好市多 (COST) 2013 Q4 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 fourth 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, and good morning to everyone. This morning, we are reporting our 16-week fourth quarter and 52-week fiscal year 2013 operating results, which ended on September 1. These results, of course, are compared to the 17-week and 53-week periods of the prior fiscal year.

In addition, we are reporting this morning our September sales results for the five weeks ended this past Sunday, October 6.

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 fourth-quarter operating results for the 16 week quarter, reported earnings per share came in at $1.40, up $0.01 from last year's 17-week fourth-quarter earnings of $1.39. I will come back to this in a moment.

In terms of sales for the quarter, total sales were up 1%, which again was impacted by the extra week. Comp sales, which compares like 16-week periods, were up 5% both on a reported basis and excluding gas and FX.

For the quarter, gas prices year-over-year were effectively flat, so no impact on the 5% US comp figure. However, foreign currencies weakened relative to the US dollar year-over-year in the fourth quarter, primarily in Canada and Japan, such that our reported 4% international comp figure assuming flat year-over-year FX rates would have been up 7%.

In terms of sales for the five-week September period, total sales increased 6% year-over-year, reported comparable sales increased 3%, and that 3% was comprised of a 4% in the US and 0% internationally. And excluding gas and FX, comparable sales would have been up 5%. The 4% US reported would have been a 5% excluding gas deflation, and the 0% internationally would have been an up 6%, assuming FX was flat year-over-year, in local currencies.

In terms of comparing our $1.40 reported earnings for the fourth quarter to last year's fourth quarter of $1.39, several items of note. First, there are a few items that I've discussed in each of the prior several earnings calls. Last year's fourth quarter had the extra week. Simply dividing the 17 weeks into the $1.39 figure would have suggested that the benefit from that extra week was about $0.08 a share.

Membership fee income, of course, included about $25 million pretax extra, and that relates to the late 2011/early 2012 annual fee increase in the US and Canada. And how that works, it's weighed to our income statement based on deferred accounting over about a 23-month period.

Interest expense, of course, was higher in the fourth quarter by about $13 million pretax, or $0.02 a share. This related to last December's $3.5 billion debt offering that was done in conjunction with the $7 per-share special dividend.

There were also a few items that year to date through the first three quarters had represented positive year-over-year profit variances, but that swung the other way in Q4 year-over-year. For example, FX; whereas strengthening foreign currencies relative to the US dollar added to earnings-per-share year to date through the first three quarters, it swung the other way in the fourth quarter. In Q4, the foreign currencies where we operate weakened versus the US dollar, resulting in foreign earnings in Q4 when converted into US dollars being lower by about $10 million pretax, or $0.015 a share, than those earnings would have been had FX exchange rates been flat year-over-year.

A similar year-over-year profit swing occurred in the profitability of our gasoline operations. Year to date through the third quarter, gas profitability was higher year-over-year through the third quarter year to date. In Q4, it too swung the other way, coming in lower in Q4 year-over-year.

In addition to these factors, I will point out in our discussion of SG&A a few other items that resulted in our expense percentages coming in higher year-over-year in Q4.

In terms of new openings, for all of fiscal 2013, we opened 26 new locations, 12 in the US, three each in Canada and the UK, five in Japan and one each in Korea, Taiwan and Mexico, ending fiscal 2013 with 634 locations worldwide.

For fiscal 2014, we've ramped up our expansion plans. On our docket are plans to open 36 new warehouses, with half of these in the US and the remaining in international markets, including our first two planned for Spain next spring and summer. Inevitably, a few of these will probably get delayed, so I would estimate that a number in the low to mid 30s is more likely, still a pretty good increase above the 16 and 26 new warehouses opened in each of the past two fiscal years.

During the first four months of 2014 through calendar year end, we plan to open 15 of these locations, 10 in the US, including three next week, two each in Canada and Australia and one in Mexico.

Also this morning, I will review with you our membership trends, our e-commerce activity and of course additional discussion about margins and SG&A.

Quickly, start this call here in terms of fourth-quarter results, more detail. Sales for the year's fourth quarter were $31.8 billion, up 1% from last year's 17-week fourth quarter of $31.5 billion. Again, if you normalize the 17 weeks by taking 16/17 of it, if you will, it would have been up 7% on a normalized comparable week basis.

On a reported comp basis, Q4 comps were up 5% for the quarter. For the quarter, our 5% reported comp was a combination of almost flat average transaction for the quarter. That included the detriment of FX of about 80 basis points, so it would have been up slightly assuming flat FX. And an average frequency increase in the quarter of 4.5% up.

In terms of comparisons by geographic region, most US regions registered mid-single digit comp increases for the quarter, with Texas, Midwest and Southeast being the strongest. Internationally in local currencies, Korea and Taiwan were on the weak end, due in part to cannibalization on a relatively small base of existing units, with Canada and Mexico the strongest in terms of comp sales increases.

In terms of comp sales by merchandise category for the quarter, within food and sundries, which were mostly in the mid-single digits, deli, wine and spirits, beer, frozen foods and candy were all relative standouts.

Within hard lines, fairly flat numbers year-over-year. The departments with the strongest results were office, health and beauty aids and hardware. Electronic sales, which is a relatively large-sized sub department within hard lines, were weaker year-over-year in the fourth quarter.

For soft lines, low double digits for the quarter. Small electrics, housewares, domestics and apparel were standouts, and the same old department, media, continuing to be the relatively weak department there.

In fresh foods, comp sales in the mid-single digits, deli and produce showing the best results.

For September, the five-week month, sales were $9.9 billion, up 6% from last year's September reporting period. On a comp basis, September comps were up a reported 3% for the month. That 3% included a negative 1.3% average transaction. This includes the detriment of FX of about 1.5 percentage points and deflationary gasoline, which deflated quite a bit, about 1 percentage point. So the 1.5 and the 1, those 2.5 percentage points negative, is included in that minus 1.3% transaction.

Average frequency, up about 4%. Excluding FX and gas effects, comp sales for the month of September were plus 5%.

In terms of sales by geography for the September, most US regions were in the low- to mid-single digit comps, with Southeast and Texas being on the strong end. Internationally, Korea and Japan were on the weak side of all the international countries, with Canada and Mexico showing the strongest comp sales increases in local currency.

In terms of category sales for September, food and sundries, low to mid singles; hard lines, low singles, similar to the quarter. Soft lines, in the low to mid teens, up a little bit from the quarter. Fresh foods continues in the mid-single-digit range, led again by produce and service deli. And lastly, ancillary business comps were slightly negative on a reported basis, basically due to the gasoline business, which experienced 8% deflation year-over-year in the average price per gallon during the five-week monthly reporting period.

Gallons in terms of gas were slightly positive.

Moving on down the line items in the income statement, membership fees were up 3% or about $22 million, an increase of four basis points year-over-year to $716 million. Both membership fee numbers for this year's fourth quarter and last year's had some items to look at. Within the $716 million, of course, this year, it included the $25 million benefit that I talked about from the fee increase. And last year's $694 million again was a 17-week quarter. Taking 1/17 out of that, it would reduce that number by $41 million. So I think the 3% reported increase in dollars, again adjusting it for those two anomalies, would have been up about 6%. But 3% is what we reported.

In terms of membership, renewal rates remain strong, both in the US and Canada and worldwide. Continued strength in our Executive Membership program. New member sign-ups in the quarter companywide were very strong, up 9% year-over-year, despite one less week in the quarter. That strong performance was mostly reflective of very strong sign-up at our three Japan openings that opened in the fourth quarter. As I've mentioned in the past, we've got very strong openings sign-ups at locations in Asia and Australia.

In terms of number of members at fourth quarter end, Gold Star ended the quarter and the year at 28.9 million, up from 28.2 million 16 weeks earlier. Primary business remained at 6.6 million. Business add-on remained at 3.5 million. Again, you get some of those add-ons moving into other categories as they opt for Executive.

Total paid memberships went from 38.3 million at year-end to 39.0 million -- I'm sorry 38.3 million at Q3 end and 39 million at fiscal year-end. And total cards went from 69.9 at third quarter-end to 71.2 at fiscal year-end.

Executive members continue to increase. We are up over 13.5 million at the end of the fiscal year, which is about 250,000 increase in terms of members since Q3 end, or about 15,000 a week added during the quarter. As I have mentioned before, Executive members are over a third of our member [rates] and about two thirds of our sales as well.

In terms of membership renewal rates, they too continue strong. Our business renewal rates went from a 93.9 at the end of the third quarter to -- tweaked up to a 94.0. Gold Star went from an 88.9 to an 89.1. So total Business and Gold Star went from an 89.9 to a 90.0. Now, those numbers, by the way, are for the US and Canada, which we've always showed in the aggregate. That's a little over 82%, 83% of our business.

Worldwide, the number went from an 86.4% at the end of the third quarter to an 86.3%. And the reason there is with all these new international openings, you're always going to have much lower renewal rates in startup years of new locations, and particularly in new markets.

Going down the gross margin line, again, I'll ask you to jot down a few numbers. We will have four columns. The columns would be reported and without gas -- and the second column without gas. That will be Q3 2013 and Q3 2013. The third and fourth columns would be reported for Q4 2013 and without gas for Q4 2013.

As I mentioned, in Q4, there is no inflation, so the third and fourth columns will be the same numbers.

The line items, the first one would be core merchandising. Going across to the four columns would be minus 5 basis points year-over-year, minus 11, minus 4 and minus 4. Ancillary and other businesses, plus 6, plus 5, and then plus 3 and plus 3 in the last two columns.

2% reward, minus 2 across the board. LIFO, plus 6 and plus 6 in the Q3 columns, and plus 7 and plus 7 in the Q4 columns. And Other, it was plus 7 and plus 7 in the Q3 columns and zero and zero in the Q4 columns. That related to a loss of recovery that we mentioned last quarter.

All told, reported in Q3 year-over-year, gross margins was up 12 basis points; but again, taking out gas inflation, it was up 5. This year both on reported and without gas, it was up 4 basis points.

Now to provide a little color on these numbers, core merchandise component of gross margin was down 4 basis points year-over-year. Three of the four core categories, food and sundries, hard lines and soft lines, showed higher year-over-year gross margin percents on their own sales, in the 10 to 25 basis points range each, while year-over-year in Q4 fresh foods margin were lower by about 80 basis points.

As I mentioned on the last few earnings calls, our investment in pricing occurs throughout many merchandising departments, but has been most notable in fresh foods.

Ancillary business gross margins were up 3 basis points year-over-year in Q4. Gas and food court margins coming in a little lower than Q4 last year, with others, like pharmacy, optical and hearing aids coming in a little bit better.

The impact from the increasing Executive membership business represented a reduction in gross margin of two basis points, reflecting the cost of higher penetration of sales going to the Executive Member reward program.

LIFO in the fourth quarter, we recorded an $8 million pretax credit a year ago. That compares to an $11.5 million pretax charge -- I'm sorry -- an $8 million pretax credit this year in the fourth quarter compared to an $11.5 million pretax charge last year in the quarter. So that was year-over-year 7 basis point swing in our favor.

All in all, a pretty good margin result in the fourth quarter.

Now moving to reported SG&A. Our SG&A percentages Q4 over Q4 were higher by 9 basis points, coming in at a 9.75% this year compared to a 9.66% last year.

Again, we will jot down a few numbers. The same four columns, reported and without gas, and then again reported and without gas. And the first two columns will be for Q3 year-over-year, and then third and fourth columns would be Q4 year-over-year.

Going across, operations, plus 2 reported in Q3 2013 and plus 7 without gas. That means -- a plus sign means better or lower. In Q4, it was a minus 9 and a minus 9. Central, plus 2 and plus 2 in columns 1 and 2, plus 3 and plus 3 in columns 3 and 4.

RSUs or equity compensation, minus 1 and zero, and minus 3 and minus 3.

All told in Q3 year-over-year, we reported a plus 3, or SG&A better by three basis points. Without gas inflation, it was actually better by 9 basis points, looking at it that way. And again in Q4 year-over-year, it was higher or minus 9 basis points.

The core operations component again was 9 basis points year-over-year. There are several moving parts to that. For example, benefits and workers' comp expenses were higher year-over-year in the fourth quarter by 5 basis points, 4 on the benefits side and 1 on the workers' comp side, in part due to year-end true-ups of various expense accruals as well as some increases. So again, some of that I would say would be more normal and some of it's just how we true up things at year-end.

Several additional basis points of our expense comparisons in Q4 year-over-year resulted from a variety of other year-end expense accrual true-ups that in the aggregate had helped us a little last year in the quarter and tended to hurt us a little bit this year in the quarter. These items notwithstanding, within core operations, our payroll as a percent of sales continued to improve year-over-year. Central expense, it was better or lower by 3 basis points, as you saw on the chart. This benefited by bringing back a little bit of our bonus accrual for the year. That benefit was somewhat offset by ongoing IT modernization costs.

I'm happy to mention also that -- I want to mention also that IT expense as a percent of sales will continue to negatively impact SG&A throughout the upcoming fiscal year, as we continue these modernization efforts.

Lastly, our equity compensation, which is provided as part of a compensation package to more than 3000 people at Cosco, represented a 3 basis point hit to SG&A in the quarter.

So all told, there were a few things that I think were anomalies and a few that were a little higher expense, all resulting of course in higher reported higher SG&A.

In terms of the income statement, preopening expense, $15 million last year, up $2 million to $17 million this year. No real surprises. Last year, we had six openings, four in the US and two international. This year, we had seven openings in the quarter, two US and five international.

All told, reported operating income in the fourth quarter increased slightly year-over-year, coming in last year at $949 million versus $954 million this year. Again, lots of reason for this -- the extra week and many of the items I pointed out earlier in this discussion.

Below the operating income line, reported interest expense was $14 million higher year-over-year, with Q4 2013 coming in at $36 million versus $22 million in last year's quarter. This difference relates to the additional interest expense again in the December 2012 $3.5 billion debt offering, which equates to about $44 million pretax a year and about between $13 million and $14 million for the 16-week quarter.

Interest income and other was lower year-over-year by $2 million, coming in at $36 million this year from $38 million a year ago. Actual interest income within this figure came in at $14 million compared to $16 million a year ago. The other component of interest income and other amounted to income of about $22 million in each of the fourth quarters, essentially the same year-over-year.

Overall pretax income was down $11 million versus last year's fourth quarter, coming in at $954 million versus $965 million last year. Again, last year's fourth quarter included one more week of earnings result than this year's 16-week fourth quarter.

In terms of income taxes, our Company's tax rate this quarter came in at a 34.8% versus 35.6% a year ago. So a little less -- about 8/10 of 1% lower year-over-year tax rate. While many of the items I talked about in expenses tended to go against us in the fourth quarter this year versus last year, there are a few discrete items in taxes that tended to help us and reduced that rate a shade from a year ago.

Overall, net income was up $8 million versus last year's fourth quarter, from $609 million last year to $617 million this fiscal year in the fourth quarter.

Now for a quick rundown of other topics. While the condensed balance sheet is included in this morning's press release, a couple of balance sheet informational items. Depreciation and amortization for the quarter totaled $295 million, and therefore $946 million for the entire fiscal year.

Merchandise accounts payable -- and when you look at accounts payable on the balance sheet, it includes -- the majority of it is merchandise-related. The other component is typically construction-related.

So anyway, on the balance sheet, our reported AP ratio was 100% this year, down from 103%. Just using merchandise accounts payable to inventories, it was 89%, down from 90%.

Average inventory per warehouse, last year was $11.7 million per warehouse. This year was $12.5 million, or about $800,000 per warehouse, or about 7% up year-over-year. The $800,000 increase is really spread throughout many merchandise departments, and overall, our inventories are in good shape. Our fiscal inventories at fiscal year end came in as good as they've ever been.

In terms of CapEx, in the first three quarters of this year, we spent $488 million, $455 million and $435 million, respectively. And in Q4, we spent $705 million. Not only is it more weeks in the fiscal quarter, but again, it's in -- related to all the openings we've got coming on this fall.

So for the total year, we spent $2.083 billion. I'd estimate that our fiscal 2014 CapEx, given the planned 36 openings, will be approximately $2.3 million to $2.5 million, again, the lower end of that range taking into account that probably there's a couple things that will slip during the period.

Costco Online, currently, costco.com, which is our US e-commerce, costco.ca and costco.couk, for Q4, sales and profits were up over last year, even with the extra week last year. Q4 e-commerce sales were up 8%. So again, if you extrapolated that for the extra week, it would've been about 15% normalized. E-commerce is again a little over 2% of our sales.

We replatformed dot-com sites, our dot-com sites last fall, as I've mentioned. We also launched the Android and Apple apps during the same time. Costco.uk was launched last fall, and this fall we plan to begin e-commerce operations in Mexico.

In terms of expansion, for the year -- again, this assumes that we open the 36 that I mentioned that are in our plan -- it would be 14 in the first quarter, two in the second quarter, including one which is before calendar year-end -- that's how we got to the 15 earlier, 9 in Q3 and 11 in Q4.

So in fiscal 2013, the 26 we added represented about 4.5% square footage growth. Assuming 36 on a base of 634 this year, that would be 5.5% square footage growth. And if you assume at the low end perhaps 30, that would be about 4.7% square footage growth. So something in the 4.5% to 5%, closer to 5% range, should be our expectation this year.

The new locations by country, assuming 36 figure, half would be in the US, three would be in Canada, seven would be in Asia, between four in Korea and three in Japan, five would be in Australia, one in Mexico, and two would be in Spain; as I mentioned, we'd enter in the spring and the fall.

As of fourth quarter-end, some of you asked about square footage. We stood at -- square footage stood at 90,805,000 square feet, an increase year-over-year of 4.5%.

In terms of dividends, our current quarterly dividend stands at $0.31 a share or $1.24 annualized. That was up 13% from the previous $0.275 per share quarterly dividend. This $1.24 annualized dividend represents a total cost to the Company of about $541 million. And of course, these quarterly dividends were in addition to the $7 per-share special dividend, which totaled a little over $3 billion that we paid to shareholders back in December of 2012, our fiscal second quarter of 2013.

The usual supplemental information will be posted on the Costco Investor Relations site later this morning. And lastly, our fiscal 2014 first-quarter scheduled earnings release date will be Wednesday, December 11th. That will be for the 12-week fourth quarter ending on November 24.

With that, I will turn it over to Felicia.

(Operator Instructions). John Heinbockel, Guggenheim Securities.

Hey, Richard. It's actually Steve Forbes on for John today. When you think about the -- I guess the holiday selling season coming up, does the shorter selling season between Thanksgiving and Christmas not matter, or does something get done differently from a merchandising or operational standpoint?

It doesn't matter. I mean, every preholiday Christmas day is better than a post-holiday Christmas day; but overall, we are approaching it the same from an inventory standpoint, being fairly positive on our buying.

Okay, and then just on Canada, how are you progressing with the rollout of gas? And then is there a target for the number of locations that offer gas as for the end of next year?

I'd have to --

(inaudible - microphone inaccessible)

We have 40 right now?

(inaudible - microphone inaccessible)

North of 40 right now, and my guess is --

Every new building will have a gas station.

Every new building will have a gas station; so those three. And I guess another three to five. So six to eight is my guess on a -- here, I've got the numbers here.

Gas in Canada, we have 43 currently at the end of -- as of this past Sunday. And that's out of 85 total Costcos in Canada. So on a base of 43, six to eight would be a good guess.

And then just lastly, on cost pressure, or actually, the competitive environment. I guess you mentioned fresh foods, the 80 basis points and so forth. Is there anything else you can give a little additional color on? And I guess is there any sense of the return that you are seeing on these investments?

Well, keep in mind, the return -- I've used the example of the rotisserie chicken in the past. We get more positive press out there from keeping that incredible giant chicken at $4.99. And over the last year, 1.5 years, the underlying poultry prices have skyrocketed. So we've -- the underlying prices have skyrocketed such that there's very little margin on it right now. Although it looks like there's some relief in terms of where pricing is going over the next few months, based on poultry futures costs.

It doesn't mean we are raising prices; it means that we will at least make a little margin. But that's us, and that's what we do.

In terms of the competitive environment out there, from what I see at the every-four-week budget meetings from all the regions, it's not easy, but it's not -- there's always pockets of something; but there's nothing that's changed to the extreme either way.

Okay, thank you.

Matthew Fassler, Goldman Sachs.

Thanks a lot and good morning. Could you comment on whether you've bought back stock this quarter and what your general thought process is on the buyback at this stage of the game?

Sure. Well, we did not -- sorry, I forgot to mention that. So for the year, we've bought very little back, about $34 million I think at the very beginning of the fiscal year, back in September.

On a long-term basis, we are still looking to -- we are still positive about the outlook of our Company long-term, and we will continue to look at it. We report once a quarter and we'll let you know next quarter what we have done or not done this quarter.

We did of course do the $3 billion special dividend back in the fall at a time when the stock was showing a lot of strength. And so we feel good about the combination of the two over time. And I'm trying to be as coy as possible because I can't give you any direction until we let you know a quarter from now.

Understood on that. And just a quick follow-up. On the electronics business, can you give us a sense whether the weakness was volume or price-driven and what you think your market share did during the quarter?

Well, it was both. I honestly don't know what others have done. We have been very strong up until the fourth quarter. Like through May, it seemed like every month we had what we call majors, which is electronics, principally, and TVs within that is the biggest category, tended to be up in the 5 percentage point to 10 percentage point range.

A little of that, I think back then, was higher average price point. Even though electronic tends to be deflationary, we were selling bigger and bigger and more advanced televisions, 60s and 80s.

Back in June/July as we saw some weakness -- and we shared that with everybody on our monthly sales call -- the big effect tended to be -- felt was it was the Olympics a year ago, and -- but that's what we've seen so far.

Thanks so much, Richard. Appreciate it.

Hold on, one other thing here.

(inaudible - microphone inaccessible)

The [vendors] are telling us there is a challenge, that sales have come down a little bit everywhere. I don't know what others have done.

Got it. Thank you.

Chris Horvers, JPMorgan.

Thanks, good morning, guys. Can you talk about how you think about inflation in key categories going forward? And does that provide an opportunity for some margin relief, such that maybe we can move back to flat core margins? And then related to that, how should we think about the LIFO impact related to that?

Well, first of all, again, as I've said several times in the last year or two, when margins have showed a little year-over-year downturn, it's us -- in our view, it's us more than our competition. And we have been pretty extreme on certain categories. I think a year ago, it was the food court. I mentioned the rotisserie chicken. When you are selling 60-plus million of those a year, that adds up to more than a couple of basis points alone to the Company.

But that's overall what we do.

In terms of LIFO -- in terms of what does inflation or deflation do, certainly inflation, we tend to -- ultimately, you've got to take some of it, subject to competition. But we tend to be a laggard historically. With deflation, we tend to be the first out-of-the-box.

So certainly, though, when there's inflation, there is perhaps a little bit of an opportunity. And that gets to the LIFO question. What generally you see is when there is a LIFO credit, meaning that there's been deflation, you've also had some price reductions. So part of the reason I think the core year-over-year was down a little is that as well. When it goes the other way -- they tend to go in opposite directions. Not all the time, but that's the case.

So I think that we do better when we are reducing prices and driving business, and overall, that's good for us better than others. We view that we tend to be more aggressive, take more advantage of that to show a difference between us and our competition.

So does that mean that -- are you seeing more deflation and do you expect more deflation going forward? And would that result in --?

Keep in mind, we are not seeing a lot of anything right now. I did mention gasoline in general. Gasoline is quite deflationary. Year-over-year in the month, it was 8% lower.

But it's kind of -- everything else is kind of neutral, certainly well under a percentage point. Again, I mentioned poultry as an example. That had more to do with the fact that poultry prices had risen dramatically over a couple of year period, and we've maintained a $4.99 price on that, which again, we find ourselves in the news about that, which is a positive.

Now that there's some -- it seems like there's some downward pressure on both feed and poultry prices futures over the next few months, as the commitments for the producers go through the higher-cost stuff, we would expect hopefully to see those prices come down, which adds to margins since we will maintain that $4.99.

But what about -- isn't there pricing on the grain side? Isn't that causing pressure? Meaning there's Nielsen data out today suggesting that prices are coming down on the grain side. And if you look at corn and soy out there and where they are priced in the market today, that would suggest that prices will come down in the future.

So are any of the merchants talking, about on the dry grocery side or other areas in the box, where they expect pricing to come down, or is the outlook basically neutral?

If our [landed] costs come down, generally you expect to see our prices come down. I think where we have the anomalies or the outliers are going to be something like an extreme item. By the way, rotisserie chicken is just one form of chicken we sell. We sell frozen and fresh and everything else. But just that one item is $300 million plus.

So when we have been the leader in terms of keeping the price down despite very upward increases in underlying cost, as those come down, that gives us a little margin relief. But generally speaking, across what I will call the supermarket canned and boxed categories, we are going to try to lower prices.

Understood. And then any commentary in terms of how September played out from a cadence perspective week to week?

I don't have that detail in front of me. A lot of it has to do with how Labor Day falls and what the weather is with back-to-school. There is probably a 3% or 4% range between the weeks, but I don't have that in front of me.

Fair enough. Thanks very much.

Dan Binder, Jefferies.

Good morning. Just want to touch on a couple things. First with regard to competitive pricing. As you know, one of your competitors has been out there with a new vendor book program that I think they've done now three or four times. Just curious in your price-sensitive organization how are you dealing with that. Are you matching price when they do a vendor book, or do you just sort of do your own vendor book and disregard that as promotional pricing that's not every day?

We are going to do what we do. If they keep doing it, it must be working. And we have been doing it for a long time ourselves. We are always out there trying to do new things as well, and I think that's fine. We take that into account when I -- in the comments I mentioned earlier about levels of competition out there.

But I guess just day to day, when they have a vendor book out there, do you feel compelled to lower the price on those items, or you just sort of treat it as a one-off promotional event that you don't necessarily match?

In a perfect world, absolutely yes every time. The reality is, just like on our MVM booklets, when we are getting -- we've negotiated a specific deal with a specific vendor, and it's essentially a lower cost to us because of that, but that's because of the deal we negotiated, we are not going to go way down to match something all the time. We will look at it as promotional.

At the end of the day, all of the big retailers, from the biggest to the next three or four, and the large supermarket chains as well, all of the big manufacturers have various buckets and different silos of promotional monies, whether it's for the MVM or slotting allowances or seasonal back-to-school, whatever it is. And different retailers are going to use it at different times in different ways.

So ultimately, everyday blocking and tackling, we are going to match prices. We are not going to go crazy 20% below cost if somebody else had used their silo of promotional monies in a way on a promotional basis. I wouldn't expect they would either.

And then with regard to Canada, I think you guys were a little bit more aggressive in front of Target's openings. They kind of came out of the gate maybe a little bit higher-priced than people thought. Just kind of curious how you've adjusted to that or if you have at all.

I would say it's been less of an issue than we had thought. We never thought it would be a huge issue, other than the fact that having a formidable player -- and they certainly are formidable and respected -- coming into a market where that would impact promotional activities with Walmart and with Loblaws and others up there, that there would be a lot of marketing and excitement and promotional stuff. There has been some, but probably not as much as we had felt.

Now, we've also been helped by the fact that we've rolled out things like gas that drives business, and the economy overall in Canada has been very strong. Over the last few years -- they have not suffered the economy strains that we have here in the US.

So maybe (inaudible), but we haven't seen a big deal.

So have you been able to take price back up since they weren't as aggressive or has it stayed pretty stable?

No, we tend not to do that.

Yes, okay. The last item was just on this other income line. You mentioned $22 million outside of interest income. Was that related to like FX gains? I know you have that Mexico peso issue (multiple speakers) the dollar.

It's principally FX gains.

FX gains, okay.

Yes.

Great, thanks.

Greg Melich, ISI Group.

Richard, thanks for the walk-through on the membership fee income. I did have a follow-up there. You said the 3% really sort of gets to 6% if you try and back out the extra week and fee increase. Does that also adjust for FX, which presumably would've been a headwind to that year-over-year in the quarter?

That would affect it a little more, you are right.

So that would only be another 100 bps. Should we just think of it as proportional to the business?

It's probably a little less than that, but I should've mentioned it. I always try to find reasons here.

All right. So basically in local currency, membership fee income might have been up 7%, not 6%?

It could have been. I just don't have -- I need to calculate it out. But it's something, but I don't know if it (multiple speakers).

And then second on SG&A, I just want to make sure I got the nine bps of headwind, that I got that right. The workers' comp sounded like most of it was a catch-up for maybe underaccrual earlier in the year. And then there were a few other things that you said were sort of a true-up by year-end.

Could you summarize of the nine bps how much of that was true-up versus how much of it is actual costs of running the business ongoing?

I don't want to get that granular, not because the number is worse than I think. Somewhere in the middle is probably the right answer. The two big ones, of course, are benefits and workers' comp, which I mentioned was five bps year-over-year.

I know within workers' comp -- first of all, understand what a true-up is. If you think about workers' comp, we have just the US workers' comp well in excess of $100 million of incurred expense every year.

There's also what we reserve. When somebody gets injured or whatever or is on disability, we set a reserve based on what we think. Now, to the extent it's a bad injury, it might be a reserve of tens of thousands, if not a few hundred thousand dollars, based on anticipation over a several-year period.

Every quarter-end, our actuaries look at that to adjust what's on the balance sheet, if you will, we've expensed or reserved already. So on top of that 100 a year of incurring items, you are also truing that up at the end of every quarter, correctly under GAAP accounting.

I think the reserve on our balance sheet at any given time just on workers' comp is over $300 million. So a swing of $5 million or $10 million one way on actuarial changes based on what happened in the last quarter of real expenses and adjusting those things, sometimes it helps you by a few million, sometimes it hurts you by a few million.

And there are several large expense accruals, given our size, that we try to be granular to help you understand the numbers. But again, if I had to look at last year in Q4, a few more of those moons lined up for us. This year, a few of those expenses lined up against us. And probably somewhere in the middle of that nine is the right number. I'd hate to go a little further than that, because I don't know.

All right. Fair enough. Lastly on the CapEx, understand that it's gone up this year with more openings. But how should we think about that number? Is that number -- because I know you spend money on land and everything well before the opening. So should we think about that number as proportional to a number that might be out there in 2015?

Or, in other words, as we model it out, if we are going to open 30 to 35 clubs a year, is this the run rate we use now? Or is this year elevated because you are going into Spain and there's stuff going on?

I think more of it is the run rate than a one-time elevation. Yes, I see something in the 2.3 to 2.5 as a best guess for right now.

Right. That makes sense, with this sort of opening level.

Right. And again, if it's six or seven less and we got delayed on a couple of property purchases and we did a little less or more on depots, all those things add into that. But probably something between 2 and 2.5 is the right guesstimate for the next few years.

Okay, great. Thanks a lot.

Jason DeRise, UBS.

Hi, it is Jason DeRise here. I just wanted to understand a bit more on the membership income, in addition to what was shared before. I guess maybe just looking forward, though, what kind of -- now that the accrual base is in there and you've taken the fee increase and renewal rates are high, I mean what can be done to drive more members per store?

Is executive membership going to be a bigger focus now that we've gone a couple years from that fee increase? And if you can share anything in terms of the international progress in terms of membership. Obviously, the renewal rates are lower than the US, but what can be done there? Thanks.

Well, first of all, what I've always been surprised at is the continued increased penetration of executive membership even in countries like the US, which has been around for 13 or 14 years and Canada which has been around for 10 years. We do a better job I think in-store of converting people to executive membership, both when they -- new sign-ups.

I remember several years ago, 10 to 15 of every 100 that signed up in an existing warehouse in the US and Canada signed up as an executive membership. Now it is in the 30s and 40s. Part of that is us being a little bit better at just doing that, and hopefully as we point that out, they will see that value.

In terms of driving membership, the fact that we are getting a lot more members in some of these countries like Asia and Australia certainly helps that as a higher percentage of our openings go to those markets.

The low renewal rate -- I remember the first few years even in the US back in the mid-80s and in Canada in the late 1980s, if you signed up 100 people in the first year to get to that what was ultimately then a mature -- a mid 80 goal rate would have been great, but of course now it's a 90. In that second year, maybe 70 or 72 or 73 of those 100 signed up.

But then a new 100 signed up also and in year three, a higher percentage of that 70 or 72 plus 70 or 72 of the second year's 100. So it kind of builds over time. I would say those starting renewal rates in Asia start out a little lower than that 70, sometimes in the 50s or low 60s, and then build from there. But mind you, it's been somewhat of a phenomena where we get a lot of press, very densely populated cities and people coming in from a little further distance in cities where it's a little harder to travel.

So I think all those things have tended to be the reasons why. We are going to keep doing what we do as it relates to driving membership. I think we have gotten better at our marketing activities in what we do. And so I think overall, we will keep driving membership the old-fashioned way in terms of opening new warehouses, and certainly in less-penetrated countries, that is a bigger help giving them value.

And historically, we have tended to raise fees about every 5, 5.5 years. And I can't promise what it will be again, but that's what it's been for 30 years.

In terms of the age of the stores in the international market and the maturity process there, obviously we are talking about adding new stores -- and new countries even. Is there anything in the cadence of that that we should think about in terms of if we are modeling on a member-per-store basis on a year-over-year basis, that there's anything that you can share there for the coming year or so compared to prior years?

It tends to be higher internationally. I think when we opened in Australia, we got off to an incredible start. It's our highest first-year volumes ever in a country.

Again, I think people around the world know what a membership club is and we get a lot more press when we go into a country. We have had outsized numbers -- it helps when you've got five or six locations in a 20 million population city and it's getting good press.

And so I think given the size of our whole Company and the fact that still 70% of our Company is in the US and another 10% or 12% is in Canada, that, yes, the international keeps moving the needle, but it moves it a little upward.

And maybe just to wrap up my line of questioning on the member fees. So talking about 6% is the clean number, maybe something closer to 7%, really clean for FX, for the way that it grew in the fourth quarter. How would you consider that as a run rate? And with the new store openings, do you think it could be better than that, or do you think that -- I guess let me let you answer how you think about that.

We are going to try. But I think that, again, something plus or minus a couple of percentage points from that is probably a best guess at this point. Mind you also there's deferred accounting. So again, I've shared examples when we open a new unit in the United States, membership sign-ups as of opening day -- which tends to be the 8- or 12-week period prior to opening day through opening day, because you've got tabling activities there where people can come in and sign up once the parking lot -- you can get in and out of.

And in the best markets in the US, Northern Cal, Southern Cal, Seattle, when we open a new unit, it's a no-brainer success story, but you might only have 5000 to 8000 sign-ups, or 4000 to 8000 sign-ups, because a lot of people are already members. They are going to come more frequently because we are closer to them.

When you open in some of these countries, you might have 20,000 to 40,000 new sign-ups through opening day. Now even if that is the case, it takes a year for that to get into the system based on deferred accounting, because it's basically you book that annual fee 1/12 a month.

So I think, again, it will trend in there over time. But on a base of 635 or 640 locations, an extra few locations internationally, again, it moves the needle in the right direction as it relates to this question, but it's not a giant mover.

Okay, thank you very much.

Charles Grom, Sterne Agee.

Thanks, good morning, Richard. As part of these modernization efforts that you talked about, when you look at your membership fee database, is there any thought internally to start data mining some of the consumer information that you have and begin more personalized couponing or targeted promotions versus the standard 3.5-week MVMs that you are currently doing?

You know, I would say we are closer than we've ever been, but it's still going to be a while. One of the modernization things that we are doing is rewriting the membership system.

Let's start with some of the basics. The extreme example was last year when we replatformed dot-com a year ago. Prior to that, the search engines couldn't even crawl on the site. So we would never -- you would never Google us, see Costco.com.

Analogous to that is the membership and the data mining. I think that Craig has shown a little openness to our marketing people, but we are not going to go crazy quickly for us. But there's some opportunity there. But again, as we do some things, we will let you know it, like we did our dot-com.

Okay, fair enough. And then just to follow back on Matt's question on the balance sheet, and with $14 per share in cash and an adjusted debt-to-EBITDA ratio one of the lowest in retail, I guess what's the Board waiting to see before you guys get more aggressive on the buyback? I get last year with the big dividend, kind of holding back on the buyback, but what are you guys waiting to see to get more aggressive?

Well, stay tuned to 12 weeks from now when we talk to you. We will let you know. Again, I think we view our runway, if you will, long-term that we've got a lot of opportunity. We certainly -- I agree with you -- even with the ramped-up CapEx, we have a strong balance sheet. And we will continue to talk at our quarterly Board meetings. But I really can't say a whole lot more than that at this point.

Okay. And then I know you'll report this when the K comes out, but do you have the US, Canada and international margins for the fiscal year of 2013 in front of you?

I don't think -- I can't -- I don't think I can give that to you unless it goes out publicly from an 8-K standpoint. And that will be out -- when will the K be out?

(inaudible - microphone inaccessible)

Next Wednesday is our plan to send out the K.

Okay. Okay, great. And then on the 80 basis points in fresh foods and the 10 to 25 up in the other three areas, could you just give us a little bit of perspective of how that compared to the last quarter?

Why don't we go to the next question and then I will answer it? I think I did talk about it in the last earnings call, which I have in front of me. So we will go to the next question and I can answer that.

Okay. And then just to follow up on Chris's question earlier with regards to that price investment, it appears that you guys -- it wasn't really necessarily offensive; it was more of a defense and the fact that your costs were going up, and so you were keeping those rotisserie chicken prices at the $4.99. Is that fair to say, that the large chunk of why you saw the margin pressure in fresh foods?

Well, that was the outsized component of it, but there are a few other items within fresh foods as well.

Okay, great.

Back to your other question. I did find what I said a quarter ago. The four core categories -- this is in Q3 of 2013 -- the four core categories, food and sundries, hard lines, soft lines and fresh foods -- each showed lower year-over-year gross margin percents. So that compares to what I mentioned this quarter, the food and sundries, hard lines and soft lines being up year-over-year. All four of those subcategories were lower year-over-year in Q3.

Okay, great. All right. Thanks a lot.

Mark Miller, William Blair.

I wanted to know whether Costco is giving consideration to having its employees enter healthcare exchanges, going to kind of a defined contribution, if you will. And additionally, if you can give us some color on the rising healthcare costs, and is it likely we will see that continuing to run ahead of sales?

First of all, we have no plans to change what we currently do. As it relates to continue to rise, the answer is probably yes. We have made a few tweaks to our plan to try to have the participants in the plan make more thoughtful decisions on a few things, and made some very small changes, which maybe it brings down the rate a little bit.

In each of the last three years, part of the Affordable Care Act, as it's transitioning in, we estimated was about 1 percentage point to 1.5 percentage points of increase each year. So even when we showed an 11, let's say, or an 11.5 a couple of years ago year-over-year, that 11.5 included a 1.5 from Affordable Care incrementally.

And I think this is the last year a few of those transition items that are going in. An example would be you have to have the same lifetime limit, irrespective of the plan. And we had a different lifetime limit for part-time and full-time plans. We upped it -- as you would expect us to do, we upped it to the higher limit for both.

And so there's things like that that -- that's part of 1% and 1.5 % growth items, on a sizable number to start with.

I would guess whatever it would've been -- it would be a little less, because of one -- these annual pieces that have gone into the Affordable Care Act that have transitioned in over three or four years now, I think this is the last year of that, as it relates to what we know now.

But I've read some articles where they've seen costs come down. And when I talk to a few others in different industries, they don't see it -- a lot of low inflation yet either. So I don't know where those reports are coming from.

But I would guess -- is it a little lower than it's run? Yes. Is it a lot lower? No.

The other thing that I think helps us on a global basis is the numbers I'm talking about here are US. We have a lot lower experience of these costs in all other countries, because in most cases, it's nationalized healthcare and expense-controlled quite a bit better as it relates to lower.

So as an increasing percentage comes from outside the US, that helps us. And we've got a little help from the fact that as we ramp up expansion, for you to be covered in our healthcare, it takes 3 to 6 months, based on full-time and part-time. The fact that we are opening more units now means that there will be a few more people in; but again, that's on a very large base. So that tweaks it down a little bit, but not a lot.

So on that dimension, I know in years past, as your employee turnover came down, that I think added to the rate of healthcare costs. What is the employee retention year on year and is that a factor here too?

It's still very low. It did come down. A lot of that had to do I think when the economy hit hard. And needless to say, the economy hasn't improved greatly. I think that probably our retention rates of employees has continued at a low, good rate, in our view, because we do have a good compensation and benefits package. And it's tough out there.

And so -- I think our renewal rate overall in the US is about 11 -- those are the numbers I'm most familiar with. And after a year, it's six, I believe. And that's pretty much about how low -- I think the 11 might have been a 10 a year or two ago at the nadir. I can be off by a percentage point here, but that's pretty much where it's been.

Okay. And a separate question. Do your buyers see much ability to trade the consumer up? I mean, really the average ticket is kind of moving with inflation, it seems like at this point. But as you are planning for the holiday, do you think you've got any ability to move it up? Usually with the upper income consumer showing some strength in consumer confidence, at least up until recently, you've been able to do that. What's the outlook now?

Well, we keep trying and I think we keep being successful. By the way, while the average ticket has moved, as you suggested, with inflation, maybe a little more, a little less, depending on the quarter, that's notwithstanding the fact that we've had 4%-plus shopper frequency for five years compounding now. Which compared to 1%, 1.5% compounding for each of the 20 years before that.

So I think that in part tends to put downward pressure on that number. So we are actually kind of pleased that it has held up where it is, given that increase in frequency.

Also, in new markets, it is a lower number to start with. And so that all goes into that weighted average as well. So I think overall, our number is holding up pretty well.

And look -- and mind you, as merchants, we are always trying to upgrade the product. We want to save a member money, but on the best item and the biggest quantity, as you might expect that we'd do. So we're always trying to drive that, and sometimes that's because we can drive more value that way, particularly on very competitive items.

All right. Thanks, Richard.

Chuck Cerankosky, Northcoast Research.

Good morning, Richard. Regarding the venture into Spain, anything you'd point out about those clubs that will be different from some of the others?

Nothing really. (multiple speakers) It will look like a warehouse. I think the one thing is they will be on one floor. As you know, in several of the very densely populated cities in Asia and even in Sydney, we've got some double-deck retail facilities, with two and three decks of parking on top of that or below that. In Spain, our plan is to be on one level. So far, but that's --

(inaudible - microphone inaccessible)

We could have over time, but the first one will be across.

And the size is in line with the corporate average?

Yes. The size is in line with the corporate average of new locations. I think our average per warehouse is about 144, 143. We tend to build things in the 155 range.

Got you. And the real estate pipeline is ready for additional international expansion. Is that why we are seeing this nice step-up here in the openings?

Yes, I think the pipeline has been built over the last couple years. If you go back four or five years ago, there were few, if any, real estate people on the ground in many of these countries. And now there are people on the ground in every country, and that has been for the last couple of years. And so yes,. the pipeline is full, but it's never any easier.

Sometimes when you look out at dates in these cities, it has planned opening 2016, if everything goes well, and sometimes a lot sooner. But the fact is is it certainly harder than some of the smaller cities in the United States.

How would you rate the prospects for additional new countries in Europe?

Well, I think we talked about going likely into two countries, one in 2014 and one in 2015. And beyond that, we will see.

And finally, can you give us what the gasoline sales were in fiscal 2013?

I don't know if I have that in front of me. We will go to the next question and I have somebody looking at up.

All right, thanks.

Paul Trussell, Deutsche Bank.

Hey, guys. How you doing? It's actually Matt for Paul. I was wondering if we could talk a little bit about SG&A. I know you kind of ran through healthcare as an issue and some of the other things you are facing with the technology investment. But with your payroll -- I think you said your payroll is getting better as a percentage of costs. How do we think about SG&A for the remainder of the year? Thanks.

Look, we keep trying to bring it down, but we are not going to bring it down -- we have our own constraints on certain aspects of it, like we are going to still do top-of-scale increases for two thirds of our hourly employees that are top-of-scale. We are going to not cut back, which we could easily do, on certain healthcare aspects. So we are going to do the things that we've always done.

We are going to do it first and foremost by trying to drive sales. By the way, gas deflation does hurt you a little bit. When there is inflating gas, it's a very low gross margin business, but it's an even lower, thankfully, low SG&A business. So when you've got big gas inflation, that seems to hurt your margin a little bit and help your SG&A. Conversely, the other way.

So given that gas was 8% deflation in September, if that continued in the next couple months, I'll be showing you that second column again for margin in SG&A. But that hurts it a little bit when it's deflationary.

The thing that's going to help it is -- first and foremost is top-line sales growth, and secondly is lower -- ultimately lower structural SG&A in several of these other countries so far that we are currently in, like Asia, Mexico, frankly, Australia.

Okay, great. Thanks. Appreciate it.

Budd Bugatch, Raymond James.

Good morning. Thank you for taking my question. Richard, just on Asia, I think you talked -- you said that there was cannibalization in Asia. And I just wonder how you think about cannibalization in Asia going forward, given the high productivity of those clubs.

We want to get more open faster, even if it's a little hurtful to cannibalization. Mind you, when you are going from 5 to 6 locations in a 20 million population city, you might have some cannibalization. But we've been blessed by having some units that are $250 million to $300 million plus in some cities in Taiwan, Korea and Japan, where when you open a second unit, you'll take $50 million to $75 million of that $300 million away and the only thing that goes in your comp is that negative $50 million or $75 million for that first year. But come second year, you've got two units that are going nicely. So that's part of the business.

And typically in the second year -- or the third year, you usually start to see that first unit rebuild. Has that been your experience so far?

We really see it the 53rd week out. Once that impact -- that cannibalizing impact anniversaries is when you'll see that rebound.

So almost immediately after you get to that second year.

Secondly, and just lastly from me, I know in the States we are all thinking about the government shutdown. And just interested how management thinks about that impact on your business and if there's anything strategic you are doing because of it.

Other than scratching our head in disbelief.

We are all getting bald doing that.

I actually polled our senior executives in operations. On the West Coast, there has really not seen any effect. Around DC is the only place where we've seen some effect, downward a little bit.

Okay. All right, thank you very much.

Joe Feldman, Telsey Advisory Group.

Hi, good morning guys. Wanted to go back to the SG&A again. I had a couple questions just talking to some people this morning about with the 5% comp, why not get it -- couldn't you get a little bit more leverage? I know there was some incremental expense, it sounds like some true-ups, things like that. But should SG&A have a little more leverage or how should we think about it going forward, I guess?

I think the two biggest things are the fact that, again, given our size and given even on our $30 billion sales number for the quarter, $3 million, which isn't what it used to be when you're doing $100 billion a year -- $3 million of anything as a basis point swing.

When you've got -- just a simple example of workers' comp, where you are adjusting every quarter, as you should for GAAP accounting actuarially, a $300 million-plus tail of previous years of workers' comp issues. You've got a much bigger number adjusting in healthcare, you've got lots of other expenses.

So I think it's a combination of several of those lining up in one direction instead of some of them offsetting. There's always going to be a range. Usually you've got half one way and half the other.

Let's see -- what else was there? The fact that we've -- 17 versus 16 weeks hurts you a little bit. Again, my guess is that the end of the day -- oh, we have some increased expansion efforts with opening in Spain and IT modernization; that's a few basis points. So all those things add up.

I think at the end of the day, what I was trying to convey when we look at all the numbers, is mine overstated the underlying secular trend. But I don't want to suggest it was zero. It was probably somewhere north of zero and south of 5%. But I don't know what the number is.

Got it. That's helpful. Thanks for that. And then just another question. As far as holiday season goes, any changes to how you are approaching this year versus last year -- opening, closing, different times of events, anything like that we should think about?

Nothing.

Okay. And then the one last thing I wanted to ask you guys was just -- I know you give us the monthly trends so we kind of know where things are at, but I want to ask anyway. Any changes in purchasing habits from the core consumer, in terms of surprises when you've maybe launched some of those special items that you have, that things either sold better or worse than you may have expected and the way people are purchasing. Anything to comment on?

I continue to be pleasantly surprised and happy that our frequency is where it is with a four in front of it. Recognizing some of that is gas expansion in Canada, some of it is new markets where we open new units. But overall, no.

Okay, thanks, guys. Good luck with this quarter.

Why don't we take two last questions?

Tiffany (inaudible), Citi.

Hi, thanks for taking my question. I wanted to ask how do you think small business owners are feeling right now? What's the sentiment that you are perceiving?

Well, I'm not an economist. We haven't seen a big change in our small business members in terms of their sales trends. It's hard to say. I don't have a good answer for that one.

Okay, thanks a lot.

Scott Mushkin, Wolfe Research.

Thanks for slipping me in, and I know a lot of questions have been asked. So I just wanted to talk about the magnitude of the price investments in fresh food next year. I guess it could vary to some degree on what happens competitively. But from what you can control, do you anticipate a continuation of a trend there?

I can't really give you any direction going forward, other than we are going to be aggressive. It's in our blood. Again, good news is that to the extent that certain commodity prices are coming down, we kept our prices down when those underlying raw material costs skyrocketed. Now that they are coming back, it hopefully will give us a fairer margin in some of those areas where we have really hit ourselves hard. And so under that scenario, that's a positive to margin.

But we are going to keep doing what we are doing in terms of being aggressive. And I do want to say while we certainly aren't cavalier about our competition, we think our toughest competitor is ourselves, and we are going to keep driving that.

So just to clarify, if I heard you right, that you are going to be pretty aggressive but -- and we've noted this in our research -- there's a chance that the wholesale prices could come down faster than what happens at retail. So you actually think it could be potentially a net benefit given that dynamic. Is that a good read of what you are saying?

Potentially, and again, I'm using a data sample of one item here, the chicken. And certainly there's a few other -- a lot of those fresh foods are like that, because if you recall a few years ago, we were talking about food court margins got hammered because the cost of cheese skyrocketed. And needless to say, we sell a lot of pizza. And so -- but we gave that as an anecdotal example of where we are going to hold the pricing, though, because it's such a value proposition. And so there are a few of those.

On general merchandise, subject to competitive challenges out there, it rains on all of us, all the competition out there. And when underlying costs are coming down a little bit, there's -- if there's pressure out there, we probably are more of it than others, but a little of it we will retain.

Okay. Listen, thank you for taking my questions. Appreciate it.

Okay, before we hang up here, Bob and Jeff and I are in a monthly budget meeting until about 1, so we will take calls after that if you have any questions, or shoot us an email. Thank you.

Thank you. This concludes today's conference call. You may now disconnect.