好市多 (COST) 2013 Q2 法說會逐字稿

Good morning.

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

At this time I would like to welcome everyone to the second-quarter FY13 operating results 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.

Thanks, crystal.

Good morning to everyone.

This morning's release, of course, reviews our second-quarter and fiscal first-half 2013 operating results for the period that ended on February 17.

As with every 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 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 second quarter, we reported earnings per share of $1.24, up 38% from last year's $0.90 reported number.

As noted in this morning's release and as I had mentioned during our first-quarter conference call -- earnings call back on December 12, this quarter's net income was positively impacted by a $62 million or $0.14 per share income tax benefit.

That was in connection with that portion of the special cash dividend paid by the Company in December of 2012 to Company 401(k) plan participants.

Excluding this one-time benefit, earnings per share for the quarter would have been $1.10 or up 22% year-over-year.

In terms of sales for the second quarter, total sales were up 8% and our 12-week reported comparable sales figure was up 5%.

For the quarter, sales were very slightly benefited by gasoline inflation, less than 10 basis points of an impact, and were also benefited by strong foreign currencies overall relative to the US dollar year-over-year.

That added about 60 basis points.

Even so, the 5% US comp sales excluding the gas inflation remained at 5%.

And while the reported 6% International comp figure assuming flat year-over-year FX rates would have been 4%, total Company comps were reported at 5%.

Excluding both gas and FX, they still came out to 5% for the Company overall.

As announced last week for our four-week month of February, which of course includes two weeks the last two weeks of fiscal Q2 and the first two weeks of our fiscal Q3, but in terms of those, the four-week month of February comps came in at a 6% both for the US and the total Company.

In terms of new openings, after opening 9 new locations in the first quarter, which ended November 25, we opened 5 new locations in the second quarter, 1 in Washington, DC; 2 in Canada; 1 in Oshawa, which is in the Toronto market of Ontario; and 1 in Drummondville, which is in the Montreal market in Quebec.

We also opened in Leicester, UK, in central England, and Gwangmyeong, which is outside of Seoul, Korea.

All told that puts our 2013 fiscal-year openings through the second-quarter end at 14 new locations, such that we now operate at 622 locations around the world.

Between now and the end of fiscal '13, which I think ends on September 1, we expect to open an additional 14 locations, 5 in the current fiscal quarter and 9 in the fourth quarter.

Of these 14 before fiscal year-end that we haven't opened yet, 4 will be in the US, 5 will be in Japan, 2 in the UK, and 1 each in Taiwan, Australia, and Mexico, such that we will most likely end the fiscal year with 28 new openings this fiscal year and be operating a total of 636 Costcos worldwide at that time.

I will also talk later in the call about eCommerce, membership trends, and additional discussions of course about margin and SG&A.

On to the quarter itself, again, sales were up 8%; comps were up 5%.

In terms of the reported 5% comp number, that was the product of an average transaction increase of a little over 2% for the quarter and an average frequency increase of a little over 3%.

The frequency trend for the last three calendar months that we reported was a 5%, a 3% and a 4% for December, January, and February, and year-to-date we are at a 4%.

In terms of sales comparisons by geographic region, overall the Southeast, Texas, and Midwest regions were the strongest.

Internationally in local currencies Korea and Japan were the weakest, again, most due to the cannibalization on a relatively small base of existing units, and with Canada and Mexico being the strongest internationally in local currency.

In terms of merchandise categories for the quarter, for the second quarter within food and sundries, overall in the mid single digits.

Frozen foods, candy and deli were the relative standouts.

In hard lines, overall in the low single digits.

Departments, the strongest results were hardware, patio, garden, and lawn and garden, and tires.

Consumer electronics sales were slightly negative, mostly due to the timing of the fiscal calendar, as the typically strong Black Friday sales around Thanksgiving benefited Q2 last year and benefit Q1 this year.

So you take that out and those numbers would have been a little better.

Within the higher single-digit soft lines comps, small electrics, domestics, and jewelry were the standouts with media, of course, continuing to be the relatively weak area.

In fresh foods, comps in the mid singles.

Deli and produce were a little better than the two other large categories.

Moving on to the other line items, membership fees, we came in at $528 million or 2.17% of sales.

That is up 15% in dollars or up $69 million from the $459 million last year, and up 13 basis points.

In terms of membership, we continue to enjoy strong renewal rates, and I will go through a little bit of that in a minute.

Continued increasing penetration of the Executive Membership, which is the roughly $110 a year fee.

And we are still, of course, benefiting from the $5 and $10 membership fee increases that began a little over a year ago in both the US and Canada.

Of the $69 million increase year-over-year in membership fees, right at a half of it or about $35 million was due to the fee increase.

Membership fee income, as I have talked about in the last few quarters, based on the deferred accounting nature of those increases and recognizing the increases occurred over a 12-month period based on when somebody originally signed up, and then the income comes in over the succeeding 12 months of that first increase.

Basically, we will continue to show year-over-year benefits from that fee increase throughout fiscal '13 and to a lesser extent into the first quarter of fiscal '14 this coming fall.

Again that is due to the deferred accounting treatment for membership fee income.

New membership sign-ups in Q2 companywide were up about 1%.

There were more locations open this quarter, 5 versus last year's 2. It is mostly reflective of the very strong sign-ups we have internationally, most particularly in Australia and Asia.

Last year we opened 2 units in Japan during the quarter and 2 right at the end of the quarter, in the first few days of Q3.

Of the 14 units opened thus far this fiscal year, only one of them has been in Asia.

Again, we have pretty much oversized sign-ups in some of those new units.

In terms of number of members at Q2 end, Gold Star 27.8 million, up from 27.3 million at Q1 end.

Primary Business remained at 6.5 million.

Business add-on went from 3.6 million down to 3.5 million; again that is somewhat reflective, I believe, of people as they switch into their own membership as an Executive Member.

All told, total members went from 37.4 million at the end of the first quarter to 37.9 million.

And including extra cards, spouse cards, 68.2 million went to 69.1 million at Q2 end.

At Q2 end, paid Executives were a shade over 13 million, an increase of 181,000 over the last 12 weeks, or about 15,000 new Executive members.

That is both new members and conversions from the base Gold Star Membership.

Executive members are approximately a third of our membership base and a little over two-thirds of our sales.

In terms of renewal rates, they have continued to tweak up.

In the US and Canada, which is about a little over 80% of our total Company and certainly the oldest and most mature part of our Company, Business renewals, which ended the fiscal year at a 93.7% rate and at the end of the first quarter was 93.8%, are now at 93.9%.

And Gold Star, which was 88.7% and remained there at the end of the Q1 was 88.8%, such that total US and Canada went from an 89.7% essentially to an 89.8% over the last quarter.

And worldwide, recognizing in newer markets you start off with lower renewal rates anyway, we went from an 86.4% at year-end; remained there at the end of the first quarter; and it tweaked up to an 86.5%.

So really since -- over the last year since the fee increases we've always been asked a lot about renewal rates.

Basically each quarter have been either the same as the prior quarter or slightly up, and they continue to tweak up almost a full percentage point in the last year and a quarter.

Going down to the gross margin line, reported margins were up 6 basis points from a 10.53% to a 10.59%.

Here we get to write down a few numbers, a little chart with five line items and 4 columns.

Basically we will do two columns for each of Q1 and Q2.

Of course, those of you who have heard this before, this relates to the fact of how many basis points of margin reduction or improvement come on a year-over-year basis in the comparison.

Once we do the chart I will give you a couple of comments.

In terms of core merchandising, the reported in Q1 was minus 7 basis points year-over-year; and without gas inflation was minus 1. Going across that line it was zero and zero in Q2 and Q2, reported and without gas inflation.

On ancillary business, the second line item, plus 14 and plus 15 in the Q1 columns.

Plus 2 and plus 3 in the Q2 columns.

2% reward, minus 2 and minus 3 in the Q1 columns; and minus 1 and minus 1 in the Q2 columns.

LIFO, plus 1 and plus 1 in the Q1 columns; and plus 5 and plus 5.

And lastly, total reported Q1 was a plus 6, which would be the sum of column one.

That is what we reported in Q1 year-over-year margins.

Without gas inflation that adds up to a plus 12.

Then of course for Q2 reported, as I just mentioned we were up 6 basis points, which would be that third column summation.

And without gas inflation, plus 7, recognizing there was very little gas inflation.

Basically again, core margins were basically flat year-over-year.

Those are the four core businesses -- food and sundries, hard lines, and soft lines, and fresh foods, which is a big piece of our business.

Basically not a bad showing.

If you look back, of course as you know over the four quarters of fiscal '12, on average year-over-year prior to fiscal -- compared to fiscal '11, those numbers were minus 13 without gas inflation.

And the trend in Q1 year-over-year was minus 1, and of course now it is zero year-over-year.

Secondly, ancillary businesses, you'll note that in Q1 it was 15 year-over-year.

A big chunk of that, as I mentioned in the first-quarter call, was strong gas margins year-over-year and some inflation.

I think I said in the first-quarter call about two-thirds of that plus 15 related to that.

In Q2, gas reversed.

As gas prices went up, margins go down.

As cost of gas goes up we make less.

And that plus 3 reflects strong ancillary business margins offset by probably 5 or 6 basis points of negative related to gas.

2% reward is simply a reflection of a little higher sales penetration to those earning the 2% reward.

And LIFO was a plus 5; again that is a LIFO credit of -- I mentioned, I will mention in a minute -- it is about $9 million of a credit versus a $2.5 million LIFO charge in the same fiscal quarter a year ago.

Mind you, when LIFO is a positive, it means the cost of the merchandise are coming down.

And as you might expect, we tend to reflect that in our sales price as well, which would be on the merchandise margin line.

For the second quarter year-over-year, food and sundries gross margins were flat.

Hard lines and soft lines were up, and fresh foods was lower.

As I mentioned on ancillary overall, the chart you saw was a plus 3 without gas inflation.

Again, all the other ones -- pharmacy, optical, hearing aids, food courts -- were all up during the quarter, more than offset -- or offset by what I just mentioned about gasoline.

The impact of the membership on Executive member I already mentioned, and LIFO I mentioned as well.

Moving to reported SG&A, our SG&A percentage second quarter year-over-year was slightly higher or worse by 2 basis points, coming in at 9.70% versus a 9.68%.

Again, we will write down four columns, the same four columns, two for Q1, reported and without gas; and then two for Q2.

And the five line items would be core operations; central; RSUs, which would be stock compensation; quarterly adjustments; and total.

Going across in Q1 the two columns were plus 10 basis points and plus 5, meaning lower.

Plus means good, lower.

And in Q2, zero and zero.

Central was minus 7 and minus 8 last year and zero and zero this year -- in Q1 and then zero and zero in Q2.

Stock compensation was minus 4 and minus 4, and in Q2 was minus 2 and minus 2.

Quarterly adjustment in Q1 was plus 8 and plus 8. That was the -- that plus 8 last year was compared to the prior year, a one-time charge for an initiative in Washington state that we funded for alcohol.

Then quarterly adjustment is zero and zero in Q2.

So all told, reported in Q1 was a plus 7, meaning that SG&A was better or lower by 7 basis points in Q1 year-over-year.

Plus 1 at total without gas inflation.

And then in Q2 again it was minus 2 and minus 2, so again higher by 2 basis points.

Within core operations, our payroll as a percent of sales improved year-over-year by 5 basis points.

It was lower by 5 basis points.

Total payroll dollars increased about a little over 6% in Q2 compared to the 8% sales increase, so a good showing there.

This improvement in payroll was offset by higher costs and benefits and healthcare, including healthcare and workers comp.

Pretty much a wash between those things.

Some of that was accrual related; again, these are big expense numbers that we also do actuarial things for.

Our central expense, it was flat year-over-year in Q2, notwithstanding ongoing IT modernization costs.

I think in Q1 we talked about that was 6 or 7 basis points year-over-year increase.

On an ongoing IT modernization business, as we are halfway -- we're not halfway through, but into the second year of a three-plus year project, it represented on an ongoing basis -- we estimated it's about a 3 or 4 basis point hit over the coming quarters year-over-year.

Next on the income statement line is preopening.

It was $6 million in both Q2 last year and this year.

Now last year we only had 2 openings, this year 5; really no surprises.

A lot of it has to do with timing.

Preopening starts in some cases many months before the actual opening in terms of the costs associated with it.

All told, operating income in Q2 was up $94 million or 15% as operating income went from $644 million to $738 million year-over-year.

Offsetting this reduction -- hold on a second -- in terms of below the operating income line, reported interest expense was lower year-over-year with Q2 coming in at $25 million, $2 million lower than the $27 million last year.

Basically we had one big reduction in interest rate expense in the quarter and then an increase related to the recent debt offering.

As you recall last year on March 15 we paid off $900 million of what was five-year maturity fixed rate debt.

The annual pretax interest savings to Costco, paying that off I think I mentioned back then was about $46 million pretax per year, or about $10.5 million of pretax for this quarter.

So that was -- that would make it lower -- made it lower by $10 million.

Offsetting this reduction, of course, was about $8.5 million of additional interest expense related to our recent debt offering.

As you know on November 28 we completed a $3.5 billion debt offering in the form of senior notes, a combination of 3-, 5- and 7-year notes, with a weighted average maturity of 5 years and an all-in annual rate of interest just under 1.25%, which again is about $44 million pretax per year currently.

So that is about a $9 million increase in interest expense for the roughly 11.5 of the 12 weeks -- the weeks of the 12 weeks that it was issued and outstanding during the quarter.

So pretty much a wash between those things, and that is why interest expense year-over-year was pretty much in line with last year.

Interest income and Other was higher year-over-year by $16 million a quarter.

Last year it was $10 million; this year was $26 million.

Actual interest income for the quarter came in at $11 million, the same amount year-over-year.

The Other component of interest income and Other amounted to income of $15 million this year versus $1 million of a negative of last year, or a $16 million swing.

About $13 million of the $16 million year-over-year change was related to forward foreign exchange contracts we use to manage the cost of US dollar merchandise purchases in our International operations.

These contracts are required to be marked-to-market at each quarter end.

The change year-over-year was attributable to the general strengthening of the US dollar as of the end of Q2 of this year versus a general weakening compared to the US dollar in these various foreign currencies in Q2 of last year.

Last year again we recognized a small loss related to it; this year we recognized a gain.

Now mind you, and again this doesn't show as part of our gross margin; this is where you put these FX contracts.

But these are generally done by our borrowers in foreign countries where they are basically locking in typically foreign currency or US dollar merchandise purchases in many cases, where they have locked that in.

So again as it relates to the buyers, many of them consider that part of their margin although we show it here.

Our Company tax rate this quarter came in at 25.1%, versus 34.2% in last year in Q2.

As discussed earlier on the call, the income tax line benefited primarily from a $62 million tax benefit in connection with that portion of a special cash dividend paid by the Company in December of 2012 to employee 401(k) plan participants.

As such time, Costco shares held by employees in the plan approximated 22.6 million shares.

These were held through employee stock option -- an employee ESOP established several years ago.

Dividends paid on these shares were deductible for US income tax purposes, and we recognized that one-time tax benefit during the quarter.

Excluding the one-time benefit our tax rate in Q2 came in at 33.5%, slightly lower compared to the last year's 34.2% during that.

Basically a combination of a few positive discrete items that went our way in Q2.

Generally -- let's see.

Ongoing, we would estimate our effective tax rate, barring anything unusual for the balance of '13, to be in the range up to 35%.

Overall, net income was up 39% versus last year's second quarter, and excluding the one-time benefit.

The 39% increase would have been 23% on a net income basis, and as I mentioned earlier 22% on an earnings per share basis.

A quick rundown of a couple of other topics.

The balance sheet will be included in the info packet that you can get online.

Actually it was in the press release as well.

Depreciation and amortization for the quarter was $217 million and $430 million year-to-date.

The other component that we are asked about is our inventories-to-payables ratio, since we are a high-turn business and we fund a lot of our inventories with trade payables.

It improved year-over-year as of the second quarter end.

On a reported basis it looks really great, 98% at the end of Q2 versus 91% AP as a percent of inventory.

Given our ramped-up expense right now, there is a lot of non-merchandise payables in there for construction and related stuff.

So really on a merchandise inventories to merchandise payables, it was 86% a year ago and it showed a little improvement to 87% this year.

So this is certainly in the right direction there.

Average inventory per warehouse was up $600,000, from $11.6 million per warehouse a year ago to $12.2 million this year.

It was up about 5% on the 8% sales increase.

Just under -- a little under half of that $600,000 per warehouse increase related to higher levels of merchandise in electronics and small electrics, consumer electronics and small electrics, with a balance mostly spread over mostly other non-foods departments.

Overall, our inventories are in good shape.

No big markdown issues through the recent holidays.

As well as our midyear fiscal inventories which we take in January and February, halfway through our fiscal year, were our best ever.

In terms of capital expenditures, in Q1 we spent $488 million; in Q2, we spent $455 million for a total of $943 million through the first half.

I would estimate that for the year it will be in the $2 billion range compared to last year for the whole year of about $1.5 billion.

Again, that certainly reflects our ramp up in openings.

In terms of Costco online, as you know we operate both in the US, Canada, and the UK now.

Both sales and profits were up again in Q2 and Q2 year-to-date.

As you know we replatformed the site last fall and also have our first apps, and so far so good.

In terms of next on the discussion list, expansion.

As again I mentioned, we have no relos or closings this year.

But in terms of units basically for the four fiscal quarters, 9 in Q1, 5 in Q2, 5 in Q3, and 9 in Q4.

That would put us at 28 for the year, up from 16 net new openings in fiscal '12 and 20 in fiscal '11.

So finally we got up a little bit there.

If you go back to fiscal '12, the 16 units on the base of 592 was about 3% square footage growth.

The 28 this year, assuming we can get them all open, on a base of 608 that we began the year with, which would be a square footage growth in the 4.5% to 5% range.

New locations by country for the year of the 28 would be 13 in the US; and 3 in Canada; 3 in the UK; a total of 7 in Asia -- 1 in Taiwan, 1 in Korea, and 5 in Japan; and 1 each in Australia and Mexico.

As of Q2 end, total square footage stood at 88,986,000 square feet.

In terms of stock buybacks, we did not purchase stock in Q2.

As you know, we purchased quite a bit less than we had in the last few years, couple years, in Q1.

Certainly, during the first several weeks of Q2 we completed a special dividend, and the debt offering, and through the holidays.

I don't think there is a whole lot to read into that at this point.

Sometimes we will buy a little more, sometimes a little less.

And as we have said in the past, we will let you know each quarter.

In terms of dividends, our current quarterly dividend stands at 27.5% -- $0.275 per share per quarter or $1.10 a year.

This currently represents annualized dividend cost for the regular dividend of $480 million.

That is, of course, in addition to the $7 special dividend which totaled a little over $3 billion paid out to shareholders in December of 2012.

As I mentioned, the supplemental information packet will be posted to the Costco Investor Relations site later this morning.

Lastly I will go ahead and -- our third-quarter scheduled earnings release date will be May 30.

That is a Thursday, I believe.

That will be for the 12-week third quarter which ends on May 12.

With that, Crystal, I will turn it back to you for Q&A.

(Operator Instructions) John Heinbockel, Guggenheim Securities.

There's a couple of things.

Drilling into payroll and benefits a little bit, if you looked at total labor cost, payroll is probably -- what?

80%?

And benefits are 20%, or something like that?

No, it's -- well, keep in mind, benefits is everything from healthcare to FICA to vacation and sick leave.

It is everything.

It is not just healthcare.

The big one that has the most inflation in it, of course, is healthcare costs and to a lesser extent but percentagewise this quarter Workers Comp.

But roughly for every payroll dollar it is about 50% -- another $0.50 in the US and less in other countries.

Well, because I am wondering the 80/20 --

80/20 is -- maybe 80/20 if -- just in healthcare and benefits, yes.

But I don't have the exact number off the top of my head.

Well, because if you look -- you said payroll was up 6%, right?

Dollars?

Yes.

So if you look at the other part that would have offset that, the all-in benefits was probably up what, double-digit?

Or not that high?

I don't think it was up that high, no.

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

But the big issue is, as I mentioned earlier, accruals.

Keep in mind, given we are talking about $20 billion, $25 billion sales numbers, every basis point is $2 million, $2.5 million.

Just accruals on a $1 billion annual US healthcare cost and a $100 million, $150 million annual Workers Comp cost when you look at different actuarial numbers, you are always going to get plus or minus a few basis point.

Sometimes plus, sometimes minus.

It is kind of like the -- as I mentioned on some of the discrete income tax items on all those small little things, more went in the positive than the negative.

A couple of them went in the negative and the positive here.

So that -- is healthcare and Workers Comp in the US still inflationary?

Yes.

It is still -- healthcare, I think is definitely in the low double digits in terms of percentage dollar growth in Q2.

You still think you need, what, about a 4.5 comp to leverage expenses?

Or has that changed?

It is somewhere in the 4 to 5 range.

We have given up on trying to figure it out since there are so many other moving parts now with International and manufacturing businesses and everything else we do in life.

Another thing.

So on Kirkland, where does that stand roughly when you think about percent of units sold and percent of dollars?

And to what degree has that been growing?

I think units -- I don't know the units off the top of my head.

I would guess we tend to try to build a bigger packs and better quality.

There are examples as you have known in the past from the tuna fish, where we sold our brand, which is packaged at a higher spec, higher quality than the leading national brands, at a higher price but a greater value.

But let's assume on average it is a lower price point by 10% or 20% versus what we would sell the brand for.

Private label is in the low 20%s and continues to grow.

When we talk about aspirational numbers we'd like to see a 3 in front of it instead of a 2. But I don't know how long that takes.

But certainly we keep adding new items.

In the last couple years we certainly added several items in apparel, in canned goods, those types of items.

I think I mentioned last quarter on the call, like the KS men's wool slack, which is a very high-quality slack at $50 or $60, $65, where we have gone from low 6-digit units to closing in on 1 million units a year.

So those are the kind of things that eke out some numbers, too.

It's growing -- is it growing as a percent of SKUs inside the Club?

I imagine maybe a little bit.

Absolutely.

So that mix that you are getting, if you are managing where it is coming out to a flat gross, the positive mix you are getting from Kirkland, it to some degree is getting reinvested in price somewhere.

I don't know where, but it's somewhere, right?

Again, there is 100 moving parts.

At the end of the day, I think that we have seen, as you know -- I think you were one of the ones that pointed out earliest, back in Q4 of '11 as we were, quote, investing in price and seeing some of the numbers come down year-over-year -- overall gross margins.

And certainly as I mentioned in the core is where a lot of it is, we saw that year-over-year trend flatten out in the last two quarters relative to being down 10 to 15 basis points on a year-over-year basis each quarter last year.

All right.

Then just one last thing.

I don't know if you have anything to say about this, but what are you seeing in Texas with Sam's membership fee increase?

Anything different competitively than what you are seeing from them elsewhere, since they have that fee to play with?

We really don't see a lot of difference elsewhere.

We generally are -- we try to be fiercely competitive everywhere.

First of all, I think it would be too early to tell.

Nothing is -- I haven't looked that closely, but nobody has also mentioned in the last few budget meetings anything regionally big in terms of margin change.

But I am not suggesting it is not a little lower; it may very well be.

I just don't know off the top of my head.

All right, thank you.

Sandra (sic) Weinswig, Citigroup.

It's Deb Weinswig.

Hi, Richard.

Can you talk about your eCommerce strategy as you move outside of Canada, US, and UK?

How should we think about it on a market-by-market basis?

And then just from a SKU perspective, how should we think about your overlap between online and off-line?

Well, just like we have done with our brick-and-mortar warehouses, we go into a new country, we do it slowly, and we see how it goes.

So don't expect a lot of -- don't expect to see us in five more countries in the next 12 months.

We certainly want to expand it, and we will do so over the next few years in a methodical way.

So our strategy is the same -- do it as we normally do stuff.

In terms of -- I think we have expanded some of the product categories to test some apparel items.

And there is a little overlap there, but it is still small.

If -- historically over the last few years, the view was this was an extension of our product line, not the same product line that we have in the warehouse.

Typically I used to hear numbers in the 80% to 90% range was not overlapping with the warehouse.

Maybe it is a little lower percent today, but by no means going dramatically in that other direction.

We still don't put our stuff online of what is in every warehouse and what the sales prices are in the warehouse and the brick-and-mortar.

One of the challenges in a fast-turning businesslike are ours is we could sell out of stuff pretty quickly.

We would hate for a member to look at something, and since we have units in locations they are going to go shop at, of something and it not be there.

All right, and then --

So at this point, yes; we will continue to do what we do and we are pleased with what we have seen so far with the replatforming and all but the little growth pains that you have when you redo stuff.

And as you might expect it was more of a hassle for the buyers as they are learning how to use the new system and put stuff on.

But we are doing fine.

Okay.

Then what do you attribute your renewal rates tweaking up to?

I would like to think it is we are wonderful.

Of course you are, Richard.

It is everything we do.

I mean the mantra around here as you have known for a long time is -- constantly driving quality up and prices down, and never being static, and constantly pushing ourselves and improving.

I think the Executive member certainly helps.

Gas and food I am convinced over the last four and a half years of a bad economy has certainly driven more frequency; that helps.

And more food.

So anytime we get another reason why you want to come shop at Costco, it is another reason why you renew every year.

And we try not to disappoint.

Then to a lesser extent, it is the -- on AMEX there is autorenewal of course.

You can opt out of it.

An employee -- a member -- a cardholder can opt out of it.

But certainly that is, in my view, less of an issue right now because the rate of increase is not as big as it used to be.

Okay, then last question.

If I go back and look over our model for a long period of time, it does seem from an SG&A perspective on the operations line that there is a more consistent pattern in terms of leveraging the operations.

Can you just discuss if there is anything that has significantly changed in terms of how you approach the operations?

Or any kind of philosophical changes, I guess?

Nothing philosophical.

I mean a couple things I have mentioned on prior calls over the last several fiscal quarters are things like increased penetration and in non-US and Canada markets, where certainly in non-US markets that relate to healthcare costs.

Lower -- higher -- lower wage relative to price points in those markets, so you have little lower payrolls, you certainly have lower healthcare costs.

Those types of things help that increasing penetration.

I think as the -- I know I have mentioned over the last few years a couple of times on a qualitative basis the word focus.

And as wonderful again as we think we are in being efficient, when the economy got bad everybody looks to see what can you do better, and what should you stop doing that you used to do but you don't need to do.

And it's those little things.

I think in the past year I mentioned the example of overtime hours.

We are probably pretty good at managing and minimizing overtime hours; but once we started getting all the 12 or 15 or so Senior VPs of Operations around the US and the world, every month at the budget meeting to report on it, guess what?

When total hours we are going up 3-plus-% year-over-year or 3.5% to 4%, whatever it was, overtime hours were going down 20-plus-%.

Again, that is a year or two trend benefit; but those are the kinds of things I think that we have gotten better at.

I think getting back to John Heinbockel's question earlier about expense -- what do you need in comp sales?

One of my canned answers in the last few years has been -- you don't -- it is hard to know what -- who knows what exactly the expense leverage is?

I can only tell you that I believe whatever it used to be it is a lower number now because we have gotten a little better in the bad economy.

Okay, great.

Well, thanks so much and best of luck.

Karen Short, BMO.

Hi, there.

Thanks for taking my questions.

Just on merchandise margins, it sounded like giving us what your core merchandise margins did in '11 and '12, and then comparing that to what happened in the first half this year, it sounds like you are trying to signal that we should not expect this first half of the year to be the trend for the remainder of the year.

Did I read that right?

Well, we try not to signal other than to say -- I know last year, as each quarter we showed that the core year-over-year prior versus -- compared to the prior respective quarters of the prior year, when they were down 10 and 15 basis points year-over-year, that people would say -- well, once you anniversary that for four quarters, does that mean you are, quote, investing in prices and getting more?

And of course, I would say there is no telling what it will be.

We will continue to do what we do for a living.

Certainly, we are cognizant we want to try to increase earnings and sales.

But we are going to try to do it by driving sales and lowering expenses first.

But so far so good.

There is two quarters behind us this year that have shown certainly a better relative trend than the four fiscal quarters last year.

But again I can't really tell you what the next quarter or next year is going to be.

Okay, thanks.

Then one of your competitors had also signaled that they had accelerated their price initiatives.

I guess, are you seeing anything on that front?

Are you changing anything in terms of your pricing in response?

I don't want to sound arrogant, but we do what we do every day and we haven't seen any big changes out there in general.

Again, we and our competitors -- and probably the one you are talking about -- are both fiercely competitive.

As I have said in the past, direct warehouse club competition, most particularly with Sams, is going to be the most competitive that we have, and that hasn't changed over the years.

As we get questions about what happens when the supermarkets are doing something, or other forms of retail food and sundries, as an example, that is less of a direct impact with the exception of a few areas like some fresh foods areas, like fresh meats and everything and some cuts of beef.

But other than that, we haven't the any dramatic deltas.

Okay, that's helpful.

Then just last question.

You have been giving us cannibalization impact on your total comp of about 50 basis points.

Is it fair to say that that is steady-state for a while?

I know you gave the cadence and the locations of new store openings in the back half of the year.

I think years ago it used to be bigger because we had a smaller base of units even in the US, and we were opening a half a dozen units in LA or something like that.

We have always just given it out.

And then it got down so it was maybe 0.25% cannibalization, and now it's back up to 50 or 60 in the last year.

Yes; it is not going to change dramatically from that.

Certainly as we continue to ramp up expansion, it stays in that range.

I don't see ever see it going to 1.5% or 2%.

I don't know if it gets up from 50 or 60 to 80, but it probably stays up there as we continue to open, particularly in some of these new International markets where we have very high-volume units that we have got to cannibalize them and get more locations open.

Okay, that's helpful.

Thanks.

Colin McGranahan, Bernstein.

Good morning, Richard.

First question on expansion.

Looks like you are now targeting 28 units this year.

I think last quarter the budget was 30, although you have always said units can slip.

It looks like you lost a Korea and a US.

Anything of note there and anything to read into that?

No.

I think the US one is one that is just delayed for six or nine months.

And I am not sure about the other one.

No, nothing unusual.

Okay.

Then just sticking with expansion, there has been a few press reports of some interest in Europe and France.

Maybe you can update us on your thinking of Continental Europe as a longer-term future opportunity.

Well, I think we have spoken generally, there have been verticals in the local and national press in those countries like France and Spain.

I would say over the next couple years we hope to be open.

But it is a long process in some of these countries as it relates to the zoning, and the permitting, and the approval, and the appeals of residential and other businesses can appeal.

So there is a lot of things going on.

But we have people landed in a few different countries including those two, and those are the most likely.

But again once we know more, we will let you know.

Okay.

Fair enough.

Then just on the LIFO, obviously you had a little bit of a benefit.

How are you thinking about that through the year in terms of inflation, deflation?

What are the merchants saying about what is coming down the pipe?

The only area I am hearing a little more inflation still is in protein, beef and poultry and pork.

And that relates both to international demand for some of those items as well as the costs associated with the drought last year and grain prices, corn and wheat and things like that.

As it relates to -- as freight costs have gone up a little, it has -- I don't think they went all the way down when freight cost peaked a few years ago and then came back down.

So I am not hearing a lot of inflationary talk out there.

On balance, there is not a lot going either way with the exception of protein.

That is really all I have heard from our buyers.

Okay, that's helpful.

Final question.

Just on MFI, fees came in a little above our estimate; but it looks like we were fairly good at figuring out the dollar value of the membership fee increase.

So two questions there.

Was there anything else?

Or was it just you had 1% growth in new members and high renewal rates that drove the little bit of upside to MFI?

That is the first question.

Then just out of curiosity, is there any lumpiness through the year in terms of when renewals happen?

On the first question, your thoughts are generally correct.

On the second question, there is -- I probably need to go look at it again; but historically, since we generally try to get openings done -- ideally if we can -- I am thinking of the US holiday and seasonal calendar here, but you can take it to each country and do that as well.

But generally speaking, we would love to get every location opened, A, as soon as possible; and every location opened the week before back-to-school and Labor Day, and to enjoy again Labor Day, back-to-school, Halloween, Thanksgiving, Christmas, seasonal, you name it, New years.

That is why there is typically more done.

Then of course if you're trying to push those views to get open, you probably slow down a little bit in January and February.

So I think if you look back at the calendar probably there is a little lumpiness of openings -- probably not as much as there used to be.

But then because of deferred accounting and such a big piece is the total now, it is not as lumpy as -- it buffer -- it tempers some of that lumpiness even more.

Okay, that's helpful.

I said that was my last question but let me slip one more in.

The US comps have been really, really consistent.

It looks like your business has been incredibly resilient and impervious to some of the pressures out there like the payroll tax hike, the delay in tax rebates that other retailers have pointed out.

Have you guys done any work on how that might be impacting your business and any offsets to that?

No, we haven't.

We had a joke about -- that we don't spend a lot of time trying to analyze other than driving quality and lowering the prices and everything else can take care of itself.

But I know back when the payroll tax holiday occurred and some of those same companies you are talking about, it did help them a little bit.

And when asked, we basically indicated and looked at it and indicated that we didn't really see much benefit from it.

So I think the same thing is happening on the tail end the other way.

It can't help, but it doesn't seem to really be impacting our numbers.

Great.

Thank you very much, Richard.

Chris Horvers, JPMorgan.

Thanks.

Good morning.

Executive Membership, 15,000 per week, it slowed down here in the second quarter.

Does that have to do with the timing of the opens in Japan?

Do you generally overindex to Executive in those countries versus domestic?

Do you sit there and say, hey, we need to step up Executive Membership to a higher percentage of sales as you think about what traffic could be in the future?

Is it something that you are watching and maybe saying -- you know what?

If Executive Membership doesn't -- grows at a slower rate that maybe our traffic could fall below that recent very consistent trend?

I don't think -- look, every day people in our Membership and marketing department are coming up with ways to drive both new members, both people -- both new members and converting members to the Executive Member but -- and then signing him up.

A higher percentage of new members are signing up as Executive Members.

I think we have done a good job over the last few years of doing that.

I remember a few years back, for every 100 members that signed up in the US, 20 or 21 were Executive.

Or 10 or 12 were Executive Members, and then a few years later it was in the low to mid 20s.

Why?

Because we started focusing on it a little bit in the warehouse.

Not doing a whole lot of fancy stuff, but just doing the 80/20 rule that we're pretty good at.

What are the simple things we can do to drive to drive this?

Certainly trying to get people to also do the triple-value play, what we jokingly call it, is to also sign up for the AMEX co-brand card.

So all those things drive frequency, drive loyalty, drive sales.

So we are constantly looking at ways to do that.

I think part of -- ultimately it has got to slow down a little bit.

We have now had it in the US for 13 or 14 years, in Canada for seven or nine years, I think, and a few other countries for less time than that.

Those other countries, though, are a much smaller piece of the total Company pie.

So I think it's -- I would expect it to continue to come down a little bit.

And I actually think 15,000 a year is still pretty good -- 15,000 a week.

Yes, absolutely.

Can you talk about -- you said one-third of your members are Executive and two-thirds are the sales.

Can you talk about the deviation around that?

Like's what some of your -- is there a wide deviation around that among your stores and maybe where some of your better investors are, as an indicator of where potentially that could go?

I think it has more to do -- less to do, if I think about it -- I will take the United States.

I think it has less to do with the typical geographic areas, other than the people -- the operators in those areas that push it a little harder.

And we try to learn from them.

One of the benefits I think of our 13 four-week meetings, every four weeks, so 13 times a year.

Our 13 fiscal-period meetings out here for two days, a day and a half, is each of those 15 or so Senior VPs of Operations in this example, in the US the eight senior VPs of Operations gets up and one of the things they talk about is what is going on in these areas.

What are the new things they have done to drive whatever?

And I think some do focus more on it than others.

And we try to learn from that.

So I guess do you have some stores where it is 40% to 50% of your membership base?

Absolutely.

Yes -- oh, okay.

I see what you are saying.

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

But I would assume if you are saying -- if I am assuming, let's say something -- and if it is roughly a third or a little over a third overall, it is probably in the US in the mid to high 30%s; let's just make up a number here, 36%.

If it is 36%, I would bet you across the 430-plus locations it would range anywhere from the high 20%s to the low 50%s.

Okay.

But I am shooting from the hip with that answer.

Sure, very helpful.

Just from an accounting perspective, can you talk about how the calendar shift might impact total sales versus comp in the next two quarters?

The calendar?

I don't think it is a big deal in the next two quarters.

There is no Easter shift; it's in the same month.

It is in the same month and quarter.

I don't think there is a whole big deal there.

I think -- now of course in Q4 last year it was a 17-week quarter, and I haven't look that far out in terms of when Labor Day falls and all that stuff.

I think Labor Day -- well, if Sunday the first -- we end on Sunday.

Sunday the first, September 1 is fiscal year-end; so I guess Labor Day is the second.

So that might affect it a little bit too, but I haven't thought through that yet.

Okay.

Last question, online you accept credit card purchases.

So how does that change the profitability of an online versus an in-store transaction?

Thanks.

Well, one of the cost components, of course, online is -- and in-store as well -- is what we call bank charges, which is credit, debit, and other fees related to vault and cash and currency and check-cashing.

Online we, of course, have the ability to -- since you can't pay by cash or check online, we also accept other national forms of credit cards.

Of course in-store it's exclusively American Express in terms of branded national cards.

And it is higher merchant fee elsewhere.

So we have a higher bank charge line, although we have overall a much, much, much, lower SG&A number online because 75-plus-% of the goods are shipped factory direct, so there is a lot less handling.

It is a -- as a percent of sales, online is a more profitable business than brick and mortar, but we do both.

Thank you.

Mark Miller, William Blair.

Hi, good morning.

It's encouraging to see the step up in Club openings, particularly more coming in the first half of the year.

I wanted, Richard, to get your view on -- I know there is an objective to possibly accelerate the Club growth further.

I think had been potentially as high as 6%, you would hope, over the long run.

But is that upper end of the objective becoming more credible in your view?

Maybe you can just talk about that pipeline of Club openings you look at.

I think, that pool going out say, three years, is that group of opportunity stores growing at that type of rate?

Probably 6% is a little high.

But given that we were at 3% and now we are getting towards 5%, that is a good sign.

I think there is certainly a lot more in the pipeline now to give, I think, us a little more -- be a little more credibility with you in terms of what we talked about at the beginning of the year.

There's always going to be a couple that fall out because we try to be optimistic that everything we have got going on is going to work and get done on time, and maybe push the envelope at the end of any fiscal year to get them still open.

But I am feeling better now that -- two years ago I was feeling that -- let's try to get into the low 20s at least, and we did 20 and 16.

We began this fiscal year talking about 30 and I think we have a good chance of actually hitting the 28.

I think that going forward, I think Craig would like to see it in the -- have a 3 in front of it, but probably a very low 3 in front of it.

So if I was a betting person, over the next three years, in fiscal '14, '15, and '16, 27 to 33 or 34 which would give you a 30 estimate; but I could be off a few.

But I think we have got enough in the pipeline to be able to do that and we will go from there.

Great, thanks.

Then on pre-opening you indicated that it was -- nothing particularly unusual there.

But the pre-opening costs first half are up about a third, but the number of openings was more than double first half.

Is that because you have got the openings coming late in the year with the nine Club openings in fourth quarter?

Or is the preopening cost coming down a little bit for you?

I would be willing to bet it is the former reason, not the latter.

A lot of it just has to do with timing.

Keep in mind, preopening, let's say that we are doing a lease, not an own; and you get the property four or five months in advance of opening.

We might have a few hundred thousand dollar charge per period for rent expense, which is preopening, prior to the opening day.

That alone might be $1 million or a little over $1 million on a location.

Now that is the exception, not the rule, since we own a lot of the units.

And certainly when we are building a multistory unit with parking and two stories of retail on a 2-acre site in Japan or Korea it takes a lot longer to do, so you might have even more preopening.

And some of those are leased.

So those are the kinds of things that will bump that number up the other way.

So it's -- overall, again like everything around here, each location has a preapproved by senior -- by Jeff and Craig and the heads of the respective operations, heads in those areas of what preopening is going to be.

And we hit it and miss it.

But overall, we have a pretty good handle on what it is.

We don't have a good handle on sometimes when there is a delay.

Again, a two- or three-month delay because of soils issues or rain or freezing ground, you couldn't get the foundation laid before the ground froze, that could be $200,000 to $800,000 on a location preopening during those several months.

All right.

Fair enough.

Thanks.

Greg Melich, ISI Group.

Thanks and good morning, Richard.

I want to follow up on the LIFO gain.

Which area was actually deflating or which categories?

Does any of that actually flow through in terms of retail deflation?

On a deflation, if I look at the big pools, what we call foods and sundries, foods was down a little, about 0.5%.

Sundries was up less than 20 basis points.

Apparel is down a little bit.

Electronics and appliances are down a little bit more than that, but still less than 2 percentage points.

Pool 5, which is a mixed batch, a mixture of things including gas and sporting goods and office and auto is down a shade.

And then alcohol and tobacco, beer, and wine, is up a shade.

But overall, again, it is down a little over 0.5% from the beginning of the year.

Again there is certainly the bigger deflationary items are still electronics.

And sometimes there's inflationary items like -- I am just looking at the top 20 deflationary components.

There is, aside from gas and a small amount from gas and the biggest chunk is electronics, pecans.

Pecans, they are down 20%.

Well that is because they were probably double last year or whatever it was.

So sometimes you have these giant commodity price increases a year ago, particularly in the nuts category or some of the grains.

And then it comes down the other way.

Got it.

On the $600,000 increase in inventory per warehouse, could you help us break that down and figure out where it is going into, that investment?

I think right at $200,000 of it was electronics, and another $75,000-plus of it was small electric.

And then I think there was a -- we definitely expanded apparel.

I gave the example of the wool pants.

We have got a much better, I think, commitment to apparel.

But then there is a lot of little stuff everywhere else.

But the single biggest component is consumer electronics.

And you go into the warehouse, you see a lot of 60- and 80-inch TVs now and tablets.

Just to maybe understand a little bit better, as you grow the online business how should we think about the inventory per warehouse vis-a-vis the online growth?

Is it the same SKU assortment?

Is it an extended assortment?

Well, right now it is an expanded assortment, it is not the same.

Certainly you're going to see some overlap on electronics or a few apparel items, there are some.

But you're going to see more SKU selection online and perhaps (technical difficulty).

So whatever changes you are going to see there are going to be very slow in terms of percentages, because the brick-and-mortar are so big.

Right, great.

Then lastly, you mention on the accruals, and we know that just 2 million or 2.5 million is just 1 bp.

But the one that you cited this quarter, was that a one-off catch-up accruals?

Or do you think now there is a different accrual run rate for those things you cited?

No, no, there was, I think as it relates to -- I don't have the exact basis points in front of me.

But like on Workers Comp, I think there was a couple basis points there.

That is just looking at -- that is probably -- my guess is there is a little catch-up in that number.

But again it is more when -- again I get back to the income tax.

We benefited by several million dollars.

I'm not talking about the $62 million number, because there are discrete items.

Usually when you have got discrete anything there's two or three pluses and two or three minuses and it balances out to be very little, a basis point or two.

My guess is there are three or four here.

So it is not a whole lot.

I wouldn't read a lot into that.

Okay, great.

Lastly on the Club openings, as we do more outside of North America, how should we think about CapEx in terms of how many of those might actually be leased?

I know you are well over -- you're 90%-plus here.

But as we go International, are most of those units in Asia and elsewhere going to be leased?

Probably a little more of them are leased or at least ground-leased and with long-term ground leases.

We still try to buy where we can, and I think we are getting a little more aggressive on that.

But it is hard to predict.

I think overall we are in the low 80s in terms of how many we own.

But I think -- I know even in the US when interest rates plummeted four years ago, all of a sudden you would have a -- a lot of times when you have an individual land owner they don't want the cash.

So we have done a few more leases in the US as well in the last several years.

But certainly there is probably a higher proportion of those done in areas like Asia.

I think we own more in Japan than we do in other -- like Korea, I think we lease more.

But every country is a little different.

But if I had -- and I took the three Asian countries overall, there is more leases there, of course, than in the US.

So maybe asked a different way, if there is 27 or 28 openings, is it fair to say that maybe this year, given where they are, that half are leased and half are owned?

Or would that be too extreme?

No, we will still own more.

Still own more?

Okay, great.

Thanks a lot.

Dan Binder, Jefferies.

Hey, good morning.

It's Dan Binder.

A couple questions.

First, on IT modernization costs, I didn't hear you call it out this quarter.

I know it has been adding some pressure.

Are we now through the worst of that?

No, I think on an ongoing basis looking over the next few quarters, and this is a guess, somewhere in the 3 to 4 basis point year-over-year.

I think it was higher in Q1; it was closer to flat in Q2.

But some of that is just, again, timing of things.

You also capitalize some of those costs.

Again overall it is going to -- my guess over a two- or three-year period, it is going to add sometimes 3, sometimes 5.

Right, okay.

Yes, I remember last year you guys were very focused on some of the operational opportunities to improve your cost structure.

You called out some of that today.

Overtime reduction was one of them which you mentioned earlier.

I am just curious.

As you look at the organization today, are there any big buckets where you can still pull costs out?

I don't think there have been any big buckets.

Even by the way, like the -- I did mention the overtime, 20-plus-% reduction in overtime hours.

That was several million dollars a year, maybe a basis point or 2 over a couple years.

But nothing so dramatic that is going to change -- nothing like everybody thought that RFID would free up the front end and reduce our biggest labor cost area.

That ain't happening.

But we have done a better job at front-end labor, kicking and tackling little things.

There is still the focus out there, but I can't think of -- other than driving sales, and again these are -- I am shooting from -- little things here.

But we have streamlined and tested and now rolling out how we return merchandise.

In some cases, not doing it at the warehouse but bringing into some of the depots.

If that can continue to work, do we save a few million here and $5 million there?

Yes.

But there is no giant thing out there.

I'm sorry if I missed it, but did you comment on the dot-com sales growth and the contribution to comps this quarter?

No, I think it was in the low teens in terms of sales growth.

Okay.

What does that look like in terms of the contribution to comp?

I don't know.

We are going to do the high 2s for the year on 100 and whatever your budget is for total sales for the Company.

So it is 2.5% of sales, and up in the low teens.

Okay, great.

Then on consumer electronics sales, I know you called out the calendar issue that affected the quarterly number.

But generally your monthly sales have been showing some pretty good strength in that category.

I was just wondering if you could speak to some of the bigger trends that you are seeing take place in the Club there.

Well, I think in electronics the biggest takeaway is our TV sales in general.

Even though they were again -- that is the biggest -- TV sales are the biggest piece of electronics.

While that was down slightly in February, over the last several months it has been up in the mid to very high single digits.

And a lot of that, I have been told in the budget meetings, relates to the fact that we have done very well with 60- to 80-inch TVs.

We have done relatively well -- we have now cycled by not selling -- as you know we stopped selling some of the Apple products, the ones that we were allowed to sell, well over a year -- maybe two years ago.

So on that low base we are selling -- starting to sell some of the other tablets and the like.

The cell phone business is pretty good.

But again, it is all dwarfed by TVs.

Great, okay.

Thanks.

Sandra Barker, Montag & Caldwell.

Richard, I just had a clarification on the website.

What impact have you seen from making it searchable and adding the mobile apps?

Has it and anything notable, now that you are more visible?

Well, I think sales are up a little better than they had been.

But the first thing is I know for the months leading up to it, everybody is warning us -- from our own dot-com people to the IT people -- that the day you flip the switch is not the day you see start to see immediate benefit, because it takes time to build the clicks and all that stuff.

But again, like the other things we do, we are methodical and slow about it.

It is showing some improvement; but off the top of my head I can't give you any specifics.

Great.

I can't remember, is Jim still in the building a little longer, or what is he focused on?

Jim?

Jim is on vacation this week.

But yes, he is still here a lot.

But he is general -- somebody asked me the other day.

You go to Craig to ask questions and get permission to do stuff.

Jim is still traveling and he is still on the Board, of course, and I see him quite a bit.

But he -- and to his credit and I think to the Company's success it has been a very good three -- a little over a three-year transition with he and Craig.

He is still traveling a lot to openings and with the merchants and with Craig, and spends a lot of time with Craig and Jeff still.

But he is doing a good job of staying away a little more.

If you asked me six months ago I would have said he was in the office 80% of the time.

Now it is still well above 50%.

But we will see.

He is still doing well.

Thanks.

Bob Drbul, Barclays.

Hi, Richard.

I just have two questions for you.

The first is, can you talk a little bit on the numbers around -- I think you said new member sign-ups, the metrics in International markets versus the US and Canadian markets, the number is higher abroad.

Can you give us -- can you tell us how much higher it is?

And the second question is, you talked about the buyback a little bit.

But on the buyback going forward, is there any reason why you wouldn't be active at these levels where the stock is?

Well, I will take the last question first.

No; I mean we are going to -- we look at it and we will keep looking at it.

I think generally speaking, as I mentioned in the past, we issue our issues that add 3 million to 3.5 million shares a year.

It would be nice to cover that; but we don't feel pressure on a given day or week to do something.

Generally speaking, we still feel good about the Company long-term.

Again I think at this point we will wait for 12 weeks and see what we are doing.

On the other question, what was it?

How much higher are the new member sign-ups in International markets versus the US, Canadian?

I will give you some general members.

I mean, we have had numbers -- keep in mind, when we talk about opening-day sign-ups it is for the generally eight to 12 weeks leading up to the opening day, where we will -- the parking lot is partly done and you can get in and out of the parking lot.

People come up and come in and sign up in advance of opening.

There's the little flags outside and the whole bit and the table activities.

In the US where we have opened a new unit, even in a very strong existing market, you might have a few thousand sign-ups, because you have already got a lot of people in that market and it is not like this giant thing for a new market.

We opened -- I know I was at an opening back in the Carolinas three or four months -- four or five months ago, and it is a relatively medium-sized town, less than 1 million people, and a brand-new market.

And through opening-day -- so opening-day sign-ups for those several weeks and they are all booked, if you will, starting on opening day, was in the 6,000 or 7,000 which was better than we would have thought.

We have some openings that we have done over in Asia and Australia, whereas through opening-day we have had anywhere from 20,000 to 60,000 members signed up.

Now, mind you, you're going to have a much lower renewal rate on those a year later.

But we have units -- I think our membership numbers, and we have been in Japan for a while now, but we also have some new units there.

The number of members per unit over there is a little over double what the Company is running.

So it is a little different metric in some of those markets, quite a bit.

So when you open 4 or 5 of those that is going to jump your membership increase, the number of members, recognizing we don't use deferred accounting for counting members, but for their dollars we do.

Great.

Thanks very much.

Okay, well is that it, Crystal?

There are no further questions at this time.

Okay.

Well, thank you.

Bob and Jeff and I are around.

Appreciate your time today.

Thank you.

This concludes today's conference call.

You may now disconnect.