COST | Q4 2009

Operator: Good morning. At this time, I would like to welcome everyone to the conference call discussing the fourth quarter and year-end results and September sales results. (Operator Instructions) I would now like to turn the call over to Richard Galanti, Chief Financial Officer.

Richard A. Galanti: Good morning to everyone. This morning we reported our 16-week fourth quarter and 52-week fiscal year-end operating results for fiscal 2009. Both ended August 30, 2009. As well, we reported our 5-week September sales results for the five weeks that ended this past Sunday, October 4, 2009. As with every conference call, I will start by stating that the discussions we are having will include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and that these statements involve risks and uncertainties that may cause actual events, results, and/or performance to differ materially from those indicated by such statements. The risks and uncertainties include, but are not limited to, those outlined in today’s call, as well as other risks identified from time to time in the company’s public statements and reports filed with the SEC. To begin with, our fourth quarter operating results, for the quarter we reported EPS at $0.85 a share, down 6% from last year's reported Q4 EPS of $0.90. The $0.85 a share figure for this year's Q4 also compares to first quarter EPS estimate of $0.77 per share that was out there this morning. As outlined in this morning's release, both fiscal fourth quarters included the impact of certain items that complicate a little bit the quarter-over-quarter comparison. Last year's fourth quarter included two items of note, a $32.3 million pre-tax, or $0.05 a share LIFO charge, and a $15.9 million pre-tax, or $0.02 per share, charge related to a litigation settlement. Together, these two items impacted last year's $0.90 reported Q4 results by $0.07, so excluding these, last year's results would have been $0.97 a share. Conversely, this year's fourth quarter results included a $16.6 million pre-tax, or $0.02 per share, LIFO benefit. So when you compare our Q4-over-Q4 earnings results, these three items, two of them negatively impacting last year's fourth quarter results, and one helping this year's fourth quarter results, represented a $0.09 per share year-over-year swing. Now, several other factors also impacted the comparison of this year's Q4 results versus those of last fiscal year, and generally went the other way, i.e. they represented a negative year-over-year impact. I will talk about some of these later but these include FX headwinds, our foreign country earnings results when converted and reported in U.S. dollars has hurt us all fiscal year, since last fall when the U.S. dollar greatly strengthened against many of the currencies with which we operate. In the fourth quarter we were hurt by a little over $21.0 million pre-tax, or $0.04 a share after tax. That is assuming FX exchange rates were flat year-over-year, our foreign country operating results in Q4, when reported in U.S. dollars, would have been higher by that amount. By the way, for the entire fiscal year, the impact of FX, assuming FX rates had remained constant, was to reduce our total company reported sales by $2.42 billion and reduce pre-tax earnings by almost $95.0 million, or $0.14 a share after tax. This calculation simply takes the currency exchange rates for the prior fiscal year and assumed that they remained at those levels throughout the fiscal year 2009. The next item, higher employee benefits costs, mainly consisting of higher U.S. health care expense. That was about $0.04 per share negative impact in the fourth quarter, and when we say $0.04 per share, that's what we estimated was above and beyond normal increases in those charges. I will talk further about this later in our discussion. As you can see in our income statement, our income tax rate, while lower than it had been over the last several years, was in fact higher year-over-year in Q4 and that had to do with the fact that in both quarters there were some discrete items that went our way, if you will, and therefore lowered the tax rate, but the tax rate this year was 35.5% in the fourth quarter, up from 34.5% last year. Not a bit item but again, this represented a little over a $0.01 per share impact on this year's fourth quarter results. Two final items impacting our Q4 P&L, recall that gas profits in Q4 2008, and very much so in Q1, during this time when gas prices were plummeting, profits were great. This year's Q4 gas profits were good, but nearly $0.04 a share lower than the year-earlier Q4. And lastly, in terms of the year-over-year things that we believe stood out, with interest rates earned on investable cash balances down substantially from a year ago, interest income this year in Q4 was $15.0 million pre-tax, or $0.02 a share lower than a year ago. So you've got a $0.09 swing one way, as described in our press release, and you have about $0.15 swing the other way. All in all, our results came in, I think, much better than many of you out there expected. Earnings for the 2009 fiscal year came in at a reported $1.086 billion, or $2.47 a share, compared to $1.283 billion, or $2.89 a share, in last year's fiscal 2008. In terms of sales for the fourth quarter, we reported on September 3 our 16-week reported comparable sales figures and they showed a 5% decrease—a minus 6% in the U.S. and a minus 3% internationally, as expressed in U.S. dollars. Excluding gas deflation and the impact of FX from the U.S. dollar strengthening year-over-year, the minus 6% U.S. comp would be a minus 1%, the minus 3% reported international comp would be a plus 7%, and the minus 5% total company comp for the fourth quarter would be a plus 1%. Now, we also reported this morning our September sales results for the five weeks of September, which ended this past Sunday. These were with the U.S. coming in at a reported minus 1%, international a reported plus 6%, and total company therefore, a reported plus 1%. Again, you still have throughout this year, and hopefully it will soon be anniversarying, but the impact of gas deflation and FX. For the 5-week September period the minus 1% reported U.S. comp would be plus 3%, but that's without the roughly 3.5% impact of gas deflation, and given the U.S. dollar's relative strength vis-à-vis other currencies in the past month, our reported plus 6% international comp would have been plus 9%, if expressed in local currencies. Excluding gas and FX our reported 1% plus September comp for the total company would be a plus 4%. A couple of other comments on September sales results. The reported plus 1% comp sales result for September was comprised of a plus 6.5% traffic increase. That's helped a little bit by week one of the five-week period with a shift in Labor Day. If you look back over the last nine weeks, August and September, the combined traffic increased, taking out that impact of how Labor Day fell, was a 5.5% increase in traffic, on average over the nine weeks. Our [inaudible], of course was a 5.5% average ticket decrease, and this is September still. Now, in September the minus 5.5% average transaction decrease included the combined negative impact of gas and FX of about 3.5%. Other topics of interest I will review this morning, our opening activities and plans. We opened a total of 15 net new locations during the past fiscal year, which ended this past August 30, plus one in Mexico. Of the 15, 8 new in the U.S., 2 in Canada, and 1 each in the U.K., Taiwan, Korea, and Japan. And of course, just a few weeks ago we opened our first location in Australia, in Melbourne. We also relocated two units in 2009 to bigger, better located facilities. Now, for fiscal 2010 we plan to open somewhere in the 15 to 18 range of new locations, about three quarters in the U.S. as well as up to two to three relocations. I will talk about expansion a little bit later. Since fiscal year end, we have opened one new location in Phoenix, Arizona, at the Paradise Valley Shopping Center, with five additional openings planned before our November 22 Q1 end, one relo, in Redwood City, California, possibly a second although I think it's been delayed a week so it will be in the first week of Q2. And new locations in each of Colorado, Missouri, and Ohio. And on November 12 we open our first unit in Manhattan at 116th Street and FDR Drive. We now operate 560 locations around the world, and that includes the 32 in Mexico, which we do not consolidate as we are a 50% owner, not more than 50%. Also this morning I will review with you our membership results, additional discussion about margins, and also our balance sheet for the fiscal year ended. Okay, to the discussion of our quarterly results, very briefly, sales for the fourth quarter were $21.9 billion, down 3.3% from last year's $22.6 billion in the fourth quarter, and on a reported comp basis, again, the Q4 comp sales were down 5%, but excluding gas and FX, the minus 5% figure would be plus 1%. For the quarter, our minus 5% reported comp sales were a combination of an average transaction decrease of minus 9.5% and an average frequency increase of plus 4.5%. Included in the average decrease of minus 9.5%, a weak FX represented a little over 2% negative and gasoline deflation a little over 4%. Cannibalization has not been an impact in the last several quarters. It's about a 40 basis point hit to the comp number but that's not that much different as compared to past recent months and quarters. Now that we are at fiscal year end, the average volume of all of our locations, company-wide, for fiscal 2009 averaged $131.0 million. That's about 4.4% lower than the $137.0 million average a year ago. Of course, a chunk of that is gas deflation and FX. The $131.0 million company-wide compares to the U.S. only of $133.0 million. Now, in terms of sales comparisons geographically, a couple of comments. Within the U.S. all but one small region showed improvement from Q4 comp results to the September comp results. The largest positive delta, and when I'm saying positive delta I'm saying what were the comps for this region for all of the fourth quarter versus what were they in September, and of course, September is overall better than the fourth quarter. The largest positive delta was Southern California, followed by the Bay Area, then the Northwest, then the Northeast. In September, just looking at September geographically, all of California came in at a minus 1%, or plus 2% without gas deflation. In terms of merchandise categories, September comp sales, all four core merchandise categories, food and sundries, hard lines, soft lines, and fresh foods, showed positive comps in September. In fact, hard lines and soft lines positive September comps represented the first time since over a year ago that these departments had comp sales figures without a negative sign in front of them. Within Q4, in terms of merchandise categories, within food and sundries, comps were slightly positive. No real standouts, pretty narrow range among sub-departments. Keep in mind that it is in many of categories were they have been experiencing pretty decent levels of consumer products price deflation. Within hard lines we showed positive comps in majors, mid-single digits. Everybody always asks about how TV sales were; they were, in terms of units, up 35%, up, again, mid-single digits in terms of—but by the way, that's not the quarter, that's for September. Hard lines, also in September, HABA in high-single digits, hardware, low-double digits and sporting goods high-double digits. Within positive soft lines comps, again, not a whole lot of standouts for the quarter, however, for September we saw decent numbers with housewares, small appliances, and domestics, the latter two of those being right around 10%. Fresh foods was also up mid-single digits, which is an improvement from the past few months. In the past few months, as well as September, the standout has been unit sales increases in the low-double digits. Deflation is still there, but not as strong a level of deflation as in July and August. While we can't predict where these go in the future, by the end of this month we will have anniversaried both peak gas prices and the strengthening—what happened last year when the dollar strengthened against many of the currencies, so those two things hopefully will help but we'll have to see. We really can't predict that. Moving down to the line items of the income statement, we'll start with membership fees. Reported in the fourth quarter, membership fees were $490.5 million, or 2.24% of sales. That's up a little under 4% and about 15 basis points higher from the $473.0 million, or 2.09% a year ago, so about a $17.0 million reported increase. Of course, these numbers are impacted by FX. Again, with the strengthening dollar, our membership fees, in international currencies when converted to U.S. dollars were lower than they would have been if the FX rates had stayed constant. So that $490.5 million reported, if we had had constant FX in 2009 as compared to 2008, the $490.5 million would be $500.5 million, or 2.29%, so a little under 6% increase, or 20 basis points up. Either way, good showing in our view. Stronger than 2008, still in the mid-87+ range. Continuing increasing penetration of the executive membership and a third factor impacting Q4 membership in terms of results, three very strong Asia openings this past July. Now that's impacting sign-ups, recognizing we account for membership income on a going-forward basis, if you will, and so even if we got them all in August, we had a very little bit of that income in August. It will be stretched out over the next 12 months. Very large new member sign-ups in the three openings in July that we did in Taiwan, Korea, and Japan. And then we also had a great opening, both in sales and membership sign-ups in the city of Melbourne in Australia in August. Our new membership sign-ups in Q4 were down 3% year-over-year in the fiscal quarter. Recall that they were down 7% in Q2 year-over-year and down 5% in Q3 year-over-year. Pretty much the same reason why. We don't feel this is a big issue, we're still feeling the impact of fewer year-over-year openings. In Q4 2008 we opened a net 6 openings, but we actually opened 13 openings, including relos, compared to 6 openings, which include 2 relos this year. So if you recall, back even in Q2, in 2008 in Q2 we opened seven openings compared to zero. So again, you've got a lot of new sign-ups in new buildings with fewer openings this year versus last. Overall, fewer opening are impacting the new sign-ups, and so again, that's we believe the biggest factor for that. In terms of number of members at Q4 end, we ended Q4 2009, the fiscal year, with 21.4 million members, up from 20.9 million at the end of Q3. Primary business remained at 5.7 million, business add-on remained at 3.4 million, so all totaled, 30.6 million compared to 30.0 million at Q3 end. Including spouse cards, we went from 54.9 million at the end of Q3 to just 8,000 shy of 56.0 million at the end of Q4. At fiscal year end, paid executive memberships totaled 8.936 million, an increase of 408,000, or 5%, since Q3 end. That's just under 26,000 a week increase. Now, that's new as well as conversions to the executive membership. I might point out that we did introduce the executive membership program in the U.K. this past fiscal quarter. That would make it the third country that we now have the executive membership. Of the 408,000 executive members that became executive members during Q4, 62,000 came from the introduction of this program in the U.K. So again, taking that out, the 5% increase in that 16-week quarter would have been a 4% increase for the rest of the existing company. In terms of renewal rates, remain a shade under 87.5%, coming in at rounding to 87.3%. 92.2% on the business, which is actually a slight improvement from Q3 end and 86.0%, which is a tenth down from Q3 end, but averaging 87.3% overall. Going down to gross margin line, in the fourth quarter year-over-year gross margin was up 56 basis points at a 10.85 compared to a 10.29 last year. This is where I ask you, one of the two times I ask you on the call to jot down a few numbers to help you understand our numbers. We will have three columns, Q2 2009, Q3 2009, and Q4 2009, and about six line items

Operator: (Operator Instructions) Your first question comes from Deborah Weinswig – Citigroup.

Deborah Weinswig - Citigroup: You obviously went into a lot of details in terms of the U.S. performance. Can you provide some more color on performance outside the U.S.?

Richard A. Galanti: Sure. In the fourth quarter our international, of course without FX, was up 7, and that up 7 was pretty constant May, June, July and August. I mean, ranging from 6 to 8. And in September our comps, which again, international was a plus 9, based on local currency. When I look at the plus 9, in local currency, Canada, which is the biggest piece of international—of course, Canada is about 10% to 12% of our total company, and all international is about 18% or 20%—Canada was in the mid- to high-single digits in local currency. All three Asian countries were in the mid-teens. So that's where you get to that number that I just mentioned. So continue to do quite well over there.

Deborah Weinswig - Citigroup: And executive membership growth obviously continues to be impressive. What percent of your sales do these customers represent and what do you think continues to drive growth there?

Richard A. Galanti: It's around 60. Now, recognizing just under 50% is rewardable because we don't include in the 10% reward gas, tobacco, and alcohol. They, of course, are all low margin businesses and different states have different rules on discounting of alcohol anyway. So those have always been excluded. And in terms of reasons, we asked ourselves the question as we entered the crappy economy a year ago, would people spend more to be able to spend more, and the answer is yes. I think they see it as a savings. We are thrilled about it because they have, within that roughly 87.5% renewal rate, executive members are a little over 90. They spend more, when they first convert they grow at a much higher rate of purchase and once they get to a higher level they are still spending comparable to the non-converted, if you will. And I think part of it, also, is we are doing a better job of converting new sign-ups. If you go back to a year and a half ago, two years ago, for every hundred new sign-ups in a warehouse, whether existing or new markets, in the U.S. and Canada were we had the program, we had, I think, about ten or twelve that started as an executive member. We talked them into that. Today that's in the low- to mid-twenties. And our marketing people here would argue that we're doing a better job explaining it at the warehouse. As you know, we don't have commissioned people doing anything at Costco and it's really a matter of training the employees how to sell it, if you will.

Deborah Weinswig - Citigroup: Can you talk about the competitive environment and deflation on how you approach 20/10 planning?

Richard A. Galanti: I'm sorry, could you repeat that?

Deborah Weinswig - Citigroup: Can you just talk about how the competitive environment and also the impact of deflation, how you are planning the upcoming fiscal year.

Richard A. Galanti: Well, let's do the last one first. I mean, deflation is continuing. We all kind of know, on the consumer product side it started back in kind of April, May. And we had some big items, you know, your paper goods, and a lot of your branded consumer products items, as well, part of that deflation related in fact that more penetration is going into private label, which tends to be 20% and 30% lower price points. So we see that continuing. I guess anniversaries come somewhere between January and May, I guess. When talking to the food and sundries people here, to the extent that there's been some price point, or deflationary, pricing from the manufacturers, it's not like there's another one coming three months later for that same item. So you've gotten some big stuff out of the way. My guess is that maybe it will be a little less impactful but still in that direction over the next couple of months. In terms of competition, we are all still pretty tough. I mean, there's a handful of big boxes and, of course, notably Sam's and Walmart and BJ's to some extent. And we are out there being tougher. And we don't see it getting more competitive, but it's not like anything has lightened up a lot, either.

Operator: Your next question comes from Robbie Holmes – Bank of America Merrill Lynch.

Robbie Holmes – Bank of America Merrill Lynch: Can you quantify the food deflation impact on the quarter of September?

Richard A. Galanti: Yes, let me tell you our methodology because it's not exact. We take the top, I think, 20 items in each subcategory. Let's say within food and sundries there's 8 or 10 subcategories. Within each of those the top 20 items. So that's 160 items to 180 items. As a company, our top 200 items are just under 40% of our total sales, and of course these are the most competitive items. The deflation within those categories—looking at just the top 20 of those subcategories—is just under 2%. Now that's looking at about 60% of our sales base, you know, the food and sundries categories. So probably 3% to 3.5%. That's a guess. So we're more than 2% and less than 3.5%. It's 3% in those departments; for the company it's just under 2%.

Robbie Holmes – Bank of America Merrill Lynch: And just to clarify the pressure from that you see of alleviating already.

Richard A. Galanti: Again, it's anecdotal from the standpoint that in the past few days, talking to our heads of fresh foods and heads of food and sundries, and what are they seeing, their sense is that you've already seen some big categories with big volume—paper goods, dry goods, big chunks of sales—come down in price. I mean, we—about three or four months ago—the 35-pack of half-liter KS, Kirkland Signature, water bottles on the West Coast—our sales price went from $4.39 to $3.59. Well, it didn't take very long for the national brands, or the regional brands, in those respective markets to come down because they were losing dramatic market share. Well, that's done now. We don't see it coming down a lot more anytime soon. So I think it's more of the fact that you've had big chunks of stuff happen, and you'll probably get a little more, but not as much as you saw already.

Robbie Holmes – Bank of America Merrill Lynch: You mentioned bringing seasonal in early as part of the inventory growth, and I think you mentioned better sales trends. Can you qualify what you saw? Was it more category-specific or did you just broadly see things pick up? Was it just traffic picked up and you said we have got to bring more inventory in? Maybe just help us understand what you were feeling in August that made you want to accelerate that.

Richard A. Galanti: A couple of things. As it relates to toys and a limited amount of sporting goods, some of it had to do with a year ago you had the issues with product safety. Remember, with all the lead issues—and I forget some of the issues—but there were a lot of delays because both manufacturers overseas and every major retailer on this side was insisting on greater testing of product coming into the U.S. and so there were—some of it was delayed. And we also felt that our whole business, from the beginning of time, has been in and out of seasons early, whatever the season happens to be, whether it's lawn and garden, we bring in patio sets essentially the day after Christmas or New Year's. Probably a couple of months earlier than most out there. So some of it is normal stuff. Some of it relates to the fact that last year was a little bit of an anomaly. But I'm not talking about big stuff, huge stuff. I mean, if you look at the toy selection we had the day before September, was it more than a year ago? Yes. Was it all Christmas out there? No. It's much more like that today than it was five weeks ago. What you don't see out there is a bunch of trim-a-tree and Christmas trees yet. Now you are starting to but I'm talking about a month ago. You saw a little of it but not a lot.

Operator: Your next question comes from Charles Grom - J.P. Morgan.

Charles Grom - J.P. Morgan: It sounds like California is getting a little better. I think you said up 2% in September. I know that Northern California has been better but I was wondering if you could flush out how much that is traffic ticket and I guess a little more color regionally within the state.

Richard A. Galanti: I don't have that handy. The Bay Area is the best. We kind of separate it into three regions, Bay Area, L.A., and San Diego. But then within San Diego we take it out Colorado and New Mexico, which is part of our operating region, just to look at California. And again, the biggest delta was in Southern California. The Bay Area was bigger in aggregate to start with. I don't have that broken out tough, in terms of traffic. But it is growth. I feel 99% certain it's both traffic and—yes, traffic is up.

Charles Grom - J.P. Morgan: In the first quarter, based on some channel work we've done, we've heard that merchandise margins are in pretty good shape and gas profitability, particularly in California, is in good shape. Can you give us a little color on what you're seeing so far, quarter-to-date?

Richard A. Galanti: Not allowed to.

Charles Grom - J.P. Morgan: On the annual, it sounds like you're not going to give a specific EPS range, but given the rebound, particularly in sales in September, it does seem like a double-digit EPS growth rate could be feasible, particularly that you're cycling about $0.20 of one-time items. Any sort of direction on an annual basis for our modeling?

Richard A. Galanti: I would love to but I've got people looking at me with evil eyes in this office, from the legal side. Frankly, we're going to talk a little bit about tomorrow at our normal quarterly board meeting, about guidance. But I think the sense around here, in talking to Jim and a couple of others, is that again, there's still a lot of unpredictableness out there. I did want to at least mention that in Q2 last year we had—again, I agree with your comment because you can pretty much publicly figure that out in terms of gas profitability, although last year was nuts because of the dramatic decline in gas prices and how that is inversely related to our gas profitability. So whatever you do, recognize that Q1 has that gas year-over-year challenge and beyond that, you guys are pretty bright. Again, I can't really tell you a lot. I'd love to, but I can't.

Charles Grom - J.P. Morgan: Okay, maybe just that at minimum last quarter you said that you were comfortable with where the Street was for the quarter and year. Maybe could you bless that?

Richard A. Galanti: I can't. I don't recall—if I said that, I was at a moment of weakness. Not weakness of earnings, weakness of my character. [Slight laugh.]

Operator: Your next question comes from Robert Drbul - Barclays Capital.

Robert Drbul - Barclays Capital: Can you give more color on September comps? Was it mostly back-to-school, Labor Day bump? Or did it slow at the end of the month? Maybe give us a little bit more week-to-week trends.

Richard A. Galanti: Labor Day was maybe a half a point, and that's our best guess. But there's a wide variety. We had a weak week and the last week was a stronger week. It probably has to do with timing of our NVM Mailers where the aggregate is not a big difference, but one started a week early last year and this year but ended a week early. So clearly people are shopping more with coupons than they have before, and I don't think that's just at Costco, that's in consumer America, consumer as well.

Robert Drbul - Barclays Capital: On the health care side of it, health care costs, have you changed at all your benefit design, deductibles, or anything in terms, you're talking about the higher costs and what you have planned for this year. Just what are the ways we should think about the ways that those costs are flowing through and hitting the P&L?

Richard A. Galanti: There's nothing that we're planning to do right yet. As many of you know who have followed us for a long time, for nine or ten years, from essentially '94 at the time of the merger with Price and Costco, to '03, we did not change what we charged our employee. Then of course, with that and with inflation and the employees went from paying around 12% of health care down to less than 5%. In October of '03 we implemented new plan designs, which also increased the cost to the employee, but still have a very good plan for a very nominal cost to the employee and that was implemented and structured so that the various changes that would, frankly, help mitigate some of the cost increases in the company, were put in over four years. So we saw reductions as a percent of sales and lower growth rates than inflation in general out there and with health care from '03 to '07. Since the last five or six months that we've seen this big spike, recognizing that in our view, two of the three factors of the spike, one, more people are covered because of lower turnover and a lower growth rate of new openings where you've got all these new employees that aren't covered yet, will subside, our sense is over a few years, but it happened over ten months, in terms of the increase. The other is increased utilization per employee. The average cost is going up. In talking to our third party administrators on an anecdotal basis, basically people are increasing utilization. Whether it's fear of losing one's job, although we haven't had lay-offs, that they are going to get stuff done beforehand, whether it's additional pressure, which even emotional pressure can manifest itself in more accidents, more whatever. Again, those things have come up in the last six or eight months. Hopefully, as the economy improves two of those three things will subside. Subside slowly probably. As it relates to us making plan changes, don't count on it in the next few months. I'm sure we'll look at everything and talk about it but we try to view that—when we did it, as some of you know, it took several years of frankly, Jim saying no, we're not going to change what we charge the employee, and then probably a couple of years of saying okay, yes, but let's figure out how we can mitigate it and then spread it out over a period of time. It's just the last six months that we've seen these issues. I think we would want to wait and see what happens over the next six months as it relates to, hopefully, the trend line of the percent covered not going up any more and maybe even coming down a little, and that's all based on openings and turnover of employees. And we'll have to wait and see.

Robert Drbul - Barclays Capital: Just with the cash balance that you are sitting on now, the share repurchase program, can you give us any updated thoughts around that?

Richard A. Galanti: I am not trying to be coy. We did, as you know, we stopped in late September last year, more to do with the fact that there were all the questions about liquidity and the craziness in the money markets out there. Fortuitously it was also when we—I think the last share we bought back then was in the low- to mid-60s a share. We did step our toe back in the water, I think it was March, when the stock dipped below 40. One day. At a sheer coincidence, the next three days we had to be out of the market because our 401-K plan, which once a year buys stock for employees—we give our employees in the U.S. a percentage of their annual wage, based on years of service. So anywhere from 1% to 9% of their wage, capped for $200,000 in more wages but you can say that hits a very few people. But that's a number that totals about $150.0 million to $160.0 million. About 40% of that is Costco stock so we were out there for over a three-day period buying that in the market, spreading it over three days in theory so that you're not driving, you're not impacting the stock price. It was a matter of the day we bought I think it was in the 38 to 39 range. The next three days it was probably somewhere in there. But in a matter of a week, with no news, the stock went way back up to the mid- to high-40s. Now, again, hindsight is wonderful and the mid- to high-40s would have been wonderful as well, but we take it as we see it and I think over time we will continue to look at it. I think longer term we will continue to be a buyer and we're not trying to be coy. We haven't, of course, in the fourth quarter. It's a subject that we talk about at each board meeting and we've got a handful of people who I think have very good thought and I respect their view of that. And then Jim and I sit down and decide what we're going to do. And so I'm not trying to wink and say stay tuned for tomorrow, or say it may be another quarter. We'll have to wait and see.

Operator: Your next question comes from Peter Benedict – Robert W. Baird.

Peter Benedict – Robert W. Baird: On 2010 Capex, I think you said 1.2 to 1.3. Is that right? And then I thought I had in my notes from the third quarter you were thinking something in the lines of 1.5 to 1.6. So am I right on that, and if so, why the pull back?

Richard A. Galanti: I think that part of that was that our view was that the number of units have continued to dwindle a little bit year and I think part of that was my mistake. I was shooting from the hip a little bit based on looking at the real estate guys' estimates by location, of what would they have in the hopper. The reality is that what they had in the hopper didn't make sense to me at the time, that if we had tried to do closer to 20 this past year net and we did 15 and then we looked at their active list and their best guess and probability of what things were going to happen, we were back in the low 20s. The reality is a few units have gotten hung up with developers and/or banks issues. A few units have gotten hung up because we pulled the plug to renegotiate. And as you may have heard, there are some reluctant sellers out there. Not every seller has realized that they are not going to get their price. And again, the pipeline is still pretty good, and we expect that as we approach near the end of fiscal 2010 and go into 2011 we will see that change. So the other little piece of it is probably $50.0 million to $100.0 million of reduced expectations for remodel activity. Again, that's more to do with the fact that it's a number that has continued to increase a little bit. And I really had not paid it as much attention of where we were in the cycle. As an example, there's not as many remodeled gas stations—we basically now are only—we would like to do them all—but we're land-locked, or zoning-locked or have to buy an adjacent parcel rather than having units that it's just a matter of working through the zoning of it. And the planning of it.

Peter Benedict – Robert W. Baird: Moving over to the Kirkland's private label penetration, rates were moving materially higher in the first half of '09. Can you give us a sense of where they were, where did Kirkland's come in for the year in terms of sales penetration? How did that compare to last year?

Richard A. Galanti: We're up about 3% of penetration company-wide. That would be a higher number if you looked at the roughly 55% of our sales are included in sundries, because that's where you have a higher level of penetration.

Peter Benedict – Robert W. Baird: And historically that's only grown a little less than 1%, is that true?

Richard A. Galanti: It seems like it's been somewhere, anywhere from .5% to .75% a year in the last five years up until this past year. The only thing—I think I mentioned on probably the Q2 conference call, in the first 24 weeks, within food and sundries, we saw almost a 300 basis point swing. So that level of increase has continued, but again, that's on that 60% of our sales base.

Peter Benedict – Robert W. Baird: The FX-adjusted MFI growth was just under 6% in the fourth quarter. How should we think about that trending into 2010?

Richard A. Galanti: Well, we continue to be surprised by the strength of conversions to the executive membership. At some point that's going to slow a little bit. I'm not saying it's going to slow tomorrow but sometime here it's going to slow. So that will impact it a little bit. I think the fact that we opened only 15 net units last year and some number there or slighter above there this coming year, that having a 3% square footage or unit growth instead of 4.5% to 5% that we had had prior to that, that impacts it these two years. My guess is that in 2010 you will have some slowing of the executive member rate of increase but there will still be some life in it. You will still have the reduced number of new units. But then as the life of the executive membership conversions and growth subsides over the next year, we'll start the process of hopefully opening more units in 2011. That's an artistic, or qualitative, version of what I'm trying to explain, because it's hard to say.

Operator: Your next question comes from Colin McGranahan – Sanford C. Bernstein & Co.

Colin McGranahan – Sanford C. Bernstein & Co.: I just wanted to focus first on SG&A and knowing the pressure you've enumerated here, but still, if my math is right and we try and adjust that for FX, it looks like the core growth of SG&A was maybe 6% or so year-over-year, which would have been one of the better performances in the past couple of years, and certainly less than the last few quarters. Obviously you are looking at U.S. only SG&A, which we don't have. But can you comment on what some of the positives were in terms of being able to control that dollar growth in SG&A a little bit better?

Richard A. Galanti: First of all, the U.S. only as it related to health care. When I talked about SG&A in general, though, it's the whole company. Well, certainly having mid- to high-single digit comps in the roughly 20% of our business that's overseas helps you. That's a downward pressure in SG&A, those levels of comps. A lot of it has to do with the fact that, you know, I was saying to somebody a couple of week s ago, for years I talked about the fact that there aren't a lot of "silver bullets" because we run a pretty good ship out there. Well, guess what? When times are tough, everybody figures out how to save a little. I use one silly anecdotal example. We took the copy machines in our central and regional offices plus the two big copy machines in each warehouse—there are several smaller ones but there is one back in receiving and one in the office—and simply made you opt-in to color printing. They are all set so that if it's a color scan it will print out color. Just by changing that to an opt-in, you are still allowed to do it if you have a presentation, but 90% of the time you don't need it, that will save, we estimate, $1.4 million a year. I think the warehouse managers, of course, are trying to button up schedules a little bit. The big changes we're not going to make. We're not going to just try to figure out how to charge them more for health care, we're not going to change our wage structure. But one big thing we're looking at—every three years we come out with an employee agreement. The next one will be in March 2010. I still expect for us to give top of scale people, and our priority scale is about 60% of our employee base in the U.S., still to get increases each year. But we have to recognize what we're seeing out there in terms of the economy and deflation right now. We're not going to do nothing but we have to look at it. So there are avenues to look at things but I don't want to promise anything because we're not there yet.

Peter Benedict – Robert W. Baird: Just in terms of the gas profitability, obviously the rapid declines in the first quarter of 2009 helped a lot, can you remind us in terms of quantifying the impact, either in EPS or basis points, what you think that contributed to first quarter last year?

Richard A. Galanti: I think it was $0.09 or $0.10.

Peter Benedict – Robert W. Baird: On just the core category merchandise margins I think were up 6 basis points here in the quarter. Was there anything notable there? A little bit of private label help? Anything else that we should be aware of?

Richard A. Galanti: Nothing that really stands out, frankly. If I look back in the prior several quarters, the most notable thing was our own aggressiveness on pricing of commodity goods before commodity prices from our suppliers went down. And that was of course the hit that we took in Q2. In four or five weeks I think we had about $30.0 million to $35.0 million of pre-tax markdowns with no contribution from the vendors. Of course, the concern there was oh my, God, they're back to doing that, and fortunately as we showed in Q3 and in Q4 that was more of a perfect storm with the deflation commodity prices that we chose to be a little more aggressive faster to help spike sales a little bit and drive sales in the right direction.

Operator: Your next question comes from Mark Wiltamuth - Morgan Stanley.

Mark Wiltamuth - Morgan Stanley: Could you walk us through a little bit of the arc of the non-food comps? Just how bad did it get last year and I know your August non-food number was down modestly and what was the overall number for September in non-food?

Richard A. Galanti: Someone will get that while I'm talking to you. If I think back a year ago when we started getting hit for the big-ticket, discretionary items in the non-food categories, we had many categories that ranged from a minus 5 to a minus 28 comps, with the minus 20 items being more like big-ticket items like furniture and patio and jewelry. September's comps were in the low-mid-single digits.

Mark Wiltamuth - Morgan Stanley: It just seems to me that that's got to be the source of a lot of operating margin swing for you. Some of those are lower margin percentage categories but the gross margin dollars are probably pretty good there. If you could talk about the opportunity to get some operating margin leverage as some of those non-food areas turn.

Richard A. Galanti: Well, clearly incremental sales help you. I mean, in terms of margins, our margins on the non-food side are not that different than the margins on the food and sundries side, when you include fresh foods. Fresh foods are higher than average margin. Certainly commodity items like tobacco and soda pop and detergent and butter and milk are a little lower. But you've got a lot of specialty food items that are in the low- to mid-teens. So overall, if I go back 15 to 20 years ago when half the business was food and half was non-food, to get to an x number—a number of x percent for the total company, food and sundries was x-1 percent and non-food was x+1. Today they're pretty much close to the same.

Mark Wiltamuth - Morgan Stanley: And we talked a little bit about deflation in the food area but there was also some pretty severe deflation in some of the big hard lines area. How bad did that get and when do we lap out of all that?

Richard A. Galanti: The business was electronics, and I think a big chunk of that was sometime around October when the market was falling out of bed, consumers were freaking out, and you've had over the last few years some new big players, notably Target and Walmart on big-ticket electronic items over the last few years. And there were many retailers, not only them but others, that cut back electronics orders for Christmas. That's when we took advantage of that and I think there was one manufacturer we bought like 40,000 units and then over about a three-month period we sold a two-pack at about $300 per TV or $500 or $600 per cell unit, lower than we were buying them for the day before. And so that's why our sales were up dramatically, but that's also why the average price points out there of items were down way beyond normal product deflation in electronics. The feeling is that of subsiding as we enter Christmas because one, there's not the type of over-production and over-inventory that the manufacturers have.

Mark Wiltamuth - Morgan Stanley: What's normal deflation now in electronics?

Richard A. Galanti: I'm guessing but my guess is 10%. 8% to 15%. Whereas last year it was as high as 45%, 42%. Some of those items.

Operator: Your next question comes from Mark Miller - William Blair & Company.

Mark Miller - William Blair & Company: A follow-on to the prior set of questions regarding average ticket, and this seems like this would be a critical element for Costco to be able to leverage the SG&A, assuming you can keep your same traffic trend. For all of 2009, if we take out gas and FX, you gave us the deflationary impact, but what would have been the mix impact? And then when you speak to the merchants, what's the assortment planning for 2010, as you're seeing consumer confidence come up in some of the higher income demographics? Do you think we can get that average ticket going in the positive direction with some of the bigger ticket items?

Richard A. Galanti: Let me answer the last question then I'm going to ask you to repeat the first part of the question. As it relates to the average ticket, two things that are purely cosmetic, I'm not talking about the branded cosmetic goods, I'm talking about it's more on the face of but not substantive, is the presumed anniversarying of gas deflation and FX strength, and both of those things will help the average tickets, assuming that it anniversaries and doesn't go crazy again, in the wrong direction. Beyond that, hopefully there is some confidence out there that will help a little bit. Now, we generally have not been one to say, Uh-oh, we're not selling big-ticket items, let's greatly reduce price points, let's limit that stuff. I think generally speaking, the evolution of it through this economy has been still more fresh foods penetration, because that's what's driving business and people come in and we've got great fresh foods at great prices. Part of it is, well, you know, Jim has reminded the buyers, as has Craig Jonik, our head of merchandising, every month in the last several months, don't be shy. We have the ability, we still are the fastest turn—our industry, and us within the industry—are the fastest turner of inventory. We are selling the top 20% of goods, not the bottom 80%, so we are less fashion-risk, less everything risk. If we get unlucky, we've got an extra couple weeks of TV supply, we just won't bring in the new one yet. And now, that being said, when we saw big-ticket value furniture come down dramatically in sales in this past January through March, and we had great $3,000 stuff for $1,299, are we going to try some $999 stuff? I think we will. But let's not get rid of all the $1,299 stuff. Our member—whoever is going to jump first, in terms of improving their purchasing, or growing their purchasing, in our view, it's going to be our member versus others. Because we've got them coming in more often and they're more upscale than the average person out there, on average. And so, again, it's fortunate, our view, that our model allows us to be more aggressive than the average traditional retailer out there, given what's going on in the economy. Now, the first question was?

Mark Wiltamuth - Morgan Stanley: Your average ticket for all of fiscal 2009, taking away gas and FX, what was the decline? So if like for like items were down, I think you said close to 2%, the balance would be mix, so I'm trying to understand how much that was down and presumably some of that was just an extreme set of circumstances, hopefully up by a similar amount in fiscal 2010.

Richard A. Galanti: I think the average ticket was, if you take out gas and FX, was generally in the range of plus or minus 2. Not dramatically different than that. And darn close to zero. Which is pretty good, given what's going on out there. And that's including deflation of late and including regular deflation, not gas deflation.

Mark Wiltamuth - Morgan Stanley: You've had great results in Asia. I think you've said your returns are higher in Taiwan and Korea, a great opening in Australia. What is the longer-term outlook for number of stores or unit openings? I mean, how quickly could you accelerate that?

Richard A. Galanti: I don't have the numbers in front of me but if I think about probably in 2008, between those three countries of Taiwan, Japan, and Korea, we were maybe opening two units a year. Between all three countries. This past year we opened four. I'm not sure what we have for 2010, somebody is looking for that for me. I think five to six but that probably includes one or two in the U.K. Probably four again this year, three to four. And I would expect in the plan that we would be at six to eight in the few years after that, in 2011, 2012, and 2013. So we've stepped it up a little bit. But we're growing as we feel comfortable about. It's also, in some case, harder to find sites. I mean, we're building up not out but it's still hard and expensive. In Australia we're thrilled about the first site and about the press we're getting over there, national press. And I think that's probably our desire to raise the bar a little bit. But it's not like we're going to go from opening four units among the three Asian countries to 15. I think it will be 4, to 6, to 8, to 10 hopefully. Or 4, to 6, to 8.

Operator: Your next question comes from Dan Binder – Jefferies & Co.

Dan Binder – Jefferies & Co.: In fiscal year 2011 would you expect the expansion to pick backup to around 5% or are there opportunities that are presenting themselves that would allow you to accelerate it from there?

Richard A. Galanti: Well, 5% on 500 plus is about 25 to 30. I think it will take—if Joe were here, as he said in our budget meeting yesterday, his goal is to figure out how to get back to 35 or 40. We've only bet at 35 or 40 I think once. And I think we've had a number with a 3 in front of it maybe twice or three times, max. I didn't expect us to get to 25 before we got to 30 in a given year. So my guess, it's the 3 goes to 4 for a few years before it heads to 5, if we can get to 5.

Dan Binder – Jefferies & Co.: As a result of this downturn, are you seeing any real estate opportunities in areas of the country, particularly high-density areas of the country where you're under-indexed, like the Northeast?

Richard A. Galanti: Yes. But as Jeff Robbin, our chairman who runs real estate, were here he would say yes, but there are still sellers who are reluctant at the prices that they need to have it at to sell it. And in some case, of course, they can afford to hold on, particularly when they say what am I going to do with my money right now anyway. But there is more in the pipeline now. And I mentioned this a couple of times, we clearly, among warehouse clubs, are confident that any shopping center that wants to put us in the parking lot, we are going to be the one of choice to do that with. I think we've—you know, the Paradise Valley Mall was the fifth or sixth one we've done in the last few years, and you'll see a few more of those each year, in the next several years. And there are markets not only in the Northeast, but greater L.A. It's less hard, but it's still hard.

Dan Binder – Jefferies & Co.: So if you look at the complexion of your growth over the next, call it year or two, based on what you know today, is there a particular emphasis on one part of the country versus another?

Richard A. Galanti: No. I think that given that our most successful densely populated areas, in our view, still provide for opportunity to grow, I think that I, and Jim, on various calls have used the example of the greater L.A. market and I talked about L.A. as south of Santa Barbara down to Irvine out to San Bernardino, so greater L.A. But there is a market where ten years ago we felt there were about—right after the merger with Price Club and Costco—I think we had somewhere in the low 30s and there might be two or three units we would close. Today we have the low-to-mid 40s units and we feel there is another 10 or 15. Two years ago, if you asked about those 10 or 15 we'd say we'd be lucky to get 5 of them open in the next 8 or 10 years. I think now the feeling is maybe we can get 10 or 12 of them open in the next 8 or 10 years. So they are still hard, but there is more available. But it's less tough, but it's still tough. Hopefully the Northeast presents more opportunities. We have a lower market penetration.

Dan Binder – Jefferies & Co.: Can you give us an idea, sort of all else being equal with FX and gas, where your leverage point is for SG&A in the coming year? Is it still up at around 4% or is your payroll and health care cost going to come down somewhat to bring that leverage point down?

Richard A. Galanti: I would hope it's somewhere near 4%. My guess is health care brings it up a little bit from there. What we learned about five or six years ago, it's just darn impossible to predict. It's always something. Right now the something is health care. Again, I think that this tough year has made us a little better out there in the warehouse and more conscious. As good as we all think we are, I think it helped us improve a little bit. But is it 5% instead of 4%? I don't know.

Operator: Your next question comes from Laura Champine – Cowen & Company.

Laura Champine – Cowen & Company: As we look at the changes in the reversal in gas prices, it's obviously going to have an impact on gross margin offset by SG&A. Can you help us forecast next year on a net basis what we should think about in terms of margin impact from the changing gas prices, assuming they basically stay where they are today?

Richard A. Galanti: Over the last year a greatly reduced penetration of gas I think hits you about 30 to 40 basis points. If it's flat it doesn't hit you. I think even this past year, comp gallons were 2% to 3%. I can do a forecast but I can't do it right now. But if you think about it, let's say gas, as I mentioned was in Q4 8% of sales. Assume that the other 92% is some number. I'm making this up but let's say it's 11 and gas is 3. Sometimes it's 1 sometimes it's 4, but let's say it's 3. You can then change that, what if total sales grow by x percent and so even if you had flat gas prices and 2% or 3% gallonage comp, you are still going to get some little benefit to the reported margin, but not the 30 or 40 when you saw the penetration go from 12 to 8 over a quarter, over a year.

Operator: Your next question comes from Adrianne Shapira - Goldman Sachs.

Adrianne Shapira - Goldman Sachs: Can you step back and help us think about sort of strategically, philosophically, how you are thinking about the operating margin. As you mentioned, there always seems to be something and there are obviously a lot of moving pieces with gas and deflation and what not, but when you think about where margins are and when you look out over the next few years, should we be thinking about expansion opportunities, and if that's the case, what are the drivers? I mean, as you've consistently said, there are no silver bullets on the expense side. You did a little bit better. Is there somewhat of a change going on there, or should we expect gross margin and the core merchandise margin to be the driver?

Richard A. Galanti: My guess is that the driver is still going to be—the goal would be the driver to be SG&A, the reality is that we are toughest on ourselves and my guess is all things being equal, for every x number of basis points, something more than half of them will come from margin improvement, if it's an improving number. Again, we're just settling down hopefully of where those numbers went and hopefully we'll have a little bit more consistent gas pricing so it doesn't distort it like it did. But I think that, as I've said, and I know as Jim has said over the last year when he's spoken a couple of times, or has been in our office when a group of you guys comes out, margins are not our problem. Recognizing from the real perspective, the well, then, let's get some more faster. But I believe that. We have the ability to improve margins but we're going to do it on our schedule and when we think it makes sense. And I think we've shown—keep in mind—our reported gross margin over the last six, seven years, since the time we introduced the 2% reward—and again, increased penetration that hits margin, and the 9 basis points hit to margin this quarter implies about a 4.5% increase in sales penetration for those people who get that 2% reward. I think we're closing in on our 100 basis point hit to reported gross margin over the last six to seven years. Notwithstanding that, our margin has done okay. So that number by definition, has to subside a little bit because you can't go—there's some limit but beyond that I think we feel that we're the toughest competitor out there and we have the ability to improve a little bit as we see fit. And we will. I think that it's easier around here to improve your margins a little when you have strong sales in a good economy than when you have tougher sales and even though some retailers feel pressured to try to generate a little more margin, we're the opposite.

Operator: Your final question comes from Joe Feldman - Telsey Advisory Group.

Joe Feldman - Telsey Advisory Group: I wanted to drill down on the membership trends a little bit. I know that the new membership trend is improving on a sequential basis. Still down 3% but the trend appears to be improving. I know a lot of it is related to stores but there is definitely, in my view, a lag time between some of the lower store openings you've had now, between where we get to 2011 and get to some of the accelerated store openings, so how should we think of new member trends going forward and what the lag time really is on that?

Richard A. Galanti: I think it's going to be a little bit of a drag for the next year because we're not dramatically changing our opening schedule in terms of numbers as compared to the previous year. Maybe it's a couple of three higher, but not a lot higher. Again, as I mentioned, if I were sitting a year ago I would have said there is no way that we would see about a 4% increase per quarter, not year-over-year but quarter over the prior quarter of new sign-ups in executive membership. And I'm taking out the U.K., just existing U.S. and Canada. They're still growing faster than we anticipated. I've got to believe it's got to slowdown. If you had asked me a year ago I would have said sometime in the first half of last year it would slowdown and it hasn't.

Joe Feldman - Telsey Advisory Group: On the new member trends, my understanding is also that the renewal rate is obviously the bulk of where you get the revenue, so how much revenue do you generate from these new members as a percentage of total membership revenue?

Richard A. Galanti: Think about it this way. If we've got roughly 30.0 million members, member households, and we have an 87.5% roughly renewal rate, so 30.0 million times 12.5% non-renewal is 3.75 million members, and that's excluding new warehouses. So somewhere 4.0 million to 4.5 million new members, so say 4.0 million out of 30.0 million, somewhere between 12% and 15% of our members are new members. Not new warehouse members, at new warehouses, but new members signing up.

Joe Feldman - Telsey Advisory Group: In the past you've talked about the couple of stores you're testing with food stamps, any update on that and plans to expand that further?

Richard A. Galanti: We're doing it now, I believe, in the five boroughs and we will of course do it in Manhattan when we open there in November. I would expect to see it other places. For us, historically, we had that and if you go back—you know, today first of all it's a lot easier to accept. From the standpoint of just not slowing up the front line. Years ago it was paper food stamps, it was additional pieces of paper currency if you will. You had to separate the stuff and have two separate transactions. Today you can run everything through and the register, if you will, knows what is food stamp able and food stamp not able, to be purchased with food stamps. And at the end you just basically tender your food stamp card first, which is now an electronic card. And so the technology is a lot better in terms of not slowing down the front end. I think also that our view was we would not get a lot of food stamps because our member on average is a little more upscale. I think that was probably a little bit arrogant on our part. And so I think the pressure and encouragement that was put on us to accept it was a good piece of encouragement and I don't know if we will roll it out everywhere but we're going to try it in a few other places as well. The one good thing about it, by the way, it's not just a question do we get some additional sales from an existing member, we're finding, in a small way, but we're finding we're getting new members that didn't shop at Costco because we didn't have them. And I would expect that some of those have chosen to move over from our competitors. And again, it's something that we haven't had and now we offer. So we'll have to see. Certainly this economy was a wake-up call. It is not just very low-end economic strata that are using this, that typically don't have purchasing power. It's a lot of people that are using this as a source of their overall consumption.

Richard A. Galanti: Thank you very much and we'll talk to you soon.

Operator: This concludes today’s conference call.