COST | Q2 2010

Operator: Welcome everyone to the second quarter and year-to-date results and February sales release conference call. (Operator Instructions) I would now like to turn the conference over to Mr. Richard Galanti, CFO. Mr. Galanti, you may begin.

Richard Galanti: Thank you and good morning to everyone. This morning’s press release reviews both our second quarter fiscal year 2010 operating results for the 12 weeks ended February 14th and our four-week sales results for the month of February which ended this past Sunday, February 28th. As with every conference call, let me start by stating that the discussions we are having will include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and that these statements involve risks and uncertainties that may cause actual events, results and/or performance to differ materially from those indicated by such statements. The risks and uncertainties include but are not limited to those outlined in today’s call, as well as other risks identified from time to time in the company’s public statements and reports filed with the SEC. To begin with our 12 week, second quarter operating results. For the quarter reported EPS came in at $0.67, up 22% from last year’s second quarter at $0.55. As noted in this morning’s release a $22 million pre-tax charge or $0.03 per share was recorded in the quarter related to a change in the company’s employee benefits whereby certain unused time off will now be paid annually to the employee. Excluding this nonrecurring charge second quarter EPS would have been $0.70 or a 27% increase over last year’s results. As will be discussed in more detail in a moment, our second quarter results and a comparison of these results with last year’s second quarter include several other items of note. They include the following

Operator: (Operator Instructions) The first question comes from the line of Deborah Weinswig – Citigroup.

Deborah Weinswig - Citigroup: You addressed it briefly but can you walk us through your share repurchase expectations or how we should think about that going forward?

Richard Galanti : It is kind of like earnings guidance. We are not going to give specific guidance. I think history has shown that for nearly 3.5 years on a pretty much regular basis we bought stock. When we stopped it was as much a sign of the economy and concerns about what was going to happen but probably more importantly the whole issue of liquidity when various types of money market plans including a little over $1 billion of the ones we were invested in were locked up for 3-6 months. That was a little scary. I think certainly we feel comfortable long-term about our business. I don’t see us trying to pick a price or pick an event in time…I wouldn’t expect us to see us announce we did some big accelerated repurchase. Historically what we did when we were buying when the stock was moving up a little we bought a little less that day and when it was moving down we bought a little more. But generally feeling the underlying value going forward is appropriate. Again, I don’t want to be cute about it but I think what we have said in the past is that we will probably be a buyer of our stock over the long-term. You probably won’t talk about it again until next quarterly earnings release. I think the indication we have started a process here is viewed that we are buying, not not buying at this point. Again, since that week we haven’t bought. Again I am not really poised to say what we are going to do in the future other than historically what we have shown that we do.

Deborah Weinswig - Citigroup: As you are aware, I’m sure, BJ’s reported earnings this morning. They talked about seeing an increasingly competitive environment. Can you maybe discuss what you are seeing from a competitive standpoint?

Richard Galanti : When you talk about competition there are two things we are always asked about. One is all the supermarket chains over the last many months have talked about a much more promotional and increased competitive market. On top of the fact there had been deflation in a lot of those categories that supermarkets are selling during those many months. Our position hasn’t really changed. While certainly the food buyers look at the weekly ads on ground beef and soda pop and the like, those are items that are probably lower than average margin items to begin with for us. We really don’t feel a great impact from that. We don’t generally price for that. Within the big box stores, both the direct competitors Sam’s and BJ’s as well as the indirect ones like Target, Wal-Mart to some extent, Home Depot and Lowes and even the office stores we have not seen any increase in the bar of competition.

Deborah Weinswig - Citigroup: Can you maybe discuss the initial performance of spring seasonal since holiday was obviously quite strong?

Richard Galanti : Again I think as we look at components of February’s comps on the soft line side particularly we had some numbers that were very strong. Recognize part of that is it was very weak a year ago but it seemed like starting in September our sundries categories finally saw some 5’s, 8’s, 10’s and 3’s on the positive side. I think this past month is the first time we have seen more than a couple of those sub departments in the high teens to mid 20’s. I think apparel was more in the mid singles. But it is more of those small electric, house ware, domestics that what I would call mid-priced stuff for the home that is selling pretty darned well. Maybe a little of that has to do with if you look at our coupon booklets we recognize there is a limit of how many big ticket items are going to sell during the tough economy over the last year. You have seen probably a little bit more marketing effort or merchandising effort towards some of those items. So I think more of it has to do with just what is going on in the industry and a little bit has to do with what we have done.

Deborah Weinswig - Citigroup: We actually had the pleasure of visiting your Danville Club out in California where you have the highest membership renewal rates in the country. You also mentioned that member signups were strong in the quarter. Can you talk about what you are seeing there specifically and is there anything you are doing differently to drive that?

Richard Galanti : Well the renewal rates are pretty constant. Again they have been in that mid 87.3-87.4 range for awhile now. On the signups in talking to Paul Latham yesterday who is VP of marketing, it is a lot of just blocking and tackling. What I find frankly is what we call our marketing people in the warehouse which are a combination of that membership renewal desk and the membership desk as well as the refund desk, some months or weeks they are focusing on executive memberships and sometimes they are going out and talking to small businesses and medium sized business about new member initiatives. So my guess is a little bit of it has to do with the fact of where did we place our bets this quarter. Overall, I have to believe a little of it is just the press that clubs are getting in general and that we get as it relates to this is the place to save. There is nothing magic we are doing other than blocking and tackling.

Deborah Weinswig - Citigroup: Do you find new member signups have been disproportionately executive members or is it pretty representative of what the base already looks like?

Richard Galanti : It is disproportionate but not majority. If you go back to a couple of years ago for every new member that signed up whether as a new warehouse in the U.S. or an existing warehouse our success rate of getting them to initially sign up as an executive member was something in the low 10’s. 10-12 I believe. In the last year I believe it has gone up to the low 20’s. Again if you talk to Paul and his people a lot of it has to do with what I will call “duh.” They are doing more stuff in the warehouse, at the desk and getting our message down a little bit better. Recognizing that we have just regular hourly employees out there. We don’t have trained marketing people. I think we have done a little better job of communicating to our members why they should.

Operator: The next question comes from the line of Charles Grom - J.P. Morgan.

Charles Grom - J.P. Morgan: I don’t ever recall so much concern about earnings guidance for you in the past. I was wondering relative to your initial expectations how did the quarter wind up coming in? Was it better, in line or did you miss what you originally set out to do?

Richard Galanti : I am looking at our in-house counsel. If you look at our original budget for the beginning of the year keep in mind this is last August I think we are pretty darned close to where we thought we were going to be. We are satisfied with the numbers.

Charles Grom - J.P. Morgan: On the margins, the 54 bips, can you walk through the four key categories just by category for us? How it actually broke out?

Richard Galanti : Again, I already mentioned the food and sundries one which again is the biggest but then if you look at food and sundries was above 50. Hard lines was around ¼. Soft lines was around ¾ of a percent and fresh food was about 50. So you add all those up per weighted average based on sales and you get to that mid 50 number.

Charles Grom - J.P. Morgan: Just to follow-up the gas mix to get down to the 15 is the plus? So that is 39 basis points? Is that right? You gave a lot of numbers. I am just trying to make sure I got it right. Or was it 24?

Richard Galanti : The 24 is the gas mix. There is other things. There is the other ancillary business margins. There is the hit which was a lot of it from executive membership. There was the hit year-over-year comparison to LIFO which was 4. So there are a few other things as well.

Charles Grom - J.P. Morgan: I know you don’t want to talk about the next couple of quarters but can you give us a little bit of a sense of what you are thinking on gross profit and SG&A given that every basis point tends to move the needle a lot?

Richard Galanti : I would love to but I can’t. I am not trying to be coy. Again I think the trend at least from the last few months has been promising. The fact there is less deflation on the food and sundries side virtually about flat, no inflation and no deflation for the first time in awhile in February. We still have deflation on the electronics side and the like. The fact that the dollar is weaker helps, again I am not a predictor of currency rates but if they stay where they are now we are still being helped by that each quarter. We don’t have the freebie of the big aggressive pricing we did last year versus now. I think we have lost a little in gas last year in the quarter. Then in Q4 last year. So again that is going to be help and then a challenge. Depending on what happens it is so hard to predict what gas profits are week to week. I think at the end of the day we are cautiously optimistic but we will have to wait and see.

Charles Grom - J.P. Morgan: My last question is with regard to Sam’s closing their ten stores have you done an analysis of what you think that can do to your profitability as they close those stores?

Richard Galanti : Yes. I think those ten locations I think 7 or 8 of them were directly near Costco locations. I believe it is 8. I believe those 8 impacted 12 Costco’s. In some cases or a few cases there is one on both sides of that Sam’s. The big impact is margin. That impact is as you might guess with Jim at the helm here is not going to change immediately overnight. But historically when we look at what I will call competitive locations in the U.S. versus non-competitive you can see as much as 1-2 percentage points of gross margin difference which all falls down to the bottom line. So, it can be meaningful in those locations. We don’t expect a big sales pickup. As you might expect the ones they are closing aren’t their best units. They are based on our analysis of them the lowest volume units. We will get a little pickup in sales, a gradual pick up and probably not the whole amount in margin because that is not what we do. But as someone said once it is like Chicken Soup, it can’t hurt and it probably helps you a little bit over the next 18 months as did the six closures in Canada that Sam’s did helped us for 12-18 months. My guess is at the end of that we get 75% of what you and I might get.

Operator: The next question comes from the line of Mark Miller - William Blair & Company.

Mark Miller - William Blair & Company: As the SG&A hits become a smaller negative and also I know you have done some work on sustainability which might be helping on the cost side, what do you think that does to the underlying comp sales leverage point?

Richard Galanti : It is a guess. Remember a few guesses is based on some things that everybody is doing including us and trying to be a little tougher on ourselves. And excluding healthcare maybe the breaking point from a 4.5 estimate to a 3.5. Who knows. We will have to see. I probably will stick to that. We haven’t done any type of regression analysis on it of late.

Mark Miller - William Blair & Company: Can you talk about when you started the new employee wage contract and should we think about that as a factor going forward? I guess I am thinking with deflation maybe that is a potentially better term?

Richard Galanti : It is effective March 2010 for the upcoming three years. The big item typically is what happens, there are three new columns if you will for hourly progression. It really doesn’t impact new employees until they get top of scale. About 55% of our U.S. hourly employees are top of scale. There is not a big difference between what they are going to get each year going forward for the next three years versus what they have gotten in the past three years. We looked and discussed around and around at a couple of different off-site meetings. At the end of the day there is not a big change. The view is that this is the time particularly in the first year of it is the time that our employees need it the most. As you would expect that is what we did. Again, I think the challenges of some of the comps we had over the last 1.5 years have started to abate both economy, not that it is getting better tomorrow but we certainly have seen some benefit and the whole issue of deflation and inflation. The feeling is we will be able to take care of that. Not a big change in terms of any major savings there other than savings with sales [inaudible].

Mark Miller - William Blair & Company: If you can give us your updated thoughts on potential membership fee increase and I am sure you are going to be looking at renewals which look healthy. If you could maybe talk about the main things we should be watching to see when the fee might be coming up?

Richard Galanti : There is no plan yet. History has shown about every five or so years we have done it on the base fee from 25 incrementally, $25 has climbed up to $50 now. One of the issues is 35% of our U.S. operation is California and California the statute says that membership fees are not sales taxable as long as the fee is diminimous. Diminimous is currently defined at $50. In their statutes they calibrate it every fifth year and that calibration calculation subject to change, I mean the state of California can do anything to change the current limit. The current way it works would be in January of 2011 that number would be reset based on the prior diminimous amount plus the California CPI over the next five year period ending in January of 2011. Now in January of 2006 when it was calibrated up to $50 we did not the next day go out and raise it. I believe we didn’t raise it until May or June of that year. My guess, we have never shown a shyness to increasing the fee as we feel that we have got more than that $5 increase in value to our members. That is our conviction. I guess the good news is the economy went into a tailspin a year and a quarter ago. I am kind of glad this calibration didn’t occur then because I don’t think anybody had an appetite even if we felt confident we could. I can’t say when it will be. Will we raise it again? My guess would be yes. Would it assume there is this calibration change in California? My sense would be yes. Will it be in January right after that? My assumption would be no. It would be sometime over the next year. That is a probability but again we have not discussed it. [normally] discuss what we would do at the $100 executive membership number. In the past two $5 increases from $40 to $45 and $45 to $50 we have chosen to leave the $100 alone and I think that one of the reasons you see this strong, continuing conversion and increased penetration of those members because that break even has gotten smaller each time when the delta was $60, then $55 and now $50. But I think again we would look at that as well. Again I am not trying to be coy. History shows that we do and at some point we probably will. We have been asked, I know, we have all been asked often what is the impact of one of our competitors it will be a big year difference with them. We really not to be arrogant about it but we have really never looked at that difference. In the face of a higher delta between our fee and our competitors we have done it in the past successfully. I don’t see that as a big concern.

Operator: The next question comes from the line of Adrianne Shapira - Goldman Sachs.

Adrianne Shapira - Goldman Sachs: Maybe just stepping back you clearly had a lot of headwinds last year that seem to be turning into tailwinds whether FX, deflation, gas and maybe your thoughts in terms of the slope of these lifts? Where they were and how steep you thought they were at the start of the year, where you think they are now. Clearly they are all positives but share in terms of degrees of positive.

Richard Galanti : From eight degrees to 40 degrees. Just kidding. I would guess a long standing slope clearly is healthcare. Again, I am hopeful part of that increase which had to do with just increased penetration of number of employees covered has peaked and is not going to impact us additionally. I guess so much of it depends on what is going to be the rate of underlying comp sales growth, FX, gasoline, inflation and deflation. The trend over the last 4-5 months has been good. The fact that in February we essentially saw no inflation or deflation compared to some deflation in the prior months on the food sundries side is a positive. I think if Jim were here he would say margins aren’t an issue. We have shown the ability to improve margins and I think we will continue to be able to do that in a controlled way. If Jim were here I would say a very controlled way. On the expense side frankly I think we have done a decent job on payroll and on central and on everything but the second biggest nut and that is healthcare. The bonus thing, it is really a mid-year deal because I am not concerned about that. Hopefully we will always accrue that every year and it will be a flat comparison year-over-year. This is the quarter that it hit us. The same thing, I think the worker’s comp was a little bit of an increase and a bigger piece which was just the left of the actuarial draw of being a bring back in Q2 of last year and a positive this year. Frankly any bring backs last year the quarter was so crappy we didn’t talk about a lot of little things.

Adrianne Shapira - Goldman Sachs: Drilling down then on deflation as Jim says margins aren’t the issue. It sounds like deflation is abating and as you describe a pretty rational competitive environment, I think we all know philosophically you are sort of the first to lower. Is the flip also true that you are the last to raise?

Phil Sewell : Absolutely. Last to raise sometimes is three days or a week. We are not going…if a cost of an item is going up and it is a high volume item like toilet paper or whatever it is really the commodities because even in things like paper goods, big volume we run into 6, 12 and 24 month deals with these vendors and they have locked in certain pricing too in order to be able to commit to us. So some of this is going to happen over time. Really it goes down to a lot of commodities and fresh food which of course changes daily and weekly. If the price of something goes up we reflect it pretty quickly. Quickly might be two weeks instead of one week later.

Operator: The next question comes from the line of Dan Binder – Jefferies & Co.

Dan Binder – Jefferies & Co.: A question on the SG&A again, not to beat a dead horse, but if you look at first quarter you didn’t really have a big FX hit there and your SG&A growth was probably I think just under 8%. Recognizing in any given quarter there may be some one-off items and there may be have been this quarter, I guess it sounds like you are not expecting much in terms of one-off items in the next couple of quarters. So does that mean the SG&A dollar growth should look more similar to Q1 including FX?

Richard Galanti : Last year wasn’t the greatest year. In Q3 of last year we also had a bonus bring back and I am hopeful this year we won’t so that will be a slight negative. I don’t think it will be as big of a negative as this year. I don’t think again if you look at the luck of the actuarial draw more to the historical prior year stuff than current year my guess is that is not likely to happen. It could but I am not guessing that is going to happen. The healthcare is not going to be as big of an increase but it is not going to be wonderful either. Every month when we see the statistics in terms of number of incidents or number of high cost incidents just when you are starting to feel a little better one month the next month it is a little higher. Again, last year in the second half of the year when healthcare costs were up in the low to mid 20’s versus it had been up in the 10-15 range before that. I know we are not seeing this big increase in employees covered. That has been anniversaried now. So the answer is a better yes. Is it wonderful? No.

Dan Binder – Jefferies & Co.: In the electronics business a separate topic, I think one or two calls ago you were thinking deflation in electronics might start to ease. We heard from Wal-Mart recently they thought it was easing a bit. In terms of your outlook at this point could you update us on what you are thinking for TVs and electronics broadly from a deflation standpoint and how you think that may impact you this year for the remainder of the year?

Phil Sewell : Actually yes. I will talk while I look. In the month of February TV unit sales were down very slightly and dollar sales were down a little more than that. So still a little deflation but less than 5% deflation. What we are seeing on the TV side a little of that was shortages. All of a sudden there is a pickup in world demand. I think last month was the first month ever that more TVs were sold in China than in America ever. Between flat screen demand in Europe and China our head merchant in electronics was talking about the fact that I forget what size it was but the underlying costs of the panel itself in the U.S. gets something like $125 and in Europe and China is getting $200. So there are big differences so more stuff is going that way. So we actually had a couple of supplier shortages that I believe are in the process of fixing themselves. Last year the other thing was and this is when I talked earlier about the couponing, it was about a year ago we were very strong in some of the multi-vendor mailers. Over the last year the success of some of those items have come down as everybody has televisions and the price points have come down. What has been successful is look at the [MDMs] it is getting people in the door with basic items. I think in terms, we think there is still plenty of demand in unit sales. I think the price points have pretty much flattened out but we are still comparing against the craziness of that tail end of that year-end period where we were seeing that 40-50% unit increases.

Dan Binder – Jefferies & Co.: On the couponing booklets as you look out over the next quarter or two whether it is for TVs or just broadly the coupon book that you send out are they from a promotional standpoint product discount savings, is it a similar posture as a year ago?

Phil Sewell : I think the posture on our [MDMs] going forward is similar to a year ago. I think the motivation is to get more non-food and bigger ticket items in there. Bigger ticket means going from medium to a little bit bigger than medium. Not all giant like it was during the gravy days.

Operator: The next question comes from the line of Robert Drbul - Barclays Capital.

Robert Drbul - Barclays Capital: Can you give us an update on the private label penetration and I guess sort of the lateral piece of that any reads you feel into the consumer you are seeing? The second question I was wondering is if you could give us any sort of early learning’s or perspective from the Manhattan store and how that is going?

Richard Galanti : What was the first question? You said Manhattan. Oh private label. I think the trends continue. We are approaching 20. I am not sure if we are at 20 yet. We are at 20 now. So it is growing. The big delta year-over-year in sales penetration we saw is continuing. Not as dramatic as it was 6-9 months ago but still increasing penetration. We have several items on the food and sundry side that will be coming out this fall which I can’t talk about yet. Again, nothing earth shattering that is going to take the 20% number to 25 but it is all additive and basically there is not a whole lot out there that is sacrosanct and we want to sell both the best brands and the best [inaudible] alternatives. On Manhattan, at the end of the day we are doing fine. We are probably doing 80-90% of what we originally thought sales wise. What we are finding is that during the week we get a lot of local neighborhood traffic. What you don’t find is people on their way home from work saying hey let’s go drive over to Costco on the way home from work because they don’t do that. We see a big upper east side and upper west side traffic on weekends. We get a lot of grief from the parking lot because it costs $4. It is not our parking lot by the way. It is what it is. Overall I think we have a little press locally in Manhattan because of the layoffs that happened right after Christmas. We always have seasonal layoffs afterwards. In addition to having opened this on November 11th we probably over expected and then came in a little under so the layoffs were a little bigger than normal. Nothing that was as news worthy as it appeared in the local papers there. We want to get as many people back to work and as quickly as possible. It has continued to grow. We are seeing the bodega, the small business improve. Again, I think it is going to be a great location. I think we have a lot of questions about it because of the local news of 160 layoffs or whatever.

Operator: The next question comes from the line of Analyst for Mark Wiltamuth - Morgan Stanley.

Analyst for Mark Wiltamuth - Morgan Stanley: One more time, I am sorry, on the SG&A line if you look at year-over-year growth excluding the $22 million charge that is about 11%, what would it be without the FX impact?

Richard Galanti : About 8.

Analyst for Mark Wiltamuth - Morgan Stanley: So going forward that could moderate a bit as you lap the health or is that incorrect?

Richard Galanti : Yes it could. We are hopeful that it will and we will let you know.

Analyst for Mark Wiltamuth - Morgan Stanley: On the $22 million charge you took this quarter was that a cumulative charge for the entire year? Will you continue to accrue this? Also…

Richard Galanti : It is a cumulative charge that will grow as the company grows. So this is rough numbers but if the company was 10% bigger in people incrementally over that two year period there would be another $2-3 million charge hit to the P&L but not a $20 million charge. That was a cumulative charge.

Analyst for Mark Wiltamuth - Morgan Stanley: That was just the new decision you decided to start paying for unused vacation? What was the decision behind the timing of it? Is it you feel better about your business?

Richard Galanti : The timing had more to do with the fact we had already delved into this in certain states based on certain state laws and we felt it was the right thing to do. It is tied into the March 10 new employee agreement. We got a lot of questions on it from employees. As we go through really a one-year process leading up to the new employee agreement you get all kinds of requests from open toe shoes and wearing shorts to how different holidays are handled. We have been getting questions on it. We looked at it and what happens is you get employees that have moved and in one state they got it and in another state they didn’t. It was just the right thing to do.

Operator: The next question comes from the line of Colin McGranahan – Sanford C. Bernstein & Co.

Colin McGranahan – Sanford C. Bernstein & Co.: Going back to gross margin here and this may be kind of an odd way of thinking about it but if the core gross margins were up I think you said 54 basis points, in the prior year core margins were down 57 basis points because of obviously the mark downs and the sharp pricing. So you didn’t quite get back all the margin you lost last year versus the first quarter I think the core margins were up 11. The prior year they were down 2. So you kind of had a net positive. If you go back a few quarters you have kind of been seeing that core piece of the merchandise margin growing and up. Adjusting for the easy compare last year maybe it was down slightly. I would have thought with mix and some of the better soft line category numbers the mix would have been a little more positive. Is there anything else going on there that maybe those core merchandise margins weren’t up as much as I thought they should have been?

Richard Galanti : There are several things. First of all last year you whereas this year gas helps your margin or hurts your margin, last year it helped your margins. Last year is when you had huge deflation in gas.

Colin McGranahan – Sanford C. Bernstein & Co.: So we have 50 basis points of positive benefit on gas but you still had 57 basis points of core kind of X gas right?

Unidentified Speaker : I will have to look at the numbers but I believe the 57 includes the benefit we actually got last year because of the deflation in gas.

Richard Galanti : We will have to look. When we looked at the numbers we felt it was still a positive. Let us look at it. We would be happy to discuss it. There are no secrets here.

Colin McGranahan – Sanford C. Bernstein & Co.: The other way you could look at that it is obvious it is a sub category and you went through by each of your sub categories. Did you feel like you got back all of the lost mark down pressure from last year at the sub category level?

Richard Galanti : Yes because virtually all of that, virtually all of the aggressive pricing I talked about was commodity related in the food sundries side. That number without that roughly $30 million of mark downs was still plus 13 on light sales.

Colin McGranahan – Sanford C. Bernstein & Co.: Bringing the horse out to kick him once more in SG&A have you disclosed or could you disclose what percentage of the SG&A is healthcare? So if we kind of adjust the growth rate for that as you are anniversarying it we can see what the X currency growth rate on SG&A might do?

Richard Galanti : I don’t have it in front of me. If you think about last year in 2009 it was roughly $700 million for healthcare costs.

Colin McGranahan – Sanford C. Bernstein & Co.: For the full year?

Richard Galanti : For the full year on sales of $70 billion.

Colin McGranahan – Sanford C. Bernstein & Co.: On the FX contract is that just currency swaps you are saying had been in the operations live SG&A. Was that ever particularly material?

Richard Galanti : It actually is in the margin line. As an example, let’s use Canada as an example. Canada buys some of their goods in U.S. dollars and there are terms on those that could be 10 days or 7 days or it could be 60 days. Based on their weighted average of daily expectations of U.S. dollars out they convert some of their Canadian sales receipts into U.S. dollars. All it is when you mark that to market at the end of a month or the end of a fiscal period we tend to err subject to giant changes in currencies we tend historically to err to our benefit a little bit. So there is always a few million pick up frankly. Historically that has been in margin. Now because of some accountants smarter than me the new rules are it is down in interest income and other. I am sure there is some FASB or APB or some other acronym out there that is making you do it this way but rather than reclassify stuff from prior years it is what it is. It is a handful of millions. Not a heck of a lot.

Colin McGranahan – Sanford C. Bernstein & Co.: So in periods of rapid currency moves you typically had a benefit?

Richard Galanti : Yes.

Colin McGranahan – Sanford C. Bernstein & Co.: Or strengthening?

Richard Galanti : We tend to mitigate the impact when it is the four week fiscal period that happens to be quarter end. To be a little more assertive in the two months leading up to it knowing that the bills will be paid and we won’t have these contracts in place at quarter end.

Operator: The next question comes from the line of Peter Benedict – Robert W. Baird.

Peter Benedict – Robert W. Baird: If you look to the core average ticket excluding gas and FX it was down about 1.5% in the second quarter but you said it was flat I think in February. As we look to the back half of the year is that something we should expect to be positive year-over-year?

Richard Galanti : It depends. The trend is good and we are hopeful. Your guess is as good as mine. Clearly from a merchandising standpoint we are aggressive. We are out there. The buyers are buying and they are told to be aggressive on getting stuff and don’t be meek on bringing in bigger ticket items. Our model allows us to be a little more aggressive. So hopefully yes but you never know until it is there.

Unidentified Speaker : I am hopeful that some of this price deflation abating that will help as well. The FX and gas will be what it will be but for it to improve a little bit barring the same traffic levels we are going to have to see a little bit of an improvement there in the core comp for that to happen.

Peter Benedict – Robert W. Baird: Shifting over to membership fee income, that 5% excluding FX growth rate you saw in the second quarter any reason why that isn’t sustainable in the back half of the year?

Richard Galanti : Well, other than it is our first time in awhile. When you talk to the marketing guys the membership revenue increased. Again I think the answer is it should be but it is always something.

Peter Benedict – Robert W. Baird: Could you talk a little bit about the trends you are seeing in California? Excluding the gas, take out the gas business what has been going on in California?

Richard Galanti : It is actually doing pretty good. I mean the trend in California if I looked at the last 3-4 months it has been gradually improving.

Peter Benedict – Robert W. Baird: Is it positive excluding gas or still slightly negative?

Richard Galanti : Slightly positive in February.

Operator: The next question comes from the line of Laura Champine – Cowen & Company.

Laura Champine – Cowen & Company: Why did you make the change that cost the 12 basis points in SG&A in the quarter, the change in benefits? What was the driver there?

Richard Galanti : The driver was in about 30% of our employees in the U.S. in certain states it was something that upon termination they would get paid. Up to three days. Some fraction of three days pay. For the other 70% they weren’t. We were getting questions on it. We have always done it that way but as each state changed the rules we just thought it was the right thing to do. Also with the employee agreement so it was a good time to tie it in.

Operator: The next question comes from the line of Sandra [Barker] – Montage & Caldwell.

Sandra [Barker] – Montage & Caldwell: I will ask about real estate what you are seeing in terms of opportunities there. How do you think about the pipeline of opportunities going forward?

Richard Galanti : There is more opportunities. We are not getting back into it. It was about a year ago when we halted anything that wasn’t signed to renegotiate. I know we are talking to and continue to talk to the shopping center operators as well as banks in the case of some foreclosed properties. We are ramping up some of our international a little bit. Our success in Asia is an example and Australia recognizing we have one unit for a few months there but ramping up doesn’t mean we are going to go from one in Australia to ten in two years. It means instead of doing three in three years total we will do hopefully five or six. I would say active. The hope is we did a net of 16 last year and something around that number this year. This is the year that number could get back into the low 20’s in 2011 and 2012 and the high 20’s in 2013 and 2014. We have been wrong before but we do have a lot of irons in the fire there. We have two coming in your state.

Operator: At this time there are no further questions.

Richard Galanti : Thank you everyone. Have a good day.