopefully that is a trend, but you never know.

Central expense was better or lower year-over-year in Q2 by 5 basis points.

And as you saw, stock compensation expense was 1 basis point higher.

Overall, we consider Q2 a good performance in SG&A, and hopefully that can continue.

Moving down the income statement, pre-opening, $4 million last year in Q2, $6 million this year, so $2 million higher or 1 basis point.

In both fiscal quarters we had two openings.

The bigger difference has to do with when they open and where they open.

Some countries have higher much higher pre-opening per unit; and there is also -- based on remodels and other expansion activities.

Terms of provision for impaired assets and closing costs, in both Q2 '11 and Q2 '12 we had a charge of $2 million.

All told, operating income in Q2 was up $48 million from $596 million last year to $644 million this year.

Below operating income, reported interest expense was about the same year-over-year with Q2 '12 coming in at $27 million compared to $27 million a year ago as well.

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

As I mentioned, last quarter and probably the quarter before that, that next month on March 15, in about two weeks, we will pay off $900 million of this debt.

The anticipated annual pretax interest savings to Costco, assuming we are paying 5.3% coupon and a small amount of amortization of issuance costs, about a 5.4% benefit hits the P&L currently.

And we'll be forgoing interest income on our cash in the 20 to 30 basis point range.

That is about $46 million pretax per year.

For Q3, given that we're doing this effective March 15, we will get a pretax positive bump of about $7 million.

For Q4 -- and again, it's 17 weeks, not 16 -- the pretax positive bump about $15 million.

Again you can divide that by the number of weeks in Q1 and Q2 next year; that will be 12 weeks each.

In terms of interest income and other, it was higher year-over-year by $6 million.

$10 million this year in the quarter; $4 million last year.

Of that $6 million increase, actual interest income was higher year-over-year by $2 million, a reflection of higher cash balances.

However, the biggest component of the $6 million change was interest income and other, and in interest income and other was related to the FX impacts on our business.

It was much -- this positive was much bigger in Q1 year-over-year.

But as I explained in last fiscal quarter, we consider this part of our gains -- and whether they are gains and losses, these contracts are done mostly by our merchants and are offset or an addition to their merchandise margin, which is reported on the gross margin.

Overall, pretax income was up $54 million or 9.5%.

Last year, it was $573 million.

This year, pretax income is $627 million.

In terms of income taxes, our tax rate was a little lower, 34.2% versus 35.5% last year.

Our lower effective tax rate is due to a few discrete Q2 items that -- any number of things, whether it is state or federal and audits going on and whatever.

The sum of which reduced our Q2 taxes.

This was about a third of that lower -- in our view a lower tax rate increase versus last year in Q2; and the rest of it mostly related to decreases in foreign tax rates, our overall average foreign tax rate.

Now, for a quick rundown of other topics, I am always asked about depreciation and amortization.

For Q2, it was $209 million, giving a year to date D&A of $414 million.

Our accounts payable as a percent of inventories, last year we reported it was 97%; 87% if you just look at merchandise payables, not construction and other payables.

This year, the reported number was 91%; again that compares to 97% a year ago.

But again truly at merchandise inventories and payables this year the AP ratio was 86%, down just a little bit from 87% a year ago.

Average inventory per warehouse was up $1.1 million.

$10.5 million last year in the quarter; $11.6 million this year.

Very little, almost zero impact from FX.

Really spread across many, many subcategories.

Obviously, this includes the impact of inflation.

As I mentioned in Q1 a year-over-year we were just up under $1 million, [900], almost $1 million.

So pretty much in line with that level of increase.

That being said, there are no inventory concerns.

We feel we did a good job of taking markdowns through the holidays and our inventories are in good shape.

As well as our midyear -- we take fiscal inventories twice a year, midyear and year-end.

Our midyear fiscal year physical inventories were our best ever for midyear.

In terms of CapEx, in Q2 we spent $234 million.

Last year in Q2 '12 we spent a little bit more, $289 million; and year-to-date it's $632 million.

We would estimate for the year our CapEx will be in the $1.4 billion range.

In terms of Costco.com, both sales and profits were up over last year in Q2.

Our average ticket has come down a little bit but our site traffic continues strong; it was up a little over 9% in the quarter, year-over-year.

We are transitioning to a new platform this summer.

I will bet on mid to end summer.

The new technology will give us greater visibility on the Internet and we hope will bring users to Costco.com via search engines, which our much older current system does not allow.

And early summer we will launch the first app on smartphones, and assume both -- and over the course of the next few months, a couple of those.

We will introduce Costco.com elsewhere later this calendar year and into next calendar year, outside of the US and Canada.

In terms of expansion, I mentioned 17 units this year.

Now, the eight remaining that we have, that is -- or the eight that would be in Q4, this is down three from the previous 11 that I spoke about.

These are all delays.

There are still happening.

They were all scheduled for August.

They are now in either October or November, so into Q1 of fiscal '13.

Adding 17 units to the original base this fiscal year of 592, that is about 3% unit growth and a little over 3% square footage growth.

At Q2 end our square footage stood at 84,998,000 square feet.

In terms of a stock repurchase, during the quarter we spent $145 million.

That is a little lower than Q1 of $173 million.

We are generally buyers every day; and to date since June of '05 we have bought back a little over 111 million shares at about $56.74 a share for about $6.3 billion total dollars.

We currently have, I think, roughly just under $3.4 billion of authorization left on our program.

As I always mention, supplemental information will be shortly posted on our investor relations site, which has some additional information.

And lastly, our Q3 scheduled earnings call -- earnings release date will be Thursday, May 24.

That will be for the 12-week third quarter ended May 6.

With that, I'll turn it back to Dawn for questions and answers.

Thank you.

Dawn?

(Operator Instructions) Deborah Weinswig, Citi.

Congratulations on a great quarter, Richard.

Thank you.

As we look out for the rest of fiscal '12 and you start to cycle much easier gross margin compares, how should we think about gross margins for the rest of the year?

Especially with one of your competitors talking about very aggressive price investments.

Well, I think -- needless to say I can't give you any guidance since we don't guide, but clearly I think our message has been that we continue to invest in price.

And I think we do it more than talk about it, frankly; and so we will continue to do that.

But that is what we do.

I think the other message that I have tried to convey over the last couple of quarters and will continue to do so is, while there's certainly a lot of tough competitors out there, this is us, not them, in terms of what we do for a living.

And we are not, in our view -- while every day every competitor responds to one another.

But overall, we are responding to ourselves here, more than anything.

Okay.

Then can you talk about anything you are doing in terms of improving productivity on the floor?

Well, I mean it is a never-ending battle.

I mean we constantly are working to speed the front-end line, whether it is redoing the software for credit and debit; printing out -- all the things that all of us do out there.

This last year I know one focus -- these are all anecdotal -- has been in operations.

Again I think this is where Craig has put a lot of effort into given his operations background.

Operators have put a focus on overtime hours.

You're always going to have overtime hours, whether it is because of weather or people didn't come in, they were sick, or a holiday where you misjudged something, whatever it is, or physical inventories.

But that being said, with a focus on it -- and I think that is the key word, focus -- we saw just in the last couple of quarters a few million dollars just by having fewer actual hours.

So saying those hours, even if they were still worked, those hours were worked as regular hours rather than overtime hours.

That extra half was a reduction.

So those are the types of things we are doing.

I think we still get a lot of benefit from again what I talked about over the last couple years, sustainability.

Again, it's not all us; it is everybody.

It is the vendors.

We are all working towards this end.

But it is taking grams of resin out of water bottles; and packaging into square containers instead of round; and making liquid everything -- detergents and the like -- more concentrated.

All those things are having I think real benefits to all of us.

I think we do a good job of managing healthcare and workers comp in our view, relative to what our third-party providers tell us they are seeing elsewhere.

But it is a lot of blocking and tackling and trying to not do things that we are doing that we don't need to be doing.

So in the last three or four years our active SKU count has come down from 4,100, 4,100 plus, down to 3,800, 3,750.

That again was our doing a conscious effort to say -- if the top 200 items out of roughly 4,000 are 35% to 40% of sales, you can imagine what the bottom 200 are.

And every time we can take a pallet of something out that doesn't make sense -- and you are always going to have some slow things, because it makes sense for the small-business owner, the restaurant owner, whoever it might be.

But if every time you can take a pallet out in mass quantity -- mass out something, some existing item bigger, you are going to have more productivity.

So all those things that we do.

I think, for those of you who have followed us for many years I feel that we continue to do little things that have helped us.

We have all been helped by what has happened in the economy and trying to be more efficient.

But there is no one big thing.

Okay.

Then lastly, throughout I would say this earnings season we have heard a lot about volume declines.

Can you talk about maybe what is happening with the national brands and then maybe also with Kirkland Signature?

Well, the first part of the question, I heard the question; but what was the first part you said?

So we have heard a lot about volume declines throughout the quarter on the HBA and CPG side.

So could you maybe talk about what is happening national brands versus private label?

Well, again, sub-department-wise we haven't seen any of that kind of issue in general.

You see the constant pressures on what we call media and 1 Hour Photo.

But in terms of -- we see a continued increase in penetration of private label, even within existing private label items, recognizing the bigger part of that increase in my view tends to be where we have continued to add items.

In the last year, year and a half, we have continued to add some canned good items, as an example.

Canned vegetables, canned fruits and the like.

We have got that great peanut butter pretzel that I love.

So there's a lot of things out there that we are doing.

But we have not seen any giant change as it relates to the kind of impact we saw in the first half of calendar '09, right after the financial crisis.

Where -- I think in a given year we probably see three-quarters of 1% increase in penetration, maybe 0.5%, maybe 1%.

But remember in that six months we saw 2 to 3 percentage points just in six months.

And that was, again, people focusing on figuring out how to save money.

I think one of the things that we continue to see impactful is when we introduce a private label item.

It not only drives penetration to that item, which generally is a little bit better margin, but also gets the brand to choose and [answers] us to be competitive because they are losing market share.

So it is a win-win for us and our members.

Great.

Thanks so much, Richard, and best of luck.

Charles Grom, Deutsche Bank.

Hey, thanks.

Good morning, Richard.

Just on the price investments that you are doing, I am curious.

Are the number of SKUs increasing each month that you are lowering prices on?

Or is it the same basket of products each month?

I guess the second follow-up would be -- how are you guys measuring the success of those price investments?

Are you seeing a big increase in unit velocity when you do the price investments?

We are not the most formal when it comes to trying to analyze, did it work or not?

I remember years, several -- when we had rampant inflation in the middle of '08 and we lowered the price of our chicken, at the end of '08 when we were trying -- we saw comps going toward zero.

And I gave you examples; I think over a four-week period we had about $32 million of actual markdowns on a limited number of highly visible items.

One of them was the rotisserie chicken that had gone from $4.99 to $5.99, and we brought it back to $4.99.

Well, if you put a dollar divided by 6, by the $5.99, that was darn close in my view to the margin, the entire margin.

So no matter how many more chickens you sold, it didn't help margin.

It hurt it.

So we are merchants at heart, and we attempt to drive the top line.

I will give you another anecdotal example.

Last August or so in Canada where historically the soda, and Coke -- or the soda and hot dog was CAD1.99.

Well, many years ago the Canadian dollar was about $0.65 on the US dollar.

Well, in one fell swoop, Jim said take it down to CAD1.50.

Well, that is just because that is the right thing to do.

Clearly that impacted the bottom line negatively.

But I got to tell you, in a country where they have had a good economy and there is a lot of talk about inflation up there, we got national attention of being the only game in town that is lowering the prices on anything.

So we saw increases in traffic and certainly increases in Food Court as well.

So that is what we do, and we feel good about the quarter in that we are getting our improvement from expense leverage and buying back a little stock and the like.

And certainly the membership fee, as that improves in deferred accounting, that helps you.

But we feel good about what we do with pricing and we will continue to do it.

But we have always shown that when we need a little margin over time we figure out ways to do it and do it the right way.

Right.

Then can you just remind me?

In late 2008 when you did do the price investments, did it last for more than a few quarters, or was it longer than that?

Well, that was more of what I called back then the Perfect Storm.

Again, we were heading towards zero and we wanted to go into Christmas and early January with some -- driving it.

Whether that was the reason comps, did turn around a little bit then.

This is more that we feel that we are strong; we have got a lot of good things going on.

We are always reminded by Jim and now by Craig -- let's not get too ahead of ourselves in terms of our success, and let's keep driving that top line.

So again, I can't give you guidance it is going to be for another six weeks or another 25 weeks.

But we don't worry about it, honestly.

And not because we are cavalier; because we know that we have the ability to continue to drive sales.

And if we need a little margin over time, we feel we can get it.

Got you.

Okay.

Then, just a little surprised, only $145 million of buyback in the quarter, given the cash balance.

I know you got the $900 million tranche coming due in a couple weeks.

But what are the Board's thoughts on accelerating the buyback here?

Clearly trying to open up more than 20 to 25 stores a year has been challenging because of delays, and your cash position is only going to continue to grow.

What are you guys going to -- what is the priority here?

Well, the Board every quarter talks about it.

Needless to say, what we do they are certainly knowledgeable of and comfortable with.

Part of it has to do with the strength in our stock price.

We look at it on a -- periodically update it, but kind of matrix pricing, buying more as the stock goes down and less as it goes up a little bit; and then adjust that upward over time as the stock has gone up.

There were a number of weeks in the Q, quarter, where again on a given daily basis we bought a little less, but we feel comfortable.

We will continue to look at it.

I don't want to judge what we and the -- I and the Board will consider and do.

We recognize that we have a high quality challenge with cash.

You have heard it before, but I still mean it; I am confident that we will continue to increase our expansion and some of that expansion is going to be more expensive given the international rate of expansion.

Over time, all things being equal, I would guess we would increase it.

But again, we are not going to feel pressured to do it this Thursday or next week.

But you will continue to see us buy stock back, and the Board is supportive of that.

Okay.

Thanks very much.

That's a pretty vague answer, sorry.

That's all right.

Thanks.

Robert Carroll, UBS.

Hey, guys.

Just drilling down on the pricing investment a little bit more.

I know given the 10 basis point decline in core business, is that the rough level that we should think about until things start to anniversary in Q4?

Again, we can't guide you.

Okay.

All right, no problem.

Then, just in terms of the precedents I guess from this time last year, when gas prices started accelerating meaningfully.

Are there any lessons learned from that period that you guys will be putting in place as we see, let's just say, gas prices catch a bit of a tailwind?

Well, I mean I think the big thing has been our frequency.

There is nothing -- it is a very low margin business, and to try to hedge yourself a little bit, all you are doing is, if you will, maybe smoothing the profitability out.

But there is a cost to that hedge.

And on a low margin business that is a big cost, so we don't.

So this is going to continue to be volatile.

Whenever it has been a big year-over-year impact to earnings, we talk about it's a few cents better or worse or $0.05 better or worse.

But clearly I think last year in the fourth quarter, we had huge profits in gas; and we shared with you at the time.

But when prices rise we get more action.

We are on the news more.

People are -- there is more frequency.

I looked at some statistics in recently in US gallon consumption.

Not just Costco, but the US consumers' gallon consumption, which in good economies is up a couple of percent, 1% or 2%.

Had been down 3% or 4%; and of late has been down 5% or 6%, I believe -- I have to check that.

And we are still up in the mid single digits.

So we got -- we are driving people into the parking lot, no pun intended, and a portion of them come in to shop.

So it is just reinforcing that image.

Then for the gas sales penetration, I know you said it was up year-over-year.

But do you have that number?

I don't.

Gas sales penetration?

I think it wasn't as much as Q1.

I think it was up about 1%.

Yes, I think it was around 8.5, and the low 9s.

Great.

All right.

Thanks, guys.

Brian Nagel, Oppenheimer.

I just wanted to -- I also had a question regarding the pricing actions you have taken, and the resultant impact we have seen on your core gross margins.

So we see it now for I guess a few quarters.

The first question I have is, as you think about the actions you are taking within your clubs, what is driving so to say the cadence of those?

Are you going product category by product category?

Or is it a reflection to some extent of the underlying input cost in those products where you are deciding to make actions?

Then the second question I have along those same lines is, after these actions are taken, how are you priced relative to some of your competitors?

We have talked a lot about -- the other questions asked too about the competitive price out there.

But are you generally speaking -- been lowering prices below competitors or are you matching competitors, etc.?

Well, first of all, we are always going to match or try to be lower than our competitors.

Keep in mind, I don't know if it is half or more of our business are very competitive commodity items, whether it is milk, cheese, and butter, or soda pop, or Advil or diapers or you name it.

Private label helps that impact with us and others as well.

But I really do mean it.

We don't -- it is kind of like all the merchants are -- going into Christmas as an example, the merchants were directed in every category.

Says, come up with some ideas of where we can get sharper and be exciting out there and have hot buys and have hot items and hot selling prices.

So that is what we do.

When we do comp price shops, and we do it most importantly directly with Sam's and BJ's, the two warehouse club operators, we are not comparing every price.

Are the fresh food buyers looking at the ground beef ads and the chicken fryer ads or whatever else?

Yes.

But we are not comp shopping supermarkets; because keep in mind, our margins are on average 11% and theirs are in the mid-20%s -- or more, in some cases.

Or the home improvement retailers in the low to mid 30%s.

But when you look at the most direct warehouse club competition, where we are across the street from each other or down the road from each other, on key commodity items -- which is, I don't know if it is 40% or 60% of our business, call it half -- we are all very close.

When we look at it on exact items, we are going to be lower; it could be a 0.75%, it could be 1.5%, 2%, but it is small.

Where we find the big differences is on those non-commodity or highly competitive items.

Where we are selling a better quality item, there is not is much of a direct price comparison because it is not the exact item on a lot of things like domestics and housewares.

And that is -- or the quality of some of the homeo replacement items at Costco versus elsewhere.

So that is where others we feel can make a little more margin.

And we can too, but not as much.

And again, that is what we do as merchants, though.

So it really is all over the board.

All right, thank you.

Adrianne Shapira, Goldman Sachs.

Thanks.

Richard, if I recall, the last time you made some price investments, it was ahead of easing prices.

You were the first to lower and it obviously paid off remarkably well with strong share.

Is that true this time around as well?

Maybe give us a sense of what you are seeing in terms of inflationary pressures potentially easing, especially in food.

No.

Again, the example that I talked about and as you just mentioned as well is in late calendar '08 the economy fell into crisis; the rampant inflation of mid-calendar '08 towards the fall of calendar '08, it was rising gas prices, rapid inflation.

That came to -- that was coming to an abrupt end.

In many instances our suppliers, who had committed to raw materials, it was going to be four, six, eight weeks out before the underlying prices to us and to other retailers was going to come down.

Well, we saw comps heading towards zero and I think -- again, we called it the Perfect Storm.

That is completely different.

That was hopefully a one-time Perfect Storm, and we acted upon it.

I think this has more to do with the fact that we are very strong, we feel.

We are driving sales and comps.

We are seeing increasing relative levels of profitabilities in some of these other countries.

And it is a constant internal reminder -- again for years by Jim and now by Craig -- let's not be too sure of ourselves.

Let's keep doing what we are (technical difficulty) As long as we are growing the Company and growing earnings, we will do that.

As Jim used to say, we are still -- we think we deserve to make more, and we will.

I understand it is different in that it is not as abrupt.

But maybe shed some light in terms of -- are you seeing any easing of some of the inflation that we saw last year?

Oh, I'm sorry.

Yes, we are.

As an example, while there is a very minor LIFO charge, I think using 100.00 as the starting point at the beginning of the fiscal year for LIFO indices, I think we are up 11 basis points for the first half -- the first 24 weeks of the year.

So virtually nothing -- and that includes gas, which is a chunk of that.

Are we seeing some declines?

I know as an example cotton prices have come down from its peak, so we will see some declines going forward.

So yes, there is some of that.

Clearly to the extent that we -- self-inflicted tend to lag when there is inflation, we -- even if there is less inflation, there is no lag to be lagging on.

So, did that answer it?

Yes, I think the point is that while we saw sequentially some degradation in core merchandise margins, if we are seeing some easing cost pressures perhaps going forward we shouldn't see as negative of a hit on the margins going forward, if you are seeing some relief there.

Well, I'm going to bet on you, then.

Okay.

Then my next question, as it relates to -- with gas prices obviously that would seem as if, as you mentioned the frequency and the traffic should continue to at least hold, if not get better.

Help us think about -- are you starting to see -- how are you addressing the throughput issues?

I would imagine some warehouses, given what is just unbelievable traffic trends, what are you doing to accommodate this kind of frequency?

I know Jim was very focused on making sure the lines were not too long.

What, if anything, is going on to accommodate what is just fantastic traffic?

There's pretty much two things you can do, other than trying to speed up the register a little bit.

You could put more people up front, which we do.

The worse thing is when you have long lines and registers that aren't open, and that is a no-no.

Clearly one of those slides we had shown at conferences that showed the number of units that are doing 200 to 250, and 250 to 300, and more than 300, there are more of them.

We look for more sites, and we have taken a couple units over in Asia that were in the 300-plus range and have opened sites.

That impacts cannibalization, but that is what we have to do, and we will continue to do that.

So, there is -- we recognize that is a high-quality problem; but we have to continue to address it.

There is again those three things.

You add more people; you can improve technology a little bit.

That is an ongoing iterative thing, but not a lot.

Other than when you can just push the basket through the archway and it tells you what you owe.

And then open more units.

Great, and then just last --

We are also remodeling and expanding.

I mean this is anecdotal, but an example is we are under construction in Maui.

We are adding a significant amount of parking, I forget how many square feet we're adding to the physical building itself, and we are adding a gas station.

But most importantly, we are adding parking.

If any of you have been over there, it's approaching 300 million, and it is mind-boggling how small the parking lot and the building is.

Great.

Then just my last question as it relates to online.

You talked a little bit.

Maybe give us a sense of -- where is that business in terms of sales, profitability, how pleased you are with it?

You talked about some tweaks and some changes coming in this year as well as expansion overseas.

Maybe give us a sense of what we should expect online and what trajectory you would be pleased with as that channel continues to grow.

Thanks.

Well look, as you know, we are a little different than others.

We have few items on it.

More big-ticket items.

We cater mostly to our members, and it's a product extension of what we do.

We don't have 100,000 or a million items on there.

I think the replatforming is a no-brainer from the standpoint that -- I think I said it last call.

You go online and punch in Kirkland Signature or something and you don't get Costco.com because our platform is an old platform that doesn't allow search engines do crawl on it.

Well, that is a duh.

That will happen at the end of the summer, and then it takes several months for the hits to improve your pole position, if you will.

Beyond that, we have found success in again big-ticket items, white-glove items, whether it is furniture or big-ticket electronics.

It is a lower gross margin business and a higher pretax as a percent of sales business.

So it is still small relative to our Company.

For a company that is going to do $95-billion-plus this year, it's 2.5-ish, so it is small.

Does it drive us crazy when others do a lot of business?

Yes.

But we recognize we do some things that they can't do, and they do things that we are not going to do.

So, we want to do better and we will.

And we are growing, but we can always do better on it.

Thank you.

Best of luck.

Greg Melich, ISI.

Hi, thanks.

Just a follow-up on that last question, Richard, when you talked about dot.com, is that dynamic of lower gross margin, higher pretax profit -- is that entirely because of mix?

Or does it have to do with the business itself?

Say that again, Greg.

I'm sorry.

That dynamic on dot.com that you described, lower gross margin rate, higher pretax profitability, is that entirely driven by mix?

Or is it something with the actual business?

Well, it is certainly bigger ticket items help.

But I think I would guess -- and I'm just shooting from the hip here -- the biggest thing is lower operating costs.

A high percentage of the items -- I don't know if it is 70% or 80% today or more -- is factory direct shipped.

So, the cost is the electronics -- is running the physical system and the buyers, and not a hell of a lot more.

Got it, great.

Then you mentioned inventory up $1 million per club globally, FX not an impact, but inflation was key there.

Could you help us quantify that a little bit more?

Was inflation, all of it, half of it?

Yes, well, on a year-over-year basis, my guess is that inflation was 2 to 3, probably closer to 3 but I don't have the exact number.

Yes, 2.5, call it 2.5, so that was -- rough number on $10 million, $250,000.

The rest of it is, I know we tend to have more in electronics right now, but a little bit.

I mean it really was across the board.

Historically it was in one or two categories, but I think it is partly driving the business.

Is that -- it sounds like with fewer SKUs.

But then inflation being $250,000 of it, it means there is $750,000 of actual just more depth in the SKUs you have?

More depth and higher tickets, not just because of inflation.

Got it; okay, great.

Then lastly, on gasoline, could you highlight a little bit the -- I think you mentioned gas profitability and the ancillary.

I imagine that is because of the rate of increase and the replenishment of your inventory.

Could you just give maybe a little more color on that?

Did that dynamic -- was that what hit you in this quarter?

In ancillary, that hit us -- the Food Court I mentioned, I think; that is a big chunk of it as well.

That is again -- I think I talked about that a couple of the last three or four quarters.

And again, that is clearly us.

We have held the price of pizza when cheese prices skyrocketed.

And again we are driving -- it's still profitable, needless to say, but it's at a lower level of profitability.

But that negative 4 bps to gross margin, you mentioned the Food Court.

But the part that is gas margin, I imagine that is not the fact that gas mix went up; that is the actual penny profit of gas?

Yes.

Okay, great.

Just given the cadence of what we are seeing, there is no reason to think that that would change?

In fact, could it get worse here before it gets better?

Well, first of all, with gas, who knows what happens?

If we -- it was just a few days ago that everybody was talking about gas and speculators and there is no reason it should be going up so much.

But then in the same breath everybody is saying that summer gas prices rise starting Memorial Day.

So when gas prices rise our profitability lessens.

There are weeks when we lose money in gas.

That being said, I mentioned -- yes, I think last summer is when we made a lot of money and I imagine prices were going down at the time.

So it is hard to say.

That is why we try to point out gas because it is such a volatile thing.

All right, great.

Thanks a lot.

Chris Horvers, JPMorgan.

Thanks, and good morning.

So, Richard, continuing the long thread on gross margin, maybe going at it again another way.

When we last met you talked about how the first membership fee years ago, Jim basically said to all the merchants -- hey, we have an extra $20 million in price investment that we can create.

So as you think about going forward and the fact that MFI growth really accelerates in the back half, as you talked about, do you think that that will allow you to accelerate the price investment?

Maybe yes, maybe no.

I have always looked at it -- again, and I think the example you are talking about is probably something from 20 years ago, literally.

There are lots of reasons we are competitive on pricing.

It is direct competition, private label, given competition geographically in a given state or country, our level of strong profitability.

Is the success of our membership fee income a factor in how we operate our business?

Yes; but by no means any different than all the other factors.

Some are bigger than others, and sometimes they are not.

Again I can't give you any direction.

Our goal is not to drive you guys crazy with what we do; it is to drive our business in the right direction.

Understood.

Then is there any -- how much of the price investment maybe relates to what is going on in Canada?

It seems like there is war brewing with Wal-Mart accelerating and Target launching next year.

Well, again I am not going to comment specifically.

What we do everywhere in the world, as we enter a new state in the United States, as somebody comes into one of our markets, we are more competitive.

We respond most -- usually our most direct response and impact to that direct response is when it is direct warehouse club to warehouse club.

Certainly as Target, which is a new entrant into the Canadian retail market, and Wal-Mart, a very strong retailer up there as well, and other Canadian retailers -- there is going to be a lot of pricing competition and advertising.

Certainly we are going to continue to drive our business.

So again that is what we do.

That is one of the things we do, but we do those things elsewhere as well.

Understood.

Then final question on the weather, our other favorite topic.

So it seems like there is some speculation out there whether or not this is core consumer getting better, or maybe January and February is seeing a lift out of the weather.

Is there anything you can say to that topic or anything you are seeing on the category level that you think is instructive?

Bob was whispering that this year was a little better than last year weather-wise, but not a big impact in our view.

Thank you.

Mark Wiltamuth, Morgan Stanley.

Hi, Richard.

It's Mark Wiltamuth.

I wanted to get your thoughts on foreign exchange drag that we could see in the second half of the year at this point.

Well, who knows?

It depends on what's going on.

I was looking back at the last several quarters.

For a long time the dollar weakened; and then it strengthened dramatically; and then it is coming off of that strength.

Right now it is likely negative.

There is nothing giant brewing out there.

Europe seems less of an impact.

But who knows?

Okay, and --

I don't know.

Then looking back through the holiday period, you were clearly one of the holiday winners in terms of sales trend.

If you look at those margin investments you did make, were those all planned investments?

Or did you have any of that holiday promotion that was kind of reactionary?

I don't think anything we did was reactionary.

It was all done in advance.

I mean you are always -- there's going to be maybe one or two things, but I don't even remember thinking, hearing about that.

Okay.

Then as you look at how things are going on expenses right now, what level of comps do you think you need to lever SG&A in the back half of the year?

For the last several years we have tried not to predict because we realize we don't know.

I think whatever X is, it is a little bit lower sales comp number than it used to be because we, like everybody, has gotten a little more efficient in the last few years with the economy.

I hesitate to know what it would be.

Okay.

Thank you very much.

Robby Ohmes, Bank of America.

Hey, Richard.

Just a couple quick questions.

I just want to follow up on your answer to Greg Melich's question where you said higher tickets but not just because of inflation.

I was wondering if you can just give us a little more insight to the type of category shifts that you have been seeing recently and what maybe you expect for this year that could be different from what you have seen in the last couple years.

Are you adding higher ticket items to the assortment broadly?

Or is it in the softlines category?

Or maybe just a little help, helping us see what you may be feeling?

We won't hold you to it, but any changes you are seeing.

Look, it's all over the board.

Jewelry is up, needless to say, because of inflation.

The average price point of a TV is up a little bit versus being down typically year-over-year.

Cameras are up a little bit, and both of those have to do with the earthquake in Japan and the floods in Thailand I think in regard to cameras and to hard drives or whatever.

So some of those things [haven't] been deflationary.

I noticed -- again, I am telling you this as a shopper.

Some of the private label items we have had in the canned goods are eight-packs not six-packs.

Those are things we do out there.

I know we have a few more homeo replacement items, so I think it is really all over the board.

I would think some of it also is more physical units out there, because you can't all be first.

But again our inventories are clean and our shrink numbers at midyear were great.

Just one other question on online.

Are you guys contemplating a change in how you charge for shipping related to this redo?

I will tell you as soon as I know.

I don't know what plans that I have or haven't heard about yet.

We keep doing what we do.

All right, great.

Thanks a lot, Richard.

Chuck Cerankosky, North Coast Research.

Good morning.

Richard, first thing, just a data point.

Do you have the square footage at the end of the quarter?

Yes, it is -- hold on; I got it right here.

84,998,000.

All right, thank you.

I want to poke around on another category, apparel.

How did that behave during the quarter?

And any comments on what you might be doing there?

I can tell you; hold on.

Apparel was up in the mid to mid-high single digits.

We see brands and continue to try to [divert] brands that won't sell us.

But no, it has been relatively decent.

Then on the electronics category, you mentioned before on the comp commentary it was -- I think you said just below zero.

But you had some dollar increases in TVs.

So how are units tracking overall in electronics?

Well, needless to say, it is a little bit below below-zero.

I don't have that in front of me.

My guess, it's in the low to mid.

It is not dramatically different than that.

When you are looking at the cash the Company has, you're going to pay down a chunk of debt.

How about the dividend?

What is the Board or management's thought on boosting the dividend meaningfully?

Again, we talk about it.

There is a formal discussion every year at our April Board meeting.

But there is no -- again I can't give any direction of what we discuss until we announce (technical difficulty).

All right.

Great quarter.

Thank you.

Thank you, Chuck.

Why don't we take two more questions?

Mark Miller, William Blair.

Hey, good morning, Richard.

On the club opening delays you are seeing, that was also down from the prior plan.

But I'm trying to think of many comparable situations for companies that have such strong consumer demand, high comps, great return on capital.

Is it your fate at this point to be driving around 3% footage growth due to the size?

Or are there any changes you can make to reaccelerate unit openings?

Expanding the real estate team or changes in property siting.

We have expanded the real estate team in the last year or so, including putting people on the ground in a few of these other countries, more so than we had in the past.

We clearly are focused more internationally, which has a little longer timeline.

There is a lot in the pipeline.

Craig clearly is committed to that.

I hope we can all sit here soon and say -- okay, it finally happened.

One of the things that I have said before as we reflect on this question is that in our view one of our strengths -- in some people's view relative to how quickly we open units, people think it is a shortcoming -- is we are very hands-on.

We particularly -- I viewed it as a real positive in terms of rapid rate of expansion.

For years between the three countries Japan, Korea, and Taiwan, between the three countries we had about 20 units.

So six or seven per -- five to eight per country.

And between those three units we may open one or two a year in total between those three countries.

That was six in the last year, I think, and it will be more going forward.

So we have got more on the plate and I think you should see that turn somewhat at least directionally upward.

But I am tired of listening to me also.

On the pipeline -- and that sounds encouraging.

Is that -- I mean is there I guess a figure you could share with us in terms of sites that have been approved?

Or I guess some way for us to look at '13 and whether that number can push higher?

Thanks.

At the end of the day, I would assume -- and I am shooting from the hip here -- the number should be in the mid-20s, which would give me more comfort that at least it will be in the low 20s.

But we will have to see.

We have got a lot going on.

A lot -- we have more going on now than we had a year ago or two years ago.

All right.

Thanks, Richard.

John Heinbockel, Guggenheim Securities.

Hey, Richard, a couple of things.

When you look -- obviously your customer is very loyal; but when you look at loyalty, is the fresh food customer and/or the Kirkland customer, when you look at those two, are they significantly more loyal than people that don't put as much fresh food or Kirkland in their basket?

Have you looked at that?

I have not.

So happy to, but I have not.

Okay.

Secondly, with respect to real estate is there more -- the sites you are looking at, because there is less -- there seems to be fewer people looking to grow as there had been, the quality of sites that you would look at, is that now opening up a bit, or not?

That is still not where you would like it to be in terms of availability?

It is certainly up a bit from pre-financial crisis.

But while there is some slowing there are still people growing out there.

The other impact aspect of that particularly in let's say the US and Canada where we are, locations are more pinpoint shots rather than wide blasts of geographic area.

You know, anything within a five-mile radius.

We are looking within this mile radius because it is between two locations, six and eight miles in each direction.

So that becomes a little more challenging.

But that is why there is more effort being put into it.

Yes, the answer is yes, the economy has helped that process.

But it has not like gone from difficult to easy.

Do we ever get to a point where you think about playing around with the size of the box to open up the potential number of locations?

A lot smaller or --?

Not yet.

Years ago -- it is probably 15 plus, 15 or 17 years ago -- in the Northwest we opened four units, the Coast.

Astoria, Oregon; Juneau, Alaska; Kamloops, British Columbia; and one more I can't remember, I can't figure which one.

They were 72,000 foot units.

Over time, we have changed three of them into 140,000, 145,000 foot units, and they are doing quite well.

So, again, our focus is keeping it focused on what we do.

All right.

Then finally, are healthcare costs now into the single digits in terms of growth, or not yet?

I think they actually were in Q2.

I don't have the sheet in front of me.

But given the total sales increase was 10 and we increased -- we had a few basis points improvement, the answer is most likely yes.

That is not -- you haven't done anything differently with the plan?

I'm not talking about being less generous.

I am talking about just being more diligent about how that money gets spent.

Has that been the case?

Or it is just more it's kind of happened more naturally?

It is mostly more naturally.

We haven't done anything to the plan in terms of detrimenting -- improving the bottom line of the costs of it by passing something on to the employee.

We have not done that.

I think that we are always doing -- in the last several years we focus a lot more on preventative stuff, needless to say, and getting people back to work on workers comp.

But beyond that, there is nothing to speak of.

I know what we call high-cost claims, which are $100,000 and over, are down a little bit in terms of frequency.

All right.

Then just lastly, wage growth in comparable stores, that hasn't changed much here in the last couple of quarters, has it?

I'm sort of thinking about within that 6.5% growth, whatever wages were growing, maybe whatever -- 3% to 3.5%, that hasn't changed?

I don't think it would.

To the extent that we are opening more units overseas, some of those countries have a lower effective wage than the US does, but still very well compensated relative to that country's regular retail rates.

So a slight change there probably helps you a little bit.

Okay, thank you.

At your request, Mr.

Galanti, there are no further questions.

I will turn the floor back over to you for any closing remarks.

Well, thank you very much.

Bob and Jeff and I are here; and we will talk to you soon.

Thank you.

This concludes today's conference call.

You may now disconnect.