Costco Q2 Earnings Call Transcript

123jump.com Staff
14 Mar, 2009
New York City

The membership warehouse operator quarterly net sales declined 1% to $16.49 billion on comparable store sales fall of 3%. Net quarterly income decreased 27% to $239.7 million. Earnings per share dropped to 55 cents from 74 cents a year-ago quarter.

Costco Wholesale Corporation ((COST))
Q2 2009 Earnings Call Transcript
March 4, 2009 11:00 a.m. ET

Executives

Richard A. Galanti – Executive Vice President, Chief Financial Officer & Director

Analysts

Charles Grom – JPMorgan
Mark Wiltamuth – Morgan Stanley
Adrianne Shapira – Goldman Sachs & Co.
Robert Drbul – Barclays Capital
Daniel Binder – Jefferies & Co.
Daniel Hofkin – William Blair & Company.
Deborah Weinswig – Citigroup
Sandra Barker – Montag & Caldwell
Teresa Donahue – Neuberger Berman
Michael Exstein – Credit Suisse First Boston LLC

Presentation

Operator

Good morning. My name is Chastity and I''ll be your conference operator today. At this time I''d like to welcome everyone to the Costco Wholesale second quarter earnings and sales conference call. All lines have been placed on mute to prevent any background noise. After the speakers'' remarks there will be a question-and-answer session. If you would like to ask a question during this time, simply press “*” then the number “1”on your telephone keypad. If you would like to withdraw your question press the “#” key. Thank you. Mr. Galanti, you may begin your conference.

Richard A. Galanti

Thank you, Chastity and good morning to everyone. This morning''s press release reviews our second quarter fiscal 2009 operating results for the 12 weeks that ended this past February 15th and our four weeks February sales results for the four weeks ended this past Sunday, March 1st.

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

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

To begin with our 12-week second quarter, fiscal 2009 operating results, for the quarter earnings per share came in at $0.55, down 26% from last year''s Q2 EPS of $0.74. This compares to current FirstCall consensus of $0.59, which needless to say has come down over the past several weeks from the low-to-mid 70s to its current level of $0.59 as a result I believe mostly it related to our February 4th announcement that Q2 earnings would be substantially below where FirstCall was at that time.

As outlined in this morning''s release, this year''s second quarter earnings results resolved a several factors virtually all of which negatively impacted our results for the quarter. These included several factors impacting gross margin, which I will go through in a few minutes. A negative swing in our year-over-year gas profits in Q2 by about $0.04 a share, FX headwinds as I mentioned in the first quarter when the U.S. dollar strengthened, our foreign earnings results when converted and reported in U.S. dollars, this hurt us for the second quarter by about $27 million or about $0.04 a share pretax, the 27. That is assuming FX exchange rates were flat year-over-year, our foreign operating results in Q2 would have been higher by this amount.

Additionally, while sales trends during the quarter showed some improvement in January and February as compared to December, the all-important month of December, with larger sales levels and increased penetration of bigger ticket non-foods items was the weakest of the three-four week periods. And these weaker sales results of course were despite the aggressive pricing we did early in the fiscal quarter to drive sales, we believe that that aggressive pricing roughly estimated somewhere in the $0.03 to $0.04 a share range. Also, while our inventories came out of the holidays quite clean, we incurred higher seasonal markdowns year-over-year in Q2 roughly an estimated $0.03 a share.

LIFO was actually $0.01 a share pickup in the quarter about $7 million pretax and I will talk about that later, and lastly on the expense side we actually did fairly well of controlling expenses given the sales weakness. Although, our costs for employee healthcare were up a little this quarter, despite the small offset to that. In terms of sales for the 12-week quarter reported total sales came in at minus 1% and our 12-week reported comp sales figure was reported at a minus 3%. For the quarter, both total sales and comp sales were significantly impacted by both gasoline price deflation and by the strengthening of the U.S. dollar.

On a comp sales basis, the minus 1% comp sales decline that was reported, if you exclude gasoline deflation would have been plus 4% so quite a big swing there because of the price of gas is so much lower. And total company comps again reported at minus 3% for the quarter. If you exclude both the gas deflation at our gas stations and exclude the FX changes that we''ve seen of recent so on a local currency basis if you will that minus 3% reported would have been a plus five for the company overall. And in terms of sales for the four week in month of February, it''s similar to the quarter in terms of the impact of these factors, excluding gasoline deflation, the 0% reported U.S. comp would be plus four, and excluding gas and the impact of the FX changes, February''s total company reported comp of minus 3% would have been plus five.

Other topics of interest this morning - our opening activities and plans. After opening eight new locations in the first quarter, seven net of one closing in Las Vegas we opened a new Las Vegas location and then spent a few months converting that one into a new Costco business center, which we just opened in the first few weeks of Q3 here. So, net of seven locations in the first quarter of this fiscal year, since Q2 end on February 15th, we opened nothing in Q2, but since Q2 end on February 15th we have opened three new locations, new Costco warehouses in Lakewood, California and in Honolulu, Hawaii. And as I mentioned our new business center in Las Vegas that being our seventh Costco business center.

We now operate 553 locations around the world and that includes the 31 in Mexico, the only ones, which we don’t consolidate all of that results into our numbers. Also this morning, I will review with you our outlining results, membership trends, additional discussion about margins in Q2 and trends, our balance sheet of course and with that I will go down the income statement here.

In terms of our quarterly results, as I mentioned sales for the quarter, 12 weeks ended February 15 were $16.5 billion, down just under minus 1% from last year''s Q2 of $16.6 billion. On a reported comp basis Q2 comps as I mentioned were down 3%. The minus 3% reported comp figure for the quarter was comprised of a minus 4% in December, a minus 2% in January and a minus 3% in February. The minus 3% comp was of course negatively impacted as I mentioned due to strengthening of U.S. dollar, which was about a little over 4 percentage points of impact on the company.

Our international comps as you saw in the press release, in local currency we are actually up 8% about once converted into U.S. dollars given the dollar strength in the past several months we reported a minus 11%, so a big swing there. And gasoline deflation as I again mentioned had a big impact, such that the minus 1% comp would have been a plus 4. In terms of the minus 3% comp for the quarter, we always break that down into the, of course the comp is the product of average transaction size and average frequency. The average transaction decreased as compared to get to that minus 3% comp for the quarter and included an average transaction decrease of minus 7% for the quarter, and it bounced around 6 to 8 in each of the three months, a 7% in December, a minus 6% in January and a minus 8% in February, pretty much a 7 average and the average frequency increase of almost plus 5% for the quarter. I might add that the frequency trend during the quarter past three months continue to improve. As many of you know for the years that you followed us our historical frequency trends tended to be generally in the 0% to 2% range, a pretty small range there. Over the summer, we saw it improved somewhat I think in part because of a lot of press we got on gasoline prices, as car prices were spiking and the value proposition of course. During the past three months we saw in December, January and February frequency being in the mid-3s in December, around 4% in January, and a little over 5% in February. So, our members are buying a little less each visit, they''re coming in more frequently and as I think you will see in a moment continue to be quite loyal in terms of renewal.

Including the average transaction decrease of minus 7%, again it gets convoluted because of the weak FX and the gasoline deflation, the FX being again a little over 4 percentage points negative to that minus 7% and gas deflation being about minus 3%. So, as you can see the average transaction ex those two things was pretty darn close to zero. In terms of cannibalization not a big impact in Q2 or in Q1 as we''ve opened as you know in the low 20s in terms of number of units in the last couple of years.

For the February reporting month, much like the quarterly comps, our minus 3% reporting comps were a combination of an average transaction decrease of minus 8%, which includes of course the FX impact of a little over 4% and the gasoline deflation impact of around 3%. I might add that in terms of gas year-over-year the average sales price per gallon in each of the second quarters was down 41% year-over-year and again, as I mentioned we had a great frequency in February of plus a little over 5%. In terms of sales by geography, not a lot has changed. California, which we have seen, going back several months ago in the beginning of this economic downturn, during the summer we saw a little bit of an increased spread in terms of as things were softening it was softening a little more there, as isn’t that gap of California relative to rest of the U.S for us had come back a little bit closer to normal. And even in California, again if you look in terms of traffic or frequency comps in California, in Q1 California was a shade under zero, about 0.5% minus and in Q2 around 3% positive. So, again we are seeing the frequency is not the issue. We are getting people in, they''re just buying a lot more food and sundries and pure bigger ticket items of course.

Internationally, again showing pretty good results in the quarter, while international expressed in U.S dollars was in the minus teens both for the quarter and the month of February, in local currencies they were in the high single and low double digits for the quarter and in the mid-to-high single digits in the month of February itself. So, again internationally despite the economic turmoil in plenty of places around the world we are seeing some very good results in local currency there.

In terms of the categories, our merchandise categories for the quarter, it’s still the story of the haves and the have-nots, food and sundries and health and beauty aids and fresh foods continue to be positive and again, generally non-foods, hard lines, and soft lines overall are in the have-not category, although there is a few shining lights within that. Within food and sundries for the quarter tobacco continues to be a little bit negative. That may reverse itself with an upcoming increase in price simply related to our upcoming federal floor tax on tobacco; I believe $6.50 a carton in April. Other than tobacco though all the other subcategories were up year-over-year with the dry groceries and canned goods being the strongest in the low double digits and others strengthened in the mid-to-high singles in frozen and refrigerated goods.

We see the increasing shift, I might add within some of our private label. As you know for those who have followed us we have seen private-label sales penetration company wide go from below 10% several years ago to the high teens over the last couple of years and continue to increase 0.5% to 1% a year it seems.

On the foods and sundries side of our business, we''ve seen in the last six months about a 300 basis point spike in penetration and talking to Tim Rose, our Head of Foods & Sundries, a lot of that has to do, his feeling is a lot of that has to do in fact that, in this economy despite many items that have great brand loyalty and a great quality, KS items, Kirkland Signature items have continue to show increased penetration on that side Within the 2% hardlines, minus 2% hardlines comp, not a whole lot very thrilling, actually not a bad number overall, strongest subcategories - tires and automotive, we also include health and beauty aids in our hardlines so that''s I view that more is the food and sundries and the like in terms of we talk about the haves and have-nots.

Again we continue to see some usual things within majors, which was just below flat for the quarter and month, TV unit sales just in February were up over 50%, dollars up just barely over 0%, in other words big price point changes downward in those products. We had played opportunistic in that area as you know, over the last several months and provided great value to our members. You know other areas, as we lean into new spring season that we see weakness and we expect to continue to see weakness or things like garden, barbecues and patios, and the like again, bigger ticket, non-food items.

Within softlines comps, again negative not a whole lot thrilling, generally everything is in the high singles negative to low 20s negative, the one standout is small electric surprisingly, which is a category within there that was slightly positive for the quarter and quite positive in the month. Just anecdotally looking at the items, things like coffee makers and food savers and toaster, ovens were up 30% to 60% in many cases. In some cases related to some of the mailers that we are doing with the coupons. Fresh foods, like foods and sundries is positive in the mid-singles, bakery being a little bit of more of a standout on the positive side than the other categories, but nonetheless all of them positive.

Moving down the income statement line, in Q2, in terms of dollars, membership fees were up 4% or 10 basis points was a $30 million increase to $355 million or 2.16% of sales. That 10 basis point increase is again a little deceiving in the sense that, while it is up as a percent of sales, again, the gas deflation alone if you just took assumed flat gas prices year-over-year I think a more correct way to look at that would be a little bit up 3 basis points. So, again a good showing given the economy and we are certainly gratified by the ongoing improvement in these numbers. In the terms of membership we continue to benefit from strong renewal rates and continue the increasing penetration of the $100 a year executive membership.

And, due to no new openings this year in the quarter, compared to seven new opening in last year''s second quarter, while our new membership sign ups in Q2 were down a bit about 7% year-over-year, much of that negative variance relates to last year''s Q2 opening of seven new locations, Japan again compared to none this year. In terms of number of members at Q2 end. We stood at 20.7 million in Gold Star at the end of the quarter, compared to 20.5 million at the end of the first quarter and 20.2 million at the beginning of the fiscal year. Primary business at 5.7 from 5.6 grounded at Q1 and year-end.

Business add-on continues at 3.4, recognizing what you see is partly is add-ons, who want to become executive members, in many cases they are being converted into their own primary membership. But all told, total member household is 29.8 million at Q2 end, up from 29.6 at Q1 end and 29.2 at year-end. At the February 15th Q2 end, our paid executive members continues to grow, a little over $8.2 million, an increase of about 175,000 since Q1, enter about 15,000 a week. That level of increase was a little lower than recent quarters, but again I think that''s pretty good given no new openings coming in Q2 this year.

We also have seen a little bit of a pick up when we sign up new members in terms of how many are signing up immediately as an executive member, if we talk to our marketing department, they would suggest that a lot of that has do with better marketing initiatives in place. We got a little better of doing that. In terms of membership renewal rates they continue strong essentially at our all-time high. At the end of Q2, at the end of Q1 ''09 I had mentioned that the business renewal rate was 91.9. At the end of Q2 that was 92.2 so I shade a little bit of an improvement there, certainly on the Gold Star side 85.7 at the end of Q1, 86.1 at the end of Q2. So, we are still I believe in 87, but a very close to 87.5 and we are certainly gratified in this economy that we see this level of member loyalty renewal.

Our gross margin came down on a reported basis, 31 basis points from a 10.73 last year to a 10.42. Again we will jot down a few numbers here and then I can walk you through them. The line items would be core merchandising. Second line item ancillary businesses; third line item, two-percent reward; fourth line item, LIFO, and the fifth line item would be the other and then the total of course. In terms of trends just looking at the last three quarters, Q4 ''08, Q1 ''09 and Q2 ''09, on the core, minus 19 basis points in Q4 ''08 year-over-year, minus 13 in Q1, as compared to its prior first quarter a year earlier, and in Q1 minus 7. Ancillary, minus 6 plus 46 and minus 19 basis points. Two-percent reward, minus 2, minus 2 and minus 9. LIFO, minus 14, plus 1 and plus 4. Other, minus 4, 0 and 0, which would give you a total in Q4 ''08 we reported gross margins year-over-year were down 45 basis points in Q1, up 32 and in Q2 minus 31.

As you can see our overall margin again was down 31 basis points, but the 7 basis, but we will start with the core merchandise, the minus 7 basis points in year-over-year core merchandise results appears a little better to reality, because it results in large part from lower sales penetration this quarter of the lowest margin gasoline business. Our gas business whereas represented 8% of sales in Q2 ''08 last year, this year represented 5% of Q2 ''09 sales and again with the price per gallon down 41% that’s certainly evident. So, that’s the sales penetration of our core merchandise business was up year-over-year. So, our gross margins of this core business, which is foods and sundries, hardlines, softlines and fresh foods were reported in this matrix to be down 7 basis points, it was actually on like sales, those departments’ margins over divided by those department sales it was actually down 57 basis points.

Our largest merchandise department, foods and sundries was down year-over-year by nearly 70%, in large part due to some of the aggressive pricing that we mentioned in the press release, both the February 4th and today’s press release about aggressive pricing on select commodity items. One last comment on sales and margin results - deflation of basic products we are seeing, we have seen it, we saw it in a little bit in Q1 and certainly into Q2. We are seeing that in our sales, despite the fact that sales have been reported pretty well we are seeing that deflation and margin dollars are being impacted by that as well. So, that''s part of the issue in Q2. Examples of recent price declines across the board on commodity items, in the milk and eggs in the minus 10% to 15% range, items like trash bags in the minus 25% to 35% range, nuts minus 5% range. So, again a lot of commodity prices coming down and we would expect to continue to see that for a little bit.

In terms of the outlook going forward overall, again we will have to see each quarter, keep in mind we will work foremost to drive top line sales, which may sometimes require some sacrifice of gross margin. I think we saw some of that in late November in Q1 and in early December in Q2 as I described a little bit to some of you, is kind of the perfect storm driving, consistent on driving sales as well as taking advantage of the underlying price declines that we knew would come in some of the products as commodities prices were falling in. Really getting up here in front of that to be ever more competitive and we would hope that some of the increased frequency is a product of that.

The impacts from the increasing executive membership that was a little unusual in Q2. In the last several quarters it has been impacted on margin of minus 2 or 3 basis points, which would imply an increase in sales penetration, two executive members of 1 or 2 percentage points given they get a two-percent reward. With the minus 9 implies that''s a little over a 4% sales penetration.

Then we believe this is a good thing that reflects increase sales penetration to our most loyal members. Our LIFO as you recall it was small credit or income in Q1 of $2.2 million pretax and about $7 million credit to Q2. This reflects again the same deflation returns that will continue into Q3 and possibly on we will have to see. We should point out that moderate LIFO benefit recorded into Qs 1 and Q2 exclude the effect of gas deflation that has occurred since the beginning of the year, because we are just are not confident that gas prices will stay this low and certainly don’t know when it will turn. If gas prices continue to be as low as compared to prior year we might realize some additional positive LIFO adjustments in the upcoming two quarters. One offset we are aware of, as I mentioned is $6.5 of carton floor tax on tobacco, the cartons of tobacco in the U.S., that of course will increase the cost of tobacco and in many ways that may be very much an offset in the LIFO of credits we get on gas. Again it is LIFO non-cash, but nonetheless something will impact the reported EPS.

Moving down to SG&A. Our SG&A percentage Q2-over-Q2 was higher by 39 basis points coming in the 10.11, compared to a 9.72 as a percent of sales last year in the quarter. Again quickly to jot down a few numbers, the line items or operations, second line item is central, third equity, which is stock options and RSUs, fourth is quarterly adjustments, and fifth would be total.

Again looking at three columns, Q4 ''08, Q1 ''09 and Q2 ''09. Going across operations was plus 21 in Q4 ''08 meaning lower by 21 basis points, plus is good. Q1 ''09 minus 16 and Q2 ''09 minus 34. Central, plus 3, minus 3 and minus 4. Equity related charges, minus 3, 0 and minus 1. Quarterly adjustments, minus 6, minus 12 and 0. For a total of a plus 15 in Q4 ''08 year-over-year and minus 31 in Q1 ''09 and a minus 39 in Q2 ''09. A little editorial on these numbers, again it shows operations was higher SG&A by 34 basis points, but again this is mostly related to sales levels and just like gross margin percentage, where it helped us correspondingly impacts negatively reported SG&A. In the minus 34 about 21 basis points of that 34 basis points relates to the sales deflation, the gasoline deflation.

Our central expense was higher year-over-year in Q2 by 4 basis points as you can see in this chart, again the same story as it relates to sales. I will tell you that while we haven''t had any layoffs at central or our regional offices, which totaled about 8,000 people of our 140,000 we have instituted a hiring freeze about two months ago and that remains in effect for the time being. We do at the warehouses of course after every seasonal Christmas, have seasonal, what we call seasonal lay offs, in some cases we dug a little deeper there but I believe and the most extreme example is, people were laid off were part-timers that had tenure of less than six months of the company and will be the first to be hired back should they want to be hired back and usually that takes a few months. So, overall we are very pleased with the fact that our sales have remained on in the positive direction in these last few months and we were able to withstand the fate of the companies out there as it relates to hiring and layoffs.

Stock compensation expense, not a big deal there, again I think the actual expenses come down a shade because of a lower stock price, but up a little bit as a percentage of sales, simply because of the lower sales results. Benefits - overall in Q2 our benefits percentage was higher by 9 basis points. Again, dollars increased about 4% on healthcare but just below flat sales. Again, the more we can get sales driving and it will flavor up with roughly the same type of healthcare costs that will be good. Overall, not a bad SG&A performance given the sales levels and given the gasoline deflation.

Next on the income statement - pre-opening expense, last year 9.7 million or 6 basis points, this year 7.3 million or 4 basis points, so, 2.4 million lower and 2 basis points better. Of course last year we had seven openings this year none, but again it’s the timing of openings we incur, a pre-opening expense in some cases several months before the actual opening and in addition we had some opening just half of the quarter as well. No real surprises in those numbers.

In terms of the provision for impaired assets and closing costs, in Q2 ’08 last year we actually had income line of $2.9 million, basically about a $0.5 million of impaired expense and closing cost expense more than offset by a $3.4 million pretax gain on a property sale. So, all sort of operating income of Q2 ’09 was down 21% year-over-year from $504 million last year to $399 million this year or a decrease of a $105 million. Below the operating income line reported interest expense was slightly higher year-over-year, Q2 coming in the $25 million, up about $1.5 million from $23.5 million in last year''s Q2. These amounts mainly reflect the interest expense on our $2 billion debt offering we did in February of ‘07. The reason that the net interest expense is actually down or improved by 2 million has mostly to do with the offset interest expense, which is part of this line item known as capitalized interest that was actually lower year-over-year by $1.6 million. Now interest income and other was lower year-over-year by $33 million at the quarter coming at a $7.8 million this year, compared to $40.6 million last year in Q2. Just under two-thirds of the lower income figure was lower interest income, due to significantly lower interest rates being realized on our investments and a little bit of that lower, most of it is just year-over-year market changes and interest rates, a little bit of it is changes in the compensation of our cash related investments to safer government backed type securities, like government money market funds.

Another big chunk of this delta was at the reporting of our half of Mexico’s earnings on the equity methods on this line. When given that the peso has gone from roughly 10 pesos to the dollar several months ago to about 15 pesos to the dollar today. So, again when we report U.S. dollars on this line that has an impact there as well. Overall pretax earnings were down 27% from $521.5 million last year to $381.9 million this year.

Our tax rates were pretty much the same year-over-year, 37.2% this year and 37.1% last year. So, no real change year-over-year. A quick run down of the balance sheet, $3.282 billion of cash and equivalents, inventories of $4.995 billion, other current of $1.414 billion, total current of $9.691 billion, net fixed assets of $10.354 billion, other assets of $692 and total assets of $20.737 billion.

On the right side, the short-term debt of 173, accounts payable exactly at $5 billion, other current, $3.825 billion. Total current liabilities $8.998 billion, long-term debt of $2.198 billion, deferred and other of $332. For total liabilities of $11.528 billion, minority interest of $88, stockholders’ equity $9.121 billion for a total of $20.737 billion. So you ask each time for depreciation and amortization, which of course will appear ultimately on our cash flow statements, when we issue the 10-Q, but for the quarter, depreciation and amortization was $160.9 million and year-to-date $315.7 million.

In terms of our balance sheet, strong balance sheet debt-to-capital of 21%. In terms of accounts payable ratio as you - if you just take the numbers, the accounts payable divided by inventories, or inventories divided by accounts payable. I am sorry accounts payable divided by inventories. This year was at a 100% down or versus slightly from a 102% a year ago that includes quite a bit of construction payables for our new openings. So, if you take and look at just merchandise payables a year ago was 84%, this year 83%.

In terms of average inventories per warehouse last year in Q2 it was $10.450 million this year it was $9.625 million. So, an 8% reduction or $825,000. Now, again FX is part of that, about $475,000, over half of that $825,000 reduction is the strong U.S dollar. So, when we convert foreign inventories into U.S. dollar inventories, foreign currency inventories into U.S. dollar inventories we see that show lower there, so but even taking that out we had about a $350,000 year-over-year decrease, it’s spread among many departments, the largest chunk is in majors some of that we believe is simply again price deflation on many of those items so cost deflation as well.

Lower inventory concerns, we feel we did a good job of taking the markdowns early and reducing commitments on certain seasonal items, we continue to see that as we get into the post-Christmas season, the spring season here and things like patio, furniture, barbecue grills, we have like many retailers out there who are conservative and have the ability to cancel a little bit on the way, along the way. So, hopefully we will be able to manage our markdowns there, we will have to see. In terms of CapEx, in Q2 we spent $339 million last year in the quarter, in Q2 this year we spent $289 million. Based on where we think we come out for the year of 21 new units including one in Mexico, we will be probably right around the $1.5 billion range, a shade lower than our original plans for the year, but nonetheless pretty substantial amount.

Now I get a lot of questions about real estate, what’s going on with prices and availability – availability is going up and prices are coming down, but I need to say that they will come down as quick as you want them to. We are talking with property owners and developers, who previously would not even talk to us, in some cases, short-term where deals haven''t been started yet, to the extent that the developer has gotten in some financial trouble or, and the banks have taken over a couple of the projects we had ongoing, it may even delay it a few months where things are sorting out, but I think long-term this economic downturn and what it’s doing to the commercial real estate market is probably net positive for us over the next three to five years in terms of giving us more availability of better sites at perhaps than hopefully a little better price.

In terms of Costco Online, both www.costco.com and www.costco.ca in Canada, very profitable business, last year did $1.7 billion. It too, as you would expect has been impacted this year by the economy and certainly given the nature of our focus many of our items are big ticket discretionary items like electronics, like home furnishings, like jewelry and the like. In Q1 sales were up slightly, but recall September for us was pretty strong, in October, November when our sales started to come down a little bit. In Q2 sales were down slightly in the mid-single-digits again I believe a reflection of a penetration of these bigger ticket discretionary items. We''ve seen our average ticket on costco.com go from the low $400 range to the high $300 range.

Our e-commerce as I mentioned the business is very profitable and the sales have been below plan as you might expect. That being said it''s a good business for us and we will continue to capitalize and grow it going forward.

In terms of expansion, as I mentioned in Q1 we opened eight new locations and closed one that was really the closing up of the our original Las Vegas location, which we had since in early Q3 here reopened as a Costco business center, but so net of seven openings in Q1, no openings in Q2. We planned five new openings in Q3 and eight new openings in Q4, which would give us 21 openings less the one relo. So, 20 net openings, in addition one in Mexico so 21 for our company. If you look at the 21 on our starting base of 543 at the beginning of the year, it''s about 4% unit growth and perhaps a little over 4, 4.5% square footage growth.

At Q2 end our total square footage for those of you who keep those stats 73.7 million square feet. Lastly, in terms of stock repurchases, as you know that we began repurchases of stock back in June of ''05. We purchased through this past September not just under 89 million shares for about $4.8 billion; we still have repurchase authorization under our Board authorized programs of about $2 billion. We currently are not in the market and we have not been as I mentioned since last early fall. We are prepared to be in the market as conditions warrant and we will let you know when we are.

As mentioned on a February 4th press release and conference call given the volatility and uncertainty we aren''t providing guidance for the quarter and the year, but hopefully I will give you some insight into how we’ve done in the quarter and what we look forward to – what we see going forward. Lastly, I will mention that we have supplemental information including balance sheet and quarterly LIFO charges and opening schedules in our Q&A that we put on our Investor Relations site later this morning.

With that let me turn it back for questions and answers to Chastity and I will be happy to answer your questions.

Question-and-Answer Session

Operator

Thank you. Once again to ask a question, please press “*” then the number “1” on your telephone keypad. Your first question comes from the line of Charles Grom with JPMorgan.

Charles Grom – JPMorgan

Hi Richard. Good morning everybody. When you look at the second quarter the 57 basis points of core margin erosion I know you''re not going to give us a back half EPS, but for terms of modeling purposes do you think that''s a good proxy or do you think it could be a little bit better? And then also on the, I think you walked through all the components except the 19 basis points of ancillary margin compression in the quarter, could you just kind of flush that out for us?

Richard A. Galanti

I would hope that the minus 57 would better recognizing it includes seasonal markdowns which were higher than planned, but for a good reason to do, it included that ""aggressive pricing"", which as I don''t know if I mentioned on this call but when we did that and as you recall we did a little bit at the end of the end of Q1 as well in November, what we did is comps were starting to weaken, we felt very strongly we wanted to drive sales in the right directions. We saw commodity prices starting to come down and knew there was a matter of weeks not months where many of the underlying procurement costs would come down and we did what we are good at. We tried to drive sales and ate some of that margin. So, given that you never know what''s going to happen tomorrow in terms of sales, I think as I mentioned, we are prepared to sacrifice margin, if comps are moving on the wrong direction, at least for the last couple of months they have been moving in the right direction. So, based on that I would hope that it’s a little better than that. Again we will have to wait and see each quarter. In terms of the ancillary business margin down 19%, that is basically gas.

Charles Grom – JPMorgan

Okay.

Richard A. Galanti

That could be up or down. Our underlying margins in the various ancillary business is photo, one-hour photo is probably the weakest as people, even though we are getting a lot of business and lot of specialty printing with the books and all the things you can do online and then some pick up at Costco for the most part, people are storing more things on their computer and not printing out lots of copies until they want to print out what they want. So, that''s a business that''s a challenge in the industry.

The pharmacy is despite its challenges with $4 prescriptions and Medicare, Medicaid, Medicare Part D and everything else going on out there, we seem to be doing pretty well in the pharmacy. Food court is strong, we cycled it, it was a year ago, I think we were anecdotally talking about holding prices despite huge increases in things like cheese. I think one of the national pizza chains actually had a cheese surcharge, price surcharge for a period of time back then. But that has reversed itself now with a procurement cost and within the food court we see strength in take home items like a food court pizza, which is quite strong right now. Again I think the fact that people are eating out less and eating more at home.

Charles Grom – JPMorgan

Okay. And then just moving on the P&L historically I think you''ve said roughly a four to five hurdle rate with your traffic up north of 5% and food becoming a bigger piece of a mix, is it costing more for you guys to generate each sales dollar or in another words less dollars flowing to the bottom line for every sales dollar you generate?

Richard A. Galanti

I think you have, a couple of things going on right now that does, I mean I look at even our healthcare costs, which again in real dollars were up 4% notwithstanding no layoffs to the extent that we''ve cut hours back of a few people, we are still paying for all their - 100% of the healthcare even if they are working 70% or 80% or 90% of the hours they used to work. So, that has an impact there short-term, hopefully short-term. Also some of the deflationary nature I mean, anecdotally we sold 60%, almost 60% more television units for a 2% increase in price. Our margins, our percentage is fine, but we are seeing, more labor involved in getting those dollar sales. And then you look at some of the deflationary pressures on, I looked at one that again it''s something, it’s more extreme example, but something like garbage bags, which in the last couple of months the price point has come down over 30%, units are up 5% or 10%, which is good but dollars are, which means dollars are down less than 30%, but we are not making all that margin back. So, again as you would certainly know, we are also figuring out how to drive bigger sizes of items and we continue to do that to help offset that.

Charles Grom – JPMorgan

Okay.

Richard A. Galanti

But those are the things that I think make it a little less predictive of saying if I give you comp, underlying comp, if you give me underlying comp I can give you what the SG&A is going to go up or down. We feel pretty good about controlling our expenses recognizing that we''re getting a little benefit also from some of the packaging changes, which in part is green, the greening of manufacturing, but some of the square boxes I''ve talked about, set of round containers, better, more tight packaging on paper products with new technologies by the manufacturers, all those things, lower freight, lower handling expense. So, on a very small basis it''s helping your margin and your SG&A or offsetting some of the other things that are hurting them.

Charles Grom – JPMorgan

Okay. Thanks for flushing that out.

Operator

Thank you. Your next question comes from the line of Mark Wiltamuth with Morgan Stanley.

Mark Wiltamuth – Morgan Stanley

Hi, good morning. I appreciate the comments on the garbage bag etc., but if you look at the products where you proactively went lower on margin, how is the price elasticity on some of those categories?

Richard A. Galanti

Honestly, we don''t look at it and then determine it; we won''t do it again because we always had a 5% bump in units when we thought we might even have gotten the 10. What we try to do and I look at it more as when we, as we run our business, when we saw the underlying U.S. comp go from a five in September to a two at least out with our gas, five in September to a two in October to a one in November, we''re saying, hey, we''re going to, and knowing that there were several commodity items that were going to come down in price in the weeks to come, let''s be proactive and take them down fast, if it cost us $10 million or $20 million or $30 million we''re going to do it. That''s us guys, and so we''re less concerned, but we know it, we believe it helps, we see our frequency up when our brethren out there are not seeing these types of numbers and we are going to do that from time-to-time as we see fit. I think Jim has talked about in the past though we are a for-profit company and we are trying to go in that direction. We feel we will be better served, and our shareholders will be better served as we come out of this economy maybe a couple of years from now, maybe a year from now because of the things we are doing right now.

Mark Wiltamuth – Morgan Stanley

And if you look at how you affected the discounts, was it done with couponing or was it done with in-store signage, how do you show that to the consumer?

Richard A. Galanti

Mostly just lower the price and we are not beginning to putting out bright yellow signs saying new lower price, we don’t do that. But you know on the common commodity items that we are talking about - milk, cheese, butter, chicken, our customer gets it, and the couponing like the MV, the multi-vendor mailers that we do generally those are negotiated with manufacturers where a lot of those costs other than perhaps some private label items, which are both perhaps manufacturers and us, those are types of things that we negotiate the vendor pays for a lot of that. But just the lowering prices is where we do it, they get it, sales are, I mean I hate to use the chicken example again, but on an item that were selling almost a million a week of, that chicken, a million units a week, we went down from 599 back to 499 about 8 or 10 weeks in advance of the underlying cost to us coming down. Our margins in chicken from three months ago they went down by half and they''ve nearly doubled going into the next month back to a healthy margin. So, again I am sure somebody could show us that if we had not lowered it we might have actually made this buck a little extra dollars, but when you see the type of frequency and member loyalty we have, and the underlying sales growth we think that''s the right thing to do.

Mark Wiltamuth – Morgan Stanley

Okay. Thank you.

Operator

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

Adrianne Shapira – Goldman Sachs & Co.

Thank you, Richard. Just following up on the margin, you shared your outlook in terms of deflation and procurement costs, and it sounds like much like we saw this past quarter we should expect ongoing investment in price, is that fair?

Richard A. Galanti

Well, I think I hate to use the word reduce there is a little bit of a perfect storm, if you look back in November. Again, we are looking at comps growing from five to three to two to one. We are looking at commodity cost starting to really come down a lot knowing that it''s a matter of weeks not many months before the cost is actually going to come down. And that''s a little different than now where, yes, there is continued price deflation and we will take that, but we don’t necessarily have to always take it eight weeks in advance. And particularly when we see comps moving in the right direction here. So, I think that''s a little bit different, I think that''s a little bit different painted picture there.

Adrianne Shapira – Goldman Sachs & Co.

Okay. So, you''ve got ahead of it, I guess last quarter and now perhaps.

Richard A. Galanti

Ahead of it, maybe there is still little of it, but not as much back in late November and December. Keep in mind we are not the only ones out there pressuring manufacturers. So, on the one hand you read in the paper that some very large, very great consumer products companies are talking about increased price is sticking; you think that there is more than just Costco out there, which is saying, oh yeah. And we are out there everyday and Jim and Greg here are putting the pressure on the buyers to go out and get it. We have a unique position in the sense also that we don’t have to carry three brands, and we can choose between brands that are going to be more aggressive to help us, help our member. So, it doesn’t happen overnight. We respect the fact that for years there was probably some pent-up demand for some price increases as the retailers could push back hard during those periods of small inflation, but there is some big inflation here that had come last year and every time when it was explained to us, it''s because resin prices went up this and electricity costs went up that, and feed prices and grain prices went up x, y, and z. We know what those prices are now, and we''re going back for it. So, I think you''re seeing in both and again the manufacturers will have to choose what they want to do also, but we think that there is some opportunity for the manufacturers to help our numbers as well here.

Adrianne Shapira – Goldman Sachs & Co.

Okay. And then shifting to private label, big spike up in that penetration, that 300 basis point spike, help us understand there the margin opportunity, are you seeing, have you been as aggressive on private label, one would assume given that penetration is, how helpful has that been in terms of offsetting margin, does that represent as healthy of a margin as we once saw?

Richard A. Galanti

I think it''s, certainly the private label margins tend to be better, but this is not the extreme example of replacing some branded sales where it was a commodity football item out there that was always selling at 5% to 8% and we''ve replaced it with a 75% price point, the 20% to 25% lower price at twice the margins percent. So, more margin dollars per unit. Some of it is more that I think while it would see to help margins as it plays out over the next year. What we''ve seen in just the last few months really for the first time is why is it more than just a gradual increase in penetration, it''s that, our feeling is that somebody looking at a $20 price point on a branded sundry item and saying, hey, I can save $6 or $7 or I can save $4 or $5 on a $15, $3 or $4 on a $15, the brand loyalty changes a little bit, I think part of it is also the quality once they try it, they like it, but there are items out there right now where the brand hasn’t come down, so that $3 and $4 on a $20 item might be six or seven. These are finite examples, but I don’t think it''s just the low hanging fruit any more. So yes, there is a net margin, there is a net margin percentage pick up, there is a pick up in dollars, but not huge, but that’s okay.

Adrianne Shapira – Goldman Sachs & Co.

Okay. I guess my question is the differential in terms of the margin of private label versus national brand, so that narrowed?

Richard A. Galanti

Well, I think it’s only narrowed in the sense that the original low hanging fruit was taking the ultimate hugely brand loyal items that everybody discounts out there, diapers, paper towels you name it that it''s 8% to 10% margins or even five in some cases where we can replace it with those 12% to 15% margin.

Adrianne Shapira – Goldman Sachs & Co.

Okay. And then just my last question, it seems that if the sharper prices are striking a chord you are seeing incredible traffic, but the fact is the model is less equipped to handle smaller ticket and greater frequencies, it would seem to pressure the cost structure and understand you are looking to add members in the eventual upturn, but could you be doing something perhaps to mitigate the pressures on the cost line as traffic continues to move higher and tickets come down?

Richard A. Galanti

Well, we still, if you will say, each buyer has 20 priorities that are number one. One of them is on food and sundries items in increase pack sizes, we are constantly doing that, we are constantly going from a six-pack of canned goods to an eight pack where we can. I think we''ve found our limits in many water and soda items, the darn thing is, we''ve gotten up to 30 counts of water and power drinks and what have you, and we''ve had increased the plastic. So, it doesn’t break when you pick it up and we don’t want to hurt your back either. So, but on lot of, I saw examples at just the last budget meeting, where we were looking for bigger sizes of our own KS tuna, the number of cans and size of can. So, we are, that’s how you combat a little bit of it, but I would say that’s number one on the list. We, are driving our business right now and again whether this economy in its current state last three, six, or nine months or two to three years, it’s probably somewhere in the middle. We will incur part of those costs while it happens right now. There is not a lot of magic bullets. I think some of the greeny stuff that I mentioned; we are seeing freight improvements in not only freight rates, but pallet throughput on because we get more items on the pallet.

Adrianne Shapira – Goldman Sachs & Co.

Thank you.

Operator

Thank you. Your next question comes from the line of Bob Drbul with Barclays Capital.

Robert Drbul – Barclays Capital

Hi. Good morning, Richard. Questions I have, first on the increased penetration of the executive membership spending, did this reflect accelerated growth in spending by executive members or a slowdown in spending by non-executive member?

Richard A. Galanti

I think a little of both, I mean the fact is that they tend to be a more affluent and certainly more loyal group. I think part of it is the fact that as I mentioned that we are more successful today converting people to executive member than we were a year ago. By the way, gas is part of that too. Even though gas as a percent of sales is down a little, gas doesn’t, it’s not just proportionate to the executive or to the business member.

Robert Drbul – Barclays Capital

And just some questions on the gas business overall, so gas profits were down but prices really didn''t move much. Has your thinking changed around the profitability with your approach to the gas business?

Richard A. Galanti

Not at all. We get more. Gas is going to probably be volatile as long as we are out. And every time it goes up it becomes the topic de''jour at night on television, and we''ve seen that enhanced our value and frequency, and despite again, the requirement for a thicker stomach lining in terms of reporting gas profits on any rolling 12 months period that''s been profitable. And there wasn’t, as I joke to you, it was embarrassingly high profitable in Q1 and slightly not profitable in Q2 and that''s the nature of that beast, but we, if we get out of a gas station in every location we would. We were constrained of course because of the size of the parking lots and traffic mitigation issues, and the like, but we are constantly in every existing location that doesn’t have one, where we can we want to put one.

Robert Drbul – Barclays Capital

On the gas can you talk a little about gallons trending and when you look at the overall traffic number for the business where do you think all the share gains are coming from within retail?

Richard A. Galanti

For us.

Robert Drbul – Barclays Capital

Yes.

Richard A. Galanti

Well, I assume gallons are coming from again, I think this is my own feeling not something else as we''ve had, but I think for the same reason you are seeing people willing now to save $3 and $4 on a $20 item, which despite brand loyalty versus KS. The same reason there is a few more people probably going out of their way to save a few bucks at the gas pump. And it’s reinforced every time that somebody on the news talks about gas. Now, I want get back to the larger sizes too. That stuff is always a better value and again everything right now is reinforced out there, that average family that''s eating one or two fewer times in a restaurant every week, the fact that our pizza sales, our home pizza sales were up in the food court dramatically, the fact that penetration on $15 to $20 price points are up, people are willing to save $3 and $4. All that stuff is in my view the common reaction to what''s going on out there. And so, I think we will continue to drive towards what we call sensible upgrades of sizes, some customers sometimes argue that we''ve exceeded that sensibility, but we keep trying.

Robert Drbul – Barclays Capital

One last question for you Richard is, when you look over the next several months with discussions with the buyers, do you think the deflationary trends will be greater than what you''ve experienced over the last three months or four months?

Richard A. Galanti

I am sorry, say it again.

Robert Drbul – Barclays Capital

Over the next roughly six months with discussions that you have with a lot of the suppliers and vendors do you think deflationary pressures will be greater than they were over the last three or four months?

Richard A. Galanti

I hope so. I mean we are out there, that is probably defocused right now of our buyers on those items, we want to, prices of the underlying raw material cost and electricity cost to make it and we want it to give it to our member, and we want to be first.
Robert Drbul – Barclays Capital

Thank you very much.

Operator

Thank you. Your next question comes from the line of Dave Binder with Jefferies.

Daniel Binder – Jefferies & Co.

They got the Binder part right, they got the first thing wrong, but that’s all right. It''s Dan Binder. A couple of questions for you, first on the, if we just go back to the 57 basis points of gross margin erosion, it sounds like the inventory is in pretty good control. So, the markdown is presumably well, continue as I think you pointed out, but if we were to look at sort of the piece that was attributable to more aggressive pricing I think you know, on your pre-announcement call you had said that rough and tough I think you said you were sort of back 75% backup to the way of, back to normal on the items where you did get cut prices and I''m just curious how do the margins look today on those items that you cut prices on versus what they look like prior?

Richard A. Galanti

Well, they are going to be less negative or hopefully going towards better. In the 75% or in the items that we did, we are still, there will still be a little more in the future, there is nothing driving that goal right now. Again, if you look back when that trend line over again, September through November was south in terms of underlying comp, there was a, if you will have Call to Action to do a little more of that. I think I would hope you will see it a little better, and but we will find out in late May or early June when we announce Q3.

Daniel Binder – Jefferies & Co.

The improvement in the renewal rates was pretty significant. I think you have probably like 15% more members renewing during that November to January period than any other time during the year. How much do you think the lower prices may have helped to boost those renewal rates above, we typically see?

Richard A. Galanti

Well, Jim will hear all of it.

Daniel Binder – Jefferies & Co.

Okay.

Richard A. Galanti

No, I think it''s all of the above, as a fact that we have always seen the executive member be more loyal, I mean to use the 87 number exact, so in the low 90s. So, that 25% or 28% of our membership base by definition is the one that they see the value and you say they are willing to pay twice as much. And so, by us being more successful of converting new members or signing up new members as executive member to start with, by our success and thinking out how to keep talking to the same ones that have said no in the past without upsetting them, that were asking again, but we''ve done I think a better job with that. So, that helps us well, I''m hoping that some of the press out there, not the Wall Street press, but the news press recognize that what we are doing in some of the price reductions unlike a lot of people, retailers out there, we''re helping the consumer out there too, we''re doing it so we can drive business, but we are being aggressive on that and that''s hopefully that drives sales when our members know that we not only treat our employees right, but we''re bringing down prices.

Daniel Binder – Jefferies & Co.

All right. I''m not sure if you mentioned it earlier, but was your, if we adjust for the currency impact was your membership dollars up closer to 8% that was kind of where we are coming up with, just want to double-check?

Richard A. Galanti

Well, they were up, but yes, I mean if it had been flat currencies it would have been higher by about 4 percentage points.

Daniel Binder – Jefferies & Co.

Right. Okay. So, close to 8. And then on the, in terms of the new store productivity on the stores you opened in Q1 how are you feeling about those thus far in terms of what you''re saying?

Richard A. Galanti

They are fine. I might add that the two that we, the two new warehouses that we opened in the last few weeks arguably in very successful markets for us, Los Angeles and Honolulu, we are not only pleased with the sales levels, but with the, in our view the net new business we are getting now they''re only a couple of weeks old, two weeks old, but we are getting off to a good start to those.

Daniel Binder – Jefferies & Co.

And then lastly, I know you''re not providing guidance, but the Street said like $0.60 around Q3, based on everything we’ve heard today it sounds like that’s probably too higher and I don''t know if you can give us any color in terms of your thoughts about that?

Richard A. Galanti

My Securities Counsel is across the table from me and he is pulling a quiver out of his pocket, no, we are not doing that.

Daniel Binder – Jefferies & Co.

Okay. Thanks.

Operator

Thank you. Your next question comes from the line of Daniel Hofkin with William Blair.

Daniel Hofkin – William Blair & Company

Good morning, Richard. Question I guess if we were to kind of look at your operating income trend and look at the growth and membership fee income. If you were to strip out just the membership fee income, you would have sort of operating profits down. Something in the order of 70% year-to-year, obviously that’s allocating no expenses whatsoever to membership fees. I''m just wondering what''s the right way to look at that, how much of your overhead do you think are to be allocated against the membership fee income if we wanted to look at that those two sort of the merchandising.

Richard A. Galanti

You know, I would do very little. I mean actually there is an ongoing expense of running the membership return desk and mailing out 29 million or whatever lower number, because some of them were on a renewal, but the fact of the matter at the end of the day, we have always looked at our membership fee as part of our total gross profit margin. And if we are at roughly, if membership fees in the second quarter were 2.16 and gross margin was at 10.42, that’s a 12.6 in good times approaching a 13, that 13 is roughly in an 11 and a 2 or that 12.5 is roughly a 10.5 and a 2. And no matter how we get it that''s our model. So, I know, it''s not to be able to strip it out needless to say we would be getting them unless we did what we did in the warehouse.

Daniel Hofkin – William Blair & Company

Very good, fair point, and that''s sort of that''s the basis of the question, not wanting to overweight or underweight the allocation there just in terms of how you look at it internally, and I guess another question would be I think you indicated in the pre-release call that gallonage was even stronger in January, gas gallonage on a comp basis, has that continued into February?

Richard A. Galanti

We will see gallonage has been positive and there is no indication that it''s going to switch. One of the thing I think what you are alluding to is the fact that on the way up in prices, when gas was hitting 3.5 plus dollars, the gallon not only was the price for gallons up, but the gallon itself was up better than normal and the fear of course was, we will know that nobody cares anymore about the price of gas as much as they did when it was approaching $4 are people going to then come less frequently because they don''t need – they don''t see it on the news every night. Two, to our pleasant surprise that did not occur, but I think probably it gets back to the point I made on some of the switch in private label. People are going further to save 2 and 3 bucks and so again, everybody is on the value train here.

Daniel Hofkin – William Blair & Company

Okay. And then I guess final question on the – at the very beginning when you quantified sort of the sources of the profit difference, was that all compared to last year''s second quarter or was that compared to what you might have expected a few months ago?

Richard A. Galanti

Well, again, if you look at what FirstCall for Q2 was as we began our fiscal year I think it was about the same as last year, plus or minus a $0.01 or $0.02. So, it''s really kind of both relative to what expectations were first of all and arguably we were perhaps providing a little more guidance six, eight months ago. So, that roughly that $0.74 number last year, previous year it was pretty north close to what the expectation was in Q2 this year at the beginning of the year, of course it has come down, and so in that regard, either way you look at it''s the same. When you look at it, if you took last year''s number versus this year''s number, that $0.19 change at times about $7 million is a $130 million pretax. Again, if you look at gas and the FX, each of those was in the mid-20s. So, that''s about 50 of the 130. So, everything else is the other 80, a shade of it might be expenses, but the vast majority is all of the things we talked about that impacted margins.

Daniel Hofkin – William Blair & Company

Okay. Thank you.

Operator

Thank you. Your next question comes from the line of Deborah Weinswig with Citi.

Deborah Weinswig – Citigroup

Good morning, Richard. With regards to some of your prepared comments on aggressive pricing I think you said there was a $0.03 to $0.04 hit, was a majority of that from the reductions in pricing on seasonal merchandise?

Richard A. Galanti

No. That was all really consumables, chicken, milk, cheese, butter, garbage bags, things like that. Now, it’s entirely good stuff that I mean in terms of sales, we wanted to be aggressive and the customer knows those prices and if we can show it, they will see it.

Deborah Weinswig – Citigroup

And we think about kind of moving forward through the rest of ‘09, how should we, I mean it sounds like the level, it sounds like you''re not being as aggressive, but how should we think about kind of relative to what we saw in the quarter?

Richard A. Galanti

I think we are going to be as aggressive in terms of our mindset. Again, I think given that we were, November was like the third or four month in a row of downward trending underlying comps, prices started to fall underlying commodity prices and so we knew again it was a matter of weeks not months. And we are not perfect, but we are not being aggressive just to end the torpedoes here, we are going to still try to grow our bottom line as well. And, but there may be weeks or months when we want to be more as aggressive and so I think the general view out there should be that it will be not as aggressive, but we are going to still be aggressive relative to our competitors and we are going to do as necessary. So, I think we all have our fingers crossed to you guys that we will need to be that aggressive and we are trying to do - we have a tough job we are trying to lower prices and raise