Richard Galanti - CFO

Charles Grom - JP Morgan Mark Rowen - Prudential Charmaine Tang - Citigroup Bob Drbul - Lehman Brothers Gregory Melich - Morgan Stanley Mark Husson - HSBC Securities Dan Binder - Buckingham Research Christine Augustine - Bear Stearns & Co. Elan Si Alex Bisson - KeyBanc Capital Peter Benedict - CIBC World Markets Neil Currie - UBS Scott Mallet Virginia Genero - Merrill Lynch Mitch Kaiser - Piper Jaffray Dan Geiman - McAdams, Wright & Ragen

Good morning. My name is Meredith, and I'll be your conference operator. At this time, I would like to welcome everyone to the Costco Wholesale Corporation First Quarter Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions). I'd now like to turn the conference over to Richard Galanti, Chief Financial Officer. Please go ahead, sir.

Thank you, Meredith. Good morning to everyone. This morning's press release covers two major items, our first quarter fiscal 2007 operating results and our Form 8-K filing this morning related to a non-recurring charge that we plan to record in the second quarter related to protecting our employees from certain adverse tax and financial consequences of our historical stock option practices. As with every conference call, I'll 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 first quarter. For the quarter, we came in at a reported $0.51 a share. This compares to our October 12 guidance of $0.48 to $0.51, at which time First Call consensus was $0.50. In last year’s first quarter, we came in at a reported $0.45 a share. So, on an actual calculation earnings per share were up 13%, helped of course by share repurchases. If you look at net income, its growth was up 10%. As I will discuss in a few minutes, this year's first quarter benefited by about a penny a share due to a revision in our method of allocating certain payroll-related expenses, which we expect to be more than offset in our upcoming third quarter by a corresponding hit to EPS in Q3 of a little under $0.02 a share, with small expected benefits in Q2 and Q4, such that in total there will be no impact on our annual figures. But, we believe that are in counting, and I'll explain that in a minute. So in fairness, excluding this benefit, our Q1 came in at adjusted $0.50 a share, up 11% year-over-year in Q1 and in line with First Call, and frankly, a pretty good showing, given sales this quarter and the competitive landscape out there. In terms of sales for the quarter, as previously reported, our 12-week comp sales figure showed an increase of 4%. Other topics of interest that I'll review this morning our opening activities and plans. As you know, we opened a total of 13 units, including one in Mexico, so 12 net consolidated units during the first quarter, which ended November 26. And, that puts 10 new units in the US and two in Canada. Since first quarter end and through the end of this calendar year, we opened four additional locations, three more in the US, and one in the UK. Also included in this expansion, among those was on November 22, we opened our 500th Costco location down in La Quinta, California. And today, we stand at 504 locations, 474 consolidated into our financial statements and plus 30 now in Mexico, which we are 50% partner. Also this morning, I'll review with you the normal items, ancillary business results, online results, membership and the balance sheet. Now to the discussion of earnings. Again, sales for the quarter were up -- total sales were up 9% from last year's first quarter, up to $13.9 billion as compared to $12.7 billion last year in the first quarter. On a comp basis, like I mentioned 4%. The 4% first quarter comp was comprised of reported 4% number in September, and also a 4 in October and a 5 in November. For the quarter, our 4% reported comp results were a combination of an average transaction increase of about 2.5% to 3%, and in the quarter an average frequency increase of right around 1.5%. As I think I'd mentioned in the last call, for all of last fiscal '06, our company-wide average annualized warehouse volume was $127 million, and US only $130 million. So, we enter this fiscal year '07 with that base. Included in the average transaction increase of 2.5% to 3% in Q1, we, of course, had -- helped by an FX gain given the weak US dollar. That was about right at 100 basis points, boosting these quarterly comps and to the average transaction. However, as I foreshadowed on our last earnings conference call, gasoline pricing hurt our comps in Q1 by about 135 basis points due to lower year-over-year gas prices. This, of course, was due to last September as we are now anniversaring the impact that Katrina had on September, October and even a little bit into November gas prices, and that was associated with the gas price and gas availability craziness that occurred at that time. In terms of cannibalization, given our ongoing ramp up and expansion in infill markets with most of that in existing markets, it impacted comps by an estimated 165 basis points in the quarter. So, our comps were impacted by that negative as well. In terms of sales comparison by geographic region, as you know, with the 4% reported comp, US was 3 and so there is not a lot of variation there. Within that, of course, US gets the entire hit -- virtually the entire hit for gas price deflation, as well as most of the cannibalization hits. So, these numbers were impacted there. Basically the West Coast was just around flat. The strongest was the newer markets like the Midwest. Canada continued to do strong, helped of course by the strong Canadian dollar still positive on a comp basis notwithstanding. So, pretty weak tobacco numbers with some things have gone out there. In terms of merchandise categories, the strongest department by far has been hard lines, certainly helped by very strong majors in electronic sales, both consumer electronics and PCs and what have you. Food and sundries and soft lines were all in the low to mid single digits. Food and sundry is actually impacted negatively also by tobacco, where tobacco was -- comp for the company was about 9% to 10% and it represents, I believe, 7% or 8% of our total sales. Ancillary businesses were slightly negative, but again that higher impact of gas, if you take out gas it was about 8% positive. Within that, we had a very strong hard lines comp, as I mentioned, in majors and toys, where the majors, which is electronics for us, and toys were the stronger sub-categories, up one of those -- majors was up in excess of 20%, toys in the mid-teens. Within a decent soft lines number, we saw a particular strength in small electrics, men's and women's apparel, and jewelry, offset by weaker comps in media, which is books, CDs, videos, DVDs and what we call photo camera. Now cameras themselves were fairly strong, but the big offset there is within that department we have film, although we don’t have the -- all the memory sticks in electronics. So, there is a little bit of anomaly there. Fresh foods was fine with bakery being the standout, that particularly given the help of Thanksgiving week. In terms of other components of sales, in terms of pharmacy competition, we've got a lot of questions, of course, to that with some of the competitive changes out there with generics. Pharmacy comps were up in the mid single digits, and actually that pharmacy is split between Rx business and over-the-counter health and beauty type business, analgesics and what have you. The Rx piece was actually up in the high single digits, and overall the entire Rx business was better than our total company comp. We will comment about this competitive landscape. When our competition went to $4 generic drug offering on 30-day supply of a variety of generics, initially we matched it. Last week, we launched our own deal on a little over 200 of these generic drugs. It's basically straight across hundred pills for $10. We have slightly lower cost on 30- and 60-day supplies, recognizing that the cost associated with filling prescriptions as such, we believe that the pharma must take advantage of the hundred pills for $10, which is [equal] to say is, it is pretty darn good. Moving on to the line items of the income statement, I will start with membership fees. Our membership fees were strong, up 14% in dollars, or $37 million, and up 9 basis points as a percent of sales. That, of course, has to do with starting to receive on a deferred accounting basis the benefit of the $5 increase we did back in May. Realistically, in May it started, but in July 1 is when renewals hit. And so, we will see the associated trend of improving year-over-year delta there in terms of the up 9 basis points as we get the full impact of that over the 12-month period. In terms of membership, we continue to benefit from the renewal rates, very strong renewal rates, the $5 increase, as I mentioned. And the continuing increasing penetrating of the executive membership, which [we will say] lots of new member and membership spend more and spend at a faster rate. You should see reported membership fees, as I mentioned, as a percent of sales continue to show good growth this year, and for no other reason related to the entry of the deferred accounting of the $5 increase that we did in July. In terms of the number of members at Q1 end, we ended Gold Star at 17.7 million, up from 17.4 million at 12 weeks earlier in fiscal year-end. Primary business is 5.3 versus 5.2, add-on 3.4 versus 3.5. A lot of that has to do with, as an add-on becomes an executive, it's an individual that goes to the Gold Star account, so you net that out there. But all told, 26.5 up from 26.1 million members at fiscal year-end and with the free add-on card, add-on with spouse card 48.5 million versus 47.8 million at year-end. In terms of paid executive members, during the quarter, we added 270,000 executive members in that 12-week period, or up 5% since year-end in terms of number of members. These 5.5 million paid executive members, roughly 21% of our membership base, generate a little over 50% of our sales and a little over 40% is rewardable, recognizing we don’t reward gas, tobacco and alcohol. In terms of renewal rates, our business members, both at year end and at Q1, ’07 end, rounded to 92%, Gold Star both at year end and Q1 end 85%. And so, the total actually peaked up so that -- on the company total, I am happy to say for the first time, I think, that we have been reporting a company average of 86% renewal rate for past four, five years now. And, now we are stating the fact that you probably get a little bit of negative from the $5 increase in the renewal rate. Although we are not seeing a lot of that, we do have a little bit of that. For the first time in our history, the renewal rate has rounded up to 87%. Now going down the gross margin line. Our gross margin in the first quarter was lower year-over-year by 2 basis points, coming in at 10.56 versus a 10.58. In terms of the numbers that I ask you to usually to jot down, we will just give two columns, fiscal '06 in its entirety in Q1 '07. The five line items would be merchandising, the second line will be 2% reward, third line LIFO, fourth line total. That's actually four lines, I am sorry. In terms of merchandising, for all of last year, and this will be on a year-over-year comparison, so all of '06 versus all of '05, the core merchandising business was down 4 basis points year-over-year. By comparison in Q1 '07, it was up 8 basis points, but I'll share with you how that math works in a second. The 2% reward for all of '06 was 10 basis points hit to margin, and again that has to do with the success of the program, in effect that it is essentially a 5% increase in the amount of sales that are being done by the executive memberships year-over-year. In Q1 '07, a corresponding 10 basis point hit. Again, we had quite a bit of success, part of it has to do with how we market it. We on a periodic basis will do in-store solicitation at the register, and so we had a jump there. My guess is in terms of how it hits the gross margin that rate of increase will be up, but probably slow a little bit over the coming quarter. LIFO no change, we had no estimated charge in the quarter, in total recognizing the huge deflationary aspect of electronics in what we call majors department. We basically -- and on top of that gasoline deflation. We basically had a slight deflationary environment, we are therefore assuming as best we can estimate that there is no increase or decrease in LIFO for the quarter. Total then would be -- whereas by the way in fiscal '06, we had a 3 basis point pickup due to LIFO. So if you look at '06, it was the minus for merchandising, minus 10, and 2% reward. The plus 3 in LIFO, which basically have reported margins for all of '06, down 11 basis points this year in the first quarter, plus 8 in merchandizing, minus 10 in reward, therefore total -- 0 in LIFO, and therefore a total of minus 2 year-over-year. Now, let me go through a little bit of the component of the, what we call, merchandizing plus 8%. Our core merchandize business, the roughly high 70% of our business, which is the four basic categories, food sundries, hard line, soft lines and fresh foods. That was actually down slightly year-over-year in Q1 by about 6 basis points. Within these four major departments, food and sundries, which is about half the business, and soft lines which is about 12% or 13%, I believe, in the business, they were higher year-over-year and quite strong. Hard lines and fresh foods were down. Hard lines, of course, impacted by our higher cost of dealing with return items, primarily in electronics. Our year-over-year gross margin in the retail gas business was nearly flat in Q1 year-over-year and down ever so slightly, but it is a significantly lower gross margin business as you know than the rest of the company. And gas sales penetration, again, if you go back to last year with Katrina, you had huge increases in gas prices. Now, they are down from that. And, our Q1 gross margin was impacted negatively by 10 basis points from higher sales penetration of the 2% executive member reward -- I am sorry, was impacted positively by that, because you had a lower penetration. Okay, let me start again. Gas sales penetration was down in Q1 2 full percentage points in sales due to Katrina a year ago. Thus, to reduce penetration of a lower margin business that was an increase to gross margin. So, despite the fact that the core business was down slightly, the fact that this business have greatly reduced sales penetration was a net merchandizing positive of 8 basis points. Also, Q1 gross margin, I mentioned the 10 basis points from the executive membership program. Lastly, despite Medicare Part D last year, which impacted negatively gross margins in the pharmacy and the very beginning of the initial [competitive] issues with generics, our pharmacy gross margins in Q1 were within 2 basis points of last year's Q1 pharmacy gross margin, and its overall gross margin contribution level with last year was actually slightly higher due to continued strong sales in that area. In terms of our gross margin outlook going forward, reported gross margins will probably be, again, flat to down a little due in large part to the competitive issues out there and the electronics issues, as well as the lessening of this gas impacted with little bit of anomaly in the first quarter. We will probably still see a little of that benefit, if you will, by lower gas penetration, but not as extreme in Q1. The impact from increasing executive membership, again, should still be a hit. My guess is that comes down a little bit in terms of the [amount] of the hit, given that we had done some marketing efforts. LIFO for the time being we will assume that it's zero for the year. Increasing private label penetration, again, that's a slow moving trend, but nonetheless a positive to gross margin. And again, our overall core margin -- our core merchandise groups are just fine. And inventories, I’m pleased to report, seem to be clean going into the Christmas year -- going out of Christmas year. In terms of our ancillary businesses, as you know, during the quarter we opened 12 net new units. In those 12 units, we opened 12 pharmacies, 12 food courts, 12 photo labs, 12 optical centers. We also in the quarter opened 11 gas stations and 14 hearing aid centers. In total, as I mentioned earlier, our ancillary business sales comps were down 2%, but up 8% without excluding gasoline. Now moving to SG&A, our SG&A percentages Q1-over-Q1 were the same coming in both quarters at 9.98% of sales. Again, to jot down just a few numbers, two columns, total year '06 and Q1 '07 and five line items, operations, central, stock options, quarterly adjustments and total. And a plus here means good or lower SG&A year-over-year comparison. In core operations, fiscal '06 versus fiscal '05 was plus 5 basis points or lower by 5 basis points. Central going down was plus 4 basis points. Stock options was a hit of 5 basis points or minus 5. Quarterly adjustments were zero and total was plus 4. So, for all of '06 please recall that SG&A year-over-year was lower by 4 basis points. Now, on the first quarter '07 as compared with first quarter '06, operations showed an improvement of 4. Central was higher or minus 2, stock options was higher year-over-year or minus 8, and I will mention -- I am suppose to say about that in a minute. The quarterly adjustments actually helped the number by six, and I will share that with you as well in a minute. In terms of a little editorial, operations showed an improvement of 4 basis points, that I mentioned here. Payroll in Q1 was actually a couple of basis points higher year-over-year. I kind of expected, if you consider the hit in sales, given the lower gasoline penetration, which is a very low SG&A business, and overall slightly lower than planned sales results. Our stock options expense was a little higher, 8 basis points, frankly a little higher than our original plan. And looking back at last year Q1, we did have a slight year-over-year pickup, or reduction in SG&A, due to the timing -- due to the chewing up of some equity forfeitures in terms of how we accounted for that, that helped by couple of basis points last year. I don't think it was big enough to talk about, but trying to explain why this number was a little higher as we looked back and saw that. In addition, this year we added approximately 1,100 assistant managers to our stock option plan. Historically, assistant managers is about two to three assistant managers in every warehouse had not had stock options. They get a one-time grant that on a periodic basis, not on annual basis -- I am sorry, not stock options, restricted stock units. That’s what we give out now. But that also had the impact of a couple of basis points to this number. And I expect that impact to be going forward for the next couple of quarters as well. And finally in last year in Q1 we had an expense hit related to Hurricane Wilma in Florida, and the damage that grew out of that over and above our retention -- over and above what our retention. That helped last year by 6 basis points. So, on a comparative basis, that was a negative 6 hit to Q1 last year and a positive 6 therefore comparative basis this year. So overall, what hurt SG&A, declining gas sales, it hurt that calculation a little bit, declining comps overall a little bit in terms of being 4s, 5s instead of a little higher, increase in new warehouses, of course, we ramped that up, all those things are little impacts on it. The stock options expense, which I mentioned, was a little higher. And what helped of course is -- one thing that did help was the thing that I mentioned earlier that impacted the quarter by about a penny a share. So let me turn to that. This has to do with our revision to our method of allocating central payroll related -- central payroll related expenses on a quarterly basis. In the first fiscal quarter of 2007, we revised our method of allocating certain payroll related expenses in order to more accurately reflect actual costs for a given quarter. Historically, these costs were estimated for the entire fiscal year and then recognize it evenly over our 13 and 12-week periods. Since these expenditures are disproportionately concentrated in the early part of the calendar year, which is really the middle of our fiscal year, we revised the approach to more accurately align these expenses for the period in which they were actually incurred and to report our actual liabilities as of the interim balance sheet dates. I want to give you a simple example. Again, we have a fiscal year that runs from September to August. If you think about social security or FICA payable taxes, which is 7.65%, as you go through a calendar year, some employees were higher paid, ultimately maxed out on the biggest component of that the 6.2% of the 7.45. That -- and so by the end of the calendar year, many salary people and people who had options historically and expensed them, they maxed out and there is no cash charge in the -- those cash charges are greatly reduced as a percentage of payroll in the later part of the calendar year. And, again, I think as we went through over the last couple of years of SOX 404 and constantly looking at how we could be most appropriate looking at some of these expenses on -- we think a more appropriate balance sheet perspective, we made this change as of beginning of this year in terms of how we allocate those. And what that has the effect of doing, as example, is our first fiscal quarter is in the last calendar quarter essentially of the calendar year. We historically had booked some of that expense and they are accruing it, if you will, for the actual expenses on a cash basis that occur more likely in January and declined over the course of the calendar year. Although there will be no impact in the annual consolidated financial statements, the change in approach will result in comparably higher expense being recognized in third fiscal quarter and lower expense recognized in the first fiscal quarter. This impact to this -- and the impact to the second and fourth quarters are nominal, but slightly positive we estimate. The effect of this change in the first fiscal quarter of 2007 was to lower SG&A expenses, again, by about a penny a share, a shade over a penny a share. The third fiscal quarter will have an offsetting effect that will increase SG&A expense by approximately -- with just under $0.02 a share, but again, with a small associated benefits in Q2 and Q4 such that some of the fourth quarters will be equal to zero. In terms of SG&A outlook for remainder of '07, we could be helped by slightly lower expense percentages and benefits in workers' comp. The payroll, of course, is a question of where comp sales are and we'll see how that goes with sales trends. Overall, again, I think given what sales were, a pretty good showing. In terms of pre-opening expense, pre-opening expense was up $10 million, $22.7 million in the quarter, was 16 basis points versus 12.3 last year and first quarter was 10. Now, we opened last year nine openings, which includes one of Mexico, so those actually -- so really eight openings in terms of pre-opening expense, and this year 12. In addition, there is always some carryover or something is pushed either before or after the quarter, given the ramp up and expansions, really no surprises here. In terms of provisions for impaired assets at closing costs, that was higher by $2.9 million year-over-year, coming in at $4.3 million in the quarter versus 1.2, no big surprises there.All total operating income in Q1 was up 9%, from 325 last year to $353 million, or an increase of $27.6 million. Below the operating income line, reported interest expense was lower year-over-year, coming in at $2.1 million or $1.6 million lower than last year's 3.7. This mainly reflects lower interest expense on a convertible debt, as more of its holders convert into our dividend paying common stock and recognizing the common stock is significantly in the money relative to their breakeven analysis. And interest income and other was a bit higher, higher year-over-year by $1.6 million, coming in at $27.1 million. Actual interest expense was a shade lower year-over-year, even though interest rates have gone up as we expended more money than we generated cash, principally because of stock buybacks. We expect to see that number come down. The reason this interest income and other is up a little bit is because of the other. And that's mostly higher profits in our 50% interest in Mexico, which account for on an equity basis, therefore in this number is that half. Actual interest income was slightly lower, as I mentioned. So, overall, pre-tax income was up 9% as well versus last year Q1 coming in at 378 million this year, as compared to 347 million a year ago. In terms of tax rate, I’m happy that we have a quarter where we don’t have to explain the anomalies of why tax rate was higher or generally lower. But tax rates were both right around 37.5, coming in at 37.35 this year versus 37.86% last year. In terms of a quick rundown of the other usual topics, I'll start with the balance sheet as of November 26. Cash and equivalents, 2.614 billion, so 2.614. Inventories, 5389. Other current, 861. Total current, 8864. Net PP&E, 8832. Other assets, 719. For total assets of 18,415. Short-term debt on the right side, 396, that of course includes the $300 million anticipated debt repayment of the $300 million issue that we have outstanding and [rebates] in June of this year, either late spring or June. Accounts payable $5.538 billion, so a shade over inventories. Other current liabilities $3.013 billion, for total current liabilities of 8947. Long-term debt of 175, much of that is the remaining piece of the convert plus a little foreign debt. Deferred and other, 257. For total liabilities of 9.379 billion. Minority interest, 64, and stockholders' equity, 8.972 billion, for total right side balance sheet, 18,415. I might add that the balance sheet, as well as the other calculations and summary information that we put out in our Q&A, will be available shortly after the conference call on our website. In terms of the balance sheet, it's fairly strong. In terms of accounts payable, at Q1 end last year, accounts payable as a percent of inventories, the number that we look at that was 101%, at this quarter end it was slightly better than that at 103%. If you take out non-merchandise payables with the construction payables and other things in there as well, our last year quarter end was 85%, this year's first quarter end 86, again a slight improvement or increase in amount of inventories that will be funded with trade payables. Average inventory per warehouse was up about 4.8% to 11.466 billion a warehouse versus 10.942 a warehouse at year earlier. Pretty consistent with what we have seen quarter-to-quarter -- year-over-year on a quarterly basis over the last few quarters. It's really spread out a lot of places. FX still is about $65,000 of that $520,000 difference. Our food and sundries is about 190,000, just lots of things like gift baskets and increasing our presence in some of those items. Jewelry was up about 70,000. I think that certainly is one of the reasons why our sales have been a little stronger there as well. Pharmacy up about 62,000, so really no one thing that stands out there, various some other small increases. As I mentioned earlier, no inventory concerns coming out of the -- coming out of Christmas, we have [to speak] being pretty clean. My guess is, as the inventories being -- they are spread out, again, little over sales comps over the last few months. In terms of CapEx, in Q1 ’07 we spend 390 million right in line with our budget and our ramped up level expansion for the year. I would estimate that our CapEx, which was a 1.2 billion last year, would still -- we still estimate it will be in the 1.4 billion to 1.6 billion range this year. In terms of dividend, no change in the quarter. We are still at $0.13 per share quarterly dividend or a $0.52 a share annualized dividend, that last increase of our dividend and our quarterly dividend payment was done in May. In terms of Costco Online, doing very well. During the quarter a 59% increase in sales. That’s on top of the 61% increase in sales for all of ’06 when we did just a shade over $900 million. We will say we will well exceed $1 billion in sales this year. In terms of expansion, as I mentioned earlier, we currently have 504 warehouses, including the 30 in Mexico, so 474 consolidated into our financial statements, if you will. One number that Bob and Jeff asked me to give out, because we do get quite a few calls afterwards after the call, is the square footage at quarter end. The square footage at quarter end was 65,856,000 and at quarter end we had 470 consolidated warehouses. So, you can divide those two numbers we are right at an average square footage per warehouse of 140,000 and we tend to build 148s right now on average. In terms of expansion , if you check the account -- if you recall, we opened in all of ’06 28 -- 30 units, including two in Mexico, so 28 consolidated. Three of those were relos and 25 net increase in the consolidated number up to the 474 -- I am sorry, up to the 433. In Q1 ’07, we opened 12, no relos, so a net of 12 plus the one in Mexico. In Q2, we've already opened the four that we were going to open this quarter, no relos. So another four this quarter. We anticipate seven net new openings in Q3 with no relos, so a net of seven. And in Q4, 11 openings, one of which is going to be a relo, so net of 10. Where these numbers would put you is 34 less one relo is 33, plus the one we’ve already opened in Mexico and perhaps another, but we are not sure how that will pan out for after the end of this fiscal year. So, the 33 is two less than we had at the beginning of the year. I think it's pretty realistic number. We constantly find things that go into the number this early in the year that may still happen. So, that number probably is rounded 32 to 35 for the year. In fiscal '07, assuming we open the 33, as I mentioned here, however, on a consolidated base of 458 that we started the fiscal year at, that will be 7.2% unit growth and a little over 8% square footage growth. We would hope to open at least 35 a year in '08-'09 as it currently stands. Lastly, I want to talk about our stock repurchases. Since, we really began buying stock in earnest back in June of '05, we purchased approximately 48.6 million shares at an aggregate price of 2.446 billion, or $50.27 a share. So that's means with the 4.5 billion of aggregate authorization that we've had under the couple of these programs, we still have a little over 2 billion authorized, but not purchased, which expire -- which authorization expires in November of '07. For Q1 only, we purchased right around 8.3 million shares for a little over $400 million, or $51.38 a share. So, let me now speak to this morning's Form 8-K filing regarding the company's intention to protect the Board and the 1,000 employees who face possible adverse income tax consequences in connection with the review of stock options announced by the company this past October 12. The anticipated options charge that we would -- we plan to record in Q2, first, of course, it is non-recurring. As noted in the release, we estimate that next quarter, Q2, we will record a charge growing out of the previously disclosed stock option review. The charge relates to protecting our employees against adverse tax consequences for events beyond their control. The protection largely entails replacing upward these options with compensating payments to the employees with a difference. A portion of this is driven by the technical requirements of Section 409A, the deferred compensation law that grew out of the demise of Enron. We are still evaluating how we handle this in foreign countries, and the $70 million pre-tax estimate is inclusive of foreign countries. As noted in the release, the hit to cash is less than the charge to the book income statement, because the company gets the higher proceeds from future option exercises. These proceeds however do not run to the P&L, so therefore that will be a lesser in the cash charge. Finally, before I turn it back to Meredith, just a direction going forward. Again, for the first quarter, we came in at $0.51. And looking at both, at the end of the fiscal year back in October when we had First Call up there and for the year, if you recall we were -- the guidance at the time was, I believe, right at 260, I believe now it's at 259. And looking at the three quarterly numbers for Q2, 3 and Q4, Q2 seems to be a little overstated with Q3 and 4 being a shade understated. So that the total we are still pretty comfortable with and that's -- we're not pushing things out. It is just simply I haven't really focused beyond Q1 at the last conference call. So, kind of a wide -- arguably a wide range for Q2 would be more in the $0.62 to $0.66 range. And, of course, that would be before the hit for the options in tax issue. Q3, which First Calls at 57, again, that probably is within the range, but not at the high end of the range for Q3. And similarly Q4, same way the -- what's out there currently. So in terms of guidance, First Call was at 259. We would look at a range probably in the 250 to 260 range. If you recall, at the end of the last quarter we had said 250 to 265. Not a lot of directional change there frankly. Again, we are starting off pretty good relative to what we said at the beginning of the year, but it's a tough world out there and that we'll where it goes from here in terms of the economy. But with that, even that 250 to 260 range that would be a 9% to 13% increase on arguably the number last year that was a 53-week number. So, a little higher than on a normalized basis. With that, as I mentioned Q&A will be -- Q&A will be out today in a couple of hours, and also our proxy and annual report are at the printers and I should be seeing that within the next few days. With that, I'll turn it back to Meredith for Q&A. Meredith?

(Operator Instructions). The first question is from the line of Charles Grom. Charles Grom - JP Morgan: Hi, good morning, Richard. Thanks. Clearly, TV returns continue to be a drag. Can you update us on the concierge service in Southern California and the potential implication of a return policy sometimes in the next couple of quarters?

Sure. The concierge service has now been started in Southern California. What it is? Basically, it is two things. One, first and foremost is, it's a high quality answering service that answers your questions quickly and at a higher level. What we found by the way is that, a significant number of calls aren’t TV related, but other electronics related, like, dads like me calling -- not that I call. But dads like me calling to say, I got my kids an iPod and I can't figure out how to get the darn songs on there. Simple stuff like that, which arguably helps other returns as well in a smaller way. But also seeing that, we're also testing -- we will roll that out in all of California, which is about 38% of our -- of the US company, of the total company. In terms of -- I am 38% of the US. In terms of the other aspect of concierge service is home installation service, and I believe we are still testing that in Southern California and whatever we're doing, we're going to rollout between now and the first part of calendar '07, such that by spring we would expect to be rolled out in the US. That is improving the numbers, but it's not fixing the entire thing. We were looking at -- as we've said for and I am not trying to recall it, but obviously said for, gosh, number of months, we are going to do everything short of changing our return policy first. But if we have to, we will look at that and rest assured, it is still going to be a great policy. We haven’t made any announcements on that. We continue to look at it. But I think as Jim said at a recent conference in the fall in New York, at some point during the year, we will make that decision. And the -- one thing I will mention in looking at some of the blogs out there, I saw there was some rumors that we're going to change our policy in the beginning of the calendar year and you better get everything back in, because they are changing the policy. Well, the reality is that irrespective of what we do, if and when we change our policy that will be on a prospective basis. We will never change our policy for things done prior to that. So assuming we were to make any change, whether it's early part of calendar or middle point of calendar, wherever it is, the impact to our numbers will still be a number of months after that. So, I still see this as an impact for ’07 on a comparable basis to ’06 that we were hit pretty hard last year. My guess is, it's still a hit, but on a comparable basis not as big a hit that it was in ’06 versus ’05. Charles Grom - JP Morgan: Okay, that’s helpful, thanks. And just with regards to your balance sheet, you have got close to 3 billion in cash, no debt, and there is only about $500 million of free cash and I know you have the 2.5 billion authorization. But could you speak to appetite to accelerate the buyback and/or assume more debt and potentially leverage up the balance sheet? And there has been a lot of speculation out there, so hoping you could address it.

We haven’t said anything other than our action. We have said that our actions speak for themselves. As you know, in the quarter -- in a 12-week quarter, we spent $424 million, and for whatever 18 or so months now since June, we spent close to 2.5 billion. But even if you just annualize the 12-week quarter, that gets you up to about 1.8 billion versus, I think, a little under 1.5 billion in the first 12 months since we started buying back stock. So, I think you will see our actions on a continual basis that we will continue to review it. To the extent that we saw -- we stubbed our toe badly or the economy or the stock market stubs us still badly, certainly I think we will be more opportunistic. But so far it has been steady as it goes and we would expect, as I've said in the past, to continue buy back on a regular basis. I will make two comments. With what we are currently doing, we are bringing that cash number down on the balance sheet. And second comment, probably about 800 million of that close to 3 billion of reported cash and equivalents is the equivalents and what that is, it is essentially about 500 million is debit and credit card receivables that we get credit for early when business opens the next day. The other piece is couple of 200 or 300 million, I believe, is what we call cash in transit, again, cash on a weekend that we can use come morning business day. This requested by the armored car services over the weekend. That, again, it's our cash and we can certainly borrow against it, but in this about 2 billion of that that's useable cash. And arguably within that 2, there is a couple of hundred million that you would have as just your normal cash in the company. So, we still have, but notwithstanding, it doesn’t change your question. If you extrapolate what we have done historically over the last year and a half, you would say at some point we will be in a debt position, but that will happen when it happens. We haven’t made any plans. I know, I think it was a Home Depot yesterday that announced $5 million debt dealing, we've got some questions on that. But right now, it's steady as it goes. Charles Grom - JP Morgan: Thanks. Good luck.

Your next question is from Mark Rowen. Mark Rowen - Prudential: Thanks. You mentioned on the membership growth that accelerated, that most of that came from price increases. But since you opened quite of few new clubs this year, more than you did a year ago, did you get quite a few new members in those clubs or was there a lot of cannibalization from existing clubs?

If you look at this year versus last year, the actual number of openings in the quarter was 12 versus nine. And arguably, in both of those years, 80 plus percent of the openings, maybe 90%, are existing infill markets. So, is there a still more cannibalization? Yeah, not a lot. We still saw a net increase in number of members, of course. Certainly, in an existing market you are going to have a little bit of cannibalization. Arguably, a little less than we had anticipated before we cannibalized in earnest a couple of years ago. Mark Rowen - Prudential: Okay. So -- but the bulk of the acceleration came from the price increase, did I get that right?

I would say that the two biggest things would be price increase. Clearly, the biggest thing is price increase, because you are start to get the benefit of that. The other is the fact that, converting into executive members who pay $100 instead of 50. Mark Rowen - Prudential: Right, okay. All right. And then just a follow-up on the flat panel TV business. You mentioned a few months ago on your sales call that the growth was still strong there, but had slowed from much stronger growth earlier in the year. Are you seeing any reacceleration as we head into the holidays in that category on flat panel TVs?

Yes. Hold on. Bob? Yes, part of it is really the continual increase in availability for us. I mean, we are getting pretty much anything we want now from those suppliers. I think sales of majors, which was a little over 20% comp in November, the reported month of November, TVs within that was close to 50, total TV sales increase. So, I mean, the numbers are nuts in TVs. Mark Rowen - Prudential: Okay. And are you seeing margins in that category come down from competition elsewhere, or are you basically able to hold your margins and --

What I call the initial markup, no, we are not seeing any competitive price changes there, as some of the traditional consumer electronics companies have indicated lately. Our challenge has been the returns and how would impact dealing with the disposition of returned TVs has impacted our gross margin. Mark Rowen - Prudential: Okay. And have the returns gotten any better this quarter with some of the programs or are they still at roughly the same levels they were some months ago?

On a year-over-year basis they have gotten better, because it was a year ago that some of this craziness started with us. It has probably gotten a little better because of that. We still have -- we are still using it as a tool to get people in the door with great prices on TVs and some of the couponing that we do and some are past quarter they wouldn’t allow it. But, again, I can always say a lot, but stay tuned and we'll see what we need to do. As Jim has said time and again, it's an income -- it's a gross margin problem for that department. Clearly, it's an impact given its size on our income statement. At least, now we are anniversaring against it, but we will recognize it, we will address it. Mark Rowen - Prudential: Okay great, thank you.

Your next question is from the line of Deborah Weinswig. Charmaine Tang - Citigroup: Hi good morning. It's Charmaine Tang for Deb. Can you just talk a little more specifically about the trends you're seeing on the pharmacy side of the business, given the high single digit comp in Rx? And then also, are there any plans to expand your current list of 200 drugs?

There is not a lot to say other than I’m happy that the Rx is in the high single digits. We have done a little more marketing to larger user groups, employee groups -- employer groups rather, employee groups where we go to the employer and work out some deals. So, we are constantly getting into more programs. Still fewer programs than large nationals, but quite a few where we are concentrated, and we have a lot of openings. I think the second piece of that was what, the question -- Charmaine Tang - Citigroup: Second piece was, any plans to expand the current list of --

Yes, I talked to Charlie Burnett, our Head of Pharmacy yesterday, and he answers yes. And I asked him, as to, what's the difference between our slightly more than 200 and Wal-Mart's slightly -- approximately 300. He said there is some -- we are still looking at the list. These are few items we are not going to do based on cost, but there is many items that are, as he described it, some low volume ointments and what have you that we just haven’t got around to do yet. We are going through the list still and we'll continue to add to it. And I’m not trying to balloon it. I’m sure our number will get bigger, whether it gets all the way to their number, probably we'll still fall a little short of that. Charmaine Tang - Citigroup: Great. And then I have one other question, it's actually more macro level question. Do you think you could share any observations you are seeing on the sales of higher ticket item? For example, are you seeing any pockets of strength or weakness in any particular categories?

Well, electronics is nuts. Jewelry is, I guess, a pleasant surprise for us, because I think back in September and October, our jewelry comps were not down, but low single digits instead of high single digits. And so, that’s nice to see that pickup as we get closer to the holiday here, to Christmas. The things that, of course, we mentioned this summer was, what I will call the big ticket, the $900 side chair for the living room that we turned into a $300 impulse item, that didn't sell very well this summer. Right now we don’t have that kind of stuff, because that stuff, that's kind of a big ticket bulk furniture items or items that we bring in during the seasonally slow periods of middle of the summer before back to school and post Christmas-New Years and before spring lawn and gardens sporting goods. So, we will have to see how the patio furniture does, if you will, in January-February. My guess is that we're not going to back-off. We're going to look at it as great value being, as we typically are in the season earlier than traditional retailers and hopefully out earlier. And we'll see how that goes. Again, jewelry I guess was a little bit of a pleasant surprise for us. And electronics, who knows with the right number should be, it still so aren't strong. It's hard to say it should be higher. And I think part of the issue there is, once the price points of flat screen TVs went from $1,500, even LCDs went from $1,500 to below $,1000 to, in many instances, below 500 now, people are buying second and third ones. The same thing with plasmas. When they went below 3,000 you saw a pickup, when they went below 2, you are seeing a much bigger pickup and now they are in the mid to high teens. And in our case, there aren’t more available for manufactures than they were a year ago and the year before that. Charmaine Tang - Citigroup: Great, thank you.

Your next question is from the line of Bob Drbul. Bob Drbul - Lehman Brothers: Good morning, Richard. Questions that I have is, can you talk a little about the apparel business and how that’s trending for you? And I guess I am just wondering if you could maybe elaborate a little bit more in current trends. Are there any big deltas between the trends that you discussed on the quarter that you have just have reported and sort of what we are looking at in the second quarter?

Not with any expertise. I remember at the end of the -- I think it was the end of the fourth quarter when we talked about, women's apparel was strong towards the high -- if I recall, towards the high single digits, and men's apparel was weak, flat to plus or minus a couple of percentage points. And I remember, Jim said here in the meeting and saying, we just didn’t have very exciting stuff in men's apparel. I mean, it's more of that than the economy. That's still shooting over me, but it's probably more of a right answer. Why were high single digits in both, this quarter or this most recent month? It beats me. So, I really can't give you a lot of trends out there. We have been helped, of course, not just recently, but over the last few years as more manufactures are willing to sell us more items. You have seen, maybe you have seen the list of new vendors that were buying direct from for the first time, so I think that helps us a little too. But, what I basically just said is gives you no insight into what’s going on with the apparel business. Bob Drbul - Lehman Brothers: Then, how about on the guidance, Richard, for the second quarter? When you look at like merchandise margins or core operations or central expensing, any big changes between last quarter and the second quarter that you would call out for the 62 to 66?

Well, no, the range is purposely wide because what I've learnt is that on $15 billion quarters -- $15 to $16 billion quarters, 10 basis points of anything in the aggregate is $0.02 a share. And so, just sales being better by a percent or worse by a percent is $0.04, arguably. And again, I want to let you know is, is that we did -- we are not just bringing down Q1 relative to consensus. Frankly, I hadn’t really focused on what second and third and fourth First Call numbers were. At the end of our fourth quarter we talked about Q1 and the year. The year is pretty much the same, arguably I want to be conservative, because it's -- we are in an environmental that allows us to be. We are at the top of our game merchandizing wise. We are at the top of our game expansion wise. As you -- many know Jim and company, we are pushing ahead in all directions and being -- yes, we are playing offence and that's a good news. The bad news is, we'll see what happens with sales and see what happens with other expenses. Bob Drbul - Lehman Brothers: Okay, great. Thank you, Richard.

They have got a confident way, but we'll have to see.

The next question is from the line of Gregory Melich. Gregory Melich - Morgan Stanley: Hi, good morning. Richard, two questions. One was on some of the geographic stuff. You said that the West was a flattish comp and the Midwest was stronger, and that's just a pure maturity issue or do you think there is something else going on?

I think the biggest issue is the gas. Back when we were running -- we were running comps in the higher single digits, the West was 4 or 5. Now it's a little less because of -- the West is where you got -- is where we have a higher concentration of gas stations. If you think about it, if gas impacted the quarter by 135 basis points, that's the whole company and probably there is a disproportionate amount in the West Coast where half our business is and the same thing with cannibalization. We have a disproportionate impact to cannibalization in California. I hadn’t put pencil to paper on that, but I've got to believe, if just those two things we are close to 300 basis points for the company, it is easily 500 basis points for the West Coast. Gregory Melich - Morgan Stanley: Great. And then the second question was on the gross margins, just to make sure I've got this right. They were -- if they were 8 basis points positive, but the core was down 6 bips?

Yes. Gregory Melich - Morgan Stanley: All right. Gas was down, but it helped your mix 8 bips. So I guess where's the others, where's the other 6?

Probably the easiest way to think about it, Greg, is all these purposely round numbers. If you think about a department like gas, let's just make the number up here, has a 5% gross margin and the rest of the company has 11, that's 600 basis points lower margin. And now gas has 200 basis points lower sales penetration. 200 times 600 is 12 basis points. Now that's a very easy simple example. Gregory Melich - Morgan Stanley: Okay, all right. The reality is gas could have been more than 8 bips the way you defined it?

Yes. Gregory Melich - Morgan Stanley: You think about the effect on both the sales and the mix?

Yes. And keep in mind it's kind of like reminds me of manufacturing/accounting. There is the mix -- there is the price piece and the mix piece and all these other pieces, how you look at it, we kind of try to always look at it the same way. Gregory Melich - Morgan Stanley: And on the core side, down, but food and sundries were up. They must have been up pretty significantly, because hard lines and fresh foods were down. Is that --

Well, food and sundries is half our business. Gregory Melich - Morgan Stanley: Okay.

And the fresh foods is another 30%. So, food sundries and fresh foods were 60%. Gregory Melich - Morgan Stanley: Okay. Thanks.

The next question is from the line of Mark Husson. Mark Husson - HSBC Securities: Yeah. A couple of questions to do with overseas. The first one is, can you just talk about the impact of the dollar on perhaps the P&L account in the quarter? And also maybe on some of the balance sheet items that you've got out there? And the second one is, in broader terms, it seems that you've done a better job this year at sourcing from certainly some Asian businesses. Can you just talk about trends of both in gross margin on the non-food stuff?

I have to get you offline, only -- because I have to calculate it up, the impacts of the FX. I mean, if FX is 100 basis points, it help -- foreign entities are about 17%, 18% of our company, I’m just going to do math here. And let's say it was equally -- it's probably a little less than equally profitable, because you have some of the newer countries like Japan. So, 100 basis points. I am going to have to calculate it. It's too early in the morning for me. I am going to have to calculate that off and get back to you. Mark Husson - HSBC Securities: And probably procurement side is concerned?

In terms of procurement side, the one thing that stands on my mind from our budget meeting is more on the availability of procurement due to worldwide sourcing of things like produce. The fact that the dollar is weaker, I don’t think we've really seen a lot of impact out there. I mean, things are more expensive, but they are more expensive for everybody. Mark Husson - HSBC Securities: Okay. But just in terms of the mix of stuff that you're sourcing from lower cost environments. I mean, the deals are still done in dollars, right? And you're not having to do a translation here?

That’s correct. Correct. Again, I thought I'd do a lot about retail, but let's -- feel free to call me. I'll show you, I just don’t have the information in front of me. Mark Husson - HSBC Securities: Okay, great. Thank you.

Your next question is from the line of [Don Madder]. Mr. [Madder], your line is open. The next question is from the line of Dan Binder. Dan Binder - Buckingham Research: Hi, good morning. Couple of questions. First, just some clarification on the SG&A impact on payroll. You had indicated that there was -- it was up a couple of basis points year-over-year in Q1. Did that include the impact of the allocation issue that you mentioned on the call as well?

No, because that’s benefits. Benefit -- when I talk about payroll is, benefits are about 40% of payroll. But when I talk payroll specifically, that did not include those components. Dan Binder - Buckingham Research: Okay. And then on the buyback, you seemed pretty comfortable with the pace you're at. Lot of questions about what you could do in terms of debt. Any sense of how much you could take on without jeopardizing the ratings at this point, or are you still working on that?

We're working on it, Dan. As you might expect, the investment bankers have come to us and there is pretty standard looking at comparable retailers and what they're -- there seems to be certainly a lot of room to maintain our rating where it is. But we haven't -- I will be happy to get back to you, but it's more standardized comparisons than saying, this is how much we can do. Right now, our desire to do exceeds -- is less than our ability to do in our view. Dan Binder - Buckingham Research: And then on the generic program, are you maintaining the $4 generic program as you -- following the introduction of the $10?

We no have 30, 60 and 100 -- 30-day price, which is more than more 4 and less than 10. And I am sorry. I don’t have that in front of me. And, we have a 60-day price. And I assume on a 30-day, the $4 is cheaper than our competitor. On a 60-day, it's probably about the same, rough number, probably little better or little worse. And on the 100-day, it's $10 for 100 pills instead of 13.33. Dan Binder - Buckingham Research: Okay. So the -- any margin pressure that you were feeling from the $4 program with that, I guess, presume, but that would just go away at this point?

Yes. Dan Binder - Buckingham Research: Okay. And then on the -- in terms of the membership growth, largely as we expected I think this quarter, the way the accruals work, as I understand it, should we be expecting that rate of growth to accelerate through this year?

You should -- certainly, this is yes. Dan Binder - Buckingham Research:

I think in Q2, yes. In Q3, yes. And I think in Q4, it will be still growing, but at lower rate. Dan Binder - Buckingham Research: Okay. And by the end of the year, we could be like sort of 16% kind of growth in that line item?

Not if you want to think about it in really round numbers. We talked about earlier when we announced it. We said the impact of membership line is -- the aggregate impacts 15 million people, 15 times five is 75 million. Let's -- if you think about it, our quarter is 12 weeks, 12 weeks, 12 weeks and 16. But if you think about just 12 months and 75 million, that would be 6.25 million. let's round it to 6 million a month. What you do is, is in the very first month of the increase in theory our members have spread out renewal, but it's over whole year. When you think about it, we will get 6 million of extra dollars at last July when it hit the renewal -- hit the renewals, that was the first month of getting 6 extra million. Well, we wouldn’t book all 6 million, because that would impact the next 12 months, 500,000 a month. So, in July, if you will, you got a 0.5 million of book income, and obvious you got another 6 million in cash from the next group of renewers, and you got two times 500,000. And then in September -- I am sorry -- yes, in September, you've got three times that. So, if you think about it in Q4, which ended in end of August, you got one $500,000 tranch, and two $500,000 tranches in August, one-twelfth of each of the 6 million in July and one-twelfth of the 6 million in August. Now these are the examples. But rough number does a 1.5 million addition to recorded memberships fees. When you think about the next three months, essentially September, October, and November, you get 1.5 million in September into your books. You've got 6 million in cash, right? Because you've got three tranches with 0.5 million, and October you got 2 million, four tranches of 1.5 million, and November five tranches. So, you've got 1.5 million, 2 million and 2.5. You are now up to 6 million of book income in the quarter, even though you got 18 million of extra cash proceeds, and so on. So in Q2, these are a very rough numbers, but you have 3 plus 3.5 plus 4, which is 10.5. So kind of see how the math works here. Those are really rough numbers, but it's a -- it gives you a sense of how it grows through 12 months and starts growing little less over the next 11 months. Dan Binder - Buckingham Research: Okay. And my final question on membership, are you seeing any increased level of discounting from your competitors?

Yes. I was going to barge in and say no from us. But yes, we do see that and that's fine. It's not that we are completely sure on it. We've done some marginal few things from time to time, but our big margin thing that we did back in '01 and '02 when we opened in a lot of new markets was a free check mailer. That time has seized to exist around here and we will do some co-marketing things with American Express with, kind of, for co-branded card. You get a, whatever, $10 cash card or something like that. But we've done those kind of things historically anyway. If anything, we have probably done a little less than more over the last couple of years. We certainly have seen not only some membership marketing things from our competitors, but certainly a lot more direct advertising as well, which is fine.

Your next question is from the line of Christine Augustine. Christine Augustine - Bear Stearns & Co.: Hi, thank you. Richard, I am wondering -- I have a few questions. One is, why was the gross margins down in fresh food? Could I just -- could you just confirm the penetration of gasoline in the sales mix, just on an annual basis? And then does the -- a little bit more conservative guidance for Q2 have anything to do with how the current sales trends are in December?

Okay. What was the second question? Christine Augustine - Bear Stearns & Co.: Could you just verify on an annual basis roughly the penetration gasoline to total sales?

Both numbers are in the mid to high single digits. So -- but was almost exactly 200 basis points dealt year-over-year in the quarter. In terms of fresh foods, meat sales are half of fresh food sales and meat margins were weaker. And I assume it's prices are higher and labor cost are higher, and not all of it is passed on to the customer, because meats are very competitive to buy them out there. And, the last one, in terms of Q2. Christine Augustine - Bear Stearns & Co.: Yes, does it have anything do it with the trend here in December, your more conservative outlook versus First Call on Q2?

No, really it was just like, when I sat down over the last few nights to start writing my little script here and I looked at First Call numbers, and I go, wow, where did they get that number for Q2 out there on the First Call. As frankly a month ago -- three months ago I hadn’t really focused on it, looking into Q1 and whole year. Now, arguably as we were in Q1, our mindset in terms of conservatism is like it was in Q1. Things are good around here, but let's see what happens with the economy. Christine Augustine - Bear Stearns & Co.: Thank you.

The next question is from the line of [Elan Si].

Hi. Can you just address, whether you look to monetize the real asset value, as you know there are a lot of rumors out there for any retailer that has -- that owned their real estate? And do you believe that if you do not address this that part of equity you will be interested in buying Costco? Thank you.

Who knows what everybody else is thinking out there. We have no current plans. Our plans that you have seen over the last two years is to, initiate a dividend, ramp up expansion and start to buyback stock in earnest at a level we're comfortable with. We'll continue to do what we're doing.

Your next question is from the line of Chuck Cerankosky. Alex Bisson - KeyBanc Capital: Good morning. This is Alex Bisson. I’m sitting in for Chuck Cerankosky. I’m curious if you could look at your sales, excluding electronics and gasoline, if there is any trends going on with inflation, particularly within food and general merchandise?

Nothing is to speak of. The only thing that comes to memory over the last couple of budget meetings is, nuts. Nuts are way up, and meat. Meat is up about as much. We have seen not just in the last few months but over the last couple of years, paper goods. We saw a couple of increases in the paper goods over the last couple of years, probably ranging from 4% to 8% in the aggregate. On specific nuts, we have seen about 20%, 30% -- hold on, I have got a sheet. When I look down the list here, of the top 20 items that impacted our LIFO dollars, cut 20 items. Five were meat, which is again I mentioned that, eggs are up huge, but not a big dollar amount to the company. Really nothing else really stands out in that. Alex Bisson - KeyBanc Capital: Nothing in general merchandize?

On these largest inflation items, I am looking down the list here. Of the top 25 items in terms of aggregate LIFO dollars, one of them is a non-food item. Alex Bisson - KeyBanc Capital: That is helpful, thank you very much.

The next question is from the line of Peter Benedict. Peter Benedict - CIBC World Markets: Thanks, Richard. A quick question, I might have missed this. Did you tell us what the stock compensation expense was in dollars during the third quarter?

I don’t have that handy in front of me. I don’t think we generally give that out. Peter Benedict - CIBC World Markets: Okay. And then moving back to the membership fee, can you just comment on the attrition rate you have seen? I think in the last call you said you hadn’t seen much in terms of attrition with the fee increases, is that still the case.

Yes. Peter Benedict - CIBC World Markets: Excellent, thanks.

The next question is from the line of Neil Currie.

Before I answer the next question, I guess, I can tell you, the stock compensation expense was -- is approximately 32 million in the quarter. Again, increased a little bit because of the addition of assistant managers. Neil Currie - UBS: Good morning, Richard, it's Neil. Just wanted to know if your guidance for the year, what sort of assumptions you are making in terms of stock buyback?

The assumptions we made in the beginning of the year were somewhere in the -- I don’t have the exact numbers in front of me. Somewhere -- more than 1 billion and less than 2 billion, I'll give you that kind of range, somewhere in the middle. Neil Currie - UBS: Okay. And in terms of determining the top end of our guidance for the year, rather than just looking at the second quarter, that’s again more based on just conservatively by the economy or is there anything you're seeing in the current sales, which leads you to believe that you should be more conservative?

Nothing has changed other than -- frankly, nothing has changed. Neil Currie - UBS: Okay, thanks.

One thing that changed was is, again honestly, three nights ago or two nights ago when I sat down to start writing in earnest the update of my little spiel here, I looked at the First Call consensus for Q2, because usually we look at the current quarter in the year and provide the guidance on that. And I looked Q2 and I go, well, where did that First Call number come from, when in fact it was the same First Call number from a year ago -- from three months ago. So, I have really take in a few cents extra out of Q2.

Your next question is from the line of [Scott Mallet].

Hey, good morning. Just on the unit openings, I think you went from 35. You were saying on last call maybe 35 to 40 to now 32 to 35. Can you just go into a little more details the missing -- maybe is there upside or downside to those numbers?

Well, the 35 to 40 goes back in my view to August or maybe October, at the very beginning of the year. Within that number, there is probably 7 or 8 in months 12, or August of ’07. Inevitably, we fight by head to get it over as quickly as possible. But as every month passes, we know with permitting issues or rain issues and the winter and to the extent that you can't get a foundation laid, those types of things occur. I kind of said, I think, (inaudible) in last year as well, we're at least getting closer than we used to. My guess is that, when we said 35 to 40, in our view 35 was a solid number and we are going to try to get a few more in and try to get almost or likely be at month 12 end. And now three months hence, we have a better handle on that. And my guess is the 35 was the strongest number over the 35 to 40 number, and 33 to 35 is a smaller range now. So, I think we've come down a couple.

Okay. And then I don't want to be [legalist] at this point at all. I am not trying to be difficult in any way. Just forgetting about what First Call was and just looking at 2Q, it looked to me like the earnings growth will be anywhere from flat to 6% with share repurchase. I guess if I asked it that way, I am just wondering the earnings growth perspective from where you were last year, was it just that it was that strong of a quarter?

I'll have to go back and look at last year. My guess is that's part of the answer.

Okay. Thanks.

The next question is from the line of Virginia Genero. Virginia Genero - Merrill Lynch: Thanks, Richard. I am enjoying my two flat screen televisions from your store. Thank you. The first on pharmacy. A 100 pills for $10, is that basically a replacement for the $4 -- 30 pills for $4, is that what you said?

The reality is across are asking, we believe, most pharmacy and retailers out there -- chain retailers, more than $4 to fill a prescription without medicine in it, just pharmacist and the bottle and all the regulatory stuff you've to do with record keeping. And while we maxed it, because we are competitive, we want to be competitive out there, we always have tried to encourage people historically on a, let's say, a given item, even a given generics item, we might have been 6.50 -- 6.99, making these numbers up, but 6.99 for 30, and 8.99 for or 9.49 for 60, and 10.99 for 90, or 10.49 for 90. We match the $4, because we want to remain competitive, but we lose money on it. And we would expect anybody selling a $4 month 30-day supply is going to still try to up sell the customer, maybe not, we would to a higher -- to a 2 month or 3 month, because that's the way that they can save more and we can lose less. Recognizing the 4 -- a couple of months ago, we didn’t have a $4 30-day offering. With this deal, we look -- you can give skin this thing 12 different ways. We looked at it as, we can offer a $100 -- 100 pills for $10 and make money and give the customer a better deal. And will we lose someone who insists on 30 days at $4? Yes, there are some of those people, a small subset of those people that are (inaudible) not only $4, $6 to $7 or whatever it is. $7 here versus $4 elsewhere, they may decide to leave. We will certainly share with them what they are paying for per pill for $10 by comparison and something are priced [between the phase] years ago, sometimes you have to deal with them and (inaudible) sales. Virginia Genero - Merrill Lynch: Okay. But, this is a replacement who is effectively lower pricing in response to that?

Yes. Virginia Genero - Merrill Lynch: Okay. And are your new member signups on plan, Richard? I am asking Sam's and BJ's I think have said, renewal rates are great, but new member signups are lagging plan?

I haven’t heard that lately. If I think back over the last year or so, every month in the budget meeting when Paul Latham, our VP of Membership and Marketing, gets up to talk, on a monthly basis sometimes on a -- versus our own plan for that month, we are a little higher or little lower than planed. And we’ve actually -- we've been a couple of months over the last year, not the last month or two, where you had ever so slight negative growth to signups. But when you look at it, it's because we -- there is a limited number of hours or cumulative full time equivalents in each warehouse whose jobs include outside membership marketing and felicitation as well as doing price checks, comp shops and things like that, as well as doing tabling activities, some of which were required under the Amex relationship or certain number of weeks ago, tabling activities for Amex items. So, in any given year, we've seen a net increase of new members per warehouse. But it has never been a big number above zero. And so, the answer I guess is no, we haven’t seen that. There has been no trend, other than when we cause it, because we're doing two weeks of Amex co-branded credit card marketing activities and those -- we have six peoples that aren't out on the street doing stuff.

Your next question is from the line of Mitch Kaiser. Mitch Kaiser - Piper Jaffray: Good morning, guys. I was wondering if could comment on flat panel TV margins. I think you said that they are fairly consistent? And if that’s the case, is the initial markup similar to how you price or mark things the rest of the house up?

The answer to the second question is, yes, recognizing not everything as in the same markup. Talking to our electronics buyer a couple of weeks ago, the feeling was -- is that, one, these big ticket items. A, it is very competitive, and B, they are big ticket items, so you can work on lower percentages and still make certain number of dollars per unit sold. Generally speaking, and this is before markdowns and before disposition cost of stuff, but generally speaking, TVs have been in the mid to high single digit initial markups and at those levels we feel we can generally save the customer 5% to 10% versus competition. And so, as there has been a little more competition out there, we haven’t seen our IMUs, if you will, change dramatically. What we see though is our returns hurting us. Mitch Kaiser - Piper Jaffray: Right. And then do you feel that the differential in markup is starting to close?

No, not a lot. Mitch Kaiser - Piper Jaffray: Okay.

Recognizing, part of it is, we have a great looking presentation now. We still have probably 10 to 14 SKUs out there, three or four of which are pending to leave because you are down to the last two quantity of one item. That’s different than 50 to 100 SKUs elsewhere. And I think the challenge, my guess, is that -- you have to have some of those competitors. But my guess is that, they are seeing it across a lot of inventory trying to make sure they get through it all. Mitch Kaiser - Piper Jaffray: Okay. And did I hear you correctly? You said that the initial markups in the high single digits there.

Mid to high. Mitch Kaiser - Piper Jaffray: Mid to high, okay. Thank you.

Your next question is from the line of Dan Geiman. Dan Geiman - McAdams, Wright & Ragen: Hey, good morning. I guess irrespective of electronics, can you give a general sense of the competitive environment that you are seeing at this point, maybe talk a little bit more about what you are seeing now versus prior periods as well?

Well, I think you are on -- what are some of the weakness we have seen over the last couple of years in parts of media, what we called, media, like whenever a hot movie or a book comes out, some of the big discount retailers, the Targets and the Wal-Marts in the world and even some of the supermarkets, they will sell that a couple of bucks below cost for two or three days before the weekend, for that first weekend. And they bring the price, so it's above us. We have seen some reduced sales penetration, now that’s not a new thing that’s over the last couple of years. As I've said before, when somebody says who is our toughest competitor, our toughest competitor is us. We are our own toughest person out there and I see it every four weeks in our budget meeting. And I am not trying to be cute or anything, but when we look at all the ads in the paper, we compete with them. Even though some of it's -- maybe we don’t have to, we do. So I don’t know if we've seen any big changes out there. If we could continue to stay ahead of the game in terms of new items and that helps us. The TV thing is really an anomaly. The increased popularity of people buying two or three now, not just one, because the price points have gotten to such a point, when streamed -- when tube TVs were out, when the Mitsubishi 30 whatever inch, was the big TV everybody bought, that was like a $2,000 price point. And when big color TVs got down in the 600, 700, buy new ones all the time. This whole concept of spending $1,200, because it's down from 2,500 and buying two or three of them over the last couple of years, is a new one. With that, I am going to take two more questions.

We do have a question from Mark Husson. Mark Husson - HSBC Securities: Yes. Sorry, it's a clarification of Virginia's clarification. Can I still get $4 generic prescriptions in Costco, or do I have to buy 100 pills?

You cannot get a $4 prescription in Costco. Mark Husson - HSBC Securities: And I can't get a $6 one, I have to get a 100 pills?

You can get 30 or 60, and I think the 30 is going to be a couple of $3 more than $4, and the 60 is going to be probably right around the same price as $8. Mark Husson - HSBC Securities: That’s great. Thank you.

There are no further questions.

Well, that’s it. Thank you very much. We'll be here to answer any questions.

This concludes today's conference call. You may now disconnect.