Costco Q1 Earnings Call Transcript

123jump.com Staff
09 Jan, 2009
New York City

Costco quarterly sales rose 4% to $16.04 billion last year while total revenue including membership fee rose by 3.7% to $16.39. Comparable same stores sales in the quarter rose 1% from a year ago, excluding foreign exchange effect would have been 4%.

Costco Wholesale Corporation ((COST))
Q1 2009 Earnings Call Transcript
December 11, 2008 11:00 a.m. ET

Executives

Richard Galanti – EVP & Chief Financial Officer

Analysts

Deborah Weinswig - Citigroup
Dan Binder - Jefferies & Company
Charles Grom – JP Morgan
Adrianne Shapira - Goldman Sachs
Robert Drbul – Barclay’s Capital
Uta Werner - Sanford Bernstein
Peter Benedict – Wachovia Capital Markets
[Mark Wiltemuth] – Morgan Stanley

Presentation

Operator

Good morning. My name is Rachel and I’ll be your conference operator today. At this time I’d like to welcome everyone to the Costco Wholesale Corporation first quarter earnings conference call. (Operator Instructions) All lines have been placed on mute to prevent any background noise. After the speaker’s remarks, there’ll be a question-and-answer session. If you’d like to ask a question during this time simply press * then the number 1 on your telephone keypad, if you’d like to withdraw your question press * then the number 2. Thank you. I would now like to introduce Richard Galanti, Chief Financial Officer. Sir, please go ahead.

Richard Galanti – Chief Financial Officer

Thank you, Rachel. Good morning. This morning’s press release reviews our first quarter fiscal 2009 operating results for the 12 weeks which ended November 23. As with every call, let me start by stating that the discussions we are having will include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and that these statements involve risks and uncertainties that may cause actual events, results, and/or performance to differ materially from those indicated by such statements. The risks and uncertainties include, but are not limited to, those outlined in today’s call as well as other risks identified from time to time in the company’s public statements and reports filed with the SEC.

So to begin with, 12-week first quarter, for the quarter we came in at a reported $0.60 a share. This compares to our October 8th conference call guidance range of $0.61 to $0.65. First call at the time as you recall was at $0.64. Most recently then at $0.61 and then yesterday it jumped to $0.62 as a couple of the data points in there had raised the rest of it over the last day or two.

So essentially coming down, I think I believe as analysts are responding to the slightly weaker sales trends in October and November as compared to September. Last year’s first quarter of course we came in at $0.59 a share. As outlined in this morning’s release this year’s first quarter results included several items; some helping and others hurting our results for the quarter. These include very strong gas profits this year in the first quarter. Two charges to our P&L related to what’s going on in our view in the stock market and the credit markets together representing a $34.2 million pre-tax or $0.05 charge to first quarter earnings. Next item that I will term foreign exchange headwinds, as I had mentioned on the last conference call our foreign earnings results when converted and reported in US dollars essentially hit us in the first quarter by an estimated $0.03 a share, that is assuming FX exchange rates were flat year-over-year. Our foreign operating results, which are about 20% of our company, would have been pre-taxed $22.7 million or $0.03 a share higher. We would expect that had, assuming currency stayed the same for the year of course you can see that all year.

Additionally the trend during the quarter of weaker comps mostly on the non-food side of our business, needless to say that hit earnings as well as the trend line from September to October to November was slightly down each quarter, the underlying comps. And with those weaker sales results I might add things were despite more aggressive pricing, a conscious effort on our part to drive sales during the quarter. We estimate that to be a penny or two. Also while our inventories were clean and we believe well managed during the quarter, some seasonal markdowns to keep them clean. I talked to our head of non-foods merchandising and he estimated that somewhere less than a penny a share, but nonetheless several million dollars of markdowns to get out of some of the seasonal stuff early. LIFO was actually a small pick-up. I believe on the fourth quarter conference call back on October 8th, we had estimated and of course then it was before gas plummeted and the economy changed a little bit and we started to see an exact opposite of inflationary trends, we did get a pick-up of $2 million in the quarter of LIFO income, LIFO credit if you will.

I believe at the last call we indicated that that could be about a penny a share hit and so that was a positive for the quarter. And lastly as it relates to our first quarter earnings performance, one of the other things that jumped out at us was healthcare costs particularly during the month of October and into early November. In talking to our third party administrators of the plan they said they’ve seen this a lot of places around the country and putting two and two together myself, its almost in sync with the stock market decline we saw that we saw healthcare costs go up dramatically above and beyond what you see at the end of the calendar year anyway when people are just, they’ve already hit their deductibles and they want to make sure they get their free eye exam in or their teeth cleaned. In terms of sales for the quarter, first of all if you just added up the things that I just outlined, the negative slightly outweighed the positives but not by much. In terms of sales for the quarter as previously reported total sales were up 4% and our 12-week comparable sales figure showed an increase of up 1%. For the quarter both total sales and comp sales were significantly impacted by the strengthening dollar. The 4% total sales number includes a hit if you will of about 3.25 percentage points due to FX such that the 4% total sales increase and the 1% comp reported figures essentially would have been 7% and 4% without the FX impact.

By the way gas inflation or deflation now, gas inflation helped September sales pretty dramatically, was essentially a non-issue in October as prices were falling and as they continued to fall gas deflation hurt November sales. So essentially a non-factor for all the quarter but certainly a big change in factor from where we entered this fiscal year and where we ended this quarter in terms of how that impacted sales. Other topics of interest I’ll review with you, our opening activities and plans. We opened a total of eight new locations in the first quarter; seven net in the sense that we closed our original Las Vegas location. It will reopen in the first quarter as a Costco business center but that is currently closed. So a net increase of seven during the quarter and we’ll see Vegas go back into the equation into Q3. Of the eight new locations, six were in the US. One was in Canada and one in the UK. As of quarter-end we operated 550 locations around the world which includes of course the 31 in Mexico that we currently do not consolidate into our figures.

Also this morning I’ll review with you our ancillary business results which seem to be pretty good, online results, which as you might expect have weakened along with big-ticket electronics items and the like and membership trends which remain pretty strong. I’ll also explain these two charges that totaled the $34 million, the bigger piece going to SG&A and the smaller piece going to interest income, a reduction in interest income, I’ll mention that. I’ll go through the preliminary balance sheet, give you a few comments on the directional change of inflation to deflation and how that impacted LIFO. I’ll make a brief comment on Mexico operations and our partner Commercial. You’ve seen that in the news with the issues that our partner down there has had and lastly what I will call limited guidance. I’m going to be conservative, and perhaps a little more vague, given that it’s so hard to predict given all the headwinds and the tailwinds out there.

I’ll take you through the discussion of our quarterly results, sales for this year as I mentioned, were $16.0 billion, up 4% from last year’s $15.5 billion, again on a reported comp basis up 1%, add three percentage points to each of those numbers to account for the FX if you wanted to look at it in local currency sales increases. In terms of the 1% reported first quarter comp it was comprised of a reported 7% figure in September, a minus 1% in October for the company, and a minus 5% in November. But again such monthly figures greatly impacted by both FX and by gasoline price changes. If you just added up the two that Bob Nelson talks about each month in the monthly sales call recording, the sum of those two things in September was a positive 130 basis points, in October minus 400 basis points and in November minus 760 basis points, so almost a nine-percentage point swing in just 8 to 10 weeks. So, quite a bit of swing in those things which just makes it a little more difficult to understand the numbers but that’s what they are. The 1% recorded comp, our international comps in local currency as you saw expressed in US dollars our international comps for the quarter were minus 7%. It was actually plus 7% in local currency and I might add that they were even stronger as the quarter progressed.

They are all positive in local currencies both in November and the quarter-end and in the past couple of weeks. As I briefly mentioned, which is by the way not the case as I mentioned to you already in the US, as I briefly mentioned gasoline had essentially no impact on Q1 comps as relative price inflation year-over-year during the first month, month and a half, was offset essentially by price deflation relative to the year-over-year for the last six weeks of the quarter. The average transaction decrease, to get to our 1% reported comp, just in terms of simple math it’s an average transaction decrease of 1.5% for the quarter. Again you’d have to add the three percentage points of FX in there to get kind of an underlying local currency transaction increase of 1.5% to 2% and average frequency increase of just a shade under 3%. So, frequency has continued strong in the high 2s and low 3s for many months in a row now, in terms of cannibalization, small impact of about 0.05% in the fiscal quarter.

In terms of sales comparisons by geographic region, if you look at the comps as compared to back in the summer, again they strengthened a little bit in September, were a little weaker in October and still a little more weak in November. Again I’m taking out FX. I’m taking out gas inflation and deflation. Trend-wise Northwest has weakened a little more than average although it has been the stalwart holding up a little more than average for a long time here. California has been pretty much proportional to the overall US, still lower but that gap between California’s comps and the best of the US not widening and holding up the best has been the Northeast. Internationally all of Asia is doing great in local currencies in the mid-teens or better with Canada in the mid-singles. In terms of merchandise categories for the quarter within food and sundries which is about half our business, high singles, again I’m adjusting the detriment of FX out of that. Tobacco continues to be mid-singles negative, otherwise virtually all subcategories were up year-over-year with dry groceries, canned goods, and what have you being the strongest comp in the mid-teens. Just looking through the list I was surprised to see given all the craziness out there that alcohol was flat, beer and wine and spirits.

Within hard lines comp which has been in the mid to high single negative digits, nothing very thrilling. Generally everything is low single-digit negative to up as much as 20% minus comp in the hard lines. The one bright point has been the electronics while it still is overall a low negative comp. Our television sales have been way up in November. I heard Bob mention this on the recording, but we had unit sales up over 50% in the four weeks but that translated into a dollar sales increase of only 3%. If you go onto Costco.com you can see that we’re selling two packs of flat screen televisions for less than $1500 for the both of them and so we’ve seen a lot of, notwithstanding what’s going on in the economy and with big ticket items we have taken an advantage of being opportunistic and going to vendors that have been stuck with inventory when other cancellations have occurred elsewhere and taking advantage of that, within the soft lines comp, again in the mid to high single-digits negative, kind of a repeat of hard lines, nothing thrilling. Generally everything is in the minus 5% to minus 20%, 25% comp range. Probably the one-standout again slightly negative but still standout relative to other subcategories is apparel. Again I think it has to do with the fact of availability of branded items in that category.

Fresh foods, light food, and sundries positive, darn near close to positive double-digits. Produce is the standout in the double-digits with all four of the sub fresh fruits categories positive. Clearly food is driving our business as it is others. Moving down the line items on the income statement, we’ll start with membership fees in dollars. We were up 6% or $21 million and as percent of sales up five basis points. The five basis points, seems stronger than the up 6%. I think again that has to do partly with the FX issue. If you had flat FX dollars it would be up 9% to 10%.

Someone here asked earlier, we’re talking about it now that its positive, part of that is the fact that the negative as the dollar weakened over several years, it was always a small effective negative to us but here in the matter of one fell swoop in the matter of six or eight weeks its been a big change. So I felt I should mention that. In terms of membership fees strong renewal rates, still a slight increased penetration of the executive membership despite a weak economy and the apparent ramp up in membership marketing activities from the competition. Our new member signups in Q1 were essentially flat year-over-year in the quarter notwithstanding the fact that we opened two fewer openings. In terms of members at Q1 end, Gold Star 20.5 million, primary business 5.6 million, add-ons 3.4 million for a total of 29.6 million. That’s up from 29.2 million at the end of the year 12 weeks ago. Including spouse cards 54.1 million cards in our system. I’d add about 2.8 million to that number to be actually at 57 million if you include Mexico.

At quarter-end on November 23, our paid executive membership topped eight million, an increase of almost 400,000 or 5% just in the last 12 weeks or about 30,000 per week increase in the quarter. So again, its still has been a big success for us in terms of converting members to that. In terms of renewal rates as I said they continued strong, essentially our all-time high renewal rate. At Q1 2009 the numbers both for business, Gold Star end total were the same as they were at fiscal year end and rounding up a percentage point versus a year ago, business coming in at 92%, Gold Star at 86%, and total a shade above 87.0%. Continuing on down the line, gross margins, year-over-year in the quarter they were up 32 basis points. This is where we get to drive you crazy a little bit with the explanations but basically coming in at 1097 this year versus a 1065 last year. As usual we’ll jot down a few numbers. The line items will be core merchandising, the second line item ancillary businesses, third line item 2% reward, fourth line item LIFO, fifth line item Other, and lastly total and then three columns; all of fiscal ‘08, fourth quarter of ‘08 and then first quarter of ‘09 so we can see a trend here.

In terms of going across the merchandising core was plus 17 basis points for all of ‘08 compared to all of ‘07. In Q4 on a Q4 over Q4 basis, minus 19 basis points, and then in Q1 ‘09 versus Q1 ‘08 lower by 13 basis points, so minus 13 basis points. Continuing across, ancillary, minus 13, minus 6, and plus 46. Two percent reward, minus 3, minus 2, minus 2, LIFO, minus 5, minus 14, plus 1, other, plus 5, minus 4 and 0. So the totals for all of ‘08 year-over-year we were up one basis point, all of ‘08 versus all of ‘07. In the fourth quarter ‘08 versus the fourth quarter of ‘07, we were down 45 basis points and Q1 over Q1 end we were up 32 basis points.

Now as you look at that up 32, our core merchandise business which is again a little over 80% of our business, food and sundries, hard lines, soft lines, and fresh foods, we show here the core was down 13. We still have the issue with gas and its penetration notwithstanding the fact that its relative penetration, while still up a little bit is not nearly as up as it was Q4 over Q4 with the decline in gas prices of late. But just looking with blinders on at just those four categories, based on those four categories margins and sales, Q1 was lower by two basis points and I’ll go through a couple of comments on that in a minute. But the aggregate was lower, sales penetration of those categories made that minus 2 a minus 13 in our matrix. Of the four major departments, fresh foods and soft lines were lower year-over-year. Part of our conscious aggressive pricing was bringing down produce items to drive more business on the food side and bring people in. With food and sundries and hard lines being higher year-over-year I think the hard lines one would be a surprise to many given the weakness in some of those categories but again we I think improved in some categories like electronics, again, given non-food sales weakness and a few extra seasonal markdowns, not a bad showing at all in our view. Our year-over-year gross margin in the retail gas business as you might expect was substantially up year-over-year.

In terms out outlook going forward overall margins are okay. Keep in mind we will look foremost to drive top line sales which have and may in the future still be a small hit to margins. We are also, as you would expect us to be doing is going back to vendors who are raising prices just at several months ago to understand why they aren’t coming down and we have been successful in that as well as I would expect our competitors to be as well. The impact from increasing executive membership, a very small hit, as you see, two basis points. LIFO given how we started out the fiscal quarter and again I think on October 8th at our last quarter conference call we mentioned that we could take a charge in the quarter of perhaps a penny a share, $8 million to $10 million pre-tax. Now however with the expectations for lower inflation again we actually, looking at our LIFO pool calculations as of Q1 end we did bring back a couple million dollars.

I should point out that the moderate LIFO benefit recorded in Q1 excluded the effect of significant gas deflation that occurred during the quarter. That’s because we’re not, remember LIFO is not just looking at index at quarter-end, it’s trying to guesstimate what its going to be as of year-end and adjusting accordingly. We’re not sure which way gas prices are going and how low, whether they’ll go up or down but we felt that looking at it at mid-year, but nonetheless there’s a decent LIFO credit that is still there, potentially there if gas prices remained low. We will realize that in the future.

Now moving on to SG&A, our SG&A percentages Q1 over Q1 were higher by 31 basis points, higher being bad so it’s a minus 31, coming in at 1046 this year versus a 1015 last year. Again a very simple quick table helps to look at it better. The line items are operations, central, stock compensation, quarterly adjustments, and total, going across the same three columns, fiscal ‘08, Q4 ‘08, and Q1 ‘09. Operations in the first column would be a plus five, meaning it was better year-over-year by five or lower by five basis points, Q4 ‘08 plus 21 and Q1 ‘09 minus 16, Central, plus three, plus three, minus three, stock compensation, minus two, minus three, zero.

Quarterly adjustments, plus eight, minus six, minus 12 for at total of plus 14, so all of ‘08 we were lower year-over-year by 14, in Q4 ‘08 plus 15 or lower by 15 and in Q1 2009 minus 31 or higher by 31. Now operation was higher by 16 year-over-year. Let’s face it, this is all about sales levels, and about six to eight basis points related to that healthcare spike that I mentioned. We’ve seen that subside by the way in the last couple of weeks, but we’ll see what happens tomorrow. Nothing really unusual in central, nothing unusual in the dollars, it’s really the same story, a little weaker sales and the challenge of leveraging or deleveraging that. Our stock compensation expense was flat year-over-year as a percentage. It’s really a slightly higher number of RSUs being granted to more managers and more people in the organization but done on granted a lower price than a year ago and so some of those two essentially was a wash in terms of expenses as a percent of sales, overall not a thrilling SG&A performance, but to be expected with sales weakness and of course the lower gas prices. I will mention lastly the minus 12 basis points of quarterly adjustments, the charge we described in this morning’s press release that hit SG&A, of that $34 million that was in the press release, $28.4 million or 18 basis points, minus 18 is in this minus 12.

We also have a pick-up year-over-year of plus six. If you recall last year in Q1 we took a $9 million reserve for a giveback to employees last year in first quarter for healthcare which we don’t have a comparable number this year. So looking at that, you got the minus 18 is really the non-recurring amount of that and then of course the non-recurring, the plus 16, offset to that. Let me go over briefly these two charges, again one which is the bigger of the two which relates to SG&A and the one that will impact interest income and other but I’ll go ahead and talk about both of them now. Of the $34 million we talked about in the press release, the $28.4 million pre-tax charge related essentially to the stock markets’ freefall and the mark-to-market impact on the cash value of the life insurance policies covering just over 800 Costco members of management. This was a charge to SG&A.

For 18 years we have utilized split dollar insurance to provide for life insurance coverage for our warehouse managers and above. Using this traditional insurance product as the cash surrender values in the underlying policies grew, that asset if you will, which is on our books as a long-term asset, has been invested in a diversified portfolio of both fixed income and equity type market funds. It’s always mark-to-market at the end of each quarter. Historically at least until this quarter the plus or the minus to our quarterly P&L was generally zero to $2 million or $3 million, a couple of dollars beyond that but nothing huge and just part of SG&A, nothing really to talk about historically. In Q1 the mark-to-market value of these policies went from a little over $90 million to $61.7 million or a loss of $28.4 million. That was a 32% decline in value. I don’t need to explain to you guys that when you’ve got a diverse portfolio from fixed income to S&P 500 to small cap growth and the like and we all know what happened in October. I can tell you that as of the beginning of the quarter the portfolio was about just under 30% what I would call non-equity type funds, fixed income and the like. It’s now about 60% including that incremental 30% in money market funds and just to be out of that craziness and go forth with running our business.

So I would hope and expect that to be relatively one-time and we’ll go on from there. The second charge, a $5.8 million pre-tax charge to interest income and other, I spoke to you about that on the last couple of quarterly conference calls and on October 8th on our year-end conference call as well. Just very quickly if you go back to a year ago in early December, 2007 we had about $1.1 billion of our cash in what was referred to as enhanced money market funds spread among six or seven of them and we received a call in early 2007 from one of those funds saying that the fund was stopping redemptions and the fund would be allowed to float, DNAV from a dollar. That hadn’t happened in a number of years, over 15 years, prior to that. We immediately requested redemption from all the funds, which at the time as I mentioned totaled a little over $1.1 billion. As of last week we’ve redeemed just under $1 billion of it which is reinvested in government funds and have about $137 million remaining among three of those six months and those are being done orderly with liquidations as these things mature. All three have restricted redemption and are in the process of undergoing that orderly liquidation as they mature and can be sold by the portfolio managers.

With this $5.8 million charge I think we’ve taken right around $10 million against the $1.1 billion if you will, but most of it has been in one of those funds but nonetheless about 1%, a little under 1% hit to that original $1.1 billion we had in these what we thought were safe money market funds. We don’t expect big changes in that. Again we are down to the final throes here and what’s left is not the best, its just when these things mature and could there be a few million here, a couple million there? Sure, but we certainly don’t expect a big charge like the $28 million again. Could we get a couple million here and there from this over the next four to eight quarters? I wouldn’t be surprised but nothing big. Again this has been more of a liquidity issue for us. We don’t have a liquidity issue because we’ve got plenty of cash but this has not been about a risk of principal thankfully, its been more about just getting our money out these things.

In terms of the SG&A outlook for the remainder of 2009, it really relies on sales trends. No big changes expected plus or minus. We don’t have anything up our sleeves to drive you guys crazy in the next six months but we’ll have to see what sales trends are. Moving down to pre-opening, pre-opening was quite a bit lower, $8.6 million lower coming in at $12.8 million this year versus $21.5 million last year. We did open 10 openings last year versus eight this year. Probably more importantly we also had several openings that occurred in the early parts of Q2, in late November, early December last year. I don’t think we have any plans for openings in Q2 this year. So again some of that, that’s the reason. As well last year we had about $3.5 million more within this number, more in remodel and new warehouse business additions than we had this year. No real surprises when you look at the underlying components of it.

In terms of the provision for impaired assets and closing costs, last year in first quarter we essentially were flat, a $79,000 charge. As you recall from last year in the first quarter that essentially flat number, zero number, was about $3 million of expense, normal expenses for impairments and closing costs offset by a nearly like amount in real estate gains.

In the first quarter this year we had a charge of $6.8 million, a little over two-thirds of which is related to the relocations that we’ve got going on. So all told, operating income in the first quarter was up 7% year-over-year from $394 million last year to $420 million this year. That’s on a reported basis with all the stuff that we’ve talked about here but as I mentioned early on in the call, a couple, one big positive, gas profits and a small positive LIFO credit, that relative expectation essentially were offset those other things that I mentioned. Below the operating income line reported interest expense was slightly higher year-over-year essentially the same $24.6 million versus $23 million in last year’s first quarter. Nearly all of this is the interest expense on the $2 billion debt offering we did in February of ‘07. Interest income and other significantly lower year-over-year, a year ago in the quarter it was $33.3 million, this year came in at $18.2 million or a $15.1 million lower amount. Virtually all was lower interest income not other which of course this $15 million includes the $5.8 million hit I just talked about and as you might expect much lower rates of return on our cash balances. Somebody asked this morning were we investing in any of these negative return treasuries and the answer is no, we haven’t.

Overall if you take all of this into account, pre-tax income was up 2.3% from $405 million to $414 million this year. Our tax rate, a good tax rate, higher than last year, probably something I forgot to mention earlier on. Last year we had a 35.3% tax rate for the quarter. There were a few extra discrete items that worked in the positive for us, 36.7% actually includes those small amount of discrete positives. I think we start with kind of a base rate assumption of about 37.25% so again but nonetheless about a percentage, a little over a percentage point higher than a year ago. In terms of the quick rundown on the balance sheet, which we will also include in the Q&A which goes out in a few hours, we’ll keep trying to get this to you at the same time, but we want to get it right before we turn it out.

Cash and equivalents, and this is a November 23 balance sheet, cash and equivalents, $2.816 billion, inventories $5.933 billion, other current $1.351 billion for total current assets of exactly $10.100 billion. Net PP&E $10.192 billion, other assets $721 for total assets of $21.013 billion. Short-term debt on the right hand side of the balance sheet, short-term debt $169, accounts payable $5.847 billion, other current $3.522 billion, total current $9.538 billion, long-term debt $2.196 billion, deferred and other $327 for total liabilities of $12.061 billion. Minority interest $85, stockholders’ equity $8.867 billion, again for a total of $21.013 billion. Some of you have asked in the past could we also give you our depreciation and amortization number, for the quarter it was $155 million. Let me point out a couple of things, again our debt to cap ratio came in at 21%, that’s after buying back nearly $5 billion of stock in the last 3.5 years and back in early 2007 adding $2 billion of debt to our balance sheet; plenty of financial strength.

Accounts payable, if you just take what’s on the balance sheet and take accounts payable as a percent of inventories, a year ago at quarter-end it was 93%, this year its 88%, down a little bit. Again it all gets back to a little bit of sales weakness and inventories in local currency dollars up slightly.

If you look at average inventory per warehouse last year at quarter end it was $11.687 million. This of course would be the highest of our quarterly numbers each year anyway because it’s a month before Christmas. This year quarter end it was down $256,000 per warehouse to $11.431 million. But again in fairness there you need to look at the FX impact with the roughly 18% or 20% of our business that’s outside of the United States. Of that $256,000 lower number if you had flat currencies year-over-year that’s $600,000 of the $256,000. So in fairness the increase per warehouse is about $350,000 across the board. There are no issues. About half of it is actually about 40% of that $350,000 is food and sundries. Just increase in food and sundries and as Bob mentioned, Black Friday was a week later so that could be part of it as well.

Seasonal is fine, I want to emphasize that. We took markdowns early in the season on trim the home and trim a tree and things like that and we feel pretty good about coming out of that with no surprises there. So no inventory concerns. Again I think we did a good job of taking markdowns early and reducing commitments on certain seasonal items that we know we don’t want to be stuck with at the end of the season. In terms of CapEx, first quarter of ‘08 we spent $437 million, a little bit more than a year ago first quarter of $378 million. However I would estimate that for all of ‘09, I think in the last quarterly conference call we mentioned, I’m sorry, we spent less this year about $378 million versus $437 million last year.

My guess I think on October 8 we mentioned that for the year we expected ‘09 to spend about $1.6 billion to $1.8 billion. My guess is that with just a few things slowing down, not consciously on our part, just delays in getting a few things done, we’ll probably be in the $1.5, $1.6 billion range. That notwithstanding in talking to Jeff Rotman and Paul Latham who run, Jeff who reports to our Chairman and Paul who reports to him who runs real estate, we are starting as you might expect, to see opportunities out there and we will be opportunistic. But it takes some time and we think there are going to be plenty of opportunities. All you have to do is pick up The Wall Street Journal and read about real estate opportunities. Our dividend, this past May we increased our quarterly dividend from $0.14.5 a share to $0.16 or a $0.64 per share annualized dividend. On an annual basis that represents a cost to the company of about $285 million. At Costco online which is both Costco.com as well as Costco.ca in Canada, it’s been a great business, very profitable. And the year ended as you know was $1.7 billion sales. Comps again for the quarter were in the high single very low double-digits negative. Skewed in October and November, it’s actually come back a little bit but not, but still a negative number.

Again we too are being opportunistic there. If you go to Costco.com right now you too can get two flat screen televisions for less than $1500 total price. I also want to mention, again September was good. It was off in October and November and is consistent with what we see in general in big ticket and non-food items. In terms of expansion, I mentioned in the quarter we opened eight, closed one, and so net is seven. And then that closure will come back to us in Q3 when we open Las Vegas as a business center, the old Las Vegas unit.

We have no openings in Q2, six planned for Q3 and seven for Q4. Actually again eight plus one re-lo for a total of 22 new, two re-los, for a net of 20 plus two in Mexico which we don’t consolidate so we would expect to currently have 22 units which so far so good, we’re actually pretty much inline with what we said at the beginning of the year, something in the 20 to 25 range. In terms of square footage, some of you have called back and asked for square footage. At quarter end our total square feet of retail operations were 72,994,390 square feet. So all told, for ‘09 if we add the 20 nets units net of Mexico, that would be 4% unit growth and about just under 5% square footage growth.

Two final topics, Mexico, not a whole lot to say there, as many of you know, we and the third largest supermarket chain in Mexico, Commercial Mexicana, each own 50% of the stock of a company called Costco Mexico which operates 31 Costco’s down in Mexico. We actually manage the operation out of our San Diego office but have very good management down there as well. We have gotten questions about what’s going to happen with the challenges that the other partner have. We like you will have to wait and see and Costco Mexico is currently operating profitably. We have a good partner down there and we’ll have to see what tomorrow brings. Last thing, just yesterday or the day before we announced that we were adding a Board member and now have 14, a gentleman named Jeff Raikes, who is currently the CEO of the Bill and Melinda Gates Foundation. I think he has been CEO there for about three months. Prior to that Jeff was for a little over 25 years, a key member of management at Microsoft and we welcome him to our company’s Board.

Finally before I turn it back over to Rachel for Q&A, I’m going to give what again I called earlier conservative, vague guidance. First call is at $0.75. Clearly that’s in our view going to be on the high side. Again we haven’t seen sales improve and again the trend during the quarter was lower not higher. We still have the FX headwinds. That hasn’t changed. The one bright spot of course after Christmas, is that you traditionally have higher food penetration in January, February versus non-food, big-ticket discretionary items. So given that the strength is on that side, hopefully that helps you a little bit but we’re not betting a lot on that. And we’re going to continue to price aggressively to drive business. We’ve got a lot of good things going on merchandising wise. We’re not going to go crazy here but we are looking ahead to what the business looks like after we get out of this economy.

For the year, it was October 8 when we had our conference call at which time first calls estimate for the year was at $3.25. Happy to report that all you guys did a good job bringing it down to $3.00 as of today. Again I’m going to have to punt on that one. What we have seen is it’s very hard to predict nine months out much less next month and again there are a lot of good things going on here merchandising wise. Operationally we’re in good control in terms of our physical inventory, or shrink numbers. We think there’s some more real estate opportunities coming down the road over the next several months but that being said, trying to predict what’s going to happen eight, nine months from now is very hard right now. So in talking to Jim about that we wanted to defer.

Again if you think about it, if just currency rates stay where they are now relative to where they were last year, that alone is a $0.10 to $0.15 hit for the year which we of course identified in Q1. A little under half of that was in our number to begin with but quite a bit of it’s not. And again those are the types of difficult predictions that, we’re going to try to just run our business right now.

With that, I’m going to turn it over to Rachel to answer any questions. Rachel?

Question-and-Answer Session

Operator

(Operator Instructions) At this time gentlemen if you’d like to ask a question simply press * followed by the number 1 on your telephone keypad, that’s * followed by the number 1. Your first question comes from the line of Deborah Weinswig with Citi.

Deborah Weinswig – Citigroup

Good morning and thanks a lot for the color on the quarter, a lot of questions these days on food disinflation and how we should expect that to impact your business in 2009?

Richard Galanti

My guess is its going to go the other way. Inflation was a short-lived word at least right now. I’ll give you just a little color, random examples. As an example if I looked at our various LIFO pools, what we call food and sundries, in Q1 it was still up about 0.5% in pricing. In sundries it was up about 0.5%. In electronics and computers and what have you, it was down 2.5%. Gas which also includes sporting goods, office, automotive, was down all because of gas. And tobacco, beer and wine were essentially flat. But I just again look at some examples, in something as basic as ham and bacon and butter, are all down about $0.50 on $9 and $10 price points so down 4% or 5%. These are recent price decreases, Cheerios down $0.50 on a $5.50 item, canned tomatoes down $0.80 on a $7.50 item, $0.40 down on juice, orange juice.

A year ago New York steaks were $7.99. They’re now $5.99. That’s all because of a lower demand. But we’re doing a heck of a job with that stuff. And on the non-food side, again just looking down a whole list here and just picking out a few, Kirkland Signature Diapers and Kirkland Signature Baby Formula are both down a couple of bucks on $20 and $40 price points so 5% to 10%. So we are seeing some of this come down. Gas of course is way down. You feel like you forgot to fill up your tank when it only says $38. Again who knows what tomorrow brings. When you read the paper there’s nothing in the world going on that’s going to change this very dramatically so my off-the-cuff guess, and its truly a guess, is we’ll probably have a LIFO credit for the year whereas just three months ago, we in our own budgets were adding $0.03 or $0.04 to the number for the year of a hit. So my guess is there’s going to be very little if any and probably a little again, headwind if you will on pricing.

Deborah Weinswig – Citigroup

Okay and then just being an optimist an increase in terms of the instant manufacturer rebates which I believe are vendor supported markdowns. Can you talk about the trend year-over-year in terms of what you’re seeing there?

Richard Galanti

Well there’s a lot of what we call IRCs, instant rebates, and what it is, is the manufacturers who have a lot of inventory pushing it out and we of course are well known for taking large quantities, large massive quantities of big-ticket items. I think the television example is a great one but whether it’s a high end vacuum cleaner, or high end luggage or apparel, we’re getting some great brand names out there in big quantities and that stuff is selling by the way. Its not selling like it was but its still, we can push through that with great confidence and so I don’t see that changing other than the fact that I’m sure some of these manufacturers haven’t continued to build as if things were getting better next week. So maybe there’s a little less availability next year, but certainly going into Christmas and certainly the pressure on the buyers here as you would expect, among other pressures like going back and saying, the price should be coming down now, is to find those items that we can either divert or buy indirectly direct or buy direct.

Deborah Weinswig – Citigroup

Okay and then last question, on the SG&A front, I was actually pretty impressed with your performance in the quarter especially in the past where you’ve had kind of mid-single-digit comps and haven’t been able to lever out for a very strong performance, can you talk about anything different in terms of your business model now versus let’s say three to four years ago where we could expect continued SG&A performance as such on a weak comp.

Richard Galanti

I’ve always said there are not a lot of silver bullets out there. There are little things. Over the last several years I think we certainly improved in healthcare other than the spike last month. But we’ve certainly improved in healthcare with the changes that we implemented back in late ‘03 early ‘04, that had a four-year tail to it because of how those changes to the healthcare plan changed and that helped us. I think we’ve done a great job on Workers’ Comp. We brought in a couple of great people about three years ago that are getting people back to work safely and more quickly and getting them off Workers’ Comp. I think we have, aside from the great changes in legislation in California that was killing us five, six years ago, we are seeing still a little improvement at Workers’ Comp and I think again that’s being proactive on that side. We continue to, believe it or not and I only hear from you guys or my in-laws or anybody and my own friends when they’re backed up in a line and there’s 10 lines closed at the front end but I’ve got to tell you that we continue to improve the speed at the front end. That helps you a little bit.

There are some other things that help margin and SG&A that are little things. I think the example I gave recently was you’re seeing a lot of square packaging. What used to be a round bottle, a round tub of detergent is now square. Its now triple concentrated and milk you’ve no doubt seen the new Costco milk carton which again you can get more on a pallet and therefore less freight per item. A lot of that goes into, those are all little things and we don’t quantify them but all that goes into, I know at our Annual Manager’s Meeting in August we had an example and on the slide it was 12 or 15 bulk high volume items like paper towels and toilet paper and facial tissue and water and just in terms of changes of packaging much of which is being done by the manufacturers but with help from us and other major retailers I’m sure, just in those 12 items in the United States we were going to save on like volume reduce our pallet through-put by over 200,000 pallets.

Now that’s a lot of trucks that you don’t have to spend money on. A lot of that goes into, needless to say the freight goes into, reduced cost of sales but it also means that forklift operators aren’t schlepping 200,000 pallets through the warehouse. So all those things, a million here and a million there, it doesn’t add up to a lot of basis points but at least helps a little bit. We are not, as you would expect, changing our wage rates. We are not, as you would expect, going to charge our employees a lot more for healthcare. Those are the types of things we have in place and what we pride ourselves in. But we aren’t giving up. We’re looking for where we can save money. But it certainly is tough when you’ve got comps being weakened.

Deborah Weinswig – Citigroup

So should we assume then that you need a lower comp to leverage going forward than you have historically?

Richard Galanti

Well I don’t know and I say that because even here, it sounds so easy when I finally give it to you today on the call.

Deborah Weinswig – Citigroup

It sounds easy when you tell it like that.

Richard Galanti

I’ve got to tell you just in terms of understanding it, you think about it, in Q4 a year ago, five quarters ago, gas sales which is a sub 1% SG&A business was 8% of our sales, in Q4 this year it was 12%. In Q1 it was a little over 9% and it still rounded to 9%. So its still going, directionally it still impacts, it hurts a little bit, but not nearly as much as it did a quarter ago. So there’s a lot of screwy things going on that make it hard but when I look at just basic payroll in the warehouses, I think we’ve done a pretty good job with the lower comps not getting as deleveraged as we could have in my view a couple of years ago. But again I think it’s a lot of these little things and I’d like to say yes with a slightly lower comp than we thought a few years ago we can still get a little leverage but it’s hard to predict.

Deborah Weinswig – Citigroup

Okay great. Thanks so much for the color and best of luck.

Richard Galanti

Thank you.

Operator

Your next question comes from the line of Dan Binder with Jefferies.

Dan Binder - Jefferies & Company

Here I had a few questions. First, just following on Deb’s question, if we were just interested in core comp, I guess recently you’ve talked about four to five, sort of that magic level of where you can achieve expense leverage. If we look at something more like a three, what would you say is a reasonable range of expense deleverage in terms of basis points for every comp point under four? Is that something you think you can address if you’re just looking at core comps?

Richard Galanti

It’s very hard to address. A different way to look at it and this is truly back of the envelope. If you think about it what is one percentage point of comp up or down versus what you think you can do. On $71 billion in sales last year, one percentage point is $710 million. When we’ve done our own regression analysis if you will, what is that on the margin? Its been a long time by the way since we’ve done a regression analysis but the fact of the matter is best guess and it’s a guess, is that incremental dollar of sales be it lost or gained, is about 4.5% of pre-tax profit. I don’t know if it’s four or five but let’s say its five just to make the math easy, on $700 million that’s $35 million. At right around $7 million a penny that’s $0.05 a share. So I’m not sure when comps go up or down how many basis points margin changes and SG&A changes, those are the two critical ones, but I have more confidence in guesstimating how the bottom line changes and then you decide where you want to put the basis points. Hopefully you’re not a shareholder.

Dan Binder - Jefferies & Company

Yeah it’s helpful. Can you talk a bit about what you’re doing on the pricing front in the Club? I know you did some things in November on some of the higher profile items, I guess just one. Why did you feel the need to do it? How much are you doing? How deep are the cuts? What areas of the Club? Any color you can give us on that front it will be helpful.

Richard Galanti

Basically as one of the analysts I think put in a comment a few months back it’s in our DNA that our first order of business is to drive sales. A company with a 5% minus comp versus a 5% plus comp operates completely differently. You’re spending your time worrying, employees are spending their time worrying about being cut hours and laid off and we want to do everything possible to drive sales. In a given month, in the last month of the quarter I think we came, the head of merchandising came to Jim as Jim had asked for, I want markdowns on key items be it produce or high profile items, like I don’t even know if these are the items we did but it could be soda pop it could be Tylenol, it could be butter, it could be Tide detergent, who knows. But at the end of the day it was a couple of cents a share. And we’re still doing a little of it this quarter. So, but its not $0.05 and $0.10 but it’s not zero.

Dan Binder - Jefferies & Company

Are you pleased with the results that you’re getting on the items where you’ve been able to cut prices, in terms of unit increases?

Richard Galanti

If you ask Jim absolutely if you ask me, I’m not sure. It’s hard to quantify what it would have been with and without. I can tell you anecdotally when the operators, and I’ve talked to several of the operators, when they are going around, as an example, we took our famous rotisserie chicken back to $4.99 in many markets. We saw a big pick-up in unit sales of chickens when we did that. And that by the way, even for a naysayer which I can be sometimes myself, was wow, that really worked. There’s a little bit of awe-struck retail merchandising in us, this is what we do for a living. We’re going drive business. By the way we’re also going back to vendors. Its not like, we’ll start by doing it and then going back to vendors so but there’s a little bit of headwind there. And that’s what we do for a living.

Dan Binder - Jefferies & Company

On the healthcare side, I heard recently from a company that they were seeing this spike as a result of spouses becoming unemployed and getting on with the other spouses healthcare. Is that something that you’re seeing and then what may be causing it and does that mean that it could continue? And then the final question is with regards to the full year guidance, I understand your reluctance to put a range but if we were to assume just to get somewhat of a handle on it, if we were just to assume that the dollar does stay where it is, that comps stay, core comps stay at about 3% and that some of the trends that are in place on pricing were to stay where they are, are we talking about something closer to like 280, 290 or just under 3, any additional color there?

Richard Galanti

I haven’t fallen off of my chair but I want to stay away from giving exact numbers.

Dan Binder - Jefferies & Company

Okay.

Richard Galanti

On your first question as it relates to healthcare, two comments. One we seem to have a lot of married people here that are married to each other, but a much bigger reason and a real reason I don’t see that, we have not seen that and I just talked to our benefits people yesterday when I was gathering information for this call. We tend to be the, when you think about it, first of all we have 90% of our employees are hourly and many of them who are married, we have on average, our average employee who is in the plan, there’s a little over two people covered by that person from that person, so there’s an extra one and a quarter people, be it spouses or children. A lot of them are already in our plan because we’re the plan of choice. If their spouse is working in a comparable job for another company, and again some of them are working here, so that’s wonderful from that standpoint, but if they’re working for another company in a comparable job, eight or nine times out of 10, they’re coming to our plan because it’s a much more favorable plan. So we won’t be hitting ourselves with it forever.

Dan Binder - Jefferies & Company

Okay thanks.

Operator

Your next question comes from the line of Charles Grom with JP Morgan

Charles Grom – JP Morgan

Thanks good morning, Richard, I just had a small question maybe asked a little bit differently. I guess if $0.75 for the second quarter is too high, let’s just say $0.70 just to make the math work, and that would suggest about 20 basis points of operating margin erosion and EPS down about 5%, just wondering if in your models internally does that feel right and if that seems like a good yardstick for the second half of the year.

Richard Galanti

Charles, as much as I’d, and you know I love to talk, I’ve got all my keepers here in the room as well, and we’re just trying to stay away from it. Its not unlike in July when we for the first time ever we announced we were going to miss Q4 if you recall and we said we were going to be way below and we’re not saying that here, I’m just saying that back then when we said that that was the first time we didn’t quantify something. And we’re trying to wean ourselves of this quantification particularly in this time when it’s so hard to predict.

Charles Grom – JP Morgan

Okay. I understand. That’s fair. Yesterday in Kroger talked about some changes they’re seeing in their perishable business with a little bit more shift to frozen product away from fresh, I was just wondering if you guys are seeing that in your mix at all.

Richard Galanti

Both are strong and looking just in our fresh, our comps in fresh have remained where they have been so I don’t, I haven’t been aware of a shift there. The only shift I’ve seen is there’s been some shift from meat to poultry and things like that, but that’s not just in the last month, that’s been, and we’ve seen anecdotally I mean in our food court we’ve seen a huge jump in take-home cooked pizzas. And that’s again, people I think instead of eating out are coming to supermarkets and to Costco to have dinner and for $9.99 you get this oversized, over capacity wonderful pizza that you bring home.

Charles Grom – JP Morgan

Okay and then just one last one, any sort of color post Black Friday sales trends, similar to November or maybe a little bit of a down tick because of the increase in discretionary that naturally happens in the month of December?

Richard Galanti

Again I think the comment I made earlier in the call was simply that there has been a downward slight trend from September to October to November. There’s been no change. There’s been no up tick since then.

Charles Grom – JP Morgan

Okay, fair enough, good luck. Thanks.

Operator

Your next question comes from the line of Adrianne Shapira with Goldman Sachs

Adrianne Shapira - Goldman Sachs

Thanks Richard. Richard, just talking about credit for traffic has remained strong despite the fact that gas has pulled back, kind of walk us through your thoughts there. Is that a function of the lower food prices as now what are the traffic drivers as opposed to lower gas prices?

Richard Galanti

Again, I’m shooting from the hip here. I think we’re the value proposition. I think that the fact that people aren’t eating out, again clearly you don’t see the press every night on TV talking about $4.00 gas prices. Now that its, I filled up my tank it was $1.00 and Washington has high gas prices because we have no state income tax, there’s a lot of tax on the gas. It was $1.89 for high test yesterday and it was $1.99 a week ago. Nobody on the news is talking about that anymore so its old news. I think that food in general and the fact that we’ve got great cheap stuff, good quality cheap stuff, is helping. I think people’s habits have changed. Some of them, good habit changes, and some of them, like I don’t really need that sofa is not good but at the end of the day, food is, clearly if you look at other forms of discount where companies that have embraced more food than not food are being helped in the, are holding up better.

Adrianne Shapira - Goldman Sachs

Okay, so the fact that traffic is holding up and gas perhaps is not as much of a driver, that’s not surprising. I mean you wouldn’t expect…

Richard Galanti

I would have guessed, if you had said six months ago, hey Richard if gas prices halved, do you think your frequency would still be at around three. I would absolutely have said no. It doesn’t make sense because you’re not getting that press every day out there saying where is the cheapest place to buy gas. Its gratifying, and I remember even two years ago when gas prices were rising, and says, well people come to Costco because (a) it’s a further trip and (b) they said, gosh I can’t get in there without spending a lot of money. Well they seem to have figured out how to do both.

Adrianne Shapira - Goldman Sachs

And I guess my follow up question is, in light of the fact that gas doesn’t present that type of driver you are now using food to maintain traffic levels, is that the strategic decision or is it more a competitive response and that’s the thought process in terms of taking prices down, others are being more aggressive out there.

Richard Galanti

I think it’s just us. I don’t think we, strategic is too flattering. It just, that’s what we do. But keep in mind on gas, I mean our comp gallons are still positive mid singles. So maybe it was positive high singles or low doubles at the peak of $4.00 a gallon or something but it’s still holding up pretty well.

Adrianne Shapira - Goldman Sachs

Okay and then are you seeing and competitive response, if it is just you taking prices down, what are you seeing from Sam’s and BJs as you are taking prices down.

Richard Galanti

Well Sam’s particularly is very fierce and we are down the road from each other. As I’ve mentioned in the past it’s, you take a big market basket of highly competitive commodity items and branded items and there’s, we both are in each other’s places every day. So yes, but we want to be first and we’re going to keep being aggressive.

Adrianne Shapira - Goldman Sachs

And then the vendor conversations that you’re having, should we expect whatever you get back to be reinvested in price or should we see some fall to the bottom line?

Richard Galanti

All of that will be reinvested in price and again, but on the stuff that’s just us doing it, just pick out a few things to try to drive business.

Adrianne Shapira - Goldman Sachs

Okay and then just the last question on the buyback, we’re seeing obviously Wal-Mart has suspended their plans to buyback stock. Talk to us….

Richard Galanti

What was your last comment? We were talking about what I’m sorry. Last comment on the pricing, we are doing other things. I still feel pretty comfortable generally about our margins, notwithstanding a few things because sales have fallen here a little bit and we want to get it in the right direction. We’re still focusing on private label expansion which helps margins. We still are looking at certain initiatives that we’ve talked about in the past where we can make a little margin and so this is not all one way street, but at the end of the day if it costs us a penny or two and a quarter to try to drive a little extra business, that’s what we want to do. We owe it to our customers, and we owe it to our employees. And we owe it to our long-term business.

Adrianne Shapira - Goldman Sachs

Okay so the margin that you talked about that’s down two basis points, in the past you had said that we should see a positive sign in front of it obviously that’s switched, so going forward it should be…

Richard Galanti

My guess is its, my long-term statement is still that it’s positive, okay? Whether it’s positive last month or next month, we’ll see but again we’re not going to be down here forever with the economy as well. Now getting back to stock purchase, we did see that announcement. In terms of ourselves we currently, when we stopped buying I think in mid-September we held off, again it gets back to liquidity. Just keep our gunpowder dry and long-term we are a buyer of our stock, and I’m guessing that we’re not going to rush into it until we talk to probably have our typical informal conversation at our next Board meeting which is the same time of our Annual Meeting in late January. So I don’t expect anything now. If the stock plummeted from here all rules are off, but there’s no rush right now. I would expect something in the future and I don’t mean the long future. A lot of it had to do, like everybody out there in the world we got as much “cash” as we have half of that $3 billion is not, its marketable, its monetizable, but its not, debit and credit card receivables, and monies tied up in our VIVA trust and things like that.

So if the $1.25 billion, $1.50 billion that’s truly cash, we’re now down to $140 billion or so that’s in those enhanced money markets. That will keep coming out. That’s good news. We had that one government fund lock up on us a few months back with $320 million. We got about $140 million out of that two weeks ago and all of the rest of it is, we’ve been notified and the money fund has announced all of it without any impairments and the dollar net asset value, will be forthcoming in the second week in January. So that’ll make me breathe a little easier but when you started seeing things like government money market funds halt redemption, you say, hey, whether we buy stock today or tomorrow, let’s wait a little bit and just see what happens in the craziness in the world.

Adrianne Shapira - Goldman Sachs

Thanks Richard.

Operator

Your next question comes from the line of Robert Drbul with Barclay’s Capital

Robert Drbul – Barclay’s Capital

Hi Richard, just two questions from me. First one is on the opportunity for gross margin and continue to expand it, the private label penetration from a consumer standpoint, are you seeing much around there and then I guess your co-branded efforts within private label, should we continue to expect more products like that coming out or how are you thinking about it at this point.

Richard Galanti

Yes, it’s going up a little bit and yes, you should expect to see more. And again, the brand is there. The quality is there and the margins are there, but I think Jim has said it best all the time, it keeps inching up but we still see ourselves as a provider of well-known brand names at great savings too and as much as we sell the heck out of a gift pack right now of Belgian chocolates, we’re thrilled to have the ability to sell Godiva chocolate, or See’s candy. And the same thing goes as much as we sell the heck out of a Kirkland Signature Jean. We had some jean over there yesterday it was in for $140 which apparently, we had Zegna men’s dress pants for $229 yesterday across the street. Now most people think that’s crazy as do I, but I bought a pair because I know they retail for $400. So, is that okay?

Robert Drbul – Barclay’s Capital

Can you talk about membership fee, just the signup trends or just your ability to sort of rejuvenate membership fee income growth and sort of your plans around that?

Richard Galanti

Well again on local currency basis membership fee dollars were up 9.5%, when total sales in local dollars were up 7%. So, actually a little bit of that is conversion to executive members within this conversion but we are actually thrilled. I mean the question that I’ve been asked and I know Bob here and Jeff Elliott have been asked 10 times a week in the last several months is that BJs and Sam’s are doing lots of marketing and lots of advertising and lots of membership deals, 10 weeks for $10 and all this stuff and we’ve actually curtailed some of our membership marketing from a year ago. It was about six months ago that we were off campus 10 or 15 of the executives, for two days, and the topic was one of the visitors to that meeting who said was the head of membership marketing to outline all the things we’re doing everywhere in the country and let’s now consolidate them