好市多 (COST) 2013 Q1 法說會逐字稿

Good morning.

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

At this time, I would like to welcome everyone to the first-quarter fiscal year 2013 operating results 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)

Thank you.

Mr. Galanti, you may begin your conference.

Thank you, Felicia.

Good morning.

Today of course is our first-quarter earnings report for the 12 weeks ended November 25.

As with every conference call, I'll start by stating that these discussions we're having will include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and that these statements involve risks and uncertainties that may cause actual events, results, and/or performance to differ materially from those indicated by such statements.

The risks and uncertainties include but are not limited to those outlined in today's call, as well as other risks identified from time to time in the Company's public statements and reports filed with the SEC.

To begin with, our 12-week first-quarter operating results for the quarter, our reported earnings per share came in at $0.95, compared to last year's first quarter of $0.73.

As was noted in this morning's release, there were two one-time items that hit last year's Q1 results.

The first of these was the settlement of an income-tax audit at Costco Mexico last year in the first quarter.

During that quarter, Costco Mexico recorded an after-tax charge of $24 million.

The impact to Costco's net income, as a then 50% owner of Costco Mexico, was $12 million, or $0.03 a share.

The second item that hit last year's earnings results was a $17 million, or $0.04 per share charge, to SG&A line for our contributions to the Washington state I-1183 liquor initiative.

Excluding these two one-time items from last year's results, last year's $0.73 reported figure would have been $0.79, making this year's $0.95 figure a 20% year over year increase.

In terms of sales for the first quarter, our 12-week reported comparable sales figures in Q1 showed a 7% increase, 7% in the US, and reported, and 9% internationally.

Excluding gas price inflation and the impact of FX, the 7% US comp reported number would have been 6%, the 9% reported international comp would have been 7%, and the 7% overall would have been a 6%.

Other topics of interest.

I'll talk about our opening schedule first.

We opened nine locations during the first fiscal quarter of 2013, eight in the US and one in Alberta, Canada.

By the end of this week, we will have opened in the second quarter, five additional locations, one in Washington, DC, one additional one in Canada, one in the UK, and one in Korea, which is later this week, giving us 14 new openings thus far in fiscal 2013.

For all of '13, we have a current plan of 30 new locations, 14 of which are planned for the US, 3 each in Canada and the UK, 1 in Australia, which will be our fourth in that country, a new one in Mexico -- our 33rd location, and the first new opening in Mexico in a little over three years -- and 8 in Asia, including five in Japan, 2 in Korea, and 1 in Taiwan.

Also this morning, I'll review with you our e-commerce activities, our membership trends, additional discussion about gross margins and SG&A in the first quarter, stock repurchase activities, which were relatively small, and of course the two subsequent events, the announcement of $7 per share special dividend, which will be payable on December 18, and the sale of $3.5 billion of senior notes.

Okay, on to the discussion of the quarter.

Again, very briefly, the sales for the year, the 12 weeks ended of November 25, were $23.2 billion, up 9.6% from last year's first quarter of $21.2 billion.

Our reported comp basis, first-quarter comps were up 7% for the quarter, and excluding gas and FX, up 6%, again, comprised of 6% US without gas and 7% international in local currencies.

For the quarter, our 7% reported comp result was a combination of an average transaction increase of about 2.5% and an average frequency increase of just under a 5%.

In terms of sales comparisons by geography, geographically, all the regions have been fairly consistent for the past few fiscal quarters, generally in the mid- to high single-digit positive range.

One outlier was due to Hurricane Sandy hitting the Northeast.

Comps for the Northeast region November were lower than it had been running by 2 percentage points.

California has been in the mid-singles, positive range, southeast and Midwest in the mid- to high singles.

Internationally in local currencies during the quarter, Costco -- Canada continues strong, coming in in the low double digits for Q1 and in the mid- to high singles in November.

Where international sales results are being hit is in Asia, and in a word, cannibalization.

Since Q1 end a year ago, we opened one unit in Korea, we now have eight there, one unit in Taiwan, which brings us to nine, and four new locations in Japan.

So we now have 13 in Japan.

So 6 new openings in the past year on a base a year ago of 24.

Additionally, in Korea, a few months ago, we, like other big-box retailers in Korea, are now required to be closed two Sundays a month.

In terms of merchandise categories for the quarter, for the first quarter, September, October, November, essentially, within food and sundries, overall in the 4 to 6 range with candy, deli, and refrigerated being the relative standouts.

Our hard line sales were quite a bit stronger as compared to recent quarters.

Majors, electronics, came in in the high teens and hardware in the mid-teens.

Overall, in the low double-digits for hard lines.

Within the low double-digit soft lines comps, small electrics and women's apparel were the standouts, with media being the area of continued weakness.

Within fresh foods, its comps have been in the mid- to high single digit range.

All sub-categories pretty good results.

Moving down the income statement, in the first quarter, membership fees, $511 million, or 2.20%.

That's up 14%, or 9 basis points, from the $447 million a year ago, or $64 million increase.

In terms of membership, we continue to benefit from several things.

Certainly we're still benefiting from the $5 and $10 membership fee increases that began last November in the US and Canada for new sign-ups and this past January for renewals.

Of the $64 million increase year over year in membership fee income, about $28 million we estimate was due to these increases, based on how deferred accounting works.

The income statement benefit to the membership income line, as I mentioned before, will continue to show incremental year over year increases throughout the four fiscal quarters of 2013, and to a partial extent, in the first quarter of fiscal 2014.

In addition, we've got new openings that have helped, as well as strong renewal rates, rounding up to 90% in the US and Canada and 86% worldwide, and continued increasing penetration of the $110-a-year executive membership in the US and Canada.

Our new membership sign-ups in first quarter Company-wide kept pace year over year with last year's sign-ups.

While we did have more locations open in the quarter, nine versus a year ago, four, we think it's pretty good outcome given that there were very strong international openings last year, which contributed to very large sign-ups in Q1 a year ago.

In terms of new members for Q1 end, at fiscal year-end, we had 26.7 million Gold Star members.

That's up to 27.3 million at Q1 end.

Some of that, of course, is the conversion of some of our business add-ons as they convert into Executive member and become their own separate membership.

So again, 26.7 million became 27.3 million.

Primary business, 6.4 million at year-end and 6.5 million at Q1 end.

Business add-on, 3.8 million, and down to 3.6 million.

Again, that's related to that conversion.

And so all told, 36.9 million, and now 37.4 million.

Including add-on spouse cards, 67.4 million cardholders at the end of Q4 and 68.2 million cardholders 12 weeks later at Q1 end.

At Q1 end, paid Executive members were 12.9 million, an increase of 280,000, or about 23,000 a week increase in the quarter.

Executive members account for a little over one-third of our membership and a little over two-thirds of our sales.

That trend continues as well.

In terms of renewal rates, they continue strong at 89.7% at Q1 end in the US and Canada, and 86.4% worldwide.

Business was a 93.6% at Q4 end and picked up to a 93.8% at Q1 end.

Gold Star remained constant at 88.7%, and total, 89.7%.

Again, worldwide, 86.4%, so continuing strong in all categories.

Overall, it certainly appears that a year-ago's membership fee increase had little or no impact on our renewal rates.

Going down to gross margin line, margins were up 6 basis points year over year in the quarter from a 10.62% last year to a 10.68%.

And as usual, we'll just jot down a few numbers, give you a few less this time.

We'll make four columns, and the line items are as follows.

Four columns, by the way would be, reported fiscal year '12, and then fiscal year '12 without gasoline inflation.

For the quarter, the same thing, reported Q1 '13, and then without gas inflation.

So those would be the four columns.

Going across, core merchandising, for the year, it was minus 21 basis points.

Without gas inflation, it was minus 13.

For Q1, reported was minus 7, and without gas, minus 1. Ancillary, plus 1 and plus 2 for fiscal '12, reported and without gas.

And in Q1, plus 14 and plus 15.

2% reward, minus 2 and minus 2, and in the quarter, minus 2 and minus 3. LIFO, plus 8 and plus 8 for last year, and plus 1 and plus 1 in the first quarter.

All told, we reported for all of last year a 14% year over year decline in gross margins, but without gas inflation, it was minus 5. In the first quarter, we reported plus 6, and without gas inflation, it was plus 12.

So with that chart in front of you, you can see that our overall gross margin was higher year over year by 6, but again, up 12 without gas inflation.

In the first quarter, our core merchandising gross margin, again, was a minus 7, but only 1 basis point lower year over year excluding gas inflation.

This 1 basis point negative result compares favorably to the previous four fiscal quarter figures, where the year over year core merchandising gross margin variances had ranges from minus 10 to minus 16 basis points.

As you can see in the chart we just wrote down, for all of last year ranged averaged minus 13 basis points.

Ancillary business, gross margins contributed 14, a higher year over year gas sales, both in dollars and gallons.

Higher year over year gross margins in the gasoline business represented about two-thirds of this positive year over year gross margin variance.

Margins in our food and sundries department, which is a little over half of our core merchandise, were up slightly year over year in the quarter.

While in non-foods, hard lines was flat year over year, and soft lines margins were down slightly, as were fresh foods.

The 2% reward feature, again, just a little extra sales penetration, therefore a minus 2 basis point reward.

That of course would imply about a 1 percentage point increase in sales penetration to those members.

And LIFO, LIFO there was no charge or credit last year, and there was a very small credit this year of $2 million, or 1 basis point, implying some minor amount of deflation during the fiscal quarter.

Moving on to SG&A, our SG&A percentages in the first quarter were lower or better by 7 basis points, coming in at a 10.05% compared to 10.12% as a percent of sales last year in the quarter.

Again, we'll do the same little chart with the four columns.

Two columns for fiscal '12, reported and without gas, and then two columns for Q1, reported and without gas.

First line item is core operations.

In fiscal '12, plus 18, and then without gas inflation, plus 12, meaning lower, better or lower, by that much.

In Q1, plus 10, and plus 5. Central was a small improvement for [all] of fiscal year of '12, plus 2, and then without gas, plus 1. And in Q1, SG&A was higher at central, minus 7, and minus 8 without gas inflation.

Equity compensation was minus 1 and minus 2 for all of last year, and minus 4 and minus 4 in the first quarter, certainly a reflection of both the higher stock price, as well as every -- there are certain recipients that get them every other year, and we're trading off a year versus that one.

That doesn't happen.

All told, plus 17 and plus 9 for last year, so reported SG&A -- I'm sorry, excluding quarterly adjustments.

Quarterly adjustments, which is basically that $17 million charge to SG&A last year in the first quarter for I-1183.

For all of the year, that was that minus 2 in the reported fiscal '12 column, and a minus 2 without gas inflation.

In Q1 it, was plus 8 and plus 8, so lower year over year, of course.

So a total of plus 7 and plus 1, meaning we reported 7 basis points of improvement, and without gas inflation, plus 1 basis point improvement.

In terms of a little editorial, operations were lower again, you can see the chart, by 10 basis points, but 5 excluding gas.

Within core operations, our payroll as a percent of sales improved year over year by 7 basis points.

And I think for the first time in the past few quarters, we benefited slightly by a 2 basis point improvement in healthcare cost line item.

Our central expenses were higher year over year in Q1 by 7 basis points, as you can see, 8 without gas.

The big culprit there is something I've mentioned in the past few quarters that has continued to increase, is the IT modernization cost.

We are now in full swing, and that represented year over year 7 basis point hit to SG&A.

Next on the income statement line is pre-opening expenses.

$10 million last year, and of course with the ramp-up in expansion, that's $8 million higher this year.

That was 3 basis points to the Company, but $18 million this year versus $10 million last year.

Last year in the quarter, we had four openings.

This year, of course, we had had nine, with five more just after Q1 end.

All told, reported operating income was $543 million compared to last year, compared to $639 million this year, or an 18% increase.

Excluding the $17 million charge for I-1183, operating income last year would have been $560 million, or up about 14%.

Below the operating income line, reported interest expense was much lower this year versus last year, with Q1 '13 coming in at $13 million, versus $27 million in last year's Q1.

Virtually all of this is the pay-down -- represents the pay-down of $900 million of debt impact in March, which we did on an annual basis beginning this past March.

The annual pretax interest savings to Costco, given that we paid off 5.3% debt, and we're then foregoing interest at a much lower rate, that's about $44 million pretax a year.

Interest income and other in Q1 was much lower year over year as well, by $17 million, coming in $20 million this year, interest income and other, and $37 million last year.

Actual interest income, within net interest income, and other was only lower by $1 million, coming in at $10 million versus $11 million.

The other component of the interest income and other amounted to $10 million this year, versus $26 million last year, or lower by $16 million.

$12 million of that negative variance related to a gain last year in the first quarter on US dollars held at our Mexico joint venture.

Because the Mexico venture held US dollars, and during that quarter, the peso declined relative to the value of the dollar, its holdings of the US dollar, which is a foreign currency to them, required marking that to market and a gain.

That $12 million, of course, 50% of that gain was ours, ultimately, since we owned 50% of Costco Mexico at the time.

So 50% of the gain was -- so all of the gain was in the interest income and other line a year ago, and 50% of it was down below in non-controlling interest as an offset.

Most of the remaining year over year decrease of approximately $4 million is just a normal swing, plus or minus, where buyers managing the cost of foreign-denominated inventory purchases in our foreign operations, which require at quarter-ends to mark those to market.

Overall, pretax income was up 17% last year, from $553 million to $646 million this year.

Again, excluding I-1183, that would have been -- last year's $553 million would have been $570 million, so the increase would have been 13%.

Terms of tax rates, our Company tax rate this quarter came in at 34.8%, a much lower of course than last year's reported rate of 40.8%.

But excluding the two items mentioned in the press release, our effective tax rate last year was at 35.3%, which I think is a more appropriate comparison, still about 0.5 point higher last year than this year.

And again, that reflects mostly the fact of increasing penetration of earnings outside the US, where federal tax rates generally are lower.

Overall, net income was up 30%, as you know, in the press release.

Excluding those two items in the press release, that would have been up 19.

Now for a quick rundown of other usual topics.

The balance sheet is included in today's press release.

Depreciation and amortization, $213 million for the quarter.

Accounts payable, as a percent of inventories, reported, of course, it showed 108% year over year, up 5 percentage points from 103% last year.

If you just looked at merchandised inventory accounts payable compared to merchandise inventories, last year it was 92%, and again, improved up to 94%.

So most of our inventory is trade-payable financed.

Average inventory [per warehouse] last year in the first quarter was $12.871 million.

This year in the first quarter, it was $13.213 million, so up $432,000, or 3%.

About $100,000 of that -- just under $100,000 of that -- is FX, strengthening foreign currencies versus the dollar.

Another $130,000 is in majors, principally televisions and cameras.

We've done very well, as you know, in the monthly sales reports about how our comps in the majors [have been].

The rest is pretty much spread among many departments.

In terms of CapEx, in the first quarter, we spent $488 million.

Our fiscal '13 CapEx is estimated to be approximately $2 billion.

This compares to CapEx last year of just under $1.5 billion.

Some of this higher annual year over year estimated expenditures are due to both the higher penetration of the number of units planned in Asia, as well as anticipated higher ramp of total openings scheduled for Q1 and beyond.

Also want to mention our dividends, our regular dividend, our quarterly dividend of $0.275 per share quarterly.

This $1.10 per share annualized dividend represents a total cost to the Company of just about $480 million.

In terms of expansion, as you know, last year, we opened 16 units, 17 openings, including 1 relocation, so 16 net openings.

For this year, we've, as I mentioned, opened nine new units with no relos.

Actually, there's no relos all year.

So in Q1, we opened nine.

In Q2, with the opening later this week in Korea, we will have opened 5 more, so 14 total.

We plan 3 -- we plan 7 for Q3 and 9 for Q4, and that would give us our 30.

Certainly, we're going to get north of 25.

If one or two of those slip, so be it.

But that's our current budget, is 30.

In fiscal '12, the 16 units we added on the then base of -- a beginning base of 592 represented 3% square footage growth.

In '13, adding 30 on a base of the 608 that we began this fiscal year is about 5% square footage growth.

Again, that includes 14 in the US, 3 each in Canada and the UK, 2 in Korea, 1 in Taiwan, 5 planned for Japan, 1 in Australia, and 1 in Mexico.

As of Q1, our total square footage ended at 88.259 million square feet, which represents an average of just over 145,000 feet per Costco warehouse.

In terms of stock repurchased during the quarter, basically for -- as you recall, for all of fiscal '12, we had purchased 7.3 million shares for a total of a little over $600 million.

This year in the first quarter, we repurchased 357,000 shares at an average price of $96.41.

That represented about $35 million.

Mind you that during the 12 weeks, there were only about 3 weeks that we actually purchased stock.

For the first five or six weeks, between the beginning of the fiscal quarter and through the day after of first-quarter earnings announcement in I think the second week in December, we essentially were locked into a previous 10b5-1 filing, and the stock had moved above that matrix.

So we weren't buying it.

Of course, once we decided to do a special dividend, we held off on buying during the last few weeks of the quarter as well.

If I looked at the days we actually bought, on an annualized basis, it was in excess of $500 million on an annualized basis.

But who knows what that brings for the future.

And lastly, the two subsequent events.

Two weeks ago, on November 28, we announced a declaration of a $7 a share special cash dividend.

This dividend will be paid on December 18 to people who owned the stock on the close of business on December 10.

In total, the dividend represents a return to our shareholders of just over $3 billion.

By the way, in connection with the Costco shares held by our employees in the 401(k) plan, which totals approximately 22.6 million shares, these shares are held through an employee stock-ownership plan that had been established several years ago, and dividends paid on these shares are deductible for US income tax purposes.

We will recognize a one time income-tax benefit of approximately [$62] million in the second fiscal quarter of '13 in connection with the dividend payable on December 18.

Also on November 28, we announced the completion of a $3.5 billion public debt offering in the form of senior notes.

The notes were issued amongst three tranches, three-year, $1.2 billion worth; five-year, $1.1 billion; and seven-year, $1.2 billion.

Given the weighted-average maturity of five years, our all-in annual rate of interest came in just under 1.25%, so we believe extremely attractive financing.

With that, I will turn it back over to Felicia.

As you know, later this morning, there will be a supplemental information pack which includes some useful stats, and that will be posted to the Costco investor relations site later this morning.

Felicia?

(Operator Instructions)

John Heinbockel, Guggenheim Securities.

Richard, a couple of things.

What are your merchants now saying about reflation in '13?

It seems like it may be less than we originally thought, but there still would seem there are some price increases coming down the pike.

What's their thought and what's your thought in terms of what you put in the budget?

I think the buyers are the ones that more put in the budget.

But in polling the buyers just yesterday, actually, the area that stands out would be components of fresh foods, notably protein, beef, poultry, and pork.

The view there is there's still additional mid- to high single-digit inflation expected over the next six to nine months.

Beyond that, it's hit and miss.

If I look at our LIFO statistics as an indication, apparel is down ever so slightly year-over-year, but that's partly because it was up a lot last year.

So it's coming off of its peak.

It's still probably higher than a few years ago.

I would say the overall view, aside from electronics being down slightly, per like item but -- our average price points are up a little, I believe, because we've tended to go towards higher end, like 60- and 80-inch TVs and more SLR cameras, DSLR cameras and the like.

In looking down the list of some unusual items, again, tuna looks like it's come up a little bit, canned tuna.

As I mentioned, beef is up some.

There's always going to be some ups and downs on produce, based on supply.

Grapes and blueberries are dramatic right now, higher year-over-year, but I'm sure it's weather-related, not anything-else-related.

On the down side, when I scan the list of the top 20 or 30 items here, most of them are electronics, with a few other things.

I mean, anecdotally, it's pecans and walnuts.

But I know a year ago, again, they were way up.

If you put it all in, my guess is, is that gas, who the heck knows.

Fresh foods, inflationary.

The rest of it, kind of a wash at this point.

Nothing up or down a lot.

Probably not enough to dampen demand it sounds like, right?

Not on our part.

Okay.

Your big competitor has talked about price investments.

Other than rotisserie chickens, I can't see a lot -- a big change in the competitive environment or the intensity of competition.

What have you seen?

And it doesn't look like you've had to do any reaction thus far.

Is that likely -- is that the plan going forward, based on what you're seeing today?

I can only speak of today and yesterday and prior.

But we don't see any big changes there.

Okay.

Finally, when you look out into January, is there any -- either with your individual customers or small-business customer, as best as you can tell, do you think the cliff -- has it created any change in behavior to-date?

Do you think it will, or it's pretty much a non-event for you?

We're a little jaded here, because our numbers, particularly our frequencies and our comps, have been pretty darn good.

I think we, like everybody, have a little of cautious optimism that they're going to do at least a compromise, or they better.

So we're not really focusing a lot on it right now.

Okay.

Thanks a lot.

I would think that we'd do a little better than others, at least if history continues.

That's fair.

Thanks a lot.

Mark Wiltamuth, Morgan Stanley.

Hi, Richard.

Congrats on the quarter.

I wanted to ask a little bit about the core merchandising margin, only down 1 basis point ex-gas.

Is there any change there, or can you really point to what was going on there to keep that number muted?

Not really.

As we've always said for many quarters, margins are more us than anybody else.

No, there's -- it's pretty much as you see it.

It's a little better.

I don't think we started the quarter saying let's get a little better, or let's get that trend back to zero, but that's where it ended up.

We're trying to do both, drive business and make money.

Have you seen an uptick in your private-label penetration or anything like that that might be contributing?

Nothing out of the ordinary.

We continue to add products, [add anything] from some wine and spirits to canned goods and all kinds of nut and candy items.

So I'd say nothing dramatic.

The big dramatic number came in the first half of calendar '09 after the financial crisis, where we saw an unusually large increase in sales penetration of private label.

I think on the food and sundries side, over six months back then, it was like 300 basis points.

But generally we see 0.5% to 0.75% a year.

I'm not aware of anything that is different than that right now.

Lastly, Black Friday, how did that go for you?

It looked like there was a lot of activity in the electronics part of the store, especially with the manufacturer rebates that were being featured there.

How did that look for you on that category?

It was fine.

No surprises versus what we had expected.

We've now done some of our own Black Friday coupon hand-outs and the like for the last few years, and we were pleased with it.

Okay.

Thank you very much.

Greg Melich, ICI Group.

Hi, it's Greg with ISI.

One question on SG&A, and then CapEx.

What really drove that central increase?

Is that some of the modernization impacts, or getting the website up and running in the new format, or what should we call out there?

The big -- when I look at IT cost as a percent of sales year-over-year, they were up 7 basis points.

My guess is is 0.5 or 1 -- a 0.5 basis point might be replatforming.

Maybe another 0.5 basis point or 1 basis point is normal increase in IT.

Clearly, 5 plus of it is modernization.

That probably has trended up a little extra year-over-year over the last few quarters and will probably peak this year, and then it will be anniversarying against itself each year over the next three or four years.

Got it.

(multiple speakers)

But -- go ahead.

As it anniversaries, do you expect it to go back to zero?

Or do you actually cycle it and it becomes a year-over-year down [for good guy]?

I don't think it's going to go down for two or three years.

These things take on a life of their own.

It will be a lot less than 5 to 7 basis points.

I would hope -- we haven't budgeted that detail that far out, but I would hope it's 0 to 2, not 5 to 7 next year.

And by the way, regarding the prior question as related to Black Friday, I just was looking.

That week, on a year-over-year basis frequency was still darn close to 4%, just below 4%, so pretty consistent with what we've seen all over.

That's great.

If I could follow up on the CapEx front.

I know it's going up because we're having more club openings.

Could you help us on the international openings and how many of those you actually build and own the store as opposed to lease it?

I imagine it's less when you go overseas than the US.

I don't have that detail in front of me.

I can tell you that when we look at the average location cost, which might be on average over the last couple years Company-wide in the mid-30s.

It tends to be a shade lower than that in the US and Canada and higher -- and might be in the 40s on average over, let's say in Asia.

But we've done a couple that are in the low 50s, and I would assume we'll continue to do that.

In Korea, we tend to do more ground leases.

In Japan, we tend to own.

In Taiwan, I think we tend to -- it's a combination, so ground leases as well.

Australia, I think we own.

And Mexico, we own, and UK, we own.

In Canada and the US, we generally own 80% plus.

Okay.

The ownership rate doesn't seem to change dramatically if we look international -- (multiple speakers)

No, particularly because we tend to -- right now at least we're tending to open, like in Asia, more in Japan than in Korea and Taiwan, where we tend of own more than lease.

Lastly, a follow-up on gross margin.

I think you mentioned in hard lines, gross margins were flat.

Just surprised on that, especially given the strength of electronics.

Was there anything else going on in there that could have impacted it?

Not really.

I think sales were strong, but in terms of the outright gross margin year-over-year -- there's a lot of hot deals over there.

I don't -- I didn't really read anything into that.

There's not a lot -- we've certainly improved on our returns over the last few years as we change our returns policy in electronics to 90 days instead of infinity.

But I haven't -- in terms of anecdotally in the last few budget meetings, there hasn't been anything coming out of there in terms of any issues in electronics or hard lines.

Great.

Thanks.

Charles Grom, Deutsche Bank.

Good morning, guys.

It's actually Matt for Chuck.

Most of my questions have been answered.

I was wondering if you could flush out your comments about the cannibalization you're seeing in Asia and where that is relative to what you expected and what you think is going to going forward as you continue to open up?

Thanks.

It's as we expected.

As an example, I think in Taiwan, we opened north Kaohsiung, which of course took a bunch of business from Kaohsiung.

In Japan, earlier this year, we opened in -- reopened Tamasakai, which was the one unit that was -- that had been closed for about 10 or 11 months from the tragedy of the earthquake.

Essentially all of that business went to two or three -- two nearby Costcos, when I say nearby, half an hour away.

The day it reopened, that unit is not comping, because it hadn't done any sales over the last year, but it took all that business out of the other two.

On top of regular cannibalization, we had extreme cannibalization in that one.

All that -- that was, yes, in March.

That will subside this March.

But nonetheless, we're opening a bunch of units over there, so that will continue as we expect.

Okay.

Great.

And then just a follow-up.

In terms of the Northeast, you said it was obviously weak, given Sandy.

Have you seen the recovery take hold, and are we back to normal in this area yet?

Yes, we are.

Okay.

Thanks a lot.

Colin McGranahan, Bernstein.

Good morning.

Thanks, Richard.

A quick follow-up on Asia cannibalization.

Looks like the comps in international ex-currency were running at the 10% range for all of fiscal '11, and the first half of fiscal '12, and then the last two quarters in the 7% range.

Is that entirely explainable by cannibalization?

And can you quantify what the that cannibalization impact is in total on the international business?

Yes, a big chunk of it is.

I don't have all that detail in front of me.

But if I look at Japan in local currency as an example, it's easily from up -- I don't have the -- I don't know what it was [but] I'm sure running in the low double-digits, and of late, it's in the high single negative digits.

You look at it, and we've opened four units in the last year.

What did that impact?

Those new units aren't in the calculation yet.

Almost half of the previous units are being cannibalized, and two of them extremely cannibalized, because you'd had a high volume in Tamasakai unit, existing location that had been closed for 11 months, and all those customers came back to their home base.

We don't -- then again, there's the anomaly in Korea of having to be closed for two Sundays a month.

If you just do simple math, that's one-fifteenth.

That's 6% or 7% of the days.

You don't lose it all, but you certainly lose some or half of it, or who knows.

Okay.

That's helpful.

Back in the US, how many clubs that don't have a gasoline station can still be converted at this point?

And where are you on that, that entire path?

I think in the US, we have about 440 locations.

I could be off 1 or 2, and I think about 70 of them don't have gas.

My guess, without looking at detail, is is that half of them ultimately can have gas, and half of them will never have gas.

You're never going to have a gas station at 11th and Harrison in San Francisco or Brooklyn.

They're landlocked, and forget about it.

I'm sure there will be some that we're working on.

I don't have the list in front of me, and there will be others that will relocate.

Probably a best guess is over the next five to eight years, half of those 70.

My guess is is when we open new ones, virtually all of them do -- there will always be one outlier, but virtually all of them have gas stations, as is in Canada.

In Canada, we have -- In Canada, we have 83 locations.

38 of them have gas, so 45 of them don't, recognizing we've only been in gas in Canada for the last few years.

Again, my guess is is that two-thirds of those that don't have it will have it over time.

Okay.

That's great.

Very quickly, you went through the variance on other income relative to last year, but what's the $10 million of actual other income this year?

Bear with me.

Interest income.

It's $20 million of (technical difficulty) other income, and there was $10 million of interest.

There's $10 million of other income.

Yes, there is.

He's asking us, the $20 million that we had -- hold on, I've got to look real quick.

When I look at interest income and other -- hold on a second.

Okay, about $10 million of it was investment income, and $10 million -- it's mostly equity and earnings of -- hold on.

I just did the variance.

Hold on.

Basically, it's about $8 million or $9 million of FX-related stuff, but by comparison, it's within $0.5 million of a year ago, so no change.

Okay.

Thanks.

I was just trying to figure out how persistent it is for modeling purposes.

Appreciate that.

Thanks.

Mind you, just because it's about the same year-over-year means nothing.

I understand.

Okay.

Karen Short, BMO Capital.

Hi, there.

Thanks for taking my question.

On the SG&A leverage, you obviously pointed out that payroll and healthcare.

Wondering how sustainable you think that might be throughout the year?

We always -- certainly, payroll depends -- I think we've certainly shown that we've focused a little more on expenses and payroll and that's -- we've gotten it down.

But certainly sales are a big part of that as well, and increased penetration outside the US, where payroll percentage as a percent of sales are lower to start with.

Our $20.50 average hourly wage in the US is one-third to 60% of that number in other countries, and close to it in Canada, of course, and a couple countries as well.

So that helps increasing penetration.

On the healthcare, I think if we got 2 basis points, it's probably more related to sales being stronger and getting it down a little black to flat without it.

Still hit and miss there.

Several components of all the new healthcare legislation, which have hit each year incrementally a little more, I think we're nearing the end of that.

A lot of that stuff, if you will, is in there by the end of this year, the end of next year, rather.

I can't predict that it's a trend by any means yet.

Okay.

Thanks.

Any color on the online sales, growth in general with the website revamp and the roll-out of the UK site?

So far, so good, but I don't want to really give numbers out, because it's only been a few -- a month and a half.

And probably talk about that more on the second-quarter call.

Okay.

Last question, any comments on fuel profits in the quarter, comp gallons and total fuel sales?

Gallons, I think I have.

We generally don't give that, but I'm here, so we'll get it.

(laughter) Let's see.

Volume -- do you have it handy?

I don't have it.

I think in the last couple of budget meetings, it's been running in the mid-single-digit range positive.

(multiple speakers) Mid- to high single-digits.

Okay.

Anything on tax rate going forward that we should think about?

I'm sorry?

Anything on the tax rate going forward that we should think about?

I know you commented on the issue, the [$60] million I think in the 2Q, but --

Other than that, I think the number in that 35% range.

On a normal basis, somewhere in the 35%, maybe a shade higher, but the trend line, if international's penetration continues, which we expect it to, would see that again trending down, again, ever so slightly, certainly (technical difficulty), all things being equal.

Great.

Thanks very much.

Mark Miller, William Blair.

Hi.

Good morning, Richard.

One thing that really stands out for me with Costco versus other discounters is that the comp growth is very consistent for you across the product categories, so not just food and consumables, but also very strong in general merchandise.

Can you expand on what you think you're doing differently or better, especially in hard lines and majors?

I think I can give you a different reason for some different categories.

From the beginning of time, we've always known we could be strong in foods and fresh foods, and the key is how do you -- and those are fast-turning areas, so how do you turn the bigger-ticket, non-food items, because you don't have to add more square footage for it?

If you can get something that's turning six and eight times up to nine and 10, that's good, and bigger-ticket items.

So we've always focused on that.

Of late, if I think of electronics, certainly our strength in 60 and 80-inch TVs, the bigger, higher-quality TVs, that's helped us.

Clearly, getting people in the door via gas and fresh foods and having them walk by those types of things.

I think in apparel, certainly we've made a conscious, bigger commitment in several of those areas over the last year, year and a half.

I think I used the example, last quarter something as simple as like the men's wool Kirkland signature pants, which I think we tested a couple of years ago with 100,000 units and last year 200,000 units, and this year 1 million units at $60 or so a pair, and they're doing well.

Not only are we making a decent margin, on the KS shirt, we've gone from just a standard one to a couple of different styles with a spread collar, and a -- so we're up to 4 plus million KS shirts.

Overall, making some bigger commitments.

Jewelry is strong, and not just because some of the prices of components have gone up, but jewelry has been pretty good of late.

Great.

Thanks.

New member sign-ups, I'm assuming, benefited in the first quarter due to the rise in gas prices during the summer, especially in California.

To what degree did that -- was that material?

Gas prices have come down.

Might that slow up member sign-ups in the periods ahead?

I don't think a lot of it relates to that.

Yes, a little bit of it.

When we get somebody -- when a newscaster talks about it in a given market, certainly that helps.

When I look at the numbers, on a base of about 1.3 million new sign-ups in each of the fiscal -- prior two fiscal quarters, again, when I talked about Australia and Japan last year, which opened near the end of -- very, very -- just before Q1 '12 a year ago, and into Q2 '12, Japan, a couple units, just those two markets represented almost 90,000 fewer sign-ups year-over-year because of the huge sign-ups we have in those markets during the six or eight weeks prior to opening, and then they're booked as of opening day.

So that, again, dwarfed anything else.

The fact that we were flat year-over-year given 90,000 less in those few locations is pretty good.

Great.

Thanks.

My final question is previously you'd indicated 27 to 30 new clubs as your plan for this year.

This morning, you said in your prepared remarks, 30.

Is there anything I should read into that?

Do you have higher visibility now for this year, or is that -- should I perceive it to be the same?

I think that earlier, probably a quarter ago, I talked about 25 to 27.

Again, if pushed, I'd probably say 27 to 29.

But 30 is our budget, and they're all doable.

There's always the chance that a couple will fall out, but I think we're getting more confident of those numbers.

So if my single-point estimate was 27 or 26, now it's 28 or 29.

Thanks, Richard.

Dan Binder, Costco.

It's Dan Binder with Jefferies.

I had a couple of questions.

First, on the membership growth, what do you think we should see, given the extraordinary sign-ups per club last year, what do you think average sign-ups per club should look like this year for the 30 or so stores that you're opening?

I don't have -- I haven't looked at it that way.

Our membership guy's not here.

But it ranges -- again, some of these locations overseas can be -- and again, when I say opening-day sign-ups, it's anything that was -- any paid member sign-ups during the six or eight weeks prior to opening when they've got the tabling activities outside of the construction site through opening day.

In the US, in very strong Southern California markets, but we're plopping the unit in where we have a bunch of members already, it's just moving around where they shop, and shopping more frequently because they're closer to a location, we might have 3,000 to 6,000 as of opening day and another 5,000 to 10,000 or 8,000 to 12,000 over the next 12 months, that first year.

In a new market, a small new market, like a Tennessee or a Carolina unit, we might have 4,000 to 7,000 or 8,000 new sign-ups in the first day, as of that first day, which is more than a high-volume LA unit when we open it.

Again, it has [more to do with that].

Over in Asia, we've seen numbers in the 25,000 to 50,000 range as of -- through opening day, well over the Company average for all members per warehouse, which is in the high 50,000s, for all warehouses that's have been opened, whether they've been open 1 week or 29 years.

So there's no right number there.

If we look at existing clubs, how does the new member growth rate look like in existing or comp clubs?

At the end of the day -- again, I don't have that level of detail right in front of me, but when I've looked at it in the past, if our renewal rate is just under 90, let's say in the US and Canada, and call it 90 for a moment for simplicity, we lost 10 and we gained 11.

It's always up a little bit more, just a little bit more than it was at the beginning of the year.

That of course is cannibalized a little bit when we open in an existing market a little bit.

But those new sign-ups in those new markets help us.

It's a lot of -- there's no major trend changes, if you take out cannibalizing units and take out some of the crazy high numbers in some of the new Asia units or the like.

My last question was on SG&A, the 7% comp impressive.

Got flattish SG&A year-over-year rate.

As we look forward, do you think that because of the accelerated store openings this year that to get leverage on SG&A going forward this year, that we need to be at 6% or 7%?

Or do you think you can achieve it at somewhat lower levels?

I think there are a couple of things.

IT, my guess, will continue for these next few quarters.

What I didn't mention, there's always four or five miscellaneous line items that generally should add up to zero, some a little higher, some a little less.

If I look in the quarter, I think if I added up those types of things, it hit us by 2 or 3 basis points in the quarter versus being 0 or helping us by 1 basis point.

There's always going to be those things that I would think that on average, 0, not minus 2 or 3, as it was this quarter.

When I look at it, I was pleased that payroll, which was -- payroll benefits are 70% of SG&A.

The fact that we have increasing penetration overseas, that helps us a little bit, just because it is on average lower SG&A.

Offset that probably for the next year in Japan, as an example, where we're cannibalizing the heck out of it.

Great.

Thanks.

Deborah Weinswig, Citi.

Thanks so much, and congratulations on a great quarter.

Richard, obviously, with the 30 clubs that you're targeting at this point in the game, it's very different from what we've seen in the recent past.

Can you talk about the difference in real-estate process to get those 30 clubs open in one year?

We put a lot more people on the ground in countries.

If I go -- we've been working on it a long time.

I know it was forever before we even got to perform in terms of how many we say we're going to do and we actually do.

But if I look back three years ago, two, three years ago, as an example, between Korea, Taiwan, Japan and Australia, all of that real-estate activity was done with no real-estate people on the ground, none of our real-estate people on the ground in those countries.

We now have one to two people in each of those countries.

Same thing with Europe.

Same -- we've always had it pretty much in the US and Canada.

So the pipeline is more full.

As the pipeline -- as the time to get to opening in some of these countries are more difficult and take a little longer anyway, we've built up the pipeline.

I think there will be more confidence in the next few years of how many we can open based on the pipeline.

Okay.

In terms of looking at the 5% increase in frequency in the quarter, most retailers have been talking about traffic as being a major issue.

Can you provide some additional color around your strong traffic numbers?

Well, the 5%, my guess is -- by the way, these months are a little strange for a couple of reasons.

One, we had a 53-week fiscal year, so it ended on the September 2 instead of late August.

So how did that affect Labor Day a little bit.

Same thing at the other end of the quarter, of I think Thanksgiving was a week off in terms of dating.

So all those things are in that number.

My guess is, is that getting -- being just below 5%, I mean just below 5%, is there a 0.5 point in there or a little more that could have been just how all these things ramp?

Possibly.

I'm not banking on a plus 5%.

Certainly that gives me comfort that our high 3%s to low 4%s that we've seen, 3.5% to 4.5%, hopefully that will continue.

There's nothing that we see that should change that until it changes.

All right.

And then --

The other point is, as I've said over the years, the good news is it's a lot of little things.

It's everything from the membership base and the demographics, certainly gas and fresh foods, certainly big screen TVs.

There's lots of different things that we've been blessed by.

Okay.

You called out hard line sales as being quite a bit stronger as compared to recent quarters.

Was that -- and you called out several specific categories.

Was there any kind of key there, or was it quite broad?

It was broad, recognizing what we call majors is a big category within hard lines, cameras and TVs and the like.

Jewelry is not a big percentage category but had decent numbers.

That was across the board.

I think also, even in some of the little things -- when we bring in items within the furniture category, we've tended to do well with them.

Certainly on the soft line side, as I mentioned in apparel, that's been a help.

Okay.

And then --

Part of it is our aggressiveness in some of these categories.

Okay.

Lastly, if you could give some color on how new clubs are performing in markets?

I'm sorry, what was the last part of that?

How new clubs are performing, both domestically and internationally?

Of the 13 openings this fiscal year that we've opened, we've got the 14th coming in a couple of days, I think overall, they've done as good if not a little better than our overall plans.

Craig walks in happy from the opening trips.

Great.

Thanks so much, and best of luck.

(Operator Instructions)

Michael Epstein, Credit Suisse.

Hi, this is actually Trey Schorgl in for Michael.

We were wondering if you think there will be any impact from the retroactive income tax increase that was passed last month in California?

No.

No.

Okay.

Then that's all.

Thank you.

Okay.

Why don't we just take two more questions?

(Operator Instructions)

And there are no further questions at this time.

Thank you, everyone, and have a good holiday.

Thank you.

This concludes today's conference call.

You may now disconnect.