costco wholesale corporation (cost) earnings report: q3 ... · effective this past march 14, we...

CompanyName:CostcoWholesaleCorpCompanyTicker:COSTSector:ServicesIndustry:Retail

EventDescription:Q32016EarningsCallMarketCapasofEventDate:62.59BPriceasofEventDate:149.9

©2014TheStreet,Inc.Al l R ightsReserved Page1of22

CostcoWholesaleCorporation(COST)EarningsReport:Q32016ConferenceCallTranscriptThefollowingCostcoWholesaleCorporationconferencecalltookplaceonMay26,2016,11:00AMET.Thisisatranscriptofthatearningscall:

CompanyPart icipants

RichardGalanti;CostcoWholesaleCorporation;CFO

OtherPart icipants

StevenZaccone;Cowen&Co.;AnalystJohnHeinbockel;GuggenheimSecurities;AnalystSimeonGutman;MorganStanley;AnalystMatthewFassler;GoldmanSachs;AnalystMattLasser;UBS;AnalystJohnHeinbockel;GuggenheimSecurities;AnalystMikeMontani;EvercoreISI;AnalystPeterBenedict;RobertBaird;AnalystBobDrbul;Nomura;AnalystPaulTrussell;DeutscheBank;AnalystScotCiccarelli;RBCCapitalMarkets;Analyst

MANAGEMENTDISCUSSIONSECTION

Operator :

Goodmorning.MynameisKarenandIwillbeyourconferenceoperatortoday.AtthistimeIwouldliketowelcomeeveryonetotheQ3earningsconferencecall.(OperatorInstructions)

Iwouldnowliketoturntoday'scallovertoMr.RichardGalanti,ChiefFinancialOfficer.Mr.Galanti,youmaybegin.

RichardGalanti(CFO):

Thankyou,Karen.Goodmorningtoeveryone.BeforeIbegin,pleasenotethatthesediscussionswillincludeforward-lookingstatementswithinthemeaningofthePrivateSecuritiesLitigationReformActof1995.Thesestatementsinvolverisksanduncertaintiesthatmaycauseactualresults,eventsand/orperformancetodiffermateriallyfromthoseindicatedbysuchstatements.

Therisksanduncertaintiesincludebutarenotlimitedtothoseoutlinedintoday'scallaswellasotherrisksidentifiedfromtimetotimeintheCompany'spublicstatementsandreportsfiledwiththeSEC.Forward-lookingstatementsspeakonlyasofthedatetheyaremade.Andwedonotundertaketoupdatethesestatementsexceptasrequiredbylaw.

Lastnight'spressreleasereportedourthird-quarterandyear-to-datefiscal2016operatingresultsforthe12and36-weekperiodsthatendedthispastMay8.Forthequarter,ourreportedearningspersharecameinat$1.24,up6%overlastyear'sthird-quarterearningspershareof$1.17.

Incomparingourthird-quarterresultsyear-over-year,thereareafewitemsofnote.Asusual,FXas




comparedtoayearago,duringthequarter,theforeigncurrenciesinthecountrieswhereweoperateweakenedoverallversustheUSdollar,primarilyinCanada,MexicoandKorea.

ThisresultedinourforeignearningsinQ3whenconvertedintoUSdollarsforreportingpurposesbeinglowerbyabout$15million,or$0.03asharethantheywouldhavebeenhadthevariousforeignexchangeratesversusthedollarbeenflatyear-over-year.

Grossmargin.

Onareportedbasis,itwashigherby34basispoints.Thisincludeda$19millionbenefitfromnonrecurringlegalsettlements.Thisrepresented7basispointsofmarginimprovement,orabout$0.03ashare.Numberthree,ourco-brandedcreditcardtransitionintheUnitedStates.

Withthetransitiontoournewco-brandedCitiVisacardnextmonth,co-brandedAmExcreditcardsign-upstopped,asyouknow,latelastcalendaryear--IthinkinOctober/November.Theshort-termnegativeearningsimpactofthelostco-brandcreditcardsign-upsinthequarteryear-over-yearwasabout$11million,or$0.02asharetothenegative.

Weexpecttohavethenewco-brandVisacardsinthehandsofourmembersbytheendofMay,earlyJune--someofyoumayhavealreadyreceivedtheminthemail--withagolivetransitiondateofJune--Monday,June20.Numberfour,wages.AsImentionedonlastquarter's--second-quarter'searningsconferencecallbackinMarch,inadditiontothe--wedoatop-of-scaleincreaseeachyear,whichwegenerallyagainhavedoneeveryyeareachMarch.

Thisyear,wealsoincreasedourbottom-scalehourlyratesintheUSandCanada,whichisabout80%ofourcompany.EffectivethispastMarch14,weincreasedourstartingwage$1.50anhourto$13and$13.50anhour.

Thenewbottom-of-scalewageincreaseresultsinayear-over-yearincrementalpayrollexpenseofabout$6million,or$0.01ashareinthequarter.Weestimatethatthiswillbeanywherefrom$0.01to$0.02aquarterineachofthenextthreequartersdependingonwhichwayitrounds.

Numberfive,ITmodernization.ITmodernizationeffortsnegativelyimpactedSG&AexpensesinQ3onanincrementalyear-over-yearbasisbyabout$16million,whichisabout5basispoints,or$0.02asharetoSG&A.

Ibelieveinthefirstandsecondquartersthisyearthatyear-over-yeardeltaofmodernizationexpensewas7basispointstothenegativeinQ1,in3,andQ2.Soitlookslikeit'saveragingaround5aquarterforthefirstthreequartersoftheyear.

LIFO.ThisyearinQ3,wepickedupalittlebittherefromaLIFOcredit.WerecordedapretaxLIFOcreditof$13millioninthequarter.Lastyear,itwasalsodeflationary,butasyouknowdeflationhascontinued.Itwas$7million.

Soagainabouta$6million,orapennyasharedeltathere.ThosearetheitemsI'dpointout.Turningtoourthird-quartersales.Totalreportedsales,asyouknow,wereup--asreported,wasup2%.Andour12-weekreportedcompsalesfigurewasflatorzero.

Sales,ofcourse,werenegativelyimpactedbygasolinepricedeflation--thatwasalmost2percentagepointsimpactandabout190basispoints--andbytheweakeningforeigncurrenciesrelativetothedollarthatIjustmentioned.Thatwasabout145basispoints.Soexcludinggasdeflation,theflatUScompnumberwereportedwouldhavebeenaplus3%.InCanada,theplus1%reportedCanadiancompwould'vebeenaplus8inlocalcurrency,excludinggasdeflationandflatFXrates.




Andthereportedminus2otherinternational,excludinggasdeflationandassumingflatoveryearFX,thatwould'vebeenaplus3.Soalltold,ourreportedzerocompforthequarter.Ex-gasandFX,wouldhavebeenaplus3.

Intermsofnewopenings,inthequarter,weopened7newlocationsandalsocompletedonerelo.Soyear-to-dateforthefirst36weeks,we'veopenedatotalof19newwarehousesand3relos.Forallof2016,wehaveacurrentplanof29netnewlocations.

Alittleovertwo-thirdsofthem,21,willbeintheUS;twoinCanada;twoinJapan;andoneeachintheUK,Taiwan,andAustraliaandSpain.Thismorning,Iwillalso,ofcourse,reviewwithyoue-commerceactivities,memebershiptrendsandrenewalrates,additionaldiscussionaboutmarginsandSG&Ainthequarterandacoupleofotheritems.SogoingdowntheP&L,again,forsales.Totalsaleswereup2%.

Reportedcompsflat.Reported,up3,excludinggasandFX.Nowthezeroflatcomponareportedbasiswasacombinationofanaveragetransactiondecreaseofalittleunder3%,atminus2.7%,onareportedbasis.Andagainex-gasandFX,theaveragetransactionincreasewould'veactuallybeenup0.5%.

Andtheaverageshoppingfrequencyincreasewasup3%forthequarter,whichismostofFebruary,allofMarch,allofAprilandalittleofMay.

Intermsofsalescomparisonsbygeography.

IntheUS,Texas,MidwestandSoutheastregionswerethestrongerones.Internationallyinlocalcurrencies,betterperformingcountrieswereMexico,CanadaandtheUK.Intermsofmerchandisingcategoriesforthequarter,withinfoodandsundries,whichwasoverallflattishyear-over-year,sundries,foodsandmeat/deliweretheleaders.

Tobacco,asIthinkwementionedalittlebitontheAprilsalescall,wasnegativeinthelowteensaswecontinuetoeliminatetobaccofromvariouslocations.

Forhardlinesoverallinthemid-singledigits.Thedepartmentswiththestrongestresultsweresportinggoods,toys,seasonal,automotive,consumerelectronicsandgarden/patio.IthinkIwillhavetogolookatwhatwasdownbecausethosewereallprettygooddepartmentswithinhardlines.

Withinlowtomid-singlesoftlinecomps,single-digitsoftlinecomps,smallelectrics,men'sapparelandhomefurnishingswerethestandouts.Andlastly,infreshfoods,compsalesoverallinthelowsingledigits.Produceanddelishowedthebestresults.Ofcourse,weprobablyhadthemostdeflationIthinkinthemeat,poultryandporkareas.

IntheUS,wecontinuetoseedeflationinthelowsingledigitrangeforfoodandsundries,andasImentionedfreshfoods,andalittleinsomeofthenon-foodareasaswell,notablyelectronics.Movingdowntheincomestatement,membershipfeescamein--indollarswereup6%andup7basispointsasapercentofsales,cominginup$34millionfrom$584millionlastyearto$618million.

Again,FXcurrencies,exchangeratesimpactthisnumber.WithoutFX,weareassumingflatyear-over-yearFX.The$618millionwouldhavebeenup$7moremillion.Andsothe6%dollarincreaseyear-over-yearwouldhavebeenup7%.Samenumberofbasispoints,ofcourseup7.Intermsofrenewalrates,wecontinueatstrongrenewalrates,90%plusintheUSandCanada,88%worldwide.

Continuingincreasingpenetrationoftheexecutivemembership--andIwilltalkaboutthatinasecond.Newmembersignupsinthequartercompany-widewereup15%year-over-yearinpartdrivenbystrongsign-upsatournewopeningsinTaiwanandJapan.TheAsiaopeningsalwayshaveoutsizednewsign-ups.Wealsohadverystrongsign-upsinTulsa,forthatmatter.




Overall,intheUS,infact,itwasup15%aswell.Intermsofnumberofmembersatthirdquarter-end,GoldStarwas36.2million,upfrom12weeksearlierat35.4million.Primarybusiness,thesameat7.2million.Businessadd-ons,thesameat3.5millionatthebeginningandtheendofthequarter.Soalltold,46.9millionmemberhouseholds,up800,000from46.1millionatQ2end.Totalcardholdersis85.5million,up1.5millionfrom84millionattheendofthesecondquarter.

Imentionedexecutivememberships.WecameinattheendofQ3withrightat17millionexecutivemembers,whichisanincreaseofactually402,000overthe12-weekperiod,or33,000aweekincreaseinthequarter.(inaudible)thattendstobeonthehighendofthatweeklyincreaseinmanyofthelastrecentquarters.

Executivemembersareapproximately36%ofourmemberbase,andabouttwo-thirdsofoursales.Itagaincontinuestoimprovepenetration.Intermsofrenewalrates.Intermsofrenewalrates,businessmemberswere94.4attheendofthequarter,tweakeddownfrom94.5;GoldStar,89.6,atenthdownalso,89.7.SototalUSandCanada,90.4,downfrom90.5.Worldwide,at87.6attheendofthequarter,againatenthdownaswell.

WithintheUSandCanada,ofcourse,we'veseenabiggertickdownthanatenthofapercentinCanada.Thathastodowithasweanniversarynowabout18monthswhenweinitiatedthechangeincreditcardsupthere,whichwasactuallyeverybodyhavingtosignupagain.

SoIthinkpartofthatistheautorenewal.WeseealittleofthatintheUSsincewehaven'tbeenaddingon,acceptingnewapplicationsforthecurrentcreditcard--currentco-brandedcreditcardsincepastOctober.Butprettymuchinlinewithwhatwethought.

Intermsofgrossmargin,ourreportedgrossmargin,asImayhavementioned,wasup34basispoints,11.43%thisyearversus11.09%lastyear.

Andasusual,Iwillaskyoutojotdownfourcolumnsofnumberstoprovidealittleedificationhere.ThefourcolumnswouldbeQ22016.Columns1and2arebothQ22016.

Theseareyear-over-yearchangesinbasispoints.Firstcolumnwouldbereportedfiguresformargin.Secondwouldbewithouttheimpactofgasdeflationsincethattendstodistortthenumberswildly.Andthencolumns3and4wouldbeQ32016bothreported;andincolumn4,Q32016withoutgasdeflation.

Turningtothelineitems.Thefirstlineitemgoingacrosswouldbecoremerchandising,soQ22016,wereportedaplus5basispointyear-over-year.Ex-gasdeflation,itwasminus3.InQ3,reported,plus16.Andex-gas,minus2.Ancillary,aplus9andaplus7.Andthencolumns3and4,aplus9andaplus4.2%reward,minus1and0.AndinQ3,reportedwithoutgas,0andplus2.

LIFOinthesecondquarter,plus4,plus4.Inthethirdquarter,plus2,plus2.Other,no0and0inthefirsttwocolumnsandaplus7incolumns3and4.That'sthosenonrecurringlegalsettlementsItalkedaboutearlier.YouaddupthosecolumnsreportedinQ2year-over-year,wehadanup17basispointmarginandup8onanex-gasdeflationbasis.

Andagain,as--wereportedaplus34.It'saplus13ex-gasdeflation.Itermsofthecoremerchandisecomponent--whichagainreportedplus16,butminus2--ifyoulookatthefourkeycategories,whichis80%plusofourbusiness,foodandsundries,hardlines,softlinesandfreshfoods,asapercentageoftheirownsales,theywerepositiveyear-over-yearby16basispointswithfoodandsundries,hardlinesandsoftlinesallbeingupyear-over-yearandfreshfoodsbeingslightlydownduringthequarteryear-over-year.

Ancillaryandotherbusiness--bytheway,thosenumbersexcludethenon-recurringitemsthatI




mentioned.Ancillaryandotherbusinessmarginswereup9basispoints,up4withoutgas.Andwithinthequarterontheirownsales,gas,opticalandhearingaidsallshowedhighergrossmarginsyear-over-yearasapercentoftheirownsales.ImentionedLIFOalready.

Thatwasa2-basis-pointbenefityear-over-year.AndOther,againa7basispointimprovementyear-over-year.Soevenexthatonanex-gasdeflationbasis,marginswereupafewbasispointsyear-over-year.

Movingdowntoexpenses,SG&A.Onareportedbasis,werehigherby33basispointscominginat10.44comparedto10.11ayearago.Again,we'lldothesamefourcolumns,Q2reportedandwithoutgas;andthenQ3reportedandwithoutgas.Coreoperations-minus22reportedyear-over-year.Andaminusmeanshigheryear-over-year.Gaswasaplus--Ex-gasinQ2wasaminus16.

Columns3and4,minus24andminus8.CentralinQ2wasaminus8andminus7.Q3,minus6andminus4.Stockcompensation,minus4andminus4;andthenaminus3andaminus2.Andnoquarterlyadjustments.Soalltold,wereportedyear-over-yearinQ2SG&Ahigherby34basispointsonareportedbasisand27ex-gas.ThisquarterQ3reportedhigherSG&Aby33--14higherex-gas.

Basicallywithinthe--ifyougobacktothecoreoperationsoroperations,theex-gasdeflation,the8basispointsyear-over-yearhigher,thatconsistedofhigherpayrollandbenefitsyear-over-year,whichimpactedthatminus8byminus12,somoretotheminus8.Theseitemsweresomewhatoffsetbyavarietyofothercontrollableexpenseitems.

Q2isofcoursealwaysthelowestvolumequarterandofcourse,asweknow,saleswerealittleweakerforavarietyofreasons,includingsomedeflation.

Centralexpensewashigheryear-over-yearinthequarterby6,ex-gasby4.ITisthe4onanex-gasbasis.Itwasminus5onareported,butessentiallyexthat.Centraldidaprettygoodjobinthequarterofcontrollingthat.Andagain,stockcompensationexpense,nosurprisethere.Nextontheincomestatement,pre-opening.Alittlehigheryear-over-year--$18millionforthequarterversus$14millionayearago.

Soupbyabasispoint.Thisyearinthequarter,wehad8openings,includingonerelo.Lastyearinthequarter,wehad4openings,and1relo--including1relo.Again,someofthatisnotnecessarilyrelatedtothosespecificopeningsasitmayincludesomerightbeforethequarteropenedaswell.Alltold,operatingincomecameinat$858millionforthe12-weekquarter--up$37million,orup5%year-over-yearfromlastyear's$821million.

Belowtheoperating(in-kind)interestexpense,interestexpensecameinat$30millionthisyearversus$31millionayearago,essentiallyflat.Nosurprisesthere.

Interestincomeonotherthisyearwas$7million--lowerby$2millionversuslastyear's$9million.Actualinterestincomewithininterestincomeandotherwasessentiallysimilaryear-over-yearatabout$10million;thebalanceofthatdeltawasyear-over-yearitwastheothercategorycomingfromsmallforeignexchangeadjustmentsandslightyear-over-yearchangesinwhateverotheris,otherearnings.Nobigsurprisethere.

Overall,pretaxincomewashigherby4.5%,or$36million--cominginat$835million,upfrom$799millionayearearlier.

Ourtaxratewasalittlelowerorbetteryear-over-yearcominginat34.2%,downfrom35.0%lastyearinthethirdquarter.Basically,thisyear'sthird-quarterincometaxpercentagebenefitedfromagainjustafewpositivediscreteitemsintheaggregategoingourway.

That'swhyitwasalittlelower.Ournormalizedrateisactuallyjustashadeover35%inbothofthose




quarters.

Overall,reportednetincomeof$545millionforthequartercomparedtolastyear's$516millionorup5.5%.Foraquickrundownofothertopics,typicaltopics--well,thebalancesheetisincludedinthemorning'spressrelease.Acoupleofbalancesheetinfoitemsthatmaynotbeonthere.

Depreciationandamortizationinthequarterwas$291millionand$847millionyeartodate.Accountspayableasapercentofinventories,onareportedbasisitwas99%,apercentagepointlowerthanayearagoat100%.Thatofcourseincludesnon-merchandisepayables,suchasconstructionpayables.

Samekindofdelta.Samekindofdelta.The99reportedthisyearwouldhavebeenat89.The100wouldhavebeenat90.Soagainrightaroundthesameyear-over-year.Averageinventoryperwarehousewasactuallydownabout$0.5million,ordown4%.AboutathirdofthatisFX,soabout--almostexactlyathird,$173,000of$516,000.Therestisprettymuchspreadacrossmanycategories,includingtheimpactfordeflation.

Ifyouassume--andagain,youneverknowexactlywhatthedeflationarycostamountsare.Butifyouassumea1%deflation,yougetsomewhereabouthalfofthatremainingbeinggasandtherestbeingjustlowerinventories.Butagain,loweryear-over-yearbyabout$0.5million.InQ3intermsofCapEx,wespent$460millionduringthe12-weekperiodandessentiallyyear-to-datewearerightat$1.8billion.

Iwouldestimatefortheyearwewillcomeinataround$2.5billionto$2.7billioncomparedtofiscal2015totalexpendituresof$2.4billion.

Soup$100millionto$300millionfromayearagobasedonwhatevertimingwehavelefthereandwhatexpendituresaremade.IntermsofCostcoOnline,asyouknow,wearenowinsixcountries--US,Canada,UKandMexico,plustherecentlylaunchedcountriesofKoreaandTaiwan.Inthequarter,salesandprofitsareup.Saleswereuponareportedbasis14%inthequarter--upabout15.5%ex-FX.Onacompbasis,thatwouldbe13%,and14%ex-FX.

Intermsofexpansion.

Again,Imentionedinthequarterthatweareinnow,whichisa16-weekquarter,wewouldexpecttoopen10newopeningsplus1relo,andagain,thatwouldputusat29netnewopenings,33openings,but4ofthosewererelos.So29overall.Infiscal2015,weadded23netnewunitsonabaseof663--soabout3.5%squarefootagegrowth.In2016,the29onthenewbasewouldbeabout4.5%squarefootagegrowth--slightlylowerunitgrowth,butyoutendtoopenalittlebiggerunitandyou'vegottherelosaswell.Newlocationsbycountryagain,21intheUS,2inCanada,1eachintheUK,Taiwan,AustraliaandSpainandtwoinJapan.

Asofthirdquarter-end,ourtotalsquarefootagewasrightabove100millionat100.7millionsquarefeet.Intermsofstockbuybacks,ifyourecallinQ1,werepurchased$130millionofourcommonstock;inQ2,$80million.Bothofthose,ofcourse,are12-weekquartersaswell.

Andinthe12-weekthirdquarter,wepurchased$136million.Sothatyear-to-datewe'vespentabout$346millionwithanaveragepricepershareof$148.64.Ifyouannualizedthosequarters--andagain,we'llseewhatwedothisquarter.Butifyouannualizeit,wearerightat$0.5billionfortheyear.We'dberightat$0.5billionfortheyear(inaudible)whenwecomeout.Intermsofdividends,asyouknow,lastquarter,weraisedourquarterlydividendrateyear-over-yeartoaquarterlyamountof$0.45.

Ibelievethatwasupfrom$0.40fortheprioryeareachquarter.That$1.80ashareannualizeddividendrepresentsatotalcosttothecompanyofaround$790million.BeforeIturnthecallbacktoKarenforQ&A,Iwanttomentionaslighttimingchangeeachquarterwhenwereportourquarterlyresults.




Youknow,manyofyouhaveaskedaboutthefactthatwereportearningsthenightbefore,usuallyaround6:00PacificTime.Andthenyou'vegot-yougettowaituntilthenextmorningtohearthecall.

Beginningwithourfourth-quarterearningsrelease,wearegoingtochangethetimingofthatreleaseandtheconferencecall,suchthatforthefourthquarter,we'llissueresultsafterthemarketclosesonThursday,September29,followedupshortlythereafterwithaliveconferencecallthatafternoonandaQ&Asessionattheendofthatcall.

ThisnewschedulewillbeourplanforearningsreleasesgoingforwardandIthinkit'llbehelpfulandcertainlyinresponsetoseveralofyourcommentsoutthere.Thelastquickitem,nextweek,wereportthefourweeksofcalendarMaysales.

ThisisthefourweeksendingthiscomingSunday,May29.I'llmentiontoyouthat,basedonhowMemorialDayfallsyear-over-year,thisyear,MemorialfallsondayoneoftheJuneretailcalendarmonth.Sothisyear,wehave28daysnextyear--versuslastyears27days.Sothatwillbealittlebenefit.Again,we'llpointthatout.June,there'sreallyawash.You'vegotadetrimentrelatedtoMemorialDay.You'vegotadatepickupontheotherendofJunewithhowJuly4falls.AndthenfinallywewillgetthroughthatsillinessinJulywherewereportJulysales.

Withthat,IwillopenuptoQ&A,andIwillturnitbacktoyou,Karen.

QUESTIONS&ANSWERS

Operator :

(OperatorInstructions)

OliverChen,CowenandCompany.

StevenZaccone (Analyst-Cowen&Co.):

Hi.Goodmorning.ThisisStevenZacconeonforO liverChen.Thanksfortakingourquestions.Justtwoquestionsfromus.Firstly,wewantedtogetyourtakeonthehealthofthecustomerbaseforyou.There'sbeensomedifferenttrendsamongretailersreportedthusfarinearnings.Wantedtojustgetyoursensehaveyouseenanychangesintrendsorspendinghabits?

Secondquestion,justwantedtogetyourthoughtsonprogresswithsomeofthethird-partypartnershipsingrocerydelivery.Howhasgrowthinthosechannelsperformedrelativetoexpectations?Andthenjustthoughtsaboutexpandingintonewmarkets?Thanksverymuch.


Okay.Well,intermsofthecustomer,sofarsogood.Wedon'tseeanydramaticchange.Manyofyouhaveaskedquestionsorhavehadsomeconcernabouttrafficcomingdownfromthis4%plusnumberoversevenyears.Wefeelprettygoodaboutwhereournumbersare.Wedon'treallyseealotofdifferentchanges.

Interestingly,whenyoulookatnondiscretionaryitemslikefoodandsundriesversusdiscretionaryitemsacrossthenonfoodscategories,includingbig-ticketitemslikefurniture,electronicsandthelike,we'veactuallyhad,relativelyspeaking,alittlemorestrengthinsomeofthosenonfoodcategories.

SothatIthinkallayssomeofanyconcernsthatsomepeoplehavehad.Butgenerallyspeaking,I'dhavetosayourcustomersarestillprettyhealthyandwearestillgettinggoodrenewalratesnotwithstandingaverysmallimpactfromsomeofthecreditcardtransitionsandsowefeelprettygoodatthispointaboutthat.CertainlyIfeelgoodaboutsomeofthemerchandisingstuffwe'vegotgoingon.




Bytheway,oneoftheotherdatapointsI'vebeenaskedseveraltimesinthelastfewweekseachtimewe'vereportedsalesinthelastcoupleofmonthsisisitdeflation?Isitweakness?Isitdotcom?Whatever?

Thefactofthematteris,ifyoulikeatduringthe12-weekquarteronayear-over-yearbasis,ifwejusttaketheaverageitemsperunitinthebasketgoingthroughthefrontend,USonly,soUSonly,itwasup1.4%.Sowearegettingpeopletobuymoreitems,ifyouwill.Theaveragebasketvalueisup0.4%.Thesimpleimplicationthereisyou'vegotdeflationpresumably--deflationarypressuresofabout1%.Nowthat'sagoodeducatedguess.

Therecouldbeotherimpactsofsizes,buttypicallywegointobiggersizes,notsmallersizesandbiggerpacksizes.SoIthinkoverallthere'sprobablystillalittlebitmoredeflationthatwe'veseenoverthelastcoupleofquartersspreadtootheritemsinthenonfoodcategoryaswellaswe'veseen.Intermsofthird-partypartnerships,weareprettyagnostic.WehavegoodrelationshipswithGoogleinregardtoGoogleShoppingExpress.WehaveInstacart,ofcourse,isin--Google'sinsixlargecommunitiesinthecountry--theBayarea,theLAareaandafewothers.

AndInstacartIthinkisnowinwellover15,maybeeven20marketswhereweparticipatewiththem.Andalsoafewoftheothersoutthere.Intermsofexpectations,wedidn'tknowwhattoexpect.Ibelievethatwegenerallyaretheanchortenant,ifyouwill,inmanyoftheseopportunitieswherethereismorethanjustCostcoitemsbeingpurchasedandsoldjusttoprovidetotheendconsumer.

Andsowethinkit'sbeengood.It'sstillsmallrelativeto--westillwantyoutocomeintothewarehouse.Andwearegoingtostillfigureouthowtogetyoutodothat.Butit'sgrowingnicelyandit'scertainly--onasmallscaleabitofahelp.Intermsofexpansionplans,Ithinkyouaskedaboutopenings.

Lookslike--ourgoalisstillsimilarnextyear,about30.We'llshootforsomethingalittleover30andendupabout30ifhistoryrepeatsitself.Weprobablyhadafewmorerelativetothat30number--afewmoreintheUSthisyearthanwewouldhaveanticipatedifyouhadaskedmeafewyearsago.

Ithinksomeofthatistiming.We'vehadsuccessintheUSandprobablytheexpectationofsomeofthemarketswe'vegoneintointhelastcoupleofyears,ifyouaskedmefiveyearsago,wouldwebegoingintosomeofthesemarketswherewehaveneverbeeninandourcompetitorshavebeeninforupto30years.

We'vehadsuccessinthosemarkets--whetherit'sMobileorTulsaorToledoorRochesterandNewOrleans.Soprobablythere'safewmoreinthosemarketsontopofthefewthatweopenedlikewhatever(inaudible)numberwehaveinthePugetSoundorLA,wheretheyarehardertofindbecauseweareveryspecificlocationstofillinmarkets.SoIthinkthat'sprobablyonething.Lookingatthe30nextyear,andthisisaguess,it'sprobablynottwo-thirds,not21over29.IfIhadtoguess,it'sprobably--

Unidentif iedCompanySpeakers :

Justalittleover50--littlelessthanhalf.


Alittlelessthanhalf,50%,52%.Andagain,that'saguessatthispoint.

StevenZaccone (Analyst-Cowen&Co.):

Thanksverymuch.

Operator :

SimeonGutman,MorganStanley.




SimeonGutman (Analyst-MorganStanley):

Hi.Goodmorning.SimeonGutman.Richard,theVisatransitionbesidesthetimingthatstartedalittlelater,anythingelsetothinkabout?Imeaninterchangefeesprobablystarttogodownwhenithappens,butarethereothercoststhatmakesyourSG&Aoranyotherlineitemselevatedtemporarily?


No,other--sameoldstuffthatwe'vetalkedaboutintermsofsomeofthosethingslikehavingnotsignedupnewco-brandedcardssincelastOctober,November.

There'spartofanyoftheseequationsaredifferentpocketsofincome,includinggeneratingnewsign-ups,newcreditcardsign-upsandthat'sbeenabout4millionto5millionamonth,whichiseasy.

It'sagreatrewardforourmember'simprovement-wise.Andwe'llsee--wewillkeepalittleofitourselvesintermsofmerchantfeereduction.Reallythere'snotawholelot--


Cardsarehittingrightnow.


Yes.Cardsarehittingrightnowinfact.Theywillcontinuetohit(multiplespeakers)--whenyou'vegotliterallyover10millionpiecesofmailgoingout,it'sspreadoverafewweekperiod,andIthinktheyjuststartedhitting.Socardsshouldbeineverybody'shandsafewdaystoaweek--atleastafewdaystoaweekbeforetheJune20thD-dayhere.AndwewillbeabletotellyoumoreinSeptemberonthe--lateSeptemberwhenwedothefourth-quarterearningscall,butagainwearereadytogoandweareexcitedaboutit.


Andthenthemarketingdollars,thein-storekiosks,likeyousaidthemailing,that's--wearenotgoingtoseeablip,goodorbadintheSG&Adollarrunrate?There'snothingunusualthatshouldhappenaswesequencethere?


Absolutely.


Okay.Andthenmyfollow-upongrossmargin.IthinkyoumentionedthatlookingatIthinkitwasthegasolinewiththeopticalbusiness,Ithinkyousaiditwashigheryear-over-yearandifthat'sthecase,canyouexplainIguesshowyouaredoing--Ithoughtwewerecyclingthehumpofsomeofthebestperforminggasolinegrossmarginquartersayearago.

Maybeitwasthemixofoptical,butfigurethatgasisabiggerinput.


Yes,it'llcomeinQ4.We--thisquarterwasanoddquarter.Itendedupbeing--inthefirstpartofthequarter,itwasbetterthanweexpectedandwithgaspricesgoingupanddown--goinguprightnow,it'sbeenalittleweakerthelastcoupleweeks.

Butitwasprobablyalittlestrongernearthebeginningandintothemiddleofthequarterthanwehad




anticipated.Andit'sgenerallytwothings.Ithinkthebiggerfactorisiswhenthere'sdailypricechangesupanddowninthecostof--procurementcostofbothusandothergasstationoperators.

Andthenwhenitgoesdown,weseemtofeelthatwegetalittleextramargininpartbecauseourcompetitorsdon'tgiveasmuchbackasfastaswedo.Sowestillgivewaymoreback,butithelpsusalittlebit.AndsoIthinkpartofthatnewnormal,ifyouwill,overthelastcoupleofyearsinthatregard,it'sprobablyonaveragealittlebetter.


Okay.Thankyou.


YouwillseeitinQ4though.Isaythattoday.We--day-to-daysometimesitchangesrelativetowhat--justwhenwethinkwearesmartandit'ssafetogoout,itgoestheotherway.ButsofarIguessit'llimpactusinQ4.


ButinQ4beingthehumpandthenitgetseasierafterthat?


Yes.


Okay.Great.

Operator :

MatthewFassler,GoldmanSachs.

MatthewFassler (Analyst-GoldmanSachs):

Thanksalot.Goodmorning,Richard.Myfirstquestionrelatestomargin.Canyoujusttalkaboutthedegreetowhichmovingfoodprices,Iguessadeflationissue,and/orFXwould'vecontributedtomarginrateinanyway?


WellFXdoesn't--theonlythingthatFXdoesis--needlesstosay,inmostothercountries,someoftheirgoodsareUS-sourcedorUS-dollarpayable.InCanada,itissubstantial,frankly.

Andwemanagethat.Andwelockininawaynaturalhedgesduringthequarteroncethebuyersarecomfortablewiththatexchangerateandwhatthey'regoingtobeabletopriceitat.

Butmyguessistheyarestill--whenyou'vegot...


Hereitis.


whenyoulookat--let'ssayinCanadayear-over-yeartheCanadiandollaris17%weaker,incrementally




justinthequarter5%weakerfromthepreviousmonth.Soyou'vegotthatkindofstuffgoingonfromthepreviousquarter.Youaregoingtohaveprobablyalittlemarginpressurethere.Thatnotwithstandingthemarginsareupalittle.


(offmike)


Ithinkgenerally--wetrytobringdownpriceswhenthere'sdeflationandprobablydoesn'timpactusasmuchbecause--itimpactsusalittlesoonerthanothersandthat'sprettymuchit.


Gotit.AndthenLIFO,Iguess,it'sIthinktheseventhconsecutivequarterwherethishasgoneyourway.AndIknowyoumarkittothebestofyourexpectationsattheendofeveryquarter.Howmuchofthisisfood,andifwethinkaboutcommodityprices,Iknowonceagainthisshouldbezeroinanormativeenvironment.Anysenseofwhetherthere'smoremomentumthatcouldprovehelpfultoyouhere?


Idon'tthink--again,deflationfromtheendoftheyearisdownabout0.8%tintermsofaLIFOindex.AndtheothercommentImade,itwasabout1%.Askthequestionagain.Iwaslookingatonething.Goahead.


IguessthequestionishowmuchofthemovementinLIFO,theongoingcredits,relatetofood?Andbasedoncommoditypricesthatyousee,anydesiretoventureaguessastowhereLIFOgoesnext?


Wedon'tknow.Imeanifyoutalktoourfreshfoodsbuyers,they'reexpecting--continuetoexpectsomedeflation.Igetdifferentanswersfromsomeofthenon-foodsbuyers.Mindyou,whenwelookatfreshfoodsyear-over-year,thosemarginsweredownslightlyinthelowdouble-digitbasispointsyear-over-year.Soagainnotabigimpactthere.It'stheothercategorieswhereitwasupalittlebit.Andsothenetofallthosefourmaincategories,itwasup16basispoints.Idon'tthinktherealot--


Thankyou.Andthen,finally,anysense--thinkingabouttheverylongrunaboutwhetheryourfood--howyourfoodmarketsharemovesifatallwhenpricesaredeflationaryandperhapsconsumersseesomeofthepricesthattheyhadonlyseenatCostcoforalongtime,butatotherretailers?


Well,firstandforemost,Ithinkwecontinuetobelievethatwewillcontinuetoseeincreasingpenetrationofthestuffwesellinfreshfoods.Nobodydoesitlikeus.Thequalitylevelsandthevaluesareawesomeandsomeofthethingswearedoingwithglobalsourcinginitiativesandpoultryplantsandorganic--ourpoundsinbeefarewayup,butyou'vegotdeflationinbeefmorethansomeoftheotherproteincategories.Wearethefirsttogodowninsomeofthoseitemswhenthereisdeflation.

SoIthinkournumbershaveactually--thedeflationinsomeofthefreshfoodcategoriesIthinkmasksomeofthepoundstrength,ifyouwillortheunitstrengththatwehavewhetherit'sproteinorproduce.




AndIwouldneverbesoarroganttosaythatnobodycancatchus,butwe'vegotsomegreatthingsgoingonintermsofagainglobalsourcing,workingwithvendorpartners.

Andwelookedatourproducetoday,whichisIthinka$6billionbusinessnow,approachinga$6billionbusiness,whichisasbigasprotein.Idon'tthinkmanyretailfoodplacesdothosekindofnumbers,andsoIthinkithasmoretodowiththatthan,yes,there'sprobablygoingtobealittlebitofamacroshift,whatever.Ithinkwhatwedoandhowwedoitdwarfsthoseotherimpacts.

Nowthere'sotherplayerscomingintothemarket.Ithinkjustthisweekyou'vegota365openingandyou'vegototherpeoplecomingtotownwithdifferenthealth-relatedorganic-relatedtypesofretailformats.Weareprettygoodatthatstuff,too.Andagain,you'vegottolikebiggersizes.ButweareprettyawesomeinthefreshareaandIthinkthatwillcontinueto--shouldbeforusanincreasedsalespenetrationareaandsomethingthat'llkeepdrivingourmembers.


Thankyousomuch.Appreciateit.Thanks,Richard.

Operator :

MattLasser,UBS.

MattLasser (Analyst-UBS):

Thanksalotfortakingmyquestion.Richard,yousizedtheP&Limpactofthecreditcardtransitionat$11million.Presumably,that'sjustfromlostsign-up--creditcardsign-ups.Areyouabletoteaseoutanyimpactfromspendingasaresultofthistransition?Soforexample,maybesomeoftheholdersdon'tknowthattheycanstillusetheircardandsotheyputitawayandthatchangestheirbehaviorandall.


There'sprobably--there'salwaysgoingtobealittleconfusion.Totheextentthatwehaven'tsignedupnewco-brandcreditcardmembers,Idon'tthinkmanymembers--manypeoplecomingintosignupforaCostcomembershiphavewalkedawaybecausewedon't--theycan'tsignupforthenewAmExcard.IftheyhaveanAmExcardintheirwallet,theycanusethatone.

Now,totheextentthattheydon'thaveanAmExcardintheirwallet,ortotheextentthatthey--keepinmind,noteverybodythatsignedupforoneoverthelast16yearsgotit.Itwasstillacrediteligibilitydecisionthattheissuermadeandit'llbethatwayinthefuture.

Thefactofthematterthoughisisthat,totheextentthattheysignedupasamember,andagainIdon'tthinkitwasthatimpactful,somebodywalkingawaybecausetheycan'tgetanAmExcard,theyhavetouseadebitcardintheirwalletorcashorcheck.Now,onamacrobasis,doesthatimpactsomeofthebig-ticketitems?Yes,itprobablydoes.AlthoughourTVsaleshavebeenprettydarnstrong.SoIcantalkoutofbothsidesofmymouthonthisone.


Sodoesthatmeanthatsomeofthecompslowdownjustmaybeafunctionofthelawofdiminishingreturnsmasstakingover?


Itcouldbe.Again,theoneswecanquantifyeasilywelookat.Wecandriveourselvescrazy.Weknowthat--let'sfaceit,inAprilsaleswhenwetriedto--whenwesharedwithmanyofyouonouraudio,it's




everything.It'sdeflation,it'salittleoftheAmEx.

Maybeit'sgettingclosertothelineofmaximizingmarginalwhatever.Attheendoftheday,wearestillrollingoutgasstations.Wearestillrollingoutsomeoftheancillarybusinesses.Wearestillopeningupnewwarehouses.Weareexpandingfreshfoodsaswehaveoverthelastseveralyears.Peopleaskusaboutwhataresomeofournewareasandcertainlywhatwedowithticketingandexecutivememberservices,allthosethings--wineandspiritsIthinkwe'vebeensurprisedbythat--theseareallsmallthings,theyareallneedlemovers,butsmallmovements.ButI'vealwayssaidthere'slotsoflittlethingsthathelpushere.


Mylastquestionis,totheextentthatyou'vealreadyseensomeofyourexistingAmExcardholdersclipuptheircardandswitchtoVisa,andit'shavinganimpactonyoursales,doyouthinkthat'sgoingtoonlyintensifyasyougetclosertotheJune20transitiondate?Soforexample,areyouseeingevenslowertrendsinbasesofar?


Well,firstofall,Idon'tthinkanybody'sclippedupanything.Theystillhavetousethatco-brandAmExcardthroughJune19.AndnobodycanactuallyusethenewcardevenifyougotitinthemailuntilJune20.That'spartofouroriginalagreementwithourpreviousserviceprovider.

Andthat'sfine.SoallstuffwillhappenJune20andbeyond.Andrestassured,there'sgoingtobealotofstuffhappeningintermsofourcontinuedcommunication,ofcourse,toourmembers,butthere'salotofmembersouttherethatdon'thavethe--youknow,aboutalittleover40%ofourUSsalesweredoneonAmEx;withIthinkovertwo-thirdsofthat,alittleovertwo-thirdstohalfofthatbeingontheco-brandedcard.Somepeopletendtohave--wantDeltapointsorStarwoodpoints,sotheyareusingadifferentone.

ThesamethingwillhappenwithVisa.Ourgoalistogetthatco-brandedcard,aswedidsuccessfullywiththeAmExco-brandedcard,thattobeyourtop-of-walletcard.Wethinkthatthere'sgoingtobealotofthingsthatdrivethat,includingthepeopleoutthereonblogsindependentlyandothersthatlookatwhatiscurrentlya3,2,1isgoingtobea4,3,2,1.That'shuge.Somypersonalviewisit'llbesomethingthat'snotgoingtoallhitondayone.Let'sgetthroughdayoneandthetransitionfirst,butit'llbesomethingthatwillcontinueforacoupletoseveralyears.


Okay.Goodluck.Thankyou.

Operator :

(OperatorInstructions)JohnHeinbockel,GuggenheimSecurities.

JohnHeinbockel(Analyst-GuggenheimSecurities):

SoRich,doyouthinkthis30annualopenings,isthatsortof--certainlyyouhavethepeopleandthecapitaltodomore.Isitarealestatebottleneck?Oryouarecomfortableatthatlevel?Canyougosolidlybeyondthat?AndIthinkinternationallyoutsideofnorthAmericaasyougointomorecountries,youwouldthinkthatthereisanopportunitytodo15,20ayearcomfortably.Canyouevergettothatlevel?


Well,firstofall,itclearlyisnotcapital.Wegotplentyofcapital.





Yes.


Iwouldarguewehavetoomuchcapitaloutthere.Welikeitthatway.It'speople.Itispeople.Yearsago,Ididn'tdepreciateitasmuchasIdonow,particularlyinthesecountries.IfyouthinkaboutinJapan,Ithinktherewasan18-monthperiodafewyearsagowherewewentfrom9to20unitsinaboutayearandahalf,twoyears.It'snotlikewearesendingabunchofexperiencedwarehousemanagerstogoopenandoperateandbewarehousemanagersinJapanfromdifferentcountries.

Soyoudothatafew--atthebeginning,andyoumaydoitoccasionallyonaonesiebasis.Butattheendoftheday,youaregrowingfromwithinanddevelopingthoselocalcountrypeople.

Andfirstandforemostfromaninternationalstandpoint,you'vegotthat.Thatcanbealittlebitofachallenge,andthenyou'vegotthingstakelongerthere.TherearesomecountriesthatIunderstandareverydifficultjustbecauseofzoningandrestrictionsthatareinplace--notjustonus,butanybig-box,evenlocalcompanybigboxes--inthehypermarketareaandthelike.Soit'sgoingtotakealittlelongerthere.

Theotherthing--doIthinkwecangoabove30?Look,weshootforlow30s.Andthennextyearwewillshootformid-30s.Andyou'vecertainlyheardmesaythatwewanttobearound30,andfiveyearsfromnowweshouldbedoing35.Maybewewillfallalittleshortofthat,maybewewon't.Butwe'vegotmorefeetonthegroundrealestate-wiseinothercountries,aswellastheUS,thanwe'veeverhad.Itdoestakealittlelonger.Butwealso--couldwebephysicallyopenmore?

Sure.Butwelikewhatwedoandthewaywedoit.Andprobablywealsohaveacomfortlevelthatit'snotlikewearegoingtomissout.Weare,inourview,thepreferredcluboutthere.Andsowhenwegointoamarket,ifwetakealittlelongertogetthere,peoplearewaitingforus.Itmightbealittleharder,butthefactofthematterisiswefeelcomfortablehowwearedoingit.


Andthen,asthetrafficintheUShasmoderated,backtowhat--maybeyousaidyouwereatalevelthatcouldn'tbesustained,backatalevelthatcanbe,aretherediscussionsinternallythatitisjustanaturalmoderation?Or--becauseyoutalkedaboutwithinthecategoriesthe16basispointimprovementinmargin--thattherearethingsyoucandoproactivelytogivemorebacktothemember?

Andwouldthatdoanythingtotraffic?Sothatdiscussioninternallyaboutthebalanceofearningversustryingtomaybedrivetrafficalittlemore,canthatbedone?


Firstquarterwas--andifyouhaven'tseenthisslidebefore,it'sreiteratedandputouthereinternallyeverydayoftheyearandatourmanagersmeeting,JimusedtoandCraigdoesnow,weareatop-linecompany.


Yes.


Wewanttodrivesales.Thefactthatmarginsyear-over-yearareuponthosecorecategoriesup16basis




points,we'renotsmartenoughtofigureouthowtogetthereallthetime.


Yes.


Wearealwaysgoingtodrivemarginalittlebitwherewecan,butwedoittherightwaybygivingmostofanysavingsbacktothecustomer.IfIlookatourcompetitivestance,ourpricingcompetitivestance,versusourdirectcompetitors,thegaphasneverbeenwider.

Wecouldmakealittlemoreofthis,butwedon't.Attheendoftheday,wearealwayslookingforwaystodothat.Whenwedomembershipfeechanges,historically,wearealwayslookingtogivesomeofthatback.Soallofthosethingsgointoit.Butattheendoftheday,whathelpsmargins?Privatelabel,freshfoodstrength,someoftheancillarybusinesses.

Allofthosethingsarehelpingaswell.Andagain,wefeel--wedon'tnecessarily--Igottotellyou,wedon'tlookatitandsay,hey,frequencycamedownalittlebit,orthecompisanewnormaloralittlebitlower.Wewanttodomore.

Evenwhenweweredoinga4%shopping(receipt)seehowdowegetithighereventhoughthatwaskindoftough.Sowearegoingtocontinuetodothingsinthatdirection.Andwedon'tnecessarilyworryabout,well,thatcamedownalittlebitsoweneedanextrafewbasispointsofmargin.That'sneverthecasearoundhere.


Allright.Andthen,lastly,isKShavinganykindofrealimpactthatyoucanseeonbasketsize?Ornotreally?


Idon'tknow.Wekeepadding--well,wesubtractandaddKSitems.


Yes.


Sotheyliveanddiebythesamemetrics.Ifit'snotagreatitem,westopit.Buttherearen'tanygiantitemsliketoiletpaperandwater,orthosetypesofthingsordisposablediapers,severalyearsago,buttherearelotsoflittleones.Ithink,again,wewouldseethatcontinue,theincreasedpenetration,butataslowerrateofgrowthinthefutureaswellforthesamereasons.


Okay.Thanks.


Idon'tthink--gettingbacktoyourquestion,Idon'tthinkthat'sabigreasonofwhythebasketsizehaschanged.

Ifanything,manyofthoseitems,it'salowerpricepoint.Ifwehad-ifweweredoingbrandonlyandwe




broughtintheKirklandnexttoit,inmanyinstances,itmaybethesamebecausewegotoabiggerpacksize.Butinmanyinstances,you'vegotalowerpricepointonthesamenumberofunits.

Operator :

GregMelich,EvercoreISI.

MikeMontani(Analyst-EvercoreISI):

Hi,guys.ThisisMikeMontanionforGreg.Thanksfortakingthequestion.Wantedtoask,firstofall,Richard,youmentionedthattherewasobviouslyalittlebitofextrastrengthmaybeinsomeofthediscretionaryversusnondiscretionarycategories,andthatwassomethingthatgaveyoucomfortthattheconsumerhadn'tchangedthatmuch.Canyouprovideanyupdates--obviously,earlyonhere,butlikefromMayresultssofar,haveyouseensequentialimprovementintrafficversusevenApriltrend?


Well,wereallycan'ttalktoanythingaboutMayyet.There'snogiantsurprisesineitherdirection.Butattheendoftheday--andagain,thecomfortlevel--IthinkIwas--earlierinthecall,IwasrespondingtomanycallsthatIreceivedfrombothinstitutionalinvestorsandanalystsoutthereabouttheconcern.

Andagain,whenwelookbackatit--andwereportedAprilsalesandwesaid,okay,whatarethereasonswhyitcamedownabit,whyitwasalittleweaker.Whatagaingaveuscomfort,onelittledatapointofcomfort,wasthefactthatsomeofthosediscretionarycategoriesareactuallydoingalittlebetterthanonewouldhavethoughtgiventhetotalnumber.Andsothat'saboutasmuchasIwouldreadintothat.


Okay.Thankyou.


We'lltellyounextWednesday.ForMay.


AndifIcould,justafollowupongasalittlebit,couldyouprovidethepricepergallonforthequarterandalsothecompgallontrends?AndiftherewasanymaterialimpacttoEPSthatImayhavemissed?


Yes.Thepricepergallonwasdownforthequarter19.7%.


(offmike)


Basically$2.59ayearagoand$2.08thisyear.Andwhatwasthelastpart?


Justaskingaboutwhatwasthecompgallonpercentagechange?AndthenalsowasthereanymaterialEPSimpactonthisquarter?Andifyoucouldhelpussizeupexactlywhatweareupagainstinnextquarter?





Ithinkyear-to-dateweareupinthelowsingledigitsintermsofcompgallons.Again,thebigcomparisonwasitwasayearagowhenitwasreallyoutsizedcompgallonsup7%,8%.IknowinAprilIthinkayearagoitwas8%intheUS.Andsothatwaspartofthatimpactofwhysales,inourview,saleswerealittleweakerparticularlyinCaliforniainApril.


AndjusttheEPSimpact,Richard,I'msorry,onapergallon.


Itwaswithinapennyortwo,reallynochangeyear-over-year.Ithinkitmighthavebeenapenny(audiogap).


Thankyou.

Operator :

PeterBenedictofRobertBaird.

PeterBenedict (Analyst-RobertBaird):

Hi,Richard.Thanksfortakingthequestion.Oneongasandanotheronadifferentsubject.You'vebeenadding20to30gasstationsayearthelastseveralyears.Ithinkyourpenetrationislike70%acrosstheclubs.Howdoweseethatgoingforward?Isthatpaceofgrowthgoingtocontinue?Wheredoyouthinkyoucangetthepenetrationofgasstationscallitafewyearsout?


Well,intheUS--firstofall,everynewunitwedowhereit'spossible,weputinagasstationandweareevendoingafewincountrieslikeJapanandAustralia,whichwehadn'tdonehistorically.WerelocatedafewunitsintheUS.WejustmovedHackensacktoTeterboro.

TheHackensackbecameIthinkour11thbusiness--or12thbusinesscenterandthenewTeterborooneisabignewCostcowithagasstation,withbetterparkingandgreat.Soifwedidthreeorfour--Idon'thaveitinfrontofme--butifwedid4relosthisyear,myguessatleast3ofthemhavegasstationsandthosethree(didn't).Butwearestartingtomaxthatout.IntheUS,wehave--attheendofthequarter,wehad420gasstationsoutof481warehouses.InCanada,55outof90.I'mguessinginCanadawestillhavealittlebitmoreroomtogrowbecausewestartedtherelater.Again,intheUK,wehadnoneacoupleyearsago,nowwehave4.Japanwehave5.

Spain,50%ofthem,1outof2.AndAustralia,5outof8Ibelieve.Andsoyes--againit'snotlikefiveyearsagointermsofjustaddingabunchofgasstations,butitstill,Ithink,movestheneedlealittlebit.


Okay.That'shelpful.Andthenmaybe--canyoutakeaminuteanddiscusstheseniormanagementranksatCostco?There'sbeensometurnoverlately.Doug,IthinkhislastdaymaybetomorrowIguess.Butjusttalkaboutwhat'sgoingonintermsoftransition,futuretransitionsandmaybewhatchanges,ifany,thesenewleadershaveimplemented.Iunderstanditwouldbeonlymarginal,butjustcuriousyourthoughtsonallthat.





Well,look,youtalkedaboutshoppingfrequencystayingat4%for7years.Peoplehavestayedfor30,includingme.Soyouarehavingsometurnover,ofcourse.Overthelastfewyears,you'vehadpeoplethatareretiringintheirearly70sthathaveworkedtogetherstarting55yearsagoatFedMartinSanDiego.ButIthinkfromamerchandisingandoperationsstandpoint,that'sbeenwellthoughtout.Let'sfaceit,thefirstbigconcernwaswhat'sgoingtohappenwhenJimleaves.

Ithinkwhilewewerecomfortablehereinternally,Ithinkwe'veshownandcertainlyCraighasshownthatthetransitionandthemaintainingofthecultureiscontinuedwithwithoutmissingabeat.Inmerchandisingoverthelastfewyears,we--tookcertaincategorieslikewhatusedtobenon-foods,whichisacombinationofhardlinesandsoftlinesandDennisKnapp,whowasaseniorexecutiveoverthatandhassinceretired,webroughtintwo--promotedtwopeopleandhavebrokenouthardlinesandsoftlines.

Inoperations,we'vemadeseveralpromotionsandchangesofpeopleagain,typicallylow-tenuredpeoplelikethey'veonlybeenhere20to25yearsthataregoingfromVPtoSeniorVPlevelson--Ithinkwe'vegotabout16SeniorVPsofOperationsintheUSgeographically.NowintermsofDoug,Doug,asyouknow,hasbeenheadofUSmerchandisingandcertainlyinvolvedinalotofmerchandisingbeyondthataswell.Dougisgreat.

He'sleavingfor--nonegativeissuesbothinternallyorwithhimself.Andweareallkindofjealous.He'smoreontheyoungersideoftheseniormanagementteam.'Craighasaplan,buthe'slookingatafewthings.Andoverthenextfewmonths,wewillbeannouncinghowthatchanges.Butwe'vegotgoodpeopleinplaceandwedon'tthinkthatthere'sanissueatallthere.

InAsia,RichardChang,whogoesbacktothePriceClubdaysprobably25plusyearsago,ranoperationsforTaiwan,waspromotedtoSeniorVPoverAsia.Andwe'vebroughtsomenewpeopleinthereaswell,newpeoplemeaningnew--existingCostcopeople,ofcourse.AndfromtheUS.AndsoIthinkwefeelprettygoodaboutthechange.It'sspedupbecauseitwasatzero.Inthelastcoupleofyears,it'sbeenafew,acoupleandnowit'safewandafewmore.ButIthinkweareprettywell-positionedforthat.Idon'tseeabigchangeinwhatwedoandhowwedoit.


Okay.Great.Thanks,Richard.

Operator :

BobDrbulofNomura.

BobDrbul(Analyst-Nomura):

Goodmorning.IwaswonderingifyoucouldcommentalittlebitmorearoundsomeofthegeographictrendsthatyouareseeingandjustupdateusonyourthoughtsaroundthetrendsinCalifornia?


Ithink--wepointedoutCalifornialastmonthforAprilbecauseitwas--whileUSoverallagainwasalittleweakerthanithadbeen,itwasreallyCalifornia.CaliforniaisaboutathirdofourUScompanyoperationsandit'sprobablyalittlebitmorepenetratedgas-wise.

Andagain,ayearago,wehadgalloncomps,whichnotonlydrivesgasoline,butmoreimportantlydrivespeopleintheparkinglotand52or53ofevery100comeintoshop.Andsothatwaswherewesawabitof




adistortion,CaliforniaversustherestoftheUS.Ibelievetherewasa--Idon'thavethenumberinfrontofme--buttogettoa1,theotherUSwasata2andCaliforniawasaminus1.

AndI'moffbyalittlebitthere,butitwasthatkindofdirection.Andsothatwasalittleunusual.Again,Ican'tpredictwhatthatmeansforthefuture,butotherthanthat,therearesomemarketswhere--Imean--Ithinkthepositivethatweseeiswe'vebeensuccessfulinsomeofthesenewmedium-sizemarkets.Wehadthemostnewsign-upsIbelieveinmanyyearsintermsofanewmarket,newmedium-sizemarketinTulsajustafewweeksago.Throughopeningday,wehadmoresign-upsthanwe'vehad.NowI'mnottalkingaboutAsia;that'sawholedifferentstoryintermsofsign-uplevels.Soagain,thingslookprettygood.Idon'tknowifthere'salotofgeographicchangesotherthanthethingwecalledoutonCalifornia.Ipersonallybelievealotofthatrelatedtosomeofthegasissues.


Gotit.Andin--Isawthatyouaredoing--whatisit,apickuptruckwithGMCintermsof--


Yes.


Andareyougettingothervendorsthatarecomingtoyoutolookformarketingopportunitiesgiventhesuccessofthebusiness?


Well,sure.Inthecarbusiness,IthinklastyearjustintheUS,wedidjustunderahalfmillionnewcars.We'vealwaysdone--whencarmanufacturershavecomeoutwithsomethingnew,wecoulddo--byputtingoneofthosecarsinfrontof--ortrucksinfrontofeachofourlocationsanddoingsometypeofextraamountofincentive,wecandrivearidiculouslylargepercentageofthosesixweeksofsalesinthatcarortruck.

Inthiscase,we'vetoyedwiththeideaforseveralyearsandtalkedtoallthemanufacturersaboutdoingaKSvehicle.Agreatvehiclewithallthebellsandwhistlesandanevenbettervaluewhenyou'dgetasaCostcomemberorasaCostcoexecutivemember.SoIknowwehadstartedandstoppedacoupletimeswithacoupledifferentmanufacturers.Wearepleasedwithit.Wethinkthemanufactureris.Thedealersare.Andsure,therewillprobablybemoreinthefuture,butwe'llsee.


Great.Thankyouverymuch.


Thatgoeswithotherproductstoo.Wejustkeepbringingittoadifferentlevel.

Operator :

(inaudible)


Whydon'twetaketwomorequestions?

Operator :




PaulTrussellofDeutscheBank.

PaulT russell(Analyst-DeutscheBank):

Hi.Goodmorning,Richard.Ijustwanttoclarifyafewthings,ifyoudon'tmind.First,onthenewmembersign-ups,Ithinkyousaidup15%.Certainlyinternationalstoreopeningshasalottodowiththat,butyouarealsoseeingsuccessintheUS.Ifyoucanmaybejustgiveusalittlebitmoredetailaroundwhat'sdrivingthat?


Well,Idon'tknowwhat'sdrivingit.Imeanwedoaprettygoodjobofgettingpeopleinthedoor.


(offmike)


Openinginsomeofthesenewmarketshelp.It'sjustbeenoverallstrong.IftheUSis15%andthewholecompanyis15%,wherewasitdown?Itwasuprelativetothe15%ofcourseintheendandplaceslikeTaiwan.AndSpainofcoursewashuge,butit'shugeonabaseofone.

AndthenitwasalittlelowerinCanada,wherewehadveryfewnewopenings.AndMexicosamething.


Lastyear.


Yes.Mexicolastyearwehadahugeopeningonabaseofabout34or35units,ahugeopeningwhichhadoutsizednumbers.

Sowearecomparingagainstthatwithnonewopeningsthisyear.SamethinginCanada.Wehadahugeopeninginalocationthereayearagointhequarterversusnone.


Gotit.Andthenoncoremerchandisemargins,justwantedtomakesure,the16basispointgainyouarereferringto,that'skindofthetruecoremerchandisemarginsonthefourcategoriesthatcomparestothe11basispoints.Isthatcorrect?

AndthenalsoyoumadeacommentearlierinthecallregardingAUR.Isyourviewoftotalstoredeflationaround1%?


Well,ifIlookatmyLIFOindex--wedon'tknowexactly.IfIlookatmyLIFOindex,whichis70%ofourinventory,it'saUSaccountingprinciple,fromthebeginningoftheyeartonow,that'saboutapercentagepoint,0.9ofapercent.

IfIlookatthejustthetotalthroughtheUSfront-endregisters,numberofitemsinabasketwasupyear-over-year1.4percentagepoints.Theaveragebasketwasup0.4percentagepoints--soa1.0percentagepointdeltathere.Thatagain,Ithinkjustaffirmsthatroughly1%deflationarynumberonaverage.




Butit'seducatedart,notcompletesciencehere.


Andthemargin--


Yes.Andthemargins,the16,isonitsownsales,eachofthosecategories--byeachofthosefourcategories'sales.


Great.Thankyou.Goodluck.


Appreciateit.

Operator :

ScotCiccarelliofRBCCapitalMarkets.

ScotCiccarelli(Analyst-RBCCapitalMarkets):

Goodmorning,guys.ScotCiccarelli.Thanksforgettingmeinattheendhere.Richard,canyoureminduswhereyouareintheITmodernizationinvestmentprogram--kindofwhensomeofthosepressuresmaystarttoease?

Andsecondarily,arethereanyotherinvestmentbubblesweshouldbemindfulofaswethinkaboutthenexttwotothreeyears?


Well,ITisthegiftthatkeepsongiving.Westartedataboutfouryears--3.5,4yearsago.Aswelookatittoday,whatwethoughtmighttakefourorsoyearstodothebigchunksofthiswilltakesix.

AswethoughtitwouldcostX,itcost1.5Xto2X,orwhateveritis.Whichistypical.Ourguessisthatit'llstillbeslightlydetrimentalinfiscal2017.Andactuallytechnicallyitmaybeevenflattoimprovedalittlein2017,butyou'vegota53-weekyear,sothereisalittlecheatthere.Butgenerallyspeaking,flattoupalittlein2017,maybeupalittlein2018orflat.Maybedownalittle.Wedon'tknowyet.

Butwearestartingtogettothatinflectionpoint.Andmyguessisthatinflectionpointwillcomesometimetowardstheendof2017orinto2018.Keepinmind,thesenumbersdon'tassumeanything--andthisisnecessityfirstandforemost.Webelieveitwillhelpusindifferentways,inmanyways,Andtherewillbeotherthingswe'lladdtoit.Butthebulkofit,ofcourse,isgettingbehindusandwe'llgofromthere.


Okay.Andanyotherincrementalexpensesthatweshouldbemindfulof,likeyoufinishoneprogramandtypicallythere'sanotheronewaitingorlurkingrightbehindit?


Idon'tthinkthere'sanythingbigouttherethatway.Exceptwejustdidthebottomofscaleincrease,whichisalittleunusual,notabignumber,butit's$0.06orsoayear.There'snogiantchangescomingto




healthcare.Westillgivegreathealth,medical,dentalandvisionbenefitstoeverybody.

IfweincreasesalespenetrationoutsideoftheUS,certainstructuralexpenseshelpus.HealthcareintheUSiseasily20to60basispointsasapercentofsalehigherthaneveryothercountryintheworld.

Andsojustbydoingmoreelsewhere,that'llhelpthatnumberalittlebit.Samethingwithlaborcosts.Wepaysimilarlygreatlaborwagesrelativetowhateverin-countrynormsare,butcertainlythenumbersintheUSandCanadaarehigherthansomeofthecountries.

Andsothosethingswillhelpusalittlebit.NowIdon'tthink--there'snothinghugegoingonouttherethat--Idon'tthinkwehaveanybigshockstothesystem.


Gotyou.Allright.Thanksalot,guys.


Thankyou,guys.We'llbearound.Haveagoodday.

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