Good morning. My name is Whitney, and I will be your conference facilitator. At this time I would like to welcome everyone to the Costco wholesale Corporation's first quarter fiscal 2006 earnings announcement. 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 Now, I would like to turn the call over to Richard Galanti, Chief Financial Officer. Thank you. You may begin your conference.

Thank you, Whitney. Good morning to everyone. And 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 results, events 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 press releases as well as other risks identified from time to time in the Company's public statements and reports filed with the SEC. This morning as usual I would like to review with you several items. To begin with, our 12 week first quarter fiscal 2006 operating results. We came in as you know, at $0.45 a share, up $0.05 over last year's first quarter of $0.40 a share. These results were $0.01 above the top end of the EPS guidance that I had provided you in early October on our fourth quarter year end earnings conference call. And even with this week's First Call estimate of $0.45. And as I will review with you later today, this quarter's $0.45 figure was negatively impacted with a charge of approximately $7.6 million pretax or $0.01 a share which, is our estimated retention cost of hurricane Wilma that impacted Florida this past fall. Needless to say that was not included in our assumption, to start with. So excluding Wilma we would have reported $0.46 a share, $0.02 above the top end our estimate and $0.01 above the current $0.45 First Call estimate. In terms of sales for the quarter, our 12 week comp sales figures showed an increase of 9%. And in terms of the three retail reporting months that essentially coincide with those, with the first quarter, September, October, and November our reported comps were 11%, 10%, and 6% respectively. Of course, the strength in September was particularly strong given the Katrina hurricane and what it did with gas prices both from an inflationary standpoint with gas, as well as I think some of the positive press that we got nationally. Other topics of interest I'll review this morning; Our recent openings. We have opened a total of 12 locations since the beginning of the fiscal year on August 29. Nine in the U.S., including one relocation, one new location in Canada, our 66th in Canada, one new location in the U.K., our 17th and one new location in Mexico, our 28th. Of course, Mexico we account for on an equity basis. And we're still on track to open 28 plus net new locations for the fiscal year. And when I say net new, I mean net of relocations and excluding Mexico, which are not consolidated into our figures. I will also discuss ancillary business results, Costco online, membership trends, our balance sheet, and lastly provide you a little updated direction and guidance for Q2 and the fiscal year overall. So with that said, sales for the year's, for this year's first quarter were $12.7 billion, up 12% from last year's Q1 of 11.3. On a 12-week to 12-weak comp basis comps were up 9%. And for the quarter our 9% reported comp sales results were a combination of an average transaction increase of about 8% for the quarter and an average frequency increase of about 1% for the quarter. I might add that cannibalization was a little higher year-over-year, impacting this quarter by about 70 basis points. If you look at the average transaction of 8%, that included about 0.75% improvement due to FX year-over-year, the weaker U.S. dollar. And about 1.5 percentage points due to gasoline inflation. Although, that has subsided quite a bit as we ended the quarter as prices have fall from raising in September. In terms of sales and comparisons by geographic region, and I guess the Northwest and the Midwest stood out as well as California not being far behind in terms of being better in the quarter versus last year. Every region, in fact, but the Southeast, which was impacted by the hurricanes, of course, we had up to ten units closed for anywhere from one or two to several days. Comps for the quarter, every region the comps in the quarter were better than they were last year. In terms of merchandise categories; again, each major department showed improvement versus last year, both food and sundries, hard lines. Soft lines was about the same as last year in the quarter. Fresh foods up versus last year. Ancillary, particularly strong again, even without gas, a double digit comp number. In food and sundries, no real outliers. All nine subdepartments of food and sundries were positive. Eight single digit numbers and one actually above 10%. Hard lines, certainly the strength in the subcategory was majors, with comps in majors being in the high teens. Helped dramatically by all the cool electronics stuff and plasma and LCD screen TV's and digital cameras and what have you. In soft lines, we saw strength in domestics, housewares, small electronics and home furnishings. With weakness in media and apparel. Gas sales by the way were, as I mentioned, very strong, but about a 45% comp with 9% of that being gallonage. And again ancillary businesses, even without gas, were up low double digits. Moving down the line, items of the income statement. Membership fees, we reported $262.6 billion, or 2.07% of sales in the first quarter. That's up 10% in dollars and down 3 basis points as a percent of sales but still up almost $25 million. A very good showing given our strong comp sales results. And in terms of dollars, we were quite pleased with that. In terms of membership, we continue to benefit from strong renewal rates that remain at our historical high of 86%, increasing penetration of the $100 a year executive membership and new market openings. In terms of numbers at Q1 end, Q1 end and I'll give you a comparison at year end back in August as well, gold star 16.5 million versus 16.2 million at year end. Primary business remained the same at 5.1 million. Business add-ons both at 3.5 million. The total, 25.2 million versus 24.8 million at fiscal year end. Including free spouse cards, 45.8 million cardholders at quarter end versus 45.3 million at fiscal year end. At first quarter end November 20, our paid executive members approached 4.6 million. It was an increase of 330,000, or 7.5% since fiscal year end just 12 weeks ago. So, an average weekly increase of about 28,000 conversions, new executive members. All of last year, by the way, the executive membership base increased about 19,000 week. So, we had a push on that during the first quarter. We did quite well. Executive membership, which the number of members which had increased 30% in all of fiscal '05, again increased another 7.5% of our base in the first quarter of '06. Going down the gross margin line. Q1 gross margin was lower year-over-year by 11 basis points, coming in at 10.54 versus a 10.65 last year. This is much improved in terms of year-over-year comparison as compared to the Q4 year-over-year comparison just three months ago. Recall in the fourth quarter of '05 year-over-year we were, our gross margin reported was 37 basis points lower year-over-year. If you jot down the following numbers I can give you a little bit of editorial here. We have five line items, merchandising, 2% reward, LIFO, EITF 310 and total. And then the three columns would be; first column would be fiscal year '05 in its entirety. The second column would be Q4 '05, just those 16 weeks. And the third column would be first quarter of '06, the 12 weeks ended November 20. Looking in and this again would be basis points as a percent of sales, gross margin as a percent of sales year-over-year comparison of those numbers. In merchandising going across line one. In '05 year-over-year for the year it was -3 basis points, in Q4 '05 it was -24 basis points. And in Q1 '06 it was -2 basis points. 2% reward. again this reflects the increasing penetration success of that program, -10, -9, and -9. LIFO, -0, -4, and 0. EITF 310, which is now well anniversaried but for all of fiscal year '05 it was +5. And the next two columns, 0 and 0. So all told for all of '05 gross margins as a percentage of sales were down nine basis points. For the fourth quarter they were down 37 basis points, and for the first quarter, down 11. As you can see, And the first thing to point out, of course, is the merchandising gross margin that was lower year over year in the first quarter by just 2 basis points compared to 24 in the fourth quarter. The -2 basis point figure was actually a little better than I had thought back in early October when on my October 6 year end conference call I said; in terms of our fiscal '06 gross margin outlook we expected reported gross margins would probably be down a little to start the year due in large part to the gas/non-gas sales penetration issue. So how did we get to -2 basis points here? First, lower year-over-year sales penetration of our core merchandise business. That's food and sundries, hard lines, soft lines and fresh foods. Which have a much higher gross margin than gasoline gross margins. This reduced sales penetration of the core areas of merchandising, hurt the margin a little bit. As well, while food and sundries, which is over 40% of our total sales showed higher gross margins. Gross margins of hard lines, soft lines and fresh foods were a little lower year-over-year. No real change in competition. We did see in the apparel area a little bit higher markdowns. That impacted margins by a few basis points. We also saw what we call D&D, damage and destroyed, at higher returns. And part of that has to do with mix. We've had tremendous strength in consumer electronics. And you've got $1,000 and $2,000 and $3,000 television sets going home. Where not every customer understands how to install it and what have you, and given our generous return policy, we would expected that. And that did hit us a little bit in Q1 as well. Also, on a lot of these big ticket items you tend to have a little lower margin because it's a competitive area. But in terms of competition with our direct competitors, we haven't seen any major change there. All told, those 80% of total sales had slightly down year-over-year gross margins. And while the gasoline gross margins were actually up in Q1 year-over-year, which certainly helped our reported gross margin. This year's Q1 saw significantly higher sales penetration of this lower category, as I mentioned. Finally, as our other ancillary business overall contributed slightly to margin improvement. Looking beyond the merchandising component of margin. Our Q1 gross margin was impact, as I mentioned, negatively by 9 basis points from the higher sales penetration of the 2% executive member program. This 9 basis points is consistent with Q4 '05's year-over-year comparison, gross margin variance. Again, we had a little bit of a push on executive membership programs during the first quarter and saw great results from it. In terms of LIFO, note that we took no charge in either this year's or last year's first quarter. As of Q1 end we were ever so slightly deflationary, believe it or not. Overall, I look at Q1 gross margins as being pretty good. A much improved variance year-over-year in Q1 versus the variance year-over-year in Q4. In terms of our outlook continuing into '06, our reported gross margins again, we'll probably continue to be a little down year-over-year. And due in very large part to the gas/non-gas penetration issue. The impact from increasing executive memberships should still be a small hit to it. LIFO, notwithstanding, no charge for LIFO in Q1. I would still assume a little inflation this year and therefore a possible LIFO charge during the course of the year. Although, we did have LIFO charges in each of Q's 2, 3 and 4. But I would have said the same thing three months ago and we came out a little deflationary. So, we'll see. And we believe our core merchandising groups from, a competitive standpoint, are fine and we feel fine about where we're going with that. Before moving on to SG&A let me briefly go over our ancillary businesses. Pharmacies, we ended first quarter with 382. That's up eight from fiscal year end. Food service, or food courts, 435, also up eight. One-hour photo labs, 432, up nine. Optical, 424, up 10. We remain at 10 copy shops, print and copy centers. Hearing aid centers, we added six to be at 174. And we added eight gas stations to be at 233. In total for Q1, ancillary business sales comps were up 26% and up 11% without gasoline. Moving on to SG&A. Happy to report again positive trends in SG&A leverage. In Q1 of '06, as you will see, our SG&A year-over-year was lower or better by 5 basis points, coming in at a 993 versus 998 as a percent of sales last year. Again if you'd write down a few numbers here. Again, I'll give you three columns and six line items. The line items would be operations. The second one would be central. Third would be stock options. Fourth would be EITF 310. Fifth would be quarterly adjustments. And lastly would be total. And again we'll look at the fiscal '05 year as column one, Q4 '05 as column two, and Q1 '06 as column three. Going across, and again what positive numbers here mean, lower SG&A basis points year-over-year. In terms of core operations, fiscal '05 was a +14, Q4 '05 was a +17, Q1 '06 was a +9. And as I'll show you in a minute, while still plus, a little less plus than last year. Last year was the first year of some of the significant benefits in healthcare as we made some changes to our healthcare plans. But we're still seeing good leverage in core operations. Excuse me. Central; 0, -1, and +2. The -1, of course, would mean for all of, for Q4 of '05 central expenses as a percentage of sales were higher by 1 basis point. Stock options, -6, m-7, -6. EITF 310, -5, 0 and 0. Again, that had the impact in the first half of '05. Quarterly adjustments, -1, 0, and 0. What the quarterly adjustment simply, and that's part of SG&A is the hurricanes. Interestingly we also had hurricane charges in Q1 last year of $6.4 million related to three or four different hurricanes that hit Florida. Again, the 7.6 million this year, that was all related to Wilma. And it hit the first quarter of '06. In terms of a little editorial on SG&A I'll point out the following. As we were hurt, if will you, in our gross margin percentage from changes with regard to strong gasoline sales, those same strong gasoline sales arguably helped us a little in SG&A this year. Also, we benefited in lower Q1 over Q1 SG&A. An improvement in our largest expense categories. Payroll improved year over year in Q1 by about 8 basis points. And our Workers' Comp and benefits expenses are also continuing to show improvement year-over-year. The one line item that impacted us negatively by a few basis points is utility expenses. I don't have to tell you what's going on with that. The 2, moving down the line the 2 basis point improvement in SG&A central, again was helped by strong comp sales. Central costs, we feel are well in check. Finally stock option expense, which higher by 6 basis points year-over-year in Q1. The thing I'd like to point out, of course, is beyond fiscal '06 we don't expect a big incremental negative impact to SG&A from option grants. Regarding the expensing of stock options, as you know, we began expensing stock options at the beginning of our fiscal '03. So, we now have, as of the beginning of this fiscal year we had three years of gradual expensing under our belt, if you will. Under previous accounting rules, FAS 123, given that our option grants vest ratably over five years, we have seen the expense grow each year such that by fiscal '07 we would have included in our income statement 5/5, if you will. Or essentially a full year of stock options. 1/5 of each of the five year grants that they vested. In that regard, our pretax expense to earnings in fiscal years 2003, 2004 and 2005 were $12 million, $37 million, and $68 million respectively. And under FAS 123 we would have budgeted an '06 pretax expense of about $100 million. Now, recently a revised FAS 123, called FAS 123R came out. And we now have fully adopted this effective the first quarter this year. What it affect does, it gets you fully, your income statement is being hit fully for what I'll call the 5/5 answer. 1/5 from each of the last five years. As I indicated at that the October call, the impact from 123R would be an additional $12 to $15 million this fiscal year. This was in our budgets and in our guidance, both on this call and on our previous October 6 call. In terms of SG&A outlook for the remainder of '06, I'm encouraged what we are seeing in each month's results in terms of payroll and benefits and what have you. Again, offset a little bit by utility costs. But we do have, and again, we do have this year a slightly higher stock option expense year-over-year as well as our ramped up expansion plans. But really no chapping direction from our prior discussions. And again I point out with regard to the incremental increases we've seen each year that now accumulate probably 20+ basis points into SG&A over the last four years. After fiscal '06 we won't see any big incremental changes as a percent of sales in that number. Next on the income statement is preopening expense. $2 million or 1 basis point higher coming in although 12.4 million or 10 basis points. Higher preopening related to more warehouses opened. Last year in Q1 we opened seven openings with no relocations. This year, nine openings with one relocation. No surprises. In terms of revision for impaired assets and closing costs, with Q1 '06 these totaled $1.2 million. That's actually 1.6 million lower than last year's first quarter closing cost line of 2.8 million. So all told, operating income in Q1 '06 was up $25 million over last year's Q1 figures. Or up 8% to $325.5 million this year versus $300.6 million last year. Again, both of those numbers were impacted by hurricane charges. Below the operating income line. Reported interest expense was substantially down by about $6 million year-over-year. Last year in the first quarter interest expense was 9.6 million, this year 3.7. This reflects both the June 15 payoff of a $300 million debt amount. And lower interest expense on our convertible debt, as more of its holders converted into our dividend paying common stock. In interest income and other was significantly higher year-over-year as it has been in recent quarters. Coming in at 25.5 million this year, up right around $10 million from 15.6 million last year. Virtually all of this increase was due to much higher investment income, higher cash balances earning higher average interest rates. Although our cash balances, as I'll talk about in a minute, have come down a little bit relative to where they were as we continue to buy back some stock. So overall pretax income was up 13% versus last year's Q1. From 306.6 last year to 347.3 million this year. In terms of our effective tax rate, it was 37%, even with last year's Q1. For all of fiscal '05 it was at what I'll call a normalized 36.2% for all of '05. We did have some additional one-time benefits last year. But again, in trying to do apples to apples it was 36.2. And it came in at 37.86 in the first quarter this year. A little higher than my estimate that I gave you in October when I said it would be about 37 going into the fiscal year. For the remainder of the fiscal year we would budget somewhere in the high 37's or 38. For a quick rundown of our other usual topics I'll start with the balance sheet as of November 20. Cash and equivalents 3.289 billion. Inventories, 4825. Other current, 728. Total current assets, 8842. Net PP&E, 7916, other assets, 624. Total assets, 17,382. On the right side; short-term debt 62. Accounts payable 4859. Other currents, 2534. Total current liabilities 7455. Long-term debt 547. Deferred and other 254. Liabilities total, 8256. Minority interest, 60. Stockholders equity, 9067. And total on that side of course 17,382. In terms of our balance sheet, again, very, needless to say a lot of strength. Debt to capital of sub 10%. In terms of one of the things that we look to measure ourselves is our accounts payable ratio, or accounts payable as a percent of inventories as a percent of accounts payable, I'm sorry, accounts payable as a percent of inventories. We reported at Q1in 101%, so we had more accounts payable than inventories. And that's up about 2 percentage points from last year, reported number of 99. Now, in fairness both of those numbers account include accounts payable for construction projects. If you want look at true merchandising accounts payable to inventories, we're also up 2 percentage points from last year. Last year in the quarter that number was 83%. This year 85%. And a reflection of improving our turns, doing what we try to do every day. Average inventories per warehouse were up $265,000, 10.677 million per warehouse last year versus 10.942 million. At Q1 end you're always going to see, first of all, the highest average balance per warehouse as we, that of course is four weeks shy of Christmas. And so right in the thick of things in terms of Holiday inventories. The 265 actually is a relative improvement, I guess. It's only 2.5% up year-over-year, a little lower than we've seen in the past. Not bad, particularly given our 9% comp sales figures. Reasons for being higher, we finally have seen a turnaround in the FX, so really no FX impact. As the dollar has strengthened, particularly relative to Canada from where it had been. The higher consumer electronics by about 100,000 a warehouse. Again, that business is on fire. And higher year-over-year jewelry and toy inventories totaling about $130,000 per unit. So, most of it was in those three areas. Again, all seasonally related. No worries. Our merchants feel our inventories are clean in terms of anticipated postseasonal markdowns. But as I mentioned earlier, we did have some extra markdowns in the first quarter related to some of the longer warmer weather before it turned. But as I had indicated when I discussed that markdowns were a few basis points higher in the quarter, not a big deal there. In terms of CapEx, in '05 we spent 995 million. Of course a chunk of that relates to Q1 openings. Our projections for this year are 1.2 to 1.3 billion. This is for the 28 to 30 planned new openings. In Q1 '06 we actually spent 272 million. Next topic, Costco online, is actually going great guns. For the quarter, sales increase was up 61%, significantly ahead of our budget. Next one in discussion, expansion. Again if you want to just jot down numbers. In terms of new openings, in all of '05 we opened 21 net new, not net new but total new openings. That included five relo's. So total net new openings last year were 16. We also opened three in Mexico last year. Now, looking at that time four quarters this year I'll give you my best guess right now. In Q1 we opened nine net new, I'm sorry, nine total, including one relocation, so eight net new. Plus one in Mexico. In Q2, we have opened already, and planned that will be it, as we've now pretty much done for this calendar year. Two new, none of which were relo's, so a total of two. Zero in Mexico. In Q3 six new, including one relo, so five net. And zero or one in Mexico. In Q4, 14 new, including one relo. So 13 net new. Plus one to two in Mexico. That would give you 31 total, including three relo's, or 28 net new, plus two to three in Mexico. You may ask that; given our recent results of opening fewer than expected openings in each of the last three years. And given that fiscal '06 is a little bit back-end loaded with 14 in Q4. Why should you be comfortable with getting all these opened? Well I think first and foremost, we feel more confident about in this year than we have in the last couple of years. But lastly, of those 14 total new openings in Q4, only four of them are currently planned in August. And even on those four we feel a little better than we have felt in the past in terms of what may be back-end loaded. So, we're well on our way. And I think that our original guidance this year was 28 to 30 net new. This 28, by the way, includes I think 26 or 27 that was in that original group, plus two that we added. So, we've lost a couple and added a couple. I think we're going to be very close to what I said at the beginning of the year. If it falls, it falls one or two, not 10 or 15. So, if you use the 28 net new on a basis of 433; that would be 6.5% unit growth and about 7.5% square footage growth. Significantly ahead of the last several years. Lastly, I want to talk about our stock repurchases. As you probably know, we have had in place an existing common stock repurchase program authorization allowing to us repurchase up to $500 million of Costco common stock. During our fiscal fourth quarter, actually beginning in early June, we repurchased during the quarter approximately 9.2 million shares at an aggregate purchase price of about $413 million or just under $45 a share. So, we still had repurchase authorization under that program of about $87 million. On October 6, when we announced year-end earnings we also announced a new program that was authorized by our Board. That would allow to us repurchase up to an additional $1 billion of common stock. Since that time and through yesterday, we have purchased an additional 6.6 million shares at an aggregate purchase price of about $315.6 million. So all told, since the beginning of, since the beginning of fiscal '05 Q4 back in June, back in late May, we repurchased a total of 15.8 million shares at an a purchase price of $s million or a little over $46 per share. Finally, before I turn it back for Q&A some direction on earnings. As you know again lacking at Q1, in Q1 we had $0.40 a share last year. At the time of the October 6 conference call, First Call estimate was $0.44. I had indicated on that conference call that we expected that was at that time high end of our range. I'm happy to report of course that we came in on reported basis $0.45, $0.46 if you exclude hurricane Wilma impact. The First Call estimate for Q2 is $0.60. Again, I'd like to stick with what I said last quarter. That this is the high end of our comfort range and we'll see what we can do but there is a range. And I would leave untouched our fiscal year estimates that we had. While it's come up $0.01 from October 6 to now for the year that's basically $0.01 extra that Q4 moved last week from $0.44 to $0.45 in the First Call averages. That's, both of those numbers are in the range. So we still feel that we'll be essentially in the 10% to 13% or 14% earnings growth range. And we'll see what we can do. With that I will turn it over for questions and answers. Thank you.